<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Atlantic Gulf Communities Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------
Notes:
<PAGE>
ATLANTIC GULF COMMUNITIES CORPORATION
2601 SOUTH BAYSHORE DRIVE
MIAMI, FLORIDA 33133-5461
May 21, 1997
To Our Stockholders:
On behalf of the Company's board of directors (the "Board"), I would like to
extend to you a cordial invitation to attend the annual meeting of the
Company's stockholders to be held on Monday, June 23, 1997 at 11:00 a.m.
(Florida time) at the Hyatt Regency Miami, 400 S.E. Second Avenue, Miami,
Florida.
The accompanying notice of annual meeting and proxy statement discuss the
matters to be presented at the meeting. These matters include:
(a) a proposal to approve: (i) an Amended and Restated Certificate of
Incorporation of the Company which, among other things, would authorize the
Company's issuance of certain preferred stock and increase the amount of
the Company's authorized common stock, (ii) certain transactions, including
the investments in the Company of up to $25,000,000 by an affiliate of
Apollo Real Estate Investment Fund II, L.P., up to $20,000,000 in a private
placement and UP TO $10,000,000 IN A RIGHTS OFFERING TO THE COMPANY'S
STOCKHOLDERS, and (iii) an amendment to a non-employee directors' stock
option plan in respect of options held by directors who will resign upon
consummation of certain of the above-mentioned investment transactions;
(b) the election of three Class 2 directors; and
(c) a proposal to amend the Company's certificate of incorporation (which
may be the Company's existing restated certificate of incorporation or, if
it is approved by the stockholders and becomes effective, the above-
mentioned Amended and Restated Certificate of Incorporation) which would
authorize the Board to effect, in its discretion, a reverse stock split
followed by a forward stock split of the Company's common stock.
The Board has determined that the above-mentioned proposed (a) Amended and
Restated Certificate of Incorporation and related investment transactions and
(b) amendment to the Company's certificate of incorporation to effect the
reverse and forward stock splits (if the Board so determines) are advisable
and in the best interests of the Company and its stockholders and recommends
that you vote "for" their approval.
A copy of the Company's annual report for the fiscal year ended December 31,
1996 accompanies the notice of the annual meeting and proxy statement.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, I
URGE YOU TO PARTICIPATE BY COMPLETING AND RETURNING YOUR PROXY AS SOON AS
POSSIBLE. IF YOU ATTEND THE MEETING, YOU MAY, IF YOU WISH, REVOKE YOUR PROXY
AND VOTE YOUR SHARES PERSONALLY.
J. LARRY RUTHERFORD,
President and Chief Executive
Officer
<PAGE>
ATLANTIC GULF COMMUNITIES CORPORATION
2601 SOUTH BAYSHORE DRIVE
MIAMI, FLORIDA 33133-5461
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 23, 1997
---------------
An annual meeting of stockholders of Atlantic Gulf Communities Corporation,
a Delaware corporation (the "Company"), will be held on Monday, June 23, 1997
at 11:00 a.m. (Florida time), at the Hyatt Regency Miami, 400 S.E. Second
Avenue, Miami, Florida for the following purposes:
1. To consider and vote upon a proposal to approve (a) an Amended and
Restated Certificate of Incorporation of the Company (attached as Appendix
A to the accompanying proxy statement) which would, among other things, (i)
increase the Company's authorized common stock ("Common Stock") from
15,665,000 shares to 70,000,000 shares and (ii) authorize the Company's
issuance of 4,500,000 shares of preferred stock, with a liquidation
preference of $10 per share, of which (x) 2,500,000 shares would be 20%
cumulative redeemable convertible preferred stock, designated as Series A
Preferred Stock, and (y) 2,000,000 shares would be 20% cumulative
redeemable convertible preferred stock, designated as Series B Preferred
Stock; (b) certain investment transactions involving, among other things,
(i) the issuance to an investor of up to 2,500,000 shares of Series A
Preferred Stock in the aggregate amount of $25,000,000 and warrants to
purchase 5,000,000 shares of Common Stock, (ii) the granting to such
investor of representation on the Company's board of directors (the
"Board"), (iii) the issuance and sale in a potential private placement to
certain other investors of up to 1,000,000 shares of Series B Preferred
Stock in the aggregate amount of $10,000,000, shares of newly issued Common
Stock with a fair market value of up to $10,000,000, and warrants to
purchase up to 2,000,000 shares of Common Stock and (iv) subject to
compliance with securities registration and other laws, the making
available for sale to stockholders in a rights offering up to 1,000,000
shares of Series B Preferred Stock in the aggregate amount of $10,000,000
and warrants to purchase up to 2,000,000 shares of Common Stock; and (c) an
amendment to the 1994 Non-Employee Directors' Stock Option Plan which would
provide for the extension of the exercise period of those options held by
directors who will resign upon consummation of certain of the investment
transactions.
2. To elect three Class 2 directors (all of whom will resign, in addition
to certain other directors of the Company, if the investment transaction
with the investor referred to in item 1(a) and (b) above are consummated).
3. To consider and vote upon a proposal to approve an amendment to the
Company's certificate of incorporation (which may be the existing restated
certificate of incorporation or, if the investment transaction referred to
in item 1 above is consummated, the Amended and Restated Certificate of
Incorporation referred to therein) that would effect, if subsequently
determined by the Board, a reverse stock split of the outstanding Common
Stock as of 5:00 p.m. (Florida time) on the effective date of the
provision, pursuant to which 100 shares or 200 shares, as determined by the
Board, then outstanding will be converted into one share (the "Reverse
Split"), and to effect a forward split of the Common Stock as of 6:00 a.m.
(Florida time) on the day following the effective date of the Reverse
Split, pursuant to which each share of Common Stock then outstanding as of
such date which is owned by a stockholder who owns at least one whole share
will be converted into 100 or 200 shares of Common Stock, as the Board
shall have determined in connection with the Reverse Split, and each
resulting fractional share which is owned by a stockholder who does not own
at least one whole share will be converted into the right to receive a cash
payment in lieu of a fractional share, all as set forth in the proposed
amendment to the Company's certificate of incorporation attached as
Appendix C to the accompanying proxy statement.
4. To transact such other business as may properly come before the
meeting and at any adjournment thereof.
The Board has fixed the close of business on May 2, 1997 as the record date
for determination of stockholders entitled to notice of, and to vote at, the
annual meeting and at any adjournment thereof.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND
DATE YOUR PROXY AND MAIL IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED WITHIN THE UNITED STATES OF AMERICA. IF YOU ATTEND THE
MEETING, YOU MAY, IF YOU WISH, REVOKE YOUR PROXY AND VOTE YOUR SHARES
PERSONALLY.
By Order of the Board of Directors,
Joel K. Goldman
Secretary
May 21, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION............................................................... 1
SUMMARY.................................................................... 2
Introduction............................................................. 2
Recommendation of Board.................................................. 3
Opinion of Financial Advisor............................................. 3
Loan..................................................................... 3
Series A Preferred Stock................................................. 3
Special Purpose Subsidiary............................................... 5
Warrants................................................................. 5
Series B Preferred Stock................................................. 6
Board Representation, Voting Rights and Election of Directors............ 6
Consent Rights........................................................... 7
Co-Investment Opportunity................................................ 7
Exclusivity and Fiduciary Out............................................ 7
Termination.............................................................. 7
Fees and Expenses........................................................ 8
Control of the Company................................................... 8
Stockholders Approval.................................................... 8
Potential Private Placement.............................................. 9
Interest of Certain Persons in the Transactions.......................... 9
Intention of Directors and Officers...................................... 9
Market Price of the Common Stock......................................... 9
Reverse and Forward Stock Splits......................................... 9
FORWARD-LOOKING STATEMENTS................................................. 10
THE TRANSACTIONS........................................................... 10
Background............................................................... 10
Certain Effects of the Transactions...................................... 14
Use of Proceeds.......................................................... 16
Recommendation of the Board; Reasons for the Transactions................ 17
Consequences if the Transactions Are Not Approved........................ 19
Absence of Appraisal Rights.............................................. 19
Interest of Certain Persons in the Transactions.......................... 20
Expenses of the Transactions............................................. 20
Fairness Opinion of Financial Advisor.................................... 20
Analyses of Financial Advisor.......................................... 22
Status Quo--Liquidation................................................ 23
Status Quo--Growth Without Apollo...................................... 23
Transaction--Growth With Apollo........................................ 23
Other Considerations................................................... 24
Sponsorship.......................................................... 24
Apollo's Ability to Generate Deal Flow............................... 24
Potential Source of Additional Capital............................... 24
Potential Source for Management Assignments.......................... 24
Alternative Transactions Considered.................................. 24
Conclusion............................................................. 24
Note Agreement........................................................... 25
The Loan............................................................... 25
Collateral............................................................. 26
Special Purpose Subsidiary............................................. 27
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fees................................................................... 27
Guarantees............................................................. 28
Representations and Warranties......................................... 28
Conditions Precedent................................................... 29
Affirmative Covenants.................................................. 29
Certain Negative Covenants............................................. 30
Events of Default...................................................... 31
Expenses............................................................... 32
Miscellaneous.......................................................... 33
Intercreditor Agreement.................................................. 33
Investment Agreement..................................................... 33
Transactions at the Closing............................................ 33
Transactions after the Closing......................................... 34
Special Purpose Subsidiary............................................. 35
Series A Preferred Stock............................................... 36
Number of Shares..................................................... 36
Rank................................................................. 36
Dividends............................................................ 36
Liquidation Preference............................................... 38
Optional Redemption.................................................. 38
Voting Rights........................................................ 38
Repurchase Obligations............................................... 39
Conversion........................................................... 40
Warrants............................................................... 41
General.............................................................. 42
Number and Classes of Warrants....................................... 42
Exercise Price and Term.............................................. 42
Reservation of Warrant Shares........................................ 42
"Cash Flow Adjustment" of Exercise Price............................. 42
Antidilution Adjustments............................................. 42
Restrictions on Transfer............................................. 44
Fees and Expenses.................................................... 44
Value Determination and Appraisal.................................... 44
Series B Preferred Stock............................................... 44
Consent Rights......................................................... 45
Co-Investment Opportunity.............................................. 46
Registration Rights.................................................... 47
Activities Prior to Closing............................................ 48
Certain Covenants...................................................... 48
Conditions............................................................. 50
Representations and Warranties......................................... 51
Indemnification........................................................ 52
Exclusivity and Fiduciary Out.......................................... 52
Termination............................................................ 53
Fees and Expenses...................................................... 53
Potential Private Placement.............................................. 54
Charter Amendments....................................................... 55
Resigning Directors--Options and Indemnification......................... 58
Stockholders Approval.................................................... 58
ELECTION OF DIRECTORS...................................................... 59
Changes to the Board..................................................... 59
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Class 2 Nominees........................................................ 60
Other Directors--Class 3................................................ 61
Other Directors--Class 1................................................ 62
Miscellaneous........................................................... 62
Directors Following the Closing......................................... 63
PROPOSAL TO AMEND THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION TO
EFFECT A REVERSE STOCK SPLIT FOLLOWED BY A FORWARD STOCK SPLIT OF THE
COMMON STOCK............................................................. 64
Cash Payment in Lieu of Shares.......................................... 65
Effect of the Proposed Stock Splits..................................... 66
Purpose of the Proposed Stock Splits.................................... 67
Exchange of Stock Certificates.......................................... 68
Federal Income Tax Consequences......................................... 69
Recommendation and Vote................................................. 70
BENEFICIAL OWNERSHIP OF COMMON STOCK...................................... 70
Ownership by Directors, Nominees and Executive Officers................. 70
Ownership by Persons Owning More Than Five Percent...................... 71
Ownership by Apollo..................................................... 71
COMPENSATION AND CERTAIN RELATED MATTERS.................................. 73
Executive Compensation.................................................. 73
Stock Options........................................................... 73
Defined Benefit Retirement Plan......................................... 74
Employment Agreements................................................... 74
Director Compensation................................................... 75
Related Party Transactions.............................................. 76
Indemnification Arrangements............................................ 76
Report to Stockholders on Compensation.................................. 76
Base Salary........................................................... 77
Annual Incentives..................................................... 77
Long-Term Incentives.................................................. 78
Performance Graph....................................................... 79
INDEPENDENT PUBLIC ACCOUNTANTS............................................ 80
OTHER MATTERS............................................................. 80
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING............................. 80
METHOD OF PROXY SOLICITATION.............................................. 80
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 80
APPENDIX A--FORM OF PROPOSED AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION............................................................ A-1
Annex A--Statement of Preferences and Rights of 20% Cumulative
Redeemable Convertible Preferred Stock, Series A................ A-4
Annex B--Statement of Preferences and Rights of 20% Cumulative
Redeemable Convertible Preferred Stock, Series B................ A-18
Annex C--Form of Warrants for the Purchase of Common Stock of Atlantic
Gulf Communities Corporation.................................... A-32
APPENDIX B(1)--OPINION OF TALLWOOD ASSOCIATES, INC. dated February 7,
1997..................................................................... B-1
APPENDIX B(2)--OPINION OF TALLWOOD ASSOCIATES, INC. dated May 15, 1997.... B-2
APPENDIX C--PROPOSAL TO AMEND THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION TO EFFECT THE PROPOSED REVERSE AND FORWARD STOCK SPLITS.... C-1
</TABLE>
iii
<PAGE>
ATLANTIC GULF COMMUNITIES CORPORATION
2601 SOUTH BAYSHORE DRIVE
MIAMI, FLORIDA 33133-5461
----------------
PROXY STATEMENT
----------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 23, 1997
----------------
INTRODUCTION
This proxy statement is furnished in connection with the solicitation of
proxies by the board of directors (the "Board") of Atlantic Gulf Communities
Corporation, a Delaware corporation (the "Company"), for use at the annual
meeting of the Company's stockholders to be held on Monday, June 23, 1997 at
11:00 a.m. (Florida time), at the Hyatt Regency Miami, 400 S.E. Second Avenue,
Miami, Florida, and at any adjournment thereof (the "Meeting") for the
purposes specified in the accompanying notice of the Meeting. See "Other
Matters."
On May 2, 1997 there were outstanding 9,721,720 shares of the Company's
common stock, par value $.10 per share ("Common Stock"), including 13,290
shares held in a "disputed claims" reserve for subsequent distribution, as
discussed below ("Reserved Shares"). Record holders of the outstanding Common
Stock (except the Reserved Shares) at the close of business on May 2, 1997 are
entitled to notice of, and to vote at, the Meeting. Such record holders will
be entitled to one vote for each share of Common Stock held of record at the
close of business on May 2, 1997. To take action, a quorum, composed of a
majority of the outstanding Common Stock, excluding the Reserved Shares, must
be represented by proxy or in person at the Meeting.
Common Stock represented by valid proxies received by the Company in time
for the Meeting will be voted as specified in such proxies. If no voting
specification is made, Common Stock represented by proxies will be voted for
the approval of the proposals in items 1 and 3 of the accompanying notice of
the Meeting and for the election as Class 2 directors of the three nominees
discussed below under "Election of Directors." Any holder of Common Stock
("Stockholder") giving a proxy has the right to revoke it at any time before
it is exercised by attending the Meeting and voting in person or by filing
with the Company's secretary an instrument of revocation or a duly executed
proxy bearing a later date. See "Method of Proxy Solicitation."
Votes cast by proxy or in person at the Meeting will be tabulated by the
judge of elections appointed for the Meeting. The judge of elections will
treat abstentions as Common Stock that is present and entitled to be voted for
purposes of determining the presence of a quorum but as not voted for purposes
of determining the approval of any matter submitted to Stockholders for a
vote. If a broker indicates on a proxy that such broker does not have
discretionary authority as to certain Common Stock to vote on a particular
matter, such shares will not be considered as present and entitled to vote
with respect to that matter.
The mailing address of the Company's principal executive office is 2601
South Bayshore Drive, Miami, Florida 33133-5461. The Company's telephone
number is (305) 859-4000. This proxy statement, the accompanying form of proxy
and the Company's annual report to Stockholders for the fiscal year ended
December 31, 1996 were first sent or given to Stockholders on or about May 21,
1997.
<PAGE>
SUMMARY
The following is a brief summary that highlights selected information
concerning certain matters described in this Proxy Statement in respect of the
Stockholders considering and acting on (a) the proposal to approve an Amended
and Restated Certificate of Incorporation of the Company in the form of
Appendix A hereto (the "Charter Amendments"), which, among other things, would
authorize the issuance of certain preferred stock and increase the amount of
authorized Common Stock, certain investment transactions and an amendment to a
non-employee directors' stock option plan; (b) the election of three Class 2
directors (all of whom will resign together with certain other directors if
certain investment transactions are consummated); and (c) a proposal to amend
the Company's certificate which would authorize the Board to effect, in its
discretion, a reverse stock split followed by a forward stock split of Common
Stock, as set forth in Appendix C hereto. This summary is not intended to be
complete and is qualified in all respects by reference to the detailed
information contained elsewhere in this Proxy Statement and the appendices
attached to this Proxy Statement ("Appendices"). Stockholders are urged to
review carefully the entire Proxy Statement including the Appendices.
INTRODUCTION. The Company and AP-AGC, LLC ("Apollo or the Investor") entered
into an Amended and Restated Investment Agreement dated as of February 7, 1997,
amended as of March 20, 1997, and amended and restated as of May 15, 1997 (the
"Investment Agreement"). The Company, certain of its subsidiaries (the
"Subsidiaries") and Apollo entered into a Secured Note Agreement dated as of
February 7, 1997, and amended and restated as of May 15, 1997 (the "Note
Agreement"). Collectively, the Investment Agreement and the Note Agreement are
referred to herein as the Agreements.
Apollo, a Delaware limited liability company, is an affiliate of Apollo Real
Estate Investment Fund II, L.P. ("Apollo Fund II"), a private real estate
investment fund, the general partner of which is Apollo Real Estate Advisors
II, L.P., a New York-based investment fund. Apollo Fund II was formed in 1996
with investment capital of more than $570 million for the purpose of investing
in direct and indirect real estate interests. Apollo Real Estate Advisors II,
L.P., together with an affiliate, also serves as general partner of Apollo Real
Estate Investment Fund, L.P., a fund formed in 1993, which manages a portfolio
of real estate assets of in excess of $2 billion. Apollo's investments include
multi-family properties, commercial and office properties, hotels, home
development companies and other real estate management companies.
Under the terms and conditions of the Agreements and subject to certain
conditions, including the Stockholders prior approval of the Charter Amendments
and certain related transactions, Apollo will invest up to $25 million in the
Company, including the conversion of the outstanding principal balance, if any,
of the above-mentioned loan from Apollo, by purchasing 20% cumulative
redeemable convertible preferred stock, Series A, of the Company ("Series A
Preferred Stock") and warrants to purchase 5,000,000 shares of Common Stock
(the "Investor Warrants"). In addition, the Company is negotiating a potential
private placement of securities in which certain other investors may invest up
to $20 million in the Company by purchasing up to $10 million in fair market
value of Common Stock, up to 1,000,000 shares of 20% cumulative redeemable
convertible preferred stock, Series B, of the Company ("Series B Preferred
Stock"), and warrants to purchase up to 2,000,000 shares of Common Stock, on a
pro rata basis. Further, subject to compliance with securities registration and
other laws, the Company intends to make available for sale to Stockholders in a
rights offering up to 1,000,000 shares of Series B Preferred Stock and warrants
to purchase up to 2,000,000 shares of Common Stock, on a pro rata basis. (The
warrants to purchase up to 4,000,000 shares of Common Stock to be issued to
purchasers of Series B Preferred Stock in the private placement and the rights
offering will be referred to as the "Series B Warrants.") An amendment to the
1994 Non-Employee Directors' Stock Option Plan (the "Plan Amendment") would
provide for the extension of the exercise period of those options held by
directors who will resign upon consummation of certain of the investment
transactions. The approval at the Meeting by the holders of a majority of the
outstanding Common Stock ("Stockholders Approval") is required to effect the
Charter Amendments, the investment transactions contemplated by the Agreements
and the Plan Amendment (collectively, the "Transactions").
2
<PAGE>
RECOMMENDATION OF BOARD. The Board believes that the Transactions and the
Charter Amendments are advisable and in the best interests of the Company and
its Stockholders, and accordingly unanimously (with the exception of Mr.
Scheetz who, because of his association with Apollo, has recused himself from
this recommendation) recommends to the Stockholders that they vote their Common
Stock in favor of the Transactions and the Charter Amendments, which are
required to consummate the Transactions. In arriving at a recommendation, the
Board considered the advantages and disadvantages of the Transactions, the
results of a review of the Company's strategic alternatives, an original and a
supplemental opinion of its financial advisor, Tallwood Associates, Inc.
("Tallwood"), the Company's financial condition and other factors, all as more
fully discussed herein. See "The Transactions--Background" and "--
Recommendation of Board; Reasons for the Transactions" and "--Certain Effects
of the Transaction."
OPINION OF FINANCIAL ADVISOR. Prior to entering into the original agreements
with Apollo dated as of February 7, 1997, the Board received an opinion of the
Company's financial advisor, Tallwood, that the transactions contemplated by
the original agreements, including the Company's issuance of Series A Preferred
Stock and the Investor Warrants, for an aggregate purchase price of $25,000,000
to be paid at the closing, are fair, from a financial point of view, to the
Stockholders. Prior to entering into the Agreements (amended and restated as of
May 15, 1997), the Board received a supplemental opinion of Tallwood that the
modifications (taken in the aggregate) to the original agreements dated as of
February 7, 1997 are fair to the Stockholders from a financial point of view as
of the date of the original agreements (whether or not the Private Placement
(described below) is consummated). See "The Transactions--Fairness Opinion of
Financial Advisor."
LOAN. The Agreements provide, among other things, that subject to certain
terms and conditions, including Apollo's approval of the use of the loan
proceeds, Apollo would make a loan to the Company in a principal amount up to
$10,000,000 (the "Loan") and the Company would execute and deliver to Apollo a
secured convertible promissory note (the "Note") in the principal amount equal
to the loan amount. While circumstances may change, as of the date hereof, the
Company does not expect to borrow under the Loan (the "Funding"). In addition,
the Investment Agreement provides that (a) after the Company makes a request
for the Funding, Apollo has 10 business days to approve the Company's proposed
use of the Funding; (b) the Funding would occur on the 20th business day after
Apollo's approval; and (c) Apollo's obligation to make the Loan is conditioned
on the Closing (defined below) not having occurred. Accordingly, it may not be
possible for the Funding to occur without Apollo's approval and waiver of
certain terms and conditions. The Loan is not subject to or conditioned on the
Stockholders Approval but is subject to certain other conditions including
Apollo's approval of the use of proceeds. See "The Transactions--Loan and Note
Agreement" and "--Intercreditor Agreement."
SERIES A PREFERRED STOCK. Subject to the prior satisfaction of certain
conditions, including Stockholders Approval, Apollo will purchase from the
Company, and the Company will issue and sell to Apollo, up to 2,500,000 shares
of Series A Preferred Stock (20% cumulative redeemable convertible preferred
stock, Series A of the Company) and the Investor Warrants (to purchase up to
5,000,000 shares of Common Stock). Initially, Apollo will purchase at a closing
to occur promptly after Stockholders Approval (the "Closing") a number of
shares of Series A Preferred Stock to be agreed upon between the Company and
Apollo which number will be not less than 500,000 (the "Initial Preferred
Shares") and two Investor Warrants for each share of Series A Preferred Stock
purchased (the "Proportionate Number of Investor Warrants"). The number of
Investor Warrants purchased at the Closing (the "Initial Warrants"), therefore,
will be not less than 1,000,000. The purchase price of the Initial Preferred
Shares and the Investor Warrants ( the "Initial Purchase Price") will be an
amount equal to (a) the number of Initial Preferred Shares multiplied by $9.88,
plus (b) the number of Initial Warrants multiplied by $0.06 (the "Per Warrant
Price"). For example, if the Company and Apollo agree that the Initial
Preferred Shares to be purchased and sold at the Closing will be 500,000, the
Initial Purchase Price will be $5,000,000. The Initial Purchase Price will be
payable as follows. If the Funding (consummation of the Loan) has not occurred,
Apollo will deliver to the Company the Initial Purchase Price in exchange for
the Initial Preferred Shares and the Initial Warrants. If the Funding has
occurred and if the Initial Purchase Price is greater
3
<PAGE>
than the outstanding principal amount of the Note, Apollo will present the Note
for conversion into Series A Preferred Stock and will deliver to the Company an
amount equal to the Initial Purchase Price minus the outstanding principal
amount of the Note. If the Funding has occurred and the principal amount of the
Note is greater than the Initial Purchase Price, Apollo will present the Note
for partial conversion into Series A Preferred Stock and the Company will
execute and deliver to Apollo a new Note in an amount equal to the amount of
the original Note minus the Initial Purchase Price. Accrued unpaid interest due
on the Note will be paid by the Company at the Closing. See "The Transactions--
Investment Agreement--Transactions at the Closing."
From time to time after the Closing and until Apollo has acquired all of the
2,500,000 shares of Series A Preferred Stock and paid the aggregate purchase
price of $25,000,000, the Company will issue and sell to Apollo, and Apollo
will purchase from the Company, additional Series A Preferred Stock and on each
such occasion, a Proportionate Number of Investor Warrants (each such
transaction, a "Subsequent Issuance") on the terms and conditions set forth in
the Investment Agreement, to enable the Company to invest in real estate
development projects approved by the Board. Such projects will also be subject
to the approval of Apollo. Promptly after delivery to Apollo of a certified
Board resolution to invest in a real estate development project, the Company
and Apollo will set a date for the Subsequent Issuance and the number of shares
of Series A Preferred Stock to be issued and sold (the "Subsequent Issuance
Preferred Shares") and the Proportionate Number of Warrants to be issued and
sold (the "Subsequent Issuance Warrants").
At each Subsequent Issuance, Apollo will purchase from the Company, and the
Company will issue and sell to Apollo, the agreed number of Subsequent Issuance
Preferred Shares and Subsequent Issuance Warrants for a purchase price equal to
the number of Subsequent Issuance Preferred Shares multiplied by $9.88 plus the
number of Subsequent Issuance Warrants multiplied by the Per Warrant Price of
$0.06 (the "Subsequent Issuance Purchase Price"), payable as described below.
If no amount is outstanding under a new Note, Apollo will deliver to the
Company the Subsequent Issuance Purchase Price in cash in exchange for the
Subsequent Issuance Preferred Shares and Subsequent Issuance Warrants. If any
amount is outstanding under a new Note and if the Subsequent Issuance Purchase
Price is greater than the outstanding principal amount of the new Note, Apollo
will present the new Note for conversion into Series A Preferred Stock and will
deliver to the Company an amount in cash equal to the Subsequent Issuance
Purchase Price minus the outstanding principal amount of the new Note. If any
amount is outstanding under a new Note and if the outstanding principal amount
of the new Note is greater than the Subsequent Issuance Purchase Price, Apollo
will present the new Note for partial conversion into Series A Preferred Stock
and the Company will execute and deliver a new Note in an amount equal to the
amount of the prior Note minus the Subsequent Issuance Purchase Price. Accrued
unpaid interest on the new Note will be paid by the Company at the Subsequent
Issuance.
The obligations of Apollo at each Subsequent Issuance are subject to the
conditions (unless waived by Apollo) that no Event of Default (as defined in
the Note Agreement) shall have occurred and, except for an Event of Default
which is or results from a Bankruptcy Event (defined below), shall then exist.
In the event the Company has not presented Apollo with real estate
development projects pursuant to which Apollo has invested the aggregate
purchase price of $25,000,000, on the terms and conditions set forth in the
Investment Agreement, (a) Apollo will be entitled at any time to require that a
Subsequent Issuance be effected at which Apollo will acquire all of the Series
A Preferred Stock not acquired by it prior thereto and (b) from and after June
30, 1998, the Company will be entitled at any time to require that a Subsequent
Issuance be effected at which Apollo will acquire all of the Series A Preferred
Stock not acquired by it prior thereto. The Company's right to require Apollo
on and after June 30, 1998 to purchase all of the Series A Preferred Stock not
acquired by it prior thereto is subject to the condition that no Event of
Default (as defined in the Note Agreement) shall have occurred and, except for
an Event of Default which is or results from a Bankruptcy Event (defined
below), shall then exist.
The Series A Preferred Stock will rank senior to the Common Stock with
respect to dividends and distributions. Holders of the Series A Preferred Stock
will be entitled to receive, when, as and if declared by the Board, cash
dividends on a quarterly basis at an annual rate equal to 20% of the
liquidation preference, which is $10 per share, plus any accrued and unpaid
dividends (as in effect at the time, the "Liquidation Preference"). If
4
<PAGE>
the Board does not declare and pay cash dividends on a quarterly basis, such
dividends will be accrued. If a payment default occurs on a Redemption Date (as
defined below) or Purchase Date (as defined below), dividends will accumulate
at an annual rate of 23%. The Series A Preferred Stock will be redeemable by
the Company, in whole or in part, after three years from the issuance date at a
redemption price in cash equal to the Liquidation Preference. Holders of the
Series A Preferred Stock will have certain "put rights," which will entitle
them to require the Company to repurchase the Series A Preferred Stock as
follows: (a) up to one-third of the shares after the end of the fourth year
following the issuance date and before the end of the fifth year, (b) up to
two-thirds in the aggregate after the end of the fifth year following the
issuance date and before the end of the sixth year, and (c) up to the entire
amount after the sixth year following the issuance date, at a repurchase price
in cash equal to the Liquidation Preference. Certain events of default,
including certain change of control events in respect of the Company, would
accelerate the exercisability of the put rights. The put rights will be secured
by (a) a junior lien on substantially all of the Company's assets, except for
the capital stock of the SP Subsidiary (defined below) and the assets of the SP
Subsidiary and (b) a senior lien on the outstanding capital stock of the SP
Subsidiary and on its assets. See "The Transactions--Investment Agreement--
Series A Preferred Stock" and "--Intercreditor Agreement."
Holders of the Series A Preferred Stock will be entitled to elect three of
the Board's seven members, but will have no other rights to vote on matters
submitted to a vote of the Stockholders, except as may be required by
applicable law. The Series A Preferred Stock will be convertible into Common
Stock at a conversion price of $5.75 per share, subject to certain adjustments.
Holders of the Series A Preferred Stock will have certain demand and "piggy-
back" registration rights under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the Series A Preferred Stock and the Common
Stock issuable upon conversion of the Series A Preferred Stock. As long as
Apollo holds at least 500,000 shares of Series A Preferred Stock, Apollo will
have certain consent rights in respect of the Company engaging in Major
Transactions (as defined below). See "The Transaction--Investment Agreement--
Series A Preferred Stock" and "--Consent Rights."
SPECIAL PURPOSE SUBSIDIARY. Without Apollo's prior consent, so long as the
Note remains outstanding and unpaid or Apollo holds any Series A Preferred
Stock, the proceeds from the issuance and sale of the Note, the Series A
Preferred Stock and the Investor Warrants and all funds generated thereby or
assets acquired therewith will be held from and after the Closing by a newly
formed special purpose corporation which will be a direct wholly owned
subsidiary of the Company ("SP Subsidiary"). The only business transactions in
which SP Subsidiary will engage are the development and sale of Board-approved
real estate development projects and certain activities incidental thereto. SP
Subsidiary will be under certain restrictions, including with respect to the
incurrence of debt and liens and the payment of dividends and payments for
certain other purposes. Apollo will have a first priority security interest in
all outstanding capital stock and assets of SP Subsidiary. See "The
Transactions -- Investment Agreement -- Special Purpose Subsidiary."
WARRANTS. The Investment Agreement contemplates the issuance by the Company
of 5,000,000 Investor Warrants and up to 4,000,000 Series B Warrants
(collectively, the "Warrants"). At the Closing, and at the Subsequent
Issuances, the Company will issue to Apollo the Investor Warrants to purchase
up to an aggregate of 5,000,000 shares of Common Stock as follows: 1,666,667
Class A Warrants, 1,666,667 Class B Warrants and 1,666,666 Class C Warrants. As
the Investor Warrants are issued, they will be allocated as evenly as possible
among Class A Warrants, Class B Warrants and Class C Warrants. In the rights
offering (see "Series B Preferred Stock" below), the Company will issue pro
rata to purchasers of Series B Preferred Stock up to 2,000,000 Series B
Warrants in three classes: 666,667 Class A Warrants, 666,667 Class B Warrants
and 666,666 Class C Warrants. In the private placement (see "Potential Private
Placement" below), the Company will issue pro rata to purchasers of Common
Stock and Series B Preferred Stock up to 2,000,000 Series B Warrants in the
three classes: 666,667 Class A Warrants, 666,667 Class B Warrants and 666,666
Class C Warrants. The Warrants will have an exercise price of $5.75, subject to
certain antidilution and other adjustments. The Class A, Class B and Class C
Warrants are identical except that they have different minimum exercise prices.
Unexercised Warrants
5
<PAGE>
will expire on the seventh anniversary of their issuance date. Apollo and its
transferees will have certain demand and piggy-back registration rights with
respect to the Common Stock issuable upon the exercise of the Warrants. See
"The Transactions--Investment Agreement--Warrants."
SERIES B PREFERRED STOCK. The Company intends to conduct a rights offering,
expected to commence promptly after Closing, whereby it will distribute to the
holders of Common Stock transferrable rights to purchase, on a pro rata basis,
an aggregate of 1,000,000 shares of Series B Preferred Stock (20% cumulative
redeemable convertible preferred stock, Series B of the Company, with a
liquidation preference of $10 per share) and Series B Warrants to purchase an
aggregate of 2,000,000 shares of Common Stock, for an aggregate purchase price
of $10,000,000, all subject to compliance with applicable securities
registration and other laws and regulations (the "Rights Offering"). The Series
B Preferred Stock would be pari passu with the Series A Preferred Stock as to
dividends and other rights of payment; except, however, (a) the put rights of
the holders of the Series B Preferred Stock would not be secured by any lien on
the assets of the Company or any Subsidiaries, (b) optional redemptions of
Series B Preferred Stock by the Company can be effected (subject to certain
consent rights of Apollo) without proration in accordance to the number of
shares held by each holder, and (c) the holders of the Series B Preferred Stock
(i) would not be entitled to vote Series B Preferred Stock with respect to the
election of Company directors, and (ii) would not have any "consent" rights in
respect of Major Transactions. It is expected that for United States federal
income tax purposes, holders of Common Stock will not be taxed upon receipt or
exercise of the rights issued in the Rights Offering. The Company will send
notice to its Stockholders at least 10 days prior to the proposed record date
for determining the eligibility of Stockholders to participate in the Rights
Offering. See "The Transactions--Investment Agreement--Series B Preferred
Stock."
BOARD REPRESENTATION, VOTING RIGHTS AND ELECTION OF DIRECTORS. The Investment
Agreement provides that, until the Closing the Board will consist of 10
directors, one of whom will be designated by Apollo (the "Original Investor
Designee") and that as of the Closing the Board will consist of seven
directors, three of whom will be designated by Apollo. In accordance with the
foregoing, the Board on February 10, 1997 increased, pursuant to the Company's
by-laws, the number of Class 1 directors from three to four and the size of the
Board from nine to 10 members. Then, the Board appointed W. Edward Scheetz, the
Original Investor Designee, as a Class 1 director, whose term will continue
until the annual meeting of Stockholders to be held in 1999 (except as
discussed below). If, however, a Funding has not occurred and the Investment
Agreement is terminated in accordance with its terms, Apollo will cause the
Original Investor Designee to resign promptly from the Board. Apollo will be
entitled to have at least one designee on the Board so long as any amounts are
owed by the Company under the Note.
At the Meeting, the Stockholders will vote upon the election to the Board of
Messrs. James W. Apthorp, Jerome J. Cohen and Lawrence B. Seidman, the three
Class 2 directors whose terms of office expire at the Meeting. If elected, the
terms of the three Class 2 directors will expire at the meeting of Stockholders
in the year 2000. However, pursuant to the Investment Agreement, as of and
after the Closing, the Board will be reduced from 10 to seven directors. Seven
current directors, including three Class 2 directors nominated to be reelected
at the Meeting, will resign effective as of the Closing. As of the Closing, the
seven directors of the Company will be: the three designees of Apollo; Mr. J.
Larry Rutherford, the Company's current president and chief executive officer;
and three independent directors selected by the incumbent Board with Apollo's
approval. Apollo's three designees will be Mr. Scheetz and Messrs. Lee Neibart
and Ricardo Koenigsberger. The Board, with Apollo's approval, has selected
three independent directors as follows: Mr. Gerald N. Agranoff, who is a
current director, and two new directors: James M. DeFrancia and Charles K.
MacDonald. See "Election of Directors."
As of the Closing, Mr. Scheetz will resign as a Class 1 director and will
become a director having a term which will expire at the annual Stockholders
meeting in 1998; Messrs. Koenigsberger and Neibart will have terms which will
expire at the annual meeting in 1998; Mr. Rutherford will be a Class 2 director
having a term which will expire at the annual meeting in the year 2000; Mr.
DeFrancia will be a Class 3 director having a term which will expire at the
annual meeting in 1998; Mr. Agranoff will be a Class 1 director having a term
which
6
<PAGE>
will expire at the annual meeting in 1999 and Mr. MacDonald will be a Class 1
director having a term which will expire at the annual meeting in 1999. After
the Closing, the member of incumbent management on the Board and the three
independent directors will continue to have staggered three-year terms. The
three other directors will be elected by the holders of the Series A Preferred
Stock and will have terms of one year. See "Election of Directors."
CONSENT RIGHTS. From the date of the Investment Agreement and as long as
Apollo holds at least 500,000 shares of Series A Preferred Stock, without
Apollo's consent, the Company will not have the right to engage in or enter
into any agreement with respect to certain significant actions and transactions
("Major Transactions"), including (subject to certain exceptions):
recapitalizations, redemptions or reclassifications of the Company's capital
stock; distributions or dividends on the Company's capital stock; liquidation,
winding-up or dissolution of the Company or any Subsidiary amendments of the
Company's certificate of incorporation or by-laws; mergers or consolidations;
sales of a significant amount of assets not contemplated by an Approved
Business Plan (as defined below); special dividends or distributions; entering
into or amending material contracts; significant new financings or
refinancings, issuances of securities; unplanned major investments or capital
expenditures; transactions which would result in a change of control of the
Company; or the commencement, undertaking or acquisition of real estate
development projects by SP Subsidiary and related financing or joint venture
arrangements. See "The Transactions-- Investment Agreement--Consent Rights."
CO-INVESTMENT OPPORTUNITY. Under the Investment Agreement, Apollo, subject to
certain conditions and limitations, will have the opportunity to participate in
new joint venture community development projects that the Company proposes to
enter into, until Apollo has invested $60,000,000 or more in such projects.
Except with respect to certain preexisting projects, Apollo will have a right
of first offer to participate in such projects so long as it holds at least
500,000 shares of Series A Preferred Stock. See "The Transactions--Investment
Agreement--Co-Investment Opportunity."
EXCLUSIVITY AND FIDUCIARY OUT. The Investment Agreement contains certain
exclusivity provisions that preclude the Company prior to the Closing from
soliciting or initiating a transaction as an alternative to the Transaction. In
addition, the Company has agreed that the Board will not withdraw or modify its
approval or recommendation of the Investment Agreement or the Transactions, or
approve or recommend or enter into any agreement with respect to an alternative
proposal. If, however, the Board receives an unsolicited alternative proposal
that, in the exercise of the Board's fiduciary obligations, it determines to be
a Superior Proposal (as defined below), the Board may withdraw or modify its
approval or recommendation of the Investment Agreement and the Transactions,
approve or recommend such Superior Proposal and terminate the Investment
Agreements, subject to the Company's obligation to pay certain fees to Apollo.
See "The Transactions--Investment Agreement--Exclusivity and Fiduciary Out."
TERMINATION. The Investment Agreement (other than certain provisions thereof,
if and so long as the Note remains outstanding) can be terminated at any time
prior to the Closing (a) by mutual consent of the Company and Apollo; (b) by
the Company or Apollo if the Closing shall not have occurred on or before June
24, 1997; provided, however, that such right to terminate shall not be
available to any party whose breach of the Investment Agreement has been the
cause of the failure of the Closing to occur on or before such date; (c) by
Apollo if this Proxy Statement regarding the Investment Agreement and the
Transactions has not been mailed to the Stockholders on or by May 22, 1997; (d)
by the Company or Apollo if any judgment, injunction, order, or decree
enjoining Apollo or the Company from consummating the Transactions is entered
and such judgment, injunction, order, or decree shall become final and
nonappealable; provided, however, that the party seeking to terminate the
Investment Agreement shall have used all reasonable efforts to remove such
judgment, injunction, order, or decree; (e) by Apollo or the Company if the
other party is in material breach of the Investment Agreement and such breach
is not cured within 30 days notice thereof; or (f) by the Company in connection
with its approval of a Superior Proposal provided that prior to or concurrently
with such termination Apollo shall have received the
7
<PAGE>
termination fee discussed below. See "The Transactions--Investment Agreement--
Termination" and "The Transactions--Intercreditor Agreement."
FEES AND EXPENSES. On January 21, 1997, the Company paid to Apollo a
$1,000,000 commitment fee, which will be refunded to the Company at the
Closing. If, however, the Investment Agreement is terminated or the Closing
does not occur on or before June 24, 1997 for any reason other than a breach of
the Investment Agreement by Apollo, the commitment fee will be forfeited and
the Company will pay certain out-of-pocket expenses of Apollo and its
affiliates (the "transaction expenses"). If the Closing does not occur on or
before June 24, 1997 as a result of a breach of the Investment Agreement or the
Note Agreement by the Company, the Stockholders Approval not having been
obtained, or failure by June 24, 1997 to obtain the consent required from the
Company's senior secured lender, Foothill Capital Corporation ("Foothill") in
respect of the transactions contemplated by the Investment Agreement, the
Company is required to pay to Apollo a $1,000,000 "break-up" fee plus Apollo's
transaction expenses, in addition to forfeiting the commitment fee. If the
conditions for the payment of the break-up fee are fulfilled and either the
Company willfully breaches the Investment Agreement or the Company enters into
an agreement for or consummates an Alternative Transaction (as defined below)
within a specified period after termination of the Investment Agreement, the
Company is required to pay to Apollo a $1,000,000 alternative transaction fee,
in addition to the payment of the break-up fee and Apollo's transaction
expenses and forfeiting the commitment fee. If the Board withdraws its approval
of the Investment Agreement, approves or recommends a Superior Proposal, enters
into an agreement with respect to a Superior Proposal or terminates the
Investment Agreement, the Company is required to pay to Apollo a $2,000,000
termination fee and Apollo's transaction expenses in addition to forfeiting the
commitment fee. In that case, the Company will not be required to pay the
break-up fee and the Alternative Transaction fee.
The maximum amount of fees that Apollo will be entitled to receive as a
result of the termination of the Investment Agreement will be $3,000,000
(inclusive of the $1 million commitment fee) plus Apollo's transaction
expenses. As required by the Investment Agreement, as of the date hereof, the
Company has reimbursed Apollo's transaction expenses in the approximate amount
of $360,000. See "The Transactions--Investment Agreement--Fees and Expenses."
CONTROL OF THE COMPANY. So long as it holds at least 500,000 shares of the
Series A Preferred Stock, Apollo will have the right to elect three of the
seven Board members and to withhold its consent to the Company engaging in
Major Transactions. In addition, if Apollo converts its Series A Preferred
Stock and/or exercises the Investor Warrants, it would become a substantial
holder of the outstanding Common Stock. See "The Transactions--Certain Effects
of the Transactions," "The Transactions--Investment Agreement--Series A
Preferred Stock--Voting Rights;" "The Transactions--Investment Agreement--
Consent Rights"; and "Beneficial Ownership of Common Stock--Ownership by
Apollo."
STOCKHOLDERS APPROVAL. The Closing is subject to a number of conditions,
including the vote by the holders of a majority of the outstanding Common Stock
in favor of the Transactions and the Charter Amendments which will upon
effectiveness, among other things, (a) authorize the Company's issuance of the
Series A Preferred Stock, (b) authorize the Company's issuance of the Series B
Preferred Stock, and (c) increase the amount of authorized Common Stock
sufficient to permit the conversion of Series A Preferred Stock and Series B
Preferred Stock, the exercise of the Warrants and the issuance of new Common
Stock in the Private Placement. In addition, the Charter Amendments will modify
the dividend rights of the holders of Common Stock in certain respects
including the elimination of mandatory dividends on the Common Stock equal to
25% of Available Cash (defined below). See "The Transactions--Charter
Amendments." Additional conditions precedent to the Closing include
(a) Foothill's consent to the Agreements and the transactions contemplated
thereby, all on terms and conditions reasonably satisfactory to the Company and
Apollo, and (b) the absence of any material adverse effect occurring in respect
of the Company's business, operations, property, condition (financial or
otherwise) or prospects. See "The Transactions--Investment Agreement--
Conditions to the Closing" and "The Transactions--Charter Amendments" and "--
Stockholders Approval."
8
<PAGE>
POTENTIAL PRIVATE PLACEMENT. The Company and certain prospective purchasers
are in the process of negotiating a securities purchase agreement providing for
the Company's issuance and sale, in a private placement, of Common Stock,
Series B Preferred Stock and Warrants. It is contemplated that the Company will
issue and sell to the prospective purchasers, for an aggregate purchase price
of up to $20,000,000, on a pro rata basis, up to: (a) that number of shares of
Common Stock equal to $10,000,000 divided by the average closing price per
share of Common Stock for the 10 business days following the issuance of this
Proxy Statement; (b) 1,000,000 shares of Series B Preferred Stock; and (c)
Series B Warrants to purchase 2,000,000 shares of Common Stock (the "Private
Placement"). No agreement has been executed with respect to the foregoing
potential transactions and there can be no assurance that such agreement will
be executed, or if executed, on the terms and conditions discussed above.
Further, if such agreement were executed, there can be no assurance that such
agreement would be closed and the transactions effected, in whole or in part.
The Stockholders Approval of the Transactions and Charter Amendments would
enable the Company to consummate the potential Private Placement. The Company's
issuance and sale in the Private Placement of Common Stock, Series B Preferred
Stock and Warrants to purchase Common Stock for an aggregate purchase price of
at least $15,000,000 is a condition to Foothill granting its consent to the
transactions. See "The Transactions--Intercreditor Agreement" and "Investment
Agreement--Fees and Expenses."
INTEREST OF CERTAIN PERSONS IN THE TRANSACTIONS. The seven Board members who
have agreed to resign as directors as of the Closing so that the Board will
have seven members, of whom three will be Investor designees, as required by
the Investment Agreement, will receive (a) certain indemnification rights and
releases under an agreement with the Company and (b) an extension of the
exercise period of the stock options they hold under the 1994 Plan. See
"Election of Directors" and "Compensation and Certain Related Matters--Director
Compensation." Currently, under the Company's charter and by-laws all directors
and officers, including former directors and officers, are entitled to
indemnification to the fullest extent permitted by Delaware law.
INTENTION OF DIRECTORS AND OFFICERS. Each of the Company's directors and
executive officers who owns Common Stock has indicated that he or she intends
to vote in favor of the Charter Amendments and the Transactions. See "The
Transactions--Background; and Recommendation of Board; Reasons for the
Transactions." These directors and officers own, in the aggregate, 113,921
shares of Common Stock (representing 1.2% of the outstanding shares).
MARKET PRICE OF THE COMMON STOCK. The closing sales price of the Common
Stock, as quoted on the NASDAQ National Market, on February 10, 1997 (the last
trading day prior to the public announcement of the Company's execution of the
original investment agreement) was $4.8125 per share. On May 19, 1997 (the next
to last trading day before the date of this Proxy Statement), the closing sales
price was $5.50 per share.
REVERSE AND FORWARD STOCK SPLITS. The Company proposes that the Stockholders
approve an amendment to its certificate of incorporation which would authorize
the Board in its discretion to effect, prior to the annual meeting of
Stockholders in 1998, either of two different reverse stock splits of the
Common Stock, followed by a forward stock split. Pursuant to the reverse stock
split, each 100 shares or 200 shares, as determined by the Board, of the then
outstanding Common Stock will be converted into one share. Stockholders who own
fewer than 100 shares or 200 shares would be entitled to receive from the
Company a cash payment based on the closing price of the Common Stock, in lieu
of receiving less than one whole share. Pursuant to the forward stock split, on
the day following the reverse stock split, Common Stock then outstanding will
be converted into the number of shares of Common Stock that such shares
represented prior to the reverse stock split. This proposal, if effected, would
significantly reduce the number of holders of Common Stock based on the
Company's estimate that more than 23,000 record holders own fewer than 100
shares and more than 28,000 record holders own fewer than 200 shares. As a
result, it is expected that the cost of administering Stockholder accounts
would be reduced. The Board unanimously recommends that Stockholders vote for
the proposal. The Board's decision to affect a reverse stock split or a forward
stock split would be a Major Transaction which would require Apollo's approval.
There can be no assurance that Apollo would grant such approval. See "Proposal
to Amend the Company's Restated Certificate of Incorporation to Effect a
Reverse Stock Split followed by a Forward Stock Split of the Common Stock."
9
<PAGE>
FORWARD-LOOKING STATEMENTS
This Proxy Statement includes "forward-looking" statements that are subject
to risks and uncertainties. Such forward-looking statements include (a)
expectations and estimates as to the Company's future financial performance,
including growth and opportunities for growth in revenues, net income and cash
flow; (b) the advantages and benefits and disadvantages and costs of the
Transaction; (c) the opportunities for cash flow growth through the use of the
net proceeds from the Transaction; and (d) those other statements preceded by,
followed by or that include the words "believes," "expects," "intends,"
"anticipates," "potential" or similar expressions. For these statements, the
Company claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
The following important factors, in addition to those discussed elsewhere in
this Proxy Statement, could affect the Company's future results and could
cause those results to differ materially from those expressed in the forward-
looking statements: (a) the inability to generate growth in revenues and net
income; (b) the inability to generate sufficient cash flows from operations to
fund capital expenditures and debt service; (c) unanticipated capital
expenditures, including costs associated with real estate development
projects; (d) the inability to realize significant benefits as a result of the
Transaction or to realize increases in revenues, net income or cash flow as a
result of such Transaction; (e) unanticipated costs, difficulties or delays in
completing or realizing the intended benefits of development projects; (f)
adverse changes in current financial markets and general economic conditions,
including interest rate increases, and the real estate industry; and (g)
actions by competitors.
THE TRANSACTIONS
BACKGROUND
In August 1995, the Company retained BT Securities Corporation ("BTSC"), an
affiliate of Bankers Trust Company of New York, as its financial advisor to
assist the Company in developing a financing plan to deleverage and
recapitalize the Company through new debt and possibly equity, and the
repayment or refinancing of the Company's existing debt. For the past several
years, the Company has operated under significant financial constraints as a
result of devoting of substantially all of its operating cash flow to debt
service. The Company's high degree of leverage, combined with the illiquid
nature of the assets the Company had when it emerged from a bankruptcy
proceeding in March 1992, have resulted in the Company having insufficient
liquidity and capital resources to implement fully its business plan and
generate net income and increase Stockholder value.
In its marketing efforts, BTSC contacted approximately 60 potential lenders
and investors. Thereafter, BTSC had discussions with 32 potential lenders and
investors that indicated preliminary interest in the proposed recapitalization
plan. Of the 32 that indicated preliminary interest, six, including Apollo and
Foothill, submitted preliminary term sheets. In June 1996 Apollo and the
Company entered into a letter of intent with respect to a proposed debt
financing to be provided by Apollo to the Company. In July 1996 Foothill
submitted to the Company a letter of intent with respect to a proposed debt
financing and the Company determined to enter into a transaction with
Foothill. The Company thereupon terminated the proposed debt financing
transaction contemplated by the letter of intent with Apollo. The Company
subsequently reimbursed Apollo for its actual out-of-pocket expenses and paid
Apollo a termination fee. On September 30, 1996, the Company closed on three
credit facilities with Foothill totaling $85 million. The credit facilities
consisted of: (a) a two-year extension to December 1, 1998, of the Company's
existing $20 million working capital facility with Foothill, at an annual
interest rate of prime plus two percent (the "Working Capital Facility"); (b)
a $40 million term loan to mature on June 30, 1998, at an annual interest rate
of 15%; and (c) a reducing revolving facility of up to $25 million to mature
on June 30, 1998, at an annual interest rate of prime plus four percent
(collectively, the "Foothill Debt"). The Foothill Debt is secured by a senior
lien on substantially all of the assets of the Company and its Subsidiaries.
The $40 million term loan and $25 million reducing revolving facility require
principal payments of approximately $21.67 million on each of June 30, 1997,
December 31, 1997 and June 30, 1998. See "Intercreditor Agreement."
In July 1996 representatives of BTSC, the Company and Apollo began to
discuss a potential equity investment by Apollo in the Company. On July 25,
1996, the Company and Apollo agreed that (a) Apollo would
10
<PAGE>
continue its due diligence examination of the Company's assets and operations
with a view to making an investment proposal to the Company and (b) the
Company would reimburse Apollo for its actual out of pocket expenses in its
due diligence examination. In August and September 1996, representatives of
Apollo, BTSC and the Company had several meetings concerning Apollo's
examination of the Company's assets and operations and a potential structure
for an equity investment in the Company.
At a Board meeting in September 1996, the directors reviewed possible
scenarios involving an equity investment by Apollo and the Company's primary
uses of the resulting proceeds. Such potential use of proceeds included (a)
the Company's acquisition of new real estate development projects with its own
capital, without other parties participating in the projects on a joint
venture basis, thereby increasing the Company's potential financial return
from such new projects; (b) the provision of additional financial liquidity as
a secondary source for the Company to pay its unsecured 12% notes maturing on
December 31, 1996 in the aggregate principal amount of $42 million (the
"Unsecured 12% Notes"); (c) the possible repurchase at a discount of the
Company's unsecured cash flow notes maturing on December 31, 1998 in the
aggregate principal amount of $39.6 million ("Unsecured Cash Flow Notes"); and
(d) to increase the Company's ability to obtain the consent of its current
lenders or other holders of the Company's debt to modify or extend existing
debt.
At several Board meetings in October and November 1996, the directors
reviewed the then current status of negotiations regarding the proposed Apollo
transaction, including proposed letters of intent, with term sheets, from
Apollo.
On November 20, 1996, as authorized by a majority of the Board on November
19, 1996, the Company and Apollo executed a letter of intent dated November
19, 1996 (which included a term sheet dated November 15, 1996) (the "November
19, 1996 Letter of Intent").
During several Board meetings in December 1996, the directors reviewed the
status of the Apollo transaction as contemplated by the November 19, 1996
Letter of Intent.
At a Board meeting on January 20, 1997, the directors reviewed a revised
letter of intent dated as of January 14, 1997 and term sheet providing for
certain modifications to the November 19, 1996 Letter of Intent. Under the
revised letter of intent and term sheet dated as of January 14, 1997, it was
contemplated, among other things, that conditioned on Stockholders approval
(a) the Company would issue and sell to Apollo, and Apollo would purchase, at
the Closing 25,000 shares of Series A Preferred Stock having a liquidation
preference of $1,000 per share and warrants to purchase 5,000,000 shares of
Common Stock, for an aggregate purchase price of $25,000,000; (b) the
Company's Board would be reduced from 10 members to seven, three of whom will
be designated by Apollo, one of whom will be a member of incumbent management,
and three of whom will be independent directors selected by the Board with
Apollo's approval; and (c) after the Closing, the Company would make available
for sale in a rights offering to Stockholders, 1,000,000 shares of Series B
Preferred Stock, having a liquidation preference of $10 per share, but no
warrants would be issued to Stockholders who subscribe for the Series B
Preferred Stock. In addition, the directors reviewed (a) a financial report of
Tallwood to the Board regarding the contemplated transaction; and (b) a draft
opinion of Tallwood as to the fairness, from a financial point of view, of the
transaction to the Stockholders. A Tallwood representative presented to the
Board Tallwood's analyses and its opinion that, from a financial point of
view, the transaction is fair to the Stockholders. See "Fairness Opinion of
Financial Advisor."
At the end of the January 20, 1997 Board meeting, the Board authorized the
Company to execute and deliver the letter of intent and term sheet dated as of
January 14, 1997 (the "January 14, 1997 Letter of Intent") and the definitive
agreements providing for consummation of the transactions contemplated
thereby. Six of the Company's directors, Messrs. James W. Apthorp, Jerome J.
Cohen, Raymond Ehrlich, W. D. Frederick, Jr., J. Larry Rutherford and John W.
Temple, voted in favor of the action authorizing the Company's execution of
the January 14, 1997 Letter of Intent and definitive agreements and three of
the directors, Messrs. Gerald N. Agranoff, Allen A. Blase and Lawrence B.
Seidman, voted against such action.
11
<PAGE>
The three directors who voted against the approval of the Company's
execution and delivery of the January 14, 1997 Letter of Intent, and the
contemplated transaction indicated at a number of Board meetings that their
primary concerns were as follows: (a) the $1 million fee being payable and the
$1 million commitment fee being forfeited if the Stockholders Approval is not
obtained and the additional $1 million fee being payable if an Alternative
Transaction is consummated is, in their view, too high; (b) the potential
dilutive effect on the existing Stockholders resulting from the conversion of
the Series A Preferred Stock into Common Stock and the issuance of Common
Stock pursuant to the exercise of the Warrants, particularly if the exercise
price of the Warrants is adjusted downward during the first quarter of 1999;
and (c) the Series B Preferred Stock expected to be offered in a Rights
Offering to all Stockholders would not be accompanied by any warrants to
purchase Common Stock and the Company's obligation to repurchase the Series B
Preferred Stock would not be secured by any collateral.
On January 21, 1997, the Company, as authorized by the Board on January 20,
1997, executed and delivered the January 14, 1997 Letter of Intent and paid
the $1,000,000 commitment fee to Apollo, as required by such Letter of Intent.
On February 7, 1997, the Company executed an investment agreement and a note
agreement providing for the transactions contemplated by the January 14, 1997
Letter of Intent, and pursuant to an agreement with Apollo, such agreements
were held in escrow, with effectiveness subject to the Board's approval on
February 10, 1997.
At a Board meeting on February 10, 1997, the directors discussed that the
investment agreement and note agreement were being held in escrow, with
effectiveness subject to the Board's approval because Foothill and Apollo had
not, as of execution of the agreements, agreed upon an intercreditor agreement
regarding the relationship between the holder of the Foothill Debt and Apollo
as a possible lender under the Note Agreement and holder of Series A Preferred
Stock (the "Intercreditor Agreement"). The Board noted that the investment
agreement contained a termination provision which permitted either the Company
or Apollo to terminate such agreement at any time from March 30, 1997 to April
5, 1997, if at such time Foothill, Apollo and the Company had not agreed upon
an Intercreditor Agreement, subject, as a result of such termination, to the
Company being obligated to pay a $2 million Alternative Transaction fee if
within 180 days thereafter the Company either (a) entered into an Alternative
Transaction agreement or (b) consummated an Alternative Transaction. After
further discussion, the directors unanimously authorized and directed the
release of the agreements from escrow so that, as a result thereof, they
became effective agreements. Directors Agranoff, Blase and Seidman noted that,
while they approved the above-discussed resolution so that the agreements and
contemplated transaction could be submitted to the Stockholders for their
consideration and action, they were not changing their previous votes,
including on January 20, 1997, against the approval of the January 14, 1997
Letter of Intent, the agreements and the transaction. See "Intercreditor
Agreement."
Also, the directors unanimously resolved that, pursuant to the Company's by-
laws, effective as of adjournment of such meeting, the number of the Company's
Class 1 directors would be increased from three to four, thereby increasing
the total number of the Company's directors from nine to 10 and that, as
required by the investment agreement, W. Edward Scheetz was appointed as a
Class 1 director to fill the vacancy created by such increase in Class 1
directors, to serve until the annual meeting of the Stockholders in 1999,
subject to Apollo's obligation to cause Mr. Scheetz to resign as a director if
the investment agreement is terminated in accordance with its terms and if no
Funding occurred under the note agreement.
On March 20, 1997, the Company and Apollo signed a letter agreement
extending certain dates under the investment agreement and note agreement as
executed on February 7, 1997.
Thereafter, the Company and Apollo had further discussions with Foothill in
an attempt to negotiate an Intercreditor Agreement regarding Foothill's
consent to the transactions and intercreditor matters. While such discussions
were ongoing, the Company and Apollo had discussions regarding modifying the
terms of the transactions contemplated by the February 7, 1997 agreements.
While such discussions were proceeding, the Company and Apollo also had
discussions with representatives of certain prospective purchasers including
12
<PAGE>
Morgan Stanley Asset Management Inc. ("Morgan Stanley") (which beneficially
owns 12.1% of the Common Stock in its capacity as investment advisor to
certain of its clients) regarding a potential private placement of Common
Stock, Series B Preferred Stock, and warrants to purchase Common Stock on
certain terms and conditions and in certain amounts. The potential Private
Placement under discussion would involve the Company's issuance and sale of up
to $10,000,000 in fair market value of Common Stock, up to 1,000,000 shares of
Series B Preferred Stock, and Series B Warrants to purchase up to 2,000,000
shares of Common Stock, for an aggregate purchase price of up to $20,000,000
payable to the Company. See "Potential Private Placement."
In conjunction with the negotiations with Foothill and the potential Private
Placement, the Company and Apollo discussed and negotiated certain
modifications to the February 7, 1997 agreements, among other things, as
follows. Such modifications included that (a) the 1,000,000 shares of Series B
Preferred Stock expected to be offered in a Rights Offering to Stockholders
would be accompanied by warrants to purchase an aggregate of 2,000,000 shares
of Common Stock; (b) the Company and Apollo would agree on a number of shares
of Series A Preferred Stock to be issued and sold to Apollo at the Closing,
which number would be at least 500,000 shares having a liquidation preference
of $5,000,000, out of a maximum of 2,500,000 shares of Series A Preferred
Stock; (c) from time to time after the Closing and until Apollo has acquired
all of the 2,500,000 shares of Series A Preferred Stock, the Company would
issue and sell to Apollo, and Apollo would purchase, additional shares of
Series A Preferred Stock to enable the Company to invest in real estate
development projects approved by the Board and Apollo; (d) that the proceeds
from the sale of the Series A Preferred Stock and the Investor Warrants would
be held by a newly formed special purpose subsidiary of the Company, SP
Subsidiary, which would be under certain restrictions including with respect
to, among other things, the incurrence of debt and the payment of dividends,
and that Apollo would have a first priority security interest in the capital
stock and assets of SP Subsidiary; and (e) that the amount of the cash flow
adjustment to which the exercise price of the warrants is subject would be
reduced.
