SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9/A-7
(Amendment No. 8)
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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CHATEAU PROPERTIES, INC.
(NAME OF SUBJECT COMPANY)
CHATEAU PROPERTIES, INC.
(NAME OF PERSON(S) FILING STATEMENT)
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COMMON STOCK, $.01 PAR VALUE PER SHARE
(TITLE OF CLASS OF SECURITIES)
161739 10
(CUSIP NUMBER OF CLASS SECURITIES)
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C. G. Kellogg
President and Chief Executive Officer
Chateau Properties, Inc.
19500 Hall Road
Clinton Township, MI 48038
(810) 286-3600
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED
TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF THE
PERSON(S) FILING STATEMENT)
COPIES TO:
Arthur Fleischer, Jr., Esq.
Peter Golden, Esq.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8000
Henry J. Brennan, III, Esq.
Charles W. Royer, Esq.
Timmis & Inman L.L.P.
300 Talon Centre
Detroit, MI 48207
(313) 396-4200
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This Amendment No. 8 (the "Final Amendment") amends and supplements
the Solicitation/Recommendation Statement on Schedule 14D-9 (as amended, the
"Schedule 14D-9") originally filed with the Securities and Exchange Commission
(the "SEC") on September 18, 1996 by Chateau Properties, Inc., a Maryland
corporation (the "Company"), relating to the offer by MHC Operating
Limited Partnership, an Illinois limited partnership ("MHC OP"), the sole
general partner of which is Manufactured Home Communities, Inc., a
Maryland corporation ("MHC"), to purchase all outstanding shares of
common stock, $.01 par value per share (the "Shares"), of the Company,
at a price of $26.00 per Share, net to the seller in cash. Capitalized
terms used but not defined herein have the meanings previously set
forth in the Schedule 14D-9.
1. ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) The ninth paragraph under Item 4(a) is hereby amended and
restated in its entirety as follows:
After Sun's announcement, MHC issued a press release on
August 23, 1996 in which it reiterated its commitment to consummating
a transaction with the Company and indicated that it was willing to
negotiate a tax-free transaction with the Company's Board of
Directors.
(b) The following is hereby added as the third to last paragraph of
Item 4(a):
The Merger Agreement contains restrictions (subject to
certain exceptions) on the Company's ability to solicit acquisition
proposals, negotiate with third parties regarding acquisition
proposals and to provide non-public information to third parties. The
relevant provisions are:
"Section 5.6 No Solicitation of Transactions. Subject to Section 7.1,
each of Chateau and ROC shall not directly or indirectly, through any
officer, director, employee, agent, investment banker, financial
advisor, attorney, accountant, broker, finder or other
representative, initiate or solicit (including by way of furnishing
nonpublic information or assistance (any inquiries or the making of
any proposal that constitutes, or may reasonably be expected to lead
to, any Competing Transaction (as defined below), or authorize or
permit any of its officers, directors, employees or agents,
attorneys, investment bankers, financial advisors, accountants,
brokers, finders or other representatives to take any such action.
Each of Chateau and ROC shall notify the other in writing (as
promptly as practicable) of all of the relevant details relating to
all inquiries and proposals which it or any of its Subsidiaries or
any such officer, director, employee, agent, investment banker,
financial advisor, attorney, accountant, broker, finder or other
representative may receive relating to any of such matters and if
such inquiry or proposal is in writing, each of Chateau and ROC shall
deliver to the other a copy of such inquiry or proposal. For purposes
of this Agreement, "Competing Transaction" shall mean any of the
following (other than the Transactions contemplated by this
Agreement): (i) any merger, consolidation, share exchange, business
combination, or similar transaction involving Chateau (or any of its
Subsidiaries) or ROC (or any of
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its Subsidiaries), as the case may be; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 30% or
more of the assets of Chateau and its Subsidiaries taken as a whole
or ROC and its Subsidiaries taken as a whole, as the case may be, in
a single transaction or series of related transactions, excluding any
bona fide financing transactions which do not, individually or in the
aggregate, have as a purpose or effect the sale or transfer of
control of such assets; (iii) any tender offer or exchange offer for
30% or more of the outstanding shares of capital stock of Chateau (or
any of its Subsidiaries) or ROC (or any of its Subsidiaries) or the
filing of a registration statement under the Securities Act in
connection therewith; or (iv) any public announcements or a proposal,
plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing."
"Section 7.1 Board Actions. Notwithstanding Section 5.7 or
any other provision of this Agreement to the contrary, to the extent
required by the fiduciary obligations of the Board of Directors of
either Chateau or ROC, as determined in good faith based on the
advice of outside counsel, either Chateau or ROC may:
(a) disclose to its stockholders and OP Unit holders any
information required to be disclosed under applicable law;
(b) in response to an unsolicited request therefore,
participate in discussions or negotiations with, or furnish
information with respect to itself pursuant to a confidentiality
agreement no less favorable to itself than the Confidentiality
Agreement (as determined by its outside counsel) to, any person in
connection with a Competing Transaction proposed by such person; and
(c) approve or recommend (and in connection therewith
withdraw or modify its approval or recommendation of (i) for ROC,
this Agreement and the Merger and (ii) for Chateau, the issuance of
the Merger Consideration to the ROC stockholders in the Merger) a
Superior Competing Transaction (as defined below) or enter into an
agreement with respect to such Superior Competing Transaction (for
purposes of this Agreement, "Superior Competing Transaction" means a
bona fide proposal of a Competing Transaction made by a third party
which a majority of the members of the Board of Directors of Chateau
or ROC, as the case may be, determines in good faith (based on the
advice of its investment banking firm) to be more favorable to its
stockholders than the Merger, as the case may be.
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Reference is hereby made to the Merger Agreement, which has been
filed as Exhibit 99.6 to the Schedule 14D-9.
(c) Paragraphs (iii), (iv) and (vi) under Item 4(b) are hereby
amended and restated in their entirety as follows:
(iii) The opinion of Goldman, Sachs & Co. ("Goldman Sachs")
that, based upon and subject to certain assumptions, as of September
17, 1996 the exchange ratio pursuant to the ROC Merger Agreement is
fair to the Company. The opinion does not address the relative merits
of the ROC Merger as compared to any alternative business transaction
that might be available to the Company. A copy of the written opinion
dated September 17, 1996 of Goldman Sachs delivered to the Board
which sets forth the assumptions made (including, but not limited to,
the assumption that, based on certain representations made by the
Company's management, the tax effects to the Company and the holders
of Shares, if any, resulting from the transactions contemplated by
the Merger Agreement would be immaterial), procedures followed,
matters considered and limits on its review is attached as Annex A to
this Schedule 14D-9/A and is incorporated by reference. THE FULL TEXT
OF SUCH OPINION SHOULD BE READ IN CONJUNCTION WITH THIS STATEMENT.
(iv) The opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") that, based upon and subject to
certain assumptions, as of September 17, 1996, the proposed
consideration to be paid by the Company in the ROC Merger is fair to
the Company and its shareholders (other than ROC and its affiliates)
from a financial point of view. The opinion does not address the
relative merits of the ROC Merger as compared with any other business
plan or opportunity that might be presented to the Company, including
alternative business combinations with third parties, or the effect
of any other arrangement in which the Company might engage. A copy of
the written opinion dated September 17, 1996 of Merrill Lynch
delivered to the Board which sets forth the assumptions made
(including, but not limited to, the assumption that, based certain
representations made by the Company's management, the tax effects to
the Company and the holders of Shares, if any, resulting from the
transactions contemplated by the Merger Agreement would be
immaterial), procedures followed, matters considered and limits on
its review is attached as Annex B to this Schedule 14D-9/A and is
incorporated by reference. THE FULL TEXT OF SUCH OPINION SHOULD BE
READ IN CONJUNCTION WITH THIS STATEMENT.
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(vi)(a) The oral opinion of Goldman Sachs, co-financial
advisor to the Company, after reviewing with the Board of Directors
certain financial criteria customarily used in assessing an offer,
that the MHC Offer is inadequate.
GOLDMAN SACHS' OPINION WAS GIVEN TO THE CHATEAU BOARD AND
ADDRESSED ONLY THE ADEQUACY OF THE MHC OFFER AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY CHATEAU STOCKHOLDER AS TO WHETHER OR NOT SUCH
STOCKHOLDER SHOULD TENDER INTO THE MHC OFFER.
