SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant[ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CROCKER REALTY TRUST, INC.
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6 (i)(3).
[ ] Fee computed on the table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was 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:
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CROCKER REALTY TRUST, INC.
433 PLAZA REAL, SUITE 335
BOCA RATON, FLORIDA 33432
August 30, 1996
To the Stockholders of
CROCKER REALTY TRUST, INC.:
You are cordially invited to attend a special meeting (the "Special
Meeting") of stockholders of Crocker Realty Trust, Inc. (the "Company") to be
held at 10:00 a.m. on Friday, September 20, 1996, at the Boca Raton Marriott,
5150 Town Center Circle, Boca Raton, Florida.
As described in the enclosed Proxy Statement, at the Special Meeting you
will be asked to consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated as of April 29, 1996, by and among Highwoods
Properties, Inc. ("Highwoods"), Cedar Acquisition Corporation, a subsidiary of
Highwoods ("CAC"), and the Company (the "Merger Agreement") and the transactions
contemplated by the Merger Agreement, including the merger of CAC with and into
the Company (the "Merger"). Pursuant to the Merger Agreement, the Company will
become a subsidiary of Highwoods, and each outstanding share of the Company's
common stock will be converted in the Merger into the right to receive $11.05243
in cash, without interest. In addition, stockholders will receive a special cash
dividend of $0.60411 per share representing their interest in certain assets of
the Company that Highwoods is not acquiring.
Your Board of Directors has determined that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are advisable and in
the best interests of the Company and its stockholders and has unanimously
approved and adopted the Merger Agreement and the transactions contemplated
thereby, including the Merger. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, INCLUDING THE MERGER.
Only holders of common stock of record at the close of business on August
26, 1996 are entitled to notice of and to vote at the Special Meeting or any
adjournments or postponements thereof.
The agreement of holders of 77.1% of the Company's common stock to (i) vote
in favor of the Merger and the transactions contemplated by the Merger Agreement
and (ii) to grant CAC a proxy with respect to such holders' shares of common
stock of the Company in respect of certain matters, including the Merger, will
mean that there will be sufficient votes cast for approval and adoption of the
Merger Agreement and the transactions contemplated by the Merger Agreement to
ensure its passage without the vote of any other stockholders. Under Maryland
law, stockholders of the Company do not have dissenters' rights in connection
with the Merger Agreement and the consummation of the transactions contemplated
thereby.
You are urged to read the enclosed Proxy Statement, which provides you with
a description of certain of the terms of the proposed Merger. A copy of the
Merger Agreement is included as Appendix A to the enclosed Proxy Statement. As
more fully described in the enclosed Proxy Statement, certain members of the
Company's management and Board of Directors may receive economic benefits as a
result of the Merger, including (i) benefits derived from their ownership of
shares of the Company's common stock and options or warrants to purchase shares
of the Company's common stock, (ii) benefits pursuant to severance agreements
entered into between the Company and certain executives in connection with the
Merger and (iii) benefits associated with the formation of a new entity,
controlled by the two principal stockholders of the Company and to be operated
by the Company's current senior management, which will hold certain assets
currently held by the Company.
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It is very important that your shares be represented at the Special
Meeting. Whether or not you plan to attend the Special Meeting, you are
requested to complete, date, sign, and return the proxy card in the enclosed
postage paid envelope. FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO
VOTE AT THE SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
MERGER. The giving of a proxy will not affect your right to vote in the event
that you attend the Special Meeting.
Please do not send in your stock certificate at this time. In the event
that the Merger is approved by the requisite vote of the Company's stockholders,
you will be sent a letter of transmittal for that purpose promptly after the
Merger is consummated.
Sincerely,
/s/Thomas J. Crocker
--------------------
THOMAS J. CROCKER
<PAGE>
CROCKER REALTY TRUST, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, SEPTEMBER 20, 1996
TO OUR STOCKHOLDERS:
A special meeting of stockholders (the "Special Meeting") of Crocker Realty
Trust, Inc., a Maryland corporation (the "Company"), will be held at 10:00 a.m.
(local time), on Friday, September 20, 1996, at the Boca Raton Marriott, 5150
Town Center Circle, Boca Raton, Florida, for the following purposes:
1. To approve and adopt an Agreement and Plan of Merger, dated as of April
29, 1996 (the "Merger Agreement"), by and among Highwoods Properties, Inc.,
a Maryland corporation ("Highwoods"), Cedar Acquisition Corporation, a
Maryland corporation and a subsidiary of Highwoods ("CAC"), and the Company,
pursuant to which, among other things, (a) CAC will be merged with and into
the Company (the "Merger"); (b) each share of common stock, par value $0.01
per share, of the Company (other than shares held by the Company or
Highwoods or any wholly-owned subsidiary of Highwoods or the Company which
will be cancelled) will be converted automatically into the right to receive
$11.05243 in cash, without interest; and (c) the Company will become a
subsidiary of Highwoods, all as more fully described in the accompanying
Proxy Statement.
2. To transact such other business as may properly be brought before the
meeting or any adjournment or postponement thereof.
Only stockholders of record at the close of business on August 26, 1996,
the record time and date fixed by the Board of Directors of the Company, are
entitled to notice of, and to vote at, the Special Meeting.
Under Maryland law, stockholders of the Company do not have dissenters'
rights in connection with the Merger Agreement and the consummation of the
transactions contemplated thereby.
The Company's Proxy Statement accompanies this Notice of Special Meeting. A
list of stockholders entitled to notice of the Special Meeting shall be
available for inspection by any stockholder, during regular business hours, for
a period of ten days prior to the Special Meeting at the principal office of the
Company, 433 Plaza Real, Suite 335, Boca Raton, Florida, and at the Special
Meeting.
To ensure that a quorum is present for the Special Meeting and at any
adjournment or postponement thereof, and that your shares are voted at the
Special Meeting, please vote, sign, date and promptly return the enclosed proxy
form in the envelope provided. Proxies may be revoked at any time prior to the
Special Meeting by giving written notice of revocation to the Company's
Secretary, by giving a later dated proxy, or by attending the Special Meeting
and voting in person.
By Order of the Board of Directors,
/s/Thomas J. Crocker
--------------------
Thomas J. Crocker
August 30, 1996
------------------------------------------------------
433 PLAZA REAL - SUITE 335 - BOCA RATON, FLORIDA 33432
(407) 395-9666 - FAX (407) 394-7712
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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE MERGER.
THE AFFIRMATIVE VOTE OF HOLDERS OF AT LEAST TWO-THIRDS OF THE OUTSTANDING
SHARES OF COMMON STOCK ENTITLED TO VOTE THEREON IS REQUIRED TO APPROVE AND ADOPT
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
MERGER. WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS
POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. YOU
MAY REVOKE THE PROXY AT ANY TIME PRIOR TO ITS EXERCISE IN THE MANNER DESCRIBED
IN THE ACCOMPANYING PROXY STATEMENT. ANY STOCKHOLDER PRESENT AT THE SPECIAL
MEETING, INCLUDING ANY ADJOURNMENT OR POSTPONEMENT THEREOF, MAY REVOKE SUCH
HOLDER'S PROXY AND VOTE PERSONALLY ON THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE MERGER, AT THE SPECIAL MEETING. FAILURE TO
RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE SPECIAL MEETING WILL
HAVE THE SAME EFFECT AS A VOTE "AGAINST" THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.
PLEASE DO NOT SEND YOUR COMMON STOCK CERTIFICATES AT THIS TIME.
<PAGE>
PROXY STATEMENT
CROCKER REALTY TRUST, INC.
SPECIAL MEETING OF STOCKHOLDERS
To Be Held On September 20, 1996
--------------------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors (the "Board of Directors") of Crocker Realty
Trust, Inc., a Maryland corporation (the "Company"), from holders of outstanding
shares of common stock, par value $0.01 per share, of the Company (the "Common
Stock"), for use at a special meeting (the "Special Meeting") of the
stockholders of the Company (the "Stockholders") to be held at the Boca Raton
Marriott, 5150 Town Center Circle, Boca Raton, Florida, at 10:00 a.m. (local
time) on Friday, September 20, 1996, and at any adjournment or postponement
thereof (the "Special Meeting").
At the Special Meeting, the Stockholders will be asked to consider and act
upon a proposal to approve and adopt an Agreement and Plan of Merger, dated as
of April 29, 1996 (the "Merger Agreement"), by and among Highwoods Properties,
Inc., a Maryland corporation ("Highwoods"), Cedar Acquisition Corporation, a
Maryland corporation and a subsidiary of Highwoods ("CAC"), and the Company,
pursuant to which, among other things, (i) CAC will be merged with and into the
Company (the "Merger"); (ii) each share of Common Stock (other than shares held
by the Company or Highwoods or any wholly-owned subsidiary of Highwoods or the
Company which will be cancelled) will be converted automatically into a right to
receive $11.05243 in cash, without interest (the "Merger Consideration"); and
(iii) the Company will become a subsidiary of Highwoods, all as more fully
described in this Proxy Statement.
You are requested to complete, date and sign the accompanying proxy and
return it to the Company in the enclosed postage prepaid envelope. Your proxy
may be revoked at any time prior to its exercise by delivering written notice of
revocation to the Secretary of the Company, by giving a later dated proxy or by
attending the Special Meeting and voting in person. Proxies duly executed and
received in time for the Special Meeting will be voted in accordance with the
Stockholder's instructions. Proxies that are submitted without voting
instructions will be voted as follows:
1. FOR the approval and adoption of the Merger Agreement and the
transactions contemplated thereby, including the Merger.
2. In the discretion of the proxy holders, FOR or AGAINST such other
business as may properly come before the Special Meeting or any
adjournment thereof.
Only Stockholders of record at the close of business on August 26, 1996,
the record time and date fixed by the Board of Directors (the "Record Date"),
are entitled to notice of, and to vote at, the Special Meeting. On the Record
Date, there were 29,108,007 outstanding shares of Common Stock. All holders of
issued and outstanding shares of Common Stock are entitled to vote on the Merger
Agreement and the transactions contemplated thereby, including the Merger. The
affirmative vote of two-thirds of the votes entitled to be cast by holders of
outstanding shares of Common Stock is required for approval of the Merger
Agreement and the transactions contemplated thereby, including the Merger.
Abstentions and broker non-votes will, if present, be counted for purposes of
establishing a quorum at the Special Meeting but will not be counted for
purposes of the number of votes cast at the Special Meeting for the Merger
Agreement and the transactions contemplated thereby, including the Merger.
The Board of Directors has approved the Merger and declared it advisable to
the Stockholders. In addition, AP CRTI Holdings, L.P., a Delaware limited
partnership ("Apollo"), AEW Partners, L.P., a Delaware limited partnership
("AEW"), Thomas J. Crocker, Richard S. Ackerman, Robert E. Onisko and Mr.
Crocker's wife (collectively, the "Sellers"), which together own 77.1% of the
outstanding Common Stock, have agreed to (i) vote in favor of the Merger or any
other transaction contemplated by the Merger Agreement, and (ii) grant CAC a
proxy with respect to their Common Stock in respect of certain matters,
including the Merger and the other transactions contemplated by the Merger
Agreement. Therefore, there will be a quorum at the Special Meeting and
sufficient votes cast for approval and adoption of the Merger Agreement and the
transactions contemplated thereby, including the Merger, to ensure its passage
without the vote of any other Stockholder.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE MERGER.
Stockholders are urged to read and consider carefully the information
contained in this Proxy Statement and to consult with their personal financial
and tax advisors.
This Proxy Statement and the accompanying form of proxy are first being
mailed to holders of the Common Stock on or about August 30, 1996.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR
NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN, AND
RETURN THE PROXY CARD IN THE ENCLOSED POSTAGE PAID ENVELOPE.
NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT IMPLY THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE
COMPANY OR HIGHWOODS SINCE THE DATE HEREOF.
<PAGE>
---------------
PROXY STATEMENT
---------------
TABLE OF CONTENTS
PAGE
----
Summary............................................................. 2
The Special Meeting................................................. 13
Matters to Be Considered at the Special Meeting................... 13
Record Date and Voting............................................ 13
The Parties to the Merger........................................... 16
The Company....................................................... 16
Highwoods......................................................... 41
CAC............................................................... 41
Selected Financial Data............................................. 42
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 45
Management.......................................................... 53
Directors and Executive Officers.................................. 53
Committees of the Board of Directors.............................. 56
Executive Compensation............................................ 57
Stock Option Plan................................................. 59
Transactions with Apollo and its Affiliates....................... 61
Transactions with the Executive Officers.......................... 62
The Merger.......................................................... 63
General........................................................... 63
Background of the Merger........................................... 63
Reasons for the Merger............................................. 64
Opinion of Financial Advisor....................................... 66
The Merger Agreement................................................. 70
Effective Time..................................................... 70
The Merger......................................................... 70
Representations and Warranties..................................... 72
Conduct of Business Pending the Merger............................. 72
Employee Arrangements.............................................. 73
Company Stock Options.............................................. 73
Indemnification and Insurance...................................... 74
Solicitation of Transactions....................................... 75
Other Agreements................................................... 75
Conditions Precedent to the Merger................................. 76
<PAGE>
PAGE
----
Termination........................................................ 77
Fees and Expenses.................................................. 78
Amendment and Waivers.............................................. 78
Excluded Assets.................................................... 78
The Stock Purchase Agreement......................................... 81
Voting Agreement; Proxy............................................ 81
Conditions to Closing.............................................. 81
Effect of the Stock Purchase Agreement............................. 82
Dissenters' Rights................................................... 83
Interests of Certain Persons in the Merger........................... 83
Benefit Plans...................................................... 83
Company Stock Options.............................................. 84
Excluded Assets.................................................... 85
Certain Federal Income Tax Consequences to Common Stockholders....... 86
Security Ownership of Certain Beneficial Owners and Management....... 87
Affiliates of the Company.......................................... 88
Stockholders Agreement............................................. 89
Registration Rights................................................ 89
Independent Public Auditors.......................................... 90
Other Matters........................................................ 90
Stockholder Proposals................................................ 90
Additional Information............................................... 90
APPENDICES:
Appendix A--Agreement and Plan of Merger
Appendix B--Schedule of Excluded Properties
Appendix C--Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated
INDEX TO FINANCIAL STATEMENTS........................................ F-1
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement. This summary is not intended to be a complete description and
is qualified in its entirety by reference to the more detailed information
contained in this Proxy Statement or in the documents attached as Appendices
hereto. Each Stockholder is urged to give careful consideration to all of the
information contained in this Proxy Statement and the Appendices before voting.
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
The Special Meeting is scheduled to be held at 10:00 a.m. (local time), on
Friday, September 20, 1996 at the Boca Raton Marriott, 5150 Town Center Circle
in Boca Raton, Florida. At the Special Meeting, Stockholders will consider and
vote upon (i) a proposal to approve and adopt the Merger Agreement and the
transactions contemplated thereby, including the Merger, and (ii) such
procedural matters, including, without limitation, potential adjournments of the
Special Meeting, and such other matters as may properly be brought before the
Special Meeting. See "THE SPECIAL MEETING--Matters to be Considered at the
Special Meeting" and "OTHER MATTERS."
RECORD DATE AND VOTING
The Board of Directors has fixed the close of business on August 26, 1996
as the Record Date for the Special Meeting. At the close of business on the
Record Date, there were 29,108,007 shares of Common Stock outstanding and
entitled to vote at the Special Meeting, held by approximately 60 Stockholders
of record. Each holder of Common Stock on the Record Date will be entitled to
one vote for each share of Common Stock held of record upon each matter properly
submitted at the Special Meeting. The presence, either in person or by proxy, of
a majority of the outstanding shares of Common Stock entitled to be voted at the
Special Meeting is necessary to constitute a quorum thereat. Abstentions
(including broker non-votes) are included in the calculation of the number of
votes represented at the meeting for purposes of determining whether a quorum
has been achieved. See "THE SPECIAL MEETING--Record Date and Voting."
VOTE REQUIRED; REVOCABILITY OF PROXIES
The affirmative vote of holders of at least two-thirds of the outstanding
shares of Common Stock entitled to vote thereon is required to approve and adopt
the Merger Agreement and the transactions contemplated thereby, including the
Merger.
The required vote of the Stockholders on the Merger Agreement and the
transactions contemplated thereby, including the Merger, is based upon the total
number of outstanding shares of Common Stock as of the Record Date. Therefore,
the failure to submit a proxy card (or to vote in person at the Special Meeting)
or the abstention from voting by a Stockholder (including broker non-votes) will
have the same effect as an "AGAINST" vote with respect to approval and adoption
of the Merger Agreement and the transactions contemplated thereby, including the
Merger. Proxies may be revoked prior to the proxy being voted by following the
procedures described in this Proxy Statement. See "THE SPECIAL MEETING--Record
Date and Voting--Vote Required; Revocability of Proxies."
STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES REPRESENTING COMMON
STOCK ("COMPANY STOCK CERTIFICATES") WITH THEIR PROXY CARDS. IN THE EVENT THE
MERGER IS CONSUMMATED, COMPANY STOCK CERTIFICATES SHOULD BE DELIVERED IN
ACCORDANCE WITH INSTRUCTIONS SET FORTH IN THE COMPANY LETTER OF TRANSMITTAL (AS
HEREINAFTER DEFINED), WHICH WILL BE SENT TO STOCKHOLDERS BY THE EXCHANGE AGENT
(AS HEREINAFTER DEFINED) PROMPTLY AFTER THE EFFECTIVE TIME (AS HEREINAFTER
DEFINED).
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THE PARTIES TO THE MERGER
THE COMPANY
Unless the context otherwise requires, the term "Company" as used in this
section of "SUMMARY" and in "THE PARTIES TO THE MERGER--The Company" includes
Crocker Realty Trust, Inc. and its subsidiaries. The material subsidiaries are:
AP Southeast Portfolio Partners, L.P. ("Financing Partnership"); AP Fontaine III
Partners, L.P. ("Fontaine Partnership"); Crocker Realty Management, Inc.
("Management Subsidiary"); Southeast Realty Options Corp. ("Land Options
Subsidiary"); Crocker Realty Investors, Inc. ("CRI"); CRT Benjamin Center, Inc.;
CRT Florida Holdings, Inc.; CRT South Carolina Development I, Inc.; CRT
Tennessee Holdings Corp.; and CRT Leasing, Inc. ("Leasing Company").
Crocker Realty Trust, Inc. is a fully-integrated real estate company with
in-house expertise in the management, leasing, acquisition, development and
construction of office properties. The Company owns 70 Class A office
properties, aggregating approximately 5.7 million rentable square feet
(collectively, the "Properties"), in 16 markets in Florida, North Carolina,
South Carolina, Tennessee, Georgia, Virginia and Alabama (the "Company
Markets"). Based on rentable square feet, the Company owns and operates the
largest portfolio consisting exclusively of Class A office properties in the
Southeastern United States (as hereinafter defined) that is held by a public
company. Class A office properties refer to those office properties generally
considered to have excellent location and access, attract high quality tenants,
be well maintained and professionally managed, and achieve among the highest
rent, occupancy and tenant retention rates within their markets. The majority of
the Properties are located in suburban office parks. The Company also owns
approximately 258 acres of undeveloped land (the "Land") and options to acquire
up to approximately 47 acres of undeveloped land (the "Land Options"), which
Land and land subject to the Land Options are available for future development
of 4 million and 485,000 rentable square feet, respectively, all strategically
located adjacent to certain of the Properties. The Land is among certain of the
assets that will be effectively removed from the Company prior to the Merger and
held by an entity, the interests of which will be held by certain of the
Stockholders, as more fully described under "THE MERGER AGREEMENT--Excluded
Assets." The Company also maintains a third-party property, asset and
construction management business and a leasing and brokerage business (83% of
1995 pro forma revenues from which were attributable to affiliates of the
Company). The Company qualified as a real estate investment trust (a "REIT") for
federal income tax purposes commencing with its taxable year ended December 31,
1995 and made an election to be taxed as a REIT for such year.
Sixty-three of the Properties are located in 20 suburban office parks, with
the remainder also located in suburban areas. The Properties are in high growth
regions of the Southeast and are strategically located for ease of access and
proximity to transportation corridors. As used herein, the "Southeast" or
"Southeastern United States" refers to Alabama, Delaware, Florida, Georgia,
Kentucky, Maryland, Mississippi, North Carolina, South Carolina, Tennessee,
Virginia, West Virginia and Washington, D.C., collectively, a region which has
experienced a greater growth in population, household formation and employment
than the United States as a whole. The Properties are well maintained and
professionally managed, with high quality amenities and lush landscaping. The
Properties are either new or competitive with new buildings. The Properties were
developed from 1980 to 1991 (with a weighted average age of approximately nine
years). The majority of the Properties were acquired by the Company or its
predecessors in 1993 near the end of a downturn in commercial real estate
markets that resulted from the over-building of the 1980's.
The Properties are leased as of December 31, 1995 to approximately 570
tenants representing a diverse group of local, regional, national and
international companies. Leases generally are medium-term and provide for the
recovery of operating costs through either a full pass-through to tenants or the
recovery of increases over a stated cost base. See "THE PARTIES TO THE
MERGER--The Company--Business and Properties--Leases." As of December 31, 1995,
the Properties were approximately 93.6% leased, with no
3
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one tenant representing more than 3.3% of the Company's Annual Base Rent (as
hereinafter defined) and with only 12 tenants individually representing more
than 1.0% each. See "THE PARTIES TO THE MERGER--The Company--Business and
Properties--Tenants."
The Company also conducts third-party property, asset and construction
management businesses and a leasing and brokerage business, which includes the
management of approximately 2.2 million rentable square feet of space. Revenue
from such activities was approximately $2.7 million on a pro forma basis for
1995, 83% of which was attributable to affiliates of the Company.
The Company is a Maryland corporation. The Company's executive offices are
located at 433 Plaza Real, Suite 335, Boca Raton, Florida 33432, and its
telephone number is (407) 395-9666. The Company maintains regional offices in
Boca Raton, Florida, Charlotte, North Carolina, Atlanta, Georgia, and Memphis,
Tennessee, with a senior asset manager resident in each office. See "THE PARTIES
TO THE MERGER--The Company."
RECENT DEVELOPMENTS. The Company has implemented its strategies to expand
its presence in existing markets and to enter new markets within the
Southeastern United States. The Company has financed such expansion through
private placements of Common Stock to sophisticated institutions and the
assumption of indebtedness related to certain of the Properties acquired.
Acquisitions.
In two transactions that occurred in December 1995 and January 1996, the
Company acquired an aggregate of 20 Class A office buildings (approximately 1.3
million rentable square feet) and approximately 294 acres of undeveloped land
(of which the Company sold 48 acres and entered into a contract to sell 15
acres). Consistent with the Company's strategy, the recent acquisitions were
each accomplished on a privately negotiated basis and at prices which the
Company believes to be below replacement cost. Each of the newly acquired
buildings is consistent with the Company's standards with respect to quality and
location.
Sabal Acquisition. On December 29, 1995, the Company completed the
acquisition (the "Sabal Acquisition") of 11 Class A office buildings and
approximately 278 acres of undeveloped land within the Sabal Park office park in
Tampa, Florida, from subsidiaries of Stone and Webster Incorporated for an
aggregate cash consideration of $42.5 million. Prior to the Sabal Acquisition,
the Company owned six buildings (aggregating 334,000 rentable square feet) in
Sabal Park. The buildings acquired consist of an aggregate of 571,000 square
feet, had an occupancy rate in excess of 95% at December 31, 1995 and generated
net operating income for 1995 of approximately $3.8 million. The allocated
purchase price for the buildings was $29.5 million (equivalent to approximately
$51.66 per square foot). Based on net operating income in 1995, the
capitalization rate was 12.9% on the Sabal Acquisition. The allocated purchase
price for the undeveloped land was $13.0 million. In a concurrent transaction,
the Company contracted to sell approximately 63 acres of the land acquired to
Security Capital Industrial Trust for $2.9 million, resulting in a net gain of
15.4% on the land sold. The land to be sold is industrial land that is not
suitable for office development. The land to be held by the Company is expected
to be suitable for possible future development of approximately 3.4 million
rentable square feet of office space. In connection with the Sabal Acquisition,
the Company hired five former employees of Stone and Webster Incorporated who
continue to perform leasing and property management functions at Sabal Park.
Towermarc Acquisition. On January 16, 1996, the Company completed the
acquisition (the "Towermarc Acquisition") from affiliates of Towermarc
Corporation of (i) nine Class A office buildings located in Memphis, Tennessee,
and in Tampa and Jacksonville, Florida, (ii) approximately 16 acres of
undeveloped land in Memphis and Tampa and (iii) management contracts for an
aggregate of approximately 700,000 square feet of space in Memphis and Tampa,
for an aggregate consideration of $81.4 million. The
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buildings acquired consist of an aggregate of 683,000 square feet, had a 95%
occupancy rate at December 31, 1995 and generated net operating income for 1995
of approximately $7.5 million. The purchase price for the buildings was $78.0
million (equivalent to approximately $114.20 per square foot). Based on net
operating income in 1995, the capitalization rate was 9.6% on the acquisition.
Of the nine buildings, five are located in suburban Memphis, three in the
Westshore area of Tampa and one in Jacksonville's Deerwood Park development. The
purchase price for the undeveloped land was $3.4 million. The land is expected
to be suitable for possible future development of approximately 300,000 rentable
square feet of office space. The purchase price was paid by the Company as
follows: approximately $67.2 million in the form of assumption of indebtedness,
1,687,939 unregistered shares of Common Stock and approximately $900,000 cash.
In connection with the Towermarc Acquisition, the Company established a regional
office in Memphis and hired 15 former employees of Towermarc Corporation who
will continue to perform leasing and asset and property management in Memphis,
Tampa and Jacksonville.
Financing Transactions.
In addition to the assumption of indebtedness and issuance of shares in
connection with the Towermarc Acquisition, the Company has capitalized on its
ability to finance its activities through the sale of its equity securities and
the establishment of credit facilities. Since its formation, the Company has
directly negotiated and consummated two private placements of Common Stock. The
Company has also recently entered into a line of credit facility.
AEW Private Placement. On July 28, 1995, the Company entered into a
commitment to sell 8,818,231 unregistered shares of Common Stock to AEW in a
private placement transaction for $64,808,553 (approximately $7.35 per share,
subject to adjustment). The closing price of the Common Stock on the day prior
to the commitment was $7.25. The net proceeds from the sale, which was
consummated on December 28, 1995, were used to repay $20 million of indebtedness
and to fund the Sabal Acquisition.
Fortis Private Placement. On January 9, 1996, the Company contracted to
sell 1,875,000 unregistered shares of Common Stock to Fortis Benefits Insurance
Company and its affiliate, Time Insurance Company (collectively, "Fortis"), in a
private placement transaction for $15 million ($8.00 per share). The closing
price of the Common Stock on the date prior to the contract was $8.875. The net
proceeds from the sale to Fortis, which was consummated on January 12, 1996,
were used to pay down certain indebtedness assumed in connection with the
Towermarc Acquisition and for other general corporate purposes.
Line of Credit. On March 20, 1996, the Company entered into an agreement
with The First National Bank of Boston for a full recourse $20 million secured
revolving credit facility (the "Line of Credit"). The Line of Credit has a term
of three years and bears interest at either the London Interbank Offering Rate
("LIBOR") plus 175 basis points or The First National Bank of Boston's Base Rate
plus 75 basis points, at the Company's option. The Line of Credit is available
to fund acquisitions and development activities, as well as for the refinancing
of indebtedness and for general corporate purposes, and is subject to customary
covenants and reporting requirements.
DISTRIBUTION POLICY. On July 8, 1996, the Company paid its second quarterly
distribution of $0.15 per share to Stockholders of record on July 1, 1996. On
March 8, 1996, the Company announced a distribution of $0.15 per share which was
paid on April 3, 1996 to Stockholders of record on March 20, 1996. On an
annualized basis, this represents a distribution of $0.60 per share. Also on
March 8, 1996, the Company announced a special dividend of $0.03 per share paid
on March 28, 1996 and related to the Company's REIT dividend distribution
requirements. In order to maintain its qualification as a REIT, the Company must
make annual distributions to its Stockholders of at least 95% of its REIT
taxable income
5
<PAGE>
(which does not include capital gains). Under certain circumstances, the Company
may be required to make distributions in excess of cash available for
distribution in order to meet such distribution requirements.
Pursuant to the Merger Agreement, the Company is permitted to pay quarterly
dividends on shares of Common Stock in an amount not exceeding $0.15 per share
per quarter (or a prorated portion of such amount in the case of any portion of
a quarterly dividend) through the Closing Date (as hereinafter defined). The
Company intends to pay dividends in the period prior to the Closing Date such
that each share of Common Stock will earn a dividend of $0.15 per quarter (or a
prorated portion of such amount in the case of any portion of a quarterly
dividend).
The Company has declared a special distribution to Stockholders of $0.60411
per share, payable on August 30, 1996 to Stockholders of record at the close of
business on August 26, 1996, which distribution will represent the per share
portion of the Excluded Assets (as hereinafter defined). See "THE MERGER
AGREEMENT--Excluded Assets."
HIGHWOODS AND CAC
Highwoods is a self-administered and self-managed REIT that owns and
operates a portfolio of 201 properties (the "Highwoods Properties") located in
Raleigh-Durham, Winston-Salem/Greensboro (the "Piedmont Triad") and Charlotte,
North Carolina; Nashville, Tennessee; and Richmond, Virginia. The Highwoods
Properties consist of 103 suburban office properties and 98 industrial
(including 62 service center) properties, contain an aggregate of approximately
10.4 million rentable square feet and are leased to approximately 1,100 tenants.
At June 30, 1996, the Highwoods Properties were 95% leased. Highwoods also owns
approximately 221 acres of land for future development. All of the development
land is zoned and available for office and industrial development, 184 acres of
which have utility infrastructure already in place.
Highwoods was incorporated in Maryland in February 1994. Its executive
offices are located at 3100 Smoketree Court, Suite 600, Raleigh, North Carolina
27604, and its telephone number is (919) 872-4924. Highwoods also maintains
regional offices in the Piedmont Triad, Charlotte, Richmond and Nashville. See
"THE PARTIES TO THE MERGER--Highwoods."
Cedar Acquisition Corporation is a Maryland corporation and a subsidiary of
Highwoods. Pursuant to the terms of the Merger Agreement, at the Effective Time,
CAC will be merged with and into the Company, with the Company continuing as the
surviving corporation (the "Surviving Corporation"). CAC's principal offices are
c/o Highwoods Properties, Inc. at 3100 Smoketree Court, Suite 600, Raleigh,
North Carolina 27604 and its telephone number is (919) 872-4924. See "THE
PARTIES TO THE MERGER--CAC."
RECOMMENDATION OF BOARD OF DIRECTORS
The Board of Directors has determined that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are advisable and in
the best interests of the Company and its Stockholders, and has unanimously
approved and adopted the Merger Agreement and the transactions contemplated
thereby, including the Merger. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.
In reaching its unanimous determination that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are advisable and in
the best interests of the Company and its Stockholders, the Board of Directors
considered a number of factors, as more fully described under "THE MERGER--
Background of the Merger" and "THE MERGER--Reasons for the Merger."
6
<PAGE>
OPINION OF FINANCIAL ADVISOR
Merrill Lynch, Pierce, Fenner & Smith Incorporated, an independent investment
banking firm ("Merrill Lynch"), has rendered its opinion to the Board of
Directors to the effect that the cash consideration to be received by the
Stockholders pursuant to the Merger Agreement together with a distribution of
the value per share of Excluded Assets in the form of a Special Dividend (as
hereinafter defined) is fair to the Stockholders (other than Highwoods and its
affiliates and the Stockholders who will have an interest in the Excluded Assets
after the Merger and their affiliates) from a financial point of view as of the
date such opinion was rendered. Merrill Lynch also participated as the Company's
advisor in the negotiations with Highwoods concerning the cash consideration and
the structure of the Merger. A copy of the August Opinion (as hereinafter
defined), which sets forth the matters considered by Merrill Lynch, is attached
to this Proxy Statement as Appendix C and should be read in its entirety.
THE MERGER AGREEMENT
THE MERGER
Subject to the provisions of the Merger Agreement, as of the Effective
Time, each issued and outstanding share of Common Stock, other than those shares
held by the Company, Highwoods or any wholly-owned subsidiary of the Company or
Highwoods, will be converted into and represent the right to receive $11.05243
in cash, and CAC will be merged with and into the Company, with the Surviving
Corporation thereby becoming a subsidiary of Highwoods. Following consummation
of the Merger, Stockholders will not, by virtue of the Merger, own shares of
capital stock of Highwoods and, therefore, will not participate in the growth,
if any, of Highwoods and/or its stock price. Moreover, Stockholders, other than
the two principal Stockholders and the Company's senior management, will not
participate as owners of a newly formed entity which will purchase certain
assets currently owned by the Company. See "THE MERGER AGREEMENT--Effective
Time," "THE MERGER AGREEMENT--The Merger" and "THE MERGER AGREEMENT--Excluded
Assets."
EXCLUDED ASSETS
In the course of the negotiations leading to the Merger Agreement, the
Company and Highwoods were unable to agree on a mutually acceptable price for
certain assets of the Company that were not producing current income (the
"Excluded Assets"). These Excluded Assets primarily consist of undeveloped land
and contracts to acquire certain new properties. The current book value of the
Excluded Assets is approximately $17.2 million. The Excluded Assets include
approximately 237 acres of undeveloped land in Tampa, Florida, approximately 8.5
acres of undeveloped land in Memphis, Tennessee, approximately eight acres of
undeveloped land in Greenville, South Carolina and approximately four acres of
undeveloped land in Boca Raton, Florida, whose current book values are
approximately $11.7 million, $3.0 million, $1.7 million and $0.8 million,
respectively. The current book values and fair market values of the other
Excluded Assets are not, in the aggregate, material to the Company and its
subsidiaries as a whole. The current book value of each Excluded Asset which is
land is the price that the Company paid to acquire such Excluded Asset. The
current book value of each Excluded Asset which is not land is $0. The Excluded
Assets also include a receivable due from Leasing Company in the amount of $12.1
million and created in connection with the Sabal Acquisition. Because such
receivable is among the Excluded Assets, it will be effectively cancelled in the
Newco Transaction (as hereinafter defined). In addition, Highwoods indicated
that its willingness to pay the price it was offering for the Company depended
on certain contingent liabilities (the "Excluded Liabilities") being effectively
removed from the Company prior to the Merger. See "THE MERGER
AGREEMENT--Excluded Assets." The Company believes that the sale of the Excluded
Assets for their fair market value to one or more buyers unaffiliated with the
Company could not be achieved in the short term. Accordingly, the Company
determined that in order to maximize the value of the Merger to the
7
<PAGE>
Stockholders, it was necessary to form a new entity ("Newco") that would own the
Excluded Assets and assume the Excluded Liabilities at or prior to the Merger.
The Company determined that the most efficient method of distributing the fair
market value of Newco to all of its Stockholders would be to (i) organize Newco
as a private company controlled by the two principal Stockholders and operated
by the Company's current senior management, (ii) sell the Excluded Assets,
subject to the Excluded Liabilities, to Newco for cash in an amount equal to the
net fair market value of the Excluded Assets and Excluded Liabilities, (the
"Newco Transaction") and (iii) distribute to all of the Stockholders the
proceeds of the Newco Transaction in the form of a special cash dividend (the
"Special Dividend"). The price paid in the Newco Transaction was $18 million, or
$0.60411 per share of Common Stock, and was determined by negotiation between
Newco and a special committee of the Board of Directors of the Company (the
"Special Committee"). The Special Committee consists of two directors who are
not affiliated with either Apollo or AEW and are not officers of the Company.
Merrill Lynch acted as financial advisor to the Special Committee in the
negotiations with Newco.
SOLICITATION OF TRANSACTIONS
The Company has agreed not to solicit or encourage any inquiries or the
making of any proposal that constitutes or may reasonably be expected to lead to
a Competing Transaction (as hereinafter defined), or enter into or maintain or
continue discussions or negotiate with any person or entity in furtherance of
such inquires or to obtain a Competing Transaction, or agree to or endorse any
Competing Transaction. See "THE MERGER AGREEMENT--Solicitation of Transactions."
CONDITIONS PRECEDENT TO THE MERGER
Consummation of the Merger is subject to various conditions including,
among others: (i) approval and adoption of the Merger by the requisite vote of
the Stockholders and (ii) the absence of any order, judgment, decree, injunction
or ruling of a court of competent jurisdiction restraining, enjoining or
prohibiting consummation of the Merger. In addition, Highwoods' obligation to
consummate the Merger is subject to the condition, among others, that the
Company meets the requirements for qualification as a REIT under Sections
856-860 of the Internal Revenue Code of 1986, as amended (the "Code"), except
under certain conditions. See "THE MERGER AGREEMENT--Conditions Precedent to the
Merger."
If Highwoods becomes the beneficial owner of a majority of the outstanding
shares of Common Stock prior to the Effective Time, consummation of the Merger
is subject to only the following conditions: (i) approval and adoption of the
Merger by the requisite vote of the Stockholders and (ii) the absence of any
order, judgment, decree, injunction or ruling of a court of competent
jurisdiction restraining, enjoining or prohibiting consummation of the Merger.
See "THE MERGER AGREEMENT--Conditions Precedent to the Merger" and "THE STOCK
PURCHASE AGREEMENT."
TERMINATION
The Merger Agreement may be terminated at any time prior to the earlier of
(i) such time as Highwoods becomes the owner, directly or indirectly, of a
majority of the Common Stock and (ii) the Effective Time, whether before or
after approval by the Stockholders of the Merger: (a) by mutual written consent
of Highwoods and the Company; (b) by Highwoods, upon a Terminating Company
Breach (as hereinafter defined); provided that, if such Terminating Company
Breach is curable by the Company through the exercise of its reasonable best
efforts and for so long as the Company continues to exercise such reasonable
best efforts, Highwoods may not terminate the Merger Agreement pursuant to the
provisions described in this clause (b); (c) by the Company, upon a Terminating
Highwoods Breach (as hereinafter defined); provided that, if such Terminating
Highwoods Breach is curable by Highwoods through the exercise of its reasonable
best efforts and for so long as Highwoods continues to exercise such reasonable
best efforts, the Company may not terminate the Merger Agreement pursuant to the
provisions described in
8
<PAGE>
this clause (c); (d) by Highwoods, if the Company does not meet the requirements
for qualification as a REIT under Sections 856-860 of the Code; provided that,
if the Company does not meet such requirements for qualification as a result of
any action or omission of (or any action or omission taken at the direction of)
Highwoods or due to the inaccuracy of the representation of Highwoods contained
in the Merger Agreement and related to the effect of the transactions
contemplated by the Merger Agreement and the Stock Purchase Agreement (as
hereinafter defined) upon the Company's status as a REIT, Highwoods will not
have the right to terminate this Agreement pursuant to the provisions described
in this clause (d); (e) by Highwoods or the Company, if any court of competent
jurisdiction shall have issued, enacted, entered, promulgated or enforced any
order, judgment, decree, injunction or ruling which restrains, enjoins or
otherwise prohibits the Merger and such order, judgment, decree, injunction or
ruling shall have become final and nonappealable; provided, however, that the
party seeking to terminate this Agreement pursuant to the provisions described
in this clause (e) shall have used commercially reasonable best efforts to
remove such injunction or overturn such action; or (f) by either Highwoods or
the Company, if the Special Meeting shall have concluded without the Company
having obtained the required stockholder approval. See "THE MERGER
AGREEMENT--Termination."
THE STOCK PURCHASE AGREEMENT
The Sellers have entered into a stock purchase agreement, dated as of April
29, 1996, with Highwoods and CAC (the "Stock Purchase Agreement"). Pursuant to
the Stock Purchase Agreement, each Seller has agreed that, during the Term (as
hereinafter defined), at any meeting of the Stockholders, and in any action by
written consent of the Stockholders, it will (a) vote its shares of Common Stock
in favor of the Merger or any other transaction contemplated by the Merger
Agreement; (b) vote its shares of Common Stock against any action or agreement
which would result in a breach in any material respect of any covenant,
representation or warranty or any other obligation of the Company under the
Merger Agreement; and (c) vote its shares of Common Stock against any action or
agreement which would impede, interfere with or attempt to discourage the
Merger, including, but not limited to: (i) any extraordinary corporate
transaction, such as a merger, reorganization or liquidation involving the
Company or any of its subsidiaries; (ii) a sale or transfer of a material amount
of assets of the Company or any of its subsidiaries; (iii) any change in the
management or Board of Directors of the Company, except as otherwise agreed to
in writing by Highwoods; (iv) any change in the capitalization or dividend
policy of the Company in effect as of the date of the Stock Purchase Agreement
or (v) any other material change in the Company's corporate structure or
business. Each Seller has granted CAC, or any nominee of CAC, such Seller's
irrevocable proxy and attorney-in-fact to vote or act by written consent with
respect to all of such Seller's shares of Common Stock in respect of any of the
matters with respect to which the Seller has agreed to vote its shares of Common
Stock and described in the immediately preceding sentence. The closing under the
Stock Purchase Agreement is subject to various conditions. See "THE STOCK
PURCHASE AGREEMENT."
A majority of the shares of Common Stock outstanding and entitled to vote
at the Special Meeting constitutes a quorum for purposes of the Special Meeting.
Approval of the Merger requires the affirmative vote of two-thirds of the shares
of Common Stock outstanding and entitled to vote thereon. Therefore, the
agreement by the Sellers, who in the aggregate own 77.1% of the outstanding
shares of Common Stock, to (i) vote in favor of the Merger or any other
transaction contemplated by the Merger Agreement and (ii) grant CAC a proxy with
respect to their shares of Common Stock in respect of certain matters, including
the Merger and the other transactions contemplated by the Merger Agreement, will
mean that there will be a quorum at the Special Meeting and sufficient votes
cast for approval and adoption of the Merger Agreement to ensure its passage
without the vote of any other Stockholder. Moreover, if the closing under the
Stock Purchase Agreement occurs prior to the Record Date of the Special Meeting,
a quorum will be present at the Special Meeting and sufficient votes will be
cast for approval and adoption of the Merger Agreement to ensure its passage
without the vote of any other Stockholder, assuming CAC votes the shares of
Common Stock purchased at such closing in favor of approval and adoption of the
Merger Agreement. If a closing
9
<PAGE>
under the Stock Purchase Agreement occurs prior to the Effective Time, there
will be fewer conditions to consummation of the Merger than if such closing does
not occur. See "THE MERGER AGREEMENT-- Conditions Precedent to Merger" and "THE
STOCK PURCHASE AGREEMENT."
DISSENTERS' RIGHTS
Under Maryland law, Stockholders do not have dissenters" rights in
connection with the Merger Agreement and the consummation of the transactions
contemplated thereby. See "DISSENTERS' RIGHTS."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Company's management and of the Board of Directors
may receive economic benefits as a result of the Merger, including benefits
pursuant to certain severance agreements entered into between the Company and
certain executives in connection with the Merger. See "MANAGEMENT-- Executive
Compensation--Severance Agreements Entered into in Connection with the Merger."
In addition, certain directors and executive officers of the Company hold Common
Stock as well as options to purchase Common Stock. See "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Furthermore, the Excluded Assets will
be owned by Newco, a private company to be controlled by one or more of the
principal Stockholders and to be operated by the Company's current management.
The proceeds of the Newco Transaction will be distributed to all of the
Stockholders. See "THE MERGER AGREEMENT--Excluded Assets." For additional
information concerning such benefits, shareholdings, options and other interests
of certain persons in the Merger, see "INTERESTS OF CERTAIN PERSONS IN THE
MERGER."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO COMMON STOCKHOLDERS
The Merger will be a taxable transaction to Stockholders. For federal
income tax purposes, Stockholders will generally recognize gain or loss in the
Merger in an amount determined by the difference between the cash received and
their tax basis in the Common Stock exchanged therefor. For further information
regarding certain federal income tax consequences to Stockholders, see "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES TO COMMON STOCKHOLDERS."
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of August 26, 1996, the directors and executive officers of the Company
beneficially owned, in the aggregate, 776,262 shares of Common Stock (excluding
certain shares which could be acquired upon the exercise of options),
representing approximately 2.7% of the Company's outstanding shares. To the
knowledge of the Company, such directors and executive officers of the Company
intend to vote their outstanding shares of Common Stock for the approval and
adoption of the Merger Agreement. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
MARKET PRICES OF COMMON STOCK
The Common Stock is traded on the American Stock Exchange (the "AMEX")
under the symbol "CKT." On April 26, 1996, the last trading day before the
public announcement of the execution of the Merger Agreement, the reported high
and low sale prices per share of Common Stock were $10.25 and $10.00,
respectively. On August 28, 1996, a recent trading day prior to the date of this
Proxy Statement, the reported closing sale price per share of Common Stock was
$11.00. For additional information concerning historical market prices of the
Common Stock, see "THE PARTIES TO THE MERGER--The Company-- Price Range of
Common Stock and Dividend History."
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The summary historical financial information of the Company set forth below
should be read in conjunction with, and is qualified in its entirety by,
financial statements contained in "SELECTED FINANCIAL DATA," the discussion
contained in "THE PARTIES TO THE MERGER--The Company-- Capitalization" and the
financial statements of the Company, properties acquired from Towermarc and
Sabal (the "CRT Acquired Properties"), CRI and Crocker & Sons, Inc. (and the
related notes thereto) and other financial information included elsewhere in
this Proxy Statement. See "INDEX TO FINANCIAL STATEMENTS."