The foregoing and related matters were considered and discussed by the Board
at meetings in March, April and May 1997. At a Board meeting on April 23,
1997, the directors indicated their preliminary approval to the transactions
as modified. To facilitate the transactions, seven current directors, Messrs.
Apthorp, Blase, Cohen, Ehrlich, Frederick, Seidman and Temple indicated that
they would resign effective as of the Closing subject to the execution of
indemnification and release agreements.
At a Board meeting on April 29, 1997, the Board discussed three suggested
candidates to serve as the Company's new independent directors as of the
Closing. The Board also approved, subject to certain modifications,
indemnification and release agreements between the Company and each of the
resigning directors. See "Compensation and Certain Related Matters--
Indemnification Arrangements."
At a Board meeting on May 12, 1997, the Board further discussed the
modifications including a provision that subject to certain conditions, the
Company from and after June 30, 1998 would have the right to require Apollo to
purchase all of the Series A Preferred Stock not previously acquired by it.
The Board discussed and approved the appointment of James M. DeFrancia and
Charles K. MacDonald as directors as of the Closing. See "Election of
Directors--Directors Following the Closing."
At a meeting on May 14, 1997, the Board discussed a further modification
agreed to by Apollo, to the effect that the Investor Warrants would be issued
proportionately to Apollo as Apollo purchased the Series A Preferred Stock. In
addition, the Board reviewed Tallwood's supplemental opinion that the
modifications, taken in the aggregate, to the transaction contemplated by the
original agreements dated as of February 7, 1997, are fair to Stockholders
from a financial point of view as of February 7, 1997, whether or not the
Private Placement is consummated. See "Fairness Opinion of Financial Advisor."
The Board unanimously (except for Mr. Scheetz who, because of his association
with Apollo, abstained) approved the proposed modifications to the agreements
between the Company and Apollo and the transactions contemplated thereby.
On May 20, 1997, the Company, pursuant to the unanimous approval of the
Board (except for Mr. Scheetz who abstained), and Apollo executed the
Investment Agreement and the Note Agreement (both amended and restated as of
May 15, 1997).
13
<PAGE>
CERTAIN EFFECTS OF THE TRANSACTIONS
As long as Apollo holds at least 500,000 shares of Series A Preferred Stock,
(a) the holder(s) of the Series A Preferred Stock will have the right to elect
three of the seven directors on the Board and (b) without Apollo's consent,
the Company will not have the right to engage in or enter into any agreement
with respect to any Major Transaction. See "Investment Agreement--Series A
Preferred Stock--Voting Rights" and "Consent Rights."
The Board is empowered by the General Corporation Law of Delaware ("DGCL")
to direct the management of the Company's business and to make numerous major
decisions without the approval of Stockholders. Matters and decisions subject
to Board control include, among other things, the purchase and sale of assets
of the Company (other than a disposition of all or substantially all of the
Company's assets outside of the ordinary course of business), the issuance of
additional equity or debt securities (subject to limitations imposed by the
Company's charter and debt agreements), the declaration of dividends in
respect of the Company's capital stock, the election and removal of officers
of the Company, capital expenditure decisions, strategic planning, by-law
amendments, officer compensation matters, and the recommendation for
Stockholder approval of certain major corporate transactions (including
mergers, certain asset sales, charter amendments and dissolutions). While not
constituting a majority of the entire seven-person Board, the three directors
elected by Apollo, if they vote together, may have the ability to control the
outcome of a vote taken by the Board; and, in any event, if the matter under
Board consideration involves a Major Transaction, Apollo will be able to
withhold its required consent in respect of such transaction. Under applicable
law, the directors elected by Apollo, like all directors, will have fiduciary
obligations to the Company and all of the Stockholders, not just to Apollo.
However, Apollo's representation on the Board could have the effect of
delaying, deterring or preventing tender offers or takeover attempts that some
or a majority of the Stockholders might consider to be in their best
interests, including offers or attempts that might result in the payment of a
premium over the market price of the Common Stock and the Series B Preferred
Stock. Although the Company expects to benefit from the participation of
Apollo's designees, there can be no assurances regarding the effect that
Apollo's influence on and participation in the Company's management will have
on the Company's financial condition and performance. See "Recommendation of
the Board; Reasons for the Transactions."
Apollo could also obtain sufficient ownership of Common Stock having, in
addition to Apollo's right to elect three Board members, the power to elect
one or more additional Board members, or otherwise significant voting power on
matters other than the election of directors. Based on certain assumptions,
Apollo's percentage ownership of Common Stock could range up to approximately
49%. See "Beneficial Ownership of Common Stock--Ownership by Apollo." Apollo
therefore would be in a position to significantly influence actions that
require the approval of the Stockholders.
Under the DGCL and the Company's charter and by-laws, the following matters
generally require the approval of the holders of a majority of the outstanding
Common Stock entitled to vote (subject to any additional rights of the holders
of any class or series of stock to vote on such matters separately as a
class): (a) a merger of the Company with or into another corporation or other
entity; (b) a sale, lease, exchange or disposition of all or substantially all
of the Company's assets; (c) the amendment of the Company's charter; and (d) a
dissolution of the Company. In addition, subject to certain exceptions, NASDAQ
National Market ("NASDAQ") rules require that the following securities
issuances by listed companies be approved by at least a majority of the votes
cast on the proposal: (a) the establishment of a stock option or purchase plan
or arrangement pursuant to which stock may be acquired by officers and
directors, except for warrants or rights issued generally to security holders
or broadly-based plans or arrangements including other employees; (b) in
connection with the acquisition of assets or stock of another company, if any,
a director, officer or substantial security holder of the Company has a
substantial direct or indirect interest in such other company; (c) the
issuance, other than in a public offering, of common stock or securities
convertible into or exchangeable for common stock representing more than 20%
of the common stock or voting power outstanding prior to the issuance, at a
price less than the greater of book or market value of the Common Stock; and
(d) an issuance of securities that will result in a change of control of the
Company.
14
<PAGE>
Holders of Series A Preferred Stock will vote as a single class on (a) the
creation or issuance of Senior Stock (as defined below) or Parity Stock (as
defined below), (b) any reclassification of the Series A Preferred Stock, and
(c) any charter amendment that would adversely affect any of the specified
rights of the Series A Preferred Stock or increase or decrease the authorized
number of shares.
Under the DGCL and the Company's charter, matters submitted to Stockholders
generally require approval of the holders of a majority of the outstanding
shares (or in certain cases, a plurality or majority of those voting).
However, Article Tenth of the Company's charter provides that the provisions
of such Article Tenth and of Article Fifth (regarding the management of the
Company by the Board, the Company's by-laws governing the determination of the
number of directors, and the Board's authority to amend the Company's by-
laws); Sixth (regarding the taking of action by Stockholders); Eighth
(regarding the removal of directors from office); Ninth (regarding the
indemnification of Company directors, officers, employees and agents);
Eleventh (regarding the authority of the Board and Stockholders to modify the
Company's by-laws); and Twelfth (regarding the exculpation of directors from
certain liabilities) may not be amended except by the vote of the holders of
not less than three-fifths of the outstanding Common Stock.
The issuance of the Series A Preferred Stock and of Common Stock upon the
conversion of the Series A Preferred Stock or the exercise of the Investor
Warrants could have the effect of diluting the economic interests and will
have the effect of diluting the voting rights of the existing holders of
Common Stock. The issuance of Series B Preferred Stock and Series B Warrants
in the Rights Offering and the issuance of Common Stock, Series B Preferred
Stock and Series B Warrants in the Private Placement could have similar
effects. As discussed above, the holders of the Series A Preferred Stock and
the Series B Preferred Stock will have a preference as to dividends and other
distributions, over the holders of Common Stock. Also, the holder(s) of Series
A Preferred Stock will have the right to elect three out of seven directors so
long as the Series A Preferred Stock is outstanding (provided, that if the
Investor does not hold at least 500,000 shares of Series A Preferred Stock,
the number of directors that the holders of Series A Preferred Stock will be
entitled to elect will equal three multiplied by a fraction, the numerator of
which is the number of shares of Series A Preferred Stock outstanding and the
denominator of which is 2,500,000, rounded up to the nearest whole director).
In addition, the Investor will have Consent Rights which will prohibit the
Company, without the Investor's consent, from entering into Major
Transactions. Also the conversion of the Series A Preferred Stock, the
conversion of the Series B Preferred Stock or the exercise of the Warrants
would increase the amount of Common Stock outstanding and thereby dilute the
percentage ownership interests and voting rights of the holders of Common
Stock immediately prior to such conversion or exercise. Further, as a result
of the foregoing, the issuance of the Series A Preferred Stock, the Series B
Preferred Stock and the Warrants could have certain anti-takeover effects.
Such effects could discourage and frustrate an attempt to acquire the Company,
thus depriving Stockholders of the benefits that could result from such an
attempt including a merger or tender offer in which Stockholders might receive
a premium over the market price of their Common Stock. The Company, however,
did not enter into, and does not view, the Investment Agreement, including the
Charter Amendments, the issuance of Series A Preferred Stock, Series B
Preferred Stock and the Warrants, as an anti-takeover measure. Other than the
transactions described herein, the Board is not aware of any current effort by
any person or group to obtain control of the Company.
Section 382 of the Internal Revenue Code of 1986, as amended, limits a
corporation's ability to carry forward its net operating losses and other tax
attributes following a transfer of stock or changes in a corporation's equity
structure which results in a "change of ownership." The determination of
whether a change of ownership occurs is made by determining for each "five-
percent shareholder" of the corporation the excess, if any, of his percentage
ownership of the corporation's stock over his smallest percentage ownership
during the three prior years. If the total of such increases exceeds 50
percentage points, there has been a change of ownership for purposes of
Section 382. A five-percent shareholder generally refers to any person that
directly or indirectly owns five percent or more of the total value of the
corporation's stock at any time during the three years analysis period. As a
result of certain transactions, several less than five-percent shareholders
may be aggregated and treated as a single five-percent shareholder whose
increase in ownership is taken into account. At December 31, 1996, the Company
had approximately $207 million of unused net operating loss ("NOL") carry
forwards which
15
<PAGE>
expire in years 1999 through 2010. Included in this amount is approximately
$24.1 million of net operating loss attributable to certain legal entities
that may only be used against future taxable income of these same entities. As
reflected in the Company's audited financial statements for the year ended
December 31, 1996, the tax effected NOL of approximately $78 million has been
included in the valuation allowance which effectively reduces the net deferred
tax asset to zero. For financial statement purposes, a valuation allowance is
required if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized.
As a result of the Company's high tax basis in Predecessor assets and certain
other factors, it is possible that, even without a change of ownership, a
substantial portion of its existing NOLs could expire before the Company was
able to utilize them.
The Company cannot determine at this time whether the proposed transactions
will result in a Section 382 change of ownership. That determination is
dependent on several factors that are not known at this time (e.g., the
portion of the stock issued in the proposed transactions that will be acquired
by actual or deemed five percent shareholders and the Common Stock prices
prevailing at the time the proposed transactions are consummated). Once these
factors are known, the Company may determine that the consummation of the
proposed transactions will result or have resulted in a change of ownership.
Further, even if a change of ownership does not result immediately, the
proposed transactions will result in an increase in the ownership of five-
percent shareholders of the Company, and, therefore, will significantly
increase the risk that a subsequent transaction within three years (over which
the Company may not have control) would cause a change of ownership of the
Company. If a change of ownership were to occur, the Company's ability to
carry forward its existing NOLs to offset future income and gain would be
subject to an annual limitation. The impact of this limitation cannot be
predicted with any certainty because the amount of the limitation would depend
on the value of the Common Stock and on interest rates in effect at the time
the change of ownership occurred. However, based on recent Common Stock
trading prices of $5.50 to $6.00 per share and on current interest rates, the
Company's ability to utilize its existing NOLs would be limited to
approximately $2.9 million to $3.2 million per year (reduced in the first five
years following the change of ownership to the extent necessary to permit the
deduction of certain realized tax operating losses that were built-in as of
the change in ownership). If the restriction on the utilization of the NOLs
did apply, a significant portion of the NOLs would expire before the Company
was able to utilize them. Any unused annual NOL limitations as well as any tax
operating losses generated after the change of ownership, adjusted for tax
attributes existing prior to the change of ownership date, would carry forward
for use in future years without restriction by Section 382.
Absent the acquisition of assets which generate significant taxable income,
the Company expects to generate tax losses during the next twelve to eighteen
months due to the anticipated disposition of a substantial portion of the
remaining Predecessor assets, the timing of the realization of income relative
to recent investments and certain operating overhead and carrying costs. While
there are no assurances, the Company believes that if a change of ownership
were to occur upon the consummation of the proposed transactions, a portion of
the Company's expected tax losses generated thereafter, adjusted for tax
attributes existing prior to the change of ownership, would carry forward for
use in future years without restriction by Section 382.
Notwithstanding the foregoing, the Transactions are expected by the Board to
have substantial benefits for the Company and its Stockholders. See
"Background" and "Recommendation of Board; Reasons for the Transactions."
USE OF PROCEEDS
The Company expects the aggregate net proceeds from the sale of all the
Series A Preferred Stock (at the Closing and Subsequent Issuances) and
Investor Warrants to be approximately $22,500,000, after payment of related
expenses and fees. The Company expects to use such net proceeds in the
acquisition and development, through the SP Subsidiary, of real estate
projects in Florida and other areas of the Southeast United States. While as
of the date hereof, the Company is considering and discussing with Apollo
several prospective real estate development projects (including Estero Pointe
described below), no determination has been made by the Company and Apollo to
invest net proceeds from the sale of the Series A Preferred Stock and the
Investor Warrants in such projects.
16
<PAGE>
During 1995 and 1996, the Company began an assemblage of property in the
Naples/Ft. Myers area of southwest Florida. The project, known as Estero
Pointe, which will be marketed as West Bay Club, is planned for 313 single
family homes and 744 multi-family homes on approximately 879 acres. The
Company has purchased 326 acres for approximately $6 million of which $2.4
million was financed by the sellers through notes secured by mortgages on the
properties. The remaining 553 acres are under purchase contracts expected to
close during 1997 and 1998. The Company anticipates converting ownership of
this project to a joint venture in which the joint venture partner would
contribute capital for acquisition and development. The Company is engaged in
preliminary discussions with Apollo concerning the possibility of transferring
the Company's interest in the Estero Pointe project to SP Subsidiary in which
event net proceeds from the Closing may be used to reimburse the Company for
its acquisitions and costs to date relating to Estero Pointe. Such
transactions would be subject to the approval of Apollo and Foothill and there
can be no assurance that they will be consummated.
If the potential Private Placement is consummated in whole for an aggregate
purchase price of $20,000,000, the Company expects the net proceeds from such
sale of Common Stock, Series B Preferred Stock and Series B Warrants to be
approximately $19,200,000, after payment of related expenses and placement and
other fees. The Company expects to use such net proceeds for working capital
purposes, including the payment of the approximately $21.67 million of
Foothill Debt due on June 30, 1997. There is no assurance that the potential
Private Placement will be consummated in whole or in part. If the Rights
Offering is fully subscribed and consummated in whole for an aggregate
purchase price of $10,000,000, the Company expects the net proceeds from the
sale of Series B Preferred Stock and Series B Warrants to be approximately
$9,300,000. The Company also expects to use the net proceeds from the sale of
Series B Preferred Stock and Series B Warrants in the Rights Offering for
working capital purposes, including payment of certain Foothill Debt. There is
no assurance that the Rights Offering will be consummated in whole or in part.
RECOMMENDATION OF THE BOARD; REASONS FOR THE TRANSACTIONS
The Board believes that the Transactions and the Charter Amendments are
advisable and in the best interests of the Company and its Stockholders, and
accordingly, the Board unanimously (except for Mr. Scheetz who, because of his
association with Apollo, has recused himself from this recommendation)
recommends to the Stockholders that they vote their Common Stock in favor of
the Transactions and the Charter Amendments, which would enable the Company to
consummate the Transactions.
For several years the Company has explored various strategic alternatives to
improve its financial condition, with the primary goal being to reduce
corporate debt by either creating equity value, raising additional equity or
repaying or refinancing existing debt. The Board believes, as a result of an
extensive and lengthy review process, that the Transactions are the most
advantageous of the alternatives available to the Company principally because
of the potential benefits, as discussed below, expected to result from the use
of the net proceeds from the Transactions and Apollo's access on a national
basis to new real estate development opportunities, and the expected benefits
to the Company of the additional transactional and financial expertise of
Apollo's designees on the Board.
As part of its review in respect of the Transactions, the Board considered
(a) information concerning the Company's financial performance, condition,
business operations and prospects; (b) the proposed terms and conditions of
the Agreements, and the transactions contemplated thereby, including the terms
and conditions of the Series A Preferred Stock, the Warrants, and the Series B
Preferred Stock, the provisions of the Charter Amendments, the Rights Offering
and the potential Private Placement; (c) the negotiations that led to the
terms and conditions of the Agreements, including the terms and conditions of
the Series A Preferred Stock, the Warrants, and the Series B Preferred Stock,
and the provisions of the Charter Amendments; (d) the related efforts of the
Company's financial advisor, BTSC, to obtain financing proposals for the
Company (see "Background") and the advice of BTSC in respect of the
Transaction; (e) the fairness opinions and related analyses of the Company's
financial advisor Tallwood regarding the Transactions, as discussed below; (f)
the potential dilutive effect on the outstanding Common Stock resulting from
the issuance of the Series A Preferred Stock and Series B Preferred Stock and
the conversion thereof into Common Stock and of the exercise of Warrants,
including the potential downward adjustment to the exercise price of the
Warrants; (g) the business advantages and benefits expected to result from the
Company's use of the net proceeds from the Transactions, including the
expectation that the availability of such funds will enable the Company to
increase significantly its future cash flow, including
17
<PAGE>
the Company's use of such funds in new real estate development projects,
without other parties participating on a joint venture basis, thereby
increasing the Company's potential rate of return; (h) the expected cumulative
benefits from the Transactions and the net proceeds from the Private Placement
and Rights Offering significantly enhancing the ability of the Company to
satisfy its substantial payment obligations in respect of the Foothill Debt
and the Unsecured Cash Flow Notes during 1997 and 1998; (i) the Company's
expectation that because of the Investor's ownership of the Series A Preferred
Stock and Warrants (or underlying Common Stock), the Investor may be inclined
to making additional investments in the Company on a project specific basis,
in accordance with the Investor's Co-Investment Opportunity rights under the
Investment Agreement (see "Investment Agreement--Co-Investment Opportunity");
(j) the Company's resulting enhanced financial liquidity which may increase
the Company's ability to obtain, from time to time, particular modifications,
consents and waivers from its lenders and other holders of the Company debt in
respect of affirmative and negative covenants; (k) the possibility that the
Investor's sponsorship will enable the Company to expand nationally its access
to new real estate development opportunities; and (l) that as a result of the
expected benefits to the Company from the Transactions, the market price of
the Company Stock could increase.
The Board also considered that for the past four years the Company's
principal focus has been to liquidate assets to repay debt and meet overhead
expense; and that considering the Company's existing asset base and high debt
and overhead requirements and the declining price of the Common Stock, it is
unlikely that the Company will be able to create Stockholder value by
continuing the liquidation of assets and attempting to grow without a
significant infusion of equity and a sponsor. The Board believes further that
Stockholder value will only be developed with growth which requires access to
capital resources on acceptable terms and sponsorship to improve the Company's
access to development opportunities and negotiating strength. In addition, the
Board believes that the Transactions will enhance the Company's ability to
refinance the Company's outstanding debt in 1998, and may enhance the
Company's ability to sell equity securities in the financial markets at more
favorable prices. Further, the Board anticipates that a relationship with
Apollo could provide the Company with additional access to real estate
development opportunities and a potential source of management contracts.
Accordingly, the Board concluded that the Transactions represent the best
strategic alternative for the Company.
The Board also considered that the "exclusivity" provisions of the
Investment Agreement preclude the Company during a specified period of time
from soliciting any Alternative Transaction (see "Exclusivity and Fiduciary
Out" below). The Investment Agreement provides, however, that the Company may
furnish information to and enter into discussions or negotiations with, any
party that makes an unsolicited bona fide written proposal to consummate an
Alternative Transaction on terms which, in the exercise of the Board's
fiduciary duty, after the consideration of advice from the Company's legal and
financial advisors, the Board determines is likely to be more beneficial to
the Stockholders than the Transactions. This provision permits the Company to
(a) terminate the Investment Agreement, and enter into an agreement with
respect to an Alternative Transaction subject to the Company's obligation to
pay certain fees to the Investor. The Board also noted that the Investment
Agreement provides for the forfeiture of the $1 million commitment fee the
Company paid to the Investor and payment of the Investor's expenses if the
Investment Agreement is terminated under certain circumstances and the payment
to the Investor of a termination fee of $2 million if the Company enters into
an Alternative Transaction with another party within a specified period of
time. A majority of the Board concluded that the Investor would not have
agreed to enter into the Investment Agreement without those fee provisions.
The Board concluded that, while the existence of the transaction expense and
termination fee provisions might reduce the likelihood that a third party
would propose an Alternate Transaction, the increased cost to a third party
would not be material and the benefits of the Transactions outweighed the
risks and costs.
In considering the Transactions, the Board acknowledged that there are
certain risks and costs associated with the Transactions, including (a) the
possibility that the potential benefits to the Company and the Stockholders
may not be realized, including the anticipated significant increase in cash
flow and opportunities to acquire new real estate development projects, (b)
the dilutive effect of the issuance of the Series A Preferred Stock, the
Series B Preferred Stock, and the Warrants, and of the issuance of Common
Stock pursuant thereto, (c) the possible decrease in March 1999 of the
exercise price of the Warrants, (d) the possibility that the Closing may not
occur, including as a result of not obtaining Stockholders Approval or
otherwise, resulting in forfeiture
18
<PAGE>
and the payment of certain fees to Apollo and a potential adverse effect on
the market price of the Common Stock, (e) the possibility that the Company may
not be able to effect Subsequent Issuances of Series A Preferred Stock to
enable the Company to invest in proposed projects because Apollo may not
approve the proposed projects or the conditions precedent to Apollo's purchase
obligations may not be satisfied (see "Investment Agreement--Transactions
After the Closing"); and (f) the possibility that the Private Placement may
not be consummated, in whole or in part, and that the related condition to
Foothill's consent may not be satisfied or waived. The Board also considered
the concerns expressed by the three directors who voted against approval of
the original agreements dated as of February 7, 1997 and the transaction
contemplated thereby, being primarily that: (a) the $1 million fee being
payable and the $1 million commitment fee being forfeited if the Stockholders
Approval is not obtained and the additional $1 million fee being payable if an
Alternative Transaction is consummated is, in the view of such directors, too
high; (b) the effect on the existing Stockholders resulting from the
conversion of the Series A Preferred Stock into Common Stock and the issuance
of Common Stock pursuant to the exercise of the Warrants, would be potentially
dilutive, particularly if the exercise price of the Warrants is adjusted
downward during the first quarter of 1999; and (c) the Series B Preferred
Stock expected to be offered in a Rights Offering to all Stockholders would
not be accompanied by any warrants to purchase Common Stock and the Company's
obligation to repurchase the Series B Preferred Stock would not be secured by
any collateral. Under the modifications, however, the Series B Preferred Stock
will be accompanied by warrants to purchase Common Stock.
The Board concluded that the expected benefits and advantages described
above and the likelihood of realizing such benefits, outweighed the risks,
costs and disadvantages. The Board also considered the potential for
increasing the value of the Common Stock with and without the Transactions,
including (a) an orderly liquidation of the Company's assets with the proceeds
used to cover overhead and debt (including the $85 million of Foothill Debt
and $39.6 million of principal under the Unsecured Cash Flow Notes) and (b) a
"status quo" scenario under which the Company would attempt to expand by
undertaking joint venture projects in the near term without making any
significant capital contributions into new projects and, therefore, only
retain a minority share of the residual interest of each project. Based on
these considerations, the Board believes that the potential value of the
Common Stock as a result of the Transactions should exceed the potential value
of the Common Stock without the Transactions. The Board also believes that, as
concerns about liquidity and a shortage of capital for reinvestment are
alleviated, the market value of the Common Stock may improve.
In view of the wide variety of factors considered in connection with its
evaluation of the Agreements, the Board did not find it practical to, and did
not, quantify or otherwise attempt to assign relative weights to the specific
factors considered in reaching its determinations.
THE BOARD UNANIMOUSLY (WITH THE EXCEPTION OF MR. SCHEETZ WHO, BECAUSE OF HIS
ASSOCIATION WITH APOLLO, HAS RECUSED HIMSELF FROM THIS RECOMMENDATION)
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE CHARTER AMENDMENTS AND THE
TRANSACTIONS. SEE "INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS."
CONSEQUENCES IF THE TRANSACTIONS ARE NOT APPROVED
If the Stockholders Approval is not obtained or the Transactions are not
otherwise consummated, the Company will pursue other alternatives to increase
Stockholder value, address its liquidity issues, and improve its financial
condition, including the possibility of soliciting other transactions similar
to the Transactions. As discussed above, if the Stockholders Approval is not
obtained or the Transactions are not otherwise consummated, the Company will
be required to pay a $1 million fee to Apollo and the Company's $1 million
commitment fee will be forfeited; and if an Alternative Transaction is
consummated, the Company will be required to pay an additional $1 million fee
to Apollo.
ABSENCE OF APPRAISAL RIGHTS
Under Delaware law, objecting Stockholders will have no appraisal,
dissenters' or similar rights (i.e., the right to seek a judicial
determination of the "fair value" of the Common Stock and to compel the
Company to purchase their Common Stock for cash in that amount) with respect
to matters presented at the Meeting or
19
<PAGE>
otherwise with respect to the Transactions, nor will such rights be
voluntarily accorded to Stockholders by the Company. Therefore, if the matters
submitted for approval of the Stockholders at the Meeting are approved by the
requisite number of shares, such approval will bind all Stockholders and
objecting Stockholders will be able to liquidate their Common Stock only by
selling it in the market.
INTEREST OF CERTAIN PERSONS IN THE TRANSACTIONS
The Investment Agreement provides that (a) the Company's charter and by-
laws, however amended, will contain provisions exculpating and indemnifying
its directors to the fullest extent permitted under applicable law; and (b)
the Company will maintain valid policies of directors and officers indemnity
insurance, as are reasonable for the Company's business and assets. In
addition, the seven Board members who have agreed to resign as directors as of
the Closing so that the Board will have seven members, of whom three will be
Investor designees, as required by the Investment Agreement, will receive (a)
certain indemnification rights and releases under an agreement with the
Company and (b) an extension of the exercise period of the stock options they
hold under the 1994 Non-Employee Directors Stock Option Plan, as discussed
under "The Transactions--Resigning Directors--Options and Indemnification,"
"Election of Directors" and "Compensation and Certain Related Matters--
Director Compensation" and "--Indemnification Arrangements." Currently, under
the Company's charter and by-laws all directors and officers, including former
directors and officers, are entitled to indemnification to the fullest extent
permitted by Delaware law.
Other than as discussed under "Compensation and Certain Related Matters--
Employment Agreements," the Company does not have employment agreements with
any of its executive officers or directors. After the Closing, the Company may
enter into employment agreements with certain senior officers, including the
Company's president and chief executive officer, J. Larry Rutherford.
EXPENSES OF THE TRANSACTIONS
The Company expects to incur expenses incident to the Transactions
(including the Rights Offering and the Private Placement) of approximately $4
million, including (a) fees paid or payable to BTSC of $1,250,000, (b) fees
paid or payable to Tallwood of $300,000, and (c) legal expenses and other
transactional expenses.
FAIRNESS OPINION OF FINANCIAL ADVISOR
The Company retained Tallwood as its financial advisor to render an opinion
to the Board as to whether the transaction as contemplated by the original
investment agreement dated as of February 7, 1997 is fair, from a financial
point of view, to the Stockholders, on the date of execution of the
Agreements. Tallwood delivered its oral opinion to the Board on January 20,
1997, during a Board meeting, and its written opinion dated February 7, 1997,
to the effect that on the basis of and subject to the assumptions set forth
therein, the transaction as contemplated by the original investment agreement
dated as of February 7, 1997 is fair, from a financial point of view, to the
Stockholders. Subsequent to Tallwood's rendering its opinion, the Company and
Apollo entered into the Agreements (amended and restated as of May 15, 1997)
containing certain modifications including the Private Placement (the
"Modifications") to the transaction as contemplated by the original investment
agreement dated as of February 7, 1997. The Company asked Tallwood to render
an opinion to the Board as to whether the terms and conditions of the
Modifications, taken in the aggregate, would alter the conclusions reached in
its original opinion. On May 14, 1997, Tallwood delivered its proposed written
opinion and subsequently its written opinion dated May 15, 1997 to the Board,
to the effect that on the basis of and subject to the assumptions set forth
therein, the Modifications, taken in the aggregate, are fair to the
Stockholders from a financial point of view as of February 7, 1997, whether or
not the Private Placement is consummated (the "supplemental opinion"). The
supplemental opinion is based on and subject to the purchase and sale of
Series A Preferred Stock and Investor Warrants having an aggregate purchase
price of at least $5 million at the Closing and the obligation under the
Modifications for the purchase and sale of an additional amount of Series A
Preferred Stock and Investor Warrants to total $25 million in the aggregate by
June 30, 1998. A copy of Tallwood's written opinion dated February 7, 1997 is
attached as Appendix B(1). A copy of the Tallwood's written opinion dated May
15, 1997 is attached as Appendix B(2). Stockholders are urged to read each
opinion carefully and in its entirety.
20
<PAGE>
In conducting its original analyses and arriving at its original opinion,
Tallwood reviewed and considered, among other things: (a) the January 14, 1997
Letter of Intent (including the term sheet attached thereto), the original
investment agreement dated as of February 7, 1997, the original note agreement
dated as of February 7, 1997, the Series A Statement of Designations (see
"Investment Agreement--Series A Preferred Stock") and the form of Warrant
Certificate (see "Investment Agreement--Warrants"); (b) Company cash flow
projections and underlying assumptions reflecting a liquidation scenario;
Company cash flow, income statement and balance sheet projections and
underlying assumptions reflecting a growth scenario assuming the Transaction
is not consummated; and Company cash flow, income statement and balance sheet
projections and underlying assumptions reflecting a growth scenario assuming
the Transaction is consummated; (c) the Company's Forms 10-K for the years
ended December 31, 1993, 1994 and 1995, the Company's Forms 10-Q for the
periods ended March 31, 1996, June 30, 1996 and September 30, 1996, and
unaudited financial information for the period ended December 31, 1996; (d)
the terms and conditions of other transactions that Tallwood deemed similar to
the Transaction; (e) reported market prices and trading volumes of the Common
Stock for the past 25 months; (f) a list of prospective investors contacted by
the Company's financial advisor BTSC in connection with a proposed
recapitalization of the Company's debt; and (g) other information that
Tallwood believed to be relevant to its analysis, that was publicly available
or furnished by the Company, including information provided during discussions
with its management, directors and advisors. In addition, Tallwood interviewed
(a) the Company's senior management in respect of the Company's business and
prospects and the benefits of the Transaction; (b) certain representatives of
Apollo in respect of the expected benefits of the Transaction; and (c) senior
executives of BTSC in respect of the expected benefits of the Transaction and
BTSC's efforts since August 1995 to secure financing for the Company's
proposed recapitalization. Tallwood also considered such other information,
financial studies, analyses, investigations and financial, economic and market
criteria which it deemed relevant.
In performing its original analyses and rendering its original opinion,
Tallwood relied upon the accuracy and completeness of all information provided
to it, whether obtained from private or public sources, including that from
the Company and BTSC, and upon the assurances of members of the Company's
management that they were not aware of any facts that would make such
information materially inaccurate or misleading. Tallwood did not attempt to
independently verify any such information or undertake an independent
appraisal of the Company or its assets, nor was Tallwood furnished with any
such appraisals. With respect to financial forecasts examined by Tallwood, it
assumed that such forecasts were reasonably prepared on bases reflecting the
best currently available estimates and good faith judgments of the Company's
management as to the Company's expected future financial performance. The
Company does not publicly disclose internal management projections of the type
provided to Tallwood in connection with Tallwood's analyses. Such projections
were not prepared with the expectation of public disclosure or in accordance
with guidelines of the American Institute of Certified Public Accountants or
of the Securities and Exchange Commission ("SEC"). The projections were based
on numerous variables and assumptions that are inherently uncertain.
Accordingly, actual results could vary significantly from those set forth in
the projections utilized by Tallwood in performing its analyses.
Tallwood's original opinion necessarily is based upon market, economic and
other conditions existing on, and evaluated as of, the date of its original
opinion. Tallwood does not have any obligation to update, revise or reaffirm
its opinion to reflect subsequent developments although such developments may
materially affect its opinion.
In conducting its supplemental analysis of the Modifications, Tallwood
reviewed and considered, among other things: (a) the Investment Agreement (as
amended and restated as of May 15, 1997); (b) the Company's proxy material;
(c) the Company's cash flow projections and underlying assumptions assuming
the Transactions after giving effect to the Modifications; and (d) other
information that Tallwood believed to be relevant to its supplemental
analysis, that was publicly available or furnished to Tallwood by the Company,
including information provided during discussions with its management,
directors and advisors. In addition, Tallwood interviewed the Company's senior
management, as to the business and prospects of the Company and as to the
possible benefits of the Modifications. Tallwood also considered such other
information, financial studies, analyses, and investigations and financial,
economic and market criteria which it deemed relevant.
21
<PAGE>
Tallwood's supplemental opinion rendered in connection with the
Modifications is based upon market, economic and other conditions existing on,
and were evaluated as of February 7, 1997, the date of the original opinion.
For purposes of rendering the supplemental opinion, Tallwood did not update or
revise its analysis to reflect subsequent developments, although such
developments may have affected the original opinion.
Neither Tallwood's original opinion nor its supplemental opinion addresses
the Board's business decision to engage in the transaction as originally
contemplated or as altered by the Modifications or constitute a recommendation
to any Stockholder as to how such Stockholder should vote on the Charter
Amendments. Tallwood has advised the Board that, based on the terms of
Tallwood's engagement by the Company, Tallwood does not believe that any
person (including any Stockholder), other than the Company and the Board, has
the legal right to rely on Tallwood's original or supplemental opinion to
support any claim against Tallwood arising under applicable state law and
that, if any claim is brought against Tallwood by any such person, this
assertion would be raised as a defense. In addition, Tallwood's original and
supplemental opinions exclude any opinion as to the price or trading range of
the Common Stock at any time whether or not the Transaction is effected.
Notwithstanding the above, no limitations were imposed by the Company upon
Tallwood with respect to the investigations made, the procedures followed or
the methodologies used by Tallwood in rendering its opinions, except that
Tallwood was not requested or authorized to seek any other potential investors
in the Company.
ANALYSES OF FINANCIAL ADVISOR. Set forth below is a summary of the principal
financial and valuation analyses performed by Tallwood in connection with the
preparation of its original opinion. The summary of such analyses does not
purport to be a complete description of the analyses performed and factors
considered by Tallwood in arriving at its original opinion. Tallwood believes
that the preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a summary description. Tallwood also believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered, without a comprehensive consideration of
all analyses and factors, could be materially misleading. Tallwood believes
that the methodologies underlying its analysis are standard methodologies
customarily used by investment bankers in the valuation of real estate
companies. In the following discussion, "Transaction" refers to the
transaction as contemplated by the original investment agreement dated as of
February 7, 1997.
Tallwood considered and analyzed two "status quo" scenarios and two
Transaction scenarios prepared by the Company. The status quo scenarios are
called "Status Quo--Liquidation" and "Status Quo--Growth Without Apollo." The
Status Quo--Liquidation scenario assumes that the Company would sell its
existing assets over time and not undertake any significant new projects. The
Status Quo--Growth Without Apollo scenario assumes that the Company would
expand its business by undertaking significant new projects in a joint venture
format, without any required capital contributions from the Company until such
time as the Company generates sufficient cash flow from the initial new
projects to fully fund future projects. The continuity of the Company's senior
management is assumed in the Status Quo--Growth Without Apollo scenario.
The Transaction scenarios are called "Proposed Transaction--Growth With
Apollo--Redemption" and "Transaction--Growth With Apollo--Conversion." Both
these scenarios assume the Company would use the proceeds from the issuance of
2,500,000 shares of the Series A Preferred Stock to the Investor to undertake
new projects in which the Company would be the majority owner until the
Company could fully fund its future projects. The Redemption scenario assumes
the Company would redeem the Series A Preferred Stock in the year 2001. The
Conversion scenario assumes the Investor would convert its Series A Preferred
Stock into Common Stock at a conversion price of $5.75. The Conversion
scenario was evaluated assuming three conversion dates: at the end of the
years 2000, 2001 and 2002.
In its evaluation of the Status Quo--Liquidation scenario, Tallwood used a
net asset value analysis. In its evaluation of the Status Quo--Growth Without
Apollo scenario, the Transaction--Growth With Apollo--Redemption scenario, and
the Transaction--Growth With Apollo--Conversion scenario, Tallwood used two
methodologies: a net asset value analysis and an analysis involving the
application of multiples to projected earnings before interest and taxes.
22
<PAGE>
STATUS QUO--LIQUIDATION. The Status Quo--Liquidation scenario assumes an
orderly liquidation of the Company's assets with the proceeds used to cover
overhead and retire debt. The Status Quo--Liquidation scenario assumes that
the Company will be able to obtain $48 million of new debt financing in 1998
when its Unsecured Cash Flow Notes in the aggregate principal amount of $39.6
million mature. As of December 31, 1998, under this scenario the Company
projects the fair market value of its assets and liabilities to be
approximately $107.1 million (the average of the Company's projected present
value of the proceeds generated by the sale of substantially all of its assets
using 15% and 20% discount rates) and $38.5 million, respectively, resulting
in an unencumbered asset value of $68.6 million. The proposed $48 million of
new debt financing would represent a loan to value ratio of approximately 70%.
Tallwood noted that the Company's ability to refinance $48 million of debt
with such level of asset coverage is questionable given the illiquid nature of
the Company's assets. Tallwood also noted that absent the ability to refinance
outstanding debt, the Company might be required to sell its remaining assets
at substantial discounts to market value.
STATUS QUO--GROWTH WITHOUT APOLLO. The Status Quo--Growth Without Apollo
scenario assumes the Company would attempt to expand by undertaking joint
venture projects in the near term, without making any capital contributions
into new projects and, therefore only retaining a minority share of the
residual interest of each project. The Company assumes that after
participating with a minority share of the residual interest in several of
these projects, it would generate sufficient cash flow to invest in the
ensuing projects. In addition, the Company's projections assume that it could
undertake the same number of new projects without investing capital in the
initial transactions, as the Company could undertake as a result of the
Transaction which would provide it with capital to invest in new transactions.
Continuity of the Company's senior management is assumed by Tallwood.
The Status Quo--Growth Without Apollo scenario assumes that the Company will
be able to obtain $48 million of new debt financing in 1998. As of December
31, 1998 the Company projects the fair market value of its assets and
liabilities under this scenario to be approximately $107.1 million (the
average of the Company's projected present value of the proceeds generated by
the sale of substantially all of its assets using 15% and 20% discount rates)
and $38.5 million, respectively, resulting in an unencumbered asset value of
$68.6 million. The proposed $48 million of new financing would represent a
loan to value ratio of approximately 70%. Tallwood noted that the Company's
ability to refinance $48 million of debt with such level of asset coverage is
questionable given the illiquid nature of the Company's assets. Tallwood also
noted that absent the ability to refinance outstanding debt, the Company might
be required to sell its remaining assets at significant discounts to their
market value.
Tallwood concluded that although this scenario produces better results than
a liquidation, because the Company would not have any capital to invest in new
projects, and would therefore only have a minority residual interest in each
of the initial projects, the Company would not build a sufficient asset base
or generate earnings levels necessary to increase the Company's value for many
years.
TRANSACTION--GROWTH WITH APOLLO. The Transaction--Growth With Apollo
scenarios assume that the Company would attempt to grow by undertaking
projects in which it would be the majority owner until such time as the
Company could fully fund its future projects. The Transaction--Growth With
Apollo--Redemption scenario assumes that the Company would redeem 2,500,000
shares of the Series A Preferred Stock in the year 2001. The Transaction--
Growth With Apollo--Conversion scenario assumes that the Investor would
convert 2,500,000 shares of Series A Preferred Stock into Common Stock at a
conversion price of $5.75. The Conversion scenario was evaluated assuming
three conversion dates: at the end of the years 2000, 2001 and 2002.
The Transaction scenarios also assume that the Company will be able to
obtain $48 million of new debt financing in 1998. As of December 31, 1998, the
Company projects the fair market value of its assets and liabilities under
both the redemption and conversion scenarios to be approximately $189.6
million (the average of the Company's projected present value of the proceeds
generated by the sale of substantially all of its assets) and $50.7 million,
respectively, resulting in an unencumbered asset value of $138.9 million. The
proposed $48 million of new financing would represent a loan to value ratio of
approximately 34.6%. Tallwood noted that although there can be no assurance,
this level of asset coverage should support such a loan.
23
<PAGE>
Tallwood concluded that under this scenario the estimated per share values
of the Common Stock are substantially higher than those of the other scenarios
considered. Thus, the Transaction--Growth with Apollo scenario represents the
alternative which should produce the greatest Stockholder value and is,
therefore, the preferred alternative from a financial point of view.
OTHER CONSIDERATIONS. In analyzing the Transaction, Tallwood considered
several factors described below in addition to the financial analyses.
SPONSORSHIP. Tallwood noted that Apollo is a highly successful and
nationally respected corporate and real estate investor. Tallwood believes
that the Apollo name should provide the Company with additional credibility
and recognition. Tallwood noted that BTSC reported that in several instances,
the stock prices of companies in which Apollo has invested have increased
significantly upon the public disclosure of Apollo's involvement. Tallwood
also noted that Apollo indicated to Tallwood that Apollo's investment strategy
in the real estate industry has been to invest in or acquire operating
companies within a property category to use as vehicles for Apollo's
acquisitions in that category, rather than investing in multiple transactions
with different operators/partners. Apollo's investment in the Company would be
Apollo's first major investment in a community developer. Accordingly,
Tallwood noted that Apollo seems committed to the Transaction and a long-term
relationship with the Company.
APOLLO'S ABILITY TO GENERATE DEAL FLOW. Tallwood noted that due to Apollo's
visibility within the real estate development industry and the funds at its
disposal, Apollo is presented with a significant number of development
investment opportunities to consider and often provides many of these
opportunities to its affiliated companies for evaluation. Currently, the
Company and Apollo are investigating possible transactions.
POTENTIAL SOURCE OF ADDITIONAL CAPITAL. Tallwood noted that Apollo
represents a significant potential source of additional growth capital for the
Company.
POTENTIAL SOURCE FOR MANAGEMENT ASSIGNMENTS. Tallwood also noted that Apollo
indicated that it would consider contracting with the Company for its
provision of management services for some of Apollo's future real estate
acquisitions, thereby providing the Company with an additional potential
source of fee revenue.
ALTERNATIVE TRANSACTIONS CONSIDERED. Tallwood noted that in August 1995, the
Company retained BTSC to act as exclusive financial advisor to effectuate a
debt recapitalization for the Company. Of the approximately 60 potential
investors contacted by BTSC, 32 indicated preliminary interest and only six
thereof, including Foothill and Cypress, submitted term sheets. In September
1996, the Company closed on three credit facilities totaling $85 million with
Foothill, and in June 1996, Cypress purchased the Company's Julington Creek
Plantation project for a sale price of approximately $24 million. The minimum
target returns for the debt facilities proposed in the term sheets submitted
by the four potential investors with which transactions were not consummated
were found by BTSC to range from approximately 22% to 24%. According to the
Company's management, since closing on the Foothill credit facilities, the
Transaction is the only proposal the Company received for a capital infusion
with deferred "current pay" terms acceptable to the Company's management. If
the Transaction is not consummated, there can be no assurance that the Company
will be able to raise capital on terms it deems acceptable.
CONCLUSION. Tallwood noted that while over the past four years the Company
has been able to enter into several joint ventures for new projects without
making significant capital contributions, the Company's principal focus has
been to liquidate assets to repay debt and meet overhead expense. Tallwood
also noted that given the Company's existing asset base and high debt and
overhead requirements and, as reflected by its declining stock price, it is
unlikely that the Company will be able to create Stockholder value by
continuing in this fashion. Tallwood further noted that Stockholder value will
only be developed with growth which requires access to capital on acceptable
terms and sponsorship to improve both deal flow and negotiating leverage.
Tallwood concluded that the Transaction will provide the Company with the
capital that it requires to invest in new projects which the Company projects
to generate high enough returns to increase Stockholder value. Based on the
24
<PAGE>
Company's projections, Tallwood believes that the Transaction will generate
the highest per share values of the scenarios considered. In addition,
Tallwood concluded that the Transaction will enhance the Company's ability to
(a) sell Common Stock at prices higher than the price of $4.69 (the per share
closing trading price on February 5, 1997, two days before the original
investment agreement was executed), in part due to Apollo's sponsorship, which
proceeds could be used to deleverage the Company's debt and (b) refinance its
outstanding debt in 1998. Further, a relationship with Apollo could
potentially provide the Company with additional access to real estate
development opportunities and a potential source of management contracts.
Accordingly, Tallwood concluded that the Transaction represents the best
strategic alternative for the Company of those analyzed and, based on the
foregoing, is fair to the Stockholders from a financial point of view.
Tallwood is an investment and merchant banking firm. As part of its
investment banking and financial advisory business, Tallwood is regularly
engaged in the valuation of businesses, including businesses in the real
estate industry, and their securities in connection with mergers and
acquisitions, underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for other purposes. Tallwood is
familiar with the Company. Tallwood has provided financial advisory and other
investment banking services to the Company with respect to several other
matters since 1993, for which Tallwood received customary compensation. The
Company selected Tallwood as financial advisor to render an opinion regarding
the Transactions based on Tallwood's qualifications and experience and the
Company's prior experience with Tallwood.
As compensation for services performed in rendering its original opinion,
the Company agreed to pay and paid Tallwood a fee in the total amount of
$250,000, of which $150,000 was paid upon execution of the retainer agreement
with Tallwood and $100,000 was paid at the time Tallwood delivered its written
opinion. The Company agreed to pay Tallwood a fee in the amount of $50,000 for
services performed in rendering its supplemental opinion. The Company agreed
to reimburse Tallwood for its reasonable out-of-pocket expenses incurred in
connection with this matter, including any fees and expenses of its counsel.
In addition, the Company agreed to indemnify Tallwood against certain
liabilities that arise out of Tallwood's engagement.
NOTE AGREEMENT
THE LOAN. The Note Agreement provides that the Investor will make a loan to
the Company and to the Subsidiaries, in a principal amount to be specified by
the Company up to $10,000,000 (the "Loan"). The Company is not obligated to
borrow any or all of the $10,000,000. The borrowing is subject to the approval
of Foothill and the State of Florida Division of Land Sales. Under the
Investment Agreement, if the Company wishes to borrow under the Note
Agreement, the Company will give the Investor a request for such loan,
including the amount of funds the Company wishes to borrow and a description
of its proposed use of such funds. The Investor will notify the Company within
10 business days of such request whether or not the Investor, in its absolute
discretion, approves such use of funds. If the Investor does not approve such
use of funds, it will have no obligation to make such Loan. If the Investor
approves the Company's proposed use of such funds, the Funding will occur on
the 20th business day following the notice from the Investor, subject to all
of the conditions to the Funding having been satisfied (or waived) including
the condition that Apollo's obligation to make the Loan is conditioned on the
Closing not having occurred. At the Funding the Investor is obligated to
deliver to the Company the amount of the loan to be made (the "Loan Amount")
and the Company and the Subsidiaries will execute and deliver to the Investor
the Note in the principal amount equal to the Loan Amount. There will be only
one borrowing, if any, under the Note Agreement and if the initial Loan is
less than $10,000,000 the Investor's commitment will terminate with respect to
any remaining portion of such $10,000,000.
While circumstances may change, as of the date hereof, the Company does not
intend to borrow any of the $10,000,000 under the Note Agreement. Because of
the provisions regarding the timing of Apollo's approval as described above,
it may not be possible for the Funding to occur without Apollo's approval and
waiver of certain terms and conditions.
25
<PAGE>
If the Investor has made a Loan under the Note Agreement, the then
outstanding principal amount of the Note will be due and payable, and will be
paid in full by the Company and the Mortgagor Subsidiaries, on December 31,
1998 (the "Maturity Date"). In addition, a principal installment in an amount
designated by the Investor in its sole discretion to the Company on or before
December 2, 1997, not to exceed the lesser of (a) the outstanding amount due
under the Note and (b) $5,000,000, will be due with respect to the Note on
December 31, 1997, provided that if the Investor fails to designate any amount
by such date, the amount of such installment will be the lesser of (a) the
outstanding amount due under the Note and (b) $5,000,000. If the maturity of
any of the principal of the Note is accelerated pursuant to applicable
provisions of the Note Agreement or the Note, such accelerated principal will
be immediately due and payable. The principal of the Note may, in whole or in
part, be prepaid from time to time, without premium or penalty. On any date
that any principal is due and payable, all accrued and unpaid interest with
respect to such principal likewise will be due and payable on such date.
If the Investor has made a Loan under the Note Agreement, the outstanding
principal amount of the Note will be convertible into Series A Preferred Stock
on the terms and conditions set forth in the Investment Agreement. All
interest and other amounts (other than principal) accrued and owing under the
Note Agreement or under the Due Diligence Fee Agreement (described below) must
be paid in full prior to or concurrent with such conversion. If the Note is
converted into Series A Preferred Stock, as set forth in the Investment
Agreement, the Company will be obligated to repurchase all such Series A
Preferred Stock on the occurrence of certain conditions. After such conversion
of the Note into Series A Preferred Stock, the Note will no longer evidence
indebtedness for borrowed money, but the Note will remain in full force and
effect to evidence the Company's repurchase obligation with respect to the
Series A Preferred Stock and the obligations of the Company and the
Subsidiaries to pay all other Secured Obligations (as defined below) then
outstanding. If no Loan is made prior to the issuance of the Series A
Preferred Stock, the Note will evidence the obligations of the Company and the
Subsidiaries to repurchase the Series A Preferred Stock and to pay all other
Secured Obligations. See "Investment Agreement--Series A Preferred Stock--
Repurchase Obligations."
The outstanding principal amount of any Loan will bear interest at an annual
rate equal to 20%. If, however, an Event of Default (as defined below) occurs
and continues, the Stockholders vote on but fail to approve the Charter
Amendments or such Stockholders Approval is not obtained on or before June 20,
1997, all amounts due under the Note Agreement and not paid when due shall
bear interest at an annual rate equal to 23% (the "Default Rate").
COLLATERAL. To secure the prompt payment of the Secured Obligations,
together with all costs, expenses, fees and other obligations payable by the
Company or the Subsidiaries under the Agreements with respect to the Secured
Obligations, the Company will grant, and will cause each Subsidiary to grant,
to the Collateral Agent, a continuing lien, junior to the lien created by, and
securing the obligations of the Company and Subsidiaries under, the loan
agreements and related documents governing the Foothill Debt, on substantially
all of the assets of the Company and its Subsidiaries except, as discussed
below, for the capital stock and assets of SP Subsidiary, and Apollo will be
subject to "payment" subordination provisions, on terms mutually satisfactory
to Apollo and Foothill, in respect of Apollo's junior lien on the above-
mentioned assets of the Company and its Subsidiaries. Apollo will have a
senior lien on all of the capital stock of SP Subsidiary and on all of its
assets, except as may be agreed otherwise. Foothill will have a junior lien on
all capital stock of SP Subsidiary and on all of its assets; and Foothill will
agree to payment subordination provisions in respect of such lien that are
substantially identical to Apollo's payment subordination provisions. All net
proceeds from (a) the Loan, (b) Apollo's investment in Series A Preferred
Stock, and (c) up to $60 million of additional Apollo investments in specific
Company development projects will, except as Apollo may otherwise agree, only
be used by SP Subsidiary, whether directly or through wholly owned
Subsidiaries thereof. Except as discussed above, the junior lien securing the
Secured Obligations will be on all of the following property of the Company
and its Subsidiaries (except certain excluded property), whether owned or
existing at the time of execution of the Note Agreement or thereafter acquired
or arising and all proceeds thereof (the "Collateral"): (a) the capital stock
of all Subsidiaries (the "Subsidiary Stock"); (b) all contracts for deed,
promissory notes, mortgages, deeds of trust and other agreements, pursuant to
which the Company or any Subsidiary has the right to receive payment in any
form for
26
<PAGE>
the sale of single-family home sites (excluding commercial receivables); (c)
all promissory notes and mortgages and deeds of trust payable to, or held by,
the Company or any Subsidiary, and all other documents, instruments and
agreements executed in connection therewith, arising from the sale of single-
family home sites or arising from the sale of other Real Property and all cash
and non-cash proceeds thereof; (d) all real property and fixtures and
interests in real property and fixtures, owned or acquired by the Company or
any Subsidiary (the "Real Property"); and (e) all personal property of the
Company or any Subsidiary. "Secured Obligations" means collectively, all
obligations owed under the Note Agreement or any other Secured Note Document
together with, after the issuance of the Series A Preferred Stock, all
repurchase obligations owed to the holders of Series A Preferred Stock or,
after the occurrence of an Event of Default (as defined in the Series A
Statement of Designations) all indemnification obligations owed to the
Investor pursuant to the Investment Agreement. "Collateral Agent" refers to
Foothill and its successors with respect to properties in which, pursuant to
the Intercreditor Agreement, the holders of the Foothill Debt hold a senior
lien and Apollo's designee and its successors with respect to properties in
which pursuant to the Intercreditor Agreement the Investor holds a senior
lien.
SPECIAL PURPOSE SUBSIDIARY. Unless the Investor consents otherwise, SP
Subsidiary shall not, and the Company shall not permit SP Subsidiary (which
term as used in the Note Agreement includes SP Subsidiary and its
Subsidiaries) to, directly or indirectly: (a) create, incur, assume or permit
to exist (i) any indebtedness, other than indebtedness under the Transaction
Documents and, subject to certain conditions, the Foothill Debt, (ii) any lien
on the capital stock of SP Subsidiary or on any of its property, assets or
revenues, other than liens under the Transaction Documents and, subject to
certain conditions, the Foothill Debt, and (iii) any guarantee obligation,
other than guarantee obligations under the Transaction Documents and, subject
to certain conditions, the Foothill Debt; (b) enter into any merger or
consolidation or liquidate, windup or dissolve itself or convey, sell, lease,
assign, transfer or otherwise dispose of, all or substantially all of its
property, business or assets, except to the extent such merger or
consolidation is of a Subsidiary of SP Subsidiary with and into SP Subsidiary
or between or among Subsidiaries of SP Subsidiary; (c) except as expressly
approved by the Board in connection with a Board-approved real estate
development project, convey, sell, lease, assign, transfer or otherwise
dispose of any of its property, business or assets; (d) declare or pay any
dividend on, or make any payment on account of, or set apart assets for a
sinking fund for the purchase, redemption, defeasance, retirement or other
acquisition of any capital stock of the Company other than the Series A
Preferred Stock, or make any other distributions in respect thereof, with
certain exceptions, including as permitted by certain provisions of the
Investment Agreement (see "Investment Agreement--Special Purpose Subsidiary");
(e) except as expressly approved by the Board in connection with a Board-
approved real estate development project, make or enter into any agreement the
performance of the terms of which would require SP Subsidiary to make any
expenditures in respect of the purchase or other acquisition of fixed or
capital assets; (f) except as expressly approved by the Board in connection
with a Board-approved real estate development project, make any advance, loan,
extension of credit or capital contribution to, or purchase any stock, bonds,
notes, debentures or other securities of or any assets constituting a business
unit of, or make any other investment in any person or entity; (g) make any
optional payment or optional prepayment on, or optional redemption of, or
purchase or otherwise acquire any interest in, any indebtedness other than any
indebtedness to the Investor; amend or modify, or agree to any amendment or
modification to any of the terms of any indebtedness, including Foothill Debt,
or any other agreement executed in connection with any indebtedness; or amend
any subordination provisions of any instrument governing any indebtedness; (h)
except as permitted by certain provisions of the Investment Agreement, enter
into any transaction with any Affiliate, including the Company or any
Subsidiary other than a Subsidiary of SP Subsidiary; (i) enter into any sale
or leaseback; (j) enter into any agreement with any person or entity other
than the Investor which prohibits or limits the ability of SP Subsidiary to
create, incur, assume or permit to exist any lien upon any of its property,
assets or revenues; (k) own any assets or properties on which the Investor
does not have a perfected first lien pursuant to the Security Documents; or
(l) create or permit to exist any Subsidiary. For a description of other
provisions regarding SP Subsidiary, see "Investment Agreement--Special Purpose
Subsidiary" and "Intercreditor Agreement."
FEES. Under the Note Agreement, the Company is obligated to pay to the
Collateral Agent such fees as may be required under any agreement between the
Company and the Collateral Agent with respect to
27
<PAGE>
compensation in respect of its services and to each other person or entity to
whom the Company has agreed to pay a fee in connection with the Note Agreement
or the other Transaction Documents and the transactions contemplated thereby.
"Transaction Documents" means the Secured Note Documents, the Intercreditor
Agreement, the Investment Agreement, the Due Diligence Fee Agreement, the
Series A Preferred Stock, the Warrants, the Amended and Restated Certificate
of Incorporation, and each exhibit, schedule, certificate and document to be
executed or delivered pursuant thereto. "Secured Note Documents" means the
Note Agreement and each instrument or document required to be executed and
delivered by the Company or any Subsidiary pursuant thereto.
GUARANTEES. The payment and performance by the Company of its obligations
under the Note Agreement and the other Transaction Documents, and any and all
other liabilities of the Company to the Investor or Collateral Agent, whether
existing at the time of execution of the Note Agreement or thereafter created
or acquired, are and will continue to be guaranteed by all Subsidiaries.
REPRESENTATIONS AND WARRANTIES. The Note Agreement contains representations
and warranties by the Company concerning, among other things: (a) the
financial statements of the Company and its consolidated Subsidiaries; (b) the
Business Plan update for the period 1996-1998; (c) since December 31, 1996,
the absence of an undisclosed development or event which has had or could
reasonably be expected to have a Material Adverse Effect, the absence of
dividends or other distributions upon the capital stock of the Company, and
the absence of any redemption, retirement or purchase by the Company of its
capital stock; (d) due organization, existence and good standing of the
Company and its Subsidiaries and similar corporate matters; (e) the Company's
power and authority to enter into the Note Agreement, the Note and the other
Transaction Documents; (f) the validity and enforceability of the Note
Agreement and the other Transaction Documents; (g) the authority of the
Subsidiaries with respect to the Transaction Documents; (h) the absence of any
violation of any legal requirement or contractual obligation; (i) the absence
of any litigation, investigation or proceeding with respect to the Note
Agreement, the Note or other Transaction Documents or any of the transactions
contemplated thereby or which is likely to have a Material Adverse Effect and
has not been disclosed; (j) the absence of default by the Company or any of
its Subsidiaries likely to have a Material Adverse Effect, the absence of a
Default (defined below) or Event of Default (defined below) that is
continuing, the absence of a default that is continuing under the Foothill
Loan Documents or the Unsecured Cash Flow Notes; (k) ownership of and title to
the Collateral and other property; (l) intellectual property; (m) taxes; (n)
Federal regulations; (o) Employment Retirement Income Security Act of 1974, as
amended; (p) the Investment Company Act; (q) the Subsidiaries and the Joint
Ventures; (r) environmental matters; (s) indebtedness; (t) guarantee
obligations; (u) compliance with Restitution Program and Final Judgment, as
defined in the Reorganization Plan; (v) the absence of broker's fees, finder's
fees or commissions with respect to the Note Agreement or the other
Transaction Documents, except for the fee payable by the Company to BTSC
pursuant to an engagement letter dated August 3, 1995, as amended by a letter
agreement dated February 29, 1996, which the Company agreed to pay; (w)
absence of untrue statements or omissions of material facts in any
representation or warranty of the Company or its Subsidiaries; (x) insurance;
(y) compliance with development orders with respect to certain Real Property;
(z) the Company's Reorganization Plan and Confirmation Order entered on March
27, 1992, and; (aa) zoning. With respect to the Note Agreement, "Material
Adverse Effect" means a material adverse effect on (a) the business,
operations, property, condition (financial or otherwise) or prospects of (i)
the Company and its Subsidiaries taken as a whole or (ii) SP Subsidiary, (b)
the ability of the Company to perform its obligations under the Note
Agreement, the Note, the security documents executed by the Company and its
Subsidiaries as contemplated by the Note Agreement (the "Security Documents"),
or the other Transaction Documents or (c) the validity or enforceability of
the Note Agreement, the Notes, the Security Documents or the rights or
remedies of the Collateral Agent or the Investor thereunder. "Business Plan"
means the business plan of the Company and its Subsidiaries dated October 23,
1996, and thereafter the business plan of the Company and its Subsidiaries
delivered to and approved by the Investor in December of each year in
accordance with the Note Agreement. "Joint Ventures" means any and all of (a)
the joint ventures identified on a specified schedule to the Note Agreement
and (b) other partnership, joint venture, limited liability company, or other
entity in which a Subsidiary acquires equity interests therein representing
50% or less of such entity's contributed capital. Certain of the
representations and warranties are subject to exceptions and limitations.
