<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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
/X/ Definitive Proxy Statement of the Commission
/ / Definitive Additional Materials Only (as permitted by Rule
/ / Soliciting Material Pursuant to 14a-6(e)(2))
Rule 14a-11 or Rule 14a-12
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No Fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Class A Units of Limited Partner Interest
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2) Aggregate number of securities to which transaction applies:
1,800,000
-----------------------------------------------------------------------
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). $23.94 --
Average of High and Low Price on 7-29-97*
-----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
$43,092,000.00
-----------------------------------------------------------------------
5) Total fee paid:
$8,618.40
-----------------------------------------------------------------------
* Of Shares of the Registrant Underlying the Securities To Which
Transaction Applies
/X/ 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:
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<PAGE>
[GRAPHIC OMITTED]
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Pennsylvania Real Estate Investment Trust (the "Trust") to be held at 10:00
a.m., EDT, on September 29, 1997, at Philadelphia Marriott West, 111 Crawford
Road, West Conshohocken, Pennsylvania. At the Meeting, you will be asked to
approve a transaction in which the Trust will acquire substantially all of the
equity of The Rubin Organization, Inc. ("TRO") and interests in a number of
shopping center projects in various stages of completion. In connection with
the proposed transaction, Ronald Rubin, currently the Chief Executive Officer
of TRO, will become the Chief Executive Officer of the Trust. The proposed
transaction includes a number of inter-related matters, including the formation
of an operating partnership by the Trust which will hold substantially all of
the Trust's real property interests. The proposed transaction with TRO is
described more fully in the formal notice of special meeting and in the proxy
statement which appear on the following pages.
At the Special Meeting, Shareholders will also be asked to vote on (i)
amendments to the Trust Agreement of the Trust, (ii) amendments to the Trust's
1990 Incentive and Nonqualified Stock Option Plan, and (iii) the Trust's 1997
Stock Option Plan.
At the Meeting we will respond to any questions you may have.
Your Board of Trustees recommends that you vote to approve the transaction
with TRO and the other matters to be voted upon at the Special Meeting.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the
Meeting, it is important that your shares be represented. Therefore, I urge you
to sign, date, and promptly return the enclosed proxy in the enclosed postage
paid envelope. If you attend the Meeting, you will, of course, have the
privilege of voting in person.
I look forward to greeting you personally; and on behalf of the Board of
Directors and management of the Trust, I would like to express our appreciation
for your interest in Pennsylvania Real Estate Investment Trust.
Sincerely,
SYLVAN M. COHEN
Chairman and Chief Executive
Officer
Fort Washington, Pennsylvania
August 27, 1997
<PAGE>
[GRAPHIC OMITTED]
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
---------------------
NOTICE OF SPECIAL MEETING OF
HOLDERS OF CERTIFICATES OF BENEFICIAL INTEREST
SEPTEMBER 29, 1997
---------------------
A Special Meeting of Holders of Certificates of Beneficial Interest
("Shareholders") of Pennsylvania Real Estate Investment Trust (the "Trust")
will be held on Monday, September 29, 1997, at 10:00 a.m., local time, at the
Philadelphia Marriott West, Salon, 111 Crawford Road, West Conshohocken,
Pennsylvania for the following purposes:
(1) To consider and vote upon a transaction (the "TRO Transaction")
pursuant to which the Trust will transfer its assets to an operating
partnership (the "Operating Partnership"), the Operating Partnership will
acquire all of the non-voting common shares of The Rubin Organization,
Inc. ("TRO"), representing 95% of the total equity of TRO, and the
interest of certain affiliates of TRO in, or their right or obligation to
acquire interests in, a number of shopping centers, or portions of
shopping centers, in existence, under construction, or in the
pre-development stage, Mr. Ronald Rubin will become Chief Executive
Officer of the Trust, Mr. Rubin and two other designees of TRO will become
Trustees of the Trust, nine other members of TRO management will become
executive officers of the Trust or TRO following completion of the
transaction, and Mr. Sylvan Cohen and certain other members of the Trust's
existing senior management will continue as members of the new management
group;
(2) To consider and vote upon an Amended and Restated Trust Agreement of
the Trust;
(3) To consider and vote upon the Trust's Amended and Restated 1990
Incentive and Nonqualified Stock Option Plan;
(4) To consider and vote upon the Trust's 1997 Stock Option Plan; and
(5) To transact any other business that may properly come before the
Meeting or any adjournments thereof.
The Trustees have fixed the close of business on August 25, 1997 as the
record date for the determination of Shareholders entitled to notice of and to
vote at the Meeting.
All Shareholders are cordially invited to attend the Meeting. Whether or
not you expect to attend the meeting in person, please mark, sign and date the
enclosed proxy and return it promptly in order that your shares may be voted.
If you attend the Meeting, you may revoke your proxy and vote in person.
By Order of the Board of Trustees
JEFFREY A. LINN
Secretary
Fort Washington, Pa.
August 27, 1997
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
455 Pennsylvania Avenue
Suite 135
Fort Washington, Pennsylvania 19034
---------------------
PROXY STATEMENT FOR SPECIAL MEETING
OF HOLDERS OF CERTIFICATES OF BENEFICIAL INTEREST
TO BE HELD ON SEPTEMBER 29, 1997
This proxy statement and the enclosed proxy are being sent to Holders of
Certificates of Beneficial Interest ("Shareholders") of the Pennsylvania Real
Estate Investment Trust ("PREIT" or the "Trust") on or about August 28, 1997,
in connection with the solicitation of proxies for use at the Special Meeting
of Holders of Certificates of Beneficial Interest of the Trust to be held on
Monday, September 29, 1997, at 10:00 a.m. at the Philadelphia Marriott West,
111 Crawford Road, West Conshohocken, Pennsylvania.
The enclosed proxy is solicited on behalf of the Board of Trustees of the
Trust. The proxy is revocable at any time prior to its use by delivering a
subsequently executed proxy or written notice of revocation to the Secretary of
the Trust.
On August 25, 1997, the record date for Shareholders entitled to notice
of, and to vote at, the Special Meeting, there were 8,679,598 Certificates of
Beneficial Interest ("Shares") of the Trust issued and outstanding, each of
which is entitled to one vote on all matters to be presented at the meeting.
The Trust will bear the cost of preparing and mailing the Notice of
Meeting, this Proxy Statement and the enclosed proxy. Trustees, officers and
regular employees of the Trust may solicit proxies by personal interview, mail,
telephone or telegraph. Such persons will receive no compensation for any such
solicitation activities other than their regular salary but will be reimbursed
for actual expenses in connection therewith. The Trust has retained Georgeson &
Co. to assist in the solicitation of proxies for a fee of $7,000 plus the
payment of verified out-of-pocket expenses. Arrangements will be made with
brokerage houses and other custodians, nominees and fiduciaries for proxy
material to be sent to their principals, and the Trust will reimburse such
persons for their expenses in so doing.
At the Special Meeting, Shareholders will be asked to consider and take
action on the following matters (collectively, the "Proposals"):
1. To consider and vote upon a transaction (the "TRO Transaction") in
which the Trust, inter alia, will (i) form a Delaware limited partnership (the
"Operating Partnership"), of which the Trust will be the general partner and a
business trust wholly-owned by the Trust will be the initial limited partner,
(ii) transfer to the Operating Partnership its interests in its real property
assets, or the economic benefits thereof, in exchange for the issuance to the
Trust's business trust subsidiary of Class A units of limited partner interest
in the Operating Partnership ("Class A OP Units"), (iii) cause the Operating
Partnership to acquire all of the issued and outstanding non-voting common
shares of The Rubin Organization, Inc. ("TRO"), representing 95% of the total
equity of TRO, in exchange for 200,000 Class A OP Units and a contingent
obligation to issue up to 800,000 additional Class A OP Units over a five year
period based on the levels of the Trust's funds from operations ("FFO") per
share during such period, (iv) cause the Operating Partnership to acquire, or
to become obligated to acquire, in exchange for additional Class A OP Units and
cash, the interests of certain affiliates of TRO ("TRO Affiliates") in, or
their rights or obligations to acquire interests in, three existing shopping
centers, or portions thereof (the "Existing Properties"), and in two shopping
centers currently under construction (the "Development Properties"), (v) cause
the Operating Partnership to acquire the pre-development rights, subject to the
pre-development obligations, of certain TRO Affiliates in certain additional
proposed shopping centers (the "Predevelopment Properties") in exchange for
additional Class A OP Units in respect of half of the aggregate net profit
associated with the development of such properties and the reimbursement by the
Operating Partnership of certain of TRO's pre-closing expenses relating to such
properties, and the rights, subject to the obligations, of TRO under a
1
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co-development agreement with a joint venture partner of TRO, (vi) implement,
directly or indirectly, employment agreements with ten members of TRO
management, including Ronald Rubin, who will become the Chief Executive Officer
of the Trust, and (vii) appoint three designees of TRO, including Ronald Rubin,
as trustees of the Trust, all as more fully set forth herein.
2. To consider and vote upon an Amended and Restated Trust Agreement of
the Trust.
3. To consider and vote upon the Trust's Amended and Restated 1990
Incentive and Nonqualified Stock Option Plan;
4. To consider and vote upon the Trust's 1997 Stock Option Plan.
The Board of Trustees has concluded that the TRO Transaction is in the
best interests of the Trust and the Shareholders and is on terms and conditions
fair to the Trust and the Shareholders, and has approved the TRO Transaction.
In arriving at its conclusion as to the TRO Transaction, the Board of Trustees
considered, among other things, the opinion of Lehman Brothers Inc. ("Lehman
Brothers"), rendered on July 8, 1997 (as supplemented and reissued on July 24,
1997) that, as of such dates, the consideration to be paid by the Trust under
the TRO Transaction is fair to the Trust from a financial point of view. A copy
of the opinion of Lehman Brothers, reissued on the date of this Proxy
Statement, is attached to this Proxy Statement as Appendix B and Shareholders
are urged to read this opinion in its entirety. The Board of Trustees has also
approved each of the other Proposals described herein and recommends that the
Shareholders vote for each of the Proposals at the Meeting.
Approval of the Trust's 1997 Stock Option Plan (Proposal No. 4) is also a
condition to completion of the TRO Transaction.
ALL PROXIES DULY EXECUTED WILL BE VOTED AS INSTRUCTED. IF INSTRUCTIONS ARE
NOT GIVEN, THEY WILL BE VOTED FOR ALL PROPOSALS.
The Board of Trustees knows of no business that will be presented for
consideration at the Meeting other than the matters described in this Proxy
Statement. If any other matter should be presented at the Meeting for action,
the persons named in the accompanying proxy card will vote the proxy in their
own discretion.
In the event that there are not sufficient votes to approve any one or
more of the Proposals, it is expected that the Meeting will be postponed or
adjourned in order to permit further solicitation of proxies by the Trust.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement incorporates by reference the following documents
relating to the Trust which are not delivered herewith:
(a) The Annual Report on Form 10-K for the fiscal year ended August 31,
1996, as amended by Form 10-K/A-1, dated December 2, 1996; and
(b) The Quarterly Reports on Form 10-Q for the three-month periods ended
November 30, 1996, February 28, 1997, and May 31, 1997.
All documents and reports subsequently filed by the Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the
mailing date of this Proxy Statement and prior to the Meeting shall be deemed
to be incorporated by reference in this Proxy Statement and to be a part hereof
from the date of filing such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein, or contained in
this Proxy Statement, shall be deemed to be modified or superseded for purposes
of this Proxy Statement to the extent that a statement contained herein or in
any such subsequently filed document which also is deemed to be incorporated
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed to constitute a part of this Proxy Statement,
except as so modified or superseded.
This Proxy Statement incorporates documents by reference which are not
presented herein or delivered herewith. The Trust will provide, without charge,
to each person to whom this Proxy Statement is delivered, on written or oral
request of such person a copy (without exhibits, unless such exhibits are
specifically incorporated by reference) of any or all of the documents that
have been or will be incorporated by reference herein, within one business day
of the receipt of such request by first class mail or equally prompt means.
Such request should be made to Pennsylvania Real Estate Investment Trust, 455
Pennsylvania Avenue, Suite 135, Fort Washington, PA 19034, Attention: Investor
Relations. Telephone number 215-542-4185.
* * * *
All financial and other information contained in this Proxy Statement
relating to The Rubin Organization, Inc. and the Existing, Development,
Predevelopment and Right of First Refusal Properties (as those terms are
defined herein) have been supplied to the Trust by The Rubin Organization, Inc.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
SUMMARY ........................................................................ 7
The Meeting .................................................................. 7
The TRO Transaction ......................................................... 7
Other Matters ............................................................... 11
Recommendation of the Board of Trustees ....................................... 11
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
SUMMARY SELECTED FINANCIAL INFORMATION .......................................... 12
THE RUBIN ORGANIZATION, INC.
SUMMARY SELECTED FINANCIAL INFORMATION .......................................... 13
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
UNAUDITED PRO FORMA CONSOLIDATING FINANCIAL INFORMATION ........................ 14
PREIT Pro Forma Consolidating Balance Sheet as of May 31, 1997 ............... 16
PREIT Pro Forma Consolidating Income Statement for the Year Ended
August 31, 1996 ............................................................ 17
PREIT Pro Forma Consolidating Income Statement for the Nine-Month
Period Ended May 31, 1997 ................................................... 18
PREIT Notes and Management's Assumptions to Unaudited Pro Forma Consolidating
Financial Information ...................................................... 19
THE RUBIN ORGANIZATION, INC. -- MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .............................. 27
PROPOSAL NO. 1 -- THE TRO TRANSACTION .......................................... 30
The TRO Transaction ......................................................... 30
Background of, and Reasons for, the TRO Transaction; Board Recommendation ... 30
Opinion of Financial Advisor ................................................ 35
Business Objectives Following the TRO Transaction ........................... 40
Description of the Business of TRO .......................................... 40
Principal Features of the TRO Transaction .................................... 43
The Special Committee ......................................................... 54
General Authority if TRO Transaction is Approved .............................. 55
The New Credit Agreement ...................................................... 55
Consequences of Failure to Approve the TRO Transaction ........................ 55
Distributions ............................................................... 56
Federal Income Tax Considerations ............................................. 56
Regulatory Requirements; Approvals .......................................... 62
Third Party Consents ......................................................... 62
Effective Date; Conditions to the TRO Transaction ........................... 62
Required Vote ............................................................... 62
Recommendation of the Board of Trustees ....................................... 62
PROPOSAL NO. 2 -- THE AMENDED AND RESTATED TRUST AGREEMENT ..................... 63
Election to be Governed by the Pennsylvania Business Trust Statute ............ 63
UPREIT Structure ............................................................ 64
Authority to Issue Additional Classes, Series and Types of Securities ......... 64
Removal of Trustees ......................................................... 64
REIT Ownership Limitations ................................................... 64
Compensation of Trustees ...................................................... 66
Trustees Dealings with the Trust ............................................. 66
Extraordinary Transactions ................................................... 66
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Voting Rights and Other Miscellaneous Changes ..................... 66
Required Vote ................................................... 67
Board Recommendation ............................................. 67
PROPOSAL NO. 3 -- THE AMENDED AND RESTATED 1990 INCENTIVE AND
NONQUALIFIED STOCK OPTION PLAN ................................. 68
Shares Subject to the 1990 Plan .............................. 69
Administration ................................................ 69
Duration and Amendment of 1990 Plan ........................... 69
Terms and Conditions-Nonqualified Stock Options ............... 69
Terms and Conditions-Incentive Stock Options .................. 70
Stock Option Agreements ....................................... 70
Registration ................................................... 70
Withholding and Use of Shares to Satisfy Tax Obligations ...... 70
Loans ......................................................... 70
Discharge for Cause; Competition .............................. 70
Change in Control ............................................. 71
Adjustments upon Mergers and Other Events ..................... 71
Other Considerations .......................................... 71
Required Vote ................................................ 71
Board Recommendation .......................................... 71
PROPOSAL NO. 4 -- THE 1997 STOCK OPTION PLAN ..................... 72
Administration ................................................ 72
Duration and Amendment of 1997 Plan ........................... 72
Terms and Conditions-Nonqualified Stock Options ............... 72
Terms and Conditions-Incentive Stock Options .................. 73
Stock Option Agreements ....................................... 73
Registration ................................................... 73
Withholding and Use of Shares to Satisfy Tax Obligations ...... 73
Loans ......................................................... 73
Discharge for Cause; Competition .............................. 74
Change in Control ............................................. 74
Adjustments upon Mergers and Other Events ..................... 74
Other Considerations .......................................... 74
Federal Income Tax Consequences .............................. 74
Required Vote ................................................ 75
Board Recommendation .......................................... 75
THE TRUST ......................................................... 76
Outstanding Shares ............................................. 76
Price Range of Shares and Dividend History ..................... 76
Ownership of Certain Persons ................................. 77
Compensation of Executive Officers ........................... 80
Employment Agreements .......................................... 80
Stock Option Tables .......................................... 82
Stock Option Plans ............................................. 82
Benefit Plans ................................................ 83
Certain Transactions .......................................... 83
Board Matters ................................................ 83
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ......... 84
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ...... 84
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
REPORT OF EXECUTIVE COMPENSATION AND HUMAN RESOURCES COMMITTEE ON
EXECUTIVE COMPENSATION IN RESPECT OF FISCAL YEAR ENDED AUGUST 31, 1996 ... 84
PERFORMANCE GRAPH ......................................................... 86
PRINCIPAL SECURITY HOLDERS ................................................ 87
OTHER MATTERS ............................................................... 87
SHAREHOLDERS' PROPOSALS ................................................... 87
</TABLE>
APPENDICES INDEX
Appendix A -- Glossary of Certain Terms
Appendix B -- Opinion of Lehman Brothers Inc.
Appendix C -- The Amended and Restated Trust Agreement
Appendix D -- The Amended and Restated 1990 Incentive and Nonqualified
Stock Option Plan
Appendix E -- 1997 Stock Option Plan
Appendix F -- Financial Statements of The Rubin Organization, Inc.
Appendix G -- Financial Statements of Oxford Valley Road Associates
Appendix H -- Financial Statements of Magnolia Mall
Appendix I -- Financial Statements of North Dartmouth Mall
6
<PAGE>
SUMMARY
The following is a summary of certain information contained in this Proxy
Statement. The following is not intended to be complete and is qualified in its
entirety by the more detailed information appearing elsewhere in this Proxy
Statement and its appendices. Shareholders are urged to review carefully the
entire Proxy Statement and the appendices which form an important part hereof.
A Glossary of terms used in this Proxy Statement as defined terms is attached
as Appendix A. Such definitions are qualified in their entirety by the more
complete definitions of such terms found in the text of this Proxy Statement.
The Meeting
Date, Time and Place:
Monday, September 29, 1997, at 10:00 a.m., local time, at the Philadelphia
Marriott West, 111 Crawford Road, West Conshohocken, Pennsylvania.
Purpose:
The purpose of the Meeting will be:
1. To consider and vote upon the TRO Transaction.
2. To consider and vote upon an Amended and Restated Trust Agreement of
the Trust.
3. To consider and vote upon the Trust's Amended and Restated 1990
Incentive and Nonqualified Stock Option Plan.
4. To consider and vote upon the Trust's 1997 Stock Option Plan.
Record Date:
The record date for the determination of Shareholders entitled to notice
of and to vote at the Meeting is August 25, 1997.
Quorum and Vote Required:
A majority of the outstanding Shares, represented in person or by proxy
and entitled to vote on the Proposals, will constitute a quorum for the
transaction of business at the Meeting. On the record date, 8,679,598 Shares
were issued and outstanding. The holder of each outstanding Share on the record
date will be entitled to vote such holder's Shares on each of the Proposals.
The approval of each Proposal requires the affirmative vote of the holders
of a majority of the votes cast on the Proposal in person or by proxy.
Sylvan M. Cohen, Chairman and Chief Executive Officer of the Trust, and
Leonard I. Korman, a Trustee of the Trust, have agreed to vote the 325,842
Shares and 243,088 Shares owned and controlled exclusively by them,
respectively, in favor of approval of the TRO Transaction and the other matters
set forth in the Notice of Meeting.
If the TRO Transaction is approved, the Trust will have the authority to
complete such transaction upon the terms generally described in this Proxy
Statement, subject to such modifications as the Board of Trustees determines to
be fair and in the best interests of the Shareholders.
The TRO Transaction
Transaction Overview
The TRO Transaction involves the formation by the Trust of a limited
partnership named PREIT Associates, L.P. (referred to herein as the "Operating
Partnership") that will acquire, directly or indirectly, or in economic
substance, (i) the Trust's current interests in nineteen residential properties
and fourteen shopping centers, and nine additional improved and unimproved
properties, (ii) all of the non-voting common shares of TRO, and
7
<PAGE>
(iii) the interests of TRO Affiliates, or their right or obligation to acquire
interests in, three shopping centers, or portions of shopping centers, now in
existence (the "Existing Properties"), two shopping centers currently under
construction (the "Development Properties"), and rights in other shopping
center sites currently in the pre-development phase (the "Predevelopment
Properties"). The Operating Partnership will also acquire rights of first
refusal in respect of the indirect interests of TRO Affiliates in an additional
three shopping centers (the "Right of First Refusal Properties"). The
acquisition will be accompanied by a coordination of the managements of the
Trust and TRO and the addition to the Trust's Board of Trustees of three
designees of TRO, two of whom will be affiliates of TRO and one of whom will
not have been previously affiliated with either TRO or PREIT.
TRO is party to approximately 30 management agreements, which include
leasing rights, under which it manages approximately 14.6 million square feet
of net rentable shopping center and other retail space in which neither it nor
its affiliates nor the Trust have an economic interest and is also party to an
additional 15 management agreements, which include leasing rights, under which
it manages approximately 3.7 million square feet of net rentable shopping
center and other retail space in which TRO Affiliates own a direct or indirect
interest. In addition, TRO is party to management agreements to manage seven
office buildings with an aggregate of 2.3 million net rentable square feet (TRO
Affiliates have a direct or indirect interest in all such office buildings). TRO
also acts as leasing agent, without management rights, for three shopping
centers with approximately 1.2 million net rentable square feet and four office
buildings with approximately 1.6 million net rentable square feet.
In short, the TRO Transaction will involve a substantial change in the
business of the Trust; a substantial increase in the number of properties in
which the Trust will have an indirect interest; and, as a result of the
indebtedness on the properties to be acquired by the Trust, a substantial
increase in the Trust's indebtedness.
As of the date of this Proxy Statement, 8,679,598 Shares are issued and
outstanding and options on 483,875 Shares are outstanding. Immediately
following the TRO Closing Date, the Operating Partnership will have outstanding
approximately 440,000 Units of Class A Limited Partner Interests ("Class A OP
Units" or "OP Units"), in addition to the 8,679,598 Class A OP Units held
directly or indirectly by the Trust, and the obligation to issue a substantial
number of additional Class A OP Units, the number of which is dependent upon
future events, but could approximate 1.3 million in the aggregate. Any Class A
OP Unit (other than the 8,679,598 Class A OP Units held directly or indirectly
by the Trust) may be redeemed by the holder thereof for cash equal to the
average closing market price of a Share for the twenty trading days prior to
receipt of the notice of redemption, subject to the Trust's right under the
Operating Partnership's First Amended and Restated Agreement of Limited
Partnership (the "Operating Partnership Agreement") to acquire for cash, or for
Shares, any OP Units tendered for redemption. The Trust may acquire OP Units
for Shares on a one-for-one basis (subject to subsequent adjustment for stock
splits and other capital changes). As a result, subject to the timing of
redemption requests and the election of the Trust to acquire OP Units for
Shares, the TRO Transaction could ultimately result in the issuance of
approximately 1.8 million additional Shares of the Trust. Certain holders of
Class A OP Units will have the right to require that their Units be redeemed
for cash, and the Trust will not have any right to acquire for Shares Units for
which the holders have made a cash-only election, provided that the maximum
amount of cash-only redemptions is $500,000 annually.
In addition, the TRO Transaction provides for the granting of options to
purchase 560,000 Shares to TRO management and employees, or approximately 6.45%
of the 8,679,598 Shares issued and outstanding on the date hereof. As part of
the TRO Transaction, ten executives of TRO have entered into, or are expected
to enter into, employment agreements with the Trust or TRO, including Ronald
Rubin, the Chief Executive Officer of TRO, who will become Chief Executive
Officer of the Trust. In addition, three individuals selected by TRO will
become members of the Trust's Board of Trustees and three of the current
Trustees will resign.
If all of the Class A OP Units to be issued in connection with the TRO
Transaction were redeemed for Shares and all options to be granted to TRO
personnel in connection with the TRO Transaction were exercised, the Trust
would have approximately 11.1 million Shares issued and outstanding.
The Board of Trustees of the Trust considered a number of issues in
determining to approve, and to recommend to Shareholders that they approve, the
TRO Transaction. See "The TRO Transaction -- Background of and Reasons for the
TRO Transaction; Board Recommendation."
8
<PAGE>
Principal Features of the TRO Transaction
The TRO Transaction will involve a number of related transactions that are
expected to occur simultaneously on the date of the initial closing of the TRO
Transaction (the "TRO Closing Date"). The summary below describes the principal
features of the TRO Transaction. (See "The TRO Transaction -- Principal
Features of the TRO Transaction" for a more detailed discussion of each of the
features described below.)
Operating Partnership. The Trust will form a limited partnership (the
"Operating Partnership") and contribute to it the real estate interests owned
directly or indirectly by the Trust, or the economic benefit thereof, in
exchange for the general partner interest of the Operating Partnership and
Class A OP Units, which will be issued to a business trust wholly-owned by the
Trust. The Trust will be the sole general partner of the Operating Partnership.
(See "The TRO Transaction -- Principal Features of the TRO Transaction -- The
Operating Partnership.")
OP Units. Class A OP Units (other than those held directly or indirectly
by the Trust) will be redeemable by the Operating Partnership, at the option of
the holder, beginning one year following the dates of their respective issuance
(except for those units held by persons who own less than a 2% equity interest
in TRO as of the TRO Closing Date and Class A OP Units held by employees of TRO
who will not continue their employment following the TRO Closing Date, which,
in each case, may become redeemable earlier) in each case for an amount of cash
per unit equal to the average closing price of a Share on the twenty trading
days immediately prior to the date notice of redemption is received by the
Trust in its capacity as general partner of the Operating Partnership (subject
to adjustment for stock splits and other capital changes). The Trust will have
the right to acquire any OP Units tendered for redemption for (i) cash, or (ii)
Shares, on the basis of one Share for each OP Unit (subject to adjustments for
share splits and like capital changes). Certain holders of Class A OP Units
will have the right to require that their Units be redeemed for cash, and the
Trust will not have any right to acquire for Shares Units for which the holders
have made a cash-only election, provided that the maximum amount of cash-only
redemptions is $500,000 annually. Redeeming holders of OP Units who receive
Shares from the Trust will have certain rights to cause the Trust to register
such Shares for resale under the federal securities laws. Ronald Rubin, George
Rubin and Edward Glickman, who will serve as Chief Executive Officer of the
Trust, President of TRO, and Chief Financial Officer of the Trust,
respectively, will each be prohibited from reselling more than one half of the
Shares to which they would be entitled upon redemption of Class A OP Units held
by them during the five year period following the completion of the TRO
Transaction if they continue to hold executive positions with the Trust or TRO
during such period. (See "The TRO Transaction -- Principal Features of the TRO
Transaction -- The Operating Partnership.")
TRO Equity Acquisition. The Operating Partnership will acquire all of the
non-voting common shares of TRO, constituting 95% of all of the total equity of
TRO, in exchange for the issuance of 200,000 Class A OP Units and a contingent
obligation to issue up to 800,000 additional Class A OP Units over the five
years following the TRO Closing (the "Earn-Out Period") to the former holders
of the non-voting common shares of TRO depending on the Trust achieving certain
specified levels of funds from operations, on a per share basis, over such
period. (See "The TRO Transaction -- Principal Features of the TRO Transaction
- -- The TRO Equity Acquisition.")
Existing Properties Acquisition. The Operating Partnership will acquire
the interests of certain affiliates of TRO ("TRO Affiliates") in three existing
shopping centers, or portions of shopping centers (the "Existing Properties").
In two instances, the properties were placed under contract for acquisition by
TRO from affiliates of, and co-investors with, Equity Properties and
Development Limited Partnership ("EPDLP"), an entity affiliated with Samuel
Zell. The Operating Partnership has acquired from TRO Affiliates the rights of
TRO under an agreement of sale, subject to the obligations thereunder, to
acquire one of these two centers, and the Operating Partnership will acquire
that center for its portfolio regardless of whether the TRO Transaction is
completed. The aggregate consideration for the two former EPDLP properties is
approximately $80 million, of which approximately (i) $26 million represents
the aggregate existing equity in both properties and will be paid in cash
financed by borrowings of the Operating Partnership, (ii) $25.5 million
represents an assumable mortgage, and (iii) the balance represents a mortgage
to be refinanced at the Closing by borrowings by the Operating Partnership. In
addition, the Operating Partnership has acquired the interests of TRO in an
additional retail property prior to completion of the TRO Transaction, but has
retained the right to cause TRO to reacquire the interests (and TRO will have
the right to cause such conveyance) at the Operating Partnership's cost, plus
an interest factor, in the event the TRO Transaction is not completed. (See
"The TRO Transaction -- Features of the TRO Transaction -- The Existing
Properties Acquisition.")
9
<PAGE>
Development Properties Acquisition. The Operating Partnership will become
obligated to acquire, for Class A OP Units, the interests of certain TRO
Affiliates in two shopping centers currently under construction (the
"Development Properties"), upon completion of their construction, at prices
which are based upon a formula for space leased at the time of acquisition and,
absent agreement, appraisals of space unleased at the time of completion. Class
A OP Units will be valued at $23.40 per unit, which was the average of the
closing price of the Shares for the twenty trading days immediately preceding
the execution of the definitive documentation for the TRO Transaction on July
30, 1997. (See "The TRO Transaction -- Principal Features of the TRO
Transaction -- The Development Properties Acquisition.")
Predevelopment Property Acquisition. The Operating Partnership will
acquire the rights of certain TRO Affiliates in respect of three potential
shopping center sites (the "Predevelopment Properties") in exchange for (i) a
loan of cash to TRO equal to the verified out-of-pocket expenditures of TRO
incurred in respect of such properties through the Closing Date (when added to
amounts due TRO by the Trust in respect of TRO start-up expenses on new
management business, expected to approximate an aggregate of $9.0 million), and
(ii) an obligation to issue, upon the completion of any property subsequently
developed, Class A OP Units, at values contemporaneous with the valuation date,
for one-half of the positive difference between the aggregate value of the
Operating Partnership's interest in all such properties at the time of
respective completion (valued on substantially the same basis as Development
Properties) and the all-in costs of all such properties. TRO will use the
proceeds of such loan to repay obligations incurred to finance such
expenditures, to pay certain legal fees and to reimburse certain TRO
shareholders and their affiliates for such expenditures incurred by them. (See
"The TRO Transaction -- Principal Features of the TRO Transaction -- The
Predevelopment Properties Acquisition.")
Rights of First Refusal. The Operating Partnership will acquire, without
separate consideration, rights of first refusal on the interests of certain TRO
Affiliates in three additional shopping centers. (See "The TRO Transaction --
Principal Features of the TRO Transaction -- Rights of First Refusal.")
Management Changes. The Trust or TRO has entered into, or expects to enter
into, employment agreements with ten members of senior management of TRO,
including Ronald Rubin, currently the Chief Executive Officer of TRO, and Mr.
Rubin's brother, George Rubin, the President and Chief Operating Officer of
TRO. The employment agreements will take effect on the TRO Closing Date. Ronald
Rubin will become the Chief Executive Officer of the Trust and George Rubin
will remain President of TRO, which will be renamed "PREIT-Rubin, Inc." Ronald
Rubin, George Rubin and Rosemarie B. Greco, who has not previously been
affiliated with TRO or the Trust, will be appointed Trustees of the Trust and
Messrs. Lee H. Javitch, Robert Freedman and Robert G. Rogers will resign as
Trustees. Sylvan M. Cohen, the founder of the Trust and currently Chairman of
the Board of Trustees and Chief Executive Officer of the Trust, will continue
to serve as Chairman of the Board of Trustees and Chairman of the Property
Committee of the Board of Trustees. The obligation of the Trust to complete the
TRO Transaction is subject to a number of conditions, including the condition
that Ronald Rubin be in good health at the Closing. (See "The TRO Transaction
- -- Principal Features of the TRO Transaction -- Management Changes" and --
"Ronald Rubin Employment Agreement" and -- "Other Employment Agreements.")
Special Trustees Committee. A committee consisting of three Trustees not
currently affiliated with TRO, TRO Affiliates, or the Trust (other than in
their capacity as Trustees), but including Ms. Greco, will be constituted
following completion of the TRO Transaction to address and resolve matters
which may arise in connection with the implementation of the terms of the TRO
Transaction. (See "The TRO Transaction -- The Special Committee.")
Voting Agreements. Sylvan M. Cohen, Chairman of the Board of Trustees and
Chief Executive Officer of the Trust, and Leonard I. Korman, a Trustee of the
Trust, have each agreed to vote the 325,842 Shares and 243,088 Shares,
respectively, beneficially owned by them and over which they have sole voting
power, in favor of approval of the TRO Transaction and the other matters set
forth in the Notice of Meeting.
New Credit Agreement. The Trust has received a commitment letter for a
$125 million revolving line of credit to be entered into coincident with the
TRO Closing. (See "The TRO Transaction -- The New Credit Agreement.")
Termination of the TRO Transaction; Break-up Fee. In the event that the
Trust were to elect to terminate the TRO Transaction prior to completion,
before or after Shareholder approval (other than by reason of the Shareholders
failing to approve the TRO Transaction), to permit the Trust to participate in
a transaction determined by the Trustees to be more favorable to the Trust and
its Shareholders than the TRO Transaction, the Trust
10
<PAGE>
would be required to pay TRO and the TRO Affiliates an aggregate of $2 million
in cash. Upon the payment of such amount, the Trust would thereafter have no
further obligations to TRO or the TRO Affiliates; provided, however, in the
event that the TRO Transaction is not completed, the Operating Partnership will
nonetheless be obligated to acquire the Magnolia Mall. (See "The TRO
Transaction -- Principal Features of the TRO Transaction -- The Existing
Properties Acquisition.")
Expense Protection. In the event the TRO Transaction is not completed
because the Shareholders vote not to approve the transaction, the Trust will be
obligated to reimburse TRO for its documented transaction-related expenses up
to $1 million.
OTHER MATTERS
At the Meeting, Shareholders will also be asked to consider and vote upon
(i) amendments to the Trust Agreement of the Trust, (ii) amendments to the
Trust's 1990 Incentive and Nonqualified Stock Option Plan, and (iii) the
Trust's 1997 Stock Option Plan, each as more fully discussed herein.
RECOMMENDATION OF TRUSTEES
The Board of Trustees recommends a vote FOR all four proposals.
----------------
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
SUMMARY SELECTED FINANCIAL INFORMATION
The following sets forth summary selected financial information for the
Trust for each of the five years during the period ended August 31, 1996 and as
of and for the nine months ended May 31, 1996 and May 31, 1997.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the Trust and all of the financial statements included in the
Trust's Annual Report on Form 10-K for the year ended August 31, 1996, and in
the Trust's Quarterly Report on Form 10-Q for the quarter ended May 31, 1997,
each as previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
11
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
SUMMARY SELECTED FINANCIAL DATA
(amounts in thousands, except for per share data)
<TABLE>
<CAPTION>
For the fiscal year ended August 31,
--------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Total revenues .............................. $ 16,859 $ 21,625 $ 27,914 $ 37,154 $ 39,156
Income before gains on sales of interests
in real estate .............................. 8,677 10,125 8,325 11,106 10,179
Gains on sales of interests in real estate .... -- 3,875 12,362 119 865
Net income .................................... 8,677 14,000 20,687 11,225 11,044
Distributions paid to beneficiaries ......... 14,680 15,386 16,121 16,302 16,310
Per Share Results:
Income before gains on sales of interests
in real estate .............................. 1.01 1.17 0.96 1.28 1.17
Gains on sales of interests in real estate..... -- 0.45 1.43 0.01 0.10
Net income .................................... 1.01 1.62 2.39 1.29 1.27
Distributions paid ........................... 1.72 1.78 1.86 1.88 1.88
Distribution Rate at Period End ............... 1.72 1.80 1.88 1.88 1.88
Cash Flow Data:
Cash Flows from operating activities ......... 10,332 13,034 15,909 16,672 14,814
Cash Flows from investing activities ......... (13,011) (38,683) (18,524) (40,082) 1,209
Cash Flows from financing activities ......... 10 25,913 3,305 22,356 (16,901)
Balance Sheet Data:
Investments in Real Estate, at Cost ......... 64,612 112,262 154,281 195,929 198,542
Total Assets ................................. 66,250 107,853 142,495 181,336 177,725
Total mortgage and bank loans payable ......... 10,772 51,929 80,155 122,518 124,148
Other Data:
Net income .................................... $ 8,677 $ 14,000 $ 20,687 $ 11,225 $ 11,044
Less: Gains on sales of interests in real
estate ....................................... -- (3,875) -- (119) (865)
Plus: Provisions for losses .................. 320 320 1,795 -- --
---------- ---------- ---------- ---------- ----------
8,997 10,445 10,120 11,106 10,179
Plus:
Depreciation and Amortization:
Wholly owned and consolidated
partnerships .............................. 2,101 2,685 3,322 5,044 5,650
Unconsolidated partnerships and joint
ventures .................................... 3,960 4,119 3,229 3,214 3,334
Refinancing prepayment penalty ............... -- -- -- -- --
Less:
Depreciation of non-real estate assets ...... (88) (104) (146) (173) (202)
Amortization of deferred financing costs....... (138) (275) (108) (228) (333)
---------- ---------- ---------- ---------- ----------
Funds from operations ........................ $ 14,832 $ 16,870 $ 16,417 $ 18,963 $ 18,628
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended:
May 31, May 31,
1996 1997
------------ ------------
Unaudited
<S> <C> <C>
Operating Results:
Total revenues .............................. $ 29,310 $ 30,344
Income before gains on sales of interests
in real estate .............................. 7,806 6,944
Gains on sales of interests in real estate .... 411 1,461
Net income .................................... 8,217 8,405
Distributions paid to beneficiaries ......... 12,233 12,236
Per Share Results:
Income before gains on sales of interests
in real estate .............................. 0.90 0.80
Gains on sales of interests in real estate .... 0.05 0.17
Net income .................................... 0.95 0.97
Distributions paid ........................... 1.41 1.41
Distribution Rate at Period End ............... 1.41 1.41
Cash Flow Data:
Cash Flows from operating activities ......... 11,599 11,137
Cash Flows from investing activities ......... 1,519 15,272
Cash Flows from financing activities ......... (13,317) (23,885)
Balance Sheet Data:
Investments in Real Estate, at Cost ......... 199,702 201,336
Total Assets ................................. 177,490 161,879
Total mortgage and bank loans payable ......... 122,844 112,467
Other Data:
Net income .................................... $ 8,217 $ 8,405
Less: Gains on sales of interests in real
estate ....................................... (411) (1,461)
Plus: Provisions for losses .................. -- 500
---------- ----------
7,806 7,444
Plus:
Depreciation and Amortization:
Wholly owned and consolidated
partnerships .............................. 4,193 4,461
Unconsolidated partnerships and joint
ventures .................................... 2,520 2,454
Refinancing prepayment penalty ............... -- 733
Less:
Depreciation of non-real estate assets ...... (150) (165)
Amortization of deferred financing costs ...... (246) (216)
---------- ----------
Funds from operations ........................ $ 14,123 $ 14,711
========== ==========
</TABLE>
12
<PAGE>
THE RUBIN ORGANIZATION, INC.
----------------
SUMMARY SELECTED FINANCIAL INFORMATION
The following sets forth summary selected financial information for TRO
for each of the four years during the period ended December 31, 1996 and as of
and for the six months ended June 30, 1996 and June 30, 1997.
The following selected financial data should be read in conjunction with
"The Rubin Organization -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements of TRO
included herein as Appendix F.
THE RUBIN ORGANIZATION, INC.
SUMMARY SELECTED FINANCIAL DATA
(dollars in thousands except for per share data)
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------------------ ---------------------
1993 1994 1995 1996 1996 1997
---------- ---------- --------- ---------- -------- ----------
Unaudited Unaudited
----------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Results:
Total revenues ......... $14,040 $15,339 $16,654 $15,643 $7,050 $ 9,770
Income (Loss) from
Operations ............ (2,964) (1,642) 1,160 367 (225) 27
Net Loss ............... (3,864) (2,271) (52) (591) (735) (524)
Balance Sheet Data:
Total Assets ............ 8,233 8,072 8,710 16,727 -- 17,352
Total mortgage and bank
loans payable ......... 3,870 6,450 6,937 12,724 -- 12,392
Cash Flow Data:
Cash flows from operating
activities ............ (1,350) 338 208 674 236 1,097
Cash flows from investing
activities ............ (371) (263) (910) (3,083) (271) (1,161)
Cash flows from financing
activities ............ 2,433 157 501 2,401 (290) 57
</TABLE>
13
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
The following sets forth the pro forma consolidating balance sheet of
Pennsylvania Real Estate Investment Trust as of May 31, 1997 and the pro forma
consolidating statements of operations for the year ended August 31, 1996 and
the nine-month period ended May 31, 1997 to give effect to the TRO Transaction.
The TRO Transaction will involve a number of related transactions, the
combined effect of which will be to form and capitalize an Operating
Partnership and to transfer ownership of the Trust's direct and indirect
interests in its existing properties, or the economic benefits thereof, to the
Operating Partnership, and to effect the acquisitions described below:
o TRO Equity Acquisition. The Operating Partnership will acquire all of the
non-voting common shares of TRO, constituting 95% of all of the total
equity of TRO, in exchange for the issuance of 200,000 Class A OP Units
and a contingent obligation to issue up to 800,000 additional Class A OP
Units over the following five-year period if the Trust achieves certain
specified levels of funds from operations, on a per share basis, over such
period.
o Existing Properties Acquisition. The Operating Partnership will acquire
the interests of certain affiliates of TRO ("TRO Affiliates") in three
existing shopping centers, or portions of shopping centers (the "Existing
Properties").
Two of the properties (Magnolia Mall and North Dartmouth Mall) were placed
under contract for acquisition by TRO from affiliates of, and
co-investors, with Equity Properties and Development Limited Partnership
("EPDLP"). The Operating Partnership will acquire Magnolia Mall for its
portfolio regardless of whether the TRO Transaction is completed. The
aggregate consideration, excluding transaction costs, for the two former
EPDLP Properties is approximately $80 million, of which $25.5 million
represents an assumable mortgage, and the balance will be financed at the
Closing Date with borrowings under a revolving credit facility.
The Operating Partnership will issue approximately 239,000 additional
Class A OP units to TRO Affiliates in respect of their 50% equity interest
in the Court at Oxford Valley.
The Operating Partnership has acquired the interests of TRO in an
additional retail property prior to the completion of the TRO Transaction,
but has retained the right to cause TRO to reacquire the interests at the
Operating Partnership's cost, plus interest, in the event the TRO
Transaction is not completed.
o Development Properties Acquisition. The Operating Partnership will become
obligated to acquire, for Class A OP Units, the interests of certain TRO
Affiliates in two shopping centers currently under development (the
"Development Properties"), upon completion of their construction, at
prices based upon a pre-determined formula.
o Predevelopment Properties Acquisition. The Operating Partnership will
acquire the rights of certain TRO Affiliates in respect of three potential
shopping center sites (the "Predevelopment Properties") in exchange for
(i) a loan of cash to TRO equal to actual out-of-pocket expenditures of
TRO incurred with respect of such properties through the Closing Date
(expected to approximate an aggregate of $9.0 million as of the Closing
Date), and (ii) an obligation to issue, upon completion of any property
subsequently developed, Class A OP Units for one-half of the difference
between the aggregate value of all such properties at the time of
completion and the all-in-cost of all such properties.
As the Development and Predevelopment Properties Acquisitions are expected
to occur in the future at amounts that are not currently determinable, the
financial impact of such future events has not been reflected in the
accompanying pro forma financial statements.
14
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
All of the acquisitions described above will be recorded by the Trust
using the purchase method of accounting.
The accompanying pro forma consolidating financial information is
presented as if the transactions described above had been consummated on May
31, 1997 for balance sheet purposes and September 1, 1995 for purposes of the
statements of operations. This unaudited pro forma consolidating financial
information should be read in conjunction with the historical financial
statements of the Trust, The Rubin Organization, Inc., Magnolia Mall, North
Dartmouth Mall and Oxford Valley Road Associates and the related notes thereto
all incorporated by reference or included elsewhere herein. In management's
opinion, all adjustments necessary to reflect the effects of the transactions
to be consummated have been made.
The pro forma consolidating financial information is unaudited and is not
necessarily indicative of what the actual financial position or results of
operations of the Trust would have been had the TRO Transaction been
consummated as of the dates indicated, nor does it purport to represent the
future financial position and the results of operations of the Trust.
15
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
PRO FORMA CONSOLIDATING BALANCE SHEET
MAY 31, 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Other The
PREIT Existing Pro Forma Company
Historical TRO (A) Properties(B) Adjustments Pro Forma
------------ --------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Investments in Real Estate, at cost ......
Apartment buildings ..................... $ 158,865 $ -- $ -- $ -- $ 158,865
Industrial properties .................. 5,078 -- -- -- 5,078
Shopping centers and retail stores ...... 37,393 -- 80,365 2,212(C) 119,970
--------- -------- --------- ----------- ---------
Total investments in real estate ...... 201,336 -- 80,365 2,212 283,913
Less accumulated depreciation ......... 49,172 -- -- -- 49,172
--------- -------- --------- ----------- ---------
152,164 -- 80,365 2,212 234,741
Property under development ............... -- -- -- 2,212(D) 2,212
Investment in management company ......... -- 4,680 -- 896(E) 5,576
Investments in partnerships and joint
ventures, at equity ..................... 1,710 -- 5,602 778(F) 8,090
Advances to management company ............ -- -- -- 9,000(G) 9,000
--------- -------- --------- ----------- ---------
153,874 4,680 85,967 15,098 259,619
Less allowance for possible losses ..... 1,880 -- -- -- 1,880
--------- -------- --------- ----------- ---------
151,994 4,680 85,967 15,098 257,739
Other Assets: ..............................
Cash and cash equivalents ............... 3,554 -- -- -- 3,554
Rents and sundry receivables ............ 370 -- -- -- 370
Deferred costs, prepaid real estate taxes
and expenses, net ..................... 5,961 -- -- 725(H) 6,686
--------- -------- --------- ----------- ---------
$ 161,879 $ 4,680 $ 85,967 $ 15,823 $ 268,349
========= ======== ========= =========== =========
Liabilities and Beneficiaries' Equity
Mortgage notes payable .................. $ 83,844 $ -- $ 25,500 $ -- $ 109,344
Bank and other loans payable ............ 28,623 -- 54,865 15,823(I) 99,311
Tenants' deposits and deferred rents ...... 1,246 -- -- -- 1,246
Accrued pension and other benefits ...... 1,117 -- -- -- 1,117
Accrued expenses and other liabilities ... 3,624 -- -- -- 3,624
--------- -------- --------- ----------- ---------
118,454 -- 80,365 15,823 214,642
--------- -------- --------- ----------- ---------
Minority interest ........................ 718 4,680 5,602 -- 11,000
--------- -------- --------- ----------- ---------
Beneficiaries' Equity
Shares of beneficial interest ............ 8,678 -- -- -- 8,678
Capital contributed in excess of par ...... 53,164 -- -- -- 53,164
Distributions in excess of net income ... (19,135) -- -- -- (19,135)
--------- -------- --------- ----------- ---------
42,707 -- -- -- 42,707
--------- -------- --------- ----------- ---------
$ 161,879 $ 4,680 $ 85,967 $ 15,823 $ 268,349
========= ======== ========= =========== =========
</TABLE>
The accompanying notes and management's assumptions
are an integral part of this statement.
16
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
PRO FORMA CONSOLIDATING INCOME STATEMENT
FOR THE YEAR ENDED AUGUST 31, 1996
(Unaudited)
(In Thousands, except Per Share Data)
<TABLE>
<CAPTION>
North Other The
PREIT Magnolia Dartmouth Pro Forma Company
Historical TRO (a) Mall(b) Mall (c) Adjustments Pro Forma
------------ ------------ ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Revenues from real estate ...... $ 38,985 $ -- $ 6,017 $ 5,823 $ -- $50,825
Interest and other income ...... 171 -- 84 285 -- 540
--------- -------- ------- ------- --------- --------
39,156 -- 6,101 6,108 -- 51,365
Expenses
Property expenses ............... 16,102 -- 1,575 2,188 -- 19,865
Depreciation and amortization .... 5,908 -- 1,512 1,164 -- 8,584
General and administrative
expenses ..................... 3,119 -- -- -- -- 3,119
Interest ........................ 9,831 -- 3,680 2,800 666(d) 16,977
--------- -------- ------- ------- --------- --------
34,960 -- 6,767 6,152 666 48,545
--------- -------- ------- ------- --------- --------
Income (loss) before gains on
sales of interests in real
estate, equity in unconsoli-
dated entities and minority
interest ..................... 4,196 -- (666) (44) (666) 2,820
Gains on sales of interests in
real estate .................. 865 -- -- -- -- 865
Equity in loss of management
company ........................ -- (1,002) -- -- -- (1,002)
Equity in income of
partnerships and joint
ventures ..................... 6,258 -- -- -- (367)(e) 5,891
--------- -------- ------- ------- --------- --------
Income (loss) before minority
interest ..................... 11,319 (1,002) (666) (44) (1,033) 8,574
Minority interest ............... 275 -- -- -- 121(f) 396
--------- -------- ------- ------- --------- --------
Net income (loss) ............... $ 11,044 $ (1,002) $ (666) $ (44) $ (1,154) $ 8,178
========= ======== ======= ======= ========= ========
Net Income Per Share ............ $ 1.27 $ 0.94
========= ========
Weighted Average Number of
Shares Outstanding ............ 8,676 8,676
========= ========
</TABLE>
The accompanying notes and management's assumptions
are an integral part of this statement.
17
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
PRO FORMA CONSOLIDATING INCOME STATEMENT
FOR THE NINE MONTHS ENDED MAY 31, 1997
(Unaudited)
(In Thousands, except Per Share Data)
<TABLE>
<CAPTION>
North Other The
PREIT Magnolia Dartmouth Pro Forma Company
Historical TRO (a) Mall(b) Mall (c) Adjustments Pro Forma
------------ --------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Revenues from real estate ...... $ 30,116 $ -- $ 4,730 $ 4,543 $ -- $39,389
Interest and other income ...... 218 -- 15 15 -- 248
--------- ----- ------- ------- -------- --------
30,334 -- 4,745 4,558 -- 39,637
Expenses
Property expenses ............... 12,154 -- 1,313 1,714 -- 15,181
Depreciation and amortization .... 4,661 -- 1,134 873 -- 6,668
General and administrative
expenses ..................... 2,433 -- -- -- -- 2,433
Interest ........................ 6,864 -- 2,760 2,100 703(d) 12,427
Provisions for losses on
investments .................. 500 -- -- -- -- 500
--------- ----- ------- ------- -------- --------
26,612 -- 5,207 4,687 703 37,209
--------- ----- ------- ------- -------- --------
Income (loss) before gains on
sales of interests in real
estate, equity in unconsoli-
dated entities and minority
interest ..................... 3,722 -- (462) (129) (703) 2,428
Gains on sales of interests in
real estate .................. 1,461 -- -- -- -- 1,461
Equity in loss of management
company ........................ -- (96) -- -- -- (96)
Equity in income of
partnerships and joint
ventures ..................... 3,487 -- -- -- (75)(e) 3,412
--------- ----- ------- ------- -------- --------
Income (loss) before minority
interest ..................... 8,670 (96) (462) (129) (778) 7,205
Minority interest ............... 265 -- -- -- 177(f) 442
--------- ----- ------- ------- -------- --------
Net income (loss) ............... $ 8,405 $ (96) $ (462) $ (129) $ (955) $ 6,763
========= ===== ======= ======= ======== ========
Net Income Per Share ............ $ .97 $ 0.78
========= ========
Weighted Average Number of
Shares Outstanding ............ 8,678 8,678
========= ========
</TABLE>
The accompanying notes and management's assumptions
are an integral part of this statement.
18
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING BALANCE SHEET
(A) Acquisition of The Rubin Organization (TRO):
<TABLE>
<CAPTION>
Assets and
Liabilities
TRO Not TRO
Historical (1) Acquired (2) Other (3) Acquisition
---------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents ..................... $ 787 $ -- $855 $ 1,642
Fees and commissions receivable ............... 3,614 -- -- 3,614
Real estate held for sale ..................... -- -- -- --
Prepaid expenses .............................. 165 (165) -- --
--------- --------- ----- --------
Total current assets ........................ 4,566 (165) 855 5,256
Property and Equipment, net ..................... 1,141 -- -- 1,141
Leasing commissions receivable, long-term ...... 312 -- -- 312
Investment in partnerships ..................... 146 (146) -- --
Intangible assets -- management contracts ...... 6,859 -- -- 6,859
Advances to affiliated partnerships ............ 3,525 (3,525) -- --
--------- --------- ----- --------
Total Other Assets ........................... 10,842 (3,671) -- 7,171
--------- --------- ----- --------
Total Assets ................................. $ 16,549 $ (3,836) $855 $13,568
========= ========= ===== ========
Liabilities and Stockholders' Equity
Current Liabilities
Current portion of long-term debt ............ $ 3,053 $ (2,553) $ -- $ 500
Accounts payable, trade and accrued expenses . 3,281 -- -- 3,281
Accounts payable to affiliates ............... 223 -- -- 223
Advances from Operating Partnership ......... -- 1,500 -- 1,500
Deferred compensation payable ............... 186 -- -- 186
--------- --------- ----- --------
Total current liabilities .................. 6,743 (1,053) -- 5,690
Long-term debt ................................. 9,440 (3,541) 5,899
Deferred compensation -- long term ............... 247 -- -- 247
Minority Interest .............................. 4 (4) -- --
Stockholders' Equity
Common stock ................................. 28 (28) -- --
Additional paid-in capital .................. 4,663 (3,786) 855 1,732
Treasury stock .............................. (1) 1 -- --
Accumulated deficit ........................... (4,575) 4,575 -- --
--------- --------- ----- --------
Total stockholders' equity .................. 115 762 855 1,732
--------- --------- ----- --------
Total Liabilities and Stockholders' Equity . $ 16,549 $ (3,836) $855 $13,568
========= ========= ===== ========
Operating partnership's investment in management
company (4) .................................... $ 4,680
========
</TABLE>
(Footnote explanations appear on next page)
19
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING BALANCE SHEET
- ------------
Footnotes to Acquisition of TRO:
(1) To reflect the historical cost basis of the assets and liabilities of
TRO.
(2) To eliminate assets and liabilities not being acquired or assumed.
(3) Represents additional cash contribution required by TRO shareholders to
satisfy minimum working capital requirements at the Closing Date.
(4) The Operating Partnership will record its investment in the non-voting
common shares of TRO using the equity method of accounting. The excess
of purchase price paid for TRO, including allocated transaction costs,
over the fair value of the net assets acquired will be amortized against
the Operating Partnership's share of TRO's income over 10 years.
(B) Acquisition of the EPDLP Properties and 50% interest in the Court at Oxford
Valley (the "Existing Properties"):
<TABLE>
<CAPTION>
North The Court at Total
Magnolia Dartmouth Oxford Existing
Mall (1) Mall (2) Valley (3) Properties
---------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Assets
Investments in Shopping Centers and Retail Stores,
at cost ....................................... $45,365 $35,000 $ -- $80,365
Investments in Partnerships and Joint Ventures, at
equity ....................................... -- -- 5,602 5,602
-------- -------- ------- --------
$45,365 $35,000 $5,602 $85,967
======== ======== ======= ========
Liabilities
Mortgage Notes Payable ........................ $25,500 $ -- $ -- $25,500
Bank and Other Loans Payable .................. 19,865 35,000 -- 54,865
Minority Interest .............................. -- -- 5,602 5,602
-------- -------- ------- --------
$45,365 $35,000 $5,602 $85,967
======== ======== ======= ========
</TABLE>
- ------------
Footnotes to Acquisition of Existing Properties:
(1) To record the acquisition of Magnolia Mall for total consideration of
$45.4 million consisting of $25.5 million of mortgage notes payable
assumed and $19.9 million of borrowings under the revolving line of
credit.
(2) To record the acquisition of North Dartmouth Mall for total
consideration of $35 million utilizing borrowings under the revolving
line of credit.
(3) To record the Operating Partnership's 50% interest in the Court at
Oxford Valley for total consideration of approximately 239,000 Class A
OP Units valued at $23.40 per unit.
20
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
<S> <C>
(C) To allocate transaction costs to Magnolia Mall and North Dartmouth Mall. $2,212
(D) To record the Operating Partnership's acquisition of the Predevelopment
Properties and an allocation of transaction costs. 2,212
(E) To allocate transaction costs to the Operating Partnership's investment in
the management company. 896
(F) To allocate transaction costs to the Operating Partnership's investment in
the Court at Oxford Valley. 778
(G) To reimburse TRO for EPDLP management contract start-up costs and
pre-development expenses. 9,000
(H) To record financing costs incurred relating to the $125 million revolving
line of credit. 725
(I) To record additional borrowings to fund transaction costs and reimburse TRO
for pre-development expenses and EPDLP management contract start-up costs. 15,823
</TABLE>
21
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING INCOME STATEMENTS
(a) TRO:
<TABLE>
<CAPTION>
For the Year Ended August 31, 1996
-----------------------------------------
TRO Pro Forma TRO
Historical Adjustments Pro Forma
------------ ------------- ----------
<S> <C> <C> <C>
Revenues ............................................. $ 14,783 -- $14,783
Operating Expenses
Salaries, commissions and employee benefits ......... 9,985 300(1) 10,285
Rent expense ....................................... 795 -- 795
Other operating expenses ........................... 4,023 -- 4,023
Depreciation and amortization ..................... 351 -- 351
Property writedown ................................. 320 (320)(2) --
-------- --------- --------
Total Operating Expenses ........................ 15,474 (20) 15,454
-------- --------- --------
Income (Loss) From Operations ........................ (691) 20 (671)
Interest Expense ....................................... (715) 715(3) --
Equity in Loss from Partnership Investments ............ (468) 468(4) --
-------- --------- --------
Pre-tax loss .......................................... (1,874) 1,203 (671)
Provision for income taxes ........................... -- -- --
-------- --------- --------
Net loss ............................................. $ (1,874) $ 1,203 $ (671)
======== ========= ========
Amortization of excess purchase price over net assets
acquired recorded in consolidation (5) ............... (384)
Net loss, as adjusted ................................. $(1,055)
========
Operating Partnership's share of net loss of TRO ...... $(1,002)
========
</TABLE>
(Footnote explanations appear on next page)
22
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING INCOME STATEMENTS
<TABLE>
<CAPTION>
For the Nine Months Ended May 31, 1997
-----------------------------------------
TRO Pro Forma TRO
Historical Adjustments Pro Forma
------------ ------------- ---------
<S> <C> <C> <C>
Revenues ............................................. $14,155 $ -- $14,155
Operating Expenses
Salaries, commissions and employee benefits ......... 8,602 225(1) 8,827
Rent expense ....................................... 581 -- 581
Other operating expenses ........................... 3,884 -- 3,884
Depreciation and amortization ..................... 676 -- 676
Property writedown ................................. -- -- --
------- -------- -------
Total Operating Expenses ........................ 13,743 225 13,968
------- -------- -------
Income From Operations ................................. 412 (225) 187
Interest Expense ....................................... (618) 618(3) --
Equity in Loss from Partnership Investments ............ (131) 131(4) --
------- -------- -------
Pre-tax loss .......................................... (337) 524 187
Provision for income taxes ........................... -- -- --
------- -------- -------
Net (loss) income .................................... $ (337) $ 524 $ 187
======= ======== =======
Amortization of excess purchase price over net assets
acquired recorded in consolidation (5) ............... (288)
Net loss, as adjusted ................................. $ (101)
=======
Operating Partnership's share of net loss of TRO ...... $ (96)
=======
</TABLE>
- ------------
Footnotes to TRO:
(1) To record additional compensation expense in accordance with the proposed
employment contracts. Certain employees will also be entitled to additional
incentive compensation based on their achievement of certain financial and
other performance objectives. Additional amounts for incentive compensation
expense have not been recorded, as such amounts would not have been earned
on an historical basis.
