<PAGE> 1
As Filed with the Securities and Exchange Commission on December 1, 1997
Registration No. 333-30307
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
AMENDMENT NO. 5
TO
FORM S-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
------------------
LEXINGTON CORPORATE PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland 6798 13-3717318
- ---------------- ---------------------------- ----------------------
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
355 Lexington Avenue
New York, New York 10017
Telephone Number (212) 692-7260
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
------------------------------------
T. Wilson Eglin
President and Chief Operating Officer
Lexington Corporate Properties, Inc.
355 Lexington Avenue
New York, New York 10017
(212) 692-7260
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
Copies to:
Barry A. Brooks, Esq.
Knute J. Salhus, Esq.
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue
New York, New York 10022-4697
(212) 318-6000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the Registration Statement becomes
effective and the merger of Corporate Realty Income Trust I with and into
Lexington Corporate Properties, Inc. (the "Merger") has become effective.
------------------------------------
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. |_|
------------------------------------
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 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
CORPORATE REALTY INCOME TRUST I
NOTICE OF MEETING OF SHAREHOLDERS
A special meeting of shareholders (the "Meeting") of Corporate Realty
Income Trust I ("CRIT") will be held on December 30, 1997 at 11:00 am, local
time, at CRIT's offices at 388 Greenwich Street, New York, New York, 33rd floor,
for the following purposes:
1. To consider and act on a proposal to approve the merger (the
"Merger") of CRIT with and into Lexington Corporate Properties, Inc.
("Lexington Properties") as set forth in the Agreement and Plan of Merger,
dated as of May 29, 1997, as amended, between Lexington and CRIT (the
"Merger Agreement"). Pursuant to the Merger Agreement, each share of
beneficial interest, par value $0.10 per share, of CRIT (each, a "CRIT
Share") issued and outstanding immediately prior to the effective time of
the Merger shall be converted into a number of shares of Lexington Common
Stock, par value $0.0001 per share (the "Lexington Common Stock"), based
upon a calculated value per CRIT Share of approximately $17.96. For
purposes of calculating the ratio at which the CRIT Shares will be
converted into shares of Lexington Common Stock in the Merger, the value of
Lexington Common Stock will be based on the average of the closing sales
prices of Lexington Common Stock on the New York Stock Exchange, Inc. on
the 20 consecutive trading days ending on the fifth business day
immediately preceding the Meeting (the "Lexington Common Stock Price");
however, the Lexington Common Stock Price will be deemed to equal (i)
$14.125 if the average price of the Lexington Common Stock calculated above
is greater than $14.125 or (ii) $12.125 if the average price of the
Lexington Common Stock is less than $12.125. Based upon the foregoing
conversion formula, each CRIT Share may be converted into a maximum of
1.481 shares of Lexington Common Stock assuming that the Lexington Common
Stock Price is $12.125 (or 1,496,959 shares of Lexington Common Stock, in
the aggregate, representing approximately 7.66% of the aggregate number of
outstanding shares of Lexington Common Stock on a fully diluted basis) or a
minimum of 1.271 shares of Lexington Common Stock assuming a Lexington
Common Stock Price of $14.125 (or 1,284,956 shares of Lexington Common
Stock, in the aggregate, representing approximately 6.58% of the aggregate
number of outstanding shares of Lexington Common Stock on a fully diluted
basis). As a result of the Merger, Lexington Properties will succeed to the
operations and assets of CRIT, the separate existence of CRIT will cease
and the former holders of the CRIT Shares will become shareholders of
Lexington Properties.
A copy of the Merger Agreement is attached as Annex A to the Proxy
Statement/Prospectus accompanying this Notice.
2. To consider and act on a proposal to amend the First Amended and
Restated Declaration of Trust to permit CRIT to merge into or consolidate
with other entities with the approval of a majority of the Trustees and the
affirmative vote of the holders of a majority of the outstanding CRIT
Shares entitled to vote thereon.
3. To transact such other business as may properly come before the
Meeting or any adjournments or postponements thereof.
CRIT's shareholders are not entitled to dissenters' rights of appraisal in
connection with the Merger.
The Board of Trustees has fixed the close of business on November 21, 1997
as the record date for CRIT Shares entitled to vote at the Meeting.
A Proxy Statement/Prospectus and a form of proxy are enclosed with this
Notice.
<PAGE> 3
You are requested, if you cannot be present at the Meeting, to complete,
sign and return the proxy in the enclosed business reply envelope promptly.
By Order of the Board of Trustees
MARK R. PATTERSON
Secretary
December 1, 1997
IMPORTANT: PLEASE FILL IN, DATE, SIGN AND MAIL PROMPTLY THE ENCLOSED PROXY
IN THE POSTAGE-PAID ENVELOPE PROVIDED TO ENSURE THAT YOUR CRIT SHARES ARE
REPRESENTED AT THE MEETING. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF
YOU WISH TO DO SO EVEN THOUGH YOU HAVE PREVIOUSLY SENT IN YOUR PROXY.
<PAGE> 4
1,496,959 SHARES
LEXINGTON CORPORATE PROPERTIES, INC.
COMMON STOCK
------------------------
PROXY STATEMENT
CORPORATE REALTY INCOME TRUST I
MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 30, 1997
------------------------
This Proxy Statement and Prospectus (the "Proxy Statement/Prospectus") is
being furnished in connection with the solicitation of proxies by the Board of
Trustees of Corporate Realty Income Trust I, a Massachusetts business trust
("CRIT"), from holders of outstanding shares of beneficial interest, par value
$0.10 per share, of CRIT (the "CRIT Shares") for use at the special meeting of
shareholders of CRIT to be held at CRIT's offices at 338 Greenwich Street, New
York, New York, 33rd floor, at 11:00 a.m. (local time) on December 30, 1997, and
at any adjournment or postponement thereof (the "Meeting").
At the Meeting, the shareholders of CRIT will be asked to consider and act
upon a proposal to (1) approve an Agreement and Plan of Merger, dated as of May
29, 1997, as amended (the "Merger Agreement"), between CRIT and Lexington
Corporate Properties, Inc., a Maryland corporation ("Lexington" or the
"Company") and transactions contemplated thereby (the "Merger Proposal"); and
(2) to amend CRIT's First Amended and Restated Declaration of Trust (the
"Declaration of Trust") to permit CRIT to merge into and consolidate with
another entity upon receipt of approvals from the CRIT Board of Trustees and
shareholders (the "Trust Amendment Proposal"). A copy of the Merger Agreement is
attached hereto as Annex A. Pursuant to the Merger Agreement, CRIT will merge
with and into the Company, with the Company as the surviving corporation (the
"Merger"). The consent of the holders of a majority of CRIT's outstanding shares
is a condition to the consummation of the Merger.
This Proxy Statement/Prospectus also serves as a Prospectus of the Company
with respect to the Company's common stock, par value $0.0001 ("Lexington Common
Stock"), to be issued in the Merger in exchange for the CRIT Shares. On November
28, 1997, the last reported sales price of the Lexington Common Stock on the New
York Stock Exchange (the "NYSE") was $14.5625.
Under the terms of the Merger Agreement, each CRIT Share issued and
outstanding immediately prior to the effective time of the Merger will be
converted into shares of Lexington Common Stock based upon a value per CRIT
Share of approximately $17.96 (the "Stock Consideration"). For purposes of
calculating the ratio at which the CRIT Shares will be converted into Lexington
Common Stock in the Merger, the value of the Lexington Common Stock will be
based on the average of the closing sale prices of Lexington Common Stock on the
NYSE during the 20 consecutive trading days ending on the fifth business day
immediately preceding the Meeting; provided, however, that in the event the
Lexington Common Stock Price is (i) greater than $14.125, then, for purposes of
determining the Stock Consideration, the Lexington Common Stock Price will be
deemed to be $14.125, and (ii) in the event the Lexington Common Stock Price is
less than $12.125, then, for purposes of determining the stock consideration,
the Lexington Common Stock Price shall be deemed to be $12.125. Each CRIT Share
may be converted into a maximum of 1.481 shares of Lexington Common Stock
assuming that the Lexington Common Stock Price is $12.125 (or 1,496,959 shares
of Lexington Common Stock, in the aggregate, constituting 7.66% of the
outstanding shares of Lexington Common Stock on a fully diluted basis) or a
minimum of 1.271 shares of Lexington Common Stock assuming a Lexington Common
Stock Price of $14.125 (or 1,284,956 shares of Lexington Common Stock, in the
aggregate, constituting 6.58% of the outstanding shares of Lexington Common
Stock on a fully diluted basis). As a result of the Merger, the Company will
succeed to the operations and assets of CRIT, the separate existence of CRIT
will cease and the former holders of the CRIT Shares will become shareholders of
the Company.
This Proxy Statement/Prospectus and the form of proxy are first being
mailed to shareholders of CRIT on or about December 1, 1997.
For a description of risk factors relating to the Merger and the related
transactions described in this prospectus, see "Risk Factors" on page 15.
------------------------
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 PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Proxy Statement/Prospectus is December 1, 1997.
<PAGE> 5
T A B L E O F C O N T E N T S
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION............................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................... 1
PROXY STATEMENT/PROSPECTUS SUMMARY.................................................. 3
Parties to the Merger............................................................. 3
Date, Time and Place of Meeting................................................... 3
Shareholders Entitled to Vote..................................................... 3
Purpose of the Meeting............................................................ 4
Vote Required..................................................................... 4
Effect of the Merger.............................................................. 4
Trust Amendment Proposal.......................................................... 4
Recommendation of the CRIT Board of Trustees...................................... 4
Opinion of Financial Advisor to CRIT.............................................. 4
Interests of Certain Persons in the Merger........................................ 4
Effective Time of the Merger...................................................... 5
Management After the Merger....................................................... 5
Conditions to the Merger.......................................................... 5
Termination....................................................................... 5
Surrender of Certificates......................................................... 5
No Appraisal Rights............................................................... 5
Material Federal Income Tax Consequences.......................................... 5
Accounting Treatment.............................................................. 6
Comparison of Shareholder Rights.................................................. 6
Resales of Lexington Common Stock Issued in the Pending Transaction; Affiliates... 6
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA OF THE
COMPANY........................................................................... 7
CRIT HISTORICAL FINANCIAL DATA...................................................... 10
COMPARATIVE PER SHARE DATA.......................................................... 12
PRICE RANGE OF THE COMPANY'S COMMON STOCK AND DISTRIBUTION HISTORY.................. 13
MARKET FOR CRIT SHARES AND RELATED SHAREHOLDER MATTERS.............................. 14
RISK FACTORS........................................................................ 15
THE MEETING......................................................................... 19
General........................................................................... 19
Matters To Be Considered at the Meeting........................................... 19
Voting at the Meeting; Record Date................................................ 19
Proxies........................................................................... 20
THE MERGER.......................................................................... 21
Background of the Merger.......................................................... 21
Reasons for the Merger; Recommendation of the CRIT Board of Trustees.............. 22
Opinion of Financial Advisor to CRIT.............................................. 25
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accounting Treatment.............................................................. 29
No Appraisal Rights............................................................... 29
Interests of Certain Persons in the Merger........................................ 29
THE MERGER AGREEMENT (PROPOSAL 1)................................................... 30
The Merger........................................................................ 30
Conversion of Securities.......................................................... 30
Representations and Warranties.................................................... 31
Certain Covenants and Agreements.................................................. 32
No Solicitation................................................................... 32
Indemnification................................................................... 33
Conditions........................................................................ 33
Termination; Termination Fees and Expenses........................................ 34
Amendment and Waiver.............................................................. 35
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.............................. 35
TRUST AMENDMENT (PROPOSAL 2)........................................................ 46
INFORMATION REGARDING LEXINGTON PROPERTIES.......................................... 47
The Company....................................................................... 47
The Net Lease Real Estate Business................................................ 48
Business Objectives............................................................... 48
Internal Growth; Effectively Managing Assets...................................... 48
Tenant Relations and Lease Compliance............................................. 48
Extending Lease Maturities........................................................ 48
Revenue Enhancing Property Expansion.............................................. 48
Property Sales and Redeployment of Assets......................................... 48
Acquisition Strategies............................................................ 49
Operating Partnership Structure................................................... 49
Acquisitions of Portfolio and Individual Net Lease Properties..................... 49
Sale/Leaseback Transactions....................................................... 49
Build-To-Suit Properties.......................................................... 49
Acquisitions from Affiliated Net Lease Partnerships............................... 49
Refinancing Existing Indebtedness and Increasing Access to Capital................ 49
Completed Acquisitions............................................................ 50
Recent Activities................................................................. 51
Recent Acquisitions............................................................... 52
FirstPlus Financial Group, Inc.; Dallas, TX....................................... 52
Lockheed Martin Corporation; Marlborough, MA...................................... 52
Bull HN Information Systems, Inc.; Phoenix, AZ.................................... 52
Cymer, Inc.; Rancho Bernardo, California.......................................... 52
Exel Logistics, Inc.; Pennsylvania................................................ 52
Johnson Controls, Inc.; Alabama................................................... 52
Recent Disposition................................................................ 53
Stratus Computer, Inc.; Marlborough, MA........................................... 53
Pending Acquisition............................................................... 54
Ryder Integrated Logistics; Waterloo, IA.......................................... 51
Financing Activities.............................................................. 53
</TABLE>
ii
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Public Offering of Lexington Common Stock......................................... 53
Salt Lake City Refinancing........................................................ 53
Partnership Merger................................................................ 53
Sale of Exchangeable Notes........................................................ 53
Credit Facility................................................................... 54
Sale of Convertible Preferred Stock............................................... 54
Potential Acquisitions from Affiliates............................................ 54
Ross Stores Litigation............................................................ 55
Reorganization Of The Company As A Maryland Real Estate Investment Trust.......... 55
Organizational Structure.......................................................... 56
Distributions Of OP Units......................................................... 56
Properties........................................................................ 57
Indebtedness of the Company....................................................... 64
Salt Lake City Refinancing........................................................ 64
Sale of Exchangeable Notes........................................................ 64
Credit Facility................................................................... 64
REMIC Financing................................................................... 64
Subordinated Notes................................................................ 65
Mortgage Indebtedness............................................................. 65
Legal Proceedings................................................................. 66
Capitalization.................................................................... 67
Selected Historical and Unaudited Pro Forma Consolidated Financial Data........... 68
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 71
Unaudited Pro Forma Consolidated Financial Data................................... 76
Unaudited Pro Forma Consolidated Statement of Income.............................. 76
Notes to the Unaudited Pro Forma Consolidated Statements of Income................ 77
Unaudited Pro Forma Consolidated Condensed Financial Statements................... 79
Notes to the Unaudited Pro Forma Consolidated Condensed Financial Statements...... 80
INFORMATION REGARDING CRIT.......................................................... 82
Business.......................................................................... 82
Investment Policy................................................................. 83
Properties........................................................................ 83
The Circuit City Property......................................................... 839
The Allegiance Property (formerly the "Baxter Property").......................... 84
The Dana Property................................................................. 86
Legal Proceedings................................................................. 86
Selected Financial Data........................................................... 87
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 87
Liquidity and Capital Resources................................................... 87
Results of Operations............................................................. 88
Year Ended December 31, 1996 versus Year Ended December 31, 1995.................. 88
Year Ended December 31, 1995 versus Year Ended December 31, 1994.................. 88
Beneficial Ownership of Common Shares............................................. 88
MANAGEMENT OF THE COMPANY........................................................... 89
Compensation of Executive Officers................................................ 90
Summary of Cash and Certain Other Compensation.................................... 91
</TABLE>
iii
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Compensation of Directors......................................................... 92
Management After the Merger....................................................... 92
Principal Security Holders........................................................ 92
Stock Ownership of Directors and Executive Officers............................... 93
COMPARISON OF SHAREHOLDER RIGHTS.................................................... 94
Board of Trustees................................................................. 95
Issuance of Capital Stock......................................................... 95
Distributions to Shareholders..................................................... 95
Shareholder Meetings.............................................................. 95
Shareholder Approval of Certain Actions........................................... 96
Restrictions on Corporate Activities.............................................. 96
Interested Party Transactions..................................................... 98
Ownership Limit................................................................... 98
Maintaining REIT Status........................................................... 98
Indemnification................................................................... 98
Nominations of Directors by Shareholders.......................................... 99
DESCRIPTION OF LEXINGTON CAPITAL STOCK.............................................. 99
Description of Preferred Stock.................................................... 99
Description of Common Stock....................................................... 100
General........................................................................... 100
Terms............................................................................. 100
Restrictions on Ownership......................................................... 101
Transfer Agent.................................................................... 101
Restrictions on Transfers of Capital Stock and Anti-takeover Provisions........... 101
LEGAL MATTERS....................................................................... 104
EXPERTS............................................................................. 104
SHAREHOLDER PROPOSALS............................................................... 104
ANNEX Agreement and Plan of Merger, as amended
A.....
ANNEX Opinion of McFarland Dewey & Co.
B.....
</TABLE>
iv
<PAGE> 9
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the shares of Lexington Common Stock to be issued in
connection with the Merger. This Proxy Statement/Prospectus also constitutes the
proxy statement of CRIT for the Meeting. As permitted by the rules and
regulations of the Commission, this Proxy Statement/Prospectus omits certain
information, exhibits and undertakings contained in the Registration Statement.
For further information pertaining to the securities offered hereby, reference
is made to the Registration Statement, including the exhibits filed as a part
thereof.
The Company and CRIT are each subject to the informational requirements of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Commission. Reports, proxy statements and other information filed by the
Company and CRIT can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
and at its Regional Offices located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, Suite 1300,
New York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a Website that contains
reports, proxy and information statements and other information filed
electronically by the Company and CRIT, and can be found at http://www.sec.gov.
The Lexington Common Stock is listed on the NYSE and reports, proxy statements
and other information concerning the Company can be inspected at the offices of
the NYSE, 20 Broad Street, New York, New York 10005.
All information contained in this Proxy Statement/Prospectus with respect
to the Company has been supplied by the Company, and all information with
respect to CRIT has been supplied by CRIT.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or information have been filed by the Company with
the Commission and are incorporated herein by reference:
1. The Company's Quarterly Reports on Forms 10-Q (Commission File No.
1-12386) for the quarter ended September 30, 1997, filed on November 14,
1997; for the quarter ended June 30, 1997, filed on August 14, 1997, as
amended by Forms 10-Q/A filed on November 17, 1997 and November 18, 1997;
and for the quarter ended March 31, 1997, filed on May 15, 1997, as amended
by Forms 10-Q/A filed on June 12, 1997 and November 17, 1997.
2. The Company's Annual Report on Form 10-K (Commission File No.
1-12386) for the year ended December 31, 1996, filed on March 31, 1997, as
amended by Form 10-K/A filed on November 18, 1997.
3. The Company's Current Reports on Forms 8-K filed on January 15,
1997, February 6, 1997, February 10, 1997, April 25, 1997, June 2, 1997,
June 20, 1997, September 19, 1997 and November 14, 1997, as amended by
Forms 8-K/A filed on March 14, 1997, June 17, 1997, August 4, 1997 and
November 17, 1997 (Commission File No. 1-12386).
4. The Company's 1997 Proxy Statement on Schedule 14-A, filed on May
6, 1997 (Commission File No. 1-12386).
5. The description of the Company's capital stock contained in the
Company's Registration Statement on Form 8-B under the Exchange Act, filed
on August 10, 1994 (Commission File No. 1-12386), including any amendment
or report filed for the purpose of updating that description.
1
<PAGE> 10
The following documents or information have been filed by CRIT with the
Commission and are incorporated herein by reference:
1. CRIT's Annual Report on Form 10-K (Commission File No. 0-25570) for
the year ended December 31, 1996, filed on March 31, 1997 and Form 10-K/A
filed on September 18, 1997.
2. CRIT's Quarterly Reports on Forms 10-Q (Commission File No.
0-25570) for the quarter ended March 31, 1997, filed on May 15, 1997; for
the quarter ended June 30, 1997, filed on August 19, 1997, as amended by
Form 10-Q/A filed on August 19, 1997; and for the quarter ended September
30, 1997, filed on November 14, 1997.
3. CRIT's Current Report on Form 8-K (Commission File No. 0-25570),
filed on June 2, 1997.
All documents subsequently filed by the Company and CRIT with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Proxy Statement/Prospectus and prior to the Meeting will
be deemed incorporated by reference into this Proxy Statement/Prospectus and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Proxy Statement/Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement/Prospectus.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, OR INCORPORATED
IN IT BY REFERENCE, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS,
OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, OR SOLICITATION OF AN OFFER, OR PROXY
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO
THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE
WITHOUT CHARGE (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY
INCORPORATED BY REFERENCE THEREIN) UPON WRITTEN OR ORAL REQUEST FROM (1)
LEXINGTON CORPORATE PROPERTIES, INC., 355 LEXINGTON AVENUE, NEW YORK, NEW YORK
10017 (TELEPHONE NO. (212) 692-7260), ATTENTION: T. WILSON EGLIN, PRESIDENT AND
CHIEF OPERATING OFFICER, OR (2) CORPORATE REALTY INCOME TRUST I, 388 GREENWICH
STREET, NEW YORK, NEW YORK (TELEPHONE NO. (212) 816-8237), ATTENTION: JAMES C.
COWLES.
2
<PAGE> 11
PROXY STATEMENT/PROSPECTUS SUMMARY
Shareholders are urged to read carefully this entire Proxy
Statement/Prospectus and the documents incorporated herein by reference. The
following summary is qualified in its entirety by the more detailed information
and Consolidated Financial Statements and related Notes thereto included
elsewhere in this Proxy Statement/Prospectus, or otherwise incorporated herein
or therein by reference. A copy of the Merger Agreement is set forth in Annex A
to this Proxy Statement/Prospectus and reference is made thereto for a complete
description of the terms of the Merger. All references to the "Company" refer to
Lexington Corporate Properties, Inc. and those entities owned or controlled,
directly or indirectly, by Lexington Corporate Properties, Inc. Unless the
context otherwise requires, the pro forma financial and certain other
information presented in this Proxy Statement/Prospectus, including the Annexes
hereto, give effect to the Pro Forma Adjustments (as defined herein, see
"-- Summary Historical and Unaudited Pro Forma Consolidated Financial Data").
PARTIES TO THE MERGER
The Company. Lexington Corporate Properties, Inc. is a self-managed and
self-administered real estate investment trust ("REIT") that acquires, owns and
manages a geographically diversified portfolio of net leased office, industrial
and retail properties. As of the date of this Proxy Statement/Prospectus, the
Company owns controlling interests in 46 properties (the "Properties," and each
a "Property") and minority interests in two additional properties. The
Properties, all of which are 100% net leased, are located in 24 states, have
approximately 6.9 million net rentable square feet and, under the terms of their
applicable leases, currently generate approximately $47.4 million in annual base
rent. As of October 1, 1997, the Company's leases had a weighted average
remaining term of approximately 9.07 years (excluding renewal options). The
Company's tenants, a majority of which (based on annual rental revenue) have
debt ratings of investment grade and many of which are nationally recognized,
include Bank One, Arizona, N.A., Circuit City Stores, Inc., FirstPlus Financial
Group, Inc., Lockheed Martin Corporation, The Hartford Fire Insurance Company,
Honeywell, Inc., Northwest Pipeline Corporation, Ryder Integrated Logistics and
Wal-Mart Stores, Inc. The Company currently generates approximately 47%, 31% and
22% of its annual rental revenues from office, industrial and retail properties,
respectively. Substantially all of the Company's leases are "Net Leases," under
which the tenant is responsible for all costs of real estate taxes, insurance,
ordinary maintenance and structural repairs.
The Company's principal executive offices are located at 355 Lexington
Avenue, New York, New York 10017, and its telephone number is (212) 692-7260.
CRIT. CRIT was formed as a Massachusetts business trust under the laws of
Massachusetts on June 27, 1989 and qualified as a REIT in 1990. CRIT was formed
to invest in triple net leased income producing commercial and industrial real
estate properties throughout the United States. CRIT owns and operates directly
three properties located in Alabama, Tennessee and Virginia. Corporate Realty
Advisors, Inc. (the "Advisor") acts as advisor to CRIT pursuant to an Advisory
Services Agreement (the "Advisory Agreement").
CRIT's principal executive offices are located at 388 Greenwich Street, New
York, New York 10013, and its telephone number is (212) 816-8237.
Date, Time and Place of Meeting. The Meeting will be held at 11:00 a.m.,
local time, on December 30, 1997, at CRIT's offices at 388 Greenwich Street, New
York, New York, 33rd Floor, for the purposes described below under "Purpose of
Meeting".
Shareholders Entitled to Vote. Only holders of record of CRIT Shares at
the close of business on November 21, 1997 (the "Record Date") are entitled to
notice of, and to vote at, the Meeting. As of the Record Date, there were
1,010,776 CRIT Shares outstanding. As of the Record Date, the Advisor owned
10,000 CRIT Shares, and none of the CRIT Board members or officers of CRIT
beneficially owned any CRIT Shares.
3
<PAGE> 12
Purpose of the Meeting. The purpose of the Meeting is to consider and vote
upon (i) the Merger Proposal, (ii) the Trust Amendment Proposal and (iii) such
other matters as may properly be brought before the Meeting, or any
postponements or adjournments thereof.
Vote Required. The approval of the Trust Amendment Proposal by CRIT
shareholders will require the affirmative vote of the holders of a majority of
the outstanding CRIT Shares entitled to vote thereon. Pursuant to such
amendment, if approved, the affirmative vote of the holders of a majority of the
outstanding CRIT Shares entitled to vote thereon will be required for the
approval of the Merger Proposal. Each CRIT Share is entitled to one vote.
Shareholders do not have cumulative voting rights. Votes cast in person or by
proxy at the Meeting will be tabulated by the inspector of election for the
Meeting.
Effect of the Merger. The CRIT Board of Trustees (the "CRIT Board") has
unanimously approved the Merger and the Merger Agreement, a copy of which is
attached hereto as Annex A. Pursuant to the Merger Agreement, upon fulfillment
(or waiver) of the conditions set forth therein, at the Effective Time (i) CRIT
will be merged with and into the Company, with the Company being the surviving
corporation in the Merger, and (ii) each issued and outstanding CRIT Share will
be converted into a number of shares of Lexington Common Stock equal to the
Stock Consideration, subject to adjustment pursuant to the Merger Agreement. See
"The Merger Agreement -- Conversion of Securities."
No fractional shares of Lexington Common Stock will be issued in connection
with the Merger. In lieu thereof, a holder of a CRIT Share otherwise entitled to
a fractional share of Lexington Common Stock will be given a check representing
an amount in cash (without interest) rounded to the nearest cent determined by
multiplying (i) the Lexington Common Stock Price, by (ii) the fraction of a
share of Lexington Common Stock which such holder would otherwise be entitled.
Based upon the number of CRIT Shares and shares of Lexington Common Stock
outstanding as of the date hereof and assuming a Lexington Common Stock Price of
$14.125 per share, upon consummation of the Merger the former CRIT shareholders
will be issued approximately 1,284,956 shares of Lexington Common Stock,
representing approximately 6.58% of the aggregate number of outstanding
Lexington Common Stock, on a fully diluted basis, as of the date hereof.
Trust Amendment Proposal. CRIT shareholders will also be asked to consider
and vote on an amendment to the Declaration of Trust that will allow CRIT to
merge into or consolidate with any other corporation, association, partnership,
trust, limited liability company or other organization with the approval of a
majority of the CRIT Board and the affirmative vote of the holders of a majority
of the outstanding CRIT Shares entitled to vote thereon. CRIT's Declaration of
Trust currently lacks such authority; the passage of this amendment, therefore,
is necessary for the proposed Merger to be consummated. See "Amendment to
Declaration of Trust."
Recommendation of the CRIT Board of Trustees. The terms of the Merger and
the Merger Agreement were arrived at as the result of arm's length negotiations
between representatives of the Company and CRIT. The CRIT Board has approved the
Merger and the transactions contemplated by the Merger Agreement by unanimous
vote, believes the Merger is advisable and in the best interests of CRIT and its
shareholders and recommends its adoption and approval by CRIT shareholders. The
decision of the CRIT Board to approve the Merger Agreement and the Merger and to
recommend the approval thereof to the shareholders of CRIT was based on a number
of considerations, including the fairness, from a financial point of view, of
the Stock Consideration. See "The Merger -- Reasons for the Merger;
Recommendations of the CRIT Board of Trustees."
Opinion of Financial Advisor to CRIT. McFarland Dewey & Co. delivered a
written opinion on May 29, 1997 to the CRIT Board to the effect that the terms
of the Merger are fair from a financial point of view to the holders of CRIT
Shares. A copy of the opinion of the financial advisor is attached as Annex B to
this Proxy Statement/Prospectus. See "The Merger -- Opinion of Financial Advisor
to CRIT."
Interests of Certain Persons in the Merger. Certain members of CRIT
management and the CRIT Board may be deemed to have interests in the Merger.
These interests include provisions in the Merger Agreement providing
indemnification rights to such officers, trustees and other parties under
certain
4
<PAGE> 13
conditions. As of the Record Date, the Advisor owned 10,000 CRIT Shares. James
C. Cowles is Trustee, Chairman, President and Treasurer of CRIT and is Chairman
and President of the Advisor. Pursuant to the Advisory Agreement with CRIT, the
Advisor is entitled to receive a termination fee of approximately $850,000 in
connection with the consummation of the Merger. However, the Advisor has
determined unconditionally to waive approximately $789,000 of such fee, with the
remaining $61,000 to be payable by CRIT at the Effective Time. The Advisor
agreed to waive such amount to increase the consideration payable to CRIT
shareholders in connection with the Merger. The amount of the fee will
effectively reimburse the Advisor for an identical amount paid during 1997 by
the Advisor to Antony E. Monk, a former trustee and officer of CRIT and the
former president of the Advisor who resigned from those positions in 1992, in
connection with the termination of a Management and Consulting Services
Agreement among the Advisor, Smith Barney, Harris, Upham & Co., Monk and Hadley
Page Ellis, Inc. ("Hadley"), a corporation whose sole shareholder is Mr. Monk,
pursuant to which Hadley provided advice with respect to the selection,
financing, refinancing, leasing and disposition of properties. In addition,
Hadley will receive a $250,000 finder's fee from the Company upon consummation
of the Merger.
Effective Time of the Merger. In accordance with the Maryland General
Corporation Law (the "MGCL"), the Merger will become effective upon the
acceptance for recording of the Articles of Merger by the State Department of
Assessments and Taxation of Maryland. It is anticipated that the Merger will
become effective as promptly as practicable after the requisite approval of the
CRIT shareholders has been obtained and all other conditions to the Merger have
been satisfied or waived (the "Effective Time"). It is anticipated that,
assuming all conditions are met, the Merger will occur on or about December 30,
1997.
Management After the Merger. After the Effective Time, CRIT will merge
with and into the Company and the current management of the Company will remain
unchanged.
Conditions to the Merger. The obligation of the Company and CRIT to
consummate the Merger is subject to the satisfaction of certain conditions,
including, but not limited to, CRIT obtaining requisite shareholder approval of
the Merger Proposal and Trust Amendment Proposal, the continuing accuracy of the
representations and warranties made in the Merger Agreement on and as of the
Effective Time, and the receipt of certain legal opinions with respect to tax
matters. The consummation of the Merger is not subject to any federal or state
regulatory requirements. The Merger is not subject to receipt of shareholder
approval by the Company. See "The Merger Agreement -- Conditions."
Termination. The Merger Agreement is subject to termination at any time
prior to the Effective Time under certain circumstances, including, but not
limited to, mutual written consent of the Company and CRIT, failure to achieve
requisite votes for approval by the CRIT shareholders, and at the option of
either the Company or CRIT if the Merger is not consummated on or before
December 31, 1997. See "The Merger Agreement -- Termination."
Surrender of Certificates. After the Effective Time, the Company will mail
a letter of transmittal with instructions to all holders of record of CRIT
Shares immediately prior to the Merger for use in surrendering their stock
certificates in exchange for certificates representing shares of Lexington
Common Stock and a cash payment in lieu of fractional shares, if any. See "The
Merger Agreement -- Conversion of Securities."
No Appraisal Rights. CRIT shareholders are not entitled to dissenters'
rights of appraisal under CRIT's Declaration of Trust or under the laws of the
Commonwealth of Massachusetts in connection with the Merger. See "Merger -- No
Appraisal Rights."
Material Federal Income Tax Consequences. Conditions precedent to the
Merger include, among other things, the receipt by each of CRIT and the Company
of an opinion of counsel to the effect that the Merger will be treated for
United States federal income tax purposes as a tax-free reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
See "The Merger -- Material United States Federal Income Tax Consequences."
BECAUSE CERTAIN TAX CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF EACH SHAREHOLDER, IT IS RECOMMENDED THAT SHAREHOLDERS CONSULT
THEIR OWN TAX ADVISORS
5
<PAGE> 14
CONCERNING THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES
TO THEM OF THE MERGER IN THEIR PARTICULAR CIRCUMSTANCES.
Accounting Treatment. The Merger will be treated as a purchase in
accordance with Accounting Principles Board Opinion No. 16.
Comparison of Shareholder Rights. The rights of CRIT shareholders are
currently determined by the Declaration of Trust. At the Effective Time, CRIT
shareholders will become shareholders of the Company, and their rights as
shareholders of the Company will be determined by the Articles of Incorporation
and By-Laws of the Company, as amended, and Maryland law, the jurisdiction in
which the Company is incorporated. See "Comparison of Shareholder Rights" for a
summary of the material differences between the rights of holders of CRIT Shares
and Lexington Common Stock. The Company has received the approval of its
shareholders to reorganize as a Maryland real estate investment trust and
intends to do so in early 1998. The rights of holders of Lexington Common Stock
will be affected by such reorganization. See "The Company -- Reorganization of
the Company as a Maryland Real Estate Investment Trust."
Resales of Lexington Common Stock Issued in the Pending Transaction;
Affiliates. All Lexington Common Stock received by holders of CRIT Shares who
are deemed affiliates of CRIT for purposes of Rule 145 under the Securities Act
may be resold by them only in transactions permitted by the resale provisions of
Rule 145 or as otherwise permitted by the Securities Act. Pursuant to the Merger
Agreement, CRIT will use its reasonable best efforts to cause each person who
may be deemed to be an "affiliate" of CRIT to enter into a letter agreement with
CRIT prior to the closing date of the Merger providing that such affiliate will
not sell, transfer or otherwise dispose of any Lexington Common Stock obtained
as a result of the Merger except in compliance with the Securities Act and the
rules and regulations of the Commission thereunder. The Company has agreed to
file with the Commission required reports covering Lexington Common Stock
received in the Merger by any CRIT affiliate to enable such affiliate to sell
such shares of Lexington Common Stock without registration under the Securities
Act pursuant to Rule 145(d)(1) or any successor rule.
6
<PAGE> 15
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The Summary Historical and Unaudited Pro Forma Consolidated Financial Data
of the Company set forth below has been derived from the Selected Unaudited
Historical and Pro Forma Consolidated Financial Statements of the Company
incorporated or included elsewhere in this Proxy Statement/Prospectus, and
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto incorporated by reference in this Proxy Statement/Prospectus. The
unaudited pro forma financial data gives effect to (i) the Merger; (ii)
acquisitions consummated by the Company since January 1, 1996; (iii) the Salt
Lake City Refinancing (as defined in "Information Regarding Lexington
Properties -- Financing Activities"); (iv) the issuance and sale of 1,325,000
shares of Convertible Preferred Stock (as defined in "Information Regarding
Lexington Properties -- Financing Activities") and the application of the net
proceeds therefrom; (v) the Ross Stores Litigation (as defined in "Information
Regarding Lexington Properties -- Ross Stores Litigation"); (vi) the 1997 public
offerings of a total of 5,720,000 shares of Lexington Common Stock and the
application of the proceeds therefrom; and (vii) the sale of the Stratus
Computer Property (as defined in "Information Regarding Lexington
Properties -- Recent Disposition") (collectively, the "Pro Forma Adjustments"),
as if such Pro Forma Adjustments had occurred on January 1, 1996 and were
carried forward through September 30, 1997 for the operating data and on
September 30, 1997 for the balance sheet data. The unaudited pro forma financial
data does not purport to be indicative of what the results of the Company would
have been had the transactions been completed on the dates assumed, nor is such
unaudited pro forma financial data necessarily indicative of the results of
operations of the Company that may exist in the future. The unaudited financial
data for the nine months ended September 30, 1997 includes all adjustments,
consisting of normal recurring accruals, which management considers necessary
for the fair presentation of the financial position and the results of
operations of the Company for such period. The results for the nine-month
periods may not be indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
----------------------------
PRO PRO FORMA
FORMA (UNAUDITED) YEAR ENDED DECEMBER 31,
-------- ----------- ------------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
-------- -------- -------- ----------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Rental revenue................... $ 35,745 $ 31,420 $ 22,805 $47,968 $ 31,244 $ 24,523 $ 25,894 $ 25,702 $ 25,620
Interest and other income........ 469 447 331 470 431 479 144 169 177
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues................... 36,214 31,867 23,136 48,438 31,675 25,002 26,038 25,871 25,797
Interest expense................. 11,905 12,628 9,213 15,097 12,818 10,295 10,982 11,066 11,220
Depreciation..................... 8,833 7,920 5,510 11,733 7,627 5,817 5,909 5,909 5,892
Amortization of deferred
expenses....................... 561 649 450 650 619 464 346 268 262
Property operating expenses...... 616 616 499 686 686 620 808 558 964
General and administrative
expenses....................... 2,885 2,885 2,147 3,125 3,125 2,694 2,416 1,020 2,172
Income before minority interests,
gain on sale of properties,
lease termination proceeds and
extraordinary items............ 11,414 7,169 5,317 16,503 6,156 5,112 5,577 4,609 5,287
Minority interests................. 1,421 1,158 460 1,824 690 93 98 81 93
Income from continuing
operations(1).................... $ 9,993 6,011 4,857 $14,679 5,466 5,019 5,479 4,528 5,194
======== ========
-------- -------- -------- -------- -------- -------- --------
Net Income(2)...................... $ 5,639 $ 4,857 $ 5,466 $ 3,284 $ 5,479 $ 4,528 $ 5,194
======== ======== ======== ======== ======== ======== ========
Per Share of Common Stock:(3)
Proforma income from continuing
operations(4)
Primary........................ $ 0.53 $ -- $ -- $ 0.78 $ -- $ -- $ -- $ -- $ --
Fully Diluted.................. 0.53 -- -- 0.77 -- -- -- -- --
Income before extraordinary items
Primary........................ $ -- $ 0.77 $ 0.52 $ -- $ 0.58 $ 0.88 $ 0.59 $ 0.48 $ 0.56
Fully diluted.................. -- 0.70 0.49 -- 0.58 0.88 0.59 0.48 0.56
</TABLE>
7
<PAGE> 16
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
----------------------------
PRO PRO FORMA
FORMA (UNAUDITED) YEAR ENDED DECEMBER 31,
-------- ----------- ------------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
-------- -------- -------- ----------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income
Primary........................ $ -- $ 0.42 $ 0.52 $ -- $ 0.58 $ 0.35 $ 0.59 $ 0.48 $ 0.56
Fully diluted.................. -- 0.42 0.49 -- 0.58 0.35 0.59 0.48 0.56
Cash distributions paid.......... $ -- $ 0.87 $ 0.82 $ -- $ 1.10 $ 1.08 $ 1.08 $ 0.24 $ --
Weighted average, common shares
outstanding
Primary........................ 17,002 11,143 9,383 16,830 9,393 9,263 9,306 9,303 9,303
Fully diluted.................. 19,729 13,736 10,699 19,455 9,393 9,263 9,306 9,303 9,303
Balance Sheet Data (at end of
period):
Real estate, before accumulated
depreciation..................... $427,009 $415,433 $302,641 -- $339,411 $244,223 $243,280 $243,280 $243,280
Total assets....................... 400,985 383,532 275,428 -- 309,126 221,216 216,020 222,467 230,387
Mortgage loans payable (including
accrued interest)................ 166,908 199,550 157,650 -- 186,188 121,690 110,065 112,501 115,222
Total liabilities.................. 204,423 237,065 162,782 -- 216,467 124,698 114,800 116,815 119,794
Stockholders' equity............... 196,562 146,467 112,646 -- 92,659 96,518 101,220 105,652 110,593
Other Data:
Cash flows from operating
activities....................... $ -- $ 16,196 $ 11,173 $ -- $ 14,972 $ 7,216 $ 12,423 $ 11,151 $ 12,002
Cash flows from investing
activities....................... -- (64,232) (2,232) -- (16,951) 7,887 -- -- (2,870)
Cash flows from financing
activities....................... -- 48,836 (8,666) -- 1,859 (15,611) (12,304) (12,780) (8,254)
Funds from operations(5)........... 15,256 11,268 14,371 12,049 11,486 12,959 12,673
Total net rentable sq. ft. (at end
of period)....................... 6,742 6,430 4,563 6,742 5,235 4,212 3,767 3,767 3,767
</TABLE>
- ---------------
(1) Income from continuing operations represents income before gain on sale of
properties, lease termination proceeds and extraordinary items.
(2) Historical net income for the nine months ended September 30, 1997 includes
an extraordinary loss on extinguishment of debt of $3,889 and a gain on sale
of properties of $3,517; historical net income and pro forma income from
continuing operations for the year ended December 31, 1996 include $644 of
transactional expenses; net income for the year ended December 31, 1995
includes gain on sale of properties of $1,514, income from lease
terminations of $1,600 and an extraordinary loss on extinguishment of debt
of $4,849; and net income for the year ended December 31, 1993 includes
expenses of the merger of $2,441.
(3) Primary net income per share is computed by dividing net income reduced by
preferred dividends by the weighted average number of common and diluted
common equivalent shares outstanding during the periods. Fully diluted net
income per share amounts are similarly computed, but include the effect,
when dilutive of the Company's other potentially dilutive securities. Fully
diluted net income is reduced by preferred dividends and is increased by
minority interests resulting from the assumed conversion of the OP Units (as
defined herein). The Company's convertible preferred stock and exchangeable
notes are excluded from the 1997 and 1996 historical and pro forma
computations due to their anti-dilutive effect during those periods.
(4) Primary income from continuing operations per share is computed by dividing
income from continuing operations (reduced by preferred dividends) by the
weighted average number of common and diluted common equivalent shares
outstanding during the period. Fully diluted income from continuing
operations per share amounts are similarly computed but include the effect,
when dilutive, of the Company's other potentially dilutive securities. Fully
dilutive income from continuing operations is reduced by preferred dividends
and is increased by minority interests resulting from the assumed conversion
of the OP Units. The Convertible Preferred Stock and Exchangable Notes are
excluded from the pro forma computations due to their anti-dilutive effect
during the period.
8
<PAGE> 17
(5) The Company believes that Funds From Operations enhances an investor's
understanding of the Company's financial condition, results of operations
and cash flows. The Company believes that Funds From Operations is an
appropriate measure of the performance of an equity REIT, and that it can be
one measure of a REIT's ability to make cash distributions. Funds From
Operations is defined by the National Association of Real Estate Investment
Trusts, Inc. ("NAREIT") as "net income (or loss) (computed in accordance
with generally accepted accounting principles), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures." The Company's method of calculating Funds From Operations
excludes other non-recurring revenue and expense items and may be different
from methods used by other REITs and, accordingly, is not comparable to such
other REITs. Funds From Operations should not be considered an alternative
to net income as an indicator of the Company's operating performance or to
cash flows from operating activities as determined in accordance with
generally accepted accounting principles ("GAAP"), or as a measure of
liquidity and other consolidated income or cash flow statement data as
determined in accordance with GAAP.
9
<PAGE> 18
CRIT HISTORICAL FINANCIAL DATA
The following sets forth financial information for CRIT on a historical
basis and should be read in conjunction with, and is qualified in its entirety
by, the historical financial statements and notes thereto of CRIT which are
incorporated by reference in this Proxy Statement/Prospectus. The financial
information of CRIT at December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996 has been derived from the historical
financial statements of CRIT audited by Ernst & Young LLP, independent auditors,
whose report with respect to the financial statements of CRIT as of December 31,
1996 and 1995 and for each of the three years in the period ended December 31,
1996 are incorporated by reference into this Proxy Statement/Prospectus. The
financial information as of September 30, 1997 and 1996 and for the nine-month
periods then ended has been derived from the unaudited financial statements of
CRIT and, in the opinion of management, such financial statements include all
adjustments necessary to present fairly the information set forth therein. The
results for the nine-month periods may not be indicative of the results to be
expected for the full year. The financial statements of CRIT as of December 31,
1994, 1993 and 1992 and for each of the two years in the period ended December
31, 1993 were derived from CRIT's audited financial statements.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement:
Revenue:
Rental...................... $ 2,567,450 $ 2,567,451 $ 3,423,267 $ 3,423,267 $ 3,423,267 $ 3,423,267 $ 3,176,251
Interest income............. 22,112 26,435 36,699 19,556 20,124 17,669 56,080
Total revenue......... $ 2,589,562 $ 2,593,886 $ 3,459,966 $ 3,442,823 $ 3,443,391 $ 3,440,936 $ 3,232,331
Expenses:
Interest expense............ $ 1,033,917 $ 1,039,353 $ 1,385,018 $ 1,398,421 $ 1,436,645 $ 1,428,489 $ 1,270,640
Depreciation................ 597,834 597,836 797,114 797,114 797,115 797,115 739,958
Amortization of deferred
expenses.................. 17,148 17,148 22,863 22,779 22,370 22,369 20,110
General and administrative
expenses.................. 136,529 127,220 170,626 148,057 146,398 149,461 172,486
Base annual fee to
Advisor................... 98,754 131,211 175,152 173,028 164,005 162,666 156,428
Proposed Merger Expenses.... 321,117 -- -- -- -- -- --
Total expenses........ $ 2,205,299 $ 1,912,768 $ 2,550,773 $ 2,539,399 $ 2,566,533 $ 2,560,100 $ 2,359,622
Net income.................... $ 384,263 $ 681,118 $ 909,193 $ 903,424 $ 876,858 $ 880,836 $ 872,709
Shares outstanding............ 1,010,776 1,010,776 1,010,776 1,010,776 1,010,776 1,010,776 1,010,776
Net income per share (1)...... $ .38 $ .67 $ .90 $ .89 $ .87 $ .87 $ .86
Cash distributions paid....... $ 1.05 $ 1.05 $ 1.40 $ 1.40 $ 1.40 $ 1.40 $ 1.55
Balance Sheet Data (at end of
period):
Real estate, before
accumulated depreciation.... $32,600,000 $32,600,000 $32,600,000 $32,600,000 $32,600,000 $32,600,000 $32,600,000
Total assets.................. 30,287,102 30,807,184 30,585,114 31,155,095 31,802,627 32,241,966 32,715,083
Mortgage loans payable........ 15,350,200 15,421,294 15,404,146 15,470,369 15,506,127 15,421,658 15,344,500
Total liabilities............. 16,229,336 15,946,670 15,850,295 15,914,383 16,050,253 15,951,364 15,890,231
Shareholders' equity.......... 14,057,766 14,860,514 14,734,819 15,240,712 15,752,374 16,290,602 16,824,852
Other Data:
Cash flows from operating
activities.................. $ 1,285,992 $ 1,562,464 $ 1,784,363 $ 1,239,820 $ 1,486,582 $ 1,396,675 $ 1,273,154
Cash flows from investing
activities.................. -- -- -- -- -- 30,000 (1,580,000)
Cash flows used in financing
activities.................. (1,115,262) (1,110,391) (1,481,309) (1,475,330) (1,469,890) (1,415,086) (574,563)
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
10
<PAGE> 19
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Funds from operations:(2)
Net income.................. 384,263 681,118 909,193 903,424 876,858 880,836 872,709
Add back:
Depreciation................ 597,834 597,836 797,114 797,114 797,115 797,115 739,958
Proposed Merger Expenses.... 321,117 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Funds from operations......... 1,303,214 1,278,954 1,706,307 1,700,538 1,673,973 1,677,951 1,612,667
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ---------------
(1) Net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period.
(2) CRIT's management believes that Funds From Operations enhances an investor's
understanding of CRIT's financial condition, results of operations and cash
flows and believes Funds From Operations it is an appropriate performance
measure for an equity REIT and that it can be one measure of a REIT's
ability to make cash distributions. Funds From Operations is defined by the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as
"net income (or loss) (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring
and sales of property, plus real estate depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures."
CRIT's method of calculating Funds From Operations excludes other
non-recurring revenue and expense items and may be different from methods
used by other REITs and, accordingly, is not comparable to such other REITs.
Funds From Operations should not be considered an alternative to net income
as an indicator of CRIT's operating performance or to cash flows from
operating activities as determined in accordance with GAAP or as a measure
of liquidity and other consolidated income or cash flow statement data as
determined in accordance with GAAP.
11
<PAGE> 20
COMPARATIVE PER SHARE DATA
The following table sets forth the Company's and CRIT's historical per
share data, unaudited pro forma per share data after giving effect to the Merger
(using the purchase method of accounting), and the equivalent pro forma combined
per share amounts of CRIT. The pro forma combined per share data also gives
effect to the other Pro Forma Adjustments. See "Summary Historical and Unaudited
Pro Forma Consolidated Financial Data of the Company." The Pro Forma and the
CRIT Equivalent data are not necessarily indicative of actual financial position
or future operating results that would have occurred or will occur upon
consummation of the Merger.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------------------------- -------------------------------------
COMPANY PRO CRIT COMPANY PRO CRIT
HISTORICAL FORMA(A) EQUIVALENT(B) HISTORICAL FORMA(A) EQUIVALENT(B)
---------- -------- ------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations
Lexington
Primary..................... $ .58 $ .78 $ .46 $ .53
Fully diluted............... $ .58 $ .77 $ .45 $ .53
CRIT........................... $ .90 $ .98 $ .38 $ .67
Cash Dividends
Lexington...................... $ 1.12 $ 1.12 $ .87 $ .87
CRIT........................... $ 1.40 $1.42 $ 1.05 $ 1.11
Book Value Per Common Share
Lexington...................... $ 9.83 N/A $11.52 $14.52
CRIT........................... $14.58 N/A $13.91 $ 18.45
</TABLE>
- ---------------
(a) The pro forma combined per share data for the Company and CRIT have been
prepared assuming that in the Merger each CRIT Share is converted into 1.271
shares of Lexington Common Stock (the "Pro Forma Exchange Ratio"), resulting
in 10,711,856 and 13,538,993 shares of Lexington Common Stock outstanding as
of December 31, 1996 and September 30, 1997, respectively.
(b) The equivalent pro forma combined per share amounts of CRIT are calculated
by multiplying pro forma income from continuing operations per share of
Lexington Common Stock, pro forma Cash Dividends per share of Lexington
Common Stock and pro forma Book Value per share of Lexington Common Stock by
the Pro forma Exchange Ratio so that the per share amounts are equated to
the comparative values for each such CRIT Share.
12
<PAGE> 21
PRICE RANGE OF THE COMPANY'S COMMON STOCK AND DISTRIBUTION HISTORY
Lexington Common Stock has been traded on the NYSE under the symbol "LXP"
since October 1993. On May 28, 1997 (the last full trading date prior to the
execution and delivery of the Merger Agreement and the public announcement
thereof), the last reported sale price of Lexington Common Stock on the NYSE was
$13.25 per share. On November 28, 1997 the last reported sale price of the
Lexington Common Stock on the NYSE was $14.5625 per share. On November 13, 1997,
there were outstanding 15,213,663 shares of Lexington Common Stock. The
following table sets forth the quarterly high and low sales prices per share
reported on the NYSE and the distributions paid by the Company with respect to
the periods indicated.
<TABLE>
<CAPTION>
PRICE
--------------------------------------
QUARTER ENDED HIGH LOW DISTRIBUTION
- ---------------------------------------------------------- -------- -------- ------------
<S> <C> <C> <C>
1995
First Quarter........................................... $ 9.500 $ 8.625 $ 0.27
Second Quarter.......................................... $11.000 $ 9.125 $ 0.27
Third Quarter........................................... $11.375 $10.000 $ 0.27
Fourth Quarter.......................................... $11.250 $ 9.625 $ 0.27
1996
First Quarter........................................... $12.125 $10.500 $ 0.27
Second Quarter.......................................... $12.375 $11.125 $ 0.28
Third Quarter........................................... $13.375 $11.500 $ 0.28
Fourth Quarter.......................................... $15.000 $12.125 $ 0.29
1997
First Quarter........................................... $15.000 $12.125 $ 0.29
Second Quarter.......................................... $14.375 $12.125 $ 0.29
Third Quarter........................................... $15.625 $13.8125 $ 0.29
Fourth Quarter through November 30, 1997................ $16.8125 $13.750 N/A
</TABLE>
The Company increased the distributions paid per share of Lexington Common
Stock from $0.27 per share ($1.08 on an annualized basis) to $0.28 per share
($1.12 per share on an annualized basis) for the quarter ended June 30, 1996 and
to $0.29 per share ($1.16 per share on an annualized basis) commencing with the
quarter ended December 31, 1996. In order to maintain the Company's status as a
REIT, the Company must make annual distributions (other than capital gain
distributions) to its shareholders in amounts at least equal to (i) the sum of
(A) 95% of its "REIT taxable income" (computed without regard to the
distributions paid deduction and its net capital gain), and (B) 95% of any
after-tax net income from foreclosure property, minus (ii) excess noncash
income. Distributions by the Company to the extent of its current or accumulated
earnings and profits generally will be taxable to shareholders as ordinary
distribution income for federal income tax purposes and will not be eligible for
the distributions-received deductions for corporations. Distributions in excess
of current and accumulated earnings and profits will constitute a non-taxable
return of capital to a shareholder to the extent that such distributions do not
exceed the adjusted basis of the shareholder's shares, and will result in a
corresponding reduction in the shareholder's basis in the shares. Approximately
4.54% of the Company's distributions for the year ended December 31, 1996
represented a return of capital. Any portion of such distributions that exceed
both current and accumulated earnings and profits and the adjusted basis of a
shareholder's shares will be taxed as a capital gain from the disposition of
shares provided that the shares are held as capital assets. The payment of
future distributions by the Company will be at the discretion of the Board of
Directors and will depend on numerous factors, including actual cash flow of the
Company, its financial condition, contractual restrictions, capital
requirements, the annual distribution requirements under the REIT provisions of
the Code and such other factors as the Board of Directors deems relevant. See
"Description of Lexington Capital Stock -- Description of Common Stock."
13
<PAGE> 22
MARKET FOR CRIT SHARES AND RELATED SHAREHOLDER MATTERS
Since the termination of its public offering in October 1991, there have
been only occasional, isolated public trades of the CRIT Shares. The most recent
trades of which CRIT has knowledge occurred in March 1997, when 3,750 shares
were sold at a price of $11.40 per share. In addition, CRIT believes that
between August 25, 1997 and November 21, 1997, 20,000 CRIT Shares were sold by
CRIT shareholders to Madison Partnership Liquidity Investors 37, LLC ("Madison")
pursuant to a tender offer commenced by Madison on July 18, 1997 for up to 4.9%
of the outstanding CRIT Shares. Madison's tender materials stated that the offer
price for the CRIT Shares was $10.00 per share, reduced by the amount of any
cash distributions made to the CRIT shareholders on or after July 18, 1997. No
established public trading market for the CRIT Shares exists and none is
anticipated. As of the Record Date, the CRIT Shares were held by 489 holders of
record.
It is CRIT's policy to make distributions at least quarterly to holders of
its shares aggregating annually at least 95% of its REIT Taxable Income (which
term does not include capital gains realized by CRIT). In addition, when
investment properties are sold by CRIT, CRIT intends to distribute the net
proceeds (less appropriate reserves) of the sale of each investment property to
the holders of its shares (a "self-liquidating" distribution), except under
limited circumstances. For the fiscal year ended December 31, 1996, 53% of
CRIT's distributions represented a return of capital.
CRIT has paid a $.35 per share cash dividend to its shareholders for each
of the quarters for the years ended December 31, 1996 and 1995 and the quarters
ended March 31, June 30 and September 30, 1997.
14
<PAGE> 23
RISK FACTORS
In considering the matters set forth in this Proxy Statement/Prospectus,
CRIT shareholders should carefully consider, among other things, the risk
factors described below which are associated with an investment in Lexington
Common Stock. CRIT's shareholders do not have appraisal rights in connection
with, or as a result of, the matters to be acted upon relating to the Merger at
the Meeting. Shareholders of CRIT who vote against the Merger (or do not vote)
will be bound by the results of the vote if CRIT's shareholders approve the
Merger. See "The Merger -- Dissenters' Rights."
Risks of Single Tenant Leases. The Company focuses its acquisition
activities in Net Leased real properties or interests therein. Because the
Company's Net Leased real properties are leased to single tenants, the financial
failure of or other default by a tenant resulting in the termination of a lease
is likely to cause a significant reduction in the operating cash flow of the
lessor and might decrease the value of the property leased to such tenant.
Dependence on Major Tenants. Revenues from several of the Company's
Properties constitute a significant percentage of the Company's consolidated
rental revenues. On May 22, 1996, the Company consummated the acquisition of its
Salt Lake City, Utah property (the "Northwest Salt Lake City Property") which is
100% occupied by Northwest Pipeline Corporation pursuant to a Net Lease which
expires on September 30, 2009, subject to two renewal options for a total of 19
additional years. Revenue derived from the Northwest Salt Lake City Property
(net of ground lease payments) represents approximately 18.43% of the Company's
annualized rental revenue for as of October 1, 1997. In addition, the Company's
Newark, California Property (the "Ross Stores Newark Property") is 100% occupied
by Ross Stores, Inc. ("Ross Stores") pursuant to a Net Lease which expires on
August 31, 2002, subject to six five-year renewal options. See "Adverse Effects
of Ross Stores Litigation" below. During 1996, the revenue derived by the
Company from the Ross Stores Newark Property represented approximately 10% of
the Company's consolidated rental revenue. The default, financial distress or
bankruptcy of either of the foregoing tenants could cause interruptions in the
receipt of lease revenues from such tenants and/or result in vacancies in the
respective properties, which would reduce the revenues of the Company until the
affected property is re-let, and could decrease the ultimate sale value of each
such property. Upon the expiration of the leases that are currently in place
with respect to these properties, the Company may not be able to re-lease the
vacant property at a comparable lease rate or without incurring additional
expenditures in connection with such releasing.
Adverse Effects of Ross Stores Litigation. Ross Stores, the tenant of the
Company's Ross Stores Newark Property, has exercised an option to purchase the
Ross Stores Newark Property for its fair market value, which was determined by
arbitration based on estimates of fair market value submitted by Ross Stores and
the Company. Under the terms of the arbitration, the arbitrator was required to
select the submission of either the Company or Ross Stores, whichever more
closely approximated the arbitrator's own opinion of fair market value, and was
not permitted any discretion to select another valuation. The opinion of value
selected by the arbitrator is deemed the purchase price. The estimate of the
fair market value of the Ross Stores Newark Property submitted by Ross Stores
more closely approximated the arbitrator's opinion of value and, accordingly was
selected by the arbitrator and confirmed by the Superior Court of the State of
California for San Francisco County. The arbitrator's opinion of value was based
on numerous factors, including current and future market rental rates, the
length of the Ross Stores Newark Property lease, the creditworthiness of Ross
Stores and rates of return required by investors who acquire similar properties.
The arbitration decision would have allowed Ross Stores to purchase the Ross
Stores Newark Property for $24.8 million on or about September 1, 1997. The
Company has appealed the state court decision which has resulted in a stay of
Ross Stores' exercise of its purchase right; the outcome of such appeal cannot
be determined at this time. If the Company is successful on its appeal, the
parties will go back to the arbitration process and await a new opinion of
value. On August 26, 1997 the court ruled in favor of a motion made by Ross
Stores to require the Company to post a bond equivalent to one year's rent, in
the amount of approximately $3,400,000 securing Lexington's potential
reimbursement of Ross Stores for rental payments made following September 1,
1997 in the event that the sale was deemed to be consummated as of such date.