In connection with the opinions referred to in paragraph
(iii) above and this paragraph (vi)(a), Goldman Sachs reviewed, among
other things, the ROC Merger Agreement; the MHC Offer; Annual Reports
to Stockholders and Annual Reports on Form 10-K for the three years
ended December 31, 1995 of the Company and ROC; certain interim
reports to stockholders and Quarterly Reports on Form 10-Q of the
Company and ROC; certain other communications from the Company and
ROC to their respective stockholders; and certain internal financial
analyses and forecasts for the Company and ROC prepared by the
respective managements of the Company and ROC and certain cost
synergies and revenue enhancements expected to be achieved as a
result of the ROC Merger. Goldman Sachs also held discussions with
members of the senior management of the Company and ROC regarding the
past and current business operations, financial condition and future
prospects of their respective companies, including the future
prospects of the Combined Company after the ROC Merger. In addition,
Goldman Sachs reviewed the reported price and trading activity for
the Shares and the ROC common stock, compared certain financial and
stock market information for the Company and ROC with similar
information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent
business combinations among real estate investment trusts, and
performed such other studies and analyses as Goldman Sachs considered
appropriate.
Goldman Sachs assumed, with the Company's consent, that the
Stock Dividend will be declared and paid and any ROC common stock
issued in a cash transaction will be issued as permitted by Section
4.1(b)(iv) of the ROC Merger Agreement.
Goldman Sachs relied without independent verification upon
the accuracy and completeness of all of the financial and other
information reviewed by it for purposes of its opinion. In that
regard, Goldman Sachs
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assumed, with the Company's consent, that the forecasts referred to
in the preceding paragraph had been reasonably prepared on a basis
reflecting the best currently available judgments and estimates of
the managements of the Company and ROC, as the case may be, and that
such forecasts will be realized in the amounts and at the times
contemplated thereby. Also in that regard, based on certain
representations made by the Company's management, Goldman Sachs
assumed that the tax effects to the Company and the holders of
Shares, if any, resulting from the transactions contemplated by the
ROC Merger Agreement would be immaterial. In addition, Goldman Sachs
did not make an independent evaluation or appraisal of the assets and
liabilities of the Company or ROC or any of their respective
subsidiaries, and Goldman Sachs was not furnished with any such
evaluation or appraisals. Goldman Sachs' opinion as to fairness does
not address the relative merits of the ROC Merger as compared to any
alternative business transactions that might be available to the
Company.
The preparation of an opinion as to fairness or adequacy is
a complex process and is not necessarily susceptible to partial
analysis or summary description. Selecting portions of the analyses
or of the summary set forth below, without considering the analyses
as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its adequacy
determination, Goldman Sachs considered the results of all such
analyses. No company or transaction used in the above analyses as a
comparison is identical to the Company or ROC or the Company and MHC
or the contemplated transactions. The analyses were prepared solely
for purposes of Goldman Sachs' providing its opinion to the Company's
Board as to the fairness of the Exchange Ratio pursuant to the ROC
Merger Agreement to the Company and as to the adequacy of the MHC
Offer and do not purport to be appraisals or necessarily reflect the
prices at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more
or less favorable than suggested by such analyses. Because such
analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the Company or its
advisors, none of the Company, Goldman Sachs or any other person
assumes responsibility if future results are materially different
from those forecast.
As described above, Goldman Sachs' opinions to the Company's
Board were two of many factors taken into consideration by the
Company's Board, in making its determination to reject the MHC Offer
and to approve the ROC Merger Agreement.
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(b) the oral opinion of Merrill Lynch, co-financial advisor
to the Company, after reviewing with the Board of Directors certain
financial criteria customarily used in assessing an offer, that the
MHC Offer is inadequate from a financial point of view.
MERRILL LYNCH'S OPINION WAS GIVEN TO THE CHATEAU BOARD AND
ADDRESSED ONLY THE ADEQUACY FROM A FINANCIAL POINT OF VIEW OF THE MHC
OFFER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY CHATEAU
STOCKHOLDER AS TO WHETHER OR NOT SUCH STOCKHOLDER SHOULD TENDER INTO
THE MHC OFFER.
In connection with the opinions referred to in paragraph
(iv) above and this paragraph (vi)(b), Merrill Lynch, among other
things: (i) reviewed the Company's Annual Reports, Forms 10-K and
related financial information for the three fiscal years ended
December 31, 1995 and the Company's Forms 10-Q and the related
unaudited financial information for the quarterly periods ended March
31, 1996 and June 30, 1996; (ii) reviewed ROC's Annual Reports, Forms
10-K and related financial information for the three fiscal years
ended December 31, 1995 and MHC's Forms 10-Q and the related
unaudited financial information for the quarterly periods ended March
31, 1996 and June 30, 1996; (iii) reviewed certain information,
including financial forecasts, relating to the business, earnings,
cash flow, assets and prospects of the Company and ROC, furnished to
it by the Company and ROC, respectively; (iv) conducted discussions
with members of senior management of the Company and ROC concerning
their respective businesses and prospects; (v) reviewed the
historical market prices and trading activity of the Shares and the
ROC common stock and compared them with that of certain publicly
traded companies which Merrill Lynch deemed to be reasonably similar
to the Company and ROC; (vi) compared the results of operations of
the Company and ROC with that of certain companies which Merrill
Lynch deemed to be reasonably similar to the Company and ROC,
respectively; (vii) reviewed the ROC Merger Agreement and the MHC
Offer and (viii) reviewed such other financial studies and analyses
and performed such other investigations and took into account such
other matters as Merrill Lynch deemed necessary.
In preparing its opinions, Merrill Lynch relied on the
accuracy and completeness of all information supplied or otherwise
made available to it by the Company and ROC, and did not
independently verify such information or undertake an independent
appraisal or valuation of the assets
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of the Company or ROC. With respect to the financial forecasts
furnished by the Company and ROC, Merrill Lynch relied upon, without
independent investigation, the estimates of the Company's and ROC's
management. In addition, Merrill Lynch assumed that the financial
forecasts furnished to it by the Company and ROC had been reasonably
prepared and reflected the best currently available estimates and
judgment of the Company's and ROC's management as to the expected
future financial performance of the Company or ROC, as the case may
be. Also in that regard, based on certain representations of the
Company's management that were incorporated into such financial
forecasts, Merrill Lynch assumed that the tax effects to the Company
and the holders of Shares resulting from the transactions
contemplated by the ROC Merger Agreement would be immaterial.
The summary set forth below does not purport to be a
complete description of the analyses performed by Merrill Lynch in
arriving at its opinion. The preparation of an adequacy opinion is a
complex process and not necessarily susceptible to partial analysis
or summary description. Merrill Lynch believes that its analyses must
be considered as a whole and that selecting portions of its analyses
and of the factors considered by it, without considering all factors
and analyses, could create a misleading view of the processes
underlying the Merrill Lynch opinions as to adequacy and fairness.
None of the companies used in the analyses described below for
comparative purposes is, of course, identical to the Company. In its
analyses, Merrill Lynch made numerous macroeconomic, operating and
financial assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are
beyond the Company's and Merrill Lynch's control. Any estimates
contained in Merrill Lynch's analyses are not necessarily indicative
of actual values, which may be significantly more or less favorable
than as set forth therein. Estimated values do not purport to be
appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future and such estimates
are inherently subject to uncertainty. Merrill Lynch's opinion as to
fairness addresses the ownership position in the combined company to
be received by the Company's stockholders pursuant to the ROC Merger
on the terms set forth in the ROC Merger Agreement based upon the
relative contributions of the Company and ROC to the Combined Company
and Merrill Lynch did not express any opinion as to prices at which
the Shares will trade following the consummation of the ROC Merger or
prices which could be obtained for the Shares in a sale of the
Company following the consummation of the ROC Merger. In addition,
Merrill Lynch's opinion as to fairness does not address the relative
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merits of the ROC Merger as compared with any other business plan or
opportunity that might be presented to the Company, including
alternative business combinations with third parties, or the effect
of any other arrangement in which the Company might engage; and
(c) The following is a summary of certain of the financial
and comparative analyses which Merrill Lynch and Goldman Sachs
presented to the Company's Board on September 17, 1996. The summary
includes certain comparative analyses involving hypothetical
combinations with ROC or Sun, but neither Merrill Lynch nor Goldman
Sachs used such analyses in arriving at their respective opinions,
and neither Merrill Lynch nor Goldman Sachs expressed any opinion or
view as to the relative merits of the ROC Merger as compared to
alternative business transactions, including transactions with MHC or
Sun. As noted above, however, each of Merrill Lynch and Goldman Sachs
did, however, render an opinion to the effect that the MHC Offer is
inadequate.