SUMMARY SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------------- JUNE 30,
PREDECESSOR PREDECESSOR -----------------------
PRO FORMA HISTORICAL HISTORICAL HISTORICAL PRO FORMA HISTORICAL
1995(1) 1995(3) 1994(4) 1993(5) 1996(1)(2) 1996
------- ------- ------- ------- ---------- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental income and tenant
reimbursements........................ $ 66,474 $ 42,489 $ 37,047 $ 3,813 $ 35,124 $ 34,604
Management income(5).................... 2,654 770 -- -- 1,173 1,162
Interest and other(6)................... 1,233 1,007 318 155 672 671
--------- --------- --------- --------- --------- ---------
Total revenue....................... $ 70,361 $ 44,266 $ 37,365 $ 3,968 $ 36,969 $ 36,437
--------- --------- --------- --------- --------- ---------
Expenses:
Operating expenses...................... $ 15,648 $ 8,632 $ 5,601 $ 611 $ 8,970 $ 8,845
Real estate taxes and insurance......... 6,678 3,680 3,343 359 3,388 3,559
General and administrative.............. 5,189 2,813 505 135 2,896 2,896
Cost incurred for Terminated Offering... -- -- -- -- 486 486
Management fees......................... 444 1,289 2,122 219 203 203
Depreciation and amortization........... 12,247 7,366 5,110 525 6,430 6,322
Interest(7)............................. 21,901 16,212 14,001 1,563 10,635 10,420
--------- --------- --------- --------- --------- ---------
Total expenses...................... $ 62,107 $ 39,992 $ 30,682 $ 3,412 $ 33,008 $ 32,731
========= ========= ========= ========= ========= =========
Income before extraordinary item......... $ 8,254 $ 4,274 $ 6,683 $ 556 $ 3,961 $ 3,706
========= ========= ========= ========= ========= =========
Income before extraordinary item per
share(8)................................ $ 0.31 $ 0.31 $ N/A $ N/A $ 0.15 $ 0.14
========= ========= ========= ========= ========= =========
BALANCE SHEET DATA:
Real estate assets, before accumulated
depreciation and amortization........... N/A $ 302,156 $ 208,544 $ 203,767 $ 375,236 $ 392,442
Real estate assets, after accumulated
depreciation and amortization........... N/A $ 290,566 $ 203,265 $ 203,249 $ 358,156 $ 375,362
Total assets............................. N/A $ 324,676 $ 223,211 $ 221,996 $ 398,941 $ 416,147
Total debt............................... N/A $ 181,873 $ 160,000 $ 160,000 $ 244,267 $ 244,267
Total liabilities........................ N/A $ 190,537 $ 165,322 $ 164,690 $ 259,456 $ 259,456
CASH FLOW INFORMATION:
Net cash flow provided by operating
activities.............................. $ 16,924 $ 7,771 $ 10,830 $ 4,661 $ 14,073 $ 13,697
Net cash flow used in investing
activities............................... $ (49,500) $ (47,059) $ (6,567) $(204,243) $ (10,039) $ (10,039)
Net cash flow provided by (used in)
financing activities.................... $ 49,488 $ 44,875 $ (5,073) $ 200,524 $ 375 $ 375
OTHER DATA:
Funds from Operations(9)................. $ 21,410 $ 12,257 $ 12,463 $ 1,165 $ 11,463 $ 11,087
Cash dividends declared per share(10).... N/A $ 0.20 N/A N/A N/A $ 0.34
Book value per share(11)................. N/A $ 5.74 N/A N/A N/A $ 5.80
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
1995(4)
-------
<S> <C>
OPERATING DATA:
Revenue:
Rental income and tenant
reimbursements........................ $ 18,537
Management income(5).................... --
Interest and other(6)................... 492
---------
Total revenue....................... $ 19,029
---------
Expenses:
Operating expenses...................... $ 2,964
Real estate taxes and insurance......... 1,619
General and administrative.............. 319
Cost incurred for Terminated Offering... --
Management fees......................... 1,016
Depreciation and amortization........... 3,018
Interest(7)............................. 6,991
---------
Total expenses...................... $ 15,927
=========
Income before extraordinary item......... $ 3,102
=========
Income before extraordinary item per
share(8)................................ $ 0.25
=========
BALANCE SHEET DATA:
Real estate assets, before accumulated
depreciation and amortization........... $ 210,655
Real estate assets, after accumulated
depreciation and amortization........... $ 202,681
Total assets............................. $ 236,286
Total debt............................... $ 160,000
Total liabilities........................ $ 168,388
CASH FLOW INFORMATION:
Net cash flow provided by operating
activities.............................. $ 6,635
Net cash flow used in investing
activities............................... $ (3,297)
Net cash flow provided by (used in)
financing activities.................... $ (524)
OTHER DATA:
Funds from Operations(9)................. $ 6,475
Cash dividends declared per share(10).... $ 0.10
Book value per share(11)................. $ 5.12
</TABLE>
- -----------------------------------
(1) Statement of operations data have been presented as if the following
transactions had occurred on January 1, 1995; (i) the Company had issued
8,818,231 shares of Common Stock at $7.35 per share to AEW, (ii) the Sabal
Acquisition, (iii) the merger of the predecessor to CRI with and into CRI
pursuant to the Agreement and Plan of Merger, dated as of September 29,
1994, as amended, by and among CRI, the Company and the predecessor to CRI
(the "CRI Merger") and the Management Subsidiary Merger (as hereinafter
defined), (iv) the Company had issued 1,875,000 shares of Common Stock at
$8.00 per share to Fortis, (v) the Towermarc Acqusition and (vi) the Newco
transaction (see note 2 below).
(2) Balance sheet data have been presented as if the following transactions had
occurred on June 30, 1996: The August 1996 sale to Newco of the Excluded
Assets, the assumption by Newco of Excluded Liabilities, and the Special
Dividend related thereto for Stockholders of record on August 26, 1996
payable on August 30, 1996. The Excluded Assets consist of parcels of
undeveloped land owned by the Company with a book value of $17.2 million as
of June 30, 1996 and contracts to acquire new properties. Such contracts
have no book value at June 30, 1996. If the Merger is not ultimately
consummated, the Company may elect to require Newco to transfer the
Excluded Assets back to the Company at Newco's cost. The historical
financial statements of operating properties subject to the existing
purchase contracts that are included in the Excluded Assets, and the pro
forma effects thereof, have not been provided and are not included in this
pro forma consolidated balance sheet or related statement of
11
<PAGE>
operations because management currently considers the likelihood of
exercising its election to reacquire the Excluded Assets from Newco to be
remote and such information is not otherwise considered by management to be
material to invetstors.
The Excluded Liabilities to be assumed by Newco are (i) the payment
obligations under a master lease to be entered into between Newco and
Highwoods, which total $1.8 million, (ii) any liability arising out of the
Company's indemnification obligation with respect to a particular lawsuit,
(iii) amounts payable to Highwoods relating to expenses incurred by the
Company in connection with the Merger (including solicitation fees payable,
if any, in connection with the exercise of the Public Warrants) in excess
of $9,150,000, if any. No adjustments are required to the pro forma
consolidated balance sheet of the Company as of June 30, 1996 to reflect
the assumption of the Excluded Liabilities by Newco.
(3) Statement of operations data represents the Company's activity for the year
ended December 31, 1995, which consists of 12 months of operations for the
Mortgage Note Properties (as hereinafter defined) and the properties of the
Fontaine Partnership (collectively, the "Partnership Properties") and the
six months of operations for the period ended December 31, 1995 for CRI,
Management Subsidiary and Leasing Company. Balance sheet data represents
the consolidated assets, liabilities and stockholders equity of the Company
at December 31, 1995.
(4) Represents the combined historical data for the Financing Partnership and
the Fontaine Partnership (collectively, the "Partnerships"). The
Partnerships' inception dates occurred in the fourth quarter of 1993.
(5) Includes property management, development and construction fees, and
leasing and brokerage commissions from third parties.
(6) Includes gain on sale of land of $124,000 in historical and pro forma 1995.
(7) Interest expense includes amortization of deferred loan costs of $594,000,
$737,000, $667,000 and $84,000 for pro forma 1995 and historical 1995, 1994
and 1993, respectively, $584,000 for pro forma six months ended June 30,
1996, and $571,000 and $325,000 for the six months ended June 30, 1996 and
1995, respectively.
(8) Based on 26,925,431, 13,537,976, 26,958,145, 26,705,705, and 12,565,071,
weighted average number of shares of Common Stock outstanding for pro forma
and historical 1995, pro-forma six months ended June 30, 1996 and
historical six months ended June 30, 1996 and 1995, respectively.
(9) Funds from Operations ("FFO") is defined by the NAREIT (as hereinafter
defined) as net income or loss excluding gains or losses from debt
restructuring and sales of property plus depreciation and amortization, and
after adjustments for minority interests, unconsolidated partnerships and
joint ventures (adjustments for minority interests, unconsolidated
partnerships and joint ventures are calculated to reflect FFO on the same
basis). FFO does not represent cash flow from operating activities as
defined by generally accepted accounting principles, should not be
considered as an alternative to net income as an indicator of the Company's
operating performance and is not indicative of cash available to fund all
cash flow needs. The Company generally considers FFO to be an appropriate
measure of the performance of an equity REIT because it is predicated on a
cash flow analysis, as opposed to a measure predicated on generally
accepted accounting principles, which gives effect to non-cash items such
as depreciation. Since there is no formally agreed upon calculation of FFO,
and the National Association of Real Estate Investment Trusts ("NAREIT")
definition thereof is merely a gudeline, computation of FFO may vary from
one REIT to another. In March 1995, NAREIT issued a clarification of its
definition of FFO. The clarification provides that amortization of deferred
financing costs and depreciation of non-rental real estate assets are no
longer to be added back to net income in arriving at FFO. The Company
adopted these changes effective January 1, 1996. The amounts in this table
do not include the effect of the new clarifications. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Pro Forma Funds From Operations."
The following table presents old computation of the Funds From Operations
for each period presented:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE SIX MONTHS
-------------------------------------------------- ENDED JUNE 30,
PREDECESSOR PREDECESSOR ----------------------
PRO FORMA HISTORICAL HISTORICAL HISTORICAL PRO FORMA HISTORICAL
1995 1995 1994 1993 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item......... $ 8,254 $ 4,274 $ 6,683 $ 556 $ 3,961 $ 3,706
Add back:
Depreciation and amortization on real
estate assets......................... $ 10,940 $ 6,354 $ 4,761 $ 518 $ 5,659 $ 5,552
Depreciation on non-real estate
assets................................ 90 60 -- -- 82 82
Amortization of deferred leasing
costs................................. 682 682 349 7 421 420
Amortization of deferred loan costs..... 1,029 737 667 84 584 571
Amortization of goodwill and management
contracts............................. 535 270 -- -- 268 268
Amortization of organization costs...... 4 4 3 -- 2 2
Cost incurred for terminated offering... -- -- -- -- 486 486
Deduct:
Gain on sale of land.................... (124) (124) -- -- -- --
--------- --------- --------- --------- --------- ---------
Funds From Operations.................... $ 21,410 $ 12,257 $ 12,463 $ 1,165 $ 11,463 $ 11,087
========= ========= ========= ========= ========= =========
</TABLE>
HISTORICAL
1995
----
Income before extraordinary item......... $ 3,102
Add back:
Depreciation and amortization on real
estate assets......................... $ 2,703
Depreciation on non-real estate
assets................................ 9
Amortization of deferred leasing
costs................................. 334
Amortization of deferred loan costs..... 325
Amortization of goodwill and management
contracts............................. --
Amortization of organization costs...... 2
Cost incurred for terminated offering... --
Deduct:
Gain on sale of land.................... --
---------
Funds From Operations.................... $ 6,475
=========
(10) Based on 26,705,705, 12,565,071 and 13,537,976 weighted average number of
shares of Common Stock outstanding during the six months ended June 30,
1996 and 1995, and the year ended December 31, 1995, respectively. 1995
excludes and 1996 includes a special dividend of $0.03 per share related to
the Company's 1995 REIT dividend distribution requirements, which dividend
was declared on March 7, 1996 for Stockholders of record on March 18, 1996
and was paid on March 28, 1996.
(11) Based on 23,362,492, 26,989,587 and 13,265,000 shares of Common Stock
outstanding as of December 31, 1995, June 30, 1996 and June 30, 1995,
respectively.
12
<PAGE>
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Each copy of this Proxy Statement mailed to Stockholders is accompanied by
a proxy card furnished in connection with the solicitation of proxies by the
Board of Directors for use at the Special Meeting. The Special Meeting is
scheduled to be held at 10:00 a.m. (local time) on Friday, September 20, 1996 at
the Boca Raton Marriott, 5150 Town Center Circle, in Boca Raton, Florida. At the
Special Meeting, Stockholders will consider and vote upon (i) a proposal to
approve and adopt the Merger Agreement and the transactions contemplated
thereby, including the Merger, and (ii) such procedural matters, including,
without limitation, potential adjournments of the Special Meeting, and such
other matters as may properly be brought before the Special Meeting. See "OTHER
MATTERS."
The Board of Directors has determined that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are advisable and in
the best interests of the Company and its Stockholders and has unanimously
approved and adopted the Merger Agreement and the transactions contemplated
thereby, including the Merger. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER. See
"THE MERGER--Background of the Merger," "THE MERGER-- Reasons for the Merger"
and "THE MERGER AGREEMENT."
STOCKHOLDERS ARE REQUESTED TO PROMPTLY COMPLETE, DATE, SIGN AND RETURN THE
ACCOMPANYING PROXY CARD TO THE COMPANY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE SPECIAL
MEETING WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" THE MERGER AGREEMENT.
RECORD DATE AND VOTING
The Board of Directors has fixed the close of business on August 26, 1996
as the Record Date for the determination of the holders of Common Stock entitled
to notice of and to vote at the Special Meeting. Only Stockholders of record at
the close of business on that date will be entitled to notice of and to vote at
the Special Meeting. At the close of business on the Record Date, there were
29,108,007 shares of Common Stock outstanding and entitled to vote at the
Special Meeting held by 60 Stockholders of record.
Each holder of Common Stock on the Record Date will be entitled to one vote
for each share of Common Stock held of record upon each matter properly
submitted at the Special Meeting. The presence, either in person or by proxy, of
a majority of the outstanding shares of Common Stock entitled to be voted at the
Special Meeting is necessary to constitute a quorum thereat. Abstentions
(including broker non-votes) are included in the calculation of the number of
votes represented at the meeting for purposes of determining whether a quorum
has been achieved.
If the enclosed proxy card is properly executed and received by the Company
in time to be voted at the Special Meeting, the shares of Common Stock
represented thereby will be voted in accordance with the instructions marked
thereon. Executed proxies with no instructions indicated thereon will be voted
"FOR" approval and adoption of the Merger Agreement and the transactions
contemplated thereby, including the Merger.
The Board of Directors is not aware of any matters other than those set
forth in the Notice of Special Meeting of Stockholders that may be brought
before the Special Meeting. If any other matters properly
13
<PAGE>
come before the Special Meeting, the persons named in the accompanying proxy
will vote the shares represented by all properly executed proxies on such
matters in such manner as shall be determined by a majority of the Board of
Directors, except that shares represented by proxies which have been voted
"AGAINST" the Merger Agreement will not be used to vote "FOR" adjournment of the
Special Meeting for the purpose of allowing additional time for soliciting
additional votes "FOR" the Merger. See "--Vote Required; Revocability of
Proxies" and "OTHER MATTERS."
STOCKHOLDERS SHOULD NOT FORWARD ANY COMPANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS. IN THE EVENT THE MERGER IS CONSUMMATED, COMPANY STOCK CERTIFICATES
SHOULD BE DELIVERED IN ACCORDANCE WITH INSTRUCTIONS SET FORTH IN THE COMPANY
LETTER OF TRANSMITTAL, WHICH WILL BE SENT TO STOCKHOLDERS BY THE EXCHANGE AGENT
PROMPTLY AFTER THE EFFECTIVE TIME.
VOTE REQUIRED; REVOCABILITY OF PROXIES
The affirmative vote of holders of at least two-thirds of the outstanding
shares of Common Stock entitled to vote thereon is required to approve and adopt
the Merger Agreement and the transactions contemplated thereby, including the
Merger.
The required vote of the Stockholders on the Merger Agreement and the
transactions contemplated thereby, including the Merger, is based upon the total
number of outstanding shares of Common Stock as of the Record Date. Therefore,
the failure to submit a proxy card (or to vote in person at the Special Meeting)
or the abstention from voting by a Stockholder (including broker non-votes) will
have the same effect as an "AGAINST" vote with respect to approval and adoption
of the Merger Agreement and the transactions contemplated thereby, including the
Merger.
A proxy may be revoked prior to its being voted by: (i) giving written
notice of revocation to the Secretary of the Company, (ii) giving a later dated
proxy or (iii) attending the Special Meeting and voting in person. Any written
instrument revoking a proxy should be sent to: Crocker Realty Trust, Inc., 433
Plaza Real, Suite 335, Boca Raton, Florida 33432, Attention:
Secretary.
If a quorum is not obtained, or if fewer shares of Common Stock than the
number required therefor are voted in favor of approval and adoption of the
Merger Agreement and the transactions contemplated thereby, including the
Merger, it is expected that the Special Meeting will be postponed or adjourned
in order to permit additional time for soliciting and obtaining additional
proxies or votes, and, at any subsequent reconvening of the Special Meeting, all
proxies will be voted in the same manner as such proxies would have been voted
at the original convening of the Special Meeting, except for any proxies which
have theretofore effectively been revoked or withdrawn.
No vote of the stockholders of Highwoods is required in connection with the
Merger Agreement.
The obligations of the Company and Highwoods to consummate the Merger
Agreement are subject to, among other things, the condition that the
Stockholders, by the requisite vote thereof, approve and adopt the Merger. See
"THE MERGER AGREEMENT--Conditions Precedent to the Merger."
The agreement by the Sellers, pursuant to the Stock Purchase Agreement, to
(i) vote in favor of the Merger or any other transaction contemplated by the
Merger Agreement and (ii) to grant CAC a proxy with respect to their shares of
Common Stock in respect of certain matters, including the Merger and the other
transactions contemplated by the Merger Agreement, will mean that there will be
quorum at the Special Meeting and sufficient votes cast for approval and
adoption of the Merger Agreement and the transactions
14
<PAGE>
contemplated thereby, including the Merger, to ensure its passage without the
vote of any other Stockholder. Moreover, if the closing under the Stock Purchase
Agreement occurs prior to the Record Date, a quorum will be present at the
Special Meeting and sufficient votes will be cast for approval and adoption of
the Merger Agreement and the transactions contemplated thereby, including the
Merger, to ensure its passage without the vote of any other Stockholder,
assuming CAC votes the shares of Common Stock purchased at such closing in favor
of approval and adoption of the Merger Agreement and the transactions
contemplated thereby, including the Merger. If a closing under the Stock
Purchase Agreement occurs prior to the Effective Time, there will be fewer
conditions to consummation of the Merger than if such closing does not occur.
See "THE MERGER AGREEMENT--Conditions Precedent to the Merger" and "THE STOCK
PURCHASE AGREEMENT."
SOLICITATION OF PROXIES
All costs of this solicitation will be borne by the Company. In addition to
the use of the mails, proxies may be solicited personally or by telephone by
some of the regular employees of the Company. The Company does not expect to pay
any compensation for the solicitation of proxies but will reimburse brokers and
other persons holding stock in their names, or in the names of nominees, for
their expenses incurred in sending proxy materials to their principals and
obtaining their proxies.
15
<PAGE>
THE PARTIES TO THE MERGER
THE COMPANY
The Company is a fully integrated, self-administered and self-managed real
estate investment company with in-house expertise in management, leasing,
acquisition, development and construction of office properties in the
Southeastern United States. The Company owns and operates 70 Class A office
buildings, located in the following 16 markets throughout the Southeastern
United States:
FLORIDA NORTH CAROLINA SOUTH CAROLINA
Tampa Charlotte Greenville
Boca Raton Raleigh Columbia
Orlando Asheville
Jacksonville Greensboro VIRGINIA
Winston-Salem Chesapeake
TENNESSEE GEORGIA ALABAMA
Memphis Norcross (suburban Atlanta) Birmingham
Nashville
The Company also owns the Land (approximately 258 acres) and the Land
Options (to acquire up to approximately 47 acres). The Company operates on a
regional management basis, with regional offices located in Boca Raton, Florida,
Charlotte, North Carolina, Atlanta, Georgia, and Memphis, Tennessee. In
addition, each Property has on-site management. The Company qualified as a REIT
for federal income tax purposes for the year ended December 31, 1995 and made an
election to be taxed as a REIT for such year.
The Company is led by an experienced management team. The Company's senior
management, which includes Thomas J. Crocker, Richard S. Ackerman and Robert E.
Onisko (collectively, the "Executive Officers"), four senior asset managers and
five junior asset managers, has been in the real estate industry for an average
of more than 16 years, with experience in all aspects of the real estate
industry. Since 1984, entities owned or controlled by one or more of the
Executive Officers have acquired, developed or redeveloped and repositioned
commercial properties, including Mizner Park, a mixed use property that includes
office and retail space and residential units, which is located in Boca Raton,
Florida, and Crocker Center, a mixed use project that includes office and retail
space and a hotel which is also located in Boca Raton, Florida.
In December 1992, the Executive Officers formed a self-administered REIT
(the "Original REIT") that completed an initial public offering in January 1993
and engaged in a reorganization (the "Reorganization") that resulted in its
merger into the Company on July 1, 1995. The Reorganization consisted of a
series of transfers and mergers designed to consolidate the ownership of certain
of the Properties and the management operations of certain predecessors of the
Company, as well as to enable the Company to qualify as a REIT for federal
income tax purposes. The Reorganization resulted in the transfer to the Company
of (i) 47 of the Properties and the Land Options by Apollo Real Estate
Investment Fund, L.P. ("Apollo Fund") and its affiliates, including Apollo Real
Estate Advisors, L.P. ("AREA"), (ii) three of the Properties by the Original
REIT and (iii) certain leasing, brokerage and management businesses by the
Executive Officers and Mr. Crocker's wife. For REIT qualification purposes, the
Company's third-party leasing and brokerage businesses were subsequently
contributed to Leasing Company. The 50 Properties transferred by Apollo Fund and
its affiliates and the Original REIT are collectively referred to as the
"Original Properties."
16
<PAGE>
The Company's sophisticated accounting and property management information
systems enable the Company to report standardized financial revenue and expense
data, compile occupancy and turnover data and track lease negotiations. The
Company operates a centralized accounting department at its corporate offices in
Boca Raton, Florida, that allows for full integration and management of property
management activities. However, each of the regional and property management
offices is fully equipped with standardized hardware, software and read-only
capabilities with the centralized system in Boca Raton.
The Company is a Maryland corporation. The Company's executive offices are
located at 433 Plaza Real, Suite 335, Boca Raton, Florida 33432, and its
telephone number is (407) 395-9666. The Company maintains regional offices in
Boca Raton, Florida, Charlotte, North Carolina, Atlanta, Georgia and Memphis,
Tennessee, with a senior asset manager resident in each office.
SUBSIDIARIES OF THE COMPANY
The Company holds the Properties through two partnerships and three
corporations. Forty-six of the Properties are held by Financing Partnership, a
Delaware limited partnership that was formed on November 17, 1993 for the sole
purpose of acquiring such Properties from NationsBank of North Carolina, N.A.,
as trustee for the NCNB Real Estate Fund ("NationsBank"). Fontaine Partnership
is a Delaware limited partnership formed on October 28, 1993 for the sole
purpose of acquiring one of the Properties. Neither partnership has employees
and their activities are carried out by the Company and its subsidiaries. The
corporate subsidiaries hold the remaining 23 Properties as follows: three are
owned by CRI, a Florida corporation, 15 are owned by CRT Florida Holdings, Inc.,
a Florida corporation, and five are owned by CRT Tennessee Holdings Corp., a
Tennessee corporation.
The Company conducts its property management business through Management
Subsidiary, a real estate operating company specializing in property management,
leasing development and construction management of office buildings and mixed
use properties. In addition to the Properties, Management Subsidiary currently
manages approximately 2.2 million square feet of commercial property, 70% of
which space is attributable to affiliates of the Company. See "--Business and
Properties--Third-Party Management, Leasing and Development." Management
Subsidiary is the successor to the businesses of Crocker Realty Management
Services, Inc. and Crocker & Sons, Inc. (other than the third-party leasing and
brokerage businesses which are conducted by Leasing Company) and to the
construction management business previously conducted by Crocker Construction
Company.
The Land is held by CRT Florida Development, Inc., a Florida corporation,
CRT Tennessee Development Corp., a Tennessee corporation, and Leasing Company.
The Land Options are held by Land Options Subsidiary, which was formed for the
purpose of acquiring and holding the Land Options and does not presently conduct
any operating business.
Leasing Company was formed to enable the Company to benefit, in a manner
consistent with the Company's status as a REIT, from the income of the
third-party leasing and brokerage business formerly conducted by predecessor
entities. Leasing Company is responsible for leasing and brokerage services
provided to properties owned by third parties, including entities owned, in
whole or in part, or controlled, by Messrs. Crocker and Ackerman. Leasing
Company also owns the land acquired from Sabal Corporation. See "--Recent
Developments." In order to facilitate the Company's qualification as a REIT
while realizing income from third-party leasing and brokerage activities, as
well as from possible sales of undeveloped land, all of the Company's
third-party leasing and brokerage activities, and substantially all ownership of
undeveloped land, are conducted through Leasing Company. Messrs. Crocker and
Ackerman each hold approximately 1.6% of the common stock of Leasing Company,
Apollo holds 56.1% of the common stock of Leasing Company, AEW holds 37.7% of
the common stock of Leasing Company and the Company holds 100% of the non-voting
preferred stock and 3.1% of the common stock of Leasing Company. The
17
<PAGE>
preferred stock of Leasing Company is entitled to dividends equal to 95% of all
distributions of Leasing Company. As a result of its holding of all of the
non-voting preferred stock of Leasing Company, the Company expects to receive
substantially all of the available net cash flow from Leasing Company, and
thereby will enjoy substantially all of the net economic benefit of the business
carried on by Leasing Company. The income earned by Leasing Company is subject
to federal, state and local income taxes.
RECENT DEVELOPMENTS
The Company has implemented its strategies to expand its presence in
existing markets and to enter new markets within the Southeastern United States.
The Company has financed such expansion through private placements of Common
Stock to sophisticated investors and the assumption of indebtedness related to
certain of the Properties acquired.
ACQUISITIONS. In two transactions that occurred in December 1995 and
January 1996, the Company acquired an aggregate of 20 Class A office buildings
(approximately 1.3 million rentable square feet) and approximately 294 acres of
undeveloped land (of which the Company sold 48 acres and entered into a contract
to sell 15 acres). Consistent with the Company's strategy, the recent
acquisitions were accomplished on a privately negotiated basis and at prices
which the Company believes to be below replacement costs. Each of the newly
acquired properties is consistent with the Company's standards with respect to
quality and location.
The Sabal Acquisition. On December 29, 1995, the Company completed the
acquisition of 11 Class A office buildings and approximately 278 acres of
undeveloped land within Sabal Park in Tampa, Florida, from subsidiaries of Stone
and Webster Incorporated. The assets were acquired for an aggregate cash
consideration of $42.5 million. The allocated purchase price for the buildings
was $29.5 million (equivalent to approximately $51.66 per square foot). Based on
net operating income for 1995 of $3.8 million, the capitalization rate was 12.9%
on the acquisition. The allocated purchase price for the undeveloped land was
$13.0 million. The Company believes that the price paid for the buildings is
below replacement cost. Prior to the Sabal Acquisition, the Company owned six
buildings (334,000 rentable square feet) in Sabal Park. The buildings acquired
consist of an aggregate of 571,000 feet and had an occupancy rate in excess of
95% at December 31, 1995.
In a concurrent transaction, the Company contracted to sell approximately
63 acres of the land to Security Capital Industrial Trust for an aggregate
consideration of approximately $2.9 million, resulting in a net gain of 15.4% on
the land sold. Approximately 48 of such acres were sold on December 29, 1995.
The sale of remaining land (consisting of two parcels) is contingent upon the
resolution or satisfaction of certain conditions. The land sold is industrial
land and is not suitable for office development. The undeveloped land held by
the Company is expected to be suitable for possible future development of
approximately 3.4 million rentable square feet of office space.
Including the assets acquired in the Sabal Acquisition, the Company owns 17
buildings in Sabal Park. Consistent with the Company's strategy, the Sabal
Acquisition expanded the Company's existing presence in a desirable office park
and the undeveloped land acquired provides additional opportunities to expand
further such presence in the future. The Sabal Acquisition is part of the
Company's plan for continued development at Sabal Park, particularly on the east
side of the park. The buildings acquired are Class A office buildings,
consistent with the level of quality of the Company's portfolio with respect to
construction, maintenance, amenities and location. The Company maintains a local
office at Sabal Park with a staff of approximately 15 employees involved in
property management and leasing of the Company's Tampa, Orlando and
Jacksonville, Florida holdings. In connection with the Sabal Acquisition, the
Company hired five former employees of Stone and Webster Incorporated who
continue to perform leasing and property management functions at Sabal Park.
18
<PAGE>
The Towermarc Acquisition. On January 16, 1996, the Company completed the
acquisitions from affiliates of Towermarc Corporation of the following: (i) nine
Class A office buildings located in Memphis, Tennessee, and in Tampa and
Jacksonville, Florida, (ii) approximately 16 acres of undeveloped land in
Memphis and Tampa and (iii) management contracts for an aggregate of
approximately 700,000 square feet of space in Memphis and Tampa. The aggregate
consideration for the acquisitions was approximately $81.4 million and was paid
as follows: (i) $67.2 million in the form of assumption of indebtedness, (ii)
1,687,939 unregistered shares of Common Stock, and (iii) approximately $900,000
in cash. The purchase price for the buildings was $78.0 million (equivalent to
approximately $114.20 per square foot). Based on net operating income for 1995
of $7.5 million, the capitalization rate was 9.6% on the Towermarc Acquisition.
The purchase price for the undeveloped land was $3.4 million. Subsequent to the
closing, the Company paid down an aggregate of approximately $9.4 million of the
debt assumed.
The buildings acquired consist of an aggregate of 683,000 square feet and
had a 95% occupancy rate at December 31, 1995. Of the nine buildings, five are
located in suburban Memphis, three in the Westshore area of Tampa and one in
Jacksonville's Deerwood Park. The buildings are each Class A office buildings
consistent with the quality standards applied to the Company's portfolio. The
land is expected to be suitable for possible future development of 300,000
rentable square feet of office space. The Towermarc Acquisition expanded the
Company's presence in strategic markets in Florida and Tennessee. In connection
with that acquisition, the Company established a regional office in Memphis and
hired 15 former employees of Towermarc Corporation who continue to perform
leasing and asset and property management in Memphis, Tampa and Jacksonville.
Concurrently with the closing of the Towermarc Acquisition, the Company
entered into a registration rights agreement with the affiliates of Towermarc
Corporation that received the shares of Common Stock. See "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT-- Registration Rights."
FINANCING TRANSACTIONS. In addition to the assumption of indebtedness and
issuance of shares in connection with Towermarc Acquisition, the Company has
capitalized on its ability to finance its activities through the sale of its
equity securities and the establishment of credit facilities. Since its
formation, the Company has directly negotiated and consummated two private
placements of Common Stock.
AEW Private Placement. On July 28, 1995, the Company entered into a
commitment to sell 8,818,231 unregistered shares of Common Stock to AEW pursuant
to a stock purchase agreement. The proceeds of the sale of the Common Stock were
$64,808,553 or approximately $7.35 per share. The closing price of the Common
Stock on the day prior to the commitment was $7.25. The net proceeds from the
sale, which was consummated on December 28, 1995, were used to repay $20 million
of indebtedness and to fund the Sabal Acquisition.
In connection with the closing of the private placement to AEW, the Company
entered into an amended and restated registration rights agreement with certain
Stockholders, including AEW and Apollo. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT-- Registration Rights."
In connection with the private placement to AEW, the Company, Leasing
Company, Apollo and AEW also entered into a Stockholders Agreement, dated as of
December 28, 1995, as amended (the "Stockholders Agreement"), pursuant to which,
among other things, AEW has the right to designate two representatives, and
Apollo has the right to designate three representatives, to serve on the Board
of Directors. AEW and Apollo also agreed to vote their shares in favor of two
Executive Officers and two independent individuals for the remaining seats on
the Board of Directors. The Stockholders Agreement also restricts Apollo and AEW
from selling any portion of their respective interests in the Company without
the consent of the other, prior to December 28, 1997 (except to certain
permitted transferees or in
19
<PAGE>
connection with a public offering by the Company) and provides for certain
rights of first refusal, parallel exit rights and buy/sell rights. The Company
is restricted by the terms of the Stockholders Agreement from taking certain
actions without the prior consent of Apollo and AEW, in each case, for so long
as such entity (and its transferees) owns 10% of the Common Stock. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT--Stockholders Agreement."
Fortis Private Placement. On January 9, 1996, the Company contracted to
sell an aggregate of 1,875,000 shares of Common Stock to Fortis. The proceeds of
the sale, which was consummated on January 12, 1996, were $15 million, or $8.00
per share. The closing price of the Common Stock on the date prior to the
contract was $8.875. The net proceeds from the sale to Fortis were used to pay
down certain indebtedness assumed in connection with the Towermarc Acquisition
and for other general corporate purposes.
In connection with the private placement to Fortis, the Company also
entered into a registration rights agreement with Fortis. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT--Registration Rights."
Line of Credit. On March 20, 1996, the Company entered into an agreement
with The First National Bank of Boston for a full recourse $20 million secured
revolving credit facility. The Line of Credit has a term of three years and
bears interest at either LIBOR plus 175 basis points or The First National Bank
of Boston's Base Rate plus 75 basis points, at the Company's option. As of the
date of this Proxy Statement, the Company has drawn $7 million on the Line of
Credit. The Line of Credit is available to fund acquisitions and development
activities, as well as for the refinancing of indebtedness and for general
corporate purposes, and is subject to customary covenants and reporting
requirements.
PENDING TRANSACTIONS. Consistent with the Company's objectives, the Company
is continually exploring opportunities for the acquisition and development of
additional Class A office buildings in strategic markets in the Southeastern
United States.
Pending Acquisitions. Prior to entering into the Merger Agreement, the
Company (i) had entered into a contract to acquire a 51,800 square foot building
located in the Deep River Corporate Center in Greensboro, North Carolina ("Deep
River Improved Property", and the contract to acquire such property, "Deep River
Improved Property Contract") and (ii) was negotiating to acquire (a)
approximately 22.13 acres of unimproved property located in the Deep River
Corporate Center in Greensboro, North Carolina ("Deep River Unimproved
Property"), (b) six multi-tenant office/warehouse buildings and other
improvements known as Colony Center located in Gwinnett County, Georgia ("Colony
Center Property"), (c) certain improved property known as Woodlands III, located
in Ridgeland, Mississippi ("Woodlands III Property"), (d) certain improved
property known as Woodlands V located in Ridgeland, Mississippi ("Woodlands V
Property"), (e) certain improved property known as Woodlands I & II located in
Ridgeland, Mississippi ("Woodlands I & II") and (f) certain improved property
known as Patewood I & II located in Greenville, South Carolina ("Patewood
Property" and together with Woodlands I & II Property, Woodlands V Property,
Woodlands III Property, Colony Center Property and Deep River Unimproved
Property, the "Negotiation Properties"). The Deep River Improved Property or the
Deep River Improved Property Contract and all of the Company's interest in, and
rights with respect to, the Negotiation Properties are among the Excluded
Assets. See "THE MERGER AGREEMENT--Excluded Assets." To facilitate the removal
of such assets, the Deep River Improved Property Contract and all of the
Company's interest in, and rights with respect to, the Negotiation Properties
were assigned to Newco. Newco has acquired the Deep River Improved Property, has
entered into a contract to acquire the Deep River Unimproved Property and is
actively negotiating contracts to acquire the Colony Center Property, Woodlands
I & II Property, Woodlands III Property and Woodlands V Property. The Company
and Newco have entered into an agreement which provides the Company the option
to acquire the Deep River Improved Property and all of Newco's interest in, and
rights with respect to, the Negotiation Properties for a purchase price equal to
the
20
<PAGE>
sum of Newco's investment in such assets, including all costs incurred by Newco
related thereto, and a return on its capital investment, if the Merger is not
consummated.
Pending Development. The Company is currently developing an approximately
81,000 square foot office building in Center Point Office Park in Columbia,
South Carolina. The Company owns the other office building in that park, which
building was 100% leased at December 31, 1995. The total cost of the project is
expected to be approximately $7.6 million (equivalent to approximately $93.83
per square foot), including the purchase of the land. Pursuant to a contract
entered into with the contractor, the construction costs are fixed. The building
is expected to be completed in the fourth quarter of 1996 and is approximately
50% pre-leased.
SOUTHEAST OFFICE MARKETS
The Southeastern United States generally, as well as the Company Markets in
particular, have experienced significant growth since 1990 and are expected to
continue to experience growth in coming years. From 1990 to 1995, the Southeast
consistently outperformed the nation in terms of population, household formation
and employment growth. During the same time period, the Company Markets
experienced growth, as measured by these indicators, that was greater than the
Southeast as a whole. According to industry reports, the Company Markets are
expected to continue to post higher population, household formation and
employment growth rates than the Southeast or the United States as a whole, at
least through the year 2000. The Company believes that factors contributing to
the strong growth trends of the Southeast generally and of the Company Markets
specifically include low costs of labor and utilities, relaxed regulatory
policies, proximity to Latin American markets, and favorable climate.
Corporate relocation and expansion activity, as well as the developing
tourist and entertainment industries in the Southeast, have been and are
expected to continue to be sources of continued growth. Since 1990, a number of
prominent companies have relocated to or expanded their operations in the
Southeast, including the following in the Company Markets: Holiday Inn
Worldwide, United Parcel Service of America, Inc. and Saab Cars USA, Inc. to
Atlanta, Georgia; MagneTek and Columbia/HCA to Nashville, Tennessee; Panasonic,
Avis, TWA, UPS and MCI to Norfolk, Virginia; and AT&T (27% increase in workforce
by 1998), Walt Disney World Company and Universal Studios in Orlando, Florida.
The Company has been successful in attracting a number of major corporations to
the Company Markets. W.R. Grace & Co., Joseph E. Seagram & Sons, Scott Paper and
USF&G have all recently leased major corporate facilities owned or managed by
the Company. According to industry reports, the tourist and entertainment
industries, ranging from family theme parks to professional sports teams and
from beach resorts to convention centers, will continue to attract businesses as
well as tourists to the Southeastern United States. Four National Football
League teams have, or will have, been added to the Southeast by the end of the
1990s.
The Company believes that the strong performances of the Southeast in
general and of the Company Markets in particular, as measured by the population,
household formation and employment growth rates, have created and will continue
to create favorable office market conditions in terms of lower vacancy rates,
higher rental rates and strong absorption trends. According to industry reports,
occupancy levels and lease rates in the Company Markets generally have improved
in recent years and are expected to continue to improve as existing available
space is absorbed.
ECONOMIC AND DEMOGRAPHIC OVERVIEW. The following provides an economic and
demographic overview of the Southeast and the Company Markets.
21
<PAGE>
Population. From 1990 to 1995, while the population of the United States
grew by 1.1% per year, the population of the Southeast increased at an annual
rate of 1.4%. This increase is believed to be primarily a result of migration by
persons attracted to the job opportunities in the Southeast. According to
industry reports, migration from outside the United States to the region
resulted in the Southeast's accounting for 45% of the national population growth
from 1990 to 1995. During the same period, the Company Markets grew at a
compound average annual rate of 1.8%, 29% faster than the Southeast as a whole.
Further, the forecasted population growth rates for the Company Markets are
higher than those forecasted for the Southeast and the United States as a whole.
Industry reports predict that the Company Markets will post a compound average
annual population growth rate of 1.5% from 1995 to 2000. During the same period,
the Southeast and the United States are expected to have annual population
growth rates of 1.2% and 1.0%, respectively. The following graphs illustrate the
historical and forecasted compound average annual population growth trends for
the years 1990 to 1995 and 1995 to 2000, respectively.
(The following table represents a bar chart in the printed version:)
POPULATION GROWTH TRENDS
1990 - 1995 1995 - 2000
United States 1.1% 1.0%
Southeast 1.4% 1.2%
Company Markets 1.8% 1.5%
Household Formation. In the early 1990s, the rate of household formation in
the Southeast was 1.4% per year as compared to the national annual growth rate
of 1.2%. Like the high population growth rates, household formation in the
Company Markets outpaced that in the Southeast and in the nation with a 1.9%
compound average annual growth rate. According to industry reports, the rate of
household formation in Company Markets will continue to be higher than in the
Southeast and the United States until at least the end of the century. The
Company Markets are expected to have a household formation growth rate of 1.5%
from 1995 to 2000, as compared to 1.2% for the Southeast and 1.0% for the nation
as a whole. The following graphs depict the historical and forecasted compound
average annual household formation rates for the years 1990 to 1995 and 1995 to
2000, respectively.
(The following table represents a bar chart in the printed version:)
HOUSEHOLD FORMATION GROWTH TRENDS
1990 - 1995 1995 - 2000
United States 1.2% 1.0%
Southeast 1.4% 1.2%
Company Markets 1.9% 1.5%
Employment Growth. Higher employment growth rates of the Southeast and the
Company Markets in the early 1990's followed the higher population and household
formation growth rates for these areas. Between 1990 and 1995, while the
national employment growth rate was 1.2% per year, the Southeast's
22
<PAGE>
employment base increased at a rate of 1.7% per year. In comparison, the Company
Markets experienced a compound average annual rate of 2.5%, more than twice the
national rate, during the same period. According to industry reports, the
employment base of the Company Markets should continue to grow at an annual rate
faster than the Southeast or the United States as a whole. It is projected that
through the year 2000 the Company Markets will post a 2.3% compound average
annual rate compared to 1.8% and 1.6% for the Southeast and the United States,
respectively. The following graphs illustrate the historical and forecasted
compound average annual employment growth trends for the years 1990 to 1995 and
1995 to 2000, respectively.
(The following table represents a bar chart in the printed version:)
EMPLOYMENT GROWTH TRENDS
1990 - 1995 1995 - 2000
United States 1.2% 1.2%
Southeast 1.7% 1.8%
Company Markets 2.5% 2.3%
OFFICE MARKET OVERVIEW. The following provides an overview of the office
market in the Southeast and the Company Markets.
Vacancy Rates. From 1990 to 1995, office building vacancy rates in the
Southeast and the Company Markets decreased at a faster rate than vacancy rates
for the United States as a whole. While the national vacancy rate fell by an
average of 5.8% per year to 15.1% in 1995, the Southeast vacancy rate fell by an
average of 7.7% per year to 14.1% and the vacancy rates of the Company Markets
fell by an average of 7.3% per year to 12.8%. The Company believes that the
vacancy rates in the Company Markets for new buildings or buildings competitive
with new buildings, such as the Properties, may be lower than the overall rate.
The overall rate may be higher because it includes older buildings which are
non-competitive with newer buildings and includes buildings located in central
business districts which generally have higher vacancy rates than suburban
markets. The following graph depicts the historical and forecasted average
vacancy rates of the Company Markets for the years 1990 to 1998.
23
<PAGE>
(The following text represents a line graph in the printed version:
AVERAGE VACANCY RATES
Historical and forecasted average vacancy rates for Company Markets for the
years 1990 to 1998 have decreased steadily from a high point of just below 19%
in 1990 to a forecasted low point of just more than 11% in 1998)
Rental Rates. According to industry reports, while gross rental rates for
office space fell in the United States and to a lesser extent in the Southeast
between 1990 and 1995, gross rental rates actually increased slightly in the
Company Markets. The gross rental rates used in industry reports do not reflect
rent concessions, including tenant improvement costs, leasing commissions and
free rent periods. The Company believes that in an improving market rent
concessions are generally discontinued prior to increases in gross rental rates.
Thus, the Company believes that the improvement in the effective rental rates in
the Company Markets is greater than the improvement in gross rental rates.
According to industry reports, gross rental rates are forecasted to grow at an
average annual rate of 3.8% between 1995 and 1998. These reports also indicate
that the majority of the Company Markets had higher rental rates in 1995 than in
1990 and substantially all Company Markets are expected to have higher rental
rates in 1998 than in 1995. Based on industry projections, the Company believes
that 13 of the Company Markets will have rental rates in 1998 that exceed the
1995 rental rates by 5% or more. The following graph depicts the historical and
forecasted average rental rates of the Company Markets for the years 1990 to
1998.
(The following text represents a line graph in the printed version:
AVERAGE RENTAL RATES
Historical and forecasted average rental rates for Company Markets for the years
1990 to 1998 have increased steadily from a low point of just below 16.5% in
1993 to a forecasted high point of 18.25% in 1998.)