The Company has posted the bond. The net book value of the Ross Stores Newark
Property at September 30, 1997 was $25.0 million, which includes approximately
$1.5 million of deferred rent and deferred expenses related to the Company's
15
<PAGE> 24
refinancing of certain properties, which were allocated to the Ross Stores
Newark Property. If the Company does not prevail on its appeal of the California
state court decision, the potential loss on the sale of the Ross Stores Newark
Property as of September 1, 1997 would have been approximately $400,000, after
the write-off of $515,000 of deferred financing expenses. The Company has been
advised by the Court that the hearing is set for November 25, 1997. Subject to
the approval of the trustee under the REMIC trust, the Company is permitted to
substitute another property into the REMIC Financing pool in place of the Ross
Stores Newark Property. In the event the Company is unable to complete such
substitution, the Company would be required to repay approximately $19.6 million
of the REMIC Financing and would incur a prepayment penalty of approximately
$750,000. As of December 31, 1996, the annual net rent for the Ross Stores
Newark Property was approximately $3.3 million, which increased to approximately
$3.4 million commencing September 1, 1997. Revenue derived from the Ross Stores
Newark Property accounted for approximately 10% and 7.8% of the Company's
consolidated rental revenue for 1996 and as of September 30, 1997, respectively.
Unless offset by other revenue sources, the loss of such annual rental revenue
from the Ross Stores Newark Property will adversely affect the Company's results
of operations.
Leverage. The Company has incurred, and may continue to incur,
indebtedness (secured and unsecured) in furtherance of its activities. The
Company's aggregate consolidated outstanding indebtedness as of September 30,
1997 was approximately $206 million. As of September 30, 1997, a total of
thirty-seven Properties were subject to mortgages which had an aggregate
outstanding principal balance of approximately $199 million. Neither the
Articles of Incorporation nor any policy statement formally adopted by the
Company's board of directors limits either the total amount of indebtedness or
the specified percentage of indebtedness (based upon the total market
capitalization of the Company) which may be incurred. Accordingly, the Company
could become more highly leveraged, resulting in increased risk of default on
obligations of the Company and in an increase in debt service requirements which
could adversely affect the financial condition and results of operations of the
Company and the Company's ability to pay distributions. The Company's secured
revolving credit facility with Fleet National Bank (the "Credit Facility")
limits the amount of indebtedness the Company may incur to 60% of the Company's
total market capitalization. See "Information Regarding Lexington
Properties -- Indebtedness of the Company."
Possible Inability to Refinance Balloon Payments on Mortgage Debt. A
significant number of the Company's Properties are subject to mortgages with
balloon payments. Balloon payments, relating to three Properties, of
approximately $10.0 million and $5.6 million are due in 1998 and 1999,
respectively. The Credit Facility matures in 1999. Also, on May 19, 1995, the
Company, through its wholly owned subsidiary, LXP Funding Corp., completed a $70
million secured debt offering, secured by fifteen of the Company's Properties,
by issuing commercial mortgage pass-through certificates, which mature in 2005.
See Note 6 of the Company's Consolidated Financial Statements included in the
Company's 1996 Annual Report on Form 10-K. The ability of the Company to make
such balloon payments will depend upon its ability either to refinance the
mortgage related thereto or to sell the related property. The ability of the
Company to accomplish such goals will be affected by various factors existing at
the relevant time, such as the state of the national and regional economies,
local real estate conditions, available mortgage rates, the Company's equity in
the mortgaged properties, the financial condition of the Company, the operating
history of the mortgaged properties, and tax laws.
Uncertainties Relating to Lease Renewals and Re-letting of Space. The
Company will be subject to the risks that, upon expiration of leases for space
located in the Company's Properties, the premises may not be re-let or the terms
of re-letting (including the cost of concessions to tenants) may be less
favorable than current lease terms. If the Company were unable to re-let
promptly all or a substantial portion of its commercial units or if the rental
rates upon such re-letting were significantly lower than expected rates, the
Company's net income and ability to make expected distributions to shareholders
would be adversely affected. There can be no assurance that the Company will be
able to retain tenants in any of the Company's Properties upon the expiration of
their leases.
Defaults on Cross-collateralized Properties. Although the Company does not
generally cross-collateralize any of its properties, management may determine to
do so from time to time. As of the date of this Proxy Statement/Prospectus, two
of the Company's Properties in Florida were cross-collateralized (with
outstanding
16
<PAGE> 25
mortgage balances on such two Properties of approximately $10 million), and
fifteen of the Company's Properties were the subject of a segregated pool of
assets with respect to which commercial mortgage pass-through certificates (as
discussed above) were issued (with an outstanding principal balance thereon of
approximately $68 million). To the extent that any of the Company's Properties
are cross-collateralized, any default by the Company under the mortgage relating
to one such Property will result in a default under the financing arrangements
relating to any other Property which also provides security for such mortgage.
Possible Liability Relating to Environmental Matters. Under various
federal, state and local environmental laws, statutes, ordinances, rules and
regulations, an owner of real property may be liable for the costs of removal or
remediation of certain hazardous or toxic substances at, on, in or under such
property, as well as certain other potential costs relating to hazardous or
toxic substances (including government fines and penalties and damages for
injuries to persons and adjacent property). Such laws often impose liability
without regard to whether the owner knew of, or was responsible for, the
presence or disposal of such substances. Such liability may be imposed on the
owner in connection with the activities of an operator of, or tenant at, the
property. The cost of any required remediation, removal, fines or personal or
property damages and the owner's liability therefor could exceed the value of
the property and/or the aggregate assets of the owner. In addition, the presence
of such substances, or the failure to properly dispose of or remove such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral, which, in turn, would
reduce the Company's revenues and ability to make distributions. A property can
also be adversely affected either through physical contamination or by virtue of
an adverse effect upon value attributable to the migration of hazardous or toxic
substances, or other contaminants that have or may have emanated from other
properties. Although the Company's tenants are primarily responsible for any
environmental damages and claims related to the leased premises, in the event of
the bankruptcy or inability of the tenant of such premises to satisfy any
obligations with respect thereto, the Company may be required to satisfy such
obligations. In addition, under certain environmental laws, the Company, as the
owner of such properties may be held directly liable for any such damages or
claims irrespective of the provisions of any lease.
From time to time, in connection with the conduct of the Company's
business, and prior to the acquisition of any property from a third party or as
required by the Company's financing sources, the Company authorizes the
preparation of Phase I environmental reports and, when necessary, Phase II
environmental reports, with respect to its Properties. Based upon such
environmental reports and management's ongoing review of its Properties, as of
the date of this Proxy Statement/Prospectus, management was not aware of any
environmental condition with respect to any of the Company's Properties which
management believed would be reasonably likely to have a material adverse effect
on the Company. There can be no assurance, however, that (i) the discovery of
environmental conditions, the existence or severity of which were previously
unknown, (ii) changes in law, (iii) the conduct of tenants or (iv) activities
relating to properties in the vicinity of the Company's Properties will not
expose the Company to material liability in the future. Changes in laws
increasing the potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other conditions may
result in significant unanticipated expenditures or may otherwise adversely
affect the operations of the Company's tenants, which could adversely affect the
Company's financial condition or results of operations.
Risks Relating to Acquisitions. A significant element of the Company's
business strategy is the enhancement of its portfolio through acquisitions of
additional properties. The consummation of any future acquisition will be
subject to satisfactory completion of the Company's extensive valuation analysis
and due diligence review and to the negotiation of definitive documentation.
There can be no assurance that the Company will be able to identify and acquire
additional properties or that it will be able to finance acquisitions in the
future. In addition, there can be no assurance that any such acquisition, if
consummated, will be profitable for the Company. If the Company is unable to
consummate the acquisition of additional properties in the future, there can be
no assurance that the Company will be able to increase or maintain the cash
available for distribution to shareholders.
Concentration of Ownership by Certain Investors. In December 1996, the
Company entered into an investment agreement which contemplates the issuance by
the Company of up to 2,000,000 shares of Class A Senior Cumulative Convertible
Preferred Stock (the "Convertible Preferred Stock") to Five Arrows Realty,
17
<PAGE> 26
L.L.C. ("Five Arrows"). As of the date of this Proxy Statement/Prospectus,
1,325,000 shares of Convertible Preferred Stock had been issued to Five Arrows
under such investment agreement, which would currently represent approximately
8.01% of the issued and outstanding voting stock of the Company if all such
shares of Convertible Preferred Stock were immediately converted into shares of
Lexington Common Stock. In March 1997, the Company sold to an institutional
investor in a private placement 8% Exchangeable Redeemable Secured Notes (the
"Exchangeable Notes") in the aggregate principal amount of $25 million. The
Exchangeable Notes are exchangeable at $13 per share for shares of Lexington
Common Stock beginning in the year 2000, subject to adjustment. If, however, the
Exchangeable Notes were immediately converted into shares of Lexington Common
Stock, such shares of Lexington Common Stock would represent approximately
10.42% of the issued and outstanding voting stock of the Company (assuming
conversion of all outstanding shares of Convertible Preferred Stock).
Significant concentrations of ownership by certain investors may allow such
investors to exert a greater influence over the management and affairs of the
Company.
Uninsured Loss. The Company carries comprehensive liability, fire,
extended coverage and carries rent loss insurance on most of its Properties,
with policy specifications and insured limits customarily carried for similar
properties. However, with respect to certain of the Properties where the leases
do not provide for abatement of rent under any circumstances, the Company
generally does not maintain rent loss insurance. In addition, there are certain
types of losses (such as losses due to wars or acts of God) that generally are
not insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
Company could lose capital invested in a Property, as well as the anticipated
future revenues from a Property, while remaining obligated for any mortgage
indebtedness or other financial obligations related to the Property. Any such
loss would adversely affect the financial condition of the Company. Management
believes that the Company's Properties are adequately insured in accordance with
industry standards.
Adverse Effects of Changes in Market Interest Rates. The trading prices of
equity securities issued by REITs have historically been affected by changes in
broader market interest rates, with increases in interest rates resulting in
decreases in trading prices, and decreases in interest rates resulting in
increases in such trading prices. An increase in market interest rates could
therefore adversely affect the trading prices of any equity Securities issued by
the Company.
Competition. The real estate industry is highly competitive. The Company's
principal competitors include national REITs many of which are substantially
larger and have substantially greater financial resources than the Company.
Failure to Qualify as a REIT. The Company and CRIT believe that they have
met the requirements for qualification as a REIT for United States federal
income tax purposes beginning with their taxable years ended December 31, 1993
and the Company intends to continue to meet such requirements in the future.
However, qualification as a REIT involves the application of highly technical
and complex provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), for which there are only limited judicial or administrative
interpretations. No assurance can be given that the Company or CRIT has
qualified, or that the Company will remain qualified, as a REIT. The Code
provisions and income tax regulations applicable to REITs are more complex than
those applicable to corporations. The determination of various factual matters
and circumstances not entirely within the Company's control may affect its
ability to qualify as a REIT. In addition, no assurance can be given that
legislation, regulations, administrative interpretations or court decisions will
not significantly change the requirements for qualification as a REIT or the
United States federal income tax consequences of such qualification. If the
Company did not qualify as a REIT, the Company would not be allowed a deduction
for distributions to shareholders in computing its income subject to United
States federal income tax at the regular corporate rates. The Company also could
be disqualified from treatment as a REIT for the four taxable years following
the year during which qualification was lost. Cash available for distribution to
the Company's shareholders would be significantly reduced for each year in which
the Company did not qualify as a REIT. Although the Company currently intends to
continue to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the Company, without the consent of
the shareholders, to revoke the REIT election or to otherwise take action that
would result in disqualification. See "The Merger -- Material United States
Federal Income Tax Consequences -- Treatment of the Company as a REIT."
18
<PAGE> 27
THE MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of CRIT
Shares in connection with the solicitation of proxies by the CRIT Board for use
at the Meeting to be held on December 30, 1997 at CRIT's offices at 388
Greenwich Street, New York, New York, 33rd Floor, commencing at 11:00 a.m.,
local time, and at any adjournments or postponements thereof.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to shareholders of CRIT on or about December 1, 1997.
If CRIT receives a written request from any shareholder at least five days
prior to the Meeting stating that the shareholder will be present in person at
the Meeting and desires to ask questions of the auditors concerning CRIT's
financial statements, CRIT will arrange to have a representative of Ernst &
Young present at the Meeting who will respond to appropriate questions and have
an opportunity to make a statement. Any such requests, may be sent to the Trust
Administrator, Corporate Realty Income Trust I, 388 Greenwich Street, 33rd
Floor, New York, New York 10013, telephone: (212) 816-8237, facsimile: (212)
816-4226.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, holders of CRIT Shares will consider and vote upon the
Trust Amendment Proposal, the Merger Proposal and such other matters as may
properly be brought before the Meeting, or any postponements or adjournments
thereof. THE CRIT BOARD HAS UNANIMOUSLY APPROVED THE TRUST AMENDMENT PROPOSAL
AND THE MERGER PROPOSAL AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF SUCH
PROPOSALS.
Other Matters. The CRIT Board of Trustees knows of no other business which
will be presented at the Meeting. If other matters properly come before the
Meeting, the persons named as proxy holders will vote on them in accordance with
their best judgment.
The expense of preparing, printing and mailing the form of proxy and the
material used in the solicitation thereof shall be shared equally by CRIT and
the Company provided CRIT's portion does not exceed $15,000. In addition to the
use of the mails, some of the officers of CRIT and/or regular employees of the
Advisor may solicit proxies by telephone. CRIT will request brokerage houses and
other custodians, nominees and fiduciaries to forward soliciting material to the
beneficial owners of shares held of record by such persons and may verify the
accuracy or marked proxies by contacting record and beneficial owners of CRIT
Shares. CRIT will reimburse such persons for their reasonable expenses incurred
in forwarding such soliciting materials. CRIT has retained Innisfree M & A
Incorporated to assist with the solicitation of proxies and will pay a fee of
approximately $3,000 for its services.
Annual Meeting. CRIT will hold an annual meeting only if the Merger is not
consummated. Shareholder proposals intended to be presented at the next Annual
Meeting, if held, must be received a reasonable amount of time prior to CRIT's
solicitation of proxies relating to such Meeting.
VOTING AT THE MEETING; RECORD DATE
Holders of record of CRIT shares on the Record Date will be entitled to
notice of and to vote at the Meeting. As of the Record Date, there were
1,010,776 CRIT Shares outstanding, entitled to vote and held by 489 holders of
record. Each holder of record of CRIT Shares on the Record Date is entitled to
cast one vote per share on each proposal submitted for the vote of the CRIT
shareholders, either in person or by properly executed proxy, at the Meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares entitled to vote is necessary to constitute a
quorum at the Meeting.
The approval and adoption by CRIT shareholders of the Trust Amendment
Proposal and the Merger Proposal will require the affirmative vote of the
holders of a majority of the outstanding CRIT Shares.
19
<PAGE> 28
At the Meeting, in determining whether the Merger Proposal and the Trust
Amendment Proposal have received the requisite number of affirmative votes,
abstentions and broker non-votes will have the same effect as a vote against
such proposal. At the Meeting, abstentions and broker non-votes will be counted
for purposes of determining the presence or absence of a quorum. A "broker
non-vote" occurs when a nominee holding shares for a beneficial owner does not
vote on a proposal because, for such proposal, the nominee does not have
discretionary voting power and has not received instructions with respect to
voting of such shares.
PROXIES
All CRIT Shares which are entitled to vote and are represented at the
Meeting by properly executed proxies received prior to or at the Meeting, and
not revoked, will be voted at the Meeting in accordance with the instructions
indicated on such proxies. If no instructions are indicated, such proxies will
be voted for approval and adoption of the Merger Proposal and for the adoption
of the Trust Amendment Proposal.
If any other matters are properly presented at the Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Meeting to another time and/or place (including, without limitation,
for the purpose of soliciting additional proxies), the persons named in the
enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment unless the proxy contains
instructions to the contrary.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of CRIT at or before the taking of the vote at the Meeting, a
written notice of revocation bearing a later date than the proxy, (ii) duly
executing a later dated proxy relating to the same shares and delivering it to
the Secretary of CRIT before the taking of the vote at the Meeting or (iii)
attending the Meeting and voting in person (although attendance at the Meeting
will not in and of itself constitute a revocation of a proxy). Any written
notice of revocation or subsequent proxy should be sent so as to be delivered to
CRIT, 388 Greenwich St., 33rd Floor, New York, N.Y. 10013, Attention: Investor
Relations, or hand delivered to the Secretary of CRIT, at or before the taking
of the vote at the Meeting.
CRIT SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
20
<PAGE> 29
THE MERGER
BACKGROUND OF THE MERGER
On April 12, 1996, CRIT received an unsolicited proposal from Lexington
relating to the acquisition by Lexington of CRIT. To assist it in assessing and
evaluating this proposal, CRIT endeavored to obtain additional expressions of
interest against which to compare the bid from Lexington. Toward that end, CRIT
authorized its Advisor, Corporate Realty Advisors, Inc., to prepare and
distribute private offering materials to a number of potential acquirors known
in the industry as purchasers of net leases. The Advisor holds 10,000 shares of
CRIT Stock, is a wholly-owned subsidiary of Smith Barney, Inc. and its Chairman
and President (James C. Cowles) is also the Trustee, Chairman, President and
Treasurer of CRIT. Among those initially contacted, two parties submitted cash
bids to acquire the assets of CRIT.
Lexington initially offered to purchase all of CRIT's assets and to assume
all of its outstanding debt in exchange for 1,330,000 shares of Lexington Common
Stock which would have valued each CRIT Share at approximately $15.88. At about
the same time, CRIT received the two other offers to acquire all of its
properties, which ranged in value from $12.77 per CRIT Share, to $16.92 per CRIT
Share, after taking into account certain assumptions regarding the tax
consequences of these proposed transactions. The higher of these two offers
included the assumption by the offeror of CRIT's outstanding mortgage
indebtedness, subject to the consent of CRIT's lenders, and the lower offer
excluded the existing debt, which would have caused CRIT to incur prepayment
penalties of approximately $1.5 million.
In August 1996, Lexington proposed to increase CRIT's downside protection
by offering CRIT shareholders up to 55,400 additional shares in the event the
price of Lexington Common Stock fell below $12.625 per share for a period of
time. After additional negotiations, Lexington increased its initial offer to
provide for a payment to CRIT Shareholders of Lexington Common Stock valued at
approximately $17.03 per Share as of such time.
On September 10, 1996, the CRIT Board held a meeting by telephonic
conference to consider the cash offers and Lexington's revised offer. In
addition, the CRIT Board considered whether CRIT's three properties could be
sold for a higher price if marketed separately rather than together. The CRIT
Board believed that an active market existed for each of the properties but that
coordinating separate sales of CRIT's properties within a reasonable time at
acceptable prices would be impractical, and that the potential cost of
administering CRIT for a smaller portfolio of properties would be burdensome and
economically inefficient. Accordingly, the CRIT Board determined to offer for
sale all three properties as a portfolio or to effect a merger of CRIT with or
into another entity, preferably one which would provide CRIT shareholders
greater liquidity. At a Board meeting held on September 24, 1996, after further
discussions with existing and potential offerors, the CRIT Board determined to
move forward with the cash offer valued at $16.92 per CRIT Share and commenced
negotiations for the sale of its three properties to this party (the "Primary
Cash Offeror"). Messrs. Scott Butera and Jon Kline, representatives of the
Advisor, were present and participated in the discussions at the foregoing
meeting.
Negotiations with the Primary Cash Offeror did not result in a definitive
agreement, leading CRIT's Board to authorize the Advisor to send a further round
of inquiries to potential investors in early December 1996. On December 24,
1996, the CRIT Board held a conference call to discuss responses to its
inquiries and an offer that CRIT received from a fourth interested party that
had arisen from such inquiries. Mr. Jon Kline, a representative of the Advisor,
participated in the discussions during this conference call. This fourth offer
contained a proposal to acquire the properties of CRIT for $30.9 million in
cash, with no assumption of debt, but did not conform to the terms on which CRIT
had requested offers and was inferior on an equity per share basis ($13.07) to
the offers made by the Primary Cash Offeror and Lexington. During the December
24, 1996 conference call, the CRIT Board concluded that the offer from the
Primary Cash Offeror remained the most viable, and authorized the Advisor to
continue to work with the Primary Cash Offeror toward a definitive agreement.
CRIT did not engage in any subsequent discussions with the fourth interested
party whose offer was non-conforming and considered inferior from a financial
point of view. After further negotiations with the Primary Cash Offeror, the
parties were unable to reach a definitive agreement on terms acceptable to both
21
<PAGE> 30
parties due primarily to the inability to negotiate a new lease with one of
CRIT's lessees, which was a condition to obtaining the consent of the lessee to
the transaction, and in early 1997 discussions between CRIT and the Primary Cash
Offeror terminated.
On April 10, 1997, Lexington delivered a revised offer as ultimately
reflected in the definitive Merger Agreement. Lexington's decision to again
increase its offer was based on numerous factors including improved real estate
market fundamentals and appreciation in the price of Lexington Common Stock.
This offer resulted in a value per share to the CRIT shareholders of $17.31 as
of such time. CRIT thereafter entered into negotiations with Lexington over the
detailed terms of the Merger Agreement. At a special meeting of the CRIT Board
held on May 28, 1997, the Advisor and representatives of McFarland Dewey made
presentations concerning the business prospects of CRIT and the potential
combination of CRIT and Lexington. The CRIT Board also reviewed the terms of the
Merger Agreement with CRIT's management, the Advisor and CRIT's legal advisors.
McFarland Dewey's presentations included a summary of the terms of the Merger, a
description of Lexington, the valuation summary discussed below under "Opinion
of Financial Advisor to CRIT" and a review of pro forma financial information.
At the meeting, McFarland Dewey delivered its opinion to the CRIT Board that the
exchange ratio of Lexington Common Stock for CRIT Shares was fair from a
financial point of view to the holders of CRIT shares. The CRIT Board also
considered a proposed amendment to the Declaration of Trust that would authorize
CRIT to merge with another entity, and a proposal for CRIT to enter into the
Merger Agreement with Lexington. The CRIT Board unanimously approved both
proposals and the Merger Agreement was executed on May 29, 1997.
In its review of the proposals received from the four offerors described
above, the CRIT Board considered factors such as the assumption of debt, payoff
of debt prepayment penalties associated therewith, the necessity of
renegotiating leases, obtaining necessary consents, the ability of the offeror
to obtain financing and the tax consequences to shareholders. In addition, the
CRIT Board considered the tax-free nature of the merger proposal by Lexington
and the increased liquidity which Lexington Common Stock offered CRIT
shareholders. The CRIT Board also considered the marketability of CRIT's assets
in the current environment.
REASONS FOR THE MERGER; RECOMMENDATION OF THE CRIT BOARD OF TRUSTEES
The CRIT Board believes that the Merger provides an opportunity for CRIT's
shareholders to become equity holders in a self-administered REIT that has an
expanded and diversified geographic presence in the United States, significantly
greater liquidity, a lower risk capital structure, a higher current yield,
better access to the capital markets and greater potential for long-term
appreciation. The CRIT Board also believes that the Merger will combine
complementary assets of CRIT with the Company's larger but similar quality
portfolio, while enabling the CRIT portfolio to benefit from the expertise of
the Company's experienced management team.
In making its determination with respect to the Merger, the CRIT Board
considered a number of factors, including without limitation, the factors
discussed by the Advisor in its presentation to the Board and listed below. In
view of the wide variety of factors considered by the CRIT Board, the Board did
not quantify or otherwise attempt to assign relative weights to the specific
factors considered in making its determination:
(i) Consideration: The CRIT Board believed that the Merger was the
best offer reasonably available for CRIT's shareholders. The Board believed
that there were no other prospective purchasers that had the financial
ability to complete the transaction and would be willing to pay an
aggregate consideration greater than that to be paid by the Company in the
Merger. In seeking to maximize value to CRIT shareholders, CRIT and its
representatives solicited the interest of approximately twenty prospective
buyers and received a number of indications of interest at various times.
In response to CRIT's solicitation of interest, the four proposals
discussed above were received offering to acquire CRIT itself or
substantially all of its assets. The Company's proposal presented the most
attractive price on a per share basis with the greatest certainty of
execution (a value per share of approximately $17.31 compared to
approximately $16.92, $12.77 and $13.07, respectively, for the other three
offers, in each case calculated prior to the decision by the Advisor to
waive the substantial majority of its termination fee, which decision had
the effect of increasing such value per share). In addition, certain of the
other
22
<PAGE> 31
proposals were subject to various conditions, including, in some cases, the
acquiror obtaining necessary financing approvals and performing additional
due diligence before committing to a definitive transaction.
(ii) Liquidity: The CRIT Board believed that the exchange of the CRIT
shares for Lexington Common Stock, which is listed on the New York Stock
Exchange and has a larger total market capitalization than that of CRIT,
would provide a significant increase in the liquidity available to CRIT
shareholders.
(iii) Alternatives: As a stand-alone entity, CRIT would likely
experience difficulty in accessing the capital markets on acceptable terms
in the future, resulting in shareholders' continued lack of a reasonable
degree of liquidity. The CRIT Board also considered as a possible
alternative to the Merger auctioning CRIT's properties individually. In
this regard, the CRIT Board believed that an active market existed for each
of the properties, but coordinating within a reasonable time at acceptable
prices would be impracticable, and that the potential cost of administering
CRIT for a smaller portfolio of properties would be burdensome and
economically inefficient. For example, because the Circuit City Property
represents 76% of CRIT's annual revenues, its sale would cause a material
decrease in annual revenues, without significantly decreasing CRIT's
administrative costs. As a result, the CRIT Board believed that, at that
time, there were no feasible alternatives that were available to CRIT that
were as likely in the near term to provide greater shareholder value and
certainty of execution.
(iv) Financial analysis: Information relating to the financial
performance, condition, business operations and prospects of CRIT and the
Company on a separate and combined basis were considered. Based on analyses
prepared by the Advisor and McFarland Dewey, and assuming that the price
per share of the Lexington Common Stock on the effective date of the Merger
would be approximately equal to the price per share of the Lexington Common
Stock on the date the Merger Agreement was signed ($13.125 per share), the
Board believed that the Merger would be accretive to the FFO per share and
cash available for distribution per share of the Company. For a discussion
of the factors relied on by McFarland Dewey in preparation of such
analysis, see "-- Opinion of the Financial Advisor of CRIT."
(v) Increased Current Yield: The CRIT Board viewed as favorable the
determination that CRIT's shareholders will likely realize an increase in
quarterly dividend income as shareholders of the Company, assuming, among
other things, that (i) the Company will continue to make regular quarterly
distributions at the Company's current rate of $0.29 per share; and (ii)
there will be sufficient cash available to make such distributions.
(vi) Cost savings: The CRIT Board considered the anticipated cost
savings and operating efficiencies available to the Company from the
Merger, particularly in the reduction of overhead expenses and the
elimination of CRIT's advisory fee. The CRIT Board did not attempt to
quantify those savings with precision. However, the advisory fee and
general and administrative expenses in 1996 for CRIT were approximately
$175,000 and $171,000, respectively, all of which can be viewed as
potential overhead savings as a result of the Merger.
(vii) Merger Agreement terms: The terms of the Merger Agreement,
including the exchange ratio of shares and the equity interest in the
Company to be received by CRIT's shareholders were considered. In this
regard, the CRIT Board noted that the exchange ratio has been determined
through arms-length negotiations, it fairly reflects the current market
price of the stock of the two companies and it provides downside protection
through the floating exchange ratio mechanism.
(viii) Structure: In this regard, the CRIT Board viewed as favorable
the fact that the Merger, as a "stock-for-stock" structure with a floating
exchange ratio mechanism rather than a "cash-for-stock" transaction, will
provide an opportunity for CRIT's shareholders to share in any future
appreciation of the Company as well as enable CRIT's shareholders to
convert their CRIT Shares into Lexington Common Stock on a tax-free basis.
The Merger Agreement provides for a floating exchange ratio based upon a
fraction of which the numerator is the Share Value and the denominator is
the Lexington Common Stock Price, see "The Merger Agreement -- Conversion
of Securities."
23
<PAGE> 32
(ix) Finite life of CRIT: The finite life of CRIT led the CRIT Board
to the conclusion that a future liquidation of CRIT would be required in
the year 2002 and would likely lead to less value realized for shareholders
in view of the term of the Baxter Lease (as defined), which terminates in
2001. The Merger will provide an opportunity for CRIT shareholders to
become shareholders in a REIT which is self-administered, has a larger
number of properties and the capacity for future growth so that lease
expiration can be better managed.
(x) Outstanding indebtedness of CRIT: As of September 30, 1997,
CRIT's outstanding mortgage indebtedness was approximately $15 million.
Annual interest rates ranged from 8.875% to 9.5% and each of the three
mortgage loans requires a balloon payment. The mortgages mature at various
dates between March 1, 2000 and October 1, 2002 at which time the balloon
payments, which total approximately $15 million, are due. Although the debt
is generally at rates above that which would be achievable given the
current interest rate environment and condition of the mortgage market,
high prepayment premiums totalling approximately $1.0 million prevent a
current refinancing. The loans would be difficult to refinance in the event
that a tenant does not exercise its renewal option or otherwise renew its
lease and a replacement tenant is not found in a timely fashion. In such
case, it is possible that CRIT would be subject to foreclosure proceedings.
(xi) McFarland Dewey Opinion: The CRIT Board considered the analyses,
presentations and opinion of McFarland Dewey described below under "Opinion
of the Financial Advisor of CRIT" that stated, as of the date of such
opinion and based upon and subject to certain matters stated therein, that
the consideration to be received by the holders of CRIT Shares pursuant to
the Merger Agreement was fair from a financial point of view to such
holders. In this respect, the CRIT Board considered McFarland Dewey's
financial analyses in its overall evaluation of the Merger and viewed such
analyses as favorable to its determination. The Board viewed McFarland
Dewey's opinion as favorable to its determination based upon the McFarland
Dewey's experience and expertise as a recognized investment banking and
advisory firm that is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, private placements
and valuation for estate, corporate and other purposes.
The CRIT Board also considered certain potentially negative factors in its
deliberations concerning the Merger:
(i) The risk that the portfolios of the Company and CRIT may not be
fully complementary as each of the tenants in the CRIT portfolio is rated
on an investment grade category while the Company has some tenants which
are not rated as such;
(ii) The fact that, because the value of the Lexington Common Stock
for purposes of calculating the ratio at which CRIT Shares will be
converted is fixed when the Lexington Common Stock Price falls below
$12.125, a decline in the value of the Lexington Common Stock below $12.125
would reduce the value of the consideration to be received by CRIT's
shareholders in the Merger;
(iii) The various conditions to the Company's obligations to
consummate the Merger, including the declaring effective by the Securities
and Exchange Commission of a registration statement covering the Lexington
Common Stock to be issued in the merger, the receipt from each guarantor of
any lease relating to CRIT's properties of an affirmation of the guarantee
upon consummation of the Merger; the receipt of estoppel certificates from
each of CRIT's tenants that there are no defaults under the leases, and the
receipt of evidence that certain of CRIT's mortgage lenders have approved
the assumption by Lexington of the mortgages on the CRIT properties. See
The Merger Agreement -- "Conditions";
(iv) The risk that the anticipated benefits of the Merger to CRIT
shareholders may not be realized as a result of possible changes in the
real estate market in general, the inability to achieve the anticipated
reductions in expenses, the effect of the factors described in clause (i)
above and the inability of the Company to access the capital markets in an
efficient manner; and
(v) The fact that if the Merger Agreement is terminated under certain
circumstances, CRIT must pay the Company a termination fee of $700,000. See
The Merger Agreement -- "Termination; Tenant Fees and Expenses." The CRIT
Board recognizes that the inclusion of such provisions in the Merger
24
<PAGE> 33
Agreement could render it unlikely that a more attractive offer for the
acquisition of CRIT would be presented to CRIT and its shareholders;
however, the Board believes that, based on its efforts to find a buyer for
CRIT, the Merger represents the best offer reasonably available to CRIT and
its shareholders, that the inclusion of such a termination fee was a
reasonable method to compensate the Company for expending significant time
and money in negotiating and attempting to complete the Merger, and that
the termination fee was within the range of fees payable in comparable
transactions.
In the view of CRIT's Board, the potentially negative factors considered
were not sufficient, either individually or collectively, to outweigh the
positive factors considered by the Board in its deliberations relating to the
Merger. The CRIT Board considered the search process and analysis conducted by
the Advisor to be thorough, and in view of the positive factors enumerated above
and the enhanced liquidity which the Merger would afford the CRIT shareholders,
who heretofore have not had access to an established public trading market for
their CRIT shares, the Board concluded that the Merger was fair to, and in the
best interests of, CRIT and its shareholders.
As described above under the caption "Interests of Certain Persons in the
Merger," the Advisor owns 10,000 CRIT Shares, which represents approximately 1%
of the total number of CRIT shares issued and outstanding. The Advisor was also
entitled to receive a termination fee of approximately $850,000 in connection
with the consummation of the Merger, $789,000 of which the Adviser has waived if
the Merger is consummated. The ownership of CRIT Shares and the right to receive
a termination fee may be considered to be conflicts of interest of the Advisor.
The CRIT Board was aware of these conflicts in assessing the presentation of the
Advisor, and approved payment of the termination fee to the Advisor. The Advisor
has informed the Company that it intends to vote all of its CRIT Shares in favor
of the Merger Proposal and Trust Proposal.
In the event the Merger is not consummated for any reason, CRIT intends to
continue to manage its properties in the near term in the manner in which it has
heretofore. In addition, CRIT may seek another strategic combination, assuming
the Trust Amendment Proposal is adopted by the shareholders, or the sale of all
or substantially all of its assets in one transaction or a series of
transactions. The CRIT Board believes there are no feasible alternatives to the
Merger available to CRIT at the present time that are likely to result in
greater shareholder value.
BY UNANIMOUS VOTE, THE CRIT BOARD DETERMINED THAT THE MERGER IS FAIR TO,
AND IN THE BEST INTERESTS OF, CRIT AND ITS SHAREHOLDERS, APPROVED THE MERGER AND
AUTHORIZED CRIT TO ENTER INTO THE MERGER AGREEMENT AND CONSUMMATE THE
TRANSACTIONS CONTEMPLATED THEREBY. THE CRIT BOARD UNANIMOUSLY RECOMMENDS THAT
THE SHAREHOLDERS OF CRIT APPROVE THE MERGER PROPOSAL.
OPINION OF FINANCIAL ADVISOR TO CRIT
CRIT retained McFarland Dewey & Co. ("McFarland Dewey") to provide a
fairness opinion in connection with the Merger and related matters based upon
McFarland Dewey's qualifications, reputation and expertise. No limitations were
imposed by the CRIT Board upon McFarland Dewey with respect to the
investigations made or the procedures followed by McFarland Dewey in rendering
its opinion. At the May 28, 1997 meeting of the CRIT Board, McFarland Dewey
rendered an oral opinion to the CRIT Board that, as of such date and subject to
the considerations expressed to the CRIT Board, the Merger consideration to be
received by the public holders of CRIT Shares pursuant to the Merger Agreement
is fair from a financial point of view to such holders. McFarland Dewey
confirmed its oral opinion by delivery of a written opinion dated as of May 29,
1997.
THE FULL TEXT OF THE MCFARLAND DEWEY OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. HOLDERS OF CRIT SHARES ARE URGED TO, AND SHOULD, READ THE MCFARLAND
DEWEY OPINION CAREFULLY AND IN ITS ENTIRETY. THE MCFARLAND DEWEY OPINION IS
DIRECTED TO THE CRIT BOARD AND ADDRESSES ONLY THE FAIRNESS FROM A FINANCIAL
POINT OF VIEW OF THE CONSIDERATION TO BE RECEIVED BY THE PUBLIC HOLDERS OF CRIT
SHARES PURSUANT TO THE MERGER AGREEMENT, AND IT DOES NOT ADDRESS ANY OTHER
ASPECT OF THE MERGER NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF
CRIT SHARES AS TO HOW TO VOTE AT THE CRIT
25
<PAGE> 34
SPECIAL MEETING. THE SUMMARY OF THE MCFARLAND DEWEY OPINION SET FORTH IN THIS
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION ATTACHED.
In arriving at its opinion, McFarland Dewey (i) analyzed certain publicly
available financial statements and other information of CRIT, (ii) analyzed
certain internal financial statements and other financial and operating data
concerning CRIT prepared by the management of CRIT, (iii) analyzed certain
financial projections prepared by the management of CRIT, (iv) discussed the
past and current operations and financial condition and prospects of CRIT and
certain of its real property assets with James C. Cowles, Chairman of CRIT and
Mr. Jon Kline, a representative of the Advisor, (v) reviewed the reported prices
and trading activity of the CRIT Shares, (vi) analyzed certain publicly
available financial statements and other information of the Company, (vii)
discussed the past and current operations and financial condition and prospects
of the Company and certain of its real property assets with E. Robert Roskind
and T. Wilson Eglin, Chairman and President, respectively, of the Company,
(viii) reviewed the reported prices and trading activity of the Lexington Common
Stock, (ix) compared the financial performance of the Company and the prices and
trading activity of the Lexington Common Stock with those of certain comparable
publicly-traded companies and their securities, and (x) performed such other
analyses as McFarland Dewey deemed appropriate.
In rendering its opinion, McFarland Dewey assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by McFarland Dewey for the purposes of its opinion. With respect to the
projected financial information, McFarland Dewey assumed that such information
has been reasonably prepared on bases reflecting the best then available
estimates and judgments of the future financial performance of CRIT. McFarland
Dewey did not make any independent valuation or appraisal of the assets or
liabilities of CRIT or of the Company, and was supplied an independent third
party appraisal of CRIT properties. The McFarland Dewey opinion rendered on May
29, 1997 is necessarily based on economic, market and other conditions as in
effect on, and the information made available to McFarland Dewey as of, such
date.
In arriving at its opinion, McFarland Dewey was not authorized to solicit,
and did not solicit interest from any party with respect to the acquisition of
CRIT or any of its assets, nor did McFarland Dewey negotiate with any party with
respect to the possible acquisition of CRIT or any of its assets.
At the meeting of the CRIT Board, McFarland Dewey presented certain
financial analyses accompanied by written materials in connection with the
delivery of its fairness opinion. The following is a summary of the material
financial and comparative analyses performed by McFarland Dewey in arriving at
its May 29, 1997 opinion. The opinion assumed $700,000 of the $18.15 million
total consideration to be paid by Lexington would be paid in cash and applied
toward transaction expenses, as permitted by the Merger Agreement. See "The
Merger Agreement -- Conversion of Securities." The following analyses therefore
assumed that the purchase price per share for the CRIT Shares was $17.26.
McFarland Dewey arrived at this amount by dividing $17.45 million (which
represented the $18.15 million total consideration minus the $700,000 assumed to
be applied from this consideration toward transaction expenses) by the 1,010,776
CRIT Shares outstanding. Subsequent to the meeting date, the Advisor waived
substantially all of its termination fee under its Advisory Agreement. As a
consequence of such waiver, CRIT management currently anticipates that all or
substantially all of the $18.15 million will be applied to the Stock
Consideration.
Selected Comparable Public Companies Analysis
Using publicly available information, McFarland Dewey compared selected
historical and projected financial, operating and stock market performance data
of CRIT and the Company with corresponding data of certain publicly-traded
companies that McFarland Dewey considered comparable in certain respects with
those of CRIT and the Company for purposes of this analysis. The comparable
companies consisted of net leased REITs. McFarland Dewey considered CRIT and the
Company in relation to a set of comparables which consisted of Commercial Net
Lease Realty, Franchise Financial Corp., Golf Trust of America, National Golf
Properties, TriNet Corporate Realty Trust, Realty Income Trust, and Hospitality
Properties Trust (the "Net Leased Comparables"). The ratios of the common stock
trading price to Funds From Operations per share (each, an "FFO Multiple") for
1996 and 1997 for the Net Leased Comparables were
26
<PAGE> 35
based on Funds From Operations per share as reported by the companies, if
available, and as estimated and published by First Call Corporation, an industry
service provider of earnings estimates published by various investment banking
firms and further estimated by McFarland Dewey using closing stock prices as of
May 24, 1997. Funds From Operations estimates for CRIT for 1997 were based on
internal projections. McFarland Dewey noted that the price offered by the
Company for each share of the CRIT Shares represented 10.2x and 10.1x CRIT's
reported 1996 and estimated 1997 Funds From Operations per share, respectively,
below the average FFO Multiples of the Net Leased Comparables of 12.0x and 11.7x
for 1996 and 1997, respectively. McFarland Dewey noted that CRIT's market
capitalization of approximately $27 million was the smallest of all the Net
Leased Comparables and 12.3% of the next largest Net Leased Comparable. CRIT's
leverage of 57.2% was higher than that of all the Net Leased Comparables. As a
result of the foregoing, McFarland Dewey determined that CRIT could be viewed
negatively by the public relative to the Net Leased Comparables.
McFarland Dewey compared the Company's FFO Multiple with the median FFO
Multiple for the Net Leased Comparables. The FFO Multiple for the Company for
the year ending December 31, 1996 was based on reported Funds From Operations,
and for the year ended December 31, 1997 the FFO Multiple was based on the
projected Funds From Operations. In calculating the FFO Multiples for the
periods, McFarland Dewey noted that the Company's 1996 FFO Multiple of 8.9x and
1997 FFO Multiple of 8.9x were lower than the average FFO Multiples of the Net
Leased Comparables of 12.0x and 11.7x for 1996 and 1997. McFarland Dewey noted
that the Company's leverage of 56.0% was higher than all the Net Leased
Comparables, which ranged from 2.0% to 37.0%, with an average leverage of 21.1%.
As a result the Company may have a lower FFO Multiple relative to the Net Leased
Comparables.
Stock Trading History
McFarland Dewey reviewed the history of trading prices and volume for the
CRIT Shares and the Lexington Common Stock. The Company was viewed in relation
to the Standard & Poor's 400 Index and an index composed of the Net Leased
Comparables. McFarland Dewey noted that the CRIT Shares trade infrequently and
that the Company's historical stock price performance since May 17, 1996 was
approximately 9.0% lower than that of Net Leased Comparables. However, McFarland
Dewey noted that the Lexington Common Stock will provide CRIT shareholders with
more liquidity.
Contribution Analysis
McFarland Dewey reviewed CRIT's financial contribution to the Company on a
projected pro forma basis. On a pro forma basis, CRIT shareholders would be
receiving approximately 8.8% of the ownership in the Company based on an
Exchange Ratio of 1.315 as of such time and the Lexington Common Stock as of
such time and could receive as high as 9.5% and as low as 8.2% based upon the
Share Value as of such time. Based on CRIT and the outstanding Lexington Common
Stock as of such time management's financial projections for 1997, CRIT would
have contributed 7.3% of the Funds From Operations of the Company. McFarland
Dewey noted that CRIT's shareholders would receive a greater percentage of the
stock than would theoretically be indicated by their contribution of Funds From
Operations.
Pro Forma Merger Analysis
McFarland Dewey performed an analysis of the effect of the Merger on the
Company's Funds From Operations per share for the projected years ending
December 31, 1997 through December 31, 1998, which assumed that the Merger had
been consummated on January 1, 1997. McFarland Dewey combined the projected
operating results of CRIT and the Company to arrive at a combined projected
Funds From Operations. McFarland Dewey then compared the combined Funds From
Operations per share with the Company's stand-alone Funds From Operations per
share to determine the projected pro forma impact of the Merger. This analysis
indicated that the Company's Funds From Operations per share on a pro forma
basis in each of 1997 through 1998 would most likely be higher than the
stand-alone projections for the Company of Funds From Operations for each year
were the Merger not to occur. McFarland Dewey noted that the Merger would result
in a dividend increase of approximately 9.3% for CRIT shareholders, based on the
Company's
27
<PAGE> 36
maintenance of its then current $0.29 quarterly dividend per share and the
Exchange Ratio of 1.315, and could increase by a maximum of 17.9% and a minimum
of 1.4% based upon the Share Value.
McFarland Dewey noted that the Merger would result in a slight decrease in
the leverage ratios for the Company. Specifically, the Company's ratio of Debt
to Book Capitalization as of December 31, 1996 would decrease from 67.0% to
65.4% on a pro forma basis.
Discounted Cash Flow Analysis
McFarland Dewey also performed discounted cash flow analyses (i.e., an
analysis of the present value of the projected cash flows for the periods using
the discount rates indicated) of CRIT based upon projections for the years 1997
through 2001, inclusive, using discount rates reflecting a weighted average cost
of capital ranging from 10% to 11% and terminal value multiples in calendar year
2001 ranging from 10x to 11x. McFarland Dewey observed that the offer for the
CRIT Shares of $17.26 was within the ranges of values ($16.58 to $18.31) implied
by the discounted cash flow analysis.
Precedent Transactions Analysis
An analysis was conducted of the stock-for-stock mergers involving public
REITs consummated since 1995. As there have been no prior Net Leased REIT
mergers, McFarland Dewey does not believe that this type of analysis provides a
reliable comparison to the Merger or that such analysis regarding REIT mergers
is significant to McFarland Dewey's determination that the price is fair to the
public holders of the CRIT Shares from a financial point of view.
McFarland Dewey, however, compared certain financial ratios of the Merger
with those of selected other mergers and strategic transactions involving REITs
which McFarland Dewey deemed to be reasonably comparable to the Merger. These
transactions (acquiree/acquiror) included Union Property Investors/Kranzco
Realty, Retail Properties Investors/Glimcher Realty, Crocker Realty
Trust/Highwoods Property and Copley Properties/East Group Properties.
Using publicly available information, McFarland Dewey calculated the
premium of the implied offer value per share relative to the acquired company's
stock price on the day before announcement of the respective transaction and the
implied offer value per share for the acquired company, as of the day before the
announcement of the respective transaction, as a multiple of the projected FFO
per share for such company. This analysis yielded a range of premiums from
10.55% to 11.4% with a mean of 10.9% and a range of transaction multiples of
11.8x to 14.4x with a mean of 12.9x. The Merger's premium, based upon the most
recent trade of which CRIT had knowledge, was 51.3% and the transaction multiple
was 10.2x.
Independent Third Party Appraisal
McFarland Dewey noted that the appraisals provided by an independent third
party did not include certain costs, such as transfer taxes and refinancing
costs, which would be incurred by CRIT if it were to sell the properties in
individual transactions. Utilizing the appraisal values from the independent
third party and management's estimate of the costs which would be incurred in
connection with the sale of the properties, McFarland Dewey calculated that the
proceeds available for distribution to the CRIT shareholders upon a liquidation
would be approximately $16.93 per share.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. McFarland
Dewey believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion. In addition,
McFarland Dewey may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting for any particular
analysis described above should not be taken to be McFarland Dewey's view of the
actual value of CRIT and the Company.
In performing its analyses, McFarland Dewey made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the
28
<PAGE> 37
control of CRIT and the Company. The analyses performed by McFarland Dewey are
not necessarily indicative of actual value, which may be significantly more than
or less favorable than suggested by such analyses. Such analyses were prepared
solely as a part of McFarland Dewey's analysis of whether the Merger
consideration to be received by the public holders of the CRIT Shares is fair
from a financial point of view to such holders, and were conducted in connection
with the delivery of the McFarland Dewey opinion. The analyses do not purport to
be appraisals or to reflect the prices at which CRIT might actually be sold.
Because such estimates are inherently subject to uncertainty, none of CRIT,
McFarland Dewey, or any other person assumes responsibility for their accuracy.
The McFarland Dewey analyses described above should not be viewed as
determinative of the opinion of the CRIT Board or the management of CRIT with
respect to the value of CRIT or of whether McFarland Dewey would have rendered
an opinion of fairness with respect to, or the CRIT Board or the management of
CRIT would have been willing to agree to, any consideration other than the
Merger consideration.
The CRIT Board retained McFarland Dewey based upon its experience and
expertise. McFarland Dewey is a recognized investment banking and advisory firm.
As part of its investment banking business, McFarland Dewey is regularly
engaging in the valuation of businesses and securities in connection with
mergers and acquisitions, private placements and valuation for estate, corporate
and other purposes.
Pursuant to a letter agreement dated May 8, 1997, CRIT paid McFarland Dewey
a fee of $100,000 upon the delivery of its opinion. The fee paid to McFarland
Dewey was not contingent upon the contents of the opinion delivered. In
addition, CRIT has agreed to reimburse McFarland Dewey for its reasonable
out-of-pocket expenses and to indemnify McFarland Dewey and its affiliates
against certain liabilities and expenses, including liabilities arising under
federal securities laws.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16. The fair market value of the consideration
given by the Company in the Merger will be used as the valuation basis of the
Merger. The assets and liabilities of CRIT will be revalued to their respective
fair market values at the Effective Time. The consolidated financial statements
of the Company will include the results of operations of CRIT from the Effective
Time.
NO APPRAISAL RIGHTS
Holders of CRIT Shares are not entitled to dissenters' rights of appraisal
under CRIT's Declaration of Trust or under the laws of the Commonwealth of
Massachusetts in connection with the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the CRIT management and the CRIT Board may be deemed to
have interests in the Merger, as described in this section. These include
provisions in the Merger Agreement providing indemnification rights to such
officers, trustees and other parties under certain conditions. The Merger
Agreement provides that CRIT shall, and the Company shall, after the Effective
Time, indemnify and hold harmless trustees, officers, employees, fiduciaries or
agents of CRIT against any liabilities in connection with any threatened or
actual claim or investigation based on or pertaining to such persons' position
as trustees, officers or employees or agents of CRIT, whether asserted or
arising before or after the Effective Time, and liabilities based on or
pertaining to the Merger Agreement or the transactions contemplated thereby, to
the extent permitted by law or the Declaration of Trust of CRIT. After the
Effective Time, for a period of six years thereafter, the Company will fulfill
the obligations of CRIT pursuant to the Declaration of Trust as in effect on the
date of the Merger Agreement. See "The Merger Agreement -- Indemnification."
As of the Record Date, the Advisor owned 10,000 CRIT Shares, which the
Advisor intends to vote in favor of the Merger. James C. Cowles is Trustee,
Chairman, President and Treasurer of CRIT and is Chairman and President of the
Advisor. Pursuant to the Advisory Agreement with CRIT, the Advisor is entitled
to receive a termination fee of approximately $850,000 in connection with the
consummation of the Merger. However, the Advisor has determined unconditionally
to waive approximately $789,000 of such fee,
29
<PAGE> 38
with the remaining $61,000 to be payable by CRIT at the Effective Time. The
Advisor agreed to waive such amount to increase the consideration payable to
CRIT shareholders in connection with the Merger. The amount of the fee will
effectively reimburse the Advisor for an identical amount paid during 1997 by
the Advisor to Antony E. Monk, a former trustee and officer of CRIT and the
former president of the Advisor who resigned from those positions in 1992, in
connection with the termination of a Management and Consulting Services
Agreement among the Advisor, Smith Barney, Harris, Upham & Co., Monk and Hadley
Page Ellis, Inc., a corporation whose sole shareholder is Mr. Monk, pursuant to
which Hadley provided advice with respect to the selection, financing,
refinancing, leasing and disposition of properties. In addition, Hadley will
receive a $250,000 finder's fee from the Company upon consummation of the
Merger.
THE MERGER AGREEMENT (PROPOSAL 1)
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is attached as Annex A to this Proxy
Statement/Prospectus and incorporated herein by reference. Such summary is
qualified in its entirety by reference to the Merger Agreement. Shareholders of
CRIT are urged to read the Merger Agreement in its entirety for a more complete
description of the Merger.
THE MERGER
The Merger Agreement provides that, following the approval and adoption of
the Merger Agreement by the CRIT shareholders and the satisfaction or waiver of
the other conditions to the Merger, CRIT is to be merged with and into the
Company, with the Company continuing as the surviving corporation (the
"Surviving Corporation").
If all such conditions to the Merger are satisfied or waived, the Merger
will be completed pursuant to Chapter 182 of the Massachusetts General Laws (the
"MGL") and Section 3-114 of the Maryland General Corporation Law (the "MGCL")
and will become effective upon the acceptance for record of the Articles of
Merger by the State Department of Assessments and Taxation of Maryland in
accordance with the MGCL or at such time thereafter which CRIT and the Company
have agreed upon and designated in such filing in accordance with applicable law
as the effective time of the Merger.
CONVERSION OF SECURITIES
Upon consummation of the Merger, pursuant to the Merger Agreement, the
Company will issue shares of Lexington Common Stock in exchange for all CRIT
Shares at the Effective Time. Each issued and outstanding CRIT Share (other than
shares owned by CRIT as treasury shares or by the Company or any of the
Company's subsidiaries, all of which will be cancelled) will be converted into
the right to receive a number of shares of Lexington Common Stock equal to a
fraction, the numerator of which is the Share Value and the denominator of which
is the Lexington Common Stock Price (collectively, the "Stock Consideration").
If any holder of CRIT Shares would be entitled to receive a number of Lexington
Common Stock that includes a fraction, then, in lieu of a fractional share, such
holder will be entitled to receive cash in an amount equal to such fractional
part of a share of Lexington Common Stock multiplied by the Lexington Common
Stock Price.
The "Lexington Common Stock Price" means an amount equal to the average of
the closing sales prices of the Lexington Common Stock on the NYSE during the
twenty consecutive trading days ending on the fifth business day immediately
preceding the Meeting; provided, however, that in the event the Lexington Common
Stock Price is (i) greater than $14.125, then, for purposes of determining the
Stock Consideration, the Lexington Common Stock Price shall be deemed to be
$14.125, and (ii) in the event the Lexington Common Stock Price is less than
$12.125, then, for purposes of determining the Stock Consideration, the
Lexington Common Stock Price shall be deemed to be $12.125. The "Share Value"
will equal the quotient obtained by dividing (A) an amount equal to (y) $18.15
million minus (z) the amount of the Cash Payment (as defined below), if any,
which CRIT shall elect to receive from the Company (up to $1,000,000) and apply
toward the payment of CRIT's obligations, by (B) the total number of CRIT Shares
issued and outstanding immediately prior to the Effective Time (subject to
adjustments). The "Share Value" as of the date of this Proxy
30
<PAGE> 39
Statement/Prospectus is $17.96 per share, which assumes that CRIT will elect to
receive no Cash Payment. The stock consideration will be appropriately adjusted
to reflect the effect of any stock split, reverse stock split, stock dividend,
reorganization, recapitalization or other like change with respect to the
Lexington Common Stock occurring prior to the Effective Time, or to reflect the
effect of any merger, consolidation or other transaction involving the Company
which would affect the Lexington Common Stock or its listing on the NYSE.
The Merger Agreement authorizes CRIT, at its option, to direct that up to
$1,000,000 in cash (the "Cash Payment") be deducted from the $18.15 million in
consideration to be paid by Lexington in connection with the Merger, and be
available for use by the Advisor to pay and discharge obligations of CRIT that
Lexington will not be responsible to assume in the Merger. The Merger Agreement
further provides that, in the event any such amount is requested by CRIT and
applied toward the payment of its obligations, any unexpended balance will be
paid to the CRIT shareholders at a later time. One such obligation of CRIT that
would not be assumed by Lexington would have been a termination fee in the
approximate amount of $850,000 payable by CRIT to the Advisor pursuant to the
Advisory Agreement; however, the Advisor has determined to waive $787,000 of
such termination fee, with the remaining $61,000 to be payable by CRIT at the
Effective Time. See "The Merger -- Interests of Certain Persons in the Merger."
As a consequence, management of CRIT believes that CRIT will have sufficient
cash on hand at the effective time of the Merger to satisfy those obligations of
CRIT that Lexington will not be responsible for after the Merger, and currently
anticipates that all or substantially all of the $18.15 million in consideration
provided for in the Merger Agreement will be applied to the Stock Consideration
to be received by the CRIT shareholders in the Merger.
Promptly after the Effective Time, Chase Mellon Shareholder Services LLC
(the "Exchange Agent") will mail transmittal forms and exchange instructions to
each holder of record of CRIT Shares to be used to surrender and exchange
certificates evidencing CRIT Shares for certificates evidencing the Lexington
Common Stock to which such holder has become entitled. After receipt of such
transmittal forms, each holder of certificates formerly representing CRIT Shares
will be able to surrender such certificates to the Exchange Agent, and each such
holder will receive in exchange therefor certificates, evidencing the number of
whole shares of Lexington Common Stock to which such holder is entitled and any
cash which may be payable in lieu of a fractional share of Lexington Common
Stock. Such transmittal forms will be accompanied by instructions specifying
other details of the exchange. CRIT SHAREHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
After the Effective Time, each certificate evidencing CRIT Shares, until so
surrendered and exchanged, will be deemed, for all purposes, to evidence only
the right to receive the number of whole shares of Lexington Common Stock which
the holder of such certificate is entitled to receive and the right to receive
any cash payment in lieu of a fractional share of Lexington Common Stock. The
holder of such unexchanged certificate will not be entitled to receive any
dividends or other distributions, if any, payable by the Company until the
certificate has been exchanged. Subject to applicable laws, such dividends and
distributions, together with any cash payment in lieu of a fractional share of
Lexington Common Stock, will be paid without interest.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties relating to, among other things, (a) the due organization, valid
existence and good standing of each of CRIT and the Company and certain similar
corporate matters; (b) the capital structure of each of CRIT and the Company;
(c) the authorization, execution, delivery and enforceability of the Merger
Agreement, the consummation of the transactions contemplated by the Merger
Agreement and related matters; (d) conflicts under organizational documents,
required consents or approvals and violations of any instruments or law; (e)
documents and financial statements filed by each of CRIT and the Company with
the Commission and the accuracy of information contained therein; (f)
undisclosed liabilities; (g) the absence of certain material adverse changes or
events; (h) taxes, tax returns and audits; (i) properties; (j) contracts and
commitments; (k) litigation; (l) environmental matters, hazardous materials and
hazardous materials activities; (m) leases; (n) affiliated transactions; (o) the
accuracy of information supplied by each of CRIT and the Company in connection
with
31
<PAGE> 40
the Registration Statement and this Proxy Statement/Prospectus; (p) employees;
and (q) opinion of financial advisor.
CERTAIN COVENANTS AND AGREEMENTS
Pursuant to the Merger Agreement, CRIT has agreed, among other things, that
during the period from the date of the Merger Agreement until the Effective
Time, except as otherwise consented to in writing by the Company or as
contemplated by the Merger Agreement, CRIT will: (a) preserve intact its
business organizations and goodwill; (b) notify and confer with the Company on
operational matters of materiality, proposals to engage in material transactions
and material adverse conditions; (c) deliver copies of any documents filed with
the Commission; (d) conduct its operations in the ordinary course; (e) not
acquire additional real property, incur additional indebtedness, encumber assets
or commence construction of any other type of real estate projects; (f) not
issue any shares of its capital stock, grant any option, warrant, conversion
right to acquire any shares of its capital stock; (g) not increase any
compensation or enter into or amend any employment agreement with its officers
or trustees or retain any person as an employee; (h) not adopt any employee
benefit plan; (i) not to dispose of any of its properties; (j) not make any
loans; (k) not pay any claims, liabilities or obligations other than in the
ordinary course of business; (k) not enter into any commitment in excess of
$25,000; (l) not enter into any commitment with any officer, trustee, consultant
or affiliate of CRIT; and (m) not effect any material change in any lease or
occupancy agreement currently in effect, renew or extend the term of any lease,
enter into any new lease or cancel or terminate any lease. CRIT may declare
regular quarterly dividends and pay a special dividend within 30 days prior to
the Effective Time in an aggregate amount up to the amount of cash at hand at
the time of such declaration; provided, however, that CRIT may only make such
payment after reserving a sufficient amount of cash necessary to pay those
expenses for which it is responsible under the Merger Agreement. On or about
November 15, 1997, CRIT paid a quarterly dividend of $.35 per share for the
quarter ending September 30, 1997 to shareholders of record of CRIT as of
September 30, 1997.
Pursuant to the Merger Agreement, the Company has agreed, among other
things, that during the period from the date of the Merger Agreement until the
Effective Time, except as otherwise consented to in writing by CRIT or as
contemplated by the Merger Agreement, the Company will: (a) preserve intact its
business organizations and goodwill; (b) notify CRIT in the event the employment
of certain members of senior management terminates; and (c) deliver copies of
any documents filed with the Commission.
NO SOLICITATION
The Merger Agreement provides that CRIT will not, directly or indirectly,
through any officer, trustee, employee, representative or agent of CRIT, (i)
solicit or initiate any inquiries or proposals regarding any merger, sale of
substantial assets, sale of shares of beneficial interest (including without
limitation by way of a tender offer for 15% or more of the outstanding CRIT
Shares) or similar transactions involving CRIT other than the Merger (any of the
foregoing inquiries or proposals being referred to in the Merger Agreement as an
"Acquisition Proposal"), (ii) except as otherwise required by CRIT's Declaration
of Trust or applicable law, engage in negotiations concerning, or provide any
nonpublic information to any person relating to, any Acquisition Proposal, or
(iii) agree to, approve, or recommend any Acquisition Proposal; provided,
however, that nothing contained in the Merger Agreement shall prevent the CRIT
Board from (A) considering, negotiating, discussing, approving and recommending
to the shareholders of CRIT a bona fide Acquisition Proposal not solicited in
violation of the Merger Agreement, if, and only to the extent that, the CRIT
Board determines in good faith (upon advice of outside counsel) that it is
required to do so in order to discharge properly its fiduciary duties or (B)
complying with Rules 14e-9 and 14e-2 promulgated under the Exchange Act with
regard to any Acquisition Proposal.