Selected Companies Analysis
Merrill Lynch and Goldman Sachs reviewed and compared
certain financial information, ratios and public market multiples
relating to the Company to corresponding financial information,
ratios and public market multiples for selected publicly traded
companies in the field of manufactured home REITs. The selected
companies were ROC, MHC and Sun (the "Selected Companies"). The
Selected Companies were chosen because they are publicly-traded
companies with operations that, for purposes of the Merrill Lynch and
Goldman Sachs analysis, were considered similar to the Company's. The
multiples of the Company were calculated using a price of $22.75 per
Share, the closing price of the Shares on the NYSE on July 16, 1996
(the last trading day prior to the announcement of the Old ROC Merger
Agreement) (the "Chateau July 16 Stock Price"); a price of $23.25 per
Share , the closing price of the Shares on the NYSE on August 16,
1996 (the last trading day prior to the announcement of the MHC
Offer) (the "Chateau August 16 Stock Price"); and funds from
operations ("FFO") per Share of $1.82 for projected 1996 and $1.95
for projected 1997 (each as reported by First Call). With respect to
the Company and the Selected Companies, Merrill Lynch and Goldman
Sachs considered (A) 1996 and 1997 FFO multiples (based on July 16,
1996 closing market prices and projected 1996 and projected 1997 FFOs
as reported by First Call for the Selected Companies) that ranged
from (x) 11.5x to 11.8x for the Selected Companies compared to 12.5x
for the Chateau July 16 Stock Price and (y) 10.5x to 11.0x for the
Selected
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Companies compared to 11.7x for the Chateau July 16 Stock Price,
respectively; (B) 1996 and 1997 FFO multiples (based on August 16,
1996 closing market prices and projected 1996 and projected 1997 FFOs
as reported by First Call for the Selected Companies) that ranged
from (x) 11.9x to 12.4x for the Selected Companies compared to 12.8x
for the Chateau August 16 Stock Price and (y) 11.1x to 11.4x for the
Selected Companies compared to 11.9x for the Chateau August 16 Stock
Price, respectively; (C) dividend yields as of July 16, 1996 that
ranged from 6.8% to 7.3% for the Selected Companies compared to 7.1%
for the Chateau July 16 Stock Price; and (D) dividend yields as of
August 16, 1996 that ranged from 6.5% to 6.8% for the Selected
Companies compared to 7.0% for the Chateau August 16 Stock Price.
Valuation Analysis
Merrill Lynch and Goldman Sachs performed (A) an implied
equity valuation (calculated, with respect to each year in the period
from 1997 through 2001, as the sum of assumed multiples of projected
FFO per share for that year ranging from 11.5x to 12.5x and projected
dividends per share through that year, in each case discounted to
present value at assumed discount rates ranging from 12.5% to 14.5%),
(B) a discounted cash flow analysis (calculated as the sum of
terminal values per share based on assumed multiples of projected
2001 FFO per share ranging from 11.5x to 12.5x and the projected
1997-2001 five-year stream of Cash Available for Distribution ("CAD")
per share (the FFO less normalized recurring capital expenditures),
in each case discounted to present value at assumed discount rates
ranging from 12.5% to 14.5%), (C) a net asset value summary
(calculated by subtracting outstanding debt and other liabilities
from gross value (based on projected 1997 net operating income at
capitalization rates ranging from 8.50% to 9.50% plus the value of
other assets)) and (D) a public market FFO multiple analysis
(calculated by multiplying projected 1996 and 1997 FFO per share by
public market multiples ranging from 11.5x to 12.5x projected 1996
FFO per share and 10.5x to 11.7x projected 1997 FFO per share in the
Standalone Case (as defined below) and 11.9x to 12.8x projected 1996
FFO per share and 11.1x to 11.9x projected 1997 FFO per share in the
Combination Cases (as defined below)), in each case using the
Company's management projections under the following four scenarios:
(1) on a standalone basis for the Company (the "Standalone Case"),
(2) on a combined basis, assuming the combination of the Company and
ROC pursuant to which (w) holders of 75% of the OP Units exchange
their OP Units for Shares and assign their rights to receive Shares
in respect of such Shares pursuant to the Stock Dividend to the other
stockholders of the
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Company, (x) the Stock Dividend is paid, (y) the Chateau Share
Repurchase Program is completed and (z) each share of ROC common
stock is converted into 1.042 Shares (the "ROC Combination Case"),
(3) on a combined basis, assuming the combination of the Company and
MHC pursuant to which each Share and each OP Unit is converted into
1.15 shares of MHC common stock (the "MHC Combination Case") and (4)
on a combined basis assuming the combination of the Company and Sun
pursuant to which each Share and each OP Unit is converted into 0.892
shares of Sun common stock (the "Sun Combination Case" and together
with the ROC Combination Case and the MHC Combination Case, the
"Combination Cases"). The ROC Combination Case did not assume the
Chateau Share Issuance; had that case assumed such issuance, certain
of the valuations would have been somewhat lower. Under its implied
equity valuation, the implied values per Share (rounded to the
nearest 0.25) ranged from (i) $21.25 to $24.50 in the Standalone
Case, (ii) $24.25 to $29.25 in the ROC Combination Case, (iii) $21.75
to $27.00 in the MHC Combination Case and (iv) $24.25 to $29.75 in
the Sun Combination Case. Under its discounted cash flow analysis,
the implied values per Share (rounded to the nearest $0.25) ranged
from (i) $22.25 to $25.50 in the Standalone Case, (ii) $27.00 o
$30.25 in the ROC Combination Case, (iii) $26.00 to $29.75 in the MHC
Combination Case and (iv) $28.25 to $32.25 in the Sun Combination
Case. Under its net asset value summary, the implied net asset values
per Share (rounded to the nearest $0.25) ranged from (i) $19.75 to
$23.25 in the Standalone Case, (ii) $22.75 to $25.50 in the ROC
Combination Case, (iii) $19.25 to $22.50 in the MHC Combination Case
and (iv) $20.50 to $23.75 in the Sun Combination Case. Under its
public market FFO multiple analysis, the implied values per Share
(rounded to the nearest $0.25) ranged from (i) $20.75 to $22.75 in
the Standalone Case, (i) $24.75 to $26.25 in the ROC Combination
Case, (iii) $22.25 to $24.25 in the MHC Combination Case and (iv)
$25.25 to $27.50 in the Sun Combination Case.
Selected Transactions Analysis
Merrill Lynch and Goldman Sachs reviewed certain information
relating to the following 12 pending and consummated selected public
transactions in the REIT industry since 1994: the Old ROC Merger; the
ROC Merger; the merger contemplated by the Sun Proposal; the Proposed
MHC Merger; and transactions between (a) Highwoods Properties, Inc.
and Crocker Realty Trust, Inc.; (b) Simon Property Group, Inc. and
DeBartolo Realty; (c) Security Capital U.S. Realty and CarrAmerica
Realty Corp.; (d) Bradley Real Estate, Inc. and Tucker Properties
Corp.; (e) BRE
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Properties, Inc. and REIT of California; (f) Horizon Outlet Centers,
Inc. and McArthur/Glen Realty, Inc.; (g) Mid America Apartment
Communities, Inc. and America First REIT; and (h) Wellsford
Residential Property Trust and Holly Residential Properties, Inc.
(collectively, the "Selected Transactions"). Such review indicated
that, for the Selected Transactions (excluding proposed transactions
relating to the Company), (i) the premium (discount) of the implied
offer price to the target stock price on the trading day before the
transaction was announced ranged from (0.8%) to 38%, with a mean of
13.1%, compared to a premium of 3.3% over the price of the ROC common
stock on the last trading day prior to the announcement of the Old
ROC Merger Agreement to be paid by the Company in the ROC Merger and
(ii) the implied offer price expressed as a multiple of the target's
projected FFO per share at the announcement date ranged from 6.6x to
15.5x, with a mean of 10.0x, compared to a multiple of 10.9x the
projected 1997 FFO per share of ROC common stock (as reported by
First Call) to be paid by the Company in the ROC Merger (based in
each case on the effective exchange ratio after giving effect to the
Stock Dividend and on the Chateau July 16, 1996 Stock Price).
Summary of Dilution Analysis
Merrill Lynch and Goldman Sachs prepared a summary of
dilution analysis of the financial impact of each of the Combination
Cases. Assuming an exchange ratio of 1.042x (without taking into
account any Stock Dividend or OP Unitholder exchanges), Merrill Lynch
and Goldman Sachs compared the projected 1997 FFO per Share to the
projected 1997 FFO per Share in each of the Combination Cases.
