<PAGE>
As filed with the Securities and Exchange Commission on May 15, 1998.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KRANZCO REALTY TRUST
(Exact name of registrant as specified in its charter)
---------------------------
<TABLE>
<S> <C> <C>
Maryland 6798 23-2691327
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification no.)
</TABLE>
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,
including 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>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
__% Convertible Subordinated
Notes due 2008 $8,000,000 N/A $8,000,000 $2,500
Common Shares of Beneficial
Interest, par value $.01 per share 400,000(2) N/A N/A None(2)
===========================================================================================================================
</TABLE>
(1) Reflects the maximum amount of Convertible Subordinated Notes due
2008 issuable in connection with the Exchange Offer.
(2) A maximum of 400,000 Common Shares of Beneficial Interest, par
value $.01 per share, of Kranzco Realty Trust may be required
for issuance upon conversion of its Convertible Subordinated
Notes due 2008. Pursuant to Rule 457(i), no registration fee is
required for the Common Shares of Beneficial Interest of Kranzco
Realty Trust reserved for conversion because such shares will be
issued for no additional consideration.
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.
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<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 MAY 15, 1998
PROSPECTUS
Offer to Exchange $8,000,000 Kranzco Realty Trust
___% 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 ___% 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 May 13, 1998, there were 12,974,414 NAI Shares outstanding.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN
MATTERS WHICH SHOULD BE CONSIDERED BY NAI STOCKHOLDERS WITH RESPECT TO THE
EXCHANGE OFFER.
The ___% 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 May 12, 1998, the closing sale price of the Kranzco Common
Shares was $18.125 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 RELATED CLOSING 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.
----------------
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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, 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, with respect to the Securities. This Prospectus does not
contain
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<PAGE>
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 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 with the Commission and are incorporated herein by reference:
1. Kranzco's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
2. Kranzco's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
3. Kranzco's Current Report on Form 8-K dated March 23, 1998, filed
on March 23, 1998.
4. The description of Kranzco Common Shares contained in the
Registration Statement on Form S-11 (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.
5. 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 (No. 333-18249),
and the documents incorporated therein by reference, as amended by Amendment
No. 1, filed with the Commission on January 29, 1997.
6. The description of Kranzco's Series B-1 Preferred Shares contained
in the Registration Statement on Form 8-A (No. 1-11478), and the documents
incorporated therein by reference, as amended by Amendment No. 1, filed with
the Commission on June 2, 1997.
7. 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 dated February 27, 1997.
8. The description of Kranzco's Series D Preferred Shares (as defined
below) contained in the Registration Statement on Form 8-A, and the documents
incorporated therein by reference, filed with the Commission on December 10,
1997.
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
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<PAGE>
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.
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, 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.
-----------------------------
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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<PAGE>
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................................................................15
RATIOS OF EARNINGS TO FIXED CHARGES.........................................25
KRANZCO CAPITALIZATION......................................................26
KRANZCO SELECTED FINANCIAL AND OPERATING DATA...............................28
KRANZCO REALTY TRUST PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION...........................30
NAI CAPITALIZATION..........................................................35
NAI SELECTED FINANCIAL AND OPERATING DATA...................................36
NEW AMERICA NETWORK, INC. PRO FORMA
CONDENSED FINANCIAL INFORMATION....................................37
NAI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................43
NAI BUSINESS................................................................47
THE OFFER...................................................................56
DESCRIPTION OF NOTES........................................................62
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS............................71
COMPARISON OF RIGHTS OF HOLDERS.............................................78
THE EXCHANGE AGREEMENT......................................................86
PROPOSED RELATED TRANSACTIONS...............................................93
THE DISTRIBUTION............................................................97
THE RIGHTS OFFERING.........................................................98
THE CONCURRENT OFFERING....................................................100
REASONS FOR THE OFFER AND THE PROPOSED RELATED TRANSACTIONS................102
MANAGEMENT OF NAI AFTER EXCHANGE OFFER.....................................104
PRINCIPAL STOCKHOLDERS.....................................................117
DESCRIPTION OF SECURITIES OF NAI...........................................119
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF NAI MARYLAND'S CHARTER AND BYLAWS..............................123
EXPERTS ..................................................................126
LEGAL MATTERS..............................................................126
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 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.
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 March 31,
1998, the Properties were 92% leased. Additionally, Kranzco has no single
tenant which accounted for greater than 5.2% of Kranzco's 1997 aggregate
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 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.
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 2,400
agents, operating in approximately 200 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
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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
March 31, 1998, the Network had an inventory of approximately 1,775
assignments to buy, sell or lease real property, with a transaction value of
approximately $927 million, and which would generate fees to NAI of
approximately $6.5 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 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.
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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 (i) each
NAI Delaware Share being converted into 1.316172 NAI Maryland Shares, (ii)
each share of Series A Preferred Stock, par value $.01 per share, of NAI
Delaware being converted into one share of Series A Preferred Stock, par value
$.01 per share, of NAI Maryland and (iii) 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, (i)
reconstitute NAI's Board of Directors to include members nominated by both NAI
and Kranzco; (ii) 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; (iii)
adopt 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); (iv) adopt 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; (v) grant options to purchase an aggregate of
3,583,992 NAI Shares to officers, directors, employees and consultants of NAI
pursuant to a new employee stock option plan; and (vi) grant options to
purchase an aggregate of 50,000 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 17,076,560 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 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").
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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) repurchase 101,000 shares of Series A
Preferred Stock of NAI for an aggregate repurchase price of $202,000, (ii)
repay approximately $643,000 aggregate principal amount of indebtedness, (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 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 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;
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
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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. Prospective investors in the Notes should review "Risk Factors"
on page 15 for a discussion of the risks involved in an investment in the
Notes and the Kranzco Common Shares issuable upon conversion thereof. 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.
The Offer
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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
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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) being
true and correct on the Expiration Date and related closing
date, and (iii) the satisfaction of other conditions set forth
in the Exchange Agreement. See "The Offer--Conditions of the
Offer." As of May 13, 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 or for any other reason 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 NAI Shares validly tendered and not properly withdrawn
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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 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."
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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.
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 related closing 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."
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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 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.
The Notes
The Notes................................................ $8,000,000 aggregate principal amount of ___% Convertible
Subordinated Notes due 2008.
Maturity Date............................................ _________________, 2008.
Interest Payment Dates................................... Interest on the Notes will be payable quarterly on January 1,
April 1, July 1 and October 1 commencing ____________,
1998.
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
</TABLE>
-9-
<PAGE>
<TABLE>
<S> <C>
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, 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
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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 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 May 12, 1998, the
closing sale price of the Kranzco Common Shares was
$18.125 per share.
</TABLE>
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<PAGE>
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, 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 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 ................................ $ 13,407 $ 13,407 $ 10,929 $ 53,441 $ 47,579 $ 41,665 $ 40,259
Percentage rent ............................. 310 310 268 1,167 1,163 1,042 1,044
Expense reimbursements ...................... 2,839 2,839 2,697 12,009 11,165 11,732 10,988
Interest income ............................. 123 123 54 278 278 624 902
Other income ................................ 247 28 31 758 127 117 277
--------- --------- --------- --------- --------- --------- ---------
Total revenue ............................... 16,926 16,707 13,979 67,653 60,312 55,180 53,470
========= ========= ========= ========= ========= ========= =========
Expenses:
General and administrative, interest
and property operating costs ............... 9,705 9,585 8,654 38,630 36,694 35,514 32,690
Depreciation and amortization ............... 3,450 3,450 2,859 13,785 12,534 11,194 10,903
Income before extraordinary charge and
before preferred distributions ................. 3,771 3,672 2,466 15,238 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) ............................... $ 3,771 $ 3,672 $ 2,466 $ 15,238 $ 10,617 $ (2,580) $ 9,877
Income before extraordinary
items per share ............................... $ 0.17 $ 0.16 $ 0.19 $ 0.66 $ 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):
Funds from operations (1) ....................... $ 5,061 $ 4,962 $ 4,723 $ 20,030 $ 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) .......... 1.20 1.19 1.37 1.20 1.27 1.41 1.50
Ratio of funds from operations to
fixed charges (3) ............................. 1.64 1.64 1.89 1.64 1.77 1.97 2.05
Total Properties (at end of period) ............. 59 59 54 59 59 38 38
Total gross leasable area in sq. ft
(at end of period, in thousands) .............. 7,600 7,600 7,000 7,600 7,600 5,700 5,700
Balance Sheet Data (at end of period):
Real estate, before accumulated
depreciation .................................. $ 491,091 $ 491,091 $ 438,454 $ 484,741 $ 370,491 $ 368,073
Total assets .................................... $ 466,630 $ 465,650 $ 423,117 $ 466,220 $ 359,157 $ 372,983
Total debt ...................................... $ 265,201 $ 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 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 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.