CRIT is required to notify the Company after receipt of any Acquisition
Proposal, or any modification of or amendment to any Acquisition Proposal.
32
<PAGE> 41
INDEMNIFICATION
The Merger Agreement provides that CRIT shall, and after the Effective
Time, the Surviving Corporation shall, indemnify and hold harmless each person
who was as of the date of the Merger Agreement or has been at any time prior to
the date thereof, or who becomes prior to the Effective Time, a trustee,
officer, employee, fiduciary or agent of CRIT against all losses, claims,
damages, liabilities, costs, expenses, judgments, fines and amounts paid in
settlement in connection with any such threatened or actual claim, action, suit,
proceeding or investigation based in whole or in part on, or arising in whole or
in part out of, or pertaining to the fact that such person is or was a trustee,
officer or employee or agent of CRIT, whether asserted or arising before or
after the Effective Time ("Indemnified Liabilities"), and all Indemnified
Liabilities based in whole or in part on, or arising in whole or in part out of,
or pertaining to the Merger Agreement or the transactions contemplated thereby,
in each case to the full extent permitted by law or the Declaration of Trust of
CRIT. After the Effective Time, for a period of six years after the Effective
Time, the Surviving Corporation will fulfill and honor in all respects the
obligations of CRIT pursuant to the Declaration of Trust of CRIT or similar
organizational documents as in effect as of the date of the Merger Agreement.
CONDITIONS
The respective obligations of CRIT and the Company to effect the Merger are
subject to the following conditions, among others: (a) the Merger Proposal and
the Trust Amendment Proposal authorizing the Merger shall have been approved by
the CRIT shareholders; (b) neither of the parties shall be subject to any order,
ruling or injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by the Merger Agreement; (c) the
Registration Statement shall have been declared effective and shall not be the
subject of a stop order or proceeding seeking a stop order; (d) the approval for
the listing of the shares of Lexington Common Stock to be issued in the Merger
on the NYSE subject to official notice of issuance; (e) all material consents,
authorizations, orders and approvals of (or filings or registrations with) any
governmental commission, board, other regulatory body or third parties required
to be made or obtained by the Company, CRIT and any affiliated entities in
connection with the Merger Agreement shall have been obtained or made, (f) the
accuracy in all material respects of the representations and warranties of the
other party set forth in the Merger Agreement; (g) the performance in all
material respects of all obligations of the other party required to be performed
under the Merger Agreement; (h) receipt by CRIT and the Company, respectively,
of the opinion of counsel to the effect that the Merger will be treated for
federal income tax purposes as a tax-free reorganization qualifying under the
provisions of Sections 368(a) of the Code (see "Merger -- Certain Federal Income
Tax Consequences"); (i) receipt by the Company of estoppel certificates that all
Leases (as defined in the Merger Agreement) are in full force and effect and
there are no defaults thereunder; (j) receipt by the Company of Affiliate
Letters (as defined in the Merger Agreement); (k) none of the Properties (as
defined in the Merger Agreement) shall have been encumbered by any lien,
easement, covenant, restriction or other title matter not reflected on the Title
Policies (as defined in the Merger Agreement) for the related property other
than those title matters set forth on title reports delivered to the Company;
(l) CRIT shall have paid any real estate transfer or similar taxes incurred in
connection with the Merger which are payable in connection with filing a
certificate of merger or quitclaim deed, but not otherwise; (m) the Company
shall have received evidence that CRIT's mortgage lenders have approved the
assumption by the Company of the mortgages on each of CRIT's properties; (n)
each guarantor of any lease relating to any of CRIT's properties shall have
agreed to the continuing effectiveness of such guarantee upon confirmation of
the Merger; and (o) the Company shall have received a certain survey and back-up
documentation with respect to the CRIT property located in Virginia.
33
<PAGE> 42
TERMINATION; TERMINATION FEES AND EXPENSES
The Merger Agreement may be terminated and abandoned at any time prior to
the Effective Time, whether before or after approval and adoption of the Merger
Agreement by the shareholders of CRIT:
(a) by mutual written consent of CRIT and the Company;
(b) by either CRIT or the Company if the Merger shall not have been
consummated on or before December 31, 1997 (provided that the right to
terminate the Merger Agreement under this clause shall not be available to
any party whose failure to fulfill any obligation under the Merger
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date);
(c) by either CRIT or the Company if any 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 Merger and
such order, decree, ruling or other action shall have become final and
non-appealable, provided that the party seeking to terminate shall have
used its best efforts to appeal such order, decree, ruling or other action;
(d) by CRIT, if (i) the Merger Agreement and the transactions
contemplated thereby shall have failed to receive the requisite vote for
approval and adoption by the shareholders of CRIT upon the holding of a
duly convened shareholder meeting or (ii) within ten days after receipt of
notice from the Company of any Material Structural Change (as defined in
the Merger Agreement);
(e) by CRIT or the Company, if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the other
party set forth in the Merger Agreement, in either case such that the
conditions set forth in the Merger Agreement relating to (i) the accuracy
of representations and warranties and (ii) the performance of all
agreements and covenants, as the case may be, would be incapable of being
satisfied by December 31, 1997; provided, however, that, in any case, a
willful breach shall be deemed to cause such conditions to be incapable of
being satisfied;
(f) by the Company if (i) the CRIT Board shall have withdrawn,
amended, modified or changed its approval or recommendation of the Merger
Agreement or any of the transactions contemplated thereby in a manner
adverse to the Company or shall have resolved to do so; (ii) the requisite
vote of shareholders shall not have been obtained at a duly held meeting on
or prior to December 31, 1997; or (iii) the CRIT Board shall have
recommended that shareholders of CRIT accept or approve an Acquisition
Proposal by a person other than the Company (or CRIT or the CRIT Board
shall have resolved to do such) or a tender offer or exchange offer for 15%
or more of the outstanding CRIT Shares is commenced (other than by the
Company) and the Board of Trustees recommends that the shareholders of CRIT
tender their shares in such tender or exchange offer;
(g) by CRIT (i) if the Board of Trustees recommends to CRIT's
shareholders approval or acceptance of an Acquisition Proposal by a person
other than the Company, but only in the event that the CRIT Board, after
consultation with and based upon the advice of legal counsel, has
determined in good faith that such action is necessary for the CRIT Board
to comply with its fiduciary duties to its shareholders under applicable
law or (ii) if the average closing sales price of Lexington Common Stock on
the NYSE on twenty trading days ending on the fifth business day
immediately preceding the date of the Meeting is equal to or less than
$11.125, without any liability on the part of CRIT; or
(h) by the Company if (i) any tenant of CRIT shall have filed a
petition commencing a voluntary case concerning such tenant under any
chapter of Title 11 of the United States Code entitled "Bankruptcy," or an
involuntary case shall be commenced against such tenant under any such
chapter and relief is ordered against such tenant or the petition is
controverted but is not dismissed within sixty days after the commencement
of the case, or (ii) any of the CRIT properties shall have been
substantially destroyed by fire or other casualty and the tenant under the
affected CRIT property shall not be required to apply the casualty
insurance proceeds to restore such property.
In the event of any termination of the Merger Agreement by either CRIT or
the Company as provided above, the Merger Agreement will become void and there
will be no liability or obligation on the part of
34
<PAGE> 43
CRIT, the Company, or their respective affiliates, trustees, officers,
directors, shareholders or affiliates, except to the extent that such
termination results from the willful breach by a party of any of its
representations, warranties, covenants or agreements set forth in the Merger
Agreement, provided that the provisions described below relating to the payment
of fees and expenses shall survive any such termination.
Except as described below, whether or not the Merger is consummated, all
fees, costs and expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereby shall be paid by the party incurring such
expenses, except that, in addition to its own costs and expenses, CRIT will be
responsible for and shall discharge prior to the Effective Time or from the
proceeds of the Cash Payment all costs associated with environmental audits of
CRIT properties, which audits have been received and approved by the Company,
and all other closing costs including, but not limited to, survey charges, third
party and governmental fees (except fees payable to the Commission and state
"blue sky" fees, which shall be paid by the Company), charges and taxes, and the
expenses of CRIT's attorneys, accountants and investment bankers, except as
provided below; and, in addition to its own costs and expenses, the Company
shall be responsible for the fees and expenses of its legal counsel, and
engineering studies of CRIT properties with respect to the structural soundness
of CRIT properties. Fees, incurred in relation to the printing costs of this
Proxy Statement/Prospectus shall be shared equally by CRIT and the Company,
provided that CRIT's portion of such costs shall not exceed $15,000; and (ii)
restructuring or assumption or amendment fees payable to CRIT's lenders,
provided that the Company's portion of such fees shall not exceed $30,000.
CRIT is required to pay the Company a termination fee of $700,000 upon: (i)
the termination of the Merger Agreement by CRIT under the circumstances
described in paragraph (g)(i) above; (ii) the termination of the Merger
Agreement by the Company under the circumstances described in paragraph (f)(iii)
above; or (iii) the termination of the Merger Agreement by the Company under the
circumstances described in paragraph (f)(i) or (ii), and thereafter on or prior
to the 60th day after the date of such termination, CRIT enters into a
definitive agreement relating to any merger, consolidation, share exchange, sale
of a substantial portion of its assets, liquidation or other similar
extraordinary corporate transaction.
Any fees payable as described above are required to be paid within five
business days after the first to occur of the relevant termination events under
paragraphs (g)(i) or (f)(iii) or the consummation of any such alternative
transaction under paragraphs f(i) or f(ii).
AMENDMENT AND WAIVER
The Merger Agreement may be amended at any time by action taken or
authorized by the respective Board of Trustees and Board of Directors of CRIT
and the Company, but after approval by the shareholders of CRIT of the matters
presented in connection with the Merger to them, no amendment shall be made
which by law requires further approval by such shareholders, without such
further approval. CRIT and the Company, by action taken or authorized by their
respective Board of Trustees and Board of Directors, may extend the time for
performance of the obligations or other acts of the other parties to the Merger
Agreement, may waive inaccuracies in the representations or warranties contained
in the Merger Agreement and may waive compliance with any agreements or
conditions contained in the Merger Agreement.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material United States federal
income tax consequences of the Merger. However, this discussion does not address
all aspects of United States federal income taxation that may be relevant to
CRIT shareholders in light of their particular circumstances or to certain types
of shareholders subject to special treatment under the United States federal
income tax laws (such as dealers in securities, tax-exempt organizations, life
insurance companies, other financial institutions, partnerships or other
pass-through entities, regulated investment companies and foreign taxpayers). No
foreign, state or local income tax considerations, or United States federal,
state, local or foreign estate, gift or other non-income tax considerations are
addressed herein.
35
<PAGE> 44
CRIT SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE UNITED
STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
A condition precedent to CRIT's obligation to effect the Merger is the
receipt from Day, Berry & Howard of an opinion of counsel, based in part on
representations of CRIT, the Company and certain CRIT shareholders, to the
effect that the Merger will be treated for United States federal income tax
purposes as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). A condition precedent to the
Company's obligation to effect the Merger is the receipt from Paul, Hastings,
Janofsky & Walker LLP of an opinion of counsel, based in part on representations
of CRIT, the Company and certain CRIT shareholders, to the effect that the
Merger will be treated for United States federal income tax purposes as a
tax-free reorganization under Section 368(a) of the Code.
The following summary is based upon the Code, applicable Treasury
Regulations, judicial authority and administrative rulings and practices, all as
in effect on the date hereof, and is not binding on the Internal Revenue Service
("IRS"), which is not precluded from adopting a contrary position. No ruling has
been or will be sought from the IRS concerning the United States federal tax
consequences of the Merger. In addition, there can be no assurance that future
legislation, judicial or administrative changes or interpretations will not
adversely affect the accuracy of the statements and conclusions set forth
herein. Any such changes or interpretations could be applied retroactively and
could result in tax consequences of the Merger to the Company, CRIT and/or CRIT
shareholders that are different from those described in this summary.
Under current law, subject to the limitations and qualifications referred
to herein, and assuming that the Merger and related transactions will take place
as described herein and in the Merger Agreement:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, and the Company and CRIT will each be a
party to a reorganization within the meaning of Section 368(b) of the Code;
(ii) No gain or loss will be recognized by the Company or CRIT in the
Merger;
(iii) No gain or loss will be recognized by CRIT shareholders upon
their receipt of shares of Lexington Common Stock in exchange for their
CRIT Shares;
(iv) A CRIT shareholder who receives cash in lieu of a fractional
interest in a share of Lexington Common Stock will be treated as having
first received and then exchanged for cash such fractional interest and,
therefore, will recognize gain or loss equal to the difference between the
amount of such cash and the tax basis allocable to such fractional
interest. Such gain or loss will constitute capital gain or loss if such
CRIT Shareholder's CRIT Shares are held as capital assets at the effective
time of the Merger;
(v) The tax basis of the shares of Lexington Common Stock received by
a CRIT shareholder in the Merger will equal the tax basis of such
shareholder's CRIT Shares exchanged in the Merger, reduced by the tax basis
allocable to any fractional interest in a share of Lexington Common Stock
treated as having been received and exchanged for cash; and
(vi) The holding period of the shares of Lexington Common Stock
received by a CRIT shareholder in exchange for such shareholder's CRIT
Shares will include the holding period of such shareholder's CRIT Shares so
exchanged, provided that such CRIT shareholder's CRIT shares are held as
capital assets at the effective time of the Merger.
THE DISCUSSIONS SET FORTH BELOW UNDER THE HEADINGS "TREATMENT OF THE
COMPANY AS A REIT," "TAXATION OF TAXABLE SHAREHOLDERS," "TAXATION OF FOREIGN
SHAREHOLDERS," "TAXATION OF TAX-EXEMPT SHAREHOLDERS," "TAXATION OF REINVESTED
DIVIDENDS" AND "OTHER TAX CONSIDERATIONS" ADDRESS ONLY FEDERAL INCOME TAX
ASPECTS OF REIT OPERATORS. THEY DO NOT ADDRESS ANY STATE, LOCAL OR FOREIGN TAX
ASPECTS OF REIT OPERATIONS. THE DISCUSSIONS ARE BASED ON CURRENTLY EXISTING
PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL THE FOREGOING
AUTHORITIES ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE
CONTINUING ACCURACY OF THIS DISCUSSION. ANY SUCH CHANGE MAY OR MAY NOT BE
RETROACTIVE AND COULD AFFECT THE QUALIFICATION AND TAXATION OF THE COMPANY AS A
36
<PAGE> 45
REIT. EACH HOLDER OF CRIT SHARES SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH
RESPECT TO THE OWNERSHIP OF SHARES OF LEXINGTON COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN INCOME
AND OTHER TAX LAWS.
TREATMENT OF THE COMPANY AS A REIT
General. The Company and CRIT elected to be taxed as REITs under Sections
856 through 860 of the Code effective for their taxable years ended December 31,
1993, and December 31, 1990, respectively. The Company and CRIT each believes
that it was organized, and has operated, in such a manner so as to qualify for
taxation as a REIT under the Code, and the Company intends to conduct its
operations so as to continue to qualify for taxation as a REIT. No assurance,
however, can be given that the Company and CRIT have operated in a manner so as
to qualify, or that the Company will be able to operate in such a manner so as
to remain qualified, as a REIT. The following is a general summary of the
requirements for qualification as a REIT and the United States federal income
tax treatment of a REIT and its shareholders. The following discussion, which is
not exhaustive of all possible tax considerations, does not include a detailed
discussion of any state, local or foreign tax considerations. Nor does it
discuss all of the aspects of federal income taxation that may be relevant to a
prospective shareholder in light of its particular circumstances or to certain
types of shareholders (including insurance companies, tax-exempt entities,
financial institutions or broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) who are subject to special
treatment under federal income tax laws. As discussed, below, the Taxpayer
Relief Act of 1997 (the "1997 Act") contains certain changes to the REIT
qualification requirements and to the taxation of REITs that may be material to
a shareholder of a REIT, but which will become effective only for the Company's
taxable years commencing on or after January 1, 1998. Qualification and taxation
as a REIT depend upon the Company's ability to meet, through actual annual
operating results, the required distribution levels, diversity of stock
ownership and the various qualification tests imposed under the Code discussed
below, the results of which will not be reviewed by counsel. Accordingly, no
assurance can be given that the actual result of the Company's operations for
any one taxable year will satisfy such requirements.
If the Company qualifies for taxation as REIT, it generally will not be
subject to United States federal corporate income tax on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investment in a corporation. However, the Company will be subject
to United States federal income tax as follows: First, the Company will be taxed
at regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of business
other than foreclosure property), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), but nonetheless has 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 the Company fails the 75% or
95% test multiplied by (b) a fraction intended to reflect the Company's
profitability. Sixth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if the Company acquires any asset from a C
Corporation (i.e., a corporation generally subject to full corporate level tax)
in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other property) in the
hands of the C corporation, and the Company recognizes gain on the disposition
of such asset during the 10-year period beginning on the date on which such
asset was acquired by the Company, then, to the extent of such property's
"built-in gain" (the excess of the fair market value of such property at the
time of the acquisition by the
37
<PAGE> 46
Company over the adjusted basis of such property at such time), such gain will
be subject to tax at the highest regular corporate rate applicable (as to be
provided in Treasury Regulations that have not yet been promulgated).
Requirements for Qualification. A REIT is a corporation, trust or
association (i) which is managed by one or more trustees or directors, (ii) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (iii) which would be taxable
as a domestic corporation but for Sections 856 through 859 of the Code, (iv)
which is neither a financial institution nor an insurance company subject to
certain provisions of the Code, (v) the beneficial ownership of which is held by
100 or more persons, (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities), and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) through (iv), inclusive, must be met during the entire taxable year and that
condition (v) 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.
The Company may redeem, at its option, a sufficient number of shares or restrict
the transfer thereof to bring or maintain the ownership of the shares in
conformity with the requirements of the Code. Moreover, pursuant to the 1997
Act, for the Company's taxable years commencing on or after January 1, 1998, if
the Company complies with regulatory rules pursuant to which it is required to
send annual letters to holders of Lexington Common Stock requesting information
regarding the actual ownership of Lexington Common Stock, and the Company does
not know, or exercising reasonable diligence would not have known, whether it
failed to meet requirement (vi) above, the Company will be treated as having met
the requirement.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of each of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and items of gross income of the partnership will retain
the same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income tests and assets (as discussed
below). Thus, the Company's proportionate share of the assets, liabilities, and
items of gross income of the partnerships in which the Company owns an interest
are treated as assets, liabilities and items of the Company for purposes of
applying the requirements described herein.
Income Tests. In order to maintain qualification as a REIT for the
Company's tax years commencing on or after January 1, 1997, the Company annually
must satisfy two gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities. In addition, for the
Company's tax years ending on or before December 31, 1997, short-term gain from
the sale or other disposition of stock or securities, gain from prohibited
transactions and gain on the sale or other disposition of real property held for
less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of the Company's gross income
(including gross income from prohibited transactions). Pursuant to the 1997 Act,
the Company will not have to meet the 30% test for its taxable years commencing
on or after January 1, 1998.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or an owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real
38
<PAGE> 47
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents received to qualify as "rents
from real property," the REIT generally must not operate or manage the property
(subject to a de minimus exception applicable to the Company's tax years
commencing on or after January 1, 1997 as described below) or furnish or render
services to the tenants of such property, other than through an independent
contractor from whom the REIT derives no revenue. The REIT may, however,
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property ("Permissible Services").
Pursuant to the 1997 Act, for the Company's taxable years commencing on or after
January 1, 1998, rents received generally will qualify as rents from real
property notwithstanding the fact that the Company provides services that are
not Permissible Services so long as the amount received for such services meets
a de minimus standard. The amount received for "impermissible services" with
respect to a property (or, if services are available only to certain tenants,
possibly with respect to such tenants) cannot exceed one percent of all amounts
received, directly or indirectly, by the Company with respect to such property
(or, if services are available only to certain tenants, possibly with respect to
such tenants). The amount that the Company will be deemed to have received for
performing "impermissible services" will be the greater of the actual amount so
received or 150% of the direct cost to the Company of providing those services.
If the Company 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 such failure was due to reasonable cause and not willful neglect, it
disclosed the nature and amounts of its items of gross income in a schedule
attached to its return, and any incorrect information on the schedule was not
due to fraud with intent to evade tax. A 100% penalty tax would be imposed on
the amount by which the Company failed the 75% or 95% test (whichever amount is
greater), less an amount which generally reflects expenses attributable to
earning the nonqualified income. No analogous relief is available for failure to
satisfy the 30% income test.
Subject to certain safe harbor exceptions, gain realized by the Company on
the sale of property held as inventory or other property held primarily for sale
to customers in the ordinary course of business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon the Company's ability to
satisfy the income tests for qualification as a REIT. Under existing law,
whether property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends on all
the facts and circumstances with respect to the particular transaction.
Asset Tests. The Company must also satisfy three tests relating to the
nature of its assets every quarter. First at least 75% of the value of the
Company's total assets must be represented by real estate assets (including (i)
its allocable share of real estate assets held by partnerships in which the
Company owns an interest or held by "qualified REIT subsidiaries" (as defined in
the Code) of the Company and (ii) stock or debt instruments held for not more
than one year purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of the Company, cash, cash items and government
securities). Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities (except that shares of qualified REITs and of
certain wholly owned subsidiaries are exempt from these prohibitions). The
Company expects that substantially all of its assets will consist of (i) real
properties, (ii) stock or debt investments that earn qualified temporary
investment income, (iii) other qualified real estate assets, and (iv) cash, cash
items and government securities. The Company may also invest in securities of
other entities, provided that such investments will not prevent the Company from
satisfying the asset and income tests for REIT qualification set forth above.
If the Company inadvertently fails one or more of the asset tests at the
end of a calendar quarter, such a failure would not cause it to lose its REIT
status, provided that (i) it satisfied all of the asset tests at the close of a
preceding calendar quarter, and (ii) the discrepancy between the values of the
Company's assets and the standards imposed by the asset test either did not
exist immediately after the acquisition of any particular
39
<PAGE> 48
acquisition or was not wholly or partly caused by such an acquisition. If the
condition described in clause (ii) of the preceding sentence were not satisfied,
the Company could still avoid disqualification by eliminating any discrepancy
within 30 days after the close of the calendar quarter in which it arose.
Distribution Test. With respect to each taxable year, the Company must
distribute to its shareholders an amount equal to the sum of (i) 95% of its
"REIT Taxable Income" (determined without regard to the deduction for dividends
paid and by excluding any net capital gain), and (ii) 95% of any after-tax net
income from foreclosure property, in each case less any "excess noncash income."
REIT Taxable Income is generally computed in the same manner as taxable income
of ordinary corporations, with several adjustments, such as a deduction allowed
for dividends paid, but not for dividends received. "Excess noncash income" is
the amount, if any, by which the sum of certain items of noncash income exceeds
5% of REIT Taxable Income for the taxable year (determined without regard to the
deduction for dividends paid and by excluding any net capital gain). With
respect to the Company's tax years ending on or before December 31, 1997, these
items of noncash income for which relief from the distribution requirement is
provided are (i) the excess of amounts includible in gross income due to the
operation of Section 467 of the Code (relating to deferred rental agreements)
over the amounts that would have been includible without regard to such
provision, (ii) income from certain like-kind exchanges not eligible for
tax-free treatment (iii) in the case of a REIT using the cash method of
accounting for United States federal income tax purposes, the amounts includible
in gross income with respect to the amount by which original issue discount on
purchase money debt obligations (but not other kinds of original issue discount
or market discount) exceed the amount of money and fair market value of other
property received during the taxable year under such instruments. With respect
to the Company's tax years commencing on or after January 1, 1998, "excess
noncash income" also includes income from the cancellation of indebtedness, and
the category of "excess noncash income" described in clause (iii) above applies
equally to REITs that use the accrual method of accounting for United States
federal income tax purposes.
To the extent that the Company distributes at least 95%, but less than
100%, of its REIT Taxable Income, as adjusted, or, with respect to the Company's
tax years ending on or before December 31, 1997, does not distribute all of its
net long-term capital gain, it will be subject to regular United States federal
corporate income tax (including any applicable alternative minimum tax) on such
undistributed net long-term capital gain or such undistributed REIT Taxable
Income. With respect to the Company's tax years beginning on or after January 1,
1998, the Company may elect to retain, rather than distribute, net long-term
capital gain, and be subject to regular United States federal income tax
thereon. For the consequences of such an election to the Company's shareholders,
see "Taxation of Taxable Shareholders." In addition, a nondeductible 4% excise
tax is imposed on the excess of (i) 85% of the Company's ordinary income for the
year plus 95% of capital gain net income for the year and the undistributed
portion of the required distribution for the prior year over (ii) the actual
distribution to shareholders during the year (if any). Net operating losses
generated by the Company may be carried forward (but not carried back) and used
by the Company for 15 years (or 20 years in the case of net operating losses
generated in the Company's tax years commencing on or after January 1, 1998) to
reduce REIT Taxable Income and the amount that the Company will be required to
distribute in order to remain qualified as a REIT. Net capital losses of the
Company may be carried forward for five years (but not carried back) and used to
reduce capital gains.
In general, a distribution must be made during the taxable year to which it
relates to satisfy the distribution test and to be deducted in computing REIT
Taxable Income. However, the Company may elect to treat a dividend declared and
paid after the end of the year (a "subsequent declared dividend") as paid during
such year for purposes of complying with the distribution test and computing
REIT Taxable Income, if the dividend is (i) declared before the regular or
extended due date of the Company's tax return for such year and (ii) paid not
later than the date of the first regular dividend payment made after the
declaration (but in no case later than 12 months after the end of the year). For
purposes of computing the 4% excise tax, a subsequent declared dividend is
considered paid when actually distributed. Furthermore, any dividend that is
declared by the Company in October, November or December of a calendar year, and
payable to shareholders of record as of a specified date in such month of such
year will be deemed to have been paid by the Company (and received by
shareholders) on December 31 of such calendar year, but only if such dividend is
actually
40
<PAGE> 49
paid by the Company in January of the following calendar year. For purposes of
complying with the distribution test for a taxable year as a result of an
adjustment in certain of its items of income, gain or deduction by the IRS, the
Company may be permitted to remedy such failure by paying a "deficiency
dividend" in a later year together with interest and a penalty. Such deficiency
dividend may be included in the Company's deduction of dividends paid for the
earlier year for purposes of satisfying the distribution test. For purposes of
the 4% excise tax, the deficiency dividend is taken into account when paid, and
any income giving rise to the deficiency adjustment is treated as arising when
the deficiency dividend is paid.
Each of the Company and CRIT believes that it has distributed, and the
Company intends to continue to distribute, to its shareholders an amount at
least equal to 95% of the sum of (i) its REIT Taxable Income (determined without
regard to the deduction for dividends paid and by excluding any net capital
gains) and (ii) any after-tax net income from foreclosure properties less any
"excess noncash income," as those amounts are determined in good faith by the
Company (or CRIT, as the case may be) or its independent accountants. However,
it is possible that timing differences between the accrual of income and its
actual collection, and the need to make nondeductible expenditures (such as
capital improvements or principal payments on debt) may cause the Company to
recognize taxable income in excess of its net cash receipts, thus increasing the
difficulty of compliance with the distribution requirement. In order to meet the
95% requirement, the Company might find it necessary to arrange for short-term,
or possibly long-term, borrowings.
Failure to Qualify. If the Company fails to qualify as a REIT for any
taxable year, and if certain relief provisions of the Code do not apply, it will
be subject to United States federal income tax (including applicable alternative
minimum tax) on its taxable income at regular corporate rates. Distributions to
shareholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. As a result, the
Company's failure to qualify as a REIT would reduce the cash available for
distribution by the Company to its shareholders. In addition, if the Company
fails to qualify as a REIT, all distributions to shareholders will be taxable as
ordinary income, to the extent of the Company's current and accumulated earnings
and profits. Subject to certain limitations of the Code, corporate distributees
may be eligible for the dividends received deduction.
If the Company's failure to qualify as a REIT is not due to reasonable
cause but results from willful neglect, the Company will not be permitted to
elect REIT status for the four taxable years after the taxable year for which
such disqualification is effective. In the event the Company were to fail to
qualify as a REIT in one year and subsequently requalify in a later year, the
Company might be required to recognize taxable income based on the net
appreciation in value of its assets as a condition to requalification. In the
alternative, the Company may be taxed on the net appreciation in value of its
assets if it sells properties within ten years of the date the Company
requalifies as a REIT under federal income tax laws.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and corporate shareholders will not be
eligible for the dividends received deductions as to such amounts. For purposes
of computing the Company's earnings and profits, depreciation for depreciable
real estate will be computed on a straight-line basis over a 40-year period.
Distributions that are properly designated as capital gain dividends will
be taxed as gains from the sale or exchange of a capital asset held for more
than one year (to the extent they do not exceed the Company's actual net capital
gain for the taxable year) without regard to the period for which the
shareholder has held its stock. However, corporate shareholders may be required
to treat up to 20% of certain capital gain dividends as ordinary income pursuant
to Section 291 of the Code. As described below in "-- Recent Legislation," the
1997 Act changed significantly the taxation of capital gains by taxpayers who
are individuals, estates, or trusts. It is not clear whether, for a taxable
domestic shareholder who is an individual or an estate or a trust, amounts
designated as capital gain dividends will be taxable at the rate applicable to
mid-term capital gains (i.e., gains from the sale of capital assets held for
more than one year but not more than 18 months) or at the rate applicable to
long-term capital gains (i.e., gains from the sale of capital assets held for
more than 18 months).
41
<PAGE> 50
This uncertainty may be clarified by future legislation or regulations.
Distributions in excess of current and accumulated earnings and profits will
constitute a non-taxable return of capital to a shareholder to the extent that
such distributions do not exceed the adjusted basis of the shareholder's shares,
and will result in a corresponding reduction in the shareholder's basis in the
shares. Any reduction in a shareholder's tax basis for its shares will increase
the amount of taxable gain or decrease the deductible loss that will be realized
upon the eventual disposition of the shares. The Company will notify
shareholders at the end of each year as to the portions of the distributions
which constitute ordinary income, capital gain or a return of capital. Any
portion of such distributions that exceed the adjusted basis of a shareholder's
shares will be taxed as capital gain from the disposition of shares, provided
that the shares are held as capital assets.
Aside from the different income tax rates applicable to ordinary income and
capital gain dividends, regular and capital gain dividends from the Company will
be treated as dividend income for most other United States federal income tax
purposes. In particular, such dividends will be treated as "portfolio" income
for purposes of the passive activity loss limitation with respect to
shareholders subject to such limitation (including all individuals) and
generally will not be able to be used to offset any "passive losses." Dividends
will be treated as investment income for purposes of the investment interest
limitation contained in Section 63(d) of the Code, which limits the
deductibility of interest expense incurred by noncorporate taxpayers with
respect to indebtedness attributable to certain investment assets.
In general, dividends paid by the Company will be taxable to shareholders
in the year in which they are received, except in the case of dividends declared
at the end of the year, but paid in the following January, as discussed above.
In general, a domestic shareholder will realize capital gain or loss on the
disposition of Lexington Common Stock equal to the difference between (i) the
amount of cash and the fair market value of any property received on such
disposition and (ii) the shareholder's adjusted basis of such Lexington Common
Stock. With respect to dispositions occurring after July 28, 1997, in the case
of a taxable domestic shareholder who is an individual or an estate or a trust,
such gain or loss will be mid-term capital gain or loss if such shares have been
held for more than one year but not more than 18 months and long-term capital
gain or loss if such shares have been held for more than 18 months. In the case
of a taxable domestic shareholder that is a corporation, such gain or loss will
be long-term capital gain or loss if such shares have been held for more than
one year. Loss upon a sale or exchange of Lexington Common Stock by a
shareholder who has held Lexington Common Stock for six months or less (after
applying certain holding period rules) will be treated as long-term capital loss
to the extent of the distribution from the Company required to be treated by
such shareholder as long-term capital gain.
Pursuant to the 1997 Act, for the Company's taxable years commencing on or
after January 1, 1998, the Company may elect to require the holders of Lexington
Common Stock to include the Company's undistributed net capital gains in their
income. If the Company makes such an election, the shareholders of Lexington
Common Stock will (i) include in their income as long-term capital gains their
proportionate share of such undistributed capital gains and (ii) be deemed to
have paid their proportionate share of the tax paid by the Company on such
undistributed capital gains and thereby receive a credit or refund for such
amount. A shareholder of Lexington Common Stock will increase the basis in its
Lexington Common Stock by the difference between the amount of capital gain
included in its income and the amount of the tax it is deemed to have paid. The
earnings and profits of the Company will be adjusted appropriately. As described
below in "-- Recent Legislation," with respect to such long-term capital gain of
a taxable domestic shareholder that is an individual or an estate or a trust,
the IRS has authority to issue regulations that could apply the special tax rate
applicable to sales of depreciable real property by an individual or an estate
or trust to the portion of the long-term capital gains of an individual or an
estate or trust attributable to deductions for depreciation taken with respect
to depreciable real property.
With respect to the Company's tax years beginning on and after January 1,
1998, if the Company elected to retain, rather than distribute, net long-term
capital, see "Treatment of the Company as a REIT -- Distribution Test," a
shareholder would (i) include in income its proportionate share of such
undistributed net long-term capital gain, (ii) be allowed a credit for its
proportionate share of the United States federal income
42
<PAGE> 51
tax paid by the Company, and (iii) increase its tax basis in its REIT shares by
the excess of its proportionate share of net long-term capital gain over its
proportionate share of the tax paid by the REIT.
TAXATION OF FOREIGN SHAREHOLDERS
The following discussion is only a summary of the rules governing United
States federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders (collectively,
"Non-U.S. Shareholders"). Non-U.S. Shareholders should consult with their own
tax advisors to determine the impact of United States federal, state and local
income and other tax laws with regard to ownership of shares of Lexington Common
Stock, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. Certain tax treaties limit
the extent to which dividends paid by a REIT can qualify for a reduction of the
withholding tax on dividends. The Company expects to withhold United States
income tax at the rate of 30% on the gross amount of any such dividends made to
a Non-U.S. Shareholder unless (i) a lower treaty rate applies and the
shareholder files an IRS Form 1001 or (ii) the Non-U.S. Shareholder files a
properly completed IRS Form 4224 with the Company claiming that the distribution
is effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade
or business. Distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a Non-U.S. Shareholder to the
extent that they do not exceed the adjusted basis of the Non-U.S. Shareholder's
shares, but rather will reduce the adjusted basis of such shares. To the extent
that such distributions exceed the adjusted basis of a Non-U.S. Shareholder's
shares, they will give rise to gain from the sale or exchange of its Lexington
Common Stock, the tax treatment of which is described below. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that the Company will be required to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or a lower applicable treaty rate) will
be subject to withholding at a rate of 10%. However, the Non-U.S. Shareholder
may seek a refund of such amounts from the IRS if it is subsequently determined
that such distribution was, in fact, in excess of current or accumulated
earnings and profits of the Company, and the amount withheld exceeded the
Non-U.S. Shareholder's United States tax liability, if any, with respect to the
distribution.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, a Non-U.S. Shareholder is taxed as if such gain were
effectively connected with a United States business. Non-U.S. Shareholders would
thus be taxed at the normal capital gain rates applicable to U.S. shareholders
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of non-resident alien individuals). Also, distributions subject
to FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not entitled to treaty relief. The Company is required by
applicable regulations to withhold 35% of any distribution that could be
designated by the Company as a capital gain dividend regardless of the amount
actually designated as a capital gain dividend. This amount is creditable
against the Non-U.S. Shareholder's FIRPTA tax liability.
Although the law is not entirely clear on this matter, it appears that
amounts designated by the Company pursuant to the 1997 Act as undistributed
capital gains in respect of shares of Lexington Common Stock (see "Taxation of
Shareholders -- Taxation of Taxable Domestic Shareholders" above) would be
treated with respect to Non-U.S. Shareholders in the manner outlined in the
preceding paragraph for actual distributions by the Company of capital gain
dividends. Under that approach, the Non-U.S. Shareholders would be able to
offset as a credit against their United States federal income tax liability
resulting therefrom their proportionate
43
<PAGE> 52
share of the tax paid by the Company on such undistributed capital gains (and to
receive from the IRS a refund to the extent their proportionate share of such
tax paid by the Company were to exceed their actual United States federal income
tax liability).
Gain recognized by a Non-U.S. Shareholder upon a sale of shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. It is anticipated that the Company will be a
"domestically controlled REIT;" therefore, the sale of shares will not be
subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
U.S. Shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and such gain is attributable to an office or
fixed place of business in the United States or such nonresident alien
individual has a "tax home" in the United States and such gain is not
attributable to an office or fixed place of business located outside the United
States or, if such gain is attributable to an office or fixed place of business
located outside the United States, it is not subject to foreign income tax equal
to at least 10% of such gain. If the gain on the sale of shares were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder will be subject to
the same treatment as U.S. Shareholders with respect to such gain (subject to
applicable alternative minimum tax, special alternative minimum tax in the case
of non-resident alien individuals and possible application of the 30% branch
profits tax in the case of foreign corporations) and the purchaser would be
required to withhold and remit to the IRS 10% of the purchase price.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from United States federal income taxation. However, they
are subject to taxation on their unrelated business taxable income ("UBTI").
While investments in real estate may generate UBTI, the Service has issued a
published ruling to the effect that dividend distributions by a REIT to an
exempt employee pension trust do not constitute UBTI, provided that the shares
of the REIT are not otherwise used in an unrelated trade or business of the
exempt employee pension trust. Based on that ruling and on the intention of the
Company to invest its assets in a manner that will avoid the recognition of UBTI
by the Company, amounts distributed by the Company to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
financed its acquisition of CRIT Shares with debt, a portion of its income from
the Company, if any, will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental employment benefit trusts, and qualified group legal
services plans that are exempt from taxation under paragraphs (7), (9), (17),
and (20), respectively, of Code Section 501(c) are subject to different UBTI
rules, which generally will require them to characterize distributions from the
Company as UBTI.
In addition, a pension trust that owns more than 10% of the Company is
required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage") in certain circumstances. The UBTI Percentage is the gross
income derived from an unrelated trade or business (determined as if the Company
were a pension trust) divided by the gross income of the Company for the year in
which the dividends are paid. The UBTI rule applies only if (i) the UBTI
Percentage is at least 5%, (ii) the Company qualifies as a REIT by reason of the
modification of the 5/50 Rule that allows the beneficiaries of the pension trust
to be treated as holding shares of the Company in proportion to their actuarial
interests in the pension trust, and (iii) either (A) one pension trust owns more
than 25% of the value of the Company's stock or (B) a group of pension trusts
individually holding more than 10% of the value of the Company's stock
collectively own more than 50% of the value of the Company's stock.
While ownership of Lexington Common Stock by an Exempt Organization
generally is not expected to result in UBTI except in the circumstances
described in the preceding paragraph, any gross UBTI that does arise from such
ownership will be combined with all other gross UBTI of the Exempt Organization
for a
44
<PAGE> 53
taxable year and reduced by all deductions attributable to the UBTI plus $1,000.
Any amount then remaining will constitute UBTI on which the Exempt Organization
will be subject to tax. If the gross income taken into account in computing UBTI
exceeds $1,000, the Exempt Organization is obligated to file a tax return for
such year on IRS Form 990-T. None of the Company, the Board of Directors, or any
of their Affiliates expects to undertake the preparation or filing of IRS Form
990-T for any Exempt Organization in connection with an investment by such
Exempt Organization in the Lexington Common Stock. Generally, IRS Form 990-T
must be filed with the Service by April 15 of the year following the year in
which it relates.
RECENT LEGISLATION
As discussed above, the 1997 Act contains certain changes to the REIT
qualification requirements and to the taxation of REITs. The 1997 Act also
contains certain changes to the taxation of capital gains of individuals, trusts
and estates.
Capital Gain Rates. Subject to certain exceptions, for individuals, trusts
and estates, the maximum rate of tax on the net capital gain from a sale or
exchange occurring after July 28, 1997 of a long-term capital asset (i.e., a
capital asset held for more than 18 months) has been reduced from 28% to 20%.
The maximum rate has been reduced to 18% for capital assets acquired after
December 31, 2000 and held for more than five years. The maximum rate for
mid-term capital assets (i.e., capital assets held for more than one year but
not more than 18 months) remains at 28%. The maximum rate for net capital gains
attributable to the sale of depreciable real property held for more than 18
months is 25% to the extent of the prior deductions for "unrecaptured Section
1250 gain" (that is depreciation deductions not otherwise recaptured as ordinary
income under the existing depreciation recapture rules). Capital gain from the
sale of depreciable real property held for more than 18 months allocated by the
Company to a non-corporate shareholder will be subject to the 25% rate to the
extent that the capital gain on the real property sold by the Company does not
exceed prior depreciation deductions with respect to such property. The 1997 Act
provides the IRS with authority to issue regulations that could, among other
things, apply these rates on a look-through basis in the case of "pass-through"
entities such as the Company. The taxation of capital gains of corporations was
not changed by the 1997 Act.
REIT Provisions. In addition to the provisions discussed above, the 1997
Act contains a number of technical provisions that either (i) reduce the risk
that the Company will inadvertently cease to qualify as a REIT, or (ii) provide
additional flexibility with which the Company can meet the REIT qualification
requirements. These provisions are effective for the Company's taxable years
commencing on or after January 1, 1998.
TAXATION OF REINVESTED DIVIDENDS
Those holders of shares of Lexington Common Stock who elect to participate
in the Company's dividend reinvestment plan will be deemed to have received the
gross amount of dividends distributed on their behalf by the plan agent as agent
for the participants in such plan. Such deemed dividends will be treated as
actual dividends to such shareholders by the Company and will retain their
character and have the tax effects as described above. Participants that are
subject to United States federal income tax will thus be taxed as if they
received such dividends despite the fact that their distributions have been
reinvested and, as a result, they will not receive any cash with which to pay
the resulting tax liability.
OTHER TAX CONSIDERATIONS
Entity Classification. A significant number of the Company's investments
are held through partnerships. If any such partnerships were treated as an
association, the entity would be taxable as a corporation and therefore would be
subject to an entity level tax on its income. In such a situation, the character
of the Company's assets and items of gross income would change and might
preclude the Company from qualifying as a REIT.
Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company was treated as a partnership for United States federal
income tax purposes rather than as an association taxable as
45
<PAGE> 54
a corporation only if it had no more than two of the four corporate
characteristics that the Treasury Regulations in effect at that time used to
distinguish a partnership from a corporation for tax purposes. These four
characteristics were (i) continuity of life, (ii) centralization of management,
(iii) limited liability and (iv) free transferability of interests. Under final
Treasury Regulations which became effective January 1, 1997, the four factor
test has been eliminated and an entity formed as a partnership or as a limited
liability company will be taxed as a partnership for United States federal
income tax purposes, unless it specifically elects otherwise. The Treasury
Regulations provide that the IRS will not challenge the classification of an
existing partnership or limited liability company for tax periods prior to
January 1, 1997 so long as (1) the entity had a reasonable basis for its claimed
classification, (2) the entity and all its members recognized the United States
federal income tax consequences of any changes in the entity's classification
within the 60 months prior to January 1, 1997, and (3) neither the entity nor
any member of the entity had been notified in writing on or before May 8, 1996,
that the classification of the entity was under examination by the IRS.
The Company believes that each partnership in which it holds an interest
(either directly or indirectly) is properly treated as a partnership for tax
purposes (and not as an association taxable as a corporation).
Tax Allocations with Respect to the Properties. When property is
contributed to a partnership in exchange for an interest in the partnership, the
partnership generally takes a carryover basis in that property for tax purposes
equal to the adjusted basis of the contributing partner in the property, rather
than a basis equal to the fair market value of the property at the time of
contribution (this difference is referred to as "Book-Tax Difference"). Special
rules under 704(c) of the Code and the regulations thereunder tend to eliminate
the Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed
properties in the hands of the partnership could cause the Company (i) to be
allocated lower amounts of depreciation and other deductions for tax purposes
than would be allocated to the Company if all properties were to have a tax
basis equal to their fair market value at the time the properties were
contributed to the partnership, and (ii) possibly to be allocated taxable gain
in the event of a sale of such contributed properties in excess of the economic
or book income allocated to the Company as a result of such sale.
TRUST AMENDMENT (PROPOSAL 2)
At the Meeting, CRIT shareholders will also be asked to consider and vote
on an amendment to the Declaration of Trust that will allow CRIT to merge into
or consolidate with any other corporation, association, partnership, trust,
limited liability company or other organization with the approval of a majority
of the CRIT Board and the affirmative vote of the holders of a majority of the
outstanding CRIT Shares entitled to vote thereon. Under Massachusetts law, in
order for a Massachusetts business trust to merge into or consolidate with an
unrelated entity, express authority must be contained in the business trust's
declaration of trust. CRIT's Declaration of Trust currently lacks such
authority; therefore, the passage of this amendment is necessary for the
proposed Merger to be consummated. Even if the proposed Merger were not approved
by shareholders or did not otherwise take place, approval of this amendment to
the Declaration of Trust would allow CRIT flexibility to undertake certain
transactions beneficial to its shareholders in the future in the event that the
Merger Proposal is not approved by CRIT shareholders. Under the Trust Amendment
Proposal any such future merger transaction would be subject to the approval of
a majority of the outstanding CRIT Shares entitled to vote.
The Declaration of Trust sets forth special voting requirements with
respect to, among other transactions, mergers with an "Acquiring Person" (as
defined in the Declaration of Trust). An Acquiring Person is a person or entity
who, together with its affiliates, and with any other person with whom it has an
agreement with respect to acquiring, holding, voting or disposing of CRIT
Shares, owns 8.5% or more of the outstanding CRIT Shares. In order to merge with
an Acquiring Person, the Declaration of Trust requires the affirmative vote of
not less than 80% of the outstanding CRIT Shares entitled to vote held by
shareholders other than an Acquiring Person. As of November 21, 1997, the
Company owned no CRIT Shares, which means the Company is not an Acquiring
Person, and such special voting provisions do not apply. Pursuant to the Trust
Amendment Proposal, if approved, the affirmative vote of the holders of a
majority of the outstanding CRIT
46
<PAGE> 55
Shares entitled to vote thereon will be required for the approval of the Merger
Proposal. THE CRIT BOARD HAS RESOLVED THAT THE TRUST AMENDMENT PROPOSAL IS
ADVISABLE AND IN THE BEST INTERESTS OF THE SHAREHOLDERS AND CRIT AND RECOMMENDS
THAT THE SHAREHOLDERS OF CRIT VOTE FOR ITS APPROVAL. The affirmative vote of the
holders of a majority of the outstanding CRIT Shares entitled to vote thereon is
required for the approval of the Trust Amendment Proposal.
INFORMATION REGARDING LEXINGTON PROPERTIES
THE COMPANY
The Company is a self-managed and self-administered REIT that acquires,
owns and manages a geographically diversified portfolio of net leased office,
industrial and retail properties. As of the date of this Proxy
Statement/Prospectus, the Company owns controlling interests in 46 Properties
and minority interests in two additional properties. The Properties, all of
which are 100% net leased, are located in 24 states, have approximately 6.9
million net rentable square feet and, under the terms of their applicable
leases, currently generate approximately $47.4 million in annualized base rent.
As of October 1, 1997, the Company's leases had a weighted average remaining
term of approximately 9.07 years (excluding renewal options). The Company's
tenants, a majority of which (based on annual rental revenue) have debt ratings
of investment grade and many of which are nationally recognized, include Bank
One, Arizona, N.A., Circuit City Stores, Inc., Lockheed Martin Corporation,
FirstPlus Financial Group, Inc., The Hartford Fire Insurance Company, Honeywell,
Inc., Northwest Pipeline Corporation, Ryder Integrated Logistics and Wal-Mart
Stores, Inc. The Company currently generates approximately 47%, 31% and 22% of
its annual rental revenues from office, industrial and retail properties,
respectively. Substantially all of the Company's leases are "net leases," under
which the tenant is responsible for all costs of real estate taxes, insurance,
ordinary maintenance and structural repairs. Management believes that owning,
acquiring and managing net leased properties results in lower operating expenses
for the Company than the Company otherwise would incur through investments in
properties which were not net leased. See "-- Properties."
The Company's senior executive officers average 17 years of experience in
the real estate investment and net lease business. Management has diversified
the Company's portfolio by geographical location, tenant industry segment, lease
term expiration and property type with the intention of providing steady
internal growth with low volatility. Management believes that such
diversification should help insulate the Company from regional recession,
industry specific downturns and price fluctuations by property type. Since
August 1, 1995, the Company has also enhanced the value of its portfolio by
acquiring $218.0 million of properties, aggregating 3,450,698 net rentable
square feet and accounting for approximately $26.5 million in annual net
effective rent. These properties include 100% interests in 21 Properties,
controlling interests in four Properties and minority interests in two
additional Properties. See "-- Completed Acquisitions." As part of management's
ongoing efforts, the Company expects to continue to effect portfolio and
individual property acquisitions and dispositions, expand existing Properties,
attract investment grade quality tenants, extend lease maturities in advance of
expiration and refinance outstanding indebtedness when advisable.
The Company commenced operations in 1993 as a REIT, with several operating
partnership subsidiaries. This operating partnership structure enables the
Company to acquire property by issuing to a seller, as a form of consideration,
interests ("OP Units") in the Company's subsidiary operating partnerships. The
OP Units are exchangeable, after certain dates, for shares of Lexington Common
Stock. Management believes that this structure facilitates the Company's ability
to raise capital and to acquire portfolio and individual properties by enabling
the Company to structure transactions which may defer tax gains for a
contributor of property while preserving the Company's available cash for other
purposes, including the payment of distributions. The Company has used OP Units
as a form of consideration in connection with the acquisition of 15 of the 27
Properties or interests therein acquired by the Company since August 1, 1995.
47
<PAGE> 56
THE NET LEASE REAL ESTATE BUSINESS
Under a typical net lease, the tenant is responsible for all costs of real
estate taxes, insurance and ordinary maintenance. Investments in net leased
properties can offer more predictable returns than investments in properties
which are not net leased, as rising costs of operating net leased properties are
typically absorbed by tenants. Investors in net leased properties have,
historically, included limited partnerships, REITs, pension funds and finance
subsidiaries of large corporations.
Net leased properties are often acquired in sale/leaseback transactions. In
a typical sale/leaseback transaction, the purchaser/landlord (such as the
Company) acquires a property from an operating company and simultaneously leases
the property back to the operating company under a long-term lease. A
sale/leaseback transaction is structured to provide the purchaser/landlord with
a consistent stream of income which typically increases periodically pursuant to
the lease. Sale/leaseback transactions are advantageous to the seller/tenant as
they (i) enable the seller/tenant to realize the value of its owned real estate
while continuing occupancy on a long-term basis; (ii) may provide the
seller/tenant with off-balance sheet financing; (iii) may provide the
seller/tenant with increased earnings by replacing generally higher depreciation
and mortgage interest costs with rental costs; and (iv) may reduce the
seller's/tenant's debt-to-equity ratio.
BUSINESS OBJECTIVES
The Company's primary objectives are to increase Funds From Operations and
cash available for distribution to its shareholders. Since 1995, management has
principally focused on:
- effectively managing existing assets through lease extensions, revenue
enhancing property expansions, opportunistic property sales and
redeployment of assets, when advisable;
- acquiring portfolio and individual net lease properties from third
parties, completing sale/leaseback transactions, acquiring build-to-suit
properties and acquiring properties from affiliated net lease
partnerships; and
- refinancing existing indebtedness at lower average interest rates and
increasing the Company's access to capital to finance property
acquisitions and expansions.
INTERNAL GROWTH; EFFECTIVELY MANAGING ASSETS
Tenant Relations and Lease Compliance. The Company maintains close contact
with its tenants in order to understand their future real estate needs. The
Company monitors the financial, property maintenance and other lease obligations
of its tenants through a variety of means, including periodic reviews of
financial statements and physical inspections of the Properties. The Company
performs annual inspections of those Properties where it has an ongoing
obligation with respect to the maintenance of the Property and for all
Properties during each of the three years immediately prior to lease expiration.
Biannual physical inspections are undertaken for all other Properties.
Extending Lease Maturities. The Company seeks to extend its leases in
advance of their expiration in order to maintain a balanced lease rollover
schedule. Since February 1994, the Company has entered into lease extensions of
three years or more on ten of its Properties.
Revenue Enhancing Property Expansions. The Company undertakes expansions
of its Properties based on tenant requirements. The Company believes that
selective property expansions can provide it with attractive rates of return and
actively seeks such opportunities.
Property Sales and Redeployment of Assets. The Company may determine to
sell a Property, either to the Property's existing tenant or to a third party,
if it deems such disposition to be in the Company's best interest. As of
September 30, 1997, the Company had sold two Properties. The restrictions
applicable to REITs may limit the Company's ability to dispose of a property.
See "Federal Income Tax Considerations -- Treatment of the Company as a
REIT -- Income Tests" in the accompanying Proxy Statement/Prospectus.
48
<PAGE> 57
ACQUISITION STRATEGIES
The Company seeks to enhance its net lease property portfolio through
acquisitions of general purpose, efficient, well located buildings in growing
markets. Management has diversified the Company's portfolio by geographical
location, tenant industry segment, lease term expiration and property type with
the intention of providing steady internal growth with low volatility.
Management believes that such diversification should help insulate the Company
from regional recession, industry specific downturns and price fluctuations by
property type. Prior to effecting any acquisitions, management analyzes the (i)
property's design, construction quality, efficiency, functionality and location
with respect to the immediate submarket, city and region; (ii) lease integrity
with respect to term, rental rate increases, corporate guarantees and property
maintenance provisions; (iii) present and anticipated conditions in the local
real estate market; and (iv) prospects for selling or re-leasing the property on
favorable terms in the event of a vacancy. Management also evaluates each
potential tenant's financial strength, growth prospects, competitive position
within its respective industry and a property's strategic location and function
within a tenant's operations or distribution systems. Management believes that
its comprehensive underwriting process is critical to the assessment of
long-term profitability of any investment by the Company.
Operating Partnership Structure. The operating partnership structure
enables the Company to acquire property by issuing to a seller, as a form of
consideration, OP Units. Management believes that this structure facilitates the
Company's ability to raise capital and to acquire portfolio and individual
properties by enabling the Company to structure transactions which may defer tax
gains for a contributor of property while preserving the Company's available
cash for other purposes, including the payment of distributions. The Company has
used OP Units as a form of consideration in connection with the acquisition of
15 of the 27 Properties or interests therein acquired by the Company since
August 1, 1995.
Acquisitions of Portfolio and Individual Net Lease Properties. The Company
seeks to acquire portfolio and individual properties that are leased to
creditworthy tenants under long-term net leases. Management believes there is
significantly less competition for the acquisition of property portfolios
containing a number of net leased properties located in more than one geographic
region. Management also believes that the Company's geographical
diversification, acquisition experience and access to capital will allow it to
compete effectively for the acquisition of such net leased properties.
Sale/Leaseback Transactions. The Company seeks to acquire portfolio and
individual net lease properties in sale/leaseback transactions. The Company
selectively pursues sale/leaseback transactions with creditworthy
sellers/tenants with respect to properties that are integral to the
sellers'/tenants' ongoing operations. See "-- The Net Lease Real Estate
Business."
Build-To-Suit Properties. The Company may also acquire, after construction
has been completed, "build-to-suit" properties that are entirely pre-leased to
their intended corporate users before construction. As a result, the Company
does not assume the risk associated with the construction phase of a project.
Acquisitions from Affiliated Net Lease Partnerships. Management believes
that net lease partnerships affiliated with the Company provide it with an
opportunity to acquire properties with which management is already familiar. The
Company has acquired ten Properties and minority interests in two additional
Properties from its affiliated limited partnerships since August 1995.
REFINANCING EXISTING INDEBTEDNESS AND INCREASING ACCESS TO CAPITAL
As a result of the Company's financing activities, the weighted average
interest rate on the Company's outstanding indebtedness has been reduced from
approximately 10.0% as of December 31, 1994 to approximately 8.4% as of
September 30, 1997. In addition, management is constantly pursuing opportunities
to increase the Company's access to public and private capital in order to
achieve maximum operating flexibility.
49
<PAGE> 58
COMPLETED ACQUISITIONS
Since August 1, 1995, the Company has acquired $218.0 million of
properties, aggregating 3,450,698 net rentable square feet and accounting for
approximately $26.5 million in annual net effective rent. These properties
include 100% interests in 21 Properties, controlling interests in four
Properties and minority interests in two additional properties. The following
chart sets forth certain information regarding such properties.
<TABLE>
<CAPTION>
NET
RENTABLE ACQUISITION NET EFFECTIVE
SQUARE ACQUISITION COST RENT AT LEASE
TENANT LOCATION FEET DATE (IN MILLIONS)(1) OCTOBER 1, 1997(2) EXPIRATION
- ----------------------------- -------------------- --------- ----------- ---------------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Northwest Pipeline
Corporation(3)............. Salt Lake City, UT 295,000 05/96 $ 55.392 $ 8,571,292 09/30/09
FirstPlus Financial Group,
Inc. ...................... Dallas, TX 247,968 09/97 32.600 3,223,584 08/31/12
Lockheed Martin Corp. ....... Marlborough, MA 126,000 07/97 15.500 1,671,292 12/17/06
Exel Logistics, Inc. ........ New Kingstown, PA 330,000 03/97 12.200 1,139,496 11/30/06
Bull HN Software............. Phoenix, AZ 137,058 07/97 10.904 972,118 10/10/05
Liberty House, Inc.(3)....... Honolulu, HI 85,610 12/96 10.519 962,981 09/30/09
Ryder Integrated Logistics... Waterloo, IA 276,480 10/97 9.300 890,671 07/31/12
Exel Logistics, Inc. ........ Mechanicsburg, PA 252,000 03/97 9.000 845,242 11/30/06
Hechinger Property
Co.(3)(4).................. Bethesda, MD 95,000 08/95 N/A 772,383 04/30/06
Cymer, Inc. ................. Rancho Bernardo, CA 65,755 05/97 7.725 755,294 01/01/10
Federated Dept. Stores,
Inc.(3).................... Laguna Hills, CA 160,000 08/95 4.528 676,601 01/31/06
Johnson Controls, Inc. ...... Plymouth, MI 134,160 12/96 6.296 648,804 12/22/06
Scandinavian Health Spa,
Inc. ...................... Canton, OH 37,214 12/95 4.410 612,692 12/31/08
Exel Logistics, Inc. ........ New Kingstown, PA 179,200 03/97 5.900 552,203 11/30/06
Johnson Controls, Inc. ...... Oberlin, OH 111,160 12/96 4.765 491,042 12/22/06
GFS Realty, Inc. ............ Oxon Hill, MD 107,337 08/95 2.534 408,360 02/29/04
Mervyn's(4).................. Bakersfield, CA 122,000 08/95 N/A 406,948 12/31/02
Toys "R" Us, Inc.(3)......... Houston, TX 123,293 12/96 3.753 400,200 08/31/06
Toys "R" Us, Inc.(3)......... Clackamas, OR 42,842 12/96 3.135 382,783 05/31/06
Toys "R" Us, Inc.(3)......... Lynwood, WA 43,105 12/96 2.928 357,331 05/31/06
Toys "R" Us, Inc.(3)......... Tulsa, OK 43,123 12/96 2.679 326,925 05/31/06
SKF USA, Inc. ............... Franklin, NC 72,868 12/96 3.413 322,397 12/31/14
Johnson Controls, Inc. ...... Cottondale, AL 58,800 02/97 2.900 288,608 02/18/07
Wal-Mart Stores, Inc. ....... Riverdale, GA 81,911 12/95 2.596 269,770 01/31/11
GFS Realty, Inc.(3).......... Rockville, MD 51,682 08/95 1.726 224,016 02/28/05
Montgomery Ward & Co.,
Inc.(3).................... Brownsville, TX 115,000 08/95 1.242 152,760 10/31/04
Wal-Mart Stores, Inc. ....... Jacksonville, AL 56,132 02/96 2.050 146,040 01/31/09
---------- -------- -----------
Total: 3,450,698 $217.995 $ 26,471,833
========== ======== ===========
</TABLE>
- ---------------
(1) Represents total capitalized cost for such acquisitions, including
transaction expenses and assumed debt.
