<PAGE>
As filed with the Securities and Exchange Commission on August 7, 1998.
REGISTRATION NO. 333-52743
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 3 TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
KRANZCO REALTY TRUST
(Exact name of registrant as specified in its charter)
---------------
Maryland 6798 23-2691327
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or classification code number) identification no.)
organization)
128 Fayette Street
Conshohocken, Pennsylvania 19428
(610) 941-9292
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Norman M. Kranzdorf
President and Chief Executive Officer
Kranzco Realty Trust
128 Fayette Street
Conshohocken, Pennsylvania 19428
(610) 941-9292
(Name, address, including zip code, and telephone number,
ncluding area code, of agent for service)
-------------------------
Copies To:
Alan S. Pearce, Esq.
Robinson Silverman Pearce
Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, New York 10104
(212) 541-2000
-------------------------
Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practicable after the effective date of this Registration Statement.
-------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
-------------------------
<PAGE>
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED AUGUST 7, 1998
PROSPECTUS
Offer to Exchange $8,000,000 Kranzco Realty Trust
6% Callable Convertible Subordinated Notes due 2008
for
10,379,531 Outstanding
Shares of New America Network, Inc.
---------------
THIS OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5 P.M. ON _____________,
1998, UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). NAI SHARES (AS
DEFINED HEREIN) WHICH ARE TENDERED PURSUANT TO THE OFFER MAY BE WITHDRAWN ANY
TIME PRIOR TO THE EXPIRATION DATE.
Kranzco Realty Trust, a Maryland real estate investment trust ("Kranzco"),
hereby offers, upon the terms and subject to the conditions set forth herein and
in the related Letter of Transmittal (collectively, the "Offer" or the "Exchange
Offer"), to exchange $0.7707 of the $8,000,000 Kranzco Realty Trust 6% Callable
Convertible Subordinated Notes due 2008 (the "Offer Consideration"), for each
outstanding share of common stock, par value $0.01 per share (each, an "NAI
Share" and collectively, the "NAI Shares"), of New America Network, Inc., a
Delaware corporation which conducts business under the name New America
International ("NAI"), validly tendered on or prior to the Expiration Date and
not properly withdrawn, not to exceed 10,379,531 NAI Shares. As of June 30,
1998, there were 12,974,414 NAI Shares outstanding.
See "Risk Factors" beginning on page 17 for a discussion of material risks
which should be considered by NAI stockholders with respect to the Exchange
Offer.
The 6% Callable Convertible Subordinated Notes Due 2008 (the "Notes") of
Kranzco are convertible, in whole or in part, at the option of the holder (the
"Holder") at any time after two years following the date of original issuance
thereof, or earlier upon a Change in Control (as defined herein) or an Event of
Default (as defined herein) (but in no event prior to one year after the date of
original issuance), and prior to the close of business on the business day
immediately preceding the maturity date, unless previously redeemed, into Common
Shares of Beneficial Interest, par value $0.01 per share, of Kranzco ("Kranzco
Common Shares"), at a conversion price of $20 per Kranzco Common Share
(equivalent to a conversion rate of one Common Share per $20 principal amount of
Notes), subject to adjustment in certain circumstances. The Notes and the
Kranzco Common Shares issuable upon the conversion thereof are referred to
collectively as the "Securities" unless the context requires otherwise. Each
Note is redeemable, in whole or in part, at the option of Kranzco at any time on
or after two years from the date of original issuance, upon payment of an amount
equal to the principal amount of the Note, or part thereof being redeemed, plus
accrued and unpaid interest on the Note, or part thereof being redeemed, to the
date of redemption. No sinking fund is provided for the Notes. The Notes are
general unsecured obligations of Kranzco, subordinated in right of payment to
the prior payment in full of all Senior Indebtedness (as defined herein) of
Kranzco and
(continued on next page)
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Dated
<PAGE>
(continued from cover)
effectively subordinated in right of payment to the prior payment in full of all
indebtedness of Kranzco's subsidiaries. The Indenture does not restrict
Kranzco's ability to incur Senior Indebtedness or additional indebtedness or
Kranzco's subsidiaries' ability to incur additional indebtedness. At March 31,
1998, Senior Indebtedness and indebtedness of Kranzco's subsidiaries was
approximately $257,201,000. See "Description of Notes--Subordination." The
Kranzco Common Shares are traded on the New York Stock Exchange under the symbol
"KRT." On August 5, 1998, the closing sale price of the Kranzco Common Shares
was $17.06 per share. The Notes will not be listed on any securities exchange or
quotation system.
KRANZCO'S OBLIGATION TO EXCHANGE THE OFFER CONSIDERATION FOR NAI SHARES
PURSUANT TO THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THE SATISFACTION
OR, WHERE APPLICABLE, WAIVER OF THE FOLLOWING CONDITIONS: (I) THERE BEING
VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION DATE A NUMBER OF NAI
SHARES WHICH WILL CONSTITUTE 80% OF THE OUTSTANDING NAI SHARES (THE "MINIMUM
TENDER CONDITION"), (II) THE REPRESENTATIONS AND WARRANTIES OF NAI CONTAINED IN
THE EXCHANGE AGREEMENT (AS DEFINED HEREIN), BEING TRUE AND CORRECT ON THE
EXPIRATION DATE, AND (III) THE SATISFACTION OF OTHER CONDITIONS SET FORTH IN THE
EXCHANGE AGREEMENT. SEE "THE OFFER--CONDITIONS OF THE OFFER." SUBJECT TO THE
TERMS OF THE EXCHANGE AGREEMENT, KRANZCO EXPRESSLY RETAINS THE RIGHT TO AMEND,
TERMINATE OR WITHDRAW THE OFFER AT ANY TIME PRIOR TO THE CONSUMMATION OF THE
EXCHANGE OFFER.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO KRANZCO (OTHER THAN EXHIBITS
TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF
NAI SHARES TO WHOM THIS PROSPECTUS IS DELIVERED, WITHOUT CHARGE, UPON WRITTEN OR
ORAL REQUEST, FROM KRANZCO AT 128 FAYETTE STREET, CONSHOHOCKEN, PENNSYLVANIA
19428, ATTENTION: ROBERT H. DENNIS (TELEPHONE NO. (610) 941-9292). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
__________ ___, 1998.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes certain statements that may be deemed to be
"forward-looking statements." All statements, other than statements of
historical facts, included in this Prospectus that address activities, events or
developments that Kranzco or NAI expects, believes or anticipates will or may
occur in the future, including, with respect to Kranzco, such matters as future
capital expenditures, distributions and acquisitions (including the amount and
nature thereof), expansion and other development trends of the real estate
industry, business strategies, expansion and growth of Kranzco's operations and
other similar matters and, with respect to NAI, such matters as future capital
expenditures, the acquisition or development of real estate or Real
Estate-Related Services (as defined below) (including the amount and nature
thereof), the consolidation or expansion trends of the commercial real estate
brokerage industry, business strategies, expansion and growth of NAI's
operations and other similar matters. Such statements are forward-looking
statements and are based on assumptions and expectations which may not be
realized and are inherently subject to risks and uncertainties, many of which
cannot be predicted with accuracy and some of which might not even be
anticipated. Prospective investors are cautioned that any such statements are
not guarantees of future performance and that actual results or developments may
differ materially from those anticipated in the forward-looking statements.
Risks and other factors that might cause differences from Kranzco's
expectations, some of which could be material, include, but are not limited to:
the burden of Kranzco's substantial debt obligations; the necessity of future
financings to repay the "balloon" payments required at the maturity of certain
of Kranzco's debt obligations; the highly competitive nature of the real estate
leasing market; adverse changes in the real estate markets including, among
other things, competition with other companies; general economic and business
conditions, which will, among other things, affect demand for retail space or
retail goods, availability and creditworthiness of prospective tenants and lease
rents; financial condition and bankruptcy of tenants, including disaffirmance of
leases by bankrupt tenants; the availability and terms of debt and equity
financing; risks of real estate acquisition, expansion and renovation;
governmental actions and initiatives; environmental/safety requirements;
possible failure by Kranzco to achieve the benefits contemplated by it as set
forth in this Prospectus and the Intercompany Agreement; and other changes and
factors referenced in this Prospectus. In addition, certain of these risks may
also effect NAI's expectations, including, the possible failure by NAI to
achieve the benefits contemplated by it as set forth in this Prospectus and the
Intercompany Agreement and other changes and factors referenced in this
Prospectus. See "Risk Factors."
AVAILABLE INFORMATION
Kranzco is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, including annual reports on Form 10-K
which include audited financial statements, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
reports, proxy statements and other information filed by Kranzco with the
Commission in accordance with the Exchange Act can be inspected and copied at
the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, Kranzco Common Shares,
Kranzco's 9.75% Series B-1 Cumulative Convertible Preferred Shares of Beneficial
Interest, par value $.01 per share (the "Series B-1 Preferred Shares"), and
Kranzco's 9.5% Series D Cumulative Redeemable Preferred Shares of Beneficial
Interest, par value $.01 per share (the "Series D Preferred Shares"), are listed
on the New York Stock Exchange ("NYSE") and similar information concerning
Kranzco can be inspected and copied at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
Kranzco has filed with the Commission a registration statement (the
"Registration Statement") (of which this Prospectus is a part) under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the contents of any contract or other document are not
necessarily complete, and
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in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or to previous
filings made by Kranzco with the Commission, each such statement being qualified
in all respects by such reference and the exhibits and schedules thereto. For
further information regarding Kranzco and the Securities, reference is hereby
made to the Registration Statement, the previous filings made by Kranzco with
the Commission and the exhibits and schedules thereto, which may be obtained
from the Commission (i) at its principal office in Washington, D.C., upon
payment of the fees prescribed by the Commission or (ii) by consulting the
Commission's web site at the address of http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by Kranzco under the Exchange
Act of 1934, as amended (the "Exchange Act"), with the Commission and are
incorporated herein by reference:
1. Kranzco's Annual Report on Form 10-K (File No. 1-11478) for the fiscal
year ended December 31, 1997.
2. Kranzco's Quarterly Report on Form 10-Q (File No. 1-11478) for the
quarter ended March 31, 1998.
3. Kranzco's Current Report on Form 8-K (File No. 1-11478) dated February
27, 1997, filed March 14, 1997, as amended by Form 8-K/A (File No. 1-11478)
dated May 6, 1997, filed May 8, 1997.
4. Kranzco's Current Report on Form 8-K (File No. 1-11478) dated November
25, 1997, filed November 25, 1997.
5. Kranzco's Current Report on Form 8-K (File No. 1-11478) dated March 23,
1998, filed on March 23, 1998.
6. Kranzco's Current Report on Form 8-K (File No. 1-11478) dated July 16,
1998, filed on July 16, 1998.
7. The description of Kranzco Common Shares contained in the Registration
Statement on Form S-11 (File No. 33-49434), and the documents incorporated
therein by reference, as amended by Amendment No. 1, filed with the Commission
on October 16, 1992, Amendment No. 2, filed with the Commission on November 4,
1992 and Amendment No. 3, filed with the Commission on November 10, 1992, dated
November 10, 1992.
8. The description of Kranzco's Series A-1 Preferred Shares of Beneficial
Interest, par value $.01 per share (the "Series A-1 Preferred Shares"),
contained in the Registration Statement on Form S-4 (File No. 333-18249), and
the documents incorporated therein by reference, as amended by Amendment No. 1,
filed with the Commission on January 29, 1997.
9. The description of Kranzco's Series B-1 Preferred Shares contained in
the Registration Statement on Form 8-A (File No. 1-11478), and the documents
incorporated therein by reference, as amended by Amendment No. 1, filed with the
Commission on June 2, 1997.
10. The description of Kranzco's Series B-2 Preferred Shares of Beneficial
Interest, par value $.01 per share (the "Series B-2 Preferred Shares") and
Kranzco's Series C Preferred Shares of Beneficial Interest, par value $.01 per
share (the "Series C Preferred Shares"), contained in Kranzco's Current Report
on Form 8-K (File No. 1- 11478) dated February 27, 1997.
11. The description of Kranzco's Series D Preferred Shares (as defined
below) contained in the Registration Statement on Form 8-A (File No. 1-11478),
and the documents incorporated therein by reference, filed with the Commission
on December 10, 1997.
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All reports and other documents filed by Kranzco pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the consummation of the Offer shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
-----------------------------
In connection with the Exchange Offer, Kranzco is delivering its 1997 Annual
Report to Shareholders to the holders of NAI Shares, along with this Prospectus.
-----------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY KRANZCO OR NAI. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY BY ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF KRANZCO OR NAI
SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
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NAI INFORMATION
On _______ __, 1998, Kranzco, NAI, and Gerald C. Finn and Jeffrey M. Finn,
individually, and as trustee of a trust for the benefit of Jeffrey M. Finn
(collectively, the "Finns"), entered into an Exchange Agreement (the "Exchange
Agreement") pursuant to which, subject to the terms and conditions of the
Exchange Agreement, Kranzco agreed to conduct the Exchange Offer, and the Finns
agreed to tender 80% (and up to 90% in certain circumstances) of their
respective NAI Shares in the Exchange Offer, and pursuant to which the Finns and
NAI made certain representations and warranties regarding NAI as an inducement
for Kranzco to enter into the Exchange Offer. See "Proposed Related
Transactions--The Exchange Agreement." In accordance with the Exchange
Agreement, NAI has provided Kranzco with the information regarding NAI contained
herein, and has represented to Kranzco, in connection with the filing of the
Registration Statement with the Commission, that the information regarding NAI
contained in this Prospectus and the Registration Statement of which this
Prospectus is a part, does not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements made
not misleading.
IMPORTANT
Any stockholder of NAI (an "NAI Stockholder") desiring to tender all or any
portion of his or her NAI Shares should complete and sign the Letter of
Transmittal or a facsimile copy thereof in accordance with the instructions in
the Letter of Transmittal, and mail or deliver the Letter of Transmittal or such
facsimile and any other required documents to First Union National Bank (the
"Exchange Agent") and deliver the certificates for such NAI Shares to the
Exchange Agent along with the Letter of Transmittal. Any NAI Stockholder that
desires to tender NAI Shares and whose certificates for such NAI Shares are not
immediately available or who cannot deliver all required documents to the
Exchange Agent prior to the Expiration Date, should contact the Exchange Agent
immediately at (800) 829-8432.
Although the Finns have agreed to tender up to 90% of the NAI Shares owned
by them, such number of NAI Shares is not sufficient to meet the Minimum Tender
Condition without other NAI Stockholders joining in the tender. Accordingly, if
other NAI Stockholders do not tender a number of NAI Shares, that together with
the NAI Shares to be tendered by the Finns, would meet the Minimum Tender
Condition, the Exchange Offer will not be consummated and NAI will continue to
conduct its business as a private company. See "The Exchange Agreement."
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the back cover of this
Prospectus. Requests for additional copies of this Prospectus and the Letter of
Transmittal may be directed to the Exchange Agent.
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TABLE OF CONTENTS
Page
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..............................i
AVAILABLE INFORMATION..........................................................i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................ii
NAI INFORMATION...............................................................iv
IMPORTANT ..................................................................iv
PROSPECTUS SUMMARY.............................................................1
RISK FACTORS..................................................................17
KRANZCO'S OPERATING, ACQUISITION AND FINANCING STRATEGIES.....................28
KRANZCO'S GENERAL INVESTMENT STRATEGIES.......................................30
RATIOS OF EARNINGS TO FIXED CHARGES...........................................31
KRANZCO CAPITALIZATION........................................................32
KRANZCO SELECTED FINANCIAL AND OPERATING DATA.................................34
KRANZCO REALTY TRUST PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION..........................36
NAI CAPITALIZATION............................................................43
NAI SELECTED FINANCIAL AND OPERATING DATA.....................................44
NEW AMERICA NETWORK, INC. PRO FORMA
CONDENSED FINANCIAL INFORMATION...................................46
NAI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................51
NAI BUSINESS..................................................................55
THE OFFER ..................................................................63
DESCRIPTION OF NOTES..........................................................70
MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS.............................77
COMPARISON OF RIGHTS OF HOLDERS...............................................85
THE EXCHANGE AGREEMENT........................................................92
PROPOSED RELATED TRANSACTIONS.................................................98
THE DISTRIBUTION.............................................................102
THE RIGHTS OFFERING..........................................................103
THE CONCURRENT OFFERING......................................................105
REASONS FOR THE OFFER AND THE PROPOSED RELATED TRANSACTIONS..................109
MANAGEMENT OF NAI AFTER EXCHANGE OFFER.......................................111
PRINCIPAL STOCKHOLDERS.......................................................123
CERTAIN RELATED PARTY TRANSACTIONS...........................................124
DESCRIPTION OF SECURITIES OF NAI.............................................125
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF NAI MARYLAND'S CHARTER AND BYLAWS.............................127
EXPERTS .................................................................130
LEGAL MATTERS................................................................130
INDEX TO FINANCIAL STATEMENTS OF NAI.........................................F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
financial and other information appearing elsewhere in this Prospectus, or
incorporated herein or therein by reference. Upon consummation of the Exchange
Offer, New America Network, Inc., a Delaware corporation which conducts business
as New America International ("NAI Delaware"), will merge (the "Reincorporation
Merger") with and into New America International, Inc., a Maryland corporation
and a wholly-owned subsidiary of NAI Delaware ("NAI Maryland"). Unless otherwise
stated, this Prospectus assumes that all Underlying Shares (as defined below)
and Additional Shares (as defined below) are purchased in the Rights Offering
(as defined below) and the Concurrent Offering (as defined below). Unless
otherwise indicated, the financial information contained herein does not give
effect to the Southeast Acquisition (defined below). Unless the context
otherwise requires, references in this Prospectus to (i) "Kranzco" shall refer
to Kranzco Realty Trust, a Maryland real estate investment trust, and its
subsidiaries and affiliated entities; (ii) "NAI" shall refer to NAI Delaware
prior to the Reincorporation Merger, and NAI Maryland after the Reincorporation
Merger, as the case may be, and in each case, its subsidiaries and affiliated
entities; (iii) "NAI Delaware Shares" shall refer to the shares of common stock,
par value $0.01 per share, of NAI Delaware; (iv) "NAI Maryland Shares" shall
refer to the shares of common stock, par value $0.01 per share, of NAI Maryland;
and (v) "NAI Shares" shall refer to NAI Delaware Shares prior to the
Reincorporation Merger and NAI Maryland Shares after the Reincorporation Merger,
as the case may be.
Kranzco
Kranzco Realty Trust is a self-administered and self-managed equity real
estate investment trust (a "REIT") engaged in the business of owning, managing,
operating, leasing, acquiring and expanding neighborhood and community shopping
centers and, to a lesser extent, free-standing retail properties. Kranzco owns
and operates 48 neighborhood and community shopping centers and 11 free-standing
properties (collectively, the "Properties"), aggregating approximately 7.6
million square feet of gross leasable area ("GLA") located primarily in the
Northeast, Mid-Atlantic and Southern regions of the United States with a diverse
base of approximately 550 tenants.
On June 26, 1998 Kranzco entered into an agreement to acquire nine
community shopping centers in five midwestern and southern states for
approximately $85 million (the "Southeast Acquisition"). The purchase price will
be financed through a first mortgage financing and borrowings under the Salomon
Facility (defined below). Five of the centers are in Georgia and the others are
in Ohio, Tennessee, Florida and Virginia. The centers have a total of 1.4
million square feet of GLA and an overall leased rate of approximately 99%.
Wal-Mart is a tenant in nine of the centers and has vacated its space at two of
the centers but continues to pay rent in accordance with its leases. Wal-Mart
has subleased space at one of these two centers to a third party. Besides
Wal-Mart, other well-known anchor retailers are Eckerd Drug, Food Lion, Radio
Shack, and CVS. After the purchase, Kranzco will own 68 properties in 19 states
with a total of nine million square feet of GLA, an approximate 15 percent
increase in GLA. The purchase is subject to customary due diligence and is
expected to close by August 31, 1998.
Kranzco's primary business objective is to achieve growth in its funds from
operations by enhancing the operating performance of the Properties and, through
selective acquisitions, the value of its portfolio. Kranzco's operating
strategies are to: (i) focus on the neighborhood and community shopping center
business; (ii) actively manage its properties for long-term growth in funds from
operations and capital appreciation; (iii) increase portfolio occupancy by
capitalizing on management's reputation and long-standing relationships with
national and regional tenants and extensive experience in marketing to local
tenants, as well as the negotiating leverage inherent in a large portfolio of
properties; (iv) maintain, renovate, expand and reconfigure its properties; (v)
optimize the tenant mix in each shopping center; (vi) develop or ground lease
outparcels or expansion areas existing from time to time at its properties for
use as restaurants, banks, auto centers, cinemas or other facilities; and (vii)
benefit from economies of scale by spreading overhead expenses over a larger
asset base. As of June 30, 1998, the Properties were approximately 92% leased.
Additionally, Kranzco has no single tenant which accounted for greater than 5.2%
of Kranzco's 1997 minimum rent.
Kranzco's acquisition strategy is to opportunistically acquire properties
which have been over-leveraged, which need replacement anchor tenants or where
Kranzco's management and leasing expertise can enhance value. That strategy
includes acquiring and rehabilitating properties in markets where it currently
owns properties and in new markets with strong demographic characteristics in
order to reduce Kranzco's sensitivity to regional economic cycles.
Kranzco was formed on June 17, 1992 as a Maryland real estate investment
trust. Kranzco's executive offices are located at 128 Fayette Street,
Conshohocken, Pennsylvania 19428, and its telephone number is (610) 941-9292.
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NAI
New America Network, Inc., which conducts business as New America
International ("NAI"), operates a network (the "Network") of independently
owned, licensed real estate brokers ("Broker Members") throughout the United
States and, more recently, abroad. NAI, directly and through its Broker Members,
provides commercial real estate brokerage services to local, regional, national
and international businesses ("Clients"). NAI has approximately 130 affiliated
Broker Members, which employ approximately 2,600 agents, operating in
approximately 300 markets, including North, Central and South America and
Western Europe. NAI believes it is represented in more North American market
areas than any national commercial real estate brokerage company. Unlike other
real estate broker networks, in addition to managing real estate transactions
generated by its Broker Members, NAI generates its own source of real estate
transactions for its Broker Members and actively manages and tracks those
transactions on behalf of Clients. In order to increase the portfolio of
services marketed to Clients and Broker Members, NAI has entered into several
alliance agreements with entities ("Alliance Members") which provide real estate
related services which complement NAI's brokerage capabilities, including
sealed-bid sales, real estate auctions, real estate financing and appraisal
services. As of June 30, 1998, the Network had an inventory of approximately
1,683 assignments to buy, sell or lease real property (approximately 77% of
which are exclusive to NAI), with a transaction value of approximately $927
million, and which would generate fees to NAI of approximately $6.8 million, if
consummated. There is no assurance that such inventory will result in any
revenues to NAI.
NAI earns revenues primarily from the sharing of brokerage commissions with
Broker Members who earn commissions from the acquisition, disposition or leasing
of real property assigned to them by NAI (approximately $2,686,000 or 46% of
NAI's net revenues for fiscal year 1997). NAI also earns revenues from (i) the
sharing of brokerage commissions with Broker Members who earn commissions from
the acquisition and/or disposition or leasing of real estate referred to them by
other Broker Members (approximately $1,063,000 or 18% of NAI's net revenues for
fiscal year 1997), (ii) the sharing of fees received from Alliance Members in
sealed-bid sales, auction transactions and other real estate-related services
(approximately $170,000 or 3% of NAI's net revenues for fiscal year 1997), and
(iii) the collection of annual membership fees paid by Broker Members and
Alliance Members (approximately $1,282,000 or 22% of NAI's net revenues for
fiscal year 1997). See "NAI Business."
NAI began forming the Network in 1978 in order to meet the growing real
estate needs of large national and international corporations in multiple
markets. NAI meets the multiple market needs of its Clients and its Broker
Members by combining local representation with the management and control
capabilities of its centralized Corporate Services Department. NAI's Corporate
Services Department is responsible for establishing and developing relationships
with Clients in order to generate assignments for the Network and its Broker
Members. Currently, NAI has 13 staff members in its Corporate Services
Department serving over 100 Clients. These Clients include retail chains (such
as Woolworth Corp.), international companies (such as International Paper
Company), service businesses (such as Roadway Services, Inc.), and other larger
owners of real estate (such as the United States Postal Service, a new Client of
NAI). NAI's Clients are often involved in real estate transactions in multiple
markets. In addition, NAI has an Investment Sales Department which specializes
in the acquisition and disposition of real estate for Clients who are seeking to
acquire, or currently own, real estate for investment purposes. See "NAI
Business--Broker and Client Relations," "--Corporate Services Department" and
"--Investment Sales."
NAI maintains a proprietary information sharing and research intranet, in
order to efficiently and effectively coordinate with its Broker Members to meet
its Clients' needs. NAI's information systems consist of a transaction
management system and a central database information system. NAI's computerized
transaction management system allows Broker Members, the Corporate Services
Department and Clients to manage and track the progress of transactions assigned
to Broker Members, including those generated by its Broker Members. NAI's
databases include, among other things, real estate market data, demographic
information, Broker Member profiles, Broker Member listings, transaction
histories, Client relationship information and Client profiles. See "NAI
Business--NAI Technology and Information Services."
NAI's objective is to increase profitability by continuing to grow its
brokerage business, increase its international coverage, expand its Corporate
Services and Investment Sales Departments and to further develop its
non-brokerage real estate-related services, including sealed-bid sales and real
estate auctions, and to acquire or develop additional real estate-related
services (collectively, "Real Estate-Related Services"). To the extent funds are
available from the proceeds of the Rights Offering and the Concurrent Offering
referred to below, NAI's strategy will be to (i) expand NAI's Corporate Services
Department and Investment Sales Department to generate business from additional
Clients and in new markets, (ii) invest in or acquire brokerage firms (including
certain of those owned by Broker Members) and firms which provide Real
Estate-Related Services, (iii) train and support Broker Members to generate
additional business for the Network; (iv) continue to expand the Network into
international markets, (v) generate
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additional revenue by providing brokerage and Real Estate-Related Services to
Kranzco, (vi) expand and enhance NAI's real estate technology and information
services, (vii) opportunistically acquire and develop real estate for its own
account, and (viii) utilize Real Estate-Related Services to create and develop
relationships with Clients.
NAI's management team has extensive experience in the real estate brokerage
industry. Gerald C. Finn, founder and Chief Executive Officer of NAI, has over
25 years experience in the real estate industry. Jeffrey M. Finn, Gerald Finn's
son and President, Chief Operating Officer and Treasurer of NAI, has over 10
years experience in the commercial real estate services industry.
NAI was incorporated under the laws of the State of Delaware on February 5,
1974. The executive offices of NAI are located at 572 Route 130, Hightstown, New
Jersey 08520 and its telephone number is (609) 448-4700.
Transaction Summary
Kranzco is offering, upon the terms and subject to the conditions set forth
herein, to exchange an aggregate of $8,000,000 of Notes, for an aggregate of
10,379,531 NAI Shares, which represent approximately 80% of the outstanding NAI
Shares. Upon consummation of the Exchange Offer, NAI will effect the
Reincorporation Merger in order to reincorporate NAI as a Maryland corporation
for corporate reasons as well as to reduce certain franchise taxes which are
payable by NAI. The Reincorporation Merger will result in each NAI Delaware
Share being converted into 1.318087 NAI Maryland Shares and the adoption of
certain anti-takeover provisions.
Immediately following the consummation of the Exchange Offer and the
Reincorporation Merger, NAI and Kranzco will, among other things, reconstitute
NAI's Board of Directors to include members nominated by both NAI and Kranzco
and enter into an Intercompany Agreement between Kranzco and NAI which will
provide for certain rights of first opportunity and first notification which the
companies will grant each other and will also provide for the provision of
certain consulting services by Kranzco to NAI. In connection with the Exchange
Offer and the Reincorporation Merger, NAI (i) adopted a management incentive
plan which provides for the issuance of 1,700,000 NAI Shares, which may be
awarded in the form of options, share appreciation rights, reload options,
restricted share awards, performance-based awards, and share purchase awards
(80% of the NAI Shares will be reserved for officers, employees or consultants
of NAI who are not also employees of Kranzco and 20% of the NAI Shares will be
reserved for officers, employees or consultants of NAI who are also employees of
Kranzco); (ii) adopted an employee incentive compensation plan pursuant to which
certain employees of NAI would be entitled to aggregate incentive compensation
payable in up to 8,500,000 NAI Shares issuable over 10 years; (iii) adopted a
stock option plan pursuant to which it is expected to grant options to purchase
an aggregate of 3,536,853 NAI Shares to officers, directors, employees and
consultants of NAI immediately following the reincorporation Merger; and (iv)
expects to grant immediately following the Reincorporation Merger, options to
purchase an aggregate of 60,000 NAI Shares to directors and trustees of NAI and
Kranzco. The foregoing transactions, together with the Reincorporation Merger,
the Distribution, the Rights Offering and the Concurrent Offering (as defined
below), are collectively referred to herein as the "Proposed Related
Transactions." See "Management--NAI 1998 Management Incentive Plan," "--NAI 1998
Employee Incentive Compensation Plan," "--NAI 1998 Stock Option Plan," "The
Exchange Agreement" and "Proposed Related Transactions."
Immediately following the consummation of the Exchange Offer and the
Reincorporation Merger, Kranzco will distribute (the "Distribution")
approximately 70.2% of the outstanding NAI Shares to holders of Kranzco Common
Shares and holders of the outstanding Series B-1 Preferred Shares and Series B-2
Preferred Shares (together, the "Kranzco Series B Preferred Shares") of Kranzco,
on the basis of one NAI Share for each Kranzco Common Share and one NAI Share
for each Kranzco Common Share into which the Kranzco Series B Preferred Shares
are convertible (a "Kranzco Common Share Equivalent"). See "The Distribution."
Upon the consummation of the Distribution, NAI will be an independent public
company, and the NAI Shares will be eligible for trading on the OTC Bulletin
Board. Kranzco will own approximately 9.8% of the outstanding NAI Shares,
Kranzco shareholders will own approximately 70.2% of the outstanding NAI Shares,
and the persons who owned NAI Shares prior to the Exchange Offer will own an
aggregate of approximately 20% of the NAI Shares.
Immediately following the consummation of the Exchange Offer and the
Reincorporation Merger, and simultaneously with the Distribution, NAI will
distribute to each holder of NAI Shares, including the Kranzco shareholders who
receive NAI Shares in the Distribution, rights (the "Rights") to purchase an
aggregate of 17,101,403 NAI Shares at a subscription price of $2 per NAI Share
(the "Subscription Price") on the basis of one Right to purchase one NAI Share
(the "Basic Subscription Privilege"), for each NAI Share held by NAI
Stockholders. The exercise of Rights is irrevocable once made, and no underlying
NAI Shares (the "Underlying Shares") will be issued until the closing of the
Rights Offering. The distribution of the Rights and the offer and sale of the
Underlying Shares is referred
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to herein as the "Rights Offering." Upon exercise of the Basic Subscription
Privilege, each holder of Rights will also be entitled to purchase at the
Subscription Price a pro rata portion of any Underlying Shares that are not
otherwise subscribed for pursuant to the exercise of Basic Subscription
Privileges (the "Oversubscription Privilege").
Concurrently with the Rights Offering, NAI is offering (the "Concurrent
Offering") the right to purchase any Underlying Shares that are not otherwise
subscribed for pursuant to the Rights Offering ("Excess Shares"), first, to
officers, directors and trustees of NAI and Kranzco (the "Executive Group"), and
then, to NAI's Broker Members and the principals, shareholders, partners,
officers, managers and licensed real estate agents of NAI's Broker Members in
the United States (as defined herein) (the "Broker Member Group"). In order to
ensure that the Broker Member Group will in aggregate have the right to purchase
a minimum of 2,000,000 NAI Shares, NAI has authorized an additional 2,000,000
NAI Shares ("Additional Shares") for issuance pursuant to the Broker Member
Group Subscription Privilege. See "The Rights Offering" and "The Concurrent
Offering."
The net proceeds to be received by NAI from the Rights Offering and the
Concurrent Offering depends on the number of Rights exercised and the number of
Underlying Shares and Additional Shares purchased, as the case may be. If all
Rights are exercised and all of the Additional Shares are purchased, NAI expects
the net proceeds available to it from the Rights Offering and the Concurrent
Offering to be approximately $38,000,000. After paying the expenses of the
Rights Offering, the Concurrent Offering and the Proposed Related Transactions,
the proceeds from the Rights Offering and the Concurrent Offering will be used
to (i) repay $202,000 principal amount of indebtedness incurred in connection
with the repurchase of 101,000 shares of Series A Preferred Stock of NAI for an
aggregate repurchase price of $202,000, (ii) repay approximately $715,000 of
indebtedness (which includes approximately $72,000 of accrued interest), (iii)
grow NAI's Corporate Services Department and Investment Sales Department, and
(iv) strategically acquire and develop Real Estate-Related Services. The balance
of any proceeds will be invested in short-term commercial paper at a rate of
approximately 5.5% per annum until used for general corporate and working
capital purposes and to opportunistically acquire real estate. See "Risk
Factors--No Commitments to Purchase and No Minimum Size of Rights Offering" and
"The Concurrent Offering--Use of Proceeds."
Reasons for the Offer
Kranzco is a self-administered and self-managed equity REIT engaged in the
business of owning, managing, operating, leasing, acquiring and expanding
neighborhood and community shopping centers and, to a lesser extent,
free-standing retail properties. Kranzco is limited in its activities by the
investment limitations imposed by Federal income tax laws applicable to REITs,
which (i) limit the amount of income that a REIT can realize from certain
services that are not customarily furnished or rendered in connection with the
rental of real property in a particular geographic area, and (ii) limit
Kranzco's ownership in corporations other than REITs and qualified REIT
subsidiaries (a) to 10% of the outstanding voting securities of such
corporation, and (b) in that the value of any one corporation's securities
cannot exceed 5% of the value of Kranzco's total assets. Kranzco believes that
significant opportunities are available to investors in entities which provide
brokerage and Real Estate-Related Services, own properties other than
neighborhood and community shopping centers, and which are not limited in their
activities by the investment limitations imposed by Federal income tax laws
applicable to REITs. Accordingly, in light of the limitations on investments
imposed on REITs, Kranzco believes that effecting the Exchange Offer, the
Distribution, the Rights Offering and the Concurrent Offering, and establishing
an intercompany relationship between Kranzco and NAI will yield significant
benefits to Kranzco and its shareholders similar to those which may be obtained
by investors who are not so limited, while preserving Kranzco's REIT status. For
Kranzco, these benefits include:
o increased opportunities to acquire retail properties which become
available for sale through the Network, which might not otherwise be
available to Kranzco;
o greater access to a diverse range of tenants, in order to re-tenant
vacant space owned by Kranzco, including access to non-retail tenants
looking for space appropriate for office, warehouse or other
non-retail uses;
o the ability to enter into agreements with NAI to have NAI develop new
shopping centers or re-develop distressed shopping centers for sale to
Kranzco;
o the ability to enter into new geographic areas with the assistance of
NAI's real estate professionals; o NAI disseminating Kranzco's
acquisition criteria to Broker Members throughout the Network, in
order to create additional opportunities to purchase retail
properties;
o increased opportunities to purchase additional retail properties which
are included in portfolios with non-retail properties, utilizing NAI
to purchase the non-retail properties or find a purchaser for the
non-retail properties;
o access to NAI's sophisticated, real estate oriented computer network,
which includes information on real estate transactions, market
conditions and demographics;
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o the ability to purchase Real Estate-Related Services at competitive
prices;
o the ability to own an equity interest in a company which owns real
estate and provides Real Estate-Related Services which Kranzco, as a
REIT, could not directly own or provide; and
o access to local property managers where Kranzco may own retail
properties, and the opportunity for Kranzco to manage retail
properties owned by NAI.
NAI operates a network of independently owned, licensed real estate Broker
Members throughout the United States and, more recently, abroad, to provide
commercial real estate services to regional, national and international Clients.
NAI believes that a strategic relationship between companies which provide real
estate brokerage and services, such as NAI, and companies which own and operate
real estate, such as Kranzco, would provide significant benefits and
opportunities. For NAI, the benefits of entering into the strategic relationship
and consummating the Proposed Related Transactions (and under certain
circumstances, to the extent proceeds are available through the Rights Offering
and the Concurrent Offering) include:
o the opportunity as a public company, to raise additional capital
through the Rights Offering and the Concurrent Offering and, to the
extent possible, future equity and debt offerings;
o the ability to expand its Corporate Services Department, Investment
Sales Department and Broker Services Department;
o the ability to invest in or acquire Broker Members or other real
estate service firms in order to strengthen the Network;
o access to new transactions by providing real estate brokerage services
to Kranzco through NAI's Network;
o the ability to accelerate the development of information services and
technology infrastructure to more efficiently deliver services;
o the opportunity to offer to Kranzco Real Estate-Related Services which
NAI may develop; o the opportunity to further develop existing Real
Estate-Related Services and to acquire or develop businesses that
provide Real Estate-Related Services; o the ability to accelerate
Network growth in international markets; o providing Broker Members
the opportunity to manage selected Kranzco shopping centers;
o the opportunity to enter into agreements with Kranzco to have NAI
develop new shopping centers or re-develop distressed shopping centers
for sale to Kranzco; and
o expansion of its business through access to the real estate expertise
of Kranzco's management.
In the past Kranzco and NAI have worked together in a mutually beneficial
relationship. In December 1997, NAI's Investment Sales Department assisted
Kranzco in arranging for the acquisition of five shopping centers, aggregating
approximately 650,000 square feet of GLA, for approximately $44 million. NAI's
Investment Sales Department initiated this opportunity, and assisted Kranzco in
acquiring the properties. Kranzco's acquisition of such properties generated
$100,000 in fee income to NAI. Kranzco and NAI expect that the Intercompany
Agreement will set forth a framework for a mutually beneficial relationship in
the future. See "Proposed Related Transactions--The Intercompany Agreement."
Risk Factors
The Notes offered hereby and the Proposed Related Transactions which NAI
and Kranzco intend to enter into involve a high degree of risks and
uncertainties. These risks and uncertainties include, among others:
o Risks related to the substantial debt obligations of Kranzco which, at
March 31, 1998, after giving effect to the Proposed Related Transactions would
be $265,201,000.
o Risks related to the existence of balloon payments on Kranzco
indebtedness for the outstanding principal balance at maturity.
o Risks resulting from approximately $20,000,000 of Kranzco indebtedness
which bears interest at variable interest rates.
o Risks resulting from the fact that the Notes are unsecured and
subordinated in right of payment in full to all existing and future senior
indebtedness of Kranzco, and the fact that the Indenture governing the Notes
does not contain financial covenants and does not prohibit or limit the
incurrence of additional senior indebtedness by Kranzco and its subsidiaries.
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o Risks related to the balloon payment on the Notes, and the fact that
Kranzco's ability to pay the outstanding principal balance of its debt at
maturity may depend upon its ability to refinance such debt.
o General real estate investment risks which may affect Kranzco,
including adverse changes in general or local economic conditions, the
illiquidity of real estate investments, possible environmental liabilities and
the geographic concentration of Kranzco's properties.
In addition, NAI Stockholders should consider the effect of the Proposed
Related Transactions on NAI, since NAI Stockholders, in aggregate, will retain
ownership of 20% of the outstanding NAI Shares after the consummation of the
Exchange Offer. Accordingly, NAI Stockholders should consider risks related to
the Proposed Related Transactions, which include, among others:
o Risks related to the fact that certain officers and directors of NAI
have an interest in the Proposed Related Transactions. Certain proceeds of the
Rights Offering and the Concurrent Offering will be used to repay indebtedness
to affiliates of NAI. In addition, certain officers and directors of NAI will
receive options to purchase NAI Shares, and two executives will enter into
employment agreements with NAI, in connection with the Proposed Related
Transaction.
o Risks related to the uncertainty of the Rights Offering and Concurrent
Offering. NAI does not have a written commitment from any person to purchase any
of the NAI Shares being offered in the Rights Offering or the Concurrent
Offering, and no minimum amount of proceeds is required for NAI to consummate
the Rights Offering or the Concurrent Offering. NAI may not be able to achieve
all the benefits it would otherwise anticipate from the strategic relationship
with Kranzco and the Proposed Related Transactions if less than all of the
Underlying Shares and Additional Shares are sold.
o Risks related to NAI's plans to expand the scope of its business
beyond its current focus on real estate brokerage transaction to the broader
delivery of its Real Estate-Related Services.
o Certain risks related to the Intercompany Agreement and related
restrictions on NAI's opportunities
o Risk related to potential conflicts of interests created by the fact
that Kranzco and NAI have several common members on its Board of Trustees and
Board of Directors, as the case may be, and have certain common executive
officers.
o Risks related to the institution of anti-takeover measures in
connection with the Reincorporation Merger, and the anti-takeover effect of
certain provisions of Maryland law and of NAI's Charter and Bylaws
Prospective investors in the Notes should review "Risk Factors" beginning
on page 17 for a discussion of the material risks involved in an investment in
the Notes and the Kranzco Common Shares issuable upon conversion thereof.
The Offer
General.................... Kranzco is offering, upon the terms and subject to
the conditions set forth herein and in the related
Letter of Transmittal, to exchange $0.7707 of the
aggregate Offer Consideration, of $8,000,000 of
Notes, for each outstanding NAI Share, up to a
maximum of 10,379,531 NAI Shares (80% of the
outstanding NAI Shares). Immediately following the
consummation of the Exchange Offer, NAI and
Kranzco will effect the Proposed Related
Transactions (as defined below), including the
Distribution, the Rights Offering and the
Concurrent Offering. See "Proposed Related
Transactions," "The Distribution," "The Rights
Offering" and "The Concurrent Offering." Kranzco's
obligation to exchange the aggregate Offer
Consideration for 10,379,531 NAI Shares pursuant
to the Offer is subject to (i) the Minimum Tender
Condition, (ii) the representations and warranties
of NAI contained in the Exchange Agreement (as
defined herein)
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being true and correct on the Expiration Date, and
(iii) the satisfaction of other conditions set
forth in the Exchange Agreement. See "The
Offer--Conditions of the Offer." As of June 30,
1998, there were 12,974,414 NAI Shares
outstanding.
Timing of the Offer........ The Offer is currently scheduled to expire on
__________, 1998; however, Kranzco has the right,
subject to the Exchange Agreement, to extend or
amend the Offer at any time or from time to time,
as the case may be, and may choose to extend the
Offer as necessary until all conditions to the
Offer have been satisfied or waived. See
"--Extension, Termination and Amendment." Kranzco
may also terminate the Offer if the conditions
precedent to the Offer have not been satisfied.
See "The Offer--Conditions of the Offer."
Extension, Termination
and Amendment............. Kranzco expressly reserves the right (but will not
be obligated), in its sole discretion, at any time
or from time to time, and regardless of whether
any of the events set forth under "--Conditions of
the Offer" shall have occurred or shall have been
determined by Kranzco to have occurred, to extend
the period of time during which the Offer is to
remain open by giving oral or written notice of
such termination or extension to the Exchange
Agent, which extension will be announced no later
than 9:00 a.m., Eastern time, on the next business
day after the termination of the previously
scheduled Expiration Date. During any such
extension, all NAI Shares previously tendered and
not withdrawn will remain subject to the Offer,
subject to the right of a tendering NAI
Stockholder to withdraw his or her NAI Shares. See
"--Withdrawal Rights."
Kranzco also reserves the right, in its sole
discretion, at any time or from time to time, (i)
to delay the exchange of any NAI Shares for Notes
pursuant to the Offer, or, subject to the terms of
the Exchange Agreement, to withdraw or terminate
the Offer and not accept for exchange or exchange
any NAI Shares for Notes not theretofore accepted
for exchange, or exchanged, upon the failure of
any of the conditions of the Offer to be satisfied
and (ii) to waive any condition or otherwise amend
the Offer in any respect. See "The
Offer--Extension, Termination and Amendment" and
"--Conditions of the Offer."
Exchange of Notes for
NAI Shares; Delivery of
Offer Consideration....... Upon the terms and subject to the conditions of
the Offer (including, if the Offer is extended or
amended, the terms and conditions of any such
extension or amendment), Kranzco will accept for
exchange, and will exchange, Notes for a maximum
of 10,379,531 NAI Shares validly tendered and not
properly withdrawn as promptly as practicable
following the Expiration Date. See "The
Offer--Exchange of NAI Shares; Delivery of Offer
Consideration."
Upon the terms and subject to the conditions of
the Offer, including Kranzco's rights to
terminate, amend or extend the offer, Kranzco will
accept for exchange a maximum of 10,379,531
validly tendered NAI Shares, which represents 80%
of the outstanding NAI Shares. Each NAI
Stockholder may tender all or any portion of his
or her NAI Shares. If
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Kranzco determines to consummate the Offer,
Kranzco will accept for exchange from each NAI
Stockholder a number of validly tendered NAI
Shares representing (i) 80% of such stockholder's
NAI Shares ("Guaranteed Minimum Tender"), or, (ii)
if such NAI Stockholder tendered less than 80% of
such stockholder's NAI Shares, then such lesser
number of NAI Shares. NAI Stockholders may validly
tender for exchange NAI Shares in excess of his or
her Guaranteed Minimum Tender. If after
aggregating the NAI Shares validly tendered
pursuant to the Guaranteed Minimum Tender, the
Minimum Tender Condition has not been met, Kranzco
will accept for exchange such number of validly
tendered NAI Shares as would be required to meet
the Minimum Tender Condition on a pro rata basis
from among all the NAI Shares tendered in excess
of each NAI Stockholder's Guaranteed Minimum
Tender (with appropriate adjustments to avoid
purchases of fractional shares).
Pursuant to the Exchange Agreement, the Finns
agreed to tender 80% of their respective NAI
Shares in the Exchange Offer, and, in the event
that less than 80% of the issued and outstanding
NAI Shares are tendered by other NAI Stockholders
in the Exchange Offer, the Finns agreed to tender
up to an additional 10% of their NAI Shares, as
may be required to reach the Minimum Tender
Condition. Although the Finns have agreed to
tender up to 90% of the NAI Shares owned by them,
such number of NAI Shares is not sufficient to
meet the Minimum Tender Condition without other
NAI Stockholders joining in the tender.
Accordingly, if other NAI Stockholders do not
tender a number of NAI Shares that, together with
the NAI Shares to be tendered by the Finns, would
meet the Minimum Tender Condition, the Exchange
Offer will not be consummated and NAI will
continue to conduct its business as a private
company. See "The Exchange Agreement."
Withdrawal Rights.......... Tenders of NAI Shares made pursuant to the Offer
are irrevocable, except that NAI Shares tendered
pursuant to the Offer may be withdrawn pursuant to
the procedures set forth herein under the heading
"The Offer-- Withdrawal Rights" at any time prior
to the Expiration Date, and, unless theretofore
accepted for exchange and exchanged by Kranzco for
the Offer Consideration pursuant to the Offer, may
also be withdrawn at any time after ________,
1998. See "The Offer--Withdrawal Rights."
Procedure for Tendering.... For an NAI Stockholder to validly tender NAI
Shares pursuant to the Offer, a properly completed
and duly executed Letter of Transmittal (or
manually executed facsimile thereof), together
with any required signature guarantees, and any
other required documents, must be transmitted to
and received by the Exchange Agent at its address
set forth on the back cover of this Prospectus and
certificates for tendered NAI Shares must be
received by the Exchange Agent at such address
prior to the Expiration Date. Any NAI Stockholder
who desires to tender NAI Shares and whose
certificates for such NAI Shares are not
immediately available or who cannot deliver all
required documents to the Exchange Agent prior to
the Expiration Date, should contact the Exchange
Agent immediately at (800) 829-8432.
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THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND
RISK OF THE TENDERING STOCKHOLDER, AND THE
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY
MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
Conditions of the Offer.... The Offer is conditioned upon, among other things,
(i) there being validly tendered and not withdrawn
prior to the Expiration Date 10,379,531 NAI
Shares, (ii) the representations and warranties of
NAI contained in the Exchange Agreement (as
defined herein) being true and correct on the
Expiration Date, and (iii) the satisfaction of
other conditions set forth in the Exchange
Agreement. See "The Offer--Conditions of the
Offer." See "The Offer--Conditions to Offer."
The Exchange Agreement..... On __________ __, 1998, Kranzco, NAI and the Finns
entered into the Exchange Agreement, pursuant to
which Kranzco agreed to conduct the Exchange
Offer, and the Finns agreed to tender 80% of their
respective NAI Shares owned by them in the
Exchange Offer, and, in the event that less than
80% of the issued and outstanding NAI Shares are
tendered by other NAI Stockholders in the Exchange
Offer, the Finns agreed to tender up to an
additional 10% of their NAI Shares, as may be
required to reach the Minimum Tender Condition.
Although the Finns have agreed to tender up to 90%
of the NAI Shares owned by them, such number of
NAI Shares is not sufficient to meet the Minimum
Tender Condition without other NAI Stockholders
joining in the tender. Accordingly, if other NAI
Stockholders do not tender a number of NAI Shares
that, together with the NAI Shares to be tendered
by the Finns, would meet the Minimum Tender
Condition, the Exchange Offer will not be
consummated and NAI will continue to conduct its
business as a private company. See "The Exchange
Agreement."
In addition, unless the Exchange Agreement is
terminated in accordance with its terms, NAI and
the Finns have agreed not to (a) solicit or
encourage any acquisition or purchase of 10% or
more of the assets of, or any 5% or greater equity
interest in, NAI or any of its subsidiaries or any
tender offer (including a self tender offer) or
exchange offer, merger, consolidation, business
combination, sale of 10% or more of the assets,
sale of securities, recapitalization, liquidation,
dissolution or similar transaction involving NAI
or its subsidiaries or any other transaction the
consummation of which would or could reasonably be
expected to impede, interfere with, prevent or
materially delay any of the Proposed Related
Transactions or materially dilute the benefits to
Kranzco of such transactions (an "Other
Transaction Proposal") or agree to or endorse any
Other Transaction Proposal, (b) propose or enter
into any discussions or negotiations regarding an
Other Transaction Proposal, or (c) sell, transfer
or encumber any real property investments or
- --------------------------------------------------------------------------------
-9-
<PAGE>
- --------------------------------------------------------------------------------
partnership or joint venture interests of NAI or
enter into any agreement to do so. However, the
Exchange Agreement does not prohibit, among other
things, (i) furnishing information, or (ii)
engaging in discussions in connection with any
bona fide Other Transaction Proposal which is not
as a result of a breach of the Exchange Agreement,
after the Board of Directors of NAI concludes in
good faith that such action is necessary for the
Board of NAI to comply with its fiduciary
obligations under applicable law. In certain
instances, if the Exchange Agreement is
terminated, and any Other Transaction Proposal
relating to in excess of 10% of NAI's assets or
outstanding capital stock is consummated within
180 days of December 31, 1998 or at any time
thereafter pursuant to a definitive agreement
entered into within such 180-day period, NAI and
the Finns shall immediately pay in cash to Kranzco
a termination fee of $1,000,000. See "The Exchange
Agreement--Effect of Termination and Abandonment."
Accounting Treatment....... Kranzco will account for the acquisition of NAI
Shares pursuant to the Offer using the purchase
method of accounting. Accordingly, the purchase
price will be allocated to assets acquired and
liabilities assumed based on their estimated fair
values at the acquisition date. Subsequent to the
Transaction, Kranzco will account for its 9.8%
investment in NAI using the cost method of
accounting.
Tax Consequences........... The exchange by an NAI Stockholder of its NAI
Shares for Notes is intended to qualify as an
installment sale. See "Material United States
Federal Tax Considerations--Federal Income
Taxation of the Exchange Offer" for a detailed
discussion of the federal income tax consequences
of the Exchange Offer.
The Notes
The Notes.................. $8,000,000 aggregate principal amount of 6%
Callable Convertible Subordinated Notes due 2008.
Maturity Date.............. Ten years following the date of original issuance
of the Notes.
Interest Payment Dates..... Interest on the Notes will be payable quarterly on
January 1, April 1, July 1 and October 1.
Sinking Fund............... None.
Conversion Rights.......... The Notes are convertible, in whole or in part, at
the option of the Holder at any time after two
years following the date of original issuance
thereof and prior to the close of business on the
business day immediately preceding the maturity
date, unless previously redeemed into Kranzco
Common Shares, at a conversion price of $20 per
Kranzco Common Share (equivalent to a conversion
rate of one Common Share per $20 principal amount
of Notes), subject to adjustment in certain
circumstances as described herein (the "Conversion
Price").
The Finns and Norma Finn, Mr. Gerald Finn's wife,
have agreed not to convert the Notes into Kranzco
Common Shares until three years from the date of
issuance; provided,
- --------------------------------------------------------------------------------
-10-
<PAGE>
- --------------------------------------------------------------------------------
however, that in the event that Kranzco issues a
notice of redemption relating to the Notes prior
to the end of such three-year period, then the
Finns and Norma Finn may earlier convert the Notes
issued to them, in accordance with the terms of
such Notes.
Unless the Notes are previously converted, during
the period from the date Kranzco resolves to take
any action that would constitute a Change in
Control (as defined below) until five days prior
to the consummation of such Change in Control
transaction, the holders of the Notes shall have
the right to make an election to convert all or
any Notes conditioned upon approval of such Change
in Control by the holders entitled to vote on such
matter, in which case, if such Change in Control
is approved, conversion of such Notes as to which
a conditional election has been made shall occur
upon the later of (i) immediately prior to such
Change in Control, or (ii) the date one year after
the date of original issuance of the Notes. A
"Change in Control" shall be deemed to have
occurred upon (i) the merger or consolidation of
Kranzco with or into any entity, unless (A)
immediately following such merger or
consolidation, more than 50% of the surviving
company's issued and outstanding voting securities
are held by the holders of Kranzco's issued and
outstanding voting securities immediately prior to
such merger or consolidation and (B) effective
provision is made in the merger documents of the
surviving entity or otherwise for the recognition,
preservation and protection of the preferences,
conversion and other rights, of the holders of the
Notes, or (ii) the sale, lease, transfer,
spin-off, or other disposal or distribution of all
or substantially all of the assets of Kranzco. The
Notes will be convertible immediately upon an
Event of Default; however, if an Event of Default
occurs prior to one year from the date of original
issuance of the Notes, any conversion of such
Notes will not be permitted until one year from
the date of original issuance of the Notes, and
then will only be permitted if such Event of
Default has not been cured prior to one year from
the date of original issuance of the Notes. See
"Description of Notes--Events of Default." The
Notes may be converted at any time after a notice
of redemption prior to the Redemption Date (as
defined below).
Optional Redemption........ The Notes are redeemable, in whole or in part, at
the option of Kranzco at any time on or after two
years from the date of original issuance, upon
payment of an amount equal to the principal amount
of the Note, or part thereof being redeemed, plus
accrued and unpaid interest on the Note, or part
thereof being redeemed, to the date of redemption.
The Notes will remain convertible after a notice
of redemption until the close of business on the
Business Day (as defined herein) immediately
preceding the Redemption Date. See "Description of
Notes--Optional Redemption by Kranzco" and
"--Conversion Rights."
Ranking.................... The Notes are general unsecured obligations of
Kranzco, subordinated in right of payment to the
prior payment in full of all Senior Indebtedness
(as defined in the Indenture) of Kranzco and
effectively subordinated in right of payment to
the prior payment in full of all indebtedness of
Kranzco's subsidiaries. The Indenture does not
restrict Kranzco's ability
- --------------------------------------------------------------------------------
-11-
<PAGE>
- --------------------------------------------------------------------------------
to incur Senior Indebtedness or additional
indebtedness or Kranzco's subsidiaries' ability to
incur additional indebtedness. At March 31, 1998,
Senior Indebtedness and indebtedness of Kranzco's
subsidiaries was approximately $257,201,000. See
"Description of Notes -- Subordination."
Transferability............ The Notes are not transferable and will not be
listed for trading. The Kranzco Common Shares are
traded on the NYSE under the symbol "KRT." On
August 5, 1998, the closing sale price of the
Kranzco Common Shares was $17.06 per share.
Comparison of Rights of Holders
Certain differences exist between the rights of holders of the Notes
(and the underlying Kranzco Common Shares) and the rights of holders of NAI
Delaware Shares.
The Notes are unsecured debt obligations of Kranzco and the Note holders'
rights are governed by the terms of the Notes and the Indenture. NAI Delaware
Shares are equity securities of NAI and the rights of holders of such shares are
governed by the Delaware General Corporation Law (the "DGCL") and the Amended
and Restated Certificate of Incorporation (the "Certificate") and the Bylaws of
NAI Delaware. Kranzco Common Shares are equity securities of Kranzco and the
rights of holders of such shares are governed by Title 8 ("Title 8") and certain
other provisions of the Annotated Code of Maryland, the Declaration of Trust and
the Kranzco Bylaws.
Differences between the rights of a holder of NAI Delaware Shares and a
holder of the Notes and, after conversion, a holder of Kranzco Common Shares,
include, among others, the following: (i) holders of the Notes are not entitled
to any vote on matters submitted to a vote of the holders of Kranzco Common
Shares, whereas each NAI Delaware Share entitles the holder thereof to one vote
on all matters submitted to a vote of holders of NAI Delaware Shares; (ii) the
Notes will bear interest at a rate of 6% per year from the date of original
issuance, payable quarterly, but are not entitled to receive distributions on
Kranzco Common Shares, whereas the holders of NAI Delaware Shares are entitled
to distributions if, as and when declared by the NAI Board; (iii) the Notes are
not negotiable and are not transferable except upon death of a holder in
accordance with the laws of descent and distribution or in connection with a
gift without consideration, whereas there are no restrictions on the
transferability of NAI Delaware Shares under the DGCL, the Certificate or the
NAI Delaware Bylaws; (iv) the Kranzco Bylaws may be amended only by the Kranzco
Board and not by the holders of Kranzco Common Shares or holders of the Notes,
whereas the NAI Delaware Bylaws may be amended by the NAI Board or by the
holders of NAI Delaware Shares; (v) with certain exceptions, Kranzco is subject
to the provisions of the Maryland business combination statute, which is more
likely to deter unsolicited bids for the Kranzco Common Shares than the Delaware
business combination statute; (vi) Maryland law provides more limited rights of
inspection to shareholders of Kranzco than Delaware law provides to stockholders
of NAI Delaware; (vii) Kranzco is subject to certain restrictions on the type of
assets it may own (and on the use thereof) to which NAI Delaware is not subject;
and (viii) the Notes will be convertible into Kranzco Common Shares in
accordance with a specific conversion ratio, which ratio is subject to
adjustment upon certain antidilutive events, whereas the NAI Delaware Shares are
not convertible into another security. See "Comparison of Rights of Holders" for
a more detailed comparison of the rights of holders of Notes, NAI Delaware
Shares and Kranzco Common Shares.