(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 and preferred share distributions and excludes amortization of
debt expense.
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<PAGE>
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, the
Distribution, the Rights Offering and the Concurrent Offering 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, the Distribution, the Rights Offering and the Concurrent Offering 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 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
---- ---- ---- ---- ---- ---- ----
(unaudited)(unaudited)(unaudited)(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
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 ................................... 1,238 0 0 1,650 0 0 0
-------- -------- -------- -------- -------- -------- --------
Total revenue .............................. 5,676 4,438 4,396 7,551 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 .............................. 0 47 47 0 60 48 46
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses ................... 4,704 4,376 4,164 6,188 5,748 6,084 5,217
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations .............. 972 62 232 1,363 153 (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 ........................ 960 50 217 1,338 128 (69) 717
Income taxes ............................... 5 5 0 0 0 0 35
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations ... 955 45 217 1,338 128 (69) 682
Loss from discontinued operations .......... 0 0 162 0 223 128 392
-------- -------- -------- -------- -------- -------- --------
Net income (loss) .......................... 955 45 55 1,338 (95) (197) 290
Preferred share distributions .............. 0 7 8 0 11 13 15
-------- -------- -------- -------- -------- -------- --------
Net income (loss) available to common
shareholders ............................. $ 955 $ 38 $ 47 $ 1,338 $ (106) $ (210) $ 275
======== ======== ======== ======== ======== ======== ========
Net income (loss) per share ................ $ 0.03 $ 0.00 $ 0.00 $ 0.04 $ (0.01) $ (0.02) $ 0.02
======== ======== ======== ======== ======== ======== ========
Other data (unaudited):
Common shares outstanding .................... 36,154 12,974 12,888 36,154 12,871 12,863 12,782
Weighted average shares outstanding .......... 36,100 12,954 12,888 35,912 12,883 12,860 12,648
Ratio of EBITDA to fixed charges(1) .......... 25.00 1.46 3.27 26.73 1.95 0.30 7.62
EBITDA ....................................... $ 1,000 $ 137 $ 301 $ 1,390 $ 240 $ 35 $ 808
Balance sheet data (1995 unaudited):
Total assets ................................. $ 38,138 $ 1,829 $ 1,807 $ 1,689 $ 1,732 $ 1,649
Total debt ................................... $ 0 $ 643 $ 550 $ 575 $ 496 $ 441
Shareholders equity (deficit) ................ $ 36,128 $ (1,026) $ (983) $ (1,090) $ (1,008) $ (837)
</TABLE>
(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.
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<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; Balloon Payments; Floating Rate Debt
The pro forma debt of Kranzco at March 31, 1998, after giving effect
to the consummation of the Exchange Offer and subsequent Distribution, would
be $265,201,000, of which approximately $264,355,000 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 and subsequent Distribution, would be
approximately 50%. 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 $265,201,000 of pro forma debt of Kranzco referred to above will
be due as follows: $846,000 in 1998; $21,637,000 in 1999; $7,440,000 in 2000;
$4,576,000 in 2001; $3,600,000 in 2002; and $227,102,000 thereafter. In
addition, Kranzco may finance future acquisitions with debt which may require
a "balloon" payment for the outstanding principal balance at maturity. After
giving effect to the consummation of the Exchange Offer and subsequent
Distribution, 52 of the Properties will be security for mortgage indebtedness
of Kranzco. Kranzco's $50,000,000 secured first mortgage loan facility with
Salomon Brothers Realty Corp. (the "Salomon Facility") is secured by 14
Properties; Kranzco's seven-year real estate loan (the "Mortgage Loan") due in
June 2003, in the principal amount of $181,700,000, is secured by 27
Properties. 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. As a result of variable interest rates on the
Salomon Facility or any 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.
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
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<PAGE>
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 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, including certain covenants typically found in leases with
tenants in shopping centers that restrict the use of other space at such
shopping centers. 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
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<PAGE>
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. There are, however, certain types of extraordinary losses which
may be either uninsurable or not economically insurable. 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.
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 in enforcing
its rights and may incur substantial costs and experience significant delays
associated with 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. Stop & Shop Companies, Inc. is
primarily liable under all 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
rejected. 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. remains primarily liable for all payments and
other obligations set forth in the leases and 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 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
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<PAGE>
leases are at or below market rental rates and, therefore, Kranzco would not
have significant difficulty in leasing these stores if the leases were
rejected. The average annual rent paid by Caldor for these locations is
approximately $6.15 per square foot.
The Rickels stores were 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.
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. 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
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<PAGE>
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.
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. 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). To the extent that general economic or other relevant
conditions in these states decline and result in a decrease in consumer demand
in these areas, the income from, and value of, these Properties may be
adversely affected.
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.
-19-
<PAGE>
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.
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 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.
-20-
<PAGE>
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%
in 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 1998, 1999 and 2000,
respectively. Each year one class of the Kranzco Board is elected 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 2.04% of the outstanding Kranzco Common Shares (approximately
7.38% if they exercise all options granted to them under Kranzco share option
plans and assuming all restricted 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.
Subordination; Absence of Financial Covenants; Repayment
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. As of March 31, 1998, Senior
Indebtedness and indebtedness of
-21-
<PAGE>
Kranzco's subsidiaries was approximately $257,201,000. Kranzco anticipates
that from time to time Kranzco and its subsidiaries will incur additional
indebtedness, including Senior Indebtedness. See "Description of Notes --
Subordination."
In addition, 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 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. Accordingly, there is no assurance that Kranzco will be able to
repay the Notes upon maturity.
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. Officers
and directors of a corporation and officers and trustees of a trust owe duties
to the shareholders of such entities. 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
-22-
<PAGE>
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 fiduciary 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 have a primary responsibility 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
"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.
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<PAGE>
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 (i) each NAI Delaware Share being converted into 1.316172 NAI
Maryland Shares, (ii) each share of Series A Preferred Stock of NAI Delaware
will be converted into one share of Series A Preferred Stock of NAI Maryland
and (iii) 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
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,
except that (i) the Finns, jointly and severally, have agreed to exercise
Rights to purchase an aggregate of 500,000 NAI Shares and (ii) Kranzco has
agreed to exercise such number of Rights to purchase NAI Shares that would
result in Kranzco owning 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 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."
Institution of Anti-takeover Measures; Anti-takeover Effect of Certain
Provisions of Maryland Law and of NAI Maryland's Charter and Bylaws
Upon consummation of the Reincorporation Merger each NAI Delaware
Share will be converted into 1.316172 NAI Maryland Shares and each share of
Series A Preferred Stock of NAI Delaware will be converted into one share of
Series A Preferred Stock of NAI Maryland. Certain provisions of NAI Maryland's
Articles of Incorporation (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 interest of NAI Stockholders. NAI Stockholders should
consider the effect of any anti-takeover measures or increase in the
authorized number of shares of stock of NAI 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.
Staggered Board. NAI Maryland'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 Maryland 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 Maryland's Charter and Bylaws -- Classification of the
Board of Directors."
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<PAGE>
Blank Check Stock. NAI Maryland's Charter authorizes the
Board of Directors to cause NAI Maryland to issue additional authorized but
unissued shares of NAI Maryland common stock and to classify or reclassify any
unissued shares of stock of NAI Maryland into 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 of NAI Maryland -- 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 Maryland
Preferred Stock that could, depending on the terms of such series, delay,
defer or prevent a transaction or a change in control of NAI Maryland that
might involve a premium price for the NAI Maryland Shares or otherwise be in
the best interest of the stockholders.
Other Provisions. The Charter and Bylaws of NAI Maryland
also contain other provisions that may delay, defer or prevent a transaction
or a change in control of NAI Maryland 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 Maryland's Charter and Bylaws
- -- Removal of Directors," "-- Business Combinations," "-- Control Share
Acquisitions" and "-- Advance Notice of Director Nominations and New
Business."
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.
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 and the subsequent Distribution.