28
<PAGE>
CONDITIONS PRECEDENT. Under the Note Agreement, the Investor's obligation to
make the Loan and/or purchase Series A Preferred Stock pursuant to the
Investment Agreement is subject to the following conditions precedent to be
satisfied (or waived) by the Investor on or before June 24, 1997: (a) the
Investor will have received (i) the Note, the other Secured Note Documents,
the other Transaction Documents, the Security Documents and an agreement
regarding certain collateral-related services to be provided to the Investor
and Collateral Agent; (ii) certain Board resolutions; (iii) certain corporate
documents and certificates; (iv) the Unsecured Cash Flow Note indenture,
Foothill Loan Documents and the Business Plan and the book prepared by the
Company dated December 1994 setting forth the fair market value of the Real
Property of the Company and its Subsidiaries; (v) certain legal opinions; (vi)
a certificate as to environmental matters; (vii) certain mortgages, title
insurance policies, appraisals and other Real Property matters; (viii)
certificates of insurance; (ix) a certificate that no Material Adverse Effect
has occurred since September 30, 1996; (x) the Intercreditor Agreement
executed by the Investor, Foothill and the Company; and (xi) a borrowing
request from the Company specifying the amount of the borrowing requested and
the date such borrowing is to be made and certifying, as of the date of such
certificate and the date of such borrowing, that no Default or Event of
Default has occurred and that each representation and warranty of the Company
or any Subsidiary was materially true and correct when made and as of the
dates of such certificate and such borrowing; (b) the consummation of the
transactions contemplated by the Note Agreement and the other Transaction
Documents will not violate or conflict with, or involve Secured Creditor in
any violation of, any legal requirement; (c) the Company and its Subsidiaries
will have taken all such actions deemed necessary or desirable by the
Collateral Agent to ensure that Collateral Agent or Secured Party has a valid
and perfected priority security interest in the Collateral subject to the
liens permitted pursuant to the Note Agreement and the Security Documents; (d)
the Company will have paid all fees, costs and expenses of the Investor and
its counsel and the Collateral Agent and its counsel, incurred in connection
with the preparation, negotiation and execution of the Note Agreement and the
other Transaction Documents; (e) any consents necessary under the Security
Documents and other Foothill Loan Documents in connection with the
transactions contemplated by the Transaction Documents will have been
obtained; (f) the Company will have made available to the Investor such other
documents and information or taken such other actions, as the Investor may
reasonably request; (g) satisfactory provision will have been made for
delivery to the Investor and Collateral Agent of all reports and information
delivered to the holders of the Foothill Debt pursuant to any tax servicing
contracts in favor of such holders in respect of Real Property located in
Florida and Tennessee; (h) the Company and the Investor will have executed and
delivered the Due Diligence Fee Agreement; (i) the Investor will have received
a certificate from the Company describing the use to be made of the proceeds
of the issuance of the Note and the Investor will have approved such use, in
its sole and absolute discretion; and (j) a person reasonably satisfactory to
the Investor will have agreed to serve as Collateral Agent under the
Transaction Documents. Certain of the conditions precedent are subject to
exceptions and limitations.
AFFIRMATIVE COVENANTS. The Company has agreed that until the Closing Date
and thereafter at any time while there is due and owing and unpaid any
Repurchase Obligation (see "Investment Agreement--Series A Preferred Stock--
Repurchase Obligations"), the Company will, and will cause its Subsidiaries
(including SP Subsidiary, except to the extent that any agreement between the
Investor and the Company with respect to SP Subsidiary shall provide to the
contrary) to: (a) furnish to the Investor by specified dates (i) annual,
quarterly and monthly financial statements of the Company and its
Subsidiaries; (ii) projections of the operating cash flow budget of the
Company and its Subsidiaries; (iii) annual, quarterly and monthly financial
statements of certain Company joint ventures; (b) furnish to the Investor by
specified dates (i) certificates regarding the occurrence of a Default or
Event of Default and the performance of covenants and other agreements and the
satisfaction of conditions; (ii) financial statements and reports sent to
Stockholders, holders or trustee of any Unsecured Cash Flow Notes, and the
SEC; (iii) financial statements, material reports, management letters and
other financial information prepared for the Board; (iv) on a monthly basis, a
calculation of the Company's "borrowing base" under the Foothill Debt, a
summary listing of the Real Property included in such borrowing base and of
the Company's investments of certain joint ventures, an aging of certain
receivables and a summary aging of accounts payable; (v) monthly management
Business Plan updates; (vi) land sales reports; and (vii) such other
information as the Investor may reasonably request; (c) pay all its
obligations at or before maturity or before they become delinquent; (d)
continue to (i) engage in business of the same general type as now conducted
by it,
29
<PAGE>
maintain in effect its corporate existence and (ii) comply with all its
contractual obligations and requirements of law; (e) maintain all its property
in good working order and condition and maintain insurance on all its
property; (f) (i) keep proper books of records and account, (ii) permit
Investor representatives to inspect the Collateral, examine the Company's
books and records, and discuss the business, properties and financial
condition of the Company with officers and employees of the Company and its
certified public accountants, and (iii) permit the Investor to obtain
appraisal reports; (g) give notice to the Investor of (i) the occurrence of
any Default or Event of Default, (ii) any default or event of default under
certain contractual obligations of the Company or any of its Subsidiaries or
litigation, investigation or proceeding between the Company or any of its
Subsidiaries and any government authority, (iii) any litigation or proceeding
affecting the Company or any of its Subsidiaries in which the amount involved
is $250,000 or more or in which injunctive relief is sought, (iv) the
occurrence of any event expected to result in liability of the Company or any
Subsidiary in excess of $100,000, and (v) any development or event which could
reasonably be expected to have a Material Adverse Effect; (h) comply with and
use its best efforts to insure compliance by all tenants, with all
environmental laws and all lawful orders and directives of government
authorities respecting environmental laws, and indemnify, defend and hold the
Investor harmless against violation of any environmental laws applicable to
the real property owned or operated by the Company or any of its Subsidiaries;
(i) furnish to the Investor a Business Plan of the Company and its
Subsidiaries and any amendment, modification or update, setting forth a
projected balance sheet, income statement and cash flow; (j) conduct their
business substantially in accordance with the Business Plan and not materially
modify or deviate from the Business Plan without the Investor's prior
approval; (k) comply with all of the Transaction Documents; (l) cause the
Subsidiaries (other than SP Subsidiary, to the extent the Transaction
Documents provide to the contrary) to pay dividends to the Company from the
net cash proceeds of any sales of assets; (m) furnish to the Investor
supplemental title reports on the Real Property as the Investor may reasonably
request and deliver to the Investor certain third party appraisals,
environmental reports, surveys and title policies to the extent such were not
required to be delivered prior to the Funding; (n) comply with all applicable
legal requirements and orders of any government authority; (o) give notice to
the Investor with respect to certain matters; (p) maintain in effect the
Company's cash management system; and (q) deliver to the Investor all reports,
documents or information delivered to the Investors pursuant to the Foothill
Loan Documents. Certain of the affirmative covenants of the Company and its
subsidiaries are subject to exceptions and limitations.
CERTAIN NEGATIVE COVENANTS. The Company has agreed that, until the Closing
Date and thereafter, at any time while there is due and owing and unpaid any
Repurchase Obligation (see "Investment Agreement--Series A Preferred Stock--
Repurchase Obligations"), the Company will not, and will not permit any
Subsidiary (other than SP Subsidiary) to: (a) permit (i) the consolidated net
worth of the Company and its Subsidiaries to be less than the sum of
$23,500,000 and 50% of the annual net income for the prior fiscal year or (ii)
the interest charges coverage ratio to be less than 1.5; (b) create or incur
any indebtedness except (i) indebtedness of the Company under the Transaction
Documents, (ii) indebtedness under the Foothill Revolving Loan Agreement and
any replacement of the revolving loans not to exceed $45,000,000 in the
aggregate principal amount outstanding at any time (unless increased to
$50,000,000 pursuant to an increase in the Foothill Working Capital Facility
commitments from $20,000,000 to $25,000,000 in accordance with the
Intercreditor Agreement), (ii) the Secured Floating Rate Note Agreement and
any replacement indebtedness, (iii) indebtedness of the Company in respect of
the Unsecured Cash Flow Notes, (iv) indebtedness of the Company and its
Subsidiaries at any time outstanding, not exceeding $55,000,000 in the
aggregate (subject to certain exclusions and limitations), (v) indebtedness of
the Company to any Subsidiary or of any Subsidiary to the Company provided
that indebtedness of Subsidiaries to the Company will not exceed $20,000,000,
(vi) indebtedness of the Company and its Subsidiaries outstanding on the date
of the Note Agreement and disclosed in a schedule thereto, (vii)
notwithstanding (v) above, indebtedness of any Subsidiary to Persons extending
acquisition or project development financing in connection with certain
property under development of the Subsidiary, subject to certain limitations,
(viii) indebtedness of Subsidiaries for the development of infrastructures,
common areas or recreational facilities owing to quasi-governmental entities
such as community development and special districts to the extent financed
through industrial revenue bonds or other similar public financing; (c) create
or incur any lien upon any of its property, assets or revenue, with certain
exceptions; (d) create or incur any guarantee obligation, with certain
exceptions; (e) enter into any merger or consolidation or liquidate, wind-up
or dissolve
30
<PAGE>
or sell, lease, transfer or assign all or substantially all of its property,
business or assets with certain exceptions; (f) so long as no Default or Event
of Default has occurred and is continuing or would result therefrom, sell,
lease, transfer or assign any of its property, business or assets, with
certain exceptions; (g) declare or pay any dividend on or make any payment on
account of or set apart assets for a sinking fund; (h) enter into any
agreement the performance of which would require the Company or any Subsidiary
to make capital expenditures in excess of $25,000,000 during any 12-month
period; (i) make any advance, loan, capital contribution to or investment in
any person with certain exceptions; (j) make any optional payment or
prepayment on or redemption of any indebtedness or amend or modify the terms
of any Unsecured Cash Flow Notes or any indebtedness outstanding under the
Foothill Loan Documents or any other indebtedness, or amend any subordination
provisions of any indebtedness; (k) enter into any transaction with any
affiliate (other than any Subsidiary), with certain exceptions; (l) enter into
any sale and leaseback to the extent the aggregate book value of all assets
sold and leased exceeds $2,000,000; (m) enter into any agreement, other than
the Foothill Loan Documents and certain other financing, which limits the
ability of the Company and its Subsidiaries to create or incur any lien; (n)
allow the Company's actual net operating cash flow during any fiscal year to
deviate from the net operating cash flow projected under the Business Plan by
a negative margin equal to 30% or more as of the end of each quarter on a
cumulative basis, or allow the Company's total actual net cash flow for any
year to deviate from the annual net cash flow projected under the Business
Plan for such year by a negative margin equal to 40% or more; (o) permit
unsold housing inventory to exceed $10,000,000 in the aggregate; (p) allow
cash and cash equivalents maintained in bank accounts other than in the
Company's cash collateral account to exceed $5,000,000 in the aggregate; (q)
permit certain Subsidiaries to have any asset or revenue other than the joint
venture interests owned by such Subsidiaries or create or incur any lien on
such Subsidiaries properties, assets or revenues; or (r) permit any or certain
Subsidiaries to own any assets, have any revenues or such liabilities or
conduct any business. "Secured Floating Rate Note Agreement" means the Second
Amended and Restated Secured Floating Rate Note Agreement dated as of
September 30, 1996 among the parties to the Revolving Loan Agreement, together
with all amendments, modifications, extensions, substitutions and renewals
thereof. "Revolving Loan Agreement" means the Second Amended and Restated
Revolving Loan Agreement dated as of September 30, 1996 by and between the
Company and Foothill, together with all amendments, modifications, extensions,
substitutions and renewals thereof. Certain of the negative covenants of the
Company and its Subsidiaries are subject to exceptions and limitations.
EVENTS OF DEFAULT. Any of the following events will be an "Event of Default"
provided that any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied: (a) the Company or any
Subsidiary shall fail to pay when due any amount payable to the Investor under
the Note Agreement or any other Transaction Document; (b) any representation
or warranty by the Company or any of its Subsidiaries proves to have been
incorrect in any material respect when made or deemed made; (c) the Company
defaults in the observance or performance of any negative covenant in the Note
Agreement; (d) the Company defaults in the performance of any other agreement
in the Note Agreement (other than as provided in (a)-(c) above) or in any
other Transaction Document, and such default continues unremedied for 30 days;
(e) the Company fails to pay any obligations under the Foothill Loan Documents
or any principal of or interest on any Unsecured Cash Flow Notes and such
failure continues after the applicable grace period, if any; (f) any Foothill
Debt or any Unsecured Cash Flow Note is declared to be due and payable, or
required to be prepaid, prior to the stated maturity thereof; (g) any
Subsidiary fails to pay any principal of, or interest on, any indebtedness or
any guarantee obligation (other than any guarantee obligation created pursuant
to any Transaction Document) in excess of $1,000,000 when due and payable and
such failure continues after the applicable grace period, if any, and, if such
agreement or instrument permits the acceleration of the maturity of such
indebtedness or guarantee obligation as a result of such failure, such
indebtedness or guarantee obligation is declared to be due and payable, or
required to be prepaid prior to the stated maturity; (h) the Company
(i) defaults in any payment of principal of or interest on any indebtedness
(other than the Note, the Foothill Debt or any Unsecured Cash Flow Notes) or
in the payment of any guarantee obligation in excess of $1,000,000 beyond the
grace period, if any, or (ii) defaults in the performance of any other
agreement or condition relating to any such indebtedness or guarantee
obligation or any other event occurs or condition exists the effect of which
default or other event or condition is to cause, with the giving of notice if
required, such indebtedness to become due prior to its stated maturity or
31
<PAGE>
such guarantee obligation to become payable; (i)(i) the Company or any of its
Subsidiaries commences any action (A) under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors or (B) seeking appointment of
a receiver or trustee for any substantial part of its assets, or the Company
or any of its Subsidiaries makes a general assignment for the benefit of its
creditors, or (ii) there is commenced against the Company or any of its
Subsidiaries any action referred to in clause (i) above which results in the
entry of an order for relief or an adjudication or appointment or remains
undismissed or undischarged for 60 days; or (iii) there is commenced against
the Company or any of its Subsidiaries any action seeking an attachment or
execution against any substantial part of its assets which results in the
entry of an order for any such relief which is not vacated, discharged or
stayed within 60 days after entry; or (iv) the Company or any of its
Subsidiaries takes any action in furtherance of or consenting to any of the
acts in clauses (i), (ii), or (iii) above or, (v) the Company or any of its
Subsidiaries generally fails to pay its debts as they become due, or (vi) the
Company or any of its Subsidiaries causes the Reorganization Proceedings/1/ to
be reinstated; (j) the Confirmation Order entered in March 1992 by the
Bankruptcy Court is reversed, withdrawn or modified; (k) there occurs one or
more events or conditions relating to the provisions of the Employment
Retirement Income Security Act of 1974, as amended, which result in liability
of the Company or any "commonly controlled entity" in excess of $4,600,000;
(l) one or more judgments is entered against the Company or any of its
Subsidiaries involving liability of $500,000 or more and such judgments are
not vacated, discharged, stayed or bonded pending appeal within 60 days after
entry; (m) a Subsidiary Guaranty (see "Miscellaneous" below) or any Security
Document ceases to be in full force and effect or any Security Document ceases
to be effective to grant a perfected lien on the Collateral; (n) other than
Investor or any of its affiliates, any person that is not a transferee of
Investor or of any affiliate or two or more such persons acting in concert
acquire beneficial ownership of 30% or more of the outstanding capital stock
of the Company or no member of the Board is a designee of the Investor; (o)
any event or change occurs that has caused or evidences a Material Adverse
Effect; (p) the Total Unsecured Claims as defined in the Reorganization Plan
exceeds $1.5 billion; or (q) the Company or SP Subsidiary defaults in the
observance or performance of any agreement in certain provisions of the Note
Agreement that govern SP Subsidiary.
If an Event of Default occurs under subclauses (i), (ii), (iv), (v) or (vi)
of clause (i) above, then the principal amount of the Note with accrued
interest and all other amounts owing under the Note Agreement and Note will
immediately become due and payable and will accrue interest at the Default
Rate. If any other Event of Default occurs, the Investor may, by notice of
default, declare the principal amount of the Note with accrued interest and
all other amounts owing under the Note Agreement and the Note to be due and
payable, and such amount will accrue interest at the Default Rate. In any such
case, the Investor and Collateral Agent will have all rights and remedies
pursuant to the Security Documents and under applicable law.
"Default" means any of the events specified as an "Event of Default" whether
or not any requirement for the giving of notice, the lapse of time, or both,
or any other condition, has been satisfied. "Payment Default" means a Default
referred to in any of clauses (a), (e), (g) or (h) above, whether or not any
requirement for the giving of notice, the lapse of time, or both, or any other
condition thereto, has been satisfied.
EXPENSES. The Company has agreed (a) to pay or reimburse the Investor and
Collateral Agent for all out-of-pocket costs and expenses incurred in
connection with the Note Agreement, the Note, the Intercreditor Agreement and
the other Transaction Documents, including the reasonable fees and
disbursements of counsel, including the reasonable allocated costs of in-house
counsel, to the Investor and Collateral Agent, (b) to pay or reimburse the
Investor and Collateral Agent for all costs and expenses incurred in
connection with the enforcement or preservation of any rights under the Note
Agreement, the Note, the Intercreditor Agreement and
- --------
/1Pursuant/to a plan of reorganization, effective as of March 31, 1992 (the
"Reorganization Plan"), as confirmed by an order of the Bankruptcy Court
entered on March 27, 1992 (the "Confirmation Order"), the Company is the
successor to General Development Corporation, which commenced reorganization
proceedings under the Bankruptcy Code in April 1990 (the "Reorganization
Proceedings").
32
<PAGE>
the other Transaction Documents including the reasonable allocated costs of
in-house counsel, to the Investor and Collateral Agent, (c) to pay, indemnify,
and hold the Investor and Collateral Agent harmless from recording and filing
fees, and any and all taxes which may be payable in connection with the
execution and delivery of the Note Agreement, the Note and the other
Transaction Documents, (d) to pay the costs of furnishing all opinions of
counsel for the Company, (e) to pay the costs of obtaining any required
consents, amendments, and waivers to the Foothill Loan Documents and the
agreements governing the Unsecured Cash Flow Notes, (f) to pay the costs and
expenses incurred to continue the perfection of any liens in favor of the
Investor and Collateral Agent pursuant to any of the Security Documents, and
(g) to pay, indemnify and hold the Investor and Collateral Agent harmless from
and against any and all other liabilities, obligations, losses, damages, suits
and expenses with respect to the execution, delivery, enforcement, and
performance of the Note Agreement, the Note, the Intercreditor Agreement, and
the other Transaction Documents, provided that the Company will have no
obligation to Collateral Agent or the Investor under this clause with respect
to indemnified liabilities arising from the (i) gross negligence or willful
misconduct of Collateral Agent or the Investor or (ii) legal proceedings
commenced against the Investor by any transferee of the Note.
MISCELLANEOUS. All of the Subsidiaries are jointly and severally liable as
primary obligors and not merely as sureties for the due and punctual payment
in full of the Secured Obligations, provided that the obligations of each
Subsidiary is limited to the largest amount that would not render its
obligations subject to avoidance as a fraudulent transfer or conveyance under
applicable law. The Subsidiaries are also parties to a Subsidiary Guaranty
among Subsidiaries and pursuant thereto have allocated among themselves
liability for the Secured Obligations and provided contribution from one
another in amounts designed to ensure that each bears only its "fair share" of
the obligations. Such allocation, however, will not limit the liability of any
Subsidiary under the Note Agreement or the Subsidiary Guaranty.
INTERCREDITOR AGREEMENT
Both the Funding and the Closing are subject to, among other things,
Foothill and Apollo having entered into an Intercreditor Agreement regarding
the enforcement (a) of the security interests and other liens in the
collateral securing the Foothill Debt and (b) of the security interests and
other liens in the collateral securing the obligations under Note Agreement
and the Repurchase Obligations. Currently, Foothill, as the holder of the
Foothill Debt, has a senior lien on substantially all of the assets of the
Company and of its Subsidiaries. If the Funding or the Closing occurs, Apollo
will have (a) a junior lien securing the obligations of the Company and
Subsidiaries under the Note Agreement, if the Funding occurs, and, if the
Closing occurs, in respect of the Repurchase Obligations, on substantially all
of the assets of the Company and its Subsidiaries, except for the capital
stock and assets of SP Subsidiary and (b) a senior lien on all of the capital
stock of SP Subsidiary and on all of its assets (subject to subsequent
subordination to project specific loans on SP Subsidiary's projects funded by
non-Apollo lenders, provided that Apollo has approved the terms of the
subordination and of the project specific loan). Also, if the Funding or the
Closing occurs, Foothill will have a junior lien on all capital stock of SP
Subsidiary and on all of its assets. Under the expected form of the
Intercreditor Agreement, Apollo's above-mentioned junior lien would be subject
to certain payment subordination provisions in respect of the Foothill Debt
and Foothill's junior lien on the capital stock and assets of SP Subsidiary
would be subject to payment subordination provisions that are substantially
identical to Apollo's payment subordination provisions.
INVESTMENT AGREEMENT
TRANSACTIONS AT THE CLOSING. On the terms and conditions in the Investment
Agreement, including the obtaining of Stockholders Approval, at the Closing
the Investor will purchase from the Company, and the Company will issue and
sell to the Investor, the Initial Preferred Shares the number of which will be
agreed upon between the Company and the Investor but will be not less than
500,000 and the Initial Investor Warrants. The Initial Purchase Price of the
Initial Preferred Shares and the Initial Investor Warrants will be an amount
equal to (a) the number of Initial Preferred Shares multiplied by $9.88, plus
(b) the number of Initial Warrants multiplied by $0.06 (the Per Warrant
Price). For example, if the Company and Apollo agree that the Initial
Preferred Shares to be purchased and sold at the Closing will be 500,000, the
Initial Purchase Price will be
33
<PAGE>
$5,000,000. The Initial Purchase Price will be payable as follows. If the
Funding (consummation of the Loan) has not occurred, Apollo will deliver to
the Company the Initial Purchase Price in exchange for the Initial Preferred
Shares and the Initial Investor Warrants. If the Funding has occurred and if
the Initial Purchase Price in cash is greater than the outstanding principal
amount of the Note, Apollo will present the Note for conversion into Series A
Preferred Stock and will deliver to the Company an amount in cash equal to the
Initial Purchase Price minus the outstanding principal amount of the Note. If
the Funding has occurred and the principal amount of the Note is greater than
the Initial Purchase Price, Apollo will present the Note for partial
conversion into Series A Preferred Stock and the Company will execute and
deliver to Apollo a new Note in an amount equal to the amount of the original
Note minus the Initial Purchase Price. If the Funding has occurred, at the
Closing the Company will pay to the Investor the amount of accrued and unpaid
interest due on the Note. At the Closing, the Company will issue and deliver
to the Investor certificates representing the Initial Preferred Shares and the
Initial Investor Warrants. The Investor will deliver to the Company $1,000,000
representing the return of the Commitment Fee paid by the Company to the
Investor pursuant to the Letter of Intent.
TRANSACTIONS AFTER THE CLOSING. From time to time after the Closing and
until the Investor has acquired all of the 2,500,000 shares of Series A
Preferred Stock and paid the aggregate purchase price of $25,000,000, the
Company will issue and sell to the Investor and the Investor will purchase
from the Company, at one or more Subsequent Issuances additional shares of
Series A Preferred Stock and on each such occasion, a Proportionate Number of
Investor Warrants on the terms and conditions set forth in the Investment
Agreement, to enable the Company to invest in real estate development projects
approved by the Board and Apollo. Promptly after delivery to the Investor of a
certified Board resolution to invest in a real estate development project, the
Company and the Investor will set a date for the Subsequent Issuance, which
will be not less than 20 business days after such notification, and the number
of Subsequent Issuance Preferred Shares and the Subsequent Issuance Warrants.
At each Subsequent Issuance, the Investor will purchase from the Company,
and the Company will issue and sell to the Investor, the agreed number of
Subsequent Issuance Preferred Shares and the Subsequent Issuance Warrants for
a Subsequent Issuance Purchase Price equal to the number of Subsequent
Issuance Preferred Shares multiplied by $9.88 plus the number of Subsequent
Issuance Warrants multiplied by the Per Warrant Price of $0.06 payable as
described below. If no amount is outstanding under a new Note, the Investor
will deliver to the Company the Subsequent Issuance Purchase Price in exchange
for the Subsequent Issuance Preferred Shares and the Subsequent Issuance
Warrants. If any amount is outstanding under a new Note and if the Subsequent
Issuance Purchase Price is greater than the outstanding principal amount of
the new Note, the Investor will present the new Note for conversion into
Series A Preferred Stock and will deliver to the Company an amount equal to
the Subsequent Issuance Purchase Price minus the outstanding principal amount
of the new Note. If any amount is outstanding under a new Note and if the
outstanding principal amount of the new Note is greater than the Subsequent
Issuance Purchase Price, Apollo will present the new Note for partial
conversion into Series A Preferred Stock and the Company will execute and
deliver a new Note in an amount equal to the amount of the prior Note minus
the Subsequent Issuance Purchase Price.
The obligations of the Investor at each Subsequent Issuance are subject to
the conditions (unless waived by the Investor) that no Event of Default (as
defined in the Note Agreement) shall have occurred and, except for an Event of
Default which is or results from a Bankruptcy Event (defined below), shall
then exist.
In the event the Company has not presented the Investor with real estate
development projects pursuant to which the Investor has invested $25,000,000,
on the terms and conditions in the Investment Agreement, (a) the Investor will
be entitled at any time to require that a Subsequent Issuance be effected at
which the Investor will acquire all of the Series A Preferred Stock not
acquired by it prior thereto and (b) from and after June 30, 1998, the Company
will be entitled at any time to require that a Subsequent Issuance be effected
at which the Investor will acquire all of the Series A Preferred Stock not
acquired by it prior thereto. The Company's right to require Apollo on and
after June 30, 1998 to purchase all of the Series A Preferred Stock not
acquired by it prior thereto is subject to the condition that no Event of
Default (as defined in the Note Agreement) shall have occurred and, except for
an Event of Default which is or results from a Bankruptcy Event (defined
below), shall then exist.
34
<PAGE>
The aggregate proceeds from any such Subsequent Issuance will be invested by
the Company in debt securities issued by the Federal Government (or such other
investments as the Investor may approve) until they can be invested in Board-
approved real estate development projects. All such U.S. government debt
securities (or such other investments as the Investor may approve) and all
projects funded by the Investor's acquisition of Series A Preferred Stock and
Warrants will be held by SP Subsidiary in accordance with the provisions
described below.
SPECIAL PURPOSE SUBSIDIARY. So long as the Note remains outstanding and
unpaid or the Investor holds any Series A Preferred Stock, and unless the
Investor consents otherwise, the proceeds from the issuance and sale of the
Note, the Series A Preferred Stock and the Issues for Warrants and all funds
generated thereby or assets acquired therewith will be held from and after the
Closing Date by SP Subsidiary. All funds received by the Company from the
Investor (including additional investments by the Investor pursuant to the Co-
Investment Opportunity) and all proceeds thereof will be contributed to and
held by SP Subsidiary or a wholly-owned subsidiary of SP Subsidiary or, with
the prior written consent of the Investor, a joint venture in which SP
Subsidiary (or a wholly owned Subsidiary thereof) is a joint venturer or
partner, so long as, except for the Company's ownership of all of SP
Subsidiary's outstanding capital stock, neither the company nor any other
Subsidiary has an interest therein. The only business transactions in which SP
Subsidiary will engage are the development and sale of Board-approved real
estate development projects, including financing and other activities
incidental thereto.
Until the fourth anniversary of the Closing Date, SP Subsidiary will not
declare or pay any dividend on, or make any payment on account of, the
purchase, redemption, defeasance or retirement of any capital stock of SP
Subsidiary, or make any advance, loan, extension of credit or capital
contribution to, or purchase any stock, bonds, notes, debentures or other
securities or assets of, or make any other investment in, or engage in any
other transactions with, the Company or any entity in which the Company has an
interest, except that (a) the foregoing restrictions will not apply to
transactions with or investments in a wholly owned Subsidiary of SP
Subsidiary; (b) at any time after the Closing Date, SP Subsidiary can transfer
funds to the Company, whether in the form of a dividend or otherwise, solely
for the purpose of, or otherwise directly pay on the Company's behalf, any
dividend or other cash payment on or in respect of Series A Preferred Stock,
(c) upon the third anniversary of the Closing Date or, if earlier, any
Repurchase Date (defined below, see "Series A Preferred Stock--Repurchase
Obligations"), SP Subsidiary can transfer funds to the Company, whether in the
form of a dividend or otherwise, solely for the purpose of, or otherwise
directly pay on the Company's behalf in respect of, the purchase or redemption
of Series A Preferred Stock and (d) to the extent the Company provides
administrative and other services to SP Subsidiary, an appropriate portion of
the general and administrative expenses of the Company may be allocated to and
reimbursed by SP Subsidiary.
At any time after the fourth anniversary of the Closing Date, SP Subsidiary
may declare and pay dividends in respect of its capital stock in an amount not
to exceed, during any fiscal year, the lesser of 5% of SP Subsidiary's Excess
Value (as defined below) or 10% of SP Subsidiary's cash-on-hand, provided that
no Event of Default (as defined in the Series A Preferred Stock Statement of
Designations) exists with respect to theSeries A Preferred Stock. "Excess
Value" means SP Subsidiary's net worth, after taking into account all of its
liabilities, on a GAAP basis, and all amounts necessary to redeem all
outstanding Series A Preferred Stock in full.
The Investor will at all times have a first priority security interest in
all outstanding capital stock of SP Subsidiary and (subject to prior liens for
customary project financing with the consent of the Investor) its assets,
perfected under security documents satisfactory to the Investor.
The board of directors of SP Subsidiary will consist of one director
designated by the Company and one director designated by the Investor, but the
Investor's designee will not vote against or otherwise impede any resolution
or other action authorizing or directing SP Subsidiary to take any action as
described above.
Any agreement to which SP Subsidiary will be a party that will govern (a) a
borrowing of funds which will be secured by its interest in one or more real
estate development projects or (b) a joint venture, partnership or similar
agreement between SP Subsidiary and the third party in respect of one or more
real estate development
35
<PAGE>
projects shall include provisions reasonably satisfactory to Apollo with
respect to (i) rights to cure any default or event of default by SP Subsidiary
or (ii) rights of a third party triggered or otherwise exercisable upon the
occurrence of a change in the control of the Company or SP Subsidiary.
For a description of other provisions regarding SP Subsidiary, see "Note
Agreement--Special Purpose Subsidiary" and "Intercreditor Agreement."
SERIES A PREFERRED STOCK. The following includes a summary of the
preferences, powers, and rights of the Series A Preferred Stock set forth in a
Statement of Preferences and Rights ("Series A Statement of Designations") as
well as a description of certain related provisions of the Investment
Agreement and a Due Diligence Fee Agreement. The summary is qualified in its
entirety by reference to the full text of theSeries A Statement of
Designations, which is Annex A to the Charter Amendments, which is attached
hereto as Appendix A.
NUMBER OF SHARES. The number of authorized shares of Series A Preferred
Stock will be 2,500,000 shares.
RANK. With respect to dividends and distributions upon the voluntary or
involuntary liquidation, winding-up or dissolution of the Company, the Series
A Preferred Stock will rank senior to the Common Stock and pari passu with any
Parity Stock (subject to any differing security interests between different
classes of Parity Stock). Parity Stock means any class or series of stock the
terms of which provide that it is entitled to participate pari passu with the
Series A Preferred Stock with respect to any dividend or distribution or upon
voluntary or involuntary liquidation, dissolution or winding-up of the
Company. Parity Stock includes the Series B Preferred Stock (except insofar as
the Series A Preferred Stock has certain security rights and interests which
are not applicable to the Series B Preferred Stock). See "Investment
Agreement--Series B Preferred Stock."
DIVIDENDS. The holders of record of the Series A Preferred Stock will be
entitled to receive, when, as and if declared by the Board, out of funds
legally available therefor, cash dividends on each share of Series A Preferred
Stock at an annual rate (the "Dividend Rate") equal to 20% of the Liquidation
Preference in effect from time to time. "Liquidation Preference" means, at any
time, $10 per share of Series A Preferred Stock, plus accumulated and unpaid
dividends thereon through the date of such determination, whether or not
declared and whether or not funds are legally available therefor. All
dividends will be cumulative, whether or not declared, on a daily basis from
the date on which the Series A Preferred Stock is originally issued by the
Company (the "Original Issue Date") and will be payable quarterly in arrears
on March 31, June 30, September 30 and December 31 of each year (the "Dividend
Payment Date"), commencing on September 30, 1997.
Dividends will cease to accumulate in respect of Series A Preferred Stock on
the Redemption Date (see "Optional Redemption" below), the Conversion Date
(see "Conversion" below) or the Repurchase Date (see "Repurchase Obligations"
below) for such shares, as the case may be, unless, in the case of a
Redemption Date or Repurchase Date, the Company defaults in the payment of the
amounts necessary for such redemption, or in its obligation to deliver
certificates representing Common Stock issuable upon such conversion, as the
case may be, in which case, dividends will continue to accumulate at an annual
rate of 23% of the Liquidation Preference in effect from time to time (the
"Default Dividend Rate") until such payment or delivery is made. In addition,
any event that would cause dividends on the Series A Preferred Stock to accrue
at the Default Dividend Rate, including an Event of Default (defined below,
with respect to the Series A Statement of Designations), would trigger the
Company's obligation to pay a monthly fee under the Due Diligence Fee
Agreement (described below). If the Company defaults in the payment of amounts
due upon a Repurchase Date, interest will accrue on the amount of such
obligation at the Default Dividend Rate until such payment is made (with all
interest due).
Under the Due Diligence Fee Agreement amended and restated as of May 15,
1997, the Company has agreed if a Fee Triggering Event occurs, to pay the
Investor on the last day of each month $25,000 per month ending on or prior to
June 30, 1998, $40,000 per month ending after such date and on or prior to
June 30, 2000, and $75,000 per month ending thereafter (the "Fee") as
compensation for in-house and out-of-pocket expenses incurred by the Investor
in the due diligence and investment analysis required from time to time in
connection with the Investor's preliminary analysis of co-investment
opportunities under the Investment Agreement. See
36
<PAGE>
"Investment Agreement--Co-Investment Opportunity." "Fee Triggering Event"
means the occurrence while any Series A Preferred Stock is outstanding under
the Investment Agreement of any event that would cause dividends on the Series
A Preferred Stock to accrue at the Default Dividend Rate (defined above). The
Investor will perform its preliminary due diligence and financial analysis
services free of charge prior to a Fee Triggering Event or if such Fee
Triggering Event does not occur. No fee will be payable if no Series A
Preferred Stock and no Repurchase Obligations shall be outstanding. Under the
Investment Agreement, the sole consequence of any failure on the part of
Investor to conduct such due diligence and financial analysis will be that the
Investor may be deemed to have rejected the Company's offer of a co-investment
opportunity and the Investor will continue to be entitled to receive the Fee.
The Investor will be entitled to payment of the Fee without regard to the
number, if any, of co-investment opportunities presented to the Investor for
its analysis in any month and will be entitled to such Fee even if no co-
investment opportunities are presented to it by the Company and whether or not
the Investor performs such due diligence and analysis or incurs any expenses
in connection therewith. Except as provided in the Due Diligence Fee
Agreement, the Investor will not be entitled to reimbursement by the Company
of the Investor's expenses in connection with analysis of co-investment
opportunities unless the Company agrees to do so in connection with a
particular co-investment opportunity.
Following an Event of Default (as defined in the Series A Statement of
Designations), the holders will be entitled to receive dividends on each share
of Series A Preferred Stock at an annual rate equal to the Default Dividend
Rate, payable in cash. "Event of Default," as defined in the Series A
Statement of Designations, means (a) any event of default (whatever the reason
for such event of default and whether it is voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any governmental authority)
under any instrument creating, evidencing, or securing any indebtedness for
borrowed money of the Company or any Significant Subsidiary in an amount in
excess of $2,500,000 that would enable the creditors or secured parties under
such instrument to declare the principal amount of such indebtedness due and
payable prior to its scheduled maturity, which event of default has not been
waived, (b) the occurrence of a Default Change of Control (as defined below),
(c) a material breach by the Company of (i) the provision in the Investment
Agreement prohibiting (except as permitted by the Investment Agreement) the
Company from engaging in, or entering into any agreement with respect to, any
Major Transaction, without the prior consent of the Investor or (ii) (insofar
as such breach is willful and materially imperils the value of the collateral
securing the rights of the holder of the Series A Preferred Stock) of the
provisions in the Note Agreement relating to the collateral or any Security
Document (as defined in the Note Agreement) which, in any event, is not
curable or if curable is not cured within 15 days; or (d) any Bankruptcy Event
giving rise to each holder of Series A Preferred Stock being deemed
automatically to have delivered a Repurchase Notice as described below under
"Repurchase Obligations." "Significant Subsidiary" means a subsidiary as
defined in Regulation S-X under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); provided that SP Subsidiary will be a
Significant Subsidiary. Regulation S-X under the Exchange Act defines a
Significant Subsidiary as a subsidiary which meets any of the following
conditions: (a) the Company's and its other Subsidiaries' investments in and
advances to the subsidiary exceed 10% of the total assets of the Company and
its Subsidiaries consolidated as of the end of the most recently completed
fiscal year; (b) the Company's and its other Subsidiaries' proportionate share
of the total assets of the subsidiary exceeds 10% of the total assets of the
Company and its Subsidiaries consolidated as of the end of the most recently
completed fiscal year; and (c) the Company's and its other Subsidiaries'
equity in the income from continuing operations before income taxes,
extraordinary items and cumulative effect of a change in accounting principle
of the subsidiary exceeds 10% of such income of the Company and its
Subsidiaries consolidated for the most recently completed fiscal year.
While any Series A Preferred Stock is outstanding, the Company will not
declare, pay or set apart for payment any dividend on any Junior Stock or make
any payment on account of, or set apart for payment money for a sinking or
other similar fund for, the purchase, redemption or other retirement of, any
Junior Stock, or any warrants, rights, calls or options exercisable for any
Junior Stock or make any distribution in respect thereof (other than, prior to
the occurrence of an Event of Default, dividends, payments, purchases,
acquisitions, redemptions, retirements or distributions in Junior Stock) and
will not permit any Subsidiary to do any of the
37
<PAGE>
same in respect of such Junior Stock (other than, prior to the occurrence of
an Event of Default, dividends, payments, purchases, acquisitions,
redemptions, retirements or distributions in Junior Stock) unless and until
all dividend arrearages, if any, on the Series A Preferred Stock have been
paid in full in cash and the Company is not in default of any of its
redemption obligations or Repurchase Obligations. "Junior Stock" means Common
Stock and all other classes of capital stock of the Company and series of
preferred stock of the Company after the Closing Date which is not Senior
Stock or Parity Stock.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the holders of the
Series A Preferred Stock will be entitled to be paid out of the Company's
assets available for distribution to its Stockholders an amount in cash equal
to the then Liquidation Preference, for each share outstanding, before any
payment will be made or any assets distributed to the holders of any Junior
Stock. If the Company's assets are not sufficient to pay in full the
liquidation payments payable to the holders of the Series A Preferred Stock
and the holders of any Parity Stock outstanding, then, subject to the rights
of the holders of Series A Preferred Stock to require the Company to purchase
their shares as described under "Repurchase Obligations" below and subject to
any differing security interests between different classes of Parity Stock,
the holders of all such shares will share ratably in such distribution of
assets. Each holder agrees that it will respect the security rights and
priorities of any holder of shares of Parity Stock or Senior Stock and will
not challenge the right of any holder of Parity Stock or Senior Stock to be
paid in respect of any obligations of the Company under any instruments
between such holder and the Company or any of its Subsidiaries, including the
right to be paid by any Subsidiary of the Company under any guarantee by such
Subsidiary of the obligations of the Company. For the purposes of the
foregoing, neither the sale, conveyance, exchange or transfer of all or
substantially all of the property or assets of the Company nor the
consolidation or merger of the Company with or into one or more corporations
will be deemed to be a voluntary or involuntary liquidation, dissolution or
winding-up of the Company.
OPTIONAL REDEMPTION. At the Board's option, the Company may redeem, upon 30
days notice, at any time on or after the third anniversary of the Original
Issue Date, from any source of funds legally available therefor, in whole or
in part, any or all of the Series A Preferred Stock, at a redemption price in
cash equal to the then Liquidation Preference. No optional redemption will be
made unless full dividends have been or contemporaneously are declared and
paid or declared and a sum set apart sufficient for such payment, on the
Series A Preferred Stock for all dividend periods terminating on or prior to
the redemption date. In addition, no partial redemption will be made (a) for
an amount of shares less than such number of shares of Series A Preferred
Stock as have an aggregate Liquidation Preference equal to the lesser of
$1,000,000 or the aggregate Liquidation Preference of all outstanding Series A
Preferred Stock or (b) if after consummation of any such partial redemption
there would remain outstanding fewer than 500,000 shares of Series A Preferred
Stock. The Company has agreed in the Investment Agreement that without
Apollo's consent, the Company will not redeem Series A Preferred Stock except
on a pro rata basis with the Series B Preferred Stock issued in the Rights
Offering.
In the event of a redemption of only a portion of the then outstanding
shares of Series A Preferred Stock, unless the holders of a majority of such
outstanding Series A Preferred Stock agree to waive the proration requirement,
the Company will effect such redemption pro rata according to the number of
shares held by each holder of Series A Preferred Stock, except that the
Company may redeem such shares held by holders of fewer than 100 shares.
VOTING RIGHTS. The holders of Series A Preferred Stock voting together as a
single class will be entitled to elect, out of a seven-member Board, three
directors to the Board (who will serve for terms of one year). The holders of
Series A Preferred Stock will otherwise not vote on any matters submitted for
a vote of the holders of the Common Stock, except as may be required by
applicable law; provided that if the Investor does not hold at least 500,000
shares of Series A Preferred Stock, the number of directors that the holders
of the Series A Preferred Stock will be entitled to elect will be equal to
three multiplied by a fraction, the numerator of which is the number of shares
of Series A Preferred Stock outstanding and the denominator of which is
2,500,000, rounded up to the nearest whole director.
38
<PAGE>
Under the Investment Agreement, directors nominated by the holders of the
Series A Preferred Stock will be represented on any committee of the Board and
will constitute one-half of the Executive Committee of the Board, if the Board
decides to have an Executive Committee.
So long as any Series A Preferred Stock is outstanding, the Company will not
take any of the following actions, without the affirmative vote or consent of
holders of at least a majority of the outstanding Series A Preferred Stock,
voting or consenting, as the case may be, as one class: (a) issue, or
reclassify any authorized stock of the Company into, or issue any obligation
or security convertible into or evidencing a right to purchase, any Senior
Stock or Parity Stock or any preferred stock having voting rights senior or
equal to those of the Series A Preferred Stock (other than Series B Preferred
Stock), (b) reclassify the Series A Preferred Stock, or (c) amend its charter
or the Series A Statement of Designations or the Series B Statement of
Designations so as to affect adversely the specified rights, preferences,
privileges or voting rights of holders of Series A Preferred Stock or Series B
Preferred Stock or to increase or decrease the number of authorized shares of
Series A Preferred Stock or Series B Preferred Stock. "Senior Stock" means any
class or series of stock the terms of which provide that it is entitled to a
preference to the Series A Preferred Stock with respect to any dividend or
distribution or upon voluntary or involuntary liquidation, dissolution or
winding-up of the Company.
In any case in which the holders of Series A Preferred Stock will be
entitled to vote as a separate class, each holder will be entitled to one vote
for each share of Series A Preferred Stock then held.
REPURCHASE OBLIGATIONS. Beginning on the fourth anniversary of the Original
Issue Date, each holder of Series A Preferred Stock will have the right, at
such holder's option, exercisable by notice (a "Repurchase Notice") to require
the Company to purchase Series A Preferred Stock then held by such holder, at
a repurchase price in cash equal to the Liquidation Preference in effect at
such time (the "Repurchase Price"). Prior to the fifth anniversary of the
Original Issue Date, however, the number of shares required to be repurchased
by the Company from any holder pursuant to the foregoing provision (the "Put
Shares"), will not exceed one-third of the total number of shares of Series A
Preferred Stock issued by the Company and, prior to the sixth anniversary of
the Original Issue Date, the number of Put Shares will not exceed two-thirds
of the total number of shares of Series A Preferred Stock issued by the
Company. The Repurchase Date will be the 30th day following the date of the
Repurchase Notice relating thereto. If the Company defaults in its obligation
to pay the Repurchase Price, interest will accrue on the amount of such
obligation at the Default Dividend Rate until such payment is made (with all
interest due).
Notwithstanding the foregoing, if an Event of Default (as defined in the
Series A Statement of Designations) occurs at any time on or after the
Original Issue Date, each holder of Series A Preferred Stock will have the
right, at such holder's option exercisable by notice at any time within 60
days after the happening of each such Event of Default or, if later, receipt
of notice from the Company of such Event of Default, to require the Company to
purchase all or any part of the Series A Preferred Stock then held by such
holder as such holder may elect, at the Repurchase Price.
Notwithstanding any of the foregoing, if any of the following events shall
occur and be continuing, then automatically each holder of Series A Preferred
Stock will be deemed to have delivered on the date immediately preceding such
event, a Repurchase Notice with respect to all Series A Preferred Stock held
by such holder, all such shares will be Put Shares and the aggregate
Repurchase Price in respect of each such share will immediately become due and
payable in full. Such events ("Bankruptcy Events") are: (a) the Company or any
of its Subsidiaries shall commence any case, proceeding or other action under
any existing or future law of any jurisdiction, domestic or foreign, relating
to bankruptcy, insolvency, reorganization or relief of debtors, seeking to
have an order for relief entered with respect to it, or seeking to adjudicate
it a bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other relief
with respect to it or its debts, or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Company or any of its Subsidiaries
shall make a general assignment for the benefit of its creditors; (b) there
shall be commenced against the Company or any Significant Subsidiary any case,
proceeding or other action of a nature referred to in clause (a) above which
results in the entry of an order for relief or any such adjudication or
appointment remains undismissed, undischarged or
39
<PAGE>
unbonded for a period of 60 days; (c) there shall be commenced against the
Company or any Significant Subsidiary any case, proceeding or other action
seeking issuance of a warrant of attachment, execution, distraint or similar
process against all or any substantial part of its assets which results in the
entry of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within 60 days from the entry
thereof; (d) the Company or any Significant Subsidiary shall take any action
in furtherance of, or indicating its consent to, approval of, or acquiescence
in, any of the acts set forth in clauses (a), (b) or (c) above; (e) the
Company or any Significant Subsidiary shall generally not, or shall be unable
to, or shall admit in writing its inability to, pay its debts as they become
due; (f) the Company or any Significant Subsidiary shall cause to be
reinstated the Reorganization Proceedings; or (g) the Confirmation Order shall
be reversed, withdrawn, modified (in any manner adverse to Company or any
Significant Subsidiary), or any rehearing shall be ordered with respect
thereto by the Bankruptcy Court or by any court having jurisdiction over the
Company.
CONVERSION. The holder of each share of Series A Preferred Stock will have
the right at any time prior to the 30th day after receipt of a notice of
redemption by the Company, at such holder's option, to convert such share into
Common Stock. Subject to provisions for adjustment, each share of Series A
Preferred Stock will be convertible into such number of shares of Common
Stock, as is obtained by dividing the Liquidation Preference by the Conversion
Price, in each case as in effect at the date any Series A Preferred Stock is
surrendered for conversion. If any Series A Preferred Stock is called for
redemption, the right to convert such Series A Preferred Stock will terminate
on the 30th day following the date of the Redemption Notice. Conversion Price
means, initially, $5.75 and, thereafter, such price as adjusted.
The Conversion Price will be subject to adjustment from time to time upon
the following events: (a) if the Company declares a dividend or makes a
distribution on the outstanding Common Stock in capital stock of the Company,
subdivides or reclassifies the outstanding Common Stock into a greater number
of shares (or into other securities or property), or combines or reclassifies
the outstanding Common Stock into a smaller number of shares (or into other
securities or property); (b) if the Company fixes a record date for the
issuance of rights or warrants to all holders of Common Stock entitling them
to subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) (other than Series B Preferred Stock, Series B
Warrants, or Investor Warrants) at a price per share less than the Current
Market Price of Common Stock on such record date; (c) if the Company fixes a
record date for the making of a distribution to all holders of Common Stock of
shares of any class other than Common Stock, of evidences of indebtedness of
the Company or any Subsidiary, of assets or other property or of rights or
warrants (excluding those rights or warrants resulting in an adjustment
pursuant to clause (b) above and the right to acquire Series B Preferred Stock
in the Rights Offering thereof); (d) if the Company issues Common Stock (other
than certain Common Stock issued (i) to the Company's employees or former
employees or their estates under certain employee benefit plans, (ii) pursuant
to the Bank Warrants (as defined below), (iii) to the Investor pursuant to the
Warrants and (iv) upon conversion of the Series A Preferred Stock or Series B
Preferred Stock) for a consideration per share less than the Current Market
Price per share on the date the Company fixes the offering price of such
additional shares; (e) if the Company issues any securities convertible into
or exchangeable for Common Stock (excluding securities issued in transactions
resulting in adjustments pursuant to clauses (b) and (c) above, Series B
Preferred Stock, Investor Warrants or Series B Warrants and upon conversion of
any such securities) for a consideration per share of Common Stock deliverable
upon conversion or exchange of such securities less than the Current Market
Price per share in effect immediately prior to the issuance of such
securities. Current Market Price per share at any date means the average of
the daily closing price for the Common Stock for the 10 consecutive trading
days commencing 14 trading days before such date. Bank Warrants means the
1,500,000 warrants for the purchase of Common Stock issued by the Company on
September 30, 1996 pursuant to the Prepayment Agreement dated as of September
30, 1996 among certain financial institutions and the Company.
In the event of any consolidation with or merger of the Company into another
corporation, or in the event of any sale, lease or conveyance of assets to
another corporation of the property of the Company as an entirety or
substantially as an entirety, then adequate provisions will be made whereby
each holder of Series A Preferred Stock will have the right to receive, from
such successor, leasing or purchasing corporation, as the case may be, in lieu
of the Common Stock immediately prior thereto receivable upon the conversion
of such Series A Preferred
40
<PAGE>
Stock, the kind and amount of shares of stock, other securities, property or
cash or any combination thereof receivable upon such consolidation, merger,
sale, lease or conveyance by a holder of the number of shares of common stock
into which such shares of Series A Preferred Stock might have been converted
immediately prior to such consolidation, merger, sale, lease or conveyance.
In the event of any reclassification or change of the Common Stock issuable
upon conversion of Series A Preferred Stock, or in the event of any
consolidation or merger of another corporation into the Company in which the
Company is the continuing corporation and in which there is a reclassification
or change of the Common Stock, adequate provisions will be made whereby each
holder of Series A Preferred Stock will have the right to receive, in lieu of
the Common Stock immediately prior thereto receivable upon the conversion of
Series A Preferred Stock, the kind and amount of stock, other securities,
property or cash or any combination thereof receivable upon such
reclassification, change, consolidation or merger, by a holder of the number
of shares of Common Stock into which such Series A Preferred Stock might have
been converted immediately prior to such reclassification, change,
consolidation or merger.
The Conversion Price will be adjusted if the Company repurchases (by way of
tender offer, exchange offer or otherwise) any Common Stock for a per share
consideration which exceeds the Current Market Price of a share of Common
Stock on the date immediately prior to such repurchase.
The formulas for calculating the foregoing adjustments are set forth in the
Series A Statement of Designations, Annex A to Appendix A.
In addition to the adjustments required in accordance with the foregoing,
the Company may make such reductions in the Conversion Price as it considers
to be advisable so that any event treated for federal income tax purposes as a
dividend of stock or stock rights will not be taxable to the recipients.
If any event occurs as to which the foregoing provisions are not strictly
applicable or, if strictly applicable, would not, in the Board's good faith
judgment, fairly protect the conversion rights of the Series A Preferred Stock
in accordance with the essential intent and principles of such provisions,
then the Board will make adjustments in the application of such provisions, in
accordance with such essential intents and principles, as shall be reasonably
necessary, in the Board's good faith opinion, to protect such conversion
rights as aforesaid, but in no event will any adjustment have the effect of
increasing the Conversion Price, or otherwise adversely affect the holders of
the Series A Preferred Stock.
The Company will at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued stock, for the purpose
of effecting the conversion or redemption of Series A Preferred Stock, such
number of its authorized shares of Common Stock as will from time to time be
sufficient for the conversion of all outstanding Series A Preferred Stock into
Common Stock. See "Charter Amendments." The Company will, from time to time
and in accordance with Delaware law, cause the authorized number of shares of
Common Stock to be increased if the aggregate of the number of authorized
shares of Common Stock remaining unissued and the issued shares of such Common
Stock reserved for issuance in any other connection will not be sufficient for
the conversion of all outstanding Series A Preferred Stock into Common Stock
at any time.
WARRANTS. The Investment Agreement contemplates the Company's issuance of
5,000,000 Investor Warrants and up to 4,000,000 Series B Warrants. At the
Closing and at Subsequent Issuances, the Company will issue to Apollo the
Investor Warrants in three classes: 1,666,667 Class A Warrants, 1,666,667
Class B Warrants and 1,666,666 Class C Warrants. As the Investor Warrants are
issued, they will be allocated as evenly as possible among Class A Warrants,
Class B Warrants and Class C Warrants. In the Rights Offering the Company will
issue pro rata to purchasers of Series B Preferred Stock up to 2,000,000
Series B Warrants in three classes: 666,667 Class A Warrants, 666,667 Class B
Warrants and 666,666 Class C Warrants. In the Private Placement the Company
will issue pro rata to purchasers of Common Stock and Series B Preferred Stock
up to 2,000,000 Series B Warrants in three classes: 666,667 Class A Warrants,
666,667 Class B Warrants and 666,666 Class C Warrants. The following is a
summary of certain terms and conditions of the Warrants. The summary is
qualified in its entirety by reference to the full text of the form of Warrant
Certificate. The form of Warrant Certificate, which sets forth the terms of
the Warrants, is attached as Annex B to the Charter Amendments, which is
attached hereto as Appendix A.
41
<PAGE>
GENERAL. Each Warrant entitles the holder, subject to the terms and
conditions of the Warrant, to purchase one share of Common Stock at the
Exercise Price.
NUMBER AND CLASSES OF WARRANTS. The Warrants will be issued in three classes
as noted above. The classes are identical except that they have different
minimum exercise prices described below.
EXERCISE PRICE AND TERM. The Warrants will have an Exercise Price of $5.75
per share, subject to certain antidilution and other adjustments described
below. Unexercised Warrants will expire on the seventh anniversary of the
Original Issue Date.
RESERVATION OF WARRANT SHARES. In the Warrant Certificate, the Company
represents that it has sufficient Common Stock reserved for issuance upon
exercise of all outstanding Warrants and the Company agrees that, during the
term of the Warrant, there will be reserved for issuance upon exercise of the
Warrants, free from preemptive rights, such number of shares of authorized but
unissued or treasury Common Stock, as will be required for issuance upon
exercise of the Warrants. See "Charter Amendments." The Company also agrees
(a) that it will not, by amendment of its restated certificate of
incorporation or through reorganization, consolidation, merger, dissolution or
sale of assets, or by any other voluntary act, avoid or seek to avoid the
observance or performance of any of the covenants, stipulations or conditions
to be observed or performed under the Warrant by the Company and (b) to take
promptly all action as may from time to time be required to permit the holder
to exercise the Warrants and the Company duly and effectively to issue Common
Stock issuable upon the exercise of the Warrants (the "Warrant Shares").
"CASH FLOW ADJUSTMENT" OF EXERCISE PRICE. The Exercise Price is subject to
downward adjustment as described below by March 31, 1999 (the "Cash Flow
Adjustment"). The Exercise Price will be adjusted downward by $0.015 for every
$100,000 by which Actual Cumulative Operating Cash Flow is less than Targeted
Cumulative Operating Cash Flow, on a cumulative basis for 1997 and 1998.
Actual Operating Cash Flow in 1998 in excess of Target Operating Cash Flow for
1998 will be applied at a 15% discount for such excess in the cumulative
calculation. Notwithstanding the Cash Flow Adjustment provisions, the Exercise
Price as adjusted will in no event be less than $2.00 per share for the Class
A Warrants, $3.00 per share for the Class B Warrants and $4.00 per share for
the Class C Warrants. Also, no Cash Flow Adjustment will be made if, on
December 31, 1998, and on an average basis during the three months ending on
December 31, 1998, the average Closing Price for the Common Stock is greater
than $9.75, which is equal to the original Exercise Price plus $4.00 per share
(adjusted in accordance with certain antidilution provisions).
Target Cumulative Operating Cash Flow equals $62,443,000. Actual Cumulative
Operating Cash Flow equals the sum of the Actual Operating Cash Flow for the
year ending December 31, 1997 and the Actual Operating Cash Flow for the year
ending December 31, 1998, minus 0.15 times the Excess 1998 Operating Cash
Flow. Actual Operating Cash Flow for any year means the net cash proceeds
derived by the Company from the operation in the ordinary course of its
business and from the bulk asset sales contemplated by the Business Plan,
calculated the same as, and using the same accounting principles and practices
and classification systems and techniques as were used in, the calculation of
the Target Cumulative Operating Cash Flow. Excess 1998 Operating Cash Flow
means the Actual Operating Cash Flow for the year ending December 31, 1998
minus $3,028,000.
The Company will cause the financial statements for the Company and its
consolidated Subsidiaries for the fiscal year ending on December 31, 1998, to
be audited by Ernst & Young, LLP, or another national independent accounting
firm, and a manually signed copy of such financial statements to be delivered
to the holders of the Series A Preferred Stock as soon as practicable
following December 31, 1998, but in no event later than March 31, 1999 (the
date such financial statements are so delivered, the "Adjustment Date"). Any
reduction of the Exercise Price will be effective as of the Adjustment Date.
ANTIDILUTION ADJUSTMENTS. The Exercise Price and the number of shares of
Common Stock purchasable upon the exercise of the Warrants will be subject to
adjustment from time to time upon the following events: (a) if the Company (i)
declares a dividend or makes a distribution on the outstanding Common Stock in
capital
42
<PAGE>
stock of the Company, (ii) subdivides or reclassifies the outstanding Common
Stock into a greater number of shares (or into other securities or property),
or (iii) combines or reclassifies the outstanding Common Stock into a smaller
number of shares (or into other securities or property); (b) if the Company
fixes a record date for the issuance of rights or warrants to all holders of
Common Stock entitling them to subscribe for or purchase Common Stock (or
securities convertible into or exchangeable for Common Stock) (other than
Series B Preferred Stock) at a price per share less than the Current Market
Price of a share of Common Stock on such record date; (c) if the Company fixes
a record date for the making of a distribution to all holders of Common Stock
(i) of shares of any class other than Common Stock, (ii) of evidences of
indebtedness of the Company or any Subsidiary, (iii) of assets or other
property or (iv) of rights or warrants (excluding rights or warrants resulting
in an adjustment pursuant to paragraph (b) above, and the right to acquire
Series B Preferred Stock in the Rights Offering thereof); (d) if the Company
issues its Common Stock (other than certain Common Stock issued (i) to the
Company's employees or former employees or their estates under certain
employee benefit plans, (ii) pursuant to the Bank Warrants, (iii) pursuant to
the Warrants, and (iv) upon conversion of the Series A Preferred Stock or
Series B Preferred Stock) for a consideration per share less than the Current
Market Price per share on the date the Company fixes the offering price of
such additional shares; and (e) if the Company issues any securities
convertible into or exchangeable for Common Stock (excluding securities issued
in transactions resulting in an adjustment pursuant to clauses (b) and (c)
above, Series A Preferred Stock, Series B Preferred Stock and upon conversion
of any of such securities) for a consideration per share of Common Stock
deliverable upon conversion or exchange of such securities less than the
Current Market Price per share in effect immediately prior to the issuance of
such securities. Current Market Price per share at any date means the average
of the daily closing price for the Common Stock for the 10 consecutive trading
days commencing 14 trading days before such date.
In the event of any consolidation with or merger of the Company into another
corporation, or in the event of any sale, lease or conveyance of assets to
another corporation of the property of the Company as an entirety or
substantially as an entirety, then such successor, leasing or purchasing
corporation, as the case may be, will be bound by the Warrant Certificate and
will execute and deliver a new Warrant Certificate providing that the holder
of each Warrant then outstanding will have the right to exercise such Warrant
solely for the kind and amount of shares of stock, other securities, property
or cash or any combination thereof receivable upon such consolidation, merger,
sale, lease or conveyance by a holder of the number of shares of Common Stock
for which such Warrants might have been exercised immediately prior to such
consolidation, merger, sale, lease or conveyance.
In the event of any reclassification or change of the Common Stock issuable
upon exercise of the Warrants, or in the event of any consolidation or merger
of another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change of the Common
Stock, the Company will execute and deliver to the holder of the Warrant a new
Warrant Certificate providing that the holder of each Warrant then outstanding
will have the right to exercise such Warrant solely for the kind and amount of
shares of stock, other securities, property or cash or any combination thereof
receivable upon such reclassification, change, consolidation or merger, by a
holder of the number of shares of Common Stock for which such Warrant might
have been exercised immediately prior to such reclassification, change,
consolidation or merger.
If the Company repurchases any Common Stock for a per share consideration
which exceeds the Current Market Price of a share of Common Stock on the
trading day immediately prior to such repurchase, then the Company will issue
to the holder additional Warrants having the Exercise Price in effect on the
trading day immediately prior to such repurchase.
The formulas for calculating the foregoing adjustments are set forth in the
form of Warrant Certificate, Annex C to Appendix A.