Also, see "Description of Securities of NAI," "Certain Provisions of
Maryland Law and of NAI Maryland's Charter and Bylaws" and "Risk
Factors--Institution of Anti-takeover Measures; Anti-takeover Effect of Certain
Provisions of Maryland Law and of NAI Maryland's Charter and Bylaws."
- --------------------------------------------------------------------------------
-12-
<PAGE>
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Kranzco Summary Financial and Operating Data
(In thousands, except ratio, property and per share data )
The following sets forth summary financial, operating and other data on a
historical basis for Kranzco. Also set forth below are summary pro forma
financial, operating and other data for Kranzco at and for the three months
ended March 31, 1998 and the year ended December 31, 1997. The pro forma balance
sheet data as of March 31, 1998 has been prepared as if the Exchange Offer, the
subsequent Distribution and the Southeast Acquisition had occurred on March 31,
1998. The pro forma operating and other data for the three months ended March
31, 1998 have been prepared as if the Exchange Offer, the subsequent
Distribution and the Southeast Acquisition had occurred on January 1, 1997. The
pro forma operating and other data for the year ended December 31, 1997 have
been prepared as if the foregoing transactions had occurred on January 1, 1997.
The pro forma financial and operating data do not give effect to the Concurrent
Offering and the Rights Offering, and are not necessarily indicative of what the
actual financial position or results of operations of Kranzco would have been as
of the date or for the periods indicated, nor do they purport to represent the
results of operations or financial position for future periods. The five year
summary historical data is incorporated by reference from Kranzco's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
------------------------------------ -----------------------------------------------
Pro Forma Historical Pro Forma Historical
--------- ------------------ --------- -------------------------------
1998 1998 1997 1997 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Minimum rent ....................... $15,484 $13,407 $10,929 $61,679 $47,579 $41,665 $40,259
Percentage rent .................... 330 310 268 1,382 1,163 1,042 1,044
Expense reimbursements ............. 3,017 2,839 2,697 12,812 11,165 11,732 10,988
Interest income .................... 123 123 54 278 278 624 902
Other income ....................... 153 28 31 627 127 117 277
--------- --------- --------- --------- --------- --------- ---------
Total revenue ...................... 19,107 16,707 13,979 76,778 60,312 55,180 53,470
========= ========= ========= ========= ========= ========= =========
Expenses:
General and administrative, interest
and property operating costs ...... 11,712 9,585 8,654 46,624 36,694 35,514 32,690
Depreciation and amortization ...... 4,044 3,450 2,859 16,160 12,534 11,194 10,903
Income before extraordinary charge and
before preferred distributions ......... 3,351 3,672 2,466 13,994 11,084 8,472 9,877
Extraordinary charge from early
extinguishment of debt and
debt refinancing ................... 0 0 0 0 467 11,052 0
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ....................... $3,351 $3,672 $2,466 $13,994 $10,617 $(2,580) $9,877
Income before extraordinary
items per share ....................... $0.13 $0.16 $0.19 $0.54 $0.73 $0.75 $0.91
Distributions per share ................. $0.48 $0.48 $0.48 $1.92 $1.92 $1.92 $1.92
Other Data (unaudited):
Cash flows provided by (used in)
Operating ............................... 7,098 6,875 5,910 31,056 24,720 18,459 20,449
Investing ............................... (98,557) (3,557) (3,118) (122,551) (27,551) (3,059) (4,524)
Financing ............................... 86,707 (8,293) (2,598) 99,150 8,953 (16,228) (13,720)
Funds from operations (1) ............... $5,185 $4,962 $4,723 $20,961 $19,428 $18,313 $19,278
Preferred share distributions ........... $2,013 $2,013 $465 $8,368 $3,565 $695 $485
Ratio of earnings to fixed charges (2) .. 1.11 1.19 1.37 1.13 1.27 1.41 1.50
Ratio of funds from operations to
fixed charges (3) ..................... 1.53 1.64 1.89 1.54 1.77 1.97 2.05
Total Properties (at end of period) ..... 68 59 54 68 59 38 38
Total gross leasable area in sq. ft .....
(at end of period, in thousands) ..... 9,000 7,600 7,000 9,000 7,600 5,700 5,700
Balance Sheet Data (at end of
period):
Real estate, before accumulated
depreciation ......................... $578,091 $491,091 $438,454 $484,741 $370,491 $368,073
Total assets ............................ $554,630 $465,650 $423,117 $466,220 $359,157 $372,983
Total debt .............................. $353,201 $257,201 $246,034 $255,124 $212,590 $204,247
Kranzco Series C Preferred Shares ....... $ 1,782 $ 1,782 $ 3,564 $ 2,228 $ 0 $ 0
Beneficiaries' equity ................... $188,320 $195,340 $153,501 $198,112 $137,013 $159,882
</TABLE>
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-13-
<PAGE>
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- ---------------
(1) Funds From Operations
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
--------------------------------- -----------------------------------------
Pro Forma Historical Pro Forma Historical
1998 1998 1997 1997 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income available to common shareholders 1,338 1,659 2,001 5,159 7,052 (3,274) 9,392
Loss on sale of real estate and extraordinary
items -- -- -- 467 467 11,115 --
Amortization of leasing costs 86 86 63 385 385 337 228
Depreciation of investment in real estate 3,761 3,217 2,659 14,950 11,524 10,135 9,658
Funds From Operations 5,185 4,962 4,723 20,961 19,428 18,313 19,278
</TABLE>
Management generally considers Funds From Operations to be a useful measure
of the operating performance of an equity REIT because, together with net
income and cash flows, Funds From Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service
debt and to fund acquisitions and other capital expenditures. Funds From
Operations has been calculated in accordance with the definition of "funds
from operations" clarified by the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT") generally as net income, computed in
accordance with generally accepted accounting principles, excluding gains
or losses from debt restructuring and sales of property, plus depreciation
and amortization (in each case only on real estate related assets) and
after adjustments for unconsolidated partnerships and joint ventures, less
preferred share distributions. Funds From Operations does not represent net
income or cash flows from operating, investing or financing activities as
defined by GAAP. Funds from operations should not be considered as a
substitute for net income as an indication of Kranzco's performance or as a
substitute for cash flows as a measure of its liquidity. Furthermore, Funds
From Operations as disclosed by other REIT's may not be comparable to
Kranzco's calculation of Funds From Operations.
(2) For purposes of these computations, earnings consist of income before
extraordinary charges, if any, plus preferred share distributions, interest
expense and amortization of debt expense. Fixed charges include interest,
whether expensed or capitalized, amortization of debt expense and preferred
share distributions.
(3) For purposes of these computations, Funds From Operations include interest,
preferred share distributions and amortization of debt expense. Management
believes that the ratio of Funds From Operations to fixed charges is a
useful measure of a REIT's ability to generate sufficient funds to meet its
future financing costs. This ratio does not represent cash flows from
financing activities as defined by GAAP and may not be comparable to other
REITs.
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<PAGE>
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NAI Summary Financial and Operating Data
(In thousands, except ratio, property and per share data )
The following sets forth summary financial, operating and other data on a
historical basis for NAI. Also set forth below are summary pro forma financial,
operating and other data for NAI at and for the nine months ended March 31, 1998
and the year ended June 30, 1997. The pro forma balance sheet data as of March
31, 1998 has been prepared as if the Exchange Offer and the Distribution had
occurred on March 31, 1998. The pro forma operating and other data for the nine
months ended March 31, 1998 have been prepared as if the consummation of the
Exchange Offer and the Distribution had occurred on July 1, 1996. The pro forma
operating and other data for the year ended June 30, 1997 have been prepared as
if the foregoing transactions had occurred on July 1, 1996. The pro forma
financial and operating data do not give effect to the Concurrent Offering and
the Rights Offering, and are not necessarily indicative of what the actual
financial position or results of operations of NAI would have been as of the
date or for the periods indicated, nor do they purport to represent the results
of operations or financial position for future periods. This data should be read
in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Nine Months Ended March 31, Year Ended June 30,
-------------------------------- ------------------------------------------
Pro Forma Historical Pro Forma Historical
--------- ----------------- --------- ----------
1998 1998 1997 1997 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA: (unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Commissions $ 2,836 $ 2,836 $ 2,910 $ 4,001 $ 4,001 $ 4,124 $ 4,371
License fees 1,128 1,128 923 1,282 1,282 1,373 1,158
Other 474 474 563 618 618 523 470
Interest 0 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
Total revenue 4,438 4,438 4,396 5,901 5,901 6,020 5,999
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Commission expense 602 602 788 1,143 1,143 1,782 1,485
Sales and marketing 277 277 194 321 321 285 324
Compensation and benefits 1,832 1,832 1,911 2,528 2,528 2,438 1,981
Operating expense 1,953 1,578 1,187 2,144 1,644 1,475 1,336
Depreciation and amortization 40 40 37 52 52 56 45
Interest, net 47 47 47 60 60 48 46
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses 4,751 4,376 4,164 6,248 5,748 6,084 5,217
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations (313) 62 232 (347) 153 (64) 782
-------- -------- -------- -------- -------- -------- --------
Other expenses:
Equity in loss of affiliate 12 12 15 25 25 5 0
Loss on sale of real estate 0 0 0 0 0 0 65
-------- -------- -------- -------- -------- -------- --------
Total other expenses 12 12 15 25 25 5 65
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes (325) 50 217 (372) 128 (69) 717
-------- -------- -------- -------- -------- -------- --------
Income taxes 5 5 0 0 0 0 35
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations (330) 45 217 (372) 128 (69) 682
-------- --------
Loss from discontinued operations 0 0 162 0 223 128 392
-------- -------- -------- -------- -------- -------- --------
Net income (loss) (330) 45 55 (372) (95) (197) 290
-------- -------- -------- -------- -------- -------- --------
Preferred share distributions 0 7 8 0 11 13 15
-------- -------- -------- -------- -------- -------- --------
Net income (loss) available to common
shareholders $ (330) $ 38 $ 47 $ (372) $ (106) $ (210) $ 275
======== ======== ======== ======== ======== ======== ========
Net income (loss) per share $ (0.02) $ 0.00 $ 0.00 $ (0.02) $ (0.01) $ (0.02) $ 0.02
======== ======== ======== ======== ======== ======== ========
Other data (unaudited):
Cash flows provided by (used in)
Operating (186) 189 313 (267) 233 158 593
Investing (41) (41) (196) (260) (260) (277) (260)
Financing 18 11 (8) (156) 13 (7) (156)
Common shares outstanding 17,101 12,974 12,888 16,965 12,871 12,863 12,782
Weighted average shares outstanding 17,075 12,954 12,888 16,981 12,883 12,860 12,648
Ratio of EBITDA to fixed charges(1) (2.74) 1.46 3.27 (2.32) 1.95 0.30 7.62
EBITDA(1) $ (238) $ 137 $ 301 $ (260) $ 240 $ 35 $ 808
Balance sheet data (1995 unaudited):
Total assets $ 1,829 $ 1,829 $ 1,807 $ 1,689 $ 1,732 $ 1,649
Total debt $ 643 $ 643 $ 550 $ 575 $ 496 $ 441
Shareholders deficit $ (1,026) $ (1,026) $ (983) $ (1,090) $ (1,008) $ (837)
</TABLE>
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-15-
<PAGE>
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(1) For purposes of these computations, EBITDA consists of income before
interest expense, taxes, depreciation and amortization. Fixed charges
include interest expense, depreciation and amortization, and preferred
share distributions. Management believes that EBITDA provides additional
information about the Company's ability to meet its future debt service,
capital expenditures and working capital requirements. EBITDA is not a
measure of financial performance under GAAP and should not be considered an
alternative either to net income as an indicator of NAI's performance or to
cash flows as a measure of its liquidity. EBITDA as disclosed by other
Companies may not be comparable to the Company's calculation of EBITDA.
- --------------------------------------------------------------------------------
-16-
<PAGE>
RISK FACTORS
An investment in the Notes involves various risks. Prospective investors
should consider carefully the following factors, in addition to other
information contained in this Prospectus and incorporated herein and therein by
reference, in connection with an investment in the Notes offered hereby.
Substantial Debt Obligations
The pro forma debt of Kranzco at March 31, 1998, after giving effect to the
consummation of the Exchange Offer, the subsequent Distribution and the
Southeast Acquisition, would be $353,201,000, of which approximately
$352,355,000 would be long-term debt. The pro forma ratio of Kranzco's debt to
estimated value of Kranzco's real estate assets (as estimated by Kranzco's Board
of Trustees (the "Kranzco Board") (the "Debt Ratio") at March 31, 1998, after
giving effect to the consummation of the Exchange Offer, the subsequent
Distribution and the Southeast Acquisition, would be approximately 57%. The
incurrence of new debt subsequent to the consummation of the Exchange Offer and
subsequent Distribution, could increase the debt service charges and the risk of
default under instruments or agreements creating Kranzco's debt, which would
have an adverse effect on Kranzco's net income and cash available for
distributions to shareholders. There is no limitation on the amount of debt that
Kranzco may incur. The $353,201,000 of pro forma debt of Kranzco referred to
above will be due as follows: $846,000 in 1998; $7,637,000 in 1999; $43,440,000
in 2000; $4,576,000 in 2001; $3,600,000 in 2002; and $293,102,000 thereafter. In
addition, 52 of the Properties are security for mortgage indebtedness of
Kranzco.
Balloon Payments on Debt
All of Kranzco's outstanding debt instruments require "balloon" payments
for the outstanding principal balance at maturity. Kranzco's $50,000,000 secured
first mortgage loan facility with Salomon Brothers Realty Corp. (the "Salomon
Facility") is secured by 14 Properties and is due February 2000; Kranzco's
seven-year real estate loan (the "Mortgage Loan") in the principal amount of
$181,700,000, is secured by 27 Properties and is due in June 2003. The remainder
of Kranzco's eleven mortgages have balloon indebtedness with due dates ranging
from August 1999 to February 2009. See "Capitalization-Summary of Indebtedness"
for the principal amounts, interest rates, and maturity dates on Kranzco
indebtedness. In addition, Kranzco may finance future acquisitions with debt
which may require a "balloon" payment for the outstanding principal balance at
maturity. Kranzco's ability to pay the outstanding principal balance of its debt
at maturity may depend upon its ability to refinance such debt, or to sell
Properties. Kranzco has no commitments with respect to refinancing its debt.
There can be no assurance that refinancing will be available on reasonable terms
and conditions, that such sales are possible or that the amounts received from
such refinancing or sales will be sufficient to make the required balloon
payment on its debt. In fact, there are substantial restrictions on the ability
to remove 27 Properties from the lien under the Mortgage Loan and similar
restrictions may exist with respect to future indebtedness. If Kranzco cannot
make a balloon payment when due, the lenders under its other debt may foreclose
on the Properties securing the debt, which foreclosure would have a material
adverse effect on Kranzco's business, assets and results of operations.
Floating Rate Debt
The Salomon Facility, which as of March 31, 1998 had an outstanding
principal balance of $14,000,000, and indebtedness of Kranzco with respect to
Kranzco's East Main Centre in Spartanburg, South Carolina and Park Centre in
Columbia, South Carolina, which currently have outstanding principal balances of
approximately $2,800,000 and $4,480,000, respectively, currently bear interest
at variable rates. As a result of variable interest rates on such debt and other
debt Kranzco may incur in the future, an increase in interest rates could have
an adverse effect on Kranzco's net income and cash available for distributions.
-17-
<PAGE>
Subordination; Absence of Financial Covenants
The Notes are unsecured and subordinated in right of payment in full to all
existing and future Senior Indebtedness of Kranzco. As a result of such
subordination, in the event of bankruptcy, liquidation or reorganization of
Kranzco or upon acceleration of the Notes due to an Event of Default under the
Indenture and in certain other events, the assets of Kranzco will be available
to pay obligations on the Notes only after all Senior Indebtedness has been paid
in full, and there may not be sufficient assets remaining to pay amounts due on
the Notes then outstanding. The Indenture does not contain financial covenants
and does not prohibit or limit the incurrence of Senior Indebtedness or the
incurrence of other indebtedness and other liabilities by Kranzco and its
subsidiaries, and the incurrence of additional indebtedness and other
liabilities by Kranzco and its subsidiaries could adversely affect Kranzco's
ability to pay its obligations on the Notes. Kranzco anticipates that from time
to time Kranzco and its subsidiaries will incur additional indebtedness,
including Senior Indebtedness. See "Description of Notes--Subordination."
Balloon Payment on the Note
Unless all or a portion of the Notes are converted prior to maturity, the
entire principal amount of the Notes will be due at maturity. Kranzco's ability
to pay the outstanding principal balance of its debt at maturity may depend upon
its ability to refinance such debt, or to sell Properties. Kranzco has no
commitments with respect to refinancing the Notes. There can be no assurance
that refinancing will be available on reasonable terms and conditions, that such
sales are possible or that the amounts received from such refinancing or sales
will be sufficient to make the required balloon payment on the Notes.
Competition
The leasing of real estate is highly competitive. All of the Properties are
located in developed retail and commercial areas and there are generally
numerous other neighborhood or community shopping centers within a five-mile
radius of any given Property. In addition, there are generally one or more
regional malls within a ten-mile radius of certain Properties.
There are numerous developers and real estate companies which compete with
Kranzco in seeking acquisition opportunities and locating tenants to lease
vacant space, some of which may have greater financial resources than Kranzco.
In addition, such developers or real estate companies may develop or acquire new
shopping centers or regional malls, or renovate, refurbish or expand existing
shopping centers or regional malls, in the vicinity of one or more of the
Properties. Competition from such developers and real estate companies could
have a material adverse effect on Kranzco's acquisition opportunities and
ability to locate tenants to lease vacant space.
Real Estate Investment Risks
General
Various factors, many of which are beyond the control of and cannot be
predicted by Kranzco, may affect the economic viability of the Properties. The
Properties may be affected by risks generally associated with real estate
investments, including, without limitation, adverse changes in general or local
economic conditions, adverse changes in consumer spending patterns, local
competitive conditions such as the supply of retail or commercial space or the
existence or construction of new shopping centers, regional malls or other
retail or commercial space, increased operating costs (including maintenance,
insurance, debt service, lease payments and tenant improvement costs and real
estate and other taxes), the attractiveness of the Properties to tenants and
their customers, the need to comply with various federal, state and local laws,
ordinances and regulations (including zoning and other regulatory restrictions
on the use of the Properties), and the loss, bankruptcy or financial distress of
tenants. In addition, certain significant operating expenses associated with the
Properties (including maintenance, insurance, debt service, lease payment and
tenant improvement costs and real estate and other taxes) generally are not
reduced when circumstances cause a reduction in gross income from the
Properties. If the Properties do not generate gross income sufficient to
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meet operating expenses, Kranzco's net income and ability to make cash
distributions would be adversely affected.
Dependence on Retail Industry
Kranzco's performance is significantly affected by the market for retail
space and, indirectly, the retail sector of the general or local economy. The
market for retail space has been adversely affected in recent years by
consolidation in the retail sector, the financial distress of certain large
retailers and the excess amount of retail space in certain markets. To the
extent that these conditions persist, they would have an adverse effect on
Kranzco's net income and cash available for distributions to shareholders and
Kranzco may not be able to obtain debt or equity financing on reasonable terms
and conditions.
Leasing Risks
The ability of Kranzco to rent or relet unleased space is affected by many
factors, which may include certain covenants typically found in leases with
tenants in shopping centers, such as covenants which restrict the use of other
space at such shopping center to those which are not competitive with such
tenant. Changes in the abilities of tenants of the Properties to pay and perform
their rental and other obligations under their respective leases and in
Kranzco's ability to lease or relet Properties may cause fluctuations in
Kranzco's cash flow, which, in turn, may affect the cash available for
distributions to shareholders.
Changes in Laws
The Properties are subject to various federal, state and local regulatory
requirements, including, without limitation, the Americans with Disabilities
Act, which requires that buildings be made accessible to people with
disabilities. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or the award of damages to
private litigants. Kranzco believes the Properties to be in substantial
compliance with all material federal, state and local regulatory requirements.
There can be no assurance, however, that these regulatory requirements will not
be changed or that new regulatory requirements will not be imposed that would
require significant unanticipated expenditures by Kranzco or the tenants, which
would adversely affect Kranzco's net income and cash available for distributions
to shareholders.
Illiquidity of Real Estate
The illiquidity of real estate investments, the possibility of taxes
imposed on a REIT such as Kranzco by the Internal Revenue Code of 1986, as
amended (the "Code"), upon the sale of properties held for fewer than four years
and restrictions placed on Kranzco on the removal of 27 of the Properties from
the lien of the Mortgage Loan, will each serve to limit Kranzco's ability to
vary its real estate holdings promptly in response to changes in economic or
other conditions.
Casualty; Sufficiency of Insurance
Kranzco carries comprehensive liability, fire, flood, extended coverage and
rental loss insurance for the Properties with policy specifications, limits and
deductibles customarily carried for similar properties. Kranzco currently
believes it is adequately insured for all material risks of loss. However, there
is no assurance that all such insurance will be available in the future or will
be available at commercially reasonable rates. In addition, there can be no
assurance that every loss affecting the Properties will be covered by insurance
or that any such loss incurred by Kranzco will not exceed the limits of policies
obtained. Should an uninsured loss occur, Kranzco's net income and cash
available for distributions would be adversely affected.
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Default by Tenants; Financial Distress and Bankruptcy of Tenants
Substantially all of Kranzco's income will be derived from rental payments
from tenants of the Properties under their respective leases. In the event of a
default by a tenant in its payment or performance of its rental or other
obligations under its lease, Kranzco may experience delays and substantial cost
in enforcing its rights and protecting its investment, including costs incurred
in making substantial improvements or repairs to a property and re-leasing the
property. In the event that a substantial number of tenants become financially
distressed and so default, Kranzco's net income and cash available for
distributions to shareholders would be adversely affected.
During 1997, three of Kranzco's anchor tenants, Bradlees, Caldor and
Rickels, were in bankruptcy under Chapter 11 of the United States Bankruptcy
Code. In general, in a Chapter 11 proceeding, the tenant is required to pay the
full rental to the landlord for the store on a current basis unless the lease is
disaffirmed.
The Bradlees stores are located in Bethlehem, Pennsylvania, Whitehall,
Pennsylvania and Groton, Connecticut and are approximately 85,899, 85,120 and
85,120 square feet, respectively. The Bradlees stores represent approximately
$2.2 million or 3.6% of Kranzco's annualized revenues; however, Stop & Shop
Companies, Inc. is primarily liable for all payments and other obligations set
forth in the three leases. Kranzco believes that these three leases are at or
below market rental rates and, therefore, Kranzco would not have significant
difficulty in leasing these stores if the leases were disaffirmed. The average
annual rent paid by Bradlees for these locations is approximately $6.50 per
square foot. Bradlees has closed its stores in Groton, Connecticut and
Whitehall, Pennsylvania and has disaffirmed the leases. The Stop & Shop
Companies, Inc. has commenced paying rent under the Groton, Connecticut and
Whitehall, Pennsylvania leases.
The Caldor stores are located in Towson, Maryland, Bristol, Pennsylvania
and Hamilton Township, New Jersey and are approximately 94,600, 113,160 and
119,935 square feet, respectively. The Caldor stores represent approximately
$2.5 million or 4.1% of Kranzco's annualized revenues. The Towson lease is
guaranteed by The May Company. Effective November 1, 1996, Kranzco entered into
an agreement to reduce the common area maintenance and real estate tax
reimbursements at one of the Caldor locations by approximately $230,000 for each
year in a five year period. Kranzco believes that these three leases are at or
below market rental rates and, therefore, Kranzco would not have significant
difficulty in leasing these stores if the leases were disaffirmed. The average
annual rent paid by Caldor for these locations is approximately $6.15 per square
foot.
The Rickels stores are located in Phillipsburg, New Jersey and Yonkers, New
York and both are approximately 50,000 square feet. Rickels disaffirmed the
lease for the store located at Phillipsburg in November 1996. The rental for
this store amounted to approximately $300,000 per year including reimbursements
for operating expenses. Kranzco is actively pursuing a replacement tenant for
the vacant Phillipsburg location. Rickels affirmed the lease at the Yonkers
location. Rental for this store is approximately $1.1 million per year including
reimbursements for operating expenses. Effective May 5, 1998, this lease was
assigned to National Wholesale Liquidators Inc.
Other tenants in Kranzco's portfolio that continue to pay current rent and
operate their stores under Chapter 11 constitute individually and in the
aggregate less than 1% of Kranzco's annualized 1997 revenues. Kranzco believes
that it has adequately reserved for these tenants.
There can be no assurance that any tenant of the Properties that has filed
for bankruptcy protection will continue to pay or perform its rental or other
obligations under its lease or that other tenants of the Properties will not
file for bankruptcy protection in the future. If certain other tenants were to
file for bankruptcy protection, a delay or substantial reduction in rental
payments may occur which would adversely affect Kranzco's net income and cash
available for distributions to shareholders.
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Possible Environmental Liabilities
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances on, under or in such property. Such laws often impose such liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances, and the liability under certain
such laws may be strict, joint and several unless the harm is divisible and
there is a reasonable basis for allocating responsibility. The costs of any
required remediation or removal of such substances may be substantial and the
owner's or operator's liability therefor as to any property is generally not
limited under such laws, ordinances and regulations and could exceed the value
of the property and/or the aggregate assets of the owner or operator. The
presence of hazardous or toxic substances, or the failure to properly remediate
property affected by such substances, may adversely affect the market value of
the affected property, as well as the owner's ability to sell or lease such
property or to obtain financing using such property as collateral.
None of the Properties is currently subject to an environmental claim, nor
is Kranzco aware of any threatened environmental claim with respect to any of
the Properties. Kranzco obtains Phase I environmental reports with respect to
all properties prior to acquisition. In addition, Kranzco believes it is in
substantial compliance with state and federal environmental laws. However, there
can be no assurance that the Properties will not be subject to environmental
claims in the future.
Consequences of Failure to Maintain Status as a REIT
Kranzco has qualified to be taxed as a REIT commencing with its taxable
year ended December 31, 1992 and intends to continue to qualify to be taxed as a
REIT under the Code. There can be no assurance that Kranzco will be able to
continue to operate in a manner so as to maintain its qualification as a REIT.
Qualification as a REIT involves the application of highly technical and complex
Code provisions for which there are only limited judicial or administrative
interpretations and the determination of various factual matters and
circumstances not entirely within Kranzco's control may impact its ability to
qualify as a REIT under the Code. In addition, no assurance can be given that
new legislation, new regulations, administrative interpretations or court
decisions will not change the tax laws with respect to qualification as a REIT
or the federal income tax consequences of such qualification. Kranzco, however,
is not aware of any currently pending tax legislation or regulations that would
adversely affect its ability to maintain its qualification as a REIT.
If Kranzco fails to maintain its qualification as a REIT, Kranzco will be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at corporate rates, and distributions, if any, to
shareholders will no longer be deductible by Kranzco. In addition, unless
entitled to relief under certain statutory provisions, Kranzco will also be
disqualified from treatment as a REIT for the four taxable years following the
year in which qualification was so lost. This treatment would reduce the net
earnings of Kranzco available for investment or distribution to shareholders
because of the additional tax liability to Kranzco for the year or years
involved. In addition, during the period of disqualification, Kranzco would no
longer be required by the Code to make any distributions as a condition to REIT
qualification. To the extent that distributions to shareholders would have been
made in anticipation of Kranzco's continuing to qualify as a REIT, Kranzco might
be required to borrow funds or to liquidate certain of its investments on
adverse terms to pay the applicable tax.
The President's fiscal year 1999 budget proposal contains certain
provisions that would affect the rules pertaining to the qualification and
taxation of a REIT. None of these proposals, if enacted, is anticipated to have
any material adverse tax consequences for Kranzco.
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Reliance on Major Tenants
As of March 31, 1998 Kranzco's four largest tenants were Pathmark
Supermarkets, Caldor, Bradlees and Kmart, which represented approximately 5%,
4%, 4% and 3%, respectively, of Kranzco's annualized minimum rents. Both Caldor
and Bradlees filed for bankruptcy under Chapter 11 of the United States
Bankruptcy Code. See "-Real Estate Investment Risks" and "- Default by Tenants;
Financial Distress and Bankruptcy of Tenants." No other tenant represented more
than 2% of the aggregate annualized minimum rents of the Properties as of such
date. The financial position of Kranzco and its ability to make distributions
may be adversely affected by financial difficulties experienced by any such
tenants, or any other major tenant of Kranzco, including a bankruptcy,
insolvency or general downturn in the business of any such tenant, or in the
event any such tenant does not renew its leases as they expire.
Geographic Considerations
All of the Properties are located in 16 states (Arizona, Connecticut,
Georgia, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi,
New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina
and Virginia). In addition, Properties located in the Commonwealth of
Pennsylvania and the states of New York, Connecticut and Maryland generated 36%
or $21,700,000 of revenues, 14% or $8,400,000 of revenues, 12% or $7,400,000 of
revenues and 11% or $6,900,000 of revenues, respectively of Kranzco's revenues
in fiscal year 1997, without giving effect to the Georgia Acquisition and the
Southeast Acquisition. To the extent that general economic or other relevant
conditions in the states in which the Properties are located decline and result
in a decrease in consumer demand in these areas, the income from, and value of,
these Properties may be adversely affected. The impact of any such general
decline would affect Kranzco more significantly if it affected the states of
Pennsylvania, New York, Connecticut and Maryland, or the Eastern United States
as a whole.
Effect of Distribution Requirements
In order to maintain its qualification as a REIT, Kranzco must make
distributions to shareholders aggregating annually at least 95% of its REIT
taxable income (which does not include net capital gains). Kranzco currently
distributes to shareholders approximately 100% of its funds from operations
(exclusive of nonrecurring items), which is in excess of 95% of Kranzco's REIT
taxable income. The actual amount of Kranzco's future distributions to its
shareholders will be based on the cash flows from operations from the
Properties, Kranzco's other business activities, from any future investments and
on Kranzco's net income.
Under certain circumstances, Kranzco may be required to accrue as income
for tax purposes interest and rent earned but not yet received. In such event,
Kranzco could have taxable income without sufficient cash to enable Kranzco to
meet the distribution requirements of a REIT. Accordingly, Kranzco could be
required to borrow funds or to sell certain of its investments on adverse terms
to meet such distribution requirements.
Kranzco expects to continue to make acquisitions and sign leases that may
require tenant improvements. As Kranzco must distribute 95% of its REIT taxable
income to continue to qualify as a REIT, there may not be sufficient available
cash in excess of distributions to fund future acquisitions or required tenant
improvements. In such an event, the necessary funds for future acquisitions or
required tenant improvements would have to be obtained, to the extent available,
from net proceeds from the issuance of equity securities, the sale of existing
investments and, to the extent consistent with Kranzco's strategy to maintain a
conservative capital structure, bank and other institutional borrowings and the
issuance of debt securities.
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Anti-Takeover Effects of Ownership Limit, Maryland Law and a Staggered Board
Under Kranzco's Declaration of Trust, not more than 50% in value of its
outstanding shares of beneficial interest may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
entities). The Declaration of Trust of Kranzco authorizes the Kranzco Board to
take such action as may be required to preserve its qualification as a REIT and
to limit any person, other than (i) Messrs. Norman M. Kranzdorf and Marvin
Williams and (ii) any person approved by the Board, to direct or indirect
ownership of 9.8% of the lesser of the number or value of the outstanding shares
of beneficial interest of Kranzco; provided, however, in no event may the
Kranzco Board grant an exemption from the foregoing ownership limitation to any
person whose ownership, direct or indirect, of in excess of 9.8% of the lesser
of the number or value of the outstanding shares of beneficial interest of
Kranzco would result in the termination of Kranzco's status as a REIT. In
connection with the acquisition of certain properties from Union Property
Investors, Inc. ("UPI"), pursuant to the terms of the Series B Preferred Shares,
the Kranzco Board granted an exemption from such ownership limitations to
Leonard Mandor, the Chairman of the UPI Board and the Chief Executive Officer of
UPI; Robert Mandor, the President and a director of UPI; and certain of their
affiliates. In addition to the foregoing, the Articles Supplementary with
respect to the Series D Preferred Shares authorize the Kranzco Board to take
such action as may be required to preserve its qualification as a REIT for
federal income tax purposes and to limit any person, other than persons who may
be excepted by the Board, to direct or indirect ownership of 10% of the lesser
of the number or the value of the total Series D Preferred Shares outstanding.
Based on the foregoing, there can be no assurance that there will not be five or
fewer individuals who will own more than 50% in value of the outstanding shares
of beneficial interest of Kranzco, thereby causing Kranzco to fail to qualify as
a REIT.
Under the Maryland General Corporation Law, as amended (the "MGCL"), as
applicable to a Maryland REIT, certain "business combinations" (including a
merger, consolidation, share exchange or, in certain circumstances, an asset
transfer or issuance or reclassification of equity securities) between a
Maryland REIT and any person who beneficially owns 10% or more of the voting
power of the trust's shares or an affiliate of the trust who, at any time within
the two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then-outstanding voting shares (an
"Interested Shareholder") or an affiliate thereof are prohibited for five years
after the most recent date on which the Interested Shareholder becomes an
Interested Shareholder. Thereafter, any such business combination must be
recommended by the board of trustees of such trust and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of outstanding voting shares of the trust and (b) two-thirds of the votes
entitled to be cast by holders of voting shares of the trust other than shares
held by the Interested Shareholder with whom (or with whose affiliate) the
business combination is to be effected, unless, among other conditions, the
trust's common shareholders receive a minimum price (as defined in the MGCL) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of trustees prior to the time that the Interested
Shareholder becomes an Interested Shareholder.
The ownership limits, as well as the ability of Kranzco to issue other
classes of common and preferred shares of beneficial interest and certain other
provisions of Maryland law, may delay, defer or prevent a change in control of
Kranzco or other transaction that may be in the best interests of the
shareholders and also may (i) deter tender offers for the Series D Preferred
Shares, which offers may be attractive to the shareholders, or (ii) limit the
opportunity for shareholders to receive a premium for their Series D Preferred
Shares that might otherwise exist if an investor attempted to assemble a block
of shares of beneficial interest of Kranzco in excess of 9.8% of the lesser of
the number or value of the outstanding shares of beneficial interest of Kranzco
or 10% of the lesser of the number or the value of the total Series D Preferred
Shares outstanding or otherwise to effect a change in control of Kranzco.
The Kranzco Board is divided into three classes of trustees. The terms of
the first, second and third classes expire in 2000, 2001 and 1999, respectively.
Each year one class of the Kranzco Board is elected
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by the shareholders. The staggered terms prevent the shareholders from voting on
the election of more than one class of trustees at each annual meeting and thus,
may delay a change in control of Kranzco or deter a bid for control of Kranzco
even in a case where the holders of a majority of the outstanding Kranzco Common
Shares believe a change in control would be in their interest.
Dependence on Key Personnel
Kranzco is dependent on the efforts of its executive officers and trustees,
particularly Norman M. Kranzdorf, the President and Chief Executive Officer and
a member of the Board. The loss of his services could have an adverse effect on
Kranzco's business, assets or results of operations.
Control by Trustees and Executive Officers
Trustees and executive officers of Kranzco currently own beneficially
approximately 3.26% of the outstanding Kranzco Common Shares (approximately
8.41% if they exercise all options granted to them under Kranzco share option
plans and assuming all restricted Kranzco Common Shares are fully vested). Based
on such share ownership and their positions with Kranzco, trustees and executive
officers of Kranzco may have substantial influence on Kranzco and on the outcome
of any matters submitted to Kranzco's shareholders for approval.
Changes in Investment and Financing Policies
The investment and financing policies of Kranzco and its policies with
respect to certain other activities, including growth, capitalization, debt
levels, distributions, REIT status and operating policies, are determined by the
Board. The Kranzco Board may amend or revise these policies from time to time at
its discretion without a vote of the shareholders of Kranzco. See "Kranzco
General Investment Strategies."
Shares Available for Future Sale
No prediction can be made as to the effect, if any, that future sales of
shares of beneficial interest, or the availability of shares of beneficial
interest for future sale, will have on the market price of the Kranzco Common
Shares. Sales of substantial amounts of Common Shares in the public market or
the perception that such sales might occur could adversely affect the market
price of the Kranzco Common Shares. As of July 2, 1998, there were 12,005,185
Kranzco Common Shares and Kranzco Common Share Equivalents outstanding and
options outstanding to purchase an aggregate of 932,850 Kranzco Common Shares.
The conversion of Kranzco Series B Preferred Shares into Kranzco Common
Shares, the exercise of currently outstanding options of Kranzco and the
issuance and exercise of additional options and warrants under Kranzco's 1992
Employee Share Option Plan, 1992 Trustee Share Option Plan and 1995 Management
Incentive Plan, could adversely affect the market prices of the Kranzco Common
Shares and the terms upon which Kranzco may obtain additional equity financing
in the future.
In addition, Kranzco has, and may in the future issue, Kranzco Common
Shares or options or other securities convertible or exercisable into Kranzco
Common Shares pursuant to stock option, stock purchase, performance or other
remuneration plans adopted by the Kranzco Board from time to time. Kranzco may
also issue Kranzco Common Shares or such options or securities to its employees
in lieu of bonuses or to its trustees in lieu of trustee's fees. The issuance of
a substantial number of Kranzco Common Shares, or options or other securities
convertible or exercisable into a substantial number of Kranzco Common Shares,
could adversely affect the market price of the Kranzco Common Shares.
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Absence of Market For Notes; Liquidity of Common Shares
Although the Notes have been registered under the Securities Act, there has
been no public market for the Notes prior to this Exchange Offer, and there will
be no public market for the Notes subsequent to the consummation of the Exchange
Offer. The Notes are not transferable, other than by the laws of descent or
distribution. Accordingly, the Notes are a highly illiquid investment. Kranzco
plans to apply to have the underlying Kranzco Common Shares approved for listing
on the NYSE, subject to official notice of issuance; however, except under
limited circumstances, the Notes are not convertible into Kranzco Common Shares
until a period of two years from the date of issuance. However, the Finns and
Norma Finn have agreed not to convert the Notes into Kranzco Common Shares until
three years from the date of issuance. There can be no assurance that, upon
listing, Kranzco will continue to meet the criteria for continued listing of the
Kranzco Common Shares on the NYSE. Prices for the Kranzco Common Shares will be
determined in the marketplace and may be influenced by many factors, including
interest rates, the liquidity of the market for the Kranzco Common Shares,
investor perceptions of Kranzco, the market for similar securities, the volume
of Kranzco Common Shares available for sale and general industry and economic
conditions.
Potential Conflicts of Interest
Upon consummation of the Exchange Offer and the Reincorporation Merger,
Kranzco and NAI will have several common members on its Board of Trustees or
Board of Directors, as the case may be, and have certain common executive
officers. Kranzco and NAI will operate in a relationship governed by the
Intercompany Agreement. In their relationship with Kranzco as a Client of NAI,
Kranzco and NAI may have conflicting views on the manner in which services and
opportunities are provided to Kranzco by NAI, or the manner in which
opportunities are provided to NAI by Kranzco, pursuant to the Intercompany
Agreement, and in the enforcement of the Intercompany Agreement. As a result,
the trustees and executives of Kranzco (who serve in similar capacities at NAI)
may well be presented with several decisions which provide them the opportunity
to benefit Kranzco to the detriment of NAI or benefit NAI to the detriment of
Kranzco. Such potential conflicts of interest will be present in all of the
numerous transactions between Kranzco and NAI. There is a risk that the common
management and members of the Boards of NAI and Kranzco will lead to conflicts
of interest in connection with transactions between the two companies and
opportunities presented to each of the companies. Although, the Intercompany
Agreement attempts to minimize the conflicts which may arise due to the common
management and Board membership, there is no assurance that it will successfully
cover all conflicts, or that such conflicts may not negatively effect one or
both companies. See "Proposed Related Transaction--The Intercompany Agreement"
for a description of the relationship between Kranzco and NAI and the
Intercompany Agreement.
It is intended that each of Gerald C. Finn, Co-Chairman and Chief
Executive Officer of NAI, and Jeffrey M. Finn, President and Chief Operating
Officer of NAI, will be required to spend all of his respective business time
working for NAI. However, Mr. Finn is a nominee to the Board of Trustees of
Kranzco, and will also owe a duty to the shareholders of Kranzco. In addition,
pursuant to the Intercompany Agreement, NAI has agreed to cause Norman M.
Kranzdorf to serve as the Co-Chairman of NAI, Robert H. Dennis to serve as the
Chief Financial Officer of NAI, and Michael Kranzdorf to serve as the Chief
Information Officer of NAI, in each case for a period of three years. Each of
Messrs. N. Kranzdorf, Dennis and M. Kranzdorf are also officers of Kranzco and
will devote a majority of their time to Kranzco. Although each of Messrs. N.
Kranzdorf, Dennis, and M. Kranzdorf is committed to the success of NAI they are
also committed to the success of Kranzco, and none of Messrs. N. Kranzdorf,
Dennis, and M. Kranzdorf is committed to spending a particular amount of time on
NAI's or Kranzco's affairs, nor will any of them devote his full time to NAI or
Kranzco.
Risks of Intercompany Agreement; Restrictions on NAI's Opportunities
NAI and Kranzco are entering into an Intercompany Agreement to provide both
Kranzco and NAI with first opportunity rights or first notification rights with
respect to certain business opportunities. See
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"Proposed Related Transactions--Intercompany Agreement." While the Intercompany
Agreement grants NAI certain first notification rights with respect to providing
certain brokerage and Real Estate-Related Services to Kranzco, Kranzco is not
required to enter into an agreement to purchase such services from NAI.
Accordingly, there is no assurance that the Intercompany Agreement will result
in any revenues to NAI, or that the benefits anticipated therefrom will be
realized. Similarly, although the Intercompany Agreement provides Kranzco with
certain first opportunity rights with respect to retail properties for sale
which NAI is aware of through the Network or otherwise, there is no assurance
that NAI will provide Kranzco with any opportunities or that Kranzco will be
able to, or will desire to, purchase such properties. Accordingly, the benefit
to Kranzco of having greater access to retail properties which become available
for sale, and the benefit to NAI, of increased revenue from transactions with
Kranzco, may not be realized.
The Intercompany Agreement restricts NAI's opportunities in certain
instances. Although NAI does not currently invest in real estate, it may
determine to acquire properties in the future. Under the Intercompany Agreement,
NAI has agreed not to acquire or make investments in retail properties unless it
has notified Kranzco of the acquisition or investment opportunity, and Kranzco
has determined not to pursue such acquisition or investment. In addition, the
Intercompany Agreement provides that NAI may not enter into any type of
strategic relationship with any other REIT or real estate investment or
operating type entity without the prior written consent of Kranzco. NAI,
however, is permitted under the Intercompany Agreement to solicit assignments
from other REITs or real estate investment or operating type entities with
respect to the purchase, sale or lease of real estate or the provision of Real
Estate-Related Services, subject to Kranzco's first opportunity rights. See
"Proposed Related Transactions--Intercompany Agreement." The restrictions
imposed by the Intercompany Agreement may prohibit NAI from pursuing business
opportunities which it believes may be beneficial.
Limited Experience in Certain Areas
NAI anticipates expanding the scope of its business beyond its current
focus on real estate brokerage transactions to the broader delivery of its Real
Estate-Related Services. NAI is not currently engaged in any negotiations to
provide for the acquisition or development of such Real Estate-Related Services,
and there is no assurance that NAI will be able to acquire, develop or provide
additional Real Estate-Related Services in the future.
Effects of Reincorporation Merger
Immediately following the consummation of the Exchange Offer, NAI Delaware
will merge with and into NAI Maryland. The Reincorporation Merger will result in
each NAI Delaware Share being converted into 1.318087 NAI Maryland Shares and
the adoption of certain anti-takeover provisions. See "--Institution of
Anti-takeover Measures; Anti-takeover Effect of Certain Provisions of Maryland
Law and of NAI Maryland's Charter and Bylaws" below for a description of certain
anti-takeover provisions. NAI Stockholders should consider the effect of the
Reincorporation Merger in making the decision as to whether to tender because,
in aggregate, NAI Stockholders will retain ownership of 20% of the outstanding
NAI Shares after the consummation of the Exchange Offer.
No Commitments to Purchase and No Minimum Size of Rights Offering or Concurrent
Offering
NAI does not have a written commitment from any person to purchase any of
the Underlying Shares pursuant to the Rights Offering or to purchase any Excess
Shares or Additional Shares pursuant to the Concurrent Offering. However, the
Finns have advised NAI that they intend to exercise Rights to purchase an
aggregate of 500,000 NAI Shares and Kranzco has advised NAI that it intends to
exercise such number of Rights to purchase NAI Shares that would result in
Kranzco owning approximately 9.8% of the issued and outstanding NAI Shares,
before the issuance of any Additional Shares. In addition, no minimum amount of
proceeds is required for NAI to consummate the Rights Offering or the Concurrent
Offering. Accordingly, no assurances can be given as to the amount of gross
proceeds that NAI will realize from the Rights Offering
-26-
<PAGE>
or the Concurrent Offering. NAI may not be able to achieve all the benefits it
would otherwise anticipate from the strategic relationship with Kranzco and the
Proposed Related Transactions if less than all of the Underlying Shares and
Additional Shares are sold. See "The Rights Offering" and "The Concurrent
Offering."
Certain Proceeds of the Rights Offering and the Concurrent Offering to
Affiliates; Benefits to Insiders
Approximately $441,235 of the proceeds of the Rights Offering and the
Concurrent Offering will be used to repay principal indebtedness owed by NAI and
its subsidiaries to Gerald C. Finn, a director and officer of NAI, and Norma J.
Finn, an officer of NAI, which bear interest at rates ranging from 10% to 12%.
See "The Concurrent Offering--Use of Proceeds" for a description of such
indebtedness.
In connection with the Proposed Related Transactions, NAI has entered into
employment agreements with each of Gerald C. Finn and Jeffrey M. Finn. See
"Management--Employment Agreements." In addition, in connection with the
Proposed Related Transactions, certain officers and directors of NAI will
receive options to purchase NAI Shares under the NAI 1998 Stock Option Plan, and
will be eligible to participate in the NAI 1998 Bonus Compensation Plan and the
NAI 1998 Incentive Plan. See "NAI Management--1998 Incentive Plan" and "--1998
Stock Option Plan."
Institution of Anti-takeover Measures; Anti-takeover Effect of Certain
Provisions of Maryland Law and of NAI Maryland's Charter and Bylaws
Certain provisions of NAI Maryland's Charter (the "Charter") and bylaws
(the "Bylaws") could have the effect of discouraging a third party from pursuing
a non-negotiated takeover of NAI or could delay, defer or prevent a transaction
or a change in control of NAI that might involve a premium price for the NAI
Shares or otherwise be in the best interests of NAI Stockholders.
Staggered Board. NAI's Board of Directors is divided into three classes of
directors. The initial terms of the first, second and third classes will expire
in 1999, 2000 and 2001, respectively. Beginning in 1999, directors of each class
will be chosen for three-year terms upon the expiration of their current terms
and each year one class of directors will be elected by the stockholders. The
staggered terms of directors may reduce the possibility of a tender offer or an
attempt to change control of NAI even though a tender offer or change in control
might be in the best interest of the stockholders. See "Certain Provisions of
Maryland Law and of NAI's Charter and Bylaws -- Classification of the Board of
Directors."
Blank Check Stock. The Charter authorizes the Board of Directors to cause
NAI to issue additional authorized but unissued shares of NAI common stock and
to classify or reclassify any unissued shares of stock of NAI in one or more
classes or series of stock and to set the preferences, rights and other terms of
such classified or unclassified shares. See "Description of Securities -- Common
Stock" and "--Preferred Stock" and "-- Power to Issue Additional Shares of
Common Stock and Preferred Stock." Although the Board of Directors has no such
intention at the present time, it could establish a series of NAI Preferred
Stock that could, depending on the terms of such series, delay, defer or prevent
a transaction or a change in control of NAI that might involve a premium price
for the NAI Shares or otherwise be in the best interest of the stockholders.
Maryland Business Combination Law. Under the MGCL, certain "business
combinations" (including certain issuances of equity securities) between a
Maryland corporation and any person who beneficially owns ten percent or more of
the voting power of the corporation's shares (an "Interested Stockholder") or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Stockholder becomes an Interested Stockholder. Thereafter,
any such business combination must be approved by two super-majority stockholder
votes unless, among other conditions, the corporation's common stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder
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<PAGE>
for its common shares. These provisions of the MGCL do not apply, however, to
business combinations that are approved or exempted by the board of directors of
the corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The business combination provisions of the MGCL may have
the effect of delaying, deferring or preventing a transaction or a change in
control of NAI that might involve a premium price for the NAI Shares or
otherwise be in the best interest of the stockholders. See "Certain Provisions
of Maryland Law and of NAI's Charter and Bylaws--Business Combinations."
Control Share Acquisitions. The MGCL provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquiror, by officers or by directors who are employees of the corporation.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Bylaws of NAI contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of NAI's shares of
stock. There can be no assurance that such provision will not be amended or
eliminated at any time in the future. If such provision is amended or
eliminated, the control share acquisition provisions of the MGCL could have the
effect of delaying, deferring or preventing a transaction or a change in control
of NAI that might involve a premium price for the NAI Shares or otherwise be in
the best interest of the stockholders. See "Certain Provisions of Maryland Law
and of NAI's Charter and Bylaws--Control Share Acquisitions."
Other Provisions. The Charter and Bylaws of NAI also contain other
provisions that may delay, defer or prevent a transaction or a change in control
of NAI that might involve a premium price for the NAI Shares or otherwise be in
the best interest of the stockholders. See "Certain Provisions of Maryland Law
and of NAI's Charter and Bylaws--Removal of Directors" and "--Advance Notice of
Director Nominations and New Business."
KRANZCO'S OPERATING, ACQUISITION AND FINANCING STRATEGIES
Operating Strategies
Kranzco's primary business objective is to achieve growth in its funds from
operations by enhancing the operating performance of the Properties and, through
selective acquisitions, the value of its portfolio. Kranzco's operating
strategies are to: (i) focus on the neighborhood and community shopping center
business; (ii) actively manage its properties for long-term growth in funds from
operations and capital appreciation; (iii) increase portfolio occupancy by
capitalizing on management's reputation and long-standing relationships with
national and regional tenants and extensive experience in marketing to local
tenants, as well as the negotiating leverage inherent in a large portfolio of
properties; (iv) maintain, renovate, expand and reconfigure its properties; (v)
optimize the tenant mix in each shopping center; (vi) develop or ground lease
outparcels or expansion areas existing from time to time at its properties for
use as restaurants, banks, auto centers, cinemas or other facilities; and (vii)
benefit from economies of scale by spreading overhead expenses over a larger
asset base.
Acquisition Strategies
Kranzco intends to make acquisitions in a manner consistent with the
requirements of the Code applicable to REITs and related regulations with
respect to the composition of Kranzco's portfolio and the derivation of income
unless, because of circumstances or changes in the Code (or any related
regulation), the Kranzco Board determines that it is no longer in the best
interests of Kranzco to qualify as a REIT. Kranzco's acquisition strategy is to
opportunistically acquire properties which need replacement anchor
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<PAGE>
tenants or where Kranzco's management expertise and reputation can enhance
value. Although this strategy includes acquiring and rehabilitating properties
in markets where it currently owns properties and in new markets with strong
demographic characteristics in order to reduce Kranzco's sensitivity to regional
economic cycles. Kranzco has not designated any specific geographic region for
expansion. Kranzco does not intend to invest in excess of 15% of its assets in
any single property.
Kranzco will generally acquire a 100% fee simple or leasehold interest in
real property consistent with Kranzco's acquisition strategies set forth above.
However, Kranzco may make equity investments through joint ventures with
developers, owners or other persons which may provide for, among other terms,
(i) a cumulative preference as to cash distributions; (ii) a participation in
net cash flows from operations; and (iii) a participation in the appreciation of
the value of the underlying real property. Kranzco contemplates that it would
maintain at least equal control over the underlying real property to be operated
by any joint venture (including possibly the day-to-day management of the real
property) and additional investments in or sale or financing of such underlying
real property. Kranzco may also acquire investments in real property or real
estate oriented companies through issuance of debt or equity securities in
exchange for investments or by such other methods as the Trustees deem to be in
the best interests of Kranzco. In the past, Kranzco has not invested in real
estate mortgages, and does not currently intend to invest in such securities in
the future.
Financing Strategies
Kranzco intends to maintain a ratio of debt to estimated value of Kranzco's
real estate assets (as determined by the Kranzco Board, taking into
consideration the tenants in occupancy, gross rental revenues, geographic
location and other factors affecting the value of Kranzco's properties) ("Debt
Ratio") of generally not more than 60%. At March 31, 1998, on a pro forma basis
after giving effect to the Exchange Offer, the Proposed Related Transactions and
the Southeast Acquisition, Kranzco had a Debt Ratio of approximately 57% and a
ratio of debt to total market capitalization, based upon the closing price of
Kranzco's stock on the New York Stock Exchange as of March 31, 1998, of
approximately 56%. Kranzco intends to finance acquisitions with the most
appropriate sources of capital, as determined by the Trustees, which may include
available cash flows from operations, the issuance of equity securities, the
sale of investments and bank and other institutional borrowings and the issuance
of debt securities. Future borrowings by Kranzco for acquisitions may be either
on a secured or unsecured basis. In this regard, in addition to its $181,700,000
Mortgage Loan, Kranzco has obtained several credit facilities as described
below.
In 1995, Kranzco obtained a $1.0 million unsecured credit facility from
Corestates Bank, N.A. (the "Corestates Facility"). Amounts borrowed under the
line of credit bear interest at the bank's prime rate. As of March 31, 1998,
there were no borrowings outstanding under the Corestates Facility. The facility
was extended in 1997 through December 31, 1998.
In November 1996, Kranzco obtained a $3.0 million secured line of credit
facility from Bank Leumi Trust Company of New York (the "Bank Leumi Facility").
Amounts borrowed under the Bank Leumi Facility will bear interest at 50 basis
points above that bank's reference rate. Borrowings under the Bank Leumi
Facility are secured by a first mortgage lien on the Golfland Shopping Center in
Orange, Connecticut. There were no borrowings outstanding under this facility as
of March 31, 1998. The expiration date of the Bank Leumi Facility was extended
in 1997 to June 30, 1998. Kranzco is currently engaged in discussions regarding
the extension of the Bank Leumi Facility.
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<PAGE>
In February 1997, Kranzco obtained the Salomon Facility, a secured first
mortgage loan facility of up to $50 million from Salomon Brothers Realty Corp.
(the "Salomon Facility"). Fourteen of Kranzco's properties secure the Salomon
Facility. Amounts borrowed under the Salomon Facility will bear interest at a
rate equal to one month London Interbank Offering Rate ("LIBOR") plus 175 basis
points. The term of the Salomon Facility is for two years, with an option for a
one year renewal. As of March 31, 1998, Kranzco had $14 million of outstanding
borrowings under this facility. The Salomon Facility provides that the
consolidated debt of Kranzco may not exceed 70% of Kranzco's market
capitalization, including Kranzco's outstanding preferred shares of beneficial
interest. In addition, the Salomon Facility provides that the ratio of
consolidated income available for service cannot be less than 1.75 to 1.
Kranzco does not have a policy limiting the number or amount of mortgages
that may be placed on any particular property, but mortgage financing
instruments usually limit additional indebtedness on such properties. There are
currently no restrictions on the amount of debt that Kranzco may incur.
KRANZCO'S GENERAL INVESTMENT STRATEGIES
Permitted Investments and Activities
Kranzco intends to make acquisitions in a manner consistent with the
requirements of the Code applicable to REITs and related regulations with
respect to the composition of Kranzco's portfolio and the derivation of its
income. See "Material United States Federal Income Tax Considerations." Kranzco
has the authority to offer its shares of beneficial interest or other senior
securities in exchange for property and to repurchase or otherwise reaquire
Shares or any other securities.
Kranzco may acquire securities of other REITs or other issuers or purchase
or otherwise acquire its own Shares. However, except for the Exchange Offer and
the Proposed Related Transactions, Kranzco does not anticipate investing in
issuers of securities, other than REITs, for the purpose of exercising control
or underwriting securities of other issuers or acquiring any investments
primarily for sale in the ordinary course of business or to hold any investments
with a view to making short-term profits from their sale. In any event, Kranzco
does not intend that its investments in securities will require Kranzco to
register as an "investment company" under the Investment Company Act of 1940,
and Kranzco will divest securities before any such registration would be
required. Although Kranzco may make loans to other entities or persons, it has
not done so in the past. In the future, the Board will consider any transaction
involving loans to other entities or persons on a case by case basis.
The Declaration of Trust of Kranzco permits the trustees, without the
approval of shareholders, to alter Kranzco's operating, acquisition, financing
and investment strategies if they determine in the future that such a change is
in the best interests of Kranzco and its shareholders.
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<PAGE>
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios of earnings to fixed
charges for Kranzco for the periods indicated:
<TABLE>
<CAPTION>
KRANZCO REALTY TRUST
---------------------------------------------------------------------------------------------------
Three Months Ended March 31, For the 12 Months Ended Dec. 31,
---------------------------- ------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings
to Fixed Charges 1.19 1.27(1) 1.41(2) 1.50 1.72 1.99
==== ==== ==== ==== ==== ====
</TABLE>
(1) Excludes a $467,000 extraordinary loss on early extinguishment of debt.
(2) Excludes $11,052,000 extraordinary loss on refinancing.
(3) After giving effect to the Southeast Acquisition, the ratio of earnings to
fixed charges would have been 1.10 for the three months ended March 31,
1998 and 1.13 for the 12 months ended December 31, 1997.