<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 14,000
Mortgage Loans .............................................. 61,501 61,501
____% Convertible Subordinated Notes ........................ 0 8,000
--------- ---------
Total debt ....................................... 257,201 265,201
--------- ---------
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, 3,450,000
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 $ 455,303
========= =========
</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
Subordinated Convertible
Notes due 2008................ 8,000 . % 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 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 .................................... $ 13,407 $ 13,407 $ 10,929 $ 53,441 $ 47,579 $ 41,665 $ 40,259
Percentage rent ................................. 310 310 268 1,167 1,163 1,042 1,044
Expense reimbursements .......................... 2,839 2,839 2,697 12,009 11,165 11,732 10,988
Interest income ................................. 123 123 54 278 278 624 902
Other income .................................... 247 28 31 758 127 117 277
--------- --------- --------- --------- --------- --------- ---------
Total revenue ................................... 16,926 16,707 13,979 67,653 60,312 55,180 53,470
========= ========= ========= ========= ========= ========= =========
Expenses:
General and administrative, interest
and property operating costs ................... 9,705 9,585 8,654 38,630 36,694 35,514 32,690
Depreciation and amortization ................... 3,450 3,450 2,859 13,785 12,534 11,194 10,903
Income before extraordinary charge and
before preferred distributions ................... 3,771 3,672 2,466 15,238 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) ................................. $ 3,771 $ 3,672 $ 2,466 $ 15,238 $ 10,617 $ (2,580) $ 9,877
========= ========= ========= ========= ========= ========= =========
Income before extraordinary
items per share ................................. $ 0.17 $ 0.16 $ 0.19 $ 0.66 $ 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):
Funds from operations (1) ......................... $ 5,061 $ 4,962 $ 4,723 $ 20,030 $ 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) ............ 1.20 1.19 1.37 1.20 1.27 1.41 1.50
Ratio of funds from operations to fixed charges (3) 1.64 1.64 1.89 1.64 1.77 1.97 2.05
Total Properties (at end of period) ............... 59 59 54 59 59 38 38
Total gross leasable area in sq. ft
(at end of period, in thousands) ................ 7,600 7,600 7,000 7,600 7,600 5,700 5,700
Balance Sheet Data (at end of period):
Real estate, before accumulated
depreciation .................................... $ 491,091 $ 491,091 $ 438,454 $ 484,741 $ 370,491 $ 368,073
Total assets ...................................... $ 466,630 $ 465,650 $ 423,117 $ 466,220 $ 359,157 $ 372,983
Total debt ........................................ $ 265,201 $ 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>
-28-
<PAGE>
- ---------------
(1) Funds From Operations has been calculated in accordance with the
definition of "funds from operations" clarified by 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 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.
(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 and preferred share distributions and excludes amortization of
debt expense.
-29-
<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, the subsequent
Distribution, the Rights Offering and the Concurrent Offering (the "NAI
Transaction").
The unaudited pro forma combined condensed Balance Sheet as of
March 31, 1998 is presented as if the NAI Transaction 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 NAI Transaction had occurred on January 1, 1998 and
1997, respectively.
Preparation of the pro forma financial information was based on
assumptions deemed appropriate by the management of Kranzco. The assumptions
give effect to the NAI Transaction 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.
-30-
<PAGE>
KRANZCO REALTY TRUST
PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Kranzco Exchange Pro Forma
(Historical) Offer Distribution Total
------------ ----- ------------ -----
(A) (B)
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Assets:
Shopping centers, at cost, net...................... $ 441,063 $ 0 $ 0 $ 441,063
Cash and marketable securities...................... 6,448 0 0 6,448
Restricted cash..................................... 1,185 0 0 1,185
Rents and other receivables, net.................... 9,732 0 0 9,732
Prepaid expenses.................................... 2,067 0 0 2,067
Deferred financing costs, net....................... 1,828 0 0 1,828
Other deferred costs, net........................... 2,155 0 0 2,155
Other assets........................................ 1,172 0 0 1,172
Investment in NAI................................... 0 8,000 (7,020) 980
------------ -------- -------- -----------
Total assets........................................ $ 465,650 $ 8,000 $ (7,020) $ 466,630
============ ======== ======== ===========
Liabilities:
Mortgages and notes payable......................... $ 257,201 $ 8,000 $ 0 $ 265,201
Tenant security deposits............................ 1,364 0 0 1,364
Accounts payable and accrued expenses............... 2,772 0 0 2,772
Other liabilities................................... 574 0 0 574
Distributions payable............................... 6,617 0 0 6,617
------------ -------- --------- -----------
Total liabilities................................... 268,528 8,000 0 276,528
------------ -------- --------- -----------
Series C Preferred Shares........................... 1,782 0 0 1,782
Beneficiaries Equity:
Common shares and Preferred shares.................. 135 0 0 135
Capital in excess of par value...................... 261,647 0 0 261,647
Cumulative net income available to common
shareholders...................................... 35,465 0 0 35,465
Cumulative distributions on common shares........... (101,784) 0 (7,020) (108,804)
------------ -------- --------- -----------
195,463 0 (7,020) 188,443
Unearned compensation on restricted common shares (123) 0 0 (123)
------------ -------- --------- -----------
Total beneficiaries' equity......................... 195,340 0 (7,020) 188,320
------------ -------- --------- -----------
Total liabilities, Series C Preferred Shares
and beneficiaries' equity......................... $ 465,650 $ 8,000 $ (7,020) $ 466,630
============ ======== ========= ===========
</TABLE>
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 acquisition of 80% of NAI:
Shares 10,380 13,661
Purchase Price $8,000
------
Issuance of Subordinated Convertible Notes $8,000
======
(B) To reflect the distribution of NAI shares to Kranzco's shareholders:
Shares distributed 11,987 Basis $7,020
======
</TABLE>
-31-
<PAGE>
KRANZCO REALTY TRUST
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
for the Three Months Ended March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Kranzco NAI Kranzco
(Historical) Transaction (Pro Forma)
------------ ----------- -----------
(Dollar and share amounts in thousands except per share amounts)
<S> <C> <C> <C>
REVENUE:
Minimum rent...................................... $ 13,407 $ 0 $ 13,407
Percentage rent................................... 310 0 310
Expense reimbursements............................ 2,839 0 2,839
Other income...................................... 28 219 (C) 247
Interest income................................... 123 0 123
----------- ---------- -----------
Total revenue..................................... 16,707 219 16,926
----------- ---------- -----------
EXPENSES:
Interest.......................................... 4,871 120 (C) 4,991
Depreciation and amortization..................... 3,450 0 3,450
Real estate taxes................................. 1,804 0 1,804
Operations and maintenance........................ 2,101 0 2,101
General and administrative........................ 809 0 809
----------- ---------- -----------
Total expenses.................................... 13,035 120 13,155
----------- ---------- -----------
Net Income........................................ 3,672 99 3,771
DISTRIBUTIONS ON PREFERRED SHARES................. 2,013 0 2,013
----------- ---------- -----------
Net income attributable to common shareholders $ 1,659 $ 99 $ 1,758
=========== ========== ===========
Basic Earnings Per Common Share................... $ 0.16 $ 0.17
=========== ===========
Diluted Earnings Per Common Share................. $ 0.16 $ 0.17
=========== ===========
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.