(2) "Net Effective Rent" means the annual rent in effect as of October 1, 1997
and is calculated by multiplying monthly rent in effect as of October 1,
1997 by 12. The amounts do not include percentage rents (i.e. additional
rent calculated as a percentage of the tenant's gross sales above a
specified level), if any, that may be payable under leases covering certain
of the Properties or Consumer Price Index ("CPI") adjustments. The Net
Effective Rent amount shown for the Ryder Property is as of November 1,
1997.
(3) The Company holds leasehold interests in the land on which these buildings
are situated. The Company owns in fee simple the land on which all other
listed buildings are situated.
50
<PAGE> 59
(4) The Company holds 33.85% and 19% of the limited partnership interests in the
limited partnerships that, respectively, own the properties in Bethesda, MD
and Bakersfield, CA.
LEASEHOLD INTERESTS
The following table sets forth material terms of leasehold interests held
by the Company.
<TABLE>
<CAPTION>
LAND AREA
(ACRES)/NET GROUND LEASE BASE (RENEWAL
RENTABLE TERM AND ANNUAL RENTS PER NET OPTIONS) TERM
TENANT AND PROPERTY LOCATION SQUARE FEET RENTABLE SQUARE FEET PER OPTION
- ----------------------------------- ----------- ------------------------------ -------------
<S> <C> <C> <C>
Northwest Pipeline Corporation..... 19.79/ 01/79-09/18 (1) 10 year
295 Chipeta Way 295,000 09/82-09/18: $100,392 plus CPI
Salt Lake City, UT adjustment every 3 years
Hechinger Property Company......... 7.61/ 06/80-12/10 (8) 5 year
7111 Westlake Terrace 95,000 06/80-12/10: $0.00
Bethesda, MD
Federated Department Stores, 11.00/ 04/74-04/14 (4) 15 year
Inc..............................
24100 Laguna Hills Mall 160,000 04/74-04/14: $1.00/YR
Laguna Hills, CA
Toys "R" Us, Inc................... 7.56/ Exp. 08/11 (1) 50 year
West Wingfoot Road 123,293 $0.00
Houston, TX
Toys "R" Us, Inc................... 5.85/ Exp. 07/11 (1) 50 year
12535 SE 82nd Avenue 42,842 $0.00
Clackamas, OR
Toys "R" Us, Inc................... 3.64/ Exp. 07/11 (1) 50 year
18601 Alderwood Mall Blvd. 43,105 $0.00
Lynwood, WA
Toys "R" Us, Inc................... 4.44/ Exp. 07/11 (1) 50 year
6910 S. Memorial Highway 43,123 $0.00
Tulsa, OK
GFS Realty, Inc.................... 7.32/ 06/77-06/17 (4) 10 year
Rockshire Village Center 51,682 07/87-12/97: $0.18
West Ritchie Parkway 12/97-12/07: $0.18 plus CPI
Rockville, MD adjustment
12/07-06/17: $0.18 plus CPI
adjustment
Montgomery Ward Co., Inc........... 7.61/ 12/72-11/04 (6) 5 year
Amigoland Shopping Center 115,000 12/72-11/04: $20,000/YR
Mexico St. and Palm Blvd.
Brownsville, TX
</TABLE>
RECENT ACTIVITIES
General Motors Corporation; Auburn Hills, Michigan. In November 1997 the
Company signed a contract to purchase an office/industrial facility in Auburn
Hills, Michigan for approximately $13.875 million. The property is leased to
General Motors Corporation. The lease will commence at the completion of the
current expansion to 184,106 square feet, anticipated in July 1998 and run for
eight years with one five-year renewal option. The annual net effective rent for
the first four years is $1,326,998 and will increase by 6% in the fifth year.
RECENT ACQUISITIONS
Ryder Integrated Logistics; Waterloo, IA. In October 1997, the Company
acquired a newly constructed 276,480 square foot, build-to-suit,
warehouse/distribution facility in Waterloo, Iowa (the "Ryder Property") for
approximately $9.3 million. The Ryder Property is 100% net leased to Ryder
Integrated Logistics, a wholly owned subsidiary of Ryder Systems, Inc. under a
net lease which expires in 2012. The acquisition was financed
51
<PAGE> 60
by a draw-down from the Credit Facility. The current annual net effective rent
is $890,671, or 9.6% of the purchase price, which will escalate at the end of
the fifth year of the lease to an annual net effective rent of $997,552 and at
the end of the tenth year to an annual net effective rent of $1,117,258. Rent
payments for the Ryder Property are guaranteed by the tenant's parent, Ryder
Systems, Inc. The average annual net effective rent payable during the lease
term is $1,003,713.
FirstPlus Financial Group, Inc.; Dallas, TX. In September 1997, the
Company acquired a 248,000 square foot eight-story Class A office building (the
"FirstPlus Property") in the Stemmons Freeway submarket of Dallas, Texas for
$32.6 million. The FirstPlus Property is leased to FirstPlus Financial Group,
Inc. under a net lease which expires in August 2012. The acquisition was
financed with the proceeds from the sale of the Stratus Computer Property and by
a draw-down on the Credit Facility. The current annual net effective rent on the
FirstPlus Property is $3,223,584. The tenant has posted a letter of credit in
the amount of one year's rent as security for the lease which will remain
outstanding for up to five years. The average annual net effective rent payable
on the FirstPlus Property during the lease term is $3,356,688.
Lockheed Martin Corporation; Marlborough, MA. In July, 1997, the Company
acquired a two-story 126,000 square foot office/research and development
facility in Marlborough, Massachusetts (the "Lockheed Martin Property") for
$15.5 million. The Lockheed Martin Property is leased to Lockheed Martin
Corporation under a net lease which expires in December 2006. The original lease
with Honeywell, Inc., was assigned to Lockheed Martin Corporation. However,
Honeywell, Inc. remains fully obligated under the terms of the lease. The
acquisition was financed with $5.5 million drawn from the Company's Credit
Facility and $10.0 million in cash. The current annual net rent is $1,671,292
and will increase in December 2001 by 75% of the cumulative increase in the CPI
for the preceding 60 months.
Bull HN Information Systems, Inc.; Phoenix, AZ. In July, 1997, the Company
acquired a 137,058 square foot office building in Phoenix, Arizona (the "Bull
Property") for approximately $10.9 million. The Bull Property is leased to Bull
HN Information Systems, Inc. under a net lease which expires in October 2005.
The acquisition was financed with approximately $600,000 in a promissory note
issued to the seller, the assumption of approximately $5.9 million of mortgage
indebtedness (which bears interest at 8.12%), a credit received by the Company
for the transfer of an existing security deposit of approximately $1.0 million
and cash of approximately $3.4 million. The current annual net effective rent on
the Bull Property is $972,118. The average annual net effective rent payable
during the lease term is $1,028,260.
Cymer, Inc.; Rancho Bernardo, CA. In May 1997, the Company acquired a
65,755 square foot office/ research and development facility in Rancho Bernardo,
California for approximately $7.7 million. The Property is currently leased to
Cymer, Inc. under a net lease which expires on January 1, 2010. The acquisition
was financed with cash proceeds from the sale of Convertible Preferred Stock.
See "-- Financing Activities." The lease provides for current annualized base
rent payments (including a management fee) of $736,872, which will increase to
$755,294 on June 1, 1997 and by approximately 5% every two years thereafter. The
average annual net rent payable during the lease term is $860,419, or
approximately 11.1% of the purchase price.
Exel Logistics, Inc.; PA. In March 1997, the Company acquired the Exel
Pennsylvania Properties, totaling 761,200 net rentable square feet, for $27.0
million. The Exel Pennsylvania Properties are all 100% leased to Exel Logistics,
Inc. under net leases which expire in November 2006. The acquisition was
financed with net proceeds of approximately $24.1 million from the sale of the
Exchangeable Notes and the balance of approximately $2.9 million in cash.
Current annualized base rent payments under the leases total approximately $2.5
million.
The average annual net rent payable during the terms of the leases is
approximately $3.0 million or approximately 11.1% of the purchase price.
Johnson Controls, Inc.; Alabama. In February 1997, the Company acquired a
58,800 square foot industrial property in Cottondale, Alabama for approximately
$2.9 million. The Cottondale Property is leased to Johnson Controls, Inc. under
a net lease which expires in February 2007. The acquisition was financed
52
<PAGE> 61
entirely with borrowings under the Credit Facility. The current annualized base
rent is $288,608 and increases annually by three times the percentage change in
the Consumer Price Index ("CPI"), not to exceed 4.5%.
RECENT DISPOSITION
Stratus Computer, Inc.; Marlborough, MA. In September 1997, the Company
sold its property leased to Stratus Computer, Inc. in Marlborough, Massachusetts
for $21.4 million The Company realized net cash proceeds of approximately $9.3
million from the sale after repaying a first mortgage loan and a related
prepayment penalty. The property was encumbered by a first mortgage loan with a
balance of $9.97 million. In connection with the loan repayment, the Company
paid a prepayment premium of $1.9 million. As a result of the sale, the Company
recognized a gain of approximately $3.5 million.
FINANCING ACTIVITIES
Public Offerings of Lexington Common Stock. In November 1997, the Company
completed an offering of 2,500,000 shares of Lexington Common Stock at a price
of $14.25 per share, less underwriting discounts and commissions. Proceeds of
the offering, net of underwriting fees and offering costs, amounted to $33.3
million, which were used to repay debt and for general corporate purposes. In
July 1997, the Company completed an offering of 3,220,000 shares of Lexington
Common Stock(including 420,000 shares sold in July, 1997 upon exercise of the
underwriter's over-allotment option) at a price of $13.75 per share, less
underwriting discounts and commissions. Proceeds of the offering, net of
underwriting fees and offering costs, amounted to $40.984 million, which were
used to repay debt, and the balance was used for other general corporate
purposes.
Salt Lake City Refinancing. In May 1997, the Company completed the
refinancing of a $22.1 million mortgage (the "Refinanced Amount") secured by its
Property in Salt Lake City, Utah (the "Salt Lake City Refinancing"). The Company
borrowed approximately $24.25 million to effect the Salt Lake City Refinancing,
with excess proceeds used to pay debt restructuring and transaction costs and
for general corporate purposes. The Salt Lake City Refinancing reduced the
stated interest rate on the Refinanced Amount from 12.9% to 7.61% per annum,
and, commencing January 1, 1998, will reduce the Company's annual debt service
payments by approximately $1.35 million. See "Indebtedness of the Company."
Partnership Merger. In March 1997, in connection with the acquisition of
the Exel Pennsylvania Properties, an unaffiliated partnership (the "Exel
Partnership"), merged into Lepercq Corporate Income Fund L.P. ("LCIF"). As a
result of the merger, LCIF issued 480,028 OP Units (the "Exel Partnership OP
Units") exchangeable beginning in April 1999 for shares of Lexington Common
Stock, to the former partners of the Exel Partnership. The Exel Partnership OP
Units are entitled to distributions at the same rate as shares of Lexington
Common Stock. At the time of the merger, the Exel Partnership's sole assets
consisted of approximately $6.0 million in cash and the right to acquire the
Exel Pennsylvania Properties in a tax-free exchange under the Code.
Sale of Exchangeable Notes. In March 1997, in connection with the
acquisition of the Exel Pennsylvania Properties, LCIF issued and sold $25
million aggregate principal amount of its 8.0% Exchangeable Redeemable Secured
Notes (the "Exchangeable Notes") to an institutional investor in a private
placement. The Exchangeable Notes bear interest at a rate of 8.0% per annum and
mature in March 2004. The Exchangeable Notes are secured by first mortgage liens
on the Exel Pennsylvania Properties, are fully guaranteed by the Company and can
be exchanged by the holders thereof for shares of Lexington Common Stock at $13
per share beginning in the year 2000, subject to adjustment. The Exchangeable
Notes require interest only payments semi-annually in arrears and may be
redeemed at the Company's option after three years at a price of 103.2% of the
principal amount thereof, declining to par after five years. In connection with
the sale of the Exchangeable Notes, the Company entered into certain related
agreements providing for, among other things, certain demand and piggyback
registration rights to the initial purchaser of the Exchangeable Notes. The
Exchangeable Notes are subordinated in right of payment to the Company's
obligations under the Credit Facility (as defined below).
53
<PAGE> 62
Credit Facility. In February 1997, the Company's secured revolving credit
facility (the "Credit Facility") was amended to extend the maturity to June 1999
and to increase the maximum borrowing availability to $60 million. The Credit
Facility is currently secured by first mortgage liens on seven Properties; bears
interest at 150 basis points (equivalent to 1.5%) over the London Inter-Bank
Offered Rate ("LIBOR") and has an interest period of one (1), three (3) or six
(6) months, at the option of the Company. As of the date of this Proxy
Statement/Prospectus, the Company has selected a one month interest period. As
of September 30, 1997, the aggregate amount outstanding under the Credit
Facility was approximately $28.5 million, with an interest rate thereon of
approximately 7.18%. The Credit Facility contains various leverage, debt service
coverage, net worth maintenance and other customary covenants. See "Indebtedness
of the Company."
Sale of Convertible Preferred Stock. In December 1996, the Company entered
into an agreement with Five Arrows Realty Services L.L.C. ("Five Arrows")
providing for the sale of up to 2,000,000 shares of Convertible Preferred Stock
(the "Investment Agreement"). Under the terms of the Investment Agreement, the
Company may sell the Convertible Preferred Stock to Five Arrows at up to three
closings, at the Company's option, during 1997 for an aggregate price of
approximately $25 million. The Convertible Preferred Stock, which is convertible
into Lexington Common Stock on a one-for-one basis at $12.50 per share, subject
to adjustment, is entitled to quarterly distributions equal to the greater of
$.295 or the product of 1.05 and the per share quarterly distribution on
Lexington Common Stock. The Convertible Preferred Stock may be redeemed by the
Company after five years at a 6% premium over the liquidation preference of
$12.50 per share (plus accrued and unpaid dividends), with such premium
declining to zero on or after December 31, 2011. Each share of Convertible
Preferred Stock is entitled to one vote per share and holders will be entitled
to vote on all matters submitted to a vote of holders of outstanding Lexington
Common Stock. In connection with such sale, the Company has entered into certain
related agreements with Five Arrows, providing, among other things, for certain
demand and piggyback registration rights with respect to such shares and the
right to designate a member or members of the Board of Directors under certain
circumstances.
As of October 1, 1997, two closings under the Investment Agreement have
taken place. On January 21, 1997, the Company sold 700,000 shares of Convertible
Preferred Stock to Five Arrows and used the proceeds of approximately $8.8
million primarily to repay in full approximately $8.5 million of outstanding
mortgage indebtedness (including related prepayment premiums) on Properties
located in Tulsa, Oklahoma; Clackamas, Oregon; Lynwood, Washington; and Houston,
Texas. Such mortgage indebtedness bore interest at 12.625% per annum and would
have required interest and principal payments of approximately $1.5 million in
1997. On April 28, 1997, the Company sold an additional 625,000 shares of
Convertible Preferred Stock to Five Arrows and used the proceeds of
approximately $7.8 million to acquire a Property in Rancho Bernardo, California.
Pursuant to the Investment Agreement, the Company may sell an additional 675,000
shares of Convertible Preferred Stock for a sale price of $8.5 million before
December 31, 1997.
POTENTIAL ACQUISITIONS FROM AFFILIATES
The Company has been granted an option (the "Option") by The LCP Group,
L.P. ("LCP"), an affiliate of E. Robert Roskind, Chairman of the Board of
Directors and Co-Chief Executive Officer of the Company, exercisable at any
time, to acquire general partnership interests ("General Partnership Interests")
currently owned by LCP in two limited partnerships, Net 1 L.P. and Net 2 L.P.
(together, the "Net Partnerships"), which own net leased office, industrial and
retail properties. The Net Partnerships own a total of 61 single-tenant
properties located in 16 states which contain approximately 1.4 million net of
rentable square feet. The tenants of such properties include Alco Standard
Corporation, Ameritech Services, Honeywell, Inc. and Wal-Mart Stores, Inc. Under
the terms of the Option, the Company, subject to review of any such transaction
by the independent members of its Board of Directors, may acquire the General
Partnership Interests at their fair market value based upon a formula relating
to partnership cash flows, with the Company retaining the option of paying such
fair market value in securities of the Company, OP Units, cash or a combination
thereof. The Company has not yet determined whether to exercise the Option.
54
<PAGE> 63
ROSS STORES LITIGATION
Ross Stores Litigation. Ross Stores, the tenant of the Company's Ross
Stores Newark Property, has exercised an option in the lease to purchase the
Ross Stores Newark Property for its fair market value, which was determined by
arbitration based on estimates of fair market value submitted by Ross Stores and
the Company. Under the terms of the arbitration, the arbitrator was required to
select the submission of either the Company or Ross Stores, whichever more
closely approximated the arbitrator's own opinion of fair market value, and was
not permitted any discretion to select another valuation. The opinion of value
selected by the arbitrator is deemed the purchase price. The estimate of the
fair market value of the Ross Stores Newark Property submitted by Ross Stores
more closely approximated the arbitrator's opinion of value and, accordingly was
selected by the arbitrator and confirmed by the Superior Court of the State of
California for San Francisco County. The arbitrator's opinion of value was based
on numerous factors, including current and future market rental rates, the
length of the Ross Stores Newark Property lease, the creditworthiness of Ross
Stores and rates of return required by investors who acquire similar properties.
The arbitration decision would have allowed Ross Stores to purchase the Ross
Stores Newark Property for $24.8 million on or about September 1, 1997. The
Company has appealed the state court decision which has resulted in a stay of
Ross Stores' exercising its purchase right. The outcome of such appeal cannot be
determined at this time. If the Company is successful on its appeal, the parties
will go back to the arbitration process and await a new opinion of value. On
August 26, 1997 the court ruled in favor of a motion made by Ross Stores to
require the Company to post a bond equivalent to one year's rent, in the amount
of approximately $3.4 million securing Lexington's potential reimbursement of
Ross Stores for rental payments made following September 1, 1997 in the event
that the sale was deemed to be consummated as of such date. The Company has
posted the bond at a cost of approximately $17,000. The net book value of the
Ross Stores Newark Property at September 30, 1997 was $25.0 million, which
includes approximately $1.5 million of deferred rent and deferred expenses
related to the Company's refinancing of certain properties, which were allocated
to the Ross Stores Newark Property. If the Company does not prevail on its
appeal of the California state court decision, the potential loss on the sale of
the Ross Stores Newark Property as of September 1, 1997 would have been
approximately $400,000, after the write-off of $515,000 of deferred financing
expenses. Subject to the approval of the trustee under the REMIC trust, the
Company is permitted to substitute another property into the REMIC Financing
pool in place of the Ross Stores Newark Property. In the event the Company is
unable to complete such substitution, the Company would be required to repay
approximately $19.6 million of the REMIC Financing and would incur a prepayment
premium of approximately $750,000. As of October 1, 1997, the annualized base
rent for the Ross Stores Newark Property is approximately $3.4 million. Revenue
derived from the Ross Stores Newark Property accounted for approximately 10% and
7.4% of the Company's consolidated rental revenue for 1996 and for the nine
months ended September 30, 1997, respectively. Unless offset by other revenue
sources, the loss of such annual rental revenue from the Ross Stores Newark
Property will negatively affect the Company's results of operations. See "Risk
Factors -- Dependence on Major Tenants" and "Risk Factors -- Adverse Effects of
Ross Stores Litigation" in the accompanying Proxy Statement/Prospectus.
Reorganization Of The Company As A Maryland Real Estate Investment Trust
The Company is currently incorporated under the laws of the State of
Maryland, but intends to reorganize as a Maryland REIT in early 1998 (which has
not occurred as of the date of this Proxy). The reorganization is expected to
result in franchise tax savings for the Company in certain jurisdictions in
which the Company owns properties. The reorganization will be effected by
merging the Company with and into a newly formed Maryland REIT. In the merger,
each outstanding share of Lexington Common Stock and Convertible Preferred Stock
of the Company will be converted into one common share of beneficial interest or
preferred share of beneficial interest, as the case may be, of the Maryland
REIT. Each common or preferred share of beneficial interest in the Maryland REIT
will entitle the holder thereof to the same voting rights to which such
shareholder was entitled prior to the merger, and it will not be necessary for
shareholders of the Company to surrender or exchange their existing stock
certificates for new certificates of the Maryland REIT. The Board of Directors
does not believe that the reorganization will result in any material change in
the Company's business or operations, or otherwise have any affect on the
Company's financial statements. Upon effectiveness of the merger, the Company
will be known as Lexington Corporate Properties Trust.
55
<PAGE> 64
The Company believes that the Merger will be treated for United States
federal income tax purposes as a reorganization within the meaning of Section
368(a)(1)(F) of the Code. Accordingly, holders of shares of Lexington Common
Stock and Convertible Preferred Stock will not recognize any gain or loss for
United States federal income tax purposes as a result of the conversion of their
shares into shares of the Maryland REIT. For United States federal income tax
purposes, a holder's aggregate basis in the shares of the Maryland REIT received
in the merger will equal such holder's adjusted basis in the shares converted
therefor and such holder's holding period for the new shares received in the
merger will include such holder's holding period in the shares converted
therefor. In addition, the Company will not recognize any gain or loss for
United States federal income tax purposes upon the transfer of its property to
the Maryland REIT pursuant to the merger. Holders of shares of Lexington Common
Stock should consult their own tax advisers as to the application and effect of
United States federal, state, local and foreign income and other tax laws to the
conversion of their shares of Lexington Common Stock or Convertible Preferred
Stock into shares of the Maryland REIT in the merger. See "The Merger -- Certain
United Stated Federal Income Tax Consequences."
ORGANIZATIONAL STRUCTURE
The chart set forth below provides information with regard to certain
property-holding affiliates of the Company as of the date of this Proxy
Statement/Prospectus.
DISTRIBUTIONS OF OP UNITS
The Company's operating partnership structure enables the Company to
acquire property by issuing to a seller, as a form of consideration, OP Units.
All of such OP Units are exchangeable, after certain dates, for shares of
Lexington Common Stock on a one-for-one basis and all of such interests require
the Company to pay certain distributions to the holders thereof. As a result,
the Company's cash available for distribution to holders of Lexington Common
Stock and Convertible Preferred Stock is reduced by the amount of the
distributions required by the terms of such OP Units, and the number of shares
of Lexington Common Stock that will be outstanding in the future should be
expected to increase, from time to time, as such OP Units and shares of
Convertible Preferred Stock are converted into shares of Lexington Common Stock.
The table set forth below provides certain information with respect to such OP
Units as of September 30, 1997.
The general partner of each of the limited partnerships has the right to
redeem the OP Units held by all, but not less than all, of the limited partners
under certain circumstances, including but not limited to a merger,
56
<PAGE> 65
sale of assets or other transaction by the Company or such partnerships which
would result in a change of beneficial ownership in the Company or such
partnership by 50% or more.
<TABLE>
<CAPTION>
CONVERTIBLE
CURRENT INTO SHARES
NUMBER OF ANNUALIZED TOTAL OF COMMON UNITS
UNITS PER UNIT ANNUALIZED STOCK OWNED BY
PARTNERSHIP ISSUED DISTRIBUTION DISTRIBUTIONS COMMENCING: AFFILIATES(1)
- --------------------------------- --------- ------------ ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
LCIF Special Limited Partners.... 112,229 $ 1.16(2) $ 130,186 At any time 85,933
LCIF II Special Limited
Partners....................... 56,880 1.16(2) 65,981 At any time 44,598
Barngiant Livingston............. 52,335 0.27(3) 14,130 03/04 1,593
Barnhale Modesto................. 23,267 0(3) N/A 02/06 1,743
Barnes Rockshire................. 36,825 0(3) N/A 03/05 1,933
Barnvyn Bakersfield.............. 7,441 0(3) N/A 01/03 978
Barnhech Montgomery.............. 11,766 0.29(3) 3,412 05/06 695
Barnward Brownsville............. 35,400 0(3) N/A 11/04 2,856
Red Butte Creek Associates....... 1,715,294 0.66(4) 1,132,094 05/98 6,540
114,006 1.08(5) 123,126 05/98 114,006
Toy Properties Associates II..... 94,999 1.12(6) 106,398 01/99 23,088
Toy Properties Associates V...... 34,988 1.12(6) 39,186 01/99 11,797
Fort Street Partners............. 207,728 0(7) N/A 01/06 416
17,259 1.12(6) 19,330 01/99 17,259
Exel Partnership................. 480,028 1.16(2) 556,832 04/99 --
--------- ------------- --------------
3,000,445 $ 2,190,675 313,435
======== ========= =========
</TABLE>
- ---------------
(1) Represents OP Units owned by affiliates of the Company: Richard J. Rouse, E.
Robert Roskind (each a member of the Board of Directors and Co-Chief
Executive Officer of the Company), The LCP Group, L.P. and its affiliates.
(2) Holders of these units receive distributions that are equal to distributions
on Lexington Common Stock.
(3) Holders of these units receive distributions as noted until such units
become eligible for conversion to Lexington Common Stock, upon which date
they will receive distributions as described in (2) above.
(4) Distributions on these units will increase to $1.08 annually in January
1998.
(5) Holders of these units receive distributions that are equal to distributions
on Lexington Common Stock, with an annual cap of $1.08.
(6) Holders of these units receive distributions that are equal to distributions
on Lexington Common Stock, with an annual cap of $1.12.
(7) Holders of these units will receive distributions as described in footnote
(6) above when such Holder's operating partnership units become eligible for
conversion into Lexington Common Stock.
PROPERTIES
As of October 1, 1997, the Company owns controlling interests in 46
Properties and minority interests in two additional properties. The Properties,
all of which are 100% net leased, are located in 24 states, have approximately
6.9 million net rentable square feet and, under the terms of their applicable
leases, currently generate approximately $47.4 million in annualized base rent.
The Company's leases currently have a weighted average remaining term (excluding
renewal options) of approximately 9.07 years. A majority of the Company's
tenants have debt ratings of investment grade. The Company currently generates
approximately 47%, 31% and 22% of its annualized base rent from office,
industrial and retail properties, respectively.
57
<PAGE> 66
The following table sets forth certain information, as of the date of this
Proxy Statement/Prospectus, regarding each of the Properties (excluding the Ross
Stores Newark Property), the two properties in which the Company owns a minority
interest and the Pending Acquisition.
<TABLE>
<CAPTION>
LAND AREA NET
(ACRES)/NET BASE LEASE TERM AND (RENEWAL EFFECTIVE RENT
TENANT AND PROPERTY LOCATION YEAR RENTABLE SQUARE ANNUAL RENTS PER NET OPTIONS) TERM AT OCTOBER 1,
(OBLIGOR*/GUARANTOR**) BUILT FEET RENTABLE SQUARE FOOT PER OPTION 1997(1)
- -------------------------------------- ----- --------------- --------------------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
OFFICE
Northwest Pipeline Corporation(2)..... 1982 19.79/ 10/82-09/09 (1) 9 year $ 8,571,292
295 Chipeta Way 295,000 10/97-09/09: $29.06 (1) 10 year
Salt Lake City, UT (plus CPI adjustments)
FirstPlus Financial Group, Inc........ 1986 8.17/ 09/97-08/12 (4) 5 year $ 3,223,584
1600 Viceroy Drive & 247,968 09/97-08/02: $13.00
Dallas, TX 1997 09/02-08/07: $14.30
09/07-08/12: $15.73
Circuit City Stores, Inc.(2)(3)....... 1990 19.71/ 03/90-02/10 (4) 10 year $ 2,478,125
9950 Mayland Drive 288,562 03/96-02/00: $8.59 (1) 5 year
Richmond, VA 03/00-02/10: $9.91
Hartford Fire Insurance Company(5).... 1983 12.40/ 09/91-12/05 (1) 5 year $ 2,165,500
200 Southington Executive Park 153,364 01/95-12/05: $14.12
Southington, CT
Bank One, Arizona, N.A................ 1960 10.26/ 11/88-11/03 (1) 5 year $ 1,967,059
3615 North 27th Avenue & 179,280 12/98-11/03: $10.60
Phoenix, AZ 1979
Honeywell, Inc.(5).................... 1985 51.79/ 07/86-07/01 (3) 5 year $ 1,892,250
19019 No. 59th Avenue 252,300 07/96-07/01: $7.50
Glendale, AZ
Lockheed Martin Corporation........... 1960 36.94/ 07/97-12/06 (6) 5 year $ 1,671,292
401 Elm Street & 126,000 07/97-12/01: $13.26
Marlborough, MA 1988 12/01-12/06: increased
by 75% of cumulative
increase in CPI.
Time Customer Service, Inc. .......... 1986 14.38/ 04/87-03/02 (4) 5 year $ 1,102,412
10419 North 30th Street 132,981 01/97-12/97: $ 8.29
Tampa, FL 01/98-12/98: $ 8.78
(Time, Inc.**) 01/99-12/99: $ 9.31
01/00-12/00: $ 9.87
01/01-12/01: $10.46
01/02-03/0 : $11.09
Bull HN Information Systems,
Inc.(6)............................. 1985 13.37/ 10/94-10/05 None $ 972,118
13430 North Black Canyon Freeway & 137,058 10/94-10/00: $ 7.09
Phoenix, AZ 1994 10/00-10/01: $ 7.43
10/01-10/02: $ 7.62
10/02-10/03: $ 7.82
10/03-10/04: $ 8.01
10/04-10/05: $ 8.20
Cymer, Inc. .......................... 1989 2.73/ 06/96-12/09 None $ 755,294
16160 West Bernardo Drive 65,755 06/97-05/99: $11.26
Rancho Bernardo, CA 06/99-05/01: $11.82
06/01-05/03: $12.42
06/03-05/05: $13.04
06/05-05/07: $13.69
06/07-12/09: $14.37
--------------- --------------
Subtotal: Office...................... 189.54/ $ 24,798,926
1,878,268
--------------- --------------
INDUSTRIAL
Exel Logistics, Inc.(7)............... 1985 29.01/ 10/90-03/12 (2) 10 year $ 1,771,262
6345 Brackbill Boulevard 1991 507,000 03/97-03/02: $3.49
Mechanicsburg, PA & 03/02-03/07: $4.02
(NFC plc**) 1995 03/07-03/12: greater of
$4.62 or fair market rent
as specified in the lease
</TABLE>
58
<PAGE> 67
<TABLE>
<CAPTION>
LAND AREA NET
(ACRES)/NET BASE LEASE TERM AND (RENEWAL EFFECTIVE RENT
TENANT AND PROPERTY LOCATION YEAR RENTABLE SQUARE ANNUAL RENTS PER NET OPTIONS) TERM AT OCTOBER 1,
(OBLIGOR*/GUARANTOR**) BUILT FEET RENTABLE SQUARE FOOT PER OPTION 1997(1)
- -------------------------------------- ----- --------------- --------------------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Federal Express Corp.(4)(7)........... 1987 10.92/ 02/88-01/98 (1) 5 year $ 1,284,953
3350 Miac Cove Road 141,359 02/93-01/98: $9.09
Memphis, TN
Exel Logistics, Inc. ................. 1989 24.38/ 11/91-11/06 (2) 5 year $ 1,139,496
6 Doughton Road 330,000 12/94-11/97: $3.45
New Kingstown, PA 12/97-11/00: $3.77
(NFC plc**) 12/00-11/03: $4.12
12/03-11/06: $4.51
Time Customer Service, Inc. .......... 1986 15.02/ 08/87-07/02 (1) 5 year $ 913,828
3102 Queen Palm Drive 229,605 08/96-07/98: $3.98
Tampa, FL 08/98-07/01: $4.16
(Time, Inc.**) 08/01-07/02: $4.39
Ryder Integrated Logistics............ 1997 25.70/ 10/97-07/12 (3) 5 year $ 890,671
Northeast Industrial Park 276,480 10/97-07/02: $3.22
Northeast Industrial Park 08/02-07/07: $3.61
Waterloo, IA 08/07-07/12: $4.04
Excel Logistics, Inc. ................ 1985 12.52/ 11/91-11/06 (2) 5 year $ 845,242
245 Salem Church Road 252,000 12/94-11/97: $3.35
Mechanicsburg, PA 12/97-11/00: $3.67
(NFC plc**) 12/00-11/03: $4.01
12/03-11/06: $4.38
Johnson Controls, Inc.(5)............. 1996 24.00/ 12/96-12/06 (2) 5 year $ 648,804
46600 Port Street 134,160 12/96-12/97: $4.84
Plymouth, MI 12/97-12/06: annual
esc. equal to 3xCPI, not
to exceed 4.5%/annum
White Consolidated Industries,
Inc.(7)(8).......................... 1970 26.57/ 12/86-12/01 (2) 5 year $ 593,436
Tappan Park 296,720 01/97-12/01: $2.00
22 Chambers Road
Mansfield, OH
Exel Logistics, Inc. ................. 1981 9.66/ 11/91-11/06 (2) 5 year $ 552,203
34 East Main Street 179,200 12/94-11/97: $3.08
New Kingstown, PA 12/97-11/00: $3.37
(NFC plc**) 12/00-11/03: $3.68
12/03-11/06: $4.02
Johnson Controls, Inc.(5)............. 1996 25.20/ 12/96-12/06 (2) 5 year $ 491,042
450 Stern Street 111,160 12/96-12/97: $4.42
Oberlin, OH 12/97-12/06: annual
esc. equal to 3xCPI, not
to exceed 4.5%/annum
Walker Manufacturing Company(7)....... 1968 20.00/ 08/87-08/00 None $ 487,144
904 Industrial Road & 195,640 08/97-08/00: $2.49
Marshall, MI 1972
(Tenneco Automotive, Inc.**)
Allegiance Healthcare
Corporation(2)(3)................... 1991 10.16/ 09/91-09/01 (2) 5 year $ 472,500
5950 Greenwood Pkway 123,924 09/91-09/01: $3.81
Bessemer, AL
(Baxter International, Inc.**)
Toys "R" Us, Inc.(2).................. 1981 7.56/ 09/81-08/06 (5) 5 year $ 400,200
West Wingfoot Rd. 123,293 09/87-04/98 $3.25
Houston, TX 05/98-08/06 $3.98
Unisource Worldwide, Inc. ............ 1958 7.00/ 10/87-09/02 None $ 379,800
109 Stevens Street & 168,800 10/97-09/02: $2.25
Jacksonville, FL 1969
Dana Corporation(3)................... 1983 20.95/ 08/92-08/07 (2) 5 year $ 325,367
One Spicer Dr. & 148,000 08/96-07/99: $2.20 (1) 4 years,
Gordonsville, TN 1985 08/99-07/02: $2.26 11 mos.
08/02-07/05: $2.33
08/05-08/07: $2.40
</TABLE>
59
<PAGE> 68
<TABLE>
<CAPTION>
LAND AREA NET
(ACRES)/NET BASE LEASE TERM AND (RENEWAL EFFECTIVE RENT
TENANT AND PROPERTY LOCATION YEAR RENTABLE SQUARE ANNUAL RENTS PER NET OPTIONS) TERM AT OCTOBER 1,
(OBLIGOR*/GUARANTOR**) BUILT FEET RENTABLE SQUARE FOOT PER OPTION 1997(1)
- -------------------------------------- ----- --------------- --------------------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
SKF USA, Inc. ........................ 1996 21.13/ 12/96-12/14 (3) 10 year $ 322,397
324 Industrial Park Road 72,868 12/96-12/99: $4.42
Franklin, NC 01/00-12/14: CPI
adjusted every three
years
Crown Cork & Seal Company, Inc.(7).... 1970 5.80/ 09/86-09/01 (1) 5 year $ 293,460
567 So. Riverside Drive & 146,000 09/96-09/01: $2.01
Modesto, CA 1976
Johnson Controls, Inc.(5)............. 1997 22.20/ 02/97-02/07 (2) 5 year $ 288,608
15911 Progress Drive 58,800 02/97-02/98: $4.91
Cottondale, AL 02/98-02/07: annual
esc. equal to 3xCPI, not
to exceed 4.5%/annum
Walker Manufacturing Company(7)....... 1979 8.26/ 08/87-08/00 None $ 166,696
1601 Pratt Avenue 53,600 08/97-08/00: $3.11
Marshall, MI
(Tenneco Automotive, Inc.**)
--------------- --------------
Subtotal: Industrial.......... 326.04/ $ 12,267,109
3,548,609
--------------- --------------
RETAIL
Fred Meyer, Inc.(7)................. 1986 13.90/ 03/88-03/08 (3) 10 year $ 1,009,375
2655 Shasta Way 178,204 03/88-03/08: $5.66
Klamath Falls, OR
Liberty House, Inc.(2)................ 1980 1.22/ 10/80-09/09 (1) 115 mos. $ 962,981
Fort Street Mall (King St.) 85,610 10/95-09/05: $11.25 (1) 2 year
Honolulu, HI 10/05-09/09: $11.56 (3) 5 year
Fred Meyer, Inc.(7)................... 1986 8.81/ 06/86-05/11 (3) 5 year $ 826,086
Highway 101 118,179 06/86-05/11: $6.99 plus
Newport, OR 0.5% of gross sales in
excess of $20,000,000
($60,977 paid in 1997)
Hechinger Property Co.(2)(t).......... 1980 7.61/ 05/81-04/06 (1) 10 year $ 772,383
7111 Westlake Terrace 95,000 05/96-04/06: $8.13 (3) 5 year
Bethesda, MD
(Hechinger Stores Company*)
Physical Fitness Centers of
Philadelphia, Inc.(7)............... 1987 2.87/ 07/87-07/07 (2) 5 year $ 712,827
1160 White Horse Road 31,750 07/97-07/02: $22.45
Voorhees, NJ 07/02-07/07: $25.82
(Bally Total Fitness Corp.**)
Federated Department Stores,
Inc.(2)............................. 1974 11.00/ 02/76-01/06 (1) 8 year $ 676,601
24100 Laguna Hills Mall 160,000 02/80-01/06: $4.23 (2) 15 year
Laguna Hills, CA (1) 6 year
Scandinavian Health Spa, Inc. ........ 1987 3.32/ 01/89-12/08 (2) 5 year $ 612,692
4733 Hills and Dales Road 37,214 01/97-12/97: $16.46
Canton, OH 01/98-12/08:
(Bally Total Fitness Holding
Corp.**) 2.2% annual escalations
Bally Total Fitness Corp.(7).......... 1987 2.73/ 07/87-07/07 (2) 5 year $ 573,965
5917 South La Grange Road 25,250 07/97-07/02: $22.73
Countryside, IL 07/02-07/07: $26.14
Champions Fitness IV, Inc.(7)......... 1977 3.66/ 08/87-08/07 (2) 5 year $ 444,360
5801 Bridge Street & 24,990 08/97-08/02: $17.78
DeWitt, NY 1987 08/02-08/07: $20.45
(Bally Total Fitness Corp.*)
GFS Realty, Inc. ..................... 1976 10.60/ 01/77-02/04 (6) 5 year $ 408,360
9580 Livingston Road 107,337 03/77-02/04: $3.80
Oxon Hill, MD
(Giant Food, Inc.**)
</TABLE>
60
<PAGE> 69
<TABLE>
<CAPTION>
LAND AREA NET
(ACRES)/NET BASE LEASE TERM AND (RENEWAL EFFECTIVE RENT
TENANT AND PROPERTY LOCATION YEAR RENTABLE SQUARE ANNUAL RENTS PER NET OPTIONS) TERM AT OCTOBER 1,
(OBLIGOR*/GUARANTOR**) BUILT FEET RENTABLE SQUARE FOOT PER OPTION 1997(1)
- -------------------------------------- ----- --------------- --------------------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Mervyn's (t).......................... 1976 11.00/ 02/77-12/02 (5) 5 year $ 406,948
4450 California Street 122,000 01/78-12/02: $3.34
Bakersfield, CA
(Dayton Hudson Corporation**)
Toys "R" Us, Inc.(2).................. 1981 5.85/ 06/81-05/06 (5) 5 year $ 382,783
12535 SE 82nd Avenue 42,842 07/94-01/98 $8.93
Clackamas, OR 02/98-05/01 $9.74
06/01-05/06 $9.91
Toys "R" Us, Inc.(2).................. 1981 3.64/ 06/81-05/06 (5) 5 year $ 357,331
18601 Alderwood Mall Blvd. 43,105 06/86-01/98 $8.29
Lynwood, WA 02/98-05/01 $9.03
06/01-05/06 $9.18
Circuit City Stores West Coast,
Inc.(7)............................. 1988 3.93/ 10/88-10/08 (3) 10 year $ 352,580
7272 55th Street 45,308 10/93-10/98: $7.78
Sacramento, CA 10/98-10/03: $8.54
(Circuit City Stores, Inc.*) 10/03-10/08: $9.30
Toys "R" Us, Inc.(2).................. 1981 4.44/ 06/81-05/06 (5) 5 year $ 326,925
6910 S. Memorial Highway 43,123 06/86-01/98 $7.58
Tulsa, OK 02/98-05/01 $8.26
06/01-05/06 $8.40
Comp USA, Inc.(7)..................... 1988 2.72/ 12/88-12/08 (3) 10 year $ 304,794
6405 South Virginia Street 31,400 12/93-12/98: $9.71
Reno, NV 12/98-12/03: $10.65
(Circuit City Stores, Inc.*) 12/03-12/08: $11.60
Wal-Mart Stores East, Inc.(5)......... 1985 8.61/ 12/85-01/11 (5) 5 year $ 269,770
7055 Highway 85 South 81,911 12/85-01/11: $3.29
Riverdale, GA
Circuit City Stores
West Coast, Inc.(7)................. 1988 2.57/ 12/88-12/08 (3) 10 year $ 260,560
5055 West Sahara Avenue 36,053 12/93-12/98: $7.23
Las Vegas, NV 12/98-12/03: $7.93
(Circuit City Stores, Inc.*) 12/03-12/08: $8.64
GFS Realty, Inc.(2)................... 1977 7.32/ 01/78-02/05 (1) 12 year $ 224,016
Rockshire Village Center 51,682 01/78-02/05: $4.33 (2) 10 year
West Ritchie Parkway
Rockville, MD
(Giant Food, Inc.**)
Montgomery Ward Co., Inc.(2).......... 1973 7.61/ 11/74-10/04 (3) 5 year $ 152,760
Amigoland Shopping Center 115,000 11/74-10/04: $1.33
Mexico Street and Palm Boulevard
Brownsville, TX
Wal-Mart Stores, Inc.(5).............. 1982 5.21/ 08/83-01/09 (5) 5 year $ 146,040
Highway 21 South 56,132 09/87-01/09: $2.60
Jacksonville, AL plus 1% of gross sales in
excess of $10,290,204
($40,518 paid in 1996)
--------------- --------------
Subtotal: Retail.............. 128.62/
1,532,090 $ 10,184,137
--------------- --------------
TOTAL(9).............................. 644.20/
6,958,967 $ 47,250,172
============== ============
</TABLE>
- ---------------
(1) Net Effective Rent means the annual rent in effect as of October 1, 1997 and
is calculated by multiplying monthly rent in effect as of October 1, 1997 by
12. The amounts do not include percentage rents (i.e., additional rent
calculated as a percentage of the tenant's gross sales above a specified
level), if any, that may be payable under leases covering certain of the
properties. The Net Effective Rent amount shown for the Ryder Property is as
of November 1, 1997.
(2) The Company holds leasehold interests in the land on which these buildings
are situated. The Company owns in fee simple the land on which all other
buildings are situated.
61
<PAGE> 70
(3) Represents a Pending Acquisition.
(4) The tenant of this Property has not delivered a renewal notice. The Company
is expecting a vacancy of this Property and is therefore seeking to relet or
sell the Property.
(5) The Credit Facility is secured by first mortgage liens on these Properties.
As of September 30, 1997, approximately $28.5 million was outstanding under
the Credit Facility.
(6) Assumes the tenant pays its rent annually in advance, resulting in a prompt
payment discount of 3.5% per year.
(7) The REMIC Financing is secured by first mortgage liens on these Properties
and the Ross Stores Newark Property.
(8) Effective March 1, 1999 tenant may cancel lease upon 12 months notice and
payment of a cancellation fee equal to $197,812.
(9) Includes Pending Acquisitions but excludes the Ross Stores Newark Property.
If the Pending Acquisitions were excluded and the Ross Stores Newark
Property were included, total Net Rentable Square Feet would be 6,923,537
and the Net Effective Rent at October 1, 1997 would be $47,416,581.
(t) The Company holds 33.85% and 19% of the limited partnership interest in the
limited partnerships that, respectively, own the properties in Bethesda,
Maryland and Bakersfield, California.
The following table sets forth certain information as of October 1, 1997,
regarding the timing of lease expirations of the Company's Properties (excluding
the Ross Stores Newark Property), the two properties owned by limited
partnerships in which the Company holds a minority interest and the Pending
Acquisition.
<TABLE>
<CAPTION>
NUMBER OF NET EFFECTIVE PERCENTAGE
LEASES BASE RENT AT OF TOTAL
YEAR(1) EXPIRING OCTOBER 1, 1997(2) NET EFFECTIVE RENT
- ------------------------------------------------ --------- ------------------ ------------------
<S> <C> <C> <C>
1997............................................ 0 $ 0 0
1998............................................ 1 1,284,953 2.72%
1999............................................ 0 0 0
2000............................................ 2 653,840 1.38
2001............................................ 4 3,251,646 6.88
2002............................................ 4 2,802,988 5.93
2003............................................ 1 1,967,059 4.16
2004............................................ 2 561,120 1.19
2005............................................ 3 3,361,634 7.12
2006............................................ 12 8,264,302 17.50
2007............................................ 5 2,345,127 4.96
2008 and thereafter............................. 16 22,757,503 48.16
--- ---------- ------
Total........................................... 50 $ 47,250,172 100.00%
=== ========== ======
</TABLE>
- ---------------
(1) The Company's leases, including the Pending Acquisitions and properties in
which the Company owns a minority interest, currently have an average
weighted remaining term (excluding renewal options) of approximately 9.07
years.
(2) Net Effective Rent means the annual rent in effect at October 1, 1997 which
is calculated by multiplying monthly rent in effect as of October 1, 1997 by
12. The amounts do not include percentage rents (i.e., additional rent
calculated as a percentage of the tenant's gross sales above a specified
level), if any, that may be payable under leases covering certain of the
Properties or CPI adjustments.
62
<PAGE> 71
The following table sets forth certain state-by-state information regarding
the Properties (excluding the Ross Stores Newark Property), the two properties
owned by limited partnerships in which the Company holds a minority interest and
the Pending Acquisitions as of October 1, 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER NET EFFECTIVE TOTAL NET
OF NET RENTABLE RENT AT EFFECTIVE
STATE PROPERTIES SQUARE FEET OCTOBER 1, 1997(1) RENT
- --------------------------------------- ---------- ------------ ------------------ -------------
<S> <C> <C> <C> <C>
Alabama................................ 3 238,856 $ 907,148 1.92%
Arizona................................ 3 568,638 4,831,427 10.22
California............................. 5 539,063 2,484,883 5.23
Connecticut............................ 1 153,364 2,165,500 4.58
Florida................................ 3 531,386 2,396,040 5.06
Georgia................................ 1 81,911 269,770 0.57
Hawaii................................. 1 85,610 962,981 2.04
Illinois............................... 1 25,250 573,965 1.22
Iowa................................... 1 276,480 890,671 1.89
Maryland............................... 3 254,019 1,404,759 2.97
Massachusetts.......................... 1 126,000 1,671,292 3.54
Michigan............................... 3 383,400 1,302,644 2.76
Nevada................................. 2 67,453 565,354 1.20
New Jersey............................. 1 31,750 712,827 1.51
New York............................... 1 24,990 444,360 0.94
North Carolina......................... 1 72,868 322,397 0.68
Ohio................................... 3 445,094 1,697,170 3.60
Oklahoma............................... 1 43,123 326,925 0.69
Oregon................................. 3 339,225 2,218,244 4.70
Pennsylvania........................... 4 1,268,200 4,308,203 9.12
Tennessee.............................. 2 289,359 1,610,320 3.41
Texas.................................. 3 486,261 3,776,544 7.99
Utah................................... 1 295,000 8,571,292 18.16
Virginia............................... 1 288,562 2,478,125 5.25
Washington............................. 1 43,105 357,331 0.76
--- ---------- ----------- ------
Total.................................. 50 6,958,967 $ 47,250,172 100.00%
=== ========== =========== ======
</TABLE>
- ---------------
(1) Net Effective Rent is calculated by multiplying monthly base rent in effect
at October 1, 1997 by 12. The amounts do not include percentage rents (i.e.,
additional rent calculated as a percentage of the tenant's gross sales above
a specified level), if any, that may be payable under leases covering
certain of the properties or any CPI adjustments permitted under leases
covering certain properties. The Net Effective Rent amount shown for the
Iowa Property (the Ryder Property) is as of November 1, 1997.
Substantially all of the Company's leases are net leases, under which the
tenant is responsible for all costs of real estate taxes, insurance and ordinary
maintenance. The remainder of the Company's leases are on terms which management
believes are substantially similar to those of its net leases. However, the
Company has retained responsibility for certain structural repairs with respect
to four Properties. Management estimates that the Company's expenditures and
reserves for these items will be approximately $150,000 for the year ended
December 31, 1997 and $200,000 for the year ended December 31, 1998.
The Company carries comprehensive liability, fire, extended coverage and
casualty insurance for all of its Properties, and carries rent loss insurance on
certain of its Properties. However, with respect to certain of the Properties
where the leases do not provide for abatement of rent under any circumstances,
the Company
63
<PAGE> 72
generally does not maintain rent loss insurance. See "Risk Factors -- Uninsured
Loss" in the accompanying Proxy Statement/Prospectus.
INDEBTEDNESS OF THE COMPANY
The Company's aggregate consolidated outstanding indebtedness as of
September 30, 1997, was approximately $209 million, which consisted of
approximately (i) $68.4 million of indebtedness outstanding under the REMIC
Financing, (ii) $25.0 million of outstanding indebtedness in respect of the
Exchangeable Notes described below, (iii) $106.0 million of outstanding mortgage
indebtedness related to 12 Properties and (iv) other debt of approximately $9.3
million. All of the mortgages outstanding on the Properties have a fixed rate of
interest. As of September 30, 1997, the Company's ratio of debt-to-total market
capitalization (defined as debt divided by the sum of debt plus the market value
of equity, including Lexington Common Stock, Convertible Preferred Stock and OP
Units) was approximately 40.6%. On a pro forma basis, after giving effect to the
Pro Forma Adjustments, the Company's ratio of debt-to-total market
capitalization, as of September 30, 1997, would have been 36.6%.
Salt Lake City Refinancing. In May 1997, the Company completed the
refinancing of a $22.1 million mortgage in the Salt Lake City Refinancing. The
Company borrowed approximately $24.25 million to effect the Salt Lake City
Refinancing, with excess proceeds used to pay debt restructuring and transaction
costs and for general corporate purposes. The Salt Lake City Refinancing reduced
the stated interest rate on the Refinanced Amount from 12.9% to 7.61% per annum
and, commencing January 1, 1998, will reduce the Company's annual debt service
payments by $1.35 million.
Sale of Exchangeable Notes. In March 1997, in connection with the
acquisition of the Exel Pennsylvania Properties, LCIF issued and sold $25
million aggregate principal amount of its Exchangeable Notes to an institutional
investor in a private placement. The Notes bear interest at a rate of 8.0% per
annum and mature in March 2004. The Exchangeable Notes are secured by first
mortgage liens on the Exel Pennsylvania Properties, are fully guaranteed by the
Company and can be exchanged by the holders thereof for shares of Lexington
Common Stock at $13.00 per share beginning in the year 2000, subject to
adjustment. The Exchangeable Notes require interest only payments semi-annually
and may be redeemed at the Company's option after three years at a price of
103.2% of the principal amount thereof, declining to par after five years. In
connection with the sale of the Exchangeable Notes, the Company entered into
certain related agreements providing for, among other things, certain demand and
piggyback registration rights to the initial purchaser of the Exchangeable
Notes. The Exchangeable Notes are subordinated in right of payment to the
Company's obligations under the Credit Facility.
Credit Facility. In February 1997, the Company's secured revolving Credit
Facility was amended to extend the maturity to June 1999 and to increase the
maximum borrowing availability to $60 million. The Credit Facility is currently
secured by first mortgage liens on seven Properties and bears interest at 150
basis points over LIBOR. As of September 30, 1997, the aggregate amount
outstanding under the Credit Facility was approximately $28.5 million, with a
weighted average interest rate thereon of approximately 7.18%. As of December 1,
1997, there were no amounts outstanding under the Credit Facility. The Credit
Facility limits the amount of indebtedness the Company may incur to 60% of the
Company's total market capitalization. The Credit Facility is secured by first
mortgage liens on the following seven Properties: Glendale, Arizona;
Southington, Connecticut; Riverdale, Georgia; Jacksonville, Alabama; Plymouth,
Michigan; Oberlin, Ohio; and Cottondale, Alabama.
REMIC Financing. In May 1995, the Company completed the $70 million REMIC
Financing by issuing commercial mortgage pass-through certificates secured by 15
Properties, and used a portion of the proceeds to repay approximately $51
million of mortgage indebtedness on eight of these Properties. The remaining net
proceeds of the REMIC Financing were used to repay other existing indebtedness
and for general corporate purposes. The REMIC Financing has a fixed interest
rate of 8.10% and matures in May 2005. The REMIC Financing is secured by
Mortgages on the following fifteen Properties: Modesto, California; Mansfield,
Ohio; Marshall, Michigan (904 Industrial Road); Marshall, Michigan (1601 Pratt
Avenue); Memphis, Tennessee; Mechanicsburg (6345 Brackbill Blvd.), Pennsylvania;
Newark, California;
64
<PAGE> 73
Countryside, Illinois; Voorhees, New Jersey; Dewitt, New York; Newport, Oregon;
Sacramento, California; Reno, Nevada; Las Vegas, Nevada; and Klamath Falls,
Oregon.
Subordinated Notes. As of September 30, 1997, the Company had
approximately $1.9 million of subordinated notes outstanding (the "Subordinated
Notes"). The Subordinated Notes mature on October 12, 2000 and bear interest at
a fixed rate of 7.75% per annum, payable semiannually on January 1 and July 1 of
each year to the holders of record at the close of business on the December 15
or June 15 immediately preceding such interest payment date. The Subordinated
Notes are redeemable, at the Company's option, in whole or in part, upon not
less than 15 nor more than 60 days' notice, at a redemption price equal to 100%
of the principal amount plus all accrued and unpaid interest on the Subordinated
Notes through the date of redemption.
Mortgage Indebtedness. As of September 30, 1997, a total of 12 Properties
(in addition to the Properties securing the Credit Facility and the REMIC
Financing) were subject to outstanding mortgages. The aggregate outstanding
principal amount of such mortgages, including accrued interest thereon, was
approximately $82.4 million as of such date. These mortgages are subject to
certain balloon payments, which, in general, are due over the next five years as
follows: $0 in 1997; approximately $10 million in 1998; approximately $5.6
million in 1999 (in addition to $26.4 under the Credit Facility); approximately
$8.0 million in 2000, and $0 in 2001. The ability of the Company to make such
mortgage payments will depend upon the Company's ability to refinance the
relevant mortgages, sell the mortgaged Properties or draw from the Credit
Facility sufficient amounts to satisfy such balloon payments. The ability of the
Company to accomplish these goals may be affected by economic factors affecting
the real estate industry generally, including the available mortgage rates at
the time, the Company's equity in the mortgaged Properties, the financial
condition of the Company, the operating history of the mortgaged Properties, the
then current tax laws and the national, regional and local economic conditions
at the time. The sale of the Stratus Computer Property which occurred in
September 1997 resulted in the repayment of a first mortgage loan in the amount
of $10.0 million. In connection with the loan repayment, the Company paid a
prepayment premium of $1.9 million.
65
<PAGE> 74
The following table sets forth certain information regarding outstanding
mortgage indebtedness on the Company's Properties as of September 30, 1997:
<TABLE>
<CAPTION>
MORTGAGE APPROXIMATE SCHEDULED DEBT
PROPERTY LOCATION BALANCE INTEREST RATE MATURITY SERVICE IN 1997
- ---------------------------------------- ----------- ------------- -------- ---------------
<S> <C> <C> <C> <C>
Salt Lake City, UT...................... $22,694,361 7.610% 10/1/09 $ 4,316,798
12,373,658 7.870% 10/1/05 2,098,896
Tampa, FL (104 North 30th Street)....... 5,929,406 8.600% 6/1/98 784,539
Honolulu, HI............................ 6,307,760 10.250% 10/1/10 841,170
Phoenix, AZ............................. 5,651,408 10.750% 5/1/99 692,707
Laguna Hills, CA........................ 4,492,677 8.375% 2/1/06 665,711
Tampa, FL (3102 Queen Palm Drive)....... 4,289,775 9.125% 5/1/98 391,442
Canton, OH.............................. 2,696,980 9.490% 2/28/09 387,719
Franklin, NC (1)........................ 2,286,385 8.500% 4/1/15 222,252
Oxon Hill, MD........................... 2,031,131 6.250% 3/1/04 381,042
Rockville, MD........................... 1,211,492 8.820% 3/1/05 221,491
Brownsville, TX......................... 945,303 8.375% 11/1/04 150,380
Phoenix, AZ............................. 5,880,564 8.120% 10/1/05 621,297
592,165 12.000% 9/30/05 --
----------- -----------
Total................................... $77,383,065(2) $11,775,444
=========== ===========
</TABLE>
- ---------------
(1) Represents the annualized debt service assuming debt was incurred January 1,
1997.
(2) Does not include mortgage balances of $3,980,618 and $2,325,067 as of
September 30, 1997 from the minority owned properties located in Bethesda,
Maryland and Bakersfield, California, respectively.
LEGAL PROCEEDINGS
Ross Stores, the tenant of the Company's Ross Stores Newark Property, has
exercised an option to purchase the Ross Stores Newark Property for its fair
market value, which was determined by arbitration based on estimates of fair
market value submitted by Ross Stores and the Company. Under the terms of the
arbitration, the arbitrator was required to select the submission of either the
Company or Ross Stores, whichever more closely approximated the arbitrator's own
opinion of value and was not permitted any discretion to select another
valuation. The opinion of value selected by the arbitrator is deemed the
purchase price. The estimate of the fair market value of the Ross Stores Newark
Property submitted by Ross Stores more closely approximated the arbitrator's
opinion of value and, accordingly was selected by the arbitrator and confirmed
by the Superior Court of the State of California for San Francisco County. The
arbitrator's opinion of value was based on numerous factors, including current
and future market rental rates, the length of the Ross Stores Newark Property
lease, the creditworthiness of Ross Stores and rates of return required by
investors who acquire similar properties. The arbitration decision would have
allowed Ross Stores to purchase the Ross Stores Newark Property for $24.8
million on or about September 1, 1997. The Company has appealed the state court
decision which has resulted in a stay of Ross Stores' exercise of its purchase
right. The outcome of such appeal cannot be determined at this time. If the
Company is successful on its appeal, the parties will go back to the arbitration
process and await a new opinion of value. On August 26, 1997 the Superior Court
of the State of California for San Francisco County ruled in favor of a motion
made by Ross Stores to require the Company to post a bond equivalent to one
year's rent in the amount of approximately $3,400,000 securing Lexington's
potential reimbursement of Ross Stores for rental payments made following
September 1, 1997 in the event that the sale was deemed to be consummated as of
such date. The Company has posted the bond at a cost of approximately $17,000.
See "Risk Factors -- Adverse Effects of Ross Stores Litigation."
66
<PAGE> 75
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of September 30, 1997 and the pro forma capitalization of the Company as of
September 30, 1997, which gives effect to the Pro Forma Adjustments. See
"-- Summary Historical and Unaudited Pro Forma Consolidated Financial Data."
This table should be read in conjunction with the financial information
presented elsewhere in this Proxy Statement/Prospectus and the Consolidated
Financial Statements of the Company and Notes thereto incorporated by reference.