For purposes of computing the ratio of earnings to fixed charges: (a)
earnings have been based on income (loss) from continuing operations before
fixed charges (exclusive of interest capitalized) and (b) fixed charges consist
of interest and amortization of deferred financing costs (including amounts
capitalized) and distributions on the Series A-1 Preferred Shares of Beneficial
Interest of Kranzco, the Series B Preferred Shares, the Series C Preferred
Shares of Beneficial Interest of Kranzco and the Series D Preferred Shares of
Beneficial Interest of Kranzco.
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<PAGE>
KRANZCO CAPITALIZATION
Capital Structure
The following table sets forth the consolidated capitalization of Kranzco
(i) as of March 31, 1998 and (ii) as adjusted to give effect to the consummation
of the Exchange Offer, the subsequent Distribution and the Southeast
Acquisition.
<TABLE>
<CAPTION>
As of March 31, 1998
--------------------
(In thousands)
Actual As adjusted
------ -----------
<S> <C> <C>
Debt:
Mortgage Loan ............................................... $ 181,700 $ 181,700
Credit Facilities ........................................... 14,000 36,000
Mortgage Loans .............................................. 61,501 127,501
6% Callable Convertible Subordinated Notes .................. 0 8,000
--------- ---------
Total debt ................................... 257,201 353,201
--------- ---------
Redeemable preferred shares:
Series C cumulative redeemable preferred shares of
beneficial interest, 395,834 shares authorized,
178,200 shares issued and outstanding ..................... 1,782 1,782
--------- ---------
Beneficiaries' equity:
Series A-1 increasing rate
cumulative convertible preferred shares of
beneficial interest, 11,155 shares authorized,
11,155 shares issued and outstanding ...................... 1 1
Series B-1 and B-2 cumulative convertible preferred shares of
beneficial interest, 2,470,000 shares authorized,
1,183,331 shares issued and outstanding ................... 12 12
Series D cumulative redeemable preferred shares
of beneficial interest, 2,070,000
shares authorized, 1,800,000 issued and
outstanding ............................................... 18 18
Common shares of beneficial interest, $0.01 par
value per share; 10,444,054 shares issued
and outstanding ........................................... 104 104
Capital in excess of par value .............................. 261,647 261,647
Cumulative net income available for
common shareholders ....................................... 35,465 35,465
Cumulative distributions on common
shares of beneficial interest ............................. (101,784) (108,804)
--------- ---------
195,463 188,443
Unearned compensation on restricted
shares of beneficial interest ............................. (123) (123)
--------- ---------
Total beneficiaries' equity .................. 195,340 188,320
--------- ---------
Total capitalization ......................... $ 454,323 $ 543,303
========= =========
</TABLE>
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<PAGE>
Summary of Indebtedness
The following is a summary, as of March 31, 1998, of the significant terms
of the indebtedness of Kranzco which will remain outstanding after the Offer.
The amounts reflected below are in thousands, other than the interest rates.
<TABLE>
<CAPTION>
Principal Balance Interest
Indebtedness Property and Location March 31, 1998 Rate Maturity Date
- ------------ --------------------- -------------- ---- -------------
<S> <C> <C> <C> <C>
Mortgage Loan......................... 27 Properties in $181,700 7.96% June 2003
various locations
Salomon Facility...................... 14 Properties in 14,000 7.44%(1) February 2000
various locations
Mortgage.............................. Marumsco-Jefferson 15,744 9.38% July 2004
Plaza in Woodbridge, VA
Mortgage.............................. The Village at 10,557 9.22% August 2006
Mableton in Atlanta, GA
Mortgage.............................. Park Plaza in Douglasville, GA 3,345 8.25% September 2001
Mortgage.............................. Holcomb Bridge Crossing 6,490 8.20% November 2000
in Roswell, GA
Mortgage.............................. Builder's Square in Flint, MI 2,769 8.50% October 2006
Mortgage.............................. East Main Centre in 2,800 7.88% January 2003
Spartanburg, SC
Mortgage.............................. Park Centre in Columbia, SC 4,480 7.63% April 2003
Mortgage.............................. Campus Village in 2,660 8.00% December 2002
College Park, MD
Mortgage.............................. Coral Hills in Coral Hills, MD 6,513 10.50% August 1999
Mortgage.............................. Cary Plaza in Cary, NC 1,440 7.88% February 2009
Mortgage.............................. Northpark Plaza in Macon, GA 4,703 7.75% January 2003
Callable Subordinated Con-
vertible Notes due 2008............... 8,000 6.00% Due 2008
-----
Total $265,201
========
</TABLE>
- ----------
(1) The Salomon Facility bears interest at a rate equal to one month LIBOR plus
175 basis points, which interest rate was 7.44% at March 31, 1998.
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<PAGE>
KRANZCO SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except ratio, property and per share data )
The following table sets forth selected financial, operating and other data
on a historical basis for Kranzco. Also set forth below are selected pro forma
financial, operating and other data for Kranzco at and for the three months
ended March 31, 1998 and the year ended December 31, 1997. The pro forma balance
sheet data as of March 31, 1998 has been prepared as if the Exchange Offer, the
subsequent Distribution, the Rights Offering and the Concurrent Offering had
occurred on March 31, 1998. The pro forma operating and other data for the three
months ended March 31, 1998 have been prepared as if the Exchange Offer, the
subsequent Distribution, the Rights Offering and the Concurrent Offering had
occurred on January 1, 1998. The pro forma operating and other data for the year
ended December 31, 1997 have been prepared as if the foregoing transactions had
occurred on January 1, 1997. The pro forma financial and operating data do not
give effect to the Concurrent Offering and the Rights Offering, and are not
necessarily indicative of what the actual financial position or results of
operations of Kranzco would have been as of the date or for the periods
indicated, nor do they purport to represent the results of operations or
financial position for future periods. The five year selected historical data is
incorporated by reference from Kranzco's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
---------------------------------- ----------------------------------------------
Pro Forma Historical Pro Forma Historical
--------- ---------- --------- --------------------------------
1998 1998 1997 1997 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Minimum rent ........................... $ 15,484 $ 13,407 $ 10,929 $ 61,679 $ 47,579 $ 41,665 $ 40,259
Percentage rent ........................ 330 310 268 1,382 1,163 1,042 1,044
Expense reimbursements ................. 3,017 2,839 2,697 12,812 11,165 11,732 10,988
Interest income ........................ 123 123 54 278 278 624 902
Other income ........................... 153 28 31 627 127 117 277
--------- --------- --------- --------- --------- --------- ---------
Total revenue .......................... 19,107 16,707 13,979 76,778 60,312 55,180 53,470
========= ========= ========= ========= ========= ========= =========
Expenses:
General and administrative, interest
and property operating costs .......... 11,712 9,585 8,654 46,624 36,694 35,514 32,690
Depreciation and amortization .......... 4,044 3,450 2,859 16,160 12,534 11,194 10,903
Income before extraordinary charge and
before preferred distributions ........... 3,351 3,672 2,466 13,994 11,084 8,472 9,877
Extraordinary charge from early
extinguishment of debt
and debt refinancing ................... 0 0 0 0 467 11,052 0
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ......................... $ 3,351 $ 3,672 $ 2,466 $ 13,994 $ 10,617 $ (2,580) $ 9,877
========= ========= ========= ========= ========= ========= =========
Income before extraordinary
items per share ......................... $ 0.13 $ 0.16 $ 0.19 $ 0.54 $ 0.73 $ 0.75 $ 0.91
Distributions per share ................... $ 0.48 $ 0.48 $ 0.48 $ 1.92 $ 1.92 $ 1.92 $ 1.92
Other Data (unaudited):
Cash flows provided by (used in)
Operating ................................. 7,098 6,875 5,910 31,056 24,720 18,459 20,449
Investing ................................. (98,557) (3,557) (3,118) (122,551) (27,551) (3,059) (4,524)
Financing ................................. 86,707 (8,293) 2,598) 99,150 8,953 (16,228) (13,720)
Funds from operations (1) ................. $ 5,185 $ 4,962 $ 4,723 $ 20,961 $ 19,428 $ 18,313 $ 19,278
Preferred share distributions ............. $ 2,013 $ 2,013 $ 465 $ 8,368 $ 3,565 $ 695 $ 485
Ratio of earnings to fixed charges(2) ..... 1.11 1.19 1.37 1.13 1.27 1.41 1.50
Ratio of funds from operations
to fixed charges(3) ...................... 1.53 1.64 1.89 1.54 1.77 1.97 2.05
Total Properties (at end of period) ....... 68 59 54 68 59 38 38
Total gross leasable area in sq. ft
(at end of period, in thousands) ....... 9,000 7,600 7,000 9,000 7,600 5,700 5,700
Balance Sheet Data (at end of
period):
Real estate, before accumulated
depreciation ........................... $ 578,091 $ 491,091 $ 438,454 $ 484,741 $ 370,491 $ 368,073
Total assets .............................. $ 554,630 $ 465,650 $ 423,117 $ 466,220 $ 359,157 $ 372,983
Total debt ................................ $ 353,201 $ 257,201 $ 246,034 $ 255,124 $ 212,590 $ 204,247
Kranzco Series C Preferred Shares ......... $ 1,782 $ 1,782 $ 3,564 $ 2,228 $ 0 $ 0
Beneficiaries' equity ..................... $ 188,320 $ 195,340 $ 153,501 $ 198,112 $ 137,013 $ 159,882
</TABLE>
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<PAGE>
- ----------
(1) Funds From Operations
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
----------------------------- -------------------------------------------
Pro Forma Historical Pro Forma Historical
--------- ---------------- --------- ----------------------------
1998 1998 1997 1997 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income available to common shareholders 1,338 1,659 2,001 5,159 7,052 (3,274) 9,392
Loss on sale of real estate and extraordinary
items -- -- -- 467 467 11,115 --
Amortization of leasing costs 86 86 63 385 385 337 228
Depreciation of investment in real estate 3,761 3,217 2,659 14,950 11,524 10,135 9,658
Funds From Operations 5,185 4,962 4,723 20,961 19,428 18,313 19,278
</TABLE>
Management generally considers Funds From Operations to be a useful measure
of the operating performance of an equity REIT because, together with net
income and cash flows, Funds From Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service
debt and to fund acquisitions and other capital expenditures. Funds From
Operations has been calculated in accordance with the definition of funds
from operations" clarified by the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT") generally as net income, computed in
accordance with generally accepted accounting principles, excluding gains
or losses from debt restructuring and sales of property, plus depreciation
and amortization (in each case only on real estate related assets) and
after adjustments for unconsolidated partnerships and joint ventures, less
preferred share distributions. Funds From Operations does not represent net
income or cash flows from operating, investing or financing activities as
defined by GAAP. Funds From Operations should not be considered as a
substitute for net income as an indication of Kranzco's performance or as a
substitute for cash flows as a measure of its liquidity. Furthermore, Funds
From Operations as disclosed by other REIT's may not be comparable to
Kranzco's calculation of Funds From Operations.
(2) For purposes of these computations, earnings consist of income before
extraordinary charges, if any, plus preferred share distributions, interest
expense and amortization of debt expense. Fixed charges include interest,
whether expensed or capitalized, amortization of debt expense and preferred
share distributions.
(3) For purposes of these computations, Funds From Operations include interest,
preferred share distributions, and amortization of debt expense. Management
believes that the ratio of Funds From Operations to fixed charges in a
useful measure of a REIT's ability to generate sufficient funds to meet its
future financing costs. This ratio does not represent cash flows from
financing activities as defined by GAAP and may not be comparable to other
REITs.
-35-
<PAGE>
KRANZCO REALTY TRUST PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
The accompanying financial statements present the unaudited pro forma
combined condensed Balance Sheet of Kranzco as of March 31, 1998 and the
unaudited pro forma combined condensed Statements of Operations of Kranzco for
the three months ended March 31, 1998 and for the year ended December 31, 1997,
in each case after giving effect to the Exchange Offer and the subsequent
Distribution (the "Transactions") and the Southeast Acquisition.
The unaudited pro forma combined condensed Balance Sheet as of March 31,
1998 is presented as if the Transactions and the Southeast Acquisition occurred
on March 31, 1998. The unaudited pro forma combined condensed Statements of
Operations for the three months ended March 31, 1998 and for the year ended
December 31, 1997 are presented as if the Transactions and the Southeast
Acquisition had occurred on January 1, 1997. However, the unaudited pro forma
combined condensed Balance Sheet as of March 31, 1998 and the unaudited pro
forma condensed statements of operations for the three months ended March 31,
1998 and for the year ended December 31, 1997 do not reflect the impact of the
Rights Offering or the Concurrent Offering.
Preparation of the pro forma financial information was based on assumptions
deemed appropriate by the management of Kranzco. The assumptions give effect to
the Transactions and the Southeast Acquisition in accordance with generally
accepted accounting principles, the entity qualifying as a REIT, distributing
all of its taxable income and, therefore, incurring no federal income tax
expense during the periods presented. The pro forma financial information is
unaudited and is not necessarily indicative of the results which actually would
have occurred if the transactions had been consummated at the beginning of the
periods presented, nor does it purport to represent the future financial
position and results of operations for future periods. The pro forma information
should be read in conjunction with the historical financial statements of
Kranzco incorporated by reference into this Prospectus.
-36-
<PAGE>
KRANZCO REALTY TRUST
PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Kranzco Southeast Exchange Pro Forma
(Historical) Acquisition Offer Distribution Total
------------ ----------- ----- ------------ -----
(A) (B) (C)
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Shopping centers, at cost, net ........................... $ 441,063 $ 87,000 $ 0 $ 0 $ 528,063
Cash and marketable securities ........................... 6,448 0 0 0 6,448
Restricted cash .......................................... 1,185 0 0 0 1,185
Rents and other receivables, net ......................... 9,732 0 0 0 9,732
Prepaid expenses ......................................... 2,067 0 0 0 2,067
Deferred financing costs, net ............................ 1,828 1,000 0 0 2,828
Other deferred costs, net ................................ 2,155 0 0 0 2,155
Other assets ............................................. 1,172 0 0 0 1,172
Investment in NAI ........................................ 0 8,000 (7,020) 980
--------- --------- --------- --------- ---------
Total assets ............................................. $ 465,650 $ 88,000 $ 8,000 $ (7,020) $ 554,630
========= --------- ========= ========= =========
Liabilities:
Mortgages and notes payable .............................. $ 257,201 $ 88,000 $ 8,000 $ 0 $ 353,201
Tenant security deposits ................................. 1,364 0 0 0 1,364
Accounts payable and accrued expenses .................... 2,772 0 0 0 2,772
Other liabilities ........................................ 574 0 0 0 574
Distributions payable .................................... 6,617 0 0 0 6,617
--------- --------- --------- --------- ---------
Total liabilities ........................................ 268,528 88,000 8,000 0 364,528
--------- --------- --------- --------- ---------
Series C Preferred Shares ................................ 1,782 0 0 0 1,782
Beneficiaries Equity:
Common shares and Preferred shares ....................... 135 0 0 0 135
Capital in excess of par value ........................... 261,647 0 0 0 261,647
Cumulative net income available to common
shareholders ........................................... 35,465 0 0 0 35,465
Cumulative distributions on common shares ................ (101,784) 0 0 (7,020) (108,804)
--------- --------- --------- --------- ---------
195,463 0 0 (7,020) 188,443
Unearned compensation on restricted common shares ........ (123) 0 0 0 (123)
--------- --------- --------- --------- ---------
Total beneficiaries' equity .............................. 195,340 0 0 (7,020) 188,320
--------- --------- --------- --------- ---------
Total liabilities, Series C Preferred Shares
and beneficiaries' equity .............................. $ 465,650 $ 88,000 $ 8,000 $ (7,020) $ 554,630
========= ========= ========= ========= =========
</TABLE>
-37-
<PAGE>
NOTES AND MANAGEMENT'S ASSUMPTIONS TO PRO FORMA COMBINED
CONDENSED BALANCE SHEET FOR KRANZCO REALTY TRUST
As of March 31, 1998
<TABLE>
<CAPTION>
(Dollar and share
amounts in
Acquired Recapitalized thousands)
<S> <C> <C> <C>
(A) Adjustment to reflect the Southeast Acquisition:
Purchase Price $ 84,750
Costs 2,250
-------------
Total 87,000
Deferred financing costs 1,000
-------------
Total assets $ 88,000
=============
First mortgage $ 66,000
Credit lines 22,000
-------------
Total debt $ 88,000
=============
(B) Adjustment to reflect acquisition of 80% of NAI:
Shares 10,380 13,661
Purchase Price $ 8,000
-------------
Issuance of Callable Subordinated Convertible Notes $ 8,000
=============
(C) To reflect the distribution of NAI shares to
Kranzco's shareholders: Shares distributed 11,987 Basis $ 7,020
=============
</TABLE>
-38-
<PAGE>
KRANZCO REALTY TRUST
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
for the Three Months Ended March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Kranzco Southeast Kranzco
(Historical) Acquisition Transactions (Pro Forma)
------------ ----------- ------------ -----------
(I)
(Dollar and share amounts in thousands except per share amounts)
<S> <C> <C> <C> <C>
REVENUE:
Minimum rent...................................... $ 13,407 $ 2,077 $ 0 $ 15,484
Percentage rent................................... 310 20 0 330
Expense reimbursements............................ 2,839 178 0 3,017
Other income...................................... 28 0 125(C) 153
Interest income................................... 123 0 0 123
--------------- ----------- -------- -----------
Total revenue..................................... 16,707 2,275 125 19,107
--------------- ----------- -------- -----------
EXPENSES:
Interest.......................................... 4,871 1,733 (J) 120(C) 6,724
Depreciation and amortization..................... 3,450 594 (K) 0 4,044
Real estate taxes................................. 1,804 123 0 1,927
Operations and maintenance........................ 2,101 151 0 2,252
General and administrative........................ 809 0 0 809
--------------- ----------- -------- -----------
Total expenses.................................... 13,035 2,601 120 15,756
--------------- ----------- -------- -----------
Net Income........................................ 3,672 (326) 5 3,351
DISTRIBUTIONS ON PREFERRED SHARES................. 2,013 0 0 2,013
--------------- ----------- -------- -----------
Net income attributable to common shareholders.... $ 1,659 $ (326) $ 5 $ 1,338
=============== ---------- ========= ============
Basic Earnings Per Common Share................... $ 0.16 $ 0.13
=============== ============
Diluted Earnings Per Common Share................. $ 0.16 $ 0.13
=============== ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OF BENEFICIAL INTEREST..................... 10,424 10,424
</TABLE>
The accompanying notes and management's assumptions are an integral part of
this statement.
-39-
<PAGE>
KRANZCO REALTY TRUST
PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
for the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Georgia
Acquisition/
UPI Issuance of Payoff
Kranzco Acquisition(A) Preferred of existing Kranzco Southeast
(Historical) (1/1-2/27/97) Shares(B) Debt Total Acquisition
------------ -------------- ----------- ----------- ------- -----------
(I)
(Dollar and share amounts in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Minimum rent .............................. $47,579 $ 1,194 $ 4,668 $ 0 $53,441 $ 8,238
Percentage rent ........................... 1,163 4 0 0 1,167 215
Expense reimbursements .................... 11,165 152 692 0 12,009 803
Other income .............................. 127 0 0 0 127 0
Interest income ........................... 278 0 0 0 278 0
------- ------- ------- ------- ------- -------
Total revenue ............................. 60,312 1,350 5,360 0 67,022 9,256
------- ------- ------- ------- ------- -------
EXPENSES:
Interest .................................. 18,887 498 1,765(D) (1,862)(E) 19,288 6,930(J)
Depreciation and amortization ............. 12,534 228(F) 1,023(G) 0 13,785 2,375(K)
Real estate taxes ......................... 6,584 83 394 0 7,061 420
Operations and maintenance ................ 8,346 96 482 0 8,924 644
General and administrative ................ 2,877 0 0 0 2,877 0
------- ------- ------- ------- ------- -------
Total expenses ............................ 49,228 905 3,664 (1,862) 51,935 10,369
------- ------- ------- ------- ------- -------
Net income ................................ 11,084 445 1,696 1,862 15,087 (1,113)
DISTRIBUTIONS ON PREFERRED
SHARES .................................... 3,565 528 4,275(H) 0 8,368 0
------- ------- ------- ------- ------- -------
Net income attributable to common
shareholders .............................. $ 7,519 $ (83) $(2,579) $ 1,862 $ 6,719 $(1,113)
======= ======= ======= ======= ======= =======
Basic Earnings Per Common Share ........... $ 0.73 $ 0.64
======= =======
Diluted Earnings Per Common Share ......... $ 0.73 $ 0.64
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OF BENEFICIAL
INTEREST .................................. 10,342 10,426
<CAPTION>
Kranzco
Transactions (Pro Forma)
------------ -----------
<S> <C> <C>
REVENUE:
Minimum rent .................... $ 0 $61,679
Percentage rent ................. 0 1,382
Expense reimbursements .......... 0 12,812
Other income .................... 500(C) 627
Interest income ................. 0 278
------- -------
Total revenue ................... 500 76,778
------- -------
EXPENSES:
Interest ........................ 480(C) 26,698
Depreciation and amortization ... 0 16,160
Real estate taxes ............... 0 7,481
Operations and maintenance ...... 0 9,568
General and administrative ...... 0 2,877
------- -------
Total expenses .................. 480 62,784
------- -------
Net income ...................... 20 13,994
DISTRIBUTIONS ON PREFERRED
SHARES .......................... 0 8,368
------- -------
Net income attributable to common
shareholders .................... $ 20 $ 5,626
======= =======
Basic Earnings Per Common Share . $ 0.54
=======
Diluted Earnings Per Common Share $ 0.54
=======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OF BENEFICIAL
INTEREST ........................ 10,426
</TABLE>
The accompanying notes and management's assumptions
are an integral part of this statement.
-40-
<PAGE>
Footnotes to Pro Forma Combined Condensed Statement of Operations (Unaudited)
The extraordinary loss of $467 on early extinguishment of debt recorded in the
fourth quarter of 1997 by Kranzco has been excluded from the pro forma
presentation of the Statement of Operations.
(A) In February 1997, Kranzco acquired from Union Property Investors, Inc.
("UPI") 16 properties located in 11 states for approximately $65 million,
aggregating approximately 1.3 million square feet of GLA (the "UPI
Acquisition"). This adjustment reflects the operations of UPI.
(B) In December 1997, Kranzco acquired five shopping centers in the Atlanta
metropolitan area (the "Georgia Properties") aggregating approximately
650,000 square feet of GLA, for approximately $44 million (the "Georgia
Acquisition"). This adjustment reflects the operations of the Georgia
Properties.
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
(C) To reflect interest expense relating to the Transactions, consulting fees
paid to Kranzco by NAI and Kranzco's share (9.8%) of the income of NAI
Shares acquired (80% of the outstanding shares) 10,380 10,380
Acquisition price $8,000 $8,000
Interest rate (assumed for purposes of pro forma statements) 6.00% 6.00%
Interest expense $120 $480
Fees payable to Kranzco under the Intercompany Agreement $125 $500
(D) To reflect the interest expense on the mortgages assumed in the Georgia
Acquisition as follows:
Debt assumed N/A $20,435
Interest expense N/A $1,862
(E) To record the repayment of debt outstanding and the related reduction of
interest expense as follows:
Principal amount of debt repayment N/A $19,894
Interest expense reduction on debt repayment N/A $1,862
(F) The depreciation and amortization amounts include pro forma
adjustments as a result of the UPI Acquisition N/A $228
(G) To reflect depreciation expense over a 30 year life as a result of the
Georgia Acquisition as follows:
Depreciable basis of property N/A $30,702
Depreciation expense N/A $1,023
(H) To record the distributions on the issuance of Series D Preferred Shares:
Shares issued N/A 1,800
Face amount per share N/A $25.00
Gross Proceeds N/A $45,000
Distribution rate N/A 9.50%
Distributions N/A $4,275
</TABLE>
(I) To reflect operating results of the Southeast Acquisition properties.
-41-
<PAGE>
(J) To record interest on the debt incurred in connection
with the Southeast Acquisition:
<TABLE>
<CAPTION>
Rate Debt
---- ----
<S> <C> <C> <C> <C>
First Mortgage 7.50% $66,000 $1,238 $4,950
Credit Lines 9.00% 22,000 495 1,980
------- ------ -------
Total $88,000 $1,733 $6,930
====== ======
(K) To record depreciation and amortization on
the Southeast Acquisition properties:
Purchase price $84,750
Costs 2,250
-------
Total depreciation $87,000 $ 544 $2,175
Amortization on $1,000 of deferred financing costs $ 50 $ 200
------ -------
Total depreciation and amortization $ 594 $2,375
====== ======
</TABLE>
-42-
<PAGE>
NAI CAPITALIZATION
The following table sets forth the capitalization of NAI (i) as of March
31, 1998 and (ii) as adjusted to give effect to the consummation of the Exchange
Offer, the subsequent Distribution, the Rights Offering and the Concurrent
Offering and assuming all of the Underlying Shares and Additional Shares are
purchased.
<TABLE>
<CAPTION>
As of March 31, 1998
--------------------------------
(In thousands)
Actual As adjusted(1)
-------- --------------
<S> <C> <C>
Debt:
Stockholders loans ...................................................... $ 441 $ 0
Long-term debt .......................................................... 75 0
-------- --------
Total debt ...................................... 516 0
-------- --------
Convertible Preferred Stock; $0.01 par value per share;
101,000 shares issued and outstanding; (0 as adjusted) .................. 202 0
-------- --------
Stockholders' equity (deficit):
Common stock, $.01 par value; 200,000,000 authorized,
12,974,414 shares issued and outstanding; (36,202,812
as adjusted) ............................................................ 134 362
Capital in excess of par value .......................................... 2,553 39,245(3)(4)
Retained earnings (deficit) ............................................. (3,479) (3,479)
-------- --------
(792) 36,128
Treasury stock, at cost ................................................. (234)(2) 0(3)
-------- --------
Total stockholders' equity (deficit) ............ (1,026) 36,128
-------- --------
Total capitalization ............................ $ (308) $ 36,128
======== ========
</TABLE>
(1) The following table presents the capitalization of NAI, as adjusted to give
effect to the consummation of the Exchange Offer, the subsequent Distribution,
the Rights Offering and the Concurrent Offering and assuming the purchase of (a)
a minimum number of Underlying Shares, Excess Shares and Additional Shares (an
aggregate of 930,000 NAI Shares) and (b) a moderate number of Underlying Shares,
Excess Shares and Additional Shares (an aggregate of 10,000,000 NAI Shares):
<TABLE>
<CAPTION>
Pro Forma
-------------------------------
(In thousands)
(Minimum) (Moderate)
--------- ----------
(a) (b)
<S> <C> <C>
Total debt........................................................ $ 0 $ 0
Convertible preferred stock....................................... $ 0 $ 0
Common stock...................................................... $ 180 $ 271
Capital in excess of par value.................................... $ 3,133(3)(4) $21,182(3)(4)
Retained earnings (deficit)....................................... $(3,479) $(3,479)
Treasury stock.................................................... $ 0(3) $ 0(3)
Total capitalization......................................... $ (166) $17,974
NAI Shares outstanding............................................ 18,032 27,101
</TABLE>
(2) Includes 434,675 NAI Shares issued and held as treasury stock as of March
31, 1998.
(3) Represents the retirement of 434,675 NAI Shares of treasury stock valued at
$233,868, as adjusted.
(4) Includes approximately $1,000,000 of transaction costs reflected as a
reduction of equity.
-43-
<PAGE>
NAI SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except ratio, property data and per share data)
The following sets forth selected financial, operating and other data on an
historical basis for NAI. Also set forth below are selected pro forma financial,
operating and other data for NAI at and for the nine months ended March 31, 1998
and the year ended June 30, 1997. The pro forma balance sheet data as of March
31, 1998 has been prepared as if the Exchange Offer and the Distribution had
occurred on March 31, 1998. The pro forma operating and other data for the nine
months ended March 31, 1998 have been prepared as if the consummation of the
Exchange Offer and the Distribution had occurred on July 1, 1997. The pro forma
operating and other data for the year ended June 30, 1997 have been prepared as
if the foregoing transactions had occurred on July 1, 1996. The pro forma
financial and operating data do not give effect to the Concurrent Offering and
the Rights Offering, and are not necessarily indicative of what the actual
financial position or results of operations of NAI would have been as of the
date or for the periods indicated, nor do they purport to represent the results
of operations or financial position for future periods. This data should be read
in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Nine Months Ended March 31, Year Ended June 30,
------------------------------- ---------------------------------------------------------
Pro Forma Historical Pro Forma Historical
--------- ---------------- --------- -------------------------------------------
1998 1998 1997 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
OPERATING DATA: (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions ..................... $ 2,836 $ 2,836 $ 2,910 $ 4,001 $ 4,001 $ 4,124 $ 4,371 $ 2,312
License fees .................... 1,128 1,128 923 1,282 1,282 1,373 1,158 1,081
Other ........................... 474 474 563 618 618 523 470 427
Interest ........................ 0 0 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue ................... 4,438 4,438 4,396 5,901 5,901 6,020 5,999 3,820
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Commission expense .............. 602 602 788 1,143 1,143 1,782 1,485 839
Sales and marketing ............. 277 277 194 321 321 285 324 274
Compensation and benefits ....... 1,832 1,832 1,911 2,528 2,528 2,438 1,981 1,895
Operating expense ............... 1,953 1,578 1,187 2,144 1,644 1,475 1,336 1,161
Depreciation and amortization ... 40 40 37 52 52 56 45 53
Interest, net ................... 47 47 47 60 60 48 46 37
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses ........ 4,751 4,376 4,164 6,248 5,748 6,084 5,217 4,259
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations ... (313) 62 232 (347) 153 (64) 782 (439)
-------- -------- -------- -------- -------- -------- -------- --------
Other expenses:
Equity in loss of affiliate ..... 12 12 15 25 25 5 0 0
Loss on sale of real estate ..... 0 0 0 0 0 0 65 0
- - - - - - -- -
Total other expenses ............ 12 12 15 25 25 5 65 0
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes (325) 50 217 (372) 128 (69) 717 (439)
Income taxes .................... 5 5 0 0 0 0 35 0
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations .................... (330) 45 217 (372) 128 (69) 682 (439)
Loss from discontinued
operations .................... 7 0 162 0 223 128 392 0
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ............... (330) 45 55 (372) (95) (197) 290 (439)
Preferred share distributions ... 0 7 8 0 11 13 15 0
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) available to
common shareholders ............. $ (330) $ 38 $ 47 $ (372) $ (106) $ (210) $ 275 $ (439)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share ..... $ (0.02) $ 0.00 $ 0.00 $ (0.02) $ (0.01) $ (0.02) $ 0.02 $ (0.03)
======== ======== ======== ======== ======== ======== ======== ========
Other data (unaudited):
Cash flows provided by (used in)
Operating .......................... (186) 189 313 (267) 233 158 593 10
Investing .......................... (41) (41) (196) (260) (260) (277) (260) (113)
Financing .......................... 18 11 (8) (156) 13 (7) (156) 48
Common shares outstanding .......... 17,101 12,974 12,888 16,965 12,871 12,863 12,782 12,523
Weighted average shares
outstanding ........................ 17,075 12,954 12,888 16,981 12,883 12,860 12,648 12,589
Ratio of EBITDA to fixed
charges(1) ...................... (2.74) 1.46 3.27 (2.32) 1.95 0.30 7.62 (3.88)
EBITDA(1) .......................... $ (238) $ 137 $ 301 $ (260) $ 240 $ 35 $ 808 ($349)
Balance sheet data (1995 unaudited):
Total assets ....................... $ 1,829 $ 1,829 $ 1,807 0 $ 1,689 $ 1,732 $ 1,649 $ 1,177
Total debt ......................... $ 643 $ 643 $ 550 0 $ 575 $ 496 $ 441 $ 482
Shareholders' deficit .............. $ (1,026) $ (1,026) $ (983) 0 $ (1,090) $ (1,008) $ (837) $ (1,176)
<CAPTION>
Year Ended June 30,
-------------------
Historical
-------------------
1993
----
OPERATING DATA: (unaudited)
<S> <C>
Revenue:
Commissions ..................... $ 2,563
License fees .................... 1,007
Other ........................... 384
Interest ........................ 0
--------
Total revenue ................... 3,954
--------
Costs and expenses:
Commission expense .............. 790
Sales and marketing ............. 283
Compensation and benefits ....... 1,648
Operating expense ............... 1,018
Depreciation and amortization ... 152
Interest, net ................... 43
--------
Total costs and expenses ........ 33,934
--------
Income (loss) from operations ... 20
--------
Other expenses:
Equity in loss of affiliate ..... 0
Loss on sale of real estate ..... 0
--------
Total other expenses ............ 0
--------
Income (loss) from continuing
operations before income taxes 20
Income taxes .................... 0
--------
Income (loss) from continuing
operations .................... 20
Loss from discontinued
operations .................... 0
--------
Net income (loss) ............... 20
Preferred share distributions ... 0
--------
Net income (loss) available to
common shareholders ............. $ 20
========
Net income (loss) per share ..... $ 0.00
========
Other data (unaudited):
Cash flows provided by (used in)
Operating .......................... 141
Investing .......................... (241)
Financing .......................... (73)
Common shares outstanding .......... 12,655
Weighted average shares
outstanding ........................ 12,652
Ratio of EBITDA to fixed
charges(1) ...................... 1.10
EBITDA(1) .......................... $ 215
Balance sheet data (1995 unaudited):
Total assets ....................... $ 1,447
Total debt ......................... $ 358
Shareholders' deficit .............. $ (44)
</TABLE>
-44-
<PAGE>
- -------------
(1) For purposes of these computations, EBITDA consists of income before
interest expense, taxes, depreciation and amortization. Fixed charges
include interest expense, depreciation and amortization, and preferred
share distributions. Management believes that EBITDA provides additional
information about the Company's ability to meet its future debt service,
capital expenditures and working capital requirements. EBITDA is not a
measure of financial performance under GAAP and should not be considered an
alternative either to net income as an indicator of NAI's performance or to
cash flows as a measure of its liquidity. EBITDA as disclosed by other
Companies may not be comparable to the Company's calculation of EBITDA.
-45-
<PAGE>
NEW AMERICA NETWORK, INC. PRO FORMA
CONDENSED FINANCIAL INFORMATION
The accompanying financial statements present the unaudited pro forma
condensed Balance Sheet of NAI as of March 31, 1998, the unaudited pro forma
condensed Statements of Operations of NAI for the nine months ended March 31,
1998 and for the year ended June 30, 1997, in each case after giving effect to
the Transactions.
The unaudited pro forma combined condensed Balance Sheet as of March 31,
1998 is presented as if the Transactions had occurred on March 31, 1998. The
unaudited pro forma condensed Statements of Operations for the nine months ended
March 31, 1998 and for the year ended June 30, 1997 are presented as if the
Transactions had occurred on July 1, 1996. However, the unaudited pro forma
combined condensed Balance Sheet as of March 31, 1998 and the unaudited pro
forma condensed Statements of Operations for the nine months ended March 31,
1998 and the year ended June 30, 1997 do not reflect the impact of the Rights
Offering or the Concurrent Offering.
Preparation of the pro forma financial information was based on assumptions
deemed appropriate by the management of NAI. The assumptions give effect to the
Transactions in accordance with generally accepted accounting principles. The
pro forma financial information is unaudited and is not necessarily indicative
of the results which actually would have occurred if the Transactions had been
consummated at the beginning of the periods presented, nor does it purport to
represent the future financial position and results of operations for future
periods. The pro forma information should be read in conjunction with the
historical financial statements of NAI included in this Prospectus.
-46-
<PAGE>
NEW AMERICA NETWORK, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
As of March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
March 31,
Historical Reincorporation Merger(A) 1998
---------- ------------------------- ---------
<S> <C> <C> <C>
Assets:
Current assets:
Cash ............................................................. $ 220 $ 0 $ 220
Accounts receivable .............................................. 787 0 787
Commissions receivable ........................................... 637 0 637
Notes and other receivables ...................................... 6 0 6
Other current assets ............................................. 20 0 20
------- ------- -------
Total current assets ............................................. 1,670 0 1,670
------- ------- -------
Property and equipment (net) ........................................... 156 0 156
Other assets ........................................................... 3 0 3
------- ------- -------
Total assets ..................................................... $ 1,829 $ 0 $ 1,829
======= ======= =======
Liabilities and stockholders' equity:
Current liabilities
Accounts payable and accrued expenses ............................ $ 1,016 $ 0 $ 1,016
Accrued interest ................................................. 72 0 72
Current portion of long-term debt ................................ 127 0 127
Stockholder loans ................................................ 441 0 441
Deferred revenue ................................................. 922 0 922
------- ------- -------
Total current liabilities ........................................ 2,578 0 2,578
------- ------- -------
Long-term debt ......................................................... 75 0 75
------- ------- -------
Total liabilities ................................................ 2,653 0 2,653
------- ------- -------
Redeemable convertible preferred stock ................................. 202 0 202
------- ------- -------
Stockholders' equity:
Preferred stock .................................................. 0 0 0
Common stock ..................................................... 134 0 134
Additional paid-in capital ....................................... 2,553 (234)(B) 2,319
Accumulated deficit .............................................. (3,479) 0 (3,479)
Treasury stock, at cost .......................................... (234) 234(B) --
------- ------- -------
Total stockholders' equity ....................................... (1,026) 0 (1,026)
------- ------- -------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity ......................................... $ 1,829 $ 0 $ 1,829
======= ======= =======
</TABLE>
NOTES AND MANAGEMENT'S ASSUMPTIONS TO NAI'S PRO FORMA BALANCE SHEET
as of March 31, 1998
A) The pro forma balance sheet does not reflect the receipt of proceeds of the
Rights Offering and Concurrent Offering; because there is no standby underwriter
the proceeds of such offerings cannot be determined at this time. See "NAI
Capitalization".
B) To reflect the retirement of the Treasury Stock.
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<PAGE>
NEW AMERICA NETWORK, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the Nine Months Ended March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
March 31,
Historical Reincorporation Merger(A) 1998
---------- ------------------------- ----
<S> <C> <C> <C>
Revenue:
Commissions .......................................................... $ 2,836 $ 0 $ 2,836
License fees ......................................................... 1,128 0 1,128
Other ................................................................ 474 0 474
Interest income ...................................................... 0 0 0
-------- -------- --------
Total revenue ........................................................ 4,438 0 4,438
-------- -------- --------
Costs and expenses:
Commission expense ................................................... 602 0 602
Sales and marketing .................................................. 277 0 277
Compensation and benefits ............................................ 1,832 0 1,832
Operating expense .................................................... 1,578 375(B) 1,953
Depreciation and amortization ........................................ 40 0 40
Interest, net ........................................................ 47 0 47
-------- -------- --------
Total costs and expenses ............................................. 4,376 375 4,751
-------- -------- --------
Income (loss) from operations .............................................. 62 (375) (313)
Other expenses:
Loss in investment in NAIS ................................................. 12 0 12
-------- -------- --------
Total other expense .................................................. 12 0 12
-------- -------- --------
Income taxes ............................................................... 5 0 5
-------- -------- --------
Net income (loss) .......................................................... 45 (375) (330)
Preferred share distributions .............................................. 7 (7)(C) 0
-------- -------- --------
Net income (loss) available to common shareholders ......................... $ 38 $ (368) $ (330)
======== ======== ========
Basic and diluted earnings per common share ................................ $ 0.00 $ (0.02)
======== ========
Basic and diluted earnings per recapitalized common share .................. $ 0.00 $ (0.02)
======== ========
Weighted average number of
common shares outstanding ................................................ 12,954
Weighted average number of common
shares and equivalents outstanding ....................................... 13,080
After recapitalization
Weighted average number of
common shares outstanding ................................................ 17,075 17,075
Weighted average number of common shares and
equivalents outstanding .................................................. 17,201 17,201
</TABLE>
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<PAGE>
NEW AMERICA NETWORK, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the Year Ending June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
June,
Historical Reincorporation Merger(A) 30, 1997
---------- ------------------------- --------
<S> <C> <C> <C>
Revenue:
Commissions .......................................................... $ 4,001 $ 0 $ 4,001
License fees ......................................................... 1,282 0 1,282
Other ................................................................ 618 0 618
Interest income ...................................................... 0 0 0
-------- -------- --------
Total revenue ........................................................ 5,901 0 5,901
-------- -------- --------
Costs and expenses:
Commission expense ................................................... 1,143 0 1,143
Sales and marketing .................................................. 321 0 321
Compensation and benefits ............................................ 2,528 0 2,528
Operating expenses ................................................... 1,644 500(B) 2,144
Depreciation and amortization ........................................ 52 0 52
Interest, net ........................................................ 60 0 60
-------- -------- --------
Total costs and expenses ............................................. 5,748 500 6,248
-------- -------- --------
Income from operations ..................................................... 153 (500) (347)
Other expenses:
Loss in investment in NAIS ................................................. 25 0 25
-------- -------- --------
Total other expenses ................................................. 25 0 25
-------- -------- --------
Income taxes ............................................................... 0 0 0
-------- -------- --------
Net income (loss) .......................................................... 128 (500) (372)
Distributions on preferred shares .......................................... 11 (11)(C) 0
-------- -------- --------
Net income (loss) available to common shareholders ......................... $ 117 $ (489) $ (372)
======== ======== ========
Basic and diluted earnings per common share ................................ $ 0.01 $ (0.02)
======== ========
Basic and diluted earnings per recapitalized common share .................. $ 0.01 $ (0.02)
======== ========
Weighted average number of
common shares outstanding ................................................ 12,883
Weighted average number of common
shares and equivalents outstanding ...................................... 13,035
After recapitalization
Weighted average number of
common shares outstanding ................................................ 16,981 16,981
Weighted average number of common shares and
equivalents outstanding .................................................. 17,133 17,133
</TABLE>
The accompanying notes and management's assumptions
are an integral part of this statement.
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<PAGE>
Footnotes to NAI's Pro Forma Consolidated Statements of Operations for the year
ended June 30, 1997 and the Nine Months ended March 31, 1998.
The Loss from Discontinued Operations is eliminated for purposes of the Pro
Forma Consolidated Statements of Operations for the year ended June 30, 1997.
A) The pro forma balance sheet does not reflect the receipt of proceeds of the
Rights Offering and Concurrent Offering; because there is no standby underwriter
the proceeds of such offerings cannot be determined at this time. See "NAI
Capitalization."
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
B) To reflect fees and costs payable under the Intercompany Agreement. $375 $500
C) To reflect the elimination of preferred share distributions in connection with the redemption
of the redeemable convertible preferred shares. $ 7 $ 11
</TABLE>
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NAI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
New America Network, Inc., which conducts business as New America
International, operates a network of independently owned, licensed real estate
brokers throughout the United States and abroad. NAI, directly and through its
Broker Members, provides commercial real estate brokerage and other real
estate-related services to local, regional, national and international
businesses. Unlike other real estate broker networks, in addition to managing
real estate transactions generated by its brokers, NAI generates its own source
of real estate transactions for its brokers and actively manages and tracks
those transactions on behalf of its Clients. In order to increase the portfolio
of services marketed to Clients and Broker Members, NAI has entered into several
alliance agreements with entities which provide real estate-related services
which complement NAI's brokerage capabilities, including sealed-bid sales, real
estate auctions, real estate financing and appraisals.
NAI earns revenue primarily from the sharing of brokerage commissions with
Broker Members who earn commissions from the acquisition, disposition or leasing
of real property assigned to them by NAI. Revenue from brokerage commissions is
largely transactional in nature and subject to economic cycles. However, NAI's
geographic coverage, number of transactions and continuing client base tend to
minimize the impact of economic cycles on annual revenue. NAI also earns revenue
from (i) the sharing of brokerage commissions with Broker Members who earn
commissions from the acquisition and/or disposition or leasing of real estate
referred to them by other Broker Members, (ii) the sharing of fees received from
Alliance Members in sealed-bid sales, auction transactions and other Real
Estate-Related Services and (iii) the collection of annual membership fees paid
by Broker Members and Alliance Members ("License fees"). Other revenues of NAI
include primarily (i) marketing fees for Broker Members, which is generally
calculated as a percentage of the Broker Members' License fees, and (ii)
convention and meeting revenue. A major expense to NAI is the commission expense
which is a direct function of gross commission revenue levels. In numerous
instances, NAI collects a gross commission and must subsequently pay the Broker
Member their respective portion of the gross commission. Other operating
expenses of NAI includes professional fees, advertising and promotion expenses,
rental expenses and various other general and administrative costs incurred by
NAI in their day to day operations.
Liquidity and Capital Resources
At March 31, 1998 NAI had approximately $220,000 of cash on hand. NAI has
generated approximately $159,000 of cash flows from operating, investing and
financing activities for the nine months ended March 31, 1998. Management
believes that NAI will be able to continue to generate such positive cash flow
at a rate sufficient to meet its short-term liquidity needs. Approximately 35%
of total liabilities as of March 31, 1998 represent deferred revenue that will
not require the use of cash in the future. NAI's current assets exceed the
remaining current liabilities. In addition, management believes that it can
obtain additional debt or equity capital to meet its long-term liquidity needs.
NAI had loans outstanding of $643,000 at March 31, 1998. Of this amount,
$441,000 was due to related parties with interest rates ranging from 10% to 12%.
These loans are due on demand. In addition, NAI had a bank loan outstanding of
$6,666 which requires monthly payments of principal of $3,333 with interest at
the bank's prime rate (8.5% at March 31, 1998) plus 1%. NAI also had a bank loan
outstanding of $95,000 which requires monthly payments of principal and interest
of $1,667 with interest at the bank's prime rate (8.5% at March 31, 1998) plus
1%. This loan matures in November 2002. NAI also has a $100,000 line of credit
with First Washington State Bank which expires October 2, 1998. Interest on any
outstanding borrowings is at the bank's prime rate (8.5% at March 31, 1998) plus
1%. This line was fully utilized at March 31, 1998.
Assuming all of the Underlying Shares and Additional Shares are purchased
in the Rights Offering and the Concurrent Offering, NAI expects to receive
proceeds of approximately $38,000,000. Management will use such proceeds in the
following order of priority: (i) pay the expenses of the Rights Offering, the
Concurrent
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<PAGE>
Offering and the Proposed Related Transactions, (ii) repay $202,000 principal
amount of indebtedness incurred in connection with the repurchase of shares of
Series A Preferred Stock of NAI, (iii) repay outstanding indebtedness, (iv)
expand NAI's Corporate Services Department and Investment Sales Department, and
(v) acquire and develop Real Estate-Related Services. See "The Concurrent
Offering-Use of Proceeds". The balance of any proceeds will be invested in
short-term commercial paper at a rate of approximately 5.5% per annum until used
for general corporate and working capital purposes and to opportunistically
acquire real estate. In the event that the full proceeds of $38,000,000 are not
received, management will use any proceeds received in the above order.
Management believes it has adequate access to capital to continue to meet
its short-term requirements and objectives, including its needs over the next 12
months. Management believes NAI's short-term and long-term needs may be met from
cash flow from operations. To the extent proceeds are raised in the Rights
Offering and the Concurrent Offering, NAI may use such funds to meet any
increase in NAI's long-term and short-term capital requirements which relate to
the expansion of NAI's business. See "The Concurrent Offering--Use of Proceeds."
NAI has established a Year 2000 compliance review process to assess the
impact of the Year 2000 on the company's business, operations and financial
condition. The process encompasses internal information technology systems,
office mechanical operation systems and the potential impact from Broker Members
and vendors. Management believes that NAI has no material exposure to the Year
2000 issues at this time.
Commitments
In connection with a lease on NAI's corporate headquarters, NAI pays an
annual rent of $102,000, plus the payment of maintenance expenses. See "NAI
Business--Property." In addition, pursuant to the Intercompany Agreement, NAI
will be obligated to pay an annual consulting services fee of $500,000 for a
five-year period, payable in equal monthly installments of $41,666. See
"Proposed Related Transactions--Intercompany Agreement--Consulting Services."
Results of Operations
Nine months ended March 31, 1998 versus the nine months ended March 31,
1997
Net income for common shareholders decreased $9,000, or 19%, from $47,000
for the nine months ended March 31, 1997 to $38,000 for the same period in 1998.
This decrease is due to a combination of factors as described below.
Revenue from commissions decreased $74,000, or 3%, from $2,910,000 for the
nine months ended March 31, 1997 to $2,836,000 for the same period in 1998. This
decrease is due to a decrease in broker to broker commissions which is primarily
the result of a lower dollar value of transactions in the broker to broker area.
License fees increased $205,000, or 22%, from $923,000 for the nine months
ended March 31, 1997 to $1,128,000 for the same period in 1998. The increase was
due to an increase in the number of international broker members (which resulted
in approximately $125,000 of additional fees) and increased revenue from
existing membership renewals (which increased approximately 5% per annum over
prior year's fees).
Other revenue decreased $89,000, or 16%, from $563,000 for the nine months
ended March 31, 1997 to $474,000 for the nine months ended March 31, 1998. The
decrease was due to a one time change in NAI's meeting and events calendar in
1998 in which NAI did not hold one of its major meetings, the National Council
Symposium.
Commission expense decreased $186,000, or 24%, from $788,000 for the nine
months ended March 31, 1997 to $602,000 for the nine months ended March 31,
1998. NAI's commission expense is proportionately less
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<PAGE>
on a Network to Broker transaction than on a Broker to Broker transaction.
Because a greater percentage of NAI's 1998 revenue was generated from its
Network to Broker business than in 1997, the total commission expense decreased.
Sales and marketing expenses increased $83,000, or 43%, from $194,000 for
the nine months ended March 31, 1997 to $277,000 for the nine months ended March
31, 1998. This increase was due primarily to increased costs of NAI's annual
convention and meetings, which was offset by a decrease in costs as a result of
NAI not holding its National Council Symposium in 1998.
Compensation and benefits decreased $79,000, or 4%, from $1,911,000 for the
nine months ended March 31, 1997 to $1,832,000 for the nine months ended March
31, 1998. This decrease was due primarily to the streamlining and consolidation
of staffing.
Other operating expenses increased $391,000, or 33%, from $1,187,000 for
the nine months ended March 31, 1997 to $1,578,000 for the nine months ended
March 31, 1998. This increase was due to an increase in public relations and
advertising relating to the change in the corporate trade name from New America
Network, Inc. to New America International, Inc.
NAI had a loss from operations of discontinued businesses of $162,000 for
the nine months ending March 31, 1997. NAI discontinued its New America
Financial Services ("NAFS") division which provided a wide array of financial
services. These services are currently provided by Alliance members. NAI had no
such loss for the same period in 1998.
Year ended June 30, 1997 versus the year ended June 30, 1996
Net income (loss) for common shareholders increased $104,000, or 50%, from
a loss of ($210,000) in 1996 to a loss of ($106,000) in 1997. This increase is
due to a combination of factors as described below.
Revenue from commissions decreased $123,000, or 3%, from $4,124,000 for the
year ended June 30, 1996 to $4,001,000 for the year ended June 30, 1997. The
decrease was primarily due to a decrease in broker to broker transactions.
License fees decreased $91,000, or 7%, from $1,373,000 for the year ended
June 30, 1996 to $1,282,000 for the year ended June 30, 1997. The decrease was
due to the discontinuance of the property management services in early fiscal
1997. Fees were recognized for the property management services for the entire
fiscal 1996 year.
Other revenue increased $95,000, or 18%, from $523,000 for the year ended
June 30, 1996 to $618,000 for the year ended June 30, 1997. The increase was
primarily due to a new contract in 1997 in which NAI was paid $42,000 for the
use of their Real Estate Planning Guide on the internet. The residual increase
was due to a general increase in marketing assessments.
Commission expense decreased $639,000, or 36%, from $1,782,000 for the year
ended June 30, 1996 to $1,143,000 for the year ended June 30, 1997. The decrease
was primarily due to a decrease in sealed bid transactions.
Sales and marketing expenses increased $36,000, or 13%, from $285,000 for
the year ended June 30, 1996 to $321,000 for the year ended June 30, 1997. This
increase was due to increased costs of conventions and meetings.
Compensation and benefits increased $90,000, or 4%, from $2,438,000 for the
year ended June 30, 1996 to $2,528,000 for the year ended June 30, 1997. This
increase was due to the addition of personnel in the Corporate Services and
Brokerage Services areas.
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<PAGE>
Other operating expenses increased $169,000, or 11%, from $1,475,000 for
the year ended June 30, 1996 to $1,644,000 for the year ended June 30, 1997.
This increase was due to an increase in public relations and advertising
relating to changing the corporate trade name from New America Network, Inc. to
New America International, Inc.
The loss from operations of discontinued businesses increased $95,000, or
74%, from $128,000 for the year ended June 30, 1996 to $223,000 for the year
ended June 30, 1997. This loss represents the effect of the discontinuance of
NAFS in each respective year.
Preferred share distributions decreased $2,000, or 15%, from $13,000 for
the year ended June 30, 1996 to $11,000 for the year ended June 30, 1997. This
decrease was due to a redemption of 25,000 shares of NAI's preferred stock for
$50,000.
Year ended June 30, 1996 versus the year ended June 30, 1995
Net income (loss) for common shareholders decreased $485,000 from income of
$275,000 in 1995 to a loss of ($210,000) in 1996. This decrease is due to a
combination of factors as described below.
Revenue from commissions decreased $247,000, or 6%, from $4,371,000 for the
year ended June 30, 1995 to $4,124,000 for the year ended June 30, 1996. The
decrease was primarily due to a decrease in the Network to Broker commissions.
In 1995, there were two major Network to Broker deals which totaled
approximately $439,000. While these fees were not similarly earned in 1996, the
decrease was partially offset by an increase in sealed bids and broker to broker
commissions.
License fees increased $215,000, or 19%, from $1,158,000 for the year ended
June 30, 1995 to $1,373,000 for the year ended June 30, 1996. The increase was
primarily due to the fees earned by the property management services ($166,000)
which was a new service provided in 1996.
Other revenue increased $53,000, or 11%, from $470,000 for the year ended
June 30, 1995 to $523,000 for the year ended June 30, 1996. The increase was
primarily due to marketing assessment fees which were initiated in mid-year in
1995 with a full year of revenues recognized in 1996.
Commission expense increased $297,000, or 20%, from $1,485,000 for the year
ended June 30, 1995 to $1,782,000 for the year ended June 30, 1996. The increase
was primarily due to an increase in sealed bid sales in fiscal year 1996.
Sales and marketing expenses decreased $39,000, or 12%, from $324,000 for
the year ended June 30, 1995 to $285,000 for the year ended June 30, 1996. This
decrease was due to NAI eliminating its regional meetings in 1996 and thereby
incurring no costs with respect to these meetings.
Compensation and benefits increased $457,000, or 23%, from $1,981,000 for
the year ended June 30, 1995 to $2,438,000 for the year ended June 30, 1996.
This increase was due to an increase in personnel in the Northeast and Southeast
brokerage services regions, Corporate Services, Property Management and
Headquarters staff.
Other operating expenses increased $139,000, or 10%, from $1,336,000 for
the year ended June 30, 1995 to $1,475,000 for the year ended June 30, 1996.
This increase was primarily due to an increase in travel expenses for newly
hired regional staff as well as an increase in advertising and promotional
expenses.
The loss from operations of discontinued businesses decreased $264,000, or
67%, from $392,000 for the year ended June 30, 1995 to $128,000 for the year
ended June 30, 1996. This decrease was due to NAI recording a loss of
approximately $245,000 in 1995 related to the discontinuance of RealQuest, Inc.,
a wholly-owned
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subsidiary of NAI. NAI recorded a loss of approximately $147,000 and $128,000
for the discontinuance of NAFS for the years ended June 30, 1995 and 1996,
respectively.
Preferred share distributions decreased $2,000, or 16%, from $15,000 for
the year ended June 30, 1995 to $13,000 for the year ended June 30, 1996. This
decrease was due to a redemption of 25,000 shares of NAI's preferred stock for
$50,000.
Inflation
Most of NAI's revenue is derived from commissions on the sale or lease of
commercial property and therefore is protected from inflation since an increase
in the sales prices or lease rates would generate additional revenue. The
majority of the license agreements signed by the Broker Members have fee
increases built in for the term of the agreements which are based on fixed
increases or increases over the Consumer Price Index. These two factors help
decrease NAI's exposure to inflation.
NAI BUSINESS
General Description
NAI operates a Network of independently owned, licensed real estate Broker
Members throughout the United States and, more recently, abroad. NAI, directly
and through its Broker Members, provides commercial real estate brokerage
services to local, regional, national and international Clients. NAI has
approximately 130 affiliated Broker Members, which employ approximately 2,600
agents, operating in approximately 300 markets, including North, Central and
South America and Western Europe. NAI believes it is represented in more North
American market areas than any national commercial real estate brokerage
company. Unlike other real estate broker networks, in addition to managing real
estate transactions generated by its Broker Members, NAI generates its own
source of real estate transactions for its Broker Members and actively manages
and tracks those transactions on behalf of Clients. In order to increase the
portfolio of services marketed to Clients and Broker Members, NAI has entered
into several alliance agreements with Alliance Members which provide real estate
related services which complement NAI's brokerage capabilities, including
sealed-bid sales, real estate auctions, real estate financing and appraisal
services. As of June 30, 1998, the Network had an inventory of approximately
1,683 assignments to buy, sell or lease real property (approximately 77% of
which are exclusive to NAI), with a transaction value of approximately $927
million, and which would generate fees to NAI of approximately $6.8 million, if
consummated. There is no assurance that such inventory will result in any
revenues to NAI.
NAI earns revenues primarily from the sharing of brokerage commissions with
Broker Members who earn commissions from the acquisition, disposition or leasing
of real property assigned to them by NAI (approximately $2,686,000 or 46% of
NAI's net revenues for fiscal year 1997). NAI also earns revenues from (i) the
sharing of brokerage commissions with Broker Members who earn commissions from
the acquisition and/or disposition or leasing of real estate referred to them by
other Broker Members (approximately $1,063,000 or 18% of NAI's net revenues for
fiscal year 1997), (ii) the sharing of fees received from Alliance Members in
sealed-bid sales, auction transactions and other Real Estate-Related Services
(approximately $170,000 or 3% of NAI's net revenues for fiscal year 1997), and
(iii) the collection of annual membership fees paid by Broker Members and
Alliance Members (approximately $1,282,000 or 22% of NAI's net revenues for
fiscal year 1997).