In addition to the adjustments required in accordance with the foregoing,
the Company may make such reductions in the Exercise Price as it considers to
be advisable so that any event treated for federal income tax purposes as a
dividend of stock or stock rights will not be taxable to the recipients.
43
<PAGE>
If any event occurs as to which the foregoing provisions are not strictly
applicable or, if strictly applicable, would not, in the Board's good faith
judgment, fairly protect the purchase rights of the Warrants in accordance
with the essential intent and principles of such provisions, then the Board
will make adjustments in the application of such provisions, in accordance
with such essential intents and principles, as shall be reasonably necessary,
in the Board's good faith opinion, to protect such purchase rights as
aforesaid, but in no event will any adjustment have the effect of increasing
the Exercise Price or decreasing the number of shares of Common Stock subject
to purchase upon exercise of the Warrants, or otherwise adversely affect the
holders of the Warrants.
RESTRICTIONS ON TRANSFER. Until such time as an appropriate registration
statement covering the Warrants or the Warrant Shares has become effective
under the Act, the holder will not dispose of either the Warrants or the
Warrant Shares, as the case may be, unless (a) the transferee has agreed to be
bound by the restrictions contained in the Warrant Certificate on such
Warrants or Warrant Shares, as the case may be, and (b) except in the case of
a transfer by the holder to an affiliate, the Company will have received an
opinion of counsel (which will be reasonably satisfactory to the Company) to
the effect that the sale or other proposed disposition of the Warrants or
Warrant Shares may be accomplished without such registration under the Act.
FEES AND EXPENSES. All fees and expenses incurred by the holder in
connection with the holder's ownership of Warrants and securities or other
property received upon exercise thereof which relate to (a) any required
regulatory filings, (b) registration fees, (c) stock exchange or NASDAQ
listing fees, and (d) reasonable fees and expenses of counsel in connection
with the foregoing, will be paid by the Company.
VALUE DETERMINATION AND APPRAISAL. Upon each determination of fair market
value or other evaluation or calculation required under the Warrants
(including calculation of the Cash Flow Adjustment Amount), the Company will
promptly give notice thereof to all holders, setting forth the calculation of
such fair market value or valuation (or Cash Flow Adjustment Amount) and the
method and basis of determination thereof, as the case may be. If any holders
of Warrants to purchase at least 100,000 shares of Common Stock (including,
for purposes of determining such level of ownership, all Warrants owned by
affiliates of such holders) disagree with such determination, they may elect
to dispute such determination, and such dispute shall be resolved in
accordance with the appraisal procedure set forth in the Warrant Certificate.
SERIES B PREFERRED STOCK. After Closing, the Company intends to conduct a
Rights Offering, whereby it will distribute to its Stockholders, transferrable
rights to purchase, on a pro rata basis, an aggregate of 1,000,000 shares of
Series B Preferred Stock, and Series B Warrants to purchase an aggregate of
2,000,000 shares of Common Stock, for an aggregate purchase price of
$10,000,000, all subject to compliance with applicable securities registration
and other laws and regulations. The terms of the Rights Offering must be
reasonably acceptable to the Investor. The Rights Offering is expected to
commence promptly after the Closing. The Series B Warrants will be issued, pro
rata, in three classes: up to 666,667 Class A Warrants, 666,667 Class B
Warrants, and 666,666 Class C Warrants. The Series B Warrants to be issued
will have an exercise price of $5.75, subject to certain antidilution and
other adjustments. Unexercised Warrants will expire on the seventh anniversary
of their original issue date. The terms and conditions of the Series B
Warrants are the same as those of the Investors Warrants. See "Investment
Agreement--the Warrants." The Series B Preferred Stock would be substantially
the same as the Series A Preferred Stock, as to rank, dividends, liquidation
preference, optional redemption by the Company, put rights and the Company's
repurchase obligation, and conversion rights (except as described below). The
Series B Preferred Stock would be pari passu with the Series A Preferred Stock
as to dividends or distributions and other rights to receive payments (except
as described below). Notwithstanding the foregoing, however, the put rights of
the Series B Preferred Stock would not be secured by any lien on the assets of
the Company or any Subsidiary, and holders of the Series B Preferred Stock (a)
would not be entitled to vote Series B Preferred Stock with respect to the
election of Company directors or on any other matter submitted for a vote of
the holders of the Common Stock, except as may be required by applicable law,
and (b) would not have any consent rights of the Investor with respect to
Major Transactions (see "Investment Agreement--Consent Rights") or any voting
or consent rights of the holders of the Series A Preferred Stock as set forth
in the Series A Statement of Designations (see "Investment Agreement--Series A
Preferred Stock--Voting Rights"). As described below, the Investor has certain
consent rights with respect to Major Transactions including, among
44
<PAGE>
other things, the payment of dividends and the redemption of stock; provided,
however, that subject to the terms and conditions of the Transaction
Documents, neither (a) any action or determination by the Company in respect
of any Series A Preferred Stock that is not otherwise prohibited by the
Investment Agreement and is in accordance with the Series A Statement of
Designations, including dividends and redemptions, nor (b) any dividends on or
redemptions of Series B Preferred Stock in accordance with the Series B
Statement of Designations, or any action in respect of the Series B Preferred
Stock required to be taken by the Company under the Series B Statement of
Designations or under the securities purchase agreement pursuant to which the
Private Placement is consummated (which agreement shall be a material
agreement for purposes of this definition) shall be deemed to be a Major
Transaction, so long as, in the case of dividends and optional redemptions,
the ratio of the aggregate amount being paid on the Series A Preferred Stock
to the aggregate amount being paid on the Series B Preferred Stock is both (A)
greater than or equal to the ratio of the aggregate outstanding liquidation
preference of the Series A Preferred Stock to the aggregate outstanding
liquidation preference of the Series B Preferred Stock issued in the Rights
Offering and the Private Placement and (B) less than or equal to the ratio of
the aggregate outstanding liquidation preference of the Series A Preferred
Stock to the aggregate outstanding liquidation preference of the Series B
Preferred Stock issued in the Rights Offering. See "Investment Agreement--
Consent Rights." Also, unlike optional redemptions of Series A Preferred
Stock, optional redemptions of Series B Preferred Stock by the Company can be
effected (subject to the Investor's above-discussed consent rights) without
proration in accordance to the number of shares of Series B Preferred Stock
held by each holder.
It is expected that for United States federal income tax purposes, holders
of Common Stock will not be taxed upon receipt or exercise of the rights
issued in the Rights Offering.
The preferences, powers, and rights of the Series B Preferred Stock are set
forth in the Series B Statement of Designations, which is Annex B to the
Charter Amendments (attached hereto as Appendix A).
CONSENT RIGHTS. So long as the Note is outstanding and unpaid or more than
500,000 shares of the Series A Preferred Stock are held by the Investor, and
except as permitted by the Investment Agreement, the Company will not engage
in, or enter into any agreement with respect to, any Major Transaction,
without the Investor's prior consent (it being agreed that the approval (i) of
a majority of the Investor Designees at a Board meeting, (ii) of one or more
of the Investor Designees at a meeting of the executive committee of the Board
or (iii) of all Board members, including the Investor Designees, by a written
directors consent, will be deemed to be the Investor's consent. "Major
Transaction" means any material transaction which is not described in an
Approved Business Plan, including any (a) recapitalization, redemption or
reclassification of, or distribution or dividend on, the Company's capital
stock provided, however, that subject to the terms and conditions of the
Transaction Documents, neither (i) any action or determination by the Company
in respect of any Series A Preferred Stock that is not otherwise prohibited by
the Investment Agreement and is in accordance with the Series A Statement of
Designations, including dividends and redemptions, nor (ii) any dividends on
or redemptions of Series B Preferred Stock in accordance with the Series B
Statement of Designations, or any action in respect of the Series B Preferred
Stock required to be taken by the Company under the Series B Statement of
Designations or under the securities purchase agreement pursuant to which the
Private Place is consummated (which agreement shall be a material agreement
for purposes of this definition) shall be deemed to be a Major Transaction, so
long as, in the case of dividends and optional redemptions, the ratio of the
aggregate amount being paid on the Series A Preferred Stock to the aggregate
amount being paid on the Series B Preferred Stock is both (A) greater than or
equal to the ratio of the aggregate outstanding liquidation preference of the
Series A Preferred Stock to the aggregate outstanding liquidation preference
of the Series B Preferred Stock issued in the Rights Offering and the Private
Placement and (B) less than or equal to the ratio of the aggregate outstanding
liquidation preference of the Series A Preferred Stock to the aggregate
outstanding liquidation preference of the Series B Preferred Stock issued in
the Rights Offering, (b) amendment of the Company's restated certificate of
incorporation or by-laws, (c) liquidation, winding-up or dissolution of the
Company or any Significant Subsidiary of the Company, (d) consolidation of the
Company with, or merger of the Company with or into, any other person, except
a merger of a Subsidiary wholly owned by the Company into the Company, with
the Company
45
<PAGE>
surviving such merger, (e) sale, transfer, lease or encumbrance by the Company
or any Subsidiary of a significant amount of assets of the Company, other than
in respect of sales of certain assets held by the Company's predecessor,
General Development Corporation; (f) special dividends or distributions with
respect to, or repurchase or redemption of, the Company's equity securities or
any rights, warrants or options in respect of such equity securities, (g)
capital expenditure or investment by the Company or any Subsidiary in excess
of $500,000, (h) entering into or materially amending any material contract,
(i) significant new financing or refinancing, (j) issuance of securities
(other than employee and director stock options to acquire up to 2,000,000
shares of Common Stock and the issuance of Common Stock thereunder),
(k) transactions which would result in a Change of Control (as defined below),
or (l) material transaction the nature of which prevents specificity in the
Business Plan, or (m) commencement, undertaking or acquisition of a real
estate development project by SP Subsidiary (whether independently, by joint
venture or otherwise) and related financing or joint venture arrangements.
"Approved Business Plan" means a Business Plan of the Company that has been
approved by the Investor.
"Change of Control" means: (a) an acquisition by any person or group (as
defined for purposes of Section 13(d) under the Exchange Act of 1934),
(excluding the Company or an employee benefit plan of the Company or a
corporation controlled by the Stockholders) of beneficial ownership (as
defined for purposes of Section 13(d) under the Exchange Act) of Common Stock
such that such person or group thereafter beneficially owns 25% or more of the
outstanding Common Stock or other voting securities of the Company; (b) a
change in a majority of the Incumbent Board (excluding any individuals
approved by a vote of at least five members of the
Incumbent Board other than in connection with an actual or threatened proxy
contest); (c) failure of the requisite number of Investor Designees to be
members of the Board (other than as result of the Investor's failure to
nominate a successor to an Investor Designee who has resigned or been removed
as a director); or (d) consummation of a Business Combination (other than a
Business Combination in which all or substantially all of the Stockholders
receive or own upon consummation thereof 50% or more of the Company's
outstanding stock resulting from the Business Combination, at least a majority
of the board of directors of the resulting corporation are members of the
Incumbent Board, and after which no Person owns 25% or more of the outstanding
stock of the resulting corporation who did not own such stock immediately
before the Business Combination), excluding, in each case (a) through (d), the
transactions contemplated by the Investment Agreement (including for this
purpose the Rights Offering and the Private Placement). "Default Change of
Control" means a Change in Control of the type referred to in clauses (b) or
(c) above or of the type referred to in clauses (a) and (d) provided that the
percentage thresholds referred to in clauses (a) and (d) will be 40% instead
of 25%. "Incumbent Board" means, prior to the Closing, the Board as
constituted on the day after execution and delivery of the Investment
Agreement and, following the Closing, the Board as constituted immediately
following the Closing. "Business Combination" means a complete liquidation or
dissolution of the Company or a merger, consolidation or sale of all or
substantially all of the Company's assets.
CO-INVESTMENT OPPORTUNITY. The Investment Agreement provides that except
with respect to certain preexisting projects, as long as the Investor owns at
least 500,000 shares of Series A Preferred Stock, the Investor will have a
right of first offer to participate in new joint venture community development
projects proposed to be entered into by the Company, until the Investor has
invested at least an aggregate of $60,000,000 in such projects; provided that
the foregoing will not apply to any project in which the Company's
participation and commitment will be in the form of its expertise and business
efforts or the contribution of real property (or equity interests in real
property), as opposed to capital contributions. Subject to the foregoing, if
the Company proposes to enter into any new community development project, the
Company will inform the Investor and will offer the Investor the opportunity
to invest in such proposed project for one week before offering such
opportunity to any third party. The Company will give the Investor, to the
extent reasonably available to the Company, such information regarding the
proposal as the Investor may reasonably request to enable it to make an
investment decision. The Investor will respond to the Company within 10
business days after receipt of any such offer in writing, or will be deemed to
have rejected such offer. The Investor and the Company are obligated to
negotiate with each other in good faith with respect to any such proposed
investments for up to 20 business days following
46
<PAGE>
the Investor's receipt of such information. If, after the Company and the
Investor have discussed the proposed transaction for such 20 business day
period, the Investor determines not to invest in such project, or not to
invest the full amount that the Company requires for such project, or has not
committed to the Company to make such investment, on substantially the terms
and conditions offered to the Investor, then the Company may enter into any
agreement with or consummate a transaction with other potential investors with
regard to the proposed investment, provided that the Company may not offer
terms to another potential investor materially more favorable in the aggregate
than the terms offered to the Investor unless the Company first offers such
terms to the Investor. The foregoing does not imply any commitment by the
Investor to invest in the Company or any project proposed by the Company,
except as expressly provided in the Investment Agreement. So long as any
principal amount is outstanding under the Note, in connection with the
Investor's rights described above, the Company will offer the Investor the
opportunity to conduct due diligence investigations with respect to such
projects and will comply with the terms of the Due Diligence Fee Agreement
(described above). See "Series A Preferred Stock--Dividends."
REGISTRATION RIGHTS. The Investment Agreement provides that at any time
after the Closing, upon the Investor's demand, the Company will use its best
efforts to effect the registration (a "Demand Registration") under the
Securities Act of such number of Registrable Securities then beneficially
owned by the Investor. The Company will be obligated to effect no more than
(a) two Demand Registrations so long as the Company is not eligible to file
Form S-3 under the Securities Act and (b) five Demand Registrations if the
Company is eligible to file Form S-3. If a Demand Registration is initiated by
the Investor, no other securities may be offered in such offering by the
Company without the Investor's consent. The Investor will have the right to
select the underwriters for a Demand Registration. "Registrable Securities"
means any of the (a) up to 2,500,000 shares of Series A Preferred Stock to be
issued to the Investor at the Closing or in Subsequent Issuances, (b) the
Common Stock issuable or issued upon conversion of the Series A Preferred
Stock (the "Conversion Shares"), (c) the 5,000,000 shares of Common Stock
issuable upon the exercise of the Warrants, (d) any other Common Stock
acquired by the Investor, and (e) any securities issued or issuable with
respect to the Series A Preferred Stock, Conversion Shares, Warrant Shares by
way of stock dividend or stock split, or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise.
In addition, if the Company proposes to register any of its securities under
the Securities Act for sale for cash, the Investor, upon request, will have
the right to include the number of Registrable Securities that the Investor
wishes to sell or distribute publicly under the registration statement
proposed to be filed by the Company, and the Company will use its best efforts
to register under the Securities Act the sale of such Registrable Securities
(a "Piggyback Registration"). Under certain circumstances, the number of
Registrable Securities that the Investor will be entitled to include in a
Piggyback Registration will be limited.
The Investment Agreement contains certain indemnification and contribution
provisions in the event of a registration of any Registrable Securities under
the Securities Act. In connection with any Demand Registration or any
Piggyback Registration, the Company will pay all registration, filing and NASD
fees, and all fees and expenses of complying with securities or "blue sky"
laws; provided, however, that the Investor will pay its pro rata share of any
commissions, fees and disbursements of underwriters customarily paid by
sellers of securities. The Company and the Investor will be responsible for
the fees and disbursements of their respective counsel and the Company will
also be responsible for the fees and disbursements of its independent public
accountants, printing costs and premiums and other costs of policies of
insurance against liabilities arising out of the public offering of the
Registrable Securities.
The Investor (or any Eligible Transferee) may transfer all or any portion of
its Demand Registration, Piggyback Registration and related rights to any
transferee of an amount of Registrable Securities equal to or exceeding five
percent of the outstanding class of such Registrable Securities at the time of
transfer (each transferee that receives such minimum number of such
Registrable Securities, an "Eligible Transferee").
So long as the Company is subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act, the Company will take all actions reasonably
necessary to enable the Investor to sell the Registrable
47
<PAGE>
Securities without registration under the Securities Act within the limitation
of the exemptions provided by Rule 144 and Rule 144A under the Act, as such
rules may be amended, or any similar rule or regulation hereafter adopted by
the SEC, including filing on a timely basis all reports required to be filed
by the Exchange Act.
The Company may defer, for certain time periods, filing any Registration
Statement, amendment, supplement or post-effective amendment thereto or
prospectus supplement, if the Company is then involved in discussions
concerning, or otherwise engaged in, an acquisition, disposition, financing or
other material transaction and the Company determines in good faith that such
filing would materially adversely affect or interfere with such transactions.
ACTIVITIES PRIOR TO CLOSING. The Investment Agreement provides that until
the Closing the Company and the Investor shall act with good faith to each
other, use all reasonable efforts to consummate the Transaction, and not take
any action that would prohibit or impair its ability to consummate the
Transaction. In addition, the Company shall conduct the business of it and its
Subsidiaries in the ordinary course consistent with past practice and shall
use all reasonable efforts to preserve intact its business organizations and
relationships with third parties, and, except as otherwise provided in the
Investment Agreement, to keep available the services of the present directors,
officers and key employees.
Without the Investor's prior consent, until the Closing the Company shall
not, and shall ensure that each of its Subsidiaries does not: (a) adopt or
propose any change in its restated certificate of incorporation or by-laws,
except as contemplated by the Investment Agreement or as required to effect
the transactions thereunder; (b) take any action that would make any
representation or warranty of the Company inaccurate at the Closing; (c)
issue, sell, pledge or encumber any capital stock or other securities, except
(i) pursuant to outstanding Options or Bank Warrants, (ii) pursuant to options
granted automatically under certain plans and Common Stock issued to directors
in lieu of cash fees; or (iii) for the issuance of up to $10,000,000 of
aggregate liquidation preference of Series B Preferred Stock to Stockholders
in a Rights Offering the terms of which shall be reasonably acceptable to the
Investor (and up to 2,000,000 warrants to purchase Common Stock in connection
therewith) or (iv) for the issuance of up to $10,000,000 aggregate liquidation
preference of Series B Preferred Stock (and up to 2,000,000 warrants to
purchase Common Stock in connection therewith) in connection with the issuance
of up to $10,000,000 in fair market value of Common Stock to certain
purchasers pursuant to the Private Placement, the terms of which shall be
reasonably acceptable to Apollo; provided that the net proceeds of the sale of
such Series B Preferred Stock, such warrants and Common Stock shall be used
for working capital purposes, including the payment of the Foothill Debt and
other existing indebtedness of the Company in accordance with the provisions
of the Investment Agreement; (d) make any material change in its accounting
methods, principles or practices; (e) except as described in the Approved
Business Plan for 1997, (i) grant to any employee any material increase in
salary or any increase in severance or termination pay not consistent with
past practice, (ii) grant or approve any general increase in salaries of
employees not consistent with past practice, (iii) pay or award any material
bonus, incentives, compensation, service award or other like benefit for any
employee except in accordance with written policy or consistent with past
practice, (iv) enter into any material employment contract or severance
agreement with any employee or make a material amendment to any of its
employee benefit plans; or (v) change in any material respect the compensation
of its agents; (f) except as permitted by the Note Agreement, enter into or
assume any loan or other instrument pursuant to which the Company or its
Subsidiaries incurs indebtedness for borrowed money or request or agree to any
material amendment or supplement to or waiver, termination or modification of
any material existing instrument (other than instruments relating to
indebtedness); (g) declare, pay, set aside or make any dividend or
distribution on, or combine, subdivide or reclassify, any shares of any class
of its capital stock or of its Subsidiaries, or apply any of its funds,
property or assets to the purchase, redemption, sinking fund or other
retirement of any shares of any class of its capital stock or of its
Subsidiaries; or (h) agree, commit or resolve to do any of the foregoing.
Certain of these provisions are subject to exceptions and limitations.
CERTAIN COVENANTS. Under the Investment Agreement, the Company has agreed
that, among other things, (a) it will convene a special or annual meeting of
its Stockholders (the "Meeting") for the purpose of considering and voting on
the Charter Amendments and that the Board will recommend that the Stockholders
48
<PAGE>
vote in favor thereof; (b) prepare and file this Proxy Statement with the SEC;
(c) neither it nor its Subsidiaries will enter into any agreement that will
prohibit or restrict the Company's ability to perform any of its obligations
under the Investment Agreement or any of the Transaction Documents; (d) after
the Closing, the Company will reserve and keep available, free from preemptive
rights, out of its authorized and unissued stock, a sufficient number of
shares of Common Stock to effect the conversion of all of the Series A
Preferred Stock and the Warrants; (e) the Company will take all actions
necessary so that until the Closing the Board will consist of 10 directors one
of whom will be the Original Investor Designee and that as of and after the
Closing the Board will consist of seven directors, who will be the Original
Investor Designee, the two additional Investor Designees, one member of the
Company's incumbent management and three independent directors selected by the
Incumbent Board with the Investor's approval; (f) from and after the Closing,
the Charter Amendments and by-laws will contain provisions exculpating and
indemnifying its directors to the fullest extent permitted under applicable
law and that the Company will maintain policies of directors and officers
indemnity insurance; and (g) within 30 days after the date of the Investment
Agreement, the Company will deliver to the Investor a draft of the Business
Plan for 1997-1998 and the Company and the Investor will exercise reasonable
efforts to reach agreement on the Approved Business Plan.
In addition, the Company has agreed that so long as the Note remains
outstanding and unpaid or the Investor holds at least 500,000 shares of Series
A Preferred Stock: (a) the Company will furnish to the Investor by specified
dates certain annual and quarterly financial statements of the Company, a
report showing all sales by the Company of real property, and all reports or
other documents delivered to Foothill under the Foothill Loan Documents, and
such other information as the Investor may reasonably request; (b) the Company
will, and will cause its Subsidiaries to, afford the officers, employees,
counsel, accountants, financing sources and other representatives of the
Investor or any of its affiliates reasonable access to its properties, books,
contracts, commitments and records and personnel and advisors and will furnish
to the Investor information concerning its business, properties and personnel
as the Investor may reasonably request; (c) the Company will give notice to
the Investor of (i) the occurrence of any Default or Event of Default, (ii)
any default or event of default under certain contractual obligations of the
Company or any of its Subsidiaries or litigation, investigation or
administrative or other proceeding between the Company or any of its
Subsidiaries and any government authority which, if not cured or if adversely
determined would have a Material Adverse Effect; (iii) any litigation or
administrative or other proceeding affecting the Company or any of its
Subsidiaries in which the amount involved or sought is in excess of $500,000
or in which injunctive relief is sought; (iv) any default under or revocation
of any material operating permit or license; (v) its becoming aware that any
representation or warranty is or has become untrue in any material respect;
(vi) any development or event which could reasonably be expected to have a
Material Adverse Effect; (d) the Company will comply with, and use its
reasonable efforts to insure compliance by all tenants, with all environmental
laws and all lawful orders and directives of government authorities respecting
environmental laws; (e) the Company will furnish to the Investor by specified
dates a Business Plan of the Company and any amendment, modification or
update, setting forth a projected statement of income, cash flow and balance
sheet; (f) the Company will conduct its business substantially in accordance
with the Business Plan and will not materially modify or deviate from the
Business Plan without the Investor's prior approval.
The Company and the Investor have agreed that (a) they will make all filings
and furnish all required information required by the Hart-Scott-Rodino Act;
and (b) they will cooperate with each other in the development and
distribution of all news releases and other public information disclosures
with respect to the Investment Agreement or any of the transactions
contemplated thereby and will not issue any public announcement with respect
thereto without prior notification to the other party, and, until 30 days
after the Closing Date, except as required by law, without the reasonable
approval of the other party. The Company believes that no filings or
furnishing of information are required under the Hart-Scott-Rodino Act in
respect of the Agreements or the Transactions, and no such filings or
furnishing of information have been made.
The Investor has agreed that it will not assign or otherwise transfer any of
the Series A Preferred Stock, the Warrants, the Warrant Shares, the Conversion
Shares and the Note until the second anniversary of the date of the Investment
Agreement, unless a Payment Default, an Event of Default or a Default Change
of Control has
49
<PAGE>
occurred or Stockholders Approval has not been received at the Meeting. The
Investor, however, may pledge any of such securities or the Note as security
for indebtedness owed to a Person which is not an affiliate of the Investor.
Certain of the covenants of the Company and the Investor are subject to
exceptions and limitations. The covenants and agreements in the Investment
Agreement, other than those which by their terms only apply until the Closing
Date, will survive the Closing in accordance with their terms.
CONDITIONS. The Investor's obligations at the Closing are subject to the
following conditions to be satisfied at or prior to the Closing (unless waived
by the Investor): (a) the Company will have complied with and performed the
terms, covenants and conditions of the Investment Agreement and the other
Transaction Documents; (b) the Company's representations and warranties will
be true and correct in all material respects at and as of the Closing; (c) no
action, suit, investigation or other proceeding relating to the Transaction
will have been instituted or threatened before any court or by any government
authority that restrains or prohibits the Transaction or seeks to restrain or
prohibit the Transaction or to obtain material damages or other material
relief; (d) all requisite approvals with respect to the Transaction will have
been received and will be in full force and effect; (e) the Transaction at the
Closing will not violate any applicable law or governmental regulation and
will not subject the Investor to any tax, penalty or liability or require the
Investor to register or qualify under any applicable law or governmental
regulation; (f) there will not have occurred, and there will not be pending or
threatened, any change in law, regulation or regulatory practice that has or
could reasonably be expected to have a Material Adverse Effect on the Company;
(g) the Company will have furnished to the Investor on the Closing Date
certain legal opinions of counsel to the Company; (h) the Transaction
Documents required to be delivered at or before the Closing will have been
executed and delivered and will be in full force and effect; (i) the Company
will have delivered to the Investor certain customary certificates; (j) the
Stockholders Approval will have been obtained at the Meeting and the Charter
Amendments will have been filed with the Delaware Secretary of State and will
be effective; (k) the Company will have taken all actions necessary to provide
that the Board will consist of seven members and the Company will have caused
the Original Investor Designee, the two additional Investor Designees, one
director who is then an incumbent member of the Company's management, and the
three independent directors, to be appointed to the Board, effective upon the
Closing; (l) the Company will have paid or reimbursed all unreimbursed
Transaction Expenses (defined below) incurred by the Investor (or made
provision satisfactory to the Investor for payment or reimbursement of such
expenses in the case of expenses incurred but not yet billed); (m) no Default
shall have occurred (and, if the Funding has occurred, the Company shall have
paid all interest due on the Note), no Change of Control shall have occurred,
and there shall have been no events causing a Material Adverse Effect on the
Company, nor any developments that could, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect on the Company;
(n) any amendments to the Security Documents that may be required to increase
the dollar amount of indebtedness secured thereby to not less than the maximum
possible aggregate Repurchase Price shall have been effected and shall be in
form and substance satisfactory to the Investor; and (o) the Company will have
performed certain obligations to be performed by the Funding Date under the
Note Agreement.
The Company's obligations at the Closing are subject to the following
conditions to be satisfied at or prior to the Closing (unless waived by the
Company): (a) the Investor will have complied with and performed the terms,
covenants and conditions of the Investment Agreement to be complied with and
performed by the Investor at or prior to the Closing; (b) the Investor's
representations and warranties will be true and correct in all material
respects at and as of the Closing; (c) no action, suit, investigation or other
proceeding relating to the Transaction will have been instituted or threatened
before any court or by any government authority that restrains or prohibits
the Transaction or to obtain material damages or other material relief; (d)
all requisite approvals with respect to the Transaction will have been
received and will be in full force and effect; (e) the Investment Agreement
will be in full force and effect; (f) the Investor will have delivered to the
Company a certificate of the Investor's managing member, dated the Closing
Date, certifying, among other things, the resolutions adopted by the
Investor's managing member authorizing the Investor's execution and delivery
of the Investment Agreement and the other Transaction Documents and
consummation of the Transaction and a certificate to the effect that the
50
<PAGE>
certain conditions have been satisfied; and (g) the Stockholders Approval will
have been obtained at the Meeting and the Charter Amendments will have been
filed with the Delaware Secretary of State and will be effective.
The Investor's obligations to be discharged under the Investment Agreement
at the Funding are subject to (a) the Closing not having occurred, (b) the
Investment Agreement remaining in full force and effect, and (c) satisfaction
at or prior to the Funding (unless waived by the Investor at or prior to the
Funding) of the conditions to the Funding set forth in the Note Agreement. See
"Loan and Note Agreement--Conditions."
The Investor's obligations at each Subsequent Issuance are subject to the
conditions (unless waived by the Investor at or prior to such Subsequent
Issuance) that no Event of Default shall have occurred and, except for an
Event of Default which is or results from a Bankruptcy Event, shall then
exist.
REPRESENTATIONS AND WARRANTIES. The Investment Agreement incorporates by
reference the Company's representations and warranties set forth in the Note
Agreement and provides that the Company represents and warrants that its
representations and warranties in the Note Agreement are true and correct. See
"Loan and Note Agreement--Representations and Warranties."
In addition, the Investment Agreement contains representations and
warranties by the Company concerning, among other things: (a) the authority to
enter into and, subject to obtaining Stockholders Approval, perform the
Investment Agreement and the other Transaction Documents; (b) the vote
required to approve the Investment Agreement, the other Transaction Documents
and the contemplated transactions; (c) the authorization of the Investment
Agreement, the other Transaction Documents and the performance of obligations
thereunder; (d) the absence of conflict with, violation of, or default under
any applicable legal requirement or contractual obligation; (e) the absence of
any lien on any of the properties of the Company as a result of the Investment
Agreement and other Transaction Documents, other than pursuant to any
Transaction Document; (f) the execution and delivery, validity and
enforceability of the Investment Agreement; (g) the capitalization of the
Company on the date of the Investment Agreement and at the Closing after
giving effect to the Charter Amendments; (h) the authorization and validity of
the Series A Preferred Stock, the Conversion Shares, the Warrants and the
Warrant Shares; (i) the absence of preemptive rights; (j) the absence of
obligations to vote, repurchase, redeem or register shares of capital stock;
(k) the filing of required documents with the SEC, compliance with applicable
requirements of the federal securities laws, and the absence of untrue or
misleading statements or omissions; (l) delivery and disclosure to the
Investor of correspondence and communications with the SEC; (m) the
Subsidiaries, the capital stock of the Subsidiaries, and the ownership
interests of the Joint Ventures; (n) approvals required to consummate the
Transaction; (o) governmental and regulatory licenses; (p) the absence of
undisclosed material agreements; (q) no finder's fees, broker's fees, and
financial advisor's fees, except for the fees and expenses of BTSC and
Tallwood; (r) no undisclosed employee benefit plans; (s) securities laws
matters relating to the sale and issuance of the Series A Preferred Stock, the
Warrants, the Conversion Shares and the Warrant Shares; (t) state takeover
statutes; and (u) the financial statements of the Company and its consolidated
Subsidiaries.
The Investment Agreement contains representations and warranties by the
Investor concerning, among other things: (a) the authority to enter into and
perform the Investment Agreement and the other Transaction Documents; (b) the
authorization of the Investment Agreement, the other Transaction Documents,
and the performance of obligations thereunder; (c) the absence of conflict
with, violation of, or default under any applicable legal requirement or
contractual obligation; (d) the execution and delivery, validity and
enforceability of the Investment Agreement; (e) approvals required to
consummate the Transaction; (f) the acquisition of the Series A Preferred
Stock and the Warrants by the Investor for its own account and with no
intention of distributing or reselling in violation of the Act or state
securities laws; (g) the Investor's capability to evaluate the merits and
risks of an investment in the Series A Preferred Stock, the Warrants and the
Warrant Shares and bear the economic risk of such investment; (h) finder's
fees, broker's fees and financial advisor's fees; and (i) the Investor's
possession of funds necessary to fulfill its obligations under the Investment
Agreement.
Certain of the representations and warranties of the Company and the
Investor are subject to exceptions and limitations. The Investment Agreement
provides that all representations and warranties contained therein will
51
<PAGE>
survive for 30 months after the Closing Date, except that any representation
or warranty as to which notice of a breach giving rise to a right of
indemnification has been given prior to the end of the 30-month period will
survive until any such right of indemnification has been finally resolved.
INDEMNIFICATION. The Company has agreed to indemnify and hold harmless the
Investor and its affiliates and their respective officers, directors, agents,
employees, subsidiaries, partners and controlling persons from and against any
and all losses, claims, damages, expenses (including reasonable fees,
disbursements and other charges of counsel) or other liabilities resulting
from any breach of any covenant, agreement, representation or warranty of the
Company in the Investment Agreement or in any other Transaction Document,
provided that the Company will not be liable under this provision (a) for any
amount paid in settlement of claims without its consent or (b) to the extent
that it is finally judicially determined that such liabilities resulted
primarily from a breach by the Investor of any representation, warranty,
covenant or agreement of the Investor in the Investment Agreement or the
willful misconduct of the Investor. The Investor has agreed to indemnify and
hold harmless the Company and its affiliates, officers, directors, agents,
employees, subsidiaries, partners and controlling persons from and against any
and all liabilities resulting from any breach of any covenant, agreement,
representation or warranty of the Investor in the Investment Agreement or in
any other Transaction Document, provided that the Investor will not be liable
under this provision (a) for any amount paid in settlement of claims without
the Investor's consent or (b) to the extent that it is finally judicially
determined that such liabilities resulted primarily from a breach by the
Company of any representation, warranty, covenant or agreement of the Company
in the Investment Agreement or the willful misconduct of the Company. The
foregoing indemnification provisions are subject to the applicable survival
periods provided for in the Investment Agreement with respect to
representations and warranties and covenants and agreements.
EXCLUSIVITY AND FIDUCIARY OUT. Under the Investment Agreement, the Company
will not, nor will it permit any of its Subsidiaries, officers, directors,
employees, investment bankers, attorneys or other advisors or representatives
to, solicit or initiate, or encourage the submission of, any proposal or
transaction for a financing of the Company (other than borrowings under the
Working Capital Facility and project financing in the ordinary course of
business consistent with past practice) or for the acquisition by a person
other than the Investor or an affiliate of the Investor of stock or a
substantial part of the assets of the Company through a merger or other
business combination, stock or assets acquisition or otherwise (in any such
case, an "Alternative Transaction") prior to the Closing. In addition, the
Company will, and will cause its Subsidiaries, officers, directors, employees,
investment bankers, attorneys and other advisors or representatives to,
terminate any other discussions or negotiations with any third party regarding
any Alternative Transaction. The Company will not, nor will it permit any of
its Subsidiaries, officers, directors, employees, investment bankers,
attorneys or other advisors or representatives of the Company or its
Subsidiaries to, have any additional discussions or negotiations with any
third party regarding such an Alternative Transaction prior to the Closing.
Notwithstanding the foregoing, prior to the Closing, to the extent required
by the Board's fiduciary obligations, as determined in good faith by the Board
after receipt of the advice of its outside counsel and financial advisor, the
Company may (a) in response to an unsolicited request, furnish information
with respect to the Company pursuant to a customary confidentiality agreement
and discuss such information with such person and (b) upon receipt by the
Company of an unsolicited Alternative Proposal, following delivery to the
Investor of the notice described below, participate in negotiations regarding
such Alternative Proposal. Any violation of the restrictions described above
by any director or executive officer of the Company or any of its Subsidiaries
or any investment banker, financial advisor, attorney or other advisor to or
representative of the Company or any of its Subsidiaries will be deemed to be
a breach by the Company of the exclusivity provisions of the Investment
Agreement. "Alternative Proposal" means any proposal for a Business
Combination involving the Company or any proposal or offer to conduct in any
manner, directly or indirectly, an Alternative Transaction. The Company will
promptly advise the Investor of any request for information or of any
Alternative Proposal, or any inquiry with respect to or which could lead to
any Alternative Proposal, the material terms and conditions of such request,
Alternative Proposal or inquiry, and the identity of the person making any
such Alternative Proposal or inquiry. The Company will keep the Investor
informed of the status and details of any such request, Alternative Proposal
or inquiry.
52
<PAGE>
Prior to the Closing, neither the Board nor any committee thereof will (a)
withdraw or modify, or propose to withdraw or modify, in a manner adverse to
the Investor, the approval or recommendation by the Board of the Investment
Agreement or the Transaction, (b) approve or recommend, or propose to approve
or recommend, any Alternative Proposal or (c) enter into any agreement with
respect to any Alternative Proposal. Notwithstanding the foregoing, if the
Board receives an unsolicited Alternative Proposal that, in the exercise of
its fiduciary obligations (as determined in good faith by the Board after
receipt of the written advice of its outside counsel and financial advisor),
it determines to be a Superior Proposal, the Board may withdraw or modify its
approval or recommendation of the Investment Agreement and the Transaction,
approve or recommend any such Superior Proposal, enter into an agreement with
respect to such Superior Proposal and terminate the Investment Agreement (any
such action, a "Change of Position"), in each case at any time after the
second business day following the Investor's receipt of written notice (a
"Notice of Superior Proposal") advising the Investor that the Board has
received a Superior Proposal, specifying the material terms and conditions of
such Superior Proposal and identifying the person making such Superior
Proposal. "Superior Proposal" means any bona fide Alternative Proposal which
the Board determines in its good faith reasonable judgment (after receipt of
the written advice of its financial advisor and outside counsel) to be more
favorable from a financial point of view to the Stockholders than the
Transaction.
If the Company proposes to approve or engage in any Change of Position with
respect to any Alternative Proposal, it will prior to or concurrently with
approving or adopting such Change of Position pay to the Investor $2,000,000
(the "Termination Fee"). In addition, the Commitment Fee will be forfeited by
the Company and the Company will pay to the Investor within two business days
of request therefor the Investor's Transaction Expenses.
TERMINATION. The Investment Agreement (other than certain provisions thereof
if and so long as the Note remains outstanding) may be terminated at any time
prior to the Closing: (a) by mutual consent of the Company and the Investor;
(b) by the Company or the Investor, if the Closing has not occurred on or
before June 24, 1997; provided, however, that the right to terminate under
this clause will not be available to any party whose failure to fulfill any
obligation under the Investment Agreement has been the cause of the failure of
the Closing to occur on or before such date; (c) by the Investor, if the Proxy
Statement has not been mailed to Stockholders by May 22, 1997; (d) by the
Company or the Investor, if any judgment, injunction or decree enjoining the
Investor or the Company from consummating the Investment Agreement is entered
and becomes final and nonappealable; provided, however, that the party seeking
to terminate has used all reasonable efforts to remove such judgment,
injunction, or decree; (e) by the Investor or the Company, if there has been a
material breach of any representation, warranty or material covenant or
agreement of the other party, which breach is incurable or, if curable, which
is not cured within 30 days of receipt of notification from the other party
identifying such breach and demanding that it be cured; (f) by the Company, if
the Board receives an unsolicited Alternative Proposal that, in the exercise
of its fiduciary obligations, it determines to be a Superior Proposal and
provides the required notice to the Investor, provided that prior to or
concurrently with such termination, the Investor has received the Termination
Fee.
If the Investment Agreement is terminated pursuant to the foregoing, then,
except for the provisions relating to fees and Transaction Expenses to be paid
to the Investor and certain provisions that will remain in effect if and so
long as the Note is outstanding, the Investment Agreement will become void and
of no effect with no liability on the part of the Company or the Investor,
except to the extent such termination results from the breach by a party of
any of its representations, warranties, covenants or agreements in the
Investment Agreement.
FEES AND EXPENSES. A $1,000,000 refundable commitment fee (the "Commitment
Fee") was paid by the Company upon its signing of the January 14, 1997 Letter
of Intent on January 21, 1997. The Commitment Fee will be refunded to the
Company at the Closing. If, however, the Investment Agreement is terminated or
the Closing does not occur on or before June 24, 1997 for any reason
whatsoever other than as a result of a breach by the Investor entitling the
Company not to consummate the Closing, the Commitment Fee will be forfeited
and the Company must pay the Transaction Expenses. "Transaction Expenses"
means the out-of-pocket expenses of the Investor and its affiliates, including
the reasonable fees and expenses of lawyers, accountants,
53
<PAGE>
appraisers, consultants and other advisors relating to the discussion,
evaluation, negotiation and documentation of the Transaction Documents and the
Funding and Closing.
If the Closing has not been consummated on or by June 24, 1997, as a result
of (a) a breach by the Company of the Investment Agreement, or a breach by the
Company of the Note Agreement which is not cured on or by June 24, 1997, or
(b) a failure on or before June 24, 1997 to obtain the Stockholders Approval
or (c) a failure by June 24, 1997 to obtain the consent required from Foothill
in respect of the transactions contemplated by the Investment Agreement
because of the failure of the Company to sell Common Stock, Series B Preferred
Stock and warrants to purchase Common Stock in the Private Placement for an
aggregate purchase price of at least $15,000,000, then, in addition to the
forfeiture of the Commitment Fee, the Company is obligated to pay to the
Investor in cash on June 25, 1997, a $1,000,000 break-up fee (the "Break-Up
Fee"), plus the Transaction Expenses. If Foothill grants its consent in
respect of the transactions contemplated by the Investment Agreement, then the
failure of the Company to sell Common Stock, Series B Preferred Stock and
Series B Warrants in the Private Placement, for an aggregate purchase price of
at least $15,000,000, will not trigger the forfeiture of the Commitment Fee
and the obligation to pay the Break-Up Fee. If the conditions for the payment
of the Break-Up Fee are fulfilled and either (a) the Company wilfully breached
the Investment Agreement or the Note Agreement, or (b) the Company (i) enters
into an agreement for an Alternative Transaction prior to the earlier of June
24, 1998 or the date that is nine months after the date of termination of the
Investment Agreement or (ii) consummates an Alternative Transaction prior to
the earlier of June 24, 1998 or the first anniversary of the date of
termination of the Investment Agreement, the Company must pay to the Investor
a $1,000,000 Alternative Transaction Fee, in addition to the forfeiture of the
Commitment Fee, and the payment of the Break-Up Fee and the Transaction
Expenses.
If the Board withdraws or modifies its approval or recommendation of the
Investment Agreement, approves or recommends a Superior Proposal, enters into
an agreement with respect to a Superior Proposal and terminates the Investment
Agreement, the Company is required to pay to the Investor a $2,000,000
Termination Fee and the Transaction Expenses in addition to forfeiture of the
Commitment Fee. In that case, if the Company has paid the Termination Fee and
the Transaction Expenses, the Company will not be required to pay the Break-Up
Fee and the Alternative Transaction Fee.
The maximum amount of Fees that the Company is obligated to pay to the
Investor as a result of the termination of the Investment Agreement will be
$3,000,000 plus the Transaction Expenses. The Company has agreed to reimburse
the Investor for its Transaction Expenses on or prior to the Closing Date. As
of the date hereof, the Company has reimbursed Apollo approximately $360,000
for its Transaction Expenses.
POTENTIAL PRIVATE PLACEMENT
The Company and certain prospective purchasers are in the process of
negotiating a securities purchase agreement providing for the Company's
issuance and sale, in a private placement, of Common Stock, Series B Preferred
Stock and Warrants. It is contemplated that the Company will issue and sell to
the prospective purchasers, for an aggregate purchase price of up to
$20,000,000 on a pro rata basis: (a) up to that number of shares of Common
Stock equal to $10,000,000 divided by the average closing price per share of
Common Stock for the 10 business days following the commencement of the
mailing of this Proxy Statement; (b) up to 1,000,000 shares of Series B
Preferred Stock; and (c) warrants to purchase up to 2,000,000 shares of Common
Stock. It is contemplated that Morgan Stanley Asset Management Inc., as agent
on behalf of one or more of its clients, will purchase, for an aggregate
purchase price of $6,000,000: (a) that number of shares of Common Stock equal
to $3,000,000 divided by the average closing price per share of Common Stock
for the 10 business days following the commencement of the mailing of this
Proxy Statement; (b) 300,000 shares of Series B Preferred Stock; and (c)
Series B warrants to purchase 600,000 shares of Common Stock. According to a
Schedule 13G dated January 22, 1997, and certain supplemental information
furnished to the Company, Morgan Stanley, in its capacity as investment
advisor to certain of its clients, is the beneficial owner of 12.1% of the
Company's outstanding Common Stock. See "Beneficial Ownership of Common
Stock--Ownership by Persons Owning More Than Five Percent."
54
<PAGE>
The Company has been discussing with Mr. Robin C. Rodriguez, a principal of
Anglo-American Investor Services Corp. ("Anglo-American"), on behalf of
certain of its clients, the possible issuance and sale in the Private
Placement, for an aggregate purchase price of up to $14,000,000, on a pro rata
basis, of up to: (a) that number of shares of Common Stock equal to $7,000,000
divided by the average closing price per share of Common Stock for the 10
business days following the commencement of the mailing of this Proxy
Statement; (b) 700,000 shares of Series B Preferred Stock; and (c) Series B
Warrants to purchase up to 1,400,000 shares of Common Stock. The Company
expects to enter into a placement agreement with Anglo-American under which,
among other things, the Company would pay to Anglo-American a placement fee in
the amount of $165,000 if, in the Private Placement, Anglo-American places,
for an aggregate purchase price of $11,000,000: (a) that number of shares of
Common Stock equal to $5,500,000 divided by the average closing price per
share of Common Stock for the 10 business days following the commencement of
the mailing of this Proxy Statement; (b) 550,000 shares of Series B Preferred
Stock; and (c) Series B Warrants to purchase up to 1,100,000 shares of Common
Stock (excluding securities purchased by Morgan Stanley or its clients in the
Private Placement). In addition, Anglo-American would receive $0.125 for each
additional share of Common Stock and each additional share of Preferred Stock
that Anglo-American placed (excluding securities purchased by Morgan Stanley
or its clients in the Private Placement) in excess of the sale of securities
of the Company for an aggregate purchase of $11,000,000 referenced above up to
a maximum fee of $52,841 (assuming the average closing price per share of
Common Stock is $5.50). The Company's obligation to pay any fee to Anglo-
American would be conditioned on, among other things, the Closing occurring
and the consummation of the Private Placement resulting in the Company's
receipt of the proceeds therefrom. It is expected that such placement
agreement pursuant to which the Company would agree to compensate Anglo-
American as discussed above would contain terms and conditions relating to
Anglo-American's efforts to place the securities in the Private Placement. Mr.
Gerald N. Agranoff, a Company director, from time to time serves as counsel
for Anglo-American and it is anticipated that he will serve as counsel for
Anglo-American in connection with the Private Placement. (Mr. Rodriguez has
advised the Company that he intends to nominate at the Meeting certain persons
for election as Class 2 directors. See "Election of Directors-Changes to the
Board.")
It is expected that the purchasers will receive certain registration rights
under the Securities Act with respect to the Common Stock and Series B
Preferred Stock that they purchase in the Private Placement and the Common
Stock issuable upon conversion of such Series B Preferred Stock. Under the
Investment Agreement, the terms of the Private Placement (including the above-
mentioned placement agreement) must be acceptable to Apollo. No agreement has
been executed with respect to the foregoing potential transactions and there
can be no assurance that such agreement will be executed or if executed, on
the terms and conditions discussed above. Further, if such agreement were
executed, there can be no assurance that such agreement would be closed and
the potential transactions effected. The Stockholders Approval of the Charter
Amendments would enable the Company to consummate the Private Placement.
If the Private Placement is consummated, the purchasers thereunder will not
be entitled to participate in the Rights Offering in respect of the Common
Stock they purchase in the Private Placement, but will be entitled to
participate in the Rights Offering in respect of the Common Stock owned other
than through the purchase in the Private Placement.
The Company's issuance and sale in the Private Placement of Common Stock,
Series B Preferred Stock and Warrants to purchase Common Stock, for an
aggregate purchase price of at least $15,000,000 is a condition to Foothill
granting its consent to the Transactions. See "Intercreditor Agreement." There
can be no assurance that such condition will be satisfied or waived. If such
condition is not satisfied or waived, and, as a result, the Company fails by
June 24, 1997 to obtain the consent required from Foothill, in respect of the
Transactions, then the Transactions would not be consummated. In that event,
the Company would forfeit its $1,000,000 Commitment Fee paid to Apollo and
would be obligated to pay Apollo the $1,000,000 Break-Up Fee plus the
Transaction Expenses. See "Investment Agreement--Fees and Expenses."
CHARTER AMENDMENTS
The Board has adopted a resolution declaring the advisability of, and
submits to the Stockholders for approval, the Charter Amendments which would
amend the Company's restated certificate of incorporation to, among other
things (a) authorize the issuance of the Series A Preferred Stock, (b)
authorize the issuance of the
55
<PAGE>
Series B Preferred Stock, (c) increase the amount of authorized Common Stock
sufficient to permit the conversion of Series A Preferred Stock and Series B
Preferred Stock and the exercise of the Warrants and (d) eliminate certain
provisions of the Company's restated certificate of incorporation that would
be inconsistent with the rights of the holders of Series A Preferred Stock and
Series B Preferred Stock. The Closing is conditioned on, among other things,
the holders of a majority of the outstanding Common Stock approving at the
Meeting the Transactions and the Charter Amendments and the filing of the
Charter Amendments with the Delaware Secretary of State. The filing is
expected to occur on the date of the Closing. Stockholders Approval of the
Charter Amendments will, in effect, constitute Stockholders approval for the
Company to consummate the Transaction, as discussed herein.
The Charter Amendments, together with the Series A Statement of Designations
(Annex A thereto) and the Series B Statement of Designations (Annex B thereto)
are attached hereto as Appendix A. The following summary of the Charter
Amendments is qualified in its entirety by reference to the complete text of
the Charter Amendments (Appendix A, including Annex A and B thereto).
Under the Company's restated certificate of incorporation as currently in
effect, the Company's authorized capital stock consists of 15,665,000 shares
of Common Stock, par value $0.10 per share. Of the 15,665,000 shares of
authorized Common Stock, (a) 9,721,720 shares are issued and outstanding, (b)
86,277 shares are held in the Company's treasury, (c) 1,241,000 shares are
reserved for issuance upon the exercise of outstanding stock options (no more
than 840,500 Options have been granted), (d) 1,500,000 shares are reserved for
issuance pursuant to the Bank Warrants (1,500,000 Bank Warrants are
outstanding), and (e) 13,290 shares (which are outstanding but ineligible to
vote) are Reserved Shares held for distribution in connection with disputed
claims pursuant to the Plan of Reorganization.
Currently, the Company's restated certificate of incorporation does not
authorize preferred stock and the Company does not have sufficient authorized,
unissued and unreserved Common Stock to permit the issuance of the number of
shares of Common Stock that would be required to be issued upon exercise of
the Issues for Warrants, the Series B Warrants and the issuance of Common
Stock in the Private Placement and conversion of the Series A Preferred Stock
and Series B Preferred Stock to be issued. Accordingly, to effect the
Transactions, the Company's restated certificate of incorporation needs to be
amended, as contemplated by the Charter Amendments.
Under the Charter Amendments, the Company's authorized capital stock would
consist of 70,000,000 shares of Common Stock par value $.10 per share and
4,500,000 shares of preferred stock, par value $.01 per share. Of such
authorized Common Stock, at the Closing (assuming no stock option or warrant
exercises and assuming that the Private Placement and the Rights Offering have
been consummated) (a) 9,721,720 shares will be outstanding (including 13,290
Reserved Shares) (excluding shares granted automatically to directors in lieu
of fees); (b) 10,000,000 shares will be reserved for issuance upon conversion
of the Series A Preferred Stock; (c) 8,000,000 shares will be reserved for
issuance upon conversion of the Series B Preferred Stock; (d) 1,500,000 shares
will be reserved for issuance pursuant to the Bank Warrants, (e) 5,000,000
shares will be reserved for issuance upon the exercise of the Warrants; (f)
4,000,000 shares will be reserved for issuance upon exercise of the Series B
Warrants to be issued in connection with the Private Placement and the Rights
Offering; (g) 86,277 shares will be held in the Company's treasury; (h)
1,241,000 shares will be reserved for issuance upon the exercise of employee
and director stock options; and (h) the remaining shares will be authorized
but unissued. Of the authorized preferred stock, (a) 2,500,000 shares will be
designated Series A Preferred Stock, with a liquidation preference of $10 per
share, of which the Initial Preferred Shares will be issued to the Investor at
the Closing and the remainder will be reserved for issuance to the Investor at
Subsequent Issuances, and (b) 2,000,000 shares will be designated Series B
Preferred Stock, with a liquidation preference of $10 per share, of which
1,000,000 shares will have been issued pursuant to the Private Placement and
up to 1,000,000 shares will have been issued pursuant to the Rights Offering.
The Investment Agreement obligates the Company to reserve at all times and
keep available, free from preemptive rights, out of its authorized and
unissued Common Stock (a) solely for the purpose of effecting the conversion
of the 2,500,000 shares of Series A Preferred Stock to be issued to the
Investor, such number of
56
<PAGE>
shares of Common Stock as will be sufficient to effect the conversion of all
the Series A Preferred Stock and (b) solely for the purpose of issuing shares
upon the exercise of the Warrants, such number of shares of Common Stock which
the Company would be obligated to deliver upon exercise of all of the
Warrants. The Company's restated certificate of incorporation does not provide
nor, if effected, will the Charter Amendments provide for any preemptive
rights upon the issuance of Common Stock.
Additional authorized Common Stock would provide the Board with flexibility
in the management of the Company's capitalization and the provision of
incentives to the Company's directors and officers and other employees. The
additional Common Stock could be used by the Company in connection with (a)
the
establishment of stock option plans and other employee compensation plans, (b)
the issuance of additional stock purchase warrants in connection with the
refinancing of debt, (c) future acquisitions by the Company, (d) future
capital raising by the Company and (e) other corporate purposes. Other than
(a) the possible issuance of Common Stock as described above in "Potential
Private Placement," (b) the completion of the distribution of Common Stock
pursuant to the Reorganization Plan, (c) the issuance of Common Stock upon
conversion of Series A Preferred Stock and Series B Preferred Stock, (d) the
issuance of Common Stock upon the exercise of outstanding warrants, including
the Bank Warrants, and the exercise of the Investor Warrants and the Series B
Warrants, (e) the issuance of Common Stock upon exercise of options issued
under the Company's Employee Stock Option Plan and the 1994 Non-Employee
Directors' Stock Option Plan and (f) the issuance of Common Stock under the
Company's 1996 Non-Employee Directors' Stock Plan, the Company has no specific
plans to issue Common Stock. Furthermore, there are no other agreements,
understandings or arrangements for the issuance of the additional Common Stock
under the Charter Amendments. Common Stock, including, if approved, the newly
authorized shares, may be issued upon the Board's approval, without any
further vote of the Stockholders.
The Company's restated certificate of incorporation as currently in effect
provides that the Company shall not issue any nonvoting equity securities.
This provision would be deleted under the Charter Amendments, because the
holders of the Series A Preferred Stock will have limited voting rights and
the holders of the Series B Preferred Stock will not have any voting rights.
See "Series A Preferred Stock--Voting Rights."
The Charter Amendments would modify the dividend rights of holders of Common
Stock, as described below. Currently, the restated certificate of
incorporation provides that after all debt incurred by the Company under its
Reorganization Plan (the "Reorganization Debt") has been paid, the Board shall
declare, and the Company, on each August 1 and February 1, shall pay mandatory
dividends on the Common Stock equal to 25% of Available Cash (as defined in
the Reorganization Plan). "Available Cash" is defined in the Reorganization
Plan with respect to any payment period (generally, any six-month period
ending June 30 or December 31), as the sum of all cash income of the Company
during that period from all sources (except for borrowed money and certain
delineated cash items) less the sum of payments for operating expenses, debt
payments, capital expenditures, tax payments, payments to creditors under the
Reorganization Plan and creation of reserves for working capital and other
expenses. The Company has never paid mandatory dividends on the Common Stock
because it has not had Available Cash as defined and all indebtedness incurred
by the Company under its Reorganization Plan has not been paid. Currently, the
unpaid Reorganization Debt consists of (a) up to $20 million of principal,
plus interest thereon, of Working Capital Loans under the Foothill Loan
Documents; (b) all indebtedness of, and other amounts payable by, the Company
and its Subsidiaries under the Secured Floating Rate Note Agreement, and (c)
all indebtedness of, and other amounts payable by, the Company under the
Unsecured Cash Flow Notes. Currently, the outstanding principal balances under
the Working Capital Loan, the Secured Floating Rate Notes and the Unsecured
Cash Flow Notes are, respectively $20 million, $40 million and $39.6 million.
The Charter Amendments will delete the provision that, after all
Reorganization Debt has been paid, the Company will pay mandatory dividends on
the Common Stock equal to 25% of Available Cash. While there can be no
assurance, the Board believes that the deletion of the above-mentioned 25% of
Available Cash mandatory dividend payment provision will enhance the Company's
ability to obtain debt and equity financing on commercially reasonable terms.
Furthermore, the Board believes that the existence of such mandatory dividend
payment obligations would have deterred the Company's ability to consummate
the transactions contemplated by the Investment Agreement, including the
issuance of Series A Preferred Stock and Series B Preferred Stock, because the
Company would be obligated after its Reorganization Debt was paid (whether
from earnings, debt or equity proceeds or other proceeds) to pay 25% of its
Available Cash as dividends on its Common Stock.
57
<PAGE>
Under the Investment Agreement and the Series A Statement of Designations,
the Series A Preferred Stock ranks senior to, and has a dividend preference
over, the Common Stock. The Series A Statement of Designations provides that
the Company will not declare, pay or set apart for payment any dividend on any
Junior Stock, which includes the Common Stock, or make any payment on account
of, or set apart for payment money for a sinking or other similar fund for,
the purchase, redemption or other retirement of, any Junior Stock, or any
warrants, rights, calls or options exercisable for any Junior Stock or make
any distribution in respect thereof, and will not permit any Subsidiary of the
Company to do any of the same in respect of such Junior Stock unless and until
all dividend arrearages, if any, on the Series A Preferred Stock have been
paid in full in cash, and the Company is not in default of any of its
redemption obligations or repurchase obligations. Thus, under the Charter
Amendments, the payment of dividends on the Series A Preferred Stock (and on
the Series B Preferred Stock) will have priority over the payment of dividends
on the Common Stock.
RESIGNING DIRECTORS--OPTIONS AND INDEMNIFICATION
Messrs. James W. Apthorp, Allen A. Blase, Jerome J. Cohen, Raymond Ehrlich,
W.D. Frederick, Jr., Lawrence B. Seidman and John W. Temple have agreed to
resign as directors effective as of the Closing, so that the Board will have
seven members, of whom three will be Investor designees, as required by the
Investment Agreement. In view of such resignations, the options issued under
the Company's 1994 Non-Employee Directors' Stock Option Plan (the "1994 Plan")
to each such resigning director will be amended, as directed by the Board, to
extend the exercisability of such options after the effective date of
resignation from 90 days to the earlier of (a) the original expiration date of
each particular option (10th anniversary of its issuance date) or (b) the
expiration of the period ending on the second anniversary of the effective
date of resignation plus, if any applicable, the expiration of the period
equal to six months for each full 12 months such resigning director served as
a Board member. Consequently, the exercisability periods of the 1994 Plan
options held by the resigning directors, assuming the Closing occurs on June
23, 1997, will be extended as follows: Mr. Apthorp: 20,000 options--until
June, 2002; Mr. Blase: 25,000 options--until June, 2000; Mr. Cohen: 20,000
options--until December, 2001; Mr. Ehrlich: 25,000 options--until December,
2001; Mr. Frederick: 25,000 options--until June, 2001; Mr. Seidman: 20,000
options--until December, 1999; and Mr. Temple: 25,000 options--until December
2001. Because the above-discussed option amendments will constitute an
amendment to the 1994 Plan which requires the approval of Stockholders, such
amendment to the 1994 Plan is included as part of the Transactions requiring
Stockholders Approval. See "Election of Directors."
The restated certificate of incorporation and by-laws of the Company provide
for the indemnification of its directors and officers, and the advancement to
them of expenses in connection with proceedings and claims, to the fullest
extent permitted by the DGCL. The Company is entering into indemnification and
release agreements with its directors, who have agreed to resign effective as
of the Closing, that contractually provide for indemnification and expense
advancement, including related provisions intended to facilitate the
indemnitees' receipt of such benefits, and certain releases. Under such
agreements, the Company for itself, its Subsidiaries and any other entities
that the Company controls, will release each of the resigning directors from
any and all claims that any of the releasors may have against the resigning
directors. In addition, the Company has purchased customary directors' and
officers' liability insurance policies for its directors and officers. The
Investment Agreement also provides for continuing indemnification following
the Closing for the Company's directors to the fullest extent provided by law,
as well as continuing coverage under the Company's directors' and officers'
liability insurance policies.
STOCKHOLDERS APPROVAL
Stockholders Approval will constitute approval of (a) the Charter
Amendments, (b) the Transactions, including (i) the issuance to Apollo of the
Series A Preferred Stock and the Investor Warrants, (ii) the granting to
Apollo of representation on the Board as described herein, (iii) the issuance
of up to 1,000,000 shares of the Series B Preferred Stock and up to 2,000,000
Series B Warrants in the Rights Offering and (iv) the issuance of shares of
Common Stock with a fair market value of up to $10,000,000, up to 1,000,000
shares of Series B Preferred Stock and up to 2,000,000 Series B Warrants in
the potential Private Placement; and (c) amendment of
58
<PAGE>
the 1994 Plan to provide for the extension of the exercise period of the
options issued under the 1994 Plan, to the directors who will resign as of the
Closing, all as discussed herein. Under the DGCL, approval of the Charter
Amendments requires the affirmative vote of holders of a majority of the
outstanding Common Stock. Subject to certain exceptions, NASDAQ rules require
that a NASDAQ-quoted company obtain the affirmative vote of holders of a
majority of the outstanding voting stock voting at a meeting at which a quorum
is present to (a) issue, other than in a public offering, common stock or
securities convertible into or exchangeable for common stock representing more
than 20% of the common stock or voting power outstanding prior to the
issuance, at a price less than the greater of book or market value, or (b)
issue securities that will result in a change in control of the listed
company. If the consummation of the Transactions would result in such an
issuance or would result in a change in control, such requirement would be
satisfied by the obtaining of the Stockholders Approval.
