<PAGE> 1
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
(AMENDMENT NO. 3)
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
IRVINE APARTMENT COMMUNITIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
IRVINE APARTMENT COMMUNITIES, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------
<PAGE> 2
LOGO
IRVINE APARTMENT COMMUNITIES, INC.
550 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
May 4, 1999
Dear Irvine Apartment Communities, Inc. Shareholder:
You are cordially invited to attend a special meeting of the shareholders
of Irvine Apartment Communities, Inc. (the "Company") to be held at the Westin
Los Angeles Airport Hotel, 5400 West Century Boulevard, Los Angeles, California
90045, on Monday, June 7, 1999, at 9:00 a.m., local time (the "Special
Meeting").
At this meeting, you will be asked to vote on the merger of the Company
with and into TIC Acquisition LLC (the "Acquiror"), an indirect wholly-owned
subsidiary of The Irvine Company. Currently, The Irvine Company and its sole
shareholder, Donald Bren, beneficially own an aggregate of approximately 17.9%
of the Company's outstanding common stock. Mr. Bren is also Chairman of the
Board of the Company and Chairman of the Board of The Irvine Company. In
addition, two of the remaining eight members of the Company's Board of
Directors, Michael D. McKee and Raymond L. Watson, are executive officers and
directors of The Irvine Company.
In the merger, you will have the right to receive $34.00 in cash for each
share of Irvine Apartment Communities, Inc. common stock you own. The $34.00 per
share price represents a 24.2% premium to the closing price of the Company's
common stock on the New York Stock Exchange of $27.375 on December 1, 1998, the
day that the Acquiror made its initial merger proposal to the Company's Board of
Directors.
An independent special committee (the "Special Committee") formed by the
Company's Board of Directors negotiated the $34.00 per share price and other
terms of the transaction with the Acquiror. The Special Committee consists of
four Board members who are not employees of the Company or The Irvine Company
and who are not affiliated with The Irvine Company or its affiliates (other than
the Company and its subsidiaries).
The Board of Directors of the Company, acting on the unanimous
recommendation of the Special Committee, has unanimously approved the proposed
merger with the Acquiror (the terms of which are set forth in a merger agreement
between the Company and the Acquiror). The Special Committee and the full Board
of Directors believe that the proposed merger is in the best interests of the
Company's shareholders (other than the Acquiror and its affiliates). Therefore,
the Board of Directors unanimously recommends that you vote in favor of the
merger and the merger agreement.
The attached notice of meeting and proxy statement describe the merger and
the merger agreement and provide specific information concerning the Special
Meeting. Please read these materials carefully.
<PAGE> 3
Whether or not you plan to attend the Special Meeting, I urge you to
complete, date, sign and promptly return the enclosed proxy card to ensure that
your shares will be voted at the meeting. The merger is an important decision
for the Company and its shareholders. The merger will only be approved upon the
affirmative vote of (i) the holders of two-thirds of the total number of
outstanding shares of Irvine Apartment Communities, Inc. common stock and (ii)
the holders of a number of shares of Irvine Apartment Communities, Inc. common
stock (excluding the shares held by the Acquiror and its affiliates)
representing a majority of the total number of outstanding shares of Irvine
Apartment Communities, Inc. common stock. Thus, if you fail to return your proxy
card, the effect will be the same as a vote against the merger, unless you
appear at the Special Meeting and vote in favor of the merger.
On behalf of the Board of Directors, I thank you for your support and urge
you to vote FOR approval and adoption of the merger and the merger agreement.
Sincerely,
/s/ WILLIAM H. MCFARLAND
--------------------------------------
William H. McFarland
President and Chief Executive Officer
<PAGE> 4
LOGO
IRVINE APARTMENT COMMUNITIES, INC.
550 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MONDAY, JUNE 7, 1999
To the Shareholders:
Notice is hereby given that a Special Meeting of the Shareholders of Irvine
Apartment Communities, Inc. will be held at the Westin Los Angeles Airport
Hotel, 5400 West Century Boulevard, Los Angeles, California 90045 on Monday,
June 7, 1999, at 9:00 a.m., local time, for the following purposes:
1. To consider and act upon a proposal to approve and adopt the merger
of Irvine Apartment Communities, Inc. with and into TIC Acquisition LLC
(the "Merger") and an Agreement and Plan of Merger between Irvine Apartment
Communities, Inc. and TIC Acquisition LLC (the "Merger Agreement"). TIC
Acquisition LLC is an indirect wholly-owned subsidiary of The Irvine
Company that was formed with a view to implementing the Merger. If the
Merger and the Merger Agreement are adopted by the shareholders of Irvine
Apartment Communities, Inc. and the other conditions to the Merger are
satisfied or waived, each outstanding share of Irvine Apartment
Communities, Inc.'s common stock will be converted into the right to
receive $34.00 in cash per share, without interest.
2. If a motion to adjourn or postpone the Special Meeting is properly
brought, to vote upon the adjournment or postponement of the Special
Meeting.
3. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The close of business on April 26, 1999 has been fixed as the record date
for determination of the shareholders entitled to notice of and to vote at the
Special Meeting or any adjournment thereof. Any shareholder will be able to
examine a list of holders of record, for any purpose related to the Special
Meeting, during the 10-day period before the Special Meeting. The list will be
available at the offices of Irvine Apartment Communities, Inc., 550 Newport
Center Drive, Suite 300, Newport Beach, California 92660; telephone (949)
720-5500.
Shareholders may vote in person or by proxy. The proxy statement, which
explains the merger in detail, and the accompanying proxy card are included with
this notice. Holders of record of common stock at the close of business on April
26, 1999 will be entitled to vote at the Special Meeting or any adjournment
thereof with respect to all matters described above. PLEASE COMPLETE, DATE, SIGN
AND RETURN THE ENCLOSED PROXY CARD PROMPTLY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
By Order of the Board of Directors,
/s/ SHAWN HOWIE
Shawn Howie
Interim Chief Financial Officer and
Secretary
Newport Beach, California
May 4, 1999
<PAGE> 5
LOGO
IRVINE APARTMENT COMMUNITIES, INC.
550 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
------------------------
PROXY STATEMENT
------------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MONDAY, JUNE 7, 1999
This Proxy Statement is being furnished to the holders of common stock
("Common Stock") of Irvine Apartment Communities, Inc., a Maryland corporation
(the "Company"), in connection with the solicitation of proxies by the Board of
Directors of the Company (the "Board of Directors") for use at the Special
Meeting of Shareholders (the "Special Meeting") to be held on Monday, June 7,
1999. The Board of Directors has fixed the close of business on April 26, 1999
as the record date (the "Record Date") for the Special Meeting with respect to
this solicitation.
At the Special Meeting, the holders of Common Stock (the "Shareholders")
will consider and vote upon a proposal to approve and adopt the proposed merger
(the "Merger") of the Company with and into TIC Acquisition LLC, a Delaware
limited liability company (the "Acquiror"), and an Agreement and Plan of Merger
dated as of February 1, 1999 (the "Merger Agreement") between the Company and
the Acquiror. A copy of the Merger Agreement is attached as Appendix A to this
Proxy Statement. Pursuant to the Merger Agreement and subject to satisfaction of
the conditions set forth therein, (i) the Company would be merged with and into
the Acquiror, with the Acquiror continuing as the surviving company (the
"Surviving Company"), and (ii) each outstanding share of Common Stock would be
converted, upon consummation of the Merger, into the right to receive $34.00 in
cash from the Acquiror. The Merger and the Merger Agreement are collectively
referred to as the "Merger Proposal" in this Proxy Statement. The Acquiror is an
indirect wholly-owned subsidiary of The Irvine Company, which, together with its
sole shareholder, Donald Bren, currently owns approximately 17.9% of the
outstanding shares of Common Stock. In addition, Mr. Bren currently serves as
Chairman of the Board of Directors of The Irvine Company and Chairman of the
Board of Directors of the Company (which has nine members). Two other
individuals, Michael D. McKee and Raymond L. Watson, who serve as officers and
directors of The Irvine Company, also serve as directors of the Company.
Directors of the Company are referred to as "Directors" in this Proxy Statement.
THE BOARD OF DIRECTORS, BASED UPON THE UNANIMOUS RECOMMENDATION OF A
SPECIAL COMMITTEE (THE "SPECIAL COMMITTEE") CONSISTING OF FOUR DIRECTORS WHO ARE
INDEPENDENT OF THE ACQUIROR, THE IRVINE COMPANY AND THEIR AFFILIATES (OTHER THAN
THE COMPANY AND ITS SUBSIDIARIES), HAS UNANIMOUSLY APPROVED THE MERGER PROPOSAL.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER PROPOSAL.
SHAREHOLDERS ARE URGED TO READ AND CONSIDER CAREFULLY THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT AND TO CONSULT WITH THEIR PERSONAL FINANCIAL
AND TAX ADVISORS.
This Proxy Statement, the accompanying Notice of Special Meeting and the
accompanying proxy card are first being mailed to Shareholders on or about May
5, 1999. Copies of the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1998 and Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 accompany this Proxy Statement.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR
NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
------------------------
The date of this Proxy Statement is May 4, 1999.
------------------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE> 6
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS?......................... 2
SUMMARY..................................................... 3
Voting.................................................... 3
Purpose, Structure and Effects of the Merger.............. 3
Recommendation of the Board of Directors and the Special
Committee.............................................. 5
Factors Considered by the Board of Directors and the
Special Committee...................................... 6
Morgan Stanley's Fairness Opinion......................... 7
Potential Conflicts of Interest of Officers and Directors
of the Company......................................... 7
The Merger Consideration.................................. 8
Conditions to the Merger.................................. 8
Termination of the Merger Agreement....................... 8
Financing; Source of Funds................................ 9
Federal Income Tax Consequences........................... 9
No Appraisal Rights....................................... 10
INFORMATION CONCERNING THE SPECIAL MEETING.................. 11
Time, Place and Date...................................... 11
Purpose of the Special Meeting............................ 11
Record Date; Quorum; Outstanding Common Stock Entitled to
Vote................................................... 11
Vote Required............................................. 11
Action to Be Taken Under the Proxy........................ 12
Proxy Solicitation........................................ 12
GENERAL..................................................... 12
The Company............................................... 12
The Acquiror.............................................. 13
BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER............... 14
Background of the Merger.................................. 14
Preliminary Analyses Conducted for the Special
Committee.............................................. 20
Major Differences Between NationsBanc Montgomery's and
Morgan Stanley's Preliminary Analyses.................. 29
The Acquiror's Purpose; Structure of the Merger........... 30
Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger...................... 31
Benefits and Detriments to Nonaffiliated Shareholders..... 34
Opinion of the Financial Advisor for the Special
Committee.............................................. 34
Position of the Acquiror, The Irvine Company and Mr.
Bren................................................... 41
Summary of the NationsBanc Montgomery Reports............. 42
Interests of Certain Persons in the Merger................ 57
Certain Consequences of the Merger........................ 60
Plans for the Company After the Merger.................... 61
Conduct of the Business of the Company If the Merger Is
Not Consummated........................................ 62
Material Tax Consequences................................. 62
</TABLE>
ii
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Litigation Regarding the Merger........................... 63
Accounting Treatment...................................... 63
THE MERGER.................................................. 64
The Merger................................................ 64
Merger Consideration...................................... 64
Effective Time............................................ 64
Exchange and Payment Procedures........................... 64
Transfer of Common Stock.................................. 65
Additional Agreements..................................... 65
Conduct of Business Pending the Merger.................... 66
Representations and Warranties............................ 67
Conditions................................................ 69
Termination; Withdrawal of Recommendations................ 70
Termination Fees and Expenses............................. 71
Amendment and Waiver...................................... 71
Letter Agreement with The Irvine Company.................. 71
Financing; Source of Funds................................ 71
No Appraisal Rights....................................... 72
Fees and Expenses......................................... 72
Regulatory Requirements................................... 73
SELECTED FINANCIAL DATA OF THE COMPANY...................... 74
COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND
INFORMATION............................................... 75
CERTAIN FINANCIAL PROJECTIONS OF THE COMPANY................ 76
CERTAIN RELATIONSHIPS AND TRANSACTIONS...................... 77
Agreement with Messrs. Thompson, Dorfman and Hughes....... 77
Special Rights of The Irvine Company Under Certain
Agreements............................................. 78
Purchases of Common Stock and Common L.P. Units by The
Irvine Company and Its Affiliates Since January 1,
1997................................................... 80
Other Transactions........................................ 81
MANAGEMENT OF THE COMPANY................................... 81
MANAGEMENT OF THE ACQUIROR AND ITS MEMBERS.................. 82
The Acquiror.............................................. 82
The Irvine Company........................................ 83
ICDC...................................................... 85
SECURITIES OWNERSHIP........................................ 87
PROPOSALS BY SHAREHOLDERS OF THE COMPANY.................... 89
INDEPENDENT AUDITORS........................................ 90
ANNUAL REPORT............................................... 90
WHERE YOU CAN FIND MORE INFORMATION......................... 90
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 91
OTHER MATTERS............................................... 91
APPENDIX A -- MERGER AGREEMENT
APPENDIX B -- OPINION OF MORGAN STANLEY
APPENDIX C -- LETTER AGREEMENT BETWEEN THE COMPANY AND THE
IRVINE COMPANY
</TABLE>
iii
<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive $34.00 in cash in exchange for each share of Irvine
Apartment Communities, Inc. Common Stock owned by you at the time of the
Merger. The Special Committee formed by the Company's Board of Directors
negotiated this price with the Acquiror. The record date for the Special
Meeting is earlier than the expected date of the Merger -- therefore,
transferors of shares of Common Stock after the record date but prior to the
Merger will retain their right to vote at the Special Meeting but the right
to receive the $34.00 in cash per share will transfer with the shares of
Common Stock.
Q: WHAT WILL HAPPEN TO MY DIVIDENDS?
A: The Merger Agreement permits the continued declaration and payment of
regular quarterly dividends of $.385 per share on the Common Stock, in
accordance with past practice, but also requires that the record dates for
the second and third quarter 1999 quarterly dividends not be earlier than
June 15, 1999 and September 15, 1999, respectively. Such dates are later
than the record dates in prior years. The Company currently intends to set
the close of business on June 15, 1999 as the record date for the second
quarter 1999 quarterly dividend. Therefore, if the Merger is consummated on
or before June 15, 1999, you will not receive any additional dividends on
your Common Stock.
Q: WHAT DO I NEED TO DO NOW?
A: Please complete, date and sign your proxy card and then mail it in the
enclosed postage-paid envelope as soon as possible, so that your shares may
be represented at the Special Meeting.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the Merger is completed, we will send you written instructions for
exchanging your stock certificates.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares ONLY if you provide your broker with
instructions on how to vote. Any failure to instruct your broker to vote in
favor of the Merger will have the effect of a NO vote. You should follow the
directions provided by your broker regarding how to instruct your broker to
vote your shares.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. Just send in a later dated, signed proxy card before the Special
Meeting or attend the Special Meeting and vote.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the Merger as quickly as possible. We expect to
complete the Merger (if it is approved) within several days of the Special
Meeting.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: The exchange of Common Stock for cash by a Shareholder in the Merger will be
a taxable transaction for federal income tax purposes and may also be a
taxable transaction under state and local and other tax laws. In addition,
if you are a foreign shareholder, you will be subject to tax and withholding
under the Foreign Investment in Real Property Tax Act of 1980. See
"Background; Purpose and Effects of the Merger -- Material Tax
Consequences."
<PAGE> 9
Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
A: We do not expect to ask you to vote on any other matters at the Special
Meeting. However, if a motion is made to adjourn or postpone the Special
Meeting, you may also be asked to vote on adjournment or postponement of the
Special Meeting.
Q: WHAT WILL HAPPEN TO THE EXISTING PUBLIC AND TAX-EXEMPT DEBT SECURITIES AND
PREFERRED EQUITY OF IRVINE APARTMENT COMMUNITIES, L.P. AND IAC CAPITAL
TRUST?
A: By itself, the Merger will not have any effect on these securities -- they
will remain obligations of Irvine Apartment Communities, L.P. and IAC
Capital Trust, as applicable. The Company has been advised by the Acquiror
that the Acquiror's present intention is to retain all such existing debt
securities and preferred equity. The Acquiror's plans could be revised,
however. See "Background; Purpose and Effects of the Merger -- The
Acquiror's Purpose; Structure of the Merger -- No Offer Made to Holders of
Limited Partner Interests in the Operating Partnership."
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the Merger or would like additional copies
of this Proxy Statement, you should contact:
GEORGESON & COMPANY INC.
88 Pine Street, 30th Floor
New York, New York 10005
Banks and Brokers Call Collect: (212) 440-9800
All Others Call Toll-Free: (800) 223-2064
FAX: (212) 440-9009
2
<PAGE> 10
SUMMARY
This summary highlights the material information included in this Proxy
Statement. This summary may not contain all of the information that is important
to you. To understand the Merger fully and for a more complete description of
the legal terms of the Merger, you should read carefully this entire document
and the other documents to which we have referred you. See "Where You Can Find
More Information." The actual terms of the Merger are contained in the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy Statement.
All information contained in this Proxy Statement relating to the Acquiror,
The Irvine Company and Mr. Bren and their affiliates (other than the Company and
its subsidiaries) or to their respective actions, purposes, beliefs, intentions
or plans has been supplied by the Acquiror for inclusion herein and has not been
independently verified by the Company. This information includes, without
limitation, certain information set forth under the captions "-- Purpose,
Structure and Effects of the Merger," "-- Financing; Source of Funds,"
"General -- The Acquiror," "Background; Structure and Effects of the
Merger -- Background of the Merger," "-- The Acquiror's Purpose; Structure of
the Merger," "-- Position of the Acquiror, The Irvine Company and Mr. Bren,"
"-- Summary of the NationsBanc Montgomery Reports," "-- Plans for the Company
After the Merger," "The Merger -- Financing; Source of Funds," "-- Regulatory
Requirements," "Certain Relationships and Transactions" and "Securities
Ownership."
VOTING
At the Special Meeting, the Shareholders will vote on a proposal to approve
and adopt the Merger Proposal. Each share of Common Stock is entitled to one
vote. Maryland law and the Company's Articles of Incorporation provide that the
Merger must be approved by the holders of two-thirds of the total number of
outstanding shares of Common Stock. The Merger Agreement also requires that the
holders of a number of shares of Common Stock (excluding the shares held by the
Acquiror and its affiliates) representing a majority of the total number of
outstanding shares of Common Stock vote to approve the Merger. Subject to the
Merger Agreement, which requires that the Special Meeting be held as promptly as
practicable, Shareholders may also be asked to vote on adjournment or
postponement of the Special Meeting for the purpose of soliciting additional
proxies if the Board of Directors or the Special Committee determines that
Shareholders have not had sufficient time to consider the Merger Proposal.
The Record Date for determining who is entitled to vote at the Special
Meeting has been fixed as the close of business on April 26, 1999. On the Record
Date, there were 20,175,892 shares of Common Stock outstanding, held of record
by approximately 1,150 registered holders. Of such shares, an aggregate of
3,613,738 shares are beneficially owned by The Irvine Company and Mr. Bren,
affiliates of the Acquiror.
PURPOSE, STRUCTURE AND EFFECTS OF THE MERGER
The purpose of the Merger is for the Acquiror to acquire the assets of the
Company, while providing the Nonaffiliated Shareholders with the opportunity to
liquidate their investment in the Company for cash at a price representing a
significant premium to market prices for the Common Stock prior to the
announcement of the Acquiror's acquisition offer (although below the midpoint of
the per share net asset value range determined by the Company's financial
advisor, Morgan Stanley & Co. Incorporated ("Morgan Stanley")). The Acquiror,
The Irvine Company and Mr. Bren believe that the Merger will result in benefits
to the Acquiror and The Irvine Company, including: (i) enabling The Irvine
Company to manage directly the Operating Partnership and thereby integrate The
Irvine Company's apartment activities with its other activities in achieving its
master plan for development of the Irvine Ranch; (ii) enhancing The Irvine
Company's ability to retain capital for future development of apartment
communities; (iii) reducing overall operational and administrative costs; and
(iv) providing enhanced tax benefits.
Pursuant to the Merger Agreement, following approval and adoption of the
Merger Proposal and subject to the fulfillment or waiver of certain conditions,
the Company will be merged with and into the Acquiror, and the Acquiror will
continue as the Surviving Company in the Merger.
3
<PAGE> 11
Upon completion of the Merger, holders of shares of Common Stock will have
the right to receive $34.00 in cash per share. Also, upon completion of the
Merger, Nonaffiliated Shareholders will cease to have any ownership interest in
the Company and will cease to participate in future earnings and growth, if any,
of the Company or benefit from any increases, if any, in the value of the
Company. Moreover, upon completion of the Merger, the Common Stock will be
canceled, public trading of the Common Stock will cease and the Common Stock
will be delisted from the New York Stock Exchange (the "NYSE").
Pursuant to the terms of the Merger, the Acquiror will pay $34.00 in cash
per share of Common Stock, or an aggregate of approximately $563 million, to the
Nonaffiliated Shareholders.
The following charts show the ownership structure of the Company and Irvine
Apartment Communities, L.P., a Delaware limited partnership (the "Operating
Partnership") prior to the Merger:
OWNERSHIP STRUCTURE OF THE COMPANY PRIOR TO THE MERGER
[GRAPH]
OWNERSHIP STRUCTURE OF THE OPERATING PARTNERSHIP PRIOR TO THE MERGER
[GRAPH]
4
<PAGE> 12
The following charts show the ownership structure of the Acquiror (the
Surviving Company) and the Operating Partnership following the Merger (if
approved and consummated):
OWNERSHIP STRUCTURE OF THE ACQUIROR (THE SURVIVING COMPANY) FOLLOWING THE MERGER
[GRAPH]
OWNERSHIP STRUCTURE OF THE OPERATING PARTNERSHIP FOLLOWING THE MERGER(4)
[Graph]
- ---------------
(1) Includes 0.9% of the Common Stock held by a trust of which Mr. Bren is the
trustee.
(2) Includes 16.3% of the common limited partnership interests in the Operating
Partnership ("Common L.P. Units") held by 6 partnerships of which The Irvine
Company is the 99% general partner and DBIAC Investment Company, a
California corporation wholly owned by Mr. Bren, is the 1% partner.
(3) Stonecrest Village Company, LLC ("Stonecrest") is indirectly wholly owned by
Mr. Bren.
(4) Assumes consummation of the transactions described under "Certain
Relationships and Related Transactions -- Agreement with Messrs. Thompson,
Dorfman and Hughes."
RECOMMENDATION OF THE BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE
The Board of Directors, acting on the unanimous recommendation of the
Special Committee, has unanimously approved the Merger Proposal and recommends
that you vote to adopt the Merger Proposal. The Board of Directors and the
Special Committee believe that the Merger is in the best interests of the
Nonaffiliated Shareholders, and that the $34.00 per share price is fair to the
Nonaffiliated Shareholders.
5
<PAGE> 13
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE
In reaching their decision to recommend, approve and adopt the Merger
Proposal, the Board of Directors and the Special Committee considered a number
of factors. The material supporting factors considered were:
- the opinion of Morgan Stanley as to the fairness from a financial point
of view to the Nonaffiliated Shareholders of the $34.00 per share to be
received by the Nonaffiliated Shareholders, and the analyses presented to
the Special Committee and the Board of Directors by Morgan Stanley (see
"Background; Purpose and Effects of the Merger -- Opinion of the
Financial Advisor for the Special Committee");
- the structural impediments contained in the Company's Articles of
Incorporation (including ownership limitations and provisions that
effectively require the consent of The Irvine Company before the Company
can engage in certain transactions (including sale or liquidation of the
Company) or amend the Company's Articles of Incorporation to change these
provisions), as well as The Irvine Company's stated desire not to
consider offers to sell its position in the Company, making it
impracticable for the Company to solicit a third-party bidder (see
"Certain Relationships and Transactions -- Special Rights of The Irvine
Company Under Certain Agreements");
- the fact that $34.00 per share was within the range of net asset value
valuations for real estate transactions presented by Morgan Stanley (see
"Background; Purpose and Effects of the Merger -- Opinion of the
Financial Advisor for the Special Committee -- Net Asset Value");
- the history of the negotiations with respect to the Merger Proposal that,
among other things, led to an increase in the Acquiror's offer from
$32.50 to $34.00 per share, and the belief of the Special Committee that
$34.00 per share was the best price that could be obtained from the
Acquiror (or any other party, primarily because of the above-referenced
structural impediments);
- the fact that the $34.00 per share to be received by Nonaffiliated
Shareholders in the Merger represented a premium of approximately 24.2%
to the closing price of the Common Stock on the NYSE of $27.375 on
December 1, 1998, the day the Acquiror made its initial merger proposal
to the Company's Board of Directors, and that $34.00 per share exceeds
the all-time high price of the Common Stock ($33.50 per share);
- the fact that the Company could continue to declare regular quarterly
dividends (although the record dates for the second and third quarter
1999 quarterly dividends may not be earlier than June 15, 1999 and
September 15, 1999, respectively);
- the terms and conditions of the Merger Agreement, including the price of
$34.00 in cash per share, the scope of the parties' representations,
warranties, covenants and agreements, the limited number of conditions to
the obligations of the Acquiror and the rights of the Special Committee
and the Board of Directors, consistent with their duties, to withdraw or
modify their respective recommendations;
- the Shareholder approval condition to the consummation of the Merger that
effectively requires the affirmative vote of approximately 60.9% of the
shares held by the Nonaffiliated Shareholders in favor of the Merger
Proposal; and
- the fact that, although no third-party offers were actively solicited,
from the time of the Acquiror's initial acquisition proposal which was
publicly announced on December 1, 1998 through the approval of the Merger
by the Special Committee and the Board of Directors on February 1, 1999,
neither the Company nor the Special Committee received any alternative
offers (taking into account the potential deterrent effect of the
structural impediments discussed above).
The material negative factors considered were:
- the fact that, following the Merger, Nonaffiliated Shareholders will
cease to participate in future earnings or growth, if any, of the Company
or benefit from increases, if any, in the value of the Company;
6
<PAGE> 14
- potential or actual conflicts of interest of officers and Directors of
the Company in connection with the Merger (see "Background; Purpose and
Effects of the Merger -- Interests of Certain Persons in the Merger" and
"Certain Relationship and Transactions"); and
- Nonaffiliated Shareholders will recognize a taxable gain upon the
completion of the Merger.
MORGAN STANLEY'S FAIRNESS OPINION
Morgan Stanley delivered to the Board of Directors a written opinion, dated
February 1, 1999, that the consideration the Acquiror is paying is fair to the
Nonaffiliated Shareholders from a financial point of view. Morgan Stanley's
opinion is attached as Appendix B to this Proxy Statement. Please read this
opinion. Morgan Stanley will receive a financial advisory fee of approximately
$4.3 million, approximately $3.8 million of which is contingent upon the
consummation of the Merger. See "Background; Purpose and Effects of the
Merger -- Opinion of the Financial Advisor for the Special Committee."
POTENTIAL CONFLICTS OF INTEREST OF OFFICERS AND DIRECTORS OF THE COMPANY
Officers and Directors of the Company may have interests in the Merger that
are different from your interests as a Shareholder or relationships that may
present conflicts of interest, as follows:
- Messrs. Bren, McKee and Watson, Directors of the Company, are executive
officers and directors of The Irvine Company, and as a result, they have
fiduciary duties to the Shareholders as well as to Mr. Bren, as sole
shareholder of The Irvine Company. Therefore, they may be confronted by
issues, including the Merger, which present them with conflicts. Because
of the conflicting fiduciary duties owed by Messrs. Bren, McKee and
Watson, among other reasons, the Company established the Special
Committee to represent the interests of the Nonaffiliated Shareholders in
the consideration and potential negotiation of the proposed merger.
- On April 11, 1999, Mr. Richard E. Lamprecht, an executive officer of the
Company, entered into an employment agreement with the Acquiror, intended
to replace his existing employment agreement with the Company, which is
effective upon the Merger.
- Six officers (William H. McFarland, William W. Thompson, Richard E.
Lamprecht, Rudy A. Svrcek, Scott A. Reinert and Shawn Howie) have entered
into letter agreements with the Company which provide for severance
benefits of one year's base salary in the event of their termination
following the Merger.
- The Directors and executive officers of the Company will receive an
aggregate of approximately $2,750,000 in payment for cancellation of
vested options upon consummation of the Merger, and executive officers of
the Company may be entitled in the future (subject to continued
employment or in the event of certain terminations of employment) to
receive an aggregate of approximately $6,442,000 in payment for
cancellation of unvested options and restricted stock units.
- Three officers of the Company (William W. Thompson, Bruce N. Dorfman and
Robert J. Hughes) have entered into an agreement with the Operating
Partnership relating to the purchase of their interests in Thompson
Residential Company, Inc. ("TRC") by the Operating Partnership, for an
aggregate of $4,533,782 contingent upon the consummation of the Merger.
TRC owns approximately 0.2% of the outstanding Common L.P. Units. The
purchase price is equivalent to the sum of (i) $34.00 per Common L.P.
Unit held by TRC and (ii) the $2,000,000 "earn out" which represents the
maximum amount that TRC could receive under the agreement pursuant to
which the Operating Partnership acquired the assets of TRC.
- Two Directors (John F. Grundhofer and Jack W. Peltason) or their
affiliates have had, and may continue to have, business relationships
with Mr. Bren or The Irvine Company.
See "Background; Purpose and Effects of the Merger -- Interests of Certain
Persons in the Merger" and "Certain Relationships and Transactions."
7
<PAGE> 15
THE MERGER CONSIDERATION
If the Merger is completed, you will receive $34.00 in cash per share for
your Common Stock (the "Merger Consideration"). In the Merger, the Acquiror will
pay approximately $563 million to the Nonaffiliated Shareholders.
CONDITIONS TO THE MERGER
There are a number of conditions that must be satisfied before either the
Company or the Acquiror is obligated to complete the Merger. These conditions
are:
- the holders of two-thirds of the total number of outstanding shares of
Common Stock must approve the Merger;
- the holders of a number of shares of Common Stock (excluding the shares
held by the Acquiror and its affiliates) representing a majority of the
total number of outstanding shares of Common Stock must approve the
Merger; and
- there can be no legal restraints or prohibitions that prevent completion
of the Merger.
There are additional conditions that the Company must meet before the
Acquiror is obligated to complete the Merger. These conditions are:
- the representations and warranties the Company made in the Merger
Agreement must be true and correct in all material respects;
- the Company must comply in all material respects with the terms of the
Merger Agreement;
- the Acquiror must have received a tax opinion (as to the qualification of
each of the Company and IAC Capital Trust as a real estate investment
trust ("REIT") within the meaning of the Internal Revenue Code of 1986,
as amended (the "Code"), and as to the treatment of the Operating
Partnership, and each other subsidiary of the Company that is a
partnership, as a partnership for federal income tax purposes) from the
Company's counsel, Davis Polk & Wardwell ("Davis Polk"); and
- all awards under any Company stock option plan must be canceled in
accordance with the terms of the Merger Agreement.
There are additional conditions that the Acquiror must meet before the
Company is obligated to complete the Merger. These conditions are:
- the representations and warranties the Acquiror made in the Merger
Agreement must be true and correct in all material respects; and
- the Acquiror must comply in all material respects with the terms of the
Merger Agreement.
The mutual conditions can be waived if waiver is legally permitted and both
parties agree (in the case of the Company, the determination as to the waiver
may be made only by the Special Committee on behalf of the Company). The
conditions the Company must meet can be waived by the Acquiror, and the
conditions the Acquiror must meet can be waived by the Special Committee on
behalf of the Company. If any material conditions are waived by the Special
Committee on behalf of the Company, the Special Committee will, in light of its
duties under Maryland law and the federal securities laws, determine at such
time whether a resolicitation of proxies from Shareholders should be made. If a
waiver of any conditions causes a material detriment to Nonaffiliated
Shareholders, the Company intends to resolicit proxies from Shareholders.
TERMINATION OF THE MERGER AGREEMENT
Either the Special Committee (on behalf of the Company) or the Acquiror may
terminate the Merger Agreement and abandon the Merger, generally whether before
or after approval by the Shareholders:
- by mutual written consent;
- if the Merger has not been completed by October 1, 1999;
- if a law or final order prohibits the Merger; or
8
<PAGE> 16
- if the Merger Proposal is not approved by either (i) the holders of
two-thirds of the total number of outstanding shares of Common Stock or
(ii) the holders of a number of shares of Common Stock (excluding the
shares held by the Acquiror and its affiliates) representing a majority
of the total number of outstanding shares of Common Stock at the Special
Meeting.
The Special Committee (on behalf of the Company) may terminate the Merger
Agreement:
- upon a material breach of any covenant or agreement contained in the
Merger Agreement on the part of the Acquiror or if any representation or
warranty of the Acquiror becomes untrue in any material respect and the
Acquiror is not in good faith attempting to cure such breach; or
- if, prior to the approval of the Merger Proposal by the Shareholders, the
Special Committee determines to accept a superior acquisition proposal
from a third party (subject to payment of a $19,250,000 break-up fee to
the Acquiror).
The Acquiror may terminate the Merger Agreement:
- upon a material breach of any covenant or agreement contained in the
Merger Agreement on the part of the Company or if any representation or
warranty of the Company becomes untrue in any material respect and the
Company is not in good faith attempting to cure such breach; or
- upon any of the following (each of which will obligate the Company to pay
a $19,250,000 break-up fee to the Acquiror):
- the Company receives an acquisition proposal from a third party and,
thereafter, the Special Committee or the Board of Directors (including a
majority of the members of the Special Committee) withdraws or modifies
its recommendation of the Merger or the Merger Agreement;
- the Company receives an acquisition proposal from a third party and,
thereafter, the Acquiror requests in writing that the Special Committee
or the Board of Directors publicly reconfirm its recommendation of the
Merger Proposal to the Shareholders and the Special Committee or the
Board of Directors (including a majority of the members of the Special
Committee) fails to do so within 5 business days after receipt of the
Acquiror's request;
- the Special Committee or the Board of Directors (including a majority of
the members of the Special Committee) recommends to the Shareholders an
alternative transaction;
- a tender offer or exchange offer for 20% or more of the outstanding
shares of Common Stock is commenced (other than by the Company or an
affiliate of the Company) and the Special Committee or the Board of
Directors (including a majority of the members of the Special Committee)
recommends that the Shareholders tender their shares in such tender
offer or exchange offer; or
- the Company fails to call and hold the Special Meeting by October 1,
1999.
FINANCING; SOURCE OF FUNDS
The total amount of funds required to pay the Merger Consideration to the
Nonaffiliated Shareholders and fees and expenses related to the Merger is
estimated to be approximately $582 million. These funds will be obtained from
$238 million of cash on hand of the Acquiror and an irrevocable and
unconditional letter of credit from Bank of America National Trust and Savings
Association ("Bank of America") in the amount of $350 million, which was entered
into on May 3, 1999 (the "Letter of Credit"). The Letter of Credit requires the
Acquiror to certify to Bank of America that the proceeds obtained upon draw down
of the Letter of Credit will be applied only to the payment of the Merger
Consideration to the Nonaffiliated Shareholders. For additional information
regarding the Letter of Credit, see "The Merger -- Financing; Source of Funds."
FEDERAL INCOME TAX CONSEQUENCES
You will be taxed on your receipt of the $34.00 per share to the extent
that the amount you receive exceeds your tax basis in your Common Stock. In
addition, if you are a Foreign Shareholder (as defined herein), you will be
subject to tax and withholding under the Foreign Investment in Real Property Tax
Act of
9
<PAGE> 17
1980. See "Background; Purpose and Effects of the Merger -- Material Tax
Consequences." Because determining the tax consequences of the Merger can be
complicated, you should consult your tax advisor in order to understand fully
how the Merger will affect you.
NO APPRAISAL RIGHTS
Holders of Common Stock are not entitled to dissenting shareholders'
appraisal rights or other similar rights under the Maryland General Corporation
Law (the "MGCL") and will be bound by the terms of the Merger Agreement. The
MGCL does not provide appraisal rights or other similar rights to shareholders
of a corporation in connection with a merger if their shares are listed on a
national securities exchange, such as the NYSE, on the record date for
determining shareholders entitled to vote on such merger. All of the shares of
Common Stock outstanding on the record date for determining Shareholders
entitled to vote on the Merger were listed on the NYSE.
10
<PAGE> 18
INFORMATION CONCERNING THE SPECIAL MEETING
TIME, PLACE AND DATE
This Proxy Statement is being furnished to the holders of the outstanding
Common Stock of the Company in connection with the solicitation of proxies by
the Board of Directors for use at the Special Meeting of Shareholders of the
Company to be held on Monday, June 7, 1999 at 9:00 a.m. local time, at the
Westin Los Angeles Airport Hotel, 5400 West Century Boulevard, Los Angeles,
California 90045, including any adjournments or postponements thereof.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, holders of Common Stock will consider and vote upon
a proposal to approve and adopt the Merger and the Merger Agreement. Subject to
the Merger Agreement, which requires that the Special Meeting be held as
promptly as practicable, Shareholders may also be asked to vote on adjournment
or postponement of the Special Meeting if a motion to adjourn or postpone the
Special Meeting is properly brought. Additional information concerning the
Special Meeting and the Merger Agreement is set forth below and a copy of the
Merger Agreement is attached as Appendix A to this Proxy Statement. The Special
Committee has unanimously determined that the terms of the Merger Proposal are
fair to, and in the best interests of, the Nonaffiliated Shareholders, and has
recommended that the Shareholders and the Board of Directors vote for approval
and adoption of the Merger Proposal and the transactions contemplated thereby.
Acting on the unanimous recommendation of the Special Committee, the Board of
Directors has unanimously approved and adopted the Merger and the Merger
Agreement. THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMEND THAT SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
PROPOSAL. HOWEVER, SHAREHOLDERS SHOULD BE AWARE THAT CERTAIN OF THE MEMBERS OF
THE BOARD OF DIRECTORS HAVE CONFLICTS OF INTEREST WITH RESPECT TO THE MERGER.
See "Background; Purpose and Effects of the Merger -- Interests of Certain
Persons in the Merger" and "Certain Relationships and Transactions."
RECORD DATE; QUORUM; OUTSTANDING COMMON STOCK ENTITLED TO VOTE
The Record Date for the Special Meeting has been fixed as the close of
business on April 26, 1999. Only holders of record of Common Stock on the Record
Date are entitled to notice of and to vote at the Special Meeting. Holders of
Common Stock on the Record Date are entitled to one vote on matters properly
presented at the Special Meeting for each share of Common Stock held. A list of
Shareholders will be available for examination by holders of Common Stock, for
any purpose related to the Special Meeting, during the 10-day period preceding
the Special Meeting, at the offices of Irvine Apartment Communities, Inc., 550
Newport Center Drive, Suite 300, Newport Beach, California, 92660; telephone
(949) 720-5500.
On the Record Date, there were 20,175,892 shares of Common Stock
outstanding, held of record by approximately 1,150 registered holders. The
presence in person or by proxy of a majority of the shares of Common Stock
entitled to vote will constitute a quorum for the transaction of business at the
Special Meeting.
VOTE REQUIRED
Pursuant to the MGCL and the Company's Articles of Incorporation, the
Merger must be approved and adopted by the affirmative vote of the holders of
two-thirds of the total number of outstanding shares of Common Stock. The Merger
Agreement also requires that the holders of a number of shares of Common Stock
(excluding the shares held by the Acquiror and its affiliates) representing a
majority of the total number of outstanding shares of Common Stock vote to
approve the Merger. The Irvine Company has advised the Company that it and its
affiliates will vote their shares of Common Stock for approval and adoption of
the Merger Proposal. As of the Record Date, The Irvine Company and Mr. Bren
beneficially owned an aggregate of 3,613,738 shares of Common Stock
(approximately 17.9% of the outstanding Common Stock). The Merger is also
subject to other conditions. See "The Merger -- Conditions."
11
<PAGE> 19
Failure to return an executed proxy card or to vote in person at the
Special Meeting or voting to abstain (or broker non-votes) will constitute, in
effect, a vote against approval and adoption of the Merger Proposal for purposes
of both the two-thirds vote requirement and the additional Nonaffiliated
Shareholder vote requirement specified in the Merger Agreement.
Any proposal to adjourn or postpone the Special Meeting for the purpose of
soliciting additional proxies must be approved by a majority of the Shareholders
present in person or by proxy. Votes to abstain or broker non-votes will
constitute, in effect, votes against such adjournment or postponement. Failure
to return an executed proxy card will have no effect on whether the Special
Meeting is adjourned or postponed.
ACTION TO BE TAKEN UNDER THE PROXY
All proxy cards in the enclosed form that are properly executed and
returned to the Exchange Agent, EquiServe, L.P., on or before the date of the
Special Meeting, and not revoked, will be voted at the Special Meeting or any
adjournments or postponements thereof in accordance with any instructions
thereon, or, if no instructions are provided, will be voted FOR approval and
adoption of the Merger Proposal and, as appropriate, FOR adjournment or
postponement for the purpose of soliciting additional proxies. Any Shareholder
who has given a proxy pursuant to this solicitation may revoke it by attending
the Special Meeting and voting in person, without compliance with any other
formalities. In addition, any proxy given pursuant to this solicitation may be
revoked prior to the Special Meeting by delivering an instrument revoking it or
a duly executed proxy bearing a later date.
Management of the Company does not know of any matters other than those set
forth herein which may come before the Special Meeting. If any other matters are
properly presented at the Special Meeting for action, it is intended that the
persons named in the enclosed form of proxy and acting thereunder will vote in
accordance with their discretion on such matters.
PROXY SOLICITATION
The expense of preparing, printing and mailing this Proxy Statement and the
proxies solicited hereby will be borne by the Company. In addition to the use of
the mails, proxies may be solicited by officers and Directors and regular
employees of the Company, without additional remuneration, by personal
interviews, written communication, telephone, telegraph or facsimile
transmission. The Company also will request brokerage firms, nominees,
custodians and fiduciaries to forward proxy materials to the beneficial owners
of Common Stock held of record by such brokerage firms, nominees, custodians and
fiduciaries and will provide reimbursement for the cost of forwarding the
material in accordance with customary charges. In addition, the Company has
retained Georgeson & Company Inc. to assist in the solicitation of proxies at an
estimated fee of $15,000 plus reimbursement of reasonable expenses.
GENERAL
THE COMPANY
Formed in 1993, the Company operates as a REIT under the Code. In
connection with the Company's initial public offering of Common Stock (the
"Offering"), the Company obtained a general partnership interest in and became
the sole managing general partner of the Operating Partnership. The Operating
Partnership was formed on November 15, 1993 and began operations as of December
8, 1993, the date of the Offering. At March 31, 1999, the Company had a 44.6%
general partnership interest in and was the sole managing general partner of the
Operating Partnership. At March 31, 1999, the common limited partners had a
55.4% common limited partnership interest in the Operating Partnership, with The
Irvine Company and its subsidiaries owning a 54.5% common limited partnership
interest in the Operating Partnership. In addition, at March 31, 1999, The
Irvine Company and Mr. Bren beneficially owned an aggregate of approximately
17.9% of the outstanding shares of Common Stock. The Operating Partnership's
management and operating decisions are under the unilateral control of the
Company. The Company was originally incorporated in Delaware, but on May 2,
1996, changed its state of incorporation to Maryland.
The Company is a self-administered equity REIT engaged in the operation and
development (through the Operating Partnership) of apartment communities in
California. As of March 31, 1999, the Operating
12
<PAGE> 20
Partnership owned 65 apartment communities representing 16,630 operating
apartment units and 2,849 apartment units under construction or development
(collectively, the "Properties"). Until July 31, 2020, the Operating Partnership
has the exclusive right, but not the obligation, to acquire land from The Irvine
Company for development of additional apartment communities on the Irvine Ranch.
The Irvine Company has no obligation to designate any land for sale and
development of additional apartment communities. Since 1997, the Company has
acquired or developed two off-Ranch properties (with 1,265 units) and is in the
process of developing six additional off-Ranch properties (with 1,347 units). In
March 1998, the Operating Partnership and Western National Property Management
("WNPM") announced the formation of a strategic alliance that, in April 1998,
assumed all property management responsibilities for the Operating Partnership's
Southern California portfolio. The new entity, Irvine Apartment Management
Company ("IAMC"), is owned 51% by the Operating Partnership and 49% by WNPM.
The address of the principal business and the principal executive offices
of the Company is 550 Newport Center Drive, Suite 300, Newport Beach, California
92660; telephone (949) 720-5500.
THE ACQUIROR
The Acquiror in the Merger is TIC Acquisition LLC. The principal business
of the Acquiror is to merge with the Company and to be the surviving company
following the Merger. The Acquiror is capitalized with $238 million in cash and
cash equivalents. The Acquiror will obtain the balance of the Merger
Consideration to the Nonaffiliated Shareholders at or before the consummation of
the Merger. See "The Merger -- Financing; Source of Funds." The address of the
principal business and the principal executive offices of the Acquiror is 550
Newport Center Drive, Suite 900, Newport Beach, California 92660; telephone
(949) 720-2000.
The Irvine Company is the managing member (holding the sole managing member
interest) of the Acquiror. The Irvine Company is a century old, privately held
real estate investment company primarily engaged in the long-term development of
its land in Orange County, California, and elsewhere in California. Following a
comprehensive master plan created in the 1960s, The Irvine Company is building a
series of large-scale communities on the Irvine Ranch, a 90 square mile parcel
of land located in central Orange County in Southern California. The Irvine
Company's principal business consists of the ownership, development, management
and leasing of real estate on the Irvine Ranch. The sole shareholder of The
Irvine Company is Donald Bren. In connection with the Merger, The Irvine Company
has entered into a letter agreement with the Company. See "The Merger -- Letter
Agreement with The Irvine Company" and Appendix C to this Proxy Statement.
The Irvine Company, including its affiliates, is the largest Shareholder of
the Company, with beneficial ownership of approximately 17.9% of the outstanding
shares of Common Stock. The Irvine Company also beneficially owns a 54.5% common
limited partnership interest in the Operating Partnership. Pursuant to the
Miscellaneous Rights Agreement dated March 20, 1996, as amended, among the
Company, the Operating Partnership and The Irvine Company (the "Miscellaneous
Rights Agreement"), The Irvine Company has certain rights with respect to the
nomination of Directors of the Company so long as The Irvine Company and its
related parties meet certain beneficial ownership tests. The Irvine Company
currently has the right to nominate three Directors. The three current Directors
nominated by The Irvine Company are Messrs. Bren, McKee and Watson. The
Company's Articles of Incorporation provide The Irvine Company additional rights
with respect to the Company's Board of Directors, including the requirement that
certain types of transactions, such as the Merger, be approved by more than 75%
of the entire Board of Directors, which effectively requires the consent of at
least one of The Irvine Company's Director nominees. See "Certain Relationships
and Transactions -- Special Rights of The Irvine Company Under Certain
Agreements." The address of the principal business and the principal executive
offices of The Irvine Company is 550 Newport Center Drive, Suite 900, Newport
Beach, California 92660; telephone (949) 720-2000.
Irvine Community Development Company, a Delaware corporation and
wholly-owned subsidiary of The Irvine Company ("ICDC"), holds the sole
non-managing member interest in the Acquiror. Mr. Bren is the indirect sole
shareholder of ICDC. The principal business of ICDC is land development and
sales. The
13
<PAGE> 21
address of the principal business and the principal executive offices of ICDC is
550 Newport Center Drive, Suite 900, Newport Beach, California 92660; telephone
(949) 720-2000.
BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER
BACKGROUND OF THE MERGER
In mid-November 1998, The Irvine Company requested Latham & Watkins and
NationsBanc Montgomery Securities LLC ("NationsBanc Montgomery") to analyze The
Irvine Company's investment alternatives. After initial consultations with
Latham & Watkins and NationsBanc Montgomery, The Irvine Company decided to
pursue more intensive analysis of its investment alternatives, including
possible business combination transactions with the Company. NationsBanc
Montgomery presented its preliminary financial analyses as well as a discussion
of issues related to potential third-party offers to The Irvine Company in
connection with a possible business combination with the Company in the form of
a report dated November 25, 1998 (the "First NationsBanc Montgomery Report").
During the period from November 25, 1998 to December 1, 1998, The Irvine Company
consulted from time to time with Latham & Watkins and NationsBanc Montgomery
regarding various courses of action. During this period, The Irvine Company also
discussed with Bank of America the availability of a special funding facility
for a potential transaction. On December 1, 1998, The Irvine Company entered
into an engagement letter with NationsBanc Montgomery (the "Acquiror Engagement
Letter").
On December 1, 1998, after the close of trading on the NYSE, the Acquiror
delivered a letter (the "December 1 Letter") to the Company, the text of which
follows:
TIC Acquisition LLC
550 Newport Center Drive
Newport Beach, CA 92660
December 1, 1998
Board of Directors
Irvine Apartment Communities, Inc.
550 Newport Center Drive
Newport Beach, CA 92660
Gentlemen:
This letter is a proposal from TIC Acquisition LLC, a wholly owned
subsidiary of The Irvine Company, to acquire all of the outstanding common
shares of Irvine Apartment Communities, Inc. in a business combination for
$32.50 per share in cash. This represents a 21% premium to yesterday's closing
price and one of the highest cash premiums ever paid for a REIT. We are
prepared, at the earliest possible time, to enter into a binding agreement which
would contain standard terms and conditions for transactions of this nature.
There will be no financing contingency.
We believe that our proposal presents an excellent opportunity for
shareholders of Irvine Apartment Communities to achieve liquidity for their
shares at a significant premium to current market value. We are confident that
you will conclude that our proposal is fair and in the best interests of the
public shareholders.
Attached is a press release to be issued immediately which briefly
describes our reasons for making this proposal. We look forward to your response
at your earliest convenience but in any event no later than December 31, 1998.
We look forward to your careful consideration of this important proposal
and are prepared to work closely with you over the coming weeks.
Very truly yours,
TIC Acquisition LLC
By: /s/ MICHAEL D. MCKEE
------------------------------------
Michael D. McKee
Authorized Officer
14
<PAGE> 22
Also on December 1, 1998, after the close of trading on the NYSE, the
Acquiror issued a press release stating that the Acquiror proposed to acquire
all of the outstanding shares of Common Stock at a price of $32.50 per share.
The Company's Articles of Incorporation and by-laws contain provisions
establishing an Independent Directors Committee of the Board of Directors, which
must approve all transactions (including transactions under the Exclusive Land
Rights and Non-Competition Agreement dated as of November 21, 1993 by and among
The Irvine Company, the Operating Partnership, the Company and Mr. Bren, as
amended (the "Land Rights Agreement")) between the Company, on the one hand, and
The Irvine Company and its affiliates, on the other. The Independent Directors
Committee consists of five of the nine members of the Board of Directors
(Anthony M. Frank (Chairman), John F. Grundhofer, Bowen H. McCoy, John F.
Seymour, Jr. and Jack W. Peltason). Each member of the Independent Directors
Committee must not be (i) an affiliate of, or an officer, director or employee
of, The Irvine Company or (ii) a spouse, ancestor or lineal descendant or
brother or sister of Mr. Bren, and cannot have been employed by The Irvine
Company or any of its subsidiaries within the five years preceding such person's
election as a Director of the Company.
On December 3, 1998, the Independent Directors Committee met to consider
what action the Board of Directors should take in response to the offer from the
Acquiror. Mr. Peltason was unavailable for the initial meeting and did not
participate in any of the deliberations of the Independent Directors Committee
prior to February 1, 1999. At the initial meeting, Mr. Frank outlined the terms
and conditions of the December 1 Letter. Mr. Frank then indicated that it would
be appropriate for the committee to hire a financial advisor to assist it in
reviewing the proposal set forth in the December 1 Letter and in formulating a
response. After discussion, the Independent Directors Committee authorized
Messrs. Frank and McCoy to interview a number of candidates.