NAI began forming the Network in 1978 in order to meet the growing real
estate needs of large national and international corporations in multiple
markets. NAI meets the multiple market needs of its Clients and its Broker
Members by combining local representation with the management and control
capabilities of its centralized Corporate Services Department. NAI's Corporate
Services Department is responsible for establishing and developing relationships
with Clients in order to generate assignments for the Network and its Broker
Members. Currently, NAI has 13 staff members in its Corporate Services
Department serving over 100 Clients. These Clients include retail chains (such
as Woolworth Corp.), international companies (such as International Paper
Company), service businesses (such as Roadway Services, Inc.), and other larger
owners of real estate (such
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as the United States Postal Service, a new Client of NAI). NAI's Clients are
often involved in real estate transactions in multiple markets. In addition, NAI
has an Investment Sales Department which specializes in the acquisition and
disposition of real estate for Clients who are seeking to acquire, or currently
own, real estate for investment purposes. See "--Corporate Services Department"
and "--Investment Sales."
NAI maintains a proprietary information sharing and research intranet, in
order to efficiently and effectively coordinate with its Broker Members to meet
its Clients' needs. NAI's information systems consist of a transaction
management system and a central database information system. NAI's computerized
transaction management system allows Broker Members, the Corporate Services
Department and Clients to manage and track the progress of transactions assigned
to Broker Members, including those generated by its Broker Members. NAI's
databases include, among other things, real estate market data, demographic
information, Broker Member profiles, Broker Member listings, transaction
histories, Client relationship information and Client profiles. See "NAI
Technology and Information Services."
NAI's objective is to increase profitability by continuing to grow its
brokerage business, increase its international coverage, expand its Corporate
Services and Investment Sales Departments and to further develop its
non-brokerage Real Estate-Related Services, including sealed-bid sales and real
estate auctions, and to acquire or develop additional Real Estate-Related
Services. To the extent funds are available from the proceeds of the Rights
Offering and the Concurrent Offering referred to below, NAI's strategy will be
to (i) expand NAI's Corporate Services Department and Investment Sales
Department to generate business from additional Clients and in new markets, (ii)
invest in or acquire brokerage firms (including certain of those owned by Broker
Members) and firms which provide Real Estate-Related Services, (iii) train and
support Broker Members to generate additional business for the Network; (iv)
continue to expand the Network into international markets, (v) generate
additional revenue by providing brokerage and Real Estate-Related Services to
Kranzco, (vi) expand and enhance NAI's real estate technology and information
services, (vii) opportunistically acquire and develop real estate for its own
account, and (viii) utilize Real Estate-Related Services to create and develop
relationships with Clients.
The Network
NAI began forming the Network in 1978 on the premise that local commercial
real estate brokers could not efficiently service the needs of national and
international businesses due to the extremely local nature of the commercial
real estate market. Previously, local commercial brokers could only assist a
business with respect to its needs in a limited market area; however, large
national and international corporations need real estate services in multiple
market areas. NAI's affiliated Network of Broker Members throughout the United
States enables NAI to simultaneously provide real estate services to businesses
with multiple requirements in a number of market areas. NAI, with approximately
130 Broker Members in 46 states and 10 countries, provides real estate services
to its Clients throughout the United States and, more recently, abroad. See
"--Competition."
By agreeing to dispose of or acquire its real estate through the Network, a
Client can utilize one large brokerage network to simultaneously execute
numerous real estate transactions in different markets. Clients avoid the
time-consuming tasks of interviewing, establishing relationships with, and
negotiating with, different commercial real estate brokers, and minimize time
spent managing the status and progress of each transaction in multiple market
areas.
Through the use of the Network's facilities and the individual marketing
know-how of the Broker Members, a seller or lessor can quickly establish whether
there is a strong demand for its property, while a purchaser or lessee can
immediately determine which properties being offered across the country meet its
requirements. To facilitate this process, NAI maintains computerized information
on potential lessors and lessees, types of properties sought or available for
sale in numerous markets, preferred locations, rental rates, price and mortgage
financing requirements and other relevant information.
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Broker Members
NAI established the Network as a nationally recognized marketer of real
estate services, by obtaining quality Broker Members in major metropolitan areas
and smaller cities throughout the United States, as well as more recently in
foreign countries. NAI selects its Broker Members based upon a number of factors
including (a) the Broker Member's reputation in the industry, (b) the sales
volume of the Broker Member in its local market, (c) the Broker Member's ability
and desire to work with NAI and NAI's stated method of operations, (d) the
professionalism of the sales associates as evidenced by industry designations
and memberships and (e) the Broker Member's performance in interviews performed
by NAI. As of June 30, 1998, NAI had approximately 130 Broker Members in 46
states and 10 foreign countries. Approximately 80 of the Network's Broker
Members have been with NAI for 5 years or longer.
In order to ensure that the Network's standards for Broker Members are
consistently maintained, NAI has established a Broker Services Department. The
Broker Services Department, which consists of 11 members, focuses on training
Brokers to (i) develop and fulfill business on behalf of NAI, (ii) adhere to NAI
systems and processes, (iii) use the Network and its computer tracking systems
in order to manage real estate transactions assigned to them through the Network
and for their own internal use, (iv) effectively utilize NAI's national and
international identity, and (v) meet the needs of NAI's Clients. After a Broker
Member becomes a member of the Network, NAI performs periodic reviews to
determine whether such Broker Member is maintaining the standards set forth in
its Membership Agreement. In the past, NAI has replaced certain Broker Members
who have not met their obligations under the Membership Agreements. NAI intends
to continue this practice so that the Network can continue to provide high
quality service to its Clients.
Membership Agreements and Fees
Each Broker Member executes an agreement ("Membership Agreement") which
defines the legal relationship between NAI and the Broker Member, including the
Broker Member's obligations, the services to be provided by the Network and the
compensation to be paid for such services by the Broker Member (including an
annual membership fee and co-brokerage commission arrangements). Under the terms
of the Membership Agreement, the majority of Broker Members obtain, in most
instances, an exclusive territory and a license to use NAI's service marks
including "New America," "New America International," "NAI" and the "NAI Globe"
logo. Territories in the United States range in size from single cities to
several counties (sometimes in more than one state), or statewide depending on
the demographics of the area. International territories range in size from
single cities to, under certain circumstances, an entire country.
In certain market areas, NAI has selected more than one Broker Member. All
such Broker Members are designated as "Specialty Members" as each specializes in
one or more types of real estate (i.e., Retail, Industrial or Office). This
practice was instituted to address situations in which no individual commercial
broker could be identified in a particular market area meeting NAI's
qualifications as a full service broker. It also reflects NAI's recognition that
in certain market areas the Network and its Clients could best be served by
Specialty Members.
Over the past 18 months NAI has been transitioning Broker Members to a new
form of Membership Agreement. The old form, which typically provided for a three
year term, permitted members to terminate the Membership Agreement at any time
upon 45 days notice. The new form of Membership Agreement, which includes
stronger identity and performance standards as well as increased licensing fees,
does not allow early termination of the Membership Agreement except for cause.
NAI may terminate such agreements for specified causes upon forty-five (45) days
written notice to a Broker Member. Approximately 60% of the Broker Members have
executed the new form of Membership Agreement.
Each Broker Member pays NAI an annual membership fee ("Membership Fee"),
which varies depending upon the population level of a Broker Member's exclusive
territory. Each Broker Member is also required to pay an annual marketing
assessment equal to 15% of its Membership Fee. NAI has agreed to spend a minimum
of 3.5% of the total Membership Fees it receives to marketing activities
annually. NAI earns most of its revenue
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from the co-brokerage provisions contained in the Membership Agreement. NAI's
share of any brokerage commission earned from such services ranges from 10% to
50% depending on NAI's involvement in the transaction. Of NAI's net revenues for
fiscal year 1997, approximately $2,686,000 or 46% were earned through the
sharing of brokerage commissions with Broker Members who earn commissions from
the acquisition, disposition or leasing of real property assigned to them by
NAI, approximately $1,063,000 or 18% of NAI's net revenues were earned through
the sharing of brokerage commissions with Broker Members who earn commissions
from the acquisition and/or disposition or leasing of real estate referred to
them by other Broker Members, and approximately $1,282,000 or 22% of NAI's net
revenues were earned through the collection of annual membership fees paid by
Broker Members and Alliance Members.
NAI's percentage of the Broker Member compensation may be decreased in
instances where the Network Client was introduced to the Network by a Broker
Member or where an assignment was originally identified by a Broker Member. In
those instances, the Broker Member who made the introduction or identified the
listing may be entitled to a portion of the commission.
Broker Services Group
NAI believes that in addition to obtaining assignments and Clients for
Broker Members, the Network creates a framework within which Broker Members can
assist each other in their own businesses. In order to strengthen the
relationship among Broker Members, NAI conducts annual international conventions
and regional meetings on various aspects of utilizing the Network and
structuring transactions for all Broker Members. Also, the Network maintains a
Broker Member Advisory Council consisting of 24 Broker Members, which offers
advice to NAI regarding ways in which to improve the Network and the services
offered by it.
Additional publications, advertising, promotional materials and public
relations enhance NAI's image and reputation. NAI membership and participation
is maintained in industry trade associations including the International Council
of Shopping Centers ("ICSC"), International Association of Corporate Real Estate
Executives ("NACORE"), Industrial Development Research Council ("IDRC") and
other similar groups.
To further increase the Network's capabilities to service Clients, NAI has
established five Specialty Councils addressing various issues peculiar to
industrial, office, retail, land and investment properties. Each Specialty
Council is made up of Broker Members and/or sales persons associated with such
Broker Members who specialize in those areas. Through the personal relationships
which are established, NAI believes that council members gain a greater
recognition of each other's capabilities, local market knowledge and general
expertise.
Corporate Services Department
NAI's Corporate Services Department is responsible for establishing and
developing relationships with existing and potential Clients in order to
generate assignments for the Network and its Broker Members. NAI employs persons
with backgrounds in business and finance ("Corporate Service Executives") to
solicit and secure from existing and potential Clients, exclusive assignments to
acquire, dispose of or lease commercial real estate. The current trend of
downsizing corporate real estate departments has increased the need for
Corporate Services Executives, who can assist corporate real estate departments
with multiple transactions. The Corporate Services Department assists Clients in
managing multiple transactions through NAI's technology and information systems,
which facilitate up-to-date electronic and/or written reports which are
regularly sent to Clients and Broker Members. See "--NAI Technology and
Information Systems."
NAI's Corporate Services Department has ongoing relationships with more
than 100 Clients, including the Hertz Corporation, Pepsi-Cola, Airborne Express,
and the International Paper Company. Substantially all NAI-generated assignments
from its Clients are exclusive to NAI and many assignments referred from one
Broker Member to another Broker Member are also exclusive to the initiating
Broker Member. These assignments include acquisitions, dispositions, buy-outs,
sales, leases and auctions of office, industrial and retail properties.
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Assignments are obtained in NAI's name and then directed to the Broker Members
for execution. In certain circumstances the assignment, although secured by NAI,
is placed directly with the Broker Member. Resulting commissions are shared with
NAI as prescribed in the Broker Members Membership Agreement. See "NAI
Business--Membership Agreements and Fees". In some instances NAI will structure
a partner relationship with a Broker Member pursuant to which the Broker Member
will act as a Corporate Service Executive with respect to a Network Client. This
typically occurs when a Broker Member has a significant relationship with a
Client with national and international real estate needs. As of June 30, 1998,
NAI employed 13 staff members for its Corporate Services Department. Currently,
the majority of the Clients of the Corporate Service Department are located in
the eastern and north central United States; however, upon consummation of the
Exchange Offer, the Distribution, the Rights Offering and the Concurrent
Offering, NAI intends to retain additional Corporate Service Executives to
solicit Clients from throughout the United States and abroad.
Investment Sales
In order to increase transactions generated for the Network, NAI has
established an Investment Sales Department, consisting of two real estate
professionals, which specializes in the acquisition and disposition of real
estate for Clients who are seeking to acquire, or who currently own, real estate
for investment purposes, rather than for the investor's business use. A specific
target of the Investment Sales Department is the identification and sale of
properties to REITs, as well as insurance companies or pension funds which may
be interested in the acquisition of real estate investments for their
portfolios.
The Investment Sales Department works with Broker Members to assist them in
pursuing investment opportunities which the Department has identified. The
Investment Sales Department also works closely with the members of NAI's
Specialty Council for Investment Sales to stimulate Broker-to-Broker investment
referrals and to obtain sources of financing for investment transactions.
The Investment Sales Department has previously assisted Kranzco in pursuing
Kranzco's strategy of acquiring shopping centers. In December 1997, Kranzco
acquired five shopping centers, aggregating approximately 650,000 square feet of
GLA, for approximately $44 million. NAI's Investment Sales Department initiated
this opportunity, and assisted Kranzco in acquiring the properties. Kranzco's
acquisition of such properties generated $100,000 in fee income to NAI.
During the calendar year ended December 31, 1997, the Network consummated
20 investment real estate transactions with a transaction value of approximately
$100,000,000, which resulted in approximately $400,000 of revenues to NAI (which
for financial purposes are reported as commissions).
Real Estate-Related Services
NAI is in the process of widening its focus from a transactional core to
include more Real Estate-Related Services. These services include real estate
auctions and sealed-bid sales, real estate tax, valuation and appraisal
services, real estate information services (providing sales and marketing data
and demographic information), lease audits (review of leases for tenants in
order to ensure no overpayments were made), loan sales (purchases of defaulted
mortgages), and senior citizen housing (an investment specialty focusing on
facilities for the growing population of senior citizens). In order to expand
into Real Estate-Related Services, NAI has entered into several agreements with
Alliance Members pursuant to which certain Real Estate-Related Services are
provided by Alliance Members to Broker Members and Clients. To date, the only
Real Estate-Related Services which have generated significant revenues, in
addition to the membership fees paid by Alliance Members, for NAI have related
to national auctions and international sealed-bid sales. See "NAI Business--
Accelerated Marketing Programs" below.
Each Alliance Member pays NAI an annual membership fee (an "Alliance
Membership Fee"), which varies depending upon the market opportunity and the NAI
Services to be provided. Of NAI's net revenues for calendar year 1997,
approximately $475,000 of NAI's net revenues were earned through the sharing of
fees
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received from Alliance Members in the sealed-bid sales and auction transactions
(which for financial purposes are reported as commissions) and approximately
$25,000 of NAI's net revenues were earned through the collection of annual
membership fees paid by Alliance Members (which for financial purposes is
reported as license fees). Other Real Estate-Related Services which have not as
yet provided significant revenues to NAI have been strategically implemented in
order to provide a full range of services which may fulfill the real estate
related needs of Clients. These services include lease auditing, appraisal
services and real estate information services.
Accelerated Marketing Program
Through its Accelerated Marketing Program, NAI markets commercial real
estate properties for disposition through alternative vehicles for real estate
sales, such as sealed-bid sales and auctions. In 1994, NAI entered into
agreements with Terra Marketing and Terra Marketing, East (collectively,
"Terra"), an Alliance Member and specialist in international sealed-bid sales.
In the sealed-bid process, Terra puts together a portfolio of commercial and
industrial properties for sale. NAI and its Broker Members may assist Terra in
creating the portfolio of properties. The properties may be in varied locations
and have different owners. Terra then markets these properties to possible
purchasers through a brochure. Purchasers interested in any property may request
additional due diligence materials for a small fee. NAI Broker Members provide
sales support by providing site tours and providing useful local information for
those purchasers interested in visiting the site. The winning bids are selected
by the seller of the property and Terra, together. For the calendar year ended
December 31, 1997, NAI and Terra produced sealed-bid sales resulted in the sale
of approximately 19 properties with approximately $421,000 of revenues to NAI
(which for financial purposes are reported as commissions) and an additional
$2,500,000 of revenues to Terra, participating Broker Members and other brokers.
Fees earned in sealed-bid sales are paid by Terra to NAI and its Broker Members.
In 1989, NAI entered into an alliance agreement with Michael Fox
International, Inc., a specialist in national auction services ("Fox"). NAI and
local Broker Members work with Fox to provide and assist in auction sales. NAI
and Fox worked together on 15 auctions in the calendar year ended December 31,
1997. In the calendar year ended December 31, 1997, auction sales resulted in
approximately $50,000 of revenues to NAI and an additional $500,000 of revenues
to Fox, participating Broker Members and other brokers. Fees earned in auction
sales are paid by Fox to NAI and its Broker Members.
NAI Technology and Information Services
NAI has invested substantially in technology to create advanced systems to
deliver services to its Clients and Broker Members, as well as to efficiently
manage its operations. NAI believes that technology is important to the
continued growth of NAI's business and the real estate brokerage industry
generally. NAI continually refines its proprietary intranet in order to
efficiently manage and track assignments, and communicate with Broker Members
and Clients.
NAI's central information sharing and research intranet consists of two
proprietary software programs. REALTracTM, a transaction management system,
allows Broker Members, the Corporate Services Department and the Investment
Sales Department, to efficiently and effectively manage and track the progress
of transactions assigned to Broker Members. REALTracTM allows NAI staff to
easily track multiple Client assignments, and produce portfolio activity
reports. REALNetTM, NAI's central database information system, includes, among
other things, Broker Member profiles, Broker Member listings, transaction
histories, Client relationship information and Client profiles.
NAI maintains both public-access and secure, limited-access web sites in
order to provide computer access to NAI's Broker Members and Clients, as well as
the general public. Broker Members access REALTracTM and REALNetTM through
www.members.naiweb.com, a secure, web-based system. www.members.naiweb.com also
hosts discussion groups; a site to post property listings to NAI's internet
site, www.naiweb.com; NAI's Marketing Resource Center where Broker Members can
download marketing presentations; current press releases; and the "Market Maker"
system which promotes Broker-to-Broker opportunities. www.clients.naiweb is a
secure site
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which has been designed to allow Clients to log into NAI's information network
and get immediate updates on the status of any assignments which such Client has
placed with the Network. The information contained in this site is fed directly
from the NAI REALTracTM system. This site also allows Clients to contact NAI
staff that is working on their assignments. NAI's website, www.naiweb.com, is a
public site which conveys NAI's image in the marketplace, houses interactive
versions of NAI's marketing materials, and NAI's annual Real Estate Planning
Guide, a comprehensive, market-by-market commercial real estate analysis of over
140 real estate markets. Additionally, this site maintains a global property
listings database with over 1,500 active commercial property listings which are
posted by Broker Members.
NAI provides Broker Members and Clients with key demographic, mapping and
site modeling services, through its New America Information Services division
("NAIS"), previously operated through a joint venture which has been terminated.
NAI annually licenses demographic databases from national information providers.
The information contained in these databases is then used to produce custom
demographic reports and sophisticated mapping services.
Competition
NAI primarily seeks business from corporations, individual owner/investors
and national and international organizations with real estate requirements in
multiple market areas. NAI faces competition for clients on a local, regional
and national basis from national broker-owned companies with global alliances,
and national/global networks, as well as local and regional commercial brokerage
firms. Some of NAI's largest competitors include CB Commercial Real Estate
Services Group, Inc.; Cushman & Wakefield, Inc.; Grubb & Ellis Company; and
Trammel Crow Company. However, NAI believes that it is in more North American
market areas than any of these competitors. Real estate broker networks with
which NAI competes include Colliers International; Oncor International; and The
Commercial Network. NAI distinguishes itself from other real estate broker
networks by generating its own source of real estate transactions for its Broker
Members and actively managing those transactions, and does not simply facilitate
an exchange of transactions generated solely by network members, as is the case
in other broker networks.
NAI's ability to earn revenues is directly related to its ability to
attract and retain successful, independently owned, commercial and industrial,
licensed real estate brokers ("Commercial Real Estate Brokers") in a substantial
number of market areas as Broker Members. The number of brokers in different
market areas and their strength and reputation in their own local markets may
directly affect the anticipated volume of commissions generated through the
Network, as well as NAI's ability to obtain exclusive assignments from a
national client base. NAI is presently competing for Broker Members with
cooperative commercial broker networks, as well as large national and regional
commercial real estate brokerages. There has been a consolidation of real estate
brokerage and service companies, which are better known and have greater
resources than NAI that are actively seeking to acquire other real estate
brokerage and service companies. Certain of NAI's competitors, such as CB
Commercial and Grubb & Ellis, are attempting to grow their businesses through
acquisitions, as well as by entering into affiliation agreements with
independent Commercial Real Estate Brokers. To the extent these companies are
successful in acquiring or entering into affiliation agreements with independent
Commercial Real Estate Brokers, there may be a negative impact on NAI's ability
to attract and retain qualified Commercial Real Estate Brokers as part of the
Network as Broker Members. However, approximately 80 Broker Members have been
members of the Network for 5 years or longer.
In addition, approximately 40% of NAI's Broker Members are party to a
Membership Agreement which permits Broker Members to terminate the Agreement
upon 45 days prior notice. Certain Broker Members may not view the Related
Transactions as favorable to them. Accordingly, there can be no assurance that
in light of the increased competition to retain or acquire Commercial Real
Estate Brokers, that Broker Members will not terminate, or renew, their
Membership Agreements.
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Government Regulation
State Laws Governing Real Estate Brokers
Most states permit licensed real estate brokers to enter into commission
sharing agreements with licensed real estate brokers from other jurisdictions.
However, some states impose certain requirements with respect to entering into
such agreements. For example, some states allow only the local broker to conduct
negotiations. Other states require a written commission-sharing agreement to be
filed with the state real estate commission. Still other states do not permit
the out-of-state broker to conduct brokerage activities within the state. NAI
presently has real estate brokerage licenses in New Jersey, Florida, New York,
and Pennsylvania. See "Certain Transactions." NAI presently shares commissions
with brokers in 48 jurisdictions, including states in which it has a license.
NAI does not believe that it provides brokerage services or conducts
negotiations in those states in which it shares commissions. In certain
instances, NAI has not filed written fee-sharing agreements with state real
estate commissions. To the extent NAI has potentially violated any state law
with respect to commission sharing, it may not be able to enforce its Membership
Agreement and may be subject to civil liability or criminal penalties.
Laws Related to Franchising
The offer and sale of franchises is subject to federal law and certain
state laws. NAI believes that it is exempt from compliance with the Federal
Trade Commission's ("FTC") trade regulation rule entitled "Disclosure
Requirements and Prohibitions Concerning Franchising and Business Opportunity
Ventures" (the "Franchise Rule"). The Franchise Rule requires a franchisor to
provide pre-sale disclosure to a prospective franchisee prior to the sale of a
franchise subject to the Franchise Rule. Many states have franchise sales laws
that require a franchisor, prior to the offer or sale of a franchise in the
state, to comply with registration or filing requirements, and, prior to the
sale of a franchise, to provide a prospective franchisee with a current
franchise offering circular. Certain other states have business opportunity laws
that apply to some franchise agreements that also may require a seller to comply
with applicable registration or filing requirements and to provide pre-sale
disclosure. State franchise sales laws and business opportunity laws are
described below as "State Laws." In addition, many states have laws that
regulate certain substantive aspects of the franchisor-franchisee relationship,
including termination or non-renewal of franchise agreements.
NAI believes that by offering and selling memberships to its Broker Members
it may have been offering a "franchise," as defined by the Franchise Rule, but
that the offer and sale of such memberships are a "fractional franchise" and are
exempt from compliance with the requirements of the Franchise Rule. As defined
in the Franchise Rule, a "fractional franchise" is a commercial arrangement
which meets the following two conditions: (a) the franchisee or any of its
current directors or executive officers has more than 2 years of prior
management experience at any time in the past in the business represented by the
franchise and (b) the parties anticipated or should have anticipated, at the
time they entered into their agreement, that the sales of the franchisee arising
from the proposed relationship would represent no more than 20% of the total
dollar volume of the franchisee's projected gross sales within at least one year
after the franchisee commences selling the goods or services under the parties'
agreement.
NAI believes that it is exempt from compliance with the Franchise Rule,
since (a) its Broker Members and their directors or executive officers typically
had more than 2 years' experience as Commercial Real Estate Brokers at the time
they entered into their agreements with NAI and (b) at the time a Broker Member
entered into its Membership Agreement, neither NAI nor the Broker Member
anticipated or should have anticipated that the sales proceeds of any Broker
Member arising from membership in NAI would represent 20% or more of its sales.
As of the date of the Prospectus, NAI has neither prepared nor distributed
a franchise disclosure document ("Franchise Disclosure Document"). NAI believes
that it is exempt from the requirements of many of the State Laws in states in
which it has entered into Member Agreements, based on various exemptions,
including, without limitation, applicable state "fractional franchise"
exemptions (or the functional equivalent), exemptions in
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connection with the licensing of a registered trademark, or sophisticated
purchaser exemptions. However, NAI appears to have been subject to certain
requirements (e.g., registration or disclosure requirements) under State Laws in
certain other states in which it has agreements with Broker Members. In some
states, although no exemptions may have been available, past violations by NAI
of claims under those State Laws would be time barred.
NAI believes that there are approximately six (6) states with a State Law
in which NAI has entered into Membership Agreements for which NAI may not be
exempt, may have failed to comply with the filing or registration and disclosure
provisions of such State Law, and for which it may be subject to certain
sanctions or potential liability. Such sanctions or potential liability would
include that NAI may be subject to civil penalties imposed by state regulatory
agencies, and legal actions by existing Broker Members for rescission of
existing Membership Agreements, restitution, and damages as a result of any
violation of such law. NAI believes that, if any state regulatory agencies or
any of the Broker Members in such states sought such remedies and any such
action were successful, its potential liability could be to refund certain
payments made to NAI. Notwithstanding, the applicability of such laws is
uncertain as applied to NAI's Membership Agreements, and there can be no
assurance that a court would not take the position that NAI should have complied
with such laws in connection with those transactions. In the future NAI intends
to comply with State Laws, where necessary, by preparation and delivery to
prospective Members of a Franchise Disclosure Document, and registering or
filing with necessary state authorities, and/or by complying with available
exemptions.
NAI has also recently entered into several Membership Agreements with
Members in foreign countries. NAI believes that it either is not subject to, or
would be exempt from, such laws. If NAI were subject to, or were not exempt
from, such laws, it could be subject to actions by regulatory agencies and legal
actions by existing Members, and subject to fines, penalties, and damages. NAI
intends to comply with such laws in the future.
Trademarks
NAI has a registered servicemark on the principal register with the United
States Patent and Trademark Office for the logo design eagle with the initials
"NAI" and the name "New America."
Legal Proceedings
There is no material litigation pending, or to its knowledge, threatened
against NAI or its properties.
Property
NAI leases approximately 8,100 square feet of office space as its corporate
headquarters located at Route 130 and Maple Stream Road, Hightstown, New Jersey.
The landlord, The Building Center, Inc., is wholly owned by Gerald C. Finn and
his wife. See "Certain Transactions." The lease provides for an annual rental of
$102,000 plus the payment of maintenance expenses. The initial lease, which
expired on August 31, 1989, has been extended by an Extension of Lease
Agreement, dated April 15, 1998, which provides for a one year term with
automatic one year renewals, unless either party gives 90 days written notice.
THE OFFER
General
Kranzco hereby offers, upon the terms and subject to the conditions set
forth herein and in the related Letter of Transmittal, to exchange $0.7707 of
the aggregate Offer Consideration for each outstanding NAI Share, up to a
maximum of 10,379,531 NAI Shares, validly tendered on or prior to the Expiration
Date and not properly withdrawn. The aggregate Offer Consideration consists of
$8,000,000 of Notes. Tendering NAI Stockholders
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will not be obligated to pay any charges or expenses of the Exchange Agent.
Except as set forth in the Instructions to the Letter of Transmittal, transfer
taxes on the exchange of NAI Shares pursuant to the Offer will be paid by or on
behalf of Kranzco. The purpose of the Offer is to enable Kranzco to acquire 80%
of the outstanding NAI Shares. Immediately following the consummation of the
Exchange Offer, Kranzco and NAI intend to consummate the transactions referred
to under the heading "Proposed Related Transactions" (generally referred to
herein as the "Proposed Related Transactions"), including the Distribution, the
Rights Offering and the Concurrent Offering. See "Proposed Related
Transactions," "The Distribution," "The Rights Offering" and "The Concurrent
Offering." Kranzco's obligations to exchange the aggregate Offer Consideration
for 10,379,531 NAI Shares pursuant to the Offer is subject to (i) the Minimum
Tender Condition, (ii) the representations and warranties of NAI contained in
the Exchange Agreement being true and correct on the Expiration Date, and (iii)
the satisfaction of other conditions set forth in the Exchange Agreement. See
"The Offer--Conditions of the Offer." Subject to the provisions of the Exchange
Agreement, Kranzco expressly retains the right to amend, terminate or withdraw
the Offer at any time prior to the consummation of the Exchange Offer. According
to NAI, as of June 30, 1998, there were 12,974,414 NAI Shares outstanding. The
Finns have agreed to tender 80% of their respective NAI Shares in the Exchange
Offer, and, in the event that less than 80% of the issued and outstanding NAI
Shares are tendered by other NAI Stockholders in the Exchange Offer, the Finns
agreed to tender up to an additional 10% of their NAI Shares, as may be required
to reach the Minimum Tender Condition. Although the Finns have agreed to tender
up to 90% of the NAI Shares owned by them, such number of NAI Shares is not
sufficient to meet the Minimum Tender Condition without other NAI Stockholders
joining in the tender. Accordingly, if other NAI Stockholders do not tender a
number of NAI Shares, that together with the NAI Shares to be tendered by the
Finns, would meet the Minimum Tender Condition, the Exchange Offer will not be
consummated and NAI will continue to conduct its business as a private company.
Timing of the Offer
The Offer is currently scheduled to expire on __________, 1998; however,
Kranzco has the right, subject to the Exchange Agreement, to extend or amend the
Offer at any time or from time to time, as the case may be, and may choose to
extend the Offer as necessary until all conditions to the Offer have been
satisfied or waived. See "--Extension, Termination and Amendment." Kranzco may
also terminate the Offer if the conditions precedent to the Offer have not been
satisfied. See "The Offer--Conditions of the Offer." However, the obligation of
the Finns to tender NAI Shares owned by them will terminate on December 31,
1998.
Extension, Termination and Amendment
Subject to the applicable rules and regulations of the Commission, Kranzco
also reserves the right, in its sole discretion, at any time or from time to
time, (i) to delay acceptance for, exchange of, or, regardless of whether such
NAI Shares were therefore accepted for exchange, exchange of any NAI Shares for
Notes pursuant to the Offer, or, subject to the provisions of the Exchange
Agreement, to terminate the Offer and not accept for exchange or exchange any
NAI Shares for Notes not theretofore accepted for exchange, or exchanged, upon
the failure of any of the conditions of the Offer to be satisfied and (ii) to
waive any condition or, subject to the Exchange Agreement, otherwise amend the
Offer in any respect, by giving oral or written notice of such delay,
termination or amendment to the Exchange Agent and by making a public
announcement thereof. Any such extension, termination, amendment or delay will
be followed as promptly as practicable by public announcement thereof, such
announcement in the case of an extension to be issued no later than 9:00 a.m.,
Eastern time, on the next business day after the previously scheduled Expiration
Date. Subject to applicable law and without limiting the manner in which Kranzco
may choose to make any public announcement, Kranzco shall have no obligation to
publish, advertise or otherwise communicate any such public announcement other
than by making a release to the Dow Jones News Service. During any such
extension, all NAI Shares previously tendered and not withdrawn will remain
subject to the Offer, subject to the right of a tendering NAI Stockholder to
withdraw his or her NAI Shares. See "--Withdrawal Rights."
Kranzco confirms that if it makes a material change in the terms of the
Offer or the information concerning the Offer, or if it waives a material
condition of the Offer, Kranzco will extend the Offer to the extent
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required under the Exchange Act. If, prior to the Expiration Date, Kranzco shall
increase or decrease the percentage of NAI Shares being sought or the
consideration offered to holders of NAI Shares, such increase or decrease shall
be applicable to all holders whose NAI Shares are accepted for exchange pursuant
to the Offer, and, if at the time notice of any such increase or decrease is
first published, sent or given to holders of NAI Shares, the Offer is scheduled
to expire at any time earlier than the tenth business day from and including the
date that such notice is first so published, sent or given, the Offer will be
extended until the expiration of such ten business day period. For purposes of
the Offer, a "business day" means any day other than a Saturday, Sunday or a
federal holiday and consists of the time period from 12:01 a.m. through 12:00
midnight, Eastern time.
Exchange of Notes for NAI Shares; Delivery of Offer Consideration
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment), Kranzco will accept for exchange, and will exchange, Notes for
NAI Shares validly tendered and not properly withdrawn as promptly as
practicable following the Expiration Date. In addition, subject to applicable
rules of the Commission, Kranzco expressly reserves the right to delay
acceptance of or the exchange of NAI Shares in order to comply with any
applicable law. In all cases, exchange of NAI Shares tendered and accepted for
exchange pursuant to the Offer will be made only after receipt by the Exchange
Agent of certificates for such NAI Shares, a properly completed and duly
executed Letter of Transmittal or facsimile thereof and any other required
documents. See "--Conditions of the Offer."
Upon the terms and subject to the conditions of the Offer and the Exchange
Agreement, including Kranzco's rights to terminate, amend or extend the offer,
Kranzco will accept for exchange a maximum of 10,379,531 validly tendered NAI
Shares, representing 80% of the outstanding NAI Shares. Each NAI Stockholder may
tender all or any portion of his or her NAI Shares. If Kranzco determines to
consummate the Offer, Kranzco will accept for exchange from each NAI Stockholder
a number of validly, tendered NAI Shares representing such Stockholder's
Guaranteed Minimum Tender (80% of such stockholder's NAI Shares or, if such NAI
Stockholder tendered less than 80% of such stockholder's NAI Shares, then such
lesser number of NAI Shares). NAI Stockholders may validly tender for exchange
NAI Shares in excess of his or her Guaranteed Minimum Tender. If after
aggregating the NAI Shares validly tendered pursuant to the Guaranteed Minimum
Tender, the Minimum Tender Condition has not been met, Kranzco will accept for
exchange such number of validly tendered NAI Shares as would be required to meet
the Minimum Tender Condition on a pro rata basis from among all the NAI Shares
tendered in excess of each NAI Stockholder's Guaranteed Minimum Tender (with
appropriate adjustments to avoid purchases of fractional shares). Pursuant to
the Exchange Agreement, the Finns agreed to tender 80% of their respective NAI
Shares in the Exchange Offer, and, in the event that less than 80% of the issued
and outstanding NAI Shares are tendered by other NAI Stockholders in the
Exchange Offer, the Finns agreed to tender up to an additional 10% of their NAI
Shares, as may be required to reach the Minimum Tender Condition. Although the
Finns have agreed to tender up to 90% of the NAI Shares owned by them, such
number of NAI Shares is not sufficient to meet the Minimum Tender Condition
without other NAI Stockholders joining in the tender. Accordingly, if other NAI
Stockholders do not tender a number of NAI Shares, that together with the NAI
Shares to be tendered by the Finns, would meet the Minimum Tender Condition, the
Exchange Offer will not be consummated and NAI will continue to conduct its
business as a private company. See "The Exchange Agreement."
For purposes of the Offer, Kranzco will be deemed to have accepted for
exchange NAI Shares validly tendered and not withdrawn as, if and when Kranzco
gives oral or written notice to the Exchange Agent of its acceptance of the
tenders of such NAI Shares pursuant to the Offer. The Exchange Agent will act as
agent for tendering NAI Stockholders for the purposes of receiving the Offer
Consideration and transmitting such Offer Consideration to tendering NAI
Stockholders.
If any tendered NAI Shares are not accepted for exchange pursuant to the
terms and conditions of the Offer for any reason, or if certificates are
submitted for more NAI Shares than are tendered, certificates for such
unexchanged NAI Shares will be returned without expense to the tendering NAI
Stockholder, as soon as practicable following expiration or termination of the
Offer. If the Exchange Offer and the subsequent
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Reincorporation Merger are consummated, any certificates representing
unexchanged NAI Shares returned to such tendering NAI Stockholder will reflect
ownership of NAI Maryland Shares. Since the existing NAI Shares are "restricted"
securities within the meaning of Rule 144 under the Securities Act, the
certificates for such unexchanged NAI Shares will bear a legend to such effect.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares from NAI or any
"affiliate" of NAI, as that term is defined under the Securities Act, the
acquiror or subsequent holder thereof is entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1.0% of the then
outstanding NAI Shares or the average weekly trading volume of the NAI Shares
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 also are subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about NAI. If two years have elapsed since the date of
acquisition of restricted shares from NAI or from any "affiliate" of NAI, and
the acquiror or subsequent holder thereof is deemed not to have been an
"affiliate" of NAI at any time during the three months preceding a sale, such
person would be entitled to sell such shares in the public market under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements.
Withdrawal Rights
Tenders of NAI Shares made pursuant to the Offer are irrevocable, except
that NAI Shares tendered pursuant to the Offer may be withdrawn pursuant to the
procedures set forth below at any time prior to the Expiration Date, and, unless
theretofore accepted for exchange and exchanged by Kranzco for the Offer
Consideration pursuant to the Offer, may also be withdrawn at any time after
________, 1998.
For a withdrawal to be effective, a written, telegraphic, telex or
facsimile transmission notice of withdrawal must be timely received by the
Exchange Agent at its address set forth on the back cover of this Prospectus,
and must specify the name of the person having tendered the NAI Shares to be
withdrawn, the number of NAI Shares to be withdrawn and the name of the
registered holder, if different from that of the person who tendered such NAI
Shares. If certificates have been delivered or otherwise identified to the
Exchange Agent, the name of the registered holder and the serial numbers of the
particular certificates evidencing the NAI Shares withdrawn must also be
furnished to the Exchange Agent as aforesaid prior to the physical release of
such certificates.
All questions as to the form and validity (including time of receipt) of
any notice of withdrawal will be determined by Kranzco, in its sole discretion,
which determination shall be final and binding. Neither Kranzco, the Exchange
Agent, nor any other person will be under any duty to give notification of any
defects or irregularities in any notice of withdrawal or will incur any
liability for failure to give any such notification. Any NAI Shares properly
withdrawn will be deemed not to have been validly tendered for purposes of the
Offer. However, withdrawn NAI Shares may be retendered by following the
procedure described under "--Procedure for Tendering" at any time prior to the
Expiration Date.
Release Restrictions on NAI Shares Subject to Restricted Stock Agreements
Certain employees of NAI received their NAI Shares pursuant to restricted
stock agreements (the "Restricted Stock Agreement"). The Restricted Stock
Agreement restricts the transfer of such NAI Shares and subjects such restricted
NAI Shares to a repurchase right. The repurchase right grants NAI the option,
for a period of three years following the date of grant, to repurchase the
restricted NAI Shares if the employee's services to NAI are terminated. NAI may
repurchase restricted NAI Shares for a period of 90 days after the date of any
such termination at prices ranging from $.10 per NAI Share in the first year
after grant to $.30 per NAI Share in the third year after grant. See
"Management-Restricted Stock Agreements." In connection with the Exchange Offer,
NAI has agreed to permit the transfer to Kranzco of all restricted NAI Shares
which are validly tendered on or prior to the Expiration Date, and not
subsequently withdrawn. In addition, NAI has agreed to eliminate the
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repurchase option with respect to all restricted NAI Shares owned by any such
employee after the consummation of the Exchange Offer, if such employee tenders
at least 80% of his or her restricted NAI Shares.
The release of any or all of the preceding restrictions could cause the
holders of restricted NAI Shares to immediately recognize ordinary income in an
amount equal to the excess of the fair market value of such NAI Shares at the
time the restrictions are released over any amounts paid to acquire such NAI
Shares. In addition, withholding taxes will be payable to NAI (or withheld by
NAI from amounts otherwise due such holders) in connection with any such
recognition of income. Holders of restricted NAI Shares are urged to consult
their tax advisors concerning the federal, state and local tax consequences of
the release of any restrictions on their NAI Shares.
Procedure for Tendering
For an NAI Stockholder validly to tender NAI Shares pursuant to the Offer,
a properly completed and duly executed Letter of Transmittal (or manually
executed facsimile thereof), together with any required signature guarantees,
and any other required documents, must be transmitted to and received by the
Exchange Agent at its address set forth on the back cover of this Prospectus and
certificates for tendered NAI Shares must be received by the Exchange Agent at
such address prior to the Expiration Date. Any NAI Stockholder that desires to
tender NAI Shares and whose certificates for such NAI Shares are not immediately
available or who cannot deliver all required documents to the Exchange Agent
prior to the Expiration Date, should contact the Exchange Agent immediately at
(800) 829-8432.
No signature guarantee is required on the Letter of Transmittal in cases
where the Letter of Transmittal is signed by the registered holder(s) of the NAI
Shares tendered therewith. If the certificates for NAI Shares are registered in
the name of a person other than the signer of the Letter of Transmittal, or if
certificates for unexchanged NAI Shares are to be issued to a person other than
the registered holder(s), the certificates must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name or names of
the registered owner or owners appear on the certificates, with the signature(s)
on the certificates or stock powers guaranteed as aforesaid.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER, AND THE
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.
IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO THE OFFER
CONSIDERATION, A STOCKHOLDER MUST PROVIDE THE EXCHANGE AGENT WITH HIS OR HER
CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY WHETHER SUCH STOCKHOLDER IS
SUBJECT TO BACKUP WITHHOLDING OF FEDERAL INCOME TAX BY COMPLETING THE SUBSTITUTE
FORM W-9 INCLUDING IN THE LETTER OF TRANSMITTAL. CERTAIN STOCKHOLDERS
(INCLUDING, AMONG OTHERS, ALL CORPORATIONS AND CERTAIN FOREIGN INDIVIDUALS) ARE
NOT SUBJECT TO THESE BACKUP WITHHOLDING AND REPORTING REQUIREMENTS.
In all cases, exchanges of NAI Shares tendered and accepted for exchange
pursuant to the Offer will be made only after timely receipt by the Exchange
Agent of certificates for NAI Shares, properly completed and duly executed
Letter(s) of Transmittal (or facsimile(s) thereof), and any other required
documents.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of NAI Shares will be
determined by Kranzco, in its sole discretion, which determination shall be
final and binding. Kranzco reserves the absolute right to reject any and all
tenders of NAI Shares determined by
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it not to be in proper form or the acceptance of or exchange for which may, in
the opinion of Kranzco's counsel, be unlawful. Kranzco also reserves the
absolute right to waive any of the conditions of the Offer or any defect or
irregularity in the tender of any NAI Shares. No tender of NAI Shares will be
deemed to have been validly made until all defects and irregularities in tenders
of NAI Shares have been cured or waived. Neither Kranzco, the Exchange Agent nor
any other person will be under any duty to give notification of any defects or
irregularities in the tender of any NAI Shares or will incur any liability for
failure to give any such notification. Kranzco's interpretation of the terms and
conditions of the Offer (including the Letter of Transmittal and instructions
thereto) will be final and binding.
The tender of NAI Shares pursuant to any of the procedures described above
will constitute a binding agreement between the tendering NAI Stockholder and
Kranzco upon the terms and subject to the conditions of the Offer.
Conditions of the Offer
In accordance with the Exchange Agreement, Kranzco's obligation to
consummate the Exchange Offer is subject to the fulfillment, at or prior to the
Expiration Date of the Exchange Offer of the following conditions: (i) the
parties to the Exchange Agreement are not subject to any order or injunction
which prohibits the consummation of the Exchange Agreement and the Proposed
Related Transactions; (ii) the Registration Statement shall have become
effective and all necessary state securities law approvals shall have been
obtained and no stop order with respect to any of the foregoing shall be in
effect; (iii) 80% of the total number of issued and outstanding NAI Shares
shall have been validly tendered and not withdrawn prior to the Expiration Date
in the Exchange Offer; (iv) Kranzco shall have obtained the approval for the
listing of Kranzco Common Shares issuable upon conversion of the Notes on the
NYSE, subject to official notice of issuance; (v) all required consents,
authorizations, orders and approvals of any governmental entity or third
parties shall have been obtained or made; (vi) each party to the Exchange
Agreement shall have delivered all such documents or certificates and disclosed
such information as the other party may reasonably request; (vii) NAI and the
Finns shall have performed their agreements contained in the Exchange Agreement
and the representations and warranties of NAI and the Finns contained in the
Exchange Agreement shall be true and correct in all material respects as of the
Expiration Date, and Kranzco shall have received a certificate of NAI and of
each of the Finns certifying to such effect; (viii) the Finns and an escrow
agent shall have entered into an Escrow Agreement (as defined below); (ix)
Kranzco shall have received evidence in writing that Matthew Arnold, Robert
McMenamim and Marc Shegoski have resigned from the Board of Directors of NAI,
effective as of the closing date; (x) Kranzco shall have received a legal
opinion from NAI's counsel on certain issues, including, among other things,
the capitalization of NAI and the ownership of NAI Shares, the organization and
good standing of NAI and its subsidiaries, the authority of NAI and the Finns,
any required consents and approvals, absence of violations of charter documents,
compliance with applicable law, and the accuracy of the information contained
in the Registration Statement; (xi) any consent or waiver of the holders of the
NAI Series A Preferred Stock shall have been obtained; (xii) from the date of
the Exchange Agreement through the Expiration Date, there shall not have
occurred any change in the financial condition, business, operations or
prospects of NAI and its subsidiaries, taken as a whole, that would have or
would be reasonably likely to have an NAI Material Adverse Effect (as defined
in the Exchange Agreement); and (xiii) Norma Finn shall have entered into a
letter agreement pursuant to which she agrees not to convert the Notes issued to
her until after three years following the issuance of the Notes other than upon
the occurrence of a Change in Control or an Event of Default but in no event
prior to the date one year after the date of issuance of the Notes. See "The
Exchange Agreement" for a summary of the terms of the Exchange Agreement.
In addition, the obligation of the Finns to tender the NAI Shares owned by
them is subject to fulfillment, at or prior to the Expiration Date of the
Exchange Offer of the conditions set forth in clauses (i) through (vi) above,
and the following conditions, unless waived by the Finns: (i) Kranzco shall
have performed its agreements contained in the Exchange Agreement and the
representations and warranties of Kranzco contained in the Exchange Agreement
shall be true and correct in all material respects as of the Expiration Date,
and NAI and the Finns
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shall have received a certificate of Kranzco certifying to such effect; (ii) NAI
shall have received a legal opinion from Kranzco's counsel on certain issues,
including the organization and good standing of Kranzco, the capitalization of
Kranzco, the authority of Kranzco, and any required consents and approvals, and
absence of violations of charter documents; and (iii) from the date of the
Exchange Agreement through the Expiration Date, there shall have not occurred
any material adverse change in the financial condition, business, operations or
prospects of Kranzco (provided, however, that a change in the price of Kranzco
Common Shares does not constitute a material adverse change).
Furthermore, the Exchange Agreement and the Exchange Offer may be
terminated by action of the Finns, the Board of Directors of NAI or the Board of
Trustees of Kranzco by mutual agreement, or, under certain circumstances,
including, if (a) the Exchange Offer shall not have been consummated by December
31, 1998, or (b) a United States federal or state court of competent
jurisdiction or other Governmental Entity shall have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Exchange Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable, provided, that the party seeking to terminate the Exchange
Agreement pursuant to clause (b) shall have used all reasonable efforts to
remove such order, decree, ruling or injunction; and provided, in the case of a
termination pursuant to clause (a) above, that the terminating party shall not
have breached in any material respect its obligations under the Exchange
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause. See "Proposed Related
Transactions--The Exchange Agreement."
Notwithstanding any other provision of the Offer and subject to any
applicable rules and regulations of the Commission, including Rule 14e-1(c)
under the Exchange Act (relating to Kranzco's obligation to exchange or return
tendered NAI Shares promptly after the termination or withdrawal of the Offer),
and subject to the Exchange Agreement, Kranzco shall not be required to accept
for exchange or exchange any NAI Shares, may postpone the acceptance for
exchange or exchange for tendered NAI Shares and may, in its sole discretion,
terminate or amend the Offer as to any NAI Shares not then exchanged for any
reason, including, without limitation, if at the Expiration Date any of the
Minimum Tender Condition has not been satisfied or waived or if on or after the
date of this Prospectus and on or prior to the Expiration Date, Kranzco believes
that the representations and warranties of NAI contained in the Exchange
Agreement are not, at that point, true and correct. Any conditions to this Offer
are for the sole benefit of Kranzco and may be asserted by Kranzco regardless of
the circumstances giving rise to any such conditions (including any action or
inaction by Kranzco) or may be waived by Kranzco in whole or in part. The
determination as to whether any condition has been satisfied shall be in the
reasonable judgment of Kranzco and will be final and binding on all parties. The
failure by Kranzco at any time to exercise any of the foregoing rights shall not
be deemed a waiver of any such right, and each such right shall be deemed a
continuing right which may be asserted at any time and from time to time, prior
to the consummation of the Exchange Offer. Notwithstanding the fact that Kranzco
reserves the right to assert the failure of a condition following acceptance for
exchange but prior to exchange in order to delay exchange or cancel its
obligation to exchange properly tendered NAI Shares, Kranzco will either
promptly exchange such NAI Shares or promptly return such NAI Shares.
Kranzco will pay the Exchange Agent reasonable and customary compensation
for its services in connection with the Offer, plus reimbursement for
out-of-pocket expenses, and will indemnify the Exchange Agent against certain
liabilities and expenses in connection therewith, including liabilities under
the federal securities laws. Kranzco will not pay any fees or commissions to any
broker or dealer or other person for soliciting tenders of NAI Shares pursuant
to the Offer. Brokers, dealers, commercial banks and trust companies will be
reimbursed by Kranzco for customary mailing and handling expenses incurred by
them in forwarding material to their customers.
Accounting Treatment
Kranzco will account for the acquisition of NAI Shares pursuant to the
Offer using the purchase method of accounting. Accordingly, the purchase price
will be allocated to assets acquired and liabilities assumed based
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on their estimated fair values at the acquisition date. NAI's financial position
and results of operations will not be included in Kranzco's consolidated
accounts prior to the consummation date of the Exchange Offer and the
Distribution. Subsequent to the Transaction, Kranzco will account for its 9.8%
interest in NAI using the cost method of accounting.
DESCRIPTION OF NOTES
The Notes will be issued under an indenture, to be dated as of the closing
of the Exchange Offer (the "Indenture"), between Kranzco and the United States
Trust Company of New York, as Trustee (the "Trustee"). The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions of
the Indenture, copies of which will be available for inspection at the Corporate
Trust Office of the Trustee in New York, New York, Capitalized terms used in
this section, unless otherwise defined in this Prospectus, are defined in the
Indenture, and such definitions are incorporated in their entirety herein by
reference.
The following description of the Notes and the Indenture is a summary of
the provisions thereof, and does not purport to be complete and is qualified in
its entirety by reference to the Indenture. Certain capitalized terms used below
but not defined herein have the meanings ascribed to them in the applicable
Indenture.
General
The Notes will be unsecured, subordinated general obligations of Kranzco,
will mature ten years following the date of original issuance thereof and will
be limited to an aggregate principal amount of $8,000,000. The Notes will bear
interest at a rate of 6% per annum from the date of original issuance, or from
the most recent Interest Payment Date on which interest has been paid or
provided for, payable quarterly on January 1, April 1, July 1 and October 1 of
each year, to the Persons in whose name the Notes are registered at the close
of business on the preceding March 15, June 15, September 15, or December 15
(whether or not a Business Day (as defined herein)), as the case may be. THE
NOTES ARE NOT NEGOTIABLE AND ARE NOT TRANSFERABLE EXCEPT UPON DEATH OF A
HOLDER IN ACCORDANCE WITH THE LAWS OF DESCENT AND DISTRIBUTION OR IN
CONNECTION WITH A GIFT WITHOUT CONSIDERATION.
Interest on the Notes will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The Notes will be direct, unsecured obligations of Kranzco and will rank
equally with all other unsecured and unsubordinated indebtedness of Kranzco from
time to time. The Notes will be effectively subordinated to any secured
indebtedness of Kranzco to the extent of the value of the assets securing such
indebtedness. The Indenture will permit Kranzco to incur additional secured and
unsecured indebtedness.
The Notes will not be subject to any mandatory redemption or annual sinking
fund payments.
The Indenture does not contain any provisions that would limit the ability
of Kranzco to incur indebtedness or that would afford the holders of the Notes
(the "Holders") protection in the event of (i) a highly leveraged or similar
transaction involving Kranzco and (ii) a reorganization, restructuring, merger
or similar transaction involving Kranzco that may adversely affect the Holders.
In addition, Kranzco may, in the future, enter into certain transactions such as
the sale of all or substantially all of its assets or the merger or
consolidation of Kranzco that would increase the amount of Kranzco's
indebtedness or substantially reduce or eliminate Kranzco's assets, which may
have an adverse effect on Kranzco's ability to service its indebtedness,
including the Notes. Kranzco and its management have no present intention of
engaging in a highly leveraged or similar transaction involving Kranzco.
Kranzco conducts certain of its operations through its subsidiaries. The
rights of Kranzco and its creditors, including the Holders, to participate in
the assets of any subsidiary upon the latter's liquidation or
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reorganization will be subject to the prior claims of the subsidiary's creditors
except to the extent that Kranzco may itself be a creditor with recognized
claims against the subsidiary.
Optional Redemption by Kranzco
Kranzco may redeem the Notes, at any time after two years following the
date of original issuance thereof, in whole or from time to time in part, at the
election of Kranzco, at a redemption price equal to the sum of (i) the principal
amount of the Notes being redeemed and (ii) accrued interest thereon to the
redemption date, if any with respect to such Notes (the "Redemption Date").
From and after the date notice has been given as provided in the Indenture,
if funds for the redemption of any Notes called for redemption shall have been
made available on such redemption date, such Notes will cease to bear interest
on the date fixed for such redemption specified in such notice and the only
right of the Holders will be to receive payment of the Redemption Price.
Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the Note register, not more than 60 nor less than
30 days prior to the date fixed for redemption. The notice of redemption will
specify, among other items, the Redemption Price and the principal amount of the
Notes to be redeemed by Holders. The Notes will remain convertible after a
notice of optional redemption until the close of business on a Business Day
immediately preceding the Redemption Date. See "--Conversion Rights."
Kranzco will notify the Trustee at least 45 days prior to the Redemption
Date (or such shorter period as satisfactory to the Trustee) of the aggregate
principal amount of Notes to be redeemed and the Redemption Date. If less than
all the Notes are to be redeemed at the option of Kranzco, the Trustee shall
select, pro rata or by lot or by any other method that the Trustee considers
fair and appropriate under the circumstances, Notes of such series to be
redeemed in whole or in part. Notes may be redeemed in part in the minimum
authorized denomination for Notes or in any integral multiple thereof.
Form, Denomination and Registration
Except as set forth below, the Notes will be issued in the form pursuant to
the Indenture. The Notes will be issued only in fully registered form, without
exception. No service charge will be made for any registration of transfer or
exchange of Notes, but Kranzco may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Kranzco will appoint the Trustee as registrar, Paying Agent, transfer
agent, and conversion agent of the Notes. In such capacities, the Trustee will
be responsible for, among other things, (i) maintaining a record of the Holders
and their respective holdings and accepting Notes for exchange and registration
of transfer, (ii) ensuring that payments of principal and interest with respect
to the Notes received by the Trustee from Kranzco are duly paid to the Holders,
(iii) transmitting to Kranzco any notices from Holders, (iv) accepting
conversion notices and related documents, and transmitting the relevant items to
Kranzco, and (v) delivering certificates for Kranzco Common Shares issued in
conversion of the Notes.
Payments and Paying Agents
Payments of principal of and interest on the Notes will be made at the
office of the Trustee or, at the option of the Holder and subject to any fiscal
or other laws and regulations applicable thereto, at the corporate trust office
of the Trustee or any Paying Agent. Payment in respect of principal on Notes
will be made only against surrender of such Notes and will be made by U.S.
Dollar check. Payment in respect of interest on each Interest Payment Date with
respect to any such Note will be made to the Person in whose name such Note is
registered on the relevant Record Date by U.S. Dollar check.
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If the due date for payment of any amount in respect of principal or
interest on any Note is not a Business Day at the place in which it is presented
for payment, the Holder thereof shall not be entitled to payment of the amount
due until the next succeeding Business Day at such place and shall not be
entitled to any further interest or other payment in respect of any such delay.
As used in the Indenture regarding payment, "Business Day" means a day on which
banks are open for business in the states of New York and Pennsylvania and
carrying out transactions in U.S. Dollars in the relevant place of payment.
Subject to certain limitations set forth in the Indenture, Kranzco reserves
the right at any time to vary or terminate the appointment of the Trustee or any
Paying Agent with or without cause and to appoint another Trustee or additional
or other Paying Agents and to approve any change in the specified offices
through which any Paying Agent acts.
Conversion Rights
The Notes will be convertible, in whole or in part, into Kranzco Common
Shares at the option of the Holder at any time after two years from the
following date of original issuance thereof and prior to the close of business
on the Business Day immediately preceding the maturity date, unless previously
redeemed, at the conversion price stated on the cover page of this Prospectus.
The right to convert Notes called for redemption will terminate at the close of
business on the Business Day immediately preceding the Redemption Date unless
Kranzco defaults in making the payment due on the Redemption Date. The Finns and
Norma Finn have agreed not to convert the Notes into Kranzco Common Shares until
three years from the date of issuance; provided, however, that in the event that
Kranzco issues a notice of redemption relating to the Notes prior the end of
such three-year period, then the Finns and Norma Finn may earlier convert the
Notes issued to them, in accordance with the terms of such Notes. See "Optional
Redemption." Unless the Notes are previously convertible, during the period from
the date Kranzco resolves to take any action that would constitute a Change in
Control (as defined below) until five days prior to the consummation of such
Change in Control Transaction, the holders of the Notes shall have the right to
make an election to convert all or any Notes conditional upon approval of such
Change in Control by the holders entitled to vote on such matter, in which case,
if such Change in Control is approved, conversion of such Notes as to which a
conditional election has been made shall occur upon the later of (i) immediately
prior to such Change in Control, or (ii) the date one year after the date of
original issuance of the Notes. A "Change in Control" shall be deemed to have
occurred upon (i) the merger or consolidation of Kranzco with or into any
entity, unless (A) immediately following such merger or consolidation, more than
50% of the surviving company's issued and outstanding voting securities are held
by the holders of Kranzco's issued and outstanding voting securities immediately
prior to such merger or consolidation and (B) effective provision is made in the
merger documents of the surviving entity or otherwise for the recognition,
preservation and protection of the preferences, conversion and other rights, of
the holders of the Notes, or (ii) the sale, lease, transfer, spin-off, or other
disposal or distribution of all or substantially all of the assets of Kranzco.