The Board unanimously (with the exception of Mr. Scheetz who, because of his
association with Apollo, has recused himself from this recommendation)
recommends that Stockholders vote FOR approval of the Transactions and Charter
Amendments. See "Background" and "Recommendation of Board; Reasons for the
Transaction."
ELECTION OF DIRECTORS
CHANGES TO THE BOARD
The Company has a classified Board currently consisting of four Class 1
directors, three Class 2 directors and three Class 3 directors. The terms of
the Class 2, Class 3 and Class 1 directors continue until the annual meeting
of Stockholders to be held in 1997, 1998 and 1999, respectively, and until
their respective successors are elected and qualified. At each annual meeting,
directors are elected for a full term of three years to succeed those
directors whose term expires at the annual meeting date. The election of each
director requires the vote of holders of a plurality of the outstanding Common
Stock present and entitled to be voted at the Meeting.
Prior to the Company's entering into the Investment Agreement, the Board
consisted of nine members: three Class 1 directors, three Class 2 directors
and three Class 3 directors. The Investment Agreement provides that until the
Closing the Board will consist of 10 directors and one of the directors will
be the Original Investor Designee in the class of directors whose term of
office expires at the annual meeting in 1999; however, as of the Closing, the
Original Investor Designee will resign as a Class 1 director and will become a
director having a term which will expire at the annual meeting to be held in
1998. If the Note is not outstanding and the provisions of the Investment
Agreement which are only applicable to the Closing are terminated in
accordance with the terms thereof, the Investor will cause the Original
Investor Designee to resign promptly from the Board. The Investor will be
entitled to have at least one designee on the Board so long as any amounts are
owed under the Note.
On February 10, 1997, the Board increased the number of Class 1 directors
from three to four and the size of the Board from nine to 10 members, and
appointed Mr. W. Edward Scheetz as a Class 1 director, pursuant to his
designation as the Original Investor Designee by the Investor.
At the Meeting, the holders of Common Stock will vote upon the election of
the three Class 2 directors (whose terms expire at the Meeting). If the
Closing does not occur on or before June 24, 1997, or if the Investment
Agreement is terminated, the term of the Class 2 directors elected at the
Meeting will expire at the annual meeting of Stockholders in the year 2000.
Notwithstanding the election of the Class 2 directors at the Meeting, the
Investment Agreement provides that, as of the Closing, the Board will consist
of seven directors, three of whom will be designated by the Investor, one of
whom will be a member of incumbent management, and three of whom will be
independent directors selected by the incumbent Board with the Investor's
approval. If the Closing occurs, seven current Board members will resign as
directors effective as of the Closing, as discussed below under "Directors
Following the Closing."
59
<PAGE>
The Board, with the Investor's approval, selected Mr. Gerald N. Agranoff, a
current director, and Messrs. James M. DeFrancia and Charles K. MacDonald as
the three independent directors of the seven-member Board effective as of the
Closing. See "Directors Following the Closing." After the Company advised Mr.
Robin C. Rodriguez, a principal of Anglo-American Investors Services Corp.
(Anglo-American), of the Board's selection, Mr. Rodriguez advised the Company
that as a Stockholder he intends to nominate Messrs. DeFrancia and MacDonald
for election as Class 2 directors at the Meeting. See "The Transactions--
Potential Private Placement" for a discussion of compensation that Anglo-
American may receive in connection with the potential Private Placement. Mr.
Agranoff from time to time serves as counsel for Anglo-American and it is
anticipated that he will serve as counsel for Anglo-American in connection
with the Private Placement. As indicated below, the Board has nominated
Messrs. James W. Apthorp, Jerome J. Cohen and Lawrence B. Seidman as Class 2
directors; however, Messrs. Apthorp, Cohen and Seidman, along with four other
current directors, will resign effective as of the Closing.
After the Closing, the Board will consist of seven directors. The member of
incumbent management and the three independent directors will be elected by
the holders of the Common Stock and will have staggered three-year terms.
These will be: two Class 1 directors; one Class 2 director and one Class 3
director. The three other directors will be elected by the holders of the
Series A Preferred Stock and will have terms of one year; provided that if the
Investor does not hold at least 500,000 shares of Series A Preferred Stock,
the number of directors that the holders of the Series A Preferred Stock will
be entitled to elect will be equal to three multiplied by a fraction, the
numerator of which is the number of shares of Series A Preferred Stock
outstanding and the denominator of which is 2,500,000, rounded up to the
nearest whole director.
The persons named in the proxy solicited by the Board will vote, unless the
proxy is marked otherwise, to elect the following persons as Class 2
directors: Messrs. James W. Apthorp, Jerome J. Cohen and Lawrence B. Seidman.
Messrs. Apthorp, Cohen and Seidman are among the seven directors who will
resign effective as of the Closing. If a nominee is unable to serve as a
director, the persons acting under the proxy may vote the proxy for the
election of a substitute. It is not currently contemplated that any nominee
will be unable to serve.
The following information relates to the nominees listed above and to the
Company's other directors whose terms of office will extend beyond the Meeting
(subject in certain cases to resignation upon the Closing), including Mr.
Scheetz, the Original Investor Designee.
CLASS 2 NOMINEES
Mr. James W. Apthorp, age 58, was named chairman of the Board in February
1992, after serving as a director of the Company since 1990. Mr. Apthorp
currently consults with real estate companies and Lehman Brothers. From 1986
to 1989, Mr. Apthorp was the executive vice president and a director of
Gulfstream Land & Development Corp., a Florida-based community development and
homebuilding company. From 1977 to 1986, Mr. Apthorp was vice president for
corporate affairs of Deltona Corporation. Prior to 1977, Mr. Apthorp had an
extensive career in Florida State government, including seven years as Chief
of Staff for Governor Reubin Askew.
Mr. Jerome J. Cohen, age 68, has been a director since March 1992. Since
1988, he has been a director and president of Mego Financial Corp., a
director, president and chief executive officer of Mego Financial Corp.'s
wholly owned subsidiary, Preferred Equities Corporation; chairman of the board
of directors of Vacation Spa Resorts, Inc., an 80%-owned subsidiary of
Preferred Equities Corporation (Vacation Spa Resorts, Inc. was merged into
Preferred Equities Corporation in March 1993); and in 1993 he became president
and chief executive officer and in 1995, chairman of the board and chief
executive officer of Mego Mortgage Corporation. Mego Mortgage Corporation was
a wholly owned subsidiary of Mego Financial Corp. until November, 1996, when
Mego Mortgage issued approximately 19% of its stock in a public offering. Mego
Financial Corp. is a financial services company that through its subsidiaries
provides consumer financing to purchasers of its timeshare interests and land
parcels, originates and purchases government insured loans for home
improvements and sells and services receivables. Preferred Equities
Corporation is headquartered in Las Vegas and has properties that it develops
and operates in Nevada, New Jersey, Colorado and Hawaii. Preferred Equities
also owns Central Nevada Utilities Corp. serving a large portion of the
Pahrump Valley near Las Vegas. Mego Mortgage Corporation is headquartered in
Atlanta, Georgia, and has numerous branch offices in the United States.
60
<PAGE>
Mr. Lawrence B. Seidman, age 49, has been a director since May 1996. He has
served as a financial and legal consultant to an environmental company since
1991 and since 1995 he has also managed several investment partnerships. From
1988 to 1991, he was the general partner of Seidman Financial Associates,
L.P., a financial advisor, and from 1989 to 1992, he was chairman of the board
of directors of Crestmont Federal Savings and Loan Association. From 1986 to
1991, Mr. Seidman was a director of The Savings Bank of Rockland County and
during that time served as vice president of First American Mortgage Company,
a subsidiary of The Savings Bank of Rockland County. Mr. Seidman served as
chairman of the board of directors and president of Movielab, Inc. from 1988
to 1989. On November 8, 1995, the Acting Director of the Office of Thrift
Supervision ("OTS") entered an order that Mr. Seidman cease and desist from
any attempts to hinder the OTS in the discharge of its regulatory
responsibilities, including the conduct of any OTS examination or
investigation, or to induce any person to withhold material information from
the OTS related to the performance of its regulatory responsibilities. The
Acting Director also ordered that if Mr. Seidman becomes an "institution
affiliated party" of any depository institution subject to the jurisdiction of
the OTS, the board of directors of such institution must review any report or
other information he prepares or reviews which is to be submitted to or
reviewed by the OTS in the discharge of its regulatory functions. The order
provides that three years after assuming any such position Mr. Seidman may
apply to have the foregoing condition removed. Finally, the order assessed
Mr. Seidman a civil monetary penalty of $20,812.50.
OTHER DIRECTORS--CLASS 3
Mr. Gerald N. Agranoff, age 50, has been a director since June 1994. He is a
general partner of, and general counsel to, Edelman Securities Company, L.P.
(formerly Arbitrage Securities Company), a registered broker-dealer. He has
been affiliated with Edelman Securities Company, L.P. since January 1982. In
addition, Mr. Agranoff is currently counsel to the law firm of Pryor, Cashman,
Sherman & Flynn, in New York. From 1975 through 1981, Mr. Agranoff was engaged
exclusively in the private practice of law in New York. In addition, he was an
adjunct instructor at New York University's Institute of Federal Taxation.
Prior to entering private practice, Mr. Agranoff served as attorney-advisor to
a judge of the United States Tax Court. Mr. Agranoff is a director of
Datapoint Corporation, Canal Capital Corporation, Bull Run Corporation and
American Energy Group, Ltd.
Mr. J. Larry Rutherford, age 51, has been a director of the Company since
January 1991, when he was named the Company's president and acting chief
executive officer. Mr. Rutherford was named chief executive officer of the
Company in March 1991. Mr. Rutherford joined the Company in September 1990 as
its executive vice president-operations. Before his employment with the
Company, from May 1989 to August 1990, Mr. Rutherford served as president and
chief executive officer of Gulfstream Land & Development Corp. ("Gulfstream").
In this capacity, Mr. Rutherford was charged with restructuring $300 million
in Gulfstream debt. Gulfstream actively developed seven large-scale mixed-use
communities totaling 27,000 acres in Fort Lauderdale, Tampa, Jacksonville,
Sarasota and Orlando, Florida; Atlanta, Georgia; and Richmond, Virginia. In
addition, Gulfstream managed a homebuilding subsidiary which sold
approximately 500 units per year. Prior to being named Gulfstream's chief
executive officer, Mr. Rutherford served Gulfstream as president and chief
operating officer from 1986 until May 1989 and as senior vice president from
1982 until 1986. From 1974 to 1982, Mr. Rutherford worked in various real
estate-related financial and operational capacities for Wintergreen
Development, Inc. and the Cabot, Cabot & Forbes Company. In 1992, Mr.
Rutherford was named as a defendant in a three-count Information filed by the
State Attorney for Broward County, Florida. The charges in the Information,
which include a charge of vehicular homicide, relate to an April 1991 traffic
accident in which a passenger was killed. Following review of the
circumstances surrounding this accident and the charges, the Board determined
that the pendency of this proceeding likely will not adversely affect, and
expressed its continuing confidence in, Mr. Rutherford's ability to perform
his duties as the Company's president and chief executive officer.
Mr. John W. Temple, age 59, has been a director since March 1992. He has
been president and chief executive officer of the Temple Development Company
since its formation in 1989. Temple Development Company is a privately owned
Florida real estate developer. From 1987 to 1989, Mr. Temple was president and
a director of Markborough Communities, Inc., a wholly owned subsidiary of the
Hudson Bay Company and a large-scale community developer with holdings in
California, Colorado, Texas, Arizona and Florida. From 1984 to 1987, Mr.
Temple was president and a director of Arvida/Disney, a wholly owned
subsidiary of The Walt Disney Company and a "high-end" community developer in
Florida.
61
<PAGE>
OTHER DIRECTORS--CLASS 1
Mr. Allen A. Blase, age 48, has been a director since March 1995. Mr. Blase
is president of Blase Estates, Inc., a real estate developer and builder since
1990, and the principal of A. Blase Financial Advisors, a financial management
and advisory firm, since 1988. Mr. Blase also has been a director and an
officer of InterWave, Inc., a privately held manufacturer of R.F. cable TV
modems, since January 1996. Mr. Blase served as vice president, investments,
of JW Charles Securities, Inc., from 1993 to 1995 and as a trustee of the
Damson Oil Liquidating Trust from 1992 to 1995. During 1991 and 1992, Mr.
Blase also served as a creditors committee member for Damson Oil Company, a
publicly held oil and gas producer, and as a partner of Blase, Lofton,
McConnell and Company, a partnership of introducing brokers. Mr. Blase is also
an accountant, maintaining a private practice since 1971, and he earned a
juris doctor in 1981 from Nova University.
Mr. Raymond Ehrlich, age 79, has been a director since March 1992. He has
been a partner in the law firm of Holland & Knight since January 1992. The
Company retains Holland & Knight to represent the Company in certain legal
matters. Mr. Ehrlich served as a Justice of the Florida Supreme Court from
1981 until his retirement from the Court in January 1991. From July 1988 until
July 1990, Mr. Ehrlich served as Chief Justice of the Florida Supreme Court.
From January 1991 until August 1991, Mr. Ehrlich served as special Washington
counsel to U.S. Senator Bob Graham. From August to November 1991, he was
jurist-in-residence at Florida State University College of Law.
Mr. W.D. Frederick, Jr., age 62, has been a director since October 1992 and
served as an ex officio (nonvoting) director from March 1992 to October 1992.
Mr. Frederick is president of the Frederick Enterprise Group, which holds
citrus, ranching and other real estate interests. He was a partner in the law
firm of Holland & Knight from November 1992 to March 1995. Mr. Frederick
served as the Mayor of the City of Orlando, Florida from 1980 to 1992. He also
served as chairman (a) of the Frederick Commission, which was created by
Florida Governor Lawton Chiles to recommend ways to improve efficiency in
state government; (b) of the Florida Environmental Regulation Commission from
1975 to 1978; and (c) of the Florida Department of Pollution Control from 1972
to 1975. Mr. Frederick is a director of Florida Progress Corporation and of
Blue Cross & Blue Shield of Florida.
Mr. W. Edward Scheetz, age 32, has been a director since February 10, 1997.
Mr. Scheetz has been a partner of Apollo Real Estate Advisors, L.P., since
1993 and of Apollo Real Estate Advisors II, L.P., since 1996, which, together
with affiliates, act as managing general partners of the Apollo Real Estate
Investment Funds, private real estate investment funds which invest in direct
and indirect real property interests, including real estate-related public and
private debt and equity securities. Since that time, he has directed the
investment activities of the Funds. Prior to 1992, Mr. Scheetz was a principal
of Trammell Crow Ventures, a national real estate investment firm. Mr. Scheetz
is a director of Capital Apartment Properties, Inc., Koger Equity, Inc.,
Metropolis Realty Trust, Inc., NextHealth, Inc., Koll Management Services,
Inc., Meadowbrook Golf, Inc., All-Right Parking Corp. and Roland
International, Inc.
MISCELLANEOUS
There is no family relationship between any of the Company's directors or
officers. Except as discussed in this Proxy Statement in respect of Board
membership as contemplated by the Investment Agreement, there are no
arrangements between any director of the Company and any other person pursuant
to which he was selected as a director.
The Board held 20 meetings (including telephonic meetings) during 1996. The
Board has standing committees including an audit committee, a human relations
committee and a nominating committee. During 1996, each director attended at
least 75% of the aggregate of the total number of meetings of the Board (held
during the period for which he was a director) and the total number of
meetings held by all Board committees on which he served (during the periods
that he served as a member).
The audit committee, composed of Messrs. Agranoff, Blase and Cohen, held one
meeting during 1996. The principal functions of the audit committee are to
make recommendations to the Board regarding the selection of the Company's
independent accountants, to consult with the Company's independent accountants
and financial and accounting staff and to review and report to the Board with
respect to the scope of audit procedures, accounting practices and internal
accounting and financial controls.
62
<PAGE>
The human relations committee, composed of Messrs. Agranoff, Blase and
Frederick, held three meetings during 1996. The principal function of the
human relations committee is to review and make recommendations to the Board
on all compensation and hiring issues relating to officers and senior staff
members. The members of the human relations committee also serve as the stock
option committee under the Company's Employee Stock Option Plan.
The nominating committee, composed of Messrs. Blase, Ehrlich and Temple,
held no meetings during 1996. The principal functions of the nominating
committee are to review potential candidates for the Board and to recommend
nominees for election to the Board. The nominating committee will consider
nominees recommended by Stockholders. Recommendations by Stockholders should
be submitted to the Company's secretary and should identify the recommended
nominee by name and provide detailed background information. Recommendations
received by January 23, 1998 will be considered by the nominating committee
for nomination at the 1998 annual meeting of Stockholders.
Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons who own more than 10% of a registered class of the
Company's equity securities ("10% Stockholders"), to file with the SEC initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Directors, officers and 10%
Stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file. The Company assists its directors and
officers in preparing their Section 16(a) forms. Each of the following filed a
late Form 3 during 1996: J. Thomas Gillette, III, Marcia H. Langley, and
Lawrence B. Seidman. Each of the following filed a late Form 5 with respect to
stock options granted in July 1996: Callis N. Carleton, Jay C. Fertig, John H.
Fischer, J. Thomas Gillette, III, Thomas W. Jeffrey, Marcia H. Langley, Kevin
M. O'Grady, and Kimball D. Woodbury.
Except as set forth above, to the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, with respect to 1996, the
Company's directors, officers and 10% Stockholders complied with all
applicable Section 16(a) filing requirements.
DIRECTORS FOLLOWING THE CLOSING
As discussed above, in accordance with the Investment Agreement, as of and
after the Closing, the Board will consist of seven directors: three Investor
designees, one member of incumbent management, and three independent directors
selected by the Incumbent Board, with the Investor's approval. The Board has
adopted a resolution effective as of the Closing, which will reduce the size
of the Board from 10 to seven members.
The three Investor designees are Messrs. W. Edward Scheetz (the Original
Investor Designee), Lee Neibart and Ricardo Koenigsberger. Information related
to Mr. Scheetz is provided above, and information related to Messrs. Neibart
and Koenigsberger is provided below. The member of incumbent management on the
Board will be Mr. Rutherford, the Company's president and chief executive
officer. The three independent directors will be Mr. Agranoff, Mr. James M.
DeFrancia and Mr. Charles K. MacDonald. Information related to Messrs.
Rutherford and Agranoff is provided above. Information related to Messrs.
DeFrancia and MacDonald is provided below. As discussed above, Messrs.
Apthorp, Blase, Cohen, Ehrlich, Frederick, Seidman and Temple have agreed to
resign as directors effective as of the Closing. Mr. Rutherford currently is a
Class 3 director. Effective as of the Closing, Mr. Rutherford has been
appointed by the Board as a Class 2 director to fill one of the vacancies
created by the resignation of the Class 2 directors. Mr. Agranoff currently is
a Class 3 director. Effective as of the Closing, Mr. Agranoff has been
appointed by the Board as a Class 1 director to fill one of the vacancies
created by the resignation of three of the Class 1 directors. See "Director
Compensation" below.
Mr. Lee Neibart, age 46, has been a partner of Apollo Real Estate Advisors,
L.P. since 1993 and of Apollo Real Estate Advisors II, L.P., since 1996,
which, together with affiliates, act as managing general partners of the
Apollo Real Estate Investment Funds, private real estate investment funds
which invest in direct and indirect real property interests, including real
estate related public and private debt and equity securities. From prior to
63
<PAGE>
1992, Mr. Neibart was executive vice president and chief operating officer of
The Robert Martin Company, a private real estate development and management
firm based in Westchester County, New York. Mr. Neibart is a director of
Capital Apartment Properties, Inc., Koger Equity, Inc., Metropolis Realty,
Inc., NextHealth, Inc., Meadowbrook Golf, Inc., All-Right Parking Corp. and
Roland International, Inc.
Mr. Ricardo Koenigsberger, age 30, has been associated since 1995 with
Apollo Real Estate Advisors, L.P. and a partner of Apollo Real Estate Advisors
II, L.P., since 1996, which, together with affiliates, act as managing general
partner of the Apollo Real Estate Investment Funds, private real estate
investment funds which invest in direct and indirect real property interests,
including real estate related public and private debt and equity securities.
From prior to 1992 Mr. Koenigsberger has been associated with Apollo Advisors,
L.P. which acts as managing general partner of Apollo Investment Fund, L.P.
and AIF II, L.P., private securities investment funds. Mr. Koenigsberger is a
director of Meadowbrook Golf, Inc.
Mr. James M. DeFrancia, age 55, has been since 1987 a principal of Lowe
Enterprises, Inc., a national real estate development company engaged in
residential, commercial and resort development activities. Since 1995 he has
served as chairman of Lowe Enterprises Mid-Atlantic Inc., and president of
Lowe Enterprises Community Development, which is headquartered in suburban
Washington, D.C. and manages the development of large scale community projects
nationally. He has also managed projects where Lowe has been retained by
banks, insurance companies and Federal agencies as a consultant/development
manager for properties in numerous States.
Mr. Charles K. MacDonald, age 38, is president of Morgandane Management
Corp., an investment advisory firm. From 1987 to 1995 he was a securities
analyst and portfolio manager with Elliott Associates, L.P. Mr. MacDonald is a
director and a member of the Executive Committee of Bio-Technology General
Corporation and a director of Live Entertainment Inc.
The terms of the members of the seven-member Board upon consummation of the
Closing will expire as follows: The term of Mr. Rutherford, who will be a
Class 2 director, will expire at the annual meeting of Stockholders in the
year 2000. The term of Mr. Agranoff, who will be a Class 1 director, will
expire at the annual meeting in 1999. The term of Mr. DeFrancia, a Class 3
director, will expire at the annual meeting in 1998. The term of Mr.
MacDonald, a Class 1 director, will expire at the annual meeting in 1999. The
terms of Messrs. Koenigsberger, Neibart and Scheetz, the Investor designees,
will expire at the annual meeting in 1998.
PROPOSAL TO AMEND THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION TO EFFECT A REVERSE STOCK SPLIT FOLLOWED BY A
FORWARD STOCK SPLIT OF THE COMMON STOCK
The Board has unanimously adopted a resolution declaring the advisability
of, and submits to the Stockholders for approval, a proposal to amend the
Company's restated certificate of incorporation (a) to effect, as determined
by the Board in its discretion, either of two different reverse stock splits
of the outstanding Common Stock as of 5:00 p.m. (Florida time) on the
effective date of the amendment (the "Effective Date"), pursuant to which
either (i) each 100 shares then outstanding will be converted into one share
(the "1-for-100 Reverse Split"), or (ii) each 200 shares then outstanding will
be converted into one share (the "1-for-200 Reverse Split" and together with
the 1-for-100 Reverse Split, the "Reverse Split" or "Reverse Splits") and (b)
to effect a forward split of the Common Stock as of 6:00 a.m. (Florida time)
on the day following the effective date of the Reverse Split, pursuant to
which Common Stock then outstanding as of such date will be converted into the
number of shares of the Common Stock that such shares represented immediately
prior to the Effective Date ("Forward Split"). In lieu of issuing less than
one whole share resulting from the proposed stock splits to holders of fewer
than 200 or 100 shares, as the case may be, the Company would make a cash
payment based on the closing prices of the Common Stock, as discussed below.
The Board will select, in its discretion, one of the Reverse Splits based on
factors existing at the time of determination, including (a) the availability
of funds necessary to consummate the Reverse Split and the cost of such funds;
(b) the market price of the Common Stock; (c) the Board's determination of
which of the Reverse Splits will result in the greatest reduction in the
64
<PAGE>
Company's administrative expenses; (d) prevailing market conditions; (e) the
likely effect on the market price of the Common Stock; and (f) other relevant
factors. If one Reverse Split is consummated, the other Reverse Split would be
abandoned by the Board pursuant to Section 242(c) of the DGCL, without further
action by the Stockholders.
This proposal was submitted to and approved by the Stockholders at their
annual meeting in 1996. The Board, however, did not implement either of the
proposed stock splits that were approved at the 1996 annual meeting and does
not intend to do so prior to the Meeting. If this proposal is approved by the
Stockholders at the Meeting, there is no assurance that the Board will
determine to implement it.
Consummation of either Reverse Stock Split will not change the number of
shares of Common Stock authorized by (a) the Company's restated certificate of
incorporation, which will remain at 15,665,000 shares or, (b) if effective, by
the Charter Amendments, which would remain at 70,000,000 shares of Common
Stock. Stockholders may approve or reject the Reverse Splits in whole but not
in part. If, for any reason the Board deems it advisable to abandon the
proposed stock splits following their approval by Stockholders, the proposed
stock splits may be abandoned by the Board at any time before the Effective
Date, whether before or after the Meeting (even if it has been approved by the
Stockholders). The Reverse Split will become effective on the date that the
certificate of amendment to (a) the Company's restated certificate of
incorporation or, (b) if effective, the Charter Amendments is filed with the
Secretary of State of Delaware, as selected by the Board prior to the annual
meeting of Stockholders in 1998. If the Effective Date does not occur prior to
the annual meeting of Stockholders in 1998, the proposed stock splits will not
be consummated without further approval of Stockholders. If the Board
determines to consummate a Reverse Stock Split, the Company will publicly
announce the determination at least 10 days prior to the Effective Date.
The text of the resolutions providing for the stock splits, including
proposed amendments to (a) the Company's restated certificate of incorporation
or, (b) if effective, the Charter Amendments, is attached as Appendix C.
The combined effect of the proposed stock splits on the holders of Common
Stock will be as follows:
(a) The Common Stock of holders of record of fewer than 100 shares of
Common Stock on the Effective Date (assuming a 1-for-100 Reverse Split) or
fewer than 200 shares of Common Stock on the Effective Date (assuming a 1-
for-200 Reverse Split) will automatically be converted in the Reverse Split
into the right to receive cash in lieu of less than one whole share in the
amount set forth below. See "Cash Payment in Lieu of Shares."
(b) The Common Stock of holders of record of 100 or more shares on the
Effective Date (assuming a 1-for-100 Reverse Split) or 200 or more shares
on the Effective Date (assuming a 1-for-200 Reverse Split) will be
automatically converted in the Reverse Split into the number of shares
equal to the number of their shares divided by 100 shares (assuming a 1-
for-100 Reverse Split) or 200 shares (assuming a 1-for-200 Reverse Split).
However, as of 6:00 a.m. (Florida time), on the day after the Effective
Date, each remaining Stockholder's Common Stock (giving effect to the
Reverse Split) will be converted, pursuant to the Forward Split, into
Common Stock, either on the basis of 100 shares (assuming a 1-for-100
Reverse Split) or 200 shares (assuming a 1-for-200 Reverse Split) per share
of Common Stock and any fraction thereof held immediately after the Reverse
Stock Split. As a result, the number of shares held by each remaining
Stockholder immediately after the Forward Stock Split will equal the number
of shares of Common Stock such record holder held immediately prior to the
Reverse Stock Split.
CASH PAYMENT IN LIEU OF SHARES. In lieu of issuing less than one whole share
resulting from the Reverse Split to holders of record of fewer than 100 shares
(assuming a 1-for-100 Reverse Split) or fewer than 200 shares (assuming a 1-
for-200 Reverse Split), the Company will value each outstanding share of
Common Stock held on the Effective Date of the Reverse Split at the average
daily closing price per share of the Common Stock as reported by the NASDAQ
National Market for the 10 trading days preceding the Effective Date. Such per
share price is hereinafter referred to as the "Purchase Price."
65
<PAGE>
Stockholders who hold fewer than 100 shares of record on the Effective Date
(assuming a 1-for-100 Reverse Split) or fewer than 200 shares of record on the
Effective Date (assuming a 1-for-200 Reverse Split) will be entitled to
receive in lieu of the less than one whole share arising as a result of the
Reverse Split, cash in the amount of the Purchase Price times the number of
shares of Common Stock held immediately prior to the Reverse Split.
Any Stockholder owning of record fewer than 100 shares of Common Stock
(assuming a 1-for-100 Reverse Split) or fewer than 200 shares of Common Stock
(assuming a 1-for-200 Reverse Split) who desires to retain an equity interest
in the Company after the Effective Date may do so by purchasing, prior to the
Effective Date, sufficient shares of Common Stock in the open market to
increase the number of shares held in his name to 100 or more shares or 200 or
more shares, respectively.
As soon as practical after the Effective Date, the Company will mail a
letter of transmittal to each holder of record of a stock certificate or
certificates which represent issued Common Stock outstanding on the Effective
Date. The letter of transmittal will contain instructions for the surrender of
such certificate or certificates to the Company's designated exchange agent in
exchange for cash payments in lieu of shares or certificates representing the
number of whole shares of Common Stock into which the shares of Common Stock
has been converted as a result of the proposed stock splits. No cash payment
will be made or new certificate issued to a Stockholder until he has
surrendered his outstanding certificates together with the letter of
transmittal to the Company's exchange agent. See "Exchange of Stock
Certificates."
EFFECT OF THE PROPOSED STOCK SPLITS. Under Delaware law, Stockholders have
no right to dissent from the proposed stock splits, or to dissent from the
payment of cash in lieu of issuing less than one whole share resulting from
the Reverse Split.
On the Effective Date, each Stockholder of record who owns fewer than 100
shares of Common Stock (assuming a 1-for-100 Reverse Split) or fewer than 200
shares of Common Stock (assuming a 1-for-200 Reverse Split) will have only the
right to receive cash based upon the Purchase Price in lieu of receiving less
than one whole share. The interest of each such Stockholder in the Company
will thereby be terminated, and each such Stockholder will have no right to
vote as a Stockholder or share in the Company's assets, earnings or profits.
Each Stockholder on the Effective Date who owns of record 100 or more shares
of Common Stock (assuming a 1-for-100 Reverse Split) or 200 or more shares
(assuming a 1-for-200 Reverse Split) will continue as a Stockholder with
respect to the share or shares resulting from the Reverse Split, and such
shares will be forward split as of 6:00 a.m. (Florida time), on the date
immediately after the Effective Date so as to convert each share plus any
fraction thereof held by such record holder immediately after the Effective
Date into Common Stock, on the basis of 100 shares of Common Stock for each
share then held (assuming a 1-for-100 Reverse Split) or on the basis of 200
shares of Common Stock for each share then held (assuming a 1-for-200 Reverse
Split). Each such Stockholder will continue to share in the Company's assets,
earnings or profits, if any, to the extent of each such Stockholder's
ownership of Common Stock following the proposed stock splits.
The Company's restated certificate of incorporation currently authorizes the
issuance of 15,665,000 shares of Common Stock (which would be increased to
70,000,000 if the Charter Amendments become effective). The authorized Common
Stock will not be changed by reason of the proposed stock splits. As of May 2,
1997, the number of outstanding shares of Common Stock was 9,721,720 including
13,290 Reserved Shares. Based upon the Company's best estimates as of May 2,
1997, the number of outstanding shares of Common Stock will be reduced as a
result of the proposed 1-for-100 Reverse Split and 1-for-200 Reverse Split
from 9,721,720 to approximately 8,763,977 and 8,050,915, respectively (or by
approximately 957,743 and 1,670,805 shares, respectively), and the number of
Stockholders of record will be reduced from approximately 30,689 to
approximately 7,372 and 2,249, respectively (or by approximately 23,717 and
28,440 Stockholders, respectively).
The Common Stock is currently registered under section 12(g) of the Exchange
Act and as a result, the Company is subject to the periodic reporting and
other requirements of the Exchange Act. The proposed stock
66
<PAGE>
splits will not affect the registration of the Common Stock under the Exchange
Act, and the Company has no current intention of terminating its registration
under the Exchange Act to become a "private" company. Also, consummation of
the proposed stock splits is not expected to adversely affect the eligibility
of the Common Stock to be traded on the NASDAQ National Market.
Based on, as of May 2, 1997, the aggregate number of shares owned by record
holders with fewer than 100 shares and the market price of the Common Stock,
the Company estimates that payments for less than one whole share resulting
from the 1-for-100 Reverse Split will aggregate approximately 5,267,587
(957,743 shares times $5.50 per share). As of May 2, 1997, based on the
aggregate number of shares owned by record holders with fewer than 200 shares
and the market price of the Common Stock, the Company estimates that payments
for less than one whole share resulting from the 1-for-200 Reverse Split will
aggregate approximately $9,189,428 (1,670,805 shares times $5.50 per share).
The Company currently neither has the funds necessary to consummate the
proposed stock split or has decided on the source of such funds. If the Board
determined to effect a stock split, it could consider, among other things, the
Company raising the necessary funds by borrowing or privately placing Common
Stock or other securities. In any event, consummation of the proposed stock
splits will require the consent of Foothill and, if either a Funding or the
Closing has occurred, the consent of Apollo.
The par value of the Common Stock will remain at $.10 per share following
consummation of the proposed stock splits, and the number of shares of Common
Stock outstanding will be reduced. As a consequence, the aggregate par value
of the outstanding Common Stock will be reduced, while the aggregate capital
in excess of par value attributable to the outstanding Common Stock for
statutory and accounting purposes will be correspondingly increased. The
resolutions approving the Reverse Stock Split provide that this increase in
capital in excess of par value will be treated as capital for statutory
purposes. Under Delaware law, however, the Board will have the authority,
subject to various limitations, to transfer some or all of such increased
capital in excess of par value from capital to surplus, which additional
surplus could be distributed to Stockholders as dividends or used by the
Company to repurchase outstanding Common Stock. The Company currently has no
plans to use any surplus so created to pay any such dividend or to repurchase
shares (and is currently prohibited from repurchasing shares and paying
dividends pursuant to existing agreement with creditors).
The increase in the authorized but unissued number of shares of Common Stock
affected by the proposed stock splits could have an anti-takeover effect.
Common Stock could, within the limits imposed by applicable law, be issued by
the Company in one or more transactions which would make more difficult, and
therefore less likely, a takeover of the Company. Any such issuance of
additional Common Stock could have the effect of diluting the earnings per
share and book value per share of outstanding Common Stock, and such
additional shares could be used to dilute the stock ownership or voting rights
of persons seeking to obtain control of the Company.
PURPOSE OF THE PROPOSED STOCK SPLITS. As of May 2, 1997, the Company
estimates that approximately 23,317 and 28,440 record holders, or
approximately 76% and 93% of the record holders of Common Stock, owned fewer
than 100 shares and 200 shares of Common Stock, respectively. Such
Stockholders owning fewer than 100 shares and 200 shares own in the aggregate
approximately 9.9% and 17.2% of the outstanding Common Stock, respectively.
Based upon the closing price per share of the Common Stock of $5.50, as
reported on the NASDAQ National Market on May 2, 1997, a stockholding of 99
shares has a market value of approximately $544.50 and a stockholding of 199
shares has a market value of approximately $1,094.50.
The cost of administering each Stockholder's account and the amount of time
spent by management in responding to Stockholder requests is the same
regardless of the number of shares held in the account. Accordingly, the cost
to the Company of maintaining many small accounts is disproportionately high
when compared with the total number of shares involved. In view of the
disproportionate cost to the Company of retaining small Stockholder accounts,
management believes that it would be beneficial to the Company and its
Stockholders as a whole to eliminate the administrative burden and cost
associated with approximately 23,317 accounts containing fewer than 100 shares
of Common Stock (assuming a 1-for-100 Reverse Split) or 28,440 accounts
containing fewer than 200 shares of Common Stock (assuming a 1-for-200 Reverse
Split). It is expected
67
<PAGE>
that the direct cost of administering Stockholder accounts will be reduced by
up to approximately $150,000 per year if the 1-for-100 Reverse Stock Split is
consummated and up to approximately $185,000 per year if the 1-for-200 Reverse
Stock Split is consummated.
Furthermore, the Company is unable to locate a significant number of its
Stockholders with small holdings. Therefore, the Company believes it cannot
acquire the shares of those Stockholders and realize the savings described
above by making a tender offer to acquire shares. If the Company is to acquire
these shares it must do so by means of the proposed Reverse Split. Funds
otherwise payable to a Stockholder who cannot be located will be held until
proper claim therefor is made, subject to applicable escheat laws.
Also, the Reverse Split will enable Stockholders holding of record fewer
than 100 shares (assuming a 1-for-100 Reverse Split) or fewer than 200 shares
(assuming a 1-for-200 Reverse Split) to dispose of their investment at market
value and, in effect, avoid brokerage fees on the transaction. Stockholders
owning a small number of shares would, if they chose to sell their shares,
probably incur brokerage fees disproportionately high relative to the market
value of their shares. In some cases, it might be difficult to find a broker
to handle such small transactions.
If the proposed stock splits are consummated, the Common Stock held by the
Company as treasury shares and available for subsequent issuance would
increase by approximately 957,743 shares, assuming a 1-for-100 Reverse Stock
Split, and 1,670,805 shares, assuming a 1-for-200 Reverse Stock Split, based
on record ownership of Common Stock as of May 2, 1997 (and in either event,
without giving effect to the possible issuance of Common Stock to raise funds
to consummate the Reverse Stock Split). While the Company has no current
specific plans to issue Common Stock other than as discussed above under "The
Transaction" and otherwise pursuant to the Company's Employee Stock Option
Plan, 1994 Non-Employee Directors Stock Option Plan and 1996 Non-Employee
Directors Stock Plan, the additional treasury shares would provide the Board
with flexibility in the management of the Company's capitalization and the
provision of incentives to the Company's officers and other employees. The
additional Common Stock could be used by the Company in connection with (a)
the establishment of director or employee stock compensation plans, (b) the
issuance of stock purchase warrants in connection with the refinancing of
debt, (c) future acquisitions by the Company, (d) future capital raising by
the Company and (e) other corporate purposes. Unless required by law or
regulatory authorities, no further authorization by vote of Stockholders will
be sought for any future Common Stock issuances. No Stockholder will have any
preemptive or other preferential right to purchase any Common Stock that may
be issued and sold by the Company in the future.
EXCHANGE OF STOCK CERTIFICATES. If the Board determines to consummate the
proposed stock splits, as soon as practicable after the Effective Date, the
Company will send letters of transmittal to all Stockholders of record on the
Effective Date for use in transmitting stock certificates ("old certificates")
to the Company's exchange agent. Upon proper completion and execution of the
letter of transmittal and return thereof to the exchange agent, together with
old certificates, each stockholder who holds of record fewer than 100 shares
on the Effective Date (assuming a 1-for-100 Reverse Split) or fewer than 200
shares on the Effective Date (assuming a 1-for-200 Reverse Split) will receive
cash in the amount to which the holder is entitled. After the Effective Date
and until surrendered, each outstanding old certificate held by a Stockholder
who holds of record fewer than 100 shares (assuming a 1-for-100 Reverse Split)
or fewer than 200 shares (assuming a 1-for-200 Reverse Split) shall be deemed
for all purposes to represent only the right to receive the amount of cash to
which the holder is entitled as a result of the Reverse Split. No interest
will be paid on cash sums due as of the Effective Date. See "Cash Payment in
Lieu of Shares."
Upon proper completion and execution of the letter of transmittal and return
thereof to the exchange agent, together with old certificates, holders of
record of 100 or more shares on the Effective Date (assuming a 1-for-100
Reverse Split) or 200 or more shares on the Effective Date (assuming a 1-for-
200 Reverse Split) will receive certificates ("new certificates") representing
the number of whole shares of Common Stock into which their shares of Common
Stock have been converted as a result of the proposed stock splits. Until
surrendered, each outstanding old certificate held by a Stockholder who holds
of record 100 or more shares (assuming a 1-for-100
68
<PAGE>
Reverse Split) or 200 or more shares (assuming a 1-for-200 Reverse Split)
shall be deemed for all purposes to represent the number of whole shares to
which the holder is entitled as a combined result of the proposed stock
splits.
FEDERAL INCOME TAX CONSEQUENCES. The following discussion describes certain
federal income tax consequences of the proposed stock splits to Stockholders
who are citizens or residents of the United States, other than Stockholders
who received their Common Stock as compensation. The consequences for each
Stockholder will be governed by the specific facts and circumstances
pertaining to his acquisition and ownership of Common Stock. Thus, the Company
recommends that each stockholder consult with his tax advisor concerning his
own personal tax situation. In general, the federal income tax consequences of
the proposed stock splits will vary among Stockholders depending upon whether
they receive solely cash for their shares or solely new certificates in
exchange for old certificates. Further, the income tax consequences to a
Stockholder who receives cash for shares and who continues to own, or is
treated (see description of constructive ownership under item 5 below) as
continuing to own, Common Stock immediately following the transaction will
depend on factors which cannot be predicted with certainty. A Stockholder may
receive cash in the transaction and own shares immediately after the
transaction, if he holds shares in more than one account. The Company has not
sought and will not seek an opinion of counsel or a ruling from the Internal
Revenue Service regarding the federal income tax consequences of the proposed
stock splits. The Company, however, believes that because the proposed stock
splits are not part of a plan to increase periodically a stockholder's
proportionate interest in the Company's assets or earnings and profits, the
proposed stock splits probably will have the following federal income tax
effects:
1. A stockholder who receives only cash as a result of the Reverse Split
and who is not treated as owning any Common Stock immediately following the
transaction will generally be treated as having sold his Common Stock
represented by old certificates and will recognize gain or loss to the
extent that the cash received differs from his basis in such Common Stock.
If the shares are a capital asset in the hands of the Stockholder, the gain
or loss will be recognized as a capital gain or loss. Whether gains or
losses from the sale or exchange of capital assets are short-term or long-
term capital gains or losses depends on the period the capital asset was
held.
2. A Stockholder who receives solely new certificates will not recognize
gain or loss on the exchange. In the aggregate, the Stockholder's basis in
the Common Stock represented by new certificates will equal the holder's
basis in the Common Stock represented by old certificates.
3. The income tax consequences to a Stockholder who receives cash as a
result of the Reverse Split and who owns, or is treated as owning, any
Common Stock immediately following the transaction will depend on whether
the percentage of the outstanding Common Stock which the stockholder owned,
or is treated as owning, immediately after the transaction is less than the
percentage of the outstanding Common Stock which the Stockholder owned, or
was treated as owning, immediately prior to the transaction. If there has
been a reduction in such percentage, the Stockholder will generally be
treated as having sold the shares for which he received cash and will
recognize gain or loss on such shares in the manner described under item 1
above. If there is no reduction in such percentage, the stockholder will
generally be treated as having received a dividend distribution equal to
the amount of cash received. A dividend distribution would be ordinary
income to the extent of the Company's current or accumulated earnings and
profits. Amounts in excess of earnings and profits would be a return of
capital to the extent of the Stockholder's basis in his directly owned
shares and, assuming the shares are held as a capital asset, any balance of
the cash distribution would be capital gain.
4. The proposed stock splits will constitute a reorganization within the
meaning of Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as
amended, and the Company will not recognize any gain or loss as a result of
the proposed stock splits.
5. Generally a taxpayer is deemed to own shares actually owned by, and in
certain instances, constructively owned by, certain family members,
corporations in which the stockholder has a major interest, partnerships,
trusts and estates in which the Stockholder has an interest, or which the
taxpayer may acquire by exercise of an option or by conversion of a
security. In addition, a taxpayer which is a
69
<PAGE>
partnership, trust or estate is deemed to own shares owned by persons
having an interest in the taxpayer and a taxpayer which is a corporation
will be deemed constructively to own shares owned by major stockholders of
the corporation.
RECOMMENDATION AND VOTE. The proposed stock splits must be approved by the
holders of a majority of the outstanding Common Stock.
The Board unanimously recommends that Stockholders vote FOR approval of each
of the proposed stock splits and each of the resolutions with respect thereto
set forth in Appendix C hereto. Stockholders may approve or reject the
proposed stock splits in whole but not in part.
BENEFICIAL OWNERSHIP OF COMMON STOCK
OWNERSHIP BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
The following table sets forth, to the Company's knowledge, the beneficial
ownership of Common Stock by each director, nominee (including if the Closing
occurs Messrs. Koenigsberger and Neibart who will be appointed as directors
designated by the Investor and Messrs. DeFrancia and MacDonald) and certain
executive officers, individually, and all directors and executive officers as
a group, as of May 2, 1997.
<TABLE>
<CAPTION>
AMOUNT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT
------------------------ ------------------ -------
<S> <C> <C>
Gerald N. Agranoff...................... 43,310/1/,/2/ /9/
James W. Apthorp........................ 24,528/1/ /9/
Allen A. Blase.......................... 29,018/1/,/2/,/3/ /9/
Jerome J. Cohen......................... 26,773/1/ /9/
James M. DeFrancia...................... 0 0
Raymond Ehrlich......................... 36,973/1/,/2/,/4/ /9/
Jay C. Fertig........................... 14,000/5/ /9/
W.D. Frederick, Jr...................... 39,773/1/,/2/ /9/
Thomas W. Jeffrey....................... 47,000/6/ /9/
Ricardo Koenigsberger................... 0 0
Charles K. MacDonald.................... 0 0
Brian A. McLaughlin..................... 0 0
Lee Neibart............................. 0 0
Kevin O'Grady........................... 0 0
J. Larry Rutherford..................... 172,500/7/ 1.8%/9/
W. Edward Scheetz....................... 20,000/1/ /9/
Lawrence B. Seidman..................... 43,773/1/,/8/ /9/
John W. Temple.......................... 43,773/1/,/2/ /9/
All directors, Investor designees and
executive officers as a group (16
persons)............................... 541,421 5.6%
</TABLE>
- --------
/1/Includes 20,000 shares issuable upon exercise of stock options exercisable
as of May 2, 1997.
/2/Includes 5,000 shares issuable upon exercise of stock options exercisable
as of May 2, 1997.
/3/Includes 63 shares held by Mr. Blase's mother-in-law.
/4/Includes 200 shares held in his spouse's individual retirement account.
/5/Includes 14,000 shares issuable upon exercise of stock options exercisable
as of May 2, 1997.
/6/Includes 46,000 shares issuable upon exercise of stock options exercisable
as of May 2, 1997.
/7/Includes 162,500 shares issuable upon exercise of stock options exercisable
as of May 2, 1997.
/8/Includes 20,000 shares held by Seidman & Associates, L.L.C. of which Mr.
Seidman is the managing director.
/9/Less than one percent.
70
<PAGE>
OWNERSHIP BY PERSONS OWNING MORE THAN FIVE PERCENT
Based upon a Schedule 13G dated January 22, 1997 filed with the SEC by
Morgan Stanley Asset Management Inc. and Morgan Stanley Group Inc. and certain
supplemental information as of March 31, 1997 that was furnished to the
Company and based on a Schedule 13G dated February 5, 1997 filed with the SEC
by Dimensional Fund Advisors Inc., the Company has been informed that the
following persons currently beneficially own more than five percent of the
outstanding Common Stock:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES OF OUTSTANDING
HOLDER BENEFICIALLY OWNED STOCK
------ ------------------ --------------
<S> <C> <C>
Morgan Stanley Group Inc. and
Morgan Stanley Asset Management Inc. ...... 1,172,100 12.1%
1221 Avenue of the Americas
New York, NY
Dimensional Fund Advisors Inc. ............ 548,900 5.7%
1299 Ocean Avenue
Santa Monica, CA 90401
</TABLE>
Morgan Stanley Asset Management Inc. is, according to the Schedule 13G, a
wholly owned subsidiary of Morgan Stanley Group Inc. The Schedule 13G states
that Morgan Stanley Asset Management Inc. and Morgan Stanley Group Inc. are
investment advisors registered under Section 203 of the Investment Advisers
Act of 1940, as amended. The Company has been informed that Morgan Stanley is
the beneficial owner of the Common Stock in its capacity as investment advisor
to certain of its clients. The Schedule 13G states that of 1,001,400 shares of
Common Stock beneficially owned as of December 31, 1996, the reporting persons
have sole voting power as to none of the shares and shared voting power as to
207,800 shares.
It is contemplated that in the Private Placement Morgan Stanley Asset
Management Inc., as agent on behalf of one or more of its clients, will
purchase $3 million in fair market value of Common Stock (approximately
545,455 shares assuming $5.50 per share, which was the closing sales price of
the Common Stock on May 19, 1997, as quoted on the NASDAQ National Market),
300,000 shares of Series B Preferred Stock, and warrants to purchase 600,000
shares of Common Stock. See "The Transactions--Potential Private Placement."
According to its Schedule 13G, Dimensional Fund Advisors Inc.
("Dimensional") is an investment advisor registered under Section 203 of the
Investment Advisors Act of 1940, as amended, and all of the 548,900 shares
reflected above are held in portfolios of DFA Investment Dimensions Group
Inc., a registered open-end investment company ("the Fund"), or in series of
the DFA Investment Trust Company, a Delaware business trust (the "Trust"), or
the DFA Group Trust and DFA Participation Group Trust, investment vehicles for
qualified employee benefit plans, for all of which Dimensional serves as
investment manager. Dimensional disclaims beneficial ownership of all such
shares. The Schedule 13G states that of the 548,900 shares of Common Stock
beneficially owned, the reporting person has sole voting power as to 367,100
shares. In addition, persons who are officers of Dimensional also serve as
officers of the Fund and the Trust and, in such capacities, those persons vote
74,800 additional shares owned by the Fund and 107,000 shares owned by the
Trust, which shares are included in the 548,900 shares.
OWNERSHIP BY APOLLO
The following table sets forth the percentage of Common Stock to be
beneficially owned by Apollo after the Closing assuming (a) certain
percentages of the Series A Preferred Stock are purchased by Apollo and
converted into Common Stock; (b) certain percentages of the Investor Warrants
have been exercised pro rata with the conversion of the Series A Preferred
Stock; (c) certain percentages of the Series B Preferred Stock are subscribed
for in the Rights Offering and converted into Common Stock, the same
percentages of Series B Warrants issued in the Rights Offering are exercised;
(d) none of the 1,500,000 Bank Warrants are converted into Common Stock; (e)
none of the 500,950 outstanding director and employee options are exercised;
(f) the
71
<PAGE>
Private Placement is not effected; and (g) other than the foregoing and the
existing 9,721,720 shares of Common Stock outstanding, no other Common Stock
is outstanding.
APOLLO'S PERCENTAGE OWNERSHIP OF COMMON STOCK
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PERCENTAGE OF SERIES B PREFERRED STOCK PURCHASED BY
STOCKHOLDERS IN RIGHTS OFFERING AND CONVERTED; SAME
PERCENTAGE OF SERIES B WARRANTS ISSUED IN RIGHTS OFFERING
EXERCISED
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF 0% 25% 50% 75% 100%
SERIES A --------------------------------------------------------------
PREFERRED 20% 16% 15% 14% 13% 12%
STOCK --------------------------------------------------------------
PURCHASED BY 40% 28% 26% 24% 23% 22%
APOLLO AND --------------------------------------------------------------
CONVERTED; 60% 37% 34% 33% 31% 29%
SAME --------------------------------------------------------------
PERCENTAGE OF 80% 43% 41% 39% 37% 36%
INVESTOR --------------------------------------------------------------
WARRANTS 100% 49% 47% 45% 43% 41%
EXERCISED
- --------------------------------------------------------------------------------
</TABLE>
APOLLO'S PERCENTAGE OWNERSHIP OF COMMON STOCK
The following table sets forth the percentage of Common Stock to be
beneficially owned by Apollo after the Closing based on the same assumptions
as set forth in (a) through (e) above and assuming that (f) the Private
Placement of $10 million in fair market value of Common Stock, 1,000,000
shares of Series B Preferred Stock and 2,000,000 Series B Warrants is effected
concurrently with the Closing; (g) all Series B Preferred Stock issued in the
Private Placement is converted into Common Stock; (h) all Series B Warrants
issued in the Private Placement are exercised; and (i) other than the forgoing
and the existing 9,721,720 shares of Common Stock outstanding, no other Common
Stock is outstanding.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PERCENTAGE OF SERIES B PREFERRED STOCK PURCHASED BY
STOCKHOLDERS IN RIGHTS OFFERING CONVERTED; SAME
PERCENTAGE OF SERIES B WARRANTS ISSUED IN RIGHTS OFFERING
EXERCISED
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF 0% 25% 50% 75% 100%
SERIES A --------------------------------------------------------------
PREFERRED 20% 11% 10% 10% 9% 9%
STOCK --------------------------------------------------------------
PURCHASED BY 40% 20% 19% 18% 17% 16%
APOLLO AND --------------------------------------------------------------
CONVERTED; 60% 27% 26% 25% 24% 23%
SAME --------------------------------------------------------------
PERCENTAGE OF 80% 33% 32% 30% 29% 28%
INVESTOR --------------------------------------------------------------
WARRANTS 100% 38% 37% 35% 34% 33%
EXERCISED
- -------------------------------------------------------------------------------
</TABLE>
72
<PAGE>
COMPENSATION AND CERTAIN RELATED MATTERS
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid by the Company with respect to 1996, 1995 and 1994 to each of its five
executive officers on December 31, 1996 who were the Company's most highly
compensated executive officers in 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
------------------------------------ COMPENSATION
NAME AND OTHER ANNUAL ------------ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#) COMPENSATION(5)
------------------ ---- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
J. Larry Rutherford..... 1996 $400,000 $295,000 $ 0 0 $3,183
President and 1995 350,000 230,000 0 50,000 2,288
Chief Executive Officer 1994 350,000 200,000 0 112,500 924
Jay C. Fertig........... 1996 70,000 329,777/2/ 0 10,000 3,946
Senior Vice President 1995 70,000 152,992/2/ 0 10,000 1,922
1994 70,000 73,573/2/ 0 10,000 1,185
Thomas W. Jeffrey....... 1996 175,000 85,000 0 20,000 3,403
Executive Vice Presi-
dent 1995 175,000 55,220 0 40,000 2,616
and Chief Financial Of-
ficer 1994 155,288 52,250 0 30,000 981
Brian A. McLaughlin/3/.. 1996 250,000 618,907/2/ 24,000 0 2,250
President--Atlantic 1995 110,577 66,887/2/ 24,138 0 0
Gulf Land Company
Kevin O'Grady/3/........ 1996 100,000 168,914/4/ 12,000 5,000 0
Vice President 1995 42,433 50,000/2/ 9,274 0 0
</TABLE>
- --------
(1) Other Annual Compensation for Mr. McLaughlin included $20,413 for
relocation expenses in 1995. While the named officers receive certain
perquisites, except as stated herein such perquisites did not exceed the
lesser of $50,000 or 10% of any such officer's salary and bonus for any of
the periods presented.
(2) The bonus amounts for Messrs. Fertig, McLaughlin and O'Grady represent
commissions.
(3) Messrs. McLaughlin and O'Grady joined the Company in July 1995.
(4) The bonus amount for Mr. O'Grady in 1995 included commissions of $153,914.
(5) Represents amounts contributed on the officer's behalf by the Company to
its 401(k) plan.
STOCK OPTIONS
The Company's Employee Stock Option Plan provides for the grant of options
with respect to Common Stock.
OPTION GRANTS IN 1996 FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF TOTAL OPTIONS
OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION GRANT DATE
NAME GRANTED(1) IN FISCAL YEAR PRICE DATE PRESENT VALUE(2)
---- ---------- ------------------------ -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
J. Larry Rutherford..... 0 -- $5.875 7/17/06 $2.72
Jay C. Fertig........... 10,000 9.8% 5.875 7/17/06 2.72
Thomas W. Jeffrey....... 20,000 19.5% 5.875 7/17/06 2.72
Brian A. McLaughlin..... 0 -- -- -- --
Kevin O'Grady........... 5,000 4.9% 5.875 7/17/06 2.72
</TABLE>
- --------
(1) All options vest 40% two years from the date of grant and 20% on each of
the three subsequent anniversaries of the date of grant.
(2) The grant date present values are calculated based on the "risk free"
Black-Scholes model. The assumptions used in the calculations include an
expected volatility of .418, a rate of return of 6.6%, no dividend yield
and a time to exercise of five years.
73
<PAGE>
AGGREGATED OPTION EXERCISES IN 1996 FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END/1/
ON VALUE ------------------------------ -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Larry Rutherford..... 0 $ 0 162,500 112,500 $ 0 $ 0
Jay C. Fertig........... 0 0 14,000 26,000 0 0
Thomas W. Jeffrey....... 0 0 46,000 74,000 0 0
Brian A. McLaughlin..... 0 0 0 0 0 0
Kevin O'Grady........... 0 0 0 5,000 0 0
</TABLE>
- --------
(1) Represents the difference between the fair market value of the Common
Stock subject to the options, based on the closing price of $4.3125 for
the Common Stock on December 31, 1996, and the exercise prices of the
options.
DEFINED BENEFIT RETIREMENT PLAN
The Company has a defined benefit retirement plan (the "Retirement Plan")
that covers most employees who met certain requirements regarding age and
service before December 31, 1990. The Retirement Plan was amended in 1990 to
fix benefits and service accruals as of December 31, 1990. The following table
reflects estimated annual benefits payable on retirement under the Retirement
Plan in the form of a life annuity. Because credited service ceased in 1990
and none of the Company's executive officers has 15 years of credited service,
the table does not display more than 15 years. Benefits payable under the
Retirement Plan are subject to certain limitations imposed by the Code, and
benefits in certain situations may be subject to offsets for Social Security.
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
ASSUMED HIGHEST -------------------------
AVERAGE COMPENSATION 5 10 15
-------------------- ------- -------- --------
<S> <C> <C> <C>
$ 75,000.................................... $ 4,467 $ 8,935 $ 13,402
100,000.................................... 6,155 12,310 18,465
</TABLE>
Because of the 1990 amendment to the Retirement Plan, of the executive
officers named in the Summary Compensation Table, only Mr. Fertig is entitled
to participate in the Retirement Plan. His credited service is fixed at six
years and his benefits are fixed at his average salary for the five years
ended December 31, 1990 of $46,454.
EMPLOYMENT AGREEMENTS
Mr. Rutherford's previous employment agreement with the Company has expired.
The Board has authorized an employment agreement with Mr. Rutherford which, if
executed, would provide as follows: (a) Mr. Rutherford's term of employment,
unless terminated earlier, would terminate on September 30, 1997; (b) Mr.
Rutherford's base salary would be at the rate of $400,000 per annum; (c) in
the Board's sole discretion, after a review of Mr. Rutherford's employment
performance, Mr. Rutherford may be awarded up to a $300,000 bonus in respect
of the Company achieving the results contemplated by its business plan and
obtaining new development project opportunities and additional debt or equity
financing, including the consummation of the Closing; and (d) Mr. Rutherford
would provide, if so requested by the Board, "transition" assistance, on a
part time basis, after the termination of employment, for up to 180 days,
subject to the continuation of his base compensation at the rate of $400,000
per annum and his ability to engage in real estate development activities,
including activities that may, in fact, be competitive with the Company's
efforts, or otherwise involve corporate
opportunities that the Company may be interested in pursuing. The Company's
proposed employment agreement with Mr. Rutherford also would provide that he
will be entitled to receive a severance payment of $400,000 in a lump sum,
within five business days after the occurrence of either (a) the Company's
termination of the Employee's employment prior to September 30, 1997, other
than for cause or (b) a Change of Control of the
74
<PAGE>
Company and within five business days thereafter, the termination by Mr.
Rutherford of his employment thereunder, with or without reason or cause.
"Change of Control" would be defined to mean any person, entity or group (as
defined in the Exchange Act), acquiring equity securities of the Company
either (i) for an aggregate purchase price in excess of $10,000,000 being paid
to the Company for its equity securities or (ii) in a transaction that would
require disclosure under Item 1 of Form 8-K pursuant to Section 13 or 15(d) of
the Exchange Act; provided, however, in either event Change of Control of the
Company would not include the consummation of the Transaction, the Private
Placement or the Rights Offering. It is contemplated that Mr. Rutherford would
negotiate a new employment agreement with the Company after the Closing;
however, there is no commitment or understanding regarding the terms thereof.
An employment agreement with Mr. Jeffrey expired on April 30, 1995 and under
its terms he elected to remain an employee-at-will. The agreement provided
that if Mr. Jeffrey elected to become an employee-at-will and he is thereafter
terminated other than for "cause" as defined in the agreement, he will receive
severance compensation at the rate of his annual base salary and certain
fringe benefits for six months following termination.
Under an employment agreement with Mr. McLaughlin dated July 1, 1995, and
effective July 17, 1995. Mr. McLaughlin was employed as president and chief
executive officer of Atlantic Gulf Land Company, a non-incorporated division
of the Company until April 11, 1997, when such employment was terminated.. He
will be entitled to (a) an annual base salary of $250,000 and (b) override
payments equal to one and one-half percent of (i) the gross sales proceeds of
the Company from each sale of eligible property, as defined in the agreement,
which close either during the term of the agreement (the "Term") or, if the
Term has terminated and Mr. McLaughlin has participated in obtaining the
particular definitive contract of sale prior to such termination, during the
first 180 days after the effective date of termination, (ii) any non-
refundable deposit paid to the Company while the sale does not occur, but the
Company is entitled to retain such deposit and (iii) the value of eligible
property transferred during the Term by the Company to a joint venture or
partnership between the Company and an unaffiliated third party or to an
operating division of the Company for the purpose of developing such property.
Also, Mr. McLaughlin is receiving one year's base salary of $250,000 and
unpaid override payments for sales he participated in which close within 180
days of the termination date.
DIRECTOR COMPENSATION
In 1996 Stockholders approved the adoption of the 1996 Non-Employee
Directors Stock Plan. Under such Plan, which took effect as of July 1, 1996,
the Non-Employee Directors receive an annual retainer of $25,000 paid in
Common Stock quarterly based on the share price at the end of the previous
quarter, and $3,000 per Board meeting attended in person or $1,000 per Board
meeting if attended by telephone. Board meeting fees are paid in cash
quarterly. The Chairman is paid a retainer of $25,000 in Common Stock and
$10,000 per month in cash. No fees are paid for attending Board committee
meetings nor for serving as chairman of a Board committee.