On December 4, 1998, Messrs. Frank and McCoy met with Davis Polk, who had
acted as counsel to the Company, the Board of Directors and the Independent
Directors Committee since the Offering, for the purpose of interviewing
candidates for financial advisor to the Board of Directors. Presentations were
made by four investment banks invited by the Independent Directors Committee
based upon their general reputation and experience in REIT mergers and
acquisitions, "going private" transactions and similar matters.
Also on December 4, 1998, Mr. Frank, on behalf of the Independent Directors
Committee, delivered to the Acquiror a letter acknowledging receipt of the
December 1 Letter and stating that the Board of Directors and the Independent
Directors Committee intended to review the Acquiror's proposal and respond in
due course.
On December 8, 1998, by unanimous written consent, the Board of Directors
established a Special Committee consisting of Messrs. Frank, McCoy, Grundhofer
and Seymour, four Directors of the Company who are not employees of the Company
or The Irvine Company and are not affiliates of The Irvine Company, Mr. Bren or
their affiliates (other than the Company and its subsidiaries). The Special
Committee was delegated the full power and authority of the Board of Directors
to determine what actions with respect to the proposal set forth in the December
1 Letter would be in the best interests of the Nonaffiliated Shareholders,
including whether to consummate or reject the proposal set forth in the December
1 Letter or seek modification of any of its terms. The Board of Directors
authorized the Special Committee to evaluate and negotiate, if appropriate, the
terms of the proposal set forth in the December 1 Letter with the Acquiror and
its representatives, to consider and negotiate the terms of transactions other
than the proposal set forth in the December 1 Letter as it deemed appropriate,
and to make a recommendation to the full Board of Directors concerning the
proposal set forth in the December 1 Letter. The Special Committee was also
authorized to retain legal advisors and investment bankers to assist it in
discharging these duties and to determine appropriate compensation for its
members. Other than the legal and financial advisors engaged by and on behalf of
the Special Committee, no outside parties were engaged to negotiate on behalf of
the Nonaffiliated Shareholders (the Special Committee served this purpose).
Also on December 8, 1998, the Special Committee held its initial meeting.
At the meeting, the Special Committee elected Messrs. Frank and McCoy as
Co-Chairmen of the Special Committee and retained Davis Polk as legal counsel in
connection with the Special Committee's evaluation and negotiation of the
proposal
15
<PAGE> 23
set forth in the December 1 Letter and any alternative transactions. The Special
Committee also retained Piper & Marbury L.L.P. and Morris, James, Hitchens &
Williams for the purpose of consultation with regard to Maryland and Delaware
law, respectively. The Special Committee, along with Davis Polk, reviewed the
presentations received from the four investment banks and discussed their
relative merits. After further deliberations, the Special Committee engaged
Morgan Stanley as its financial advisor to analyze and provide advice with
respect to the proposal set forth in the December 1 Letter and with respect to
any other strategic transaction or decision which might be considered by the
Special Committee whether or not involving the Acquiror and to assist in any
negotiations with respect to such transactions. For descriptions of the terms of
the engagement of Morgan Stanley, see "-- Opinion of the Financial Advisor for
the Special Committee." The Special Committee then discussed the fact that
affiliates of U.S. Bancorp, of which Mr. Grundhofer is Chairman, President and
Chief Executive Officer, are lenders to The Irvine Company (as well as to the
Company). In addition, it was expected that one or more of these affiliates
would be lenders (as participants in a syndicated facility) to The Irvine
Company in connection with the proposed merger. However, the Special Committee
determined that, because these affiliates are not agent banks or lead banks
under the facilities in question, and the aggregate of these loans was not
material to U.S. Bancorp, these relationships would not impair Mr. Grundhofer's
ability to serve on the Special Committee and to evaluate the proposed merger
and merger agreement. In light of the extensive time commitments and travel
anticipated in connection with negotiating a transaction (including reviewing
and negotiating the terms of the proposed merger, numerous meetings in New York
City and California and numerous telephonic meetings), the Special Committee
also determined compensation for its members as follows: In addition to the
Company's normal fees for attendance at meetings and reimbursement of expenses,
Messrs. Grundhofer and Seymour will each receive $20,000 for their service as
members of the Special Committee through March 31, 1999 and Messrs. Frank and
McCoy will each receive $50,000 for their service as Co-Chairmen of the Special
Committee through March 31, 1999.
On December 22, 1998, the Compensation Committee of the Board of Directors
(consisting of Messrs. McCoy and Seymour) met with its employee benefits
consultant, Frederic W. Cook & Co., Inc., to discuss appropriate arrangements
for preventing the loss of key employees in light of uncertainty as to the
Company's future status. The Compensation Committee's employee benefits
consultant analyzed the Company's current compensation arrangements for senior
management and other key employees and presented its recommendations relating to
appropriate retention arrangements. The Compensation Committee ultimately
determined that these retention-related matters were integrally related to the
proposal set forth in the December 1 Letter of the Acquiror, and therefore, it
would be more appropriate for the Special Committee to address and decide these
issues.
Later on December 22, 1998, the Special Committee met with Davis Polk and
Morgan Stanley. The Special Committee discussed the retention issues considered
by the Compensation Committee and authorized the implementation of certain
measures aimed at the retention of key employees, all as more fully described
under "-- Interests of Certain Persons in the Merger." Davis Polk then outlined
the duties of the Special Committee under Maryland law and aspects of federal
securities law. In addition, the Special Committee and its advisors considered
the structural impediments contained in the Company's Articles of Incorporation
(including ownership limitations and provisions that effectively require the
consent of The Irvine Company before the Company can engage in certain
transactions (including sale or liquidation of the Company) or amend the
Company's Articles of Incorporation to change these provisions), as well as The
Irvine Company's stated desire not to consider offers to sell its position in
the Company. The Special Committee believed that these circumstances would deter
any serious interest from third-party bidders because The Irvine Company could
effectively block any attempt of a third-party bidder to obtain control of the
Company. Accordingly, the Special Committee determined that it was impracticable
to solicit third-party bidders. On the basis of this determination, the Special
Committee, taking into account the advice it received from its legal advisors
regarding its duties under Maryland law, concluded that it would not solicit
third-party bidders. The Special Committee decided to negotiate the highest
price and best terms possible for a transaction with the Acquiror and then
determine whether it was preferable to engage in such transaction or to adopt
the alternative of saying "no" to such transaction and to continue to operate
the Company as a public company for the benefit of the Shareholders. Morgan
Stanley then reviewed certain preliminary financial and comparative analyses
based in part on information it had received from the Company in the prior week.
Morgan Stanley noted that its
16
<PAGE> 24
analyses were preliminary and subject to revision. See "-- Preliminary Analyses
Conducted for the Special Committee."
At the request of the Special Committee and the Acquiror, on December 30,
1998, Morgan Stanley and NationsBanc Montgomery met to discuss their respective
valuation analyses. Also present were representatives of Merrill Lynch Equity
Research, a consultant to The Irvine Company. Morgan Stanley presented its
preliminary valuation analyses. In addition, Morgan Stanley delivered a letter
requesting disclosure from NationsBanc Montgomery, the Acquiror and The Irvine
Company of all material facts relating to the use or value of the assets in
question and to the market value of the subject transaction. NationsBanc
Montgomery presented its financial analyses to Morgan Stanley in connection with
the proposed business combination in the form of a report dated December 30,
1998 (the "Second NationsBanc Montgomery Report"). During the meeting, a
discussion ensued about the Company's October 30, 1998 Board of Directors
meeting pertaining to the 1999 business plan of the Company (the "1999 Business
Plan"). At that Board meeting, members of management of the Company had
discussed management's 1999 Business Plan and the assumptions underlying it.
Following that presentation, Mr. Bren had indicated that he believed that
certain assumptions in management's proposed 1999 Business Plan were too
conservative in light of existing conditions and expected market conditions in
1999 and beyond. Prior to the meeting, Mr. Bren had presented information that
suggested a recent rental growth rate for certain competitive properties in the
range of 12% and that management's assumed 1999 rental growth rate of 5% should
be reviewed. Management disagreed with the information presented and the
conclusions reached by Mr. Bren. There followed considerable discussion among
the Directors and management of what growth assumptions and targets should be
established for the 1999 Business Plan. Upon conclusion of this discussion, the
Board of Directors (including Mr. Bren) unanimously approved management's 1999
Business Plan as a base case and it was agreed that management would undertake
to develop an additional 1999 Business Plan which would reflect actual growth
rates in the relevant competitive California markets. It was also agreed by
management and the Board of Directors that, in any case, the Company would
commit to meet or exceed the competitive market in 1999 with respect to rental
growth and occupancy rates. It was further agreed that management would work
with representatives of The Irvine Company and independent consultants to agree
on the composition of properties comprising appropriate competitive markets.
Because of the Acquiror's acquisition proposal, the additional 1999 Business
Plan has not yet been undertaken.
In connection with the ongoing discussions, on December 31, 1998, the
Acquiror sent a letter to the Special Committee extending the time for the
Special Committee to respond to the Acquiror's proposal from December 31, 1998
to January 18, 1999.
On January 7, 1999, NationsBanc Montgomery delivered to Morgan Stanley
certain materials pertaining to the Company as requested by Morgan Stanley in
its December 30, 1998 letter. In a letter dated January 12, 1999 (the "Third
NationsBanc Montgomery Report" and, together with the First NationsBanc
Montgomery Report and the Second NationsBanc Montgomery Report, the "NationsBanc
Montgomery Reports"), NationsBanc Montgomery provided additional detail and
documentation in support of the Acquiror's offer of $32.50 per share.
By mutual agreement, on January 13, 1999, Morgan Stanley and NationsBanc
Montgomery met to discuss outstanding differences between the two financial
advisors related to valuation assumptions, including rental growth rates,
liquidity or control discounts, the valuation of the Land Rights Agreement,
capitalization rates, and the asset and equity discount rates. Morgan Stanley
reiterated its position that as a result of its preliminary analyses, Morgan
Stanley continued to be of the view that the Acquiror's offer undervalued the
Company.
On January 14, 1999, the Special Committee met with Morgan Stanley and
Davis Polk and reviewed the discussions that had occurred up until that point
and outlined the major differences between NationsBanc Montgomery's and Morgan
Stanley's valuations, including certain rental growth assumptions,
capitalization rates, and the asset and equity discount rates. For a discussion
of these differences, see "-- Major Differences Between NationsBanc Montgomery's
and Morgan Stanley's Analyses." Morgan Stanley then provided to the Special
Committee a summary of its preliminary analyses. Morgan Stanley noted that its
analyses were
17
<PAGE> 25
preliminary and subject to revision. No resolution was reached on the valuation
assumption differences. See "-- Preliminary Analyses Conducted for the Special
Committee."
On January 18 and 19, 1999, Messrs. Frank and McCoy arranged to meet with
Messrs. Bren and McKee, together with their respective financial advisors, to
discuss valuation issues. No progress was made at these meetings. Following the
meeting on January 19, 1999, Messrs. Bren and McKee met with Messrs. Frank and
McCoy and indicated that, as a result of the ongoing discussions, the Acquiror
might be willing to increase its offer to $33.50 per share. Messrs. Frank and
McCoy responded that they would discuss the matter with the full Special
Committee.
On January 20, 1999, the Special Committee met with its advisors to discuss
the course of the negotiations. After deliberation, the Special Committee
concluded that a price of $33.50 per share would not be satisfactory. The
Special Committee instructed Messrs. Frank and McCoy to communicate to Mr. Bren
that the Special Committee would not support a price of $33.50 per share.
Messrs. Frank and McCoy telephoned Mr. Bren informing him of the Special
Committee's conclusion. Mr. Bren indicated that he would consider the matter and
proposed a meeting with Messrs. Frank and McCoy on January 21, 1999.
On January 21, 1999, Mr. Bren telephoned Messrs. Frank and McCoy and stated
that, as a final offer, the Acquiror was willing to raise its offer to $34.00
per share. Messrs. Frank and McCoy indicated that they would communicate the
revised offer to the Special Committee.
Later on January 21, 1999, the Special Committee met with Davis Polk and
Morgan Stanley. Mr. McCoy indicated that the Acquiror had agreed to raise its
offer to $34.00 per share. Messrs. Frank and McCoy also indicated that Mr. Bren
urged them to consider this proposal carefully with the full Special Committee
and stated that the time had come when the transaction should either be
concluded or discussions terminated. Messrs. Frank and McCoy advised the members
of the Special Committee that they believed that $34.00 per share was the final
and best offer that would be received from the Acquiror. This assessment was
based on the history and status of the negotiations (as described above),
including, among other things, the direct interaction between Messrs. Frank and
McCoy and Mr. Bren, two months of negotiations and two increases, aggregating
$1.50 per share, in the proposed merger consideration (from $32.50 to $33.50 to
$34.00) and the experience of Messrs. Frank and McCoy with the Acquiror and Mr.
Bren (including over five years of service on the Board of Directors). In
response to questions from members of the Special Committee, Morgan Stanley
indicated that its preliminary view was that it would be able to deliver a
fairness opinion to the Board of Directors with respect to a transaction at
$34.00 per share.
Later on January 21, 1999, Messrs. Frank and McCoy telephoned Mr. Bren and
stated that the Special Committee would likely recommend acceptance of a
transaction at a price of $34.00 per share subject to final approval by the
Special Committee, receipt by the Special Committee of a written opinion from
Morgan Stanley that such consideration would be fair from a financial point of
view to the Nonaffiliated Shareholders, approval by the Board of Directors and
agreement on the terms of a definitive merger agreement.
In subsequent conversations between the parties on the same day, it became
evident that the Acquiror's offer did not include the continued payment of
quarterly dividends to the Shareholders, whereas the Special Committee had
contemplated the continued payment of regular quarterly dividends until the
completion of the Merger. The Special Committee concluded that it was not
prepared to recommend a transaction that did not allow for the continued payment
of regular quarterly dividends.
On January 26, 1999, the Acquiror delivered a letter to the Company stating
that in light of nearly two months of negotiations between the parties and the
upcoming regularly scheduled February 1, 1999 meeting of the Board of Directors,
at which declaration of quarterly dividends was scheduled to be considered, the
Acquiror believed that the parties should come to a prompt resolution regarding
the outstanding issues. The Acquiror set a deadline of 5:00 p.m. on February 1,
1999 for the resolution of all open issues.
The material open issues were: (i) whether the Company would continue to be
able to pay regular quarterly dividends; (ii) financing representations of the
Acquiror; (iii) the right of the Special Committee to change its recommendation
with respect to the Merger; and (iv) the scope of covenants restricting the
conduct of the Company's business pending the Merger.
18
<PAGE> 26
On January 27, 1999, the Special Committee met with Davis Polk and Morgan
Stanley. Pursuant to earlier discussions between members of the Special
Committee and Mr. Bren, the Special Committee instructed its counsel to attempt
to resolve as many of the open issues as possible. The Acquiror instructed its
counsel similarly. During the period from January 28, 1999 through January 31,
1999, Davis Polk continued to negotiate the terms of a definitive merger
agreement with Latham & Watkins. No material progress was made.
By mutual agreement, on January 31, 1999, Messrs. Frank, McCoy, Bren and
McKee, with their respective financial advisors and counsel, met in an attempt
to resolve the major outstanding issues. The parties met for several hours,
discussing each of these issues, but no agreement was reached on these issues.
On the morning of February 1, 1999, the Special Committee met prior to the
Company's regularly scheduled Board of Directors and Committee meetings. The
Special Committee and Davis Polk then met with Messrs. Bren and McKee and Latham
& Watkins. Thereafter, the Special Committee and Mr. Bren met for approximately
one hour. At this meeting, the remaining open issues were resolved as follows:
(i) the parties agreed that the Company would continue to pay regular quarterly
dividends after entering into the proposed merger agreement, provided that the
record dates for the second and third quarter 1999 dividends would not be
earlier than June 15, 1999 and September 15, 1999, respectively; (ii) the
Acquiror and The Irvine Company agreed to represent in the proposed merger
agreement and related letter agreement that the Acquiror would maintain a
minimum of $150 million of cash on hand and would have access to additional
funds sufficient to consummate the Merger; (iii) the parties agreed that,
consistent with its duties, the Special Committee would have the right to change
its recommendation with respect to the Merger, provided that it would be subject
to a $19,250,000 break-up fee in certain circumstances; and (iv) the parties
agreed that the Company would be subject to restrictions on its ability to
transfer property, incur indebtedness, enter into material contracts and
discharge liabilities prior to the closing of the Merger. Upon resolution of
these open issues, the parties reached an agreement in principle, subject to
formal approval by the Special Committee and the entire Board of Directors and
receipt by the Board of Directors of the Morgan Stanley fairness opinion.
Later on February 1, 1999, the Special Committee held a meeting with Davis
Polk. Davis Polk reviewed the principal terms and conditions of the Merger
Agreement and outlined to members of the Special Committee the details of their
duties. Morgan Stanley had previously indicated its view that it would be able
to deliver an opinion that the $34.00 in cash per share to be received by the
Nonaffiliated Shareholders in the Merger was fair from a financial point of view
to such holders. See "-- Opinion of the Financial Advisor for the Special
Committee." Subject to receipt of Morgan Stanley's fairness opinion, after full
discussion, the Special Committee unanimously determined that the Merger
Proposal was fair to, and in the best interests of, the Nonaffiliated
Shareholders. Subject to receipt of Morgan Stanley's fairness opinion, after
full discussion, the Special Committee unanimously adopted resolutions (i)
recommending to the Board of Directors that it approve and adopt the Merger
Proposal and (ii) recommending to the Shareholders that they vote to approve and
adopt the Merger Proposal.
Immediately following the Special Committee meeting, the Board of Directors
and the Independent Directors Committee met to consider the Merger Proposal.
Davis Polk outlined to the Board of Directors its duties. Messrs. Bren, McKee
and Watson then departed the meeting temporarily to permit Directors William H.
McFarland and Jack W. Peltason, neither of whom had served on the Special
Committee, a full opportunity to ask questions and obtain information to satisfy
themselves that the Merger Proposal was fair to, and in the best interests of,
the Nonaffiliated Shareholders. Messrs. Bren, McKee and Watson then rejoined the
meeting and Davis Polk reviewed the principal terms and conditions of the Merger
Agreement. Morgan Stanley then reviewed the financial terms of the Merger and
Morgan Stanley's financial analyses and delivered its oral opinion, subsequently
confirmed in writing as of February 1, 1999, and subject to the various
considerations set forth in its opinion, that the consideration to be received
by the Nonaffiliated Shareholders pursuant to the Merger Agreement is fair from
a financial point of view to such holders. In response to questions from the
Directors, Morgan Stanley gave its informal response, based on its analyses
described in "-- Opinion of the Financial Advisor for the Special Committee" and
the circumstances then existing and as discussed with the Special Committee,
that the proposed transaction at $34.00 per share was a superior alternative for
the Nonaffiliated Shareholders as compared to continuing to hold their shares of
Common
19
<PAGE> 27
Stock. Some of these circumstances included: (a) the lack of other alternatives
to the proposed transaction based on the stated desire of The Irvine Company not
to consider offers to sell its position in the Company, (b) the possibility,
based on conversations with The Irvine Company relative to land pricing for
apartment community uses versus alternative uses, that actual land for
multi-family development made available to the Company in the future by The
Irvine Company might be substantially less than the assumptions in the Company's
business plan, (c) the potential inability of the Company to attract and retain
qualified senior management personnel if the Merger is not consummated because
there would be ongoing uncertainty as to the possibility of future "going
private" transactions that might be initiated by The Irvine Company and (d) the
analyses performed by Morgan Stanley in connection with rendering its fairness
opinion. Finally, Morgan Stanley indicated that failure to consummate the Merger
would likely be viewed by investors as having adversely affected the
relationship between the Company and The Irvine Company, and therefore the price
of the Common Stock would likely be affected. The Special Committee and the
Board of Directors took the view of Morgan Stanley into account in their
evaluation of the Merger. While neither the Special Committee nor the Board of
Directors formally adopted the view of Morgan Stanley, they concluded that the
Merger was fair to, and in the best interests of, the Nonaffiliated
Shareholders. Following the discussions with Morgan Stanley, the Special
Committee recommended that the Board of Directors and the Independent Directors
Committee each approve the Merger Proposal. After full discussion, the Board of
Directors and the Independent Directors Committee each unanimously determined
that the Merger Proposal was fair to, and in the best interests of, the
Nonaffiliated Shareholders, and adopted resolutions to approve and adopt the
Merger Proposal and to recommend that the Shareholders vote to approve and adopt
the Merger Proposal.
Later on February 1, 1999, the Company and the Acquiror entered into a
definitive merger agreement, a copy of which is attached as Appendix A to this
Proxy Statement. The Company and The Irvine Company also entered into a letter
agreement, a copy of which is attached as Appendix C to this Proxy Statement.
On February 2, 1999, prior to the open of trading on the NYSE, the Company
and the Acquiror issued a joint press release announcing that they had signed a
definitive merger agreement under which, upon the merger of the Company into the
Acquiror, the Shareholders would receive $34.00 in cash per share.
PRELIMINARY ANALYSES CONDUCTED FOR THE SPECIAL COMMITTEE
The Special Committee retained Morgan Stanley to act as the Company's
financial advisor with respect to the proposed merger and related matters. At
meetings of the Special Committee on both December 22, 1998 and January 14,
1999, Morgan Stanley reviewed with the Special Committee preliminary financial
and comparative analyses of the Company. These analyses, although not complete
at the time, were prepared for two major purposes: (i) for the purpose of
providing the Special Committee with an update as to Morgan Stanley's valuation
analyses performed to date and (ii) for purposes of negotiation with the
Acquiror, The Irvine Company and NationsBanc Montgomery.
THE FOLLOWING IS A SUMMARY OF PRELIMINARY ANALYSES PREPARED BY MORGAN
STANLEY AND DISCUSSED WITH THE SPECIAL COMMITTEE ON DECEMBER 22, 1998 AND
JANUARY 14, 1999. THE INFORMATION CONTAINED IN THE PRELIMINARY ANALYSES WAS
PREPARED AS A NEGOTIATING TOOL AND TO PROVIDE THE SPECIAL COMMITTEE WITH SOME
BACKGROUND INFORMATION WITH RESPECT TO POSSIBLE ALTERNATIVES IN CONNECTION WITH
THE OFFER MADE BY THE ACQUIROR. IT IS IMPORTANT TO NOTE THAT NEITHER THE DUE
DILIGENCE NOR THE ANALYSES PERFORMED BY MORGAN STANLEY REFLECTED IN THE ABOVE
REFERENCED DRAFTS WERE COMPLETE AT THE TIME THE PRELIMINARY DRAFTS WERE PREPARED
AND THEY WERE NOT INTENDED TO BE RELIED UPON BY THE SPECIAL COMMITTEE OR ANY
THIRD PARTIES, INCLUDING THE SHAREHOLDERS. THE SPECIAL COMMITTEE WAS AWARE OF
THE STATUS OF AND THE PRELIMINARY NATURE OF THE DRAFTS AND THE FACT THAT THEY
WERE NOT TO BE RELIED UPON. THE PRELIMINARY DRAFTS WERE PREPARED AS OF DECEMBER
22, 1998 AND JANUARY 14, 1999 AND REFLECT INFORMATION MADE AVAILABLE TO MORGAN
STANLEY PRIOR TO SUCH DATES. THEREFORE, MORGAN STANLEY'S PRELIMINARY ANALYSES
PERFORMED AS OF DECEMBER 22, 1998 AND JANUARY 14, 1999 DO NOT AND DID NOT AS OF
THE DATES THEY WERE PROVIDED TO THE SPECIAL COMMITTEE REFLECT THE FINAL VIEWS OF
MORGAN STANLEY WITH RESPECT TO MORGAN STANLEY'S VALUATION OF THE COMPANY OR AN
OPINION AS TO THE FAIRNESS OF THE PROPOSED TRANSACTION.
20
<PAGE> 28
In preparing the preliminary analyses, Morgan Stanley assumed and relied
upon, without independent verification, the accuracy and completeness of the
information reviewed by Morgan Stanley for the purposes of its analyses. With
respect to the financial projections, Morgan Stanley assumed that such
information had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company. Further, Morgan Stanley relied upon the Company's estimates of the
synergies and other cost savings to be realized pursuant to the proposed merger.
Morgan Stanley did not make any independent valuation or appraisal of the assets
or liabilities of the Company, nor was Morgan Stanley provided with any such
appraisals. In addition, as discussed above, the preliminary analyses were
prepared primarily for negotiation purposes, and they should be treated
accordingly. The Morgan Stanley analyses are necessarily based on economic,
market and other conditions as in effect on, and the information made available
to Morgan Stanley as of, December 22, 1998 and January 14, 1999.
December 22, 1998 Special Committee Meeting
Net Asset Value. Morgan Stanley estimated the net asset value of the
Company based on a property-by-property analysis. For stabilized properties, a
range of capitalization rates based on recent, comparable market transactions
was applied to estimates of 1999 net operating income, based on rent growth
projections ranging from 5% to 10%. Properties under development were valued
using a discounted cash flow analysis through the stabilization period using
discount rates ranging from 12% to 16% and applying capitalization rates ranging
from 7.25% to 8.25% to estimate terminal value. Morgan Stanley then added an
estimated value associated with the Land Rights Agreement based upon the
Company's right to purchase land from The Irvine Company at below-market prices
(the "LRA Value"). The estimated LRA Value was added to the net asset value
based upon the Company's right to purchase land from The Irvine Company at
below-market prices. The estimated LRA Value was estimated at $50 million to
$100 million based upon a total build-out of 17,000 units through the Land
Rights Agreement expiration date, and assuming a 5% to 15% discount to projected
land sales based upon a historical review of appraisals under the Land Rights
Agreement. The gross value of the assets was reduced by the estimated value of
the Company's outstanding consolidated debt and preferred equity to arrive at a
net asset value range of $35.00 to $44.00 per fully diluted share, as compared
to the offer price as of that date of $32.50 per share.
Discounted Cash Flow. Morgan Stanley performed discounted cash flow
analyses of the Company based upon the preliminary due diligence performed and
the projections provided by the Company and rental growth assumptions ranging
from 5% to 9%. Morgan Stanley performed two separate discounted cash flow
analyses using the varying rental growth rates: dividend discount and leveraged
recapitalization. The dividend discount model discounted dividends per share for
the years 1999 through 2003, using discount rates reflecting an expected equity
total return and applying terminal multiples on 2004 funds from operations
("FFO"). The expected equity total return was determined based upon comparable
companies' dividend yields plus expected FFO growth. The leveraged
recapitalization analysis assumed that debt would be raised to purchase the
outstanding public shares and projected dividends based upon 50% of funds
available for distribution after all projected capital expenditures. The
projected dividends were discounted for the years 1999 through 2003. The ranges
of estimated present values per share of Common Stock pursuant to the discounted
cash flow analyses are shown below, as compared to the offer price as of that
date of $32.50 per share:
<TABLE>
<CAPTION>
METHODOLOGY DISCOUNT RATE TERMINAL MULTIPLE PER SHARE VALUE RANGE
----------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
Dividend Discount............... 13.0% to 15.0% 9.0x to 10.5x $34.00 to $43.00
Leveraged Recapitalization...... 14.5% to 16.5% 8.5x to 10.0x $33.00 to $43.00
</TABLE>
Analyses of Selected Comparable Publicly Traded Companies. Morgan Stanley
reviewed the trading statistics of selected comparable publicly traded apartment
REITs, selected on the basis of their size, portfolio characteristics and
geographic concentration or presence in high-barrier-to-entry markets. The
comparable companies selected are listed below:
- Archstone Communities Trust
- AvalonBay Apartment Communities Inc.
21
<PAGE> 29
- BRE Properties Inc.
- Equity Residential Properties Trust
- Essex Property Trust Inc.
- Post Properties Inc.
Such trading statistics included aggregate value earnings before interest,
taxes, depreciation and amortization expense ("EBITDA") multiples, price to FFO
multiples, price to normalized FFO multiples, dividend yields, and multiple to
total return ratios, based on consensus security analyst estimates for 1999 as
reported by First Call. The normalized FFO multiples were calculated based on
normalizing each company's 1999 projected FFO to a target leverage ratio of 35%
debt to market capitalization based upon the comparable companies' average
leverage levels. The multiple to total return ratios were obtained by dividing
the FFO trading multiple for each company by its total return, computed as the
sum of its annualized reported dividend yield and the consensus analyst estimate
of the long term growth rate as reported by First Call.
Morgan Stanley then added the estimated LRA Value, as calculated above, to
the values estimated by applying trading statistics of the comparable companies
to the Company.
The following table presents, as of December 22, 1998, the range of
multiples of the comparable companies and the resulting implied value range for
the Common Stock. The comparable company information was based upon consensus
security analyst estimates for 1999 as reported by First Call.
<TABLE>
<CAPTION>
AGGREGATE VALUE/
LAST TWELVE PRICE/NORMALIZED
MONTHS PRICE/1999E DIVIDEND DIVIDEND MULTIPLE TO
EBITDA FFO 1999E FFO YIELD TOTAL RETURN
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
COMPARABLE COMPANIES
INFORMATION......... 13.3x to 16.6x 9.1x to 10.4x 9.8x to 10.8x 5.9% to 7.6% .52x to .65x
COMPANY COMMON STOCK
ESTIMATED VALUE
RANGE............... $22.35 to $32.46 $27.04 to $30.59 $29.08 to $31.74 $26.64 to $33.74 $28.64 to $35.38
</TABLE>
No company utilized as a comparison in the comparable companies analysis is
identical to the Company. In evaluating the comparable companies, Morgan Stanley
made judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of the Company, such as the impact of competition
on the Company and the industry generally, industry growth and the absence of
any adverse material change in the financial condition and prospects of the
Company or the industry or in the financial markets in general.
Ability-to-Pay Analysis. Morgan Stanley analyzed the estimated purchase
price that could be paid by another public apartment company based on a variety
of assumptions as to the potential acquiror's acceptable level of earnings
accretion or dilution. Based upon each company's cost of debt and equity, a
supportable purchase price was calculated assuming the price would result in
break-even earnings or be slightly dilutive. To arrive at the break-even and
slightly dilutive prices, the Company's 1999 estimated FFO was divided by the
blended cost of debt and equity. The blended cost of debt and equity was
determined based on the debt and preferred equity to total market capitalization
ratio multiplied by the cost of debt, and the equity market capitalization to
total market capitalization ratio multiplied by the inverse of the FFO multiple
which equates to the cost of equity. The resulting comparable companies
supportable price ranged from $32.00 to $35.00.
Analyses of Selected Comparable Transactions. Morgan Stanley compared the
principal terms of the Merger with those of selected other comparable
transactions. Morgan Stanley analyzed two groups of selected precedent
transactions: public multi-family REIT transactions and minority shareholder
transactions.
22
<PAGE> 30
PUBLIC MULTI-FAMILY REIT TRANSACTIONS
<TABLE>
<CAPTION>
DATE ANNOUNCED ACQUIROR ACQUIREE
-------------- -------- --------
<S> <C> <C>
July 8, 1998 Equity Residential Properties Trust Merry Land & Investment Company
April 2, 1998 Security Capital Pacific Trust Security Capital Atlantic
March 8, 1998 Bay Apartment Communities Avalon Properties
December 23, 1997 Apartment Investment and Management Ambassador Properties
Company
December 17, 1997 Camden Property Trust Oasis Residential
August 28, 1997 Equity Residential Properties Trust Evans Withycombe
August 4, 1997 Post Properties Trust Columbus Realty Trust
January 17, 1997 Equity Residential Properties Trust Wellsford Residential
December 16, 1996 Camden Property Trust Paragon Group, Inc.
October 1, 1996 United Dominion Realty South West Property Trust
October 1, 1995 BRE Properties Inc. REIT of California
</TABLE>
Based on the average trading prices for the ten trading days ending five
trading days prior to the public announcement of each of the public multi-family
REIT transactions, the average premium paid for the company being acquired by
the surviving company was 11.7% and ranged from (1.0)% to 20.7% for the selected
transaction. On the same computation basis, the premium to be paid by the
Acquiror pursuant to the proposed merger with the Company was 19.1%, based upon
the offer price as of that date of $32.50. However, these transactions
represented stock for stock merger transactions and Morgan Stanley believed,
therefore, that these transactions were not comparable to the proposed merger
under discussion.
23
<PAGE> 31
The second group of transactions analyzed involved minority squeeze-out
transactions in which the majority shareholder bought out the minority
shareholders. A sampling of 24 transactions from 1992 to 1998 was reviewed:
MINORITY SHAREHOLDER TRANSACTIONS
<TABLE>
<CAPTION>
DATE ANNOUNCED ACQUIROR ACQUIREE
-------------- -------- --------
<S> <C> <C>
October 19, 1998 Affiliated Computer Services, BRC Holdings Inc.
Inc
September 23, 1998 Usinor SA J&L Specialty Steel Inc.
July 7, 1998 Dexter Corporation Life Technologies
June 2, 1998 BT OPI Acquisition Corp BT Office Products
International
May 26, 1998 Dow AgroSciences Mycogen Corp.
March 16, 1998 Robert L. Johnson and Liberty BET Holdings Inc.
Media
March 4, 1998 Xerox Corporation XL Connect Solutions, Inc.
February 27, 1998 World Access, Inc. NACT Telecommunications
January 8, 1998 Rayonier Inc. Rayonier Timberlands LP
August 1, 1997 RP Vehicle, Inc. Rhone-Poulenc Rorer Inc.
June 20, 1997 Waste Management, Inc. Wheelabrator Technologies Inc.
June 3, 1997 F.H. Faulding & Co. Ltd. Faulding Inc.
April 17, 1997 Zurich Insurance Inc. Zurich Reinsurance Centre
Holdings Inc.
January 28, 1997 Monsanto Calgene Inc.
January 13, 1997 Novartis AG Systemix Inc.
December 17, 1996 Allmerica Financial Corp. Allmerican Ppty. & Casualty
Cos.
August 8, 1996 Chemed Corp Roto Rooter Inc.
October 18, 1995 Rhone-Poulenc Rorer Inc. Applied Immune Sciences
April 5, 1995 Club Mediterranee S.A. Club Med, Inc.
March 7, 1995 AT&T Co. Lin Broadcasting Corp.
April 28, 1994 MacFadden Holdings & Boston Enquirer/Star Group Inc.
Ventures
November 23, 1993 Triarc Co. Southeastern Public Service Co.
October 13, 1993 Medco Containment Services Medical Marketing Group Inc.
Inc.
August 17, 1992 Leucadia National Corp. PHLCorp Inc.
</TABLE>
The premiums paid ranged widely from approximately 0% to 50%. Applying the
premiums paid from the selected minority transactions resulted in a value range
of $30.00 to $35.00.
No transaction utilized as a comparison in a comparable transaction
analysis is identical to the Merger in timing, size and currency, and,
accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning financial and operating
characteristics of the Company and other factors that would affect the
acquisition value of companies to which it is being compared. In evaluating the
selected comparable transactions, Morgan Stanley made judgments and assumptions
with regard to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the Company, such as the absence of any adverse material change in the financial
conditions and prospects of the Company or the industry or in the financial
markets in general.
Wall Street's Views. Morgan Stanley reviewed the price estimates and net
asset value estimates for the Company as reported by Green Street Advisors,
Morgan Stanley Dean Witter, CIBC Oppenheimer, Jefferies & Company, Sutro & Co.,
the Penobscot Group, and Realty Stock Review. Morgan Stanley reviewed the net
asset and price target valuations published by the analysts prior to the
December 1, 1998 offer date, and after December 1, 1998. From October 5, 1998 to
December 10, 1998 (post-announcement), the net asset value
24
<PAGE> 32
estimates from these analysts ranged from $24.00 to $35.28 per share. In the
same time period, 12-month price targets ranged from $30.00 to $37.47 per share.
January 14, 1999 Special Committee Meeting
Morgan Stanley reviewed a summary of its preliminary financial analyses as
of that date to the Special Committee on January 14, 1999. Analysis had
continued since the December 22, 1998 meeting based upon, among other things,
further review of updated Orange County rental surveys, review of recent
apartment sale transactions, discussions with Company management, review of
materials received from NationsBanc Montgomery, and assumption and valuation
discussions with NationsBanc Montgomery. Morgan Stanley noted that although it
had performed certain additional due diligence, the January 14, 1999 preliminary
analysis was not complete and was subject to further review and completion of
further due diligence.
Net Asset Value. Morgan Stanley estimated the net asset value of the
Company based on a property-by property analysis. For stabilized properties, a
range of capitalization rates based on recent, comparable market transactions
was applied to estimates of 1999 net operating income, based on rent growth
projections ranging from 7% to 12%. Properties under development were valued
using a discounted cash flow analysis through the stabilization period using
discount rates ranging from 12% to 16% and applying capitalization rates ranging
from 7.25% to 8.25% to estimate terminal value. The estimated LRA Value was
added to the net asset value based upon the Company's right to purchase land
from The Irvine Company at below-market prices. The estimated LRA Value was
estimated at $50 million to $100 million based upon a total build-out of 14,359
units through the expiration date of the Land Rights Agreement, and assuming a
5% to 15% discount to projected land sales based upon a historical review of
appraisals under of the Land Rights Agreement. The gross value of the assets
were reduced by the estimated value of the Company's outstanding consolidated
debt and preferred equity to arrive at a net asset value range of $34.50 to
$40.00 per fully diluted share, as compared to the offer price as of that date
of $32.50 per share.
Discounted Cash Flow. Morgan Stanley performed discounted cash flow
analyses of the Company based upon projections provided by the Company and
rental growth assumptions ranging from 7% to 12%. Morgan Stanley performed three
separate discounted cash flow analyses at the assumed rental growth rates:
dividend discount, free cash flow and leveraged recapitalization. The dividend
discount model discounted dividends per share for the years 1999 through 2003,
using discount rates reflecting an expected equity total return and applying
terminal multiples on 2004 FFO. The expected equity total return was determined
based upon comparable companies' dividend yields plus expected FFO growth, and
cost of equity calculations derived by the Capital Asset Pricing Model ("CAPM").
The free cash flow methodology discounted all available cash flow before
interest and dividends for the years ending December 31, 1999 through December
31, 2003, using discount rates reflecting a weighted average cost of capital of
9.5% to 10.5% and terminal multiples on 2004 EBITDA of 11.0x to 12.0x. The
leveraged recapitalization analysis assumed that debt would be raised to
purchase the outstanding public shares and projected dividends based upon 50% of
funds available for distribution after all projected capital expenditures. The
projected dividends were discounted for the years 1999 through 2003. The ranges
of estimated present values per share of Common Stock pursuant to the discounted
cash flow analyses are shown below, as compared to the offer price as of that
date of $32.50 per share:
<TABLE>
<CAPTION>
METHODOLOGY DISCOUNT RATE TERMINAL MULTIPLE PER SHARE VALUE RANGE
----------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
Dividend Discount............... 11.0% to 13.0% 9.5x to 11.5x $32.50 to $43.00
Free Cash Flow.................. 9.5% to 10.5% 11.0x to 12.5x $33.00 to $45.00
Leveraged Recapitalization...... 14.0% to 16.0% 8.0x to 10.0x $33.50 to $46.00
</TABLE>
Analyses of Selected Comparable Publicly Traded Companies. Morgan Stanley
reviewed the trading statistics of selected comparable publicly traded apartment
REITs, selected on the basis of the size, portfolio characteristics and
geographic concentration or presence in high-barrier-to-entry markets. The
comparable companies selected are listed below:
- Archstone Communities Trust
25
<PAGE> 33
- AvalonBay Apartment Communities Inc.
- BRE Properties Inc.
- Equity Residential Properties Trust
- Essex Property Trust Inc.
- Post Properties Inc.
Such trading statistics included aggregate value to EBITDA multiples, price
to FFO multiples, price to normalized FFO multiples, dividend yields, and
multiple to total return ratios, based on consensus security analyst estimates
for 1999 as reported by First Call. The normalized FFO multiples were calculated
based on normalizing each company's 1999 projected FFO to a target leverage
ratio of 35% debt to market capitalization based upon the comparable companies'
average leverage levels. The multiple to total return ratios were obtained by
dividing the FFO trading multiple for each company by its total return, computed
as the sum of its annualized reported dividend yield and the consensus analyst
estimate of the long term growth rate as reported by First Call.
Morgan Stanley then added the estimated LRA Value, as calculated above, to
the values estimated by applying trading statistics of the comparable companies
to the Company.
The following table presents, as of January 14, 1999, the range of
multiples of the comparable companies and the resulting implied value range for
the Common Stock. The comparable company information was based upon consensus
security analyst estimates for 1999 as reported by First Call.
<TABLE>
<CAPTION>
AGGREGATE VALUE/
LAST TWELVE PRICE/NORMALIZED
MONTHS PRICE/1999E DIVIDEND DIVIDEND MULTIPLE TO
EBITDA FFO 1999E FFO YIELD TOTAL RETURN
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
COMPARABLE COMPANIES
INFORMATION......... 13.3x to 16.6x 9.2x to 10.5x 9.9x to 11.0x 5.8% to 7.5% .52x to .73x
COMPANY COMMON STOCK
ESTIMATED VALUE
RANGE............... $22.40 to $32.31 $27.42 to $30.89 $29.21 to $32.40 $26.64 to $33.74 $28.42 to $36.30
</TABLE>
No company utilized as a comparison in the comparable companies analysis is
identical to the Company. In evaluating the comparable companies, Morgan Stanley
made judgements and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of the Company, such as the impact of competition
on the Company and the industry generally, industry growth and the absence of
any adverse material change in the financial condition and prospects of the
Company or the industry or in the financial markets in general.
Ability-to-Pay Analysis. Morgan Stanley analyzed the estimated purchase
price that could be paid by another public apartment company based on a variety
of assumptions as to the potential acquiror's acceptable level of earnings
accretion or dilution. Based upon each company's cost of debt and equity, a
supportable purchase price was calculated assuming the price would result in
break-even earnings or be slightly dilutive. To arrive at the break-even and
slightly dilutive prices, the Company's 1999 estimated FFO was divided by the
blended cost of debt and equity. The blended cost of debt and equity was
determined based on the debt and preferred equity to total market capitalization
ratio multiplied by the cost of debt, and the equity market capitalization to
total market capitalization ratio multiplied by the inverse of the FFO multiple
which equates to the cost of equity. The resulting comparable companies
supportable price ranged from $32.50 to $35.50.
Analyses of Selected Comparable Transactions. Morgan Stanley compared the
principal terms of the proposed merger with those of selected other comparable
transactions. Morgan Stanley analyzed two groups of selected transactions:
public multi-family REIT transactions and minority shareholder transactions.
26
<PAGE> 34
PUBLIC MULTI-FAMILY REIT TRANSACTIONS
<TABLE>
<CAPTION>
DATE
ANNOUNCED ACQUIROR ACQUIREE
--------- -------- --------
<S> <C> <C>
July 8, 1998 Equity Residential Properties Trust Merry Land & Investment Company
April 2, 1998 Security Capital Pacific Trust Security Capital Atlantic
March 8, 1998 Bay Apartment Communities Avalon Properties
December 23, 1997 Apartment Investment and Ambassador Properties
Management Company
December 17, 1997 Camden Property Trust Oasis Residential
August 28, 1997 Equity Residential Properties Trust Evans Withycombe
August 4, 1997 Post Properties Trust Columbus Realty Trust
January 17, 1997 Equity Residential Properties Trust Wellsford Residential
December 16, 1996 Camden Property Trust Paragon Group, Inc.
October 1, 1996 United Dominion Realty South West Property Trust
October 1, 1995 BRE Properties Inc. REIT of California
</TABLE>
Based on the average trading prices for the ten trading days ending five
trading days prior to the public announcement of each of the public multi-family
REIT transactions, the average premium paid for the company being acquired by
the surviving company was 11.7% and ranged from (1.0)% to 20.7% for the selected
transaction. On the same computation basis, the premium to be paid by the
Acquiror pursuant to the Merger for the Company was 19.1%, based upon the offer
price as of that date of $32.50. However, these transactions represented stock
for stock merger transactions and Morgan Stanley believed, therefore, that these
transactions were not comparable to the proposed merger under discussion.
27
<PAGE> 35
The second group of transactions analyzed involved minority squeeze-out
transactions in which the majority shareholder bought out the minority
shareholders. A sampling of 24 transactions from 1992 to 1998 was reviewed:
MINORITY SHAREHOLDER TRANSACTIONS
<TABLE>
<CAPTION>
DATE ANNOUNCED ACQUIROR ACQUIREE
-------------- -------- --------
<S> <C> <C>
October 19, 1998 Affiliated Computer Services, BRC Holdings Inc.
Inc
September 23, 1998 Usinor SA J&L Specialty Steel Inc.
July 7, 1998 Dexter Corporation Life Technologies
June 2, 1998 BT OPI Acquisition Corp BT Office Products
International
May 26, 1998 Dow AgroSciences Mycogen Corp.
March 16, 1998 Robert L. Johnson and Liberty BET Holdings Inc.
Media
March 4, 1998 Xerox Corporation XL Connect Solutions, Inc.
February 27, 1998 World Access, Inc. NACT Telecommunications
January 8, 1998 Rayonier Inc. Rayonier Timberlands LP
August 1, 1997 RP Vehicle, Inc. Rhone-Poulenc Rorer Inc.
June 20, 1997 Waste Management, Inc. Wheelabrator Technologies Inc.
June 3, 1997 F.H. Faulding & Co. Ltd. Faulding Inc.
April 17, 1997 Zurich Insurance Inc. Zurich Reinsurance Centre
Holdings Inc.
January 28, 1997 Monsanto Calgene Inc.
January 13, 1997 Novartis AG Systemix Inc.
December 17, 1996 Allmerica Financial Corp. Allmerican Ppty. & Casualty
Cos.
August 8, 1996 Chemed Corp Roto Rooter Inc.
October 18, 1995 Rhone-Poulenc Rorer Inc. Applied Immune Sciences
April 5, 1995 Club Mediterranee S.A. Club Med, Inc.
March 7, 1995 AT&T Co. Lin Broadcasting Corp.
April 28, 1994 MacFadden Holdings & Boston Enquirer/Star Group Inc.
Ventures
November 23, 1993 Triarc Co. Southeastern Public Service Co.
October 13, 1993 Medco Containment Services Medical Marketing Group Inc.
Inc.
August 17, 1992 Leucadia National Corp. PHLCorp Inc.
</TABLE>
The premiums paid ranged widely from approximately 0% to 50%. Applying the
premiums paid from the minority transactions resulted in a value range of $30.00
to $35.00.
No transaction utilized as a comparison in a comparable transaction
analysis is identical to the Merger in timing, size and currency, and,
accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning financial and operating
characteristics of the Company and other factors that would affect the
acquisition value of companies to which it is being compared. In evaluating the
selected comparable transactions, Morgan Stanley made judgments and assumptions
with regard to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the Company, such as the absence of any adverse material change in the financial
conditions and prospects of the Company or the industry or in the financial
markets in general.
Wall Street's Views. Morgan Stanley reviewed the price estimates and net
asset value estimates for the Company as reported by Green Street Advisors,
Morgan Stanley Dean Witter, CIBC Oppenheimer, Jefferies & Company, Sutro & Co.,
the Penobscot Group, and Realty Stock Review. Morgan Stanley reviewed the net
asset and price target valuations published by the analysts prior to the
December 1, 1998 offer date, and after December 1, 1998. From October 5, 1998 to
December 10, 1998 (post-announcement), the net asset value estimates from these
analysts ranged from $24.00 to $35.28 per share. In the same time period,
12-month price targets ranged from $30.00 to $37.47 per share.
28
<PAGE> 36
MAJOR DIFFERENCES BETWEEN NATIONSBANC MONTGOMERY'S AND MORGAN STANLEY'S
PRELIMINARY ANALYSES
At the January 14, 1999 Special Committee meeting, Morgan Stanley reviewed
with the Special Committee discussions that had occurred with NationsBanc
Montgomery up until the date thereof and outlined the major differences between
NationsBanc Montgomery's and Morgan Stanley's preliminary valuation assumptions.
The following discussion of Morgan Stanley's preliminary valuations and
assumptions is subject to all of the qualifications set forth above under
"-- Preliminary Analyses Conducted for the Special Committee." The major
differences in assumptions could be summarized as follows:
<TABLE>
<CAPTION>
MORGAN STANLEY NATIONSBANC MONTGOMERY
------------------------------ ----------------------
<S> <C> <C>
RENTAL GROWTH................. 5% to 12% 5%
LIQUIDITY DISCOUNT............ None 10%
LAND RIGHTS AGREEMENT......... $50 MM - $100 MM $10 MM
CAPITALIZATION RATES.......... 7.25% to 8.25% 7.25% to 8.00%
Applied to net operating Applied to cash flow
income
DISCOUNT RATES................ 11% to 13% cost of equity 11% to 13% weighted
9.5% to 10.5% weighted average average cost of
cost of capital capital
14% to 16% leveraged
recapitalization cost of
equity
</TABLE>
Rental Growth. NationsBanc Montgomery utilized a 5% rental growth
assumption for calendar year 1999 based upon the Company's 1999 Business Plan
and references to publicly available Orange County rental growth studies and
publicly available equity analyst research reports. Morgan Stanley utilized a
range of rent growth rates ranging from 5% to 12% based upon discussions with
the Company's management, a review of publicly available Orange County rental
growth studies, and information presented by Mr. Bren at the Company's October
30, 1998 Board meeting that suggested a recent rental growth rate for certain
competitive properties in the range of 12%.
NationsBanc Montgomery noted that its understanding was Mr. Bren's
information was historical and intended as a basis for reviewing the Company
management's assumed 5% rental growth rate in the 1999 Business Plan, which Mr.
Bren thought was too conservative. NationsBanc Montgomery also noted that
management disagreed with the information presented and the conclusions reached
by Mr. Bren. NationsBanc Montgomery noted that the Board of Directors, including
Mr. Bren, unanimously adopted management's plan as the base case. However, as
noted above in "-- Background of the Merger," the Board of Directors agreed that
management would undertake to develop an additional 1999 Business Plan which
would reflect actual growth rates in the relevant competitive California
markets.
Liquidity Discount. NationsBanc Montgomery utilized a 10% bulk discount
based on NationsBanc Montgomery's experience, the aggregate size of the
Company's portfolio, the time value of money and anticipated fees associated
with liquidation. Morgan Stanley did not apply a bulk discount due to the fact
that Morgan Stanley was not estimating liquidation value; rather Morgan Stanley
was estimating the net asset value, which is a static estimate of value, not a
liquidation value.
Land Rights Agreement. NationsBanc Montgomery valued the Land Rights
Agreement based upon the 1999 Business Plan and assumed that 5,763 units were
potentially available for development over a period of five years. In addition,
NationsBanc Montgomery applied a 5% discount to the fair market value of
projected land sales determined by independent appraisals and an average land
price of $50,000 per acre. Morgan Stanley assumed that approximately 14,000
units could be developed based on discussions with the Company's management
indicating that the total build-out of the Irvine Ranch property is 30,000 units
and that approximately 16,000 units had been built. NationsBanc Montgomery noted
that historical building rates for the Company indicated that half of the number
of assumed units would be built in that period of time. Morgan Stanley
discounted the cash flows through the date upon which the Land Rights Agreement
expires. In addition, Morgan Stanley applied a 5% to 15% discount based upon a
review of the historical land prices paid over the last four years under the
Land Rights Agreement. NationsBanc Montgomery noted a 5% discount was specified
in the Land Rights Agreement. The land prices paid as compared to independent
29
<PAGE> 37
appraisals procured by The Irvine Company resulted in discounts ranging from 14%
to 73% of the appraised value. Morgan Stanley utilized an average land price
range of $50,000 to $75,000 per unit based on recent land sale comparables.
Morgan Stanley also believed that if NationsBanc Montgomery's assertion that
14,000 units would not be delivered to the Company in the future for various
reasons were correct, then rents would likely increase due to lack of
competition.