The Notes will also be convertible immediately upon an Event of Default;
however, if an Event of Default occurs prior to one year from the date of
original issuance of the Notes, any conversion of such Notes will not be
permitted until one year from the date of original issuance of the Notes, and
then will only be permitted if such Event of Default has not been cured prior to
one year from the date of original issuance of the Notes.
The conversion price will be subject to adjustment upon the occurrence of
certain events, including (i) the payment of dividends (and other distributions)
of Kranzco Common Shares on any class of capital stock of Kranzco; (ii) the
issuance to all holders of Kranzco Common Shares of rights, warrants or options
entitling them to subscribe for or purchase Kranzco Common Shares at less than
the current market price (as defined) thereof; and (iii) subdivisions and
combinations of Kranzco Common Shares. No adjustment of the conversion price
will be required to be made until cumulative adjustments amount to 1% or more of
the conversion price as last adjusted.
For example, if Kranzco declares a one-for-one share split or share
dividend, the conversion price will be adjusted to one-half of the conversion
price prior to the share split or share dividend. Similarly, if Kranzco effects
a reverse split, the conversion price will be proportionately affected. Finally,
if Kranzco makes a
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dividend or other distribution of its Common Shares, the conversion price will
be reduced by multiplying such conversion price by a fraction of which the
numerator shall be the number of Common Shares outstanding plus the number of
Common Shares which the aggregate of the offering price of the total number of
Common Shares so offered for subscription or purchase would purchase at such
current market price and the denominator shall be the number of Common Shares
outstanding plus the number of Common Shares so offered for subscription or
purchase.
In the event that Kranzco distributes rights or warrants (other than those
referred to in clause (ii) of the preceding paragraph) pro rata to holders of
Kranzco Common Shares, so long as any such rights or warrants have not expired
or been redeemed by Kranzco, the Holder of any Note surrendered for conversion
will be entitled to receive upon such conversion, in addition to the Kranzco
Common Shares issuable upon such conversion (the "Conversion Shares"), a number
of rights or warrants to be determined as follows: (i) if such conversion occurs
on or prior to the date for the distribution to the holders of rights or
warrants of separate certificates evidencing such rights or warrants (the
"Distribution Date"), the same number of rights or warrants to which a holder of
a number of Kranzco Common Shares equal to the number of Conversion Shares is
entitled to at the time of such conversion in accordance with the terms and
provisions of and applicable to the rights or warrants, and (ii) if such
conversion occurs after such Distribution Date, the same number of rights or
warrants to which a holder of the number of Kranzco Common Shares into which
such Note was convertible immediately prior to such Distribution Date would have
been entitled on such Distribution Date in accordance with the terms and
provisions of and applicable to the rights or warrants. The conversion price of
the Notes will not be subject to adjustment on account of any declaration,
distribution or exercise of such rights or warrants.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Kranzco Common
Shares are converted into the right to receive other securities, cash or other
property, each Note then outstanding would, without the consent of any Holders,
become convertible only into the kind and amount of securities, cash and other
property receivable upon the transaction by a Holder of the number of Kranzco
Common Shares which would have been received by such Holder immediately prior to
such transaction if such Holder had converted its Note.
Fractional Kranzco Common Shares will not be issued upon conversion, but,
in lieu thereof, Kranzco will pay a cash adjustment based upon market price.
Except as described in this paragraph, no Holder will be entitled, upon
conversion of a Note, to any actual payment or adjustment on account of accrued
and unpaid interest (although such accrued and unpaid interest will be deemed
paid by the appropriate portion of the Kranzco Common Shares received by the
Holders upon such conversion) or on account of dividends on Kranzco Common
Shares issued in connection therewith. Notes surrendered for conversion during
the period from the close of business on any Regular Record Date to the opening
of business on the corresponding Interest Payment Date (except Notes called for
redemption on a Redemption Date within such period between and including such
Regular Record Date and such Interest Payment Date) must be accompanied by
payment to Kranzco of an amount equal to the interest payable on such Interest
Payment Date on the principal amount converted.
If at any time Kranzco makes a distribution of property to its shareholders
that would be taxable to such shareholders as a dividend for federal income tax
purposes (e.g., distributions of evidences of indebtedness or assets of Kranzco,
but generally not stock dividends or rights to subscribe for capital stock) and,
pursuant to the conversion price adjustment provisions of the Indenture, the
conversion price of the Notes is reduced, such reduction may be deemed to be the
receipt of taxable income to Holders of Notes.
In addition, Kranzco may make such reductions in the conversion price as
Kranzco's Board of Directors deems advisable to avoid or diminish any income tax
to holders of Kranzco Common Shares resulting from any dividend or distribution
of stock (or rights to acquire stock) or from any event treated as such for
income tax purposes or for any other reasons.
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Consolidation, Merger and Sale of Assets
The Indenture will provide that Kranzco, without the consent of the
Holders, may consolidate with or merge into any other Person or convey, transfer
or lease its properties and assets substantially as an entirety to any Person or
may permit any Person to consolidate with or merge into, or transfer or lease
its properties substantially as an entirety to, Kranzco, provided that (i) the
successor, transferee or lessee is organized under the laws of any United States
jurisdiction; (ii) the successor, transferee or lessee, if other than Kranzco,
expressly assumes Kranzco's obligations under the Indenture and the Notes by
means of a supplemental indenture entered into with the Trustee; (iii) after
giving effect to the transaction, no Event of Default and no event which, with
notice or lapse of time, or both, would constitute an Event of Default shall
have occurred and be continuing; and (iv) certain other conditions are met.
Under any consolidation by Kranzco with, or merger by Kranzco into, any
other Person or any conveyance, transfer or lease of the properties and assets
of Kranzco substantially as an entirety as described in the preceding paragraph,
the successor resulting from such consolidation or into which Kranzco is merged
or the transferee or lessee to which such conveyance, transfer or lease is made
will succeed to, and be substituted for, and may exercise every right and power
of, Kranzco under the Indenture, and thereafter, except in the case of a lease,
the predecessor (if still in existence) will be released from its obligations
and covenants under the Indenture and the Notes.
Modification of the Indenture
Under the Indenture, with certain exceptions, the rights and obligations of
Kranzco with respect to the Notes and the rights of holders of the Notes may be
modified by Kranzco and the Trustee only with the consent of the holders of at
least a majority in principal amount of the outstanding Notes. However, without
the consent of each holder of Notes affected, an amendment, waiver or supplement
may not (i) reduce the principal of, or rate of interest on, any Notes; (ii)
change the stated maturity date of the principal of, or any installment of
interest on, any Notes; (iii) waive a default in the payment of the principal
amount of, or the interest on, or any premium payable on redemption of, any
Notes; (iv) change the currency for payment of the principal of, or premium or
interest on, any Notes; (v) impair the right to institute suit for the
enforcement of any such payment when due; (vi) reduce the amount of outstanding
Notes necessary to consent to an amendment, supplement or waiver provided for in
the Indenture; or (vii) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or waivers of past defaults, except
as otherwise specified.
Modification and Waiver
The Indenture contains provisions permitting Kranzco and the Trustee, with
the consent of the Holders of not less than a majority in principal amount of
the Outstanding Notes, to enter into one or more supplemental indentures adding
any provisions to or changing in any manner or eliminating any of the provisions
of the Indenture or modifying in any manner the rights of the Holders of the
Notes, except that no such modification or amendment may, without the consent of
the Holders of each of the Outstanding Notes affected thereby, among other
things, (i) change the Stated Maturity of the principal of or any installment of
interest on any Note; (ii) reduce the principal amount thereof or any premium
thereon or the rate of interest thereon; (iii) adversely affect the right of any
Holder to convert any Note as provided in the Indenture; (iv) change the place
of payment where, or the coin or currency in which, the principal of any Note or
any premium or interest thereon is payable; (v) impair the right to institute
suit for the enforcement of any such payment on or with respect to any Note on
or after the Stated Maturity (or, in the case of redemption, on or after the
Redemption Date); (vi) modify the subordination provisions of the Indenture in a
manner adverse to the Holders; (vii) modify the redemption provisions of the
Indenture in a manner adverse to the Holders; (viii) modify the provisions of
the Indenture relating to Kranzco's requirement to offer to repurchase Notes
upon a Change in Control in a manner adverse to the Holders; (ix) reduce the
percentage in principal amount of the Outstanding Notes the consent of whose
Holders is required for any such modification or amendment of the Indenture or
for any waiver of compliance with certain provisions of, or of certain defaults
under, the Indenture; or (x) modify the foregoing requirements.
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The Holders of a majority in principal amount of the Outstanding Notes may,
on behalf of the Holders of all Notes, waive compliance by Kranzco with certain
restrictive provisions of the Indenture. The Holders of a majority in principal
amount of the Outstanding Notes may, on behalf of the Holders of all Notes,
waive any past default under the Indenture and its consequences, except a
default in the payment of the principal of or any premium or interest on any
Note or in respect of a provision which under the Indenture cannot be modified
or amended without the consent of the Holders of each Outstanding Note affected.
Subordination
The payment of the principal of and premium, if any, and interest on the
Notes will, to the extent set forth in the Indenture, be subordinated in right
of payment to the prior payment in full of all Senior Indebtedness. When there
is a payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency or similar
proceedings of Kranzco, the holders of all Senior Indebtedness will first be
entitled to receive payment in full of all amounts due or to become due thereon,
or provision for such payment in money or money's worth, before the Holders will
be entitled to receive any payment in respect of the principal of or premium, if
any, or interest on the Notes. No payments on account of principal of, premium,
if any, or interest on the Notes or on account of the purchase or acquisition of
Notes may be made if there has occurred and is continuing a default in any
payment with respect to Senior Indebtedness or if any judicial proceeding is
pending with respect to any such default. The Notes are also effectively
subordinated in right of payment to the prior payment in full of all
indebtedness of Kranzco's subsidiaries.
By reason of such subordination, in the event of insolvency, Holders of the
Notes and other creditors of Kranzco who are not holders of Senior Indebtedness
may recover less, ratably, than holders of Senior Indebtedness.
"Senior Indebtedness" is defined in the Indenture as the principal of and
premium, if any, and interest on all indebtedness of Kranzco for borrowed money,
other than the Notes, whether outstanding on the date of execution of the
Indenture or thereafter created, incurred, guaranteed or assumed, except such
indebtedness that by the terms of the instrument or instruments by which such
indebtedness was created or incurred expressly provides that it (i) is junior in
right of payment to the Notes or any other indebtedness of Kranzco or (ii) ranks
pari passu in right of payment to the Notes. The term "indebtedness for borrowed
money" when used with respect to Kranzco is defined to mean (a) any obligation
of, or any obligation guaranteed by, Kranzco for the repayment of borrowed
money, whether or not evidenced by bonds, debentures, notes or other written
instruments, (b) all obligations of Kranzco with respect to interest rate
hedging arrangements to hedge interest rates relating to Senior Indebtedness of
Kranzco, (c) any deferred payment obligation of, or any such obligation
guaranteed by, Kranzco for the payment of the purchase price of property or
assets evidenced by a note or similar instrument, and (d) any obligation of, or
any such obligation guaranteed by, Kranzco for the payment of rent or other
amounts under a lease of property or assets, which obligation is required to be
classified and accounted for as a capitalized lease on the balance sheet of
Kranzco under generally accepted accounting principles.
At March 31, 1998, Senior Indebtedness and indebtedness of Kranzco and
Kranzco's Subsidiaries was approximately $257,201,000. Kranzco and its
Subsidiaries expect from time to time to incur additional indebtedness. The
Indenture does not limit or prohibit the incurrence of additional Senior
Indebtedness or additional indebtedness of Kranzco or its Subsidiaries.
Defeasance
The Indenture will provide that (i) if applicable, Kranzco will be
discharged from any and all obligations in respect of the Outstanding Notes
(except for certain obligations to register the transfer or exchange of Notes,
to replace stolen, lost or mutilated Notes, to provide for conversion of the
Notes, to maintain Paying Agents and hold moneys for payment in trust and to
repurchase Notes in the event of a Change in Control) or (ii) if applicable,
Kranzco may decide not to comply with certain restrictive covenants, but not
including the obligation
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to provide for conversion of the Notes or repurchase Notes in the event of a
Change in Control, and that such decision will not be deemed to be an Event of
Default under the Indenture and the Notes, in either of case (i) or (ii) upon
irrevocable deposit with the Trustee, in trust, of money and/or U.S. Government
Obligations that will provide money in an amount sufficient in the opinion of a
nationally recognized firm of independent public accountants expressed in
written opinions thereof to pay the principal of, premium, if any, and each
installment of interest on the Outstanding Notes. With respect to clause (ii),
the obligations under the Indenture other than with respect to such covenants
and the Events of Default other than the Event of Default relating to such
covenants will remain in full force and effect. Such trust may only be
established if, among other things (a) with respect to clause (i), Kranzco has
delivered to the Trustee an Opinion of Counsel to the effect that Kranzco has
received from, or there has been published by, the U.S. Internal Revenue Service
a ruling or there has been a change in law which, in the opinion of counsel to
Kranzco, provides that Holders will not recognize gain or loss for federal
income tax purposes as a result of such deposit, defeasance and discharge and
will be subject to federal income tax on the same amount, in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred; or, with respect to clause (ii), Kranzco has
delivered to the Trustee an Opinion of Counsel to the effect that the Holders
will not recognize gain or loss for federal income tax purposes as a result of
such deposit and defeasance and will be subject to federal income tax on the
same amount, in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred; (b) no Event of Default
(or event that with notice or lapse of time, or both, would constitute an Event
of Default) shall have occurred or be continuing; (c) Kranzco has delivered to
the Trustee an Opinion of Counsel to the effect that such deposit shall not
cause the Trustee or the trust so created to be subject to the Investment
Company Act of 1940, as amended; and (d) certain other customary conditions
precedent are satisfied.
Events of Default
An Event of Default is defined in the Indenture to be a (i) default in the
payment of any interest upon any of the Notes for 30 days or more after such
payment is due, whether or not such payment is prohibited by the subordination
provisions of the Indenture; (ii) default in the payment of the principal of and
premium, if any, on any of the Notes when due, whether or not such payment is
prohibited by the subordination provisions of the Indenture; (iii) default by
Kranzco in the performance or breach of any of its other covenants in the
Indenture which will not have been remedied by the end of a 60-day period after
written notice to Kranzco by the Trustee or to Kranzco and the Trustee by the
Holders of at least 50% in principal amount of the Outstanding Notes; (iv) the
default in the payment of principal or interest when due which extends beyond
any stated period of grace applicable thereto, or an acceleration for any other
reason, of the maturity of any indebtedness of Kranzco, with an aggregate
principal amount in excess of $30 million, and (v) certain events of bankruptcy,
insolvency or reorganization of Kranzco.
The Indenture will provide that if an Event of Default (other than of a
type referred to in clause (v) of the preceding paragraph) shall have occurred
and is continuing, either the Trustee or the Holders of at least 50% in
principal amount of the Outstanding Notes may declare the principal amount of
all Notes to be immediately due and payable. Such declaration may be rescinded
if certain conditions are satisfied. If an Event of Default of the type referred
to in clause (v) of the preceding paragraph shall have occurred, the principal
amount of the Outstanding Notes shall automatically become immediately due and
payable.
The Indenture will also provide that the Holders of not less than a
majority in principal amount of the Outstanding Notes may direct the time,
method and place of conducting any proceedings for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee, provided
that such direction is not in conflict with any rule of law or with the
Indenture. The Trustee may take any other action deemed proper by it that is not
inconsistent with such direction.
The Indenture contains provisions entitling the Trustee, subject to its
duty during the continuance of an Event of Default to act with the required
standard of care, to be indemnified by the Holders before proceeding to exercise
any right or power under the Indenture at the request of the Holders.
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No Holder will have any right to institute any proceeding with respect to
the Indenture or for any remedy thereunder, unless such Holder shall have
previously given to the Trustee written notice of a continuing Event of Default
and unless the Holders of at least 50% in aggregate principal amount of the
Outstanding Notes shall have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding as the Trustee on behalf
of the holders, and the Trustee shall not have received from the Holders of a
majority in aggregate principal amount of the outstanding Notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 30 days. However, such limitations do not apply to a suit
instituted by a Holder of a Note for enforcement of payment of the principal of
and premium, if any, or interest on such Note on or after the respective due
dates expressed in such Note or of the right to convert such Note in accordance
with the Indenture.
The Indenture requires Kranzco to file annually with the Trustee a
certificate, executed by a designated officer of Kranzco, stating to the best of
his knowledge that Kranzco is not in default under certain covenants under the
Indenture or, if he has knowledge that Kranzco is in such default, specifying
such default.
Information Concerning the Trustee
The Trustee under the Indenture will be United States Trust Company of New
York.
The Trustee will act as registrar and transfer agent for the Notes.
Registration of transfers of the Notes will be effected without charge by or on
behalf of Kranzco, but upon payment of any tax or other governmental charges
that may be imposed in connections with any transfer or exchange.
Following the offering hereunder, the Trustee shall have and be subject to
all the duties and responsibilities specified in the Indenture. Subject to such
provisions, the Trustee is under no obligation to exercise any of the powers
vested in it by the Indenture at the request of any holder of Notes, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities which might be incurred thereby. The Trustee is not required to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of its duties if the Trustee reasonably believes that repayment
or adequate indemnity is not reasonably assured to it.
Governing Law
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York.
Additional Information
Anyone who receives this Offering Memorandum may obtain a copy of the
Indenture without charge by writing to Kranzco Realty Trust, 128 Fayette Street,
Conshohocken, Pennsylvania 19428, telephone number: (610) 941-9292, Attention:
Robert H. Dennis.
MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS
The following general discussion summarizes certain of the material U.S.
federal income tax aspects of the acquisition, ownership, conversion and
disposition of the Notes or the Kranzco Common Shares acquired in conversion of
the Notes. This discussion is a summary for general information only and does
not consider all aspects of U.S. federal income tax that may be relevant to the
acquisition, ownership, conversion and disposition of the Notes or the Kranzco
Common Shares acquired in conversion of the Notes by an NAI Stockholder in light
of such Stockholder's personal circumstances.
This discussion is limited to the U.S. federal income tax consequences
relevant to an NAI Stockholder receiving Notes pursuant to this offering, and
who is (i) a citizen or resident (as defined in Section 7701(b)(1)
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of the Code) of the United States, (ii) treated as a domestic corporation or a
domestic partnership, or (iii) an estate or trust other than a "foreign estate"
or "foreign trust" as defined in Section 7701(a)(31) of the Code (a "U.S.
Holder"). This discussion does not address the tax consequences to a Holder that
is not a U.S. Holder. This discussion also does not address the U.S. federal
income tax consequences of the acquisition, the ownership, conversion or
disposition of the Notes or Kranzco Common Shares not held as capital assets
within the meaning of Section 1221 of the Code, or the U.S. federal income tax
consequences to NAI Stockholders subject to special treatment under the U.S.
federal income tax laws, such as dealers in securities or foreign currency,
tax-exempt entities, banks, thrift institutions, insurance companies or other
financial institutions, persons that hold the Notes or the Kranzco Common Shares
as part of a "straddle," a "hedge" against currency risk or a "conversion
transaction," persons that have a "functional currency" other than the U.S.
dollar, and investors in pass-through entities. Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed.
This discussion is based on the Code, existing and proposed regulations
thereunder, and current administrative rulings and court decisions. All the
foregoing is subject to change, possibly on a retroactive basis, and any such
change could affect the continuing validity of this discussion.
EACH NAI STOCKHOLDER CONSIDERING THE ACQUISITION OF A NOTE IS STRONGLY
URGED TO CONSULT ITS OWN TAX ADVISOR CONCERNING THE APPLICATION OF FEDERAL
INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION, TO ITS PARTICULAR SITUATION. THE CONTENTS OF THIS PROSPECTUS ARE
NOT TO BE CONSTRUED AS LEGAL, BUSINESS OR TAX ADVICE. EACH NAI STOCKHOLDER
SHOULD CONSULT ITS OWN ATTORNEY, BUSINESS ADVISOR AND/OR TAX ADVISOR AS TO
LEGAL, BUSINESS OR TAX ADVICE.
Federal Income Taxation of the Exchange Offer
General
The exchange by an NAI Stockholder of its NAI Shares for Notes pursuant to
the Exchange Offer is intended to qualify as an installment sale, as described
below, unless such NAI Stockholder expressly makes a timely election to have the
installment sale rules not apply. If such an election is made, the exchange will
constitute a taxable sale and the electing NAI Stockholder will recognize (i) a
capital gain measured by the excess of the Offer Consideration received over its
adjusted tax basis in the NAI Shares tendered, or (ii) a capital loss measured
by the excess of its adjusted tax basis in the NAI Shares tendered over the
Offer Consideration received. In general, the Offer Consideration will equal the
fair market value of the Notes received, in the case of a cash method taxpayer,
and will equal the face amount of the Notes received, in the case of an accrual
method taxpayer.
The remainder of this tax discussion assumes that an election out of the
installment method will not be made. In the absence of an election, the exchange
is intended to qualify for installment sale treatment. In general, installment
sale treatment will be available provided, among other things, that (i) the NAI
Shares are not "traded on an established securities market," and (ii) the Notes
will not be treated as being "readily tradable in an established securities
market," as those terms are used in Section 453 of the Code. The Notes are not
negotiable and are not transferable except upon death of a holder in accordance
with the laws of descent and distribution or in connection with a gift without
consideration. Assuming an election out of the installment method is not made
and the requirements of clauses (i) and (ii) above are satisfied, in the opinion
of Robinson Silverman Pearce Aronsohn & Berman LLP, the receipt of Notes by an
NAI Stockholder in exchange for its NAI Shares will qualify for installment sale
reporting.
Under the installment method, a taxpayer will generally recognize gain
during each taxable year equal to the product of (i) the amount of cash received
(other than interest payments), if any, multiplied by (ii) the "gross profit
percentage." The taxpayer's "gross profit percentage" will generally be equal to
the product of (i) the total gain to be recognized by the taxpayer, divided by
(ii) the total consideration the taxpayer will receive for the property sold.
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Interest payable on a Note will be taxable to an NAI Stockholder as
ordinary interest income either at the time it accrues or is received, depending
on such NAI Stockholder's method of accounting for federal income tax purposes.
Certain transactions can accelerate the recognition of gain under the
installment sale method, including (i) a redemption of the Notes by Kranzco,
(ii) any disposition (including a gift) or pledge of the Notes, or (iii) certain
grants of a security interest therein. In addition, the conversion of a Note is
treated as a taxable disposition, and gain (or loss) is measured by the excess
of the fair market value of the Kranzco Common Shares received in the conversion
over the adjusted tax basis in the Notes.
Additionally, an NAI Stockholder must pay interest on its deferred tax
liability to the extent that it holds installment obligations with an aggregate
face amount in excess of $5 million and that arose during and are outstanding as
of the close of the taxable year. If applicable, the NAI Stockholder must
continue to pay interest on the deferred tax liability (as may be reduced from
time to time) for each subsequent taxable year in which an amount of the
installment obligation remains outstanding.
An NAI Stockholder's capital gain or loss will be long term if the NAI
Shares have been held more than one year, otherwise the gain or loss will be
short term. Currently, for individual taxpayers, net long term capital gains
reduced by net short term capital losses are taxed at a maximum 20% federal
income tax rate, provided the NAI Shares have been held for more than 12 months.
Net short term capital gains are taxed at the same rate as ordinary income. An
individual may deduct only $3,000 of net capital losses (net of capital gains)
per year.
Deemed Dividends
Section 305 of the Code treats as a distribution taxable as a dividend (to
the extent of the issuing corporation's current or accumulated earnings and
profits) certain actual or constructive distributions of stock with respect to
stock or convertible securities. Under U.S. Treasury regulations, an adjustment
in the conversion price of a Note, or the failure to make such an adjustment,
may, under certain circumstances, be treated as a constructive dividend to
holders of Notes. Generally, an NAI Stockholder's tax basis in a Note will be
increased by the amount of any such constructive dividend.
Conversion of Notes into Kranzco Common Shares
As described above, the conversion of the Notes into Kranzco Common Shares
is a taxable event. The tax basis for the Kranzco Common Shares received upon
conversion will be equal to the tax basis of the Notes converted into Kranzco
Common Shares plus any gain recognized in the conversion, and the holding period
of the Kranzco Common Shares will begin on the day following the date of
conversion.
Backup Withholding
A U.S. Holder of Notes or Kranzco Common Shares may be subject to "backup
withholding" at a rate of 31% with respect to certain "reportable payments,"
including interest payments, dividend payments and, under certain circumstances,
principal payments on the Notes or proceeds from the disposition of Kranzco
Common Shares. These backup withholding rules apply if the U.S. Holder, among
other things, (i) fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest or dividends, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN furnished is the correct number and that such U.S. Holder
is not subject to backup withholding. A U.S. Holder who does not provide Kranzco
with its correct TIN also may be subject to penalties. Any amount withheld from
a payment to a U.S. Holder under the backup withholding rules is creditable
against the U.S. Holder's federal income tax liability, provided the required
information is furnished to the Service. Backup withholding will not apply,
however, with respect to payments made to certain holders, including
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corporations and tax-exempt organizations, provided their exemption from backup
withholding is properly established.
Kranzco will report to the U.S. Holders of Notes and Kranzco Common Shares
and to the Service the amount of any "reportable payments" for each calendar
year and the amount of tax withheld, if any, with respect to such payments.
Federal Income Taxation of Kranzco
General
Kranzco has elected to be taxed as a REIT under Sections 856 through 860 of
the Code, commencing with its taxable year ended December 31, 1992. In the
opinion of Robinson Silverman Pearce Aronsohn & Berman LLP, commencing with
Kranzco's taxable year ended December 31, 1992, it was organized in conformity
with the requirements for qualification as a REIT, and its method of operation
enabled it to meet the requirements for qualification and taxation as a REIT
under the Code. Kranzco intends to continue to operate in such a manner, but no
assurance can be given that it will operate in a manner so as to qualify or
remain qualified. It must be emphasized that this opinion is based on various
assumptions and is conditioned upon certain representations made by Kranzco as
to factual matters. In addition, this opinion is based upon the factual
representations made by the management of Kranzco concerning its business and
properties. Moreover, such qualification and taxation as a REIT depends upon
Kranzco's ability to meet, through actual annual operating results, distribution
levels, diversity of share ownership, and the various other qualification tests
imposed under the Code discussed below, the results of which have not been and
will not be reviewed by Robinson Silverman Pearce Aronsohn & Berman LLP.
Accordingly, no assurance can be given that the actual results of Kranzco's
operation for any one taxable year will satisfy such requirements. See "Material
United States Federal Tax Considerations--Failure to Qualify as a Real Estate
Investment Trust."
If Kranzco qualifies for tax treatment as a REIT, it will generally not be
subject to Federal corporate taxation on its net income to the extent currently
distributed to its shareholders. This substantially eliminates the "double
taxation" (at both the corporate and stockholder levels) that typically results
from the use of corporate investment vehicles.
Kranzco will be subject to Federal income tax, however, as follows: First,
Kranzco will be taxed at regular corporate rates on its undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, Kranzco may be subject to the "alternative minimum tax" to the
extent that tax exceeds its regular tax. Third, if Kranzco has net income from
the sale or other disposition of "foreclosure property" that is held primarily
for sale to customers in the ordinary course of business or other nonqualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, any net income that Kranzco has 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 and, effective for Kranzco's
taxable years beginning January 1, 1998 and thereafter, other than dispositions
of property that occur due to an involuntary conversion) will be subject to a
100% tax. Fifth, if Kranzco should fail to satisfy either the 75% or 95% gross
income tests (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 an amount equal to (a) the gross income
attributable to the greater of the amount by which Kranzco fails the 75% or 95%
test, multiplied by (b) a fraction intended to reflect Kranzco's profitability.
Sixth, if Kranzco fails to distribute during each year at least the sum of (i)
85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain
net income for such year, and (iii) any undistributed taxable income from
preceding periods, Kranzco will be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed. Seventh, if
Kranzco acquires any asset from a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in certain transactions in which the basis
of the asset in the hands of Kranzco is determined by reference to the basis of
the asset (or any other property) in the hands of the C corporation, and Kranzco
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recognizes gain on the disposition of such asset during the 10-year period (the
"Recognition Period") beginning on the date on which such asset was acquired by
Kranzco, then, to the extent of the excess, if any, of the fair market value
over the adjusted basis of any such asset as of the beginning of the Recognition
Period, such gain will be subject to tax at the highest regular corporate rate.
Requirements for Qualification
A REIT is defined in the Code 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 860 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) not more than 50% in value of the outstanding stock of which is
owned during the last half of each taxable year, directly or indirectly, by or
for five or fewer individuals (as defined in the Code to include certain
entities) (the "Five or Fewer Requirement"); and (7) which meets certain income
and asset tests described below. Conditions (1) to (4), inclusive, must be met
during the entire taxable year and condition (5) must be met 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. For purposes of conditions (5) and (6), pension
funds and certain other tax-exempt entities are treated as individuals, subject
to a "look-through" exception in the case of condition (6).
Kranzco believes that it has satisfied the share ownership requirements set
forth in (5) and (6) above. In addition, Kranzco's Declaration of Trust provides
restrictions regarding the transfer of its NAI Shares which are intended to
assist Kranzco in continuing to satisfy the shares ownership requirements
described in (5) and (6) above.
Effective for Kranzco's taxable years commencing on and after January 1,
1998, if Kranzco complies with regulatory rules pursuant to which it is required
to send annual letters to certain of its shareholders requesting information
regarding the actual ownership of its stock, but does not know, or exercising
reasonable diligence would not have known, whether it failed to meet the Five or
Fewer Requirement, Kranzco will be treated as having met the requirement
described in (6) above. If Kranzco were to fail to comply with these regulatory
rules for any year, it would be subject to a $25,000 penalty. If Kranzco's
failure to comply was due to intentional disregard of the requirements, the
penalty is increased to $50,000. However, if Kranzco's failure to comply was due
to reasonable cause and not willful neglect, no penalty would be imposed.
Kranzco owns and operates a number of properties through wholly owned
subsidiaries. Code Section 856(i) provides that a corporation which is a
"qualified REIT subsidiary" shall not be treated as a separate corporation, and
all assets, liabilities, and items of income, deduction, and credit of a
"qualified REIT subsidiary" shall be treated as assets, liabilities and such
items (as the case may be) of the REIT. Thus, in applying the requirements
described herein, Kranzco's "qualified REIT subsidiaries" will be ignored, and
all assets, liabilities and items of income, deduction, and credit of such
subsidiaries will be treated as assets, liabilities and items of Kranzco.
Income Tests
Effective for Kranzco's taxable years beginning on and after January 1,
1998, there are two percentage tests relating to the sources of Kranzco's gross
income. First, at least 75% of Kranzco's gross income (excluding gross income
from certain sales of property held primarily for sale and from discharge of
indebtedness) must be directly or indirectly derived each taxable year from
investments relating to real property or mortgages on real property or certain
temporary investments. Second, at least 95% of Kranzco's gross income (excluding
gross income from certain sales of property held primarily for sale and from
discharge of indebtedness) must be directly or indirectly derived each taxable
year from any of the sources qualifying for the 75% test and from dividends,
interest, and gain from the sale or disposition of stock or securities. In
applying these tests, if Kranzco invests in a partnership, Kranzco will be
treated as realizing its share of the income and bearing its share of the loss
of
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the 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 Kranzco will qualify as "rents from real property" for
purposes of satisfying the gross income tests for a REIT 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, although rents generally will not
be excluded merely because they are based on a fixed percentage of receipts or
sales. Second, 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, also directly or
constructively owns 10% or more of such 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 to qualify as "rents from real property," the REIT
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an independent contractor
from whom the REIT derives no income; provided, however, Kranzco may directly
perform certain services customarily furnished or rendered in connection with
the rental of real property in the geographic area in which the property is
located other than services which are considered rendered to the occupant of the
property. Kranzco will, in a timely manner, hire independent contractors from
whom it derives no revenue to perform such services, except that Kranzco will
directly perform services under certain of its leases with respect to which it
will receive an opinion of counsel or otherwise satisfy itself that its
performance of such services will not cause the rents received with respect to
such leases to fail to qualify as "rents from real property." Kranzco has
represented that each of the above requirements has been satisfied. In addition,
for its 1998 taxable year and thereafter, Kranzco is permitted to receive up to
1% of the gross income from each property from the provision of non-customary
services and still treat all other amounts received from such property as "rents
from real property."
The term "interest" generally does not include any amount if the
determination of such amount depends in whole or in part on the income or
profits of any person, although an amount generally will not be excluded from
the term "interest" solely by reason of being based on a fixed percentage of
receipts or sales.
If Kranzco 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 eligible for relief under certain provisions of the Code. These relief
provisions will be generally available if Kranzco's failure to meet such tests
was due to reasonable cause and not due to willful neglect, Kranzco attaches a
schedule of the sources of its income to its return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It is
not now possible to determine the circumstances under which Kranzco may be
entitled to the benefit of these relief provisions. If these relief provisions
apply, a 100% tax is imposed on the net income attributable to the greater of
the amount by which Kranzco failed the 75% test or the 95% test.
Asset Tests
At the close of each quarter of its taxable year, Kranzco must also satisfy
several tests relating to the nature and diversification of its assets. First,
at least 75% of the value of Kranzco's total assets must be represented by real
estate assets, cash, cash items (including receivables arising in the ordinary
course of Kranzco's operation) and government securities. In addition, not more
than 25% of the value of Kranzco's total assets may be represented by securities
other than those includible in the 75% asset class. Moreover, of the investments
included in the 25% asset class, the value of any one issuer's securities owned
by Kranzco may not exceed 5% of the value of Kranzco's total assets. Finally, of
the investments included in the 25% asset class, Kranzco may not own more than
10% of any one issuer's outstanding voting securities.
Annual Distribution Requirements
Kranzco, in order to avoid being taxed as a regular corporation, is
required to make distributions (other than capital gain distributions) to its
shareholders which qualify for the dividends paid deduction in an amount at
least equal to (A) the sum of (i) 95% of Kranzco's "REIT taxable income"
(computed without regard to the
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dividends paid deduction and Kranzco's net capital gain) and (ii) 95% of the
after-tax net income, if any, from foreclosure property, minus (B) a portion of
certain items of non-cash income. Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
Kranzco timely files its tax return for such year and if paid on or before the
first regular distribution payment after such declaration. To the extent that
Kranzco 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 thereon at regular corporate tax rates. Finally, as discussed
above, Kranzco may be subject to an excise tax if it fails to meet certain other
distribution requirements. Kranzco intends to make timely distributions
sufficient to satisfy these annual distribution requirements.
It is possible that Kranzco, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement, or to
distribute such greater amount as may be necessary to avoid income and excise
taxation, due to, among other things, (a) timing differences between (i) the
actual receipt of income and actual payment of deductible expenses and (ii) the
inclusion of such income and deduction of such expenses in arriving at taxable
income of Kranzco, or (b) the payment of severance benefits that may not be
deductible to Kranzco. In the event that such timing differences occur, Kranzco
may find it necessary to arrange for borrowings or, if possible, pay taxable
share distributions in order to meet the distribution requirement.
Under certain circumstances, in the event of a deficiency determined by the
IRS, Kranzco may be able to rectify a resulting failure to meet the distribution
requirement for a year by paying "deficiency dividends" to shareholders in a
later year, which may be included in Kranzco's deduction for distributions paid
for the earlier year. Thus, although Kranzco may be able to avoid being taxed on
amounts distributed as deficiency distributions, it will be required to pay
interest based upon the amount of any deduction taken for deficiency
distributions.
Failure to Qualify as a Real Estate Investment Trust
Kranzco's election to be treated as a REIT will be automatically terminated
if Kranzco fails to meet the requirements described above. In that event,
Kranzco will be subject to tax (including any applicable minimum tax) on its
taxable income at regular corporate rates, and distributions to shareholders
will not be deductible by Kranzco. All distributions to shareholders will be
taxable as ordinary income to the extent of current and accumulated earnings and
profits allocable to such distributions and will be eligible for the 70%
dividends received deduction for corporate shareholders (although special rules
apply in the case of any "extraordinary dividend" as defined in Code Section
1059). Kranzco will not be eligible again to elect REIT status until the fifth
taxable year which begins after the year for which Kranzco's election was
terminated unless Kranzco did not willfully fail to file a timely return with
respect to the termination taxable year, inclusion of incorrect information in
such return was not due to fraud with intent to evade tax, and Kranzco
establishes that failure to meet the requirement was due to reasonable cause and
not willful neglect. Failure to qualify for even one year could result in
Kranzco incurring substantial indebtedness (to the extent borrowings are
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
Federal Income Taxation of Shareholders
General
So long as Kranzco qualifies for taxation as a REIT, distributions with
respect to its shares of beneficial interest (the "Kranzco Shares") made out of
current or accumulated earnings and profits allocable thereto (and not
designated as capital gain dividends) will be includible by the shareholders as
ordinary income for Federal income tax purposes. For this purpose, the current
and accumulated earnings and profits of Kranzco will be allocated first to
distributions with respect to Series A-1 Preferred Shares, Series B Preferred
Shares, Series C Preferred Shares, Series D Preferred Shares and then to
distributions with respect to Kranzco Common Shares. None of these distributions
will be eligible for the dividends received deduction for corporate
shareholders. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent
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they do not exceed Kranzco's actual net capital gain for the taxable year)
without regard to the period for which the shareholder has held his shares.
Recent legislation reduced the holding period for capital gains to be taxed at a
maximum 20% rate from more than 18 months to more than 12 months. Based on that
change it is expected that for a U.S. shareholder who is an individual or an
estate or trust, such capital gain dividends generally will be taxable at the
20% rate applicable to gains from the sale of capital assets held for more than
one year except to the extent Kranzco designates the capital gain dividend as a
25% rate distribution based on certain IRS guidelines. Corporate shareholders
may be required to treat up to 20% of certain capital gain dividends as ordinary
income.
Effective for Kranzco's taxable years beginning on and after January 1,
1998, if Kranzco elects to retain and pay income tax on any net long term
capital gain, domestic shareholders of Kranzco would include in their income as
long term capital gain their proportionate share of such net long term capital
gain. A domestic shareholder would also receive a refundable tax credit for such
shareholder's proportionate share of the tax paid by Kranzco on such retained
capital gains and an increase in its basis in the shares of Kranzco in an amount
equal to the shareholder's includible capital gains less its share of the tax
deemed paid.
Distributions in excess of current or accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Kranzco Shares. Shareholders will be
required to reduce the tax basis of their Kranzco Shares by the amount of such
distributions until such basis has been reduced to zero, after which such
distributions will be taxable as capital gain (ordinary income in the case of a
shareholder who holds his Kranzco Shares as a dealer). The tax basis as so
reduced will be used in computing the capital gain or loss, if any, realized
upon sale of the Kranzco Shares. Any loss upon a sale or exchange of Kranzco
Shares by a shareholder who held such Kranzco Shares for six months or less
(after applying certain holding period rules) will generally be treated as a
long-term capital loss to the extent such shareholder previously received
capital gain distributions with respect to such Kranzco Shares.
Shareholders may not include in their individual Federal income tax returns
any net operating losses or capital losses of Kranzco. In addition, any
distribution declared by Kranzco in October, November or December of any year
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by Kranzco and received by the shareholder on December
31 of such year, provided that the distribution is actually paid by Kranzco no
later than January 31 of the following year. Kranzco may be required to withhold
a portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to Kranzco.
Upon the sale or exchange of Kranzco Shares to or with a person other than
Kranzco or a sale or exchange of Kranzco Shares with Kranzco to the extent not
taxable as a dividend, a holder will recognize capital gain or loss equal to the
difference between the amount realized on such sale or exchange and the holder's
adjusted tax basis in such shares. Any capital gain or loss recognized will
generally be treated capital gain or loss (taxable at a maximum rate of 20%) if
the holder held such shares for more than one year.
Backup Withholding and Information Reporting
A noncorporate holder of Kranzco Shares who is not otherwise exempt from
backup withholding may be subject to backup withholding at the rate of 31% with
respect to distributions paid on, or the proceeds of a sale, exchange or
redemption of, the Kranzco Shares. Generally, backup withholding applies only
when the taxpayer (i) fails to furnish or certify his correct taxpayer
identification number to the payor in the manner requested, (ii) is notified by
the IRS that he has failed to report payments of interest or dividends properly,
or (iii) under certain circumstances, fails to certify that he has not been
notified by the IRS that he is subject to backup withholding for failure to
report interest or dividend payments. Any amounts withheld under the backup
withholding rules from a payment to a holder will be allowed as a credit against
the holder's federal income tax liability or as a refund, provided that the
required information is furnished to the IRS. Holders should consult their own
tax advisors regarding their qualification for exemption from backup withholding
and the procedure for obtaining any applicable exemption.
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State, Local and Foreign Taxation
Kranzco and its shareholders may be subject to state, local or foreign
taxation in various state, local or foreign jurisdictions, including those in
which it or they transact business or reside. Such state, local or foreign
taxation may differ from the Federal income tax treatment described above.
Consequently, NAI Stockholders should consult their own tax advisors regarding
the effect of state, local and foreign tax laws on an investment in Kranzco.
COMPARISON OF RIGHTS OF HOLDERS
General
Certain differences exist between the rights of holders of the Notes and
the rights of holders of NAI Delaware Shares and between the rights of holders
of NAI Delaware Shares and the rights of holders of Kranzco Common Shares. This
comparison reviews the rights of holders of NAI Delaware Shares rather than NAI
Maryland Shares because if the Exchange Offer is not consummated NAI will not
effect the Reincorporation Merger and the NAI Delaware Shares will not be
converted into NAI Maryland Shares. See "Description of Securities of NAI,"
"Certain Provisions of Maryland Law and of NAI Maryland's Charter and Bylaws"
and "Risk Factors--Institution of Anti-takeover Measures; Anti-takeover Effect
of Certain Provisions of Maryland Law and of NAI Maryland's Charter and Bylaws."
The Notes are unsecured debt obligations of Kranzco and the Note holders'
rights are governed by the terms of the Notes and the Indenture. NAI Shares are
equity securities of NAI and the rights of holders of such shares are governed
by the Amended and Restated Certificate of Incorporation (the "Certificate") and
the Bylaws of NAI Delaware and the Delaware General Corporation Law (the
"DGCL"). Kranzco Common Shares are equity securities of Kranzco and the rights
of holders of such shares are governed by Title 8 ("Title 8") and certain other
provisions of the Annotated Code of Maryland, the Declaration of Trust and the
Kranzco Bylaws.
The DGCL is a general corporation statute dealing with a wide variety of
matters, including election, tenure, duties and liabilities of directors and
officers; dividends and other distributions; meetings of stockholders; and
extraordinary actions, such as amendments to the certificate of incorporation,
mergers, sales of all or substantially all of the assets and dissolution. Title
8 covers some of the same matters covered by the DGCL, including liabilities of
the trust, shareholders, trustees and officers; amendments of the declaration of
trust; and mergers of a Maryland REIT with other entities. There are, however,
many matters that are addressed in the DGCL that are not addressed by Title 8,
and it is a general practice for a Maryland REIT such as Kranzco to address some
of these matters in its declaration of trust or bylaws.
The discussion of the comparative rights of holders of NAI Shares, holders
of Kranzco Common Shares and holders of the Notes set forth below does not
purport to be complete and is subject to and qualified in its entirety by
reference to the DGCL and Title 8 and also to the Certificate and the Bylaws,
the Declaration of Trust, the Kranzco Bylaws and the Notes and the Indenture.
Voting Rights
Each NAI Share entitles the holder thereof to one vote on all matters
submitted to a vote of holders of NAI Shares, including the election of
directors. No action to be taken by NAI requires approval by the affirmative
vote of the holders of greater than a majority of the NAI Shares entitled to
vote on the matter, although certain matters also require the approval of
holders of two-thirds of the shares of Series A Redeemable Convertible Preferred
Stock of NAI.
Each Kranzco Common Share entitles the holder thereof to one vote on all
matters submitted to a vote of holders of Kranzco Common Shares, including the
election of trustees. The following actions must be approved by the affirmative
vote of the holders of at least two-thirds of the outstanding Kranzco Common
Shares:
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certain amendments to the Declaration of Trust; removal of trustees from the
Kranzco Board; merging Kranzco into another entity, consolidating Kranzco with
one or more other entities into a new entity or selling or otherwise disposing
of all or substantially all of the assets of Kranzco. No other action to be
taken by Kranzco requires approval by the affirmative vote of the holders of
greater than a majority of the outstanding Kranzco Common Shares, although
certain matters also require the approval of holders of Kranzco Preferred
Shares.
Neither Title 8 nor the Declaration of Trust entitles the holders of the
Notes to any vote on any matter submitted to a vote of the holders of Kranzco
Common Shares. See "Description of Notes -- Consolidation, Merger and Sale of
Assets."
Standard of Conduct for Directors and Trustees
Under Delaware law, the standards of conduct for directors have developed
through written opinions of the Delaware courts in cases decided by them.
Generally, directors of Delaware corporations are subject to a duty of loyalty,
a duty of care and a duty of candor to the shareholders of the corporation. The
duty of loyalty has been said to require directors to refrain from self-dealing.
According to the Delaware Supreme Court, the duty of care requires "directors .
. . in managing the corporate affairs . . . to use that amount of care which
ordinarily careful and prudent men would use in similar circumstances" and the
duty of candor requires directors "to disclose fully and fairly all material
information within the Board's control when it seeks shareholder action." Later
case law has established "gross negligence" as the standard for recovery of
money damages for violations of the duty of care in the process of
decision-making by directors of Delaware corporations.
Under Title 8, the trustees of Kranzco owe no duties to the holders of the
Notes.
Under Maryland law, the standards of conduct for directors of corporations
are governed by statute. The MGCL requires a director of a Maryland corporation
to perform his duties in good faith, with a reasonable belief that his actions
are in the best interests of the corporation and with the care of an ordinarily
prudent person in a like position under similar circumstances. Title 8 does not
contain a similar provision concerning the standard of conduct for trustees of a
Maryland REIT, but Maryland courts may look to Maryland corporation law in
determining the appropriate standards for trustees.
Dividends and Other Distributions
Holders of NAI Shares are entitled to distributions if, as and when
declared by the NAI Board. NAI has never paid any cash dividends on the NAI
Shares and has no present intention to declare or pay any cash dividends other
than as required by the terms of any existing or future outstanding shares of
preferred stock of NAI. Dividends may only be paid out of the surplus of NAI or,
if there is no surplus, out of net profits for the year in which the dividend is
declared and/or the preceding fiscal year.
Holders of Kranzco Common Shares are entitled to distributions if, as and
when declared by the Kranzco Board. Kranzco currently pays a quarterly cash
distribution of $.48 per Kranzco Common Share (which, on an annual basis, equals
$1.92 per Kranzco Common Share). However, future distributions are at the
discretion of the Kranzco Board. Under Title 8 and the Declaration of Trust,
there are no limits on the payment of dividends or other distributions on the
Kranzco Common Shares similar to the limits in the DGCL.
The Notes will bear interest at a rate of 6% per year from the date of
original issuance, payable quarterly, but holders of the Notes are not entitled
to receive any other distributions from Kranzco prior to conversion. See
"Description of Notes -- General."
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Restrictions on Transfer
There are no restrictions on the transferability of NAI Shares under the
DGCL, the Certificate or the Bylaws.
The Declaration of Trust restricts the transferability of Kranzco Common
Shares. The Declaration of Trust, subject to certain exceptions, authorizes the
Kranzco Board to take such actions as are necessary and desirable to preserve
its qualification as a REIT and to limit any person (other than (i) Norman
Kranzdorf and Marvin Williams, (ii) Leonard Mandor, Robert Mandor and certain of
their affiliates and (iii) certain other persons approved by the Kranzco Board,
in its discretion, provided that such approval will not result in the
termination of Kranzco's status as a REIT) to direct or indirect ownership of
9.8% (the "Ownership Limit") of the lesser of the number or value of the
outstanding Kranzco Shares. The Ownership Limit may delay, defer or prevent a
transaction or a change in control of Kranzco that might involve a premium price
for the Kranzco Common Shares or otherwise be in the best interest of the
shareholders of Kranzco.
The Notes are not negotiable and are not transferable except upon death of
a holder in accordance with the laws of descent and distribution or in
connection with a gift without consideration.
Amendment of Bylaws
The Bylaws may be amended by the NAI Board or by the holders of NAI Shares.
The Kranzco Bylaws may be amended only by the Kranzco Board and not by the
holders of Kranzco Common Shares or holders of the Notes.
Appraisal Rights
Under the DGCL, holders of shares of stock of NAI are entitled to appraisal
rights in connection with certain mergers of NAI into another entity. Under
Title 8, because the Kranzco Common Shares are listed on a national securities
exchange, holders of such shares have no appraisal rights. Holders of the Notes
have no appraisal rights. The Reincorporation Merger does not give rise to
appraisal rights with respect to the NAI Shares under the DGCL.
NAI Board and Kranzco Board
The business and affairs of NAI are managed under the direction of a
seven-member board of directors. The business and affairs of Kranzco are managed
under the direction of a seven-member board of trustees.
The Bylaws provide that the number of directors of NAI shall be not less
than two nor more than nine and shall be seven until such number is changed by
the NAI Board from time to time. Vacancies occurring for any reason (other than
the removal of director without cause) may be filled by a majority of the
directors then in office. All directors are elected at each annual meeting for a
term lasting until the next annual meeting and the election and qualification of
their successors.
The Declaration of Trust provides that the number of trustees of Kranzco
cannot be less than two or more than 15. Any vacancy (including a vacancy
created by an increase in the number of trustees) will be filled, at any regular
meeting or at any special meeting of the trustees called for that purpose, by a
majority of the trustees. The Kranzco Board is divided into three classes, as
nearly equal in number as possible, with the term of one class expiring at each
annual meeting of shareholders. At each annual meeting, one class of trustees
will be elected for a term of three years and the trustees in the other two
classes will continue in office.
Kranzco believes the classification of the Kranzco Board will help to
assure the continuity and stability of Kranzco's business strategies and
policies as determined by the Kranzco Board.
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The classified board provision could, however, have the effect of making
the replacement of incumbent trustees more time-consuming and difficult. At
least two annual meetings of shareholders, instead of one, will generally be
required to effect a change in a majority of the trustees on the Kranzco Board.
Thus, the classified board could increase the likelihood that incumbent trustees
will retain their positions. The staggered terms of trustees might have the
effect of delaying, deferring or preventing a change in control of Kranzco or
other transaction which might involve a premium price for Kranzco Common Shares
or otherwise be in the best interest of its shareholders.
Special Meetings
Under the DGCL, a special meeting of the stockholders of NAI may be called
by the NAI Board or by any person authorized to do so by the Certificate or the
Bylaws. The Bylaws provide that a special meeting of the stockholders of NAI may
be called by its President and must be called by the Secretary at the written
request of a majority of the entire board of directors or holders of at least
25% of the outstanding NAI Shares. Under the Kranzco Bylaws, a special meeting
of holders of Kranzco Common Shares may be called by the President or one-third
of the trustees and must be called upon the written request of the holders of
Kranzco Common Shares entitled to cast not less than 40% of all the votes
entitled to be cast at such meeting.
Advance Notice for Shareholder Nominations for Directors and Trustees and
Proposals of New Business
Holders of NAI Shares are not required to provide advance notice to
nominate a director or to propose new business at NAI's annual meeting of
stockholders.
In order to nominate a trustee or to propose new business at a meeting of
Kranzco shareholders, a shareholder entitled to vote at the meeting must comply
with certain advance notice provisions in the Kranzco Bylaws, which include the
requirement that such shareholder must generally give written notice of not less
than 60 days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting. Similar notice must be given in connection with
nominations for trustees at special meetings called for the purpose of electing
one or more trustees.
Action by Written Consent
Any action required or permitted to be taken at an annual meeting or
special meeting of stockholders of NAI may be taken without a meeting if a
written consent to the action is signed by holders of outstanding shares of
stock having not less than the minimum number of votes required to authorize or
take the action at a meeting at which all shares entitled to vote thereon were
present and voted.
Any action required or permitted to be taken at an annual or special
meeting of shareholders of Kranzco may be taken without a meeting only if a
written consent to the action is signed by holders of all of the outstanding
shares entitled to vote thereon.
Amendment of Certificate and Declaration of Trust
An amendment to the Certificate must be approved by holders of a majority
of the outstanding stock entitled to vote thereon. The trustees of the Kranzco
Board, by a two-thirds vote, may at any time amend the Declaration of Trust of
Kranzco to enable Kranzco to maintain its qualification as a REIT under the Code
or as a Maryland REIT, without the approval of the shareholders. Other
amendments require the affirmative vote of the holders of a majority of the
outstanding Kranzco Shares entitled to vote thereon except that amendments to
the provisions of the Declaration of Trust relating to the removal of trustees,
the restrictions on transfer of Kranzco Shares, reorganizations and mergers
require the affirmative vote of the holders of two-thirds of the outstanding
Kranzco Shares entitled to vote thereon.
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Limitation of Liability of Directors, Trustees and Officers
Although the DGCL permits a Delaware corporation to include in its
certificate of incorporation a provision eliminating the liability of the
directors and officers of NAI to NAI or to any stockholder of NAI for monetary
damages for breach of fiduciary duty as a director or officers except for (a)
any breach of the director's duty of loyalty to NAI or the stockholders of NAI,
(b) acts or omissions not in good faith or which involve intentional misconduct
or knowing violation of law, (c) unlawful dividends or redemptions or purchases
of stock, or (d) any transaction from which the director derived an improper
personal benefit, the NAI certificate of incorporation includes no such
provision.
As permitted by Title 8, the Declaration of Trust contains a provision
eliminating the liability of trustees and officers of Kranzco to Kranzco or to
any shareholder of Kranzco for money damages in suits by or in the right of
Kranzco or by shareholders of Kranzco except for (a) actual receipt of an
improper personal benefit in money, property or services and (b) active and
deliberate dishonesty established by a final judgment as being material to the
cause of action.
Indemnification of Directors, Trustees and Officers
NAI is required to indemnify, to the fullest extent permitted by the DGCL,
any and all persons that it shall have the power to indemnify under the DGCL.
The DGCL currently permits NAI to indemnify any person who was or is a party or
is threatened to be made a part to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer, employee or agent of a
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him in connection with such action, suit or proceeding if the
individual acted in good faith and in a manner he reasonably believed to be in
or not opposed to the corporation's best interests and, with respect to a
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. However, the DGCL does not permit NAI to indemnify any person for
judgments or amounts paid in settlement in a suit by or in the right of NAI. The
Bylaws provide that the rights to indemnification provided thereby are
non-exclusive.
Kranzco is required by its Bylaws, to the maximum extent permitted by
Maryland law in effect from time to time, to indemnify any trustee or officer,
or former trustee or officer, (a) against reasonable expenses incurred by him in
the successful defense (on the merits or otherwise) of any proceeding to which
he is made a party by reason of such status or (b) against any claim or
liability to which he may become subject by reason of such status unless it is
established that (i) the act or omission giving rise to the claim was committed
in bad faith or was the result of active and deliberate dishonesty, (ii) he
actually received an improper personal benefit in money, property or services or
(iii) in the case of a criminal proceeding, he had reasonable cause to believe
that his act or omission was unlawful. Maryland law permits indemnification for
settlements (but not judgments) in suits by or in the right of the trust.
Kranzco is also required by its Bylaws to pay or reimburse, in advance of a
final disposition, reasonable expenses of a trustee or officer made a party to a
proceeding by reason of his status as such upon receipt of a written affirmation
by the trustee or officer of his good faith belief that he has met the
applicable standard of indemnification under the Kranzco Bylaws and a written
undertaking to repay such expenses if it is ultimately determined that the
applicable standard was not met.
The DGCL, Title 8, the Certificate, the Bylaws, the Declaration of Trust
and the Kranzco Bylaws and the Notes may permit indemnification for liabilities
arising under the Securities Act or the Exchange Act. The NAI Board and the
Kranzco Board have been advised that, in the opinion of the commission,
indemnification for liabilities arising under the Securities Act or the Exchange
Act is contrary to public policy and is, therefore, unenforceable, absent a
decision to the contrary by a court of appropriate jurisdiction.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to trustees, directors, officers or persons controlling NAI or
Kranzco pursuant to the foregoing provisions, NAI and Kranzco
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have been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Business Combinations
Under the DGCL, certain "business combinations" (including certain mergers,
consolidations, asset transfers and certain issuances or reclassifications of
securities) between a Delaware corporation and any person who owns 15% percent
or more of the outstanding voting stock of the corporation (an "Interested
Stockholder") or certain affiliates of the Interested Stockholder are prohibited
for three years after the time that the Interested Stockholder became an
Interested Stockholder. This provision of the DGCL does not apply, however, to
certain business combinations, including any business combination or transaction
resulting in an Interested Stockholder becoming an Interested Stockholder if the
combination or transaction was approved by the board of directors of the
corporation prior to the time the Interested Stockholder became an Interested
Stockholder. However, the business combination provisions of the DGCL do not
currently apply to NAI because it does not have a class of voting stock listed
on a national securities exchange, authorized for quotation on the NASDAQ Stock
Market or held of record by more than 2,000 stockholders.
Under the MGCL, as applicable to Maryland REITs, certain "business
combinations" (including certain mergers, consolidations, share exchanges, asset
transfers and issuances or reclassifications of equity securities) between a
Maryland REIT and any person who beneficially owns 10% or more of the voting
power of the trust's shares or an affiliate of the trust who, at any time within
the two-year period before the date in question, was the beneficial owner of ten
percent or more of the voting power of the then outstanding voting shares of
beneficial interest of the trust (an "Interested Shareholder") or an affiliate
of the Interested Shareholder are prohibited for five years after the most
recent date on which the Interested Shareholder becomes an Interested
Shareholder. Thereafter, any such business combination must be recommended by
the board of trustees of such trust and approved by the affirmative vote of at
least (i) 80% of the votes entitled to be cast by holders of outstanding voting
shares of the trust and (ii) two-thirds of votes entitled to be cast by holders
of voting shares other than shares held by the Interested Shareholder with whom
the business combination is to be effected, unless, among other conditions, the
trust's common shareholders receive a minimum price (as defined in the statute)
for their shares and the consideration is received in cash or in the same form
as previously paid by the Interested Shareholder for his shares. These
provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by the board of trustees of the trust prior to the time
that the Interested Shareholder becomes an Interested Shareholder. The Board of
Trustees has exempted from the Maryland statute any business combination with
Mr. Kranzdorf or Mr. Williams or any other person acting in concert or as a
group with either of the foregoing persons. The business combination statute
could have the effect of delaying, deferring or preventing a change in control
of Kranzco or other transaction that might be in the best interests of
shareholders of Kranzco.