24
<PAGE>
Absorption and Construction. Southeast office market conditions are also
benefitting from strong absorption trends. As a result of the limited available
space in some of the Company Markets, new office space is expected to be
constructed. However, industry reports indicate that between 1990 and 1995, the
Company Markets absorbed more square feet of office space than was constructed
in every year except 1991. The total absorption during this period exceeded the
total construction by approximately 22%. According to the forecasted
construction and absorption figures for 1996 to 1998, the Company Markets will
continue to absorb more office space every year. The total absorption is
expected to exceed the total construction by 17%.
BUSINESS AND PROPERTIES
The Properties consist of 70 Class A office buildings located in 16 metropolitan
areas in seven states in the Southeastern United States encompassing a total of
approximately 5.7 million rentable square feet. In addition to the Properties,
the Company manages approximately 2.2 million square feet owned by third
parties. The Company also owns the Land and Land Options and expects that such
undeveloped land, which is strategically located adjacent to certain of the
Properties, is suitable for development of approximately 4 million and 485,000
rentable square feet of office space, respectively.
The following table presents information about the Properties by location:
PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL PERCENTAGE OF TOTAL ANNUAL TOTAL ANNUAL
NUMBER OF RENTABLE TOTAL RENTABLE BASE RENT BASE RENT PERCENT
MARKET PROPERTIES SQUARE FEET SQUARE FEET (12/31/95)(1) (12/31/95)(1) LEASED
- ------ ---------- ----------- ----------- ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Tampa, FL................................ 20 1,155,483 20.4% 13,329,000 23.2% 94.8%
Norcross, GA
(suburban Atlanta)..................... 5 706,745 12.5 4,481,000 7.8 93.3
Greenville, SC........................... 7 687,150 12.1 7,067,000 12.3 94.9
Boca Raton, FL........................... 3 506,834 9.0 6,090,000 10.6 96.2
Charlotte, NC............................ 6 396,847 7.0 4,309,000 7.5 94.4
Memphis, TN.............................. 5 382,131 6.7 6,492,000 11.3 100.0
Raleigh, NC.............................. 6 376,199 6.6 2,585,000 4.5 91.0
Nashville, TN............................ 3 335,994 5.9 2,815,000 4.9 97.4
Columbia, SC............................. 5 318,713 5.6 2,758,000 4.8 66.3(2)
Orlando, FL.............................. 2 200,796 3.5 1,666,000 2.9 98.1
Chesapeake, VA........................... 2 179,006 3.2 1,264,000 2.2 100.0
Asheville, NC............................ 2 124,177 2.2 977,000 1.7 100.0
Birmingham, AL........................... 1 111,905 2.0 1,551,000 2.7 98.0
Greensboro, NC........................... 1 78,094 1.4 747,000 1.3 100.0
Winston-Salem, NC........................ 1 51,236 0.9 402,000 0.7 55.9(3)
Jacksonville, FL......................... 1 50,513 0.9 919,000 1.6 100.0
-- --------- ----- ---------- ---- -----
Total or Weighted Average
of all Properties.................. 70 5,661,823 100.0% 57,452,000 100.0% 93.6%
== ========= ===== ========== ===== ====
- -----------------------
</TABLE>
(1) Total Annual Base Rent (12/31/95) means the amounts contractually due
(excluding recoveries from tenants for common area maintenance charges,
taxes or other items) for the calendar month ending on December 31, 1995
annualized for continuing leases in force on such date, except that Annual
Base Rent (12/31/95) for space leased but not occupied at December 31, 1995
(17,265 rentable square feet) is computed based on the contractual base rent
on the commencement date of the respective leases, annualized.
(2) Subsequent to December 31, 1995, the Company leased 34,000 square feet and
is negotiating leases for an additional 42,000 square feet in this market.
The percent leased in this market would be 90.1% assuming consummation of
all leases under negotiation.
(3) During 1995, two tenants which occupied 44% of the building vacated their
leases.
25
<PAGE>
Sixty-three of the Properties are located in suburban office parks. The
remaining seven Properties are also located in suburban areas in the Southeast.
The Company believes that suburban markets are preferable to downtown locations
for several reasons: proximity to residences of tenants' employees, higher
quality public education, lower occupancy costs of office space and generally
newer buildings that can accomodate modern technological requirements.
The Properties were developed between 1980 and 1991, and have a weighted
average age of nine years. The majority of the Properties were acquired by the
Company or its predecessors in 1993, near the end of a downturn in commercial
real estate markets that resulted from the over-building of the 1980's. Most of
the Properties are used for more than one business activity. The Properties are
primarily of brick or concrete construction, having one to ten stories, with
lush landscaped areas and sufficient parking for their intended use. The
Properties are well maintained and strategically located near transportation
corridors. All of the Properties have been inspected by independent engineers
since September 1993 and are in good to excellent physical condition. In the
absence of the Merger, other than regular maintenance operations and routine
tenant improvements, the Company does not anticipate undertaking any significant
renovation or construction projects at any of the Properties in the near term.
Certain of the Properties are encumbered by mortgage indebtedness. See
"--Mortgage Indebtedness and Line of Credit."
Management of the Properties is supervised by the Company's asset managers
in the regional offices. On-site management is conducted by the Company at most
of the Properties. In certain circumstances, where direct management by the
Company is not cost effective due to the size of the market, size of the
property or number of tenants in such market or at such Property, third-party
managers are retained by the Company. The Company evaluates the management of
such Properties on a regular basis.
In the aggregate, the Properties were approximately 93.6% leased as of
December 31, 1995. At any time, however, an individual Property may have a
significantly lower percentage of net rentable square footage leased ("leased
rate") reflecting the expiration of one or more leases and/or an inability to
find tenants, or may have a significantly higher leased rate, reflecting the
lease of a significant amount of space to a single tenant or generally high
demand for space at that Property. In addition, the size of a building or
percentage occupied by a single tenant in a particular building could have an
effect on the leased rate at such building at a point in time. In this regard,
eight of the Properties had leased rates below 75.0% (ranging from 27.1% to
74.5%) as of December 31, 1995. As of the same date, 62 of the Properties had
leased rates of 75.0% or better, with 36 being 100% leased. Although no
assurance can be given that leased rates will remain constant at any single
Property or for the portfolio as a whole, the Company believes that the periodic
fluctuations in occupancy at individual Properties will not have a material
adverse effect on portfolio base rental revenues or on the Company's ability to
service its indebtedness and to satisfy its other obligations when due.
The following table sets forth the average percent leased and average
Annual Base Rent per leased square foot for the Properties during the last three
years:
AVERAGE AVERAGE ANNUAL BASE
YEAR PERCENT LEASED RENT PER SQUARE FOOT
- ---- -------------- --------------------
1995 93.6% $10.84
1994 92.5% $10.77
1993 87.6% $10.61
26
<PAGE>
The following table summarizes certain information about the Properties:
<TABLE>
<CAPTION>
ANNUAL BASE
RENT PER
TOTAL PERCENT LEASED SQUARE FOOT
PROPERTY NAME YEAR RENTABLE AT DECEMBER 31, LEASED
AND ADDRESS BUILT SQUARE FEET 1995(1)(2) (12/31/95)(3) SIGNIFICANT TENANTS (AS OF 12/31/95)(4)
- ----------- ----- ----------- ---------- ------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
TAMPA, FL
- ---------
Tower Place 1988 180,848 93.2% $ 19.24 Unisys Corporation (20.2%)
1511 N. Westshore Blvd. Value Behavioral Health, Inc. (10.3%)
Gensar (10.7%)
Atrium 1989 129,855 99.4 12.97 GTE Data Services, Incorporated (81.7%)
10017 Princess Palm Avenue Florida Coca Cola Bottling Company (10.1%)
Prudential (3.8%)
Sabal Business Center VI 1988 99,136 100.0 9.95 Pharmacy Management Services, Inc.
3611 Queen Palm Drive (100.0%)
Progressive Insurance 1988 83,648 100.0 9.92 Progressive American Insurance Co.
3632 Queen Palm Drive (100.0%)
Sabal Business Center VII 1990 71,248 100.0 13.16 Pharmacy Management Services, Inc.
3625 Queen Palm Drive (100.0%)
Sabal Business Center V 1988 60,578 96.6 14.21 Lebhar-Friedman Inc. (65.9%)
3922 Coconut Palm Drive Airlines Reporting Corporation (14.4%)
Registry II 1987 58,781 92.1 13.62 Transamerican Real Estate Tax Service,
9950 Princess Palm Avenue Inc. (19.6%)
Ultrasound of New Jersey, Inc. (17.5%)
Integrated Healthcare Delivery Service
(8.7%)
Registry I 1985 58,319 85.9 14.70 National Insurance Services, Inc. (17.8%)
10002 Princess Palm Avenue State Farm Mutual Automobile Insurance
Company (9.0%)
NationsBank of Florida, N.A. (8.8%)
Sabal Business Center IV 1984 49,368 100.0 13.18 Phillips Educational Group of Central
3924 Coconut Palm Drive Florida, Inc. (71.4%)
TGC Home Health Care, Inc. (28.6%)
Sabal Tech Center 1989 48,220 100.0 6.70 National RX Services, Inc. (100.0%)
3504 Cragmont Drive
Sabal Park Plaza 1987 46,758 95.4 10.54 State of Florida Department of Revenue
9501-9503 Princess Palm (45.7%)
Avenue ERM South, Inc. (32.3%)
CERCO Concrete Construction Corp. (4.6%)
Sabal Lake Building 1986 44,533 100.0 11.82 Warner Publisher Services, Inc. (88.4%)
9210 King Palm Drive Columbia Brokerage Co., Inc. (11.6%)
Sabal Business Center I 1982 40,698 87.7 7.79 Pharmacy Corporation of America (16.9%)
3923-3925 Coconut Palm Fujitsu-ICL Systems, Inc. (16.5%)
Drive Carlton Technologies, Inc. (14.2%)
Benjamin Center #9 1989 38,405 84.3 6.53 First Image Management Company (28.6%)
5706 Benjamin Center Drive Mortenssen Engineering, Inc. (23.4%)
Marketing Configuration (10.8%)
Sabal Business Center II 1984 32,660 78.9 8.87 Owen Ayres and Associates, Inc. (34.6%)
3901 Coconut Palm Drive O'Brian & Gere Engineers, Inc. (14.8%)
Staodyn, Inc. (14.8%)
Benjamin Center #7 1991 30,960 83.2 6.55 Basetec Office Systems, Inc. (32.0%)
5910 Benjamin Center Drive Logical Systems Corporation (20.5%)
Weighco of Florida, Inc. (19.4%)
Registry Square 1988 26,568 94.2 7.78 Proctor & Redfern, Inc. (27.5%)
9720 Princess Palm Avenue Nutritional Support Services, LP (15.8%)
Unique Floral Creations, Inc. (6.3%)
Expo Building 1981 25,600 100.0 4.50 Exposystems, Inc. (100.0%)
3202 Queen Palm Drive
Sabal Business Center III 1984 21,300 73.5 9.15 Eli Witt Co. (73.5%)
3829 Coconut Palm Drive
Day Care Center 1986 8,000 100.0 8.00 Telesco Enterprises, Inc. (100.0%)
----- ----- ----
SUBTOTAL/AVERAGE 1,155,483 94.8% $ 12.19
NORCROSS, GA
- ------------
Oakbrook V 1985 204,381 100.0 8.34 CSC CompuSource, Inc. (9.9%)
5300 Oakbrook Parkway AKZO Nobel Coatings, Inc. (9.0%)
Medaphis Hospital Services Corporation
(8.5%)
Oakbrook III 1984 164,330 100.0 5.94 AT&T Resource Management Corp. (21.5%)
5555 Oakbrook Parkway Ryder Dedicated Logistics, Inc. (15.2%)
Apria Healthcare, Inc. (9.7%)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
ANNUAL BASE
RENT PER
TOTAL PERCENT LEASED SQUARE FOOT
PROPERTY NAME YEAR RENTABLE AT DECEMBER 31, LEASED
AND ADDRESS BUILT SQUARE FEET 1995(1)(2) (12/31/95)(3) SIGNIFICANT TENANTS (AS OF 12/31/95)(4)
- ----------- ----- ----------- ---------- ------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
Oakbrook II 1983 141,942 71.5 6.37 Memorex Telex Corp. (9.8%)
5555 Oakbrook Parkway Travis Pruitt and Associates (8.7%)
Scientific Atlanta, Inc. (4.9%)
Oakbrook I 1981 106,680 93.8 4.85 Bethco Incorporated (20.3%)
5600 Oakbrook Parkway D.S. Medical Supply, Inc. (10.8%)
Mosler Inc. (10.5%)
Oakbrook IV 1985 89,412 100.0 7.52 AT&T Resource Management Corp. (13.9%)
5555 Oakbrook Parkway Wilson Travel, Inc. (9.4%)
Burnup & Sims Communications Services,
Inc. (7.2%)
------- ----- ---------
SUBTOTAL/AVERAGE 706,745 93.3% $ 6.80
GREENVILLE, SC
- --------------
Brookfield-CRS Sirrine 1990 228,345 100.0 7.89 CRS Sirrine Engineers, Inc. (100.0%)
104 East Butler Road
Brookfield Plaza 1987 116,800 94.7 13.00 Dow Brands, Inc. (35.1%)
201 Brookfield Parkway Allstate Insurance Co. (17.3%)
I-Bank Systems, Inc. (11.9%)
Patewood Business Center 1983 103,302 94.7 8.07 ITT Educational Services, Inc. (21.4%)
One Marcus Drive Electrolock, Inc. (12.6%)
Business Systems, Inc. (10.3%)
Patewood V 1990 100,187 100.0 14.21 Bell Atlantic Mobile Systems, Inc. (47.1%)
80 International Drive PYA/Monarch, Inc. (37.9%)
Patewood IV 1989 61,649 100.0 14.75 MCI Telecommunications Corp. (100.0%)
50 International Drive
Patewood III 1989 61,367 75.6 14.30 MCI Telecommunications Corp. (56.4%)
50 International Drive Coca-Cola Bottling Company Consolidated
(9.2%)
United of Omaha Life Insurance Co. (6.0%)
Brookfield-YMCA 1990 15,500 45.7 6.62 Kids & Company at Pelham Falls, Inc.
1070 East Butler Road (45.5%)
------- ----- ---------
SUBTOTAL/AVERAGE 687,150 94.9% $ 10.85
BOCA RATON, FL
- --------------
One Boca Place 1987 277,630 96.9 14.52 Gourmet Coffees of America, Inc. (8.1%)
2255 West Glades Road ADT, Inc. (6.0%)
HQ Boca Raton, Inc. (5.6%)
Scott Center 1989 148,944 93.8 8.40 Scott Paper Company (20.2%)
2600 and 2650 N. Military Rutherford Minerley & Mulhall (13.7%)
Trail Leisure Centers, Inc. (9.3%)
Crocker Financial Plaza 1980 80,260 98.1 12.70 AmTrust Bank (15.1%)
5550 West Glades Road PaineWebber, Incorporated (14.0%)
The Cheesecake Factory (14.0%)
------- ----- ---------
SUBTOTAL/AVERAGE 506,834 96.2% $ 12.47
CHARLOTTE, NC
- -------------
Oakhill Business Park-Twin 1985 97,652 91.6 8.22 Springs Industries, Inc. (28.4%)
Oaks Kraft General Foods, Inc. (18.2%)
1337/1338 Hundred Oaks Dr. Conway Southern Express, Inc. (13.7%)
Oakhill Business 1985 90,853 97.4 16.09 Paramount Parks Inc. (16.6%)
Park-Water Oak Gist-Brocades International B.V. (13.3%)
8720 Red Oak Boulevard Material Handling Industry (13.1%)
Oakhill Business 1982 76,433 100.0 7.94 Krueger Ringier Inc. (36.7%)
Park-Scarlet Oak Washburn Direct Marketing Inc. (15.1%)
8700/8702 Red Oak Blvd The Computer Group, Inc. (15.1%)
Oakhill Business 1984 55,013 96.4 9.09 The Employers Association of the Carolinas
Park-English Oak (27.1%)
8848 Red Oak Boulevard Machine Tool Systems, Inc. (12.9%)
Systems Support Services of the Carolinas
(9.6%)
Oakhill Business 1982 38,448 100.0 16.48 Coats American (100%)
Park-Willow Oak
8757 Red Oak Boulevard
Oakhill Business 1984 38,448 74.5 13.69 Paramount Parks Inc. (44.0%)
Park-Laurel Oak Woolpert Consultants (30.5%)
8731 Red Oak Boulevard
------- ----- ---------
SUBTOTAL/AVERAGE 396,847 94.4% $ 11.41
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
ANNUAL BASE
RENT PER
TOTAL PERCENT LEASED SQUARE FOOT
PROPERTY NAME YEAR RENTABLE AT DECEMBER 31, LEASED
AND ADDRESS BUILT SQUARE FEET 1995(1)(2) (12/31/95)(3) SIGNIFICANT TENANTS (AS OF 12/31/95)(4)
- ----------- ----- ----------- ---------- ------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
MEMPHIS, TN
- -----------
International Place Phase 1988 208,006 100.0 17.85 AC Humko Corp. (34.4%)
II International Paper Company (26.1%)
6410 Poplar Avenue Mutual Life Insurance (4.0%)
Southwind Office Center 1991 62,179 100.0 16.83 Promus Hotels, Inc. (57.5%)
"A" Universal Underwriters (9.6%)
5245 Tournament Drive General Motors (5.5%)
Southwind Office Center 1990 61,860 100.0 15.86 Check Solutions, Inc. (35.8%)
"B" Emhart Industries, Inc. (21.4%)
8275 Tournament Drive 6800 Capital Corporation (15.5%)
Kirby Centre 1984 32,007 100.0 15.76 Financial Federal Savings Bank (38.0%)
1755 Kirby Parkway Union Central Life Insurance Co. (26.5%)
Apperson, Crump, Duzane and Maxwell
(17.0%)
Hickory Hill Medical Plaza 1988 18,079 100.0 13.20 Health Tech Affiliates, Inc. (100.0%)
6950 Kirby Centre Cove
------- ----- ---------
SUBTOTAL/AVERAGE 382,131 100.0% $ 16.97
RALEIGH, NC
- -----------
ONCC-Phase I 1981 101,127 76.1 6.62 Monolith Corporation (25.9%)
5205-5293 Capital Tri Point Medical, L.P. (14.8%)
Boulevard ABB Power T&D Company, Inc. (10.0%)
ONCC-"W" Building 1983 91,335 100.0 9.01 International Business Machines Corp.
5240 Green's Dairy Road (75.0%)
5301 Departure Drive 1984 84,899 100.0 5.47 ABB Power T&D Co., Inc. (63.8%)
Cardiovascular Diagnostics, Inc. (36.3%)
ONCC 3645 Trust Drive 1984 50,652 81.1 9.27 Customer Access Resources, Inc. (36.3%)
Johnson Controls, Inc. (23.2%)
ONCC 5220 Green's 1984 29,869 100.0 8.67 Avnet, Inc. (24.4%)
Dairy Road Arrow Electronics, Inc. (22.0%)
Sprint Cellular Corporation (19.7%)
ONCC 5200 Green's 1984 18,317 100.0 7.98 Carolina Power & Light Company (58.4%)
Dairy Road Jaco Electronics, Inc. (14.3%)
------- ----- ---------
SUBTOTAL/AVERAGE 376,199 91.0% $ 7.54
NASHVILLE, TN
- -------------
Grassmere II 1985 145,092 93.9 8.60 International Clinical Laboratories, Inc.
624 Grassmere Park Drive (21.8%)
Contel Cellular of Tennessee, Inc. (13.1%)
Danka Industries, Inc. (12.7%)
Grassmere III 1990 103,000 100.0 7.99 Harris Graphics Corporation (100.0%)
601 Grassmere Park Drive
Grassmere I 1984 87,902 100.0 9.41 Contel Cellular of Nashville, Inc. (40.5%)
618 Grassmere Park Drive Digi International, Inc. (19.5%)
Kraft General Foods, Inc. (7.4%)
------- ----- ---------
SUBTOTAL/AVERAGE 335,994 97.4% $ 8.63
COLUMBIA, SC
- ------------
Fontaine I 1985 97,576 62.4 11.94 Blue Cross and Blue Shield of South
300 Arbor Lake Drive Carolina (62.0%)
Center Point I 1988 71,380 100.0 15.60 Sedgewick James of South Carolina, Inc.
2000 Center Point (37.7%)
BellSouth Mobility, Inc. (29.3%)
U.S. Personnel, Inc. (15.0%)
Fontaine II 1987 70,762 59.6 10.91 Lanier Worldwide, Inc. (10.3%)
400 Arbor Lake Drive Corporate Concepts (7.7%)
Richland Memorial Hospital (7.1%)
Fontaine III 1988 57,888 27.1 14.87 John Hancock Mutual Life Insurance Company
Arbor Lake Drive (10.4%)
James Madison Mortgage Company (6.6%)
Xerox Corporation (6.4%)
Fontaine V 1990 21,107 100.0 9.76 Roche Biomedical Laboratories, Inc.
201 Arbor Lake Drive (100.0%)
------- ----- ---------
SUBTOTAL/AVERAGE 318,713 66.3% $ 12.97
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
ANNUAL BASE
RENT PER
TOTAL PERCENT LEASED SQUARE FOOT
PROPERTY NAME YEAR RENTABLE AT DECEMBER 31, LEASED
AND ADDRESS BUILT SQUARE FEET 1995(1)(2) (12/31/95)(3) SIGNIFICANT TENANTS (AS OF 12/31/95)(4)
- ----------- ----- ----------- ---------- ------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
ORLANDO, FL
- -----------
Metrowest I 1988 102,019 96.3 10.19 Hilton Grand Vacations Co. (20.6%)
6355 Metrowest Boulevard Allstate Insurance Co. (17.5%)
Coram Healthcare Corporation Critical Care
America-East, Inc. (8.5%)
Southwest Corporate Center 1984 98,777 100.0 6.90 Walt Disney World Co. (100.0%)
7100 Municipal Drive
--------- ------ ---------
SUBTOTAL/AVERAGE 200,796 98.1% $ 8.54
CHESAPEAKE, VA
- --------------
Battlefield I 1987 97,633 100.0 4.87 Kasei Memory Products, Inc. (100.0%)
535 Independence Parkway
Greenbrier Business Center 1984 81,373 100.0 9.86 Canon Computer Systems, Inc. (58.6%)
850 Greenbrier Circle Roche Biomedical Laboratories, Inc.
(25.8%)
Telecable Corporation (7.0%)
--------- ------ ---------
SUBTOTAL/AVERAGE 179,006 100.0% $ 7.06
ASHEVILLE, NC
- -------------
Ridgefield II 1989 63,500 100.0 8.49 Akzo Industrial Systems, Co. (16.0%)
300 Ridgefield Court Western Carolina Industries Inc. (14.9%)
Blue Cross/Blue Shield of North Carolina
(10.3%)
Ridgefield I 1987 60,677 100.0 6.93 Memorial Mission Hospital, Inc. (64.1%)
200 Ridgefield Court Acme Business (Systems & Services, Inc.)
(10.3%)
--------- ------ ---------
SUBTOTAL/AVERAGE 124,177 100.0% $ 7.73
BIRMINGHAM, AL
- --------------
Grandview I 1989 111,905 98.0 14.37 Computer Sciences Corporation (31.7%)
3535 Grandview Parkway Liberty Mutual Insurance Company (15.1%)
MortgageAmerica, Inc. (14.3%)
--------- ------ ---------
SUBTOTAL/AVERAGE 111,905 98.0% $ 14.37
GREENSBORO, NC
- --------------
Deep River I 1989 78,094 100.0 9.39 Allstate Insurance Company (23.1%)
7800 Thorndike Road Volvo GM Heavy Truck Corporation (10.9%)
The Computer Group, Inc. (9.4%)
--------- ------ ---------
SUBTOTAL/AVERAGE 78,094 100.0% $ 9.39
WINSTON-SALEM, NC
- -----------------
Forsyth I 1985 51,236 55.9 14.34 Alexander & Alexander of the Carolinas,
2000 Frontis Plaza Inc. (34.7%)
Boulevard Weyerhaeuser Company (11.7%)
Bowden & Rabil, P.A. (5.1%)
--------- ------ ---------
SUBTOTAL/AVERAGE 51,236 55.9% $ 14.34
JACKSONVILLE, FL
- ----------------
Towermarc Plaza 1991 50,513 100.0 18.60 Aetna Casualty (81.5%)
10161 Centurian Parkway Philip Morris, U.S.A. (12.1%)
--------- ------ ---------
SUBTOTAL 50,513 100.0% $ 18.60
--------- ------ ---------
TOTAL/AVERAGE 5,661,823 93.6% $ 10.84
========= ===== =========
</TABLE>
- -------------------
(1) Percentages have been rounded to the nearest tenth of a percentage.
(2) Includes a total of 17,265 rentable square feet leased but not occupied in
the Properties. Annual Base Rent with respect to these leases is computed
based on the contractual base rent on the commencement date of the leases,
annualized.
(3) Annual Base Rent at any date means the amounts contractually due (excluding
recoveries from tenants for common area maintenance charges, taxes or other
items) for the calendar month ending on that date annualized for continuing
leases in force on or before such date, except that Annual Base Rent for
leases for space not occupied at December 31, 1995 (17,265 rentable square
feet) is computed based on the contractual base rent on the commencement
date of the respective leases, annualized (see note (2) above). The Company
believes that base rent is a conservative and appropriate measure for
comparative purposes of the commercial real estate rental revenue from
office properties, such as the Properties, that do not generate percentage
rents based on sales and that generally are subject to leases that do not
employ a uniform method of handling property expense recoveries. Annual Base
Rent per square foot for any Property is determined by dividing the Annual
Base Rent for that Property by the aggregate rentable square feet leased at
that Property.
(4) Represents the three largest tenants or, if less than three, tenants which,
in the aggregate, represent more than 50% of the occupancy, in either case,
based on the percentage of total rentable square feet of the Property
leased.
30
<PAGE>
TENANTS. At December 31, 1995, the Properties had approximately 570 tenants
under 650 separate leases, with no tenant leasing in excess of 4.0% of the
rentable square feet of the Properties or representing more than 3.3% of the
Annual Base Rent of the Properties. Annual Base Rent at any date means the
amounts contractually due (excluding recoveries from tenants for common area
maintenance charges, taxes or other items) for the calendar month ending on that
date annualized, for continuing leases in force on or before such date. At
December 31, 1995, 14 buildings representing approximately 17.7% of the
aggregate rentable square feet were occupied by single tenants.
The following are the Company's ten largest tenants, by rentable square
feet leased, as of December 31, 1995:
TEN LARGEST TENANTS
<TABLE>
<CAPTION>
% OF TOTAL
% OF TOTAL ANNUAL BASE
RENTABLE RENTABLE ANNUAL BASE RENT AS OF
TENANT PROPERTY SQUARE FEET SQUARE FEET RENT(1) DECEMBER 31, 1995
- ------ -------- ----------- ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
CRS Sirrine Engineers, Inc. Brookfield-CRS Sirrine
Greenville, SC 228,345 4.0% $1,801,694 3.1%
Pharmacy Management Services, Sabal VI
Inc. Tampa, FL 99,136 1.7% $ 986,400 1.7%
Sabal VII
Tampa, FL 71,248 1.3% $ 937,971 1.6%
--------- ---- ---------- ----
170,384 3.0% $1,924,371 3.3%
GTE Data Services, Inc. Atrium at Sabal
Tampa, FL 106,123(2) 1.9% $1,325,769 2.3%
Harris Graphics Corporation Grassmere III
Nashville, TN 103,000 1.8% $ 822,118 1.4%
Walt Disney World Co. S.W. Corporate Center
Orlando, FL 98,777 1.7% $ 632,173 1.1%
Mitsubishi Kasei America, Inc. Battlefield I
Chesapeake, VA 97,633 1.7% $ 461,580 0.8%
MCI Telecommunications Corp. Patewood IV
Greenville, SC 61,649 1.1% $ 909,312 1.6%
Patewood III
Greenville, SC 34,595 0.6% $ 486,071 0.8%
--------- ---- ---------- ----
96,244 1.7% $1,395,383 2.4%
Progressive American Insurance Progressive Insurance
Co. Building Tampa, FL 83,648 1.5% $ 829,654 1.4%
IBM Corp. ONCC "W"
Raleigh, NC 68,502 1.1% $ 667,902 1.2%
ONCC Phase I
Raleigh, NC 3,514 0.1% $ 23,700 --
Ridgefield I
Asheville, NC 3,022 0.1% $ 23,436 --
--------- ---- ---------- ----
75,038 1.3% $ 715,038 1.2%
AC Humko Corp. International Place II
Memphis, TN 71,545 1.3% $ 999,876 1.7%
TOTAL 1,130,737 20.0% 10,907,656 19.0%
========= ==== ========== ====
</TABLE>
(1) Annual Base Rent at any date means the amounts contractually due (excluding
recoveries from tenants for common area maintenance charges, taxes or other
items) for the calendar month ending on that date, annualized, for
continuing leases in force on or before such date.
(2) As of February 14, 1996, the total square feet leased by GTE Data Services,
Inc. was reduced to 69,052 square feet.
In the aggregate, the Properties' ten largest tenants accounted for
approximately 19.0% (approximately $10.9 million) of the Company's total Annual
Base Rent as of December 31, 1995. The weighted average remaining lease term of
the Company's ten largest tenants is 5.2 years as of December 31, 1995. Although
the loss of several significant tenants could have a material adverse effect on
the financial condition of the
31
<PAGE>
Company, the Company believes that the total number and the geographical
distribution of tenants at the Properties contributes to the stability of the
portfolio, eases re-leasing of space subject to expiring leases and mitigates
the potential impact on cash flows of periodic vacancies. The following table
indicates the distribution of tenant leases at the Properties according to the
amount of space subject to each tenant lease in each market location:
NUMBER OF TENANT LEASES BY SQUARE FEET LEASED
(AS OF DECEMBER 31, 1995)
<TABLE>
<CAPTION>
5,000- 10,000- 25,000- 50,000-
MARKET LOCATION 0-4,999 9,999 24,999 49,999 99,999 100,000+
- --------------- ------- ----- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Tampa, FL................................................. 78 21 14 8 3 --
Norcross, GA (suburban Atlanta)........................... 45 32 17 1 -- --
Greenville, SC............................................ 11 13 7 4 1 1
Boca Raton, FL............................................ 77 20 12 -- -- --
Charlotte, NC............................................. 26 16 9 3 -- --
Memphis, TN............................................... 39 8 12 -- -- --
Raleigh, NC............................................... 9 10 5 2 3 --
Nashville, TN............................................. 10 10 4 2 -- 1
Columbia, SC.............................................. 20 5 4 1 -- --
Orlando, FL............................................... 14 3 2 -- 1 --
Chesapeake, VA............................................ 2 1 1 1 1 --
Asheville, NC............................................. 9 7 1 2 -- --
Birmingham, AL............................................ 12 3 3 -- -- --
Greensboro, NC............................................ 5 7 1 -- -- --
Winston-Salem, NC......................................... 2 1 1 -- -- --
Jacksonville, FL.......................................... 3 3 -- -- -- --
--- --- -- -- - -
Total.............................................. 362 160 93 24 9 2
=== === == == == ==
</TABLE>
LEASES. Leases for the Properties generally range from one to ten years
with a weighted average remaining term of 3.8 years as of December 31, 1995.
Each lease is written to reflect local market conditions. However, the majority
of leases are written on a modified gross basis requiring the tenants to pay a
base rent and to reimburse the landlord for taxes, insurance, utilities,
maintenance and common area costs. Cost recoveries vary with the market allowing
for either full pass-through or recovery of increases over a stated cost base.
In some instances, increased costs are recovered through consumer price index
adjustments to base rent. Certain of the leases, including a substantial
majority of the single tenant buildings, are written on a triple net basis,
containing provisions requiring tenants to pay directly or fully reimburse the
landlord for the expenses described above.
The average rentable square feet subject to expiring leases in 1996 through
2005 is approximately 523,000 square feet per year, with a maximum of
approximately 838,000 square feet. In the year ended December 31, 1995, the
Company leased, re-leased or renewed approximately 1,059,000 rentable square
feet (including the Properties acquired in the Sabal Acquisition and Towermarc
Acquisition) and leases for 986,000 square feet expired. The following table
sets forth scheduled lease expirations for the Properties for all leases in
effect (as of December 31, 1995) for each of the next ten calendar years
beginning with leases expiring after December 31, 1995, assuming that none of
the tenants exercise any renewal or termination options in their existing
leases:
32
<PAGE>
LEASE EXPIRATIONS
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RENTABLE SQUARE ANNUAL BASE ANNUAL BASE RENT LEASED RENTABLE PERCENTAGE OF TOTAL
YEAR OF NUMBER FEET SUBJECT RENT UNDER PER RENTABLE SQUARE SQUARE FEET BUILDING ANNUAL BASE
LEASE OF LEASES TO EXPIRING EXPIRING FOOT REPRESENTED BY REPRESENTED BY RENT REPRESENTED BY
EXPIRATION EXPIRING LEASES(1) LEASES(2) EXPIRING LEASE EXPIRING LEASES EXPIRING LEASES
- ---------- -------- --------- --------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1996 122 748,352 $ 7,883,622 $ 10.53 14.2% 13.7%
1997 129 817,701 8,446,980 10.33 15.5 14.7
1998 126 837,690 9,390,528 11.21 15.8 16.3
1999 107 816,995 8,050,584 9.85 15.4 14.0
2000 90 793,769 8,909,952 11.22 15.0 15.5
2001 27 318,661 3,919,992 12.30 6.0 6.8
2002 24 332,387 4,067,277 12.24 6.3 7.1
2003 12 186,643 2,241,436 12.01 3.5 3.9
2004 4 55,926 692,472 12.38 1.1 1.2
2005 6 317,365 2,638,056 8.31 6.0 4.6
--- --------- ------------ --------- ---- ----
647 5,225,489 $ 56,240,899 $ 10.76 98.8% 97.9%
=== ========= ============ ========= ==== ====
- -----------------
</TABLE>
(1) Month-to-month leases are included in the 1996 total.
(2) Annual Base Rent at any date means the amounts contractually due (excluding
recoveries from tenants for common area maintenance charges, taxes or other
items) for the calendar month ending on that date, annualized, for
continuing leases in force on or before such date.
HISTORICAL NON-INCREMENTAL REVENUE-GENERATING STRUCTURAL CAPITAL
EXPENDITURES, TENANT IMPROVEMENT COSTS AND LEASING COMMISSIONS. The following
table sets forth annual and per square foot non-incremental revenue-generating
structural capital expenditures and tenant improvement costs and leasing
commissions at the Properties. Such costs are those necessary to retain revenues
attributable to existing leased space. The historical amounts set forth below
are not necessarily indicative of future non-incremental revenue-generating
structural capital expenditures, non-tenant improvement costs or leasing
commissions.
<TABLE>
<CAPTION>
1994 1995 1994-1995 AVERAGE
---- ---- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SQUARE FOOT DATA)
<S> <C> <C> <C>
STRUCTURE CAPITAL EXPENDITURES
Annual.................................................... $ 942 $ 926 $ 933
Per square foot........................................... $ 0.17 $ 0.16 $ 0.16
TENANT IMPROVEMENT COSTS AND LEASING COMMISSIONS
Annual.................................................... $ 6,178 $ 5,088 $ 5,633
Per square foot leased.................................... $ 5.24 $ 5.18 $ 5.21
</TABLE>
HISTORICAL INCREMENTAL REVENUE-GENERATING TENANT IMPROVEMENT COSTS AND
LEASING COMMISSIONS. The following provides all remaining tenant improvement
costs and leasing commissions not included in the table set forth above for the
Properties in the years indicated. Such costs relate to vacant and non-revenue
generating space. There were no historical incremental revenue-generating
structural capital expenditures. The historical amounts set forth below are not
necessarily indicative of future incremental revenue-generating tenant
improvement costs and leasing commissions.
<TABLE>
<CAPTION>
1994 1995(1) 1994-1995 AVERAGE
---- ------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SQUARE FOOT DATA)
<S> <C> <C> <C>
TENANT IMPROVEMENT COSTS AND LEASING COMMISSIONS
Annual.................................................... $ 3,292 $ 2,451 $ 2,872
Per square foot leased.................................... $ 12.14 $ 31.55 $ 16.46
</TABLE>
- -------------------------
(1) This amount includes approximately $1.4 million (equivalent to $47.17 per
square foot) of tenant improvement costs and leasing commissions relating to
the leasing of approximately 30,000 square feet of shell space.
33
<PAGE>
DESCRIPTION OF CERTAIN EXCLUDED ASSETS. The following is a description of
certain of the Excluded Assets. See "THE MERGER AGREEMENT--Excluded Assets." The
Company owns approximately 243 acres (excluding the 15 acres subject to a
contract for sale) of land available for possible future development. The
following table sets forth the location, acreage and estimated build-out
capacity with respect to the Land:
<TABLE>
<CAPTION>
BUSINESS PARK MARKET APPROXIMATE ACREAGE BUILDABLE SQUARE FEET
- ------------- ------ ------------------- ---------------------
<S> <C> <C> <C>
Sabal Tampa, FL 215 3,400,000
International Place Memphis TN 3 200,000
Scott Center Boca Raton, FL 4 160,000
Patewood Business Park Greenville, SC 8 107,000
Southwinds Memphis, TN 6 105,000
Benjamin Center Tampa, FL 7 60,000
--- ---------
Total 243 4,032,000
=== =========
</TABLE>
All of the Land is zoned and available for office development,
substantially all of which has utility infrastructure already in place. The
Company believes that the cost of developing the Land could be financed with the
funds available from additional borrowings and offerings of equity securities.
All of the Land is strategically located adjacent to certain of the Properties.
Any future development, however, is dependent on the demand for office space in
the area, the availability of favorable financing and other factors, and no
assurance can be given that any construction will take place on the Land.
LAND OPTIONS. The Company has the right to purchase an aggregate of up to
approximately 47 acres of undeveloped land pursuant to the Land Options to
permit development of buildings adjacent to certain of the Properties,
particularly for the benefit of existing tenants. The Land Options relate to
land in five separate locations and are expected to be available for possible
future development of up to an aggregate of 485,000 rentable square feet. Each
option is exercisable at an agreed upon price or, if no agreement is reached, at
95% of fair market value determined by a MAI appraisal procedure. All of the
Land Options expire on November 22, 1998.
The agreement granting the Land Options (the "Option Agreement") also
grants a right of first refusal with respect to the parcels subject to the Land
Options, for a period concurrent with the exercise period, if NationsBank
receives and desires to accept a bona fide third-party offer. If the Company
does not exercise its right of first refusal, it may not exercise its purchase
option relative to the particular parcel so long as NationsBank is negotiating
or under contract with the third party. Any such sale to a third party will
terminate the Company's rights under the Option Agreement with respect to the
subject parcel. For a description of certain other Excluded Assets, see
"--Recent Developments--Pending Transactions."
THIRD-PARTY MANAGEMENT, LEASING AND DEVELOPMENT. The Company conducts
third-party property, asset and construction management businesses and a leasing
and brokerage business. Revenue from such activities was $2.7 million on a pro
forma basis for 1995, 83% of which is attributable to affiliates of the Company.
In addition to the Properties, Management Subsidiary currently manages
approximately 2.2 million square feet of space owned by third parties. Of such
space, 70% is attributable to affiliates of the Company. On a selective basis,
the Company intends to expand its third-party management business, including the
management of development and construction projects. The Company will evaluate
each management contract against the Company's objectives and portfolio to
ensure that each is compatible with the Company's existing resources and
complementary to the Company's assets and will seek to be compensated through
participation in the increase in value created by the Company's services. The
Company believes that such third-party contracts will enable it to use its
property management assets effectively without any significant increase in
capital investment or overhead throughout its various
34
<PAGE>
markets. The Company receives approximately 95% of the profit generated from the
leasing and brokerage activities for third parties through its ownership of the
preferred stock and 3.1% of the common stock of Leasing Company.
COMPETITION. Numerous office properties compete with the Company for
tenants. Some of such properties may be newer, better located or better
capitalized than the Properties. The Company believes, however, that, in most
cases, the areas in which the Properties are located are the premier business
parks or suburban business areas in their real estate markets, based primarily
on quality, location and amenities. In general, the Properties do not compete
with urban properties for tenants. Tenants who lease space in urban properties
generally have different site criteria than those who lease in suburban business
parks.
INSURANCE. The Properties are covered by comprehensive liability, fire,
flood, extended coverage and rental loss insurance with policy specifications,
limits and deductibles customarily carried for similar properties. The
commercial liability insurance covers broad form property damage as well as
blanket contractual and personal injuries. The extended coverage policy insures
against such risks as riot and civil commotion, vandalism, malicious mischief,
burglary and theft. In addition, the Company maintains a supplemental blanket
umbrella and casualty and indemnity policy. Certain extraordinary losses may be
uninsurable or not economically insurable. Should an uninsured loss occur, the
Company could lose its investment in and anticipated profits and cash flows from
a Property.
ENVIRONMENTAL MATTERS. Under various federal, state and local laws and
regulations, a current or previous owner or operator, manager or developer of
real estate may be liable for the costs of removing and remediating certain
hazardous or toxic substances on the property. These laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the presence of the hazardous or toxic substances. The costs of removing or
remediating these substances may be substantial and the presence of these
substances, or the failure to remediate conditions affected by the substances
promptly, may adversely affect the owner's or operator's ability to sell the
real estate or to borrow using the real estate as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may also
be liable for the costs of removing or remediating the substances at the
disposal or treatment facility. Certain laws impose liability for the release of
asbestos into the air and third parties may seek recovery from owners or
operators of real properties for personal injury associated with exposure to
asbestos. In connection with its ownership and operation of the Properties, the
Company may be potentially liable for these costs. In addition, the presence of
hazardous or toxic substances at a site adjacent to or in the vicinity of a
property could require the property owner to participate in remediation
activities in certain cases or could have an adverse effect on the value of such
property. Although certain tenants at several of the Properties use hazardous or
toxic substances in the ordinary course of their operations, the Company
believes that the Properties are in compliance in all material respects with all
federal, state and local regulations regarding hazardous or toxic substances and
is not aware of any material liability or claim relating to hazardous or toxic
substances at any of the Properties. Pursuant to an environmental indemnity
agreement, Financing Partnership made certain representations and warranties
concerning compliance in all material respects with, and lack of liability
under, environmental laws and regulations with respect to the Mortgage Note
Properties.
All of the Properties have been subject to at least one Phase I
environmental assessment since April 1993. Such assessments were intended to
evaluate the environmental condition of, and potential environmental liabilities
associated with, the Properties, and included visual observations of the
Properties during site visits, reviews of certain records concerning the
Properties as well as publicly available information concerning known conditions
at properties in the vicinity of the Properties, consideration of the likely
presence of asbestos-containing materials ("ACMs") in the buildings on the
Properties and of the presence of elevated levels of lead in the drinking water,
inquiries into the likely presence of polychlorinated biphenyls ("PCBs") in
electrical transformers, the presence of underground or above
35
<PAGE>
ground storage tanks and the preparation of a written report, but did not
include sampling or analysis of soil, groundwater or other environmental media
or subsurface investigations.
A property located adjacent to the southwestern perimeter of the Sabal
Business Center VI at 3611 Queen Palm Drive, Tampa, Florida (the "Sabal VI
Property") is listed on the National Priority List (the "NPL") of the
Environmental Protection Agency (the "EPA"). Groundwater at this site contains
inorganic metals that have leached from the soil and the cost of this
remediation is estimated by the EPA as ranging from a present value of $140,000
to $2,650,000, depending on the remedy ultimately implemented. The EPA has not
yet completed its investigation of wetlands in the area that may have been
affected by the contamination at this adjacent site. Groundwater sampling on the
portion of the Sabal VI Property that borders such adjacent property revealed
concentrations at above cleanup standards of inorganic metals similar to those
found to be leaching from the adjacent site. However, soil sampling from the
same location on the Sabal VI Property revealed concentrations of such inorganic
metals within the range commonly found in area soils. The Company does not
believe that its Property is a source of the problems found in the adjacent site
and, based on the information known to date, the Company believes it is unlikely
that the EPA or any other party would seek to impose liability on the Company
with respect to such Property.
Contamination exists in groundwater at two NPL sites adjacent to and
upgradient from the Properties in Nashville, Tennessee (the "Grassmere
Properties"). Due to the geology of the area, the Company's consultant advised
that sampling on the Grassmere Properties would not definitively determine
whether contamination from off-site had reached the Grassmere Properties;
therefore, no on-site sampling was performed. Funded clean-ups are ongoing at
both NPL sites. Based on information known to date, there is no indication that
the Grassmere Properties are a source of the contamination, and it is unlikely
that the EPA or any other party would seek to impose liability on the Company
for the presence of such contamination.
Lead was detected above the federal action level in drinking water from
limited outlets at seven of the Properties. Federal law only requires that
public water suppliers take action when this level is exceeded and requires no
direct action by the Company. Sampling was limited and more thorough sampling
would be required to accurately determine the sources and levels of lead in
those buildings. However, if elevated lead levels do exist, it could present the
potential for allegations of liability from third parties.