<TABLE>
<CAPTION>
UNAUDITED
------------------------
AT SEPTEMBER 30, 1997
------------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Liabilities:
Credit Facility(1)................................................... $ 28,500 $ --
REMIC(2)............................................................. 68,389 48,897
8% Exchangeable Redeemable Secured Notes............................. 25,141 25,141
Other Mortgage Notes(3).............................................. 77,520 92,870
Other Liabilities.................................................... 9,283 9,283
-------- --------
Subtotal.......................................................... 208,833 176,191
Minority interest.................................................... 28,232 28,232
Stockholders' equity:
Preferred Stock, $.0001 par value, 10,000,000 shares authorized;
Class A Senior Cumulative Convertible Preferred, liquidation
preference $12.50 per share, 1,325,000 shares issued and
outstanding....................................................... 0 0
Excess stock, $.0001 par value, 40,000,000 shares authorized, no
shares issued or outstanding...................................... 0 0
Common Stock, $.0001 par value, 40,000,000 shares authorized,
12,713,663 shares issued and outstanding at September 30, 1997,
and 16,458,993 pro forma shares issued and outstanding (4)........ 1 2
Paid-in capital...................................................... 194,787 245,889
Accumulated distributions in excess of net income.................... (48,321) (49,329)
-------- --------
Total stockholders' equity........................................ 146,467 196,562
-------- --------
Total capitalization......................................... $ 383,532 $ 400,985
======== ========
</TABLE>
- ---------------
(1) The pro forma balance reflects a net $28.5 million decrease in borrowings
under the Credit Facility due to the purchase of the Ryder Property offset
by (i) the proceeds of the November 1997 offering and (ii) the pro forma
effect on the Credit Facility of $5.5 million from the Ross Stores
Litigation assuming the repayment of REMIC Financing of approximately $19.6
million and the associated prepayment penalty of approximately $750,000.
(2) The pro forma balance reflects a net decrease in the REMIC Financing due to
the repayment of such indebtedness of approximately $19.6 million with a
portion of the proceeds from the Ross Stores Litigation.
(3) The pro forma balance reflects the effect of the assumption of mortgage
indebtedness in connection with the Merger.
(4) Assumes exchange of shares in connection with the Merger at $14.125 per
share. If the exchange took place at the minimum price ($12.125), the total
pro forma issued and outstanding would be 16,670,944.
67
<PAGE> 76
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA
The Selected Historical and Unaudited Pro Forma Consolidated Financial Data
set forth below should be read in conjunction with the Consolidated Financial
Statements and Notes thereto incorporated by reference. The unaudited pro forma
financial data gives effect to the Pro Forma Adjustments as if such Pro Forma
Adjustments had occurred on January 1, 1996 and were carried forward through
September 30, 1997 for the operating data and on September 30, 1997 for the
balance sheet data. See "-- Summary Historical and Unaudited Pro Forma
Consolidated Financial Data." The unaudited pro forma financial information does
not purport to be indicative of what the results of operations or financial
position of the Company would have been had the transactions been completed on
the dates assumed, nor is such unaudited pro forma financial data necessarily
indicative of the results of operations of the Company that may exist in the
future. The unaudited financial data for the nine months ended September 30,
1997 includes all adjustments, consisting of normal recurring accruals, which
management considers necessary for the fair presentation of the financial
position and the results of operations of the Company for such period. The
results for the nine-month periods may not be indicative of the results to be
expected for the full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------------
PRO PRO FORMA
FORMA (UNAUDITED)
-------- -----------
1997 1997 1996 1996 1996 1995 1994 1993 1992
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Revenue:
Rental......................... $ 35,745 $ 31,420 $ 22,805 $47,968 $ 31,244 $ 24,523 $ 25,894 $ 25,702 $ 25,620
Interest and other income...... 469 447 331 470 431 479 144 169 177
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Revenue............ 36,214 31,867 23,136 48,438 31,675 25,002 26,038 25,871 25,797
Expenses:
Interest expense............... 11,905 12,628 9,213 15,097 12,818 10,295 10,982 11,066 11,220
Depreciation................... 8,833 7,920 5,510 11,733 7,627 5,817 5,909 5,909 5,892
Amortization of deferred
expenses..................... 561 649 450 650 619 464 346 268 262
Property operating expenses.... 616 616 499 686 686 620 808 558 964
General and administrative
expenses..................... 2,885 2,885 2,147 3,125 3,125 2,694 2,416 1,020 2,172
Expenses of the mergers........ -- -- -- -- -- -- -- 2,441 --
Transactional expenses......... -- -- -- 644 644 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Expenses........... 24,800 24,698 17,819 31,935 25,519 19,890 20,461 21,262 20,510
Income before minority interests,
gain on sale of properties,
lease termination proceeds and
extraordinary item............. 11,414 7,169 5,317 16,503 6,156 5,112 5,577 4,609 5,287
Minority interests............... 1,421 1,158 460 1,824 690 93 98 81 93
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before gain on sale of
properties, lease termination
proceeds and extraordinary
item........................... $ 9,993 6,011 4,857 $14,679 5,466 5,019 5,479 4,528 5,194
======= =======
Gain on sale of properties....... 3,517 1,514 -- -- --
Proceeds from lease
termination.................... -- -- -- 1,600 -- -- --
------- ------- ------- ------- ------- ------- -------
Income before extraordinary
items.......................... 9,528 4,857 5,466 8,133 5,479 4,528 5,194
Extraordinary item -- loss on
extinguishment of debt......... 3,889 -- -- 4,849 -- -- --
------- ------- ------- ------- ------- ------- -------
Net income....................... $ 5,639 $ 4,857 $ 5,466 $ 3,284 $ 5,479 $ 4,528 $ 5,194
======= ======= ======= ======= ======= ======= =======
Per Share of Common Stock:(1)
Proforma income from continuing
operations
Primary...................... $ 0.53 $ -- $ -- $ 0.78 $ -- $ -- $ -- $ -- $ --
Fully diluted................ 0.53 -- -- 0.77 -- -- -- -- --
Income before extraordinary
items
Primary...................... $ -- $ 0.77 $ 0.52 $ -- $ 0.58 $ 0.88 $ 0.59 $ 0.48 $ 0.56
Fully diluted................ -- 0.70 0.49 -- 0.58 0.88 0.59 0.48 0.56
</TABLE>
68
<PAGE> 77
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------------
PRO PRO FORMA
FORMA (UNAUDITED)
-------- -----------
1997 1997 1996 1996 1996 1995 1994 1993 1992
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Extraordinary items -- loss on
extinguishment of debt
Primary...................... $ -- $ (0.35) $ -- $ -- $ -- $ (0.53) $ -- $ -- $ --
Fully diluted................ -- (0.28) -- -- -- (0.53) -- -- --
Net income
Primary...................... $ -- $ 0.42 $ 0.52 $ -- $ 0.58 $ 0.35 $ 0.59 $ 0.48 $ 0.56
Fully diluted................ -- 0.42 0.49 -- 0.58 0.35 0.59 0.48 0.56
Cash distributions paid.......... $ -- $ 0.87 $ 0.82 $ -- $ 1.10 $ 1.08 $ 1.08 $ 0.24 $ --
Weighted average Common Stock
shares outstanding
Primary........................ 17,002 11,143 9,383 16,830 9,393 9,263 9,306 9,303 9,303
Fully diluted.................. 19,729 13,736 10,699 19,455 9,393 9,263 9,306 9,303 9,303
BALANCE SHEET DATA (at end of
period):
Real estate, before accumulated
depreciation................... $427,009 $415,433 $302,641 $ -- $ 339,411 $244,223 $243,280 $243,280 $243,280
Total assets............. 400,985 383,532 275,428 -- 309,126 221,216 216,020 222,467 230,387
Mortgage loans payable (including
accrued interest).............. 166,908 199,550 157,650 -- 186,188 121,690 110,065 112,501 115,222
Total liabilities........ 204,423 237,065 162,782 -- 216,467 124,698 114,800 116,815 119,794
Stockholders' equity............. 196,562 146,467 112,646 -- 92,659 96,518 101,220 105,652 110,593
OTHER DATA:
Cash flows from operating
activities..................... $ -- $ 16,196 $ 11,173 $ -- $ 14,972 $ 7,216 $ 12,423 $ 11,151 $ 12,002
Cash flows from investing
activities..................... -- (64,232) (2,232) -- (16,951) 7,887 -- -- (2,870)
Cash flows from financing
activities..................... -- 48,836 (8,666) -- 1,859 (15,611) (12,304) (12,780) (8,254)
Funds from operations(2)......... 15,256 11,268 14,371 12,049 11,486 12,959 12,673
Total net rentable sq. ft (at end
of period)..................... 6,742 6,430 4,563 6,742 5,235 4,212 3,767 3,767 3,767
Calculation of Funds From
Operations(2):
Net Income....................... $ 5,639 $ 4,857 $ 5,466 $ 3,284 $ 5,479 $ 4,528 $ 5,194
Add back:
Real Estate depreciation and
amortization................. 7,920 5,510 7,627 5,817 5,909 5,909 5,892
Minority interest's share of
net income................... 1,158 460 690 93 98 81 93
Loss from debt restructuring... -- 3,889 -- -- -- 4,849 -- -- --
Property arbitration
litigation................. 167 -- -- -- -- -- -- --
Less:
Gain on sale of properties..... -- (3,517) -- -- -- (1,514) -- -- --
Write-off of deferred rent
receivable related to
property sale................ -- -- -- -- -- 678 -- -- --
Proceeds from lease
termination.................. -- -- -- -- -- (1,600) -- -- --
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
Funds from Operations before
items below.................... $ 15,256 $ 10,827 $ 13,783 $ 11,607 $ 11,486 $ 10,518 $ 11,179
======== ======== ======== =========== =========== ======== ======== ======== ========
Adjustments of other
non-recurring items(3)
Non-recurring stock
compensation................. -- -- 441 588 442 -- -- --
Transactional expense.......... -- -- -- -- -- -- -- 2,441 1,494
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
Funds From Operations............ $ 15,256 $ 11,268 $ 14,371 $ 12,049 $ 11,486 $ 12,959 $ 12,673
======== ======== ======== =========== =========== ======== ======== ======== ========
</TABLE>
69
<PAGE> 78
- ---------------
(1) Primary net income per share is computed by dividing net income (reduced by
preferred dividends) by the weighted average number of common and diluted
common equivalent shares outstanding during the periods. Fully diluted net
income per share amounts are similarly computed but include the effect, when
dilutive, of the Company's other potentially dilutive securities. Fully
diluted net income is decreased by preferred dividends and increased by
minority interests resulting from the assumed conversion of the OP Units.
The Company's Convertible Preferred Stock and Exchangeable Notes are
excluded from the 1997 and 1996 historical and pro forma computations due to
their anti-dilutive effect during those periods.
(2) The Company believes that Funds From Operations enhances an investor's
understanding of the Company's financial condition, results of operations
and cash flows. The Company believes that Funds From Operations is an
appropriate measure of the performance of an equity REIT, and can be one
measure of a REIT's ability to make cash distributions. Funds From
Operations is defined by the National Association of Real Estate Investment
Trusts, Inc. ("NAREIT") as "net income (or loss) (computed in accordance
with generally accepted accounting principles), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures." The Company's method of calculating Funds From Operations
excludes other non-recurring revenue and expense items and may be different
from methods used by other REITs and, accordingly, is not comparable to such
other REITs. Funds From Operations should not be considered an alternative
to net income, as an indicator of the Company's operating performance or to
cash flows from operating activities as determined in accordance with GAAP,
or as a measure of liquidity or other consolidated income or cash flow
statement data as determined in accordance with GAAP.
(3) For purposes of the calculation of Funds From Operations, the Company has
added back to net income amounts for transactional expenses and
non-recurring stock compensation, which management believes to be
appropriate adjustments based on the non-recurring and unusual nature of
such amounts. As discussed above in footnote (2), the Company's method of
calculating Funds From Operations may be different from methods used by
other REITs. Non-recurring stock compensation represents the expense of a
simultaneous exercise and re-granting of options to the Company's management
during the period between July 1995 and January 1996, which was intended to
increase management's ownership in the Company (a practice which has been
discontinued). The Board of Directors has determined that the Company will
not engage in such practices in the future. Transactional expenses incurred
in 1993 represent the costs of the formation of the Company as a REIT
through a roll-up of two limited partnerships. Transactional expenses
reflected for 1992 were incurred by the predecessor partnerships (prior to
the formation of the REIT), and are considered not to be representative of
the continuing operations of the Company. In 1996 transactional expenses of
approximately $644 were incurred. Management believes such expenses were of
an unusual and significant nature for the Company at the time they were
incurred. If such amount was added back to net income, Funds From Operations
for 1996 would have been $15,015.
70
<PAGE> 79
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Real Estate Assets. The Company's principal sources of liquidity are
revenues generated from the Properties, interest on cash balances, amounts
available under its Credit Facility and amounts that may be raised through the
sale of preferred shares described below or other private or public offerings.
For the nine months ended September 30, 1997, leases on the Properties generated
approximately $31,420,000 in revenue compared to $22,805,000 for the same period
in 1996. For the year ended December 31, 1996, leases on the properties
generated approximately $31,244,000 in revenue compared to $24,523,000 in 1995.
Dividends. The Company paid a dividend of $.27 per share to stockholders
in respect of each of the calendar quarters of 1995 and the first quarter of
1996, $.28 per share in respect of the second and third quarters of 1996, and
$.29 per share in respect of the fourth quarter of 1996, the first, second and
third quarters of 1997. The Company's annualized dividend rate is currently
$1.16 per share.
Operating Partnership Structure. The Company's operating partnership
subsidiary structure permits the Company to effect acquisitions by issuing to a
seller, as a form of consideration, interests in partnerships controlled by the
Company. See "The Company -- Distributions on OP Units."
RESULTS OF OPERATIONS
Quarter and nine months ended September 30, 1997 compared to quarter and
nine months ended September 30, 1996
Total Revenues. Total revenues for the quarter and nine months ended
September 30, 1997 were $11,405,000 and $31,867,000, representing increases of
$2,750,000 and $8,731,000 from the same periods in 1996. The increases in
revenues were primarily attributable to increases in rental revenue of
$2,690,000 and $8,615,000 for the quarter and nine month periods, respectively.
Rental revenue increased primarily due to revenues from properties acquired
since May 1996. Interest and other revenues for the quarter and nine months
ended September 30, 1997 increased $60,000 and $116,000 from the same periods in
1996 primarily due to higher interest-bearing cash balances during the nine
months ended September 30, 1997.
Total Expenses. Total expenses for the quarter and nine months ended
September 30, 1997 were $8,210,000 and $24,698,000, representing increases of
$1,370,000 and $6,879,000 from the same periods in 1996. The increases were
primarily attributable to increases in interest expense, depreciation and
amortization of real estate, general and administrative expenses and
amortization of deferred expenses, all of which increased principally as a
result of property acquisitions and increased property portfolio activity.
Interest expense for the quarter and nine months ended September 30, 1997
increased $432,000 and $3,415,000 from the same periods in 1996 primarily due to
interest expense incurred on $131 million of gross additional debt obtained or
assumed in connection with acquisitions since May 1996. The increase has been
offset, particularly in the quarter ended September 30, 1997, by a lower average
borrowing rate as a result of refinancings and the use of proceeds from equity
placements to reduce the overall leverage of the Company. Depreciation and
amortization of real estate for the quarter and nine months ended September 30,
1997 increased $727,000 and $2,410,000 from the same periods in 1996 primarily
due to property acquisitions. General and administrative expenses for the
quarter and nine months ended September 30, 1997 increased $114,000 and $738,000
from the same periods in 1996 as a result of increases in certain operating
costs due to incremental growth of the Company. Additionally, property
arbitration litigation expenses relating to the Newark, California Property of
$167,000 were incurred during the quarter ended June 30, 1997. Amortization of
deferred expenses for the quarter and nine months ended September 30, 1997
increased $81,000 and $199,000 from the same periods in 1996 due to an increase
in amortizable deferred loan expenses incurred in connection with the debt
obtained or assumed in property acquisitions. Excluding the property arbitration
litigation expenses incurred during the quarter ended June 30, 1997, general and
administrative expenses for
71
<PAGE> 80
the quarter and nine months ended September 30, 1997 were approximately 7.8% and
8.6% of rental revenues, compared to approximately 8.6% and 9.4% for the same
respective periods in 1996.
Net Income. Net income for the quarter and nine months ended September 30,
1997 was $3,825,000 and $5,639,000, representing increases of $2,270,000 and
$782,000 from the same periods in 1996. The increases were primarily
attributable to the increases in rental revenues, offset by the increases in
interest expense, depreciation and amortization of real estate, general and
administrative expenses and amortization of deferred expenses, all described
above. Additionally, during the quarter and nine months ended September 30,
1997, a gain on the sale of the Stratus Property in the amount of $3,517,000 was
recognized, and extraordinary losses on extinguishment of debt were incurred as
follows: $2,033,000 in connection with the Stratus Property mortgage repayment
during the quarter ended September 30, 1997 and $1,787,000 in connection with
the Salt Lake City debt refinancing during the quarter ended June 30, 1997 .
Income before gain on sale of property and extraordinary item for the quarter
and nine months ended September 30, 1997 increased $786,000 and $1,154,000 from
the same periods in 1996.
Year ended December 31, 1996 compared to year ended December 31, 1995
Total Revenues. Total revenues for the year ended December 31, 1996 were
$31,675,355, an increase of $6,673,593 from the year ended December 31, 1995.
The increase in total revenues was attributable to an increase in rental
revenue, primarily due to revenues from properties acquired in August and
December 1995, and May 1996.
Total Expenses. Total expenses for the year ended December 31, 1996 were
$25,519,469 an increase of $5,629,284 from the year ended December 31, 1995. The
increase was primarily attributable to increases in interest expense,
depreciation and general and administrative expenses, and transactional expenses
incurred in 1996.
Interest expense for the year ended December 31, 1996 was $12,817,528, an
increase of $2,522,352 from the year ended December 31, 1995, which was
primarily due to interest expense incurred on the mortgage notes assumed in the
exchange transaction of May 22, 1996 to acquire the Salt Lake City, Utah
Property.
Depreciation expense for the year ended December 31, 1996 was $7,627,232,
an increase of $1,809,994 from the year ended December 31, 1995, which was
primarily due to properties acquired in August and December 1995 and May 1996.
General and administrative expenses for the year ended December 31, 1996
were $3,125,100, a $431,340 increase from the year ended December 31, 1995. This
increase is due to an increase in performance-based compensation of $146,702 and
an increase in professional fees.
The transactional expenses totaled $644,047 and were comprised of costs of
$169,530 associated with a proposed equity offering which was abandoned in favor
of the completed private equity placement, and $474,517 of expenses incurred in
connection with transactions in progress for which expenses are required to be
charged to current operations.
The Company has added two senior corporate officers and one additional
employee as employees as of October 1, 1996, in connection with the Company
entering into management agreements with two partnerships which own 59 single
tenant net-leased office, industrial and retail properties. The cost of the
additional overhead is expected to be offset by expenses reimbursed pursuant to
the management agreements.
Net income. Net income for the year ended December 31, 1996 was $5,465,824
an increase of $2,181,824 from the year ended December 31, 1995. The increase
was primarily attributable to a non-recurring loss on extinguishment of debt
incurred in 1995 in the amount of $4,849,226, offset by non-recurring items in
1995 relating to the sale of the Eagan Property on March 31, 1995; a gain on the
sale of approximately $1.5 million and proceeds from lease termination of $1.6
million, offset by the related write-off of deferred rent receivable of
approximately $678,000. Additionally, the increase in rental revenue discussed
above also contributed to the increase in net income.
72
<PAGE> 81
Year ended December 31, 1995 compared to year ended December 31, 1994
Total Revenues. Total revenues for the year ended December 31, 1995 were
$25,001,762, a decrease of $1,036,144 from the year ended December 31, 1994. The
decrease in total revenues resulted from a property sale that occurred in March,
1995. The loss of revenue resulting from the property sale was partially offset
by an increase in interest income of $334,648 and revenues from new
acquisitions.
Total Expenses. Total expenses for the year ended December 31, 1995 were
$19,890,185, a decrease of $571,338 from the year ended December 31, 1994.
Interest expense for the year ended December 31, 1995 was $10,295,176, a
decrease of $687,133 from 1994 as a result of debt refinancing. General and
administrative expenses for the year ended December 31, 1995 were $2,693,760, an
increase of $277,574 from the year ended December 31, 1994. The increase in
general and administrative expense is attributable to an expense of $441,562
relating to performance-based stock compensation. Property operating expenses
for the year ended December 31, 1995 were $620,058 a decrease of $188,360,
resulting from appraisal and environmental audit work undertaken in 1994.
Net Income. Net income for the year ended December 31, 1995 was
$3,284,000, a decrease of $2,194,796 from the year ended December 31, 1994. The
decrease in net income in 1995 was primarily attributable to a $4,849,226 loss
on extinguishment of debt, of which approximately $4.6 million was incurred by
the Company in connection with the REMIC Financing, which was partially offset
when the Company recognized a $1,514,400 gain and $1,600,000 of lease
termination proceeds resulting from the sale of the Company's property in Eagan,
Minnesota.
FUNDS FROM OPERATIONS
Management believes that Funds From Operations enhances an investor's
understanding of the Company's financial condition, results of operations and
cash flows . The Company believes Funds From Operations is an appropriate
measure of the performance of an equity REIT, and it can be one measure of a
REIT's ability to make cash distributions. Funds From Operations is defined by
the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as
"net income (or loss) (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate depreciation and amortization and after adjustments
for unconsolidated partnerships and joint ventures." The Company's method of
calculating Funds From Operations excludes other non-recurring revenue and
expense items and may be different from methods used by other REITs and,
accordingly, is not comparable to such other REITs. Funds From Operations should
not be considered an alternative to net income, as an indicator of the Company's
operating performance or to cash flows from operating activities as determined
in accordance with generally accepted accounting principles ("GAAP"), or as a
measure of liquidity to other consolidated income or cash flow statement data as
determined in accordance with GAAP.
The Company reports Funds From Operations ("FFO") on a fully diluted basis
(Total FFO) assuming the conversion of all operating partnership units. This
reporting method treats all operating partnership units as common stock
equivalents even though many units are not immediately convertible and receive
distributions below the level paid in respect of the Company's common stock. The
following table reflects the Company's
73
<PAGE> 82
FFO for the periods ended September 30, 1997 and 1996 and the years ended
December 31, 1996 and 1995 (all amounts in thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- -------------------
1997 1996 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income.......................................... $ 5,639 $ 4,857 $ 5,466 $ 3,284
Add back:
Depreciation of real estate....................... 7,920 5,510 7,627 5,817
Minority interest share of income................. 1,158 460 690 93
Loss from debt restructuring...................... 3,889 -- -- 4,849
Property arbitration litigation expense........... 167 -- -- --
Less:
Gain on sale of properties........................ (3,517) -- -- (1,514)
Write-off of deferred rent receivable related to
property sale.................................. -- -- -- 678
Proceeds from lease termination................... -- -- -- (1,600)
------- ------ ------ ------
Total funds from operations before items below.... 15,256 10,827 13,783 11,607
Adjustments of other non-recurring items (1) Non-
recurring stock compensation...................... -- 441 588 442
------- ------ ------ ------
Total funds from operations for shares and
partnership units.............................. 15,256 11,268 14,371 12,049
Minority interest's share of depreciation......... (1,301) (424) (751) (150)
Minority interest's share of income............... (1,158) (460) (690) (93)
------- ------ ------ ------
Funds from operations for common and preferred
shares only.................................. $12,797 $10,384 $12,930 $11,806
======= ====== ====== ======
</TABLE>
- ---------------
(1) For purposes of the calculation of Funds From Operations, the Company has
added back to net income amounts for transactional expenses and
non-recurring stock compensation, which management believes to be
appropriate adjustments based on the non-recurring and unusual nature of
such amounts. The Company's method of calculating Funds From Operations may
be different from methods used by other REITs. Non-recurring stock
compensation represents the expense of a simultaneous exercise and re-
granting of options to the Company's management during the period between
July 1995 and January 1996, which was intended to increase management's
ownership in the Company (a practice which has been discontinued). The Board
of Directors has determined that the Company will not engage in such
practices in the future. In 1996 transactional expenses of approximately
$644 were incurred. Management believes such expenses were of an unusual and
significant nature for the Company at the time they were incurred. If such
amount was added back to net income, Funds From Operations for 1996 would
have been $15,015.
The Company's dividends declared to be paid to stockholders (including
preferred stockholders) amounted to approximately 77% of the Company's FFO for
the quarter ended September 30, 1997.
Below are the cash flows provided by (used in) operating, investing and
financing activities for the nine months ended September 30, 1997 and 1996 and
the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED
UNAUDITED DECEMBER 31,
-------------------- -------------------
1997 1996 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash flows provided by (used in):
Operating activities..................... $ 16,196 $11,173 $14,972 $ 7,216
Investing activities..................... (64,232) (2,232) (16,951) 7,887
Financing activities..................... 48,836 (8,666) 1,859 (15,611)
======== ======= ======= =======
</TABLE>
74
<PAGE> 83
ACCOUNTING STANDARD NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, Earnings Per
Share ("APB 15") and specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. SFAS No. 128 replaces the presentation
of primary EPS with a presentation of basic EPS and fully diluted EPS with
diluted EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This statement will be adopted for both interim and annual periods ending after
December 15, 1997.
The following table reflects what would have been the Company's basic and
diluted EPS under SFAS 128 for the quarters and nine months ended September 30,
1997 and 1996:
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic:
Income before extraordinary
item.......................... $ 0.43 $0.17 $ 0.81 $0.52
Extraordinary item -- loss on
extinguishment of debt........ (0.16) -- (0.37) --
------ ----- ------ -----
Net income...................... $ 0.27 $0.17 $ 0.44 $0.52
====== ===== ====== =====
Diluted:
Income before extraordinary
item. ..................... $ 0.39 $0.15 $ 0.70 $0.49
Extraordinary item -- loss on
extinguishment of debt..... (0.13) -- (0.28) --
------ ----- ------ -----
Net income...................... $ 0.26 $0.15 $ 0.42 $0.49
====== ===== ====== =====
</TABLE>
75
<PAGE> 84
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables of unaudited pro forma consolidated financial data of
the Company have been prepared from the historical consolidated financial
statements of the Company, as adjusted to give effect to (i) the Merger; (ii)
acquisitions consummated since January 1, 1996; (iii) the Salt Lake City
Refinancing (as defined herein); (iv) the issuance and sale of 1,325,000 shares
of Convertible Preferred Stock (as defined herein) and the application of the
net proceeds therefrom; (v) the Ross Stores Litigation (as defined herein); (vi)
the 1997 public offerings of a total of 5,720,000 shares of Lexington Common
Stock and the application of the proceeds therefrom and (vii) the sale of the
Stratus Computer Property (as defined herein) (collectively, the "Pro Forma
Adjustments"). The accompanying pro forma statements of income and other
financial data for the year ended December 31, 1996 and the nine months ended
September 30, 1997 have been prepared as if the events had been consummated as
of January 1, 1996 and were carried forward through September 30, 1997 for the
operating data and on September 30, 1997 for the balance sheet data. The
unaudited pro forma financial data does not purport to be indicative of what the
results of operations or financial position of the Company would have been had
the transactions been completed on the dates assumed, nor is such unaudited
financial data necessarily indicative of the results of operations of the
Company that may exist in the future. The unaudited pro forma financial data
must be read in conjunction with the Notes thereto and with the historical
Consolidated Financial Statements and the related Notes incorporated by
reference.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(FOR THE YEAR ENDED DECEMBER 31, 1996)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY CRIT OTHER
HISTORICAL HISTORICAL MERGER(1) ADJUSTMENTS(2) PRO FORMA
---------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Revenues:
Rental.................................. $ 31,244 $3,423 $ 134 $ 13,167 $47,968
Interest and other...................... 431 37 -- 2 470
------- ------ ---- ------- -------
Total Revenues.................. 31,675 3,460 134 13,169 48,438
Expenses:
Interest expense........................ 12,818 1,408 -- 871 15,097
Depreciation............................ 7,627 797 125 3,184 11,733
Amortization of deferred expenses....... 619 -- -- 31 650
Property operating expenses............. 686 -- -- -- 686
General and administrative expenses..... 3,125 346 (346) -- 3,125
Other expenses.......................... 644 -- -- -- 644
------- ------ ---- ------- -------
Total Expenses.................. 25,519 2,551 (221) 4,086 31,935
------- ------ ---- ------- -------
Income before minority interests.......... 6,156 909 355 9,083 16,503
Minority interests........................ 690 -- -- 1,134(3) 1,824
------- ------ ---- ------- -------
Income from continuing operations (before
gain on sale of properties and
extraordinary item)(4).................. $ 5,466 $ 909 $ 355 $ 7,949 $14,679
======= ====== ==== ======= =======
PER SHARE DATA:(5)
Income from continuing operations
Primary................................. $ 0.58 $ 0.90 $ -- $ -- $ 0.78
Fully diluted........................... 0.58 0.90 -- -- 0.77
Weighted average common shares outstanding
Primary................................. 9,393 1,011 274 6,152 16,830
Fully diluted........................... 9,393 1,011 274 8,777 19,455
</TABLE>
76
<PAGE> 85
- ---------------
(1) This column reflects the adjustments to the historical financial statements
as a result of the Merger as follows:
<TABLE>
<S> <C>
Purchase price:
Issuance of common stock:
1,284,956 shares at $14.125 per share........................... $ 18,150
Assumption of debt (fair value approximates carrying value)..... 15,850
Write-off of deferred rent receivable........................... 2,020
Historical carrying value of properties......................... (30,585)
--------
Excess of Purchase Price over historical net book value
allocated up to fair value of properties allocated to
depreciable assets (estimated depreciable life of 40
years)....................................................... $ 5,435
========
</TABLE>
The rental revenue adjustment reflects the effect of applying SFAS 13 as if
the Merger had occurred on January 1, 1996.
The reduction in general and administrative expenses reflects the
elimination of those costs which would not have been incurred by the
combined entity.
(2) This column reflects (i) the addition of historical results of operations
for the period from January 1 to the respective acquisition dates for the
Properties acquired by the Company during 1996 and for a 12-month period for
Properties acquired since January 1, 1997 and for the Pending Acquisitions;
(ii) the elimination of the results of operations of the Ross Stores Newark
Property and the Stratus Computer Property as if the sales had taken place
on January 1, 1996, (iii) the Salt Lake City Refinancing and (iv) the 1997
public offerings of a total of 5,720,000 shares of Lexington Common Stock
and the application of the proceeds therefrom. The results of operations for
properties acquired during 1996, from their respective acquisition dates
through December 31, 1996 are included in the Company's historical 1996
consolidated statement of income. The results of operations consist
principally of rental revenue, interest expense and depreciation expense.
Rental revenue in these pro forma financial statements (both historical and
pro forma) is generated from leases that are "net leases," under which the
tenant is responsible for substantially all costs of real estate taxes,
insurance and ordinary maintenance. Pro forma rental income represents
straight-line rent as provided by GAAP, calculated as the difference
between the cash rent paid under the lease and the average rent due over
the noncancelable term of the lease.
The depreciable life for all real property additions is 40 years.
Applicable pro forma interest expense adjustments are calculated based on
annual interest rates on the respective debt as of the acquisition,
disposal or refinancing dates. The pro forma reduction of historical
interest expense represents only the actual interest expense incurred on
debt that has been or will be repaid.
77
<PAGE> 86
<TABLE>
<CAPTION>
ANNUALIZED
RENTAL INTEREST INTEREST DEPRECIATION
REVENUE RATE EXPENSE EXPENSE
------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Acquisition of LP Properties............ $ 2,595 * $ 962 $ 840
Acquisition of Salt Lake City
Property.............................. 3,264 11.0400% 424 824
Acquisition of Exel Pennsylvania
Properties............................ 2,949 8.0000% 2,000 601
Acquisition of Bull Property............ 1,023 7.9600% 521 226
Acquisition of Lockheed Martin
Property.............................. 1,671 7.1875% 395 344
Acquisition of Ryder Property........... 1,009 7.1875% 665 206
Acquisition of FirstPlus Property....... 3,544 7.1875% 1,653 779
Sale of Ross Stores Newark Property..... (3,242) 8.1000% (2,015) (726)
Sale of Stratus Computer Property....... (2,254) 10.1800% (1,082) (473)
Common stock offerings.................. -- 6.8750% (3,879) --
Other activities........................ 2,608 (**) 1,227 563
------- ------- ------
$13,167 $ 871 $3,184
======= ======= ======
</TABLE>
* The LP Properties consist of four properties leased to Toys "R" Us and the
property leased to Liberty House, Inc. The annualized interest rates on the
debt were 12.625% and 10.25% on the Toys "R" Us and Liberty House
properties, respectively, prior to prepayment.
** The interest rates on the debt on the other activities range from 6.875% to
12.90%.
(3) This amount represents the minority interest in the net income of LCIF due
to the issuance of OP units in the acquisition of the Salt Lake City
Property, the acquisition of the LP Properties and the acquisition of the
Exel Pennsylvania Properties.
(4) The following nonrecurring items are not included in the pro forma statement
of income for the year ended December 31, 1996:
<TABLE>
<S> <C>
Prepayment Premium -- Northwest Pipeline Property refinancing...... $(1,824)
Prepayment Premium -- Ross Stores Newark Property debt repayment... (773)
Prepayment Premium -- Stratus Computer Property debt repayment..... (1,862)
Gain on sale of Stratus Computer Property.......................... 2,850
Pro Forma loss on sale of Ross Stores Newark Property.............. (910)
=======
</TABLE>
(5) Primary income per share from continuing operations is computed by dividing
income from continuing operations (reduced by preferred dividends) by the
weighted average number of common and diluted common equivalent shares
outstanding during the period. Fully diluted income from continuing
operations per share amounts are similarly computed but include the effect
when dilutive of the Company's other potentially dilutive securities. Fully
diluted income from continuing operations is reduced by preferred dividends
and increased by minority interests resulting from the assumed conversion of
the OP units. The Convertible Preferred Stock and Exchangeable Notes are
excluded from the pro forma computations due to their anti-dilutive effect
during the period.
78
<PAGE> 87
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(FOR THE NINE MONTHS ENDED AND AS OF SEPTEMBER 30, 1997)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY CRIT OTHER
HISTORICAL HISTORICAL MERGER(1) ADJUSTMENTS(2) PRO FORMA
---------- ---------- --------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Revenues:
Rental.......................... $ 31,420 $ 2,567 $ 117 $ 1,641 $ 35,745
Interest and other.............. 447 22 -- -- 469
-------- ------- ------- -------- --------
Total Revenues.......... 31,867 2,589 117 1,641 36,214
Expenses:
Interest expense................ 12,628 1,051 -- (1,774) 11,905
Depreciation.................... 7,920 598 88 227 8,833
Amortization of deferred
expenses..................... 649 -- -- (88) 561
Property operating expenses..... 616 -- -- -- 616
General and administrative
expenses..................... 2,885 235 (235) -- 2,885
Other expenses.................. -- 321 (321) -- --
-------- ------- ------- -------- --------
Total Expenses.......... 24,698 2,205 (468) (1,635) 24,800
-------- ------- ------- -------- --------
Income before minority
interests....................... 7,169 384 585 3,276 11,414
Minority interests................ 1,158 -- -- 263(3) 1,421
-------- ------- ------- -------- --------
Income from continuing
operations(4)................... $ 6,011 $ 384 $ 585 $ 3,013 $ 9,993
======== ======= ======= ======== ========
PER SHARE DATA:(5)
Income from continuing operations
Primary......................... $ 0.46 $ 0.38 $ -- $ -- $ 0.53
Fully diluted................... 0.45 0.38 -- -- 0.53
Weighted average common shares
outstanding
Primary......................... 11,143 1,011 274 4,574 17,002
Fully diluted................... 13,736 1,011 274 4,708 19,729
Balance Sheet (at end of
period)(6):
Real estate at cost............. $ 415,433 $ 32,600 $ 570 $(21,594) $ 427,009
Less: accumulated
depreciation................. 55,632 5,652 (5,652) (7,327) 48,305
-------- ------- ------- -------- --------
Real estate, net................ 359,801 26,948 6,222 (14,267) 378,704
Other assets.................... 23,731 3,339 (3,009) (1,780) 22,281
-------- ------- ------- -------- --------
Total assets............ $ 383,532 $ 30,287 $ 3,213 $(16,047) $ 400,985
======== ======= ======= ======== ========
Mortgage loans payable
(including accrued
interest).................... $ 199,550 $ 15,350 $ -- $(47,992) $ 166,908
Other liabilities............... 9,283 879 (879) -- 9,283
Minority interest............... 28,232 -- -- -- 28,232
-------- ------- ------- -------- --------
Total liabilities............... 237,065 16,229 (879) (47,992) 204,423
</TABLE>
79
<PAGE> 88
<TABLE>
<CAPTION>
COMPANY CRIT OTHER
HISTORICAL HISTORICAL MERGER(1) ADJUSTMENTS(2) PRO FORMA
-------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Shareholders' equity:
Convertible preferred........... -- -- -- -- --
Common stock.................... 1 101 (101) 1 2
Additional paid in capital...... 194,787 13,957 4,193 32,952 245,889
Accumulated distributions in
excess of net income......... (48,321) -- -- (1,008) (49,329)
-------- ------- ------- -------- --------
Total shareholders' equity... 146,467 14,058 4,092 31,945 196,562
-------- ------- ------- -------- --------
Total liabilities and
shareholders'
equity................ $ 383,532 $ 30,287 $ 3,213 $(16,047) $ 400,985
======== ======= ======= ======== ========
</TABLE>
- ---------------
(1) This column reflects the adjustments to the historical financial statements
as a result of the Merger as follows:
<TABLE>
<S> <C>
Purchase price:
Issuance of common stock: 1,284,956 shares at $14.125 per share... $ 18,150
Assumption of debt (fair value approximates carrying value)....... 16,229
Write-off of deferred rent receivable............................. 2,130
Historical carrying value of property (total assets).............. (30,287)
--------
Excess of purchase price over historical net book value allocated
to fair value of properties -- allocated to depreciable assets
(estimated depreciable life of 40 years)........................ $ 6,222
========
</TABLE>
The increase in common shares outstanding is the net difference between the
number of CRIT shares and number of Lexington shares being issued.
The rental revenue adjustment reflects the effect of applying SFAS 13 as if
the Merger had occurred on January 1, 1996.
The reduction in general and administrative expenses and other expenses,
representing CRIT's costs incurred in connection with the Merger, reflects
the elimination of these costs which would not have been incurred by the
combined entity.
The reduction in other assets represents the elimination of the deferred
rent receivable and other deferred expenses.
(2) These amounts reflect (i) the addition of historical results of operations
for the period from January 1 to the respective acquisition dates for the
Properties acquired by the Company during 1997 and for a 6-month period for
the Pending Acquisitions, (ii) the elimination of the results of operations
of the Ross Stores Newark Property and Stratus Computer Property as if the
sales had taken place on January 1, 1996, (iii) the Salt Lake City
Refinancing and (iv) the 1997 public offerings of a total of 5,720,000
shares of Lexington Common Stock and the application of the proceeds
therefrom. The results of operations for Properties acquired during 1997,
from their respective acquisition dates through September 30, 1997, are
included in the Company's historical September 30, 1997 consolidated
statement of income.
Rental revenue in these financial statements (both historical and pro forma)
is generated from leases that are "net leases," under which the tenant is
responsible for substantially all costs of real estate taxes, insurance and
ordinary maintenance. Pro forma rental income represents straight-line rent
as provided by GAAP, calculated as the difference between the cash rent paid
under the lease and the average rent due over the non-cancelable term of the
lease.
80
<PAGE> 89
The depreciable life for all real property additions is 40 years. Applicable
pro forma interest expense adjustments are calculated based on annual
interest rates on the respective debt as of the acquisition, disposal or
refinancing dates.
<TABLE>
<CAPTION>
ANNUALIZED
RENTAL INTEREST INTEREST DEPRECIATION
REVENUE RATE EXPENSE EXPENSE
------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Acquisition of Exel Pennsylvania
Properties............................ $ 648 8.000% $ 433 $ 130
Acquisition of Bull Property............ 537 7.960% 271 118
Acquisition of Lockheed Martin
Property.............................. 930 7.125% 218 191
Acquisition of Ryder Property........... 751 7.125% 494 154
Acquisition of FirstPlus Property....... 2,423 7.125% 1,109 527
Sale of Ross Stores Newark Property..... (2,457) 8.100% (1,478) (624)
Sale of Stratus Computer Property....... (1,516) 10.180% (698) (335)
Other activities........................ 325 ** (2,123) 66
------ ------ -----
$ 1,641 $ (1,774) $ 227
====== ====== =====
</TABLE>
The pro forma interest expense adjustment includes (i) the impact of the
Salt Lake City Refinancing (ii) repayment of the Credit Facility with
proceeds from the sale of the Ross Stores Newark Property and with proceeds
from the Lexington Common Stock offerings, and (iii) the impact of interest
on acquisitions and other debt repayments described above as if they had
occurred on January 1, 1996. The pro forma reduction of interest expense
represents only the actual interest expense incurred on debt that has been
or will be repaid.
** The interest rates related to other activities range from 6.875% to 12.900%.
(3) This amount represents the minority interest in the net income of LCIF due
to the issuance of OP Units in connection with the acquisition of the
Company's Salt Lake City Property and the Exel Pennsylvania Properties
Acquisition.
(4) The following non-recurring items are not included in the pro forma
statement of income for the nine months ended September 30, 1997: Prepayment
Premiums for the Northwest Pipeline Property and the Stratus Property
refinancing of $1,856 and $3,889, respectively, or the gain on sale of the
Stratus Property of $3,517.
(5) Primary income from continuing operations per share is computed by dividing
income from continuing operations reduced by preferred dividends by the
weighted average number of common and diluted common equivalent shares
outstanding during the period. Fully diluted income from continuing
operations per share amounts are similarly computed but include the effect
when dilutive of the Company's other potentially dilutive securities. Fully
diluted income from continuing operations excludes preferred dividends. The
Company's Convertible Preferred Stock, Exchangeable Notes and the Company's
Operating Partnership Units are excluded from the pro forma computations due
to their anti-dilutive effect during the period.
(6) September 1997 Pro Forma Balance Sheet adjustments:
<TABLE>
<CAPTION>
ACCUMULATED
REAL MORTGAGE ADDITIONAL DISTRIBUTIONS
ESTATE ACCUMULATED OTHER LOANS PAID IN IN EXCESS OF
AT COST DEPRECIATION ASSETS PAYABLE CAPITAL NET INCOME
-------- ------------ ------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Acquisition of Ryder
Property................... $ 9,250 $ -- $ -- $ 9,250 $ -- $ --
Sale of Ross Stores Newark
Property................... (30,844) (7,327) (2,483) (24,992) -- (1,008)
November 1997 common stock
offering................... -- -- 703 (32,250) 32,952 --
-------- -------- -------- --------- ------- -------
$(21,594) $ (7,327) $(1,780) $(47,992) $ 32,952 $(1,008)
======== ======== ======== ========= ======= =======
</TABLE>
81
<PAGE> 90
INFORMATION REGARDING CRIT
BUSINESS
CRIT was formed as a Massachusetts business trust under the laws of the
Commonwealth of Massachusetts on June 27, 1989. CRIT qualified in 1990 as a
REIT. Corporate Realty Advisors, Inc. acts as advisor to CRIT pursuant to the
Amended and Restated Advisory Services Agreement between CRIT and the Advisor.
CRIT was formed to invest in triple net leased income-producing commercial
and industrial real estate properties throughout the United States. Through the
ownership of equity interests in income-producing real property, CRIT has sought
rental income from the leasing of its real properties and long term capital
gains from appreciation in the value of its real properties. CRIT was intended
to have a life cycle consisting of three phases: (1) capital formation and
property acquisition; (2) real estate portfolio management; and (3) property
disposition. CRIT has completed the first phase, capital formation and property
acquisition, and is currently in the second phase of its life cycle, real estate
portfolio management. CRIT was designed to be a self-liquidating/finite life
trust. It has been anticipated that CRIT would liquidate its portfolio of
properties approximately six to ten years after the acquisition of the last
acquired property, and would distribute the net proceeds to its shareholders.
The last property acquired by CRIT was purchased on September 28, 1992. In the
event the proposed Merger is not consummated, CRIT will continue to manage the
properties and eventually dispose of them individually or in the aggregate in
accordance with the investment policy described below.
INVESTMENT POLICY
CRIT's investment policy has been to acquire properties, located throughout
the United States, that are devoted to commercial and industrial uses. CRIT owns
no residential properties. CRIT does not have a policy, and there have been no
limitations, as to the amount or percentage of CRIT's assets that may be
invested in any one property or group of properties or with any one person or
group of persons. However, CRIT has attempted to acquire properties in various
locations throughout the United States to minimize the effect of changes in
local economic conditions and certain other risks.
Subject to the overall portfolio borrowing limitation described below, any
single property may be encumbered by indebtedness in an amount up to 75% of the
appraised value of such property. CRIT may also selectively leverage or
refinance, as the case may be, certain, but not necessarily all, of the
properties. CRIT will distribute the proceeds received from any such leveragings
or refinancings to the shareholders. The amount of any leverage for any property
and in the aggregate for all of the properties shall be subject to the
limitations described below.
The aggregate indebtedness (without regard to any temporary or bridge
financing) of CRIT's real estate portfolio will not exceed 50% of the aggregate
appraised values of all of the properties, and any single property may not bear
indebtedness in an amount greater than 75% of the appraised value of any
property. For purposes of determining maximum allowable indebtedness, "appraised
value" shall be the value reflected in the appraisal obtained by CRIT at the
time of acquisition of each property, unless one or more higher appraisals are
subsequently obtained, in which event the appraised value shall refer to the
value reflected in the highest appraisal.
If CRIT does not merge with the Company, CRIT expects to hold each property
it has acquired for an extended period until eventual liquidation. Prior to its
termination and dissolution, CRIT will sell some or all of the properties. The
decision to sell any property will depend, in part, on the anticipated remaining
economic benefits of continued ownership.
While CRIT will not conduct a mortgage lending business, it is not
precluded, subject to certain restrictions, from making investments in mortgages
or holding mortgages received in the process of liquidating CRIT, although CRIT
does not currently intend to provide seller financing in the disposition of its
properties.
82
<PAGE> 91
The Declaration of Trust, among other things, prohibits CRIT from (i)
investing in commodities or commodity future contracts, (ii) engaging in any
short sales or engaging in trading or underwriting of securities issued by other
persons, (iii) issuing equity securities of more than one class; (iv) issuing
options or warrants to purchase CRIT Shares unless the exercise price equals or
exceeds the then fair market value of CRIT Shares, or issuing options or
warrants to purchase CRIT Shares to the Advisor, a Trustee or any affiliate
thereof unless such options or warrants are issued under the same terms as sold
to the general public and do not exceed 10% of the outstanding shares of CRIT on
the date of grant, (v) issuing debt securities unless cash flow is sufficient to
cover debt service on all debt securities to be outstanding, (vi) incurring
indebtedness in an aggregate amount in excess of 300% of net asset value
(defined as the total assets of CRIT (other than intangibles) at cost before
deducting depreciation or other non-cash reserves less total liabilities of
CRIT), and (vii) causing CRIT Shares to be listed for trading on a national or
regional stock exchange or included on the NASD automated quotation system
without the prior approval of the holders of a majority of the outstanding CRIT
Shares.
The Declaration of Trust requires that certain of the trustees review and
approve CRIT's investment policy at least annually. The investment objectives
and policies of CRIT, except as otherwise provided in the Declaration of Trust,
may be altered by CRIT Board without the approval of the shareholders. The
methods implementing CRIT's investment policies may also vary as new investment
techniques are developed.
PROPERTIES
To date, CRIT has acquired three properties which are triple net leased.
CRIT has contracted with the Advisor to provide management and other related
services with respect to such properties and with respect to the investment of
monies held in reserve for working capital purposes. CRIT currently has no
employees, as the Advisor and affiliates provide all services. All of CRIT's
operations are located in the United States. The business conducted by CRIT
during 1996, and the business of CRIT as currently conducted, related primarily
to managing the three properties previously acquired by CRIT. Further
information with respect to the three investment properties follows below:
The Circuit City Property. On March 27, 1990, CRIT acquired its first
rental property: the Circuit City Stores, Inc. ("Circuit City") corporate
headquarters building located outside of Richmond, Virginia. CRIT purchased the
headquarters building, and assumed the rights and obligations under a ground
lease for the underlying land, from CRA Acquisition Corp. ("CRAAC") for
$25,000,000 (less certain pro-rated closing amounts). The office building and
underlying land (the "Circuit City Property") has been leased to Circuit City
under a triple net lease for use by Circuit City as its corporate headquarters.
Funding sources for the purchase price of the Circuit City Property were as
follows: offering proceeds and cash in the amount of $9,313,609; a first
mortgage loan in the amount of $12,500,000 from Principal Mutual Life Insurance
Company plus accrued interest of $6,552 thereon; and an unsecured loan from
CRAAC in the amount of $3,156,990, which unsecured loan was net of $22,849 of
prorated rental income and interest. The unsecured loan from CRAAC was
subsequently paid in installments as additional offering proceeds were received
and was fully repaid on April 30, 1991.
The Circuit City Property is encumbered by a Deed of Trust and Security
Agreement (the "Deed of Trust") which secures a non-recourse note from CRAAC to
Principal Mutual Life Insurance Company (the "Lender") for $12,500,000 (the
"Note"). CRIT has assumed responsibility for payment on the Note and CRIT has
agreed to comply with the terms of the Deed of Trust. During the first five
years that the Note was outstanding, interest accrued at the rate of 9.25% per
annum, but was payable monthly in advance at the rate of 8.5% per annum. The
unpaid interest which accrued at a rate of .75% per annum was added monthly to
the principal balance of the Note. The Note matures on March 1, 2000, subject to
the right of CRIT to prepay the Note. Prepayment on the Note is subject to a
"make-whole" prepayment premium. The amount of the premium, if any, is
determined by comparing the then present value of the future yield on the Note
with the then present value of the future yield on certain government securities
specified in the Note. CRIT must pay a premium, in the amount of the difference,
only if the government securities would yield less in the future than the Note.
83
<PAGE> 92
The rate of interest on the Note was subject to adjustment at the end of
five years to reflect the then current interest rate offered by the Lender for a
real estate loan of similar quality, term and amount, with the setting of an
amortization arrangement as then prevalent in the lending industry. In December
1994, CRIT reached an agreement with the Lender with respect to the interest
rate for the second five years. Effective March 1, 1995, the interest rate under
the Note decreased from 9.25% to 8.875%, and interest on the Note is now payable
in full monthly. The principal amount of the Note plus the unpaid interest which
accrued during the first five years of the loan, totaling $13,093,133 in the
aggregate, is payable on March 1, 2000.
The Circuit City office building is located on approximately 18.5 acres of
land, and has approximately 288,000 gross leasable square feet. The building
also houses a gymnasium/basketball court, exercise facility, full service
cafeteria with 200 seats, a 9,000 square foot computer facility with satellite
linkage to Circuit City's other business locations, and a 6,000 square foot
warehouse and staging facility. The Circuit City building has parking available
for approximately 1,100 cars.
The lease for the Circuit City office building (the "Circuit City Lease")
is a triple net lease under which Circuit City is responsible for real estate
taxes, maintenance, utility fees and insurance. As sole tenant, Circuit City
occupies 100% of the leasable square footage. The Circuit City Lease commenced
on February 28, 1990 and will expire on February 28, 2010. Circuit City has five
options to renew and extend the Circuit City Lease consisting of four ten-year
periods followed by one five-year period. The monthly rental for years one
through five was $189,583 payable monthly in advance. The monthly rental for
years six through ten is $206,510 and monthly rental for years eleven through
twenty will be $238,281. The rent for each renewal term may be adjusted by the
percent change in the consumer price index, as defined in the Circuit City
Lease. Rent attributed to the Circuit City Lease represented 76% of CRIT's total
rental income in 1996, which percentage was unchanged from 1995.
Circuit City is a retailer of brand name consumer electronics and major
appliances and, through its CarMax division, new and used automobiles with 500
stores in 42 states. According to its Annual Report on Form 10-K, it also owns
subsidiaries that provide consumer financing, extended warranty programs and
repair and maintenance services relating to substantially all products it sells.
Circuit City files annual, quarterly and current reports, proxy statements and
other information with the SEC. The summarized financial information of Circuit
City set forth below was derived from reports filed by Circuit City with the SEC
and neither Lexington nor CRIT assumes any responsibility or liability
therefore. Such information is being presented for informational purposes only.
<TABLE>
<CAPTION>
1996
1997 -------------- 1995
---------- (IN THOUSANDS) ----------
<S> <C> <C> <C>
Net sales............................................ $7,633,811 $7,029,123 $5,582,947
Gross profit......................................... 1,761,000 1,634,830 1,385,000
Net earnings......................................... 136,414 179,375 167,875
Current assets....................................... 2,163,133 1,733,677
Current liabilities.................................. 836,651 831,175
Total assets......................................... 3,081,173 2,526,022
Total liabilities.................................... 1,466,317 1,462,101
Stockholders' equity................................. 1,614,856 1,063,921
</TABLE>
The Allegiance Property (formerly the "Baxter Property"). On October 9,
1991, pursuant to a Purchase and Sale Agreement dated as of October 19, 1990
between CRIT and Birmware I Limited Partnership ("Birmware"), a Texas limited
partnership affiliated with Trammell Crow Company, CRIT purchased all of
Birmware's right, title and interest in the land and a 123,924 square foot
distribution center built thereon (together, the "Allegiance Property") in
Bessemer, Alabama. CRIT purchased the rights to the Allegiance Property for
$4,500,000, including a 7.5% development fee payable to Birmware. The Allegiance
Property is located on 10.16 acres in the Greenwood Exchange development, an
industrial park developed by Trammell Crow Company in Bessemer, and is serving
as a regional distribution center for Allegiance Healthcare Corporation
("Allegiance").
84
<PAGE> 93
Allegiance was formed as a result of the spin-off by Baxter International,
Inc. ("Baxter International") of the distribution and surgical manufacturing
businesses of Baxter Healthcare Corporation ("Baxter"), a subsidiary of Baxter
International, which spin-off was completed on September 30, 1996. In connection
with the spin-off, assets of Baxter were transferred to Allegiance, including
the net lease covering the Allegiance Property described below.
CRIT effected the acquisition of the Allegiance Property by means of a
financing arrangement with the Industrial Development Board of the City of
Bessemer ("IDB") in the form of an Inducement and Loan Agreement (the
"Inducement and Loan Agreement"). The Inducement and Loan Agreement was
originally entered into between Birmware and the IDB and was subsequently
assigned by Birmware to CRIT. In accordance with the terms of the Inducement and
Loan Agreement, at the request of Birmware the IDB purchased the land and
constructed the building with the proceeds of a non-interest bearing loan made
by Birmware to the IDB and evidenced by a bond anticipation note. CRIT acquired
beneficial interest to the Allegiance Property upon payment to the IDB of the
purchase price of $4,500,000.
In June, 1992, CRIT financed $1,000,000 of the purchase price pursuant to a
lease financing arrangement with the IDB, under which the IDB issued a first
mortgage industrial revenue bond in the principal amount of $1,000,000 to a
third party lender, Modern Woodmen of America. The payment of such revenue bond
is collateralized by, among other things, a first mortgage lien on the property.
The loan matures on September 1, 2001 and bears interest at an annual rate of
9.5% with monthly payments of interest only until maturity. CRIT, in turn,
entered into a lease with the IDB under which the lease payments equal an amount
sufficient to service the revenue bond. CRIT has the option to purchase the
Allegiance Property at any time after the revenue bond has been paid in full for
a nominal purchase price.
The Allegiance Property is being leased to Allegiance under a pre-existing
ten-year triple net lease which commenced on November 1, 1991 (the "Allegiance
Lease", formerly the "Baxter Lease"). As part of the spin-off from Baxter
International, Baxter assigned all of its right, title and interest under the
Baxter Lease to Allegiance, and Allegiance assumed the obligations of Baxter
under the lease accruing after the date of the assignment. Baxter remains liable
to CRIT under the Allegiance Lease except with respect to any amendment of the
Allegiance Lease subsequently entered into between CRIT and Allegiance. The
Allegiance Lease has a base annual rent of $472,500. Allegiance is required to
pay all taxes, utility charges, insurance, maintenance and repairs, management
fees and all other charges relating to the use and occupancy of the Allegiance
Property. Baxter International has unconditionally guaranteed all of the
obligations under the Allegiance Lease, except with respect to any amendments
entered into between CRIT and Allegiance. Under the terms of the Allegiance
Lease, Allegiance has two five-year renewal options at rents which reflect
increases in the Consumer Price Index, as published by the Bureau of Labor
Statistics of the United States Department of Labor, from the initial
commencement date of the lease through the renewal date; provided, however, that
pursuant to the assignment and assumption agreement entered into between Baxter
and Allegiance, any exercise by Allegiance of an option that would extend the
term of the Allegiance Lease beyond December 31, 2006 is subject to the prior
consent of Baxter. Any increase in rents may not be less than 3% nor more than
5% on a compounded annual basis. Rent attributed to the Allegiance Lease
represented 14% of CRIT's total rental income in 1996, which percentage was
unchanged from 1995.
Allegiance has the right under the Allegiance Lease to require CRIT to pay
for the expansion of the distribution center by an additional 88,920 square
feet. Allegiance may exercise this right at any time during the initial ten
years of the Allegiance Lease. If Allegiance does not exercise this option
within the first five years of the Allegiance Lease, Allegiance would be
obligated to pay CRIT an additional $100,000 if it later exercises the expansion
option.
Once the distribution center is expanded, the basic term of the Allegiance
Lease will be automatically extended by five to ten years, at Allegiance's
option, provided that under no circumstances will the term of the Allegiance
Lease expire before the end of the ten-year basic term. Commencement of the two
five-year optional renewal terms would then be deferred until the end of the
extended base term. Rent on the expanded space will depend on the length of the
lease extension and prevailing interest rates at the time of expansion, but in
no event will be less than 10.5% of the total cost of the expansion.
85
<PAGE> 94
If Allegiance exercises the expansion option, CRIT would attempt to finance
100% of the cost of construction of the expansion space and to arrange the term
of such financing to be coterminous with the lease extension selected by
Allegiance.
The Allegiance Property is located at the interchange of Morgan Road and
Interstate 459, a major artery serving the southern quadrant of the Birmingham
metropolitan area. Birmingham is Alabama's largest city with, according to the
National Census Bureau, a population in the metropolitan area in 1990 of over
907,000.
Depreciation of that portion of the purchase price allocated to the
distribution center is provided by the straight line method over a 40-year
recovery period.
The Dana Property. On September 28, 1992, pursuant to a Purchase and Sale
agreement dated as of May 15, 1992 between CRIT and Shannon Properties Inc.
("Shannon"), a Delaware corporation, CRIT purchased all of Shannon's rights,
title and interest in the land and a 148,000 square foot regional assembly
facility built thereon (together, the "Dana Property"). CRIT purchased the
rights to the Property for $3,100,000. The Dana Property is located on 20.95
acres in Gordonsville, Tennessee, and is serving as a regional assembly facility
for Dana Corporation ("Dana").
CRIT financed 50% of the purchase price of the Dana Property by obtaining a
first mortgage loan from American Fidelity Assurance Company in the principal
amount of $1,550,000. The loan is due on September 1, 2002 and bears interest at
an annual rate of 9.5% with a 15-year amortization of monthly payments of
principal and interest of $16,185, and a balloon payment in the amount of
$770,669 payable upon maturity of the loan. The loan is secured by a deed of
trust with respect to the Dana Property and assignment of the lease with Dana.
On December 31, 1996, the balance of the loan was $1,311,013.
The Dana Property is being leased to Dana under a pre-existing triple net
lease (the "Dana Lease") whereby Dana is required to pay all taxes, utility
charges, insurance, maintenance and repairs, management fees and all other
charges relating to the use and occupancy of the Dana Property. The lease is for
a term of 15 years, expiring on August 31, 2007. Dana has three options to renew
and extend the lease consisting of two five-year periods followed by one term of
four years and eleven months. The rent is payable monthly in advance. The
monthly rental was $26,324.17 per month through the period ending July 31, 1996;
$27,113.92 per month for the three-year period ending July 31, 1999; $27,927.33
per month for the three-year period ending July 31, 2002; $28,765.17 per month
for the three-year period ending July 31, 2005 and $29,544.75 per month
thereafter through August 31, 2007. The base rent for each renewal term will be
fixed and will equal market rates, but, in no event less than 95% or greater
than 105% of the rent in the year immediately preceding such option period. Rent
attributed to the Dana Lease represented 10% of CRIT's total rental income in
1996, which percentage was unchanged from 1995.