(2) To eliminate impairment loss recorded on equity investment not being
acquired.
(3) To eliminate interest expense on debt not assumed.
(4) To eliminate equity in loss of partnerships and joint ventures not being
acquired.
(5) To record the amortization of excess purchase price, including allocated
transaction costs, over net assets acquired over 10 years.
23
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING INCOME STATEMENTS
(b) Magnolia Mall:
<TABLE>
<CAPTION>
For the Year Ended August 31, 1996
-----------------------------------------
Magnolia Magnolia
Mall Pro Forma Mall
Historical Adjustments Pro Forma
------------ ------------- ----------
<S> <C> <C> <C>
Revenues
Gross revenues from real estate ...... $6,017 $ -- $6,017
Interest and other income ............ 84 -- 84
------- ---------- ------
6,101 -- 6,101
Expenses
Property operating expenses ......... 1,575 -- 1,575
Depreciation and amortization ......... -- 1,512(1) 1,512
Mortgage and bank loan interest ...... -- 3,680(2) 3,680
------- ---------- ------
1,575 5,192 6,767
------- ---------- ------
Net income (loss) ..................... $4,526 $ (5,192) $ (666)
======= ========== ======
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended May 31,1997
-----------------------------------------
Magnolia Magnolia
Mall Pro Forma Mall
Historical Adjustments Pro Forma
------------ ------------- ----------
<S> <C> <C> <C>
Revenues
Gross revenues from real estate ...... $4,730 $ -- $4,730
Interest and other income ............ 15 -- 15
------- ---------- ------
4,745 -- 4,745
Expenses
Property operating expenses ......... 1,313 -- 1,313
Depreciation and amortization ......... -- 1,134(1) 1,134
Mortgage and bank loan interest ...... -- 2,760(2) 2,760
------- ---------- ------
1,313 3,894 5,207
------- ---------- ------
Net income (loss) ..................... $3,432 $ (3,894) $ (462)
======= ========== ======
</TABLE>
- ------------
Footnotes to Magnolia Mall:
(1) To record depreciation and amortization on assets acquired and transaction
costs capitalized.
(2) To record interest expense on $25,500 of assumed mortgage indebtedness at
8.2% and $19,865 of short-term borrowings under the revolving line of
credit at 8%.
24
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING INCOME STATEMENTS
(c) North Dartmouth Mall Acquisition:
<TABLE>
<CAPTION>
For the Year Ended August 31, 1996
-----------------------------------------
North North
Dartmouth Pro Forma Dartmouth
Historical Adjustments Pro Forma
------------ ------------- ----------
<S> <C> <C> <C>
Revenues
Gross revenues from real estate ...... $5,823 $ -- $5,823
Interest and other income ............ 285 -- 285
------- ---------- ------
6,108 -- 6,108
Expenses
Property operating expenses ......... 2,188 -- 2,188
Depreciation and amortization ......... -- 1,164(1) 1,164
Mortgage and bank loan interest ...... -- 2,800(2) 2,800
------- ---------- ------
2,188 3,964 6,152
------- ---------- ------
Net income (loss) ..................... $3,920 $ (3,964) $ (44)
======= ========== ======
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended May 31,1997
-----------------------------------------
North North
Dartmouth Pro Forma Dartmouth
Historical Adjustments Pro Forma
------------ ------------- ----------
<S> <C> <C> <C>
Revenues
Gross revenues from real estate ...... $4,543 $ -- $4,543
Interest and other income ............ 15 -- 15
------- ---------- ------
4,558 -- 4,558
Expenses
Property operating expenses ......... 1,714 -- 1,714
Depreciation and amortization ......... -- 873(1) 873
Mortgage and bank loan interest ...... -- 2,100(2) 2,100
------- ---------- ------
1,714 2,973 4,687
------- ---------- ------
Net income (loss) ..................... $2,844 $ (2,973) $ (123)
======= ========== ======
</TABLE>
- ------------
Footnotes to North Dartmouth Mall:
(1) To record depreciation and amortization on assets acquired and transaction
costs capitalized.
(2) To record interest expense on additional short-term borrowings under the
revolving line of credit of $35 million at 8%.
25
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING INCOME STATEMENTS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
August 31, 1996 May 31, 1997
----------------- ------------------
<S> <C> <C>
(d) To record interest expense on $14.5 million of additional borrow-
ings at an effective borrowing rate 8%, including amortization of
deferred financing costs, net of interest capitalized on Develop-
ment Properties. $ 666 $ 703
(e) To record the Operating Partnership's 50% equity in the income
of the Court at Oxford Valley, net of amortization of excess pur-
chase price over net book value of assets acquired. $ (367) $ (75)
(f) To adjust the minority interest's share of income in Operating
Partnership. $ 121 $ 177
</TABLE>
26
<PAGE>
THE RUBIN ORGANIZATION, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following discussion should be read in connection with "The Rubin
Organization, Inc. -- Summary Selected Financial Information" and the audited
financial statements of The Rubin Organization, Inc. which appear as Appendix F
to this Proxy Statement.
TRO is a fully integrated real estate company which earns revenue
primarily from the management, leasing and development of retail, office and
residential properties. TRO's primary focus is in the retail sector. TRO
manages and leases properties for its own account and for third parties,
including several financial institutions, insurance companies and pension
funds. At the end of 1996, TRO entered into an agreement to purchase the
management contracts of Equity Properties & Development, L.P. ("EPDLP")
starting January 1, 1997. This acquisition, financed by a $7.0 million note,
nearly doubled TRO's retail profile. TRO's development business includes
development, expansion, renovation and reconfiguration of properties for its
own account and for third parties. Current development projects on which TRO
anticipates earning a development fee (but in which the Trust will not have an
ownership interest) include the renovation of a vacant office building into a
class A space for use by a single tenant and the renovation of a high rise
office building for use as a five star hotel near the Pennsylvania Convention
Center. TRO is also involved in the development of several retail power
centers.
TRO also makes advances to affiliated partnerships involved in various
development projects. These advances are used by the affiliates to fund soft
costs incurred in the planning and predevelopment stages of the proposed
projects. TRO will generally be reimbursed from proceeds of construction or
permanent financing. TRO may also earn development, leasing and management fees
from the affiliates as the projects advance through the development stage and
become operating properties.
Results of Operations
For the Six Months Ended June 30, 1997 vs. 1996
Total revenues increased $2.72 million or 38.6% for the six months ended
June 30, 1997, as compared to the same period in 1996. Of this increase, $1.88
million was the result of fees earned from the EPDLP properties. The remaining
$840,000 was the result of a $696,000 increase in brokerage commissions earned
by the office realty department; a $118,000 increase in other leasing revenue;
and a $300,000 fee earned from KIMCO Realty for the disposition of the Clover
Stores chain. These increases were partially offset by a decrease of $238,000
in development fees and a $35,000 decrease in publication income.
Total operating expenses increased $2.47 million, or 34%, for the six
months ended June 30, 1997, as compared to the same period in 1996 primarily as
the result of one time start-up costs of $560,000, an increase of $1.22 million
in recurring costs related to the management and leasing of the EPDLP
properties, an increase of $350,000 in professional fees incurred related to
the PREIT transaction, and an increase of $334,000 in depreciation and
amortization due primarily to the amortization of the $7.0 million intangible
asset related to the EPDLP management contracts.
Interest expense increased $204,000 or 62.1% for the six months ended June
30, 1997, as compared to the same period in 1996, primarily due to financing
the acquisition of the EPDLP contracts.
Net loss was $524,000 for the six months ended June 30, 1997, as compared
to $735,000 for the same period in 1996, reflecting a decrease of approximately
$211,000, for the reasons discussed above.
Twelve Months Ended December 31, 1996 Compared to 1995
Total revenues decreased $1.0 million, or 6.1%, for the twelve months
ended December 31, 1996, as compared to the same period in 1995. Of this
decrease, $800,000 was the result of a breakup fee earned in 1995 in connection
with an attempted purchase of the John Wanamaker Department Stores chain. The
remaining $200,000 was the result of a $370,000 reduction in management fees
and leasing commissions from contracts cancelled or not renewed and a $100,000
reduction in publication income, which was partially offset by an increase of
$280,000 in development fees primarily as the result of the development of a
powerstrip center in English Creek, NJ.
27
<PAGE>
Total operating expenses decreased $218,000, or 1.4%, for the twelve
months ended December 31, 1996, as compared to the same period in 1995. This
was the result of decreases in professional fees of $368,000 related to the
attempted Wanamaker purchase, $308,000 in normal recurring operating expenses,
and $198,000 in cost of goods for publications. A portion of these decreases
was offset by increases of $320,000 for a write-down of TRO's investment in
1626 Locust Street Associates, $280,000 for start-up costs related to the
acquisition of EPDLP management agreements, and $56,000 in depreciation.
Interest expense decreased $210,000, or 25.8%, for the twelve months ended
December 31, 1996, as compared to the same period in 1995, primarily due to a
reduction of debt.
Equity in loss from investments in limited partnerships decreased by
$44,000, or 11.0%, for the twelve months ended December 31, 1996, as compared
to the same period in 1995. This was a direct result of the operations of two
limited partnerships (APEX Site Management, L.P. and 1626 Locust Street
Associates) in which TRO has equity interests.
Net loss was $591,000 for the twelve months ended December 31, 1996, as
compared to a net loss of $52,000 for the same period in 1995, reflecting an
increase of $539,000, for the reasons discussed above.
Twelve Months Ended December 31, 1995 Compared to 1994
Total revenues increased $1.3 million, or 8.6%, for the twelve months
ended December 31, 1995 as compared to the same period for 1994. Of this
increase, $800,000 was the result of the 1995 Wanamaker transaction discussed
above. The remaining $500,000 was primarily the result of increased leasing and
management activity.
Total operating expenses decreased $1.5 million, or 8.8%, for the twelve
months ended December 31, 1995, as compared to the same period for 1994. Of
this decrease, $2.1 million was the result of a one time write-off in 1994 of
costs incurred during an attempted public offering. This was offset by an
increase in professional fees of $368,000 related to the Wanamaker transaction,
and an increase in normal recurring operating expenses of $200,000 resulting
from increased leasing and management activity.
Interest expense increased $184,000, or 29%, for the twelve months ended
December 31, 1995, as compared to the same period in 1994, primarily due to
increased debt.
Equity in loss from investments in limited partnerships increased to
$398,000 for the twelve months ended December 31, 1995, primarily as a result
of an investment in APEX Site Management, L.P.
Net loss was $52,000 for the twelve months ended December 31, 1995, as
compared to a net loss of $2.27 million for the same period in 1994, reflecting
a decrease of $2.22 million for the reasons discussed above.
Cash Flows
For the Six Months Ended June 30, 1997 vs. 1996
Cash and cash equivalents increased to $854,000 at June 30, 1997 as
compared to $544,000 at June 30, 1996.
Cash provided by operations was $1.1 million for the six months ended June
30, 1997 as compared with $236,000 for the same period in 1996. This increase
was primarily the result of EPDLP properties management start-up and PREIT
transaction costs incurred but not paid as of June 30, 1997.
Cash used in investing activities increased to $1.6 million for the six
months ended June 30, 1997 as compared with $271,000 for the same period in
1996. This increase was primarily the result of capital expenditures of
$431,000 for computer equipment primarily related to the management of the
EPDLP Properties, other costs for a new office in Chicago, Illinois used in the
management of the EPDLP properties and an increase of $838,000 in advances to
affiliated partnerships involved in various development projects. These
advances are made to fund soft costs in the planning and predevelopment stages
of these projects. Reimbursement from the affiliates is expected from the
proceeds of construction or permanent financing. These increases were partially
offset by a decrease of $265,000 in contributions to APEX Site Management,
L.P., as the Company had fulfilled its funding requirements by the end of 1996,
and proceeds of $114,000 from the sale of real estate.
28
<PAGE>
Cash provided by financing activities was $58,000 for the six months ended
June 30, 1997 as compared with cash used in financing activities of $290,000
for the same period in 1996. This increase was primarily the result of $718,000
in proceeds from the issuance of common stock in the first quarter of 1997 and
partially offset by $395,000 of dividends paid.
Twelve Months Ended December 31, 1996 Compared to 1995
Cash and cash equivalents were $861,000 and $869,000 at December 31, 1996
and December 31, 1995, respectively.
Cash provided by operations increased to $674,000 for the twelve months
ended December 31, 1996 as compared with $208,000 for the same period in 1995.
The increase was primarily the result of improved collections of fees and
leasing commissions during 1996 as compared with 1995.
Cash used in investing activities increased to $3.1 million for the twelve
months ended December 31, 1996, as compared with $910,000 for the same period
in 1995. This increase was primarily the result of a $2.3 million increase in
advances to affiliated partnerships in order to fund predevelopment costs.
Cash provided by financing activities increased to $2.4 million for the
twelve months ended December 31, 1996, as compared with $501,000 for the same
period in 1995. This was primarily the result of $4.3 million of proceeds from
the issuance of stock in 1996, which was partially offset by the payments of
existing long-term debt of $1.7 million and amounts due to various affiliates
of $360,000.
Twelve Months Ended December 31, 1995 Compared to 1994
Cash and cash equivalents decreased to $870,000 at December 31, 1995 as
compared to $1.1 million at December 31, 1994.
Cash provided by operations decreased to $208,000 for the twelve months
ended December 31, 1995 as compared with $338,000 for the same period 1994. The
decrease was primarily the result of an increase $134,000 in payments toward
deferred compensation in 1995.
Cash used in investing activities increased to $910,000 for the twelve
months ended December 31, 1995 as compared with $263,000 for the same period in
1994. This increase was primarily the result of an increase of $247,000 in
advances to affiliated partnerships and increases of $131,000 and $264,000 in
contributions to 1626 Locust Street Associates and APEX Site Management, L.P.,
respectively.
Cash provided by financing activities increased to $501,000 for twelve
month period ended December 31, 1995 as compared to $157,000 for the same
period in 1994. This increase was primarily the result of an increase in long
term debt.
Liquidity and Capital Resources
At December 31, 1996, TRO's balance of cash and cash equivalents was
$861,000, which will be used to fund working capital requirements. Throughout
the first half of 1997, TRO will continue to incur start up costs, including
upgrades to its computer hardware and software related to its acquisition of
the EPDLP management contracts. This will adversely affect cash flows. During
the third and fourth quarters of 1997, as start up costs decrease, TRO expects
cash flows to increase to levels which will enable it to operate without the
need for additional capital funding or the use of existing cash reserves. In
addition, TRO will continue to actively pursue development opportunities, which
will also have an adverse effect on cash flows.
TRO expects to have adequate cash flow to fund normal operations through
1997 and 1998. In order to fund the EPDLP start up costs and development
projects, it plans to authorize and issue additional shares of stock, and
outside financing for specific development projects.
29
<PAGE>
PROPOSAL NO. 1:
THE TRO TRANSACTION
----------------
The TRO Transaction
The TRO Transaction will involve a number of related transactions. See
"The TRO Transaction -- Principal Features of the TRO Transaction" and "Summary
- -- The TRO Transaction -- Principal Features of the TRO Transaction."
Background of and Reasons for the TRO Transaction; Board Recommendation
The Trust was organized in 1960 promptly following enabling amendments to
the Internal Revenue Code, enacted earlier that same year, to permit
pass-through tax treatment for real estate investment trusts. The Trust was one
of the first publicly-held real estate investment trusts in the United States.
The Trust has historically concentrated its assets in apartment projects
and shopping centers. Because much of the Trust's real estate investment
activity has been through joint ventures with entities active in real estate
development, the Trust has historically maintained a limited management staff.
Currently, the Trust has interests in nineteen apartment projects, eleven of
which (comprising 4,659 units) are wholly-owned, directly or indirectly, by the
Trust, and eight of which (comprising 2,577 units) are owned by joint venture
partnerships in which the Trust has a 50% interest (or, in one case, a 40%
interest).
In connection with shopping center investments, the Trust has made even
greater utilization of joint ventures with developers and other real estate
investors. The Trust currently has interests in fourteen regional and community
shopping centers, four of which (comprising an aggregate of 694,000 leasable
square feet) are wholly-owned, directly or indirectly, by the Trust, and ten of
which (comprising an aggregate of 3,569,000 leasable square feet) are owned by
joint ventures in which the Trust's direct or indirect interest ranges from 70%
to 25%. In five of the joint venture shopping center projects, the Trust's
interest is 50%.
For the most part, the Trust's relationships with joint venture partners
have been amicable and mutually beneficial and have led, in many instances, to
other profitable real estate investment opportunities. In addition, joint
venture ownership has permitted the Trust to have interests in a greater number
of projects, thereby diversifying its contacts in the industry.
Beginning in the mid-1980's, some investors and market professionals have
questioned the desirability of the utilization of joint venture investing for
real estate investment trusts. Analysts and others have applied premiums to
trusts which controlled all of the equity in the projects which they owned and,
presumably, discounts to those which did not. This trend was in some measure
prompted by a perceived desirability to be able to directly influence the
active management of the assets in the portfolio -- a right which the Trust
does not have in most of its joint venture arrangements -- and also a belief
that those real estate investment trusts which had the internal capability to
identify and develop projects without dependence on third party developers were
likely, over time, to achieve growth and returns superior to those which lack
such capacity.
The Trust has developed in-house expertise to acquire, redevelop, and
manage wholly-owned apartment projects. In recent years, the Trustees and
senior management of the Trust have considered the desirability of creating or
obtaining comparable in-house capabilities in shopping centers so as to give
the Trust the flexibility to originate, develop and manage newly acquired
shopping center projects. Since 1990, members of the Trust's management have
conducted discussions with various developers relating to the acquisition of
projects in which the developers had an interest and, in that context,
considered whether certain of these potential sellers had the breadth of
experience, proven capabilities and market presence in the Trust's principal
geographic areas of focus that they could assist the Trust in becoming more
self-sufficient in shopping center development, acquisition and management. For
various reasons, none of these discussions progressed beyond the most
preliminary stage.
In 1994, TRO investigated the possibility of organizing a publicly-held
real estate investment trust and contributing to it the direct and indirect
interests which it had in a number of shopping center and apartment properties.
These efforts were abandoned in the summer of 1994 when the public market for
real estate investment
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trusts became, for an extended period of time, unreceptive to further initial
public offerings. While these efforts were on-going, representatives of TRO and
representatives of the Trust had limited discussions as to whether TRO might be
able to achieve its then-objectives without organizing its own public real
estate investment trust and the Trust might be able to achieve its objectives
of greater self-sufficiency in the development and management of existing and
new shopping center assets. These discussions terminated shortly after they
were commenced without any meaningful substantive negotiation of the terms of a
possible transaction, in part because TRO had not yet abandoned its efforts or
desire to pursue a stand-alone publicly-held real estate investment trust and
in part because the Trust had not yet determined its intermediate and long-term
strategic direction.
In March, 1995, the Trust retained Lehman Brothers to explore, and advise
the Trust with respect to, strategic transactions.
In January of 1996, discussions between TRO and the Trust recommenced.
Negotiations proceeded sporadically until August of 1996. After that time,
counsel for both parties became involved in the discussions and the substantive
negotiation of possible transaction terms intensified. In December of 1996, TRO
concluded a transaction with Equity Properties and Development Limited
Partnership ("EPDLP") under which TRO increased the number of leasable square
feet of shopping center space under management from approximately 11.4 million
to approximately 23.4 million and agreed to acquire shopping centers controlled
by affiliates of EPDLP in Dartmouth, Massachusetts and Florence, South Carolina
(the "TRO/EPDLP Transaction") (See "The TRO Transaction -- Description of the
Business of TRO -- The TRO/EPDLP Transaction").
One of the principal terms to be agreed upon was a valuation of TRO and
the manner in which the consideration would be paid. At their October, 1996,
Board Meeting, the Trustees appointed a Special Acquisition Committee of
Trustees, consisting of Messrs. Farber, Korman, and Orleans, to work with
management and assist in formulating and negotiating the terms of a transaction
with TRO and the TRO Affiliates which would be acceptable to the Trust.
The Special Acquisition Committee took an active role in structuring the
deferred, earn-out mechanics relating to the payment for the equity interest in
TRO and in assuring that, as part of the overall transaction, the Trust would
obtain the benefits of the full-time efforts of Mr. Rubin, as its Chief
Executive Officer, and a substantial portion of the balance of his staff while
retaining the contributions of Mr. Cohen, who was the founder of the Trust and
had been its Chief Executive Officer for thirty-six years, as well as a number
of other important senior officers of the Trust.
The members of the Special Acquisition Committee met several times and
reported the status of negotiations to the full Board at meetings of the Board
held in December of 1996 and in April of 1997.
During the period from December, 1996 through April, 1997, there were
numerous meetings between the principals and their respective counsel and on
April 16, 1997, the Trust and TRO entered into a non-binding letter of intent
which set forth the principal terms of the transaction.
On July 8, 1997, the Trustees reviewed the TRO Operative Documents and the
overall terms of the TRO Transaction at a meeting devoted principally to the
TRO Transaction. At the meeting, the Board received the opinion of Lehman
Brothers that the consideration to be paid by the Trust in the TRO Transaction
was fair to the Trust from a financial point of view. The Board also reviewed
terms of the TRO Transaction with the Trust's legal counsel and accountants.
Following such review, the Board authorized the officers of the Trust, subject
to final negotiation of a limited number of issues, to execute and deliver the
TRO Transaction Documentation providing for consummation of the TRO Transaction
subject to the conditions set forth in the TRO Transaction Documentation.
The matters requiring final negotiation, and certain other matters
subsequently arising in the course of such final negotiations, required further
meetings of the Board on July 18, 1997, and on July 24, 1997. At the latter
meeting, Lehman Brothers supplemented and reissued their opinion, originally
delivered on July 8, 1997, that under the terms resulting from the final
negotiations the consideration to be paid by the Trust in the TRO Transaction
was fair to the Trust from a financial point of view.
The definitive TRO Transaction Documentation was executed and delivered by
the parties on July 30, 1997.
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In reaching the decision to pursue, and ultimately to approve, the TRO
Transaction, the Board considered numerous factors. Throughout the course of
its deliberations, the Board's paramount consideration was to maximize the
Trust's value for the Shareholders in an increasingly competitive environment
for the acquisition and development of desirable shopping center projects and
position the Trust for growth.
In its deliberations, the Board did not assign relative degrees of
importance to any specific factors considered. The factors listed below were
all considered by the Board at its various meetings at which the terms and
structure of the TRO Transaction were deliberated and ultimately approved:
1. The need of the Trust to obtain proven internal expertise in the
development and management of shopping center projects so as to enable the
Trust, going forward, not to rely solely on joint venture partners for the
development, acquisition and management of shopping center project assets. In
this regard, the Trustees concluded that the TRO personnel have demonstrated
substantial expertise in all phases of shopping center development, including
the identification of attractive sites, structuring the financing of projects,
obtaining necessary local approvals, pre-leasing or leasing anchor and
satellite space, and delivering timely, leased-up projects. TRO personnel have
also developed a team capable of managing in excess of 18 million square feet
of regional and community shopping centers.
Although the Trustees acknowledged that much of TRO's real estate
development efforts had been in the context of joint ventures, TRO had entered
into such transactions not because of an absence of internal expertise but
rather largely because of limitations on its access to the capital markets to
develop properties on a stand-alone basis. The Trustees believed that the
combination of TRO's experience and the Trust's more ready access to private
and public debt and equity financing should permit the combined enterprise to
confine future joint venture shopping center developments to those where there
was a strategic advantage in doing so.
2. The economic terms of the TRO Transaction, including: (i) the fact that
80% of the consideration to be paid for the TRO property management business is
directly related to increases in the Trust's FFO per share; and (ii) in large
measure, the prices allocable to the Existing Properties and Development
Properties are prices at which the Trust would acquire the interests of the TRO
Affiliates in such properties independent of the TRO Transaction.
3. The fact that projections of the Trust's management reflect that in
each of the years 1998 through 2002 the Trust's FFO on a per share equivalent
basis should be higher after giving effect to the implementation of the TRO
Transaction than it would have been if the TRO Transaction were not effected.
4. The fact that the transaction afforded the Trust a number of sites on
which to pursue pre-development shopping center opportunities, although it was
understood that it was unlikely that all such opportunities would result in
buildable projects and that none of these possible projects would be
wholly-owned by the Trust.
5. The fact that TRO's extended property management business would likely
enable the Trust to become aware of, and obtain an opportunity to consider,
specific future shopping center project acquisitions and that the acquisition
of TRO's development expertise would also enable the Trust to benefit from its
own extensive relationships in the shopping center industry.
6. The fact that the geographic concentration of TRO's activities and
contacts in Pennsylvania and the Middle Atlantic states was consistent with the
Trust's historic concentration in those areas while TRO's recent transaction
with EPDLP provided access for the Trust to a number of other markets.
7. The fact that the acquisition of the Existing Properties and the
Development Properties, and the possible development of one or more of the
Predevelopment Properties, will result in increases in the size of the Trust's
assets and the diversity of its portfolio and may result in greater interest in
the Trust's Shares in the financial markets. In this regard, the Trustees
recognized that the acquisition of the Existing and Development Properties will
result in a significant increase in the Trust's debt-to-equity ratio and the
Trust's administrative costs and further recognized that there can be no
assurance that the Trust will be able to raise equity to improve such ratios on
terms acceptable to the Trust.
8. The Board's judgment that the TRO Transaction, taken as a whole, would
not only provide an additional avenue for profitable additions to the Trust's
portfolio of real estate assets but also would provide the Trust with the
internal capacity to identify, and in some cases implement, steps to improve
the marketability and profitability of some of the older properties currently
held by the Trust.
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9. The legal and accounting advice provided by the Trust's counsel and
accountants, respectively, concerning the terms of the TRO Transaction.
10. The opinion rendered by Lehman Brothers as to the fairness of the
consideration to be paid by the Trust in the TRO Transaction from a financial
point of view.
Based on the foregoing, the Board concluded that the TRO Transaction is
fair to the Trust and the Shareholders and would be in the best interest of the
Trust and the Shareholders. Accordingly, the Board of Trustees voted to
recommend that the Shareholders approve the terms of the TRO Transaction.
Although approval of the terms of the TRO Transaction by the Shareholders is
not required by the terms of the Trust's Agreement of the Trust, the Trustees
concluded that because of their belief as to the potential of the TRO
Transaction to the long-term interests of the Trust, and the probable need, in
any event, under the rules of the American Stock Exchange, Inc. to obtain
approval by the Shareholders of the issuance of the additional Shares which
will become issuable under the terms of the TRO Transaction, it was appropriate
to condition the Trust's obligation to complete such transaction on Shareholder
approval and, in the event such approval were not obtained, the Trust would
abandon the TRO Transaction. In the event the TRO Transaction is not completed
by reason of the failure of the Shareholders to approve the Transaction, the
Trust will be obligated to reimburse TRO for its documented transaction-related
expenses up to $1 million.
Mr. Jack Farber, a Trustee of the Trust since 1971, and a member of the
Special Acquisition Committee, was the sole member of the Board who voted
against approval of the TRO Transaction.
Certain of the reasons stated above as to the basis for the determination
of the Board of Trustees to approve, and to recommend that the Shareholders
approve, the TRO Transaction are, or include, statements which are, or may be
deemed to be, forward looking statements (the "Forward Looking Statements")
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those stated in, or contemplated by, the Forward Looking
Statements as a result of a number of factors, including market constraints on
increased rental income, competition from projects owned by others, an
inability to identify profitable opportunities to develop new projects or to
rehabilitate existing properties, and the additional factors considered by the
Board of Trustees and listed immediately below.
In the course of their deliberations regarding the TRO Transaction, and in
connection with their ultimate resolution to approve, and to recommend to
Shareholders that they approve, the TRO Transaction, the Board of Trustees gave
consideration to the following additional factors, among others:
1. TRO's third-party management business has lost money in recent periods.
Since TRO only began to perform the EDPLP Contracts in February of 1997, there
is as yet no significant basis for determining what effect that business will
have on TRO's profitability. The Trust's initial payment for the TRO property
management business will be 200,000 Class A OP Units (having an aggregate
imputed market value of $4,776,000, based on the closing price of the Shares on
the AMEX on July 29, 1997 of $23.88 per share). The Trust will be required to
issue up to an aggregate of an additional 800,000 Class A OP Units over a five
year period for the TRO property management business, depending on benchmark
improvements in the Trust's FFO per share in each of such five years.
Improvements in FFO of the Trust, on a consolidated basis, will give rise to
further issuances of Class A OP Units, whether or not the profitability of
TRO's third-party management business has improved on a stand-alone basis.
2. At May 31, 1997, the Trust had aggregate indebtedness of approximately
$195 million and a ratio of indebtedness to total market capitalization of
approximately .50:1. Immediately after the TRO Closing Date, after giving
effect to that portion of the TRO transaction to be completed on the TRO
Closing Date, the Trust will have aggregate long-term indebtedness of
approximately $335 million and a ratio of long-term indebtedness to total
market capitalization of approximately .585:1. Although management of the Trust
currently intends to mitigate the increased leverage through the subsequent
issuance of equity, or equity-equivalent securities, on a private or public
basis, there is no assurance that it will be able to do so, or will be able to
do so on terms not detrimental to existing Shareholders.
3. The terms of the TRO Transaction require the Operating Partnership to
acquire the interest of TRO Affiliates in two shopping centers currently under
construction upon completion of the construction in exchange
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for Class A OP Units based upon a valuation formula that gives economic credit
for the then-existing leases and provides mechanics for valuing unleased space
and that values such Class A OP Units based upon the value of the Shares prior
to the execution and delivery of the definitive TRO Transaction Documentation.
There can be no assurance that the formulas for valuation of such centers or
the Class A OP Units issuable in respect thereof will result in effective
payments by the Trust which are consistent with fair market values at the time
of the acquisition of such properties by the Operating Partnership.
4. Under the terms of the TRO Transaction, the Trust will acquire the
interest of TRO Affiliates in three potential shopping centers. Although TRO
personnel have substantial experience in shopping center development, existing
Trust personnel do not. At least one of the projects has some committed tenants
and/or site purchasers; some have none. In most instances, substantial
additional development approvals are required prior to the commencement of
construction. Shopping center development is extremely competitive and entails
substantial risks, both in respect to the ultimate recapture of pre-development
expenses and the viability and profitability of any resulting project. It is
not possible to predict how many of these projects, if any, will ultimately be
completed or completed on favorable economic terms.
5. Currently, the Trust participates in 20 joint ventures in which it has
between a 25% and a 60% equity interest but has no day-to-day management
control over the assets of the joint venture. If all of the properties
contemplated to be acquired by the Operating Partnership under the terms of the
TRO Transaction are ultimately acquired, the Trust will be a party to three
additional joint ventures in which it has a 50% joint venture interest but no
management rights either under the applicable partnership agreement or by
separate management contract.
6. Although the Operating Partnership will own 95% of the aggregate equity
interests in TRO, all of the voting stock of TRO will be owned by the TRO Stock
Bonus Plan. TRO employees will be entitled to vote the common shares vested in
their accounts in the TRO Stock Bonus Plan on fundamental transactions (merger,
sale of assets, etc.) Voting on the shares in the Plan on all other matters
will be by the Trustee for the Plan at the direction of the TRO Stock Bonus
Plan Committee, the members of which will be appointed by the TRO Board of
Directors. Thus, the Trust will not control TRO and will not be able to
influence the manner in which it performs its management obligations, seeks and
accepts new business or otherwise determines its business strategy.
7. The terms of the TRO Transaction provide that, on the Closing Date,
Ronald Rubin, the Chief Executive Officer of TRO, will become the Chief
Executive Officer of the Trust. Ronald Rubin has been involved in major office
building, hotel, apartment and shopping center projects over a forty-four year
career in real estate. Although current Trust management and other TRO
management have substantial extended experience in real estate development,
ownership and/or management, a meaningful portion of the underlying rationale
for the TRO Transaction is obtaining the services of Ronald Rubin for the
benefit of the Trust. Ronald Rubin is party to an employment agreement with the
Trust, to take effect on the TRO Closing Date, providing for an initial five
year term and one year renewal periods thereafter at an initial base salary of
not less than $345,000 per year and with additional cash incentive
compensation. He will also be granted options on the Closing Date with respect
to 150,000 Shares at an exercise price equal to the closing price of the Shares
on that date. The options will vest in four equal annual installments beginning
on the first anniversary date of the Closing Date. His employment agreement
also provides for substantial severance payments if he is terminated other than
for cause or if he is terminated or resigns following a "change in control" of
the Trust (as defined in his employment agreement), whether or not such change
was initiated by, or consented to, by the then Trustees of the Trust. In the
event of his death, options vested at his death would be exercisable by his
estate.
8. Following completion of the TRO Transaction, the Trust intends to
selectively pursue development activities, including expansion or substantial
renovation of certain properties now owned, directly or indirectly, in whole or
in part, by the Trust, and to consider the development or acquisition of
shopping centers and apartment properties where it believes that such
development or acquisition is consistent with the business strategies of the
Trust. Development projects generally require various governmental and other
approvals, the receipt of which cannot be assured. The Trust will incur certain
risks in connection with development activities in addition to those involved
in the ownership and operation of established shopping centers and apartment
properties. These risks include the expenditure of funds on and devotion of
management's time to projects which may not come to fruition, the risk that
construction costs of a project may exceed original estimates, possibly making
the
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project uneconomical, the risk that a project may not be completed on schedule
which may affect its profitability, the risk that occupancy rates and rents at
a completed project will not be sufficient to make the project profitable,
financing risks and the failure to obtain required or desirable zoning,
occupancy or other governmental permits or authorizations. In addition, because
the Trust must distribute 95% of its taxable income in order to maintain its
qualification as a REIT, the Trust anticipates that new developments (including
expansions) and acquisitions will be financed primarily through lines of credit
or other forms of secured or unsecured construction financing. In case of an
unsuccessful development project, the Trust's loss could exceed its investment
in the project. If any of the above occurs, the Trust's ability to repay such
borrowings or make expected distributions to Shareholders could be adversely
affected.
9. The employment agreements between the Trust and each of the former TRO
managers who will be parties to such agreements provide that they will devote
their full business time and effort to the business of the Trust. However, TRO
will continue to render management, development, leasing and related services
to over twenty projects in which certain TRO Affiliates will retain equity
interests. The existing management arrangements with these entities are on
terms at least as favorable to TRO as the average of TRO's third-party
management arrangements with unrelated parties. In addition, there will be
numerous issues requiring resolution over the next several years relating to
the implementation of various important elements of the TRO Transaction to
occur following the TRO Closing where the interest of those members of the
Trust's management who are former TRO employees may diverge from the interests
of the Trust and the Shareholders.
10. Under the terms of the TRO Transaction, (i) the Operating Partnership
could ultimately issue OP Units exchangeable (at the option of the Trust, if
tendered for redemption) for approximately 1.8 million Shares, or approximately
21% of the Shares outstanding on the date hereof, and (ii) the Trust will grant
options on at least 560,000 Shares. Thus the interest of existing Shareholders
in the Trust will be substantially reduced as a result of the TRO Transaction.
11. By reason of the employment agreements entered into with senior
executives of TRO (to take effect on the TRO Closing Date), in addition to an
initial increase in the aggregate fixed cash compensation expense for senior
management of the Trust and TRO (an increase of approximately $300,000 per year
on a combined basis), the Trust's and TRO's incentive cash compensation will
also increase substantially. In addition, TRO management and other TRO
personnel will be granted options to purchase 560,000 Shares in the Trust first
becoming exercisable over a five year period at the closing market price of the
Shares of the Trust on the Closing Date.
12. The employment contracts between the Trust or TRO with Ronald Rubin
and nine other shareholders of TRO all contain provisions under which they will
be entitled to three times base salary and incentive compensation, in the case
of Ronald Rubin, and two times base salary and incentive compensation, in the
case of all others, subject to, in each case, any applicable limitations on
deductibility of such payments under the Internal Revenue Code, in the event
that there has been a "change of control" (as defined in the agreements) and
(i) in the case of Ronald Rubin, he elects to subsequently resign or his
employment is subsequently terminated for any reason other than cause, and (ii)
in the case of all others, if the employee subsequently resigns following a
change in the terms or conditions of his employment (to the extent specified in
the agreement) or the employee's employment is thereafter terminated other than
for cause.
Opinion of Financial Advisor
The Trust has retained Lehman Brothers to act as its financial advisor in
connection with rendering a fairness opinion with respect to the TRO
Transaction. Lehman Brothers delivered its opinion to Board of Trustees of the
Trust on July 8, 1997 that, based upon and subject to the various assumptions,
considerations and limitations set forth therein, as of the date of such
opinion, the consideration to be paid by the Trust in connection with the TRO
Transaction was fair, from a financial point of view, to the Trust. Such
opinion was supplemented and reissued on July 24, 1997.
THE FULL TEXT OF THE OPINION OF LEHMAN BROTHERS, AS REISSUED ON THE DATE
OF THIS PROXY STATEMENT, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITS ON THE REVIEW UNDERTAKEN BY LEHMAN BROTHERS IN CONNECTION WITH SUCH
OPINION, IS ATTACHED HERETO AS APPENDIX B. THE SUMMARY OF THE OPINION OF LEHMAN
BROTHERS SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
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No limitations were imposed by the Trust on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. Lehman Brothers was not requested to and did not make any
recommendation to the Board of Trustees of the Trust as to the form or amount
of the consideration to be paid by the Trust in the TRO Transaction, which was
determined through arm's-length negotiations between the parties. In arriving
at its opinion, Lehman Brothers did not ascribe a specific range of values to
the Trust, TRO or the Related Real Assets (as defined below), but rather made
its determination, as to the fairness, from a financial point of view, of the
consideration to be paid by the Trust on the basis of the financial and
comparative analyses described below. Lehman Brothers' opinion is for the use
and benefit of the Board of Trustees of the Trust and was rendered to the Board
of Trustees of the Trust in connection with its consideration of the TRO
Transaction. Lehman Brothers' opinion is not intended to be and does not
constitute a recommendation to any holder of Shares as to how such shareholder
should vote with respect to the TRO Transaction. Lehman Brothers was not
requested to opine as to, and its opinion does not address, the Trust's
underlying business decision to proceed with or effect the TRO Transaction.
In connection with its opinion, Lehman Brothers reviewed and analyzed: (i)
a draft of the TRO Contribution Agreement dated July 23, 1997 and the specific
terms of the TRO Transaction; (ii) publicly available information concerning
the Trust that Lehman Brothers believed to be relevant to its analysis,
including the Annual Report on Form 10-K of the Trust for the year ended August
31, 1996, and the Quarterly Report on Form 1O-Q of the Trust the quarter ended
May 31, 1997; (iii) financial and operating information with respect to the
business, operations, assets, liabilities and prospects of the Trust, TRO and
the related real estate assets to be acquired by the Trust in connection with
the TRO Transaction (the "Related Real Estate Assets") furnished to Lehman
Brothers by the Trust and TRO, including in connection with an analysis of the
Trust's net asset value; (iv) the trading history of the Shares for the past
three years and a comparison of such trading history to the Trust's current
stock price and to the trading histories of such other companies and indices
that Lehman Brothers deemed relevant; (v) a comparison of the historical
financial results and present financial condition of the Trust with those of
other companies that Lehman Brothers deemed relevant; (vi) a comparison of the
historical financial results and present financial condition of TRO with those
of other companies that Lehman Brothers deemed relevant; (vii) a comparison of
the financial terms of the purchase of TRO and the Related Real Estate Assets
with the financial terms of certain other transactions that Lehman Brothers
deemed relevant; (viii) a comparison of the financial terms of the purchase of
the Related Real Estate Assets with the financial terms of certain other
transactions that Lehman Brothers deemed relevant; (ix) a comparison of the
relative contribution of TRO to the Trust's financial results following the TRO
Transaction to the TRO ownership interests in the Trust following the TRO
Transaction; and (x) an analysis of the pro forma financial results of the TRO
Transaction. In addition, Lehman Brothers had discussions with the managements
of the Trust and TRO concerning their respective businesses, operations,
assets, liabilities, financial conditions and prospects and undertook such
other studies, analyses and investigations as Lehman Brothers deemed
appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied on the assurances of the management of the Trust
that they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial projections
of the Trust, TRO and the Related Real Estate Assets, upon advice of the Trust,
Lehman Brothers assumed that such projections had been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
respective managements of the Trust, TRO and EPDLP as to the future financial
performance of the Trust, TRO and the Related Real Estate Assets, as the case
may be, and that the Trust, TRO and the Related Real Estate Assets will perform
substantially in accordance with such projections. In arriving at its opinion,
Lehman Brothers conducted only a limited physical inspection of certain of the
properties and facilities of the Trust, TRO and EPDLP and did not make nor
obtain any evaluations or appraisals of the assets or liabilities of the Trust,
TRO and EPDLP. Lehman Brothers' opinion was necessarily based upon market,
economic and other conditions as they existed on and could be evaluated as of
the date thereof.
In connection with rendering its opinion to the Board of Trustees of the
Trust, Lehman Brothers performed a variety of financial and comparative
analyses, as described below. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial and comparative
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analysis and the application of those methods to the particular circumstances,
and therefore, such an opinion is not readily susceptible to summary
description. Furthermore, in arriving at its fairness opinion, Lehman Brothers
did not attribute any particular weight to any analysis or factor considered by
it, but rather made qualitative judgments as to the significance and relevancy
of each analysis and factor. Accordingly, Lehman Brothers believes that its
analyses must be considered as a whole and that a review of selected portions
of such analyses and the factors considered therein, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Lehman Brothers made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the Trust's and TRO's
control. Any estimates contained in Lehman Brothers' analysis are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than such estimates.
Estimates of values of companies do not purport to be appraisals or necessarily
reflect the prices at which companies or their securities actually may be sold.
The projections used by Lehman Brothers in its analyses were prepared by
the managements of the Trust and TRO. Neither the Trust nor TRO publicly
discloses internal management projections of the type provided to Lehman
Brothers in connection with the review of the TRO Transaction and such
projections were not prepared with a view towards public dissemination. The
projections were based on numerous variables and assumptions that are
inherently uncertain and beyond the control of the Trust and TRO, including,
without limitation, factors related to general economic and competitive
conditions. Accordingly, actual results could vary significantly from those set
forth in such projections.
At the meeting of the Board of Trustees of the Trust on July 8, 1997,
Lehman Brothers presented certain written materials and financial analyses in
connection with the delivery of its opinion on that date. The following is a
summary of the material analyses performed by Lehman Brothers in arriving at
such opinion.
a. PRO FORMA ACQUISITION ANALYSIS. Lehman Brothers analyzed the effect
of the TRO Transaction on, among other things, the Trust's estimated funds
from operations ("FFO") and FFO per share for the years 1997 through 2002.
In doing so, Lehman Brothers combined the estimated operating results of
the Trust and TRO and assumed certain increases in general and
administrative expenses per estimates provided by the managements of the
Trust and TRO. Lehman Brothers then compared the estimated FFO per share
for the Trust on a standalone basis to the estimated FFO per share for the
Trust following the TRO Transaction. Lehman Brothers noted that the Trust's
estimated FFO per share for each of the years 1997 through 2002 was higher
assuming the completion of the TRO Transaction.
Lehman Brothers also analyzed the effect of the TRO Transaction on the
equity market capitalization, total market capitalization, dividend payout
and leverage ratios for the Trust. In this regard Lehman Brothers noted
that the TRO Transaction would create a significant increase in the Trust's
equity and total market capitalization. Lehman Brothers further observed
that, on a pro forma basis, the Trust's debt-to-total market capitalization
ratio would increase moderately, and that its dividend payout ratio
(expressed as the current annualized dividend payment divided by estimated
FFO per share) would decrease.
b. SELECTED COMPARABLE PUBLIC COMPANY ANALYSIS. Lehman Brothers compared
certain operating, financial and stock market data for the Trust to
corresponding data for selected publicly traded companies that Lehman
Brothers deemed relevant to its analysis. The comparable companies
consisted of the following four diversified real estate investment trusts:
Colonial Properties Trust, MGI Properties, Inc., Regency Realty Corporation
and Washington Real Estate Investment Trust (the "Comparable Companies").
For the purpose of its analysis, Lehman Brothers utilized the latest
publicly available balance sheet data for the Comparable Companies (as of
March 31, 1997).
In its analysis, Lehman Brothers compared the ratio of closing common
stock prices of each of the Trust and the Comparable Companies to estimated
1998 FFO per share for the Trust and each of the Comparable Companies. In
estimating FFO per share, Lehman Brothers utilized internal management
estimates for the Trust and First Call research analysts' estimates for the
Comparable Companies. Lehman Brothers observed that the Trust's stock price
as a multiple of 1998 FFO was 9.6x as compared to an average of 11.5x for
the Comparable Companies. As a result, Lehman Brothers noted that the
Trust's FFO multiples on a standalone basis were less favorable than the
average for the Comparable Companies.
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Lehman Brothers also analyzed dividend yields, dividend payout ratios
and leverage ratios for the Trust and the Comparable Companies. In this
regard, Lehman Brothers observed that the Trust's dividend yield of 8.3%
and dividend payout ratio of 76.7% were higher than the average for the
Comparable Companies of 6.1% and 70.3%, respectively, while its ratio of
debt-to-total market capitalization of 49.9% was higher than the Comparable
Companies' average of 32.5%.
However, because of the inherent differences between the businesses,
operations and prospects of the Trust and the Comparable Companies, Lehman
Brothers believed that it was inappropriate to, and therefore did not, rely
solely upon the quantitative results of the analysis, and accordingly also
made qualitative judgments concerning the differences in financial and
operating characteristics and historical performance of these companies
which might affect their relative market valuation.
c. STOCK TRADING ANALYSIS. Lehman Brothers reviewed the historical
trading prices for the Trust's Shares and the Comparable Companies relative
to each other and to certain indices that Lehman Brothers deemed relevant
to its analysis. Lehman Brothers observed that on a standalone basis, the
Trust's Share price had increased 1.7%, 2.3% and 15.7% during the prior
month, quarter and year, and had declined by 6.8% during the prior three
years. Lehman Brothers then compared these percentages to those of the
Comparable Companies, which had an average price change of 3.0%, 2.1%,
24.2% and 30.6% during the prior month, quarter, year and three years,
respectively. Lehman Brothers further observed that on a price-only and
total return basis, the Trust's Shares had underperformed the Lehman
Brothers REIT Index, an index of selected REITs maintained by Lehman
Brothers equity research group, during the prior year and three years.
Lehman Brothers also noted that, with respect to the OP Units to be
issued in the TRO Transaction, the Trust's historical Share prices for the
prior month, quarter, year and three years were generally equivalent to or
less than the current Share price (which serves as the basis for the OP
Units initially issued by the Trust in the TRO Transaction).
d. CONTRIBUTION ANALYSIS. Lehman Brothers reviewed the relative
contribution of the Trust and TRO to the Trust's projected FFO following
the TRO Transaction for the years 1998 through 2002 and compared such
contributions to the pro forma percentage interests of the Trust's current
shareholders and TRO following the TRO Transaction. Lehman Brothers noted
that, based upon projections provided by the Trust and TRO, the relative
contributions to projected 1998 FFO (excluding the contribution of the
EPDLP Related Real Estate Assets) were 81.4% and 18.6% for the Trust and
TRO, respectively. This compares to relative ownership interests of 95.0%
and 5.0% for the Trust's current shareholders and TRO, respectively,
immediately following the TRO Transaction. Lehman Brothers noted that the
relative contribution by TRO to FFO following the TRO Transaction
exceeds its relative ownership interests in the Trust following the TRO
Transaction.
e. COMPARABLE TRANSACTION ANALYSIS. Lehman Brothers considered
comparable transactions in assessing the value attributed by the Trust to
TRO and the Related Real Estate Assets.
With respect to the acquisition of TRO, Lehman Brothers reviewed 15
comparable transactions involving the sale of real estate-related
management companies, including: the acquisition by TA Associates of Aetna
Asset Management; the acquisition by AMRESCO Inc. of Acadia Realty Advisors
Inc.; the acquisition by United Asset Management Inc. (Heitman Financial
Limited) of JMB Realty Corp.; the acquisition by LaSalle Partners of Alex
Brown Kleinwort Benson Realty Advisors Corporation; the acquisition by Lend
Lease Corp. of The Yarmouth Group Inc. and of Equitable Real Estate
Investment Management Inc.; the acquisition by CB Commercial Real Estate
Services Group Inc. of Koll Real Estate Services; the acquisitions by
Insignia Financial Group, Inc. of The Edward S. Gordon Company, Inc. and of
the Paragon Commercial Unit of Paragon Group, Inc. and of Rostenberg-Doern
Co., Inc., HMB Property Services Inc., Frain Camins & Swartchild, Inc. and
Radius Retail Advisors; and the acquisitions by Shurgard Storage Centers,
Inc., FFCA I, and Equity Office Properties Trust of their respective
management companies (the "Comparable Management Company Transactions").
Lehman Brothers considered the range of multiples of revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") for each
of these
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transactions. Lehman Brothers noted that the range of multiples of revenues
was 0.8x to 7.7x, with a mean of 2.1x based upon the 11 transactions for
which such data was available. Lehman Brothers noted that the range of
multiples of EBITDA was 3.8x to 13.6x, with a mean of 7.4x based upon the 11
transactions for which data was available.
Lehman Brothers then observed that the multiples of revenues
attributable to the purchase of TRO were 0.3x and 0.2x based upon TRO's
historical 1996 revenues and projected 1997 revenues, respectively, and
assuming a purchase price equal to the Trust's initial payment for TRO
(excluding the potential earn-out). Based upon TRO's average projected
revenues for the years 1998 through 2002 and an assumed purchase price for
TRO which includes the initial payment and maximum potential earn-out, the
multiple of revenues attributable to the purchase of TRO is 1.0x.
The multiples of EBITDA observed were 3.3x and 2.9x based TRO's
historical 1996 EBITDA (adjusted for certain non-recurring items) and
projected 1997 EBITDA, respectively, and assuming the initial payment for TRO
(excluding the potential earn-out). Alternatively, based upon the maximum
potential earn-out for TRO and TRO's projected EBITDA for the years 1998
through 2002, the multiple of EBITDA attributable to the purchase of TRO is
10.1x.
As a result of these analyses, Lehman Brothers noted that the value
attributed to TRO generally falls within the ranges observed for the
Comparable Management Company Transactions.
With respect to the value attributed to the Related Real Estate Assets
to be acquired, Lehman Brothers reviewed 28 sales of regional malls and 64
sales of non-mall shopping centers that have taken place in the United
States since January 1, 1996 (the "Comparable Asset Transactions"). In
reviewing these comparable sales, Lehman Brothers considered the indicated
per square foot sales prices and the indicated capitalization rates for
each. The regional mall sales had an average per square foot sales price of
$85.48 and an average indicated capitalization rate of 9.37%. The non-mall
shopping centers had an average per square foot sales price of $80.52 and
an average indicated capitalization rate of 10.49%. Lehman Brothers
compared these figures to the mall properties to be acquired by the Trust
in the TRO Transaction, which have an average per square foot sales price
of $67.93 and an average indicated capitalization rate of 9.96%. The
non-mall shopping centers to be acquired by the Trust have an average per
square foot sales price of $76.37 and an average indicated capitalization
rate of 10.54%.
As a result of these analyses, Lehman Brothers noted that, on average,
the value attributed to the Related Real Estate Assets by the Trust
compares favorably from the Trust's perspective to that observed in the
Comparable Asset Transactions.
However, because the reasons for and the circumstances surrounding each
of the transactions analyzed were specific to each transaction and because
of the current differences between the businesses, operations and prospects
of the Trust, TRO and the Related Real Estate Assets and the companies
which were parties to the Comparable Management Company Transactions and
the Comparable Asset Transactions, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely upon the quantitative
results of the analysis, and accordingly also made qualitative judgments
concerning the differences in the characteristics of these transactions and
in the financial and operating characteristics and historical performance
of these companies and assets which might affect their relative acquisition
values.
f. NET ASSET VALUE LIQUIDATION ANALYSIS. Lehman Brothers calculated a
range of theoretical net asset values for the Trust. In its analysis,
Lehman Brothers applied a range of estimated capitalization rates to the
Trust's actual 1996 property net cash flow (property net operating income
less a reserve for capitalized expenditures) to determine the theoretical
value of the Trust's property portfolio. Lehman Brothers then adjusted its
valuation to reflect certain liabilities, as well as an appropriate
discount for the Trust's joint venture properties to reflect the Trust's
lack of control of such properties.
However, Lehman Brothers' net asset value analysis did not take into
account the potential strategic benefits and synergies resulting from the
TRO Transaction, nor did it consider the costs, timing or potential market
fluctuations associated with a sale of assets. Based upon these and other
limiting factors, in arriving at its opinion Lehman Brothers attributed
less significance to the liquidation analysis than to the other analyses
described herein.
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Lehman Brothers is an internationally recognized investment banking firm
and, as a part of its investment banking business, is regularly engaged in the
valuation of businesses and securities in connection with acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Lehman Brothers has from time to time provided
financial advisory services to the Trust, for which Lehman Brothers has
received customary compensation. The Trust selected Lehman Brothers as its
financial advisor because of Lehman Brothers' reputation and substantial
experience in transactions such as the TRO Transaction and Lehman Brothers'
familiarity with the Trust and its operations.
In addition to the financial advisory services referred to above, in the
ordinary course of its business, Lehman Brothers may trade in the securities of
the Trust for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
The Trust and Lehman Brothers have entered into a letter agreement, dated
March 23, 1995 and amended on May 15, 1997, relating to the services to be
provided by Lehman Brothers in connection with the TRO Transaction. The Trust
paid to Lehman Brothers a fee of $250,000 relating to the delivery of its
opinion on July 8, 1997. The Trust also will pay to Lehman Brothers an
additional fee of $1,500,000 if the TRO Transaction is successfully
consummated. In its letter agreement, the Trust also has agreed to reimburse
Lehman Brothers for its reasonable out-of-pocket expenses and to indemnify
Lehman Brothers for certain liabilities, including liabilities under the
federal securities laws.
Business Objectives Following the TRO Transaction
Following the completion of the TRO Transaction, the Trust's overall
business objectives will be to increase its Funds from Operations and
substantially lower its leverage ratios. It is anticipated that it will take
between three and six months to achieve a proper level of coordination between
TRO personnel and existing Trust management and the accounting and information
systems of the two entities. During that period and thereafter, the Trust will
seek to increase its Funds from Operations through (i) more efficient, direct
management of its existing properties where it has the legal right to do so,
including upgrading, major maintenance and renovations to support higher rental
and/or occupancy levels where market conditions will support such action, (ii)
the development and/or acquisition of selected additional properties, including
the Predevelopment Properties, where management believes market conditions
support value-added ownership by the Trust, (iii) the adjustment of rents to
current market levels as releasing opportunities arise, and (iv) the
exploration of additional third-party management business by TRO when such
business can be performed on a profitable basis.
The improvement of the Trust's leverage ratios on the consolidated balance
sheet of the Trust will require additional equity funds, in one or more public
or private offerings, on terms acceptable to the Trust and the possible
refinancing of existing indebtedness on certain of the Trust's assets. Both
such efforts will be highly dependent on terms and general conditions
prevailing in the capital markets during the periods following completion of
the TRO Transaction.
There can be no assurance that the Trust will be successful in
accomplishing these objectives.
Description of the Business of TRO
General. TRO is a fully-integrated real estate company headquartered in
Philadelphia, Pennsylvania. TRO and its various predecessor entities have been
in the commercial real estate business since 1916. TRO is a leading provider of
leasing, brokerage, property management and development services in the
shopping center, office and apartment sectors of the commercial real estate
industry. As of June 30, 1997, TRO managed 50 retail properties (including
approximately 45 enclosed or strip shopping centers) in 23 states with
approximately 20 million net rentable square feet, eight office buildings with
approximately 2.8 million net rentable square feet, and approximately 1,000
apartment units.
History of TRO. Richard I. Rubin & Co. ("Rubin & Co.") was founded in 1946
by Richard I. Rubin, Ronald Rubin's father, primarily as a retail leasing
company. In the late 1950's, after Ronald Rubin joined the company, Rubin & Co.
began building small office buildings designed for regional offices of national
insurance
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companies. In the 1960's, Rubin & Co. developed several sites for A&P
Supermarkets and built its first major office building. Rubin & Co.
subsequently developed several retail and office properties, and Richard I.
Rubin & Co., Inc. ("RIR Inc."), an affiliate of Rubin & Co., managed and leased
a growing portfolio of retail and office properties for its own account and for
third parties.
The original geographic focus of Rubin & Co. and RIR Inc. was in
Philadelphia and the surrounding Delaware Valley region. Over time, those
entities expanded their real estate business to the management, leasing,
acquisition and development of properties in primary markets in the Northeast
United States. In 1992, TRO was formed from the prior businesses of RIR Inc.
and Strouse, Greenberg & Co., Inc. ("Strouse, Greenberg"), a full service real
estate company, the predecessor of which was founded in 1916. Strouse,
Greenberg had extensive experience in the management, leasing, acquisition and
development of shopping centers, both for its own account and for third
parties. The combination of these real estate firms resulted in the
establishment of a full service real estate company with a substantial
portfolio of managed shopping centers and office projects in the Delaware
Valley region, which historically had been each firm's principal market. In
addition, Strouse, Greenberg's markets in the Southeast United States were
combined with those of RIR Inc. in the Northeast to create a significant
property portfolio and market presence throughout the Eastern United States.
The TRO/EPDLP Transaction. On December 31, 1996, TRO acquired the rights
under various management agreements from Equity Properties and Development
Limited Partnership ("EPDLP") related to 23 shopping centers that EPDLP had
previously managed. The management agreements are for ten year terms, but are
cancelable upon 30 days notice by the respective owners of the properties in
the event of an asset sale or transfer of the shopping centers. The Agreements
give TRO the rights to various management, leasing and other fee revenue
generated from the respective properties in return for TRO's performance of the
related management and leasing functions. The $7,000,000 purchase price for
this transaction was funded by a promissory note bearing interest at a rate of
7% per annum payable to EPDLP and was accounted for under the purchase method
of accounting. Accordingly, at December 31, 1996, TRO recorded $7,108,977 as an
intangible asset, which includes $108,977 of transaction costs. This intangible
asset is being amortized in proportion of the fee revenue expected to be
generated over a ten-year period.