Merrill Lynch and Goldman Sachs, relying on the Company's management
assumption that $3.0 million in annual synergies would result in each
of the Combination Cases, performed this analysis under the following
two scenarios: (a) using closing stock prices as of September 3, 1996
and $11.1 million in transaction costs financed at 7.33% and starting
from 1997 FFO projections for the Company, ROC, Sun and MHC as
reported by First Call (the "Market Case") and (b) using the ten-day
average closing stock prices as of September 13, 1996 and $11.2
million in transaction costs in the ROC Combination Case and $20.4
million in transaction costs in each of the Sun Combination Case and
MHC Combination Case (reflecting payment of a break-up fee) financed
at 7.0% and using 1997 FFO projections for the Company and for each
of the combined companies prepared by the Company management (the
"Management Case"). Based on such analyses, (a) in the Market Case,
(i) the ROC combination Case would result in 5.5% accretion to the
Company's stockholders and OP Unitholders; (ii) the Sun
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Combination Case would result in 10.4% accretion to the Company's
stockholders and OP Unitholders and (iii) the MHC Combination Case
would result in 0.7% accretion to the Company's stockholders and OP
Unitholders and (b) in the Management Case, (i) the ROC Combination
Case would result in 8.6% accretion to the Company's stockholders and
OP Unitholders; (ii) the Sun Combination Case would result in 17.9%
accretion to the Company's stockholders and OP Unitholders and (iii)
the MHC Combination Case would result in 4.0% accretion to the
Company's stockholders and OP Unitholders.
Impact of Stock Dividend on Exchange Ratio
Merrill Lynch and Goldman Sachs analyzed the impact of the
Stock Dividend and of the election by OP Unitholders to exchange
their OP Units prior to such dividend under the following four
scenarios: (a) no OP Unitholders electing to exchange (the "No
Exchange Case"), (b) OP Unitholders electing to exchange 60% of the
OP Units (the "60% Exchange Case"), (c) OP Unitholders electing to
exchange 75% of the OP Units (the "75% Exchange Case") and (d) OP
Unitholders electing to exchange 90% of the OP Units (the "90%
Exchange Case"). Based on such scenarios, (i) the Stock Dividend to
be received by the Company's public stockholders ranged from 3.16% in
the No Exchange Case to 6.85% in the 90% Exchange Case; (ii) the
implied market value per Share held by public stockholders (based on
the September 13, 1996 closing price of the ROC common stock) ranged
from $25.02 in the No Exchange Case to $25.91 in the 90% Exchange
Case; and (iii) the accretion to the Company's public stockholders in
the Management Case ranged from 8.6% in the No Exchange Case to 12.2%
in the 90% Exchange Case.
Contribution Analysis
Merrill Lynch and Goldman Sachs reviewed certain historical
and estimated future operating and financial information, including,
among other things, revenue, earnings before interest, taxes,
depreciation and amortization ("EBITDA") and FFO and CAD for each of
the Company, ROC, Sun and MHC and the combined entity in each of the
Combination Cases based on the Company, ROC, Sun and MHC historical
financial information and the Company's management's forecasts for
the Company, and the Company and ROC managements' forecasts for the
ROC Combination Case and First Call estimates for Sun and MHC. Based
on a range of exchange ratios from 1.000 to 1.040 Shares for each
share of ROC common stock, the analysis indicated that (a) the
Company's stockholders
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would receive between 53.3% and 54.3% of the total number of shares
of the combined entity formed in the ROC Merger and (b) the Company's
stockholders would have contributed to that combined entity (i) in
1995 (actual), 54.9% of revenue, 56.7% of EBITDA, 52.7% of FFO and
55.4% of CAD; (ii) in projected 1996, 51.8% of revenue, 54.5% of
EBITDA, 53.4% of FFO and 54.9% of CAD; and (iii) in projected 1997,
50.0% of revenue, 52.5% of EBITDA, 51.6% of FFO and 53.3% of CAD.
Based on an exchange ratio of 1.15 shares of MHC common stock for
each Share, the analysis indicated that (a) the Company's
stockholders would receive 39.7% of the total number of shares of the
combined entity formed in the MHC Combination Case and (b) the
Company's stockholders would have contributed to that combined entity
(i) in 1995 (actual), 41.1% of revenue, 42.1% of EBITDA, 42.5% of FFO
and 44.3% of CAD; (ii ) in projected 1996, 40.3% in revenue, 41.4% of
EBITDA, 40.8 of FFO and 42.4% of CAD; and (iii) in projected 1997,
39.8% of revenue, 41.1% of EBITDA, 41.2% of FFO and 43.0% of CAD.
Based on an exchange ratio of 0.892 shares of Sun common stock for
each Share, the analysis indicated that (a) the Company's
stockholders would receive 45.3% of the total number of shares of the
combined entity formed in the Sun Combination Case and (b) the
Company's stockholders would have contributed to that combined entity
(i) in 1995 (actual), 58.3% of revenue, 55.5% of EBITDA, 51.8% of FFO
and 53.2% of CAD; (ii) in projected 1996, 47.2% of revenue, 43.9% of
EBITDA, 42.7% of FFO and 44.1 of CAD; and (iii) in projected 1997,
44.7% of revenue, 42.0% of EBITDA, 42.4% of FFO and 43.8% of CAD.
Analysis of Exchange Ratios
Merrill Lynch and Goldman Sachs compared the exchange ratio
in the Combination Cases with the historical ratios of the daily
market prices of (x) the Shares and the ROC common stock, (y) the
Shares and the MHC common stock and (z) the Shares and the Sun common
stock for the last twelve months leading up to September 13, 1996,
which ranged from .88 to 1.11; 1.152 to 1.425; and .810 to .956,
respectively.
2. ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
Item 7 is hereby amended by adding to the end thereof the following:
Certain Other Transactions and Agreements
Among other things, in order to facilitate the completion of
the ROC Merger and the qualification of the ROC Merger and the OP
Unit Exchange for
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treatment pursuant to Section 351 of the Code, certain other
transactions (the "Other Transactions") affecting the capital stock
of the Company and ROC have been, or will be, effected on or prior to
the effective time ("Effective Time") of the ROC Merger. Such Other
Transactions, which are summarized below, would not have been
effected in the absence of the ROC Merger and the MHC Offer. The ROC
Merger and the Other Transactions, if successfully completed, could
have the effect of preventing the consummation of the MHC Offer.
o Between October 14 and October 16, 1996, ROC purchased
350,000 Shares in open market or negotiated transactions, which
Shares will be voted in favor of the Chateau Proposals (as defined)
and will be cancelled if the ROC Merger is consummated.
o In addition, between October 25 and October 28, 1996, the
Company repurchased in open market or negotiated transactions
effected on the New York Stock Exchange 450,000 Shares, and,
following the special meeting (the "ROC Special Meeting) of ROC
stockholders to vote on the ROC Merger (the "ROC Proposal") and on or
prior to the completion of the ROC Merger, the Company may repurchase
up to an additional 1,000,000 Shares in the open market, in
negotiated transactions or pursuant to a tender offer (such
repurchases being referred to together herein as the "Chateau Share
Repurchase Program"). All Shares purchased in the Chateau Share
Repurchase Program will be cancelled prior to the ROC Merger.
However, the additional Shares that would have been issuable to
stockholders of the Company pursuant to the Stock Dividend with
respect to the Shares repurchased pursuant to the Chateau Share
Repurchase Program will be allocated among the remaining stockholders
of record of the Company as of the record date for the Stock
Dividend.