Dana is a manufacturer of vehicular products, including drivetrain
components, engine parts and chassis products, and other industrial products,
including fluid power systems and industrial power transmission products. Dana
had reported revenues in 1996 of approximately $7.7 billion.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or threatened against CRIT.
86
<PAGE> 95
SELECTED FINANCIAL DATA
The following table sets forth certain historical selected financial
information for CRIT as of or for the year ended December 31, 1996, 1995, 1994,
1993 and 1992. The financial information of CRIT at December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996 has been
derived from the historical financial statements of CRIT audited by Ernst &
Young LLP, independent auditors, whose report with respect to the financial
statements of CRIT as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996 are incorporated by reference into
this Proxy Statement/Prospectus. The financial statements of CRIT as of December
31, 1994, 1993 and 1992 and for each of the two years in the period ended
December 31, 1993 were derived from CRIT's audited financial statements. This
information should be read in conjunction with the historical financial
statements of CRIT, including the related notes thereto, and the other documents
incorporated herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Revenues.................. $ 3,459,966 $ 3,442,823 $ 3,443,391 $ 3,440,936 $ 3,232,331
Net Income...................... 909,193 903,424 876,858 880,836 872,709
Net Income Per Share(1)......... 0.90 0.89 0.87 0.87 0.86
Total Assets.................... 30,585,114 31,155,095 31,802,627 32,241,966 32,715,083
Long Term Obligations........... 15,404,146 15,470,369 15,506,127 15,421,658 15,344,500
Dividends Per Share............. $ 1.40 $ 1.40 $ 1.40 $ 1.40 $ 1.55
</TABLE>
- ---------------
(1) Based on 1,010,776 CRIT Shares outstanding during each of such years.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with CRIT's
financial statements, and the notes thereto, which are incorporated by reference
in this Proxy Statement/Prospectus and other information presented elsewhere
herein.
LIQUIDITY AND CAPITAL RESOURCES
CRIT's main sources of current liquidity are: (1) a working capital reserve
generated by the cash proceeds from the offering of CRIT Shares; (2) net cash
flow generated from rental payments received from the Circuit City, Allegiance
and Dana Properties; and (3) borrowings from financial institutions.
Since its inception in June 1989, CRIT's principal applications of its
capital resources have been: (1) the acquisition of income producing real
estate; (2) the payment of offering and organization expenses; (3) the payment
of interest and administrative expenses; (4) the payment of distributions to
shareholders; and (5) payments in respect of mortgages.
As of September 30, 1997, CRIT had cash of approximately $1,005,000 which
was invested in a money market fund of an affiliate, and prepaid expenses and
receivables totalling approximately $138,000. Of these amounts, approximately
$264,000 represented a working capital reserve, $353,772 was reserved to pay the
quarterly dividend in November 1997 and the balance was reserved for operations.
During the nine months ended September 30, 1997, CRIT incurred approximately
$321,000 of expenses in connection with the proposed Merger and expects to incur
an additional $75,000 of such expenses. CRIT expects to maintain its current
dividend rate paid to shareholders since the working capital reserve would be
sufficient to cover the expected additional proposed Merger expenses.
CRIT expects sufficient cash flow to be generated from operations to meet
its current operating and debt service requirements on a short-term and
long-term basis. CRIT's only significant liabilities are mortgages aggregating
$15,352,200 at September 30, 1997, maturing at various dates in approximately
three to five years. CRIT anticipates satisfying these mortgages with the
proceeds of refinancings or sales of underlying properties.
87
<PAGE> 96
CRIT paid dividends aggregating $1,566,702 in 1992, $1,415,086 in each of
1993, 1994, 1995 and 1996 and $353,772 in each of February, May, August and
November 1997. Dividends have been paid by CRIT in excess of net income. Such
excess amounts have been charged to additional paid-in capital.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 versus September 30, 1996
Net income for the three and nine months ended September 30, 1997 decreased
by approximately $80,000 and $297,000 from each of the corresponding periods in
1996 due to expenses incurred in 1997 in connection with the proposed merger.
The Company incurred approximately $321,000 of such merger expenses.
Year Ended December 31, 1996 versus Year Ended December 31, 1995
Net income in 1996 approximated net income in 1995. Interest income
increased by approximately $17,000 due to the increase in cash invested in an
interest bearing account. Interest expense decreased $13,319 primarily due to
the decrease in the interest rate on the Circuit City loan. An increase in
general and administrative expenses was attributable primarily to an increase in
the aggregate amount of trustee fees paid by CRIT. Such fees of approximately
$22,000 increased as a result of an additional independent trustee (which was
due to the change in status of an existing trustee from an affiliated to an
independent trustee) and payment for additional trustee meetings to discuss and
review proposals received regarding potential sales of assets.
Year Ended December 31, 1995 versus Year Ended December 31, 1994
Net income in 1995 increased $26,566 from 1994 due primarily to the
decrease in interest expense resulting from the interest rate adjustment, from
9.25% to 8.875%, on the Circuit City loan. Although rental income recognized for
financial statement purposes was the same for 1995 and 1994, actual rent
received increased by approximately $170,000 due to the rental increase on the
Circuit City Property, which became effective in March 1995. Interest expense
decreased $37,815 due to the reduction in the annual interest rate on the
Circuit City loan, which also became effective in March 1995. However, since the
pay rate on this loan increased from 8.5% to 8.875%, actual cash paid for
interest increased by approximately $83,000. Net cash flow during 1995 increased
as the higher rent for the Circuit City Property more than offset the increased
cash interest payments on the Circuit City loan. As a result of the increased
cash flow, the base annual fee to the advisor increased by approximately $9,000
from 1994.
BENEFICIAL OWNERSHIP OF COMMON SHARES
To the knowledge of management of CRIT, the following entity is the only
holder of record or beneficial owner of more than 5% of the outstanding CRIT
Shares of CRIT.
<TABLE>
<CAPTION>
PERCENT
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP CLASS
--------------------------------------------------- ----------------------- -------
<S> <C> <C>
Glenmede Trust Company............................. 274,725 CRIT Shares(1) 27.2%
Trustee for the Pew Memorial Trust
1 Liberty Place 1650 Market Street, Suite 1200
Philadelphia, PA 19103
</TABLE>
- ---------------
(1) Sole voting and investment power.
As of the Record Date no trustee or officer of CRIT beneficially owned any
CRIT Shares. As of the Record Date, the Advisor owned 10,000 Shares of CRIT.
88
<PAGE> 97
MANAGEMENT OF THE COMPANY
The directors and senior executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
E. Robert Roskind...................... 52 Chairman of the Board of Directors and
Co-Chief Executive Officer(1)
Richard J. Rouse....................... 51 Vice Chairman of the Board of Directors
and Co-Chief Executive Officer
T. Wilson Eglin........................ 33 President, Chief Operating Officer and
Director
Antonia G. Trigiani.................... 36 Chief Financial Officer and Treasurer
Stephen C. Hagen....................... 54 Senior Vice President
Paul R. Wood........................... 37 Vice President, Chief Accounting
Officer and Secretary
Janet M. Kaz........................... 34 Vice President
Philip L. Kianka....................... 41 Vice President
Carl D. Glickman....................... 71 Director(1)(2)
Kevin W. Lynch......................... 44 Director(2)
John McGurk............................ 53 Director(1)(2)
Seth M. Zachary........................ 44 Director(2)
</TABLE>
- ---------------
(1) Member, Executive Committee of the Board of Directors.
(2) Member, Audit and Compensation Committees of the Board of Directors.
E. Robert Roskind has served as the Chairman of the Board of Directors and
Co-Chief Executive Officer of the Company since October 1993. He founded The LCP
Group, L.P. ("LCP") in 1973 and has been its Chairman since 1976. Prior to
founding LCP, Mr. Roskind headed the real estate net lease financing area of
Lehman Brothers Inc. He is also a general partner for a variety of entities
which serve as the general partner of various partnerships that hold net leased
real properties and other real estate or interests therein. Mr. Roskind is a
director of Berkshire Realty Company, Inc., Krupp Government Income Trust I and
Krupp Government Income Trust II.
Richard J. Rouse became the Vice Chairman of the Board of Directors in
April 1996, has served as the Co-Chief Executive Officer and a director of the
Company since October 1993, and was the President of the Company from October
1993 until April 1996. Mr. Rouse was also a managing director of LCP. He had
been associated with LCP since 1979 and had been engaged there in all aspects of
net lease finance, acquisition and syndication and corporate financing
transactions.
T. Wilson Eglin became the President of the Company in April 1996, has
served as Chief Operating Officer of the Company since October 1993, has been a
director of the Company since May 1994, and was the Executive Vice President of
the Company from October 1993 until April 1996. Prior to his association with
the Company, Mr. Eglin had been associated with LCP since 1987 and had been its
Vice President--Acquisitions from 1990 to 1993. In connection with his
responsibilities with LCP, Mr. Eglin was an officer of affiliated companies that
own and manage over 400 net leased real properties and was involved in all
aspects of real estate acquisition and finance, principally in net leased
transactions.
Antonia G. Trigiani has served as the Chief Financial Officer and Treasurer
of the Company since October 1993. She had been associated with LCP from 1989
until April 1996, serving as its Vice President--Asset Management from 1990
until April 1996. Prior to joining LCP, Ms. Trigiani was associated with HRE
Properties, a REIT listed on the New York Stock Exchange, and Merrill Lynch,
Hubbard Inc., a real estate division of Merrill Lynch & Co., Inc.
Stephen C. Hagen has served as Senior Vice President of the Company since
October 1996. From 1992 to 1994, Mr. Hagen was a principal of Pharus Realty
Investments, a money manager in real estate stocks, and served as Chief
Operating Officer of HRE Properties, a NYSE-listed REIT, from 1989 to 1992.
89
<PAGE> 98
Paul R. Wood has served as Vice President, Chief Accounting Officer and
Secretary of the Company since October 1993. He had been associated with LCP
from 1988 to 1993 and from 1990 to 1993 had been responsible for all accounting
activities relating to the net leased properties managed by LCP and its
affiliates. Prior to joining LCP, Mr. Wood was, from 1987 to 1988, associated
with E.F. Hutton & Company Inc. as a senior accountant.
Janet M. Kaz has served as Vice President of the Company since May 1995,
and prior thereto served as Asset Manager of the Company since October 1993.
Prior to her association with the Company, Ms. Kaz had been a member of LCP's
property acquisition team from 1986 to 1990 and a member of LCP's asset
management team from 1991 to 1993. Ms. Kaz was involved in all aspects of real
estate acquisition, finance and management, principally in net leased
transactions.
Philip L. Kianka joined the Company in 1997 as Vice President of Asset
Management. Prior to joining Lexington, from 1985 through 1997, Mr. Kianka
served as a Vice President and Senior Asset Manager at Merrill Lynch Hubbard,
Inc., a real estate division of Merrill Lynch & Co., Inc. Mr. Kianka was
involved with real estate acquisitions, development and asset management for a
national portfolio of diversified properties.
Carl D. Glickman has served as a director and a member of the Audit
Committee and Compensation Committee of the Board of Directors of the Company
since May 1994. He has been President of the Glickman Organization since 1953.
He is on the Board of Directors of Alliance Tire & Rubber Co., Ltd., Bear,
Stearns Companies, Inc. (an affiliate of Bear, Stearns & Co. Inc.), Continental
Health Affiliates, Inc., Franklin Corporation, Infu-Tech, Inc., Jerusalem
Economic Corporation Ltd. and OfficeMax Inc., as well as numerous private
companies.
Kevin W. Lynch is a founder and principal of The Townsend Group, an
institutional real estate consulting firm founded in 1983. Prior to forming The
Townsend Group, Mr. Lynch was a Vice President for Stonehenge Capital
Corporation. Mr. Lynch has been involved in the commercial real estate industry
since 1974, and is a director of First Industrial Realty Trust.
John D. McGurk became a member of the Board in January 1997 as the designee
of Five Arrows to the Board of Directors. He is the founder and President of
Rothschild Realty, Inc., the advisor to Five Arrows Realty Securities L.L.C.
("Five Arrows"). Prior to starting Rothschild Realty, Inc. in 1981, Mr. McGurk
served as a Regional Vice President for The Prudential Insurance Company of
America where he oversaw its New York City real estate loan portfolio, equity
holdings, joint ventures and projects under development. Mr. McGurk is a member
of the Urban Land Institute, Pension Real Estate Association, Real Estate Board
of New York and the National Real Estate Association, and is the President of
the Trustee Committee of the Caedmon School.
Seth M. Zachary has served as a director and a member of the Audit
Committee and Compensation Committee of the Board of Directors of the Company
since November 1993. Since 1987, he has been a partner in the law firm of Paul,
Hastings, Janofsky & Walker LLP, counsel to the Company.
COMPENSATION OF EXECUTIVE OFFICERS
Summary of Cash and Certain Other Compensation. The following table
contains certain information regarding aggregate compensation paid or accrued by
the Company during the years ended December 31, 1996, 1995 and 1994 to the
Chairman of the Board of Directors and Co-Chief Executive Officer, the President
and Chief Operating Officer and the two additional executive officers of the
Company who received an annual salary and bonus in excess of $100,000.
90
<PAGE> 99
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
PAYOUTS
ANNUAL COMPENSATION ---------
-------------------------- AWARDS LONG-
OTHER ------------------------ TERM ALL
ANNUAL RESTRICTED SECURITIES INCENTIVE OTHER
FISCAL COMPEN- STOCK UNDERLYING PLAN COMPEN-
NAME AND YEAR SALARY BONUS SATION AWARDS OPTIONS PAYOUTS SATION
PRINCIPAL POSITION ENDED ($) ($)(1) ($) ($)(2) (#)(3) ($) ($)(4)
- ----------------------- -------- ------- ------ ------- ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E. Robert Roskind...... 12/31/96 200,000 18,333 -- -- 265,400 -- 900
Chairman of the Board 12/31/95 200,000 18,333 -- 20,000 236,200 -- 900
of Directors and 12/31/94 200,000 17,333 -- 21,060 -- -- 792
Co-Chief Executive
Officer
Richard J. Rouse....... 12/31/96 125,000 11,458 -- -- 166,600 -- 750
Vice Chairman and 12/31/95 125,000 11,458 -- 12,600 133,800 -- 750
Co-Chief Executive 12/31/94 125,000 10,825 -- 13,185 -- -- 660
Officer(5)
T. Wilson Eglin........ 12/31/96 120,000 11,000 -- -- 142,250 -- 600
President and Chief 12/31/95 100,000 9,166 -- 10,000 81,000 -- 600
Operating Officer(6) 12/31/94 100,000 8,666 -- 10,530 -- -- 582
Antonia G. Trigiani.... 12/31/96 120,000 11,000 -- -- 136,250 -- 600
Chief Financial
Officer 12/31/95 100,000 9,166 -- 10,000 75,000 -- 600
and Treasurer 12/31/94 100,000 8,666 -- 10,530 -- -- 528
</TABLE>
- ---------------
(1) Bonus amounts include amounts deferred at the election of the named
executive officers pursuant to the Company's plan established under Section
401(K) of the Code.
(2) Amount represents the dollar value of awards of restricted stock at $9.00
per share for 1994 and $11.25 per share for 1995, the closing prices of the
Lexington Common Stock on December 30, 1994 and December 29, 1995,
respectively, the business day immediately prior to the date the restricted
stock grant became effective. In addition the following table reflects the
number and aggregate value of restricted Lexington Common Stock held by the
named executed officers as of December 31, 1996 (price as of December 31,
1996 was $14.625):
<TABLE>
<CAPTION>
RESTRICTED STOCK
-------------------
AMOUNT(#) VALUE
--------- -------
<S> <C> <C>
E. Robert Roskind........................................ 4,118 $60,226
Richard J. Rouse......................................... 2,585 37,806
T. Wilson Eglin.......................................... 2,059 30,113
Antonia G. Trigiani...................................... 2,059 30,113
</TABLE>
(3) Of the 1995 stock options, 56,200, 43,800, 35,000 and 35,000 were granted on
February 27, 1995 to Messrs. Roskind, Rouse and Eglin and Ms. Trigiani,
respectively. The remaining options listed were granted to the named
executive officers on July 28, 1995 in connection with an exercise of
previously granted options. The exercise price of each stock option was
equal to the price at which the previously granted options were purchased,
which was $11.125. On February 27, 1995, the Lexington Common Stock had a
fair market value of $9.125 and on July 28, 1995 the Lexington Common Stock
had a fair market value of $10.875. Of the 1996 stock options, 32,800,
32,800, 46,000 and 40,000 were granted on January 2, 1996 to Messrs.
Roskind, Rouse and Eglin and Ms. Trigiani, respectively. The remaining
options were granted to the named executive officers on January 24, 1996 in
connection with an exercise of previously granted options. The exercise
price of each such stock option was equal to the price at which the
previously granted options were purchased, which was $11.875. On January 2,
1996, the Lexington Common Stock had a fair market value of $11.25 and on
January 24, 1996 the Lexington Common Stock had a fair market value of
$11.50. In order to increase management ownership of the Company certain
officers of the Company exercised options that were "in the money" and such
officers were then re-issued the same number of options which are
exercisable at the then current Lexington Common Stock price.
91
<PAGE> 100
The word "purchased" refers to the price at which the prior options were
exercised, which was the then current market price of Lexington Common
Stock.
(4) Amount represents the dollar value of life insurance premiums paid by the
Company during the applicable fiscal year with respect to the life of the
named executive officer.
(5) Mr. Rouse was elected Vice Chairman of the Company on April 1, 1996 and
prior to such date had served as President of the Company.
(6) Mr. Eglin was elected President and Chief Operating Officer of the Company
on April 1, 1996 and prior to such date had served as Executive Vice
President and Chief Operating Officer of the Company.
COMPENSATION OF DIRECTORS
With the exception of the director appointed by Five Arrows, each director
who is not employed by the Company receives an annual fee of $20,000 for service
as a director. In addition, such directors receive $1,000 for each meeting of
the Board of Directors or any committee thereof attended by the director and
reimbursement for expenses incurred in attending such meetings. Pursuant to the
1994 Outside Director Stock Plan, as amended, during 1996 each non-employee
director was required to receive not less than 50% of such director's fees in
Lexington Common Stock at an amount per share equal to 95% of the fair market
value of one share of Lexington Common Stock as of the date of purchase. During
1996, Messrs. Glickman, Zachary, and Mr. Harry E. Petersen (who served as
director until the Company's 1997 annual meeting of shareholders) elected to
receive 100%, 50% (as of August 1, 100%), and 10% (as of October 1, 100%),
respectively, of their fees in Lexington Common Stock with respect to the five
meetings which the Board of Directors held in 1996. Effective as of February 29,
1996, the 1994 Outside Director Stock Plan was amended to provide that at least
50% of all non-employee directors' fees must be converted into Lexington Common
Stock as set forth above. Non-employee directors will continue to have the
option of converting all or a portion of their remaining fees into Lexington
Common Stock. Pursuant to the Company's 1993 Stock Option Plan, non-employee
directors automatically are granted each year, on January 1, non-qualified stock
options to purchase, after a one-year holding period, 2,500 shares of Lexington
Common Stock at an exercise price equal to the fair market value of the
Lexington Common Stock on the date of the grant.
MANAGEMENT AFTER THE MERGER
After the Effective Time, CRIT will merge with and into the Company and the
current management of the Company will continue as members of management of the
Company.
PRINCIPAL SECURITY HOLDERS
Except as described herein, no person is known by the Company to own
beneficially in excess of five percent (5.0%) of the outstanding shares of
Lexington Common Stock or Preferred Stock as of September 30, 1997. On December
31, 1996, the Company entered into an agreement with Five Arrows, a real estate
investment fund of which Rothschild Realty Investors II L.L.C. ("Rothschild
Investors") is the managing member, under the terms of which Five Arrows agreed
to purchase an aggregate of up to 2,000,000 share of Preferred Stock, which
would be convertible into 2,000,000 shares of Lexington Common Stock, subject to
adjustment. If all 2,000,000 shares of Preferred Stock were purchased by Five
Arrows and converted into Lexington Common Stock, Five Arrows would, as of
September 30, 1997, have been the beneficial owner of approximately 9.44% of the
issued and outstanding voting stock of the Company, on a fully diluted basis.
92
<PAGE> 101
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table indicates, as of September 30, 1997, (a) the number of
shares of Lexington Common Stock and Preferred Stock beneficially owned by each
director and nominee for director, each executive officer named in the Summary
Compensation Table above, and by all directors and executive officers as a
group, and (b) the percentage such shares represent of the total outstanding
shares of Lexington Common Stock, Preferred Stock and voting stock. All shares
were owned directly on such date with sole voting and investment power unless
otherwise indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF
SHARES(1) PERCENT OF CLASS
---------------------------- ------------------------------
LEXINGTON PREFERRED VOTING
NAME OF BENEFICIAL OWNER COMMON STOCK STOCK COMMON PREFERRED STOCK
- ---------------------------------- ------------ --------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
E. Robert Roskind................. 713,129(2) -- 5.47% -- 4.97%
Richard J. Rouse.................. 273,654(3) -- 2.12 -- 1.92
Carl D. Glickman.................. 116,302(4) -- * -- *
T. Wilson Eglin................. 278,199(5) -- 2.15 -- 1.95
Kevin W. Lynch.................... 3,960(6) -- * -- *
John D. McGurk.................... -- 1,325,000(7) -- 100.000% 9.44
Antonia G. Trigiani............... 163,071(8) -- 1.27 -- 1.15
Seth M. Zachary................... 16,902(9) -- * -- *
All directors and executive
officers as a group (10
persons)........................ 1,620,275 1,325,000 10.58% 100.000% 19.60%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any shares as of a given date which such person has the right
to acquire within 60 days after such date. For purposes of computing the
percentage of outstanding shares held by each person named above on a given
date, any security which such person or persons has the right to acquire
within 60 days after such date is deemed to be outstanding, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Includes (i) 70,574 units of special limited partner interest held by Mr.
Roskind in Lepercq Corporate Income Fund L.P. and Lepercq Corporate Income
Fund II L.P., each of which is a subsidiary of the Company, which are
exchangeable, on a one-for-one basis, for shares of Lexington Common Stock,
(ii) 196,455 units of special limited partner interest held by The LCP
Group, L.P., which are exchangeable, on a one-for-one basis, for shares of
Lexington Common Stock, (iii) 9,000 shares of Lexington Common Stock owned
of record by The LCP Group, L.P. (iv) options to purchase 180,000 shares of
Lexington Common Stock at an exercise price of $11.125 per share, 52,600
shares of Lexington Common Stock at an exercise price of $11.875 per share,
32,800 shares of Lexington Common Stock at an exercise price of $11.25 per
share and 51,310 shares of Lexington Common Stock at an exercise price of
$12.325 per share, (v) 46,650 shares of Lexington Common Stock owned of
record by Mr. Roskind's wife, and (vi) 13,000 shares of Lexington Common
Stock owned of record by a private pension plan for the benefit of Mr.
Roskind and his wife. Mr. Roskind disclaims beneficial ownership of the
46,650 shares listed in clause (v) above.
(3) Includes (i) 46,406 units of special limited partner interest held by Mr.
Rouse in Lepercq Corporate Income Fund L.P. and Lepercq Corporate Income
Fund II L.P., which are exchangeable, on a one-for-one basis, for shares of
Lexington Common Stock, (ii) options to purchase 90,000 shares of Lexington
Common Stock at an exercise price of $11.125 per share, 43,800 shares of
Lexington Common Stock at an exercise price of $11.875 per share, 32,800
shares of Lexington Common Stock at an exercise price of $11.25 per share
and 34,552 shares of Lexington Common Stock at an exercise price of $12.625
per share and (iii) 1,500 shares of Lexington Common Stock owned of record
by a private pension plan for the benefit of Mr. Rouse.
93
<PAGE> 102
(4) Includes options to purchase 2,500 shares of Lexington Common Stock at an
exercise price of $10.125 per share, 2,500 shares of Lexington Common Stock
at an exercise price of $9.00 per share and 2,500 shares of Lexington Common
Stock at an exercise price of $11.25 per share.
(5) Includes options to purchase 61,250 shares of Lexington Common stock at an
exercise price of $11.125 per share, 35,000 shares of Lexington Common Stock
at an exercise price of $11.875 per share, 46,000 shares of Lexington Common
Stock at an exercise price of $11.25 per share and 111,466 shares of
Lexington Common Stock at an exercise price of $12.325 per share.
(6) Includes options to purchase 2,500 shares of Lexington Common Stock at an
exercise price of $11.75 per share.
(7) Includes 1,325,000 shares of Preferred Stock owned beneficially and of
record by Five Arrows. Mr. McGurk, among others, has been appointed by
Rothschild Investors as a manager of Five Arrows. Mr. McGurk is also the
designee of Five Arrows to the Company's Board of Directors. Mr. McGurk
disclaims beneficial ownership of all such shares of Preferred Stock.
(8) Includes options to purchase 61,250 shares of Lexington Common Stock at an
exercise price of $11.125 per share, 35,000 shares of Lexington Common Stock
at an exercise price of $11.875 per share, 40,000 shares of Lexington Common
stock at an exercise price of $11.25 per share and 14,224 shares of
Lexington Common Stock at an exercise price of $12.625 per share.
(9) Includes options to purchase 2,500 shares of Lexington Common Stock at an
exercise price of $10.00 per share, 2,500 shares of Lexington Common Stock
at an exercise price of $10.125 per share, 2,500 shares of Lexington Common
Stock at an exercise price of $9.00 per share and 2,500 shares of Lexington
Common Stock at an exercise price of $11.25 per share.
COMPARISON OF SHAREHOLDER RIGHTS
The following is a summary of the material differences between the
provisions of the MGCL and the MGL and the charter documents of the Company and
CRIT that will result in changes in the rights of CRIT shareholders. Upon
consummation of the Merger, the CRIT shareholders will become shareholders of
the Company, a Maryland corporation. Differences between the provisions of the
MGCL, and the MGL, and the charter documents of the respective companies, will
result in several changes in the rights of CRIT shareholders. It is not
practical to summarize all such changes here or to cover all of the respects on
which Maryland law may differ from Massachusetts law. Shareholders are advised
to review the charter and the by-laws of the Company (the "Charter") and the
charter documents of CRIT (the "Declaration of Trust"), which are available as
described under "Available Information." CRIT's charter documents and relevant
provisions of Massachusetts law are summarized below under the captions "CRIT,"
and the Company's charter documents and relevant provisions of Maryland law are
summarized below under the captions "The Company." The Company believes that the
provisions contained in the Charter and By-Laws are comparable to those
contained in the constituent documents of similarly situated publicly-traded
REITs.
The following defined terms apply to this discussion of Massachusetts law
and the CRIT charter documents: "independent trustees" means the Trustees who
(i) are not affiliated, directly or indirectly, with the Advisor or any other
affiliates of CRIT (except as permitted by (ii) below) whether by ownership of,
ownership interest in, employment by, any material business or professional
relationship with, or service as an officer or director of, the Advisor or its
affiliates, (ii) do not serve as a director or trustee for more than two other
REITs organized by the sponsor, and (iii) perform no other services for CRIT,
except as Trustees. For this purpose, (i) an indirect relationship shall include
circumstances in which a member of the immediate family of a Trustee has one of
the foregoing relationships with the Advisor or CRIT, and (ii) a material
business or professional relationship shall not include provision of
indemnification by the sponsor or its affiliates. "Sponsor" means Smith Barney,
Harris Upham & Co., Incorporated, and any other person directly or indirectly
instrumental in organizing (wholly or in part), or who will manage or
participate in the management of, CRIT, and any affiliate of any such person but
shall not include a person whose only relationship with CRIT is that of an
independent property manager whose sole compensation from CRIT is as a property
manager or any independent third party whose only compensation is for
professional services.
94
<PAGE> 103
BOARD OF TRUSTEES
CRIT. The Declaration of Trust provides that the CRIT Board must consist
of at least three but not more than five persons, and at least a majority of the
CRIT Board of Trustees must be independent. The Declaration of Trust provides
that trustees may be removed either with or without cause by a vote of the
holders of record of at least a majority of the CRIT Shares outstanding and
entitled to vote.
The Declaration of Trust requires that vacancies on the CRIT Board and
newly created trusteeships be filled by a majority of the trustees in office,
although less than a quorum exists. Vacancies occurring as a result of the
removal of trustees by shareholders shall be filled by the shareholders.
The Company. The Board of Directors must consist of at least three persons
but not more than nine persons. The Charter does not require that a majority of
the Company's Board of Directors be independent.
The Charter provides that a director may be removed only for "cause" and
only by the affirmative vote of holders of at least 80% of the combined voting
power of all classes of shares of capital stock entitled to vote in the election
for directors.
The Charter requires that, subject to the rights of the holders of any
class of Preferred Stock, vacancies on the Board of Directors, except for those
resulting from removal by shareholders, and newly created directorships be
filled by a majority of the remaining directors, though less than a quorum, or
by the shareholders. A vacancy on the Board of Directors resulting from removal
of a director by shareholders shall be filled by a vote of the shareholders.
ISSUANCE OF CAPITAL STOCK
CRIT. CRIT is authorized by its Declaration of Trust to issue up to 20
million CRIT Shares. A majority of the Trustees are authorized to determine from
time to time the number of additional Shares that will be sold and issued to the
public or others. Preferred stock is not authorized.
The Company. The Charter authorizes the Company to issue 40 million shares
of Common Stock and 10 million shares of Preferred Stock in such classes or
series and with such rights, preferences, limitations, terms and conditions, as
determined by the Board of Directors. The Charter also authorizes the Company to
issue 40 million shares of Excess Stock. The Board of Directors may classify and
reclassify any unissued shares of capital stock by changing or setting in any
respect the rights, privileges, and powers of such shares of stock. See
"Description of Lexington Properties Capital Stock -- Restrictions on Transfers
of Capital Stock and Anti-takeover Provisions."
DISTRIBUTIONS TO SHAREHOLDERS
CRIT. The Board of Trustees have complete discretion in choosing whether
and to what extent shareholders will receive dividends.
The Company. Shares of stock owned by a person in excess of 9.8% of the
outstanding shares of Equity Stock in the Company ("Excess Stock") are not
transferable and not entitled to dividends or voting rights. See "Description of
Lexington Properties Capital Stock."
SHAREHOLDER MEETINGS
CRIT. The Declaration of Trust requires that CRIT hold an annual meeting
of shareholders and furnish to each shareholder an annual report at least 30
days prior to each annual meeting of shareholders. A special meeting of
shareholders may be called by the Chairman of the Board, a majority of Trustees
or a majority of independent Trustees and will be called upon the written
request of the Shareholders holding in the aggregate not less than 10% of the
outstanding Shares of the Trust entitled to vote at such meeting.
CRIT must prepare an alphabetical list of the names of all the shareholders
who are entitled to vote at a shareholders meeting. The shareholders' list must
be available for inspection by any shareholder for a period of
95
<PAGE> 104
ten days prior to the meeting or such shorter time as exists between the record
date and the meeting, and continuing through the meeting, at the CRIT's
principal office.
The Company. The Company's By-Laws require that the Company hold an annual
meeting of shareholders. A special meeting of shareholders may be called by the
Chairman of the Board of Directors or the President or the majority vote of the
Board of Directors. Special meetings of the stockholders shall also be called as
may be required by law.
At each meeting of stockholders, a full, true and complete list of all
stockholders entitled to vote at such meeting, showing the number and class of
shares held by each and certified by the transfer agent for such class or by the
Secretary, shall be furnished by the Secretary.
SHAREHOLDER APPROVAL OF CERTAIN ACTIONS
CRIT. Amendments to the Declaration of Trust require a majority of the
outstanding shares entitled to vote unless the amendment involves the rights
with respect to outstanding shares of the trust, ownership limits, or
shareholder approval requirements set out in the Declaration of Trust. In that
case, an affirmative vote of two-thirds of the shares entitled to vote is
necessary.
"Business Combinations" as defined in the Declaration of Trust with any
"Acquiring Person" requires approval by the affirmative vote of 80% of all votes
entitled to be cast on the matter and held by persons other than the Acquiring
Person. The term "Acquiring Person" is defined in the Declaration of Trust to
mean any person who, together with its affiliates, and with any other person
with whom it has an agreement or understanding with respect to holding or voting
CRIT's shares, beneficially owns, in the aggregate, 8.5% or more of the
outstanding CRIT Shares.
The Company. Amendments to the Company's charter require a vote of not
less than a majority of the aggregate votes entitled to be cast unless the
amendment is inconsistent with the Board of Directors' powers and processes as
delineated in the Charter or the shareholder proposal processes and voting
requirements of directors and shareholders as delineated in the Charter. If an
amendment is inconsistent with the requirements of the Charter, an affirmative
vote of no less than 80% of the aggregate votes entitled to be cast is
necessary.
The By-Laws may be amended by either a vote of not less than 80% of the
outstanding shares of capital stock in the Company entitled to vote or by vote
of two-thirds of the Board of Directors.
Neither the Company's Charter nor By-Laws refer to any shareholder approval
requirements in reference to mergers, sales, acquisitions, or exchanges of any
kind.
RESTRICTIONS ON CORPORATE ACTIVITIES
CRIT. Under CRIT's Declaration of Trust, the Board of Trustees shall not:
(a) sell property to the Sponsor, the Advisor, a Trustee or any
affiliate thereof;
(b) invest more than 10% of its total assets in or make mortgage loans
on unimproved real property (property which has the following three
characteristics: (i) the property was not acquired for the purpose of
producing rental or other operating income, (ii) there is no development or
construction in process on such land, and (iii) no development or
construction on such land is planned in good faith to commence on such land
within one year) or indebtedness secured by a deed of trust or mortgage
loans on unimproved real property;
(c) invest in or make mortgage loans, unless (i) an appraisal is
obtained concerning the underlying property and, in the event the
Independent Trustees require or the mortgage loan involves the Advisor,
Trustees, Sponsor or affiliate, the appraisal is prepared by an independent
appraiser, (ii) the appraisal is maintained in the Trust's records for at
least five years and is available for inspection and duplication by any
shareholder, (iii) a mortgagee's or owner's title insurance policy or
commitment as to the priority of the mortgage or the condition of the title
is obtained, and (iv) the aggregate amount of all mortgage
96
<PAGE> 105
loans, including construction loans and the loans of the Trust, outstanding
on the property, does not exceed 85% of the appraised value of the property
without substantial justification;
(d) invest in or make any mortgage loans which are subordinate to any
mortgage loan or equity interest of the Advisor, Trustees, Sponsor or
affiliates of the Trust or invest in indebtedness ("junior debt") secured
by a mortgage on real property which is subordinate to the lien of other
indebtedness ("senior debt"), except where the amount of such junior debt,
plus the outstanding amount of the senior debt on such property, does not
exceed 85% of the appraised value of such property, if after giving effect
thereto, the value of all such investments of the Trust (as shown on the
books of the Trust in accordance with generally accepted accounting
principles, after all reasonable reserves, but before provision for
depreciation) would not then exceed 10% of tangible assets of the Trust;
(e) invest in real estate contracts of sale, unless such contracts of
sale are in recordable form and are appropriately recorded in the chain of
title;
(f) invest in any foreign currency, bullion, commodities, or
commodities futures contracts;
(g) engage in any short sale;
(h) engage in trading (as compared with investment activities) or
engage in the underwriting of or distributing as agent the Securities
issued by others;
(i) invest in any Security in any entity holding investments or
engaging in activities prohibited by the Declaration of Trust;
(j) invest in equity securities of any non-governmental issuer,
including other REITs or limited partnerships for a period in excess of 18
months, provided further, that investments in money market funds sponsored
by Affiliates of the Advisor may not exceed 5% of the gross proceeds of the
offering;
(k) issue "redeemable securities" (as defined in Section 2(A)(32) of
the Investment Company Act of 1940, as amended), "face amount certificates
of the installment types" as defined in Section 2(a)(5) thereof, or
"periodic payment plan certificates" as defined in Section 2(a)(27)
thereof;
(l) issue options or warrants to purchase CRIT Shares to any person
unless (i) the exercise price equals or exceeds the fair market value of
the CRIT Shares on the date of grant and (ii) the consideration received
(which may include services), in the judgment of the Independent Trustees,
has a market value equal to or exceeding the value of such options or
warrants on the date of grant;
(m) issue options or warrants to purchase the CRIT Shares to the
Advisor, a Trustee, the Sponsor or an affiliate thereof, unless such
options or warrants (i) are issued on the same terms as such options or
warrants are sold to the general public and (ii) do not exceed an amount
equal to 10% of the outstanding CRIT Shares of the Trust on the date of
grant;
(n) issue CRIT Shares on a deferred payment basis or other similar
arrangement;
(o) issue debt securities to the public, unless the cash flow (in the
most recently completed fiscal year) excluding extraordinary non-recurring
items, is sufficient to properly service the interest on all debt
securities to be outstanding after the issuance of any proposed debt
securities;
(p) issue CRIT Shares in a private offering, unless the voting rights
per CRIT Share of such CRIT Shares do not exceed the voting rights which
bear the same relationship to the voting rights of the publicly held CRIT
Shares as the consideration received for each privately offered CRIT Share
bears to the Book Value of the CRIT Shares issued pursuant to the
Prospectus;
(q) issue equity securities of more than one class;
(r) cause any of CRIT Shares to be listed for trading on a national or
regional stock exchange or included on the automated quotation system
maintained by the National Association of Securities Dealers, Inc. without
the prior approval of the holders of a majority of the outstanding CRIT
Shares entitled to vote;
97
<PAGE> 106
(s) undertake any activity that would disqualify the Trust as a REIT
under the REIT Provisions of the Code as long as a REIT is accorded
substantially the same treatment or benefits under the United States tax
laws from time to time in effect as under the REIT Provisions of the
Internal Revenue Code as the date of adoption of the Declaration of Trust;
or
(t) invest in real property which, after acquisition by the Trust,
will be used primarily for residential, hotel, motel or restaurant
purposes.
The Company. The Company's charter documents do not contain similar
restrictions on the Company's activities.
INTERESTED PARTY TRANSACTIONS
CRIT. Under CRIT's Declaration of Trust, any transaction between the Trust
and the Sponsor, the Advisor, a Trustee or any affiliates, or any investment by
the Trust in an entity affiliated with any of the foregoing or any joint venture
with any of the foregoing, or any employment of or contract with any of the
foregoing, shall require approval by a majority of the Trustees not otherwise
interested in the transaction, including a majority of the Independent Trustees
not otherwise interest in such transaction.
The Company. The Company's charter documents contain no similar
restrictions with respect to interested party transactions.
Under the MGCL, any contract or transaction between a corporation and any
director or any entity in which the director has a material financial interest
will be voidable unless (i) it is approved, after disclosure of the interest, by
the affirmative vote of a majority of disinterested directors or by the
affirmative vote of a majority of the votes cast by disinterested shareholders
or (ii) it is fair and reasonable to the corporation.
OWNERSHIP LIMIT
CRIT. The Declaration of Trust requires that a beneficial owner of more
than 8.5% of the total shares outstanding give notice to the Trust of his/her
ownership position and any other information the Trust may require.
The Trust may take actions which in its discretion it deems necessary to
insure that the Trust maintains its REIT status, including but not limited to
purchasing the Excess Shares, as defined in the Declaration of Trust, from a
beneficial owner who owns more than 8.5% of the total outstanding shares or
refusing to permit a transaction that would lead to a beneficial owner
possessing more than 8.5% of the total outstanding shares.
The Company. The Charter provides that the Ownership Limit for any
stockholder of the Corporation shall be 9.8% of the value of the outstanding
Equity Stock of the Corporation. Any shares held over and above the 9.8%
threshold are Excess Shares and are governed by the Charter. See "Description of
Lexington Properties Capital Stock."
MAINTAINING REIT STATUS
CRIT. The trustees may take necessary action to insure that CRIT maintains
its REIT Status. Any transaction that may occur which would disqualify CRIT from
REIT Status is null and void.
The Company. The Directors may take necessary action to insure that
Company remains a qualified REIT under the Code.
INDEMNIFICATION
CRIT. (A) The Trust shall indemnify and hold harmless the Trustees, the
Advisor or any affiliate of the Advisor who performs services on behalf of the
Trust against any and all losses, claims, demands, costs, damages, liabilities,
joint and several, expenses of any nature (including attorneys' fees and
disbursements), judgments, fines, settlements, and other amounts paid and
reasonably incurred by them in connection with or by reason of any act performed
or omitted to be performed by them in connection with the business of the
98
<PAGE> 107
Trust, provided that (i) the Board of Trustees (excluding the indemnified party)
has determined, in good faith, that the course of conduct which caused the loss
or liability was in the best interests of the Trust, (ii) such liability or loss
was not the result of negligence or misconduct on the part of the indemnitee and
(iii) such indemnification or agreement to hold harmless is recoverable only out
of the assets of the Trust and not from the CRIT shareholders.
The Trust may indemnify a Trustee, the Advisor or any person acting as a
broker or dealer for the offering and sale of CRIT Shares for any liability or
loss and costs associated therewith, including attorneys' fees, if the liability
or loss relates to the expenses of successful defense or settlement of a lawsuit
alleging a violation of state or federal securities laws associated with the
offer and sale of CRIT Shares if a court (i) approves the settlement and finds
that indemnification of the settlement and related costs should be made or (ii)
approves indemnification of litigation costs if there has been a dismissal with
prejudice or a successful adjudication on the merits of each count involving
alleged securities law violations as to the particular indemnitee. The Trust may
not indemnify any persons for any liability imposed by judgment, or any costs
associated therewith, including attorneys' fees, arising from or out of a
violation of state or federal securities laws.
(B) The Trust may advance expenses incurred in defending a legal action,
suit or proceeding in advance of the final disposition of such action, suit or
proceeding provided that the following three conditions are satisfied: (i) the
legal action relates to the performance of duties or services by such person on
behalf of the Trust; (ii) the legal action is initiated by a third party who is
not a Shareholder of the Trust; and (iii) such Person agrees in writing to repay
the advanced funds to the Trust if it is ultimately determined that he or it is
not entitled to indemnification by the Trust.
The Company. The Company's Charter and By-Laws contain similar provisions
concerning the indemnification of directors, officers, agents and employees.
NOMINATIONS OF DIRECTORS BY SHAREHOLDERS
CRIT. The Declaration of Trust of CRIT requires that trustees nominate
persons to be elected as trustees or appoint a committee of trustees to make
such nominations, and that independent trustees nominate persons to be elected
as independent trustees. No nominations for trustees, except those made by the
trustees themselves, shall be voted upon at an annual meeting of the
shareholders unless nominations of shareholders are made in writing and
delivered to the Secretary of CRIT at least 90 days prior to the date of the
annual meeting.
The Company. For any shareholder proposal to be presented in connection
with an annual meeting of shareholders of the Company, including any proposal
relating to the nomination of a director to be elected to be Board of Directors
of the Company, the shareholders must have given timely notice thereof in
writing to the Secretary of the Company. To be timely, a shareholder's proposal
shall be delivered to the Secretary at the principal executive offices of the
Company not less than 120 days in advance of the release date of the Company's
proxy statement to shareholders in connection with the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days from
such anniversary date, notice by the shareholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made.
DESCRIPTION OF LEXINGTON CAPITAL STOCK
DESCRIPTION OF PREFERRED STOCK
Under the Articles of Incorporation, the Company has authority to issue
10,000,000 shares of preferred stock, par value $.0001 per share ("Preferred
Stock"), 1,325,000 of which, designated as Class A Senior Cumulative Convertible
Stock, were outstanding as of the date of this Proxy Statement/Prospectus.
Shares of Preferred Stock may be issued from time to time, in one or more
series, as authorized by the Board of
99
<PAGE> 108
Directors of the Company. Prior to issuance of shares of each series, the Board
of Directors is required by the MGCL and the Articles of Incorporation to fix
for each series, subject to the provisions of the Articles of Incorporation
regarding excess stock, $.0001 par value per share ("Excess Stock"), the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption, as are permitted by Maryland law. The Preferred Stock
will, when issued against payment therefor, be fully paid and nonassessable and
will not be subject to preemptive rights. The Board of Directors could authorize
the issuance of shares of Preferred Stock with terms and conditions that could
have the effect of discouraging a takeover or other transaction that holders of
Lexington Common Stock might believe to be in their best interests or in which
holders of some, or a majority, of the shares of Lexington Common Stock might
receive a premium for their shares over the then market price of such shares of
Lexington Common Stock. In December 1996, the Company entered into an agreement
with Five Arrows providing for the sale of up to 2,000,000 shares of Convertible
Preferred Stock. See "Information Regarding Lexington Properties -- Financing
Activities -- Sale of Convertible Preferred Stock."
DESCRIPTION OF COMMON STOCK
The description of the Lexington Common Stock set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Articles of Incorporation and Bylaws.
GENERAL
Under the Articles of Incorporation, the Company has authority to issue
40,000,000 shares of Lexington Common Stock, par value $.0001 per share. Under
Maryland law, stockholders generally are not responsible for a corporation's
debts or obligations. At September 30, 1997, the Company had outstanding
12,713,633 shares of Lexington Common Stock.
TERMS
Subject to the preferential rights of any other shares or series of stock
and to the provisions of the Articles of Incorporation regarding Excess Stock,
holders of shares of Lexington Common Stock are entitled to receive dividends on
shares of Lexington Common Stock if, as and when authorized and declared by the
Board of Directors of the Company out of assets legally available therefor and
to share ratably in the assets of the Company 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
the Company and the amount to which holders of any class of stock classified or
reclassified or having a preference on distributions in liquidation, dissolution
or winding-up of the Company have a right.
Subject to the provisions of the Articles of Incorporation regarding Excess
Stock, each outstanding share of Lexington Common Stock entitles the holder to
one vote on all matters submitted to a vote of stockholders, including the
election of Directors and, except as otherwise required by law or except as
provided with respect to any other class or series of stock, the holders of
Lexington Common Stock 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 shares of Lexington Common Stock can elect all of
the Directors then standing for election, and the holders of the remaining
shares of Lexington Common Stock will not be able to elect any Directors.
Holders of Lexington Common Stock have no conversion, sinking fund or
redemption rights, or preemptive rights to subscribe for any securities of the
Company.
The Company furnishes its stockholders with annual reports containing
audited consolidated financial statements and an opinion thereon expressed by an
independent public accounting firm and quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
Subject to the provisions of the Articles of Incorporation regarding Excess
Stock, all shares of Lexington Common Stock will have equal dividend,
distribution, liquidation and other rights, and will have no preference,
appraisal or exchange rights.
100
<PAGE> 109
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
Articles of Incorporation, 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 to be cast on the matter) is set forth in the corporation's Articles of
Incorporation. However, the Articles of Incorporation provide that such actions,
with the exception of certain amendments to the Articles of Incorporation for
which a higher vote requirement has been set, shall be valid and effective if
authorized by holders of a majority of the total number of shares of all classes
outstanding and entitled to vote thereon.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement, the Company may take certain actions to limit the beneficial
ownership, directly or indirectly, by a single person of the Company's
outstanding equity securities. See "Restrictions on Transfers of Capital Stock
and Anti-Takeover Provisions."
TRANSFER AGENT
The transfer agent and registrar for the Lexington Common Stock is Chase
Mellon Shareholder Services LLC.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK AND ANTI-TAKEOVER PROVISIONS
Restrictions Relating to REIT Status. For the Company to qualify as a REIT
under the Code, among other things, not more than 50% in value of its
outstanding capital stock may be owned, directly or indirectly, by five or fewer
individuals (defined in the Code to include certain entities) during the last
half of a taxable year, and such capital stock must be beneficially owned by 100
or more persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year (in each case, other than
the first such year). To assist the Company in continuing to remain a qualified
REIT, the Articles of Incorporation, subject to certain exceptions, provide that
no holder may own, or be deemed to own by virtue of the attribution provisions
of the Code, more than 9.8% (the "Ownership Limit") of the Company's equity
stock, defined as Lexington Common Stock or Preferred Stock. The Board of
Directors may waive the Ownership Limit if evidence satisfactory to the Board of
Directors and the Company's tax counsel is presented that the changes in
ownership will not then or in the future jeopardize the Company's status as a
REIT. Any transfer of equity stock or any security convertible into equity stock
that would create a direct or indirect ownership of equity stock in excess of
the Ownership Limit or that would result in the disqualification of the Company
as a REIT, including any transfer that results in the equity stock being owned
by fewer than 100 persons or results in the Company being "closely held" within
the meaning of Section 856(h) of the Code, shall be null and void, and the
intended transferee will acquire no rights to the equity stock. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Directors determines that it is no longer in the best interests of the Company
to attempt to qualify, or to continue to qualify, as a REIT.
Equity stock owned, or deemed to be owned, or transferred to a stockholder
in excess of the Ownership Limit, will automatically be exchanged for shares of
Excess Stock that will be transferred, by operation of law, to the Company as
trustee of a trust for the exclusive benefit of the transferees to whom such
capital stock may be ultimately transferred without violating the Ownership
Limit. While the Excess Stock is held in trust, it will not be entitled to vote,
it will not be considered for purposes of any stockholder vote or the
determination of a quorum for such vote and, except upon liquidation, it will
not be entitled to participate in dividends or other distributions. Any dividend
or distribution paid to a proposed transferee of Excess Stock prior to the
discovery by the Company that equity stock has been transferred in violation of
the provisions of the Articles of Incorporation shall be repaid to the Company
upon demand. The Excess Stock is not treasury stock, but rather constitutes a
separate class of issued and outstanding stock of the Company. The original
101
<PAGE> 110
transferee-stockholder may, at any time the Excess Stock is held by the Company
in trust, transfer the interest in the trust representing the Excess Stock to
any individual whose ownership of the equity stock exchanged into such Excess
Stock would be permitted under the Articles of Incorporation, at a price not in
excess of the price paid by the original transferee-stockholder for the equity
stock that was exchanged into Excess Stock, or, if the transferee-stockholder
did not give value for such equity stock, a price not in excess of the market
price (as determined in the manner set forth in the Articles of Incorporation)
on the date of the purported transfer. Immediately upon the transfer to the
permitted transferee, the Excess Stock will automatically be exchanged for
equity stock of the class from which it was converted. If the foregoing transfer
restrictions are determined to be void or invalid by virtue of any legal
decision, statute, rule or regulation, then the intended transferee of any
Excess Stock may be deemed, at the option of the Company, to have acted as an
agent on behalf of the Company in acquiring the Excess Stock and to hold the
Excess Stock on behalf of the Company.
In addition to the foregoing transfer restrictions, the Company will have
the right, for a period of 90 days during the time any Excess Stock is held by
the Company in trust, to purchase all or any portion of the Excess Stock from
the original transferee-stockholder for the lesser of the price paid for the
equity stock by the original transferee-stockholder or the market price (as
determined in the manner set forth in the Articles of Incorporation) of the
equity stock on the date the Company exercises its option to purchase. The
90-day period begins on the date on which the Company receives written notice of
the transfer or other event resulting in the exchange of equity stock for Excess
Stock.
Each stockholder shall upon demand be required to disclose to the Company
in writing any information with respect to the direct, indirect and constructive
ownership of beneficial interests as the Board of Directors deems necessary to
comply with the provisions of the Code applicable to REITs, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
This ownership limitation may have the effect of precluding acquisition of
control of the Company unless the Board of Directors determines that maintenance
of REIT status is no longer in the best interests of the Company.
Federal Securities Law Restrictions Regarding "Affiliates". The Lexington
Common Stock issued pursuant to the Merger will not be subject to any
restrictions on transfer arising under the Securities Act, except for shares
issued to any CRIT shareholder who may be deemed to be an "affiliate" of CRIT
for purposes of Rule 145 under the Securities Act ("Rule 145"). All Lexington
Common Stock received by CRIT shareholders who are deemed to be affiliates may
be resold only in transactions permitted by the resale provisions of Rule 145 or
as otherwise permitted under the Securities Act. Pursuant to the Merger
Agreement, CRIT will use its reasonable best efforts to cause each person who
may be deemed to be an affiliate of CRIT to enter into a letter agreement prior
to the closing date of the Merger providing that such affiliate will not sell,
transfer or otherwise dispose of any Lexington Common Stock obtained as a result
of the Merger except in compliance with the Securities Act and the related rules
and regulations of the Commission.
In general, under Rule 145(d)(1) as currently in effect, securities can be
sold (without any holding period restrictions) subject to the requirements of
Rule 144 regarding public availability of information about the issuer, volume
limitations and manner of sale. The Company has agreed to file with the
Commission required reports covering Lexington Common Stock received in the
Merger by any CRIT affiliate to enable such affiliate to sell such shares of
Lexington Common Stock without registration under the Securities Act pursuant to
Rule 145(d)(1) or any successor rule. Also under Rule 145, if a person is not an
affiliate of the issuer and one year has elapsed since the later of the date of
acquisition of the subject securities from the issuer or an affiliate of the
issuer, such person may sell the securities without registration and without
regard to the volume limitations and manner of sale requirements of Rule 144 if
there is sufficient public information available about the issuer. If two years
have elapsed since the date of acquisition of the securities from the issuer or
an affiliate of the issuer, and the person is not, and has not been for at least
three months, an affiliate of the issuer, Rule 145 permits sales without regard
to the information, volume limitation and manner of sale requirements of Rule
144.
Authorized Capital. The Company has an aggregate of 40,000,000 authorized
shares of Lexington Common Stock, 40,000,000 shares of Excess Stock and
10,000,000 undesignated shares of Preferred Stock
102
<PAGE> 111
available for issuance in its Articles of Incorporation. The actual numbers of
shares of Lexington Common Stock outstanding and reserved for issuance fall far
below the number of authorized shares, and no shares of Excess Stock or
Preferred Stock are outstanding or reserved for issuance. Such shares (other
than reserved shares) may be issued from time to time by the Company in the
discretion of the Board to raise additional capital, acquire assets, including
additional real properties, redeem or retire debt or for any other business
purpose. In addition, the undesignated shares of Preferred Stock may be issued
in one or more additional classes with such designations, preferences and
relative, participating, optional or other special rights including, without
limitation, preferential dividend or voting rights, and rights upon liquidation,
as shall be fixed by the Board. Also, the Board of Directors is authorized to
classify and reclassify any unissued shares of capital stock by setting or
changing, in any one or more respects, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of stock. Such authority
includes, without limitation, subject to the provisions of the Articles of
Incorporation, authority to classify or reclassify any unissued shares of such
stock into a class or classes of preferred stock, preference stock, special
stock or other stock, and to divide and reclassify shares of any class into one
or more series of such class. In certain circumstances, the issuance of
Preferred Stock, or the exercise by the Board of such rights to classify or
reclassify stock, could have the effect of deterring individuals or entities
from making tender offers for the shares of Lexington Common Stock or seeking to
change incumbent management.
Maryland Corporation Law. The General Corporation Law of the State of
Maryland includes certain other provisions which may also discourage a change in
control of management of the Company. Maryland law provides that a Maryland
corporation may not engage in any "business combination" with any "interested
stockholder." An "interested stockholder" is defined, in essence, as any person
owning beneficially, directly or indirectly, 10% or more of the outstanding
voting stock of a Maryland corporation. Unless an exemption applies, the Company
may not engage in any business combination with an interested stockholder for a
period of five years after the interested stockholder became an interested
stockholder, and thereafter may not engage in a business combination unless it
is recommended by the Board and approved by the affirmative vote of at least (i)
80% of the votes entitled to be cast by the holders of all outstanding voting
stock of the Company, and (ii) 66 2/3% of the votes entitled to be cast by all
holders of outstanding shares of voting stock other than voting stock held by
the interested stockholder. The voting requirements do not apply at any time to
business combinations with an interested stockholder or its affiliates if
approved by the Board prior to the time the interested stockholder first became
an interested stockholder. Additionally, if the business combination involves
the receipt of consideration by the stockholders in exchange for the Company's
stock, the voting requirements do not apply if certain "fair price" conditions
are met.
Maryland law provides for the elimination of the voting rights of any
person who makes a Control Share Acquisition (as defined below) except to the
extent that such acquisition is exempt or is approved by at least 66 2/3% of all
votes entitled to be cast on the matter, excluding shares of capital stock owned
by the acquiror or by officers or directors who are employees of the Company. A
control share acquisition ("Control Share Acquisition") is the direct or
indirect acquisition by any person of ownership of, or the power to direct the
exercise of voting power with respect to, shares of voting stock ("Control
Shares") that would, if aggregated with all other voting stock owned by such
person, entitle such person to exercise voting power in electing directors
within one of the following ranges of voting power: (i) 20% or more but less
than 33 1/3%; (ii) 33 1/3% or more but less than a majority; or (iii) a majority
of voting power. 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 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 Company may itself present the question
at any stockholder meeting. If voting rights are not approved at the meeting or
if the acquiring person does not deliver an acquiring person statement as
permitted by the statute, then, subject to certain conditions and limitations,
the Company 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 voting rights, as of the date of the last Control Share Acquisition 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,
103
<PAGE> 112
all other stockholders may exercise appraisal rights. The fair value of the
stock as determined for purposes of such appraisal rights may not be less than
the highest price per share paid in the Control Share Acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a Control Share Acquisition. The Control
Share Acquisition statute does not apply to stock acquired in a merger,
consolidation or stock exchange if the Company is a party to the transaction, or
to acquisitions approved or exempted by the charter or by-laws of the Company.
LEGAL MATTERS
Certain legal matters, including the validity of the Shares and certain tax
matters, will be passed upon for the Company by Paul, Hastings, Janofsky &
Walker LLP, New York, New York. Seth M. Zachary, a partner of Paul, Hastings,
Janofsky & Walker LLP, is presently serving as a director of the Company and
will continue to serve as a director at least until the Company's 1998 Annual
Meeting of Shareholders. Mr. Zachary is the beneficial owner of 5,211 shares of
Lexington Common Stock and holds options to purchase an additional 12,500 shares
of Common Stock. In connection with certain matters related to the laws of the
State of Maryland, Paul, Hastings, Janofsky & Walker LLP will rely on the
opinion of Piper & Marbury LLP, Baltimore, Maryland.
EXPERTS
The consolidated financial statements of the Company incorporated into this
Proxy Statement/Prospectus by reference to the Annual Report on Form 10-K, as
amended, for the year ended December 31, 1996, have been so incorporated in
reliance on the report incorporated by reference of KPMG Peat Marwick LLP,
independent certified public accountants, given on authority of said firm as
experts in accounting and auditing.
The financial statements and schedule of CRIT appearing in CRIT's Form
10-K, as amended for the year ended December 31, 1996, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon,
dated January 29, 1997, included therein and incorporated herein by reference.
The information under the captions "CRIT Historical Financial Data" and
"Selected Financial Data" as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996, appearing in this Proxy
Statement/Prospectus and Registration Statement have been derived from financial
statements audited by Ernst & Young LLP, as set forth in their report, dated
January 29, 1997, incorporated herein by reference. Such financial statements
and schedule are incorporated herein by reference, in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
SHAREHOLDER PROPOSALS
CRIT will hold an Annual Meeting only if the Merger is not consummated.
Shareholder proposals intended to be presented at the next Annual Meeting must
be received by CRIT a reasonable amount of time prior to CRIT's solicitation of
proxies relating to such meeting.
MMARK R. PATTERSON
Secretary
December 1, 1997
104
<PAGE> 113
ANNEX A
AGREEMENT AND PLAN OF MERGER
<PAGE> 114
AGREEMENT AND PLAN OF MERGER
BETWEEN
CORPORATE REALTY INCOME TRUST I
AND
LEXINGTON CORPORATE PROPERTIES, INC.