It is possible that these assessments with respect to the Properties do not
reveal all potential environmental liabilities or that there are material
environmental liabilities of which the Company is unaware. Moreover, no
assurances can be given that (i) future laws, ordinances or regulations will not
impose any material environmental liability or (ii) the current environmental
condition of the Properties has not been or will not be affected by tenants and
occupants of the Properties, by the condition of properties in the vicinity of
the Properties or by third parties unrelated to the Company.
REGULATION. A number of federal, state and local laws exist, such as the
Americans with Disabilities Act of 1990 (the "ADA"), which may require
modifications to existing buildings to improve, or may restrict certain
renovations by requiring, access to such buildings by disabled persons.
Additional legislation may impose further requirements on owners with respect to
access by disabled persons. The costs of compliance with such laws may be
substantial and may reduce overall returns on the Company's investments. The
Company believes that all of the Properties are in substantial compliance with
laws currently in effect, and will review periodically its properties to
determine continuing compliance with existing laws and any additional laws that
are hereafter promulgated.
Under the ADA, all public accommodations and commercial facilities are
required to meet certain federal requirements related to access and use by
disabled persons. These requirements became effective in 1992. Compliance with
the ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the United States government or an award
of damages to private litigants. Although the Company believes that the
Properties are substantially in compliance with these
36
<PAGE>
requirements, the Company may incur additional costs to comply with the ADA.
Although the Company believes that such costs would not have a material adverse
effect on the Company, if required changes involve a greater expenditure than
the Company currently anticipates, the Company's results of operations and
ability to make expected distributions could be adversely affected.
EMPLOYEES. The Company employs approximately 135 persons. None of the
employees of the Company are subject to collective bargaining agreements. The
Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS. The Company is not currently involved in any litigation
nor, to its knowledge, is any material litigation currently threatened against
it or any of the Properties, except for routine litigation arising in the
ordinary course of business, most of which is expected to be covered by
liability insurance.
MORTGAGE INDEBTEDNESS AND LINE OF CREDIT
The Company does not have any non-consolidated mortgage indebtedness. In
addition, the Company has entered into an agreement with a bank for a Line of
Credit. The following are summaries of certain provisions of the Company's
indebtedness and of the Line of Credit. Such summaries do not purport to be
complete and are subject to and qualified in their entirety by reference to all
of the provisions of the relevant instruments, copies of which are filed as part
of the Company's filings with the Securities and Exchange Commission (the
"Commission") and are available for inspection as described under "ADDITIONAL
INFORMATION."
THE MORTGAGE NOTE. The first mortgage note issued by Financing Partnership
is a conventional, monthly pay, first mortgage note in the principal amount of
$140 million (the "Mortgage Note"). The Mortgage Note is a limited recourse
obligation of the Financing Partnership as to which, in the event of a default
under the Indenture or the Mortgage (as such terms are hereinafter defined),
recourse may be had only against the specific 46 Properties (the "Mortgage Note
Properties") and other assets that have been pledged as security therefor. The
Mortgage Note was issued to Kidder Peabody Acceptance Corporation I pursuant to
an Indenture, dated March 1, 1994, among the Financing Partnership, Bankers
Trust Company of California, N.A., and Bankers Trust Company (the "Indenture").
Defined terms used in this subsection"--Mortgage Indebtedness and Line of
Credit" and not otherwise defined are as defined in the Indenture.
The Mortgage Note bears interest on its outstanding principal balance at
the rate of 7.88% per annum, subject to increase in the event of a default in
the payment of any amount due, and matures on January 31, 2001. The Mortgage
Note provides for scheduled monthly payments of interest only which are due on
the first Business Day of each calendar month.
The Mortgage Note is secured by a blanket, first mortgage lien on the
Mortgage Note Properties (the "Mortgage"). The Mortgage Note is further secured
by (i) a first priority assignment of all present and future leases encumbering
portions of those Properties, (ii) a security interest in any personal property
owned by Financing Partnership and (iii) a collateral assignment of the right,
title and interest of Financing Partnership in and rights to all management
agreements relating to those Properties. As an additional security for the
Mortgage Note, Financing Partnership maintains with Bankers Trust Company, a
banking organization duly organized and existing under the laws of the State of
New York (the "Servicer") various "sweep accounts," a central cash collateral
account (the "Cash Collateral Account") and a contingency reserve account (the
"Contingency Reserve Account"). All rents with respect to the Mortgage Note
Properties are made payable to, and deposited directly in, the sweep accounts,
which are then transferred to the Cash Collateral Account, and all other
Property Income and Capital Event Proceeds are deposited into
37
<PAGE>
the Cash Collateral Account promptly upon receipt thereof. Cash of at least $7
million (the "Contingency Reserve") is maintained in the Contingency Reserve
Account.
The Indenture provides for a lockout period which prohibits Optional
Redemption Payments in respect of principal of the Mortgage Note (other than the
Premium-Free Redemption Payment) prior to November 22, 1998. Thereafter, the
Financing Partnership may make Optional Redemption Payments in respect of
principal of the Mortgage Note on any Distribution Date, subject to the payment
of a Yield Maintenance Charge in connection with such payments made prior to
August 1, 2000. Notwithstanding the foregoing, the Financing Partnership may be
required to make payments in respect of the principal of the Mortgage Note in
certain limited circumstances, and the Financing Partnership has a one-time
right, exercisable at any time during the term of the Mortgage Note, to make the
Premium-Free Redemption Payment in a principal amount not to exceed $7 million,
without any applicable Yield Maintenance Charges.
Covenants in the Indenture restrict Financing Partnership from, among other
things, engaging in any business or activity other than that in connection with
or relating to the ownership and operation of the Mortgage Note Properties,
incurring, creating or assuming any indebtedness or encumbrance other than the
Mortgage Note and as otherwise expressly permitted under the Indenture, or
liquidating or dissolving or entering into any consolidation or merger. The
Indenture also restricts Financing Partnership's right to terminate any of its
leases and requires Financing Partnership to maintain or cause the tenants to
maintain specified insurance coverage, including rental loss insurance covering
annual gross rentals net of noncontinuing expenses for a period of not less than
two years.
Under the terms of the purchase agreement relating to the Mortgage Note
Properties, Financing Partnership may be obligated to pay NationsBank a Deferred
Contingent Purchase Price (as defined in the purchase agreement). The payment of
the Deferred Contingent Purchase Price, which will in no event exceed $4.4
million, is due on April 1, 1998 if the actual four year cumulative cash flow
(as defined in the purchase agreement) of such Properties exceeds the projected
four year cumulative cash flow (as defined in the purchase agreement). Based on
the Company's estimates of future operations, the Company does not believe that
any Deferred Contingent Purchase Price will be payable.
In connection with the Reorganization, the Company assumed the two loans
issued by General Electric Capital Corporation ("GE Capital"). Both of the loans
have floating interest rates based on the GE Capital Composite Commercial Paper
Rate, which was 5.40% at June 30, 1996. The GE Capital Composite Commercial
Paper Rate has had a decrease of 43 basis points since December 31, 1995. The
first loan (as amended on April 27, 1994), which at June 30, 1996 had an
outstanding principal balance of $11.4 million and approximately $85,000
available to be drawn upon, bears interest at the rate of 9.40% per annum (at
June 30, 1996). The second loan, which had an outstanding principal balance of
$30.5 million at June 30, 1996, bears interest at the rate of 9.65% per annum
(at June 30, 1996). Both loans require monthly payments of interest. The
outstanding principal balance of the first loan is due at maturity on April 27,
1999. The outstanding principal balance of the second loan is payable in an
amount equal to 50% of the annual cash flow generated by One Boca Place at 2255
West Glades Road, Boca Raton, Florida (the "One Boca Place Property") after
payment of interest on the loan and tenant improvements and expenses on the One
Boca Place Property for each calendar year subsequent to 1995. This payment is
limited to a maximum amount of $750,000 per year. All remaining unpaid principal
on the second loan is payable at maturity on April 27, 1999.
In connection with the Towermarc Acquisition, the Company assumed eleven
separate mortgage notes. At June 30, 1996, an aggregate of $29.9 million of the
debt had fixed interest rates with a weighted average rate of 9.77% and an
aggregate of $27.5 million of the debt has floating interest rates, which, in
the aggregate, had a weighted average interest rate of 8.37% at June 30, 1996.
The notes have various years of
38
<PAGE>
maturities ranging from 1996 to 2001, with approximately $15.9 million due in
1996, including one loan for $14.0 million due on October 31, 1996.
LINE OF CREDIT. On March 20, 1996, the Company entered into an agreement
with The First National Bank of Boston for a full recourse $20 million secured
revolving credit facility. The Line of Credit has a term of three years and
bears interest at either LIBOR plus 175 basis points or The First National Bank
of Boston's Base Rate plus 75 basis points, at the Company's option. As of the
date of this Proxy Statement, the Company has drawn approximately $7 million on
the Line of Credit. The Line of Credit is available to fund acquisitions and
development activities, as well as for the refinancing of indebtedness and for
general corporate purposes, and is subject to customary covenants and reporting
requirements.
DISTRIBUTION POLICY
On March 8, 1996, the Company announced a distribution of $0.15 made on
April 3, 1996 to Stockholders of record on March 20, 1996. On an annualized
basis, this represents a distribution of $0.60 per share. Also on March 8, 1996
the Company announced a special dividend of $0.03 per share paid on March 28,
1996 and related to the Company's REIT dividend distribution requirements. On
July 8, 1996, the Company paid its second quarterly distribution of $0.15 per
share to Stockholders of record on July 1, 1996.
In order to qualify to be taxed as a REIT, each year the Company must make
distributions to Stockholders of at least 95% of its REIT taxable income (which
does not include capital gains). Because the Company's "REIT taxable income" is
calculated without reference to cash flow, under certain circumstances, the
Company may not have sufficient cash available to make the distributions
required under the REIT provisions of the Code.
Pursuant to the Merger Agreement, the Company is permitted to pay quarterly
dividends on shares of Common Stock in an amount not exceeding $0.15 per share
per quarter (or a prorated portion of such amount in the case of any portion of
a quarterly dividend) through the Closing Date. The Company intends to pay
dividends in the period prior to the Closing Date such that each share of Common
Stock will earn a dividend of $0.15 per quarter (or a prorated portion of such
amount in the case of any portion of a quarterly dividend).
The Company declared the Special Dividend to Stockholders of $0.60411 per
share, payable on August 30, 1996 to Stockholders of record at the close of
business on August 26, 1996, which distribution will represent the per share
portion of the Excluded Assets. See "THE MERGER AGREEMENT-- Excluded Assets."
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY
The Common Stock has been traded on the AMEX under the symbol "CKT" since
July 1, 1995. The following table sets forth the quarterly high and low sales
prices for the Common Stock.
PRICE
------------------
HIGH LOW
------ -------
1995
Quarter ended September 30, 1995.......................... $ 7-7/8 $ 6-5/8
Quarter ended December 31, 1995........................... $ 9-1/8 $ 7-13/16
1996
Quarter ended March 31, 1996.............................. $10-3/8 $ 8-9/16
Quarter ended June 30, 1996............................... $11-1/2 $ 9-1/8
Period July 1, 1996 through August 28, 1996............... $11-7/8 $11
39
<PAGE>
On April 26, 1996, the last trading day before the public announcement of
the execution of the Merger Agreement, the reported high and low sale prices per
share of Common Stock were $10.25 and $10.00, respectively. On August 28, 1996,
a recent trading day prior to this Proxy Statement, the reported closing sale
price per share of Common Stock was $11.00. Stockholders are urged to obtain
current information with respect to the price of Common Stock. As of August 26,
1996, the Company had 60 stockholders of record.
On December 28, 1995, the Company made its first distribution to
Stockholders of $0.036 per share. On March 8, 1996, the Company announced a
special dividend of $0.03 per share related to the Company's 1995 REIT dividend
distribution requirements. This special dividend was paid on March 28, 1996 to
Stockholders of record on March 18, 1996. Also on March 8, 1996, the Company
announced a quarterly distribution of $0.15 per share that was paid on April 3,
1996 to Stockholders of record on March 20, 1996.
On July 8, 1996, the Company paid its second quarterly distribution of
$0.15 per share to Stockholders of record on July 1, 1996.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 on a historical basis. The information set forth in the following table
should be read in conjunction with the financial statements included elsewhere
in this Proxy Statement. See "SELECTED FINANCIAL DATA" and "INDEX TO FINANCIAL
STATEMENTS" and the discussion contained in "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
(IN THOUSANDS)
<S> <C>
Debt:
Mortgage Indebtedness and Line of Credit............................. $ 244,267
Stockholders' Equity:
Preferred Stock, $0.01 par value, 10,000,000 shares authorized,
none issued or outstanding......................................... $ --
Common Stock, $0.01 par value,
50,000,000 shares authorized, 26,989,587 shares
issued and outstanding(1).......................................... $ 270
Additional paid-in capital........................................... $ 156,421
Accumulated earnings (deficit)....................................... $ --
------------
Total stockholders' equity...................................... $ 156,691
============
Total capitalization............................................ $ 400,958
============
- ----------------------------
</TABLE>
(1) Does not include Common Stock (a) reserved for issuance upon exercise of
the 2,331,500 Common Stock Purchase Warrants (the "Public Warrants"), each
of which Public Warrant entitles the holder thereof to purchase, during the
four-year period ending January 21, 1998, one share of Common Stock at
$10.00 per share, subject to adjustment, and the warrants to purchase
175,299 shares of Common Stock at an exercise price of $9.13 per share as
adjusted (the "GE Warrants" and together with the Public Warrants, the
"Warrants") (in the aggregate 2,506,799 shares), and (b) reserved for
issuance upon exercise of options granted pursuant to the Stock Option Plan
(as hereinafter defined) (2,500,000 shares), including options to purchase
an aggregate of 1,320,000 shares granted to officers and 27,000 shares
granted to directors and former directors.
40
<PAGE>
HIGHWOODS
Highwoods is a self-administered and self-managed REIT that owns and
operates the properties located in Raleigh-Durham, the Piedmont Triad and
Charlotte, North Carolina; Nashville, Tennessee; and Richmond, Virginia.
Highwoods conducts substantially all of its activities through, and all of
its properties are held directly or indirectly by, Highwoods/Forsyth Limited
Partnership (the "Operating Partnership"). Highwoods is the sole general partner
of the Operating Partnership and, as of June 30, 1996, owned 88% of the
partnership interests (the "Units") in the Operating Partnership. The remaining
Units are owned by limited partners (including certain officers and directors of
Highwoods). Each Unit may be redeemed by the holder thereof for cash or, at
Highwoods' option, one share (subject to certain adjustments) of common stock of
Highwoods. With each such exchange, the number of Units owned by Highwoods and,
therefore, Highwoods' percentage interest in the Operating Partnership, will
increase.
Highwoods was incorporated in Maryland in February 1994. Its executive
offices are located at 3100 Smoketree Court, Suite 600, Raleigh, North Carolina
27604, and its telephone number is (919) 872-4924. Highwoods also maintains
regional offices in the Piedmont Triad, Charlotte, Richmond and Nashville.
CAC
CAC is a Maryland corporation and a subsidiary of Highwoods. Pursuant to
the terms of the Merger Agreement, at the Effective Time, CAC will be merged
with and into the Company, with the Company continuing as the Surviving
Corporation. CAC's principal offices are c/o Highwoods Properties, Inc. at 3100
Smoketree Court, Suite 600, Raleigh, North Carolina 27604 and its telephone
number is (919) 872-4924.
41
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information
for the Company on a historical basis and pro forma basis and should be read in
conjunction with all of the financial statements and the notes thereto included
elsewhere in this Proxy Statement. The historical financial information
presented herein is based upon the separate historical financial statements of
the respective entities and the notes thereto which appear elsewhere in this
Proxy Statement and should be read in conjunction with such financial
statements. See "INDEX TO FINANCIAL STATEMENTS" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The unaudited pro
forma financial information presented herein is based upon the pro forma
financial statements of the Company and the notes thereto which appear elsewhere
in this Proxy Statement and should be read in conjunction with such financial
statements.
The pro forma financial information is not necessarily indicative of what
the Company's actual financial position and results of operations would have
been as of and for the period indicated, nor does it purport to represent the
future financial position or results of operations of the Company.
<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------------------------------- JUNE 30,
PREDECESSOR PREDECESSOR ----------------------------------
PRO FORMA HISTORICAL HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL
1995(1) 1995(3) 1994(4) 1993(4) 1996(1)(2) 1996 1995(4)
-------- --------- ----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental income and tenant
reimbursements............. $ 66,474 $ 42,489 $ 37,047 $ 3,813 $ 35,124 $ 34,604 $ 18,537
Management income(5)......... 2,654 770 -- -- 1,173 1,162 --
Interest and other(6)........ 1,233 1,007 318 155 672 671 492
---------- ---------- --------- ----------- ---------- ---------- ----------
Total revenue............ $ 70,361 $ 44,266 $ 37,365 $ 3,968 $ 36,969 $ 36,437 $ 19,029
---------- ---------- --------- ----------- ---------- ---------- ----------
Expenses:
Operating expenses........... $ 15,648 $ 8,632 $ 5,601 $ 611 $ 8,970 $ 8,845 $ 2,964
Real estate taxes and
insurance................ 6,678 3,680 3,343 359 3,388 3,559 1,619
General and administrative... 5,189 2,813 505 135 2,896 2,896 319
Cost incurred for Terminated
Offering................... -- -- -- -- 486 486 --
Management fees.............. 444 1,289 2,122 219 203 203 1,016
Depreciation and
amortization................. 12,247 7,366 5,110 525 6,430 6,322 3,018
Interest(7).................. 21,901 16,212 14,001 1,563 10,635 10,420 6,991
---------- ---------- --------- ----------- ---------- ---------- ----------
Total expenses........... $ 62,107 $ 39,992 $ 30,682 $ 3,412 $ 33,008 $ 32,731 $ 15,927
========== ========== ========= =========== ========== ========== ==========
Income before extraordinary
item......................... $ 8,254 $ 4,274 $ 6,683 $ 556 $ 3,961 $ 3,706 $ 3,102
========== ========== ========= =========== ========== ========== ==========
Income before extraordinary
item per share(8)............ $ 0.31 $ 0.31 $ N/A $ N/A $ 0.15 $ 0.14 $ 0.25
========== ========== ========= =========== ========== ========== ==========
BALANCE SHEET DATA:
Real estate assets, before
accumulated depreciation and
amortization................. N/A $ 302,156 $ 208,544 $ 203,767 $ 375,236 $ 392,442 $ 210,655
Real estate assets, after
accumulated
depreciation and
amortization................. N/A $ 290,566 $ 203,265 $ 203,249 $ 358,156 $ 375,362 $ 202,681
Total assets................... N/A $ 324,676 $ 223,211 $ 221,996 $ 398,941 $ 416,147 $ 236,286
Total debt..................... N/A $ 181,873 $ 160,000 $ 160,000 $ 244,267 $ 244,267 $ 160,000
Total liabilities.............. N/A $ 190,537 $ 165,322 $ 164,690 $ 259,456 $ 259,456 $ 168,388
CASH FLOW INFORMATION:
Net cash flow provided by
operating activities......... $ 16,924 $ 7,771 $ 10,830 $ 4,661 $ 14,073 $ 13,697 $ 6,635
Net cash flow used in investing
activities................... $ (49,500) $ (47,059) $ (6,567) $ (204,243) $ (10,039) $ (10,039) $ (3,297)
Net cash flow provided by (used
in)financing activities...... $ 49,488 $ 44,875 $ (5,073) $ 200,524 $ 375 $ 375 $ (524)
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
OTHER DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Funds from Operations(9)....... $ 21,410 $ 12,257 $ 12,463 $ 1,165 $ 11,463 $ 11,087 $ 6,475
Cash dividends declared per
share(10).................... N/A $ 0.20 N/A N/A N/A $ 0.34 $ 0.10
Book value per share(11)....... N/A $ 5.74 N/A N/A N/A $ 5.80 $ 5.12
- -------------------
</TABLE>
(1) Statement of operations data have been presented as if the following
transactions had occurred on January 1, 1995: (i) the Company had issued
8,818,231 shares of Common Stock at $7.35 per share to AEW, (ii) the Sabal
Acquisition, (iii) the CRI Merger and the Management Subsidiary Merger, (iv)
the Company had issued 1,875,000 shares of Common Stock at $8.00 per share
to Fortis, (v) the Towermarc Acquisition and (vi) the Newco transaction (see
note 2 below).
(2) Balance sheet data have been presented as if the following transactions had
occurred on June 30, 1996: The August 1996 sale to Newco of the Excluded
Assets, the assumption by Newco of Excluded Liabilities, and the Special
Dividend related thereto for Stockholders of record on August 26, 1996
payable on August 30, 1996. The Excluded Assets consist of parcels of
undeveloped land owned by the Company with a book value of $17.2 million as
of June 30, 1996 and contracts to acquire new properties. Such contracts
have no book value at June 30, 1996. If the Merger is not ultimately
consummated, the Company may elect to require Newco to transfer the Excluded
Assets back to the Company at Newco's cost. The historical financial
statements of operating properties subject to the existing purchase
contracts that are included in the Excluded Assets, and the pro forma
effects thereof, have not been provided and are not included in this pro
forma consolidated balance sheet or related statement of operations because
management currently considers the likelihood of exercising its election to
reacquire the Excluded Assets from Newco to be remote and such information
is not otherwise considered by management to be material to investors.
The Excluded Liabilities to be assumed by Newco are (i) the payment
obligations under a master lease to be entered into between Newco and
Highwoods, which total $1.8 million, (ii) any liability arising out of the
Company's indemnification obligation with respect to a particular lawsuit,
(iii) amounts payable to Highwoods relating to expenses incurred by the
Company in connection with the Merger (including solicitation fees payable,
if any, in connection with the exercise of the Public Warrants) in excess of
$9,150,000, if any. No adjustments are required to the pro forma
consolidated balance sheet of the Company as of June 30, 1996 to reflect the
assumption of the Excluded Liabilities by Newco.
(3) Statement of operations data represents the Company's activity for the year
ended December 31, 1995, which consists of 12 months of operations for the
Partnership Properties and the six months of operations for the period ended
December 31, 1995 for CRI, Management Subsidiary and Leasing Company.
Balance sheet data represents the consolidated assets, liabilities and
stockholders' equity of the Company at December 31, 1995.
(4) Represents the combined historical data for the Partnerships. The
Partnerships' inception dates occurred in the fourth quarter of 1993.
(5) Includes property management, development and construction fees, and leasing
and brokerage commissions from third parties.
(6) Includes gain on sale of land of $124,000 in historical and pro forma 1995.
(7) Interest expense includes amortization of deferred loan costs of $594,000,
$737,000, $667,000 and $84,000 for pro forma 1995, and historical 1995, 1994
and 1993, respectively, $584,000 for pro forma six months ended June 30,
1996, and $571,000 and $325,000 for the six months ended June 30, 1996 and
1995, respectively.
(8) Based on 26,925,431, 13,537,976, 26,958,145, 26,705,705 and 12,565,071
weighted average number of shares of Common Stock outstanding for pro forma
and historical 1995, pro-forma six months ended June 30, 1996 and historical
six months ended June 30, 1996 and 1995, respectively.
(9) FFO is defined by the NAREIT as net income or loss excluding gains or losses
from debt restructuring and sales of property plus depreciation and
amortization, and after adjustments for minority interest, unconsolidated
partnerships and joint ventures (adjustments for minority interests,
unconsolidated partnerships and joint ventures are calculated to reflect FFO
on the same basis). FFO does not represent cash flow from operating
activities as defined by generally accepted accounting principles, should
not be considered as an alternative to net income as an indicator of the
Company's operating performance and is not indicative of cash available to
fund all cash flow needs. The Company generally considers FFO to be an
appropriate measure of the performance of an equity REIT because it is
predicated on a cash flow analysis, as opposed to a measure predicated on
generally accepted accounting principles, which gives effect to non-cash
items such as depreciation. Since there is no formally agreed upon
calculation of FFO, and the NAREIT definition thereof is merely a gudeline,
computation of FFO may vary from one REIT to another. In March 1995, NAREIT
issued a clarification of its definition of FFO. The clarification provides
that amortization of deferred financing costs and depreciation of non-rental
real estate assets are no longer to be added back to net income in arriving
at FFO. The Company adopted these changes effective January 1, 1996. The
amounts in this table do not include the effect of the new clarifications.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Pro Forma Funds from Operations."
43
<PAGE>
The following table presents old computation of the Funds From Operations
for each period presented:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE SIX MONTHS
----------------------------------------------- ENDED JUNE 30,
PREDECESSOR PREDECESSOR ----------------------------------
PRO FORMA HISTORICAL HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL
1995 1995 1994 1993 1996 1996 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before extraordinary item.... $ 8,254 $ 4,274 $ 6,683 $ 556 $ 3,961 $ 3,706 $ 3,102
Add back:
Depreciation and amortization on
real estate assets............ $ 10,940 $ 6,354 $ 4,761 $ 518 $ 5,659 $ 5,552 $ 2,703
Depreciation on non-real estate
assets........................ 90 60 -- -- 82 82 9
Amortization of deferred leasing
costs......................... 682 682 349 7 421 420 334
Amortization of deferred loan
costs......................... 1,029 737 667 84 584 571 325
Amortization of goodwill and
management contracts.......... 535 270 -- -- 268 268 --
Amortization of organization
costs......................... 4 4 3 -- 2 2 2
Cost incurred for terminated
offering...................... -- -- -- -- 486 486 --
Deduct:
Gain on sale of land.............. (124) (124) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Funds From Operations............... $ 21,410 $ 12,257 $ 12,463 $ 1,165 $ 11,463 $ 11,087 $ 6,475
========= ========= ========= ========= ========= ========= =========
</TABLE>
(10) Based on 26,705,705, 12,565,071 and 13,537,976 weighted average number of
shares of Common Stock outstanding during the six months ended June 30,
1996 and 1995 and the year ended December 31, 1995, respectively. 1995
excludes and 1996 includes a special dividend of $0.03 per share related to
the Company's 1995 REIT dividend distribution requirements, which dividend
was declared on March 7, 1996 for stockholders of record on March 18, 1996
and was paid on March 28, 1996.
(11) Based on 23,362,492, 26,989,587 and 13,265,000 shares of Common Stock
outstanding as of December 31, 1995, June 30, 1996 and June 30, 1995,
respectively.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with the accompanying
financial statements and notes thereto.
GENERAL
The results of operations for the six months and three months ended June
30, 1995 do not include (i) the Company's acquisition of three properties on
July 1, 1995 and certain property management, leasing, brokerage and
construction management businesses from the Executive Officers and Mr. Crocker's
wife on June 30, 1995, resulting in the Reorganization; (ii) the Sabal
Acquisition and Towermarc Acquisition; and (iii) AEW and Fortis private
placements. As a result, the operating results of the Company for the six months
and three months ended June 30, 1996 and 1995 are not directly comparable.
The results of operations for the year ended December 31, 1994 represent
solely the operating results of the Predecessor Entities (as defined in Note 1
of the Financial Statements). As a result of the Reorganization, in connection
with which the Company acquired three of the Properties and certain leasing,
brokerage and construction management businesses from the Executive Officers and
Mr. Crocker's wife and became self-managed and self-administered, the operating
results of the Company for the year ended December 31, 1995 and the Predecessor
Entities for the year ended December 31, 1994 are not directly comparable. As
the inception dates of the two Predecessor Entities were October 28, 1993 and
November 17, 1993, a comparison of the results of operations for the year ended
December 31, 1994 to the period ended December 31, 1993 is not meaningful.
Rental income and tenant reimbursements are derived principally from base
rents, additional rents in the form of escalation billings and expense
reimbursements charged to tenants of the Properties. The recognition of rental
revenue is a function of the terms of the leases entered into with the tenants
and rent concessions granted. The operating expenses of the Properties include
operating costs typically incurred by office building projects of the type owned
by the Company.
RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1996 COMPARED
TO THE SIX AND THREE MONTHS ENDED JUNE 30, 1995
Net income for the six and three months ended June 30, 1996 was $3.7
million and $2.1 million compared with net income of $3.1 million and $1.6
million in 1995.
Rental income and tenant reimbursements were $34.6 million and $17.6
million for the six and three months ended June 30, 1996 compared to $18.5
million and $9.4 million in 1995. The increase of $16.1 million and $8.2 million
is primarily attributable to the properties acquired in the Reorganization, the
Sabal Acquisition and the Towermarc Acquisition, which contributed in the
aggregate $14.6 million and $7.2 million, in the respective periods, including a
$610,000 net lease termination fee earned in the first quarter of 1996.
Management fee and leasing commission revenue of approximately $1.2 million
and $572,000 in the aggregate for the six and three months ended June 30, 1996
relate to third-party management contracts acquired in the Reorganization and
Towermarc Acquisition.
Rental property operating expenses were $8.8 million and $4.3 million for
the six and three months ended June 30, 1996 compared to $3.0 million and $1.6
million in 1995. Of the total increase of $5.8 million and $2.7 million, $4.5
million and $2.3 million in the respective periods is attributable to the
properties acquired in the Reorganization, the Sabal Acquisition and the
Towermarc Acquisition. The
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<PAGE>
remaining increase is due to higher occupancies at the properties of the
Predecessor Entities and the change in the overall management of the Company
from third-party to primarily self-managed subsequent to June 30, 1995.
Real estate taxes and insurance costs were $3.6 million and $2.0 million
for the six and three months ended June 30, 1996, compared to $1.6 million and
$798,000 in 1995. All of the total net increase is attributable to the
properties acquired in the Reorganization, the Sabal Acquisition and the
Towermarc Acquisition.
Management fee expenses were $203,000 and $88,000 for the six and three
months ended June 30, 1996 compared to $1.0 million and $505,000 in 1995. This
decrease is due to the change in the overall management of the Company from
third-party to primarily self-managed as a result of the Reorganization
subsequent to June 30, 1995. The third-party asset management fees were
approximately $475,000 and $225,000 for the six and three months ended June 30,
1995 compared to none during 1996. Third-party property management fees were
approximately $541,000 and $280,000 for the six and three months ended June 30,
1995, respectively.
Depreciation and amortization of property and equipment was $5.6 million
and $3.0 million for the six and three months ended June 30, 1996 compared to
$2.7 million and $1.4 million in 1995. Of the total increase of $2.9 million and
$1.6 million, approximately $2.6 million and $1.3 million is attributable to the
properties acquired in the Reorganization, the Sabal Acquisition and the
Towermarc Acquisition.
Amortization of goodwill and management contracts was approximately
$268,000 and $134,000 for the six and three months ended June 30, 1996 compared
to none in 1995. This amortization relates to the goodwill and management
contract assets recorded by the Company in connection with the Reorganization.
General and administrative expenses were $2.9 million and $1.4 million for
the six and three months ended June 30, 1996 compared to approximately $319,000
and $40,000 in 1995. This $2.6 million and $1.4 million increase resulted from
the Reorganization as well as becoming a public company subsequent to June 30,
1995.
Interest expense was $10.4 million and $5.4 million for the six and three
months ended June 30, 1996 compared to $7.0 million and $3.5 million in 1995.
Interest expense resulting from debt assumed in the Reorganization and Towermarc
acquisition was approximately $4.5 million and $2.3 million for the respective
periods in 1996. This was offset by a reduction of approximately $1.2 million
and $600,000 of interest expense for the respective periods in 1996 resulting
from the extinguishment of $20 million of debt on December 28, 1995.
Costs incurred for terminated offering of $486,000 and $96,000 represents
costs incurred by the Company for the six and three months ended June 30, 1996
in connection with a planned offering of Common Stock which was canceled due to
the April 29, 1996 announcement that Highwoods would be acquiring all of the
outstanding Common Stock.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1994
Net income for the year ended December 31, 1995 was $3.8 million compared
with net income of $6.7 million in 1994. The decrease in net income is primarily
attributable to the Reorganization, as discussed further below. The 1995 income
before extraordinary item excludes an extraordinary loss of approximately
$400,000 arising from the write-off of unamortized deferred loan costs
attributable to the pre-payment of a $20.0 million junior note (the "Junior
Note") on December 28, 1995.
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<PAGE>
Rental income and tenant reimbursements were $42.5 million for the year
ended December 31, 1995 compared to $37.0 million in 1994. The increase of $5.5
million is primarily attributable to the three Properties acquired in the
Reorganization, which contributed $5.1 million. The remaining increases are due
to increases in expense reimbursements, as well as to an increase in the
percentage of net rentable square feet leased at the Partnership Properties from
91.5% at December 31, 1994 to 92.4% at December 31, 1995.
Management fee and leasing commission revenue of approximately $800,000 in
the aggregate relate to third-party management contracts acquired in the
Reorganization.
Rental property operating expenses were $8.6 million for the year ended
December 31, 1995 compared to $5.6 million in 1994. Of the total increase of
$3.0 million, $1.3 million is attributable to the three Properties acquired in
the Reorganization. The remaining increase is due to higher occupancies and the
change in the overall management of the Company from third-party to primarily
self-managed starting in 1995.
Real estate taxes and insurance costs were $3.7 million for the year ended
December 31, 1995, compared to $3.3 million in 1994. After considering the
impact of approximately $500,000 of the three Properties acquired in the
Reorganization, there was a net decrease of approximately $100,000 due to lower
insurance premium rates in 1995 and lower assessed valuations of the Properties
in several locations resulting from the Company's efforts to reduce real estate
taxes.
Management fee expenses were $1.3 million for the year ended December 31,
1995 compared to $2.1 million in 1994. This decrease is due to the change in the
overall management of the Company from third-party to primarily self-managed in
1995. The third-party asset management fees were approximately $500,000 for the
six months ended June 30, 1995 compared to none during the remainder of 1995.
Third-party property management fees were approximately $500,000 for the six
months ended June 30, 1995 compared to approximately $300,000 during the
remainder of 1995.
Amortization of deferred leasing costs was approximately $700,000 for the
year ended December 31, 1995 compared to approximately $300,000 in 1994. This
increase is due to the incurrence of $3.8 million of leasing costs since
inception on November 17, 1993, at which date there were no deferred leasing
costs. Of this amount, $1.5 million was incurred in 1995. The recognition of
amortization of deferred leasing costs is a function of the terms of the leases
entered into with the tenants.
Depreciation and amortization of property and equipment was $6.4 million
for the year ended December 31, 1995 compared to $4.8 million in 1994. Of the
total increase of $1.6 million, approximately $800,000 is attributable to the
three Properties acquired in the Reorganization. The remaining increase is
principally due to the incurrence of an additional $10.6 million in tenant and
building improvements since inception on November 17, 1993, of which $4.6
million was incurred in 1995. The majority of such expenditures relates to
tenant improvements, the amortization of which is a function of the terms of the
leases entered into with the tenants
Amortization of goodwill and management contracts was approximately
$300,000 for the year ended December 31, 1995 compared to none in 1994. This
amortization relates to the goodwill ($4.1 million) and management contract
($1.4 million) assets recorded by the Company in connection with the
Reorganization.
General and administrative expenses were $2.8 million for the year ended
December 31, 1995 compared to approximately $500,000 in 1994. This $2.3 million
increase resulted from the Reorganization as well as becoming a public company
in 1995.
Interest and other income was approximately $900,000 for the year ended
December 31, 1995 compared to approximately $300,000 in 1994. This increase is
primarily attributable to approximately
47
<PAGE>
$200,000 of non-recurring income earned during 1995 and an increase in interest
income due to higher average interest rates and cash balances in 1995 as
compared to 1994.
PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
On a pro forma basis, after giving effect to the Reorganization, the Sabal
Acquisition, the Towermarc Acquisition and the Fortis and AEW private placements
as if they had occurred on January 1, 1995, income before extraordinary item
would have been $7.8 million for the year ended December 31, 1995, representing
an increase of $3.5 million over the historical income before extraordinary item
for such period. The $3.5 million increase in pro forma income before
extraordinary item is attributable to the pro forma income related to the Sabal
Acquisition and Towermarc Acquisition and the use of the net proceeds of the AEW
and Fortis private placements to purchase the properties in the Sabal
Acquisition, pre-pay a $20.0 million unsecured note and pay down approximately
$9.4 million of the debt assumed by the Company in connection with the Towermarc
Acquisition.
MATERIAL CHANGES IN FINANCIAL CONDITION AT JUNE 30, 1996 COMPARED TO DECEMBER
31, 1995
Rental properties, net of accumulated depreciation, increased by $75.7
million from December 31, 1995 to June 30, 1996. In addition, land held for
investment increased by $5.2 million. These increases are primarily attributable
to the Towermarc Acquisition on January 16, 1996. Office building under
construction of $3.9 million represents $1.2 million of land costs and $2.7
million in construction to date on the Company's construction of an office
building in Columbia, South Carolina.
The Company's cash and cash equivalents at June 30, 1996 increased by $4.0
million compared to December 31, 1995. This increase resulted from $13.7 million
net cash provided by operating activities and $375,000 net cash provided by
financing activities offset by $10.0 million net cash used in investing
activities. The net cash used in investing activities resulted primarily from
$1.7 million used to acquire certain rental properties and undeveloped land,
$1.8 million for the acquisition and improvements of land held for investment,
$3.3 million for the office building under construction, and $3.1 million for
building and tenant improvements and leasing costs. The net cash provided by
financing activities resulted from the receipt of $15.0 million from the Fortis
private placement of the Company's Common Stock and $5.0 million borrowed on the
Line of Credit. These receipts were offset primarily by payments to reduce debt
of $9.8 million, $1.0 million for the payment of financing costs, $4.9 million
in dividends paid, $3.0 million increase in the balance of restricted cash, and
the payment of $1.0 million in offering costs related to the AEW and Fortis
private placements.
The balance in restricted cash at June 30, 1996 increased by $3.0 million
compared to December 31, 1995 primarily due to the funding of real estate tax
and insurance escrows into the restricted cash accounts referred to above.
Accounts payable and accrued expenses were $2.6 million at June 30, 1996
compared to $2.1 million at December 31, 1995. Of this $500,000 increase,
$335,000 relates to operation of the properties from the Sabal and Towermarc
Acquisitions. In addition, amounts due for office building under construction,
building and tenant improvements and leasing commissions increased by a net
$192,000.
Accrued real estate taxes at June 30, 1996 increased by $3.1 million
compared to December 31, 1995. A significant portion of the Company's
portfolio's real estate taxes are due in January of each year. The amounts which
were due in January 1996 were paid in December 31, 1995. Accordingly, the
balance in accrued real estate taxes increases during the year.
The $4.2 million dividend payable was paid on July 8, 1996 for Stockholders
of record on July 1, 1996.
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<PAGE>
Common Stock and additional paid-in capital at June 30, 1996 increased by
approximately $36,000 and $23.7 million, respectively, since December 31, 1995.
The increase is primarily due to a $15.0 million private placement of the
Company's Common Stock and the issuance of 1,687,939 shares of Common Stock for
the Towermarc Acquisition. 8,500 shares of Common Stock were issued during the
second quarter of 1996 due to the conversion of Public Warrants at $10.00 per
share. These increases were offset by approximately $4.1 million of dividends
paid or accrued during the six month period in excess of net income and retained
earnings.
MATERIAL CHANGES IN FINANCIAL CONDITION AT DECEMBER 31, 1995 COMPARED TO
DECEMBER 31, 1994
The Company's cash and cash equivalents at December 31, 1995 increased by
$5.6 million compared to December 31, 1994. This increase resulted from $7.8
million net cash provided by operating activities and $44.9 million net cash
provided by financing activities offset by $47.1 million net cash used in
investing activities. The net cash used in investing activities resulted
primarily from $42.5 million used to acquire certain rental properties and
undeveloped land, $6.0 million in capital expenditures on building and tenant
improvements and deferred leasing costs and $1.0 million in expenditures for
acquisition costs deferred at December 31, 1995. These expenditures were offset
by $2.1 million in proceeds from the sale of a parcel of the undeveloped land
acquired and approximately $900,000 in cash received in the Reorganization. The
net cash provided by financing activities included the receipt of $64.8 million
from the AEW and Fortis private placements of Common Stock, $2.1 million from
the additional issuance of Common Stock to the Apollo Fund, $1.8 million from a
reduction in the balance of restricted cash (including approximately $500,000
related to the Reorganization) and $1.3 million in capital contributions from
the Apollo Fund. These receipts were offset primarily by the payoff of the $20.0
million Junior Note, $2.7 million in dividends paid, and the payment of $2.9
million in offering and deferred offering costs related to the Reorganization
and the AEW and Fortis private placements.
The balance in restricted cash at December 31, 1995 decreased by $1.3
million compared to December 31, 1994, primarily due to the fact that the
December 1995 interest due on both the Mortgage Note (approximately $900,000)
and the Junior Note (approximately $200,000) were both paid in December 1995
while the same amounts for December 1994 were not paid until January 1995.
Accrued interest expense at December 31, 1995 decreased by approximately
$800,000 compared to December 31, 1994. The net decrease is due to a reduction
in interest payable at December 31, 1995 on the Mortgage Note and Junior Note
discussed above, offset by interest payable on mortgage notes payable acquired
in the Reorganization.
Other liabilities represent the amount by which the fair value of mortgage
notes payable acquired in the Reorganization and additional interest amounts
exceeded the outstanding principal balance of such mortgage notes payable.
Common Stock and additional paid-in capital increased by approximately
$100,000 and $75.0 million, respectively, since December 31, 1994. These
increases are primarily due to a $64.8 million private placement of Common Stock
offset by $1.2 million in offering costs, an additional issuance of Common Stock
to the Apollo Fund for $2.1 million, an additional $1.8 million in capital
contributions from the Apollo Fund and the issuance of 1,657,500 shares of
Common Stock in the Reorganization for net assets having a fair value of $10.3
million. Offering costs relating to the Reorganization amounted to $2.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Capital resources for the six months ended June 30, 1996 were provided
primarily by operations in addition to a $15.0 million private placement of the
Common Stock and $5.0 million borrowed on the Line
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<PAGE>
of Credit. The net proceeds from the private placement were used principally to
pay off $9.4 million of debt assumed in the Towermarc Acquisition. Assets
acquired in the Towermarc Acquisition were acquired primarily through the
issuance of Common Stock and the assumption of debt.
Capital resources for the year ended December 31, 1995 were provided
primarily by operations and the net proceeds from the sale of a parcel of
undeveloped land ($2.1 million) in addition to a $64.8 million private placement
of Common Stock. The net proceeds from the private placement were used
principally to acquire rental properties and undeveloped land ($42.6 million)
and to pay off the Junior Note ($20.0 million). Assets acquired in the
Reorganization were acquired through the issuance of Common Stock.
At June 30, 1996, the Company's Properties were approximately 94.2% leased.
The Properties (including the Properties acquired in the Towermarc
Acquisition) had an Annual Base Rent per square foot leased of $10.84 as of
December 31, 1995 compared to $11.24 as of June 30, 1996. Annual Base Rent at
June 30, 1996 and December 31, 1995, is defined as the amounts contractually due
(excluding percentage rents due and recoveries from tenants for common area
maintenance charges, taxes or other items) for the month of June 1996 and
December 1995, respectively, annualized, for continuing leases in force on or
before June 30, 1996 and December 31, 1995.
The Properties (excluding the Properties acquired in the Towermarc
Acquisition) had an Annual Base Rent per square foot leased of $10.00 ($9.54 for
the properties of the Predecessor Entities') as of December 31, 1995 compared to
$9.27 (Partnership Properties only) as of December 31, 1994. Annual Base Rent at
December 31, 1995 and December 31, 1994, is defined as the amounts contractually
due (excluding percentage rents due and recoveries from tenants for common area
maintenance charges, taxes or other items) for the month of December 1995 and
1994, respectively, annualized, for continuing leases in force on or before
December 31, 1995 and 1994, respectively.
The Company's consolidated historical indebtedness at December 31, 1995 was
$181.9 million at a weighted average interest rate of 8.37%. The Company's
consolidated indebtedness at June 30, 1996 was $244.3 million at a weighted
average interest rate of 8.45%. Such indebtedness included (i) a mortgage note
(the "Mortgage Note") issued by the Financing Partnership and secured by the
Properties owned by the Financing Partnership, (ii) two loans issued by GE
Capital to CRI and secured by the three Properties in Boca Raton, Florida, (iii)
various loans assumed in the Towermarc Acquisition, and (iv) the Line of Credit
with the First National Bank of Boston.
The Mortgage Note is a conventional, monthly pay, first mortgage note in
the principal amount of $140 million. The Mortgage Note is a limited recourse
obligation of the Financing Partnership that was issued to Kidder Peabody
Acceptance Corporation I pursuant to the Indenture. The Mortgage Note bears
interest on its outstanding principal balance at the rate of 7.88% per annum,
subject to increase in the event of a default in the payment of any amount due,
and matures on January 3, 2001. The Mortgage Note provides for scheduled monthly
payments of interest only which are due on the first business day of each
calendar month.
The Mortgage Note is secured by a blanket, first mortgage lien on the
Properties owned by the Financing Partnership, as well as (i) a first priority
assignment of all present and future leases encumbering portions of those
Properties, (ii) a security interest in any personal property owned by Financing
Partnership and (iii) a collateral assignment of the right, title and interest
of Financing Partnership in and rights to all management agreements relating to
those Properties. As an additional security for the Mortgage Note, Financing
Partnership maintains with the Servicer various "sweep accounts," the Cash
Collateral Account and the Contingency Reserve Account. All rents with respect
to the Properties securing the Mortgage Note are made payable to, and deposited
directly in, the sweep accounts, which are then transferred to the Cash
Collateral Account, and all other property income and capital event proceeds are
deposited into the Cash
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<PAGE>
Collateral Account promptly upon receipt thereof. Cash of at least $7 million is
maintained in the Contingency Reserve Account.