Removal of Directors and Trustees
A director of NAI may be removed, with or without cause, by the holders of
a majority of NAI Shares. A trustee of Kranzco may be removed, with or without
cause, by the affirmative vote of holders of not less than two-thirds of the
Kranzco Common Shares outstanding and entitled to vote in the election of
trustees. Holders of the Notes have no rights with respect to the removal of
trustees.
Inspection of Books and Records
Any stockholder of NAI, upon making a written demand, may examine the
stockholders' list and may inspect any other corporate books and records for any
purpose reasonably related to the stockholder's interest as a stockholder. Any
shareholder of Kranzco may inspect and copy the Kranzco Bylaws, minutes of
proceedings of shareholders and annual statements of affairs of Kranzco. In
addition, any shareholder of record of Kranzco who has owned at least five
percent of the outstanding shares of any class of beneficial interest for at
least six months will be entitled to inspect and copy Kranzco's books of account
and stock ledger and to require Kranzco
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to prepare and deliver a verified list of the name and address of, and the
number of shares owned by, each shareholder of Kranzco. Holders of the Notes
have no rights to inspect the books and records of Kranzco.
Restrictions on Investment and Use
A Maryland REIT must hold at least 75% of the value of its assets in real
estate assets, mortgages or mortgage related securities, government securities,
cash and cash equivalent items (including high-grade short term securities and
receivables) and may not use or apply land for farming, agriculture,
horticulture or similar purposes. There are no such limits for corporations,
such as NAI, organized under the DGCL.
Conversion Rights
Holders of the Notes have the right, exercisable after two years following
the date of original issuance of the Notes, at any time and from time to time,
to convert all or any Notes into fully paid Kranzco Common Shares at a
conversion price of $20 per Kranzco Common Share (equivalent to a conversion
rate of one Kranzco Common Share per $20 principal amount of Notes). See
"Description of Notes -- Conversion Rights." NAI Shares and Kranzco Common
Shares are not convertible into other securities of NAI or Kranzco.
Redemption Rights
The Notes are redeemable, in whole or in part, by Kranzco at any time after
two years following the date of original issuance of the Notes, at a redemption
price equal to the sum of (i) the principal amount of the Notes being redeemed
and (ii) accrued interest thereon to the redemption date with respect to such
Notes. See "Description of Notes -- Optional Redemption by Kranzco." NAI Shares
and Kranzco Common Shares are not redeemable at the option of NAI or Kranzco,
respectively.
Dissolution of NAI and Termination of Kranzco and REIT Status
NAI may be dissolved if (i) the NAI Board, by resolution adopted by a
majority of the directors of the NAI Board at any meeting called for that
purpose, deems such dissolution advisable and (ii) the holders of a majority of
the outstanding NAI Shares entitled to vote on the matter vote for the proposed
dissolution at a stockholders meeting called for the purpose of acting upon such
resolution. Dissolution of NAI may also be authorized without action by the NAI
Board if all stockholders entitled to vote thereon shall consent thereto in
writing.
Under the Declaration of Trust, Kranzco may be dissolved by the affirmative
vote of the holders of a majority of the outstanding Kranzco Common Shares at a
meeting of shareholders called for that purpose. The Kranzco Board may terminate
the status of Kranzco as a REIT at any time.
Upon liquidation, dissolution or winding-up of the affairs of Kranzco,
before any distribution may be made to the holders of any equity securities of
Kranzco, including the Kranzco Common Shares, the holders of the Notes shall be
entitled to receive an amount equal to the principal amount thereof plus all
accrued and unpaid interest to the date of such liquidation, dissolution or
winding up. After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of the Notes have no right or claim to any
of the remaining assets of Kranzco and will not be entitled to any other
distribution.
Upon any liquidation, dissolution or winding-up of the affairs of Kranzco,
holders of Kranzco Common Shares will be entitled to share ratably in the assets
of Kranzco remaining after provision for payment of liabilities to creditors and
any senior securities, including without limitation, the Kranzco Preferred
Shares.
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THE EXCHANGE AGREEMENT
On _________ __, 1998, Kranzco, NAI and the Finns entered into the Exchange
Agreement, pursuant to which Kranzco agreed to conduct the Exchange Offer, and
the Finns agreed to tender 80% of their respective NAI Shares in the Exchange
Offer, and, in the event that less than 80% of the issued and outstanding NAI
Shares are tendered by other NAI Stockholders in the Exchange Offering, the
Finns agreed to tender up to an additional 10% of the NAI Shares owned by them,
as may be required to reach the Minimum Tender Condition. Although the Finns
have agreed to tender up to 90% of the NAI Shares owned by them, such number of
NAI Shares is not sufficient to meet the Minimum Tender Condition without other
NAI Stockholders joining in the tender. Accordingly, if other NAI Stockholders
do not tender a number of NAI Shares that, together with the NAI Shares to be
tendered by the Finns, would meet the Minimum Tender Condition, the Exchange
Offer will not be consummated and NAI will continue to conduct its business as a
private company.
Representations and Warranties
The Exchange Agreement contains various representations and warranties
regarding NAI and the Finns, relating to, among other things: (a) the due
organization and good standing of NAI and its subsidiaries; (b) the
capitalization of NAI and its subsidiaries and the ownership of the Finns' NAI
Shares; (c) the outstanding options to purchase NAI securities; (d) the
authorization, execution, delivery and enforceability of the Exchange Agreement;
(e) conflicts under charter and bylaws, violations of any instruments or law and
required consents or approvals; (f) the assets and liabilities of NAI; (g) the
insurance of NAI; (h) real property owned and leased by NAI; (i) NAI's contracts
and debt instruments; (j) the absence of certain changes in NAI or certain
specified events; (k) NAI's financial statements and undisclosed liabilities;
(l) NAI's books and records; (m) NAI's taxes; (n) any related party
transactions; (o) litigation involving NAI; (p) compliance with applicable law;
(q) there being no brokers or finders involved in the Exchange Offer; (r) the
absence of changes in benefit plans and ERISA compliance; (s) employees and
employee policies; (t) broker members, brokerage and other services; (u)
environmental compliance; (v) NAI's intellectual property; (w) access to
Kranzco's records; (x) the Finns receiving responses to inquiries; (y) that
there is no representation by Kranzco relating to certain matters; (z) NAI being
a private company and NAI's prior offerings; (aa) the ability of the Finns to
make an informed investment decision; and (bb) receipt of the Registration
Statement.
The Exchange Agreement contains various representations and warranties
regarding Kranzco, relating to, among other things: (a) the due organization and
good standing of Kranzco; (b) the authorization, execution, delivery and
enforceability of the Exchange Agreement; (c) conflicts under charter and
bylaws, violations of any instruments or law and required consents or approvals;
(d) the reservation of Kranzco Common Shares issuable upon exercise of the
Notes; (e) there being no brokers or finders involved in the Exchange Offer; (f)
Kranzco's SEC filings; (g) access to NAI's records; (h) Kranzco receiving
responses to inquiries; and (i) that there is no representation by NAI relating
to certain matters.
Certain Covenants
In addition, unless the Exchange Agreement shall have been consummated or
terminated in accordance with its terms, NAI and the Finns have agreed not to,
(a) solicit or encourage any acquisition or purchase of 10% or more of the
assets of, or any 5% or greater equity interest in, NAI or any of its
subsidiaries or any tender offer (including a self tender offer) or exchange
offer, merger, consolidation, business combination, sale of 10% or more of the
assets, sale of securities, recapitalization, liquidation, dissolution or
similar transaction involving NAI or its subsidiaries or any other transaction
the consummation of which would or could reasonably be expected to impede,
interfere with, prevent or materially delay any of the Proposed Related
Transactions or materially dilute the benefits to Kranzco of such transactions
(any "Other Transaction Proposal") or agree to or endorse any Other Transaction
Proposal, (b) propose or enter into any discussions or negotiations regarding
any Other Transaction Proposal, or (c) sell, transfer or encumber any real
property investments or partnership or joint venture interests of NAI or enter
into any agreement to do so. However, the Exchange Agreement does not prohibit
(i) furnishing information pursuant to an appropriate confidentiality letter
concerning NAI and its
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businesses, properties or assets to a third party who has made any bona fide
Other Transaction Proposal which is not as a result of a breach of the Exchange
Agreement, (ii) engaging in discussions or negotiations with such a third party
who has made any bona fide Other Transaction Proposal which is not as a result
of a breach of the Exchange Agreement, or (iii) taking and disclosing to its
stockholders a position with respect to any bona fide Other Transaction Proposal
which is not as a result of a breach of the Exchange Agreement, but in each
case, only after the Board of Directors of NAI concludes in good faith following
consultation with, and receipt of an opinion of, outside counsel that such
action is necessary for the Board of NAI to comply with its fiduciary
obligations under applicable law. If NAI receives notice from a third party of
any Other Transaction Proposal, NAI has agreed to immediately inform Kranzco of
the receipt thereof, and provide a general summary of such proposal, and to keep
Kranzco informed of the status of any such proposal and any response to such
proposal. In certain instances, if the Exchange Agreement is terminated, and any
Other Transaction Proposal relating to in excess of 10% of NAI's assets or
outstanding capital stock is consummated within 180 days of December 31, 1998 or
at any time thereafter pursuant to a definitive agreement entered into within
such 180-day period, NAI and the Finns shall immediately pay in cash to Kranzco
a termination fee of $1,000,000. See "--Effect of Termination and Abandonment."
In addition, prior to the closing of the Exchange Offer, the Finns and NAI
agreed, among other things, to conduct NAI's operations according to its usual,
regular and ordinary course in substantially the same manner as previously
conducted and, among other things, not to, without the consent of Kranzco: (i)
amend NAI's Articles of Incorporation or Bylaws; (ii) issue any shares of its
capital stock, effect any stock split, reverse stock split, stock dividend,
recapitalization or other similar transaction; (iii) grant, confer or award any
option, warrant, conversion right or other right not existing on the date the
Exchange Agreement was executed to acquire any shares of its capital stock; (iv)
increase any compensation or enter into or amend any employment agreement with
any of its present or future officers or directors; (v) adopt any new employee
benefit plan (including any stock option, stock benefit or stock purchase plan)
or amend any existing employee benefit plan in any material respect, except for
changes which are less favorable to participants in such plans; (vi) declare,
set aside or pay any dividend or make any other distribution or payment with
respect to any shares of its capital stock; (vii) directly or indirectly redeem,
purchase or otherwise acquire any shares of its capital stock or capital stock
of any of its subsidiaries, or make any commitment for any such action except
for the redemption of the NAI Preferred Stock in accordance with its terms;
(viii) sell, lease or otherwise dispose of any of its capital stock of or other
interests in its subsidiaries or except in the ordinary course of business, any
of its other assets which are material, individually or in the aggregate; (ix)
make any loans, advances or capital contributions to, or investments in, any
other Person in excess of $1,000; (x) pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction, in
the ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent audited consolidated financial statements (or
the notes thereto) or incurred in the ordinary course of business consistent
with past practice; (xi) enter into any commitment, contract or agreement which
may result in total payments or liability by or to it in excess of $10,000
(other than Membership Agreements or alliance member agreements in the ordinary
course of business); and (xii) enter into any commitment, contract or agreement
with any officer, director, consultant or affiliate of NAI or any of its
subsidiaries.
Kranzco has also agreed in the Exchange Agreement not to effect any share
split, reverse share split, recapitalization or other similar transaction prior
to the closing of the Exchange Offer, without the prior written consent of the
Finns.
Restriction on Sales of Securities and Conversion of Notes
The Finns have agreed not to sell or transfer, directly or indirectly, any
NAI Shares, Notes or any Kranzco Common Shares issuable upon conversion of the
Notes held by the Finns for a period of three years from the closing of the
Exchange Offer, except that the Finns may transfer NAI Shares, Notes (other than
Notes held pursuant to the Escrow Agreement described below), and Kranzco Common
Shares issuable upon conversion of the Notes to members of their immediate
family; provided, however, in the event that Kranzco issues a notice of
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redemption relating to the Notes prior the end of such three-year period, then
the Finns and Norma Finn may earlier convert the Notes issued to them, in
accordance with the terms of such Notes. The Finns' Kranzco Common Shares, the
Notes, the NAI Shares and the Rights shall bear restrictive legends to the
effect of the foregoing. The Finns also agreed not to convert the Notes into
Kranzco Common Shares until three years from the date of issuance, other than
upon the occurrence of a Change in Control or an Event of Default but in no
event prior to the date one year after the date of issuance of the Notes.
Expenses
If the Proposed Related Transactions are consummated, all costs and
expenses incurred by all parties in connection with the Proposed Related
Transactions will be paid by NAI, including, without limitation, the filing fee
in connection with the filing of the Exchange Offer Registration Statement with
the SEC, accounting fees, attorney's fees and the expenses incurred in
connection with printing and mailing the Exchange Offer Registration Statement.
The Reincorporation Merger; NAI Board
The Finns agreed to execute a non-unanimous written consent of the
shareholders of NAI, authorizing, among other things, the Reincorporation
Merger. Kranzco and NAI agreed that immediately following the consummation of
the Reincorporation Merger, the Board of Directors of NAI shall be reconstituted
to consist of Gerald C. Finn, Jeffrey M. Finn, Norman M. Kranzdorf, Joseph
Grossman, Peter O. Hanson, Robert H. Dennis, Bernard J. Korman and Michael
Kranzdorf.
Conditions to Each Party's Obligation to Consummate the Exchange Offer
The respective obligations of each of Kranzco, NAI and the Finns to
consummate the Exchange Offer are subject to the fulfillment at or prior to the
Expiration Date of the Exchange Offer of the following conditions: (i) the
parties to the Exchange Agreement are not subject to any order or injunction
which prohibits the consummation of the Exchange Agreement and the Proposed
Related Transactions; (ii) the Registration Statement shall have become
effective and all necessary state securities law approvals shall have been
obtained and no stop order with respect to any of the foregoing shall be in
effect; (iii) 80% of the total number of issued and outstanding NAI Shares
shall have been validly tendered and not withdrawn prior to the Expiration
Date in the Exchange Offer; (iv) Kranzco shall have obtained the approval for
the listing of Kranzco Common Shares issuable upon conversion of the Notes on
the NYSE, subject to official notice of issuance; (v) all required consents,
authorizations, orders and approvals of any governmental entity or third
parties shall have been obtained or made; and (vi) each party to the Exchange
Agreement shall have delivered all such documents or certificates and
disclosed such information as the other party may reasonably request.
The obligation of Kranzco to consummate the Exchange Offer is subject to
the fulfillment at or prior to the Expiration Date of the following conditions,
unless waived by Kranzco: (i) NAI and the Finns shall have performed their
agreements contained in the Exchange Agreement and the representations and
warranties of NAI and the Finns contained in the Exchange Agreement shall be
true and correct in all material respects as of the Expiration Date as if made
on the Expiration Date, and Kranzco shall have received a certificate of NAI
and of each of the Finns certifying to such effect; (ii) the Finns, Kranzco
and an escrow agent shall have entered into an Escrow Agreement (the "Escrow
Agreement"); (iii) Kranzco shall have received evidence in writing that Matthew
Arnold, Robert McMenamim and Marc Shegoski have resigned from the Board of
Directors of NAI, effective as of the closing date; (iv) Kranzco shall have
received a legal opinion from NAI's counsel on certain issues; (v) any consent
of the holders of the NAI Series A Preferred Stock shall have been obtained;
(vi) from the date of the Exchange Agreement through the Expiration Date, there
shall not have occurred any change in the financial condition, business,
operations or prospects of NAI and its subsidiaries, taken as a whole, that
would have or would be reasonably likely to have an NAI Material Adverse
Effect; and (vii) Norma Finn shall have entered into
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a letter agreement pursuant to which she agrees not to convert the Notes issued
to her until after three years following the issuance of the Notes.
The obligations of NAI and the Finns to consummate the Exchange Offer is
subject to the fulfillment at or prior to the Expiration Date of the following
conditions, unless waived by the Finns: (i) Kranzco shall have performed its
agreements contained in the Exchange Agreement required to be performed on or
prior to the Expiration Date and the representations and warranties of Kranzco
contained in the Exchange Agreement (without giving effect to any materiality
qualifications or exceptions contained therein) shall be true and correct in all
material respects as of the Expiration Date as if made on the Expiration Date,
and NAI and the Finns shall have received a certificate of Kranzco certifying to
such effect; (ii) NAI shall have received the opinion of counsel to Kranzco
regarding certain legal matters; and (iii) from the date of the Exchange
Agreement through the expiration of the Exchange Offer, there shall have not
occurred any material adverse change in the financial condition, business,
operations or prospects of Kranzco (except that any change in the price at which
the Kranzco Common Shares trade will not constitute a material adverse change).
Termination
The Exchange Agreement and the Exchange Offer may be terminated at any time
prior to the Expiration Date of the Offer, by the mutual written consent of
Kranzco, NAI and the Finns.
The Exchange Agreement may be terminated and the Exchange Offer may be
terminated by action of the Finns, the Board of Directors of NAI or the Board of
Trustees of Kranzco if (a) the Exchange Offer shall not have been consummated by
December 31, 1998, or (b) a United States federal or state court of competent
jurisdiction or other Governmental Entity shall have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Exchange Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable, provided, that the party seeking to terminate the Exchange
Agreement pursuant to clause (b) shall have used all reasonable efforts to
remove such order, decree, ruling or injunction; and provided, in the case of a
termination pursuant to clause (a) above, that the terminating party shall not
have breached in any material respect its obligations under the Exchange
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
The Exchange Agreement may be terminated and the Exchange Offer may be
terminated at any time prior to the Expiration Date, by action of the Finns or
the Board of Directors of NAI, if (a) in the exercise of its good faith judgment
following consultation with, and receipt of an opinion of, outside counsel that
such action is necessary for the Board of Directors of NAI to comply with its
fiduciary duties to its shareholders imposed by law, the Board of Directors of
NAI determines that such termination is required by reason of any Other
Transaction Proposal being made; or (b) there has been a breach by Kranzco of
any representation or warranty contained in the Exchange Agreement which would
be reasonably likely to materially impair Kranzco's ability to consummate the
transactions contemplated by the Exchange Agreement, which breach is not curable
by December 31, 1998; or (c) there has been a material breach of any of the
covenants or agreements set forth in the Exchange Agreement on the part of
Kranzco, which breach is not curable or, if curable, is not cured within 30 days
after written notice of such breach is given by NAI or the Finns to Kranzco; or
(d) the consideration being offered in the Exchange Offer for each NAI Share is
reduced below $0.7707 of Notes, without the consent of the Finns; or (e) after
the date hereof: (i) any domestic or international event or act or occurrence
has materially disrupted, or in the opinion of the Finns will in the immediate
future materially disrupt, the securities markets, (ii) a general suspension of,
or a general limitation on prices for, trading in securities on the NYSE or the
American Stock Exchange or in the over-the-counter market, (iii) a banking
moratorium shall have been declared either by Federal or New York State
authorities, (iv) there shall have occurred any outbreak or material escalation
of hostilities or other calamity or crises the effect of which on the financial
markets of the United States or on the United States is such as to make it, in
the judgment of the Finns, impracticable to consummate the Proposed Related
Transactions; or (v) any restriction materially adversely affecting the Proposed
Related Transactions which was not in effect on the date hereof shall have
become effective. Any termination of the Exchange
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Agreement pursuant to clause (b), (c) or (d) is referred to herein as an "NAI
Cause for Termination". Any termination pursuant to clause (a) will only be
effective if, simultaneously with such termination, all sums that NAI and the
Finns are required to pay to Kranzco pursuant to the Exchange Agreement have
been paid.
The Exchange Agreement may be terminated and the Exchange Offer may be
terminated at any time prior to the Expiration Date, by action of the Board of
Trustees of Kranzco, if (a) after the date the Exchange Agreement is executed:
(i) any domestic or international event or act or occurrence has materially
disrupted, or in the opinion of Kranzco will in the immediate future materially
disrupt, the securities markets, (ii) a general suspension of, or a general
limitation on prices for, trading in securities on the NYSE or the American
Stock Exchange or in the over-the-counter market, (iii) a banking moratorium
shall have been declared either by Federal or New York State authorities, (iv)
there shall have occurred any outbreak or material escalation of hostilities or
other calamity or crises the effect of which on the financial markets of the
United States or on the United States is such as to make it, in the judgment of
Kranzco, impracticable to consummate the Proposed Related Transactions; or (v)
any restriction materially adversely affecting the Proposed Related Transactions
which was not in effect on the date the Exchange Agreement was executed shall
have become effective; (b) there has been a breach by NAI or the Finns of any
representation or warranty contained in the Exchange Agreement which would have
or would be reasonably likely to have an NAI Material Adverse Effect or,
materially impair NAI's or the Finns' ability to consummate the transaction
contemplated by the Exchange Agreement, which breach is not curable by December
31, 1998; or (c) there has been a material breach of any of the covenants or
agreements set forth in the Exchange Agreement on the part of NAI or the Finns
which breach is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by Kranzco to NAI and the Finns.
Effect of Termination and Abandonment
If an election is made to terminate the Exchange Agreement by NAI or the
Finns due to an Other Transactions Proposal or by Kranzco due to a breach by NAI
or the Finns of a representation or warranty set forth in the Exchange Agreement
or a breach of a covenant which is not curable, or if curable, which is not
cured within 30 days written notice, then (i) NAI and the Finns shall
immediately reimburse Kranzco for Kranzco's costs and expenses, including,
without limitation, legal and accounting fees, printing and filing fees,
incurred in connection with its due diligence and negotiation and efforts to
complete and process the Exchange Agreement, the Registration Statement and the
transactions contemplated thereby and (ii) if NAI and the Finns consummate any
Other Transaction Proposal relating to in excess of 10% of NAI's assets or
outstanding capital stock within 180 days of December 31, 1998 or at any time
thereafter pursuant to a definitive agreement entered into within such 180-day
period, NAI and the Finns shall immediately pay in cash to Kranzco a termination
fee of $1,000,000.
If an election is made to terminate the Exchange Agreement pursuant to an
NAI Cause for Termination, Kranzco has agreed to immediately reimburse NAI and
the Finns for up to $100,000 of their costs and expenses, including, without
limitation, legal and accounting fees, incurred in connection with its due
diligence, negotiation and efforts to complete the Exchange Agreement, the
Registration Statement and the transactions contemplated thereby and hereby.
At any time prior to the Expiration Date, any party to the Exchange
Agreement, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties to the
Exchange Agreement, (b) waive any inaccuracies in the representations and
warranties made to such party contained in the Exchange Agreement or in any
document delivered pursuant thereto and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained therein. Any
agreement on the part of a party to the Exchange Agreement to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
Indemnification and Escrow
The Finns and, in the event the transactions contemplated by the Exchange
Agreement are not consummated, NAI, have agreed to indemnify and hold harmless
Kranzco and its affiliates (each an "indemnified
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person") from and against, any Losses (as defined in the Exchange Agreement)
incurred by such indemnified person by reason of or arising out of or in
connection with (i) the breach of any representation or warranty made by or on
behalf of NAI or any Finn contained in the Exchange Agreement (or any other
related documents); (ii) the failure of NAI or any Finn to perform any agreement
required by the Exchange Agreement (or any other related documents) to be
performed by such person; and (iii) the allegation by any third party of the
existence of any state of facts which if it existed would constitute a breach of
any representation or warranty made by or on behalf of NAI or any Finn contained
in the Exchange Agreement (or any other related documents).
Kranzco has agreed to indemnify and hold harmless the Finns and their
respective affiliates (each an "indemnified person") from and against, any
Losses incurred by such indemnified person by reason of or arising out of or in
connection with (i) the breach of any representation or warranty made by or on
behalf of Kranzco contained in the Exchange Agreement (or any other related
document), (ii) the failure of Kranzco to perform any agreement required by the
Exchange Agreement (or any other related document) to be performed by it, and
(iii) the allegation by any third party of the existence of any state of facts
which if it existed would constitute a breach of any representation or warranty
made by or on behalf of Kranzco contained in the Exchange Agreement(or any other
related document).
Neither the Finns, on the one hand, nor Kranzco, on the other hand, shall
be required to pay any amounts pursuant to clause (i) or (iii) of the paragraphs
immediately preceding this one (as the case may be) unless and until the
aggregate of all Losses incurred by all persons indemnified by such indemnifying
parties under such clauses exceeds $80,000, in which event such indemnifying
parties shall be liable, dollar-for-dollar, for the full amount of such Losses;
and, except as provided below, in no event shall the Finns be liable to Kranzco
for any Losses for which a claim is made against the Finns under clause (i) or
(iii) of the paragraph describing the Finns' obligation to indemnify Kranzco
above (other those arising out of or in connection with the breach or alleged
breach of the representations and warranties made in the Exchange Agreement and
set forth in the proviso below, in excess of $1,000,000; provided that,
notwithstanding the foregoing, the Finns are in all events obligated to
indemnify Kranzco on a dollar-for-dollar basis from and against all Losses
arising out of or in connection with the breach or alleged breach of certain
representations and warranties contained in the Exchange Agreement, including,
among others, those representation and warranties relating to (a) the due
organization and good standing of NAI and its subsidiaries, (b) the
capitalization of NAI and its subsidiaries and the ownership of the Finns' NAI
Shares, (c) the outstanding options to purchase NAI securities, (d) the
authorization, execution, delivery and enforceability of the Exchange Agreement,
(e) conflicts under charter and bylaws, violations of any instruments or law and
required consents or approvals, (f) litigation involving NAI, (g) there being no
brokers or finders involved in the Exchange Offer, (h) the absence of changes in
benefit plans and ERISA compliance, (i) NAI being a private company and NAI's
prior offerings, and (j) receipt of the Registration Statement; and Kranzco
shall be obligated to indemnify the Finns on a dollar-for-dollar basis from and
against all Losses arising out of or in connection with the breach or alleged
breach of certain representations and warranties contained in the Exchange
Agreement, including, among others, those representation and warranties relating
to (i) the due organization and good standing of Kranzco, (ii) the
authorization, execution, delivery and enforceability of the Exchange Agreement,
(iii) conflicts under charter and bylaws, violations of any instruments or law
and required consents or approvals, (iv) the reservation of Kranzco Common
Shares issuable upon exercise of the Notes, (v) there being no brokers or
finders involved in the Exchange Offer, and (vi) Kranzco's SEC filings.
In addition, NAI has agreed to indemnify and hold harmless Kranzco and its
affiliates (each an "indemnified person") from and against, any Losses incurred
by such indemnified person by reason of or arising out of or in connection with
the failure of NAI to comply with (i) any Laws (as defined therein) relating to
real estate brokers or (ii) any federal or state franchise Laws.
In order to secure the obligations of the Finns to indemnify Kranzco
pursuant to the Exchange Agreement, on the closing date, G. Finn and J. Finn
shall deposit with the escrow agent under the Escrow Agreement $800,000
principal amount of the Notes and $200,000 principal amount of the Notes,
respectively. In any instance in which Kranzco has a claim for indemnity under
the Exchange Agreement, Kranzco agrees that it will make a demand and a
reasonable effort under the circumstances (which shall not require Kranzco to
institute any
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suit or other action) to collect such claim against the funds, to the extent of
such funds, then held under the Escrow Agreement prior to making any claim
against the Finns with respect to such claim unless the claim exceeds the amount
of such funds.
Survival
All statements, certifications, indemnifications, representations and
warranties made in the Exchange Agreement by the parties to the Exchange
Agreement, and their respective covenants, agreements and obligations to be
performed pursuant to the terms thereof, shall survive the closing,
notwithstanding any examination by or on behalf of any party thereto,
notwithstanding any notice of a breach or of a failure to perform not waived in
writing and notwithstanding the consummation of the transactions thereby
contemplated with knowledge of such breach or failure, and (except with respect
to those made by NAI and the Finns relating to (a) the due organization and good
standing of NAI and its subsidiaries, (b) the capitalization of NAI and its
subsidiaries and the ownership of the Finns' NAI Shares, (c) the outstanding
options to purchase NAI securities, (d) the authorization, execution, delivery
and enforceability of the Exchange Agreement, (e) conflicts under charter and
bylaws, violations of any instruments or law and required consents or approvals,
(f) litigation involving NAI, (g) there being no brokers or finders involved in
the Exchange Offer, (h) the absence of changes in benefit plans and ERISA
compliance, (i) NAI being a private company and NAI's prior offerings, and (j)
receipt of the Registration Statement; and those representations and warranties
made by Kranzco relating to (i) the due organization and good standing of
Kranzco, (ii) the authorization, execution, delivery and enforceability of the
Exchange Agreement, (iii) conflicts under charter and bylaws, violations of any
instruments or law and required consents or approvals, (iv) the reservation of
Kranzco Common Shares issuable upon exercise of the Notes, (v) there being no
brokers or finders involved in the Exchange Offer, and (vi) Kranzco's SEC
filings, which shall survive without limitation, and those relating to NAI's
taxes, which shall survive until the expiration of the statute of limitations on
the tax matters discussed therein) the representations and warranties made
thereby by the parties shall terminate on the second anniversary of the closing
date, except to the extent a party gives written notice to the other parties of
any breach thereof on or before such date, and then only with respect to the
matters described in such notice; provided, however, that nothing therein
contained shall modify or be construed to modify in any respect whatsoever any
covenant, agreement or obligation to be performed by any party pursuant to the
provisions of the Exchange Agreement.
PROPOSED RELATED TRANSACTIONS
Reincorporation Merger and Related Matters
Immediately following the consummation of the Exchange Offer, NAI Delaware
will merge with and into NAI Maryland, a wholly-owned subsidiary of NAI
Delaware, pursuant to which NAI Maryland will be the surviving corporation. NAI
Delaware determined to pursue the Reincorporation Merger in order to
reincorporate NAI Delaware as a Maryland corporation for corporate reasons, as
well as to reduce certain franchise taxes which are payable by NAI. The
Reincorporation Merger will result in each NAI Delaware Share being converted
into 1.318087 NAI Maryland Shares and the adoption of certain anti-takeover
provisions.
Following consummation of the Reincorporation Merger, NAI Maryland will be
the surviving corporation, and NAI Maryland's Charter and Bylaws will become the
Charter and Bylaws of NAI. NAI's Maryland's Charter and Bylaws provide certain
anti-takeover provisions which are typical for a public company. See "Risk
Factors--Institution of Anti-takeover Measures; Anti-takeover Effect of Certain
Provisions of Maryland Law and of NAI's Charter and Bylaws." Upon consummation
of the Reincorporation Merger, holders of certificates representing NAI Delaware
Shares may surrender such certificates to the Transfer Agent and registrar, the
certificate so surrendered shall be canceled and a certificate representing NAI
Maryland Shares shall be issued. Until so surrendered, from and after the
Reincorporation Merger, each certificate representing NAI Delaware Shares will
be deemed to represent the right to receive 1.318087 NAI Maryland Shares,
rounded to the nearest whole share, for each share of NAI Delaware represented
by such certificate.
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Upon consummation of the Reincorporation Merger, the Board of Directors of
NAI will be reconstituted to include Gerald C. Finn, Jeffrey M. Finn, Joseph
Grossman and Peter Hanson, current members of the Board, and Norman M.
Kranzdorf, Robert H. Dennis, Bernard J. Korman, and Michael Kranzdorf. See
"Management of NAI After Exchange Offer."
Intercompany Agreement
Immediately following consummation of the Exchange Offer and the
Distribution, Kranzco and NAI will enter into an Intercompany Agreement which
will provide for the manner in which NAI and Kranzco expect to create
opportunities for each other and for reducing potential conflicts of interest.
Kranzco Right of First Opportunity; Notification Right
The Intercompany Agreement provides that, if any REIT Opportunity (as
defined below) becomes available to NAI in which NAI is acting, intends to act
or will act as principal or participate for its own account (a "Principal REIT
Opportunity"), NAI will first offer such Principal REIT Opportunity to Kranzco.
If Kranzco rejects a Principal REIT Opportunity, or accepts such Principal REIT
Opportunity but thereafter provides, or is required by the provisions of the
Intercompany Agreement to provide, written notice to NAI that it is no longer
pursuing such Principal REIT Opportunity, NAI is, for a period of one year
thereafter, entitled to consummate the Principal REIT Opportunity or provide any
other person or entity the right to consummate such Principal REIT Opportunity
at a price, and on terms and conditions, that are not more favorable to NAI in
any material respect than the price and terms and conditions made available to
Kranzco relating to such Principal REIT Opportunity. "REIT Opportunity" means
any opportunity, principally within the United States, to (i) acquire, develop,
lease, sell or make any investment in retail real estate, real estate mortgages,
real estate derivatives, or entities that invest exclusively in or have a
substantial portion of their assets in any of the foregoing, so long as such
investment would be consistent with the requirements of the Code and regulations
relating to Kranzco's status as a REIT; or (ii) make any REIT-Qualified
Investment. "REIT-Qualified Investment" means an investment, at least 95% of the
gross income from which would qualify under the 95% gross income test set forth
in section 856(c)(2) of the Code (or could be structured so to qualify) and the
ownership of which would not cause Kranzco to violate the asset limitations set
forth in section 856(c)(4) of the Code (or could be structured not to cause
Kranzco to violate the section 856(c)(4) limitations) and which otherwise meets
the federal income tax requirements applicable to REITs, or (ii) any other
investments which may be structured in a manner so as to be REIT-Qualified
Investments, as determined by Kranzco. Kranzco may from time to time provide
written notice to NAI specifying certain criteria, reasonably acceptable to NAI,
for a REIT Opportunity in addition to the criteria specified above in this
definition of REIT Opportunity. Any such written notice from Kranzco may be
canceled by written notice given by Kranzco at any time or, with NAI's consent,
which shall not be unreasonably withheld, modified by Kranzco by written notice
at any time. The definition of REIT Opportunity will be modified as appropriate
from time to time in accordance with any such written notices sent by Kranzco
and reasonably acceptable to NAI. A Principal REIT Opportunity does not include
the receipt of any commissions in cash or in kind (including an equity interest
in a REIT Opportunity) in connection with NAI serving as a broker or
intermediary in connection with the sale or lease of retail real estate.
The Intercompany Agreement also provides that NAI will immediately notify
Kranzco in writing of any REIT Opportunity that becomes available or known to
NAI (through its Broker Members or otherwise) and which is not a Principal REIT
Opportunity and which in the reasonable opinion of NAI meets the acquisition and
investment criteria of Kranzco (which will be provided to NAI by Kranzco from
time to time) (a "Non-Principal REIT Opportunity"). In the event Kranzco
determines to pursue such Non-Principal REIT Opportunity, NAI shall use good
faith efforts to cause its Broker Members to assist Kranzco in considering and
consummating such Non-Principal REIT Opportunity. In the event Kranzco
consummates a transaction that constitutes a Non-Principal REIT Opportunity,
Kranzco will pay NAI a fee to be mutually agreed to by NAI and Kranzco.
In addition, if NAI develops or becomes aware of any acquisition or
investment opportunity with respect to real estate (other than a REIT
Opportunity) in which NAI intends to or has the opportunity to act as principal
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or participate in for its own account, and NAI is not interested in pursuing
such opportunity, or the opportunity is otherwise unavailable to NAI, NAI will
immediately notify Kranzco in writing of such opportunity with such writing to
contain a description of all material terms concerning such opportunity and be
delivered to Kranzco with a copy of any written material or information in NAI's
possession regarding such opportunity.
NAI will also, without any additional consideration, (i) disseminate
acquisition and investment criteria provided by Kranzco to its Broker Members,
(ii) disseminate information regarding space available for lease from Kranzco
(including tenant criteria) to its Broker Members, (iii) provide Kranzco
reasonable access to NAI personnel, NAI Broker Members and NAI's computer data
bases (other than confidential client information), (iv) cooperate with Kranzco
to develop new shopping centers or re-develop distressed shopping centers for
sale to Kranzco in a mutually agreeable manner, (v) provide Kranzco access to
local property managers within areas in which Kranzco owns retail properties and
(vi) disseminate such other materials and information regarding Kranzco and its
properties as Kranzco may reasonably request.
Limitation on Strategic Alliance
NAI has agreed not to enter into, without the consent of Kranzco, any type
of strategic relationship with any other REIT or real estate investment or
operations type entity, including, without limitation, any equity investment by
any other REIT or real estate investment or operations type entity in NAI (other
than as a result of a purchase of NAI Shares in the public market), any equity
investment by NAI in any other REIT or real estate investment or operations type
entity, entering into any agreements which provide such entities with rights of
first opportunity or contain cooperation provisions of the type or relating to
the matters contained in the Intercompany Agreement (other than with respect to
consulting arrangements). Notwithstanding the foregoing, NAI shall be permitted
to solicit assignments from other REITs or real estate investment or operations
type entities with respect to the purchase or sale of real estate or the
provision of Real Estate Related Services, subject to Kranzco's rights of first
opportunity and notification.
NAI Right of First Opportunity for Services Opportunity
The Intercompany Agreement provides that if Kranzco requires Services (as
defined below) (a "Services Opportunity"), Kranzco shall engage in discussions
with NAI regarding such Services Opportunity prior to retaining another service
provider to perform such Services unless, in the reasonable judgment of Kranzco,
offering such Services Opportunity to NAI would be detrimental to Kranzco.
Notwithstanding the foregoing, (i) Kranzco shall have no obligation to retain
NAI to perform any Services for Kranzco and (ii) any Services provided by NAI to
Kranzco shall (a) be at market rates and (b) on terms and conditions as
attractive as the best available for comparable services offered by NAI or, to
the extent within NAI's control, any broker member or affiliated member of NAI
to third parties. "Services" means real estate brokerage services, local
management and other maintenance services, and certain other Real Estate-Related
Services then provided by NAI, including sealed-bid sales, due diligence and
real estate auctions.
The Intercompany Agreement also provides that in the event Kranzco desires
to purchase any retail real estate based upon an opportunity provided to Kranzco
by someone other than NAI (a "Purchase Opportunity"), Kranzco will notify NAI of
such Purchase Opportunity and will use its good faith efforts to cause the
broker for such Purchase Opportunity to share any brokerage commissions for such
Purchase Opportunity with NAI in accordance with industry practice; provided,
however, Kranzco is not required to comply with the foregoing if the Purchase
Opportunity is based upon an exclusive brokerage arrangement or, if in the
reasonable judgment of Kranzco, compliance with the foregoing would be
detrimental to the relationship between Kranzco and such broker or would impede,
inhibit or slow down the proposed transaction. In connection with a Purchase
Opportunity in which NAI will be sharing in the brokerage commission, NAI agrees
to perform, without any consideration, any due diligence services requested by
Kranzco.
In addition, in the event NAI desires to offer to Kranzco tenants any
Services currently provided by NAI (a "Tenant Services Opportunity"), NAI shall
notify Kranzco in writing of such Tenant Services Opportunity.
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Promptly following the receipt of such notice, Kranzco has agreed to provide NAI
with a list of the mailing addresses of its tenants solely for purpose of NAI
soliciting such tenant with respect to such Tenant Services Opportunity. If NAI
notifies Kranzco of a Tenant Services Opportunity, Kranzco shall not for a
period of six months after NAI notifies Kranzco of a Tenant Services Opportunity
provide a list of the mailing addresses of its tenants to a competitor of NAI
with respect to such Tenant Services Opportunity.
Certain Employee Matters
NAI and Kranzco have agreed to make reasonable and ongoing efforts to
ensure that members of management of each of NAI and Kranzco are given
appropriate salary, bonus and options and other compensation as may be
reasonably necessary to incentivize management to enhance value to shareholders
of both NAI and Kranzco. The NAI Board and the Kranzco Board will direct each of
their compensation committees to take into consideration the objective set forth
in the previous sentence in establishing compensation levels and performance
criteria for management of NAI and Kranzco. In order to further this objective,
NAI will grant to selected directors, officers, employees and consultants of NAI
five-year options to purchase an aggregate of 1,378,800 NAI Shares at a price of
$2.00 per NAI Share.
NAI and Kranzco also agreed to use their best efforts to cause, for a
period of three years from the date of the Intercompany Agreement, (i) Norman
Kranzdorf to serve as NAI's Co-Chairman, (ii) Robert Dennis to serve as NAI's
Chief Financial Officer, and (iii) Michael Kranzdorf to serve as NAI'S Chief
Information Officer. NAI acknowledged in the Intercompany Agreement that Norman
Kranzdorf, Robert Dennis and Michael Kranzdorf, as officers of Kranzco, will
have a primary responsibility to Kranzco and that none of such individuals are
committed to devoting a specific amount of time to NAI's affairs.
Consulting Services
Pursuant to the terms of the Intercompany Agreement, Kranzco has agreed to
provide NAI with such consulting services relating to management administrative,
corporate, accounting, financial, legal, equity offering, insurance, tax, data
processing, human resources and operational matters as NAI shall from time to
time reasonably request. In consideration for Kranzco entering into the
Intercompany Agreement and providing such consulting and administrative
services, NAI has agreed, during the term of the Intercompany Agreement or until
such earlier date as the consulting arrangement is terminated in accordance with
its terms, to pay Kranzco an annual fee of $500,000, payable in equal monthly
installments on the first day of each month. NAI may terminate the consulting
arrangement, such termination to be effective at any time on or after the fifth
anniversary of the date of the Intercompany Agreement, by providing Kranzco 90
days prior written notice of its intention to terminate such consulting
arrangement.
REIT Compliance
Nothing in the Intercompany Agreement obligates any party to take any
action that could cause Kranzco to lose its qualification as a REIT under the
Code.
Cooperation in Equity Offerings
The Intercompany Agreement also provides that, if either Kranzco or NAI
desires to engage in a public or private offering of its debt or equity
securities, the other party shall cooperate and provide such information and
personnel as is reasonably required in connection with such offering.
Term
The Intercompany Agreement has a term of ten years and may be terminated by
a party only if the other party or any affiliate of such other party is in
default of the Intercompany Agreement or any other agreement
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entered into by the parties thereto or any of their controlled affiliates, if
such default is material and remains uncured for fifteen days after receipt of
notice thereof.
Employee Incentive Plans
In connection with the Exchange Offer and the Proposed Related
Transactions, NAI adopted the following employee incentive plans:
o NAI 1998 Incentive Plan. In connection with the Exchange Offer and the
Reincorporation Merger, NAI adopted a management incentive plan for
approximately 1,700,000 NAI Shares, which may be the subject of awards in the
form of share options, including corresponding share appreciation rights and
reload options, restricted share awards, performance-based awards and share
purchase awards. Eighty percent of the NAI Shares would be reserved for
employees of NAI who are not also employees of Kranzco and 20% of the NAI Shares
would be reserved for employees of NAI who are also employees of Kranzco. There
will be no awards issued in connection with the Exchange Offer or
Reincorporation Merger pursuant to the 1998 Incentive Plan. See "Management--NAI
1998 Management Incentive Plan."
o NAI 1998 Employee Bonus Compensation Plan. In connection with the
Exchange Offer and the Reincorporation Merger, NAI adopted the NAI 1998 Employee
Bonus Compensation Plan. Pursuant to such plan, certain employees of NAI would
be entitled to aggregate incentive compensation payable in NAI Shares, up to a
maximum of 8,500,000 NAI Shares, assuming all of the Rights are exercised. If
less than all of the Underlying Shares are purchased pursuant to the Rights
Offering and the Concurrent Offering, the number of NAI Shares available as
incentive compensation under this plan will be decreased by 25% of the amount by
which 34 million NAI Shares exceeds the number of NAI Shares outstanding after
the Rights Offering and the Concurrent Offering. The 8,500,000 NAI Shares would
be issuable over 10 years, beginning with the fiscal year ended June 30, 1999,
with the number of NAI Shares to be issued each year equal to the product of
6.25% times NAI's pre-tax net income for such year. See "Management--NAI 1998
Employee Incentive Compensation Plan."
o NAI 1998 Stock Option Plan. In connection with the Exchange Offer and the
Reincorporation Merger, NAI adopted a stock option plan for 3,536,853 NAI
Shares, which will be the subject of awards in the form of options to purchase
NAI Shares. Certain officers, directors, employees and consultants of NAI will
upon consummation of the Exchange Offer and the Reincorporation Merger receive
five-year options to purchase an aggregate of 1,378,800 NAI Shares at an
exercise price of $2.00 per NAI Share. In addition, Gerald C. Finn and Jeffrey
M. Finn will each receive a five-year option to purchase 1,547,049 and 611,004
NAI Shares, respectively, at an exercise price of $2.00 per NAI Share; the
exercise price of each NAI Share purchasable under such options will increase
$.12 each year during which such option remains outstanding and unexercised. See
"Management--NAI 1998 Stock Option Plan."
o Options to Directors. NAI will grant options to purchase an aggregate of
30,000 NAI Shares to certain directors of NAI.
THE DISTRIBUTION
Kranzco believes that significant opportunities are available to investors
in entities which provide brokerage and Real Estate-Related Services, own
properties other than neighborhood and community shopping centers, and which are
not limited in their activities by the investment limitations imposed by Federal
income tax laws applicable to REITs. Accordingly, in light of the limitations on
investments imposed on REITs, Kranzco believes that effecting the Exchange
Offer, the Distribution, Rights Offering and the Concurrent Offering, and
establishing an intercompany relationship between Kranzco and NAI will yield
significant benefits to Kranzco and its shareholders similar to those which may
be obtained by investors who are not so limited, while preserving Kranzco's REIT
status.
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A small number of REITs, operating under tax provisions that no longer are
available to other REITs, have shares that are "paired" or "stapled" with shares
of a related operating company. The NAI Shares and Kranzco Common Shares are
not, and will not be, paired or stapled in any manner and may be owned and
transferred separately and independently of each other. However, shareholders
who own NAI Shares and Kranzco Common Shares will in effect have the economic
equivalent of a paired investment in NAI and Kranzco.
The Kranzco Board recognized in its planning that the Distribution could
result in a transaction taxable to Kranzco stockholders and possibly to Kranzco
depending on the fair market value of the NAI Shares on the date on which the
Distribution is effected (the "Distribution Date"). Upon review of this and
other relevant factors, the Kranzco Board concluded that the benefits of the
Distribution would more than offset any negative tax consequences of the
Distribution.
Distribution Agent
The Distribution Agent is First Union National Bank, 1525 West W.T. Harris
Boulevard, 3C3, Charlotte, North Carolina 28262-1153, telephone: (800) 829-8432.
Manner of Effecting the Distribution
Kranzco will effect the Distribution upon consummation of the Exchange
Offer by delivering 70.2% of the outstanding NAI Shares which Kranzco receives
in the Exchange Offer to the Distribution Agent for distribution to the holders
of the outstanding Kranzco Common Shares and Kranzco Common Share Equivalents as
of the close of business on the Distribution Record Date. The Distribution will
be made on the basis of one NAI Share for each Kranzco Common Share and each
Kranzco Common Share Equivalent held as of the close of business on the
Distribution Record Date. Based on 12,005,185 Kranzco Common Shares and Kranzco
Common Share Equivalents on the Distribution Record Date, approximately
12,005,185 NAI Shares will be distributed to Kranzco shareholders. See "Proposed
Related Transactions."
Results of the Distribution
After the Distribution, NAI will be an independent public company which
will continue to conduct its business of providing real estate brokerage and
related services. The number and identity of the holders of 70.2% of the NAI
Shares immediately after the Distribution will be similar to the number and
identity of the holders of Kranzco Common Shares and Kranzco Common Share
Equivalents. The initial holders of NAI Shares prior to the Exchange Offer will
retain an aggregate of 20% of NAI Shares. Also, after the Distribution Kranzco
will retain approximately a 9.8% ownership interest in NAI. Immediately after
the Distribution, NAI expects to have approximately 1,000 holders of record of
NAI Shares and approximately 17,101,403 NAI Shares outstanding based on the
number of Kranzco shareholders of record on the Distribution Record Date and the
outstanding number of Kranzco Common Shares and Kranzco Common Share Equivalents
on the Distribution Record Date.
THE RIGHTS OFFERING
The Rights
NAI is distributing to the record holders of outstanding NAI Shares
immediately after the Distribution, including holders of Kranzco Common Shares
and Kranzco Common Share Equivalents who receive NAI Shares in the Distribution,
at no cost to them, transferable Rights to purchase additional NAI Shares at a
Subscription Price of $2.00 per NAI Share. NAI will distribute one Right for
each NAI Share held on the Distribution Date. Each Right will entitle its Holder
to purchase one NAI Share. The Rights to purchase NAI Shares pursuant to the
Basic Subscription Privilege and the Oversubscription Privilege will be
evidenced by transferable subscription certificates (the "Subscription
Certificates"). An aggregate of 17,101,403 Underlying Shares will be sold if all
Rights are exercised. The Finns have advised NAI that they intend to exercise
Rights to purchase an aggregate of 500,000 NAI Shares and Kranzco has advised
NAI that it intends to exercise such number of Rights to purchase
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<PAGE>
NAI Shares that would result in Kranzco owning approximately 9.8% of the issued
and outstanding NAI Shares, before the issuance of any Additional Shares. To the
extent Underlying Shares are not purchased in the Rights Offering, such
unsubscribed shares will be offered to the Executive Group and the Broker Member
Group in the Concurrent Offering. In order to ensure that the Broker Member
Group will have the right to purchase NAI Shares, NAI has authorized an
additional 2,000,000 NAI Shares for issuance pursuant to the Broker Member Group
Subscription Privilege. There is no minimum number of NAI Shares required to be
sold as a condition to the consummation of the Rights Offering or the Concurrent
Offering.
Subscription Privileges
Basic Subscription Privilege. Each Right will entitle the Holder thereof to
receive, upon payment of the Subscription Price, one NAI Share. Certificates
representing NAI Shares purchased pursuant to the Basic Subscription Privilege
will be delivered to subscribers as soon as practicable after the closing date,
irrespective of whether the Subscription Privilege is exercised immediately
prior to the Expiration Date or earlier. Holders exercising their Subscription
Privilege will not be stockholders of record with respect to the shares issuable
pursuant to such Subscription Privilege until the closing of the Rights
Offering, which is anticipated to occur five Business Days after the Expiration
Date.
Oversubscription Privilege. Subject to the allocation described below, each
Right also carries the right to subscribe at the Subscription Price for any
Underlying Shares not subscribed for through the exercise of Basic Subscription
Privileges by other Holders. If the remaining Underlying Shares are not
sufficient to satisfy all subscriptions pursuant to the Oversubscription
Privilege, such Underlying Shares will be allocated pro rata (subject to the
elimination of fractional shares) among those Holders exercising the
Oversubscription Privilege, in proportion, not to the number of shares requested
pursuant to the Oversubscription Privilege, but to the number of shares each
Holder exercising the Oversubscription Privilege subscribed for pursuant to the
Basic Subscription Privilege; provided, however, that if such pro rata
allocation results in any Holder being allocated a greater number of Underlying
Shares than such Holder subscribed for pursuant to the exercise of such holder's
Oversubscription Privilege, then such Holder will be allocated only such number
of Underlying Shares as such Holder subscribed for and the remaining Underlying
Shares will be allocated among all other Holders exercising the Oversubscription
Privilege. Only beneficial holders who exercise the Basic Subscription privilege
in full will be entitled to exercise the Oversubscription Privilege.
Certificates representing the Underlying Shares purchased pursuant to the
Oversubscription Privilege will be delivered to subscribers as soon as
practicable after the closing date and after all prorations have been effected.
The Basic Subscription Privilege and the Oversubscription Privilege are
referred to herein as the "Subscription Privileges."
Limitation on Exercise of Rights
The Rights may not be exercised by residents of the state of California
unless such residents are "qualified purchasers" as such term is defined in
under the laws of the state of California, and the resident makes a
representation that such resident is purchasing the Underlying Shares for his or
her own account (or trust account, if such resident is a trustee) for investment
and not with a view to or for sale in connection with any distribution of the
Underlying Shares (the "California Representation"). The Rights may not be
exercised by residents of the state of North Dakota unless such residents are
holders of NAI Shares. In addition, NAI maintains the right, in its sole
discretion, to limit the number of Underlying Shares sold in any state and/or
place restrictions on the exercise of Rights in any particular state in order to
comply with state securities laws.
Expiration Date
The Rights will expire at 5:00 p.m., New York time, the 45th day following
the commencement of the Rights Offering, unless extended by NAI from time to
time.
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No Revocation
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE OR
THE OVERSUBSCRIPTION PRIVILEGE SUCH EXERCISE MAY NOT BE REVOKED.
THE CONCURRENT OFFERING
The Concurrent Privileges
Executive Group Subscription Privilege. Simultaneously with the Rights
Offering, NAI is offering to the Executive Group the right to purchase any
Underlying Shares that are not otherwise subscribed for pursuant to the Rights
Offering ("Excess Shares"), at the Subscription Price, after the Basic
Subscription Privileges and Oversubscription Privileges have been fulfilled (the
"Executive Group Subscription Privilege"). If the number of Excess Shares is not
sufficient to satisfy all subscriptions pursuant to the Executive Group
Subscription Privilege, such Excess Shares will be allocated pro rata (subject
to the elimination of fractional shares) among those exercising the Executive
Group Subscription Privilege, in proportion to the number of Excess Shares
requested pursuant to the Executive Group Subscription Privilege. There is no
assurance that any Excess Shares will be available for purchase by the Executive
Group pursuant to the Executive Group Subscription Privilege.
Broker Member Group Subscription Privilege. Simultaneously with the Rights
Offering, NAI is offering to the Broker Member Group, the right to purchase any
Excess Shares, at the Subscription Price, after the Executive Group Subscription
Privileges have been fulfilled (the "Broker Member Group Subscription
Privilege," together with the Executive Group Subscription Privilege, the
"Concurrent Privileges"). NAI has authorized an additional 2,000,000 Additional
Shares in order to ensure that the Broker Member Group will have the right to
purchase an aggregate of 2,000,000 NAI Shares. If, after fulfillment of the
Executive Group Subscription Privilege, the number of Excess Shares and
Additional Shares is not sufficient to satisfy all subscriptions pursuant to the
Broker Member Subscription Privilege, such Excess Shares and Additional Shares
will be allocated pro rata (subject to the elimination of fractional shares)
among those exercising the Broker Member Subscription Privilege, in proportion
to the number of NAI Shares requested pursuant to the Broker Member Subscription
Privilege. There is no assurance that any person subscribing pursuant to the
Broker Member Group Subscription Privilege will receive all of the NAI Shares
for which such person subscribes.
Expiration Date
The Concurrent Privileges will expire at 5:00 p.m., New York time, on the
Expiration Date for the Rights Offering, unless extended in accordance with the
terms of the Rights Offering by NAI from time to time.
Limitations on Subscriptions by Certain Broker Members
The Broker Members and the principals, shareholders, partners, officers,
managers and licensed real estate agents of NAI's Broker Members in the states
of California (other than "qualified purchasers" under the laws of the state of
California who make the California Representation), Florida, Maryland, North
Dakota, South Dakota and Texas are not eligible to participate in the Concurrent
Offering. In addition, in connection with the securities laws of other states,
NAI reserves the right to limit, in its sole discretion, the number of NAI
Shares offered or sold in any state; accordingly, members of the Broker Member
Group in such other states may receive none, or a proportionally lower number of
NAI Shares than other Broker Members. In addition, NAI maintains the right, in
its sole discretion, to limit the ability of Broker Members in additional states
from participating in the Concurrent Offering in order to comply with state
securities laws.
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No Revocation
ONCE A MEMBER OF THE EXECUTIVE GROUP OR BROKER MEMBER GROUP HAS EXERCISED
THE EXECUTIVE GROUP SUBSCRIPTION PRIVILEGE OR THE BROKER MEMBER GROUP
SUBSCRIPTION PRIVILEGE, AS THE CASE MAY BE, SUCH EXERCISE MAY NOT BE REVOKED.
Non Transferability of Concurrent Privileges
THE EXECUTIVE GROUP SUBSCRIPTION PRIVILEGE AND THE BROKER MEMBER GROUP
SUBSCRIPTION PRIVILEGE ARE NOT TRANSFERABLE.
Use of Proceeds
The net proceeds to be received from the Rights Offering and the Concurrent
Offering depend on the number of Rights exercised and the number of Excess
Shares and Additional Shares purchased. If all Rights are exercised and all
Additional Shares are purchased, NAI expects the net proceeds available to it
from the Rights Offering and the Concurrent Offering to be approximately
$38,000,000. After paying the expenses of the Rights Offering, the Concurrent
Offering and the Proposed Related Transactions, the proceeds from the Rights
Offering and the Concurrent Offering will be used, in the following order of
priority, to (i) repay $202,000 principal amount of indebtedness incurred in
connection with the repurchase of 101,000 shares of Series A Preferred Stock of
NAI for an aggregate repurchase price of $202,000, (ii) repay approximately
$715,000 of indebtedness described below (which includes approximately $72,000
of accrued interest), (iii) expand NAI's Corporate Services Department and
Investment Sales Department, and (iv) strategically acquire and develop Real
Estate-Related Services. The balance of any proceeds will be invested in
short-term commercial paper at a rate of approximately 5.5% per annum until used
for general corporate and working capital purposes and to opportunistically
acquire real estate.
