<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2).
[ ] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
Inland Real Estate Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
$0.1 par value common stock of Inland Real Estate Corporation
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
6.181.818 shares
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$11.00 determined by arm's-length negotiations by the parties in
association with a range of value for our shares as determined by an
independent third party.
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$68 million
- --------------------------------------------------------------------------------
(5) Total fee paid:
$13,600
- --------------------------------------------------------------------------------
[ ] 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 paid 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
Inland Real Estate Corporation
[LOGO]
READ THIS FIRST
Inland Real Estate Corporation proposes to become a self-administered Real
Estate Investment Trust through a non-cash merger with the two companies which
currently provide us with all of our property management services (Inland
Commercial Property Management, Inc.) and advisory services (Inland Real Estate
Advisory Services, Inc.).
Our board of directors is recommending this merger for three reasons:
- - So that our management structure will be similar to that of most of the
REITs whose stock already trades on public exchanges, enhancing the
attractiveness of our shares in the event we list our shares on an exchange
in the future;
- - Because we expect that the merger will increase our funds from operations
per share.
- - And, because, as a result of the merger, certain key managers who have been
instrumental in the growth of our company over the past five years will
become our employees.
You have received the enclosed proxy statement because you are a stockholder of
record as of April 30, 2000. In addition to the proposed merger, the proxy
statement describes three other proposals to be considered at the annual meeting
on June 27, 2000, including the election of our board of directors; the
ratification of our selection of KPMG LLP as our principal public accountants
for this year; and the amendment of certain provisions of our governing charter,
so that the language of our charter will conform with our proposed new status as
a self-administered REIT.
IT IS IMPORTANT THAT YOU READ THE ENCLOSED PROXY STATEMENT AND THAT YOU VOTE.
You can vote by mailing back the enclosed ballot card, by calling the toll-free
number of our proxy service, by accessing the Web site of our proxy service, or
by attending the annual meeting and voting in person. Unless you attend the
meeting in person, WE MUST RECEIVE YOUR PROXY VOTE BY JUNE 27, 2000.
If you have any questions or need help with any of the materials enclosed in
this package, you may call us toll-free at 1-___-___-_____ or write us at Inland
Real Estate Corporation, c/o Beacon Hill Partners, Inc., _____________________.
The following list describes the materials enclosed in this package. If
anything is missing, please call the toll-free number.
- -- PRESIDENT'S LETTER - A letter from our president, Robert D. Parks,
explaining our plans.
- -- BALLOT CARD - Read both sides and complete and sign the card if you want to
vote by mail.
- -- RETURN ENVELOPE - For the ballot card.
- -- READ THIS FIRST --
- - Questions and Answers for Stockholders: Concise answers to questions about
the merger. (Pages _-_ of this booklet.)
- - Instruction Guide for Voting - How to vote by proxy, whether by mail,
telephone or the Internet. (Pages __-__ of this booklet.)
<PAGE> 3
- - PROXY STATEMENT - The detailed information you should rely upon in
determining how to cast your vote.
Questions and Answers for Stockholders
We've tried to anticipate questions you may have concerning Proposal No. 3 in
our proxy statement, which is our proposed acquisition of our property manager,
Inland Commercial Property Management, Inc. (the Manager) and our advisor,
Inland Real Estate Advisory Services, Inc. (the Advisor). The questions and
answers which follow are based upon the detailed information contained in the
enclosed proxy statement. You should read the proxy statement, and rely upon the
information which it contains, in casting your vote.
1. WHICH COMPANIES ARE MERGING, AND WHY DO THEY ALREADY HAVE SIMILAR NAMES?
You own stock in Inland Real Estate Corporation, which is a Real Estate
Investment Trust (REIT). Our business is the operation of neighborhood and
community shopping centers. We currently own 119 neighborhood and community
shopping centers, including one under development.
The investment was sponsored by Inland Real Estate Investment Corporation, which
is part of The Inland Group, Inc., a group of affiliated, privately owned
companies involved in most aspects of the commercial real estate business,
including investments, property management and asset management.
When we began operations and owned only a few properties, it was not
economically feasible for us to hire our own staff to operate our properties and
run our business. We entered into contracts with the Manager for property
management services and with the Advisor to conduct the other aspects of our
day-to-day business. We do, however, have our own five-member board of
directors, which has ultimate authority over our company. Three of the five
members of the board are not affiliated with The Inland Group, Inc.
The board has considered ways to maximize stockholder value. Because we have
grown to a considerable size, the board has concluded that it makes sense to
have our own employees and, further, that it is desirable to acquire the Manager
and the Advisor for this purpose.
2. IS THE PROPOSED MERGER FAIR TO STOCKHOLDERS?
Because two of our board members are principals of The Inland Group, Inc., the
board formed a three-member special committee made up entirely of the
independent or "disinterested" directors, to consider this merger. The special
committee obtained its own legal counsel to aid in conducting negotiations with
The Inland Group, Inc. The special committee also obtained a fairness opinion
from an independent investment banker, First Union Securities, which concluded
that the merger is fair to our stockholders, from a financial point of view,
based upon comparable transactions by other companies and upon our own financial
projections, as prepared by the Manager and the Advisor.
3. WHAT WILL BE THE IMPACT OF THE MERGER ON THE CURRENT STOCKHOLDERS?
If approved by the current stockholders, we will issue $68 million of our stock
to those affiliates of The Inland Group, Inc. which own the Manager and the
Advisor, in return for our acquisition of those two companies. Through its
affiliates, The Inland Group, Inc. will become our single largest stockholder,
with approximately 10% of the shares which will then be outstanding, reducing
current stockholders' percentage of ownership in the company to 90%.
From an earnings standpoint, we expect our funds from operations per-share to
increase following the merger, after adjusting for the non-cash nature of the
acquisition. We expect that the distributions paid
<PAGE> 4
to The Inland Group, Inc. on the $68 million in stock, plus the costs of
compensating our new employees from the Manager and the Advisor will be less
than the fees and cost reimbursements we are paying under our current contracts
with the Manager and the Advisor. For 2001, we project our funds from operations
to rise by $0.04 per share - or $2.6 million - as a direct result of the merger.
To the extent that we continue to buy properties in the future, we expect the
merger to be increasingly beneficial to us through the additional savings of
fees that would otherwise be payable under the current contracts. For this
reason, we expect that the merger will have no negative effect on our current
cash distributions to stockholders, and should in fact increase future funds
available for distribution.
In addition to these savings, acquiring the Advisor means that we will not have
to pay fees to the Advisor relating to the sale of our properties, if we choose
to sell properties in the future.
4. ARE THERE OTHER REASONS FOR THE PROPOSED MERGER?
Stock analysts and institutional investors have a strong preference for
"self-administered" REITs those which have their own employees which can conduct
their day-to-day business. In the future, we may wish to list our shares on a
national exchange. The board believes that such a future listing would be better
received by the investment community, and the stock would command a higher
listing price, if we are self-administered.
Also, as part of the acquisition of the Manager and the Advisor, we gain as
employees certain key managers who have been instrumental in the growth of our
business, as well as the rank-and-file employees such as the leasing agents and
property managers who have been operating our centers. They know our business
and our properties better than anyone else.
5. WHAT ARE THE TAX CONSEQUENCES OF THE PROPOSED MERGER?
The opinion of our legal counsel is that the merger will not be a taxable event
for our stockholders, nor will it have any adverse impact on our tax status as a
REIT.
6. WHAT HAPPENS IF I DON'T VOTE?
A non-vote is not counted. If the merger proposal fails to receive a minimum of
more than 50% of our currently outstanding shares - whether they are voted or
not -- it will not pass. In that case, we will continue to operate under our
current management structure, paying fees and cost reimbursements to the Manager
and the Advisor under their contracts.
7. HOW DO I VOTE?
You have four options. We have retained an independent service, Beacon Hill
Partners, Inc., to conduct and tabulate the voting. You can mail your marked and
signed proxy card to them in the enclosed postage-paid envelope. You can vote by
calling a toll-free telephone number. You can also vote by accessing the Web
site of the proxy service. Or, you can vote your shares in person at our annual
meeting on June 27, 2000. See the instructions on Pages _______ of this booklet
for details.
<PAGE> 5
_____________, 2000
Dear Fellow Stockholder:
On March 7, 2000, the board of directors of Inland Real Estate Corporation voted
unanimously to acquire the companies which provide us with all of our property
management and advisory services, Inland Commercial Property Management, Inc.
(the Manager) and Inland Real Estate Advisory Services, Inc. (the Advisor).
As a member of the board, I joined in that affirmative vote. There are several
important reasons why I believe you and the rest of our fellow stockholders
should vote for this proposal.
As you may know, our company is a Real Estate Investment Trust, a REIT. We began
as a start-up company at the end of 1994. We have grown rapidly to the point
where we now own 119 retail properties, most in the Chicago area, totaling more
than 9.4 million square feet of retail space. Based upon our assets, we are as
big as many of the retail REITs whose stocks trade on national exchanges.
Currently our shares do not trade on an exchange and, as a result, your
investment in our stock is illiquid. Our business plan has always contemplated a
future "liquidity event" which could take the form of listing our shares on an
exchange, merging our REIT with an already listed REIT, or selling our real
estate assets to others.
All of those future options are viable, although at this time the market for
publicly traded REITs is not conducive to listing our shares. However, we wish
to be prepared when the opportunity to list our shares presents itself. Analysts
and investors who specialize in REIT stocks have a strong preference for
"self-administered" companies - companies with their own employees, which do not
rely upon contract services to conduct their day-to-day business. Our
acquisition of the Manager and the Advisor will accomplish that.
Secondly, we project that being self-administered will have a positive effect on
our financial performance. The owners of the Manager and the Advisor will
receive 6,181,818 shares of our stock in return for those companies. However, we
project that the distributions we pay on that stock and the compensation we will
pay to our new employees will be more than offset by the savings we will realize
by not paying property management fees, advisory fees and cost reimbursements.
The third point is that through the merger we will secure the full-time
employment of certain employees of the Manager and the Advisor who have been
instrumental in our growth and the operation of our properties. These people
know our company and can oversee our continued progress, all the way from top
management to the leasing agents and property managers who look after our
tenants and our buildings. If you and the other stockholders approve the merger,
Norm Treonis, one of the principals of The Inland Group, Inc., who for many
years has managed all of Inland's property management operations, will come to
work for us full-time as president and CEO. I can assure you there is no one in
the Inland organization better qualified for this job. I will continue with the
company as a director and will become chairman of the board.
Your vote is crucial to the future of our company. The board of directors,
including all of its independent directors, has found this transaction to be
fair to you and the other stockholders and has voted for this merger. We ask
that you vote FOR the merger, as well as the other three proposals on the proxy
ballot.
<PAGE> 6
If you have any questions, or need help with any of the documents included in
this package, please call our independent proxy service, Beacon Hill Partners,
Inc. at
----------------------------------------------.
Sincerely,
INLAND REAL ESTATE CORPORATION
Robert D. Parks
President
<PAGE> 7
INLAND REAL ESTATE CORPORATION
NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS
AND
PROXY STATEMENT
DATE: June 27, 2000
TIME: 2:00 p.m. CDT
PLACE: Hyatt Regency Oak Brook
1909 Spring Road
Oak Brook, Illinois 60523
<PAGE> 8
INLAND REAL ESTATE CORPORATION
2901 BUTTERFIELD ROAD
OAK BROOK, ILLINOIS 60523
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
---------------
DATE: June 27, 2000
TIME: 2:00 p.m. CDT
PLACE: Hyatt Regency Oak Brook
1909 Spring Road
Oak Brook, Illinois 60523
Dear Stockholders:
At our annual meeting, we will ask you to:
(1) elect five directors, a majority of whom must meet the
requirements to be "independent" as described in the proxy
statement under the section entitled "Election of Directors;"
(2) ratify our selection of KPMG LLP as our principal independent
public accountant for 2000;
(3) approve and adopt the Agreement and Plan of Merger that we have
signed with Inland Commercial Property Management, Inc. and Inland
Real Estate Advisory Services, Inc. and their respective parents;
(4) amend certain provisions of our governing charter; and
(5) transact any other business that may properly come before the
annual meeting, or any adjournment or postponement of the annual
meeting.
If you were a stockholder of record at the close of business on April
30, 2000, you may vote at the annual meeting.
<PAGE> 9
YOUR VOTE IS IMPORTANT
IN ORDER TO ENSURE THAT YOUR VOTE WILL BE COUNTED, YOU SHOULD GRANT US
YOUR PROXY ELECTRONICALLY, BY TELEPHONE, OR BY COMPLETING, DATING, SIGNING AND
RETURNING THE ENCLOSED PROXY CARD PROMPTLY IN THE ENCLOSED PRE-ADDRESSED
ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES. YOUR PROXY MAY BE REVOKED AT ANY TIME BEFORE IT
IS VOTED AT THE ANNUAL MEETING, BY FILING WITH THE SECRETARY OF THE COMPANY A
WRITTEN REVOCATION, BY SUBMITTING A PROXY BEARING A LATER DATE, OR BY ATTENDING
AND VOTING IN PERSON AT THE MEETING. PLEASE DO NOT SEND ANY CERTIFICATES FOR
YOUR SHARES.
By Order of the Board of Directors
----------------------------------
Robert D. Parks
President and
Chief Executive Officer
Oak Brook, IL
, 2000
- ------
<PAGE> 10
INLAND REAL ESTATE CORPORATION
2901 BUTTERFIELD ROAD
OAK BROOK, ILLINOIS 60523
--------------------
PROXY STATEMENT
--------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 27, 2000
We are furnishing this Proxy Statement to our stockholders in
connection with the solicitation by our board of directors of proxies to be used
at an annual meeting of stockholders to be held on June 27, 2000 at 2:00 p.m.,
local time, the Hyatt Regency Oak Brook, 1909 Spring Street, Oak Brook, Illinois
60523, and at any adjournments or postponements thereof. This Proxy Statement,
along with the notice of annual meeting and the enclosed proxy card, are first
being mailed to our stockholders on or about , 2000.
At the annual meeting you will vote upon a number of proposals
including a proposal to approve and adopt an Agreement and Plan of Merger
(attached hereto as Appendix A), which will make us self-administered. We
propose to acquire, through a non-cash merger, Inland Commercial Property
Management, Inc., our property manager ("ICPM"), and Inland Real Estate Advisory
Services, Inc., our advisor ("IREAS"). The total purchase price for the
acquisition of ICPM and IREAS will be 6,181,818 million shares of our common
stock valued at $11.00 per share, or $68 million in the aggregate. Inland Real
Estate Investment Corporation ("IREIC"), the sole shareholder of IREAS, will
receive 2,652,683 million shares, and The Inland Property Management Group, Inc.
("TIPMG"), the sole shareholder of ICPM, will receive 3,529,135 million shares
of our common stock. The principal executive offices and phone numbers of both
IREAS and ICPM are located at 2901 Butterfield Road, Oak Brook, Illinois 60523,
(630) 218-8000.
Because two of our directors are subject to conflicts of interest in
evaluating the merger, our board of directors appointed a special committee of
disinterested directors to, among other things, consider and make
recommendations to our board of directors with respect to the merger. This
committee and our board as a whole believe that the terms of the merger are in
the best interests of our stockholders and unanimously recommend that you
approve the merger.
Approval of the merger at the annual meeting will require the
affirmative vote of the holders of a majority of the outstanding shares of our
common stock. Even if our stockholders approve the merger, the completion of the
merger is subject to customary closing conditions.
<PAGE> 11
STOCKHOLDERS ARE URGED TO READ AND CONSIDER CAREFULLY THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT AND TO CONSULT WITH THEIR PERSONAL FINANCIAL
ADVISORS.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "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> 12
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
SUMMARY TERM SHEET..................................................................................1
INFORMATION ABOUT THE ANNUAL MEETING................................................................2
Information About Attending the Annual Meeting.............................................2
Information About this Proxy Statement.....................................................2
Proposals to be Considered by You at the Annual Meeting....................................2
Information About Voting...................................................................3
Quorum; Tabulation of Votes................................................................3
Number of Votes Necessary for each Proposal to be Approved.................................4
Costs of Proxies...........................................................................4
Other Matters..............................................................................4
Where You Can Find More Information About Us...............................................5
Information to Rely Upon When Casting Your Vote............................................5
SUMMARY ...........................................................................................6
Election of Directors......................................................................6
Ratify Selection of our Independent Accountant.............................................6
Approval of the Merger.....................................................................6
Amendment of Our Governing Charter........................................................10
ELECTION OF DIRECTORS..............................................................................12
Our Board of Directors....................................................................12
Our Executive Officers....................................................................15
Compensation Paid to Our Directors and Officers...........................................17
PROPOSAL NO. 1............................................................................17
RATIFICATION OF KPMG LLP...........................................................................18
KPMG LLP .................................................................................18
PROPOSAL NO. 2............................................................................18
THE MERGER.........................................................................................19
Purpose and Reasons for the Merger........................................................19
Background of the Merger..................................................................20
Agreement and Plan of Merger..............................................................26
Business of IREAS and ICPM................................................................30
IREAS Advisory Agreement..................................................................30
ICPM Property Management Agreement........................................................32
Interest of Certain Persons in Matters to be Acted Upon...................................33
</TABLE>
(i)
<PAGE> 13
<TABLE>
<CAPTION>
<S> <C>
Opinion of the Financial Advisor..........................................................34
Federal Tax Consequences..................................................................45
PROPOSAL NO. 3............................................................................50
AMENDMENT OF OUR GOVERNING CHARTER.................................................................51
Our Charter...............................................................................51
PROPOSAL NO. 4............................................................................52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................55
Advisory and Property Management Fees.....................................................55
Fees for Offering of Our Securities.......................................................55
Related Mortgage Transactions.............................................................55
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.....................................................................................56
DESCRIPTION OF OUR SECURITIES......................................................................57
SELECTED FINANCIAL DATA............................................................................58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................................61
Liquidity and Capital Resources...........................................................61
Cash Flows From Operating Activities......................................................62
Cash Flows From Investing Activities......................................................62
Cash Flows From Financing Activities......................................................62
Results of Operations.....................................................................62
Year 2000 Issues..........................................................................64
Subsequent Events.........................................................................64
Impact of Accounting Principles...........................................................65
Inflation.................................................................................65
"PRO FORMA" MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................66
Liquidity and Capital Resources...........................................................66
Cash Flows From Operating Activities......................................................66
Cash Flows From Investing Activities......................................................66
Cash Flows From Financing Activities......................................................66
Results of Operations.....................................................................66
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT..................................................67
OTHER MATTERS......................................................................................67
</TABLE>
(ii)
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................................68
STOCKHOLDER PROPOSALS..............................................................................69
PROXY FOR ANNUAL MEETING...........................................................................70
</TABLE>
APPENDICES
Appendix A Agreement and Plan of Merger
Appendix B Fairness Opinion of First Union Securities, Inc.
Appendix C Second Amended and Restated Articles of
Amendment
(iii)
<PAGE> 15
SUMMARY TERM SHEET
This term sheet is a summary of the material terms of our acquisition
of IREAS and ICPM and does not contain all of the information regarding the
acquisition that you may consider important. The following summary is applicable
only if our stockholders approve the adoption of the Agreement and Plan of
Merger, as set forth in Proposal No. 3 of this proxy statement.
- We intend on becoming a self-administered REIT by acquiring
our current advisor, IREAS, and our current property manager,
ICPM (see "THE MERGER-Background of the Merger");
- We will acquire IREAS and ICPM through a non-cash
merger (see "THE MERGER - Agreement and Plan of
Merger");
- In the merger, we will issue to IREIC and TIPMG, the
sole shareholders of IREAS and ICPM, respectively, an
aggregate of 6,181,818 shares of our common stock
(approximately 10% of our outstanding common stock
giving effect to the issuance) valued at $11.00 per
share, or $68 million, in exchange for all of the
outstanding equity securities of IREAS and ICPM (see
"THE MERGER - Agreement and Plan of Merger");
- The merger will be treated as a tax-free reorganization under
the Internal Revenue Code and will not affect our tax status
as a REIT (see "THE MERGER - Federal Tax Consequences");
- We will grant to TIPMG and IREIC registration rights,
requiring us to register the shares we issue to them as the
merger consideration under certain circumstances (see "THE
MERGER - Agreement and Plan of Merger");
- In connection with the merger, we will: (1) license from
The Inland Group, Inc. the right to continue to use the
name "Inland Real Estate Corporation" and our
corporate logo at no cost to us; (2) enter into
employment agreements with key members of our
prospective management team; (3) lease office space at
our corporate headquarters from an affiliate of The
Inland Group, Inc. at cost; and (4) contract with certain
affiliates of The Inland Group, Inc. for general and
administrative services to be provided to us at their
cost; and
- The completion of the merger is contingent upon
approval by our stockholders and other customary
closing conditions.
1
<PAGE> 16
INFORMATION ABOUT THE ANNUAL MEETING
INFORMATION ABOUT ATTENDING THE ANNUAL MEETING
Our annual meeting will be held on June 27, 2000 at 2:00 p.m.
CDT at the Hyatt Regency Oak Brook, 1909 Spring Road, Oak Brook,
Illinois 60523. Please contact Ms. Roberta Matlin at (800) 826-8228 or
(630) 218-8000 if you plan on attending. Additionally, please contact
at Beacon Hill Partners, Inc. if you have any
questions with respect to granting us a proxy to vote your shares at the
annual meeting.
INFORMATION ABOUT THIS PROXY STATEMENT
We sent you this proxy statement and the proxy card on behalf of our
board of directors who are soliciting a proxy from you to vote your shares at
the annual meeting. This proxy statement summarizes information we are required
to provide to you and is designed to assist you in voting your shares. On
, 2000, we began mailing the proxy materials to all stockholders of
record at the close of business on April 30, 2000.
PROPOSALS TO BE CONSIDERED BY YOU AT THE ANNUAL MEETING
At the annual meeting, we will be asking you to:
PROPOSAL NO. 1: Elect five directors, a majority of whom must be
"independent" as described in this proxy statement
under the section entitled "Election of Directors";
PROPOSAL NO. 2: Ratify our selection of KPMG LLP as our principal
independent public accountant for 2000;
PROPOSAL NO. 3: Approve and adopt the Agreement and Plan of Merger
we have signed with Inland Commercial Property
Management, Inc. and Inland Real Estate Advisory
Services, Inc. and their respective parents; and
PROPOSAL NO. 4: Amend certain provisions of our governing charter
as described more fully in the section below
entitled "Amendment of our Governing Charter."
2
<PAGE> 17
INFORMATION ABOUT VOTING
You may vote your shares at the annual meeting only if you are a
stockholder of record at the close of business on April 30, 2000. Each share is
entitled to one vote. As of April 30, 2000, there were shares
outstanding.
You may grant us your proxy to vote on the proposals presented at the
annual meeting in one of three ways:
- - BY PROXY CARD: You can vote your shares by signing, dating and
returning the enclosed proxy card. If you do this, the individuals
named on the card will vote your shares in the manner you
indicate. You may specify on your proxy card how you would like
your shares voted. If you do not indicate instructions on the card,
your shares will be voted for the election of the individuals
nominated for directors; for the selection of KPMG LLP as our
principal independent public accountant for 2000; for the approval
of the merger; and for the amendments to our governing charter;
or
- - BY TELEPHONE: You can vote your shares by granting us your
proxy by telephone. To do so, please call the toll free number 1-
800- and follow the recorded instructions; or
- - ELECTRONICALLY: You can vote your shares by granting us your
proxy over the Internet. To do so, go to the Website
www. .com/ and follow the instructions
provided on the Website.
Additionally, you may come to the annual meeting and cast your vote in
person. If you grant us a proxy, you may nevertheless revoke your proxy at any
time before it is exercised by: (1) sending notice to our secretary, Kelly
Tucek, in writing; (2) providing us with a later-dated proxy, electronically, by
telephone or by mail; or (3) attending the annual meeting in person and voting
your shares. Merely attending the annual meeting, without further action, will
not revoke your proxy. Your proxy designation by telephone or Internet
authorizes the named proxies in the same manner as if you marked, signed, dated
and returned the proxy card. If you choose to vote your shares by telephone or
internet, there is no need for you to mail back your proxy card.
QUORUM; TABULATION OF VOTES
We have hired an independent proxy solicitor, Beacon Hill Partners,
Inc., to solicit proxies on the board's behalf with respect to the matters to be
voted upon at the annual meeting. Votes cast by proxy or in person at the annual
meeting will be tabulated by an inspector of election appointed by Beacon Hill.
The inspector will determine whether or not a quorum is present. In order for a
quorum to be present and, consequently, for action to be taken at the annual
meeting, stockholders owning a majority of our issued and outstanding shares
must be present at the meeting either in person or by proxy. For purposes of
determining whether a quorum exists, abstentions will be
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<PAGE> 18
counted as shares that are present at the meeting. Abstentions will not count
towards approval of the merger.
NUMBER OF VOTES NECESSARY FOR EACH PROPOSAL TO BE APPROVED
- - The five individuals receiving the highest number of votes will be
elected as directors, provided that a majority of these individuals
must be "independent." To be "independent" a director must meet the
requirements described in this proxy statement under the section
entitled "Election of Directors."
- - Approval of the proposal to ratify our selection of KPMG LLP requires
the affirmative vote of a majority of the votes actually cast on the
proposal.
- - Approval of the proposal to approve and adopt the Agreement and Plan of
Merger with IREAS, ICPM and their respective parents, and the proposal
to amend certain provisions of our governing charter requires the
affirmative vote of a majority of the shares of our issued and
outstanding stock.
PLEASE VOTE YOUR SHARES BY GRANTING US YOUR PROXY BY TELEPHONE,
ELECTRONICALLY OR BY COMPLETING, SIGNING AND DATING THE ACCOMPANYING PROXY CARD
AND RETURNING IT IN THE ENCLOSED POSTAGE- PAID ENVELOPE WHETHER OR NOT YOU PLAN
TO ATTEND THE MEETING.
COSTS OF PROXIES
We have engaged Beacon Hill to solicit proxies for the annual meeting
on the board's behalf. In connection with the performance of its services, we
will pay Beacon Hill: (i) a one-time set-up fee of $7,500; (ii) $3.90 per call
placed by Beacon Hill which results in Beacon Hill actually speaking to a
stockholder of ours and asking the stockholder to vote its shares; and (iii)
$1.50 per call made to directory assistance to get the phone number of a
stockholder of ours. Additionally, we will reimburse Beacon Hill for the costs
of printing and mailing the proxy materials to our stockholders and the travel
costs of sending an inspector of elections to our annual meeting. Further,
proxies may be solicited by our directors and officers and the officers and
employees of affiliates of The Inland Group, Inc. None of these individuals will
receive additional compensation for doing so, but we may be reimburse them for
out-of-pocket expenses associated with the solicitation.
OTHER MATTERS
We are not aware of any other matter to be presented at the annual
meeting. If, however, any other matter properly comes before the annual meeting,
the people appointed by you as proxies are authorized to vote on these matters
at their discretion.
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WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy any reports,
statements or other information we file with the Commission at the SEC's public
reference rooms located at: Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; Seven World Trade Center, Suite 1300, New York, New York
10048; and The Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the Commission at 1-800-SEC-0330 for further
information regarding the public reference rooms. Our Commission filings are
also available to the public on the website maintained by the Commission at
"http://www.sec.gov."
INFORMATION TO RELY UPON WHEN CASTING YOUR VOTE
You should rely only on the information contained in this proxy
statement or incorporated by reference. No person has been authorized to give
any information or to make any representations other than those contained in or
incorporated by reference in this proxy statement in connection with the
solicitation made by this proxy statement and, if given or made, the information
or representations must not be relied upon as having been authorized by us. The
delivery of this proxy statement will not, under any circumstances, create an
implication that there has not been a change in the facts set forth in this
proxy statement or in our affairs since the date of this proxy statement. This
proxy statement does not constitute a solicitation by anyone in any jurisdiction
in which the solicitation is not authorized or in which the person making the
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make a solicitation.
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<PAGE> 20
SUMMARY
The following is a summary of the proposals that you will be asked to
vote on at the annual meeting. This summary does not contain all of the
information that you may consider important for making your decision. More
detailed information is included later in this proxy statement. Therefore, you
should read this proxy statement entirely as well as the documents that are
attached as appendices before you vote.
ELECTION OF DIRECTORS
Our governing charter requires us to have at least three, but not more
than nine directors, a majority of whom must be "independent." We currently have
a five member board, three of whom are independent. Each board member serves for
a term of one year or until his or her successor is elected. We are proposing to
reelect each of our existing board members. A biography for each board member
and additional information about our board and our management team is contained
under the heading "Election of Directors."
RATIFY SELECTION OF OUR INDEPENDENT ACCOUNTANT
Our board selects our independent public accountant annually and asks
stockholders to ratify the selection. However, if the stockholders do not ratify
the selection, we will not seek to replace the firm selected by our board.
Instead, our board will take the lack of ratification into account in making its
selection for the following year.
APPROVAL OF THE MERGER
Background. We are a real estate investment trust that invests in
"Neighborhood Retail Centers" and "Community Centers" located within a 400 mile
radius of our headquarters in Oak Brook, Illinois, as well as single-user retail
properties located throughout the United States. Neighborhood Retail Centers
generally are up to 100,000 square feet and Community Centers generally range
from 100,000 to 300,000 square feet. We lease space primarily to tenants that
sell household and other goods to meet day-to-day needs of residents living in
close proximity to the center. As of the date of this proxy statement, we own
119 retail properties and invested in one retail property currently under
development. The properties encompass approximately 9.4 million gross leasable
square feet.
Since our inception in 1994, ICPM has served as our property manager
responsible for leasing the space at each of our properties, collecting rents
and performing routine maintenance work that is not otherwise the tenant's
responsibility. For ICPM's services, we pay a fee of up to 4.5% of the gross
revenue from each property that it manages. In 1999, we paid to ICPM property
management fees of $4,869,514. The estimated property management fees that we
would incur during the next five years if our stockholders do not approve the
merger are summarized in the chart below:
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<PAGE> 21
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year 2000 2001 2002 2003 2004
---- ---- ---- ---- ----
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property
Management $6,342,971 $6,985,763 $7,340,181 $7,886,825 $8,386,326
Fee*
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Assumes growth in our property portfolio funded by our distribution
reinvestment program and retained capital.
Likewise since inception, IREAS has served as our advisor. Since we do
not have any employees, IREAS has been responsible for our day-to-day operations
including negotiating the acquisition of our properties, overseeing ICPM,
administering our bookkeeping and accounting functions and consulting with our
board on policy decisions. For these services we pay an asset management fee
based on the total book value of our assets that are invested. For 1999, we paid
to IREAS asset management fees of $4,193,068. The estimated asset management
fees that we would incur during the next five years if our stockholders do not
approve the merger are summarized in the chart below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year 2000 2001 2002 2003 2004
---- ---- ---- ---- ----
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asset
Management $5,122,542 $5,523,660 $5,718,214 $6,023,081 $6,424,375
Fee*
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* IREAS is entitled to charge a fee of up to 1% of the total book value of our
assets, however over the past three years it has charged a fee that averaged
only 0.41% and this chart assumes that IREAS would charge a fee of 0.5%. The
estimated fees indicated in the chart could be doubled if IREAS charged the
maximum allowable fee. Also, the chart assumes growth in our property portfolio
funded by our distribution reinvestment program and retained capital.
In addition to the asset management fee, we are required to pay to
IREAS a property disposition fee and a subordinated incentive fee payable on
sale of a property. The disposition fee is equal to 3% of the contract sales
price of the property and the incentive fee can be a maximum of 15% of the net
proceeds from the sale of the property. IREAS is also required to reimburse us a
portion of the asset management fee under certain circumstances. See "THE MERGER
- - IREAS Advisory Agreement."
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<PAGE> 22
The Merger. The merger agreement provides that subject to certain
conditions, Inland Advisors, Inc. and Inland Management Corporation will merge
with and into IREAS and ICPM, respectively, and following the merger, the
separate existence of Inland Advisors, Inc. and Inland Management Corporation
will cease and IREAS and ICPM will continue as the surviving corporations and as
our wholly owned subsidiaries. At the effective time of the merger, which shall
be the date and time of filing of a Certificate of Merger with the Secretary of
State of Illinois (the "Effective Time"), and subject to the terms and
conditions set forth in the merger agreement, we will issue to IREIC 2,652,683
shares of our common stock and we will issue to TIPMG 3,529,135 shares of our
common stock. The Effective Time is currently expected to occur as soon as
practicable after the annual meeting but after June 30, 2000, provided our
stockholders approve and adopt the merger agreement at the annual meeting and
all other terms and conditions of the merger agreement are satisfied.
We formed Inland Advisors, Inc. and Inland Management Corporation,
solely to facilitate the tax-free nature of the merger. Prior to the merger,
neither company has had, or will have, any operations. Our principal executive
offices are located at 2901 Butterfield Road, Oak Brook, Illinois 60523. Our
phone number is (630) 218-8000.
The Special Committee's and Board's Recommendation. Two of our
directors, Messrs. Parks and Cosenza, are officers, directors and shareholders
of The Inland Group, Inc. ("TIGI"), the ultimate owner of IREAS and ICPM.
Therefore, Messrs. Parks and Cosenza are subject to conflicts of interest in
evaluating the merger. Accordingly, our board appointed a special committee,
comprised of all three independent directors, to evaluate and make
recommendations with respect to the merger. The special committee, which
retained its own independent counsel, unanimously recommended approval of the
merger agreement to our board and to our stockholders. Following the
recommendation of the special committee, the board unanimously approved the
merger agreement and recommended that the stockholders of the Company approve
the merger agreement. The special committee and the board determined that the
merger is in the best interests of our stockholders. In connection with their
recommendation, the special committee and the board each adopted the analyses
and findings of the special committee's financial advisor, First Union
Securities, Inc. (f/k/a EVEREN Securities, Inc.) ("First Union").
Opinion of Financial Advisor. First Union provided its opinion to the
special committee that, as of the date of the opinion, the consideration to be
paid by us to the shareholders of IREAS and ICPM was fair from a financial point
of view to us and our stockholders.
The full text of First Union's written opinion, dated as of March 17,
2000, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion, is attached hereto as
Appendix B. First Union's opinion does not constitute its recommendation as to
how any stockholder should vote with respect to the merger. You should read
First Union's opinion in its entirety. See "THE MERGER - Opinion of the
Financial Advisor."
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<PAGE> 23
We agreed to pay First Union non-refundable fees totaling $550,000 in
connection with its services as financial advisor to the special committee and
to us as well as for rendering the opinion. We also agreed to reimburse First
Union for up to $25,000 of its reasonable out-of-pocket expenses, including
attorneys' fees, and to indemnify First Union against certain liabilities,
including certain liabilities under the federal securities laws. See "THE
MERGER - Opinion of the Financial Advisor."
Purpose and Reasons for the Merger. We decided to acquire IREAS and
ICPM and to become self-administered for a number of reasons. First, becoming
self-administered will make our management structure consistent with those of
REITs which trade on a national exchange or through an electronic quote service.
Although we believe that current market conditions dictate that it would not be
prudent to list our shares for trading on a national exchange at this time, we
anticipate listing our shares in the future, because, under the appropriate
circumstances, listing our shares will increase stockholder return and enhance
our ability to raise capital. Our board believes that investment analysts and
investors specializing in real estate securities have a preference for companies
that are self-administered as opposed to managed and operated by third-parties.
Thus, the board views the merger with IREAS and ICPM as a key step in
positioning to list our shares on a national exchange.
Additionally, we believe the merger will be accretive to our funds from
operations (as adjusted for the accounting impact of the merger consideration)
since we will no longer be required to pay IREAS asset management fees and ICPM
property management fees. Further, the merger will allow us to retain the
services of key members of our management team who have overseen our rapid
growth from a start-up company at the end of 1994 to a company with $124 million
in revenues for the year ended December 31, 1999. We also believe that
transforming TIGI's affiliates from fee-based providers of property management
and advisory services to our stockholders will more closely align their
interests with those of our stockholders. See "THE MERGER - Background of the
Merger."
Conflicts of Interest. In considering our board's recommendation
regarding the merger, you should be aware that certain of our officers and
directors have interests in connection with the merger which may present them
with actual or potential conflicts of interest. These potential conflicts are
described in more detail under "THE MERGER Interest of Certain Persons in the
Matters to be Acted Upon."
Conditions to the Merger, Termination and Expenses. Each party's
obligation to effect the merger is subject to a number of customary conditions,
including with respect to one or both parties: (i) approval of the merger
agreement by holders of a majority of our outstanding shares of common stock;
(ii) receipt of all required consents and approvals; (iii) the truth and
accuracy, in all material respects, of the representations and warranties
contemplated by the merger agreement and except where the failure to be true and
correct would not, in the aggregate: (X) have a material adverse effect on us;
or (Y) prevent or materially delay the completion of the merger; (iv) the
execution of a Lease Agreement with TIGI with respect to our use of office space
previously used by IREAS and ICPM; (v) the execution of a License Agreement with
respect to our continued use of the "Inland
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<PAGE> 24
Real Estate Corporation" trade name, our corporate logo and use of certain
intellectual property and software; (vi) the execution of a Services Agreement
with respect to our use of certain administrative employees of IREIC and TIPMG
and their affiliates; and (vii) the execution of employment agreements with
those individuals that will become our executive officers. Any or all of the
conditions that have not been satisfied may be waived (other than the condition
that the merger agreement shall have been approved by our stockholders). See
"THE MERGER - Agreement and Plan of Merger."
At any time prior to the Effective Time, the merger agreement may
be terminated by the mutual written consent of the parties. In addition, the
merger agreement may be terminated if, prior to the Effective Time, a court or
other governmental entity permanently enjoins, restrains or prohibits the merger
in a final and non-appealable order. See "THE MERGER - Agreement and Plan of
Merger."
Federal Income Tax Consequences. In the opinion of our counsel, the
consummation of the merger will not be a taxable event for federal income tax
purposes for our stockholders. Additionally, following the merger we expect to
continue to be taxed as a REIT for federal income tax purposes.
Accounting Treatment. The merger consideration will be treated
as an expense for terminating our advisory agreement with IREAS and
our property management agreements with ICPM.
Market Prices of Common Stock and Dividends. There is no established
public trading market for our common stock. At the record date, there were
approximately ___ holders of record of common stock and approximately ____
persons or entities holding common stock in nominee name. We declared and paid
distributions to our stockholders totaling $0.89 per share during the fiscal
year ended December 31, 1999. A total of $0.66 of these distributions were
taxable as ordinary income. The remainder constituted a return of capital for
tax purposes, which reduces each stockholder's tax basis in its shares and will
cause more gain or less loss on the sale of the shares.
AMENDMENT OF OUR GOVERNING CHARTER
Our Second Articles of Amendment and Restatement is our charter, on
file with the Secretary of State of Maryland, which governs our corporate
activities. Currently, our charter contemplates us being advised and managed by
a third party advisor and property manager. If you approve the merger and the
conditions to the merger are met, we will become a self-administered REIT.
Accordingly, our board has adopted certain amendments to our charter to ensure
that our corporate governance instruments properly reflect the effects of
becoming a self-administered REIT, by eliminating references in our Articles to
"Advisor" or "Sponsor" or provisions governing our relationship with an
"Advisor" or a "Sponsor." Approval of the amendments to our charter are also
contingent upon our stockholders approving and adopting the merger agreement.
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<PAGE> 25
Additionally, our governing charter limits the number of any class of
shares of our stock that any person or entity may "beneficially own" to not more
than 9.8% of that class of our stock. TIGI as the ultimate parent of IREIC and
TIPMG and certain individuals and entities affiliated with TIGI, will be deemed
to beneficially own all of the shares of stock which we issue pursuant to the
merger. The number of shares we issue will likely exceed the 9.8% limitation by
a small amount (depending on the number of shares outstanding immediately prior
to the completion of the merger). Our board has the authority to waive the
ownership limitation so long as the level of ownership will not adversely affect
our tax status as a REIT. If the merger is approved, our board will grant this
waiver. Our board has adopted certain amendments to our charter clarifying the
board's authority to grant a waiver to the ownership limitation to those persons
or entities whose beneficial ownership of our stock will exceed the ownership
limitation as a result of the shares we will issue in connection with the
merger.
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<PAGE> 26
ELECTION OF DIRECTORS
OUR BOARD OF DIRECTORS
Our board of directors consists of five individuals. A majority of
these individuals must be "independent" which means that the individual:
- - is not affiliated with us or TIGI whether by ownership of, ownership
interest in, employment by, any material business or professional
relationship with, or serving as an officer or director of, TIGI or its
affiliates;
- - does not serve as a director for more than two other real estate
investment trusts organized by us or TIGI or its affiliates; and
- - performs no other services for us, except as a director.
Individuals meeting this standard are referred to as our "Independent
Directors."
The nominees for election to our board of directors as Independent
Directors are:
ROLAND W. BURRIS 62. Independent Director since January 1996. Mr.
Burris is serving as "Of Counsel" to the Chicago law firm of Buford, Peters &
Ware, LLC. Prior to joining Buford, Peters & Ware, LLC, he was the Managing
Partner of Jones, Ware & Grenard. His areas of practice are business
transactions, real estate, estate planning, probate and trust, environmental and
consumer affairs. From 1973 to 1995, Mr. Burris was involved in the State of
Illinois government including holding the positions of State Comptroller and
Attorney General of the State of Illinois. Mr. Burris completed his
undergraduate studies at Southern Illinois University and studied international
law as an exchange student at the University of Hamburg in Germany. Mr. Burris
received his J.D. from Howard University. Mr. Burris served on many boards
including the Illinois Criminal Justice Authority, the Financial Accounting
Foundation, the Law Enforcement Foundation of Illinois, the African American
Citizens Coalition on Regional Development, the Boy Scouts of America and the
Illinois State Justice Commission for which he served as chair. He is also
serving as an adjunct professor in the Master of Public Administration Program
at Southern Illinois University.
JOEL G. HERTER 61. Independent Director since May 1997. Mr. Herter is a
senior consultant and advisor to Wolf & Company LLP ("Wolf") where he has been
employed since 1978. Mr. Herter graduated from Elmhurst College in 1959 with a
Bachelor of Science Degree in business administration. His business experience
includes accounting and auditing, tax and general business services including
venture and conventional financing, forecasts and projections, and strategic
planning to a variety of industries. From 1978 to 1991, Mr. Herter served as
managing partner of Wolf. Mr. Herter is a member of the American Institute of
Certified Public Accountants and the Illinois CPA Society and was a past
President and director of the Elmhurst Chamber of Commerce and was appointed by
former Illinois Governor James Thompson of the State of Illinois to serve on
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<PAGE> 27
the 1992 World's Fair Authority. Mr. Herter currently serves as chairman of the
Board of Trustees, Elmhurst Memorial Hospital, Elmhurst College; director of
Suburban Bank and Trust Company; chairman of the DuPage Water Commission;
treasurer to the House Republican Campaign Committee and Friends of Lee Daniels
Committee; treasurer of Citizens for Illinois Attorney General, Jim Ryan. Mr.
Herter has also been appointed by former Illinois Governor Jim Edgar to the
Illinois Sports Facilities Authority, and continues to serve thereon.
HEIDI N. LAWTON 37. Independent Director since October 1994. Ms. Lawton
is managing broker and owner of Lawton Realty Group, an Oak Brook, Illinois real
estate brokerage firm which she founded in 1989. Lawton Realty Group specializes
in commercial, industrial and investment real estate brokerage. Ms. Lawton is
responsible for all aspects of the operations of Lawton Realty Group. She also
structures real estate investments for clients, procures partner/investors,
acquires properties and obtains financing for development. Prior to founding
Lawton Realty Group, and while she was earning her B.S. degree in business
management from the National College of Education, she was managing broker for
VCR Realty located in Addison, Illinois. While at VCR Realty, she was engaged
primarily in brokerage of industrial and commercial properties. She also
provided property management services, including leasing, for a portfolio of
more than 100 properties, including condominium complexes, industrial
properties, apartment complexes and small retail shopping centers. At the
beginning of her career in real estate, Ms. Lawton served as a general
contractor for the building and selling of single-family homes as well as a
retail center in Lombard, Illinois. As a licensed real estate professional since
1982, she has served as a member of the Certified Commercial Investment Members,
Director of the Northern Illinois Association of Commercial Realtors, Commercial
Director of the DuPage Association of Realtors, and an Independent Director for
CCS Mortgage, a privately held company that provides mortgages and title
insurance.
The names and biographies of the remaining nominees to our board of
directors are:
ROBERT D. PARKS 56. Mr. Parks has been our president, chief executive
officer, chief operating officer and director since our formation in 1994. Mr.