Capitalization Rates. NationsBanc Montgomery applied capitalization rates
of 7.25% to 8.0% to cash flow, after capital expenditures, whereas Morgan
Stanley applied capitalization rates of 7.25% to 8.25% to net operating income.
The financial advisors disagreed over which recent transactions in Orange County
and San Diego County were most relevant and comparable, leading to the
differences in capitalization rates used.
Discount Rates. NationsBanc Montgomery applied discount rates ranging from
11% to 13%, based upon the 1999 Business Plan estimated cost of equity of 15%
and the Company's assumed cost of debt, resulting in a weighted average cost of
capital ("WACC") of 11.8%. Morgan Stanley derived the cost of equity of 11% to
13% utilized in the dividend discount cash flows based upon a review of
comparable companies' dividend yields plus expected FFO, a review of cost of
equity calculations derived through the CAPM, and a review of asset returns and
the Company's cost of debt. The free cash flow methodology discount rates
reflected a WACC of 9.5% to 10.5% based upon the above assumed cost of equity
and the Company's cost of debt. The cost of equity utilized in the leveraged
recapitalization analysis of 14% to 16% was slightly higher, reflecting the
additional risk in the leveraged scenario.
Generally speaking, the valuation analyses based on the assumptions used by
Morgan Stanley indicated values in excess of $32.50 and the valuation analyses
based on the assumptions used by NationsBanc Montgomery indicated values at or
below $32.50.
THE ACQUIROR'S PURPOSE; STRUCTURE OF THE MERGER
Purpose. The purpose of the Merger is for the Acquiror and The Irvine
Company to acquire the assets of the Company, while providing the Nonaffiliated
Shareholders with the opportunity to liquidate their investment in the Company
for cash at a price representing a significant premium to market prices for the
Common Stock prior to the announcement of the Acquiror's acquisition offer
(although below the midpoint of the per share net asset value range determined
by the Company's financial advisor, Morgan Stanley). The Acquiror and The Irvine
Company decided to make a proposal to acquire the Company on December 1, 1998
because of their determination that the Company's REIT structure was
disadvantageous for real estate development in the current economic environment.
Alternatives. Prior to reaching their decision to pursue the Merger, the
Acquiror, The Irvine Company and Mr. Bren considered various alternatives to the
Merger, including: (i) a two-step acquisition of the Company, consisting of a
first step tender offer and a second step merger; (ii) a purchase of the
Company's general partnership interest in the Operating Partnership; and (iii)
continuing The Irvine Company's existing ownership interest in the Company.
The primary benefit to the Acquiror, The Irvine Company and Mr. Bren of the
two-step acquisition alternative was the potential to consummate an acquisition
of the Company in a short time period and, potentially, avoid the time and
expense of seeking Shareholder approval at a meeting of the Shareholders. The
Acquiror, The Irvine Company and Mr. Bren ultimately rejected this alternative,
however, primarily because they believed that the two-step structure would have
increased the federal income tax cost of the Merger. The Acquiror, The Irvine
Company and Mr. Bren believed that, under the two-step structure, the Acquiror's
acquisition of shares in the first-step tender offer would have likely caused
the Company to fail to qualify as a REIT for the 1999 tax year, thus triggering
significant tax liability.
The Acquiror, The Irvine Company and Mr. Bren considered the alternative of
purchasing the Company's general partnership interest in the Operating
Partnership because it offered many of the advantages of the Merger, including
favorable tax consequences to the Surviving Company. The Acquiror, The Irvine
Company and Mr. Bren ultimately rejected this alternative, however, because it
presented no
30
<PAGE> 38
material benefits relative to the Merger structure and would result in the
Company surviving as a public entity without any significant operations.
The Acquiror, The Irvine Company and Mr. Bren also considered maintaining
The Irvine Company's current investment in the Company. The Acquiror, The Irvine
Company and Mr. Bren rejected this alternative due to the potential benefits
(discussed below) of the Merger.
Benefits and Detriments of the Merger to the Acquiror, The Irvine Company
and Mr. Bren. The primary benefits of the Merger to the Acquiror, The Irvine
Company and Mr. Bren are the following:
- enabling The Irvine Company to manage directly the Operating Partnership
and thereby integrate The Irvine Company's apartment activities with its
other activities in achieving its master plan for the Irvine Ranch;
- increasing The Irvine Company's flexibility to retain capital by
eliminating the need to comply with the distribution requirements imposed
by tax laws applicable to REITs;
- reducing overall operational and administrative costs by eliminating the
costs associated with public ownership of the Company (recognizing that
the Operating Partnership and IAC Capital Trust will continue to be
reporting companies), including the costs of investor relations, public
reporting, mailings of dividends to shareholders, directors' and
officers' liability insurance, directors' fees, administration of the
Company's treasury department, legal expenses and consultant fees, which
the Acquiror estimates will result in total annual cost savings in excess
of $2.5 million; and
- providing tax benefits associated with increasing the potential
depreciation of the assets acquired by the Acquiror in the Merger.
The detriments of the completion of the Merger to the Acquiror, The Irvine
Company and Mr. Bren will be (i) the significant cash outlay by the Acquiror
required to complete the Merger and (ii) the Surviving Company's inability to
use publicly traded securities as acquisition capital.
No Offer Made to Holders of Limited Partner Interests in the Operating
Partnership. Because the Acquiror's current intention is to retain the
outstanding preferred equity of the Operating Partnership, no offer has been
made by the Acquiror or The Irvine Company to purchase the preferred equity.
Because The Irvine Company and its subsidiaries hold all of the Common L.P.
Units in the Operating Partnership (other than the 0.7% Common L.P. Unit
interest held by Stonecrest (a limited liability company indirectly wholly owned
by Mr. Bren) and the 0.2% Common L.P. Unit interest held by TRC, no offer has
been made to holders of the Operating Partnership's common partnership
interests. However, see "Certain Relationships and Transactions -- Agreement
with Messrs. Thompson, Dorfman and Hughes."
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS; FAIRNESS OF
THE MERGER
At a meeting held on February 1, 1999, the Special Committee unanimously
determined (i) to recommend that the Board of Directors approve and adopt the
Merger Proposal and that the Board of Directors recommend to the Shareholders
that they vote to approve and adopt the Merger Proposal; (ii) to recommend to
the Shareholders that they vote to approve and adopt the Merger Proposal; and
(iii) that the terms of the Merger Proposal are fair to, and in the best
interests of, the Nonaffiliated Shareholders. At a meeting of the Board of
Directors held on February 1, 1999, at which all of the Directors were present,
the Board of Directors, based on the unanimous recommendation of the Special
Committee, unanimously (x) approved and adopted the Merger Proposal; (y)
determined to recommend to the Shareholders that they vote to approve and adopt
the Merger Proposal; and (z) determined that the terms of the Merger Proposal
are fair to, and in the best interests of, the Nonaffiliated Shareholders. See
"-- Background of the Merger" and "-- The Acquiror's Purpose; Structure of the
Merger."
The Special Committee. In determining to recommend to the Board of
Directors that it approve and adopt the Merger Proposal, and in determining that
the Merger Proposal was fair to, and in the best interests of, the Nonaffiliated
Shareholders, the Special Committee considered factors, each of which, in the
Special
31
<PAGE> 39
Committee's view, supported the Special Committee's determination to recommend
the Merger Proposal. The material supporting factors considered were:
- the opinion of Morgan Stanley as to the fairness from a financial point
of view to the Nonaffiliated Shareholders of the $34.00 per share to be
received by the Nonaffiliated Shareholders, and the analyses presented to
the Special Committee by Morgan Stanley (see "-- Opinion of the Financial
Advisor for the Special Committee");
- the structural impediments contained in the Company's Articles of
Incorporation (including ownership limitations and provisions that
effectively require the consent of The Irvine Company before the Company
can engage in certain transactions (including sale or liquidation of the
Company) or amend the Company's Articles of Incorporation to change these
provisions), as well as The Irvine Company's stated desire not to
consider offers to sell its position in the Company, making it
impracticable for the Company to solicit a third-party bidder (see
"Certain Relationships and Transactions -- Special Rights of The Irvine
Company Under Certain Agreements");
- the fact that $34.00 per share was within the range of net asset value
valuations for real estate transactions presented by Morgan Stanley (see
"-- Opinion of the Financial Advisor for the Special Committee -- Net
Asset Value");
- the history of the negotiations with respect to the Merger Proposal that,
among other things, led to an increase in the Acquiror's offer from
$32.50 to $34.00 per share, and the belief of the Special Committee that
$34.00 per share was the best price that could be obtained from the
Acquiror (or any other party, primarily because of the above-referenced
structural impediments);
- the fact that the $34.00 per share to be received by Nonaffiliated
Shareholders in the Merger represented a premium of approximately 24.2%
to the closing price of the Common Stock on the NYSE of $27.375 on
December 1, 1998, the day the Acquiror made its initial merger proposal
to the Company's Board of Directors, and that $34.00 per share exceeds
the all-time high price of the Common Stock ($33.50 per share);
- the fact that the Company could continue to declare regular quarterly
dividends (although the record dates for the second and third quarter
1999 quarterly dividends may not be earlier than June 15, 1999 and
September 15, 1999, respectively);
- the terms and conditions of the Merger Agreement, including the price of
$34.00 in cash per share, the scope of the parties' representations,
warranties, covenants and agreements, the limited number of conditions to
the obligations of the Acquiror and the rights of the Special Committee
and the Board of Directors, consistent with their duties, to withdraw or
modify their respective recommendations; and
- the Shareholder approval condition to the consummation of the Merger that
effectively requires the affirmative vote of approximately 60.9% of the
shares held by the Nonaffiliated Shareholders in favor of the Merger
Proposal.
In light of the number and variety of factors the Special Committee
considered in connection with its evaluation of the Merger Proposal, the Special
Committee did not find it practicable to assign relative weights to the
foregoing factors; accordingly, the Special Committee did not do so.
The Special Committee also considered the following less significant
factors:
- the fact that, although no third-party offers were actively solicited,
from the time of the Acquiror's initial acquisition proposal which was
publicly announced on December 1, 1998 through the approval of the Merger
by the Special Committee and the Board of Directors on February 1, 1999,
neither the Company nor the Special Committee received any alternative
offers (taking into account the potential deterrent effect of the
structural impediments discussed above);
- Morgan Stanley's informal response that, in response to questions from
the Special Committee, based on the circumstances and issues discussed
with the Special Committee, $34.00 per share was a superior
32
<PAGE> 40
alternative for the Nonaffiliated Shareholders as compared to continuing
to hold their shares of Common Stock; and
- the fact that Nonaffiliated Shareholders would no longer bear the risk of
any decreases in the value of the Company. See "-- Background of the
Merger."
In determining to recommend to the Board of Directors that it approve and
adopt the Merger Proposal, and in determining that the Merger Proposal was fair
to, and in the best interests of, the Nonaffiliated Shareholders, the Special
Committee considered factors which did not support the Special Committee's
determination to recommend the Merger Proposal. The material negative factors
considered were:
- the fact that, following the Merger, Nonaffiliated Shareholders will
cease to participate in future earnings or growth, if any, of the Company
or benefit from increases, if any, in the value of the Company;
- potential or actual conflicts of interest of officers and Directors of
the Company in connection with the Merger (see "-- Interests of Certain
Persons in the Merger" and "Certain Relationships and Transactions"); and
- Nonaffiliated Shareholders will recognize a taxable gain upon the
completion of the Merger.
The Special Committee also considered the fact that the market for REIT
stocks in general, and the Common Stock in particular, was depressed from prior
highs and that $34.00 per share represents only a slight premium to the all-time
high price of the Common Stock ($33.50). However, the Special Committee took a
longer term view of the fundamentals of the Company's business, and this factor
was not a material factor in the Special Committee's determination. The Special
Committee concluded that these negative factors were outweighed by the
supporting factors described above.
The Special Committee consulted with Morgan Stanley during the course of
Morgan Stanley's work in connection with its analysis of the Company and
evaluation of the proposed merger. Although Morgan Stanley provided advice to
the Special Committee, the decision to enter into the Merger Agreement and to
accept the consideration to be received in the Merger was solely that of the
Special Committee. The Special Committee intends to obtain a revised fairness
opinion from Morgan Stanley in the event that the amount or form of the Merger
Consideration is modified adversely to the Nonaffiliated Shareholders.
Shareholders should note that no liquidation analysis was prepared,
primarily because of the structural impediments described above and The Irvine
Company's stated desire not to consider offers to sell its position in the
Company or liquidate the Company. The Special Committee believed that these
facts made a liquidation analysis largely irrelevant.
The Special Committee believes that the Merger Proposal is procedurally
fair because: (i) the Special Committee consisted of disinterested Directors
appointed to represent the interests of, and to negotiate on an arm's-length
basis with the Acquiror on behalf of, the Nonaffiliated Shareholders; (ii) the
Special Committee retained and was advised by outside legal counsel; (iii) the
Special Committee retained Morgan Stanley as financial advisor to assist it in
evaluating the proposed merger; and (iv) the Merger Agreement contains as a
condition to the consummation of the Merger that the holders of a number of
shares of Common Stock (excluding the shares held by the Acquiror and its
affiliates) representing a majority of the total number of outstanding shares of
Common Stock vote to approve the Merger (effectively requiring the affirmative
vote of approximately 60.9% of the shares held by the Nonaffiliated Shareholders
in favor of the Merger). In addition, the Special Committee believes that the
Merger Proposal is procedurally fair because the price of $34.00 per share and
the other terms and conditions of the Merger Agreement resulted from active
arm's-length bargaining between the Special Committee and the Acquiror.
The Board of Directors. The Board of Directors, at its February 1, 1999
meeting, considered the unanimous recommendation of the Special Committee, as
well as the factors (enumerated above) considered by the Special Committee, and
unanimously determined that the Merger Proposal is fair to, and in the best
interests of, the Nonaffiliated Shareholders, approved and adopted the Merger
Proposal, and recommended that the Shareholders vote to approve and adopt the
Merger Proposal. The Nonaffiliated Shareholders should
33
<PAGE> 41
be aware in considering the recommendation of the Special Committee that was
adopted by the Board of Directors, that certain members of the Board of
Directors are also executives and directors of The Irvine Company. Such
relationships could present such members of the Board of Directors with
potential conflicts of interest. The Board of Directors and the Special
Committee considered the potential and actual conflicts of interest in making
their recommendation and in approving the Merger Proposal. The Special Committee
was formed, in part, to address these conflicts and to act on behalf of the
Nonaffiliated Shareholders in relation to the Merger. See "Summary -- Potential
Conflicts of Interest of Officers and Directors of the Company."
BENEFITS AND DETRIMENTS TO NONAFFILIATED SHAREHOLDERS
The Company, the Acquiror, The Irvine Company and Mr. Bren believe that the
Merger will result in the following benefits to the Nonaffiliated Shareholders:
(i) realizing the value of their investment in the Company in cash at a price
which is higher than the highest historical trading price of the Common Stock
and which represents a substantial premium to the market price for the Common
Stock prior to the announcement of the Acquiror's offer to acquire the Common
Stock (although below the midpoint of the per share net asset value range
determined by the Company's financial advisor, Morgan Stanley) and (ii)
eliminating the risk of a decline in the value of their investment in the
Company.
The primary detriment to Nonaffiliated Shareholders of the completion of
the Merger is that they will cease to have any ownership interest in the Company
and will cease to participate in future earnings or growth, if any, of the
Company or benefit from increases, if any, in the value of the Company. In
addition, the Nonaffiliated Shareholders will recognize a taxable gain upon the
completion of the Merger.
OPINION OF THE FINANCIAL ADVISOR FOR THE SPECIAL COMMITTEE
The Special Committee retained Morgan Stanley to act as the Company's
financial advisor with respect to the proposed merger and related matters, based
on Morgan Stanley's qualifications, reputation and expertise. At a meeting of
the Board of Directors on February 1, 1999, Morgan Stanley delivered its oral
opinion to the Board of Directors, subsequently confirmed in writing, that as of
such date, and subject to the various considerations set forth in its opinion
(the "Opinion"), the consideration to be received by the Nonaffiliated
Shareholders pursuant to the Merger Agreement is fair from a financial point of
view to such holders.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN STANLEY DIRECTED TO THE
BOARD OF DIRECTORS AND DATED AS OF FEBRUARY 1, 1999, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, PROCEDURES FOLLOWED AND LIMITATIONS OF THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED AS APPENDIX B TO
THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. MORGAN STANLEY'S
OPINION ADDRESSES ONLY THE FAIRNESS OF THE CONSIDERATION TO BE RECEIVED BY THE
NONAFFILIATED SHAREHOLDERS PURSUANT TO THE MERGER AGREEMENT FROM A FINANCIAL
POINT OF VIEW TO SUCH SHAREHOLDERS. THE OPINION OF MORGAN STANLEY IS DIRECTED TO
THE BOARD OF DIRECTORS FOR ITS USE IN CONNECTION WITH ITS CONSIDERATION OF THE
MERGER PROPOSAL AND IS NOT INTENDED TO BE, AND DOES NOT CONSTITUTE, A
RECOMMENDATION TO ANY SHAREHOLDER OF THE COMPANY AS TO HOW SUCH SHAREHOLDER
SHOULD VOTE WITH RESPECT TO THE MERGER PROPOSAL. THE SUMMARY OF THE OPINION OF
MORGAN STANLEY SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF THE OPINION. THE NONAFFILIATED SHAREHOLDERS ARE URGED TO, AND
SHOULD, READ THE OPINION CAREFULLY AND IN ITS ENTIRETY.
In connection with rendering its Opinion, Morgan Stanley, among other
things:
<TABLE>
<S> <C>
- reviewed certain publicly available financial statements and
other information of the Company;
- reviewed certain internal financial statements and other
financial and operating data concerning the Company prepared
by the management of the Company;
- reviewed certain financial projections prepared by the
management of the Company;
- discussed the past and current operations and financial
condition and the prospects of the Company with senior
executives of the Company;
- reviewed the reported prices and trading activity for the
Common Stock;
</TABLE>
34
<PAGE> 42
<TABLE>
<S> <C>
- compared the financial performance of the Company and the
prices and trading activity of the Common Stock with that of
certain other comparable publicly-traded companies and their
securities;
- reviewed the financial terms, to the extent publicly
available, of certain comparable transactions;
- participated in discussions and negotiations between the
Company and the Acquiror and The Irvine Company and their
respective financial and legal advisors;
- reviewed the draft Merger Agreement and certain related
documents;
- reviewed and considered the governance provisions relating
to the Company and the Operating Partnership; and
- considered the Company's ability to execute its business
plan if the Merger were not consummated.
</TABLE>
In rendering its Opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by Morgan Stanley for the purposes of its Opinion. With respect to the
financial projections prepared by the management of the Company, Morgan Stanley
assumed that such information had been reasonably prepared on bases reflecting
the best currently available estimates and judgments of the future financial
performance of the Company. Morgan Stanley did not make any independent
valuation or appraisal of the assets or liabilities of the Company, nor was
Morgan Stanley provided with any such appraisals. The Opinion is necessarily
based on economic, market and other conditions as in effect on, and the
information made available to Morgan Stanley as of, February 1, 1999. In
addition, Morgan Stanley considered certain economic and market factors,
principally unemployment rates, interest rates, inflation and Gross Domestic
Product growth. In arriving at its Opinion, Morgan Stanley was not authorized to
solicit, and did not solicit interest from, any other party, with respect to the
acquisition of, or any businesses combination or other extraordinary transaction
involving, the Company, nor did Morgan Stanley negotiate with any party other
than the Acquiror and The Irvine Company in connection with a transaction
involving the Company.
The following is a summary of the material financial and comparative
analyses performed by Morgan Stanley in connection with providing the Opinion to
the Board of Directors on February 1, 1999. Certain of these summaries of
financial analyses include information presented in tabular format. In order to
understand fully the financial analyses used by Morgan Stanley, the tables must
be read together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses.
Stock Trading History. Morgan Stanley reviewed the historical trading
prices for the Common Stock and noted that since the initial price in the
Offering of $17.50 on December 8, 1993, the Common Stock recorded an all-time
high of $33.50 per share on October 8, 1997. Morgan Stanley noted that, as of
December 1, 1998, the proposed Merger Consideration of $34.00 per share exceeded
the all-time high closing price of the Common Stock.
Morgan Stanley reviewed the average of the daily closing prices of the
Common Stock from January 1, 1998 through December 1, 1998, the date of the
Acquiror's offer. Morgan Stanley also reviewed the premium obtained by computing
the percentage excess of the $34.00 offer price over the average closing price
of the Common Stock for the following periods ended December 1, 1998.
<TABLE>
<CAPTION>
TIME PERIOD AVERAGE OFFER PRICE
(ENDED DECEMBER 1, 1998) CLOSING PRICE PREMIUM
------------------------ ------------- -----------
<S> <C> <C>
January 1, 1998........................ $28.91 17.6%
Last 10 Trading Days................... $27.29 24.6%
Last Two Months........................ $26.24 29.6%
Last Six Months........................ $27.26 24.7%
</TABLE>
Net Asset Value. Morgan Stanley estimated the net asset value of the
Company based on a property-by-property analysis. For stabilized properties, a
range of capitalization rates based on recent, comparable market transactions
was applied to estimates of 1999 net operating income, based on various rent
growth scenarios as used in the discounted cash flow analyses described below.
Properties under development were valued using a discounted cash flow analysis
through the stabilization period using a range of discount rates ranging from
12%
35
<PAGE> 43
to 16% and applying a range of capitalization rates ranging from 7.25% to 8.25%
to estimate terminal value. Morgan Stanley then added an estimated value
associated with the Land Rights Agreement based upon the Company's right to
purchase land from The Irvine Company at below-market prices (the "LRA Value").
The LRA Value was estimated based upon a total build-out of 4,000 to 14,000
apartment units over the 1999 to 2008 period, assuming the land purchase prices
ranged from 95% of market value, as stipulated in the Land Rights Agreement, to
85% of market value. The LRA Value was estimated at $25 million to $50 million.
The gross value of the assets was reduced by the estimated value of the
outstanding debt and preferred stock of the Company to arrive at a net asset
value range of $33.00 to $40.00 per fully diluted share of Common Stock, as
compared to the offer price of $34.00 per share. Other factors considered
included but are not limited to, historical rent growth, employment growth
projections, housing permit data and multi-family vacancy levels. This was an
important analysis considered by Morgan Stanley in connection with rendering its
Opinion.
Discounted Cash Flow. Morgan Stanley performed discounted cash flow
analyses of the Company based upon projections provided by the Company and a
range of rental growth assumptions ranging from 5% to 9%, as compared to the
Company's assumed growth rate of 5% in its projections. See "Certain Financial
Projections of the Company." These discounted cash flow analyses may be
considered to represent continuation analyses for the Company. Morgan Stanley
performed three separate discounted cash flow analyses at varying rental growth
rates: dividend discount, free cash flow, and leveraged recapitalization. The
dividend discount model discounted dividends per share for the years 1999
through 2003, using discount rates reflecting an expected equity total return
and applying terminal multiples on 2004 FFO. The expected equity total return
was determined based upon the Company's and the comparable companies' dividend
yields plus expected FFO growth rate. The free cash flow methodology discounted
all available cash flow before interest and dividends for the years 1999 through
2003, using discount rates reflecting a weighted average cost of capital and
applying terminal multiples on 2004 EBITDA. The leveraged recapitalization
analysis assumed that debt would be raised to purchase the outstanding public
shares and projected dividends based upon 50% of funds available for
distribution after all projected capital expenditures. The projected dividends
were discounted for the years 1999 through 2003. The assumed equity total return
for the leveraged recapitalization analyses was determined based on the range of
dividend yields plus FFO growth rates for the comparable publicly traded
apartment REITs listed in the comparable company analysis below. The range of
estimated present values per share pursuant to the discounted cash flow analyses
are shown below as compared to the offer price of $34.00 per share:
<TABLE>
<CAPTION>
METHODOLOGY DISCOUNT RATE TERMINAL MULTIPLE PER SHARE VALUE RANGE
----------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
Dividend Discount............... 11.0% to 15.0% 9.0x to 12.0x $30.00 to $39.00
Free Cash Flow.................. 9.5% to 11.5% 10.5x to 13.0x $30.00 to $40.00
Leveraged Recapitalization...... 14.0% to 18.0% 7.5x to 10.5x $30.50 to $40.00
</TABLE>
This was an important analysis considered by Morgan Stanley in connection with
rendering its Opinion.
Analyses of Selected Comparable Publicly Traded Companies. Morgan Stanley
reviewed the trading statistics of selected comparable publicly traded apartment
REITs, selected on the basis of their size, portfolio characteristics and
geographic concentration or presence in high barrier-to-entry markets. The
comparable companies selected included:
- Archstone Communities Trust
- AvalonBay Apartment Communities Inc.
- BRE Properties Inc.
- Equity Residential Properties Trust
- Essex Property Trust Inc.
- Post Properties Inc.
Morgan Stanley then added the LRA Value described above to the values estimated
by applying trading statistics of the comparable companies to the Company. The
LRA Value was estimated at $37.5 million or
36
<PAGE> 44
$.83 per share based on the present value of the potential below-market prices
through the expiration of the Land Rights Agreement.
Based on consensus security analyst estimates for 1999, as reported by
First Call, an industry service provider of earnings estimates based on an
average of earnings estimates published by various investment banking firms, and
January 20, 1999 closing share prices, the trading multiples of 1999 projected
FFO per share of the comparable companies ranged from 9.2x to 10.4x, with an
average of 9.9x. Applying this range of multiples to the estimated 1999 FFO per
share for the Company resulted in a range of values per share of Common Stock of
$26.61 to $29.91. Normalizing each of the comparable companies' 1999 FFO to a
target leverage (debt to market capitalization) ratio of 35% based on the
comparable companies' average leverage levels in order to allow for the
multiples to be on a comparable leverage basis, the trading multiples of
normalized 1999 FFO per share ranged from 9.7x to 11.1x. Applying this range of
multiples to the normalized 1999 FFO for the Company and adding the LRA Value
resulted in a range of values per share of Common Stock of $28.06 to $31.76.
Based on the January 20, 1999 closing share prices of the comparable
companies, their dividend yields ranged from 5.8% and 7.6%, with an average of
6.7%. Applying this range of dividend yields to the estimated 2000 dividends for
the Company and adding the LRA Value resulted in a range of values per share of
Common Stock of $25.78 to $33.49.
Morgan Stanley also reviewed the multiple-to-total return ratios of the
comparable companies. The multiple-to-total return ratios were obtained by
dividing the FFO trading multiple for each comparable company by its total
return, computed as the sum of its annualized reported dividend yield and the
consensus analyst estimates of the long-term growth rate as reported by First
Call. The multiple-to-total return ratios for the comparable companies ranged
from .52x to .75x. This range was applied to the Company's estimated total
return to arrive at an implied FFO multiple range of 9.2x to 12.1x. Applying the
estimated 1999 FFO per share and adding the LRA Value yielded an implied range
of values per share of Common Stock of $26.51 to $34.67.
The following table presents, as of January 20, 1999, the range of
multiples of the comparable companies and the resulting implied per share value
range for the Company. The comparable companies information was based upon
consensus security analyst estimates for 1999 as reported by First Call.
<TABLE>
<CAPTION>
PRICE/
PRICE/1999E NORMALIZED DIVIDEND MULTIPLE TO
FFO 1999E FFO YIELD TOTAL RETURN
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
COMPARABLE COMPANIES
INFORMATION............ 9.2x to 10.4x 9.7x to 11.1x 5.8% to 7.6% .52x to .75x
COMMON STOCK ESTIMATED
VALUE RANGE............ $26.61 to 29.91 $28.06 to $31.76 $25.78 to $33.49 $26.51 to $34.67
</TABLE>
This was an important analysis considered by Morgan Stanley in connection
with rendering its Opinion. None of the comparable companies is identical to the
Company. In evaluating the comparable companies, Morgan Stanley made judgments
and assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Company, such as the impact of competition on the Company and the
industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of the Company or the industry
or in the financial markets in general.
Ability-to-Pay Analysis. Morgan Stanley analyzed the purchase price that
could be paid by another public apartment company based on a variety of
assumptions as to a potential acquiror's acceptable level of earnings accretion
or dilution. Based upon each comparable company's cost of debt and equity, a
supportable purchase price was calculated assuming it would be break-even to the
potential acquiror's earnings or be slightly dilutive. To arrive at the
break-even and slightly dilutive prices, the Company's 1999 estimated FFO was
divided by the blended cost of debt and equity. The blended cost of debt and
equity was determined for each company based upon the debt and preferred stock
to total market capitalization ratio multiplied by the cost of debt, and the
equity market capitalization to total market capitalization ratio multiplied by
the inverse of the FFO multiple, which is considered to be a measure of the cost
of equity. The resulting comparable
37
<PAGE> 45
companies supportable price ranged from $32.00 to $34.50 per share of Common
Stock. This was an important analysis considered by Morgan Stanley in connection
with rendering its Opinion.
Analyses of Selected Comparable Transactions. Morgan Stanley compared the
principal terms of the Merger with those of selected other comparable
transactions. The analysis of comparable transactions may be considered to
represent a continuation analysis for the Company. Morgan Stanley analyzed three
groups of selected transactions: public REIT transactions, public multi-family
REIT transactions and minority shareholder transactions. None of the public REIT
transactions or public multi-family REIT transactions involved "going private"
transactions or all-cash offers.
PUBLIC REIT TRANSACTIONS
<TABLE>
<CAPTION>
DATE ANNOUNCED ACQUIROR ACQUIREE
-------------- -------- --------
<S> <C> <C>
July 8, 1998 Equity Residential Properties Trust Merry Land & Investment Company
September 15, 1997 Equity Office Properties Beacon Properties
August 28, 1997 Equity Residential Properties Trust Evans Withycombe
January 17, 1997 Equity Residential Properties Trust Wellsford Residential
March 26, 1996 Simon Property Group DeBartolo Realty
</TABLE>
Based on the average trading prices for the ten-trading day period ending
five trading days prior to the public announcement of each of the public REIT
transactions, the average premium paid by the surviving company for the company
being acquired was 18.6% and ranged from 13.5% to 22.4% for the selected
transactions. On the same computation basis, the premium to be paid by the
Acquiror pursuant to the Merger is 24.6%.
PUBLIC MULTI-FAMILY REIT TRANSACTIONS
<TABLE>
<CAPTION>
DATE ANNOUNCED ACQUIROR ACQUIREE
-------------- -------- --------
<S> <C> <C>
July 8, 1998 Equity Residential Properties Trust Merry Land & Investment Company
April 2, 1998 Security Capital Pacific Trust Security Capital Atlantic
March 8, 1998 Bay Apartment Communities Avalon Properties
December 23, 1997 Apartment Investment and Management
Company Ambassador Properties
December 17, 1997 Camden Property Trust Oasis Residential
August 28, 1997 Equity Residential Properties Trust Evans Withycombe
August 4, 1997 Post Properties Trust Columbus Realty Trust
January 17, 1997 Equity Residential Properties Trust Wellsford Residential
December 16, 1996 Camden Property Trust Paragon Group, Inc.
October 1, 1996 United Dominion Realty South West Property Trust
October 1, 1995 BRE Properties Inc. REIT of California
</TABLE>
Based on the average trading prices for the ten-trading day period ending
five trading days prior to the public announcement of each of these
transactions, the average premium paid by the surviving company for the company
being acquired in the public multi-family REIT transactions was 11.7% and ranged
from (1.0)% to 20.7% for the selected transactions. On the same computation
basis, the premium to be paid by the Acquiror pursuant to the Merger is 24.6%.
38
<PAGE> 46
The third group of transactions analyzed involved minority shareholder
transactions, in which the majority shareholder bought out the minority
shareholders. A sampling of 24 transactions from 1992 to 1998 was reviewed
including the following:
MINORITY SHAREHOLDER TRANSACTIONS
<TABLE>
<CAPTION>
DATE ANNOUNCED ACQUIROR ACQUIREE
-------------- -------- --------
<S> <C> <C>
October 19, 1998 Affiliated Computer Services, BRC Holdings Inc.
Inc
September 23, 1998 Usinor SA J&L Specialty Steel Inc.
July 7, 1998 Dexter Corporation Life Technologies
June 2, 1998 BT OPI Acquisition Corp BT Office Products
International
May 26, 1998 Dow AgroSciences Mycogen Corp.
March 16, 1998 Robert L. Johnson and Liberty BET Holdings Inc.
Media
March 4, 1998 Xerox Corporation XL Connect Solutions, Inc.
February 27, 1998 World Access, Inc. NACT Telecommunications
January 8, 1998 Rayonier Inc. Rayonier Timberlands LP
August 1, 1997 RP Vehicle, Inc. Rhone-Poulenc Rorer Inc.
June 20, 1997 Waste Management, Inc. Wheelabrator Technologies Inc.
June 3, 1997 F.H. Faulding & Co. Ltd. Faulding Inc.
April 17, 1997 Zurich Insurance Inc. Zurich Reinsurance Centre
Holdings Inc.
January 28, 1997 Monsanto Calgene Inc.
January 13, 1997 Novartis AG Systemix Inc.
December 17, 1996 Allmerica Financial Corp. Allmerican Ppty. & Casualty
Cos.
August 8, 1996 Chemed Corp Roto Rooter Inc.
October 18, 1995 Rhone-Poulenc Rorer Inc. Applied Immune Sciences
April 5, 1995 Club Mediterranee S.A. Club Med, Inc.
March 7, 1995 AT&T Co. Lin Broadcasting Corp.
April 28, 1994 MacFadden Holdings & Boston Enquirer/Star Group Inc.
Ventures
November 23, 1993 Triarc Co. Southeastern Public Service Co.
October 13, 1993 Medco Containment Services Medical Marketing Group Inc.
Inc.
August 17, 1992 Leucadia National Corp. PHLCorp Inc.
</TABLE>
The per share premiums paid ranged widely from approximately 0% to 50%.
Applying the low end of the range of public REIT transaction premiums
(given the tight range of the five public merger companies) and the midpoint of
the range of minority shareholder transaction premiums (given the significantly
wider ranges of such premiums) resulted in a range of values per share of Common
Stock of $31.00 to $35.00. This was an important analysis considered by Morgan
Stanley in connection with rendering its Opinion.
No transaction utilized in a comparable transaction analysis is identical
to the Merger and, accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning financial
and operating characteristics of the Company and other factors that would affect
the acquisition value of companies to which it is being compared. In evaluating
the selected comparable transactions, Morgan Stanley made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Company, such as the impact of competition on the Company and the
industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of the Company or the industry
or in the financial markets in general.
Wall Street's Views. Morgan Stanley reviewed the price estimates and net
asset value estimates for the Company as reported by Green Street Advisors,
Morgan Stanley Dean Witter, CIBC Oppenheimer, Jefferies
39
<PAGE> 47
& Company, Sutro & Co., the Penobscot Group and Realty Stock Review. Morgan
Stanley reviewed the net asset and price target valuations published by the
analysts prior to the December 1, 1998 offer date, and after December 1, 1998.
From October 5, 1998 through December 20, 1998 (post-announcement), the net
asset value estimates from these analysts ranged from $24.00 to $35.28 per
share. In the same time period, price targets for twelve months from these
analysts ranged from $30.00 to $37.47 per share. This was an important analysis
considered by Morgan Stanley in connection with rendering its Opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Morgan
Stanley believes that its analyses must be taken as a whole and that selecting
portions of its analyses, without considering all analyses, would create an
incomplete view of the process underlying the Opinion. In addition, certain
analyses or valuations may be more or less relevant than other analyses or
valuations, and may have assumptions which are more or less probable than other
assumptions, so that the ranges of valuations resulting from a particular
analysis described above should not be taken to be Morgan Stanley's view of the
value of the Common Stock. The analyses explicitly identified above as important
analyses had the most weight with respect to this conclusion. In light of the
number and variety of analyses, valuations and assumptions considered, Morgan
Stanley did not assign relative weights to these analyses, valuations and
assumptions considered.
In performing its analyses, Morgan Stanley assumed economic, market and
other conditions as in effect on, and the information made available to it as
of, February 1, 1999. The analyses performed by Morgan Stanley are not
necessarily indicative of actual value, which may be significantly more or less
favorable than suggested by such analyses. Morgan Stanley noted that none of the
analyses described above did not support the conclusion reached in the Opinion.
Such analyses were prepared solely as part of Morgan Stanley's analysis of
whether the consideration to be received by the Nonaffiliated Shareholders
pursuant to the Merger Agreement is fair from a financial point of view to such
holders, and were conducted in connection with the delivery of the Opinion by
Morgan Stanley to the Board of Directors. The analyses do not purport to be
appraisals or to reflect the prices at which the Company might actually be sold.
The Morgan Stanley analyses described above should not be viewed as
determinative of the opinion of the Board of Directors or the management of the
Company with respect to the value of the Company or of whether Morgan Stanley
would have been willing to agree to any consideration other than the
consideration to be received by the Shareholders pursuant to the Merger.
The Opinion speaks as of February 1, 1999 (the date the Special Committee
and the Board of Directors approved the Merger) and Morgan Stanley is not
required to and does not intend to update the Opinion. Among other things,
changes in industry performance, general business, economic, market and
financial conditions, as well as changes in the Company's business or its
properties, may affect a future determination of fairness. In addition, in the
event of a material amendment to the Merger Agreement, the Special Committee may
request Morgan Stanley to update the Opinion, if it deems appropriate.
As described above, the Opinion and presentation of Morgan Stanley to the
Board of Directors were only one of many factors taken into consideration by the
Special Committee in making its determination to approve the Merger Proposal. In
addition, the terms of the Merger Agreement were determined through negotiations
between the Special Committee and the Acquiror. Although Morgan Stanley provided
advice to the Special Committee during the course of these negotiations, the
decision to enter into the Merger Agreement and to accept the consideration to
be received in the Merger was solely that of the Special Committee and the Board
of Directors.
The Special Committee retained Morgan Stanley based upon its experience and
expertise. Morgan Stanley is an internationally recognized investment banking
and advisory firm. As part of its investment banking business, Morgan Stanley is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuation for estate, corporate and other purposes. In the ordinary course
of their business, Morgan Stanley and its affiliates may actively trade the debt
and equity securities of the Company for their own account and for the account
of customers and, accordingly, may at any time hold long or short positions in
such securities or senior loans. Morgan Stanley has also acted
40
<PAGE> 48
as an underwriter in connection with public offerings of the Company's
securities and has performed various investment banking services for the Company
and The Irvine Company. Morgan Stanley acted as an underwriter for the Series A
Preferred Securities of IAC Capital Trust in January 1998 and received
underwriting commissions and fees of $686,000 for such services. No other
similar arrangements are mutually contemplated at this time. Morgan Stanley
received no instructions from the Acquiror or The Irvine Company relating to
Morgan Stanley's preparation of the Opinion.
In connection with the services of Morgan Stanley as financial advisor to
the Special Committee with respect to the Merger and related matters, the
Company has agreed to pay Morgan Stanley certain fees. If a transaction is
accomplished, the Company has agreed to pay Morgan Stanley a transaction fee
(the "Transaction Fee"). The Transaction Fee will be approximately $4.3 million,
calculated as the sum of (a) $3 million and (b) the product of (i) 5% and (ii)
the amount, if any, by which the aggregate consideration paid in the transaction
to holders of Common Stock, options exercisable for Common Stock or common L.P.
Units of the Operating Partnership (in each case as not currently owned by The
Irvine Company or its affiliates) exceeds the aggregate consideration such
securityholders would have received under the proposal set forth in the December
1 Letter. In addition, the Company has agreed to reimburse Morgan Stanley for
its reasonable out-of-pocket expenses (including the fees and disbursements of
their attorneys) and to indemnify Morgan Stanley and certain related persons
against certain liabilities, including certain liabilities under the federal
securities laws, arising out of its engagement. If a transaction is not
accomplished, the Company has agreed to pay Morgan Stanley a fee of $500,000 in
connection with the delivery of Morgan Stanley's Opinion.
POSITION OF THE ACQUIROR, THE IRVINE COMPANY AND MR. BREN
The Acquiror, The Irvine Company and Mr. Bren have each concluded that the
Merger is fair to the Nonaffiliated Shareholders based on the following factors:
- the recommendation of and approval by the Special Committee described
under "-- Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger";
- the receipt by the Board of Directors of the Company of the opinion of
Morgan Stanley that the consideration to be received by the Nonaffiliated
Shareholders in the Merger is fair to such shareholders from a financial
point of view;
- the fact that the principal terms of the Merger were established through
arm's-length negotiation with the Special Committee and its legal and
financial advisors; and
- the fact that during the negotiation of the Merger Agreement, the
interests of the Nonaffiliated Shareholders were represented by the
Special Committee and its legal and financial advisors.
In addition to the other factors considered by the Acquiror, The Irvine
Company and Mr. Bren in concluding that the Merger is fair to Nonaffiliated
Shareholders, the Acquiror, The Irvine Company and Mr. Bren adopted the
conclusion and analysis of the Special Committee described under
"-- Recommendation of the Special Committee and the Board of Directors; Fairness
of the Merger" that the Merger is fair to the Nonaffiliated Shareholders. The
Acquiror, The Irvine Company and Mr. Bren did not attach relative weights to the
specific factors considered in reaching their conclusions as to the fairness of
the Merger, although they considered the arm's length negotiations between the
parties, the receipt by the Special Committee of the opinion of Morgan Stanley
and the recommendation of the Special Committee to be the most significant.
The Irvine Company retained NationsBanc Montgomery to analyze its
alternatives regarding its investment in the Company which included (a)
maintaining The Irvine Company's ownership in the Company without taking any
further action; (b) selling all or a portion of its ownership interest in the
Company; or (c) purchasing the shares of the Company which it did not already
own. In connection with the engagement, the Acquiror and The Irvine Company
asked NationsBanc Montgomery to perform preliminary financial analyses regarding
a potential business combination. On November 25, 1998, NationsBanc Montgomery
made presentations to the Acquiror and The Irvine Company in which NationsBanc
Montgomery summarized its preliminary financial analyses in the First
NationsBanc Montgomery Report. Upon determin-
41
<PAGE> 49
ing to proceed with the December 1 Letter, the Acquiror and The Irvine Company
engaged NationsBanc Montgomery to act as their financial advisor in connection
with the transaction proposed in the December 1 Letter. Following December 1,
1998, NationsBanc Montgomery continued to refine its financial analyses, which
culminated on December 30, 1998 in the presentation of the Second NationsBanc
Montgomery Report. In response to requests by Morgan Stanley, NationsBanc
Montgomery delivered the Third NationsBanc Montgomery Report to Morgan Stanley
on January 12, 1999.
SUMMARY OF THE NATIONSBANC MONTGOMERY REPORTS
All information contained in this summary has been supplied by the Acquiror
for inclusion herein and has not been independently verified by the Company.
NationsBanc Montgomery was not retained to, and was not expected to, render any
advice or opinion as to the fairness to the Nonaffiliated Shareholders of the
consideration to be received by them in the Merger. NEITHER THE SPECIAL
COMMITTEE NOR THE BOARD OF DIRECTORS OF THE COMPANY RELIED UPON THE NATIONSBANC
MONTGOMERY REPORTS IN DETERMINING THAT THE MERGER PROPOSAL WAS FAIR TO, AND IN
THE BEST INTERESTS OF, THE NONAFFILIATED SHAREHOLDERS.
Pursuant to the Acquiror Engagement Letter, The Irvine Company retained
NationsBanc Montgomery to act as its financial advisor in connection with the
possible acquisition of the Company. NationsBanc Montgomery is a nationally
recognized investment banking firm and, as part of its activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. The Acquiror and The Irvine Company selected NationsBanc
Montgomery as their financial advisor on the basis of NationsBanc Montgomery's
experience and expertise in transactions similar to the proposal set forth in
the December 1 Letter and its reputation in the REIT industry and investment
community and its historical investment banking relationship with The Irvine
Company.
NationsBanc Montgomery prepared the NationsBanc Montgomery Reports but did
not prepare or render any opinion as to the fairness of either the proposal set
forth in the December 1 Letter or the Merger and was not asked to prepare or
render any such opinion to the Acquiror, The Irvine Company or Mr. Bren. No
limitations were imposed by the Acquiror, The Irvine Company or Mr. Bren on
NationsBanc Montgomery with respect to the investigations made or procedures
followed in preparing the NationsBanc Montgomery Reports. NationsBanc Montgomery
was not requested to, nor did it, deliver a report to the Acquiror, The Irvine
Company or Mr. Bren with respect to the Merger or the Acquiror's underlying
decision to proceed with or effect the proposal set forth in the December 1
Letter or the Merger. NationsBanc Montgomery was not requested to, and did not,
make any recommendation to the Acquiror as to the Merger Consideration, which
was determined by the Acquiror.
THE FOLLOWING SUMMARY OF THE NATIONSBANC MONTGOMERY REPORTS IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE NATIONSBANC MONTGOMERY
REPORTS. A COPY OF EACH OF THE NATIONSBANC MONTGOMERY REPORTS HAS BEEN FILED AS
AN EXHIBIT TO THE SCHEDULE 13E-3 FILED WITH THE COMMISSION BY THE ACQUIROR, THE
IRVINE COMPANY AND MR. BREN AND IS AVAILABLE FOR INSPECTION AND COPYING AT THE
PRINCIPAL EXECUTIVE OFFICES OF THE ACQUIROR DURING ITS REGULAR BUSINESS HOURS BY
ANY SHAREHOLDER OR SUCH SHAREHOLDER'S REPRESENTATIVE WHO HAS BEEN SO DESIGNATED
IN WRITING, UPON WRITTEN REQUEST AND AT THE EXPENSE OF THE REQUESTING
SHAREHOLDER OR REPRESENTATIVE. THE NATIONSBANC MONTGOMERY REPORTS WERE DIRECTED
TO THE ACQUIROR AND THE BOARD OF DIRECTORS OF THE IRVINE COMPANY AND DO NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD
VOTE WITH RESPECT TO THE MERGER. THE NATIONSBANC MONTGOMERY REPORTS DO NOT
ADDRESS THE UNDERLYING DECISION OF THE ACQUIROR TO PROCEED WITH OR EFFECT THE
PROPOSAL SET FORTH IN THE DECEMBER 1 LETTER OR THE MERGER OR ANY OTHER ASPECT OF
THE PROPOSAL SET FORTH IN THE DECEMBER 1 LETTER OR THE MERGER. IN FURNISHING THE
NATIONSBANC MONTGOMERY REPORTS, NATIONSBANC MONTGOMERY DID NOT ADMIT THAT IT IS
AN EXPERT WITHIN THE MEANING OF THE TERM "EXPERT" AS USED IN THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), NOR DID IT ADMIT THAT THE
NATIONSBANC MONTGOMERY REPORTS CONSTITUTE REPORTS OR VALUATIONS WITHIN THE
MEANING OF THE SECURITIES ACT.
42
<PAGE> 50
In connection with the preparation of the NationsBanc Montgomery Reports,
NationsBanc Montgomery, among other things:
- reviewed certain publicly available financial and other data with respect
to the Company, including the financial statements for recent years and
interim periods to September 30, 1998, and relevant financial and
operating data relating to The Irvine Company and the Company made
available to NationsBanc Montgomery from published sources and from the
internal records of The Irvine Company and internal records of the
Company which were provided to NationsBanc Montgomery by The Irvine
Company;
- reviewed certain publicly available information concerning the trading
of, and the trading market for, the Common Stock and calculated the stock
price of the Common Stock as a multiple of projected FFO per share, based
on estimates published by First Call;
- compared the Company from a financial point of view with certain other
publicly traded companies in the REIT industry which NationsBanc
Montgomery deemed to be relevant;
- considered the financial terms of, and the premiums offered in, to the
extent publicly available, selected recent business combinations of
publicly traded companies in the REIT industry which NationsBanc
Montgomery deemed to be comparable, in whole or in part, to the proposal
set forth in the December 1 Letter;
- reviewed the reports and net asset value estimates of industry analysts;
- calculated net asset values of the Company based on certain
capitalization rate and discounted cash flow analyses, considering the
value of certain exclusive land rights using going concern and
liquidation analyses with respect to stabilized assets;
- reviewed and discussed with representatives of the management of the
Acquiror and The Irvine Company information of a business and financial
nature regarding The Irvine Company and the Company furnished to
NationsBanc Montgomery by them, including financial forecasts and related
assumptions of The Irvine Company and the Company; and
- made inquiries regarding and discussed the proposal set forth in the
December 1 Letter and other matters related thereto with the Acquiror's
counsel.
With respect to the financial forecasts referred to above provided to
NationsBanc Montgomery by The Irvine Company and the Company, NationsBanc
Montgomery and Morgan Stanley relied upon the same financial forecasts. The
Third NationsBanc Montgomery Report (described herein) details the related
assumptions and the differences between how NationsBanc Montgomery and Morgan
Stanley view those assumptions.
In connection with its review, NationsBanc Montgomery assumed and relied
upon the accuracy and completeness of the foregoing information and did not
assume any responsibility for independent verification of such information. With
respect to the financial forecasts of The Irvine Company and the Company
provided to NationsBanc Montgomery by the Acquiror's and The Irvine Company's
management, NationsBanc Montgomery assumed for purposes of preparing the
NationsBanc Montgomery Reports, upon the advice of the Acquiror's and The Irvine
Company's management, that such forecasts have been reasonably prepared on bases
reflecting the best available estimates and judgments of the management of The
Irvine Company and the Company at the time of preparation as to the future
financial performance of the Company, and that they provide a reasonable basis
upon which NationsBanc Montgomery could prepare the NationsBanc Montgomery
Reports. The Irvine Company and the Company do not publicly disclose internal
management forecasts of the type provided to NationsBanc Montgomery by the
management of The Irvine Company and the Company in connection with NationsBanc
Montgomery's analyses. Such forecasts were not prepared with a view toward
public disclosure. In addition, the forecasts were based upon variables and
assumptions that are inherently uncertain, including factors related to general
economic and competitive conditions such as rental growth rates and the rate at
which the Company would develop its properties. The material variables and
assumptions considered in projecting rental growth were historical rent growth,
competitor property statistics, such as projected competitor supply, and job
growth projections. Other factors considered were population growth/in-
43
<PAGE> 51
migration, levels of "for sale" housing, household income growth, office and
industrial space absorption and proximity to transportation corridors.
Accordingly, actual results could vary significantly from those set forth in
such forecasts. NationsBanc Montgomery has assumed no liability for such
forecasts. NationsBanc Montgomery also assumed that there have been no material
changes in the Company's assets, financial condition, results of operations,
business or prospects since the date of the most recent financial statements
made available to NationsBanc Montgomery. NationsBanc Montgomery relied on
advice of counsel and independent accountants to the Acquiror and The Irvine
Company as to all legal and financial reporting matters with respect to The
Irvine Company, the Merger and the Merger Agreement. In addition, NationsBanc
Montgomery did not assume responsibility for making an independent evaluation,
appraisal or physical inspection of the assets or liabilities (contingent or
otherwise) of the Company, nor was NationsBanc Montgomery furnished with any
such appraisals. Finally, the NationsBanc Montgomery Reports are based on
economic, monetary and market and other conditions as in effect on, and the
information made available to NationsBanc Montgomery as of, the respective dates
of the NationsBanc Montgomery Reports. Set forth below is a summary of the
NationsBanc Montgomery Reports.
The following is a summary of the material financial and comparative
analyses performed by NationsBanc Montgomery in connection with the NationsBanc
Montgomery Reports. Certain of these summaries of financial analyses include
information presented in tabular format. In order to fully understand the
financial analyses used by NationsBanc Montgomery, the tables must be read
together with the text of each summary. The tables alone do not constitute a
complete description of the financial analyses.
THE FIRST NATIONSBANC MONTGOMERY REPORT
NationsBanc Montgomery prepared the First NationsBanc Montgomery Report at
the request of The Irvine Company to demonstrate what methodologies might be
used by (a) the Company as the Company determined its response to an offer to
acquire the Company and (b) The Irvine Company or an acquisition subsidiary as
such entities determine the appropriate valuation of the Company should such
entities decide to make an offer to acquire or combine with the Company.