o In connection with and as an integral part of the ROC
Merger, it is expected that certain limited partners of CP who hold
OP Units (such holders being referred to herein as the "Exchanging OP
Unitholders") will enter into an agreement with the Company, CP and
ROC (the "Chateau Securityholder Agreement") pursuant to which they
will agree that, subject to the satisfaction of certain conditions
described below, they will exercise rights the Exchanging OP
Unitholders currently hold to exchange all or a portion of their OP
Units for the same number of Shares on or prior to the record date
(the "Chateau Record Date") for the special meeting (the "Chateau
Special Meeting") of stockholders of the Company to vote on the
issuance of Shares in the ROC Merger (the "Chateau Proposal"), and,
in certain cases, contemporaneously with the closing of the ROC
Merger, to exchange additional OP Units for the same number of
Shares. The first phase of the OP Unit Exchange is expected to occur
within one or two days following the ROC Special Meeting. The
obligations of the Exchanging OP
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Unitholders to consummate the OP Unit Exchange, as contemplated by
the Chateau Securityholder Agreement, are expected to be conditioned
on the following: (i) the approval of the ROC Merger by holders of
two-thirds of the outstanding shares of ROC common stock (the "ROC
Stockholder Approval"); (ii) the receipt by the Exchanging OP
Unitholders of an opinion of counsel to the effect that the ROC
Merger and the transfer of OP Units by the Exchanging OP Unitholders
in the OP Unit Exchange together qualify as tax-free transfers by the
stockholders of ROC and partially tax-deferred transfers of property
by the Exchanging OP Unitholders to the Company in exchange for
Shares qualifying for treatment pursuant to Section 351 of the Code;
and (iii) the Exchanging OP Unitholders being reasonably satisfied
that, upon completion of the ROC Merger and the Other Transactions,
such Exchanging OP Unitholders, together with the ROC stockholders
and other transferors, will, based on the number of Shares expected
to be outstanding at the Effective Time, together constitute at least
80% of the outstanding Shares. Based on the number of Shares
currently outstanding, as adjusted for Shares expected to be issued
to ROC stockholders in the ROC Merger, to be issued to the OP
Unitholders in the OP Unit Exchange and to be issued in the Chateau
Share Issuance (as defined) and expected to be repurchased by the
Company in the Chateau Share Repurchase Program, the Company expects
that the 80% test specified in (iii) above will be satisfied. If for,
any reason such 80% test cannot be satisfied, it is not expected that
the ROC Merger could be consummated as currently structured.
o In connection with the OP Unit Exchange, the Company will
sell after the Chateau Record Date up to an aggregate of
approximately 1,450,000 Shares (such amount will be reduced if any to
the extent certain OP Unitholders purchase shares of ROC common stock
as described below) to Exchanging OP Unitholders at an average price
per Share of not less than the greater of the average price per Share
paid in the Chateau Share Repurchase Program or the fair market value
of the Shares as of the sale date determined in good faith by the
Company's Board (the "Chateau Share Issuance"). Because the Shares to
be issued in the Chateau Share Issuance will be issued after the
Chateau Record Date, none of these Shares will be voted on the
Chateau Proposals. At the Chateau Special Meeting, holders of Shares
will be asked to consider and vote upon the Chateau Share Issuance
(the "Chateau Share Issuance Proposal" and together with the Chateau
Proposal, the "Chateau Proposals"). Each of the Chateau Proposals
requires the affirmative vote of the holders of a majority of the
Shares voting at the Chateau Special Meeting (provided the total vote
cast represents over 50% of the outstanding Shares).
o Four of the OP Unitholders, John A. Boll, Edward R. Allen,
C. G. Kellogg and J. Peter Ministrelli, have indicated that they
intend to exchange a
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substantial portion of the OP Units they own and that they may
purchase, depending in part on the number of Shares issued in the
Chateau Share Issuance, up to an aggregate of 850,000 shares of ROC
common stock in open market transactions prior to the record date
(the "ROC Record Date") for the ROC stockholder vote on the ROC
Proposal. In the event that such shares are purchased, these
individuals are expected to vote such shares of ROC common stock in
favor of the ROC Proposal. The purchase of these shares will permit
such Exchanging OP Unitholders to defer all or a portion of the
taxable gain which would otherwise be recognized by such Exchanging
OP Unitholders by virtue of the OP Unit Exchange.
In addition, in connection with the consummation of the ROC
Merger, certain additional agreements will be entered into and
performed and other actions will be taken by the parties, as follows:
o Pursuant to the Contribution Agreement among ROC, Redwood
Acquisition Corp., a Maryland corporation and a wholly-owned
subsidiary of ROC ("RAC"), the Company and CP (the "Contribution
Agreement"), substantially all of the assets, subject to liabilities,
held directly by ROC and RAC will be transferred to CP. In addition,
ROCF, Inc., a Maryland corporation which functions as ROC's financing
subsidiary (ROCF"), will be merged with a newly organized Delaware
financing limited partnership subsidiary of CP to be known as CCF,
L.P. (the "Financing Partnership"). In exchange for such
contributions and in connection with the ROCF merger, ROC will
receive that number of OP Units equal to the number of Shares issued
to the ROC stockholders pursuant to the ROC Merger, reduced by such
number of OP Units, which shall be determined in good faith by the
Board of Directors of the Company after the consummation of the ROC
Merger (the "Combined Company"), having a fair market value equal to
the value of the 1% general partner interest in the Financing
Partnership, which interest shall be issued to a wholly owned
subsidiary of ROC. The assets, subject to liabilities, currently held
by the Company through CP will continue to be held by CP.
o The Amended and Restated Operating Partnership Agreement
of CP will be further amended and restated to, among other matters,
provide that ROC will be admitted as an additional general partner of
CP.
o A new Registration Rights Agreement (the "New Registration
Rights Agreement") will be executed, at or prior to the Effective
Time, between the Company and certain former stockholders of ROC
pursuant to which the Company will grant registration rights with
respect to certain Shares.
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o Effective at the Effective Time, the By-Laws of the
Company will be amended to create the By-Laws of the Combined
Company. The amendment will provide for the initial grouping of
directors of the Combined Company into two groups, each of which is
expected to consist of existing directors of ROC and the Company,
respectively, immediately following the Effective Time, as well as
for the creation of a third group of directors upon the addition of
an additional independent director to the Board beginning with the
1997 annual meeting of stockholders of the Combined Company. Each
group of directors will be responsible for initiating Board
nominations for directors within such group of the Combined Company
following the ROC Merger, but will not have any other duties as a
group. The amendments will also fix the size of the Board and specify
the procedures for the nomination of directors by the Board as well
as certain other related matters. Following the ROC Merger, the Board
will continue to be divided into three classes, with terms of each
such class expiring in successive years.
o Three of the Exchanging OP Unitholders, John A. Boll,
Edward R. Allen and C.G. Kellogg, have agreed with Gary P. McDaniel,
the Chairman of the Board of ROC, that, for a period of three years
following the Effective Time of the ROC Merger, they will vote all
Shares held by them in favor of the election as directors of the
nominees selected by the Group B Nominating Committee of the
Company's Board.
Certain Effects of the Provisions of the Merger Agreement
and the Other Transactions
The provisions of the Merger Agreement which require the
payment of certain break-up fees and allow the exercise of the option
granted pursuant to the ROC Option Agreement in circumstances
relating to the acceptance by the Company's Board of certain Superior
Competing Transactions (as defined in the Merger Agreement), as well
as certain provisions contained in Maryland law and in the Articles
and By-Laws of the Company, could have the effect of discouraging or
increasing the difficulty of consummating unsolicited acquisition
proposals involving the Company, even if holders representing a
majority of the outstanding Shares considered such alternative
transactions to be advantageous. However, the Company does not
believe these provisions of the ROC Merger Agreement or the ROC
Option Agreement should deter any acquisition proposals. In that
regard, the Company notes that the MHC Offer is not conditioned on
the non-payment of the break-up fees contemplated by the ROC Merger
Agreement or the non-exercise of the option under the ROC Option
Agreement.
John A. Boll, Chairman of the Company's Board, C.G. Kellogg,
the Company's President and Chief Executive Officer, and a director
of the Company, and Tamara D.
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Fischer, the Company's Chief Financial Officer (the "Chateau
Principals"), have executed proxies (as amended,the "Chateau
Principal Proxies") granting to ROC the full power to vote all
Shares held by them in favor of the Chateau Proposals and against
any proposal made in opposition to or in competition with the Chateau
Proposals. In addition, certain other officers and directors of the
Company have expressed to ROC an intention to vote all Shares held by
them as of the Chateau Record Date in favor of the Chateau Proposals.
Further, the Exchanging OP Unitholders,who include Messrs. Boll and
Kellogg, will agree with ROC pursuant to the Chateau Securityholder
Agreement to the effect that, subject to the approval by the ROC
stockholders of the ROC Proposal and certain other conditions
described above, they will exchange OP Units for Shares.OP Unitholders
who exchange their OP Units for Shares on or prior to the Chateau
Record Date will be entitled to vote at the Chateau Special Meeting
and they are expected to vote in favor of the Chateau Proposals
because they would be subject to significant tax liability as a result
of the exchange of their OP Units if the ROC Merger does not occur.