Parks joined The Inland Group, Inc. and its affiliates in 1968 and is one of its
four original principals. Mr. Parks is a director of The Inland Group, Inc., is
chairman of IREIC, is a director of both Inland Securities Corporation and
IREAS, and is chairman and an affiliated director of Inland Retail Real Estate
Trust, Inc. Mr. Parks is also a director and president of Inland Retail Real
Estate Advisory Services, Inc., the advisor to Inland Retail Real Estate Trust,
Inc. Mr. Parks is responsible for the ongoing administration of existing
investment programs, corporate budgeting and administration for IREIC. In this
capacity he oversees and coordinates the marketing of all of its investments
nationwide and has overall responsibility for investor relations. Mr. Parks
received his B.A. degree from Northeastern Illinois University in 1965 and his
M.A. from the University of Chicago in 1968. He is a member of the Real Estate
Investment Association and the National Association of Real Estate Investment
Trusts.
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<PAGE> 28
G. JOSEPH COSENZA 56. Mr. Cosenza has been with The Inland Group, Inc.
and its affiliates since 1968 and is one of its four original principals. He has
been a director since our formation in 1994. Mr. Cosenza is a director and vice
chairman of The Inland Group, Inc. and oversees, coordinates and directs many of
Inland's enterprises. He is a director of IREAS and Inland Retail Real Estate
Advisory Services, the advisor to Inland Retail Real Estate Trust, Inc. In
addition, Mr. Cosenza is chairman and president of Inland Real Estate
Acquisitions, Inc., the Inland affiliate that negotiates our acquisitions. As
such, he immediately supervises a staff of nine persons who engage in property
acquisition. Mr. Cosenza has been a consultant to other real estate entities and
lending institutions on property appraisal methods. Mr. Cosenza received his
B.A. degree from Northeastern Illinois University and his M.S. degree from
Northern Illinois University. From 1967 to 1968, he taught in the La Grange
Illinois School District and from 1968 to 1972, he served as Assistant Principal
and taught in the Wheeling, Illinois School District. Mr. Cosenza has been a
licensed real estate broker since 1968 and an active member of various national
and local real estate associations, including the National Association of
Realtors and the Urban Land Institute. Mr. Cosenza has also been chairman of the
board of American National Bank of DuPage, and has served on the board of
directors of Continental Bank of Oakbrook Terrace. He is presently a director of
Westbank in Westchester and Hillside, Illinois.
Our board of directors met 12 times during 1999. The special committee
our board established to evaluate and negotiate the merger met eight times
during 1999. Our board has established an audit committee comprised of Ms.
Lawton, Mr. Herter and Mr. Burris. This committee met five times during 1999.
The committee is responsible for recommending the engagement of our independent
accountant, approving services performed by our independent accountant and
reviewing and evaluating our accounting system and internal controls. Our board
has not established any other committees such as nominating and compensation
committees.
Under our Bylaws, nominations for the election of directors may be made
by any of our stockholders, but only if written notice of the stockholder's
intent to make the nomination has been received by us at our principal executive
offices between 75 - 180 days prior to the anniversary of the preceding year's
annual meeting. If, however, the date of the annual meeting is advanced by more
than 30 days or delayed by more than 60 days from the anniversary date, notice
by the stockholder must be delivered between 60 - 90 days prior to the annual
meeting or on the 10th day following the day on which public announcement of the
annual meeting is first made. The stockholder's notice must set forth:
- - the name of each person the stockholder proposes to nominate for
election or reelection as a director and any other information that is
required to be disclosed in a solicitation of proxies for election of
directors pursuant to Regulation 14A of the Securities Exchange Act of
1934; and
- - the name and address of the stockholder as it appears on our books and
that of any beneficial owner, as well as the class and number of shares
of stock owned directly or indirectly by the stockholder.
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<PAGE> 29
Notwithstanding the above, if the number of directors to be elected to
the board is increased and there is no public announcement naming all of the
nominees or specifying the size of the increased board at least 70 days prior to
the anniversary of the preceding year's annual meeting, the requisite notice
will be considered timely, but only with respect to nominees for any new
positions created by the increase, if it is delivered to our secretary at our
principal executive offices not later than the close of business on the 10th day
following the day on which public announcement of the upcoming annual meeting is
first made by us.
OUR EXECUTIVE OFFICERS
The following are our current executive officers:
ROBERT D. PARKS 56. Mr. Parks has been our president, chief executive
officer, chief operating officer and director since our formation in 1994. Mr.
Parks' biography is included above under the heading "Our Board of Directors"
where biographies of each of the director nominees are provided.
ROBERTA S. MATLIN 55. Ms. Matlin has been our vice president -
administration since March 1995. Ms. Matlin joined The Inland Group, Inc. in
1984 as director of investor administration and currently serves as senior vice
president of IREIC directing its day-to-day internal operations. Ms. Matlin is a
director of IREIC, Inland Securities Corporation and IREAS and is vice president
- - administration of Inland Retail Real Estate Trust, Inc. Prior to joining The
Inland Group, Inc., Ms. Matlin was employed for eleven years by the Chicago
Region of the Social Security Administration of the United States Department of
Health and Human Services. Ms. Matlin received her B.A. degree from the
University of Illinois in 1966 and is registered with the NASD as a general
securities principal.
KELLY TUCEK 37. Ms. Tucek has been our secretary, treasurer and chief
financial officer since August 1996. Ms. Tucek joined The Inland Group, Inc. in
1989 and is an assistant vice president of IREIC. Ms. Tucek is responsible for
IREIC's Investment Accounting Department which is responsible for accounting and
all public limited partnership accounting functions along with quarterly and
annual Commission filings. Prior to joining The Inland Group, Inc., Ms. Tucek
was on the audit staff of Coopers & Lybrand (now known as
PricewaterhouseCoopers) since 1984. She received her B.A. degree in Accounting
and Computer Science from North Central College in 1984.
If the merger is approved and our nominees for directors are elected,
our board will appoint Mr. Parks to be chairman and the following individuals to
be our executive officers:
NORBERT J. TREONIS 49, President and Chief Executive Officer. Mr.
Treonis joined The Inland Group, Inc. and its affiliates in 1975 and is
currently a Director of The Inland Group, Inc., as well as Chairman and Chief
Executive Officer of Inland Property Management Group, Inc. and Chairman of the
Board of Directors of Inland Commercial Property Management, Inc. He serves on
the Board of Directors of all Inland subsidiaries involved in property
management, acquisitions
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<PAGE> 30
and maintenance of real estate, including Mid-America Management Corp.,
Metropolitan Constructions Services, Inc., and American Building Services, Inc.
He has the responsibility for the overall management and leasing of all
apartment units, retail, industrial and commercial properties nationwide for
Inland affiliates. Mr. Treonis is a licensed real estate broker. He is a past
member of the Board of Directors of the American National Bank of DuPage, the
Apartment Building Owners and Managers Association of Illinois, the National
Apartment Association, and the Chicagoland Apartment Association.
MARK ZALATORIS 42, Chief Financial Officer and Treasurer. Mr. Zalatoris
joined The Inland Group, Inc. in 1985 and currently serves as Vice President of
IREIC. He is also a Director, Vice President and Secretary of Inland Securities
Corporation. His responsibilities include the coordination of due diligence
activities by selling broker/dealers and limited partnership asset management,
with special emphasis on the financing activities of the various investment
programs and partnerships. Mr. Zalatoris is also a Director of Inland Great
Lakes, L.L.C., a condominium conversion company, in which IREIC holds a 20%
ownership interest. Prior to joining Inland, Mr. Zalatoris was a member of the
tax department at Arthur Young & Company (now known as Ernst & Young L.L.P.) and
spent two years with VMS Realty structuring tax-advantaged real estate limited
partnership investments. In 1979 he graduated from the University of Illinois
where he received a Bachelor's Degree in Finance and in 1981 a Master's Degree
in Accounting and Taxation. He is a Certified Public Accountant and holds a
General Securities License. He is also a member of the National Association of
Real Estate Investment Trusts.
SAMUEL A. ORTICELLI 46, General Counsel and Secretary. Mr. Orticelli
has been our assistant secretary since March 1995. Mr. Orticelli joined The
Inland Group, Inc. in April 1984. He is a Vice President and Senior Counsel of
The Inland Real Estate Group, Inc. He has been involved in all aspects of our
business since our formation, including real estate acquisitions and financings,
securities law and corporate governance matters, leasing and tenant matters, and
litigation management. He has had the same responsibilities for Inland Real
Estate Investment Corporation and Inland Securities Corporation, as well as
Inland Retail Real Estate Trust, Inc., a REIT, since its formation in February
1999. He received his B.S. degree in accounting from Marquette University in
Milwaukee, Wisconsin in 1975 and his law degree from DePaul University in
Chicago, Illinois in 1978. Prior to joining TIGI, Mr. Orticelli was associated
with the Chicago law firm of Katz, Randall & Weinberg, specializing in real
estate transactions. He is a member of the Illinois State Bar Association and
served on the Corporate Law Department's Section Council (1995-1998) and the
Real Estate Law Section Council (1989-1994). He is past president of the
Justinian Society of Lawyers DuPage Chapter (1997-1998).
WILLIAM W. ANDERSON 41, Director of Acquisitions. Mr. Anderson joined
The Inland Group, Inc. in 1985 as a real estate broker for Inland Commercial
Property Sales, Inc., where he was involved in transactions of over $37 million
worth of commercial and investment properties, until 1991. In 1996 he joined
Inland Real Estate Acquisitions, Inc. and as an Assistant Vice President has
responsibilities for the analysis, negotiation and closing of properties which
include shopping centers, apartments, and net leased commercial properties.
During 1991 - 1993, Mr. Anderson was
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employed at The Prudential Preferred Property Sales where he designed and
implemented marketing programs for homebuilders, developers, and individuals
and, in 1994, rejoined Inland Residential Sales Corporation with
responsibilities for condominium development and supervising other staff
members. Prior to joining Inland in 1985, Mr. Anderson was employed at Sheldon
F. Good & Company specializing in commercial and industrial facilities and was
involved in the firm's auction subsidiary. In 1980 he graduated from Northern
Illinois University with a Bachelor of Science degree in finance with an
emphasis in real estate. He is a member of the National Association of Realtors
and the International Council of Shopping Centers.
COMPENSATION PAID TO OUR DIRECTORS AND OFFICERS
Director Compensation. We pay our Independent Directors an annual fee
of $15,000 plus $500 for each board and committee meeting attended in person and
$250 for each board and committee meeting attended by telephone. In addition,
each year on the date of our annual meeting, each Independent Director then in
office receives a grant of options to purchase 500 shares of our stock at an
exercise price equal to the then fair market value of the stock. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Messrs. Parks and
Cosenza do not receive any fees or other remuneration for serving as our
directors because each of them is affiliated with IREAS or its affiliates.
Executive Compensation. Currently, our executive officers do not
receive compensation for services they render to us. Each of our executive
officers are employees, officers and/or directors of IREAS and/or its affiliates
and are compensated by these entities, in part, for the services they render to
us. We pay IREAS and its affiliates certain fees in exchange for services they
provide to us. These fees are more fully described below under the heading
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." If our stockholders approve
the merger agreement, the individuals set forth above will become our executive
officers and employees and, as a result, will receive compensation from us. See
"THE MERGER Agreement and Plan of Merger," for a description of the compensation
each executive officer will receive if the merger is completed.
PROPOSAL NO. 1: TO ELECT FIVE INDIVIDUALS TO SERVE AS DIRECTORS TO HOLD OFFICE
UNTIL THE NEXT ANNUAL MEETING OF STOCKHOLDERS, OR OTHERWISE AS PROVIDED IN OUR
SECOND ARTICLES OF AMENDMENT AND RESTATEMENT.
Recommendation of the Board. Our board of directors recommends and
nominates Joel G. Herter, Heidi N. Lawton, Roland W. Burris, Robert D. Parks and
G. Joseph Cosenza for election as directors to serve until the next annual
meeting of stockholders or otherwise as provided in our Second Articles of
Amendment and Restatement.
Vote Required. The five nominees receiving the highest vote totals (a
majority of which must be Independent Directors) cast by stockholders present in
person or by proxy and eligible to vote at the Meeting, a quorum being present,
will be elected as our Directors.
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RATIFICATION OF KPMG LLP
KPMG LLP
Our board selects our independent public accountant annually and asks
stockholders to ratify the selection. We believe that KPMG LLP is knowledgeable
about our operations and accounting practices and is well qualified to act in
the capacity of our principal independent accountant. Therefore, we have
selected KPMG LLP to act as our principal independent accountant to examine our
consolidated financial statements for 2000. Although our selection of an
independent accountant does not require your approval, we believe it is
desirable to obtain your concurrence with our selection. Due to the difficulty
and expense involved in retaining another independent accounting firm on short
notice, we do not contemplate appointing another firm to act as our independent
accountant for 2000 if you do not concur with our appointment of KPMG LLP.
Instead, we will consider your vote as advice in making our selection of our
independent accountant next year.
Representatives of KPMG LLP are expected to be present at the annual
meeting. They will have the opportunity to make a statement if they so desire
and will be available to respond to any appropriate questions.
PROPOSAL NO. 2: TO RATIFY OUR SELECTION OF KPMG LLP AS OUR PRINCIPAL INDEPENDENT
ACCOUNTANT FOR 2000.
Recommendation of the Board. Our board of directors recommends that you
vote "FOR" the following resolution which will be presented for a vote at the
annual meeting:
RESOLVED, that the stockholders ratify the appointment by our
board of directors of KPMG LLP to serve as our principal independent
accountant for 2000.
Vote Required. Provided a quorum is present, the affirmative vote of a
majority of the votes actually cast by stockholders on this proposal is required
to adopt the foregoing resolution.
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THE MERGER
PURPOSE AND REASONS FOR THE MERGER
Since our inception in 1994, IREAS has been our advisor and ICPM has
been our property manager. IREAS has generally been responsible for our
day-to-day operations, including property acquisition, administering our
bookkeeping and accounting functions and consulting with our board on various
policy and strategic issues. ICPM has been responsible for managing our real
estate portfolio. For their services, we have paid IREAS and ICPM various fees.
See "IREAS Advisory Agreement - Compensation of IREAS" and "ICPM Property
Management Agreement - Compensation of ICPM" below. We do not have any
employees. We believe that our relationship with IREAS and ICPM served us well
when we did not have a large enough asset base to support the administrative and
other expenses associated with an in-house management team.
As our asset and revenue base has grown, however, the amount of fees
paid to IREAS and ICPM has grown to the level where we believe it is economical
for us to hire our own staff and "internalize" these functions. We believe that,
if the merger is not approved, our operating costs will exceed the operating
costs that we would incur if we were self-administered.
In addition, our board has been reviewing the desirability of listing
our stock for trading on a national stock exchange or having our stock included
for quotation on a national market system. Although we believe that current
market conditions dictate that it would not be prudent to list our shares for
trading on a national exchange at this time, we anticipate listing our shares in
the future, when it will increase stockholder return and enhance our ability to
raise capital. Our board, as part of its ongoing evaluation of whether to list
our shares, believes that investment analysts and investors specializing in real
estate securities have a preference for companies that are self-administered as
opposed to managed and operated by third-parties. Thus, the board views the
merger with IREAS and ICPM as a key step in positioning us to list our shares on
a national exchange. In fact, nearly all of the REITs which have become public
companies since 1992 have adopted a self-administered structure and a number of
existing entities have converted to self-administered structures.
Additionally, the merger should be accretive to our funds from
operations (as adjusted for the accounting impact of the merger consideration)
because we will no longer be required to pay IREAS asset management fees and
ICPM property management fees. Thus, our board concluded that the merger would
be cost-effective even if we do not list our common stock.
The board analyzed different methods for us to become self-administered
and concluded the merger to be the most cost-effective because IREAS and ICPM
constitute a readily available in-place work force that understands and has been
intimately involved with our business. Our board believed that the costs
associated with hiring a completely new staff of individuals to administer our
day-to-day operations would be higher than taking IREAS and ICPM in-house
because there would be no learning curve necessary to familiarize the employees
with all of our properties. Further, although the Advisory Agreement is
terminable by either party upon 60 days written notice, the Property
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Management Agreements for a significant number of our properties do not
terminate for another year, and hence there would be costs associated with
either terminating such agreements earlier or starting to internally manage
those properties at a later date. Further, transforming affiliates of TIGI from
fee-based providers of property management and advisory services to our
stockholders will more closely align their interests with those of our
stockholders. Additionally, we would not be able to continue to use the name
"Inland Real Estate Corporation" or our corporate logo upon termination of the
advisory agreement.
BACKGROUND OF THE MERGER
The merger proposal described in this proxy statement represents a step
in the process begun in late 1998 by our board. We had previously indicated to
our stockholders that by the end of 1999 our board would determine whether it
was in our best interest to list our shares on a national stock exchange or
include them for quotation on a national market system or to issue additional
shares in a public offering. We also had indicated that if our board concluded
that listing was not advisable, we might sell some of our individual assets or
defer listing until a later date. Thus, our board began to review these issues
and retained First Union to assist in this process.
First Union initially advised our board that due to unfavorable
investor demand for REIT stocks that developed in the latter half of 1998 and
continued in 1999 and the abundance of retail oriented publicly traded REITs
that existed, a listing of our stock was not advisable. Publicly traded REITs
experienced negative total returns of 18.8% in 1998 and 6.5% in 1999 (which
reflects a decline in share prices partially offset by distributions to
stockholders). Retail oriented publicly traded REITs experienced negative total
returns of 4.9% in 1998 and 11.8% return in 1999. In order to become a publicly
traded REIT, investors expect a 5% to 15% discount to existing publicly traded
comparables. Given the pricing discount required to list shares of our common
stock, First Union advised us not to list the shares on a national exchange at
this time. Additionally, given that the majority of publicly traded REITs are
self-administered, our structure with third party management and advisory
services would not be well received by investors.
In response to First Union's recommendations, our board and
representatives of IREAS and ICPM began to discuss the desirability of combining
IREAS and ICPM with us so that we would be structured more in line with the vast
majority of the publicly traded REITS. Since certain members of our board
(Messrs. Parks and Cosenza) have conflicts of interest in evaluating this
combination, our board formed a special committee comprised of Messrs. Roland W.
Burris and Joel G. Herter and Ms. Heidi N. Lawton. The special committee was
formed to, among other things, consider and evaluate a merger. To assist in its
review and analysis, the special committee retained outside legal counsel
separate and distinct from our outside counsel. First Union was asked to prepare
a valuation of IREAS and ICPM.
On June 16, 1999, First Union met again with our board. At this
meeting, First Union provided an update and review of the valuation analysis as
well as a preliminary discounted cash flow valuation of IREAS and ICPM.
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On September 15, 1999, the board as a whole met to discuss various
strategic alternatives available to the Company, including the merger. At this
meeting, representatives of First Union provided an overview of the REIT
marketplace and assisted the board in a review of a preliminary valuation of
IREAS and IREC. The board and First Union discussed the various valuation
methods, assumptions and comparables which First Union utilized, as well as
those which First Union felt were not applicable. At this meeting, the special
committee asked the staff of IREAS to prepare pro forma financial information
reflecting the impact that a merger might have on, among other things, our funds
from operations as well as a sensitivity analysis prepared at various pricing
multiples. This material was received by the special committee on September 17,
1999.
On September 24, 1999, the special committee held a meeting, along with
its counsel, to review the pro forma financial information prepared by the staff
of IREAS and the valuation analysis prepared by First Union. The special
committee discussed how the merger might impact the make-up of our management
team. The special committee decided to continue its due diligence.
On October 8, 1999, the special committee met again with its legal
counsel. Also present were Mr. Mark Zalatoris, Vice President of IREIC and Ms.
Cathy Wang, Asset Management Analyst of IREIC. Mr. Zalatoris and Ms. Wang
described the various financial analyses pertaining to the possible merger. The
special committee members asked numerous questions regarding the assumptions and
analyses undertaken by Mr. Zalatoris and Ms. Wang in preparing the pro forma
financial information and sensitivity analysis. Mr. Zalatoris also provided the
special committee with an initial list of individuals employed by ICPM and IREAS
who would likely become our employees following a merger. Mr. Zalatoris provided
the special committee with background information on each of these employees,
including detailed information regarding the proposed full-time executive
officers subsequent to the merger. At this meeting, it was also determined that
the special committee should meet with representatives of First Union to discuss
the valuation of the shares of our stock which would be utilized as the merger
consideration should a merger be consummated.
A subsequent meeting of the special committee was held on October 25,
1999. At this meeting, the special committee reviewed and discussed, in greater
detail, the valuation analysis of our stock prepared by First Union and the
potential synergies, strategic fit, financial benefits, personnel issues and
timing considerations related to the possible merger.
On October 29, 1999, the special committee received a letter of intent
from IREIC and TIPMG (collectively with IREIC, "Inland"), proposing a merger of
IREAS and ICPM with and into the Company. Under the terms proposed by Inland,
all of the issued and outstanding shares of IREAS and ICPM would be exchanged
for 6.9 million shares of our common stock which, based on an assumed value of
our shares equal to $11.00 per share, would value the transaction at
approximately $75.5 million.
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On November 1, 1999, the special committee met, along with its counsel
and representatives of First Union, to discuss Inland's proposal. The First
Union representatives provided the special committee with an update on First
Union's valuation analysis. The special committee reviewed the proposed merger
focusing particular attention on the valuation proposed by Inland and the
valuation range set forth in the First Union analysis. First Union explained,
and the special committee took note of, the fact that the preliminary analysis
prepared by First Union in September 1999 did not reflect approximately $71
million which was available to us for investment in real properties. First Union
explained that if one were to assume investment of these funds, the fees payable
to IREAS and ICPM would likewise increase thereby affecting the valuation of
each entity.
The special committee next met, along with its counsel, on November 19,
1999 to review an updated version of First Union's analysis. The special
committee discussed the analysis and asked First Union to analyze the degree to
which the merger would add to our funds from operations.
On November 23, 1999, the special committee and its counsel held a
meeting to review this latter analysis. The special committee decided to respond
to Inland's offer by proposing a valuation of IREAS and ICPM of $65 million.
Assuming a value of $11.00 per share, the special committee's proposal would
have resulted in our issuing approximately 5.9 million shares. Inland
subsequently rejected this offer and instead suggested reducing the price from
$75.5 million to $69.0 million.
On December 3, 1999, the special committee and its counsel held a
meeting. Counsel provided a summary of the negotiations with Inland and the
special committee again reviewed First Union's analysis. The special committee
took note of the projections (which IREAS prepared and upon which First Union
relied in preparing its analysis) which showed an increase to our funds from
operations as a result of the merger as well as the "marketplace" benefits of
being a self-administered REIT. The special committee thus concluded that the
merger was in the stockholders' best interests at a value of $69 million in the
aggregate for IREAS and ICPM. The special committee then adopted a resolution
authorizing execution of a letter of intent with Inland and the negotiation of a
definitive merger agreement. The special committee subsequently directed our
primary outside counsel to prepare a proposed merger agreement. The committee
also asked First Union to prepare a written opinion regarding the fairness of
the consideration to be paid by us in the merger.
On December 23, 1999, the special committee and its counsel held a
meeting during which counsel provided the special committee with an overview of
the structure for the proposed merger and described the changes to the merger
agreement to be delivered to our counsel on behalf of the special committee. The
special committee also provided its counsel other proposed changes to the draft
merger agreement which the special committee had received and reviewed prior to
the meeting. Thereafter, the special committee and its counsel discussed timing
issues for the proposed merger and the various steps which needed to be
undertaken to complete the merger, including finalizing negotiations with
respect to the merger agreement, the submission of preliminary proxy materials
to the Commission for its review and comment, receipt of a fairness opinion from
First Union, and the mechanics of the solicitation process to seek our
stockholders' approval of the proposed merger.
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On January 24, 2000, the special committee and its counsel held a
meeting, at which time counsel provided the special committee with a report on a
meeting held on January 21, 2000 in which counsel to the special committee, our
counsel and representatives of IREAS and ICPM discussed their collective
comments and issues on the initial draft of the merger agreement. Counsel to the
special committee reported that representatives of IREAS and ICPM asked that the
parent corporations of IREAS and ICPM receive certain registration rights in
connection with the shares issued to them as consideration for the merger. The
special committee and its counsel undertook a lengthy discussion with respect to
the type of registration rights to be granted to the parent corporations. It was
determined at such meeting that counsel to the special committee have further
discussions with both our counsel and representatives of First Union on this
matter.
On February 28, 2000, the special committee and its counsel held a
meeting during which counsel to the special committee provided the special
committee with a report on numerous meetings held between counsel to the special
committee, our counsel and counsel to IREAS and ICPM relating to the merger
agreement and the registration rights agreement, copies of which had been
provided to the members of the special committee for their review and comment
prior to this meeting. Counsel to the special committee then provided the
special committee with a detailed discussion of the significant issues remaining
in the merger agreement and the related documents including:
- the valuation of IREAS and ICPM;
- indemnification;
- the registration rights to be provided to the parents of
IREAS and ICPM;
- TIGI's license of the name "Inland Real Estate Corporation"
and logo to us;
- our lease for office space;
- employment agreements for the individuals who will be our
executive management team; and
- the services agreement between TIGI and us.
The special committee discussed First Union's decrease in the high-end
of its valuation range for IREAS and ICPM from an aggregate of $74.5 million to
$72 million. The special committee reviewed First Union's findings and took into
consideration the updated valuation ranges and questioned the assumptions
regarding First Union's analysis and its valuation. The special committee
discussed whether current factors merited a reduction in the aggregate
consideration to be paid by us. After a lengthy discussion the special committee
determined that a purchase price of $69 million remained within the range
established by First Union and if the other significant issues discussed during
this meeting were resolved in our favor, the valuation would be appropriate and
in the best interests of our stockholders.
Counsel to the special committee then outlined the minimum registration
rights that IREAS and ICPM were willing to accept. After lengthy discussion and
a report from counsel to the special committee on First Union's recommendations
for the issuance of registration rights, the special
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committee concluded that the registration rights agreement as revised was
acceptable and in the stockholders' best interests.
Next, the special committee expressed its desire to retain the name
"Inland Real Estate Corporation" even following a subsequent change in our stock
ownership and rejected TIGI's proposal for a more limited use of the name. It
was determined that counsel for the special committee, our counsel and counsel
for IREAS and ICPM should have further discussions regarding this matter and to
clarify certain provisions of the proposed office lease and the employment
agreements for our officers. The special committee reiterated its desire not to
allocate corporate overhead for senior TIGI employees and certain other TIGI
employees for a period following the merger.
Counsel to the special committee then described the indemnification
provisions of the merger agreement. The special committee concluded that
indemnification should not be limited to the shares issued to IREIC and TIPMG
and that additional indemnification from TIGI was appropriate.
On March 2, 2000, the special committee and its counsel held a meeting
during which counsel to the special committee provided the special committee
with a report on the extensive negotiations between counsel to the special
committee, our counsel and counsel to IREAS and ICPM relating to the merger
agreement and the significant issues discussed at the February 28, 2000 meeting
of the special committee.
Counsel to the special committee informed the special committee that
given First Union's revised valuation range, Inland agreed to reduce the
aggregate consideration to $68 million, through the issuance of 6,181,818 shares
of our stock. The special committee reviewed the valuation analysis and the
assumptions underlying First Union's valuation range and directed its counsel to
request that Mr. Zalatoris review the financial information and assumptions
furnished to First Union in light of the negotiated changes to the merger
agreement. The special committee requested that it receive the revised analysis,
if any, prior to the board meeting to be held on March 7, 2000 so that it may
complete its financial analysis.
Counsel to the special committee reported that, as requested by the
special committee, we will receive the exclusive right to the use of the name
"Inland Real Estate Corporation" which would continue even following a change of
control, as long as we designate ourselves as "not an affiliate of The Inland
Group, Inc." following such change of control. The special committee accepted
this proposal as reasonable.
Counsel to the special committee then reviewed the proposed services
agreement and reported that, as requested by the special committee, we will not
be charged for the services of IREIC's senior and middle level management
personnel for the first 12 months following the merger. Additionally, following
the merger, we will be entitled to utilize the services of other Inland entities
or employees at cost. Finally, we received the right to charge back to Inland
any services that our employees provide for any other Inland affiliated
entities.
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Counsel to the special committee reviewed the proposed terms of the
employment agreements for our new executive officers and the special committee
discussed comparable employment terms for similar executive officers employed by
Inland and other comparable entities. The special committee determined that the
proposed terms were fair and appropriate.
Next, the special committee discussed the real estate lease for our
space within the building where IREAS and ICPM currently operate. The special
committee reported that it had reviewed both affiliated and non-affiliated
comparable leases and found the proposed lease terms for our space to be
reasonable and favorable to us in light of current market conditions in the Oak
Brook, Illinois area.
Finally, the special committee focused on the indemnification
provisions set forth in the merger agreement and, in particular, any loss that
we might suffer in excess of the value of the shares provided to IREIC and TIPMG
as the merger consideration. Counsel to the special committee stated that
negotiations resulted in our right to receive up to the value of the stock even
if it is worth more than $68 million in the event of any indemnification claim.
Furthermore, in response to the special committee's requests, TIGI agreed to
guaranty the obligations of TIPMG, and IREIC, TIPMG and TIGI agreed to indemnify
us for 50% of the difference between the losses we incur and the fair market
value of the shares at the time of indemnification, not to exceed $34 million.
The special committee then discussed the likelihood of obtaining additional
indemnification provisions given the other negotiated changes. After a lengthy
discussion, the special committee determined that it had obtained acceptable
indemnification protections for us and our stockholders.
On March 7, 2000, our board held a meeting at which the special
committee formally recommended that the board approve and adopt the merger
agreement. At this meeting, counsel for the special committee gave an overview
of the terms of the proposed merger and the reasons necessary for the formation
of the special committee. Counsel then gave a brief summary of the deliberations
and negotiations conducted by the special committee including the special
committee's due diligence.
Counsel stated that the special committee spent a considerable amount
of time negotiating what it believed were favorable license terms for the use of
the name "Inland Real Estate Corporation" and the company logo as well as the
use of software and services of Inland affiliates. Counsel further explained
that the special committee successfully negotiated with Inland to have the
merger consideration reduced from $69 million to $68 million to address changes
in market conditions that occurred during the final weeks of negotiations, and
that the special committee believed that it had negotiated extremely favorable
indemnification protections in the event of a breach of a representation or
warranty by Inland.
Counsel went on to state that the special committee interviewed the
prospective employees of the self-administered entity and that those individuals
demonstrated a real commitment to work for us. Members of the special committee
summarized the terms of the services agreement and lease agreement that the
special committee had negotiated with TIGI. After the presentation, the special
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committee formally recommended that the board approve the merger agreement, the
board so approved and the merger agreement was then executed.
AGREEMENT AND PLAN OF MERGER
The following summarizes the material terms and provisions of the
merger agreement, a copy of which is attached as Appendix A to this Proxy
Statement and is incorporated herein by reference. This summary is qualified in
its entirety by reference to the full text of the merger agreement.
General. The parties to the merger agreement are us, Inland Advisors,
Inc. and Inland Management Corporation, two newly formed, wholly owned
subsidiaries of ours, IREAS, IREIC, the sole shareholder of IREAS, ICPM, TIPMG,
the sole shareholder of ICPM and, for purpose of guarantying the obligations of
TIPMG, TIGI. Our board of directors has authorized the execution and performance
of the merger agreement subject to the approval of our stockholders and other
customary closing conditions. In addition, the board of directors of IREIC and
TIPMG and the shareholders and directors of IREAS and ICPM have approved and
adopted the merger agreement. In connection with the merger, Inland Advisors,
Inc. will be merged into IREAS and Inland Management Corporation will be merged
into ICPM.
Effective Time. If our stockholders approve the merger agreement, and
all other conditions are satisfied or waived, the merger will become effective
upon the filing of a certificate of merger with the Secretary of State of
Illinois, which we anticipate will occur as soon as practicable after the annual
meeting, but in no case on or before June 30, 2000.
Shares Issued as Merger Consideration. In connection with the merger,
we will issue to IREIC 2,652,683 shares of our common stock, and to ICPM
3,529,135 shares of our common stock. Each share issued will contain those
rights described in the section of this proxy statement with the heading
"DESCRIPTION OF OUR SECURITIES." The shares will not be registered, and, except
as provided below, may only be transferred pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended, or pursuant to an
exemption from such registration. The merger agreement permits the transfer of
the shares to any entity that is a member of TIGI's "Affiliated Group" as that
term is defined in the Internal Revenue Code of 1986, as amended.
If the merger is completed, TIPMG and IREIC will be granted
registration rights with respect to the shares we issue as consideration for the
merger. IREIC, TIPMG or any member of TIGI's Affiliated Group to whom the shares
are transferred, will have the right to include for registration any or all of
the shares of our common stock issued in the merger on any registration
statement (other than a registration statement on Form S-4 or Form S-8) that we
file after the Effective Time, subject to underwriter cutbacks, if any.
Additionally, holders of at least 50% of the shares we issue in the merger have
a one-time right to cause us to file a registration statement registering such
shares, provided that this right will not vest until the earlier of: (i) the
sixth month anniversary of the date shares of our common stock are listed on a
national securities exchange or on the NASDAQ National Market System; (ii) our
stockholders approve a subsequent merger or consolidation or sale
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of substantially all of our assets; (iii) the acquisition of not less than 25%
of our voting equity securities by a person, or group of persons acting in
concert, that is not affiliated with TIGI; and (iv) June 7, 2001.
Conditions to the Merger. The obligations of each party to effect the
merger is conditioned on: (i) the truth and accuracy of all of the
representations and warranties made by each party; (ii) completion by each party
of its respective obligations under the merger agreement; (iii) the absence of
any material adverse change in the other party; (iv) the absence of any court
order prohibiting or restricting completion of the merger; and (v) receipt of
all written consents, assignments, waivers or authorizations required to effect
the merger.
In addition, we will not be obligated to proceed with the merger unless
we: (i) receive an opinion from counsel that the merger will not jeopardize our
status as a "real estate investment trust" under the Internal Revenue Code of
1986, as amended; (ii) receive an opinion from counsel that the merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code; (iii) execute a Lease Agreement
with TIGI or its affiliates for our use of office space previously used by IREAS
and ICPM; (iv) execute a License Agreement for our continued use of the "Inland
Real Estate Corporation" trade name and corporate logo and use of certain
intellectual property and software; (v) execute a Services Agreement, for our
use of certain administrative employees of IREIC and TIPMG and their affiliates;
and (vi) execute employment agreements with those individuals that will become
our executive officers.
Termination. The merger agreement may be terminated at any time prior
to the closing of the merger by: (i) written consent of all parties to the
merger agreement; (ii) unilaterally by any of the parties to the merger
agreement, so long as such party has not breached any of its obligations under
the merger agreement, if the merger has not been completed within 90 days
following the approval of the merger agreement by our stockholders; (iii)
unilaterally by any of the parties, if one or more of the other parties (A)
fails to perform any material covenant or agreement in the merger agreement, and
does not cure the failure within 15 business days after the terminating party
delivers written notice of the alleged failure to the other parties or (B) fails
to fulfill or complete a condition to the obligations of the terminating party
(which condition is not waived) by reason of a breach by the non-terminating
party or parties of its obligations; or (iv) unilaterally by any of the parties
to the merger agreement, if any condition to the obligations of the terminating
party is not satisfied (other than by reason of a breach by that party of its
obligations under the merger agreement), and it reasonably appears that the
condition cannot be satisfied prior to the closing of the merger.
Indemnification. We have agreed to indemnify IREIC and TIPMG and they
have agreed to indemnify us against losses due to a breach of a representation
or warranty under the merger agreement. The indemnifying party or parties, as
the case may be, will be liable only when damages by such party exceed $350,000
in the aggregate. IREIC and TIPMG's indemnification obligations are limited to
the fair market value of all of the shares we issue to IREIC and TIPMG in
connection with the merger at the time the indemnification obligation arises
plus fifty percent (50%) of the difference between the losses we incur and the
then fair market value of the shares not to exceed $34
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million. Additionally, the maximum total indemnification payments for which
IREIC and TIPMG may, collectively, be liable, may not exceed $68 million, unless
and to the extent the then fair market value of the shares exceeds $68 million.
IREIC and TIPMG may pay their indemnification obligations in cash, shares of our
common stock, or a combination thereof. Additionally, TIGI has guaranteed the
indemnification obligations of TIPMG.
Expenses. Each party to the merger agreement is required to pay its own
fees and expenses.
Material Governmental Permits. We are not currently aware that any
material governmental permits, approvals, consents or similar actions are
required for consummation of the merger, except for compliance with applicable
federal and state securities laws.
Accounting Treatment. For financial reporting purposes, we will account
for the merger consideration as an expense of terminating our advisory agreement
with IREAS and our property management agreements with ICPM because neither
IREAS nor ICPM qualify as "businesses" for purposes of applying APB Opinion No.
16 "Business Combinations."
Employment Agreements. At the closing of the merger, we anticipate
entering into employment agreements with the following persons who will serve in
the following positions:
Robert D. Parks Chairman of the Board of Directors
Norbert Treonis President and Chief Executive Officer
Mark E. Zalatoris Chief Financial Officer and Treasurer
Samuel A. Orticelli General Counsel and Secretary
William Anderson Director of Acquisitions
Each employment agreement will: (i) begin on the closing date of the
merger and continue for one year, provided that on each anniversary, the term
automatically will be extended by one-year periods unless either we or the
employee elects not to extend the term; and (ii) provide for an annual base
salary as follows: Mr. Parks - $50,000; Mr. Treonis - $300,000; Mr. Zalatoris -
$125,000; Mr. Orticelli - $180,000; and Mr. Anderson - $100,000. TIGI and its
affiliates have agreed not to hire or solicit to hire any of these individuals,
except for Mr. Parks, for a period of three years from the closing date without
the prior approval of our independent directors or unless a "change of control"
has occurred. Upon termination of the employee's employment with us (other than
for cause or if hired by TIGI or an affiliate of TIGI), the terminated employee
will receive severance compensation for the unexpired portion of the remaining
employment term plus an additional six months.
Under the employment agreements, a "change in control" of our Company
is deemed to have occurred if any party, or group of parties acting in concert,
unrelated to TIGI becomes a beneficial owner of securities representing
twenty-five percent (25%) or more of the combined voting power of all of our
outstanding voting securities or purchases substantially all of our assets and
such individual's employment with us is terminated.
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Lease Agreement. As part of the merger, we will enter into a lease
agreement with TIGI to lease approximately 7,438 square feet of office space,
located at 2901 Butterfield Road, Oak Brook, Illinois. The lease term will be
for a period of one year with five one-year renewals at our sole discretion. The
annual rental rate for 2000 is expected to be $17.64 per square foot (TIGI's
cost for such space), paid in equal monthly installments. Monthly rental rates
for subsequent years will be increased in accordance with TIGI's underlying
lease of the property with no profit to TIGI.
License Agreement. We will also enter into a license agreement with
TIGI, pursuant to which TIGI will grant to us a royalty-free license of the name
"Inland Real Estate Corporation," our corporate logo, and any self-created
property management, accounting and administrative software that has been
developed by TIGI and its affiliates. The license of the name and the logo are
exclusive and the license for the software is non-exclusive. We may sublicense
the aforementioned intellectual property to affiliated entities that are in the
same line of business. Finally, the licenses will be perpetual unless a "change
of control" (as defined above) occurs or we engage in inappropriate conduct.
Services Agreement. We will also enter into a services agreement with
IREIC and certain affiliates of TIGI pursuant to which these affiliates will
provide to us the following services: general administrative services, payroll
preparation and management services, employee benefits management services,
human resource management services, data processing, computer equipment and
support services, insurance consultation and insurance coverage placement
services, marketing communications services, property tax and processing
services, office management services, and investor relation services. These
services will be performed on our behalf at cost, with no mark-up to us. The
services agreement is for an initial term of twelve months, and, at our option,
will continue in force so long as we continue to lease our headquarters pursuant
to the Lease Agreement described above.
Additional Agreements. The parties to the merger agreement have agreed
to: (i) afford each other party reasonable access to financial, operating and
other information; (ii) give prompt notice of breaches of any covenant or
condition in the merger agreement; (iii) make no public announcement related to
the merger without the prior consent of the other parties except as required by
law; (iv) cooperate in preparing and filing all forms, reports and notifications
required by any governmental authority and to use their best efforts to overcome
any objections by any governmental authority to the merger; (v) use their best
efforts to obtain the authorizations required to consummate the transactions
contemplated by the merger agreement; and (vi) keep all proprietary information
of the other parties which such party received in connection with the merger
confidential.
We, IREAS and ICPM have agreed that, prior to consummation of the
merger or the termination of the merger agreement, each entity shall conduct
their respective business only in the ordinary course consistent with past
practice.
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BUSINESS OF IREAS AND ICPM
IREAS is an Illinois corporation which, since its formation in 1994,
has been a wholly owned subsidiary of IREIC. Since its inception, IREAS' sole
business has been to serve as our advisor and has generally been responsible for
our day-to-day operations, including property acquisition, administering our
bookkeeping and accounting functions and consulting with our board on various
issues. For a summary of IREAS' business activities, including its compensation
and types of fees earned, see "IREAS Advisory Agreement."
ICPM is an Illinois corporation formed in 1994 and, since its
formation, has been a wholly owned subsidiary of TIPMG. Since its inception,
ICPM's sole business has been to serve as our property manager and has been
responsible for managing our real estate portfolio. For a summary of ICPM's
business activities, including its compensation and types of fees earned, see
"ICPM Property Management Agreement."
IREAS ADVISORY AGREEMENT
Duties of IREAS. In 1994, we entered into an Advisory Agreement with
IREAS pursuant to which we engaged IREAS to conduct all of our day-to-day
business activities other than those related to property management including:
- presenting to us a continuing and suitable investment program
and opportunities to make investments consistent with our
investment policies and the investment program adopted by our
board of directors and furnish us with advice concerning the
making, acquisition, holding and disposition of investments
and commitments;
- managing our day-to-day investment operations to effect the
investment program adopted by our board of directors;
- serving as our investment advisor in connection with policy
decisions to be made by our board of directors and, as
requested, furnishing reports to our board of directors and
providing research, economic and statistical data in
connection with our investments and investment policies;
- investigating, selecting and conducting relations with
lenders, consultants, accountants, brokers, banks, builders,
underwriters, appraisers and many other third parties on our
behalf;
- assisting in negotiations on our behalf with investment
banking firms and other institutions or investors for public
or private sales of our securities;
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- maintaining title insurance or other assurance of title and
customary fire, casualty and public liability insurance for
our real property;
- advising us as to the operating results of our properties; and
- preparing on our behalf, all reports and returns required by
the Commission, the Internal Revenue Service and other state
or federal governmental agencies.
Compensation of IREAS. Pursuant to the Advisory Agreement, IREAS
receives the following compensation:
- an annual asset management fee, paid quarterly, of not more
than 1% of the total book value of our assets that are
invested, directly or indirectly, in real estate before
reserves for non-cash charges, such as depreciation or bad
debt expense;
- a property disposition fee payable on sale of a property,
assuming IREAS provides a substantial amount of services in
connection with the sale, equal to the lesser of: (1) 3% of
the contract sales price; or (2) 50% of the commission paid to
third parties; provided that in no event will the amounts paid
to IREAS and other third parties exceed 6% of the contract
sales price; and
- a subordinated incentive fee of up to 15% of the net proceeds
from the sale of any property; provided that our stockholders
have received a cumulative, non-compounded return equal to 8%
on an annual basis on the original issue price of the shares
reduced by prior distributions plus a return of the original
issue price paid for the shares reduced by any distributions.
IREAS is required to reimburse us for the amount that the asset
management fee and our total operating expenses excluding items such as taxes,
interest payments, depreciation and property acquisition costs during any year
exceed: (1) 2% of the average aggregate book value of our assets that are
invested, directly or indirectly, in real estate before reserves for non-cash
charges; or (2) 25% of our net income excluding gains from the sale of property.
IREAS must also reimburse us to the extent that our stockholders have not
received any annual cash distribution equal to 8% of the original issues price
of the shares.
For the year ended December 31, 1999, we incurred an asset management
fee of $4,193,068. Additionally, IREAS and its affiliates are entitled to
reimbursement for salaries and expenses of their employees relating to the
administration of our day-to-day operations. During the year ended December 31,
1999, we incurred and paid $752,239 of these expenses.
Further, the Advisory Agreement provides that if IREAS merges into us
at the time of the listing for trading of our common stock on a national
exchange or market, IREAS will receive, in
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exchange for terminating the Advisory Agreement, shares of our common stock in
an amount equal to the value of the fees given up by IREAS as a result of such
termination. Additionally, we are prohibited from terminating the Advisory
Agreement for the purpose of avoiding such a merger in anticipation of the
listing of our common stock on a national exchange or market.