DATED AS OF MAY 29, 1997
<PAGE> 115
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
I. THE MERGER..................................................................... 1
(A) The Merger............................................................... 1
(B) The Closing.............................................................. 1
(C) Effective Time........................................................... 1
II. ARTICLES OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION............. 2
III. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION............................ 2
IV. EXCHANGE OF STOCK, ASSUMPTION OF MORTGAGE AND OTHER CONSIDERATION.............. 2
(A) Conversion and Redemption of Stock....................................... 2
(B) Exchange of Certificates Representing Trust Shares....................... 3
(C) Return of Exchange Fund.................................................. 4
(D) Cash Payment; Continuance of Mortgages................................... 4
V. REPRESENTATIONS AND WARRANTIES OF THE TRUST.................................... 5
(A) Existence; Good Standing; Authority; Compliance With Law................. 5
(B) Authorization, Validity and Effect of Agreements......................... 5
(C) Capitalization........................................................... 5
(D) Subsidiaries and Other Interests......................................... 6
(E) No Violation............................................................. 6
(F) SEC Documents............................................................ 6
(G) Litigation............................................................... 6
(H) Absence of Certain Changes................................................ 6
(I) Absence of Undisclosed Liabilities....................................... 7
(J) Registration Statement and Proxy Information............................. 7
(K) Taxes.................................................................... 7
(L) Books and Records........................................................ 8
(M) Properties................................................................ 8
(N) Environmental Matters..................................................... 9
(O) No Fees.................................................................. 9
(P) Opinion of Financial Advisor............................................. 10
(Q) Contracts and Commitments................................................ 10
(R) Leases................................................................... 10
(S) Affiliated Transactions.................................................. 10
(T) Employees................................................................ 10
(U) Definition of the Trust's Knowledge...................................... 10
VI. REPRESENTATIONS AND WARRANTIES OF LEXINGTON.................................... 11
(A) Existence; Good Standing; Authority; Compliance With Law................. 11
(B) Authorization, Validity and Effect of Agreements......................... 11
(C) Capitalization........................................................... 11
(D) Registration Statement and Proxy Information............................. 12
(E) Other Interest........................................................... 12
(F) No Violation............................................................. 12
(G) SEC Documents............................................................ 12
(H) Litigation................................................................ 13
(I) Absence of Certain Changes............................................... 13
(J) Taxes.................................................................... 13
(K) Environmental Matters.................................................... 14
</TABLE>
i
<PAGE> 116
<TABLE>
<S> <C> <C>
(L) No Fees.................................................................. 14
(M) Beneficial Share Ownership................................................ 15
(N) Contracts and Commitments................................................. 15
(O) Lexington Common Stock................................................... 15
(P) Convertible Securities................................................... 15
(Q) Definition of Lexington's Knowledge...................................... 15
VII. COVENANTS...................................................................... 15
(A) Acquisition Proposals.................................................... 15
(B) Conduct of Businesses.................................................... 16
(C) Meeting of Stockholders.................................................. 17
(D) Filings; Other Action.................................................... 18
(E) Inspection of Records.................................................... 18
(F) Publicity................................................................ 18
(G) Registration Statement................................................... 18
(H) Listing Application....................................................... 19
(I) Further action........................................................... 19
(J) Affiliates of the Trust.................................................. 19
(K) Expenses................................................................. 20
(L) Indemnification and Insurance............................................ 20
(M) Reorganization............................................................ 21
(N) Payment of Advisory Fees and Transaction Expenses......................... 21
(O) REIT Status.............................................................. 21
VIII. CONDITIONS PRECEDENT........................................................... 21
(A) Conditions to Each Party's Obligation to Effect the Merger............... 21
(B) Conditions to Obligations of the Trust to Effect the Merger.............. 22
(C) Conditions to Obligation of Lexington to Effect the Merger............... 22
IX. TERMINATION.................................................................... 23
(A) Termination.............................................................. 23
(B) Effect of Termination.................................................... 25
(C) Fees and Expenses........................................................ 25
(D) Extension; Waiver........................................................ 25
X. GENERAL PROVISIONS............................................................. 26
(A) Nonsurvival of Representations, Warranties and Agreements................ 26
(B) Notices.................................................................. 26
(C) Assignment; Binding Effect; Benefit...................................... 26
(D) Entire Agreement......................................................... 27
(E) Confidentiality.......................................................... 27
(F) Amendment................................................................ 27
(G) Governing Law............................................................ 27
(H) Counterparts.............................................................. 27
(I) Headings................................................................. 27
(J) Waivers.................................................................. 27
(K) Incorporation............................................................ 27
(L) Severability............................................................. 27
(M) Interpretation and Certain Definitions.................................... 28
(N) Schedules................................................................. 28
(O) Limitation of Liability.................................................. 28
</TABLE>
ii
<PAGE> 117
SCHEDULES
<TABLE>
<S> <C> <C>
Schedule 4.4 -- Trust Obligations
Schedule 5.1(c) -- Trust Organizational Documents
Schedule 5.5 -- Trust Conflicts or Breaches
Schedule 5.9 -- Trust Liabilities
Schedule 5.11 -- Trust Taxes
Schedule 5.13 -- Trust Properties
Schedule 5.14 -- Trust Environmental Matters
Schedule 5.17 -- Trust Contracts and Commitments
Schedule 5.18 -- Trust Consents
Schedule 5.19 -- Trust Affiliated Transactions
Schedule 6.1(b) -- Lexington Subsidiaries
Schedule 6.1(d) -- Lexington Charter Documents
Schedule 6.3 -- Lexington Reserved Shares
Schedule 6.6 -- Lexington Conflicts or Violations
Schedule 6.8 -- Lexington Litigation
Schedule 6.10 -- Lexington Taxes
Schedule 6.11 -- Lexington Environmental Matters
</TABLE>
iii
<PAGE> 118
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of May 29, 1997 between CORPORATE REALTY INCOME TRUST I, a Massachusetts
business trust having an office at 388 Greenwich Street, New York, New York
10013 (the "Trust"), and LEXINGTON CORPORATE PROPERTIES, INC., a Maryland
corporation having its offices at 355 Lexington Avenue, New York, New York 10017
("Lexington").
RECITALS
A. The Board of Trustees of the Trust and the Board of Directors of
Lexington each have determined that a business combination between the Trust and
Lexington is in the best interests of their respective companies and
stockholders, and accordingly have agreed to effect the merger provided for
herein upon the terms and subject to the conditions set forth herein.
B. It is intended that the merger provided for herein, for federal income
tax purposes, shall qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
C. The Trust has received a fairness opinion from its financial advisor
relating to the transactions contemplated hereby as more fully described herein.
D. The Trust and Lexington desire to make certain representations,
warranties and agreements in connection with the merger.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
I.
THE MERGER
(A) The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3 hereof), the Trust shall be merged
with and into Lexington in accordance with this Agreement and the separate
corporate existence of the Trust shall thereupon cease (the "Merger"). Lexington
shall be the surviving corporation in the Merger (sometimes hereinafter referred
to as the "Surviving Corporation"). The Merger shall be completed pursuant to
Chapter 182 of the Massachusetts General Laws (the "MGL") and Section 3-114 of
the Maryland General Corporation Law (the "MGCL").
(B) The Closing. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") shall take place at the offices of
Paul, Hastings, Janofsky & Walker LLP in New York, New York, at 1:00 p.m., local
time, on the later of (a) September 4, 1997 or (b) the second business day after
the last condition set forth in Article 8 shall have been satisfied or waived by
the party entitled to effect such waiver (but in any event no later than October
1, 1997), or at such other time, date or place as the parties hereto may agree.
The date on which the Closing occurs is hereinafter referred to as the "Closing
Date".
(C) Effective Time. If all the conditions to the Merger set forth in
Article 8 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 9, the parties
hereto shall cause Articles of Merger satisfying the requirements of the MGCL
Law to be properly executed, verified and delivered for filing in accordance
with the MGCL Law on the Closing Date. The Merger shall become effective upon
the acceptance for record of the Articles of Merger by the State Department of
Assessments and Taxation of Maryland in accordance with the MGCL Law or at such
later time which the parties hereto shall have agreed upon and designated in
such filing in accordance with applicable law as the effective time of the
Merger (the "Effective Time").
A-1
<PAGE> 119
II
ARTICLES OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION
The articles of incorporation, as amended (the "Articles of Incorporation")
and by-laws of Lexington in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and by-laws of the Surviving Corporation:
III.
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
The directors and officers of Lexington immediately prior to the Effective
Time shall be the directors and officers of the Surviving Corporation as of the
Effective Time.
IV.
EXCHANGE OF STOCK, ASSUMPTION OF MORTGAGE AND OTHER CONSIDERATION
(A) Conversion and Redemption of Stock.
1. At the Effective Time, each outstanding share of common stock, par
value .0001 per share, of Lexington ("Lexington Common Stock") and each
outstanding share of Class A Senior Cumulative Convertible Preferred Stock,
par value $.0001 per share, of Lexington ("Lexington Preferred Stock")
immediately prior to the Effective Time shall remain outstanding and shall
continue to represent one share of Lexington Common Stock or Lexington
Preferred Stock, as the case may be, of the Surviving Corporation. At the
Effective Time, Lexington shall issue shares of Lexington Common Stock as
contemplated by Section 4.1(b) and shall deliver $1,000,000 cash (the "Cash
Payment") to Corporate Realty Advisors, Inc., the Trust's advisor, as
contemplated by Section 4.4.
2. At the Effective Time, each share of beneficial interest, par value
$.10 per share, of the Trust (the "Trust Shares") issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the Trust, Lexington or the holders of
any of the securities of either of these entities, be converted into a
number of shares of Lexington Common Stock equal to a fraction, the
numerator of which is the Share Value and the denominator of which is the
Lexington Common Stock Price (collectively, the "Stock Consideration");
provided, however, that in the event the Lexington Common Stock Price is
(i) greater than $14.125, then, for purposes of determining the Stock
Consideration, the Lexington Common Stock Price shall be deemed to be
$14.125, and (ii) in the event the Lexington Common Stock Price is less
than $12.125, then, for purposes of determining the Stock Consideration,
the Lexington Common Stock Price shall be deemed to be $12.125. The
"Lexington Common Stock Price" means an amount equal to the average of the
closing sales prices of Lexington Common Stock on the New York Stock
Exchange, Inc. during the twenty consecutive trading days ending on the
fifth business day immediately preceding the Trust's meeting of
shareholders referred to in Section 7.3. The "Share Value" shall equal the
quotient obtained by dividing (A) an amount equal to (y) $18.15 million
minus (z) the amount of cash which the Trust shall elect to receive from
Lexington and apply toward the payment of Trust obligations as provided in
Section 4.4, by (B) the total number of Trust Shares issued and outstanding
immediately prior to the Effective Time (subject to the adjustments as
described in Section 7.15). The Stock Consideration shall be appropriately
adjusted to reflect the effect of any stock split, reverse stock split,
stock dividend, reorganization, recapitalization or other like change with
respect to the Lexington Common Stock occurring after the date hereof and
prior to the Effective Time, or to reflect the effect of any merger,
consolidation or other transaction involving Lexington which shall affect
the Lexington Common Stock or its listing on the New York Stock Exchange,
Inc. Subject to the right of the Trust to terminate as set forth in Section
9.1(g), the Trust and Lexington shall agree in good faith on the specific
adjustments required to be made pursuant to the preceding sentence.
A-2
<PAGE> 120
3. As a result of the Merger and without any action on the part of the
holders thereof, all Trust Shares shall cease to be outstanding, shall be
canceled and retired and shall cease to exist and each holder of a
certificate (a "Certificate") representing any Trust Shares shall
thereafter cease to have any rights with respect to such Trust Shares,
except the right to receive, without interest, shares of Lexington Common
Stock, dividends payable in accordance with Section 4.2(c), any unspent
portion of the Cash Payment and cash in lieu of fractional shares of
Lexington Common Stock in accordance with Section 4.2(e) upon the surrender
of such Certificate.
4. Each Trust Share issued and held in the Trust's treasury and each
Trust Share held by Lexington or any of the Lexington Subsidiaries
immediately prior to the Effective Time, if any, by virtue of the Merger,
shall cease to be outstanding, shall be canceled and retired and shall
cease to exist and no payment of any consideration shall be made with
respect thereto.
(B) Exchange of Certificates Representing Trust Shares.
1. At the Effective Time, Lexington shall deposit, or shall cause to
be deposited, with Chase Mellon Shareholder Services LLC (the "Exchange
Agent"), for the benefit of the holders of Trust Shares, for exchange in
accordance with this Article 4, certificates representing the shares of
Lexington Common Stock and the cash in lieu of fractional shares (such cash
and certificates for shares of Lexington Common Stock being hereinafter
referred to as the "Exchange Fund") to be issued pursuant to Section 4.1
and paid pursuant to this Section 4.2, respectively, in exchange for
outstanding Trust Shares. After payment by the Trust of its accrued
expenses, any remaining portion of the Cash Payment will be delivered to
the Exchange Agent by the Trust's advisor, Corporate Realty Advisors, Inc.
(the "Trust Advisor") at such time as shall be determined by the Trust
Advisor, for distribution to the former shareholders of the Trust; provided
that in the event any such distribution shall occur on any date other than
the date on which certificates representing shares of Lexington Common
Stock are distributed to the former stockholders of the Trust, then, in
such event, the Trust Advisor shall pay any and all fees and expenses to be
charged by the Exchange Agent for effecting such distribution prior to the
date of such distribution by the Exchange Agent.
2. Promptly after the Effective Time, Lexington shall cause the
Exchange Agent to mail to each holder of record of a Certificate or
Certificates (i) a letter of transmittal which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as Lexington may
reasonably specify and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of
Lexington Common Stock, cash in lieu of fractional shares and the portion,
if any, of the Cash Payment distributable to the Trust's shareholders. Upon
surrender of a Certificate for cancellation to the Exchange Agent together
with such letter of transmittal, duly executed and completed in accordance
with the instructions thereto, the holder of such Certificate shall be
entitled to receive in exchange therefor (x) a certificate representing the
number of whole shares of Lexington Common Stock to which such holder shall
be entitled and (y) a check representing the amount of cash in lieu of
fractional shares, if any, plus the amount of any dividends or
distributions, if any, pursuant to paragraph (c) below, after giving effect
to any required withholding tax, and the Certificate so surrendered shall
forthwith be canceled. No interest will be paid or accrued on the cash in
lieu of fractional shares or on the dividend or distribution, if any,
payable to holders of Certificates, pursuant to this Section 4.2 or on the
portion of the Cash Payment distributable to the Trust's shareholders. In
the event of a transfer of ownership of Trust Shares which is not
registered in the transfer records of the Trust, a Certificate representing
the proper number of shares of Lexington Common Stock, together with a
check, for the Cash Payment, and the cash to be paid in lieu of fractional
shares plus, to the extent applicable, the amount of any dividend or
distribution, if any, payable pursuant to paragraph (c) below, may be
issued to such a transferee if the Certificate representing shares of such
Trust Shares is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and to evidence
that any applicable stock transfer taxes have been paid.
A-3
<PAGE> 121
3. Notwithstanding any other provisions of this Agreement, no
dividends or other distributions on Lexington Common Stock shall be paid
with respect to any Trust Shares represented by a Certificate until such
Certificate is surrendered for exchange as provided herein; provided,
however, that subject to the effect of applicable laws, following surrender
of any such Certificate, there shall be paid by the Surviving Corporation
to the holder of the certificates representing whole shares of Lexington
Common Stock issued in exchange therefor, without interest, (i) at the time
of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore payable with respect to
such whole shares of Lexington Common Stock and not paid, less the amount
of any withholding taxes which may be required thereon, and (ii) at the
appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to surrender and a
payment date subsequent to surrender payable with respect to such whole
shares of Lexington Common Stock, less the amount of any withholding taxes
which may be required thereon.
4. At and after the Effective Time, there shall be no transfers on the
stock transfer books of the Trust of the Trust Shares which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation,
they shall be canceled and exchanged for certificates for shares of
Lexington Common Stock, dividends, if any, the Cash Payment, and cash in
lieu of fractional shares, if any, in accordance with this Section 4.2.
Certificates surrendered for exchange by any person constituting an
"affiliate" of the Trust for purposes of Rule 145, as such rule may be
amended from time to time ("Rule 145"), of the rules and regulations
promulgated under the Securities Act of 1933, as amended (the "Securities
Act") shall not be exchanged until Lexington has received an Affiliate
Letter in a form satisfactory to the Trust and Lexington from such person
as provided in Section 7.10.
5. No fractional shares of Lexington Common Stock shall be issued
pursuant hereto. In lieu of the issuance of any fractional share of
Lexington Common Stock pursuant to this Agreement, each holder of the Trust
Shares upon surrender of a Certificate for exchange shall be paid an amount
in cash (without interest), rounded to the nearest cent, determined by
multiplying (i) the Lexington Common Stock Price, by (ii) the fraction of a
share of Lexington Common Stock which such holder would otherwise be
entitled to receive under this Article 4.
(C) Return of Exchange Fund. Any portion of the Exchange Fund (including
the proceeds of any investments thereof and any shares of Lexington Common
Stock) that remains unclaimed by the former shareholders of the Trust one year
after the Effective Time shall be delivered to the Surviving Corporation. Any
remaining amount of the Cash Payment that remains unclaimed by the former
shareholders of the Trust one year after the Effective Time shall be delivered
to the Trust Advisor. Any former shareholders of the Trust who have not
theretofore complied with this Article 4 shall thereafter look only to (i) the
Surviving Corporation for payment of their shares of Lexington Common Stock, and
cash in lieu of fractional shares (plus dividends and distributions to the
extent set forth in Section 4.2(c), if any), as determined pursuant to this
Agreement, and (ii) the Trust Advisor for payment of their allocable share of
any remaining portion of the Cash Payment, in each case without any interest
thereon. None of Lexington, the Trust, the Exchange Agent or any other person
shall be liable to any former holder of Trust Shares for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws. In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity against
any claim that may be made against it with respect to such Certificate, the
Exchange Agent or the Surviving Corporation or the Trust Advisor, as the case
may be, will issue in exchange for such lost, stolen or destroyed Certificate
the shares of Lexington Common Stock, the Cash Payment, and cash in lieu of
fractional shares (and to the extent applicable, dividends and distributions
payable pursuant to Section 4.2(c)).
(D) Cash Payment; Continuance of Mortgages. At the Effective Time, at the
option of the Trust and if so requested by the Trust, Lexington shall pay to the
Trust Advisor, in immediately available funds up to $1,000,000, which shall be
used by the Trust and such advisor to pay and discharge in full all of the
Trust's
A-4
<PAGE> 122
obligations other than the mortgages and other obligations described on Schedule
4.4. In the event any such amount is requested by the Trust and applied toward
the payment of Trust obligations as aforesaid, any unexpended balance shall be
paid to the Trust's former stockholders in accordance with Section 4.2(a), at
such time as the Trust Advisor shall, in its sole discretion, determine, and
Lexington shall have no responsibility or liability for any such monies or the
application thereof.
V.
REPRESENTATIONS AND WARRANTIES OF THE TRUST
The Trust represents and warrants as follows:
(A) Existence; Good Standing; Authority; Compliance With Law.
1. The Trust is a Massachusetts business trust duly formed, validly
existing and in good standing under the laws of Massachusetts. The Trust is duly
licensed or qualified to do business as a foreign corporation and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary, except where the
failure to be so licensed or qualified would not have a material adverse effect
on the business, results of operations or financial condition of the Trust taken
as a whole (a "Trust Material Adverse Effect"). The Trust has all requisite
corporate power and authority to own, operate, lease and encumber its properties
and carry on its business as now conducted.
2. The Trust is not in violation of any order of any court, governmental
authority or arbitration board or tribunal, or to the knowledge of the Trust,
any law, ordinance, governmental rule or regulation to which the Trust or any of
its respective properties or assets is subject.
3. Copies of the Declaration of Trust (the "Declaration") and other
organizational documents (and all amendments thereto) of the Trust are listed in
Schedule 5.1(c), and the copies of such documents, which have previously been
delivered or made available to Lexington, are true and correct.
(B) Authorization, Validity and Effect of Agreements. Upon shareholder
approval of an amendment to the Trust's Declaration of Trust, the Trust will
have the requisite power and authority to enter into the transactions
contemplated hereby. The Board of Trustees of the Trust has unanimously approved
this Agreement, the Merger, and the transactions contemplated by this Agreement
and declared such transactions advisable and in the best interest of the
shareholders and the Trust, and shall recommend that the holders of Trust Shares
adopt and approve this Agreement, the Merger, and the transactions contemplated
by this Agreement at the Trust shareholders' meeting which will be held in
accordance with the provisions of Section 7.3 hereof. Subject only to (i) the
approval by the holders of a majority of the outstanding Trust Shares of an
amendment to the Trust's Declaration of Trust authorizing the Trust to merge,
and (ii) the approval of this Agreement, the Merger and the transactions
contemplated hereby by the holders of a majority of the outstanding Trust
Shares, the execution by the Trust of this Agreement and the consummation of the
Merger and the transactions contemplated by this Agreement, have been duly and
validly authorized by all requisite action on the part of the Trust and no other
authorization by the Trust is required. This Agreement has been duly and validly
executed and delivered by the Trust and constitutes the valid and legally
binding obligations of the Trust, enforceable against the Trust in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity.
(C) Capitalization. The authorized capital of the Trust consists of
20,000,000 Trust Shares. As of the date hereof, there are 1,010,776 Trust Shares
issued and outstanding and no Trust Shares are held in treasury or otherwise
reserved for issuance for any reason. All such Trust Shares are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights. The
Trust has no outstanding bonds, debentures, notes or other obligations the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the shareholders of
the Trust on any matter. There are not at the date of this Agreement any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights,
A-5
<PAGE> 123
agreements or commitments which obligate the Trust to issue, transfer or sell
any Trust Shares. There are no agreements or understandings to which the Trust
is a party with respect to the voting of any Trust Shares or which restrict the
transfer of any such shares, nor does the Trust have knowledge of any such
agreements or understandings with respect to the voting of any such shares or
which restrict the transfer of any such shares other than those set forth in the
Trust's Declaration of Trust with respect to the maintenance of the Trust as a
real estate investment trust ("REIT"). There are no outstanding contractual
obligations of the Trust to repurchase, redeem or otherwise acquire any Trust
Shares or any other securities of the Trust. The Trust is not under any
obligation, contingent or otherwise, by reason of any agreement to register any
of its securities under the Securities Act.
(D) Subsidiaries and Other Interests. The Trust does not own directly or
indirectly any interest or investment (whether equity or debt) in any
corporation, partnership, joint venture, business trust or other entity (other
than investments in short-term investment securities).
(E) No Violation. Neither the execution and delivery by the Trust of this
Agreement nor the consummation by the Trust of the transactions contemplated by
this Agreement in accordance with its terms, will: (i) conflict with or result
in a breach of any provisions of the Trust's Declaration or other organizational
documents, if they are amended as contemplated in Section 7.3; (ii) except as
set forth in Schedule 5.5, violate, or conflict with, or result in a breach of
any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination or in a right of termination or cancellation of, or accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties of the Trust under,
or result in being declared void, voidable or without further binding effect,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the Trust is a
party, or by which the Trust or any of its properties is bound or affected; or
(iii) other than the filings provided for in Article 1 of this Agreement, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities
Act or applicable state securities and "Blue Sky" laws (collectively, the
"Regulatory Filings"), filings as may be required in the registries of deeds or
similar governmental offices in those states where the Trust Properties (as
hereinafter defined) are located or filings necessary to qualify Lexington to do
business as a foreign corporation in such states, require any consent, approval
or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority.
(F) SEC Documents. The Trust has filed all required forms, reports and
documents with the Securities and Exchange Commission ("SEC") since December 31,
1994 (collectively, the "Trust SEC Reports"), all of which were prepared in
accordance with the applicable requirements of the Exchange Act and the
Securities Act. The Trust SEC Reports were filed with the SEC in a timely manner
and constitute all forms, reports and documents required to be filed by the
Trust since December 31, 1994 under the Securities Act, the Exchange Act and the
rules and regulations promulgated thereunder (the "Securities Laws"). As of
their respective dates, the Trust SEC Reports (i) complied as to form in all
material respects with the applicable requirements of the Securities Laws and
(ii) did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
made therein, in the light of the circumstances under which they were made, not
misleading. Each of the balance sheets of the Trust included in or incorporated
by reference into the Trust SEC Reports (including the related notes and
schedules) fairly presents the financial position of the Trust as of its date
and each of the statement of income, retained earnings and cash flows of the
Trust included in or incorporated by reference into the Trust SEC Reports
(including any related notes and schedules) fairly presents the results of
operations, retained earnings or cash flows, as the case may be, of the Trust
for the periods set forth therein (subject, in the case of unaudited statements,
to normal year-end audit adjustments which would not be material in amount or
effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may be
noted therein and except, in the case of the unaudited statements, as permitted
by Form 10-Q pursuant to Section 13 or 15(d) of the Exchange Act.
(G) Litigation. There are (i) no continuing orders, injunctions or decrees
of any court, arbitrator or governmental authority to which the Trust is a party
or by which any of its properties or assets are bound, or,
A-6
<PAGE> 124
to which any person who is now, or, to the knowledge of the Trust, has been at
any time prior to the date hereof, a trustee, officer, employee or agent of the
Trust acting in such capacity is a party, and (ii) no actions, suits or
proceedings pending against the Trust or, to the knowledge of the Trust,
threatened against the Trust or against any person who is now, or has been at
any time prior to the date hereof, a trustee, officer, employee or agent of the
Trust acting in such capacity, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality.
(H) Absence of Certain Changes. Except as disclosed in the Trust SEC
Reports filed with the SEC prior to the date hereof, since December 31, 1996,
the Trust has conducted its business only in the ordinary course of such
business and there has not been (i) any Trust Material Adverse Effect; (ii) any
declaration, setting aside or payment of any dividend or other distribution with
respect to Trust Shares except as disclosed in writing to Lexington; (iii) any
material commitment, contractual obligation, borrowing, capital expenditure or
transaction (each, a "Commitment") entered into by the Trust, inside or outside
the ordinary course of business except for Commitments for expenses of
environmental engineers, attorneys, accountants and investment bankers incurred
in connection with the Merger; or (iv) any change in the Trust's accounting
principles, practices or methods, except as disclosed in writing to Lexington.
(I) Absence of Undisclosed Liabilities. Except as set forth on Schedule
5.9 or in the Trust SEC Reports and for liabilities incurred in the ordinary
course of business since December 31, 1996, and in connection with the
transactions contemplated hereby, to the knowledge of the Trust, the Trust does
not have any material liabilities, claims, losses, damages, deficiencies or
obligations (whether absolute, contingent, accrued or otherwise) of any nature
whatsoever.
(J) Registration Statement and Proxy Information. None of the information
supplied or to be supplied by the Trust for inclusion in the Form S-4 (as
defined in Section 7.7), including any supplements or amendments thereto, will,
at the time it is mailed to the shareholders of the Trust, at the time of the
meeting of the Trust's shareholders or at the time that the Form S-4 is declared
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Notwithstanding the foregoing, the Trust makes no representation
or warranty with respect to any information supplied or to be supplied by
Lexington which is contained in the Form S-4.
(K) Taxes. Except as set forth in Schedule 5.11:
1. The Trust has timely and fully paid or caused to be paid, or has
adequately accrued or reserved for, all federal, state, local, foreign, and
other taxes (including without limitation, income taxes, estimated taxes,
alternative minimum taxes, excise taxes, sales taxes, use taxes,
value-added taxes, gross receipts taxes, franchise taxes, capital stock
taxes, employment and payroll-related taxes, withholding taxes, stamp
taxes, transfer taxes, windfall profit taxes, property taxes and
environmental taxes, whether or not measured in whole or in part by net
income), fees, duties, assessments, withholdings or governmental charges of
any kind whatsoever, and all deficiencies, or other additions to tax,
additional amounts, interest, fines and penalties with respect to any of
the foregoing (collectively, "Taxes"), required to be paid, accrued or
reserved by it through the date hereof;
2. The Trust has timely filed, in accordance with all applicable laws,
all federal, state, local and foreign tax returns, reports, declarations,
estimates, informational returns and statements regarding Taxes
(collectively "Returns") required to be filed in respect of the Trust
through the date hereof, and all such Returns completely and accurately set
forth the facts regarding the income, properties, operations and status of
any entity required to be shown thereon and the amount of any Taxes
relating to the applicable period;
3. The Trust has timely and fully withheld and paid to the appropriate
governmental authority all taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder or other party;
4. For its taxable year ended December 31, 1996, for all of its prior
taxable years beginning with the taxable year ended December 31, 1990 and
at all times thereafter up to and including the date hereof, the
A-7
<PAGE> 125
Trust has qualified to be treated as a REIT within the meaning of Sections
856-860 of the Code, including, without limitation, the requirements of
Sections 856 and 857 of the Code. For the periods described in the
preceding sentence, the Trust has satisfied all requirements necessary to
be treated as a REIT for purposes of the income tax provisions of those
states in which the Trust is subject to income tax and which provide for
the taxation of a REIT in a manner similar to the treatment of REITS under
Sections 856-860 of the Code;
5. Neither the Internal Revenue Service ("IRS") nor any other
governmental authority has asserted by written notice to the Trust or, to
the knowledge of the Trust, threatened to assert against the Trust any
deficiency or claim for additional Taxes. There is no dispute or claim
concerning any Tax liability of the Trust either claimed or raised in
writing by the IRS or any other governmental authority, or, to the
knowledge of the Trust, which, at some future date, may be claimed or
raised by the IRS or any other governmental authority. No written claim has
ever been made by a taxing authority in a jurisdiction where the Trust does
not file Returns that the Trust is or may be subject to taxation by that
jurisdiction. There are no security interests, liens or other encumbrances
of any nature on any of the assets of the Trust that arose in connection
with any failure (or alleged failure) to pay any Taxes when due. The Trust
has never been a party to any Tax sharing or similar agreement or entered
into a closing agreement pursuant to Section 7121 of the Code (or any
comparable provision of state, local or foreign law); and
6. The Trust has not received notice of any audit of any Tax Return
filed by the Trust, and the Trust has not been notified by any Tax
authority that any such audit is contemplated or pending. The Trust has not
executed or filed with the IRS or any other taxing authority, and no person
has been requested to so execute or file any agreement extending the period
for assessment or collection of any income or other Taxes, or the time to
file any Return other than routine extensions. True, correct and complete
copies of all federal, state and local income or franchise tax returns
required to be filed by the Trust and all written communications relating
thereto (including, without limitation, in respect of any audits and
examinations) have been delivered to Lexington or made available to
representatives of Lexington. The Trust has not agreed, and is not
required, to make any adjustments under Section 481(a) of the Code (or any
comparable provision of state, local or foreign law) by reason of a change
in accounting method or otherwise. Since the most recent Tax period for
which the Trust has provided Lexington with a copy of each of its federal,
state and local income and franchise tax returns, neither the Trust nor any
person or entity on its behalf has made or changed any election concerning
Taxes or Returns, changed an annual accounting period, adopted or changed
any accounting method, filed any amended Return, settled any Tax claim or
filed any amended Return, settled any Tax claim or assessment or
surrendered any right to claim a refund of Taxes or obtained or entered
into any Tax ruling, agreement, contract, understanding, arrangement or
plan.
(L) Books and Records.
1. The books of account and other financial records of the Trust are
true, complete and correct in all material respects, have been maintained
in accordance with good business practices, and are accurately reflected in
all material respects in the financial statements included in the Trust SEC
Reports.
2. Records of the Trust have been, or will be prior to the Closing,
made available to Lexington, and such records contain in all material
respects accurate minutes of all meetings and accurately reflect in all
material respects all other action of the shareholders and trustees and any
committees of the Board of Trustees of the Trust.
(M) Properties. All of the real estate owned by the Trust (the "Trust
Properties") is set forth in Schedule 5.13. The Trust has made available to
Lexington for inspection title insurance policies obtained by the Trust in
connection with the acquisition of the Properties (the "Title Policies") and
surveys ("Surveys") relating to the Trust Properties. The Trust has no knowledge
of any encumbrance to title to any Trust Property or any survey matter affecting
any Trust Property other than (i) matters listed in the title reports obtained
by the Trust and delivered to Lexington with respect to such Trust Property (the
"Title Reports"), (ii) matters shown on the Survey with respect to such Trust
Property, (iii) customary ordinances and regulations, including zoning
ordinances and building codes, affecting building use or occupancy, none of
which are, to the
A-8
<PAGE> 126
knowledge of the Trust, violated by the present use of the related Trust
Property, (iv) matters listed in Schedule B of the Title Policies, and (v)
matters disclosed in Schedule 5.13. Schedule 5.13 sets forth all of the Title
Policies of the Trust relating to the Trust Properties and such policies are, at
the date hereof, in full force and effect and no claims have been made against
any such policies. To the knowledge of the Trust, except as set forth in
Schedule 5.13, the Trust has obtained all certificates, permits and licenses
from any governmental authority having jurisdiction over any of the Trust
Properties which are not the responsibility of tenants and no tenant, to the
knowledge of the Trust, has failed to obtain any such certificate, permit or
license. All agreements, easements and other rights which are necessary to
permit the lawful use and operation of all driveways, roads and other means of
egress and ingress to and from any of the Trust Properties, have been obtained
and are in full force and effect and the Trust has not received notice with
respect to the termination or breach of any such easements, agreements or other
rights. Each Trust Property is in full compliance with all governmental permits,
licenses and certificates except where the failure to be in compliance would not
be reasonably likely to have a Trust Material Adverse Effect. Except as set
forth in Schedule 5.13, no notice of any violation of any federal, state or
municipal law, ordinance, order, regulation or requirements affecting any
portion of any of the Trust Properties has been issued by any governmental
authority which has not been remedied or cured. There are no material structural
defects relating to any of the Trust Properties, except as set forth in the
reports referred to in Schedule 5.13. The building systems of each Trust
Property are in working order in all material respects, except as set forth in
the reports referred to Schedule 5.13. Except as set forth in Schedule 5.13,
there is no physical damage to any Trust Property in excess of $25,000 for which
there is no insurance in effect covering the full cost of the restoration.
Except as set forth in Schedule 5.13, there is no current renovation or
restoration or tenant improvements ongoing to any Trust Property or any portion
thereof, nor is there any renovation, restoration, or tenant improvement which
the Trust has committed to undertake, the cost of which exceeds, or would be
likely to exceed, $25,000 individually. Except as disclosed in Schedule 5.13,
the use and occupancy of each Trust Property complies in all material respects
with all applicable codes and zoning laws and regulations and there is no
pending or, to the knowledge of the Trust, any threatened proceeding or action
that will in any manner affect the size of, use of, improvements on,
construction on, or access to any of the Trust Properties. The Trust has not
received any notice to the effect that (A) any betterment assessments have been
levied against, or any condemnation or rezoning proceedings are pending or
threatened with respect to any of the Trust Properties, or (B) any zoning,
building or similar law, code, ordinance, order or regulation is or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Trust Properties or by the continued
maintenance, operation or use of the parking areas except as set forth in
Schedule 5.1(c). Except as disclosed on Schedule 5.13, there are no contingent
liabilities or amounts owed by the Trust to third parties (excluding any
obligations with respect to mortgage loans encumbering the Properties) with
respect to any Property including, without limitation, those for leasing
commissions, asset management fees or brokerage fees.
(N) Environmental Matters. Except as set forth in Schedule 5.14 and any
environmental assessment or report listed therein: (i) to the knowledge of the
Trust, no Hazardous Substances or Hazardous Wastes have been or are being
released into the environment, discharged into the environment or disposed of
from, at, or under the Trust Properties; (ii) to the knowledge of the Trust, no
Hazardous Substances or Hazardous Wastes have been or are being generated or
treated at the Trust Properties or discharged from the Trust Properties, except
in compliance with applicable Laws (defined below); (iii) to the knowledge of
the Trust, no Hazardous Wastes have been or are being stored for more than 90
days or handled at or on the Trust Properties, except in compliance with
applicable laws; (iv) none of the Trust Properties are listed on, and the Trust
has not received written or oral notice that any of the Trust Properties are
being considered for inclusion on, the National Priorities List ("NPL"), the
Comprehensive Environmental Response, Compensation and Liability Information
System ("CERCLIS"), or any State or local listing of sites which are known or
suspected to be contaminated by Hazardous Substances or Hazardous Wastes; (v) to
the knowledge of the Trust, there are no on-going, and there have been no,
violations of any federal, state, or local law, statute, ordinance, rule or
regulation ("Law") at any Trust Properties which could result in contamination
of the land, surface water or groundwater from, at, on or under any such
properties; and (vi) to the knowledge of the Trust, no federal, state or local
governmental board, body, department or agency (collectively "Government
A-9
<PAGE> 127
Agency") is investigating any alleged or potential release, discharge, disposal
or storage of Hazardous Substances or Hazardous Wastes at, on, under or from any
Trust Properties.
As used in this Agreement, the term "Hazardous Substance" shall mean any
hazardous or toxic chemical, waste, byproduct, pollutant, contaminant, compound,
product or substance, including without limitation asbestos, polychlorinated
biphenyl, petroleum (including crude oil or any fraction thereof), radioactive
substances and any material the manufacture, possession, presence, use,
generation, storage, transportation, treatment, release, disposal, discharge,
abatement, cleanup, removal, remediation or handling of which is prohibited,
controlled or regulated by any Government Agency pursuant to any Law relating to
protection of the environment or human health. The term "Hazardous Waste" shall
have the meaning set forth in the Resource Conservation and Recovery Act, as
amended, the regulations thereunder, and any similar or implementing State or
local law, statute, ordinance, rule or regulation.
The Trust has not received any notice from any Government Agency with
respect to alleged or potential liability relating in any way to Hazardous
Substances or Hazardous Wastes at, on, under or from any Trust Property.
(O) No Fees. The Trust has not entered into any contract, arrangement or
understanding with any person or firm other than the Trust Advisor which may
result in the obligation of such entity or Lexington to pay any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. Amounts due to the Trust Advisor will be paid in full at
Closing by the Trust and will not become the obligation of Lexington.
(P) Opinion of Financial Advisor. The Trust has received the opinion of
McFarland Dewey & Co., to the effect that, as of the date hereof, the Stock
Consideration and other consideration as described in Section 4.4 is fair to the
holders of the Trust Shares from a financial point of view, and has delivered a
true and correct copy of such opinion to Lexington, a copy of which may be
included, and referred to, in the Form S-4.
(Q) Contracts and Commitments. Schedule 5.17 sets forth (i) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Trust Properties or personal property of the Trust and (ii) each Commitment
entered into by the Trust which may result in total payments by or liability of
the Trust in excess of $10,000 in any calendar year or $25,000 during the term
of any such Commitment and which may not be terminated within 90 days by the
Trust without payment of any penalty by the Trust. Copies of the foregoing are
listed in Schedule 5.17 and the copies of such documents, which have previously
been provided or made available to Lexington, are true and correct. Except as
set forth in Schedule 5.17, the Trust has not received any notice of a default
or breach under any of the documents described in the preceding sentence, and
any such default has been described in all material respects on Schedule 5.17
and has been cured to the satisfaction of the other party to such document. The
Trust is not in default respecting any payment obligations under any of the
documents described in the first sentence of this Section beyond any applicable
grace periods. Except as set forth on Schedule 5.17, the Merger will not require
the payment of any fees or other amounts by the Trust or Lexington under any of
the documents described in the first sentence of this Section and the Merger
will not cause the acceleration of, or a default under any of, such documents.
To the knowledge of the Trust, none of the other parties to any of the documents
described in the first sentence of this Section is in default under, or in
breach of, any of such documents and there has occurred no event, which the
lapse of time or the giving of notice, would be reasonably likely to result in a
default or breach thereof. There has been no payment default by any such other
party to any of the documents described in the first sentence of this Section.
(R) Leases. Each of the leases described in Item 2 of the Trust's Form
10-K for the year ended December 31, 1996, is valid and subsisting, in full
force and effect and binding upon the Trust and, to the knowledge of the Trust,
the other parties thereto. Each lessee thereunder has paid in full all amounts
due, and has satisfied in full all of its liabilities and obligations, under its
respective lease and there has not occurred any default under any such lease,
nor (to the knowledge of the Trust) does any condition exist that with notice or
lapse of time or both would constitute a default thereunder. No lessee has paid
rent under any of the leases more than one month in advance. All security
deposits specified under any such leases are held by the Trust
A-10
<PAGE> 128
and shall be conveyed to Lexington upon consummation of the Merger. Except as
disclosed in Schedule 5.18, the Merger will not require the consent of any
lessee, or require any payment or undertaking by the Trust or Lexington under
any of such leases.
(S) Affiliated Transactions. Except as described in Schedule 5.19 or Item
13 of the Trust's Form 10-K for the year ended December 31, 1996, the Trust has
not engaged in any transactions with any affiliate and is not indebted to any
affiliate for any amounts. At Closing, the Advisory Services Agreement, and any
other agreement then in effect with any affiliate, will be terminated and
Lexington will not assume any responsibility for, or liability under, any such
agreements.
(T) Employees. The Trust has no employees and there are not, and have not
at any time been, any employment or similar agreements with any person to which
the Trust is a party, except the Advisory Services Agreement. The Trust does not
maintain or contribute to, and has never maintained or contributed to, and is
not, and has not, been a party to, any employee benefit plans, programs,
arrangements or practices, including any employee benefit plans within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended, and all regulations thereunder.
(U) Definition of the Trust's Knowledge. As used in this Agreement, the
phrase "to the knowledge of the Trust" or any similar phrase means the actual,
not the constructive or imputed, knowledge of trustees of the Trust, including
any information contained in any written notice and correspondence addressed to
the Trust or any of its trustees.
VI.
REPRESENTATIONS AND WARRANTIES OF LEXINGTON
Lexington represents and warrants to the Trust as follows:
(A) Existence; Good Standing; Authority; Compliance With Law.
1. Lexington is a corporation duly formed, validly existing and in
good standing under the laws of the State of Maryland. Lexington is duly
licensed or qualified to do business as a foreign corporation and is in
good standing under the laws of any other state of the United States in
which the character of the properties owned or leased by it therein or in
which the transaction of its business makes such qualification necessary,
except where the failure to be so licensed or qualified would not have a
material adverse effect on the business, results of operations or financial
condition of Lexington and the Lexington Subsidiaries (as defined below)
taken as a whole (a "Lexington Material Adverse Effect"). Lexington has all
requisite corporate power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted.
2. Schedule 6.1(b) lists each subsidiary required to be listed by
Lexington in Exhibit 21 to the Lexington SEC Reports (the "Lexington
Subsidiaries"). Each of the Lexington Subsidiaries set forth on Schedule
6.1(b) is a corporation, partnership or trust, as the case may be, duly
formed, validly existing and in good standing under the laws of its
jurisdiction of organization, has the organizational power and authority to
own its properties and to carry on its business as it is now being
conducted, and is duly qualified to do business and is in good standing in
each jurisdiction in which the ownership of its property or the conduct of
its business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not have a
Lexington Material Adverse Effect.
3. To the knowledge of Lexington, neither Lexington nor any Lexington
Subsidiary is in violation of any law, ordinance, governmental rule or
regulation to which Lexington or any Lexington Subsidiary or any of their
respective properties or assets is subject.
4. Copies of the Articles of Incorporation or other charter documents
(and all amendments thereto) of Lexington are listed in Schedule 6.1(d),
and the copies of such documents, which have previously been delivered or
made available to the Trust or its counsel, are true and correct copies.
A-11
<PAGE> 129
(B) Authorization, Validity and Effect of Agreements. Lexington has the
requisite corporate power and authority to enter into the transactions
contemplated hereby and to execute and deliver this Agreement. The Board of
Directors of Lexington has, by resolutions adopted by unanimous vote, approved
this Agreement, the Merger and the other transactions contemplated by this
Agreement. The execution by Lexington of this Agreement, and the consummation by
Lexington of the transactions contemplated by this Agreement have been duly
authorized by all requisite corporate action on the part of Lexington. This
Agreement constitutes the valid and legally binding obligations of Lexington,
enforceable against Lexington in accordance with its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
(C) Capitalization. The authorized capital stock of Lexington consists of:
(i) 40,000,000 shares of Lexington Common Stock; (ii) 10,000,000 shares of
preferred stock, par value $.0001 per share (the "Preferred Stock"); and (iii)
40,000,000 shares of excess stock, par value $.0001 per share (the "Excess
Stock"). As of the date hereof, (i) 9,454,037, 1,325,000 and 0 shares of the
Lexington Common Stock, the Preferred Stock and the Excess Stock, respectively,
were validly issued and outstanding, fully paid and nonassessable; and (ii)
10,545,963, 0, and 0 shares of the Lexington Common Stock, the Preferred Stock
and the Excess Stock, respectively, were reserved for issuance as set forth on
Schedule 6.3 hereto. Except as set forth in the preceding sentence of this
Section 6.3, or as set forth on Schedule 6.3 hereto or contemplated by this
Agreement, as of the date hereof there are no other shares of capital stock of
Lexington outstanding and no other outstanding options, warrants, convertible or
exchangeable securities, subscriptions, rights (including preemptive rights),
stock appreciation rights, calls or commitments of any character whatsoever to
which Lexington is a party or may be bound requiring the issuance or sale of
shares of any capital stock of Lexington, and there are no contracts or other
agreements by which Lexington is or may become bound to issue additional shares
of its capital stock or any options, warrants, convertible or exchangeable
securities, subscriptions, rights (including preemptive rights), stock
appreciation rights, calls or commitments of any character whatsoever relating
to such shares.
(D) Registration Statement and Proxy Information. None of the information
supplied or to be supplied by Lexington for inclusion in the Form S-4 (as
defined in Section 7.7), including any supplements or amendments thereto, will,
at the time it is mailed to the shareholders of the Trust, at the time of the
meeting of the Trust's shareholders or at the time that the Form S-4 is declared
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they wee made, not
misleading. Notwithstanding the foregoing, Lexington makes no representation or
warranty with respect to any information supplied or to be supplied by the Trust
which is contained in the Form S-4.
(E) Other Interest. Since December 31, 1996, Lexington has not acquired
any interest or investment (whether equity or debt) in any corporation,
partnership, joint venture, business trust or other entity which is, or will be,
required to be reported by Lexington in a report to the SEC and which has not
been so reported.
(F) No Violation. Except as set forth in Schedule 6.6, neither the
execution and delivery by Lexington of this Agreement nor the consummation by
Lexington of the transactions contemplated by this Agreement in accordance with
its terms will: (i) conflict with or result in a breach of any provisions of the
Articles of Incorporation, Charter and other organizational documents,
partnership agreements or joint venture agreements of Lexington or any Lexington
Subsidiary; (ii) result in a breach or violation of, a default under, or the
triggering of any payment or other material obligations pursuant to, or
accelerate vesting under, any of Lexington's stock option plans, or any grant or
award under any of the foregoing; (iii) violate, or conflict with, or result in
a breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination or in a right of termination or cancellation of, or accelerate
the performance required by, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties of Lexington or any
of the Lexington Subsidiaries under, or result in being declared void, voidable,
or without further binding effect, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust or any license, franchise,
permit, lease, contract, agreement or other instrument, commitment or obligation
to which Lexington or any of the Lexington Subsidiaries is a party, or by which
Lexington or any of the Lexington Subsidiaries or any of their
A-12
<PAGE> 130
properties is bound or affected except for any of the foregoing matters which,
individually or in the aggregate, would not have a Lexington Material Adverse
Effect; or (iv) other than the Regulatory Rulings, require any consent, approval
or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority except where the failure to obtain any such
consent, approval or authorization of, or declaration, filing or registration
with, any governmental or regulatory authority would not have a Lexington
Material Adverse Effect.
(G) SEC Documents. Lexington has filed all required forms, reports and
documents with the SEC since December 31, 1994 (collectively, the "Lexington SEC
Reports") all of which were prepared in accordance with the applicable
requirements of the Securities Laws. The Lexington SEC Reports were filed with
the SEC in a timely manner and constitute all forms, reports and documents
required to be filed by Lexington since December 31, 1994 under the Securities
Laws. As of their respective dates, the Lexington SEC Reports (i) complied as to
form in all material respects with the applicable requirements of the Securities
Laws and (ii) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. Each of the consolidated balance sheets of Lexington
included in or incorporated by reference into the Lexington SEC Reports
(including the related notes and schedules) fairly presents the consolidated
financial position of Lexington and the Lexington Subsidiaries as of its date
and each of the consolidated statements of income, retained earnings and cash
flows of Lexington included in or incorporated by reference into the Lexington
SEC Reports (including any related notes and schedules) fairly presents the
results of operations, retained for the periods set forth therein (subject, in
the case of unaudited statements, to normal year-end audit adjustments which
would not be material in amount or effect), in each case in accordance with
generally accepted accounting principles consistently applied during the periods
involved, except as may be noted therein and except, in the case of the
unaudited statements, as permitted by Form 10-Q pursuant to Section 13 or 15(d)
of the Exchange Act.
(H) Litigation. Except as set forth in Schedule 6.8 or in the Lexington
SEC Reports, there are (i) no continuing orders, injunctions or decrees of any
court, arbitrator or governmental authority to which Lexington or any Lexington
Subsidiary is a party or by which any of its properties or assets are bound, or,
to the knowledge of Lexington, to which any person who is now, or has been at
any time prior to the date hereof, a director, officer, employee or agent of
Lexington or any Lexington Subsidiary acting in such capacity is a party, and
(ii) no actions, suits or proceedings pending against Lexington or any Lexington
Subsidiary or, to the knowledge of Lexington, threatened against Lexington or
any Lexington Subsidiary or against any person who is now, or has been at any
time prior to the date hereof, a director, officer, employee or agent of
Lexington or any Lexington Subsidiary acting in such capacity, at law or in
equity, or before or by any federal or state commission, board, bureau, agency
or instrumentality, that in the case of clause (i) or (ii) are reasonably
likely, individually or in the aggregate, to have a Lexington Material Adverse
Effect. There are no written, nor to Lexington's knowledge threatened, claims
made against Lexington or any Lexington Subsidiary by any existing or former
joint venture partner or other partner of Lexington or any Lexington Subsidiary
that are reasonably likely, individually or in the aggregate, to have a
Lexington Material Adverse Effect.
(I) Absence of Certain Changes. Except as disclosed in the Lexington SEC
Reports filed with the SEC prior to the date hereof, since December 31, 1996,
Lexington and the Lexington Subsidiaries have conducted their business only in
the ordinary course of such business and there has not been (i) any Lexington
Material Adverse Effect; (ii) as of the date hereof, any declaration, setting
aside or payment of any dividend or other distribution with respect to the
Lexington Common Stock, except for dividends declared in the ordinary course of
business; or (iii) any material change in Lexington's accounting principles,
practices or methods.
(J) Taxes. Except as set forth in Schedule 6.10:
1. Lexington and each of the Lexington Subsidiaries has timely and
fully paid or caused to be paid, or has adequately accrued or reserved for,
all Taxes required to be paid, accrued or reserved by it through the date
hereof;
2. Lexington and each of the Lexington Subsidiaries has timely filed,
in accordance with all applicable laws, all federal, state, local and
foreign tax returns, reports, declaration estimates, information
A-13
<PAGE> 131
returns and statements regarding Taxes (collectively "Returns") required to
be filed in respect of Lexington through the date hereof, and all such
Returns completely and accurately set forth the facts regarding the income,
properties, operations and status of any entity required to be shown
thereon and the amount of any Taxes relating to the applicable period;
3. Lexington and each Lexington Subsidiary has timely and fully
withheld and paid to the appropriate governmental authority all taxes
required to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, stockholder or
other party;
4. Neither the IRS nor any other governmental authority has now
asserted by written notice to Lexington or any Lexington Subsidiary or, to
the knowledge of Lexington, threatened to assert against Lexington or any
Lexington Subsidiary any deficiency or claim for additional Taxes. There is
no dispute or claim concerning any Tax liability of Lexington or any
Lexington Subsidiary either claimed or raised in writing by the IRS or any
other governmental authority, or, to the knowledge of Lexington, which may
be claimed or raised by the IRS or any other governmental authority. No
written claim has ever been made by a taxing authority in a jurisdiction
where Lexington does not file Returns that Lexington is or may be subject
to taxation by that jurisdiction. There are no security interests, liens or
other encumbrances of any nature on any of the assets of Lexington or any
Lexington Subsidiary that arose in connection with any failure (or alleged
failure) to pay any Taxes when due. Lexington has never been a party to any
Tax sharing or similar agreement or entered into a closing agreement
pursuant to Section 7121 of the Code (or any comparable provision of state,
local or foreign law); and
5. Lexington has not received notice of any audit of any Tax Return
filed by Lexington, and Lexington has not been notified by any Tax
authority that any such audit is contemplated or pending. Neither Lexington
nor any of the Lexington Subsidiaries has executed or filed with the IRS or
any other taxing authority, and no person has been requested to so execute
or file any agreement extending the period for assessment or collection of
any income or other Taxes, or the time to file any Return. True, correct
and complete copies of all federal, state and local income or franchise tax
returns required to be filed by Lexington and each of the Lexington
Subsidiaries and all written communications relating thereto (including,
without limitation, in respect of any audits and examinations) have been
delivered to the Trust or made available to representatives of the Trust.
Lexington has not agreed, and is not required, to make any adjustment under
Section 481(a) of the Code (or any comparable provision of state, local or
foreign law) by reason of a change in accounting method or otherwise. Since
the most recent Tax period for which Lexington has provided the Trust with
a copy of each of its federal, state and local income and franchise tax
returns, neither Lexington nor any person or entity on its behalf has made
or changed any election concerning Taxes or Returns, changed an annual
accounting period, adopted or changed any accounting method, filed any
amended Return, settled any Tax claim or assessment or surrendered any
right to claim a refund of Taxes or obtained or entered into any Tax
ruling, agreement, contract, understanding, arrangement or plan.
(K) Environmental Matters. Except as set forth in the Lexington SEC
Reports or in Schedule 6.11 and any environmental assessment or report listed
therein: (i) to the knowledge of Lexington, no Hazardous Substances or Hazardous
Wastes have been or are being released into the environment, discharged into the
environment or disposed of from, at, on or under the Lexington Properties; (ii)
to the knowledge of Lexington, no Hazardous Substances or Hazardous Wastes have
been or are being generated or treated at the Lexington Properties or discharged
from the Lexington Properties, except in compliance with applicable Laws; (iii)
to the knowledge of Lexington, no Hazardous Wastes have been or are being stored
for more than 90 days or handled at or on the Lexington Properties, except in
compliance with applicable Laws; (iv) none of the Lexington Properties are
listed on, and Lexington has not received written or oral notice that any of the
Lexington Properties are being considered for inclusion on, NPL, CERCLIS, or any
State or local listing of sites which are known or suspected to be contaminated
by Hazardous Substances or Hazardous Wastes; (v) to the knowledge of Lexington,
there are no on-going, and there have been no violations of any Law at any
Lexington Properties which could result in contamination of the land, surface
water or groundwater from, at, on or under any such properties; and (vi) no
Governmental Agency is investigating or has provided written
A-14
<PAGE> 132
notice that it is considering investigating any alleged or potential release,
discharge, disposal or storage of Hazardous Substances or Hazardous Wastes at,
on, under or from any Lexington Properties.
With respect to properties previously owned, leased or in the possession of
Lexington or Lexington Subsidiaries ("Lexington Previous Properties"), Lexington
has no actual knowledge that any of the activities or conditions described in
clauses (i), (ii) or (iii) as not having taken place or existed at the Lexington
Properties took place or existed at the Lexington Previous Properties during the
period when Lexington or the Lexington Subsidiaries owned, leased or possessed
the properties. In addition, Lexington has no actual knowledge that any of the
Lexington Previous Properties are listed or are being considered for listing on
any of the lists described in clause (iv) or are being investigated or
considered for investigation as described in clause (vi).
Except as disclosed in Schedule 6.11, neither Lexington nor any Lexington
Subsidiary has received any notice from any Government Agency with respect to
alleged or potential liability relating in any way to Hazardous Substances or
Hazardous Wastes at, on, under or from any Lexington Property or Lexington
Previous Properties.
(L) No Fees. Except for an arrangement with Antony E. Monk, whose fees
pursuant to such arrangement shall be the responsibility of Lexington, neither
Lexington nor any of the Lexington Subsidiaries has entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of such entity or the Trust to pay any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby. Other than the Trust's arrangements set forth in Section 5.15, and as
set forth in the preceding sentence, to the knowledge of Lexington, there is not
any claim for payment of any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
(M) Beneficial Share Ownership. Neither Lexington nor any of the Lexington
Subsidiaries owns any shares of beneficial interest of the Trust or other
securities convertible into shares of beneficial interest of the Trust.
(N) Contracts and Commitments. None of Lexington or any of the Lexington
Subsidiaries has received any written notice of a default that has not been
cured under any of the documents filed by Lexington as an exhibit to the
Lexington SEC Reports or is in default respecting any payment obligations
thereunder beyond any applicable grace periods, except where such default would
not have a Lexington Material Adverse Effect. To the knowledge of Lexington,
neither Lexington nor any of the Lexington Subsidiaries is in default with
respect to any obligations, which individually or in the aggregate are material,
under any joint venture agreements to which Lexington or any of the Lexington
Subsidiaries is a party.
(O) Lexington Common Stock. The issuance and delivery by Lexington of
shares of Lexington Common Stock in connection with the Merger and this
Agreement have been duly and validly authorized by all necessary corporate
action on the part of Lexington. The shares of Lexington Common Stock to be
issued in connection with the Merger and this Agreement, when issued in
accordance with the terms of this Agreement, will be validly issued, fully paid,
nonassessable, free of preemptive rights and, assuming the effectiveness of the
Form S-4, registered under the Securities Act, subject to no restrictions on
transfer under applicable laws or imposed by Lexington, except as contemplated
by Section 7.10.
(P) Convertible Securities. Except as described in the Lexington SEC
Reports, Lexington has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of Lexington Common Stock, the
terms of which would require any anti-dilution adjustments by reason of the
consummation of the transactions contemplated hereby.
(Q) Definition of Lexington's Knowledge. As used in this Agreement, the
phrase "to the knowledge of Lexington" or any similar phrase shall mean the
actual, not constructive or imputed, knowledge of officers of Lexington,
including any information contained in any written notice or correspondence
addressed to Lexington or any of its directors or officers.
A-15
<PAGE> 133
VII.
COVENANTS
(A) Acquisition Proposals.
1. Unless and until this Agreement shall have been terminated in
accordance with its terms, the Trust shall not, directly or indirectly,
through any officer, trustee, employee, representative or agent of the
Trust, (i) solicit or initiate any inquiries or proposals regarding any
merger, sale of substantial assets, sale of shares of beneficial interest
(including without limitation by way of a tender offer for 15% or more of
the outstanding Trust Shares) or similar transactions involving the Trust
other than the Merger (any of the foregoing inquiries or proposals being
referred to herein as an "Acquisition Proposal"), (ii) except as permitted
under subsection (e) below or as otherwise required by the Trust's
Declaration or applicable law, engage in negotiations concerning, or
provide any nonpublic information to any person relating to, any
Acquisition Proposal, or (iii) except as permitted under subsection (e)
below, agree to, approve, or recommend any Acquisition Proposal.
2. The Trust shall immediately notify Lexington after receipt of any
Acquisition Proposal, or any modification of or amendment to any
Acquisition Proposal.
(c) The Trust shall immediately cease and cause to be terminated
any existing discussion or negotiations with any persons (other than
Lexington) conducted heretofore with respect to any of the foregoing.
(d) The Trust shall ensure that the officers, trustees and
employees of the Trust and any investment banker or other advisor or
representative retained by the Trust are aware of the restrictions
described in this Section 7.1.
(e) Nothing contained in this Section 7.1 shall prevent the Board
of Trustees of the Trust from considering, negotiating, discussing,
approving and recommending to the shareholders of the Trust a bona fide
Acquisition Proposal not solicited in violation of this Agreement, if,
and only to the extent that, the Board of Trustees determines in good
faith (upon advice of outside counsel) that it is required to do so in
order to discharge properly its fiduciary duties. Nothing contained in
this Section 7.1 shall prohibit the Board of Trustees from complying
with Rules 14d-9 and 14e-2 promulgated under the Exchange Act with
regard to any Acquisition Proposal.
(B) Conduct of Businesses.
1. Until the earlier of the Effective Time or the date on which this
Agreement is terminated in accordance with its terms, except as
specifically permitted by this Agreement, unless Lexington has consented in
writing thereto, the Trust:
a. Shall use its reasonable best efforts to preserve intact its
business organizations and goodwill;
b. Shall confer on a regular basis with one or more representatives
of Lexington to report operational matters of materiality (except for
operational matters in the ordinary course of business) and, subject to
Section 7.1, any proposals to engage in material transactions;
c. Shall promptly notify Lexington of any material emergency or
other material change in the condition (financial or otherwise),
business, properties, assets, liabilities, prospects or the normal
course of its businesses or in the operation of its properties, any
material governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the
breach in any material respect of any representation, warranty or
covenant contained on its part herein; and
d. Shall promptly deliver to Lexington true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the
date of this Agreement.
A-16
<PAGE> 134
2. Until the earlier of the Effective Time or the date on which this
Agreement is terminated in accordance with its terms, Lexington:
a. Shall use its reasonable best efforts to preserve intact its
business organizations and goodwill;
b. Shall promptly notify the Trust in the event (x) any of E.