In connection with the Reorganization, the Company assumed the two loans
issued by GE Capital. Both of the loans have floating interest rates based on
the GE Capital Composite Commercial Paper Rate, which was 5.40% at June 30,
1996. The GE Capital Composite Commercial Paper Rate has had a decrease of 43
basis points since December 31, 1995. The first loan (as amended on April 27,
1994), which, at June 30, 1996, had an outstanding principal balance of $11.4
million and approximately $85,000 available to be drawn upon, bears interest at
the rate of 9.40% per annum (at June 30, 1996). The second loan, which had an
outstanding principal balance of $30.5 million at June 30, 1996, bears interest
at the rate of 9.65% per annum (at June 30, 1996). Both loans require monthly
payments of interest. The outstanding principal balance of the first loan is due
at maturity on April 27, 1999. The outstanding principal balance of the second
loan is payable in an amount equal to 50% of the annual cash flow generated by
the One Boca Place Property after payment of interest on the loan and tenant
improvements and expenses on the One Boca Place Property for each calendar year
subsequent to 1995. This payment is limited to a maximum amount of $750,000 per
year. All remaining unpaid principal on the second loan is payable at maturity
on April 27, 1999.
In connection with the Towermarc Acquisition in January 1996, the Company
assumed eleven separate mortgage notes. At June 30, 1996, an aggregate of $29.9
million of the debt has fixed interest rates with a weighted average rate of
9.77% and an aggregate of $27.5 million of the debt has floating interest rates,
which in the aggregate had a weighted average interest rate of 8.37% at June 30,
1996. The notes have various years of maturities ranging from 1996 to 2001, with
approximately $15.9 million due in 1996, including one loan for $14.0 million
due on October 31, 1996.
On March 20, 1996, the Company entered into an agreement with The First
National Bank of Boston for the Line of Credit, which is a full recourse $20
million secured revolving credit facility. The Line of Credit has a term of
three years and bears interest at either the LIBOR plus 175 basis points or The
First National Bank of Boston's Base Rate plus 75 basis points, at the Company's
option. The Line of Credit is available to fund acquisitions and development
activities, as well as for the refinancing of indebtedness and for general
corporate purposes, and is subject to customary covenants and reporting
requirements. As of June 30, 1996, the Company had borrowed $5 million on this
Line of Credit, which had an interest rate of 7.25% on June 30, 1996. On July 5,
1996, the Company borrowed an additional $2 million on this Line of Credit.
The Company expects to meets its liquidity requirements (excluding debt
principal payments) through net cash flows provided by property operations. The
Company expects to pay its debt principal payments due in 1996 by refinancing.
Management believes the cash flows from operations are adequate to fund property
operations, related leasing costs and tenant and building improvements and to
meet debt service (excluding debt principal payments) requirements.
Additionally, the Indenture requires the maintenance of a $7.0 million
contingency fund as additional security in the event that operations of the
Properties securing the Mortgage Note do not provide sufficient cash flows for
the payment of tenant lease-up costs. Escrow accounts to pay real estate taxes
and insurance have been established and will continue to be funded by the AP
Southeast Partnership from the monthly cash receipts received from its
Properties.
On July 1, 1996, 707,870 shares of Common Stock were issued when the
Company received $7.1 million as a result of the exercise of Public Warrants at
$10.00 per share. On August 26, 1996, 1,410,550 shares of Common Stock were
issued when the Company received net proceeds of $13.6 million as a result of
the exercise of Public Warrants at $10.00 per share.
The Company paid a special dividend of $809,000 on March 28, 1996 related
to the Company's 1995 REIT dividend distribution requirements. On April 3, 1996,
the Company paid a dividend of $4,047,000
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which was the Company's first quarterly dividend. On July 8, 1996, the Company
paid its second quarterly dividend of $4,155,000 to Stockholders of record on
July 1, 1996.
For a discussion of events subsequent to June 30, 1996, see "THE PARTIES TO
THE MERGER-- The Company--Recent Developments."
PRO FORMA FUNDS FROM OPERATIONS
Management believes that FFO is the industry standard for reporting the
operations of real estate investment trusts. In March 1995, the National
Association of Real Estate Investment Trusts ("NAREIT") issued a clarification
of its definition of FFO effective for years beginning after December 31, 1995.
The clarification provides that amortization of deferred financing costs and
depreciation of non-real estate assets are no longer to be added back to net
income in arriving at FFO. The Company adopted the changes effective the year
beginning January 1, 1996. The following table presents the Company's pro forma
FFO for the six months ended June 30, 1996 and the year ended December 31, 1995
under both methods of calculation for illustrative purposes (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
NEW METHOD OLD METHOD NEW METHOD OLD METHOD
<S> <C> <C> <C> <C>
Income before extraordinary item........................... $ 3,961 $ 3,961 $ 8,254 $ 8,254
Add back:
Depreciation and amortization of real estate assets...... 5,659 5,659 10,940 10,940
Depreciation of non-real estate assets................... -- 82 -- 90
Amortization of deferred leasing costs................... 421 421 682 682
Amortization of deferred loan costs...................... -- 584 -- 1,029
Amortization of goodwill and management contracts........ -- 268 -- 535
Amortization of organization costs....................... -- 2 -- 4
Cost incurred for Terminated Offering.................... 486 486 -- --
Deduct:
Gain on sale of land..................................... -- -- (124) (124)
Pro Forma Funds From Operations............................ $ 10,527 $ 11,463 $ 19,752 $ 21,410
</TABLE>
While management believes that FFO is the most relevant and widely used
measure of the Company's operating performance, such amount does not represent
cash flow from operations as defined by generally accepted accounting
principles, should not be considered as an alternative to net income as an
indicator of the Company's operating performance and is not indicative of cash
available to fund all cash flow needs. The Company generally considers FFO to be
an appropriate measure of the performance of an equity REIT because it is
predicated on a cash flow analysis, as opposed to a measure predicated on
generally accepted accounting principles, which gives effect to non-cash items
such as depreciation. Since there is no formally agreed upon calculation of FFO,
and the NAREIT definition thereof is merely a guideline, computation of FFO may
vary from one REIT to another.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information with respect to the directors and executive
officers of the Company:
NAME AGE POSITION
- ---- --- --------
Thomas J. Crocker(1)(4) 42 Chairman of the Board,
Chief Executive Officer and Director
Richard S. Ackerman(4) 37 President, Chief Operating Officer and Director
Robert E. Onisko(4) 48 Executive Vice President, Chief Financial
Officer and Secretary
William L. Mack 56 Director
Kevin McCall 42 Director
James P. Neeves(2)(3) 59 Director
Lee S. Neibart(1)(2) 45 Director
Thomas H. Nolan, Jr. 39 Director
W. Edward Scheetz(1)(3) 31 Director
S. Bruce Wunner(2) 53 Director
- ------------------
(1) Serves as a member of the Executive Committee (as hereinafter defined)
(2) Serves as a member of the Audit Committee (as hereinafter defined)
(3) Serves as a member of the Compensation Committee (as hereinafter defined)
(4) As described in "Executive Compensation--Severance Agreements Entered Into
in Connection with the Merger," Messrs. Crocker, Ackerman and Onisko
resigned from their positions as officers, and Messrs. Crocker and Ackerman
from their positions as directors, of the Company as of June 30, 1996. Since
June 30, 1996, Messrs. Crocker, Ackerman and Onisko have continued to
perform their prior functions and responsibilities in the capacity of
consultants to the Company.
Thomas J. Crocker was Chief Executive Officer and Chairman of the Board of
the Company from its formation until June 30, 1996 and was the Chief Executive
Officer and Chairman of the Board of the Original REIT from its inception in
1992 until the Reorganization. In addition, he was the Chief Executive Officer
of certain predecessor entities prior to the Reorganization. Prior to 1984, Mr.
Crocker was a real estate lending officer at Chemical Bank. Mr. Crocker is a
board member of the National Conference of Christians and Jews and a
member-elect of the National Board thereof. He is the recipient of the 1992
Ernst & Young and South Florida Business Journal's Best Overall Real Estate Deal
of the Year honors; 1991 Sun-Sentinel Excalibur Award for Palm Beach County;
1991 NAIOP Developer of the Year; past chairman of the Boca Raton Chamber of
Commerce; and a member of the National Association of Industrial and Office
Parks.
Richard S. Ackerman served as President, Chief Operating Officer and a
Director of the Company from the Reorganization until June 30, 1996. Mr.
Ackerman was President of the Original REIT from its inception until the
Reorganization and Vice President of a certain predecessor entity from August
1987 to June 30, 1992. From 1985 to 1987, Mr. Ackerman was general counsel of
Triple T Hotel Management Company, a developer, owner and manager of hotels,
where he was responsible for financing and legal affairs. From 1982 to 1985, he
was a real estate banking officer with Mellon Bank. Mr. Ackerman
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<PAGE>
graduated from Tulane University with a Bachelor of Arts in 1980 and a Juris
Doctor in 1982. He is a member of the Florida and Pennsylvania Bars.
Robert E. Onisko was the Chief Financial Officer of the Company from the
Reorganization until June 30, 1996. Mr. Onisko served as the Chief Financial
Officer of the Original REIT from its inception until the Reorganization and of
a certain predecessor entity from 1984 to June 1985. Prior to 1984, Mr. Onisko
served in various financial and accounting positions with Arvida Corp. and The
Cadillac Fairview Corporation Limited, both national real estate developers, and
as an accountant with Peat, Marwick, Mitchell & Co. in Boston. Mr. Onisko
graduated from Clark University with a Bachelor of Science in Business
Administration and from Babson College with a Masters in Business
Administration. He is a member of both the American Institute of Certified
Public Accountants and the Florida Institute of Certified Public Accountants.
William L. Mack has served as a Director of the Company since the
Reorganization. Since 1969, Mr. Mack has served as President and a Managing
Partner of the Mack Organization, a national owner, investor and developer of
office and industrial buildings as well as other income producing real estate
investments. Mr. Mack has been President of Apollo Real Estate Management, Inc.
("AREM"), the general partner of AREA, which is the managing general partner of
the Apollo Fund, since December 1994, and is a consultant to Apollo Advisors,
L.P. Mr. Mack is a Director of the New York State Urban Development Corporation
and a member of the Wharton Undergraduate Executive Board of the University of
Pennsylvania. Mr. Mack is also a Director of Capital Apartment Properties, Inc.,
a multi-family residential REIT, and Gillett Holdings, Inc., a holding company
for ski resorts in Vail and Beaver Creek, Colorado.
Kevin McCall has been a Director of the Company since January 1996. Mr.
McCall has been with AEW since 1990 and is responsible for directing AEW's
quality investment management. Mr. McCall also oversees AEW's asset management,
portfolio enhancement services and research functions. Prior to joining AEW, Mr.
McCall was a Partner and Senior Vice President of Spaulding & Slye Company,
where he managed all brokerage, development, property management and
construction activity in the New England region. He is a graduate of Harvard
University with a Bachelor of Arts and a Masters in Business Administration.
James P. Neeves has been a Director of the Company since the Reorganization
and was a director of the Original REIT from its inception. Mr. Neeves is a
private investor. Until September 1995, he was an Executive Vice President of
W.R. Grace & Co., a multinational chemical company, where he was group executive
of Corporate Management and Corporate Investments. Mr. Neeves was employed by
W.R. Grace & Co. since 1966 and held numerous executive positions since 1985,
including Executive Vice President of the General Development Group.
Lee S. Neibart has been a Director of the Company since the Reorganization.
Mr. Neibart was vice president of the Company's Predecessor Entities from
September 1994 until the Reorganization. Mr. Neibart has directed portfolio
management for the Apollo Fund since 1993. From prior to 1989 to 1993, Mr.
Neibart was Executive Vice President and Chief Operating Officer of the Robert
Martin Company, a private real estate development and management firm based in
Westchester County, New York. Mr. Neibart is a past President of the National
Association of Industrial and Office Parks in New York. Mr. Neibart is also a
director of Capital Apartment Properties, Inc., and Roland International, Inc.,
a commercial real estate company.
Thomas H. Nolan, Jr. has been a Director of the Company since January 1996.
Mr. Nolan has worked at Aldrich Eastman Waltch, a national real estate
investment advisor and the investment advisor to AEW, since 1984. He is a
Director of Portfolio Management of Aldrich Eastman Waltch and Vice President of
AEW, Inc. Mr. Nolan is also a director of Bedford Property Investors and serves
as a member of the Partnership Committee of the Taubman Realty Group Limited
Partnership.
54
<PAGE>
W. Edward Scheetz has been a Director of the Company since the
Reorganization. Mr. Scheetz was vice president of the Company's Predecessor
Entities from September 1994 until the Reorganization. Mr. Scheetz has been a
limited partner of AREA since May 1993 and has directed the investment
activities for the Apollo Fund since that time. From 1989 to 1993, Mr. Scheetz
was a principal of Trammell Crow Ventures, Ltd., a national real estate
investment firm. Mr. Scheetz is also a director of Capital Apartment Properties,
Inc., Koll Management Services, Inc. and Roland International, Inc.
S. Bruce Wunner has been a Director of the Company since the Reorganization
and was a Director of the Original REIT from its inception. Mr. Wunner is the
President of S. B. Wunner Associates, Inc., an international management
consulting firm providing franchising, real estate, construction development and
organizational advice. From 1988 to December 1995, he was Senior Vice President
and Relationship Partner of McDonald's Corporation, a multinational restaurant
company, with responsibilities for Central and South America and the Caribbean.
Mr. Wunner was part of the McDonald's Corporation's organization since 1962,
serving as Regional Vice President in charge of South Florida and the Caribbean
from 1986 to 1989 and as Regional Vice President for the North Carolina region
from 1974 to 1985.
Each of the directors serves from the date of election until the next
annual meeting of Stockholders and until such director's successor is elected
and qualified. A director may be removed only for cause and only upon the
affirmative vote of Stockholders holding at least two-thirds of the outstanding
shares of Common Stock.
The executive officers are chosen by and serve at the discretion of the
Board of Directors of the Company. The Company has employment agreements and
severance agreements with Messrs. Crocker, Ackerman and Onisko. See "--Executive
Compensation--Employment Agreements" and "--Executive Compensation--Severance
Agreements Entered Into in Connection with the Merger."
OTHER KEY PERSONNEL. Christopher L. Becker has been a Senior Vice President
of the Company since the Reorganization. Mr. Becker manages the Company's
Atlanta region, which includes over 2.2 million square feet located in Atlanta,
Georgia, Birmingham, Alabama, and Tampa, Orlando and Jacksonville, Florida. From
August 1985 to September 1990, Mr. Becker was Vice President of a certain
predecessor entity. From October 1990 to March 1993, he was employed as an
independent consultant, and he rejoined a predecessor entity in April 1993. Mr.
Becker graduated from the American Graduate School of International Management
with a Masters in Management in 1980 and a Bachelor of Science from Florida
State University in 1978.
Thomas F. Cochran has been Senior Vice President of the Company since the
Reorganization. Mr. Cochran manages the Company's Charlotte region, which
includes 2.2 million square feet located in Asheville, Charlotte, Greensboro,
Raleigh and Winston-Salem, North Carolina, Columbia and Greenville, South
Carolina and Norfolk, Virginia. From 1977 to October 1993, Mr. Cochran was a
Senior Vice President for NationsBank where he was responsible for development
and asset management of the Partnership Properties. From November 1993 to the
Reorganization, he was a Senior Vice President of Patriot American Asset
Management Corporation, the prior asset manager of the Partnership Properties.
He graduated from the University of North Carolina at Chapel Hill with a
Bachelor of Science in Business Administration in 1976.
Drew P. Cunningham has been a Senior Vice President of the Company since
the Reorganization. Mr. Cunningham manages the Company's South Florida region,
which includes 2.0 million square feet located in Boca Raton, Deerfield Beach,
Delray Beach, and Fort Lauderdale, Florida. From August 1988 to June 1995, he
was a Vice President of a certain predecessor entity where he was responsible
for asset management of 1.5 million square feet of office space. Mr. Cunningham
graduated from Nova University with a Masters in Business Administration in 1991
and Villanova University with a Bachelor of Science in Business Administration
in 1985.
55
<PAGE>
Michael E. Harris joined the Company as a Senior Vice President in January
1996. Mr. Harris manages the Company's Memphis region, which includes 1.0
million square feet located in Memphis and Nashville, Tennessee. Prior to
joining the Company, from July 1981 to January 1996, Mr. Harris served as Senior
Vice President, General Counsel and Chief Financial Officer of Towermarc
Corporation, a privately owned real estate development firm headquartered in
Boston, Massachusetts. While at Towermarc Corporation, Mr. Harris was directly
responsible for financing activities and participated in the development and
management of office properties in Memphis, Tampa, Jacksonville and Boston. Mr.
Harris received a Juris Doctor degree from the University of Arkansas School of
Law, a Master of Business Administration in Finance from The University of
Memphis and a Bachelor of Arts from the University of Mississippi.
Thomas C. Brockwell has been a Senior Vice President of the Company since
the Reorganization. Mr. Brockwell is responsible for the Company's acquisition
activities. From August 1992 to March 1994, he was a Director at Equitable Real
Estate Investment Management, Inc. He joined a certain predecessor entity as
Vice President of Acquisitions in April 1994 and held such position until June
1995. He is a graduate of Villanova University with a Bachelor of Science
degree.
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE. The Executive Committee of the Board of Directors (the
"Executive Committee") consists of three members. The Executive Committee has
all of the powers and authority of the Board of Directors not otherwise
delegated to another committee, except that the Executive Committee does not
have certain powers reserved to the Board of Directors by law.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors (the "Audit
Committee") consists of three members, two of whom are independent directors,
and does not include any members of management. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and the results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews any
recommendations made by the Company's auditors regarding the Company's
accounting methods and the adequacy of its systems of internal accounting
controls.
COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors (the "Compensation Committee") consists of three members, each of whom
is a "disinterested director," as defined in the rules promulgated by the
Commission pursuant to the Exchange Act of 1934, as amended (the "Exchange
Act"), and an "outside director" within the meaning of Section 162(m) of the
Code. As of the date of this Proxy Statement, there is a vacancy on the
Compensation Committee. The Compensation Committee determines compensation for
the Company's executive officers, in addition to administering the Stock Option
Plan and making recommendations to the directors with respect to the Company's
compensation policies.
The Board of Directors has not established a nominating committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Thomas J.
Crocker, the Chairman and Chief Executive Officer of the Company, served as a
member of the Compensation Committee during 1995. Pursuant to the Agreement and
Plan of Merger, dated as of September 29, 1994, as amended, among the Company,
Management Subsidiary, Crocker Realty Management Services, Inc. and Crocker &
Sons, Inc. (the "Management Subsidiary Merger Agreement"), Crocker Realty
Management Services, Inc. and Crocker & Sons, Inc. merged with and into
Management Subsidiary (the "Management Subsidiary Merger"). The Management
Subsidiary Merger was effective June 30, 1995. As result of the Management
Subsidiary Merger, Mr. Crocker and his spouse received an aggregate of 457,531
shares of the
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<PAGE>
Common Stock. In addition, Management Subsidiary and Leasing Company have
provided management and leasing services to certain properties in which Mr.
Crocker has an interest. Fees paid to the Company in respect of such properties
aggregated approximately $755,000 in 1995. The Company believes that the terms
upon which such services are rendered and the fees paid for such services are at
least equal to comparable market services and fees. See "--Transactions with the
Executive Officers." W. Edward Scheetz, a former officer of the Company, also
served as a member of the Compensation Committee during 1995.
COMPENSATION OF DIRECTORS
Each director who is not an executive officer of the Company is paid
$15,000 per year plus $500 for attendance in person at each meeting of the Board
of Directors and $500 for attendance in person at each meeting of a committee
thereof, if such meeting is held on a day other than the day of a Board of
Directors meeting. Each director who is not an employee of the Company also
receives a grant of options to purchase 3,000 shares of Common Stock under the
Company's Stock Option Plan upon his initial election to the Board of Directors.
See "--Stock Option Plan." Executive officers of the Company are not compensated
for their services as directors. Each director is reimbursed for expenses
relating to attendance at meetings of the Board of Directors or any committee
thereof.
EXECUTIVE COMPENSATION
The following table sets forth certain information relating to the total
annual compensation paid or accrued by the Company and its subsidiaries during
the fiscal year ended December 31, 1995 to its Chief Executive Officer and its
other two most highly compensated executive officers (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------------------
ANNUAL COMPENSATION AWARDS
------------------------------------ -----------------------------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK AWARD(S) OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION ($) (#)
- ---------------------------------- ---- --------- -------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Crocker, Chairman of the 1995 $ 137,500 $ 75,000 ** $ 75,000 500,000
Board and Chief Executive
Officer*
Richard S. Ackerman, President and 1995 $ 112,500 $ 100,000 ** $ 50,000 500,000
Chief Operating Officer*
Robert E. Onisko, Executive Vice 1995 $ 75,000 $ 75,000 ** $ 25,000 50,000
President, Chief Financial
Officer and Secretary*
- --------------------------------
</TABLE>
* As described in "--Severance Agreements Entered Into in Connection with the
Merger," Messrs. Crocker, Ackerman and Onisko resigned from their positions
as officers, and Messrs. Crocker and Ackerman from their positions as
directors, of the Company as of June 30, 1996. Since June 30, 1996, Messrs.
Crocker, Ackerman and Onisko have continued to perform their prior functions
and responsibilities in the capacity of consultants to the Company.
** Value of perquisites and other personal benefits paid does not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported for
the Executive Officer.
EMPLOYMENT AGREEMENTS. The Company had entered into employment agreements,
effective as of July 1, 1995, as amended, with each of the Executive Officers.
The agreements with each of Messrs. Ackerman and Crocker had five year terms,
and the agreement with Mr. Onisko had a three year term.
57
<PAGE>
Under their respective employment agreements, Mr. Crocker served as Chairman of
the Board and Chief Executive Officer, Mr. Ackerman served as President and
Chief Operating Officer and Mr. Onisko served as Executive Vice President and
Chief Financial Officer. The agreements provided for base annual salaries of
$275,000 for Mr. Crocker, $225,000 for Mr. Ackerman and $150,000 for Mr. Onisko,
and bonuses, if any, in the sole discretion of the Board of Directors. The
Company has granted non-qualified stock options to purchase 500,000 shares of
Common Stock to each of Messrs. Crocker and Ackerman, and non-qualified stock
options to purchase 50,000 shares of Common Stock to Mr. Onisko, in each case,
pursuant to the Stock Option Plan (as hereinafter defined) described below.
The employment contracts described above required each of the Executive
Officers to devote all of his working time to the management and operation of
the Company, and required him to present all real estate investment
opportunities to the Company. However, such officers were permitted to manage
their personal investments, to render services to non-profit organizations and
to serve as directors, advisory directors or consultants of companies not
materially competing with the Company, during their non-working time, provided
that such service did not interfere with performance of their duties to the
Company and prior notice of such services was given to the Company. During the
term of his employment each Executive Officer was prohibited from engaging in
the ownership or operation of any business similar to the business conducted by
the Company, excluding the properties currently owned by them. This provision
was to continue for a period of 18 months after termination of employment in any
geographical area in which the Company then conducts such business. Excluded
from the foregoing restrictions was the ownership of less than 5% of any class
of securities which are publicly traded.
The employment agreements provided that the respective Executive Officer's
employment thereunder could be terminated by the Company only for cause. If Mr.
Crocker's or Mr. Ackerman's employment were terminated other than for cause, (i)
prior to July 1, 1997, the Company would have been required to pay such
Executive Officer an amount equal to the product of (a) such Executive Officer's
then annual salary plus the amount last paid to such Executive Officer as bonus
compensation, and (b) a fraction, the numerator of which is 36 months, less the
number of months of employment completed by such Executive Officer, and the
denominator of which is 12, and (ii) after July 1, 1997, an amount equal to the
Executive Officer's then annual salary, plus the amount last paid to the
Executive Officer as bonus compensation. If Mr. Onisko's employment were
terminated other than for cause, the Company would have been required to pay an
amount equal to his then annual salary. In addition, all stock options granted
to any such officer would have become immediately exercisable and all
restrictions imposed by the Company on the transfer of Common Stock held by such
officer would have been terminated.
If an Executive Officer voluntarily terminated his employment or was
terminated by the Company for cause, he would have been entitled to receive only
the salary and benefits accrued through such date of termination.
The employment agreements have been superseded by the severence agreements
described in "-- Severence Agreements Entered Into in Connection with the
Merger."
SEVERANCE AGREEMENTS ENTERED INTO IN CONNECTION WITH THE MERGER. In
connection with the Merger, on April 29, 1996, the Company entered into
severance agreements with each of the Executive Officers. Under their respective
severance agreements, each of the Executive Officers has agreed to resign as an
employee of the Company and its subsidiaries and affiliates and, with respect to
Messrs. Crocker and Ackerman, as a director of the Company, upon the earlier of
(i) the consummation of the transactions contemplated by the Stock Purchase
Agreement and (ii) June 30, 1996 (the earlier of such dates, the "Effective
Date"). If the Effective Date occurs prior to the Closing Date, each of the
Executive Officers has agreed to provide consulting services to the Company, if
so requested by the Company, in scope and at the direction of the Board of
Directors, up to and through the Closing Date. For such services, each of the
Executive Officers will be paid a fee equal to his current annual salary
prorated on a daily basis for the
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<PAGE>
actual number of days he provides such services. The severance agreements
provide that, as of the Effective Date, the employment agreements described
under "--Employment Agreements" will be terminated. If the transactions
contemplated by the Merger Agreement and Stock Purchase Agreement do not occur,
then as of the first date that either of the Merger Agreement or the Stock
Purchase Agreement terminates, the severance agreements will terminate ab initio
and each Executive Officer will resume his employment with the Company pursuant
to the terms of his existing employment agreement.
The severance agreements provide for payments, as severance payments and as
consideration for the non-competition agreements contained therein, of
approximately $1,900,000, $1,700,000 and $381,000 to Messrs. Crocker, Ackerman
and Onisko, respectively. Such payments are to be made as of the earlier of the
closing under the Stock Purchase Agreement and the Closing Date. The severance
agreements provide that the individuals will be responsible for all taxes
associated with payments made to them under the severance agreements.
Pursuant to the severance agreements, Messrs. Crocker and Ackerman, for a
period of 18 months after the Effective Date, and Mr. Onisko, for a period of 12
months after the Effective Date, have agreed not to compete with the Company in
Boca Raton, Florida, subject to certain exceptions.
STOCK OPTION PLAN
The Stock Option Plan of the Company (the "Stock Option Plan") provides for
the granting of non-qualified stock options to purchase Common Stock to
employees and, as described below, non-employee directors of the Company. The
Stock Option Plan is administered by the Compensation Committee. The purpose of
the Stock Option Plan is to enable the Company to attract, retain and motivate
key employees and directors of the Company by providing them an equity
participation in the Company.
A maximum of 2,500,000 shares of Common Stock (subject to adjustment under
certain circumstances) may be issued under the Stock Option Plan. Under the
terms of the Stock Option Plan, no individual may be granted options in any
calendar year to purchase more than 500,000 shares of Common Stock. The Stock
Option Plan provides that the option exercise price may not be less than the
fair market value of the shares of Common Stock on the date of the grant of the
option, except that the exercise price of the options to purchase 1,100,000
shares currently outstanding is the lesser of $10.00 or the price that would
have been achieved in the previously contemplated public offering of additional
shares of Common Stock. Options to purchase an aggregate of 1,050,000 shares of
Common Stock are outstanding to Messrs. Crocker, Ackerman and Onisko, and
options to purchase an aggregate of 27,000 shares of Common Stock (at exercise
prices ranging from $8.00 to $8.69 per share) are outstanding to the seven
non-employee directors and two former non-employee directors.
The Compensation Committee will select the employees to whom options will
be granted and the number of shares subject to each such option, and the terms
and conditions of such options, consistent with the Stock Option Plan. The
Compensation Committee may provide that options issued under the Stock Option
Plan will be exercisable from time to time, in installments or otherwise, and
may authorize the granting of options, upon such other terms and conditions and
for such periods (up to ten years from the date of the grant) as it may, in its
discretion, determine. The Compensation Committee has the right, in its
discretion, to accelerate the time at which any option granted to an employee
becomes exercisable and to extend the period after termination of employment
during which it remains exercisable (but in no event beyond the date of
expiration).
The Board of Directors may at any time terminate or amend the Stock Option
Plan, but termination will not affect options previously granted and certain
amendments will be subject to stockholder approval. In the event of a stock
dividend, stock split or combination or other change in the number of
outstanding shares of Common Stock, the Compensation Committee will make
adjustments to the number of shares of
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<PAGE>
Common Stock subject to outstanding options and the exercise prices thereof as
may be determined to be appropriate and equitable. In the event of certain
extraordinary distributions on the Common Stock, the Compensation Committee may,
in its discretion, make an appropriate and equitable adjustment to the exercise
price of outstanding options. In addition, the Compensation Committee may
provide that, in the event of a merger, consolidation, reorganization,
dissolution or sale or exchange of substantially all of the Company's assets,
all outstanding options will become exercisable and will terminate, if not
exercised prior to such event.
Upon the grant of a option, an optionee will not recognize taxable income
for federal income tax purposes, and the Company will not be entitled to any
federal income tax deduction. Upon the exercise of an option, the optionee
generally will recognize ordinary income in an amount equal to the excess of the
fair market value of the shares acquired, determined at the time of exercise,
over the exercise price. The Company will be entitled to a federal income tax
deduction to the extent the optionee recognizes ordinary income for federal
income tax purposes. Special rules may govern the timing of the recognition of
income by optionees subject to Section 16(b) of the Exchange Act.
In connection with the Special Dividend to Stockholders representing the
proceeds of the sale of the Excluded Assets, the Compensation Committee reduced
the per share exercise price of each option, other than the 1995 grants to the
Named Executive Officers listed in the table below, by the per share amount of
such dividend, or $0.60411.
STOCK OPTION GRANTS AND EXERCISES. The following table sets forth the
options granted to the Named Executive Officers during the year ended December
31, 1995.
OPTION GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE PRICE FOR OPTION TERM
OPTIONS IN PER SHARE EXPIRATION ------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE 5%($) 10%($)
- ---- ---------- ----------- --------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Crocker 500,000 20.0% $ 10.00 6/30/05 $ 3,144,473 $ 7,968,712
Richard S. Ackerman 500,000 20.0% $ 10.00 6/30/05 $ 3,144,473 $ 7,968,712
Robert E. Onisko 50,000 2.0% $ 10.00 6/30/05 $ 314,447 $ 796,871
- ----------------
</TABLE>
(1) If the previously contemplated public offering of additional shares of
Common Stock had occurred, the exercise price of these options would have
been adjusted to equal the price per share at which the Company would have
sold shares of Common Stock in such offering. See "--Employment Agreements."
In the absence of the Merger, one-third of the options would vest on each of
the first three anniversaries of the date of the grant.
The following table sets forth the information with respect to the
exercisability of the Company Stock Options held by the Named Executive Officers
during the year ended December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END
SHARES ACQUIRED (#) ($)
ON EXERCISE VALUE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Crocker -- -- -- 500,000 -- --
Richard S. Ackerman -- -- -- 500,000 -- --
Robert E. Onisko -- -- -- 50,000 -- --
- ----------------
</TABLE>
60
<PAGE>
INDEMNIFICATION AGREEMENTS. The Company has entered into indemnification
agreements with each of the Company's directors and executive officers. The
indemnification agreements require, among other things, that the Company
indemnify its directors and executive officers to the fullest extent permitted
by law, and advance to the directors and executive officers all related
expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. The Company must also indemnify and advance
all expenses incurred by directors and executive officers seeking to enforce
their rights under the Company's directors' and officers' liability insurance.
Although the form of indemnification agreement offers substantially the same
scope of coverage afforded by provisions in the Articles of Amendment and
Restatement of Articles of Incorporation of the Company (the "Charter") and the
Amended and Restated By-laws of the Company (the "By-laws"), it provides greater
assurance to directors and executive officers that indemnification will be
available, because, as a contract, it cannot be modified unilaterally in the
future by the Board of Directors or by the Stockholders to eliminate the rights
it provides.
TRANSACTIONS WITH APOLLO AND ITS AFFILIATES
APOLLO FUND TRANSFER AGREEMENT. Pursuant to the Amended and Restated
Transfer Agreement, dated as of September 29, 1994, between the Apollo Fund and
the Company (the "Apollo Fund Transfer Agreement"), as amended, the Apollo Fund
transferred to the Company, subject to the terms and conditions of the Apollo
Fund Transfer Agreement, all of the Apollo Fund's 99% limited partnership
interest in (i) Financing Partnership, (ii) AP-GP Southeast Portfolio Partners,
L.P. ("AP Southeast GP"), (iii) the Fontaine Partnership and (iv) AP-GP Fontaine
III Partners, L.P. ("Fontaine GP"). In consideration of the transfer of the
limited partnership interests (including approximately $11.1 million excess Cash
Balance (as defined in the Apollo Fund Transfer Agreement) of the Partnership
and other Apollo Fund contributions), the Company has issued to the Apollo Fund
an aggregate of 12,788,020 shares of Common Stock. The Apollo Fund Transfer
Agreement contains customary representations and warranties of the Apollo Fund
with respect to its ownership of the partnership interests. Any claim by the
Company based on a misrepresentation or breach of a covenant by the Apollo Fund
must be made within one year after the effective time of the CRI Merger and the
Management Merger. The transfers of the limited partnership interests
contemplated by the Apollo Fund Transfer Agreement were completed on December
31, 1994.
AP SOUTHEAST GP TRANSFER AGREEMENT. Pursuant to the Amended and Restated
Transfer Agreement, dated as of September 29, 1994, as amended, between a
Predecessor Entity, the sole general partner of the AP Southeast GP, and the
Company (the "AP Southeast GP Transfer Agreement"), such Predecessor Entity
agreed to merge with and into a wholly-owned subsidiary of the Company, subject
to the terms and conditions of the AP Southeast GP Transfer Agreement. As a
result of that merger (effective on June 27, 1995), such Predecessor Entity's 1%
general partnership interest in the AP Southeast GP is held by a wholly owned
subsidiary of the Company, and AREA, the sole stockholder of such predecessor
entity, received 1,100 shares of Common Stock. The AP Southeast GP Transfer
Agreement contains customary representations and warranties of such predecessor
entity with respect to its ownership of the partnership interest.
FONTAINE GP TRANSFER AGREEMENT. Pursuant to the Amended and Restated
Transfer Agreement dated as of September 29, 1994, as amended, between a
Predecessor Entity, the sole general partner of Fontaine GP, a Delaware limited
partnership, and the Company (the "Fontaine GP Transfer Agreement"), such
Predecessor Entity merged with and into a wholly-owned subsidiary of the
Company, subject to the terms and conditions of the Fontaine GP Transfer
Agreement. The merger was effective on April 13, 1995. As a result of this
merger, such Predecessor Entity's 1% general partnership interest in the
Fontaine GP is held by a wholly-owned subsidiary of the Company and AREA, the
sole stockholder of such Predecessor Entity, received 31 shares of Common Stock.
The Fontaine GP Transfer Agreement contains customary representations and
warranties of such predecessor entity with respect to its ownership of the
partnership interest.
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OPTIONS CORP. TRANSFER AGREEMENT. Pursuant to the Amended and Restated
Transfer Agreement dated as of September 29, 1994, as amended, between a
Predecessor Entity and the Company (the "Options Corp. Transfer Agreement"),
such Predecessor Entity agreed to merge with and into Land Options Subsidiary, a
wholly-owned subsidiary of the Company, subject to the terms and conditions of
the Options Corp. Transfer Agreement. This merger was effective on March 29,
1995. As a result of this merger, Land Options Subsidiary holds such Predecessor
Entity's interest in the Land Options and Apollo Fund, the sole stockholder of
such Predecessor Entity, received 62,500 shares of Common Stock. The Options
Corp. Transfer Agreement contains customary representations and warranties of
such Predecessor Entity with respect to its ownership of the Land Options.
REPAYMENT OF JUNIOR NOTE. On December 28, 1995, Financing Partnership
repaid in full its obligations under the unsecured Junior Note in the original
principal amount of $20 million, which evidenced a subordinate, unsecured loan
(the "Junior Unsecured Indebtedness") made to Financing Partnership in
connection with Financing Partnership's acquisition of the Mortgage Note
Properties. The Junior Note was held by an affiliate of a limited partner of the
Apollo Fund. The Junior Note had a stated maturity of February 15, 2019 and bore
interest at a rate of 11.5% per annum. Interest paid in 1995 with respect to the
Junior Note was approximately $2.3 million.
TRANSACTIONS WITH THE EXECUTIVE OFFICERS
MANAGEMENT SUBSIDIARY MERGER AGREEMENT. Pursuant to the Management
Subsidiary Merger Agreement, Crocker Realty Management Services, Inc. and
Crocker & Sons, Inc. engaged in the Management Subsidiary Merger, which was
effective June 30, 1995. As a result of this merger, the Executive Officers and
Mr. Crocker's spouse received an aggregate of 637,500 shares of the Common
Stock. The Management Subsidiary Merger Agreement contains customary
representations and warranties by Crocker Realty Management Services, Inc. and
Crocker & Sons, Inc., on the one hand, and the Company and Management
Subsidiary, on the other.
MANAGEMENT SUBSIDIARY AND LEASING COMPANY FEES. Management Subsidiary and
Leasing Company have provided management and leasing services to certain
properties in which Messrs. Ackerman and/or Crocker have an interest. Fees paid
to the Company in respect of such properties aggregated $755,000 in 1995. The
Company believes that the terms upon which such services are rendered and the
fees paid for such services are at least equal to comparable market services and
fees.
LEASING COMPANY. Of the outstanding voting common stock of Leasing Company,
approximately 1.6% is owned by each of Messrs. Crocker and Ackerman. The Company
owns common stock representing 3.1% of the value of the outstanding common stock
and all of the outstanding non-voting preferred stock of Leasing Company, which
together entitle the Company to in excess of 95% of the anticipated economic
benefits of Leasing Company.
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THE MERGER
GENERAL
The following information, insofar as it relates to matters contained in
the Merger Agreement, is qualified in its entirety by reference to the Merger
Agreement, which is incorporated herein by reference and attached hereto as
Appendix A. Stockholders are urged to read the Merger Agreement in its entirety.
All information contained in this Proxy Statement with respect to Highwoods and
its subsidiaries, including CAC, except such information described under
"--Opinion of Financial Advisor," has been supplied by Highwoods for inclusion
herein and has not been independently verified by the Company.
BACKGROUND OF THE MERGER
On March 18, 1996, the Company filed a registration statement with the
Commission in preparation for a public offering of 14,375,000 shares of Common
Stock (the "Proposed Public Offering"). On March 21, 1996, Highwoods' outside
financial advisors, on behalf of Highwoods contacted W. Edward Scheetz, a
director of the Company and Vice President of AP CRTI Holdings Corp., general
partner of AP-GP CRTI Holdings L.P., general partner of Apollo, regarding the
possibility of an acquisition by Highwoods of the Company. Senior Management of
the Company, in consultation with the Board of Directors, decided to pursue
discussions with Highwoods, but with the understanding that such discussions
would not continue unless the parties could agree promptly on terms for such a
transaction. This understanding was required by the Company in order to preserve
the opportunity, in the event the parties could not agree on a transaction, to
carry out the public offering under favorable market conditions.
The Company engaged Merrill Lynch as financial advisor to the Company in
connection with the proposed acquisition due to (i) Merrill Lynch's extensive
experience in mergers and acquisitions involving REITs and (ii) the fact that
Merrill Lynch had been serving as underwriter in connection with the previously
contemplated public offering by the Company and was, therefore, quite familiar
with the Company and its activities already. In addition, the Company did not
consider other potential financial advisors because of the delay that would have
been involved in hiring an advisor that had not had previous contact with the
Company. After engaging Merrill Lynch, the Company signed a confidentiality
agreement with Highwoods on April 8, 1996, which agreement also limited the
ability of the Company to discuss or enter into a business combination with
another party prior to April 23, 1996.
Beginning on April 8, 1996, representatives of the Company, including the
Company's Chief Executive Officer, President and Chief Financial Officer, and
the Company's outside financial and legal advisors commenced negotiations with
certain representatives of Highwoods. In the negotiations, the Company and
Highwoods mutually concluded that Highwoods would not offer what the Company's
management and financial advisors considered reasonable value for the Excluded
Assets. Therefore, the Company and Highwoods agreed that the Excluded Assets
would be distributed from the Company prior to the Merger. See "THE MERGER
AGREEMENT--Excluded Assets." In addition, Highwoods required as a condition to
its entering into the Merger Agreement that the Sellers enter into the Stock
Purchase Agreement, pursuant to which, among other things (i) the Sellers have
agreed to (a) vote their shares of Common Stock in favor of the Merger or any
other transaction contemplated by the Merger Agreement and (b) give CAC a proxy
with respect to their shares of Common Stock in respect of certain matters,
including the Merger and the other transactions contemplated by the Merger
Agreement, and (ii) CAC will purchase the shares of Common Stock owned by the
Sellers prior to the Effective Time, subject to certain conditions being
satisfied or waived. See "THE STOCK PURCHASE AGREEMENT." In connection with the
Stock Purchase Agreement, Highwoods required, as a condition to its entering
into the Merger Agreement, that the Board of Directors waive the Ownership
Limits contained and defined in the Charter to permit the transactions
contemplated by the Stock Purchase Agreement. The Merger Consideration to be
received by
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the Stockholders pursuant to the Merger Agreement was determined on the basis of
arms'-length negotiations between the Company and Highwoods.
A special meeting of the Board of Directors was held on April 26, 1996. At
such meeting, the Board of Directors heard a presentation by Merrill Lynch as to
the financial evaluation of the proposed Merger and the alternatives currently
available to the Company. Furthermore, the Board of Directors discussed in
detail with management and the Company's advisors the material terms of the
Merger Agreement, including the limited conditions on consummation of the
proposed Merger, the Excluded Assets and the restrictions on the Company's
ability to solicit or negotiate alternative transactions following execution of
the Merger Agreement. The Board of Directors also discussed the terms of the
Stock Purchase Agreement and the fact that, if the closing under the Stock
Purchase Agreement were held prior to the Effective Time, CAC would own 77.1% of
the outstanding shares of Common Stock. The Board of Directors was also informed
of the open issues remaining between the Company and Highwoods relating to the
proposed merger.
Between April 26 and April 29, 1996, negotiations between Highwoods and the
Company continued, agreement was reached on all remaining open issues and the
proposed Merger Agreement was finalized. The Merger Agreement and the waiver of
the Ownership Limits with respect to the transactions contemplated by the Stock
Purchase Agreement were considered and approved by the Board of Directors on
April 29, 1996 and executed by the Company and Highwoods later that day. The
Company expects that it will incur approximately $9,150,000 in expenses in
connection with the Merger, which sum includes fees payable to Merrill Lynch
(see"--Opinion of Financial Advisor"), payments to be made under the severance
agreements entered into with Messrs. Crocker, Ackerman and Onisko, legal
expenses and costs of the Special Meeting. See "MANAGEMENT--Executive
Compensation--Severance Agreements Entered Into in Connection with the Merger."
REASONS FOR THE MERGER
The Board of Directors has determined that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are advisable and in
the best interests of the Company and its Stockholders and has unanimously
approved and adopted the Merger Agreement and the transactions contemplated
thereby, including the Merger. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER. See
"--Background of the Merger" and "--Opinion of Financial Advisor."
Prior to March 1996, the Board of Directors and the two principal
Stockholders reached the conclusion that the Company had to either (i) expand
its asset base, by raising additional capital to make additional acquisitions of
single or groups of properties or other REITs or (ii) be acquired by another
corporation, including another REIT. This conclusion was based on the belief
that the current scale of the Company and its assets could not support the
viability of the Company in the long-term. When Highwoods made its proposal, the
Board of Directors determined that the Merger Consideration and the level of
certainty of consummation of the Merger made the Merger more favorable to the
interests of the Stockholders than remaining an independent company.
In reaching its unanimous determination that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are advisable and in
the best interests of the Company and its Stockholders, the Board of Directors
considered a number of factors which favor the Merger Agreement, including,
without limitation, the following:
(i) the presentation by Merrill Lynch and its opinion that the cash
consideration of $11.05243 per share to be received by the Stockholders
pursuant to the Merger Agreement together with a distribution
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of the value per share of the Excluded Assets is fair to the Stockholders
(other than Highwoods and its affiliates and the Stockholders who will have
an interest in Newco and their affiliates) from a financial point of view
(see "--Opinion of Financial Advisor");
(ii) the relationship of the Merger Consideration to the historical and
current market prices for the Common Stock preceding the announcement of
the Merger (see "THE PARTIES TO THE MERGER--The Company--Price Range of
Common Stock and Dividend History");
(iii) the conclusion of the Board of Directors that Highwoods' proposal
was favorable and in the best interests of the Stockholders, in terms of
the value to be realized by such Stockholders and the high likelihood of
consummation, based on the advice of senior management and Merrill Lynch,
as well as the judgment of the Board of Directors, after review with the
Company's management and its outside legal and financial advisors of
alternatives to the Merger, particularly the alternative of independent
internal growth coupled with the Proposed Public Offering, that the
Stockholders would realize greater value from the transaction with
Highwoods than from the other alternatives available to the Company (see
"--Background of the Merger" and "--Opinion of Financial Advisor");
(iv) the facts that the Merger Consideration is all cash and that the
Merger is not subject to financing contingencies (see "THE MERGER
AGREEMENT--The Merger" and "THE MERGER AGREEMENT--Conditions Precedent to
the Merger").