NationsBanc Montgomery prepared the First NationsBanc Montgomery Report using
only publicly available data. The Acquiror's initial proposal price of $32.50
(the "Acquiror's Initial Proposal Price") had not been determined prior to the
preparation of the First NationsBanc Montgomery Report and consequently
NationsBanc Montgomery did not compare the results of its preliminary analyses
to any actual offer price.
Historical Stock Price Analysis. NationsBanc Montgomery reviewed the
performance of the per share market price and trading volume of the Common Stock
for the period from December 1, 1993 to November 23, 1998. The analysis
indicated that for the last year, the highest closing market price per share was
$32.44. The average stock prices for the last 30 trading days, 60 trading days
and 90 trading days prior to November 23, 1998 were:
<TABLE>
<CAPTION>
TIME PERIOD PRIOR AVERAGE
TO NOVEMBER 23, 1998 STOCK PRICE
-------------------- -----------
<S> <C>
Last 30 trading days........................................ $26.81
Last 60 trading days........................................ $26.21
Last 90 trading days........................................ $25.95
</TABLE>
NationsBanc Montgomery noted that the closing stock price on November 23,
1998 was $27.13 (the "November Stock Price").
NationsBanc Montgomery also calculated the implied price per share of
Common Stock as a multiple of projected FFO (as of November 23, 1998) based on
estimates provided to NationsBanc Montgomery by First Call, with such estimates
based on an average of earnings estimates published by various investment
banking firms and based on historical forward multiples of the Company. The
calculations yielded historical forward FFO per share multiples ranging from
9.1x to 15.2x, with a mean of 12.1x and a median of 12.2x. NationsBanc
Montgomery noted that the mean and median multiples of forward FFO per share, on
a historical basis, when multiplied by the estimated calendar year 1999 FFO per
share, implied per share prices of $30.97 and $31.20, respectively, for a share
of Common Stock.
44
<PAGE> 52
Comparable Company Analysis. Based on public and other available
information, including estimates of future financial results published by First
Call and taken from NationsBanc Montgomery research reports, NationsBanc
Montgomery calculated the percentages of debt to total market capitalization
(defined as the market value of the equity of the Company and its subsidiaries
plus total debt), the multiples of stock price to estimated calendar year 1998
FFO per share, and the multiples of stock price to estimated calendar year 1999
FFO per share for the following eight publicly traded companies in the REIT
industry (the "First Report Comparable Companies"):
- AvalonBay Apartment Communities Inc.
- Apartment Investment and Management Company
- BRE Properties Inc.
- Equity Residential Properties Trust
- Post Properties Trust
- Archstone Communities Trust
- Charles E. Smith Residential Realty
- United Dominion Realty
The First Report Comparable Companies were selected based on the fact that such
companies (a) had publicly traded securities; (b) were in the apartment REIT
industry; and (c) had market valuations and trading valuations exceeding $1
billion. Such analysis indicated the following:
<TABLE>
<CAPTION>
RANGE OF
PERCENTAGES MEAN MEDIAN
-------------- ----- ------
<S> <C> <C> <C>
Debt to market capitalization............. 31.0% to 61.8% 45.2% 46.4%
</TABLE>
<TABLE>
<CAPTION>
RANGE OF
STOCK PRICE TO: MULTIPLES MEAN MEDIAN
--------------- -------------- ----- ------
<S> <C> <C> <C>
Estimated calendar year 1998 FFO per
share................................... 7.7x to 11.6x 10.5x 10.9x
Estimated calendar year 1999 FFO per
share................................... 7.2x to 10.6x 9.5x 9.9x
</TABLE>
NationsBanc Montgomery noted that the November Stock Price implied a
percentage of debt to total market capitalization of 44.6%. NationsBanc
Montgomery also noted that the estimated calendar year 1998 FFO per share and
the estimated calendar year 1999 FFO per share, when multiplied by the stock
price to estimated calendar year 1998 FFO per share or the estimated calendar
year 1999 FFO per share (as applicable) mean and median multiples, implied per
share valuations of $23.68 and $24.60 and $24.30 and $25.25, respectively, for a
share of Common Stock.
Comparable Transactions Analysis. Based on public and other available
information, NationsBanc Montgomery calculated the multiples of aggregate value
to last twelve months (to November 23, 1998) ("LTM") EBITDA and LTM FFO per
share for the target company implied in the following 13 acquisitions of control
of comparable publicly traded REIT companies (the "First Report Comparable
Transactions"):
45
<PAGE> 53
FIRST REPORT COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
DATE ANNOUNCED ACQUIROR ACQUIREE
-------------- -------- --------
<S> <C> <C>
November 17, 1998 ProLogis Trust Meridan Industrial Trust
September 10, 1998 United Dominion Trust American Apartment
Communities
July 8, 1998 Equity Residential Merry Land & Investment
Properties Trust Co. Inc.
April 2, 1998 Security Capital Security Capital Atlantic
Pacific Trust
March 8, 1998 Bay Apartment Avalon Properties Inc.
Communities
December 22, 1997 United Dominion Realty ASR Investments Corp.
December 17, 1997 Camden Property Trust Oasis Residential Inc.
December 16, 1997 Apartment Investment Ambassador Properties
and Management Company
August 28, 1997 Equity Residential Evans Withycombe
Properties Trust
August 25, 1997 Vornado Realty Trust Arbor Property Trust
August 4, 1997 Post Properties Trust Columbus Realty Trust
February 20, 1997 Apartment Investment NHP Inc.
and Management Company
January 17, 1997 Equity Residential Wellsford Residential
Properties Trust
</TABLE>
The First Report Comparable Transactions (i) involved comparable publicly
traded apartment REIT companies, (ii) were announced between January 17, 1997
and November 17, 1998, and (iii) resulted in the surviving company paying a
premium for the company being acquired.
Such analysis yielded the following multiples:
<TABLE>
<CAPTION>
RANGE OF
AGGREGATE VALUE TO: MULTIPLES MEAN MEDIAN
------------------- -------------- ----- ------
<S> <C> <C> <C>
Last twelve months (to November 23, 1998)
EBITDA per share........................ 8.1x to 17.9x 13.9x 13.6x
Last twelve months (to November 23, 1998)
FFO per share........................... 10.6x to 19.7x 13.9x 13.9x
</TABLE>
NationsBanc Montgomery noted that the Company's estimated calendar year
1999 EBITDA and estimated calendar year 1999 FFO per share, when multiplied by
the means and medians of LTM EBITDA and LTM FFO per share, implied per share
prices of $20.79 and $19.96 and $30.35 and $30.37, respectively, for a share of
Common Stock.
NationsBanc Montgomery also compared the discounts/premiums paid in the
First Report Comparable Transactions to the share price of the target company
one day prior to the announcement of the proposal set forth in the December 1
Letter in the First Report Comparable Transactions. Such analysis indicated a
range of discounts/premiums of (1.3%) to 14.9%, with a mean of 7.7% and a median
of 7.9%. NationsBanc Montgomery noted that adding the mean and median
discounts/premiums to the November Stock Price implied share prices of $29.20
and $29.27.
Control Premium Analysis. NationsBanc Montgomery reviewed the consideration
paid in 124 acquisitions of controlling equity interests in target companies
announced between January 7, 1997 and November 17, 1998 in which the aggregate
values paid were between $500 million and $1.5 billion. NationsBanc Montgomery
calculated the premiums paid relative to the prices of the acquired controlling
equity interests for
46
<PAGE> 54
one day, one week and thirty days prior to the announcement of the proposal set
forth in the December 1 Letter. Such analysis indicated the following:
<TABLE>
<CAPTION>
PERIOD PRIOR TO
THE ANNOUNCEMENT
OF THE PROPOSAL
SET FORTH IN THE
DECEMBER 1 LETTER MEDIAN PREMIUMS
- ----------------- ---------------
<S> <C> <C>
One day.................................................. 17.8%
One week................................................... 23.0%
Thirty days.............................................. 28.2%
</TABLE>
Multiplying the implied premiums by the November Stock Price implied per
share stock prices of $31.78, $33.37 and $35.46, respectively, for a share of
Common Stock.
NationsBanc Montgomery presented the control premium analysis as an
analysis which might be used in determining the valuation of the Company but
determined that such an analysis would not be meaningful in preparing the other
NationsBanc Montgomery Reports because the target companies within the aggregate
value range of $500 million and $1.5 billion were not generally in the same
industry as the Company, making the analysis less meaningful.
No other company or transaction used in the comparable company, comparable
transactions and control premium analyses as a comparison is identical to the
Company or the proposal set forth in the December 1 Letter. Accordingly, an
analysis of the results of the foregoing is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors that
could affect the public trading value of the companies to which the Company and
the proposal set forth in the December 1 Letter were compared in the NationsBanc
Montgomery Reports.
Research Analyst Views. NationsBanc Montgomery reviewed and summarized
publicly available equity analyst research reports regarding the Company
published between October 24, 1997 and November 4, 1998 (the "Research
Reports"). The Research Reports were prepared by:
- Merrill Lynch
- NationsBanc Montgomery
- Jefferies & Co.
- Morgan Stanley
- Dean Witter
- Sutro & Co.
- J.P. Morgan & Co.
- Paine Webber
- CIBC Oppenheimer
- Everen Securities
- Goldman, Sachs & Co.
- Salomon Smith Barney
- Donaldson, Lufkin & Jenrette
- Prudential
NationsBanc Montgomery noted that the Research Reports indicated a range of
estimated target price (during a projected twelve to eighteen month period) per
share valuation of $30.00 to $34.00, with a mean of $32.00, to the extent the
Research Reports indicated such a price. NationsBanc Montgomery also noted that
47
<PAGE> 55
the Research Reports indicated a range of estimated net asset value ("NAV") per
share of $24.00 to $28.71, with a mean of $26.57, to the extent the Research
Reports indicated such a value.
Net Asset Value Analysis. NationsBanc Montgomery estimated the NAV per
share of the Company based on a property-by-property analysis. For stabilized
properties, a range of capitalization rates based on recent, comparable market
transactions were applied to forward estimates of net operating income, based on
projections of The Irvine Company's management. Other assets under construction
or not fully leased were valued at cost of construction. The gross value of the
assets was reduced by the estimated value of the net debt and preferred equity
of the Company and its subsidiaries to arrive at NAVs per share ranging from
$30.76 to $32.50 for a share of Common Stock. NationsBanc Montgomery prepared
its net asset value analysis based solely on publicly available information and
consequently noted that such analysis was preliminary.
Discounted Cash Flow Analysis. NationsBanc Montgomery applied a discounted
cash flow analysis to the financial cash flow forecasts for the Company for
calendar years 1998 through 2003, as estimated by The Irvine Company's
management. In conducting this analysis, NationsBanc Montgomery first calculated
the present values of the forecasted cash flows. Second, NationsBanc Montgomery
estimated the present value of the aggregate value of the Company at the end of
calendar year 2003 by capitalizing the Company's estimated calendar year 2004
net operating income at a capitalization rate of 8.5%, which was arrived at by
determining the capitalization rates implied by recent comparable transactions
and adding 100 basis points. In arriving at the terminal value, NationsBanc
Montgomery deemed it appropriate to adjust the exit capitalization rate by 100
basis points. It was the judgment of NationsBanc Montgomery that such an
adjustment was standard in the industry in order to reflect the aging of the
properties over the forecast period and to reflect the reduction of land
available for development over the forecast period. Such cash flows and
aggregate values were discounted to present values using discount rates ranging
from 10% to 12%. NationsBanc Montgomery selected the range of discount rates
based on its prior experience in the Company's industry and its estimation of
what discount rates potential third-party acquirors might apply in determining
their own valuations of the Company. This analysis indicated a range of imputed
equity values of the Company of $29.94 to $33.46.
THE SECOND NATIONSBANC MONTGOMERY REPORT
NationsBanc Montgomery prepared the Second NationsBanc Montgomery Report in
response to the request of the Special Committee and the Acquiror for the
December 30, 1998 meeting with Morgan Stanley. NationsBanc Montgomery was now
able to take the Acquiror's Initial Proposal Price of $32.50 per share into
account and was instructed to perform financial due diligence regarding the
Company and its properties.
Historical Stock Price Analysis. NationsBanc Montgomery again reviewed the
performance of the per share market price and trading volume of the Common Stock
for the period from December 1, 1993 to November 23, 1998. The analysis
indicated that for the last year, the highest closing market price per share was
$32.44. The average stock prices and 90 trading days prior to November 23, 1998
were:
<TABLE>
<CAPTION>
TIME PERIOD PRIOR AVERAGE
TO NOVEMBER 23, 1998 STOCK PRICE
-------------------- -----------
<S> <C>
Last 30 trading days........................................ $26.81
Last 60 trading days........................................ $26.21
Last 90 trading days........................................ $25.95
</TABLE>
NationsBanc Montgomery noted that the Acquiror's Initial Proposal Price of
$32.50 was greater than each of the average historical stock prices.
NationsBanc Montgomery also calculated the implied price per share of
Common Stock as a multiple of projected FFO (as of November 23, 1998), based on
estimates provided to NationsBanc Montgomery by First Call, with such estimates
based on an average of earnings estimates published by various investment
banking firms and based on historical forward multiples of the Company. The
calculations yielded historical forward FFO multiples ranging from 9.1x to
15.2x, with a mean of 12.1x and a median of 12.2x. NationsBanc Montgomery noted
that the mean and median multiples of forward FFO per share, on a historical
basis, when multiplied by the estimated calendar year 1999 FFO per share,
implied per share prices of $30.97 and $31.20,
48
<PAGE> 56
respectively, for a share of Common Stock, which were less than the Acquiror's
Initial Proposal Price of $32.50.
Comparable Company Analysis. Based on public and other available
information including estimates of future financial results published by First
Call and taken from NationsBanc Montgomery research reports, NationsBanc
Montgomery calculated the percentages of debt to total market capitalization,
the multiples of stock price to estimated calendar year 1998 FFO per share, and
the multiples of stock price to estimated calendar year 1999 FFO per share for
the First Report Comparable Companies. Such analysis indicated the following:
<TABLE>
<CAPTION>
RANGE OF
PERCENTAGES MEAN MEDIAN
-------------- ----- ------
<S> <C> <C> <C>
Debt to market capitalization............. 31.0% to 61.8% 45.2% 46.4%
</TABLE>
<TABLE>
<CAPTION>
RANGE OF
STOCK PRICE TO: MULTIPLES MEAN MEDIAN
--------------- -------------- ----- ------
<S> <C> <C> <C>
Estimated calendar year 1998 FFO per
share................................... 7.7x to 11.6x 10.5x 10.9x
Estimated calendar year 1999 FFO per
share................................... 7.2x to 10.6x 9.5x 9.9x
</TABLE>
NationsBanc Montgomery noted that the November Stock Price implied a
percentage of debt to total market capitalization of 44.6%. NationsBanc
Montgomery also noted that the estimated calendar year 1998 FFO per share and
the estimated calendar year 1999 FFO per share, when multiplied by the stock
price to estimated calendar year 1998 FFO per share or the estimated calendar
year 1999 FFO per share (as applicable) mean and median multiplies, implied per
share valuations of $23.68 and $24.60 and $24.30 and $25.25, respectively, for a
share of Common Stock, which were less than the Acquiror's Initial Proposal
Price of $32.50.
Comparable Transactions Analysis. Based on public and other available
information, NationsBanc Montgomery calculated the multiples of aggregate value
to LTM EBITDA and LTM FFO per share for the target company implied in the First
Report Comparable Transactions. Such analysis yielded the following multiples:
<TABLE>
<CAPTION>
RANGE OF
AGGREGATE VALUE TO: MULTIPLES MEAN MEDIAN
------------------- -------------- ----- ------
<S> <C> <C> <C>
Last twelve months (to November 23, 1998)
EBITDA per share........................ 8.1x to 17.9x 13.9x 13.6x
Last twelve months (to November 23, 1998)
FFO per share........................... 10.6x to 19.7x 13.9x 13.9x
</TABLE>
NationsBanc Montgomery noted that the Company's estimated calendar year
1999 EBITDA and estimated calendar year 1999 FFO per share, when multiplied by
the means and medians of LTM EBITDA and LTM FFO per share, implied per share
prices of $20.79 and $19.96 and $30.35 and $30.37, respectively, for a share of
Common Stock, which were less than the Acquiror's Initial Proposal Price of
$32.50.
NationsBanc Montgomery also compared the discounts/premiums paid in the
First Report Comparable Transactions to the share price of the target company
one day prior to the announcement in the First Report Comparable Transactions.
Such analysis indicated a range of discounts/premiums of (1.3%) to 14.9%, with a
mean of 7.7% and a median of 7.9%. NationsBanc Montgomery noted that adding the
mean and median discounts/premiums to the November Stock Price implied share
prices of $29.20 and 29.27, which were less than the Acquiror's Initial Proposal
Price of $32.50.
No other company or transaction used in the comparable company and
comparable transactions analyses as a comparison is identical to the Company or
the proposal set forth in the December 1 Letter. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which the Company and the proposal set forth
in the December 1 Letter were compared in the NationsBanc Montgomery Reports.
49
<PAGE> 57
Research Analyst Views. NationsBanc Montgomery reviewed and summarized the
Research Reports. NationsBanc Montgomery noted that the Research Reports
indicated a range of estimated target price (during a projected twelve to
eighteen month period) per share valuation of $30.00 to $34.00, with a mean of
$32.00, to the extent the Research Reports indicated such a price. NationsBanc
Montgomery also noted that the Research Reports indicated a range of estimated
NAV per share of $24.00 to $28.71, with a mean of $26.57, to the extent the
Research Reports indicated such a value, with such values being less than the
Acquiror's Initial Proposal Price of $32.50.
Net Asset Value Analyses. NationsBanc Montgomery performed several net
asset value analyses of the Company, incorporating the results of its financial
due diligence. NationsBanc Montgomery calculated NAV by first arriving at a
value for the real property assets of the Company. The real estate assets
included were categorized as stabilized (properties which are fully constructed
and fully leased), lease-up (properties for which construction is nearly
complete and which are not fully leased) and under construction. Stabilized
assets were valued using "going concern" and liquidation analyses, discussed
below. "Lease-up" assets were valued by using a number equal to the sum of
Company management estimates of total costs incurred prior to November 23, 1998
with respect to the construction of such properties and an additional estimated
ten percent (10%) developer's profit, such percentage being customary for the
industry and reflecting the risks incurred by the developer. The "under
construction" assets were valued at cost incurred prior to November 23, 1998
based on Company management estimates.
Second, NationsBanc Montgomery identified and calculated other sources of
value within the Company. Other sources of value identified included value
associated with existing tax exempt debt and value associated with the Land
Rights Agreement. NationsBanc Montgomery determined that the value associated
with the Land Rights Agreement was $10.7 million or $0.24 per share. NationsBanc
Montgomery used The Irvine Company's management estimates to determine a value
for the exclusive land rights associated with the Land Rights Agreement. Based
on estimates from The Irvine Company and Company management, NationsBanc
Montgomery assumed that the Company would acquire land eligible for the
development of 5,888 apartment units over a period of five years, commencing in
calendar year 1999. Reviewing 13 comparable sale transactions between July 1996
and October 1998, NationsBanc Montgomery assumed an average land cost per unit
of $47,000. The comparable sale transactions included:
- The Lakes at South Coast
- The Resorts
- Villas Alliento
- Leguna Brisas
- Sea Terrace
- Villa Serena
- Toscana
- Oasis Martinique
- Sea Palms Village
- Crown Terrance
- Woodbridge Meadows
- Mill Creek
Applying a 5% discount established in the Land Rights Agreement to such
projected land sales to determine a hypothetical stream of cash flows for such
five year period, and further discounting such hypothetical cash flows by 12%,
which was the midpoint of the range of selected discount rates, a present value
was determined.
Third, NationsBanc Montgomery added the value of the stabilized properties,
the "lease-up" properties and the "under construction" properties and other
identified sources of value to determine the Company's
50
<PAGE> 58
total enterprise value. Fourth, NationsBanc Montgomery adjusted the total
enterprise value to reflect an estimated discount of 10% based on, among other
factors, the aggregate size of the Company's portfolio and anticipated fees
associated with liquidation. Finally, NationsBanc Montgomery subtracted the net
liabilities and preferred equity of the Company and its subsidiaries from the
adjusted total enterprise value to determine the Company's aggregate equity
value.
The following table summarizes the net asset valuation analyses performed
by NationsBanc Montgomery:
<TABLE>
<CAPTION>
METHODOLOGY IMPLIED SHARE PRICE
----------- -------------------
<S> <C>
Capitalization Analysis............................. $21.54 - $24.12
Present Value Analysis.............................. $19.30 - $21.68
Replacement Cost Analysis........................... $22.86 - $23.84
Liquidation Analysis................................ $21.70 - $24.34
</TABLE>
The procedures used by NationsBanc Montgomery to perform these analyses are
described below.
a. Going Concern Analysis. In performing the NAV calculations, NationsBanc
Montgomery analyzed the value of the Company under the assumption that the
Company would continue its current operations as a going concern. Under the
Going Concern Analysis, the assumption was made that the Company would continue
to incur corporate overhead expenses, which would be deducted from the
stabilized portfolio value prior to arriving at the final NAV.
NationsBanc Montgomery used three methods to calculate the going concern
value for stabilized assets. The first method utilized property-specific
projections of net operating income less maintenance capital expenditures for
each of the estimated calendar years 1998 and 1999 (the "Capitalization Rate
Analysis"). Such projections were based on information contained in monthly
operating performance reports through October 1998 prepared by Company
management. The projected cash flows were then capitalized at a blended
capitalization rate of 7.62% to arrive at a value for the Company's stabilized
portfolio of assets. Adding the value of the stabilized portfolio to the other
components of value described above, capitalization of the estimated calendar
years 1998 and 1999 cash flow projections yielded implied share prices of $21.54
and $24.12, respectively, which were less than the Acquiror's Initial Proposal
Price of $32.50.
The second method utilized Company management operating performance reports
to estimate cash flows for a period of ten years, between 1998 and 2008 (the
"Present Value Analysis"). NationsBanc Montgomery expanded the period to which
the discounted cash flow analysis was applied from five to ten years after
having had the opportunity to conduct its financial due diligence and further
opportunity to review the 1999 Business Plan. A discounted cash flow analysis
was applied to cash flows over the ten year period using discount rates between
11% and 13%. NationsBanc Montgomery increased the range of discount rates based
on its financial due diligence and the factors discussed under the heading
"Discount Rates for Analysis of the Present Value of Future Property Cash Flows"
in the summary of the Third NationsBanc Montgomery Report. The terminal value of
the assets was also determined by capitalizing the eleventh year (calendar year
2009) cash flow projection of each of the assets at a blended capitalization
rate of 8.62%. Adding the value of the stabilized portfolio to the other
components of value described above, the NAV per share range implied by such
present value analysis was $19.30 to $21.68, which were less than the Acquiror's
Initial Proposal Price of $32.50.
The third method of determining the going concern value of the stabilized
asset portfolio (the "Replacement Cost Analysis") used reports of the Company's
management to determine the aggregate costs of the construction of six recent
Company building projects:
- Sonoma (Oak Creek I)
- Britanny I (Oak Creek II)
- Baypointe
- Santa Rosa II
51
<PAGE> 59
- Santa Maria
- Rancho Santa Fe
The aggregate cost of construction of each project was divided by the number of
units available for lease in each project to determine an average cost per unit.
Using such statistics, NationsBanc Montgomery calculated the mean and median
cost per unit for the projects to be $116,118 and $117,526. Multiplying the mean
and median costs per unit by the number of units in the Company's stabilized
portfolio, the implied aggregate value of the stabilized portfolio was
calculated to be within a range of $1.895 billion to $1.918 billion. Adding the
value of the stabilized portfolio to the other components of value described
above, the NAV per share range implied by such capitalization was $22.86 to
$23.84, which was less than the Acquiror's Initial Proposal Price of $32.50.
b. Liquidation Analysis. Under a liquidation analysis, the stabilized
portfolio was valued using the same analysis performed in the Capitalization
Rate Analysis. NationsBanc Montgomery then assumed that the Company would incur
no additional corporate overhead expenses but rather would liquidate its
properties. Additionally, NationsBanc Montgomery assumed that a potential buyer
of the liquidated properties would have to pay additional sums based on a tax
reassessment made under California's Proposition 13 (the "Proposition 13
Liability"). Adding the value of the stabilized portfolio to the other
components of value described above and accounting for the Proposition 13
Liability, the NAV per share range implied by such capitalization was $21.70 to
$24.34, which was less than the Acquiror's Initial Proposal Price of $32.50.
THE THIRD NATIONSBANC MONTGOMERY REPORT
NationsBanc Montgomery prepared the Third NationsBanc Montgomery Report in
response to a further request by Morgan Stanley. NationsBanc Montgomery
incorporated its review of the 1999 Business Plan into its analyses where
appropriate.
Comparable Transactions Analysis. In the Third NationsBanc Montgomery
Report, NationsBanc Montgomery enclosed a copy of its comparable transactions
analyses from the First NationsBanc Montgomery Report and the Second NationsBanc
Montgomery Report. NationsBanc Montgomery noted that the Acquiror's Initial
Proposal Price implied a 19% premium over the closing price of the Common Stock
on November 30, 1998 and that the implied 19% premium was in excess of the 7.9%
median for discounts/premiums indicated in the First Report Comparable
Transactions.
Comparable Company Analysis. In the Third NationsBanc Montgomery Report,
NationsBanc Montgomery enclosed a copy of its comparable company analyses from
the First NationsBanc Montgomery Report and the Second NationsBanc Montgomery
Report. NationsBanc Montgomery reiterated that its analyses indicated that
multiples of stock price to estimated calendar year 1999 FFO per share for the
First Report Comparable Companies ranged from 7.2x to 10.6x, with a mean of
9.5x. NationsBanc Montgomery noted that the Acquiror's Initial Proposal Price
implied a multiple of 12.7x estimated calendar year 1999 FFO per share and a
premium of 34% over the mean 1999 FFO per share multiple of 9.5x. NationsBanc
Montgomery stated that it believed the Company's high FFO per share multiple was
partly due to support from an open market purchase program conducted by The
Irvine Company prior to the Acquiror's offer and that the share price prior to
the Acquiror's offer was also supported by The Irvine Company with respect to a
return guarantee with respect to land sales, which had expired.
Research Analyst Views
Views Prior to Offer. NationsBanc Montgomery enclosed a copy of a summary
of research analyst views analyses from the First NationsBanc Montgomery Report
and the Second NationsBanc Montgomery Report. NationsBanc Montgomery noted again
that the Research Reports indicated a range of estimated NAV per share of $24.00
to $28.71 with a mean of $26.57, to the extent the Research Reports indicated
such a value. NationsBanc Montgomery noted that the Acquiror's Initial Proposal
Price implied a 22% premium over the estimated mean NAV per share.
52
<PAGE> 60
Further, NationsBanc Montgomery noted that the estimated mean target price
per share valuation indicated in the Research Reports was $32.00. NationsBanc
Montgomery noted that the Acquiror's Initial Proposal Price implied a 2% premium
over the estimated mean target price per share, which was a projection of price
per share value over a 12 to 18 month period in the future.
Views After Offer Was Made. NationsBanc Montgomery enclosed copies of
publicly available equity analyst research reports regarding the Company
published between December 1, 1998 and December 4, 1998 (the "Post-Offer
Research Reports"). The Post-Offer Research Reports stated that the Acquiror's
Initial Proposal Price was reasonable or fair, with the exception of one such
report which contained no assessment regarding the Acquiror's Initial Proposal
Price's fairness or reasonableness. NationsBanc Montgomery noted that the common
view in unrelated and unsolicited conversations with Shareholders and research
analysts indicated support of the Acquiror's Initial Proposal Price.
Historical Stock Price Analysis. NationsBanc Montgomery enclosed a copy of
the primary page from its historical stock price analyses from the First
NationsBanc Montgomery Report and the Second NationsBanc Montgomery Report.
NationsBanc Montgomery noted that the Acquiror's Initial Proposal Price:
(a) implied:
- a 21% premium over the average stock price for the last 30 trading
days prior to November 23, 1998; and
- a 25% premium over the average price of the Common Stock for the last
90 trading days prior to November 23, 1998;
and (b) was greater than the highest price of the Common Stock for the
52-week period prior to November 23, 1998 (i.e., $32.44).
Trading Activity Analysis. NationsBanc Montgomery noted that over 20% of
the shares of Common Stock owned by Nonaffiliated Shareholders parties were sold
in the open market between December 1, 1998 and January 11, 1999 at prices less
than the Acquiror's Initial Proposal Price.
Rent Growth. NationsBanc Montgomery enclosed copies of rent growth
projections for the Company contained in the 1999 Business Plan and a
presentation by Company management to the Board of Directors on October 30,
1998. NationsBanc Montgomery noted that the 1999 Business Plan contained a 5%
rent growth projection for calendar year 1999 which the Board of Directors
approved at its October 30, 1998 Board meeting (the "October 1998 Board
Presentation").
NationsBanc Montgomery also enclosed a summary providing 21 references to
estimated calendar year 1999 rent growth rates for the Company obtained from the
Company's management and publicly available equity analyst research reports. The
estimated calendar year 1999 rent growth rates for the Company ranged from 3.0%
to 6.2%, with a mean of 4.8%. Based on the information contained in the 1999
Business Plan and the publicly available equity analyst research reports,
NationsBanc Montgomery, the Acquiror and The Irvine Company used the 5% rent
growth projection for calendar year 1999 contained in the 1999 Business Plan for
the applicable valuation analyses. NationsBanc Montgomery also enclosed
summaries of gross domestic product growth forecasts for calendar years 1999
through 2001 derived from publicly available university forecasts and publicly
available "blue chip" economic indicators as well as the Company's internal
forecasts regarding employment to show that forecasted declines in gross
domestic product growth and employment would likely affect housing demand and
the Company's ability to increase rents.
The Third NationsBanc Montgomery Report also clarified references to a
statement by the Chairman of the Board of Directors that the Company's rental
growth rate had been below the 12% annualized rate achieved by competitors in
the relevant geographic region in the first three quarters of 1998. As noted in
the Third NationsBanc Montgomery Report, the statement by the Chairman of the
Board of Directors was made in the context of setting a goal for Company
management that the Company's rental growth rate should meet or exceed the
projected rental growth rates generally anticipated in the regional marketplace
in the future, not that the Chairman had established a 12% rental growth rate
target for the Company.
53
<PAGE> 61
Bulk Discount. As stated in the third paragraph of the "Net Asset Value
Analyses" section of the summary of the Second NationsBanc Montgomery Report,
NationsBanc Montgomery adjusted the total enterprise value to reflect an
estimated discount of 10% based on, among other factors, the aggregate size of
the Company's portfolio, the time value of money and anticipated fees associated
with liquidation. NationsBanc Montgomery responded to Morgan Stanley's inquiries
regarding the discount by noting that in the experience of The Irvine Company
and NationsBanc Montgomery, and based on market research and other information,
buyers would typically apply a size-oriented discount to the total value of the
assets being acquired in a transaction. NationsBanc Montgomery stated its belief
that few buyers would be willing or have the resources available to purchase the
Company's entire portfolio, making liquidity an issue for a prospective buyer.
NationsBanc Montgomery further noted that the Company's portfolio was
geographically concentrated, increasing the risk that any legislative changes,
natural disasters or regional economic downturns would have an impact on the
entire portfolio.
Additionally, NationsBanc Montgomery noted that a third party buyer would
likely discount the value of the Company's aggregate portfolio for a number of
reasons, including the time and transaction costs necessary to complete a
liquidation of the portfolio and the downward pressure that the sale of each
property would cause on property prices for subsequent sales of other properties
out of the portfolio. A third party buyer would also likely have to account for
a substantial increase in property taxes due to tax reassessments under
California's Proposition 13 upon sale of the properties.
NationsBanc Montgomery focused on such factors to further explain its use
of the 10% discount. Finally, NationsBanc Montgomery noted that if Morgan
Stanley's assumptions that:
(a) no bulk discount would be used in the valuations; and
(b) a 45% savings could be achieved with respect to corporate, general
and administrative expenses
were applied to the NAV analysis, the price per share would still be below the
Acquiror's Initial Proposal Price.
Land Rights Agreement. NationsBanc Montgomery responded to Morgan Stanley's
inquiries regarding the valuation for the Land Rights Agreement. NationsBanc
Montgomery enclosed a copy of a portion of the 1999 Business Plan setting forth
the Company's projected Irvine Ranch development program.
NationsBanc Montgomery noted that the valuation for the Land Rights
Agreement was affected by the supply of available land for multi-family
development on the Irvine Ranch property. NationsBanc Montgomery noted that The
Irvine Company was not obligated under the Land Rights Agreement to make any
land available to the Company for future apartment development and land
identified in the 1999 Business Plan for multi-family development was not
covered by any contractual obligation of The Irvine Company. Using the 1999
Business Plan, NationsBanc Montgomery determined that 5,763 units were
potentially available for development over a period of five years under the Land
Rights Agreement, which was lower than the 5,888 unit number derived from the
estimates of The Irvine Company's management, available prior to preparation of
the Second NationsBanc Montgomery Report. NationsBanc Montgomery noted that the
estimates of the Company and NationsBanc Montgomery were aggressive and that The
Irvine Company had informed the Company on several occasions that the projects
listed in the 1999 Business Plan would likely not all be made available.
Consequently, there existed the possibility that not all of the land referred to
in the 1999 Business Plan would actually be developed under the Land Rights
Agreement, therefore impacting the NAV analysis.
NationsBanc Montgomery restated Morgan Stanley's assumption that 15,000
units could be developed over a period of 10 years to determine the value of the
Land Rights Agreement. NationsBanc Montgomery noted that 16,000 units had been
built over 30 years and that expectations that a similar number of units could
be built in 10 years in a more rigorous zoning environment were subject to
question. NationsBanc Montgomery also stated that the Company's historical
building rate after December 1, 1993 was 800 units per year, slightly over half
the number that would have to be built to meet Morgan Stanley's assumption.
Further, NationsBanc Montgomery noted that no apartment development had occurred
on the Irvine Ranch property for several years prior to December 1, 1993.
54
<PAGE> 62
NationsBanc Montgomery responded to Morgan Stanley's suggestion that the
value to the Company of the Land Rights Agreement should be greater than the 5%
discount applied to the fair market value of projected land sales determined by
independent third party appraisers by noting that the Land Rights Agreement
specified that a 5% discount to fair market value was to be applied. NationsBanc
Montgomery further noted that the 10% minimum return guarantee set forth in the
Land Rights Agreement had expired. Consequently, NationsBanc Montgomery had used
a 5% discount in arriving at the cash flow numbers to be valued over the
forecast period.
As stated in the "Net Asset Value Analyses" section of the description of
the Second NationsBanc Montgomery Report, NationsBanc Montgomery discounted to
present value the value of the hypothetical cash flows under the Land Rights
Agreement by 12%. NationsBanc Montgomery stated its assumption that discount
rates for land should be significantly higher than discount rates for completed
apartment units due to the speculative nature of the investment, the uncertainty
of entitlement, lack of cash flow and long term investment horizon.
On average, over the five year forecasted period, NationsBanc Montgomery
used an average land price of approximately $50,000 per unit in its valuation
analysis of the Land Rights Agreement. NationsBanc Montgomery responded to
Morgan Stanley's inquiries regarding the average land price by noting that the
Company's best Irvine Ranch land had a current price of $54,000 per unit, while
the land anticipated to be sold under the Land Rights Agreement was to be
located in other areas where land prices were lower.
NationsBanc Montgomery also responded to Morgan Stanley's assertion that a
decrease or cessation of multi-family development would result in higher rents
and increase the value of the existing portfolio. NationsBanc Montgomery noted
that The Irvine Company had the right to use any land on the Irvine Ranch
property for the development and sale of medium to high density residential
property, directly competing with the Company. Further, NationsBanc Montgomery
noted that competitors could build apartment units adjacent to the Irvine Ranch
property, offsetting the potential for rent growth from decreased on-ranch
development. The completion of the Highway 73 corridor and the impact of toll
roads on the apartment rental market in the Irvine Ranch area were also noted.
Corporate General and Administrative Costs. NationsBanc Montgomery enclosed
a copy of a portion of the 1999 Business Plan containing the Company's statement
of funds available for distribution. NationsBanc Montgomery reiterated that if
Morgan Stanley's assumptions that:
(a) no bulk discount would be used in the valuations; and
(b) a 45% savings could be achieved with respect to corporate, general
and administrative expenses were applied to the NAV analysis, the
price per share would still be below the Acquiror's Initial
Proposal Price.
NationsBanc Montgomery noted that corporate general and administrative
costs had been taken into account in its analyses because The Irvine Company
management had stated that they anticipated the retention of the Company's
existing management structure and further noted that NationsBanc Montgomery's
estimate of the Company's corporate general and administrative costs for
calendar year 1999 had already accounted for a reduction of $1,000,000 from the
estimate contained in the 1999 Business Plan to reflect cost savings from the
merger. NationsBanc Montgomery noted that The Irvine Company anticipated
retaining public securities and that consequently, expenses related to reporting
requirements and obtaining credit ratings would continue to be incurred after
the merger.
Capitalization Rates. NationsBanc Montgomery enclosed copies of:
- a summary of the cash flow capitalization rates for (i) the
Company's recent bids and acquisitions, (ii) comparable sales
transactions in the relevant geographic area, and (iii) publicly
available equity analyst research reports;
- a comparable sales transactions table included in the Second
NationsBanc Montgomery Report;
55
<PAGE> 63
- pro forma operations statements from a Company investment proposal
dated June 19, 1998 for Paloma Summit, Seaview Summit, Niguel Summit
and Hidden Hills;
- the stabilized portfolio valuation capitalization rate analysis
chart from the Second NationsBanc Montgomery Report;
- an executive summary of growth strategies provided by the Company's
management;
- a memorandum from the Company's management regarding financial
information for four recent acquisitions or bids by the Company;
- a chart comparing equity analyst research reports issued before and
after the announcement of the Acquiror's offer; and
- an article entitled "Denver developer buys 800 Hon units in Orange
County" from the January 8, 1999 edition of The Orange County
Register.
NationsBanc Montgomery reviewed the factors for selecting a blended cash
flow capitalization rate of 7.62% in the going concern analysis of the Company's
stabilized portfolio. NationsBanc Montgomery noted that it had reviewed 45
Company properties and 20 comparable apartment projects in the relevant
geographic area. NationsBanc Montgomery further noted that:
- comparable sales transactions and publicly available equity analyst
research reports each implied cash flow capitalization rates of 7.8%;
- the Hon apartment portfolio sale in Laguna Niguel implied a
capitalization rate of 7.55%, which the Company had valued at a 7.6%
forward twelve month capitalization rate;
- recent Company bids and acquisitions were valued using capitalization
rates ranging from 7.3% to 7.8%;
- the 1999 Business Plan specified target "breakeven" capitalization
rates of 7.75%;
- over the 90 days prior to the Third NationsBanc Montgomery Report, the
turmoil in public equity and debt markets had reduced the number of
real estate buyers, increasing capitalization rates;
- two recent comparable sales should have their capitalization rates
adjusted due to favorable conditions specific to those transactions;
- older properties in the Company portfolio would be valued at
significantly higher capitalization rates, balancing the impact of
higher value properties; and
- the blended capitalization rate of 7.62%, when applied to the
Acquiror's Initial Proposal Price, implied a price of approximately
$140,000 per stabilized apartment unit, which was two times greater
than the average price for an apartment unit sold in Orange County,
California, 34% higher than comparable apartment unit prices in the
southern Orange County, California area and higher than all apartment
unit prices in Orange County California.
Discount Rates for Analysis of the Present Value of Future Property Cash
Flows. NationsBanc Montgomery reviewed the factors it considered in selecting a
range of discount rates between 11% and 13% to be applied in the second method
of performing a going concern analysis with respect to the Company's stabilized
portfolio. NationsBanc Montgomery noted that the Company's management and the
1999 Business Plan stated that the estimated cost of equity was 15%. Based on
the assumption that the cost of equity was 15% and using the same capital
structure and cost of debt assumed by Morgan Stanley, NationsBanc Montgomery
noted that the assumptions implied a weighted average cost of capital of 11.8%.
NationsBanc Montgomery further assumed that institutional investors such as
pension funds, who would be the most likely private buyers of a portfolio equal
in size to the Company's portfolio, would apply discounts ranging from 11 to
13%.
NationsBanc Montgomery did not apply a capital asset pricing model in its
analysis because it believed that the model was flawed when applied to the real
estate industry, due in part to (a) its use of a correlation
56
<PAGE> 64
between the price of the Common Stock and the Standard & Poor's stock index over
time, since the index does not allow REITs to be included in the index due to
circumstances surrounding their structure; and (b) the insignificance of the
correlation between the price of the Common Stock and the Standard & Poor's
stock index.
While the foregoing summary describes all analyses and examinations that
NationsBanc Montgomery deemed material in its preparation of the NationsBanc
Montgomery Reports, it is not a comprehensive description of all analyses and
examinations actually conducted by NationsBanc Montgomery. The preparation of
the NationsBanc Montgomery Reports was not susceptible to partial analysis or
summary description. NationsBanc Montgomery believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses and of the factors considered, without considering all
analyses and factors, would create an incomplete view of the process underlying
the analyses set forth in its presentations to the Acquiror and The Irvine
Company. In addition, NationsBanc Montgomery 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. The fact that any specific
analysis has been referred to in the summary above is not meant to indicate that
such analysis was given greater weight than any other analysis. Accordingly, the
ranges of valuations resulting from any particular analysis described above
should not be taken to be NationsBanc Montgomery's view of the actual value of
the Company.
In performing its analyses, NationsBanc Montgomery made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of the
Acquiror, The Irvine Company or the Company. The analyses performed by
NationsBanc Montgomery are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than those
suggested by such analyses. Such analyses were provided to the Acquiror and The
Irvine Company in connection with the delivery of the NationsBanc Montgomery
Reports. The analyses do not purport to be appraisals or to reflect the prices
at which a company might actually be sold or the prices at which any securities
may trade at any time in the future.
As described above, the NationsBanc Montgomery Reports and NationsBanc
Montgomery's presentations to the Acquiror and The Irvine Company were among a
number of factors taken into consideration by the Acquiror and The Irvine
Company in making their determination to make the proposal set forth in the
December 1 Letter and to approve the Merger.
Upon execution of the Acquiror Engagement Letter, The Irvine Company agreed
to pay NationsBanc Montgomery a retainer fee of $250,000. In addition, The
Irvine Company agreed to pay NationsBanc Montgomery a transaction fee of
approximately $4.5 million, contingent on the consummation of an acquisition of
the Company. The Acquiror Engagement Letter also calls for The Irvine Company to
reimburse NationsBanc Montgomery for its reasonable out-of-pocket expenses.
Pursuant to a separate letter agreement, The Irvine Company has agreed to
indemnify NationsBanc Montgomery, its affiliates, and their respective partners,
directors, officers, employees and controlling persons against certain
liabilities, including liabilities under the federal securities laws.
In the ordinary course of its business, NationsBanc Montgomery actively
trades the equity securities of the Company for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. NationsBanc Montgomery has also acted as an
underwriter in connection with public offerings of the Company's securities and
has performed various investment banking services for the Company. NationsBanc
Montgomery's ultimate parent corporation, BankAmerica Corporation, and its
affiliates have commercial lending relationships with each of The Irvine Company
and the Company; additionally, Bank of America has agreed to provide funding to
the Acquiror and The Irvine Company in connection with the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. In considering the recommendation of the Special Committee and the
Board of Directors, Shareholders should be aware that the officers and Directors
of the Company may have interests in the Merger or relationships, including
those referred to below, that may present potential or actual conflicts of
57
<PAGE> 65
interest in connection with the Merger. The Special Committee and the Board of
Directors were aware of these potential or actual conflicts of interest and
considered them along with other matters described under "-- Recommendation of
the Special Committee and the Board of Directors; Fairness of the Merger." See
also "Certain Relationships and Transactions."
Donald Bren. Mr. Donald Bren, a Director of the Company, is a director,
executive officer and the sole shareholder of The Irvine Company as well as an
executive officer and indirect 100% owner of the Acquiror. As described more
fully in "General -- The Acquiror," The Irvine Company is the managing member of
the Acquiror and the sole shareholder of ICDC, which holds the sole non-managing
member interest in the Acquiror. After the Acquiror delivered the December 1
Letter, Mr. Bren recused himself from all discussions of the Board of Directors
of the Company involving the potential Merger until the February 1, 1999 meeting
of the Board of Directors. As described more fully in "Background; Purpose and
Effects of the Merger -- Background of the Merger," Mr. Bren, on behalf of the
Acquiror, was an active participant in the negotiations regarding the Merger
Agreement, and, if the Merger Proposal is approved, Mr. Bren will indirectly own
all of the membership interests in the Surviving Company.
Treatment of Options and Restricted Stock Units; Retention Letters. Certain
Directors have received options ("Director Options") to acquire Common Stock
pursuant to the Company's 1993 Stock Option Plan for Directors (the "Director
Plan") and certain officers and employees of the Company and its affiliates have
received options ("Employee Options") to acquire Common Stock and restricted
stock units ("Units") pursuant to the Company's 1993 Long-Term Stock Incentive
Plan (the "1993 Plan") and the Company's 1996 Long-Term Stock Incentive Plan
(the "1996 Plan" and, together with the Director Plan and the 1993 Plan, the
"Plans"). The Director Options and the Employee Options are together referred to
as the "Options," and the Directors and the officers and employees of the
Company and its affiliates are together referred to as "Holders." In addition,
Mr. McFarland has the right, under certain circumstances, to receive future
grants of restricted stock units ("Future Units") pursuant to the terms of the
July 14, 1997 employment offer letter agreement between the Company and Mr.
McFarland (the "McFarland Agreement"). Capitalized terms not otherwise defined
in this subsection only have the respective meanings set forth in the Retention
Letters (as defined below).
Pursuant to the Merger Agreement, the Company will take all actions
necessary to assure that, prior to the time the Merger becomes effective (the
"Effective Time"), each outstanding Option and each Unit (and any dividend
equivalents relating thereto) (and each right to any award under the Plans) will
be canceled. The Merger Agreement provides that the Company will take all
actions necessary to assure that, prior to the Effective Time, each Holder will
be entitled to receive a cash amount equal to the excess of $34.00 over the
exercise price for each share of Common Stock subject to the Option, payable at
the Effective Time for a vested Option or a portion of an Option. All Director
Options are fully vested. All unvested Employee Options held by any Holder not a
party to a Retention Letter (as defined below) will be canceled. Each holder of
Employee Options has entered into a Retention Letter, except for James E. Mead,
the Company's former Chief Financial Officer, whose Employee Options are
addressed in his termination agreement. Each other Employee Option will be
canceled according to the terms of the letter agreements dated as of January 22,
1999 between the Company and the Holder of such Employee Option or Unit (the
"Retention Letters"), which were authorized by the Special Committee on December
22, 1998. In the case of an Employee Option, the Retention Letters provide that
each Holder will be entitled to receive a cash amount equal to the excess of
$34.00 over the exercise price for each share of Common Stock subject to the
Option, payable at the Effective Time if then vested, or at the time such Option
or portion of an Option would otherwise have vested according to the relevant
award agreement. In the case of a Unit, the Retention Letters provide that each
Holder will be entitled to receive a cash amount equal to $34.00 per Unit,
payable at the time such Unit would otherwise have been available for vesting
according to the relevant award agreement, assuming the achievement of all
applicable performance targets for the relevant periods. In the case of Mr.
McFarland's Future Units, his Retention Letter provides that he will be entitled
to receive a cash amount equal to $34.00 per Future Unit, payable at the time
the restricted stock units with respect to such Future Unit would otherwise have
been available for vesting according to the McFarland Agreement, assuming that
restricted stock units had been granted to Mr. McFarland in accordance with the
terms of the McFarland Agreement. It is a condition of
58
<PAGE> 66
payment with respect to both Options and Units (and Future Units) that the
Holder remain continuously employed by the Company until the respective payment
dates, except as otherwise described below. The Unit amounts (and the Future
Unit amounts) will bear interest from the Effective Time (or, in the case of the
Future Unit amounts, from February 1 of the scheduled year of grant of the
restricted stock units) to the relevant payment date, payable on the last day of
each calendar quarter, at the annual rate of 5% through February 29, 2000, and
6% from March 1, 2000 until the date such Unit (or in the case of such Future
Unit, the date the restricted stock unit with respect to such Future Unit) would
have been available for vesting or, if sooner, until payment for such Units (or
Future Units) is accelerated in accordance with the Retention Letters. Interest
will be payable in cash as promptly as practicable following each interest
payment date.
Pursuant to the Retention Letters, in the event that a Holder's employment
is terminated involuntarily by the Company without Cause or by the Holder for
Good Reason prior to the relevant payment date, payment for unvested Options and
Units (and Future Units) will be accelerated and made within 10 days after such
employment termination date.
The table below shows the Options and Units (and Future Units) currently
held by each of the Company's executive officers and Directors (and all other
individuals as a group) and the amounts in respect of such Options and Units
(and Future Units) such individuals (and such group) will be entitled to receive
at the Effective Time and in the future (not including interest). All amounts to
be paid at the Effective Time relate to vested Options.
<TABLE>
<CAPTION>
PAYMENT AT POTENTIAL
OPTIONS OUTSTANDING EFFECTIVE FUTURE
NAME GRANTED UNITS(1) TIME PAYMENTS
---- ------- ----------- -------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Independent Directors:
Anthony M. Frank.......................... 10,500 -- $ 132.1 $ --
John F. Grundhofer........................ 3,500 -- 16.9 --
Bowen H. McCoy............................ 10,500 -- 132.1 --
Jack W. Peltason.......................... 10,500 -- 132.1 --
John F. Seymour, Jr....................... 10,500 -- 132.1 --
Executive Officers:
William H. McFarland...................... 100,000 104,500 150.0 3,853.0
William W. Thompson....................... 45,000 20,000 175.2 781.0
Richard E. Lamprecht...................... 68,500 16,000 643.2 629.8
Bruce N. Dorfman.......................... 30,000 8,000 62.9 326.6
Rudy A. Svrcek............................ 10,000 10,000 -- 381.9
Scott A. Reinert.......................... 32,000 8,000 265.5 308.7
Shawn Howie............................... 65,000 4,000 903.3 160.8
All Other Individuals As a Group.......... 202,000 22,000 1,039.2 1,197.5
</TABLE>
- ---------------
(1) Represents Units that have been granted except in Mr. McFarland's case where
it represents Units granted as well as Future Units.
Termination Protection and Severance. Messrs. McFarland, Thompson,
Lamprecht, Svrcek, Reinert and Howie (each, an "executive") also entered into
termination protection and severance arrangements with the Company set forth in
their Retention Letters, which provide that, in addition to the above-mentioned
treatment of Options and Units (and Future Units, in Mr. McFarland's case), an
executive whose employment is terminated involuntarily by the Company without
Cause, or by himself for Good Reason within eighteen months following the
Merger, will be entitled to one year's base salary at the rate in effect at
either (i) the time of his termination of employment or (ii) the Effective Time,
whichever is higher. Such amount will be paid to the executive in a lump sum,
without reduction for the time value of money, as soon as practicable, but in
any event within 10 days, after the date of his termination of employment. The
severance benefits payable under the Retention Letters depend on the effective
rate of the base salary applicable to an
59
<PAGE> 67
executive at the time of his termination of employment. Therefore, the severance
amount payable to an executive is not precisely determinable. However, assuming
termination at current levels of base salaries, the amounts that would be
payable to Messrs. McFarland, Thompson, Lamprecht, Svrcek, Reinert and Howie
would be $400,000, $275,000, $200,000, $175,000, $175,000 and $165,000,
respectively.
The Retention Letters also provide that the Company will bear the legal
fees and expenses incurred by an employee to remedy a breach of the terms of the
Retention Letters by the Company, unless the employee's claim is determined by a
court or arbitrator to be without merit.