Most of the properties subject to the management agreements acquired from
EPDLP have been, or are anticipated to be, exposed for sale and there can be no
assurance that TRO will succeed in retaining the management relationship with
the buyers of these properties. In the event EPDLP does not assign replacement
management agreements for management agreements terminated or cancelled prior
to the maturity date of the promissory note other than by reason of TRO's
default in the performance of a management agreement, the principal amount of
the note will be subject to proportionate reduction.
The $7,000,000 note is subject to repayment in each year in an amount
equal to 20% to 35% of the management fees received each year, depending on the
dollar volume received, on the acquired contracts. In the event the principal
of, and accrued interest on, the Note is repaid prior to December 31, 2006 from
the percentage of fees received, additional purchase price is due annually to
EPDLP until the fiscal year ending December 31, 2006, which is based upon a
fixed percentage of a specified level of fee revenue earned by TRO for the
applicable fiscal year. The Trust has also agreed to reimburse TRO at the TRO
Closing, by means of an advance, for certain of TRO's start-up costs associated
with performing TRO's obligations under the management contracts acquired from
EPDLP.
Under the terms of the purchase agreement, TRO did not earn leasing
commissions revenue for the three-month period ending on March 31, 1997.
Leasing commissions earned in the three-month period beginning April 1, 1997
and ending June 30, 1997 were shared equally between TRO and EPDLP. All
commissions earned subsequent to June 30, 1997 are due to TRO, subject to the
amortization terms of the note described above.
Real Estate Development. TRO's real estate development business has
consisted of the development, expansion, renovation, and reconfiguration of
properties for the account of TRO Affiliates and for third parties.
In recent years, TRO's development business has been focused on power
centers and the expansion or redevelopment of retail properties. A power center
development ranges in size from approximately 150,000 square feet of gross
leasable area for a single tenant to approximately 700,000 square feet of gross
leasable area for at least three anchor tenants. Generally, TRO or an affiliate
will own the land and develop the site while the tenants will develop and own
their buildings.
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TRO may also redevelop or expand a shopping center to protect or enhance
the current competitive position of the property or to reposition an
underperforming property. TRO's services typically include a thorough study of
the retail property and local markets, an assessment of the compatibility of
the existing tenant mix and the renovation and reconfiguration of existing
space in order to better attract customers and to strategically channel
customer flow.
Shopping Center Management Business and Strategy. In the case of shopping
center management, TRO's strategy has been, as lease terms expire, to seek to
lease available space and renew existing leases at higher base rents. TRO
frequently recommends that its managed shopping centers seek to increase income
and property value through renovations, reconfiguration, tenant relocations and
other activities designed to maximize the property's appeal. TRO assesses
changing economic and demographic conditions that may create a need for the
property to change its focus. TRO seeks to maximize the appeal of its tenant
mix through its longstanding relationships with national and regional retailers
and its extensive experience in marketing. Close attention is given to tenant
sales, local marketing programs, promotional events, customer attitudes and
other factors. TRO's objective is to generate the highest possible customer
traffic to maximize sales of retail tenants, thereby increasing both the
potential for TRO to receive percentage rents and the likelihood of receiving
higher minimum rents from new tenants.
Shopping center management and leasing services are provided to property
owners pursuant to contracts that are of varying lengths and which generally
provide for management fees of 2% to 5% of monthly gross receipts and leasing
fees generally ranging from 1% to 5% of the rent payable by the tenant over the
life of the lease. Certain leasing agreements call for lease fees to be paid
when the lease is executed while others call for lease fees to be paid over the
term of the lease agreement. TRO's responsibilities under the various retail
management and leasing contracts include the responsibility for all aspects of
the leasing and marketing efforts for the property and include collection of
all income due to the owner, annual budgeting responsibilities and providing
each owner with financial statements on a regular basis.
In addition to the services which TRO provides to all properties, TRO also
provides certain additional services to the shopping center properties it
manages. For example, TRO prepares an annual "game plan" for each retail
property. Based upon market data, TRO attempts to create the optimum tenant mix
and location for each tenant at each retail property. A management team visits
the property, analyzes each store's sales per square foot, upcoming lease
expirations and other data and conducts a visual inspection of each store.
Depending upon the conditions of a particular retail property, TRO may seek to
terminate leases or relocate tenants based upon the "game plan" for a
particular property. TRO also designs each retail property's common area to
maximize its attractiveness to the target market. Special leasing programs are
instituted with merchandise to complement in-line retailers, adding visual
appeal to shopping centers. These retail merchandising units are secured
through temporary leases and typically lead to substantial increases in
shopping center revenue.
Office Management and Leasing. TRO's office management and leasing
portfolio as of June 30, 1997 consisted of approximately 3.9 million square
feet of net rentable area. Office management and leasing services currently are
provided to properties in Philadelphia, Pennsylvania, Bala Cynwyd, Pennsylvania
and southern New Jersey. TRO's portfolio includes several premiere office
buildings in Philadelphia, where the Company has a significant market presence.
Office management and leasing services are provided to property owners pursuant
to contracts that are of varying lengths and which generally provide for
management fees of 2% to 6% of monthly gross receipts and leasing fees
generally ranging from 3% to 6% of the rent payable by the tenant over the life
of the lease. Certain leasing agreements call for lease fees to be paid when
the lease is executed while others call for lease fees to be paid over the term
of the lease agreement. TRO's responsibilities under the various office
management and leasing contracts include the responsibility for all aspects of
the leasing and marketing efforts for the property and include collection of
all income due to the owner, annual budgeting responsibilities and providing
each owner with financial statements on a regular basis.
TRO also acts as a tenant representative for a number of local, national
and multi-national firms. TRO's responsibilities include conducting in-depth
surveys of office property availability, review of various proposals and
comparative analyses for the purchase or lease of properties identified by the
client as potentially acceptable, negotiation of the economic terms of the
transaction and numerous follow-up services, including operating expense audits
and the monitoring of the lease or agreement of sale to ensure compliance with
its terms and conditions.
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Employees. On June 30, 1997, TRO had 808 full time equivalent employees.
Offices. TRO maintains administrative offices at The Bellevue, 200 South
Broad Street, Philadelphia, Pennsylvania, and at 500 West Madison Avenue,
Chicago, Illinois. Such offices are leased on terms expiring, in each case, in
1999. In the event either of such leases were not renewed, TRO management is
confident that acceptable, adequate replacement space would be available at
comparable occupancy costs.
Principal Features of the TRO Transaction
The TRO Transaction will involve a number of related transactions that are
expected to occur simultaneously and are intended ultimately to result in (A)
the non-voting common equity of TRO, the interests of TRO Affiliates in the
Existing Properties and the Development Properties and the rights of TRO
Affiliates with respect to the Predevelopment Properties, being owned, directly
or indirectly, by the Operating Partnership, (B) the additions to, and changes
in, the management of the Trust described elsewhere herein.
The following summary describes the principal features of the TRO
Transaction. The TRO Transaction will be accomplished in several separate
transactions, the combined effect of which will be to form and capitalize the
Operating Partnership and to transfer ownership of the Trust's direct and
indirect interests in its existing properties, or the economic benefits
thereof, to the Operating Partnership, and to effect the acquisitions described
in the immediately previous paragraph.
It is intended that the structuring of the TRO Transaction through the
Operating Partnership will enable those persons and entities conveying assets
in the TRO Transaction to defer certain tax consequences of the TRO Transaction
and will permit the Trust, through the Operating Partnership, to subsequently
acquire from third parties additional commercial properties in a structure that
may enable such parties to defer the recognition of taxable gain.
The Operating Partnership. The Trust will form a limited partnership (the
"Operating Partnership") in which the Trust will be the sole general partner
and a business trust wholly-owned by the Trust will be, initially, the sole
limited partner. The Trust will contribute to the Operating Partnership the
real estate interests owned, directly or indirectly, by the Trust, or the
economic benefits thereof, in exchange for general partnership interests and a
number of Class A Limited Partner Interests ("Class A OP Units") equal to the
number of Shares issued and outstanding on the closing date of the TRO
Transaction.
It is intended that the formation of the Operating Partnership will permit
the completion of the TRO Transaction, and subsequent acquisitions of real
estate interests, in a manner that will enable parties who transfer properties
to the Operating Partnership to defer recognition of taxable gain on such
transfer. This structure, known in the industry as an "UPREIT" structure, is
now a common method for organizing the holdings of the real property portfolio
investments of real estate investment trusts. The Trust believes that the
formation of the Operating Partnership will increase the pool of potential
property acquisitions by enabling the Trust to afford prospective transferors
the prospect of a deferral of taxable gain.
Under the Operating Partnership's First Amended and Restated Agreement of
Limited Partnership (the "Operating Partnership Agreement"), the Trust, as the
sole general partner of the Operating Partnership, has the authority, to the
exclusion of the limited partners, to make all management decisions on behalf
of the Operating Partnership. In addition, the Trust, as general partner, will
have the ability to cause the Operating Partnership to make subsequent
acquisitions of real property assets from persons and entities unrelated to
TRO, the TRO Affiliates or Affiliates of EPDLP, and, in connection therewith,
to issue additional Class A OP Units, and to create and issue subsequent
classes of limited partner interests with terms different from the OP Units to
be issued to the Trust and in the TRO Transaction. The Trust has agreed in the
Operating Partnership Agreement to conduct substantially all of its real estate
investment activities through the Operating Partnership.
OP Units. The Operating Partnership Agreement authorizes the issuance of
an unlimited number of OP Units. Holders of Class A OP Units are entitled to
distributions from the Operating Partnership as and when made by the general
partner. Since the general partner will, of necessity, have to make
distributions on the Class A OP Units held directly or indirectly by it at the
times and in the amounts as will permit it to make distributions to
Shareholders necessary to preserve its status as a real estate investment trust
for federal income tax purposes, it is anticipated that the holders of Class A
OP Units will receive such distributions at the approximate time, and in the
same amounts, as dividends are declared and paid by the Trust to the
Shareholders.
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Holders of OP Units will have no right to vote on any matter voted on by
holders of Shares except that prior to the date on which at least half of the
Class A OP Units issued on the TRO Closing Date (other than to the Trust or an
affiliate of the Trust) have been redeemed, the holders of Class A OP Units
issued on the TRO Closing Date (other than the Trust or an affiliate of the
Trust) shall be entitled to vote on any proposal to merge, consolidate, or sell
substantially all of the assets of the Trust if the holders of Shares are
entitled to vote thereon and, in such event, the necessary vote to effect such
action shall be the sum of an absolute majority of the outstanding Class A OP
Units and the applicable vote of the holders of the Shares, which such vote may
be met by any combination of holders of the Class A OP Units and the Shares. In
such event, holders of Class A OP Units will be entitled to one vote for each
Share issuable by the Trust upon the redemption of one Class A OP Unit.
The Operating Partnership Agreement also provides that the Trust may not
engage in a fundamental transaction (e.g., a merger) unless, by the terms of
such transaction, the OP Units are treated in the same manner as that number of
Shares for which they are exchangeable by the Trust upon notice of redemption
are treated.
Class A OP Units are redeemable by the Operating Partnership at the
election of a limited partner holding such units, at such time, and for such
consideration, as set forth in the Operating Partnership Agreement. In general,
and subject to certain exceptions and limitations, "qualifying parties" may,
beginning one year following the respective issue dates, give one or more
notices of redemption with respect to all or any part of the Class A OP Units
so received and then held by such party. Neither the Trust nor its wholly-owned
business trust subsidiary will be qualifying parties and, accordingly, neither
will have contractual redemption rights under the Operating Partnership
Agreement unless such agreement were to be subsequently amended.
If a notice of redemption is given, the Trust has the right to elect to
acquire the OP Units tendered for redemption for its own account, either in
exchange for the issuance of a like number of Shares (subject to adjustments
for stock splits, recapitalizations, and like events) or a cash payment equal
to the average of the closing prices of the Shares on the twenty trading days
immediately prior to receipt by the Trust, in its capacity as general partner
of the Operating Partnership, of the notice of redemption. If the Trust
declines to exercise such right, then on the sixtieth day following tender for
redemption the Operating Partnership will pay a cash amount equal to the number
of units so tendered multiplied by such average closing price. In general, such
acquisition by the Trust, or redemption by the Operating Partnership, of OP
Units tendered for redemption will only be effected at the end of a calendar
quarter. Certain holders of Class A OP Units will have the right to require
that their Units be redeemed for cash, and the Trust will not have any right to
acquire for Shares Units for which the holders have made a cash-only election,
provided that the maximum amount of cash-only redemptions is $500,000 annually.
The TRO Equity Acquisition. Pursuant to an agreement among the TRO
Shareholders (including entities who will receive TRO shares in the
recapitalization of TRO immediately prior to the TRO Closing Date), TRO, a
corporate affiliate of TRO, the Trust and the Operating Partnership (the "TRO
Contribution Agreement"), (i) TRO will be recapitalized immediately prior to
the closing of the TRO Transaction, (ii) the Operating Partnership will acquire
all of the non-voting common shares of TRO, constituting 95% of the total
equity of TRO, (iii) a stock bonus plan created for the benefit of TRO
employees will acquire all of the voting common shares of TRO, constituting 5%
of the total equity of TRO, and (iv) the TRO shareholders (including certain
TRO Affiliates who will become shareholders of TRO immediately prior to the TRO
Closing as a result of the recapitalization) will receive (x) an aggregate of
200,000 Class A OP Units, and (y) the right to receive up to an additional
800,000 Class A OP Units over the following five-year period, depending on the
Trust's per share "adjusted funds from operations" ("Adjusted FFO") during such
period. (See "The TRO Transaction -- Principal Features of the TRO Transaction
- -- TRO Stock Bonus Plan.")
The TRO Contribution Agreement defines "Adjusted FFO" as the Trust's
consolidated net income for any period, plus, to the extent deducted in
computing such net income (i) depreciation, (ii) certain amortization expenses,
(iii) the expenses of the TRO Transaction, (iv) losses on the sale of real
estate, (v) material write-downs on real estate, (vi) material prepayment
penalties, and (vii) rents currently due in excess of rents reported, minus (i)
rental revenue reported in excess of amounts currently due, (ii) lease
termination fees, and (iii) gains on the sale of real estate. For the
twelve-month periods ending August 31, 1996 and May 31, 1997, the Trust's
Adjusted FFO per share on a stand-alone basis would have been $2.16 and $2.21,
respectively.
With respect to the additional 800,000 Class A OP Units which the
Operating Partnership will be contingently obligated to issue in the future as
additional consideration to TRO Shareholders, the TRO Contribution
44
<PAGE>
Agreement establishes "hurdles" and "targets" during specified "earn-out
periods." If the closing of the TRO Transaction occurs on or before September
30, 1997, as is currently anticipated, the earn-out periods will consist of (i)
the three month period ending December 31, 1997, (ii) the years ending December
31, 1998 through 2001, and (iii) the nine-month period ending September 30,
2002. If the TRO Closing occurs after September 30, 1997, the earn-out periods
will consist of the five calendar years ending December 31, 2002.
If the TRO Closing occurs on or before September 30, 1997, the per share
Adjusted FFO hurdles/targets are $0.58/$0.65 for the first earn-out period and
$2.40/$2.66, $2.53/$2.81, $2.65/$2.94, $2.83/$3.14 and $2.19/$2.43 for the
second through the sixth earn-out periods, respectively. If the TRO Closing
occurs after September 30, 1997, the per share Adjusted FFO hurdles/targets are
$2.40/$2.66, $2.53/$2.81, $2.65/$2.94, $2.83/$3.14, and $2.92/$3.24,
respectively. The minimum number of Earn-out Units for each earn-out period,
assuming the hurdle is met, is 20,000 in the first earn-out period and 57,500
in each subsequent earn-out period, except if the TRO Closing occurs on or
before September 30, 1997, the minimum number of earn-out units (i) for the
first earn-out period is 5,000, (ii) for the second earn-out period is 20,000,
(iii) for the third through fifth earn-out periods is 57,500, and (iv) for the
sixth earn-out period is 52,500. The maximum earn-out units in the first
earn-out period is 130,000 and 167,500 in each subsequent earn-out period,
except that if the closing occurs on or before September 30, 1997, the maximum
earn-out units (i) for the first earn-out period is 32,500, (ii) for the second
earn-out period is 130,000, (iii) for the third through fifth earn-out periods
is 167,500, and (iv) for the sixth earn-out period is 135,000.
In general, (i) if the hurdle for any earn-out period is not met, no units
will be issued in respect of such period, (ii) if the target for any earn-out
period is met, the maximum number of units for such period will be issued, and
(iii) if Adjusted FFO for any earn-out period is between the hurdle and the
target for such period, the Operating Partnership would issue the base units
for such period plus a pro rata portion of the number of units by which the
maximum units exceeded the base units for such period equal to the amount by
which the per share Adjusted FFO exceeded the hurdle but was less than the
target. For example, the minimum number of units for the calendar year 1998 is
20,000 and the maximum number of units is 130,000, the per share Adjusted FFO
hurdle for 1998 is $2.40 and the per share Adjusted FFO target is $2.66. If the
per share Adjusted FFO for 1998 were $2.53 (that is, one-half of the difference
between the target and the hurdle), the Operating Partnership would issue
75,000 Units (20,000 + (.5 (130,000-20,000))).
The foregoing is subject to the right to carry back to prior earn-out
periods amounts in excess of the target in the current period, thereby earning
additional units (but never more than the maximum amount) and to carry forward
into the next, but only the next, earn-out period amounts of per share Adjusted
FFO which exceed the target in any such period, provided, in all cases, no
amounts in excess of the target in any period may be applied to result in the
issuance of additional units in any other period until first applied to
eliminate all shortfalls from targets in all prior periods.
In the computation of Adjusted FFO, certain revenues received by TRO prior
to the TRO Closing Date which remain as cash assets of TRO on the TRO Closing
Date will be included as a portion of Adjusted FFO. In the computation of per
share Adjusted FFO, outstanding Shares will include the number of Shares
issuable by the Trust upon redemption of all then outstanding OP Units.
The TRO Contribution Agreement provides that either the Trust or the
Operating Partnership will loan TRO on the TRO Closing Date an amount equal to
(i) start-up expenses incurred by TRO in performing the management contracts
acquired from EPDLP (see "The TRO Acquisition -- Description of the Business of
TRO -- The TRO/EPDLP Transaction"), plus (ii) costs incurred by TRO in
connection with the purchase agreements for the Existing Properties to be
acquired from affiliates of EPDLP and co-investors therewith (see "The TRO
Transaction -- Principal Features of the TRO Transaction -- The Existing
Properties Acquisition"), plus (iii) legal expenses incurred by TRO which were
directly related to the preparation of this proxy statement; provided, however,
that the sum of (i) and (ii) shall not exceed $1.5 million. TRO will use the
proceeds of such loans to repay obligations incurred to finance such costs, or,
in the case of legal fees, TRO's counsel. The Operating Partnership is also
required to make payments to TRO in respect of certain costs incurred by it
relating to Predevelopment Properties (see "The TRO Transaction -- The
Principal Features of the TRO Transaction -- The Predevelopment Properties
Acquisition").
The TRO Contribution Agreement contemplates that TRO will make
distributions of current assets to its shareholders immediately prior to the
TRO Closing, subject to a requirement that, on the TRO Closing Date,
45
<PAGE>
TRO shall have no liabilities other than those (i) under scheduled contracts,
(ii) with respect to scheduled contingencies, (iii) with respect to advances
made by the Operating Partnership to TRO on the TRO Closing Date, (iv) ordinary
course accounts payable, accrued salaries and taxes, and (v) certain other
specified liabilities. TRO will be obligated on the TRO Closing Date to have
cash and collectible receivables at least equal to the sum of the amount of
certain categories of permitted liabilities on the TRO Closing Date and certain
principals of TRO may be required to pledge Class A OP Units to secure the
payment of certain undischarged contingent obligations of TRO incurred prior to
the TRO Closing Date.
Indemnification. In the TRO Contribution Agreement, the TRO shareholders
make representations and warranties about TRO, its organization,
capitalization, financial statements and like matters and the Trust and the
Operating Partnership make like representations and warranties to TRO and the
TRO shareholders. The TRO Contribution Agreement provides for indemnification
by the TRO shareholders in respect of their representations, warranties and
covenants in the agreement. Such indemnification is subject to a general
$350,000 threshold (subject to certain exclusions therefrom) and the Operating
Partnership may set-off Class A OP Units subject to the earn-out against any
such claims. The contribution agreements for the Oxford Valley Mall and the
Development Properties also contain post-transaction indemnification
obligations of the contributing parties.
Registration Rights. At the TRO Closing, the Trust will enter into a
Registration Rights Agreement with those persons receiving or entitled to
receive Class A OP Units in respect of shares of TRO and/or their interests in
the Existing, Development and Predevelopment Properties. In general, the
Registration Rights Agreement provides that those parties receiving and
entitled to receive Class A OP Units in the TRO Transaction will be entitled to
cause the Trust, subject to exclusions and limitations commonly found in
agreements of this type, to register Shares received by them in connection with
the redemption of Class A OP Units for resale by them in connection with other
registration statements filed by the Trust. The Registration Rights Agreement
contains provisions dealing with registration procedures, holdbacks,
responsibility for expenses, indemnification, and other customary provisions.
If the TRO Shareholders having piggyback registration rights do not have
an opportunity to exercise those rights during the six months beginning one
year following the last issuance of Class A Units pursuant to the TRO
Transaction, these TRO Shareholders will have the right to cause the Trust to
file a registration statement covering the resale of the Shares underlying the
Class A Units owned by these TRO Shareholders. In such event, the Trust will be
obligated to use its commercially reasonable efforts to cause the registration
statement to become effective within sixty (60) days after filing and to remain
effective for not less than two years (or until the date on which PREIT Shares
may be sold without registration, if earlier).
Other Rights. If the Operating Partnership determines to sell, before the
fifth anniversary of the TRO Closing, an Existing Property, Development
Property or Predevelopment Property and the holders of a majority of the then
outstanding Class A OP Units issued to the TRO Shareholders and the TRO
Affiliates object to such sale, the sale will not be consummated unless (i) the
sale constitutes an exchange under Section 1031 of the Internal Revenue Code or
(ii) the sale is in connection with the proposed sale of all or substantially
all of the retail real estate assets of the Operating Partnership.
46
<PAGE>
The Existing Properties Acquisition. In connection with the TRO
Transaction, the Operating Partnership has or will acquire interests in four
shopping centers/retail properties, listed below:
Existing Properties -- General Information
<TABLE>
<CAPTION>
Approximate Approximate
Acquisition Annualized
Gross Percentage Price of the Percentage Minimum
Leasable Interest to Trust's Interest Leased at Number of Rent as of
Property/Location Sq. Ft. be Acquired ($Mil.) June 30, 1997 Tenants June 30, 1997
- ----------------------------- ---------------- ------------- ------------------ --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
The Court at Oxford Valley, 692,000(1) 50% 31.1(2) 100% 15 6.6
Valley, Langhorne, PA
Magnolia Mall, 570,000 100% 45.4(4) 97.7% 72 3.5
Florence, SC (3)
North Dartmouth Mall, 620,000 100% 35.0(6) 87.7% 55 4.0
Dartmouth, MA (5)
Former Strawbridge Store, 207,000(1) (8) 3.2 (9) -- --
Store, Springfield, PA (7)
</TABLE>
- ------------
(1) A portion of such square footage is attributable to space owned by tenants.
(2) Includes allocated mortgage debt of $24.7 million at June 30, 1997. The
equity portion of the purchase price (approximately $5.6 million, subject
to various closing adjustments) will be paid in Class A OP Units valued at
$23.40 per unit.
(3) This property was initially subject to a purchase contract between TRO and
Magnolia Retail Associates, L.L.C. TRO assigned its rights and obligations
under such contract to the Trust. The seller is an affiliate of EPDLP.
(4) Includes mortgage debt of approximately $25.0 million. The equity portion
of the purchase price will be paid in cash.
(5) TRO has entered into a contract to purchase this center from Diversified
Equity Corporation of Illinois, Inc., an affiliate of EPDLP. The Operating
Partnership is only obligated to assume TRO's obligations under the
Agreement of Sale if the TRO Transaction is completed.
(6) Approximately $6.0 million of the purchase price (subject to closing
adjustments) attributable to equity in the project will be paid in cash
and the balance of the purchase price, to be applied to mortgage debt on
the property which will not be assumed, will also be paid in cash.
(7) The Trust may require TRO to purchase the Trust's interest in this
property, and TRO may require the Trust to sell its interest in this
property to TRO, if the TRO Transaction is not completed, in each case at
a price equal to the Trust's costs plus interest at the rate of 10% per
annum.
(8) The Trust is a co-tenant with an undivided one-half interest in one of
three floors in this free-standing former department store. Its share of
the costs of reconstruction is 14.98%.
(9) Vacant.
<PAGE>
The Court at Oxford Valley (Langhorne, Pennsylvania).
The Court at Oxford Valley was completed in 1996. The center has 15 units
with total minimum rents of approximately $6.7 million. Its tenants include
Dick's, Best Buy, HomePlace, Phar-mor, Baby Superstore, Sears HomeLife, Office
Max, and Barnes & Noble. Home Depot and BJ's Warehouse Club own stores (and
associated land) at the center. TRO's joint venture partner in the center is
the Goldenberg Group, which also manages the center and will continue to do so
following completion of the TRO Transaction.
The center is encumbered by a mortgage held by an institutional lender in
the current principal amount of approximately $49.3 million. The mortgage will
be unaffected by the Trust's acquisition of a 50% interest in the partnership
that owns the center. The mortgage is for a fifteen-year term at a fixed
interest rate of 8.02% per annum and requires level monthly payments of
principal and interest based on a twenty-five year amortization. It is first
prepayable in 2002 and any prepayment is subject to a prepayment fee.
The Trust will issue an aggregate of approximately 240,000 Class A OP
Units to certain TRO Affiliates in respect of their 50% equity interest in
Oxford Valley Road Associates, the partnership which owns The Court at Oxford
Valley. The consideration was obtained by dividing the agreed-upon value of the
equity of the TRO Affiliates in the center (approximately $5.6 million, subject
to closing adjustments) by $23.40, which was the average closing price per
Share on the twenty trading days prior to July 30, 1997, the date the TRO
Transaction Documents were executed.
47
<PAGE>
Magnolia Mall (Florence, South Carolina)
This center was completed in 1979, expanded in 1986-87, and renovated in
1992. Its anchor tenants are JC Penney, Belk and Sears. Other tenants include
Rose's and Carmike Cinema. The center has 67 other tenants (including kiosks).
TRO currently manages the center.
TRO contracted with EPDLP to acquire the center in connection with its
acquisition of the EPDLP management business and assigned its rights, subject
to its obligations, under the contract to the Trust.
The Magnolia Mall is encumbered by a mortgage held by an institutional
lender which will be in the principal amount of approximately $25.5 million at
settlement and will be unaffected by the acquisition of the property by the
Operating Partnership. The mortgage is a ten-year fixed rate mortgage maturing
in 2006. The interest rate on the mortgage is 8.2% per annum and the mortgage
provides for level payments of principal and interest which would amortize the
principal over a twenty-year term.
Settlement on the property is scheduled to occur on the same date as the
TRO Closing. The Trust currently intends that it or the Operating Partnership
will acquire Magnolia Mall whether or not the TRO Transaction is completed.
North Dartmouth Mall, Dartmouth, Massachusetts
This center was completed in 1971 and renovated in 1987. Its anchor
tenants include JC Penney, Sears, General Cinema, and Ames. The center
currently has approximately fifty other tenants (including kiosks). TRO
obtained management of the center from EPDLP in December, 1996. TRO contracted
to acquire the center in connection with its acquisition of the EPDLP
management business and has made a $1 million earnest money deposit under the
contract. If the TRO Transaction is completed, TRO will assign its rights,
subject to its obligations, under the contract to the Operating Partnership. If
the TRO Transaction is not completed, the Trust does not currently intend to
acquire any interest in the center. The center is encumbered by a mortgage in
the principal amount of approximately $29 million, which will be prepaid in
full at settlement. The purchase price for all of the equity in the center is
approximately $6.0 million, subject to closing adjustments, and will be paid in
cash.
Former Strawbridge Store (Springfield, Pennsylvania)
Target, the Trust and the Trust's co-owner acquired condominium interests
in the former Strawbridge Store on April 18, 1997. The site is at the
Intersection of Route 13, Baltimore Pike and Route 420, approximately 1/2 mile
from the Springfield Mall. Target plans on occupying the lower two levels. The
Trust and its co-tenants, entities affiliated with Claude deBotton, together
own a condominium interest in the third floor of the building and condominium
interests in pads for one to three outparcels. All levels of the building have
access to at-grade parking. The Trust's projected investment is approximately
$3.2 million. If the TRO Transaction is not completed, the Trust may require
TRO to purchase the property for the Trust's cost, plus interest at 10% per
annum, and TRO would have the option to purchase the property at the same
price.
The Development Properties Acquisition. As part of the TRO Transaction,
the Operating Partnership will acquire two properties developed by TRO and
owned, in whole or in part, by TRO Affiliates. The Operating Partnership's
actual aggregate purchase price (assumed debt and equity) for each property
will be based on a formula which capitalizes cash flow from leased and occupied
space, and space leased but not yet occupied, to credit-worthy tenants, values
triple net leases with purchase arrangements at the present value of payments
in excess of related debt amortization, and values all other space as mutually
agreed or, failing agreement, pursuant to appraisals. The equity portion of the
purchase price will be payable, in each case, in Class A OP Units valued at
$23.40 per Unit, which was the average of the closing prices of the Shares on
the twenty trading days prior to July 30, 1997, the date on which the
definitive documentation for the acquisition of the Development Properties was
executed. The projected purchase prices listed below are based on certain
assumptions which may not be realized and actual results are likely to vary.
Accordingly, the actual purchase prices may differ from the projected purchase
prices and will be a function of lease-up activity, and other factors, prior to
acquisition by the Operating Partnership. Information with respect to the
Development Properties is listed below.
48
<PAGE>
Development Properties -- General Information
<TABLE>
<CAPTION>
Projected
Annualized
Minimum Rent
Planned Gross Percentage on a Fully- Projected Anticipated
Leasable Interest to Leased Basis Purchase Acquisition
Property/Location Sq. Ft. be Acquired ($Mil.) Price ($Mil.) (1) Date by Trust
- --------------------------- --------------- ------------- -------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Hillview Shopping Center, 341,000 50% 3.2 14.0(2) Prior to
Cherry Hill, NJ December 31, 1998
Northeast Tower Center, 462,000 100%(3) 4.0 25.3(4) Prior to
Philadelphia, PA (3) December 15, 1999
</TABLE>
- ------------
(1) The projected purchase prices listed above are illustrative only and the
actual purchase prices will be a function of lease-up activity, and other
factors, prior to acquisition by the Operating Partnership.
(2) Includes allocated portion of projected assumed indebtedness of $12.9
million.
(3) The Trust will initially acquire 89% of the interest in the partnership
which owns this property and obtain the right to acquire the remaining 11%
interest not earlier than three years from the first acquisition date.
(4) Includes projected assumed indebtedness of $20.5 million.
Hillview Shopping Center (Cherry Hill, New Jersey)
This center was developed by TRO, which has a 50% interest in the center.
Affiliates of the Goldenberg Group own the balance of the center. TRO will
manage the center. Anchor tenants in the center will be Target, Kohl's, Babies
'R Us, Home Place, PetsMart, Crown Book, and Silver Diner.
The Operating Partnership will acquire the 50% interest of certain TRO
Affiliates in the center upon its completion, which is currently anticipated in
Autumn of 1997.
The center is currently encumbered by a floating-rate construction loan
and mortgage held by an institutional lender and having an approximate
principal balance of $25.8 million. The mortgage bears interest at the London
Interbank Offered Rate plus 1.9% and is extendable until the spring of 1998.
The terms of the mortgage will be unaffected by the acquisition by the
Operating Partnership of the equity interest of TRO Affiliates in the center,
but it is anticipated that a permanent mortgage will be placed on the property
on or before its acquisition by the Operating Partnership. If the TRO
Transaction is not completed, neither the Trust nor the Operating Partnership
will have any interest in, or obligations with respect to, the center.
<PAGE>
Northeast Tower Center (Philadelphia, Pennsylvania)
This center was developed by TRO and all of the equity interests in the
center are owned by TRO Affiliates. TRO will manage the center. Tenants in the
center include Home Depot, PetsMart, Staples, and Old Navy. Pep Boys owns a
store at the center. The center will have approximately twelve other stores.
Upon completion of the center, which is currently anticipated to be not
later than December, 1999, the Operating Partnership will initially acquire 89%
of the interests of the TRO Affiliates which own the center. The Operating
Partnership will have the absolute right to acquire the remaining 11% interests
of the TRO Affiliates thirty-seven months following the original acquisition
date.
It is currently anticipated that the center will be encumbered at the time
of its acquisition by the Operating Partnership by one or more mortgages in the
aggregate amount of approximately $20.6 million. The terms of the mortgage will
be unaffected by the acquisition by the Operating Partnership of the equity
interest of TRO Affiliates in the center. If the TRO Transaction is not
completed, neither the Trust nor the Operating Partnership will have any
interest in, or obligations with respect to, the center.
The Predevelopment Properties Acquisition. Under the terms of the TRO
Transaction, the Trust will acquire all of the interests of certain TRO
Affiliates in the Predevelopment Properties listed below. Additional
49
<PAGE>
permitting and other work is required on all sites. Accordingly, there can be
no assurance that any particular site will ultimately be developed and it is
possible that the right to acquire an interest in some of these properties will
be allowed to expire unexercised due to unresolved permitting problems or other
factors encountered in the development process.
Predevelopment Properties -- General Information
<TABLE>
<CAPTION>
Total
Projected Projected Gross Current Projected Projected
Percentage Rentable Retail Construction Cost to the Trust
Property/Location Interest Sq. Ft. Commencement Date ($Mil.) (1)
- ------------------------- ------------ ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Blue Route Metroplex 50%* 760,000 Autumn, 1998 38.8
Plymouth Meeting, PA
Christiana Strip Center 50% 279,000 Winter, 1997 14.7
(Phase 1)
Newark, DE
Christiana Strip Center 50%(2) 445,000 Autumn, 1998 (3)
(Phase II)
Newark, DE
Red Rose Commons 50%* 461,000 Winter, 1997 14.6
Lancaster, PA
</TABLE>
- ------------
* Subject to reduction to 25% under the terms of the Goldenberg Letter
Agreement. See "The TRO Transaction -- Principal Features of the TRO
Transaction -- The Goldenberg Letter Agreement."
(1) Stated projected project costs are based on current estimates and include
both attributed debt and equity but exclude amounts due certain TRO
Affiliates in respect of one-half of any positive difference between value
at completion and cost (on an aggregate basis).
(2) This property is not currently zoned for retail use and any participation
by the Trust in the development of this property is subject to rezoning.
(3) None as of the date of this Proxy Statement.
<PAGE>
The Basic Predevelopment Arrangements
The terms of the TRO Transaction require the Operating Partnership, on the
TRO Closing Date, to reimburse TRO in cash for its verified out-of-pocket
expenditures and advances in respect of the Predevelopment Properties which are
not covered by the funding under the Goldenberg Letter Agreement (see "The TRO
Transaction -- The Predevelopment Properties Acquisition -- The Goldenberg
Letter Agreement"). At the TRO Closing, the Operating Partnership will also
purchase from TRO, for cash, the account through which TRO had then made
Predevelopment Property advances under the Goldenberg Letter Agreement. It is
currently anticipated that the sum of the cash transfers by the Operating
Partnership to TRO on the Closing Date by reason of the matters described in
the previous two sentences and in respect of certain start up costs incurred by
TRO in performing the EPDLP property management business will be approximately
$9.0 million. TRO will use such cash to repay obligations incurred to finance
such expenditures and advances, to pay certain legal fees and to reimburse
certain TRO shareholders and their affiliates for such expenditures incurred by
or advances made by them.
As each Predevelopment Property project is completed, it will be valued
based on the following valuation principles: (i) all space leased and occupied
by credit tenants will be valued at ten times adjusted cash flow (computed as
specified in the agreement); and (ii) all space leased to a credit tenant but
unoccupied will be valued at ten times adjusted cash flow calculated as though
the space was built and occupied as set forth in the budget in the property,
and (iii) space not leased or occupied, whether built or unbuilt, will be
valued as mutually agreed on or, failing agreement, by appraisal. Additional
provisions exist for valuing triple net lease/purchase arrangements. Although
each Predevelopment Property project will be valued as completed and an
"account" established against which Class A OP Units will be deemed to be
credited, as well as deemed cash in an amount that would have been distributed
on such deemed Units and a 10% interest factor on such deemed cash, no
consideration will be paid until the earlier of (x) the completion of the last
predevelopment property,
50
<PAGE>
and (y) the abandonment by the Trust of any uncompleted projects, and (z) five
years following the TRO closing. At that time, any uncompleted project will be
valued and the Operating Partnership will issue Class A OP Units equal in value
to 50% of the amount, if any, by which the value of the Operating Partnership's
interest in each predevelopment project exceeded the aggregate cost of such
project at the time of completion. Negative amounts arising in connection with
the completion or abandonment of any project will be netted back against
earlier completed projects in order of completion. Class A OP Units issued in
respect of the foregoing valuations of the Predevelopment Projects will be
valued at the greater of (x) average of the closing prices of the Shares for
the twenty trading days prior to the date of the completion valuation and (y)
$19.00. If the average of the closing prices of the Shares on the 20 trading
days prior to each valuation is less than $19.00, additional OP Units, of a new
class but equal in value to those Class A OP Units not issued because of the
operation of the pricing limitation, will be issued.
TRO may, with the Trust's consent, designate additional Predevelopment
Properties prior to the TRO Closing Date. Such agreed upon designation will
give rise to an obligation of the Trust to reimburse TRO on the TRO Closing
Date for TRO's predevelopment expenses incurred with respect to such
properties. However, with the exception of a property in Howell Township, New
Jersey (which would be accounted for in the same manner as the Predevelopment
Properties described above), the TRO Affiliates will not share in any profit
realized by the Operating Partnership from the subsequent development of any
subsequently-designated Predevelopment Properties.
The Goldenberg Letter Agreement
TRO is party to a letter agreement with the Goldenberg Group (the
"Goldenberg Letter Agreement"), which contemplates the development of six power
centers, three by the Goldenberg Group and three by TRO. The Goldenberg Letter
Agreement provides that the entity developing the center will have the right to
manage the center but that each center will be 50% owned by the Goldenberg
Group and 50% owned by TRO. TRO is obligated under the Goldenberg Letter
Agreement to provide a $5 million revolving fund to carry pre-development
expenses on the Goldenberg Group's three projects to the extent those expenses
exceed construction loan financing proceeds and to fund all such expenses on
TRO projects directly. At the TRO Closing, the Operating Partnership will take
by assignment from TRO all of TRO's rights, subject to all of TRO's
obligations, under the Goldenberg Letter Agreement.
The Court at Oxford Valley, an Existing Property, was developed by
Goldenberg under the Goldenberg Letter Agreement and Hillview Shopping Center,
a Development Property, was developed by TRO under the Goldenberg Letter
Agreement. Goldenberg's remaining two projects under the Goldenberg Letter
Agreement are the Blue Route/Metroplex Center, Plymouth Meeting, Pennsylvania,
and Red Rose Commons, Lancaster, Pennsylvania, both listed above as
Predevelopment Properties. TRO has not yet proposed its second and third
projects under the Goldenberg Letter Agreement. In the event that TRO, or the
Operating Partnership following the TRO Closing, were to fail to offer the
Goldenberg Group two proposed power center projects meeting specified criteria
(one to be selected at the Goldenberg Group's sole election) within eighteen
months of the closing of a construction loan on each of Blue Route/Metroplex
and Red Rose Commons, then the interest of the Operating Partnership in the
"unmatched" project would be subject to reduction by the Goldenberg Group,
without the payment of any consideration, from 50% to 25%.
Although TRO has performed preliminary work for the requisite "matches"
for Blue Route/Metroplex and Red Rose Commons, there can be no assurance that
either project will be successfully matched and, therefore, that the Operating
Partnership's interest in these projects will not be reduced to 25%. However,
since the Operating Partnership will only pay TRO Affiliates in respect of
one-half of the "developer profit" on the share of the profit actually
acquired, a reduction in the interest in these projects should not result in
any unrecaptured cost to the Operating Partnership.
Rights of First Refusal. The Operating Partnership will obtain rights of
first refusal with respect to the interests of certain TRO Affiliates in the
three retail properties listed below (the "Right of First Refusal Properties").
There can be no assurance that the Operating Partnership will have the
opportunity to exercise its right of first refusal with respect to any of such
properties or that, having such right, it will elect to do so.
51
<PAGE>
Rights of First Refusal Properties -- General Information
<TABLE>
<CAPTION>
Gross Leasable Percentage Interests Percentage Leased
Property/Location Sq. Ft. Owned By TRO Affiliates At June 30, 1997
- ------------------- ---------------- ------------------------- ------------------
<S> <C> <C> <C>
Christiana Mall, 1,100,000 (1) 100.0%
Newark, DE (1)
Cumberland Mall, 463,143 50% 100.0%
Vineland, NJ
Fairfield Mall, 417,940 50% 77.2%
Chicopee, MA
</TABLE>
- ------------
(1) The ownership interest in this property is to be restructured. The
interests of TRO Affiliates is subject to adjustment. The Operating
Partnership's right of first refusal does not attach to transactions
incident to such restructuring.
Management Changes. A substantial number of management changes will occur
at the Trust as a consequence of the completion of the TRO Transaction. Ronald
Rubin, currently Chairman and Chief Executive Officer of TRO, will be appointed
a Trustee of the Trust and will be elected Chief Executive Officer of the
Trust. George Rubin, currently President and Chief Operating Officer of TRO,
will be appointed a Trustee of the Trust and elected President of TRO. Ronald
Rubin, George Rubin and Rosemarie B. Greco will be appointed Trustees of the
Trust as designees of TRO. Ms. Greco has no prior affiliation with the Trust.
Messrs. Robert G. Rogers, Lee H. Javitch and Robert Freedman will resign as
Trustees of the Trust on the TRO Closing Date. Set forth below is biographical
and other data with respect to Ronald Rubin, George Rubin and Rosemarie B.
Greco.
<PAGE>
<TABLE>
<CAPTION>
Occupation During Beneficial Ownership
Age Last Five Years of Shares of the Trust
----- ---------------------------------------- -----------------------
<S> <C> <C> <C>
Ronald Rubin (1) 66 Chairman and Chief Executive Officer, (2)
The Rubin Organization, Inc., since
1992; also a director of PECO Energy
Corp.
George Rubin (1) 54 President, The Rubin Organization, (2)
Inc., since 1992
Rosemarie B. Greco 51 Businesswoman; formerly President, -0-
CoreStates Financial Corp. and President
and Chief Executive Officer,
CoreStates Bank, N.A.; also a director
of General Accident Insurance Company of
America and VISA Corporation
</TABLE>
- ------------
(1) Ronald Rubin and George Rubin are brothers.
(2) Neither Ronald Rubin nor George Rubin currently own Shares of the Trust.
Mr. George Rubin's spouse owns 500 Shares over which Mr. George Rubin
disclaims beneficial ownership. At the closing of the TRO Transaction,
Ronald Rubin and George Rubin will become beneficial owners of
approximately 140,000 and 75,000 Class A OP Units, respectively, issued in
respect of their equity interests in TRO and the Court of Oxford Valley.
They will be entitled to receive additional Class A OP Units during the
five-year period following the TRO Closing to the extent the Trust meets
specified financial goals. (See "The TRO Transaction -- Principal Features
of the TRO Transaction -- The TRO Equity Acquisition.") They own a
majority of the interests of the TRO Affiliates that own interests in the
Development Properties and the Predevelopment Properties and thus will
also obtain beneficial interests in a substantial additional number of
Class A OP Units as some or all of such interests are acquired by the
Operating Partnership. Class A OP Units become redeemable by the holder
one year after issuance and, if tendered for redemption may, at the
election of the Trust, be exchanged for Shares. Class A OP Units have no
right to vote on any matter voted on by the Shareholders except as set
forth under "The TRO Transaction -- Principal Features of the TRO
Transaction -- OP Units" and " -- Other Rights." Ronald Rubin and George
Rubin will also be granted options at the TRO Closing to purchase 150,000
and 75,000 Shares, respectively, of the Trust.
Sylvan M. Cohen, a founder of the Trust and currently Chairman and Chief
Executive Officer of the Trust, will continue as Chairman of the Board of
Trustees and Chairman of its Property Committee. Jonathan B. Weller,
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a Trustee and President of the Trust, will continue in those positions and as
Chief Operating Officer of the Trust. Robert G. Rogers, currently Executive
Vice President of the Trust, will retire on December 31, 1997. Edward Glickman,
currently Chief Financial Officer of TRO, will become Chief Financial Officer
of the Trust. A number of members of management of TRO will continue in such
capacities in TRO.
Ronald Rubin Employment Agreement. The Trust has entered into an
employment agreement with Ronald Rubin for an initial term of five years and
extending year-to-year thereafter until terminated by either party. The
agreement will take effect on the TRO Closing Date. During the period of his
employment, Mr. Rubin will be required to devote his full working time, energy,
skill and best efforts to the performance of his duties under the agreement and
may not participate in any other business pursuits except that he may maintain
his existing ownership interest in approximately 35 commercial properties in
which the Trust will have no interest so long as the aggregate time he devotes
to such properties is insignificant and such activities do not interfere with,
detract from or affect the performance of his duties to the Trust. The contract
precludes Mr. Rubin, directly or indirectly, from engaging in any development
opportunity in which Mr. Rubin has an ownership interest other than three
specified projects, subject to waiver by the Special Committee of the Board of
Trustees of the Trust (see "The TRO Transaction -- The Special Committee"),
upon the request of Mr. Rubin, in exceptional circumstances.
The contract provides for annual base salary of $345,000, provided that at
all times during the term of the contract the base salary must be at least
equal to the highest amount paid to any other person employed by the Trust or
TRO. For each fiscal year commencing after December 31, 1997, Mr. Rubin will be
entitled to incentive compensation under a plan to be adopted by the Trust.
(See "The TRO Transaction -- Principal Features of the TRO Transaction -- Cash
Incentive Bonus Plan"). The contract also provides for the grant pursuant to
the 1997 Stock Option Plan of non-qualified options to purchase 150,000 Shares
at an exercise price fixed in accordance with the terms of the Plan, which will
be the closing price of the Shares on the TRO Closing Date. The options will
vest in four equal annual installments beginning on the first anniversary of
the grant date. (See "The 1997 Stock Option Plan").
If Mr. Rubin's employment is terminated other than for cause or a change
in control of the Trust, he will be entitled to lump sum severance equal to the
present value of his base salary and a target incentive bonus for the remaining
portion of the contract term at the time of termination. If his employment is
terminated pursuant to a change in control (including voluntary termination by
Mr. Rubin within 60 days of a change in control), the Trust shall pay him up to
three times the present value of his base salary and target incentive
compensation, subject to all necessary reductions to preserve the deductibility
of all such payments under the Internal Revenue Code.
Mr. Rubin's contract defines change in control to mean (i) the acquisition
by any person or group of the beneficial ownership of 51% of the issued and
outstanding Shares, or (ii) a circumstance in which the majority of the Board
of Trustees does not consist of persons ("Continuing Trustees") who were
Trustees of the Trust prior to the time any person or group acquired 50% or
more of the Shares, or who were recommended to succeed such persons by a
majority of such persons, or (iii) the approval by the Shareholders of a
reorganization, consolidation or merger or approval by the Shareholders of a
liquidation or dissolution of the Trust or sale of all or substantially all of
the Trust's assets unless (A) the Shareholders will, by reason of such
transaction, own at least 51% of the voting securities of the surviving entity,
and (B) no person, excluding an employee benefit plan, will own more than 49%
of the voting power of any resulting entity, and (C) a majority of the members
of the board of directors or trustees of the surviving entity consist of
persons who were Continuing Trustees of the Trust immediately prior to the
transaction.
During Mr. Rubin's employment and for one year thereafter if his
employment is terminated for cause, Mr. Rubin will be prohibited from
competing, in certain defined respects, with the Trust, subject to the
permitted ownership interests described above. Any non-competition agreement
would terminate upon a change in control of the Trust.
Other Employment Agreements. The Trust and TRO have entered into, or
expect to enter into, employment agreements with nine current managers of TRO,
to take effect on the TRO Closing Date, at stated rates of minimum base cash
compensation, initial option grants, and incentive compensation to be
established in the
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<PAGE>
future. (See "The TRO Transaction -- Principal Features of the TRO Transaction
- -- Cash Incentive Bonus Plan.") These individuals include George Rubin, the
brother of Ronald Rubin, who is currently President of TRO and who will become
a Trustee of the Trust and remain President of TRO, and Edward Glickman, who is
currently Chief Financial Officer of TRO and who will become the Chief
Financial Officer of the Trust. Minimum base annual cash compensation under
these agreements ranges from $250,000 per annum to $140,000 per annum.
The nine individuals will be granted options to purchase an aggregate of
310,000 shares at an exercise price equal to the closing price of the Shares on
the date of the closing of the TRO Transaction. The options will be
non-qualified options, and will vest in four equal annual installments
beginning on the first anniversary of the grant date.
The term of all such contracts will be two years and automatically
renewable for year-to-year terms thereafter unless prior notice is given by
either party. In many respects, these contracts otherwise contain terms similar
to those of the contract with Ronald Rubin, except that severance upon a change
in control is a multiple of twice base and targeted incentive compensation,
subject to reduction to satisfy limitations on deductibility, and the executive
may only obtain such payment if he or she resigns for Good Reason (as defined
in the agreements) following a change in control.
TRO Stock Bonus Plan. Contemporaneously with the closing of the TRO
Transaction, TRO will establish a stock bonus plan for all of its employees who
have completed at least one year of service on the day prior to the effective
date of the plan. The plan will be qualified for favorable tax treatment under
section 401(a) of the Internal Revenue Code and all of the outstanding voting
common shares of TRO will be held by the trust established under the plan.
TRO will contribute all of its voting common shares to the plan for the
plan year ending December 31, 1997. The shares will be allocated to the plan
accounts of the eligible employees as of December 31, 1997, pro rata, based on
their covered compensation for 1997. The shares held by the plan will be
appraised annually as of each December 31. The value of an employee's account
under the plan will be paid to the employee upon termination of service. Since
TRO's Articles of Incorporation will restrict ownership of all of the
outstanding voting common shares of TRO to TRO employees or to a tax-qualified
plan for the benefit of employees, benefits to terminated employees will be
paid only in cash.
Voting on major corporate transactions (including mergers,
recapitalizations, liquidations, and similar transactions) will be passed
through by the plan trustee to the plan's participants. Voting by the plan
trustee on other matters will be directed by majority vote of the TRO Stock
Bonus Plan Committee, who will be appointed by the Board of Directors of TRO.
It is anticipated that the TRO Stock Bonus Plan Committee will initially
consist of the same persons who are members of the Board of Directors of TRO
following the completion of the TRO Transaction.
Cash Incentive Bonus Plan. After the closing of the TRO Transaction, the
Trust intends to establish an incentive bonus plan, effective January 1, 1998,
for certain officers and key employees of the Trust and TRO. The plan will be a
nonqualified, unfunded plan with bonuses to be paid from the general assets of
the Trust or the Operating Partnership.
The Executive Compensation and Human Resources Committee of the Board of
Trustees of the Trust and/or a similar committee of TRO will administer the
plan. The committee(s) will designate which eligible officers and key employees
are eligible to receive a bonus under the plan. Each of the individuals who
will be entering into employment agreements in connection with the TRO
Transaction will be eligible to participate in the Plan. The committee(s) will
use identified performance levels, weighted performance dimensions, and
weighted performance measures and standards to determine each bonus.
Bonuses will be paid in a single-sum cash payment within a reasonable time
after the Trust's fiscal year-end financial statements are approved. Only
participants who are employed by the Trust or TRO on December 31 of each plan
year will be eligible to receive payment under the plan. The Trust will only be
required to pay bonuses in their entirety if there are sufficient funds
available for distribution after all dividends are paid; otherwise, bonuses
will be paid pro rata. The unpaid portions of any bonuses will be forfeited.
The Special Committee
The TRO Contribution Agreement provides for the establishment of a
special, standing committee of the Board of Trustees (the "Special Committee")
for the purpose of addressing and resolving matters which may
54
<PAGE>
arise after the TRO Closing in connection with the implementation of the terms
of the TRO Transaction. The Special Committee will consist of three Trustees,
none of whom have any prior affiliation with TRO (other than as Trustees), and
will initially include Rosemarie B. Greco, a designee of TRO as a Trustee, who
is unaffiliated with TRO. The Special Committee will continue in existence for
a minimum of five years following the closing of the TRO Transaction.
General Authority if TRO Transaction is Approved
If the TRO Transaction is approved, the Trust will have the authority to
complete the TRO Transaction upon the terms generally described in this Proxy
Statement, subject to such modifications as the Board of Trustees determines to
be fair and in the best interest of the Shareholders. Subsequent to the TRO
Closing, the Special Committee of the Trustees, described immediately above,
will have the authority to make equitable adjustments in the provisions of the
TRO Documentation, including, without limitation, to the extent that they deem
any change in circumstances to so warrant, adjustments in the provisions
relating to the TRO earn-out Shares. See "The TRO Transaction -- Principal
Features of the TRO Transaction -- The TRO Acquisition."
The New Credit Agreement
The Trust has obtained a commitment letter from CoreStates Bank, N.A. (the
"Bank") for a $125 million revolving credit facility (the "New Revolver"). The
New Revolver would replace existing facilities which the Trust currently
maintains with the Bank in the aggregate principal amount of $75 million, of
which $37.2 million was outstanding, all on a floating rate basis, on June 30,
1997. As currently structured, the New Revolver would leave in place a separate
$35 million term loan facility from a bank group, including the Bank, which is
secured by four apartment properties, had a balance at June 30, 1997, of $34.0
million, which may be extended at the borrower's option to March, 2000.
The New Revolver would be for an initial term of twenty-four months and
would bear interest, at the Trust's election, at (i) the higher of the Bank's
prime rate, or the Federal Funds lending rate plus .5%, in each case as in
effect from time to time, or (ii) the London Interbank Offered Rate plus
margins ranging from 1.1% to 1.7%, depending on the ratio of the Trust's
consolidated liabilities to gross asset value (the "Leverage Ratio"), each as
determined pursuant to the terms of the New Revolver. After giving effect to
the acquisition of the non-voting common shares of TRO and the acquisition of
the Existing Properties, the Trust's Leverage Ratio, computed as provided in
the commitment letter, would be approximately 60.7%.
The New Revolver will contain affirmative and negative covenants normally
found in facilities of this type, as well as requirements that the Trust
maintain: (i) a maximum Leverage Ratio of 65%; (ii) a maximum ratio of Senior
Liabilities to Unencumbered Asset Value of 73%; (iii) minimum tangible net
worth of $115 million; (iv) a minimum ratio of annualized consolidated property
net operating income to total annual debt service of 1.40:1; (v) a minimum
ratio of annualized consolidated property net operating income to pro forma
debt service 1.30:1; and (vi) annualized consolidated property net operating
income of at least $40 million (plus a requirement that such net operating
income not decline by more than 10% during any 12 month period). Until the
Trust reduces its Leverage Ratio below 50%, the Bank will hold unrecorded
mortgages on eleven unencumbered properties which the Trust owns, directly or
indirectly, and would be entitled to record such mortgages upon any event of
default.
Closing and funding the New Revolver will be subject to a number of
conditions, including, but not limited to (i) the negotiation and execution of
mutually acceptable documentation, and (ii) acquisition of the non-voting
equity of TRO and the Existing Properties. Although the Bank intends to
syndicate this facility to other lenders, it is not a condition of the Bank's
commitment that it do so. There can be no assurance that all conditions to
closing and funding of the New Revolver will be satisfied. Due to the operation
of certain covenants in the New Revolver, the Trust presently anticipates that
it will only be able to utilize approximately $110 million of the facility
until it obtains additional equity financing. However, such utilization will be
sufficient to complete the acquisition of the non-voting equity of TRO and the
Existing Properties.
Consequences of Failure to Approve the TRO Transaction
The failure of the Shareholders to approve the TRO Transaction may result
in the following consequences:
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<PAGE>
(i) The Trust would continue to conduct its business in a manner
consistent with past practices. This would involve the implementation of the
Trust's business plan by continuing to attempt to maximize the value of the
Trust's existing asset base and continuing to explore attractive property
acquisitions.
(ii) The TRO Contribution Agreement provides that if the TRO Transaction
is not completed by reason of a failure of the Shareholders to vote in favor of
it, the Trust will be liable for the documented out-of-pocket transaction
expenses of TRO incurred in connection with the TRO Transaction up to $1
million.
Distributions
To qualify for taxation as a real estate investment trust, the Trust must
distribute at least 95% of its REIT taxable income (which essentially is its
net income, not including capital gains). Following the TRO Transaction, the
Trust intends to continue to pay regular quarterly dividends to its
Shareholders in accordance with its long-standing distribution policies. The
amount of dividends will be affected by a number of factors, including revenues
received from rental properties, the operating expenses of the Trust, interest
incurred on borrowings, capital expenditures, the annual distribution
requirements under the REIT provisions of the Code, proceeds from the sale or
refinancing of properties and such other factors as the Trustees consider
relevant.
Federal Income Tax Considerations
The following discussion summarizes the material Federal income tax
consequences to a holder of Shares who is a U.S. citizen or resident or which
is a tax exempt organization (including individual retirement accounts). Such
discussion is based on current law. The discussion is not exhaustive of all
possible tax considerations, nor does the discussion give a detailed
description of any state, local, or foreign tax considerations. The discussion
does not describe all of the aspects of Federal income taxation that may be
relevant to a Shareholder in light of his or her particular circumstances or to
certain types of Shareholders (including insurance companies, financial
institutions or broker-dealers, and foreign corporations) subject to special
treatment under the Federal income tax laws.
General. The Trust expects to continue to be taxed as a REIT for Federal
income tax purposes. The Trustees believe that the Trust was organized, has
operated and, assuming consummation of the TRO Transaction, will continue to
operate after the TRO Transaction in such a manner as to meet the requirements
for qualification and taxation as a REIT under the Code. No assurance, however,
can be given that the Trust will continue to operate in a manner so as to
remain qualified as a REIT.
The following is a general summary of the Code sections that govern the
Federal income tax treatment of a REIT and its shareholders. These sections of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof as currently in effect. There is no assurance that
there will not be future changes in the Code or administrative or judicial
interpretation thereof which could adversely affect the Trust's ability to
continue to qualify as a REIT or adversely affect the taxation of holders of
Shares or which could further limit the amount of income the Trust may derive
from the management, construction, development, leasing or sale of properties
owned by the Operating Partnership or by third parties or in partnerships with
third parties.
Taxation of the Trust as a REIT. An entity, such as the Trust, that
qualifies for taxation as a REIT and distributes to its Shareholders at least
95% of its REIT taxable income is generally not subject to Federal corporate
income taxes on net income that it currently distributes to Shareholders. This
treatment substantially eliminates the "double taxation" (at the corporate and
Shareholder levels) that generally results from investment in a corporation.
However, the Trust will be subject to Federal income tax as follows:
(i) The Trust will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
(ii) Under certain circumstances, the Trust may be subject to the
"alternative minimum tax" on its items of tax preference, if any.
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<PAGE>
(iii) If the Trust has net income from prohibited transactions (which are,
in general, certain sales or other dispositions of property other than
foreclosure property held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. See "Sale of
Partnership Property."