The Board of Directors also considered factors which were not favorable to
the Merger Agreement in reaching its decision to approve and adopt the Merger
Agreement, including, without limitation, the facts that following execution of
the Merger Agreement, the Company would not be permitted to solicit any other
acquisition proposal and would not be able to terminate the Merger Agreement if
a more favorable proposal was made. See "THE MERGER AGREEMENT--Solicitation of
Transactions." However, the Board of Directors concluded that these negative
factors were more than compensated by the factors which favored the Merger
Agreement, although the Board of Directors took the various factors into account
collectively, and did not perform a factor-by-factor analysis.
The Board of Directors also considered a number of other factors (the
"Neutral Factors") which it considered neither positive nor negative, including,
without limitation, the following factors:
(i) the knowledge of the Board of Directors of the business, operations,
properties, assets, financial condition and operating results of the
Company;
(ii) information relating to the financial condition, results of
operations, capital levels, asset quality and prospects of the Company (see
"SELECTED FINANCIAL DATA" and "INDEX TO FINANCIAL STATEMENTS"), and
management's assessment of the prospects of the Company (see "--Opinion of
Financial Advisor");
(iii) the current and prospective environment in which the Company
operates, including regional and local economic conditions;
(iv) the terms of the Merger Agreement (other than those referred to
above) as reviewed by the Board of Directors with its legal advisors (see
"THE MERGER AGREEMENT");
(v) the facts that certain assets of the Company would not be acquired
by Highwoods and that the Stockholders would either own a pro rata portion
of the entity that will hold such assets or receive cash in lieu of such
pro rata portion; and
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(vi) the awareness and assessment of the Board of Directors that, at or,
following the Merger, certain payments will be made pursuant to certain
severance agreements entered into with certain of the Company's executives
(see "MANAGEMENT--Executive Compensation--Severance Agreements Entered Into
In Connection with the Merger").
The first three Neutral Factors described above helped lead the Board of
Directors to conclude that the Company must either remain an independent company
and expand its asset base or be acquired by another corporation. The
determination of the Board of Directors that the factors which favored the
Merger Agreement clearly outweighed the factors which were unfavorable to the
Merger Agreement led the Board of Directors to unanimously conclude that the
Merger Agreement and the transactions contemplated thereby, including the
Merger, are advisable and in the best interests of the Stockholders.
The foregoing discussion of the information and factors considered by the
Board of Directors is not meant to be exhaustive but is believed to include the
material factors considered by the Board of Directors. The Board of Directors
did not quantify or attach any particular weight to the various factors that it
considered in reaching its determination that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are advisable and in
the best interests of the Stockholders.
OPINION OF FINANCIAL ADVISOR
Opinion of Merrill Lynch. On April 29, 1996, Merrill Lynch delivered its
opinion (the "April Opinion"), which opinion was subsequently confirmed as of
the date of this Proxy Statement (the "August Opinion," together with the April
Opinion, the "Merrill Lynch Opinions"), to the Board of Directors to the effect
that, as of such dates and based upon the assumptions made (of which the
material ones are described below), matters considered and limits of review, as
set forth in such opinions, the consideration to be received by the Stockholders
pursuant to the Merger Agreement and pursuant to the Special Dividend is fair to
the Stockholders (other than Highwoods and its affiliates and the Stockholders
who will have an interest in Newco and their affiliates) from a financial point
of view.
A copy of the August Opinion which sets forth all material assumptions
made, matters considered and certain limitations on the scope of review
undertaken by Merrill Lynch, is attached hereto as Appendix C and is
incorporated herein by reference. The description of the written opinion set
forth herein is qualified in its entirety by reference to the full text of the
written opinion. Stockholders are urged to read in its entirety the August
Opinion. The Merrill Lynch Opinions are addressed to the Board of Directors and
address only the fairness from a financial point of view of the consideration to
be paid and do not constitute a recommendation to any Stockholder as to how such
Stockholder should vote at the Special Meeting. The consideration to be paid
pursuant to the Merger was determined on the basis of negotiations between the
Company and Highwoods.
The Company retained Merrill Lynch to render financial advisory services
with respect to the Company's proposed business combination with Highwoods.
Merrill Lynch was not authorized by the Company or the Board of Directors to
solicit, nor did Merrill Lynch solicit, third-party indications of interest for
the acquisition of all or any part of the Company. No other limitations were
imposed by the Board of Directors upon Merrill Lynch with respect to the
investigations made or the procedures followed by it in rendering its opinion.
In connection with the preparation of the Merrill Lynch Opinions, Merrill
Lynch, among other things: (i) reviewed the Company's Annual Report on Form 10-K
and related financial information for the fiscal year ended December 31, 1995;
(ii) reviewed the Company's preliminary Form S-11 dated March 18, 1996; (iii)
reviewed the Company's quarterly report on Form 10-Q and related unaudited
financial information for the quarterly period ended March 31, 1996; (iv)
reviewed the Company's quarterly report on Form 10-Q
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and related unaudited financial information for the quarterly period ended June
30, 1996; (v) reviewed certain information, including financial forecasts
relating to the business, earnings, cash flow, funds from operations, assets and
prospects of the Company, furnished to Merrill Lynch by the Company; (vi)
conducted discussions with members of senior management of the Company
concerning the business and prospects of the Company; (vii) reviewed the
historical market prices and trading activity for Common Stock and compared them
with those of certain publicly traded companies which Merrill Lynch deemed to be
reasonably similar to the Company; (viii) compared the results of operations of
the Company with those of certain companies which Merrill Lynch deemed to be
reasonably similar to the Company; (ix) compared the underlying real estate
assets of the Company with other real estate assets which were deemed to be
similar to those of the Company; (x) reviewed the Merger Agreement; and (xi)
reviewed such other financial studies and analyses and performed such other
investigations and took into account such other matters as Merrill Lynch deemed
necessary.
In preparing the Merrill Lynch Opinions, Merrill Lynch relied on the
accuracy and completeness of all information supplied or otherwise made
available to it by the Company, and did not independently verify such
information or undertake an independent asset-by-asset appraisal of the assets
of the Company. With respect to the financial forecasts furnished by the
Company, Merrill Lynch assumed that they had been reasonably prepared and
reflected the best currently available estimates and judgment of the Company's
management as to the expected future financial performance of the Company.
The matters considered by Merrill Lynch in arriving at the Merrill Lynch
Opinions are based on numerous macroeconomic, operating and financial
assumptions with respect to industry performance, general business and economic
conditions, many of which are beyond the control of the Company, and involved
the application of complex methodologies and educated judgment. Any estimates
incorporated in the analyses performed by Merrill Lynch are not necessarily
indicative of actual past or future results or values, which may be
significantly more or less favorable than such estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future. The Merrill Lynch Opinions do
not present a discussion of the relative merits of the Merger as compared to any
other business plan or opportunity that might be presented to the Company, or
the effect of any other arrangement in which the Company might engage.
At the meeting of the Board of Directors held on April 26, 1996, Merrill
Lynch presented certain financial analyses accompanied by written materials in
connection with the delivery of the April Opinion. At the meeting of the Board
of Directors held on August 14, 1996, Merrill Lynch updated its financial
analyses. The following is a summary of the material financial and comparative
analyses performed by Merrill Lynch in arriving at the August Opinion.
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call, Merrill Lynch compared certain financial and operating information
and ratios for the Company with the corresponding financial and operating
information for a group of eleven publicly traded companies engaged primarily in
the ownership, management, operation and acquisition of office properties which
Merrill Lynch deemed to be reasonably comparable to the Company for the purposes
of its analysis, including Beacon Properties, Cali Realty Corp., Carr Realty
Corp., Cousins Properties Inc., Crescent Real Estate Equities, Duke Realty,
Highwoods Properties, Inc., Liberty Property Trust, Reckson Associates Realty,
Spieker Properties and Weeks Corp. (the "Comparable Companies"). The estimates
published by First Call were not prepared in connection with the Merger or at
Merrill Lynch's request.
Merrill Lynch's calculations resulted in the following relevant ranges for
the Comparable Companies and the Company based on each Comparable Company's and
the Company's most recent public filings and closing stock prices on August 2,
1996: a range of total debt to total market capitalization of 24.3% to 45.1%
with a mean of 32.2% (with the Company at 44.1%); a range of payout ratios
(each, a "Payout
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Ratio"), i.e., the ratio of dividends to FFO, of 72.3% to 83.8%, with a mean of
78.6% calculated on the basis of projected 1996 FFO estimates (with the Company
at 72.3%); equity market capitalization as a multiple of 1995 FFO of 10.7x to
17.3x, with a mean of 13.5x (with the Company at 13.9x); equity market
capitalization as a multiple of projected 1996 FFO of 10.5x to 15.7x, with a
mean of 12.4x (with the Company at 13.9x); and equity market capitalization as a
multiple of projected 1997 FFO of 9.7x to 14.6x, with a mean of 11.3x (with the
Company at 12.5x).
Based upon the above analysis, Merrill Lynch applied a range of multiples
of 1996 FFO of 10.5x to 14.0x to the Company's projected 1996 FFO and a range of
multiples of 1997 FFO of 10.0x to 12.5x and observed that the sum of the Merger
Consideration and the Special Dividend per Share exceeded the range of values
per share implied by this analysis.
None of the companies utlized in the above analysis for comparative
purposes is, of course, identical to the Company. Accordingly, a complete
analysis of the results of the foregoing calculations cannot be limited to a
quantitative review of such results and involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the Comparable Companies and other factors that could affect the public trading
value of the Comparable Companies as well as that of the Company. In addition,
the multiples of equity market capitalization to projected 1996 and 1997 FFO for
the Comparable Companies are based on projections prepared by research analysts
using only publicly available information. Accordingly, such estimates may or
may not prove to be accurate.
Net Asset Valuation. Merrill Lynch performed a net asset valuation on the
Company by summing the following: (i) the implied value range calculated by
applying a range of capitalization rates of 9.0% to 10.0% to the next 12 months
("NTM") projected net operating income ("NOI") for the Company's existing
portfolio of office properties; (ii) the implied value range calculated by
applying a range of multiples of 3.0x to 6.0x to the NTM earnings before
interest, taxes, depreciation and amortization to be generated by certain
management service contracts; (iii) the implied value range for the Excluded
Assets; (iv) the present value of certain restricted cash holdings, and (v) the
cash and cash equivalent balances of the Company less the outstanding debt
obligations of the Company.
Merrill Lynch observed that the sum of the Merger Consideration and the
Special Dividend per share exceeded the range of values per share implied by the
above net asset valuation.
Discounted Cash Flow Analyses. Merrill Lynch performed discounted cash flow
analyses applying two methodologies. The first method (the "Stockholder Return
Method") calculated the present value of the future dividend stream projected to
be received by each current share of stock of the Company from 1996 to 2000,
inclusive, plus the residual value of each share based on the Company's
projected FFO per share and cash balance per share using discount rates
reflecting a cost of equity ranging from 13.0% to 15.0% and terminal value
multiples of calendar year 2000 FFO ranging from 12.0x to 14.0x on a trailing
basis.
Merrill Lynch observed that the sum of the Merger Consideration and the
Special Dividend per share exceeded the range of values per share implied by the
Stockholder Return Method.
The second method (the "Going Concern Method") calculated the present value
of the future FFO per share adjusted to reflect normalized recurring capital
expenditures ("Adjusted FFO") from 1996 to 2000, inclusive, plus the residual
value of each share based on the Company's projected FFO per share and cash
balance per share using discount rates reflecting a cost of equity ranging from
13.0% to 15.0% and terminal value multiples of calendar year 2000 FFO ranging
from 12.0x to 14.0x.
Merrill Lynch observed that the sum of the Merger Consideration and the
Special Dividend per Share fell within and near the high end of the range of
values per share implied by the Going Concern Method.
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Excluded Asset Valuation. Merrill Lynch performed a valuation analysis on
the Excluded Assets. Merrill Lynch arrived at a range of values by summing the
following: (i) the implied value range for certain parcels of undeveloped land
(ii) the implied value range of contract rights related to certain pending
acquisitions and development projects; (iii) the implied value range of a
partnership interest in the Benjamin Center, in Tampa, Florida, and (iv) the
implied value range of the other Excluded Assets and subtracting therefrom: (i)
the present value of certain payments to be made to Highwoods under the Master
Lease; (ii) the present value of a liability related to the Florida Litigation
(as hereinafter definded) and (iii) the other Excluded Liabilities.
Based upon the above analysis, Merrill Lynch determined the value of the
Excluded Assets to be in a range of $0.48 to $0.84 per Share on a primary basis
as of June 30, 1996, or approximately $0.66 per Share at the midpoint of the
range, and $0.43 to $0.76 per share on a fully-diluted basis (excluding shares
issuable on the exercise of certain stock options that do not share in the value
attributable to the Excluded Assets), or approximately $0.60 per share at the
midpoint of the range (the "Excluded Asset Valuation per Share").
The summary set forth above does not purport to be a complete description
of the analyses performed by Merrill Lynch in arriving at the Merrill Lynch
Opinions. The preparation of a fairness opinion is a complex process and not
necessarily susceptible to partial or summary description. Merrill Lynch
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create a misleading view of the
processes underlying its analyses set forth in the Merrill Lynch Opinions.
The Board of Directors selected Merrill Lynch to render a fairness opinion
because Merrill Lynch is an internationally recognized investment banking firm
with substantial experience in transactions similar to the Merger and because it
is familiar with the Company and its business. Merrill Lynch has from time to
time rendered investment banking, financial advisory and other services to the
Company. Merrill Lynch has, in the past, provided financial advisory and
financing services to Highwoods, and has received fees for the rendering of such
services. Merrill Lynch acted as underwriter to Highwoods in connection with a
recent offering of Highwoods' securities, in part, for the purpose of providing
funds to be used by Highwoods in financing the Merger. Merrill Lynch is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, secondary distributions of listed and unlisted securities and
private placements.
Pursuant to a letter agreement dated as of April 8, 1996, the Company has
agreed to pay Merrill Lynch (i) a $500,000 opinion fee, and (ii) a transaction
fee equal to 0.25% of the sum of the aggregate cash consideration paid, all
indebtedness of the Company assumed or retired by Highwoods and the value of the
Excluded Assets, upon consummation of the Merger. The fee referred to in clause
(ii) of the immediately preceeding sentence will be reduced by the amount
referred to in clause (i) of the immediately preceding sentence. The fees paid
or payable to Merrill Lynch are not contingent upon the contents of the opinion
delivered. In addition, the Company has agreed to reimburse Merrill Lynch for
its reasonable out-of-pocket expenses and to indemnify Merrill Lynch and certain
related persons against certain liabilities arising out of or in connection with
its rendering of services under its engagement, including certain liabilities
under the federal securities laws.
In the ordinary course of its business, Merrill Lynch may actively trade in
the securities of the Company or Highwoods for its own account and the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities.
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THE MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement, a
copy of which is attached hereto as Appendix A. All references to and summaries
of the Merger Agreement in this Proxy Statement are qualified in their entirety
by reference to Merger Agreement which is incorporated herein by reference.
"Subsidiaries" of any party shall mean any corporation, partnership, joint
venture, business trust or other entity, of which such party, directly or
indirectly, owns or controls at least 50% of the securities or other interests
entitled to vote in the election of directors or others performing similar
functions with respect to such corporation or other organization, or to
otherwise control such corporation, partnership, joint venture, business trust
or other entity. Without limiting the generality of the foregoing, the
Subsidiaries of the Company shall include the Leasing Company.
EFFECTIVE TIME
Subject to the provisions of the Merger Agreement, the closing of the
Merger will take place as promptly as practicable (and in any event within two
business days) after satisfaction or waiver of the conditions to closing set
forth in the Merger Agreement, unless another date or time is agreed to in
writing by the parties to the Merger Agreement (the "Closing Date"); provided,
that Highwoods may, at its election, postpone the Closing Date until August 15,
1996. Subject to the provisions of the Merger Agreement, the Merger will become
effective upon the acceptance for record of the articles of merger by the
Department of Assessments and Taxation of the State of Maryland (the
"Department") in accordance with the provisions of the General Corporation Law
of Maryland (the "GCLM"), and by making all other filings required under the
GCLM to be made prior to or concurrent with the effectiveness of the Merger,
which filings will be made as soon as practicable on the Closing Date. The term
"Effective Time" means the time at which such articles are accepted for filing
by the Department.
THE MERGER
The Merger Agreement provides that, upon the terms and subject to the
conditions of the Merger Agreement, at the Effective Time, CAC will be merged
with and into the Company, and the separate existence of CAC will thereupon
cease, and the Company will continue as the Surviving Corporation under the laws
of the State of Maryland. The Merger Agreement provides that the Merger will,
from and after the Effective Time, have all the effects provided by the GCLM.
THE SURVIVING CORPORATION. After the Effective Time, the directors of CAC
immediately prior to the Effective Time will be the directors of the Surviving
Corporation and the officers of CAC immediately prior to the Effective Time will
be the officers of the Surviving Corporation, in each case, until the earlier of
their respective resignations or the time that their respective successors are
duly elected or appointed and qualified. The Articles of Incorporation and
By-laws of CAC as in effect immediately prior to the Effective Time will be the
Articles of Incorporation and By-laws of the Surviving Corporation after the
Effective Time, until thereafter changed or amended as provided therein or by
applicable law, subject to certain limitations with respect to provisions
relating to indemnification. See "--Indemnification and Insurance."
CONVERSION OF SHARES. As of the Effective Time, by virtue of the Merger and
without any action on the part of any Stockholder, (i) all shares of Common
Stock which are held by Highwoods, the Company or any wholly-owned subsidiary of
Highwoods or the Company will be cancelled and retired and shall cease to exist,
and no consideration shall be delivered in the exchange therefor; (ii) each
outstanding share of Common Stock, other than those described in clause (i)
above, will be converted into and represent the right to receive $11.02 in cash
(or, if there is Excess Cash (as hereinafter defined), $11.02 plus the Per Share
Excess Cash Amount (as hereinafter defined) in cash, or, if there is Deficient
Cash (as hereinafter defined), $11.02 minus the Per Share Deficient Cash Amount
(as hereinafter defined)) and (iii) each share of common
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stock of CAC will be converted into one share of common stock of the Surviving
Corporation. "Excess Cash" shall equal (i) the amount, if any, by which the sum
of cash, cash equivalents and restricted cash reflected on the Company's
consolidated balance sheet as of the date of the Merger Agreement exceeds the
sum of cash, cash equivalents and restricted cash reflected on the Company's
consolidated balance sheet as of March 31, 1996 minus (ii) the amount, if any,
by which the principal amount of the Company's indebtedness for borrowed money
outstanding as of the date of the Merger Agreement exceeds the sum of $5
million, and the principal amount of the Company's indebtedness for borrowed
money outstanding as of March 31, 1996. The "Per Share Excess Cash Amount" shall
equal the quotient obtained by dividing the Excess Cash by the number of shares
of Common Stock outstanding on the date of the Merger Agreement, assuming the
exercise of all options and warrants outstanding on the date of the Merger
Agreement (the "Fully Diluted Shares"). "Deficient Cash" shall equal (i) the
amount, if any, by which the sum of cash, cash equivalents and restricted cash
reflected on the Company's consolidated balance sheet as of March 31, 1996
exceeds the sum of cash, cash equivalents and restricted cash reflected on the
Company's consolidated balance sheet as of the date of the Merger Agreement plus
(ii) the amount, if any, by which the principal amount of the Company's
indebtedness for borrowed money outstanding as of the date of the Merger
Agreement exceeds the sum of $5 million and the principal amount of the
Company's indebtedness for borrowed money outstanding as of March 31, 1996. The
"Per Share Deficient Cash Amount" shall equal the quotient obtained by dividing
the Deficient Cash by the Fully Diluted Shares.
As a result of the adjustments described in the preceeding paragraph, the
amount to be received for each share of Common Stock in the Merger is $11.05243.
PAYMENT. Promptly after the Effective Time, Highwoods will deposit (or
cause to be deposited) with a bank or trust company to be designated by
Highwoods and reasonably acceptable to the Company (the "Exchange Agent"), for
the benefit of the holders of shares of Common Stock cash in the amount
sufficient to pay the aggregate Merger Consideration.
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail to each holder of record of Common Stock immediately prior to
the Effective Time (i) a letter of transmittal (the "Company Letter of
Transmittal") (which will specify that delivery shall be effected, and risk of
loss and title to the Company Stock Certificates will pass, only upon delivery
of such Company Stock Certificates to the Exchange Agent and will be in such
form and have such other provisions as Highwoods specifies) and (ii)
instructions for use in effecting the surrender of Company Stock Certificates in
exchange for the Merger Consideration with respect to the shares of Common Stock
formerly represented thereby.
Upon surrender of a Company Stock Certificate for cancellation to the
Exchange Agent, together with the Company Letter of Transmittal, duly executed,
and such other documents as Highwoods or the Exchange Agent reasonably requests,
the holder of such Company Stock Certificate will be entitled to receive in
exchange therefor a certified or bank cashier's check in the amount equal to the
cash which such holder has the right to receive pursuant to the provisions of
the Merger Agreement, and the Company Stock Certificate so surrendered will be
cancelled. Until surrendered, each Company Stock Certificate will be deemed at
any time after the Effective Time to represent only the right to receive the
Merger Consideration with respect to the shares of Common Stock formerly
represented thereby.
If the Merger Consideration is to be delivered to a person other than the
person in whose name the Company Stock Certificates surrendered in exchange
therefor are registered, it will be a condition to the payment of such Merger
Consideration that the Company Stock Certificates so surrendered be properly
endorsed or accompanied by appropriate stock powers and otherwise in proper form
for transfer, that such transfer otherwise be proper and that the person
requesting such transfer pay to the Exchange Agent any transfer or other taxes
payable by reason of the foregoing or establish to the satisfaction of the
Exchange Agent that such taxes have been paid or are not required to be paid.
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Unless required otherwise by applicable law, any portion of the aggregate
Merger Consideration which remains undistributed to holders of shares of Common
Stock two years after the Effective Time will be delivered to Highwoods and any
holders of shares of Common Stock who have not theretofore complied with the
provisions of the Merger Agreement relating to payment will thereafter look only
to Highwoods for payment of any Merger Consideration to which they are entitled
pursuant to the Merger Agreement. Neither Highwoods nor the Exchange Agent will
be liable to any holder of shares of Common Stock for any cash held by Highwoods
or the Exchange Agent for payment pursuant to the Merger Agreement delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
NO FURTHER RIGHTS. From and after the Effective Time, holders of
certificates theretofore evidencing shares of Common Stock will cease to have
any rights as Stockholders, except as provided in the Merger Agreement or by
law, and no transfer of shares of Common Stock will thereafter be made on the
stock transfer books of the Company.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain representations and warranties of the
Company and Highwoods, including, without limitation, representations and
warranties regarding their respective due organization, good standing and
authority to enter into the Merger Agreement and to consummate the transactions
contemplated thereby. The Company has made certain additional representations
and warranties relating to capitalization; subsidiaries; the absence of conflict
between the transactions contemplated by the Merger Agreement and other
agreements and documents; filings, consents and approvals; reports filed with
the Commission and financial statements; accuracy of information included in
this Proxy Statement; litigation; absence of certain changes or events;
undisclosed liabilities; employee benefit plans, compliance with the Employee
Retirement Income Security Act of 1974, as amended, and certain related matters;
taxes; compliance with laws; properties; leases; environmental matters; actions
taken by the Board of Directors; and brokers. Highwoods has made certain
additional representations and warranties relating to the absence of conflict
between the transactions contemplated by the Merger Agreement and other
agreements and documents; filings, consents and approvals; reports filed with
the Commission and financial statements; accuracy of information included in
this Proxy Statement; and the effect of the transactions contemplated by the
Merger Agreement and the Stock Purchase Agreement upon the status of the Company
as a REIT.
CONDUCT OF BUSINESS PENDING THE MERGER
The Company has agreed that, between the date of the Merger Agreement and
the Effective Time, except as contemplated by the Company's budget made
available to Highwoods prior to the date of the Merger Agreement (the "Company
Budget") or as disclosed to Highwoods or unless Highwoods otherwise agrees in
writing, the businesses of the Company and its Subsidiaries will only be
conducted in, and the Company and its Subsidiaries will not take any action
except in the usual, regular and ordinary course and in substantially the same
manner as conducted prior to the date of the Merger Agreement.
The Company is also prohibited, during the period between the date of the
Merger Agreement and the Effective Time, from engaging in many actions otherwise
taken in the ordinary course. Such restrictions include prohibitions on
declaring and paying certain dividends, leasing properties of the Company for a
period of over five years or with respect to more than 5,000 rentable square
feet, incurring indebtedness of $5,000 or more, entering into contracts or
agreements or authorizing capital expenditures, in either case, in excess of
$5,000, and increasing compensation of officers and employees of the Company.
However, the Company is permitted to pay its regular quarterly dividend on
shares of Common Stock in an amount not exceeding $0.15 per share (or a prorated
portion of such amount in the case of any portion of a quarterly
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period) and to make the distribution related to the Excluded Assets. See "THE
PARTIES TO THE MERGER--The Company--Distribution Policy" and "--Excluded
Assets."
The Company may request consent from Highwoods to take any action otherwise
prohibited by the provisions described in this section, and such consent will be
deemed to be granted if Highwoods does not give notice to the Company of its
refusal to grant such consent within five business days of Highwoods' receipt of
such request for consent. For purposes of the provisions described in this
section, expenditures by the Company will be deemed to be as contemplated by the
Company Budget if (i) the actual expenditures within a given region in the
aggregate do not exceed the aggregate amount of expenditures budgeted for such
region and (ii) the expenditures are made no earlier than the month in which
they are budgeted.
EMPLOYEE ARRANGEMENTS
From and after the Effective Time, Highwoods will cause the Surviving
Corporation to honor, in accordance with their terms, all employment and
consulting agreements and other contracts to which the Company or any of its
Subsidiaries are parties relating to (i) the employment of or rendition of
personal services by any individual and/or (ii) the compensation and/or benefits
payable in connection with such employment or services.
Highwoods will cause the Surviving Corporation to take such actions as are
necessary so that, for a period of at least one year from and after the
Effective Time, persons who are employees of the Company and its Subsidiaries as
of the Effective Time (the "Company Employees") will be provided cash
compensation, employee benefits and incentive compensation and similar plans and
programs as will provide compensation and benefits which, in the aggregate and
in all material respects, are no less favorable than those provided to Company
Employees as of the date of the Merger Agreement; provided, however, that after
the Effective Time Highwoods will have no obligation to issue shares of capital
stock of any entity pursuant to any such plan or program. In addition, from and
after the Effective Time, Highwoods will, and will cause the Surviving
Corporation to, (i) provide all Company Employees with service credit for all
periods of employment with the Company and its Subsidiaries prior to the
Effective Time for purposes of eligibility and vesting under any employee
benefit plan, program, policy or arrangement of Highwoods, the Surviving
Corporation or any of their affiliates, (ii) waive any pre-existing condition of
any Company Employee and any dependent thereof for purposes of determining
eligibility for, and the terms upon which they participate in, any employee
benefit plan, program, policy or arrangement of Highwoods, the Surviving
Corporation or any of their affiliates and (iii) provide each Company Employee,
upon the involuntary termination of such Company Employee's employment with the
Surviving Corporation and any of its Subsidiaries and affiliates, within one
year after the Effective Time, with a severance benefit determined, in most
cases, pursuant the policies disclosed to Highwoods.
Highwoods has agreed that no constraints will be imposed on any Stockholder
or officer of the Company regarding the use or operation of the Excluded Assets
to compete with the Surviving Corporation. See "INTERESTS OF CERTAIN PERSONS IN
THE MERGER."
COMPANY STOCK OPTIONS
The Company and Highwoods have agreed to take all actions necessary to
provide that, at the Effective Time, (i) each option, the existence of which was
disclosed to Highwoods, whether or not then exercisable or vested, will become
fully exercisable and vested, (ii) each such option will be cancelled, and (iii)
in consideration of such cancellation, the Company will pay to each such holder
of options an amount in cash in respect thereof equal to the product of (a) the
excess, if any, of the Merger Consideration over the exercise price of such
option as disclosed to Highwoods and (b) the number of shares of Common Stock
subject thereto. If it is determined that compliance with any of the foregoing
may cause any individual
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subject to Section 16 of the Exchange Act to become subject to the profit
recovery provisions thereof, any options held by such individual may, if such
individual so agrees, subject to the proviso to this sentence, be cancelled or
purchased, as the case may be, at the Effective Time or at such later time as
may be necessary to avoid application of such profit recovery provisions and
such individual will be entitled to receive from the Company or the Surviving
Corporation an amount in cash in respect thereof equal to the product of (a) the
excess, if any, of the Merger Consideration over the exercise price of such
option and (b) the number of shares of Common Stock subject thereto immediately
prior to the Effective Time; provided that the parties to the Merger Agreement
will cooperate, including by providing alternate arrangements, so as to achieve
the intent of the foregoing without giving rise to such profit recovery. The
total amount to be paid to holders of options at the Effective Time, is
approximately $1,537,000.
INDEMNIFICATION AND INSURANCE
Highwoods has agreed to cause (i) the provisions of the Charter relating to
indemnification of officers and directors to be incorporated into the Articles
of Incorporation of CAC and (ii) the provisions of the By-laws relating to
indemnification of officers and directors to be incorporated into the By-laws of
CAC.
Highwoods has agreed that all rights to indemnification existing in favor
of any director, officer, employee or agent of the Company and its Subsidiaries
(the "Indemnified Parties") as provided in their respective Articles of
Incorporation, By-laws or comparable organizational documents or in
indemnification agreements with the Company or any of its Subsidiaries, or
otherwise in effect as of the date of the Merger Agreement, will survive the
Merger and will continue in full force and effect for a period of not less than
six years from the Effective Time; provided, that, in the event any claim or
claims are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims will continue until final
disposition of any and all such claims. Highwoods also has agreed to indemnify
all Indemnified Parties to the fullest extent permitted by applicable law with
respect to all acts and omissions arising out of such individuals' services as
officers, directors, employees or agents of the Company or any of its
Subsidiaries or as trustees or fiduciaries of any plan for the benefit of
employees or directors of, or otherwise on behalf of, the Company or any of its
Subsidiaries, occurring prior to the Effective Time including, without
limitation, the transactions contemplated by the Merger Agreement. Without
limiting the generality of the foregoing, in the event any such Indemnified
Party is or becomes involved in any capacity in any action, proceeding or
investigation in connection with any matter, including, without limitation, the
transactions contemplated by the Merger Agreement, occurring prior to or at the
Effective Time, Highwoods has agreed to pay as incurred such Indemnified Party's
legal and other expenses (including the cost of any investigation and
preparation) incurred in connection therewith. From and after the Effective
Time, Highwoods will pay all expenses, including attorneys' fees, that may be
incurred by any Indemnified Party in enforcing the indemnity and other
obligations described in this section.
Highwoods has also agreed that it will (i) cooperate with the Company to
obtain prior to the Effective Time directors' and officers' insurance coverage
for a six-year period following the Effective Time for current and former
directors and officers of the Company covering any actions taken on or prior to
the Effective Time, such coverage to be at least as comprehensive as the
Company's current directors' and officers' liability insurance coverage or (ii)
from and after the Effective Time, cause the Surviving Corporation to cause to
be maintained in effect for not less than six years from the Effective Time the
current policies of the directors' and officers' liability insurance maintained
by the Company; provided that the Surviving Corporation may substitute therefor
policies of at least the same coverage containing terms and conditions which are
no less advantageous and provided that such substitution shall not result in any
gaps or lapses in coverage with respect to matters occurring prior to the
Effective Time; provided, further, that the Surviving Corporation will not be
required to pay an annual premium in excess of 200% of the last annual premium
paid by the Company prior to the date hereof. If the Surviving Corporation is
unable to
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obtain the insurance described above, it is required to obtain as much
comparable insurance as possible for an annual premium equal to such maximum
amount.
SOLICITATION OF TRANSACTIONS
The Company has agreed that, except as otherwise consented to in writing by
Highwoods, neither the Company nor any of its Subsidiaries will, directly or
indirectly, through any officer, director, employee, agent, representative or
otherwise, initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, (i) any acquisition in any manner, directly or indirectly
(including through any option, right to acquire or other beneficial ownership)
of more than 10% of any class of equity securities of the Company, or assets
representing a material portion of the assets of the Company (other than any
Excluded Asset), other than any of the transactions contemplated by the Merger
Agreement, (ii) any merger, consolidation, sale of assets (other than any
Excluded Asset), share exchange, recapitalization, other business combination,
liquidation, or other action out of the ordinary course of business of the
Company, other than any of the transactions contemplated by the Merger
Agreement, or (iii) any public announcement of a proposal, plan or intention to
do any of the foregoing or any agreement to engage in any of the foregoing (any
of the foregoing, a "Competing Transaction"), or enter into or maintain or
continue discussions or negotiate with any person or entity in furtherance of
such inquiries or to obtain a Competing Transaction, or agree to or endorse any
Competing Transaction, or authorize or permit any of the officers, directors or
employees of the Company or any of its Subsidiaries or any investment banker,
financial advisor, attorney, accountant or other representative retained by the
Company or any of the Company's Subsidiaries to take any such action. The
Company has agreed to immediately notify Highwoods of all the relevant details
relating to all inquiries and proposals which it or any of its Subsidiaries or
any such officer, director, employee, investment banker, financial advisor,
attorney, accountant or other representative may receive relating to any of such
matters, and, if such inquiry or proposal is in writing, the Company has agreed
as promptly as practicable to deliver to Highwoods a copy of such inquiry or
proposal. However, the Company may comply with Rule 14e-2 promulgated under the
Exchange Act with regard to a Competing Transaction.
OTHER AGREEMENTS
Subject to the terms and conditions provided in the Merger Agreement, each
party to the Merger Agreement has agreed to use its commercially reasonable best
efforts to take, or cause to be taken, all actions and to promptly 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
the Merger Agreement. Each of the Company and Highwoods has agreed to prepare
and file any filings required under the Exchange Act, the Securities Act of
1933, as amended (the "Securities Act"), or any other federal, state or local
laws relating to the Merger Agreement and the transactions contemplated thereby,
including any state takeover laws.
The Company has agreed that it will use its commercially reasonable best
efforts to obtain all necessary consents to the Merger. Highwoods has agreed to
use its best efforts to resolve any objections asserted with respect to the
transactions contemplated by the Merger Agreement under any antitrust,
competition or trade regulatory laws, rules or regulations of any governmental
entity.
Subject to the Confidentiality Agreement, dated as of April 8, 1996, by and
between the Company and Highwoods, from the date of the Merger Agreement until
the Closing Date, (i) each party to the Merger Agreement and its respective
subsidiaries will afford to the other party and such other party's accountants,
counsel and other representatives full and reasonable access during normal
business hours (and at such other times as the parties may mutually agree) to
its properties, books, contracts, commitments, records and
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personnel and, during such period, will furnish promptly to such other party (a)
a copy of each report, schedule and other document filed or received by it
pursuant to the requirements of the Securities Act, the Exchange Act and the
rules and regulations promulgated thereunder, and (b) all other information
concerning their businesses, personnel and certain real property owned by the
party as such other party may reasonably request. The Company and Highwoods have
agreed that such other party and its accountants, counsel and other
representatives will not unduly interfere with the operation of the businesses
of the party providing the access and information.
CONDITIONS PRECEDENT TO THE MERGER
ALL PARTIES. Subject to the provisions described in "--Conditions Following
Highwoods Ownership of Shares," the respective obligations of each party to the
Merger Agreement to effect the Merger are subject to the fulfillment at or prior
to the Effective Time of the following conditions: (i) the Merger shall have
been approved and adopted by the requisite vote of the holders of the Common
Stock; (ii) any waiting period applicable to the consummation of the Merger
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), if applicable, shall have expired or been terminated or the Company
and Highwoods shall have mutually concluded that no filing under the HSR Act is
required with respect to the transactions contemplated by the Merger Agreement;
and (iii) the consummation of the Merger shall not be restrained, enjoined or
prohibited by any order, judgment, decree, injunction or ruling of a court of
competent jurisdiction. The Company and Highwoods have mutually concluded that
no filing under the HSR Act is required with respect to the transactions
contemplated by the Merger Agreement.
THE COMPANY. Subject to the provisions described in "--Conditions Following
Highwoods Ownership of Shares," the obligation of the Company to effect the
Merger is subject to the fulfillment at or prior to the Effective Time of the
additional conditions, unless waived by the Company, that the representations
and warranties of Highwoods contained in the Merger Agreement relating to due
authority to enter into the Merger Agreement and consummate the transactions
contemplated thereby and relating to Highwoods' due organization, qualification
and good standing shall be true when made and at and as of the Effective Time as
if made at and as of such time, and that Highwoods shall have performed in all
material respects its agreements contained in the Merger Agreement required to
be performed at or prior to the Effective Time; and the Company shall have
received a certificate of the Chief Executive Officer or the Chief Financial
Officer of Highwoods to that effect.
HIGHWOODS. Subject to the provisions described in "--Conditions Following
Highwoods Ownership of Shares," the obligation of Highwoods to effect the Merger
is subject to the fulfillment at or prior to the Effective Time of the
additional following conditions, unless waived by Highwoods:
(i) that the representations and warranties of the Company contained in
the Merger Agreement relating to due authority to enter into the Merger
Agreement and consummate the transactions contemplated thereby and relating to
the Company's due authorization and good standing shall be true when made and at
and as of the Effective Time as if made at and as of such time, and that the
Company shall have performed in all material respects its agreements contained
in this Agreement required to be performed at or prior to the Effective Time;
and Highwoods shall have received a certificate of the Chief Executive Officer
or the Chief Financial Officer of the Company to that effect;
(ii) certain consents disclosed to Highwoods shall have been received, or
the Company shall have refinanced the indebtedness relating to such consents
with new indebtedness which is in all respects at least as favorable to the
Company as the indebtedness relating to such consents (but under the terms of
which no lender consent is required (or any required consent has been obtained)
to effect the transactions contemplated by the Merger Agreement); and
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(iii) the Company shall meet the requirements for qualification as a REIT
under Sections 856-860 of the Code; provided that, if the Company does not meet
such requirements for qualification as a result of any action or omission of (or
any action or omission taken at the direction of) Highwoods or due to the
inaccuracy of the representation made by Highwoods as to the effect of the
transactions contemplated by the Merger Agreement and the Stock Purchase
Agreement upon the status of the Company as a REIT, the condition described in
this clause (iii) shall be deemed to be satisfied.
CONDITIONS FOLLOWING HIGHWOODS OWNERSHIP OF SHARES. If Highwoods becomes
the beneficial owner of a majority of the outstanding shares of Common Stock
prior to the Effective Time (see "THE STOCK PURCHASE AGREEMENT"), the respective
obligations of each party to effect the Merger shall be subject only to the
fulfillment at or prior to the Effective Time of the following conditions:
(i) the Merger shall have been approved and adopted by the requisite vote
of the holders of the Common Stock; and
(ii) the consummation of the Merger shall not be restrained, enjoined or
prohibited by any order, judgment, decree, injunction or ruling of a court of
competent jurisdiction.
REPRESENTATIONS AND WARRANTIES. Except as otherwise described in this
section "--Conditions Precedent to the Merger," that the representations and
warranties of the Company contained in the Merger Agreement were true and
correct when and as made shall not be a condition to the obligation of either
the Company or Highwoods to effect the Merger.
TERMINATION
The Merger Agreement may be terminated at any time prior to the earlier of
(i) such time as Highwoods becomes the owner, directly or indirectly, of a
majority of the Common Stock (see "THE STOCK PURCHASE AGREEMENT") and (ii) the
Effective Time, whether before or after approval by the Stockholders of the
Merger:
(a) by mutual written consent of Highwoods and the Company;
(b) by Highwoods, upon a breach of any covenant or agreement on the part
of the Company set forth in the Merger Agreement, such that the condition
described under "--Conditions Precedent to the Merger--Highwoods" would not
be satisfied (a "Terminating Company Breach"); provided that, if such
Terminating Company Breach is curable by the Company through the exercise
of its reasonable best efforts and for so long as the Company continues to
exercise such reasonable best efforts, Highwoods may not terminate the
Merger Agreement pursuant to the provisions described in this clause (b);
(c) by the Company, upon breach of any covenant or agreement on the part
of Highwoods set forth in the Merger Agreement such that the condition
described under "--Conditions Precedent to the Merger--The Company" would
not be satisfied ("Terminating Highwoods Breach"); provided that, if such
Terminating Highwoods Breach is curable by Highwoods through the exercise
of its reasonable best efforts and for so long as Highwoods continues to
exercise such reasonable best efforts, the Company may not terminate the
Merger Agreement pursuant to the provisions described in this clause (c);
(d) by Highwoods, if the Company does not meet the requirements for
qualification as a REIT under Sections 856-860 of the Code; provided that,
if the Company does not meet such requirements for qualification as a
result of any action or omission of (or any action or omission
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taken at the direction of) Highwoods or due to the inaccuracy of the
representation of Highwoods contained in the Merger Agreement and related
to the effect of the transactions contemplated by the Merger Agreement and
the Stock Purchase Agreement upon the Company's status as a REIT, Highwoods
will not have the right to terminate the Merger Agreement pursuant to the
provisions described in this clause (d);
(e) by Highwoods or the Company, if any court of competent jurisdiction
shall have issued, enacted, entered, promulgated or enforced any order,
judgment, decree, injunction or ruling which restrains, enjoins or
otherwise prohibits the Merger and such order, judgment, decree, injunction
or ruling shall have become final and nonappealable; provided, however,
that the party seeking to terminate the Merger Agreement pursuant to the
provisions described in this clause (e) shall have used commercially
reasonable best efforts to remove such injunction or overturn such action;
or
(f) by either Highwoods or the Company if the meeting of the
Stockholders to approve the Merger (including as such meeting may be
adjourned from time to time) shall have concluded without the Company
having obtained the required Stockholder approval.
If Highwoods becomes the owner, directly or indirectly, of a majority of
the Common Stock prior to the Effective Time (see "THE STOCK PURCHASE
AGREEMENT"), the Merger Agreement may not be terminated.
FEES AND EXPENSES
The Merger Agreement provides that whether or not the Merger is
consummated, all legal and other costs and expenses incurred in connection with
the Merger Agreement and the transactions contemplated thereby will be paid by
the party incurring such expense. See "--Excluded Assets."
AMENDMENT AND WAIVERS
The Merger Agreement provides that it may not be modified or amended except
by an instrument or instruments in writing signed by the party against whom
enforcement of any such modification or amendment is sought. Either party to the
Merger Agreement may, only by an instrument in writing, waive compliance by the
other party to the Merger Agreement with any term or provision thereof on the
part of such other party to the Merger Agreement to be performed or complied
with. In the event that, prior to the Effective Time, Highwoods becomes the
owner of a majority of the outstanding shares of Common Stock (see "THE STOCK
PURCHASE AGREEMENT"), any amendment to the Merger Agreement affecting the Merger
Consideration, the timing of the Merger, or Highwoods' obligation to complete
the Merger shall require that (i) a majority of the directors of the Company are
Continuing Directors and (ii) such amendment is approved by a majority of the
Continuing Directors then serving. "Continuing Directors" means individuals who,
as of the date of the Merger Agreement, constitute the Board of Directors;
provided, however, that any individual becoming a director subsequent to the
date of the Merger Agreement whose election, or nomination for election by the
Stockholders, was approved by a vote of at least a majority of the Continuing
Directors will be considered as though such individual were a Continuing
Director.
EXCLUDED ASSETS
In the course of the negotiations leading to the Merger Agreement, the
Company and Highwoods were unable to agree on a mutually acceptable price for
the Excluded Assets. The Excluded Assets consist primarily of undeveloped land
and contracts to acquire certain new properties. The current book value of the
Excluded Assets is approximately $17.2 million. The Excluded Assets include
approximately 237 acres of
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undeveloped land in Tampa, Florida, approximately 8.5 acres of undeveloped land
in Memphis, Tennessee, approximately 8 acres of undeveloped land in Greenville,
South Carolina and approximately 4 acres of undeveloped land in Boca Raton,
Florida, whose current book values are approximately $11.7 million, $3.0
million, $1.7 million and $0.8 million, respectively. The current book values
and fair market values of the other Excluded Assets are not, in the aggregate,
material to the Company and its subsidiaries as a whole. The current book value
of each Excluded Asset which is land is the price that the Company paid to
acquire such Excluded Asset. The current book value of each Excluded Asset which
is not land is $0. The Excluded Assets also include a receivable due from
Leasing Company in the amount of $12.1 million and created in connection with
the Sabal Acquisition. Because such receivable is among the Excluded Assets, it
will be effectively cancelled in the Newco Transaction. In addition, Highwoods
indicated that its willingness to pay the price it was offering for the Company
depended on the Excluded Liabilities being effectively removed from the Company
prior to the Merger. The Company believes that the sale of the Excluded Assets
for their fair market value to one or more buyers unaffiliated with the Company
could not be achieved in the short term. Accordingly, the Company determined
that, in order to maximize the value of the Merger to the Stockholders, it was
necessary to form Newco, which would own the Excluded Assets and assume the
Excluded Liabilities at or prior to the Merger. However, the Company also
determined that it was not practical to distribute interests in Newco to all of
the Stockholders in proportion to their holdings of Common Stock for the
following reasons:
(i) Such a distribution would cause Newco to become a separate, publicly
traded company, which would require registration of Newco's securities
under the federal securities laws and result in a continuing obligation to
file reports and other documents with the Commission, all of which would
be, in the opinion of the Board of Directors, unreasonably costly in
relation to the relatively small value of Newco's assets.