Employment Agreement of Richard Lamprecht with the Acquiror. The Acquiror
and Richard E. Lamprecht, Senior Vice President of the Company, have entered
into an employment agreement dated April 11, 1999, which is intended to replace
his existing employment agreement with the Company. Mr. Lamprecht's prospective
employment with the Acquiror is effective as of, and dependent upon, the Merger
and provides for a base salary of $200,000 per year. Mr. Lamprecht will be a
participant in the Acquiror's Executive Incentive Cash Award Plan retroactive to
January 1, 1999 under which he will be eligible to earn up to 100% of base
salary based upon his performance and the performance of the Acquiror. In
addition, Mr. Lamprecht will be a participant in the Acquiror's Long Term
Compensation Plan ("LTCP") retroactive to January 1, 1999. Mr. Lamprecht's
annual awards under the LTCP will have a target value equal to 145% of his base
salary through 2001 and will be payable after a four year vesting period. Mr.
Lamprecht will also be entitled to a monthly car allowance of $700 and
participation in normal and customary benefit plans of the Acquiror such as
health and life insurance. At the Effective Time, Mr. Lamprecht's existing
employment agreement with the Company will terminate and his rights thereunder
will be canceled. Mr. Lamprecht's employment agreement with the Acquiror will
not affect his rights under his Retention Letter.
Indemnification and Insurance. Pursuant to the Merger Agreement, for six
years after the Effective Time, the Acquiror will cause the Surviving Company to
indemnify and hold harmless the present and former officers and Directors of the
Company in respect of acts or omissions occurring prior to the Effective Time to
the extent provided under the Company's Articles of Incorporation and by-laws in
effect on the date of the Merger Agreement. For six years after the Effective
Time, the Acquiror will cause the Surviving Company to provide officers' and
directors' liability insurance in respect of acts or omissions occurring prior
to the Effective Time covering each such person currently covered by the
Company's officers' and directors' liability insurance policy on terms with
respect to coverage and amount no less favorable than those of such policy in
effect on the date. See also "The Merger -- Additional Agreements."
Position of Executive Officers, Directors and Affiliates of the
Company. Certain executive officers, Directors and affiliates of the Company
hold shares of Common Stock. See "Securities Ownership" and the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998. After inquiry of
these Shareholders, the Company believes that they intend to vote their shares
in favor of the Merger. Except as otherwise set forth in this Proxy Statement
(with respect to the Acquiror and its affiliates), such Shareholders have not
informed the Company of the reasons for their vote.
CERTAIN CONSEQUENCES OF THE MERGER
Pursuant to the Merger Agreement, following approval and adoption of the
Merger Proposal and subject to the fulfillment or waiver of certain conditions,
the Company will be merged with and into the Acquiror, and the Acquiror will
continue as the Surviving Company in the Merger.
The Acquiror will continue in existence as the Surviving Company and,
without further transfer, succeed to and possess all of the rights, privileges
and powers of the Company, and all of the assets and property of whatever kind
and character of the Company will vest in the Acquiror without further act or
deed; thereafter, the Acquiror, as the Surviving Company, will be liable for all
of the liabilities and obligations of the Company and any claim or judgment
against the Company may be enforced against the Acquiror.
Therefore, following the Merger, the Nonaffiliated Shareholders will cease
to participate in future earnings or growth, if any, of the Company or benefit
from any increases, if any, in the value of the Company,
60
<PAGE> 68
and they no longer will bear the risk of any decreases in the value of the
Company. Because the Common Stock will be canceled as a result of the Merger,
the Common Stock will be delisted from the NYSE.
Distributions by the Surviving Company after completion of the Merger
(other than any distribution for which the record date is a date prior to the
date of completion of the Merger) will be paid to the members of the Surviving
Company and not to the Nonaffiliated Shareholders. The rate of distributions
after completion of the Merger is expected to correspond to the rate of
distributions by the Operating Partnership after completion of the Merger, and
may be greater than the rate of dividends presently paid by the Company.
The Common Stock is currently registered under the Securities Exchange Act
of 1934 (the "Exchange Act"). Following the Merger, the Common Stock will become
eligible for termination of registration pursuant to Section 12(g)(4) of the
Exchange Act, and its registration under the Exchange Act will be terminated.
The Company's obligation to file reports pursuant to Section 15(d) of the
Exchange Act will be suspended. In addition, the Company will be relieved of its
obligation to comply with other requirements of the Exchange Act, including the
proxy rules of Exchange Act Regulation 14A, the short-swing trading profits
provision of Exchange Act Section 16 and, with respect to future transactions
involving the Company, the "going private" provisions of Exchange Act Rule
13e-3. Accordingly, less information will be required to be made publicly
available than presently is the case. However, the Operating Partnership and IAC
Capital Trust will continue to be reporting companies.
At the Effective Time, certain unexercised options to purchase Common Stock
pursuant to certain stock option plans in which certain Company employees and
Directors participate will be converted into cash and rights to future cash
payments. See "-- Interests of Certain Persons in the Merger."
The officers of the Acquiror immediately prior to the Merger will be the
executive officers of the Surviving Company immediately after the Merger. The
certificate of formation and limited liability company agreement of the Acquiror
in effect immediately prior to the Merger will be the certificate of formation
and limited liability company agreement of the Surviving Company immediately
after the Merger.
The Company is party to certain agreements with The Irvine Company
(including the Land Rights Agreement and the Miscellaneous Rights Agreement).
There can be no assurance that the Surviving Company and The Irvine Company will
not terminate any of these agreements or that any of these agreements will
otherwise remain in effect following the Merger, or that the Surviving Company
will continue to enjoy the benefits of these agreements.
PLANS FOR THE COMPANY AFTER THE MERGER
Except as otherwise described in this Proxy Statement, the Company has not,
and the Company has been advised by the Acquiror that none of the Acquiror, The
Irvine Company or Mr. Bren has, as of the date of this Proxy Statement, approved
any specific plans or proposals for any extraordinary corporate transaction
involving the Surviving Company after the completion of the Merger or any sale
or transfer of a material amount of assets currently held by the Company after
the completion of the Merger. The Company has been advised by the Acquiror that
it is the Acquiror's, The Irvine Company's and Mr. Bren's intention to hold the
assets for long term investment. Although the Acquiror deems it unlikely, it
reserves the right to change its plan at any time, and the Acquiror may elect to
sell, transfer or otherwise dispose of all or any portion of the assets
currently held by the Company to one or more of its affiliates or to any other
parties as warranted by future conditions. In addition, the Company has been
advised by the Acquiror and The Irvine Company that they currently plan to
retain the members of senior management of the Company, in their current
positions with the Surviving Company after the Merger. The Irvine Company and
the Acquiror reserve the right to make whatever personnel changes with respect
to the current members of management of the Company they deem necessary after
completion of the Merger. As of the date hereof, only Mr. Lamprecht has entered
into an employment agreement with the Acquiror. See "Interests of Certain
Persons in the Merger -- Employment Agreement of Richard Lamprecht with the
Acquiror."
The Company has been advised by the Acquiror that the Acquiror's and The
Irvine Company's present intention is to retain all existing public and
tax-exempt debt securities and preferred limited partnership units
61
<PAGE> 69
in the Operating Partnership and preferred securities of IAC Capital Trust.
Furthermore, the Acquiror intends to seek reaffirmation of the existing
investment grade ratings for these securities. The Acquiror's plans are subject
to revision based on feedback from the rating agencies, or otherwise, and the
Acquiror reserves the right to effect such revisions. There can be no assurance
that any rating agencies will reaffirm current investment grade ratings for any
of the aforementioned securities.
CONDUCT OF THE BUSINESS OF THE COMPANY IF THE MERGER IS NOT CONSUMMATED
If the Merger is not consummated, the business and operations of the
Company are expected to continue to be conducted substantially as currently
conducted. The Company anticipates that The Irvine Company would continue to be
a substantial Shareholder and to have the right to nominate three out of the
nine members of the Board of Directors.
MATERIAL TAX CONSEQUENCES
The exchange of Common Stock for cash by a Shareholder in the Merger will
be a taxable transaction under the Code and may also be a taxable transaction
under state and local and other tax laws.
In general, a Shareholder will recognize gain or loss equal to the
difference between the tax basis of his or her Common Stock and the amount of
cash received in exchange therefor. Such gain or loss will be capital gain or
loss if the Common Stock is a capital asset in the hands of the Shareholder and
will be long-term gain or loss if the Shareholder has held the Common Stock for
more than one year as of the Effective Time. These rules may not apply to
Shareholders who acquired their Common Stock pursuant to the exercise of stock
options or other compensation arrangements with the Company or who are not
citizens or residents of the United States or who are otherwise subject to
special tax treatment under the Code.
For United States tax purposes the Merger will be treated as if the Company
sold all of its assets, including its interests in real property, to the
Acquiror and then liquidated. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a Foreign Shareholder will be subject to (i) United
States federal income tax at regular graduated rates on the amount of the Merger
proceeds that is distributed to such Foreign Shareholder and is attributable to
gains on the disposition of the Company's real property and other "United States
real property interests," and (ii) withholding in respect of this tax at a rate
of 35% of that amount. A "Foreign Shareholder" is a person or entity that, for
United States federal income tax purposes, is a non-resident alien individual, a
foreign corporation, a foreign partnership, or a foreign estate or trust.
If the Common Stock is treated as a "United States real property interest,"
then under FIRPTA a Foreign Shareholder will be subject to (i) United States
federal income tax at regular graduated rates on gain recognized on the
disposition of Common Stock pursuant to the Merger, and (ii) withholding in
respect of this tax at a rate of 10% of (x) the amount realized in the Merger,
less (y) any amount subject to 35% withholding as described above. In general,
the gain recognized on the disposition of Common Stock would not be subject to
this tax if (i) the Company is a "domestically controlled REIT" within the
meaning of the Code or (ii) the Common Stock is regularly traded on an
established securities market within the meaning of the Code and the Foreign
Shareholder does not own, actually or constructively under attribution rules
provided in the Code, in excess of 5% of the fair market value of all Common
Stock outstanding at any time during the shorter of the five-year period
preceding the Merger or the Foreign Shareholder's holding period. The Company
believes that the Common Stock is regularly traded on an established securities
market within the meaning of the Code and will endeavor to determine whether it
continues to be so traded and whether the Company is a "domestically controlled
REIT" as of the Effective Time. Foreign Shareholders are urged to consult their
tax advisors concerning the potential applicability of these provisions and the
consequences of a sale or other disposition of their Common Stock in advance of
the Merger.
To avoid FIRPTA withholding, non-Foreign Shareholders must certify under
penalties of perjury their non-foreign status by completing the certification
form that will be included with the letter of transmittal after the proposed
Merger.
62
<PAGE> 70
The exchange of Common Stock for cash by a Shareholder will be reported to
the Internal Revenue Service. "Backup" withholding at a rate of 31% will apply
to payments made to a non-Foreign Shareholder (other than a corporation or any
other exempt non-Foreign Shareholder) unless the non-Foreign Shareholder
furnishes its taxpayer identification number in the manner prescribed in
applicable Treasury regulations, certifies that such number is correct,
certifies as to no loss of exemption from backup withholding and meets certain
other conditions. A Foreign Shareholder will be exempt from backup withholding
provided that certain certification requirements are satisfied. Payment of the
proceeds from the disposition of the Common Stock to or through the United
States office of a broker is subject to information reporting and backup
withholding unless the Shareholder establishes an exemption from information
reporting and backup withholding.
Any amounts withheld from a Shareholder under the withholding rules
described above will be allowed as a refund or a credit against such
Shareholder's United States federal income tax liability, provided the required
information is furnished to the Internal Revenue Service on a timely basis.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED UPON PRESENT LAW. DUE TO THE INDIVIDUAL NATURE OF
TAX CONSEQUENCES, SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE EFFECTS OF
APPLICABLE STATE, LOCAL OR OTHER TAX LAWS.
LITIGATION REGARDING THE MERGER
Shortly after the public announcement of the proposed business combination
set forth in the December 1 Letter, certain lawsuits were initiated by
Shareholders against The Irvine Company, the Acquiror, the Company and the
Company's Directors (including Mr. Bren) (collectively, the "Defendants")
alleging, among other things, that the price offered by the Acquiror for the
shares held by the Nonaffiliated Shareholders was inadequate, that the Directors
failed to take adequate steps to obtain the highest possible price for the
Nonaffiliated Shareholders and that negotiations were not conducted at
arm's-length. A total of four class actions were filed in the Superior Court of
California, Orange County, on behalf of plaintiff Shareholders and a purported
class of all Nonaffiliated Shareholders. Subsequently, a consolidated class
action complaint (combining the four prior purported class actions relating to
the acquisition offer) was served. The consolidated class action complaint makes
general allegations similar to those made in the four prior actions, in addition
to the added allegations that advisors working for the Company, the Acquiror and
The Irvine Company were not sufficiently independent because of their other
relationships with interested parties. Although the consolidated class action
complaint seeks injunctive relief (including enjoining the Special Meeting and
the Merger, or rescinding the Merger if it is consummated) and unspecified money
damages, no motions seeking to enjoin the Merger or the Special Meeting have
been filed.
The plaintiff Shareholders and the Defendants have reached an agreement in
principle to settle the consolidated class action lawsuit based on the final
terms of the Merger. The agreement in principle is subject to, among other
things, documentation and court approval.
The Acquiror and The Irvine Company, on the one hand, and the Company, the
Board of Directors (including Mr. Bren) and the Special Committee, on the other
hand, each believe that their respective actions in connection with the proposed
Merger have been in accordance with applicable Maryland and other law (based on
each party's consultation with legal counsel, including Maryland legal counsel).
ACCOUNTING TREATMENT
The Merger will be accounted for by the Acquiror under the "purchase"
method of accounting in accordance with generally accepted accounting
principles. Therefore, the Acquiror will treat the Merger as a purchase of an
approximately 83% interest in the Company.
63
<PAGE> 71
THE MERGER
The following is a summary of the material provisions of the Merger
Agreement. The following summary does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement which is attached
as Appendix A to this Proxy Statement and is incorporated herein by reference.
Shareholders are urged to read the Merger Agreement in its entirety and to
consider it carefully. Capitalized terms not otherwise defined in the following
summary have the respective meanings set forth in the Merger Agreement.
THE MERGER
The Merger Agreement provides for the merger of the Company with and into
the Acquiror. The Acquiror will be the Surviving Company, and it will continue
its limited liability company existence under the laws of the State of Delaware.
At the Effective Time, the separate corporate existence of the Company will
cease. The Surviving Company will possess all the rights, privileges,
immunities, powers and purposes of the Company, and it will assume and become
liable for all liabilities and obligations of the Company.
MERGER CONSIDERATION
In the Merger, each outstanding share of Common Stock will be converted, by
virtue of the Merger and without any action on the part of the Shareholders,
into the right to receive $34.00 in cash per share. The Merger Consideration was
determined as the result of arm's-length negotiations between the Special
Committee and the Acquiror. See "Background; Purpose and Effects of the
Merger -- Background of the Merger," "-- The Acquiror's Purpose; Structure of
the Merger," "-- Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger" and "-- Opinion of the Financial Advisor for
the Special Committee."
EFFECTIVE TIME
The Effective Time will be on the later to occur of (i) the filing with and
acceptance for record of the Articles of Merger by the State Department of
Assessments and Taxation of Maryland and (ii) 5:00 p.m. New York City time on
the date of the filing of the Certificate of Merger with the Secretary of State
of Delaware. The Articles of Merger and the Certificate of Merger will be filed
as soon as practicable after the requisite approval and adoption of the Merger
Proposal by the Shareholders at the Special Meeting are obtained and the other
conditions precedent to the consummation of the Merger have been satisfied, or,
if legally permissible, waived. See "-- Conditions."
EXCHANGE AND PAYMENT PROCEDURES
As soon as practicable after the Effective Time, the Exchange Agent will
mail to each record holder of an outstanding certificate representing Common
Stock immediately prior to the Effective Time, a letter of transmittal and
instructions for use in effecting the surrender of such certificate in exchange
for the Merger Consideration. Upon surrender to the Exchange Agent of a
certificate representing Common Stock, together with such letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such certificate shall be entitled to receive
$34.00 in cash per share. Until surrendered in accordance with the foregoing
instructions, each certificate representing Common Stock will represent for all
purposes only the right to receive the Merger Consideration.
SHAREHOLDERS SHOULD NOT SEND THEIR COMMON STOCK CERTIFICATES NOW; THEY
SHOULD SEND THEM ONLY PURSUANT TO INSTRUCTIONS SET FORTH IN LETTERS OF
TRANSMITTAL TO BE MAILED TO SHAREHOLDERS AS SOON AS PRACTICABLE AFTER THE
EFFECTIVE TIME. IN ALL CASES, THE MERGER CONSIDERATION WILL BE PROVIDED ONLY IN
ACCORDANCE WITH THE PROCEDURES SET FORTH IN THIS PROXY STATEMENT, THE MERGER
AGREEMENT AND SUCH LETTERS OF TRANSMITTAL.
The Company and the Acquiror strongly recommend that certificates
representing Common Stock and letters of transmittal be transmitted only by
registered United States mail, return receipt requested, appropriately insured.
Shareholders whose certificates are lost will be required at the holder's
expense to furnish a lost certificate affidavit and bond acceptable in form and
substance to the Exchange Agent.
64
<PAGE> 72
Any Merger Consideration made available to the Exchange Agent that remains
unclaimed by Shareholders for six months after the Effective Time will be
delivered to the Acquiror, and any Shareholders who have not theretofore made an
exchange must thereafter look to the Acquiror for payment of their claim for
Merger Consideration.
The Acquiror will pay all charges and expenses of the Exchange Agent in
connection with the Merger and the payment and issuance of the Merger
Consideration.
Any questions concerning exchange and payment procedures and requests for
letters of transmittal may be addressed to EquiServe, L.P., the Exchange Agent.
TRANSFER OF COMMON STOCK
No transfer of Common Stock will be made on the stock transfer books of the
Company after the Effective Time. If, at or after the Effective Time,
certificates of Common Stock are presented, they will be canceled and exchanged
for the right to receive $34.00 in cash per share as provided in "-- Exchange
and Payment Procedures."
ADDITIONAL AGREEMENTS
The Company and the Acquiror have agreed in the Merger Agreement to prepare
and file with the Commission this Proxy Statement and the Schedule 13E-3 and
otherwise use all reasonable efforts to cause this Proxy Statement and the
Schedule 13E-3 to be mailed to the Shareholders at the earliest practicable
date. The Company and the Acquiror have agreed to cooperate with each other and
use their reasonable efforts to take or cause to be taken all actions, and do or
cause to be done all things, necessary, proper or advisable on their part under
the Merger Agreement and applicable laws to consummate and make effective the
Merger and the other transactions contemplated by the Merger Agreement as soon
as practicable.
The Merger Agreement provides that the Company will (i) as soon as
practicable, call and convene the Special Meeting for the purpose of obtaining
the required Shareholder approvals and (ii) through the Board of Directors and
the Special Committee, recommend to the Shareholders that they approve the
Merger Proposal and will not withdraw, modify or change such recommendation, or
recommend any other offer or proposal, at any time prior to the conclusion of
the Special Meeting. Notwithstanding the foregoing, the Special Committee or the
Board of Directors (with the concurrence of the Special Committee) may at any
time prior to the Effective Time withdraw, modify or change any recommendation
regarding the Merger or the Merger Agreement, or recommend any other offer or
proposal, if the Special Committee or the Board of Directors (with the
concurrence of the Special Committee), after consultation with its counsel,
determines that taking any such action is required in accordance with its duties
to the Shareholders under applicable law.
The Merger Agreement provides that (i) the Company will afford the
representatives of the Acquiror reasonable access to its and its subsidiaries'
properties, books, contracts, commitments and records and (ii) each of the
Company and the Acquiror will cooperate with each other and use its reasonable
efforts to take or cause to be taken all actions, and do or cause to be done all
things, necessary, proper or advisable on their part under the Merger Agreement
and applicable laws to consummate and make effective the Merger and the other
transactions contemplated by the Merger Agreement as soon as practicable.
Pursuant to the Merger Agreement, the Company has agreed to take all
actions necessary to assure that, prior to the Effective Time, (i) each
outstanding Option, Unit and Future Unit is canceled; (ii) each Plan is
terminated; and (iii) no holder of an Option, Unit, Future Unit or other award
will have a right to acquire an interest in the Company or the Acquiror as a
result of the exercise of such Option, Unit, Future Unit or other award at or
after the Effective Time.
The Merger Agreement provides that the Company will not, directly or
indirectly, (i) solicit, knowingly encourage, initiate or participate in any
negotiations, inquiries or discussions with respect to any offer or proposal to
acquire all or any part of its business, assets or capital shares whether by
merger, consolidation, other business combination, purchase of assets, tender
offer or exchange offer or otherwise (each of the foregoing, an "Acquisition
Proposal"); (ii) disclose, in connection with an Acquisition Proposal, any
65
<PAGE> 73
information or provide access to its properties, books or records, except as
required by law or pursuant to a governmental request for information; (iii)
enter into or execute any agreement relating to an Acquisition Proposal; or (iv)
make or authorize any public statement, recommendation or solicitation in
support of any Acquisition Proposal other than with respect to the Merger.
Notwithstanding the foregoing, the Special Committee, on behalf of the Company,
may undertake to engage in certain of the above prohibited acts in connection
with a Superior Proposal.
The Acquiror and the Company have also agreed to take certain actions with
regard to compliance with withholding obligations, development of a joint
communications plan, directors' and officers' liability protections and the
payment of previously declared but unpaid dividends.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, from February 1, 1999 to the Effective
Time, the Company and its subsidiaries must carry on their respective businesses
in the usual, regular and ordinary course in all material respects, in
accordance with past practice, and must use all reasonable efforts to preserve
intact their present business organizations and preserve their relationships
with customers, suppliers and others having business dealings with them.
In addition, generally the Company may not, and may not permit any of its
subsidiaries to:
- adjust, split, combine or reclassify any stock, or make, declare or pay
any dividend on, or purchase or otherwise acquire, any of its stock or
any securities or obligations convertible into or exchangeable for any
shares of its stock, voting securities or other ownership interests, or
grant any stock appreciation rights or grant any individual or entity any
right, warrant or option to acquire any shares of its stock, voting
securities or other ownership interests, except for: (A) distributions on
Series A Preferred Securities of IAC Capital Trust not to exceed the
greater of (1) the rate required by the terms thereof and (2) the minimum
rate required for IAC Capital Trust to maintain its status as a REIT; (B)
regular quarterly distributions on preferred limited partnership
interests in the Operating Partnership at the rates required by the terms
thereof; (C) regular quarterly distributions on common partnership
interests in the Operating Partnership at the rates recently paid by the
Operating Partnership; (D) regular quarterly distributions on Common
Stock not to exceed the greater of (1) $.385 per share and (2) the
minimum rate required for the Company to maintain its status as a REIT;
provided that the record dates for the 1999 second and third quarter
distributions shall not be earlier than June 15, 1999 and September 15,
1999, respectively; and (E) payment of dividend equivalents with respect
to Units, or repurchase, redeem or otherwise acquire any shares of its
stock or any stock, voting securities or ownership interests in any of
its subsidiaries;
- subject to certain exceptions, issue, deliver or sell, or authorize or
propose the issuance, delivery or sale of, any equity securities of the
Company or any of its subsidiaries, or enter into any agreement with
respect to any of the foregoing, or amend any equity-related awards
issued pursuant to any of the Plans;
- amend its Articles of Incorporation or by-laws (or other governing
documents), except as contemplated by the Merger Agreement;
- subject to certain exceptions, sell, transfer, mortgage, lease, pledge,
encumber or otherwise dispose of material properties or assets outside
the ordinary course of business;
- subject to certain exceptions, merge, consolidate or make any
acquisitions;
- enter into or terminate any material contracts;
- incur additional indebtedness, make any loan or discharge any obligation;
- increase the compensation payable to any of its officers or employees or
grant additional severance or termination pay other than in the ordinary
course of business and in accordance with past practice, or grant awards
under any of the Plans or amend, accelerate, modify or take any action
with respect to any award under any of the Plans except as described in
"Background; Purpose and Effects of the
66
<PAGE> 74
Merger -- Interests of Certain Persons in the Merger; Certain Company
Benefit Plans" above or otherwise in accordance with the Company's
contractual obligations in respect of any such awards;
- subject to certain exceptions, make or rescind any material tax election,
settle any material tax claims or make any material change in its
accounting methods, principles or practices;
- pay, discharge, settle or satisfy any claims, liabilities or obligations,
other than in the ordinary course of business in accordance with past
practice; or
- take any action that would result in any of its representations or
warranties set forth in the Merger Agreement becoming materially untrue
or any of the conditions to the Merger not being satisfied.
Pursuant to the Merger Agreement, each party has agreed:
- to confer with the other party on a regular basis and report on
operational matters; and
- to give prompt notice to the other of (i) any representation or warranty
made by it in the Merger Agreement becoming untrue or inaccurate in any
material respect, (ii) the failure by it to comply with or satisfy in any
material respect any covenant, condition or agreement required to be
complied with or satisfied by it under the Merger Agreement or (iii) any
change, event or circumstance that has had or would have a Material
Adverse Effect on the Company or materially adversely affect any party's
ability to consummate the Merger in a timely manner.
The Merger Agreement further provides that the Company and its subsidiaries
and the Acquiror will file all reports required to be filed by each of them with
the Commission (and all other Governmental Entities) between the date of the
Merger Agreement and the Effective Time and will deliver to the other party
copies of all such reports promptly after the same are filed. Subject to
applicable laws relating to the exchange of information, each of the Company and
the Acquiror will have the right to review in advance, and to the extent
practicable each will consult with the other, with respect to all the
information relating to the other party and each of their respective
subsidiaries, which appears in any filings, announcements or publications in
connection with the transactions contemplated by the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
The material representations and warranties of the Company to the Acquiror
contained in the Merger Agreement relate to the following matters:
- the due organization and valid existence of the Company and its
subsidiaries and similar corporate matters;
- the capitalization of the Company and its subsidiaries;
- the due authorization, execution and delivery of the Merger Agreement by
the Company and its binding effect on the Company;
- the lack of required regulatory filings and approvals for the
consummation of the Merger, and the lack of conflicts between the Merger
Agreement (and the transactions contemplated thereby) and the Company's
Articles of Incorporation or by-laws, contracts to which it or its
subsidiaries are parties, or any law, rule, regulation, order or decree
applicable to the Company or its subsidiaries;
- the accuracy of the Company's Commission filings and financial
statements;
- the accuracy of the information provided by the Company for inclusion in
this Proxy Statement and the Schedule 13E-3;
- compliance with applicable laws;
- the absence of current material litigation or actions (not relating to
the Merger or the Merger Agreement) pending or threatened in connection
with the Company's business;
67
<PAGE> 75
- the absence as of February 1, 1999 of any litigation or actions (other
than those described under "Background; Purpose and Effects of the
Merger -- Litigation Regarding the Merger") relating to the Merger or the
Merger Agreement;
- the Company's payment of, or provision of adequate reserve for, tax
liabilities, the Company's compliance with tax return filing
requirements, the Company's and IAC Capital Trust's qualification as a
REIT under the Code and the treatment of the Operating Partnership, and
each subsidiary of the Company that is a partnership, as a partnership
for federal income tax purposes;
- employee benefit plans, labor matters, severance and change of control
agreements;
- the ownership of, encumbrances on, and restrictions relating to, the
Company's properties;
- the Company's exposure to environmental liabilities and compliance with
environmental laws;
- the material contracts and indebtedness of the Company and its
obligations thereunder;
- the absence of any event that has or could reasonably be expected to have
a material adverse effect on the Company;
- the vote required to approve the Merger under the Company's Articles of
Incorporation or by-laws or applicable law;
- the Company's disclosure of all of its material arrangements with its
subsidiaries, control persons and affiliates;
- the inapplicability to the Merger of certain provisions of state takeover
law;
- the absence of brokers and finders (other than Morgan Stanley) engaged by
the Company who would be entitled to payment in connection with the
Merger; and
- the receipt by the Board of Directors of Morgan Stanley's Opinion.
These representations and warranties are subject, in certain cases, to
specified exceptions and qualifications.
The Merger Agreement also contains representations and warranties of the
Acquiror to the Company, including with respect to the following matters:
- the due organization and valid existence of the Acquiror and similar
corporate matters;
- the due authorization, execution and delivery of the Merger Agreement by
the Acquiror and its binding effect on the Acquiror;
- the lack of required regulatory filings and approvals for the
consummation of the Merger, and the lack of conflicts between the Merger
Agreement (and the transactions contemplated thereby) and the certificate
of formation or limited liability company agreement of the Acquiror,
contracts to which it is a party, or any law, rule, regulation, order or
decree applicable to the Acquiror;
- the Acquiror's access to funds sufficient to consummate the transactions
contemplated by the Merger Agreement;
- the accuracy of the information provided by the Acquiror or any of its
affiliates for inclusion in this Proxy Statement and the Schedule 13E-3;
and
- the absence of brokers and finders entitled to payment from the Company.
These representations and warranties are subject, in certain cases, to
specified exceptions and qualifications.
68
<PAGE> 76
CONDITIONS
The obligations of the Company and the Acquiror to consummate the Merger
are subject to the satisfaction at or prior to the Effective Time of the
following conditions:
- the obtaining of the affirmative vote of the holders of two-thirds of the
total number of outstanding shares of Common Stock in favor of the Merger
Proposal;
- the obtaining of the affirmative vote of the holders of a number of
shares of Common Stock (excluding the shares held by the Acquiror and its
affiliates) representing a majority of the total number of outstanding
shares of Common Stock in favor of the Merger Proposal (unless waived by
both parties (in the case of the Company, the determination as to the
waiver may be made only by the Special Committee on behalf of the
Company)); and
- there not being in effect any temporary restraining order, preliminary or
permanent injunction or other order of a court or governmental agency
prohibiting the consummation of the transactions contemplated by the
Merger Agreement.
The obligation of the Acquiror to effect the Merger is subject to the
satisfaction or waiver at or prior to the Effective Time of the following
conditions:
- the representations and warranties of the Company in the Merger Agreement
must be true and correct in all material respects;
- the Company must comply in all material respects with the terms of the
Merger Agreement;
- the Acquiror must have received a tax opinion (as to the qualification of
each of the Company and IAC Capital Trust as a REIT within the meaning of
the Code and as to the treatment of the Operating Partnership, and each
other subsidiary of the Company that is a partnership, as a partnership
for federal income tax purposes) from Davis Polk; and
- all awards must be canceled in accordance with the terms of the Merger
Agreement.
The obligation of the Company to effect the Merger is subject to the
satisfaction or waiver at or prior to the Effective Time of the following
conditions:
- the representations and warranties of the Acquiror in the Merger
Agreement must be true and correct in all material respects; and
- the Acquiror must comply in all material respects with the terms of the
Merger Agreement.
The conditions the Company must meet can be waived by the Acquiror and the
conditions the Acquiror must meet can be waived by the Special Committee on
behalf of the Company. As of the date of this Proxy Statement, the Company has
no present intention, and the Acquiror has advised the Company that it has no
present intention, to waive any material conditions to the Merger. If any
material conditions are waived by the Special Committee on behalf of the
Company, the Special Committee will determine at such time whether a
resolicitation of Shareholders is appropriate in light of the facts and
circumstances at that time, the Special Committee's duties under Maryland law
and the requirements of the federal securities laws. If a waiver of any
conditions causes a material detriment to Nonaffiliated Shareholders, the
Company intends to resolicit proxies from Shareholders.
69
<PAGE> 77
TERMINATION; WITHDRAWAL OF RECOMMENDATIONS
The Merger Agreement provides that it may be terminated and the Merger
abandoned at any time prior to the Effective Time, generally whether before or
after approval by the Shareholders:
- by mutual written consent of the Acquiror and the Special Committee (on
behalf of the Company);
- by either the Acquiror or the Special Committee (on behalf of the
Company) if:
- any 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 nonappealable (provided that the parties
have used their reasonable efforts to resolve the impediment);
- the Merger has not been consummated by October 1, 1999; provided that
the right to terminate the Merger Agreement in such event is not
available to any party whose failure to fulfill any of its obligations
under the Merger Agreement results in the failure of the Merger to occur
on or before such date; or
- the Merger Proposal shall have been voted on by Shareholders at the
Special Meeting and the Required Company Votes were not obtained;
- by the Acquiror (and the Company must pay the Acquiror the Break-Up Fee
described under "-- Termination Fees and Expenses" below) if:
- after the receipt by the Company of an Acquisition Proposal, the Special
Committee or the Board of Directors (including a majority of the members
of the Special Committee) withdraws or modifies its recommendation of
the Merger or the Merger Agreement;
- after the receipt by the Company of an Acquisition Proposal (which
Acquisition Proposal is public), the Acquiror requests in writing that
the Special Committee or the Board of Directors publicly reconfirm its
recommendation of the Merger and the Merger Agreement to the
Shareholders and the Special Committee or the Board of Directors
(including a majority of the members of the Special Committee), as
applicable, fails to do so within 5 business days after its receipt of
the Acquiror's request;
- the Special Committee or the Board of Directors (including a majority of
the members of the Special Committee) recommends to the Shareholders an
Alternative Transaction;
- a tender offer or exchange offer for 20% or more of the outstanding
shares of Common Stock is commenced (other than by the Company or an
affiliate of the Company) and the Special Committee or the Board of
Directors (including a majority of the members of the Special Committee)
recommends that the Shareholders tender their shares in such tender
offer or exchange offer; or
- the Company fails to call and hold the Special Meeting by October 1,
1999;
- by the Special Committee (on behalf of the Company), prior to the
approval of the Merger Proposal by the Shareholders, if the Special
Committee determines to accept a Superior Proposal (and the Company must
pay the Acquiror the Break-Up Fee described under "-- Termination Fees
and Expenses" below);
- by the Acquiror upon a material breach of any covenant or agreement on
the part of the Company set forth in the Merger Agreement, or if any
representation or warranty of the Company becomes untrue in any material
respect and the Company is not in good faith attempting to cure such
breach; and
- by the Special Committee (on behalf of the Company) upon a material
breach of any covenant or agreement on the part of the Acquiror set forth
in the Merger Agreement, or if any representation or warranty of the
Acquiror becomes untrue in any material respect and the Acquiror is not
in good faith attempting to cure such breach.
70
<PAGE> 78
TERMINATION FEES AND EXPENSES
The Acquiror and the Company have agreed that all Expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such Expenses. Notwithstanding the
foregoing, if the Special Committee or the Board of Directors (including a
majority of the members of the Special Committee) withdraw, modify or change any
recommendation regarding the Merger or the Merger Agreement, or recommend any
other offer or proposal, and the Required Company Votes are not obtained, then
the Company must pay all of the Expenses incurred by the Acquiror. The Company
must pay the Acquiror a Break-Up Fee equal to $19,250,000 upon the earliest to
occur of the following events: (i) the termination of the Merger Agreement by
either the Acquiror or the Company, if a proposal for an Alternative Transaction
involving the Company has been publicly announced prior to the Special Meeting
and either a definitive agreement for an Alternative Transaction is entered
into, or such Alternative Transaction is consummated, within eighteen months of
such termination; or (ii) the termination of the Merger Agreement due to one of
the reasons set forth under "-- Termination; Withdrawal of Recommendations"
above for which payment of the Break-Up Fee is specified.
AMENDMENT AND WAIVER
The Merger Agreement provides that it may be amended by the parties
thereto, by action taken or authorized by the Special Committee (on behalf of
the Company) and the Managing Member of the Acquiror, at any time before or
after approval of the Merger Proposal by the Shareholders, but, after any such
approval, no amendment may be made which by law or in accordance with the rules
of the NYSE requires further approval by the Shareholders without such further
approval. Generally, after Shareholder approval, the Merger Agreement may not be
amended and the Merger consummated in a manner that materially adversely affects
the Nonaffiliated Shareholders without their prior approval. It is not likely
that the Merger Agreement will be amended after approval of the Merger in a
manner materially adverse to the Nonaffiliated Shareholders. However, if such an
amendment is made, the Special Committee will resolicit proxies prior to
consummating the Merger. The Merger Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties thereto. At any
time prior to the Effective Time, the parties to the Merger Agreement, by action
taken or authorized by the Special Committee (on behalf of the Company) and the
Managing Member of the Acquiror, may, to the extent legally allowed, (i) extend
the time for the performance of any of the obligations or other acts of the
other party thereto, (ii) waive any inaccuracies in the representations and
warranties contained therein or in any document delivered pursuant thereto and
(iii) waive compliance with any of the agreements or conditions contained
therein. Any agreement on the part of a party to the Merger Agreement to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
LETTER AGREEMENT WITH THE IRVINE COMPANY
The Irvine Company has entered into a letter agreement with the Company
(attached as Appendix C to this Proxy Statement), pursuant to which The Irvine
Company has agreed (i) to take no action that would cause the Acquiror to
maintain less than $150 million in cash available to complete the Merger (until
the earlier of (x) the completion of the Merger and (y) 60 days following the
termination of the Merger Agreement), and (ii) to cooperate with the Acquiror,
and cause the Acquiror to comply with its obligations, in connection with
certain non-financial agreements of the Acquiror under the Merger Agreement
(e.g., preparation and filing of the Acquiror's Schedule 13E-3 with the
Securities and Exchange Commission, coordination with the Company on public
announcements and provision of directors' and officers' liability insurance for
the Directors of the Company). The Irvine Company is not obligated to contribute
any funds to the Acquiror in connection with the Merger.
FINANCING; SOURCE OF FUNDS
The total amount of funds required to pay the Merger Consideration to the
Nonaffiliated Shareholders and fees and expenses related to the Merger is
estimated to be approximately $582 million. These funds will be obtained from
$238 million of cash on hand of the Acquiror and the Letter of Credit in the
amount of
71
<PAGE> 79
$350 million. The Letter of Credit is irrevocable and unconditional, and it
requires the Acquiror to certify to Bank of America that the proceeds obtained
upon draw down of the Letter of Credit will be applied only to the payment of
the Merger Consideration to the Nonaffiliated Shareholders. The form of the
Letter of Credit has been filed with the Commission as an exhibit to the
Schedule 13E-3.
The Letter of Credit will be repaid by the Acquiror with additional capital
contributions from The Irvine Company. The Irvine Company intends to finance
these capital contributions through a $350 million term loan pursuant to the
Acquisition Term Loan Agreement between The Irvine Company and Bank of America,
as administrative agent, which was entered into on March 16, 1999 (the "Term
Loan Agreement"). The Term Loan Agreement provides for a maturity date of the
earlier of June 30, 2001 or the second anniversary of the initial borrowing, and
contains an option for a one year extension. The Term Loan requires that the
proceeds be contributed by The Irvine Company to the Acquiror for application to
payment of the Merger Consideration to the Nonaffiliated Shareholders. The term
loan (i) is secured by The Irvine Company's membership interest in the Acquiror
and (ii) is effectively secured by approximately 27,279,000 Common L.P. Units
and general partnership units in the Operating Partnership. The Irvine Company
is required to pay up-front fees for the term loan equivalent to 0.75% on each
of the syndicate banks' commitments at the closing of the term loan. In
addition, the term loan has an interest rate of LIBOR plus 0.95% for the first
year of the term and LIBOR plus 1.10% for the second year of the term. As of
April 14, 1999, the effective interest rate for the first year of the term would
have been 6.03%, which is subject to fluctuation. The term loan must close no
later than June 30, 1999. The Term Loan Agreement has been filed as an exhibit
to the Schedule 13E-3 filed with the Commission in connection herewith.
The Irvine Company plans to repay the Term Loan with its cash flow,
including distributions from operations of the Surviving Company and the
Operating Partnership, and secured mortgage financing of assets directly owned
by The Irvine Company.
NO APPRAISAL RIGHTS
Holders of Common Stock are not entitled to dissenting shareholders'
appraisal rights or other similar rights under the MGCL and will be bound by the
terms of the Merger Agreement. The MGCL does not provide appraisal rights or
other similar rights to shareholders of a corporation in connection with a
merger if their shares are listed on a national securities exchange, such as the
NYSE, on the record date for determining shareholders entitled to vote on such
merger. All of the shares of Common Stock outstanding on the Record Date for
determining Shareholders entitled to vote on the Merger were listed on the NYSE.
FEES AND EXPENSES
The estimated aggregate costs and fees of the Company and the Acquiror in
connection with the Merger and related transactions are as follows:
<TABLE>
<CAPTION>
TO BE PAID TO BE PAID
BY THE BY THE
COMPANY ACQUIROR
---------- -----------
<S> <C> <C>
Investment Banking Fees and Expenses....................... $4,300,000 $ 4,800,000
Filing Fees................................................ 137,197 --
Legal Fees and Expenses.................................... 3,000,000 1,500,000
Bank Fees and Services..................................... -- 4,100,000(1)
Board of Directors Fees and Expenses....................... 200,000 --
Accounting Fees and Advisory Services...................... 100,000 150,000
Printing, Mailing and Vote Solicitation Fees............... 300,000 --
Miscellaneous Fees......................................... 212,803(2) --
---------- -----------
Total............................................ $8,250,000 $10,550,000
========== ===========
</TABLE>
- ---------------
(1) Financing costs related to the Letter of Credit and the Term Loan Agreement.
(2) Contingency for consultant fees and related costs.
72
<PAGE> 80
The Merger Agreement calls for such fees and expenses to be paid by the
party which incurred them, except under certain circumstances. See
"-- Termination Fees and Expenses."
REGULATORY REQUIREMENTS
Except for the filing of the Articles of Merger with the State Department
of Assessments and Taxation of Maryland pursuant to the MGCL, and the filing of
the Certificate of Merger with the Secretary of State of the State of Delaware
pursuant to the Delaware General Corporation Law, after the approval and
adoption of the Merger Proposal, and compliance with federal and state
securities laws, neither the Company nor the Acquiror is aware of any material
United States federal or state or foreign governmental regulatory requirement
necessary to be complied with or approval that must be obtained in connection
with the Merger.
The Company and the Acquiror believe that the Merger may be consummated
without notification being given or information being furnished to the Federal
Trade Commission (the "FTC") or the Antitrust Division of the Department of
Justice (the "Antitrust Division") pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and that no waiting period
requirements under the HSR Act are applicable to the Merger. However, at any
time before or after the completion of the Merger, either the FTC or the
Antitrust Division could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, or other persons could take
action under the antitrust laws, including seeking to enjoin the Merger. The
Company and the Acquiror believe that consummation of the Merger will not
violate any antitrust laws. However, there can be no assurance that a challenge
to the Merger on antitrust grounds will not be made or, if a challenge is made,
as to what the result will be.
73
<PAGE> 81
SELECTED FINANCIAL DATA OF THE COMPANY
The following table sets forth selected financial data and other operating
information of the Company. The selected financial data in the table are derived
from the consolidated financial statements of the Company. The data should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included or incorporated by reference herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS, PERCENTAGES, PER SHARE AND PROPERTY INFORMATION)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING INFORMATION
Total revenues................... $ 220,837 $ 186,945 $158,698 $136,168 $130,236
Income before extraordinary item,
minority redeemable preferred
interests and minority interest
in income...................... 73,549 58,583 41,192 25,056 12,279
Net income....................... 8,356 26,404 18,746 8,465 7,273
Basic earnings per share(1)...... 0.42 1.34 1.06 0.61 0.62
Diluted earnings per share(1).... 0.41 1.33 1.05 0.05 0.41
Cash distributions per share..... 1.52 1.48 1.44 1.39 1.11
Ratio of earnings to fixed
charges(2)..................... 1.90x 2.37x
Apartment units (at end of
period)........................ 16,439 15,136 13,656 12,776 11,358
SELECTED STABILIZED PROPERTY
INFORMATION(3)
Total properties (at end of
period)........................ 55 51 48 43 43
Average apartment units(4)....... 15,617 14,452 12,139 11,334 11,334
Average physical occupancy(5).... 94.1% 94.5% 94.9% 94.6% 95.6%
Average monthly rent per
unit(6)........................ 1,213 1,116 1,025 996 981
SELECTED BALANCE SHEET
INFORMATION AT DECEMBER 31
Total assets..................... 1,374,624 1,163,677 900,998 853,230 757,240
Total long-term debt............. 751,818 704,063 553,064 563,286 540,689
Minority redeemable preferred
interests and minority
interest....................... 378,610 210,307 140,327 109,133 109,296
Shareholders' equity............. 195,858 210,920 180,017 155,433 81,753
Book value per share(7).......... 9.71
</TABLE>
- ---------------
(1) Differences between basic and diluted earnings per share in 1995 and 1994
are primarily due to the impact of the Company's debt extinguishment costs
which were allocated to The Irvine Company in accordance with the
Partnership Agreement.
(2) For the purpose of calculating the ratios of earnings to fixed charges,
earnings consist of net earnings before income taxes, extraordinary items
and certain fixed charges. Fixed charges consist of interest expense,
capitalized interest, amortization of deferred financing costs, that portion
of rental expense representative of the interest factor in leases and
minority redeemable preferred interests.
(3) A property is considered stabilized at the earlier of one year after
completion of construction or when it achieves 95% occupancy. Properties are
not considered in the calculations of average apartment units, average
physical occupancy and average monthly rent per unit until such time as they
are deemed stabilized.
(4) Average apartment units is calculated by taking the average of the total
number of apartment units in the stabilized properties at the end of each
week in the period.
(5) Average physical occupancy is calculated by dividing the total occupied
units in the stabilized properties on a weekly basis by the total units in
the stabilized properties on a weekly basis.
(6) Average monthly rent per unit is calculated by dividing average rental
revenue per unit by average economic occupancy.
(7) Book value per share is calculated by dividing the number of outstanding
shares of Common Stock into shareholders' equity.
74
<PAGE> 82
COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND INFORMATION
The Common Stock is traded on the NYSE and the Pacific Exchange, Inc. under
the symbol "IAC." The following table shows the per share high and low sales
prices reported in the consolidated transaction reporting system for
transactions in Common Stock for the periods indicated and for December 1, 1998
(the last full trading day prior to the announcement of the Acquiror's proposal
to effectuate the Merger). The following table also shows for the periods
indicated the dividends declared per share of Common Stock. The closing price on
the NYSE of the Common Stock on May 3, 1999 was $33.50. Holders of Common Stock
are encouraged to obtain current market quotations for the Common Stock.
<TABLE>
<CAPTION>
MARKET PRICE OF
COMMON STOCK DIVIDENDS
-------------------- DECLARED
HIGH LOW PER SHARE
-------- -------- ---------
<S> <C> <C> <C>
1996
First Quarter..................................... $21.1250 $18.5000 $0.355
Second Quarter.................................... $20.7500 $18.7500 $0.355
Third Quarter..................................... $24.0000 $20.1250 $0.365
Fourth Quarter.................................... $25.1250 $22.0000 $0.365
1997
First Quarter..................................... $29.3750 $24.6250 $0.365
Second Quarter.................................... $30.3750 $25.1250 $0.365
Third Quarter..................................... $33.4375 $28.0625 $0.375
Fourth Quarter.................................... $33.5000 $29.0000 $0.375
1998
First Quarter..................................... $32.4375 $30.2500 $0.375
Second Quarter.................................... $31.8750 $28.1875 $0.375
Third Quarter..................................... $29.9375 $23.0000 $0.385
Fourth Quarter.................................... $32.0625 $23.2500 $0.385
December 1, 1998.................................. $27.4375 $26.8125 n/a
1999
First Quarter (through February 1, 1999).......... $32.5000 $31.7500 $0.385
First Quarter (from February 2, 1999 through March
31, 1999)...................................... $33.1250 $32.5000 n/a
Second Quarter (through May 3, 1999).............. $33.7500 $32.8750 n/a
</TABLE>
If the Merger is not consummated, the declaration of future dividends, if
any, will necessarily be dependent upon business conditions, the earnings and
financial position of the Company and the Company's plans with respect to
operating and capital expenditures and such other matters as the Company's Board
of Directors deems relevant. See "Questions and Answers About the Merger -- What
will happen to my dividends?"
75
<PAGE> 83
CERTAIN FINANCIAL PROJECTIONS OF THE COMPANY
The Company does not as a matter of course publicly disclose internal
budgets, plans, estimates, forecasts or projections as to future revenues,
earnings or other financial information. The projected financial data set forth
below reflect information which was contained in projections prepared by
management of the Company. These projections were based upon a variety of
estimates and assumptions, the material ones of which are set forth below. The
estimates and assumptions underlying the projections involved judgments with
respect to, among other things, future economic, competitive, and financial
market conditions and future business decisions which may not be realized and
are inherently subject to significant business, economic and competitive
uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company. While the Company believes these estimates
and assumptions are reasonable, there can be no assurance that the projections
will be accurate, and actual results may vary materially from those shown. In
light of the uncertainties inherent in forward looking information of any kind,
the inclusion of these projections herein should not be regarded as a
representation by the Company, the Acquiror or any other person that the
anticipated results will be achieved and investors are cautioned not to place
undue reliance on such information. See "Background; Purpose and Effects of the
Merger -- Opinion of the Financial Advisor for the Special
Committee -- Discounted Cash Flow."
The Company does not intend to update or otherwise revise the information
set forth below to reflect circumstances existing after the date of the most
recent financial statements incorporated by reference in this Proxy Statement or
to reflect the occurrence of unanticipated events. The information set forth
below should be read together with the information contained in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1998 and the other
information included or incorporated by reference in this Proxy Statement.
In the normal course of operations, management drafted a five-year business
plan in October 1998. Subject to the qualifications and limitations stated
above, the information set forth below reflects the material assumptions used in
the Company's 1999 Business Plan.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
"Same store" rent growth
Existing properties........................... 5.0% 4.0% 3.0% 3.0% 3.0%
New development............................... 5.0% 4.0% 3.0% 3.0% 3.0%
"Same store" expense growth..................... 2.5% 2.5% 3.0% 3.0% 3.0%
Occupancy....................................... 95.0% 95.0% 95.0% 95.0% 95.0%
</TABLE>
In projecting rent growth, the Company first considered historical rent
growth, competitor property statistics including projected competitor supply,
and job growth projections. Of secondary importance, the Company considered
population growth/in-migration, levels of "for sale" housing, and household
income growth, office and industrial rental space absorption, proximity to
transportation corridors, and other demographic information. The above factors
were viewed collectively within each group and without a specific weighting. In
the primary group, historical rent growth within the Company's stabilized "same
store" portfolio was 5.3% and 6.4% for 1998 and 1997, respectively. In addition,
job growth was 5.0% and 5.7% for 1998 and 1997, respectively. These were the
primary factors in determining the Company's rent growth projection for the 1999
Business Plan.
76
<PAGE> 84
In addition, it was assumed that the Company would invest approximately
$400 million per year in new development.