-32-
<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
(Historical) (1/1-2/27/97) Shares (B) Debt
------------ ------------- ----------- ----
(Dollar and share amounts in thousands except per share amounts)
<S> <C> <C> <C> <C>
REVENUE:
Minimum rent.......................... $ 47,579 $ 1,194 $ 4,668 $ 0
Percentage rent....................... 1,163 4 0 0
Expense reimbursements................ 11,165 152 692 0
Other income.......................... 127 0 0 0
Interest income....................... 278 0 0 0
---------- ----------- ----------- ----------
Total revenue......................... 60,312 1,350 5,360 0
---------- ----------- ----------- ----------
EXPENSES:
Interest.............................. 18,887 498 1,765 (D) (1,862) (E)
Depreciation and amortization 12,534 228 (F) 1,023 (G) 0
Real estate taxes..................... 6,584 83 394 0
Operations and maintenance............ 8,346 96 482 0
General and administrative............ 2,877 0 0 0
---------- ----------- ----------- ----------
Total expenses........................ 49,228 905 3,664 (1,862)
---------- ----------- ----------- ---------
Net income............................ 11,084 445 1,696 1,862
DISTRIBUTIONS ON PREFERRED
SHARES................................ 3,565 528 4,275 (H) 0
---------- ----------- ----------- ----------
Net income attributable to common
shareholders.......................... $ 7,519 $ (83) $ (2,579) $ 1,862
========== =========== =========== ==========
Basic Earnings Per Common Share....... $ 0.73
==========
Diluted Earnings Per Common Share..... $ 0.73
==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OF BENEFICIAL
INTEREST.............................. 10,342
<CAPTION>
Kranzco NAI Kranzco
Total Transaction (Pro Forma)
----- ----------- -----------
(Dollar and share amounts in thousands except per share amounts)
<S> <C> <C> <C>
REVENUE:
Minimum rent.......................... $ 53,441 $ 0 $ 53,441
Percentage rent....................... 1,167 0 1,167
Expense reimbursements................ 12,009 0 12,009
Other income.......................... 127 631 (C) 758
Interest income....................... 278 0 278
---------- ---------- -----------
Total revenue......................... 67,022 631 67,653
---------- ---------- -----------
EXPENSES:
Interest.............................. 19,288 480 (C) 19,768
Depreciation and amortization 13,785 0 13,785
Real estate taxes..................... 7,061 0 7,061
Operations and maintenance............ 8,924 0 8,924
General and administrative............ 2,877 0 2,877
---------- ---------- -----------
Total expenses........................ 51,935 480 52,415
---------- ---------- -----------
Net income............................ 15,087 151 15,238
DISTRIBUTIONS ON PREFERRED
SHARES................................ 8,368 0 8,368
---------- ---------- -----------
Net income attributable to common
shareholders.......................... $ 6,719 $ 151 $ 6,870
========== ========== ===========
Basic Earnings Per Common Share....... $ 0.64 $ 0.66
========== ===========
Diluted Earnings Per Common Share..... $ 0.64 $ 0.66
========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OF BENEFICIAL
INTEREST.............................. 10,426 10,426
</TABLE>
The accompanying notes and management's assumptions are an integral part of
this statement.
-33-
<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 NAI Transaction, 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
NAI's Income (for the nine months ended March 31, 1998
and for the year ended June 30, 1997) $955 $1,338
Kranzco's share $94 $131
(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>
-34-
<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. See "Use of Proceeds."(1)
<TABLE>
<CAPTION>
As of March 31, 1998
--------------------
(In thousands)
Actual As adjusted
------ -----------
<S> <C> <C>
Debt:
Current portion of the long-term debt ........................... $ 127 $ 0
Stockholders loans .............................................. 441 0
Long-term debt .................................................. 75 0
-------- --------
Total debt .................................... 643 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; (36,153,120
as adjusted) .................................................... 134(2) 362
Capital in excess of par value .................................. 2,553(2) 39,245(3)(4)
Retained earnings (deficit) ..................................... (3,479) (3,479)
-------- --------
............................................. (792) 36,128
Treasury stock, at cost(2) ...................................... (234) 0(3)
-------- --------
Total stockholders' equity (deficit) .......... (1,026) 36,128
-------- --------
Total capitalization .......................... $ (181) $ 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)
(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.......................... 18,007 27,077
</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.
-35-
<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, the
Distribution, the Rights Offering and the Concurrent Offering 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, the Distribution, the Rights Offering and the Concurrent Offering 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 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 1993
---- ---- ---- ---- ---- ---- ---- ---- ----
(unaudited)(unaudited)(unaudited)(unaudited) (unaudited)(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Commissions ...................... $ 2,836 $ 2,836 $ 2,910 $ 4,001 $ 4,001 $ 4,124 $ 4,371 $ 2,312 $ 2,563
License fees ..................... 1,128 1,128 923 1,282 1,282 1,373 1,158 1,081 1,007
Other ............................ 474 474 563 618 618 523 470 427 384
Interest ......................... 1,238 0 0 1,650 0 0 0 0 0
-------- ------- -------- -------- -------- -------- -------- ------- -------
Total revenue .................... 5,676 4,438 4,396 7,551 5,901 6,020 5,999 3,820 3,954
-------- ------- -------- -------- -------- -------- -------- ------- -------
Costs and expenses:
Commission expense ............... 602 602 788 1,143 1,143 1,782 1,485 839 790
Sales and marketing .............. 277 277 194 321 321 285 324 274 283
Compensation and benefits ........ 1,832 1,832 1,911 2,528 2,528 2,438 1,981 1,895 1,648
Operating expense ................ 1,953 1,578 1,187 2,144 1,644 1,475 1,336 1,161 1,018
Depreciation and amortization .... 40 40 37 52 52 56 45 53 152
Interest, net .................... 0 47 47 0 60 48 46 37 43
-------- ------- -------- -------- -------- -------- -------- ------- -------
Total costs and expenses ......... 4,704 4,376 4,164 6,188 5,748 6,084 5,217 4,259 3,934
-------- ------- -------- -------- -------- -------- -------- ------- -------
Income (loss) from operations .... 972 62 232 1,363 153 (64) 782 (439) 20
-------- ------- -------- -------- -------- -------- -------- ------- -------
Other expenses:
Equity in loss of affiliate ...... 12 12 15 25 25 5 0 0 0
Loss on sale of real estate ...... 0 0 0 0 0 0 65 0 0
-------- ------- -------- -------- -------- -------- -------- ------- -------
Total other expenses ............. 12 12 15 25 25 5 65 0 0
-------- ------- -------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing
operations before income taxes . 960 50 217 1,338 128 (69) 717 (439) 20
Income taxes ..................... 5 5 0 0 0 0 35 0 0
-------- ------- -------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing
operations ................. 955 45 217 1,338 128 (69) 682 (439) 20
Loss from discontinued
operations ..................... 0 0 162 0 223 128 392 0 0
-------- ------- -------- -------- -------- -------- -------- ------- -------
Net income (loss) ................ 955 45 55 1,338 (95) (197) 290 (439) 20
Preferred share distributions .... 0 7 8 0 11 13 15 0 0
-------- ------- -------- -------- -------- -------- -------- ------- -------
Net income (loss) available to
common shareholders .............. $ 955 $ 38 $ 47 $ 1,338 $ (106) $ (210) $ 275 $ (439) $ 20
======== ======= ======== ======== ======== ======== ======== ======= =======
Net income (loss) per share ...... $ 0.03 $ 0.00 $ 0.00 $ 0.04 $ (0.01) $ (0.02) $ 0.02 $ (0.03) $ 0.00
======== ======= ======== ======== ======== ======== ======== ======= =======
Other data (unaudited):
Common shares outstanding .......... 36,154 12,974 12,888 36,154 12,871 12,863 12,782 12,523 12,655
Weighted average shares
outstanding ........................ 36,100 12,954 12,888 35,912 12,883 12,860 12,648 12,589 12,652
Ratio of EBITDA to fixed charges ... 25.00 1.46 3.27 26.73 1.95 0.30 7.62 (3.88) 1.10
EBITDA ............................. $ 1,000 $ 137 $ 301 $ 1,390 $ 240 $ 35 $ 808 ($ 349) $ 215
Balance sheet data (1995 unaudited):
Total assets ....................... $ 38,138 $ 1,829 $ 1,807 $ 1,689 $ 1,732 $ 1,649 $ 1,321 $ 1,447
Total debt ......................... $ 0 $ 643 $ 550 $ 575 $ 496 $ 441 $ 466 $ 358
Shareholders' equity (deficit) ..... $ 36,128 $(1,026) $ (983) $ (1,090) $ (1,008) $ (837) $ (630) $ (44)
</TABLE>
-36-
<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 NAI Transaction and the application of the proceeds therefrom.
The unaudited pro forma combined condensed Balance Sheet as of March
31, 1998 is presented as if the NAI Transaction and the application of the
proceeds therefrom, 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 NAI Transaction
and the application of the proceeds therefrom, had occurred on July 1, 1997
and 1996, respectively.
Preparation of the pro forma financial information was based on
assumptions deemed appropriate by the management of NAI. The assumptions give
effect to the NAI Transaction and the application of the proceeds therefrom 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.