Grant of License to Use "Inland" Mark. Pursuant to the Advisory
Agreement, IREAS sublicensed to us a perpetual, royalty-free license to use the
name and mark "Inland" throughout the United States. We agreed to use the
"Inland" name and mark in a manner which will protect the right of IREAS and to
the extent any rights in the name or mark "Inland" are deemed to accrue to us,
we agreed to assign any and all such rights to IREAS. IREAS, at such time as it
no longer provides services to us, may require our board of directors to change
our name to a name which does not include any reference to the name "Inland."
Indemnification. Under the Advisory Agreement, we agreed to indemnify
and/or reimburse IREAS, to the fullest extent permitted by Maryland law, for
losses, liabilities and expenses incurred as a result of IREAS performing
services on our part, so long as: (i) such liability or loss was not the result
of negligence or misconduct on the part of IREAS; and (ii) IREAS has determined
in good faith that the course of conduct which caused the loss or liability was
in our best interest.
We are not required to indemnify IREAS for losses, liabilities or
expenses arising from an alleged violation of federal or state securities laws
unless: (i) there has been a successful adjudication on the merits of each count
involving alleged securities law violations as to IREAS; (ii) such claims have
been dismissed with prejudice on the merits as to IREAS; or (iii) a court
approves a settlement of the claims and finds that indemnification of the
settlement and related costs should be made.
Termination. If the merger is completed, we will terminate the Advisory
Agreement and will no longer incur asset management fees, nor will we incur
disposition and incentive fees should we dispose of properties. A number of
entities affiliated with IREAS performed certain general and administrative
functions for us, these entities charged IREAS for such services and we
reimbursed IREAS for its costs. At our request, these entities will continue to
perform such services for us, at cost, and we will pay for these services
directly. See "Agreement and Plan of Merger - Services Agreement."
ICPM PROPERTY MANAGEMENT AGREEMENT
Duties of ICPM. For each property in our portfolio, we entered into a
Property Management Agreement with ICPM. If the merger is completed, we will
terminate each Property Management Agreement. Pursuant to the Property
Management Agreements, ICPM furnishes the services of its organization for the
rental, leasing, operation and management of each property and renders a monthly
Consolidated Cash Report and Budget Variance Report with respect to each
property. Additionally, ICPM is required to prepare annualized budgets for
operation of each property.
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For each property, we gave ICPM the authority:
- to advertise, rent and pay all expenses of the property, to
cause references of prospective tenants to be investigated, to
negotiate new leases and renewals and cancellations of
existing leases (subject to our approval), to institute and
prosecute actions to evict tenants and to recover rent and
other sums due, and to settle, compromise, and release such
actions or suits, or reinstate such tenancies;
- to hire, supervise, discharge, and pay all labor required for
the operation and maintenance of each property; and
- to collect rents and/or assessments and other items.
Compensation of ICPM. ICPM receives a "Property Management Fee" for
management and leasing services of 4.5% of the gross income earned by us on the
properties managed. For 1999, we paid a Property Management Fee of $4,869,514.
ICPM is entitled to reimbursement for salaries and expenses of its employees
with respect to any due diligence activities we ask it to perform with respect
to potential acquisitions.
Indemnification. Under each Property Management Agreement, we agreed to
indemnify ICPM for any losses incurred by it in connection with any property
including liability for damage to a property and injuries to or death of any
person on such property; so long as such losses do not arise out of the willful
misconduct, gross negligence and/or unlawful acts of ICPM. We also agreed to
indemnify ICPM from any losses and expenses involving any past, current or
future allegation regarding treatment, depositing, storage, disposal or
placement by any party other than ICPM of hazardous substances on any of our
properties.
Additionally, with respect to each property, we are required to carry
at our own expense Public Liability Insurance, Fire and extended Coverage
Insurance, Burglary and Theft Insurance, Rental Interruption Insurance, Flood
Insurance (if appropriate) and Boiler Insurance (if appropriate).
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
IREIC and TIPMG, the sole shareholders of IREAS and ICPM, respectively,
are each wholly owned subsidiaries of The Inland Group, Inc. Messrs. Parks and
Cosenza are control persons with respect to TIGI. Mr. Parks is our president,
chief executive officer, chief operating officer and a director. Mr. Cosenza is
one of our directors. Additionally, our executive officers do not receive
compensation for services they render to us. Each of our executive officers are
employees, officers and/or directors of IREAS and/or its affiliates and are
compensated by these entities, in part, for services they render to us.
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OPINION OF THE FINANCIAL ADVISOR
First Union delivered its written opinion to the special committee to
the effect that the total number of shares which we will issue to IREIC and
TIPMG is fair, from a financial point of view, to our stockholders.
The full text of First Union's written opinion dated March 17, 2000,
which sets forth certain assumptions made, matters considered and limitations on
the review undertaken is attached as Appendix B to this proxy statement and is
incorporated herein by reference. You should carefully read the opinion in its
entirety. The summary of the opinion set forth in this proxy statement is
qualified in its entirety by reference to the full text of the attached opinion.
First Union's opinion relates solely to the question of the fairness to us and
our stockholders, from a financial point of view, of the merger.
First Union's opinion is addressed to the special committee and does
not constitute a recommendation as to how any stockholder should vote. First
Union's opinion does not address: (i) the relative merits of the merger or any
other business strategies or transactions with third parties considered by our
board or the effect of any such transaction; or (ii) the board's decision to
proceed with the merger.
Reasons for Selecting First Union. First Union is a recognized
investment banking firm regularly engaged to value private and public businesses
and their securities in connection with mergers and acquisitions, competitive
biddings and valuations for corporate and other purposes and acting as financial
advisor in connection with other forms of strategic corporate transactions. The
special committee selected First Union because it is a nationally known
investment banking firm with experience in transactions similar to the merger
contemplated with IREAS and ICPM, as well as negotiated underwritings, initial
public offerings, secondary distributions of securities, private placements and
valuations for corporate purposes, especially with respect to REITs and other
real estate companies.
First Union Compensation. In connection with the performance of its
services, we paid First Union the following fees and expenses: (i) an initial,
non-refundable fee of $50,000 upon our engagement of First Union; (ii) an
aggregate cash fee of $250,000 for the performance of its valuation services;
(iii) an aggregate cash fee of $250,000 in connection with the delivery of its
fairness opinion; and (iv) we reimbursed First Union for all out-of-pocket
expenses up to $25,000 incurred by it in connection with the performance of its
duties.
Other Transactions with First Union. On February 1, 2000, we borrowed
$3,000,000 from First Union for the purpose of acquiring a property. The loan,
secured by our investment in securities held in a brokerage account maintained
by First Union, accrued interest at 6.5% and was repaid on March 14, 2000.
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Analysis and Conclusions. In conducting its analysis, and arriving at
its opinion, First Union performed the following activities and considered such
financial and other factors as it deemed relevant, including, among others, the
following:
- Reviewed and analyzed the merger agreement.
- Reviewed and analyzed a draft of this proxy statement.
- Reviewed and analyzed certain of our historical and pro forma
financial and operating data and that of IREAS and ICPM as
well as our Prospectus dated April 7, 1998, as amended.
- Reviewed and analyzed certain other internal information
concerning our business and operations and those of IREAS and
ICPM furnished to it by our management and the management of
IREAS and ICPM, including projections and other data.
- Discussed the business of, and prospects for, us, IREAS and
ICPM with our management and the management of IREAS and ICPM,
respectively.
- Reviewed certain materials presented by management to our
board.
- Reviewed the advisory agreement between us and IREAS.
- Reviewed the management agreements between us and ICPM.
- Conducted site visits of 94 of our properties, which represent
approximately 7.6 million square feet or approximately 80% of
the square feet owned by us.
- Analyzed the proposed values for IREAS and ICPM employing the
following techniques: comparable historical merger and
acquisition transactions, comparable publicly traded
investment and real estate management and advisory companies,
and a discounted cash flow analysis.
- Analyzed the proposed value of our shares offered as
consideration for the merger by the following methodologies:
comparable publicly traded retail real estate investment
trusts, net asset value, discounted cash flow analysis and
recent sales price.
- Conducted such other analyses, studies and investigations, as
First Union deemed appropriate under the circumstances for
rendering the opinion expressed therein.
In preparing its opinion, First Union relied, without independent
verification, on the accuracy and completeness of all information that was
publicly available, supplied or otherwise communicated to First Union by us,
IREAS and ICPM and further relied upon the assurances of management that they
are unaware of any facts that would make the information provided incomplete or
misleading. First Union assumed that the financial forecasts examined by it were
reasonably prepared and reflected the best current estimates and good faith
judgements of our management and that of IREAS and ICPM of our future
performance and that of IREAS and ICPM, respectively. The First Union opinion is
based upon financial, economic, market and other
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conditions existing on the date of the opinion. Furthermore, First Union has
expressed no opinion as to the price or trading range at which our shares of
common stock will trade in the future. The merger consideration was determined
by the special committee and IREAS and ICPM in arm's-length negotiations.
Although First Union evaluated the financial terms of the merger and
participated in discussions concerning the consideration to be paid, First Union
did not propose the specific values of ICPM and IREAS. Instead, it established a
range of prices for comparable transactions and companies and determined that
the merger consideration for IREAS and ICPM fell within that range.
The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant quantitative methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or amenable to summary description. Accordingly, First Union believes that its
analysis must be considered as a whole and that considering any portion of the
analysis and of the factors considered, without considering all analyses and
factors, could create a misleading or incomplete picture of the process
underlying the First Union opinion. Any estimates contained in these analyses
are not necessarily indicative of actual values or predictive of future results
or values, which may be significantly more or less favorable than as set forth
therein. In addition, analyses relating to the values of businesses are not
appraisals and may not reflect the prices at which businesses may actually be
sold. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty and First Union does not assume responsibility for any
future variations from such analyses or estimates. The following paragraphs
summarize the significant quantitative and qualitative analyses performed by
First Union in arriving at its opinion.
As background for its analyses, First Union held extensive discussions
with the special committee and with members of our senior management and that of
IREAS and ICPM regarding the history, current business operations, financial
condition, future prospects and strategic objectives of ours, IREAS and ICPM.
In evaluating IREAS and ICPM, First Union was provided with income
projections for the five years beginning January 1, 2000 and ending December 31,
2004. We advised First Union that as of March 3, 2000, we owned 119 retail
properties and invested in one retail property currently under development. The
properties encompass approximately 9.4 million gross leasable square feet. The
cost of this portfolio was approximately $985 million as of March 3, 2000. The
income stream analyzed and projected included only the properties owned and
operations prior to and including March 3, 2000 as well as our development
properties. First Union has not made an independent evaluation or appraisal of
our assets or liabilities or those of IREAS or ICPM, nor has First Union been
furnished with any such evaluations or appraisals. We advised First Union that
we had one property under development and three under contract to purchase,
representing an aggregate investment of $16.8 million. We advised First Union
that we expect to acquire these properties within the next twelve months. We
also provided projections reflecting management and advisory fees from the
current portfolio as well as the properties under development and under
contract. Total investment was $985 million. We advised First Union that we
expect to acquire all of these
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properties during the fiscal year ending December 31, 2000. We assumed that all
of the acquisitions and developments that closed in 1999 will provide a full
year of cash flow contribution in 2000, but any developments that close in 2000
will only get partial cash flow contribution for that year.
In analyzing IREAS and ICPM, First Union considered a variety of
methodologies, including: (i) an analysis and comparison of recent historical
transactions in which previously non- self-administered REITs have acquired an
external advisor; (ii) an analysis of selected publicly traded companies that
act as advisors or managers in the real estate business; and (iii) a discounted
cash flow analysis. As a result of this analysis, an implied range of value was
produced using each of the methodologies in order to arrive at an implied global
range of value that encompasses all of the methodologies used.
First Union focused its analysis on the earnings before interest,
taxes, depreciation and amortization (EBITDA) generated by IREAS and ICPM as the
primary valuation ratio, since, in First Union's view, EBITDA is a good
indicator of cash flow and is readily available and comparable among companies.
First Union did, however, consider valuation ratios other than EBITDA, including
revenues and net income.
Comparable Merger and Acquisition Transactions - Market Approach. First
Union analyzed merger and acquisition transactions of a "like kind" that
included other non-self- administered REITs that have integrated outside
third-party property management and advisory services thereby creating a fully
integrated, self-administered real estate management company. This analysis
indicated the range of values that REITs have historically paid for their
management companies and advisors. First Union noted that the comparable
transaction analysis is one of the primary methods of determining implied value
because it identifies, on a relative basis, the amount that companies have paid
for similar entities. First Union explained that assuming no major changes in
pricing have occurred in the marketplace, the comparable transaction approach to
value can be used to determine an implied range of values for an entity based
upon historical pricing of similar entities. First Union added that although its
analysis assumed no fundamental changes in pricing, the risk of these changes
were mitigated in its analysis by evaluating five years of historical
transactions which allows for an adjustment for pricing trends. The analysis
also assumes that, all things being equal, the market is efficient and that
purchase prices are determined on the basis of historical, like kind
transactions.
First Union analyzed the following transactions involving merger or
acquisitions of real estate management/advisory companies: Franchise Finance
Corp. of America's acquisition of FFCA Management, L.P.; Boddie-Noell Restaurant
Prop.'s acquisition of BT Venture Corporation; Shurgard Storage Centers'
acquisition of Shurgard Incorporated; Realty Income Corp.'s acquisition of
R.I.C. Advisor, Inc.; Storage Equities, Inc.'s acquisition of Public Storage
Management; Health Care REIT, Inc.'s acquisition of First Toledo Advisory
Company; Great Lakes REIT, Inc.'s acquisition of Equity Partners Ltd.; IndyMac
Mortgage Holdings' acquisition of Countrywide Asset Management Corp.; U.S.
Restaurant Properties, Inc.'s acquisition of QSV Properties, Inc.; Security
Capital Industrial's acquisition of SCG Realty Services, Inc.; Security Capital
Pacific Trust's
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acquisition of SCG Realty Services, Inc.; Asset Investors Corp.'s acquisition of
Financial Asset Management LLC; Commercial Net Lease Realty's acquisition of CNL
Realty Advisors; CCA Prison Realty Trust's acquisition of Corrections Corp. of
America; CNL American Properties acquisition of CNL Restaurant Businesses; and
Starwood Financial Trust's acquisition of TriNet Corporate Realty Trust.
First Union then analyzed these transactions on the basis of a few key
transaction multiples. These multiples were used to compare and contrast each
relevant historical transaction and arrive at a standard range of multiples.
Only the transactions completed during or after 1996 were included in the
following analysis because, in First Union's view, they more accurately
reflected current management and advisor company values. Additionally, the CCA
Prison Realty Trust acquisition was excluded from First Union's analysis due to
extensive shareholder lawsuits that have resulted from the transaction. First
Union determined that the value of the transaction may change in the event some
or all of the lawsuits are successful. As a result, the total group of
transactions under examination encompassed nine acquisitions, which included:
Great Lakes REIT, Inc.'s acquisition of Equity Partners Ltd.; IndyMac Mortgage
Holdings' acquisition of Countrywide Asset Management Corp.; U.S. Restaurant
Properties, Inc.'s acquisition of QSV Properties, Inc.; Security Capital
Industrial's acquisition of SCG Realty Services, Inc.; Security Capital Pacific
Trust's acquisition of SCG Realty Services, Inc.; Asset Investors Corp.'s
acquisition of Financial Asset Management LLC; Commercial Net Lease Realty's
acquisition of CNL Realty Advisors; CNL American Properties acquisition of CNL
Restaurant Businesses; and Starwood Financial Trust's acquisition of TriNet
Corporate Realty Trust.
First Union compared the purchase price paid in each comparable
transaction with the revenues, EBITDA and net income of the target companies for
the latest twelve month reporting period, on an annualized basis. In aggregate,
the transactions yielded multiples of purchase price to the target's EBITDA
ranging from a high of 25.7x to a low of 2.2x, with a median of 6.5x. Multiples
of purchase price to the target's revenues ranged from a high of 6.5x to a low
of 0.8x, with a median of 3.4x. Multiples of purchase price to the target's net
income ranged from a high of 49.8x to a low of 2.2x, with a median of 11.2x.
Next, First Union graphed the transaction multiples chronologically to
derive a trend line of past results. In each graph, First Union noted a flat to
downward trend going-forward, although the multiples implied in the regression
analysis were either greater than or in-line with the median multiples derived
from the comparable transactions analysis which were 6.5x, 3.4x and 11.2x for
EBITDA, revenues and net income, respectively.
In addition to the real estate management and advisory company
transactions, First Union also analyzed transactions involving the merger of
hotel management and advisory companies. However, in First Union's view, the
target companies owned assets in each case which implied that the target
companies were not pure management/advisory companies. The consideration paid
for the management companies, therefore, took into account hotel assets, and the
values ascribed for the hotel assets in the transaction versus the
management/advisory-side of the business could not be
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determined. First Union added that managing hotels is a more active process than
that of other real estate assets since hotel management relies on a more fluid
occupant base and its success depends on re-booking the rooms each and every
night. In addition, the food and beverage departments of hotels involve
extensive management and are an integral function of the hotel management
company. Because the nature of hotel management differs in many respects, First
Union concluded that hotel management/advisory company acquisitions were not
relevant to the analysis.
Comparable Public Real Estate Advisors and Managers Analysis - Market
Approach. Next, First Union analyzed comparable public companies that act as
real property managers, advisors and asset managers. First Union analyzed these
companies to determine the multiples that these companies trade at as a function
of estimated earnings for 2000, trailing twelve months EBITDA and trailing
twelve months revenues.
First Union advised the board that the public-comparable analysis
identifies, on a relative basis, that value that investors are ascribing to
these entities. Assuming no major changes in pricing have occurred in the
marketplace, First Union stated that this approach can be used to determine a
range of values for an entity based on the present pricing of publicly traded
comparable entities. First Union assumed that occasional ongoing and slight
changes in pricing would occur in the marketplace, but that the market is, all
things being equal, efficient with value being determined on the strength of a
company's earning power and overall financial health. First Union analyzed the
following public real estate management and advisory companies: CB Richard
Ellis; Insignia Financial; Jones Lang LaSalle; and Trammell Crow.
First Union chose these companies because they are the largest publicly
traded real estate management and advisory companies with over two years of
property and asset management expertise. First Union noted that Amresco Inc. was
also considered, but that company's focus on commercial and mortgage lending was
not considered significant because of its dissimilarity to IREAS and ICPM. In
addition, since Amresco first started its management business in the beginning
of 1997, First Union did not believe that Amresco had enough of an established
track record in the real estate management and advisory business to be included
in the analysis.
To derive multiples for the real estate companies noted above, the
total market capitalization and current stock price was first determined for
each company. Total market capitalization is equivalent to a company's total
equity plus total long-term debt outstanding, while the current stock price as
of March 6, 2000 was used. These companies were analyzed using the market
approach to valuation in order to determine the total market capitalization as a
function of 2000 estimated earnings, trailing twelve months EBITDA and trailing
twelve months revenues. The first multiple utilized was the price to earnings
ratio or P/E ratio. The P/E ratio is the current stock price divided by a
company's expected 2000 earnings per share. First Union stated that the P/E
ratio is accepted as a fundamental means of a company's valuation. The second
multiple used was total market capitalization to trailing twelve months EBITDA.
First Union noted that this multiple is computed by dividing the total market
capitalization of the company by the trailing twelve months EBITDA.
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The last multiple used was the total market capitalization to trailing twelve
months revenues ratio.
Analyzed as a whole, the real estate companies traded at a median P/E
ratio of 8.6x with a range of 33.6x to 6.9x based on 2000 earnings expectations.
On a trailing twelve month EBITDA basis, the real estate companies traded in a
range of 7.8x to 4.2x with a median of 5.7x. On a trailing twelve month revenue
basis, the real estate companies traded in a range of 1.0x to 0.5x with a median
multiple of 0.7x.
Comparable Public Investment Managers and Advisors Analysis - Market
Approach. Next, First Union analyzed companies that specialize in the management
of large pools of assets with the bulk of their revenues coming from the
advisory and asset management services. The following companies were analyzed:
Alliance Capital Management; Franklin Resources; T. Rowe Price Associates, Inc.;
and United Asset Management Corp.
First Union chose these four companies because they are the largest
publicly traded investment managers with over 50% of their revenues generated
from asset management activities.
These companies were analyzed based on the same key multiples used in
the analysis of real estate companies. These multiples were utilized to arrive
at a standard range of multiples for companies in this line of business.
Analyzed as a whole, these companies traded at a high of 15.9x to a low
of 11.7x with a median P/E ratio of 13.2x based on 2000 earnings expectations.
On a total market capitalization to trailing twelve months EBITDA multiple,
these companies traded at a high of 10.9x to a low of 5.8x with a median of
10.1x. On a total market capitalization to trailing twelve months revenue
multiple, these companies traded at a high of 4.2x to a low of 3.6x with a
median of 2.0x.
First Union explained to the board that the multiples derived in the
previous two analyses should not be considered a true proxy for the multiples at
which IREAS or ICPM should be purchased since unlike IREAS or ICPM, those real
estate companies are publicly traded. First Union stated that in order to
determine an implied value for IREAS and ICPM vis-a-vis these public entities,
it is necessary to apply a 5%-15% discount to the multiples since shares of
public companies are more liquid than shares of private companies like IREAS and
ICPM, and public companies have enhanced credibility in the marketplace,
resulting from a history of public disclosure of operating results. First Union
explained that these discount rates are typical rates applied to private
companies
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in the market. After discounting the multiples, First Union obtained the
following range for the EBITDA multiples:
ADJUSTED EBITDA MULTIPLES FOR THE REAL ESTATE MANAGEMENT AND ADVISORY COMPANIES
BASED ON APPLICABLE DISCOUNT RATES FOR PRIVATE COMPANIES
Trailing Twelve Months EBITDA
<TABLE>
<CAPTION>
DISCOUNT
APPLIED HIGH MEDIAN LOW
------- ---- ------ ---
<S> <C> <C> <C>
5% 7.4x 5.4x 4.0x
10% 7.0 5.1 3.8
15% 6.6 4.9 3.6
</TABLE>
ADJUSTED EBITDA MULTIPLES FOR INVESTMENT MANAGEMENT AND ADVISORY COMPANIES
BASED ON APPLICABLE DISCOUNT RATES FOR PRIVATE COMPANIES
Trailing Twelve Months EBITDA
<TABLE>
<CAPTION>
DISCOUNT
APPLIED HIGH MEDIAN LOW
------- ---- ------ ---
<S> <C> <C> <C>
5% 10.3x 9.6x 5.5x
10% 9.8 9.1 5.2
15% 9.2 8.6 4.9
</TABLE>
First Union then integrated the EBITDA multiples derived from the three
analyses described above and concluded that the analyses, as integrated, yielded
a range of EBITDA multiples from a high of 25.7x, to a low of 2.2x and a median
of 6.5x.
Discounted Cash Flow Analysis - Income Approach. Next, First Union
estimated an implied range of values for IREAS and ICPM based on the current
value of future cash flows that each would receive in the form of management or
advisory fees. This income approach to valuation estimates the market value by
estimating the present value of the future cash flows. First Union noted that
the analysis is only as good as the assumptions utilized to determine the future
cash flows, the interest rate used to discount the cash flow and the
capitalization rate on the final cash flow to determine the terminal value of
the future stream of cash flows on the investment. First Union added that, in
its view, the income approach is one of the better approaches in the valuation
of income-producing
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entities or properties because it is the primary factor considered by real
estate investors and is the primary analytical tool used in determining the
present value of any financial instrument which produces a set of future cash
flows to value.
In constructing its cash flow analysis, First Union relied upon the
accuracy of the cash flow projections and growth rates supplied by management
and did not independently verify the underlying assumptions for each property.
Management's projections and the income streams analyzed were based upon the
investment of approximately $985,430,200 in properties acquired and under
development through March 3, 2000. First Union explained that IREAS and ICPM
derive their revenue solely from fees generated from the management of our
properties and advisory services provided to us.
First Union derived a discount rate (based on IREAS and ICPM's
perceived cost of capital) of 11.5% which served as the mid-point of the
sensitivity analysis involving the discount rates. The discount rate range
applied to IREAS and ICPM's cash flows ranged from 10.0% to 12.3%.
In order to capture the cash flows in perpetuity, a range of EBITDA
multiples was applied to the final projected year's cash flow, which in this
case is year five. First Union used the same EBITDA multiples described above in
the comparable transaction and comparable company analysis discussed above. By
applying these multiples, a terminal value was established which represents the
amount a company would pay to capture the cash flows in perpetuity.
This analysis resulted in a range of imputed aggregate values of IREAS
and ICPM of approximately $37.0 million to $155.3 million.
First Union advised the board that each method of establishing the
value for IREAS and ICPM was considered separate and equal in standing. The
methods were considered, with certain exceptions, independent of each other in
arriving at a valuation range, which served as a benchmark for the value in
connection with the proposed merger. The range of value produced by each method
employed was as follows:
FINAL RANGE OF IMPLIED VALUE FOR ALL METHODOLOGIES
<TABLE>
<CAPTION>
HIGH MEDIAN LOW
<S> <C> <C> <C>
Comparable Transactions $202,947,681 $51,574,142 $17,200,396
Comparable Real Estate Mgmt./Advisor Co.'s 58,159,046 40,498,500 28,309,381
Comparable Investment Mgmt./Advisor Co.'s 81,309,741 71,650,023 38,751,837
Discounted Cash Flow 155,279,855 58,517,625 36,977,274
</TABLE>
First Union stated that the above range of implied value was so wide,
that the board should focus on, and analyze the range of median implied values
produced by each methodology. First
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Union stated that the median implied value in each analysis eliminated outlying
observations and, therefore, it was logical to use the range of median implied
values in order to arrive at a more likely range in which IREAS and ICPM could
be analyzed.
Taking into account current market valuations and the financial results
and projections, First Union concluded that the implied range of valuation for
IREAS and ICPM, combining both scenarios, ranged from approximately $40.0
million to $72.5 million.
First Union indicated that the above implied range did not take into
account the remaining $38.1 million that we have to invest which would increase
the implied valuation range as those proceeds are invested. First Union also
noted that the merger is expected to be accretive to our funds from operations
(as adjusted for the accounting impact the issuance of the merger consideration
will have) and that if the merger is approved for the years 2001 and 2002, our
current stockholders will contribute 87.7% and 87.9% of funds from operations,
respectively, in return for approximately 90.0% of our equity.
Valuation of Our Common Stock. Next, First Union performed a similar
valuation analysis to establish a range of implied values attributable to our
shares of common stock without giving effect to the merger. First Union
established this implied range of values employing five methodologies. First
Union first analyzed a comparable group of publicly traded retail REITs based
upon current funds from operations (FFO) multiples and a private market
discount. First Union also analyzed the same comparable group of publicly traded
retail REITs based upon historical FFO multiples and a private market discount.
First Union performed a net asset value analysis by applying a capitalization
rate range which fairly reflects current market conditions to our budgeted net
operating income. First Union also conducted discounted cash flow analysis and
analyzed recent sales prices of our shares of common stock.
Current Public Market Valuation Analysis. First Union analyzed ten
comparable publicly traded retail REITs to determine at what multiple their
stock was trading (as of March 6, 2000) compared to FFO. These 10 comparable
REITs were established as our peer group based on the following criteria: total
market capitalization between $200 million and $2.0 billion;
community/neighborhood shopping center properties account for at least 80% of
the REIT's gross leasable area; and companies in which no material strategic or
focus driven difference could substantially affect pricing. The REITs produced a
median FFO multiple of 7.0x. As earlier, First Union then applied a 5-15%
private market discount to the multiple and produced a range of multiples from a
high of 6.65x to a low of 5.95x with a midpoint of 6.30x.
First Union then applied the range of median FFO multiples to our
estimated 2000 FFO per share to determine the implied value of our common stock
per share. We estimated our FFO per share for 2000 to be $1.03, which did not
include the merger (which we estimated would add $.01 per share in FFO in 2000,
as adjusted for the accounting impact the issuance of the merger consideration
will have). The application resulted in a range of implied value of our common
stock of $6.85 to $6.13 per share, with a midpoint of $6.49 per share.
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Historical Public Market Valuation Analysis. First Union noted that
while current retail REIT FFO multiples are at a 7.0x median, REITs, as an
industry have historically traded at a median of 9.7x. In order to gauge a more
accurate representation of FFO multiples, First Union analyzed the past three
and a half years of weighted average FFO multiples (from March, 1996 through and
including December, 1999) for comparable community shopping center REITs to
provide a historical perspective on trading ranges. The REITs produced a
market-weighted average FFO multiple of 9.70x. As earlier, First Union then
applied a 5-15% private market discount to the multiple and produced a range of
multiples from a high of 9.22x to a low of 8.25x with a midpoint of 8.73x.
First Union then applied the range of FFO multiples to our estimated
2000 FFO per share to determine the implied value of our common stock per share.
We estimated our FFO per share for 2000 to be $1.03, which did not include the
merger (which we estimated would add $.01 per share in FFO in 2000, as adjusted
for the accounting impact the issuance of the merger consideration will have).
The application resulted in a range of value of our common stock of $9.49 to
$8.49 per share.
Net Asset Value Analysis. First Union then estimated the per share
implied value of our common stock by applying a capitalization rate range to our
budgeted 2000 Net Operating Income ("NOI") which fairly reflects current market
conditions. For purposes of this valuation, we estimated our net operating
income for 2000 to be $97,687,528. First Union then divided our NOI by a range
of capitalization rates, with a high of 9.75%, a low of 8.75%, and a midpoint of
9.25% (capitalization rates are standard in real estate to gauge relative
valuation of similar properties). The resulting quotient yielded a range of
estimates of our total market capitalization to be $1.094 billion to $982
million and a midpoint of $1.035 billion.
First Union then subtracted our outstanding debt (of $440,740,296) from
our total market capitalization to yield a range of our equity market
capitalization. First Union then divided each equity market capitalization
number by our shares of common stock outstanding (55,404,212) to yield a range
of per share values of our common stock. The analysis yielded an implied value
range per share of $11.79 to $9.77.
Discounted Cash Flow Analysis. First Union then performed a discounted
cash flow analysis similar to the one it performed in the valuation of IREAS and
ICPM. First Union based its analysis on management projections which assumed an
investment of approximately $985,430,200 in properties acquired and under
development through March 3, 2000 and that our portfolio will remain static on a
going forward basis.
First Union derived a discount rate (based on our cost of capital) of
8.62% which served as the mid-point of the sensitivity analysis involving the
discount rates. The discount rate range applied to our cash flows ranged from
10.12% to 7.12%. First Union utilized a capitalization rate of 9.75% to capture
the value of our cash flows in perpetuity.
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This analysis resulted in a range of imputed equity values of
approximately $1.063 billion to $940 million, or a per share value of $11.24 to
$9.02.
Recent Sales Price Analysis. First Union then summarized that from
April 7, 1998 to December 31, 1999 we sold a total of 16,642,397 shares of our
common stock for a price of $11.00 per share. First Union noted that recent
sales price, especially for such a significant block of shares, is a good
indication of how the market would value our shares, and therefore, should be
utilized when determining a valuation range for our shares.
Conclusion. First Union concluded that the $11.00 value we ascribed to
our shares for purposes of determining the total merger consideration is fair
from a financial point of view. First Union noted that the $11.00 valuation fell
within the range of values determined pursuant to three out of the five
methodologies used to value our shares.
FEDERAL TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences in connection with the mergers to a stockholder of ours who is a
U.S. citizen or resident or that is a tax exempt organization. Shefsky &
Froelich Ltd., counsel to the Company, has reviewed the following discussion and
believes that it fairly summarizes the federal income tax considerations that
are likely to be material to our stockholders. Such discussion is based on
current law. The discussion is not exhaustive of all possible tax
considerations, nor does the discussion give a detailed description of any
state, local, or foreign tax considerations. This discussion does not describe
all of the aspects of federal income taxation that may be relevant to a
stockholder in light of his or her particular circumstances or to certain types
of stockholders (including insurance companies, financial institutions or
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. No ruling has been or will be requested from the Internal
Revenue Service.
EACH STOCKHOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC CONSEQUENCES TO HIM OR HER OF THE OWNERSHIP OF COMMON
STOCK IN AN ENTITY THAT HAS ELECTED TO BE TAXED AS A REAL ESTATE INVESTMENT
TRUST, INCLUDING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF SUCH OWNERSHIP
AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
General. We expect to continue to be taxed as a REIT for federal income
tax purposes. We believe that we were organized, have operated and, assuming
consummation of the merger, will continue to operate after the merger in such a
manner as to meet the requirements for qualification and taxation as a REIT
under the Code, and we intend to continue to operate in such a manner. No
assurance, however, can be given that we will continue to operate in a manner so
as to remain qualified as a REIT.
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In the opinion of our counsel, assuming that (i) we have qualified to
be taxed as a REIT under the Code for each of our taxable years from and
including the first year for which we made the election to be taxed as a REIT;
(ii) the assumptions and representations referred to below are true upon and
following the merger, including that we will not succeed to any earnings and
profits of IREAS and/or ICPM; (iii) the merger will be consummated in conformity
with the requirements for our continued qualification and taxation as a REIT and
will close as soon as practicable on or after July 1, 2000; and (iv) following
the merger, IREAS and ICPM will operate in accordance with the terms described
herein, following the merger, we should continue to qualify as a REIT for our
current and subsequent taxable years. This analysis is based on certain
assumptions relating to our organization and operation and that of IREAS and
ICPM and is conditioned upon certain representations made by us as to certain
factual matters relating to the merger and the intended manner of our operation
after the merger and the operation of IREAS and ICPM. The opinion is further
conditioned upon us not otherwise being allocated more non-qualifying income
than is consistent with the 95 percent gross income test. Our counsel is not
aware of any facts or circumstances that are inconsistent with these assumptions
and representations. Unlike a tax ruling, an analysis of counsel is not binding
on the IRS, and no assurance can be given that the IRS will not challenge our
status as a REIT for federal income tax purposes. Our qualification and taxation
as a REIT has depended and will depend upon, among other things, our ability to
meet on a continuing basis, through ownership of assets, actual annual operating
results, receipt of qualifying real estate income, distribution levels and
diversity of stock ownership, the various qualification tests imposed under the
Code discussed below. See "--Failure to Qualify" below.
The following is a summary of all material considerations concerning
applicable Code sections that affect the merger. These sections of the Code are
highly technical and complex. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder
("Treasury Regulations"), and administrative and judicial interpretations
thereof as currently in effect. There is no assurance that there will not be
future changes in the Code, Treasury Regulations or administrative or judicial
interpretations thereof that could adversely affect our ability to continue to
qualify as a REIT or adversely affect the taxation of our stockholders or that
could further limit the amount of income we may derive from the management and
development activities to be performed after the merger.
Nontaxable Merger. In general, statutory mergers and other types of
acquisition transactions can qualify as "tax-free reorganization" if the rules
in the Code are met. Under Section 368(a)(1)(A) of the Code, a transaction that
qualifies as a statutory merger or consolidation of one entity into another in
which the stock of the surviving entity is in this consideration will qualify as
a tax-free organization. In addition, other provisions allow for tax-free
treatment if specific rules are met.
Under Section 368(A)(2)(E), a merger of a target corporation into a
wholly owned subsidiary of a parent corporation in which the shareholders of the
target receive stock in the parent will qualify as a tax-free reorganization so
long as (i) the reorganization is a statutory merger or consolidation; (ii)
after the merger, the target corporation and substantially all of its properties
and those of the entity with which it merged will be owned by the target; and
(iii) shareholders of the surviving target corporation receive voting stock from
the merger which represents at least 80% of the consideration
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for the merger. In this situation, ICPM and IREAS will constitute the target
corporations and Inland Management Corporation and Inland Advisors, Inc. will
constitute our wholly owned subsidiaries. Although in form the transactions
described herein appear to be subject to Section 368(a)(2)(e), certain IRS
pronouncements seem to indicate the fact that IREAS and ICPM will be "qualified
REIT subsidiaries" will result in the application of Section 368(a)(1)(A). In
statutory mergers, the stockholders and creditors of the transferor corporation
automatically become stockholders and creditors of the surviving corporation by
operation of state law. The merger will be executed in accordance with the
Illinois Business Corporation Act of 1983, as amended, and IREIC and TIPMG will
receive shares of our voting common stock. While the merger is, for state law
purposes, a merger into IREAS and ICPM, by virtue of the mandate of Section
856(i) to ignore the separate corporate existence of qualified REIT
subsidiaries, as applied by the IRS in several private letter rulings (which are
not directly applicable to us and which are not valid precedent under IRS
rules), the merger will be treated for federal income tax purposes as being
directly into us.
In addition to satisfying the statutory provisions of the Code, an
reorganization must comply with several subjective tests in order to be
considered "tax-free," including the continuity-of-interest doctrine set out in
section 1.368-1(b) of the Treasury Regulations, which requires that there be
certain continuity of interest on the part of the transferor corporation or its
stockholders. The shares of common stock being issued as consideration for the
merger may not be sold, transferred or otherwise disposed of to entities not in
TIGI's Affiliated Group, except pursuant to an effective registration statement
filed under the Securities Act of 1933, as amended, or in accordance with an
opinion of counsel satisfactory to us that an exemption from registration is
available. Additionally, we may, unless a registration statement is in effect
covering the shares of our common stock issued in consideration for the merger,
place stop transfer orders with our transfer agents with respect to any shares
transferred. In addition, the reorganization must comply with the continuity of
business enterprise test which requires the survivor of a merger to carry-on the
historic business of the predecessor. IREAS and ICPM will continue to carry-on
their operations as our wholly owned subsidiaries, and therefore this test
should be met. Based upon the foregoing, in the opinion of our counsel, the
consummation of the merger should not be a taxable event for federal income tax
purposes to us or any of our existing stockholders.
Should any of the assumptions or representations upon which the tax
opinion described above is based prove inaccurate, the transactions described
herein may not qualify as tax-free reorganizations under the Code. In addition,
the aforementioned tax opinion is not binding upon the IRS, which may challenge
the qualification of the transactions as tax-free reorganizations. If the
mergers fail to qualify as tax-free reorganizations, they would instead be
treated as a taxable sale by IREAS and ICPM of their assets to us in exchange
for our voting common stock, followed by a distribution of such stock to the
shareholders of IREAS and ICPM in complete liquidation. While we would not
directly recognize gain or loss as a result of the failure of the mergers to
qualify as tax-free reorganizations, we would succeed to the tax liabilities of
IREAS and ICPM just as we would succeed to any other liabilities thereof. In
addition, this would cause us to have "earnings and profits" from periods when
we were not a REIT and could, based on the discussion below, cause us to fail to
qualify as a REIT for federal income tax purposes.
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Built-in Gain Rules. Under the "Built-in Gain Rules" of Notice 88-19,
1988-1 C.B. 486, and Temporary Regulations issued thereunder, we will be subject
to a corporate tax if we dispose of any of the assets acquired from IREAS and
ICPM in the merger during the 10-year period beginning at the closing date (the
"Restriction Period). This tax is imposed at the top regular corporate rate
(currently 35%) on the excess of (i) the lesser of (a) the fair market value at
the closing date of the assets disposed of and (b) the selling price of such
assets over (ii) our adjusted basis at the closing date in such assets (such
excess being referred to as the "Built-in Gain"). We do not intend to dispose of
any of the assets acquired in the merger during the Restriction Period. However,
on such a disposition, if the fair market value of the asset sold at the closing
date exceeded the basis therein, we would be taxed at the time of the
disposition on the resulting gain at the top corporate rate under the Built-in
Gain Rules. See, e.g. Prop. Treas. Reg. 1.1374-4(h).
The results described above with respect to the recognition of Built-in
Gain assume that we will make a certain election pursuant to the Built-in Gain
Rules in accordance with Section 1374 of the Code. Pursuant to the merger
agreement, we are required to make this election, and we will promptly file such
election to prevent adverse tax consequences in the year of the Merger. If we do
not make this election, we will be taxed on the Built-in Gain at the closing
date at regular corporate tax rates.
Qualified REIT Subsidiary. A REIT is permitted to have a wholly owned
subsidiary (also referred to as a "qualified REIT subsidiary") provided that
such subsidiary satisfies certain conditions. A qualified REIT subsidiary is not
treated as a separate entity for federal income tax purposes. Rather, all of the
assets, liabilities and items of income, deduction and credit of a qualified
REIT subsidiary are treated as if they were those of the REIT. Following the
merger, IREAS and ICPM will be our "qualified REIT subsidiaries," and the
assets, liabilities and items of income of each will be treated as our assets,
liabilities and items of income. Based on the foregoing, it is the opinion of
our counsel that, following the merger, each of IREAS and ICPM will constitute a
qualified REIT subsidiary.
Consequences of Merger on the Company's Qualification as a REIT -
Earnings and Profits Distribution Requirements. A REIT is not permitted to have
accumulated earnings and profits attributable to a non-REIT year. A REIT has
until the close of its first taxable year in which it has non-REIT earnings and
profits to distribute such earnings and profits. In a corporate reorganization
qualifying as a tax-free statutory merger, the acquired corporation's earnings
and profits are carried over to the surviving corporation, and any earnings and
profits treated as having been acquired by a REIT through such a merger will be
treated as accumulated earnings and profits of the REIT attributable to non-REIT
years. Accordingly, any earnings and profits of IREAS and/or ICPM will carry
over to us and be treated as earnings and profits attributable to non-REIT
years. If we do not make distributions in accordance with the rules set forth
below, we could lose our status as a REIT for federal income tax purposes.
The amount of earnings and profits of IREAS and ICPM acquired by us
("Acquired Earnings") will be based on the earnings and profits of each
immediately prior to the Effective Time.
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Based on the law existing as of the date hereof, we believe that we should not
receive or be deemed to receive any earnings and profits from the mergers. In
addition, IREAS and ICPM believe that they have no earnings and profits to which
we will succeed and have represented that their aggregate earnings and profits
do not exceed $1,000,000. Based on such assumptions, and the most reasonable
interpretation of the existing law, it appears that IREAS and ICPM will have no
earnings and profits as of the Effective Time.
If it is later determined that IREAS and/or ICPM had earnings and
profits at the Effective Time, we could maintain our status as a REIT if we
distribute an amount equal to the Acquired Earnings before the close of the
current taxable year. Only those distributions which are sourced to the Acquired
Earnings will be treated as reducing such earnings and profits. To distribute
the Acquired Earnings, we must distribute (or be deemed to distribute) during
2000 the sum of all of our current earnings and profits and any accumulated
earnings and profits, and then the amount of the Acquired Earnings. Because our
distributions have exceeded our REIT taxable income (determined prior to the
dividends paid deduction) in each year of our existence and are expected to
exceed such amount in this year, we have no earnings and profits, either from
current periods or from prior periods and therefore, all distributions should
first reduce Acquired Earnings to the extent any exist. In addition, our board
intends to declare that all distributions will first reduce Acquired Earnings,
and then will reduce subsequent earnings and profits. We believe that this
approach should prevent us from losing our status as a REIT for federal income
tax purposes due to the application of these rules.
The calculation of the amount of Acquired Earnings is subject to
challenge by the IRS. The IRS may examine prior tax returns and propose
adjustments to increase the taxable income of IREAS and/or ICPM, thereby
increasing the amount of the Acquired Earnings. If the IRS determines that we
have not distributed all of the Acquired Earnings prior to the end of 2000, we
will fail to qualify as a REIT for such year. However, we may make an additional
distribution within 90 days of such determination by the IRS to distribute the
Acquired Earnings and would be required to pay to the IRS an interest charge
based on 50% of the amount not previously distributed. If such additional
distribution is made, we would be able to maintain our REIT status for
subsequent years notwithstanding the failure to distribute the Acquired
Earnings.
Failure to Qualify. If we fail to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, we will be subject to tax
(including any applicable corporate alternative minimum tax) on our taxable
income at regular corporate rates. We will not be able to deduct distributions
to stockholders in any year in which we fail to qualify as a REIT, nor will they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to stockholders will be taxable to them
as ordinary income, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, we will also be
disqualified from
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<PAGE> 64
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
we would be entitled to such statutory relief.
PROPOSAL NO. 3: TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER WE HAVE
SIGNED WITH INLAND COMMERCIAL PROPERTY MANAGEMENT, INC., INLAND REAL ESTATE
ADVISORY SERVICES, INC. AND THEIR RESPECTIVE PARENTS AND THE INLAND GROUP, INC.
Recommendation of the Board. Our board of directors unanimously
recommends that our stockholders vote "for" the following resolution:
RESOLVED, that the Agreement and Plan of Merger and the
transactions contemplated therein be and hereby are approved, and that
the Company be and hereby is authorized to complete the merger and the
transactions contemplated by the Agreement and Plan of Merger, and to
perform all of its obligations thereunder.