(iv) If the Trust should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which the Trust fails the 75% or 95% test, multiplied by a
fraction intended to reflect the Trust's profitability.
(v) If the Trust should fail to distribute during each calendar year at
least the sum of (1) 85% of its REIT ordinary income for such year, (2) 95% of
its REIT capital gain net income for such year, and (3) any undistributed
taxable income from prior years, it would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
(vi) If the Trust has (1) net income from the sale or other disposition of
"foreclosure property" (which is, in general, property acquired by the Trust by
foreclosure or otherwise or default on a loan secured by the property) which is
held primarily for sale to customers in the ordinary course of business or (2)
other non-qualifying income from foreclosure property, it will be subject to
tax on such income at the highest corporate rate.
(vii) If the Trust acquires any asset from a C corporation (i.e.,
generally a corporation subject to tax at the corporate level) in a transaction
in which the basis of the asset in the Trust's hands is determined by reference
to the basis of the asset (or any other property) in the hands of the C
corporation, and the Trust recognizes gain on the disposition of such asset
during the 10-year period (the "Restriction Period") beginning on the date on
which such asset was acquired by the Trust then, pursuant to guidelines issued
by the IRS, the excess of the fair market value of such property at the
beginning of the applicable Restriction Period over the Trust's adjusted basis
in such asset as of the beginning of such Restriction Period will be subject to
a tax at the highest regular corporate rate. The results described above with
respect to the recognition of built in gain assume that the Trust will make an
election pursuant to IRS Notice 88-19 or applicable future administrative rules
or Treasury Regulations.
(viii) The Trust may elect to retain, and pay income tax on, some or all
of its net long-term capital gain for any year. In that event, such capital
gain amount will be deemed distributed to shareholders and recontributed to the
Trust, and each shareholder will receive a tax credit for his allocable portion
of the tax paid by the Trust.
Qualification of the Trust as a REIT. The Code defines a REIT as a
corporation, trust or association:
(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation but for Sections 856
through 859 of the Code;
(4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in value
of the outstanding stock of which is owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain exempt
organizations); and
(7) which meets certain income and asset tests, described below.
Conditions (1) through (4), inclusive, must be satisfied during the entire
taxable year, and condition (5) must be satisfied during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. The Trust has previously issued Shares in sufficient
proportions to allow it to satisfy requirements (5) and (6) (the "100
Shareholder" and "five-or-fewer" requirements). In addition, the Trust's
Declaration of Trust provides restrictions regarding the transfer of its shares
that are intended to assist the Trust in continuing to satisfy the share
ownership requirements described in (5) and (6) above.
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A REIT is permitted to have a wholly-owned subsidiary (also referred to as
a "qualified REIT subsidiary"). A qualified REIT subsidiary is not treated as a
separate entity for Federal income tax purposes. Rather, all of the assets,
liabilities and items of income, deductions and credit of a qualified REIT
subsidiary are treated as if they were those of the REIT.
A REIT is deemed to own its proportionate share of the assets of a
partnership in which it is a partner and is deemed to receive its proportionate
share of the income of the partnership. Thus, the Trust's proportionate share
of the assets, liabilities and items of income of the Operating Partnership and
each of the real estate partnerships in which the Operating Partnership holds
an interest (the "Title Holding Partnerships") will be treated as assets,
liabilities and items of income of the Trust for purposes of applying the
requirements described herein, provided that the Operating Partnership and the
Title Holding Partnerships are treated as partnerships for Federal income tax
purposes.
Income Tests. To maintain qualification as a REIT, there are two gross
income requirements that must be satisfied annually. First, at least 75% of the
Trust's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from "qualified
temporary investment income" (described below). Second, at least 95% of the
Trust's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from such real property investments and from
dividends, interest, and gain from the sale or disposition of stock or
securities or from any combination of the foregoing. In applying these tests,
the Trust will be treated as realizing its share of the income and bearing its
share of the loss of the Operating Partnership, and the character of such
income or loss, as well as other partnership items, will be determined at the
partnership level.
Rents received by the Trust will qualify as "rents from real property"
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if the REIT, or an
owner of 10% or more of the REIT, directly or constructively owns 10% or more
of such tenant (a "Related Party Tenant"). Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion
of rent attributable to such personal property will not qualify as "rents from
real property." Finally, for rents received to qualify as "rents from real
property," the REIT generally must not operate or manage the property or
furnish or render more than a de minimis amount of services to the tenants of
such property, other than through an "independent contractor" who is adequately
compensated and from whom the REIT does not derive any income; provided,
however, that the Trust may directly perform certain customary services (e.g.,
furnishing water, heat, light and air conditioning, and cleaning windows,
public entrances and lobbies) other than services which are considered rendered
to the occupant of the property (e.g., renting parking spaces on a reserved
basis to tenants).
It is expected that the Trust's real estate investments which include its
allocable share of income from the Operating Partnership will give rise to
income that will enable it to satisfy all of the income tests described above.
The Trust does not anticipate charging an amount of rent that is based in
whole or in part on the income or profits of any person. The Trust does not
anticipate receiving rents in excess of a de minimis amount from Related Party
Tenants. The Trust does not anticipate holding a lease on any property in which
rents attributable to personal property constitute greater than 15% of the
total rents received under the lease. The Trust will not knowingly directly
perform services considered to be rendered to the occupant of property.
The Operating Partnership will own all of the nonvoting common shares of
TRO, a corporation that is taxable as a regular corporation. TRO will perform
management, development and leasing services for the Operating Partnership and
other real estate owned in whole or in part by third parties. The third-party
income earned by and taxed to the Management Company would be nonqualifying
income if earned directly by the Trust. As a result of the corporate structure,
the income will be earned by and taxed to TRO and will be received by the Trust
only indirectly as dividends. Although dividends generally qualify under the
95% test, the IRS refuses to rule on this issue when the dividends are earned
in this manner.
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If the Trust fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if (i) the Trust's failure to meet such
tests was due to reasonable cause and not due to willful neglect, (ii) the
Trust attaches a schedule of the sources of its income to its return, and (iii)
any incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the Trust would be entitled to the benefit of these relief provisions. As
discussed above in "Taxation of the Trust as a REIT," even if these relief
provisions apply, a tax would be imposed with respect to the excess net income.
See "Failure to Qualify."
Asset Tests. In order for the Trust to maintain its qualification as a
REIT, at the close of each quarter of its taxable year it must also satisfy
three tests relating to the nature of its assets. First, at least 75% of the
value of the Trust's total assets must be represented by real estate assets
(which for this purpose include (i) its allocable share of real estate assets
held by partnerships in which the Trust or a "qualified REIT subsidiary" of the
Trust owns an interest and (ii) stock or debt instruments purchased with the
proceeds of a stock offering or a long-term (at least five years) debt offering
of the Trust and held for not more than one year from the date the Trust
receives such proceeds, cash, cash items, and government securities. Second,
not more than 25% of the Trust's total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by the
Trust may not exceed 5% of the value of the Trust's total assets, and the Trust
may not own more than 10% of any one issuer's outstanding voting securities
(excluding securities of a qualified REIT subsidiary or another REIT).
The Trust anticipates that it will be able to comply with these asset
tests. The Trust is deemed to hold directly its proportionate share of all real
estate and other assets of the Operating Partnership and should be considered
to hold its proportionate share of all assets deemed owned by the Operating
Partnership through its ownership of partnership interests in other
partnerships. As a result, the Trust plans to hold more than 75% of its assets
as real estate assets. In addition, the Trust does not plan to hold any
securities representing more than 10% of any one issuer's voting securities,
other than any qualified REIT subsidiary of the Trust, nor securities of any
one issuer exceeding 5% of the value of the Trust's gross assets (determined in
accordance with generally accepted accounting principles). As previously
discussed, the Trust is deemed to own its proportionate share of the assets of
a partnership in which it is a partner so that the partnership interest,
itself, is not a security for purposes of this asset test.
The Operating Partnership will own all of the nonvoting common shares of
TRO. The Operating Partnership will not own more than 10% of the voting
securities of TRO. The Trust believes that its indirect interest in the
securities of TRO will not exceed 5% of the total value of the Trust's assets.
However, no independent appraisals have been obtained.
No assurance can be given that the Trust's indirect ownership of TRO will
meet the 10% voting securities test. Prior to June 1994, the IRS routinely
issued rulings that the 10% voting securities test was met in any case where
the REIT did not have more than 10% of the management company's voting stock.
However, in September 1994, the IRS reevaluated its position on this issue and
now refuses to issue a ruling on whether the 10% voting securities test is met.
After initially meeting the asset tests at the close of any quarter, the
Trust will not lose its status as a REIT for failure to satisfy the asset tests
at the end of a later quarter solely by reason of changes in asset values. If
the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Trust intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests, and to take such other
action within 30 days after the close of any quarter as may be required to cure
any noncompliance. However, there can be no assurance that such other action
will always be successful.
Annual Distribution Requirements. The Trust, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends)
to its Shareholders in an amount at least equal to (A) the sum of (i) 95% of
the Trust's "REIT taxable income" (computed without regard to the dividends
paid deduction and the REIT's net capital gain) and (ii) 95% of the net income
(after tax), if any from foreclosure property, minus (B) the sum of certain
items of non-cash income. Such distributions must be paid in the taxable year
to which they
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relate, or in the following taxable year if declared before the Trust timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that the Trust does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax
on the undistributed amount at regular capital gains and ordinary corporate tax
rates. Furthermore, if the Trust should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT net capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Trust would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed.
The Trust intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, the Operating Partnership
Agreement authorizes the Trust, as general partner, to take such steps as may
be necessary to cause the Operating Partnership to distribute to its partners
an amount sufficient to permit the Trust to meet these distribution
requirements. It is possible that the Trust, from time to time, may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due primarily to the expenditure of cash for nondeductible expenses such as
principal amortization or capital expenditures. In order to meet the 95%
distribution requirement, the Trust may borrow or may cause the Operating
Partnership to arrange for short-term or other borrowing to permit the payment
of required dividends or pay dividends in the form of taxable stock dividends.
If the amount of nondeductible expenses exceeds non-cash deductions, the
Operating Partnership may refinance its indebtedness to reduce principal
payments and borrow funds for capital expenditures.
Under certain circumstances, the Trust may be able to rectify a failure to
meet the distribution requirement for a certain year by paying "deficiency
dividends" to Shareholders in a later year that may be included in the Trust's
deduction for dividends paid for the earlier year. Thus, the Trust may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Trust will be required to pay to the IRS interest based upon the amount of
any deduction taken for deficiency dividends.
Failure to Qualify. If the Trust fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Trust will be
subject to tax (including any applicable corporate alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to Shareholders in
any year in which the Trust fails to qualify will not be deductible by the
Trust, nor will they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, all distributions to Shareholders
will be taxable to them as ordinary income, and subject to certain limitations
of the Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Trust also will be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not
possible to state whether in all circumstances the Trust would be entitled to
such statutory relief.
Income Taxation of the Operating Partnership, the Title Holding
Partnerships and Their Partners. The following discussion summarizes certain
Federal income tax considerations applicable to the Trust's investment in the
Operating Partnership and the Title Holding Partnerships:
Classification of the Operating Partnership and Title Holding Partnerships
as Partnerships. The Trust will be entitled to include in its income its
distributive share of the income and to deduct its distributive share of the
losses of the Operating Partnership (including the Operating Partnership's
share of the income or losses of the Title Holding Partnerships) only if the
Operating Partnership and the Title Holding Partnerships (collectively, the
"Partnerships") are classified for Federal income tax purposes as partnerships
rather than as associations taxable as corporations. Under recently promulgated
"check-the-box" regulations, an organization formed as a limited partnership
will be treated as a partnership for Federal income tax purposes rather than as
a corporation, provided that it does not affirmatively elect to be taxable as a
corporation. The Operating Partnership and the Title Holding Partnerships do
not intend to elect to be taxable as corporations. Accordingly, they anticipate
that they will be classified as partnerships for Federal income tax purposes.
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under Section 704(b) of the Code if they
do not comply with the provisions of Section 704(b) of the Code and the
Treasury Regulations promulgated thereunder as to substantial economic effect.
If an allocation is not recognized for Federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
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account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Operating Partnership's
allocations of taxable income and loss are intended to comply with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. The properties
contributed directly or indirectly to the Operating Partnerships will generally
be appreciated. Pursuant to Section 704(c) of the Code, items of income, gain,
loss, and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership
must be allocated for Federal income tax purposes in a manner such that the
contributor is charged with or benefits from the unrealized gain or unrealized
loss associated with the property at the time of the contribution. The amount
of such unrealized gain or unrealized loss is generally equal to the difference
between the fair market value of the contributed property at the time of
contribution and the adjusted tax basis of such property at the time of
contribution. The partnership agreements of the Partnerships will require
allocations of income, gain, loss and deduction attributable to such
contributed property to be made in a manner that is consistent with Section
704(c) of the Code. Thus, if the Partnerships sell contributed property at a
gain or loss, such gain or loss will be allocated to the contributing
partner(s) generally to the extent of the precontribution unrealized gain or
loss.
Depreciation. The Partnerships' assets other than cash will consist
largely of appreciated property contributed by its partners. Assets contributed
to a partnership in a tax-free transaction carry over their depreciation
schedules. Accordingly, the Operating Partnership's depreciation deductions for
its real property are based largely on the historic depreciation schedules for
the Properties. The Properties are being depreciated over a range of 15 to 40
years using various methods of depreciation which were determined at the time
that each item of depreciable property was placed in service. Any real property
purchased by the Partnerships will be depreciated over at least 39 years. In
certain instances where a partnership interest rather than real estate is
contributed to the Partnership, the real estate may not carry over its
depreciation schedule but rather may, similarly, be subject to the lengthier
depreciation period.
Section 704(c) of the Code requires that depreciation as well as gain and
loss be allocated in a manner so as to take into account the variation between
the fair market value and tax basis of the property contributed. Depreciation
with respect to any property purchased by the Operating Partnership subsequent
to the admission of its partners, however, will be allocated among the partners
in accordance with their respective percentage interests in the Partnerships.
Sale of Partnership Property. Generally, any gain realized by a
partnership on the sale of property held by the partnership for more than one
year will be long-term capital gain, except for any portion of such gain that
is treated as depreciation or cost recovery recapture. However, under the REIT
Requirements, the Trust's share as a partner of any gain realized by the
Partnerships on the sale of any property held as inventory or other property
held primarily for sale to customers in the ordinary course of a trade or
business will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "Taxation of the Trust as a REIT." Such
prohibited transaction income will also have an adverse effect upon the Trust's
ability to satisfy the income tests for REIT status. See "Income Tests." Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. A safe harbor to avoid classification as a prohibited transaction
exists as to real estate assets held for the production of rental income by a
REIT for at least four years where in any taxable year the REIT has made no
more than seven sales of property or, in the alternative, the aggregate of the
adjusted bases of all properties sold does not exceed 10% of the adjusted bases
of all of the REIT's properties during the year and the expenditures includable
in a property's net sales price. The Partnerships intend to hold the Properties
for investment with a view to long-term appreciation, to engage in the business
of acquiring, developing, owning, and operating and leasing properties and to
make such occasional sales of the properties as are consistent with the Trust's
and the Operating Partnership's investment objectives. No assurance can be
given, however, that every property sale by the Partnerships will constitute a
sale of property held for investment.
Possible Federal Tax Developments. The rules dealing with Federal income
taxation are constantly under review by the IRS, the Treasury Department and
Congress. New Federal tax legislation or other provisions may be enacted into
law or new interpretations, rulings or Treasury Regulations could be adopted,
all of which could
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affect the taxation of the Trust or of its Shareholders. For example, the
Taxpayer Relief Act of 1997, which was recently enacted, changed some of the
rules applicable to REITs (which changes are reflected in the discussion
above). No prediction can be made as to the likelihood of passage of any new
tax legislation or other provisions either directly or indirectly affecting the
Trust or its Shareholders. Consequently, the tax treatment described herein may
be modified prospectively or retroactively by legislative, judicial or
administrative action.
State and Local Taxes. Each of the Trust, the Operating Partnership, the
Title Holding Partnerships and the Shareholders will be subject to state, local
or other taxation in various state, local or other jurisdictions, including
those in which they transact business or reside. The tax treatment in such
jurisdictions may differ from the Federal income tax consequences discussed
above. Other taxes may be applied to each of the Trust, the Operating
Partnership, the Title Holding Partnerships and the Shareholders by varying
jurisdictions. In addition, the Trust may be subject to state or local taxes as
a result of holding a partnership interest in a partnership which holds real
estate in a particular state.
Real Estate Transfer Taxes. The transfer of certain of the properties to
the Operating Partnership has been structured as transfers of 89% of the
interests in the limited partnership owning such properties with the residual
interests to be acquired by the Operating Partnership on the first business day
of the 37th month following the initial transfer. If the Operating Partnership
desired or were required, for financing purposes or otherwise, to acquire such
residual interests within the first 36 months of such period, the Operating
Partnership could be required to pay real estate transfer taxes. In addition,
certain of the contributions by the Trust to the Operating Partnership have
been structured to eliminate the applicability of real property transfer taxes.
There can be no assurance that applicable governmental bodies will not attempt
to assert liability for real estate transfer taxes with respect to some or all
of these transactions.
Regulatory Requirements; Approvals
No Federal or state regulatory requirements must be compiled with, nor any
governmental approvals obtained in connection with, the TRO Transaction. No
Federal or state agency has passed upon the fairness of the TRO Transaction.
Third Party Consents
A number of consents of joint venture partners, lenders and other third
parties are necessary to complete the TRO Transaction and the obligation of the
parties are subject to the obtaining of such consents.
Effective Date; Conditions to the TRO Transaction
It is contemplated that the TRO Transaction will occur as soon as
practicable after approval by Shareholders.
Required Vote
The affirmative vote of the holders of a majority of the Shares present in
person or by proxy and casting a vote on this Proposal will be necessary to
approve the TRO Transaction. For purposes of the foregoing, abstentions and
broker non-votes will not be deemed to be votes cast.
Recommendation of the Board of Trustees
The Trustees recommend that Shareholders vote FOR the TRO Transaction.
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PROPOSAL NO. 2:
ADOPTION OF AMENDED AND RESTATED
TRUST AGREEMENT OF THE TRUST
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On July 8, 1997, the Board of Trustees of the Trust adopted the Amended
and Restated Trust Agreement of the Trust (the "Amended and Restated Trust
Agreement") and directed that the Amended and Restated Trust Agreement be
submitted to the Shareholders for consideration at the Special Meeting. The
Amended and Restated Trust Agreement contains and combines the provisions of
the Amended and Restated Trust Agreement currently in effect (the "Current
Trust Agreement") and the amendments summarized herein.
Although the Current Trust Agreement, and as proposed to be amended, would
permit the proposed amendments to be effected without approval of the
Shareholders, the incorporation of certain provisions of Pennsylvania law
relating to the liability of the Trustees of the Trust into the Amended and
Restated Trust Agreement requires Shareholder approval and the Trustees
determined it desirable to condition all of the proposed amendments on the
approval of the Shareholders. If the Amended and Restated Trust Agreement is
not approved by the Shareholders at the Meeting, none of the amendments will be
effected unilaterally by the Trustees at this time.
The following is a summary of the principal substantive amendments
effected by the Amended and Restated Trust Agreement. The Amended and Restated
Trust Agreement effects other substantive amendments of lesser significance and
a number of non-substantive amendments. Such summary is qualified in its
entirety by the full text of the Amended and Restated Trust Agreement, which
appears as Appendix C to this Proxy Statement.
Election to be Governed by the Pennsylvania Business Trust Statute
The Trust was formed in 1960. From 1960 until the present, the Trust has
been an unincorporated association in business trust form organized under
Pennsylvania law. Currently, the Trust does not exist subject to any
Pennsylvania statute. The Trust's powers and activities and the powers and
liabilities of the Trustees and the Shareholders are governed by the terms of
the Current Trust Agreement and Pennsylvania common law.
The Amended and Restated Trust Agreement provides that the Trust shall
exist subject to Pennsylvania's business trust statute, 15 Pa. C.S. Chapter 95,
as amended or supplemented and any successor statute (the "PaBTS"). The Board
of Trustees believes that the principal advantage to electing to become subject
to the PaBTS is the degree of certainty that the PaBTS provides concerning the
protection of Trustees, officers of the Trust, and Shareholders from personal
liability for obligations of the Trust and the standard of conduct, and the
consequent protection from liability for breaches of fiduciary duties, which it
establishes for Trustees and officers of the Trust. The Current Trust Agreement
provides that neither the Trustees, when acting in such capacity, nor the
Shareholders, shall be liable to third parties for obligations undertaken by
the Trustees on behalf of the Trust. The Current Trust Agreement further
provides that a Trustee shall not be personally liable for monetary damages
unless such Trustee's conduct constitutes self-dealing, willful misconduct or
recklessness. While the Board of Trustees believes that the foregoing
provisions of the Current Trust Agreement would be enforced by a court, there
is little precedent under Pennsylvania common law and, consequently, the matter
is not free from doubt.
The PaBTS and the Amended and Restated Trust Agreement provide that no
Trustee shall be personally liable for the acts, omissions, or obligations of
the Trust (Paragraph 5.A). The PaBTS and the Amended and Restated Trust
Agreement provide that a Trustee shall only be personally liable for monetary
damages to the extent that a director of a Pennsylvania business corporation
remains liable under the standards set forth in the Pennsylvania Business
Corporation Law. (Paragraph 5.B). The PaBTS and the Amended and Restated Trust
Agreement provide that an officer of the Trust shall perform his duties as an
officer of the Trust in good faith, in a manner that he reasonably believes to
be in the best interests of the Trust and with such care, including reasonable
inquiry, skill and diligence as a person of ordinary prudence would use under
similar circumstances, and that a person who so performs his duties shall not
be liable by reason of having been an officer of PREIT. (Paragraph 5.C). The
PaBTS and the Amended and Restated Trust Agreement further provide that no
Shareholder shall have personal liability for any act, omission or liability of
a Trustee or the Trust. (Paragraph 12.A). The
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foregoing protections from personal liability are closely analogous to the
protections afforded by the Pennsylvania Business Corporation Law to directors,
officers and shareholders of Pennsylvania business corporations, and the Board
of Trustees believes that the foregoing protections from personal liability are
comparable to the protections afforded directors and officers of public
companies similar to the Trust. Moreover, the Board of Trustees believes that
such protections may be necessary in order to continue to attract and retain
able persons to serve as Trustees and officers of the Trust and are desirable
in order to encourage investors to become Shareholders.
UPREIT Structure
The Amended and Restated Trust Agreement authorizes the Trust to transfer
all of its assets to the Operating Partnership and hold, in lieu of those
assets, interests in the Operating Partnership or another entity. (Paragraph 3,
lead-in paragraph; and Paragraph 3.Q)
Authority to Issue Additional Classes, Series and Types of Securities
The Amended and Restated Trust Agreement provides that the Trustees may
create and issue, and authorize the creation and issuance by subsidiaries of
the Trust of, multiple classes and series of Shares and option rights and
securities having conversion or option rights. (Paragraph 8 and Paragraph 3.S).
The Amended and Restated Trust Agreement further provides that the terms of
such rights or other securities may provide for disparate treatment of certain
holders or groups of holders of such rights or other securities. (Paragraph
3.S). These amendments are intended to give the Board of Trustees the broad
authority and flexibility in raising capital for the Trust that the Board of
Trustees believes that the board of directors of public companies similar to
the Trust typically have. The Board of Trustees also believes that, in addition
to the flexibility concerning the Trust's capital structure, the ability to
issue rights and multiple classes and series of securities, the terms of which
may provide for disparate treatment of holders thereof, would give the Board of
Trustees the authority to adopt and implement a variety of defensive strategies
in response to attempts to acquire control of the Trust, including a
shareholder rights plan or "poison pill." The Board of Trustees has no current
intention to adopt a shareholder rights plan.
Removal of Trustees
The Current Trust Agreement provides that a Trustee may be removed without
cause by Shareholders at any meeting of Shareholders called for that purpose by
the vote of Shareholders entitled to cast at least seventy-five percent (75%)
of the votes of the Shares then outstanding and entitled to vote at the annual
election of Trustees. This provision would be eliminated by the Amended and
Restated Trust Agreement. The Amended and Restated Trust Agreement retains the
other provisions in the Current Trust Agreement concerning removal of Trustees,
which provide that Trustees may be removed by the vote of at least two-thirds
of the Trustees for any cause deemed by them sufficient, or by a vote of
Shareholders who are entitled to cast at least a majority of the votes of the
Shares then outstanding and entitled to vote at the annual election of Trustees
for cause, at any meeting of Shareholders called for that purpose. (Paragraph
2.F). "Cause," with respect to a Shareholder vote, means conviction of a felony
by a court of competent jurisdiction where such conviction is no longer subject
to direct appeal, or an adjudication by a court of competent jurisdiction that
a Trustee is liable for negligence or misconduct in the performance of his duty
to the Trust in a matter of substantial importance to the Trust, where such
adjudication is no longer subject to direct appeal. The Board of Trustees
believes that preventing Shareholders from removing Trustees without cause,
combined with the existing classified Board structure, will assist in
maintaining the continuity and stability of management and its business
strategies. The elimination of the Shareholders' ability to remove Trustees
without cause may have the effect of precluding the acquisition of control of
the Trust without the approval of the Board of Trustees.
REIT Ownership Limitations
The Current Trust Agreement provides that if the Board of Trustees shall
at any time be of the opinion that direct or indirect ownership of Shares has
or may become concentrated to an extent which would cause the Trust to fail to
qualify or to be disqualified to be taxed as a REIT under the United States
Internal Revenue Code of 1986, as amended from time to time (the "Code"), the
Board of Trustees shall have the power to call for
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redemption from any Shareholder, such number of Shares as is sufficient in the
opinion of the Trustees to maintain or bring the direct or indirect ownership
of Shares in the conformity with the Code, and to refuse to register any
proposed transfer of Shares which would result in the Trust's being unable to
conform to the requirements of the Code. From and after the date fixed for
redemption in accordance with the foregoing, Shares so called for redemption
cease to be entitled to dividends, voting rights and other benefits with
respect to such Shares. (Paragraph 3.P of the Current Trust Agreement, to be
deleted). Thus, the Trust has the power to repurchase shares from any
Shareholder who actually or constructively owns a number of shares of the Trust
which would result in five or fewer shareholders beneficially or constructively
owning more than 50% of the outstanding Shares.
Because it is advantageous for the Trust to be eligible to qualify to be
taxed as a REIT, the Amended and Restated Trust Agreement updates and replaces
the provisions described in the preceding paragraph by adding new provisions
(the "Ownership Limit Provisions") to the Current Trust Agreement which the
Trustees believe will more effectively restrict the acquisition of shares of
capital stock of the Trust in order to prevent the Trust's failing to qualify
to be taxed as a REIT under the Code. (Paragraph 9). The Ownership Limit
Provisions provide that no person may beneficially own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.9% of the capital
stock of the Trust, whether measured by vote, value or number of the
outstanding Shares of the Trust. The Trustees may waive the Ownership Limit
Provisions if evidence satisfactory to the Trustees and tax counsel to the
Trust is presented that such ownership will not jeopardize the Trust's status
as a REIT.
Issuance or transfer of Shares in violation of the Ownership Limit
Provisions or which would cause the Trust to be beneficially owned by fewer
than 100 persons shall be void ab initio and the intended transferee will
acquire no rights to the Shares.
In the event of a purported transfer or other event that would, if
effective, result in the ownership of Shares in violation of the Ownership
Limit Provisions, such transfer or other event with respect to that number of
Shares that would be owned by the transferee in excess of the Ownership Limit
Provisions would automatically be exchanged for Excess Shares (the "Excess
Shares"), authorized by the Amended and Restated Trust Agreement, according to
the rules set forth therein, to the extent necessary to insure that the
purported transfer or other event does not result in the ownership of Shares in
violation of the Ownership Limit Provisions. Any purported transferee or other
purported holder of Excess Shares is required to give written notice to the
Trust of a purported transfer or other event that would result in the issuance
of Excess Shares.
Excess Shares are not treasury shares but rather continue as issued and
outstanding Shares. While outstanding, Excess Shares will be held in trust. The
trustee of such trust shall be the Trust. The beneficiary of such trust shall
be designated by the purported holder of Shares. If, after the purported
transfer or other event resulting in an exchange of Shares for Excess Shares
and prior to the discovery by the Trust of such exchange, dividends or
distributions are paid with respect to the Shares that were exchanged for
Excess Shares, then such dividends or distributions are to be repaid to the
Trust upon demand. While Excess Shares are held in trust, any interest in that
trust may be transferred by the trustee only to a person whose ownership of
Shares will not violate the Ownership Limit Provisions, at which time the
Excess Shares will be automatically exchanged for the same number of Shares of
the same type and class as the Shares for which the Excess Shares were
originally exchanged. The Amended and Restated Trust Agreement contains
provisions that are designed to insure that the purported transferee or other
purported holder of Excess Shares may not receive in return for such a transfer
an amount that reflects any appreciation in the Shares for which Excess Shares
were exchanged during the period that such Excess Shares were outstanding. Any
amount received by a purported transferee or other purported holder in excess
of the amount permitted to be received must be paid to the Trust. If the
foregoing restrictions are determined to be invalid by any court of competent
jurisdiction then the intended transferee or holder of any Excess Shares may be
deemed, at the option of the Trust, to have acted as an agent on behalf of the
Trust in acquiring such Excess Shares and to hold such Excess Shares on behalf
of the Trust.
The Amended and Restated Trust Agreement further provides that Excess
Shares shall be deemed to have been offered for sale to the Trust at the lesser
of the price paid for the Shares by the purported transferee or in the case of
a gift, devise or other transaction, the market price for such Shares at the
time of such gift, devise or other transaction or the market price for the
Shares on the date the Trust or its designee exercises its option
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to purchase. The Trust may purchase such Excess Shares during a 90-day period,
beginning on the date of the violative transfer if the original
transferee-Shareholder gives notice to the Trust of the transfer or, if no
notice is given, the date the Board of Trustees determines that violative
transfer has been made.
Each Shareholder shall upon demand be required to disclose to the Trust in
writing such information with respect to the direct, indirect and constructive
ownership of Shares as the Board of Trustees deems necessary to comply with the
provisions of the Amended and Restated Trust Agreement or the Code applicable
to a REIT or to comply with the requirements of any taxing authority or
governmental agency. Certificates representing Shares of any class or series
issued after the effectiveness of the Amended and Restated Trust Agreement will
bear a legend referring to the restrictions described above.
Compensation of Trustees
The Current Trust Agreement generally provides that the Trustees shall
receive such reasonable compensation as shall be approved by a majority of
Trustees. The Amended and Restated Trust Agreement provides that the Board of
Trustees shall have the authority to adopt and implement such executive
compensation, option, bonus and retirement plans, for themselves and for
employees of the Trust and its subsidiaries, affiliates, and entities in which
the Trust maintains an investment, that the Trustees deem advantageous to the
Trust. (Paragraph 3.T).
The Board of Trustees of the Trust has determined that the foregoing
amendments are necessary and desirable to clarify the power of the Trustees in
respect of compensation plans in connection with the implementation of certain
provisions of the TRO Transaction, as well as the operation of the Trust
generally. The Board of Trustees also believes that the foregoing amendment
will benefit the Trust by authorizing expressly the Trustees to adopt and
implement a variety of compensation schemes designed to attract and retain able
management personnel for the Trust.
Trustees Dealings with the Trust
The Current Trust Agreement provides that Trustees shall not be
disqualified by their positions as Trustees from selling to buying from, or
otherwise dealing, directly or indirectly, with the Trust, and that the
Trustees have no liability to the Trust or to the Shareholders in connection
with such transactions (except for bad faith or gross negligence) that are
approved by a majority of Trustees.
The Amended and Restated Trust Agreement addresses such transactions in
much the same manner as the Pennsylvania business corporation law addresses
interested director transactions. The Amended and Restated Trust Agreement
provides that no contract or transaction between a Trustee and the Trust shall
be void or voidable solely because of such a relationship with or interest of a
Trustee or solely because such a Trustee is present at or participates in a
meeting of the Board of Trustees that authorizes or ratifies the transaction,
or solely because his or her votes are counted for that purpose, if the
material facts as to the relationship or interest are disclosed or are known to
the Trustees and the Board of Trustees authorizes or ratifies such contract or
transaction by the affirmative vote of a majority of the Trustees not having an
interest in such transaction. (Paragraph 2.K). The Amended and Restated Trust
Agreement further provides that no Trustee shall have any liability for such a
contract or transaction so approved or ratified by a majority of the Trustees
not having an interest therein (except for bad faith or gross negligence).
Extraordinary Transactions
The Amended and Restated Trust Agreement provides that the Trustees may
merge the Trust with any other business trust or other entity, transfer all or
substantially all of the Trust's assets, and, to the extent permitted by law,
elect to have the Trust exist subject to laws other than the PaBTS. (Paragraph
3.Q).
Voting Rights and Other Miscellaneous Changes
The Amended and Restated Trust Agreement continues to provide that in any
vote of the holders of the Shares, other than the election of Trustees, the
holders of the majority of the Shares voting on a matter at a meeting at which
at least the holders majority of the Shares are present in person or by proxy
will constitute the
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act of the Shareholders. The Amended and Restated Trust Agreement makes it
clear that abstentions and broker non-votes will not be deemed to have been
voted on a matter. The Amended and Restated Trust Agreement also permits the
Trustees to authorize the holders of securities of affiliates of the Trust to
vote with the holders of shares on certain matters and the Trustees intend to
exercise such right under the Operating Partnership Agreement. (See "The TRO
Transaction -- Principal Features of the TRO Transaction -- OP Units").
In addition to the foregoing, the Amended and Restated Trust Agreement
effects a number of additional changes, including: (i) addition of a procedure
for calling special meetings of Trustees (Paragraph 2.H); (ii) a provision
authorizing Trustees to take action by written consent in lieu of a meeting
with the consent of 75% of the Trustees, rather than a majority (Paragraph
2.J); (iii) a provision setting forth which matters may be delegated to a
committee of the Board of Trustees (Paragraph 3.R); (iv) provisions relating to
the adjournment of shareholder meetings and the lack of necessity to give new
notice or set a new record date therefor (Paragraphs 11.I, 11.C (last sentence)
and 11.D (last sentence)).
Required Vote
The affirmative vote of the holders of a majority of the Shares present in
person or by proxy and casting a vote on this Proposal will be necessary for
the adoption of the Amended and Restated Trust Agreement. For purposes of the
foregoing, abstentions and broker non-votes shall not be deemed to be votes
cast.
Board Recommendation
The Board of Trustees recommends that the Shareholders vote FOR approval
of the Amended and Restated Trust Agreement.
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PROPOSAL NO. 3:
THE AMENDED AND RESTATED
1990 INCENTIVE AND NONQUALIFIED
STOCK OPTION PLAN
---------------------
The Trust's 1990 Incentive and Nonqualified Stock Option Plan (the "1990
Plan"), was approved in its original form by the Trustees on September 17, 1990
and by the Shareholders on December 19, 1990. As originally approved, the 1990
Plan authorized the granting of incentive stock options ("ISOs") in respect of
an aggregate of 200,000 Shares to key employees of the Trust ("Key Employees").
The 1990 Plan was subsequently amended and restated to increase the number of
Shares in respect of which options could be granted from 200,000 to 400,000
Shares, to provide for the granting of nonqualified stock options ("NQSOs"),
and to effect other changes in the 1990 Plan and options subsequently granted
thereunder. These amendments were approved by the Trustees on December 14, 1993
and by the Shareholders on December 15, 1994.
On July 8, 1997, the Trustees voted to further amend, and thereafter
restate, the 1990 Plan. The amendments approved by the Trustees (the "1997
Amendments"):
o Grant the Executive Compensation and Human Resources Committee of the
Board of Trustees the power (with the consent of the Key Employee) to
revise currently outstanding options to reflect any one or more of the new
features with respect to outstanding options granted under the 1990 Plan
which are permitted by the 1997 Amendments and/or to extend the exercise
date of any outstanding option of a retiring Key Employee (Section 2(b));
o Permit payment of the option price in the following additional ways
(Section 7(d)) (the Plan already permits payment by cash or check and by
using Shares previously acquired by the Key Employee) --
o through a broker-assisted transaction;
o by a loan to the Key Employee from PREIT; or
o in any combination of the above.
o Permit the joint registration of certificates in the name of the Key
Employee and the Key Employee's spouse, with right of survivorship
(Section 7(h)).
o Permit transferable nonqualified stock options (if so provided in the
option agreement) (Section 7(h)).
o Permit the use of Shares obtained upon exercise of an option to satisfy
the Key Employee's tax withholding obligations upon the exercise of the
option (Section 7(1)).
o Authorize the Trust to loan funds to the Key Employee to assist the
employee in paying the increase in the Employee's regular income tax
attributable to the exercise of options under the 1990 Plan (Section
7(m)).
o Add provisions necessary to exclude the spread on the exercise of a
nonqualified stock option (or on the disqualifying disposition of Shares
acquired through the exercise of an ISO) from a Key Employee's
compensation for purposes of computing the $1 million limitation on
deductible compensation under Section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code").
o Change the required composition of the Executive Compensation and Human
Resources Committee to comply with both the current Rule 16b-3 under the
Securities and Exchange Act of 1934 and Section 162(m) of the Code.
(Section 2(a)). As amended, the Executive Compensation and Human Resources
Committee of the Board of Trustees charged with the administration of the
1990 Plan would be required to be composed of persons who (i) are not
currently officers of, or otherwise employed by, the Trust or any parent
or subsidiary of the Trust, (ii) do not receive compensation for services
from the Trust or any parent or subsidiary of the Trust of $60,000 per
year or more, except for compensation received solely as a trustee, and
(iii) do not possess an interest in any transaction with the Trust, or
business relationships, which are of a degree or kind required to be
disclosed in the Trust's public filings under the rules
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<PAGE>
of the Securities and Exchange Commission. In addition, to meet Section
162(m) of the Code, the persons (i) must not be former employees of the
Trust who receive compensation for prior services, (ii) must not have been
officers of the Trust, and (iii) must not receive remuneration from the
Trust (including any payment in exchange for goods or services), directly
or indirectly, in any capacity other than as a Trustee.
o Limit the future changes to the 1990 Plan for which the Trustees will
need Shareholder approval to the following -- (i) any amendment which
would (A) change the class of employees eligible to participate in the
plan with respect to ISOs; (B) increase the maximum number of Shares in
respect of which ISOs may be granted under the plan; or (C) extend the
duration of the plan with respect to any ISOs granted and (ii) any
amendment requiring shareholder approval pursuant to Treas. Reg.
Section 1.162-27(e)(4)(vi) (i.e., whenever it is proposed that the material
terms of the performance goal be changed). (Section 13(a)).
Set forth below is a general description of the 1990 Plan, as amended and
restated to give effect to the 1997 Amendments. Such description is qualified
in its entirety by reference to the 1990 Plan, as so amended and restated,
which is attached hereto as Appendix D. For the federal income tax consequences
associated with the Plan, see "The 1997 Stock Option/Stock Grant Plan --
Federal Income Tax Consequences."
Shares Subject to the 1990 Plan
Under the 1990 Plan, stock options may be awarded to Key Employees up to
an aggregate of 400,000 Shares of the Trust, subject to adjustments to reflect
any stock splits, stock dividends, share combinations or similar changes in the
capital of the Trust. Shares issuable under the 1990 Plan may be authorized but
unissued shares or reacquired shares, and the Trust may purchase shares for
this purpose.
Administration
The 1990 Plan will be administered by the Executive Compensation and Human
Resources Committee of the Board of Trustees (the "Committee") consisting of
not fewer than two non-employee, outside Trustees appointed by the Trust's
Board of Trustees. The Committee currently consists of Messrs. Farber,
Dimeling, and Javitch. Mr. Farber chairs the Committee. The Committee members
will have full authority, subject to the terms of the 1990 Plan, to select
optionees, to determine the terms and conditions of options, and generally to
administer the 1990 Plan. Trustees who are employees of the Trust are eligible
to receive options under the 1990 Plan.
<PAGE>
Duration and Amendment of 1990 Plan
Except to the extent limited by the 1990 Plan and the Code, the Board of
Trustees of the Trust will have the power, without the consent of the
Shareholders, to discontinue, amend or revise the terms of the 1990 Plan. Under
the restated 1990 Plan, the Trustees will only need to obtain Shareholder
approval (1) for any amendment which would (A) change the class of employees
eligible to participate in the Plan with respect to ISOs; (B) increase the
maximum number of Shares with respect to which ISOs may be granted under the
Plan; or (C) extend the duration of the Plan with respect to any ISOs granted
and (2) for amendments requiring Shareholder approval pursuant to Treas. Reg.
Section 1.162-27(e)(4)(vi).
The 1990 Plan will terminate at midnight on September 16, 2000 unless
earlier discontinued by the Board of Trustees; no options may be granted after
such termination, but options outstanding at the time of termination will
remain exercisable in accordance with their terms.
Terms and Conditions - Nonqualified Stock Options
NQSOs may be granted for terms of not more than 10 years at an exercise
price per share determined by the Committee, which shall not be less than the
par value of such optioned Shares. NQSOs are exercisable in such installments
as the Committee may determine. The Committee may accelerate the exercise date
of NQSOs in the event of the termination of an optionee's employment (as
defined in the 1990 Plan) or death, or in the event of certain corporate
transactions (see "Adjustments upon Changes in Capitalization, Mergers, and
Other Events"). Any NQSO held by an optionee who dies while employed (as
defined in the 1990 Plan) by the Trust, or whose employment with the Trust is
terminated prior to the expiration date of such option will remain exercisable
by the former employee, or his personal representative, for a period of time
following the employee's
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<PAGE>
termination of employment or death, as provided in the 1990 Plan and the
applicable option agreement. Upon exercise of NQSOs, the exercise price may be
paid in cash, or, if the Committee shall so provide, either in whole or in part
by the delivery of other Shares held by the optionee, through a broker-
assisted transaction, or by means of a loan from the Trust, subject to
limitations set forth in the 1990 Plan. Except as provided in an optionee's
option agreement, NQSOs are not assignable or transferable by an optionee other
than by will or by the laws of descent and distribution.
Terms and Conditions - Incentive Stock Options
ISOs are subject to the same terms and conditions under the 1990 Plan as
are described above for NQSOs, except that ISOs may not be granted to
individuals who are not employees of the Trust. Such options have some
additional terms and conditions required by the Code. Under the 1990 Plan: (i)
the exercise price per share of ISOs must be not less than the greater of the
par value of the optioned Shares and the fair market value of such Shares on
the date of grant of such option, except that in cases where ISOs are granted
to a person who owns more than 10% of the voting stock of the Trust, such
exercise price must be not less than 110% of the fair market value of the
optioned Shares on the date of the grant, and the term of such options cannot
be more than five years; and (ii) the aggregate fair market value (determined
at the time the option is granted) of the Shares with respect to which ISOs are
exercisable for the first time by any eligible person during any calendar year
(under the 1990 Plan and any other ISO plan of the Trust) may not exceed
$100,000. ISOs are not assignable or transferable by an optionee otherwise than
by will or the laws of descent and distribution. There are also certain other
requirements, such as specified holding periods for Shares received upon
exercise of such options and limitations on exercisability following
termination of employment, which must be satisfied in order for an optionee to
obtain ISO treatment under the Code.
Stock Option Agreements
The 1990 Plan also requires that optionees enter into stock option
agreements with the Trust which incorporate the terms of the options and such
other terms, conditions, and restrictions, not inconsistent with the 1990 Plan
and applicable law, as the Committee may determine.
Registration
If an optionee is married at the time of exercise and if the optionee so
requests at the time of exercise, the certificate or certificates shall be
registered in the name of the optionee and the optionee's spouse, jointly, with
right of survivorship.
Withholding and Use of Shares to Satisfy Tax Obligations
The 1990 Plan provides that if the exercise of an option is subject to the
withholding requirements of applicable federal tax law, the Committee, in its
discretion, may permit or require the optionee to satisfy the federal
withholding tax by electing to have the Trust withhold Shares subject to the
exercise or by returning previously acquired Shares to the Trust.
Loans
If an optionee is designated as an "eligible participant" by the Committee
at the date of grant of an ISO or at or after the date of grant of an NQSO, and
if the optionee thereafter so requests, the Committee will loan the optionee
the money required to satisfy any regular income tax obligations resulting from
the exercise of any option.
Discharge for Cause; Competition
In the event the employment of an optionee is terminated for "cause" (as
defined in the 1990 Plan), or if the optionee terminates employment and begins
working for a "competitor" (as defined in the 1990 Plan), his right under any
stock option agreement will terminate.
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<PAGE>
Change in Control
All outstanding options become fully vested and exercisable upon a "change
in control" (as defined in the 1990 Plan).
Adjustments upon Mergers and Other Events
In the event of a merger, consolidation, or other specified corporate
transaction, options will be assumed by the surviving or successor corporation,
if any. However, the 1990 Plan also authorizes the Committee to terminate
outstanding options in the event of such a corporate transaction, provided that
any then exercisable option may be exercised by the optionee within not fewer
than seven days' notice given prior to the termination. Further, the exercise
date of any options to be so terminated may be accelerated by the Committee.
Other Considerations
The 1990 Plan is not qualified under Section 401(a) of the Code and, based
upon current law and published interpretations, the Trust believes that the
1990 Plan is not subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended.
* * * * *
At June 30, 1997, options in respect of 377,500 Shares had been granted
under the 1990 Plan, 37,375 of which have been exercised. While the Trust may
or may not grant options in respect of the remaining 22,500 Shares authorized
by the 1990 Plan, it is anticipated that if the 1997 Amendments are approved by
the Shareholders, the Executive Compensation and Human Resources Committee will
authorize the modifications of existing outstanding option agreements to
incorporate certain additional provisions with respect to options as are
permitted by the 1997 Amendments without any change in the exercise price at
which such options were originally granted. Any such modifications would be
subject to acceptance or rejection at each optionee's sole discretion and would
have the effect of converting existing outstanding ISO's held by optionees
agreeing to the modification to nonqualified stock options.
Required Vote
The affirmative vote of the holders of a majority of the Shares present in
person or by proxy and casting a vote on this Proposal will be necessary to
approve adoption of the Amended and Restated 1990 Incentive and Nonqualified
Stock Option Plan. For purposes of the foregoing, abstentions and broker
non-votes shall not be deemed to be votes cast.
Board Recommendation
The Board of Trustees adopted the 1997 Amendments to permit the terms of
options outstanding under the 1990 Plan to be substantially equal to those
options which will be granted under the 1997 Stock Option Plan in connection
with the TRO Transaction and thereafter. The Board of Trustees recommends that
Shareholders vote FOR approval of the Amended and Restated 1990 Incentive and
Nonqualified Stock Option Plan. The vote of the holders of a majority of the
Shares present in person or by proxy at the Meeting is necessary to approve the
Amended and Restated 1990 Incentive and Nonqualified Stock Option Plan.
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<PAGE>
PROPOSAL NO. 4:
THE 1997 STOCK OPTION PLAN
------------
On July 8, 1997, the Board of Trustees approved the 1997 Stock Option Plan
(the "1997 Plan"). Under the 1997 Plan, stock options may be awarded to key
employees of the Trust or TRO up to an aggregate of 560,000 Shares of the
Trust, subject to adjustments to reflect any stock splits, stock dividends,
share combinations or similar changes in the capital of the Trust. Shares
issuable under the 1997 Plan may be authorized but unissued Shares or
reacquired Shares, and the Trust may purchase Shares for this purpose. Under
the terms of employment agreements entered into or expected to be entered into
at the Closing of the TRO Transaction, the Trust would be obligated to grant on
that date to ten members of senior management of TRO who would be parties to
such agreements options on an aggregate of 460,000 Shares at the closing price
of the Shares on the American Stock Exchange on such date and options on an
aggregate of 100,000 Shares to TRO personnel who would be employed by the Trust
or TRO following the TRO Closing. Thus, if all such agreements were entered
into and all such grants made, the entire number of Shares on which options
could be granted under the 1997 Plan would be allocated to TRO personnel to be
employed by the Trust or TRO following the Closing. Options would remain
available to be granted with respect to 23,500 Shares under the 1990 Plan
pursuant to the terms thereof.
Because the options to be granted to TRO management under the 1997 Plan
are a condition to TRO's obligations to complete the TRO Transaction, a failure
of the Shareholders to approve the 1997 Plan would result in a termination of
the TRO Transaction unless such condition were subsequently waived by TRO.
The following is a summary of certain of the terms of the 1997 Plan. Such
summary is qualified in its entirety by reference to the text of the 1997 Plan,
a copy of which is attached as Appendix E to this Proxy Statement.
Administration
The 1997 Plan will be administered by the Executive Compensation and Human
Resources Committee of the Board of Trustees (the "Committee") consisting of
not fewer than two non-employee, outside trustees (directors) appointed by the
Board of Trustees. The Committee currently consists of Messrs. Farber,
Dimeling, and Javitch. Mr. Farber chairs the Committee. The Committee members
will have full authority, subject to the terms of the 1997 Plan, to select
optionees, to determine the terms and conditions of options, and generally to
administer the 1997 Plan. Employee-trustees are eligible to receive options
under the 1997 Plan.
Duration and Amendment of 1997 Plan
Except to the extent limited by the 1997 Plan and the Code, the Board of
Trustees will have the power, without the consent of the Shareholders, to
discontinue, amend or revise the terms of the 1997 Plan. Under the 1997 Plan,
the Trustees will only need to obtain Shareholder approval (1) for any
amendment which would (A) change the class of employees eligible to participate
in the 1997 Plan with respect to ISOs; (B) increase the maximum number of
Shares with respect to which ISOs may be granted under the Plan; or (C) extend
the duration of the Plan with respect to any ISOs granted and (2) for
amendments requiring Shareholder approval pursuant to Treas. Reg.
Section 1.162-27(e)(4)(vi).
The 1997 Plan will terminate at midnight on July 7, 2007, unless earlier
discontinued by the Board of Trustees; no options may be granted after such
termination, but options outstanding at the time of termination will remain
exercisable in accordance with their terms.
Terms and Conditions - Nonqualified Stock Options
NQSOs may be granted for terms of not more than 10 years at an exercise
price per share determined by the Committee, which shall not be less than the
par value of such optioned Shares. NQSOs are exercisable in such installments
as the Committee may determine. The Committee may accelerate the exercise date
of NQSOs in the event of the termination of an optionee's employment (as
defined in the 1997 Plan) or death, or in the
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<PAGE>
event of certain corporate transactions (see "Adjustments upon Changes in
Capitalization, Mergers, and Other Events"). Any NQSO held by an optionee who
dies while employed (as defined in the 1997 Plan) by the Trust or TRO, or whose
employment with the Trust and TRO is terminated prior to the expiration date of
such option will remain exercisable by the former employee, or his personal
representative, for a period of time following the employee's termination of
employment or death, as provided in the 1997 Plan and the applicable option
agreement. Upon exercise of NQSOs, the exercise price may be paid in cash, or,
if the Committee shall so provide, either in whole or in part by the delivery
of other Shares held by the optionee (except unvested Shares acquired under a
stock grant), through a broker-assisted transaction, or by means of a loan from
the Trust, subject to limitations set forth in the 1997 Plan. Except as
provided in an Optionee's option agreement, NQSOs are not assignable or
transferable by an Optionee other than by will or by the laws of descent and
distribution.
Terms and Conditions - Incentive Stock Options
ISOs are subject to the same terms and conditions under the 1997 Plan as
are described above for NQSOs, except that ISOs may not be granted to
individuals who are not employees of the Trust. Such options have some
additional terms and conditions required by the Code. Under the 1997 Plan: (i)
the exercise price per share of ISOs must be not less than the greater of the
par value of the optioned Shares and the fair market value of such Shares on
the date of grant of such option, except that in cases where ISOs are granted
to a person who owns more than 10% of the voting stock of the Trust, such
exercise price must be not less than 110% of the fair market value of the
optioned Shares on the date of the grant, and the term of such options cannot
be more than five years; and (ii) the aggregate fair market value (determined
at the time the option is granted) of the Shares with respect to which ISOs are
exercisable for the first time by any eligible person during any calendar year
(under the 1997 Plan and any other ISO plan of the Trust) may not exceed
$100,000. ISOs are not assignable or transferable by an optionee otherwise than
by will or the laws of descent and distribution. There are also certain other
requirements, such as specified holding periods for Shares received upon
exercise of such options and limitations on exercisability following
termination of employment, which must be satisfied in order for an optionee to
obtain ISO treatment under the Code.
Stock Option Agreements
The 1997 Plan also requires that optionees enter into stock option
agreements with the Trust which incorporate the terms of the options and such
other terms, conditions, and restrictions, not inconsistent with the 1997 Plan
and applicable law, as the Committee may determine.
Registration
If an optionee is married at the time of exercise and if the optionee so
requests at the time of exercise, the certificate or certificates shall be
registered in the name of the optionee and the optionee's spouse, jointly, with
right of survivorship.
Withholding and Use of Shares to Satisfy Tax Obligations
The 1997 Plan provides that if the exercise of an option is subject to the
withholding requirements of applicable federal tax law, the Committee, in its
discretion, may permit or require the optionee to satisfy the federal
withholding tax by electing to have the Trust withhold Shares subject to the
exercise or by returning previously acquired Shares to the Trust.
Loans
If an optionee is designated as an "eligible participant" by the Committee
at the date of grant of an ISO or at or after the date of grant of an NQSO, and
if the optionee thereafter so requests, the Committee will loan the optionee
the money required to satisfy any regular income tax obligations resulting from
the exercise of any option.
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<PAGE>
Discharge for Cause; Competition
In the event the employment of an optionee or grantee is terminated for
"cause" (as defined in the 1997 Plan), or if the optionee or grantee terminates
employment and begins working for a "competitor" (as defined in the 1997 Plan),
his rights under any stock option agreement will terminate.
Change in Control
All outstanding options become fully vested and exercisable upon a "change
in control" (as defined in the 1997 Plan).
Adjustments upon Mergers and Other Events
In the event of a merger, consolidation, or other specified corporate
transaction, options will be assumed by the surviving or successor corporation,
if any. However, the 1997 Plan also authorizes the Committee to terminate
outstanding options in the event of such a corporate transaction, provided that
any then exercisable option may be exercised by the optionee within not fewer
than seven days' notice given prior to the termination. Further, the exercise
date of any options to be so terminated may be accelerated by the Committee.
Other Considerations
The 1997 Plan is not qualified under Section 401(a) of the Code and, based
upon current law and published interpretations, the Trust believes the 1997
Plan is not subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended.
FEDERAL INCOME TAX CONSEQUENCES
Based on the advice of counsel, the Trust believes that the normal
operation of the 1990 and 1997 Plans should generally have, under the Code and
the regulations and rulings thereunder, all as in effect on June 30, 1997, the
principal Federal income tax consequences described below. It should be noted
that the consequences described below do not take into account any changes to
the Code or the regulations thereunder which may occur after June 30, 1997.
Incentive Stock Options. To the extent options issued under the 1990 and
1997 Plans qualify as incentive stock options ("ISOs") under Section 422 of the
Code, the principal Federal income tax consequences to each employee receiving
the options (an "optionee") and to the Trust should generally be as follows:
(1) The optionee will not recognize taxable income and the Trust will not
be entitled to a deduction upon the grant of an ISO. Moreover, the optionee
will not recognize taxable income and the Trust will not be entitled to a
deduction upon the exercise by the optionee of an ISO, provided the optionee
was an employee of the Trust during the entire period from the date of grant of
the ISO until three months before the date of exercise (increased to 12 months
if employment ceased due to total and permanent disability). However, an
amount, generally equal to the excess of the fair market value of the Shares
over the exercise price at the time of exercise, will ordinarily be included in
the optionee's alternative minimum taxable income in the year of exercise. The
employment requirement is waived in the event of the optionee's death. (Of
course, in all of these situations, the ISO itself may provide a shorter
exercise period after employment ceases than the allowable period under the
Code.)
If the employment requirements described above are not met, the tax
consequences relating to NQSOs (discussed below) will apply.
(2) If the optionee disposes of the Shares acquired under an ISO after at
least two years following the date of grant of the ISO and at least one year
following the date of transfer of the Shares to the optionee following exercise
of the ISO, the optionee will recognize a long-term capital gain or loss equal
to the difference between the amount realized upon the disposition and the
exercise price, assuming such Shares were held by the optionee as capital
assets.
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(3) If the optionee makes a disqualifying disposition of the Shares (that
is, disposes of the Shares within two years after the date of grant of the ISO
or within one year after the transfer of the Shares to the optionee), but all
other requirements of Section 422 of the Code are met, the optionee will
generally recognize ordinary income upon disposition of the Shares in an amount
equal to the lesser of (i) the fair market value of the Shares on the date of
exercise minus the exercise price, or (ii) the amount realized on disposition
minus the exercise price. Disqualifying dispositions of Shares may also,
depending upon the sales price, result in either long-term or short-term
capital gain or loss under the Code rules which govern other stock
dispositions, assuming that the Shares are held as capital assets.
(4) Where all requirements of Section 422 of the Code, including the
holding and employment requirements described in (1) and (2) above, are met,
the Trust is not entitled to any Federal income tax deduction with respect to
the ISO. In those cases where any of such requirements are not met, the Trust
will be allowed a Federal income tax deduction to the extent of the ordinary
income includable in the optionee's gross income in accordance with the
provisions of Section 83 of the Code (and Section 162(m) of the Code, to the
extent applicable) and the regulations thereunder.
Nonqualified Stock Options. To the extent options, when granted, are
NQSOs, or to the extent options, when granted, are intended to be ISOs but fail
to qualify as such, the principal Federal income tax consequences to each
optionee and to the Trust should generally be as follows:
(1) The optionee will not recognize taxable income and the Trust will not
be entitled to a deduction upon the grant of an NQSO.
(2) Generally, the optionee will recognize ordinary income at the time of
the exercise of the NQSO, in an amount equal to the excess of the fair market
value of the Shares at the time of such exercise over the exercise price.
(3) The Trust will be entitled to a deduction to the extent of the
ordinary income recognized by the optionee in accordance with the rules of
Section 83 of the Code (and Section 162(m), to the extent applicable) and the
regulations thereunder.
(4) Gain or loss recognized by the recipient upon a subsequent disposition
of such Shares will be short- or long-term capital gain or loss, if such Shares
are otherwise capital assets in the hands of the recipient.
(5) Section 162(m) of the Code limits the extent to which the remuneration
paid to the Chief Executive Officer and the four highest compensated executives
(other than the Chief Executive Officer) (collectively, the "Covered
Employees") is deductible by a corporation when the annual remuneration for any
of these officers exceeds $1,000,000 in a calendar year. Remuneration for
purposes of Section 162(m) includes cash compensation and noncash benefits paid
for services (including, with respect to NQSOs, the difference between the
exercise price and the market value of the stock at the time of exercise),
subject to certain exclusions. Approval of the 1990 and 1997 Plans by the
Shareholders will prevent the spread upon exercise of NQSOs from treatment as
remuneration for purposes of Section 162(m) so that if any remuneration paid to
any of the Covered Employees exceeds $1,000,000 in the future, any compensation
recognized upon the exercise of the NQSOs granted under the 1990 or 1997 Plan
will be deductible by the Trust.