-37-
<PAGE>
NEW AMERICA NETWORK, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
As of March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Reincorporation Merger,
Rights Offering Pro Forma
and Concurrent March 31,
Historical Offering 1998
---------- ------------ -----------
<S> <C> <C> <C>
Assets:
Current assets:
Cash.............................................. $ 220 $36,309 (A) (B), (D) $ 36,529
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 36,309 37,979
----------- ----------- -----------
Property and equipment (net)........................... 156 0 156
Other assets........................................... 3 0 3
- - -
Total assets...................................... $ 1,829 $ 36,309 $ 38,138
=========== =========== ===========
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 (127) (B) 0
Stockholder loans................................. 441 (441) (B) 0
Deferred revenue.................................. 922 0 922
----------- ----------- -----------
Total current liabilities......................... 2,578 (568) 2,010
----------- ----------- -----------
Long-term debt......................................... 75 (75) (B) 0
-- ----------- -----------
Total liabilities................................. 2,653 (643) 2,010
----------- ----------- -----------
Redeemable convertible preferred stock................. 202 (202) (D) 0
----------- ----------- -----------
Stockholders' equity:
Preferred stock................................... 0 0 0
Common stock...................................... 134 228 (A) 362
Additional paid-in capital........................ 2,553 36,692 (A), (C) 39,245
Accumulated deficit............................... (3,479) 0 (3,479)
Treasury stock, at cost........................... (234) 234 (C) 0
----------- ----------- -----------
Total stockholders' equity........................ (1,026) 37,154 36,128
----------- ----------- -----------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity $ 1,829 $ 36,309 $ 38,138
========== =========== ===========
</TABLE>
The accompanying notes and management's assumption are an integral part of
this statement.
-38-
<PAGE>
NOTES AND MANAGEMENT'S ASSUMPTIONS TO NAI'S PRO FORMA BALANCE SHEET
as of March 31, 1998
A) To reflect the recapitalization of NAI's shares (through the
Reincorporation Merger) and reflect the Rights Offering and the .
Concurrent Offering, net of costs.
NAI Shares outstanding prior to recapitalization....... 12,974
Recapitalization factor................................ 1.316172
NAI Shares outstanding after recapitalization.......... 17,077
To reflect the Rights Offering and the Concurrent Offering, net of costs:
Underlying Shares and Additional Shares issued......... 19,077
Subscription price per NAI Share ...................... $ 2.00
-----------
Gross proceeds from the Rights Offering
and the Concurrent Offering............................ $ 38,154
Less: Offering costs................................... $ 1,000
-----------
Net proceeds from the Rights Offering
and the Concurrent Offering............................ $ 37,154
B) To reflect use of proceeds to pay down outstanding notes and loans payable.
Current Portion of Long-Term Debt................. $ 127
Stockholder Loans................................. $ 441
Long-term Debt.................................... $ 75
-----------
Total debt repaid................................. $ 643
-----------
C) To reflect the retirement of the Treasury Stock.
D) To reflect the redemption of the redeemable convertible preferred shares.
-39-
<PAGE>
NEW AMERICA NETWORK, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the Nine Months Ended March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Reincorporation Merger
Rights Offering Pro Forma
and Concurrent March 31,
Historical Offering (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 1,238 (B) 1,238
- ----- -----
Total revenue..................................... 4,438 1,238 5,676
----- ----- -----
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 (C) 1,953
Depreciation and amortization..................... 40 0 40
Interest, net..................................... 47 (47) (D) 0
Distributions on preferred shares................. 7 (7) (E) 0
- --- -
Total costs and expenses.......................... 4,383 321 4,704
----- --- -----
Income (loss) from operations.......................... 55 917 972
Other expenses:
Loss in investment in NAIS............................. 12 0 12
-- - --
Total other expense............................... 12 0 12
-- - --
Income taxes........................................... 5 0 5
- - -
Net income............................................. $ 38 $ 917 $ 955
= == = === = ===
Basic and diluted earnings per common share............ $ 0.00 $ 0.03
= ==== = ====
Basic and diluted earnings per recapitalized common share $ 0.00 $ 0.03
= ==== = ====
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............................ 17,050 36,100
Weighted average number of common shares and
equivalents outstanding.............................. 17,176 36,226
</TABLE>
-40-
<PAGE>
NEW AMERICA NETWORK, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the Year Ending June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Reincorporation Merger,
Rights Offering Pro Forma
and Concurrent June,
Historical Offering (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 1,650 (B) 1,650
- ----- -----
Total revenue..................................... 5,901 1,650 7,551
----- ----- -----
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 (C) 2,144
Depreciation and amortization..................... 52 0 52
Interest, net..................................... 60 (60) (D) 0
Distributions on preferred shares................. 11 (11) (E) 0
-- ---- -
Total costs and expenses.......................... 5,759 429 6,188
----- --- -----
Income from operations................................. 142 1,221 1,363
Other expenses:
Loss in investment in NAIS............................. 25 0 25
-- - --
Total other expenses.............................. 25 0 25
-- - --
Income taxes........................................... 0 0 0
- - -
Net income............................................. $ 117 $ 1,221 $ 1,338
= === = ===== = =====
Basic and diluted earnings per common share............ $ 0.01 $ 0.04
= ==== = ====
Basic and diluted earnings per recapitalized common share $ 0.01 $ 0.04
= ==== = ====
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............................ 16,956 35,912
Weighted average number of common shares and
equivalents outstanding.............................. 17,108 36,064
</TABLE>
The accompanying notes and management's assumptions are an integral part of
this statement.
-41-
<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.
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
A) To reflect the recapitalization of NAI Shares, the Rights Offering and
the Concurrent Offering, net of costs.
B) To reflect the interest earned on an investment contract for the net proceeds:
Invested
Cash Rate Interest Earned
Maximum proceeds $30,000 5.50% $1,238 $1,650
C) To reflect fees and costs payable under the Intercompany Agreement.
D) To reflect the reduction of interest on the pay down of outstanding notes
and loans payable.
Debt Repaid Interest Saved
$659 $47 $60
</TABLE>
E) To reflect the elimination of preferred share distributions in connection
with the redemption of the redeemable convertible preferred shares.
-42-
<PAGE>
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 ("NAI"), 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 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 Offering and the Proposed Related
Transactions, (ii) repurchase 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. 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
-43-
<PAGE>
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 and long-term requirements and objectives. NAI's
short-term and long-term needs will be met from the proceeds of the Rights
Offering and the Concurrent Offering, cash flow from operations, bank loans or
its credit line.
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.
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 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
-44-
<PAGE>
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.
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.
-45-
<PAGE>
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 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.
-46-
<PAGE>
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
2,400 agents, operating in approximately 200 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 March 31, 1998, the Network had an
inventory of approximately 1,775 assignments to buy, sell or lease real
property, with a transaction value of approximately $927 million, and which
would generate fees to NAI of approximately $6.5 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 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."
-47-
<PAGE>
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 47 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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<PAGE>
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 March 31, 1998, NAI had
approximately 130 Broker Members in 47 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.
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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 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 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
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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. 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 March 31, 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
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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 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.
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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 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
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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 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.
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
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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 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. NAI believes that it has strong
defenses to any alleged violation of any State Law. 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. 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 has, to date, not taken any actions to
comply with franchise-related laws in effect in those jurisdictions. NAI
believes that it is in substantial compliance with such laws, and has good
defenses to any alleged violation of such laws. To the extent that NAI may not
be in compliance, it may be subject to actions by regulatory agencies and
legal actions by existing Members, and subject to fines, penalties and
damages. In the future, NAI intends to comply with such laws, where necessary,
as applicable in each relevant jurisdiction.
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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 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
related closing 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 May 13, 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.
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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, or for any other reason 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 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
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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 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
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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 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.
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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 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.
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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 closing 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 closing 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), and the principal amount of $800,000 of Notes issued to Gerald C. Finn
and the principal amount of $200,000 of Notes issued to Jeffrey M. Finn shall
be deposited with the escrow agent pursuant to the Escrow Agreement; (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; (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 closing, 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 closing 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 closing date, and
NAI and the Finns 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; and (iii) from the date of the Exchange Agreement
through the closing, 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
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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 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.
DESCRIPTION OF NOTES
The Notes will be issued under an indenture, to be dated as of
________ __, 1998 (the "Indenture"), between Kranzco and
_________________________, as Trustee (the "Trustee"). The following summary
of
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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 __________________. 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 are
summaries 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 on ________ __, 2008 and will be limited to an aggregate
principal amount of $8,000,000. The Notes will bear interest at a rate of ___%
per annum from ________ __, 1998, 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, commencing ___________,
1998, 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 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
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 ________ __, 2000, 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
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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.