Vote Required. Approval of the Agreement and Plan of Merger as set
forth above requires the affirmative vote of the majority of our shares of
common stock issued and outstanding. Abstentions will not count towards approval
of the Agreement and Plan of Merger.
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<PAGE> 65
AMENDMENT OF OUR GOVERNING CHARTER
OUR CHARTER
Our Second Articles of Amendment and Restatement is our charter, on
file with the Secretary of State of Maryland, which governs our corporate
activities. Currently, our charter contemplates us being advised and managed by
a third party advisor and property manager. If you approve the merger and the
conditions to the merger are met, we will become a self-administered REIT.
Accordingly, our board has adopted the following amendments to our charter to
ensure that our corporate governance instruments properly reflect the effects of
becoming a self-administered REIT, by eliminating references in our Articles to
"Advisor" or "Sponsor" or provisions governing our relationship with our
"Advisor" or a "Sponsor."
Additionally, our governing charter limits the number of any class of
shares of our stock that any person or entity may "beneficially own" to not more
than 9.8% of that class of our stock. The term "beneficially own" is defined to
mirror the definition of beneficial ownership in the Code. Due to the
attribution rules with respect to beneficial ownership contained in the Code,
TIGI as the ultimate parent of IREIC and TIPMG and certain individuals and
entities affiliated with TIGI, will be deemed to beneficially own all of the
shares of stock which we issue pursuant to the merger. The number of shares we
issue will likely exceed the 9.8% limitation by a small amount (depending on the
number of shares outstanding immediately prior to the completion of the merger).
Our governing charter allows our board to waive the ownership
limitation with respect to a person or entity that becomes a beneficial owner of
our stock (or increases their beneficial ownership) from a "Transfer" of our
shares so long as the level of ownership will not adversely affect our tax
status as a REIT. The term "Transfer" is defined to include any "sale or
transfer" of our stock. We believe that our issuing stock in connection with the
merger is a "sale or transfer" of our stock and would therefore constitute a
"Transfer" as it is currently defined. Additionally, at the closing of the
merger our board will receive an opinion of counsel that the merger will not
result in the revocation of our tax status as a REIT. As such, we believe that
our board has the authority to waive the ownership limitation with respect to
those persons or entities whose beneficial ownership of our stock will exceed
the ownership limitation as a result of the shares we will issue in connection
with merger. However, we also believe it would be prudent to amend the
definition of "Transfer" to specifically include an issuance of shares by us
thereby removing any potential ambiguity that may exist and clarifying the
board's right to waive the ownership limitation in connection with the merger.
If the merger is approved, our board of directors will, prior to the
closing of the merger, waive the ownership limitation with respect to those
persons or entities whose beneficial ownership of our stock will exceed the
ownership limitation as a result of the shares we will issue in connection with
merger. Our board will grant this waiver even if the amendments to our governing
charter are not approved.
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<PAGE> 66
Before you decide how to vote, you should read our charter, which we
have included as Appendix C. We have marked Appendix C to show the proposed
additions and deletions.
PROPOSAL NO. 4: TO AMEND OUR SECOND ARTICLES OF AMENDMENT AND RESTATEMENT TO
REMOVE REFERENCES TO "ADVISOR" OR "SPONSOR" OR PROVISIONS GOVERNING OUR
RELATIONSHIP WITH OUR "ADVISOR" OR "SPONSOR."
Recommendation of the Board. Our board of directors unanimously
recommends that our stockholders vote "for" the following resolution:
RESOLVED, that the following sections of our Second Articles of
Amendment and Restatement be, and hereby are, amended by:
1. deleting entirely the definition of "Advisor" contained in
Article V;
2. deleting from the definition of "Independent Directors"
contained in Article V the words "or the Advisor," from clause
(i), the words "the Advisor or its Affiliates" from clause
(i), the words "or the Advisor" from clause (ii) and from the
end of the second sentence, and deleting entirely the last
sentence of the definition;
3. deleting from the definition of "Independent Expert" contained
in Article V the words "the Advisor or";
4. deleting entirely the definition of "Initial Investment"
contained in Article V;
5. inserting the words "or " after paragraph (b)(ii) in the
definition of "Roll-Up" contained in Article V, and deleting
the words "Sponsor or Advisor compensation; or (iv)" from
paragraph (b)(iii) contained in Article V;
6. deleting entirely the definition of "Sponsor" contained in
Article V;
7. deleting the words ", including Advisor Asset Management
Fees," from the definition of "Total Operating Expenses"
contained in Article V, and deleting the words "incentive fees
payable to the Advisor, and (f)" therefrom;
8. deleting the words "the Advisor, the Sponsor" each time they
appear in the first sentence of Section 3(d) of Article VI,
and deleting the words ", the Advisor" from the last sentence
of Section 3(d) of Article VI;
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<PAGE> 67
9. deleting the words ", the Advisor or its Affiliates" from the
from the first sentence and clause (i) of Section 6(a) of
Article VII, deleting the word "have" from clause (i) thereof
and replacing it with the word "has", deleting the words ",
the Advisor or its Affiliates were" from clause (ii) thereof
and replacing them with the word "was";
10. deleting the words ", the Advisor or its Affiliates" from the
first sentence of Section 6(b) of Article VII;
11. deleting entirely Section 13 of Article VII and substituting
[Reserved] in lieu thereof;
12. deleting the words "the Sponsor, Advisor," from the first,
second and fourth sentences of Section 15 of Article VII, and
deleting the words "Sponsor, Advisor," both times they appear
in the second to last sentence thereof;
13. deleting the last sentence of Section 16 of Article VII;
14. deleting the words "the Advisor, the Sponsor," from the last
sentence of Section 17 of Article VII;
15. deleting the last sentence of Section 18 of Article VII;
16. deleting entirely Section 19 of Article VII and substituting
[Reserved] in lieu thereof;
17. deleting the first sentence of Section 20 of Article VII and
the word "However," from the second sentence thereof;
18. deleting the words "Sponsor, Advisor," and replacing the words
"any of the foregoing" with "a Director" in the second
sentence of Section 21 of Article VII;
19. deleting the words ", which duty shall include a duty to
supervise the relationship of the Company with the Advisor"
from Section 22 of Article VII;
20. deleting the words "and the Advisor" from the first sentence
of Section 23 of Article VII;
21. deleting entirely Section 25 of Article VII;
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<PAGE> 68
22. inserting to the definition of the word "Transfer" in Section
1 of Article VIII "issuance," after the word "sale" in the
first sentence.
23. deleting the period from the second to last sentence in the
definition of "Transfer" in Section 1 of Article VIII and
inserting the following: "; and (iv) the issuance by the
Company of Equity Stock."
24. deleting the words "the Advisor, the Sponsor," from the third
sentence of paragraph (c) of Article IX;
25. deleting the words "the Advisor, the Sponsor," from paragraph
(e) of Article IX;
26. deleting the words "the Sponsor, the Advisor," from the second
sentence of paragraph (f) of Article IX;
27. deleting the words "the Sponsor, the Advisor," both times they
appear in clause (iii) of paragraph (g) of Article IX;
28. deleting the words "the Advisor, the Sponsor," from the second
sentence of paragraph (h) of Article IX;
29. deleting the words "the Advisor or" and "the Advisor and" from
the eighth sentence of Article X; and
30. deleting clause (ii) from Article XI, deleting the words "the
Advisor," from clause (v) in Article XI and renumbering the
remaining clauses appropriately.
Vote Required. Approval of the amendments to our Second Articles of
Amendment and Restatement as set forth above requires the affirmative vote of
the majority of our shares of common stock issued and outstanding.
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<PAGE> 69
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ADVISORY AND PROPERTY MANAGEMENT FEES
See "THE MERGER - IREAS Advisory Agreement" and "THE MERGER - ICPM
Property Management Agreement" for a description of our relationship and
transactions with IREAS and ICPM, respectively.
FEES FOR OFFERING OF OUR SECURITIES
An affiliate of IREAS, Inland Securities Corporation, served as
dealer-manager of our offerings of securities and received commissions of
$49,869,188. Approximately $42,500,000 of these commissions were passed through
from the affiliate to non-affiliated soliciting broker-dealers.
RELATED MORTGAGE TRANSACTIONS
An affiliate of IREAS, Inland Mortgage Investment Corporation, holds
the mortgage on our Walgreens/Decatur property. As of December 31, 1999, the
remaining balance of the mortgage was $700,381. For the year ended December 31,
1999, we made principal and interest payments of $68,266 on this mortgage.
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<PAGE> 70
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our shares as of the date of this Proxy Statement: (i)
each stockholder known by us to own beneficially in excess of 5% of the
outstanding shares; (ii) each of our directors; (iii) each of our executive
officers; and (iv) all directors and executive officers as a group. Except as
otherwise indicated in the footnotes to the table, the persons named below have
sole voting and investment power for the shares beneficially owned by such
person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED AS OF
THE DATE OF THIS PROXY STATEMENT
------------------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert D. Parks (a)(b) 50,497 (g)
G. Joseph Cosenza (a)(b) 22,569 (g)
Roland W. Burris (c)(f) 2,428 (g)
Joel G. Herter (d)(f) 1,143 (g)
Heidi N. Lawton (e)(f) 1,260 (g)
Roberta S. Matlin (a) 621 (g)
Kelly Tucek (a) 460 (g)
Directors and Executive Officers as a Group (b) 58,978 (g)
</TABLE>
- ---------------------------
(a) The business address of each of Messrs. Parks, Cosenza, Ms. Tucek and Ms.
Matlin is c/o The Inland Group, Inc., 2901 Butterfield Road, Oak Brook,
Illinois 60523.
(b) Includes 20,000 shares owned by IREIC, which is an affiliate of TIGI.
Messrs. Parks and Cosenza are control persons with respect to TIGI and
disclaim beneficial ownership of shares owned by IREIC.
(c) The business address of Mr. Burris is c/o Buford, Peters & Ware, LLC, 111
West Washington Street, Suite 1861, Chicago, Illinois 60602.
(d) The business address of Mr. Herter is Wolf & Company LLP, 2100 Clearwater
Drive, Oak Brook, Illinois 60521.
(e) The business address of Ms. Lawton is c/o Lawton Realty Group, 2100
Clearwater Drive, Suite 106, Oak Brook, Illinois 60521.
(f) Does not include 4,500, 5,000, and 5,500 Shares issuable upon exercise of
options granted to Mr. Herter, Mr. Burris and Ms. Lawton, respectively,
pursuant to the Company's Independent Director Stock Option Plan.
(g) Less than 1% of the Company's outstanding shares, as of the date of this
proxy statement.
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<PAGE> 71
DESCRIPTION OF OUR SECURITIES
We are authorized to issue 106,000,000 shares of capital stock
comprised of 100,000,000 shares of common stock, $.01 par value per share, and
6,000,000 shares of preferred stock, $.01 par value per share. As of the record
date, we have issued ___________ shares of common stock, reserved _____________
shares of common stock for issuance pursuant to the exercise of options or
warrants granted by us and reserved an additional _______________ shares of
common stock for issuance pursuant to our Distribution Reinvestment Program.
Stockholders have no preemptive rights to purchase or subscribe for our
securities, and our common stock is not convertible or subject to redemption at
our option. Each share of common stock is entitled to one vote and shares do not
have cumulative voting rights. Subject to the rights of the holders of any class
of our capital stock having any preference or priority over our common stock,
our common stockholders are entitled to distributions in such amounts as may be
declared by our board from time to time out of funds legally available for such
payments and, in the event of liquidation, to share ratably in any of our assets
remaining after payment in full of all creditors and provisions for any
liquidation preferences on any outstanding preferred stock. We may, at the
discretion of our board, authorize the listing of our common stock on a national
securities exchange or market.
Our board of directors, without further action by our stockholders, are
authorized to issue up to 6,000,000 shares of preferred stock in one or more
series and to determine and fix, as to any series, all the relative rights and
preferences of shares including, without limitation, preferences, limitations or
relative rights with respect to redemption rights, conversion rights, if any,
voting rights, if any, dividend rights and preferences on liquidation.
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<PAGE> 72
SELECTED FINANCIAL DATA
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
For the calendar years 1995 through 1999
<TABLE>
<CAPTION>
1999
Pro Forma 1999 1998 1997 1996 1995
------------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total assets................... $ 982,054,017 982,281,972 787,608,547 333,590,131 104,508,686 18,750,877
Mortgages payable.............. $ 440,740,296 440,740,296 288,982,470 106,589,710 30,838,233 750,727
Total income................... $ 123,787,569 123,787,569 73,302,278 29,421,585 6,327,734 1,180,422
Net income .................... $ 36,462,412 30,171,901 24,085,871 8,647,221 2,452,221 496,514
Net income per
common share, basic and
diluted (b)............... $ 0.60 0.55 0.60 0.57 0.55 0.53
Distributions declared......... $ 48,379,621 48,379,621 35,443,213 13,127,597 3,704,943 736,627
Distributions per common
share (b)................. $ 0.89 0.89 0.88 0.86 0.82 0.78
Funds From Operations
(b)(c).................... $ (12,764,034) 49,605,023 35,474,823 13,203,666 3,391,365 666,408
Funds From Operations
Adjusted for Merger
consideration (b)(c)........... $ 55,895,534 49,605,023 35,474,823 13,203,666 3,391,365 666,408
Funds available for
distribution (c). . . . . . $ 55,561,975 49,271,464 35,698,975 13,141,242 3,680,824 787,011
Cash flows provided by
operating activities...... $ 64,831,977 59,201,034 43,031,662 15,923,839 5,529,709 978,350
Cash flows used in
investing activities...... $(278,013,144) (278,013,144) (344,562,533) (146,994,619) (68,976,841) (6,577,843)
Cash flows provided by
financing activities...... $ 115,179,751 115,179,751 373,363,545 173,724,632 71,199,936 6,327,490
Weighted average common
stock shares outstanding
basic and diluted......... 60,784,906 54,603,088 40,359,796 15,225,983 4,494,620 943,156
</TABLE>
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(a) The above selected financial data should be read in conjunction with the
financial statements and related notes appearing in our Annual Report on
Form 10-K for the year ended December 31, 1999, which we sent to you
previously and is on file with the Commission and the accompanying pro
forma financial statements.
(b) The net income and distributions per share are based upon the weighted
average number of common shares outstanding. The $.89 per share
distributions for the year ended December 31, 1999, represented 98.8% of
our Funds From Operations ("FFO") and 99.2% of funds available for
distribution for that period. See Footnote (c) below for information
regarding our calculation of FFO. Distributions to the extent of our
current and accumulated earnings and profits for federal income tax
purposes are taxable to our stockholders as ordinary income. Distributions
in excess of these earnings and profits generally are treated as a
non-taxable reduction of our stockholder's basis in the shares to the
extent thereof, and thereafter as taxable gain (a return of capital). These
distributions in excess of earnings and profits will have the effect of
deferring taxation of the amount of the distribution until the sale of the
stockholder's shares. For the year ended December 31, 1999, $12,738,889 (or
26.33% of the $48,379,621 distributions declared for 1999) represented a
return of capital. The balance of the distribution constitutes ordinary
income. In order to maintain our qualification as a REIT, we made annual
distributions to our stockholders of greater than 95% of our REIT taxable
income. REIT taxable income does not include net capital gains. Under
certain circumstances, we may be required to make distributions in excess
of cash available for distribution in order to meet the REIT distribution
requirements. Distributions are determined by our board and are dependent
on a number of factors, including the amount of funds available for
distribution, our financial condition, any decision by the board to
reinvest funds rather than to distribute the funds, our capital
expenditures and the annual distribution required to maintain REIT status
under the Code.
(c) One of our objectives is to provide cash distributions to our stockholders
from cash generated by our operations. Cash generated from operations is
not equivalent to our net operating income as determined under generally
accepted accounting principles or GAAP. Due to certain unique operating
characteristics of real estate companies, the National Association of Real
Estate Investment Trusts ("NAREIT"), an industry trade group, has
promulgated a standard known as "Funds From Operations" or "FFO" for short,
which it believes more accurately reflects the operating performance of a
REIT. As defined by NAREIT, FFO means net income computed in accordance
with GAAP, less extraordinary and unusual items, excluding gains (or
losses) from debt restructuring and sales of property plus depreciation on
real property and amortization and after adjustments for unconsolidated
partnership and joint ventures in which the REIT holds an interest. We have
adopted the NAREIT definition for computing FFO because management believes
that, subject to the following limitations, FFO provides a basis for
comparing our performance and operations to those of other REITs. The
calculation of FFO may vary from entity to entity since capitalization and
expense policies tend to vary from entity to entity. Items which are
capitalized do not impact FFO, whereas items that are expensed reduce FFO.
Consequently, our presentation of FFO may not be comparable to other
similarly titled measures presented
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<PAGE> 74
by other REITs. FFO is not intended to be an alternative to "Net Income" as
an indicator of our performance nor to "Cash Flows from Operating
Activities" as determined by GAAP as a measure of our capacity to pay
distributions. FFO and funds available for distribution are calculated as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
Pro Forma
Dec. 31, 1999
1999 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income .......................... $ 36,462,412 30,171,901 24,085,871 8,647,221
Depreciation, net of minority
interest ....................... $ 19,433,122 19,433,122 11,388,952 4,556,445
Merger consideration costs .......... $(68,659,568) -- -- --
------------ ------------ ------------ ------------
Funds From Operations (1) ........... $(12,764,034) 49,605,023 35,474,823 13,203,666
Adjustment for Merger
consideration costs ................. $ 8,659,568 -- -- --
------------ ------------ ------------ ------------
Funds From Operations adjusted
for Merger consideration
costs .......................... $ 55,895,534 49,605,023 35,474,823 13,203,666
Principal amortization of debt,
net of minority interest ....... $ (87,752) (87,752) (74,454) (67,300)
Deferred rent receivable, net of
minority interest (2) .......... $ (2,327,251) (2,327,251) (2,120,951) (654,978)
Acquisition cost expenses (3) ....... -- -- 437,783 249,493
Rental income received under
master lease agreements, net of
minority interest (4) .......... $ 2,081,444 2,081,444 1,981,774 410,361
------------ ------------ ------------ ------------
Funds available for distribution .... $ 55,561,475 49,271,464 35,698,975 13,141,242
============ ============ ============ ============
Funds From Operations per
Common Share ........................ $ (0.21) 0.91 0.88 0.87
Funds From Operations adjusted
for Merger consideration costs 0.87
per Common Share ............... $ 0.92 0.91 0.88
</TABLE>
(1) FFO does not represent cash generated from operating activities
calculated in accordance with GAAP and is not necessarily indicative of
cash available to fund cash needs. FFO should not be considered as an
alternative to net income as an indicator of our operating performance
or as an alternative to cash flow as a measure of liquidity. "Funds
From Operations adjusted for Merger consideration costs" reflects FFO
as adjusted for the accounting impact of merger consideration to
acquire IREAS and ICPM.
(2) Certain tenant leases contain provisions providing for stepped rent
increases. GAAP requires us to record rental income for the period of
occupancy using the effective monthly rent, which is the average
monthly rent for the entire period of occupancy during the term of the
lease.
(3) Acquisition cost expenses include costs and expenses relating to the
acquisition of properties. These costs were estimated to be up to 0.5%
of the gross proceeds from offering shares of
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<PAGE> 75
our stock to the public and were paid from such proceeds. No
acquisition costs have been included for 1999 due to the termination of
our offering at the end of 1998.
(4) In connection with the purchase of several properties, we will receive
payments under master lease agreements covering spaces vacant at the
time of acquisition of those properties. The payments will be made to
us for periods ranging from one to two years from the date of
acquisition of the property or until the spaces are leased. GAAP
requires that as these payments are received, they be recorded as a
reduction in the purchase price of the properties rather than as rental
income.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents consists of cash and short-term investments.
Cash and cash equivalents, at December 31, 1999 and December 31, 1998, were
$19,424,343 and $123,056,702, respectively. The decrease in cash and cash
equivalents since December 31, 1998 resulted primarily from the use of cash
resources to purchase additional properties. Partially offsetting the decrease
in cash and cash equivalents was additional proceeds received through our
Distribution Reinvestment Program ("DRP"). We intend to use cash and cash
equivalents to purchase additional properties, to pay distributions and for
working capital requirements. The source of future cash for investing in
properties will be from financing obtained on currently unencumbered properties
and amounts raised through our DRP.
As of December 31, 1999, we had acquired 115 properties. Our properties
are currently generating sufficient cash flow to cover operating expenses plus
pay a monthly distribution on weighted average shares. Beginning July 1999, we
increased the per share distribution paid to stockholders from $.88 per annum to
$.89 per annum on weighted average shares. Distributions declared for the year
ended December 31, 1999 were $48,379,621, of which $12,738,889 represents a
return of capital for federal income tax purposes.
IREAS monitors the various qualification tests we must meet to maintain
our tax status as a real estate investment trust. Large ownership of our stock
is tested upon purchase to determine that no more than 50% in value of the
outstanding stock is owned directly, or indirectly, by five or fewer persons or
entities at any time. IREAS also determines, on a quarterly basis, that the
Gross Income, Asset and Distribution Tests imposed by the REIT requirements are
met. On an ongoing basis, as due diligence is performed by IREAS on potential
real estate purchases or temporary investment of uninvested capital, IREAS
determines that the income from the new asset will qualify for REIT purposes.
Beginning with the tax year ended December 31, 1995, we have qualified as a
REIT.
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CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities increased from $15,923,839
for the year ended December 31, 1997 to $43,031,662 for the year ended December
31, 1998 to $59,201,034 for the year ended December 31, 1999. These increases
are due primarily to the increase in the number of properties we owned. As of
December 31, 1999 we had acquired 115 properties, as compared to 85 properties
as of December 31, 1998, and 44 properties as of December 31, 1997.
CASH FLOWS FROM INVESTING ACTIVITIES
We used $278,013,144 in cash for investing activities during the year
ended December 31, 1999 as compared to $344,562,533 and $146,994,619 for the
years ended December 31, 1998 and 1997, respectively. We used substantially all
of the cash primarily for the purchase of and additions to properties.
Additionally, during 1999 we purchased $10,659,289 of investment securities.
CASH FLOWS FROM FINANCING ACTIVITIES
For the year ended December 31, 1999, we generated $115,179,751 of cash
flows from financing activities as compared to $373,363,545 of cash flows
generated from financing activities for the year ended December 31, 1998. This
decrease is due primarily to the termination of an offering of our securities on
December 31, 1998. For the year ended December 31, 1999, we had proceeds from
the DRP, net of remaining offering costs paid and shares repurchased, of
$30,432,466 compared to $261,217,625 for the year ended December 31, 1998. The
decrease is also due to an increase in distributions paid for the year ended
December 31, 1999 of $48,773,272 compared to $33,454,118 for the year ended
December 31, 1998 and a decrease in loan proceeds received for the year ended
December 31, 1999 of $145,814,000 compared to $166,352,000 for the year ended
December 31, 1998. This decrease was partially offset by a decrease in principal
payments made on debt for the year ended December 31, 1999 of $10,659,708
compared to $18,041,255 for the year ended December 31, 1998.
For the year ended December 31, 1998, we generated $373,363,545 of cash
flows from financing activities as compared to $173,724,632 of cash flows from
financing activities for the year ended December 31, 1997. The increase is due
to the increase in proceeds raised from the offerings of our securities and an
increase in loan proceeds received in 1998. This increase was partially offset
by an increase in distributions paid and an increase in principal payments made
on debt.
The weighted annual average interest rate on the mortgages payable
outstanding at December 31, 1999 was approximately 7.07%.
RESULTS OF OPERATIONS
At December 31, 1999, we owned 23 single-user retail properties, 74
Neighborhood Retail Centers and 18 Community Centers.
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<PAGE> 77
Total income for the years ended December 31, 1999, 1998 and 1997 was
$123,787,569, $73,302,278 and $29,421,585, respectively. The increases are due
primarily to the purchase of additional properties. As of December 31, 1999, we
had acquired 115 properties, as compared to 85 properties as of December 31,
1998 and 44 properties as of December 31, 1997. The purchase of additional
properties also resulted in increases in property operating expenses and
depreciation expense.
During March 1999, we received a fee of $803,158 for the termination of
a lease at one of our properties. This termination fee is included in additional
rental income for the year ended December 31, 1999. We signed a lease with a new
tenant for this space and began receiving rent from the new tenant in April
1999.
Interest income is the result of cash and cash equivalents being
invested in short-term investments until a property is purchased.
The increases in professional services to our affiliates and
non-affiliates and general and administrative expenses to our affiliates and
non-affiliates for the year ended December 31, 1999, as compared to the years
ended December 31, 1998 and 1997, is due primarily to the management of an
increased number of real estate assets and an increased number of stockholders.
IREAS may receive an annual Advisor Asset Management Fee of not more
than 1% of our average invested assets, paid quarterly. We paid an Advisor Asset
Management Fee which represented .58, .20 and .45 of the 1% of our average
invested assets for the years ended December 31, 1999, 1998 and 1997,
respectively. Remaining Advisor Asset Management Fees are forfeited by IREAS
and, accordingly, not accrued in our financial statements.
The increase in mortgage interest to non-affiliates for the year ended
December 31, 1999, as compared to the years ended December 31, 1998 and 1997, is
due to an increase in mortgages payable to approximately $440,740,000 from
approximately $289,000,000 and $106,600,000, respectively.
The increase in acquisition cost expenses paid to our affiliates and
non-affiliates for the years ended December 31, 1999 and 1998, as compared to
the year ended December 31, 1997, is due to the increased number of properties
we considered for acquisition but did not purchase.
In October 1998, we formed the Inland Joliet Commons LLC, an Illinois
limited liability company, with an unaffiliated third party which purchased
Phase I of the Joliet Commons Shopping Center. We contributed approximately
$52,000 for a 1% interest in the Inland Joliet Commons LLC and the third party
contributed a property with a fair market value of approximately $19,733,000 and
debt of approximately $14,569,000 to the Inland Joliet Commons LLC for a 99%
stated interest. We are the managing member of the Inland Joliet Commons LLC.
The non-managing member (third party seller) has a right, on or after October
30, 2000 and prior to the time the Company has listed its shares on a national
securities exchange, to tender its units in the Inland Joliet Commons LLC to
63
<PAGE> 78
the managing member for a cash payment equal to the equity in the property at
the time of its contribution to the LLC. If the units are tendered after October
30, 1999 and we have not listed our shares on a national securities exchange,
the non-managing member has a right to receive 469,480 shares of common stock,
which right has not yet been exercised.
In September 1999, we formed the Inland Ryan LLC, a Delaware limited
liability company, with an unaffiliated third party which purchased nine
shopping centers. We contributed approximately $76,720,000 for an approximate
77% interest in the Inland Ryan LLC. The third party seller contributed nine
properties with a fair market value of approximately $99,427,000, debt of
approximately $65,500,000 to the LLC and received a cash payment of $11,175,000
from us for an approximate 23% interest. We are the managing member of the
Inland Ryan LLC. The non-managing member (third party seller) has a right on or
after January 1, 2001 to tender up to 1/2 of its interest in the Inland Ryan LLC
to the managing member for a cash payment. The remaining interest may be
tendered to the managing member on or after June 30, 2002. If the non-managing
member has not tendered all of its interest by August 31, 2004, then at any time
after that date, the managing member, at its sole and exclusive option, may
require the tender of all remaining non-managing member interests. Generally,
profit and loss allocations and distributions are made in accordance with stated
ownership interests.
In September 1999, we formed the Inland Ryan Cliff Lake LLC, a Delaware
limited liability company, with the Inland Ryan LLC in order to comply with
covenants of an assumed mortgage. We contributed approximately $6,000 in cash
for a 1% interest in the Inland Ryan Cliff Lake LLC. The Inland Ryan LLC
contributed one property with a fair market value of approximately $5,554,000
and debt of approximately $5,134,000 to the LLC for an approximate 99% interest.
We are the managing member of the Inland Ryan Cliff Lake LLC. The non-managing
member (third party seller) has a right on or after January 1, 2001 to tender up
to half of its interest in the Inland Ryan Cliff Lake LLC to the managing member
for a cash payment. The remaining interest may be tendered to the managing
member on or after June 30, 2002. If the non-managing member has not tendered
all of its interest by August 31, 2004, then at any time after that date, the
managing member, at its sole and exclusive option, may require the tender of all
remaining non-managing member interests. Generally, profit and loss allocations
and distributions are made in accordance with stated ownership interests.
YEAR 2000 ISSUES
As part of our year 2000 readiness plan, we have identified three areas
for compliance efforts: business computer systems, tenants and suppliers and
non-information technology systems. We have not experienced any problems
relating to year 2000 issues in any of these areas. Total costs associated with
year 2000 readiness were not material.
SUBSEQUENT EVENTS
In January 2000, we paid a distribution of $4,374,462 to our
stockholders.
64
<PAGE> 79
On January 13, 2000, we purchased Rose Plaza East from an unaffiliated
third party for approximately $2,171,400 using cash and cash equivalents. The
property is located in Naperville, Illinois and contains approximately 11,658
square feet of leasable space. Its anchor tenants are Starbuck's, BoRics, Plus
Signs, Alpha Communications and Kinko's.
On February 1, 2000, we purchased Chatham Ridge Shopping Center from an
unaffiliated third party for approximately $19,475,240. The property is located
in Chicago, Illinois and contains approximately 175,730 square feet of leasable
space. Its anchor tenants are Cub Foods and Marshalls. To purchase the property,
we used cash and cash equivalents of approximately $9,480,000 and obtained a
loan from a third party lender for the balance of the purchase price.
On February 1, 2000, we borrowed $3,000,000 from First Union. The loan,
secured by our investment in securities held in a brokerage account maintained
by First Union, accrued interest at 6.5% and was repaid on March 14, 2000.
On February 8, 2000, we purchased Joliet Commons Phase II from a third
party affiliated with the non-managing member of Inland Joliet Commons LLC for
approximately $4,800,000 using cash and cash equivalents. The property is
located in Joliet, Illinois and contains approximately 40,395 square feet of
leasable space. Its anchor tenants are Office Max, Eddie Bauer and Peppers
Bedroom City.
IMPACT OF ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in 1998 and is
effective for fiscal years beginning after June 15, 2000. On December 2, 1999,
the Commission issued Staff Accounting Bulletin 101 "Revenue Recognition in
Financial Statements." The staff determined that a lessor should defer
recognition of contingent rental income (i.e., percentage/excess rent) until the
specified target (i.e., breakpoint) that triggers the contingent rental income
is achieved. We record percentage rental revenue in accordance with the SAB.
INFLATION
For our Neighborhood Retail Centers and Community Centers, inflation is
likely to increase rental income from leases to new tenants and lease renewals,
subject to market conditions. Our rental income and operating expenses for those
properties owned or to be owned and operated under triple-net leases are not
likely to be directly affected by future inflation, since rents are or will be
fixed under the leases and property expenses are the responsibility of the
tenants. The capital appreciation of triple-net leased properties is likely to
be influenced by interest rate fluctuations. To the extent that inflation
determines interest rates, future inflation may have an effect on the capital
appreciation of triple-net leased properties.
65
<PAGE> 80
"PRO FORMA" MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at historical and pro forma December 31, 1999
were $19,424,343 and $19,196,388, respectively. The decrease in cash and cash
equivalents for pro forma December 31, 1999 resulted from recording the payment
of additional costs of the merger. This decrease is offset by cash received by
the Company at the closing of the Merger for accrued vacation and other employee
benefits of certain employees of IREAS and ICPM who we will employ subsequent to
the merger.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities increased from $59,201,034
for the historical year ended December 31, 1999 to $65,491,545 for the pro forma
year ended December 31, 1999. This increase is due to the elimination of
expenses related to asset management and property management fees. This increase
is offset by the increase in professional services and general and
administrative fees reflecting the 1999 operating expenses of IREAS and ICPM
which we would incur directly upon consummation of the merger.
CASH FLOWS FROM INVESTING ACTIVITIES
No pro forma adjustments were made to the historical year ended
December 31, 1999.
CASH FLOWS FROM FINANCING ACTIVITIES
No pro forma adjustments were made to the historical year ended
December 31, 1999.
RESULTS OF OPERATIONS
No pro forma adjustments were made to total income for the historical
year ended December 31, 1999.
The increase in our professional services and general and
administrative fees for pro forma year ended December 31, 1999, as compared to
the historical year ended December 31, 1999, is due to our recording the 1999
operating expenses of IREAS and ICPM which we would incur directly upon
consummation of the merger.
The decrease in asset management fee and property operating expenses is
due to the elimination of our expenses related to the asset management and
property management fees. The corresponding fee revenue recognized by IREAS and
ICPM have not been reflected as they would be eliminated in consolidation.
66
<PAGE> 81
At the closing of the Merger, we will issue to the parents of IREAS and
ICPM an aggregate of 6,181,818 shares of our common stock valued at $11 per
share, or $68,000,000, in exchange for all of the outstanding equity securities
of IREAS and ICPM.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires that our officers and
directors, and persons who own more than ten percent (10%) of a registered class
of our equities securities, to file reports of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the Commission. These officers, directors, and
individuals, entities or groups holding ten percent (10%) or more of our
outstanding shares of common stock are also required by Commission rules to
furnish us with copies of all forms they file. To the best of our knowledge,
currently no group, entity or individual holds in excess of 10% of our common
stock.
Based solely on a review of the copies of the forms received by us or
written representations from certain reporting persons, we believe that, during
1999, all Section 16(a) filing requirements applicable to our officers,
directors, and individuals, entities or groups holding ten percent (10%) or more
of our outstanding shares of common stock were met.
OTHER MATTERS
As of the date of this Proxy Statement, the above is the only business
we are aware of that is to be acted upon at the annual meeting. If, however,
other matters should properly come before us at the annual meeting, the persons
appointed by your proxy will vote on those matters according to their best
judgment.
67
<PAGE> 82
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We incorporate by reference herein the following documents filed
pursuant to the Exchange Act under the Exchange Act File No. 0-28382: (1) our
annual report on Form 10-K for the fiscal year ended December 31, 1999; and (2)
our current report on Form 8-K dated March 21, 2000. All reports and other
documents we file pursuant to Sections 13(a)(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this proxy statement also shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
these reports and documents. There has not occurred any material changes in our
affairs since December 31, 1999. Any statement incorporated or deemed to be
incorporated herein shall be deemed to be modified or superseded for purposes of
this proxy statement to the extent that any statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes this statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this proxy statement. We will not update this proxy
statement for events occurring subsequent to the date of this proxy statement.
You may read and copy any materials we file with the Commission at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330. The Commission maintains an
Internet site that contains our reports, proxy and information statements, and
other information at http://www.sec.gov.
We will provide without charge a copy of any of the foregoing documents
incorporated herein by reference (other than exhibits to documents, unless these
exhibits are specifically incorporated by reference into the document). Requests
for these documents should be made to Roberta Matlin at 2901 Butterfield Road,
Oak Brook, Illinois 60523.
68
<PAGE> 83
STOCKHOLDER PROPOSALS
We have not received any stockholder proposals for inclusion in this
year's proxy statement. If a stockholder wishes to present a proposal to be
included in the proxy statement for the next annual meeting, the proposal must
be submitted in writing and received by our secretary at our offices no later
than _________, 2001, addressed as follows: Corporate Secretary, Inland Real
Estate Corporation, 2901 Butterfield Road, Oak Brook, Illinois 60523.
By the order of the Board of Directors,
_______________________________________
Robert D. Parks
President and
Chief Executive Officer
Oak Brook, Illinois
_______________, 2000
YOUR VOTE IS IMPORTANT. THE PROMPT RETURN OF PROXIES WILL
SAVE US THE EXPENSE OF FURTHER REQUESTS FOR PROXIES. PLEASE VOTE
YOUR SHARES BY TELEPHONE, ELECTRONICALLY OR BY MARKING, SIGNING,
DATING AND RETURNING YOUR PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE.
69
<PAGE> 84
PROXY FOR ANNUAL MEETING
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
INLAND REAL ESTATE CORPORATION
2901 BUTTERFIELD ROAD
OAK BROOK, ILLINOIS 60523
I hereby appoint Roberta S. Matlin and Kelly Tucek as Proxies, to vote, as
directed, all the shares of common stock of Inland Real Estate Corporation held
of record by me as of ________, 2000, at the annual meeting of stockholders to
be held on June 27, 2000 or any adjournment or postponement of the meeting. This
Proxy authorizes each of them to vote in their discretion on any matter that may
properly come before the annual meeting or any adjournment or postponement of
the meeting.
1. ELECTION OF DIRECTORS (Mark only one box).
FOR [ ] WITHHOLD AUTHORITY [ ]
all nominees listed below to vote for all nominees listed below
(except as marked to the contrary below)
Robert D. Parks; G. Joseph Cosenza; Joel G. Herter; Heidi N. Lawton; Roland
W. Burris
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list above.)
2. PROPOSAL TO RATIFY OUR SELECTION OF KPMG LLP AS OUR PRINCIPAL
INDEPENDENT PUBLIC ACCOUNTANT FOR 2000 (mark only one box).
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. APPROVAL AND ADOPTION OF AGREEMENT AND PLAN OF MERGER (mark only one box).
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. AMEND OUR SECOND AMENDED ARTICLES AND RESTATEMENT TO REMOVE REFERENCES
TO "ADVISOR" OR "SPONSOR" OR PROVISIONS GOVERNING OUR RELATIONSHIP WITH
OUR "ADVISOR" OR "SPONSOR" (mark only one box).
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON ANY OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT OR
POSTPONEMENT OF THE MEETING.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this Proxy will be
voted FOR the Proposals.
Please sign your name exactly as it appears below.
- -------------------------------------
(Affix Mailing Label Here)
<PAGE> 85
[REVERSE SIDE]
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
YOUR MAY VOTE YOUR SHARES ELECTRONICALLY BY TELEPHONE OR INTERNET. IF
YOU CHOOSE TO VOTE YOUR SHARES ELECTRONICALLY, THERE IS NO NEED FOR YOU
TO MAIL BACK YOUR PROXY CARD.
IF YOU HOLD SHARES AS JOINT TENANTS, BOTH YOU AND THE CO-OWNER MUST
SIGN. If you are signing as executor, trustee, guardian or in another
representative capacity, please provide your full title. If you are a
corporation, please sign in full corporate name by the president or other
authorized officer. If you are a partnership, please sign in partnership name by
an authorized person.
- --------------------------------------
Your signature
- --------------------------------------
Signature of co-owner, if held jointly
Date:
---------------------------------
If you are signing as attorney, executor, administrator, trustee or guardian or
on behalf of an entity (corporation, partnership, etc.), please indicate your
office or capacity.
Title:
----------------------------------------
YOUR VOTE MUST BE INDICATED (X) IN BLACK OR BLUE INK. |X|
<PAGE> 86
Inland Real Estate Corporation
Index to Pro Forma Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Pro Forma Consolidated Balance at December 31, 1999 (unaudited)..................................................F-3
Notes to Pro Forma Consolidated Balance Sheet at December 31, 1999 (unaudited)...................................F-5
Pro Forma Consolidated Statement of Operations for the year ended December 31, 1999 (unaudited)..................F-7
Notes to Pro Forma Consolidated Statement of Operations for the year ended December 31, 1999 (unaudited)........F-10
</TABLE>
F-1
<PAGE> 87
Inland Real Estate Corporation
Pro Forma Consolidated Financial Statements
(unaudited)
The accompanying pro forma consolidated financial statements for Inland Real
Estate Corporation (the "Company") reflect the Merger pursuant to which the
Company will acquire Inland Real Estate Advisory Services, Inc. ("IREAS") and
Inland Commercial Property Management, Inc. ("ICPM") in exchange for common
shares of the Company's stock. The Merger, subject to stockholder approval and
other conditions, will result in the Company becoming self-administered. The
Merger does not meet the significance tests of the Securities and Exchange
Commission that require pro forma financial statements and financial statements
of the acquired companies. However, pro forma financial statements have been
included because management believes that presenting the pro forma effects of
the Merger will help stockholders evaluate and understand the Merger.
F-2
<PAGE> 88
Inland Real Estate Corporation
Pro Forma Consolidated Balance Sheet
December 31, 1999
(unaudited)
The following unaudited Pro Forma Consolidated Balance Sheet of the Company is
presented to give effect to the acquisition of IREAS and ICPM through a non-cash
merger as though this transaction occurred December 31, 1999. This unaudited Pro
Forma Consolidated Balance Sheet should be read in conjunction with the December
31, 1999 Consolidated Financial Statements and the notes thereto as filed on
Form 10-K.
This unaudited Pro Forma Consolidated Balance Sheet is not necessarily
indicative of what the actual financial position would have been at December 31,
1999, nor does it purport to represent the future financial position of the
Company. Unless otherwise defined, capitalized terms used herein shall have the
same meaning as in the Proxy Statement.
F-3
<PAGE> 89
Inland Real Estate Corporation
Pro Forma Consolidated Balance Sheet
December 31, 1999
(unaudited)
<TABLE>
<CAPTION>
December 31, December 31,
1999 Pro Forma 1999
Historical (A) Adjustments Pro Forma
--------------- ------------- -------------
<S> <C> <C> <C>
Assets
Net investment in properties............. $ 907,381,429 - 907,381,429
Cash and cash equivalents................ 19,424,343 (659,568) (F) 19,196,388
431,613 (B)
Investment in securities................. 8,570,656 - 8,570,656
Restricted cash.......................... 15,340,902 - 15,340,902
Accounts and rents receivable............ 26,290,228 - 26,290,228
------------- ------------- -------------
Other assets............................. 5,274,414 - 5,274,414
Total assets............................. $ 982,281,972 (227,955) 982,054,017
============= ============= =============
Liabilities and Stockholders' Equity
Accounts payable and accrued
expenses.............................. $ 2,175,464 431,613 (B) 2,607,077
Accrued real estate taxes................ 18,829,084 - 18,829,084
Distribution payable..................... 4,374,462 - 4,374,462
Security deposits........................ 1,976,082 - 1,976,082
Mortgages payable........................ 440,740,296 - 440,740,296
Unearned income.......................... 1,536,008 - 1,536,008
Other liabilities........................ 8,525,986 - 8,525,986
Due to Affiliates........................ 1,517,775 - 1,517,775
------------- ------------- -------------
Total liabilities........................ 479,675,157 431,613 480,106,770
------------- ------------- -------------
Minority interest........................ 27,112,690 - 27,112,690
------------- ------------- -------------
Common Stock............................. 553,998 61,818 (C) 615,806
Additional paid in capital
(net of Offering costs)............... 512,567,043 67,938,182 (C) 580,505,225
Accumulated distributions in
excess of net income.................. (35,538,273) (68,659,568) (D) (104,197,841)
Accumulated other comprehensive
income (loss)......................... (2,088,633) - (2,088,633)
------------- ------------- -------------
Total Stockholders' equity............... 475,494,125 (659,568) 474,834,557
------------- ------------- -------------
Total liabilities and
Stockholders' equity.................. $ 982,281,972 (227,955) 982,054,017
============= ============= =============
</TABLE>
See accompanying notes to pro forma consolidated balance sheet
F-4
<PAGE> 90
Inland Real Estate Corporation
Notes to Pro Forma Consolidated Balance Sheet
December 31, 1999
(unaudited)
(A) The December 31, 1999 Historical column represents the historical
consolidated balance sheet of the Company at December 31, 1999, as
filed with the Commission on Form 10-K.
(B) In accordance with the terms of the Merger Agreement, the Company will
not assume any assets and liabilities of IREAS or ICPM. The Company
will receive cash of approximately $432,000 at the closing of the
Merger in order to pay for accrued vacation and other employee benefits
of certain employees of IREAS and ICPM who will be employed by the
Company subsequent to the Merger.
In addition, the Company will also acquire certain assets of IREAS and
ICPM which are principally full depreciated office equipment and
supplies. For purposes of the pro forma consolidated balance sheet, the
Company has assumed that these assets acquired have no fair value.
(C) The Company will issue to the parent companies of IREAS and ICPM an
aggregate of 6,181,818 shares of Common Stock with an estimated fair
value of $11 per share (determined by financial advisors to the Company
as described in the Proxy Statement), or $68,000,000 in the aggregate,
in exchange for all of the outstanding equity securities of IREAS and
ICPM. The pro forma adjustment represents the Common Stock and
additional paid-in capital, as follows:
<TABLE>
<CAPTION>
<S> <C>
Market value of Common Stock issued......................... $ 68,000,000
Par value of Common Stock issued............................ (61,818)
------------------------
Net increase in additional paid-in capital.................. $ 67,938,182
========================
</TABLE>
(D) Represents the market value of the Common Stock issued as consideration
plus liabilities acquired from IREAS and ICPM, net of cash assumed, and
estimated costs of the Merger which has been accounted for as costs
incurred in terminating the Advisor and Management Agreements with
IREAS and ICPM, respectively, because IREAS and ICPM do not qualify as
"businesses" for purposes of applying APB Opinion No. 16, "Business
Combinations." Such amount is calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Market value of Common Stock issued......................... $ 68,000,000
Estimated costs of the Merger (see (F))..................... 659,568
------------------------
Merger consideration costs.................................. $ 68,659,568
========================
</TABLE>
F-5
<PAGE> 91
Inland Real Estate Corporation
Notes to Pro Forma Consolidated Balance Sheet
December 31, 1999
(unaudited)
(continued)
(E) No pro forma assumptions have been made for the additional payment of
distributions resulting from the shares issued as a result of the
Merger.