Further, ROC has purchased 350,000 Shares and has agreed with the
Company to vote all such Shares in favor of the Chateau Proposals and
against any proposal made in opposition to or in competition with the
Chateau Proposals. AFTER GIVING EFFECT TO THE OP UNIT EXCHANGE AND THE
450,000 SHARES PURCHASED TO DATE BY THE COMPANY IN THE CHATEAU SHARE
REPURCHASE PROGRAM, IT IS ANTICIPATED THAT, AS OF THE CHATEAU RECORD
DATE, THE CHATEAU PRINCIPALS, THE OTHER EXCHANGING OP UNITHOLDERS AND
THE OTHER STOCKHOLDERS OF THE COMPANY WHO WILL HAVE EXPRESSED AN
INTENT TO VOTE IN FAVOR OF THE ROC MERGER, COMBINED WITH THE SHARES
EXPECTED TO BE HELD BY ROC, ARE EXPECTED TO REPRESENT A MAJORITY OF
THE SHARES OUTSTANDING ON THE CHATEAU RECORD DATE. THE CHATEAU
PRINCIPALS, OTHER EXCHANGING OP UNITHOLDERS AND SUCH OTHER
STOCKHOLDERS OF THE COMPANY THEREFORE ARE EXPECTED TO HAVE SUFFICIENT
VOTING POWER TO APPROVE THE CHATEAU PROPOSALS, REGARDLESS OF THE
VOTES OF OTHER STOCKHOLDERS OF THE COMPANY. Until the OP Unit
Exchange (the first phase of which is expected to occur within one or
two days following the ROC Special Meeting), the ROC Merger will
remain subject to a number of conditions and the right of the Board
of Directors of the Company to terminate the Merger Agreement in
connection with its acceptance of certain Superior Competing
Transactions, including a sale of the Company, if required by the
Board's exercise of its fiduciary duties. If the Merger Agreement is
terminated, the OP Unit Exchange and the Chateau Share Issuance will
not occur. In addition, following consummation of the ROC Merger, the
Board of Directors of the Combined Company will not be subject to any
limitations regarding its ability to consider and respond to any
acquisition proposals. Further, after the Chateau
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Record Date and prior to the Effective Time, the Chateau Principals,
other Exchanging OP Unitholders, the other individuals described
above and ROC could, by refusing to tender Shares to MHC in the MHC
Offer, prevent the consummation of the MHC Offer.
Distribution Policy
The Company currently pays a regular quarterly distribution
of $.405 per Share (which, annualized, equals $1.62 per Share).
Distributions by the Combined Company following the ROC
Merger will be at the discretion of the Board of Directors of the
Combined Company and will depend on the Combined Company's actual
cash available for distribution, its financial condition, capital
requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of
Directors of the Combined Company (the "Combined Company Board")
deems relevant. However, the Combined Company initially intends to
pay regular quarterly distributions of $.405 per share. Management of
the Company believes that there will be sufficient cash available to
make such distributions. Assuming the Combined Company makes
regularly quarterly distributions at the rate of $.405 per share,
each stockholder of ROC would be entitled to receive a quarterly
distribution equivalent to $.422 per share of ROC common stock (based
on an exchange ratio of 1.042 to one) and each stockholder of the
Company as of the Chateau Record Date will be entitled to receive a
quarterly distribution equivalent to $.432 per Share (after giving
effect to the Stock Dividend and the assignment by the Exchanging OP
Unitholders of their dividend Shares to the other stockholders of the
Company).
The Combined Company anticipates that cash available for
distribution will exceed taxable income due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the
Combined Company. Distributions by the Combined Company to the extent
of its current or accumulated earnings and profits for federal income
tax purposes, other than capital gain dividends, will be taxable to
stockholders as ordinary dividend income. Any dividends designated by
the Combined Company as capital gain dividends generally will give
rise to capital gain for stockholders. Distributions in excess of the
Combined Company's current or accumulated earnings and profits will
be treated as a non-taxable return of capital to the extent of a
stockholder's tax basis in its Shares, and thereafter as capital
gain. Distributions treated as non-taxable return of capital will
have the effect of deferring taxation on such amount until the sale
of a stockholders' Shares or until such distributions in the
aggregate exceed the stockholder's basis in the Shares. Management of
the Company believes that, absent the ROC Merger, approximately 33%
to 35% of its distributions for 1997 would be treated as a
non-
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taxable return of capital. Management of the Company and ROC believe
that following the ROC Merger approximately 31% to 34% of
distributions by the Combined Company expected to be made for 1997
will be treated as a non-taxable return of capital, the same
percentage as under the Old ROC Merger Agreement (which did not
involve any OP Unit Exchange).
In order to maintain its qualification as a REIT, the
Combined Company will be required to make annual distributions to its
stockholders in an amount equal to at least 95% of its taxable income
(excluding net capital gains). In the event that cash available for
distribution is insufficient to meet these distribution requirements,
the Combined Company could be required to borrow the amount of the
deficiency or sell assets to obtain the cash necessary to make the
distribution required to retain REIT status.
Benefits of the ROC Merger and the Other Transactions to the
Principals of the Company.
In considering the recommendation of the Company's Board,
stockholders should be aware that certain members of the Board of
Directors of the Company have certain interests in the ROC Merger and
the Other Transactions that are in addition to the interests of the
stockholders of the Company generally. Upon consummation of the
Merger, C.G. Kellogg, the Company's current Chief Executive Officer
and President, will serve the Combined Company as President and, in
recognition of the increased size of the Combined Company and the
changing nature of his responsibilities, Mr. Kellogg will be employed
by the Combined Company pursuant to a new employment agreement at a
higher level of compensation than is currently the case, including a
base annual salary of $225,000, compared to $185,000 under his
current employment agreement. Tamara D. Fischer, currently an officer
of the Company, will be employed by the Combined Company pursuant to
a new employment agreement to be effective at the Effective Time,
also at a higher level of compensation, including a base annual
salary of $175,000, compared to $120,000 under her current employment
agreement. In addition, all outstanding stock options under the Plan
will become vested and immediately exercisable upon or immediately
prior to completion of the ROC Merger.
The Exchanging OP Unitholders, who will include three
directors of the Company, John A. Boll, Edward R. Allen and C.G.
Kellogg, intend to agree, subject to certain conditions, to exercise
rights they currently hold to exchange a substantial portion of the
OP Units they own for the same number of Shares. Because such rights
are being exercised in connection with the ROC Merger, the exchange
of their OP Units will qualify as transfers of property pursuant to
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Section 351 of the Code. Pursuant to Code Section 351, no gain or
loss will be recognized by the Exchanging OP Unitholders upon the
exchange of OP Units for Shares pursuant to the OP Unit Exchange,
except to the extent provided in Section 357(c) of the Code. For a
description of this gain and the amount of the gain not recognized by
Messrs. Boll, Allen and Kellogg, see "Federal Income Tax Consequences
- Additional Tax Consequences of the ROC Merger and the OP Unit
Exchange."
If stockholders of the Combined Company were to sell Shares
prior to any such sale of properties (or after such sale if a capital
gain dividend was not designated with respect to taxable gain
resulting from such sale), the OP Unit Exchange would have no impact
on the amount of gain or loss to be recognized by such stockholder
upon such sale. If such gain is taxable to the stockholders of the
Combined Company (because the Combined Company has designated all or
a portion of a dividend paid with respect to Common Stock as a
capital gain dividend), then to the extent that such dividend would
have, absent such designation, been a tax free return of capital, it
would have the effect of accelerating recognition of a capital gain
which would otherwise not have been recognized by such stockholders
until a later disposition of the shares of the Combined Company. This
effect results because the portion of the dividend which would have
been a tax free return of capital (absent such designation) would
have reduced the tax basis of the shares and would therefore be taxed
as a capital gain upon a later sale of such shares. Similarly, no
additional tax would be triggered upon a future tax-free merger of
the Combined Company.
Further, most Exchanging OP Unitholders will have a zero tax
basis in the Shares which they receive in the OP Unit Exchange.
Therefore, upon a later taxable sale of such Common Stock, such
Exchanging OP Unitholders will at that time recognize the taxable
gain which was deferred upon the OP Unit Exchange under Section 351
of the Code.