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
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payment, "Business Day" means a day on which banks are open for business 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 after ________ __, 2000, in whole or in
part, into Kranzco Common Shares at the option of the Holder at any time 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; (iii)
subdivisions and combinations of Kranzco Common Shares; and (iv) distributions
to all holders of Kranzco Common Shares of evidences of indebtedness of
Kranzco, shares of capital stock, securities, cash or property (excluding any
rights, warrants or options referred to in clause (ii) above and any dividend
or distribution paid exclusively in cash and any dividend or distribution
referred to in clause (i) above). 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.
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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.
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
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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 only be modified by Kranzco and the Trustee 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
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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 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
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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.
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 ___________________.
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 Maryland.
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.
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CERTAIN 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) 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.
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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 or in connection with a gift without consideration. Thus, Kranzco
intends that the Notes will not be treated as "readily tradable in an
established securities market."
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.
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 28%
federal income tax rate, or 20% where the NAI Shares have been held for more
than 18 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
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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 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.
Kranzco believes that commencing with its 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.
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
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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 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
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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 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
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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 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
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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 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. For a U.S.
shareholder who is an individual or an estate or trust, such capital gain
dividends generally will be taxable at the 28% rate applicable to mid-term
capital gain (i.e., gains from the sale of capital assets held for more than
one year but not more than 18 months) except to the extent Kranzco designates
the capital gain dividend as a 20% rate distribution or a 25% rate
distribution, as the case may be, 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
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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 as mid-term capital gain or loss (taxable
at a maximum rate of 28%) if the holder held such shares for more than one
year but not more than 18 months, or as net adjusted capital gain or loss
(taxable at a maximum rate of 20%) if the holder held such shares for more
than 18 months.
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.
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
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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 ("NAI Series A 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: 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 matters submitted to a vote of the holders of Kranzco
Common Shares. However, under certain circumstances the Indenture requires the
consent of holders of the Notes in connection with a merger, consolidation or
sale of all or substantially all of the assets of Kranzco. 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 and a duty of care 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." Later
case law has established
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"gross negligence" as the standard for 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 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 in Title 8 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 ____% per year from
________, 1998, 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."
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 or in connection with a gift without consideration.
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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 three 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 three 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.
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
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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 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 stockholders 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 of stock 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.
Limitation of Liability of Directors 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 liability of trustees and officers of
Kranzco to Kranzco or to any shareholder of Kranzco for money damages has been
eliminated except for (a) actual receipt of an improper
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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 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 Certificate provides 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 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
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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 stock 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 record 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 shares of voting stock of the trust and (ii)
two-thirds of votes entitled to be cast by holders of outstanding shares of
voting stock other than stock held by the Interested Shareholder with whom the
business combination is to be effected, unless, among other things, 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 Maryland law do not apply, however, to business
combinations that are approved or exempted for a period of five years
following the most recent date on which the Interested Shareholder became an
Interested Shareholder 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 only
for 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 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.
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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
___________________, 2000, 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 ____________, 2000 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.
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 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
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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 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.
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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 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.
Rights Offering
In connection with the Rights Offering, (i) the Finns, jointly and
severally, agreed to exercise Rights to purchase an aggregate of 500,000 NAI
Shares and (ii) Kranzco agreed to exercise such number of Rights to purchase
NAI Shares that would result in Kranzco owning 9.8% of the issued and
outstanding NAI Shares, before the issuance of any Additional Shares.
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 closing 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
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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 closing 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 closing date as if made on
the closing 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") and the principal amount of $800,000 of Notes issued to Gerald C.
Finn and the principal amount of $200,000 of Notes issued to Jeffrey M. Finn
shall be deposited with the escrow agent pursuant to 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 closing, 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 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 closing 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 closing 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 closing date as if made on the closing 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 closing 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 closing 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.
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The Exchange Agreement may be terminated and the Exchange Offer may
be terminated at any time prior to the closing 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 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 closing 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
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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 closing 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 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
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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
are depositing 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 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,
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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 (i) each NAI Delaware Share
being converted into 1.316172 NAI Maryland Shares, (ii) each share of Series A
Preferred Stock of NAI Delaware being converted into one share of Series A
Preferred Stock of NAI Maryland and (iii) 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 By-laws
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
Articles of Incorporation 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 1.316172 NAI
Maryland Shares, rounded to the nearest whole share, for each share of NAI
Delaware represented by such certificate.
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.
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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 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.
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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. 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
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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 ten-year options to purchase an aggregate of
1,479,801 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.
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
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.
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Employee Incentive Plans
In connection with the Exchange Offer and the Proposed Related
Transactions, NAI has agreed in the Exchange Agreement to have NAI Maryland
adopt the following Employee Incentive Plans:
o NAI 1998 Incentive Plan. Upon consummation of the Exchange Offer
and Reincorporation Merger, NAI will adopt 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. Upon consummation of the
Exchange Offer and Reincorporation Merger, NAI will adopt 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. Upon consummation of the Exchange Offer
and Reincorporation Merger, NAI will adopt a stock option plan for 3,583,992
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 ten-year options to purchase an aggregate of 1,429,801 NAI
Shares at an exercise price of $2 per NAI Share. In addition, Gerald C. Finn
and Jeffrey M. Finn will each receive a five-year option to purchase 1,544,220
and 609,971 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 50,000 NAI Shares to certain directors of NAI and trustees of
Kranzco.
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 11,987,746 Kranzco Common
Shares and Kranzco Common Share Equivalents on the Distribution Record Date,
approximately 11,987,746 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 17,076,560 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
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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 17,076,560
Underlying Shares will be sold if all Rights are exercised. The Finns, jointly
and severally, agreed in the Exchange Agreement, to exercise Rights to
purchase an aggregate of 500,000 NAI Shares and Kranzco agreed to exercise a
number of Rights to purchase NAI Shares that would result in Kranzco owning
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."
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.
No Revocation
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION
PRIVILEGE OR THE OVERSUBSCRIPTION PRIVILEGE SUCH EXERCISE MAY NOT BE
REVOKED.
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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.
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.
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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) repurchase 101,000 shares of Series A Preferred Stock of NAI
for an aggregate repurchase price of $202,000, (ii) repay approximately
$643,000 aggregate principal amount of indebtedness described below, (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.
The 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, (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 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. 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 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 27,076,560 NAI Shares being outstanding.
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, except that (i) the Finns,
jointly and severally, have agreed to exercise Rights to purchase an aggregate
of 500,000 NAI
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Shares and (ii) Kranzco has agreed to exercise such number of Rights to
purchase NAI Shares that would result in Kranzco owning 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" and "The Concurrent
Offering--Use of Proceeds."
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 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 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.
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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. 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 2001
Executive 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.
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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
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.
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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.
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 non-employee director of
NAI.
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 $100,000
(collectively, the "Named Executives"), during the fiscal year ended June 30,
1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term
--------------------------------------- Compensation
Name & Principal Position Year Salary Bonus Restricted
- ------------------------- ---- ------ ----- Stock Awards($)
($) ($) ---------------
<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".
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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. 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 Severance Benefits 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
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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 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. Upon consummation of the Exchange Offer and the
Reincorporation Merger, NAI will adopt 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 May 13, 1998, assuming the Proposed Related Transactions had
occurred.
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
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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 Incentive Option will be exercisable more than ten 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 Incentive Options must be at least equal to
100% of the fair market value of the NAI Shares on the date of grant and the
exercise price for Nonqualified Options will be determined by the Committee at
the time of grant. The exercise price can be 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
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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, 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
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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.
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.
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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.
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 ten years from the date the
1998 Plan was adopted. No awards may
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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. Upon consummation of the Exchange Offer and the
Reincorporation Merger, NAI will adopt 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 exercised, or
approximately 23.5% of the NAI Shares outstanding as of May 13, 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 ("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.
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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 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. Upon consummation of the Exchange Offer and the
Reincorporation Merger, NAI will adopt 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.
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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 3,583,992 NAI
Shares, or approximately 9.9% of the NAI Shares outstanding as of May 13,
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.
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.