(F) Estimated costs of the Merger consist of legal, accounting, and those
fees due to the financial advisor which are not included in the
historical amounts at December 31, 1999.
F-6
<PAGE> 92
Inland Real Estate Corporation
Pro Forma Consolidated Statement of Operations
For the years ended December 31, 1999
(unaudited)
The following unaudited Pro Forma Consolidated Statement of Operations of the
Company is presented to effect the acquisition of IREAS and ICPM through a
non-cash merger as though it occurred on January 1, 1999. This unaudited Pro
Forma Consolidated Statement of Operations should be read in conjunction with
the December 31, 1999 Financial Statements and the notes thereto as filed on
Form 10-K.
This unaudited Pro Forma Consolidated Statement of Operations is not necessarily
indicative of what the actual results of operations would have been for the year
ended December 31, 1999, nor does it purport to represent the future financial
position of the Company. Unless otherwise defined, capitalized terms used herein
shall have the same meaning as in the Proxy Statement.
F-7
<PAGE> 93
Inland Real Estate Corporation
Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
<TABLE>
<CAPTION>
December 31, December 31,
1999 Pro Forma 1999
Historical (A) Adjustments Pro Forma
--------------------- ----------------------- --------------------
<S> <C> <C> <C>
Income
Rental income............................ $ 85,951,584 - 85,951,584
Additional rental income................. 32,952,348 - 35,952,348
Interest income.......................... 4,206,809 - 4,206,809
Other income............................. 676,828 - 676,828
--------------------- ----------------------- --------------------
Total income............................. 123,787,569 - 123,787,569
--------------------- ----------------------- --------------------
Expenses
Professional services and general
and administrative fees............... 2,424,542 2,772,071 (B) 5,196,613
Advisor asset management fee............. 4,193,068 (4,193,068) -
Property operating expense............... 40,302,575 (4,869,514) (C) 35,433,061
Interest expense......................... 25,653,724 - 25,653,724
Depreciation............................. 20,262,873 - 20,262,873
Amortization........ 98,396 - 98,396
Acquisition costs expensed............... 565,823 - 565,823
--------------------- ----------------------- --------------------
Total expenses........................... $ 93,501,001 (6,290,511) 87,210,490
--------------------- ----------------------- --------------------
Income before minority
interest.............................. 30,286,568 6,290,511 36,577,079
Minority interest........................ (114,667) - (114,667)
--------------------- ----------------------- --------------------
Net income .............................. $30,171,901 6,290,511 (36,462,412)
===================== ======================= ====================
Weighted average Common Stock
outstanding........................... 54,603,088 6,181,818 (D) 60,784,906
===================== ======================= ====================
Net income per weighted
average Common Stock
outstanding, basic and diluted......... $ 0.55 0.60
===================== ====================
</TABLE>
See accompanying notes to pro forma consolidated statement of operations.
F-8
<PAGE> 94
Inland Real Estate Corporation
Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
(continued)
<TABLE>
<CAPTION>
December 31, December 31,
1999 Pro Forma 1999
Historical (A) Adjustments Pro Forma
--------------------- ----------------------- --------------------
<S> <C> <C> <C>
Reconciliation of net income
to Funds From Operations
attributable to Common Stock:
Net income (loss)........................ $ 30,171,901 6,290,511 36,462,412
Add:
Depreciation............................. 19,433,122 - 19,433,122
Subtract:
Merger consideration costs............... - (68,659,568) (D) (68,659,568)
--------------------- ----------------------- --------------------
Funds from Operations attributable
to Common Stock (E)................... 49,605,023 (62,369,057) (12,764,034)
Adjustment for Merger
consideration costs................... - 68,659,568 (D) 68,659,568
--------------------- ----------------------- --------------------
Funds From Operations adjusted
for Merger consideration
costs attributable to Common Stock
(E)................................... $ 49,605,023 6,290,511 55,895,534
===================== ======================= ====================
Weighted average Common Stock
outstanding........................... 54,603,088 6,181,818 (E) 60,784,906
===================== ======================= ====================
Funds from operations per
weighted average Common
Stock outstanding..................... $ 0.91 (0.21)
===================== ====================
Funds From Operations adjusted
for Merger consideration costs
per weighted average Common
Stock outstanding..................... $ 0.91 0.92
===================== ====================
Cash Flow Summary:
Net cash provided by operating
activities............................ $ 59,201,034 5,630,943 64,831,977
Net cash used in investing
activities............................ (278,013,144) - (278,013,144)
Net cash provided by financing
activities............................ 115,179,751 - 115,179,751
</TABLE>
See accompanying notes to pro forma consolidated statement of operations.
F-9
<PAGE> 95
Inland Real Estate Corporation
Notes to Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
(A) The December 31, 1999 Historical column represents the historical
statement of operations of the Company for the year ended December 31,
1999, as filed with the Commission on Form 10-K.
(B) Reflects (i) the historical operating expenses of ICPM which were
associated with providing services to the Company for the year ended
December 31, 1999, and (ii) the estimated operating expenses for IREAS
for the year ended December 31, 1999 as IREAS did not maintain separate
books and records as it related to services provided to the Company.
Such costs are $1,219,971 and $1,552,100, respectively. The historical
operating expenses of ICPM and the estimated operating expenses of
IREAS include management's estimates of costs associated with salaries
and other employee costs pursuant to employment contracts, rental
expense, license fees, and service fees pursuant to the related
agreements between the Company and TIGI. Upon consummation of the
Merger, these expenses will be incurred directly by the Company.
(C) Reflects the elimination of the Company's expenses related to the
Advisor Asset Management and Property Management fees. The
corresponding fee revenue recognized by IREAS and ICPM have not been
reflected as they would be eliminated in consolidation.
(D) Reflects one-time expense adjustment for issuance of 6,181,818 shares
of Common Stock of the Company at $11 per share (determined by
financial advisors to the Company as described in the Proxy Statement)
as consideration for the outstanding equity securities of IREAS and
ICPM plus consideration for the outstanding equity securities of IREAS
and ICPM plus liabilities acquired from IREAS and ICPM, net of cash
assumed, and estimated costs of the Merger. Estimated costs of the
Merger consist of legal, accounting, and the remainder of fees due to
the financial advisor which are not included in the historical amounts
at December 31, 1999.
Since the intent of the accompanying pro forma consolidated statement
of operations for the year ended December 31, 1999 is to reflect the
expected continuing impact of the Merger, the Merger consideration
costs discussed above has been excluded. Upon consummation of the
merger, this expense will be reported as an operation expense on the
Company's statement of operations and will be included in the Company's
calculation of funds from operations as discussed in (E) below.
F-10
<PAGE> 96
Inland Real Estate Corporation
Notes to Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
(continued)
(E) "Funds From Operations" represents the Company's net earnings or loss
computed in accordance with GAAP, excluding gains (or losses) from real
estate transactions, provisions for possible losses, extraordinary
items and depreciation of real estate. Funds from operations should not
be considered as an alternative to net earnings or any other GAAP
measurement of performance as an indicator of the Company's operating
performance or as an alternative to cash flows from operating,
investing or financing activities as a measure of liquidity.
Furthermore, the funds from operations measure presented by the Company
will not be comparable to similarly titled measures of the REITs who do
not compute funds from operations in a manner consistent with the
Company. The Company believes that funds from operations is helpful to
a reader as a measure of the performance of an equity REIT because,
along with cash flow from operating activities, financing activities
and investing activities, it provides a reader with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to funds other cash needs. Furthermore, management
believes that an understanding of Funds From Operations and Funds From
Operation adjusted for Merger consideration costs will enhance the
reader's comprehension of the impact of the Merger to the Company's
special committee in recommending approval of the transaction to the
Board of Directors.
F-11
<PAGE> 97
APPENDIX A
<PAGE> 98
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF MARCH 7, 2000
by and among
INLAND REAL ESTATE CORPORATION
INLAND ADVISORS, INC.
INLAND MANAGEMENT CORPORATION
INLAND REAL ESTATE INVESTMENT CORPORATION
INLAND REAL ESTATE ADVISORY SERVICES, INC.
THE INLAND PROPERTY MANAGEMENT GROUP, INC.
INLAND COMMERCIAL PROPERTY MANAGEMENT, INC.
and
THE INLAND GROUP, INC.
================================================================================
<PAGE> 99
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I
DEFINITIONS.............................................................................................2
Section 1.1 Definitions...................................................................2
ARTICLE II
THE MERGERS.............................................................................................5
Section 2.1 The Mergers...................................................................5
Section 2.2 Effects on Certain Corporate Policies.........................................6
Section 2.3 Conversion of Common Stock of Advisor and Manager.............................7
Section 2.4 Conversion of Merger Co. I and Merger Co. II Shares...........................7
Section 2.5 Exchange of Certificates......................................................7
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF REIT...................................................................8
Section 3.1 Organization and Qualification................................................8
Section 3.2 Capitalization................................................................8
Section 3.3 Issuance of Securities........................................................9
Section 3.4 Authority; Non-Contravention; Approvals.......................................9
Section 3.5 Proxy Statement..............................................................10
Section 3.6 Disclosure, Financial Statements and Absence of Certain
Changes......................................................................10
Section 3.7 Brokers and Finders..........................................................11
Section 3.8 Litigation...................................................................11
Section 3.9 No Violation of Law..........................................................11
Section 3.10 Real Property................................................................11
Section 3.11 Environmental Matters........................................................12
Section 3.12 Insurance....................................................................12
Section 3.13 Disclosure...................................................................13
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF IREIC AND TIPMG......................................................................................13
Section 4.1 Organization and Qualification...............................................13
Section 4.2 Capitalization...............................................................13
Section 4.3 Authority; Non-Contravention; Approvals......................................14
Section 4.4 Financial Statements.........................................................15
Section 4.5 Absence of Certain Changes or Events.........................................15
Section 4.6 Taxes........................................................................16
Section 4.7 Absence of Undisclosed Liabilities...........................................17
</TABLE>
i
<PAGE> 100
<TABLE>
<S> <C> <C>
Section 4.8 Litigation...................................................................17
Section 4.9 No Violation of Law..........................................................17
Section 4.10 Insurance....................................................................18
Section 4.11 Benefit Plans................................................................18
Section 4.12 Other Compensation Arrangements..............................................19
Section 4.13 Intellectual Property........................................................19
Section 4.14 Labor........................................................................20
Section 4.15 Brokers and Finders..........................................................20
Section 4.16 Investment Company Act.......................................................20
Section 4.17 Conduct of Subsidiaries' Business. .........................................20
Section 4.18 Investment in Securities.....................................................20
Section 4.19 Title to Assets; No Real Property............................................21
Section 4.20 Corporate Documents..........................................................21
Section 4.21 Disclosure...................................................................22
Section 4.22 Projections..................................................................22
Section 4.23 Subsidiary Earnings and Profits..............................................22
ARTICLE V
CONDUCT OF BUSINESSES PENDING THE MERGER CLOSING........................................................22
Section 5.1 Conduct of Businesses of Subsidiaries........................................22
Section 5.2 Conduct of Business of REIT..................................................24
ARTICLE VI
ADDITIONAL AGREEMENTS...................................................................................24
Section 6.1 Access to Information........................................................24
Section 6.2 Stockholders' Approval.......................................................25
Section 6.3 Expenses.....................................................................25
Section 6.4 Agreement to Cooperate.......................................................25
Section 6.5 Public Statements............................................................26
Section 6.6 Confidentiality..............................................................26
Section 6.7 Personnel....................................................................27
Section 6.8 Accrued Expenses.............................................................28
Section 6.9 Tax Matters..................................................................28
Section 6.10 Intercompany Indebtedness....................................................29
Section 6.11 Securities Law Matters.......................................................30
Section 6.12 Director and Officer Indemnification.........................................30
Section 6.13 WARN Act.....................................................................30
Section 6.14 Post-Closing Access..........................................................31
Section 6.15 Disclosure Generally.........................................................31
Section 6.16 ACKNOWLEDGMENT...............................................................31
Section 6.17 401(k) Accounts..............................................................31
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE VII
CONDITIONS..............................................................................................32
Section 7.1 Conditions to Each Party's Obligations.......................................32
Section 7.2 Conditions to Obligations of REIT............................................33
Section 7.3 Conditions to Obligations of Parents.........................................34
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER.......................................................................34
Section 8.1 Termination..................................................................34
Section 8.2 Effect of Termination........................................................35
Section 8.3 Amendment....................................................................35
Section 8.4 Waiver.......................................................................35
ARTICLE IX
SURVIVAL AND REMEDY; INDEMNIFICATION....................................................................36
Section 9.1 Indemnification..............................................................36
Section 9.2 Threshold....................................................................36
Section 9.3 Notice of Claims; Assumption of Defense......................................36
Section 9.4 Settlement or Compromise.....................................................37
Section 9.5 Limitations..................................................................37
ARTICLE X
GENERAL PROVISIONS......................................................................................38
Section 10.1 Notices......................................................................38
Section 10.2 Interpretation...............................................................40
Section 10.3 Entire Agreement; Amendments.................................................40
Section 10.4 Miscellaneous................................................................40
Section 10.5 Counterparts.................................................................40
Section 10.6 Parties in Interest..........................................................40
Section 10.7 Successors and Assigns.......................................................40
Section 10.8 Limitation in Liability......................................................40
Section 10.9 No Presumption Against Drafter...............................................40
Section 10.10 Facsimile Signatures.................................................41
</TABLE>
iii
<PAGE> 102
EXHIBITS
Exhibit A Amendments to Articles
Exhibit B Registration Rights Agreement
Exhibit C Lease Agreement Terms
Exhibit D License Agreement Terms
Exhibit E Services Agreement
Exhibit F Employment Agreement Terms
SCHEDULES
Schedule 3.2(b) Capitalization
Schedule 3.4(b) Conflicts
Schedule 3.7 Commissions
Schedule 3.8 Litigation
Schedule 3.10 Real Property
Schedule 3.11 Environmental Matters
Schedule 4.3(b) Authority
Schedule 4.6 Taxes
Schedule 4.8 Litigation
Schedule 4.11 Benefit Plans
Schedule 4.12 Other Compensation
Schedule 4.13 Intellectual Property
Schedule 4.19 Assets
Schedule 4.22 Projections
Schedule 6.7(d) Employees
Schedule 7.1(f) Governmental Consents
Schedule 7.1(g) Terminated Agreements
Schedule 7.2(d) Consents
Schedule 7.2(f) Employment Agreements
iv
<PAGE> 103
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), is entered into
as of the 7th day of March, 2000 by and among Inland Real Estate Corporation, a
Maryland real estate investment trust (the "REIT"), Inland Advisors, Inc., an
Illinois corporation and wholly-owned subsidiary of the REIT ("Merger Co. I")
and Inland Management Corporation, an Illinois corporation and wholly-owned
subsidiary of the REIT ("Merger Co. II"); Inland Real Estate Investment
Corporation, a Delaware corporation ("IREIC") and Inland Real Estate Advisory
Services, Inc., an Illinois corporation and wholly-owned subsidiary of IREIC
("Advisor"); The Inland Property Management Group, Inc., a Delaware corporation
("TIPMG") and Inland Commercial Property Management, Inc., an Illinois
corporation and wholly-owned subsidiary of TIPMG ("Manager").
WHEREAS, the REIT is the sole stockholder of each of Merger Co. I and
Merger Co. II, IREIC is the sole stockholder of Advisor and TIPMG is the sole
stockholder of Manager; and
WHEREAS, REIT desires to acquire all of the stock of Advisor owned by
IREIC and all of the stock of Manager owned by TIPMG through its wholly-owned
subsidiaries, Merger Co. I and Merger Co. II; and
WHEREAS, REIT and IREIC have agreed to accomplish the acquisition by
REIT of all of the stock of Advisor through a reverse triangular merger whereby
Merger Co. I will merge with and into Advisor and Advisor will be the surviving
corporation; and
WHEREAS, pursuant to such merger, IREIC will receive 2,652,683 shares
of $.01 par value common stock of REIT for all of the issued and outstanding
shares of no par value common stock of Advisor; and
WHEREAS, REIT and TIPMG have agreed to accomplish the acquisition by
REIT of all of the stock of Manager through a reverse triangular merger whereby
Merger Co. II will merge with and into Manager and Manager will be the surviving
corporation; and
WHEREAS, pursuant to such merger, TIPMG will receive 3,529,135 shares
of $.01 par value common stock of REIT for all of the issued and outstanding
shares of no par value common stock of Manager; and
WHEREAS, each of the Board of Directors of REIT, IREIC and TIPMG and
stockholders of each of the Subsidiaries, as defined herein, have approved this
Agreement and the transactions contemplated hereby upon the terms and conditions
set forth in this Agreement.
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<PAGE> 104
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound hereby, agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Act" shall have the meaning set forth in Section 2.1(a).
"Advisor Consideration" shall have the meaning set forth in Section
2.3.
"Advisor Shares" shall have the meaning set forth in Section 2.5.
"Advisor Surviving Corporation" shall have that meaning set forth in
Section 2.1(a).
"Affiliated Group" shall have the meaning set forth in Section 4.6(a).
"Agreement" shall mean this Agreement and Plan of Merger.
"Certificate of Merger" shall have the meaning set forth in Section
2.1(d).
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Commonly Controlled Entity" shall have the meaning set forth in
Section 4.11(b).
"Confidential Material" shall have the meaning set forth in Section
6.6(a).
"Consolidated Return Tax Liabilities" shall have the meaning set forth
in Section 9.1.
"Effective Time" shall have the meaning set forth in Section 2.1(d).
"Employee Benefit Plan" shall have the meaning set forth in Section 4.
11(a).
"Environmental Laws" shall have the meaning set forth in Section 3.11.
2
<PAGE> 105
"ERISA" shall have the meaning set forth in Section 4.11(a).
"Excess Amount" shall have the meaning set forth in Section 9.5(b).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" shall have the meaning set forth in Section 9.5(b).
"Indemnified Parties" shall have the meaning set forth in Section 9.1.
"Indemnifying Parties" shall have the meaning set forth in Section 9.1.
"Intellectual Property" shall have the meaning set forth in Section
4.13.
"IRS" shall have the meaning set forth in Section 4.11(a).
"Losses" shall have the meaning set forth in Section 9.1.
"Manager Consideration" shall have the meaning set forth in Section
2.3.
"Manager Shares" shall have the meaning set forth in Section 2.5.
"Manager Surviving Corporation" shall have the meaning set forth in
Section 2.1(b).
"Material Adverse Effect" shall have the meaning set forth in Section
3.1.
"Maximum Indemnification Amount" shall have the meaning set forth in
Section 9.5(b).
"Merger Co. I Merger" shall have the meaning set forth in Section
2.1(a).
"Merger Co. II Merger" shall have the meaning set forth in Section
2.1(b).
"Merger Closing" shall have the meaning set forth in Section 2.1(c).
"Merger Consideration" shall have the meaning set forth in Section 2.3.
"Mergers" shall have the meaning set forth in Section 2.1(b).
"Parents" shall have the meaning set forth in Article IV.
"Parents' Required Statutory Approvals" shall have the meaning set
forth in Section 4.3(c).
"Parents' Stockholders' Approvals" shall have the meaning set forth in
Section 6.2.
3
<PAGE> 106
"Pension Plan" shall have the meaning set forth in Section 4.11(a).
"Potential Contributor" shall have the meaning set forth in Section
9.5.
"Providing Party" shall have the meaning set forth in Section 6.6(a).
"Proxy Statement" shall mean the definitive REIT proxy statement to be
filed with the Commission as a proxy statement by REIT.
"Receiving Party" shall have the meaning set forth in Section 6.6(a).
"Register", "registered" and "registration" refer to a
registration of the offering and sale of securities effected by preparing and
filing a registration statement in compliance with the Securities Act and the
declaration or ordering of the effectiveness of such registration statement.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement attached hereto as Exhibit B.
"REIT Advisory Agreement" shall have the meaning set forth in Section
5.1(a).
"REIT Common Shares" shall mean the shares of $.01 par value per share
common stock of REIT.
"REIT Financial Statements" shall have the meaning set forth in Section
3.6.
"REIT Property Management Agreements" shall have the meaning set forth
in Section 5.1(a).
"REIT Required Statutory Approvals" shall have the meaning set forth in
Section 3.4(c).
"REIT SEC Documents" shall have the meaning set forth in Section 3.6.
"REIT Stockholders' Approval" shall have the meaning set forth in
Section 6.2.
"REIT Special Committee" shall have the meaning as set forth in Section
7.2(a).
"REIT 10-K" shall have the meaning set forth in Section 3.6.
"Representatives" shall have the meaning set forth in Section 6.6(a).
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Subsidiaries" shall have the meaning set forth in Section 4.1.
4
<PAGE> 107
"Subsidiary Financial Statements" shall have the meaning set forth in
Section 4.4.
"Surviving Corporations" shall have the meaning set forth in Section
2.1(b).
"Taxes" shall mean all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, excise,
property, sales, withholding, social security, occupation, use, service, service
use, license, payroll, franchise, transfer and recording taxes, fees and
charges, imposed by the United States, or any state, local or foreign government
or subdivision or agency thereof whether computed on a separate, consolidated,
unitary, combined or any other basis; and such term shall include any interest,
fines, penalties or additional amounts attributable or imposed on or with
respect to any such taxes, charges, fees, levies or other assessments.
"Tax Inquiry Notice" shall have the meaning set forth in Section
6.9(e).
"Tax Returns" shall mean any return, report or other document or
information required to be supplied to a taxing authority in connection with
Taxes.
"Termination Date" shall have the meaning set forth in Section 8.1(b).
"TIGI" shall mean The Inland Group, Inc.
"Welfare Plan" shall have the meaning set forth in Section 4.11(a).
ARTICLE II
THE MERGERS
Section 2.1 The Mergers.
(a) The Merger Co. I Merger. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with the Illinois
Business Corporation Act of 1983 (the "Act"), at the Effective Time, Merger Co.
I shall be merged with and into Advisor (the "Merger Co. I Merger"). Following
the Effective Time, the separate corporate existence of Merger Co. I shall cease
and Advisor shall continue as the surviving corporation (the "Advisor Surviving
Corporation"). The Advisor Surviving Corporation shall succeed to and assume all
the rights and obligations of Advisor in accordance with the Act. The Advisor
Surviving Corporation shall be a "qualified REIT subsidiary" of REIT within the
meaning of Section 856(i)(2) of the Code. The Merger Co. I Merger is intended to
qualify as a tax-free reorganization under Section 368 of the Code.
(b) The Merger Co. II Merger. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with the Act, at the
Effective Time, Merger Co. II shall be merged with and into Manager (the "Merger
Co. II Merger" and together with the Merger Co. I
5
<PAGE> 108
Merger, the "Mergers"). Following the Effective Time, the separate corporate
existence of Merger Co. II shall cease and Manager shall continue as the
surviving corporation (the "Manager Surviving Corporation" and together with the
Advisor Surviving Corporation, the "Surviving Corporations"). The Manager
Surviving Corporation shall succeed to and assume all the rights and obligations
of Manager in accordance with the Act. The Manager Surviving Corporation shall
be a "qualified REIT subsidiary" of REIT within the meaning of Section 856(i)(2)
of the Code. The Merger Co. II Merger is intended to qualify as a tax-free
reorganization under Section 368 of the Code.
(c) The Merger Closing. The events set forth in this Article II shall
be effected, upon the terms and subject to the conditions of this Agreement, as
soon as practicable, but in no event later than ninety (90) days, after this
Agreement and the transactions contemplated hereby are approved by the
stockholders holding the requisite number of shares of each of REIT, IREIC and
TIPMG and the other closing conditions specified in Article VII are satisfied
(the "Merger Closing"). It is the intention of the parties that each of the
events set forth in this Article II shall occur simultaneously.
(d) Effective Time. Subject to the provisions of this Agreement, as
soon as practicable on or after the Merger Closing and with respect to each
Merger, the parties shall file 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 Act and shall make all other filings or
recording required under the Act. Each Merger shall become effective at such
time as the respective Certificate of Merger is duly filed with the Secretary of
State of Illinois, or as such other time as REIT, IREIC and TIPMG, as
applicable, shall agree should be specified in each Certificate of Merger (the
time the Mergers become effective being referred to herein as the "Effective
Time").
(e) Effects of the Mergers. Each Merger shall have the effects set
forth in the applicable provisions of the Act.
Section 2.2 Effects on Certain Corporate Policies.
(a) Certificates of Incorporation and Bylaws. The Certificate of
Incorporation of Merger Co. I as in effect immediately prior to the Effective
Time shall be the Certificate of Incorporation of the Advisor Surviving
Corporation until thereafter changed or amended as provided therein by
applicable law, and the Certificate of Incorporation of Merger Co. II as in
effect immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Manager Surviving Corporation until thereafter changed or
amended as provided therein by applicable law. The bylaws of Merger Co. I as in
effect immediately prior to the Effective Time shall be the bylaws of the
Advisor Surviving Corporation until thereafter changed or amended as provided
therein by applicable law, and the bylaws of Merger Co. II as in effect
immediately prior to the Effective Time shall be the bylaws of the Manager
Surviving Corporation until thereafter changed or amended as provided therein by
applicable law.
(b) Directors and Officers. The directors of Merger Co. I immediately
prior to the Effective Time shall be the directors of the Advisor Surviving
Corporation until the earlier of their
6
<PAGE> 109
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be. The officers of Merger Co. I immediately prior to
the Effective Time shall be the officers of the Advisor Surviving Corporation
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be. The directors of
Merger Co. II immediately prior to the Effective Time shall be the directors of
the Manager Surviving Corporation until the earlier of their resignation or
removal or until their respective successors are duly elected and qualified, as
the case may be. The officers of Merger Co. II immediately prior to the
Effective Time shall be the officers of Manager Surviving Corporation until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
Section 2.3 Conversion of Common Stock of Advisor and Manager. As of
the Effective Time, by virtue of the Mergers and without any further action on
the part of the holder of any shares of capital stock of Advisor or Manager, all
of the issued and outstanding shares of no par value common stock of Advisor
shall be converted into 2,652,683 REIT Common Shares (the "Advisor
Consideration") and all of the issued and outstanding shares of no par value
common stock of Manager shall be converted into 3,529,135 REIT Common Shares
(the "Manager Consideration" and together with the Advisor Consideration, the
"Merger Consideration"). The REIT Common Shares issued as the Merger
Consideration shall be subject to the restrictions and entitled to the
registration and other rights set forth in the Registration Rights Agreement and
shall bear the legend set forth in Section 6.11 of this Agreement. As of the
Effective Time, all shares of common stock of Advisor and Manager shall no
longer be outstanding and shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing such shares shall
cease to have any rights with respect thereto, except the right to receive the
Merger Consideration.
Section 2.4 Conversion of Merger Co. I and Merger Co. II Shares. At and
as of the Effective Time, by virtue of the Merger Co. I Merger and without any
further action on the part of REIT, each share of common stock of Merger Co. I
issued and outstanding to REIT immediately prior to the Effective Time shall by
virtue of the Merger Co. I Merger be converted into one share of common stock of
the Advisor Surviving Corporation. Additionally, at and as of the Effective
Time, by virtue of the Merger Co. II Merger and without any further action on
the part of REIT, each share of common stock of Merger Co. II issued and
outstanding to REIT immediately prior to the Effective Time shall by virtue of
the Merger Co. II Merger be converted into one share of common stock of the
Manager Surviving Corporation.
Section 2.5 Exchange of Certificates. At the Merger Closing, IREIC
shall surrender to REIT the stock certificates representing all of the
outstanding common stock of Advisor (the "Advisor Shares"). Upon receipt of the
stock certificates, REIT shall cancel such stock certificates and shall issue to
IREIC a certificate or certificates representing the REIT Common Shares into
which the Advisor Shares previously represented by the surrendered certificates
shall have been converted at the Effective Time. Additionally, at the Merger
Closing, TIPMG shall surrender to REIT the stock certificates representing all
of the outstanding common stock of Manager (the "Manager Shares"). Upon receipt
of the stock certificates, REIT shall cancel such stock certificates
7
<PAGE> 110
and shall issue to TIPMG a certificate representing the REIT Common Shares into
which the Manager Shares previously represented by the surrendered certificates
shall have been converted at the Effective Time.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF REIT
REIT represents and warrants to IREIC and TIPMG as follows:
Section 3.1 Organization and Qualification. REIT is duly organized,
validly existing and in good standing under the laws of the State of Maryland.
Each of Merger Co. I and Merger Co. II is duly organized, validly existing and
in good standing under the laws of the State of Illinois. Each of REIT, Merger
Co. I and Merger Co. II has the requisite power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted and as it is proposed by it to be conducted. Each of REIT,
Merger Co. I and Merger Co. II is qualified to do business and is in good
standing in each jurisdiction in which the properties owned, leased or operated
by it or the nature of the business conducted by it makes such qualification
necessary, except where the failure to be so qualified and in good standing
would not reasonably be expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other) or
results of operations of it (collectively, a "Material Adverse Effect"). True,
accurate and complete copies of each of the Articles of Incorporation and bylaws
of each of REIT, Merger Co. I and Merger Co. II as in effect on the date hereof,
including all amendments thereto, have heretofore been delivered to IREIC and
TIPMG.
Section 3.2 Capitalization.
(a) The authorized shares of REIT consists of 100,000,000 shares of
REIT Common Shares of which, 55,765,413 shares are issued and outstanding as of
February 29, 2000, and are validly issued, fully paid and nonassessable and free
of preemptive rights. All issued shares of Merger Co. I are validly issued,
fully paid and nonassessable and owned by REIT and have been owned by REIT since
their issuance. All issued shares of Merger Co. II are validly issued, fully
paid and nonassessable and owned by REIT and have been owned by REIT since their
issuance.
(b) Except as contemplated by this Agreement or as set forth in
Schedule 3.2(b), as of the date hereof, there are no outstanding subscriptions,
options, calls, contracts, commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, instrument or other agreement that are presently
exercisable obligating REIT to issue, deliver or sell, or cause to be issued,
delivered or sold, additional REIT Common Shares, or obligating REIT to grant,
extend or enter into any such agreement or commitment; provided, however, that
the foregoing shall not apply to the existence of any plan providing for grants
of options or warrants to broker dealers, nor to any grant of options
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or warrants thereunder. There are no voting trusts, proxies or other agreements
or understandings to which REIT is a party or by which REIT is bound with
respect to the voting of any REIT Common Shares. Except as set forth on Schedule
3.2(b), there are no registration rights held by any individual or entity with
respect to any securities of the REIT (whether such securities are currently
outstanding or issuable in the future).
Section 3.3 Issuance of Securities. The REIT Common Shares issuable to
IREIC and to TIPMG hereunder, when issued in accordance with the provisions of
this Agreement, will be duly and validly authorized and issued and will be fully
paid and nonassessable and will be issued free and clear of all liens,
encumbrances, claims, security interests and defects.
Section 3.4 Authority; Non-Contravention; Approvals.
(a) Each of REIT, Merger Co. I and Merger Co. II has full power and
authority to enter into this Agreement and, subject to REIT Stockholders'
Approval and REIT's Required Statutory Approvals, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement, and the
consummation by REIT of the transactions contemplated hereby, have been duly
authorized by the REIT Board of Directors and no other proceedings on the part
of REIT are necessary to authorize the execution and delivery of this Agreement
and the consummation by REIT of the transactions contemplated hereby, except for
obtaining REIT Stockholders' Approval and REIT Required Statutory Approvals.
This Agreement has been duly and validly executed and delivered by each of REIT,
Merger Co. I and Merger Co. II and, assuming the due authorization, execution
and delivery hereof by IREIC, TIPMG, Advisor and Manager, constitutes a valid
and binding agreement of each of REIT, Merger Co. I and Merger Co. II
enforceable against each in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally, (ii) general equitable principles, and (iii) to the
extent this Agreement contains indemnification provisions for violations of
federal or state securities laws, as enforceability of such provisions may be
limited under federal and state securities laws.
(b) The execution and delivery of this Agreement by each of REIT,
Merger Co. I and Merger Co. II, do not, and the consummation by each of the
transactions contemplated hereby will not, violate, conflict with or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the assets of REIT,
Merger Co. I or Merger Co. II under any of the terms, conditions or provisions
of, (i) subject to obtaining REIT's Stockholders' Approval, REIT's Articles of
Incorporation or bylaws, and the Articles of Incorporation or bylaws of either
Merger Co. I or Merger Co. II, (ii) subject to obtaining REIT Required Statutory
Approvals and REIT Stockholders' Approval, any statute, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license of any
court or governmental authority applicable to any of REIT, Merger Co. I or
Merger Co. II or any of their respective properties, or (iii) except as set
forth on Schedule 3.4(b)
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hereto, any note, bond, mortgage, indenture, deed of trust, license, franchise,
permit, concession, contract, lease or other instrument, obligation or agreement
of any kind to which any of REIT, Merger Co. I or Merger Co. II is now a party
or by which any of REIT, Merger Co. I or Merger Co. II, or any of their
respective properties may be bound, excluding from the foregoing clauses (ii)
and (iii) such violations, conflicts, breaches, defaults, terminations,
accelerations or creations of liens, security interests, charges or encumbrances
that would not, in the aggregate, be reasonably expected to have a Material
Adverse Effect on REIT, Merger Co. I or Merger Co. II.
(c) Except for (i) the filing of the preliminary proxy statement and
the Proxy Statement with the Commission pursuant to the Exchange Act, (ii) any
required filings by REIT pursuant to Article II, and (iii) amendments to its
Articles of Incorporation in the form set forth as Exhibit A attached hereto
(the filings and approvals referred to in clauses (i) through (iii) are
collectively referred to as the "REIT Required Statutory Approvals"), no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and delivery of this Agreement by any of REIT,
Merger Co. I or Merger Co. II or the consummation by any of REIT, Merger Co. I
or Merger Co. II of the transactions contemplated hereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in the
aggregate, be reasonably expected to have a Material Adverse Effect on REIT,
Merger Co. I or Merger Co. II.
Section 3.5 Proxy Statement. With respect to REIT, Merger Co. I and
Merger Co. II, the Proxy Statement will not 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, with respect to REIT,
Merger Co. I and Merger Co. II, in light of the circumstances under which they
are made, not misleading. The Proxy Statement will comply as to form in all
material respects with all applicable laws, including the provisions of the
Exchange Act and the rules and regulations promulgated thereunder.
Section 3.6 Disclosure, Financial Statements and Absence of Certain
Changes. REIT's Annual Report on Form 10-K for the year ended December 31, 1998
(the "REIT 10-K"), and each other report or document filed after December 31,
1998 by REIT with the Commission under the Exchange Act other than the Proxy
Statement, taken together, do not 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, except to the extent corrected or
superceded by another document filed by REIT with the Commission ("REIT SEC
Documents"). REIT's audited consolidated financial statements contained in the
REIT 10-K (the "REIT Financial Statements") have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis and
fairly present the consolidated financial position of REIT as of the dates set
forth therein and the results of operations and cash flows for the periods then
ended. REIT's unaudited consolidated financial statements contained in the
reports or documents filed by REIT with the Commission since the filing of the
REIT 10-K have been prepared in accordance with generally accepted accounting
principles applied
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on a consistent basis and fairly present, in all material respects, the
consolidated financial position of REIT as of the dates set forth therein and
the results of operations and cash flows for the periods set forth therein,
except for the absence of footnote disclosure and normal year-end adjustments
which are not anticipated to reflect a Material Adverse Effect. Since December
31, 1998, there has not been any change or any event (other than general
economic or market conditions) which would reasonably be expected to result in a
change, individually or in the aggregate, which would have a Material Adverse
Effect.
Section 3.7 Brokers and Finders. Except as set forth on Schedule 3.7,
REIT has not employed any broker, finder or other intermediary in connection
with the transactions contemplated by this Agreement which would be entitled to
any brokerage, finder's or similar fee or commission in connection with this
Agreement or the transactions contemplated hereby.
Section 3.8 Litigation. Except as set forth on Schedule 3.8, there are
no claims, suits, actions or proceedings pending or, to the best of REIT's
knowledge, threatened against, relating to or affecting REIT, Merger Co. I or
Merger Co. II or any of their assets, before or by any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator
that could reasonably be expected, either alone or in the aggregate with all
such claims, actions or proceedings, to have a Material Adverse Effect on REIT,
Merger Co. I or Merger Co. II. None of REIT, Merger Co. I or Merger Co. II is
subject to any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator which prohibits or restricts the consummation of the transactions
contemplated hereby or would have a Material Adverse Effect.
Section 3.9 No Violation of Law. None of REIT, Merger Co. I and Merger
Co. II is in violation of or has been given notice or been charged with any
violation of any law, statute, order, rule, regulation, ordinance or judgment
(including, without limitation, any applicable Environmental Laws) of any
governmental or regulatory body or authority, except for violations which, in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect on REIT, Merger Co. I or Merger Co. II. No investigation or review of any
of REIT, Merger Co. I or Merger Co. II by any governmental or regulatory body or
authority is pending or, to the best knowledge of REIT, threatened, nor has any
governmental or regulatory body or authority indicated to REIT an intention to
conduct the same. Each of REIT, Merger Co. I and Merger Co. II has all permits,
licenses, franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals necessary to conduct its business as
presently conducted, except for permits, licenses, franchises, variances,
exemptions, orders, authorizations, consents and approvals the absence of which,
alone or in the aggregate, would not reasonably be expected to have a Material
Adverse Effect on REIT, Merger Co. I or Merger Co. II.
Section 3.10 Real Property. Except as set forth in Schedule 3.10, each
of REIT, Merger Co. I and Merger Co. II has good and defensible title to all of
its properties and assets, free and clear of all liens, charges and
encumbrances, except (i) liens for taxes not yet due and payable, and (ii) such
liens or other imperfections of title, if any, as do not materially detract from
the value of or
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interfere with the present use of the property affected thereby or which could
not reasonably be expected to have a Material Adverse Effect; and, to the
knowledge of REIT, all leases pursuant to which REIT, Merger Co. I or Merger Co.
II leases from others material amounts of real or personal property are in good
standing, valid and effective in accordance with their respective terms, and
there is not, to the knowledge of REIT, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default), except where the lack of such good standing,
validity and effectiveness or the existence of such default or event of default
could not reasonably be expected to have a Material Adverse Effect.
Section 3.11 Environmental Matters. Except as set forth in Schedule
3.11 or the REIT SEC Documents, and except in all cases as have not had and
could not reasonably be expected to have a Material Adverse Effect, to the best
knowledge of REIT, REIT (i) has obtained all applicable permits, licenses and
other authorizations which are required to be obtained under all applicable
federal, state or local laws or any regulation, code, plan, order, decree,
judgment, notice or demand letter issued, entered, promulgated or approved
thereunder relating to pollution or protection of the environment
("Environmental Laws"), including laws relating to emissions, discharges,
releases or threatened releases of pollutants, contaminants or hazardous or
toxic material or wastes into ambient air, surface water, ground water or land
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants
or hazardous or toxic materials or wastes by REIT (or its agents); (ii) is in
compliance with all terms and conditions of such required permits, licenses and
authorization, and also is in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in applicable Environmental Laws; (iii) as of
the date hereof, has not received notice of any past or present violations of
Environmental Laws or any event, condition, circumstance, activity, practice,
incident, action or plan which would give rise to any common law or statutory
liability, or otherwise form the basis of any claim, action, suit or proceeding
against REIT based on or resulting from the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, handling, emission,
discharge or release into the environment of any pollutant, contaminant, or
hazardous or toxic material or waste; and (iv) has taken all actions necessary
under applicable Environmental Laws to register any products or materials
required to be registered by REIT (or any of its agents) thereunder.
Section 3.12 Insurance. REIT maintains insurance coverage for its
assets of the types, and in amounts, typical of similar companies engaged in the
business in which REIT is engaged. All such insurance policies are in full force
and effect and REIT is not delinquent in the payment of any premiums thereon,
and no notice of cancellation or termination has been received with respect to
any such policy. All such policies are sufficient for compliance with all
requirements of law and of all agreements to which REIT is a party or otherwise
bound and are valid, outstanding, collectable, and enforceable policies and will
remain in full force and effect through their respective policy periods ending
after the Merger Closing (assuming payment of any applicable premiums arising
after the Merger Closing). REIT has not received written notice within the last
12 months from any insurance company or board of fire underwriters of any
conditions, defects or inadequacies that would materially adversely affect the
insurability of, or cause any material increase in the premiums for
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insurance covering, any of its assets that have not been cured or repaired to
the satisfaction of the party issuing the notice.
Section 3.13 Disclosure. The representations and warranties of
REIT contained herein (including information contained in any schedule), taken
as a whole, are not false or misleading in any material respect and do not omit
to state a fact herein necessary to make the statements herein not misleading in
any material respect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF IREIC AND TIPMG
IREIC represents and warrants to REIT with respect to itself and
Advisor and TIPMG represents and warrants to REIT with respect to itself and
Manager (IREIC and TIPMG are collectively referred to herein as "Parents" and
individually as "Parent"), as of the date hereof as follows:
Section 4.1 Organization and Qualification. Parents and each of
Advisor and Manager (collectively, "Subsidiaries" and individually,
"Subsidiary") are duly organized, validly existing and in good standing under
the laws of their jurisdiction of organization and each has the requisite
corporate power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted.
Subsidiaries are qualified to do business and are in good standing in each
jurisdiction in which the properties owned, leased or operated by them or the
nature of the business conducted by them make such qualification necessary,
except where the failure to be so qualified and in good standing would not
reasonably be expected to have a Material Adverse Effect on any such Subsidiary.
True, accurate and complete copies of each of the articles of incorporation and
bylaws of each Parent and the certificate of incorporation and bylaws of each
Subsidiary as in effect on the date hereof, including all amendments thereto,
have heretofore been delivered to REIT.
Section 4.2 Capitalization.
(a) The authorized stock of Advisor consists solely of 100,000 shares
of no par value common stock, of which 1,000 shares of common stock are issued
and outstanding. The authorized stock of Manager consists solely of 10,000
shares of no par value common stock, of which 1,000 shares of common stock are
issued and outstanding. All of the issued and outstanding shares of common stock
of Advisor and Manager are owned by IREIC and TIPMG, respectively, and are
validly issued, fully paid and nonassessable. IREIC and TIPMG own good and
marketable title to the issued and outstanding shares of common stock of Advisor
and Manager, respectively, and in each case, free and clear of all liens,
encumbrances, claims, security interests and defects.
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(b) There are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement obligating Parents, or either of them, or
Subsidiaries, or either of them, to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of either of the Subsidiaries or
obligating Parents or the Subsidiaries to grant, extend or enter into any
agreement or commitment with respect to any of the foregoing. There are no
voting trusts, proxies or other agreements or understandings to which
Parents or Subsidiaries are parties with respect to the voting of any shares of
either Subsidiary or Parent. Neither of the Subsidiaries owns, directly or
indirectly, any capital stock or other ownership interest in any corporation,
partnership, business association, joint venture or other entity.
Section 4.3 Authority; Non-Contravention; Approvals.
(a) Each of the Parents and each of the Subsidiaries have the requisite
corporate power and authority to enter into this Agreement and, subject to each
Parent's Stockholders' Approval and any Parents' Required Statutory Approvals,
to consummate the transactions contemplated hereby. The execution and delivery
of this Agreement, and the consummation by Parents and Subsidiaries of the
transactions contemplated hereby, have been duly authorized by the Board of
Directors of each of the Parents and each of the Subsidiaries, and no other
corporate proceedings on the part of Parents or Subsidiaries are necessary to
authorize the execution and delivery of this Agreement and the consummation by
Parents and Subsidiaries of the transactions contemplated hereby, except for
each Parent's Stockholders' Approval and the obtaining of any Parents' Required
Statutory Approvals. This Agreement has been duly and validly executed and
delivered by Parents, and, assuming the due authorization, execution and
delivery hereof by REIT, constitutes a valid and binding agreement of each
Parent enforceable against each Parent in accordance with its terms, except that
such enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally, (ii) general equitable principles, and (iii) to the
extent this Agreement contains indemnification provisions for violations of
federal or state securities laws, as enforceability of such provisions may be
limited under federal and state securities laws. Neither of the Subsidiaries is
in violation of its Articles of Incorporation, bylaws or other organizational
documents.