<TABLE>
<CAPTION>
FORECAST
-----------------------------------------------
1999 2000 2001 2002 2003
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Rental income..................................... $251.7 $310.4 $372.7 $431.0 $494.3
Other income...................................... 7.7 9.5 10.9 12.1 13.3
------ ------ ------ ------ ------
Operating revenues................................ 259.4 319.9 383.6 443.1 507.6
Property expenses................................. (52.7) (62.1) (70.7) (79.1) (90.7)
Real estate taxes................................. (20.4) (25.3) (30.8) (36.0) (41.2)
------ ------ ------ ------ ------
Net operating income.............................. 186.3 232.5 282.1 328.0 375.7
General and administrative........................ (10.2) (10.4) (10.7) (11.0) (11.3)
Interest income................................... 0.2 0.1 0.3 0.2 0.1
Interest expense, net............................. (24.3) (36.4) (51.7) (64.3) (75.9)
Amortization of deferred financing costs.......... (2.1) (2.0) (1.9) (2.0) (2.1)
Depreciation & amortization of non-real estate
assets.......................................... (0.2) (0.2) (0.2) (0.2) (0.2)
Distributions to preferred holders................ (18.8) (29.9) (36.7) (36.7) (41.6)
------ ------ ------ ------ ------
Funds from operations (FFO)(1).................... 130.9 153.7 181.2 214.0 244.7
Amortization of deferred financing costs.......... 2.1 2.0 1.9 2.0 2.1
Depreciation and amortization of non-real estate
assets.......................................... 0.2 0.2 0.2 0.2 0.2
Recurring capital expenditures.................... (7.4) (8.4) (9.4) (10.4) (11.8)
------ ------ ------ ------ ------
Funds available for distribution (FAD)............ $125.8 $147.5 $173.9 $205.8 $235.2
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) The Company generally considers FFO a useful measure of performance for an
equity REIT. The Company computes FFO in accordance with standards
established by the National Association of Real Estate Investment Trusts
("NAREIT"). FFO is defined as net income (computed in accordance with
generally accepted accounting principles), excluding gains or losses from
debt restructuring and sales of property, plus depreciation and amortization
of real estate assets, and after adjustments for unconsolidated partnerships
and joint ventures. Other REITs may not use this definition of FFO. FFO
should be considered in conjunction with net income calculated in accordance
with generally accepted accounting principles. FFO should not be considered
an alternative to net income as an indication of the Company's performance
and is not indicative of cash available to fund all cash flow needs. FFO
does not represent cash flows from operating, investing or financing
activities as defined by generally accepted accounting principles.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
AGREEMENT WITH MESSRS. THOMPSON, DORFMAN AND HUGHES
On February 4, 1997, the Operating Partnership acquired the assets
(primarily options on three parcels of land in Northern California) of Thompson
Residential Company, Inc. ("TRC") in exchange for 74,523 Common L.P. Units in
the Operating Partnership (currently approximately 0.2% of the Common L.P. Units
outstanding). In addition, TRC is entitled to an "earn out" based on the
performance of the apartment community built on one of the three parcels of land
during the 12 months following stabilization of this apartment community (May
1999 through April 2000), up to a maximum of $2,000,000, payable in June 2000.
The Company currently projects that TRC would be entitled to the maximum "earn
out." Concurrently with these transactions, each of the three owners of TRC
(William W. Thompson, Bruce N. Dorfman and Robert J. Hughes) became officers of
the Company.
The Operating Partnership has entered into a Stock Purchase Agreement with
Messrs. Thompson, Dorfman and Hughes, pursuant to which they will sell their
shares in TRC to the Operating Partnership or its assignee for an aggregate of
$4,533,782. This is equivalent to the sum of (i) $34.00 per Common L.P. Unit
77
<PAGE> 85
(each Common L.P. Unit is exchangeable into one share of Common Stock) held by
TRC and (ii) the maximum $2,000,000 "earn out." The consummation of the Stock
Purchase Agreement is conditioned upon the Merger.
After the Merger and the subsequent purchase of the shares in TRC from
Messrs. Thompson, Dorfman and Hughes, Mr. Bren, through The Irvine Company and
its subsidiaries will own 99.32% of the Common L.P. Units. The remaining 0.68%
is held by Stonecrest, in which Mr. Bren indirectly holds all membership
interests.
SPECIAL RIGHTS OF THE IRVINE COMPANY UNDER CERTAIN AGREEMENTS
Pursuant to the Partnership Agreement, the consent of the holders of a
majority of the outstanding Common L.P. Units is required with respect to
certain extraordinary actions involving the Operating Partnership including (i)
the amendment, modification or termination of the Partnership Agreement, (ii) a
general assignment for the benefit of creditors or the appointment of a
custodian, receiver or trustee for any of the assets of the Operating
Partnership, (iii) the institution of any proceeding for bankruptcy of the
Operating Partnership, (iv) the transfer of any general partnership interests in
the Operating Partnership, including through any merger, consolidation or
liquidation of the Company, subject to certain exceptions, (v) the admission of
any additional or substitute general partner in the Operating Partnership; (vi)
for the Company to take title to assets (other than temporarily in connection
with an acquisition prior to contributing such assets to the Operating
Partnership) or to conduct business other than through the Operating
Partnership; and (vii) for the Company or the Operating Partnership to engage in
any business other than the ownership, construction, development and operation
of multifamily rental apartment communities.
In addition, until such time as the Company owns 90% or more of the total
percentage interest in the Operating Partnership, the consent of the limited
partners holding a majority interest in the Common L.P. Units will also be
required with respect to the sale or other transfer of all or substantially all
of the assets of the Operating Partnership and certain mergers and business
combinations resulting in the complete disposition of all Common L.P. Units.
As general partner of the Operating Partnership, the Company has the
ability to cause the Operating Partnership to issue additional units of general
and limited partnership interest in the Operating Partnership. In the event that
the Operating Partnership issues new Common L.P. Units (for cash but not
property), The Irvine Company has the right to purchase Common L.P. Units at a
purchase price equal to the purchase price in the transaction giving rise to
such participation right in order, and to the extent necessary, to maintain its
percentage interest in the Operating Partnership.
Pursuant to the Partnership Agreement, The Irvine Company and the other
limited partners of the Operating Partnership, their affiliates and certain
related persons have rights, exercisable once in each twelve-month period, to
exchange generally up to one-third of the Common L.P. Units owned by them for
shares of Common Stock (subject to the applicable ownership limit provisions
contained in the Company's Articles of Incorporation) and to tender up to
one-third of the Common L.P. Units owned by them to the Company for cash payable
solely out of the net proceeds of an offering of the shares of Common Stock.
In the event that the Company issues (whether for cash or property) any
shares of Common Stock or securities convertible into, or exchangeable or
exercisable for, shares of Common Stock, The Irvine Company, subject to limited
exceptions, including the issuance of shares of Common Stock pursuant to any
stock incentive plan adopted by the Company or pursuant to The Irvine Company's
exercise of the exchange rights or cash tender rights described above, will have
the right to purchase shares of Common Stock or such securities at a purchase
price equal to the purchase price in the transaction giving rise to the
participation rights in order to maintain its interest in the Company and the
Operating Partnership, considered on a consolidated basis. However, other
Shareholders have no participation rights to purchase shares of Common Stock or
such securities and any such issuances might cause a dilution of a Shareholder's
investment in the Company.
78
<PAGE> 86
Pursuant to the Miscellaneous Rights Agreement, the Company has granted to
The Irvine Company, its affiliates and certain related persons, registration
rights with respect to shares of Common Stock owned by them whether acquired
upon exchange of Common L.P. Units pursuant to exchange rights, upon exercise of
any option or right of first refusal pursuant to the Land Rights Agreement,
pursuant to The Irvine Company's participation rights, in the open market or
otherwise. These registration rights, with certain limitations, grant such
parties the opportunity to demand registration of all or any portion of the
shares of Common Stock one time each calendar year and the right to have such
shares of Common Stock registered incidentally to any registration being
conducted by the Company of shares of Common Stock, securities convertible or
exchangeable for shares of Common Stock or securities substantially similar to
shares of Common Stock. The Company will bear expenses incident to its
registration requirements under the registration rights, except that such
expenses will not include any underwriting discounts or commissions.
Pursuant to the Miscellaneous Rights Agreement, The Irvine Company has the
right to nominate three persons to the Company's Board of Directors so long as
The Irvine Company, its affiliates, the shareholders of The Irvine Company and
their affiliates or immediate family members beneficially own at least 20% of
the shares of Common Stock of the Company (including for these purposes shares
of Common Stock issuable upon exchange of Common L.P. Units). In the event that
this ownership falls below 20% but is at least 15%, The Irvine Company will have
the right to nominate two persons for election to the Board of Directors, and if
this ownership falls below 15% but is at least 10%, The Irvine Company will have
the right to nominate one person for election to the Board of Directors. The
three current nominees of The Irvine Company are Messrs. Bren, McKee and Watson.
Pursuant to the Miscellaneous Rights Agreement, three nominees of The
Irvine Company have been elected to the Company's nine member Board of
Directors. Pursuant to Section 3.4 of the Miscellaneous Rights Agreement, the
Company has agreed not to increase the size of the Board of Directors to more
than ten persons or to decrease the size of the Board of Directors to fewer than
eight persons without the written consent of the Irvine Persons (as defined
therein) then owning, directly or indirectly, any shares of Common Stock or
Common L.P. Units. Pursuant to Article Ninth of the Articles of Incorporation
and Article III of the Company's by-laws, the consent of Directors representing
more than 75% of the entire Board of Directors is required with respect to
certain actions, including (i) a change of control (as defined in Article Ninth
of the Articles of Incorporation); (ii) the amendment of the Company's Articles
of Incorporation or by-laws, or the Partnership Agreement; (iii) any waiver or
modification of the ownership limits provisions set forth in the Articles of
Incorporation; (iv) the merger, consolidation or sale of all or substantially
all the assets of the Company or the Operating Partnership; (v) the issuance,
under certain circumstances, of equity securities of the Company; (vi) for the
Company to take title to assets or to conduct business other than through the
Operating Partnership, or for the Company or the Operating Partnership to engage
in any business other than the ownership, construction, development and
operation of multi-family rental apartment communities; (vii) making a general
assignment for the benefit of creditors; or (viii) terminating the Company's
status as a REIT for tax purposes.
The Company, The Irvine Company, the Operating Partnership and Mr. Bren
entered into the Land Rights Agreement which through July 31, 2020 provides the
Company with the exclusive right, but not the obligation, to acquire all land
sites on the Irvine Ranch which are entitled for residential development and
designated by The Irvine Company as ready for rental apartment community
development (the "Future Land Sites"). The purchase price for each Future Land
Site is determined by appraisal and will be payable by the Company in cash,
Common L.P. Units or shares of Common Stock at the option of the Company for
Future Land Site purchase rights exercised on or before July 31, 2000, and
thereafter at the option of The Irvine Company, but subject to a determination
by the Independent Directors Committee that the method of payment will not
adversely affect the Company's qualification as a REIT. The Irvine Company has
no obligation to designate any land for sale and development of additional
apartment communities.
79
<PAGE> 87
PURCHASES OF COMMON STOCK AND COMMON L.P. UNITS BY THE IRVINE COMPANY AND ITS
AFFILIATES SINCE JANUARY 1, 1997
On February 20, 1997, the Company sold 1,150,000 shares of Common Stock in
an underwritten public offering at $27.50 per share. The aggregate proceeds to
the Company were approximately $29,969,000. On the same date, The Irvine Company
exercised its right pursuant to the Partnership Agreement to make additional
capital contributions to the Operating Partnership totaling $36,332,695.64
through TIC Investment Company C, a California general partnership ("TICICC"),
for which TICICC received 1,394,194 Common L.P. Units.
On February 10, 1997, October 21, 1997 and December 16, 1997, TIC
Investment Company D, a California general partnership ("TICICD") and a
subsidiary of The Irvine Company, sold apartment community land sites to the
Operating Partnership pursuant to the Land Rights Agreement. TICICD received as
payment of the purchase price 313,439, 179,433 and 332,060 Common L.P. Units,
respectively, which in each case was equal to the purchase price in dollars
($8,408,000, $5,697,000 and $10,325,000, respectively) divided by the average of
the closing prices of the Common Stock on the NYSE for the ten trading days
immediately preceding the closing date of the applicable sale.
On December 1, 1997, Stonecrest sold an apartment community land site to
the Operating Partnership and received 305,707 Common L.P. Units as payment for
the $9,475,000 purchase price.
From February 28, 1997 through September 8, 1998, The Irvine Company
acquired an aggregate of 153,613 shares of Common Stock from the Company and
TICICC acquired 135,465 Common L.P. Units from the Operating Partnership at
various prices ranging from $25.438 to $30.544 pursuant to the Company's
Dividend Reinvestment and Additional Cash Investment Plan and The Irvine
Company's rights under the Partnership Agreement and the Miscellaneous Rights
Agreement.
The following chart provides quarterly data regarding: (i) the number of
shares of Common Stock purchased; (ii) the number of Common L.P. Units, which
are exchangeable for shares of Common Stock on a one-for-one basis, purchased;
(iii) the range of amounts paid for the Common Stock and Common L.P. Units; and
(iv) the average purchase price paid per share of Common Stock or Common L.P.
Unit by The Irvine Company and its affiliates since January 1, 1997.
<TABLE>
<CAPTION>
RANGE OF COMMON
STOCK AND COMMON
NUMBER OF L.P. UNIT PURCHASE AVERAGE PURCHASE
NUMBER OF COMMON L.P. PRICES PRICE PAID PER
SHARES UNITS ------------------ SHARE AND COMMON
PURCHASED(1)(2) PURCHASED(1)(3) LOW HIGH L.P. UNIT
--------------- --------------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C>
1997
First Quarter.......... 229,400 1,400,415 26.060 28.500 26.370
Second Quarter......... 970,600 6,362 26.500 28.500 27.603
Third Quarter.......... 16,882 7,317 28.083 28.188 28.109
Fourth Quarter......... 316,504 7,259 29.500 31.500 30.885
1998
First Quarter.......... 535,871 34,558 30.043 32.125 30.953
Second Quarter......... 629,882 34,572 29.000 31.000 30.013
Third Quarter.......... 731,274 39,176 25.313 29.000 26.880
Fourth Quarter......... -- -- n/a n/a n/a
1999
First Quarter.......... -- -- n/a n/a n/a
Second Quarter (through
May 3, 1999)........ -- -- n/a n/a n/a
</TABLE>
- ---------------
(1) At December 31, 1996, The Irvine Company and its affiliates beneficially
owned 183,325 shares of Common Stock and 22,292,114 Common L.P. Units.
(2) All shares of Common Stock were purchased by The Irvine Company.
(3) All Common L.P. Units were purchased by TICICC.
80
<PAGE> 88
OTHER TRANSACTIONS
Mr. Grundhofer is Chairman, President and Chief Executive Officer of U.S.
Bancorp (formerly First Bank System, Inc.) which, through an affiliate, is a
member of the bank syndicate that provided the Company's $250,000,000 revolving
credit facility. There was no outstanding balance under the credit facility as
of February 22, 1999. An affiliate of U.S. Bancorp is also a member of the bank
syndicate that provided the Company's $100,000,000 term loan facility. Based on
this bank's percentage participation in these credit facilities (and the
predecessor facilities), the Company estimates that the amount of interest and
fees paid to the affiliate totaled approximately $364,000 in 1998. Affiliates of
U.S. Bancorp are also lenders to The Irvine Company and the Acquiror and their
affiliates, including under the Letters of Credit.
Mr. Peltason has served as President of the Donald L. Bren Foundation (a
California non-profit public benefit corporation affiliated with Mr. Bren) since
September 1997, and was a consultant to Mr. Bren with respect to charitable
giving and the formation of the Donald L. Bren Foundation from October 1995
through December 1997.
Additional information (including with respect to transactions between the
Company and The Irvine Company and its affiliates) is set forth in Part
III -- Item 13. Certain Relationships and Related Transactions, and in the notes
to the consolidated financial statements of the Company, each of which is
contained in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1998, which is incorporated by reference in this Proxy Statement.
MANAGEMENT OF THE COMPANY
Information with respect to the management of the Company is set forth in
Part III of the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1998, which is incorporated by reference in this Proxy Statement.
81
<PAGE> 89
MANAGEMENT OF THE ACQUIROR AND ITS MEMBERS
THE ACQUIROR
The name, title, present and five year historical principal occupation or
employment of each of the executive officers of the Acquiror are set forth
below. Currently, the Acquiror has no directors. The business address of each
executive officer is 550 Newport Center Drive, Suite 900, Newport Beach, CA
92660. In addition, if no dates are indicated with respect to a position, the
individual has served in that capacity for at least the past five years. All of
the persons listed below are citizens of the United States of America.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
MATERIAL POSITIONS HELD DURING THE PAST
NAME AND CURRENT BUSINESS ADDRESS FIVE YEARS AND BUSINESS ADDRESSES THEREOF
--------------------------------- -------------------------------------------
<S> <C>
Donald Bren 1998 - Present -- Chairman, President and Chief
Executive Officer of the Acquiror
February 1997 - July 1997 - President and Chief
Executive Officer, the Company, 550 Newport
Center Drive, Suite 300,
Newport Beach, CA 92660
Michael D. McKee 1998 - Present -- Executive Vice President, Chief
Financial Officer and Secretary of the
Acquiror
1996 - Present -- Executive Vice President, Chief
Financial Officer and Corporate Secretary,
The Irvine Company
1994 - 1996 -- Executive Vice President and Chief
Legal Officer, The Irvine Company
1993 - 1994 -- Managing Partner, Orange County
Office,
Latham & Watkins, 650 Town Center Drive,
Suite 2000, Costa Mesa, CA 92626
David A. Patty 1998 - Present -- Senior Vice President of the
Acquiror
1996 - Present -- Senior Vice President and Chief
Investment Officer, The Irvine Company
1994 - 1996 -- Senior Vice President, The Irvine
Company
1993 - 1994 -- Chief Financial Officer, Donahue
Schriber,
a private real estate company
3501 Jamboree Road, Suite 300, Newport
Beach, CA 92660
Thomas B. Rogers 1998 - Present -- Treasurer of the Acquiror
1995 - Present -- Treasurer and Senior Vice
President,
The Irvine Company
1993 - 1995 -- Senior Vice President, The Irvine
Company
</TABLE>
82
<PAGE> 90
THE IRVINE COMPANY
The name, business address, title, present and five year historical
principal occupation or employment of each of the directors and executive
officers of The Irvine Company are set forth below. If no business address is
given, the director's or officer's business address is 550 Newport Center Drive,
Newport Beach, CA 92660. In addition, if no dates are indicated with respect to
a position, the individual has served in that capacity for at least the past
five years. There are no executive officers, other than Joseph D. Davis, who are
not also directors. All of the persons listed below are citizens of the United
States of America.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
MATERIAL POSITIONS HELD DURING THE PAST
NAME AND CURRENT BUSINESS ADDRESS FIVE YEARS AND BUSINESS ADDRESSES THEREOF
--------------------------------- -------------------------------------------
<S> <C>
Donald Bren Chairman, President and Chief Executive Officer of
The Irvine Company
February 1997 - July 1997 - President and Chief
Executive Officer, the Company, 550 Newport
Center Drive, Suite 300, Newport Beach, CA
92660
Raymond L. Watson Vice Chairman of The Irvine Company
Gary H. Hunt Executive Vice President, Corporate Affairs of The
Irvine Company
Joseph D. Davis 1996 - Present -- Executive Vice President, Land
and Residential Development, of The Irvine
Company
1994 - 1996 -- Vice President and General Manager,
Chevron Land and Development, 1 Corporate
Plaza,
Newport Beach, CA 92660
1993 - 1994 -- Vice President, Irvine Community
Builders, The Irvine Company
Richard G. Sim Executive Vice President and President, Investment
Properties Group, of The Irvine Company
Michael D. McKee 1996 - Present -- Executive Vice President, Chief
Financial Officer and Corporate Secretary of
The Irvine Company
1994 - 1996 -- Executive Vice President and Chief
Legal Officer, The Irvine Company
1993 - 1994 -- Managing Partner, Orange County
Office, Latham & Watkins, 650 Town Center
Drive, Suite 2000, Costa Mesa, CA 92626
Richard F. Alden Director, The Irvine Company
11340 West Olympic Blvd., Suite 280 Private Investor
Los Angeles, CA 90064
Donald M. Koll Director, The Irvine Company
The Koll Company Chairman and Chief Executive Officer, The Koll
4343 Von Karman Avenue Company, a private real estate company
Newport Beach, CA 92660
1991 - 1997, Chairman of the Board, Koll Management
Services, Inc., a private real estate
management company
</TABLE>
83
<PAGE> 91
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
MATERIAL POSITIONS HELD DURING THE PAST
NAME AND CURRENT BUSINESS ADDRESS FIVE YEARS AND BUSINESS ADDRESSES THEREOF
--------------------------------- -------------------------------------------
<S> <C>
Benjamin V. Lambert Director, The Irvine Company
Eastdil Realty Company Chairman and Chief Executive Officer,
40 West 57th Street, 22nd Floor Eastdil Realty Company, a private real estate
New York, NY 10019 investment banking company
Donn B. Miller, Esq. Director, The Irvine Company
Pearson-Sibert Oil Company of Texas President and Chief Executive Officer,
136 El Camino, Suite 216 Pearson-Sibert Oil Company of Texas,
Beverly Hills, CA 90212 a private oil investment company
Thomas H. Nielsen Director, The Irvine Company
The Nielsen Company 1995 - Present -- Owner, The Nielsen Company, a
3 Monaco real estate consulting company
Newport Beach, CA 92660 1993 - 1995 -- Managing Director, Orange County
Office of U.S. Trust of California
Carl E. Reichardt Director, The Irvine Company
c/o Wells Fargo Bank 1998 - Present -- Retired Chairman and
420 Montgomery St., 12th Floor Chief Executive Officer, Wells Fargo Bank
San Francisco, CA 94104
1993 - 1998 -- Chairman of the Board,
Chief Executive Officer, Wells Fargo Bank
Thomas C. Sutton Director, The Irvine Company
Pacific Life Insurance Chairman and Chief Executive Officer,
700 Newport Center Drive Pacific Mutual Life Insurance Company
Newport Beach, CA 92660
Peter V. Ueberroth Director, The Irvine Company
The Contrarian Group Managing Director, Contrarian Group, a private
1071 Camelback, Suite 111 investment company
Newport Beach, CA 92660
William T. White, III Director, The Irvine Company
Blanco Investments & Land Ltd. President, Blanco Investments and Land Ltd., a
230 Newport Center Drive, Suite 300 private real estate investment company
Newport Beach, CA 92660
</TABLE>
84
<PAGE> 92
ICDC
The name, business address, title, present and five year historical
principal occupation or employment of each of the directors and executive
officers of ICDC are set forth below. If no business address is given the
director's or officer's business address is 550 Newport Center Drive, Newport
Beach, CA 92660. In addition, if no dates are indicated with respect to a
position, the individual has served in that capacity for at least the past five
years. There are no executive officers, other than Joseph D. Davis, who are not
also directors. All of the persons listed below are citizens of the United
States of America.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
MATERIAL POSITIONS HELD DURING THE PAST
NAME AND CURRENT BUSINESS ADDRESS FIVE YEARS AND BUSINESS ADDRESSES THEREOF
--------------------------------- -------------------------------------------
<S> <C>
Donald Bren Chairman of the Board of ICDC
Chairman, President and Chief Executive Officer,
The Irvine Company
February 1997 - July 1997 - President and Chief
Executive Officer, the Company, 550 Newport
Center Drive, Suite 300, Newport Beach, CA
92660
Joseph D. Davis President and Chief Executive Officer of ICDC
1996 - Present -- Executive Vice President Land and
Residential Development, The Irvine Company
1994 - 1996 -- Vice President and General Manager,
Chevron Land and Development, 1 Corporate
Plaza,
Newport Beach, CA 92660
1993 - 1994 -- Vice President, Irvine Community
Builders, The Irvine Company
Michael D. McKee Executive Vice President, Chief Financial Officer and
Secretary of ICDC
1996 - Present -- Executive Vice President, Chief
Financial Officer and Corporate Secretary, The
Irvine Company
1994 - 1996 -- Executive Vice President and Chief
Legal Officer, The Irvine Company
1993 - 1994 -- Managing Partner, Orange County
Office, Latham & Watkins, 650 Town Center
Drive, Suite 2000, Costa Mesa, CA 92626
Richard F. Alden Director, ICDC
11340 West Olympic Boulevard, Private Investor
Suite 2800
Los Angeles, CA 90064
Gary H. Hunt Director, ICDC
Executive Vice President, Corporate Affairs,
The Irvine Company
Donn B. Miller, Esq. Director, ICDC
Pearson-Sibert Oil Company of Texas President and Chief Executive Officer, Pearson-Sibert
136 El Camino, Suite 216 Oil Company of Texas, a private oil investment
Beverly Hills, CA 90212 company
</TABLE>
85
<PAGE> 93
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
MATERIAL POSITIONS HELD DURING THE PAST
NAME AND CURRENT BUSINESS ADDRESS FIVE YEARS AND BUSINESS ADDRESSES THEREOF
--------------------------------- -------------------------------------------
<S> <C>
Thomas H. Nielsen Director, ICDC
The Nielsen Company 1995 - Present -- Owner, The Nielsen Company, a real
3 Monaco estate consulting company
Newport Beach, CA 92660
1993 - 1995 -- Managing Director, Orange County Office
of U.S. Trust of California
Richard G. Sim Director, ICDC
Executive Vice President and President, Investment
Properties Group, The Irvine Company
Peter V. Ueberroth Director, ICDC
The Contrarian Group Managing Director, Contrarian Group, a private
1071 Camelback, Suite 111 investment company
Newport Beach, CA 92660
Raymond L. Watson Director, ICDC
Vice Chairman, The Irvine Company
</TABLE>
86
<PAGE> 94
SECURITIES OWNERSHIP
The following table sets forth the beneficial ownership of Common Stock by
the Acquiror, ICDC, The Irvine Company and their affiliates, directors and
executive officers as of February 1, 1999. The number of shares of Common Stock
beneficially owned includes the number of shares of Common Stock into which
Common L.P. Units beneficially owned by the person are exchangeable. The
percentage of all shares of Common Stock/Common L.P. Units owned assumes, with
respect to each person, that all Common L.P. Units beneficially owned by such
person are exchanged for Common Stock and that none of the Common L.P. Units
held by other persons are exchanged for Common Stock.
<TABLE>
<CAPTION>
PERCENT OF ALL
PERCENT NUMBER OF SHARES SHARES OF
OF OF COMMON STOCK
ALL COMMON STOCK (ASSUMING
SHARES BENEFICIALLY EXCHANGE
NUMBER OF SHARES OF NUMBER OF OWNED OF HOLDERS'
OF COMMON COMMON (RIGHTS COMMON
PERSON COMMON STOCK STOCK L.P. UNITS TO ACQUIRE)(1) L.P. UNITS)(1)
------ ------------------- ---------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
The Acquiror(2)...... -- -- -- -- --
ICDC................. -- -- -- -- --
The Irvine Company... 3,430,413 17.0% 24,646,705(3) 28,077,118 62.6%
Donald Bren.......... 3,613,738(4) 17.9% 24,952,412(5) 28,566,150 63.2%
TICICC............... -- -- 3,034,105(6) 3,034,105 13.1%
TIC Investment
Company A.......... -- -- 1,502,105(7) 1,502,105 6.9%
TICICD............... -- -- 1,185,333(8) 1,185,333 5.5%
DBIAC Investment
Company(9)......... -- -- -- -- --
Raymond L. Watson.... 20,000 * -- 20,000 *
Richard G. Sim....... -- -- -- -- --
Michael D. McKee..... 5,000 * -- 5,000 *
David A. Patty....... -- -- -- -- --
Thomas B. Rogers..... 3,447 * -- 3,447 *
Richard F. Alden..... 17,303 * -- 17,303 *
Thomas H. Nielsen.... 25,000 * -- 25,000 *
Carl E. Reichardt.... 60,000(10) * -- 60,000 *
Peter V. Ueberroth... 14,046 * -- 14,046 *
William T. White,
III................ 6,000 * -- 6,000 *
Donn B. Miller....... 975 * -- 975 *
Gary H. Hunt......... 300 * -- 300 *
Donald M. Koll....... -- -- -- -- --
Benjamin V. Lambert.. -- -- -- -- --
Thomas C. Sutton..... -- -- -- -- --
Joseph D. Davis...... 5,300 * -- 5,300 *
<CAPTION>
PERCENT OF
ALL
SHARES OF
COMMON
STOCK/
COMMON
L.P.
PERSON UNITS(1)
------ --------------
<S> <C>
The Acquiror(2)...... --
ICDC................. --
The Irvine Company... 62.3%
Donald Bren.......... 63.1%
TICICC............... 6.7%
TIC Investment
Company A.......... 3.3%
TICICD............... 2.6%
DBIAC Investment
Company(9)......... --
Raymond L. Watson.... *
Richard G. Sim....... --
Michael D. McKee..... *
David A. Patty....... --
Thomas B. Rogers..... *
Richard F. Alden..... *
Thomas H. Nielsen.... *
Carl E. Reichardt.... *
Peter V. Ueberroth... *
William T. White,
III................ *
Donn B. Miller....... *
Gary H. Hunt......... *
Donald M. Koll....... --
Benjamin V. Lambert.. --
Thomas C. Sutton..... --
Joseph D. Davis...... *
</TABLE>
87
<PAGE> 95
- ---------------
* Less than 1%
(1) Assumes all of the Common L.P. Units (other than those referred to in Note
5 below which are not exchangeable within 60 days of the date of this
table) are exchanged for Common Stock, without regard to certain ownership
limit provisions set forth in the Company's Articles of Incorporation. It
is not anticipated that these ownership limit provisions will be waived.
The Irvine Company has the right, once in every twelve month period,
generally to exchange up to one third of the Common L.P. Units beneficially
owned by the Irvine Company and affiliates of Mr. Bren (see Note 5) for
shares of Common Stock at an exchange ratio of one Common L.P. Unit for
each share of Common Stock, subject to adjustment. The Company's Articles
of Incorporation place a limit on ownership by The Irvine Company, Mr. Bren
and their affiliates, in the aggregate, of 20% of the outstanding Common
Stock.
(2) No shares of Common Stock or Common L.P. Units are held of record by the
Acquiror. The Irvine Company, which indirectly owns all of the membership
interests in the Acquiror, beneficially owns shares of Common stock and
Common L.P. Units as set forth in the table.
(3) The 24,646,705 Common L.P. Units include (i) 15,784,000 Common L.P. Units
that The Irvine Company received directly in exchange for its transfer of
rental apartment communities to the Operating Partnership, (ii) 1,359,000
Common L.P. Units that The Irvine Company received upon liquidation of
limited partnerships that contributed rental apartment communities to the
Operating Partnership, (iii) 160,000 Common L.P. Units that The Irvine
Company received upon liquidation of the general partnership that
contributed rental apartment communities to the Operating Partnership, (iv)
478,162 Common L.P. Units that The Irvine Company controls through its
general partnership interest in TIC Investment Company B, a California
general partnership ("TICICB"), (v) 1,144,000 Common L.P. Units that The
Irvine Company controls as the general partner of two limited partnerships
(the "Limited Partnerships") that contributed rental apartment communities
to the Operating Partnership, (vi) 4,536,210 Common L.P. Units that The
Irvine Company controls through its general partnership interest in TIC
Investment Company A, a California general partnership ("TICICA"), and
TICICC and (vii) 1,185,333 Common L.P. Units that The Irvine Company
controls through its general partnership interest in TICICD.
(4) Includes (i) 3,430,413 shares of Common Stock beneficially owned by The
Irvine Company, of which Mr. Bren is the sole shareholder and Chairman of
the Board of Directors, and (ii) 183,325 shares of Common Stock held by a
trust, of which Mr. Bren is trustee. Mr. Bren disclaims beneficial
ownership of the Common Stock beneficially owned by The Irvine Company.
(5) Includes (i) 24,646,705 Common L.P. Units beneficially owned by The Irvine
Company, of which Mr. Bren is the sole shareholder and Chairman of the
Board of Directors, and (ii) 305,707 Common L.P. Units owned by Stonecrest,
of which Mr. Bren is the sole owner of the two members. Of the 305,707
Common L.P. Units owned by Stonecrest, 106,696 Common L.P. Units are not
exchangeable for shares of Common Stock, pursuant to an agreement with the
NYSE. Mr. Bren disclaims beneficial ownership of the Common L.P. Units
beneficially owned by The Irvine Company and Stonecrest.
(6) The 3,034,105 Common L.P. Units are also included in the 24,646,705 Common
L.P. Units deemed to be beneficially owned by The Irvine Company because
The Irvine Company is the managing general partner of TICICC. The address
of TICICC's principal executive offices is 550 Newport Center Drive,
Newport Beach, California 92660.
(7) The 1,502,105 Common L.P. Units were transferred to TICICA from Irvine
Lease Company, Inc. ("ILCI") on June 21, 1996. The 1,502,105 Common L.P.
Units are also included in the 24,646,705 L.P. Units deemed to be
beneficially owned by The Irvine Company because The Irvine Company is the
managing general partner of TICICA. The address of TICICA's principal
executive offices is 550 Newport Center Drive, Newport Beach, California
92660.
(8) The 1,185,333 Common L.P. Units were received in exchange for apartment
community land sites sold to the Operating Partnership pursuant to the Land
Rights Agreement. The 1,185,333 Common L.P.
88
<PAGE> 96
Units are also included in the 24,646,705 Common L.P. Units deemed to be
beneficially owned by The Irvine Company because The Irvine Company is the
managing general partner of TICICD. The address of TICICD's principal
executive offices is 550 Newport Center Drive, Newport Beach, California
92660.
(9) DBIAC Investment Company, a California corporation ("DBIAC"), is the 1%
general partner of TICICA, TICICB, TICICC and TICICD and the Limited
Partnerships, which in the aggregate own 7,343,705 Common L.P. Units. The
Irvine Company is the managing general partner of TICICA, TICICB, TICICC,
TICICD and such Common L.P. Units are included in the 24,646,705 Common
L.P. Units deemed to be beneficially owned by The Irvine Company. The sole
shareholder of DBIAC is the Donald L. Bren Trust, dated June 26, 1987, as
amended, of which Mr. Donald Bren is the sole trustee. Assuming the
exchange of the 7,343,705 Common L.P. Units into Common Stock, DBIAC would
be deemed to beneficially own 26.7% of the Common Stock. Since The Irvine
Company is the managing general partner of TICICA, TICICB, TICICC, TICICD
and the Limited Partnerships, DBIAC disclaims beneficial ownership of such
Common Stock. The address of DBIAC's principal executive offices is 550
Newport Center Drive, Newport Beach, California 92660.
(10) Includes 10,000 shares Mr. Reichardt has a right to acquire through a
pension trust account.
Except as set forth in this Proxy Statement, none of The Irvine Company,
the Acquiror, ICDC, or any other person controlling The Irvine Company, the
Acquiror or ICDC nor, to the best of any of their knowledge, any executive
officer or director of the Acquiror, The Irvine Company or ICDC beneficially
owns any Common Stock.
Additional information with respect to the securities ownership of the
Company is set forth in Part III -- Item 12. Share Ownership of Certain
Beneficial Owners and Management of the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1998, which is incorporated by reference in this
Proxy Statement.
PROPOSALS BY SHAREHOLDERS OF THE COMPANY
If the Merger is consummated, there will be no public Shareholders of the
Company and no public participation in any future meetings of Shareholders of
the Company. However, if the Merger is not consummated, or is materially
delayed, the Company intends to hold its 1999 annual meeting of Shareholders as
promptly as reasonably practicable. In such case, the Company's public
Shareholders would continue to be entitled to attend and participate in the
Company's Shareholder meetings. Any proposals by Shareholders intended to be
presented at the 1999 annual meeting of Shareholders must be received by the
Company not less than 60 nor more than 90 days prior to the 1999 annual meeting,
provided that, in the event that the Company gives less than 70 days' notice or
prior public disclosure of the date of the 1999 annual meeting, notice must be
received by the Company no later than the close of business on the tenth day
following such notice or prior public disclosure. Because the date of the
Company's 1999 annual meeting will likely have been changed by more than 30 days
from the date of the Company's 1998 annual meeting, any proposals by
Shareholders intended to be presented and included in the Company's proxy
materials must be received by the Company within a reasonable time before the
Company begins to print and mail its proxy materials in connection with the 1999
annual meeting. In order for a Shareholder to bring other business before a
Shareholder meeting, timely notice must be received by the Company within the
time limits described above. Such notice must include a description of the
proposed business, the reasons therefor, and other specific matters. In each
case, the notice must be given to the Secretary of the Company, at the Company's
principal address. Any Shareholder desiring a copy of the Company's by-laws will
be furnished one without charge upon written request of the Secretary.
89
<PAGE> 97
INDEPENDENT AUDITORS
The consolidated financial statements and financial statement schedule of
the Company appearing in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1998, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such consolidated financial statements and financial
statement schedule are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. It is expected that representatives of Ernst & Young LLP will be
present at the Special Meeting, both to respond to appropriate questions of
Shareholders and to make a statement if they so desire.
ANNUAL REPORT
The Company's Annual Report on Form 10-K/A for the year ended December 31,
1998 is being mailed to all Shareholders with this Proxy Statement. The
information contained therein, including the annual consolidated financial
statements and notes thereto, the report of Ernst & Young LLP, independent
auditors, thereon, selected financial data and management's discussion and
analysis of financial condition and results of operations included in such
Annual Report on Form 10-K/A, is incorporated herein by reference. Information
incorporated by reference is considered part of this Proxy Statement, except to
the extent that the information is superseded by information in this Proxy
Statement. Shareholders who would like to receive copies of exhibits to the
Annual Report on Form 10-K/A (other than any exhibits that are themselves
specifically incorporated by reference in this Proxy Statement) may do so upon
request to Irvine Apartment Communities, Inc., 550 Newport Center Drive, Suite
300, Newport Beach, California 92660, Attention: Shareholder Relations;
telephone (949) 720-5530 and the payment of the Company's reasonable expenses in
furnishing such exhibit.
WHERE YOU CAN FIND MORE INFORMATION
As required by law, the Company files reports, proxy statements and other
information with the Commission. Because the Merger is a "going private"
transaction, the Acquiror, The Irvine Company and Mr. Bren have filed a Rule
13e-3 Transaction Statement on Schedule 13E-3 with respect to the Merger. The
Schedule 13E-3 and such reports, proxy statements and other information contain
additional information about the Company. You can inspect and copy these
materials at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New
York 10048. For further information concerning the Commission's public reference
rooms, you may call the Commission at 1-800-SEC-0330. Some of this information
may also be accessed on the World Wide Web through the Commission's Internet
address at "http://www.sec.gov." The Common Stock is listed on the NYSE and the
Pacific Exchange, Inc., and materials may also be inspected at their offices, 20
Broad Street, New York, New York 10005, and 301 Pine Street, San Francisco,
California 94104, respectively.
You should rely only on the information contained in (or incorporated by
reference into) this Proxy Statement. The Company has not authorized anyone to
give any information different from the information contained in (or
incorporated by reference into) this Proxy Statement. This Proxy Statement is
dated May 4, 1999. You should not assume that the information contained in this
Proxy Statement is accurate as of any later date, and the mailing of this Proxy
Statement to Shareholders shall not create any implication to the contrary.
90
<PAGE> 98
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Proxy Statement are forward-looking
statements that involve risks and uncertainties. Forward-looking statements
include the information set forth under "Certain Financial Projections of the
Company" concerning the projected consolidated income statement data as to the
years ending December 31, 1999 through December 31, 2003. Such information has
been included in this Proxy Statement for the limited purpose of giving the
Shareholders access to financial projections by the Company's management. Such
information was prepared by the Company's management for internal use and not
with a view to publication. The information set forth under "Certain Financial
Projections of the Company" was based on assumptions concerning the Company's
business prospects in the years 1999 through 2003. The information also was
based on other revenue and operating assumptions. Information of this type is
based on estimates and assumptions that are inherently subject to significant
economic and competitive uncertainties and contingencies, all of which are
difficult to predict and many of which are beyond the Company's control.
Accordingly, there can be no assurance that the projected results would be
realized or that actual results would not be significantly higher or lower than
those set forth under "Certain Financial Projections of the Company." In
addition, the consolidated income statement data as to the years ending December
31, 1999 through December 31, 2003 were not prepared with a view to public
disclosure or compliance with the published guidelines of the Commission or the
guidelines established by the American Institute of Certified Public Accountants
regarding projections and forecasts and are included in this Proxy Statement
only because such information was made available to the Acquiror. Neither the
Company's nor the Acquiror's independent accountants have examined or applied
any agreed upon procedures to this information.
OTHER MATTERS
The Board of Directors does not know of any matter other than that
described in this Proxy Statement that will be presented for action at the
Special Meeting. If other matters properly come before the meeting, the persons
named as proxies intend to vote the shares they represent in accordance with
their discretion.
By Order of the Board of Directors,
/s/ SHAWN HOWIE
Shawn Howie
Interim Chief Financial Officer and
Secretary
May 4, 1999
91
<PAGE> 99
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 1, 1999
BETWEEN
TIC ACQUISITION LLC,
A DELAWARE LIMITED
LIABILITY COMPANY,
AND
IRVINE APARTMENT COMMUNITIES, INC.,
A MARYLAND CORPORATION
<PAGE> 100
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I. THE MERGER ...............................................................................1
1.1. The Merger ...................................................................................1
1.2. Closing ......................................................................................1
1.3. Effective Time ...............................................................................2
1.4. Effects of the Merger ........................................................................2
1.5. Certificate of Formation and Limited Liability Company Agreement .............................2
1.6. Bylaws .......................................................................................2
1.7. Officers of Surviving Entity .................................................................2
1.8. Tax Treatment ................................................................................2
ARTICLE II. EFFECT OF THE MERGER ON THE OWNERSHIP INTERESTS IN THE CONSTITUENT ENTITIES ..............3
2.1. Effect on Company Stock ......................................................................3
2.2. Acquiror Interests ...........................................................................3
2.3. Company Options and Restricted Stock Units ...................................................3
2.4. Surrender and Payment ........................................................................4
ARTICLE III. REPRESENTATIONS AND WARRANTIES ...........................................................6
3.1. Representations and Warranties of the Company ................................................6
3.2. Representations and Warranties of Acquiror ..................................................19
ARTICLE IV. CONDUCT OF BUSINESS PENDING THE MERGER ..................................................21
4.1. Covenants of the Company ....................................................................21
4.2. Advice of Changes; Government Filings .......................................................24
ARTICLE V. ADDITIONAL AGREEMENTS ...................................................................25
5.1. Preparation of Schedule 13E-3 and Proxy Statement; the Company
Stockholders Meeting.........................................................................25
5.2. Access to Information........................................................................26
5.3. Approvals and Consents; Cooperation..........................................................26
5.4. Stock Options and Restricted Stock...........................................................27
5.5. Acquisition Proposals........................................................................27
5.6. [Intentionally Omitted]......................................................................29
5.7. Withholding/Foreign Persons..................................................................29
5.8. Public Announcements.........................................................................29
5.9. Director and Officer Liability...............................................................29
5.10. Payment of Dividends.........................................................................29
5.11. Further Assurances...........................................................................30
</TABLE>
i
<PAGE> 101
<TABLE>
<S> <C> <C>
ARTICLE VI. CONDITIONS PRECEDENT.....................................................................30
6.1. Conditions to Each Party's Obligation to Effect the Merger...................................30
6.2. Additional Conditions to Obligations of Acquiror.............................................30
6.3. Additional Conditions to Obligations of the Company..........................................31
ARTICLE VII. TERMINATION AND AMENDMENT................................................................32
7.1. Termination..................................................................................32
7.2. Expenses.....................................................................................33
7.3. Effect of Termination........................................................................35
7.4. Amendment....................................................................................35
7.5. Extension; Waiver............................................................................35
ARTICLE VIII. GENERAL PROVISIONS.......................................................................36
8.1. Non-Survival of Representations, Warranties and Agreements; No Other
Representations and Warranties...............................................................36
8.2. Notices......................................................................................36
8.3. Interpretation...............................................................................36
8.4. Counterparts.................................................................................37
8.5. Entire Agreement; No Third Party Beneficiaries...............................................37
8.6. Governing Law................................................................................37
8.7. Severability.................................................................................37
8.8. Assignment...................................................................................38
8.9. Enforcement..................................................................................38
8.10. Definitions..................................................................................38
</TABLE>
ii
<PAGE> 102
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
LOCATION OF
DEFINITION DEFINED TERM
<S> <C>
Acquisition Proposal.................................................................................Section 5.5
Acquiror................................................................................................Preamble
Affiliate...........................................................................................Section 8.10
Agreement...............................................................................................Preamble
Alternative Transaction..........................................................................Section 7.2.(e)
Articles of Merger...................................................................................Section 1.3
Board of Directors..................................................................................Section 8.10
Break-Up Fee......................................................................................Section 7.2(f)
Business Day........................................................................................Section 8.10
Certificate of Merger................................................................................Section 1.3
Certificates......................................................................................Section 2.4(b)
Closing..............................................................................................Section 1.2
Closing Date.........................................................................................Section 1.2
Code...........................................................................................Section 3.1(i)(i)
Company.................................................................................................Preamble
Company Affiliate...................................................................................Section 8.10
Company Benefit Plans..........................................................................Section 3.1(n)(i)
Company Common Stock....................................................................................Recitals
Company Disclosure Letter...........................................................................Section 8.10
Company Permits...................................................................................Section 3.1(g)
Company Properties................................................................................Section 3.1(k)
Company Stock Option Plans..........................................................................Section 8.10
Company Stockholders Meeting......................................................................Section 5.1(c)
Company Sub.........................................................................................Section 8.10
DLLCA...................................................................................................Recitals
Effective Time.......................................................................................Section 1.3
Encumbrances......................................................................................Section 3.1(k)
Environmental Laws................................................................................Section 3.1(1)
ERISA..........................................................................................Section 3.1(n)(i)
Exchange Act.................................................................................Section 3.1(d)(iii)
Exchange Agent....................................................................................Section 2.4(a)
Expenses..........................................................................................Section 7.2(a)
GAAP...........................................................................................Section 3.1(e)(i)
Governmental Entity..........................................................................Section 3.1(d)(iii)
HSR Act.......................................................................................Section 3.1(d)(ii)
Indebtedness..................................................................................Section 3.1(m)(ii)
IRS............................................................................................Section 3.1(n)(i)
Knowledge...........................................................................................Section 8.10
Liens.........................................................................................Section 3.1(c)(ii)
Maryland Department..................................................................................Section 1.3
</TABLE>
iii
<PAGE> 103
<TABLE>
<S> <C>
Matching Transaction .............................................................................Section 5.5(b)
Material Adverse Effect ............................................................................Section 8.10
Material Contract .............................................................................Section 3.1(m)(i)
Merger .................................................................................................Recitals
Merger Consideration ................................................................................Section 2.1
MGCL ...................................................................................................Recitals
Non-Employee Option ..............................................................................Section 2.3(b)
NYSE ........................................................................................Section 3.1(d)(iii)
OP ............................................................................................Section 3.1(e)(i)
OP Units ...........................................................................................Section 8.10
Option ........................................................................................Section 3.1(n)(v)
Organizational Documents ...........................................................................Section 8.10
Outside Date .....................................................................................Section 7.1(b)
Person .............................................................................................Section 8.10
Property Restrictions ............................................................................Section 3.1(k)
Proxy Statement ..................................................................................Section 5.1(b)
REIT ........................................................................................Section 3.1.(i)(ii)
Required Company Votes .............................................................................Section 8.10
Required Regulatory Approvals ......................................................................Section 8.10
Restricted Stock Unit Agreement ..............................................................Section 3.1(n)(vi)
Retention Agreement ..............................................................................Section 2.3(a)
Schedule 13E-3 ...................................................................................Section 5.1(a)
SEC ..............................................................................................Section 3.1(a)
SEC Reports ...................................................................................Section 3.1(e)(i)
Securities Act ................................................................................Section 3.1(e)(i)
Special Committee ......................................................................................Recitals
Stock Option Agreement ........................................................................Section 3.1(n)(v)
Subsidiary .........................................................................................Section 8.10
Superior Proposal ................................................................................Section 5.5(b)
Surviving Entity ....................................................................................Section 1.1
Tax ................................................................................................Section 8.10
Taxable ............................................................................................Section 8.10
Taxes ..............................................................................................Section 8.10
Tax Return .........................................................................................Section 8.10
Terminating Acquiror Breach ......................................................................Section 7.1(h)
Terminating Company Breach .......................................................................Section 7.1(g)
The other party ....................................................................................Section 8.10
Third Party ........................................................................................Section 8.10
TIC ..............................................................................................Section 3.1(q)
Trust .........................................................................................Section 3.1(e)(i)
Trust Shares .......................................................................................Section 8.10
Violation ....................................................................................Section 3.1(d)(ii)
</TABLE>
iv
<PAGE> 104
This AGREEMENT AND PLAN OF MERGER, dated as of February 1, 1999
(this "Agreement"), by and between TIC Acquisition LLC, a Delaware limited
liability company ("Acquiror"), and Irvine Apartment Communities, Inc., a
Maryland corporation (the "Company").
W I T N E S S E T H :
WHEREAS, (i) each of the Board of Directors of the Company and a
special committee thereof comprised entirely of non-management independent
directors not affiliated with the Acquiror or any of its Affiliates (the
"Special Committee") has determined that the Merger (as defined below) is
advisable and in the best interests of its stockholders and (ii) each of the
Board of Directors of the Company, the Special Committee and the Managing Member
of Acquiror have approved the Merger upon the terms and subject to the
conditions set forth in this Agreement, whereby each issued and outstanding
share of Common Stock, par value $.01 per share, of the Company ("Company Common
Stock") will be converted into the right to receive cash;
WHEREAS, in order to effectuate the foregoing, the Company, upon the
terms and subject to the conditions of this Agreement and in accordance with the
Delaware Limited Liability Company Act (the "DLLCA") and the Maryland General
Corporation Law (the "MGCL"), will merge with and into Acquiror (the "Merger");
and
WHEREAS, Acquiror and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I.
THE MERGER
1.1. THE MERGER. Upon the terms and subject to the conditions set forth
in this Agreement, and in accordance with the DLLCA and the MGCL, the Company
shall be merged with and into Acquiror at the Effective Time (as defined below).
Following the Merger, the separate corporate existence of the Company shall
cease and Acquiror shall continue as the surviving entity (hereinafter sometimes
called the "Surviving Entity") in accordance with the DLLCA and the MGCL.
1.2. CLOSING. The closing of the Merger (the "Closing") will take place
on the second Business Day after satisfaction or waiver (as permitted by this
Agreement and applicable law) of the conditions (excluding conditions that, by
their terms, cannot be satisfied until the Closing Date) set forth in Article VI
(the "Closing Date"), unless another time or date is agreed to in writing by the
parties hereto. The Closing shall be held at the offices of Latham & Watkins,
<PAGE> 105
650 Town Center Drive, 20th Floor, Costa Mesa, California 92626, unless another
place is agreed to in writing by the parties hereto.
1.3. EFFECTIVE TIME. Upon the Closing, the parties shall (i) file with
the Secretary of State of the State of Delaware a certificate of merger or other
appropriate documents (in any such case, the "Certificate of Merger") executed
in accordance with the relevant provisions of the DLLCA, (ii) file with the
Maryland State Department of Assessments and Taxation (the "Maryland
Department") the articles of merger or other appropriate documents (in any such
case, the "Articles of Merger") executed in accordance with the relevant
provisions of the MGCL and (iii) make all other filings, recordings or
publications required under the DLLCA and MGCL in connection with the Merger.
The Merger shall become effective at 5:00 p.m., New York City time, on the later
of the date of (i) the filing of the Certificate of Merger with the Delaware
Secretary of State in accordance with the DLLCA and (ii) the filing of the
Articles of Merger with, and the acceptance for record of such Articles of
Merger by, the Maryland Department in accordance with the MGCL, or at such other
time as the parties may agree and specify in such filings in accordance with
applicable law (the time the Merger becomes effective being the "Effective
Time").
1.4. EFFECTS OF THE MERGER. At the Effective Time, Acquiror shall
continue in existence as the Surviving Entity, and without further transfer,
succeed to and possess all of the rights, privileges and powers of the Company,
and all of the assets and property of whatever kind and character of the Company
shall vest in Acquiror without further act or deed; thereafter, Acquiror, as
Surviving Entity, shall be liable for all of the liabilities and obligations of
the Company (including the Retention Agreements), and any claim or judgment
against the Company may be enforced against Acquiror, as the Surviving Entity,
in accordance with the DLLCA and the MGCL. At and after the Effective Time, the
Merger will have the effects set forth in the DLLCA and the MGCL.