* * * * *
Required Vote
The affirmative vote of the holders of a majority of the Shares present in
person or by proxy and casting a vote on this Proposal will be necessary to
approve the adoption of the 1997 Plan. For purposes of the foregoing,
abstentions and broker non-votes shall not be deemed to be votes cast.
Board Recommendation
The Board of Trustees adopted the 1997 Plan to enable the Trust to comply
with the negotiated terms of the TRO Transaction and to incentivise key
employees of the Trust and TRO on a going-forward basis. The Board of Trustees
recommends that Shareholders vote FOR approval of the 1997 Stock Option Plan. A
failure to approve the Plan, absent a subsequent waiver by TRO, would preclude
the completion of the TRO Transaction.
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THE TRUST
----------------
Outstanding Shares
The Trust currently has one class of capital stock issued and outstanding:
Certificates of Beneficial Interest (the "Shares"). On August 25, 1997, the
record date for determining Shareholders entitled to notice of, and to vote at,
the Meeting, there were 8,679,598 Shares issued and outstanding, each of which
is entitled to one vote on each matter to come before the Meeting. As of June
30, 1997, there were approximately 1,425 holders of record of the Shares.
Price Range of Shares and Dividend History
The Shares are traded on the American Stock Exchange under the symbol
"PEI."
The following table shows the high and low sales prices for the Shares on
the American Stock Exchange and cash distributions paid for the periods
indicated.
Fiscal Year 1995 Distributions
- -- Quarter Ended High Low Paid
- -------------------- -------- -------- --------------
November 30 ...... $21.25 $18.50 $ .47
February 28 ...... 23.63 19.88 .47
May 31 ............ 21.75 20.13 .47
August 31 ......... 21.88 21.25 .47
-------
$ 1.88
=======
Fiscal Year 1996 Distributions
- -- Quarter Ended High Low Paid
- -------------------- --------- --------- --------------
November 30 ...... $21.88 $19.25 $ .47
February 29 ...... 21.75 19.50 .47
May 31 ............ 21.63 19.00 .47
August 31 ......... 20.88 18.75 .47
-------
$ 1.88
=======
Fiscal Year 1997 Distributions
- -- Quarter Ended High Low Paid
- ----------------------------- --------- --------- --------------
November 30 ............... $23.38 $20.13 .47
February 28 ............... 25.00 22.13 .47
May 31 ..................... 24.13 20.75 .47
August 31 (through August 25,
1997) ..................... 27.25 21.63 .47
------
$1.88
======
On July 30, 1997, the last full trading day prior to the public announcement of
the TRO Transaction, the closing price per Share, as reported by the American
Stock Exchange, was $24.13.
76
<PAGE>
Ownership of Certain Persons
The following table sets forth, as of June 30, 1997, certain information
with respect to each person who is a Trustee or executive officer of the Trust:
<TABLE>
<CAPTION>
Shares Beneficially Owned
on June 30, 1997 (1)
Principal Occupation Trustee --------------------------------
Name Age and Affiliations Since Number Percent
- --------------------- ----- ------------------------------------- --------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Class A Trustees;
Terms Expire in 1998
Sylvan M. Cohen 82 Chairman and Chief Executive 1960 650,291(2) 7.5%
Officer of the Trust. Presently of
counsel to the Philadelphia law
firm of Drinker Biddle & Reath
LLP and formerly partner in the
Philadelphia law firm of Cohen,
Shapiro, Polisher, Shiekman and
Cohen. Director of FPA
Corporation. Trustee of EQK
Realty Investments I and Trustee
of Arbor Property Trust.
Lee H. Javitch** 65 Private Investor. Former Chairman 1985 8,500(3) *
and Chief Executive Officer of
Giant Food Stores, Inc., an owner
and operator of supermarkets.
Director of Dauphin Deposit Corp.
Jonathan B. Weller 50 President and Chief Operating 1994 105,910(4) *
Officer of the Trust. From 1988 to
1993, Executive Vice President and
Director of Eastdil Realty, Inc., a
real estate investment banking
firm.
Class B Trustees;
Terms Expire in 1999
Robert Freedman** 67 Of counsel to the Philadelphia law 1988 46,727(3)(5) *
firm of Drinker Biddle & Reath
LLP and formerly partner in the
Philadelphia law firm of Cohen,
Shapiro, Polisher, Shiekman and
Cohen.
Leonard I. Korman 61 Chairman and Chief Executive 1996 472,765(6) 5.4%
Officer, Korman Commercial
Properties, Inc., a commercial real
estate management and
development firm since January,
1996. General partner, The
Korman Co., a real estate
management and development
firm, since 1984.
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned
on June 30, 1997 (1)
Principal Occupation Trustee --------------------------------
Name Age and Affiliations Since Number Percent
- ------------------------ ----- --------------------------------------- --------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Jeffrey P. Orleans 50 Chairman of the Board, Chief 1986 51,360(3)(7) *
Executive Officer and Director of
FPA Corporation, a residential real
estate developer. Chief Executive
Officer of Orleans Construction
Corp., a residential real estate
developer, prior to FPA
Corporation's acquisition of such
company in 1993.
Class C Trustees;
Terms Expire in 1997
William R. Dimeling 55 Partner in Dimeling, Schreiber and 1982 7,250(3) *
Park, a private investment
partnership. Director of Aero
Services International, Inc., a fixed
base operator for private aviation.
Jack Farber 64 Chairman, President and Chief 1971 84,740(2)(8) *
Executive Officer of CSS
Industries, Inc., a diversified
holding company. Director of CSS
Industries, Inc. and Hunt
Manufacturing Company.
Robert G. Rogers** 65 Executive Vice President of the 1986 38,421(9) *
Trust
Non-Trustee Executive
Officers
Jeffrey A. Linn 48 Senior Vice President- Acquisitions -- 29,771(10) *
and Secretary of the Trust
Dante J. Massimini 64 Senior Vice President- Finance and -- 20,931(11) *
Treasurer of the Trust
All Trustees and -- -- -- 1,407,541(12) 15.5%
executive officers as
a group (11 persons)
</TABLE>
- ------------
* Less than one percent.
** Messrs. Javitch, Freedman and Rogers will resign as trustees at the time of
the closing of the TRO Transaction.
(1) Unless otherwise indicated in the following footnotes, each Trustee and
Non-Trustee executive officer has sole voting and investment power with
respect to all such Shares.
(2) Includes 186,558 Shares owned by Mr. Cohen's spouse, 37,056 Shares owned
by a trust of which Mr. Cohen's wife and Mr. Freedman, a Trustee of the
Trust, are co-trustees, 252 Shares owned by a corporation 50% of whose
outstanding shares are owned by Mr. Cohen and the remaining 50% of whose
outstanding shares are owned by Jeffrey P. Orleans, a Trustee of the
Trust, 71,815 Shares owned by a charitable remainder unitrust of which Mr.
Cohen and Mr. Farber, a Trustee of the Trust, are two of the three
co-trustees, and 28,523 Shares subject to options that are currently
exercisable. Mr. Cohen disclaims beneficial ownership of all of the Shares
referred to in this footnote other than Shares owned by trusts of which
78
<PAGE>
Mr. Cohen is a trustee or a co-trustee, Shares owned of record by Mr.
Cohen's wife and the Shares subject to options.
(3) Includes 5,500 Shares subject to options that are currently exercisable.
(4) Includes 94,710 Shares subject to options that are currently exercisable,
and 400 Shares held by Mr. Weller as custodian for his children under the
New York Uniform Gifts to Minors Act.
(5) Includes 37,056 Shares owned by a trust of which Mr. Freedman and Mr.
Cohen's wife are co-trustees and 4,171 Shares owned by Mr. Freedman's
spouse. Mr. Freedman disclaims beneficial ownership of the aforementioned
Shares.
(6) Includes (i) 420 Shares owned by Mr. Korman's spouse, (ii) 87,570 Shares
held by a charitable foundation of which Mr. Korman is a co-trustee, and
(iii) 141,687 Shares held by trusts of which Mr. Korman is a co-trustee.
Mr. Korman disclaims beneficial ownership of all but 10,528 of the
foregoing Shares.
(7) Includes 450 Shares owned by Mr. Orleans' spouse, 1,000 Shares for which
Mr. Orleans is custodian for his children under the Pennsylvania Uniform
Gifts to Minors Act, 947 Shares owned by an adult daughter of Mr. Orleans,
360 Shares held by trusts of which Mr. Orleans is co-trustee, and 252
Shares owned by a corporation 50% of whose shares are owned by Mr. Orleans
and the remaining 50% of whose shares are owned by Sylvan M. Cohen, a
Trustee and Chairman and Chief Executive Officer of the Trust. Mr. Orleans
disclaims beneficial ownership of the Shares owned by Mr. Orleans' wife
and certain Shares for which he serves as custodian under the Pennsylvania
Uniform Gifts to Minors Act.
(8) Includes 71,815 Shares held in the charitable remainder unitrust referred
to in footnote 2 above.
(9) Includes 32,046 Shares subject to options that are currently exercisable.
(10) Includes 21,431 Shares subject to options that are currently exercisable
and 500 Shares that are held by Mr. Linn as custodian for his son under
the Pennsylvania Uniform Gifts to Minors Act.
(11) Includes 20,331 Shares subject to options that are currently exercisable.
(12) Includes 226,036 Shares subject to options that are currently exercisable.
In certain instances, two Trustees beneficially own the same Shares
because they share voting or investment power over such Shares. Such
Shares have been counted only once in this total.
79
<PAGE>
Compensation of Executive Officers
The following table sets forth certain information concerning the
compensation paid by the Trust during the fiscal years ended August 31, 1996,
1995 and 1994 to the Trust's Chief Executive Officer and the four other most
highly compensated executive officers of the Trust.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------------------------------- ---------------- All Other
Name and Principal Other Annual Compensation
Position Year Salary ($) Bonus ($) Compensation($)(1) Options (#) ($)(2)
- -------------------------------- ------ ---------------- ----------- -------------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sylvan M. Cohen 1996 $ 342,333 0 0 0 $ 9,070
Chairman and Chief Executive 1995 333,000 0 0 20,000 9,070
Officer and Trustee 1994 316,023 0 0 40,000 9,070
Jonathan B. Weller 1996 $ 297,212 0 $ 7,182 20,000 25,608
President and Chief 1995 281,539 0 37,463 35,000 32,408
Operating Officer and Trustee 1994 157,596(3) 0 23,120 100,000(4) --
Robert G. Rogers 1996 $ 191,923 0 7,182 5,000 69,654
Executive Vice 1995 183,269 0 0 10,000 72,499
President and Trustee 1994 174,933 0 0 15,000 --
Dante J. Massimini 1996 $ 125,673 0 5,174 5,000 59,897
Senior Vice President- 1995 116,538 0 0 10,000 54,706
Finance and Treasurer 1994 106,303 0 0 15,000 --
Jeffrey A. Linn 1996 $ 130,797 0 5,163 10,000 14,114
Senior Vice President- 1995 116,346 0 0 15,000 18,021
Acquisitions and Secretary 1994 95,535 0 0 15,000 --
</TABLE>
- ------------
(1) Amounts shown in Fiscal 1996 represent discretionary contributions by the
Trust to the accounts of the named executive officers in the Company's
401(k) retirement plan. Amounts shown for Fiscal 1995 for Mr. Weller
include $14,352 for relocation expenses, $12,378 for reimbursement for
taxes resulting from payment of living expenses on behalf of Mr. Weller in
1994 and $10,733 in respect of a leased automobile. Amounts for Fiscal
1994 include $14,966 for living expenses and $8,154 for a leased
automobile.
(2) All amounts for Mr. Cohen represent annual premium payments on life
insurance provided under Mr. Cohen's employment agreement. Amounts for Mr.
Weller include $9,750 of annual premium payments on life insurance
provided under Mr. Weller's employment agreement. All other amounts
represent anticipated contributions by the Trust with respect to Fiscal
1996 under the non-qualified retirement plan approved during Fiscal 1995
in which Messrs. Weller, Rogers, Massimini and Linn are participants.
(3) Mr. Weller was not an employee or executive officer of the Trust prior to
January 31, 1994.
(4) Represents options granted to Mr. Weller in connection with his acceptance
of employment with the Trust.
Employment Agreements
The Trust entered into an Employment Agreement with Mr. Cohen on July 16,
1982, which was amended and restated on March 14, 1985 and further amended as
of January 1, 1990. The Employment Agreement provides that Mr. Cohen is to
serve as chairman and chief executive officer of the Trust. The current annual
base compensation is $345,000, and the agreement provides that base
compensation cannot be unilaterally decreased by the Trust. Mr. Cohen was not a
participant in the Trust's defined benefit pension plan, which was terminated
during Fiscal 1995, nor is he a participant in the non-qualified retirement
plan which was established during Fiscal 1995 and in which the other executive
officers of the Trust named in the Summary Compensation Table are participants.
Following the termination of Mr. Cohen's employment for any reason (including
expiration of the term) other than termination for specified cause, the Trust
is required to make payments to Mr. Cohen and, in the event his wife survives
him, to Mr. Cohen's widow. Post-termination payments to Mr. Cohen are to
continue for the balance of his lifetime at a rate equal to, subject to an
annual cost-of-living adjustment, 50% of the rate of Mr. Cohen's highest annual
basic compensation during his employment with the Trust. If Mr. Cohen is
survived by his wife, the Trust is to pay her for the balance of her lifetime
at a rate equal to, subject to an annual
80
<PAGE>
cost-of-living adjustment, (i) 25% of the rate of Mr. Cohen's highest annual
basic compensation during Mr. Cohen's employment with the Trust or (ii) if
higher than the rate specified in subclause (i), 50% of the rate of the
adjusted payments to which Mr. Cohen shall have been entitled at the time of
his death. During fiscal 1996, the Trust was not required to accrue on its
financial statements any additional amount in respect of the aforementioned
post-termination payments. As of the end of fiscal 1996, such accrual equals
approximately $1,045,000. The Employment Agreement also requires the Trust to
maintain $150,000 of life insurance coverage on Mr. Cohen's life, payable to
beneficiaries designated by Mr. Cohen. On July 8, 1997, the Board of Trustees
authorized the extension of Mr. Cohen's contract to December 31, 2000.
The Trust entered into an Employment Agreement with Mr. Weller on December
14, 1993. The Employment Agreement provides that Mr. Weller is to serve as
President and Chief Operating Officer of the Trust with responsibility for the
day-to-day management of the Trust. The employment term, which began on January
31, 1994, is three years, a period that is automatically extended, as of
January 31, 1996 and each January 31 thereafter, for a new three year term
beginning on such January 31 unless the Trust gives Mr. Weller written notice
at least 60 days prior to January 31 in a year that the term is not to be
extended as of such January 31. The agreement further provides for an initial
annual base salary of $275,000 and provides that if the annual salary is
increased, such increased annual salary thereafter constitutes the annual base
salary for purposes of the agreement. Mr. Weller's annual base salary under the
agreement currently is $305,000. In accordance with the Employment Agreement,
on December 14, 1993, the Trust granted Mr. Weller non-qualified stock options
to purchase 100,000 Shares of the Trust at an exercise price equal to the fair
market value of the Shares on such date. See "The Trust -- Stock Option
Tables". The Trust is required to provide certain employee benefits to Mr.
Weller, including $1,500,000 life insurance. Mr. Weller is required to invest a
minimum of $250,000 in Shares of the Trust. Upon a termination of employment by
Mr. Weller for specified good reason (including delivery by the Trust of
written notice that the term of the agreement is not to be renewed for a new
three-year period) or by the Trust other than for cause, disability or death,
Mr. Weller is entitled to receive a lump-sum cash payment equal to the sum of
any unpaid annual base salary through the date of termination and the amount of
annual base salary that would have been paid during the remaining term of
employment, discounted on a present value basis. The Employment Agreement
provides that all options to purchase Shares granted to Mr. Weller vest and
become immediately exercisable upon a change of control of the Trust or upon a
termination of employment by the Trust without cause or by Mr. Weller for good
reason or upon Mr. Weller's death or disability. The Employment Agreement
provides that, in the event any payments to Mr. Weller result in the imposition
on Mr. Weller of an excise tax under Section 4999 of the Internal Revenue Code,
the Trust shall pay Mr. Weller an additional amount sufficient to reimburse him
for such excise tax.
The Trust has employment agreements with Messrs. Rogers, Massimini, and
Linn. Mr. Massimini's employment agreement expires on September 30, 1998 with
automatic one-year renewals that continue until written notice of termination
is delivered at least 180 days prior to the end of the then current term. Mr.
Linn's contract extends until December 31, 2000. Mr. Rogers serves as Executive
Vice President, Mr. Massimini serves as Senior Vice President-Finance and
Treasurer, and Mr. Linn serves as Senior Vice President-Acquisitions and
Secretary. The Employment Agreements specify the initial annual basic
compensation and provide that if the annual basic compensation is subsequently
increased, such increased amount will thereafter constitute the basic
compensation thereunder. The current annual basic compensation for Mr. Rogers,
Mr. Massimini, and Mr. Linn is $195,000, $130,000, and $135,000, respectively.
The Trust's employment agreement with Mr. Rogers will terminate on
September 30, 1997. The Trust will continue to employ Mr. Rogers at his current
base rate until December 31, 1997; thereafter, he will retire. In connection
with his retirement, the Trust will make a severance payment to Mr. Rogers of
$100,000, $50,000 of which will be paid on or about the date of his retirement
and $50,000 of which will be paid in two subsequent annual installments of
$25,000 each. All of Mr. Roger's options which are not vested will vest on
December 31, 1997 and the last date of exercise of all of his options will be
extended to June 30, 2000. The Trust will reimburse Mr. Rogers for the cost of
medical insurance for himself and his wife through their lifetime in an amount
equal to Medicare Supplemental Plan J.
81
<PAGE>
Stock Option Tables
The following table sets forth certain information with respect to options
to purchase Shares granted to certain executive officers named in the Summary
Compensation Table during the fiscal year ended August 31, 1996. Mr. Cohen was
not granted options in the fiscal year ended August 31, 1996.
Options Granted in Fiscal 1996
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------ Potential Realizable
Value at Assumed
% of Total Annual Rates of Stock
Options Price Appreciation for
Options Granted to Exercise Option Term (1)
Granted Employees in Price Expiration ----------------------
Name (#) Fiscal Year Per Share Date 5% 10%
- --------------------------- -------------- -------------- ----------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jonathan B. Weller ...... 20,000(2) 39.6% $20.375 12/01/05 $259,419 $657,419
Robert G. Rogers ......... 5,000(3) 9.9% $20.375 12/01/05 $ 64,855 $164,355
Dante J. Massimini ...... 5,000(3) 9.9% $20.375 12/01/05 $ 64,855 $164,355
Jeffrey A. Linn ......... 10,000(4) 19.8% $20.375 12/01/05 $129,710 $328,709
</TABLE>
- ------------
(1) These amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the end of the option term.
These gains are based on assumed rates of share appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. The assumed annual rates of share appreciation are
specified by the Securities and Exchange Commission and are not intended
to forecast possible future appreciation of the Trust's share price.
(2) Consists of a non-qualified stock option exercisable in four equal and
consecutive annual installments of 5,000 shares each, commencing on
January 1, 1997.
(3) Consists of a non-qualified stock exercisable in four successive annual
installments of 1,125 shares each, commencing January 1, 1997.
(4) Consists of a non-qualified stock option exercisable in four equal and
consecutive annual installments of 2,500 shares each, commencing on
January 1, 1997.
<PAGE>
The following table sets forth certain information as to the exercise of
options to purchase Shares during the fiscal year ended August 31, 1996 by the
persons named in the Summary Compensation Table and the fiscal year-end value
of unexercised options.
Aggregate Option Exercises in Fiscal Year Ended August 31, 1996 and
August 31, 1996 Option Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options at Options at
Acquired August 31, 1996 August 31, 1996(1)
on Value ------------------------------- ------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ---------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sylvan M. Cohen ......... -- -- 14,245 70,755 $13,125 $45,625
Jonathan B. Weller ...... -- -- 57,355 97,645 19,307 $77,568
Robert G. Rogers ......... -- -- 19,359 32,641 52,340 $22,223
Dante J. Massimini ...... -- -- 12,217 27,158 12,065 $25,982
Jeffrey A. Linn ......... -- -- 11,787 34,463 10,197 $38,709
</TABLE>
- ------------
(1) In-the-money options are those where the fair market value of the
underlying securities exceeds the exercise price of the option. All of the
options held by the named executive officers were in-the-money except for
options granted in December 1993. Dollar amounts shown represent the
difference between the option exercise price and the fair market value of
the Shares at August 31, 1996. The closing price of the Shares on August
31, 1996 was $20.625 per Share.
Stock Option Plans
In addition to the Trust's Amended and Restated 1990 Incentive and
Nonqualified Stock Option Plan, the Trust also has a 1990 Option Plan for
Non-Employee Trustees (the "Trustee Plan"). Under the Trustee Plan,
82
<PAGE>
non-qualified stock options to purchase up to an aggregate of 100,000 of the
Trust's Shares may be issued by the Trust to Trustees of the Trust who are not
employees of the Trust or any affiliate of the Trust. Options to purchase 1,000
Shares are granted automatically to each non-employee Trustee on the last
trading day in January of each of the years 1991 through 1997. In addition,
under the Trustee Plan, a first grant of options to purchase 1,000 Shares was
made to each non-employee Trustee on December 20, 1990. The Trustee Plan
requires that the exercise price of options issued under the plan not be less
than 100% of the fair market value of the Shares on the date of grant. The
options issued under the Trustee Plan become exercisable in four equal annual
installments commencing on the first anniversary of the grant date except that
the first installment of the options granted under the plan on December 20,
1990 became exercisable on January 31, 1991. Options granted under the Trustee
Plan expire ten years from the grant date, subject to earlier termination under
certain circumstances specified in the plan.
In accordance with the terms of Mr. Weller's Employment Agreement with the
Trust, the Trust adopted the 1993 Jonathan B. Weller Non Qualified Stock Option
Plan (the "Weller Plan"). Under the Weller Plan, on December 14, 1993 the Trust
granted Mr. Weller options to purchase 100,000 Shares at an exercise price
equal to the fair market value of the Shares on such date. Such options have a
term of ten years and become exercisable in four equal annual installments of
25,000 Shares each, commencing on the first anniversary of the grant date,
subject to earlier vesting and exercisability under certain specified
circumstances.
Benefit Plans
The Trust maintains a 401(k) profit sharing and retirement savings plan in
which substantially all of the officers and employees are eligible to
participate and a non-qualified plan in which the executive officers named in
the Summary Compensation Table other than Mr. Cohen are participants. Under the
non-qualified retirement plan, the Trust is required to make defined
contributions to the plan annually in amounts equal to amounts that would have
been required to be contributed under the Trust's defined benefit pension plan,
which was terminated in fiscal 1995, in order to fund the targeted retirement
benefit (after taking into account amounts distributed under the terminated
defined benefit pension plan, together with an assumed rate of return thereon).
(See also "The TRO Transaction -- Ronald Rubin Employment Agreement" and "--
Other Employment Agreements" and "-- TRO Stock Bonus Plan" and "-- Cash
Incentive Bonus Plan.")
Certain Transactions
During fiscal 1996, the Trust paid or accrued fees and costs to the
Philadelphia law firm of Drinker Biddle & Reath LLP, general counsel for the
Trust, for legal services rendered to the Trust, its subsidiaries and its
affiliates, including partnerships and other ventures in which the Trust is
involved. Sylvan M. Cohen, Chairman, Chief Executive Officer and a Trustee of
the Trust, and Robert Freedman, a Trustee of the Trust, are of counsel to such
firm. During fiscal 1996, the Trust paid Drinker Biddle & Reath $60,000 to
reimburse the firm for office and secretarial expenses for Sylvan M. Cohen in
respect of the period from January 1, 1996 to August 31, 1996.
Rosemarie B. Greco is the former President and Chief Executive Officer of
CoreStates Bank, N.A., and the former President of its parent company,
CoreStates Financial Corp. CoreStates Bank, N.A. has been, and will continue to
be, a primary source of financing for the Trust. (See "The TRO Transaction--The
New Credit Agreement.") At June 30, 1997, the Trust was indebted (i) to
CoreStates Bank, N.A. in the amount of $10.4 million on an existing line of
credit in the total amount of $20.0 million, (ii) to CoreStates Bank, N.A. in
the amount of $26.7 million on an unsecured term loan in a total available
amount of $55 million, and (iii) to a two-bank group, of which CoreStates Bank,
N.A. is a member, for $34.0 million. All borrowing arrangements by the Trust
from CoreStates Bank, N.A. have been on terms which the Trust believes are at
least as favorable to the Trust as would be available from other lending
sources.
Board Matters
The Trust has a standing Audit Committee and a standing Executive
Compensation and Human Resources Committee. There is no standing nominating
committee.
The Audit Committee, currently comprised of Messrs. Jack Farber
(Chairman), Leonard I. Korman, and Jeffrey P. Orleans, met twice during the
1996 fiscal year. The principal duties of the Audit Committee are to recommend
independent public accountants for appointment by the Trust; to review with the
independent accountants the planned scope and results of the annual audit and
their reports and recommendations; and to review with the independent
accountants matters relating to the Trust's system of internal controls.
83
<PAGE>
The Executive Compensation and Human Resources Committee, currently
comprised of Messrs. Jack Farber (Chairman), William R. Dimeling and Lee H.
Javitch, met once during the 1996 fiscal year. The principal duties of the
Executive Compensation and Human Resources Committee are to recommend
compensation arrangements for the executive officers of the Trust, and to
administer the Trust's Amended Incentive and Non-qualified Stock Option Plan.
In addition to the Executive Compensation and Human Resources Committee
and the Audit Committee, the Trust has a standing Property Committee. The
Property Committee currently comprised of Messrs. Leonard I. Korman (Chairman),
William Dimeling, Jeffrey Orleans, Sylvan Cohen (ex officio) and Jonathan
Weller (ex officio), met twice in the 1996 fiscal year. The principal duties of
the Property Committee are to review acquisitions and dispositions of portfolio
properties proposed by management and make recommendations thereon to the Board
of Trustees.
In fiscal 1996, the Board of Trustees met four times. Trustees who are not
officers of the Trust receive an annual retainer of $7,000 plus $1,250 per
Board of Trustees meeting attended and $750 per committee meeting attended. All
of the directors other than Messrs. Dimeling, Javitch and Samuel I. Korman,
deceased, attended at least 75% of Board and applicable committee meetings in
fiscal 1996.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Trust's executive officers and directors and
persons who own more than ten percent of a registered class of the Trust's
equity securities (collectively, the "reporting persons") to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and to furnish the Trust with copies of these reports.
Based on the Trust's review of the copies of the reports received by it,
and written representations, if any, received from reporting persons with
respect to the filing of reports on Form 3, 4 and 5, the Trust believes that
all filings required to be made by the reporting persons for Fiscal 1996 were
made on a timely basis, except that two transactions effected by Mr. Orleans,
one in Fiscal 1995 and one in Fiscal 1996, were reported late on a Form 5.
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
During fiscal 1996, Sylvan M. Cohen served on the Compensation Committee
of FPA Corporation, and the Chairman of the Board and Chief Executive Officer
of FPA Corporation, Jeffrey P. Orleans, served as a Trustee of the Trust.
REPORT OF EXECUTIVE COMPENSATION AND HUMAN
RESOURCES COMMITTEE ON EXECUTIVE COMPENSATION
IN RESPECT OF FISCAL YEAR ENDED AUGUST 31, 1996
The Trust's compensation for executive officers is the responsibility of
the entire Board of Trustees acting upon the recommendation of the Executive
Compensation and Human Resources Committee (the "Committee"). The Committee is
also responsible for administering the policies that govern the Trust's Amended
Incentive and Nonqualified Stock Option Plan. The Committee consists of three
outside Trustees of the Trust, none of whom has ever been an employee of the
Trust.
It is the Board of Trustees' belief that the Trust's investment goal is to
invest in assets that provide the opportunity for cash flow growth and capital
appreciation in real terms. Accordingly, the Board of Trustees believes that
the Trust's overall performance in any year should be based on the Trust's
performance in all aspects of the Trust's business during that year, including
development, management, acquisition and capital formation, as well as
financial accomplishments.
The members of the Committee believe that the Trust's success is largely
due to the efforts of its employees and, in particular, the leadership
exercised by its officers. Therefore the Committee believes it is important to:
84
<PAGE>
o Adopt compensation programs that enhance the Trust's ability to attract
and retain qualified officers while providing the financial motivation
necessary to achieve continued high levels of Trust performance.
o Provide equity-based incentives for executives to ensure that they are
motivated over the long term to respond to the Trust's challenges and
opportunities as owners rather than only employees.
o Provide a mix of cash and stock-based compensation programs that are
competitive with a select group of real estate investment trusts that the
members of the Committee believe are comparable to the Trust.
Each executive officer's salary, including that of the Chief Executive
Officer and that of the Chief Operating Officer, is based upon his employment
contract and the competitive market for the executive officer's services,
considering the executive's specific responsibilities, experience and overall
performance. The Committee reviews each executive officer's salary and adjusts
the salary to account for inflation, any change in the executive's
responsibilities and any change in the competitive marketplace. The Committee
believes that the Trust's overall performance is best measured by the
enhancement of long-term shareholder value. The Committee further believes
that, as a result of the nature of the Trust's business, funds from operations
is a better measurement of the Trust's performance as opposed to its reported
net income. This standard has been adopted by the National Association of Real
Estate Investment Trusts. The Committee recommends compensation levels of the
Trust's executive officers, on an annual basis, to the Board of Trustees.
The Committee also periodically awards discretionary stock options to
executive officers. These awards are based upon the performance of the
individual executive, the Trust's financial results and the executive officer's
accomplishments in his area of responsibility. The Committee believes that
stock option awards are an important element in the Trust's compensation
structure as such awards promote alignment of the interests of the employees
with the interests of the shareholders.
Executive Compensation and Human Resources Committee
Jack Farber, Chairman
William R. Dimeling
Lee H. Javitch
85
<PAGE>
PERFORMANCE GRAPH
The graph below compares the Trust's cumulative shareholder return with
the cumulative total return of the S&P 500 and the index of all equity real
estate investment trusts excluding health care real estate investment trusts as
prepared by the National Association of Real Estate Investment Trusts
("NAREIT"). Equity real estate investment trusts are defined as those which
derive more than 75% of their income from equity investments in real estate
assets. The graph assumes that the value of the investment in each of the three
was $100 at August 31, 1991 and that all dividends were reinvested.
==========================================================================
225-| |
| |
| |
D 200-| # |
0 | @ |
L | |
L 175-| #@ |
A | |
R | # # |
S 150-| $ $ $ $ |
| @ @ |
| |
125-| |
| # |
| $ |
100 |$#@ @ |
| |
| |
75|-----------|---------------|-----------|-------------|-----------|
1991 1992 1993 1994 1995 1996
|-------------------------------------------------------------|
| $ = TRUST # = EQUITY W/O HEALTH CARE @ = S&P 500 |
|-------------------------------------------------------------|
==========================================================================
86
<PAGE>
PRINCIPAL SECURITY HOLDERS
The following table sets forth certain information as of June 30, 1997,
concerning beneficial ownership of the Trust's Shares by the only persons shown
by Securities and Exchange Commission records or the Trust's records to own
beneficially more than 5% of the Trust's Shares:
<TABLE>
<CAPTION>
Amount and
Nature of Percent of
Title of Name and Address Beneficial Outstanding
Class of Beneficial Owner Ownership Shares
- ---------------------------- ------------------------- ------------- ------------
<S> <C> <C> <C>
Certificates of Beneficial Sylvan M. Cohen 650,291 (1) 7.8%
Interest .................. 1100 P.N.B. Building
1345 Chestnut Street
Philadelphia, PA 19107
Certificates of Beneficial Leonard I. Korman 472,765 (2) 5.4%
Interest .................. Two Neshaminy Interplex
Trevose, PA 19047
</TABLE>
- ------------
(1) See footnote 2 to table appearing under the heading "The Trust -- Ownership
of Certain Persons."
(2) See footnote 6 to table appearing under the heading "The Trust -- Ownership
of Certain Persons."
OTHER MATTERS
The Trust has selected Arthur Andersen LLP to be its principal independent
public accountants for the current fiscal year. The accounting firm has been
the principal independent public accountants of the Trust for more than
twenty-five years. Representatives of Arthur Andersen LLP are expected to be
present at the Special Meeting and to be available to respond to appropriate
questions. The representatives of Arthur Andersen LLP will be given an
opportunity to make a statement, if they so desire.
The Trust's Agreement of Trust provides that nominations for election to
the office of Trustee at any Annual or Special Meeting of Holders of
Certificates of Beneficial Interests shall be made by the Trustees, or by
petition in writing delivered to the Secretary of the Trust not fewer than
thirty-five (35) days prior to such meeting signed by the holders of at least
two percent (2%) of the shares outstanding on the date of such petition. Unless
nominations shall have been made as aforesaid, they shall not be considered at
such meeting unless the number of persons nominated as aforesaid shall be fewer
than the number of persons to be elected to the office of Trustee at such
meeting, in which such event nominations for the Trustee positions which would
not otherwise be filled may be made at the meeting by any person entitled to
vote in the election of Trustees. No trustees are proposed to be elected at the
Special Meeting.
The management of the Trust knows of no matters other than those stated
above to come before the meeting. However, if any other matters should properly
come before the meeting, the enclosed proxy confers discretionary authority
with respect thereto.
SHAREHOLDERS' PROPOSALS
Under Securities and Exchange Commission rules, certain shareholder
proposals may be included in the Trust's proxy statement. Any shareholder
desiring to have such a proposal included in the Trust's proxy statement for
the Annual Meeting to be held in 1997 were required to have delivered a
proposal in full compliance with Rule 14a-8 under the Securities Exchange Act
of 1934 to the Trust's executive offices not later than July 19, 1997.
By Order of the Board of
Trustees
Jeffrey A. Linn
Secretary
August 27, 1997
87
<PAGE>
APPENDIX A
GLOSSARY OF CERTAIN TERMS*
Amended and Restated
Trust Agreement ...... The Trust Agreement for the Trust, as amended and
restated and approved for adoption by the
Shareholders by the Board of Trustees of the Trust
on July 8, 1997.
Class A OP Units ...... The limited partner interests in the Operating
Partnership to be issued to shareholders of TRO and
certain TRO Affiliates in respect of their equity
interests in TRO and the Existing, Development and
Predevelopment Properties.
Development Properties ... Two shopping centers in which the Operating
Partnership will acquire interests from certain TRO
Affiliates, when completed, in exchange for
additional Class A OP Units.
Earn-Out Period ......... The five year period commencing September 30,
1997, if the TRO Closing Date is on or before
September 30, 1997; the five year period commencing
January 1, 1998 if the TRO Closing Date is after
September 30, 1997.
EPDLP .................. Equity Properties and Development Limited
Partnership, an Illinois limited Partnership.
Existing Properties ... Four shopping centers, or portions thereof, in
which the Operating Partnership has acquired, or
will acquire at the TRO Closing, all or a partial
interest.
FFO ..................... Funds from Operations, which is defined as income
before gains (losses) on investments and
extraordinary items (computed in accordance with
Generally Accepted Accounting Privileges ("GAAP"))
plus real estate depreciation and similar
adjustments for unconsolidated joint ventures after
adjustments for non-real estate depreciation and
amortization of financing costs.
Operating Partnership ... PREIT Associates, L.P., a Delaware limited
partnership in which the Trust will be the sole
general partner, which will hold all of the real
property interests owned by the Trust, or the
economic benefit thereof, and which will be the
acquiring party of the various equity interests to
be acquired in the TRO Transaction. The Operating
Partnership is known in the real estate investment
trust industry as an "UPREIT."
Operating Partnership
Agreement The First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership.
OP Units ............... Class A OP Units.
Predevelopment Properties
........................ Proposed shopping center sites in which the Trust
will acquire all of the interests which TRO
Affiliates have, when and if the respective
centers are completed, for the issuance of
additional Class A OP Units.
- ------------
*The definitions of the terms listed herein are qualified in their entirety by
the more complete definitions of such terms found in the text of the Proxy
Statement.
A-1
<PAGE>
PREIT .................. Pennsylvania Real Estate Investment Trust, an
incorporated association in business Trust form
currently existing under Pennsylvania non-statutory
law.
Shares .................. Certificates of Beneficial Interest of the Trust.
Shareholders ............ Owners of record of the Shares.
The Trust ............... Pennsylvania Real Estate Investment Trust, an
incorporated association in business trust form
currently existing under Pennsylvania non-statutory
law.
TRO ..................... The Rubin Organization, Inc. a Pennsylvania
corporation.
TRO Affiliates............ Persons or entities who or which control,
collectively, or are under common control with,
TRO.
TRO Closing Date ...... The date on which the Operating Partnership will
acquire all of the non-voting common shares of TRO,
constituting 95% of the total equity of TRO, and
the interests in the Existing Properties not owned
by the Operating Partnership.
TRO Transaction ......... A transaction more fully described in the proxy
statement in which, inter alia, the Trust will (i)
form a Delaware limited partnership, of which the
Trust will be the sole general partner and a
business trust wholly-owned by the Trust will be
the initial limited partner, (ii) transfer to the
Operating Partnership its interests in its real
property assets, or the economic benefits thereof,
in exchange for the issuance to the Trust's
business trust subsidiary of Class A units of
limited partner interest in the Operating
Partnership ("Class A OP Units"), (iii) cause the
Operating Partnership to acquire all of the issued
and outstanding non-voting common shares of The
Rubin Organization, Inc. ("TRO") in exchange for
200,000 Class A OP Units and a contingent
obligation to issue up to 800,000 additional Class
A OP Units over a five year period based on the
levels of the Trust's funds from operations ("FFO")
per share during such period, (iv) cause the
Operating Partnership to acquire, or to become
obligated to acquire, the interests of certain
affiliates of TRO ("TRO Affiliates") in, or their
rights or obligations to acquire interests in,
three existing shopping centers, or portions
thereof (the "Existing Properties"), and in two
shopping centers currently under construction (the
"Development Properties"), (v) cause the Trust to
acquire the pre-development rights, subject to the
pre-development obligations, of certain TRO
Affiliates in certain additional proposed shopping
centers (the "Predevelopment Properties") and the
rights, subject to the obligations, of TRO under a
co-development agreement with a joint venture
partner of TRO, (vi) enter into, directly or
indirectly, employment agreements with ten members
of TRO management, including Ronald Rubin, who will
become the Chief Executive Officer of the Trust,
and (vii) appoint three designees of TRO, including
Ronald Rubin, as trustees of the Trust, all as more
fully set forth herein.
TRO Transaction
Documentation ......... All documentation necessary to effect the TRO
Transaction.
A-2
<PAGE>
APPENDIX B
LEHMAN BROTHERS
August 27, 1997
Board of Trustees
Pennsylvania Real Estate Investment Trust
455 Pennsylvania Avenue
Fort Washington, PA 19034
Members of the Board:
Pennsylvania Real Estate Investment Trust (the "Company") is considering
the acquisition (the "Proposed Acquisition") of The Rubin Organization, Inc.
and certain of its affiliates ("TRO") and certain related real estate assets
(the "Related Real Estate Assets") owned by TRO and Equity Properties and
Development Limited Partnership and certain of its affiliates and co-investors
(collectively, "EPDLP"). The Related Real Estate Assets owned by EPDLP are
currently managed by TRO. As consideration for the Proposed Acquisition, the
Company will assume certain indebtedness of TRO and certain indebtedness
secured by the Related Real Estate Assets, will pay a portion of the purchase
price for the Related Real Estate Assets owned by EPDLP to EPDLP in cash, and
will issue units of limited partner interest ("Units") in PREIT Associates,
L.P. (the "Operating Partnership") to TRO. The terms and conditions of the
Proposed Acquisition (including the basis for determining the number of Units
to be issued) are set forth in more detail in the TRO Contribution Agreement
and various related real estate contribution agreements dated as of July 23,
1997 (collectively, the "Agreements") by and among the Company, TRO and EPDLP.
We have been requested by the Board of Trustees of the Company to render
our opinion with respect to the fairness, from a financial point of view, to
the Company of the consideration to be paid by the Company in the Proposed
Acquisition. We have not been requested to opine as to, and our opinion does
not in any manner address, the Company's underlying business decision to
proceed with or effect the Proposed Acquisition.
In arriving at our opinion, we reviewed and analyzed: (i) the Agreements
and the specific terms of the Proposed Acquisition; (ii) publicly available
information concerning the Company that we believe to be relevant to our
analysis, including its annual report on Form 10-K for the year ended August
31, 1996 and quarterly report on Form 10-Q for the quarter ended February 28,
1997; (iii) financial and operating information with respect to the business,
operations, assets, liabilities and prospects of the Company, TRO and the
Related Real Estate Assets furnished to us by the Company and TRO, including in
connection with an analysis of the Company's net asset value; (iv) the trading
history of the common stock of the Company for the past three years and a
comparison of that trading history to the Company's current stock price and to
the trading histories of such other companies and indices that we deemed
relevant; (v) a comparison of the historical financial results and present
financial condition of the Company with those of other companies that we deemed
relevant; (vi) a comparison of the historical financial results and present
financial condition of TRO with those of other companies that we deemed
relevant; (vii) a comparison of the financial terms of the purchase of TRO with
the financial terms of certain other transactions that we deemed relevant;
(viii) a comparison of the financial terms of the purchase of certain of the
Related Real Estate Assets with the financial terms of certain other
transactions that we deemed relevant; (ix) a comparison of the relative
contribution of TRO and the Related Real Estate Assets to the financial results
of the Company following the Proposed Acquisition to the TRO ownership interest
in the Company following the Proposed Acquisition; and (x) an analysis of the
pro forma financial results of the Proposed Acquisition. In addition, we have
had discussions with the managements of the Company and TRO concerning their
respective business, operations, assets, liabilities, financial conditions and
prospects and have undertaken such other studies, analyses and investigations
as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information
and have further relied upon the assurances of the management of the Company
that they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect
B-1
<PAGE>
to the financial projections of the Company, TRO and the Related Real Estate
Assets, upon advice of the Company, we have assumed that such projections have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the managements of the Company, TRO and EPDLP, as
the case may be, as to the future financial performance of the Company, TRO and
the Related Real Estate Assets, and that the Company, TRO and the Related Real
Estate Assets will perform substantially in accordance with such projections.
In arriving at our opinion, we have conducted only a limited physical
inspection of certain of the properties and facilities of the Company, TRO and
EPDLP and have not made or obtained any evaluations or appraisals of the assets
or liabilities of the Company, TRO and EPDLP. 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.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be paid
by the Company in the Proposed Acquisition is fair to the Company.
We have acted as financial advisor to the Company in connection with the
Proposed Acquisition and will receive a fee for our services which is
contingent upon the consummation of the Proposed Acquisition. In addition, the
Company has agreed to indemnify us for certain liabilities that may arise out
of the rendering of this opinion. We also have performed various investment
banking services for the Company in the past and have received customary fees
for such services. In the ordinary course of our business, we may trade in the
securities of the Company for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is for the use and benefit of the Board of Trustees of the
Company and is rendered to the Board of Trustees in connection with its
consideration of the Proposed Acquisition. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as
to how such stockholder should vote with respect to the Proposed Acquisition.
Very truly yours,
/s/ Michael W. Reid
- -------------------------------
Managing Director
B-2
<PAGE>
APPENDIX C
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
TRUST AGREEMENT AS AMENDED
AND RESTATED [DECEMBER 16, 1987][__________], 1997*
The undersigned [Trustees] trustees of Pennsylvania Real Estate Investment
Trust [(hereinafter referred to as "Trustees"), on this 16th day of December
1987] on this [__] day of [_______] 1997, hereby amend the Trust Agreement made
December 27, 1960, and amended February 10, 1961, February 14, 1962, August 7,
1962, May 8, 1963, December 13, 1967, February 24, 1970, October 10, 1985,
November 7, 1985 [and], February 13, 1986 and December 16, 1987 and agree that
the same as amended hereby shall be restated as follows:
1. NAME OF TRUST[:]; REGISTERED OFFICE; DEFINITIONS
[The Trustees] Certain trustees acting under this Trust Agreement have
heretofore formed a Trust which is designated "Pennsylvania Real Estate
Investment Trust" (hereinafter referred to as the "Trust" or "PREIT") [and
shall, under that name, except as hereinafter provided,] . PREIT shall conduct
all business and the Trustees, and others authorized hereby or pursuant to the
provisions hereof, shall execute all instruments necessary or desirable and
appropriate to the performance of [PREIT's purposes. The designation
"Pennsylvania Real Estate Investment Trust" shall also refer to all of the
Trustees serving under this Trust Agreement, including additional or successor
Trustees, and said designation when set forth in any document (including,
without limitation, documents of title) shall refer to and be deemed to have
incorporated the names of all said Trustees with like force and effect as if
they had been fully set forth therein.] the purposes of PREIT.
PREIT shall exist subject to 15 Pa. C.S. Chapter 95, as amended from time
to time, and any successor statute thereto.
The address of the registered office of PREIT in the Commonwealth of
Pennsylvania is 455 Pennsylvania Avenue, Suite 135, Montgomery County, Fort
Washington, Pennsylvania 19034.
The term "Trustees", when used herein, shall mean the undersigned trustees
of PREIT and any successor or additional trustees of PREIT hereunder.
The term "Trust Property", when used herein, shall mean all property, of
all kinds, owned by PREIT.
The term "Shareholders", when used herein, shall mean holders of
[certificates of beneficial interest, as further] Shares, as defined in
Paragraph 8 of this Trust Agreement.
2. TRUSTEES
The following provisions shall apply to Trustees serving under this Trust
Agreement:
A. NUMBER
The Trustees shall have the right at any time, and from time to time, to
increase or decrease the number of Trustees then empowered to serve to a number
not in excess of fifteen (15) nor less than five (5). Commencing with the
Annual Meeting of Shareholders in 1970 the Trustees shall be divided into three
approximately equal classes each consisting of not [less] fewer than one (1)
nor more than five (5) individuals.
B. TERM OF OFFICE
The term of office of each Trustee serving prior to the Annual Meeting of
Shareholders in 1970 shall terminate upon the election of his successor. At
such Annual Meeting one class of Trustees ("Class A Trustees") shall be
elected, each member of which is to hold office for a term of one year, one
class of Trustees ("Class B Trustees") shall be elected, each member of which
is to hold office for a term of two years, and one class of Trustees ("Class C
Trustees") shall be elected, each member of which is to hold office for a term
of three years, and in each case and in each class such members shall serve
until their respective successors shall have been
- ------------
* Reflects all changes from Trust Agreement as in effect on the date of this
Proxy Statement. New language is in bold; deleted language is struck
through.
C-1
<PAGE>
duly elected and qualified. Commencing with the Annual Meeting in 1971, and at
each Annual Meeting thereafter, one class of Trustees, which shall be the class
whose terms expire that year, shall be elected, each member of which is to hold
office for a term of three years and until his respective successor is elected
and qualified.
C. NOMINATION OF TRUSTEES
Nomination for election to the office of Trustee at any Annual or Special
Meeting of Shareholders shall be made by the Trustees, or by petition in
writing delivered to the Secretary of PREIT not fewer than thirty-five (35)
days prior to such Shareholders' meeting signed by the holders of at least two
percent (2%) of the [shares] Shares outstanding on the date of such petition.
Unless nominations shall have been made as aforesaid, they shall not be
considered at such meeting unless the number of persons nominated as aforesaid
shall be fewer than the number of persons to be elected to the office of
Trustee at such meeting in which [events] event nominations for the Trustee
positions which would not otherwise be filled may be made at the meeting by any
person entitled to vote in the election of Trustees.
D. ADDITIONAL AND SUCCESSOR TRUSTEES: VACANCIES
The death, incapacity, resignation or removal of any or all of the
Trustees shall not terminate [PREIT'S] PREIT's existence or in any way affect
its continuity.
Vacancies shall be deemed to have occurred as a result of an increase in
the number of Trustees, or by reason of the death, resignation or incapacity of
any of the Trustees (unless the vacancy is eliminated by reduction in the
number of Trustees), and they shall be filled by persons to be elected by the
remaining Trustees. Any new Trustee so elected to fill a vacancy created by
reason of the death, resignation or incapacity of a Trustee shall hold office
for the full remaining term of the former Trustee and until his successor is
elected and qualified. Any new Trustee so elected as a result of an increase in
the number of Trustees shall hold office until the next Annual or Special
Meeting of Shareholders and until his successor is elected and qualified. A
vacancy caused by the removal of any Trustee shall be filled only by the
Shareholders at an Annual or Special Meeting, unless by reason of the removal
of the Trustee the number of Trustees is reduced to less than five (5), in
which event the next succeeding paragraph of this Paragraph [2 D] 2.D shall
apply.
Until vacancies are filled the remaining Trustees shall be empowered to
exercise all powers granted all Trustees hereunder, except that in the event
that the number of Trustees shall fall below five (5), the Trustees shall
forthwith nominate and elect at least as many Trustees as may be required to
bring the total number of trustees to five (5).
Upon the election of any [trustee] Trustee or additional or successor
Trustee, the said Trustee so elected shall execute a written Acceptance of
Trust, which together with a certificate of such election executed by two other
Trustees, shall be filed with legal counsel for PREIT. Upon the delivery of
such Acceptance, the said Trustee shall have all the rights, powers and duties
of a Trustee hereunder.
E. RESIGNATION OF TRUSTEES
Any Trustee may resign at any time by delivering to any other Trustee and
to the office of PREIT written notification of his resignation, which
resignation shall be effective when received, but if the effect of such
resignation shall be to reduce the number of Trustees below five (5), no such
resignation shall be effective until a successor shall have been elected by the
remaining Trustees.
F. REMOVAL OF TRUSTEES
Any Trustee may be removed during his term by a vote of at least
two-thirds of all of the Trustees then in office for any cause by them deemed
sufficient, at any regular meeting of the Trustees, or at any meeting specially
called for that purpose.
Any individual Trustee may be removed [from office without assigning any
cause] for cause (as herein defined) by a vote of the Shareholders at any
meeting of Shareholders called for the purpose by the affirmative vote of
Shareholders entitled to cast at least [seventy five percent (75%)] a majority
of the votes of the [shares] Shares then outstanding and entitled to vote at
the annual election of Trustees. [Any individual Trustee may be removed for
cause (as herein defined) by a vote of the Shareholders at any meeting of
Shareholders called for
C-2
<PAGE>
the purpose by the affirmative vote of Shareholders entitled to cast at least a
majority of the votes of the shares then outstanding and entitled to vote at
the annual election of Trustees.] Cause for removal shall exist only if the
Trustee whose removal is proposed has been convicted of a felony by a court of
competent jurisdiction and such conviction is no longer subject to direct
appeal or if the Trustee has been adjudged by a court of competent jurisdiction
to be liable for negligence or misconduct in the performance of his duty to
[the Trust] PREIT in a matter of substantial importance to PREIT, and such
adjudication is no longer subject to direct appeal.
No Trustee shall be removed at any meeting of Trustees or Shareholders
unless written notice of such meeting stating this purpose shall be given or
mailed to those entitled to vote thereon at least seven (7) days prior to such
meeting.
G. WAIVER OF BOND
No Trustee acting hereunder shall be required to furnish a bond in any
jurisdiction in which said Trustees may act.
H. MEETINGS
The Trustees shall hold an Annual Meeting immediately following the Annual
Meeting of Shareholders. No notice shall be required for the Annual Meeting of
Trustees. At that meeting, they shall elect officers, including a President, a
Secretary, and such other officers as they shall from time to time deem
necessary. Officers so elected by them shall remain in office until the next
Annual Meeting of Trustees, unless removed by the vote of two-thirds of the
Trustees then in office at any special meeting called on seven (7) days notice
for that purpose. Special Meetings of the Trustees shall be called by the
Chairman or by two or more of the other Trustees and shall be held at such time
and in such place as shall be designated in the notice of the meeting. Such
notice shall be given by or at the direction of the person or persons
authorized to call such meeting to each Trustee at least two (2) days prior to
the day named for the meeting, unless a different notice period is provided for
hereunder based upon the subject matter of such meeting.
I. QUORUM
A majority of the Trustees, provided that the majority consists of at
least four (4) Trustees, shall constitute a quorum. Trustees shall be deemed
present at a meeting if by means of conference telephone or similar
communications equipment all persons participating in the meeting can hear each
other. If there are [less] fewer than five (5) Trustees, the remainder
constitutes a quorum and must act to fill vacancies to bring the total number
of Trustees to at least five (5). If a quorum is not present at any meeting, a
majority of the Trustees present at the meeting may adjourn the meeting to any
later date and the meeting may be held at such later date without any further
notice.
J. VOTING REQUIREMENTS
[The] Except as otherwise required by law and except as otherwise
contemplated by paragraph 3.R, the concurrence of a majority of the Trustees
present at any meeting at which a quorum is present [or the consent in writing
of a majority of the Trustees then serving] shall be necessary to the validity
of any action taken by them[, provided, however, in]. In lieu of a meeting,
action may be taken by the consent in writing of at least seventy-five (75%) of
the Trustees then serving. In any event, the concurrence or consent in writing
of at least four (4) Trustees shall be necessary to the validity of any action
taken. The minimum voting requirements specified in this paragraph shall apply,
as a minimum requirement, with respect to any and all action taken by the
Trustees under this Trust Agreement.
K. [COMPENSATION AND] TRUSTEES' DEALINGS WITH PREIT
[For their services hereunder, the Trustees shall receive such reasonable
compensation as shall be approved by the majority of the Trustees. In addition,
any] Any Trustee may be employed by [the Trust] PREIT to hold any office, to
perform any special business, financial or other service, and shall be entitled
to receive such additional reasonable compensation as the Trustees may fix and
determine. Moreover, no Trustee shall be disqualified by his position as a
Trustee from selling to, buying from or dealing with [the Trust] PREIT either
directly or indirectly as a director, officer, member, affiliate, shareholder
or fiduciary of any other party to such a transaction[, and no Trustee shall
have any liability for such transactions approved by]. No such contract or
transaction shall
C-3
<PAGE>
be void or voidable solely because of such a relationship with or interest of a
Trustee, or solely because such a Trustee is present at or participates in the
meeting of the Board of Trustees that authorizes (or ratifies) the transaction,
or solely because his or her votes are counted for that purpose if the material
facts as to the relationship or interest are disclosed or are known to the
Trustees and the Board of Trustees authorizes (or ratifies) such contract or
transaction by the affirmative votes of a majority of the Trustees[, not having
an interest therein, even though the Trustees not having an interest in the
contract or transaction are less than a quorum. No Trustee shall have any
liability for such a contract or transaction so approved (or ratified) by a
majority of the Trustees not having an interest in such contract or transaction
except for bad faith or gross negligence[, and any such Trustee]. Those
Trustees having an interest in such a transaction may be counted in determining
the existence of a quorum at any meeting of the Board of Trustees which shall
authorize (or ratify) any such contract or transaction[ and may vote thereat to
authorize any such contract or transaction.].
[3. POWERS] 3. ACTIVITIES OF PREIT; POWERS OF THE TRUSTEES
[In] The business activities of PREIT, which shall be conducted by or
under the direction of the Trustees on behalf of PREIT, shall be (i) the
acquisition, ownership, operation, leasing, management, development and
disposition of real property and related personal property, either directly or
indirectly, and the ownership of interests in trusts, partnerships or other
entities which acquire own, operate, lease, manage, develop and dispose of real
property and related personal property, and (ii) all things that the Trustees
shall deem necessary or desirable and appropriate to the foregoing.
In furtherance of the business activities of PREIT and in addition to any
powers conferred upon the Trustees by law[, the Trustee] and by other
provisions of this Trust Agreement, the Trustees shall have the following
powers, unless otherwise restricted by any other provision of this Trust
Agreement.
A. To invest in assets of any kind and nature without being limited to
so-called "legal investments", provided the amount, type or classification will
not disqualify PREIT from qualifying as a Real Estate Investment Trust under
the pertinent provisions of the Internal Revenue Code and Regulations
thereunder.
B. To make investments incorporating[,] a variety of real property
financing techniques, including, without limitation, sale and leasebacks, net
lease financings, purchase and installment salebacks, high credit lease-secured
mortgages, convertible mortgages and mortgages of special interests including,
without limitation, leaseholds, air rights and condominiums. PREIT's investment
policy may also include new investment techniques subsequently developed which
satisfy the real estate investment trust requirements of the Internal Revenue
Code and Regulations thereunder.
C. To improve, manage, protect, subdivide, sell, mortgage, pledge,
encumber, grant easements or charges against or otherwise deal in real estate
assets and interests in real property.
D. To make such contracts as they deem expedient in the conduct of the
business of PREIT and to engage in any type of business necessary or incidental
thereto, except such business as would disqualify PREIT as a Real Estate
Investment Trust under the pertinent provisions of the Internal Revenue Code
and Regulations thereunder.
E. To borrow money to further PREIT's purposes and to pledge the Trust
Property as security therefor, provided, however, that no liability shall be
incurred except such as may be incidental to the proper management of the
property and business of PREIT and the proper execution of PREIT's purposes.
F. To raise monies or acquire assets consistent with the purposes of PREIT
by the issuance of securities and subscriptions, options and warrants relating
thereto.
G. To receive or sue for all monies at any time becoming due to PREIT.
H. To compromise or refer to arbitration any claims against or rights of
PREIT.
I. To employ any persons (including Trustees) to assist the Trustees in
the conduct of the business of PREIT and to confer upon such persons such
titles, power and authority as the Trustees may deem expedient. Those persons
who are elected and serve as officers of PREIT in accordance with Paragraph 2.H
of this Trust Agreement or otherwise shall have such powers and duties as a
resolution adopted by the Trustees or PREIT's By-laws may provide.
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J. To execute and deliver any and all instruments in writing which they
may deem advisable to carry out the purposes of PREIT. In connection with the
execution of any documents, the Trustees may, from time to time, designate one
or more of the Trustees as such or as officers of PREIT, or such other officer
or person or officers or persons to execute documents on behalf of PREIT, and
such execution shall be valid for all purposes.
K. To manage, conduct and operate PREIT under such assumed or fictitious
name or names as they, from time to time, designate and in connection
therewith, to do all things necessary to register such fictitious name or names
on behalf of PREIT and its Shareholders.
L. In accordance with applicable law, to determine whether monies or
things shall, for the purposes of these presents, be considered as principal or
income, or what constitutes gross income or net income in any year, or part of
the year, and to determine the mode in which expenses or disbursements shall be
charged between principal or income.
M. To do all and such other things and incur such other obligations as in
their judgment will advance PREIT's purposes.
N. To execute and deliver any [Regulatory Agreement or Assumption of
Regulatory Agreement] regulatory agreement or assumption of regulatory
agreement and any other instrument approved by the Trustees required by the
Federal Housing Commissioner in case of the purchase of any property subject to
a mortgage insured by the Federal Housing Administration.
[The Trustees and Shareholders are to be bound by any such Regulatory
Agreement to the extent and in the manner provided therein notwithstanding the
provisions of Paragraph 5 and Paragraph 11 hereof.]
[O. To adopt] O. To adopt, amend and repeal such By-Laws for the conduct
of the business of their meetings and of PREIT as they shall deem necessary,
but all such By-Laws shall be subordinate to and not inconsistent with the
provisions of this Agreement.