(ii) Because none of the Excluded Assets is cash or produces current
income, Newco would be illiquid and unable to satisfy the Excluded
Liabilities without raising additional equity capital or borrowing. Because
of the nature of Newco's assets, the Company believes that Newco would be
unable to borrow sufficient funds to satisfy its short-term liquidity needs
without additional equity capital.
(iii) The relatively small value of Newco would likely result in reduced
liquidity of the market for Newco's securities as compared to the market
for the Common Stock. For many public stockholders of the Company, the
transaction cost of selling the holder's proportional interest in Newco
would be large in relation to the value of such interest.
For these reasons, the Company determined that the most efficient method of
distributing the fair market value of Newco to all of its Stockholders would be
to (i) organize Newco as a private company controlled by the two principal
Stockholders and operated by the Company's current senior management, (ii) sell
the Excluded Assets, subject to the Excluded Liabilities, to Newco in the Newco
Transaction and (iii) distribute to all of the Stockholders the proceeds of the
Newco Transaction in the form of the Special Dividend. In the negotiations with
Highwoods, Highwoods required, and the Company agreed, that such cash
distribution would be reduced by any taxes or other expenses incurred by the
Company as a result of the Newco Transaction.
Because members of the Board of Directors who are officers of the Company
or who are affiliated with the Stockholders who will have an interest in Newco
have a conflict of interest with respect to the Newco Transaction, the Board of
Directors appointed the Special Committee, consisting of the directors James P.
Neeves and S. Bruce Wunner, to act on behalf of the Company in connection with
the Newco Transaction. Neither of Messrs. Neeves and Wunner has any relationship
with the Company (other than as a director or Stockholder) or with the
Stockholders who will have an interest in Newco.
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The Newco Transaction resulted in proceeds of $18 million to the Company,
resulting in a Special Dividend of $0.60411 per share of Common Stock. The price
paid in the Newco Transaction was determined by negotiation between Newco and
the Special Committee.
Merrill Lynch acted as financial advisor to the Special Committee in the
negotiations with Newco. Newco will finance the purchase of the Excluded Assets
from the Company through borrowings and equity contributions from the
Stockholders and senior management of the Company which will control Newco. Such
Stockholders will fund such loans and equity contributions to Newco through cash
on hand or short-term borrowings to be repaid with the cash proceeds which they
will obtain in connection with the Merger.
The Excluded Assets are listed on Schedule 5.13 to the Merger Agreement,
which Schedule 5.13 is attached as Appendix B to this Proxy Statement. The
current book value of the Excluded Assets is approximately $17.2 million. The
Excluded Liabilities are (i) the payment obligations under a master lease to be
entered into between Newco and Highwoods (the "Master Lease"), which total $1.8
million, (ii) any liability arising out the Company's indemnification obligation
with respect to the lawsuit styled Thomas J. Crocker and Crocker & Company, Case
No. CL 94-8669 CIV, brought in the United States District Court for the Southern
District of Florida (the "Florida Litigation"), (iii) amounts payable to
Highwoods relating to expenses incurred by the Company in connection with the
Merger (including solicitation fees payable, if any, in connection with the
exercise of the Public Warrants), in excess of $9,150,000, if any. Pursuant to
the Merger Agreement, the Company will pay to Newco 50% of the excess, if any,
of $8,600,000 over the amount of the expenses incurred by the Company in
connection with the Merger.
Leasing Company has entered into a contract to sell a parcel of land that
is included in the Excluded Assets, consisting of approximately 90 acres in
Sabal Business Park in Tampa, Florida. The contract price is $12.7 million for
land having a book value is $6.5 million. The contract also provides for options
exercisable for two additional parcels of land at a price of $2 million in the
aggregate. Newco will purchase such land subject to the contract of sale and
options. The contract contains significant conditions to closing, including the
purchaser's satisfaction with its due diligence investigation and certain
conditions that are outside the control of the parties. There is no assurance
that a closing under the contract will occur. There are significant costs,
including taxes, brokerage commissions and certain development costs, that will
be incurred by Leasing Company in connection with the sale. The Special
Committee took these circumstances into account in its negotiation of the Newco
Transaction.
It is contemplated that Newco and the Company will enter into an agreement,
pursuant to which Newco will agree that, if the Merger is not consummated and at
the option of the Company, Newco will transfer back to the Company any Excluded
Assets which have previously been removed from the Company to Newco and any
other opportunities taken by Newco which otherwise would have been taken by the
Company. The agreement will provide that, in connection with such transfer back
to the Company, the Company will reimburse Newco for its costs and a return on
its investment for the period of its investment.
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THE STOCK PURCHASE AGREEMENT
VOTING AGREEMENT; PROXY
The Sellers have entered into the Stock Purchase Agreement with Highwoods
and CAC. Pursuant to the Stock Purchase Agreement, each Seller has agreed that,
during the period (the "Term") from the date of the Stock Purchase Agreement
until the earlier to occur of (i) the closing date under the Stock Purchase
Agreement or (ii) the termination of the Merger Agreement, at any meeting of the
Stockholders, and in any action by written consent of the Stockholders, it will
(a) vote its shares of Common Stock in favor of the Merger or any other
transaction contemplated by the Merger Agreement; (b) vote its shares of Common
Stock against any action or agreement which would result in a breach in any
material respect of any covenant, representation or warranty or any other
obligation of the Company under the Merger Agreement; and (c) vote its shares of
Common Stock against any action or agreement which would impede, interfere with
or attempt to discourage the Merger, including, but not limited to: (1) any
extraordinary corporate transaction, such as a merger, reorganization or
liquidation involving the Company or any of its subsidiaries; (2) a sale or
transfer of a material amount of assets of the Company or any of its
subsidiaries; (3) any change in the management or Board of Directors of the
Company, except as otherwise agreed to in writing by Highwoods; (4) any change
in the capitalization or dividend policy of the Company in effect as of the date
of the Stock Purchase Agreement; or (5) any other material change in the
Company's corporate structure or business.
Pursuant to the Stock Purchase Agreement, each Seller has granted CAC, or
any nominee of CAC, such Seller's irrevocable proxy and attorney-in-fact to vote
or act by written consent with respect to all of such Seller's shares of Common
Stock in respect of any of the matters with respect to which the Seller has
agreed to vote its shares of Common Stock and described in the immediately
preceding paragraph.
Each Seller has agreed, during the Term, and except as contemplated by the
Stock Purchase Agreement, not to (i) sell, transfer record or beneficial
ownership of, pledge, encumber, assign or otherwise dispose of, enforce or
permit the execution of the provisions of any redemption agreement with the
Company or enter into any contract, option or other arrangement or understanding
with respect to or consent to the offer for sale, transfer record or beneficial
ownership of, pledge, encumbrance, assignment or other disposition of, any of
its shares of Common Stock or any interest in any of the foregoing except to CAC
or Highwoods or with respect to the Excluded Assets, or to purchase or otherwise
acquire any additional shares of Common Stock, except pursuant to the exercise
of warrants currently owned by such Seller; (ii) grant any proxies or powers of
attorney, deposit any of its shares of Common Stock into a voting trust or enter
into a voting agreement with respect to any of its shares of Common Stock in, or
any interest in any of the foregoing, except to CAC or Highwoods; (iii) consent
to or otherwise agree to any amendment, waiver or other modification of the
articles of incorporation or by-laws (or other applicable organizational
documents) of the Company or its subsidiaries without the prior written consent
of CAC or Highwoods; or (iv) take any action that would make any representation
or warranty of such Seller contained in the Stock Purchase Agreement untrue or
incorrect or have the effect of preventing or disabling such Seller from
performing its or his obligations under the Stock Purchase Agreement, or that
would otherwise hinder or delay CAC or Highwoods from acquiring a majority of
the outstanding shares of Common Stock, determined on a fully diluted basis.
CONDITIONS TO CLOSING
The obligations of CAC to consummate the transactions contemplated by the
Stock Purchase Agreement are subject to the fulfillment, at or prior to the
closing under the Stock Purchase Agreement, of each of the following conditions:
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(i) each of the Sellers shall have performed in all material respects its
agreements contained in the Stock Purchase Agreement required to be performed at
or prior to the closing under the Stock Purchase Agreement and the
representations and warranties of each of the Sellers contained in the Stock
Purchase Agreement shall be true when made and at and as of the closing under
the Stock Purchase Agreement as if made at and as of such time, and CAC shall
have received a certificate of each Seller or, in the case of a Seller which is
a limited partnership, an appropriate officer of the general partner of such
Seller, as the case may be, to that effect; (ii) the Company and its
subsidiaries, if applicable, shall have performed in all material respects its
agreements contained in the Merger Agreement required to be performed at or
prior to the closing under the Stock Purchase Agreement; (iii) all conditions to
Highwoods' obligation to close the Merger (other than any required consent of
the Stockholders) shall have been satisfied or waived including, but not limited
to, (a) the distribution out of the Company of the Excluded Assets, (b) the
continued qualification of the Company as a REIT as of the Closing Date, unless
the Company's failure to qualify as a REIT is the result of any action or
omission of (or an action or omission taken at the direction of) Highwoods or
CAC or as a result of the inaccuracy of the representation of Highwoods
contained in the Merger Agreement and relating to the effect of the transactions
contemplated by the Merger Agreement and the Stock Purchase Agreement upon the
Company's status as a REIT, (c) the consent to the transfer of the Seller's
shares of Common Stock to CAC under the Stockholders Agreement, and the
agreement to terminate such Stockholders Agreement upon CAC's acquisition of
Apollo's and AEW's shares of Common Stock pursuant to the Stock Purchase
Agreement, (d) the waiver of the transfer restrictions described in the legend
on the Company Stock Certificates representing the Sellers' shares of Common
Stock in connection with the transfer of such shares to CAC and (e) that the
obligation to indemnify Mr. Crocker and Crocker & Company with respect to the
Florida Litigation shall have been assumed by Newco or that Newco shall have to
reimburse the Company for all costs associated with the Company obtaining full
insurance coverage for any losses that may be suffered as a result of its
indemnification of Mr. Crocker and Crocker & Company in connection with the
Florida Litigation; (iv) the required consents to the Merger disclosed to
Highwoods shall have been received; (v) the Company shall have taken all actions
necessary to duly authorize and approve the transactions contemplated by the
Stock Purchase Agreement, including exemption of Highwoods and CAC from the
Existing Holder Limits (as defined in the Charter) and Ownership Limits
(assuming the accuracy of the representation of Highwoods contained in the
Merger Agreement and relating to the effect of the transactions contemplated by
the Merger Agreement and the Stock Purchase Agreement upon the Company's status
as a REIT) and notice requirements set forth in the Charter and waiving
application of the Maryland Control Share Acquisition Act to the transactions
contemplated by the Stock Purchase Agreement and the Merger Agreement and
approving and consenting to the consummation of the transactions contemplated by
the Stock Purchase Agreement, and all actions required under Maryland law to
consummate the transactions contemplated by the Stock Purchase Agreement shall
have been appropriately taken; (vi) there shall have been no order or
preliminary or permanent injunction entered in any action or proceeding before
any federal, state or foreign court or governmental, administrative or
regulatory authority or agency by any federal, state or foreign legislative
body, court, government or governmental, administrative or regulatory authority
or agency which shall have remained in effect and which shall have had the
effect of making illegal the consummation of any of the transactions
contemplated by the Stock Purchase Agreement; (vii) each of Messrs. Crocker,
Ackerman and Onisko shall have entered into with the Company a severance
agreement as described in "MANAGEMENT--Executive Compensation--Severance
Agreements Entered into in Connection with The Merger," which severance
agreements shall be in full force and effect as of the Closing Date and
thereafter; and (viii) the Company shall have completed the distribution of the
Excluded Assets from the Company. See "THE MERGER AGREEMENT--Excluded Assets."
EFFECT OF THE STOCK PURCHASE AGREEMENT
A majority of the shares of Common Stock outstanding and entitled to vote
at the Special Meeting constitutes a quorum for purposes of the Special Meeting.
Approval of the Merger requires the affirmative
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vote of two-thirds of the shares of Common Stock outstanding and entitled to
vote thereon. Therefore, the agreement by the Sellers, who in the aggregate own
77.1% of the outstanding shares of Common Stock, to (i) vote in favor of the
Merger or any other transaction contemplated by the Merger Agreement and (ii) to
grant CAC a proxy with respect to their shares of Common Stock in respect of
certain matters, including the Merger and the other transactions contemplated by
the Merger Agreement (see "--Voting Agreement; Proxy") will mean that there will
be a quorum at the Special Meeting and sufficient votes cast for approval and
adoption of the Merger Agreement to ensure its passage without the vote of any
other Stockholder. Moreover, if the closing under the Stock Purchase Agreement
occurs prior to the Record Date of the Special Meeting, a quorum will be present
at the Special Meeting and sufficient votes will be cast for approval and
adoption of the Merger Agreement and the transactions contemplated thereby,
including the Merger, to ensure its passage without the vote of any other
Stockholder, assuming CAC votes the shares of Common Stock purchased at such
closing in favor of approval and adoption of the Merger Agreement and the
transactions contemplated thereby, including the Merger.
If the closing under the Stock Purchase Agreement occurs prior to the
Effective Time, there will be fewer conditions to consummation of the Merger
than if such closing does not occur. See "THE MERGER AGREEMENT--Conditions
Precedent to the Merger."
DISSENTERS' RIGHTS
Under Maryland law, Stockholders do not have dissenters' rights in
connection with the Merger Agreement and the transactions contemplated thereby.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Company's management and the Board of Directors may
receive economic benefits as a result of the Merger and may have other interests
in the Merger in addition to their interests as Stockholders. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT;" "MANAGEMENT--Executive
Compensation--Severance Agreements Entered into in Connection with the Merger;"
and "THE STOCK PURCHASE AGREEMENT." The Board of Directors was aware of these
interests and considered them along with the other matters described above under
"THE MERGER--Background of the Merger" and "THE MERGER--Reasons for the Merger."
BENEFIT PLANS
Highwoods has agreed that, from and after the Effective Time, Highwoods
will cause the Surviving Corporation to honor, in accordance with their terms,
all employment and consulting agreements and other contracts to which the
Company or any of its Subsidiaries are parties relating to (i) the employment of
or rendition of personal services by any individual and/or (ii) the compensation
and/or benefits payable in connection with such employment or services.
Highwoods has agreed to cause the Surviving Corporation to take such actions as
are necessary so that, for a period of at least one year from and after the
Effective Time, the Company Employees will be provided cash compensation,
employee benefits and incentive compensation and similar plans and programs as
will provide compensation and benefits which, in the aggregate and in all
material respects, are no less favorable than those provided to Company
Employees as of the date of the Merger Agreement; provided, however, that after
the Effective Time Highwoods will have no obligation to issue shares of capital
stock of any entity pursuant to any such plan or program. In addition, from and
after the Effective Time, Highwoods will, and will cause the Surviving
Corporation to, (i) provide all Company Employees with service credit for all
periods of employment with the Company and its Subsidiaries prior to the
Effective Time for purposes of eligibility and vesting under any employee
benefit
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plan, program, policy or arrangement of Highwoods, the Surviving Corporation or
any of their affiliates, (ii) waive any pre-existing condition of any Company
Employee and any dependent thereof for purposes of determining eligibility for,
and the terms upon which they participate in, any employee benefit plan,
program, policy or arrangement of Highwoods, the Surviving Corporation or any of
their affiliates and (iii) provide each Company Employee, upon the involuntary
termination of such Employee's employment with the Surviving Corporation and any
of its Subsidiaries and affiliates, within one year after the Effective Time,
with a severance benefit determined, in most cases, pursuant the policies
disclosed to Highwoods. See "THE MERGER AGREEMENT--Employee Arrangements."
COMPANY STOCK OPTIONS
The Company and Highwoods have agreed to take all actions necessary to
provide that, at the Effective Time, (i) each option, the existence of which was
disclosed to Highwoods, whether or not then exercisable or vested, will become
fully exercisable and vested, (ii) each such option will be cancelled, and (iii)
in consideration of such cancellation, the Company will pay to each such holder
of options an amount in cash in respect thereof equal to the product of (a) the
excess, if any, of the Merger Consideration over the exercise price of such
option as disclosed to Highwoods and (b) the number of shares of Common Stock
subject thereto, subject to certain limitations described in "THE MERGER
AGREEMENT--Company Stock Options." Set forth below, with respect to each of the
executive officers and directors of the Company so listed, immediately following
such individual's name, is a calculation of the difference between the Merger
Consideration with respect to all shares of Common Stock obtainable upon
exercise of all of such individual's outstanding options and the aggregate
exercise price of such options: Richard S. Ackeman, $526,215; Thomas J. Crocker,
$526,215; William L. Mack, $10,970; Kevin McCall, $7,095; James P. Neeves,
$10,970; Lee S. Neibart, $10,970; Thomas H. Nolan, Jr., $7,095; Robert E.
Onisko, $52,622; W. Edward Scheetz, $10,970; and S. Bruce Wunner $10,970. See
"THE MERGER AGREEMENT--Company Stock Options."
DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE. The Merger
Agreement provides that Highwoods will cause (i) the provisions of the Charter
relating to indemnification of officers and directors to be incorporated into
the Articles of Incorporation of CAC and (ii) the provisions of the By-laws
relating to indemnification of officers and directors to be incorporated into
the By-laws of CAC. Highwoods has also agreed that all rights to indemnification
existing in favor of any Indemnified Party as provided in articles of
incorporation, by-laws or comparable organizational documents of the Company or
any of its Subsidiaries or in indemnification agreements with the Company or any
of its Subsidiaries, or otherwise in effect as of the date of the Merger
Agreement, will survive the Merger and will continue in full force and effect
for a period of not less than six years from the Effective Time; provided, that,
in the event any claim or claims are asserted or made within such six-year
period, all rights to indemnification in respect of any such claim or claims
will continue until final disposition of any and all such claims. Highwoods also
has agreed to indemnify all Indemnified Parties to the fullest extent permitted
by applicable law with respect to all acts and omissions arising out of such
individuals' services as officers, directors, employees or agents of the Company
or any of its Subsidiaries or as trustees or fiduciaries of any plan for the
benefit of employees or directors of, or otherwise on behalf of, the Company or
any of its Subsidiaries, occurring prior to the Effective Time, including,
without limitation, the transactions contemplated by the Merger Agreement. From
and after the Effective Time, Highwoods will pay all expenses, including
attorneys' fees, that may be incurred by any Indemnified Party in enforcing the
indemnity and other obligations described under "THE MERGER
AGREEMENT--Indemnification and Insurance." Pursuant to the Merger Agreement,
Highwoods has agreed that it will (i) cooperate with the Company to obtain,
prior to the Effective Time, directors' and officers' insurance coverage for a
six-year period following the Effective Time for current and former directors
and officers of the Company covering any actions taken on or prior to the
Effective Time, such coverage to be at least as comprehensive as the Company's
current directors' and officers' liability insurance coverage or (ii) from and
after the Effective Time, cause the Surviving Corporation to
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cause to be maintained in effect for not less than six years from the Effective
Time the current policies of the directors' and officers' liability insurance
maintained by the Company; provided, that the Surviving Corporation may
substitute therefor policies of at least the same coverage containing terms and
conditions which are no less advantageous and provided that such substitution
shall not result in any gaps or lapses in coverage with respect to matters
occurring prior to the Effective Time; provided, further, that the Surviving
Corporation will not be required to pay an annual premium in excess of 200% of
the last annual premium paid by the Company prior to the date hereof. If the
Surviving Corporation is unable to obtain the insurance described above, it is
required to obtain as much comparable insurance as possible for an annual
premium equal to such maximum amount. See "THE MERGER AGREEMENT--Indemnification
and Insurance."
EXCLUDED ASSETS
The Excluded Assets will be owned by Newco, a private company to be
controlled by the one or more of the principal Stockholders and to be operated
by the Company's current senior management. The proceeds of the Newco
Transaction will be distributed to all of the Stockholders. See "THE MERGER
AGREEMENT--Excluded Assets."
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
TO COMMON STOCK HOLDERS
The following is a summary of certain United States federal income tax
consequences of the Merger to the Stockholders. The following summary does not
address certain United States federal income tax consequences of the Merger to
Apollo and AEW.
The receipt of cash in exchange for Common Stock pursuant to the Merger
will be a taxable transaction for federal income tax purposes and may also be a
taxable transaction under applicable state, local and foreign tax laws. A
Stockholder will generally recognize gain or loss for federal income tax
purposes in an amount equal to the difference between such Stockholder's
adjusted tax basis in the Common Stock, and the amount of cash received in
exchange therefor. Such gain or loss will be a capital gain or loss if such
Common Stock is held as a capital asset, and will be a long-term capital gain or
loss if, at the Effective Time, such Common Stock was held for more than one
year.
The foregoing discussion may not apply to Stockholders who acquired their
Common Stock pursuant to the exercise of employee stock options or other
compensation arrangements with the Company or who are not citizens or residents
of the United States or who are otherwise subject to special tax treatment. EACH
STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS TAX ADVISOR WITH RESPECT TO THE
TAX CONSEQUENCES OF THE MERGER, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL
OR OTHER TAX LAWS.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 1996 certain information
regarding the beneficial ownership of shares of Common Stock for (i) each person
who is the beneficial owner of more than a 5% interest in the Company, (ii) each
director and named executive officer of the Company and (iii) the directors and
executive officers of the Company as a group. Unless otherwise indicated in the
footnotes, all of such interests are owned directly, and the indicated
individual or entity has sole voting and investment power.
NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OWNED PERCENT OWNED
- ------------------------------------ ------------ -------------
Highwoods Properties, Inc. 22,436,254(1) 83.0%(1)
3100 Smoketree Court, Suite 600
Raleigh, North Carolina 27604
AP CRTI Holdings, L.P.(2) 12,851,761 47.6%
c/o Apollo Real Estate Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
AEW Partners, L.P.(3) 8,818,231 32.7%
225 Franklin Street
Boston, Massachusetts 02110
AMEV/VSB 1990 NV(4) 1,875,000 6.9%
Fortis, Inc.
Fortis Benefits Insurance Company
Time Insurance Company
c/o Fortis Advisors, Inc.
One Chase Manhattan Plaza
New York, New York 10005
Towermarc Group(5) 1,687,939 6.3%
Suite 1840
260 Franklin Street
Boston, Massachusetts 02110
Richard S. Ackerman 191,225(6)(7) *
Thomas J. Crocker 542,164(7)(9) 2.0%
William L. Mack(10) 1,000(11) *
Kevin McCall(12) 1,000(11) *
James P. Neeves 4,000(7)(11) *
Lee S. Neibart(10) 1,000(11) *
Thomas H. Nolan, Jr.(12) 1,000(11) *
Robert E. Onisko 32,873(8) *
W. Edward Scheetz(10) 1,000(11) *
S. Bruce Wunner 1,000(11) *
All directors and executive officers
as a group (10 persons) 776,262(13) 2.9%
- ------------------
* Less than 1%
(1) Includes all shares beneficially owned by Apollo, AEW, Messrs. Crocker,
Ackerman and Onisko and Mr. Crocker's wife, which shares Highwoods has
agreed to purchase pursuant to the Stock Purchase Agreement. See "THE STOCK
PURCHASE AGREEMENT."
(2) Apollo is an indirect wholly-owned subsidiary of Apollo Fund. The managing
general partner of Apollo Fund is AREA whose general partner is AREM.
Includes 1,141 shares of Common Stock owned by AREA. Leon D. Black and John
J. Hannan are the directors of AREM, and each disclaims beneficial
ownership of all Common Stock held by Apollo.
(3) The general partner of AEW is AEW/L.P. The general partner of AEW/L.P. is
AEW, Inc.
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(4) Fortis Benefits Insurance Company, the record owner of 1,250,000 shares of
Common Stock, and Time Insurance Company, the record owner of 625,000
shares of Common Stock, are subsidiaries of Fortis, Inc. Fortis, Inc. is a
subsidiary of AMEV/VSB 1990 NV, a Netherlands company.
(5) The Towermarc Group acknowledges acting as a group within the meaning of
Section 13(d)(3) of the Exchange Act. The group consists of the following
limited partnerships, each of which owns the number of shares of Common
Stock indicated: Phase II International Partners, L.P. (595,445 shares);
S.W. Office Partners I, L.P. (132,309 shares); Kirby Centre Partners, L.P.
(53,036 shares); Medical Properties, L.P. (35,374 shares); S.W. Office
Partners II, L.P. (256,671 shares); Benjamin Center Associates No. 9, LTD.
(2,895 shares); Benjamin Center Associates No. 7, LTD. (45,995 shares);
Southeast Project Partners, LTD. (203,973 shares); and 1511 N. Westshore
Partners, Ltd. (362,241 shares).
(6) Includes 248 shares owned by Mr. Ackerman's spouse, as to which Mr.
Ackerman disclaims beneficial ownership, and 248 shares held by the trustee
of an individual retirement account for the benefit of Mr. Ackerman. Does
not include options to purchase 500,000 shares of Common Stock which have
not vested.
(7) Includes 42,000 shares of Common Stock with respect to Mr. Crocker and his
spouse, 20,000 shares of Common Stock with respect to Mr. Ackerman and
2,000 shares of Common Stock with respect to Mr. Neeves, issuable upon the
exercise of CRI public warrants.
(8) Does not include options to purchase 50,000 shares of Common Stock which
have not vested.
(9) Includes 77,500 shares of Common Stock owned by Mr. Crocker's spouse. Mr.
Crocker disclaims any beneficial interest in such shares. Does not include
options to purchase 500,000 shares of Common Stock which have not vested.
(10) Messrs. Mack, Neibert and Scheetz are each associated with AREA and Apollo
Fund. Each disclaims beneficial ownership of all shares held by Apollo Fund
and AREA.
(11) Includes 1,000 shares of Common Stock issuable upon the exercise of
options. Does not include options to purchase 2,000 shares of Common Stock
which have not vested.
(12) Messrs. McCall and Nolan are each associated with AEW Partners, L.P.,
AEW/L.P. and AEW, Inc. Each disclaims beneficial ownership of all shares
held by AEW Partners, L.P.
(13) Includes options and warrants to purchase 71,000 shares of Common Stock.
Does not include shares held by Apollo or AEW Partners, L.P. Does not
include 1,334,000 shares of Common Stock subject to Company Stock Options
granted pursuant to the Stock Option Plan that are not vested.
AFFILIATES OF THE COMPANY
APOLLO. Apollo is an indirect wholly-owned subsidiary of Apollo Fund, a
real estate-oriented investment fund established in April 1993 with investment
capital of $500 million. Apollo Fund's holdings include significant interests in
income producing real property, performing and non-performing debt obligations
secured directly and indirectly by real property, as well as other commercial
and residential multi-family real property and hotels. Apollo Fund transferred
its interests in certain of the Company's subsidiaries to the Company, and
caused its interests in the entity which held the Land Options to be transferred
to the Company, in exchange for an aggregate of 12,850,520 shares of Common
Stock. As of the date of this Proxy Statement, Apollo Fund has transferred to
the Company all of the interests controlled by Apollo or its affiliates in
multi-story or single-story office properties located in the Southeastern United
States. See "MANAGEMENT--Transactions With Apollo and its Affiliates."
AREA, the managing general partner of Apollo Fund, contributed to the
Company all of the capital stock of the corporations which were the general
partners (with a 1% partnership interest) of certain of the Company's
subsidiaries and received an aggregate of 1,141 shares of Common Stock upon the
consummation of the mergers of such corporations into wholly-owned subsidiaries
of the Company.
AEW. On July 28, 1995, the Company entered into a commitment to sell an
aggregate of 8,818,231 unregistered shares, subject to adjustment, of the Common
Stock to AEW for an aggregate consideration of $64,808,553 or approximately
$7.35 per share, subject to adjustment. See "THE PARTIES TO THE MERGER--The
Company--Recent Developments" for a further description of this transaction.
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STOCKHOLDERS AGREEMENT
In connection with the private placement to AEW, the Company, Leasing
Company, Apollo Fund and AEW entered into the Stockholders Agreement pursuant to
which AEW and Apollo, among other things, agreed to cause the number of
directors of the Company to be fixed at nine, allocated so that designees chosen
by Apollo and AEW will constitute a majority of the directors for so long as
Apollo and AEW collectively hold at least a majority of the outstanding Common
Stock. The Board of Directors initially includes three designees of Apollo, two
designees of AEW, two members of management and two outside directors.
Apollo and AEW are restricted under the Stockholders Agreement from selling
any portion of their respective interests in the Company, without the prior
consent of the other party, prior to December 28, 1997 (except to certain
permitted transferees or in connection with a public offering by the Company).
For so long as AEW holds at least 10% of the outstanding Common Stock, AEW
(and/or its designee) has a right of first refusal regarding any proposed sale
of shares of Common Stock by Apollo for a price of $8.00 per share or less,
subject to certain conditions. The Stockholders Agreement also provides for
certain parallel exit rights for each of Apollo (and its transferees) and AEW
(and its transferees) until such time as the shares held by each of them
constitute less than 10% of the outstanding Common Stock. The right of first
refusal and the parallel exist rights also terminate when the value of the
unrestricted shares held by non-affiliates of the Company is at least $150
million and is at least 35% of the shares outstanding. In the absence of the
Merger the provisions of the Stockholders Agreement providing that, after
December 28, 1997, Apollo and AEW will have buy/sell rights whereby either party
may, subject to certain conditions, acquire all of the other party's interest in
Company, thereby potentially resulting in a change of control of the Company
would apply.
The Company is restricted by the terms of the Stockholders Agreement from
taking certain actions without the prior consent of Apollo and AEW, in each
case, for so long as such entity (and its transferees) owns 10% of the Common
Stock. Such actions include (i) merger, consolidation, recapitalization,
liquidation or dissolution of the Company, (ii) sale or transfer of all or
substantially all of the Company's assets, (iii) issuances of equity securities
by the Company, (iv) amendments to the Charter or the By-laws, (v) actions
likely to jeopardize the Company's REIT status, (vi) transactions by the Company
with affiliates, (vii) agreements by the Company with underwriters, (viii)
waivers by the Company of the Ownership Limits and Existing Holder Limits
contained in the Charter, (ix) changes in the Company's distribution policy and
(x) material changes in compensation of the Company's officers and employees.
The Company will also provide Apollo and AEW certain rights to information and
to attend meetings of the Board of Directors and any committee thereof as
observer, in each case, for so long as such entity owns at least 5% of the
outstanding Common Stock.
Pursuant to the Stock Purchase Agreement, each of Apollo and AEW have
agreed that, upon the purchase by CAC of the shares of Common Stock of the
Sellers, the Stockholders Agreement shall terminate and be of no further force
or effect. See "THE STOCK PURCHASE AGREEMENT."
REGISTRATION RIGHTS
The Company is a party to an amended and restated registration rights
agreement with certain Stockholders, including Apollo, AEW and the Executive
Officers. Such agreement provides for certain demand, shelf and piggyback
registration rights which require the Company to cause certain of its securities
to be registered under the Securities Act. The Company is also a party to a
separate registration rights agreement with each of Fortis and the affiliates of
Towermarc Corporation which received the shares of the Common Stock in
connection with the Towermarc Acquisition. Each of these registration rights
agreements provide, among other things, for certain piggyback registration
rights. The Company has agreed to pay the
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expenses in connection with any registration pursuant to these registration
rights agreements, other than underwriters discounts and commissions.
INDEPENDENT PUBLIC AUDITORS
KPMG Peat Marwick LLP serves as the Company's independent certified public
accountant. A representative of KPMG Peat Marwick LLP will be at the Special
Meeting to answer appropriate questions by Stockholders and will have the
opportunity to make a statement if so desired.
OTHER MATTERS
The Board of Directors does not intend to present any matter for action at
this meeting other than the matters described in this Proxy Statement. If any
other matters properly come before the Special Meeting, it is intended that the
holders of the proxies hereby solicited will act in respect to such matters in
accordance with their best judgment.
STOCKHOLDER PROPOSALS
The Company will hold a 1997 Annual Meeting only if the Merger is not
completed prior thereto. In the event such a meeting is held, proposals by
holders of the Common Stock which are intended to be presented at the 1997
Annual Meeting of Stockholders must be received by the Company for inclusion in
the Company's next proxy statement and form of proxy relating to that meeting no
later than January 15, 1997. Such proposals must also comply in full with the
requirements of Rule 14a-8 promulgated under the Exchange Act.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, as well as any other legal or AMEX requirements, and in accordance
therewith file reports, proxy statements and other information with the
Commission and the AMEX. All such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the Commission's regional offices at 7 World Trade Center, Suite 1300, New
York, NY 10048 and 500 West Madison Street, Suite 1400, Chicago, IL 60661.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Room 3190, Washington, D.C. 20549
at prescribed rates. Additional copies may be obtained from the AMEX, 86 Trinity
Place, New York, NY 10006. Such material should also be available on-line
through the Commission's EDGAR electronic filing and retrieval system.
All information contained in this Proxy Statement concerning Highwoods and
CAC (other than information set forth under "THE MERGER--Opinion of Financial
Advisor") has been supplied by Highwoods for inclusion herein and has not been
independently verified by the Company. Except as otherwise indicated, all other
information contained in this Proxy Statement has been supplied by the Company.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
HIGHWOODS PROPERTIES, INC.,
CROCKER REALTY TRUST, INC.
AND
CEDAR ACQUISITION CORPORATION
DATED AS OF
APRIL 29, 1996
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TABLE OF CONTENTS
PAGE
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ARTICLE 1
THE MERGER
Section 1.1 The Merger 1
Section 1.2 Closing 1
Section 1.3 Effective Time of the Merger 1
Section 1.4 Effect of the Merger 1
ARTICLE 2
THE SURVIVING CORPORATION AND CONVERSION OF SHARES
Section 2.1 Articles of Incorporation 2
Section 2.2 By-laws 2
Section 2.3 Board of Directors; Officers 2
Section 2.4 Merger Consideration 2
Section 2.5 Payment 3
Section 2.6 Stock Options 3
Section 2.7 No Further Rights 4
Section 2.8 Closing of the Company's Transfer Books 4
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.1 Organization 4
Section 3.2 Capitalization 4
Section 3.3 Authority 5
Section 3.4 No Violations; Consents and Approvals 5
Section 3.5 SEC Documents; Financial Statements 6
Section 3.6 Absence of Certain Changes; No Undisclosed Liabilities 6
Section 3.7 Litigation 7
Section 3.8 Compliance with Applicable Law 7
Section 3.9 Taxes 7
Section 3.10 Certain Employee Plans 8
Section 3.11 Properties 9
Section 3.12 Leases 9
Section 3.13 Environmental Matters 9
Section 3.14 Opinion of Financial Advisor 10
Section 3.15 Information 10
Section 3.16 Board Action 10
Section 3.17 Broker's Fees 10
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Section 4.1 Organization 11
Section 4.2 Authority 11
Section 4.3 No Violations; Consents and Approvals 11
Section 4.4 SEC Documents; Financial Statements 12
Section 4.5 Information 12
Section 4.6 REIT 13
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PAGE
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ARTICLE 5
COVENANTS OF THE PARTIES
Section 5.1 Taking of Necessary Action 13
Section 5.2 Public Announcements; Confidentiality 14
Section 5.3 Conduct of the Business of the Company 14
Section 5.4 No Solicitation of Transactions 16
Section 5.5 Information and Access 17
Section 5.6 Employee and Other Arrangements 17
Section 5.7 Indemnification 18
Section 5.8 Notification of Certain Matters 18
Section 5.9 Separation of Excluded Assets 19
Section 5.10 Newco Obligations 19
ARTICLE 6
CONDITIONS TO CLOSINGS
Section 6.1 Conditions to Each Party's Obligation to Effect
the Merger 19
Section 6.2 Conditions to Obligation of the Company to Effect
the Merger 20
Section 6.3 Conditions to Obligations of Buyer to Effect
the Merger 20
Section 6.4 Conditions to Obligations of the Company and Buyer
to Effect the Merger Following Buyer's 20
Ownership of Shares
Section 6.5 Representations and Warranties 21
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination 21
Section 7.2 Procedure and Effect of Termination 21
Section 7.3 Expenses 22
ARTICLE 8
MISCELLANEOUS
Section 8.1 Counterparts 22
Section 8.2 Governing Law 22
Section 8.3 Entire Agreement 22
Section 8.4 Notices 22
Section 8.5 Successors and Assigns 23
Section 8.6 Headings 23
Section 8.7 Amendments and Waivers 23
Section 8.8 Certain Definitions; Interpretation; Absence
of Presumption 23
Section 8.9 Severability 24
Section 8.10 Confidentiality Agreement 24
Section 8.11 Further Assurances 24
Section 8.12 Specific Performance 24
Section 8.13 Third Party Beneficiaries 24
Section 8.14 Survival 25
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of April 29,
1996, by and among HIGHWOODS PROPERTIES, INC., a Maryland corporation ("Buyer"),
CROCKER REALTY TRUST, INC., a Maryland corporation (the "Company") and CEDAR
ACQUISITION CORPORATION, a Maryland corporation ("CAC").
WHEREAS, the respective Boards of Directors of Buyer, the Company and CAC
have approved the merger of CAC with and into the Company (the "Merger"), upon
the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions
hereof, at the Effective Time (as defined in Section 1.3), CAC shall be merged
with and into the Company and the separate existence of CAC shall thereupon
cease, and the Company shall continue as the surviving corporation in the Merger
(the "Surviving Corporation") under the laws of the State of Maryland.
SECTION 1.2 CLOSING. Unless this Merger Agreement shall have been
terminated and the transactions herein contemplated shall have been abandoned
pursuant to Section 7.1, and subject to the satisfaction or waiver of the
conditions set forth in Article 6, the closing of the Merger will take place as
promptly as practicable (and in any event within two business days) after
satisfaction or waiver of the conditions set forth in Sections 6.1, 6.2 and 6.3,
at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York,
New York 10019, unless another date, time or place is agreed to in writing by
the parties hereto (the "Closing Date"); provided, that Buyer may, at its
election, postpone the Closing Date until August 15, 1996.
SECTION 1.3 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective
upon the acceptance for record of the articles of merger by the Department of
Assessments and Taxation of the State of Maryland (the "Department") in
accordance with the provisions of the General Corporation Law of Maryland (the
"GCLM"), and by making all other filings required under the GCLM to be made
prior to or concurrent with the effectiveness of the Merger, which filings shall
be made as soon as practicable on the Closing Date. When used in this Merger
Agreement, the term "Effective Time" shall mean the time at which such articles
are accepted for filing by the Department.
SECTION 1.4 EFFECT OF THE MERGER. The Merger shall, from and after the
Effective Time, have all the effects provided by the GCLM. If at any time after
the Effective Time the Surviving Corporation shall consider or be advised that
any further deeds, conveyances, assignments or assurances in law or any other
acts are necessary, desirable or proper to vest, perfect or confirm, of record
or otherwise, in the Surviving Corporation, the title to any property or rights
of the Company to be vested in the Surviving Corporation, by reason of, or as a
result of, the Merger, or otherwise to carry out the purposes of this Agreement,
the Company agrees that the Surviving Corporation and its proper officers and
directors shall execute and deliver all such deeds, conveyances, assignments and
assurances in law and do all things necessary, desirable or proper to vest,
perfect or confirm title to such property or rights in the Surviving Corporation
and otherwise to carry out the purposes of this Agreement, and that the proper
officers and directors of the Surviving Corporation are fully authorized in the
name of the Company or otherwise to take any and all such action.
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ARTICLE 2
THE SURVIVING CORPORATION AND CONVERSION OF SHARES
SECTION 2.1 ARTICLES OF INCORPORATION. The Articles of Incorporation of CAC
as in effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation after the Effective Time, until
thereafter changed or amended as provided therein or by applicable law;
provided, that the provisions contained in the Articles (as hereinafter defined)
relating to indemnification of officers and directors shall be incorporated into
the Articles of Incorporation of CAC.
SECTION 2.2 BY-LAWS. The By-laws of CAC as in effect immediately prior to
the Effective Time shall be the By-laws of the Surviving Corporation, until,
subject to Section 5.8, thereafter changed or amended as provided therein or by
applicable law; provided, that the provisions contained in the By-laws of the
Company relating to indemnification of officers and directors shall be
incorporated into the By-laws of CAC.
SECTION 2.3 BOARD OF DIRECTORS; OFFICERS. The directors of CAC immediately
prior to the Effective Time shall be the directors of the Surviving Corporation
and the officers of CAC immediately prior to the Effective Time shall be the
officers of the Surviving Corporation, in each case, until the earlier of their
respective resignations or the time that their respective successors are duly
elected or appointed and qualified.
SECTION 2.4 MERGER CONSIDERATION. (a) As of the Effective Time, by virtue
of the Merger and without any action on the part of any stockholder of the
Company,
(i) all shares of common stock, $0.01 par value, of the Company (the
"Company Common Stock"), which are held by Buyer, the Company or any
wholly-owned subsidiary of Buyer or the Company shall be cancelled and retired
and shall cease to exist, and no consideration shall be delivered in the
exchange therefor;
(ii) each outstanding share of Company Common Stock, other than those to
which clause (i) of this Section 2.4(a) applies, shall be converted into and
represent the right to receive $11.02 in cash (or, if there is Excess Cash,
$11.02 plus the Per Share Excess Cash Amount in cash, or, if there is Deficient
Cash, $11.02 minus the Per Share Deficient Cash Amount) (such amount of cash
being referred to herein as the "Merger Consideration"). "Excess Cash" shall
equal (x) the amount, if any, by which the sum of cash, cash equivalents and
restricted cash reflected on the Company's consolidated balance sheet as of the
date hereof exceeds the sum of cash, cash equivalents and restricted cash
reflected on the Company's consolidated balance sheet as of March 31, 1996 minus
(y) the amount, if any, by which the principal amount of the Company's
indebtedness for borrowed money outstanding as of the date hereof exceeds the
sum of $5 million, and the principal amount of the Company's indebtedness for
borrowed money outstanding as of March 31, 1996. The "Per Share Excess Cash
Amount" shall equal the quotient obtained by dividing the Excess Cash by the
number of shares of Company Common Stock outstanding on the date hereof,
assuming the exercise of all currently outstanding options and warrants (the
"Fully Diluted Shares"). "Deficient Cash" shall equal (x) the amount, if any, by
which the sum of cash, cash equivalents and restricted cash reflected on the
Company's consolidated balance sheet as of March 31, 1996 exceeds the sum of
cash, cash equivalents and restricted cash reflected on the Company's
consolidated balance sheet as of the date hereof plus (y) the amount, if any, by
which the principal amount of the Company's indebtedness for borrowed money
outstanding as of the date hereof exceeds the sum of $5 million and the
principal amount of the Company's indebtedness for borrowed money outstanding as
of March 31, 1996. The "Per Share Deficient Cash Amount" shall equal the
quotient obtained by dividing the Deficient Cash by the Fully Diluted Shares;
and
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(iii) each share of common stock of CAC shall be converted into one share
of common stock of the Surviving Corporation.
SECTION 2.5 PAYMENT. (a) Promptly after the Effective Time, Buyer shall
deposit (or cause to be deposited) with a bank or trust company to be designated
by Buyer and reasonably acceptable to the Company (the "Exchange Agent"), for
the benefit of the holders of shares of Company Common Stock, for exchange in
accordance with this Article 2, cash in the amount sufficient to pay the
aggregate Merger Consideration.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of Company Common Stock
immediately prior to the Effective Time (A) a letter of transmittal (the
"Company Letter of Transmittal") (which shall specify that delivery shall be
effected, and risk of loss and title to the Company Certificates shall pass,
only upon delivery of such Company Certificates to the Exchange Agent and shall
be in such form and have such other provisions as Buyer shall specify) and (B)
instructions for use in effecting the surrender of certificates representing
Company Common Stock ("Company Certificates") in exchange for the Merger
Consideration with respect to the shares of Company Common Stock formerly
represented thereby.
(c) Upon surrender of a Company Certificate for cancellation to the
Exchange Agent, together with the Company Letter of Transmittal, duly executed,
and such other documents as Buyer or the Exchange Agent shall reasonably
request, the holder of such Company Certificate shall be entitled to receive in
exchange therefor (A) a certified or bank cashier's check in the amount equal to
the cash which such holder has the right to receive pursuant to the provisions
of this Article 2, and the Company Certificate so surrendered shall forthwith be
cancelled. Until surrendered as contemplated by this Section 2.5, each Company
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive the Merger Consideration with respect to the shares of
Company Common Stock formerly represented thereby.