(b) The execution and delivery of this Agreement by each Parent and
each Subsidiary, do not, and the consummation by the Parents and the
Subsidiaries of the transactions contemplated hereby will not, violate, conflict
with or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
assets of either of the Subsidiaries under any of the terms, conditions or
provisions of (i) subject to obtaining each Parent's Stockholders' Approval,
such Parent's Articles of Incorporation or bylaws, (ii) subject to obtaining
each Parent's Required Statutory Approvals and each Parent's Stockholders'
Approval, any statute, law, ordinance, rule, regulation, judgment, decree,
order, injunction, writ, permit or license of any court or governmental
authority applicable to either
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Parent or either Subsidiary or any of the assets of either of the Subsidiaries,
(iii) the Articles of Incorporation or bylaws of either Subsidiary or (iv)
except as set forth on Schedule 4.3(b) hereto, any note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind to which either
Parent or either Subsidiary is now a party or by which either Parent or either
Subsidiary or any of the assets of either of the Subsidiaries may be bound,
excluding from the foregoing clauses (ii) and (iv) such violations, conflicts,
breaches, defaults, terminations, accelerations or creations of liens, security
interests, charges or encumbrances that would not, in the aggregate, be
reasonably expected to have a Material Adverse Effect on either of the
Subsidiaries.
(c) Except for (i) any required filings by Parents or Subsidiaries
pursuant to Article II of this Agreement, and (ii) any required filings by
Parents or Subsidiaries of amendments to their Articles of Incorporation (the
filings and approvals referred to in clauses (i) and (ii) are collectively
referred to as the "Parents' Required Statutory Approvals"), no declaration,
filing or registration with, or notice to, or authorization, consent or approval
of, any governmental or regulatory body or authority is necessary for the
execution and delivery of this Agreement by either of Parents or either of
Subsidiaries or the consummation by Parents or Subsidiaries of the transactions
contemplated hereby, other than such declarations, filings, registrations,
notices, authorizations, consents or approvals which, if not made or obtained,
as the case may be, would not, in the aggregate, be reasonably expected to have
a Material Adverse Effect on either of the Subsidiaries.
Section 4.4 Financial Statements. The (i) audited financial statements
for and as of the fiscal years ended June 30, 1997, 1998 and 1999 for IREIC;
(ii) unaudited balance sheets of each Subsidiary at December 31, 1998 and 1999
and Income Statements for each Subsidiary for the years ended December 31, 1997,
1998 and 1999 (including all notes and schedules contained therein or annexed
thereto) (the financial statements of the Subsidiaries are collectively
hereinafter referred to as the "Subsidiary Financial Statements"); and (iii) the
unaudited financial statements of IREIC for and as of the six-month period ended
December 31, 1999, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except, in the case of
unaudited statements, for the absence of footnote disclosure and normal year-end
adjustments) and fairly present the financial position of the Parents and the
Subsidiaries as of the dates set forth therein and the results of operations
and, with respect to IREIC, the cash flow, for the periods then ended.
TIPMG has no prepared financial statements.
Section 4.5 Absence of Certain Changes or Events. With respect to
TIPMG, since June 30, 1999, and with respect to IREIC and each Subsidiary, since
December 31, 1999, there has not been any change or any event (other than
general economic or market conditions) which would reasonably be expected to
have a Material Adverse Effect, individually or in the aggregate. Each of the
Subsidiaries has conducted its respective businesses in the ordinary course
during the periods covered by the Subsidiary Financial Statements.
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Section 4.6 Taxes.
(a) Each Subsidiary has duly and timely filed with the appropriate
governmental authorities all Tax Returns required to be filed by it (either
separately or as a member of any affiliated group within the meaning of Section
1504 of the Code or any similar group defined under a similar provision of
state, local or foreign law (an "Affiliated Group")) for all periods ending on
or prior to the date hereof, except to the extent of any Tax Returns for which
an extension of time for filing has been properly filed. Each such return and
filing is true and correct in all material respects. All Taxes owed by either
Subsidiary have been paid (whether or not shown on a Tax Return). No material
issues have been raised in any examination by any taxing authority with respect
to the businesses and operations of either Parent or either Subsidiary which (i)
reasonably could be expected to result in an adjustment to the liability for
Taxes for such period examined, or (ii) by application of similar principles,
reasonably could be expected to result in an adjustment to the liability for
Taxes for any other period not so examined. All Taxes which each Subsidiary is
required by law to withhold or collect, including without limitation Taxes
required to have been withheld in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder, or other third party
and sales, gross receipts and use taxes, have been duly withheld or collected
and, to the extent required, have been paid over to the proper governmental
authorities or are held in separate bank accounts for such purpose. There are no
liens for Taxes upon the assets of either Parent or either Subsidiary except for
statutory liens for Taxes not yet due.
(b) Except as set forth on Schedule 4.6, none of Parents, Subsidiaries
or the Affiliated Group has filed for an extension of a statute of limitations
with respect to any Tax and no governmental authorities have requested an
extension of the statute of limitations with respect to any Tax. Except as set
forth on Schedule 4.6, the Tax Returns of each Subsidiary and the Affiliated
Group are not being and have not been examined by any taxing authority for any
past year or periods. Except as set forth on Schedule 4.6, none of Subsidiaries
or the Affiliated Group is a party to any pending action or any formal or
informal proceeding by any taxing authority for a deficiency, assessment or
collection of Taxes, and no claim for any deficiency, assessment or collection
of Taxes has been asserted, or, to the best knowledge of each Parent, threatened
against any Subsidiary or Affiliated Group, including claims by any taxing
authority in a jurisdiction where Parents and/or Subsidiaries do not file tax
returns that any of them is or may be subject to taxation in that jurisdiction.
(c) Each Subsidiary has properly accrued in accordance with GAAP on its
respective Subsidiary Financial Statements for Taxes due for which such
Subsidiary may be liable in its own right (including, without limitation, by
reason of being a member of an Affiliated Group or as a transferee of the assets
of, or successor to, any corporation, person, association, partnership, joint
venture or other entity). Each Subsidiary has established on its books and
records in accordance with GAAP for reserves that are adequate for the payment
of all Taxes not yet due and payable.
(d) The Affiliated Group of which each Subsidiary is a member has duly
and timely filed all Tax Returns that it was required to file for each taxable
period during which any Subsidiary was
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a member of the group. All such Tax Returns were true, complete and correct in
all material respects and all Taxes owed by the Affiliated Group, whether or not
shown on any Tax Return, have been paid or accrued for each taxable period
during which any Subsidiary was a member of the group.
(e) Neither Subsidiary has any liability for the Taxes of any person
other than members of its Affiliated Group (A) under Treasury Regulation Section
1.1502-6 (or any similar provision of state, local or foreign law), (B) as a
transferee or successor, (C) by contract, or (D) otherwise.
(f) Neither Subsidiary has made any payments, is obligated to make any
payments, or is a party to an agreement that could obligate it to make any
payments that will not be deductible under Section 28OG of the Code. Each
Subsidiary has disclosed to the IRS all positions taken on its federal income
tax returns which could give rise to a substantial understatement of tax under
Section 6662 of the Code.
Section 4.7 Absence of Undisclosed Liabilities. Neither Subsidiary had,
at December 31, 1999, and neither has incurred since that date, any liabilities
or obligations (whether absolute, accrued, contingent or otherwise) of any
nature (other than ordinary operating expenses and liabilities incurred in the
ordinary course of business) (a) except liabilities, obligations or
contingencies which are accrued or reserved against in the Subsidiary's
Financial Statements or reflected in the notes thereto and (b) except for any
liabilities, obligations or contingencies which (i) would not, in the aggregate,
be reasonably expected to have a Material Adverse Effect on either Subsidiary or
(ii) have been discharged or paid in full prior to the date hereof.
Section 4.8 Litigation. Except as set forth on Schedule 4.8, there are
no claims, suits, actions or proceedings pending or, to the best of each
Parent's knowledge, threatened, against, relating to or affecting either of the
Subsidiaries or any of the assets of either of the Subsidiaries before or by any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator that could reasonably be expected, either alone or
in the aggregate with all such claims, actions or proceedings, to have a
Material Adverse Effect on either of the Subsidiaries. Neither Subsidiary is
subject to any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator which prohibits or restricts the consummation of the transactions
contemplated hereby or would have a Material Adverse Effect on either of the
Subsidiaries.
Section 4.9 No Violation of Law. Neither of the Subsidiaries is in
violation of or has been given notice or been charged with any violation of any
law, statute, order, rule, regulation, ordinance or judgment (including, without
limitation, any applicable Environmental Laws) of any governmental or regulatory
body or authority, except for violations which, in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on either of the
Subsidiaries. No investigation or review of either of the Subsidiaries by any
governmental or regulatory body or authority is pending or, to the best
knowledge of the Parents, threatened, nor has any governmental or regulatory
body or authority indicated to either Parent or either Subsidiary an intention
to conduct the same. Each of the Subsidiaries and each of its officers and
employees has all permits, licenses,
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franchises, variances, exemptions, orders and other governmental authorizations,
consents and approvals necessary to conduct its business as presently conducted,
except for permits, licenses, franchises, variances, exemptions, orders,
authorizations, consents and approvals the absence of which, alone or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect on
either of the Subsidiaries.
Section 4.10 Insurance. Parents or the Subsidiaries maintain insurance
coverage for each Subsidiary and its respective assets of the types, and in
amounts, customary for similar companies engaged in the respective businesses in
which such Subsidiary is engaged. All such insurance policies are in full force
and effect, and the Parents and the Subsidiaries are not delinquent in the
payment of any premiums thereon, and no written notice of cancellation or
termination has been received with respect to any such policy. All such policies
are sufficient for compliance with all requirements of law and of all agreements
to which either of the Subsidiaries is a party or otherwise bound and, to the
knowledge of the Parents, are valid, outstanding, collectable, and enforceable
policies. The Parents and Subsidiaries have not received written notice within
the last 12 months from any insurance company or board of underwriters of any
conditions, defects or inadequacies that would materially adversely affect the
insurability of, or cause any material increase in the premiums for insurance
covering, either of the Subsidiaries or any of the assets of either of the
Subsidiaries that have not been cured or repaired to the satisfaction of the
party issuing the notice.
Section 4.11 Benefit Plans.
(a) Except as set forth in Schedule 4.11, each "employee pension
benefit plan" (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) (a "Pension Plan"), "employee
welfare benefit plan" (as defined in Section 3(1) of ERISA) (a "Welfare Plan")
and each other plan, arrangement or policy (written or oral) relating to stock
options, stock purchases, compensation, deferred compensation, bonuses,
severance, fringe benefits or other employee benefits, in each case maintained
or contributed to, or required to be maintained or contributed to, by any
Subsidiary for the benefit of any present or former employee, officer or
director of any Subsidiary (each of the foregoing, an "Employee Benefit Plan")
has been administered in all material respects in accordance with its terms. The
Employee Benefit Plans are in compliance in all material respects with the
applicable provisions of ERISA, the Code, all other applicable laws and all
applicable collective bargaining agreements. Schedule 4.11 sets forth a list of
all material Employee Benefit Plans (true and accurate copies of which, together
with the most recent annual reports on Form 5500 and summary plan descriptions
with respect thereto, were furnished to REIT). Except as set forth in Schedule
4.11, none of the Welfare Plans promises or provides retiree medical or other
retiree welfare benefits to any person. To the knowledge of each Subsidiary, no
fiduciary of an Employee Benefit Plan has breached any of the responsibilities
or obligations imposed upon fiduciaries under Title I of ERISA, which breach
would reasonably be expected to result in any material liability to either
Subsidiary. Each Employee Benefit Plan intended to qualify under Section 401(a)
of the Code and each trust intended to qualify under Section 501(a) of the Code
is the subject of a favorable determination letter from the Internal Revenue
Service (the "IRS"), and nothing has occurred which would reasonably be expected
to impair such
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determination. All contributions required to be made with respect to each
Employee Benefit Plan pursuant to the terms of the Employee Benefit Plan or any
collective bargaining agreement, have been made on or before their due dates.
(b) None of the Pension Plans is subject to Title IV of ERISA and none
of the Subsidiaries or any other person or entity that, together with the
Subsidiaries, is or was treated as a single employer under Section 414 of the
Code or pursuant to Title IV of ERISA (each, a "Commonly Controlled Entity") has
any liability under Title IV of ERISA (whether actual or contingent) with
respect to a Pension Plan, or to any other employee pension benefit plan that is
or was maintained or contributed to by a Commonly Controlled Entity (other than
for contributions not yet due) or to the Pension Benefit Guaranty Corporation
(other than for payment of premiums not yet due), which liability has not been
fully paid.
(c) No Commonly Controlled Entity is required to contribute to any
"multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) or has
withdrawn from any multiemployer plan where such withdrawal has resulted or
would result in any "withdrawal liability" (within the meaning of Section 4201
of ERISA) that has not been fully paid or as to which a Commonly Controlled
Entity would have liability pursuant to Section 4212(c) of ERISA.
(d) Each Employee Benefit Plan that is a Welfare Plan may be amended or
terminated at any time after the Effective Time, pursuant to its terms.
Section 4.12 Other Compensation Arrangements. Except as disclosed in
the Schedule 4.12, and except as provided in this Agreement as of the date of
this Agreement, neither Subsidiary is a party to any oral or written (i)
consulting agreement not terminable on not more than 60 calendar days notice and
involving the payment of more than $100,000 per annum, (ii) agreement with any
executive officer or other key employee of a Subsidiary (x) the benefits of
which are contingent, or the terms of which are materially altered, upon the
occurrence of a transaction of the nature contemplated by this Agreement, or (y)
providing any term of employment or compensation guarantee extending for a
period longer than two years or the payment of more than $100,000 per year, or
(iii) agreement or plan, including any stock option plan, stock appreciation
right plan, restricted stock plan or stock purchase plan, any of the benefits of
which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement.
Section 4.13 Intellectual Property. Schedule 4.13 is a true and
complete list of all of the logos, software, self-generated forms and other
intellectual property used in the conduct of the businesses of the Subsidiaries
("Intellectual Property") that will be licensed to REIT. All the Intellectual
Property listed on Schedule 4.13 is owned by either IREIC or TIGI or their
subsidiaries or affiliates. None of the Intellectual Property has been or is the
subject of any pending adverse claim, or to the best knowledge of Parents, any
threatened litigation or claim of infringement based on the use thereof by
either one of the Subsidiaries or a third party. The Parents and the
Subsidiaries
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have not received any notice contesting either Parents' or either Subsidiary's
right to use any of the Intellectual Property and, to the knowledge of the
Parents, neither of the Subsidiaries has infringed upon or misappropriated any
intellectual property rights of third parties. To the best of the knowledge of
the Parents and the Subsidiaries, no third party has infringed upon or
misappropriated any of the Intellectual Property listed on Schedule 4.13.
Section 4.14 Labor. No Subsidiary is a party to, or bound by, a
collective bargaining agreement, contract or other understanding with a labor
union or labor union organization. There is no unfair labor practice or labor
arbitration proceeding pending or, to the knowledge of either Parent, threatened
against either of the Subsidiaries. To the knowledge of the Parents, there are
no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of either
Subsidiary.
Section 4.15 Brokers and Finders. Neither Parent has employed any
broker, finder or other intermediary in connection with the transactions
contemplated by this Agreement which would be entitled to any brokerage,
finder's or similar fee or commission in connection with this Agreement or the
transactions contemplated hereby.
Section 4.16 Investment Company Act. Neither Subsidiary is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended nor an "investment adviser" within the meaning of the Investment
Advisers Act of 1940, as amended.
Section 4.17 Conduct of Subsidiaries' Business. No part of the
respective businesses conducted by the Subsidiaries is conducted through any
entity other than the respective Subsidiary.
Section 4.18 Investment in Securities.
(a) Each Parent understands that (i) no Federal or state agency has
passed upon the REIT's Common Shares to be issued in connection with the mergers
described in Article II or made any finding or determination as to the fairness
of the Parents' investment therein or the terms of the offer and the sale
thereof pursuant to this Agreement and (ii) each Parent must bear the economic
risk of its investment in the REIT Common Shares to be issued in connection with
the mergers described in Article II for an indefinite period of time because,
except as provided in the Registration Rights Agreement, such shares will not be
registered under the Securities Act or any state securities laws, and,
therefore, cannot be sold or transferred unless either they are subsequently
registered under the Securities Act and applicable state securities laws or an
exemption from such registrations is available.
(b) The REIT Common Shares to be issued in connection with the mergers
described in Article II are being acquired for each Parent's own account and not
with any view toward the resale or distribution thereof in violation of
applicable securities laws, or with any present intention of selling or
distributing any such shares in violation of applicable securities laws.
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(c) Each Parent has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of an
investment in the REIT Common Shares to be issued in connection with the mergers
described in Article II.
(d) Each Parent has carefully reviewed all documents that it has
requested copies of, has been furnished with all other materials that it
considers relevant to an investment in the REIT Common Shares, including REIT
SEC Documents, and has had a full opportunity to ask questions of and receive
answers from REIT or a person or persons acting on behalf of REIT concerning the
terms and conditions of an investment in the REIT Common Shares.
(e) Each Parent acknowledges that the REIT Common Shares issued
hereunder to such Parent have not been registered under the Securities Act, or
any applicable state securities laws, and, except as provided in Section 6.11,
that neither the Parents nor members of their Affiliated Group may sell,
transfer or otherwise dispose of such REIT Common Shares for value unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Each Parent further acknowledges that it, and the
members of its Affiliated Group, are entitled to only those registration rights
set forth in the Registration Rights Agreement.
Section 4.19 Title to Assets; No Real Property. Set forth on Schedule
4.19 is a complete list of all of the tangible assets currently owned by each
Subsidiary which are materially important in the conduct of its business as it
is being currently conducted. The Subsidiaries have good, valid and marketable
title to, or a leasehold interest in, (a) all of their properties and assets
(tangible and intangible) reflected in the Subsidiary Financial Statements,
except as indicated in the notes thereto and except for properties and assets
disposed of in the ordinary course of business, and (b) all of the properties
and assets purchased by a Subsidiary since the date of such financial
statements, except for properties and assets disposed of in the ordinary course
of business, in each case subject to no lien, claim, or encumbrance other than
(i) liens reflected in such financial statements, (ii) liens for current Taxes,
assessments or governmental charges or levies not yet due and delinquent, and
(iii) liens that could not reasonably be expected to have any Material Adverse
Effect on either Subsidiary where the amount of such taxes has been properly
reserved for on the Subsidiary Financial Statements. Neither Subsidiary owns, in
whole or in part, or holds as record title holder, or is the holder of any
mortgage or deed of trust with respect to, any real property.
Section 4.20 Corporate Documents. Each Parent has furnished (or has
caused to be furnished by each Subsidiary) to REIT for its examination: (i)
copies of the Parents' and Subsidiaries' certificate or articles of
incorporation and bylaws (as applicable); (ii) minute books containing all
records required to be set forth of all proceedings, consents, actions, and
meetings of the stockholders, the board of directors and any committees thereof
for each of the Subsidiaries; (iii) all material permits, orders, and consents
issued by any regulatory agency with respect to each of the Subsidiaries; and
(iv) the stock transfer books of each Subsidiary setting forth all transfers of
any capital stock. The corporate minute books, stock certificate books, stock
registers and other corporate records of the Subsidiaries are complete and
accurate in all material respects, and the
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signatures appearing on all documents contained therein are the true signatures
of the persons purporting to have signed the same.
Section 4.21 Disclosure. The representations and warranties of the
Parents and the Subsidiaries contained herein (including information contained
in any schedule), taken as a whole, are not false or misleading in any material
respect and do not omit to state a fact herein necessary to make the statements
herein not misleading in any material respect.
Section 4.22 Projections. The projections prepared by Parents and
furnished to REIT and attached hereto as Schedule 4.22 have been prepared in
good faith and with all available information regarding the current operations
of REIT and the Subsidiaries and the operations of REIT as proposed to be
conducted and are based upon assumptions which the Parents believe to be
reasonable. However, no representation or warranty is made by either of the
Parents that the results set forth in such projections or the assumptions
underlying such projections will in fact be realized.
Section 4.23 Subsidiary Earnings and Profits. As of the Merger Closing,
the aggregate accumulated earnings and profits (as determined under Section 316
of the Code) of the Subsidiaries shall not exceed $1,000,000.
ARTICLE V
CONDUCT OF BUSINESSES PENDING THE MERGER CLOSING
Section 5.1 Conduct of Businesses of Subsidiaries. After the date
hereof and prior to the Merger Closing or earlier termination of this Agreement,
except as REIT shall otherwise agree in writing or as may be otherwise
specifically contemplated by this Agreement or except as may occur in the
ordinary course of business Parents shall cause each of their respective
Subsidiaries to:
(a) conduct the businesses conducted by it in the ordinary and usual
course of business and consistent with past practice and, as to the Advisor, the
requirements of that certain Advisory Agreement between REIT and it (the "REIT
Advisory Agreement"), and as to the Manager, each of the management agreements
between REIT and it (collectively, the "REIT Property Management Agreements");
(b) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of, capital stock of a Subsidiary of
any class or any debt or equity securities convertible into or exchangeable for
such stock or amend or modify the terms and conditions of any of the foregoing;
(c) not (i) incur or become contingently liable with respect to any
additional indebtedness for borrowed money, (ii) knowingly take any action which
would jeopardize REIT's status as a real estate investment trust under the Code,
(iii) sell or otherwise dispose of any of its assets, or (iv) enter
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into any contract or violate any existing contract, agreement, commitment or
arrangement with respect to any of the foregoing;
(d) use commercially reasonable efforts to preserve intact its
businesses, organization and goodwill, keep available the services of its
present officers and employees and preserve the goodwill and business
relationships with all lessees, operators, suppliers, distributors, customers
and others having business relationships with it and REIT and not engage in any
action, directly or indirectly, with the intent to adversely impact the
transactions contemplated by this Agreement;
(e) confer with one or more representatives of REIT when requested to
report on material operational matters and the general status of ongoing
operations of its respective businesses;
(f) maintain, in full force and effect, with all premiums due thereon
paid, policies of insurance covering its respective insurable assets and
businesses in amounts and as to risks substantially as in effect as of the date
hereof;
(g) not declare, set aside or pay any dividends payable in shares of
their capital stock or purchase, redeem or otherwise acquire any shares of their
capital stock;
(h) not acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial portion of the stock or assets of, or by any
other manner, any business or any corporation, partnership, joint venture,
association, or other business organization or division thereof;
(i) not acquire or agree to acquire any assets that are material,
individually or in the aggregate, to either of the Subsidiaries, or make or
agree to make any capital expenditures except in the ordinary course of business
consistent with past practice;
(j) not adopt or amend in any material respect, unless the written
consent of REIT is first obtained, any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, employment or other
employee benefit plan, agreement, trust, fund or other arrangement for the
benefit or welfare of any present or former director or employee or, other than
increases for individuals in the ordinary course of business consistent with
past practice, increase the compensation or fringe benefits of any present or
former director or employee; and not pay any benefit not required by an existing
plan, arrangement or agreement, or grant any new or modified severance or
termination arrangement or increase or accelerate any benefits payable under its
severance or termination pay policies;
(k) not take any action that would, or is reasonably likely to, result
in any of its representations and warranties in this Agreement becoming untrue,
or in any of the conditions to the Merger set forth in Article VII not being
satisfied;
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(l) not waive, release, grant, or transfer any rights of material value
or modify or change in any material respect any existing license, lease,
contract or other documents, other than as contemplated by this Agreement or in
the ordinary course of business consistent with past practice;
(m) not (i) adopt a plan of complete or partial liquidation; (ii) adopt
any amendment to its charter or bylaws; (iii) enter into any contract, agreement
or arrangement involving more than $100,000 annually, except for agreements
entered into with prior written consent of REIT; (iv) authorize or enter into
any agreement relating to property management services to be provided by it to a
third party property owner on other than customary terms; (v) modify or change
in any material respect any existing material agreements, except in the ordinary
course and consistent with past practice; (vi) engage in any conduct the nature
of which is materially different than the business in which it is currently
engaged; or (vi) enter into any agreement providing for acceleration of payment
or performance or other consequences as a result of a change of control of it;
and
(n) not authorize any of, or commit or agree to take any of, the
foregoing actions set forth in subsections (b), (c), and (g) through (m).
Section 5.2 Conduct of Business of REIT. After the date hereof and
prior to the Merger Closing or earlier termination of this Agreement, except as
the Parents shall otherwise agree in writing or as may be otherwise specifically
contemplated by this Agreement, REIT shall:
(a) conduct the businesses conducted by it in the ordinary and usual
course of business and consistent with past practice;
(b) not take any action which would jeopardize its status as a real
estate investment trust under the Code; and
(c) operate in compliance with the terms and conditions of the REIT
Advisory Agreement and the REIT Property Management Agreements.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 Access to Information. Each of the parties shall afford to
the other party hereto and such other party's accountants, counsel, financial
advisors and other representatives full access, during normal business hours
throughout the period prior to the Merger Closing or earlier termination of this
Agreement, to all properties, books, contracts, commitments and records
(including, but not limited to, Tax Returns) of such party and, in the case of
the Parents, of the Subsidiaries, as appropriate, and, during such period, each
shall furnish promptly to the other (a) a copy of each report, schedule and
other document filed or received pursuant to the requirements of federal or
state securities laws or filed with the Commission in connection with the
transactions
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contemplated by this Agreement, and (b) such other information concerning their
respective businesses, properties and personnel which are the subject of this
Agreement as shall be reasonably requested; provided that no investigation
pursuant to this Section 6.1 shall affect any representation or warranty made
herein or the conditions to the obligations of the respective parties hereto to
consummate the transactions contemplated hereby or thereby. Each party hereto
shall promptly advise each other party in writing of any change or the
occurrence of any event after the date of this Agreement having, or which,
insofar as can reasonably be foreseen, in the future may have, any Material
Adverse Effect on such party.
Section 6.2 Stockholders' Approval. Each of REIT and Parents shall
promptly take such action as may be required by its Articles of Incorporation,
bylaws and applicable law and promptly seek, and use its best efforts to obtain,
the requisite stockholder approval of this Agreement and the transactions
contemplated hereby, including amendments to REIT's Articles of Incorporation
necessary to consummate the transactions contemplated hereby and any amendments
to each Parent's Articles of Incorporation necessary to consummate the
transactions contemplated hereby (as appropriate, the "REIT Stockholders'
Approval" and "Parents' Stockholders' Approvals"). The REIT Board of Directors
and the Board of Directors of each Parent shall recommend to their respective
stockholders the approval of this Agreement and of the transactions contemplated
by this Agreement; provided, however, that prior to the respective meetings of
stockholders of REIT and Parents, the REIT Board of Directors or the Board of
Directors of each Parent, as the case may be, may withdraw, modify or amend such
recommendation to the extent that the REIT Board of Directors or the REIT
Special Committee or the Parent's Board of Directors, as the case may be, deems
it necessary to do so in the exercise of its fiduciary obligations to REIT or
the Parents, as the case may be, in the case of the REIT Special Committee,
after being so advised by counsel to REIT's Special Committee, Holleb & Coff, or
such other nationally recognized counsel not having an interest in the
transactions contemplated by this Agreement.
Section 6.3 Expenses. All costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby and thereby shall
be paid by the party incurring such expenses; provided, however, that all
reasonable costs and expenses of the REIT Special Committee (including
reasonable fees and expenses of counsel and its financial advisors), and all
fees and expenses in connection with filing, printing and distributing the Proxy
Statement shall be paid by REIT.
Section 6.4 Agreement to Cooperate. Subject to the terms and conditions
herein provided, each of the parties hereto shall cooperate and use its
respective commercially reasonable efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including using commercially
reasonable efforts to identify and obtain all necessary or appropriate waivers,
consents and approvals to effect all necessary registrations, filings and
submissions (including, but not limited to, REIT Required Statutory Approvals,
Parents' Required Statutory Approvals and any filings under federal and state
securities
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laws) and to lift any injunction or other legal bar to the transactions
contemplated hereby and thereby (and, in such case, to proceed with such
transactions as expeditiously as possible).
Section 6.5 Public Statements. The parties hereto shall consult with
each other prior to issuing any press release or any written public statement
with respect to this Agreement or the transactions contemplated hereby and shall
not issue any such press release or written public statement prior to review and
approval by the other party, except that prior review and approval shall not be
required if, in the reasonable judgment of the party seeking to issue such
release or public statement, prior review and approval would prevent the timely
dissemination of such release or announcement in violation of any applicable
law, rule or regulation.
Section 6.6 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to
either party hereto (the "Providing Party"), all information, whether oral,
written or otherwise, furnished to the other party hereto (the "Receiving
Party") or the Receiving Party's directors, officers, partners, Affiliates (as
defined in Rule 12b-2 under the Exchange Act), employees, agents or
representatives (collectively, "Representatives"), by the Providing Party or its
Representatives and all reports, analyses, compilations, studies and other
material prepared by the Receiving Party or its Representatives (in whatever
form maintained, whether documentary, computer storage or otherwise) containing,
reflecting or based upon, in whole or in part, any such information. The term
"Confidential Material" does not include information which (i) is or becomes
generally available to the public other than as a result of a disclosure by the
Receiving Party, its Representatives or anyone to whom the Receiving Party or
any of its Representatives transmit any Confidential Material in violation of
this Agreement, (ii) is or becomes known or available to the Receiving Party on
a non-confidential basis from a source (other than the Providing Party or one of
its Representatives) who is not, to the knowledge of the Receiving Party after
reasonable inquiry, prohibited from transmitting the information to the
Receiving Party or its Representatives by a contractual, legal, fiduciary or
other obligation, or (iii) is contained in the REIT SEC Documents.
(b) Subject to paragraph (c) below or except as required by applicable
laws, regulations or legal process, the Confidential Material will be kept
confidential and will not, without the prior written consent of the Providing
Party, be disclosed by the Receiving Party or its Representatives, in whole or
in part, and will not be used by the Receiving Party or its Representatives,
directly or indirectly, for any purpose other than in connection with this
Agreement and the transactions contemplated hereby or evaluating, negotiating or
advising with respect to such matters. Moreover, the Receiving Party agrees to
transmit Confidential Material to its Representatives only if and to the extent
that such Representatives need to know the Confidential Material for purposes of
such transactions and are informed by the Receiving Party of the confidential
nature of the Confidential Material and of the terms of this Section 6.6. In any
event, the Receiving Party will be responsible for any actions by its
Representatives which are not in accordance with the provisions hereof.
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(c) In the event that the Receiving Party, its Representatives or
anyone to whom the Receiving Party or its Representatives supply the
Confidential Material are requested (by oral questions, interrogatories,
requests for information or documents, subpoena, civil or criminal investigative
demand, any informal or formal investigation by any government or governmental
agency or authority or otherwise in connection with legal process) to disclose
any Confidential Material, the Receiving Party agrees (i) to immediately notify
the Providing Party of the existence, terms and circumstances surrounding such a
request, (ii) to consult with the Providing Party on the advisability of taking
legal available steps to resist or narrow such request and (iii) if disclosure
of such information is required, to furnish only that portion of the
Confidential Material which, in the opinion of the Receiving Party's counsel,
the Receiving Party is legally compelled to disclose and to cooperate with any
action by the Providing Party to obtain an appropriate protective order or other
reliable assurance that confidential treatment will be accorded the Confidential
Material (it being agreed that the Providing Party shall reimburse the Receiving
Party for all reasonable out-of-pocket expenses incurred by the Receiving Party
in connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance
with its terms, promptly upon request from the Providing Party, the Receiving
Party shall, except to the extent prohibited by applicable laws, regulations or
legal process, redeliver to the Providing Party or destroy all tangible
Confidential Material and will not retain any copies, extracts or other
reproductions thereof in whole or in part. Any such destruction shall be
certified in writing to the Providing Party by an authorized officer of the
Receiving Party supervising the same. Notwithstanding the foregoing, the
Receiving Party and one Representative designated by the Receiving Party shall
be permitted to retain one permanent file copy of each document constituting
Confidential Material to be used only in connection with litigation arising from
the transactions contemplated by this Agreement.
Section 6.7 Personnel.
(a) Parents' Liability for Employee Obligations. Subject to the
limitations set forth in Article IX hereof, each Parent shall indemnify and hold
harmless REIT for any and all obligations, debts or liabilities relating to or
arising from any employee's employment with Parent and its Subsidiary, which
obligation, debt or liability occurred prior to the Merger Closing date. Each
Parent shall honor or cause its respective insurance carriers to honor all
claims for benefits by the employees under each Employee Benefit Plan with
respect to claims incurred by the employees or their covered dependents before
the Merger Closing date.
(b) REIT shall establish or cause to be established employee benefit
plans for the respective employees who become employees of REIT or any
subsidiary thereof after the Merger Closing that are substantially similar to
the Employee Benefit Plans, which plans shall recognize service of the employees
with REIT, Parents and Subsidiaries and their affiliates to the same extent such
service has been recognized under the Employee Benefit Plans. The medical plans
established by REIT shall recognize any deductibles and co-payments employees
have made under the Parents' and Subsidiaries' medical plans in the current plan
year.
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(c) REIT shall not incur any liability with respect to an Employee
Benefit Plan of either Parents.
(d) Schedule 6.7(d) sets forth those individuals, who, at the Merger
Closing date, shall become employees of REIT. TIGI (including any entity
affiliated with TIGI), shall not hire or solicit to hire any individual listed
on Schedule 6.7(d), for a period of three years from the Merger Closing date,
without the prior approval by the independent members of REIT's board of
directors or until a party (or group of parties acting in concert), unrelated to
REIT, either Parent or TIGI, acquires twenty five percent (25%) or more of the
outstanding voting equity securities of REIT or purchases substantially all of
the assets of REIT and such individual's employment with REIT is terminated by
REIT or its successor.
Section 6.8 Accrued Expenses. Immediately prior to the Merger Closing,
each Subsidiary shall have sufficient cash necessary to pay off any and all
expenses which were accrued but not paid prior to the Merger Closing.
Section 6.9 Tax Matters.
(a) The parties agree that they will report, and will cause the
Subsidiaries and the Surviving Corporations in the mergers pursuant to Article
II to report, the Merger on all Tax Returns and other filings as tax-free
reorganizations under Section 368(a) of the Code. REIT will not, and will not
allow the Surviving Corporations to, take any action inconsistent with the
Mergers being treated as tax-free reorganizations under Section 368(a) of the
Code.
(b) Any Tax sharing agreement between Parents and their respective
Subsidiary will apply up to the Merger Closing and then will be terminated and
will have no further effect for any taxable year thereafter.
(c) Each Parent will include the income of its Subsidiary (including
any deferred income triggered into income by Section 1.1502-13 of the Treasury
Regulations and any excess loss accounts taken into income under Section
1.1502-19 of the Treasury Regulations) on its Tax Returns for all periods
through the Merger Closing and pay any Taxes attributable to such income. Each
Subsidiary will furnish Tax information to its Parent for inclusion in such
Parent's consolidated Tax Returns for the period which includes the date of the
Merger Closing in accordance with each Subsidiary's past custom and practice.
Each Parent will allow REIT a reasonable opportunity to review and comment upon
such Tax Returns (including any amended returns) prior to their being filed to
the extent that they relate to any Subsidiary. Without the consent of REIT, the
Parents will take no position on such returns that relate to any Subsidiary that
would be inconsistent with prior positions taken by its Parent. The income of
each Subsidiary will be apportioned to the period up to and including the Merger
Closing date and the period after the Merger Closing date by closing the books
of each Subsidiary as of the end of the Merger Closing date.
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(d) Parents and REIT will cooperate fully with each other in connection
with (i) the preparation and filing of any Federal, state or local tax returns
that include the business and operations of the Subsidiaries for any period
prior to and including the date of the Merger Closing, and (ii) any audit
examination by any government taxing authority of the returns referred to in
clause (i). Such cooperation shall include, without limitation, the furnishing
or making available of records, books of account or other materials of the
Subsidiaries necessary or helpful for the defense against assertions of any
taxing authority as to any tax returns which include operations of the
Subsidiaries for any period prior to and including the date of the Merger
Closing, at the Parents' sole cost and expense.
(e) In a case in which REIT or its subsidiaries receives any inquiry,
whether oral or written, from any taxing authority relating to any matter which
could result in the indemnification of REIT by a Parent under Section 9.1, REIT
will promptly give the subject Parent written notice (the "Tax Inquiry Notice")
of such inquiry. If such Tax Inquiry Notice is not given to the subject Parent
within 30 days after the receipt by REIT or its subsidiaries of such an inquiry
and REIT's failure to give such Tax Inquiry Notice adversely affects the ability
of the subject Parent to contest any claim made by such taxing authority, the
subject Parent shall not be liable to REIT under Section 9.1 for such claim.
(f) REIT will not settle or otherwise compromise any tax claim or tax
issue subject to indemnification under Section 9.1 without the indemnifying
Parent's prior written consent, which such Parent shall not unreasonably
withhold. Nothing contained herein shall require REIT to contest a claim if REIT
shall waive the payment by the subject Parent of any amount that might otherwise
be payable by the subject Parent pursuant to Section 9.1 hereof in respect of
such claim.
(g) None of REIT, TIPMG or IREIC will take any action that would
jeopardize the mergers from qualifying as a tax-free reorganization under
Section 368 of the Code.
(h) REIT shall file with its 2000 federal income tax return an
irrevocable election under Section 1.337(d)-5T(b) of the Treasury Regulations
subjecting REIT to the rules of Section 1374 of the Code.
(i) REIT shall take appropriate steps so that its distributions in 2000
made after the Effective Time shall be made in order to comply with Section
857(a)(2)(b) of the Code through the application of Section 857(d)(3) of the
Code, to the extent of the accumulated earnings and profits (as determined under
Section 316 of the Code) of the Subsidiaries at the Merger Closing.
Section 6.10 Intercompany Indebtedness. As of the Merger Closing, no
intercompany indebtedness shall exist between either Subsidiary and any member
of TIGI's Affiliated Group.
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Section 6.11 Securities Law Matters.
(a) Each certificate representing the REIT Common Shares shall bear the
following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE MAY
NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF BY THE
HOLDER EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, WITH
RESPECT THERETO OR IN ACCORDANCE WITH AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
REIT may, unless a registration statement is in effect covering the REIT Common
Shares, place stop transfer orders with its transfer agents with respect to such
certificates in accordance with federal security laws. Notwithstanding the
foregoing, REIT acknowledges that the REIT Common Shares issued as Merger
Consideration may be freely transferred by and among members of the Parents'
Affiliated Group without delivery of an opinion of counsel and that no stop
transfer will be imposed with respect to any such transfer.
(b) REIT shall execute and deliver to each Subsidiary a registration
rights agreement concerning the REIT Common Shares substantially in the form
attached as Exhibit B hereto.
Section 6.12 Director and Officer Indemnification. From and after the
Effective Time, REIT shall cause the Surviving Corporations to provide in their
Articles of Incorporation and ByLaws provisions relating to the exculpation and
indemnification of officers and directors of Advisor and Manager to the same
extent that such provisions were contained in the Articles of Incorporation and
By-Laws of Advisor and Manager prior to the Effective Time. From and after the
Effective Time, for seven (7) years after the Effective Time, REIT shall, and
shall cause the Surviving Corporations to, indemnify, defend and hold harmless
(and advance expenses to) all past and present officers, directors and employees
of Advisor and Manager to the same extent that individuals acting in similar
capacities would be indemnified by Advisor and Manager prior to the Merger
Closing. In the event of any dispute regarding whether a director, officer or
employee has met specified standards of conduct, such question shall be
conclusively determined by the written opinion of reputable disinterested legal
counsel selected by REIT's Board of Directors and acceptable to the director,
officer or employee involved in the dispute. The heirs and legal representative
of such directors, officers and employees are entitled to the benefits of such
indemnification and shall be deemed express third party beneficiaries of this
Section.
Section 6.13 WARN Act. REIT shall not, at any time prior to the 90th
day after the Merger Closing date, without complying fully with the notice and
other requirements of the Worker Adjustment and Retraining Notification Act
("WARN Act"), effectuate (a) a "plant closing" as
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defined in the WARN Act affecting any site of employment or one or more
facilities or operating units within any site of employment of Advisor or
Manager; or (b) a "mass layoff" as defined in the WARN Act affecting any site of
employment of Advisor or Manager; or (c) any similar action under applicable
state law requiring notice to employees in the event of a plant closing or
layoff.
Section 6.14 Post-Closing Access. In connection with any audit or
similar proceeding involving either Parent or any of their affiliates or other
investigation of either Parent, any of its affiliates, Advisor or Manager for
any matter relating to any period prior to the Effective Time, REIT shall, upon
request, permit each Parent and its representatives to have access to the books
and records of Advisor and Manager. REIT shall not dispose of such books and
records during the ten-year period beginning with the Effective Time or any
longer period as mandated by applicable laws without Parents' consent, which
shall not be unreasonably withheld. Following the expiration of such ten-year
period, REIT may dispose of such books and records at any time upon giving sixty
(60) days prior written notice to Parents, unless either Parent agrees to take
possession of such books and records within sixty (60) days at no expense to
REIT.
Section 6.15 Disclosure Generally. If and to the extent any information
required to be furnished in the schedules to this Agreement in order to avoid a
breach of, or inaccuracy with respect to, a representation or warranty or
satisfy a condition contained in this Agreement is contained in this Agreement
or in the schedule, to the extent a reasonable person would deem the disclosure
in the schedule to be evident, such information shall be deemed to be included
in each schedule in which the information is required to be included in order to
avoid a breach of, or inaccuracy with respect to, a representation or warranty
or satisfy a condition contained in this Agreement.
Section 6.16 ACKNOWLEDGMENT. EACH PARENT HAS CONDUCTED WITH RESPECT TO
REIT AND REIT HAS CONDUCTED WITH RESPECT TO THE SUBSIDIARIES, TO ITS
SATISFACTION AN INDEPENDENT INVESTIGATION OF THE FINANCIAL CONDITION, RESULTS OF
OPERATIONS, PROPERTIES, ASSETS, LIABILITIES AND PROJECTED OPERATIONS OF SUCH
PARTY. IN MAKING ITS DETERMINATION TO PROCEED WITH THE TRANSACTIONS CONTEMPLATED
BY THIS AGREEMENT, EACH PARENT AND REIT RELIED ON THE RESULTS OF ITS OWN
INDEPENDENT INVESTIGATION. THE REPRESENTATIONS AND WARRANTIES MADE BY THE
PARTIES IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY CONSTITUTE THE
EXCLUSIVE REPRESENTATIONS AND WARRANTIES IN CONNECTION WITH THE TRANSACTIONS
CONTEMPLATED HEREBY, AND EACH PARTY UNDERSTANDS, ACKNOWLEDGES AND AGREES THAT
ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESSED OR
IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY RELATING TO THE FUTURE OR HISTORICAL
FINANCIAL CONDITION, RESULTS OF OPERATIONS, PROPERTIES ASSETS OR LIABILITIES OF
REIT, ADVISOR OR MANAGER) ARE SPECIFICALLY DISCLAIMED.
Section 6.17 401(k) Accounts. Following the Merger Closing date, the
parties shall cooperate to cause any accounts maintained pursuant to a "401(k)"
or similar type plan by the
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Parents or the Subsidiaries on behalf of those individuals listed on Schedule
6.7(d), to be rolled over into a 401(k) or similar type plan maintained by REIT.
ARTICLE VII
CONDITIONS
Section 7.1 Conditions to Each Party's Obligations. The respective
obligation of each party to effect the transactions contemplated hereby shall be
subject to the fulfillment at or prior to the Merger Closing of the following
conditions:
(a) REIT and each Parent shall have performed in all material respects
its agreements and covenants contained in this Agreement required to be
performed on or prior to the Merger Closing, and the representations and
warranties of each such other party shall be true and correct in all material
respects on and as of (i) the date made and (ii) the Merger Closing date with
the same effect as if made on that date; and each party shall have received a
certificate of an executive officer of each such party to that effect;
(b) This Agreement and the transactions contemplated hereby shall have
been approved by the affirmative vote of the holders of a majority of the REIT
Common Shares, excluding any REIT Common Shares held by either the Advisor or
the Manager, and each Parent's Stockholders' Approval shall have been obtained.