P. To [require the Shareholders upon demand, to disclose to the Trustees
in writing such information with rspect to direct and indirect ownership of the
Shares as the Trustees deem necessary to comply with the provisions of the
Internal Revenue Code and the Regulations thereunder as the same shall be from
time to time amended or to comply with the requirements of any other taxing
authority. If the Trustees shall at any time and in good faith be of the
opinion that direct or indirect ownership of Shares of PREIT has or may become
concentrated to an extent which is contrary to the requirements of Section
856(a) (5) and (6) of the Internal Revenue Code, the Trustees shall have the
power (i) by lot or other means deemed equitable by them to call for redemption
a number of Shares sufficient in the opinion of the Trustees to maintain or
bring the direct or indirect ownership of Shares of PREIT into conformity with
the requirements of the said Section 856(a) (5) and (6) and (ii) to refuse to
register the transfer of Shares to any person whose acquisition of the Shares
in question would, in the opinion of the Trustees, result in a violation of a
said Section 856(a) (5) or (6); provided, however, that failure to call for
redemption of Shares or refusal to register the transfer of Shares as provided
herein, shall not render the Trustees or any Shareholder or officer liable to
anyone for such failure. The redemption price shall be (i) the last reported
sale price of the Shares on the last business day prior to the redemption date
on the principal national securities exchange on which the Shares are listed or
admitted to trading or (ii) if the Shares are not so listed or admitted to
trading, the average of the highest bid and lowest asked prices on such last
business day as reported by the National Quotation Bureau Incorporated or a
similar organization selected from time to time by the Trustees for the purpose
or (iii) if no quotations for the Shares are available, as determined in good
faith by the Trustees. From and after the date fixed for redemption by the
Trustees, the holder of any Shares so called for redemption shall cease to be
entitled to dividends, voting rights and other benefits with respect to such
Shares excepting only the right to payment of the redemption price fixed as
aforesaid. For the purpose of this Section, the term "individual" shall be
construed as provided in Section 542(a) (2) of the Internal Revenue Code or any
successor provision and "ownership" of Shares shall be determined as provided
in Section 544 of the Internal Revenue Code or any successor provision.]
determine the value of all or any part of the Trust Property and of any
services, securities, property or other consideration to be furnished to or
acquired by PREIT, and to revalue all or any part of the foregoing.
Q. To sell, assign, or otherwise transfer all or substantially all or any
part of the Trust Property, to merge PREIT with another business trust or
entity, and, to the extent permitted by law, to elect not to have PREIT exist
subject to 15 Pa. C.S. CHAPTER 95, or any successor thereto.
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R. To establish one or more committees to consist of one or more Trustees
and to delegate such authority of the Trustees to those committees as is
permitted by law. The establishment of such committees and the delegation of
authority thereto shall be done only by resolution of a majority of all of the
Trustees then serving, and no such committee shall have the authority to (i)
amend or repeal any provision of this Agreement or the By-laws, (ii) remove any
Trustee from the Board of Trustees, or (iii) create or fill any vacancies in
the Board of Trustees.
S. In addition to the authority in Paragraph 8, to create and issue
(whether or not in connection with the issuance of Shares or other securities),
and to authorize the creation and issuance by subsidiaries and affiliates of
PREIT of, option rights or securities having conversion or option rights
entitling the holders thereof to purchase or acquire Shares, option rights,
securities having conversion or option rights, or obligations, of any class or
series, or assets of PREIT, or to purchase or acquire from PREIT equity
securities, option rights, securities having conversion or option rights, or
obligations, of any class or series, owned by PREIT and issued by any other
person or entity. The securities, contracts, warrants or other instruments
evidencing Shares, option rights, securities having option or conversion
rights, or obligations of PREIT, may contain such terms as are fixed by the
Trustees, including, without limiting the generality of such authority,
restrictions, provisions providing for adjustment of terms upon the happening
of certain events, pricing and payment terms, and conditions, including, but
not limited to, conditions that preclude any person or persons owning or
offering to acquire a specified number or percentage of Shares or any class or
series thereof or option rights, securities having conversion or option rights,
or obligations of PREIT or any class or series of the foregoing or any
transferee or transferees of the person or persons from exercising, converting,
transferring or receiving the Shares or other equity securities, option rights,
securities having conversion or option rights, obligations or assets. The
provisions of this Paragraph 3.S shall not be construed to effect a change in
the fiduciary relationship between a Trustee and PREIT or to change the
standard of care of a Trustee as provided for in Paragraph 5 of this Agreement,
15 Pa. C.S. Section 9506, as amended from time to time, and Subchapter B of
Chapter 17 of the Pennsylvania Business Corporation Law of 1988, as amended
from time to time.
T. To adopt and implement executive compensation, pension, profit sharing,
share option, share bonus, share purchase, share appreciation rights, savings,
thrift, retirement, incentive or benefit plans, trusts or provisions applicable
to any or all Trustees, officers, employees or agents of PREIT or trustees,
directors, officers, employees or agents of any of PREIT's subsidiaries or
affiliates or other entities in which PREIT maintains an investment and,
without limiting the foregoing authority, to create and issue rights and
options to Trustees, officers, employees and agents of PREIT and trustees,
directors, officers, employees or agents of any of PREIT's subsidiaries or
affiliates or other entities in which PREIT maintains an investment as an
incentive for service or continued service with PREIT or any of its
subsidiaries or affiliates or other entities in which PREIT maintains an
investment or for such other purposes and upon such terms as the Trustees, who
may benefit by their action, deem advantageous to PREIT.
U. To determine and alter, from time to time, the fiscal year of PREIT.
V. To grant rights to holders of equity interests in entities controlled
by PREIT to vote on matters to be voted upon by the Shareholders of PREIT,
either as a separate class or with the Shareholders and on any such basis as
the Board shall determine.
4. PROTECTION OF PERSONS DEALING WITH TRUSTEES
A resolution of the Trustees, certified by any [two of the Trustees or by
any one of the Trustees and the Executive Vice President or Secretary or
Treasurer] Trustee or by any officer of PREIT, authorizing a particular act
shall be conclusive evidence to anyone, including[,] strangers to PREIT, that
such act is within the powers of the Trustees. Any instrument executed by [two
Trustees or by the Executive Vice President or Secretary or Treasurer and one
Trustee on behalf of all Trustees] any Trustee or by the Chief Executive
Officer, President, Chief Operating Officer or any Vice President of PREIT
shall be conclusive evidence to anyone, including strangers to PREIT, that said
persons are in fact authorized to execute said instrument on behalf of [all
such Trustees] PREIT and a resolution accompanying such instrument shall not be
necessary for this purpose. A certification of incumbency of Trustees[,
executed by any two Trustees or by the Executive Vice President or Secretary or
Treasurer and one Trustee,] and officers of PREIT, executed by any other
Trustee or by any other
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officer of PREIT shall be conclusive evidence to anyone, including[,] strangers
to PREIT, that the Trustees and [Executive Vice President or Secretary or
Treasurer] the officers of PREIT named therein are at the time stated therein
then serving under this Trust Agreement. No purchaser from [the Trustees] PREIT
shall be bound to see to the application of the money or other consideration
paid by the purchaser to [the Trustees] PREIT.
5. LIMITATION OF TRUSTEES' [LIABILITY] AND OFFICERS' LIABILITY
[No Trustee of PREIT] A. The Trustees, when acting in such capacity, shall
not be personally liable to any person or entity for any act, omission or
obligation of PREIT.
B. The Trustees shall stand in a fiduciary relationship to PREIT. The
provisions of 15 Pa. C.S. Subchapter B and, specifically, Section 1715, shall
be applicable to the Trustees with respect to the fiduciary relationship and
the discharge of duties arising therefrom. No Trustee shall be personally
liable for monetary damages [as such] for any action taken, or any failure to
take any action, [unless (a) the Trustee has breached or failed to peform the
duties of his or her office in good faith (in a manner he or she] except that a
Trustee shall remain personally liable for monetary damages to the same extent
that a director of a Pennsylvania business corporation remains liable under the
provisions of 15 Pa. C.S. Section 1713. In furtherance of the purposes of the
preceding sentence, such sentence shall be deemed to have the effect of a bylaw
adopted by the Shareholders (as that term is used in 15 Pa. C.S. Section 1713).
C. An officer of PREIT shall perform his duties as an officer of PREIT in
good faith, in a manner he reasonably believes to be in the best interests of
PREIT[,] and with such care, including reasonable inquiry, skill and diligence,
as a person of ordinary prudence would use under similar circumstances [) and
(b) the breach or failure to perform constitutes self dealing, willful
misconduct or recklessness; provided, however, that the provisions of this
Paragraph 5 shall not apply to the responsibility or liability of a Trustee
pursuant to any criminal statute, or to the liability of a Trustee for the
payment of taxes pursuant to local, state or federal law. Every action taken by
a Trustee shall be presumed to be in good faith and a fair and reasonable
exercise of the powers vested in or of the duties imposed upon him or her. Each
Trustee shall be deemed to have exercised reasonable care, diligence and
prudence and to have acted impartially as to all persons interested unless the
contrary be proved by affirmative evidence. In the absence of such proof and
unless the Trustee has breached or failed to perform his or her duties in good
faith and the breach or failure to perform constitutes self dealing, willful
misconduct or recklessness, no Trustee shall be liable for any monetary loss
arising from depreciation or shrinkage in value of any property herein
authorized to be held or acquired, or from the failure of PREIT to so qualify
or continue to qualify as a real estate investment trust. No Trustee shall be
liable for the acts or omissions of any other Trustee, nor for the acts or
omissions of any persons duly appointed by any of them to assist in the
execution of PREIT's purposes. A Trustee may rely in good faith on information
prepared or presented by officers and employees of PREIT, counsel, accountants
and other professionals and by committees of the board on which such Trustee
does not serve provided the Trustee has a reasonable belief as to the
reliability and competence of such officers and employees and the professional
or expert competence of such professionals and that such committees merit his
or her confidence.] . A person who so performs his duties shall not be liable
by reason of having been an officer of PREIT.
D. It is the intention of this Trust Agreement to limit the liability of
the Trustees to the fullest extent permitted by applicable law, as amended or
supplemented. No amendment of this Agreement or repeal of any of its provisions
shall adversely affect any right or protection of any Trustee or officer of
PREIT provided for hereunder for or with respect to any acts, omissions or
obligations of PREIT or any Trustee or officer of PREIT occurring or incurred
prior to such amendment or repeal.
6. RECORDS
The Trustees shall keep a record of all meetings of the Trustees and
committees of the Trustees and of the Shareholders and the officers of PREIT
shall keep books of account showing the receipts and disbursements of PREIT.
The Trustees shall arrange for the preparation, as soon as practicable, after
the close of PREIT's fiscal year, which shall be determined by the Trustees, of
a complete report of the business of PREIT during the preceding fiscal year. A
copy of this report shall be sent to each Shareholder. In addition, the
Trustees, or their appointed institutional agents, shall maintain proper
transfer books and a register of the names and interests of the Shareholders
hereunder and any other security holders of PREIT.
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7. LEGAL TITLE
Legal title to all Trust Property shall be held by [the] PREIT (to the
extent permitted by law) or by Trustees as such, or by any of them or by such
other nominee or nominees as the [Trustee] Trustees may from time to time
designate to hold legal title for PREIT. The Trustees shall have absolute
control over the management and disposition of the Trust Property, subject only
to such limitations as are set forth herein. The Trustees shall have complete
control of the conduct of PREIT.
Any enumeration of specific duties and powers shall not be deemed [not] a
limitation upon the general powers herein conferred.
8. BENEFICIAL INTERESTS
The beneficial interests in PREIT shall be divided into an unlimited
number of shares, each having a par value of $1.00 per share (herein referred
to as "Shares" and the holders thereof are sometimes referred to herein as
"Shareholders"). The Trustees may sell or exchange such Shares for such sums or
other consideration and on such terms as they may deem expedient, provided that
in no event shall Shares be sold for a consideration less than par, and the
Shares shall be issued only upon the payment of [at least such par value] an
amount at least equal to such par value; provided that, in the case of Shares
sold for non-cash consideration, the value received shall be deemed to be an
amount at least equal to the par value thereof if the sale was authorized by
the Trustees and, in the case of Shares issued upon conversion or upon exercise
of rights to acquire Shares, such Shares shall be deemed to have been issued
for an amount at least equal to the par value thereof if, at the time such
convertible security was issued or at the time such exercise right was granted,
such issuance or grant was authorized by the Trustees. The said Shares when so
issued shall be fully paid and non-assessable. [The Trustees] PREIT shall issue
or cause to be issued to subscribers for or purchasers of such Shares,
certificates in such form as the Trustees deem proper evidencing the beneficial
interest of such Share owners. The certificates shall be personal property and,
except as otherwise provided herein, shall entitle the owners thereof to
participate in all dividends and other distributions of income or principal in
the proportion which the number of Shares of each owner bears to the total
number of Shares issued and outstanding. Shareholders' rights shall be limited
to those specifically set forth in the certificate [and], in this Trust
Agreement or in any resolution or resolutions adopted by the Trustees with
respect thereto.
The Trustees shall have the power from time to time (a) to classify or
reclassify, in one or more series or classes, any unissued Shares, (b) to
determine and alter all rights, preferences, privileges, qualifications,
limitations and restrictions thereof (including, without limitation, voting,
distribution, liquidation, conversion and/or redemption rights, and limitations
and/or exclusions thereof) granted to or imposed upon any wholly unissued
series or class of Shares and the number of Shares constituting any such series
or class, and (c) to increase or decrease (but not below the number of Shares
of such series or class then outstanding) the number of Shares of any series or
class subsequent to the issue of Shares of that series or class.
Any Trustee hereunder may acquire, hold and dispose of Shares [in PREIT]
to the same extent and in the same manner as if [he] such person were not a
Trustee and without affecting in any way [his] such person's status or powers
as such.
A. CHANGE IN PAR VALUE OF SHARES
The Trustees may from time to time change the par value of the Shares
outstanding or unissued, or any class or series thereof, if in their opinion
the same shall be necessary or desirable and appropriate to further [PREIT'S]
PREIT's purposes.
B. PRE-EMPTIVE RIGHTS WAIVED
No Shareholder shall have any pre-emptive right because of his
shareholdings to have first offered to him any part of any Shares or
debentures, bonds or securities convertible into or exchangeable, with or
without further consideration, for Shares of PREIT hereinafter issued,
including those now authorized and those authorized by amendments hereto.
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C. TRANSFER OF SHARES
Shares may be transferred by the holders thereof in person, or by duly
authorized attorney. The transferee shall surrender such certificate to PREIT
or, if applicable, to the transfer agent designated by the Trustees for such
Shares, duly endorsed for transfer, or with an appropriate power affixed
(accompanied by the requisite documentary transfer stamps if any are required)
which shall execute a new certificate representing the Share or Shares so
transferred. The acceptance by the transferee of a certificate so assigned, or
any certificate issued in place thereof, shall constitute the [transferee]
transfer, and each transferee by acceptance of the certificate shall be deemed
to have agreed to be[, a party to] bound by the provisions of this Trust
Agreement [and bound by the provisions hereof], as the same may be amended or
supplemented, and any other document or instrument authorized hereunder
pertaining to such Shares or such transferee. No such transfer shall be binding
upon [the Trustees] PREIT until it has been recorded on the transfer books
maintained by PREIT or its transfer agent. Moreover, [the Trustees] PREIT may
deem the person in whose name the Share certificate is at the time registered
upon the books maintained by the transfer agent designated by [the Trustees]
PREIT to be the absolute owner of the shares for all purposes whatsoever, and
shall not be affected by any notice to the contrary. All transfers of Shares
shall be subject to Paragraph 9 of this Trust Agreement.
D. DEATH OF A SHAREHOLDER
The death of a Shareholder during the continuance of PREIT shall not
terminate PREIT's existence or entitle the legal representative of such
Shareholder to any action in the courts or otherwise against the Trust
Property, PREIT or the Trustees by virtue of the fact of death alone. The
executors, administrators, heirs, legatees or assigns of a deceased Shareholder
shall succeed to the rights and be subject to the liabilities of the deceased
Shareholder as a holder of [a certificate of beneficial interest of PREIT]
Shares.
E. LOST OR DESTROYED CERTIFICATES
In the event of the loss or destruction of a certificate, [the Trustees]
PREIT may, in [their] its discretion, issue a new certificate representing the
interest evidenced by the lost or destroyed certificate upon satisfactory proof
of its loss or destruction and the furnishing of sufficient indemnity, in the
form of a bond, if required, for the benefit of all interested parties.
9. [DISTRIBUTIONS]
[The Trustees]RESTRICTIONS ON OWNERSHIP AND TRANSFER OF SHARES; EXCHANGE FOR
EXCESS SHARES
A. Definitions. For the purposes of this Paragraph 9, the following terms
shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Shares either directly or
constructively through the application of Section 544 of the Internal Revenue
Code of 1986, as amended from time to time (the "Code"), as modified by Section
856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns" and
"Beneficially Owned" shall have correlative meanings. Accordingly, for purposes
hereof, Beneficial Ownership expressed as a percentage shall be calculated for
any Person by dividing two numbers, (a) the number that is the numerator being
the sum of (i) the number of outstanding Shares beneficially owned by such
Person plus (ii) the maximum number of Shares issuable upon the exercise or
conversion of outstanding warrants, options or other securities exercisable for
or convertible into Shares beneficially owned by such Person and (b) the number
that is the denominator being the sum of (i) all outstanding Shares plus (ii)
the maximum number of Shares issuable upon the exercise or conversion of
outstanding warrants, options or other securities exercisable for or
convertible into Shares beneficially owned by such Person; provided that the
Trustees shall retain full authority to adopt such other formula for
determining Beneficial Ownership as they may deem appropriate.
"Constructive Ownership" shall mean ownership of Shares either directly or
constructively through the application of Section 318(a) of the Code, as
modified by Section 856(d)(5) of the Code. The terms
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"Constructive Owner," "Constructively Owns" and "Constructively Owned" shall
have correlative meanings. Accordingly, for purposes hereof, Constructive
Ownership expressed as a percentage shall be calculated for any Person by
dividing two numbers, (a) the number that is the numerator being the sum of (i)
the number of outstanding Shares beneficially owned by such Person plus (ii)
the maximum number of Shares issuable upon the exercise or conversion of
outstanding warrants, options or other securities exercisable for or
convertible into Shares owned by such Person and (b) the number that is the
denominator being the sum of (i) all outstanding Shares plus (ii) the maximum
number of Shares issuable upon the exercise or conversion of outstanding
warrants, options or other securities exercisable for or convertible into
Shares owned by such Person; provided that the Trustees shall retain full
authority to adopt such other formula for determining Constructive Ownership as
it may deem appropriate.
"Event" shall have the meaning assigned to it in Paragraph 9.C(iii).
"Excess Shares" shall mean Shares that are issued pursuant to Paragraph
9.C(i) or (iii) and held in Trust in accordance with, and governed by,
Paragraph 9.N.
"Market Price" shall mean the last reported sales price reported on the
American Stock Exchange of Shares on the trading day immediately preceding the
relevant date, or if the Shares are not then traded on the American Stock
Exchange, the last reported sales price of Shares on the trading day
immediately preceding the relevant date as reported on any exchange or
quotation system over which the Shares may be traded, or if the Shares are not
then traded over any exchange or quotation system, then the fair market value
of the Shares on the relevant date as determined in good faith by the Trustees.
"Ownership Limit" shall mean 9.9% in value of the outstanding Shares.
"Ownership Limitation Termination Date" shall mean the first day after the
date on which the Trustees determine that it is no longer in the best interests
of PREIT to attempt to, or continue to, qualify as a REIT.
"Person" shall mean an individual, corporation, partnership, limited
liability company, estate, trust (including a trust qualified under Section
401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section 642(c) of
the Code, association, private foundation within the meaning of Section 509(a)
of the Code, joint stock company or other entity or any government or agency or
political subdivision thereof and also includes a group as that term is used
for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, but does not include an underwriter which participates in a public
offering of Shares for a period of 25 days following the purchase by such
underwriter of those Shares.
"Purported Beneficial Holder" shall mean, with respect to any event other
than a purported Transfer which results in Excess Shares, the Person for whom
the Purported Record Holder of the Shares that were, pursuant to Paragraph 9.C,
automatically exchanged for Excess Shares upon the occurrence of such event
held such Shares.
"Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer which results in Excess Shares, the purported beneficial
transferee for whom the Purported Record Transferee would have acquired Shares,
if such Transfer had been valid under Paragraph 9.B.
"Purported Record Holder" shall mean, with respect to any event other than
a purported Transfer which results in Excess Shares, the record holder of the
Shares that were, pursuant to Paragraph 9.C, automatically exchanged for Excess
Shares upon the occurrence of such event.
"Purported Record Transferee" shall mean, with respect to any purported
Transfer which results in Excess Shares, the record holder of the Shares if
such Transfer had been valid under Paragraph 9.C.
"REIT" shall mean a real estate investment trust under Section 856 of the
Code.
"Section 544 Subsidiary" of any individual or entity shall mean any
entity, over 50% of the ownership interest in which is owned, directly or
indirectly (applying the principles of Section 544 of the Code) by the
individual or entity in question.
"Special Beneficiary" shall mean the beneficiary of the Special Trust as
determined pursuant to Paragraph 9.N(v).
"Special Trust" shall mean the trust created pursuant to Paragraph 9.N(i).
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"Transfer" shall mean any issuance, sale, transfer, gift, assignment,
devise or other disposition of Shares or capital stock of any Person (including
but not limited to (i) the granting of any option or entering into any
agreement for the sale, transfer or other disposition of Shares, (ii) the sale,
transfer, exercise, assignment or other disposition of any securities or rights
convertible into or exchangeable for Shares or (iii) the establishment of a put
or the granting to a third party of a call right with respect to Shares),
whether voluntary or involuntary, whether of record or beneficially and whether
by operation of law or otherwise.
B. Restrictions on Ownership and Transfer.
(i) Except as provided in Paragraph 9.K, prior to the Ownership Limitation
Termination Date, no Person shall Beneficially Own or Constructively Own any
Shares to the extent such ownership would exceed the Ownership Limit.
(ii) Except as provided in Paragraph 9.K, prior to the Ownership
Limitation Termination Date, any Transfer that, if effective, would result in
any Person Beneficially Owning or Constructively Owning Shares in excess of the
Ownership Limit shall be void ab initio as to the Transfer of such Shares which
would be otherwise Beneficially Owned or Constructively Owned by such Person in
excess of such Ownership Limit; and the intended transferee shall acquire no
rights in or to such Shares.
(iii) Prior to the Ownership Limitation Termination Date, any Transfer
that, if effective, would result in Shares being beneficially owned by less
than 100 Persons (determined without reference to any rules of attribution)
shall be void ab initio as to the Transfer of such Shares which would be
otherwise beneficially owned by the transferee; and the intended transferee
shall acquire no rights in such Shares.
(iv) Prior to the Ownership Limitation Termination Date, any Transfer
that, if effective, would result in PREIT being "closely held" within the
meaning of Section 856(h) of the Code shall be void ab initio as to the
Transfer of the Shares which would cause PREIT to be "closely held" within the
meaning of Section 856(h) of the Code; and the intended transferee shall
acquire no rights in such Shares.
(v) The Trustees shall have the authority to select the Ownership
Limitation Termination Date.
C. Exchange For Excess Shares.
(i) If, notwithstanding the other provisions contained in this Paragraph
9, at any time prior to the Ownership Limitation Termination Date, there is a
purported Transfer such that any Person would Beneficially Own or
Constructively Own Shares in excess of the Ownership Limit, then, except as
otherwise provided in Paragraph 9.K, such number of Shares in excess of such
Ownership Limit (rounded up to the nearest whole Share), shall be automatically
exchanged for an equal number of Excess Shares. Such exchange shall be
effective as of the close of business on the business day prior to the date of
the Transfer.
(ii) If, notwithstanding the other provisions contained in this Paragraph
9, at any time prior to the Ownership Limitation Termination Date, there is a
purported Transfer which, if effective, would cause PREIT to become "closely
held" within the meaning of Section 856(h) of the Code, then the Shares being
Transferred which would cause PREIT to be "closely held" within the meaning of
Section 856(h) of the Code (rounded up to the nearest whole Share) shall be
automatically exchanged for an equal number of Excess Shares. Such exchange
shall be effective as of the close of business on the business day prior to the
date of the Transfer.
(iii) If, notwithstanding the other provisions contained in this Paragraph
9, at any time prior to the Ownership Limitation Termination Date, an event
other than a purported Transfer (an "Event") occurs which would cause any
Person to Beneficially Own or Constructively Own Shares in excess of the
Ownership Limit, then, except as otherwise provided in Paragraph 9.K, Shares
Beneficially Owned or Constructively Owned by such Person (rounded up to the
nearest whole Share) shall be automatically exchanged for an equal number of
Excess Shares to the extent necessary to eliminate such excess ownership. Such
exchange shall be effective as of the close of business on the business day
prior to the date of the Event. In determining which Shares are exchanged,
Shares directly held or Beneficially Owned by any Person who caused the Event
to occur shall be exchanged before any Shares not so held are exchanged. Where
several such Persons exist, the exchange shall be pro rata based upon the
number of Shares Beneficially Owned and Constructively Owned by such Persons.
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D. Remedies For Breach. If the Trustees or their designee(s) shall at any
time determine that a Transfer has taken place in violation of Paragraph 9.B or
that a Person intends to acquire or has attempted to acquire beneficial
ownership (determined without reference to any rules of attribution) of any
Shares that would result in Shares being beneficially owned by less than 100
persons as contemplated by Paragraph 9.B(iii), or in Beneficial Ownership or
Constructive Ownership of any Shares in violation of Paragraph 9.B, the
Trustees or their designee(s) shall take such action as they deem advisable to
refuse to give effect to or to prevent such Transfer (or any Transfer related
to such intent), including, but not limited to, refusing to give effect to such
Transfer on the books of PREIT or instituting proceedings to enjoin such
Transfer; provided, however, that any Transfers or attempted Transfers in
violation of Paragraphs 9.B (ii), (iii) or (iv) shall automatically result in
the exchange described in Paragraph 9.C, irrespective of any action (or non-
action) by the Trustees or its designees.
E. Notice of Ownership or Attempted Ownership in Violation of Paragraph
9.B. Any Person who acquires or attempts to acquire Beneficial Ownership or
Constructive Ownership of Shares in violation of Paragraph 9.B shall
immediately give written notice to PREIT of such acquisition or attempted
acquisition and shall provide to PREIT such other information as PREIT may
request in order to determine the effect, if any, of such acquisition or
attempted acquisition on PREIT's status as a REIT.
F. Owners Required to Provide Information. Prior to the Ownership
Limitation Termination Date:
(i) every Beneficial Owner or Constructive Owner of 1% or more in value of
the outstanding Shares shall, within 30 days after January 1 of each year, give
written notice to PREIT stating the name and address of such Beneficial Owner
or Constructive Owner, the number of Shares Beneficially Owned or
Constructively Owned, and a description of how such Shares are held. Each such
Beneficial Owner or Constructive Owner shall provide to PREIT such additional
information as PREIT may request in order to determine the effect, if any, of
such Beneficial Ownership or Constructive Ownership on PREIT's status as a
REIT.
(ii) Each Person who is a Beneficial Owner or Constructive Owner of Shares
and each Person (including the shareholder of record) who is holding Shares for
a Beneficial Owner or Constructive Owner shall provide to PREIT such
information as PREIT may request in order to determine PREIT's status as a REIT
or to comply with regulations promulgated under the REIT provisions of the
Code.
G. Remedies Not Limited. Nothing contained in this Paragraph 9 shall limit
the authority of the Trustees to take such other action as it deems necessary
or advisable to protect PREIT and the interests of Shareholders by preserving
PREIT's REIT status.
H. Ambiguity. In the case of an ambiguity in the application of any of the
provisions of this Paragraph 9 including any definition contained in Paragraph
9.A and any ambiguity with respect to which Shares are to be exchanged for
Excess Shares in a given situation, the Trustees shall have the authority to
determine the application of the provisions of this Paragraph 9 with respect to
any situation based on the facts known to it.
I. Increase in Ownership Limit. Subject to the limitations provided in
Paragraph 9.J the Trustees may from time to time increase the Ownership Limit.
J. Limitations on Modifications.
(i) The Ownership Limit may not be increased if, after giving effect to
such increase, five (5) Beneficial Owners of Shares would Beneficially Own, in
the aggregate, more than 49.9% of the outstanding Shares.
(ii) Prior to an increase in the Ownership Limit pursuant to Paragraph
9.I, the Trustees may require such opinions of counsel or PREIT's tax
accountants, affidavits, undertakings or agreements as it may deem necessary or
advisable in order to determine or ensure PREIT's status as a REIT.
K. Exceptions. The Trustees, with a ruling from the Internal Revenue
Service or an opinion of counsel or PREIT's tax accountants to the effect that
such exemption will not result in PREIT being
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"closely held" within the meaning of Section 856(h) of the Code, may exempt a
Person from the Ownership Limit if the Trustees obtain such representations and
undertakings from such Person as the Trustees may deem appropriate and such
Person agrees that any violation or attempted violation of any of such
representations or undertakings will result in, to the extent necessary or
otherwise deemed appropriate by the Trustees, the exchange of Shares held by
such Person for Excess Shares in accordance with Paragraph 9.C.
L. American Stock Exchange Transactions. Nothing in this Paragraph 9 shall
preclude the settlement of any transaction entered into through the facilities
of the American Stock Exchange, any successor exchange or quotation system
thereto, or any other exchange or quotation system over which the Shares may be
traded from time to time.
M. Legend. (a) Each certificate for Common Shares hereafter issued shall
bear the following legend:
"The Shares represented by this certificate are subject to restrictions
on ownership and transfer for the purpose of PREIT's maintenance of its
status as a real estate investment trust under the Internal Revenue Code of
1986, as amended (the "Code"). No Person may Beneficially own or
Constructively Own Shares in excess of 9.9% in value (or such greater
percentage as may be determined by the Board of Trustees) of the
outstanding Shares of PREIT. Any Person who attempts to Beneficially Own or
Constructively Own Shares in excess of the above limitation must
immediately notify PREIT. In addition, if any Person attempts to acquire
beneficial ownership of any Shares and the result of such acquisition would
be Shares being beneficially owned by fewer than 100 persons, such
purported transfer shall be void ab initio and the intended transferee
shall acquire no rights to such Shares. All capitalized terms used in this
legend have the meanings set forth in the Trust Agreement, a copy of which,
including the restrictions on ownership and transfer, will be sent without
charge to each Shareholder who so requests. If the restrictions on
ownership and transfer are violated, the Shares represented hereby will be
automatically exchanged for Excess Shares which will be held in trust by
PREIT."
N. Excess Shares.
(i) Ownership in Trust. Upon any purported Transfer or Event that results
in an exchange of Shares for Excess Shares pursuant to Paragraph 9.C, such
Excess Shares shall be deemed to have been transferred to PREIT, as trustee of
a Special Trust for the exclusive benefit of the Special Beneficiary or Special
Beneficiaries to whom an interest in such Excess Shares may later be
transferred pursuant to Paragraph 9.N(v). Excess Shares so held in trust shall
be issued and outstanding Shares of PREIT. The Purported Record Transferee or
Purported Record Holder shall have no rights in such Excess Shares except as
and to the extent provided in this Paragraph 9.N.
(ii) Dividend Rights. Excess Shares shall not be entitled to any dividends
or distributions. Any dividend or distribution paid prior to the discovery by
PREIT that the Shares with respect to which the dividend or distribution was
made had been exchanged for Excess Shares shall be repaid to PREIT upon demand.
Any dividend on distribution declared by PREIT and not yet paid with respect to
Shares that have been exchanged for Excess Shares shall be void ab initio with
respect to such Shares.
(iii) Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, PREIT, each holder of Excess Shares shall be entitled to
receive, ratably with each other holder of Shares and Excess Shares, that
portion of the assets of PREIT available for distribution to the holders of
Shares or Excess Shares which bears the same relation to the total amount of
such assets of PREIT as the number of Excess Shares held by such holder bears
to the total number of Shares and Excess Shares then outstanding. PREIT, as
holder of the Excess Shares in trust, or if PREIT shall have been dissolved,
any trustee appointed by PREIT prior to its dissolution, shall distribute
ratably to the Special Beneficiaries of the Special Trust, when determined, any
such assets received in respect of the Excess Shares in any liquidation,
dissolution or winding up of, or any distribution of the assets of PREIT.
(iv) Voting Rights. The holders of Excess Shares shall not be entitled to
vote with respect to such Shares on any matters (except as required by law).
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(v) Restrictions On Transfer: Designation of Special Beneficiary.
(a) Excess Shares shall not be transferrable. The Purported Record
Transferee or Purported Record Holder may freely designate a Special
Beneficiary of an interest in the Special Trust (representing the number of
Excess Shares held by the Special Trust attributable to a purported Transfer or
Event that resulted in the Excess Shares) if (i) the Excess Shares held in the
Special Trust would not be Excess Shares in the hands of such Special
Beneficiary and (ii) the Purported Beneficial Transferee or Purported
Beneficial Holder does not receive a price, as determined on a Share-by-Share
basis, for designating such Special Beneficiary that reflects a price for such
Excess Shares that, (I) in the case of a Purported Beneficial Transferee,
exceeds (x) the price such Purported Beneficial Transferee paid for the Shares
in the purported Transfer that resulted in the exchanges of Shares for Excess
Shares, or (y) if the Purported Beneficial Transferee did not give value for
such Shares (having received such Shares pursuant to a gift, devise or other
transaction), the Market Price of such Shares on the date of the purported
Transfer that resulted in the exchange of Shares for Excess Shares or (II) in
the case of a Purported Beneficial Holder, exceeds the Market Price of the
Shares that were automatically exchanged for such Excess Shares on the date of
such exchange. Upon such a transfer of an interest in the Special Trust, the
corresponding shares of Excess Shares in the Special Trust shall be
automatically exchanged for an equal number of Shares and such Shares shall be
transferred of record to the transferee of the interest in the Special Trust if
such Shares would not be Excess Shares in the hands of such transferee. Prior
to any transfer of any interest in the Special Trust, the Purported Record
Transferee or Purported Record Holder, as the case may be, must give advance
notice to PREIT of the intended transfer and PREIT must have waived in writing
its purchase rights under Paragraph 9.N(vi).
(b) Notwithstanding the foregoing, if a Purported Beneficial Transferee or
Purported Beneficial Holder receives a price for designating a Special
Beneficiary of an interest in the Special Trust that exceeds the amounts
allowable under Paragraph 9.N(v)(a), such Purported Beneficial Transferee or
Purported Beneficial Holder shall pay, or cause such Special Beneficiary to
pay, such excess to PREIT.
(vi) Purchase Right in Excess Shares. Excess Shares shall be deemed to
have been offered for sale to PREIT, or its designee, at a price per share
equal to, (I) in the case of Excess Shares resulting from a purported Transfer,
the lesser of (i) the price per share in the transaction that created such
Excess Shares (or, in the case of a gift, devise or other transaction, the
Market Price at the time of such gift, devise or other transaction) or (ii) the
Market Price on the date PREIT, or its designee, accepts such offer or (II) in
the case of Excess Shares created by an Event, the lesser of (i) the Market
Price of the Shares originally exchanged for the Excess Shares on the date of
such exchange or (ii) the Market Price of such Shares on the date PREIT, or its
designee, accepts such offer. PREIT shall have the right to accept such offer
for a period of ninety (90) days after the later of (i) the date of the
purported Transfer or Event which resulted in an exchange of Shares for such
Excess Shares and (ii) the date the Trustees determine that a purported
Transfer or other event resulting in an exchange of Shares for such Excess
Shares has occurred, if PREIT does not receive a notice of any such Transfer
pursuant to Paragraph 9.E.
O. Severability; Agent for Trust. If any provision of this Paragraph 9 or
any application of any such provision is determined to be invalid by any
federal or state court having jurisdiction over the issues, the validity of the
remaining provisions shall not be affected and other applications of such
provision shall be affected only to the extent necessary to comply with the
determination of such court. In any event, to the extent such court holds the
Purported Record Transferee to be the record and beneficial owner of Shares
which, had the provisions of Paragraph 9 been enforced, would have been
exchanged for Excess Shares, such Purported Record Transferee shall be deemed,
at the option of PREIT, to have acted as agent on behalf of PREIT in acquiring
such transferred Shares and to hold such Shares on behalf of PREIT.
10. DISTRIBUTIONS
PREIT shall distribute to the Shareholders from the income or capital of
PREIT such sums as they shall determine. The amounts to be distributed and the
time of the distribution shall rest in the discretion of the Trustees. However,
the Trustees shall attempt to make such distribution so that PREIT will
continue to qualify as a real estate investment trust under pertinent
provisions of the Internal Revenue Code and Regulations thereunder.
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All other income may be distributed or accumulated in the Trustees' sole
discretion. The Shareholders shall share in all distributions from PREIT on the
record date established by the Trustees for the purpose of determining the
percentage ownership of the holders; or, if required for tax purposes, they
shall share such distributions in such manner as may be necessary so that PREIT
continues to so qualify as a real estate investment trust.
[10.] 11. SHAREHOLDERS
A. ANNUAL MEETINGS
The Annual Meeting of the Shareholders entitled to vote in the election of
Trustees shall be held at the principal office of PREIT or at such other place
as the Trustees shall by notice designate, [on] no later than the second
Wednesday of [December in each] the sixth month following the end of each
fiscal year, or, if that day falls on a holiday, the next business day
following, or on such other day as may be fixed by the Trustees. If the Annual
Meeting has not been held during a calendar year, any Shareholder may call such
meeting at any time thereafter, by following the procedure set forth in
[Section 10 B] Paragraph 11.B hereof.
At said Annual Meeting, the Shareholders entitled to vote thereat shall
elect individuals to the office of Trustee as provided in Paragraph [2 B] 2.B
of this Trust Agreement and shall at such meeting exercise and discharge any
other powers or duties vested in them by the Trust Agreement.
B. SPECIAL MEETINGS
Special Meetings of [the] Shareholders may be called at any time by the
[President] Chairman, or by the Trustees, or by the Shareholders entitled to
cast at least forty percent (40%) of the votes at the particular meeting. Upon
written request of any person or persons who have duly called a Special
Meeting, the Secretary shall affix the date of the meeting to be held not more
than sixty (60) days after receipt of the request and give due notice to the
Shareholders entitled to vote thereat. If the Secretary shall neglect or refuse
to fix such date or give such notice, the person or persons calling the meeting
may do so.
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C. NOTICE OF MEETINGS
Written notice shall, unless otherwise provided, be given to the
Shareholders entitled to vote at the meeting, not less than [seven (7)] ten
(10) nor more than forty-five (45) days prior to the date of said meeting,
either personally or by sending a copy thereof through the mail, or by
telegram, charges prepaid, to the address of the Shareholder appearing on the
books of PREIT[, or supplied by the Shareholder to PREIT for the purpose of
notice]. In said notice, the Trustees may specify the date selected by them as
a record date for the determination of Shareholders entitled to notice of or to
vote at any such meeting; only such Shareholders as were Shareholders of record
on the date so fixed and are entitled to vote at such meeting shall be entitled
to notice of [or vote at] such meeting.
In addition, the Trustees shall in the case of Special Meetings notify all
Shareholders of the purpose or purposes of the meeting and the nature of the
business to be considered thereat, and such Special Meeting shall be limited to
the business specified in the notice. Any notice addressed to a Shareholder at
the address given on the books of PREIT and mailed to such address shall be
deemed properly addressed.
When a meeting of Shareholders is adjourned it shall not be necessary to
give any notice of the adjourned meeting or of the business to be transacted at
an adjourned meeting, other than by announcement at the meeting at which the
adjournment is taken, unless the Trustees fix a new record date for the
adjourned meeting.
D. RECORD DATE
The Trustees may fix in advance a date as the record date for the
determination of Shareholders entitled to notice of, or to vote at, any meeting
of Shareholders or Shareholders entitled to receive payment of any dividend or
distribution, or in order to make a determination of Shareholders for any other
purpose, such date in any case to be not more than sixty (60) days and, in case
of a meeting of Shareholders, not less than [seven (7)] ten (10) days, prior to
the date for which such determination of Shareholders is necessary or proper.
In the absence of
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such record date fixed by the Trustees, all Shareholders entitled to vote
thereat shall be entitled to notice, except transferees of shares transferred
on the books within thirty (30) days next preceding the date of the said
meeting. The Trustees shall not be required to set a new record date with
respect to an adjourned meeting of Shareholders.
E. QUORUM
The owners of [fifty (50%) percent of the issued and outstanding shares] a
majority of the Shares entitled to vote thereat or their proxies shall
constitute a quorum for the purpose of any meeting. At any meeting where a
quorum is present, a majority of the [shares] Shares present and voting shall
be required to adopt any resolution which is within the province of the
Shareholders unless a greater or different vote shall be required by this
Agreement or by the Board in its authorizing resolution. In the event that a
quorum is not present at the time designated for any Shareholders Meeting,
annual or special, the same shall be adjourned [from day to day] without any
further notice until a quorum shall be present.
F. VOTING RIGHTS AND ACTS OF SHAREHOLDERS
Unless otherwise provided in this Agreement, the certificate for the
relevant Shares or the resolutions of the Trustees with respect to certain
Shares, at all Shareholders Meetings, annual or special, each Shareholder shall
be entitled to one vote for each [share] Share standing in his name on the
books of PREIT.
Unless a greater or different vote shall be required by this Agreement or
by the Board in its authorizing resolution as to a particular matter or under
any agreement authorized by the Board pursuant to Paragraph 3.V, an act
authorized by the vote of the holders of a majority of [shares] Shares present
[and voting] in person or by proxy and casting a vote on the matter at a duly
organized meeting shall be the act of the Shareholders. For purposes of the
foregoing, abstentions and non-votes on a particular matter shall not be deemed
to be votes cast on the matter.
G. PROXIES
At all meetings of Shareholders, a Shareholder entitled to vote on a
particular matter may vote in person or may authorize another person or persons
to act for him by proxy. Every proxy shall be executed in writing by the
Shareholder, or by his duly authorized attorney in fact. Such proxies shall be
filed with the Secretary of PREIT before or at the time of the meeting. A
proxy, unless coupled with an interest, shall be revocable at will,
notwithstanding any other agreement or any provision in the proxy to the
contrary, but the revocation of the proxy shall not be effective until notice
thereof has been given to the Secretary of PREIT.
H. VOTING FOR TRUSTEES
Cumulative voting shall not be permitted. The candidates receiving the
highest number of votes shall be elected.
I. ADJOURNMENT
Any annual, regular or special meeting of Shareholders, including one at
which Trustees are to be elected, may be adjourned for such period as the
Shareholders present and entitled to vote shall direct.
12 [11]. LIMITED LIABILITY OF SHAREHOLDERS
A. The Trustees shall have no power to bind the Shareholders to personal
liability. All persons dealing with [the Trustees] PREIT, or with any agent of
PREIT and/or the Trustees, shall look only to the Trust Property for the
payment of any sums due as a result of such dealing[. In every instrument
executed by the Trustees and] and personal liability shall not attach to any
Shareholder for any act, omission or liability of a Trustee or PREIT.
B. An obligation of PREIT based upon a writing may be limited to a
specific fund or other identified pool or group of assets of PREIT.
It is the intention of this Trust Agreement to limit the liability of
Shareholders for the obligations of PREIT to the fullest extent permitted by
applicable law, as amended or supplemented.
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13. EXPRESS EXCULPATORY LANGUAGE IN INSTRUMENTS
Neither the Shareholders nor the Trustees, officers, employees or agents
of PREIT shall be liable under any written agreement or instrument creating an
obligation of [any kind, the Trustees shall stipulate that neither they nor the
Shareholders shall be held to any personal liability under such instrument, and
the obligee agrees to look only] PREIT, and all persons shall look solely to
the Trust Property for [repayment.] the payment of any claim under or for the
performance of that agreement or instrument. The omission of the exculpatory
language from any agreement or instrument shall not affect the validity or
enforceability of such agreement or instrument and shall not render any
Shareholder, Trustee, officer, employee or agent of PREIT liable thereunder to
any third party; nor shall the Trustees or any officer, employee or agent of
PREIT be liable to anyone for such omission.
[12.] 14. INDEMNITY; INSURANCE
A. RIGHT TO INDEMNIFICATION OF TRUSTEES AND OFFICERS
Every Trustee and [Officer] officer of PREIT shall be entitled as of right
to be indemnified by PREIT against reasonable expense and any liability paid or
incurred by such person in connection with an actual (whether pending or
completed) or threatened claim, action, suit or proceeding, civil, criminal,
administrative, investigative or other, whether brought by or in the right of
PREIT or otherwise, in which he or she may be involved, as a party or
otherwise, by reason of such person's being or having been a Trustee or
[Officer] officer of PREIT or by reason of the fact that such person is or was
serving in any capacity at the request of PREIT as a trustee, director,
officer, employee, agent, partner, fiduciary or other representative of another
real estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or other entity (such claim, action, suit or proceeding
hereinafter being referred to as "action"); provided, however, that no such
right of indemnification shall exist with respect to an action brought by a
Trustee or Officer against PREIT (other than a suit for indemnification as
provided in Paragraph B of this Paragraph [12)] 14). Such indemnification shall
include the right to have expenses incurred by such person in connection with
an action paid in advance by PREIT prior to final disposition of such action,
subject to such conditions as may be prescribed by law provided that the
payment of such expenses incurred by such person in advance of the final
disposition of the action shall be made only upon delivery to PREIT of an
undertaking by or on behalf of such person, to repay all amounts so advanced
without interest if it shall ultimately be determined that such person is not
entitled to be indemnified under this Paragraph [12A] 14.A or otherwise.
Persons who are not Trustees or [Officers] officers of PREIT may be [similarly]
indemnified in respect of service to PREIT or to another such entity at the
request of PREIT to the extent the Board of Trustees at any time denominates
such person as entitled to some or all of the benefits of this Paragraph as the
Trustees shall determine as to each such Person. As used herein, "expense"
shall include fees and expenses of counsel selected by such person; and
"liability" shall include amounts of expenses, liability, loss, judgments,
excise taxes, fines and penalties and amounts paid in settlement. No
indemnification pursuant to this Paragraph [12A] 14.A shall be made, however,
in any case where the act or failure to act giving rise to the claim for
indemnification is determined by [a court] the final judgment of a court of
competent jurisdiction to have constituted willful misconduct or recklessness.
B. RIGHT OF CLAIMANT TO BRING SUIT
If a claim under Paragraph [12A] 14.A is not paid in full by PREIT within
60 days after a written claim has been received by PREIT, the claimant may at
any time thereafter bring suit against PREIT to recover the unpaid amount of
the claim, and, if successful in whole or in part, the claimant shall also be
entitled to be paid the expense of prosecuting such claim. It shall be a
defense to any such action that the conduct of the claimant was such that under
law PREIT would be prohibited from indemnifying the claimant for the amount
claimed, but the burden of proving such defense shall be on PREIT. Neither the
failure of PREIT (including its Board of Trustees, independent legal counsel
and its Shareholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the circumstances
because the conduct of the claimant was not such that indemnification would be
prohibited by law, nor an actual determination by PREIT (including, its Board
of Trustees, independent legal counsel or its Shareholders) that the conduct of
the claimant was such that indemnification would be prohibited by law, shall be
a defense to the action or create a presumption that the conduct of the
claimant was such that indemnification would be prohibited by law.
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C. INSURANCE AND FUNDING FOR PAYMENT OF EXPENSES
PREIT may purchase and maintain insurance, at its expense, to protect
itself and any person eligible to be indemnified hereunder against any
liability or expense asserted or incurred by such person in connection with any
action, whether or not PREIT would have the power to indemnify such person
against such liability or expense by law or under the provisions of this
Paragraph [12] 14. PREIT may create a trust fund, grant a security interest,
cause a letter of credit to be issued or use other means (whether or not
similar to the foregoing), to insure the payment of such sums as may become
necessary to effect indemnification as provided in this Paragraph [12] 14.
D. NON-EXCLUSIVITY OF RIGHTS
The provisions of Paragraph 5 relating to the limitation of Trustees'
liability and the right to indemnification and to the advancement of expenses
provided in this Paragraph [12] 14 shall not be exclusive of any other rights
that any person may have or hereafter acquire under any statute, provision of
this Trust Agreement, By-Laws, other agreement, vote of Shareholders or
Trustees or otherwise.
E. EXTENT OF RIGHTS
The provisions of Paragraph 5 relating to the limitations of Trustees'
liability, and the provisions of this Paragraph [12] 14 relating to or
providing for indemnification and to the advancement of expenses (1) shall be
deemed to create contractual rights in favor of each of the Trustees, Officers
and other persons entitled to indemnification hereunder and may be modified as
to any Trustee, [Officer] officer or other person only with said Trustee's,
Officer's or other such person's written consent; (2) shall continue as to
persons who have ceased to have the status pursuant to which they were entitled
or were denominated as entitled to indemnification hereunder and shall enure to
the benefit of the heirs and legal representatives of persons entitled to
indemnification hereunder; and (3) shall be applicable to actions, suits or
proceedings commenced after the adoption hereof, whether arising from acts or
omissions occurring before or after the adoption hereof. The right of
indemnification provided for herein may not be amended, modified or repealed so
as to limit in any way the indemnification provided for herein with respect to
any acts or omissions occurring prior to the adoption of such amendment or
repeal.
[13.] 15. CONTROLLING LAW
This Trust Agreement has been executed in the Commonwealth of Pennsylvania
and shall be construed in accordance with the laws of that Commonwealth.
[14.] 16. TERM
The term of PREIT's existence shall be perpetual unless sooner terminated
by a vote of the Trustees as follows:
[PREIT's existence may be] PREIT may be dissolved, its affairs wound-up
and its existence terminated by the vote of two-thirds of the total number of
Trustees then in office, but in no event less than four (4). Upon [termination
of] PREIT's [existence] dissolution, the Trustees may wind up PREIT's business,
liquidate its assets, make adequate provision for payment of liabilities and
funding of contingencies and distribute the net proceeds among the Shareholders
in the same proportions that the Shareholders own Shares in PREIT at the time
for distribution, subject to preferences and rights among different classes or
series of Shares, if any; or convey the property of PREIT to, or in any way
merge, consolidate or combine with, one or more persons, entities, trusts or
corporations, for consideration consisting in whole or part of cash, shares of
stock or beneficial interest, or other property of any kind, and distribute the
net proceeds among the Shareholders ratably. The Trustees in office at the time
of such [termination] dissolution shall continue in office until the process of
dissolving, winding-up, terminating the business and the distribution to the
Shareholders is completed. [The] PREIT shall not dissolve and the term of
PREIT's existence shall not terminate for the reason that it fails to qualify,
or after qualification as such to continue to qualify, as a real estate
investment trust under the applicable tax laws.
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[15.] 17. AMENDMENT
This Agreement may be amended by the Trustees in any particular,
including, without limitation, such amendments as may be necessary or desirable
from time to time to implement the authority granted in the second paragraph of
Paragraph 8 hereof, provided, however, that no amendment shall be effected to
increase the liability of the Shareholders without the consent of the holders
of two-thirds of the outstanding [shares] Shares at a meeting called for that
purpose, and in no event may any amendment be adopted requiring additional
contributions from or assessments against the Shareholders. No amendment may be
considered at any meeting of the Trustees unless notice of the proposed
amendment is included in the call for the meeting. No such amendment may be
considered unless the total number of Trustees is five (5) or more, in which
event, the consent of two-thirds of the Trustees, but not [less] fewer than
four (4), shall be necessary to adopt any such amendment. The amendment shall
become effective when certified by the chairman of the meeting which voted it,
countersigned by the secretary. As soon as may be, after such adoption and
certification, a copy of the amendment shall be recorded in every public office
where this Agreement has been recorded, but no failure to record such amendment
shall affect its validity.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
the day and year first above written.
TRUSTEES:
[/s/ SYLVAN M. COHEN]
- ------------------------------------- -------------------------------------
Sylvan M. Cohen
- ------------------------------------- -------------------------------------
William R. Dimeling
[/s/ WILLIAM R. DIMELING] -------------------------------------
William R. Dimeling
[/s/ JACK FARBER]
- ------------------------------------- -------------------------------------
Jack Farber
[/s/ LEE H. JAVITCH] Lee H. Javitch
- ------------------------------------- -------------------------------------
Jeffrey P. Orleans
[/s/ SAMUEL J. KORMAN]
[Samuel J. Korman]
-------------------------------------
Robert Freedman
[/s/ JEFFREY P. ORLEANS]
Leonard I. Korman
[/s/ ROBERT G. ROGERS]
- -------------------------------------
Robert G. Rogers
- -------------------------------------
Jonathan B. Weller
C-19
<PAGE>
ACKNOWLEDGEMENT
COMMONWEALTH OF PENNSYLVANIA :
: ss.
COUNTY OF PHILADELPHIA :
On this, the [27th][____] day of [January, 1988][______,] 1997, before me,
the undersigned Officer, personally appeared SYLVAN M. COHEN, WILLIAM R.
DIMELING, JACK FARBER, LEE H. JAVITCH, [SAMUEL J] LEONARD I. KORMAN, JEFFREY P.
ORLEANS, [and] ROBERT G. ROGERS, ROBERT FREEDMAN and JONATHAN B. WELLER, known
to me (or satisfactorily proved) to be the persons whose names were subscribed
to the foregoing instrument and acknowledged that they executed the same for
the purposes therein contained.
IN WITNESS WHEREOF, I have hereunto signed my name and official seal.
NOTARY PUBLIC
[MADELEINE R. BENNETT]
----------------------------------------
My Commission Expires:
C-20
<PAGE>
[August 29, 1991] CERTIFICATION
The undersigned hereby certify the adoption of this Amended and Restated
Trust Agreement dated ------------ , 1997.
----------------------------------------
Sylvan M. Cohen, Chairman
----------------------------------------
Jeffrey A. Linn, Secretary
Dated:
C-21
<PAGE>
APPENDIX D
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
1990 INCENTIVE AND NONQUALIFIED
STOCK OPTION PLAN
(As Amended and Restated Effective July 1, 1997)
D-1
<PAGE>
Table of Contents
Page
-----
1. Purpose .................................... 3
2. Administration .............................. 3
3. Eligibility ................................. 4
4. Stock ....................................... 4
5. Granting of Options ........................ 4
6. Annual Limit ................................. 4
7. Terms and Conditions of Options ............ 4
8. Forfeiture ................................. 8
9. Option Agreements -- Other Provisions ...... 8
10. Capital Adjustments ........................ 8
11. Certain Corporate Transactions ............... 8
12. Exercise Upon Change in Control ............ 9
13. Amendment or Termination of the Plan ......... 9
14. Rights ....................................... 10
15. Indemnification of Board and Committee ...... 10
16. Application of Funds ........................ 10
17. Shareholder Approval ........................ 10
18. No Obligation to Exercise Option ............ 10
19. Termination of Plan ........................ 10
20. Governing Law .............................. 11
D-2
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
1990 INCENTIVE AND NONQUALIFIED
STOCK OPTION PLAN
(As Amended and Restated Effective July 1, 1997)
WHEREAS, the Pennsylvania Real Estate Investment Trust (the "Trust")
adopted the 1990 Incentive and Nonqualified Stock Option Plan (the "Plan"),
effective as of September 17, 1990, and has amended the Plan on one occasion
thereafter;
WHEREAS, Section 9 of the Plan provides that, subject to certain
inapplicable limitations, the Plan may be amended;
WHEREAS, the Trust wishes to amend and restate the Plan (i) to reflect
recent changes made to rules promulgated under Section 16(b) of the Securities
Exchange Act of 1934, (ii) to reflect changes made to the Internal Revenue Code
of 1986, as amended (particularly, the addition of Section 162(m) to the Code),
(iii) to provide Key Employees with additional methods of exercising stock
options to be granted in the future; and (iv) to make certain other technical
changes.
NOW THEREFORE, effective as of July 1, 1997, the Plan shall be amended and
restated as follows:
1. Purpose. This Pennsylvania Real Estate Investment Trust 1990 Incentive
and Nonqualified Stock Option Plan (the "Plan") is intended to provide a means
whereby the Trust may, through the grant of incentive stock options and
nonqualified stock options (collectively, the "Options") to purchase common
shares of the Trust ("Common Stock") to officers and other key employees of the
Trust ("Key Employees"), attract and retain such Key Employees and motivate
them to exercise their best efforts on behalf of the Trust and of any Related
Corporation. For purposes of the Plan, a "Related Corporation" shall mean
either a "subsidiary corporation" of the Trust, as defined in Section 424(f) of
the Internal Revenue Code of 1986, as amended (the "Code"), or the "parent
corporation" of the Trust, as defined in Section 424(e) of the Code.
As used in the Plan, (i) the term "ISO" shall mean an option which, at the
time such option is granted, qualifies as an incentive stock option within the
meaning of Section 422 of the Code and is designated as an ISO in the "Option
Agreement" (as defined in Section 9 hereof); and (ii) the term "NQSO" shall
mean an option which, at the time such option is granted, does not qualify as
an ISO, and is designated as a nonqualified stock option in the Option
Agreement.
2. Administration
(a) The Plan shall be administered by the Trust's Executive Compensation
and Human Resources Committee (the "Committee"), which shall consist
solely of not fewer than two non-employee trustees (directors) of the
Trust (within the meaning of Rule 16b-3(b)(3) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any successor
thereto) who are also outside trustees (directors) (within the meaning of
Treas. Reg. Section 1.162-27(e)(3), or any successor thereto) of the Trust,
and who shall be appointed by, and shall serve at the pleasure of, the
Trust's Board of Trustees (the "Board"). Each member of the Committee,
while serving as such, shall be deemed to be acting in his capacity as a
trustee of the Trust.
(b) The Committee shall have full authority, subject to the terms of the
Plan, to select the Key Employees to be granted Options under the Plan, to
grant Options on behalf of the Trust, and to set the date of grant and the
other terms of such Options. The Committee may correct any defect, supply
any omission, and reconcile any inconsistency in the Plan and in any
Option granted hereunder in the manner and to the extent it deems
desirable. The Committee may also, in its discretion but with the written
consent of the Key Employee, revise previously granted Options (including
extending the exercise date of any outstanding Option held by a Key
Employee with at least 15 years of service who is retiring from the
Trust), adjust the price of an Option, or cancel an Option and grant a new
Option to replace the cancelled Option. The Committee also shall have the
authority to establish such rules and regulations, not inconsistent with
the provisions of the Plan, for the proper administration of the Plan, to
amend, modify, or rescind any such rules and
D-3
<PAGE>
regulations, and to make such determinations and interpretations under, or
in connection with, the Plan, as it deems necessary or advisable. All such
rules, regulations, determinations, and interpretations shall be binding
and conclusive upon the Trust, its shareholders, and all Key Employees,
upon their respective legal representatives, beneficiary, successors, and
assigns, and upon all other persons claiming under or through any of them.
No member of the Board or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any Option
granted under it.
3. Eligibility. The class of employees who shall be eligible to receive
Options under the Plan shall be the Key Employees (including any trustees who
also are officers or key employees) of the Trust. More than one Option may be
granted to a Key Employee under the Plan. A Key Employee who has been granted
an Option under the Plan shall hereinafter be referred to as an "Optionee."
4. Stock. Options may be granted under the Plan to purchase up to a
maximum of 400,000 shares of Common Stock, par value $1.00 per share; provided,
however, that no Key Employee shall receive Options for more than 50,000 shares
of the Trust's Common Stock in any single calendar year. However, both limits
in the preceding sentence shall be subject to adjustment as hereinafter
provided. Shares issuable under the Plan may be authorized but unissued shares
or reacquired shares, and the Trust may purchase shares required for this
purpose, from time to time, if it deems such purchase to be advisable.