In 1995 Stockholders approved the adoption of the 1994 Non-Employee
Directors' Stock Option Plan (the "1994 Plan"). The 1994 Plan provides that
each director of the Company who is not otherwise an employee of the Company
on the date of grant of the option ("grant date") shall automatically be
granted an option to purchase (a) 20,000 shares of Common Stock as of December
5, 1994, (b) 20,000 shares of Common Stock to each new non-employee director
upon his or her first election or appointment to the Board and (c) 5,000
shares of Common Stock to each non-employee director at the first meeting of
directors following such director's subsequent election or appointment to the
Board. Options granted under the 1994 Plan are exercisable for 10 years and
are fully vested and exercisable on the date of grant. Options for a maximum
of 350,000 shares of Common Stock may be issued pursuant to the 1994 Plan. In
view of the significant reduction in the cash compensation payable to non-
employee directors of the Company as a result of the effectiveness of the 1996
Non-Employee Directors Stock Plan, the Board in December 1997 nullified,
retroactively, its previous action in December 1995 providing that the
aggregate cash fees payable to the directors would be reduced by $1 for each
option share granted under the 1994 Plan.
75
<PAGE>
In view of the voluntary resignations as directors of Messrs. Apthorp,
Blase, Cohen, Ehrlich, Frederick, Seidman and Temple effective as of the
Closing, so that the Board will have seven members, of whom three will be
Investor designees, as required by the Investment Agreement, the Transactions
include the amendment of the 1994 Plan so that the options issued under the
1994 Plan to each such resigning director will be amended, as directed by the
Board, to extend the exercisability of such options after the effective date
of resignation from 90 days to the earlier of (a) the expiration date of each
option (the 10th anniversary of its issuance date) or (b) the expiration of
the period ending on the second anniversary of the effective date of
resignation, plus the expiration of the period equal to six months for each
full 12 months such resigning director served as a Board member. Consequently,
the exercisability periods of the 1994 Plan options held by the resigning
directors, assuming the Closing occurred on June 23, 1997, would be extended
as follows: Mr. Apthorp: 20,000 options--until June 2002; Mr. Blase: 25,000
options--until June 2000; Mr. Cohen: 20,000 options--until December 2001; Mr.
Ehrlich: 25,000 options--until December 2001; and Mr. Frederick: 25,000
options--until June 2001; Mr. Seidman: 20,000 options until December 1999;
Temple: 25,000 options--until December 2001. See "Related Party Transactions"
and "Indemnification Arrangements."
RELATED PARTY TRANSACTIONS
During 1996, the Company retained the law firm of Holland & Knight, of which
Mr. Ehrlich is, and Mr. Frederick was, a partner to represent the Company in
certain legal matters.
In February 1997, the Company paid to Mr. James W. Apthorp, Chairman of the
Board, $250,000 as compensation for his services in connection with the
Company obtaining the release in January 1997 of approximately $12.1 million
in cash, $4.2 million in principal amount of Unsecured 12% Notes, and $2
million in principal amount of the Unsecured Cash Flow Notes held in trust
under the Reorganization Plan for the benefit of certain purchasers of lots
from the Company's predecessor company.
In February 1996, the Company engaged Mr. Gerald N. Agranoff, a director, to
assist the Company's senior management in the negotiation of proposed
financing. As compensation for such services, the Company paid $30,000 in cash
to Mr. Agranoff and issued to him 4,537 shares of Common Stock having an
approximate market value of $30,000 upon issuance.
INDEMNIFICATION ARRANGEMENTS
The charter and by-laws of the Company provide for the indemnification of
its directors and officers, and the advancement to them of expenses in
connection with proceedings and claims, to the fullest extent permitted by the
DGCL. The Company is entering into indemnification and release agreements with
its directors who have agreed to resign effective as of the Closing that
contractually provide for indemnification and expense advancement, including
related provisions meant to facilitate the indemnitees' receipt of such
benefits, and certain releases. Under such agreements, the Company for itself,
its Subsidiaries and any other entities that the Company controls, will
release each of the resigning directors from any and all claims that any of
the releasors may have against the resigning directors. In addition, the
Company has purchased customary directors' and officers' liability insurance
policies for its directors and officers. The Investment Agreement also
provides for continuing indemnification following the Closing for the
Company's directors to the fullest extent provided by law, as well as
continuing coverage under the Company's directors' and officers' liability
insurance policies.
REPORT TO STOCKHOLDERS ON COMPENSATION
In designing its compensation programs, the human relations committee
follows the belief that compensation should reflect the following principles:
1. Compensation programs should support the Company's short-term and
long-term strategic goals and objectives by rewarding individuals who
significantly contribute to the accomplishment of those goals and
objectives.
76
<PAGE>
2. Short-term and long-term compensation play a critical role in
attracting and retaining well qualified executives.
3. Compensation should be meaningfully related to the creation of value
for the stockholders.
The Company's executive compensation is based on three components, which are
intended to serve the overall compensation philosophy.
BASE SALARY. Base salary is targeted at the competitive median for
competitors in land development and condominium construction in the Company's
market areas. Salaries for executives are reviewed by the committee annually,
and the committee may recommend an increase to the Board at that time based on
(a) the committee's view that the individual's contribution has increased and
(b) increases in median pay levels.
The 1996 base salaries of Messrs. Rutherford and McLaughlin were determined
pursuant to employment agreements. These employment agreements were designed
to attract talented executive officers to the Company and to retain certain
valuable existing executive officers. Effective July 1, 1996, Mr. Rutherford's
salary was increased.
ANNUAL INCENTIVES. On the committee's recommendation, the Board authorized
the implementation of a Management by Objectives bonus program tied to 1993
performance (the "1993 M.O. Program"). Under the 1993 M.O. Program, the
Company's chief executive officer could earn a bonus of up to 100% of his base
salary, and the other executive officers could earn bonuses of up to 35% of
their base salaries, depending upon (a) the Company meeting certain
established 1993 net cash flow goals and (b) the executive officer's achieving
certain other pre-determined departmental and individual objectives, including
objectives for regional sales and asset dispositions. In addition to the
executive officers, the 1993 M.O. Program applied to all of the Company's
employees, at varying potential bonus levels. The Board adopted a similar
Management by Objectives bonus program for 1994 (the "1994 M.O. Program"). The
bonus targets in the 1994 M.O. Program are based upon (a) 1994 net cash flow
goals, (b) departmental goals, (c) completion of certain major corporate
transactions and (d) the price of the Common Stock. A similar Management by
Objectives bonus program for 1995 (the "1995 M.O. Program") was adopted by the
Board. The Bonus targets in the 1995 M.O. Program are based upon (a) 1995 net
cash flow goals, (b) department goals and (c) completion of certain major
corporate transactions. A similar management by objectives bonus program for
1996 (the "1996 M.O. Program") was adopted by the Board. The Bonus targets in
the 1996 M.O. Program are based upon (a) 1996 net cash flow goals, (b)
department goals and (c) completion of certain major transactions.
Mr. Rutherford received a bonus payment of $200,000 in 1994 under the 1993
M.O. Program keyed to, among other things, certain specified levels of
corporate performance achieved as compared to current year budgets. The Board
set similar incentive bonus targets for Mr. Rutherford under the 1994 M.O.
Program. Under the 1994 M.O. Program, Mr. Rutherford received a bonus payment
of $130,000 and discretionary bonus payments of $100,000 pursuant to his
employment agreement, for a total of $230,000 in 1995. In 1996, Mr. Rutherford
received $295,000 in bonus payments under the terms of his employment
agreement. In February 1997, Mr. Rutherford received a $90,000 bonus in
respect of his performance during the last six months of 1996, including in
respect of the closing on the Company's debt facilities with Foothill, in
September 1996, and the Company's repayment in full of its unsecured 12% notes
due on December 31, 1996.
Based upon the Company's cash flow and the completion of certain major
corporate transactions, Mr. Jeffrey received a bonus payment of $40,220 in
1995 under the 1994 M.O. Program. No bonus was paid to Mr. Jeffrey in 1996
under the 1995 M.O. Program but he did receive a bonus of $85,000 when the
Foothill Debt was closed. Mr. Jeffrey also received a $15,000 advance of his
1996 anticipated bonus.
Mr. Fertig receives incentive compensation as a percentage of the revenues
from sales of the Company's land sales. His incentives were $73,573 in 1994,
$152,992 in 1995, and $329,777 in 1996. Mr. Fertig did not participate in the
1994, 1995 or 1996 M.O. Program.
77
<PAGE>
Mr. McLaughlin is president of Atlantic Gulf Land Company and is responsible
for liquidating land inventory not designated for development. Mr McLaughlin
received incentive compensation of $66,887 in 1995, and $618,907 in 1996 based
upon a percentage of the revenues from land sales.
Mr. O'Grady participates in the M.O. Program and also receives incentives on
various transactions. In 1995, he received an incentive payment of $50,000 and
in 1996 received a bonus of $15,000 under the terms of the M.O. Plan and
incentive payments of $153,914 for closing certain transactions.
LONG-TERM INCENTIVES. In 1993 the Company adopted an employee stock option
plan to provide a long-term incentive compensation program. The committee
believes that a long-term incentive compensation program, linked directly to
the value of the Common Stock, will provide executives with significant
incentives to increase Stockholder value, as well as assisting the Company in
attracting and retaining well qualified executives. In addition, the Company's
reorganization plan specifically provides for an employee stock option plan.
In September 1994, option grants were made to Mr. Rutherford for 112,500
shares, Mr. Jeffrey for 30,000 shares, and Mr. Fertig for 10,000 shares. In
February 1995, additional option grants were made to Mr. Rutherford for 50,000
shares, Mr. Jeffrey for 40,000 shares, and Mr. Fertig for 10,000 shares. In
July 1996, additional option grants were made to Mr. Jeffrey for 20,000
shares, Mr. Fertig for 10,000 shares and Mr. O'Grady for 5,000 shares. The
number of shares of Common Stock subject to the option grants was determined
by the committee's subjective evaluation of competitive industry practices as
well as the officers' position levels.
The Human Relations Committee
W.D. Frederick, Jr., Chairman
Gerald N. Agranoff
Allen A. Blase
78
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the total cumulative return on the
Common Stock since it commenced trading on June 4, 1992 through December 31,
1996 with the NASDAQ Composite Index and a group of peer companies. Returns
are based on the change in month-end to month-end price and assume reinvested
dividends. These calculations assume the value of an investment in the Common
Stock, the NASDAQ Index and the peer group was $100 on June 4, 1992.
The peer companies selected are in the real estate development business.
They are AMREP Corp.; Atlantic Gulf Communities Corporation; Avatar Holdings;
Killearn Properties, Inc.; MDC Holdings Inc.; Newhall Land and Farming Co.
(Patten Corp., which had been included among the peer companies in previous
years, has ceased trading; accordingly, Patten Corp. has been excluded from
the group of peer companies). The companies were weighted by market
capitalization.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
6/4/92 12/31/92 6/30/93 12/31/93 6/30/94 12/31/94 6/30/95 12/29/95 6/28/96 12/31/96
------ -------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Atlantic Gulf........... 100.00 41.32 56.54 89.16 87.02 82.70 55.84 58.00 49.3 35.35
Peer Group.............. 100.00 105.21 114.85 125.15 122.56 111.89 124.39 143.03 212.93 149.05
NASDAQ Index............ 100.00 115.67 120.29 132.74 120.68 128.61 159.66 179.95 183.55 234.39
</TABLE>
79
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Ernst & Young served as the Company's independent public
accountants for 1996. The Company has not yet selected its independent public
accountants for 1997. This selection is expected to be made by the Board
during the second quarter of 1997, based upon the recommendation of the audit
committee. Representatives of Ernst & Young are expected to attend the
Meeting, will be provided with an opportunity to make a statement, should they
desire to do so, and will be available to respond to appropriate questions
from the Stockholders.
OTHER MATTERS
The Board knows of no other business which may come before the Meeting. If,
however, any other matters are properly presented to the Meeting, it is the
intention of the persons named in the accompanying proxy to vote, or otherwise
act, in accordance with their judgment on such matters.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Any proposal of a Stockholder intended to be presented at the Company's
annual meeting of Stockholders in 1998 must be received by the Company's
secretary at the Company's principal executive offices not later than January
23, 1998 for inclusion in the proxy statement for that meeting.
METHOD OF PROXY SOLICITATION
The Company has retained D. F. King to solicit proxies in the enclosed form
and will pay a fee of approximately $5,000 plus an additional fee of $3 for
each Stockholder telephone contact and plus reasonable expenses, for such
services. In addition, the Company's directors, officers and regular
employees, without additional remuneration, may solicit proxies from
Stockholders by telephone, telegraph and personal interviews. The Company
will, if requested, reimburse banks, brokerage houses and other custodians,
nominees and certain fiduciaries for their reasonable out-of-pocket expenses
incurred in connection with the distribution of proxy materials to their
principals. The entire cost of this solicitation of proxies will be borne by
the Company.
In addition, certain directors, officers, representatives, and regular
employees of the Company may also contact Stockholders by telephone, telegram,
or personal interview. The Company will reimburse brokers and other custodians
or nominees for their reasonable expenses incurred in forwarding the
solicitation material to beneficial owners of Common Stock. The entire cost of
this solicitation will be borne by the Company.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Proxy Statement, and subject in each case
to information contained in this Proxy Statement, are the following documents
filed by the Company with the SEC pursuant to the Exchange Act: (a) the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, filed April 14, 1997 and (b) the Company's Current Report on Form 8-K
filed February 18, 1997; and (c) the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, filed May 15, 1997.
The Company will provide without charge to each person, including any
beneficial owner of Common Stock, to whom this Proxy Statement is delivered,
upon the written or oral request of such person, a copy of any and all of the
documents incorporated by reference herein (other than exhibit to such
documents unless such exhibits are specifically incorporated by reference in
such documents). Such request should be direct to Investor Relations, Atlantic
Gulf Communities Corporation, 2601 South Bayshore Drive, Miami, Florida 33133-
5461 (telephone: 305-859-4256).
By Order of the Board of Directors,
Joel K. Goldman
Secretary
May 21, 1997
80
<PAGE>
APPENDIX A
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ATLANTIC GULF COMMUNITIES CORPORATION
Atlantic Gulf Communities Corporation, a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies
as follows:
a. The name of the corporation is Atlantic Gulf Communities Corporation.
Atlantic Gulf Communities Corporation was originally incorporated under the
name "Chemical Research Corporation". The original Certificate of
Incorporation of Chemical Research Corporation was filed with the Secretary
of State of the State of Delaware on January 13, 1928. Atlantic Gulf
Communities Corporation was subsequently named General Development
Corporation. General Development Corporation filed a voluntary petition for
relief from creditors under Chapter 11 of the Bankruptcy Code on April 6,
1990, in the United States Bankruptcy Court for the Southern District of
Florida (the "Bankruptcy Court"). On , 1991, the Certificate of
Incorporation of the corporation was amended pursuant to Section 7.2(b) of
the Second Amended Joint Plan of Reorganization of General Development
Corporation dated October 9, 1991, and confirmed by Order of the Bankruptcy
Court on March 27, 1992 (the "Reorganization Plan").
b. This Amended and Restated Certificate of Incorporation was adopted by
the stockholders of the corporation on June 23, 1997 and restates and
further amends the provisions of the Certificate of Incorporation of this
corporation as heretofore amended or supplemented.
c. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby restated and further amended to read in its entirety
as follows:
FIRST: The name of the corporation (hereinafter called the "Corporation") is
ATLANTIC GULF COMMUNITIES CORPORATION.
SECOND: The registered office of the Corporation is to be located at 1209
Orange Street, in the City of Wilmington, in the County of New Castle, in the
State of Delaware. The name of its registered agent at that address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: (a) The total number of shares of stock that the Corporation shall
have authority to issue is seventy-four million and five hundred thousand
(74,500,000), of which seventy million (70,000,000) shall be common stock of
one class, par value of ten cents ($0.10) per share ("Common Stock"),
amounting in the aggregate to par value seven million dollars ($7,000,000),
and four million and five hundred thousand (4,500,000) shall be preferred
stock, par value $.01 per share ("Preferred Stock"), amounting in the
aggregate to par value of forty-five thousand dollars ($45,000).
(b) Shares of Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of the Corporation is hereby authorized to fix
the voting rights, if any, designations, powers, preferences and the relative,
participation, optional or other rights, if any, and the qualifications,
limitations or restrictions thereof, of any unissued series of Preferred
Stock; and to fix the number of shares constituting 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). Except as otherwise provided
by law, the voting rights of the Corporation's capital stock shall be as set
forth in this Amended and Restated Certificate of Incorporation or in the
resolution or resolutions adopted by the Board of Directors designating the
rights, powers and preferences of any series of Preferred Stock. Each share of
Common Stock shall have one vote, and the Common Stock shall vote together as
a single class.
A-1
<PAGE>
(c) The Board of Directors of the Corporation is authorized to effect the
elimination of shares of its Common Stock purchased or otherwise reacquired by
the Corporation from the authorized capital stock of the number of shares of
the Corporation in the manner provided for in the General Corporation Law of
the State of Delaware.
(d) No holder of Common Stock shall have any preemptive right to subscribe
to stock, obligations, warrants, rights to subscribe to stock or other
securities of the Corporation of any class, whether now or hereafter
authorized.
(e) The powers, preferences and rights of the 20% Cumulative Redeemable
Convertible Preferred Stock, Series A of the Corporation shall be set forth in
Annex A to this Amended and Restated Certificate of Incorporation (which is
incorporated herein as though set forth in full in this place).
(f) The powers, preferences and rights of 20% Cumulative Redeemable
Convertible Preferred Stock, Series B of the Corporation shall be set forth in
Annex B to this Amended and Restated Certificate of Incorporation (which is
incorporated herein as though set forth in full in this place).
FIFTH: The Corporation shall be managed by the Board of Directors, which
shall exercise all powers conferred under the laws of the State of Delaware.
The number of directors shall be determined as provided in the By-laws of the
Corporation. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is authorized to later amend or repeal the By-
laws of the Corporation.
SIXTH: No action shall be taken by the stockholders of the Corporation
except at an annual meeting or at a special meeting of stockholders of the
Corporation; provided, however, that at any time after the first meeting of
the stockholders held in accordance with the By-laws of the Corporation, any
action required or permitted to be taken at any annual or special meeting of
the stockholders may be taken without a meeting, without prior notice and
without a vote, if consents in writing, setting forth the action so taken, are
signed by the holders of shares of capital stock having not less than the
minimum number of votes that would be necessary to authorize or take the
action at a meeting at which the holders of all shares entitled to be voted
thereon were present and voted; prompt notice of the taking of action without
a meeting by less than unanimous consent shall be given to the stockholders
who have not consented in writing.
SEVENTH: At any time after the first annual meeting of stockholders held in
accordance with the By-laws of the Corporation, the holders of 35 percent of
the issued and outstanding shares of capital stock may request that a special
meeting be called in accordance with the procedures set forth in the By-laws.
EIGHTH: No director may be removed from office except for cause and only by
the affirmative vote of the holders of a majority of the outstanding stock
entitled to vote.
NINTH: The Corporation may indemnify its directors, officers, employees and
agents to the fullest extent permitted by the General Corporation Law of
Delaware, as the same exists or may hereafter be amended.
TENTH: The provisions set forth in this Article Tenth and in Articles Fifth,
Sixth, Eighth, Ninth, Eleventh, and Twelfth of this Amended and Restated
Certificate of Incorporation may not be amended, altered, repealed or
rescinded in any respect, and no other provision or provisions may be adopted
which impair(s) in any respect the operation or effect of any such provision,
except by the affirmative vote of the holders of not less than three-fifths of
the outstanding stock.
ELEVENTH: The Board of Directors shall have the power to adopt, amend,
alter, or repeal the By-Laws of the Corporation as provided in such By-Laws.
The stockholders shall also have the power to adopt, amend, alter or repeal
the By-Laws of the Corporation; provided, however, that, notwithstanding the
foregoing and anything contained in this Amended and Restated Certificate of
Incorporation to the contrary, unless amended, altered or repealed by the
Board of Directors as provided in the By-Laws, Sections 2.1, 2.2(a) and 2.2(c)
of Article II,
A-2
<PAGE>
Sections 3.1, 3.2, 3.3, 3.4, 3.8 and 3.9 of Article III, Section 4.1 of
Article IV, Article VII, Article VIII, and Section 10.1 of Article X of the
By-Laws may not be amended, altered, repealed or rescinded in any respect, and
no other provision or provisions may be adopted which impair(s) in any respect
the operation or effect of such provision, except by the same vote that would
be required to amend pursuant to Article Tenth of this Amended and Restated
Certificate of Incorporation.
TWELFTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by the General Corporation
Law of Delaware, as the same exists or may hereafter be amended. No amendment
to or repeal of this Article shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
4. This Amended and Restated Certificate of Incorporation was approved by
the shareholders of the Corporation at a meeting held on June 23, 1997 and was
duly adopted in accordance with the provisions of Sections 103 and 303 of
Title 8 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been signed and attested by the undersigned, thereunto duly authorized,
this day of June, 1997.
Atlantic Gulf Communities
Corporation
By: _________________________________
Its:
Attest:
_____________________________________
Name
Title
A-3
<PAGE>
ANNEX A TO APPENDIX A
ANNEX A TO
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ATLANTIC GULF COMMUNITIES CORPORATION
STATEMENT OF
PREFERENCES AND RIGHTS OF
20% CUMULATIVE REDEEMABLE CONVERTIBLE
PREFERRED STOCK, SERIES A
----------------
The 20% Cumulative Redeemable Convertible Preferred Stock, Series A, of
Atlantic Gulf Communities Corporation, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation")
shall have the following powers, preferences, and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, in addition to those set forth in the attached Amended
and Restated Certificate of Incorporation of the Corporation (all capitalized
terms used without definition are defined in Section 15 of this Statement of
Preferences and Rights (this "Certificate of Designation"):
1. Designation. The series of preferred stock established hereby shall be
designated the "20% Cumulative Redeemable Convertible Preferred Stock, Series
A" (and shall be referred to herein as the "Series A Preferred Stock") and the
authorized number of shares of Series A Preferred Stock shall be 2,500,000.
2. Rank. The Series A Preferred Stock shall, with respect to dividend
distributions and distributions upon the voluntary or involuntary liquidation,
winding up and dissolution of the Corporation, rank (i) senior to all classes
of Common Stock and each other class of Capital Stock of the Corporation or
series of preferred stock of the Corporation hereafter created which is not
Senior Stock or Parity Stock ("Junior Stock"), (ii) pari passu with any Parity
Stock (subject to any differing security interests between classes of Parity
Stock) and (iii) junior to any Senior Stock. There is no Senior Stock or
Parity Stock [(other than shares of Series B Preferred Stock issued on the
date hereof in accordance with the Investment Agreement)*] outstanding on the
date hereof. Senior Stock or Parity Stock may be authorized or issued only in
accordance with the provisions of Section 7(b).
3. Dividends. (a) Subject to the provisions of Section 3(c), beginning on
the Original Issue Date, the Holders shall be entitled to receive, when, as
and if declared by the Board of Directors, but only out of funds legally
available therefor, distributions in the form of cash dividends on each share
of Series A Preferred Stock at an annual rate equal to 20% of the Liquidation
Preference in effect from time to time and no more. All Dividends shall be
cumulative, whether or not declared, on a daily basis from the date of
original issuance and shall be payable quarterly in arrears on each Dividend
Payment Date commencing on September 30, 1997. Each dividend shall be payable
with respect to Series A Preferred Stock held by Holders as they appear on the
stock books of the Corporation on each Dividend Record Date. Dividends shall
cease to accumulate in respect of Series A Preferred Stock on the Redemption
Date, the Conversion Date or the Repurchase Date for such shares, as the case
may be, unless, in the case of a Redemption Date or Repurchase Date, the
Corporation defaults in the payment of the amounts necessary for such
redemption or in its obligation to deliver certificates representing Common
Stock issuable upon such conversion, as the case may be, in which case,
dividends shall continue to accumulate at an annual rate of 23% of the
Liquidation Preference in effect from time to time (the "Default Dividend
Rate") until such payment or delivery is made. If the Corporation defaults in
the payment of amounts due upon a Repurchase Date, interest shall accrue on
the amount of such obligation at the Default Dividend Rate until such payment
is made (with all interest due).
* To be included if the Private Placement is closing currently with the
Closing.
A-4
<PAGE>
(b) Dividends on account of arrears for any past Dividend Period and
dividends in connection with any optional redemption pursuant to Section 5(a)
may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to Holders on such date, not more than forty-five (45)
days prior to the payment thereof, as may be fixed by the Board of Directors.
(c) Notwithstanding anything to the contrary in the preceding provisions of
this Section 3, following an Event of Default, the Holders shall be entitled
to receive dividends on each share of Series A Preferred Stock at an annual
rate equal to the Default Dividend Rate, payable in cash.
(d) So long as any Series A Preferred Stock is outstanding, the Corporation
shall not declare, pay or set apart for payment any dividend on any Junior
Stock or make any payment on account of, or set apart for payment money for a
sinking or other similar fund for, the purchase, redemption or other
retirement of, any Junior Stock, or any warrants, rights, calls or options
exercisable for any Junior Stock (except such securities which are debt
securities or Senior Stock or Parity 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, prior
to the occurrence of an Event of Default, dividends, payments, purchases,
acquisitions, redemptions, retirements or distributions in Junior Stock) and
shall not permit any Subsidiary of the Corporation directly or indirectly to
do any of the same in respect of such Junior Stock (other than, prior to the
occurrence of an Event of Default, dividends, payments, purchases,
acquisitions, redemptions, retirements or distributions in Junior Stock)
unless and until all dividend arrearages on the Series A Preferred Stock have
been paid in full in cash, and the Corporation is not in default of any of its
obligations under Section 5 or Section 8.
(e) Unless and until all dividend arrearages on the Series A Preferred Stock
have been paid in full, all dividends declared by the Corporation upon Series
A Preferred Stock or Parity Stock shall be declared pro rata with respect to
all Series A Preferred Stock and Parity Stock then outstanding so that the
amounts of any dividends declared per share on the Series A Preferred Stock
and such Parity Stock bear the same ratio to each other at the time of
declaration as all accrued and unpaid dividends on the Series A Preferred
Stock and the Parity Stock bear to each other.
(f) Dividends payable on the Series A Preferred Stock shall be computed on
the basis of a 360-day year of twelve 30-day months and the actual number of
days elapsed in the period for which payable.
4. Liquidation Preference. (a) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the
Holders shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders an amount in cash equal to the
then Liquidation Preference for each share outstanding, before any payment
shall be made or any assets distributed to the holders of any Junior Stock. If
the assets of the Corporation are not sufficient to pay in full the
liquidation payments payable to the Holders and the holders of any outstanding
Parity Stock, then, subject to the rights of the Holders pursuant to Section 8
and subject to any differing security interests between different classes of
Parity Stock, the holders of all such shares shall share ratably in such
distribution of assets in accordance with the amounts which would be payable
on such distribution if the amount to which the Holders and the holders of any
outstanding Parity Stock are entitled were paid in full. By acceptance hereof
each Holder agrees that it shall respect the security rights and priorities of
any holder of shares of Parity Stock or Senior Stock and shall not challenge
the right of any holder of Parity Stock or Senior Stock to be paid in respect
of any obligations of the Company under any Instruments between such holder
and the Company or any of its Subsidiaries, including the right to be paid by
any Subsidiary of the Company under any guarantee by such Subsidiary of the
obligations of the Company.
(b) For the purposes of this Section 4, neither the sale, conveyance,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Corporation nor the consolidation or merger of the Corporation with or into
one or more corporations shall be deemed to be a voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation.
5. Redemption. (a) Optional Redemption. The Corporation may, at the option
of the Board of Directors, redeem at any time on or after the third
anniversary of the Original Issue Date, from any source of funds legally
A-5
<PAGE>
available therefor, in whole or in part, in the manner provided in Section
5(c), any or all of the Series A Preferred Stock, at a redemption price in
cash equal to the then Liquidation Preference (the "Optional Redemption
Price"); provided that no optional redemption shall be made unless full
dividends have been or contemporaneously are declared and paid or declared and
a sum set apart sufficient for such payment, on the Series A Preferred Stock
for all Dividend Periods terminating on or prior to the Redemption Date; and
provided, further, that no partial redemption shall be made (i) for an amount
of shares of Series A Preferred Stock less than such number as have an
aggregate Liquidation Preference equal to the lesser of $1,000,000 or the
aggregate Liquidation Preference of all outstanding Series A Preferred Stock,
or (ii) if after consummation of any such partial redemption there would
remain outstanding less than the Specified Investor Amount of shares of Series
A Preferred Stock.
(b) Proration. In the event of a redemption pursuant to Section 5(a) of only
a portion of the then outstanding Series A Preferred Stock, unless a majority
of the outstanding shares of Series A Preferred Stock shall agree in writing
to waive the requirement of proration, the Corporation shall effect such
redemption pro rata according to the number of shares held by each Holder,
except that the Corporation may redeem such shares held by Holders of 100 or
fewer shares (or shares held by Holders who would hold 100 or fewer shares as
a result of such redemption), as may be determined by the Corporation.
(c) Procedure for Redemption. At least thirty (30) days and not more than
sixty (60) days prior to the date fixed for any redemption of the Series A
Preferred Stock, written notice (the "Redemption Notice") shall be given by
first class mail, postage prepaid, to each Holder on the record date fixed for
such redemption of the Series A Preferred Stock at such Holder's address as
the same appears on the stock books of the Corporation. The Redemption Notice
shall state:
(1) that such notice constitutes a Redemption Notice pursuant to Section
5(a);
(2) the Optional Redemption Price;
(3) whether all or less than all the outstanding Series A Preferred Stock
redeemable thereunder is to be redeemed and the total number of shares of
such Series A Preferred Stock being redeemed;
(4) the number of shares of Series A Preferred Stock held, as of the
appropriate record date, by the specific Holder that the Corporation
intends to redeem;
(5) the Redemption Date;
(6) that the Holder is to surrender to the Corporation his certificate or
certificates representing the Series A Preferred Stock to be redeemed,
specifying the place or places where, and the manner in which, certificates
for Series A Preferred Stock are to be surrendered for redemption;
(7) the date on which the Series A Preferred Stock called for redemption
shall cease to be convertible; and
(8) that dividends on the Series A Preferred Stock to be redeemed shall
cease to accumulate on the Redemption Date, unless the Corporation defaults
in the payment of the amounts necessary for such redemption, in which case,
dividends shall continue to accumulate until such payment is made.
(ii) Each Holder shall surrender the certificate or certificates
representing such Series A Preferred Stock to the Corporation, duly endorsed,
in the manner and at the place designated in the Redemption Notice, and on the
Redemption Date the full Optional Redemption Price for such shares so
surrendered shall be payable in cash to the Person whose name appears on such
certificate or certificates as the owner thereof, and each surrendered
certificate shall be cancelled and retired. If less than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(iii) If on or before the Redemption Date all funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart
from its other funds, in trust for the pro rata benefit of the Holders of the
shares so called for redemption, so as to be and continue to be available
therefor and not subject to claims of creditors of the Corporation, then,
notwithstanding that any certificate for shares so called for redemption shall
not have been surrendered for cancellation, all shares so called for
redemption shall no longer be deemed outstanding on and after such Redemption
Date, and all rights with respect to such shares shall forthwith on
A-6
<PAGE>
such Redemption Date cease and terminate, except only the right of the Holders
thereof to receive the amount payable on redemption thereof, without interest.
Any interest accrued on such funds shall be paid to the Corporation from time
to time.
Any funds so set aside or deposited by the Corporation which shall not be
required for such redemption because of the exercise of any right of
conversion subsequent to the date of such deposit shall be released or repaid
to the Corporation forthwith. Any funds so set aside or deposited, as the case
may be, and unclaimed as of the first anniversary of such Redemption Date
shall be released or repaid to the Corporation, after which the Holders of the
shares so called for redemption shall look only to the Corporation for payment
thereof.
6. Conversion. (a) Conversion Right. The Holder of each share of Series A
Preferred Stock shall have the right at any time, or from time to time (prior
in each case to the thirtieth day following the date of the Redemption Notice
if such share shall be called for redemption pursuant to Section 5), at the
option of such Holder, to convert such share into Common Stock, on and subject
to the terms and conditions hereinafter set forth. Subject to the provisions
for adjustment hereinafter set forth, each share of Series A Preferred Stock
shall be convertible into such number (calculated as to each conversion to the
nearest 1/100th of a share) of fully paid and nonassessable shares of Common
Stock, as is obtained by dividing the Liquidation Preference by the Conversion
Price, in each case as in effect at the date any Series A Preferred Stock is
surrendered for conversion.
(b) Conversion Procedures. To exercise the conversion privilege, the Holder
of any Series A Preferred Stock to be converted in whole or in part shall
surrender the certificate representing such Series A Preferred Stock (the
"Series A Preferred Stock Certificate") at the office or agency then
maintained by the Corporation for the transfer of the Series A Preferred
Stock, and shall give written notice of conversion in the form provided on the
Series A Preferred Stock Certificate (or such other notice which is acceptable
to the Corporation) to the Corporation at such office or agency that the
Holder elects to convert such Series A Preferred Stock represented by the
Series A Preferred Stock Certificate so surrendered or the portion thereof
specified in said notice into Common Stock. Such notice shall also state the
name or names (with addresses) in which the certificate or certificates for
Common Stock which shall be issuable upon such conversion shall be issued, and
shall be accompanied by transfer taxes, if required. Each Series A Preferred
Stock Certificate surrendered for conversion shall, unless the shares issuable
on conversion are to be issued in the same name as the registration of such
Series A Preferred Stock Certificate, be duly endorsed by, or be accompanied
by instruments of transfer in form satisfactory to the Corporation duly
executed by, the Holder or such Holder's duly authorized attorney.
As promptly as practicable, but in no event later than five (5) Business
Days, after the surrender of such Series A Preferred Stock Certificate and the
receipt of such notice and funds, if any, as aforesaid, the Corporation shall
issue and shall simultaneously deliver at such office or agency to such
Holder, or on his written order, a certificate or certificates for the number
of shares of Common Stock, issuable upon the conversion of such Series A
Preferred Stock represented by the Series A Preferred Stock Certificate so
surrendered or portion thereof in accordance with the provisions of this
Section 6. In case less than all of the Series A Preferred Stock represented
by a Series A Preferred Stock Certificate surrendered for conversion is to be
converted, the Corporation shall simultaneously deliver to or upon the written
order of the Holder of such Series A Preferred Stock Certificate a new Series
A Preferred Stock Certificate representing the Series A Preferred Stock not
converted. If a Holder fails to notify the Corporation of the number of shares
of Series A Preferred Stock which such Holder wishes to convert, such Holder
shall be deemed to have elected to convert all shares represented by the
certificate or certificates surrendered for conversion.
Each conversion shall be deemed to have been effected on the date on which
such Series A Preferred Stock Certificate shall have been surrendered and such
notice shall have been received by the Corporation, as aforesaid (the
"Conversion Date"), and the Person in whose name any certificate or
certificates for Common Stock shall be issuable upon such conversion shall be
deemed to have become on said date the holder of record of the shares
represented thereby; provided, however, that any such surrender on any date
when the stock books of the Corporation shall be closed shall constitute the
Person in whose name the certificates are to be issued as the record holder
thereof for all purposes on the next succeeding day on which such stock books
are open, but such conversion shall be at the Conversion Price as in effect on
the date upon which such Series A Preferred Stock Certificate shall have been
surrendered.
A-7
<PAGE>
All Series A Preferred Stock that 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 forthwith cease, except only the right of the Holders
thereof, subject to the provisions of this Section 6, to receive Common Stock
in exchange therefor; provided, however, that if the Corporation defaults in
its obligation to deliver certificates representing Common Stock issuable upon
such conversion, dividends shall continue to accumulate at the Default
Dividend Rate until such delivery is made.
If any Series A Preferred Stock shall be called for redemption, the right to
convert such Series A Preferred Stock shall terminate at the close of business
on the thirtieth day following the date of the Redemption Notice.
(c) The Conversion Price at which Series A Preferred Stock is convertible
into Common Stock shall be subject to adjustment from time to time as provided
in this Section 6(c) (unless otherwise indicated, all calculations under this
Section 6(c) shall be made to the nearest $0.01):
(i) In case the Corporation shall (A) declare a dividend or make a
distribution on the outstanding Common Stock in Capital Stock of the
Corporation, (B) subdivide or reclassify the outstanding Common Stock into
a greater number of shares (or into other securities or property), or (C)
combine or reclassify the outstanding Common Stock into a smaller number of
shares (or into other securities or property), the Conversion Price in
effect at the close of business on the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution, or to
be affected by such subdivision, combination or other reclassification,
shall be adjusted by multiplying such Conversion Price by a fraction, the
numerator of which shall be the total number of outstanding shares of
Common Stock immediately prior to such event, and the denominator of which
shall be the total number of outstanding shares of Common Stock immediately
after such event. An adjustment made pursuant to this subparagraph (i)
shall become effective immediately after the record date for such event,
or, if there is no record date, upon the effective date for such event. Any
Common Stock issuable in payment of a dividend shall be deemed to have been
issued immediately prior to the time of the record date for such dividend
for purposes of calculating the number of outstanding shares of Common
Stock under subparagraphs (ii) and (iii) below. Adjustments pursuant to
this subparagraph shall be made successively whenever any event specified
above shall occur.
(ii) In case the Corporation shall fix a record date for the issuance of
rights or warrants to all holders of Common Stock entitling them to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) (other than Series B Preferred Stock, Series
B Warrants or Investor Warrants) at a price per share (or having a
conversion price or exchange price per share, subject to normal
antidilution adjustments) less than the Current Market Price (as defined in
subparagraph (vii) below) of Common Stock on such record date, the
Conversion Price in effect at the close of business on such record date
shall be reduced by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights, options or warrants
plus the number of shares of Common Stock which the aggregate offering
price of the total number of shares of Common Stock so offered would
purchase at the Current Market Price as of such record date, and the
denominator of which shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights, options or warrants
plus the number of additional shares of Common Stock offered for
subscription or purchase in connection with such rights, options or
warrants. Such adjustment shall be made whenever such rights, options or
warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights, options or warrants. In case any rights or warrants referred to in
this subparagraph (ii) in respect of which an adjustment shall have been
made shall expire unexercised within forty-five (45) days after the same
shall have been distributed or issued by the Corporation, the Conversion
Price shall be readjusted at the time of such expiration to the Conversion
Price that would have been in effect if no adjustment had been made on
account of the distribution or issuance of such expired rights or warrants.
(iii) In case the Corporation shall fix a record date for the making of a
distribution to all holders of Common Stock (A) of shares of any class
other than Common Stock, (B) of evidences of indebtedness of the
Corporation or any Subsidiary, (C) of assets or other property or (D) of
rights or warrants (excluding
A-8
<PAGE>
those rights or warrants resulting in an adjustment pursuant to
subparagraph (ii) above, and the right to acquire Series B Preferred Stock
in the rights offering thereof), then in each such case the Conversion
Price shall be reduced so that such price shall equal the price determined
by multiplying the Conversion Price in effect immediately prior to the
effectiveness of the Conversion Price reduction contemplated by this
subparagraph (iii) by a fraction, the numerator of which shall be the then
Current Market Price per share of Common Stock, less the then fair market
value (as determined by the Board of Directors, whose reasonable
determination shall be described in a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the
Board of Directors and to be in full force and effect on the date of such
certification (a "Board Resolution") of the portion of the securities,
evidences of indebtedness, assets, property or rights or warrants so
distributed, the case may be, which is applicable to one share of Common
Stock, and the denominator of which shall be the Current Market Price per
share of Common Stock as of the record date for such distribution. Such
adjustment shall be made successively whenever such a record date is fixed.
(iv) In case the Corporation shall issue Common Stock for a consideration
per share less than the Current Market Price per share on the date the
Corporation fixes the offering price of such additional shares, the
Conversion Price shall be adjusted immediately thereafter so that it shall
equal the price determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, of which the numerator shall be
the number of shares of Common Stock outstanding immediately after the
issuance of such additional shares, and the denominator shall be the total
number of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares plus the number of shares of Common
Stock which the aggregate consideration received (determined as provided in
subparagraph (vi) below) for the issuance of such additional shares would
purchase at the Current Market Price per share. Such adjustment shall be
made successively whenever such an issuance is made; provided, however,
that the provisions of this subparagraph shall not apply (A) to Common
Stock issued to the Corporation's employees or former employees or their
estates under bona fide employee benefit plans adopted by the Board of
Directors and approved by the holders of Common Stock if required by law,
if such Common Stock would otherwise be covered by this subparagraph, but
only to the extent that the aggregate number of shares excluded hereby
shall not exceed, on a cumulative basis since the date hereof, [NUMBER TO
BE AGREED BEFORE CLOSING] (including 842,000 shares as of the date hereof
to be issued pursuant to employee stock options outstanding as of the date
hereof to purchase Common Stock), (B) to the Common Stock to be issued
pursuant to the Bank Warrants, (y) to the Common Stock to be issued
pursuant to the Investor Warrants or the Series B Warrants and (C) to
Common Stock to be issued upon conversion of the Series A Preferred Stock
or the Series B Preferred Stock, adjusted as appropriate in each case, in
connection with any stock split, merger, recapitalization or similar
transaction.
(v) In case the Corporation shall issue any securities convertible into
or exchangeable for Common Stock (excluding (A) securities issued in
transactions resulting in adjustment pursuant to subparagraphs (ii) and
(iii) above, (B) Series A Preferred Stock, (C) Series B Preferred Stock,
(D) Investor Warrants or Series B Warrants, and (E) upon conversion of any
of such securities) for a consideration per share of Common Stock
deliverable upon conversion or exchange of such securities (determined as
provided in subparagraph (vi) below and subject to normal antidilution
adjustments) less than the Current Market Price per share in effect
immediately prior to the issuance of such securities, the Conversion Price
shall be adjusted immediately thereafter so that it shall equal the price
determined by multiplying the Conversion Price in effect immediately prior
thereto by a fraction, of which the numerator shall be the number of shares
of Common Stock outstanding immediately prior to such issuance plus the
maximum number of shares of Common Stock deliverable upon conversion of or
in exchange for such securities at the initial conversion or exchange price
or rate, and the denominator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such securities plus the
number of shares of Common Stock which the aggregate consideration received
(determined as provided in subparagraph (vi) below) for such securities
would purchase at the Current Market Price per share. Such adjustment shall
be made successively whenever such an issuance is made.
A-9
<PAGE>
Upon the termination of the right to convert or exchange such securities,
the Conversion Price shall forthwith be readjusted to such Conversion Price
as would have been obtained had the adjustments made upon the issuance of
such convertible or exchangeable securities been made upon the basis of the
delivery of only the number of shares of Common Stock actually delivered
upon conversion or exchange of such securities and upon the basis of the
consideration actually received by the Corporation (determined as provided
in subparagraph (vi) below) for such securities.
(vi) For purposes of any computation respecting consideration received
pursuant to subparagraphs (iv) and (v) above, the following shall apply:
(A) in the case of the issuance of Common Stock for cash, the
consideration shall be the amount of such cash, provided that in no
case shall any deductions be made for any commissions, discounts,
placement fees or other expenses incurred by the Corporation for any
underwriting or placement of the issue or otherwise in connection
therewith;
(B) in the case of the issuance of Common Stock for a consideration
in whole or in part other than cash, the consideration other than cash
shall be deemed to be the fair market value thereof as determined by
the Board of Directors, whose reasonable determination shall be
described in a Board Resolution; and
(C) in the case of the issuance of securities convertible into or
exchangeable for Common Stock, the aggregate consideration received
therefor shall be deemed to be the consideration received by the
Corporation for the issuance of such securities plus the additional
minimum consideration, if any, to be received by the Corporation upon
the conversion or exchange thereof (the consideration in each case to
be determined in the same manner as provided in clauses (A) and (B) of
this subparagraph (vi)).
(vii) For the purpose of any computation under this Certificate of
Designation, (A) the "Current Market Price" per share at any date shall be
deemed to be the average of the daily Closing Price for the Common Stock
for the ten (10) consecutive Trading Days commencing fourteen (14) Trading
Days before such date, and (B) the "Closing Price" of the Common Stock
means the last reported sale price regular way reported on the NASDAQ Stock
Market or its successor, or, if not listed or admitted to trading on the
NASDAQ Stock Market or its successor, the last reported sale price regular
way reported on any other stock exchange or market on which the Common
Stock is then listed or eligible to be quoted for trading, or as reported
by the National Quotation Bureau Incorporated.
(viii) In any case in which this Section shall require that an adjustment
shall become effective immediately after a record date for an event, the
Corporation may defer until the occurrence of such event (A) issuing to the
Holder of any Series A Preferred Stock converted after such record date and
before the occurrence of such event the Common Stock issuable upon such
conversion by reason of the adjustment required by such event over and
above the Common Stock issuable upon such conversion before giving effect
to such adjustment and (B) paying to such Holder an amount in cash in lieu
of a fractional share of Common Stock pursuant to Section 6(h); provided,
however, that the Corporation shall deliver to such Holder a due bill or
other appropriate instrument evidencing such Holder's rights to receive
such additional Common Stock, and such cash, upon the occurrence of the
event requiring such adjustment.
(ix) The Corporation may make such reductions in the Conversion Price, in
addition to those required pursuant to other subparagraphs of this Section,
as it considers to be advisable so that any event treated for federal
income tax purposes as a dividend of stock or stock rights shall not be
taxable to the recipients.
(x) In case of any consolidation with or merger of the Corporation into
another corporation, or in case of any sale, lease or conveyance of assets
to another corporation of the property of the Corporation as an entirety or
substantially as an entirety, lawful and adequate provisions shall be made
whereby each Holder of Series A Preferred Stock shall have the right to
receive, from such successor, leasing or purchasing corporation, as the
case may be, upon the basis and upon the terms and conditions specified
herein, in lieu of the Common Stock immediately theretofore receivable upon
the conversion of such Series A Preferred Stock, the kind and amount of
shares of stock, other securities, property or cash or any combination
thereof receivable upon such consolidation, merger, sale, lease or
conveyance by a holder of the number of shares
A-10
<PAGE>
of Common Stock into which such Series A Preferred Stock might have been
converted immediately prior to such consolidation, merger, sale, lease or
conveyance. In the case of any such consolidation, merger or sale of
substantially all the assets, appropriate provision shall be made with
respect to the rights and interests of the Holders to the end that the
provisions hereof (including provisions for adjustment of the Conversion
Price) shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities or assets thereafter deliverable upon the
exercise of any conversion rights hereunder.
(xi) In case of any reclassification or change of the Common Stock
issuable upon conversion of Series A Preferred Stock (other than a change
in par value, or from par value to no par value, or as a result of a
subdivision or combination, but including any change in the Common Stock
into two or more classes or series of shares), or in case of any
consolidation or merger of another corporation into the Corporation in
which the Corporation is the continuing corporation and in which there is a
reclassification or change (including a change to the right to receive cash
or other property) of the Common Stock (other than a change in par value,
or from par value to no par value, or as a result of a subdivision or
combination, but including any change in the Common Stock into two or more
classes or series of shares), lawful and adequate provisions shall be made
whereby each Holder of Series A Preferred Stock shall have the right to
receive, upon the basis and upon the terms and conditions specified herein,
in lieu of the Common Stock immediately theretofore receivable upon the
conversion of such Series A Preferred Stock, the kind and amount of shares
of stock, other securities, property or cash or any combination thereof
receivable upon such reclassification, change, consolidation or merger, by
a holder of the number of shares of Common Stock into which such Series A
Preferred Stock might have been converted immediately prior to such
reclassification, change, consolidation or merger.
(xii) The foregoing subparagraphs (x) and (xi), however, shall not in any
way affect the rights a Holder may otherwise have, pursuant to this
Section, to receive securities, evidences of indebtedness, assets, property
rights or warrants upon conversion of any Series A Preferred Stock.
(xiii) If the Corporation repurchases (by way of tender offer, exchange
offer or otherwise) any Common Stock for a per share consideration which
exceeds the Current Market Price of a share of Common Stock on the date
immediately prior to such repurchase, the Conversion Price shall be reduced
so that such price shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the effectiveness of the
Conversion Price reduction contemplated by this subparagraph (xiii) by a
fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such acquisition multiplied by the
Current Market Price per share of the Common Stock on the immediately
preceding Trading Day, and the denominator shall be the sum of (A) the fair
market value (as determined in good faith by the Board of Directors) of the
aggregate consideration payable to stockholders as a result of such
acquisition, and (B) the product of the number of shares of Common Stock
outstanding immediately following such acquisition and the Current Market
Price per share of the Common Stock on such immediately preceding Trading
Day, such reduction to become effective immediately prior to the opening of
business on the day following such acquisition.
(xiv) If any event occurs as to which the foregoing provisions of this
Section 6(c) are not strictly applicable or, if strictly applicable, would
not, in the good faith judgment of the Board of Directors, fairly protect
the conversion rights of the Series A Preferred Stock in accordance with
the essential intent and principles of such provisions, then the Board of
Directors shall make such adjustments in the application of such
provisions, in accordance with such essential intent and principles, as
shall be reasonably necessary, in the good faith opinion of the Board of
Directors, to protect such conversion rights as aforesaid, but in no event
shall any such adjustment have the effect of increasing the Conversion
Price, or otherwise adversely affect the Holders.
(xv) For purposes of Section 6(c), Common Stock owned or held at any
relevant time by, or for the account of, the Corporation in its treasury or
otherwise, shall not be deemed to be outstanding for purposes of the
calculation and adjustments described therein. Shares held in the Disputed
Claims Reserve, Division Class 14 Utility Fund Trust Agreement dated April
6, 1993 and the Improvements Fund Trust Agreement dated April 6, 1993 shall
not be deemed to be held by, or for the account of, the Corporation.
A-11
<PAGE>
(d) Conversion Price Adjustment Deferred. Notwithstanding the foregoing
provisions of this Section 6, (i) no adjustment in the number of shares of
Common Stock into which any Series A Preferred Stock is convertible shall be
required unless such adjustment would require an increase or decrease in such
number of shares of at least 1% and (ii) no adjustment in the Conversion Price
shall be required unless such adjustment would require an increase or decrease
in the Conversion Price of at least $.01 per share; provided, however, that
any adjustments which by reason of this paragraph (d) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 6 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(e) Adjustment Report. Whenever any adjustment is required in the shares
into which any Series A Preferred Stock is convertible, the Corporation shall
forthwith (i) file with each office or agency then maintained by the
Corporation for the transfer of the Series A Preferred Stock a statement
describing in reasonable detail the adjustment and the method of calculation
used and (ii) cause a notice of such adjustment, setting forth the adjusted
Conversion Price and the calculation thereof to be mailed to the Holders at
their respective addresses as shown on the stock books of the Corporation. The
certificate of any independent firm of public accountants of recognized
standing selected by the Board of Directors certifying to the Board of
Directors the correctness of any computation under this Section 6 shall be
evidence of the correctness of such computation.
(f) Notice of Certain Events. In the event that:
(i) the Corporation shall take action to make any distribution to the
holders of its Common Stock;
(ii) the Corporation shall take action to offer for subscription pro rata
to the holders of its Common Stock any securities of any kind;
(iii) the Corporation shall take action to accomplish any capital
reorganization, or reclassification of the Capital Stock of the
Corporation, or a consolidation or merger to which the Corporation is a
party and for which approval of any stockholders of the Corporation is
required, or the sale or transfer of all or substantially all of the assets
of the Corporation; or
(iv) the Corporation shall take action looking to a voluntary or
involuntary dissolution, liquidation or winding-up of the Corporation;
then the Corporation shall (A) in case of any such distribution or
subscription rights, at least twenty (20) days prior to the date or expected
date on which the stock books of the Corporation shall close or a record shall
be taken for the determination of Holders entitled to such distribution or
subscription rights, and (B) in the case of any such reorganization,
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up, at least twenty (20) days prior to the date or
expected date when the same shall take place, cause written notice thereof to
be mailed to each Holder at his address as shown on the stock books of the
Corporation. Such notice in accordance with the foregoing clause (A) shall
also specify, in the case of any such distribution or subscription rights, the
date or expected date on which the holders of Common Stock shall be entitled
thereto, and such notice in accordance with the foregoing clause (B) shall
also specify the date or expected date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding-up,
as the case may be.
(g) Common Stock. For the purposes of this Section 6, the term "Common
Stock" shall mean (i) the Common Stock or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value or from no par value to par value,
or from par value to no par value. If at any time as a result of an adjustment
made pursuant to the provisions of Section 6(c), the Holder of any Series A
Preferred Stock thereafter surrendered for conversion shall become entitled to
receive any the Corporation such other shares so receivable upon conversion of
any Series A Preferred Stock shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Common Stock contained in Section 6(c), and the other
provisions of this Section 6 with respect to the Common Stock shall apply on
like terms to any such other shares.
(h) Fractional Shares. The Corporation shall not be required to issue
fractional shares of Common Stock upon the conversion of any Series A
Preferred Stock. If more than one share of Series A Preferred Stock shall
A-12
<PAGE>
be surrendered for conversion at one time by the same Holder, the number of
full shares of Common Stock issuable upon conversion thereof shall be computed
on the basis of the aggregate number of shares so surrendered. If any
fractional interest in a share of Common Stock would be deliverable upon the
conversion of any Series A Preferred Stock, the Corporation may pay, in lieu
thereof, in cash the Closing Price thereof as of the Business Day immediately
preceding the date of such conversion.
(i) Reservation of Shares. The Corporation shall at all times reserve and
keep available, free from preemptive rights, out of its authorized but
unissued stock, for the purpose of effecting the conversion or redemption of
the Series A Preferred Stock, such number of its duly authorized shares of
Common Stock (or treasury shares as provided below) as shall from time to time
be sufficient for the conversion of all outstanding Series A Preferred Stock
into Common Stock at any time. The Corporation shall, from time to time and in
accordance with the General Corporation Law of the State of Delaware, cause
the authorized number of shares of Common Stock to be increased if the
aggregate of the number of authorized shares of Common Stock remaining
unissued and the issued shares of such Common Stock reserved for issuance in
any other connection shall not be sufficient for the conversion of all
outstanding Series A Preferred Stock into Common Stock at any time.
7. Voting Rights. The Series A Preferred Stock shall have the following
voting rights:
(a) The Holders of Series A Preferred Stock voting together as a single
class shall be entitled to elect three directors to the Board of Directors
(who shall serve for terms of one year) and shall otherwise not vote on any
matters submitted to the holders of the Common Stock for a vote, except as may
be required by law; provided, however, that if the Investor does not hold at
least the Specified Investor Amount of Series A Preferred Stock, the number of
directors that the Holders of the Series A Preferred Stock shall be entitled
to elect shall be equal to three multiplied by a fraction, the numerator of
which is the number of shares of Series A Preferred Stock outstanding and the
denominator of which is 2,500,000, rounded up to the nearest whole director.
(b) So long as any Series A Preferred Stock is outstanding, without the
affirmative vote or consent of Holders of at least a majority of the
outstanding Series A Preferred Stock, voting or consenting, as the case may
be, as one class, given in person or by proxy, either in writing or by
resolution adopted at an annual or special meeting, the Corporation shall not
(i) issue, or reclassify any authorized stock of the Corporation into, or
issue any obligation or security convertible into or evidencing a right to
purchase, any Senior Stock or Parity Stock or any preferred stock having
voting rights senior or equal to those of the Series A Preferred Stock (other
than Series B Preferred Stock), (ii) reclassify the Series A Preferred Stock,
or (iii) amend its Certificate of Incorporation or this Certificate of
Designation or the Certificate of Designation for the Series B Preferred Stock
so as to affect adversely the specified rights, preferences, privileges or
voting rights of Holders or to increase or decrease the authorized number of
shares of Series A Preferred Stock or Series B Preferred Stock.
(c) In any case in which the Holders shall be entitled to vote as a separate
class pursuant to this Section 7 or pursuant to Delaware law, each Holder
shall be entitled to one vote for each share of Series A Preferred Stock then
held.
8. Repurchase Obligation. (a) Subject to the provisions of Section 8(b), the
Series A Preferred Stock shall not be redeemable at the option of the Holder
thereof prior to the fourth anniversary of the Original Issue Date. Beginning
on the fourth anniversary of the Original Issue Date, each Holder shall have
the right, at such Holder's option, exercisable by notice (a "Repurchase
Notice"), to require the Corporation to purchase Series A Preferred Stock then
held by such Holder, at a repurchase price in cash equal to the Liquidation
Preference in effect at such time (the "Repurchase Price"); provided, however,
that the number of shares required to be repurchased from any Holder by the
Corporation pursuant to this Section 8(a) ("Put Shares") prior to the fifth
anniversary of the Original Issue Date shall not exceed one-third of the total
number of shares of Series A Preferred Stock issued by the Corporation, and,
prior to the sixth anniversary of the Original Issue Date, the number of Put
Shares shall not exceed two-thirds of the total number of shares of Series A
Preferred Stock issued by the Corporation.
A-13
<PAGE>
(b) Notwithstanding the provisions of Section 8(a), if an Event of Default
shall occur at any time or from time to time on or after the Original Issue
Date, each Holder shall have the right, at such Holder's option exercisable by
Repurchase Notice at any time within sixty (60) days after the happening of
each such Event of Default or, if later, receipt of notice from the
Corporation of such Event of Default, to require the Corporation to purchase
all or any part of the Series A Preferred Stock then held by such Holder as
such Holder may elect, at the Repurchase Price.
(c) The Corporation shall, within thirty (30) days of the occurrence of an
Event of Default, give written notice thereof by telecopy, if possible, and by
first class mail, postage prepaid, to each Holder, addressed to such Holder at
his last address and telecopy number as shown upon the stock books of the
Corporation. Each such notice shall specify the Event of Default which has
occurred and the date of such occurrence, the place or places of payment, the
then effective Conversion Price pursuant to Section 6, the then effective
Repurchase Price and the date the right of such Holder to require such
repurchase shall terminate. In addition, the Corporation shall, immediately
upon becoming aware of any facts or events that could reasonably be expected
to result in the occurrence of an Event of Default, give a written notice
thereof by telecopy, if possible, and by first class mail, postage prepaid, to
the Holders, addressed to such Holders at their last addresses as shown upon
the stock books of the Corporation.
(d) The date fixed for each such repurchase (the "Repurchase Date") shall be
the 30th day following the date of the Repurchase Notice relating thereto. The
place of payment shall be at an office or agency in the City of New York, New
York fixed therefor by the Corporation or, if not fixed, at the principal
executive office of the Corporation.
On or before the Repurchase Date, each Holder who elects to have Series A
Preferred Stock held by it purchased shall surrender the certificate
representing such shares to the Corporation at the place designated in such
notice together with an election to have such purchase made and shall
thereupon be entitled to receive payment therefor provided in this Section 8.
If less than all the shares represented by any such surrendered certificate
are repurchased, a new certificate shall be issued representing the
unpurchased shares. Payment of the Repurchase Price for the Put Shares shall
be made on the later of the Repurchase Date or the fifth Business Day after
the surrender of such certificate. Dividends with respect to the Series A
Preferred Stock so purchased shall cease to accrue after the Repurchase Date,
such shares shall no longer be deemed outstanding and the Holders thereof
shall cease to be stockholders of the Corporation and all rights whatsoever
with respect to the shares so purchased shall terminate; provided, however,
that if the Corporation defaults in its obligation to pay the Repurchase Price
for such Put Shares, interest shall accrue on the amount of such obligation at
the Default Dividend Rate until such payment is made (with all interest due).
(e) Notwithstanding any other provision hereof, if any of the following
events shall occur and be continuing: (i) the Company or any of its
Significant Subsidiaries shall commence any case, proceeding or other action
(A) under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors,
seeking to have an order for relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other relief
with respect to it or its debts, or (B) seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Company or any of its Significant
Subsidiaries shall make a general assignment for the benefit of its creditors;
(ii) there shall be commenced against the Company or any of its Significant
Subsidiaries any case, proceeding or other action of a nature referred to in
clause (i) above which (A) results in the entry of an order for relief or any
such adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of 60 days; (iii) there shall be commenced against the
Company or any of its Significant Subsidiaries any case, proceeding or other
action seeking issuance of a warrant of attachment, execution, distraint or
similar process against all or any substantial part of its assets which
results in the entry of an order for any such relief which shall not have been
vacated, discharged, or stayed or bonded pending appeal within 60 days from
the entry thereof; (iv) the Company or any of its Significant Subsidiaries
shall take any action in furtherance of, or indicating its consent
A-14
<PAGE>
to, approval of, or acquiescence in, any of the acts set forth in clauses (i),
(ii), or (iii) above; (v) the Company or any of its Significant Subsidiaries
shall generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due; (vi) the Company or any of its
Significant Subsidiaries shall cause to be reinstated the Reorganization
Proceedings (as defined in the Note Agreement (as defined in the Investment
Agreement)); or (vii) the Confirmation Order (as defined in the Note
Agreement) shall be reversed, withdrawn, modified (in any manner adverse to
Company or any of its Significant Subsidiaries), or any rehearing shall be
ordered with respect thereto by the Bankruptcy Court or by any court having
jurisdiction over the Company; then, and in any such event, all Series A
Preferred Stock held by such Holder shall be Put Shares and the aggregate
Repurchase Price in respect of each such share shall immediately and
automatically become due and payable in full without any requirement or pre-
condition of delivery of a Repurchase Notice, any such requirement or pre-
condition being expressly waived hereby.
9. Reissuance of Series A Preferred Stock. Series A Preferred Stock that has
been issued and reacquired in any manner, including shares surrendered to the
Corporation upon conversion, and shares purchased or redeemed, shall (upon
compliance with any applicable provisions of the laws of Delaware) have the
status of authorized and unissued preferred stock undesignated as to series
and may not be re-designated and reissued as part of any series of preferred
stock.