(c) REIT and each Parent shall have received a favorable opinion of
Shefsky & Froelich Ltd. (in form reasonably acceptable to counsel for the
Subsidiaries) to the effect that the mergers described in Article II will each
qualify as a reorganization within the meaning of Section 368 of the Code and
that each of REIT, Subsidiaries, Merger Co. I, Merger Co. II, the Advisor
Surviving Corporation and the Manager Surviving Corporation, will be a party to
the reorganization within the meaning of Section 368(b) of the Code;
(d) REIT, REIT Special Committee and Parents shall have received an
opinion from Shefsky & Froelich Ltd. (in form reasonably acceptable to counsel
for the Subsidiaries) that the performance of this Agreement will not jeopardize
the status of REIT as a "real estate investment trust" under the Code.
(e) No preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the transactions
contemplated by this Agreement shall have been issued and remain in effect (each
party agreeing to use its best efforts to have any such injunction, order or
decree lifted);
(f) All governmental consents, orders and approvals listed on Schedule
7.1(f) shall have been obtained and be in effect at the Merger Closing; and
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(g) All agreements set forth on Schedule 7.1(g) shall have been
terminated effective as of the Merger Closing;
(h) The representations and warranties of the parties contained in this
Agreement shall be true and correct at and as of the Merger Closing date with
the same force and effect as though made at and as of that time. The Parents and
the Subsidiaries shall have delivered to REIT and REIT shall have delivered to
the Parents, a certificate, dated as of the Merger Closing, duly signed, stating
that such representations and warranties are true and correct and that all such
obligations have been performed and complied with; and
(i) TIGI and REIT shall have executed (i) a lease agreement, on such
terms and conditions as set forth on Exhibit C attached hereto, with respect to
REIT's use of office space; (ii) a license agreement, on such terms and
conditions as set forth on Exhibit D attached hereto, with respect to REIT's
continued use of the "Inland Real Estate Corporation" trade name and REIT's use
of the Intellectual Property; and (iii) a service agreement, in the form set
forth as Exhibit E attached hereto, with respect to REIT's use of certain
employees of TIGI to perform certain administrative functions on behalf of REIT.
Section 7.2 Conditions to Obligations of REIT. Unless waived by REIT,
the obligation of REIT to effect the transactions contemplated hereby shall be
subject to the fulfillment at or prior to the Merger Closing of the following
additional conditions:
(a) The Special Committee of the REIT Board (the "REIT Special
Committee") shall have received from First Union, or another investment banking
firm reasonably satisfactory to the REIT Special Committee, a written opinion to
the effect that, as of the date of this Agreement and the date of the Proxy
Statement, the aggregate consideration to be paid and received by REIT pursuant
to this Agreement and the Agreement and Plan of Merger is fair to REIT and its
stockholders from a financial point of view, and such opinion shall not have
been withdrawn, revoked or modified;
(b) REIT shall have received a "comfort letter" from the independent
public accountants of each Parent, dated as of the date of the Proxy Statement,
with respect to financial information of each Subsidiary included or
incorporated by reference in the Proxy Statement in form and substance
reasonably satisfactory to REIT and customary in scope and substance for
"comfort letters" delivered by independent public accountants in connection with
registration statements and proxy statements;
(c) No governmental consent, order or approval legally required for the
consummation of the transactions contemplated by this Agreement shall have any
terms which in the reasonable judgment of REIT, when taken together with the
terms of all such consents, orders or approvals, would materially impair the
value to REIT of the transactions contemplated by this Agreement, and no
governmental authority shall have promulgated any statute, rule or regulation
which, when taken
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together with all such promulgations, would materially impair the value to REIT
of the transactions contemplated by this Agreement;
(d) REIT shall have been provided all consents listed on Schedule
7.2(d);
(e) TIGI and REIT shall have executed (i) a lease agreement, on such
terms and conditions as set forth on Exhibit C attached hereto, with respect to
REIT's use of office space; (ii) a license agreement, on such terms and
conditions as set forth on Exhibit D attached hereto, with respect to REIT's
continued use of the "Inland Real Estate Corporation" trade name and REIT's use
of the Intellectual Property; and (iii) a service agreement, in the form set
forth as Exhibit E attached hereto, with respect to REIT's use of certain
employees of TIGI to perform certain administrative functions on behalf of REIT;
and
(f) REIT shall have entered into a definitive employment agreement with
those individuals listed on Schedule 7.2(f) and on such terms and conditions as
set forth on Exhibit F attached hereto.
Section 7.3 Conditions to Obligations of Parents. Unless waived by both
Parents, the obligation of the Parents to effect the transactions contemplated
hereby shall be subject to the fulfillment at or prior to the Merger Closing of
the additional following conditions:
(a) No governmental consent, order or approval legally required for the
consummation of the transactions contemplated by this Agreement shall have any
terms which in the reasonable judgment of each Parent, when taken together with
the terms of all such consents, orders or approvals, would materially impair the
value to each Parent of the transactions contemplated by this Agreement
(including, without limitation, the value of the REIT Common Shares to be
received by the Parents pursuant to Article II), and no governmental authority
shall have promulgated any statute, rule or regulation which, when taken
together with all such promulgations, would materially impair the value to each
of the Parents and their stockholders of the transactions contemplated by this
Agreement (including, without limitation, the value of the REIT Common Shares to
be received by the Parents pursuant to Article II).
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.1 Termination. This Agreement may be terminated at any time
prior to the Merger Closing, whether before or after approval by the
stockholders of REIT and each of the Parents:
(a) by mutual consent of all of the parties hereto;
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(b) unilaterally by any of the parties hereto, so long as such party
has not breached any of its obligations hereunder (except for such breaches as
are immaterial), if the transactions contemplated hereby shall not have been
consummated on or before September 15, 2000 (the "Termination Date");
(c) unilaterally by either REIT or both Parents (i) if either REIT or
both Parents (A) fails to perform any covenant or agreement in this Agreement in
any material respect, and does not cure the failure, in all material respects
within 15 business days after the terminating party delivers written notice of
the alleged failure to the other parties or (B) fails to fulfill or complete a
condition to the obligations of the terminating party (which condition is not
waived) by reason of a breach by the non-terminating party or parties of its
obligations hereunder, or (ii) if any condition to the obligations of the
terminating party is not satisfied (other than by reason of a breach by that
party of its obligations hereunder), and it reasonably appears that the
condition cannot be satisfied prior to the Termination Date;
(d) unilaterally by both Parents if REIT, through the REIT Board of
Directors or REIT Special Committee, either fails to recommend to REIT's
stockholders the approval of this Agreement and the transactions contemplated
hereby or withdraws, modifies or amends such recommendation; and
(e) unilaterally by REIT if either Parent, through its Board of
Directors, either fails to recommend to its stockholders the approval of this
Agreement and the transactions contemplated hereby or withdraws, modifies or
amends such recommendation.
Section 8.2 Effect of Termination. In the event of termination of this
Agreement, as provided in Section 8.1, this Agreement shall forthwith become
void, and there shall be no further obligation on the part of any party hereto
or their respective officers or directors (except as set forth in this Section
8.2 and in Sections 6.3 and 6.6 and Article IX, which shall survive such
termination). Nothing in this Section 8.2 shall relieve any party from liability
for any breach of this Agreement.
Section 8.3 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto and in
compliance with applicable law; provided, however, this Agreement may not be
amended in any material respect following the approval of the REIT stockholders,
except with the consent of a majority of such stockholders.
Section 8.4 Waiver. At any time prior to the Merger Closing, each party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of any of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein except the requisite approvals of the stockholders
of the parties hereto. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
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ARTICLE IX
SURVIVAL AND REMEDY; INDEMNIFICATION
Section 9.1 Indemnification. REIT agrees to indemnify the Parents, and
each Parent agrees to indemnify REIT (the party providing such indemnification
shall be hereinafter referred to as an "Indemnifying Party" while the party
being indemnified shall be hereinafter referred to as an "Indemnified Party" or
the "Indemnified Parties") against, and agrees to hold it and them harmless
from, any and all liabilities, losses, costs, damages, penalties or expenses
(including, without limitation, reasonable attorneys' fees and expenses and
costs of investigation and litigation) (collectively, "Losses") incurred or
suffered by an Indemnified Party arising out of or in connection with any breach
of, or inaccuracy in, (i) to the extent a Parent is the Indemnifying Party, any
of the representations and warranties, covenants or agreements of such Parent
under this Agreement and (ii) to the extent REIT is the Indemnifying Party, the
representations, warranties, covenants and agreements of REIT set forth in this
Agreement. In addition, each Parent agrees to indemnify REIT, the other Parent
and each of REIT's affiliates (other than the subject Parent, but including,
after the Merger Closing, the Surviving Corporations in the merger pursuant to
Article II) (REIT and such included affiliates being included within the terms
"Indemnified Party" and "Indemnified Parties" as used in the other sections of
this Article IX) against, and agrees to hold it and them harmless from,
any and all Losses incurred or suffered by it or them arising out of or in
connection with any income tax liabilities arising pursuant to Treasury
Regulations Section 1.1502-6 or any analogous provision ("Consolidated Return
Tax Liabilities").
Section 9.2 Threshold. An Indemnified Party shall not be entitled to
indemnification under this Article IX until the aggregate of all Losses with
respect to which such Indemnified Party would otherwise be entitled to
indemnification under this Article IX exceeds $350,000, in which event the
Indemnified Party shall be entitled to such Losses including such $350,000.
Section 9.3 Notice of Claims; Assumption of Defense. The Indemnified
Party shall give prompt notice to the Indemnifying Party, in accordance with the
terms of Section 10.1 and in the case of a tax inquiry in compliance with the
terms of Section 6.9(e), of the assertion of any claim, or the commencement of
any suit, action or proceeding by any party in respect of which indemnity may be
sought hereunder, specifying with reasonable particularity the basis therefor
and giving the Indemnifying Party such information with respect thereto as the
Indemnifying Party may reasonably request. The Indemnifying Party may, at its
own expense, (a) participate in and (b) upon notice to the Indemnified Party,
assume the defense thereof; provided that (x) the Indemnifying Party's counsel
is reasonably satisfactory to the Indemnified Party and (y) the Indemnifying
Party shall thereafter consult with the Indemnified Party upon its reasonable
request from time to time with respect to such claim, suit, action or
proceeding; provided, however, that the Indemnified Party shall have the right
to retain its own counsel, with the reasonable fees and expenses to be paid by
the Indemnifying Party, if the Indemnified Party reasonably believes that
representation of it by the counsel retained by the Indemnifying Party would be
inappropriate due to actual or potential differing interest between the
Indemnified Party and any other party represented by such counsel in
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such proceeding. If the Indemnifying Party assumes such defense, the Indemnified
Party shall have the right (but not the duty) to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by the Indemnifying Party. Whether or not the Indemnifying Party
chooses to defend or prosecute any such claim, suit, action or proceeding, all
of the parties hereto shall cooperate in the defense or prosecution thereof.
Section 9.4 Settlement or Compromise. Any settlement or compromise made
or caused to be made by the Indemnified Party or the Indemnifying Party, as the
case may be, of any claim, suit, action or proceeding of the kind referred to in
Section 9.3 shall also be binding upon the Indemnifying Party or the Indemnified
Party, as the case may be, in the same manner as if a final judgment or decree
had been entered by a court of competent jurisdiction in the amount of such
settlement or compromise. No party shall settle or compromise any such claim,
suit, action or proceeding without the prior written consent of the other party,
which shall not be unreasonably withheld.
Section 9.5 Limitations.
(a) The indemnification provided by this Article IX shall be a
continuing right to indemnification and shall survive the closing of the
transactions contemplated hereby and the expiration or termination of this
Agreement (i) for a period of eighteen months following the Merger Closing with
respect to any indemnification other than for Consolidated Return Tax
Liabilities and (ii) until the expiration of the statute of limitations (as it
may be extended) with respect to each tax year or period pertinent to
Consolidated Return Tax Liabilities; and the Indemnified Party shall be entitled
to bring an action thereon only if the Indemnified Party has given the
Indemnifying Party written notice within such eighteen month period or
statute-of-limitations period, as the case may be. TIPMG is only liable for
representations, warranties, covenants and agreements that it has made or agreed
to on behalf of itself and the Manager. Additionally, IREIC is only liable for
representations, warranties, covenants and agreements that it has made or agreed
to on behalf of itself and the Advisor.
(b) Either Parent may, at its election, pay its indemnification
obligations in cash, in REIT Common Shares or in a combination thereof. Except
as provided in Section 9.5(c), the aggregate indemnification obligations of the
Parents hereunder (other than for Losses which are Consolidated Return Tax
Liabilities) (the "Maximum Indemnification Amount") shall not exceed the lesser
of (i) $68 million, or (ii) the sum of (X) the "Fair Market Value" (as defined
herein) of the REIT Common Shares issued hereunder and (Y) 50% of the difference
between the indemnification obligation and the Fair Market Value of the REIT
Common Shares issued hereunder (the "Excess Amount"); provided, however, that
for the purposes of determining the Maximum Indemnification Amount under this
Section 9.5(b), the Excess Amount shall be limited to $34 million. For purposes
of this Article IX, the "Fair Market Value" of a REIT Common Share shall be, at
the time of the payment of the indemnification obligation, the per share average
closing price of the REIT Common Shares for the five business days immediately
prior to the payment of the indemnification obligation, or if, the REIT Common
Shares are not then listed on a national securities exchange or included for
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quotation on the Nasdaq National Market, the amount determined by an independent
appraiser reasonably acceptable to REIT and the Indemnifying Party.
(c) If, at the time a Parent pays its indemnifying obligations, the
Fair Market Value of a REIT Common Share exceeds $11, the Maximum
Indemnification Amount shall be the Fair Market Value of all of the REIT Common
Shares being issued hereunder.
(d) TIGI shall be liable for and shall guaranty the indemnification
obligations of TIPMG and shall execute this Agreement in such capacity. Losses
shall only be comprised of direct out-of-pocket costs and expenses incurred by
the Indemnified Parties and Losses shall in no event include any special,
consequential, exemplary, speculative or punitive damages or any other damages
postulating or including a measure or calculation of lost profits or advantages
or a similar method or theory, regardless of whether a claim for such damages is
based on warranty, contract, tort, breach of duty or other cause of action.
(e) Parents shall have no obligation to indemnify REIT for any Losses
caused by a breach of the representation and warranty made in Section 4.23 of
this Agreement to the extent that REIT uses funds that it would have otherwise
used to make a distribution to its stockholders in accordance with past
practices, for any purpose other than making such distribution.
(f) The indemnification provisions of this Agreement shall be the sole
and exclusive remedy of the Indemnified Parties for breach of any
representation, warranty, covenant, undertaking or other agreement contained in
this Agreement; it being agreed that, except for the indemnification provided in
this Agreement, no party or its officers, directors and agents shall have any
recourse (whether in law or in equity) against any party hereto with respect to
any Losses or other claims relating to the transaction contemplated by this
Agreement. If the Indemnified Party receives any payment from an Indemnifying
Party in respect of any Losses and the Indemnified Party could have recovered
all or a part of such Losses from a third Person (a "Potential Contributor")
based on the underlying claim asserted against the Indemnifying Party, the
Indemnified Party shall assign such of its rights to proceed against the
Potential Contributor as are necessary to permit the Indemnifying Party to
recover from the Potential Contributor the amount of such payment.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given or delivered:
(i) when delivered personally or by commercial messenger; (ii) three business
days after deposit in the mail, when sent first class or certified U.S. mail,
postage prepaid; (iii) one business day following deposit with a recognized
overnight courier service, provided such deposit occurs prior to the deadline
imposed by such service for overnight delivery; or (iv) when transmitted, if
sent by facsimile copy, provided confirmation of
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receipt is received by sender, in each case above provided such communication is
addressed to the intended recipient thereof as set forth below:
(a) If to REIT, to:
Inland Real Estate Corporation
2901 Butterfield Road
Oak Brook, Illinois 60523
Attention: Robert D. Parks
Fax: (630) 218-4900
with copies to:
Shefsky & Froelich Ltd.
444 N. Michigan Avenue, #2500
Chicago, Illinois 60611
Attention: Michael J. Choate
Fax: (312) 527-5921
and:
Holleb & Coff
55 East Monroe, Suite 4000
Chicago, Illinois 60603
Attention: Don S. Hershman
Fax: (312) 807-3900
If to TIGI, IREIC or TIPMG:
c/o The Inland Group, Inc.
2901 Butterfield Road
Oak Brook, Illinois 60523
Attention: Robert H. Baum
Fax: (630) 218-4900
with copies to:
Katten Muchin Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Attention: Arnold Harrison
Fax: (312) 902-1061
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Section 10.2 Interpretation. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 10.3 Entire Agreement; Amendments. This Agreement and the
Exhibits and schedules referred to herein and the documents delivered pursuant
hereto contain the entire understanding of the parties hereto with regard to the
subject matter contained herein or therein, and supersede all prior agreements,
understandings or letters of intent between or among any of the parties hereto.
This Agreement shall not be amended, modified or supplemented except by a
written instrument signed by an authorized representative of each of the parties
hereto.
Section 10.4 Miscellaneous. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof and
thereof; (b) shall not be assigned by operation of law or otherwise; and (c)
shall be governed in all respects, including validity, interpretation and
effect, by the laws of the State of Illinois (without giving effect to the
provisions thereof relating to conflicts of law).
Section 10.5 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
Section 10.6 Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
Section 10.7 Successors and Assigns. Any party to this Agreement can
assign its rights hereunder without the prior written consent of the other
parties. The obligations of Parents, TIGI and the Subsidiaries under this
Agreement shall not be assignable without the prior written consent of REIT. The
obligations of REIT under this Agreement shall not be assignable without the
prior written consent of either of the Parents.
Section 10.8 Limitation in Liability. Any obligation or liability
whatsoever of REIT, either Parent or TIGI which may arise at any time under this
Agreement or any obligation or liability which may be incurred by it pursuant to
any other instrument, transaction or undertaking contemplated hereby shall be
satisfied, if at all, out of such entity's assets only. No such obligation or
liability shall be personally binding upon, nor shall resort for the enforcement
thereof be had to, the property of any of such entity's stockholders, directors,
officers, employees or agents, regardless of whether such obligation or
liability is in the nature of contract, tort or otherwise.
Section 10.9 No Presumption Against Drafter. Each of the parties hereto
has jointly participated in the negotiation and drafting of this Agreement. In
the event of an ambiguity or a question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by
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each of the parties hereto and no presumptions or burdens of proof shall arise
favoring any party by virtue of the authorship of any of the provisions of this
Agreement.
Section 10.10 Facsimile Signatures. Notwithstanding the laws of any
jurisdiction in which this Agreement is executed or delivered, a facsimile
signature shall for all purposes be deemed an original and shall bind the signor
as if such facsimile were an original. Each party hereto undertakes to deliver
to each of the other parties' hereto original copies of any facsimile signature
by overnight courier to the addressed set forth in Section 10.1 above.
* * * * *
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<PAGE> 144
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
<TABLE>
<S> <C>
INLAND REAL ESTATE CORPORATION THE INLAND PROPERTY MANAGEMENT
GROUP, INC.
By: /s/ Robert D. Parks
---------------------------------- By: /s/ Warren W. Jarog
Its: President ----------------------------------
--------------------------------- Its: Secretary
---------------------------------
INLAND ADVISORS, INC.
By: /s/ Norbert Treonis INLAND COMMERCIAL PROPERTY
---------------------------------- MANAGEMENT, INC.
Its: President
--------------------------------- By: /s/ Scott Carr
----------------------------------
Its: President
INLAND MANAGEMENT CORPORATION ---------------------------------
By: /s/ Norbert Treonis
---------------------------------- THE INLAND GROUP, INC.,
Its: President
--------------------------------- By: /s/ Daniel Goodwin
----------------------------------
Its: President
INLAND REAL ESTATE INVESTMENT ---------------------------------
CORPORATION
By: /s/ Brenda Gail Gujral
----------------------------------
Its: President
---------------------------------
INLAND REAL ESTATE ADVISORY
SERVICES, INC.
By: /s/ Patricia A. DelRosso
----------------------------------
Its: Vice President
---------------------------------
for the purposes of Section 9.5, guarantying the
representations and warranties, covenants and
obligations of TIPMG.
</TABLE>
42
<PAGE> 145
APPENDIX B
<PAGE> 146
March 17, 2000
The Special Committee of the Board of Directors
Inland Real Estate Corporation
2901 Butterfield Road
Oak Brook, Illinois 60521
Members of the Special Committee:
We understand that Inland Real Estate Corporation (the "REIT"), Inland Real
Estate Advisory Services, Inc. (the "Advisor") and Inland Commercial Property
Management, Inc. (the "Manager") have entered into an agreement and plan of
merger dated as of March 7, 2000 (the "Agreement"). Pursuant to the Agreement,
all of the outstanding stock of the Advisor and the Manager will be acquired by
the REIT (the "Merger") and shareholders of the Advisor and the Manager will
receive 6,181,818 shares of common stock of the REIT (the "Share
Consideration"). The terms of the Merger are more fully set forth in the
Agreement.
You have requested our opinion as to whether the Share Consideration is fair,
from a financial point of view, to the shareholders of the REIT.
In arriving at the opinion set forth below, we have, among other things:
-> Reviewed the financial terms of the Merger, as set forth in
the Agreement, and a draft of the proxy statement;
-> Analyzed certain historical and pro forma financial and
operating data of the REIT, the Advisor and the Manager as
well as the REIT's Prospectus dated April 7, 1998, as amended;
-> Analyzed certain internal financial information prepared by
the management of the REIT, the Advisor and the Manager
including projections and other data;
-> Discussed the business of, and prospects for, the REIT, the
Advisor and the Manager with the management of the REIT, the
Advisor and the Manager, respectively, including with respect
to the projections referenced to above which incorporate
estimates of the potential cost savings from the Merger and
the future financial performance of the REIT's properties;
<PAGE> 147
March 29, 2000
Page 3
-> Reviewed certain materials presented by the management of the
REIT, the Advisor and the Manager to the REIT's board of
directors;
-> Reviewed the advisory agreement between the REIT and the
Advisor;
-> Reviewed the management agreement between the REIT and the
Manager;
-> Conducted site visits of 94 of the 118 properties, which
represent approximately 7,600,000 square feet, or 81.5% of the
9,300,000 square feet owned by the REIT;
-> Reviewed the Advisor and the Manager employing the following
techniques: comparable historical merger and acquisition
transactions, comparable publicly traded investment and real
estate management and advisory companies, and a discounted
cash flow analysis;
-> Reviewed the REIT shares offered as consideration for the
Merger by the following methodologies: comparable publicly
traded retail real estate investment trusts, net asset value,
discounted cash flow analysis and recent sales price;
-> Reviewed such other financial studies and analyses and
performed such other investigations as we deemed appropriate.
For purposes of this opinion, we have, with your consent, assumed and relied
upon without independent verification: the accuracy and completeness of the
financial and other information reviewed by us; the accuracy, completeness and
fairness of oral statements made to us; and the assurances of management of the
REIT, the Advisor and the Manager that they do not know anything regarding the
REIT, the Advisor, or the Manager which would make the information provided to
us incomplete, or misleading, for the purposes of this opinion.
With respect to the financial projections of the REIT, the Advisor and the
Manager which were furnished to and discussed with us (including estimates of
potential cost savings to the REIT), we have assumed that they have been
reasonably prepared on the bases reflecting the best currently available
estimates and judgments of the future financial performance of the REIT, the
Advisor and the Manager.
We have not made any independent valuation or appraisal of the assets or
liabilities of the REIT, the Advisor or the Manager nor have we reviewed
environmental or other potential contingent issues relating to the Advisor, the
Manager, the REIT, or the Merger.
<PAGE> 148
March 29, 2000
Page 4
We express no opinion herein as to the legal, accounting or tax aspects of the
Merger and we have relied upon statements of the REIT's advisors and the
requirements of the Agreement with respect thereto. Our opinion is necessarily
based on economic, market, financial and other conditions as in effect on, and
the information made available to us as of the date hereof. It should be
understood that, although subsequent developments may effect this opinion, we do
not have any obligation to update, revise or reaffirm this opinion. Our opinion
may not be published or otherwise used or referred to, nor shall any public
reference to First Union Securities, Inc. or First Union Corporation be made,
without our prior written consent.
We have been engaged by the REIT as financial advisor with respect to the Merger
and will receive a fee for rendering this opinion. None of our fee is contingent
on the consummation of the Merger. We have also been retained by the REIT to
serve as exclusive financial advisor.
In rendering our opinion, we have assumed that the Merger will be consummated
pursuant to the terms and subject to the conditions set forth in the Agreement,
without waiver of any material terms or conditions. Our advisory services and
the opinion expressed herein are provided for the information of the Special
Committee of the Board of Directors of the REIT in its evaluation of the Merger.
Our opinion does not address the relative merits of the Merger and other
business strategies considered by the REIT's Board of Directors, nor does it
address the REIT's Board of Directors' decision to proceed with the Merger. This
opinion does not constitute a recommendation to any shareholder of the REIT as
to how such shareholder should vote, or as to any other action, which such
shareholder should take, in connection with the Merger. This opinion relates
solely to the question of the fairness to the REIT, from a financial point of
view, of the Merger.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Share Consideration is fair, from a
financial point of view, to the holders of Inland Real Estate Corporation common
stock.
Very truly yours,
/s/ First Union Securities, Inc.
- ----------------------------------------
FIRST UNION SECURITIES, INC.
<PAGE> 149
APPENDIX C
<PAGE> 150
INLAND MONTHLY INCOME FUND III, INC.
SECOND ARTICLES OF AMENDMENT AND RESTATEMENT
THIS IS TO CERTIFY THAT:
FIRST: Inland Monthly Income Fund III, Inc., a Maryland corporation
(the "Company"), desires to amend and restate its charter as currently in effect
and as hereinafter amended.
SECOND: The following provisions are all the provisions of the
charter currently in effect and as hereinafter amended:
ARTICLE I
NAME
The name of the corporation is: Inland Monthly Income Fund III, Inc.
ARTICLE II
PURPOSE
The purposes for which the Company is formed are to engage in any
lawful act or activity (including, without limitation or obligation, qualifying
as a real estate investment trust (a "REIT") under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended, or any successor statute (the
"Code")) for which corporations may be organized under the general laws of the
State of Maryland as now or hereafter in force.
ARTICLE III
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The post office address of the principal office of the Company in the
State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Company in the
State of Maryland is The Corporation Trust Incorporated at 32 South Street,
Baltimore, Maryland 21202. The resident agent is a corporation located in the
State of Maryland.
<PAGE> 151
ARTICLE IV
INCORPORATOR
The name and address of the incorporator shall be Don S. Hershman, 444
North Michigan Avenue, Suite 2500, Chicago, Illinois 60611.
ARTICLE V
DEFINITIONS
For the purposes of these Articles, the following terms shall have the
following meanings:
"ACQUISITION EXPENSES" means expenses related to the Company's
selection, evaluation and acquisition of, and investment in, properties, whether
or not acquired or made, including but not limited to legal fees and expenses,
travel and communications expenses, cost of appraisals and surveys,
non-refundable option payments on property not acquired, accounting fees and
expenses, computer use related expenses, architectural and engineering reports,
environmental and asbestos audits, title insurance and escrow fees, and
personnel and miscellaneous expenses related to the selection and acquisition of
properties.
"AFFILIATE" means: (i) any Person directly or indirectly owning,
controlling or holding, with the power to vote 10% or more of the outstanding
voting securities of such other Person; (ii) any Person 10% or more of whose
outstanding voting securities are directly or indirectly owned, controlled or
held, with the power to vote, by such other Person; (iii) any Person directly or
indirectly controlling, controlled by or under common control with such other
Person; (iv) any executive officer, director, trustee or general partner of such
other Person; and (v) any legal entity for which such Person acts as an
executive officer, director, trustee or general partner.
"AVERAGE INVESTED ASSETS" shall mean, for any period, the average of
the aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests and in loans secured by real estate, before
reserves for depreciation or bad debts or other similar noncash reserves,
computed by taking the average of such values at the end of each month during
such period.
"COMPETITIVE REAL ESTATE COMMISSION" means the real estate or brokerage
commission paid for the purchase or sale of a property which is reasonable,
customary and competitive in light of the size, type and location of such
property.
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"CONTRACT PRICE FOR THE PROPERTY" means the amount actually paid or
allocated to the purchase, development, construction or improvement of a
property exclusive of Acquisition Expenses.
"CONTRACT PRICE FOR THE PROPERTY" means the amount actually paid or
allocated to the purchase, development, construction or improvement of a
property exclusive of Acquisition Expenses.
"DEVELOPMENT FEE" means a fee for the packaging of a property of the
Company, including negotiating and approving plans, and undertaking to assist in
obtaining zoning and necessary variances and necessary financing for the
specific property, either initially or at a later date.
"DIRECTORS" means the members of the Board of Directors of the Company.
"EQUITY STOCK" shall mean stock that is either Common Stock and/or
Preferred Stock of the Company.
"INDEPENDENT DIRECTORS" means the Directors who: (i) are not
affiliated, directly or indirectly, with the Company , whether by ownership of,
ownership interest in, employment by, any material business or professional
relationship with, or as an officer or director of the Company; (ii) do not
serve as a director for more than two other REITs organized by the Company , and
(iii) perform no other services for the Company, except as Directors. For this
purpose, an indirect relationship shall include circumstances in which a member
of the immediate family of a Director has one of the foregoing relationships
with the Company .
"INDEPENDENT EXPERT" shall mean a person with no current or prior
business or personal relationship with the Directors and who is engaged, to a
substantial extent, in the business of rendering opinions regarding the value of
assets of the type held by the Company.
"LEVERAGE" shall mean the aggregate amount of indebtedness of the
Company for money borrowed (including purchase money mortgage loans) outstanding
at any time, both secured and unsecured.
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"NET ASSETS" or "NET ASSET VALUE" means the total assets of the Company
(other than intangibles) at cost before deducting depreciation or other non-cash
reserves less total liabilities of the Company, calculated at least quarterly on
a basis consistently applied.
"NET INCOME" means, for any period, total revenues applicable to such
period, less the expenses applicable to such period other than additions to or
allowances for reserves for depreciation, amortization or bad debts or other
similar non-cash reserves; provided, however, that Net Income shall not include
the gain from the sale of the Company's assets.
"ORGANIZATION AND OFFERING EXPENSES" means those expenses incurred by
and to be paid from the assets of the Company in connection with and in
preparing the Company for registration and subsequently offering and
distributing Shares to the public, including, but not limited to, total
underwriting and brokerage discounts and commissions (including fees of the
underwriters' attorneys), expenses for printing, engraving, mailing, salaries of
employees while engaged in sales activity, charges of transfer agents,
registrars, trustees, escrow holders, depositaries, experts, expenses of
qualification of the sale of the securities under federal and state laws,
including taxes and fees, and accountants' and attorneys' fees.
"OWNERSHIP LIMIT" means the beneficial ownership of no more than 9.8%
of the outstanding Shares of the Company.
"PARTICIPANT" means a Stockholder who purchases Shares pursuant to this
Offering and elects to participate in the DRP.
"PERSON" means any natural person, partnership, corporation,
association, trust, limited liability company or other legal entity.
"REIT" means a corporation, trust, association or other legal entity
(other than a real estate syndication) which is engaged primarily in investing
in equity interests in real estate (including fee ownership and leasehold
interests) or in loans secured by real estate or both.
"ROLL-UP" means a transaction involving the acquisition, merger,
conversion or consolidation either directly or indirectly of the Company and the
issuance of securities of a RollUp Entity. Such term does not include:
(a) a transaction involving securities of the Company that
have been for at least 12 months listed on a national securities
exchange or traded through The Nasdaq Stock Market-Nasdaq National
Market; or
(b) a transaction involving the conversion to corporate, trust
or association form of only the Company if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following:
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<PAGE> 154
(i) Stockholders' voting rights;
(ii) the term and existence of the Company; or
(iii) the Company's investment objectives.
"ROLL-UP ENTITY" means a partnership, real estate investment trust,
corporation, trust or other entity that would be created or would survive after
the successful completion of a proposed Roll-Up transaction.
"SHARES" means the common stock, par value $.01 per share, of the
Company.
"STOCKHOLDERS" means holders of shares of Common Stock.
"TOTAL OPERATING EXPENSES" means the aggregate expenses of every
character paid or incurred by the Company as determined under generally accepted
accounting principles, but excluding:
6
<PAGE> 155
(a) the expenses of raising capital such as Organization and
Offering Expenses, legal, audit, accounting, underwriting, brokerage,
listing, registration and other fees, printing and other such expenses,
and taxes incurred in connection with the issuance, distribution,
transfer, registration and stock exchange listing of the Shares;
(b) interest payments;
(c) taxes;
(d) non-cash expenditures such as depreciation, amortization
and bad debt reserves; and
(e) Acquisition Expenses, real estate commissions on resale of
property and other expenses connected with the acquisition, disposition
and ownership of real estate interests, mortgage loans or other
property (such as the costs of foreclosure, insurance premiums, legal
services, maintenance, repair and improvement of property).
ARTICLE VI
STOCK
Section 1. Authorized Shares. The total number of shares of stock
which the Company has authority to issue is 30,000,000 shares, of which
24,000,000 are shares of common stock, $0.01 par value per share ("Common
Stock"), and 6,000,000 shares are preferred stock, $0.01 par value per share
("Preferred Stock"). The aggregate par value of all authorized shares of stock
having par value is $300,000. The Board of Directors of the Company is
authorized, from time to time, to issue any additional stock or convertible
securities and to classify or reclassify, as the case may be, any unissued
shares of stock of the Company without approval of the holders of outstanding
stock.
Section 2. Liquidation. Subject to any preferential rights in favor
of any class of Preferred Stock, upon liquidation or dissolution of the Company,
each issued and outstanding share of Common Stock shall be entitled to
participate pro rata in the assets of the Company remaining after payment of, or
adequate provision for, all known debts and liabilities of the Company.
Section 3. Common Stock.
(a) Subject to the provisions of Article VIII regarding Excess
Stock (as such term is defined therein), each issued and outstanding
share of Common Stock shall entitle the holder thereof to one vote on
all matters presented for a vote of stockholders.
(b) Subtitle 7 of Title 3 of the Maryland General Corporation
Law (or any successor statute) ("Maryland Law") shall not apply to any
acquisition of shares of stock by
7
<PAGE> 156
any Existing Holder (as defined herein) that is not prohibited or
restricted by Article VIII of these Articles.
(c) Notwithstanding any provision of Maryland Law to the
contrary, the Company shall not, without the concurrence of holders of
at least a majority of the outstanding Shares: (i) amend these
Articles: (ii) dissolve or liquidate the Company; or (iii) remove the
Directors.
(d) With respect to Shares owned by the Directors or any
Affiliate, neither the Directors, nor any Affiliate may vote or consent
on matters submitted to the Stockholders regarding the removal of the
Directors, or any Affiliate or any transaction between the Company and
any of them. Shares held by the Directors and their Affiliates shall
not be included in determining the number of outstanding Shares
entitled to vote on the matters as described above.
Section 4. Preferred Stock. Shares of Preferred Stock may be issued,
from time to time, in one or more series, as authorized by the Board of
Directors. Prior to issuance of shares of each series, the Board of Directors by
resolution shall: (i) designate that series to distinguish it from all other
series and classes of stock of the Company; (ii) specify the number of shares to
be included in the series and, subject to the provisions of Article VIII
regarding Excess Stock, shall set the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption. Subject to
the express terms of any other series of Preferred Stock outstanding at the time
and notwithstanding any other provision of these Articles, the Board of
Directors may increase or decrease the number of shares of, or alter the
designation classify or reclassify, any unissued shares of any series of
Preferred Stock by setting or changing, in any one or more respects, from time
to time before issuing the shares, and, subject to the provisions of Article
VIII regarding Excess Stock, the terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption of the shares of any series
of Preferred Stock.
Section 5. Articles of Incorporation and Bylaws. All persons who shall
acquire stock in the Company shall acquire the same subject to the provisions of
these Articles and the Bylaws of the Company as amended.
Section 6. Liability of Stockholders. The Shares of the Company will
be nonassessable by the Company.
ARTICLE VII
PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN
POWERS OF THE COMPANY AND OF ITS DIRECTORS AND STOCKHOLDERS
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<PAGE> 157
Section 1. Number and Classification. The number of Directors of the
Company shall never be less than three, nor more than nine, a majority of which
will be Independent Directors. A Director shall have had at least three years of
relevant real estate experience demonstrating the knowledge and experience
required to successfully acquire and manage the type of assets being acquired by
the Company. At least one of the Independent Directors shall have three years of
relevant real estate experience. The names of the Directors who shall serve
effective as of the effective date of the Company's Registration Statement with
the Securities and Exchange Commission and until the first annual meeting of the
Stockholders and until their successors are duly elected and qualified are:
Robert D. Parks
G. Joseph Cosenza
Douglas R. Finlayson, M.D. (independent Director)
Heidi N. Lawton (Independent Director)
Robert L. Sohol (Independent Director)
Section 2. Term. Each director will be elected for a one year term and
will hold office for the term for which he or she is elected and until his or
her successor is duly elected and qualified.
Section 3. Removal. A director may be removed with or without cause by
the affirmative vote of the holders of at least a majority of all the votes
entitled to be cast for the election of directors. A special meeting of the
stockholders may be called, in accordance with the Bylaws of the Company, upon
the written request of stockholders holding 10% or more of the shares of the
Company entitled to vote at such meeting for the purpose of removing a director.
Section 4. Authorization by Board of Stock Issuance. The Board of
Directors of the Company may authorize the issuance from time to time of shares
of its stock of any class, whether now or hereafter authorized, or securities
convertible into shares of its stock of any class, whether now or hereafter
authorized, for such consideration as the Board of Directors may deem advisable,
subject to such restrictions or limitations, if any, as may be set forth in
these Articles or the Bylaws of the Company or under Maryland Law.
Section 5. Preemptive Rights. Except as may be provided by the Board
of Directors in authorizing the issuance of shares of Preferred Stock pursuant
to Article VII, Section 4, no holder of shares of stock of the Company shall, as
such holder, have any preemptive right to purchase or subscribe for any
additional shares of the stock of the Company or any other security of the
Company which it may issue or sell.
Section 6. Indemnification.
(a) The Company shall, to the fullest extent permitted by
Maryland statutory or decisional law, as amended or interpreted and,
without limiting the generality of the foregoing, in accordance with
Section 2-418 of Maryland Law, to indemnify and pay or reimburse
reasonable expenses to any Director (each an "Indemnified
9
<PAGE> 158
Party") provided, that (i) the Director HAS determined, in good faith,
that the course of conduct which caused the loss or liability was in
the best interest of the Company; (ii) the Director WAS acting on
behalf of or performing services on the part of the Company; (iii)
such liability or loss was not the result of negligence or misconduct
on the part of the Indemnified Party, except that in the event the
Indemnified Party is or was an Independent Director, such liability or
loss shall not have been the result of gross negligence or willful
misconduct; and (iv) such indemnification or agreement to be held
harmless is recoverable only out of the assets of the Company and not
from the Stockholders.
(b) The Company shall not indemnify a Director for losses,
liabilities or expenses arising from or out of an alleged violation of
federal or state securities laws by such party unless one or more of
the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities
law violations as to the particular indemnitee; (ii) such claims have
been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee; or (iii) a court of
competent jurisdiction approves a settlement of the claims and finds
that indemnification of the settlement and related costs should be made
and the court considering the request has been advised of the position
of the Securities and Exchange Commission (the "Commission") and the
published opinions of the Tennessee Securities Division and any other
state securities regulatory authority in which securities of the
Company were offered and sold as to indemnification for securities law
violations.
(c) The Company may advance amounts to persons entitled to
indemnification hereunder for legal and other expenses and costs
incurred as a result of any legal action for which indemnification is
being sought only if all of the following conditions are satisfied: (i)
the legal action relates to acts or omissions with respect to the
performance of duties or services by the Indemnified Party for or on
behalf of the Company; (ii) the legal action is initiated by a third
party who is not a Stockholder or the legal action is initiated by a
Stockholder acting in his or her capacity as such and a court of
competent jurisdiction specifically approves such advancement; and
(iii) the Indemnified Party receiving such advances undertakes to repay
the advanced funds to the Company, together with the applicable legal
rate of interest thereon, in cases in which such party is found not to
be entitled to indemnification.
(d) The Company shall have the power to purchase and maintain
insurance on behalf of an Indemnified Party against any liability
asserted which was incurred in any such capacity with the Company or
arising out of such status; provided, however, that the Company shall
not incur the costs of any liability insurance which insures any person
against liability for which he, she or it could not be indemnified
under the Articles. Nothing contained herein shall constitute a waiver
by any Indemnified Party of any right which he, she or it may have
against any party under federal or state securities laws.
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Section 7. Choice of Law. These Articles and the Bylaws, as amended,
shall be construed in accordance with the laws of the State of Maryland and the
obligations, rights and remedies of the parties hereunder shall be determined in
accordance with such laws; provided, however, that causes of action for
violations of federal or state securities laws shall not be governed by this
Section 7.
Section 8. Determinations by Board. The determination as to any of the
following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with these Articles and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Company and every holder of shares of its stock: (i)
the amount of the net income of the Company for any period and the amount of
assets at any time legally available for the payment of dividends, redemption of
its stock or the payment of other distributions on its stock; (ii) the amount of
paid-in surplus, net assets, other surplus, annual or other net profit, net
assets in excess of capital, undivided profits or excess of profits over losses
on sales of assets; (iii) the amount, purpose, time of creation, increase or
decrease, alteration or cancellation of any reserves or charges and the
propriety thereof (whether or not any obligation or liability for which such
reserves or charges shall have been created shall have been paid or discharged);
and (iv) the fair value, or any sale, bid or asked price to be applied in
determining the fair value, of any asset owned or held by the Company; and any
matters relating to the acquisition, holding and disposition of any assets by
the Company.
Section 9. Reserved Powers of Board. The enumeration and definition of
particular powers of the Board of Directors included in this Article VII shall
in no way be limited or restricted by reference to or inference from the terms
of any other clause of this or any other provision of these Articles, or
construed or deemed by inference or otherwise in any manner to exclude or limit
the powers conferred upon the Board of Directors under Maryland Law as now or
hereafter in force.
Section 10. REIT Qualification. The Board of Directors shall use its
reasonable best efforts to cause the Company and its stockholders to qualify for
U.S. federal income tax treatment in accordance with the provisions of the Code
applicable to a REIT. In furtherance of the foregoing, the Board of Directors
shall use its reasonable best efforts to take such actions as are necessary, and
may take such actions as in its sole judgment and discretion are desirable, to
preserve the status of the Company as a REIT; provided, however, that if a
majority of the Board of Directors determines that it is no longer in the best
interests of the Company to continue to have the Company qualify as a REIT, the
Board of Directors may revoke or otherwise terminate the Company's REIT election
pursuant to Section 856(g) of the Code.
The Company is an infinite-life REIT which may be dissolved pursuant to
the procedures set forth in the MGCL at any time by the affirmative vote of a
majority of the Stockholders. However, should the Board of Directors determine
within five years of the date of the Prospectus that the Shares will not be
listed for trading on a national stock exchange or market, the Company
anticipates recommending to the Stockholders that the Company be liquidated
within ten years of the date thereof.
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Section 11. Distributions. Prior to the completion of the acquisition
of the properties with the proceeds of the Company's offering, Distributions to
Stockholders shall be declared and payable quarterly, in amounts as may be
determined by the Board of Directors out of funds legally available. Upon
completion of the acquisition process, the Company will pay regular monthly
Distributions to its Stockholders. Concurrently with any Distribution, the
Company shall provide Stockholders with a statement disclosing the source of the
funds distributed. If such information is not available concurrently with the
making of a Distribution, a statement setting forth the reasons why such
information is not available shall be provided concurrently. In no event shall
such information be provided to Stockholders more than 60 days of making such
Distribution. Distributions in-kind shall not be permitted, except for
distributions of: (i) readily marketable securities; (ii) beneficial interests
in a liquidating trust established for the dissolution of the Company and the
liquidation of its assets in accordance with the terms of these Articles; or
(iii) distributions of in-kind property which meet all of the following
conditions: (a) the Directors advise each Stockholder of the risks associated
with direct ownership of the property; (b) the Directors offer each Stockholder
the election of receiving in-kind property distributions, and (c) the Directors
distribute in-kind property only to those Stockholders who accept the Directors'
offer. The Directors shall endeavor to declare and pay such distributions as
shall be necessary under the Code; however, Stockholders shall have no right to
any distribution unless and until declared by the Directors. The exercise of the
powers and rights of the Directors pursuant to this Section 11 shall be subject
to the provisions of any class or series of Shares at the time outstanding. The
receipt by any person in whose name any Shares are registered on the records of
the Company or by his, her or its duly authorized agent shall be a sufficient
discharge for all dividends or distributions payable or deliverable in respect
of such Shares and from all liability related to the application thereof.