If any Option granted under the Plan expires or otherwise terminates for
any reason whatsoever (including, without limitation, the Optionee's surrender
thereof) without having been exercised, the shares subject to the unexercised
portion of the Option shall continue to be available for the granting of
Options under the Plan as fully as if the shares had never been subject to an
Option. However, (i) if an Option is cancelled, the shares of Common Stock
covered by the cancelled Option shall be counted against the maximum number of
shares specified above for which Options may be granted to a single Key
Employee, and (ii) if the exercise price of an Option is reduced after the date
of grant, the transaction shall be treated as a cancellation of the original
Option and the grant of a new Option for purposes of such maximum.
5. Granting of Options. From time to time until the expiration or earlier
suspension or discontinuance of the Plan, the Committee may, on behalf of the
Trust, grant to Key Employees under the Plan such Options as it determines are
warranted; provided, however, that grants of ISOs and NQSOs shall be separate
and not in tandem. In making any determination as to whether a Key Employee
shall be granted an Option, the type of Option to be granted, the number of
shares to be covered by the Option, and other terms of the Option, the
Committee shall take into account the duties of the Key Employee, his present
and potential contributions to the success of the Trust, the tax implications
to the Trust and the Key Employee of any Option granted, and such other factors
as the Committee shall deem relevant in accomplishing the purposes of the Plan.
Moreover, the Committee may provide in the Option that said Option may be
exercised only if certain conditions, as determined by the Committee, are
fulfilled.
6. Annual Limit
(a) ISOs. The aggregate fair market value (determined under Section 7(b)
hereof as of the date the ISO is granted) of the Common Stock with respect
to which ISOs are exercisable for the first time by a Key Employee during
any calendar year (counting ISOs under this Plan and incentive stock
options under any other stock option plan of the Trust or a Related
Corporation) shall not exceed $100,000. If an Option intended as an ISO is
granted to a Key Employee and the Option may not be treated in whole or in
part as an ISO pursuant to the $100,000 limitation, the Option shall be
treated as an ISO to the extent it may be so treated under the limitation
and as an NQSO as to the remainder. For purposes of determining whether an
ISO would cause the limitation to be exceeded, ISOs shall be taken into
account in the order granted.
(b) NQSOs. The annual limits set forth above for ISOs shall not apply to
NQSOs.
7. Terms and Conditions of Options. Options granted pursuant to the Plan
shall include expressly or by reference the following terms and conditions, as
well as such other provisions not inconsistent with the provisions of the Plan
(and, for ISOs granted under the Plan, the provisions of Section 422(b) of the
Code), as the Committee shall deem desirable --
D-4
<PAGE>
(a) Number of Shares. The Option shall state the number of shares of
Common Stock to which the Option pertains.
(b) Price. The Option shall state the Option price which shall be
determined and fixed by the Committee in its discretion but, in the case
of an ISO, shall not be less than the higher of 100 percent (110 percent
in the case of a more-than-10-percent shareholder, as provided in
subsection (j) below) of the fair market value of the optioned shares of
Common Stock on the date the ISO is granted, or the par value thereof,
and, in the case of an NQSO, shall not be less than the higher of 100
percent of the fair market value of the optioned shares of Common Stock on
the date the NQSO is granted, or the par value thereof.
The fair market value of a share of Common Stock shall be arrived at by
a good faith determination of the Committee and shall be --
(i) if there are sales of Common Stock on a registered securities
exchange or in an over-the-counter market on the date of grant, then the
mean between the highest and lowest quoted selling price on the date of
grant; or
(ii) if there are no such sales of Common Stock on the date of grant
but there are such sales on dates within a reasonable period both
before and after the date of grant, then the weighted average of the
means between the highest and lowest selling price on the nearest date
before and the nearest date after the date of grant; or
(iii) if actual sales are not available during a reasonable period
beginning before and ending after the date of grant, then the mean
between the bid and asked price on the date of grant as reported by the
National Quotation Bureau; or
(iv) if (i) through (iii) are not applicable, such other method of
determining fair market value as shall be authorized by the Code, or
the rules or regulations thereunder, and adopted by the Committee.
Where the fair market value of the optioned shares of Common Stock is
determined under (ii) above, the average of the means between the highest and
lowest sales on the nearest date before and the nearest date after the date of
grant shall be weighted inversely by the respective numbers of trading days
between the selling dates and the date of grant (i.e, the valuation date), in
accordance with Treas. Reg. Section 20.2031-2(b)(1), or any successor thereto.
(c) Term
(1) ISOs. Subject to earlier termination as provided in subsections
(e), (f), and (g) below and in Section 9 hereof, the term of each ISO
shall be not more than 10 years (five years in the case of a
more-than-10-percent shareholder, as discussed in subsection (j) below)
from the date of grant.
(2) NQSOs. Subject to earlier termination as provided in subsections
(e), (f), and (g) below and in Section 9 hereof, the term of each NQSO
shall be not more than 10 years from the date of grant.
(d) Exercise. Options shall be exercisable in such installments and on
such dates as the Committee may specify; provided that (i) in the case of
new Options granted to an Optionee to replace options (whether granted
under the Plan or otherwise) held by the Optionee or in the case of
Options repriced by the Committee, the new or repriced Options may be made
exercisable, if so determined by the Committee, in its discretion, at the
earliest date the original Options were exercisable, but not earlier than
three months from the date of grant of the new Options or the repricing of
the original Options; and (ii) the Committee may accelerate the exercise
date and/or extend the exercise period of any outstanding Options, in its
discretion, if it deems such acceleration or extension to be desirable.
Any exercisable Options may be exercised at any time up to the
expiration or termination of the Option. Exercisable Options may be
exercised, in whole or in part and from time to time, by giving written
notice of exercise to the Trust at its principal office, specifying the
number of shares to be purchased and accompanied by payment in full of the
aggregate Option exercise price for such shares. Only full shares shall be
issued under the Plan, and any fractional share which might otherwise be
issuable upon exercise of an Option granted hereunder shall be forfeited.
D-5
<PAGE>
The Option price shall be payable in the case of an ISO, if the
Committee in its discretion causes the Option Agreement so to provide, and
in the case of an NQSO, if the Committee in its discretion so determines at
or prior to the time of exercise --
(1) in cash or its equivalent;
(2) in shares of Common Stock previously acquired by the Optionee;
provided that (i) if such shares of Common Stock were acquired through
the exercise of an ISO and are used to pay the Option price for ISOs,
such shares have been held by the Optionee for a period of not less
than the holding period described in Section 422(a)(1) of the Code on
the date of exercise, or (ii) if such shares of Common Stock were
acquired through the exercise of an NQSO and are used to pay the Option
price of an ISO, or if such shares of Common Stock were acquired
through the exercise of an ISO or an NQSO and are used to pay the
Option price of an NQSO, such shares have been held by the Optionee for
a period of more than one year on the date of exercise;
(3) by delivering a properly executed notice of exercise of the
Option to the Trust and a broker, with irrevocable instructions to the
broker promptly to deliver to the Trust the amount of sale or loan
proceeds necessary to pay the exercise price of the Option;
(4) if the Optionee is designated as an "eligible participant" by the
Committee at the date of grant in the case of an ISO, or at or after
the date of grant in the case of an NQSO, and if the Optionee
thereafter so requests, (i) the Trust will loan the Optionee the money
required to pay the exercise price of the Option; (ii) any such loan to
an Optionee shall be made only at the time the Option is exercised; and
(iii) the loan will be made on the Optionee's personal, negotiable,
demand promissory note, bearing interest at the lowest rate which will
avoid imputation of interest under Section 7872 of the Code, and
including such other terms as the Committee may prescribe; or
(5) in any combination of paragraphs (1), (2), (3), and (4) above.
In the event the Option price is paid, in whole or in part, with shares of
Common Stock, the portion of the Option price so paid shall be equal to the
aggregate fair market value (determined under subsection (b) above, but as of
the date of exercise of the Option, rather than the date of grant) of the
Common Stock so surrendered in payment of the Option price.
(e) Termination of Employment. If an Optionee's employment by the Trust is
terminated by either party prior to the expiration date fixed for his Option
for any reason other than retirement, death, disability, change in control,
cause, or employment with a competitor, such Option may be exercised, to the
extent of the number of shares with respect to which the Optionee could have
exercised it on the date of such termination, or to any greater extent
permitted by the Committee, by the Optionee at any time prior to the earlier of
(i) the expiration date specified in such Option, or (ii) an accelerated
expiration date determined by the Committee, in its discretion, and set forth
in the Option Agreement; except that, subject to Section 9 hereof, such
accelerated expiration date shall not be earlier than the date of the
Optionee's termination of employment, and in the case of ISOs, such accelerated
expiration date shall not be later than three months after such termination of
employment.
(f) Retirement or Disability. If an Optionee attains the age which the
Trust may from time to time establish as the retirement age for any class of
its employees or becomes disabled (within the meaning of Section 22(e)(3) of
the Code) during his employment and, prior to the expiration date fixed for his
Option, his employment is terminated as a consequence of such retirement or
disability, such Option may be exercised, to the extent of the number of shares
with respect to which the Optionee could have exercised it on the date of such
termination, or to any greater extent permitted by the Committee, by the
Optionee at any time prior to the earlier of (i) the expiration date specified
in such Option, or (ii) an accelerated termination date determined by the
Committee, in its discretion, and set forth in the Option Agreement; except
that, subject to Section 9 hereof, such accelerated termination date shall not
be earlier than the date of the Optionee's termination of employment by reason
of retirement or disability, and in the case of ISOs, such accelerated
termination date shall not be later than three months after such termination of
employment. In the event of the Optionee's legal disability, such Option may be
exercised by the Optionee's legal representative.
D-6
<PAGE>
(g) Death. If an Optionee dies during his employment, and prior to the
expiration date fixed for his Option, or if an Optionee whose employment is
terminated for any reason, dies following his termination of employment but
prior to the earliest of (i) the expiration date fixed for his Option, (ii) the
expiration of the period determined under subsections (e) and (f) above, or
(iii) in the case of an ISO, three months following termination of employment,
such Option may be exercised, to the extent of the number of shares with
respect to which the Optionee could have exercised it on the date of his death,
or to any greater extent permitted by the Committee, by the Optionee's estate,
personal representative, or beneficiary who acquired the right to exercise such
Option by bequest or inheritance or by reason of the death of the Optionee.
Such post-death exercise may occur at any time prior to the earlier of (i) the
expiration date specified in such Option or (ii) an accelerated termination
date determined by the Committee, in its discretion, and set forth in the
Option Agreement; except that, subject to Section 9 hereof, such accelerated
termination date shall not be earlier than one year, nor later than three
years, after the date of death.
(h) Non-Transferability; Registration. No ISO and (except as otherwise
provided in any Option Agreement) no NQSO shall be assignable or transferable
by the Optionee other than by will or by the laws of descent and distribution,
and (subject to the preceding clause) during the lifetime of the Optionee,
shall be exercisable only by him or by his guardian or legal representative. If
the Optionee is married at the time of exercise and if the Optionee so requests
at the time of exercise, the certificate or certificates shall be registered in
the name of the Optionee and the Optionee's spouse, jointly, with right of
survivorship.
(i) Rights as a Shareholder. An Optionee shall have no rights as a
shareholder with respect to any shares covered by his Option until the issuance
of a stock certificate to him for such shares.
(j) Ten Percent Shareholder. If the Optionee owns more than 10 percent of
the total combined voting power of all shares of stock of the Trust at the time
an ISO is granted to him, the Option price for the ISO shall be not less than
110 percent of the fair market value (as determined under subsection (b) above)
of the optioned shares of Common Stock on the date the ISO is granted, and such
ISO, by its terms, shall not be exercisable after the expiration of five years
from the date the ISO is granted. The conditions set forth in this subsection
shall not apply to NQSOs.
(k) Listing and Registration of Shares. Each Option shall be subject to
the requirement that, if at any time the Committee shall determine, in its
discretion, that the listing, registration, or qualification of the shares of
Common Stock covered thereby upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting
of such Option or the purchase of shares of Common Stock thereunder, or that
action by the Trust or by the Optionee should be taken in order to obtain an
exemption from any such requirement, no such Option may be exercised, in whole
or in part, unless and until such listing, registration, qualification,
consent, approval, or action shall have been effected, obtained, or taken under
conditions acceptable to the Committee. Without limiting the generality of the
foregoing, each Optionee or his legal representative or beneficiary may also be
required to give satisfactory assurance that shares purchased upon exercise of
an Option are being purchased for investment and not with a view to
distribution, and certificates representing such shares may be legended
accordingly.
(l) Withholding and Use of Shares to Satisfy Tax Obligations. The
obligation of the Trust to deliver shares of Common Stock upon the exercise of
any Option (or cash in lieu thereof) shall be subject to applicable federal,
state, and local tax withholding requirements.
If the exercise of any Option is subject to the withholding requirements
of applicable federal tax law, the Committee, in its discretion, may permit or
require the Optionee to satisfy the federal withholding tax, in whole or in
part, by electing to have the Trust withhold shares of Common Stock subject to
the exercise (or by returning previously acquired shares of Common Stock to the
Trust). The Trust may not withhold shares in excess of the number necessary to
satisfy the minimum federal income tax withholding requirements. Shares of
Common Stock shall be valued, for purposes of this subsection, at their fair
market value under subsection (b) above, but as of the date the amount
attributable to the exercise of the Option is includable in income by the
Optionee under Section 83 of the Code (the "Determination Date"). If shares of
Common Stock acquired by the exercise of an ISO are used to satisfy the
withholding requirement described above, such shares of Common Stock must have
been held by the Optionee for a period of not less than the holding period
described in Section 422(a)(1) of the Code as of the Determination Date.
D-7
<PAGE>
The Committee shall adopt such withholding rules as it deems necessary to
carry out the provisions of this subsection.
(m) Loans. If an Optionee is designated as an "eligible participant" by
the Committee at the date of grant in the case of an ISO, or at or after the
date of grant in the case of an NQSO, and if the Optionee thereafter so
requests, the Trust will loan the Optionee the money required to satisfy any
regular income tax obligations (as opposed to alternative minimum tax
obligations) resulting from the exercise of any Options. Any loan or loans to
an Optionee shall be made only at the time any such tax resulting from such
exercise is due. The Committee, in its discretion, may require an affidavit
from the Optionee specifying the amount of the tax required to be paid and the
date when such tax must be paid. The loan will be made on the Optionee's
personal, negotiable, demand promissory note, bearing interest at the lowest
rate which will avoid imputation of interest under Section 7872 of the Code,
and including such other terms as the Committee may prescribe.
8. Forfeiture. If the employment of an Optionee is terminated for "Cause"
(as defined below) or the Optionee terminates his employment and commences
working for a "Competitor" (as defined below), his right under any then
outstanding Option shall terminate at the time of such termination of
employment. As used in this Section, in the case of any Optionee not subject to
a written employment agreement, "Cause" shall mean any willful or intentional
act having the effect of injuring the reputation, business, or business
relationships of the Trust, or any repeated or continuous failure, neglect, or
refusal to perform in a satisfactory manner duties assigned to such Optionee.
In the case of an Optionee subject to a written employment agreement, "Cause"
shall mean any action giving the Trust the right to terminate such person's
employment agreement for Cause. "Competitor" shall mean any person or entity
other than the Trust engaged in a business competitive (in the good faith
judgment of the Committee) with that of the Trust.
9. Option Agreements -- Other Provisions. Options granted under the Plan
shall be evidenced by written documents ("Option Agreements") in such form as
the Committee shall from time to time approve, and containing such provisions
not inconsistent with the provisions of the Plan (and, for ISOs granted
pursuant to the Plan, not inconsistent with Section 422(b) of the Code), as the
Committee shall deem advisable. The Option Agreements shall specify whether the
Option is an ISO or NQSO. Each Optionee shall enter into, and be bound by, an
Option Agreement as soon as practicable after the grant of an Option.
10. Capital Adjustments. The number of shares which may be issued under
the Plan, and the maximum number of shares with respect to which Options may be
granted to any Key Employee under the Plan, both as stated in Section 4 hereof,
and the number of shares issuable upon exercise of outstanding Options under
the Plan (as well as the Option price per share under such outstanding Options)
shall, subject to the provisions of Section 424(a) of the Code, be adjusted, as
may be deemed appropriate by the Committee, to reflect any stock dividend,
stock split, share combination, or similar change in the capitalization of the
Trust. In the event any such change in capitalization cannot be reflected in a
straight mathematical adjustment of the number of shares issuable upon the
exercise of outstanding Options (and a straight mathematical adjustment of the
exercise price thereof), the Committee shall make such adjustments as are
appropriate to reflect most nearly such straight mathematical adjustment. Such
adjustments shall be made only as necessary to maintain the proportionate
interest of Optionees, and preserve, without exceeding, the value of Options.
11. Certain Corporate Transactions. In the event of a corporate
transaction (as that term is described in Section 424(a) of the Code and the
Treasury Regulations issued thereunder as, for example, a merger,
consolidation, acquisition of property or stock, separation, reorganization, or
liquidation), each outstanding Option shall be assumed by the surviving or
successor corporation; provided, however, that, in the event of a proposed
corporate transaction, the Committee may terminate all or a portion of the
outstanding Options if it determines that such termination is in the best
interests of the Trust. If the Committee decides to terminate outstanding
Options, the Committee shall give each Key Employee holding an Option to be
terminated not fewer than seven days' notice prior to any such termination, and
any Option which is to be so terminated may be exercised (if and only to the
extent that it is then exercisable) up to, and including the date immediately
preceding such termination. Further, as provided in Section 7(d) hereof, the
Committee, in its discretion, may accelerate, in whole or in part, the date on
which any or all Options become exercisable.
The Committee also may, in its discretion, change the terms of any
outstanding Option to reflect any such corporate transaction, provided that, in
the case of ISOs, such change would not constitute a "modification" under
Section 424(h) of the Code, unless the Optionee consents to the change.
D-8
<PAGE>
12. Exercise Upon Change in Control
(a) Notwithstanding any other provision of this Plan, all outstanding
Options shall become fully vested and exercisable upon a Change in
Control.
(b) "Change in Control" shall mean:
(1) The acquisition by an individual, entity, or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 30 percent or more of the
combined voting power of the then outstanding voting securities of the
Trust entitled to vote generally in the election of trustees (the
"Outstanding Shares"); provided, however, that the following
acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Trust, (ii) any acquisition by the Trust,
(iii) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Trust or any corporation controlled by
the Trust, (iv) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of
paragraph (3) below, or (v) any acquisition by any Person entitled to
file Form 13G under the Exchange Act with respect to such acquisition;
or
(2) individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming
a trustee subsequent to the date hereof whose appointment, election, or
nomination for election by the Trust's shareholder, was approved by a
vote of at least a majority of the trustees then comprising the
Incumbent Board (other than an appointment, election, or nomination of
an individual whose initial assumption of office is in connection with
an actual or threatened election contest relating to the election of
the trustees of the Trust, as such terms are used in Rule 14a-1
promulgated under the Exchange Act) shall be, for purposes of the Plan,
considered as though such person were a Member of the Incumbent Board;
or
(3) approval by the shareholders of the Trust of a reorganization,
merger or consolidation, or sale or other disposition of all or
substantially all of the assets of the Trust (a "Business
Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Shares
immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 60 percent of, respectively, the then
outstanding shares of stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of trustees, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Trust or all
or substantially all of the Trust's assets either directly or through
one or more subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Business Combination of the
Outstanding Shares, (ii) no Person (excluding any employee benefit plan
(or related trust) of the Trust or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 30
percent or more of, respectively, the then outstanding shares of stock
of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to
the Business Combination, and (iii) at least a majority of the members
of the board of trustees or directors of the entity resulting from such
Business Combination were members of the Incumbent Board at the time of
the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(4) approval by the shareholders of the Trust of a complete
liquidation or dissolution of the Trust.
13. Amendment or Termination of the Plan
(a) In General. The Board, pursuant to a written resolution, from time
to time may suspend or terminate the Plan or amend it, and the Committee
may amend any outstanding Options in any respect whatsoever; except that,
without the approval of the shareholders (given in the manner set forth in
subsection (b) below) --
(1) any amendment which would --
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<PAGE>
(A) change the class of employees eligible to participate in the
Plan with respect to ISOs;
(B) except as permitted under Section 9 hereof, increase the
maximum number of shares of Common Stock with respect to which ISOs may
be granted under the Plan; or
(C) extend the duration of the Plan under Section 19 hereof with
respect to any ISOs granted hereunder.
(2) No amendment requiring shareholder approval pursuant to Treas.
Reg. Section 1.162-27(e)(4)(vi) or any successor thereto may be made.
Notwithstanding the foregoing, no such suspension, discontinuance, or amendment
shall materially impair the rights of any holder of an outstanding Option
without the consent of such holder.
(b) Manner of Shareholder Approval. The approval of shareholders must be
effected by a majority of the votes cast (including abstentions, to the
extent abstentions are counted as voting under applicable state law), in a
separate vote at a duly held shareholders' meeting at which a quorum
representing a majority of all outstanding voting stock is, either in
person or by proxy, present and voting on the Plan.
14. Rights. Neither the adoption of the Plan nor any action of the Board
or the Committee shall be deemed to give any individual any right to be granted
an Option, or any other right hereunder, unless and until the Committee shall
have granted such individual an Option, and then his rights shall be only such
as are provided by the Option Agreement. Notwithstanding any provisions of the
Plan or the Option Agreement with a Key Employee, the Trust shall have the
right, in its discretion but subject to any employment contract entered into
with the Key Employee, to retire the Key Employee at any time pursuant to its
retirement rules or otherwise to terminate his employment at any time for any
reason whatsoever.
15. Indemnification of Board and Committee. Without limiting any other
rights of indemnification which they may have from the Trust, any Related
Corporation, or TRO, the members of the Board and the members of the Committee
shall be indemnified by the Trust against all costs and expenses reasonably
incurred by them in connection with any claim, action, suit, or proceeding to
which they or any of them may be a party by reason of any action taken or
failure to act under, or in connection with, the Plan, or any Option granted
thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by legal counsel selected by the Trust)
or paid by them in satisfaction of a judgment in any such action, suit, or
proceeding, except a judgment based upon a finding of willful misconduct or
recklessness on their part. Upon the making or institution of any such claim,
action, suit, or proceeding, the Board or Committee member shall notify the
Trust in writing, giving the Trust an opportunity, at its own expense, to
handle and defend the same before such Board or Committee member undertakes to
handle it on his own behalf. The provisions of this Section shall not give
members of the Board or the Committee greater rights than they would have under
the Trust's by-laws or Pennsylvania law.
16. Application of Funds. The proceeds received by the Trust from the sale
of Common Stock pursuant to Options granted under the Plan shall be used for
general corporate purposes. Any cash received in payment for shares upon
exercise of an Option shall be added to the general funds of the Trust and
shall be used for its corporate purposes. Any Common Stock received in payment
for shares upon exercise of an Option shall become treasury stock.
17. Shareholder Approval. This Plan was effective on September 17, 1990
(the date the Plan was adopted by the Board). The amendment and restatement of
the Plan shall become effective on July 1, 1997; provided, however, that if the
Plan is not approved by the shareholders, in the manner described in Section
13(b) hereof, within 12 months before or after the date the amended and
restated Plan is adopted by the Board, all Options granted on and after July 1,
1997 hereunder shall be null and void and no additional Options shall be
granted hereunder.
18. No Obligation to Exercise Option. The granting of an Option shall
impose no obligation upon a Key Employee to exercise such Option.
19. Termination of Plan. Unless earlier terminated as provided in the
Plan, the Plan and all authority granted hereunder shall terminate absolutely
at 12:00 midnight on September 16, 2000, which date is within 10
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years after the date the Plan was adopted by the Board, and no Options
hereunder shall be granted thereafter. Nothing contained in this Section,
however, shall terminate or affect the continued existence of rights created
under Options issued hereunder, and outstanding on the date set forth in the
preceding sentence, which by their terms extend beyond such date.
20. Governing Law. The Plan shall be governed by the applicable Code
provisions to the maximum extent possible. Otherwise, the laws of the
Commonwealth of Pennsylvania shall govern the operation of, and the rights of
Key Employees under, the Plan, and Options granted hereunder.
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APPENDIX E
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
1997 STOCK OPTION PLAN
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Table of Contents
Page
-----
1. Purpose .................................... E-3
2. Administration .............................. E-3
3. Eligibility ................................. E-3
4. Stock ....................................... E-4
5. Granting of Awards ........................... E-4
6. Annual Limit ................................. E-4
7. Terms and Conditions of Options ............ E-4
8. Forfeiture ................................. E-8
9. Capital Adjustments ........................ E-8
10. Certain Corporate Transactions ............... E-8
11. Exercise Upon Change in Control ............ E-8
12. Amendment or Termination of the Plan ......... E-9
13. Rights ....................................... E-9
14. Indemnification of Board and Committee ...... E-10
15. Application of Funds ........................ E-10
16. Shareholder Approval ........................ E-10
17. No Obligation Regarding Awards ............... E-10
18. Termination of Plan ........................ E-10
19. Governing Law .............................. E-10
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<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
1997 STOCK OPTION PLAN
WHEREAS, the Pennsylvania Real Estate Investment Trust (the "Trust")
desires to award incentive and nonqualified stock options to certain of the
officers and other key employees of the Trust and of The Rubin Organization,
Inc. ("TRO");
NOW, THEREFORE, the Pennsylvania Real Estate Investment Trust 1997 Stock
Option Plan (the "Plan") is hereby adopted under the following terms and
conditions:
1. Purpose. The Plan is intended to provide a means whereby the Trust may
grant incentive stock options and nonqualified stock options (collectively, the
"Options"), to purchase common shares of the Trust ("Common Stock"), to
officers and other key employees of the Trust and of TRO ("Key Employees"), a
corporation the majority of the equity (but not the voting power) of which is
indirectly owned by the Trust. Thereby, the Trust expects to attract and retain
such Key Employees and motivate them to exercise their best efforts on behalf
of the Trust, any Related Corporation, and TRO. For purposes of the Plan, a
"Related Corporation" shall mean either a "subsidiary corporation" of the
Trust, as defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code"), or the "parent corporation" of the Trust, as defined in
Section 424(e) of the Code. The term "Related Corporation" shall not include
TRO.
As used in the Plan, (i) the term "ISO" shall mean an option which, at the
time such option is granted, qualifies as an incentive stock option within the
meaning of Section 422 of the Code and is designated as an ISO in the "Option
Agreement" (as defined in Section 7(n) hereof); and (ii) the term "NQSO" shall
mean an option which, at the time such option is granted, does not qualify as
an ISO, and is designated as a nonqualified stock option in the Option
Agreement.
2. Administration
(a) The Plan shall be administered by the Trust's Executive Compensation
and Human Resources Committee (the "Committee"), which shall consist solely of
not fewer than two non-employee trustees (directors) of the Trust (within the
meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any successor thereto) who are also outside
trustees (directors) (within the meaning of Treas. Reg. Section 1.162-27(e)(3),
or any successor thereto) of the Trust, and who shall be appointed by, and
shall serve at the pleasure of, the Trust's Board of Trustees (the "Board").
Each member of the Committee, while serving as such, shall be deemed to be
acting in his capacity as a director of the Trust.
(b) The Committee shall have full authority, subject to the terms of the
Plan, to select the Key Employees to be granted Options (also referred to as
"Awards") under the Plan, to grant Awards on behalf of the Trust, and to set
the date of grant and the other terms of such Awards. The Committee may correct
any defect, supply any omission, and reconcile any inconsistency in the Plan
and in any Award granted hereunder in the manner and to the extent it deems
desirable. The Committee may also, in its discretion but with the written
consent of the Key Employee, revise previously granted Options, adjust the
price of an Option, or cancel an Option and grant a new Option to replace the
cancelled Option. The Committee also shall have the authority to establish such
rules and regulations, not inconsistent with the provisions of the Plan, for
the proper administration of the Plan, to amend, modify, or rescind any such
rules and regulations, and to make such determinations and interpretations
under, or in connection with, the Plan, as it deems necessary or advisable. All
such rules, regulations, determinations, and interpretations shall be binding
and conclusive upon the Trust and TRO, their shareholders, and all Key
Employees, upon their respective legal representatives, beneficiaries,
successors, and assigns, and upon all other persons claiming under or through
any of them.
No member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Option granted
under it.
3. Eligibility. The class of employees who shall be eligible to receive
Awards under the Plan shall be the Key Employees (including any trustees who
also are officers or key employees). More than one Award may be granted to a
Key Employee under the Plan. A Key Employee who has been granted an Option
under the Plan shall be referred to as an "Optionee."
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4. Stock. Options may be granted under the Plan to purchase up to 560,000
shares of Common Stock, par value $1.00 per share. However, no Key Employee
shall receive Options for more than 250,000 shares of the Trust's Common Stock
in any single calendar year, subject to adjustment as hereinafter provided.
Shares issuable under the Plan may be authorized but unissued shares or
reacquired shares, and the Trust may purchase shares required for this purpose,
from time to time, if it deems such purchase to be advisable.
If any Option granted under the Plan expires or otherwise terminates for
any reason whatsoever (including, without limitation, the Optionee's surrender
thereof) without having been exercised, the shares subject to the unexercised
portion of the Option shall continue to be available for the granting of
Options under the Plan as fully as if the shares had never been subject to an
Option. However, (i) if an Option is cancelled, the shares of Common Stock
covered by the cancelled Option shall be counted against the maximum number of
shares specified above for which Options may be granted to a single Key
Employee, and (ii) if the exercise price of an Option is reduced after the date
of grant, the transaction shall be treated as a cancellation of the original
Option and the grant of a new Option for purposes of such maximum.
5. Granting of Awards. From time to time until the expiration or earlier
suspension or discontinuance of the Plan, the Committee may, on behalf of the
Trust, grant to Key Employees under the Plan such Awards as it determines are
warranted; provided, however, that (i) ISOs shall not be granted to Key
Employees who are not employed by the Trust or a Related Corporation, and (ii)
grants of ISOs and NQSOs shall be separate and not in tandem. In making any
determination as to whether a Key Employee shall be granted an Award, the type
of Award to be granted, the number of shares to be covered by the Award, and
other terms of the Award, the Committee shall take into account the duties of
the Key Employee, his present and potential contributions to the success of the
Trust and/or of TRO, the tax implications to the Trust and the Key Employee of
any Award granted, and such other factors as the Committee shall deem relevant
in accomplishing the purposes of the Plan.
6. Annual Limit
(a) ISOs. The aggregate fair market value (determined under Section 7(b)
hereof as of the date the ISO is granted) of the Common Stock with respect to
which ISOs are exercisable for the first time by a Key Employee during any
calendar year (counting ISOs under this Plan and incentive stock options under
any other stock option plan of the Trust or a Related Corporation) shall not
exceed $100,000. If an Option intended as an ISO is granted to a Key Employee
and the Option may not be treated in whole or in part as an ISO pursuant to the
$100,000 limitation, the Option shall be treated as an ISO to the extent it may
be so treated under the limitation and as an NQSO as to the remainder. For
purposes of determining whether an ISO would cause the limitation to be
exceeded, ISOs shall be taken into account in the order granted.
(b) NQSOs. The annual limits set forth above for ISOs shall not apply to
NQSOs.
7. Terms and Conditions of Options. Options granted pursuant to the Plan
shall include expressly or by reference the following terms and conditions, as
well as such other provisions not inconsistent with the provisions of the Plan
(and, for ISOs granted under the Plan, the provisions of Section 422(b) of the
Code), as the Committee shall deem desirable --
(a) Number of Shares. The Option shall state the number of shares of
Common Stock to which the Option pertains.
(b) Price. The Option shall state the Option price which shall be
determined and fixed by the Committee in its discretion but, in the case of an
ISO, shall not be less than the higher of 100 percent (110 percent in the case
of a more-than-10-percent shareholder, as provided in subsection (j) below) of
the fair market value of the optioned shares of Common Stock on the date the
ISO is granted, or the par value thereof, and, in the case of an NQSO, shall
not be less than the higher of 100 percent of the fair market value of the
optioned shares of Common Stock on the date the NQSO is granted, or the par
value thereof.
The fair market value of a share of Common Stock shall be arrived at by a
good faith determination of the Committee and shall be --
(i) if there are sales of Common Stock on a registered securities
exchange or in an over-the-counter market on the date of grant, then the
mean between the highest and lowest quoted selling price on the date of
grant; or
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<PAGE>
(ii) if there are no such sales of Common Stock on the date of grant but
there are such sales on dates within a reasonable period both before and
after the date of grant, then the weighted average of the means between
the highest and lowest selling price on the nearest date before and the
nearest date after the date of grant; or
(iii) if actual sales are not available during a reasonable period
beginning before and ending after the date of grant, then the mean
between the bid and asked price on the date of grant as reported by the
National Quotation Bureau; or
(iv) if (i) through (iii) are not applicable, such other method of
determining fair market value as shall be authorized by the Code, or the
rules or regulations thereunder, and adopted by the Committee.
Where the fair market value of the optioned shares of Common Stock is
determined under (ii) above, the average of the means between the highest and
lowest sales on the nearest date before and the nearest date after the date of
grant shall be weighted inversely by the respective numbers of trading days
between the selling dates and the date of grant (i.e, the valuation date), in
accordance with Treas. Reg. Section 20.2031-2(b)(1), or any successor thereto.
(c) Term
(1) ISOs. Subject to earlier termination as provided in subsections (e),
(f), and (g) below and in Section 8 hereof, the term of each ISO shall be not
more than 10 years (five years in the case of a more-than-10-percent
shareholder, as discussed in subsection (j) below) from the date of grant.
(2) NQSOs. Subject to earlier termination as provided in subsections (e),
(f), and (g) below and in Section 8 hereof, the term of each NQSO shall be not
more than 10 years from the date of grant.
(d) Exercise. Options shall be exercisable in such installments and on
such dates as the Committee may specify; provided that (i) in the case of new
Options granted to an Optionee to replace options (whether granted under the
Plan or otherwise) held by the Optionee or in the case of Options repriced by
the Committee, the new or repriced Options may be made exercisable, if so
determined by the Committee, in its discretion, at the earliest date the
original Options were exercisable, but not earlier than three months from the
date of grant of the new Options or the repricing of the original Options; and
(ii) the Committee may accelerate the exercise date of any outstanding Options,
in its discretion, if it deems such acceleration to be desirable.
Any exercisable Options may be exercised at any time up to the expiration
or termination of the Option. Exercisable Options may be exercised, in whole or
in part and from time to time, by giving written notice of exercise to the
Trust at its principal office, specifying the number of shares to be purchased
and accompanied by payment in full of the aggregate Option exercise price for
such shares. Only full shares shall be issued under the Plan, and any
fractional share which might otherwise be issuable upon exercise of an Option
granted hereunder shall be forfeited.
The Option price shall be payable in the case of an ISO, if the Committee
in its discretion causes the Option Agreement so to provide, and in the case of
an NQSO, if the Committee in its discretion so determines at or prior to the
time of exercise --
(1) in cash or its equivalent;
(2) in shares of Common Stock previously acquired by the Optionee;
provided that (i) if such shares of Common Stock were acquired through the
exercise of an ISO and are used to pay the Option price for ISOs, such shares
have been held by the Optionee for a period of not less than the holding period
described in Section 422(a)(1) of the Code on the date of exercise, or (ii) if
such shares of Common Stock were acquired through the exercise of an NQSO and
are used to pay the Option price of an ISO, or if such shares of Common Stock
were acquired through the exercise of an ISO or an NQSO and are used to pay the
Option price of an NQSO, such shares have been held by the Optionee for a
period of more than one year on the date of exercise;
(3) by delivering a properly executed notice of exercise of the Option to
the Trust and a broker, with irrevocable instructions to the broker promptly to
deliver to the Trust the amount of sale or loan proceeds necessary to pay the
exercise price of the Option;
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<PAGE>
(4) if the Optionee is designated as an "eligible participant" by the
Committee at the date of grant in the case of an ISO, or at or after the date
of grant in the case of an NQSO, and if the Optionee thereafter so requests,
(i) the Trust will loan the Optionee the money required to pay the exercise
price of the Option; (ii) any such loan to an Optionee shall be made only at
the time the Option is exercised; and (iii) the loan will be made on the
Optionee's personal, negotiable, demand promissory note, bearing interest at
the lowest rate which will avoid imputation of interest under Section 7872 of
the Code, and including such other terms as the Committee may prescribe; or
(5) in any combination of subsections (1), (2), (3), and (4) above.
In the event the Option price is paid, in whole or in part, with shares of
Common Stock, the portion of the Option price so paid shall be equal to the
aggregate fair market value (determined under subsection (b) above, but as of
the date of exercise of the Option, rather than the date of grant) of the
Common Stock so surrendered in payment of the Option price.
(e) Termination of Employment. If an Optionee's employment by the Trust or
TRO is terminated by either party prior to the expiration date fixed for his
Option for any reason other than retirement, death, disability, change in
control, cause, or employment with a competitor, such Option may be exercised,
to the extent of the number of shares with respect to which the Optionee could
have exercised it on the date of such termination, or to any greater extent
permitted by the Committee, by the Optionee at any time prior to the earlier of
(i) the expiration date specified in such Option, or (ii) an accelerated
expiration date determined by the Committee, in its discretion, and set forth
in the Option Agreement; except that, subject to Section 8 hereof, such
accelerated expiration date shall not be earlier than the date of the
Optionee's termination of employment, and in the case of ISOs, such accelerated
expiration date shall not be later than three months after such termination of
employment.
(f) Retirement or Disability. If an Optionee attains the age which the
Trust or TRO may from time to time establish as the retirement age for any
class of its employees or becomes disabled (within the meaning of Section
22(e)(3) of the Code) during his employment and, prior to the expiration date
fixed for his Option, his employment is terminated as a consequence of such
retirement or disability, such Option may be exercised, to the extent of the
number of shares with respect to which the Optionee could have exercised it on
the date of such termination, or to any greater extent permitted by the
Committee, by the Optionee at any time prior to the earlier of (i) the
expiration date specified in such Option, or (ii) an accelerated termination
date determined by the Committee, in its discretion, and set forth in the
Option Agreement; except that, subject to Section 8 hereof, such accelerated
termination date shall not be earlier than the date of the Optionee's
termination of employment by reason of retirement or disability, and in the
case of ISOs, such accelerated termination date shall not be later than three
months after such termination of employment. In the event of the Optionee's
legal disability, such Option may be exercised by the Optionee's legal
representative.
(g) Death. If an Optionee dies during his employment, and prior to the
expiration date fixed for his Option, or if an Optionee whose employment is
terminated for any reason, dies following his termination of employment but
prior to the earliest of (i) the expiration date fixed for his Option, (ii) the
expiration of the period determined under subsections (e) and (f) above, or
(iii) in the case of an ISO, three months following termination of employment,
such Option may be exercised, to the extent of the number of shares with
respect to which the Optionee could have exercised it on the date of his death,
or to any greater extent permitted by the Committee, by the Optionee's estate,
personal representative, or beneficiary who acquired the right to exercise such
Option by bequest or inheritance or by reason of the death of the Optionee.
Such post-death exercise may occur at any time prior to the earlier of (i) the
expiration date specified in such Option or (ii) an accelerated termination
date determined by the Committee, in its discretion, and set forth in the
Option Agreement; except that, subject to Section 8 hereof, such accelerated
termination date shall not be earlier than one year, nor later than three
years, after the date of death.
(h) Non-Transferability; Registration. No ISO and (except as otherwise
provided in any Option Agreement) no NQSO shall be assignable or transferable
by the Optionee other than by will or by the laws of descent and distribution,
and (subject to the preceding clause) during the lifetime of the Optionee,
shall be exercisable only by him or by his guardian or legal representative. If
the Optionee is married at the time of exercise and if the Optionee so requests
at the time of exercise, the certificate or certificates shall be registered in
the name of the Optionee and the Optionee's spouse, jointly, with right of
survivorship.
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(i) Rights as a Shareholder. An Optionee shall have no rights as a
shareholder with respect to any shares covered by his Option until the issuance
of a stock certificate to him for such shares.
(j) Ten Percent Shareholder. If the Optionee owns more than 10 percent of
the total combined voting power of all shares of stock of the Trust at the time
an ISO is granted to him, the Option price for the ISO shall be not less than
110 percent of the fair market value (as determined under subsection (b) above)
of the optioned shares of Common Stock on the date the ISO is granted, and such
ISO, by its terms, shall not be exercisable after the expiration of five years
from the date the ISO is granted. The conditions set forth in this subsection
shall not apply to NQSOs.
(k) Listing and Registration of Shares. Each Option shall be subject to
the requirement that, if at any time the Committee shall determine, in its
discretion, that the listing, registration, or qualification of the shares of
Common Stock covered thereby upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting
of such Option or the purchase of shares of Common Stock thereunder, or that
action by the Trust or by the Optionee should be taken in order to obtain an
exemption from any such requirement, no such Option may be exercised, in whole
or in part, unless and until such listing, registration, qualification,
consent, approval, or action shall have been effected, obtained, or taken under
conditions acceptable to the Committee. Without limiting the generality of the
foregoing, each Optionee or his legal representative or beneficiary may also be
required to give satisfactory assurance that shares purchased upon exercise of
an Option are being purchased for investment and not with a view to
distribution, and certificates representing such shares may be legended
accordingly.
(l) Withholding and Use of Shares to Satisfy Tax Obligations. The
obligation of the Trust to deliver shares of Common Stock upon the exercise of
any Option (or cash in lieu thereof) shall be subject to applicable federal,
state, and local tax withholding requirements.
If the exercise of any Option is subject to the withholding requirements
of applicable federal tax law, the Committee, in its discretion, may permit or
require the Optionee to satisfy the federal withholding tax, in whole or in
part, by electing to have the Trust withhold shares of Common Stock subject to
the exercise (or by returning previously acquired shares of Common Stock to the
Trust). The Trust may not withhold shares in excess of the number necessary to
satisfy the minimum federal income tax withholding requirements. Shares of
Common Stock shall be valued, for purposes of this subsection, at their fair
market value under subsection (b) above, but as of the date the amount
attributable to the exercise of the Option is includable in income by the
Optionee under Section 83 of the Code (the "Determination Date"). If shares of
Common Stock acquired by the exercise of an ISO are used to satisfy the
withholding requirement described above, such shares of Common Stock must have
been held by the Optionee for a period of not less than the holding period
described in Section 422(a)(1) of the Code as of the Determination Date.
The Committee shall adopt such withholding rules as it deems necessary to
carry out the provisions of this subsection.
(m) Loans. If an Optionee is designated as an "eligible participant" by
the Committee at the date of grant in the case of an ISO, or at or after the
date of grant in the case of an NQSO, and if the Optionee thereafter so
requests, the Trust will loan the Optionee the money required to satisfy any
regular income tax obligations (as opposed to alternative minimum tax
obligations) resulting from the exercise of any Options. Any loan or loans to
an Optionee shall be made only at the time any such tax resulting from such
exercise is due. The Committee, in its discretion, may require an affidavit
from the Optionee specifying the amount of the tax required to be paid and the
date when such tax must be paid. The loan will be made on the Optionee's
personal, negotiable, demand promissory note, bearing interest at the lowest
rate which will avoid imputation of interest under Section 7872 of the Code,
and including such other terms as the Committee may prescribe.
(n) Option Agreements -- Other Provisions. Options granted under the Plan
shall be evidenced by written documents ("Option Agreements") in such form as
the Committee shall from time to time approve, and containing such provisions
not inconsistent with the provisions of the Plan (and, for ISOs granted
pursuant to the Plan, not inconsistent with Section 422(b) of the Code), as the
Committee shall deem advisable. The Option Agreements shall specify whether the
Option is an ISO or NQSO. Each Optionee shall enter into, and be bound by, an
Option Agreement as soon as practicable after the grant of an Option.
E-7
<PAGE>
8. Forfeiture. If the employment of an Optionee is terminated for "Cause"
(as defined below) or the Optionee terminates his employment and commences
working for a "Competitor" (as defined below), his right under any then
outstanding Award shall terminate at the time of such termination of
employment. As used in this Section, in the case of any Optionee not subject to
a written employment agreement, "Cause" shall mean any willful or intentional
act having the effect of injuring the reputation, business, or business
relationships of the Trust or TRO, or any repeated or continuous failure,
neglect, or refusal to perform in a satisfactory manner duties assigned to such
Optionee. In the case of an Optionee subject to a written employment agreement,
"Cause" shall mean any action giving the Trust or TRO the right to terminate
such person's employment agreement for Cause. "Competitor" shall mean any
person or entity other than the Trust or TRO engaged -- either before the
Optionee's employment is terminated or within the one-year period after such
termination -- in a business competitive (in the good faith judgment of the
Committee) with that of the Trust or TRO.
9. Capital Adjustments. The number of shares which may be issued under the
Plan, and the maximum number of shares with respect to which Awards may be
granted to any Key Employee under the Plan, both as stated in Section 4 hereof,
and the number of shares issuable upon exercise or vesting of outstanding
Awards under the Plan (as well as the Option price per share under outstanding
Options) shall, subject to the provisions of Section 424(a) of the Code, be
adjusted, as may be deemed appropriate by the Committee, to reflect any stock
dividend, stock split, share combination, or similar change in the
capitalization of the Trust. In the event any such change in capitalization
cannot be reflected in a straight mathematical adjustment of the number of
shares issuable upon the exercise of outstanding Options (and a straight
mathematical adjustment of the exercise price thereof), the Committee shall
make such adjustments as are appropriate to reflect most nearly such straight
mathematical adjustment. Such adjustments shall be made only as necessary to
maintain the proportionate interest of Optionee, and preserve, without
exceeding, the value of Awards.
10. Certain Corporate Transactions. In the event of a corporate
transaction (as that term is described in Section 424(a) of the Code and the
Treasury Regulations issued thereunder as, for example, a merger,
consolidation, acquisition of property or stock, separation, reorganization, or
liquidation), each outstanding Award shall be assumed by the surviving or
successor corporation; provided, however, that, in the event of a proposed
corporate transaction, the Committee may terminate all or a portion of any
outstanding Award if it determines that such termination is in the best
interests of the Trust. If the Committee decides to terminate outstanding
Options, the Committee shall give each Key Employee holding an Option to be
terminated not fewer than seven days' notice prior to any such termination, and
any Option which is to be so terminated may be exercised (if and only to the
extent that it is then exercisable) up to, and including the date immediately
preceding such termination. Further, as provided in Section 7(d) hereof, the
Committee, in its discretion, may accelerate, in whole or in part, the date on
which any or all Options become exercisable.
The Committee also may, in its discretion, change the terms of any
outstanding Award to reflect any such corporate transaction, provided that, in
the case of ISOs, such change would not constitute a "modification" under
Section 424(h) of the Code, unless the Optionee consents to the change.
11. Exercise Upon Change in Control
(a) Notwithstanding any other provision of this Plan, all outstanding
Options shall become fully vested and exercisable upon a Change in Control.
(b) "Change in Control" shall mean:
(1) The acquisition by an individual, entity, or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 30 percent or more of the combined voting power of the then outstanding
voting securities of the Trust entitled to vote generally in the election of
trustees (the "Outstanding Shares"); provided, however, that the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Trust, (ii) any acquisition by the Trust, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Trust or any corporation controlled by the Trust, (iv) any
acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of paragraph (3) below, or (v) any acquisition by
any Person entitled to file Form 13G under the Exchange Act with respect to
such acquisition; or
E-8
<PAGE>
(2) individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of
the Board; provided, however, that any individual becoming a trustee subsequent
to the date hereof whose appointment, election, or nomination for election by
the Trust's shareholders, was approved by a vote of at least a majority of the
trustees then comprising the Incumbent Board (other than an appointment,
election, or nomination of an individual whose initial assumption of office is
in connection with an actual or threatened election contest relating to the
election of the trustees of the Trust, as such terms are used in Rule 14a-1
promulgated under the Exchange Act) shall be, for purposes of this Plan,
considered as though such person were a Member of the Incumbent Board; or
(3) approval by the shareholders of the Trust of a reorganization, merger
or consolidation, or sale or other disposition of all or substantially all of
the assets of the Trust (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially all of the
individuals and entities who were the beneficial owners of the Outstanding
Shares immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 60 percent of, respectively, the then
outstanding shares of stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
trustees, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result of
such transaction owns the Trust or all or substantially all of the Trust's
assets either directly or through one or more subsidiaries) in substantially
the same proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Shares, (ii) no Person (excluding any employee
benefit plan (or related trust) of the Trust or such corporation resulting from
such Business Combination) beneficially owns, directly or indirectly, 30
percent or more of, respectively, the then outstanding shares of stock of the
corporation resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business Combination, and
(iii) at least a majority of the members of the board of trustees or directors
of the entity resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of
the action of the Board, providing for such Business Combination; or
(4) approval by the shareholders of the Trust of a complete liquidation or
dissolution of the Trust.
12. Amendment or Termination of the Plan
(a) In General. The Board, pursuant to a written resolution, from time to
time may suspend or terminate the Plan or amend it, and the Committee may amend
any outstanding Awards in any respect whatsoever; except that, without the
approval of the shareholders (given in the manner set forth in subsection (b)
below) --
(1) any amendment which would --
(A) change the class of employees eligible to participate in the Plan with
respect to ISOs;
(B) except as permitted under Section 10 hereof, increase the maximum
number of shares of Common Stock with respect to which ISOs may be granted
under the Plan; or
(C) extend the duration of the Plan under Section 18 hereof with respect
to any ISOs granted hereunder.
(2) No amendment requiring shareholder approval pursuant to Treas. Reg.
Section 1.162-27(e)(4)(vi) or any successor thereto may be made.
Notwithstanding the foregoing, no such suspension, discontinuance, or amendment
shall materially impair the rights of any holder of an outstanding Option
without the consent of such holder.
(b) Manner of Shareholder Approval. The approval of shareholders must be
effected by a majority of the votes cast (including abstentions, to the extent
abstentions are counted as voting under applicable state law), in a separate
vote at a duly held shareholders' meeting at which a quorum representing a
majority of all outstanding voting stock is, either in person or by proxy,
present and voting on the Plan.
13. Rights. Neither the adoption of the Plan nor any action of the Board
or the Committee shall be deemed to give any individual any right to be granted
an Award, or any other right hereunder, unless and until the Committee shall
have granted such individual an Award, and then his rights shall be only such
as are provided by the Option Agreement. Notwithstanding any provisions of the
Plan or the Option Agreement with a
E-9
<PAGE>
Key Employee, the Trust or TRO (as applicable) shall have the right, in its
discretion but subject to any employment contract entered into with the Key
Employee, to retire the Key Employee at any time pursuant to its retirement
rules or otherwise to terminate his employment at any time for any reason
whatsoever.
14. Indemnification of Board and Committee. Without limiting any other
rights of indemnification which they may have from the Trust, any Related
Corporation, or TRO, the members of the Board and the members of the Committee
shall be indemnified by the Trust against all costs and expenses reasonably
incurred by them in connection with any claim, action, suit, or proceeding to
which they or any of them may be a party by reason of any action taken or
failure to act under, or in connection with, the Plan, or any Award granted
thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by legal counsel selected by the Trust)
or paid by them in satisfaction of a judgment in any such action, suit, or
proceeding, except a judgment based upon a finding of willful misconduct or
recklessness on their part. Upon the making or institution of any such claim,
action, suit, or proceeding, the Board or Committee member shall notify the
Trust in writing, giving the Trust an opportunity, at its own expense, to
handle and defend the same before such Board or Committee member undertakes to
handle it on his own behalf. The provisions of this Section shall not give
members of the Board or the Committee greater rights than they would have under
the Trust's by-laws or Pennsylvania law.
15. Application of Funds. The proceeds received by the Trust from the sale
of Common Stock pursuant to Awards granted under the Plan shall be used for
general corporate purposes. Any cash received in payment for shares upon
exercise of an Option shall be added to the general funds of the Trust and
shall be used for its corporate purposes. Any Common Stock received in payment
for additional Common Stock upon exercise of an Option shall become treasury
stock.
16. Shareholder Approval. This Plan shall become effective on ___________
____, 199__ (the date the Plan was adopted by the Board); provided, however,
that if the Plan is not approved by the shareholders, in the manner described
in Section 12(b) hereof, within 12 months before or after the date the Plan is
adopted by the Board, all ISOs granted hereunder shall be null and void and no
additional ISOs shall be granted hereunder.
17. No Obligation Regarding Awards. The granting of an Award shall impose
no obligation upon a Key Employee to exercise or meet the conditions of such
Award.
18. Termination of Plan. Unless earlier terminated as provided in the
Plan, the Plan and all authority granted hereunder shall terminate absolutely
at 12:00 midnight on ________ ___, 2007 which date is within 10 years after the
date the Plan was adopted by the Board, and no Awards hereunder shall be
granted thereafter. Nothing contained in this Section, however, shall terminate
or affect the continued existence of rights created under Awards issued
hereunder, and outstanding on the date set forth in the preceding sentence,
which by their terms extend beyond such date.
19. Governing Law. The Plan shall be governed by the applicable Code
provisions to the maximum extent possible. Otherwise, the laws of the
Commonwealth of Pennsylvania shall govern the operation of, and the rights of
Key Employees under, the Plan, and Awards granted hereunder.
E-10
<PAGE>
APPENDIX F
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
The Rubin Organization, Inc.:
We have audited the accompanying consolidated balance sheet of The Rubin
Organization, Inc. (a Pennsylvania Subchapter S Corporation) and subsidiary as
of December 31, 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of The Rubin Organization, Inc. and subsidiary as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
June 23, 1997
F-1
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31
June 30, -----------------------------
1997 1996 1995
------------- -------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 854,458 $ 861,163 $ 869,498
Restricted cash ....................................... 472,485 463,280 410,550
Fees and commissions receivable, net of allowance for
uncollectable accounts of $684,017, $869,469 and
$921,358, respectively .............................. 3,031,238 2,623,104 2,431,063
Fees and commissions receivable from affiliates, net of
allowance for uncollectable accounts of $165,155,
$46,161 and $68,976, respectively ..................... 1,025,517 1,408,649 1,508,400
Real estate held for sale .............................. -- 114,000 114,000
Prepaid expenses and other assets ..................... 145,080 65,747 87,290
------------ ------------- ------------
Total current assets .............................. 5,528,778 5,535,943 5,420,801
------------ ------------- ------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment ..................... 4,226,848 3,827,110 3,719,138
Leasehold improvements ................................. 108,062 80,452 80,452
------------ ------------- ------------
4,334,910 3,907,562 3,799,590
Less-Accumulated depreciation and amortization ......... 3,166,067 2,952,564 2,518,297
------------ ------------- ------------
Net property and equipment ........................ 1,168,843 954,998 1,281,293
------------ ------------- ------------
FEES AND COMMISSIONS RECEIVABLE,
LONG-TERM, net ....................................... 271,940 333,546 1,709,969
ADVANCES TO AFFILIATED PARTNERSHIPS ..................... 3,574,059 2,793,912 247,147
INTANGIBLE ASSETS--MANAGEMENT
CONTRACTS, net of accumulated amortization of
$350,000 at June 30, 1997 .............................. 6,808,949 7,108,977 --
DEFERRED FINANCING COSTS, net of accumulated
amortization of $26,240 in 1995 ........................ -- -- 5,467
INVESTMENTS IN LIMITED PARTNERSHIPS ..................... -- -- 44,915
------------ ------------- ------------
10,654,948 10,236,435 2,007,498
------------ ------------- ------------
Total assets .................................... $17,352,569 $ 16,727,376 $ 8,709,592
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31
June 30, --------------------------------
1997 1996 1995
-------------- -------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt, including
$2,161,137, $1,262,468 and $1,357,820 to affiliates....... $ 2,986,509 $ 2,650,245 $ 3,743,683
Accounts payable, trade and accrued expenses ............ 4,156,196 2,977,571 4,055,266
Due to affiliates ....................................... 241,000 175,526 535,671
Deferred compensation payable ........................... 129,864 185,500 162,000
------------ ------------ ------------
Total current liabilities ........................... 7,513,569 5,988,842 8,496,620
LONG-TERM DEBT, including $3,127,007, $3,423,158
and $4,299,416 to affiliates .............................. 9,406,467 10,073,427 3,193,777
DEFERRED COMPENSATION PAYABLE,
LONG-TERM ................................................ 247,248 278,500 327,250
------------ ------------ ------------
Total liabilities .................................... 17,167,284 16,340,769 12,017,647
------------ ------------ ------------
MINORITY INTEREST IN SUBSIDIARY ........................... 4,492 4,492 3,487
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Capital stock, $.10 par value; 280,000, 250,000 and
250,000 shares authorized; 279,005, 249,005 and
80,005 shares issued and outstanding .................. 27,901 24,901 8,001
Additional paid-in capital .............................. 4,649,129 4,329,250 662,456
Treasury stock, at cost, 599, 599 and 19,411 shares ...... (1,008) (1,008) (601,956)
Accumulated deficit ....................................... (4,495,229) (3,971,028) (3,380,043)
------------ ------------ ------------
Total stockholders' equity (deficit) ............... 180,793 382,115 (3,311,542)
------------ ------------ ------------
Total liabilities and stockholders' equity ......... $17,352,569 $ 16,727,376 $ 8,709,592
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended
June 30 December 31
---------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Management fees ..................... $3,630,715 $2,398,210 $ 4,608,058 $ 6,273,015 $ 5,769,027
Leasing commissions ............... 3,671,861 2,351,408 6,186,407 5,914,555 5,293,143
Consulting fees ..................... 751,081 318,488 1,105,000 859,681 895,331
Development fees .................. 448,976 687,154 1,341,475 1,057,624 1,027,591
Publication ........................ 1,174,882 1,209,280 2,346,760 2,451,722 2,303,495
Other income ........................ 74,201 50,513 19,889 29,696 49,135
Interest income ..................... 19,189 35,578 35,410 67,751 1,081
---------- ---------- ----------- ----------- -------------
Total revenues .................. 9,770,905 7,050,631 15,642,999 16,654,044 15,338,803
---------- ---------- ----------- ----------- -------------
OPERATING EXPENSES:
Salaries, commissions, payroll taxes
and employee benefits ............ 5,938,007 4,688,313 9,785,660 9,831,075 9,779,739
Cost of goods sold -- publication ... 793,569 707,938 1,458,423 1,656,674 1,583,000
Rent expense ........................ 406,968 397,796 766,708 787,319 848,951
Other operating expenses ............ 1,481,453 1,031,151 2,225,599 2,835,113 2,265,596
Expenses for start-up of EPDLP
management contracts ............ 559,853 -- 280,046 -- --
Expense from abandonment of public
offering ........................ -- -- -- -- 2,103,296
Depreciation and amortization ...... 563,504 229,990 439,734 384,068 400,318
Write-down of investment in 1626
Locust Associates ............... -- 220,528 319,823 -- --
---------- ---------- ----------- ----------- -------------
Total operating expenses ......... 9,743,354 7,275,716 15,275,993 15,494,249 16,980,900
---------- ---------- ----------- ----------- -------------
(LOSS) INCOME FROM
OPERATIONS ........................ 27,551 (225,085) 367,006 1,159,795 (1,642,097)
INTEREST EXPENSE ..................... (533,449) (329,086) (603,249) (813,357) (629,242)
EQUITY IN LOSS FROM
INVESTMENTS IN LIMITED
PARTNERSHIPS ........................ (18,303) (181,316) (354,742) (398,572) --
---------- ---------- ----------- ----------- -------------
NET LOSS .............................. $ (524,201) $ (735,487) $ (590,985) $ (52,134) $ (2,271,339)
========== ========== =========== =========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital Stock Additional
-------------------- Paid-in Treasury Accumulated
Shares Amount Capital Stock Deficit Total
--------- --------- ------------ ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 ...... 80,005 $ 8,001 $ 662,456 $ (601,956) $ (1,056,570) $ (988,069)
Net loss (unaudited) ......... -- -- -- -- (2,271,339) (2,271,339)
-------- -------- ---------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 1994 ..... 80,005 8,001 662,456 (601,956) (3,327,909) (3,259,408)
Net loss (unaudited) ......... -- -- -- -- (52,134) (52,134)
-------- -------- ---------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 1995 ..... 80,005 8,001 662,456 (601,956) (3,380,043) (3,311,542)
Net loss ..................... -- -- -- -- (590,985) (590,985)
Issuance of common stock ... 169,000 16,900 3,666,794 600,948 -- 4,284,642
-------- -------- ---------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 1996 ..... 249,005 24,901 4,329,250 (1,008) (3,971,028) 382,115
Net loss (unaudited) ......... -- -- -- -- (524,201) (524,201)
Dividends (unaudited) ......... -- -- (395,444) -- -- (395,444)
Issuance of common stock
(unaudited) ............... 30,000 3,000 715,323 -- -- 718,323
-------- -------- ---------- ----------- ------------- ------------
BALANCE, JUNE 30, 1997
(unaudited) .................. 279,005 $27,901 $4,649,129 $ (1,008) $ (4,495,229) $ 180,793
======== ======== ========== =========== ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended
June 30 December 31
---------------------------- --------------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- --------------- -------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ........................... $ (524,201) $ (735,487) $ (590,985) $ (52,134) $ (2,271,339)
Adjustments to reconcile net loss to
net cash provided by operating
activities--
Depreciation and amortization ... 563,504 229,990 439,734 384,068 400,318
Equity in (income) loss on
investments in limited
partnerships ..................... 18,303 181,316 354,742 398,572 --
Provision for doubtful fees and
commissions receivable ......... (66,458) 103,757 207,513 364,057 309,884
Abandonment of public offering ... -- -- -- -- 2,103,296
Write-down of investment in 1626
Locust Associates ............... -- 220,528 319,823 -- --
Minority interest income ......... -- -- 1,005 2,164 2,230
Changes in assets and liabilities-
Decrease (increase) in--
Restricted cash .................. (9,205) 360,314 (52,730) (208,024) (28,131)
Fees and leasing commissions
receivable ..................... (280,070) 1,136,855 976,869 597,993 (1,106,907)
Fees and leasing commissions
receivable from affiliates ... 383,132 (252,323) 99,751 (1,316,545) (301,141)
Prepaid expenses and other
assets ........................ (79,333) (123,616) 21,543 (39,580) 61,171
Increase (decrease) in--
Accounts payable and accrued
expenses ..................... 1,178,625 (803,514) (1,077,695) 208,517 858,184
Deferred compensation payable ..... (86,888) (81,002) (25,250) (130,750) 310,000
---------- ---------- ------------ ------------ -------------
Net cash provided by (used in)
operating activities ......... 1,097,409 236,818 674,320 208,338 337,565
---------- ---------- ------------ ------------ -------------
</TABLE>
(Continued)
F-6
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended
June 30 December 31
------------------------------ -------------------------------------------------
1997 1996 1996 1995 1994
-------------- ------------- --------------- ------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures for property and
equipment and deferred costs ......... $ (427,348) $ (46,534) $ (107,972) $ (266,531) $ (262,952)
Acquisition costs for management
contracts ........................... (49,972) -- (108,977) -- --
Proceeds from sale of real estate ...... 114,000 -- -- -- --
(Increase) decrease in advances to
affiliated partnerships ............ (780,147) 58,013 (2,546,765) (247,147) --
(Contributions) distributions to/from
equity investees ..................... (18,303) (283,467) (319,613) (396,281) --
------------ ---------- ------------ ----------- -----------
Net cash used in investing
activities ........................ (1,161,770) (271,988) (3,083,327) (909,959) (262,952)
------------ ---------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase (decrease) in due to affiliates 65,474 149,282 (360,145) 13,549 (217,725)
Repayments on long-term debt ......... (330,697) (439,779) (1,689,225) (765,370) (546,085)
Proceeds from long-term debt ......... -- -- 165,400 1,252,593 920,645
Dividend payments ..................... (395,444) -- -- -- --
Proceeds from issuance of common
stock .............................. 718,323 -- 4,284,642 -- --
------------ ---------- ------------ ----------- -----------
Net cash provided by (used in)
financing activities ............ 57,656 (290,497) 2,400,672 500,772 156,835
------------ ---------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (6,705) (325,667) (8,335) (200,849) 231,448
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD .................. 861,163 869,498 869,498 1,070,347 838,899
------------ ---------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ........................ $ 854,458 $ 543,831 $ 861,163 $ 869,498 $ 1,070,347
============ ========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF
NONCASH ACTIVITIES:
Cash paid for interest .................. $ 153,224 $ 109,149 $ 306,202 $ 395,347 $ 235,964
============ ========== ============ =========== ===========
Noncash investing and financing
activities are discussed in Notes 3, 4
and 7
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND OPERATIONS:
The Rubin Organization, Inc. ("the Company") is a Pennsylvania Subchapter
S Corporation engaged in the leasing, development and management of retail,
commercial office properties, located primarily in the northeastern region of
the United States, which, in many cases, are wholly or partially owned by
certain of the shareholders of the Company. The Company also provides
advertising services to the tenants of retail properties including those
properties managed by the Company.