1.5. CERTIFICATE OF FORMATION AND LIMITED LIABILITY COMPANY AGREEMENT.
The certificate of formation and limited liability company agreement of Acquiror
as in effect immediately prior to the Effective Time shall be the certificate of
formation and limited liability company agreement of Surviving Entity until
thereafter changed or amended as provided therein or by applicable law.
1.6. BYLAWS. The bylaws of Acquiror as in effect at the Effective Time
shall be the bylaws of the Surviving Entity until thereafter changed or amended
as provided therein or by applicable law.
1.7. OFFICERS OF SURVIVING ENTITY. The officers of Acquiror shall be the
officers of the Surviving Entity, until the earlier of their resignation or
removal or otherwise ceasing to be an officer or until their respective
successors are duly appointed and qualified, as the case may be.
1.8. TAX TREATMENT. The parties intend that, for United States federal
and applicable state income tax purposes, the Merger shall be treated as if the
Company had transferred all of its assets and liabilities to Acquiror in a
taxable transaction in exchange for the Merger
2
<PAGE> 106
Consideration and then completely liquidated. Acquiror and the Company shall
each report the Merger for federal and applicable state income tax purposes
consistently with the above described treatment.
ARTICLE II.
EFFECT OF THE MERGER ON THE OWNERSHIP INTERESTS
IN THE CONSTITUENT ENTITIES
2.1. EFFECT ON COMPANY STOCK. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of Company
Common Stock, each issued and outstanding share of Company Common Stock shall be
converted into the right to receive $34.00 in cash, without interest (the
"Merger Consideration"). As of the Effective Time, all shares of Company Common
Stock shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate representing
any such shares of Company Common Stock shall cease to have any rights with
respect thereto, except the right to receive, upon the surrender of such
certificates, the Merger Consideration.
2.2. ACQUIROR INTERESTS. At and after the Effective Time, each membership
interest in Acquiror issued and outstanding immediately prior to the Effective
Time shall remain an issued and outstanding membership interest in Acquiror and
shall not be affected by the Merger. Each membership interest in Acquiror that
is issued but not outstanding shall remain an issued but not outstanding
membership interest in Acquiror and shall not be affected by the Merger.
2.3. COMPANY OPTIONS AND RESTRICTED STOCK UNITS.
(a) The Company shall take all actions necessary to assure that,
prior to the Effective Time, each Option (other than the Options referred to
subsection 2.3(b)) and each Restricted Stock Unit Agreement (and any dividend
equivalents relating thereto) (and each right to any award under any Company
Stock Option Plan) shall be canceled in accordance with the terms of the letter
agreement dated as of January 22, 1999 between the Company and the holder
thereof (a "Retention Agreement").
(b) The Company shall take all actions necessary to assure that;
prior to the Effective Time, each outstanding Option (i) under the Company's
1993 Stock Option Plan for Directors or (ii) held by James Mead (a "Non-Employee
Option"), whether or not then exercisable or vested, shall be canceled, and, in
consideration of such cancellation, the Company shall pay the holder of such
Non-Employee Option an amount in cash in respect thereof equal to the product of
(x) the excess (if any) of the Merger Consideration over the exercise price
thereof, and (y) the number of shares of Company Common Stock with respect to
which such Non-Employee Option is then exercisable and vested (such payment to
be net of withholding taxes applicable thereto). Each Non-Employee Option shall
be canceled with respect to all shares of Company Common Stock subject to such
Non-Employee Option, including shares of Company Common Stock with respect to
which such Non-Employee Option is not then exercisable or vested.
3
<PAGE> 107
(c) The Company shall take all actions necessary to assure that,
on and after the date of this Agreement, (i) no awards are granted under any
Company Stock Option Plan, (ii) except as provided in the Retention Agreements,
no Option or Restricted Stock Unit Agreement (or any dividend equivalents
relating thereto) is amended, modified or terminated, and (iii) except as
provided in the Retention Agreements, no other actions are taken that accelerate
the vesting or exercisability of any Option or Restricted Stock Unit Agreement
(or any dividend equivalents relating thereto) or otherwise change the rights of
the holder of any Option or Restricted Stock Unit Agreement (or any dividend
equivalents relating thereto), and (iv) that there are no options, warrants or
other rights to acquire stock from the Company (other than the Options and
Restricted Stock Unit Agreements (and dividend equivalents relating thereto) set
forth on Schedules 3.1(n)(v) and 3.1(n)(vi) to the Company Disclosure Letter.
2.4. SURRENDER AND PAYMENT.
(a) Exchange Agent. Prior to the Effective Time, pursuant to an
agreement in form and substance reasonably acceptable to the Special Committee,
Acquiror shall appoint an agent, who shall be reasonably acceptable to the
Special Committee (the "Exchange Agent"), for the purpose of exchanging
certificates representing shares of Company Common Stock for the Merger
Consideration. Acquiror will make available to the Exchange Agent, as needed,
the Merger Consideration (in immediately available funds) to be paid in respect
of the shares of Company Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after
the Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock (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 Acquiror may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Acquiror, together
with such letter of transmittal, duly executed, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such Certificate
shall be entitled to receive in exchange therefor the Merger Consideration,
without interest thereon, and the Certificate so surrendered shall forthwith be
canceled. If any portion of the Merger Consideration is to paid to a Person
other than the registered holder of the shares represented by the Certificate or
Certificates surrendered in exchange therefor, it shall be a condition to such
payment that the Certificate or Certificates so surrendered shall be properly
endorsed or otherwise be in proper form for transfer and that the Person
requesting such payment shall pay to the Exchange Agent any transfer or other
taxes required as a result of such payment to a Person other than the registered
holder of such shares of Company Common Stock or establish to the satisfaction
of the Exchange Agent that such tax has been paid or is not payable. Until
surrendered as contemplated by this Section 2.4, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration.
4
<PAGE> 108
(c) No Further Ownership Rights in Company Common Stock. All
Merger Consideration paid upon the surrender for exchange of Certificates in
accordance with the terms of this Article II shall be deemed to have been paid
in full satisfaction of all rights pertaining to the shares of Company Common
Stock theretofore represented by such Certificates, subject, however, to the
Surviving Entity's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by the Company on such shares of Company Common Stock (i) on or
after the date of this Agreement in a manner that does not violate the terms of
this Agreement or (ii) prior to the date of this Agreement and which, in either
case, remain unpaid at the Effective Time, and, from and after the Effective
Time, there shall be no further registration of transfers on the stock transfer
books of the Surviving Entity of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Entity or the Exchange Agent
for any reason, they shall be canceled and exchanged as provided in this Article
II, except as otherwise provided by law.
(d) Unclaimed Funds. Any portion of the Merger Consideration made
available to the Exchange Agent pursuant to Section 2.4(a) that remains
unclaimed by holders of the Certificates for six months after the Effective Time
shall be delivered to Acquiror, upon demand, and any holders of Certificates who
have not theretofore complied with this Article II shall thereafter look only to
Acquiror for payment of their claim for Merger Consideration.
(e) No Liability. None of Acquiror, the Company or the Exchange
Agent shall be liable to any Person in respect of any Merger Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law. If any Certificates shall not have been surrendered
prior to seven years after the Effective Time or immediately prior to such
earlier date on which any Merger Consideration in respect of such Certificate
would otherwise escheat to or become the property of any Governmental Entity (as
defined below), any such Merger Consideration in respect of such Certificate
shall, to the extent permitted by applicable law, become the property of the
Surviving Entity, free and clear of all claims or interest of any Person
previously entitled thereto.
(f) Investment of Funds. The Exchange Agent shall invest any
Merger Consideration made available to the Exchange Agent pursuant to Section
2.4(a), as directed by Acquiror, on a daily basis. Any interest and other income
resulting from such investments shall be paid to Acquiror.
(g) Lost Certificates. In the event that 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 Acquiror, the posting by such Person of a bond in such
reasonable amount as Acquiror may direct as indemnity against any claim that may
be made against it with respect to such Certificate, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed Certificate the Merger
Consideration with respect to such Certificate, to which such Person is entitled
pursuant hereto.
5
<PAGE> 109
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to Acquiror as follows:
(a) Organization, Standing and Power. The Company has been duly
incorporated and is validly existing and in good standing under the laws of the
State of Maryland. The Company is duly qualified and in good standing to do
business in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary,
except where the failure to so qualify would not, either individually or in the
aggregate, have a Material Adverse Effect on the Company. The copies of the
Organizational Documents of the Company filed with the Securities and Exchange
Commission (the "SEC") are true, complete and correct copies of such documents
as amended and in effect on the date of this Agreement.
(b) Company Subsidiaries. Schedule 3.1(b) to the Company
Disclosure Letter sets forth each Subsidiary of the Company and the ownership
interest therein of the Company. Each Company Sub that is a corporation is duly
incorporated and validly existing under the laws of its jurisdiction of
incorporation and has the requisite corporate power and authority to carry on
its business as now being conducted. Each of the Company Subs that is a
partnership, limited partnership, limited liability company or trust is duly
organized and validly existing under the laws of its jurisdiction of
organization and has the requisite power and authority to carry on its business
as now being conducted. Each Company Sub is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary, other than in such jurisdictions where the failure to be
so qualified or licensed would not, either individually or in the aggregate,
have a Material Adverse Effect on the Company. True, complete and correct copies
of the partnership agreement and trust declaration, as applicable, of the
Company Subs, each as amended to the date of this Agreement, have been
previously delivered or made available to Acquiror.
(c) Capital Structure.
(i) As of the date of this Agreement, the authorized stock
of the Company consists of (A) 150,000,000 shares of Company Common Stock,
of which 20,163,642 shares are outstanding, (B) 160,000,000 shares of
excess stock, par value $.01 per share, of which no shares are
outstanding, and (C) 10,000,000 shares of preferred stock, par value
$1.00 per share, of which no shares are outstanding. All issued and
outstanding shares of stock of the Company are duly authorized, validly
issued, fully paid and nonassessable, and, except as disclosed in Schedule
3.1(c)(i) to the Company Disclosure Letter, no class of stock of the
Company is entitled to preemptive rights. As of the date of this
Agreement, there are no outstanding options, warrants or other rights to
acquire stock from the Company other than (1) Options representing in the
aggregate the right to purchase 671,333 shares of Company Common Stock
under the Company Stock
6
<PAGE> 110
Option Plans, (2) Restricted Stock Units outstanding under the Company
Stock Plans which may, in the Company's discretion, be settled by the
delivery of an aggregate of 202,000 shares of Company Common Stock granted
under the Company Stock Option Plans, and (3) as set forth on Schedule
3.1(c)(i) to the Company Disclosure Letter. There are no stock
appreciation rights relating to the stock of the Company. Except as
disclosed in Schedule 3.1(c)(i) to the Company Disclosure Letter, as of
the date of this Agreement, no bonds, debentures, notes or other
indebtedness of the Company having the right to vote on any matters on
which stockholders may vote are issued or outstanding.
(ii) Schedule 3.1(c)(ii) to the Company Disclosure Letter
sets forth the equity ownership of each Company Sub (it being understood
that such representation with respect to securities held by any entity
other than the Company or any Company Sub is made only to the extent of
the Knowledge of the Company). Except as set forth on Schedule 3.1(c)(ii)
to the Company Disclosure Letter, (A) all of the outstanding shares of
stock of each Company Sub that is a corporation have been duly authorized,
validly issued, fully paid and nonassessable, and are owned by the Company
free and clear of all liens, claims, encumbrances, restrictions,
preemptive rights or any other claims of any thirty party ("Liens") and
(B) all equity interests in each Company Sub that is a partnership,
limited partnership, joint venture, limited liability company or trust are
owned by the Company or one or more Company Subs free and clear of all
Liens. Except as set forth on Schedule 3.1(c)(ii) to the Company
Disclosure Letter, there are no outstanding options, warrants or other
rights to acquire ownership interests from the Company Subs. Except as
disclosed in Schedule 3.1(c)(ii) to the Company Disclosure Letter, as of
the date of this Agreement, no bonds, debentures, notes or other
indebtedness of the Company Subs having the right to vote on any matters
on which holders of equity in the Company Subs are entitled to vote are
issued or outstanding.
(iii) Except as otherwise set forth in this Section 3.1(c) or
in Schedule 3.1(c)(i) or 3.1(c)(ii) to the Company Disclosure Letter, as
of the date of this Agreement, there are no securities, options, warrants,
calls, rights, commitments, agreements, arrangements or undertakings of
any kind to which the Company or the Company Subs is a party or by which
any of them is bound obligating the Company or the Company Subs to issue,
deliver or sell, or cause to be issued, delivered or sold, additional
shares of stock or other voting securities of the Company or the Company
Subs or obligating the Company or the Company Subs to issue, grant, extend
or enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. As of the date of this Agreement,
other than as set forth in Schedule 3.1(c)(i) or 3.1(c)(ii) to the Company
Disclosure Letter, there are no outstanding obligations of the Company or
the Company Subs to repurchase, redeem or otherwise acquire any shares of
stock of the Company or shares of stock or other ownership interests of
the Company Subs.
7
<PAGE> 111
(d) Authority; No Conflicts.
(i) The Company has all requisite corporate power and
corporate authority to enter into this Agreement and, subject to the
adoption of this Agreement by the requisite vote of the holders of Company
Common Stock, to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of the Company, subject in the case
of the consummation of the Merger to the approval of this Agreement by the
stockholders of the Company. This Agreement has been duly executed and
delivered by the Company and constitutes a valid and binding agreement of
the Company, enforceable against it in accordance with its terms, except
as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
creditors generally and by general equity principles (regardless of
whether such enforceability is considered in a proceeding in equity or at
law).
(ii) Except as set forth in Schedule 3.1(d)(ii) to the
Company Disclosure Letter, the execution and delivery of this Agreement
does not, and the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation of, or constitute a
default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, amendment, cancellation or acceleration of
any obligation or the loss of a material benefit under, or the creation of
a lien, pledge, security interest, charge or other encumbrance on any
assets (any such conflict, violation, default, right of termination,
amendment, cancellation or acceleration, loss or creation, a "Violation")
pursuant to: (A) any provision of the Organizational Documents of the
Company or the Company Subs or (B) except as would not have a Material
Adverse Effect on the Company and, subject to obtaining or making the
consents, approvals, orders, authorizations, registrations, declarations
and filings referred to in paragraph (iii) below, any loan or credit
agreement, note, mortgage, bond, indenture, lease, benefit plan or other
agreement, obligation, instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company, the Company Subs or their respective properties
or assets.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any supranational, national,
state, municipal or local government, any instrumentality, subdivision,
court, administrative agency or commission or other authority thereof, or
any quasi-governmental or private body exercising any regulatory, taxing,
or other governmental or quasi-governmental authority (a "Governmental
Entity"), is required by or with respect to the Company or the Company
Subs in connection with the execution and delivery of this Agreement by
the Company or the consummation by the Company of the transactions
contemplated hereby, except for (x) those required under or in relation to
(A) the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
(B) the DLLCA and the MGCL with respect to the filing and recordation of
appropriate merger documents, (C) the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") and (D) rules and
8
<PAGE> 112
regulations of the New York Stock Exchange (the "NYSE"), and (y) such
consents, approvals, orders, authorizations, registrations, decimations
and filings the failure of which to make or obtain would not, individually
or in the aggregate, have a Material Adverse Effect on the Company.
(e) Reports and Financial Statements.
(i) Each of the Company, Irvine Apartment Communities, L.P.,
a Delaware limited partnership (the "OP"), and IAC Capital Trust, a
Delaware business trust (the "Trust"), has filed all required reports,
schedules, forms, statements and other documents required to be filed by
it with the SEC since, in each case, the later of (i) January 1, 1996 and
(ii) its formation (collectively, including all exhibits thereto, the "SEC
Reports"). No other Company Sub is required to file any form, report or
other document with the SEC. None of the SEC Reports, as of their
respective dates (and, if amended or superseded by a filing prior to the
date of this Agreement or of the Closing Date, then on the date of such
filing), contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which
they were made, not misleading. Each of the financial statements
(including the related notes) included in the SEC Reports presents fairly,
in all material respects, (i) the consolidated financial position and
consolidated results of operations and cash flows of the Company and the
OP and (ii) the financial position and results of operations and cash
flows of the Trust, as of the respective dates or for the respective
periods set forth therein, all in conformity with United States generally
accepted accounting principles ("GAAP") consistently applied during the
periods involved except as otherwise noted therein, and subject, in the
case of the unaudited interim financial statements, to normal year-end
adjustments that have not been and are not expected to be material in
amount. All of such SEC Reports, as of their respective dates (and as of
the date of any amendment to the respective SEC Report), complied as to
form in all material respects with the applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the
Exchange Act and the rules and regulations promulgated thereunder.
(ii) Except for liabilities and obligations referred to in
any of the SEC Reports (including, without limitation, the financial
statements included therein) filed prior to the date of this Agreement,
and except for liabilities and obligations incurred in the ordinary course
of business since September 30, 1998, neither the Company nor any Company
Sub has any liabilities or obligations of any nature which, individually
or in the aggregate, would have a Material Adverse Effect on the Company.
(f) Schedule 13E-3; Proxy Statement.
(i) None of the information supplied or to be supplied by
the Company for inclusion or incorporation by reference in the Schedule
13E-3 (except for information about Acquiror or any of its Affiliates)
will, on the date the Schedule 13E-3 is first mailed to the Company's
stockholders or at the time of the Company Stockholders
9
<PAGE> 113
Meeting, 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. If at any time prior to the Effective Time
any event with respect to the Company should occur and is required to be
described in an amendment of, or a supplement to, the Schedule 13E-3, the
Company shall promptly furnish Acquiror with a description of such event.
For purposes of this subsection 3.1(f)(i), any statement which is made or
incorporated by reference in the Schedule 13E-3 shall be deemed modified
or superseded to the extent any later filed document incorporated by
reference in the Schedule 13E-3 or any statement included in the Schedule
13E-3 modifies or supersedes such earlier statement.
(ii) None of the information supplied or to be supplied by
the Company for inclusion or incorporation by reference in the Proxy
Statement (except for information about Acquiror or any of its Affiliates
furnished by Acquiror or any of its Affiliates to the Company) will, on
the date the Proxy Statement is first mailed to the Company's stockholders
or at the time of the Company Stockholders Meeting, 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.
If at any time prior to the Effective Time any event (other than an event
with respect to the Acquiror or any of its Affiliates) should occur and is
required to be described in an amendment of, or a supplement to, the Proxy
Statement, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of the Company. If at any time prior to
the Effective Time any event with respect to the Acquiror or any of its
Affiliates should occur and is required to be described in an amendment
of, or a supplement to, the Proxy Statement, upon receipt of a description
of such event from Acquiror or any of its Affiliates, such amendment or
supplement shall be promptly filed by the Company with the SEC and, as
required by law, disseminated to the stockholders of the Company. The
Proxy Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder. For purposes of this subsection 3.1(f)(ii), any statement
which is made or incorporated by reference in the Proxy Statement shall be
deemed modified or superseded to the extent any later filed document
incorporated by reference in the Proxy Statement or any statement included
in the Proxy Statement modifies or supersedes such earlier statement
(g) Compliance with Applicable Laws; Regulatory Matters. Except
as disclosed in any of the SEC Reports, the Company and the Company Subs hold,
and are in compliance with the terms of, all permits, licenses, certificates,
franchises, registrations, variances, exemptions, orders and approvals of all
Governmental Entities which are material to the operation of their businesses,
taken as a whole (the "Company Permits"), except where the failure so to hold
or comply, individually or in the aggregate, would not have a Material Adverse
Effect on the Company. Except as disclosed in any of the SEC Reports, the
businesses of the Company and the Company Subs are not being and have not been
conducted in violation of any law, ordinance, regulation, judgment, decree,
injunction, rule or order of any Governmental
10
<PAGE> 114
Entity, except for violations which, individually or in the aggregate, would not
have a Material Adverse Effect on the Company. As of the date of this Agreement,
except as disclosed in any SEC Report, no investigation by any Governmental
Entity with respect to the Company or the Company Subs is pending or, to the
Knowledge of the Company, threatened, other than investigations which,
individually or in the aggregate, would not have a Material Adverse Effect on
the Company.
(h) Litigation. Except as disclosed in any of the SEC Reports or
in Schedule 3.1(h) to the Company Disclosure Letter, there is no litigation,
arbitration, claim, suit, action, investigation or proceeding pending (it being
understood that such representation with respect to any litigation, arbitration,
claim, suit, action, investigation or proceeding being handled by
representatives of the Acquiror or its Affiliates on behalf of the Company is
made only to the extent of the Knowledge of the Company) or, to the Knowledge of
the Company, threatened, against or affecting the Company or the Company Subs
which, individually or in the aggregate, would have a Material Adverse Effect on
the Company, nor is there any judgment, award, decree, injunction, rule or order
of any Governmental Entity or arbitrator outstanding against the Company or the
Company Subs which, individually or in the aggregate, would have a Material
Adverse Effect on the Company. As of the date hereof, except as set forth in
Schedule 3.1(h) to the Company Disclosure Letter, (i) there is no litigation,
arbitration, claim, suit, action, investigation or proceeding pending against or
affecting the Company or its Directors relating to this Agreement or the
transactions contemplated hereby, and (ii) to the Knowledge of the Company,
there is no injunction, judgment, order, decree, ruling or charge in effect
against the Company, any of the Directors of the Company or any Company Sub
which would (A) prevent consummation of any of the transactions contemplated by
this Agreement, (B) cause any of the transactions contemplated by this Agreement
to be rescinded following consummation, or (C) materially adversely affect the
right of Acquiror or any of its Subsidiaries to own its or the Company's or any
Company Sub's assets and to operate its or the Company's or any Company Sub's
businesses (and no such injunction, judgment, order, decree, ruling or charge
shall be in effect).
(i) Taxes.
(i) Each of the Company and each Company Sub has (A) filed
on a timely basis all Tax Returns required to be filed by it (after giving
effect to any filing extension properly granted by a Governmental Entity
having authority to do so) and all such Tax Returns are accurate and
complete in all material respects; and (B) paid (or the Company has paid
on its behalf) all Taxes shown on such returns and reports as required to
be paid by it, and, except as disclosed in any of the SEC Reports or in
Schedule 3.1(i)(i) to the Company Disclosure Letter, the most recent
financial statements contained in any of the SEC Reports reflect an
adequate reserve for all material Taxes payable by the Company (and by
those Company Subs whose financial statements are contained therein) for
all taxable periods and portions thereof through the date of such
financial statements. The accruals and reserves for Taxes (including
deferred Taxes) reflected in the books and records of the Company (and
such Company Subs) as of the last day of the Company's most recently
completed fiscal month end are in all material
11
<PAGE> 115
respects adequate to cover Taxes required to be accrued through such date
(including Taxes being contested) in accordance with GAAP applied on a
consistent basis with the financial statements contained in any of the SEC
Reports. True, correct and complete copies of all federal, state, local
and foreign Tax Returns for the Company and each Company Sub, and all
written communications relating thereto, have been delivered or made
available to representatives of Acquiror. Since January 1, 1998, the
Company has not incurred and does not expect to incur any liability for
taxes under Section 857(b), 860(c) or 4981 of the Internal Revenue Code of
1986, as amended (the "Code"), and neither the Company nor any Company Sub
has incurred any material liability for Taxes other than in the ordinary
course of business. The Company has not elected and will not elect to pay
tax on any capital gain recognized on or after January 1, 1998, including
but not limited to gain recognized as a result of the Merger. To the
Knowledge of the Company, no event has occurred, and no condition or
circumstance exists, which presents a material risk that any material Tax
described in the preceding two sentences will be imposed upon the Company.
Except as set forth on Schedule 3.1(i)(i) to the Company Disclosure
Letter, to the Knowledge of the Company, no deficiencies for any Taxes
have been proposed, asserted or assessed against the Company or any of the
Company Subs, and no requests for waivers of the time to assess any such
Taxes are pending. To the Knowledge of the Company, Schedule 3.1(i)(i) to
the Company Disclosure Letter sets forth (i) the taxable years of the
Company and the Company Subs as to which the respective statutes of
limitations for assessment of federal, state and foreign income or
franchise Taxes have not expired, and (ii) with respect to such taxable
years, those years for which examinations have been completed, those years
for which examinations are presently being conducted, those years for
which examinations have not yet been initiated and those years for which
extensions to file Tax Returns have been requested and such Tax Returns
have not yet been filed.
(ii) The Company (A) for all taxable years commencing with
1993 through the most recent December 31, has been subject to taxation as
a real estate investment trust (a "REIT") within the meaning of the Code
and has satisfied all requirements to qualify as a REIT for such years,
(B) has operated, and will continue to operate, in such a manner as to
qualify as a REIT for the tax year ending upon the Closing Date, and (C)
has not taken or omitted to take any action which would reasonably be
expected to result in a challenge to its status as a REIT, and to the
Company's Knowledge, no such challenge is pending or threatened. The OP
and each other Company Sub that is a partnership has been since its
formation and continues to be treated for federal income tax purposes as a
partnership and not as a corporation or an association or publicly traded
partnership taxable as a corporation. The Trust (W) for its taxable year
ended December 31, 1998 has been organized and has operated in conformity
with the requirements for REIT qualification under the Code, (X) will, in
a timely fashion, elect to be treated as a REIT for the taxable year ended
December 31, 1998, (Y) during the portion of its taxable year from
January 1, 1999 through the date hereof has been organized and has
operated, and through the Closing Date will continue to be organized and
to operate, in conformity with the requirements for REIT qualification
under the Code, and (Z) has not taken or omitted to take any action
which
12
<PAGE> 116
would reasonably be expected to result in a challenge to its status as a
REIT and, to the Company's Knowledge, no such challenge is pending or
threatened. Each other Company Sub has been since its formation, and
continues to be treated for federal income tax purposes as a "qualified
REIT subsidiary" as defined in Section 856(i) of the Code. To the
Knowledge of the Company, neither the Company nor any Company Sub holds
any asset (A) the disposition of which would be subject to rules similar
to Section 1374 of the Code as a result of an election under IRS Notice
88-19 or (B) that is subject to a consent filed pursuant to Section 341(f)
of the Code and the regulations thereunder.
(j) No Payments to Employees, Officers or Directors. Except as set
forth on Schedule 3.1(j) to the Company Disclosure Letter or as otherwise
specifically provided for in this Agreement, there is no employment or severance
contract, or other agreement requiring payments to be made or increasing any
amounts payable thereunder on a change of control or otherwise as a result of
the consummation of the Merger, with respect to any employee, officer or
director of the Company or any Company Sub.
(k) Properties. Except as provided in Schedule 3.1(k) to the
Company Disclosure Letter, the Company or one of the Company Subs owns fee
simple or leasehold, as applicable, title to each of the real properties
identified (as to fee simple property or leasehold property) in Schedule 3.1(k)
to the Company Disclosure Letter (the "Company Properties"). The Company
Properties are not subject to liens, mortgages or deeds of trust, claims against
title, charges which are liens, security interests or other encumbrances on
title ("Encumbrances") and which could cause, individually or in the aggregate,
a Material Adverse Effect on the Company. The Company Properties (other than the
Company Properties under development) are not subject to any rights of way,
written agreements, laws, ordinances and regulations affecting building use or
occupancy, or reservations of an interest in title (collectively, "Property
Restrictions"), except for (i) Encumbrances and Property Restrictions set forth
in Schedule 3.1(k) to the Company Disclosure Letter, (ii) Property Restrictions
imposed or promulgated by law or any governmental body or authority with respect
to real property, including zoning regulations, provided they do not materially
adversely affect the current use of any Company Property (other than the Company
Properties under development), (iii) Encumbrances and Property Restrictions
disclosed on existing title reports, existing title policies or existing surveys
(in either case copies of which title reports, title policies and surveys have
been delivered or made available to Acquiror; provided, however, that platting
of development land will not be shown on existing title reports or existing
title policies) and (iv) mechanics', carriers', workmen's, repairmen's liens and
other Encumbrances, Property Restrictions and other limitations of any kind, if
any, which, individually or in the aggregate, are not substantial in amount, do
not materially detract from the value of or materially interfere with the
current use of any of the Company Properties subject thereto or affected
thereby, and would not otherwise have a Material Adverse Effect on the Company.
Except as provided in Schedule 3.1(k) to the Company Disclosure Letter, valid
policies of title insurance have been issued insuring the Company's or the
applicable Company Sub's fee simple or leasehold, as applicable, title to the
Company Properties in amounts at least equal to the purchase price (or in the
case of leasehold properties, imputed value) thereof, subject only to the
matters disclosed above, and such policies are, at the date hereof, in full
force and effect and no material claim has been made against any such policy.
Except as provided in
13
<PAGE> 117
Schedule 3.1(k) to the Company Disclosure Letter, (i) the Company has no
Knowledge that any material certificate, permit or license from any governmental
authority having jurisdiction over any of the Company Properties (other than the
Company Properties under development) or any agreement, easement or other right
which is necessary to permit the current use of the buildings and improvements
on any of the Company Properties (other than the Company Properties under
development) or which is necessary to permit the current use of all driveways,
roads, and other means of egress and ingress to and from any of the Company
Properties (other than the Company Properties under development) has not been
obtained and is not in full force and effect, or of any pending threat of
modification or cancellation of any of same, in each case which would materially
detract from the value of or materially interfere with the current use of any of
the Company Properties; (ii) the Company has not received written notice of any
material violation of any federal, state or municipal law, ordinance, order,
regulation or requirement affecting any portion of any of the Company Properties
issued by any governmental authority; (iii) the Company has no Knowledge of any
structural defects relating to the Company Properties which would materially
detract from the value of or materially interfere with the current use of any of
the Company Properties; (iv) the Company has no Knowledge of any Company
Properties whose building systems are not in working order in any material
respect; (v) the Company has no Knowledge of any physical damage to any Company
Property in excess of $50,000 for which there is no insurance in effect covering
the cost of the restoration; and (vi) the Company has no Knowledge of any
current renovation or restoration (not including recurring capital expenditures)
to any Company Property the remaining cost of which exceeds $50,000. The Company
has no Knowledge of any Property Restrictions on any Company Property under
development that are likely to materially detract from the value of or
materially interfere with the proposed use of such Company Property (other than
Property Restrictions which the Company has no reason to believe it will be
unable to have removed prior to the proposed occupancy of the Company Property).
The Company has no Knowledge that any governmental authority having jurisdiction
over any Company Property under development has denied or rejected any
application by the Company for a certificate, permit or license with respect to
such Company Property, which denial or rejection is likely to materially detract
from the value of or materially interfere with the proposed use of such Company
Property. The Company has received no notice of any material violation of any
zoning, building or similar law, code, ordinance or regulation which applies to
the Company Properties under development. Neither the Company nor any of the
Company Subs has received any notice to the effect that (A) any condemnation or
adverse rezoning proceedings are pending or threatened with respect to any of
the Company Properties or (B) any zoning, building or similar law, code,
ordinance or regulation is or will be violated by the continued maintenance,
operation or use of any buildings or other improvements on any of the Company
Properties (other than the Company Properties under development) or by the
continued maintenance, operation or use of the parking areas except where such
proceedings or violations could not have, individually or in the aggregate, a
Material Adverse Effect on the Company. All material work to be performed,
material payments to be made and material actions to be taken by the Company or
the Company Subs prior to the date hereof pursuant to any agreement entered into
with a governmental body or authority in connection with a site approval, zoning
reclassification or other similar action relating to the Company Properties has
been performed, paid or taken, as the case may be, in all material respects.
14
<PAGE> 118
(l) Environmental Liability. Except as disclosed in any of the SEC
Reports or as set forth in Schedule 3.1(1) to the Company Disclosure Letter,
there are no legal, administrative, arbitral or other proceedings, claims,
actions, causes of action, private environmental investigations or remediation
activities or governmental investigations of any nature seeking to impose, or
that would result in the imposition, on the Company or the Company Subs, of any
liability or obligation arising under common law standards relating to
environmental protection, human health or safety, or under any local, state or
federal environmental statute, regulation or ordinance, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended (collectively, "Environmental Laws"), pending
or, to the Knowledge of the Company, threatened, against the Company or any of
the Company Subs, which liability or obligation would have a Material Adverse
Effect on the Company. To the Knowledge of the Company, except as disclosed in
any of the SEC Reports or in Schedule 3.1(1) to the Company Disclosure Letter,
during or, with respect to Company Properties not located within that certain
area of Orange County, California commonly known as the Irvine Ranch, prior to
the period of (i) its or any of the Company Sub's ownership or operation of any
of their respective current properties, (ii) its or any of the Company Sub's
participation in the management of any property, or (iii) its or any of the
Company Sub's holding of a security interest or other interest in any property,
there were no releases or threatened releases (which release would represent a
violation of, or is likely to lead to liability under, any Environmental Law) of
hazardous, toxic, radioactive or dangerous materials or other materials
regulated under Environmental Laws in, on, under or affecting any such property
which would, individually or in the aggregate, have a Material Adverse Effect on
the Company. Neither the Company nor any of the Company Subs is subject to any
written agreement, order, judgment, decree, letter or memorandum by or with any
Governmental Entity or third party imposing any material liability or obligation
pursuant to or under any Environmental Law that would have a Material Adverse
Effect on the Company.
(m) Contracts; Debt Instruments.
(i) To the Knowledge of the Company, neither the Company nor
any Company Sub is in violation of or in default under (nor does there
exist any condition which upon the passage of time or the giving of notice
or both would cause such a violation of or default under) any material
loan or credit agreement, note, bond, mortgage, indenture, lease, permit,
concession, franchise, license or any other material contract, agreement,
arrangement or understanding (each, a "Material Contract") to which it is
a party or by which it or any of its properties or assets is bound, except
as set forth in Schedule 3.1(m)(i) to the Company Disclosure Letter. To
the Knowledge of the Company, a true, complete and correct copy of each
Material Contract that has not been filed as an exhibit to any of the SEC
Reports has been previously delivered or made available to Acquiror, and a
list of all Material Contracts that have not been filed as an exhibit to
any of the SEC Reports is set forth on Schedule 3.1(m)(i) to the Company
Disclosure Letter.
(ii) Except for any of the following disclosed in any of the
SEC Reports, Schedule 3.1(m)(ii) to the Company Disclosure Letter sets
forth (x) a list of all
15
<PAGE> 119
loan or credit agreements, notes, bonds, mortgages, indentures and other
agreements and instruments pursuant to which any Indebtedness of the
Company or any of the Company Subs in an aggregate principal amount of in
excess of $100,000 per item is outstanding or may be incurred and (y) the
respective principal amounts of all material Indebtedness of the Company
or any Company Sub (categorized to a level of specificity that the
Acquiror acknowledges is sufficient) outstanding on December 31, 1998. For
purposes of this Section 3.1(m)(ii), "Indebtedness" shall mean, with
respect to any Person, without duplication, (A) all indebtedness of such
Person for borrowed money, whether secured or unsecured, (B) all
obligations of such Person under conditional sale or other title retention
agreements relating to property purchased by such Person, (C) all
capitalized lease obligations of such Person, (D) all obligations of such
Person under interest rate or currency hedging transactions (valued at the
termination value thereof) and (E) all guarantees of such Person of any
such Indebtedness of any other, Person.
(n) Employee Benefit Plans; Labor Matters.
(i) With respect to each employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee
benefit plan," as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), any Company Stock
Option Plan and any bonus, deferred compensation, stock bonus, stock
purchase, restricted stock, stock option, employment, termination, change
in control and severance plan, program, arrangement and contract), to
which the Company or any Company Sub is a party, which is maintained,
administered or contributed to by the Company or any Company Sub or
Company Affiliate which the Company or any Company Sub or Company
Affiliate has maintained, administered or contributed to, or with respect
to which the Company or any Company Sub or Company Affiliate has or could
incur liability under the Code or ERISA (the "Company Benefit Plans"), the
Company has made available to Acquiror a true and complete copy of (A)
such Company Benefit Plan, (B) the most recent annual report (Form 5500)
filed with the Internal Revenue Service (the "IRS"), (C) each trust or
other funding arrangement relating to such Company Benefit Plan, (D) the
most recent summary plan description related to each Company Benefit Plan
for which a summary plan description is required, (E) the most recent
actuarial report (if applicable) relating to an Company Benefit Plan and
(F) the most recent determination letter, if any, issued by the IRS with
respect to any Company Benefit Plan qualified under Section 401 (a) of the
Code.
(ii) Each of the Company Benefit Plans that is an "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA and that
is intended to be qualified under Section 401(a) of the Code has received
a favorable determination letter from the IRS, and the Company is not
aware of any circumstances likely to result in the revocation of any such
favorable determination letter that would have a Material Adverse Effect
on the Company.
(iii) Each of the Company Benefit Plans has been administered
and operated in accordance with the terms thereof and has complied, in
form and in operation,
16
<PAGE> 120
with ERISA, the Code and any other applicable law, except to the extent
any failure to so comply, individually or in the aggregate, would not have
a Material Adverse Effect on the Company.
(iv) With respect to the Company Benefit Plans, no event has
occurred and, to the Knowledge of the Company, there exists no condition
or set of circumstances, in connection with which the Company or any
Company Sub could be subject to any liability under the terms of such
Company Benefit Plans, ERISA, the Code or any other applicable law which,
individually or in the aggregate, would have a Material Adverse Effect on
the Company.
(v) Schedule 3.1(n)(v) to the Company Disclosure Letter sets
forth with respect to each Option (an "Option") to purchase shares of
Company Common Stock under any Company Stock Option Plan, whether or not
then exercisable or vested, that is outstanding on the date of this
Agreement: (i) the name of the holder of such Option, (ii) the number of
shares of Company Common Stock with respect to which such Option is then
exercisable and vested, (iii) the grant date of each Option and a listing
of each Option which was granted pursuant to a Stock Option Agreement
(each, a "Stock Option Agreement") which is not in the form of Stock
Option Agreement previously provided to Acquiror, and (iv) the per share
exercise price of such Option.
(vi) Schedule 3.1(n)(v) to the Company Disclosure Letter sets
forth with respect to each Restricted Stock Unit Agreement (including any
dividend equivalents relating thereto) (a "Restricted Stock Unit
Agreement") under any Company Stock Option Plan, whether or not then
vested, that is outstanding on the date of this Agreement: (i) the name of
the holder of such Restricted Stock Unit Agreement, (ii) the number of
Restricted Stock Units subject to such Restricted Stock Unit Agreement,
and (iii) the grant date of each award of Restricted Stock Units and a
listing of each award which was granted pursuant to a Restricted Stock
Unit Agreement which is not in the form of Restricted Stock Unit Award
Agreement previously provided to Acquiror.
(vii) Except for the Options and Restricted Stock Unit
Agreements (including any dividend equivalents relating thereto) disclosed
in Schedule 3.1(n)(v) or 3.1(n)(vi) to the Company Disclosure Letter, as
of the date of this Agreement, (i) there are no outstanding awards under
any Company Stock Option Plan, and (ii) there are no outstanding options,
warrants or other rights to acquire stock from the Company.
(viii) Schedule 3.1(j) to the Company Disclosure Letter sets
forth a list of each Retention Agreement.
(ix) There is no pending labor dispute, strike or work
stoppage against the Company or any Company Sub which may interfere with
the respective business activities of the Company or any Company Sub,
except where such dispute, strike or work stoppage would not have a
Material Adverse Effect on the Company. There is no pending charge or
complaint against the Company or any Company Sub by the National
17
<PAGE> 121
Labor Relations Board or any comparable state agency, except where such
unfair labor practice, charge or complaint would not have a Material
Adverse Effect on the Company.
(o) Absence of Certain Changes or Events. Except as disclosed in
any of the SEC Reports or in Schedule 3.1(o) to the Company Disclosure Letter,
since September 30, 1998 through the date of this Agreement, (A) each of the
Company and the Company Subs has conducted its business in the ordinary course
and has not incurred any material liability, except in the ordinary course of
their respective businesses; and (B) there has not been any change in the
business, financial condition or results of operations of the Company or the
Company Subs that has had, or will have, a Material Adverse Effect on the
Company.
(p) Vote Required. The affirmative vote of the holders of
two-thirds of the outstanding shares of Company Common Stock in favor of the
Merger is the only vote of the holders of any class or series of the Company's
stock required by the Organizational Documents of the Company or any Company Sub
or applicable law to approve, on behalf of the Company, this Agreement, the
Merger and the other transactions contemplated by this Agreement.
(q) Related Party Transactions. Set forth in Schedule 3.1(q) to
the Company Disclosure Letter is a list of all material arrangements,
agreements and contracts (other than arrangements, agreements and contracts to
which The Irvine Company, a Delaware corporation ("TIC"), or a wholly-owned
subsidiary of TIC is a party and other than any such arrangement, agreement or
contract filed as an exhibit to any SEC Report, substantially identical in form
to any such exhibit or substantially identical in form to the forms of option
agreement, restricted stock unit agreement and performance award agreement
previously provided to Acquiror) entered into by the Company or any of the
Company Subs, on the one hand, and any Person who is an officer, director or
affiliate of the Company or any of the Company Subs, any relative of any of the
foregoing or any entity of which any of the foregoing is an affiliate, on the
other hand. Copies of all such documents have previously been delivered or made
available to Acquiror.
(r) State Takeover Laws. The Board of Directors of the Company has
taken all such action required to be taken by it to provide that this Agreement
and the transactions contemplated hereby shall be exempt from the requirements
of any "moratorium," "control share," "fair price" or other anti-takeover laws
or regulations of any state. Title 3, Subtitles 6 and 7 of the MGCL do not apply
to the Merger or to any other business combination (as defined in the MGCL)
between the Company (or any affiliate thereof) and the Acquiror (or any
affiliate thereof) or to limit the voting rights of the Acquiror as a holder of
Company Common Stock.
(s) Brokers or Finders. Other than Morgan Stanley & Co.
Incorporated, no agent, broker, investment banker, financial advisor or other
firm or Person is or will be entitled to any broker's or finder's fee or any
other similar commission or fee in connection with any of the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company or any Company Sub.
(t) Opinion of Financial Advisor. The Board of Directors of the
Company has received the opinion of Morgan Stanley & Co. Incorporated dated the
date of this
18
<PAGE> 122
Agreement, to the effect that, as of such date, the Merger Consideration is
fair, from a financial point of view, to the holders of Company Common Stock
(other than Acquiror and its Affiliates).
3.2. REPRESENTATIONS AND WARRANTIES OF ACQUIROR. Acquiror represents and
warrants to the Company as follows:
(a) Organization, Standing and Power. Acquiror has been duly
organized and is validly existing and in good standing under the laws of the
State of Delaware. Acquiror is duly qualified and in good standing to do
business in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary,
except where the failure so to qualify would not, either individually or in the
aggregate, have a Material Adverse Effect on Acquiror. Acquiror was organized on
December 1, 1998. A true, correct and complete copy of the Limited Liability
Company Operating Agreement of Acquiror has previously been delivered or made
available to the Company. Since the date of its organization, Acquiror has not
engaged in any activities other than in connection with arranging any financing
required to consummate the transactions contemplated hereby.
(b) Authority, No Conflicts.
(i) Acquiror has all requisite limited liability company
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate or limited liability
company action on the part of Acquiror. This Agreement has been duly
executed and delivered by Acquiror and constitutes a valid and binding
agreement of Acquiror, enforceable against Acquiror in accordance with its
terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to
or affecting creditors generally, or by general equity principles
(regardless of whether such enforceability is considered in a proceeding
in equity or at law).
(ii) The execution and delivery of this Agreement does not or
will not, as the case may be, and the consummation of the transactions
contemplated hereby will not, result in any Violation of. (A) any
provision of the Organizational Documents of Acquiror or (B) except as
would not have a Material Adverse Effect on Acquiror and subject to
obtaining or making the consents, approvals, orders, authorizations,
registrations, declarations and filings referred to in paragraph (iii)
below, any loan or credit agreement, note, mortgage, bond, indenture,
lease, benefit plan or other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Acquiror or its properties or
assets.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to Acquiror in connection with the execution
and delivery of this Agreement by Acquiror or the consummation by Acquiror
of the transactions contemplated hereby, except for
19
<PAGE> 123
(A) the consents, approvals, orders, authorizations, registrations,
declarations and filings required under or in relation to clauses (A), (B)
or (C) of Section 3.1(d)(iii) and (B) such consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of
which to make or obtain would not have a Material Adverse Effect on
Acquiror or impair or delay the ability of Acquiror to consummate the
transactions contemplated hereby.
(c) Available Funds. Acquiror has, and will maintain until the
Effective Time, cash or cash equivalents on hand in the amount of not less than
$150 million. Acquiror has or will have available, prior to the Effective Time,
sufficient funds to enable it to consummate the Merger and the other
transactions contemplated hereby and to pay all related fees and expenses.
(d) Schedule 13E-3; Proxy Statement.
(i) None of the information supplied or to be supplied by
Acquiror or any of its Affiliates for inclusion or incorporation by
reference in the Schedule 13E-3 (except for (A) information about the
Company furnished by the Company to Acquiror and (B) information in the
Proxy Statement which is incorporated by reference in the Schedule 13E-3
(except for the information in the Proxy Statement about Acquiror or any
of its Affiliates furnished by Acquiror or any of its Affiliates to the
Company)) will, on the date the Schedule 13E-3 is first mailed to the
Company's stockholders or at the time of the Company Stockholders Meeting,
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. If at any time prior to the Effective Time any
event (other than an event with respect to the Company) should occur and
is required to be described in an amendment of, or a supplement to, the
Schedule 13E-3, such event shall be so described, and such amendment or
supplement shall be promptly filed by Acquiror with the SEC and, as
required by law, disseminated to the stockholders of the Company. If at
any time prior to the Effective Time any event with respect to the Company
should occur and is required to be described in an amendment of, or a
supplement to, the Schedule 13E-3, upon receipt of a description of such
event from the Company, such amendment or supplement shall be promptly
filed by Acquiror with the SEC and, as required by law, disseminated to
the stockholders of the Company. The Schedule 13E-3 will comply as to form
in all material respects with the requirements of the Exchange Act and the
rules and regulations promulgated thereunder. For purposes of this
subsection 3.2(d)(i), any statement which is made or incorporated by
reference in the Schedule 13E-3 shall be deemed modified or superseded to
the extent any later filed document incorporated by reference in the
Schedule 13E-3 or any statement included in the Schedule 13E-3 modifies or
supersedes such earlier statement.
(ii) None of the information about the Acquiror or any of its
Affiliates supplied or to be supplied by Acquiror or any of its Affiliates
for inclusion or incorporation by reference in the Proxy Statement will,
on the date it is first mailed to the
20
<PAGE> 124
Company's stockholders or at the time of the Company Stockholders Meeting,
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. If at any time prior to the Effective Time any
event with respect to Acquiror or any of its Affiliates should occur and
is required to be described in an amendment of, or a supplement to, the
Proxy Statement, a description of such event shall be promptly furnished
by Acquiror or its Affiliate(s) to the Company. For purposes of this
subsection 3.2(d)(ii), any statement which is made or incorporated by
reference in the Proxy Statement shall be deemed modified or superseded to
the extent any later filed document incorporated by reference in the Proxy
Statement or any statement included in the Proxy Statement modifies or
supersedes such earlier statement.
(e) Brokers or Finders. No agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any broker's
or finder's fee or any other similar commission or fee from the Company or a
Company Sub as a result of Acquiror being a party hereto or consummating any of
the transactions contemplated by this Agreement.
ARTICLE IV.
CONDUCT OF BUSINESS PENDING THE MERGER
4.1. COVENANTS OF THE COMPANY. During the period from the date of this
Agreement and continuing until the Effective Time (except as expressly
contemplated or permitted by this Agreement or to the extent that Acquiror shall
otherwise consent in writing):
(a) Ordinary Course. The Company and the Company Subs shall carry
on their respective businesses in the usual, regular and ordinary course in all
material respects, in accordance with past practice, and shall use all
reasonable efforts to preserve intact their present business organizations and
preserve their relationships with customers, suppliers and others having
business dealings with them; provided, however, that no action by the Company or
the Company Subs with respect to matters specifically addressed by any other
provision of this Section 4.1 shall be deemed a breach of this Section 4.1(a)
unless such action would constitute a breach of one or more of such other
provisions.
(b) Dividends; Changes in Share Capital. The Company shall not,
and shall not permit any Company Sub to, and shall not propose to: (i) adjust,
split, combine or reclassify any stock; (ii) make, declare or pay any dividend
or make any other distribution on, or directly or indirectly redeem, purchase or
otherwise acquire, any shares of its stock or any securities or obligations
convertible into or exchangeable for any shares of its stock, voting securities
or other ownership interests, or grant any stock appreciation rights or grant
any individual, corporation or other entity any right, warrant or option to
acquire any shares of its stock, voting securities or other ownership interests,
except for: (A) distributions on Trust Shares not to exceed the greater of (1)
the rate required by the terms thereof and (2) the minimum rate required for the
Trust to maintain its status as a REIT; (B) regular quarterly distributions on
preferred OP Units at the rates required by the terms thereof; (C) regular
quarterly distributions on common OP Units at
21
<PAGE> 125
the rates recently paid by the OP; (D) regular quarterly distributions on
Company Common Stock not to exceed the greater of (1) $.385 per share and (2)
the minimum rate required for the Company to maintain its status as a REIT;
provided that the record dates for the 1999 second and third quarter
distributions shall not be earlier than June 15, 1999 and September 15, 1999,
respectively; and (E) payment of dividend equivalents with respect to Restricted
Stock Units; or (iii) repurchase, redeem or otherwise acquire any shares of its
stock or any stock, voting securities or ownership interests in any Company Sub.
(c) Issuance of Equity Securities. Except as disclosed on Schedule
4.1(c) to the Company Disclosure Letter, the Company shall not and shall cause
the Company Subs not to issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any equity securities of the Company or any
Company Sub, or enter into any agreement with respect to any of the foregoing
and shall not amend any equity-related awards issued pursuant to the Company
Benefit Plans, other than (i) the issuance of Company Common Stock upon the
exercise of Options outstanding as of the date of this Agreement as disclosed in
Section 3.1(c); provided any such issuance must be consistent with past practice
and in accordance with the terms of the Company Stock Option Plans as in effect
on the date of this Agreement, and no issuances shall be made with respect to
any Option which is amended, accelerated or otherwise modified in violation of
Section 4.1(i), (ii) issuances of Company Common Stock to holders of common
limited partner interests in the OP upon exchange of common limited partner
interests in the OP and (iii) issuances of excess stock of the Company in
accordance with the terms of, and subject to the limits set forth in, the
Organizational Documents of the Company upon transfers of Company Common Stock.
(d) Organizational Documents. Except to the extent required to
comply with their respective obligations hereunder, required by law or required
by the rules and regulations of the NYSE, the Company and the Company Subs shall
not amend or propose to amend their respective Organizational Documents.
(e) Properties. Except as set forth on Schedule 4.1(e) to the
Company Disclosure Letter, the Company shall not, and shall not permit any
Company Sub to sell, transfer, mortgage, lease, pledge, encumber or otherwise
dispose of any Company Properties or assets to any individual, corporation or
other entity other than a direct or indirect wholly owned Company Sub, or
cancel, release or assign any indebtedness to any such Person or any claims held
by any such Person, in each case that is material to such party, except (i)
pursuant to contracts or agreements in force at the date of this Agreement in
accordance with the terms of such contract or agreement as in effect on the date
of this Agreement, (ii) as reasonably necessary to protect REIT qualification,
(iii) pursuant to leases of apartment units in the ordinary course of business
or (iv) pursuant to sales, transfers, mortgages, leases, pledges, encumbrances
or other dispositions of assets other than Company Properties in the ordinary
course of business.
(f) Mergers and Acquisitions. Except as set forth on Schedule
4.1(f) to the Company Disclosure Letter, the Company shall not, and shall not
permit any Company Sub to merge or consolidate with any entity, make any
acquisition or investment either by purchase of stock or securities,
contributions to capital, property transfers, or purchases of any property or
22
<PAGE> 126
assets of any other individual, corporation or other entity, except transactions
which are reasonably necessary to protect REIT qualifications.