Robert Roskind, Richard R. Rouse, T. Wilson Eglin or Antonia G. Trigiani
(collectively, "Senior Management") determines to resign, is terminated
or for any other reason is no longer employed by Lexington, (y)
Lexington's ratio of debt to total market capitalization is reasonably
likely to exceed 60% and (z) subject to applicable laws, of (1) any
material and adverse change in its business, operations or financial
condition, or any fundamental change in the nature or operation of its
business, (2) the breach, in any material respect, of any
representation, warranty or covenant on its part contained herein or (3)
any Material Structural Change (as hereinafter defined); and
c. Shall promptly deliver to the Trust true and correct copies of
any report, statement or schedule filed with the SEC, or any press
release issued by Lexington, subsequent to the date of this Agreement.
3. Until the earlier of the Effective Time or the date on which this
Agreement is terminated in accordance with its terms, unless Lexington has
consented thereto (and Lexington hereby agrees to give good faith consideration
to any such request for consent by the Trust and to respond to any such request
within five (5) business days and in the event no response is received by the
Trust by the expiration of such five business day period, such consent shall be
deemed given) the Trust:
a. Shall conduct its operations in the ordinary course in
substantially the same manner as heretofore conducted, subject to
clauses (ii)-(ix) below;
b. Shall not acquire, enter into an option to acquire or exercise
an option or contract to acquire additional real property, incur
additional indebtedness, encumber assets or commence construction of, or
enter into any agreement or commitment to develop or construct, any
other type of real estate projects;
c. Shall not amend the Trust's Declaration or its other
organizational documents except as contemplated by this Agreement;
d. Shall not (A) issue any shares of its capital stock, effect any
stock split, reverse stock split, stock dividend, recapitalization or
other similar transaction; (B) grant, confer or award any option,
warrant, conversion right or other right not existing on the date hereof
to acquire any shares of its capital stock, (C) increase any
compensation or enter into or amend any employment agreement with any of
its present or future officers or trustees or retain any person as an
employee, or (D) adopt any employee benefit plan (including any stock
option, stock benefit or stock purchase plan);
e. Shall not, except in accordance with and as permitted under
Section 7.2(d), sell, lease or otherwise dispose of or enter into an
option or other commitment to dispose of (A) any the Trust Properties or
(B) except in the ordinary course of business, any of its other assets;
f. Shall not make any loans, advances or capital contributions to,
or investments in, any other person or make or declare any dividend or
distribution except as permitted by Section 7.2(e);
g. Shall not 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 financial statements (or
the notes thereto) of the Trust included in the Trust SEC Reports or
incurred in the ordinary course of business consistent with past
practice;
h. Shall not enter into any Commitment which may result in total
payments or liability by or to it in excess of $25,000 other than
Commitments for expenses of attorneys, accountants and investment
bankers incurred in connection with the Merger, but subject to Section
7.11; and
A-17
<PAGE> 135
i. Shall not enter into any Commitment with any officer, trustee,
consultant or affiliate of the Trust.
4. The Trust shall not, without the written consent of Lexington,
which consent may not be unreasonably withheld, (i) effect any material
change in any lease or occupancy agreement currently in effect (together
with such additional leases approved or permitted pursuant to this
Agreement, the "Leases"), (ii) renew or extend the term of any Lease,
unless the same is an extension or expansion permitted pursuant to the
express terms of an existing Lease, or (iii) enter into any new Lease or
cancel or terminate any Lease. When seeking consent to a new or modified
Lease, the Trust shall provide notice of the identity of the Tenant, a term
sheet, letter of intent or proposed lease containing material business
terms (including, without limitation, rent, expense base, concessions,
tenant improvement allowances, brokerage commissions, and expansion and
extension options) and whatever credit and background information, if any,
the Trust then possesses with respect to such tenant. Lexington shall be
deemed to have consented to any proposed Lease or Lease modification if it
has not responded to the Trust within five (5) business days after receipt
of such information. Upon Lexington's approval or deemed approval, the
Trust shall be entitled to enter into a Lease.
5. The Trust may declare regular quarterly dividends (provided that
any such dividends do not exceed, on a per share basis, the per share
dividend for the Trust's most recent fiscal quarter ended prior to the date
of this Agreement) and any dividends as contemplated under Section 7.15. In
addition, the Trust may declare and pay a special dividend within 30 days
prior to the Effective Time in an aggregate amount up to the amount of cash
on hand at the time of such declaration; provided, however, that the Trust
may only make such payment after reserving a sufficient amount of cash
necessary to pay those expenses for which it is responsible under this
Agreement.
(C) Meeting of Stockholders. The Trust will take all action necessary in
accordance with applicable law and its Declaration of Trust and other
organizational documents to convene a meeting of its shareholders as promptly as
practicable to consider and vote upon the approval of this Agreement and the
transactions contemplated hereby. The Board of Trustees of the Trust, subject to
Section 7.1, shall unanimously recommend that its shareholders approve this
Agreement and the transactions contemplated hereby and the adoption of an
amendment to its Declaration of Trust authorizing merger, and the Trust shall
use its reasonable best efforts to obtain such approval, including, without
limitation, by timely mailing the proxy statement/prospectus contained in the
Form S-4 (as defined in Section 7.7 hereof) to its shareholders and including
such recommendation within such Form S-4; provided, however, that nothing
contained in this Section 7.3 shall prohibit the Board of Trustees of the Trust
from failing to make or withdrawing such recommendation or using their
reasonable best efforts to obtain such approval if the Board of Trustees of the
Trust has determined in good faith, after consultation with and based upon the
advice of counsel, that such action is necessary for such Board of Trustees to
comply with its fiduciary duties to its stockholders under applicable law. It
shall be a condition to the mailing of the Form S-4 that (i) Lexington shall
have received a "comfort" letter from Ernst & Young, independent public
accountants for the Trust, dated as of a date within two business days before
the date on which the Form S-4 shall become effective, with respect to the
financial statements of the Trust included or incorporated in the Form S-4, in
form and substance reasonably satisfactory to Lexington, and customary in scope
and substance for "comfort" letters delivered by independent public accountants
in connection with registration statements and proxy statements similar to the
Form S-4, and (ii) the Trust shall have received a "comfort" letter from KPMG
Peat Marwick, independent public accountants for Lexington, dated as of a date
within two business days before the date on which the Form S-4 shall become
effective, with respect to the financial statements of Lexington included or
incorporated in the Form S-4, in form and substance reasonably satisfactory to
the Trust, and customary in scope and substance for "comfort" letters delivered
by independent public accountants in connection with registration statements and
proxy statements similar to the Form S-4.
(D) Filings; Other Action. Subject to the terms and conditions herein
provided, the Trust and Lexington shall: (a) to the extent required, promptly
make their respective filings with respect to the Merger; (b) use all reasonable
best efforts to cooperate with one another in (i) determining which filings are
required to be made prior to the Effective Time with, and which consents,
approvals, permits or authorizations are
A-18
<PAGE> 136
required to be obtained prior to the Effective Time from, governmental or
regulatory authorities of the United States, the several states and foreign
jurisdictions and any third parties in connection with the execution and
delivery of this Agreement, the consummation of the transactions contemplated by
this Agreement and (ii) timely making all such filings and timely seeking all
such consents, approvals, permits or authorization; (c) use all reasonably best
efforts to obtain in writing any consents required from third parties to
effectuate the Merger, such consents to be in reasonably satisfactory form to
the Trust and Lexington; and (d) use all reasonable efforts to take, or cause to
be taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. If, at any time after the Effective
Time, any further action is necessary or desirable to carry out the purpose of
this Agreement, the proper officers and trustees or directors of Lexington and
the Trust shall take all such necessary action.
(E) Inspection of Records. From the date hereof to the Effective Time,
each of the Trust and Lexington shall allow all designated officers, attorneys,
accountants and other representatives of the other access, at all reasonable
times, to the records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, title and financial
position, or otherwise pertaining to the business and affairs, of the Trust and
Lexington and its subsidiaries for purposes related to an evaluation of the
transactions contemplated hereby.
(F) Publicity. Lexington and the Trust shall consult with each other
before issuing any press release or otherwise making any public statements with
respect to this Agreement or any transaction contemplated herein and shall not
issue any such press release or make any such public statement without the prior
consent of the other party, which consent shall not be unreasonably withheld;
provided, however, that a party may, without the prior consent of the other
party, issue such press release or make such public statement as may be required
by law or the rules of the applicable stock exchange if it has used its
reasonable best efforts to consult with the other party and to obtain such
party's consent but has been unable to do so in a timely manner.
(G) Registration Statement. Lexington and the Trust shall cooperate and
promptly prepare, and Lexington shall file with the SEC on or before June 20,
1997, a Registration Statement on Form S-4 under the Securities Act, with
respect to the shares of Lexington Common Stock issuable in the Merger, a
portion of which Form S-4 shall also serve as the proxy statement with respect
to the meetings of the stockholders of the Trust in connection with Merger (in
its entirety, the "Form S-4"). The parties will cause the Form S-4 to comply as
to form in all material respects with the applicable provisions of the
Securities Act, the Exchange Act and the rules and regulations thereunder. Each
of Lexington and the Trust shall furnish all information about itself and its
business and operation and all necessary financial information to the other as
the other may reasonably request in connection with the preparation of the Form
S-4. Lexington shall use its best efforts, and the Trust will cooperate with
Lexington, to have the Form S-4 declared effective by the SEC as promptly as
practicable. Lexington shall use its best efforts to obtain, prior to the
effective date of the Form S-4, all necessary state securities law or "blue sky"
permits or approvals required to carry out the transactions contemplated by this
Agreement and will pay all expenses incident thereto. Lexington agrees that the
Form S-4 and each amendment or supplement thereto at the time of mailing thereof
and at the time of the meeting of stockholders of the Trust, will not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that the foregoing shall not apply to the extent that any such untrue statement
of a material fact or omission to state a material fact was made by Lexington in
reliance upon and in conformity with information concerning the Trust furnished
to Lexington by the Trust for use in the Form S-4. The Trust agrees that the
information provided by it for inclusion in the Form S-4 and each amendment or
supplement thereto, at the time of mailing thereof and at the time of the
meeting of shareholders of the Trust, will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Lexington will advise and deliver copies
to the Trust, promptly after it receives notice thereof, of the time when the
Form S-4 has become effective or any supplement or amendment has been filed, the
issuance of any stop order, the suspension of the qualification of the Lexington
Common Stock issuable in connection with the Merger for offering or sale in any
jurisdiction, or
A-19
<PAGE> 137
any request by the SEC for amendment of the Form S-4 or comments thereon (which
Lexington agrees to promptly respond to) and responses thereto or requests by
the SEC for additional information (which Lexington agrees to promptly provide).
(H) Listing Application. Prior to the Effective Time, Lexington shall
prepare and submit to the New York Stock Exchange a listing application covering
the shares of Lexington Common Stock issuable in the Merger, and shall obtain
prior to the Effective Time approval for the listing of such Lexington Common
Stock, subject to official notice of issuance.
(I) Further action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performance set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger. In connection with
the Closing, the Trust shall use its best efforts to deliver to Lexington such
deeds, bills of sale, assignments, certificates, affidavits and indemnities as
are required to effectuate the consummation of the transactions described
herein.
(J) Affiliates of the Trust.
1. At least 30 days prior to the effective date of the Form S-4, the
Trust shall deliver to Lexington a list of names and addresses of those
persons who were, in the Trust's reasonable judgment, at the record date
for its stockholders' meeting to approve the Merger, "affiliates" (each
such person, an "Affiliate") of the Trust within the meaning of Rule 145.
The Trust shall provide Lexington such information and documents as
Lexington shall reasonably request for purposes of reviewing such list. The
Trust shall use its reasonable best efforts to deliver or cause to be
delivered to Lexington, at least 30 days prior to the Closing Date, from
each of the Affiliates of the Trust identified in the foregoing list, an
Affiliate Letter in a form satisfactory to the Trust and Lexington.
Lexington shall be entitled to place legends as specified in such Affiliate
Letters on the certificates evidencing any shares of Lexington Common Stock
to be received by such Affiliates pursuant to the terms of this Agreement,
and to issue appropriate stop transfer instructions to the transfer agent
for the shares of Lexington Common Stock, consistent with the terms of such
Affiliate Letters.
2. Lexington shall file the reports required to be filed by it under
the Exchange Act and the rules and regulations adopted by the SEC
thereunder, to the extent required from time to time to enable such
Affiliate to sell shares of Lexington Common Stock received by such
Affiliate in the Merger with registration under the Securities act pursuant
to (i) Rule 145(d)(1) or (ii) any successor rule or regulation hereafter
adopted by the SEC.
(K) Expenses. Subject to the provisions of Article 9, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses, except
that, in addition to its own costs and expenses, the Trust will be responsible
for and shall discharge prior to the Closing or from the proceeds of the Cash
Payment all costs associated with environmental audits of the Trust Properties,
which audits have been received and approved by Lexington, and all other closing
costs including, but not limited to, survey charges, third party and
governmental fees (except fees payable to the SEC and state "blue sky" fees,
which shall be paid by Lexington), charges and taxes, and the expenses of the
Trust's attorneys, accountants and investment bankers, except as provided below;
and, in addition to its own costs and expenses, Lexington shall be responsible
for the fees and expenses of its legal counsel, and engineering studies of the
Trust Properties with respect to the structural soundness of the Trust
Properties. The Trust and Lexington shall share equally (i) the printing costs
associated with the Form S-4, provided that the Trust's portion of such costs
shall not exceed $15,000; and (ii) restructuring or assumption or amendment fees
payable to the Trust's lenders, provided that Lexington's portion of such fees
shall not exceed $30,000.
(L) Indemnification and Insurance.
1. In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative,
including, without limitation, any such claim, action, suit, proceeding or
investigation in which any person who is now, or has been at any time prior
to the date hereof, or who becomes prior to the Effective Time, a trustee,
officer, employee, fiduciary or agent of the Trust (the "Indemnified
Parties") is, or is threatened to be, made a party based in whole or in
part on, or arising in
A-20
<PAGE> 138
whole or in part out of, or pertaining to (i) the fact that he, she or it
is or was a trustee, officer, employee or agent of the Trust, or is or was
serving at the request of the Trust as a trustee, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or (ii) this Agreement or any of the transactions contemplated
hereby, whether in any case asserted or arising before or after the
Effective Time, the parties hereto agree to cooperate and use their
reasonable best efforts to defend against and respond thereto. It is
understood and agreed that the Trust shall indemnify and hold harmless, and
after the Effective Time Lexington shall indemnify and hold harmless, as
and to the full extent permitted by applicable law or the Declaration of
Trust of the Trust, each Indemnified Party against any losses, claims,
damages, liabilities, costs, expenses (including attorneys' fees and
expenses, judgments, fines and amounts paid in settlement in connection
with any such threatened or actual claim, action, suit, proceeding or
investigation, and in the event of any such threatened or actual claim,
action, suit, proceeding or investigation (whether asserted or arising
before or after the Effective Time); (i) the Trust, and the Lexington after
the Effective Time, shall promptly pay expenses in advance of the final
disposition of any claim, suit, proceeding or investigation to each
Indemnified Party to the full extent permitted by law, (ii) the Indemnified
Parties may retain counsel satisfactory to them, provided such counsel is
reasonably satisfactory to Lexington, and the Trust, and Lexington after
the Effective Time, shall promptly pay all fees and expenses of such
counsel for the Indemnified Parties after reasonably detailed statements
therefor are received, and (iii) the Trust and Lexington will use their
respective reasonable best efforts to assist in the vigorous defense of any
such matter; provided, that neither the Trust nor Lexington shall be liable
for any settlement effected without its prior written consent (which
consent shall not be unreasonably withheld); and provided further that the
Lexington shall have no obligation hereunder to any Indemnified Party when
and if a court of competent jurisdiction shall ultimately determine, and
such determination shall have become final and non-appealable, that
indemnification of such Indemnified Party in the manner contemplated hereby
is prohibited by applicable law. The Indemnified Parties as a group may
retain only one law firm to represent them with respect to any single
action unless there is, under applicable standards of professional conduct,
a conflict on any significant issue between the positions of any two or
more Indemnified Parties. Any Indemnified Party wishing to claim
indemnification under this Section 7.12, upon learning of any such claim,
action, suit, proceeding or investigation, shall notify the Trust and,
after the Effective Time, Lexington, thereof, provided that the failure to
so notify shall not affect the obligations of the Trust or Lexington except
to the extent such failure to notify materially prejudices such party.
2. Lexington agrees that all rights to indemnification existing in
favor, and all limitations on the personal liability, of the Indemnified
Parties provided for in the Trust's Declaration or similar organizational
documents as in effect as of the date hereof with respect to matters
occurring prior to the Effective Time shall survive the Merger and shall
continue in full force and effect for a period of not less than six (6)
years from the Effective Time; provided, however, that all rights to
indemnification in respect of any claim (a "Claim") asserted or made within
such period shall continue until the disposition of such Claim.
3. This Section 7.12 is intended for the irrevocable benefit of, and
to grant third party rights to, the Indemnified Parties and shall be
binding on all successors and assigns of Lexington and the Trust. Each of
the Indemnified Parties shall be entitled to enforce the covenants
contained in this Section 7.12 and Lexington acknowledges and agrees that
each Indemnified Party would suffer irreparable harm and that no adequate
remedy at law exists for a breach of such covenants.
4. In the event Lexington or any of its successors or assigns (i)
consolidates with or merges into any other person or entity and shall not
be the continuing or surviving corporation or entity of such consolidation
or merger or (ii) transfers or conveys all or substantially all of its
properties and assets to any person or entity, then, and in each such case,
proper provision shall be made so that the successors and assigns of
Lexington assume the obligations set forth in this Section 7.12.
(M) Reorganization. From and after the date hereof and until the earlier
of the Effective Time or the date on which this Agreement is terminated in
accordance with its terms, none of Lexington, the Trust or its affiliates shall
(i) knowingly take any action, or knowingly fail to take any action, that would
jeopardize qualification of the Merger as a reorganization within the meaning of
Section 368(a) of the Code or (ii) enter
A-21
<PAGE> 139
into any contract, agreement, commitment or arrangement with respect to the
foregoing. Following the Effective Time, Lexington shall use its reasonable best
efforts to conduct its business in a manner that would not jeopardize the
characterization of the Merger as a reorganization within the meaning of Section
368(a) of the Code.
(N) Payment of Advisory Fees and Transaction Expenses. Notwithstanding
anything to the contrary set forth in this Agreement, Lexington and the Trust
hereby agree that, immediately prior to, or upon, the Effective Time, the Trust
shall pay at Closing to the Trust Advisor the termination fee described in the
Advisory Services Agreement dated September 22, 1989 between the Trust and the
Advisor, to the extent not waived. The Trust will pay all its accrued and unpaid
obligations and its costs relating to the Merger, so that Lexington will assume
no liabilities of the Trust other than the mortgages and other obligations
described on Schedule 4.4 and those expenses described in Section 7.11.
(O) REIT Status. Notwithstanding anything to the contrary set forth in
this Agreement, nothing in this Agreement shall prohibit the Trust from taking,
and the Trust hereby agrees to take, any action at any time or from time to time
that in the reasonable judgment of the Trust is legally necessary for the Trust
to maintain its qualification as a REIT within the meaning of Sections 856-860
of the Code for any period or portion thereof ending on or prior to the Merger
including without limitations, making dividend or distribution payments to
stockholders. To the extent that any dividends or distributions are paid to the
Trust shareholders other than the payments permitted to be made pursuant to
Section 7.2, the Share Value shall be reduced by the per share amount of such
dividend or distribution payments. Prior to the payment of any such dividend or
distribution contemplated by the preceding sentence, the Trust shall provide
written notice of its intention to make such dividend or distribution and the
reasons therefor to Lexington. Following the Merger, Lexington shall use its
best efforts to take any such actions as may be necessary to maintain the
Trust's status as a REIT for any period or portion thereof ending on or prior to
the Merger (including, without limitation, the mailing of stockholder demand
letters as required by Treasury Regulations sec. 1.857-8).
VIII.
CONDITIONS PRECEDENT
(A) Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger and the other
transactions contemplated herein shall be subject to the fulfillment at or prior
to the Effective Time of the following conditions, any or all of which may be
waived, in whole or in part by the parties hereto, to the extent permitted by
applicable law:
1. This Agreement and the transactions contemplated hereby shall have
been approved by the requisite vote of shareholders of the Trust, and the
Trust's shareholders shall have approved an amendment to the Trust's
Declaration of Trust authorizing the Merger.
2. Neither of the parties hereto shall be subject to any order, ruling
or injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order, ruling or injunction shall have been issued, each
party agrees to use its best efforts to have any such order, ruling or
inunction lifted, stayed or reversed.
3. The Form S-4 shall have been declared effective by the SEC under
the Securities Act, and no stop order suspending the effectiveness of the
Form S-4 shall have been issued by the SEC, and no proceedings for that
purpose shall have been initiated or, to the knowledge of Lexington or the
Trust, threatened by the SEC.
4. Lexington shall have obtained the approval for the listing of the
shares of Lexington Common Stock issuable in the Merger on the New York
Stock Exchange, subject to official notice of issuance.
5. All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board, other regulatory
body or third parties required to be made or obtained by Lexington, the
Trust and any affiliated entities in connection with the execution,
delivery and performance of this Agreement shall have been obtained or
made, including obtaining any consents or
A-22
<PAGE> 140
approvals which are required from any holders of mortgages affecting any
Trust Properties (the "Lender Consents"); provided, however, approvals or
consents are not required where the failure to have obtained or made any
such consent, authorization, order, approval, filing or registration, would
not have a Trust Material Adverse Effect or a Lexington Material Adverse
Effect, as the case may be.
(B) Conditions to Obligations of the Trust to Effect the Merger. The
obligation of the Trust to effect the Merger shall be subject to the fulfillment
at or prior to the Effective Time of the following conditions, unless waived by
the Trust:
1. Each of the representations and warranties of Lexington contained
in this Agreement shall be true and correct in all material respects as of
the date of this Agreement and as of the Effective Time as though made on
and as of the Effective Time and the Trust shall have received a
certificate, dated the Closing Date, signed on behalf of Lexington by the
Chairman, Vice Chairman or President of Lexington to the foregoing effect.
2. Lexington shall have performed or complied in all material respects
with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Effective Time, and the
Trust shall have received a certificate, dated the Closing Date, signed on
behalf of Lexington by the Chairman, Vice Chairman or President of
Lexington to the foregoing effect.
3. The Trust shall have received the opinion of counsel, reasonably
acceptable to the Trust, and subject to customary conditions and
qualifications (including reliance, in part, on representations of
Lexington and the Trust), to the effect that the Merger will be treated for
federal income tax purposes as a tax-free reorganization qualifying under
the provisions of Sections 368(a) of the Code, which opinion shall not have
been withdrawn or modified in any material respect.
(C) Conditions to Obligation of Lexington to Effect the Merger. The
obligations of Lexington to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by Lexington:
1. Each of the representations and warranties of the Trust contained
in this Agreement shall be true and correct in all material respects as of
the date of this Agreement and as of the Effective Time as though made on
and as of the Effective Time, and Lexington shall have received a
certificate, dated the Closing Date, signed on behalf of the Trust by a
trustee of the Trust to the foregoing effect.
2. The Trust shall have performed or complied in all material respects
with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Effective Time, and
Lexington shall have received a certificate, dated the Closing Date, signed
on behalf of the Trust by the a trustee of the Trust to the foregoing
effect.
3. Lexington shall have received the opinion of counsel, reasonably
acceptable to Lexington, and subject to customary conditions and
qualifications (including reliance, in part, on representations of
Lexington and the Trust), to the effect that the Merger will be treated for
federal income tax purposes as a tax-free reorganization qualifying under
the provisions of Sections 368(a) of the Code, which opinion shall not have
been withdrawn or modified in any material respect.
4. Estoppel certificates in form reasonably acceptable to Lexington
and otherwise indicating that all Leases are in full force and effect and
there are no defaults thereunder shall have been obtained and delivered to
Lexington.
5. Lexington shall have received the letters from Affiliates of the
Trust referred to in Section 7.10, and such letters shall be in full force
and effect.
6. None of the Properties shall have been encumbered by any lien,
easement, covenant, restriction or other title matter not reflected on the
Title Policies for the related property other than those title matters set
forth on Title Reports delivered to Lexington. Lexington shall have
received title reports (or, at its option, title insurance policies)
updated through the Effective Time confirming the foregoing status of title
to the Properties as of the Effective Time.
A-23
<PAGE> 141
7. The Trust shall have paid any real estate transfer or similar taxes
incurred in connection with the Merger which are payable in connection with
filing a certificate of merger or quitclaim deed, but not otherwise.
8. Lexington shall have received evidence reasonably satisfactory to
it that the Trust's mortgage lenders have approved the assumption by
Lexington of the mortgages on each of the Trust's Properties.
9. Each guarantor of any lease relating to any of the Trust's
properties shall have agreed to the continuing effectiveness of such
guarantee upon confirmation of the Merger.
10. Lexington shall have received with respect to the Trust Property
located in Virginia (A) a survey reasonably acceptable to Lexington and its
counsel showing Parcels 1, 2, and 3 as described in the Ground Lease and
Agreement dated as of February 28, 1990 between CRA Acquisition Corp. and
Circuit City Stores, Inc., and (B) back-up documentation regarding the
dedication for public use of such Parcels 2 and 3, as referenced in Lawyers
Title Insurance Corporation title commitment dated October 8, 1996, case
number 1960836.
IX.
TERMINATION
(A) Termination. This Agreement may be terminated and abandoned at any
time prior to the Effective Time, whether before or after approval and adoption
of this Agreement by the stockholders of the Trust:
1. by mutual written consent of Lexington and the Trust; or
2. by either Lexington or the Trust if any 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 Merger and
such order, decree, ruling or other action shall have become final and
non-appealable, provided that the party seeking to terminate shall have
used its best efforts to appeal such order, decree, ruling or other action;
or
3. by Lexington upon a material breach of any representation,
warranty, covenant or agreement on the part of the Trust set forth in this
Agreement, or if any representation or warranty of the Trust shall have
become untrue, in either case such that the conditions set forth in Section
8.3(a) or Section 8.3(b), as the case may be, would be incapable of being
satisfied by October 1, 1997; provided, however, that, in any case, a
willful breach shall be deemed to cause such conditions to be incapable of
being satisfied for purposes of this Section 9.1(c); or
4. by the Trust upon a material breach of any representation,
warranty, covenant or agreement on the part of Lexington set forth in this
Agreement, or if any representation or warranty of Lexington shall have
become untrue, in either case such that the conditions set forth in Section
8.2(a) or Section 8.2(b), as the case may be, would be in capable of being
satisfied by October 1, 1997; provided, however, that, in any case, a
willful breach shall be deemed to cause such conditions to be incapable of
being satisfied for purposes of this Section 9.1(d); or
5. by Lexington if (i) the Board of Trustees of the Trust shall have
withdrawn, amended, modified or changed its approval or recommendation of
this Agreement or any of the transactions contemplated hereby in a manner
adverse to Lexington or shall have resolved to do so; (ii) the Trust shall
have failed as soon as practicable to mail the Form S-4 to its stockholders
after the Form S-4 has been declared effective by the SEC or to include the
recommendation of its Board of Trustees of this Agreement as contemplated
by this Agreement and the transactions contemplated hereby in the Form S-4,
or the requisite vote of shareholders shall not have been obtained at a
duly held meeting on or prior to October 1, 1997; or (iii) the Board of
Trustees of the Trust shall have recommended that shareholders of the Trust
accept or approve an Acquisition Proposal by a person other than Lexington
(or the Trust or its Board of Trustees shall have resolved to do such) or a
tender offer or exchange offer for 15% or more of
A-24
<PAGE> 142
the outstanding Trust Shares is commenced (other than by Lexington) and the
Board of Trustees recommends that the shareholders of the Trust tender
their shares in such tender or exchange offer; or
6. by the Trust, (i) if the Board of Trustees recommends to the
Trust's shareholders approval or acceptance of an Acquisition Proposal by a
person other than Lexington, but only in the event that the Board of
Trustees of the Trust, after consultation with and based upon the advice of
Day, Berry & Howard or another nationally-recognized law firm selected by
the Board of Trustees of the Trust, has determined in good faith that such
action is necessary for the Board of Trustees of the Trust to comply with
its fiduciary duties to its shareholders under applicable law or (ii) if
the average closing sales price of Lexington Common Stock on the New York
Stock Exchange on twenty (20) trading days ending on the fifth business day
immediately preceding (A) the date on which the Form S-4 is declared
effective by the SEC, is equal to or less than $10.50 or (B) the date on
which the meeting of the Trust shareholders is to be convened pursuant to
Section 7.3 hereof, is equal to or less than $11.125, without any liability
on the part of the Trust; or
7. by the Trust if (i) this Agreement and the transactions
contemplated hereby shall have failed to receive the requisite vote for
approval and adoption by the shareholders of the Trust upon the holding of
a duly convened shareholder meeting or (ii) within ten days after receipt
of notice from Lexington of any Material Structural Change; or
8. by Lexington if (i) any tenant of the Trust shall have filed a
petition commencing a voluntary case concerning such tenant under any
chapter of Title 11 of the United States Code entitled "Bankruptcy," or an
involuntary case shall be commenced against such tenant under any such
chapter and relief is ordered against such tenant or the petition is
controverted but is not dismissed within sixty (60) days after the
commencement of the case, or (ii) any of the Trust Properties shall have
been substantially destroyed by fire or other casualty and the tenant under
the affected Trust Property shall not be required to apply the casualty
insurance proceeds to restore such Trust Property; or
9. by either Lexington or the Trust, if the Merger shall not have been
consummated on or before October 1, 1997 (other than due to the failure of
the party seeking to terminate this Agreement to perform its obligations
under this Agreement required to be performed by it at or prior to the
Effective Time).
The right of any party hereto to terminate this Agreement pursuant to this
Section 9.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective employees, officers,
trustees, directors, agents, representatives or advisors, whether prior to or
after the execution of this Agreement.
"Material Structural Change" shall mean (i) any event which will result in
an increase in the number of issued and outstanding shares of capital stock of
Lexington on a Fully Diluted Basis, in any single transaction, in excess of 50%
of the number of issued and outstanding shares of capital stock of Lexington on
a Fully Diluted Basis immediately prior to the consummation of such event, (ii)
the date on which any two of the four members of Senior Management are no longer
serving as officers of Lexington, (iii) the date on which Lexington's ratio of
debt to total market capitalization exceeds 60%, or (iv) the first public
announcement of any transaction which will result in the acquisition of
Lexington, by way of merger, consolidation, sale of substantially all of
Lexington's assets or otherwise and in which Lexington will not be the surviving
entity.
"Fully Diluted Basis" shall mean the number of issued and outstanding
shares of capital stock of Lexington assuming conversion of all operating
partnership units and shares of convertible preferred stock, the exercise of all
warrants and options and the conversion of all other securities convertible
into, or exchangeable for, shares of Lexington capital stock.
(B) Effect of Termination. In the event of the termination and abandonment
of this Agreement pursuant to Section 9.1 hereof, this Agreement shall forthwith
become void and have no effect, without any liability on the part of any party
hereto or its affiliates, trustees, directors, officers or stockholders and all
rights and obligations of any party hereto shall cease except for the agreements
contained in Section 9.3 and
A-25
<PAGE> 143
Section 10.5; provided, however, that nothing contained in this Section 9.2
shall relieve any party from liability for any breach of this Agreement.
(C) Fees and Expenses.
1. Except as set forth in Section 7.11, fees and expenses incurred in
connection with this Agreement and the transactions contemplated hereby
shall be paid by the party incurring such expenses, whether or not the
Merger is consummated.
2. The Trust shall pay Lexington a fee of $700,000 (the "Fee") upon
the termination of this Agreement by the Trust pursuant to Section
9.1(f)(i) or Lexington pursuant to Section 9.1(e)(iii).
3. The Trust shall pay Lexington the Fee if this Agreement is
terminated by Lexington pursuant to Section 9.1(e)(i) or Section 9.1(e)(ii)
(if, in the case of Section 9.1(e)(ii), the Trust shall have failed to mail
the Form S-4 to its stockholders or shall have failed to include its
recommendation of this Agreement in such Form S-4), and thereafter on or
prior to the 60th day after the date of such termination the Trust enters
into a definitive agreement relating to any merger, consolidation, share
exchange, sale of a substantial portion of its assets, liquidation or other
similar extraordinary corporate transaction.
4. The Fee payable pursuant to Section 9.3(b) shall be paid within
five business days after the first to occur of any of the events described
in Section 9.3(b). The Fee payable pursuant to Section 9.3(c) shall be paid
within five business days following the consummation of any such
alternative transaction. The payment of the Fee under this Section 9.3
shall constitute full satisfaction of any obligation of the Trust or right
of Lexington under this Agreement or otherwise, and upon payment of the
Fee, the Trust will have no further liability to Lexington whatsoever under
this Agreement or otherwise under any other theory of recovery.
(D) Extension; Waiver. At any time prior to the Effective Time, any party
hereby, by action taken by its Board of Trustees or Board of Directors, 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 hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
X.
GENERAL PROVISIONS
(A) Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall terminate as of the
Effective Time and shall not survive the Merger, provided, however, that the
agreements contained in Article 4, the last sentence of Section 7.4 and Sections
7.10, 7.12 and 7.13 and this Article 10 shall survive the Merger.
(B) Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service),
A-26
<PAGE> 144
hand delivery or certified or registered mail (return receipt requested and
first-class postage prepaid) and addressed as follows:
<TABLE>
<S> <C> <C>
If to Lexington: Lexington Corporate Properties, Inc.
355 Lexington Avenue
New York, New York 10017
Attention: T.W. Eglin, President
With copies to: Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue, Thirty First Floor
New York, New York 10022
Attn: Barry A. Brooks and Scott M. Wornow
If to the Trust: Corporate Realty Advisors, Inc.
388 Greenwich Street, 33rd Floor
New York, NY 10013
Attn: James C. Cowles
With copies to: Day, Berry & Howard
260 Franklin Street
Boston, MA 02110
Attn: Lewis A. Burleigh, Esq.
</TABLE>
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
(C) Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties; provided, however, that the Trust has
received a copy of Lexington's proxy statement dated April 25, 1997 which sets
forth a proposal to reorganize Lexington as a Maryland real estate investment
trust pursuant to a merger of Lexington with and into a newly-formed Maryland
real estate investment trust (the "MDREIT"), with such MDREIT to be the
surviving entity. Notwithstanding anything to the contrary, the Trust consents
to the reorganization described in such proxy and agrees that all rights and
obligations of Lexington under this Agreement shall be assumed by, and inure to
the benefit of, the MDREIT upon consummation of such reorganization to the same
extent as if the MDREIT had been a signatory hereto and Lexington shall cause
such MDREIT to assume all such rights and obligations as a condition to such
reorganization. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns. Notwithstanding anything contained in this
Agreement to the contrary, but subject to the first and second sentences of this
Section, except for the provisions of Article 4 and Sections 7.10, 7.12 and
7.13, nothing in this Agreement, expressed or implied, is intended to confer on
any person other than the parties hereto or their respective heirs, successors,
executors, administrators and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
(D) Entire Agreement. This Agreement, the Schedules and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto
except that the Confidentiality Agreement (as hereinafter defined) shall remain
in effect and shall be binding upon Lexington and the Trust in accordance with
its terms.
(E) Confidentiality. Each of Lexington and the Trust understands and
agrees that it is still bound by and subject to the terms of the Confidentiality
Agreement dated as of September 16, 1996, by and between Lexington and the Trust
(the "Confidentiality Agreement").
(F) Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Board of Trustees and Board of Directors, at
any time before or after approval of matters presented in connection with the
Merger by the shareholders of the Trust, but after any such stockholder
approval, no
A-27
<PAGE> 145
amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
(G) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to its rules of
conflict of laws. Each of the Trust and Lexington hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of New York and of the United States of America located in the
State of New York (the " New York Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the New York
Courts and agrees not to plead or claim in any New York Court that such
litigation brought therein has been brought in any inconvenient forum.
(H) Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
(I) Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
(J) Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
(K) Incorporation. The Schedules attached hereto and referred to herein
are hereby incorporated herein and made a part hereof for all purposes as if
fully set forth herein.
(L) Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
(M) Interpretation and Certain Definitions.
1. In this Agreement, unless the context otherwise requires, words
describing the singular number shall include the plural and vice versa, and
words denoting any gender shall include all genders.
2. As used in this Agreement, the word "Subsidiary" or "Subsidiaries"
when used with respect to any party means any corporation, partnership,
joint venture, business trust or other entity, of which such party directly
or indirectly owns or controls at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a
majority of the board of directors or others performing similar functions
with respect to such corporation or other organization.
3. As used in this Agreement, the word "person" means an individual, a
corporation, a partnership, an association, a joint-stock company, a trust,
a limited liability company, any unincorporated organization or any other
entity.
4. As used in this Agreement, the word "affiliate" shall have the
meaning set forth in Rule 12b-2 of the Exchange Act.
(N) Schedules. Any fact or item disclosed in one section of any schedule
hereto ("Schedule") shall be deemed to be disclosed with respect to any other
section of such Schedule to the extent that the facts regarding the fact or item
disclosed is adequate so as to make reasonably clear or otherwise make the other
A-28
<PAGE> 146
party to which such Schedule is delivered reasonably aware that such fact or
item (and description relating thereto) is applicable to such other section of
the Schedule, whether or not an explicit cross-reference appears.
(O) Limitation of Liability. Reference is hereby made to the Declaration
of Trust establishing Corporate Realty Income Trust I dated June 27, 1989, as
amended and restated as of October 3, 1989, and as further amended as of
December 27, 1995, copies of which Declaration of Trust and amendments are on
file in the office of the Secretary of the Commonwealth of Massachusetts. The
name "Corporate Realty Income Trust I" refers to the trustees under said
Declaration as trustees, and no trustee, shareholder, officer, employee or agent
of Corporate Realty Income Trust I shall be held to any personal liability in
connection with the affairs of Corporate Realty Income Trust I or under this
Agreement, but the trust estate only is liable.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
<TABLE>
<S> <C>
ATTEST: CORPORATE REALTY INCOME TRUST I
By: /s/ MARK R. PATTERSON By: /s/ JAMES C. COWLES
- -------------------------------------------- ---------------------------------------------
Title: Secretary Name: James C. Cowles
Title: Chairman
ATTEST: LEXINGTON CORPORATE PROPERTIES, INC.
By: /s/ ANTONIA G. TRIGIANI By: /s/ T. WILSON EGLIN
- -------------------------------------------- ---------------------------------------------
Title: CFO Name: T. Wilson Eglin
Title: President
</TABLE>
A-29
<PAGE> 147
EXTENSION AGREEMENT
September 22, 1997
Re: Agreement and Plan of Merger Between Corporate Realty Income Trust I and
Lexington Corporate Properties, Inc., dated as of May 29, 1997 (the "Merger
Agreement")
Ladies and Gentlemen:
Reference is made to the Merger Agreement. Capitalized terms used but not
otherwise defined herein shall have the meanings set forth in the Merger
Agreement. Corporate Realty Income Trust I and Lexington Corporate Properties,
Inc. hereby agree that the Closing Date as of October 1, 1997 referred to in
Sections 1.2, 9.1(c) through 9.1(e) and 9.1(i) of the Merger Agreement is hereby
extended to November 30, 1997.
The parties have executed this Extension Agreement and caused the same to
be duly delivered on their behalf on the day and year first written above.
CORPORATE REALTY INCOME TRUST I
By: /s/ JAMES C. COWLES
------------------------------------
Name: James C. Cowles
Title: Chairman
LEXINGTON CORPORATE PROPERTIES, INC.
By: /s/ ANTONIA G. TRIGIANI
------------------------------------
Name: Antonia G. Trigiani
Title: CFO
<PAGE> 148
EXTENSION AGREEMENT
November 20, 1997
Re: Agreement and Plan of Merger Between Corporate Realty Income Trust I and
Lexington Corporate Properties, Inc., dated as of May 29, 1997 (the "Merger
Agreement")
Ladies and Gentlemen:
Reference is made to the Merger Agreement. Capitalized terms used but not
otherwise defined herein shall have the meanings set forth in the Merger
Agreement. Corporate Realty Income Trust I and Lexington Corporate Properties,
Inc. hereby agree that the Closing Date as of October 1, 1997 referred to in
Sections 1.2, 9.1(c) through 9.1(e) and 9.1(i) of the Merger Agreement is hereby
extended to December 31, 1997.
The parties have executed this Extension Agreement and caused the same to
be duly delivered on their behalf on the day and year first written above.
CORPORATE REALTY INCOME TRUST I
By: /s/ JAMES C. COWLES
------------------------------------
Name: James C. Cowles
Title: Chairman
LEXINGTON CORPORATE PROPERTIES, INC.
By: /s/ ANTONIA G. TRIGIANI
------------------------------------
Name: Antonia G. Trigiani
Title: CFO
<PAGE> 149
ANNEX B
MCFARLAND DEWEY & CO.
230 PARK AVENUE
NEW YORK, NEW YORK 10167-1450
TELEPHONE: (212) 867-4949
FACSIMILE: (212) 867-0334
MAY 29, 1997
Board of Trustees
Corporate Realty Income Trust I
388 Greenwich Street, 33rd Floor
New York, NY 10013
Members of the Board:
We understand that Corporate Realty Income Trust I ("CRIT" or the
"Company"), a Massachusetts business trust, and Lexington Corporate Properties,
Inc. ("Lexington"), a Maryland corporation, have entered into an Agreement and
Plan of Merger, dated as of May 29, 1997 (the "Merger Agreement") which
provides, among other things, for the merger (the "Merger") of CRIT with and
into Lexington. Pursuant to the Merger, each issued and outstanding share of
beneficial interest, par value $.10 per share, of CRIT ("CRIT Shares") will be
converted into the right to receive, subject to certain adjustments and
limitations, common stock, par value $.0001 per share, of Lexington valued at
$17.4 million. The terms and conditions of the Merger are more fully set forth
in the Merger Agreement.
You have asked for our opinion as to whether the consideration to be
received by the holders of CRIT Shares pursuant to the Merger Agreement (the
"Merger Consideration") is fair from a financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of CRIT and Lexington, respectively;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning CRIT;
(iii) analyzed certain financial projections prepared by the
management of CRIT;
(iv) discussed the past and current operations and financial condition
and the prospects of CRIT and Lexington with senior executives of CRIT and
Lexington, respectively;
(v) reviewed the reported prices and trading activity for the CRIT
Shares and the Lexington Common Stock;
(vi) compared the financial performance of CRIT and Lexington and the
prices and trading activity of the CRIT Shares and the Lexington Common
Stock with that of certain other comparable companies and their securities;
(vii) reviewed and discussed with the senior management of CRIT and
Lexington the strategic objectives of the Merger and certain other benefits
of the Merger;
(viii) analyzed certain pro forma financial projections for the
combined company;
(ix) reviewed the financial terms, to the extent publicly available,
of certain comparable merger transactions;
(x) reviewed the Merger Agreement and certain related documents; and
B-1
<PAGE> 150
(xi) performed such other analyses and considered such other factors
as we have deemed appropriate.
We have assumed and relied upon without independent verification of the
accuracy and completeness of the information reviewed by us for purposes of this
opinion. With respect to the financial projections, including the estimates of
synergies and other benefits expected to result from the Merger, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgements of the future financial performance of CRIT
and Lexington, respectively. We have not made any independent valuation or
appraisal of the assets or liabilities of CRIT and Lexington. We have been
furnished third party appraisals of the three CRIT properties dated March 12,
1997. Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof.
We did not participate in discussions and negotiations among
representatives of CRIT and Lexington and their financial and legal advisors nor
did we review another business plan or opportunity that might have been
presented to CRIT.
It is understood that this letter is for the information of the Board of
Trustees of CRIT and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in any
filing made by CRIT with the Securities and Exchange Commission with respect to
the Merger. We express no opinion and make no recommendation as to how the
shareholders of CRIT should vote at the shareholders' meeting held in connection
with the Merger.
Based on and subject to the foregoing, we are of the opinion on the date
hereof that the Merger Consideration is fair from a financial point of view to
the holders of CRIT Shares.
Very truly yours,
/s/ MCFARLAND DEWEY & CO.
--------------------------------------
McFarland Dewey & Co.
B-2
<PAGE> 151
ANNEX C
REVOCABLE PROXY
CORPORATE REALTY INCOME TRUST I
|X| PLEASE MARK VOTES
AS IN THIS EXAMPLE
This Proxy is Solicited on Behalf of the Trustees of CRIT.
The undersigned hereby appoints JAMES C. COWLES and VALERIE A. ST. JOHN,
and each of them acting in the absence of the other, as Proxies, each with the
power to appoint his or her substitute, and hereby authorizes them to represent
and to vote, as designated herein, all the shares (the "CRIT Shares") of
beneficial interest of Corporate Realty Income Trust I ("CRIT") held of record
by the undersigned on November 21, 1997 at the Special Meeting of Shareholders
(the "Meeting") to be held on December 30, 1997 or any adjournment thereof. This
Proxy is revocable. The undersigned reserves the right to attend and vote in
person. The undersigned hereby acknowledges receipt of the Notice of Meeting of
Shareholders dated December 1, 1997 and the Proxy Statement/Prospectus
accompanying the Notice.
1. MERGER
To approve the merger of CRIT into Lexington Corporate Properties, Inc. as
set forth in the Merger Agreement, and the consummation of the transactions
contemplated thereby (the "Merger Proposal").
|_| FOR |_| WITHHOLD |_| ABSTAIN
2. AMENDMENT TO DECLARATION OF TRUST
To approve the amendment to the First Amended and Restated Declaration of
Trust to permit CRIT to merge into or consolidate with another entity (the
"Trust Amendment Proposal").
|_| FOR |_| WITHHOLD |_| ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
- --------------------------------------------------------------------------------
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this proxy will
be voted (1) FOR approval of the Merger Proposal; (2) FOR approval of the Trust
Amendment Proposal; and (3) for or against such other business as may properly
come before the Meeting.
Please sign exactly as your name appears on this card. When shares are
held by joint tenants, both should sign, or if one signs, that shareholder's
vote binds both shareholders. When signing as attorney, executor,
<PAGE> 152
administrator, agent, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
Please be sure to sign and date
this Proxy in the box below.
Date _______________________________________
____________________________________________
Stockholder sign above
____________________________________________
Co-holder (if any) sign above
Detach above card, sign, date and mail in postage paid envelope provided.
CORPORATE REALTY INCOME TRUST I
388 Greenwich Street - 33rd Floor
New York, New York 10013
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
2
<PAGE> 153
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Amended and Restated Articles of Incorporation of the Registrant
provide that any director or officer of the Registrant shall be indemnified by
the Registrant to the full extent that officers and directors are permitted to
be indemnified by the laws of the State of Maryland.
The Maryland General Corporation Law (the "MGCL") permits a corporation to
indemnify its directors and officers (i) against judgments, penalties, fines,
settlements and reasonable expenses actually incurred in connection with any
proceeding to which they are made a party by reason of their service in those
capacities, unless it is established that the act or omission of the director or
officer was material to the matter giving rise to the proceeding and (a) was
committed in bad or (b) was the result of active or deliberate dishonesty, (ii)
the director or officer actually received an improper personal benefit in money,
property or services, or (iii) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission was
unlawful.
The MGCL permits the charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, subject to specified
restrictions. The Registrant's Charter contains such a provision. The law does
not, however, permit the liability of directors and officers to the corporation
or the stockholders to be limited to the extent that (1) it is proved that the
person actually received an improper personal benefit or (2) a judgment or other
final adjudication is entered in a proceeding based on a finding that the
person's action or failure to act was material to the cause of action
adjudicated in the proceeding, and was (a) committed in bad faith or (b) was the
result of active or deliberate dishonesty.
The Registrant maintains liability insurance for each director and officer
for certain losses arising from claims or charges made against them while acting
in their capacities as directors or officers of the Registrant.
The foregoing reference is necessarily subject to the complete text of the
Amended and Restated Articles of Incorporation and the statute referred to above
and is qualified in its entirety by reference thereto.
Item 21. Exhibits and Financial Schedules.
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, as amended (included as Annex A to
the Proxy Statement/Prospectus).
3.1 Amended and Restated Articles of Incorporation.*
3.2 Amended and Restated By-laws.*
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP as to the validity
of securities being registered.+
5.2 Opinion of Piper & Marbury L.L.P. as to the validity of securities
being registered.+
8.1 Opinion of Paul, Hastings, Janofsky & Walker LLP as to tax matters.
8.2 Opinion of Day, Berry & Howard as to tax matters.
10.1 Opinion of McFarland Dewey & Co. as to the terms of the Merger
(included as Annex B to the Proxy Statement/Prospectus).
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Paul, Hastings, Janofsky & Walker LLP (included in
Exhibit 5.1).
23.4 Consent of Day, Berry & Howard (included in Exhibit 8.2).
23.5 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.2).
24.1 Power of Attorney.+
- ----------
II-1
<PAGE> 154
* Incorporated by reference to the Registrant's Registration Statement on
Form S-3, filed with the Commission on November 6, 1995.
+ Previously Filed.
Item 22. Undertakings.
a. 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 and 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 20 percent 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.
b. The undersigned Registrant hereby undertakes:
(1) The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the 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.
(2) The undersigned Registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a- 3 or Rule 14c-3 under the Exchange
Act; and, where interim financial information required to be presented by
Article 3 of the Regulation S-X is not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the prospectus is
sent or given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such interim
financial information.
II-2
<PAGE> 155
(3) The undersigned Registrant hereby undertakes as follows: 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.
(4) The Registrant undertakes that every prospectus: (i) that is
filed pursuant to paragraph (3) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at the time shall be deemed to be the initial bona fide
offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, 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 Securities Exchange 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 director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, 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.
(6) 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.
(7) The undersigned Registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction,
and the Company being acquired involved therein, that was not the subject
of and included in the Registration Statement when it became effective.
II-3
<PAGE> 156
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 City of New York, State of New
York, on December 1, 1997.
LEXINGTON CORPORATE PROPERTIES, INC.
/s/ T. Wilson Eglin
T. Wilson Eglin
President, Chief Operating Officer and Director
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>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
By: /s/ T. Wilson Eglin, Attorney-in-Fact Chairman of the Board, Co-Chief December 1,
------------------------------------- Executive Officer and Director 1997
E. Robert Roskind (Principal Executive Officer)
By: /s/ T. Wilson Eglin, Attorney-in-Fact Vice Chairman, Co-Chief
------------------------------------- Executive Officer and Director December 1,
Richard J. Rouse 1997
By: /s/ T. Wilson Eglin President, Chief Operating
------------------------------------- Officer and Director December 1,
T. Wilson Eglin 1997
By: /s/ T. Wilson Eglin, Attorney-in-Fact Chief Financial Officer and December 1,
------------------------------------- Treasurer
Antonia G. Trigiani 1997
By: /s/ T. Wilson Eglin, Attorney-in-Fact Vice President, Chief Accounting December 1,
------------------------------------- Officer and Secretary 1997
Paul R. Wood
By: /s/ T. Wilson Eglin, Attorney-in-Fact Director December 1,
------------------------------------- 1997
Carl D. Glickman
By: /s/ T. Wilson Eglin, Attorney-in-Fact Director December 1,
------------------------------------- 1997
Kevin W. Lynch
By: /s/ T. Wilson Eglin, Attorney-in-Fact Director December 1,
------------------------------------- 1997
John D. McGurk
</TABLE>
II-4
<PAGE> 157
<TABLE>
<CAPTION>
<S> <C> <C>
By: /s/ T. Wilson Eglin, Attorney-in-Fact Director December 1,
------------------------------------- 1997
Seth M. Zachary
</TABLE>
II-5
<PAGE> 158
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
- ------- ----------- ----------
8.1 Opinion of Paul, Hastings, Janofsky & Walker LLP
as to tax matters.
8.2 Opinion of Day, Berry & Howard as to tax matters.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ernst & Young LLP
23.4 Consent of Day, Berry & Howard (included in
Exhibit 8.2)
<PAGE> 1
Exhibit 8.1
[LETTERHEAD OF PAUL, HASTINGS, JANOFSKY & WALKER LLP]
December 1, 1997
23062.81578
Lexington Corporate Properties, Inc.
355 Lexington Avenue
New York, New York 10017
Re: Agreement and Plan of Merger, dated as of May 29, 1997, between
Corporate Realty Income Trust I and Lexington Corporate Properties,
Inc.
Ladies and Gentlemen:
We have acted as counsel to Lexington Corporate Properties, Inc., a
Maryland corporation (the "Company"), in connection with the proposed merger of
Corporate Realty Income Trust I, a Massachusetts business trust (the "Trust"),
with and into the Company pursuant to the Agreement and Plan of Merger dated as
of May 29, 1997, between the Trust and the Company (the "Merger") (the "Merger
Agreement"). As counsel to the Company, we have assisted in the preparation of
the proxy statement (the "Proxy Statement") that forms a part of the
registration statement of the Company on Form S-4 registering shares of common
stock, par value $.0001 per share, of the Company to be issued in the Merger
(the "S-4"), including the discussions of certain United States federal income
tax consequences resulting from the Merger under the heading "Material United
States Federal Income Tax Consequences."
Except as otherwise provided, capitalized terms not defined herein have
the meanings set forth in the Merger Agreement or in the officer's certificates
that have been delivered to us by the Company and the Trust for purposes of this
opinion and that contain certain representations of the Company and the Trust
(the "Officer's Certificates").
The discussion of certain United States federal income tax consequences
referred to in the first paragraph hereof and this opinion are based upon and
subject to:
(i) the Merger being effected in the manner described in the Proxy
Statement and in accordance with the provisions of the Merger Agreement,
which is the only document containing the substantive terms of the Merger;
(ii) the accuracy and completeness, at all times through the
Effective Time of the Merger, of the representations made to us by the
Company and the Trust in their respective Officer's Certificates
(including, in the case of representations made to the best knowledge of
Trust or Company management, or similarly qualified, the accuracy and
completeness, at all times through the Effective Time of the Merger, of
such representations as though not so qualified);
(iii) the accuracy and completeness, at all times through the
Effective Time of the Merger, of the representations made by certain
holders of Trust Shares in the certificates that such holders have
delivered for purposes of this opinion;
<PAGE> 2
(iv) the accuracy and completeness, at all times through the
Effective Time of the Merger, of the statements concerning the Merger set
forth in the Proxy Statement, including the purposes of the Company and
the Trust for consummating the Merger; and
(v) the accuracy and completeness, at all times through the
Effective Time of the Merger, of any statements concerning the Merger that
have come to our attention during our engagement.
Based on our examination of the foregoing items and subject to the
limitations set forth herein, we are of the opinion that, for United States
federal income tax purposes, the Merger will constitute a reorganization within
the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended.
Except to the extent specifically stated herein, this opinion does not
address any United States federal, state, local or foreign tax consequences
that may result from the Merger.
We hereby consent to (i) the filing of this opinion with the Securities
and Exchange Commission as an exhibit to the S-4 and (ii) the reference to our
firm under the heading "Material United States Federal Income Tax Consequences"
in the Proxy Statement. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
-------------------------------------------
PAUL, HASTINGS, JANOFSKY & WALKER LLP
2
<PAGE> 1
Exhibit 8.2
[Letterhead of Day, Berry & Howard]
December 1, 1997
Corporate Realty Income Trust I
388 Greenwich Street, 33rd Floor
New York, NY 10013
Re: Agreement and Plan of Merger, dated as of May 29, 1997, as amended,
between Corporate Realty Income Trust I and Lexington Corporate
Properties, Inc.
Ladies and Gentlemen:
You have requested our opinion as to certain United States federal income
tax consequences to Lexington Corporate Properties, Inc., a Maryland corporation
(the "Company"), Corporate Realty Income Trust I, a Massachusetts business trust
(the "Trust"), and the beneficial interest holders of the Trust resulting from
the merger of the Trust with and into the Company pursuant to the Agreement and
Plan of Merger dated as of May 29, 1997, as amended, between the Trust and the
Company (the "Merger") (the "Merger Agreement"). As counsel to the Trust, we
have assisted in the preparation of the proxy statement (the "Proxy Statement")
that forms a part of the registration statement of the Company on Form S-4
registering the shares of common stock, par value $.0001 per share, of the
Company ("Company Common Stock") to be issued in the Merger (the "S-4"),
including the discussions of certain United States federal income tax
consequences resulting from the Merger under the heading "Material United States
Federal Income Tax Consequences."
Except as otherwise provided, capitalized terms not defined herein have
the meanings set forth in the Merger Agreement or in the officer's certificates
that have been delivered to us by the Company and the Trust for purposes of this
opinion and which contain certain representations of the Company and the Trust
(the "Officer's Certificates"). All section references, unless otherwise
indicated, are to the Internal Revenue Code of 1986, as amended (the "Code").
The discussion of certain United States federal income tax consequences
referred to in the first paragraph hereof and this opinion are based upon and
subject to:
(i) the Merger being effected in the manner described in the Proxy
Statement and in accordance with the provisions of the Merger Agreement
which is the only document containing the substantive terms of the Merger;
(ii) the accuracy and completeness, at all times through the
Effective Time of the Merger, of the representations made to us by the
Company and the Trust in their respective officer's Certificates
(including, in the case of representations made to the best knowledge of
Trust or Company management, or similarly qualified, the accuracy and
completeness, at all times through the Effective Time of the Merger, of
such representations as though not so qualified);
<PAGE> 2
(iii) the accuracy and completeness, at all times through the
Effective Time of the Merger, of the statements concerning the Merger set
forth in the Proxy Statement, including the purposes of the Company and
the Trust for consummating the Merger; and
(iv) the accuracy and completeness, at all times through the
Effective Time of the Merger, of any statements concerning the Merger that
have come to our attention during our engagement.
Based on our examination of the foregoing items and subject to the
limitations set forth herein, we are of the opinion that, for United States
federal income tax purposes:
(i) The Merger will constitute a reorganization within the meaning
of Section 368(a)(1)(A) of the Code, and the Company and the Trust will
each be a party to a reorganization within the meaning of Section 368(b)
of the Code.
(ii) No gain or loss will be recognized by the Company or the Trust
in the Merger.
(iii) No gain or loss will be recognized by the holders of Trust
Shares upon their receipt of shares of Company Common Stock in exchange
for their Trust Shares.
(iv) A holder of Trust Shares who receives cash in lieu of a
fractional interest in a share of Company Common Stock will be considered
as having first received and then exchanged for cash such fractional
interest and, therefore, will recognize gain or loss equal to the
difference between the amount of such cash and the tax basis allocable to
such fractional interest. Such gain or loss will constitute capital gain
or loss if such holder's Trust Shares are held as capital assets at the
Effective Time.
(v) The tax basis of the shares of Company Common Stock received by
a holder of Trust Shares in exchange for such holder's Trust Shares will
equal the tax basis of the holder's Trust Shares exchanged in the Merger,
reduced by the tax basis allocable to any fractional interest in a share
of Company Common Stock treated as having been received and exchanged for
cash.
(vi) The holding period of the shares of Company common Stock
received by a holder of Trust Shares in exchange for such holder's Trust
Shares will include the holding period of such holder's Trust Shares so
exchanged provided that such Trust Shares were held as capital assets at
the Effective Time.
Except to the extent specifically stated herein, this opinion does not
address any United States federal, state, local or foreign tax consequences
that may result from the Merger.
We hereby consent to (i) the filing of this opinion with the Securities
and Exchange Commission as an exhibit to the S-4 and (ii) the reference to our
firm under the heading "Material United States Federal Income Tax Consequences"
in the Proxy Statement. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
Very truly yours,
/s/ Day, Berry & Howard
--------------------------------
Day, Berry & Howard
2
<PAGE> 1
Exhibit 23.1
Accountants' Consent
The Board of Directors
Lexington Corporate Properties, Inc.
We consent to the use of our reports incorporated herein by reference and
to the reference to our firm under the heading "Experts" in the Registration
Statement.
/s/ KPMG PEAT MARWICK LLP
----------------------------------------
KPMG PEAT MARWICK LLP
New York, New York
December 1, 1997
<PAGE> 1
Exhibit No. 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Experts", "CRIT
Historical Financial Data", and "Selected Financial Data" in the Registration
Statement (Form S-4 No. 333-30307) and related Proxy Statement/Prospectus of
Lexington Corporate Properties, Inc. for the registration of 1,496,959 shares of
its common stock and to the incorporation by reference therein of our report
dated January 29, 1997, with respect to the financial statements and schedule of
Corporate Realty Income Trust I included in its Form 10-K, as amended for the
year ended December 31, 1996, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
-----------------------------------
ERNST & YOUNG LLP
New York, New York
November 24, 1997