Following the ROC Merger, it is expected that the Combined
Company will focus on expanding the size of its manufactured housing
community portfolio through acquisitions, expansions and selective
new community development. It is not expected that the Combined
Company will seek to sell any of its properties, although strategic
property dispositions of a limited nature may be undertaken in the
future in certain circumstances. If, contrary to the business plan of
the Combined Company and current expectations, property sales do
occur (and such sales are made from existing Company properties), one
effect of the application of Section 351 of the Code to the OP Unit
Exchange will be that the taxable gain deferred under Section 351
would be recognized by the Combined Company (or by all of its
stockholders, including the Exchanging OP Unitholders) and the
non-
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exchanging OP Unitholders rather than by the Exchanging OP
Unitholders (if , the OP Unit Exchange did not occur). Management of
the Company estimate that if the OP Unit Exchange did not occur, but
following the ROC Merger the Combined Company proceeded to liquidate
the entire portfolio of existing Company properties, the taxable gain
that would be recognized by the Exchanging OP Unitholders with
respect to the OP Units exchanged would have amounted to an estimated
$151 million. As stockholders of the Combined Company, the Exchanging
OP Unitholders will, however, bear a portion of the potential gain
upon any sale of the Combined Company's properties, including those
transferred to the Combined Company by ROC, in accordance with their
percentage interests as stockholders in the Combined Company at such
time. In this regard, there is an estimated $105 million of potential
taxable gain attributed to properties currently owned by ROC and
transferred to the Combined Company (relating to property
appreciation in the period after ROC's initial public offering). The
foregoing is in addition to an estimated $31 million of potential
taxable gain attributed to properties currently owned by the Company
(relating to property appreciation in the period after the Company's
initial public offering). Management of the Company estimate that the
amount of potential additional taxable gain attributable to the OP
Unit Exchange that could possibly be realized upon a taxable
disposition of all the properties to be owned by the Combined Company
(other than the portion of such gain attributable to and retained by
the Exchanging OP Unitholders through their ownership interest in the
Combined Company) to be approximately $68 million, unless CP
terminates for federal income tax purposes under Section 708 of the
Code, in which case the basis of CP's assets will be increased
resulting in a reduction of the amount of such potential additional
taxable gain by approximately $46 million, to $22 million. Of such
$68 million in potential additional taxable gain, approximately $26.8
million, $3.2 million and $0.4 million are attributable to OP Units
to be exchanged by Messrs. Boll, Allen and Kellogg, respectively (in
each case assuming exchange at 75% of such person's OP Units). No
other directors of the Company hold OP Units. The other officers of
the Company, who together hold an aggregate of 1,756 OP Units, will
not participate in the OP Unit Exchange.
Federal Income Tax Consequences
The following discussion describes the material federal
income tax consequences applicable to holders of Shares and shares of
ROC common stock that are expected to result from the ROC Merger and
the Other Transactions. This discussion assumes that each holder
holds its Shares or shares of ROC common stock as a capital asset and
does not address all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders (including
insurance companies,
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financial institutions, broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States)
subject to special treatment under the federal income tax laws, nor
does it discuss any state, local or foreign tax considerations.
ACCORDINGLY, CHATEAU STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE ROC MERGER,
INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE ROC MERGER.
The following discussion is based on the Code, applicable
Treasury Regulations, judicial authority and administrative rulings
and practice, all as of the date hereof. There can be no assurance
that future legislative, judicial or administrative changes or
interpretations will not adversely affect the accuracy of the
statements and conclusions set forth herein. Any such changes or
interpretations could be applied retroactively and could affect the
tax consequences of the ROC Merger to the Company's stockholders and
ROC stockholders.
The ROC Merger
The ROC Merger, when taken together with the Other
Transactions, each of which is an integral part of the ROC Merger, is
expected to be treated as a transfer by the ROC stockholders of their
ROC common stock for Shares qualifying for treatment under Section
351 of the Code. Counsel to ROC, and counsel to the Company
(collectively "Counsel") will issue opinions at the closing of the
ROC Merger to the effect that the ROC Merger will be treated for
federal income tax purposes as a transfer by the ROC stockholders of
their shares of ROC common stock to the Company in exchange for
Shares under Section 351 of the Code. Stockholders should be aware
that an opinion of counsel merely represents counsel's judgment with
respect to the probable outcome on the merits and is not binding on
the IRS or the courts and that the parties have not requested an
advance ruling from the IRS with respect to the tax consequences of
the ROC Merger.
Counsel's opinion will be based on certificates and
agreements of ROC and the Exchanging OP Unitholders upon the facts
described herein and in the Joint Proxy Statement/Prospectus of the
Company and ROC relating to the Company and ROC stockholder votes on
the ROC Merger, and certain representations made in writing to such
counsel by the management and representatives of the Company and ROC.
Such opinion will also be based upon a conclusion that the
transaction will not be treated as a transfer to an investment
company under Section 351(e) of the Code. However, neither the courts
nor the IRS has ruled on the application of Section 351(e) in
connection with an exchange of partnership units for shares of a REIT
or the exchange of shares of one REIT for another. While Counsel
believes
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that the ROC Merger, when taken together with the Other Transactions,
will be tax-free to the ROC stockholders under Section 351 of the
Code, there can be no assurance that the IRS will agree with this
conclusion.
Section 351 of the Code provides that no gain or loss is
recognized if property is transferred by one or more persons to a
corporation solely in exchange for stock of such corporation and
immediately after such exchange the transferors own at least 80% of
the corporation's voting stock and 80% of all other classes of the
corporation's stock. When a transaction involves more than one
transferor of property, the transaction can qualify under Section 351
if the transferors as a group satisfy the 80% control test
immediately after the exchange. Although simultaneous transfers are
not required, two or more transferors can be aggregated for purposes
of determining control if their transfers are part of a single
integrated transaction.
In the ROC Merger, a transitory subsidiary of the Company
("RSub"), will be merged into ROC with the ROC stockholders receiving
Shares and the Company receiving ROC common stock. Pursuant to the
Chateau Securityholder Agreement, the Exchanging OP Unitholders will,
subject to the satisfaction of certain conditions described below,
act with ROC and the ROC stockholders to exercise rights such
Exchanging OP Unitholders currently hold to exchange OP Units for the
same number of Shares.
A transitory subsidiary created solely to effect a merger is
disregarded for federal income tax purposes. The merger of RSub into
ROC will be characterized as the transfer by the ROC stockholders of
their ROC common stock to the Company in exchange for Shares. If only
the ROC Merger were considered, the ROC stockholders would not own
80% or more of the Company. However, for purposes of the 80% control
test of Section 351 of the Code, the Shares received by the
Exchanging OP Unitholders in the OP Unit Exchange and in the Chateau
Share Issuance, and by the ROC stockholders in the ROC Merger, should
be aggregated to satisfy the 80% test. If the IRS decided that the OP
Unit Exchange did not qualify for treatment under Section 351, it is
not clear whether the Exchanging OP Unitholders will be considered
part of the transferor group for purposes of testing the ROC Merger
under Section 351.
The ROC Merger may also comply with the statutory
requirements of a tax-free reorganization under Section 368 of the
Code. However, a tax-free reorganization requires that there be a
continuity of interest on the part of the historic owners of the
acquired corporation. Thus, for the ROC Merger to satisfy the
continuity of interest requirement, ROC stockholders must receive as
consideration for their ROC common stock a sufficiently direct
interest in ROC's
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former assets. In accordance with the terms of the Contribution
Agreement, ROC and RAC will, at the Effective Time, transfer all of
their assets to CP in exchange for a general partner interest therein
represented by OP Units. In addition, ROCF will be merged with the
Financing Partnership and ROC will receive additional OP Units as a
General Partner of CP. The IRS has taken the position that if,
following a reorganization, the acquired corporation transfers
substantially all of its assets to a partnership, the reorganization
will not qualify as a tax-free reorganization because the acquired
corporation's stockholders do not maintain a sufficiently direct
interest in the acquired corporation's assets. This position is based
on two Supreme Court decisions which dealt with transfers to
subsidiary corporations. The conclusions reached in these decisions
were overturned by subsequent changes to the Code and it is unclear
whether these cases would apply to a contribution to a partnership.
While substantial arguments exist that the transfer by ROC and RAC of
their assets to CP and by ROCF to the Financing Partnership should
not cause the ROC Merger to violate the continuity of interest
requirement, it is unclear whether or not a court would agree if the
issue were to be litigated.
Tax Consequences of the ROC Merger
Assuming that the ROC Merger qualifies as a Code Section 351
exchange, the material federal income tax consequences of the ROC
Merger will be as follows:
(i) The ROC Merger will not result in the recognition of
gain or loss to the Company's stockholders with respect to such
exchange.
(ii) The exchange in the ROC Merger of ROC common stock for
Shares will not result in the recognition of gain or loss to ROC
stockholders with respect to such exchange, except as described in
(iii) below.
(iii) Each stockholder of ROC who receives cash proceeds in
lieu of fractional interests in Shares will recognize gain equal to
the lesser of (A) the amount of such proceeds and (B) the difference
between such ROC stockholder's basis in the ROC common stock
exchanged and the fair market value, at the Effective Time, of the
Shares and cash received in exchange therefor. Any such gain
recognized as described in this paragraph will constitute capital
gain if such stockholder's shares of ROC common stock were held as a
capital asset at the Effective Time.