(g) Contracts. Except as set forth on Schedule 4.1(g) to the
Company Disclosure Letter, the Company shall not, and shall not permit any
Company Sub to, except for transactions which are reasonably necessary to
protect REIT qualification, enter into or terminate any material contract or
agreement, or make any change in any of its material leases or contracts, other
than renewals of contracts and leases without materially adverse changes of
terms thereof.
(h) Indebtedness. Except as set forth on Schedule 4.1(h) to the
Company Disclosure Letter, the Company shall not, and shall not permit any
Company Sub to, (i) incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities of the Company or any Company Sub or guarantee any
debt securities of other Persons, (ii) make any loans, advances or capital
contributions to, or investments in, any other Person, or (iii) pay, discharge
or satisfy any claims, liabilities or obligations (absolute, accrued, asserted
or unasserted, contingent or otherwise), other than in the case of clauses (ii)
and (iii), loans, advances, capital contributions, investments, payments,
discharges or satisfactions that are incurred or committed to in the ordinary
course of business consistent with past practice and that do not exceed $250,000
individually or $1 million in the aggregate.
(i) Benefit Plans. The Company shall not, and shall not permit any
Company Sub to, (i) increase the compensation payable or to become payable to
any of its executive officers or employees or (ii) take any action with respect
to the grant of any severance or termination pay, or stay, bonus or other
incentive arrangement (other than pursuant to benefit plans and policies
(including the Retention Agreements) in effect on the date of this Agreement),
except any such increases or grants made in the ordinary course of business and
in accordance with past practice. The Company shall take all actions necessary
to assure that (i) no awards shall be granted under any Company Stock Option
Plan, or (ii) the terms and conditions of any award under any Company Stock
Option Plan will not be amended, accelerated, or otherwise modified, and no
other action will be taken with respect to any award under any Company Stock
Option Plan, except as provided in Section 2.3 or otherwise in accordance with
the contractual obligations of the Company in respect of any such awards.
(j) Tax Election. The Company shall not, and shall not permit any
Company Sub to, make any material Tax election (unless required by law or
necessary to preserve the Company's status as a REIT or the status of any
Company Sub as a partnership for federal tax purposes, as a REIT or as a
"qualified REIT subsidiary" under Section 856(i) of the Code, as the case may
be).
(k) Accounting Principles and Taxes. The Company shall not, and
shall not permit any Company Sub to, (i) change in any material manner any of
its methods, principles or practices of accounting in effect at September 30,
1998, or (ii) make or rescind any express or deemed election relating to Taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, except in
the case of
23
<PAGE> 127
settlements or compromises relating to taxes on real property in an amount not
to exceed, individually or in the aggregate, $100,000, or change any of its
methods of reporting income or deductions for federal income tax purposes from
those employed in the preparation of its federal income tax return for the most
recently completed taxable year except, in the case of clause (i), as may be
required by the SEC, applicable law or GAAP.
(1) Liabilities. Except as set forth on Schedule 4.1(1) to the
Company Disclosure Letter, the Company shall not, and shall not permit any
Company Sub to, pay, discharge, settle or satisfy any claims, liabilities or
objections (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 consolidated financial statements (or the notes thereof) of the Company
included in any of the SEC Reports or incurred in the ordinary course of
business consistent with past practice.
(m) Other Actions. The Company shall not, and shall not permit any
Company Sub to, take any action that would result in (i) any of the
representations or warranties of the Company set forth in this Agreement that
are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in any
material respect or (iii) any of the conditions to the Merger set forth in
Article VI not being satisfied.
4.2. ADVICE OF CHANGES; GOVERNMENT FILINGS. Each party shall (a) confer
on a regular and frequent basis with the other, (b) report (to the extent
permitted by law, regulation and any applicable confidentiality agreement) on
operational matters, consistent with past practice, and (c) promptly advise the
other orally and in writing of (i) any representation or warranty made by it
contained in this Agreement that is qualified as to materiality becoming untrue
or inaccurate in any respect or any such representation or warranty that is not
so qualified becoming untrue or inaccurate in any material respect, (ii) the
failure by it (A) to comply with or satisfy in any respect any covenant,
condition or agreement required to be complied with or satisfied by it under
this Agreement that is qualified as to materiality or (B) to comply with or
satisfy in any material respect any covenant, condition or agreement required to
be complied with or satisfied by it under this Agreement that is not so
qualified as to materiality or (iii) any change, event or circumstance that has
had or would have a Material Adverse Effect on the Company or materially
adversely affect any party's ability to consummate the Merger in a timely
manner; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement. The Company,
the Company Subs and Acquiror shall file all reports required to be filed by
each of them with the SEC (and all other Governmental Entities) between the date
of this Agreement and the Effective Time and shall (to the extent permitted by
law or regulation or any applicable confidentiality agreement) deliver to the
other party copies of all such reports promptly after the same are filed,
consistent with past practice. Subject to applicable laws relating to the
exchange of information, each of the Company and Acquiror shall have the right
to review in advance, and to the extent practicable each will consult with the
other, with respect to all the information relating to the other party and each
of their respective Subsidiaries, which
24
<PAGE> 128
appears in any filings, announcements or publications made with, or written
materials submitted to, any third party or any Governmental Entity in connection
with the transactions contemplated by this Agreement. In exercising the
foregoing right, each of the parties hereto agrees to act reasonably and as
promptly as practicable. Each party agrees that, to the extent practicable, it
will keep the other party apprised of the status of matters relating to
completion of the transactions contemplated hereby.
ARTICLE V.
ADDITIONAL AGREEMENTS
5.1. PREPARATION OF SCHEDULE 13E-3 AND PROXY STATEMENT; THE COMPANY
STOCKHOLDERS MEETING.
(a) Acquiror will, as promptly as practicable, prepare and file
with the SEC, and will cause its Affiliates to cooperate, to the extent
necessary, in such preparation and filing, a Rule l3e-3 Transaction Statement on
Schedule 13E-3 (the "Schedule 13E-3"). Acquiror will use all reasonable efforts,
and will cause its Affiliates to cooperate, to the extent necessary, to cause
the Schedule 13E-3 to be mailed to stockholders of the Company at the earliest
practicable date.
(b) The Company will, as promptly as practicable, prepare and file
with the SEC a proxy statement in connection with the vote of the Company's
stockholders with respect to the Merger and this Agreement (such proxy
statement, together with any amendments thereof or supplements thereto, in each
case in the form or forms mailed to the Company's stockholders, are herein
called the "Proxy Statement"). The Company will use all reasonable efforts to
cause the Proxy Statement to be mailed to stockholders of the Company at the
earliest practicable date.
(c) The Company shall (i) as soon as practicable following the
date of this Agreement, duly call, give notice of, convene and hold a meeting of
its stockholders (the "Company Stockholders Meeting") for the purpose of
obtaining the Required Company Votes, and (ii) through its Board of Directors
and the Special Committee, recommend to its stockholders that they approve the
transactions contemplated by this Agreement and shall not withdraw, modify or
change such recommendation, or recommend any other offer or proposal, at any
time prior to the conclusion of the Company Stockholders Meeting.
Notwithstanding clause (ii) of the immediately preceding sentence of this
subsection 5.1(c), the Special Committee or the Board of Directors of the
Company (with the concurrence of the Special Committee) may at any time prior to
the Effective Time withdraw, modify or change any recommendation regarding this
Agreement or the Merger, or recommend any other offer or proposal, if the
Special Committee or the Board of Directors of the Company (with the concurrence
of the Special Committee) after consultation with its counsel, determines that
taking any such action is required in accordance with its legal duties to the
Company's stockholders under applicable law; provided, such withdrawal,
modification, change or recommendation shall not affect or excuse the
performance, or cure any breach, of, any obligation of the Company hereunder
(other than that set forth in clause (ii) of the immediately preceding sentence
of this subsection 5.1(c)), including, but not limited to, the requirements in
clause (i) of the immediately preceding sentence of this subsection 5.1(c) and
the requirements in Section 5.5.
25
<PAGE> 129
5.2. ACCESS TO INFORMATION. Upon reasonable notice, the Company shall
(and shall cause the Company Subs, to the extent permitted by the Organizational
Documents or other pertinent agreements of such entity, to) afford to the
officers, employees, accountants, counsel, financial advisors and other
representatives of Acquiror reasonable access during normal business hours,
during the period prior to the Effective Time, to all its properties, books,
contracts, commitments and records and, during such period, the Company shall
(and shall cause the Company Subs, to the extent permitted by the Organizational
Documents or other pertinent agreements of such entity, to) furnish promptly to
Acquiror (a) a copy of each report, schedule, registration statement and other
document filed, published, announced or received by it during such period
pursuant to the requirements of Federal or state securities laws, as applicable
(other than reports or documents which such party is not permitted to disclose
under applicable law) and (b) consistent with its legal obligations, all other
information concerning its business, properties and personnel as Acquiror may
reasonably request.
5.3. APPROVALS AND CONSENTS; COOPERATION. Each of the Company and
Acquiror shall cooperate with each other and use (and shall take all reasonable
steps to cause each of their respective Subsidiaries to use) its reasonable
efforts to take or cause to be taken all actions, and do or cause to be done all
things, necessary, proper or advisable on their part under this Agreement and
applicable laws to consummate and make effective the Merger and the other
transactions contemplated by this Agreement as soon as practicable, including
(i) preparing and filing as promptly as practicable all documentation to effect
all necessary applications, notices, petitions, filings, and other documents and
to obtain as promptly as practicable all consents, waivers, licenses, orders,
registrations, approvals, permits, tax rulings and authorizations necessary or
advisable to be obtained from any third party and/or any Governmental Entity in
order to consummate the Merger or any of the other transactions contemplated by
this Agreement and (ii) taking all reasonable steps as may be necessary to
obtain all such consents, waivers, licenses, registrations, permits,
authorizations, tax rulings, orders and approvals. Without limiting the
generality of the foregoing, each of the Company and Acquiror agrees to make all
necessary filings in connection with the Required Regulatory Approvals as
promptly as practicable after the date of this Agreement, and to use its
reasonable efforts to furnish or cause to be furnished, as promptly as
practicable, all information and documents requested with respect to such
Required Regulatory Approvals and shall otherwise cooperate with the applicable
Governmental Entity in order to obtain any Required Regulatory Approvals in as
expeditious a manner as possible. Each of the Company and Acquiror shall use its
reasonable efforts to resolve such objections, if any, as any Governmental
Entity may assert with respect to this Agreement and the transactions
contemplated hereby in connection with the Required Regulatory Approvals. In the
event that a suit is instituted by a Person or Governmental Entity challenging
this Agreement and the transactions contemplated hereby as violative of
applicable antitrust or competition laws, each of the Company and Acquiror shall
use its reasonable efforts to resist or resolve such suit. With respect to any
action, suit, or proceeding pending or threatened before any court or
quasi-judicial or administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would (i) prevent consummation of any
of the transactions contemplated by this Agreement, (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, (iii) affect adversely the right of any of Acquiror or its
Affiliates to
26
<PAGE> 130
own its assets and to operate its businesses or (iv) cause the Company, the
Company Sub, Acquiror or any of their Affiliates to pay damages in connection
with claims related to the transactions contemplated by this Agreement, the
Company and Acquiror (x) shall confer and cooperate with one another in the
defense thereof and (y) shall not, without the written consent of the other (not
to be unreasonably withheld), enter into any settlement, or consent to the entry
of any judgment, relating thereto; provided that neither party may withhold its
consent to any settlement or judgment which would not have the effects described
in clauses (i)-(iv) of this sentence and pursuant to which it would be fully and
unconditionally released from liability. The Company and Acquiror each shall,
upon request by the other, furnish the other with all information concerning
itself, its Subsidiaries, directors, officers and stockholders and such other
matters as may reasonably be necessary or advisable in connection with the
Schedule 13E-3 or the Proxy Statement or any other statement, filing, tax ruling
request, notice or application made by or on behalf of the Company, Acquiror or
any of their respective Subsidiaries to any third party and/or any Governmental
Entity in connection with the Merger or the other transactions contemplated by
this Agreement.
5.4. STOCK OPTIONS AND RESTRICTED STOCK. The Company and each Company Sub
shall take all actions as may be necessary under the Company Stock Option Plans
to effect the cancellations described in Section 2.3 and shall comply with all
requirements regarding tax withholding in connection therewith. In addition to
the foregoing and subject to the terms of the Company Stock Option Plans and
applicable law, the Company shall take all actions necessary to cause the
Company Stock Option Plans to be terminated at or prior to the Effective Time,
and to satisfy Acquiror that no holder of Options, Restricted Stock Units or
other awards under such Plans, or participant in any Company Stock Option Plans,
will have any right to acquire any interest in the Company or Acquiror as a
result of the exercise of Options, Restricted Stock Units or other awards or
rights pursuant to such Company Stock Option Plans at or after the Effective
Time.
5.5. ACQUISITION PROPOSALS.
(a) Unless and until this Agreement shall have been terminated by
either party pursuant to Article VII hereof, the Company shall not take or
cause, directly or indirectly, any of the following actions with any party other
than Acquiror or its designees: (i) solicit, knowingly encourage, initiate or
participate in any negotiations, inquiries or discussions with respect to any
offer or proposal to acquire all or any part of its business, assets or capital
shares whether by merger, consolidation, other business combination, purchase of
assets, tender or exchange offer or otherwise (each of the foregoing, an
"Acquisition Proposal"); (ii) disclose, in connection with an Acquisition
Proposal, any information or provide access to its properties, books or records,
except as required by law or pursuant to a governmental request for information;
(iii) enter into or execute any agreement relating to an Acquisition Proposal;
or (iv) make or authorize any public statement, recommendation or solicitation
in support of any Acquisition Proposal other than with respect to the Merger.
(b) Notwithstanding the foregoing, in response to a bona fide,
unsolicited, written Acquisition Proposal from a Third Party (that does not
result from a breach of this
27
<PAGE> 131
Section 5.5), the Special Committee may, and may authorize and permit the
Company's officers, directors, employees, financial advisors, representatives,
or agents to, provide such Third Party with nonpublic information, otherwise
facilitate any effort or attempt by such Third Party to make or implement such
Acquisition Proposal, agree to or recommend or endorse any such Acquisition
Proposal with or by any Third Party, and participate in discussions and
negotiations with such Third Party relating to such Acquisition Proposal, if (i)
the Special Committee believes in good faith (after consultation with its
financial advisor) that such Acquisition Proposal (A) provides or is likely to
provide for higher per share value to the stockholders of the Company, (B) is
capable of being fully financed and performed and (C) is not subject or is not
likely to be subject to any material conditions to which the Merger is not
subject (a "Superior Proposal"), (ii) the Special Committee, after having
consulted with and considered the advice of outside counsel, has reasonably
determined in good faith that the failure to do so would cause the members of
such Special Committee to breach their legal duties to the stockholders of the
Company under applicable law and (iii) the Third Party has entered into a
confidentiality agreement pertaining to nonpublic information regarding the
Company containing customary terms and conditions. The Company agrees, if so
requested by Acquiror in its sole and absolute discretion (such request must to
be made within five business days after receipt by Acquiror of notice of the
Superior Proposal from the Company in accordance with Section 5.5(c)), to enter
into an agreement to consummate a transaction with Acquiror or its designee on
terms providing equivalent value for the Company's stockholders to the value
provided by the terms contained in the Superior Proposal, including without
limitation on the same terms contained in the Superior Proposal (a "Matching
Transaction 7"). If Acquiror does not timely request to consummate a Matching
Transaction following the Company's receipt of a Superior Proposal, the Special
Committee (on behalf of the Company) may terminate this Agreement under Section
7.1(f) and accept such Superior Proposal, and the Special Committee may make or
authorize any public statement, recommendation or solicitation in support of
such Superior Proposal.
(c) The Company shall notify Acquiror reasonably promptly after
receipt by the Company (or any of their advisors) of any Acquisition Proposal or
any request for nonpublic information in connection with an Acquisition Proposal
or for access to the Company's properties, books or records by any person or
entity that informs the Company that it is considering making, or has made, an
Acquisition Proposal. Such notice shall be made orally and in writing and shall
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact. If the Acquisition Proposal is
believed by the Special Committee to be a Superior Proposal, the Company shall
reasonably promptly furnish to Acquiror all of the terms of such proposal and
copies of any proposed agreement relating thereto. The Company shall continue to
keep Acquiror informed, on a reasonably prompt basis, of the status of any
discussions or negotiations of any Acquisition Proposal and the terms being
discussed or negotiated.
(d) The provisions of this Section 5.5 shall not constitute a
waiver or limitation or in any way affect the rights of Acquiror or its
Affiliates under the Organizational Documents of the Company or otherwise.
28
<PAGE> 132
(e) The provisions of this Section 5.5 shall not be deemed to
affect any rights or claims in tort or otherwise of Acquiror or its Affiliates
against any Person not affiliated with a party to this Agreement with respect to
any attempt to interfere with, cause the termination of, or cause Acquiror or
its Affiliates to lose any benefits under, this Agreement.
5.6. [INTENTIONALLY OMITTED].
5.7. WITHHOLDING/FOREIGN PERSONS. The Company shall promptly take all
steps necessary to ensure compliance, and shall comply, with all withholding
obligations with respect to any foreign stockholders of the Company in
connection with the payment of the Merger Consideration.
5.8. PUBLIC ANNOUNCEMENTS. The Company and Acquiror shall use all
reasonable efforts to develop a joint communications plan and each party shall
use all reasonable efforts (i) to ensure that all press releases and other
public statements with respect to the transactions contemplated hereby shall be
consistent with such joint communications plan, and (ii) unless otherwise
required by applicable law or by obligations pursuant to any listing agreement
with or rules of any securities exchange, to consult with each other before
issuing any press release or otherwise making any public statement with respect
to this Agreement or the transactions contemplated hereby.
5.9. DIRECTOR AND OFFICER LIABILITY. For six years after the Effective
Time, Acquiror will cause the Surviving Entity to indemnify and hold harmless
the present and former officers and directors of the Company in respect of acts
or omissions occurring prior to the Effective Time to the extent provided under
the Company's Organizational Documents in effect on the date hereof, provided
that such indemnification shall be subject to any limitation imposed from time
to time by applicable law. For six years after the Effective Time, Acquiror will
cause the Surviving Entity to provide officers' and directors' liability
insurance in respect of acts or omissions occurring prior to the Effective Time
covering each such person currently covered by the Company's officers' and
directors' liability insurance policy on terms with respect to coverage and
amount no less favorable than those of such policy in effect on the date hereof.
5.10. PAYMENT OF DIVIDENDS. Prior to the Effective Time, the Company shall
pay any and all dividends or make any other distributions with respect to the
Company Common Stock which have been declared or made by the Company as
permitted by this Agreement. The record date and amount of any dividends or any
other distributions with respect to the Company Common Stock which have been
declared or made by the Company prior to the date of this Agreement and which
remain unpaid as of the date of this Agreement are set forth on Schedule 5.10
to the Company Disclosure Letter.
29
<PAGE> 133
5.11. FURTHER ASSURANCES. In case at any time after the Effective Time any
further action is reasonably necessary to carry out the purposes of this
Agreement, the proper officers of the Company and Acquiror shall take any such
reasonably necessary action.
ARTICLE VI.
CONDITIONS PRECEDENT
6.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
obligations of the Company and Acquiror to effect the Merger are subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions (it being understood that, in the case of the Company, any
determination as to the satisfaction or waiver of any of the following
conditions shall be made only by the Special Committee on behalf of the
Company):
(a) Required Company Votes. The Company shall have obtained the
Required Company Votes.
(b) No Injunctions or Restraints, Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued by
a court or other Governmental Entity of competent jurisdiction shall be in
effect and have the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger; provided, however, that the provisions of this
Section 6.1(b) shall not be available to any party whose failure to fulfill its
obligations pursuant to Section 5.3 shall have been the cause of, or shall have
resulted in, such order or injunction.
(c) HSR Act. If applicable, the waiting period (and any extension
thereof) applicable to the Merger under the HSR Act shall have been terminated
or shall have expired.
6.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF ACQUIROR. The obligations of
Acquiror to effect the Merger are subject to the satisfaction of, or waiver by
Acquiror, on or prior to the Closing Date, of the following additional
conditions:
(a) Representations and Warranties. Each of the representations
and warranties of the Company set forth in this Agreement that is qualified as
to materiality shall have been true and correct when made and shall be true and
correct on and as of the Closing Date as if made on and as of such date (other
than representations and warranties which address matters only as of a certain
date which shall be true and correct as of such certain date), and each of the
representations and warranties of the Company that is not so qualified shall
have been true and correct in all material respects when made and shall be true
and correct in all material respects on and as of the Closing Date as if made on
and as of such date (other than representations and warranties which address
matters only as of a certain date which shall be true and correct in all
material respects as of such certain date).
(b) Performance of Obligations of the Company. The Company shall
have performed or complied with all agreements and covenants required to be
performed by it under this Agreement at or prior to the Closing Date that are
qualified as to materiality and shall have performed or complied in all material
respects with all other agreements and covenants required
30
<PAGE> 134
to be performed by it under this Agreement at or prior to the Closing Date that
are not so qualified as to materiality.
(c) REIT Tax Opinion. Acquiror shall have received an opinion of
Davis Polk & Wardwell, counsel to the Company, in form and substance reasonably
satisfactory to Acquiror, dated as of the Effective Time, substantially to the
effect that (i) commencing with the taxable year ended December 31, 1993, the
Company has been organized and has operated in conformity with the requirements
for qualification as a REIT within the meaning of the Code, (ii) commencing with
its taxable year ended December 31, 1998, the Trust has been organized and has
operated in conformity with the requirements for qualification as a REIT within
the meaning of the Code and (iii) the OP and each other Company Sub which is a
partnership has been, at all times since it has been a Company Sub, and
continues to be, treated for federal income tax purposes as a partnership and
not as an association or publicly traded partnership taxable as a corporation
(in each case with customary exceptions, conditions, assumptions and
qualifications).
(d) Cancellation of Options and Restricted Stock Units. All
Options and Restricted Stock Units under any Company Stock Option Plan shall be
canceled in accordance with Section 2.3, and no holder of Options, Restricted
Stock Units (or dividend equivalents relating thereto) or other awards under any
Company Stock Option Plan or any other incentive compensation plans of the
Company or any Company Sub shall have any further rights thereunder or any right
or interest in the Company or Acquiror on or after the Effective Time, except as
provided in the Retention Agreements. There shall be (i) no outstanding awards
under any Company Stock Option Plan and (ii) no outstanding options, warrants or
other rights to acquire stock or other forms of equity from the Company.
6.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations
of the Company to effect the Merger are subject to the satisfaction of, or
waiver by the Company on or prior to the Closing Date of the following
additional conditions (it being understood that any determination as to the
satisfaction or waiver of any of the following conditions shall be made only by
the Special Committee on behalf of the Company):
(a) Representations and Warranties. Each of the representations
and warranties of Acquiror set forth in this Agreement that is qualified as to
materiality shall have been true and correct when made and shall be true and
correct on and as of the Closing Date as if made on and as of such date (other
than representations and warranties which address matters only as of a certain
date which shall be true and correct as of such certain date), and each of the
representations and warranties of Acquiror that is not so qualified shall have
been true and correct in all material respects when made and shall be true and
correct in all material respects on and as of the Closing Date as if made on and
as of such date (other than representations and warranties which address matters
only as of a certain date which shall be true and correct in all material
respects as of such certain date).
(b) Performance of Obligations of the Company. Acquiror shall have
performed or complied with all agreements and covenants required to be performed
by it under this
31
<PAGE> 135
Agreement at or prior to the Closing Date that are qualified as to materiality
and shall have performed or complied in all material respects with all
agreements and covenants required to be performed by it under this Agreement at
or prior to the Closing Date that are not so qualified as to materiality.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1. TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, by action taken or authorized by the Special Committee (on
behalf of the Company) or the Managing Member (on behalf of the Acquiror),
whether before or after approval of the matters presented in connection with the
Merger by the stockholders of the Company:
(a) By mutual written consent of Acquiror and the Special
Committee (on behalf of the Company), by action of the Managing Member of the
Acquiror and the Special Committee (on behalf of the Company);
(b) By either the Special Committee (on behalf of the Company) or
Acquiror if the Merger shall not have been consummated by the date which is
eight months from the date of this Agreement (the "Outside Date"); provided that
the right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the Merger to
occur on or before such date;
(c) By either the Special Committee (on behalf of the Company) or
Acquiror if any Governmental Entity shall have issued an order, decree or ruling
or taken any other action (which order, decree, ruling or other action the
parties shall have used their reasonable efforts to resist, resolve or lift, as
applicable, subject to the provisions of Section 5.3) permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement, and such order, decree, ruling or other action shall have become
final and nonappealable;
(d) By either Acquiror or the Special Committee (on behalf of the
Company) if the Required Company Votes shall not have been obtained at a duly
held meeting of stockholders or at any adjournment thereof; provided that the
right to terminate this Agreement under this Section 7.1(d) shall not be
available to the Company if it fails to fulfill its obligations under Section
5.1 and Section 5.5;
(e) By Acquiror, if (i) after the receipt by the Company of an
Acquisition Proposal, the Special Committee or the Board of Directors of the
Company (including a majority of the members of the Special Committee) shall
have withdrawn or modified its recommendation of this Agreement or the Merger,
(ii) after the receipt by the Company of an Acquisition Proposal (which
Acquisition Proposal is public), Acquiror requests in writing that the Special
Committee or the Board of Directors of the Company publicly reconfirm its
recommendation of this Agreement and the Merger to the stockholders of the
Company and the Special Committee or the Board of Directors of the Company
(including a majority of the members of the Special
32
<PAGE> 136
Committee), as applicable, fails to do so within 5 business days after its
receipt of Acquiror's request; (iii) the Special Committee or the Board of
Directors of the Company (including a majority of the members of the Special
Committee) shall have recommended to the stockholders of the Company an
Alternative Transaction; (iv) a tender offer or exchange offer for 20% or more
of the outstanding shares of Company Common Stock is commenced (other than by
the Company or an Affiliate of the Company) and the Special Committee or the
Board of Directors of the Company (including a majority of the members of the
Special Committee) recommends that the stockholders of the Company tender their
shares in such tender or exchange offer; or (v) the Company fails to call and
hold the Company Stockholders Meeting by the Outside Date in breach of Section
5.1(c).
(f) By the Special Committee (on behalf of the Company), prior to
the approval of this Agreement by the stockholders of the Company, if the
Company and the Special Committee have complied in all respects with Section
5.5, and the Special Committee has determined to accept a Superior Proposal;
provided, however, that no termination shall be effective pursuant to this
Section 7.1(f) under circumstances in which a Break-Up Fee is payable by the
Company pursuant to Section 7-2(c)(iii), unless concurrently with such
termination, such Break-Up Fee is paid in full by the Company in accordance with
Section 7.2(c)(iii), as applicable;
(g) By Acquiror, upon a material breach of any covenant or
agreement on the part of the Company set forth in this Agreement, or if (i) any
representation or warranty of the Company that is qualified as to materiality
shall have become untrue or (ii) any representation or warranty of the Company
that is not so qualified shall have become untrue in any material respect, in
each case such that the conditions set forth in Section 6.2(a) or Section 6.2(b)
would not be satisfied (a "Terminating Company Breach"); provided, however,
that, if such Terminating Company Breach is capable of being cured by the
Company prior to the Effective Time, for so long as the Company continues in
good faith to attempt to cure such breach, Acquiror may not terminate this
Agreement under this Section 7.1(g); or
(h) By the Special Committee (on behalf of the Company), upon a
material breach of any covenant or agreement on the part of Acquiror set forth
in this Agreement, or if (i) any representation or warranty of Acquiror that is
qualified as to materiality shall have become untrue or (ii) any representation
or warranty of Acquiror that is not so qualified shall have become untrue in any
material respect, in each case such that the conditions set forth in Section
6.3(a) or Section 6.3(b) would not be satisfied ("Terminating Acquiror Breach");
provided, however, that, if such Terminating Acquiror Breach is capable of
being cured by Acquiror prior to the Effective Time, for so long as Acquiror
continues in good faith to attempt to cure such breach, the Company may not
terminate this Agreement under this Section 7.1(h).
7.2. EXPENSES
(a) Except as otherwise provided in this Section 7.2, all Expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such Expenses. As used in this
Agreement, "Expenses" includes all reasonable
33
<PAGE> 137
out-of-pocket expenses (including, without limitation, all reasonable fees and
expenses of counsel, accountants, investment bankers, experts and consultants to
a party hereto and its affiliates) incurred by a party or on its behalf in
connection with or related to the authorization, preparation, negotiation,
execution and performance of this Agreement and the transactions contemplated
hereby, including the preparation, printing, filing and mailing of the Schedule
13E-3 and Proxy Statement and the solicitation of stockholder approvals and all
other matters related to the transactions contemplated hereby.
(b) Notwithstanding the foregoing, if (i) the Special Committee or
the Board of Directors of the Company (including a majority of the members of
the Special Committee) withdraw, modify or change any recommendation regarding
this Agreement or the Merger, or recommend any other offer or proposal, as
contemplated in Section 5.1(c) and (ii) the condition set forth in Section
6.1(a) is not satisfied, then the Company shall pay all of the Expenses incurred
by Acquiror.
(c) The Company shall pay Acquiror a Break-Up Fee upon the
earliest to occur of the following events:
(i) the termination of this Agreement by either Acquiror or
the Company pursuant to Section 7.1(d), if a proposal for an Alternative
Transaction involving the Company shall have been publicly announced prior
to the Company Stockholders' Meeting and either a definitive agreement for
an Alternative Transaction is entered into, or such Alternative
Transaction (or another Alternative Transaction with the proponent of such
transaction or an Affiliate) is consummated, within eighteen months of
such termination;
(ii) the termination of this Agreement by Acquiror pursuant
to Section 7.1(e); or
(iii) the termination of this Agreement by the Special
Committee (on behalf of the Company) pursuant to Section 7.1(f).
The Company's payment of a Break-Up Fee pursuant to this subsection shall be the
sole and exclusive remedy of Acquiror against the Company and any of its
Subsidiaries and their respective directors, officers, employees, agents,
advisors or other representatives with respect to the occurrences giving rise to
such payment; provided that this limitation shall not apply in the event of a
willful breach of this Agreement by the Company.
(d) The Break-Up Fee payable pursuant to Section 7.2(c) shall be
paid concurrently with the first to occur of the events described in Section
7.2(c)(i), (ii) or (iii).
(e) As used in this Agreement, "Alternative Transaction" means
either (i) a transaction pursuant to which any Third Party acquires more than
20% of the outstanding shares of Company Common Stock pursuant to a tender offer
or exchange offer or otherwise, (ii) a merger or other business combination
involving the Company pursuant to which any Third Party (or the stockholders of
a Third Party) acquires more than 20% of the outstanding shares of
34
<PAGE> 138
Company Common Stock or the entity surviving such merger or business
combination, or (iii) any other transaction pursuant to which any Third Party
acquires control of assets (including for this purpose the outstanding equity
securities of Subsidiaries of the Company and the entity surviving any merger or
business combination including any of them) of the Company having a fair market
value (as determined by the Special Committee of the Company in good faith)
equal to more than 20% of the fair market value of all the assets of the Company
and its Subsidiaries, taken as a whole, immediately prior to such transaction.
(f) The "Break-Up Fee" shall be an amount equal to $19,250,000.
7.3. EFFECT OF TERMINATION. In the event of termination of this Agreement
by either the Company or Acquiror as provided in Section 7.1, this Agreement
shall forthwith become void and there shall be no liability or obligation on the
part of Acquiror or the Company or their respective officers, members or
directors except (i) with respect to Section 5.6 and (ii) with respect to any
liabilities or damages incurred or suffered by a party as a result of the breach
by the other party of any of its representations, warranties, covenants or other
agreements set forth in this Agreement.
7.4. AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken or authorization of the Special Committee (on behalf of the
Company) and the Managing Member of Acquiror, at any time before or after
approval of the matters presented in connection with the Merger by the
stockholders of the Company, but, after any such approval, no amendment shall be
made which by law or in accordance with the rules of the NYSE requires further
approval by such stockholders without such further approval. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
7.5. EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorization of the Special Committee (on
behalf of the Company) and the Managing Member of Acquiror, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other party hereto, (ii) waive any inaccuracies
in the representations and warranties contained herein or in any document
delivered pursuant hereto and (iii) waive compliance with any of the agreements
or conditions 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 a written
instrument signed on behalf of such party. No delay on the part of any party
hereto in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party hereto of any
right, power or privilege hereunder operate as a waiver of any other right,
power or privilege hereunder, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder. Unless
otherwise provided, the rights and remedies herein provided are cumulative and
are not exclusive of any rights or remedies which the parties hereto may
otherwise have at law or in equity. The failure of any party to this Agreement
to assert any of its rights under this Agreement or otherwise shall not
constitute a waiver of those rights.
35
<PAGE> 139
ARTICLE VIII.
GENERAL PROVISIONS
8.1. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS; NO OTHER
REPRESENTATIONS AND WARRANTIES. None of the representations, warranties,
covenants and other agreements in this Agreement or in any instrument delivered
pursuant to this Agreement, including any rights arising out of any breach of
such representations, warranties, covenants and other agreements, shall survive
the Effective Time, except for those covenants and agreements contained herein
and therein that by their terms apply or are to be performed in whole or in part
after the Effective Time. Each party hereto agrees that, except for the
representations and warranties contained in this Agreement, neither of the
Company nor Acquiror makes any other representations or warranties, and each
hereby disclaims any other representations and warranties made by itself or any
of its officers, directors, members, employees, agents, financial and legal
advisors or other representatives, with respect to the execution and delivery of
this Agreement, the documents and the instruments referred to herein, or the
transactions contemplated hereby or thereby, notwithstanding the delivery or
disclosure to the other party or the other party's representatives of any
documentation or other information with respect to any one or more of the
foregoing.
8.2. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed duly given (a) on the date of delivery if delivered
personally, (b) on the first Business Day following the date of dispatch if
delivered by a nationally recognized next-day courier service, (c) on the fifth
Business Day following the date of mailing if delivered by registered or
certified mail, return receipt requested, postage prepaid or (d) if sent by
facsimile transmission, with a copy mailed on the same day in the manner
provided in (a) or (b) above, when transmitted and receipt is acknowledged. All
notices hereunder shall be delivered as set forth below, or pursuant to such
other instructions as may be designated in writing by the party to receive such
notice:
(a) if to Acquiror, to TIC Acquisition LLC, 550 Newport Center
Drive, Suite 900, Newport Beach, California 92660, Attention: Michael D. McKee,
Facsimile No. (949) 720-2599, with copies to Thomas W. Dobson, Latham & Watkins,
633 West Fifth Street, Suite 4000, Los Angeles, California 90071, Facsimile No.
(213) 891-8763, and William J. Cernius, 650 Town Center Drive, Suite 2000, Costa
Mesa, California 92626, Facsimile No. (714) 755-8290;
(b) if to the Company, to Irvine Apartment Communities, Inc.,
Attention: President, Facsimile No. (949) 720-5503, with a copy to Jeffrey
Small, Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017,
Facsimile No. (212) 450-4800.
8.3. INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents, glossary of defined terms and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes"
36
<PAGE> 140
or "including" are used in this Agreement, they shall be deemed to be followed
by the words "without limitation." The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden or proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the content requires otherwise. It is
understood and agreed that neither the specifications of any dollar amount in
this Agreement nor the inclusion of any specific item in the Schedules or
Exhibits is intended to imply that such amounts or higher or lower amounts, or
the items so included or other items, are or are not material, and neither party
shall use the fact of setting of such amounts or the fact of the inclusion of
such item in the Schedules or Exhibits in any dispute or controversy between the
parties as to whether any obligation, item or matter is or is not material for
purposes hereof.
8.4. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that both
parties need not sign the same counterpart.
8.5. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES.
(a) This Agreement (including the Schedules and Exhibits)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof.
(b) This Agreement shall be binding upon and inure solely to the
benefit of each party hereto, and nothing in this Agreement, express or implied,
except for Sections 2.1, 2.3 and 5.9, is intended to or shall confer upon any
other Person any right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement.
8.6. GOVERNING LAW. Except to the extent that the MGCL shall govern the
Merger, this Agreement shall be governed and construed in accordance with the
laws of the State of Delaware, without regard to the laws that might be
applicable under conflicts of laws principles.
8.7. SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible. Any provision of this Agreement held invalid or
unenforceable only in part, degree or certain jurisdictions will remain in full
force and effect to the extent not held invalid or unenforceable. To the extent
permitted by applicable law, each
37
<PAGE> 141
party waives any provision of law which renders any provision of this Agreement
invalid, illegal or unenforceable in any respect.
8.8. ASSIGNMENT. This Agreement and the rights, interests and obligations
hereunder shall not be assigned, except by Acquiror to a party which, in a
written instrument shall agree to assume all of Acquiror's obligations hereunder
and be bound by all of the terms and conditions of this Agreement; provided,
however, that no such assignment shall relieve the Acquiror of its obligations
hereunder. Subject to the preceding sentence, this Agreement will be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
8.9. ENFORCEMENT. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms. It is accordingly agreed that the parties
shall be entitled to specific performance of the terms hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
8.10. DEFINITIONS. As used in this Agreement:
(a) "Affiliate" means an affiliate, as defined in Rule 405
promulgated under the Securities Act; provided, that the Company and the Company
Subs shall not be deemed Affiliates of Acquiror or its members or their
Affiliates for purposes of this Agreement. For the avoidance of doubt, for
purposes of this Agreement, TIC shall be an Affiliate of Acquiror.
(b) "Board of Directors" means the Board of Directors of any
specified Person and any properly serving and acting committees thereof.
(c) "Business Day" means any day on which banks are not required
or authorized to close in the City of New York.
(d) "Company Affiliate" shall mean any entity which is (or at any
relevant time was) treated as a single employer with the Company or any Company
Sub under Section 414 of the Code or Section 4001(b)(11) of ERISA.
(e) "Company Disclosure Letter" means the letter previously
delivered to Acquiror by the Company disclosing certain information in
connection with this Agreement.
(f) "Company Stock Option Plans" means the Company's 1993 Stock
Option Plan for Directors, 1993 Long-Term Stock Incentive Plan and 1996
Long-Term Stock Incentive Plan, each as amended.
(g) "Company Sub" means a Subsidiary of the Company (excluding any
Subsidiary of the Company which is inactive, has no business operations and has
no liabilities).
(h) "Knowledge" means the actual knowledge after reasonable
investigation of the executive officers of the applicable entity.
38
<PAGE> 142
(i) "Material Adverse Effect" means, with respect to any Person,
any adverse change, circumstance or effect that, individually or in the
aggregate with all other adverse changes, circumstances and effects, would be
materially adverse to the business, operations, financial condition or results
of operations of such Person and its Subsidiaries taken as a whole; provided
that, with respect to Section 3.1(o) only, in no event shall any change,
circumstance or effect relating to or arising out of (i) the fact or terms of
this Agreement or the Merger; (ii) general economic or market conditions; or
(iii) the real estate development industry generally constitute a Material
Adverse Effect.
(j) "OP Units" shall mean any of (i) limited partnership units of
the OP, (ii) general partnership units of the OP, (iii) Series A Preferred
Limited Partner Units of the OP and (iv) Series B Preferred Limited Partner
Units of the OP.
(k) "Organizational Documents" means, with respect to any entity,
the charter, certificate of incorporation, bylaws, partnership agreement,
declaration of trust or other governing documents of such entity, including any
documents designating or certifying the terms of any security of such entity.
(l) "Person" means an individual, corporation, partnership,
limited partnership, limited liability company association, trust,
unincorporated organization, entity or group (as defined in the Exchange Act).
(m) "Required Company Votes" means (i) the affirmative vote of
the holders of two-thirds of the total number of outstanding shares of Company
Common Stock in favor of this Agreement and the Merger and (ii) the affirmative
vote of a number of shares of Company Common Stock (excluding the shares held by
Acquiror and its Affiliates) representing a majority of the total number of
outstanding shares of Company Common Stock.
(n) "Required Regulatory Approvals" means all authorizations,
consents, orders and approvals of, and declarations and filings with, and all
expirations of waiting periods imposed by, any Governmental Entity which, if not
obtained in connection with the consummation of the transactions contemplated
hereby, would have a Material Adverse Affect on TIC or the Company.
(o) "Subsidiary" when used with respect to any party means any
corporation, partnership, limited partnership, limited liability company or
other organization, whether incorporated or unincorporated, any equity interests
of which are owned by such party or by a Subsidiary of such party, or which is
consolidated with such party for financial reporting purposes.
(p) (i) "Tax" (including, with correlative meaning, the terms
"Taxes" and "Taxable") means all federal, state, local and foreign income,
profits, franchise, gross receipts, environmental, customs duty, stock,
severance, stamp, payroll, sales, employment, unemployment disability, use,
property, withholding, excise, production, value added, occupancy and other
taxes, duties or assessments of any nature whatsoever, together with all
interest, penalties, fines and additions to tax imposed with respect to such
amounts and any interest in
39
<PAGE> 143
respect of such penalties and additions to tax, and (ii) "Tax Return" means all
returns and reports (including elections, claims, declarations, disclosures,
schedules, estimates, computations and information returns) required to be
supplied to a Tax authority in any jurisdiction.
(q) "the other party" means, with respect to the Company, Acquiror
and means, with respect to Acquiror, the Company.
(r) "Third Party" shall mean any Person other than the Company,
Acquiror and their respective Affiliates.
(s) "Trust Shares" shall mean Series A Preferred Securities of the
Trust.
40
<PAGE> 144
IN WITNESS WHEREOF, the Company and Acquiror have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of February 1, 1999.
TIC ACQUISITION LLC,
a Delaware limited liability company
By: /s/ MICHAEL D. MCKEE
-------------------------------------------
Michael D. McKee
Authorized Signatory
IRVINE APARTMENT COMMUNITIES, INC.,
a Maryland corporation
By: /s/ WILLIAM H. MCFARLAND
-------------------------------------------
William H. McFarland
President
41
<PAGE> 145
APPENDIX B
MORGAN STANLEY DEAN WITTER 1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
February 1, 1999
Board of Directors
Irvine Apartment Communities
550 Newport Center Drive, Suite 300
Irvine, CA 92660
Members of the Board:
We understand that Irvine Apartment Communities (the "Company") and TIC
Acquisition LLC ("Acquisition Sub"), a wholly owned subsidiary of The Irvine
Company ("TIC"), propose to enter into an Agreement and Plan of Merger
substantially in the form of the draft dated January 29, 1999 (the "Merger
Agreement") which provides, among other things, for the merger (the "Merger") of
Acquisition Sub with and into the Company. Pursuant to the Merger, Acquisition
Sub will become a wholly owned subsidiary of TIC, and each outstanding share of
common stock, par value $.01 per share (the "Company Common Stock"), of the
Company will be converted into the right to receive $34.00 per share in cash,
subject to adjustment in certain circumstances. The terms and conditions of the
Merger are more fully set forth in the Merger Agreement. We further understand
that approximately 17% of the outstanding shares of the Company Common Stock are
owned by TIC and its affiliates.
You have asked for our opinion as to whether the consideration to be
received by the holders of shares of the Company Common Stock pursuant to the
Merger Agreement is fair from a financial point of view to such holders (other
than TIC and its affiliates).
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company prepared by the
management of the Company;
(iii) reviewed certain financial projections prepared by the
management of the Company;
(iv) discussed the past and current operations and financial condition
and the prospects of the Company with senior executives of the Company;
(v) reviewed the reported prices and trading activity for the Company
Common Stock;
(vi) compared the financial performance of the Company and the prices
and trading activity of the Company Common Stock with that of certain other
comparable publicly-traded companies and their securities;
(vii) reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
(viii) participated in discussions and negotiations among
representatives of the Company and TIC and their financial and legal
advisors;
(ix) reviewed the draft Merger Agreement and certain related
documents;
(x) reviewed and taken into consideration the governance provisions of
the Company;
(xi) considered the Company's ability to execute its business plan if
the Merger were not consummated; and
B-1
<PAGE> 146
(xii) performed such other analyses and considered such other factors
as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company. We have not made any independent valuation or appraisal of the assets
or liabilities of the Company, nor have we been furnished with any such
appraisals. Our opinion is necessarily based on financial, economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition, business
combination or other extraordinary transaction, involving the Company, nor did
we negotiate with any other parties.
We have acted as financial advisor to the Company in connection with this
transaction and will receive a fee for our services. In the past, Morgan Stanley
& Co. Incorporated and its affiliates have provided financial advisory and
financing services for the Company and have received fees for the rendering of
these services.
It is understood that this letter is for the information of the Board of
Directors of the Company, except that this opinion may be included in its
entirety in any filing made by the Company in respect of this transaction with
the Securities and Exchange Commission.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be received by the holders of shares of the
Company Common Stock pursuant to the Merger Agreement is fair from a financial
point of view to such holders (other than TIC and its affiliates).
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ SCOTT M. KELLEY
------------------------------------
Scott M. Kelley
Managing Director
B-2
<PAGE> 147
APPENDIX C
THE IRVINE COMPANY
550 Newport Center Drive
Newport Beach, CA 92660
February 1, 1999
Irvine Apartment Communities, Inc.
550 Newport Center Drive
Newport Beach, CA 92660
Gentlemen:
In connection with that certain Agreement and Plan of Merger, dated as of
February 1, 1999 (the "Merger Agreement"), between TIC Acquisition LLC
("Acquiror") and Irvine Apartment Communities, Inc. (the "Company"), you have
requested that The Irvine Company ("TIC") make certain representations,
warranties and covenants. In order to facilitate the transactions contemplated
by the Merger Agreement, TIC hereby makes the representations, warranties and
covenants set forth in this letter agreement. All capitalized terms not defined
herein shall have the meanings set forth in the Merger Agreement.
1. Ownership of Acquiror/Availability of Funds. All of Acquiror's
membership interests are owned by TIC and a wholly-owned Subsidiary of TIC.
TIC is the sole managing member of Acquiror. TIC shall take no action that
would cause Acquiror not to have a minimum of $150 million of cash on hand
from the date of the Merger Agreement through the earlier of (i) the
Effective Time and (ii) sixty (60) days following the termination of the
Merger Agreement pursuant to the terms thereof. Prior to the earlier of (i)
the Effective Time and (ii) sixty (60) days following the termination of
the Merger Agreement pursuant to the terms thereof, TIC shall not permit
Acquiror to engage in any business or transaction other than business or
transactions related to the transactions contemplated by the Merger
Agreement.
2. Ownership of Stock. From the date hereof to the earlier of (i) the
Effective Time and (ii) the termination of the Merger Agreement pursuant to
the terms thereof, TIC shall not, and shall not permit any of its
Subsidiaries to, sell or otherwise dispose of any of the shares of Company
Common Stock owned by them. At the Company Stockholders Meeting, or any
adjournment thereof, TIC shall, and shall cause its Subsidiaries to, vote
the shares of Company Common Stock owned by them in favor of the Merger.
3. Cooperation. TIC shall take all actions necessary to cooperate with
Acquiror, and shall take all actions necessary to cause Acquiror to comply
with its obligations, in connection with Sections 5.1(a), 5.8 and 5.9
(insofar as it pertains to insurance only) of the Merger Agreement;
provided that with respect to Section 5.9 of the Merger Agreement, TIC
shall be deemed to have satisfied its obligations hereunder (and the
obligations of Acquiror under the Merger Agreement) by causing Acquiror to
purchase an appropriate policy of insurance. TIC agrees to cooperate with
Acquiror and the Company in connection with the Merger Agreement and to use
reasonable efforts to cause Acquiror to consummate the Merger; provided
that TIC shall have no obligation to contribute any funds to Acquiror in
connection with the Merger.
The rights and obligations of the parties to this letter agreement shall
bind and inure to the benefit of the respective successors and assigns of the
parties hereto.
This letter agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without giving effect to conflicts of law
principles.
This letter agreement constitutes the full and complete understanding and
agreement of the parties hereto and supersedes all prior understandings and
agreements with respect to the subject matter hereof. Any waiver,
C-1
<PAGE> 148
modification or amendment of any provision of this letter agreement shall be
effective only if in writing and signed by the parties hereto.
If the foregoing reflects your understanding of our agreement concerning
the matters set forth herein, please sign a copy of this letter agreement where
indicated below and return it to me.
Very truly yours,
The Irvine Company
By: /s/ MICHAEL D. MCKEE
------------------------------------
Michael D. McKee
Chief Financial Officer
The terms and conditions of the preceding letter agreement are accepted and
agreed to by the following:
Irvine Apartment Communities, Inc.
By: /s/ WILLIAM H. MCFARLAND
------------------------------------
William H. McFarland
Chief Executive Officer
C-2
<PAGE> 149
IAC LOGO
<PAGE> 150
- --------------------------------------------------------------------------------
PROXY PROXY
IRVINE APARTMENT COMMUNITIES, INC.
SPECIAL MEETING OF SHAREHOLDERS, MONDAY, JUNE 7, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned Shareholder of Irvine Apartment Communities, Inc., a
Maryland corporation (the "Company"), hereby appoints Bowen H. McCoy and William
H. McFarland, or either of them, as proxies for the undersigned, with full power
of substitution in each of them, to attend the Special Meeting of Shareholders
of the Company, to be held on Monday, June 7, 1999 at 9:00 a.m. and at any
adjournments or postponements thereof, and to cast on behalf of the undersigned
all votes that the undersigned is entitled to cast at such meeting and otherwise
to represent the undersigned at such meeting with all powers possessed. The
undersigned hereby acknowledges receipt of the Notice of Special Meeting of
Shareholders and revokes any proxy heretofore given with respect to such
meeting.
The votes entitled to be cast by the undersigned will be cast as instructed
on the reverse hereof. If this proxy is executed but no instruction is given,
the votes entitled to be cast by the undersigned will be cast FOR the proposals
as described in the accompanying Proxy Statement and in the discretion of the
proxy holder on any other matter that may properly come before the meeting or
any adjournment or postponement thereof.
A MAJORITY (OR IF ANY ONE, THEN THAT ONE) OF THE ABOVE PERSONS OR THEIR
SUBSTITUTES WHO SHALL BE PRESENT AND ACTING AT THE MEETING SHALL HAVE THE POWERS
CONFERRED HEREBY.
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED POSTAGE-PAID ENVELOPE.
DO NOT SUBMIT ANY STOCK CERTIFICATES WITH THIS PROXY CARD.
SEE REVERSE SIDE (CONTINUED AND TO BE SIGNED ON REVERSE SIDE) SEE REVERSE SIDE
- --------------------------------------------------------------------------------
<PAGE> 151
- --------------------------------------------------------------------------------
PLEASE MARK VOTE IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]
A vote FOR approval and adoption of the below-described Merger and Merger
Agreement is recommended by the Board of Directors.
1. To consider and act upon a proposal to adopt and approve the merger of
Irvine Apartment Communities, Inc. with and into TIC Acquisition LLC (the
"Merger") and the Agreement and Plan of Merger dated as of February 1,
1999, between Irvine Apartment Communities, Inc. and TIC Acquisition LLC
(the "Merger Agreement"), as more fully described in the accompanying
Proxy Statement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. If a motion to adjourn or postpone the Special Meeting is properly
brought, to vote upon the adjournment or postponement of the Special
Meeting.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
This proxy when properly executed will
be voted in the manner directed herein
by the undersigned Shareholder(s). If
no direction is made, this proxy will
be voted FOR proposals No. 1 and 2
above and will be voted by the proxy
holders listed on the reverse hereof in
their discretion as to any other
matters which may properly come before
the meeting.
Dated: __________________________, 1999
Signature(s)___________________________
_______________________________________
Signature of Shareholder(s) -- please
sign name(s) exactly as imprinted (do
not print). Please indicate any change
of address. NOTE: Executors,
administrators, trustees and others
signing in a representative capacity
should indicate the capacity in which
they sign. If shares are held jointly,
EACH holder should sign.
- --------------------------------------------------------------------------------