10. Business Day. If any payment or redemption shall be required by the
terms hereof to be made on a day that is not a Business Day, such payment or
redemption shall be made on the immediately succeeding Business Day.
11. Headings of Sections. The headings of the various Sections hereof are
for convenience of reference only and shall not affect the interpretation of
any of the provisions hereof.
12. Severability of Provisions. If any right, preference or limitation of
the Series A Preferred Stock set forth in this Certificate of Designation (as
it may be amended from time to time) is invalid, unlawful or incapable of
being enforced by reason of any rule or law or public policy, all other
rights, preferences and limitations set forth in this Certificate of
Designation (as so amended) which can be given effect without the invalid,
unlawful or unenforceable right, preference or limitation shall, nevertheless,
remain in full force and effect, and no right, preference or limitation herein
set forth shall be deemed dependent upon any other such right, preference or
limitation unless so expressed herein.
13. Notice. All notices and other communications provided for or permitted
to be given to the Corporation hereunder shall be made by hand delivery, next
day air courier or certified first-class mail to the Corporation at its
principal executive offices at Atlantic Gulf Communities Corporation, 2601
South Bayshore Drive, Miami, Florida 33133-5461, Telecopy number (305) 859-
4623, Attention: Chief Financial Officer.
14. Amendments. This Certificate of Designation may be amended without
notice to or the consent of any Holder to cure any ambiguity, defect or
inconsistency or to make any other amendment provided that any such amendment
does not adversely affect the rights of any Holder. Any provisions of this
Certificate of Designation may also be amended by the Corporation with the
vote or written consent of Holders representing a majority of the outstanding
Series A Preferred Stock.
The Corporation will, so long as any Series A Preferred Stock is
outstanding, maintain an office or agency where such shares may be presented
for registration or transfer and where such shares may be presented for
conversion and redemption.
15. Definitions. As used in this Certificate of Designation, the following
terms shall have the following meanings (with terms defined in the singular
having comparable meanings when used in the plural and vice versa), unless the
context otherwise requires:
"Bank Warrants" means the 1,500,000 warrants for the purchase of Common
Stock issued on September 30, 1996 pursuant to the Prepayment Agreement
dated as of September 30, 1996 among the financial institutions listed on
the signature pages thereof, The Chase Manhattan Bank and the Corporation.
A-15
<PAGE>
"Board of Directors" means the Board of Directors of the Corporation.
"Board Resolution" has the meaning set forth in Section 6(c)(iii).
"Business Day" means a day that is not a Saturday, a Sunday or a day on
which banking institutions in the State of New York are not required to be
open. Unless specifically stated as a Business Day, all days referred to
herein shall mean calendar days.
"Capital Stock" means, with respect to any Person, any and all shares,
partnership interests, participations, rights in, or other equivalents
(however designated and whether voting or nonvoting) of, such Person's
capital stock.
"Closing Price" has the meaning set forth in Section 6(c)(vii).
"Common Stock" means shares of Common Stock, par value $.10 per share, of
the Corporation.
"Conversion Date" has the meaning set forth in Section 6(b).
"Conversion Price" means, initially, $5.75 and, thereafter, such price as
adjusted pursuant to Section 6.
"Corporation" means Atlantic Gulf Communities Corporation, a Delaware
corporation.
"Current Market Price" has the meaning set forth in Section 6(c)(vii).
"Default Dividend Rate" has the meaning set forth in Section 3(a).
"Dividend Payment Date" means March 31, June 30, September 30 and
December 31 of each year.
"Dividend Period" means the Initial Dividend Period and, thereafter, each
Quarterly Dividend Period.
"Dividend Record Date" means a day fifteen (15) days preceding the
Dividend Payment Date.
"Event of Default" means (i) any event of default (whatever the reason
for such event of default and whether it shall be voluntary or involuntary
or be effected by operation of law or pursuant to any judgment, decree or
order of any court or any order, rule or regulation of any governmental
authority) under any Instrument creating, evidencing or securing any
indebtedness for borrowed money of the Company or any Significant
Subsidiary in an amount in excess of $2,500,000 that would enable the
creditors or secured parties under such Instrument to declare the principal
amount of such indebtedness due and payable prior to its scheduled
maturity, and has not been waived by the relevant creditors or secured
parties, (ii) the occurrence of a Default Change of Control (as defined in
the Investment Agreement), (iii) a material breach (following written
notice by the Investor that the Investor would consider such a breach as
material) by the Company of Section 6.7(f) of the Investment Agreement or
(insofar as such breach is willful and materially imperils the value of the
collateral securing the rights of the Holder or the rights of the Holder
with respect thereto) of Section 3 of the Note Agreement or any Security
Document (as defined in the Note Agreement) which, in any event, is not
curable or if curable is not cured within 15 days, or (iv) one of the
events specified in clauses (i) through (vii) of Section 8(e).
"Holder" means a record holder of one or more outstanding shares of
Series A Preferred Stock.
"Initial Dividend Period" means the dividend period commencing on the
Original Issue Date and ending on the second Dividend Payment Date to occur
thereafter.
"Instrument" means any contract, agreement, indenture, mortgage,
security, document or writing under which any obligation is evidenced,
assumed or undertaken, or any security interest is granted or perfected.
"Investor" has the meaning set forth in the Investment Agreement.
"Investor Warrants" means the 5,000,000 warrants to acquire Common Stock
to be issued to the Investor pursuant to the Investment Agreement.
"Investment Agreement" means the Amended and Restated Investment
Agreement dated as of February 7, 1997 by and between AP-AGC, LLC and the
Corporation, amended as of March 20, 1997 and amended and restated as of
May 15, 1997.
"Junior Stock" has the meaning set forth in Section 2.
A-16
<PAGE>
"Liquidation Preference" means, at any time, $10 per share of Series A
Preferred Stock, plus accumulated and unpaid Dividends thereon through the
date of such determination, whether or not declared and whether or not
funds are legally available therefor.
"Optional Redemption Price" has the meaning set forth in Section 5(a).
"Original Issue Date" means the date upon which the Series A Preferred
Stock is originally issued by the Corporation, which shall be the Closing
Date (as defined in the Investment Agreement).
"Parity Stock" means the Series B Preferred Stock (except insofar as the
Series A Preferred Stock has certain security rights and interests which
are not applicable to the Series B Preferred Stock) and any class or series
of stock the terms of which provide that it is entitled to participate pari
passu with the Series A Preferred Stock with respect to any dividend or
distribution or upon liquidation, dissolution or winding-up of the
Corporation.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, business trust, joint-stock
company, trust, unincorporated organization or government or agency or
political subdivision thereof.
"Put Shares" has the meaning set forth in Section 8(a).
"Quarterly Dividend Period" shall mean the quarterly period commencing on
each March 31, June 30, September 30 and December 31 and ending on each
Dividend Payment Date, respectively.
"Redemption Date", with respect to any Series A Preferred Stock, means
the date on which such Series A Preferred Stock is redeemed by the
Corporation.
"Redemption Notice" has the meaning set forth in Section 5(c).
"Repurchase Date" has the meaning set forth in Section 8(d).
"Repurchase Notice" has the meaning set forth in Section 8(a).
"Repurchase Price" has the meaning set forth in Section 8(a).
"Senior Stock" means any class or series of stock the terms of which
provide that it is entitled to a preference to the Series A Preferred Stock
with respect to any dividend or distribution or upon voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation.
"Series A Preferred Stock" means the 20% Cumulative Redeemable
Convertible Preferred Stock, Series A, par value $.01 per share, of the
Corporation.
"Series A Preferred Stock Certificate" has the meaning set forth in
Section 6(b).
"Series B Preferred Stock" means the 20% Cumulative Redeemable
Convertible Preferred Stock, Series B, par value $.01 per share, of the
Corporation, which may be issued in accordance with the Investment
Agreement.
"Series B Warrants" means up to 4,000,000 warrants to acquire Common
Stock which may be issued to acquirers of Series B Preferred Stock.
"Significant Subsidiary" has the meaning set forth in Regulation S-X
under the Securities Exchange Act of 1934, as amended; provided that SP
Subsidiary (as defined in the Investment Agreement) shall be a Significant
Subsidiary.
"Specified Investor Amount" means 500,000 shares of Series A Preferred
Stock.
"Subsidiary" means, (i) with respect to any Person, a corporation a
majority of whose Capital Stock with voting power under ordinary
circumstances to elect directors is at the time, directly or indirectly,
owned by such Person, by a Subsidiary of such Person or by such Person and
a Subsidiary of such Person, or (ii) any other Person (other than a
corporation) of which at least a majority of the voting interest is at the
time, directly or indirectly, owned by such Person, by a Subsidiary of such
Person or by such Person and a Subsidiary of such Person.
"Trading Day" shall mean a day on which securities are traded or quoted
on the national securities exchange or quotation system or in the over-the-
counter market used to determine the Closing Price.
A-17
<PAGE>
ANNEX B TO
APPENDIX A
ANNEX B TO
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ATLANTIC GULF COMMUNITIES CORPORATION
STATEMENT OF
PREFERENCES AND RIGHTS OF
20% CUMULATIVE REDEEMABLE CONVERTIBLE
PREFERRED STOCK, SERIES B
----------------
The 20% Cumulative Redeemable Convertible Preferred Stock, Series B, of
Atlantic Gulf Communities Corporation, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation")
shall have the following powers, preferences, and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, in addition to those set forth in the attached Amended
and Restated Certificate of Incorporation of the Corporation (all capitalized
terms used without definition are defined in Section 15 of this Statement of
Preferences and Rights (this "Certificate of Designation")):
1. Designation. The series of preferred stock established hereby shall be
designated the "20% Cumulative Redeemable Convertible Preferred Stock, Series
B" (and shall be referred to herein as the "Series B Preferred Stock") and the
authorized number of shares of Series B Preferred Stock shall be 2,000,000.
2. Rank. The Series B Preferred Stock shall, with respect to dividend
distributions and distributions upon the voluntary or involuntary liquidation,
winding up and dissolution of the Corporation, rank (i) senior to all classes
of Common Stock and each other class of Capital Stock of the Corporation or
series of preferred stock of the Corporation hereafter created which is not
Senior Stock or Parity Stock ("Junior Stock"), (ii) pari passu with any Parity
Stock (subject to any differing security interests between different classes
of Parity Stock) and (iii) junior to any Senior Stock. There is no Senior
Stock outstanding on the date hereof, and there is no Parity Stock outstanding
on the date hereof other than the 20% Cumulative Redeemable Convertible
Preferred Stock, Series A (the "Series A Preferred Stock"), the holders of
which have certain security interests and rights to which the Holders of
Series B Preferred Stock are not entitled. Senior Stock or Parity Stock may be
authorized or issued only in accordance with the provisions of Section 7(b).
3. Dividends. (a) Subject to the provisions of Section 3(c), beginning on
the Original Issue Date, the Holders shall be entitled to receive, when, as
and if declared by the Board of Directors, but only out of funds legally
available therefor, distributions in the form of cash dividends on each share
of Series B Preferred Stock at an annual rate equal to 20% of the Liquidation
Preference in effect from time to time and no more. All Dividends shall be
cumulative, whether or not declared, on a daily basis from the date of
original issuance and shall be payable quarterly in arrears on each Dividend
Payment Date commencing on September 30, 1997. Each dividend shall be payable
with respect to Series B Preferred Stock held by Holders as they appear on the
stock books of the Corporation on each Dividend Record Date. Dividends shall
cease to accumulate in respect of Series B Preferred Stock on the Redemption
Date, the Conversion Date or the Repurchase Date for such shares, as the case
may be, unless, in the case of a Redemption Date or Repurchase Date, the
Corporation defaults in the payment of the amounts necessary for such
redemption or in its obligation to deliver certificates representing Common
Stock issuable upon such conversion, as the case may be, in which case,
dividends shall continue to accumulate at an annual rate of 23% of the
Liquidation Preference in effect from time to time (the "Default Dividend
Rate") until such payment or delivery is made. If the Corporation defaults in
the payment of amounts due upon a Repurchase Date, interest shall accrue on
the amount of such obligation at the Default Dividend Rate until such payment
is made (with all interest due).
(b) Dividends on account of arrears for any past Dividend Period and
dividends in connection with any optional redemption pursuant to Section 5(a)
may be declared and paid at any time, without reference to any
A-18
<PAGE>
regular Dividend Payment Date, to Holders on such date, not more than forty-
five (45) days prior to the payment thereof, as may be fixed by the Board of
Directors.
(c) Notwithstanding anything to the contrary in the preceding provisions of
this Section 3, following an Event of Default, the Holders shall be entitled
to receive dividends on each share of Series B Preferred Stock at an annual
rate equal to the Default Dividend Rate, payable in cash.
(d) So long as any Series B Preferred Stock is outstanding, the Corporation
shall not declare, pay or set apart for payment any dividend on any Junior
Stock or make any payment on account of, or set apart for payment money for a
sinking or other similar fund for, the purchase, redemption or other
retirement of, any Junior Stock, or any warrants, rights, calls or options
exercisable for any Junior Stock (except such securities which are debt
securities or Senior Stock or Parity 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, prior
to the occurrence of an Event of Default, dividends, payments, purchases,
acquisitions, redemptions, retirements or distributions in Junior Stock) and
shall not permit any Subsidiary of the Corporation directly or indirectly to
do any of the same in respect of such Junior Stock (other than, prior to the
occurrence of an Event of Default, dividends, payments, purchases,
acquisitions, redemptions, retirements or distributions in Junior Stock)
unless and until all dividend arrearages on the Series B Preferred Stock have
been paid in full in cash, and the Corporation is not in default of any of its
obligations under Section 5 or Section 8.
(e) Unless and until all dividend arrearages on the Series B Preferred Stock
have been paid in full, all dividends declared by the Corporation upon Series
B Preferred Stock or Parity Stock shall be declared pro rata with respect to
all Series B Preferred Stock and Parity Stock then outstanding so that the
amounts of any dividends declared per share on the Series B Preferred Stock
and such Parity Stock bear the same ratio to each other at the time of
declaration as all accrued and unpaid dividends on the Series B Preferred
Stock and the Parity Stock bear to each other.
(f) Dividends payable on the Series B Preferred Stock shall be computed on
the basis of a 360-day year of twelve 30-day months and the actual number of
days elapsed in the period for which payable.
4. Liquidation Preference. (a) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the
Holders shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders an amount in cash equal to the
then Liquidation Preference for each share outstanding, before any payment
shall be made or any assets distributed to the holders of any Junior Stock. If
the assets of the Corporation are not sufficient to pay in full the
liquidation payments payable to the Holders and the holders of any outstanding
Parity Stock, then, subject to the rights of the Holders pursuant to Section 8
and subject to any differing security interests between different classes of
Parity Stock, the holders of all such shares shall share ratably in such
distribution of assets in accordance with the amounts which would be payable
on such distribution if the amount to which the Holders and the holders of any
outstanding Parity Stock are entitled were paid in full. By acceptance hereof
each Holder agrees that it shall respect the security rights and priorities of
any holder of shares of Parity Stock or Senior Stock and shall not challenge
the right of any holder of Parity Stock or Senior Stock to be paid in respect
of any obligations of the Company under any Instruments between such holder
and the Company or any of its Subsidiaries, including the right to be paid by
any Subsidiary of the Company under any guarantee by such Subsidiary of the
obligations of the Company.
(b) For the purposes of this Section 4, neither the sale, conveyance,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Corporation nor the consolidation or merger of the Corporation with or into
one or more corporations shall be deemed to be a voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation.
A-19
<PAGE>
5. Redemption. (a) Optional Redemption. The Corporation may, at the option
of the Board of Directors, redeem at any time on or after the third
anniversary of the Original Issue Date, from any source of funds legally
available therefor, in whole or in part, in the manner provided in Section
5(c), any or all of the Series B Preferred Stock, at a redemption price in
cash equal to the then Liquidation Preference (the "Optional Redemption
Price"); provided that no optional redemption shall be made unless full
dividends have been or contemporaneously are declared and paid or declared and
a sum set apart sufficient for such payment, on the Series B Preferred Stock
for all Dividend Periods terminating on or prior to the Redemption Date; and
provided, further, that no partial redemption shall be made for an amount of
shares of Series B Preferred Stock less than such number as have an aggregate
Liquidation Preference equal to the lesser of $1,000,000 or the aggregate
Liquidation Preference of all outstanding Series B Preferred Stock.
(b) Procedure for Redemption. At least thirty (30) days and not more than
sixty (60) days prior to the date fixed for any redemption of the Series B
Preferred Stock, written notice (the "Redemption Notice") shall be given by
first class mail, postage prepaid, to each Holder on the record date fixed for
such redemption of the Series B Preferred Stock at such Holder's address as
the same appears on the stock books of the Corporation. The Redemption Notice
shall state:
(1) that such notice constitutes a Redemption Notice pursuant to Section
5(a);
(2) the Optional Redemption Price;
(3) whether all or less than all the outstanding Series B Preferred Stock
redeemable thereunder is to be redeemed and the total number of shares of
such Series B Preferred Stock being redeemed;
(4) the number of shares of Series B Preferred Stock held, as of the
appropriate record date, by the specific Holder that the Corporation
intends to redeem;
(5) the Redemption Date;
(6) that the Holder is to surrender to the Corporation his certificate or
certificates representing the Series B Preferred Stock to be redeemed,
specifying the place or places where, and the manner in which, certificates
for Series B Preferred Stock are to be surrendered for redemption;
(7) the date on which the Series B Preferred Stock called for redemption
shall cease to be convertible; and
(8) that dividends on the Series B Preferred Stock to be redeemed shall
cease to accumulate on the Redemption Date, unless the Corporation defaults
in the payment of the amounts necessary for such redemption, in which case,
dividends shall continue to accumulate until such payment is made.
(ii) Each Holder shall surrender the certificate or certificates
representing such Series B Preferred Stock to the Corporation, duly endorsed,
in the manner and at the place designated in the Redemption Notice, and on the
Redemption Date the full Optional Redemption Price for such shares so
surrendered shall be payable in cash to the Person whose name appears on such
certificate or certificates as the owner thereof, and each surrendered
certificate shall be cancelled and retired. If less than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(iii) If on or before the Redemption Date all funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart
from its other funds, in trust for the pro rata benefit of the Holders of the
shares so called for redemption, so as to be and continue to be available
therefor and not subject to claims of creditors of the Corporation, then,
notwithstanding that any certificate for shares so called for redemption shall
not have been surrendered for cancellation, all shares so called for
redemption shall no longer be deemed outstanding on and after such Redemption
Date, and all rights with respect to such shares shall forthwith on such
Redemption Date cease and terminate, except only the right of the Holders
thereof to receive the amount payable on redemption thereof, without interest.
Any interest accrued on such funds shall be paid to the Corporation from time
to time.
A-20
<PAGE>
Any funds so set aside or deposited by the Corporation which shall not be
required for such redemption because of the exercise of any right of
conversion subsequent to the date of such deposit shall be released or repaid
to the Corporation forthwith. Any funds so set aside or deposited, as the case
may be, and unclaimed as of the first anniversary of such Redemption Date
shall be released or repaid to the Corporation, after which the Holders of the
shares so called for redemption shall look only to the Corporation for payment
thereof.
6. Conversion. (a) Conversion Right. The Holder of each share of Series B
Preferred Stock shall have the right at any time, or from time to time (prior
in each case to the thirtieth day following the date of the Redemption Notice
if such share shall be called for redemption pursuant to Section 5), at the
option of such Holder, to convert such share into Common Stock, on and subject
to the terms and conditions hereinafter set forth. Subject to the provisions
for adjustment hereinafter set forth, each share of Series B Preferred Stock
shall be convertible into such number (calculated as to each conversion to the
nearest 1/100th of a share) of fully paid and nonassessable shares of Common
Stock, as is obtained by dividing the Liquidation Preference by the Conversion
Price, in each case as in effect at the date any Series B Preferred Stock is
surrendered for conversion.
(b) Conversion Procedures. To exercise the conversion privilege, the Holder
of any Series B Preferred Stock to be converted in whole or in part shall
surrender the certificate representing such Series B Preferred Stock (the
"Series B Preferred Stock Certificate") at the office or agency then
maintained by the Corporation for the transfer of the Series B Preferred
Stock, and shall give written notice of conversion in the form provided on the
Series B Preferred Stock Certificate (or such other notice which is acceptable
to the Corporation) to the Corporation at such office or agency that the
Holder elects to convert such Series B Preferred Stock represented by the
Series B Preferred Stock Certificate so surrendered or the portion thereof
specified in said notice into Common Stock. Such notice shall also state the
name or names (with addresses) in which the certificate or certificates for
Common Stock which shall be issuable upon such conversion shall be issued, and
shall be accompanied by transfer taxes, if required. Each Series B Preferred
Stock Certificate surrendered for conversion shall, unless the shares issuable
on conversion are to be issued in the same name as the registration of such
Series B Preferred Stock Certificate, be duly endorsed by, or be accompanied
by instruments of transfer in form satisfactory to the Corporation duly
executed by, the Holder or such Holder's duly authorized attorney.
As promptly as practicable, but in no event later than five (5) Business
Days, after the surrender of such Series B Preferred Stock Certificate and the
receipt of such notice and funds, if any, as aforesaid, the Corporation shall
issue and shall simultaneously deliver at such office or agency to such
Holder, or on his written order, a certificate or certificates for the number
of shares of Common Stock, issuable upon the conversion of such Series B
Preferred Stock represented by the Series B Preferred Stock Certificate so
surrendered or portion thereof in accordance with the provisions of this
Section 6. In case less than all of the Series B Preferred Stock represented
by a Series B Preferred Stock Certificate surrendered for conversion is to be
converted, the Corporation shall simultaneously deliver to or upon the written
order of the Holder of such Series B Preferred Stock Certificate a new Series
B Preferred Stock Certificate representing the Series B Preferred Stock not
converted. If a Holder fails to notify the Corporation of the number of shares
of Series B Preferred Stock which such Holder wishes to convert, such Holder
shall be deemed to have elected to convert all shares represented by the
certificate or certificates surrendered for conversion.
Each conversion shall be deemed to have been effected on the date on which
such Series B Preferred Stock Certificate shall have been surrendered and such
notice shall have been received by the Corporation, as aforesaid (the
"Conversion Date"), and the Person in whose name any certificate or
certificates for Common Stock shall be issuable upon such conversion shall be
deemed to have become on said date the holder of record of the shares
represented thereby; provided, however, that any such surrender on any date
when the stock books of the Corporation shall be closed shall constitute the
Person in whose name the certificates are to be issued as the record holder
thereof for all purposes on the next succeeding day on which such stock books
are open, but such conversion shall be at the Conversion Price as in effect on
the date upon which such Series B Preferred Stock Certificate shall have been
surrendered.
A-21
<PAGE>
All Series B Preferred Stock that 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 forthwith cease, except only the right of the Holders
thereof, subject to the provisions of this Section 6, to receive Common Stock
in exchange therefor; provided, however, that if the Corporation defaults in
its obligation to deliver certificates representing Common Stock issuable upon
such conversion, dividends shall continue to accumulate at the Default
Dividend Rate until such delivery is made.
If any Series B Preferred Stock shall be called for redemption, the right to
convert such Series B Preferred Stock shall terminate at the close of business
on the thirtieth day following the date of the Redemption Notice.
(c) The Conversion Price at which Series B Preferred Stock is convertible
into Common Stock shall be subject to adjustment from time to time as provided
in this Section 6(c) (unless otherwise indicated, all calculations under this
Section 6(c) shall be made to the nearest $0.01):
(i) In case the Corporation shall (A) declare a dividend or make a
distribution on the outstanding Common Stock in Capital Stock of the
Corporation, (B) subdivide or reclassify the outstanding Common Stock into
a greater number of shares (or into other securities or property), or (C)
combine or reclassify the outstanding Common Stock into a smaller number of
shares (or into other securities or property), the Conversion Price in
effect at the close of business on the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution, or to
be affected by such subdivision, combination or other reclassification,
shall be adjusted by multiplying such Conversion Price by a fraction, the
numerator of which shall be the total number of outstanding shares of
Common Stock immediately prior to such event, and the denominator of which
shall be the total number of outstanding shares of Common Stock immediately
after such event. An adjustment made pursuant to this subparagraph (i)
shall become effective immediately after the record date for such event,
or, if there is no record date, upon the effective date for such event. Any
Common Stock issuable in payment of a dividend shall be deemed to have been
issued immediately prior to the time of the record date for such dividend
for purposes of calculating the number of outstanding shares of Common
Stock under subparagraphs (ii) and (iii) below. Adjustments pursuant to
this subparagraph shall be made successively whenever any event specified
above shall occur.
(ii) In case the Corporation shall fix a record date for the issuance of
rights or warrants to all holders of Common Stock entitling them to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) (other than Series B Preferred Stock, Series
B Warrants or Investor Warrants) at a price per share (or having a
conversion price or exchange price per share, subject to normal
antidilution adjustments) less than the Current Market Price (as defined in
subparagraph (vii) below) of Common Stock on such record date, the
Conversion Price in effect at the close of business on such record date
shall be reduced by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights, options or warrants
plus the number of shares of Common Stock which the aggregate offering
price of the total number of shares of Common Stock so offered would
purchase at the Current Market Price as of such record date, and the
denominator of which shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights, options or warrants
plus the number of additional shares of Common Stock offered for
subscription or purchase in connection with such rights, options or
warrants. Such adjustment shall be made whenever such rights, options or
warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights, options or warrants. In case any rights or warrants referred to in
this subparagraph (ii) in respect of which an adjustment shall have been
made shall expire unexercised within forty-five (45) days after the same
shall have been distributed or issued by the Corporation, the Conversion
Price shall be readjusted at the time of such expiration to the Conversion
Price that would have been in effect if no adjustment had been made on
account of the distribution or issuance of such expired rights or warrants.
(iii) In case the Corporation shall fix a record date for the making of a
distribution to all holders of Common Stock (A) of shares of any class
other than Common Stock, (B) of evidences of indebtedness of the
Corporation or any Subsidiary, (C) of assets or other property or (D) of
rights or warrants (excluding
A-22
<PAGE>
those rights or warrants resulting in an adjustment pursuant to
subparagraph (ii) above, and the right to acquire Series B Preferred Stock
in the rights offering thereof), then in each such case the Conversion
Price shall be reduced so that such price shall equal the price determined
by multiplying the Conversion Price in effect immediately prior to the
effectiveness of the Conversion Price reduction contemplated by this
subparagraph (iii) by a fraction, the numerator of which shall be the then
Current Market Price per share of Common Stock, less the then fair market
value (as determined by the Board of Directors, whose reasonable
determination shall be described in a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the
Board of Directors and to be in full force and effect on the date of such
certification (a "Board Resolution") of the portion of the securities,
evidences of indebtedness, assets, property or rights or warrants so
distributed, the case may be, which is applicable to one share of Common
Stock, and the denominator of which shall be the Current Market Price per
share of Common Stock as of the record date for such distribution. Such
adjustment shall be made successively whenever such a record date is fixed.
(iv) In case the Corporation shall issue Common Stock for a consideration
per share less than the Current Market Price per share on the date the
Corporation fixes the offering price of such additional shares, the
Conversion Price shall be adjusted immediately thereafter so that it shall
equal the price determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, of which the numerator shall be
the number of shares of Common Stock outstanding immediately after the
issuance of such additional shares, and the denominator shall be the total
number of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares plus the number of shares of Common
Stock which the aggregate consideration received (determined as provided in
subparagraph (vi) below) for the issuance of such additional shares would
purchase at the Current Market Price per share. Such adjustment shall be
made successively whenever such an issuance is made; provided, however,
that the provisions of this subparagraph shall not apply (A) to Common
Stock issued to the Corporation's employees or former employees or their
estates under bona fide employee benefit plans adopted by the Board of
Directors and approved by the holders of Common Stock if required by law,
if such Common Stock would otherwise be covered by this subparagraph, but
only to the extent that the aggregate number of shares excluded hereby
shall not exceed, on a cumulative basis since the date hereof, [NUMBER TO
BE AGREED BEFORE CLOSING] (including 842,000 shares as of the date hereof
to be issued pursuant to employee stock options outstanding as of the date
hereof to purchase Common Stock), (B) to the Common Stock to be issued
pursuant to the Bank Warrants, (y) to the Common Stock to be issued
pursuant to the Investor Warrants or the Series B Warrants and (C) to
Common Stock to be issued upon conversion of the Series A Preferred Stock
or the Series B Preferred Stock, adjusted as appropriate in each case, in
connection with any stock split, merger, recapitalization or similar
transaction.
(v) In case the Corporation shall issue any securities convertible into
or exchangeable for Common Stock (excluding (A) securities issued in
transactions resulting in adjustment pursuant to subparagraphs (ii) and
(iii) above, (B) Series A Preferred Stock, (C) Series B Preferred Stock,
(D) Investor Warrants or Series B Warrants, and (E) upon conversion of any
of such securities) for a consideration per share of Common Stock
deliverable upon conversion or exchange of such securities (determined as
provided in subparagraph (vi) below and subject to normal antidilution
adjustments) less than the Current Market Price per share in effect
immediately prior to the issuance of such securities, the Conversion Price
shall be adjusted immediately thereafter so that it shall equal the price
determined by multiplying the Conversion Price in effect immediately prior
thereto by a fraction, of which the numerator shall be the number of shares
of Common Stock outstanding immediately prior to such issuance plus the
maximum number of shares of Common Stock deliverable upon conversion of or
in exchange for such securities at the initial conversion or exchange price
or rate, and the denominator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such securities plus the
number of shares of Common Stock which the aggregate consideration received
(determined as provided in subparagraph (vi) below) for such securities
would purchase at the Current Market Price per share. Such adjustment shall
be made successively whenever such an issuance is made.
A-23
<PAGE>
Upon the termination of the right to convert or exchange such securities,
the Conversion Price shall forthwith be readjusted to such Conversion Price
as would have been obtained had the adjustments made upon the issuance of
such convertible or exchangeable securities been made upon the basis of the
delivery of only the number of shares of Common Stock actually delivered
upon conversion or exchange of such securities and upon the basis of the
consideration actually received by the Corporation (determined as provided
in subparagraph (vi) below) for such securities.
(vi) For purposes of any computation respecting consideration received
pursuant to subparagraphs (iv) and (v) above, the following shall apply:
(A) in the case of the issuance of Common Stock for cash, the
consideration shall be the amount of such cash, provided that in no
case shall any deductions be made for any commissions, discounts,
placement fees or other expenses incurred by the Corporation for any
underwriting or placement of the issue or otherwise in connection
therewith;
(B) in the case of the issuance of Common Stock for a consideration
in whole or in part other than cash, the consideration other than cash
shall be deemed to be the fair market value thereof as determined by
the Board of Directors, whose reasonable determination shall be
described in a Board Resolution; and
(C) in the case of the issuance of securities convertible into or
exchangeable for Common Stock, the aggregate consideration received
therefor shall be deemed to be the consideration received by the
Corporation for the issuance of such securities plus the additional
minimum consideration, if any, to be received by the Corporation upon
the conversion or exchange thereof (the consideration in each case to
be determined in the same manner as provided in clauses (A) and (B) of
this subparagraph (vi)).
(vii) For the purpose of any computation under this Certificate of
Designation, (A) the "Current Market Price" per share at any date shall be
deemed to be the average of the daily Closing Price for the Common Stock
for the ten (10) consecutive Trading Days commencing fourteen (14) Trading
Days before such date, and (B) the "Closing Price" of the Common Stock
means the last reported sale price regular way reported on the NASDAQ Stock
Market or its successor, or, if not listed or admitted to trading on the
NASDAQ Stock Market or its successor, the last reported sale price regular
way reported on any other stock exchange or market on which the Common
Stock is then listed or eligible to be quoted for trading, or as reported
by the National Quotation Bureau Incorporated.
(viii) In any case in which this Section shall require that an adjustment
shall become effective immediately after a record date for an event, the
Corporation may defer until the occurrence of such event (A) issuing to the
Holder of any Series B Preferred Stock converted after such record date and
before the occurrence of such event the Common Stock issuable upon such
conversion by reason of the adjustment required by such event over and
above the Common Stock issuable upon such conversion before giving effect
to such adjustment and (B) paying to such Holder an amount in cash in lieu
of a fractional share of Common Stock pursuant to Section 6(h); provided,
however, that the Corporation shall deliver to such Holder a due bill or
other appropriate instrument evidencing such Holder's rights to receive
such additional Common Stock, and such cash, upon the occurrence of the
event requiring such adjustment.
(ix) The Corporation may make such reductions in the Conversion Price, in
addition to those required pursuant to other subparagraphs of this Section,
as it considers to be advisable so that any event treated for federal
income tax purposes as a dividend of stock or stock rights shall not be
taxable to the recipients.
(x) In case of any consolidation with or merger of the Corporation into
another corporation, or in case of any sale, lease or conveyance of assets
to another corporation of the property of the Corporation as an entirety or
substantially as an entirety, lawful and adequate provisions shall be made
whereby each Holder of Series B Preferred Stock shall have the right to
receive, from such successor, leasing or purchasing corporation, as the
case may be, upon the basis and upon the terms and conditions specified
herein, in lieu of the Common Stock immediately - theretofore receivable
upon the conversion of such Series B Preferred Stock, the kind and amount
of shares of stock, other securities, property or cash or any combination
thereof receivable upon such consolidation, merger, sale, lease or
conveyance by a holder of the number of shares
A-24
<PAGE>
of Common Stock into which such Series B Preferred Stock might have been
converted immediately prior to such consolidation, merger, sale, lease or
conveyance. In the case of any such consolidation, merger or sale of
substantially all the assets, appropriate provision shall be made with
respect to the rights and interests of the Holders to the end that the
provisions hereof (including provisions for adjustment of the Conversion
Price) shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities or assets thereafter deliverable upon the
exercise of any conversion rights hereunder.
(xi) In case of any reclassification or change of the Common Stock
issuable upon conversion of Series B Preferred Stock (other than a change
in par value, or from par value to no par value, or as a result of a
subdivision or combination, but including any change in the Common Stock
into two or more classes or series of shares), or in case of any
consolidation or merger of another corporation into the Corporation in
which the Corporation is the continuing corporation and in which there is a
reclassification or change (including a change to the right to receive cash
or other property) of the Common Stock (other than a change in par value,
or from par value to no par value, or as a result of a subdivision or
combination, but including any change in the Common Stock into two or more
classes or series of shares), lawful and adequate provisions shall be made
whereby each Holder of Series B Preferred Stock shall have the right to
receive, upon the basis and upon the terms and conditions specified herein,
in lieu of the Common Stock immediately theretofore receivable upon the
conversion of such Series B Preferred Stock, the kind and amount of shares
of stock, other securities, property or cash or any combination thereof
receivable upon such reclassification, change, consolidation or merger, by
a holder of the number of shares of Common Stock into which such Series B
Preferred Stock might have been converted immediately prior to such
reclassification, change, consolidation or merger.
(xii) The foregoing subparagraphs (x) and (xi), however, shall not in any
way affect the rights a Holder may otherwise have, pursuant to this
Section, to receive securities, evidences of indebtedness, assets, property
rights or warrants upon conversion of any Series B Preferred Stock.
(xiii) If the Corporation repurchases (by way of tender offer, exchange
offer or otherwise) any Common Stock for a per share consideration which
exceeds the Current Market Price of a share of Common Stock on the date
immediately prior to such repurchase, the Conversion Price shall be reduced
so that such price shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the effectiveness of the
Conversion Price reduction contemplated by this subparagraph (xiii) by a
fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such acquisition multiplied by the
Current Market Price per share of the Common Stock on the immediately
preceding Trading Day, and the denominator shall be the sum of (A) the fair
market value (as determined in good faith by the Board of Directors) of the
aggregate consideration payable to stockholders as a result of such
acquisition, and (B) the product of the number of shares of Common Stock
outstanding immediately following such acquisition and the Current Market
Price per share of the Common Stock on such immediately preceding Trading
Day, such reduction to become effective immediately prior to the opening of
business on the day following such acquisition.
(xiv) If any event occurs as to which the foregoing provisions of this
Section 6(c) are not strictly applicable or, if strictly applicable, would
not, in the good faith judgment of the Board of Directors, fairly protect
the conversion rights of the Series B Preferred Stock in accordance with
the essential intent and principles of such provisions, then the Board of
Directors shall make such adjustments in the application of such
provisions, in accordance with such essential intent and principles, as
shall be reasonably necessary, in the good faith opinion of the Board of
Directors, to protect such conversion rights as aforesaid, but in no event
shall any such adjustment have the effect of increasing the Conversion
Price, or otherwise adversely affect the Holders.
(xv) For purposes of Section 6(c), Common Stock owned or held at any
relevant time by, or for the account of, the Corporation in its treasury or
otherwise, shall not be deemed to be outstanding for purposes of the
calculation and adjustments described therein. Shares held in the Disputed
Claims Reserve, Division Class 14 Utility Fund Trust Agreement dated April
6, 1993 and the Improvements Fund Trust Agreement dated April 6, 1993 shall
not be deemed to be held by, or for the account of, the Corporation.
A-25
<PAGE>
(d) Conversion Price Adjustment Deferred. Notwithstanding the foregoing
provisions of this Section 6, (i) no adjustment in the number of shares of
Common Stock into which any Series B Preferred Stock is convertible shall be
required unless such adjustment would require an increase or decrease in such
number of shares of at least 1% and (ii) no adjustment in the Conversion Price
shall be required unless such adjustment would require an increase or decrease
in the Conversion Price of at least $.01 per share; provided, however, that
any adjustments which by reason of this paragraph (d) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 6 shall be made to the nearest
cent or the nearest 1/100th share, as the case may be.
(e) Adjustment Report. Whenever any adjustment is required in the shares
into which any Series B Preferred Stock is convertible, the Corporation shall
forthwith (i) file with each office or agency then maintained by the
Corporation for the transfer of the Series B Preferred Stock a statement
describing in reasonable detail the adjustment and the method of calculation
used and (ii) cause a notice of such adjustment, setting forth the adjusted
Conversion Price and the calculation thereof to be mailed to the Holders at
their respective addresses as shown on the stock books of the Corporation. The
certificate of any independent firm of public accountants of recognized
standing selected by the Board of Directors certifying to the Board of
Directors the correctness of any computation under this Section 6 shall be
evidence of the correctness of such computation.
(f) Notice of Certain Events. In the event that:
(i) the Corporation shall take action to make any distribution to the
holders of its Common Stock;
(ii) the Corporation shall take action to offer for subscription pro rata
to the holders of its Common Stock any securities of any kind;
(iii) the Corporation shall take action to accomplish any capital
reorganization, or reclassification of the Capital Stock of the
Corporation, or a consolidation or merger to which the Corporation is a
party and for which approval of any stockholders of the Corporation is
required, or the sale or transfer of all or substantially all of the assets
of the Corporation; or
(iv) the Corporation shall take action looking to a voluntary or
involuntary dissolution, liquidation or winding-up of the Corporation;
then the Corporation shall (A) in case of any such distribution or
subscription rights, at least twenty (20) days prior to the date or
expected date on which the stock books of the Corporation shall close or a
record shall be taken for the determination of Holders entitled to such
distribution or subscription rights, and (B) in the case of any such
reorganization, reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up, at least twenty (20) days prior to
the date or expected date when the same shall take place, cause written
notice thereof to be mailed to each Holder at his address as shown on the
stock books of the Corporation. Such notice in accordance with the
foregoing clause (A) shall also specify, in the case of any such
distribution or subscription rights, the date or expected date on which the
holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (B) shall also specify the date or
expected date on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up, as the case may be.
(g) Common Stock. For the purposes of this Section 6, the term "Common
Stock" shall mean (i) the Common Stock or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value or from no par value to par value,
or from par value to no par value. If at any time as a result of an adjustment
made pursuant to the provisions of Section 6(c), the Holder of any Series B
Preferred Stock thereafter surrendered for conversion shall become entitled to
receive any the Corporation such other shares so receivable upon conversion of
any Series B Preferred Stock shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Common Stock contained in Section 6(c), and the other
provisions of this Section 6 with respect to the Common Stock shall apply on
like terms to any such other shares.
(h) Fractional Shares. The Corporation shall not be required to issue
fractional shares of Common Stock upon the conversion of any Series B
Preferred Stock. If more than one share of Series B Preferred Stock shall be
A-26
<PAGE>
surrendered for conversion at one time by the same Holder, the number of full
shares of Common Stock issuable upon conversion thereof shall be computed on
the basis of the aggregate number of shares so surrendered. If any fractional
interest in a share of Common Stock would be deliverable upon the conversion
of any Series B Preferred Stock, the Corporation may pay, in lieu thereof, in
cash the Closing Price thereof as of the Business Day immediately preceding
the date of such conversion.
(i) Reservation of Shares. The Corporation shall at all times reserve and
keep available, free from preemptive rights, out of its authorized but
unissued stock, for the purpose of effecting the conversion or redemption of
the Series B Preferred Stock, such number of its duly authorized shares of
Common Stock (or treasury shares as provided below) as shall from time to time
be sufficient for the conversion of all outstanding Series B Preferred Stock
into Common Stock at any time. The Corporation shall, from time to time and in
accordance with the General Corporation Law of the State of Delaware, cause
the authorized number of shares of Common Stock to be increased if the
aggregate of the number of authorized shares of Common Stock remaining
unissued and the issued shares of such Common Stock reserved for issuance in
any other connection shall not be sufficient for the conversion of all
outstanding Series B Preferred Stock into Common Stock at any time.
7. Voting Rights. The Holders of Series B Preferred Stock shall not vote on
any matters submitted to the holders of the Common Stock for a vote, except as
may be required by law. In any case in which the Holders shall be entitled to
vote as a separate class pursuant to Delaware law, each Holder shall be
entitled to one vote for each share of Series B Preferred Stock then held.
8. Repurchase Obligation. (a) Subject to the provisions of Section 8(b), the
Series B Preferred Stock shall not be redeemable at the option of the Holder
thereof prior to the fourth anniversary of the Original Issue Date. Beginning
on the fourth anniversary of the Original Issue Date, each Holder shall have
the right, at such Holder's option, exercisable by notice (a "Repurchase
Notice"), to require the Corporation to purchase Series B Preferred Stock then
held by such Holder, at a repurchase price in cash equal to the Liquidation
Preference in effect at such time (the "Repurchase Price"); provided, however,
that the number of shares required to be repurchased by the Corporation
pursuant to this Section 8(a) ("Put Shares") prior to the fifth anniversary of
the Original Issue Date shall not exceed one-third of the total number of
shares of Series B Preferred Stock issued by the Corporation, and, prior to
the sixth anniversary of the Original Issue Date, the number of Put Shares
shall not exceed two-thirds of the total number of shares of Series B
Preferred Stock issued by the Corporation.
(b) Notwithstanding the provisions of Section 8(a), if an Event of Default
shall occur at any time or from time to time on or after the Original Issue
Date, each Holder shall have the right, at such Holder's option exercisable by
Repurchase Notice at any time within sixty (60) days after the happening of
each such Event of Default or, if later, receipt of notice from the
Corporation of such Event of Default, to require the Corporation to purchase
all or any part of the Series B Preferred Stock then held by such Holder as
such Holder may elect, at the Repurchase Price.
(c) The Corporation shall, within thirty (30) days of the occurrence of an
Event of Default, give written notice thereof by telecopy, if possible, and by
first class mail, postage prepaid, to each Holder, addressed to such Holder at
his last address and telecopy number as shown upon the stock books of the
Corporation. Each such notice shall specify the Event of Default which has
occurred and the date of such occurrence, the place or places of payment, the
then effective Conversion Price pursuant to Section 6, the then effective
Repurchase Price and the date the right of such Holder to require such
repurchase shall terminate. In addition, the Corporation shall, immediately
upon becoming aware of any facts or events that could reasonably be expected
to result in the occurrence of an Event of Default, give a written notice
thereof by telecopy, if possible, and by first class mail, postage prepaid, to
the Holders, addressed to such Holders at their last addresses as shown upon
the stock books of the Corporation.
(d) The date fixed for each such repurchase (the "Repurchase Date") shall be
the 30th day following the date of the Repurchase Notice relating thereto. The
place of payment shall be at an office or agency in the City
A-27
<PAGE>
of New York, New York fixed therefor by the Corporation or, if not fixed, at
the principal executive office of the Corporation.
On or before the Repurchase Date, each Holder who elects to have Series B
Preferred Stock held by it purchased shall surrender the certificate
representing such shares to the Corporation at the place designated in such
notice together with an election to have such purchase made and shall
thereupon be entitled to receive payment therefor provided in this Section 8.
If less than all the shares represented by any such surrendered certificate
are repurchased, a new certificate shall be issued representing the
unpurchased shares. Payment of the Repurchase Price for the Put Shares shall
be made on the later of the Repurchase Date or the fifth Business Day after
the surrender of such certificate. Dividends with respect to the Series B
Preferred Stock so purchased shall cease to accrue after the Repurchase Date,
such shares shall no longer be deemed outstanding and the Holders thereof
shall cease to be stockholders of the Corporation and all rights whatsoever
with respect to the shares so purchased shall terminate; provided, however,
that if the Corporation defaults in its obligation to pay the Repurchase Price
for such Put Shares, interest shall accrue on the amount of such obligation at
the Default Dividend Rate until such payment is made (with all interest due).
(e) Notwithstanding any other provision hereof, if any of the following
events shall occur and be continuing: (i) the Company or any of its
Significant Subsidiaries shall commence any case, proceeding or other action
(A) under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors,
seeking to have an order for relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other relief
with respect to it or its debts, or (B) seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Company or any of its Significant
Subsidiaries shall make a general assignment for the benefit of its creditors;
(ii) there shall be commenced against the Company or any of its Significant
Subsidiaries any case, proceeding or other action of a nature referred to in
clause (i) above which (A) results in the entry of an order for relief or any
such adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of 60 days; (iii) there shall be commenced against the
Company or any of its Significant Subsidiaries any case, proceeding or other
action seeking issuance of a warrant of attachment, execution, distraint or
similar process against all or any substantial part of its assets which
results in the entry of an order for any such relief which shall not have been
vacated, discharged, or stayed or bonded pending appeal within 60 days from
the entry thereof; (iv) the Company or any of its Significant Subsidiaries
shall take any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any of the acts set forth in clauses (i),
(ii), or (iii) above; (v) the Company or any of its Significant Subsidiaries
shall generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due; (vi) the Company or any of its
Significant Subsidiaries shall cause to be reinstated the Reorganization
Proceedings (as defined in the Note Agreement (as defined in the Investment
Agreement)); or (vii) the Confirmation Order (as defined in the Note
Agreement) shall be reversed, withdrawn, modified (in any manner adverse to
Company or any of its Significant Subsidiaries), or any rehearing shall be
ordered with respect thereto by the Bankruptcy Court or by any court having
jurisdiction over the Company; then, and in any such event, all Series B
Preferred Stock held by such Holder shall be Put Shares and the aggregate
Repurchase Price in respect of each such share shall immediately and
automatically become due and payable in full without any requirement or pre-
condition of delivery of a Repurchase Notice, any such requirement or pre-
condition being expressly waived hereby.
9. Reissuance of Series B Preferred Stock. Series B Preferred Stock that has
been issued and reacquired in any manner, including shares surrendered to the
Corporation upon conversion, and shares purchased or redeemed, shall (upon
compliance with any applicable provisions of the laws of Delaware) have the
status of authorized and unissued preferred stock undesignated as to series
and may not be re-designated and reissued as part of any series of preferred
stock.
10. Business Day. If any payment or redemption shall be required by the
terms hereof to be made on a day that is not a Business Day, such payment or
redemption shall be made on the immediately succeeding Business Day.
A-28
<PAGE>
11. Headings of Sections. The headings of the various Sections hereof are
for convenience of reference only and shall not affect the interpretation of
any of the provisions hereof.
12. Severability of Provisions. If any right, preference or limitation of
the Series B Preferred Stock set forth in this Certificate of Designation (as
it may be amended from time to time) is invalid, unlawful or incapable of
being enforced by reason of any rule or law or public policy, all other
rights, preferences and limitations set forth in this Certificate of
Designation (as so amended) which can be given effect without the invalid,
unlawful or unenforceable right, preference or limitation shall, nevertheless,
remain in full force and effect, and no right, preference or limitation herein
set forth shall be deemed dependent upon any other such right, preference or
limitation unless so expressed herein.
13. Notice. All notices and other communications provided for or permitted
to be given to the Corporation hereunder shall be made by hand delivery, next
day air courier or certified first-class mail to the Corporation at its
principal executive offices at Atlantic Gulf Communities Corporation, 2601
South Bayshore Drive, Miami, Florida 33133-5461, Telecopy number (305) 859-
4623, Attention: Chief Financial Officer.
14. Amendments. This Certificate of Designation may be amended without
notice to or the consent of any Holder to cure any ambiguity, defect or
inconsistency or to make any other amendment provided that any such amendment
does not adversely affect the rights of any Holder. Any provisions of this
Certificate of Designation may also be amended by the Corporation with the
vote or written consent of Holders representing a majority of the outstanding
Series B Preferred Stock.
The Corporation will, so long as any Series B Preferred Stock is
outstanding, maintain an office or agency where such shares may be presented
for registration or transfer and where such shares may be presented for
conversion and redemption.
15. Definitions. As used in this Certificate of Designation, the following
terms shall have the following meanings (with terms defined in the singular
having comparable meanings when used in the plural and vice versa), unless the
context otherwise requires:
"Bank Warrants" means the 1,500,000 warrants for the purchase of Common
Stock issued on September 30, 1996 pursuant to the Prepayment Agreement dated
as of September 30, 1996 among the financial institutions listed on the
signature pages thereof, The Chase Manhattan Bank and the Corporation.
"Board of Directors" means the Board of Directors of the Corporation.
"Board Resolution" has the meaning set forth in Section 6(c)(iii).
"Business Day" means a day that is not a Saturday, a Sunday or a day on
which banking institutions in the State of New York are not required to be
open. Unless specifically stated as a Business Day, all days referred to
herein shall mean calendar days.
"Capital Stock" means, with respect to any Person, any and all shares,
partnership interests, participations, rights in, or other equivalents
(however designated and whether voting or nonvoting) of, such Person's capital
stock.
"Closing Price" has the meaning set forth in Section 6(c)(vii).
"Common Stock" means shares of Common Stock, par value $.10 per share, of
the Corporation.
"Conversion Date" has the meaning set forth in Section 6(b).
"Conversion Price" means, initially, $5.75 and, thereafter, such price as
adjusted pursuant to Section 6.
A-29
<PAGE>
"Corporation" means Atlantic Gulf Communities Corporation, a Delaware
corporation.
"Current Market Price" has the meaning set forth in Section 6(c)(vii).
"Default Dividend Rate" has the meaning set forth in Section 3(a).
"Dividend Payment Date" means March 31, June 30, September 30 and December
31 of each year.
"Dividend Period" means the Initial Dividend Period and, thereafter, each
Quarterly Dividend Period.
"Dividend Record Date" means a day fifteen (15) days preceding the Dividend
Payment Date.
"Event of Default" means (i) any event of default (whatever the reason for
such event of default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any governmental authority)
under any Instrument creating, evidencing or securing any indebtedness for
borrowed money of the Company or any Significant Subsidiary in an amount in
excess of $2,500,000 that would enable the creditors or secured parties under
such Instrument to declare the principal amount of such indebtedness due and
payable prior to its scheduled maturity, and has not been waived by the
relevant creditors or secured parties, (ii) the occurrence of a Default Change
of Control (as defined in the Investment Agreement), or (iii) one of the
events specified in clauses (i) through (vii) of Section 8(e).
"Holder" means a record holder of one or more outstanding shares of Series B
Preferred Stock.
"Initial Dividend Period" means the dividend period commencing on the
Original Issue Date and ending on the second Dividend Payment Date to occur
thereafter.
"Instrument" means any contract, agreement, indenture, mortgage, security,
document or writing under which any obligation is evidenced, assumed or
undertaken, or any security interest is granted or perfected.
"Investor" has the meaning set forth in the Investment Agreement.
"Investor Warrants" means the 5,000,000 warrants to acquire Common Stock to
be issued to the Investor pursuant to the Investment Agreement.
"Investment Agreement" means the Amended and Restated Investment Agreement
dated as of February 7, 1997 by and between AP-AGC, LLC and the Corporation,
amended as of March 20, 1997 and amended and restated as of May 15, 1997.
"Junior Stock" has the meaning set forth in Section 2.
"Liquidation Preference" means, at any time, $10 per share of Series B
Preferred Stock, plus accumulated and unpaid Dividends thereon through the
date of such determination, whether or not declared and whether or not funds
are legally available therefor.
"Optional Redemption Price" has the meaning set forth in Section 5(a).
"Original Issue Date" means the date upon which the Series B Preferred Stock
is originally issued by the Corporation.
"Parity Stock" means the Series A Preferred Stock (except insofar as the
Series A Preferred Stock has certain security rights and interests which are
not applicable to the Series B Preferred Stock) and any class or series of
stock the terms of which provide that it is entitled to participate pari passu
with the Series B Preferred Stock with respect to any dividend or distribution
or upon liquidation, dissolution or winding-up of the Corporation.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, business trust, joint-stock company,
trust, unincorporated organization or government or agency or political
subdivision thereof.
"Put Shares" has the meaning set forth in Section 8(a).
A-30
<PAGE>
"Quarterly Dividend Period" shall mean the quarterly period commencing on
each March 31, June 30, September 30 and December 31 and ending on each
Dividend Payment Date, respectively.
"Redemption Date", with respect to any Series B Preferred Stock, means the
date on which such Series B Preferred Stock is redeemed by the Corporation.
"Redemption Notice" has the meaning set forth in Section 5(c).
"Repurchase Date" has the meaning set forth in Section 8(d).
"Repurchase Notice" has the meaning set forth in Section 8(a).
"Repurchase Price" has the meaning set forth in Section 8(a).
"Senior Stock" means any class or series of stock the terms of which provide
that it is entitled to a preference to the Series B Preferred Stock with
respect to any dividend or distribution or upon voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation.
"Series A Preferred Stock" means the 20% Cumulative Redeemable Convertible
Preferred Stock, Series A, par value $.01 per share, of the Corporation.
"Series B Preferred Stock Certificate" has the meaning set forth in Section
6(b).
"Series B Preferred Stock" means the 20% Cumulative Redeemable Convertible
Preferred Stock, Series B, par value $.01 per share, of the Corporation, which
may be issued in accordance with the Investment Agreement.
"Series B Warrants" means up to 4,000,000 warrants to acquire Common Stock
which may be issued to acquirers of Series B Preferred Stock.
"Significant Subsidiary" has the meaning set forth in Regulation S-X under
the Securities Exchange Act of 1934, as amended.
"Subsidiary" means, (i) with respect to any Person, a corporation a majority
of whose Capital Stock with voting power under ordinary circumstances to elect
directors is at the time, directly or indirectly, owned by such Person, by a
Subsidiary of such Person or by such Person and a Subsidiary of such Person,
or (ii) any other Person (other than a corporation) of which at least a
majority of the voting interest is at the time, directly or indirectly, owned
by such Person, by a Subsidiary of such Person or by such Person and a
Subsidiary of such Person.
"Trading Day" shall mean a day on which securities are traded or quoted on
the national securities exchange or quotation system or in the over-the-
counter market used to determine the Closing Price.
A-31
<PAGE>
ANNEX C TO
APPENDIX A
Warrants Certificate No. W-[A][B][C]-1
WARRANT FOR THE PURCHASE OF
COMMON STOCK OF
ATLANTIC GULF COMMUNITIES CORPORATION
(VOID AFTER , 2004)
THE WARRANTS (AND THE COMMON STOCK ISSUABLE UPON EXERCISE THEREOF) REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF SUCH REGISTRATION OR
THE AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION. THIS WARRANT MAY NOT
BE SOLD, TRANSFERRED OR ASSIGNED EXCEPT UPON COMPLIANCE WITH THE REQUIREMENTS
FOR TRANSFER SET FORTH HEREIN [AND IN AN INVESTMENT AGREEMENT DATED AS OF
FEBRUARY 7, 1997, AMENDED AS OF MARCH 20, 1997, AND AMENDED AND RESTATED AS OF
MAY 15, 1997, BETWEEN THE ISSUER AND AP-AGC, LLC]. THE COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF IS ENTITLED TO THE BENEFITS OF CERTAIN REGISTRATION
RIGHTS UNDER [SUCH INVESTMENT AGREEMENT].*
----------------
THIS IS TO CERTIFY THAT, for value received, [AP-AGC, LLC]*, or registered
assigns (collectively, the "Holder"), is the registered owner of the number of
Warrants set forth above, each of which entitles the Holder, subject to the
terms and conditions set forth hereinafter, to purchase one share of Common
Stock, par value $.10 per share (the "Common Stock"), of Atlantic Gulf
Communities Corporation, a corporation organized under the laws of the State
of Delaware (the "Company") having a place of business at 2601 South Bayshore
Drive, Miami, Florida 33133-5461, at a purchase price per share referred to
herein as the "Exercise Price." The number of shares of Common Stock which may
be received upon the exercise of this certificate (this "Warrant Certificate")
and the Exercise Price for each such share of Common Stock are subject to
adjustment from time to time as hereinafter set forth. Each share of Common
Stock issuable upon the exercise of each of the Warrants (collectively, the
"Warrant Shares") when issued and paid for pursuant to the provisions of this
Warrant shall be duly authorized, validly issued, fully paid and
nonassessable, shall be free from all taxes, liens and charges with respect to
the issuance thereof and shall be free of any preemptive or similar rights.
The Company shall cause the Warrant Shares to be listed or eligible to be
quoted for trading on the NASDAQ Stock Market or on any other stock exchange
or market on which Common Stock is then listed or eligible to be quoted for
trading.
Each Warrant evidenced hereby is originally acquired pursuant to [the
Investment Agreement between the Company and the Investor] [a Securities
Purchase Agreement between the Company and ] [a rights offering by the
Company to all of its shareholders by means of a registration statement on
Form S-3], for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged.
Each Warrant is subject to the following terms and provisions:
Section 1. Exercise of Warrant.
(a) Subject to the provisions hereof, the Warrants evidenced hereby may be
exercised at the discretion of the Holder in whole or in part at any time or
from time to time on or after June 24, 1997 [DATE OF ISSUANCE OF SERIES B
WARRANT] (the "Initial Exercise Date") to and including June 24 [ ], 2004
(the "Expiration Date") or, if either day is not a Trading Day, then on the
next succeeding Trading Day, by
- --------
* Bracketed language not to be included in Series B Warrants.
A-32
<PAGE>
presentation and surrender hereof to the Company at the office or agency of
the Company maintained for that purpose pursuant to Section 11 (the "Warrant
Office"), with the Notice of Election to Exercise (the "Exercise Notice")
attached hereto duly executed and accompanied by payment to the Company of the
Exercise Price for the number of Warrant Shares specified in such Exercise
Notice.
(b) The Exercise Price for the Common Stock which each Warrant entitles the
Holder to purchase shall initially be equal to $5.75. The Exercise Price set
forth in the preceding sentence is subject to adjustment as set forth in
Sections 5 and 6.
(c) Upon receipt by the Company of this Warrant Certificate at the Warrant
Office, together with a properly completed Exercise Notice and payment of the
Exercise Price as provided above, the Holder shall be deemed to be the holder
of record of the Warrant Shares issuable upon such exercise, notwithstanding
that the stock transfer books of the Company shall then be closed or that
certificates representing such shares shall not then be actually delivered to
the Holder. The Company shall deliver such certificates to the Holder as
promptly as possible thereafter, but in any event within five business days of
receipt of the Exercise Notice. The Company shall pay all expenses, and any
and all United States federal, state and local taxes and other charges that
may be payable in connection with the preparation, issue and delivery of stock
certificates under this Section 1 except that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issue and delivery of the Warrant Shares in a name other than
that of the Holder of the Warrant evidenced hereby who shall have surrendered
the same in exercise of the subscription right evidenced hereby. If Warrant
Shares are issued prior to the time that an appropriate registration statement
with respect to the Warrant Shares has become effective under the Securities
Act of 1933, as amended (the "Securities Act"), the Warrant Shares so issued
shall have stamped or imprinted thereon a legend in the form of Exhibit A. Any
holder of Warrant Shares so legended shall be entitled to have such legend
removed, upon surrender of Warrant Shares to the Company or the transfer agent
for the Common Stock, upon effectiveness of such a registration statement or
upon receipt by the Company of an opinion of counsel to the Holder to the
effect that such legend is no longer required.
(d) Upon any partial exercise of the number of Warrants to which this
Warrant Certificate entitles the Holder, there shall be issued to the Holder
hereof a new Warrant Certificate in respect of the shares as to which this
Warrant Certificate shall not have been exercised, subject to the provisions
of Section 3. Such new Warrant Certificate shall be identical to this Warrant
Certificate, except as to the number of shares of Common Stock covered
thereby.
Section 2. Exchange, Transfer, Assignment or Loss of Warrant Certificate;
Temporary Warrant Certificates.
(a) In case this Warrant Certificate shall be mutilated, lost, stolen, or
destroyed, the Company may, in its discretion, issue and deliver in exchange
and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen, or destroyed, a new Warrant Certificate of like tenor and representing
an equivalent right or interest, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and
indemnification reasonably satisfactory to it.
(b) The Warrant Certificates shall be numbered and shall be registered in a
Warrant Register maintained by the Company as they are issued. The registered
owner on the Warrant Register may be treated by the Company and all other
persons dealing with the Warrants evidenced hereby as the absolute owner
hereof for any purpose and as the person entitled to exercise the right
represented hereby, or to the transfer hereof on the books of the Company, any
notice to the contrary notwithstanding and, until such transfer on such books,
the Company may treat the registered owner on the Warrant Register as the
owner for all purposes. The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with
any registration of transfer of Warrant Certificates.