Options Outstanding Under the Option Plan. Upon the consummation of
the Reincorporation Merger, there will be outstanding Nonqualified Options to
purchase 3,583,992 NAI Shares under the Option Plan at an exercise price of $2
per NAI Share. Directors of NAI will hold ten-year Options to purchase an
aggregate of 1,013,150 NAI Shares under the Option Plan at an exercise price
of $2 per NAI Share. Each of Gerald C. Finn and Jeffrey M. Finn was granted a
five-year Option under the Option Plan to purchase 1,544,220 and 609,971 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,
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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 May 13, 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
May 13, 1998, and each NAI Delaware Share was converted into 1.316172 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) 12,587,066 4,711,634(5) 73.71% 13.16%
Jeffrey M. Finn(4)(6) 3,632,006 1,686,372(6) 21.19 2.94
Norman M. Kranzdorf(7) 0 829,138(8) 0.00 2.08
Robert H. Dennis(7) 0 104,466(9) 0.00 0.26
Joseph Grossman(3) 78,795 41,518(10) 0.46 0.10
Peter O. Hanson(3) 340,560 145,566(11) 1.99 0.37
Bernard J. Korman(3) 0 24,044(12) 0.00 0.06
Michael Kranzdorf(7) 0 55,714(13) 0.00 0.14
Kranzco Realty Trust(7) 0 3347006 0.00 8.41
Estate of John 704,938 291,975(15) 4.13 0.73
McMenamin(14)
Executive Officers & 14,638,427 7,054,641 85.72 17.73
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 May 1, 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.
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(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 1,673,503 NAI
Shares in order to maintain 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 May 1, 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, telephone (609) 448-4700.
(5) Includes (i) 3,949 NAI Shares owned by the Building Center, Inc.,
a corporation owned by Gerald and Norma Finn, (ii) 1,794,220 NAI Shares
issuable upon the exercise of options to purchase NAI Shares, (iii) 42,776 NAI
Shares owned by Mr. Finn's spouse, and (iv) 526,469 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) 44,092 NAI Shares owned by
Mr. G. Finn's children, or (ii) 4,936 NAI Shares held by Mr. G. Finn as
collateral for a loan to a stockholder of NAI; Mr. Finn disclaims beneficial
ownership of such NAI Shares.
(6) Includes (i) 11,846 NAI Shares held in trust for Mr. Finn's minor
children, (ii) 4,584 NAI Shares owned by Brooktree Swim & Tennis Club, Inc., a
corporation owned by Mr. J. Finn and his spouse, (iii) 859,971 NAI Shares
issuable upon the exercise of options to purchase NAI Shares; and (iii)
526,469 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) 14,206 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) 169 NAI Shares owned by Mr. Dennis' spouse, and (ii)
71,100 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)
4,343 NAI Shares and 1,645 NAI Shares owned by James E. Hanson, Inc. and
Property Investors Associates, 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 note 6.
(14) The address of such NAI Stockholder is c/o Mr. Robert
McMenamin, Executor, 4016 Indian Guide Road, Lafayette Hill, Pennsylvania
19444.
(15) Includes 5,000 NAI Shares beneficially owned by Robert
McMenamin, executor of the Estate of John McMenamin and 10,000 NAI Shares
issuable upon the exercise of options to purchase NAI Shares.
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.
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CERTAIN 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. 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. A portion of the proceeds of the Rights Offering and the Concurrent
Offering 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 Department."
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 May 13, 1997, after giving effect to the Reincorporation
Merger, there were 17,076,560 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.
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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 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 Maryland General Corporation Law (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 two thirds 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
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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 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.
Series A Preferred Stock
Agreement with Holder of Series A Preferred Stock. In connection with the
Reincorporation Merger, NAI entered into a letter agreement with the holder of
the 101,000 outstanding shares of Series A Preferred Stock which provides that
in connection with the holder of the outstanding Series A Preferred Stock
agreeing to waive any potential right of mandatory redemption which such
holder may be entitled in connection with the Reincorporation Merger, NAI will
redeem all of the outstanding shares of Series A Preferred Stock within five
Business Days of the closing of the Rights Offering. The holder of the
outstanding shares of Series A Preferred Stock also agreed in the letter
agreement not to convert the Series A Preferred Stock into NAI Shares and that
the holder of the Series A Preferred Stock is not entitled to receive Rights
in the Rights Offering.
Rank. Shares of Series A Preferred Stock rank prior to the NAI Shares.
Dividends. Holders of shares of Series A Preferred Stock are entitled to
receive, when and as declared by the Board of Directors, out of any funds of
NAI legally available therefor, cumulative cash dividends at an annual rate of
4% of the $2.00 liquidation value of each such share ($.08 per share per
annum). Any deficiency in the payment of full cumulative dividends on the
outstanding shares of Series A Preferred Stock must be fully paid, or a sum
sufficient for the payment thereof set apart for such payments, before NAI may
pay or set aside for payment any dividends with respect to the NAI Shares or
any other stock of NAI ranking junior to the Series A Preferred Stock as to
dividends or amounts upon liquidation ("Junior Stock").
Liquidating Distributions. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the holders of any
shares of Series A Preferred Stock then outstanding are entitled to receive
for each such share liquidating distributions in the amount of $2.00 per
share, plus any declared and unpaid dividends thereon, before any distribution
may be made to the holders of NAI Shares or any other Junior Stock. This
distribution may be paid in cash or in property taken at its fair value.
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If the amounts available for distribution in respect of shares of
Series A Preferred Stock upon any such voluntary or involuntary liquidation,
dissolution or winding up are not sufficient to satisfy the full liquidation
rights of all of the outstanding shares of Series A Preferred Stock, then the
holders of such outstanding shares shall share ratably in any such
distribution of assets in proportion to the full respective preferential
amounts to which they are entitled. After payment of the full amount of the
liquidating distribution to which they are entitled, the holders of shares of
Series A Preferred Stock will not be entitled to any further participation in
any liquidating distribution of any remaining assets by the Corporation.
Optional Conversion by Holders. Holders of shares of Series A Preferred Stock
have the right to convert all or a part of such shares into a number of NAI
Shares equal to (i) $2.00 multiplied by the number of shares of Series A
Preferred Stock so converted divided by (ii) the lesser of $2.00 or the
average NASDAQ bid price for NAI Shares for the 30 day period previous to the
date of conversion election. Upon such conversion, the holder of shares of
Series A Preferred Stock being converted shall also receive a warrant,
exercisable for a period of one year after the conversion date, to purchase,
at a price of $1.00 per share, one NAI Share for every ten shares of Series A
Preferred Stock so converted.
Mandatory Redemption. NAI must redeem at least 25,000 shares of Series A
Preferred Stock at a price of $2.00 per share, plus the amount of all unpaid
cumulative compounded dividends on such shares of Series A Preferred Stock,
from funds legally available for such purposes on October 1, 1998 and must
redeem all remaining shares on or before September 30, 1999. Also, NAI must
redeem all outstanding shares of Series A Preferred Stock upon the
consolidation or merger of NAI into or with another corporation or
corporations, or the sale, lease or transfer of all or a substantial part of
the assets of NAI to another corporation or corporations (each such event
being a "Sale of Business"). If a Sale of Business occurs, NAI must redeem
shares of the Series A Preferred Stock in the amounts and with the preferences
and priorities as if a liquidation had occurred. See "Liquidating
Distributions."
Optional Redemption. NAI may redeem shares of Series A Preferred Stock at any
time at a price of $2.00 per share plus unpaid cumulative accrued dividends.
Voting Rights. Except as expressly provided below, or as required by the MGCL,
holders of shares of Series A Preferred Stock have no voting rights. When the
holders of shares of Series A Preferred Stock are entitled to vote, each
senior Preferred Stock is entitled to one vote.
The affirmative vote or consent of the holders of at least two-thirds
of the outstanding shares of Series A Preferred Stock, is required to (i)
increase the authorized amount of Series A Preferred Stock, or authorize or
create, or increase the authorized amount of, any additional class of stock
ranking prior to or on a parity with the Series A Preferred Stock as to
dividends or assets; or authorize or create, or increase the authorized amount
of, any class of stock or obligations convertible into or evidencing the right
to purchase any class of stock ranking prior to or on a parity with the Series
A Preferred Stock as to dividends or assets; (ii) authorize or create, or
increase the authorized amount of, any stock of NAI, other than NAI Shares,
which has the right to participate in the distribution of the assets and
earnings of NAI without limit as to per share amount; (iii) amend, alter or
appeal any of the provisions of the Charter or any of the rights, preferences
or powers of the Series A Preferred Stock as fixed in the Certificate of
Designations creating the Series A Preferred Stock, so as to adversely affect
the rights, preferences or powers of the shares of Series
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A Preferred Stock or its holders, (iv) sell, lease or convey all, or
substantially all, of the property or business of NAI; (v) merge or
consolidate with or into any other corporation or corporations, unless the
corporation surviving or resulting from such merger or consolidation will have
after such merger or consolidation no class of stock either authorized or
outstanding ranking prior to or on a parity with the Series A Preferred Stock
as to dividends or assets with the same rights, preferences and powers as the
Series A Preferred Stock, and unless each holder of shares of Series A
Preferred Stock at the time of such merger or consolidation and in connection
therewith shall continue to hold (in the case of the merger in which NAI is
the surviving corporation), his or her shares of Series A Preferred Stock, or
(in the case of the consolidation or merger of NAI into some other
corporation) shall receive the same number of shares of Series A Preferred
Stock, with the same rights, preferences and powers, of such resulting
corporation; or (vi) amend or repeal any of the provisions of the section of
the Certificate of Designations relating to voting rights of holders of shares
of Series A Preferred Stock.