A portion of proceeds of the Rights Offering and the Concurrent Offering
will be used to repay (i) a 12% demand note, dated April 21, 1988, with an
outstanding principal balance of $110,500 issued by NAI to The Building Center,
Inc., an entity owned by Gerald and Norma Finn, (ii) two 10% demand notes, dated
August 12, 1994 and May 16, 1997, respectively, issued by NAI to Gerald and
Norma Finn, with outstanding principal balances of $35,000 and $50,000,
respectively, (iii) a 12% demand note, dated April 24, 1988, issued by NAI to
Gerald and Norma Finn, with an outstanding principal balance of $145,000, (iv)
three 10% demand notes, dated August 6, 1993, September 14, 1993, and November
9, 1993, respectively, issued by RealQuest, Inc., a wholly-owned subsidiary of
NAI, to Gerald and Norma Finn, with outstanding principal balances of $10,000,
$20,000 and $10,000, respectively, (v) a 12% demand note, dated April 24, 1991,
issued by NAI to Gerald and Norma Finn, with an outstanding principal balance of
$58,235, (vi) a loan by Gerald Finn and Norma Finn, dated December 8, 1993, in
the principal amount of $2,500, (vii) $6,666.74 aggregate principal amount
outstanding under a demand Promissory Note, dated April 29, 1996, issued by NAI
to First Washington State Bank ("FWSB"), which bears interest at a variable rate
equaling FWSB's prime rate plus one percent (8.5% as of June 30, 1998), (viii)
$100,000 aggregate principal amount outstanding under a Promissory Note, dated
October 2, 1997, issued by NAI to FWSB pursuant to a Line of Credit (the "Line
of Credit"), due October 2, 1998, which bears interest at a variable rate
equaling FWSB's prime rate plus one percent (8.5% as of June 30, 1998) and (ix)
$95,000 aggregate principal amount outstanding under a Promissory Note dated
December 2, 1997, issued by NAI to FWSB pursuant to a term loan due November
2002, which bears interest at a variable rate equalling FWSB's prime rate plus
one percent (8.5% as of June 30, 1998). The proceeds from the Term Loan and the
Line of Credit were used for general corporate and working capital purposes.
In the event that all of the Underlying Shares, Excess Shares and
Additional Shares are not purchased, NAI has assumed a minimum number of
Underlying Shares, Excess Shares and Additional Shares being purchased (an
aggregate of 930,378 NAI Shares) ("Minimum NAI Shares") and a moderate number of
Underlying Shares, Excess Shares and Additional Shares being purchased (an
aggregate of 10,000,000 NAI Shares) ("Moderate NAI Shares"). The Minimum NAI
Shares were estimated by NAI to be the minimum amount of
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Underlying Shares and Excess Shares to be purchased primarily by NAI, Kranzco
and the officers and directors of both Kranzco and NAI. The Moderate NAI Shares
were estimated by NAI to approximate the mid-point between the Minimum NAI
Shares and the Maximum NAI Shares being purchased. The sale of the Minimum NAI
Shares will result in gross proceeds to NAI of $1,860,756 and 18,006,938 NAI
Shares being outstanding. The sale of the Moderate NAI Shares will result in
gross proceeds to NAI of $20,000,000 and 27,801,483 NAI Shares being
outstanding.
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The table below sets forth the use of proceeds of the Rights Offering and the
Concurrent Offering, assuming the Minimum NAI Shares, Moderate NAI Shares and
Maximum NAI Shares are sold:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Use of Proceeds Assuming
- ------------------------------------------------------------------------------------------------------------------------------
Minimum Number of Moderate Number of Maximum Number
NAI Shares NAI Shares NAI Shares
(930,378 Shares) (10,000,000 Shares) (19,101,403 Shares)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Repayment of $202,000 23% $202,000 1% $202,000 .5%
Indebtedness related to
the Repurchase of Series
A Preferred Stock
- ------------------------------------------------------------------------------------------------------------------------------
Repayment of $658,756(1) 77% $715,000 4% $715,000 2%
Indebtedness (including
accrued interest of
approximately $72,000)
- ------------------------------------------------------------------------------------------------------------------------------
Expansion of NAI's $0 0% $2,000,000 10.5% $2,000,000 5.4%
Corporate Services
Department and
Investment Sales
Department
- ------------------------------------------------------------------------------------------------------------------------------
Acquisition and $0 0% $13,305,000 70% $27,446,860 74%
Development of Real
Estate-Related Services
- ------------------------------------------------------------------------------------------------------------------------------
Opportunistic $0 0% $0 0% $1,910,140 5%
Acquisition of Real
Estate
- ------------------------------------------------------------------------------------------------------------------------------
General corporate and $0 0% $2,778,000 14.5% $4,928,806 13.1%
working capital purposes
- ------------------------------------------------------------------------------------------------------------------------------
Total Net Proceeds: $860,756 100% $19,000,000 100% $37,202,806 100%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) $56,244 of the remaining indebtedness will be paid from NAI's cash on hand.
NAI does not have a written commitment from any person to purchase any of
the Underlying Shares pursuant to the Rights Offering or Excess Shares or
Additional Shares in the Concurrent Offering. The Finns have advised NAI that
they intend to exercise Rights to purchase an aggregate of 500,000 NAI Shares
and Kranzco has advised NAI that it intends to exercise such number of Rights to
purchase NAI Shares that would result in Kranzco owning approximately 9.8% of
the issued and outstanding NAI Shares, before the issuance of any Additional
Shares. Accordingly, no assurances can be given as to the amount of gross
proceeds that NAI will realize from the Rights Offering and the Concurrent
Offering. No minimum amount of proceeds is required for NAI to consummate the
Rights Offering or the Concurrent Offering. See "Risk Factors--No Commitments to
Purchase and No Minimum Size of Rights Offering."
NAI may change the specific use or allocation of the net proceeds from the
Rights Offering and Concurrent Offering, except that in all events NAI will use
at least $202,000 to repay $202,000 principal amount of indebtedness incurred in
connection with the repurchase of 101,000 shares of Series A Preferred Stock of
NAI for an aggregate repurchase price of $202,000, and will repay approximately
$715,000 of indebtedness of NAI
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described above. Management of NAI will have broad discretion to change the
allocation of the net proceeds among expanding NAI's Corporate Services
Department and Investment Sales Department, strategically acquiring and
developing Real Estate-Related Services and the opportunistic acquisition of
real estate; any change in the allocation of the net proceeds will depend upon,
among other things, the opportunities which are available to NAI.
REASONS FOR THE OFFER AND THE PROPOSED RELATED TRANSACTIONS
Kranzco is a self-administered and self-managed equity REIT engaged in the
business of owning, managing, operating, leasing, acquiring and expanding
neighborhood and community shopping centers and, to a lesser extent,
free-standing retail properties. Kranzco is limited in its activities by the
investment limitations imposed by Federal income tax laws applicable to REITs,
which (i) limit the amount of income that a REIT can realize from certain
services that are not customarily furnished or rendered in connection with the
rental of real property in a particular geographic area, and (ii) limit
Kranzco's ownership in corporations other than REITs and qualified REIT
subsidiaries (a) to 10% of the outstanding voting securities of such
corporation, and (b) in that the value of any one corporation's securities
cannot exceed 5% of the value of Kranzco's total assets. Kranzco believes that
significant opportunities are available to investors in entities which provide
brokerage and Real Estate-Related Services, own properties other than
neighborhood and community shopping centers, and which are not limited in their
activities by the investment limitations imposed by Federal income tax laws
applicable to REITs. Accordingly, in light of the limitations on investments
imposed on REITs, Kranzco believes that effecting the Exchange Offer, the
Distribution, the Rights Offering and the Concurrent Offering, and establishing
an intercompany relationship between Kranzco and NAI will yield significant
benefits to Kranzco and its shareholders similar to those which may be obtained
by investors who are not so limited, while preserving Kranzco's REIT status. For
Kranzco, these benefits include:
o increased opportunities to acquire retail properties which become
available for sale through the Network, which might not otherwise be
available to Kranzco;
o greater access to a diverse range of tenants, in order to re-tenant
vacant space owned by Kranzco, including access to non-retail tenants
looking for space appropriate for office, warehouse or other
non-retail uses;
o the ability to enter into agreements with NAI to have NAI develop new
shopping centers or redevelop distressed shopping centers for sale to
Kranzco;
o the ability to enter into new geographic areas with the assistance of
NAI's real estate professionals;
o NAI disseminating Kranzco's acquisition criteria to Broker Members
through the Network, in order to create additional opportunities to
purchase retail properties;
o increased opportunities to purchase additional retail properties which
are included in portfolios with non-retail properties, utilizing NAI
to purchase the non-retail properties or find a purchaser for the
non-retail properties;
o access to NAI's sophisticated, real estate oriented computer network,
which includes information on real estate transactions, market
conditions and demographics;
o the ability to purchase Real Estate-Related Services at competitive
prices;
o the ability to own an equity interest in a company which owns real
estate and provides Real Estate-Related Services which Kranzco, as a
REIT, could not directly own or provide; and
o access to local property managers where Kranzco may own retail
properties, and the opportunity for Kranzco to manage retail
properties owned by NAI.
NAI operates a network of independently owned, licensed real estate Broker
Members throughout the United States and, more recently, abroad, to provide
commercial real estate services to regional, national and international Clients.
NAI believes that a strategic relationship between companies which provide real
estate brokerage and services, such as NAI, and companies which own and operate
real estate, such as Kranzco, would provide significant benefits and
opportunities. For NAI, the benefits of entering into the strategic relationship
and consummating the Proposed Related Transactions (and under certain
circumstances, to the extent proceeds are available through the Rights Offering
and the Concurrent Offering) include:
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o the opportunity as a public company, to raise additional capital
through the Rights Offering and the Concurrent Offering and, to the
extent possible, future equity and debt offerings;
o the ability to expand its Corporate Services Department, Investment
Sales Department and Broker Services Department;
o the ability to invest in or acquire Broker Members or other real
estate service firms in order to strengthen the Network;
o access to new transactions by providing real estate brokerage services
to Kranzco through NAI's Network;
o the ability to accelerate the development of information services and
technology infrastructure to more efficiently deliver services;
o the opportunity to offer to Kranzco Real Estate-Related Services which
NAI may develop; o the opportunity to further develop existing Real
Estate-Related Services and to acquire or develop businesses that
provide Real Estate-Related Services;
o the ability to accelerate Network growth in international markets;
o providing Broker Members the opportunity to manage selected Kranzco
shopping centers;
o the opportunity to enter into agreements with Kranzco to have NAI
develop new shopping centers or re-develop distressed shopping centers
for sale to Kranzco; and
o expansion of its business through access to the real estate expertise
of Kranzco's management.
In the past Kranzco and NAI have worked together in a mutually beneficial
relationship. In December 1997, NAI's Investment Sales Department assisted
Kranzco in arranging for the acquisition of five shopping centers, aggregating
approximately 650,000 square feet of GLA, for approximately $44 million. NAI's
Investment Sales Department initiated this opportunity, and assisted Kranzco in
acquiring the properties. Kranzco's acquisition of such properties generated
$100,000 in fee income to NAI. Kranzco and NAI expect that the Intercompany
Agreement will set forth a framework for a mutually beneficial relationship in
the future. Accordingly, Kranzco and NAI believe that it is in the interest of
their respective shareholders and stockholders for Kranzco and NAI to enter into
an Intercompany Agreement to set forth the terms of a mutually beneficial
relationship between the two companies, and for there to be a commonality of
ownership interests in Kranzco and NAI. See "Proposed Related
Transactions--Intercompany Agreement" and "The Distribution."
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MANAGEMENT OF NAI AFTER EXCHANGE OFFER
Directors and Executive Officers
Upon consummation of the Exchange Offer and Reincorporation, NAI's Board of
Directors will consist of eight members who will be divided into three classes
as noted below. Class I consists of two directors whose terms will expire at the
1999 Annual Meeting of Shareholders. Classes II and III each consist of three
directors whose terms will expire at the 2000 and the 2001 Annual Meetings of
Shareholders, respectively. Upon consummation of the Exchange Offer and the
Reincorporation Merger, the names and ages of the directors and executive
officers of NAI and the positions held by them will be as set forth in the
following table:
<TABLE>
<CAPTION>
Name Age Position Term Expires
---- --- -------- ------------
<S> <C> <C> <C>
Gerald C. Finn 67 Co-Chairman of the Board, Chief Executive 2001
Officer and Director
Jeffrey M. Finn 35 President, Chief Operating Officer and 2000
Treasurer and Director
Norman M. Kranzdorf 67 Co-Chairman and Director 2001
Robert H. Dennis 51 Chief Financial Officer and Director 1999
Joseph Grossman 64 Director 1999
Peter O. Hanson 64 Director 2001
Bernard J. Korman 66 Director 2000
Michael Kranzdorf 37 Chief Information Officer and Director 2000
Norma J. Finn 65 Secretary
</TABLE>
Gerald C. Finn, NAI's principal founder, has served as the Chief Executive
Officer and a Director of NAI since 1974. He also served as NAI's President from
1974 until 1995. He was elected as Chairman of the Board in May 1990. Mr. Finn
will become Co-Chairman of the Board upon consummation of the Exchange Offer and
the Reincorporation Merger. Prior to his association with NAI, Mr. Finn was an
active real estate broker and developer for his own account and for the account
of various entities in which he had an equity interest. He is a licensed real
estate broker and a member of NACORE, ICSC and IDRC, and is a founding member of
the Wharton School Real Estate Center.
Jeffrey M. Finn, the son of Gerald C. Finn, has been employed full time by
NAI since January, 1984, and has served as Chief Operating Officer and President
since September 1995, as Treasurer of NAI since December 1987 and has served as
Executive Vice President of NAI from 1992 to 1995. He has worked in various
capacities including brokerage and corporate services, as well as Investment
Sales prior to becoming Vice President-Marketing in 1988. Mr. Finn is a graduate
of Boston University's School of Management and is a licensed Real Estate
Salesperson in the State of New Jersey. Mr. Finn is a member of ICSC, IDRC,
NACORE and the Wharton Real Estate Center Advisory Board.
Norman M. Kranzdorf, will become the Co-Chairman of the Board of Directors
of NAI upon consummation of the Exchange Offer and the Reincorporation Merger.
Mr. Kranzdorf, a co-founder of Kranzco, has been a trustee and the President and
Chief Executive Officer of Kranzco since its organization in June 1992. Mr.
Kranzdorf was the President of Kranzco Realty, Inc., a general commercial real
estate management and brokerage company ("Kranzco Realty"), from 1979, when he
founded Kranzco Realty, to 1992. He served as President of Amterre Development,
Inc. ("Amterre") from 1972 to 1981. Amterre, the successor to Food Fair
Properties, Inc., owned and operated over 50 shopping centers, as well as other
single-tenant retail properties, on
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the Eastern seaboard. Mr. Kranzdorf was also an officer and director of Kranzco
Management, Inc., a general commercial real estate manager and brokerage company
and a wholly-owned subsidiary of Kranzco Realty, from 1980, when it was founded,
to 1992. He is a member of the Board of Governors of NAREIT and a former trustee
of the ICSC.
Robert H. Dennis will become the Chief Financial Officer of NAI and a
member of the Board of Directors of NAI upon consummation of the Reincorporation
Merger. Mr. Dennis has been a trustee of Kranzco since June 1994 and the Chief
Financial Officer and Treasurer of Kranzco since its organization in June 1992.
Prior thereto he was the Chief Financial Officer and Assistant Secretary of
Kranzco Realty from 1981 to 1992.
Michael Kranzdorf will become the Chief Information Officer of NAI and a
member of the Board of Directors of NAI upon consummation of the Exchange Offer
and the Reincorporation Merger. Mr. Kranzdorf was named Director of Information
Systems at Kranzco Realty Trust in 1994 and was elected a Vice President of
Kranzco in June 1996. He has been with Kranzco since 1987 as a programmer and
designer. Mr. Kranzdorf received his B.S. from Tufts University and his M.S.
from the University of Colorado, both in Electrical Engineering. Prior to
joining Kranzco, he held positions at Texas Instruments, the University of
Colorado and owned a consulting and publishing company in Boulder, Colorado. Mr.
Kranzdorf is a member of the ICSC and serves on the Research Committee, and he
has recently accepted the first Chairmanship of NAREIT's Technology Committee.
Joseph Grossman has served as a Director of NAI since March, 1983. Mr.
Grossman has been an independent real estate developer since 1961 and has
developed shopping centers and industrial, residential and recreational
properties for his own account. Mr. Grossman is also one of the founding members
of the Tinton Falls State Bank and is a member of its Advisory Board.
Peter O. Hanson has been a member of the Board since July 1990. Mr. Hanson
is Chairman of James E. Hanson, Inc., a Broker Member of NAI. Mr. Hanson has
been active in Commercial/Industrial Brokerage and Development since 1959. A
very active member of The Society of Industrial and Office Realtors ("SIOR"),
Mr. Hanson has served that organization as a leader at the state, regional and
national level. He was SIOR's International President in 1985. In addition, Mr.
Hanson has been an active member of NAI's Advisory Board and has served as
Chairman of such Board. Mr. Hanson is a member of the Board of Trustees of
Meridian Trust and Meridian Industrial Trust. Other civic and industry groups
have benefitted from his participation and leadership. A 1955 graduate of
Colgate University (B.A. - Sociology), Mr. Hanson also was a captain in the
United States Air Force.
Bernard J. Korman will become a member of the Board of Directors of NAI
upon consummation of the Exchange Offer and the Reincorporation Merger. Mr.
Korman is Chairman of Graduate Health System, Inc., a non-profit organization,
and NutraMax Products, Inc., a consumer healthcare products company. Mr. Korman
served as President and Chief Executive Officer of MEDIQ Incorporated from 1981
to 1995 and as chairman of PCI Services, Inc. from 1992 to 1996. Mr. Korman
currently is a director of The Pep Boys, Inc., Today's Man, Inc., The New
America High Income Fund, Inc., InnoServ Technologies, Inc., Omega Healthcare
Investors, Inc., Omega Worldwide, Inc. and has been a trustee of Kranzco since
May 1997.
Norma J. Finn has served as the Secretary of NAI since its inception in
1974. Ms. Finn attended the University of Delaware and has served as secretary
and a board member of a number of real estate development corporations. She has
been active in numerous charitable activities including being President of
Contact of Mercer County N.J. and on the national board of Contact, and the
board of the Delaware Valley United Fund.
Officers of NAI are elected by the Board and hold office until their
successors are chosen and qualified or until their death, resignation or
removal.
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Director Compensation
It is NAI's policy to pay non-employee directors of NAI fees of $500 per
meeting, as well as reimbursements for expenses incurred in attending meetings
of the Board. However, in lieu of paying outstanding directors' fees, in January
1998, NAI issued 5,000 NAI Shares to each of Matthew Arnold, Joseph Grossman,
Peter Hanson, Robert McMenamin and Marc Shegoski, the then non-employee
directors of NAI. Such non-employee directors were owed accrued director fees as
follows: Matthew Arnold, $5,500 for 11 meetings; Joseph Grossman, $5,000 for 10
meetings; Peter Hanson, $6,500 for 13 meetings; Robert McMenamin $2,000 for 4
meetings; and Marc Shegoski $4,000 for 8 meetings.
In fiscal year 1997, there were two meetings of the Board of Directors of
NAI; each director attended both of the meetings, other than Mr. Matthew Arnold,
then a director of NAI Delaware, and Mr. Joseph Grossman, who each attended one
meeting.
Executive Compensation
The following table sets forth certain information with respect to the cash
and other compensation paid or accrued by NAI for services rendered by Gerald
Finn, NAI's Chief Executive Officer, and NAI's four other most highly
compensated executive officers whose salary and bonus exceeded $100,000
(collectively, the "Named Executives"), during the fiscal year ended June 30,
1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1) Compensation
---------------------------------------- ------------
Name & Principal Position Year Salary Bonus Restricted
- ------------------------- ---- ------ ----- Stock Awards($)
($) ($) --------------
<S> <C> <C> <C> <C>
Gerald C. Finn 1997 $125,000 -- $7,500(2)
Chairman and Chief
Executive Officer
Jeffrey M. Finn 1997 $110,000 $25,000 $2,250(2)
President, Chief
Operating Officer and
Treasurer
</TABLE>
- ----------
(1) The total value of all perquisites and other personal benefits received by
each individual was less than the lesser of $50,000 or ten percent of the
total salary of and bonus paid or accrued by NAI for services rendered by
each officer during the fiscal year.
(2) Reflects grant of 25,000 restricted NAI Shares and 7,500 restricted NAI
Shares to Gerald C. Finn and Jeffrey M. Finn, respectively. Such NAI Shares
were granted in fiscal year 1998 with respect to performance in fiscal
year1997, pursuant to a Restricted Stock Agreement. Such NAI Shares were
valued at $.30 per NAI Share, the value of the NAI Shares as determined by
the Board of Directors. See "Management -- Restricted Stock Agreements".
Employment Agreements
NAI has entered into employment agreements with Messrs. G. Finn and J. Finn
(the "Senior Executives"), pursuant to which Mr. G. Finn serves as the
Co-Chairman of the Board of NAI and Mr. J. Finn serves as its President. Each of
the employment agreements with Messrs. G. Finn and J. Finn has a term of three
years, which is automatically extended for successive one-year periods unless
either the Senior Executive or NAI gives prior notice not to extend the
employment agreement, as specified in the agreement. The employment agreements
provide for annual compensation of $175,000 to each of Messrs.
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G. Finn and J. Finn for the first year of the term. Pursuant to the employment
agreements, each of the Senior Executives is also entitled to incentive
compensation to be determined by the Compensation Committee. After the first
year of each employment agreement, salary and bonus for the Senior Executives
will be determined by the Compensation Committee.
In the event that either of the Senior Executives is fired without "cause,"
such Senior Executive shall be entitled to the lesser of (i) two times the
individual's annual base compensation or (ii) the individual's annual base
compensation remaining due under the terms of his employment agreement;
provided, however, that the Senior Executive shall not be entitled to any such
severance payment if he has received a payment upon a change in control as
described below. The employment agreements also contain certain provisions
relating to non-competition and confidentiality.
Each employment agreement provides that upon a change in control and so
long as such individual is an employee of NAI immediately prior to such a change
in control, (a) the individual shall receive a lump sum severance payment equal
to two times the individual's annual compensation during the calendar year
preceding the calendar year during which the change in control has occurred, (b)
restricted NAI Shares then owned by the individual shall immediately vest and no
longer be subject to repurchase or other forfeiture restrictions, (c) NAI will
continue to provide life, accident, medical and dental insurance to the
individual for the period of 18 months after the change in control, and (d) in
the event the individual holds any options to purchase NAI Shares on the date of
the change in control, such individual shall be entitled to receive an amount
equal to, generally, the number of options to purchase NAI Shares then owned by
the individual multiplied by the amount, if any, that(i) the exercise price of
the options or the closing price of the NAI Shares on the date of the change in
control, whichever is less, exceeds (i) the average closing price of the NAI
Shares during the sixth month prior to the date of the change in control. If the
closing price of the NAI Shares as of the date of the change in control is
greater than the exercise price of such option then the individual can retain
the option or receive in exchange therefor cash equal to the number of shares
underlying the options multiplied by the amount by which the closing share value
exceeds the exercise price of the options. Each Employment Agreement provides
that, to the extent that any of the foregoing benefits granted to such
individual would cause him to be liable for excise tax liabilities, the benefits
available to him shall be reduced to an amount which would not require the
payment of any such excise tax, but only if doing so yields a greater after tax
amount to such individual.
Restricted Stock Agreements
In the past, NAI has granted restricted NAI Shares to certain persons
providing services to NAI, including employees and Broker Members (each, a
"grantee"). Each grantee of restricted NAI Shares executed a form of Restricted
Stock Agreement, which contains certain representations and warranties made by
NAI and the grantee, and sets forth the terms and conditions of the grant,
including the limited conditions under which the grantee may transfer the
restricted NAI Shares. The Restricted Stock Agreement also provides NAI with an
option for a period of three years following the date of grant to repurchase the
restricted NAI Shares if the grantee's services to NAI are terminated (a
"Termination"). NAI may repurchase restricted NAI Shares, for a period of 90
days after the date of Termination, at the following prices: $.10 per NAI Share
for a termination during the first year after the date of grant of the
restricted NAI Shares; $.20 per NAI Share for a termination during the year
after the second anniversary of the date of grant of the restricted NAI Shares;
and $.30 per NAI Share for a termination during the year after the third
anniversary of the date of grant of the restricted NAI Shares. In connection
with the Exchange Offer, NAI has agreed to permit the transfer to Kranzco of all
restricted NAI Shares which are validly tendered on or prior to the Expiration
Date, and not subsequently withdrawn. In addition, NAI has agreed to eliminate
the repurchase option with respect to all restricted NAI Shares owned by NAI
Stockholders after the consummation of the Exchange Offer, if such NAI
Stockholder tenders at least 80% of his or her restricted NAI Shares. The
release of any or all of the preceding restrictions could cause the holders of
restricted NAI Shares to immediately recognize ordinary income in an amount
equal
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to the excess of the fair market value of such NAI Shares at the time the
restrictions are released over any amounts paid to acquire such NAI Shares. In
addition, withholding taxes will be payable to NAI (or withheld by NAI from
amounts otherwise due such holders) in connection with any such recognition of
income. Holders of restricted NAI Shares are urged to consult their tax advisors
concerning the federal, state and local tax consequences of the release of any
restrictions on their NAI Shares.
NAI 1998 Incentive Plan
General. In connection with the Exchange Offer and the Reincorporation
Merger, NAI adopted the NAI 1998 Incentive Plan (the "1998 Plan"). The purpose
of the 1998 Plan is to align the interests of NAI's directors, officers and
other employees and consultants with those of the shareholders and to enable NAI
to attract, compensate and retain selected individuals to serve as directors,
officers and employees and consultants who will contribute to NAI's success and
provide such individuals with appropriate incentives and rewards for their
performance.
Awards to directors, officers, employees and consultants under the 1998
Plan may take the form of cash, share options ("Options"), including
corresponding share appreciation rights ("SARs") and reload options, restricted
share awards, share purchase awards and performance based awards. The maximum
number of NAI Shares that may be the subject of awards under the 1998 Plan is
1,700,000 NAI Shares, or approximately 4.7% of the NAI Shares outstanding as of
June 30, 1998, assuming the Proposed Related Transactions had occurred. The
maximum number of NAI Shares that may be the subject of awards to any employee
during any fiscal year under the 1998 Plan is 250,000 NAI Shares.
NAI Share Authorization. NAI Shares covered by any unexercised portions of
terminated Options, NAI Shares forfeited by participants and NAI Shares subject
to any awards which are otherwise surrendered by a participant without receiving
any payment or other benefit with respect thereto may again be subject to new
awards under the 1998 Plan. In the event the purchase price of an Option is paid
in whole or in part through the delivery of NAI Shares, the number of NAI Shares
issuable in connection with the exercise of the Option shall not again be
available for the grant of awards under the 1998 Plan. NAI Shares subject to
Options, or portions thereof, which have been surrendered in connection with the
exercise of SARs, are not again available for the grant of awards under the 1998
Plan. The NAI Shares to be issued or delivered under the 1998 Plan are
authorized and unissued shares, or issued NAI Shares that have been reacquired
by NAI.
Incentive Plan Administration. The 1998 Plan will be administered by a
committee of two or more non-employee directors (the "Committee"), which will
initially consist of Messrs. Bernard J. Korman and Joseph Grossman. The
Committee will determine the directors, officers, employees and consultants who
will be eligible for and granted awards, determine the amount and type of
awards, establish rules and guidelines relating to the 1998 Plan, establish,
modify and terminate the terms and conditions of awards and take such other
action as may be necessary for the proper administration of the 1998 Plan. All
directors, employees and certain consultants are currently eligible to
participate in the 1998 Plan. Eighty percent of the NAI Shares which may be the
subject of awards under the 1998 Plan are reserved for employees of NAI who are
not also employees of Kranzco, and 20% of the NAI Shares which may be the
subject of awards under the 1998 Plan are reserved for employees and consultants
of NAI who are also employees of Kranzco.
Options. "Incentive Options" meeting the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and "Nonqualified
Options" that do not meet such requirements are both available for grant under
the 1998 Plan. The term of each Option will be determined by the Committee, but
no Option will be exercisable more than five years after the date of grant.
Options may also be subject to restrictions on exercise, such as exercise in
periodic installments, as determined by the Committee. The exercise price for
both Incentive Options and Nonqualified Options must be at least equal to 100%
of the fair market value of the NAI Shares on the date of grant. The exercise
price can be
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paid in cash, or if approved by the Committee, by tendering (actually or
constructively) NAI Shares owned by a participant.
Incentive Options are not transferable except by will or the laws of
descent and distribution and may be exercised only by the participant (or his
guardian or legal representative) during his or her lifetime, except as provided
below. With the Committee's consent, Nonqualified Options may be transferable to
family members and entities for the benefit of the participant or his family
members. If a participant's employment with NAI or service as a director
terminates for any reason (other than death or disability), any unexercised or
unexpired Options held by the participant (or its permitted transferee) will be
deemed canceled and terminated on the date of such termination, unless the
Committee decides to extend the term of such Options for a period not exceeding
three months. If a participant dies while employed by NAI, including an employee
who is also a director, any unexercised or unexpired Options will, to the extent
exercisable on the date of death, be exercisable by the holder or by the
participant's estate or by any person who acquired such Options by bequest or
inheritance, at any time generally within one year after such death. If a
participant becomes totally disabled and his employment terminates as a result
of such disability, including an employee who is also a director, the holder or
the participant (or his guardian or legal representative) will have the
unqualified right to exercise any unexercised and unexpired Options held by the
participant (or its permitted transferee) generally for one year after such
termination.
NAI Share Appreciation Rights. The 1998 Plan provides that SARs may be
granted in conjunction with a grant of Options. Each SAR must be associated with
a specific Option and must be granted at the time of grant of such Option. A SAR
is exercisable only to the extent the related Option is exercisable. Upon the
exercise of a SAR, the recipient is entitled to receive from NAI, without the
payment of any cash (except for any applicable withholding taxes), up to, but no
more than, an amount in cash or NAI Shares equal to the excess of (A) the fair
market value of one NAI Share on the date of such exercise over (B) the exercise
price of any related Option, times the number of NAI Shares in respect of which
such SAR shall have been exercised. Upon the exercise of a SAR, the related
share Option, or the portion thereof in respect of which such SAR is exercised,
will terminate. Upon the exercise of an Option granted in tandem with a SAR,
such tandem SAR will terminate.
Reload Options. The Committee may grant, concurrently with the award of any
Option (each an "Underlying Option") to such participants, one or more reload
options (each a "Reload Option") to purchase for cash or, if permissible under
the Underlying Option, NAI Shares, a number of NAI Shares equal to the number of
NAI Shares delivered (or deemed delivered) by the participant to NAI to exercise
the Underlying Option. Although an Underlying Option may be an Incentive Option,
a Reload Option is not intended to qualify as an Incentive Option. A Reload
Option may be granted in connection with the exercise of an Option that is
itself a Reload Option. Each Reload Option will have the same expiration date as
the Underlying Option and an exercise price equal to the fair market value of
the NAI Shares on the date of grant of the Reload Option. A Reload Option is
exercisable immediately.
Reload Options permit a participant to retain, through the term of the
original Option, his or her economic interest in the sum of the NAI Shares
covered by such Options as well as the already-owned NAI Shares that could be
used to exercise such Option, by granting options on the number of NAI Shares
used to pay the exercise price of the original Option and subsequent Reload
Options. In this way, Reload Options provide a participant with the opportunity
to build up ownership of NAI Shares covered by an original Option earlier during
the Option term rather than through a single exercise at or near the end of the
Option term.
Restricted NAI Shares. NAI may award restricted NAI Shares to a
participant. Such a grant gives a participant the right to receive NAI Shares
subject to a risk of forfeiture based upon certain conditions. The forfeiture
restrictions on the NAI Shares may be based upon performance standards, length
of service or other criteria as the Committee may determine. Until all
restrictions are satisfied,
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lapsed or waived, NAI will maintain custody over the restricted NAI Shares but
the participant will be able to vote the NAI Shares and will be entitled to an
amount equal to all distributions, if any, paid with respect to the NAI Shares,
as provided by the Committee. During such restrictive period, the restricted NAI
Shares may not be sold, assigned, transferred, pledged or otherwise encumbered.
Upon termination of employment, the participant generally forfeits the right to
the NAI Shares to the extent the applicable performance standards, length of
service requirements, or other measurement criteria have not been met.
NAI Share Purchase Awards. The 1998 Plan also permits the grant of share
purchase awards to participants. Participants who are granted a share purchase
award are provided with a share purchase loan to enable them to pay the purchase
price for the NAI Shares acquired pursuant to the award. The terms of each share
purchase loan will be determined by the Committee. The purchase price of NAI
Shares acquired with a share purchase loan is the fair market value on the date
of the award. The 1998 Plan provides that some or all of the share purchase loan
can be forgiven under terms determined by the Committee. At the end of the loan
term, the remainder of the share purchase loan will be due and payable. The
interest rate, if any, on a share purchase loan will be determined by the
Committee. NAI Share purchase loans may be recourse or nonrecourse under terms
determined by the Committee.
If a participant's employment with NAI is terminated for any reason, the
balance of the purchase loans to such participant will be immediately due and
payable provided, however, if a participant's employment terminates by reason of
death, disability, by NAI without "cause," or in the event of a change in
control, the balance of such participant's purchase loans may be forgiven in
whole or in part as of the date of such occurrence at the discretion of the
Committee.
Performance-Based Awards. Certain Awards granted under the 1998 Incentive
Plan may be granted in a manner such that the Awards qualify as
"performance-based compensation"(as such term is used in Section 162(m) of the
Code and the regulations thereunder) and thus be exempt from the deduction
limitation imposed by Section 162(m) of the Code ("Performance-Based Awards").
In general to qualify as a Performance-Based Award, among other things, the
Committee must be comprised solely of two or more "outside directors." The
Committee shall have complete discretion in determining the number, amount and
timing of awards granted to each participant. Such Performance-Based Awards may
take the form of, without limitation, cash, Shares or any combination thereof.
The Committee shall set performance goals at its discretion which, depending on
the extent to which they are met, will determine the number and/or value of such
Performance-Based Awards that will be paid out to the participants, and may
attach to such Performance-Based Awards one or more restrictions. The maximum
cash amount of Performance-Based Awards to be awarded to any employee during any
fiscal year shall be $1,000,000.
The Committee may use the following performance measures, among others,
(either individually or in any combination) to set performance targets with
respect to Awards intended to qualify as Performance-Based Awards: net sales;
pretax income before allocation of corporate overhead and bonus; budget;
earnings per share; net income; division, group or corporate financial goals;
return on stockholders' equity; return on assets; attainment of strategic and
operational initiatives; appreciation in and/or maintenance of the price of the
NAI Shares or any other publicly-traded securities of NAI; market share; gross
profits; earnings before taxes; earnings before interest and taxes; earnings
before interest, taxes, depreciation and amortization; economic value-added
models; comparisons with various stock market indices; and/or reductions in
costs.
Antidilution Provisions. The number of NAI Shares authorized to be issued
under the 1998 Plan and subject to outstanding awards (and the grant or exercise
price thereof) may be adjusted to prevent dilution or enlargement of rights in
the event of any dividend or other distribution, recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of NAI Shares or other securities, the
issuance of warrants or other rights to purchase NAI Shares or other securities,
or other similar capitalization change.
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Certain Federal Income Tax Consequences of the 1998 Plan. The following is
a brief summary of the principal federal income tax consequences of awards under
the 1998 Plan. The summary is based upon current federal income tax laws and
interpretations thereof, all of which are subject to change at any time,
possibly with retroactive effect. The summary is not intended to be exhaustive
and, among other things, does not describe state, local or foreign tax
consequences.
A participant is not subject to federal income tax either at the time of
grant or at the time of exercise of an Incentive Option. However, upon exercise,
the difference between the fair market value of the NAI Shares and the exercise
price is an includible item subject to the possible application of the
alternative minimum tax. If a participant does not dispose of NAI Shares
acquired through the exercise of an Incentive Option in a "disqualifying
disposition" (i.e., no disposition occurs within two years from the date of
grant of the share option nor within one year of the transfer of the NAI Shares
to the participant), then the participant will be taxed only upon the gain, if
any, from the sale of such NAI Shares, and such gain will be taxable as gain
from the sale of a capital asset.
NAI will not be allowed any tax deduction on the exercise of an Incentive
Option or, if the above holding period requirements are met, on the sale of the
underlying NAI Shares. If there is a disqualifying disposition (i.e., one of the
holding period requirements is not met), the participant will be treated as
receiving compensation subject to ordinary income tax in the year of the
disqualifying disposition and NAI will be entitled to a deduction for
compensation expense in an amount equal to the amount included in income by the
participant. The participant generally will be required to include in income an
amount equal to the difference between the fair market value of the NAI Shares
at the time of exercise and the exercise price. Any appreciation in value after
the time of exercise will be taxed as capital gain and will not result in any
deduction by NAI.
If Nonqualified Options are granted to a participant, there are no federal
income tax consequences at the time of grant. Upon exercise of the Option, the
participant must report as ordinary income an amount equal to the difference
between the exercise price and the fair market value of the NAI Shares on the
date of exercise. NAI will be allowed a tax deduction in like amount. Any
appreciation in value after the time of exercise will be taxed as capital gain
and will not result in any deduction by NAI.
No income will be realized by a participant in connection with the grant of
any SAR. The participant must include in ordinary income the amount of cash
received and the fair market value on the exercise date of any NAI Shares
received upon the exercise of a SAR. NAI will be entitled to a deduction equal
to the amount included in such participant's income by reason of the exercise of
any SAR.
The receipt of a Reload Option by a holder of an Incentive Option or a
Nonqualified Option (including a Reload Option) who pays the exercise price in
full or in part with previously acquired NAI Shares should not affect the tax
treatment of the exercise of such Incentive or Nonqualified Option (including
the amount of ordinary income, if any, recognized upon exercise). A participant
will not be subject to tax at the time a Reload Option is granted (except for
any income recognized upon the exercise of a Nonqualified Option at the time of
grant of the Reload Option). A Reload Option will constitute a Nonqualified
Option for federal income tax purposes and will be taxed as such in the manner
set forth above.
A grant of restricted NAI Shares does not constitute a taxable event for
either a participant or NAI. However, the participant will be subject to tax, at
ordinary income rates, when the NAI Shares are no longer subject to a
substantial risk of forfeiture or they become transferable. NAI will be entitled
to take a commensurate deduction at that time.
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A participant may elect to recognize taxable ordinary income at the time
restricted NAI Shares are awarded in an amount equal to the fair market value of
the NAI Shares at the time of grant, determined without regard to any forfeiture
restrictions. If such an election is made, NAI will be entitled to a deduction
at that time in the same amount. Future appreciation on the NAI Shares will be
taxed at the capital gains rate when the NAI Shares are sold. However, if, after
making such an election, the NAI Shares are forfeited, the participant will be
unable to claim a deduction.
In general, a participant who receives a share purchase award incurs no tax
liability and NAI does not receive any deduction at the time NAI Shares are
acquired through a share purchase award. However, as the share purchase loan is
forgiven, the participant will be required to recognize income in an amount
equal to the forgiven portion of the loan. NAI will be entitled to take a
commensurate deduction at such time.
Applicable withholding taxes may be withheld in connection with any award
under the 1998 Plan. In that regard, the Committee has the discretion to allow a
participant to satisfy its withholding tax obligations with NAI Shares.
Change in Control. Depending on the terms of a particular award as
determined by the Committee, upon the occurrence of a change in control of NAI,
all options and related SARs may become immediately exercisable, the restricted
NAI Shares may fully vest and share purchase loans may be forgiven in full.
Termination, Amendment and ERISA Status. The 1998 Plan will terminate by
its terms and without any action by the Board on May 27, 2008. No awards may be
made after that date. Awards outstanding on such date will remain valid in
accordance with their terms.
The Committee may amend or alter the terms of awards under the 1998 Plan,
including to provide for the forgiveness in whole or in part of share purchase
loans, the release of the NAI Shares securing such loans or the termination or
modification of the vesting or performance provisions of the grants of
restricted NAI Shares but no such action shall in any way impair the rights of a
participant under any award without such participant's consent.
The Committee may amend or terminate the 1998 Plan. No such amendments or
termination of the 1998 Plan shall in any way impair the rights of a participant
under any award previously granted without such participant's consent. In
addition, any amendment or termination will be subject to shareholder approval
if approval is required by Federal or state law or regulation or rule of any
stock exchange or quotation system on which the NAI Shares are listed or quoted.
The 1998 Plan is not subject to the provisions of the Employee Retirement
Income Security Act of 1976, as amended ("ERISA").
NAI 1998 Employee Bonus Compensation Plan
General. In connection with the Exchange Offer and the Reincorporation
Merger, NAI adopted the NAI 1998 Employee Bonus Compensation Plan (the "Bonus
Compensation Plan"). The purpose of the Bonus Compensation Plan is to compensate
outstanding performance by employees of NAI and to enable NAI to attract,
compensate and retain selected individuals to serve as employees who will
contribute to NAI's success and provide such individuals with appropriate
incentives and rewards for their performance.
Awards to employees under the Bonus Compensation Plan will be in the form
of grants of NAI Shares. The maximum number of NAI Shares that may be the
subject of awards under the Bonus Compensation Plan is 8,500,000 NAI Shares (the
"Award Shares"), assuming all of the Rights are
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exercised, or approximately 23.5% of the NAI Shares outstanding as of June 30,
1998, assuming the Proposed Related Transactions had occurred. If less than all
of the Underlying Shares are purchased pursuant to the Rights Offering and the
Concurrent Offering, the number of NAI Shares available under the Bonus
Compensation Plan will be decreased by 25% of the amount by which 34,000,000 NAI
Shares exceeds the number of NAI Shares outstanding after the Rights Offering
and the Concurrent Offering are exercised. The NAI Shares to be issued or
delivered under the Bonus Compensation Plan are authorized and unissued shares,
or issued NAI Shares that have been reacquired by NAI.
NAI Share Award Formula. Subject to the maximum number of NAI Shares
remaining available under the Bonus Compensation Plan, each year there shall be
available for award under the Bonus Compensation Plan, a number of NAI Shares
equal to the product of 6.25% times NAI's pre-tax net income for such year,
adjusted to exclude any deduction for the payment of the consulting fee to
Kranzco under the Intercompany Agreement ("Annual Award Shares").
Bonus Compensation Plan Administration. The Board will make grants of the
Annual Award Shares within 6 months after the end of the fiscal year with
respect to which such Award Shares become available for grant based on the
recommendation of the Chief Executive Officer and the President of NAI. All
employees are currently eligible to participate in the Bonus Compensation Plan.
The selection of employees who participate in the Bonus Compensation Plan will
be determined solely at the discretion of the Board based on the recommendation
of the Chief Executive Officer and President of NAI.
Antidilution Provisions. The number of NAI Shares authorized to be issued
under the Bonus Compensation Plan and subject to outstanding awards may be
adjusted to prevent dilution or enlargement of rights in the event of any
dividend or other distribution, recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of NAI Shares or other securities, the issuance of
warrants or other rights to purchase NAI Shares or other securities, or other
similar capitalization change.
Certain Federal Income Tax Consequences of the Bonus Compensation Plan. The
following is a brief summary of the principal federal income tax consequences of
awards under the Bonus Compensation Plan. The summary is based upon current
federal income tax laws and interpretations thereof, all of which are subject to
change at any time, possibly with retroactive effect. The summary is not
intended to be exhaustive and, among other things, does not describe state,
local or foreign tax consequences.
A grant of Award Shares constitutes a taxable event for a participant. The
fair market value of the Award Shares on the date of grant is reportable by the
participant as income taxable at ordinary income rates, and will be subject to
applicable federal, state and local withholding taxes at the time of grant. In
that regard, the Board has the discretion to allow a participant to satisfy its
withholding tax obligations with NAI Shares. NAI will be entitled to take a
deduction at the time of grant equal to the amount of taxable income reportable
by the participant.
Termination, Amendment and ERISA Status. The employees will first be
eligible for Award Shares under the Bonus Compensation Plan with respect to
NAI's fiscal year ended June 30, 1999. The last year employees of NAI will be
eligible for Award Shares under the Bonus Compensation Plan will be with respect
to NAI's fiscal year ended June 30, 2009.
The Board may amend or terminate the Bonus Compensation Plan; however, the
Plan may not be amended or terminated without the consent of 80% of the Board,
including the consent of either Jeffrey Finn or Gerald Finn. No such amendments
or termination of the Bonus Compensation Plan shall in any way impair the rights
of a participant under any award previously granted without such participant's
consent. In addition, any amendment or termination will be subject to
shareholder approval
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if approval is required by Federal or state law or regulation or rule of any
stock exchange or quotation system on which the NAI Shares are listed or quoted.
The Bonus Compensation Plan is not subject to the provisions of the
Employee Retirement Income Security Act of 1976, as amended.
NAI 1998 Stock Option Plan
General. In connection with the Exchange Offer and the Reincorporation
Merger, NAI adopted the NAI 1998 Stock Option Plan (the "Option Plan"). The
purpose of the Option Plan is to align the interests of NAI's directors,
officers, employees and consultants with those of the shareholders and to enable
NAI to attract, compensate and retain selected individuals to serve as
directors, officers, employees and consultants who will contribute to NAI's
success and provide such individuals with appropriate incentives and rewards for
their performance.
Awards to directors, officers, employees and consultants under the Option
Plan are in the form of share Options. The maximum number of NAI Shares that may
be the subject of awards under the Option Plan is 3,536,853 NAI Shares, or
approximately 9.8% of the NAI Shares outstanding as of June 30, 1998, assuming
the Proposed Related Transactions had occurred. Options to purchase all NAI
Shares issuable under such plan will be granted upon consummation of the
Exchange Offer and Reincorporation Merger. The maximum number of NAI Shares that
may be the subject of awards to any employee during any fiscal year under the
Option Plan is 2,000,000 NAI Shares.
Stock Option Plan Administration. The Option Plan will be administered by a
committee of two or more non-employee directors (the "Option Plan Committee"),
which will initially consist of Messrs. Joseph Grossman and Bernard Korman. The
Option Plan Committee will determine the directors, officers, employees and
consultants who will be eligible for and granted awards, determine the amount
and type of awards, establish rules and guidelines relating to the Option Plan,
establish, modify and terminate the terms and conditions of awards and take such
other action as may be necessary for the proper administration of the Option
Plan. All directors, officers, employees and consultants are currently eligible
to participate in the Option Plan.
Options. It is intended that all of the Options granted under the Option
Plan will be "Nonqualified Options" that do not meet the requirements of Section
422 of the Internal Revenue Code of 1986, as amended. The exercise price can be
paid in cash, or if approved by the Option Plan Committee, by tendering
(actually or constructively) NAI Shares owned by a participant.
With the Option Plan Committee's consent, Nonqualified Options may be
transferable to family members and entities for the benefit of the participant
or his family members. If a participant's employment with NAI or service as a
director or consultant terminates for any reason (other than death or
disability), any unexercised or unexpired Options held by the participant (or
its permitted transferee) will be deemed canceled and terminated on the date of
such termination, unless the Option Plan Committee decides to extend the term of
such Options for a period not exceeding three months. If a participant dies
while employed by NAI, including an employee who is also a director, any
unexercised or unexpired Options will, to the extent exercisable on the date of
death, be exercisable by the holder or by the participant's estate or by any
person who acquired such Options by bequest or inheritance, at any time
generally within one year after such death. If a participant becomes totally
disabled and his employment terminates as a result of such disability, including
an employee who is also a director, the holder or the participant (or his
guardian or legal representative) will have the unqualified right to exercise
any unexercised and unexpired Options held by the participant (or its permitted
transferee) generally for one year after such termination.
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Options Outstanding Under the Option Plan. Upon the consummation of the
Reincorporation Merger, there will be outstanding five-year Nonqualified Options
to purchase 3,536,853 NAI Shares under the Option Plan at an exercise price of
$2 per NAI Share. Directors of NAI will hold five-year Options to purchase an
aggregate of 1,016,150 NAI Shares under the Option Plan at an exercise price of
$2 per NAI Share. In addition, each of Gerald C. Finn and Jeffrey M. Finn was
granted a five-year Option under the Option Plan to purchase 1,547,049 and
611,004 NAI Shares, respectively, at an exercise price of $2 per NAI Share; the
exercise price per NAI Share under each such Option will automatically increase
$.12 each year during which such Option remains outstanding and unexercised.
Antidilution Provisions. The number of NAI Shares authorized to be issued
under the Option Plan and subject to outstanding awards (and the grant or
exercise price thereof) may be adjusted to prevent dilution or enlargement of
rights in the event of any dividend or other distribution, recapitalization,
stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase or exchange of NAI Shares or other
securities, the issuance of warrants or other rights to purchase NAI Shares or
other securities, or other similar capitalization change.
Certain Federal Income Tax Consequences of the Option Plan. The following
is a brief summary of the principal federal income tax consequences of awards
under the Option Plan. The summary is based upon current federal income tax laws
and interpretations thereof, all of which are subject to change at any time,
possibly with retroactive effect. The summary is not intended to be exhaustive
and, among other things, does not describe state, local or foreign tax
consequences.
For Nonqualified Options, there are no federal income tax consequences at
the time of grant. Upon exercise of the Option, the participant must report as
ordinary income an amount equal to the difference between the exercise price and
the fair market value of the NAI Shares on the date of exercise. NAI will be
allowed a tax deduction in like amount. Any appreciation in value after the time
of exercise will be taxed as capital gain and will not result in any deduction
by NAI.
Applicable withholding taxes may be withheld in connection with the
exercise of any Nonqualified Option under the Option Plan. In that regard, the
Option Plan Committee has the discretion to allow a participant to satisfy its
withholding tax obligations with NAI Shares.
Termination, Amendment and ERISA Status. The Option Plan will terminate by
its terms and without any action by the Board ten years from the date the Option
Plan was adopted. No awards may be made after that date. Awards outstanding on
such date will remain valid in accordance with their terms.
The Option Plan Committee may amend or alter the terms of awards under the
Option Plan but no such action shall in any way impair the rights of a
participant under any award without such participant's consent.
The Option Plan Committee may amend or terminate the Option Plan. No such
amendments or termination of the Option Plan shall in any way impair the rights
of a participant under any award previously granted without such participant's
consent. In addition, any amendment or termination will be subject to
shareholder approval if approval is required by Federal or state law or
regulation or rule of any stock exchange or quotation system on which the NAI
Shares are listed or quoted.
The Option Plan is not subject to the provisions of ERISA.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of NAI Shares as of June 30, 1998 of: (i) each of NAI's directors
after the Exchange Offer and the Proposed Related Transactions; (ii) the Named
Executive Officers after the Exchange Offer and the Proposed Related
Transactions; (iii) NAI's executive officers and directors as a group after the
Exchange Offer and the Proposed Related Transactions; and (iv) all persons known
by NAI to be the beneficial owner of more than 5.0% of the outstanding NAI
Shares immediately prior to the Exchange Offer. The table gives NAI Share
ownership information prior to the Exchange Offer and after giving effect to the
Exchange Offer, the Distribution, the Rights Offering, the Concurrent Offering
and the other Proposed Related Transactions. The information contained in this
table assumes that the Reincorporation Merger occurred on June 30, 1998, and
each NAI Delaware Share was converted into 1.318087 NAI Maryland Shares. See
"Proposed Related Transactions" and "Management of NAI After Exchange Offer."
<TABLE>
<CAPTION>
Number of NAI Shares Percent of Class
------------------------------------- ------------------------------------
After Exchange After Exchange
Offer, Distribution, Offer, Distribution,
Rights Offering and Rights Offering and
Before Concurrent Before Concurrent
Name and Address Exchange Offer(1) Offering(2) Exchange Offer(3) Offering(3)
- ---------------- ----------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
Gerald C. Finn(4) 12,605,380 4,718,179(5) 73.71% 11.85%
Jeffrey M. Finn(4)(6) 3,637,290 1,688,462(6) 21.27 4.24
Norman M. Kranzdorf(7) 0 835,972(8) 0.00 2.10
Robert H. Dennis(7) 0 110,890(9) 0.00 0.28
Joseph Grossman(3) 78,910 41,564(10) 0.46 0.10
Peter O. Hanson(3) 341,055 146,422(11) 1.99 0.37
Bernard J. Korman(3) 0 124,478(12) 0.00 0.31
Michael Kranzdorf(7) 0 57,232(13) 0.00 0.14
Kranzco Realty Trust(7) 0 3,351,875 0.00 8.41
Executive Officers & 14,662,635 7,177,965 85.74 18.04
Directors
as a group (9) persons
</TABLE>
- -------------------------------
(1) The numbers in this column reflect NAI Share ownership assuming the
Reincorporation Merger has occurred. The actual number of NAI Delaware
Shares beneficially owned by each person on June 30, 1998, was as follows:
Gerald Finn, 9,563,390 NAI Shares; Jeffrey Finn, 2,759,522 NAI Shares;
Norman M. Kranzdorf, no NAI Shares; Robert H. Dennis, no NAI Shares; Joseph
Grossman, 59,867 NAI Shares; Bernard J. Korman, no NAI Shares; Michael
Kranzdorf, no NAI Shares; Peter O. Hanson, 258,750 NAI Shares; Kranzco
Realty Trust, no NAI Shares; and Estate of John McMenamin, 535,597 NAI
Shares.
(2) The numbers in this column represent NAI Shares beneficially owned by each
such person, plus any NAI Shares which such person may acquire pursuant to
the Basic Subscription Privilege.
(3) Each beneficial owner's percentage ownership is determined assuming (i)
that all NAI Shares issuable upon exercise of the Rights will be exercised,
except that (x) Gerald Finn only exercises rights to purchase 400,000 NAI
Shares, (y) Jeffrey Finn only exercises rights to purchase 100,000 NAI
Shares and (z) Kranzco only exercises rights to purchase 1,675,937 NAI
Shares in order to maintain approximately a 9.8% ownership interest in the
outstanding NAI Shares; (ii) that all of the Additional Shares are
purchased in the Concurrent Offering, (iii) all other convertible
securities, options or warrants held by such person (but not those held by
any other person) and which are exercisable within 60 days of June 30,
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1998 have been exercised and (iii) that each person who was an NAI
Stockholder prior to the Exchange Offer tendered 80% of his or her NAI
Shares in the Exchange Offer.
(4) The address of all of the executive officers and directors of NAI, who are
not employees of Kranzco, is 572 Route 130, Hightstown, New Jersey 08520.
(5) Includes (i) 3,944 NAI Shares owned by the Building Center, Inc., a
corporation owned by Gerald and Norma Finn, (ii) 1,797,049 NAI Shares
issuable upon the exercise of options to purchase NAI Shares, (iii) 42,838
NAI Shares owned by Mr. G. Finn's spouse, and (iv) 527,235 NAI shares held
in trust for Mr. J. Finn, of which, in the future, Mr. G. Finn may be
entitled to receive certain NAI Shares. Does not include (i) 44,156 NAI
Shares owned by Mr. G. Finn's children, or (ii) 4,943 NAI Shares held by
Mr. G. Finn as collateral for a loan to a stockholder of NAI; Mr. G. Finn
disclaims beneficial ownership of such NAI Shares.
(6) Includes (i) 11,863 NAI Shares held in trust for Mr. J. Finn's minor
children, (ii) 4,591 NAI Shares owned by Brooktree Swim & Tennis Club,
Inc., a corporation owned by Mr. J. Finn and his spouse, (iii) 861,004 NAI
Shares issuable upon the exercise of options to purchase NAI Shares; and
(iv) 527,235 NAI Shares held in a trust for the benefit of Mr. J. Finn, of
which Mr. J. Finn is trustee.
(7) The address of Kranzco Realty Trust is 128 Fayette Street, Conshohocken,
Pennsylvania 19428, and the address of executive officers and directors of
NAI who are also employees of Kranzco is c/o Kranzco Realty Trust at such
address.
(8) Includes (i) 14,640 NAI Shares owned by Mr. Kranzdorf's spouse, (ii) 36,000
NAI Shares owned by Mrs. Kranzdorf as trustee for the benefit of Michael
Kranzdorf and Betty Kranzdorf, (iii) 400,050 NAI Shares issuable upon the
exercise of options to purchase NAI Shares granted under the Option Plan.
See "Management."
(9) Includes (i) 200 NAI Shares owned by Mr. Dennis' spouse, and (ii) 74,100
NAI Shares issuable upon the exercise of options of to purchase NAI Shares.
(10) Includes 10,000 NAI Shares issuable upon the exercise of options to
purchase NAI Shares.
(11) Includes (i) 236 NAI Shares owned by Mr. Hanson's spouse, (ii) 4,350 NAI
Shares and 1,648 NAI Shares owned by James E. Hanson, Inc. and Property
Investors Associates, respectively, entities owned by Mr. Hanson, and (iii)
10,000 NAI Shares issuable upon the exercise of options to purchase NAI
Shares granted under the Option Plan.
(12) Includes (i) 3,900 NAI Shares owned by Mr. Korman's spouse, and (ii) 14,500
NAI Shares issuable upon the exercise of options to purchase NAI Shares.
(13) Includes (i) 7,500 NAI Shares issuable upon the exercise of options to
purchase NAI Shares, and (ii) 18,000 NAI Shares held in trust for Mr. M.
Kranzdorf. See footnote 6.
Registration Rights
Kranzco and NAI will enter into a Registration Rights Agreement which
provides that at any time after the earlier of the date (i) one year from the
consummation of the Exchange Offer or (ii) that Kranzco determines, in its sole
discretion, that Kranzco is, or will in the future be, required to sell the NAI
Shares owned by it in order to maintain its status as a REIT, NAI will, upon a
written request of Kranzco, register any NAI Shares owned by Kranzco in a
Registration Statement under the Securities Act (the "Demand Rights"). NAI has
agreed to use all reasonable best efforts to keep such Registration Statement
effective for a period of two years commencing on the effective date of the
Registration Statement (or a shorter period if all the NAI Shares owned by
Kranzco have been sold or may be sold without any volume limitations pursuant to
Rule 144 under the Securities Act prior to the expiration of such two year
period). The Registration Rights Agreement provides Kranzco with two Demand
Rights, as well as piggyback Registration Rights.
CERTAIN RELATED PARTY TRANSACTIONS
NAI currently leases space for its corporate offices in Hightstown, New
Jersey from The Building Center, Inc., a New Jersey corporation (the "Building
Center"), which is wholly owned by Gerald C. Finn and his wife, Norma Finn. The
lease provides for an annual rental of $102,000 plus the payment of maintenance
expenses. See "Business--Property." NAI believes that the terms of this lease
are at or below the fair market rental for comparable facilities in the area.
NAI and its subsidiaries owe a director and an officer of NAI, Gerald and
Norma Finn, and an entity owned by them, an aggregate principal of $441,235.
Such indebtedness bears interest at rates ranging from 10% to 12%. A portion of
the proceeds of the Rights Offering and the Concurrent Offering
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will be used to repay such indebtedness. See "The Concurrent Offering-Use of
Proceeds" for a description of such indebtedness.