(c) This Warrant Certificate may be subdivided or combined with other
Warrant Certificates evidencing the same rights as the rights evidenced hereby
and thereby upon presentation and surrender hereof at the Warrant
A-33
<PAGE>
Office together with a written notice signed by the Holder hereof specifying
the denominations in which new Warrant Certificates are to be issued. Upon
presentation and surrender of any Warrant Certificates, together with such
written notice, for subdivision or combination, the Company will issue a new
Warrant Certificate or Certificates, in the denominations requested, entitling
the holders thereof to purchase the same aggregate number of shares of Common
Stock as the Warrant Certificate or Certificates so surrendered. Such new
Warrant Certificates will be registered in the name of the Holder submitting
such request and delivered to such Holder. Any Warrant Certificate surrendered
for subdivision or combination shall be cancelled promptly upon the issuance
of such new Warrant Certificate(s). The term "Warrant Certificate" as used
herein includes any Warrant Certificates into which this Warrant Certificate
may be subdivided, combined or exchanged.
Section 3. Fractional Interests.
(a) The Company shall not be required to issue fractions of Warrants or to
issue Warrant Certificates which evidence fractional Warrants.
(b) The Company shall not be required to issue fractions of shares of Common
Stock in the exercise of Warrants. If any fraction of a Warrant Share would,
but for the provisions of this Section, be issuable on the exercise of any
Warrant (or specified portion thereof), the Company shall purchase such
fraction for an amount in cash equal to the same fraction of the Current
Market Price (as defined in Section 5(g)) per share of Common Stock.
(c) The Holder, by acceptance of this Warrant Certificate, expressly waives
his right to receive any fractional Warrant or any fractional share upon
exercise of a Warrant.
Section 4. Reservation of Warrant Shares, etc.
The Company represents that, as of the date hereof, it has sufficient Common
Stock reserved for issuance upon exercise of all outstanding Warrants, and
agrees that, at all times during the period within which the rights
represented by this Warrant Certificate may be exercised, there shall be
reserved for issuance and/or delivery upon exercise of the Warrants evidenced
by this Warrant Certificate, free from preemptive rights, such number of
shares of authorized but unissued or treasury shares of Common Stock, or other
stock or securities deliverable pursuant to Section 5, as shall be required
for issuance or delivery upon exercise of the Warrants evidenced hereby. The
Company further agrees (i) that it will not, by amendment of its certificate
of incorporation or through reorganization, consolidation, merger, dissolution
or sale of assets, or by any other voluntary act, avoid or seek to avoid the
observance or performance of any of the covenants, stipulations or conditions
to be observed or performed hereunder by the Company and (ii) to promptly take
all action as may from time to time be required to permit the Holder to
exercise the Warrants evidenced hereby and the Company duly and effectively to
issue the Warrant Shares as provided herein upon the exercise hereof. Without
limiting the generality of the foregoing, the Company agrees that it will not
take any action which would result in Warrant Shares when issued not being
validly and legally issued and fully paid and nonassessable and that it will
take all such action as may be necessary to assure that the Warrant Shares may
be issued as provided herein without violation of any applicable law or
regulation, or of any requirements of the NASDAQ Stock Market or any other
stock exchange or market upon which the Common Stock may be listed; provided,
however, that the Company shall not be required to effect a registration under
federal or state securities laws with respect to such exercise except as
provided in the Investment Agreement. The Company further agrees that it will
not increase the par value of the Common Stock while the Warrants evidenced
hereby are outstanding, although such par value may be reduced at any time.
Section 5. Anti-Dilution.
The Exercise Price and the number of shares of Common Stock purchasable upon
the exercise hereof shall be subject to adjustment from time to time as
provided in this Section. Unless otherwise indicated, all calculations under
this Section 5 shall be made to the nearest $0.01 or 1/100th of a share, as
the case may be.
A-34
<PAGE>
(a) In case the Company shall (i) declare a dividend or make a distribution
on the outstanding Common Stock in capital stock of the Company, (ii)
subdivide or reclassify the outstanding Common Stock into a greater number of
shares (or into other securities or property), or (iii) combine or reclassify
the outstanding Common Stock into a smaller number of shares (or into other
securities or property), the number of Warrant Shares issuable upon the
exercise of each Warrant shall be adjusted so that the Holder of each Warrant
shall be entitled to purchase the kind and number of shares of Common Stock or
other securities or property of the Company determined by multiplying the
number of Warrant Shares issuable upon exercise of each Warrant immediately
prior to such event by a fraction, the numerator of which shall be the total
number of outstanding shares of Common Stock immediately after such event, and
the denominator of which shall be the total number of outstanding shares of
Common Stock immediately prior to such event. An adjustment made pursuant to
this paragraph (a) shall become effective immediately after the effective date
of such event, retroactive to the record date, if any, for such event. Any
Common Stock issuable in payment of a dividend shall be deemed to have been
issued immediately prior to the time of the record date for such dividend for
purposes of calculating the number of outstanding shares of Common Stock under
paragraphs (b) and (c) below. Adjustments pursuant to this paragraph shall be
made successively whenever any event specified above shall occur. Whenever the
number of Warrant Shares issuable upon exercise of a Warrant is adjusted
pursuant to this paragraph, the Exercise Price payable upon exercise of each
Warrant shall be adjusted by multiplying the Exercise Price in effect
immediately prior to such adjustment by a fraction, the numerator of which
shall be the number of Warrant Shares issuable upon the exercise of each
Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Warrant Shares issuable immediately thereafter.
(b) In case the Company shall fix a record date for the issuance of rights
or warrants to all holders of Common Stock entitling them to subscribe for or
purchase Common Stock (or securities convertible into or exchangeable of
Common Stock) (other than Series B Preferred Stock or Series B Warrants) at a
price per share (or having a conversion price or exchange price per share,
subject to normal antidilution adjustments) less than the Current Market Price
(as defined in paragraph (g) below) of the Common Stock on such record date,
the number of Warrant Shares thereafter issuable upon exercise of each Warrant
shall be determined by multiplying the number of Warrant Shares theretofore
issuable upon exercise of each Warrant by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding on the date of
issuance of such rights, options or warrants plus the number of additional
shares of Common Stock offered for subscription or purchase in connection with
such rights, options or warrants, and the denominator of which shall be the
number of shares of Common Stock outstanding on the date of issuance of such
rights, options or warrants plus the number of shares of Common Stock which
the aggregate offering price of the total number of shares of Common Stock so
offered would purchase at the Current Market Price as of such record date.
Such adjustment shall be made whenever such rights, options or warrants are
issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights, options or
warrants. Whenever the number of Warrant Shares issuable upon exercise of a
Warrant is adjusted pursuant to this paragraph, the Exercise Price payable
upon exercise of each Warrant shall be adjusted by multiplying the Exercise
Price in effect immediately prior to such adjustment by a fraction, the
numerator of which shall be the number of Warrant Shares issuable upon the
exercise of each Warrant immediately prior to such adjustment, and the
denominator of which shall be the number of Warrant Shares issuable
immediately thereafter.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of Common Stock (i) of shares of any class other
than Common Stock, (ii) of evidences of indebtedness of the Company or any
Subsidiary, (iii) of assets or other property or (iv) of rights or warrants
(excluding rights or warrants resulting in an adjustment pursuant to paragraph
(b) above, and the right to acquire Series B Preferred Stock and Series B
Warrants in the rights offering thereof), then in each such case the number of
Warrant Shares thereafter issuable upon exercise of each Warrant shall be
determined by multiplying the number of Warrants Shares theretofore issuable
upon the exercise of each Warrant by a fraction, the numerator of which shall
be the Current Market Price per share of Common Stock as of the record date
for such distribution, and the denominator of which shall be the then Current
Market Price per share of Common Stock, less the then fair market value (as
determined by the Board of Directors, whose reasonable determination shall be
described in a Board Resolution) of the portion
A-35
<PAGE>
of the securities, evidences of indebtedness, assets, property or rights or
warrants so distributed, the case may be, which is applicable to one share of
Common Stock. Such adjustment shall be made successively whenever such a
record date is fixed. Whenever the number of Warrant Shares issuable upon
exercise of a Warrant is adjusted pursuant to this paragraph, the Exercise
Price payable upon exercise of each Warrant shall be adjusted by multiplying
such Exercise Price immediately prior to such adjustment by a fraction, the
numerator of which shall be the number of Warrant Shares issuable upon the
exercise of each Warrant immediately prior to such adjustment, and the
denominator of which shall be the number of Warrant Shares purchasable
immediately thereafter.
(d) In case the Company shall issue its Common Stock for a consideration per
share less than the Current Market Price per share on the date the Company
fixes the offering price of such additional shares, the Exercise Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the total number of shares of Common
Stock outstanding immediately prior to the issuance of such additional shares
plus the number of shares of Common Stock which the aggregate consideration
received (determined as provided in paragraph (f) below) for the issuance of
such additional shares would purchase at the Current Market Price per share,
and the denominator shall be the number of shares of Common Stock outstanding
immediately after the issuance of such additional shares. Such adjustment
shall be made successively whenever such an issuance is made; provided,
however, that the provisions of this paragraph shall not apply (i) to Common
Stock issued to the Company's employees or former employees or their estates
under bona fide employee benefit plans adopted by the Board of Directors and
approved by the holders of Common Stock if required by law, if such Common
Stock would otherwise be covered by this paragraph, but only to the extent
that the aggregate number of shares excluded hereby shall not exceed, on a
cumulative basis since the Initial Exercise Date, [NUMBER TO BE AGREED BEFORE
CLOSING] (including 842,000 shares as of the Initial Exercise Date to be
issued pursuant to employee and director stock options outstanding as of the
Initial Exercise Date to purchase Common Stock), (ii) to Common Stock to be
issued pursuant to the Bank Warrants, (y) to Common Stock to be issued
pursuant to the Investor Warrants or the Series B Warrants and (iii) to Common
Stock to be issued upon conversion of Series A Preferred Stock or Series B
Preferred Stock, adjusted, as appropriate, in each case, connection with any
stock split, merger, recapitalization or similar transaction.
(e) In case the Company shall issue any securities convertible into or
exchangeable for Common Stock (excluding (A) securities issued in transactions
resulting in an adjustment pursuant to paragraphs (b) and (c) above, (B)
Series A Preferred Stock, (C) Series B Preferred Stock, (D) Series B Warrants
and (E) upon conversion of any of such securities) for a consideration per
share of Common Stock deliverable upon conversion or exchange of such
securities (determined as provided in paragraph (f) below and subject to
normal anti-dilution adjustments) less than the Current Market Price per share
in effect immediately prior to the issuance of such securities, the Exercise
Price shall be adjusted immediately thereafter so that it shall equal the
price determined by multiplying the Exercise Price in effect immediately prior
thereto by a fraction, of which the numerator shall be the number of shares of
Common Stock outstanding immediately prior to the issuance of such securities
plus the number of shares of Common Stock which the aggregate consideration
received (determined as provided in paragraph (f) below) for such securities
would purchase at the Current Market Price per share, and the denominator
shall be the number of shares of Common Stock outstanding immediately prior to
such issuance plus the maximum number of shares of Common Stock deliverable
upon conversion of or in exchange for such securities at the initial
conversion or exchange price or rate. Such adjustment shall be made
successively whenever such an issuance is made.
Upon the termination of the right to convert or exchange such securities,
the Exercise Price shall forthwith be readjusted to such Exercise Price as
would have been obtained had the adjustments made upon the issuance of such
convertible or exchangeable securities been made upon the basis of the
delivery of only the number of shares of Common Stock actually delivered upon
conversion or exchange of such securities and upon the basis of the
consideration actually received by the Company (determined as provided in
paragraph (f) below) for such securities.
A-36
<PAGE>
(f) For purposes of any computation respecting consideration received
pursuant to paragraphs (d) and (e) above, the following shall apply:
(i) in the case of the issuance of Common Stock for cash, the
consideration shall be the amount of such cash, provided that in no case
shall any deductions be made for any customary commissions, discounts,
placement fees or other expenses reasonably incurred by the Company for any
underwriting or placement of the issue or otherwise in connection
therewith;
(ii) in the case of the issuance of Common Stock for a consideration in
whole or in part other than cash, the consideration other than cash shall
be deemed to be the fair market value thereof as reasonably determined by
the Board of Directors, whose determination shall be described in a Board
Resolution; and
(iii) in the case of the issuance of securities convertible into or
exchangeable for Common Stock, the aggregate consideration received
therefor shall be deemed to be the consideration received by the Company
for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the
same manner as provided in clauses (i) and (ii) of this paragraph (f)).
(g) For the purpose of any computation under this Warrant, the "Current
Market Price" per share at any date shall be deemed to be the average of the
daily Sale Price for the Common Stock for the 10 consecutive Trading Days
commencing 14 Trading Days before such date.
(h) In any case in which this Section shall require that an adjustment shall
become effective immediately after a record date for an event, the Company may
defer until the occurrence of such event (i) issuing to the Holder of any
Warrant exercised after such record date and before the occurrence of such
event the additional Common Stock issuable upon such exercise by reason of the
adjustment required by such event over and above the Common Stock issuable
upon such exercise before giving effect to such adjustment and (ii) paying to
such Holder an amount in cash in lieu of a fractional share of Common Stock
pursuant to Section 3; provided, however, that the Company shall deliver to
such Holder a due bill or other appropriate instrument evidencing such
Holder's rights to receive such additional Common Stock, and such cash, upon
the occurrence of the event requiring such adjustment.
(i) No adjustment in the Exercise Price shall be required with respect to
Common Stock issued upon exercise of the Warrants unless such adjustment would
require a decrease of at least $.01; provided, however, that any such
adjustment which is not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
(j) The Company may make such reductions in the Exercise Price, in addition
to those required pursuant to other paragraphs of this Section, as it
considers to be advisable so that any event treated for federal income tax
purposes as a dividend of stock or stock rights shall not be taxable to the
recipients.
(k) In case of any consolidation with or merger of the Company into another
corporation, or in case of any sale, lease or conveyance of assets to another
corporation of the property of the Company as an entirety or substantially as
an entirety, such successor, leasing or purchasing corporation, as the case
may be, shall be bound by this Warrant Certificate and shall execute and
deliver to the Holder hereof simultaneously therewith a new Warrant
Certificate, reasonably satisfactory in form and substance to such Holder,
providing that the Holder of each Warrant then outstanding shall have the
right thereafter to exercise such Warrant solely for the kind and amount of
shares of stock, other securities, property or cash or any combination thereof
receivable upon such consolidation, merger, sale, lease or conveyance by a
holder of the number of shares of Common Stock for which such Warrant might
have been exercised immediately prior to such consolidation, merger, sale,
lease or conveyance.
(l) In case of any reclassification or change of the Common Stock issuable
upon exercise of the Warrants (other than a change in par value, or from par
value to no par value, or as a result of a subdivision or
A-37
<PAGE>
combination, but including any change in the Common Stock into two or more
classes or series of shares), or in case of any consolidation or merger of
another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property) of the Common Stock
(other than a change in par value, or from par value to no par value, or as a
result of a subdivision or combination, but including any change in the Common
Stock into two or more classes or series of shares), the Company shall execute
and deliver to the Holder hereof simultaneously therewith a new Warrant
Certificate, satisfactory in form and substance to such Holder, providing that
the Holder of each Warrant then outstanding shall have the right thereafter to
exercise such Warrant solely for the kind and amount of shares of stock, other
securities, property or cash or any combination thereof receivable upon such
reclassification, change, consolidation or merger by a holder of the number of
shares of Common Stock for which such Warrant might have been exercised
immediately prior to such reclassification, change, consolidation or merger.
(m) The foregoing paragraphs (k) and (1), however, shall not in any way
affect the rights a Holder may otherwise have, pursuant to this Section, to
receive securities, evidences of indebtedness, assets, property rights or
warrants upon exercise of a Warrant.
(n) Whenever there shall be any change in the Exercise Price under any
paragraph of this Section, and no specific means of adjusting the number of
Warrant Shares issuable upon exercise of each Warrant is provided in such
paragraph, then there shall be an adjustment (to the nearest hundredth of a
share) in the number of shares of Common Stock purchasable upon exercise of
this Warrant Certificate, which adjustment shall become effective at the time
such change in the Exercise Price becomes effective and shall be made by
multiplying the number of shares of Common Stock purchasable upon exercise of
this Warrant Certificate immediately before such change in the Exercise Price
by a fraction, the numerator of which is the Exercise Price immediately before
such change, and the denominator of which is the Exercise Price immediately
after such change. If, following the declaration of a record date for the
distribution of any rights, warrants or other securities or property to be
distributed to holders of Common Stock, such rights, warrants or other
securities or property are not so issued, the Exercise Price then in effect
shall be readjusted, effective as of the date when the Board of Directors
determines not to issue such rights or warrants, to the Exercise Price which
would then be in effect if a record date for such issuance had not been fixed.
(o) If the Company repurchases any Common Stock for a per share
consideration which exceeds the Current Market Price of a share of Common
Stock on the date immediately prior to such repurchase, then the Company shall
issue additional Warrants to the holder having the Exercise Price in effect on
the Trading Day immediately prior to such repurchase. The additional Warrants
issued pursuant to the preceding sentence shall entitle the Holder to purchase
the number of shares of Common Stock equal to the result obtained by dividing
(A) the product of (w) the number of shares of Common Stock repurchased at a
price in excess of the Current Market Price and (x) the amount by which the
per-share repurchase price exceeds such Current Market Price, by (B) the
amount by which (y) such Current Market Price exceeds (z) the Exercise Price
in effect as of the date immediately preceding such repurchase.
(p) If any event occurs as to which the foregoing provisions of this Section
are not strictly applicable or, if strictly applicable, would not, in the good
faith judgment of the Board of Directors, fairly protect the purchase rights
of the Warrants in accordance with the essential intent and principles of such
provisions, then such Board of Directors shall make such adjustments in the
application of such provisions, in accordance with such essential intent and
principles, as shall be reasonably necessary, in the good faith opinion of
such Board, to protect such purchase rights as aforesaid, but in no event
shall any such adjustment have the effect of increasing the Exercise Price or
decreasing the number of shares of Common Stock subject to purchase upon
exercise of this Warrant, or otherwise adversely affect the Holders. Under no
circumstances (other than (A)(x) a reverse stock split, (y) a recapitalization
in which all holders of Common Stock (and securities exercisable for or
convertible into Common Stock, with respect to such exercise or conversion
provisions) are treated equally and (z) a merger, in each case in which each
outstanding share of Common Stock is converted into less than one share of
Common
A-38
<PAGE>
Stock (including, in the case of a merger, of the entity surviving such
merger), or (B) as provided in Section 6) shall any adjustment pursuant to
this Section have the effect of raising the Exercise Price or lowering the
number of Warrant Shares issuable upon exercise of a Warrant.
(q) If, after one or more adjustments to the Exercise Price pursuant to this
Section 5, the Exercise Price cannot be reduced further without falling below
the lowest positive exercise price legally permissible for warrants to acquire
Common Stock, the Company shall make further adjustment to compensate the
holder, consistent with the foregoing principles, as the Board of Directors,
acting in good faith, deems necessary, including an increase in the number of
Warrant Shares issuable upon exercise of outstanding Warrants and/or a cash
payment to the Holder.
(r) For purposes of any adjustment to be made pursuant to this Section 5,
Common Stock owned or held at any relevant time by, or for the account of, the
Company in its treasury or otherwise, shall not be deemed to be outstanding
for purposes of the calculation and adjustments described therein, but shares
held in the Disputed Claims Reserve, Division Class 14 Utility Fund Trust
Agreement dated April 6, 1993 and the Improvements Fund Trust Agreement dated
April 6, 1993 shall not be deemed to be held by, or for the account of, the
Company.
Section 6. Additional Adjustment of Exercise Price.
(a) The Company will cause the financial statements for the Company and its
consolidated Subsidiaries for the fiscal year ending on December 31, 1998 to
be audited by Ernst & Young, LLP, or another national independent accounting
firm, and a manually signed copy of such financial statements to be delivered
by the Company to the Holders as soon as practicable following December 31,
1998, but in no event later than March 31, 1999 (the date such financial
statements are so delivered, the "Adjustment Date").
(b) The Exercise Price shall be reduced, effective as of the Adjustment
Date, by subtracting the Adjustment Amount from the Exercise Price; provided,
however, that (i) the Exercise Price shall only be adjusted pursuant to this
Section 6 if the Adjustment Amount is a positive number; (ii) in no event
shall the adjustment required by this Section 6 result in an Exercise Price
lower than [$2.00 FOR CLASS A] [$3.00 FOR CLASS B] [$4.00 FOR CLASS C] (as
adjusted pursuant to Section 5, the "Base Exercise Price"), and if the
adjustment required pursuant to this Section 6 would result in an Exercise
Price lower than the Base Exercise Price, then the Exercise Price shall be
reduced to the Base Exercise Price; and (iii) if the closing price for the
Common Stock (adjusted pursuant to Section 5) is greater than $9.75 both (A)
on the last trading day of 1998 and (B) on an average basis over the three
months ending on December 31, 1998, then no adjustment shall be made pursuant
to this Section 6.
The "Adjustment Amount" equals the product of (i) $.015 and (ii) the
quotient obtained by dividing (A) the difference between (x) the Actual
Cumulative Operating Cash Flow and (y) the Target Cumulative Operating Cash
Flow by (B) $100,000, where:
"Target Cumulative Operating Cash Flow" equals $62,443,000;
"Actual Cumulative Operating Cash Flow" equals the sum of the Actual
Operating Cash Flow for the year ending December 31, 1997 and the Actual
Operating Cash Flow for the year ending December 31, 1998, minus 0.15 times
the Excess 1998 Operating Cash Flow;
"Actual Operating Cash Flow" for any year means the net cash proceeds
derived by the Company from the operation in the ordinary course of its
business and from the bulk asset sales contemplated by the Business Plan,
calculated in all respects the same as, and using the same accounting
principles and practices and classification systems and techniques as were
used in, the calculation of the Target Cumulative Operating Cash Flow, as
described in summary format in Exhibit B to this Warrant. By way of
clarification, all revenue and cost items shall be associated for purposes of
calculating the Actual Operating Cash Flow with the same activities/categories
(such as "Net Subdivision Homesites") as they were in calculating the Target
Cumulative Operating Cash Flow.
A-39
<PAGE>
"Excess 1998 Operating Cash Flow" means the Actual Operating Cash Flow for
the year ending December 31, 1998 minus $3,028,000.
(c) No adjustment shall be made to the number of Warrant Shares issuable
upon exercise of a Warrant as a result of an adjustment to the Exercise Price
pursuant to this Section 6; provided, however, that this paragraph shall not
prevent adjustments otherwise required pursuant to another Section of this
Warrant from being made.
(d) If Company is involved in a merger, consolidation or similar
transaction, or to the extent that all or substantially all of the assets of
the Company are sold, in either case prior to the Adjustment Date, then an
adjustment to the Exercise Price shall be made pursuant to this Section 6 on a
pro rata basis by dividing both the Target Cumulative Operating Cash Flow and
the Actual Cumulative Operating Cash Flow derived by the Company's business
through the close of business on the date immediately prior to the effective
date of such transaction by a fraction, the numerator of which shall be the
number of days elapsed from the Initial Exercise Date through the business day
immediately prior to the effective date of such transaction and the
denominator of which shall be the number of days from the Initial Exercise
Date through February 28, 1999.
Section 7. Notice of Adjustments.
(a) Prior to the earlier to occur of (i) the declaration of a record date
for, or (ii) the announcement and/or consummation of, any event or action that
would result in an adjustment pursuant to Section 5 or Section 6, the Company
shall notify the Holder of such intended record date, announcement, event or
action. Such notice must be reasonably calculated to be delivered not less
than 20 nor more than 90 days prior to the applicable event.
(b) Whenever the Exercise Price is adjusted as provided in Section 5 or
Section 6:
(i) the Company shall compute the adjusted Exercise Price in accordance
with Section 5 or Section 6 and shall prepare a certificate signed by the
chief financial officer of the Company setting forth the adjusted Exercise
Price and showing in reasonable detail the facts upon which such adjustment
is based, including, if appropriate, a statement of the consideration
received or to be received by the Company for, and setting forth the amount
of, any additional Common Stock issued since the last such adjustment and
the number of shares of Common Stock for which the Warrants evidenced
hereby are exercisable at the then Exercise Price, and such certificate
shall forthwith be filed at the Warrant Office;
(ii) a notice stating that the Exercise Price and number of shares for
which each Warrant may be exercised have been adjusted and setting forth
the adjusted Exercise Price and number of shares for which each Warrant may
be exercised shall be communicated by telegram, telex, telecopier or any
other means of electronic communication capable of producing a written
record, or shall be delivered by hand or mailed as soon as practicable by
the Company to the Holder at its last address as it shall appear upon the
Warrant Register provided for in Section 2; and
(iii) the Company shall provide to the Holder such additional
information, including worksheets used in the calculation of any adjustment
made pursuant to Section 5 or Section 6, as the Holder may reasonably
request for the purpose of confirming the accuracy of such adjustment.
Section 8. No Rights as Shareholders; Notice to Holder.
Nothing contained herein shall be construed as conferring upon the Holder
the right to vote or to receive dividends or to receive notice as shareholders
in respect of the meetings of shareholders for the election of directors of
the Company or any other matter, or any rights whatsoever as shareholders of
the Company. If, however, at any time prior to the expiration of the Warrants
and prior to their exercise, any of the following shall occur:
(a) The Company shall authorize the issuance to all holders of Common Stock
of rights, options or warrants to subscribe for or purchase Common Stock, or
of any other subscription rights or warrants (other than the rights offering
of Series B Preferred Stock contemplated by the Investment Agreement); or
A-40
<PAGE>
(b) The Company shall authorize the distribution to all holders of Common
Stock of evidences of its indebtedness or assets (other than cash dividends or
cash distributions payable out of consolidated earnings or earned surplus or
dividends payable in Common Stock); or
(c) The Company shall propose any consolidation or merger to which the
Company is a party and for which approval of any stock of the Company is
required, or the conveyance or transfer of all or substantially all the
properties and assets of the Company, whether in one transaction or in a
series of transactions (whether by sale, lease or other disposition), or any
reclassification or change of outstanding Common Stock issuable upon exercise
of the Warrants (other than a change in par value or from par value to no par
value); or
(d) The Company shall propose the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then the Company shall cause to be given to the Holder at its address
appearing on the Warrant Register, at least 15 days prior to the applicable
record date hereinafter specified, by first class mail, postage prepaid, and,
if possible, by telecopy transmission, a written notice stating (i) the date
as of which the holders of record of Common Stock entitled to receive any such
rights, options, warrants or distribution are to be determined, or (ii) the
date on which any such consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up is expected to become effective or
consummated, and the date as of which it is expected that the holders of
record of Common Stock shall be entitled to exchange their shares for
securities or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up. The failure to give the notice required by this Section or any
defect therein shall not affect the legality or validity of any distribution,
right, option, warrant, consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up, or the vote upon any action.
Section 9. Restrictions on Transfer of the Warrants and Warrant Shares.
Until such time as an appropriate registration statement covering the
Warrants or the Warrant Shares has become effective under the Securities Act,
the Holder will not dispose of either the Warrants evidenced hereby or the
Warrant Shares, as the case may be, unless (i) the transferee has agreed to be
bound by the restrictions contained herein on such Warrants or Warrant Shares,
as the case may be, and (ii) except in the case of a transfer by the Holder to
an Affiliate, the Company shall have received an opinion of counsel (which
shall be reasonably satisfactory to the Company) to the effect that the sale
or other proposed disposition of the Warrants or Warrant Shares may be
accomplished without such registration under the Securities Act, which opinion
may be conditioned upon (x) acceptance by the transferee of a Warrant
Certificate or Certificates or Warrant Shares bearing a legend similar to that
set forth in Exhibit A and (y) a certificate of the transferee stating that
the Warrant(s) or Warrant Share(s) being acquired by such transferee are being
acquired by such transferee for its own account and not with a view to, or for
resale in connection with, the distribution thereof in violation of the
Securities Act.
Section 10. Execution of Warrant Certificates.
Each Warrant Certificate shall be executed on behalf of the Company by the
manual or facsimile signature of the present or any future Chairman of the
Board of Directors, President or Vice President of the Company.
Section 11. Maintenance of Office or Agency.
The Company will maintain a Warrant Office in [New York, New York], where
this Warrant Certificate may be presented or surrendered for subdivision,
combination, registration of transfer, or exchange and where notices and
demands to or upon the Company in respect of the Warrants evidenced hereby may
be served. The Company hereby initially designates [TO BE DESIGNATED] as the
agency of the Company for such purpose.
A-41
<PAGE>
Section 12. Severability.
If any one or more of the provisions contained herein, or the application
thereof in any circumstances, is held invalid, illegal or unenforceable in any
respect for any reason, the validity, legality, and enforceability of any such
provision in every other respect and the other remaining provisions hereof
shall not be in any way impaired or affected, it being intended that all of
the Holder's rights and privileges shall be enforceable to the fullest extent
permitted by law.
Section 13. Governing Law.
The Warrants shall be governed by and construed in accordance with the laws
of the State of Delaware.
Section 14. Definitions.
For all purposes of this Warrant Certificate, in addition to the other terms
defined elsewhere herein, unless the context otherwise requires:
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any specified person means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise.
"Appraisal Procedure" means a procedure whereby two independent appraisers
or other experts qualified to conduct the evaluation or calculation required
("Appraisers"), one chosen by the Company and one by the Holder entitled to
use the Appraisal Procedure (or, to the extent more than one Holder is so
entitled, by a majority in interest of the Holders so entitled), shall
mutually agree upon the determinations then the subject of appraisal,
evaluation or calculation. Each party shall deliver a notice to the other
appointing its Appraiser within 15 days after the Appraisal Procedure is
invoked. If within 30 days after appointment of the two Appraisers they are
unable to agree upon the amount in question, a third independent Appraiser
shall be chosen within 10 days thereafter by the mutual consent of such first
two Appraisers or, if such first two Appraisers fail to agree upon the
appointment of a third Appraiser, such appointment shall be made by the
American Arbitration Association, or any organization successor thereto, from
a panel of arbitrators having experience in the appraisal, evaluation or
calculation of the subject matter to be determined. The decision of the third
Appraiser so appointed and chosen shall be given within 30 days after the
selection of such third Appraiser. If three Appraisers shall be appointed and
the determination of one Appraiser is disparate from the middle determination
by more than twice the amount by which the other determination is disparate
from the middle determination, then the determination of such Appraiser shall
be excluded, the remaining two determinations shall be averaged and such
average shall be binding and conclusive on the Company and the Holders;
otherwise the average of all three determinations shall be binding and
conclusive on the Company and the Holders. The costs of conducting any
Appraisal Procedure shall be borne by the Holders requesting such Appraisal
Procedure, except (a) the fees and expenses of the Appraiser appointed by the
Company and any costs incurred by the Company shall be borne by the Company
and (b) if such Appraisal Procedure shall result in a determination that is
disparate by 5% or more from the Company's initial determination, all costs of
conducting such Appraisal Procedure shall be borne by the Company.
"Bank Warrants" means the 1,500,000 warrants for the purchase of Common
Stock issued on September 30, 1996 pursuant to the Prepayment Agreement dated
as of September 30, 1996 among the financial institutions listed on the
signature pages thereof, The Chase Manhattan Bank and the Company.
"Board of Directors" means either the Board of Directors of the Company or
any duly authorized committee of that board.
A-42
<PAGE>
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the
Board of Directors and to be in full force and effect on the date of such
certification and delivered to each of the Holders of the Warrants.
"Business Plan" means the 1997-1998 Business Plan of the Company previously
delivered to the Investor and certified to the Investor by the Company on the
date of issuance of this Warrant.
"Common Stock" means any stock of any class of the Company which has no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company, and which is not subject to redemption by the Company. However,
subject to Section 5, shares issuable on exercise of the Warrants evidenced
hereby, as contemplated by the first paragraph of this Warrant Certificate,
shall include only shares of the class designated as Common Stock of the
Company as of the date of this Warrant or shares of any class or classes
resulting from any reclassification or reclassifications thereof and which
have no preference in respect of dividends or of amounts payable in the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
Company and which are not subject to redemption by the Company; provided that
if at any time there shall be more than one such resulting class, the shares
of each such class then so issuable shall be substantially in the proportion
which the total number of shares of such class resulting from all such
reclassifications bears to the total number of shares of all such classes
resulting from all such reclassifications. As used in this Warrant
Certificate, "shares" shall include fractions thereof to the extent that
fractional shares of the Company are outstanding.
"Investment Agreement" means the Amended and Restated Investment Agreement
dated as of February 7, 1997 by and between the Investor and the Company,
amended as of March 20, 1997 and amended and restated as of May 15, 1997.
"Investor" means AP-AGC, LLC.
"Investor Warrants" means the 5,000,000 warrants to acquire Common Stock to
be issued to the Investor pursuant to the Investment Agreement.
"Person" shall mean any individual, firm, partnership, association, group
(as such term is used in Rule 13d-5 under the Securities Exchange Act of 1934,
as amended, as in effect on the date of this Warrant), corporation or other
entity.
"Sale Price" of the Common Stock means the last reported sale price regular
way reported on the NASDAQ Stock Market or its successor, or, if not listed or
admitted to trading on the NASDAQ Stock Market or its successor, the last
reported sale price regular way reported on any other stock exchange or market
on which the Common Stock is then listed or eligible to be quoted for trading,
or as reported by the National Quotation Bureau Incorporated.
"Series B Preferred Stock" means the 20% Cumulative Redeemable Convertible
Preferred Stock, Series B, par value $.01 per share, of the Company, which may
be issued in accordance with the Investment Agreement.
"Series B Warrants" means up to 4,000,000 warrants to acquire Common Stock
which may be issued to acquirers of Series B Preferred Stock.
"Subsidiary" means any subsidiary of the Company, a majority of whose
capital stock with voting power, under ordinary circumstances, to elect
directors is at the time, directly or indirectly owned by the Company, by one
or more subsidiaries of the Company or by the Company and one or more
subsidiaries of the Company.
"Trading Day" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday, other than any day on which securities are not traded on the exchange
or market where the Warrants are listed or sold.
Section 15. Fees and Expenses.
A-43
<PAGE>
All fees and expenses incurred by the Holder in connection with the Holder's
ownership of Warrants and securities or other property received upon exercise
thereof which relate to (i) any required regulatory filings, (ii) registration
fees, (iii) stock exchange or NASDAQ listing fees, and (iv) reasonable fees
and expenses of counsel to the Company in connection with the foregoing, shall
be paid by the Company.
Section 16. Contest and Appraisal Rights.
Upon each determination of fair market value or other evaluation or
calculation required hereunder (including calculation of the Adjustment
Amount), the Company shall promptly give notice thereof to all Holders,
setting forth in reasonable detail the calculation of such fair market value
or valuation (or Adjustment Amount) and the method and basis of determination
thereof, as the case may be. If any Holders of Warrants to purchase at least
100,000 shares of Common Stock (including, for purposes of determining such
level of ownership, all Warrants owned by affiliates of such Holders) shall
disagree with such determination and shall, by notice to the Company given
within 15 days after the Company's notice of such determination, elect to
dispute such determination, such dispute shall be resolved in accordance with
the Appraisal Procedure.
Section 17. Additional Warrants to be Issued at Current Exercise Price.
Notwithstanding any other provision of this Warrant, to the extent the
Holder is entitled to receive additional Warrants in accordance with the terms
hereof, the Warrants so issued shall have terms identical to this Warrant,
except that (i) the initial Exercise Price for such additional Warrants shall
be deemed to be the Exercise Price in effect on the date such additional
Warrants are issued and (ii) the amount and kind of securities and/or other
property issuable upon exercise of such Warrants shall be deemed to be the
amount and kind of securities and/or other property issuable upon exercise of
the Warrants outstanding immediately prior to issuance of such additional
Warrants.
Dated: ________, 1997 ATLANTIC GULF COMMUNITIES
CORPORATION
By: _________________________________
Name:
Title
ATTEST:
_____________________________________
Secretary
A-44
<PAGE>
NOTICE OF ELECTION TO EXERCISE
The undersigned hereby irrevocably elects to exercise the within Warrant to
the extent of purchasing shares of Common Stock and hereby makes payment
of the Exercise Price in cash in the amount of $ .
NAME OF HOLDER:
_____________________________________
(Please Print)
By: _________________________________
Date: _________, 199.
Instructions for Registration of Stock
Name: _______________________________
(please type or print in block
letters)
Address: ____________________________
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF SUCH REGISTRATION OR
THE AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION. SUCH SECURITIES MAY
NOT BE SOLD, TRANSFERRED OR ASSIGNED EXCEPT UPON COMPLIANCE WITH THE
REQUIREMENTS FOR TRANSFER SET FORTH HEREIN.
A-45
<PAGE>
EXHIBIT B TO WARRANT CERTIFICATE
ATLANTIC GULF COMMUNITIES CORPORATION
CALCULATION PRINCIPLES AND POLICIES FOR
WARRANT ADJUSTMENT FORMULA AND OPERATING CASH FLOW TARGETS (1)
Target Cumulative Operating Cash Flow was calculated as follows (capitalized
terms having the meanings set forth in the attached Warrant):
Target for Year ended 12/31,
<TABLE>
<CAPTION>
1997 1998
--------------- --------------
<S> <C> <C>
Net GDC Bulk Asset Sales (2)................ $ 54,743,000.00 $ 0.00
Utility Trust............................... 10,000,000.00 0.00
Net Subdivision Homesites (3)............... 9,000,000.00 11,128,000.00
Overhead (4)................................ (14,328,000.00) (8,100,000.00)
--------------- --------------
Total Operating Target...................... 59,415,000.00 3,028,000.00
Cumulative Total Target..................... $ 59,415,000.00 $62,443,000.00
</TABLE>
Target Cumulative Operating Cash Flow = $62,443,000.00
(1) Operating Cash Flow excludes capital transactions such as financings,
refinancings, any equity issuances, sale in bulk of assets or subdivisions and
any other transactions not in the ordinary course of business, except for GDC
Bulk Asset Sales and Utility Trust proceeds as set forth above.
(2) Includes the net cash proceeds from the sale or non-recourse financing
of any mortgages (Seller Paper) generated from GDC bulk asset sales, but
excludes any sales of assets or financings classified as "Scattered Homesites"
(bulk or otherwise) in the Business Plan. For the purpose of this calculation,
mortgages will be treated as follows: Cash Flow payments will be discounted at
15% per year, as long as the aggregate principal outstanding of mortgages at
any time is less than $10,000,000.00, otherwise the incremental amount of
mortgages will be treated in the same manner but using a 20% discount rate.
(3) "Net Subdivision Homesites" as described in the Business Plan, subject
to any further Business Plan changes approved by the Board of Directors and
the Investor.
(4) "Overhead" as described in the Business Plan.
A-46
<PAGE>
APPENDIX B (1)
[TALLWOOD ASSOCIATES, INC. LETTERHEAD]
February 7, 1997
Board of Directors
Atlantic Gulf Communities Corporation
2601 South Bayshore Drive
Miami, Florida 33133-5461
Gentlemen:
We understand that a transaction has been proposed (the "Proposed
Transaction") whereby Atlantic Gulf Communities Corporation (the "Company")
would issue 25,000 shares of Series A Redeemable Cumulative Convertible
Preferred Stock (the "Preferred Stock") to Apollo Real Estate Investment Fund,
L.P. or an entity affiliated therewith or advised thereby ("Apollo") and
warrants to purchase up to 5,000,000 shares of common stock of the Company
(the "Warrants") for an aggregate purchase price of $25 million. The Preferred
Stock would have a dividend rate of 20% per annum and would be convertible
into common stock of the Company ("Common Stock") at a conversion price of
$5.75 per share subject to adjustments. The Warrants would have an initial
exercise price of $5.75 per share subject to adjustments. The terms and
conditions of the Proposed Transaction are set forth in more detail in the
Letter of Intent including the Term Sheet attached thereto, dated as of
January 14, 1997, between the Company and Apollo (the "Letter of Intent"), the
Investment Agreement (including the exhibits thereto), dated as of February 7,
1997, between the Company and Apollo (the "Agreement"), and the Secured Note
Agreement (including the exhibits thereto), dated as of February 7, 1997,
between Apollo and the Company and certain of its subsidiaries (the "Secured
Note Agreement").
You have asked Tallwood Associates, Inc. ("Tallwood") whether, in its
opinion, the terms and conditions of the Proposed Transaction, including the
terms and conditions of the Preferred Stock and the Warrants, are fair to the
stockholders of the Company from a financial point of view.
Tallwood, as part of its investment banking and financial advisory business,
is regularly engaged in the assistance of companies in obtaining financing,
refinancing and restructuring of indebtedness and in valuing businesses and
their securities in connection with mergers and acquisitions, underwritings,
secondary distributions of listed and unlisted securities, private placements
and for other corporate purposes.
In conducting our analysis, we have, among other things: a) reviewed (i) the
Letter of Intent, the Agreement, including the Certificate of Designation of
the Series A Preferred Stock, the Warrant Certificate, and the Secured Note
Agreement; (ii) the Company's cash flow projections and underlying assumptions
reflecting a liquidation scenario, the Company's cash flow, income statement
and balance sheet projections and underlying assumptions reflecting a growth
scenario assuming the Proposed Transaction is not consummated and the
Company's cash flow, income statement and balance sheet projections and
underlying assumptions reflecting a growth scenario assuming the Proposed
Transaction is consummated; (iii) a cash flow and valuation model prepared by
Apollo; (iv) the Company's Forms 10-K for the years ended December 31, 1993,
December 31, 1994 and December 31, 1995, the Company's Forms 10-Q for the
periods ended March 31, 1996, June 30, 1996 and September 30, 1996, and
unaudited financial information for the period ended December 31, 1996; (v)
the terms and conditions of other transactions that we deem similar to the
Proposed Transaction; (vi) reported market prices and trading volumes of the
Common Stock for the past 25 months; (vii) a list of prospective investors
contacted by BT Securities Corporation ("BTSC") in connection with a proposed
$160 recapitalization of the Company; and (viii) other information that we
believe to be relevant to our analysis, that was publicly available or
furnished to us by the Company, including information provided to us during
discussions with its management, directors and
B(1)-1
<PAGE>
advisors; and (b) interviewed (i) the Company's senior management, as to the
business and prospects of the Company and as to the possible benefits of the
Proposed Transaction; (ii) certain of Apollo's senior management, as to the
possible benefits of the Proposed Transaction; and (iii) senior executives of
BTSC, the Company's financial advisor, in connection with the Proposed
Transaction, as to the possible benefits of the Proposed Transaction and as to
BTSC's efforts over the past 14 months to secure financing for the Company's
proposed recapitalization. We have also considered such other information,
financial studies, analyses, and investigations and financial, economic and
market criteria which we deem relevant.
In performing its analysis and rendering its opinion, Tallwood relied upon
the accuracy and completeness of all information provided to it, whether
obtained from private or public sources, including that from the Company,
Apollo and BTSC, and upon the assurances of management of the Company that
they are not aware of any facts that would make such information materially
inaccurate or misleading and did not attempt to independently verify any such
information or undertake an independent appraisal of the Company or its
assets, nor have we been furnished with any such appraisals. With respect to
financial forecasts examined by us, we have assumed that these have been
reasonably prepared on bases reflecting the best currently available estimates
and good faith judgments of the Company's management as to the expected future
financial performance of the Company. Our opinion necessarily is based upon
market, economic and other conditions as they exist on, and can be evaluated
as of, the date of this letter. It should be understood that, although
subsequent developments may affect this opinion, Tallwood does not have any
obligation to update, revise or reaffirm this opinion to reflect such
developments.
This opinion does not address the business decision of the Board of
Directors of the Company to engage in the Proposed Transaction or constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote on the Proposed Transaction. We have advised the Board of
Directors of the Company that, based on the terms of Tallwood's engagement by
the Company, we do not believe that any person (including any stockholder of
the Company), other than the Company and the Board of Directors of the
Company, has the legal right to rely upon this letter to support any claim
against Tallwood arising under applicable state law and that, should any such
claim be brought against Tallwood by any such person, this assertion would be
raised as a defense. In the absence of applicable state law, the availability
of such a defense would be resolved by a court of competent jurisdiction.
Resolution of the question of the availability of such a defense, however,
would have no effect on the rights and responsibilities of the Board of
Directors of the Company under applicable state law. Furthermore, the
availability of such a defense to Tallwood would have no effect on the rights
and responsibilities of either Tallwood or the Board of Directors of the
Company under the federal securities laws.
We have assumed (which assumption we have no reason to believe is
unreasonable but have made no independent investigation with respect thereto)
that the fair market value as of February 6, 1997 of one share of Common Stock
is $4.69, which equals the current last reported closing sale price of the
Common Stock as reported on the NASDAQ National Market. No opinion is
expressed herein nor should one be implied as to the fair market value of such
Common Stock or as to the price or trading range at which such shares may
trade at any time.
We are acting as financial advisor to the Company and the Board of Directors
of the Company in connection with rendering this opinion and will receive a
fee from the Company for such services. We have provided other services to the
Company in the past for which we received customary compensation. Principals
or employees of Tallwood may actively trade the securities of the Company for
their own accounts and, accordingly, may at any time hold a long or short
position in such securities.
This opinion is delivered to you based on your understanding that it is for
the benefit and use of the Board of Directors of the Company in considering
the Proposed Transaction and that the Company will not use this opinion for
any other purpose and will not reproduce, disseminate or refer to this opinion
without our prior written consent, except as provided by law; provided,
however, that the opinion may be included in a proxy statement distributed in
connection with a meeting of the Company's stockholders to consider and act on
the
B(1)-2
<PAGE>
Proposed Transaction and, as a result, the opinion will be described in such
proxy statement and reproduced in such proxy statement in full. On the basis
of, and subject to the foregoing, we are of the opinion that the terms and
conditions of the Proposed Transaction, including the terms and conditions of
the Preferred Stock and the Warrants, are fair to the stockholders of the
Company from a financial point of view as of the date hereof.
Very truly yours,
B(1)-3
<PAGE>
APPENDIX B(2)
[TALLWOOD ASSOCIATES, INC. LETTERHEAD]
May 15, 1997
Board of Directors
Atlantic Gulf Communities Corporation
2601 South Bayshore Drive
Miami, Florida 33133-5461
Gentlemen:
On February 7, 1997 Tallwood Associates, Inc. ("Tallwood") provided its
opinion (the "Opinion") to the Board of Directors of Atlantic Gulf Communities
Corporation (the "Company") that the terms and conditions of the Proposed
Transaction, including the terms and conditions of the Series A Preferred
Stock and the associated Warrants, were fair to the Company's stockholders
(the "Stockholders") from a financial point of view. Capitalized terms not
defined herein shall have the meanings set forth in the Opinion.
Subsequent to the rendering of our Opinion, certain modifications (the
"Modifications") to the Proposed Transaction were agreed to by the principal
parties. The Modifications are set forth in the Amended and Restated
Investment Agreement dated as of February 7, 1997, Amended as of March 20,
1997 and Amended and Restated as of May 15, 1997 (the "Amended Agreement") and
are further described in the Company's definitive proxy material. For purposes
of this opinion, the Modifications include the Company's private placement of
preferred and common equity and warrants to acquire common equity in the
amounts and on the terms set forth in the Company's definitive proxy material
(the "Private Placement").
You have asked Tallwood whether, in our opinion, the terms and conditions of
the Modifications, taken in the aggregate, would alter the conclusions reached
in the Opinion.
Tallwood, as part of our investment banking and financial advisory business,
is regularly engaged in the assistance of companies in obtaining financing,
refinancing and restructuring of indebtedness and in valuing businesses and
their securities in connection with mergers and acquisitions, underwritings,
secondary distributions of listed and unlisted securities, private placements
and for other corporate purposes.
In conducting our analysis, we have, among other things: a) reviewed (i) the
Amended Agreement (ii) the Company's definitive proxy material; (iii) the
Company's cash flow projections and underlying assumptions assuming the
Proposed Transaction after giving affect to the Modifications; and (iv) other
information that we believe to be relevant to our analysis that was publicly
available or furnished to us by the Company, including information provided to
us during discussions with Company management, directors and advisors; and (b)
interviewed the Company's senior management, as to the Company's business and
prospects and as to the possible benefits of the Modifications. We have also
considered such other information, financial studies, analyses, and
investigations and financial, economic and market criteria which we deem
relevant.
In performing our original analysis and rendering the Opinion and this
opinion, Tallwood relied upon the accuracy and completeness of all information
provided to us, whether obtained from private or public sources, including
that from the Company and upon the assurances of its management that they were
not aware of any facts that would make such information materially inaccurate
or misleading and did not attempt to independently verify any such information
or undertake an independent appraisal of the Company or its assets, nor were
we furnished with any such appraisals. With respect to financial forecasts
examined by us, we assumed that these were reasonably prepared on bases
reflecting the best estimates then available and good faith judgments of the
B(2)-1
<PAGE>
Company's management as to the Company's expected future financial
performance. The opinion rendered in connection with the Modifications is
based upon market, economic and other conditions that existed on, and were
evaluated as of, the date of the Opinion. Although subsequent developments may
have affected the Opinion, Tallwood has not updated or revised its analysis to
reflect such developments for purposes of rendering this opinion.
This opinion (like the Opinion) does not address the business decision of
the Company's Board of Directors to engage in the Proposed Transaction as
altered by the Modifications or constitute a recommendation to any Stockholder
as to how such Stockholder should vote on the Proposed Transaction as altered
by the Modifications. We have advised the Company's Board of Directors that,
based on the terms of Tallwood's engagement by the Company, we do not believe
that any person (including any Stockholder), other than the Company and its
Board of Directors, has the legal right to rely upon this letter to support
any claim against Tallwood arising under applicable state law and that, should
any such claim be brought against Tallwood by any such person, this assertion
would be raised as a defense. In the absence of applicable state law, the
availability of such a defense would be resolved by a court of competent
jurisdiction. Resolution of the question of the availability of such a
defense, however, would have no effect on the rights and responsibilities of
the Company's Board of Directors under applicable state law. Furthermore, the
availability of such a defense to Tallwood would have no effect on the rights
and responsibilities of either Tallwood or the Company's Board of Directors
under the federal securities laws.
We have assumed (which assumption we have no reason to believe is
unreasonable but have made no independent investigation with respect thereto)
that the fair market value as of February 6, 1997 of one share of Common Stock
was $4.69, which equaled the current last reported closing sale price of the
Common Stock as reported on the NASDAQ National Market. No opinion is
expressed herein nor should one be implied as to the fair market value of such
Common Stock or as to the price or trading range at which such shares may
trade at any time.
We are acting as financial advisor to the Company and its Board of Directors
in connection with rendering the Opinion and this opinion and have received
and will receive fees from the Company for such services. We have provided
other services to the Company in the past for which we received customary
compensation. Principals or employees of Tallwood may actively trade the
securities of the Company for their own accounts and, accordingly, may at any
time hold a long or short position in such securities.
This opinion is delivered to you based on your understanding that it is for
the benefit and use of the Company's Board of Directors in considering the
Modifications to the Proposed Transaction and that the Company will not use
this opinion for any other purpose and will not reproduce, disseminate or
refer to this opinion without our prior written consent, except as provided by
law; provided, however, that the opinion may be included in a proxy statement
distributed in connection with a meeting of the Stockholders to consider and
act on the Proposed Transaction as altered by the Modifications and, as a
result, the opinion will be described in such proxy statement and reproduced
in such proxy statement in full. On the basis of, and subject to the foregoing
as well as the purchase and sale of Series A Preferred Stock and Investor
Warrants having an aggregate purchase price of at least $5 million at the
Closing and the obligation under the Modifications for the purchase and sale
of an additional amount of Series A Preferred Stock and Investor Warrants to
total $25 million in the aggregate by June 30, 1998, we are of the opinion
that the Modifications, taken in the aggregate, are fair to the Stockholders
from a financial point of view as of February 7, 1997, whether or not the
Private Placement is consummated.
Very truly yours,
B(2)-2
<PAGE>
APPENDIX C
PROPOSAL TO AMEND THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION TO
EFFECT THE PROPOSED REVERSE AND FORWARD STOCK SPLITS
A. 1-FOR-100 REVERSE STOCK SPLIT
Resolved, that the Board finds it advisable that Article Fourth of the
Company's restated certificate of incorporation be amended to effect a reverse
stock split of the Company's issued and outstanding common stock as of the
close of business on the effective date of the amendment, pursuant to which
each 100 shares then outstanding will be converted into one share, and to
effect a forward split of the Company's common stock as of 6:00 a.m. (Florida
time) on the day following the effective date of the Reverse Split, pursuant
to which each share of common stock then outstanding as of such date and time
will be converted into 100 shares of the Company's common stock and directs
that the proposed stock splits be submitted to the stockholders for their
consideration and approval.
Resolved further, that prior to the Company's annual meeting of stockholders
in 1997, on the condition that no other amendment to the Company's restated
certificate of incorporation shall have been filed after April 15, 1996
effecting a reverse stock split of the Common Stock, Article Fourth of the
Company's restated certificate of incorporation shall be amended by the
addition of the following provisions:
As of 5:00 p.m. (Florida time) on the effective date of this amendment, each
share of the Corporation's Common Stock held of record shall be and hereby is
automatically reclassified and changed, without further action, into one-one
hundredth ( 1/100) of a share of the Corporation's Common Stock, provided that
no less than one whole share shall be issued pursuant to such reclassification
and change. Each holder of a certificate or certificates which immediately
prior to the effective date of the amendment represented Common Stock of the
Corporation in respect of which the holder who would otherwise be entitled to
less than one whole share as a result of such reclassification and change
shall be entitled to receive, upon surrender of such certificate or
certificates, the cash value of such fractional shares based upon the average
closing price per share of the Corporation's Common Stock as reported on the
NASDAQ National Market for the 10 trading days preceding the effective date of
this amendment. As of 6:00 a.m. (Florida time) on the day following the
effective date of this amendment, each share of the Corporation's Common Stock
and any fraction thereof held by a record holder of one or more shares shall
be and hereby is automatically reclassified and changed, without further
action, into the Corporation's Common Stock, on the basis of one hundred (100)
new shares of Common Stock per share of Common Stock held of record
immediately after the effective date of the amendment. Any fractional share of
the Corporation's new Common Stock resulting from such change shall be rounded
to the nearest whole share. From and after the effective date of the
amendment, the amount of capital represented by the Corporation's Common Stock
immediately after the effectiveness of this amendment shall be the same as the
amount of capital represented by such shares immediately prior to the
effectiveness of this amendment, until thereafter reduced or increased in
accordance with applicable law.
Resolved further, that at any time prior to the filing with the Secretary of
State of the State of Delaware of the foregoing amendment to Article Fourth of
the Company's restated certificate of incorporation effecting a 100-to-one
reverse stock split followed by a 100-to-one forward stock split of the
Company's common stock, notwithstanding authorization of the proposed
amendment by the Company's stockholders, the Board may abandon such proposed
amendment without further action by the stockholders, if for any reason the
Board deems it advisable to abandon such foregoing amendment.
Resolved further, that the Board recommends that the stockholders approve
the proposed stock splits.
B. 1-FOR-200 REVERSE STOCK SPLIT
Resolved, that the Board finds it advisable that Article Fourth of the
Company's restated certificate of incorporation be amended to effect a reverse
stock split of the Company's issued and outstanding common stock
C-1
<PAGE>
as of the close of business on the effective date of the amendment, pursuant
to which each 200 shares then outstanding will be converted into one share,
and to effect a forward split of the Company's common stock as of 6:00 a.m.
(Florida time) on the day following the effective date of the Reverse Split,
pursuant to which each share of common stock then outstanding as of such date
and time will be converted into 200 shares of the Company's common stock and
directs that the proposed stock splits be submitted to the stockholders for
their consideration and approval.
Resolved further, that prior to the Company's annual meeting of stockholders
in 1997, on the condition that no other amendment to the Company's restated
certificate of incorporation shall have been filed after April 15, 1996
effecting a reverse stock split of the Common Stock, Article Fourth of the
Company's restated certificate of incorporation shall be amended by the
addition of the following provisions:
As of 5:00 p.m. (Florida time) on the effective date of this amendment, each
share of the Corporation's Common Stock held of record shall be and hereby is
automatically reclassified and changed, without further action, into one-two
hundredth ( 1/200) of a share of the Corporation's Common Stock, provided that
no less than one whole share shall be issued pursuant to such reclassification
and change. Each holder of a certificate or certificates which immediately
prior to the effective date of the amendment represented Common Stock of the
Corporation in respect of which the holder who would otherwise be entitled to
less than one whole share as a result of such reclassification and change
shall be entitled to receive, upon surrender of such certificate or
certificates, the cash value of such fractional shares based upon the average
closing price per share of the Corporation's Common Stock as reported on the
NASDAQ National Market for the 10 trading days preceding the effective date of
this amendment. As of 6:00 a.m. (Florida time) on the day following the
effective date of this amendment, each share of the Corporation's Common Stock
and any fraction thereof held by a record holder of one or more shares shall
be and hereby is automatically reclassified and changed, without further
action, into the Corporation's Common Stock, on the basis of two hundred (200)
new shares of Common Stock of the Corporation per share of Common Stock held
of record immediately after the effective date of the amendment. Any
fractional share of the Corporation's new Common Stock resulting from such
change shall be rounded to the nearest whole share. From and after the
effective date of the amendment, the amount of capital represented by the
Corporation's Common Stock immediately after the effectiveness of this
amendment shall be the same as the amount of capital represented by such
shares immediately prior to the effectiveness of this amendment, until
thereafter reduced or increased in accordance with applicable law.
Resolved further, that at any time prior to the filing with the Secretary of
State of the State of Delaware of the foregoing amendment to Article Fourth of
the Company's restated certificate of incorporation effecting a 1-for-200
reverse stock split followed by a 200-for-1 forward stock split of the
Company's common stock, notwithstanding authorization of the proposed
amendment by the Company's stockholders, the Board may abandon such proposed
amendment without further action by the stockholders, if for any reason the
Board deems it advisable to abandon such foregoing amendment.
Resolved further, that the Board recommends that the stockholders approve
the proposed stock splits.
C-2
<PAGE>
ATLANTIC GULF COMMUNITIES CORPORATION
Annual Meeting of Stockholders to be held on June 23, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY'S BOARD OF DIRECTORS
The undersigned, a stockholder of Atlantic Gulf Communities Corporation, a
Delaware corporation (the "Company"), hereby acknowledges receipt of the proxy
statement dated May 21, 1997 and appoints James W. Apthorp, J. Larry Rutherford
and Thomas W. Jeffrey or any of them, attorneys and proxies of the undersigned,
with full power of substitution to vote and act for the undersigned at the
Company's annual meeting of stockholders to be held at the Hyatt Regency Miami,
400 S.E. Second Avenue, Miami, Florida on Monday, June 23, 1997 at 11:00 a.m.
(Florida time), and at any adjournment thereof, in respect of all of the
Company's common stock registered in the name of the undersigned as fully as the
undersigned could vote and act if personally present, as directed on the reverse
side of this card, and in their discretion, on any other matters which may
properly come before the meeting or any adjournment thereof. This proxy, when
properly executed, will be voted as directed herein. However, if no direction is
given, this proxy will be voted FOR proposals 1, 2 and 3 on the reverse of this
proxy card.
(To be Signed on Reverse Side)
<PAGE>
Please date, sign and mail your
proxy card back as soon as possible!
Annual Meeting of Stockholders
ATLANTIC GULF COMMUNITIES CORPORATION
June 23, 1997
Please Detach and Mail in the Envelope Provided
- --------------------------------------------------------------------------------
A [X] Please mark your
votes as in this
example.
1. To consider and vote upon a proposal to approve (a) an Amended and Restated
Certificate of Incorporation of the Company which would, among other
things, (i) increase the number of authorized shares of the Company common
stock from 15,665,000 shares to 70,000,000 and (ii) authorize the Company's
issuance of 4,500,000 shares of 20% cumulative redeemable convertible
preferred stock with a liquidation preference of $10 per share, of which
2,500,000 shares would be designated Series A Preferred Stock, and
2,000,000 shares would be designated Series B Preferred Stock; (b) certain
investment transactions involving, among other things, (i) the issuance to
an investor of up to 2,500,000 shares of Series A Preferred Stock and
warrants to purchase up to 5,000,000 shares of Common Stock, (ii) the grant
to such investor of representation on the Company's board of directors,
(iii) the issuance and sale in a potential private placement to certain
other investors of up to 1,000,000 shares of Series B Preferred Stock,
shares of newly issued common stock with a fair market value of up to
$10,000,000 and warrants to purchase up to 2,000,000 shares of common
stock; (iv) the making available for sale to existing stockholders in a
rights offering up to 1,000,000 shares of Series B Preferred Stock and
warrants to purchase up to 2,000,000 shares of common stock and (c) an
amendment to the 1994 Non-Employee Directors' Stock Option Plan which would
provide for the extension of the exercise period of those options held by
directors who will resign upon consummation of certain of the investment
transactions.
FOR [_] AGAINST [_] ABSTAIN [_]
2. Election of Class 2 Directors FOR [_] WITHHELD [_]
Nominees: James W. Apthorp, Jerome J. Cohen and Lawrence B. Seidman
For, except vote withheld from the following nominee(s):
-----------------------------------------
3. Proposal to amend the Company's certificate of incorporation (a)
to effect, as determined by the board of directors in its discretion,
either of two different reverse stock splits of the Company's outstanding
common stock as of the close of business on the effective date of the
amendment, pursuant to which either (i) each 100 shares then outstanding
will be converted into one share, or (ii) each 200 shares then outstanding
will be converted into one share and (b) to effect a forward split of the
common stock as of 6:00 a.m. (Florida time) on the day following the
effective date of the reverse split, pursuant to which each share of common
stock then outstanding as of such date will be converted into the number of
shares of common stock that such shares represented immediately prior to
the effective date of the reverse stock split.
FOR [_] AGAINST [_] ABSTAIN [_]
Signature(s)_____________________________ Date ________, 1997
NOTE: Please date this proxy and sign exactly as name appears herein. Joint
owners must each sign. When signing as attorney, executor, administrator,
trustee, guardian or other representative capacity, please give full
title.