Section 12. Distribution Reinvestment Program. The Directors may adopt
a distribution reinvestment program on such terms and conditions as shall be set
forth in the Prospectus, which program may be amended from time to time by the
Directors, provided, however, that such program shall, at a minimum, provide for
the following:
(a) All material information regarding the distribution to the
Stockholder and the effect of reinvesting such distribution, including
the tax consequences thereof, shall be provided to the Stockholder at
least annually; and
(b) Each Stockholder participating in the distribution
reinvestment program shall have a reasonable opportunity to withdraw
from the distribution reinvestment program at least annually after
receipt of the information required in subparagraph (a) above.
Section 13.
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[RESERVED]
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Section 14. Termination of the Company. The Board of Directors may
terminate the existence of the Company and discontinue the operations of the
Company only upon the affirmative vote, at a meeting of stockholders called for
that purpose, of a majority of the voting power of the Company entitled to vote
or the written consent of a majority of the voting power of the Company entitled
to vote.
Section 15. Limitation on Transactions with Affiliates. The Company
shall not sell property or make loans (except as provided under Article IX(c))
to any Director or Affiliates thereof. In all other cases in which the Company
shall enter into a transaction with Director or Affiliates thereof, an appraisal
must be obtained from an Independent Expert concerning the underlying property.
The appraisal shall be maintained in the Company's records for at least five
years, and shall be available for inspection and duplication by any Stockholder.
The Company shall not purchase property from, borrow money from, invest in joint
ventures with or enter into transactions with any Director or Affiliates
thereof, unless a majority of the Directors (including a majority of the
Independent Directors) not otherwise interested in such transaction determines
that the transaction is fair and reasonable to the Company and is on terms and
conditions no less favorable than from unaffiliated third parties. With respect
to property which the Company purchases from a Director or Affiliate thereof,
the price to the Company may not exceed the cost of the assets of such Director
or Affiliate thereof, or if the price to the Company is in excess of such cost,
substantial justification for such excess must exist, and such excess must be
reasonable. In no event shall the cost of such asset to the Company ever exceed
its current appraised value.
Section 16. Limitation on Total Operating Expenses. The annual Total
Operating Expenses of the Company shall not exceed in any fiscal year the
greater of 2% of the Average Invested Assets of the Company or 25% of the
Company's Net Income. The Independent Directors have a fiduciary responsibility
to limit the Company's annual Total Operating Expenses to amounts that do not
exceed the limitations described above. The Independent Directors may, however,
determine that a higher level of Total Operating Expenses is justified for such
period because of unusual and non-recurring expenses. Any such finding by the
Independent Directors and the reasons in support thereof shall be recorded in
the minutes of the meeting of Directors. Within 60 days after the end of any
fiscal quarter of the Company for which Total Operating Expenses (for the 12
months then ended) exceed 2% of Average Invested Assets or 25% of Net Income,
whichever is greater, as described above, there shall be sent to the
Stockholders a written disclosure of such fact. If the Independent Directors
determine that such higher Total Operating Expenses are justified, such
disclosure will also contain an explanation of the Independent Directors'
conclusion.
Section 17. Limitation on Borrowing. The Company may not incur indebtedness to
enable it to make Distributions except as necessary to satisfy the requirement
that the Company distribute
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at least 95% of its REIT Taxable Income, or otherwise as necessary or advisable
to assure that the Company maintains its qualification as a REIT for federal
income tax purposes. The aggregate borrowing of the Company, secured and
unsecured, shall be reasonable in relation to the Net Assets of the Company and
shall be reviewed by the Board of Directors at least quarterly. The maximum
amount of borrowings in relation to the Net Assets shall, in the absence of a
satisfactory showing that a higher level of borrowing is appropriate, not exceed
300% of Net Assets. Any excess in borrowing over such 300% level shall be
subject to the approval by a majority of the Stockholders. The Company shall not
borrow funds from any Director or Affiliates thereof, unless a majority of the
Directors (including a majority of the Independent Directors) not otherwise
interested in such transaction determines that such transaction is fair and
reasonable and no less favorable to the Company than from unaffiliated parties
under the same or similar circumstances.
Section 18. Limitation on Real Estate Commissions. If the Company sells
property, the Company may pay real estate brokerage fees which are reasonable,
customary and competitive, taking into consideration the size, type and location
of the property ("Competitive Real Estate Commission"), which shall not in the
aggregate exceed the lesser of the Competitive Real Estate Commission or an
amount equal to 6% of the gross sales price of the property.
SECTION 19. [RESERVED]
Section 20. Limitation on Acquisition Fees and Expenses. The total of
all Acquisition Expenses paid by the Company in connection with the purchase of
a property by the Company shall in no event exceed an amount equal to 6% of the
Contract Price for the Property, unless a majority of the Directors (including
the majority of the Independent Directors) not otherwise interested in the
transaction approve the transaction as being commercially competitive, fair and
reasonable to the Company.
Section 21. Determination of Consideration. The consideration paid for
real property acquired by the Company shall ordinarily be based on the fair
market value of the property as determined by a majority of the Directors
(including a majority Of the Independent Directors). In cases in which a
majority of the Independent Directors so determine, or if assets are acquired
from a Director or an Affiliate of A DIRECTOR, pursuant to Section
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15 of this Article VII such fair market value shall be as determined by a
qualified independent real estate appraiser selected by the Independent
Director.
Section 22. Fiduciary Duty. The Directors shall serve in a fiduciary
capacity and shall have a fiduciary duty to the Stockholders of the Company.
Section 23. Review of Investment Policies. The Directors shall
establish written policies on investments and borrowing and shall monitor the
administrative procedures, investment operations and performance of the Company
to assure that such policies are carried out. The Independent Directors shall
review such policies of the Company with sufficient frequency and at least
annually to determine that the policies being followed by the Company at any
time are in the best interests of the Stockholders. Each such determination and
the basis therefor shall be set forth in the minutes of the Board of Directors.
Section 24. Limitation on Organization and Offering Expenses. The
Organization and Offering Expenses paid in connection with the Company's
formation or the syndication or sale of the Shares shall be reasonable and shall
in no event exceed fifteen percent (15%) of the proceeds raised in the Initial
Public Offering, determined at the termination of the Initial Public Offering.
ARTICLE VIII
RESTRICTION ON TRANSFER,
ACQUISITION AND REDEMPTION OF SHARES
Section 1. Definitions. For the purposes of this Article VIII, the
following terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Equity Stock by a Person
who would be treated as an owner of such Equity Stock under Section 542(a)(2) of
the Code either directly or constructively through the application of Section
544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms
"Beneficial Owner," "Beneficially Owns," "Beneficially Own" and "Beneficially
Owned" shall have the correlative meanings.
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"Beneficiary" shall mean the beneficiary of the Trust as determined
pursuant to Section 15 of this Article VII.
"Equity Stock" shall mean any class of stock of the Company.
"Existing Holder" shall mean: (i) any Person who is, or would be, upon
the exchange of any security of the Company, the Beneficial Owner of Equity
Stock in excess of the Ownership Limit both upon and immediately after the
closing of the Initial Public Offering, so long as, but only so long as, such
Person Beneficially Owns, or would Beneficially Own, upon the exchange of any
security of the Company, Equity Stock in excess of the Ownership Limit; and (ii)
any Person to whom an Existing Holder Transfers, subject to the limitations
provided in this Article VIII Beneficial Ownership of Equity Stock causing such
transferee to Beneficially Own Equity Stock in excess of the Ownership Limit.
"Existing Holder Limit" (i) for any Existing Holder who is an Existing
Holder by virtue of clause (i) of the definition thereof, shall mean, initially,
the percentage of the outstanding Equity Stock Beneficially Owned or which would
be Beneficially Owned upon the exchange of any security of the Company by such
Existing Holder upon and immediately after the date of the closing of the
Initial Public Offering and, after any adjustment pursuant to Section 9 of this
Article VIII, shall mean such percentage of the outstanding Equity Stock as so
adjusted; and (ii) for any Existing Holder who becomes an Existing Holder by
virtue of clause (ii) of the definition thereof, shall mean, initially, the
percentage of the outstanding Equity Stock Beneficially Owned by such Existing
Holder at the time that such Existing Holder becomes an Existing Holder but in
no event shall such percentage be greater than the Existing Holder Limit for the
Existing Holder who Transfers Beneficial Ownership of the Equity Stock or, in
the case of more than one transferor, in no event shall such percentage be
greater than the smallest Existing Holder Limit of any transferring Existing
Holder, and, after any adjustment pursuant to Section 9 of this Article VIII,
shall mean such percentage of the outstanding Equity Stock as so adjusted. From
the date of the Initial Public Offering and until the Restriction Termination
Date, the Secretary of the Company shall maintain and, upon request, make
available to each Existing Holder, a schedule which sets forth the then current
Existing Holder Limits for each Existing Holder.
"Initial Public Offering" means the sale of shares of Common Stock in a
public offering pursuant to the Company's first effective registration statement
for such Common Stock filed under the Securities Act of 1933, as amended.
"Ownership Limit" shall initially mean 9.8%, in number of shares or
value, of the outstanding Equity Stock of the Company, and after any adjustment
as set forth in Section 10 of this Article VIII, shall mean such greater
percentage of the outstanding Equity Stock as so adjusted. The number and value
of shares of the outstanding Equity Stock of the Company shall be determined by
the Board of Directors in good faith, which determination shall be conclusive
for all purposes hereof.
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"Person" shall mean an individual, corporation, partnership, limited
liability company, estate, trust (including a trust qualified under Section
401(a) or 501(c)(17) of the Code), portion of a trust permanently set aside for
or to be used exclusively for the purposes described in Section 642(c) of the
Code, association, private foundation within the meaning of Section 509(a) of
the Code, joint stock company or other entity; but does not include an
underwriter which participated in a public offering of the Equity Stock for a
period of 90 days following the purchase by such underwriter of the Equity
Stock.
"Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer which results in Excess Stock as defined in Section 3 of this
Article VIII, the purported beneficial transferee for whom the Purported Record
Transferee would have acquired shares of Equity Stock, if such Transfer had been
valid under Section 2 of this Article VIII.
"Purported Record Transferee" shall mean, with respect to any purported
Transfer which results in Excess Stock as defined below in Section 3 of this
Article VIII, the purported record transferee of the Equity Stock who would have
acquired such record ownership of shares of Equity Stock if such Transfer had
been valid under Section 2 of this Article VIII.
"Restriction Termination Date" shall mean the first day after the date
of the Initial Public Offering on which the Board of Directors of the Company
determines that it is no longer in the best interests of the Company to attempt
to, or continue to, qualify as a REIT.
"Transfer" shall mean any sale, ISSUANCE, transfer, gift, assignment,
devise or other disposition of Equity Stock (including: (i) the granting of any
option or entering into any agreement for the sale, transfer or other
disposition of Equity Stock; (ii) the sale, transfer, assignment of other
disposition of any securities or rights convertible into or exchangeable for
Equity Stock, but excluding the exchange of any security of the Company for
Equity Stock ; (iii) any transfer or other disposition of any interest in Equity
Stock (as a result of a change in the marital status of the holder thereof),
whether voluntary or involuntary, whether of record or beneficially (including
but not limited to transfers of interests in other entities which result in
changes in beneficial ownership of Equity Stock) and whether by operation of law
or otherwise; AND (IV) THE ISSUANCE BY THE COMPANY OF EQUITY STOCK. The terms
"Transfers" and "Transferred" shall have the correlative meanings.
"Trust" shall mean the trust created pursuant to Section 15 of this
Article VIII.
"Trustee" shall mean the Company as trustee for the Trust, and any
successor trustee appointed by the Company.
Section 2. Ownership Limitation.
(i) Except as provided in Section 12 of this Article
VIII, from the date of the Initial Public Offering and prior
to the Restriction Termination Date, no Person (other than an
Existing Holder) shall Beneficially Own shares of Equity Stock
in
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excess of the Ownership Limit and no Existing Holder shall
Beneficially Own shares of Equity Stock in excess of the
Existing Holder Limit for such Existing Holder.
(ii) Except as provided in Sections 9 and 12 of this
Article VIII, from the date of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer that,
if effective, would result in any Person (other than an
Existing Holder) Beneficially Owning Equity Stock in excess of
the Ownership Limit shall be void ab initio as to the Transfer
of such shares of Equity Stock which would be otherwise
Beneficially Owned by such Person in excess of the Ownership
Limit; and the intended transferee shall acquire no rights in
such shares of Equity Stock.
(iii) Except as provided in Sections 9 and 12 of this
Article VIII, from the date of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer that,
if effective, would result in any Existing Holder Beneficially
Owning Equity Stock in excess of the applicable Existing
Holder Limit shall be void ab initio as to the Transfer of
such shares of Equity Stock which would be otherwise
Beneficially Owned by such Existing Holder in excess of the
applicable Existing Holder Limit; and such Existing Holder
shall acquire no rights in such shares of Equity Stock.
(iv) Except as provided in Section 12 of this Article
VIII, from the date of the Initial Public Offering and prior
to the Restriction Termination Date, any Transfer that, if
effective, would result in the Equity Stock being beneficially
owned (as provided in Section 856(a) of the Code) by less than
100 Persons (determined without reference to any rules of
attribution) shall be void ab initio as to the Transfer of
such shares of Equity Stock which would be otherwise
beneficially owned (as provided in Section 856(a) of the Code)
by the transferee; and the intended transferee shall acquire
no rights in such shares of Equity Stock.
(v) From the date of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer
that, if effective, would result in the Company being
"closely held" within the meaning of Section 856(h) of the
Code or would otherwise result in the Company failing to
qualify as a REIT (including, but not limited to, a Transfer
or other event that would result in the Company owning an
interest in a tenant that is described in Section
856(d)(2)(B) of the Code if the income derived by the
Company from such tenant would cause the Company to fail to
satisfy any of the gross income requirements of Section
856(c) of the Code), shall be void ab initio as to the
Transfer of the shares of Equity Stock which would cause the
Company: (i) to be "closely held" within the meaning of
Section 856(h) of the Code; or (ii) otherwise to fail to
qualify as a REIT, as the case may be; and the intended
transferee shall acquire no rights in such shares of Equity
Stock.
Section 3. Excess Stock.
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(i) If, notwithstanding the other provisions
contained in this Article VIII, at any time after the date of
the Initial Public Offering and prior to the Restriction
Termination Date, there is a purported Transfer or other
change in the capital structure of the Company such that any
Person would Beneficially Own Equity Stock in excess of the
applicable Ownership Limit or Existing Holder Limit, then,
except as otherwise provided in Sections 9 and 12 of this
Article VIII, such shares of Equity Stock in excess of such
Ownership Limit or Existing Holder Limit (rounded up to the
nearest whole share) shall constitute "Excess Stock" and be
treated as provided in this Article VIII. Such designation and
treatment shall be effective as of the close of business on
the business day prior to the date of the purported Transfer
or change in capital structure.
(ii) If, notwithstanding the other provisions
contained in this Article VIII, at any time after the date of
the Initial Public Offering and prior to the Restriction
Termination Date, there is a purported Transfer or other
change in the capital structure of the Company which, if
effective, would cause the Company to become "closely held"
within the meaning of Section 856(h) of the Code, then the
shares of Equity Stock being Transferred which would cause the
Company to be "closely held" within the meaning of Section
856(h) of the Code (rounded up to the nearest whole share)
shall constitute Excess Stock and be treated as provided in
this Article VIII. Such designation and treatment shall be
effective as of the close of business on the business day
prior to the date of the purported Transfer or change in
capital structure.
Section 4. Prevention of Transfer. If the Board of Directors or its
designee shall at any time determine in good faith that a purported Transfer has
taken place in violation of Section 2 of this Article VIII, or that a Person
intends to acquire Beneficial Ownership (determined without reference to any
rules of attribution) or Beneficial Ownership of any shares of stock of the
Company in violation of Section 2 of this Article VIII, the Board of Directors
or its designee shall take such action as it deems advisable to enforce this
Article VIII by refusing to give effect to or to prevent such proposed or
purported Transfer, including, but not limited to, refusing to give effect to
any purported Transfer on the books of the Company or instituting proceedings to
enjoin any proposed Transfer; provided, however, that any purported Transfers in
violation of Sections 2(ii), (iii), (iv) and (v) of this Article VIII shall
automatically result in the designation and treatment described in Section 3 of
this Article VIII, irrespective of any action (or non-action) by the Board of
Directors.
Section 5. Notice to the Company. Any Person who purports to acquire
shares in violation of Section 2 of this Article VIII, or any Person who is a
Purported Beneficial Transferee or a Purported Record Transferee such that
Excess Stock results under Section 3 of this Article VIII, shall immediately
give notice to the Company or, in the event of a proposed Transfer, give at
least 15 days prior written notice to the Company of such proposed Transfer and
in either event, shall provide to the Company such other information as the
Company may request in order to determine the effect, if any, of such purported
or proposed Transfer on the Company's status as a REIT.
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Section 6. Information for the Company. From the date of the Initial
Public Offering and prior to the Restriction Termination Date:
(i) Every Beneficial Owner of more than 9.8% (or such
other percentage, between 0.5% and 9.8%, as provided in the
income tax regulations promulgated under the Code) of the
number or value of outstanding shares of Equity Stock of the
Company shall, within 30 days after January 1 of each year,
give written notice to the Company stating the name and
address of such Beneficial Owner, the number of shares
Beneficially Owned, and a description of how such shares are
held. Each such Beneficial Owner shall provide to the Company
such additional information as the Company may reasonably
request in order to determine the effect, if any, of such
Beneficial Ownership on the Company's status as a REIT.
(ii) Each Person who is a Beneficial Owner of Equity
Stock and each Person (including the stockholder of record)
who is holding Equity Stock for a Beneficial Owner shall
provide to the Company such information that the Company may
reasonably request in order to determine the Company's status
as a REIT, to comply with the requirements of any taxing
authority or governmental agency or to determine any such
compliance.
Section 7. Other Action by the Board. Nothing contained in this Article
VIII, shall limit the authority of the Board of Directors to take such other
action as it deems necessary or advisable to protect the Company and the
interests of its stockholders by preservation of the Company's status as a REIT.
Section 8. Ambiguities. In the case of an ambiguity in the application
of any of the provisions of this Article VIII, including any definition
contained in Section 1, the Board of Directors shall have the power to determine
the application of the provisions of this Article VIII, with respect to any
situation based on the facts known to it.
Section 9. Modification of Existing Holder Limits. The Existing Holder
Limits may be modified as follows:
(i) Subject to the limitations provided in Section 11
of this Article VIII, the Board of Directors of the Company
may grant stock options which result in Beneficial Ownership
of Equity Stock by an Existing Holder pursuant to a stock
option plan approved by the Board of Directors and/or the
stockholders of the Company. Any such grant shall increase the
Existing Holder Limit for the affected Existing Holder to the
maximum extent possible under Section 11 of this Article VIII
to permit the Beneficial Ownership of the shares of Equity
Stock issuable upon the exercise of such stock option.
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(ii) Subject to the limitations provided in Section
11 of this Article VIII, an Existing Holder may elect to
participate in a dividend reinvestment program approved by the
Board of Directors of the Company which results in Beneficial
Ownership of Equity Stock by such participating Existing
Holder wherein those Existing Holders holding Equity Stock are
entitled to purchase additional Equity Stock. Any such
participation shall increase the Existing Holder Limit for the
affected Existing Holder to the maximum extent possible under
Section 11 to permit Beneficial Ownership of the shares of
Equity Stock acquired as a result of such participation.
(iii) The Board of Directors will reduce the Existing
Holder Limit for any Existing Holder after any Transfer
permitted in this Article VIII by such Existing Holder by the
percentage of the outstanding Equity Stock so Transferred or
after the lapse (without exercise) of a stock option described
in Section 9(i)) of this Article VIII by the percentage of the
Equity Stock that the stock option, if exercised, would have
represented, but in either case no Existing Holder Limit shall
be reduced to a percentage which is less than the Ownership
Limit.
(iv) Subject to the limitations provided in Section
11 of this Article VIII, the Board of Directors may grant a
waiver of the Ownership Limit of Existing Holder Limit
pursuant to Section 12 of this Article VIII. Any such waiver
shall increase (or create) the Existing Holder Limit for such
Person to the extent of the waiver of the proposed or
purported Transfer.
Section 10. Increase in Ownership Limit. Subject to the limitations
provided in Section 11 of this Article VIII and Section 6 of Article VIII, the
Board of Directors may from time to time increase or decrease the Ownership
Limit; provided, however, that any decrease may only be made prospectively as to
subsequent holders other than a decrease as a result of a retroactive change in
existing law, in which case such decrease shall be effective immediately.
Section 11. Limitations on Changes in Existing Holder and
Ownership Limits.
(i) Neither the Ownership Limit nor any Existing
Holder Limit may be increased (nor may any additional Existing
Holder be created) if, after giving effect to such increase
(or creation), five Beneficial Owners of Common Stock
(including all of the then Existing Holders) could
Beneficially Own, in the aggregate, more than 50.0% in number
or value of the outstanding shares of Equity Stock.
(ii) Prior to the modification of any Existing Holder
Limit or Ownership Limit pursuant to Section 9 or 10 of this
Article VIII, the Board of Directors of the Company may
require such opinions of counsel, affidavits, undertakings or
agreements as it may deem necessary or advisable in order to
determine or ensure the Company's status as a REIT.
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(iii) No Existing Holder Limit shall be reduced to a
percentage which is less than the Ownership Limit.
Section 12. Waivers by Board. The Board of Directors, upon receipt of a
ruling from the Internal Revenue Service or an opinion of counsel or other
evidence satisfactory to the Board of Directors and upon at least 15 days
written notice from a transferee of a purported Transfer or a proposed Transfer
which, if consummated, would result in the intended transferee Beneficially
Owning shares in excess of Ownership Limit or Existing Holder Limit, as the case
may be, and upon such other conditions as the Board of Directors may direct, may
waive the Ownership Limit or the Existing Holder Limit, as the case may be with
respect to such transferee.
Section 13. Legend. Each certificate for shares of Equity Stock shall
bear substantially the following legend:
The securities represented by this certificate are subject to
restrictions on transfer for the purpose of the Company's maintenance
of its status as a real estate investment trust under the Internal
Revenue Code of 1986, as amended. Except as otherwise provided pursuant
to these Articles of the Company, no Person may Beneficially Own shares
of Equity Stock in excess of 9.8% (or such greater percentage as may be
determined by the Board of Directors of the Company) of the number or
value of the outstanding Equity Stock of 'the Company (unless such
Person is an Existing Holder). Any Person who purports or proposes to
Beneficially Own shares of Equity Stock in excess of 9.8% (or such
greater percentage as may be determined by the Board of Directors of
the Company) of the number or value of the outstanding Equity Stock of
the Company (unless such Person is an Existing Holder) is in violation
of the restrictions on transfer and any securities so transferred shall
be designated as Excess Stock and held in trust by the Company. Any
Person who purports or proposes to Beneficially Own shares of Equity
Stock in excess of the above limitations must notify the Company in
writing immediately, in the case of a purported Transfer, and at least
15 days prior to a proposed Transfer. All capitalized terms in this
legend have the meanings defined in these Articles of the Company, a
copy of which, including the restrictions on transfer, will be sent
without charge to each stockholder who so requests. If the restrictions
on transfer are violated, the securities represented hereby will be
designated and treated as shares of Excess Stock which will be held in
trust by the Company.
Section 14. Severability. If any provision of this Article VIII or any
application of any such provision is determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the validity and
enforceability of the remaining provisions shall be affected only to the extent
necessary to comply with the determination of such court.
Section 15. Trust for Excess Stock. Upon any purported Transfer that
results in Excess Stock pursuant to Section 3 of this Article VIII, such Excess
Stock shall be deemed to have been
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transferred to the Company, as Trustee of a Trust for the benefit of such
Beneficiary or Beneficiaries to whom an interest in such Excess Stock may later
be transferred pursuant to Section 18 of this Article VIII. Shares of Excess
Stock so held in trust shall be issued and outstanding stock of the Company. The
Purported Record Transferee shall have no rights in such Excess Stock except the
right to designate a Beneficiary of an interest in the Trust (representing the
number of shares of Excess Stock held by the Trust attributable to a purported
Transfer that resulted in the Excess Stock upon the terms specified in Section
18 of this Article VIII. The Purported Beneficial Transferee shall have no
rights in such Excess Stock except as provided in Section 18 of this Article
VIII.
Section 16. No Distributions for Excess Stock. The holder of any Excess
Stock or any beneficiary of the Trust established pursuant to Section 15 of this
Article VIII shall not be entitled to any distributions (whether as dividends or
as distributions upon liquidation, dissolution or winding up). Any dividend or
distribution paid prior to the discovery by the Company that the shares of
Equity Stock have been Transferred so as to be deemed Excess Stock shall be
repaid to the Company upon demand.
Section 17. No Voting Rights for Excess Stock. The Purported Record
Transferee of shares of Excess Stock shall not be entitled to vote on any matter
with respect to those shares of Excess Stock.
Section 18. Non-Transferability of Excess Stock. Excess Stock shall not
be transferable. The Purported Record Transferee may freely designate a
Beneficiary of an interest in the Trust (representing the number of shares of
Excess Stock held by the Trust attributable to a purported Transfer to a
purported Record Transferee that resulted in the Excess Stock), if: (i) the
shares of Excess Stock held in the Trust would not be Excess Stock in the hands
of such Beneficiary; and (ii) the Purported Beneficial Transferee does not
receive a price for designating such Beneficiary that reflects a price per share
for such Excess Stock that exceeds (a) the price per share such Purported
Beneficial Transferee paid for the Equity Stock in the purported Transfer that
resulted in the Excess Stock, or (b) if the Purported Beneficial Transferee did
not give value for such Excess Stock (through a gift, devise or other
transaction), a price per share equal to the Market Price for the shares of the
Excess Stock on the date of the purported Transfer that resulted in the Excess
Stock. Upon such transfer of an interest in the Trust, the corresponding shares
of Excess Stock in the Trust shall be automatically exchanged for an equal
number of shares of Equity Stock and such shares of Equity Stock shall be
transferred of record to the transferee of the interest in the Trust if such
shares of Equity Stock would not be Excess Stock in the hands of such
transferee. Prior to any transfer of any interest in the Trust, the Purported
Record Transferee must give advance notice to the Company of the intended
transfer and the Company must have waived in writing its purchase rights under
Section 19 of this Article VIII.
Notwithstanding the foregoing, if a Purported Beneficial Transferee
receives a price for designating a Beneficiary of an interest in the Trust that
exceeds the amounts allowable under this Section 18 of this Article VIII, such
Purported Beneficial Transferee shall pay, or cause such Beneficiary to
immediately pay, such excess to the Company.
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<PAGE> 173
If any of the foregoing restrictions on transfer of Excess Stock are
determined to be void, invalid or unenforceable by any court of competent
jurisdiction, then the Purported Record Transferee may be deemed, at the option
of the Company, to have acted as an agent of the Company in acquiring such
Excess Stock and to hold such Excess Stock on behalf of the Company.
Section 19. Call by Company on Excess Stock. Shares of Excess Stock
shall be deemed to have been offered for sale to the Company, or its designee,
at a price per share equal to the lesser of: (i) the price per share in the
transaction that created such Excess Stock (or, in the case of a devise or gift,
the Market Price at the time of such devise or gift); and (ii) the Market Price
of the Equity Stock to which such Excess Stock relates on the date the Company,
or its designee, accepts such offer. The Company shall have the right to accept
such offer for a period of 90 days after the later of: (i) the date of the
Transfer which resulted in such Excess Stock; and (ii) the date the Board of
Directors determines in good faith that a Transfer resulting in Excess Stock has
occurred, if the Company does not receive a notice of such Transfer pursuant to
Section 5 of this Article VIII but in no event later than a permitted Transfer
pursuant to and in compliance with the terms of Section 18 of this Article VIII.
ARTICLE IX
INVESTMENT RESTRICTIONS
The investment policies set forth in this Article IX shall be approved
by a majority of the Independent Directors. Subject to the restrictions
contained herein, such Independent Directors may alter the investment policies
if they determine that such change is in the best interests of the Company. The
Company shall not make investments in: (i) any foreign currency or bullion; (ii)
short sales; and (iii) any security in any entity holding investments or
engaging in activities prohibited by these Articles.
In addition to other investment restrictions imposed by the Directors
from time to time consistent with the Company's objective to qualify as a REIT,
the Company will observe the following restrictions on its investments:
(a) Not more than 10% of the Company's total assets will be
invested in unimproved real property or mortgage loans on unimproved
real property. For purposes of this paragraph, "unimproved real
properties" does not include properties under construction, under
contract for development or plan for development within one year;
(b) The Company may not invest in commodities or commodity
future contracts. Such limitation is not intended to apply to interest
rate futures, when used solely for hedging purposes;
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<PAGE> 174
(c) The Company shall not invest in or make mortgage loans
unless an appraisal is obtained concerning the underlying property.
Mortgage indebtedness on any property shall not exceed such property's
appraised value. In cases in which the majority of Independent
Directors so determine, and in all cases in which the mortgage loan
involves the Directors or any Affiliates, such appraisal must be
obtained from an Independent Expert concerning the underlying property.
The appraisal shall be maintained in the Company's records for at least
five years, and shall be available for inspection and duplication by
any Stockholder. In addition to the appraisal, a mortgagee's or owner's
title insurance policy or commitment as to the priority of the mortgage
or condition of the title must be obtained. The Company may not invest
in real estate contracts of sale otherwise known as land sale
contracts;
(d) The Company may not make or invest in mortgage loans,
including construction loans, on any one property if the aggregate
amount of all mortgage loans outstanding on the property, including the
loans of the Company, would exceed an amount equal to 85% of the
appraised value of the property as determined by appraisal unless
substantial justification exists because of the presence of other
underwriting criteria provided that such loans would in no event exceed
the appraised value of the property at the date of the loans;
(e) The Company may not make or invest in any mortgage loans
that are subordinate to any mortgage or equity interest of any Director
or Affiliates thereof;
(f) The Company shall not invest in equity securities unless a
majority of the Directors (including a majority of the Independent
Directors) not otherwise interested in such transaction approves the
transaction as being fair, competitive and commercially reasonable.
Investments in entities affiliated with any Directors or Affiliates
thereof are subject to the restrictions on joint venture investments.
Notwithstanding these restrictions, the Company may purchase its own
securities, when traded on a secondary market or on a national
securities exchange or market, if a majority of the Directors
(including a majority of the Independent Directors) determine such
purchase to be in the best interests of the Company;
(g) The Company shall not issue: (i) redeemable equity
securities; (ii) debt securities unless the historical debt service
coverage (in the most recently completed fiscal year) as adjusted for
known charges is sufficient to properly service the higher level of
debt; (iii) options or warrants to purchase Shares to any Directors, or
their Affiliates except on the same terms as sold to the general
public, provided that the Company may issue options or warrants to
persons not affiliated with the Company at exercise prices not less
than the fair market value of such securities on the date of grant and
for consideration (which may include securities that in the judgment of
the Independent Directors have a market value not less than the value
of such option on the date of grant);
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<PAGE> 175
options or warrants issuable to Directors or Affiliates thereof shall
not exceed an amount equal to ten percent (10%) of the outstanding
Shares on the date of grant of any options or warrants; or (d) issue
Shares on a deferred payment basis or similar arrangement;
(h) To the extent the Company invests in real property, a
majority of the Directors shall determine the consideration paid for
such real property, based on the fair market value of the property. If
a majority of the Independent Directors determine, or if the real
property is acquired from any Director, or Affiliates thereof, such
fair market value shall be determined by a qualified independent real
estate appraiser selected by the Independent Directors;
(i) The Company may not invest in indebtedness (herein called
"Junior Debt") secured by a mortgage on real property which is
subordinate to the lien of other indebtedness (herein called "Senior
Debt"), except where the amount of such Junior Debt, plus the
outstanding amount of the Senior Debt, does not exceed 90% of the
appraised value of such property, if after giving effect thereto, the
value of all such investments of the Company (as shown on the books of
the Company in accordance with generally accepted accounting
principles, after all reasonable reserves but before provision for
depreciation) would not then exceed 25% of the Company's tangible
assets. The value of all investments in Junior Debt of the Company
which does not meet the aforementioned requirements would be limited to
10% of the Company's tangible assets (which would be included within
the 25% limitation);
(j) Engage in trading, as compared with investment activities;
and
(k) Engage in underwriting or the agency distribution of
securities issued by others.
ARTICLE X
ACCESS TO RECORDS
Any Stockholder and any designated representative thereof shall be
permitted access to all records of the Company at all reasonable times, and may
inspect and copy any of them for the purposes specified below. Inspection of the
Company's books and records by a state securities administrator shall be
provided upon reasonable notice and during normal business hours. In addition,
an alphabetical list of names, addresses and business telephone numbers of the
Stockholders of the Company along with the number of Shares held by each of them
(the "Stockholder List") shall be maintained and updated quarterly as part of
the books and records of the Company and shall be available for inspection by
any Stockholder or the Stockholder's designated agent at the business office of
the Company upon the request of the Stockholder. A copy of the Stockholder List
shall be mailed to any Stockholder requesting the Stockholder List within ten
days of the request. The copy
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<PAGE> 176
of the Stockholder List shall be printed in alphabetical order, on white paper,
and in a readily readable type size (in no event smaller than 10-point type).
The Company may impose a reasonable charge for expenses incurred in reproducing
such list. The permitted purposes for which a Stockholder may request a copy of
the Stockholder List include, without limitation, matters relating to
Stockholders' voting rights under these Articles and the exercise of
Stockholders' rights under federal proxy laws. If the Directors of the Company
neglect or refuse to exhibit, produce or mail a copy of the Stockholder List as
requested in accordance with and as required by applicable law and these
Articles, the Directors shall be liable to any Stockholder requesting the
Stockholder List, for the costs, including reasonable attorneys' fees, incurred
by that Stockholder for compelling the production of the Stockholder List, and
for actual damages suffered by any Stockholder by reason of such refusal or
neglect. It shall be a defense to such liability that the actual purpose and
reason for the requests for inspection or for a copy of the Stockholder List is
to secure such list of Stockholders or other information for the purpose of
selling such Stockholder List or copies thereof, or of using the same for a
commercial purpose or other purpose not in the interest of the applicant as a
Stockholder relative to the affairs of the Company. The Company may require the
Stockholder requesting the Stockholder List to represent that the Stockholder
List is not requested for a commercial purpose unrelated to the Stockholder's
interest in the Company. The remedies provided hereunder to Stockholders
requesting copies of the Stockholder List are in addition to, and shall not in
any way limit, other remedies available to Stockholders under federal law, or
the laws of any state.
ARTICLE XI
REPORTS AND MEETINGS
Each year, within 120 days after the close of its fiscal year, an
annual report of the Company will be submitted to each Stockholder concerning
its operations for each prior fiscal year ending after the Initial Public
Offering which contains financial statements prepared in accordance with
generally accepted accounting principles which are audited and reported on by
independent certified public accountants. The annual report shall also include:
(i) the ratio of the costs of raising capital during the period to the capital
raised; (ii) the Total Operating Expenses of the Company stated as a percentage
of Average Invested Assets and as a percentage of Net Income; (iii) a report
from the Independent Directors that the policies being followed by the Company
are in the best interests of the Stockholders, and the basis for such
determination; and (iv) separately stated, full disclosure of all material
terms, factors and circumstances surrounding any and all transactions involving
the Company, the Directors and any Affiliates thereof occurring in the year for
which the annual report is made. Independent Directors shall examine and comment
in the annual report on the fairness of all transactions involving the Company.
The annual report shall be mailed or delivered to each Stockholder as of a
record date after the end of such fiscal year. There shall be an annual meeting
of the Stockholders of the Company upon reasonable notice and within a
reasonable period (not less
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<PAGE> 177
than 30 days) following delivery of the annual report, but within six months
after the end of each fiscal year. The Directors, including the Independent
Directors, are required to take reasonable steps to insure that the requirements
of this Article XI are met.
ARTICLE XII
CONVERSION TRANSACTIONS
Notwithstanding any provision to the contrary in these Articles, and
subject to the restrictions on Roll-Ups described in Article XIII, Stockholders
representing 66% in interest of the Shares and all the Independent Directors
must approve certain exchange offers, mergers, consolidations or similar
transactions involving the Company in which the Stockholders receive securities
in a surviving entity having a substantially longer duration or materially
different investment objectives and policies, or that provides significantly
greater compensation to management from that which is described in the
Prospectus, except for any such transaction effected because of changes in
applicable law, or to preserve tax advantages for a majority in interest of the
Stockholders. Standards such as "substantially longer life," "materially
different investment objectives and policies" or "provides significantly greater
compensation to management" are not defined and their application will be
resolved by the Directors (a majority of whom are independent).
ARTICLE XIII
ROLL-UPS
Section 1. Appraisal. An appraisal of all of the Company's assets
shall be obtained from an Independent Expert. The appraisal will be included in
a prospectus used to offer the securities of a Roll-Up Entity and shall be filed
with the Securities and Exchange Commission and the state regulatory commissions
as an exhibit to the registration statement for the offering of the Roll-Up
Entity's Shares. Accordingly, an issuer using the appraisal shall be subject to
liability for violation of Section 11 of the Securities Act of 1933, as amended,
and comparable provisions under state laws for any material misrepresentations
or material omissions in the appraisal.
The Company's assets shall be appraised in a consistent manner. The
appraisal shall:
(a) be based on an evaluation of all relevant
information;
(b) indicate the value of the Company's assets as of a date
immediately prior to the announcement of the proposed Roll-Up
transaction; and
(c) assume an orderly liquidation of the Company's assets
over a 12-month period.
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<PAGE> 178
The terms of the engagement of the Independent Expert shall clearly
state that the engagement is for the benefit of the Company and its
Stockholders. A summary of the independent appraisal, indicating all material
assumptions underlying the appraisal, shall be included in a report to the
Stockholders in connection with the proposed Roll-Up.
Section 2. Stockholder Options. Stockholders who vote "no" on the
proposed Roll-Up shall have the choice of:
(a) accepting the securities of the Roll-Up Entity offered in
the proposed Roll-Up; or
(b) one of either;
(i) remaining as Stockholders of the Company and
preserving their interests therein on the same terms and
conditions as previously existed, or
(ii) receiving cash in an amount equal to the
Stockholder's pro rata share of the appraised value of the net
assets of the Company.
Section 3. Restrictions. The Company may not participate in any
proposed Roll-Up which would:
(a) result in the Stockholders having rights to meetings less
frequently or which are more restrictive to Stockholders than those
provided in these Articles;
(b) result in the Stockholders having voting rights that are
less than those provided in these Articles;
(c) result in the Stockholders having greater liability than
as provided in these Articles;
(d) result in the Stockholders having rights to receive
reports that are less than those provided in these Articles;
(e) result in the Stockholders having access to records that
are more limited than those provided in these Articles;
(f) include provisions which would operate to materially
impede or frustrate the accumulation of Shares by any purchaser of the
securities of the Roll-Up Entity (except to the minimum extent
necessary to preserve the tax status of the Roll-Up Entity);
(g) limit the ability of an investor to exercise the voting
rights of its securities in the Roll-Up Entity on the basis of the
number of Shares held by that investor;
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<PAGE> 179
(h) result in investors in the Roll-Up Entity having rights
of access to the records of the Roll-Up Entity that are less than those
provided in these Articles; or
(i) place any of the costs of the transaction on the Company
if the Roll-Up is not approved by the Stockholder;
provided, however, that nothing herein shall be construed to prevent
participation in any proposed Roll-Up which would result in Stockholders having
rights and restrictions comparable to those contained in these Articles, with
the prior approval of a majority of the Stockholders.
ARTICLE XIV
AMENDMENTS
The Company reserves the right from time to time to make any amendment
to these Articles, now or hereafter authorized by law, including any amendment
altering the terms or contract rights, as expressly set forth in these Articles,
of any shares of outstanding stock. Without concurrence of a majority of the
outstanding Shares, the Directors may not: (a) amend the Articles, except for
amendments which do not adversely affect the rights, preferences and privileges
of the Stockholders, including amendments to provisions relating to Director
qualifications, fiduciary duty, liability and indemnification, conflicts of
interest, investment policies or investment restrictions; (b) sell all or
substantially all of the Company assets other than in the ordinary course of the
Company's business or in connection with liquidation and dissolution; (c) cause
a merger or other reorganization of the Company; or (d) dissolve or liquidate
the Company, other than before the initial investment in a property by the
Company. For purposes of the above provision, a sale of all or substantially all
of the Company assets shall mean the sale of two-thirds or more of the Company's
assets based on the total number of properties or the current fair market value
of these assets.
ARTICLE XV
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers, no director or
officer of the Company shall be liable to the Company or its stockholders for
money damages. Neither the amendment nor repeal of this Article XV, nor the
adoption or amendment of any other provision of these Articles or of the Bylaws,
as amended, of the Company inconsistent with this Article XV, shall apply to or
affect in any respect the applicability of the preceding sentence with respect
to any act or failure to act which occurred prior to such amendment, repeal or
adoption,
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<PAGE> 180
THIRD: The amendment to and restatement of the charter of the
Corporation as hereinabove set forth has been duly advised by the board of
directors and approved by the stockholders of the Corporation as required by
law.
FOURTH: The current address of the principal office of the
Corporation is as set forth in Article III of the foregoing amendment and
restatement of the charter.
FIFTH: The name and address of the Corporation's current resident
agent is as set forth in Article III of the foregoing amendment and restatement
of the charter.
SIXTH: The number of directors of the Corporation and the names of
those currently in office are as set forth in Article VII of the foregoing
amendment and restatement of the charter.
[BALANCE OF THIS PAGE LEFT INTENTIONALLY BLANK]
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<PAGE> 181
IN WITNESS WHEREOF: Inland Monthly Income Fund III, Inc. has caused
these Articles to be signed in its name and on its behalf by its President and
attested by its Secretary on this 30th day of December, 1994.
ATTEST: INLAND MONTHLY INCOME FUND III,
INC.
/s/ David M. Benjamin By: /s/ Robert D. Parks
- ---------------------------------- -----------------------------
David M. Benjamin, Secretary Robert D. Parks, President
THE UNDERSIGNED acknowledges these Articles of Amendment and
Restatement to the best of his knowledge, information and belief, these matters
and facts are true in all material respects and that this statement is made
under the penalties for perjury.
/s/ Robert D. Parks
----------------------------------
Robert D. Parks, President
33
<PAGE> 182
PRESENTATION TO ANALYSTS
INLAND REAL ESTATE CORPORATION'S
ACQUISITION OF PROPERTY MANAGER AND ADVISOR
SLIDE #1
Executive Summary
of the Merger of Inland Real Estate Corporation,
with Inland Commercial Property Management
and Inland Real Estate Advisory Services, Inc.
SLIDE #2
The Objective:
Creation of a self-administered real estate company, operating one of the
largest retail property portfolios in the Chicago area.
SLIDE #3
Overview of the Company's Growth
<TABLE>
<CAPTION>
INC. Inc. Inc. Inc.
FROM from from Payments to from
YEAR- Number of PRIOR Prior Prior ICPM & Prior
END Properties YEAR Assets Year Net Income Year IREAS Year
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 6 $ 18,750,877 $ 496,514 $ 54,068
- -----------------------------------------------------------------------------------------------------------------------------
1996 21 250% $ 104,508,686 457% $ 2,452,221 394% $ 526,795 874%
- -----------------------------------------------------------------------------------------------------------------------------
1997 44 110% $ 333,590,131 219% $ 8,647,221 253% $ 2,108,201 300%
- -----------------------------------------------------------------------------------------------------------------------------
1998 85 93% $ 787,608,547 136% $ 24,085,871 179% $ 4,158,015 97%
- -----------------------------------------------------------------------------------------------------------------------------
1999 115 35% $ 982,281,972 25% $ 30,171,901 25% $ 9,814,821 136%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 183
SLIDE #4
The Merger
[Inland Real Estate Corporation]
$2.6 million
$68 million in stock in added FFO
($0.04 per Share for
2001)
Inland Commercial
Property Management
SLIDE #5
Benefits:
Immediate Accretion
Future Savings
Consistency with Publicly Traded REITs
Centralized, Dedicated Management
Alignment of Interests
SLIDE #6
The Management Team
Norbert Treonis - President and Chief Executive Officer
Mark Zalatoris - Chief Financial Officer/Treasurer
Samuel Orticelli - General Counsel/Secretary
William Anderson - Director of Acquisitions
SLIDE #7
The Board of Directors
Robert D. Parks - Chairman and Affiliated Director
Roland D. Burris - Independent Director
G. Joseph Cosenza - Affiliated Director
Joel C. Herter - Independent Director
<PAGE> 184
Heidi N. Lawton - Independent Director