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.
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 of NAI Maryland, 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. NAI Maryland believes that classification of the
Board of Directors will help to assure
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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 any of them and,
consequently, the five-year prohibition and the super-majority vote
requirements will not apply to business combinations between any of them
-124-
<PAGE>
and NAI Maryland. As a result, Kranzco, Gerald Finn, Jeffrey Finn and/or
Norman Kranzdorf 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.
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.
-125-
<PAGE>
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) 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, Gerald Finn, Jeffrey Finn and Norman Kranzdorf) 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
The validity of the Notes offered hereby will be passed upon for
Kranzco by Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland. Certain
matters of law will be passed upon for Kranzco by Robinson Silverman Pearce
Aronsohn & Berman LLP, New York, New York.
-126-
<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>
Manually signed facsimile copies of the Letter of Transmittal will be
accepted. The Letter of Transmittal, certificates for NAI Shares and any other
required documents should be sent or delivered by each NAI Stockholder to the
Exchange Agent at its address set forth below.
THE EXCHANGE AGENT:
First Union National Bank
1525 West W.T. Harris Boulevard, 3C3
Charlotte, North Carolina 28262-1153
Telephone: (800) 829-8432
Any questions or requests for assistance or additional copies of the
Prospectus or the Letter of Transmittal may be directed to the Exchange Agent
at the above listed telephone number and location.
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors 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 (i) actual receipt of an improper benefit or profit
in money, property or services or (ii) acts or omissions 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. 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.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
2.1 Form of Exchange Agreement, among Kranzco Realty Trust,
Gerald Finn and Jeffrey Finn.*
4.1 Specimen certificate for Kranzco Common Shares of Beneficial
Interest.+
4.2 Amended and Restated Declaration of Trust, of Kranzco Realty
Trust.+
4.3 Amendment No. 1 to the Amended and Restated Declaration of
Kranzco Realty Trust.++
4.4 Amendment No. 2 to the Amended and Restated Declaration of
Kranzco Realty Trust.++
4.5 Amended and Restated Bylaws of Kranzco Realty Trust, as
amended.+
4.6 Indenture for Kranzco Convertible Subordinated Notes due
2008, including form of Note.*
4.7 Form of Note (included in Indenture filed as Exhibit 4.6)*
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding
legality.*
10.1 Form of Intercompany Agreement.*
12.1 Ratio of Earnings to Fixed Charges.
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (contained
in Exhibit 5.1).*
23.2 Consent of Arthur Andersen LLP relating to Kranzco Realty
Trust and New America Network, Inc.
99.1 Letter of Transmittal*
99.2 Form of Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9*
- ---------------------
* To be filed by amendment.
+ Previously filed as an exhibit to the Registration Statement
on Form S-11, Registration No. 33-49434 and incorporated
herein by reference.
II-2
<PAGE>
++ Previously filed as an exhibit to the Registrant's
Registration Statement on Form S-8, Registration No.
33-94294 and incorporated herein by reference.
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.
(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
II-3
<PAGE>
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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Conshohocken, State of
Pennsylvania, on May 15, 1998.
KRANZCO REALTY TRUST
By: /s/ Norman M. Kranzdorf
------------------------
Norman M. Kranzdorf
Chief Executive Officer
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Norman M. Kranzdorf his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute, may lawfully do or cause to be
done by virtue hereof.
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 May 15, 1998
- ----------------------- Officer and Trustee
Norman M. Kranzdorf (Principal Executive Officer)
/s/ Robert H. Dennis Chief Financial Officer, May 15, 1998
- -------------------- Treasurer and Trustee
Robert H. Dennis (Principal Financial and
Accounting Officer)
/s/ Edmund Barrett Chief Operating Officer, May 15, 1998
- ------------------ Executive Vice President
Edmund Barrett and Trustee
/s/ Bernard J. Korman Trustee May 15, 1998
- ---------------------
Bernard J. Korman
/s/ Dr. Peter D. Linneman Trustee May 15, 1998
- -------------------------
Dr. Peter D. Linneman
/s/ James B. Selonick Trustee May 15, 1998
- ---------------------
James B. Selonick
/s/ E. Donald Shapiro Trustee May 15, 1998
- ---------------------
E. Donald Shapiro
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
2.1 Form of Exchange Agreement, among Kranzco Realty Trust,
Gerald Finn and Jeffrey Finn.*
4.1 Specimen certificate for Kranzco Common Shares of Beneficial
Interest.+
4.2 Amended and Restated Declaration of Trust, of Kranzco Realty
Trust.+
4.3 Amendment No. 1 to the Amended and Restated Declaration of
Kranzco Realty Trust.++
4.4 Amendment No. 2 to the Amended and Restated Declaration of
Kranzco Realty Trust.++
4.5 Amended and Restated Bylaws of Kranzco Realty Trust, as
amended.+
4.6 Indenture for Kranzco Convertible Subordinated Notes due
2008, including form of Note.*
4.7 Form of Note (included in Indenture filed as Exhibit 4.6)*
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding
legality.*
10.1 Form of Intercompany Agreement.*
12.1 Ratio of Earnings to Fixed Charges.
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (contained
in Exhibit 5.1).*
23.2 Consent of Arthur Andersen LLP relating to Kranzco Realty
Trust and New America Network, Inc.
99.1 Letter of Transmittal*
99.2 Form of Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9*
- ---------------------
* To be filed by amendment.
+ Previously filed as an exhibit to the Registration Statement
on Form S-11, Registration No. 33-49434 and incorporated
herein by reference.
<PAGE>
EXHIBIT 12.1
KRANZCO REALTY TRUST AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
($ in thousands)
<TABLE>
<CAPTION>
KRANZCO REALTY TRUST
------------------------------------------------------------------------------------
For the 12 months ended December 31,
Three months ----------------------------------------------------------------
Ended
March 31, 1998 1997 1996 1995 1994
-------------- ---- ---- ---- ----
EARNINGS
<S> <C> <C> <C> <C> <C>
Net Income (Loss) $3,672 11,084(1) $ 8,536(2) $ 9,877 $ 9,867
Plus:
1) Interest expense 4,871 18,887 17,069 16,208 10,469
2) Amortization of debt costs 147 577 667 964 960
-------------- ---------- ----------- -------------- -------------
Total Earnings $8,690 $30,548 $26,272 $27,049 $21,296
-------------- ---------- ----------- -------------- -------------
FIXED CHARGES
1) Interest expense $5,164 $19,834 $17,320 $16,529 $11,405
2) Amortization of debt costs 147 577 667 960 960
3) Distributions on Preferred 2,013 3,565 695 485 0
-------------- ---------- ----------- -------------- -------------
Shares
Total Fixed Charges $7,324 23,976 $18,682 $17,974 $12,365
-------------- ---------- ----------- -------------- -------------
Ratio of Earnings to
Fixed Charges 1.19 1.27(1) 1.41(2) 1.50 1.72
============== ========== =========== ============== =============
</TABLE>
- -------------------------
(1) Excludes $467 extraordinary loss on early extinguishment or debt.
(2) Excludes $11,052 extraordinary loss on debt refinancing.c
<PAGE>
Arthur Andersen LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated May 8, 1998 on the consolidated financial statements of New America
Network, Inc. and to the incorporation by reference of our reports dated
February 23, 1998 included in Kranzco Realty Trust's Form 10- K for the year
ended December 31, 1997 (and to all references to our Firm) included in this
Registration Statement on Form S-4 of Kranzco Realty Trust.
/s/ Arthur Andersen LLP
Philadelphia, PA
May 14, 1998