The consolidated financial statements as of June 30, 1997 and December 31,
1995 and 1994, and for the six-month periods ended June 30, 1997 and 1996, and
for the years ended December 31, 1995 and 1994, are unaudited; however, in the
opinion of management, all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the consolidated financial
statements for the interim periods and the fiscal years ended December 31, 1995
and 1994, have been included. The results for the interim periods are not
necessarily indicative of the results for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its 75% owned subsidiary, Strouse Greenberg Realty Investment, Inc.
The Company has limited partnership interests in a real estate partnership
and another limited partnership which are accounted for under the equity method
of accounting.
All significant intercompany balances and transactions have been
eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents for
purposes of the consolidated statements of cash flow.
Restricted Cash
The Company controls certain cash amounts as agents for their clients and
for funds on deposit to secure the future payments of insurance for various
managed properties.
Property and Equipment
A summary of property and equipment, less accumulated depreciation and
amortization at June 30, 1997, and December 31, 1996 and 1995, follows:
F-8
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1997 1996 1995
------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Furniture and fixtures ......... $2,275,374 $ 2,231,052 $ 2,189,794
Computer equipment ............ 1,758,644 1,430,683 1,363,969
Telephone equipment ............ 118,375 118,375 118,375
Transportation equipment ...... 74,455 47,000 47,000
Leasehold improvements ......... 108,062 80,452 80,452
----------- ------------ ------------
4,334,910 3,907,562 3,799,590
Less-Accumulated depreciation and
amortization .................. 3,166,067 2,952,564 2,518,297
----------- ------------ ------------
$1,168,843 $ 954,998 $ 1,281,293
=========== ============ ============
</TABLE>
Furniture, fixtures, equipment and leasehold improvements are recorded at
cost.
Major renewals and betterments are capitalized while replacements,
maintenance and repairs which do not improve or extend the life of the asset
are expensed. As assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is reflected. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets as follows:
Furniture and fixtures .................................10 years
Computer equipment ....................................5 years
Telephone equipment ....................................5 years
Transportation equipment ..............................5 years
Leasehold improvements ...........................Life of lease
Deferred Financing Costs
Deferred financing costs are amortized by the straight-line method over
the term of the related credit arrangement.
Revenue Recognition
Advisory and management fees are recognized in the period in which the
services are performed unless significant future contingencies exist.
Transaction and lease commissions are recorded as income upon the closing
of the related sale or upon the signing of lease or occupancy by the respective
tenant under the lease. Other commissions and fees are recorded as revenue at
the time the related services have been performed unless significant future
contingencies exist. Related expenses representing the employee's or
co-broker's share of transaction commissions are recorded concurrently with the
recording of the related revenue.
Income Taxes
The Company has elected Subchapter S Corporation status under the Internal
Revenue Code and is therefore not subject to federal and state income taxes.
Accordingly, no provision for income taxes has been provided by the
accompanying financial statements. The shareholders include their respective
share of the Company's profits or losses in their individual tax returns.
F-9
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
The Company's net assets at December 31, 1996 and 1995, for federal income
tax purposes are approximately $100,000 and ($3,600,000) (unaudited),
respectively. The Company's net losses for tax reporting purposes for the years
ended December 31, 1996, 1995 and 1994, were approximately $456,000, $836,000
(unaudited) and $1,655,000 (unaudited) . The differences between losses for
financial reporting purposes and tax reporting purposes are as a result of the
Company being a cash basis tax payer and using accelerated depreciation for tax
reporting purposes.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. FEES AND COMMISSIONS RECEIVABLE:
Fees and commissions receivable include amounts due from properties for
management, leasing, marketing and development services and amounts related to
reimbursements for payroll and other operating expense reimbursements due to
the Company.
These receivables include leasing commissions receivable acquired from an
affiliate of the Company on January 31, 1994, for a purchase price of
$2,205,424. The purchase was funded by a note payable, which matures in 1999
(Note 7). These non-interest-bearing receivables were related to commissions
which are payable over the terms of the related retail leases.
The Company recorded these amounts at their fair value as of the
acquisition date, which reflected a discount of 12%. The discount is amortized
over the term of the receivable as amounts are collected under the terms of the
leasing arrangements. The outstanding balances at June 30, 1997, and December
31, 1996 and 1995, are as follows:
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1997 1996 1995
------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Gross leasing commissions ............ $1,062,526 $ 1,688,380 $ 2,328,946
Unamortized discount .................. (177,970) (360,649) (530,610)
Allowance for doubtful accounts ...... (191,487) (196,373) (216,647)
---------- ----------- -----------
693,069 1,131,358 1,581,689
Less -- current portion ............... (421,129) (797,812) (561,587)
---------- ----------- -----------
Long-term portion ..................... $ 271,940 $ 333,546 $ 1,020,102
========== =========== ===========
</TABLE>
The carrying amount of the long-term portion of fees and commissions
receivable approximates fair value as the discount rate used to determine the
carrying amount approximates a current market rate.
The Company is subject to a concentration of credit risk as the majority
of the fees and commissions receivable are due from retail and commercial
office properties located in the northeastern region of the United States.
4. ACQUISITION OF EQUITY PROPERTIES AND DEVELOPMENT MANAGEMENT
AGREEMENTS:
On December 31, 1996, the Company acquired the rights under various
management agreements from Equity Properties and Development Limited
Partnership ("EPDLP") related to retail properties that EPDLP had previously
managed. The transfer of these management agreements has been approved by a
majority of the
F-10
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996, 1995 AND 1994
4. ACQUISITION OF EQUITY PROPERTIES AND DEVELOPMENT MANAGEMENT
AGREEMENTS: -- (Continued)
property owners. These agreements are initially for ten year terms; however,
they are generally cancelable with 30 days notice by the respective owners of
the property in the event of a default by the Company, as defined, or in the
event of a sale or transfer of the ownership of any of the respective
properties by the owners.
These agreements give the Company the rights to various management,
leasing and other fee revenue generated from the respective properties in
return for the Company's performance of the related management and leasing
services. The $7,000,000 purchase price for this transaction was satisfied by a
7% note payable to EPDLP (Note 7) and was accounted for under the purchase
method of accounting. Accordingly, at December 31, 1996, the Company has
recorded $7,108,977 as an intangible asset, which includes $108,977 of
transaction costs. This intangible asset, which represents contract rights, is
being amortized on a straight-line basis over a ten-year period. Amortization
expense of $350,000 (unaudited) is reflected in the accompanying financial
statements for the three-month period ended June 30, 1997.
Amortization of the $7,000,000 note payable is based on a formula which is
based on fixed percentages of a specific level of fee revenue earned by the
Company from the management agreements as defined in the purchase agreement.
Payments have been initially set at a minimum monthly amount of $82,000 for the
first quarter of 1997 and are subject to adjustment on a quarterly and annual
basis based on the fee revenue generated from the agreements. In the event the
$7,000,000 note payable and accrued interest is repaid prior to December 31,
2006, an additional purchase price, as defined, is due annually to EPDLP until
the fiscal year ending December 31, 2006, based on a formula which is based on
fixed percentages of a specified level of fee revenue earned by the Company for
the applicable fiscal year. Any unpaid balance and accrued interest on the note
is due and payable on December 31, 2006.
Under the terms of the purchase agreement, the $7,000,000 note payable is
reduced to the amount actually payable to EPDLP with respect to fee revenue
earned by the Company before the maturity of the note in December 2006 in
accordance with the above formula, for any management agreements which are
terminated or canceled for any reason other than the default by the Company in
the event that EPDLP has not assigned another management agreement to the
Company as a replacement for the terminated agreement.
Under the terms of the purchase agreement, the Company did not earn
leasing commissions revenue for the three-month period ending on March 31,
1997. Leasing commissions earned in the three-month period beginning April 1,
1997 and ending June 30, 1997, are shared equally between the Company and
EPDLP. All leasing commissions earned subsequent to June 30, 1997 are due to
the Company.
5. REAL ESTATE HELD FOR SALE:
The Company purchased a residential property from one of its officers and
shareholders as a condition of his employment agreement. This property was sold
in April 1997 for an amount which realized its carrying amount as of December
31, 1996.
6. INVESTMENTS IN LIMITED PARTNERSHIPS:
A summary of the Company's investments in limited partnerships is as
follows:
<TABLE>
<CAPTION>
Limited Partnerships
- -------------------------------------- Ownership Interest Investment
December 31, December 31,
1996 1995 1996 1995
-------- -------- ------ ---------
<S> <C> <C> <C> <C>
APEX Site Management, L.P. ......... 29.30% 32.00% $ -- $ 44,915
1626 Locust Street Associates ...... 55.64% 26.90% -- --
----- ---------
$ -- $ 44,915
===== =========
</TABLE>
F-11
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996, 1995 AND 1994
6. INVESTMENTS IN LIMITED PARTNERSHIPS: -- (Continued)
The equity in net loss related to these investments for the years ended
December 31, 1996, 1995 and 1994, was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -----
<S> <C> <C> <C>
APEX Site Management, L.P. ......... $ (328,381) $ (219,619) $ -
1626 Locust Street Associates ...... (26,361) (178,953) -
----------- ----------- ----
$ (354,742) $ (398,572) $ -
=========== =========== ====
</TABLE>
Summarized financial information for these investments is as follows:
<TABLE>
<CAPTION>
1626 Locust Street Associates APEX Site Management, L.P.
Years Ended December 31 Years Ended December 31
------------------------------- -----------------------------------
1996 1995 1996 1995
--------------- ------------- ----------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets ............ $ 528,114 $ 544,498 $ 1,456,754 $ 187,875
Liabilities ...... 1,479,104 1,513,272 2,201,033 98,045
----------- ----------- ------------- -----------
Equity ............ $ (950,990) $ (968,774) $ 744,279 $ 89,830
=========== =========== ============= ===========
Net loss ......... $ (47,378) $ (665,253) $ (1,552,541) $ (491,738)
=========== =========== ============= ===========
</TABLE>
At December 31, 1996, the Company has a 55.64% limited partnership
interest in 1626 Locust Associates. The Company does not consolidate the
financial statements of this partnership as it does not control its operations.
In 1996, under the terms of the partnership agreement, the Company was required
to acquire the 28.74% partnership interest of a deceased partner. The $433,847
purchase price was funded by a non-interest-bearing note which was recorded at
$310,037, net of discount of $123,810 (of 9%), which is due to the estate of
the former partner (Note 7). As the Company concluded this investment was not
realizable from future operations, the investment of $319,823 was written-off
in 1996. At December 31, 1996, the Company is obligated to fund operating
deficits of the partnership and has guaranteed certain debt obligations of 1626
Locust Associates. The building owned by the partnership is currently under
agreement of sale (Note 9).
During 1995, the Company entered into a limited partnership, APEX Site
Management, L.P., which is engaged in providing site management to owners of
real estate related to the establishment of telecommunications transmission
sites on their respective properties. Under the terms of the partnership
agreement, the Company was obligated to contribute up to $548,000 to the
partnership. In 1996 and 1995, the Company contributed $283,466 and $264,534
(unaudited), respectively, to the partnership. As the Company has a limited
partnership interest in this venture, and has no additional financial
commitments to the venture, it has not recorded losses in excess of its
investment as of December 31, 1996.
F-12
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996, 1995 AND 1994
7. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Line of Credit
On December 28, 1993, a $2,300,000 line of credit with interest at the
prime rate was available until June 30, 1994. This line was obtained for
working capital purposes and to repay costs associated with the abandoned
public offering. This line of credit required repayment beginning on July 1,
1994, at $50,000 per month until July 1, 1995, when payments increased to
$60,000 per month until June 30, 1996, when the remaining balance was
due. The line of credit is secured by certain fees and commissions
receivable, and a partial guarantee, equal to 50% of the credit line, by a
stockholder of the Company. Under the terms of the line, the Company
was required to maintain certain annual levels of revenues and net income
among other restrictions. The Company has not been in compliance with
these covenants since the fiscal year ended December 31, 1995. This debt
was repaid in full in May 1997. The weighted average interest rates for the
years ended December 31, 1996, 1995 and 1994, were 8.27%, 8.72%
(unaudited), and 7.40% (unaudited). The weighted average borrowing for
the years ended December 31, 1996 and 1995, were $630,950 and
$1,172,617 (unaudited). Weighted average interest rates for the six months
ended June 30, 1997 and 1996 were, 8.27% (unaudited) and 8.34%
(unaudited), respectively. ................................................ $ 610,950 $850,950
Loan Payable
Loan represents amounts borrowed from a bank for the purpose of
financing certain improvements. Interest only is payable at the rate of 9%,
and this loan matures on April 1, 1998. .................................... 309,394 309,394
Mortgage Note
This mortgage note is secured by real estate held for sale with an
adjustable rate mortgage. Interest is payable at a fixed rate of 8.625%.
Monthly principal and interest payments are $1,051 with a final payment
due November 1, 2015. The property was sold in April 1997, and the debt
was repaid from the proceeds of the sale. ................................. 117,702 119,880
Note Payable, EPDLP
The Company has a $7,000,000 note payable related to its purchase of
certain management contract rights on December 31, 1996 (Note 4). The
note bears interest at 7%, matures on December 31, 2006, and requires
initial minimum monthly principal and interest payments of $82,000 for the
first quarter of 1997 adjusted prospectively based upon fee revenue
generated by the acquired management contracts. ........................... 7,000,000 --
</TABLE>
F-13
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996, 1995 AND 1994
7. LONG-TERM DEBT: -- (Continued)
<TABLE>
<CAPTION>
Loan Payable, Affiliate
On January 31, 1994, the Company purchased for $2,205,424 leasing
commissions receivable from R.R. Loanco Associates (Note 3), an
affiliate, and financed the purchase price through a note. This note
bears interest only at 2% above prime and matures on January 31, 1999.
This debt is unsecured and is subordinate to the line of credit . The
weighted average interest rates for the years ended December 31, 1996,
1995 and 1994 were 10.27%, 10.72% (unaudited) and 9.40% (unaudited).
Weighted average interest rates for the six months ended June 30, 1997
and 1996, were 10.27% (unaudited) and 10.34% (unaudited), respectively. 2,180,424 2,205,424
<S> <C> <C>
Loan Payable, Affiliate
Represents amounts due to an affiliated partnership (Delaware
Associates) for cash advances to the Company. This debt is unsecured and
is due on demand. Interest is payable at the rate of 1% above prime. The
weighted average interest rates for the years ended December 31, 1996,
1995 and 1994 were 9.27%, 9.72% (unaudited) and 8.40% (unaudited),
respectively. Weighted average interest rates for the six months ended
June 30, 1997 and 1996 were, 9.27% (unaudited) and 9.34% (unaudited),
respectively. ....................................................... 877,068 1,502,593
Loan Payable, Affiliate
Represents an amount due to Richard I. Rubin & Co., Inc., an affiliate,
for the purchase of its operating assets on December 31, 1992. Principal
and interest are due in monthly installments of $18,370. This note bears
interest at the rate of 12%. Final payment is due on August 1, 1999.
Principal and interest payments have been deferred by Richard I. Rubin &
Co., Inc. since 1993; however, the Company has accrued all unpaid
interest. The Company made partial interest payments of $100,000 and
$120,000 in 1996 and 1995, respectively................................. 1,000,000 1,000,000
Notes Payable, Former Stockholders
The Company is obligated under notes payable to former stockholders
related to the repurchase of their shares of the Company's stock. These
notes are payable in monthly installments through the year 1999 and bear
interest at rates ranging from 7.7% to 9.0%. ........................ 77,627 236,790
Loans Payable to Affiliate
The Company has a 55.64% ownership interest in a partnership, 1626
Locust Street Associates, which was purchased at various times from
former partners of this partnership (Note 6). The aggregate purchase
price is payable in annual installments through the year 2007 without
stated interest. Interest has been imputed at rates ranging from 9% to
10%..................................................................... 385,107 262,429
</TABLE>
F-14
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996, 1995 AND 1994
7. LONG-TERM DEBT: -- (Continued)
<TABLE>
<S> <C> <C>
Loan Payable to Affiliate
Pan American Associates, an affiliated partnership, advanced amounts to the
Company to finance operating activities. The loan is due on demand with
interest at prime plus 1%. The weighted average interest rates for the years
ended December 31, 1996, 1995 and 1994, were 9.27%, 9.72% (unaudited)
and 8.4% (unaudited). Weighted average interest rates for the six months
ended June 30, 1997 and 1996, were 9.27% (unaudited) and 9.34% (unau-
dited), respectively. 165,400 200,000
Loan Payable, Shareholder
A shareholder advanced $250,000 to the Company during 1995 at prime plus
1% to finance the purchase of certain computer equipment. The loan plus
accrued interest was repaid in full during 1996. ........................ -- 250,000
------------ ------------
12,723,672 6,937,460
Less -- Current portion ................................................... (2,650,245) (3,743,683)
------------ ------------
Long-term debt ...................................................... $ 10,073,427 $ 3,193,777
============ ============
</TABLE>
The carrying amount of the Company's long term debt approximates fair
value as the interest rates on certain of the debts are variable and adjust to
the market, and the remaining debts are at fixed rates which approximate market
interest rates for similar instruments.
At December 31, 1996, annual maturities of the long-term debt are as
follows:
1997 ..................................................$2,650,245
1998 ................................................ 1,142,689
1999 ................................................ 3,300,010
2000 ................................................ 687,929
2001 and thereafter ................................. 4,942,799
8. TRANSACTIONS WITH AFFILIATES:
Business Operations
In the normal course of business the Company performs management, leasing,
development and marketing activities for partnerships and other ventures which
are affiliates of the stockholders of the Company. As certain stockholders
either directly or indirectly have ownership interests in these partnerships
and ventures. Revenue recognized for these activities is as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended December 31
1997 1996 1996 1995 1994
------------ ------------ ------------- ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Management fees ......... $1,026,352 $ 954,367 $ 2,266,397 $1,987,818 $3,582,489
Leasing commissions ...... 1,173,802 976,948 3,156,010 1,796,416 2,415,902
Consulting fees ......... 122,898 147,150 347,951 406,065 --
Development fees ......... 173,504 127,249 181,533 -- 644,598
----------- ----------- ------------ ----------- -----------
Totals ............... $2,496,556 $2,205,714 $ 5,951,891 $4,190,299 $6,642,989
=========== =========== ============ =========== ===========
</TABLE>
Operating Lease
The Company leases office space from Richard I. Rubin & Co., Inc., an
affiliate, under a sublease agreement. The term of the sublease agreement began
on January 1, 1994 and expires on July 31, 1999. The original
F-15
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996, 1995 AND 1994
8. TRANSACTIONS WITH AFFILIATES: -- (Continued)
terms of the sublease called for a monthly base rental of $49,112 plus the
Company's share of the increase in office maintenance costs, real estate taxes
and storage space rental. Effective August 1, 1996, the monthly base rent was
decreased to $36,535. Effective December 1, 1993, the Company leased additional
office space in the same building from Bellevue Associates, an affiliate, for a
minimum rental of $10,524 per year plus additional rent based on the Company's
share of increases in office maintenance and other costs. This lease is
scheduled to expire on July 31, 1999. The Company incurred $690,987, $743,032
(unaudited) and $818,437 (unaudited) for the years ended December 31, 1996,
1995 and 1994, respectively, related to these leases with affiliates.
Employment Agreements
The Company entered into employment agreements, effective on January 1,
1993, with certain key employees who are or were stockholders of the Company.
These agreements were effective for a two-year term and provided for fixed
aggregate annual base salaries of approximately $400,000 plus other benefits.
Commencing in 1995 upon the lapse of the two-year term of these agreements,
deferred compensation totaling $620,000 was payable to these individuals over a
five-year period. Payments of $25,250 and $130,750 (unaudited) were made in
1996 and 1995, respectively, leaving a balance due of $464,000 at December 31,
1996.
Advances to Affiliates
During 1996 and 1995, the Company advanced $2,546,764 and $247,148
(unaudited), respectively, to various affiliated partnerships involved in the
development of real estate. As a result, $2,793,912 was outstanding from these
partnerships at December 31, 1996. These funds are non-interest bearing, are
due on demand and will be repaid when the respective partnership secures
construction financing. In management's opinion, based upon the current status
of these development projects, advances as of June 30, 1997 and December 31,
1996 are realizable through the future activities of the related partnerships.
The ability of the Company to realize these amounts is subject to the risks
inherent in the real estate development process.
Due To Affiliates
During 1995 and 1994, an affiliate of certain shareholders advanced funds
to the Company. These advances are due on demand and bear interest at the rate
of 7%. At June 30, 1997, and December 31, 1996 and 1995, these amounts were
$229,955 (unaudited) , $175,526 and $535,671 (unaudited), respectively.
9. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases office space from affiliates (Note 8) and from other
parties. These lease payments include charges for base rent and additional rent
for the Company's share of increases in operating costs. At December 31, 1996,
the future minimum rental payments under these leases are as follows:
1997 ...... $ 671,808
1998 ...... 653,958
1999 ...... 329,413
------------
Total ...... $ 1,655,179
============
Profit Sharing Plan
All full-time employees are eligible to participate in the plan. The
Company contributes to the plan at its own discretion. In 1996, 1995 and 1994,
no discretionary contributions were made to the plan.
F-16
<PAGE>
THE RUBIN ORGANIZATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996, 1995 AND 1994
9. COMMITMENTS AND CONTINGENCIES: -- (Continued)
Stockholders Agreement
Under their current stockholders agreements, the stockholders are
restricted on the transfer of their stock. If an individual stockholder wishes
to sell his or her stock to an outside party, the Company has the first option
to purchase the stock before the remaining stockholders. Upon the termination
of employment or the death of a stockholder, the Company and the other
stockholders will be obligated to purchase the stockholder's stock at a price
calculated as provided in the agreement.
Other
The Company has guaranteed $800,000 of certain debt obligations of 1626
Locust Associates and has provided a $100,000 letter of credit related to these
obligations. In May 1997, an agreement of sale was executed for the sale of
building owned by this partnership, which is scheduled to close in February
1998. As a result, in the event this transaction is consummated the proceeds of
the sale will allow the partnership to repay substantially all of the existing
indebtedness of the partnership. There can be no assurance that the transaction
will be consummated or that the current value of the property will continue to
approximate or exceed the aggregate indebtedness of the partnership.
The Company has a $1,000,000 joint and several guarantee related to
indebtedness of another affiliated partnership. This partnership's debt matures
on June 1, 1999. Certain shareholders' of the Company intend to provide the
Company with indemnifications related to this guarantee.
The Company has an employment agreement with an individual who is also a
shareholder of the Company. This agreement continues until terminated by the
Company and provides for salary continuation for a specified number of months
under certain circumstances. The aggregate commitment at December 31, 1996
under this contract is approximately $300,000.
Litigation
In the normal course of business there are various claims which have been
brought or asserted against the Company. After consultation with counsel, in
management's opinion such actions or claims will not be material to the
Company's consolidated financial position or results of operations.
10. SUBSEQUENT EVENT
In April 1997, the Company signed a letter of intent to be acquired by a
partnership formed by Pennsylvania Real Estate Investment Trust ("PREIT"). The
transaction is subject to certain conditions including the negotiation of a
definitive purchase agreement and the approval of PREIT's shareholders.
F-17
<PAGE>
APPENDIX G
OXFORD VALLEY
ROAD ASSOCIATES
(A PENNSYLVANIA LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
G-1
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
(A PENNSYLVANIA LIMITED PARTNERSHIP)
YEARS ENDED DECEMBER 31, 1996 AND 1995
CONTENTS
Page
------------
Independent Auditors' Report ........................... G-3
Financial Statements
Balance Sheets ....................................... G-4
Statements of Operations and Partners' Capital ...... G-5
Statements of Cash Flows .............................. G-6
Notes to Financial Statements ........................... G-7 to G-13
G-2
<PAGE>
To the Partners
Oxford Valley Road Associates
(A Pennsylvania Limited Partnership)
Blue Bell, Pennsylvania
We have audited the accompanying balance sheets of OXFORD VALLEY ROAD
ASSOCIATES (a Pennsylvania limited partnership) as of December 31, 1996 and
1995, and the related statements of operations and partners' capital, and cash
flows for the years then ended. These financial statements are the
responsibility of the management of OXFORD VALLEY ROAD ASSOCIATES. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OXFORD VALLEY ROAD
ASSOCIATES and its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
ZELENKOFSKE, AXELROD & CO., LTD.
Jenkintown, Pennsylvania
June 30, 1997
G-3
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------- June 30,
1996 1995 1997
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS (Note 7)
Property on Operating Leases, at Cost Less
Accumulated Depreciation (Notes 1B and 4)........ $43,408,851 $32,848,159 $42,918,155
Cash (Note 1A) ................................. 1,747,834 641,424 1,334,848
Accounts Receivable .............................. 288,589 -- 23,870
Notes Receivable From Tenants (Note 3) ......... 815,516 -- 792,585
Due From Condominium Association (Note 8A) ...... 47,340 -- 91,123
Cash Held in Escrow (Note 2) ..................... 852,665 3,960,374 60,565
Intangible Assets, Net of Accumulated Amortization
(Notes 1D and 6) .............................. 6,214,037 3,222,008 5,965,715
Costs in Excess of Revenues on Uncompleted
Contracts (Note 5)............................... -- 3,182,120 --
Accrued Rental Income (Notes 1C and 4) ......... 450,762 -- 673,963
Prepaid Expenses and Other Assets ............... 295,226 1,000 184,983
------------ ------------ ------------
$54,120,820 $43,855,085 $52,045,807
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Mortgage Note Payable (Note 7) .................. $49,734,452 $ -- $49,403,898
Construction Loan Payable (Note 7) ............ -- 37,800,274 --
Accounts Payable .............................. 2,188,997 2,048,956 545,520
Accrued Expenses and Other Liabilities ......... 645,607 -- 541,203
Due to Affiliates (Note 8B) ..................... 974,078 1,415,272 879,096
------------ ------------ ------------
53,543,134 41,264,502 51,369,717
Commitments (Note 9) ........................... -- -- --
Partners' Capital (Note 1F) ..................... 577,686 2,590,583 676,090
------------ ------------ ------------
$54,120,820 $43,855,085 $52,045,807
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
G-4
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
----------------------------- -------------------------------
1996 1995 1997 1996
-------------- ------------ ------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Rental Income ................................. $ 4,592,980 $ -- $3,528,041 $ 1,126,257
Common Area Maintenance Fees .................. 223,405 -- 159,570 60,783
Real Estate Taxes ........................... 370,698 -- 321,683 16,527
Water and Sewer Reimbursements ............... 47,519 -- 99,384 --
------------ ----------- ---------- ------------
5,234,602 -- 4,058,678 1,203,567
------------ ----------- ---------- ------------
Operating Expenses
General and Administrative .................. 73,936 -- 71,059 5,531
Condominium Assessment ........................ 362,516 -- 235,716 96,420
Property Tax ................................. 448,183 -- 341,305 42,571
Development Expenses ........................ 522,636 -- 7,467 --
Interest .................................... 2,559,896 -- 1,976,487 --
Management Fees (Note 8C) ..................... 238,100 -- 167,861 21,352
Security .................................... 42,905 -- -- --
Depreciation and Amortization ............... 975,324 -- 739,018 254,290
------------ ----------- ---------- ------------
5,223,496 -- 3,538,913 420,164
------------ ----------- ---------- ------------
Income From Operations Before Other
Income ....................................... 11,106 -- 519,765 783,403
Other Income
Interest Income .............................. 218,700 -- 56,432 7,003
------------ ----------- ---------- ------------
Net Income .................................... 229,806 -- 576,197 790,406
Partners' Capital -- Beginning of Period ...... 2,590,583 -- 577,686 2,590,583
Add: Contributions by Partners ............... -- 2,590,583 -- --
Less: Distributions to Partners ............... (2,242,703) -- (477,793) (1,866,451)
------------ ----------- ---------- ------------
Partners' Capital -- End of Period ............ $ 577,686 $2,590,583 $ 676,090 $ 1,514,538
============ =========== ========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
G-5
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income ....................................... $ 229,806 $ --
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities
Depreciation ................................. 683,741 --
Amortization ................................. 291,583 --
(Increase) Decrease in Assets
Cash Held in Escrow ........................... 3,107,709 (3,960,374)
Accounts Receivable ........................... (288,589) --
Costs in Excess of Revenues on Uncompleted
Contracts .................................... 3,182,120 (3,182,120)
Accrued Rental Income ........................ (450,762) --
Prepaid Expenses and Other Assets ............ (294,226) (1,000)
Increase (Decrease) in Liabilities
Accounts Payable .............................. 140,041 2,048,955
Accrued Expenses and Other Liabilities ......... 645,607 --
Revenues in Excess of Costs on Uncompleted
Contracts .................................... -- --
Due From/to Affiliates, Net .................. (488,534) 1,415,272
-------------- --------------
Total Adjustments ................................. 6,528,690 (3,679,267)
-------------- --------------
Net Cash Provided by (Used in) Operating Activities 6,758,496 (3,679,267)
Cash Flows From Investing Activities
Capital Expenditures ........................... (11,244,433) (32,848,159)
Increase in Intangible Assets .................. (3,283,612) (3,222,008)
Tenant Notes Receivable ........................ (846,759) --
Repayments on Tenant Notes Receivable ............ 31,243 --
-------------- --------------
Net Cash Provided by (Used in) Investing
Activities .................................... (15,343,561) (36,070,167)
Cash Flows From Financing Activities
Proceeds From Mortgage Note Refinancing ......... 50,000,000 --
Proceeds of Construction Financing ............... 8,561,676 37,800,274
Repayment of Construction Loan .................. (46,361,950) --
Repayments on Mortgage Note Payable ............ (265,548) --
Capital Contributed by Partners .................. -- 2,590,584
Distributions to Partners ........................ (2,242,703) --
-------------- --------------
Net Cash Provided by (Used in) Financing
Activities .................................... 9,691,475 40,390,858
-------------- --------------
Net Increase (Decrease) in Cash .................. 1,106,410 641,424
Cash -- Beginning of Period ..................... 641,424 --
-------------- --------------
Cash -- End of Period ........................... $ 1,747,834 $ 641,424
============== ==============
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest, Net of Amount Capitalized ......... $ 2,180,832 $ --
============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1997 1996
--------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net Income ....................................... $ 576,197 $ 790,406
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities
Depreciation ................................. 490,696 202,230
Amortization ................................. 248,322 52,060
(Increase) Decrease in Assets
Cash Held in Escrow ........................... 792,100 3,007,534
Accounts Receivable ........................... 264,719 (126,909)
Costs in Excess of Revenues on Uncompleted
Contracts .................................... -- 3,182,120
Accrued Rental Income ........................ (223,201) (380,309)
Prepaid Expenses and Other Assets ............ 110,243 (6,165)
Increase (Decrease) in Liabilities
Accounts Payable .............................. (1,643,477) 1,084,448
Accrued Expenses and Other Liabilities ......... (104,404) 65,845
Revenues in Excess of Costs on Uncompleted
Contracts .................................... -- 981,922
Due From/to Affiliates, Net .................. (138,765) (1,511,692)
------------- --------------
Total Adjustments ................................. (203,767) 6,551,084
------------- --------------
Net Cash Provided by (Used in) Operating Activities 372,430 7,341,490
Cash Flows From Investing Activities
Capital Expenditures ........................... -- (10,945,474)
Increase in Intangible Assets .................. -- (1,753,582)
Tenant Notes Receivable ........................ -- (713,174)
Repayments on Tenant Notes Receivable ............ 22,931 9,425
------------- --------------
Net Cash Provided by (Used in) Investing
Activities .................................... 22,931 (13,402,805)
Cash Flows From Financing Activities
Proceeds From Mortgage Note Refinancing ......... -- --
Proceeds of Construction Financing ............... -- 16,889,049
Repayment of Construction Loan .................. -- (8,198,398)
Repayments on Mortgage Note Payable ............ (330,554) --
Capital Contributed by Partners .................. -- --
Distributions to Partners ........................ (477,793) (1,866,451)
------------- --------------
Net Cash Provided by (Used in) Financing
Activities .................................... (808,347) 6,824,200
------------- --------------
Net Increase (Decrease) in Cash .................. (412,986) 762,885
Cash -- Beginning of Period ..................... 1,747,834 641,424
------------- --------------
Cash -- End of Period ........................... $ 1,334,848 $ 1,404,309
============= ==============
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest, Net of Amount Capitalized ......... $ 1,976,487 $ --
============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
G-6
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
On April 13, 1995, Oxford Valley Road Associates (the "Partnership")
purchased commercial real estate in Falls Township, Pennsylvania to develop and
lease The Court at Oxford Valley. Concurrent with this transaction two national
chain store companies purchased adjacent real estate and entered into
development agreements with the Partnership. The project was fully leased as of
December 31, 1995 and collection of rents began on February 1, 1996.
The financial statements for the six months ended June 30, 1997 and June
30, 1996 are unaudited; however, in the opinion of management, all adjustments
(consisting solely of recurring adjustments) necessary for a fair presentation
of the financial statements for the interim periods have been included. The
results of the interim period are not necessarily indicative of the results for
the full year.
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, if any, and
the reported revenues and expenses. Actual results could vary from the
estimates that were used.
A summary of the Partnership's significant accounting policies
consistently applied in the preparation of the accompanying financial
statements is as follows:
A) Cash
The Company maintains substantially all of its cash at a Delaware Valley
area bank. The total cash balances are insured by the FDIC up to $100,000 per
financial institution. At December 31, 1996, uninsured cash balances total
$1,722,014.
B) Property on Operating Leases
Rental property is stated at cost. For the year ended December 31, 1996
and the six months ended June 30, 1997 (unaudited), depreciation is calculated
using straight-line and accelerated methods over the following useful lives:
Land Improvements 15 Years
Buildings 30 Years
Equipment 7 Years
The cost of assets sold, retired or otherwise disposed of, and the related
accumulated depreciation will be eliminated from the accounts and any resulting
gain or loss will be included in operations at the time of such occurrence.
Expenditures for maintenance and minor renovations are charged to expense
when paid. Additions and major renovations are capitalized.
C) Revenue Recognition
Rental income from tenants is recognized on a straight-line basis
regardless of when payments are due. Accrued rental income represents rental
income recognized in excess of payments currently due (see Note 4).
Revenues from site development contracts are recognized on the
completed-contract method. This method is used because the position and results
of operations do not vary significantly from those which would result
G-7
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1995
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -- (Continued)
from use of the percentage-of-completion method. A contract is considered
complete when all costs except insignificant items have been incurred and the
project is fully operational. Contract costs include all direct and indirect
costs associated with construction of the project.
Costs in excess of revenues are classified as assets under costs in excess
of revenues on uncompleted contracts.
D) Intangible Assets
Intangible assets are stated at cost. Amortization is calculated on the
straight-line basis over the following periods:
Start-up Costs 5 Years
Tenant Fit-out Allowances Term of the Related Lease (10 - 15 Years)
Financing Costs Term of the Related Financing (10 - 15 Years
Capitalized Lease Fees Term of the Related Lease (10 - 15 Years)
Prepaid Lease Commissions Term of the Related Lease (10 - 15 Years)
E) Income Taxes
The Partnership is not a tax-paying entity for federal and state income
tax purposes, thus no income tax expenses have been recorded in the statement.
Income from the Partnership is taxed to the Partners on their individual income
tax returns.
F) Partnership Earnings and Distribution Allocations
The General and Limited Partners have an agreement as to the allocations
of net earnings and distributions subject to extensive provisions as agreed to
by the Partners.
G-8
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1995
NOTE 2: CASH HELD IN ESCROW
<TABLE>
<CAPTION>
December 31,
------------------------- June 30,
1996 1995 1997
---------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
The Partnership has the following amounts being held in
escrow by New York Life Insurance Company, the
holder of the mortgage note payable on the Partnership
(see Note 7), which will be released upon completion of
additional construction costs associated with the project. $719,427 $ -- $ 60,565
The Partnership also has the following amounts being held
in escrow by a bank. The amount will be released to the
Partnership upon completion of certain project site work. 133,238 404,722 --
For the year ended December 31, 1995, the Partnership had
$3,555,652 held by a bank of which $3,500,000 was
used as a mandatory repayment on the Construction
Loan (see Note 7). On May 17, 1996, this escrow was
released in full and decreased the loan balance. ......... -- 3,555,652 --
--------- ----------- ---------
$852,665 $3,960,374 $ 60,565
========= =========== =========
</TABLE>
NOTE 3: NOTES RECEIVABLE FROM TENANTS
The Partnership has the following notes receivable due from tenants:
<TABLE>
<CAPTION>
December 31,
------------------- June 30,
1996 1995 1997
---------- ------ ------------
(Unaudited)
<S> <C> <C> <C>
Notes receivable from tenants for excess construction costs
which will be repaid in monthly installments ranging
from $1,424 to $9,426 including interest at 10%
maturing through January, 2012. ........................... $815,516 $ -- $792,585
========= ===== =========
</TABLE>
At December 31, 1996, the following are the maturities of the notes
receivable for each of the next five years and in the aggregate:
1997 ............ $ 52,792
1998 ............ 56,283
1999 ............ 62,183
2000 ............ 68,666
2001 ............ 75,900
Thereafter ...... 499,692
---------
$815,516
=========
G-9
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1995
NOTE 4: PROPERTY ON OPERATING LEASES
The Partnership is the lessor of real property under various operating
leases expiring through 2012.
The following is a summary of property on operating leases:
December 31, June 30,
1996 1997
-------------- ---------------
(Unaudited)
Land ................................. $17,522,402 $ 17,522,402
Land Improvements .................. 1,668,146 1,668,146
Buildings ........................... 24,677,129 24,677,129
Equipment ........................... 224,915 224,915
----------- ------------
44,092,592 44,092,592
Less: Accumulated Depreciation ...... (683,741) (1,174,457)
----------- ------------
$43,408,851 $ 42,918,135
=========== ============
Depreciation Expense ............... $ 683,741 $ 490,696
=========== ============
As of December 31, 1995, property on operating lease was not fully
developed. The following is a summary of accumulated costs as of that date:
Land and Land Improvements ...... $17,338,727
Buildings ........................ 15,334,642
Equipment ........................ 174,790
------------
$32,848,159
============
The Partnership leases shopping center space to tenants under operating
leases requiring fixed and contingent rentals based on real estate taxes and
tenants' share of other expenses.
The following is a schedule of future minimum rentals under noncancellable
leases at December 31, 1996, not including renewal option increases or any
re-leasings:
Year Ending December 31,
- --------------------------
1997 ..................... $ 6,562,620
1998 ..................... 6,591,563
1999 ..................... 6,598,799
2000 ..................... 6,598,799
2001 ..................... 6,899,322
Thereafter ............... 62,756,855
------------
$96,007,958
============
G-10
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1995
NOTE 5: COSTS AND REVENUES ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
-------- ------------
<S> <C> <C>
Costs Incurred on Uncompleted Contracts .............................. $ -- $12,282,120
Revenues on Uncompleted Contracts .................................... -- 9,100,000
------- ------------
-- $ 3,182,120
======= ============
Included in the accompanying balance sheets under the following caption:
Costs in Excess of Revenues on Uncompleted Contracts .................. -- $ 3,182,120
======= ============
</TABLE>
NOTE 6: INTANGIBLE ASSETS
The intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------- June 30,
1996 1995 1997
------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Start-up Costs ........................ $ 542,023 $ 367,439 $ 542,023
Tenant Fit-out Allowances ............ 3,173,680 46,720 3,173,680
Financing Costs ..................... 417,878 764,482 417,878
Capitalized Lease Fees ............... 1,384,578 1,055,906 1,384,578
Prepaid Lease Commissions ............ 987,461 987,461 987,461
---------- ----------- ----------
6,505,620 3,222,008 6,505,620
Less: Accumulated Amortization ...... (291,583) -- (539,905)
---------- ----------- ----------
$6,214,037 $3,222,008 $5,965,715
========== =========== ==========
Amortization Expense .................. $ 291,583 $ -- $ 248,321
========== =========== ==========
</TABLE>
For the year ended December 31, 1995, The Court at Oxford Valley was not
fully developed, therefore, no amortization expense was calculated.
G-11
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1995
NOTE 7: LOANS PAYABLE
<TABLE>
<CAPTION>
December 31,
----------------------------- June 30,
1996 1995 1997
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
Mortgage note payable to New York Life Insurance
Company. Principal and interest, calculated based upon a
twenty-five year amortization period, is payable monthly
at 8.02% per annum through July 10, 2011 when a
balloon payment of $31,833,931 plus all unpaid interest is
due. The loan is secured by a mortgage, assignment of
leases and rents and security agreement encumbering the
premises and all improvements thereon, along with all
other tangible personal property and fixtures owned by
the Partnership and all of the Partnership's interest in all
intangible personal property related to operation of the
center. ................................................... $49,734,452 $ -- $49,403,898
============ ============ ============
Construction loan payable to four banks with a maximum
borrowing limit of $60,000,000. The loan required
interest at [00ab]% in excess of the prime rate for
commercial loans. The effective rate at December 31, 1995 was
9%. The loan was secured by all real estate and an
assignment of all rents and leases relating to the
mortgaged property and the personal guarantees of two of the
partners. On July 3, 1996, the Construction Loan
payable was refinanced with New York Life Insurance
Company. -- $37,800,274 $ --
============ ============ ============
</TABLE>
At December 31, 1996, the following are maturities of long-term debt:
1997 ............ $ 674,588
1998 ............ 730,723
1999 ............ 791,530
2000 ............ 857,397
2001 ............ 928,745
Thereafter ...... 45,751,469
------------
$49,734,452
============
<TABLE>
<CAPTION>
December 31,
------------------------------- June 30,
1996 1995 1997
-------------- -------------- ------------
(Unaudited)
<S> <C> <C> <C>
Total Interest Expense ............... $ 4,090,353 $ 1,321,270 $1,976,487
Less: Amount Capitalized ............ (1,530,457) (1,321,270) --
------------ ------------ -----------
Interest Charged to Operations ...... $ 2,559,896 $ -- $1,976,487
============ ============ ===========
</TABLE>
G-12
<PAGE>
OXFORD VALLEY ROAD ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1995
NOTE 8: RELATED PARTY TRANSACTIONS
A) Due From Condominium Association
Represents an amount due from The Court at Oxford Valley Condominium
Association (the "Association") for expenses of the Association paid for by the
Partnership which is a member of the Association. No formal repayment terms
exist, however, repayment is expected within the next twelve months.
B) Due to Affiliates
The balance consists of various non-interest bearing amounts to related
affiliates (see Note 8D). The general and limited partners of Oxford Valley
Road Associates are the general and limited partners and/or stockholders and
officers of these affiliates.
C) Management Fees
The Partnership pays management fees to Goldenberg Management Company,
Inc., an affiliate of a general partner, for administration of its day-to-day
operations. Management fees are based on 4% of imputed rents and gross cash
received from tenants. Management fee expense for the years ended December 31,
1996 and 1995 was $238,100 and $-0-, respectively, and for the six months ended
June 30, 1997 (unaudited) was $94,327.
D) Leasing and Development Fees
During the years ended December 31, 1996 and 1995, the Partnership was
charged $197,636 and $1,916,194, respectively, for leasing and development fees
to affiliated companies of the general partners. At both December 31, 1996 and
1995, development fees have been capitalized and added to the cost of the
property on operating leases. At both December 31, 1996 and 1995, leasing fees
have been capitalized and included in intangible assets.
NOTE 9: OUTSTANDING LETTERS OF CREDIT
At December 31, 1996 and 1995, the Partnership had $1,278,132 and
$6,753,662, respectively, of outstanding letters of credit related to
completion of certain project construction.
At June 30, 1997 (unaudited), the Partnership had $1,278,132 of these
outstanding letters of credit.
G-13
<PAGE>
APPENDIX H
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Trustees of
Pennsylvania Real Estate Investment Trust:
We have audited the statement of revenues and certain expenses of Magnolia
Mall (the "Property"), described in Note 1, for the year ended December 31,
1996. This financial statement is the responsibility of management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in a Proxy Statement to be filed by
Pennsylvania Real Estate Investment Trust as described in Note 1 and is not
intended to be a complete presentation of the Property's revenues and expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenues and certain expenses of the Property for
the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
June 16, 1997
H-1
<PAGE>
MAGNOLIA MALL
STATEMENT OF REVENUES AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
For the For the Six
Year Ended Months Ended
December 31, June 30,
1996 1997
-------------- -------------
(unaudited)
<S> <C> <C>
REVENUES:
Minimum rent (Note 2) ........................ $ 4,583,720 $2,426,227
Operating reimbursements ..................... 1,370,977 767,362
Other income ................................. -- 7,394
------------ -----------
Total revenues ........................... 5,954,697 3,200,983
------------ -----------
CERTAIN EXPENSES:
Maintenance and other operating expenses ...... 1,507,552 634,917
Utilities .................................... 101,225 50,455
Real estate taxes ........................... 233,565 128,250
------------ -----------
Total certain expenses .................. 1,842,342 813,622
------------ -----------
REVENUES IN EXCESS OF CERTAIN EXPENSES ......... $ 4,112,355 $2,387,361
============ ===========
</TABLE>
The accompanying notes are an integral part of this these financial statements.
H-2
<PAGE>
MAGNOLIA MALL
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BASIS OF PRESENTATION:
The statement of revenues and certain expenses reflects the operations of
Magnolia Mall (the "Property"), located in Florence, South Carolina. The
Property is expected to be acquired (in addition to an unaffiliated business
and a separate affiliated property) by Pennsylvania Real Estate Investment
Trust (the "Company") from Equity Retail Properties ("Equity") in September
1997. The Property has an aggregate net rentable area of approximately 570,000
square feet (98% leased as of December 31, 1996). This statement of revenues
and certain expenses is to be included in a Proxy Statement to be filed by the
Company, as the above described transaction has been deemed significant
pursuant to the rules and regulations of the Securities and Exchange
Commission.
The accounting records of the Property are maintained on a modified cash
basis. Adjusting entries have been made to present the accompanying financial
statement in accordance with generally accepted accounting principles. The
accompanying financial statement excludes certain expenses such as interest,
depreciation and amortization, professional fees, and other costs not directly
related to the future operations of the Property.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The ultimate results could differ from those estimates.
The statement of revenues and certain expenses for the six months ended
June 30, 1997 is unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for
the fair presentation of the statement of revenue and certain expenses for the
interim period have been included. The results of the interim period are not
necessarily indicative of the results for the full year.
2. OPERATING LEASES:
Base rents presented for the year ended December 31, 1996, include
straight-line adjustments for rental revenue increases in accordance with
generally accepted accounting principles. The aggregate rental revenue increase
resulting from the straight-line adjustment for the year ended December 31,
1996, was $209,877 and for the six months ended June 30, 1997 was $104,939
(unaudited).
J.C. Penney had percentage rent in lieu of minimum rent of $439,009 which
is more than 10% of total base rents for the year ended December 31, in 1996.
The Property is leased to tenants under operating leases with expiration
dates extending to the year 2008. Future minimum rentals under noncancelable
operating leases, excluding tenant reimbursements of operating expenses as of
December 31, 1996, are as follows:
1997 $ 3,448,757
1998 3,531,641
1999 3,309,091
2000 3,114,339
2001 2,569,946
Thereafter 7,563,458
Certain leases also include provisions requiring tenants to reimburse the
Property for management costs and other operating expenses up to stipulated
amounts.
H-3
<PAGE>
3. RELATED PARTY TRANSACTIONS:
The Property paid management fees of $198,364 to Equity Development
Properties, L.P., a related party, based on percentages as defined in the
management agreement. Subsequent to December 31, 1996, the management agreement
was sold to an unaffiliated party. These management fees are included within
maintenance and other operating expenses in the statement of revenues and
certain expenses.
4. COMMITMENTS:
The Property is obligated under a ground lease agreement on the shopping
center requiring minimum annual payments as follows:
1997 $ 175,000
1998 175,000
1999 189,583
2000 200,000
2001 200,000
Thereafter 4,658,334
H-4
<PAGE>
APPENDIX I
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Trustees of
Pennsylvania Real Estate Investment Trust:
We have audited the statement of revenues and certain expenses of North
Dartmouth Mall (the "Property") described in Note 1, for the year ended
December 31, 1996. This financial statement is the responsibility of
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The statement of revenues and certain expenses was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in a Proxy Statement to be filed by Pennsylvania Real
Estate Investment Trust as described in Note 1 and is not intended to be a
complete presentation of the Property's revenues and expenses.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenues and certain expenses of the Property for
the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
June 20, 1997
I-1
<PAGE>
NORTH DARTMOUTH MALL
STATEMENT OF REVENUES AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
For the For the Six
Year Ended Months Ended
December 31, June 30,
1996 1997
-------------- -------------
(unaudited)
<S> <C> <C>
REVENUES:
Minimum and percentage rent (Note 2) ......... $ 4,496,380 $2,533,411
Operating reimbursements ..................... 1,437,767 744,271
Interest and other income (Note 2) ............ 165,883 12,139
------------ -----------
Total revenues .............................. 6,100,030 3,289,821
------------ -----------
CERTAIN EXPENSES:
Maintenance and other operating expenses ...... 1,692,757 883,887
Utilities .................................... 214,143 107,498
Real estate taxes .............................. 351,161 193,620
------------ -----------
Total certain expenses ..................... 2,258,061 1,185,005
------------ -----------
REVENUES IN EXCESS OF CERTAIN EXPENSES ......... $ 3,841,969 $2,104,816
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
I-2
<PAGE>
NORTH DARTMOUTH MALL
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BASIS OF PRESENTATION:
The statement of revenues and certain expenses reflects the operations of North
Dartmouth Mall (the "Property"), located in North Dartmouth, Massachusetts. The
Property is expected to be acquired (in addition to an unaffiliated business
and a separate affiliated property) by Pennsylvania Real Estate Investment
Trust (the "Company") from Equity Retail Properties ("Equity") in September
1997. The Property has aggregate net rentable area of approximately 640,000
square feet (81% leased as of December 31, 1996). This statement of revenues
and certain expenses is to be included in a Proxy Statement to be filed by the
Company, as the above described transaction has been deemed significant
pursuant to the rules and regulations of the Securities and Exchange
Commission.
The accounting records of the Property are maintained on a modified cash basis.
Adjusting entries have been made to present the accompanying financial
statement in accordance with generally accepted accounting principles. The
accompanying financial statement excludes certain expenses such as interest,
depreciation and amortization, professional fees, and other costs not directly
related to the future operations of the Property.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate results could differ from those estimates.
The statement of revenues and certain expenses for the six months ended June
30, 1997 is unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for the fair
presentation of the statement of revenue and certain expenses for the interim
period have been included. The results of the interim period are not
necessarily indicative of the results for the full year.
2. OPERATING LEASES:
Base rents presented for the year ended December 31, 1996, include
straight-line adjustments for rental revenue increases in accordance with
generally accepted accounting principles. The aggregate rental revenue increase
resulting from the straight-line adjustment for the year ended December 31,
1996, was $225,805 and for the six months ended June 30, 1997 was $112,903
(unaudited).
J.C. Penney had minimum rental payments equal to 11.50% of total base rents for
the year ended December 31, 1996. Interest and other income includes lease
termination fees of $125,000 for the year ended December 31, 1996.
The Property is leased to tenants under operating leases with expiration dates
extending to the year 2012. Future minimum rentals under noncancellable
operating leases, excluding tenant reimbursements of operating expenses as of
December 31, 1996, are as follows:
1997 $ 3,410,614
1998 3,448,116
1999 3,357,551
2000 3,212,507
2001 2,871,133
Thereafter 13,231,477
Certain leases also include provisions requiring tenants to reimburse the
Property for management costs and other operating expenses up to stipulated
amounts.
I-3
<PAGE>
3. RELATED PARTY TRANSACTIONS:
The Property paid management fees of $153,260 to Equity Development Properties,
L.P., a related party, based on percentages as defined in the management
agreement. Subsequent to December 31, 1996, the management agreement was sold
to an unaffiliated party. These management fees are included within maintenance
and other operating expenses in the statement of revenues and certain expenses.
I-4
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
This Proxy is Solicited on behalf of the Board of Trustees
The undersigned, revoking all prior proxies, hereby appoints SYLVAN M.
COHEN, LEONARD I. KORMAN and JEFFREY P. ORLEANS, and each and any of them, as
proxies of the undersigned, with full power of substitution, to vote and act
with respect to all Certificates of Beneficial Interest of Pennsylvania Real
Estate Investment Trust (the "Shares") held of record by the undersigned at the
close of business on August 25, 1997 at the Special Meeting of Holders of
Certificates of Beneficial Interest to be held on Monday, September 29, 1997
and at any adjournment thereof. By execution hereof, the undersigned
acknowledges receipt of the Trust's Notice of Meeting and related Proxy
Statement, dated August 27, 1997, relating to the Special Meeting.
1. Approval of the TRO Transaction.
/ / FOR / / AGAINST / / ABSTAIN
2. Approval of the Amended and Restated Trust Agreement.
/ / FOR / / AGAINST / / ABSTAIN
3. Approval of the Amended and Restated 1990 Incentive and Nonqualified Stock
Option Plan.
/ / FOR / / AGAINST / / ABSTAIN
(continued on reverse side)
- -------------------------------------------------------------------------------
4. Approval of the 1997 Stock Option Plan.
/ / FOR / / AGAINST / / ABSTAIN
5. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments thereof.
THE SHARES REPRESENTED BY
THIS PROXY, DULY EXECUTED,
WILL BE VOTED AS INSTRUCTED
ABOVE. IF INSTRUCTIONS ARE
NOT GIVEN, THEY WILL BE VOTED
FOR ALL PROPOSALS. YOU ARE
URGED TO SIGN AND RETURN THIS
PROXY SO THAT YOU MAY BE SURE
THAT YOUR SHARES WILL BE
VOTED.
-----------------------------
Signature of Stockholder
-----------------------------
Signature of Stockholder
Please sign exactly as your
name appears hereon. When
certificate(s) are held by
joint tenants, both should
sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give full
title as such. If a
corporation, please sign in
full corporate name by
President or other authorized
officer. If a partnership,
please sign in partnership
name by authorized person.
Dated:-----------------------
1997
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE, NO POSTAGE REQUIRED.