(iv) The tax basis of the Shares (including fractional share
interests for which cash is ultimately received) received by a ROC
stockholder will be equal to the tax basis of the shares of ROC
common stock exchanged therefor, decreased
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by the amount of cash received by such stockholder, and increased by
the amount of gain (if any) recognized by such stockholder in the ROC
Merger.
(v) A stockholder's holding period with respect to the
Shares received in the ROC Merger will include the holding period of
the ROC common stock exchanged in the ROC Merger if such ROC common
stock was held as a capital asset at the Effective Time.
(vi) No gain or loss will be recognized by ROC, the Company
or RSub as a result of the ROC Merger.
If the ROC Merger is not an exchange under Section 351 of
the Code or a reorganization under Section 368 of the Code, then each
ROC stockholder will recognize gain or loss with respect to its
shares of ROC common stock equal to the difference between such
stockholder's basis in its shares and the fair market value, as of
the Effective Time, of the Shares and cash received in exchange
therefor. Such gain will be long-term if the ROC common stock was
held by such stockholder for more than one year. In such event, a ROC
stockholder's aggregate basis in any Shares received will equal its
fair market value, as of the Effective Time, and the stockholder's
holding period for such stock will begin the day after the Effective
Day.
Additional Tax Consequences of the ROC Merger and the OP
Unit Exchange
The ROC Merger and the OP Unit Exchange when taken together
with certain other related transactions are expected to be treated as
a transfer of shares of ROC common stock and OP Units to the Company
for Shares qualifying for treatment under Section 351 of the Code.
Management of the Company do not anticipate that this Section 351
structure will result in any material adverse tax consequences for
the Combined Company or its stockholders following the ROC Merger.
This conclusion still obtains even though, as a result of this
Section 351 structure, the Combined Company will take, as its tax
basis, the tax basis of the OP Units which such OP Units had in the
hands of the Exchanging OP Unitholders immediately prior to the OP
Unit Exchange, increased by the amount, if any, of gain recognized by
the Exchanging OP Unitholders upon such transfer. The Combined
Company and CP will also carry over the tax basis of ROC's properties
immediately prior to the Effective Time. Thus, the Combined Company
will have a tax basis in ROC's properties and the properties owned by
CP, attributable to the OP Units exchanged by the Exchanging OP
Unitholders pursuant to the OP Unit Exchange, determined by reference
to historical cost rather than the fair market value of such
properties. Consequently, in the event of a sale of such properties
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(or any individual property), gain would be recognized to the extent
of such difference, and taxed to either the Combined Company or the
persons who are then stockholders of the Combined Company, including
the Exchanging OP Unitholders, in accordance with the rules
applicable to the taxation of a REIT and its stockholders. It is the
intention of the Combined Company to designate dividends paid as
capital gains dividends to the extent practicable such that the
Combined Company will not pay capital gains tax. To the extent that
such gain is taxable to the stockholders of the Combined Company, it
would have the effect of decreasing the portion of the Combined
Company's dividend which would otherwise be treated as a tax-free
return of capital (and which would reduce the tax basis of a
stockholder's shares), thus resulting in less taxable gain (or
greater taxable loss) upon a later sale by such stockholders of the
shares of the Combined Company. Therefore, the potential impact to
the stockholders of the Combined Company would be to accelerate the
timing of the recognition of gain which such stockholders would
otherwise have and would not result in a transfer of a permanent tax
cost. Also, a higher portion of distributions to stockholders
attributable to operating income will be taxed as dividends than
would have occurred had the Company purchased the interests of the
Exchanging OP Unitholders in CP and ROC's properties at their
respective fair market values.
It is estimated that the amount of potential additional
taxable gain attributable to the OP Unit Exchange that could possibly
be realized upon a taxable disposition of all of the properties to be
owned by the Combined Company (other than the portion of such gain
attributable to and retained by the Exchanging OP Unitholders through
their ownership interest in the Combined Company) to be approximately
$68 million, unless CP terminates for federal income tax purposes
under Section 708 of the Code, in which case the basis of CP's assets
will be increased resulting in a reduction of the amount of such
potential additional taxable gain by approximately $46 million, to
$22 million. Assuming a 28% capital gains tax rate for federal income
tax purposes, the tax on such potential gain would either be $19
million or $6 million (depending on whether or not there is a
partnership termination). The $68 million estimate is based on the
assumption that the potential additional gain attributable to the OP
Unit Exchange alone is $151 million. Since the Exchanging OP
Unitholders will, as a result of the OP Unit Exchange, become
stockholders of the Combined Company, they will continue to bear a
portion of the potential gain upon any sale of the Combined Company's
properties, including those transferred to the Combined Company by
ROC, in accordance with their percentage interests as stockholders in
the Combined Company (estimated to be 29%) at such time. Of such $68
million in potential additional taxable gain, $26.8 million, $3.2
million and $0.4 million are attributable to OP Units to be exchanged
by Messrs. Boll, Allen and Kellogg,
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respectively (in each case assuming exchange of 75% of such person's
OP Units). No other directors of the Company hold OP Units. The other
officers of the Company, who together hold an aggregate of 1,756 OP
Units, will not participate in the OP Unit Exchange. In this regard,
an estimated $105 million of potential taxable gain is attributable
to properties currently owned by ROC (relating to property
appreciation in the period after ROC's initial public offering) and
an estimated additional $31 million of taxable gain is attributable
to properties currently owned by the Company (relating to property
appreciation in the period after the Company's initial public
offering).
A partnership terminates for income tax purposes if there is
a sale or exchange of 50% or more of the total interest in
partnership capital and profits within a 12-month period. It is
possible that the OP Unit Exchange, in combination with other
transfers of OP Units made within 12 months of the Effective Date,
will result in a termination of CP. Under existing regulations, in
the event of a termination, CP's tax year would close and CP would be
treated for income tax purposes as if it had made a liquidating
distribution of its assets to its partners, followed by a
recontribution of the assets to a "new" partnership. As a result, the
tax basis of the assets of CP would be increased by approximately $65
million. Although a new depreciation recovery period would begin on
such date, management believes that CP's annual depreciation
deductions would be substantially increased and CP would have lesser
taxable income (or greater tax loss) than if no tax termination
occurred (with a corresponding increase in the portion of the
dividends of the Combined Company which will be treated as a return
of capital). Regulations have been proposed which if adopted prior to
the completion of the Other Transactions, would not adjust the tax
basis of CP's assets or change their depreciation deductions. The
Company does not represent, however, that a tax termination will
result from the ROC Merger and its related transactions or from
future direct or indirect transfers of OP Units to or by the Company
or ROC.
Additional Tax Consequences of Waiver of the Company Stock
Dividend by Exchanging OP Unitholders
In connection with the ROC Merger, the Company will declare
a stock dividend for each Share of outstanding and an equivalent
dividend for each OP Unit outstanding payable upon consummation of
the ROC Merger. Pursuant to the Chateau Securityholder Agreement, the
Exchanging OP Unitholders will waive the Shares that they would
otherwise receive from the Company as a result of the Stock Dividend
and such Shares will be reallocated to the other stockholders of the
Company. It is not clear whether the stockholders of the Company must
include into income the fair market value of the Shares received
pursuant to the waiver by
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the Exchanging OP Unitholders. Council to the Company will opine at
the closing of the ROC Merger that it is more likely than not that the
receipt of Shares by the stockholders of the Company as a result of
this waiver by the Exchanging OP Unitholders will not result in
income to such stockholders of the Company. Stockholders of the
Company should be aware that an opinion of counsel merely represents
counsel's judgment with respect to the likely outcome on the merits
and is not binding on the IRS or the courts and that the Company has
not requested an advance ruling from the IRS with respect to the tax
consequences of the waiver of the Stock Dividend.
3. ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
The Excess Share Provisions under the Company's Articles subsection
of Item 8 is hereby amended by adding to the end thereof the following
paragraph:
The provisions of Article VI of the Company's Articles may
discourage a change of control of the Company and may also (i) deter
tender offers for the Shares, which offers may be advantageous to
stockholders, and (ii) limit the opportunity for stockholders to
receive a premium for their Shares that might otherwise exist if an
investor were attempting to assemble a block of Shares in excess of
7% of the outstanding Shares or otherwise attempting to effect a
change of control of the Company.
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this statement is true,
complete and correct.
By: /s/ C.G. Kellogg
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Name: C.G. Kellogg
Title: President and Chief Executive Officer
Dated: December 6, 1996