Peter O. Hanson, a director of NAI is the owner of James E. Hanson, Inc., a
Broker Member of the Network. In the fiscal year ended June 30, 1998, James E.
Hanson, Inc., paid to NAI approximately $90,000 in fees for services and
assignments received through the Network.
Gerald C. Finn is the licensed broker of record on the New Jersey Real
Estate Broker's License held by NAI upon which NAI's reciprocal real estate
broker's licenses in Pennsylvania and New York are based. Mr. Finn's sister,
Susan Finn, is the licensed broker of record on the Florida Real Estate Broker's
License held by NAI.
In connection with the Exchange Offer, Kranzco, NAI and the Finns entered
into an Exchange Agreement and certain related transactions. In addition, NAI
and Kranzco intend to enter into the Intercompany Agreement immediately
following the Distribution. See "The Exchange Agreement" and "Proposed Related
Transactions." In addition, in the calendar year ended December 31, 1997, with
the assistance of NAI's Investment Sales Department, Kranzco purchased certain
retail properties. See "NAI Business--Investment Sales."
It is NAI's policy that material transactions and loans with affiliated
parties shall be on terms that are no less favorable than those that can be
obtained from unaffiliated third parties. Any forgiveness of loans must be
approved by a majority of NAI's independent directors who do not have an
interest in the transactions and who have access, at NAI's expense, to NAI's or
independent counsel.
All ongoing transactions have been ratified by a majority of the issuer's
independent directors who do not have an interest in the transactions and who
had access, at the issuer's expense, to its counsel or independent counsel.
DESCRIPTION OF SECURITIES OF NAI
The following summary of the terms of the stock of NAI Maryland does not
purport to be complete and is subject to and qualified in its entirety by
reference to NAI Maryland's Charter and NAI Maryland's Bylaws, copies of which
are exhibits to the Registration Statement of which this Prospectus is a part.
See "Available Information." This description reviews the securities of NAI
Maryland rather than NAI Delaware, because after the Exchange Offer is
consummated, the Reincorporation Merger will be effected and all NAI Delaware
Shares will be converted into NAI Maryland Shares.
General
The Charter provides that NAI Maryland may issue up to 200,000,000 shares
of common stock, $.01 par value per share (referred to herein as the "NAI
Shares"). As of June 30, 1997, after giving effect to the Reincorporation
Merger, there were 17,101,403 NAI Shares issued and outstanding, and 229 holders
of record of such NAI Shares. Under Maryland law, stockholders generally are not
liable for the corporation's debts or obligations.
Common Stock
All NAI Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other class or series
of stock, holders of NAI Shares are entitled to receive dividends on such NAI
Shares if, as and when authorized and declared by the Board of Directors
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of NAI Maryland out of assets legally available therefor and to share ratably in
the assets of NAI Maryland legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding up after
payment of or adequate provision for all known debts and liabilities of NAI
Maryland.
Each outstanding NAI Share entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of directors and,
except as provided with respect to any other class or series of stock, the
holders of such shares will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means that the holders of
a majority of the outstanding NAI Shares can elect all of the directors then
standing for election and the holders of the remaining shares will not be able
to elect any directors.
Holders of NAI Shares have no preference, conversion, exchange, sinking
fund, redemption or appraisal rights and have no preemptive rights to subscribe
for any securities of NAI Maryland. NAI Shares will have equal dividend,
liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's charter. The Charter of NAI
Maryland provides for approval of (i) a consolidation, (ii) a share exchange,
(iii) a merger in which NAI Maryland is the successor, and (iv) amendments to
the Charter (except for amendments to the sections of the Charter relating to
the classification and removal of directors) by the affirmative vote of
stockholders holding at least a majority of the shares entitled to vote on the
matter.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of stock into other classes or series of stock and to establish the
number of shares in each class or series and to set the preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications or terms or conditions of redemption for
each such class or series.
Preferred Stock
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any series, as authorized by the Board of Directors. Prior to
issuance of shares of each class or series, the Board is required by the MGCL
and the Charter of NAI Maryland to set, subject to the provisions of the Charter
regarding the restrictions on transfer of stock, the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
such series. Thus, the Board could authorize the issuance of shares of Preferred
Stock with terms and conditions which could have the effect of delaying,
deferring or preventing a transaction or a change in control of NAI Maryland
that might involve a premium price for holders of NAI Shares or otherwise be in
their best interest.
Power to Issue Additional Shares of Common Stock and Preferred Stock
NAI Maryland believes that the power of the Board of Directors to issue
additional authorized but unissued NAI Shares and to classify or reclassify
unissued shares of stock and thereafter to cause NAI Maryland to issue such
classified or reclassified shares of stock will provide NAI Maryland with
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increased flexibility in structuring possible future financings and acquisitions
and in meeting other needs which might arise. The additional classes or series,
as well as the NAI Shares, will be available for issuance without further action
by NAI Maryland's stockholders, unless such action is required by applicable law
or the rules of any stock exchange or automated quotation system on which NAI
Maryland's securities may be listed or traded. Although the Board of Directors
has no intention at the present time of doing so, it could authorize NAI
Maryland to issue a class or series that could, depending upon the terms of such
class or series, delay, defer or prevent a transaction or a change in control of
NAI Maryland that might involve a premium price for holders of NAI Shares or
otherwise be in their best interest. In addition, the issuance of a class or
series of preferred stock with voting or conversion rights may adversely affect
the voting power of common stockholders of NAI.
Rights to Purchase NAI Shares
Each NAI Share issued in the Distribution will be accompanied by a Right to
purchase one additional NAI Share. The Rights are exercisable for 45 days from
the date of the Distribution at a Subscription Price of $2.00 per share. See
"The Rights Offering."
Transfer Agent and Registrar
The transfer agent and registrar for the NAI Shares and Rights will be
First Union National Bank.
Series A Preferred Stock of NAI Delaware
On July 15, 1998 NAI Delaware entered into a letter agreement with the
holder of the 101,000 outstanding shares of Series A Preferred Stock pursuant to
which NAI redeemed all of the outstanding shares of Series A Preferred Stock for
a promissory note in the principal amount of $202,000, due November 12, 1998. A
portion of the proceeds of the Rights Offering and the Concurrent Offering will
be used to repay such Note. See "The Concurrent Offering--Use of Proceeds."
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF NAI MARYLAND'S CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of NAI Maryland does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and the
Charter and Bylaws, copies of which are exhibits to the Registration Statement
of which this Prospectus is a part. See "Available Information."
Classification of the Board of Directors
The Bylaws provide that the number of directors of NAI Maryland may be
established by the Board of Directors but may not be fewer than the minimum
number required by the MGCL (which is three, unless the corporation has less
than three stockholders) nor more than 15. Any vacancy will be filled, at any
regular meeting or at any special meeting called for that purpose, by a majority
of the remaining directors, except that a vacancy resulting from an increase in
the number of directors must be filled by a majority of the entire Board of
Directors.
Pursuant to the Charter, the Board of Directors is divided into three
classes of directors. The initial terms of the Class I, Class II and Class III
directors will expire in 1999, 2000 and 2001, respectively. Beginning in 1999,
directors of each class will be chosen for three-year terms upon the expiration
of their current terms and each year one class of directors will be elected by
the stockholders.
-127-
<PAGE>
NAI Maryland believes that classification of the Board of Directors will help to
assure the continuity and stability of NAI Maryland's business strategies and
policies as determined by the Board of Directors. Holders of NAI Shares will
have no right to cumulative voting in the election of directors. Consequently,
at each annual meeting of stockholders, the holders of a majority of the NAI
Shares will be able to elect all of the successors of the class of directors
whose terms expire at that meeting.
The classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult. At least
two annual meetings of stockholders, instead of one, will generally be required
to effect a change in a majority of the Board of Directors. Thus, the classified
board provision could increase the likelihood that incumbent directors will
retain their positions. The staggered terms of directors may delay, defer or
prevent a tender offer or an attempt to change control of NAI Maryland, even
though a tender offer or change in control might be in the best interest of the
stockholders.
Removal of Directors
The Charter provides that a director may be removed only for cause (as
defined in the Charter) and only by the affirmative vote of at least two-thirds
of the votes entitled to be cast in the election of directors. This provision,
when coupled with the provision in the Bylaws authorizing the Board of Directors
to fill vacant directorships, precludes stockholders from removing incumbent
directors (except upon the existence of cause for removal and a substantial
affirmative vote) and filling the vacancies created by such removal with their
own nominees.
Business Combinations
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate of such an Interested Stockholder are prohibited for five years
after the most recent date on which the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the board of directors of such corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of outstanding shares of voting stock of the corporation and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. Each of Kranzco, Gerald Finn, Jeffrey Finn and Norman
Kranzdorf may beneficially own more than ten percent of NAI Maryland's voting
shares and would, therefore, be subject to the business combination provision of
the MGCL. However, pursuant to the statute, NAI Maryland has exempted any
business combinations involving Kranzco and consequently, the five-year
prohibition and the super-majority vote requirements will not apply to business
combinations between any of them and NAI Maryland. As a result, Kranzco may be
able to enter into business combinations with NAI Maryland that may not be in
the best interest of its stockholders without compliance by NAI Maryland with
the super-majority vote requirements and the other provisions of the statute.
-128-
<PAGE>
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror, by officers or by directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Bylaws of NAI Maryland contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of NAI
Maryland's shares of stock. There can be no assurance that such provision will
not be amended or eliminated at any time in the future.
Dissolution of NAI Maryland
The dissolution of NAI Maryland must be approved by the affirmative vote of
the holders of not less than two thirds of all of the votes entitled to be cast
on the matter.
Advance Notice of Director Nominations and New Business
The Bylaws of NAI Maryland provide that (a) with respect to an annual
meeting of stockholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by stockholders may be
made only (i) pursuant to NAI Maryland's notice of the meeting, (ii)
-129-
<PAGE>
by the Board of Directors or (iii) by a stockholder who is entitled to vote at
the meeting and has complied with the advance notice procedures set forth in the
Bylaws and (b) with respect to special meetings of stockholders, only the
business specified in NAI Maryland's notice of meeting may be brought before the
meeting of stockholders and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to NAI Maryland's notice of the meeting,
(ii) by the Board of Directors or (iii) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a stockholder who
is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
Anti-takeover Effect of Certain Provisions of Maryland Law and of the Charter
and Bylaws
The business combination provisions (with respect to stockholders other
than Kranzco) and, if the applicable provision in the Bylaws is rescinded, the
control share acquisition provisions of the MGCL, the provisions of the Charter
on classification of the Board of Directors and removal of directors and the
advance notice provisions of the Bylaws could delay, defer or prevent a
transaction or a change in control of NAI Maryland that might involve a premium
price for holders of NAI Shares or otherwise be in their best interest.
EXPERTS
The consolidated financial statements of Kranzco incorporated by reference
in this Prospectus and the consolidated financial statements of NAI included in
this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, to the extent and for the periods indicated in their reports, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.
LEGAL MATTERS
Certain matters regarding the legality of the Notes and the underlying
Kranzco Common Shares offered hereby will be passed upon for Kranzco by Ballard
Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland. Certain other matters
regarding the legality of the Notes and certain other matters of law will be
passed upon for Kranzco by Robinson Silverman Pearce Aronsohn & Berman LLP, New
York, New York.
-130-
<PAGE>
INDEX TO NEW AMERICA NETWORK, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
Page
----
Index to Financial Statements..............................................F-1
Report of Independent Public Accountants...................................F-2
Consolidated Balance Sheets................................................F-3
Consolidated Statements of Operations......................................F-4
Consolidated Statements of Stockholders' Deficit...........................F-5
Consolidated Statements of Cash Flows......................................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of New America Network, Inc.:
We have audited the accompanying consolidated balance sheets of New America
Network, Inc. as of June 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
three years in the period ended June 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of New America Network, Inc. as of June 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
May 8, 1998
F-2
<PAGE>
NEW AMERICA NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30
March 31, ------------------------------
1998 1997 1996
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 220,246 $ 61,506 $ 75,085
Accounts receivable (net of allowance of $20,000 and
$7,439 at June 30, 1997 and 1996) 787,408 576,924 716,378
Commissions receivable 636,541 856,194 726,941
Notes and other receivables 6,299 16,829 19,566
Other current assets 19,588 20,456 20,062
----------- ----------- -----------
Total current assets 1,670,082 1,531,909 1,558,032
----------- ----------- -----------
PROPERTY AND EQUIPMENT, net 156,353 155,083 170,375
OTHER ASSETS, net 2,382 1,987 3,895
----------- ----------- -----------
Total assets $ 1,828,817 $ 1,688,979 $ 1,732,302
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,015,718 $ 1,051,859 $ 985,216
Accrued interest 71,887 127,495 95,193
Current portion of long-term debt 126,667 133,333 43,334
Stockholder loans 441,235 441,235 419,083
Deferred revenue 922,433 773,023 862,506
----------- ----------- -----------
Total current liabilities 2,577,940 2,526,945 2,405,332
----------- ----------- -----------
LONG-TERM DEBT 75,000 -- 33,333
----------- ----------- -----------
Total liabilities 2,652,940 2,526,945 2,438,665
----------- ----------- -----------
REDEEMABLE CONVERTIBLE PREFERRED
STOCK 202,000 252,000 302,000
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 8,
9 and 10)
STOCKHOLDERS' DEFICIT:
Common stock 134,091 132,939 132,687
Additional paid-in capital 2,552,779 2,526,969 2,498,604
Accumulated deficit (3,479,125) (3,517,206) (3,411,761)
Treasury stock, at cost (233,868) (232,668) (227,893)
----------- ----------- -----------
Total stockholders' deficit (1,026,123) (1,089,966) (1,008,363)
----------- ----------- -----------
Total liabilities, redeemable convertible preferred $ 1,828,817 $ 1,688,979 $ 1,732,302
stock and stockholders' deficit =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NEW AMERICA NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months For the Year Ended
Ended March 31 June 30
---------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE:
Commissions $ 2,836,365 $ 2,910,147 $ 4,001,168 $ 4,124,139 $ 4,370,999
License fees 1,127,575 923,100 1,281,861 1,373,418 1,157,960
Other 473,998 562,593 617,587 522,399 469,741
----------- ----------- ----------- ----------- -----------
Total revenue 4,437,938 4,395,840 5,900,616 6,019,956 5,998,700
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Commission expense 602,534 788,193 1,142,575 1,782,292 1,485,024
Sales and marketing 276,860 193,809 321,379 284,963 323,619
Compensation and benefits 1,831,783 1,911,151 2,527,676 2,437,395 1,980,962
Other operating 1,578,222 1,186,953 1,644,040 1,475,091 1,336,179
Depreciation 39,789 36,874 52,518 56,321 44,779
Interest, net 46,906 46,678 59,639 48,035 45,811
----------- ----------- ----------- ----------- -----------
Total costs and expenses 4,376,094 4,163,658 5,747,827 6,084,097 5,216,374
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 61,844 232,182 152,789 (64,141) 782,326
----------- ----------- ----------- ----------- -----------
OTHER EXPENSES:
Equity in loss of affiliate 11,603 14,866 24,863 4,763 --
Loss on sale of real estate -- -- -- -- 65,323
----------- ----------- ----------- ----------- -----------
Total other expenses 11,603 14,866 24,863 4,763 65,323
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes 50,241 217,316 127,926 (68,904) 717,003
INCOME TAXES 5,600 -- -- -- 35,000
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations 44,641 217,316 127,926 (68,904) 682,003
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESSES,
net of tax (Note 7) -- 161,938 222,791 128,096 392,412
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) 44,641 55,378 (94,865) (197,000) 289,591
Preferred share distributions 6,560 7,935 10,580 12,580 14,580
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE $ 38,081 $ 47,443 $ (105,445) $ (209,580) $ 275,011
TO COMMON SHAREHOLDERS =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NEW AMERICA NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated Treasury
Shares Par Value Capital Deficit Stock Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1994* 12,523,120 $ 128,286 $ 2,349,943 $(3,477,192) $ (177,893) $(1,176,856)
Stock issued 358,970 3,590 80,850 84,440
Amortization of deferred compensation 30,169 30,169
Distributions on preferred stock (14,580) (14,580)
Treasury stock purchase (100,000) (50,000) (50,000)
Net income 289,591 289,591
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1995 12,782,090 131,876 2,460,962 (3,202,181) (227,893) (837,236)
Stock issued 81,110 811 811
Amortization of deferred compensation 37,642 37,642
Distributions on preferred stock (12,580) (12,580)
Net loss (197,000) (197,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1996 12,863,200 132,687 2,498,604 (3,411,761) (227,893) (1,008,363)
Stock issued 25,170 252 252
Amortization of deferred compensation 28,365 28,365
Distributions on preferred stock (10,580) (10,580)
Treasury stock purchase (17,125) (4,775) (4,775)
Net loss (94,865) (94,865)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1997 12,871,245 132,939 2,526,969 (3,517,206) (232,668) (1,089,966)
Stock issued* 115,169 1,152 13,250 14,402
Amortization of deferred
compensation* 12,560 12,560
Distributions on preferred stock* (6,560) (6,560)
Treasury stock purchase* (12,000) (1,200) (1,200)
Net income* 44,641 44,641
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1998* 12,974,414 $ 134,091 $ 2,552,779 $(3,479,125) $ (233,868) $(1,026,123)
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
*Unaudited
F-5
<PAGE>
NEW AMERICA NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months For the Year Ended
Ended March 31 June 30
---------------------- -----------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 44,641 $ 55,378 $ (94,865) $(197,000) $ 289,591
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Discontinued operations -- 161,938 222,791 128,096 392,412
Equity in loss of affiliate 11,603 14,866 24,863 4,763 --
Depreciation 39,789 36,874 52,518 56,321 44,779
Amortization of deferred compensation 26,962 22,092 28,617 38,453 114,609
Loss on sale of real estate -- -- -- -- 65,323
Changes in assets and liabilities-(Increase) decrease in-
Accounts receivable (210,484) 92,074 139,454 (82,409) (113,832)
Commissions receivable 219,653 (98,337) (129,253) (25,464) (412,959)
Notes and other receivables 10,530 (2,627) 2,737 (23,479) (3,567)
Other current assets (10,735) (5,074) (25,257) 14,021 (8,084)
Other assets (395) -- 1,908 (4,140) 388
Increase (decrease) in-
Accounts payable and accrued
expenses (91,749) 33,746 98,945 225,660 14,566
Deferred revenue 149,410 1,983 (89,483) 23,416 209,684
--------- --------- --------- --------- ---------
Net cash provided by operating activities 189,225 312,913 232,975 158,238 592,910
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Costs incurred by discontinued operations -- (161,938) (222,791) (128,096) (392,412)
Proceeds from sale of real estate -- -- -- -- 75,000
Disposal of property and equipment -- -- -- -- 57,706
Purchase of property and equipment (41,059) (33,602) (37,226) (149,060) --
--------- --------- --------- --------- ---------
Net cash used in investing activities (41,059) (195,540) (260,017) (277,156) (259,706)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Distributions paid on preferred stock (6,560) (7,935) (10,580) (12,580) (14,580)
Treasury stock purchase (1,200) (4,775) (4,775) -- (50,000)
Redemption of redeemable convertible
preferred stock (50,000) (50,000) (50,000) (50,000) (50,000)
Loan proceeds 100,000 99,999 150,000 110,531 2,105
Repayment of long-term debt (31,666) (45,675) (71,182) (55,365) (43,345)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 10,574 (8,386) 13,463 (7,414) (155,820)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH 158,740 108,987 (13,579) (126,332) 177,384
CASH, BEGINNING OF PERIOD 61,506 75,085 75,085 201,417 24,033
--------- --------- --------- --------- ---------
CASH, END OF PERIOD $ 220,246 $ 184,072 $ 61,506 $ 75,085 $ 201,417
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NEW AMERICA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND OPERATIONS:
New America Network, Inc. (the "Company") is a Delaware corporation, which has
developed a network of independently owned licensed real estate brokers to
provide commercial real estate brokerage and other real estate-related
services. The Company services national and international businesses which own
or use real estate throughout the United States and, to a lesser extent,
abroad. The Company provides brokerage and real estate services to
institutional owners, lenders and large corporations.
The financial statements as of March 31, 1998 and for the nine-month periods
ended March 31, 1998 and 1997 are unaudited; however, in the opinion of
management, all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the financial statements for
the unaudited periods 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 wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
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.
Statements of Cash Flows
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents for purposes of the statements
of cash flows. Cash paid for interest was $27,337, $16,799 and $15,937 for the
years ended June 30, 1997, 1996 and 1995, respectively, and $102,514
(unaudited) and $16,491 (unaudited) for the nine month periods ended March 31,
1998 and 1997, respectively.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share ("SFAS") No. 128. SFAS No. 128 establishes
standards for computing and presenting earnings per share ("EPS") and applies
to entities with publicly held common stock or potential common stock. This
statement simplifies the standards for computing EPS previously found in APB
Opinion No. 15, "Earnings per Share," and makes them comparable to
international EPS standards.
F-7
<PAGE>
Basic EPS is based on the weighted average number of common shares
outstanding. The weighted average number of shares outstanding used in the
Basic EPS computations was 12,883,549, 12,860,322 and 12,648,300 for the years
ended June 30, 1997, 1996 and 1995, respectively, and 12,954,181 (unaudited)
and 12,887,632 (unaudited) for the nine-month periods ended March 31, 1998 and
1997, respectively.
The Diluted EPS computations have been adjusted to give effect to common share
equivalents; specifically, redeemable convertible preferred stock outstanding.
The weighted average number of shares outstanding used in the Diluted EPS
computations was 13,034,549, 13,036,322 and 12,849,300 for the years ended
June 30, 1997, 1996 and 1995, respectively, and 13,080,181 (unaudited) and
13,038,632 (unaudited) for the nine-month periods ended March 31, 1998 and
1997, respectively.
The Company's per common share data is as follows:
<TABLE>
<CAPTION>
March 31, March 31, June 30, June 30, June 30,
1998 1997 1997 1996 1995
---------------- -------------- --------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations $ -- $ .01 $ .01 $ (.01) $ .05
Discontinued operations -- (.01) (.02) (.01) (.03)
---------------- -------------- --------------- -------------- -------------
Basic and diluted net income (loss) $ -- $ -- $ (.01) $ (.02) $ .02
================ ============== =============== ============== =============
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Major renewals and betterments are
capitalized while replacements, maintenance and repairs that 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 is computed using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<CAPTION>
June 30
Useful March 31, ---------------------------------------
Life 1998 1997 1996
---------------- ----------------- ------------------ -----------------
(unaudited)
<S> <C> <C> <C> <C>
Office equipment 7 years $ 135,614 $ 128,219 $ 128,912
Leasehold improvements 7 years 13,626 13,626 13,626
Computer equipment 3 years 185,342 151,679 127,508
----------------- ------------------ -----------------
334,582 293,524 270,046
Less - Accumulated depreciation (178,229) (138,441) (99,671)
----------------- ------------------ -----------------
Property and equipment, net $ 156,353 $ 155,083 $ 170,375
================= ================== =================
</TABLE>
F-8
<PAGE>
Investments
The Company accounts for its 50% investment in NAIS on the equity method. The
Company has a net (deficit) investment in NAIS of ($24,626) and $8,680 at June
30, 1997 and 1996, respectively, and is included in other current assets. The
joint venture was dissolved in February 1998.
The Company's share of NAIS' loss was $24,863, $4,763 and $0 for the years
ended June 30, 1997, 1996 and 1995, respectively.
Revenue Recognition and Deferred Revenue
License fees received from the Company's member broker firms are deferred and
recognized ratably over the term of the marketing service agreement, generally
over one to three years. Commissions from real estate sales brokered by the
Company are recognized at the time of the transfer of title. Commissions from
other network transactions are primarily recognized as they are earned. Such
commissions may be collected in installments over several years.
3. INDEBTEDNESS:
Notes Payable
The Company had available a $100,000 line of credit from First Washington Bank
which expired on October 2, 1997. The line was secured by a second mortgage on
the Company's office building. Borrowings against this line were $100,000 and
$0 as of June 30, 1997 and 1996, respectively. Interest was payable quarterly
on this line at a rate of prime plus 1%. This line was repaid on October 2,
1997.
On October 2, 1997, the Company entered into a $100,000 line of credit with
First Washington State Bank. The line is secured by a second mortgage on the
Company's office building and borrowings under the line bear interest at prime
plus 1% (8.5% (unaudited) at March 31, 1998) with a maturity date of October
1998. The Company had no outstanding borrowings against this line of credit at
June 30, 1997 and 1996, respectively, and $100,000 (unaudited) outstanding at
March 31, 1998.
The Company has a commercial installment loan in the amount of $80,000 from
First Washington Bank which is secured by equipment and personally guaranteed
by the Chief Executive Officer of the Company. The interest rate on this loan
is prime plus 1% which was 8.5% and 8.3% at June 30, 1997 and 1996,
respectively, and 8.5% (unaudited) at March 31, 1998. The outstanding
principal balance on this loan totaled $33,333 and $76,667 as of June 30, 1997
and 1996, respectively. At March 31, 1998 principal of $6,666 was outstanding
under this loan. Principal and interest payments of $3,333 are due monthly
with all outstanding principal and interest due in full at the loan maturity
date of May 1998.
At June 30, 1997, all outstanding indebtedness was payable within one year.
On December 2, 1997, the Company received $100,000 of proceeds from a term
loan with First Washington State Bank. The loan bears interest at the prime
rate plus 1% (8.5% (unaudited) at March 31, 1998), with monthly principal
payments of $1,667 and a maturity date of November 2002. The loan is secured
by a second mortgage on the Company's office building and personally
guaranteed by the Chief Executive Officer of the Company. At March 31, 1998,
principal of $95,000 was outstanding under this loan, with remaining principal
payments of $6,667 due in fiscal year 1998, $19,992 due in fiscal years 1999
through 2002 and $8,365 due thereafter.
F-9
<PAGE>
Stockholder Loans
The Company had loans outstanding of $441,235 and $419,083 as of June 30, 1997
and June 30, 1996, respectively, from certain of its stockholders. These
amounts are due on demand and interest is payable at rates ranging from 10% to
12%. During the years ended June 30, 1997 and 1996, the Company incurred
interest of $41,588 and $41,369 on these borrowings, respectively.
4. RELATED PARTY TRANSACTIONS:
The Company rents office space in Hightstown, New Jersey, under the terms of
an operating lease from an affiliate owned by two officers of the Company. The
minimum annual rent under the lease is $102,000 and the lease expires in April
1999. The lease automatically renews for successive one-year periods and
either party may terminate the lease on 90 days written notice. During fiscal
1997, 1996 and 1995 the Company paid $102,000 in rent expense.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company issued 201,000 shares of Series A Redeemable Convertible Preferred
Stock ("Series A Preferred Stock"), par value $ .01 per share in April 1994
for $402,000. The Series A Preferred Stock has a distribution rate of 4
percent of the Exchange Price ($2.00). The distributions are payable in
arrears on July 1, October 1, January 1 and April 1.
The holders of shares of the Series A Preferred Stock are able to convert all
or part of such shares into shares of Common Stock of the Company equal to the
lesser of $2.00 or the average NASDAQ bid price per share, as defined. Upon
such conversion, the holder of shares of Series A Preferred Stock will also
receive a warrant to purchase, for one year, shares of common stock equal to
one share of common stock for every ten shares of Series A Preferred Stock
converted at a purchase price of $1 per share. No shares of Series A Preferred
Stock have been converted through June 30, 1997.
The Company is required to redeem in five consecutive annual installments of
at least 25,000 shares on October 1, 1994 through 1998, with all remaining
shares being redeemed on or before September 30, 1999. The Company has
redeemed 75,000 shares through June 30, 1997 for a total value of $150,000.
The Company paid distributions of $10,580, $12,580 and $14,580 for the years
ended June 30, 1997, 1996 and 1995, respectively.
6. STOCKHOLDERS' DEFICIT:
Common Stock
The Company had 200,000,000 shares of common stock, $.01 par value per share
authorized as of June 30, 1997 and 1996. The Company had 13,293,920 shares of
common stock issued and 12,871,245 shares outstanding as of June 30, 1997. The
Company had 13,268,750 shares of common stock issued and 12,863,200 shares
outstanding as of June 30, 1996. The Company had 13,409,089 (unaudited) shares
of common stock issued and 12,974,414 (unaudited) shares outstanding as of
March 31, 1998.
Treasury Stock
The Company repurchases common stock at a weighted average stock price at
management's discretion. At June 30, 1997 and 1996, the Company had 422,675
shares of treasury stock valued at $232,668 and 405,550 shares of treasury
stock valued at $227,893, respectively. At March 31, 1998, the Company had
434,675 (unaudited) shares of treasury stock valued at $233,868 (unaudited).
F-10
<PAGE>
7. INCOME TAXES:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
which adopts an asset and liability approach for financial
accounting and reporting for income taxes.
The Company files a consolidated federal tax return and state tax returns on a
separate company basis. At June 30, 1997, the Company had federal net
operating loss carryforwards of approximately $2,620,000 for application
against future taxable income.
The components of income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
For the Nine Months For the Year Ended
Ended March 31 June 30
---------------- --------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ -- $ -- $ -- $ -- $ --
State 5,600 -- -- -- --
----------- ------------ ------------- ------------ ------------
5,600 -- -- -- --
----------- ------------ ------------- ------------ ------------
Deferred:
Federal (7,140) (42,332) (56,444) 112,808 (61,028)
State -- -- -- -- 35,000
----------- ------------ ------------- ------------ ------------
(7,140) (42,332) (56,444) 112,808 (26,028)
----------- ------------ ------------- ------------ ------------
Valuation Allowance 7,140 42,332 56,444 (112,808) 61,028
----------- ------------ ------------- ------------ ------------
$ 5,600 $ -- $ -- $ -- $ 35,000
=========== ============ ============= ============ ============
</TABLE>
The reported provision for income taxes differs from that computed by
multiplying pre-tax income by the applicable statutory federal income tax rate
due primarily to state income taxes and the utilization of net operating loss
carryforwards.
F-11
<PAGE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
March 31, June 30
----------------------------------------
1998 1997 1996
-------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Net operating loss carryfowards $ 984,552 $ 1,012,048 $ 993,201
Other accruals and reserves (204,115) (232,313) (269,910)
-------------- --------------- ---------------
780,437 779,735 723,291
-------------- --------------- ---------------
Valuation allowance (780,437) (779,735) (723,291)
-------------- --------------- ---------------
Net $ - $ - $ -
============== =============== ===============
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance for the entire net deferred tax.
8. DISCONTINUED OPERATIONS:
During 1995 and 1997, the Company adopted plans to discontinue operations of
RealQuest, Inc. ("RealQuest") and New America Financial Services ("NAFS"),
respectively. Accordingly, the operating results of RealQuest and NAFS have
been segregated from continuing operations and reported as a separate line
item on the statement of operations for all periods presented.
Operating results from these discontinued operations are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Total revenue $ 9,530 $ 26,250 $ 129,055
Costs and expenses:
Cost of services -- -- (44,177)
Operating expenses (232,321) (154,346) (477,290)
------------------- ------------------- -------------------
Loss from operations of $ (222,791) $ (128,096) $ (392,412)
discontinued businesses =================== =================== ===================
No deferred tax benefit was recorded for these discontinued operations due to
the net operating loss carryforwards.
9. SEVERANCE AGREEMENT:
On August 15, 1994, the Company entered into a severance agreement with an
employee. The Company agreed to pay the employee one year's full salary at the
higher of the employee's salary at the time of the agreement or
F-12
<PAGE>
at the time of termination. This employee terminated on June 28, 1996, but
remained as an independent contractor until November 25, 1996, at which time
severance payments began. Payments aggregating $100,000 are to be made over a
two-year period and are included in accrued expenses.
10. COMMITMENTS AND CONTINGENCIES:
All full-time employees over the age of 21 and who have completed one full
year of employment are eligible to participate in the Company's 401K plan. The
Company contributes to the plan at its own discretion. For the years ended
June 30, 1997, 1996 and 1995 the Company's contribution to the plan amounted
to $7,000, $7,089 and $8,277, respectively.
In the normal course of business, there are various claims which have been
brought or asserted against the Company. After consultation with legal
counsel, in management's opinion such actions or claims will not have a
material adverse effect on the Company's financial position or results of
operations.
11. SUBSEQUENT EVENTS:
In March 1998, the Company signed a letter of intent to enter into a strategic
alliance with Kranzco Realty Trust ("Kranzco") that will recapitalize the
Company as a public company. The transaction is subject to certain conditions.
Under the terms of the agreement, Kranzco will conduct an exchange offer for
80% of the outstanding common stock of the Company for $8,000,000 of Kranzco
convertible subordinated notes, convertible into common shares of beneficial
interest of Kranzco at $20 per share.
In connection with this transaction, the Company has agreed to effect a
reincorporation merger by merging into New America International, Inc., a
Maryland corporation and a wholly-owned subsidiary of the Company ("NAI
Maryland"). Upon the consummation of such merger, each share of the Company
will be converted into 1.316172 shares of NAI Maryland.
Kranzco is expected to spin off approximately 88% of its shares of the
Company, estimated to be approximately 12,000,000 shares or 70.2% of all
outstanding shares of the Company, to Kranzco's shareholders on a one-for-one
basis. After the spin off, the Company will issue rights to acquire additional
shares of common stock of the Company, at $2 per share, to all of its
stockholders on a one-for-one basis, exercisable for 45 days.
F-13
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Trustees and Officers.
Under Maryland law, a real estate investment trust formed in Maryland is
permitted to eliminate, by provision in its declaration of trust, the liability
of its trustees and officers to the trust and its shareholders for money damages
except for liability resulting from (i) actual receipt of an improper benefit or
profit in money, property or services or (ii) involving active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. Kranzco's Declaration of Trust contains such a provision which
eliminates such liability to the maximum extent permitted by Maryland law.
Kranzco's Bylaws require it, to the maximum extent permitted by Maryland
law in effect from time to time, to indemnify (i) any present or former trustee
or officer who has been successful, on the merits or otherwise, in the defense
of a proceeding to which he was made a party by reason of his service in that
capacity, against reasonable expenses incurred by him in connection with the
proceeding and (ii) any present or former trustee or officer against any claim
or liability to which he may become subject by reason of service in that
capacity unless it is established that (a) his act or omission was committed in
bad faith or was the result of active and deliberate dishonesty, (b) he actually
received an improper personal benefit in money, property or services or (c) in
the case of a criminal proceeding, he had reasonable cause to believe that his
act or omission was unlawful. In addition, Kranzco's Bylaws require it to pay or
reimburse, in advance of final disposition of a proceeding, reasonable expenses
incurred by a present or former trustee or officer made a party to a proceeding
by reason of his status as a trustee or officer provided that Kranzco shall have
received (i) a written affirmation by the trustee or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
Kranzco as authorized by the Bylaws and (ii) a written undertaking by him or on
his behalf to repay the amount paid or reimbursed by Kranzco if it shall
ultimately be determined that the standard of conduct was not met. Kranzco's
Bylaws also (i) permit Kranzco to provide indemnification and payment or
reimbursement of expenses to a present or former trustee or officer who served a
predecessor of Kranzco in such capacity and to any employee or agent of Kranzco
or a predecessor of Kranzco, (ii) provide that any indemnification or payment or
reimbursement of the expenses permitted by the Bylaws shall be furnished in
accordance with the procedures provided for indemnification and payment or
reimbursement of expenses under Section 2-418 of the MGCL for directors of
Maryland corporations and (iii) permit Kranzco to provide to the trustees and
officers such other and further indemnification or payment or reimbursement of
expenses as may be permitted by the MGCL for directors of Maryland corporations.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extend as permitted by the Maryland General Corporation Law (the
"MGCL") for directors and officers of Maryland corporations. The MGCL permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services, or (c) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission was
unlawful. However, under the MGCL, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition,
II-1
<PAGE>
the MGCL permits a corporation to advance reasonable expenses to a director or
officer upon the corporation's receipt of (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the corporation and (b) a written
undertaking by him or on his behalf to repay the amount paid or reimbursed by
the corporation if it shall ultimately be determined that the standard of
conduct was not met.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to trustees and officers of Kranzco pursuant to the foregoing
provisions or otherwise, Kranzco has been advised that, although the validity
and scope of the governing statute has not been tested in court, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In addition, indemnification may be limited by state securities
laws.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
2.1 Form of Exchange Agreement, among Kranzco Realty Trust, Gerald Finn
and Jeffrey Finn. (Incorporated by reference to Exhibit 2.1 of the
Company's Registration Statement on Form S-4 (Reg. No. 333-52743)
filed July 17, 1998.)
3.1 Amended and Restated Declaration of Kranzco Realty Trust.
(Incorporated by reference to Exhibit 3.4 of the Company's
Registration Statement NO. 33-49434.)
3.2 Amendment of Amended and Restated Declaration of Trust, dated
December 31, 1995. (Incorporated by reference to Exhibit 3.3 to the
Company's Annual Report on Form 10- K for the fiscal year ended
December 31, 1996.)
3.3 Amendment No. 2 of Amended and Restated Declaration of Trust, dated
June 4, 1997. (Incorporated by reference to Exhibit 4.1(c) of the
Company's Registration Statement on Form S-3 filed July 31, 1997.)
3.4 Amended and Restated Bylaws of Kranzco Realty Trust, as amended.
(Incorporated by reference to Exhibit 3.4 of the Company's
Registration Statement on Form S-4 (Reg. No. 333-52743) filed July
17, 1998.)
4.1 Specimen certificate for Common Shares of Beneficial Interest.
(Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement NO. 33-49434.)
4.2 Articles Supplementary for the Series A Increasing Rate Cumulative
Convertible Preferred Shares of Beneficial Interest. (Incorporated
by reference to the Company's Report on Form 8-K dated May 4, 1995.)
4.3 Articles Supplementary Classifying 1,155 Shares of Beneficial
Interest as Series A-1 Increasing Rate Cumulative Convertible
Preferred Shares of Beneficial Interest. (Incorporated by reference
to Exhibit 4.5 of the Company's Registration Statement on Form S-4
No. 33-18249.)
II-2
<PAGE>
4.4 Articles Supplementary for the Company's Series B-1 Cumulative
Convertible Preferred Shares of Beneficial Interest. (Incorporated
by reference to Exhibit 3.4 of the Company's Registration Statement
on Form 8-A dated February 27, 1997.)
4.5 Articles Supplementary for the Company's Series B-2 Cumulative
Convertible Preferred Shares of Beneficial Interest. (Incorporated
by reference to Exhibit 4.2 of the Company's Registration Statement
on Form S-4 No. 333-18249.)
4.6 Articles Supplementary for the Company's Series C Cumulative
Redeemable Preferred Shares of Beneficial Interest. (Incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement on
Form S-4 No. 333-18249.)
4.7 Articles Supplementary for the Company's Series D Redeemable
Preferred Shares of Beneficial Interest. (Incorporated by reference
to Exhibit 3.5 of the Company's Registration Statement on Form 8-A
filed December 10, 1997.)
4.8 Specimen of the Company's Series D Redeemable Preferred Shares of
Beneficial Interest. (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form 8-A filed December 10,
1997.)
4.9 Indenture for Kranzco Callable Convertible Subordinated Notes due
2008, including form of Note.
4.10 Form of Note (included in Indenture filed as Exhibit 4.9)
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding
legality. (Incorporated by reference to Exhibit 5.1 of the Company's
Registration Statement on Form S-4 (Reg. No. 333-52743) filed July
17, 1998.)
5.2 Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP regarding
legality. (Incorporated by reference to Exhibit 5.2 of the Company's
Registration Statement on Form S-4 (Reg. No. 333-52743) filed July
17, 1998.)
8.1 Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP regarding
tax matters.
10.1 Kranzco Realty Trust 1992 Employees Share Option Plan, as amended.
(Incorporated by reference to Exhibit 10.10 of the Registrant's
Annual Report on From 10-K for the fiscal year ended December 31,
1992.)
10.2 Kranzco Realty Trust 1992 Employees Share Option Plan, amended.
(Incorporated by reference to Exhibit 10.11 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992.)
10.3 Kranzco Realty Trust 1995 Incentive Plan. (Incorporated by reference
to Exhibit 4.4 of the Company's Registration Statement on Form S-8
No. 33-94294.)
10.4 Loan Agreement dated as of February 26, 1997 with Salomon Brothers
Realty Corp. (Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8- K filed March 14, 1997.)
II-3
<PAGE>
10.5 Global Promissory Note dated February 26, 1997 in the amount of
$50,000,000 executed in favor of Salomon Brothers Realty Corp.
(Incorporated by reference to Exhibit 10.2 of the Company's Current
Report on Form 8-K filed March 14, 1997.)
10.6 Unlimited Guaranty of Payment dated as of February 26, 1997 issued
by Kranzco Realty Trust in favor of Salomon Brothers Realty Corp.
(Incorporated by reference to Exhibit 10.3 of the Company's Current
Report on Form 8-K filed March 14, 1997.)
10.7 Exemplar Open End Fee and Leasehold Mortgage, Assignment of Leases
and Rents, Security Agreement and Fixture Filing dated as of
February 26, 1997 issued in connection with the Line of Credit.
(Incorporated by reference to Exhibit 10.4 of the Company's Current
Report on Form 8-K filed March 14, 1997.)
10.8 Trust and Servicing Agreement, dated as of June 18, 1996, among KRT
Origination Corp., GE Capital Management Corporation and State
Street Bank and Trust Company. (Incorporated by reference to Exhibit
10.43 of the Company's Current Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.9 Cash Collateral Account, Security, Pledge and Assignment Agreement,
dated as of June 18, 1996, among the Borrower, State Street Bank and
Trust Company, as Agent, and KRT Origination Corp., as Lender.
(Incorporated by reference to Exhibit 10.44 to the Company's Annual
Report on Form 10- K for the fiscal year ended December 1, 1996.)
10.10 Cash Collateral Agreement, dated June 18, 1996, among the Borrowers,
and State Street Bank and Trust Company, as Agent. (Incorporated by
reference to Exhibit 10.45 to the Company's Annual Report on Form
10-K for the fiscal year ended December 1, 1996.)
10.11 $123,700,000.00 Class A Mortgage Note dated June 18, 1996 made by
the Borrowers in favor of KRT Origination Corp., as Lender.
(Incorporated by reference to Exhibit 10.46 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 1, 1996.)
10.12 $20,600,000.00 Class B Mortgage Note dated June 18, 1996 made by the
Borrowers in favor of KRT Origination Corp., as Lender.
(Incorporated by reference to Exhibit 10.47 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 1, 1996.)
10.13 $28,900,000.00 Class C Mortgage Note dated June 18, 1996 made by the
Borrowers in favor of KT Origination Corp., as Lender. (Incorporated
by reference to Exhibit 10.48 to the Company's Annual Report on Form
10-K for the fiscal year ended December 1, 1996.)
10.14 $8,500,000.00 Class D Mortgage Note dated June 18, 1996 made by the
Borrowers in favor of KT Origination Corp., as Lender. (Incorporated
by reference to Exhibit 10.49 to the Company's Annual Report on Form
10-K for the fiscal year ended December 1, 1996.)
10.15 Form of Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases, Rents
and Security Deposits made by the Borrowers, as grantor, for the
benefit of KRT Origination Corp., as mortgagee,
II-4
<PAGE>
and filed in Connecticut, Maryland, New Jersey, New York and
Pennsylvania with respect to Groton Square in Groton, Connecticut,
Manchester Kmart in Manchester, Connecticut, Milford in Milford,
Connecticut, Orange in Orange, Connecticut, Fox Run in Prince
Frederick, Maryland, Hillcrest Plaza in Frederick, Maryland,
Anneslie in Baltimore, Maryland, Suburban Plaza in Hamilton, New
Jersey, Collegetown in Glassboro, New Jersey, Hillcrest Mall in
Phillipsburg, New Jersey, The Mall at Cross County in Yonkers, New
York, Highridge Plaza in Yonkers, New York, North Ridge in New
Rochelle, New York, Village Square in Larchmont, New York, A&P
Mamaroneck in Mamaroneck, New York, Port Washington in Port
Washington, New York, Bethlehem in Bethlehem, Pennsylvania,
Whitehall Square in Whitehall, Pennsylvania, Bristol Commerce Park
in Bristol, Pennsylvania, Park Hills Plaza in Altoona, Pennsylvania,
Barn Plaza in Doylestown, Pennsylvania, Best Plaza in Tredyffrin,
Pennsylvania, Bensalem Square in Bensalem, Pennsylvania, Street Road
in Bensalem, Pennsylvania, Pilgrim Gardens in Drexel Hill,
Pennsylvania, 69th Street Plaza in Upper Darby, Pennsylvania and
MacArthur Road in Whitehall, Pennsylvania (the "Properties").
(Incorporated by reference to Exhibit 10.50 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.)
10.16 Form of Unrecorded Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of
Leases, Rents and Security Deposits made by the Borrowers, as
grantor, for the benefit of KRT Origination Corp., and held in
escrow with respect to the Properties located in Maryland and in New
York. (Incorporated by reference to Exhibit 10.51 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.)
10.17 Escrow Agreement made among KRT Origination Corp., the Borrowers and
Robinson Silverman Pearce Aronsohn & Berman LLP, as escrow agent
with respect to the unrecorded second mortgages covering the
Properties located in New York and Maryland (Incorporated by
reference to Exhibit 10.52 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).
10.18 Severance Benefits Agreement dated as of March 28, 1997 by and
between Kranzco Realty Trust and Norman M. Kranzdorf. (Incorporated
by reference to Exhibit 10.1 of the Company's Form 10-Q for the
quarter ended June 30, 1997.)
10.19 Severance Benefits Agreement dated as of March 28, 1997 by and
between Kranzco Realty Trust and Robert H. Dennis. (Incorporated by
reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter
ended June 30, 1997.)
10.20 Severance Benefits Agreement dated as of March 28, 1997 by and
between Kranzco Realty Trust and Edmund Barrett. (Incorporated by
reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter
ended June 30, 1997.)
10.21 Severance Benefits Agreement dated as of March 28, 1997 by and
between Kranzco Realty Trust and Bengt Danielsson. (Incorporated by
reference to Exhibit 10.4 of the Company's Form 10-Q for the quarter
ended June 30, 1997.)
10.22 Severance Benefits Agreement dated as of March 28, 1997 by and
between Kranzco Realty Trust and Michael Warrington. (Incorporated
by reference to Exhibit 10.5 of the Company's Form 10-Q for the
quarter ended June 30, 1997.)
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<PAGE>
10.23 Severance Benefits Agreement dated as of March 28, 1997 by and
between Kranzco Realty Trust and Michael Kranzdorf. (Incorporated by
reference to Exhibit 10.6 of the Company's Form 10-Q for the quarter
ended June 30, 1997.)
10.24 Severance Benefits Agreement dated as of March 28, 1997 by and
between Kranzco Realty Trust and Peter J. Linneman. (Incorporated by
reference to Exhibit 10.7 of the Company's Form 10-Q for the quarter
ended June 30, 1997.)
10.25 Severance Benefits Agreement dated as of March 28, 1997 by and
between Kranzco Realty Trust and E. Donald Shapiro. (Incorporated by
reference to Exhibit 10.9 of the Company's Form 10-Q for the quarter
ended June 30, 1997.)
10.26 Agreement dated October 30, 1997 between Kranzco Realty Trust and GP
Development Corporation. (Incorporated by reference to Exhibit 2.1
of the Company's Current Report on Form 8-K dated November 25,
1997.)
10.27 Agreement and Plan of Merger dated October 30, 1997 between Kranzco
Realty Trust, GP Development Corporation, the shareholders of GP
Development Corporation and KR Atlanta, Inc. (Incorporated by
reference to Exhibit 2.2 of the Company's Current Report on Form 8-K
dated November 25, 1997.)
10.28 Mortgage Note for $6,700,000.00, dated as of October 5, 1990, from
Holcomb Bridge Partners, L.P., a Georgia limited partnership
("Holcomb"), in favor of Allstate Life Insurance Company
("Allstate") (relating to Holcomb Bridge Crossing). (Incorporated by
reference to Exhibit 2.3 of the Company's Current Report on Form 8-K
dated November 25, 1997.)
10.29 Modification of Mortgage Note, dated as of October 31, 1995, between
Holcomb and Harris Trust and Savings Bank ("Harris Trust") (relating
to Holcomb Bridge Crossing). (Incorporated by reference to Exhibit
2.4 of the Company's Current Report on Form 8-K dated November 25,
1997.)
10.30 Deed to Secure Debt, Assignment of Leases, Rents and Contracts,
Security Agreement and Fixture Filing ("Deed to Secure Debt") from
Holcomb to Allstate, dated as of October 5, 1990 (relating to
Holcomb Bridge Crossing). (Incorporated by reference to Exhibit 2.5
of the Company's Current Report on Form 8-K dated November 25,
1997.)
10.31 Modification of Deed to Secure Debt between Holcomb and Harris
Trust, dated as of October 31, 1995 (relating to Holcomb Bridge
Crossing). (Incorporated by reference to Exhibit 2.6 of the
Company's Current Report on Form 8-K dated November 25, 1997.)
10.32 Real Estate Note for $3,725,000.00 dated as of August 6, 1987, from
West Stewarts Mill Associates, Ltd., a Georgia limited partnership
("West Stewarts"), in favor of Confederation Life Insurance Company,
a mutual insurance company incorporated in Canada ("Confederation"),
first amendment thereto dated as of November 27, 1987, second
amendment thereto dated as of November 1, 1993, third amendment
thereto dated as of November 1, 1993 and fourth amendment thereto
dated as of February 21, 1995 (relating to Park Plaza).
(Incorporated by reference to Exhibit 2.7 of the Company's Current
Report on Form 8-K dated November 25, 1997.)
II-6
<PAGE>
10.33 Deed to Secure Debt and Security Agreement between West Stewarts and
Confederation, dated as of August 6, 1987, first amendment thereto
dated as of November 27, 1987 and second amendment thereto dated as
of November 1, 1993 (relating to Park Plaza). (Incorporated by
reference to Exhibit 2.8 of the Company's Current Report on Form 8-K
dated November 25, 1997.)
10.34 Escrow Agreement, dated as of November 1, 1993, between
Confederation and West Stewarts. (Incorporated by reference to
Exhibit 2.9 of the Company's Current Report on Form 8-K dated
November 25, 1997.)
10.35 Promissory Note for $10,670,000.00, dated as of July 31, 1996, from
Mableton Village Associates, L.L.C., a Georgia limited liability
company ("Mableton Village"), in favor of Lehman Brothers Holdings,
Inc. d/b/a Lehman Capital ("Lehman") (relating to The Village at
Mableton). (Incorporated by reference to Exhibit 2.10 of the
Company's Current Report on Form 8-K dated November 25, 1997.)
10.36 Deed to Secure Debt and Security Agreement, dated as of July 31,
1996, between Mableton Village and Lehman (relating to The Village
at Mableton). (Incorporated by reference to Exhibit 2.11 of the
Company's Current Report on Form 8-K dated November 25, 1997.)
10.37 Form of Intercompany Agreement. (Incorporated by reference to
Exhibit 10.37 of the Company's Registration Statement on Form S-4
(Reg. No. 333-52743) filed July 17, 1998.)
10.38 Sales Contract dated June 26, 1998 by and among Kranzco Realty
Trust, a Maryland real estate investment trust, and Europco Property
Investors II, Ltd., a Georgia limited partnership; Europco Property
Investors III, Ltd., a Georgia limited partnership; Europco Property
Investors IV, Ltd., a Georgia limited partnership; Secured
Properties Investors V, L.P., a Georgia limited partnership; Secured
Properties Investors VIII, L.P., a Georgia limited partnership;
Secured Properties Investors IX, L.P. a Georgia limited partnership;
and Tifton Partners, L.P., a Georgia limited partnership.
(Incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K dated June 26, 1998, filed July 16, 1998)
12.1 Ratio of Earnings to Fixed Charges. (Incorporated by reference to
Kranzco's Registration Statement on Form S-4 (Reg. No. 333-52743)
filed May 15, 1998.)
21.1 Subsidiaries of Kranzco Realty Trust. (Incorporated by reference to
Exhibit 21.1 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.)
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (contained in
Exhibit 5.1). (Incorporated by reference to Exhibit 23.1 of the
Company's Registration Statement on Form S-4 (Reg. No. 333-52743)
filed July 17, 1998.)
23.2 Consent of Robinson Silverman Pearce Aronsohn & Berman LLP
(contained in Exhibits 5.2 and 8.1).
23.3 Consent of Arthur Andersen LLP relating to Kranzco Realty Trust and
New America Network, Inc. (Previously filed with Amendment No. 2 to
the Registration Statement)
II-7
<PAGE>
25.1 Statement of Eligibility of Trustee on Form T-1. (Incorporated by
reference to Exhibit 25.1 of the Company's Registration Statement on
Form S-4 (Reg. No. 333-52743) filed July 17, 1998.)
99.1 Letter of Transmittal (Incorporated by reference to Exhibit 99.1 of
the Company's Registration Statement on Form S-4 (Reg. No.
333-52743) filed July 17, 1998.)
Item 22. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
II-8
<PAGE>
(5) That every prospectus: (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(6) The undersigned Registrant hereby further undertakes that, for the
purposes of determining any liability under the Securities Act of 1933,
each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(7) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(8) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(9) The undersigned Registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Town of Conshohocken, State
of Pennsylvania, on August 6, 1998.
KRANZCO REALTY TRUST
By: /s/ Norman M. Kranzdorf
----------------------------
Norman M. Kranzdorf
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
</TABLE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Norman M. Kranzdorf President, Chief Executive August 6, 1998
- ------------------------- Officer and Trustee
Norman M. Kranzdorf (Principal Executive Officer)
/s/ Robert H. Dennis Chief Financial Officer, August 6, 1998
- ------------------------- Treasurer and Trustee
Robert H. Dennis (Principal Financial and
Accounting Officer)
* Chief Operating Officer,
- ------------------------- Executive Vice President
Edmund Barrett and Trustee
* Trustee
- -------------------------
Bernard J. Korman
* Trustee
- -------------------------
Dr. Peter D. Linneman
* Trustee
- -------------------------
E. Donald Shapiro
* Trustee
- -------------------------
Gerald C. Finn
By /s/ Norman M. Kranzdorf August 6, 1998
------------------------
Norman M. Kranzdorf
Attorney-in-Fact
</TABLE>
II-10
<PAGE>
Exhibit 8.1
[LETTERHEAD OF ROBINSON SILVERMAN PEARCE ARONSOHN & BERMAN, LLP]
August 6, 1998
Kranzco Realty Trust
128 Fayette Street
Conshohocken, Pennsylvania 19428
Ladies and Gentlemen:
We have acted as United States counsel to Kranzco Realty
Trust, a Maryland real estate investment trust, its subsidiaries and
affiliates (the "Company") in connection with the exchange offer whereby the
Company would acquire approximately 80% of the outstanding stock of New
America Network, Inc. in exchange for $8 million of the Company's convertible
subordinated notes, as more fully described in the Company's Registration
Statement on Form S-4 (Registration Number 333-52743), as amended (the
"Registration Statement").
You have requested our opinion concerning (i) the
qualification and taxation of the Company as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code") for
the taxable years ended December 31, 1992 through December 31, 1997, and (ii)
the tax treatment of Notes received by an NAI Stockholder in exchange for its
NAI Shares (as those terms are defined in the Registration Statement).
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of the Registration Statement and such
corporate records, agreements, documents and other instruments, and such
certificates or comparable documents of public officials and of officers and
representatives of the Company, and have made such inquiries of such officers
and representatives, as we have deemed relevant and necessary as a basis for
the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies and to all questions of fact material to this
opinion that have not been independently established, we have relied upon
certificates of officers and representatives of the Company and upon the
representations, warranties and covenants of the Company.
<PAGE>
Our understanding of the facts is based on the information
set forth in such documents and various assumptions and factual
representations made by the Company, including the representation letter dated
August 4, 1998.
For the purposes of our opinion, we have not made an
independent investigation of the facts set forth in the documents we reviewed.
We consequently have assumed that the information presented in such documents
or otherwise furnished to us accurately and completely describes all material
facts relevant to our opinion. We have also assumed that (i) during the
relevant periods, all persons who were required under the Securities and
Exchange Act of 1934 to file or amend Schedules 13D and 13G with respect to
the Company's outstanding shares appropriately made such filings and that the
Company was duly apprised of all such filings, and (ii) the information
concerning the Company and its affiliates set forth in the Company's Federal
income tax returns is true and correct. Moreover, the qualification and
taxation of the Company as a REIT depends upon its ability to meet, through
actual annual operating results, distribution levels and diversity of share
ownership and the various income and asset tests imposed under the Code, the
results of which will not be reviewed by the undersigned. Accordingly, no
assurance can be given that the actual results of the operations of the
Company for any one taxable year will satisfy such requirements.
Based upon and subject to the foregoing, we are of the
opinion that (i) the Company was organized and has operated in conformity with
the requirements for qualification as a REIT under the Code for the taxable
years ended December 31, 1992 through December 31, 1997 and its proposed method
of operation will enable it to continue to meet the requirements for
qualification as a REIT, and (ii) assuming anelection out of the installment
method is not made, Notes received by an NAI Stockholder in exchange for its
NAI Shares will qualify for installment sale treatment under Code Section 453.
Our opinions are based upon our examination and review of
the documents noted above, the facts, circumstances and assumptions referred
to above and existing law as contained in the Code, applicable Treasury
Regulations promulgated thereunder, administrative rulings of the Internal
Revenue Service, and judicial decisions as of the date hereof, all of which
are subject to change either prospectively or retroactively. Any change in
applicable law or any of the facts and circumstances upon which we have relied
may affect the continuing validity of the opinions set forth herein. We
express no opinion concerning any tax consequences other than as expressly set
forth herein.
We assume no obligation to supplement this opinion if any
applicable law changes after the date hereof or if we become aware of any fact
after the date hereof that might change the opinion expressed herein.
We hereby consent to the filing of this opinion with the
Securities and Exchange Commission as an exhibit to the aforesaid Registration
Statement and to the use of our name therein. We hereby further consent to the
use of this opinion as an exhibit to filings with the securities commissioners
of various states of the United States as required by the securities laws of
such states.
<PAGE>
Very truly yours,
/s/ Robinson Silverman Pearce Aronsohn & Berman LLP