(d) If the Merger Consideration is to be delivered to a person other than
the person in whose name the certificates surrendered in exchange therefor are
registered, it shall be a condition to the payment of such Merger Consideration
that the certificates so surrendered shall be properly endorsed or accompanied
by appropriate stock powers and otherwise in proper form for transfer, that such
transfer otherwise be proper and that the person requesting such transfer pay to
the Exchange Agent any transfer or other taxes payable by reason of the
foregoing or establish to the satisfaction of the Exchange Agent that such taxes
have been paid or are not required to be paid.
(e) Unless required otherwise by applicable law, any portion of the
aggregate Merger Consideration which remains undistributed to holders of shares
of Company Common Stock two years after the Effective Time shall be delivered to
Buyer and any holders of shares of Company Common Stock who have not theretofore
complied with the provisions of this Article 2 shall thereafter look only to
Buyer for payment of any Merger Consideration to which they are entitled
pursuant to this Article 2. Neither Buyer nor the Exchange Agent shall be liable
to any holder of shares of Company Common Stock for any cash held by Buyer or
the Exchange Agent for payment pursuant to this Article 2 delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
SECTION 2.6 STOCK OPTIONS. The Company and Buyer shall take all actions
necessary to provide that, at the Effective Time, (i) each Company Stock Option
(as hereinafter defined) as set forth on Schedule 3.2, whether or not then
exercisable or vested, shall become fully exercisable and vested, (ii) each such
Company Stock Option shall be cancelled, and (iii) in consideration of such
cancellation, the Company shall pay to each such holder of Company Stock Options
an amount in cash in respect thereof equal to the product of (1) the excess, if
any, of the Merger Consideration over the exercise price of such Common Stock
Option as reflected on Schedule 3.2 and (2) the number of shares of Company
Common Stock subject thereto. Notwithstanding anything to the contrary herein,
if it is determined that compliance with any of the
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foregoing may cause any individual subject to Section 16 of the Securities
Exchange Act of 1934, as amended, to become subject to the profit recovery
provisions thereof, any Company Stock Options held by such individual may, if
such individual so agrees, subject to the proviso to this sentence, be cancelled
or purchased, as the case may be, at the Effective Time or at such later time as
may be necessary to avoid application of such profit recovery provisions and
such individual will be entitled to receive from the Company or the Surviving
Corporation an amount in cash in respect thereof equal to the product of (1) the
excess, if any, of the Merger Consideration over the exercise price of such
Common Stock Option and (2) the number of shares of Company Common Stock subject
thereto immediately prior to the Effective Time; provided, that the parties
hereto will cooperate, including by providing alternate arrangements, so as to
achieve the intent of the foregoing without giving rise to such profit recovery.
SECTION 2.7 NO FURTHER RIGHTS. From and after the Effective Time, holders
of certificates theretofore evidencing shares of Company Common Stock shall
cease to have any rights as stockholders of the Company, except as provided
herein or by law.
SECTION 2.8 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time,
the stock transfer books of the Company shall be closed and no transfer of
shares of Company Common Stock shall be made thereafter. In the event that,
after the Effective Time, certificates for shares of Company Common Stock are
presented to Buyer or the Surviving Corporation, they shall be cancelled and
exchanged for Merger Consideration for each share of Company Common Stock
represented as provided in Section 2.4.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Buyer as follows:
SECTION 3.1 ORGANIZATION. The Company and each of its Subsidiaries (as
defined in Section 8.8(a)(iii)), all of which are set forth in Schedule 3.1, is
a corporation or partnership duly organized, validly existing and in good
standing under the laws of their respective jurisdictions of incorporation or
organization, as applicable, and the Company and each of its Subsidiaries has
all requisite corporate or partnership power and authority to own, lease and
operate their respective properties and to carry on their respective businesses
as now being conducted. The Company and each of its Subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
listed on Schedule 3.1, which are all of the jurisdictions in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except in such jurisdictions where the
failure to be so duly qualified or licensed and in good standing would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect (as defined in Section 8.8(a)(i)). Except as set forth on
Schedule 3.1, the Company owns directly all of the outstanding capital stock or
other equity interests of each of its Subsidiaries.
SECTION 3.2 CAPITALIZATION. The authorized capital stock of the Company
consists of 50,000,000 shares of Company Common Stock, 10,000,000 shares of
preferred stock, par value $0.01, 50,000,000 shares of excess common stock, par
value $0.01, and 10,000,000 shares of excess preferred stock, par value $0.01.
As of April 26, 1996, there were 26,981,087 shares of Company Common Stock, no
shares of preferred stock, no shares of excess common stock and no shares of
excess preferred stock issued and outstanding, and there were no shares of
Company Common Stock, no shares of preferred stock, no shares of excess common
stock and no shares of excess preferred stock held in the Company's treasury. As
of the date hereof, there were outstanding options (the "Company Stock Options")
to purchase 1,347,000 shares of Company Common Stock under the 1995 Stock Option
Plan of the Company (the "Company Option Plan"). Schedule 3.2 sets forth all
outstanding options, warrants and other securities or rights to purchase
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shares of Company Common Stock or securities convertible into or exchangeable
for Company Common Stock as of the date hereof and, with respect to each such
option, warrant, security or other right, (i) the holder of such option,
warrant, security or other right, (ii) the number of shares of Company Common
Stock or securities convertible into or exchangeable for Company Common Stock
for which such option, warrant, security or other right is exercisable, and
(iii) the price at which such option, warrant, security or other right is
exercisable. Except as set forth on Schedule 3.2, there were not as of the date
hereof, and at all times thereafter through the Effective Time, there will not
be, any existing options, warrants, calls, subscriptions, or other rights or
other agreements or commitments obligating the Company or any of its
Subsidiaries to issue, transfer or sell any shares of capital stock or other
equity interests of the Company or any of its Subsidiaries or any other
securities convertible into or evidencing the right to subscribe for any such
shares or other equity interests. All issued and outstanding shares of Company
Common Stock are duly authorized and validly issued, fully paid, non-assessable
(other than general partnership interests in Subsidiaries that are partnerships)
and free of preemptive rights with respect thereto.
SECTION 3.3 AUTHORITY. The Company has full corporate power and authority
to execute and deliver this Agreement and, subject to the approval of its
stockholders, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized and approved by the
Board of Directors of the Company, and, other than the approval by its
stockholders, no other corporate proceedings are necessary to authorize this
Agreement or the consummation of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by the Company, and,
assuming this Agreement constitutes a legal, valid and binding agreement of
Buyer, it constitutes a legal, valid and binding agreement of the Company,
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors"
rights or general principles of equity.
SECTION 3.4 NO VIOLATIONS; CONSENTS AND APPROVALS. (a) None of the
execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby or compliance by the Company with any of the provisions
hereof will (i) violate any provision of its or any of its Subsidiaries'
Articles of Incorporation or by-laws, partnership agreement or other
organizational document, as applicable, (ii) except for the indebtedness of the
Company described under the caption "Use of Proceeds" in the Company's
Registration Statement on Form S-11 filed with the Securities and Exchange
Commission (the "SEC") on March 18, 1996 or as set forth in Schedule 3.4, result
in a violation or breach of, or constitute (with or without due notice or lapse
of time or both) a default, or give rise to any right of termination,
cancellation or acceleration or any right which becomes effective upon the
occurrence of a merger, consolidation or change in control under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture or other
instrument of indebtedness for money borrowed to which the Company or any of its
Subsidiaries is a party, or by which the Company or any of its Subsidiaries or
any of their respective properties is bound, (iii) except as set forth in
Schedule 3.4, require any consent, waiver or approval by any other party or
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default, or give rise to any right of termination,
cancellation or acceleration or any right which becomes effective upon the
occurrence of a merger, consolidation or change in control under, any of the
terms, conditions or provisions of any license, franchise, permit or agreement
to which the Company or any of its Subsidiaries is a party, or by which the
Company or any of its Subsidiaries or any of their respective properties is
bound, or (iv) violate any statute, rule, regulation, order or decree of any
public body or authority by which the Company or any of its Subsidiaries or any
of their respective properties is bound, excluding from the foregoing clauses
(iii) and (iv) of this Section 3.4(a) violations, breaches, defaults or rights
which, either individually or in the aggregate, would not reasonably be expected
to have a Material Adverse Effect or for which the Company has received or,
prior to the Closing Date, shall have received appropriate consents or waivers.
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(b) No filing or registration with, notification to, or authorization,
consent or approval of, any governmental entity is required in connection with
the execution and delivery of this Agreement by the Company, or the consummation
by the Company of the transactions contemplated hereby, except (i) expiration of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), if a filing under the HSR Act is required,
(ii) in connection, or in compliance, with the provisions of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (iii) the filing of
articles of merger with the Department, (iv) such filings and consents as may be
required under any environmental law pertaining to any notification, disclosure
or required approval triggered by the Merger or the transactions contemplated
hereby, (v) filing with, and approval of, the American Stock Exchange and the
SEC with respect to the Merger and the delisting and deregistration of the
shares of Company Common Stock, (vi) such consents, approvals, orders,
authorizations, notifications, registrations, declarations and filings as may be
required under the corporation, takeover or blue sky laws of various states and
(vii) such other consents, approvals, orders, authorizations, notifications,
registrations, declarations and filings the failure of which to be obtained or
made would not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect.
SECTION 3.5 SEC DOCUMENTS; FINANCIAL STATEMENTS. (a) The Company has made
available to Buyer copies of each registration statement, report, proxy
statement, information statement or schedule filed with the SEC by the Company
or its predecessor since March 31, 1994 (the "Company SEC Documents"). As of
their respective dates, the Company SEC Documents complied in all material
respects with the applicable requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the Exchange Act, as the case may be, and
none of such Company SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) None of the Company, any of its Subsidiaries, or any of their
respective assets, businesses, or operations, is as of the date of this
Agreement a party to, or is bound or affected by, or receives benefits under any
contract or agreement or amendment thereto, that, in each case, would be
required to be filed as an exhibit to a Form 10-K as of the date of this
Agreement that has not been filed as an exhibit to a Company SEC Document filed
prior to the date of this Agreement.
(c) As of their respective dates, the consolidated financial statements
included in the Company SEC Documents complied as to form in all material
respects with then applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto, were prepared in accordance
with generally accepted accounting principles ("GAAP") applied on a consistent
basis during the periods involved (except as may be indicated therein or in the
notes thereto) and fairly presented the Company's consolidated financial
position and that of its consolidated subsidiaries as at the dates thereof and
the consolidated results of their operations and statements of cash flows for
the periods then ended (subject, in the case of unaudited statements, to the
lack of footnotes thereto, to normal year-end audit adjustments and to any other
adjustments described therein).
SECTION 3.6 ABSENCE OF CERTAIN CHANGES; NO UNDISCLOSED LIABILITIES. (a)
Except as disclosed in the Company SEC Documents filed on or prior to the date
hereof or as set forth on Schedule 3.6, since December 31, 1995, the Company has
not (i) incurred any liability, whether or not accrued, contingent or otherwise,
or suffered any event or occurrence which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect, (ii) made any
changes in accounting methods, principles or practices or (iii) declared, set
aside or paid any dividend or other distribution with respect to its capital
stock, other than a special dividend of $.03 per share of Company Common Stock
paid in March 1996 and its regular quarterly dividend in an amount not exceeding
$.15 per share of Company Common Stock (or a prorated portion of such amount in
the case of any portion of a quarterly period). Since December 31, 1995 to the
date of this Agreement, each of the Company and its Subsidiaries has conducted
its operations according to its ordinary course of business consistent with past
practice.
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(b) Except as and to the extent disclosed in the Company SEC Documents
filed on or prior to the date hereof, as of December 31, 1995, neither the
Company nor any of its Subsidiaries had any liabilities or obligations of any
nature, whether or not accrued, contingent or otherwise, that would be required
by GAAP to be reflected on a consolidated balance sheet of the Company and its
Subsidiaries (including the notes thereto) or which would reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect.
SECTION 3.7 LITIGATION. Except as disclosed in the Company SEC Reports
filed on or prior to the date hereof, there is no suit, claim, action,
proceeding or investigation pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries or any of their
respective properties or assets before any governmental entity which,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect. Except as disclosed in the Company SEC Documents filed
on or prior to the date hereof, neither the Company nor any of its Subsidiaries
is subject to any outstanding order, writ, injunction or decree which, insofar
as can be reasonably foreseen in the future would, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. Schedule
3.7 sets forth a list of all litigation as of the date hereof in which the
Company or any of its Subsidiaries is a defendant and there is a claim in excess
of $100,000.
SECTION 3.8 COMPLIANCE WITH APPLICABLE LAW. Except as disclosed in the
Company SEC Documents filed on or prior to the date hereof, the Company and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all governmental entities necessary for the lawful ownership and
operation of the Company Properties (as defined in Section 3.11) or the lawful
conduct of their respective businesses (the "Company Permits"), except for
failures to hold such permits, licenses, variances, exemptions, orders and
approvals which would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. Except as disclosed in the Company
SEC Documents filed on or prior to the date hereof, the Company and its
Subsidiaries and the Company Properties are in compliance with the terms of the
Company Permits, except where the failure so to comply would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Except as disclosed in the Company SEC Documents filed on or prior to the date
hereof, the businesses of the Company and its Subsidiaries and the operation of
the Company Properties are not being conducted in violation of any law,
ordinance or regulation of any governmental entity except for violations or
possible violations which, individually or in the aggregate, would not, and,
insofar as reasonably can be foreseen, in the future will not, reasonably be
expected to have a Material Adverse Effect. Except as disclosed in the Company
SEC Documents filed on or prior to the date hereof, no investigation or review
by any governmental entity with respect to the Company or any of its
Subsidiaries or any Company Property is pending or, to the knowledge of the
Company, threatened nor, to the knowledge of the Company, has any governmental
entity indicated an intention to conduct the same, other than, in each case,
those which the Company reasonably believes will not reasonably be expected to
have a Material Adverse Effect.
SECTION 3.9 TAXES. Except as set forth in Schedule 3.9, each of the Company
and its Subsidiaries has filed, or caused to be filed, all federal, state, local
and foreign income and other material tax returns required to be filed by it,
including all returns required to be filed for the Company Plans, as defined
below, has paid or withheld, or caused to be paid or withheld, all taxes of any
nature whatsoever, with any related penalties, interest and liabilities (any of
the foregoing being referred to herein as a "Company Tax"), that are shown on
such tax returns as due and payable, or otherwise required to be paid, other
than such Company Taxes as are being contested in good faith and for which
adequate reserves have been established and other than where the failure to so
file, pay or withhold would not reasonably be expected to have a Material
Adverse Effect. Except as set forth in Schedule 3.9, there are no material
claims or assessments pending against the Company or its Subsidiaries for any
alleged deficiency in any Company Tax, and the Company does not know of any
threatened Company Tax claims or assessments against the Company or any of its
Subsidiaries which if upheld would reasonably be expected to have a Material
Adverse Effect or adversely affect the REIT qualification of the Company. None
of the Company or any of its Subsidiaries has made an election to
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be treated as a "consenting corporation" under Section 341(f) of the Internal
Revenue Code of 1986, as amended (the "Code"). There is no material deferred
inter-company gain within the meaning of the Treasury Regulations promulgated
under Section 1502 of the Code. There are no waivers or extension of any
applicable statute of limitations to assess any Company Taxes. All returns filed
with respect to Company Taxes are true and correct in all material respects.
There are no outstanding requests for any extension of time within which to file
any return or within which to pay any Company Taxes shown to be due on any
return. The Company (a) has elected to be taxed as a real estate investment
trust (a "REIT") within the meaning of Sections 856 through 860 of the Code and
for all periods beginning with the period of such election has qualified as, and
complied with all applicable laws, rules and regulations, including the Code,
relating to, a REIT, (b) subject to the accuracy of the representation contained
in Section 4.6, has operated, and intends to continue to operate, in such a
manner as to qualify as a REIT for 1996, and (c) except as set forth on Schedule
3.9, subject to the accuracy of the representation contained in Section 4.6, has
not taken or omitted to take, nor has any predecessor REIT of the Company not
taken or omitted to take, any action which could result in, and the Company has
no actual knowledge of, a challenge to its status as a REIT. The Company
represents that each of its Subsidiaries of which all the outstanding capital
stock is owned solely by the Company is a "Qualified REIT Subsidiary" as defined
in Section 856(i) of the Code.
SECTION 3.10 CERTAIN EMPLOYEE PLANS. The Company and its Subsidiaries have
complied, and are now in compliance, in all material respects with all
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the Code and all laws and regulations applicable to the "employee
benefit plans," as defined in Section 3(3) of ERISA, of the Company or any of
its Subsidiaries (the "Company Plans"). No Company Plan is intended to be a
"qualified plan" within the meaning of Section 401(a) of the Code, nor is any
Company Plan subject to Title IV or Section 302 of ERISA or Section 412 or 4971
of the Code. None of the Company, the Subsidiaries of the Company and their
respective ERISA Affiliates (as defined in the next sentence) contributes to or
is obligated to contribute to, or has, at any time within the last six years,
contributed to or been obligated to contribute to, any "multiemployer plan"
within the meaning of Section 4001(a)(3) of ERISA (a "Multiemployer Plan") or
any plan with two or more contributing sponsors at least two of whom are not
under common control, within the meaning of Section 4063 of ERISA (a "Multiple
Employer Plan"). The term "ERISA Affiliate" means, with respect to any entity,
trade or business, any other entity, trade or business that is a member of a
group described in Section 414(b) or (c), (m) or (o) of the Code or Section
4001(b)(1) of ERISA that includes the first entity, trade or business, or that
is a member of the same "controlled group" as the first entity, trade or
business pursuant to Section 4001(a)(14) of ERISA. There does not now exist, nor
do any circumstances exist that could result in, any liability on the part of
the Company or any Subsidiary of the Company under (a) Title IV of ERISA, (b)
Section 302 of ERISA, (c) Sections 412 and 4971 of the Code or (iv) the
continuation coverage requirements of Section 601 et seq. of ERISA and section
4980B of the Code, other than such liabilities that arise solely out of, or
relate solely to, the Company Plans. Neither the Company and its Subsidiaries,
nor any of their respective directors, officers, employees or agents has, with
respect to any Company Plan, engaged in any "prohibited transaction" (as such
term is defined in Section 4975 of the Code or Section 406 of ERISA)) nor has
any Company Plan engaged in any such prohibited transaction which could result
in any taxes or penalties or prohibited transactions under Section 4975 of the
Code or under Section 502(i) of ERISA, which, in the aggregate, would reasonably
be expected to result in material liability on the part of the Company or any of
its Subsidiaries. Copies of all of the Company Plans and any related trusts and
summary plan descriptions have been made available to Buyer, and a list of all
of the Company Plans is set forth on Schedule 3.10. Except as set forth on
Schedule 3.10 or as specifically contemplated by this Agreement, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will result in, cause the accelerated vesting
or delivery of, or increase the amount or value of, any payment or benefit to
any employee or former employee of the Company, or any of its Subsidiaries,
either alone or in conjunction with any other event such as termination of
employment.
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SECTION 3.11 PROPERTIES. The Company and its Subsidiaries have fee simple
or leasehold title to each of the real properties identified in the Company SEC
Documents (the "Company Properties"), which are all of the real estate
properties owned or leased by them. Except as disclosed in the Company SEC
Documents, each Company Property is owned or leased by the Company or a
Subsidiary of the Company free and clear of liens, claims against title, rights
of way, written agreements, laws, ordinances or regulations affecting building
use or occupancy, other encumbrances on title or defects in title except for
such matters which would not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect (collectively, the "Company
Permitted Encumbrances"). Valid policies of title insurance have been issued
insuring the Company's or any of its Subsidiaries" title to the Company
Properties in amounts at least equal to the purchase price thereof, subject only
to the Company Permitted Encumbrances or other matters disclosed in the Company
SEC Documents, and such policies are, at the date hereof, in full force and
effect and no claim has been made against any such policy. To the best knowledge
of the Company, the Company SEC Documents disclose all adverse matters with
respect to or in connection with the Company Properties (including, without
limitation, structural defects, legal noncompliance, threatened or pending
condemnation, constraints on present or future use, operation or development,
title defects or problems, deferred maintenance, deficient building systems,
absence of any necessary permits, environmental liabilities, tenant defaults or
other adverse matters with respect to tenants) which could reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect.
SECTION 3.12 LEASES. (a) Schedule 3.12 sets forth a complete and correct
list of all of the lessees of the Company Properties in excess of 25,000
rentable square feet in effect as of the date hereof (the "Leases"), setting
forth for each lessee any exceptional clauses relating thereto including without
limitation, any "kick-out" clauses, co-tenancy requirements or exclusions,
"go-dark" clauses or clauses requiring any unfunded tenant improvements.
(b) Except as set forth in Schedule 3.12, as of the last day of the
calendar month immediately preceding the date hereof, (i) each of the Leases is
valid and subsisting and in full force and effect, and has not been amended,
modified or supplemented; (ii) the tenant under each of the Leases is in actual
possession of the leased premises; (iii) no tenants under the Leases are in
arrears for the payment of rent for any month preceding the month of the date
hereof; and (iv) neither the Company nor any of its Subsidiaries has received
any written notice from any tenant under the Leases of any intention to vacate.
Except as set forth in Schedule 3.12, neither the Company nor any of its
Subsidiaries has collected payment of rent (other than security deposits)
accruing for a period which is more than one month beyond the date of
collection.
(c) The Company has previously delivered or made available to Buyer a true
and correct copy of all Leases.
(d) Except as set forth in Schedule 3.12, as of the last day of the
calendar month immediately preceding the date hereof, no tenant under any of the
Leases has asserted any claim of which the Company or any of its Subsidiaries
has received written notice which would materially affect the collection of rent
from such tenant and neither the Company nor any of its Subsidiaries has
received written notice of any material default or breach on the part of the
Company or any of its Subsidiaries under any of the Leases which has not been
cured.
(e) Schedule 3.12 sets forth all space leases under which the Company or
any of its Subsidiaries is a lessee (except where the underlying real property
is owned by the Company). True and correct copies of such leases have been
delivered or made available to Buyer.
SECTION 3.13 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 3.13,
none of the Company, any of its Subsidiaries or, to the knowledge of the
Company, any other person has caused or permitted (a) the unlawful presence of
any hazardous substances, hazardous materials, toxic substances or waste
materials (collectively, "Hazardous Materials") on any of the Company
Properties, or (b) any unlawful
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spills, releases, discharges or disposal of Hazardous Materials to have occurred
or be presently occurring on or from the Company Properties as a result of any
construction on or operation and use of such properties, which presence or
occurrence would reasonably be expected to, individually or in the aggregate,
have a Material Adverse Effect; and, in connection with the construction on or
operation and use of the Company Properties, the Company and its Subsidiaries
have not failed to comply, in any material respect, with all applicable local,
state and federal environmental laws, regulations, ordinances, and
administrative and judicial orders relating to the generation, recycling, reuse,
sale, storage, handling, transport and disposal of any Hazardous Materials.
SECTION 3.14 OPINION OF FINANCIAL ADVISOR. The Company has received the
written opinion of Merrill Lynch & Co. ("Merrill Lynch") to the effect that the
consideration to be received in the Merger by the holders of Company Common
Stock is fair to such holders from a financial point of view. A copy of such
opinion has been made available to Buyer.
SECTION 3.15 INFORMATION. None of the Proxy Statement (as defined in
Section 5.1(b)) or any other document filed or to be filed by or on behalf of
the Company with the SEC or any other governmental entity in connection with the
transactions contemplated hereby contained when filed, or will, at the
respective times filed with the SEC or other governmental entity, and, in
addition, in the case of the Proxy Statement at the date it or any amendment or
supplement thereto is mailed to stockholders of the Company and at the time of
the meeting of stockholders of the Company to vote on the Merger, 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 made therein,
in light of the circumstances under which they were made, not misleading;
provided that the foregoing shall not apply to information supplied by Buyer
specifically for inclusion or incorporation by reference in any such document.
The Proxy Statement will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder. None of
the information supplied by the Company specifically for inclusion or
incorporation by reference in any document filed or to be filed by or on behalf
of Buyer with the SEC or any other governmental entity in connection with the
transactions contemplated hereby contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
SECTION 3.16 BOARD ACTION. The Board of Directors of the Company has taken
all action required by the Articles of Amendment and Restatement of Articles of
Incorporation of the Company (the "Articles") to permit the consummation of the
transactions contemplated hereby and by the Stock Purchase Agreement (as
hereinafter defined) (assuming the accuracy of the representation contained in
Section 4.6). The Company hereby consents to the transfer of shares of Company
Common Stock pursuant to the Stock Purchase Agreement.
SECTION 3.17 BROKER'S FEES. Except for Merrill Lynch, none of the Company,
any of its Subsidiaries or any of its directors or officers has incurred any
liability for any broker's fees, commissions, or financial advisory or finder's
fees in connection with any of the transactions contemplated hereby, and none of
the Company, any of its Subsidiaries or any of their respective directors or
officers has employed any other broker, finder or financial advisor in
connection with any of the transactions contemplated hereby.
Notwithstanding any contrary provision contained in this Agreement, none of
the representations or warranties contained in this Article 3 shall apply to the
Excluded Assets (as defined in Section 5.3(a)); provided, however, that the
representations and warranties contained in this Article 3 shall apply to
liabilities or other obligations arising from or relating to the Excluded Assets
and for which the Company, as the Surviving Corporation, or Buyer will be liable
or otherwise responsible following the consummation of the Merger.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to the Company as follows:
SECTION 4.1 ORGANIZATION. Buyer, the Highwoods/Forsyth Limited Partnership,
a North Carolina partnership (the "Operating Partnership"), and each of their
respective Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of their respective jurisdictions
of incorporation or organization, as applicable, and Buyer, the Operating
Partnership and each of their respective Subsidiaries has all requisite
corporate or partnership power and authority to own, lease and operate their
respective properties and to carry on their respective businesses as now being
conducted. Buyer, the Operating Partnership and each of their respective
Subsidiaries is duly qualified or licensed and in good standing to do business
in each jurisdiction in which the property owned, leased or operated by it or
the nature of the business conducted by it makes such qualification necessary,
except in such jurisdictions where the failure to be so duly qualified or
licensed and in good standing would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. Except as disclosed in
the Buyer SEC Documents (as hereinafter defined) filed on or prior to the date
hereof, Buyer and the Operating Partnership each own directly all of the
outstanding capital stock or other equity interests of each of their respective
Subsidiaries.
SECTION 4.2 AUTHORITY. Buyer has full corporate power and authority to
execute and deliver this Agreement and, subject to the approval of its
stockholders, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized and approved by the
Board of Directors of Buyer, and other than the approval by its stockholders, no
other corporate proceedings are necessary to authorize this Agreement or the
consummation of the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by Buyer and, assuming this Agreement
constitutes a legal, valid and binding agreement of the Company, it constitutes
a legal, valid and binding agreement of Buyer, enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors" rights or general
principles of equity.
SECTION 4.3 NO VIOLATIONS; CONSENTS AND APPROVALS. (a) None of the
execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby or compliance by Buyer with any of the provisions hereof
will (i) violate any provision of its Articles of Incorporation or by-laws, (ii)
except as set forth in Schedule 4.3, result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default, or
give rise to any right of termination, cancellation or acceleration or any right
which becomes effective upon the occurrence of a merger, consolidation or change
in control, under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture or other instrument of indebtedness for money borrowed to
which Buyer, the Operating Partnership or any of their respective Subsidiaries
is a party, or by which Buyer, the Operating Partnership or any of their
respective Subsidiaries or any of their respective properties is bound, or (iii)
except as set forth in Schedule 4.3, result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default, or
give rise to any right of termination, cancellation or acceleration or any right
which becomes effective upon the occurrence of a merger, consolidation or change
in control, under, any of the terms, conditions or provisions of any license,
franchise, permit or agreement to which Buyer, the Operating Partnership or any
of their respective Subsidiaries is a party, or by which Buyer, the Operating
Partnership or any of their respective Subsidiaries or any of their respective
properties is bound, or (iv) violate any statute, rule, regulation, order or
decree of any public body or authority by which Buyer, the Operating Partnership
or any of their respective Subsidiaries or any of their respective properties is
bound, excluding from the foregoing clauses (iii) and (iv) violations, breaches,
defaults or rights which, either individually or in the aggregate, would not
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reasonably be expected to have a Material Adverse Effect or for which Buyer has
received or, prior to the Closing Date, shall have received appropriate consents
or waivers.
(b) No filing or registration with, notification to, or authorization,
consent or approval of, any governmental entity is required in connection with
the execution and delivery of this Agreement by Buyer, or the consummation by
Buyer of the transactions contemplated hereby, except (i) expiration of the
waiting period under the HSR Act, if a filing under the HSR Act is required,
(ii) in connection, or in compliance, with the provisions of the Exchange Act,
(iii) the filing of articles of merger with the Department, (iv) such filings
and consents as may be required under any environmental law pertaining to any
notification, disclosure or required approval triggered by the Merger or the
transactions contemplated hereby, (v) filings with, and approval of, the New
York Stock Exchange, Inc. and the SEC with respect to the Merger, (vi) such
consents, approvals, orders, authorizations, notifications, registrations,
declarations and filings as may be required under the corporation, takeover or
blue sky laws of various states and (vii) such other consents, approvals,
orders, authorizations, notifications, registrations, declarations and filings
the failure of which to be obtained or made would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
SECTION 4.4 SEC DOCUMENTS; FINANCIAL STATEMENTS. (a) Buyer has made
available to the Company copies of each registration statement, report, proxy
statement, information statement or schedule filed with the SEC by Buyer since
its initial public offering (the "Buyer SEC Documents"). As of their respective
dates, the Buyer SEC Documents complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the case
may be, and none of such SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) None of Buyer, any of its Subsidiaries or any of their respective
assets, businesses, or operations, is as of the date of this Agreement a party
to, or is bound or affected by, or receives benefits under any contract or
agreement or amendment thereto, that in each case would be required to be filed
as an exhibit to a Form 10-K as of the date of this Agreement that has not been
filed as an exhibit to a Buyer SEC Document filed prior to the date of this
Agreement.
(c) As of their respective dates, the consolidated financial statements
included in the Buyer SEC Documents complied as to form in all material respects
with then applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
GAAP applied on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto) and fairly presented Buyer's
consolidated financial position and that of its consolidated subsidiaries as at
the dates thereof and the consolidated results of their operations and
statements of cash flows for the periods then ended (subject, in the case of
unaudited statements, to the lack of footnotes thereto, to normal year-end audit
adjustments and to any other adjustments described therein).
SECTION 4.5 INFORMATION. None of the Proxy Statement or any other document
filed or to be filed by or on behalf of the Company with the SEC or any other
governmental entity in connection with the transactions contemplated by this
Agreement contained when filed or will, at the respective times filed with the
SEC or other governmental entity and, in addition, in the case of the Proxy
Statement, at the date it or any amendment or supplement thereto is mailed to
stockholders and at the time of the meeting of stockholders of the Company to
vote on the Merger, 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 made therein, in light of the circumstances under which they
were made, not misleading; provided that the foregoing shall not apply to
information supplied by the Company specifically for inclusion or incorporation
by reference in any such document. The Proxy Statement will comply as to form in
all material respects with the provisions of the Exchange Act and the rules and
regulations thereunder. None of
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the information supplied by Buyer specifically for inclusion or incorporation by
reference in any document filed or to be filed by or on behalf of the Company
with the SEC or any other governmental entity in connection with the
transactions contemplated by this Agreement contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
SECTION 4.6 REIT. Immediately following the purchase by CAC of the shares
of Company Common Stock owned by AP CRT Holdings, L.P. ("AP"), AEW Partners,
L.P. ("AEW"), Thomas J. Crocker ("Mr. Crocker"), Richard S. Ackerman ("Mr.
Ackerman") and Robert E. Onisko ("Mr. Onisko") pursuant to the Stock Purchase
Agreement of even date herewith, by and among AP, AEW, Messrs. Crocker, Ackerman
and Onisko and CAC (the "Stock Purchase Agreement"), immediately following the
execution of the Stock Purchase Agreement and immediately following the Merger,
the Company will not meet the test of being "closely held" within the meaning of
Section 856(a)(6) of the Code.
ARTICLE 5
COVENANTS OF THE PARTIES
SECTION 5.1 TAKING OF NECESSARY ACTION. (a) Each party hereto agrees to use
its commercially reasonable best efforts promptly to take or cause to be taken
all action and promptly 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 hereby, subject to the terms and
conditions hereof, including all actions and things necessary to cause all
conditions precedent set forth in Article 6 to be satisfied and including
Buyer's incorporation in Maryland of CAC as promptly as practicable following
the date hereof.
(b) As promptly as practicable after the date hereof, the Company shall
prepare and file with the SEC a preliminary proxy statement by which the
stockholders of the Company will be asked to approve the Merger (together with
all amendments and supplements thereto, the "Proxy Statement"). The Company
shall use its commercially reasonable best efforts to respond to any comments of
the SEC, and to cause the Proxy Statement to be mailed to the stockholders of
the Company at the earliest practicable time. As promptly as practicable after
the date hereof, the Company and Buyer shall prepare and file any other filings
required of the Company or Buyer under the Exchange Act, the Securities Act or
any other federal, state or local laws relating to this Agreement and the
transactions contemplated hereby, including under the HSR Act, if required, and
state takeover laws (the "Other Filings"). The Company and Buyer will notify
each other promptly of the receipt of any comments from the SEC or its staff and
of any request by the SEC or its staff or any other government officials for
amendments or supplements to the Proxy Statement or any Other Filing or for
additional information and will supply each other with copies of all
correspondence between each of them or any of their respective representatives,
on the one hand, and the SEC, or its staff or any other government officials, on
the other hand, with respect to the Proxy Statement or any Other Filing. The
Proxy Statement and any Other Filing shall comply in all material respects with
all applicable requirements of law. Whenever any event occurs which is required
to be set forth in an amendment or supplement to the Proxy Statement or any
Other Filing, the Company or Buyer, as the case may be, shall promptly inform
the other party of such occurrence and cooperate in filing with the SEC or its
staff or any other government officials, and/or mailing to stockholders of the
Company and of Buyer, such amendment or supplement. The Proxy Statement shall
include the recommendation of the Board of Directors of the Company that the
stockholders of the Company vote in favor of and approve the Merger, unless
otherwise required by applicable fiduciary duties of the directors of the
Company, as determined by such directors in good faith after consultation with
independent legal counsel (which may include the Company's regularly engaged
legal counsel).
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(c) If required in order to effect the Merger, the Company shall call a
meeting of its stockholders to be held as promptly as practicable for the
purpose of voting upon the Merger.
(d) If a meeting of stockholders of the Company is required in order to
effect the Merger, Buyer shall, and shall use its best efforts to cause any of
its subsidiaries and affiliates, to vote any shares of Company Common Stock of
which Buyer, or any of its subsidiaries or affiliates, hold voting control in
favor of approval and adoption of the Merger.
(e) The Company shall use its commercially reasonable best efforts to
obtain the consents set forth in Schedule 3.4.
(f) In furtherance and not in limitation of the foregoing, Buyer shall use
its best efforts to resolve such objections, if any, as may be asserted with
respect to the transactions contemplated by this Agreement under any antitrust,
competition or trade regulatory laws, rules or regulations of any governmental
entity.
SECTION 5.2 PUBLIC ANNOUNCEMENTS; CONFIDENTIALITY. (a) Subject to each
party's disclosure obligations imposed by law and any stock exchange or similar
rules and the confidentiality provisions contained in clause (b) of this Section
5.2, the Company and Buyer will cooperate with each other in the development and
distribution of all news releases and other public information disclosures with
respect to this Agreement and any of the transactions contemplated hereby.
(b) Each of the Company and Buyer agrees that all information provided to
it or any of its representatives pursuant to this Agreement shall be kept
confidential, and each of the Company and Buyer shall not (i) disclose such
information to any persons other than the directors, officers, employees,
financial advisors, legal advisors, accountants, consultants and affiliates of
the Company or Buyer, as applicable, who reasonably need to have access to the
confidential information and who are advised of the confidential nature of such
information or (ii) use such information in a manner which would be detrimental
to the Company; provided, however, the foregoing obligation of each of the
Company and Buyer shall not (A) relate to any information that (1) is or becomes
generally available other than as a result of unauthorized disclosure by the
Company or Buyer, as applicable, or by persons to whom the Company or Buyer, as
applicable, has made such information available, (2) is or becomes available to
the Company or Buyer, as applicable, on a non-confidential basis from a third
party that is not, to the knowledge of the Company or Buyer, as applicable,
bound by any other confidentiality agreement with the other party hereto, or (B)
prohibit disclosure of any information if required by law, rule, regulation,
court order or other legal or governmental process.
SECTION 5.3 CONDUCT OF THE BUSINESS OF THE COMPANY. The Company covenants
and agrees that, between the date of this Agreement and the Effective Time,
except as contemplated by the Company's budget heretofore made available to
Buyer (the "Company Budget") and except for the matters set forth in Schedule
5.3 or unless Buyer shall otherwise agree in writing, the businesses of the
Company and its Subsidiaries shall only be conducted in, and the Company and its
Subsidiaries shall not take any action except in the usual, regular and ordinary
course and in substantially the same manner as heretofore conducted, and the
Company shall, and shall cause its Subsidiaries to, use its best efforts to
comply with all material applicable laws, maintain their respective good
standing in the jurisdiction of their respective formation, maintain all
material Company Permits, comply with all state and federal securities laws and
timely file all required filings under the Exchange Act, preserve intact their
present business organizations, keep available the services of their respective
current officers, employees and consultants and preserve their respective
current relationships with customers, suppliers, tenants and others having
business dealings with the Company and its Subsidiaries. By way of amplification
and without limiting the generality of the foregoing, except as contemplated by
this Agreement or by the Company Budget and except for the matters set forth in
Schedule 5.3, neither the Company nor any Subsidiary shall, between the date of
this Agreement
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and the Effective Time, directly or indirectly, do, or propose to do, any of the
following without the prior written consent of Buyer:
(i) (x) declare, set aside, or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than (1) the
Company's regular quarterly dividend on the shares of Company Common Stock
in an amount not exceeding $.15 per share (or a prorated portion of such
amount in the case of any portion of a quarterly period), (2) dividends and
distributions by any direct or indirect Subsidiary of the Company to its
parent(s) and (3) distribution by the Company to its stockholders of the
assets described in Schedule 5.3(i) (collectively, the "Excluded Assets"),
(y) split, combine or reclassify any of its capital stock or issue or,
other than pursuant to the exercise of options to purchase Company Common
Stock, authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or (z)
purchase, redeem or otherwise acquire, directly or indirectly, other than
pursuant to the exercise of outstanding options to purchase Company Common
Stock, any shares of capital stock of the Company or any of its
Subsidiaries or any other equity securities thereof or any rights,
warrants, or options to acquire any such shares or other securities;
(ii) issue, deliver, sell, pledge, dispose of, grant, encumber, or
authorize the issuance, sale, pledge, disposition, grant or encumbrance of,
(i) any shares of capital stock of any class of the Company or any
Subsidiary or any securities convertible into, or any rights, warrants or
options to acquire, any such shares of such capital stock, or any other
ownership interest (including, without limitation, any phantom interest),
of the Company or any Subsidiary (except for the issuance of Company Common
Stock pursuant to warrants or issuable pursuant to employee stock options
outstanding on the date hereof and set forth on Schedule 3.2) or (ii) any
assets of the Company or any Subsidiary, except (in the case of clause
(ii)) for the distribution of the Excluded Assets and except for sales in
the ordinary course of business and in a manner consistent with past
practice in an amount not to exceed $5,000 individually, or in any related
series of transactions;
(iii) amend its Articles of Incorporation, by-laws or other comparable
organizational documents;
(iv) acquire or agree to acquire by merging or consolidating with, or by
purchasing 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, or any real property or buildings or any
assets in excess of $5,000 individually or in any related series of
transactions;
(v) subject to liens, mortgages, deeds of trust, deeds to secure debt,
security interests, pledges, claims, charges, easements and other
encumbrances of any nature whatsoever (collectively, "Liens") or sell,
lease or otherwise dispose of any of its properties or assets, except in
the ordinary course of business consistent with past practice with respect
to assets in an amount less than $5,000 individually or in any related
series of transactions and except for the distribution of the Excluded
Assets;
(vi) lease, in one transaction or a series of transactions, any of its
assets or properties, except for the leases made in the ordinary course of
business consistent with capital expenditures, rental rates, expense stops
and other terms consistent with the Company Budget; provided, however, that
no leases shall be for a period of longer than five years or with respect
to properties with greater than 5,000 rentable square feet;
(vii) (a) incur any indebtedness for borrowed money or issue or sell any
debt securities of the Company or any of its Subsidiaries, or guarantee,
assume or endorse, or otherwise as an accommodation become responsible for,
the obligations of any person, or make any loans or advances, except, in
any such case, for borrowings or other transactions incurred in the
ordinary course of business and consistent with past practice in an amount
less than $5,000 individually or in the
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aggregate; (b) except in the ordinary course of business, make any loans,
advances or capital contributions to, or investments in, any other person
but in no event to exceed $5,000; (c) enter into any contract or agreement
other than in the ordinary course of business, consistent with past
practice but in no case greater than $5,000; or (d) authorize any single
capital expenditure which is in excess of $5,000 or capital expenditures
which are, in the aggregate, in excess of $5,000 for the Company and the
Subsidiaries taken as a whole;
(viii) increase the compensation payable or to become payable to its
officers or employees, or grant any severance or termination pay to, or
enter into any employment or severance agreement with any director, officer
or other employee of the Company or any Subsidiary, or establish, adopt,
enter into or amend any collective bargaining, bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
director, officer or employee;
(ix) take any action, other than reasonable and usual actions in the
ordinary course of business and consistent with past practice, with respect
to accounting policies or procedures (including, without limitation,
procedures with respect to the payment of accounts payable and collection
of accounts receivable);
(x) make any tax election or settle or compromise any material
federal, state, local or foreign income tax liability;
(xi) pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business and consistent with past practice, of liabilities reflected or
reserved against in the balance sheet as of March 31, 1996 or subsequently
incurred in the ordinary course of business and consistent with past
practice and as permitted by this Section 5.3;
(xii) enter into any transactions or agreements with any directors,
officers, employees, stockholders or affiliates of the Company or any of
its Subsidiaries, except for transactions or agreements relating to or
arising out of the Excluded Assets or as disclosed on Schedule 5.3; or
(xiii) take any action or fail to take any action if such action or
failure to act would reasonably be expected to materially impair the value
of its material assets or properties; or
(xiv) authorize or enter into or amend any contract, agreement,
commitment or arrangement with respect to any action prohibited by this
Section 5.3.
The Company may request consent from Buyer to take any action otherwise
prohibited by this Section 5.3, and such consent shall be deemed to be granted
if Buyer does not give notice to the Company of its refusal to grant such
consent within five business days of Buyer's receipt of such request for
consent. For purposes of this Section 5.3, expenditures by the Company will be
deemed to be as contemplated by the Company Budget if (i) the actual
expenditures within a given region in the aggregate do not exceed the aggregate
amount of expenditures budgeted for such region and (ii) the expenditures are
made no earlier than the month in which they are budgeted.
SECTION 5.4 NO SOLICITATION OF TRANSACTIONS. Except as otherwise consented
to in writing by Buyer, neither the Company nor any of its Subsidiaries shall,
directly or indirectly, through any officer, director, employee, agent,
representative or otherwise, initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, (i) any acquisition in any manner, directly or
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indirectly (including through any option, right to acquire or other beneficial
ownership) of more than 10% of any class of equity securities of the Company, or
assets representing a material portion of the assets of the Company (other than
any Excluded Asset), other than any of the transactions contemplated by this
Agreement, (ii) any merger, consolidation, sale of assets (other than any
Excluded Asset), share exchange, recapitalization, other business combination,
liquidation, or other action out of the ordinary course of business of the
Company, other than any of the transactions contemplated by this Agreement, or
(iii) any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing (any of the
foregoing, a "Competing Transaction"), or enter into or maintain or continue
discussions or negotiate with any person or entity in furtherance of such
inquiries or to obtain a Competing Transaction, or agree to or endorse any
Competing Transaction, or authorize or permit any of the officers, directors or
employees of the Company or any of its Subsidiaries or any investment banker,
financial advisor, attorney, accountant or other representative retained by the
Company or any of the Company's Subsidiaries to take any such action. The
Company shall immediately notify Buyer of all the relevant details relating to
all inquiries and proposals which it or any of its Subsidiaries or any such
officer, director, employee, investment banker, financial advisor, attorney,
accountant or other representative may receive relating to any of such matters,
and, if such inquiry or proposal is in writing, the Company shall as promptly as
practicable deliver to Buyer a copy of such inquiry or proposal. Nothing
contained in this Section 5.4 shall prohibit the Company from complying with
Rule 14e-2 promulgated under the Exchange Act with regard to a Competing
Transaction.
SECTION 5.5 INFORMATION AND ACCESS. (a) Subject to the Confidentiality
Agreement, dated as of April 8, 1996, by and between the Company and Buyer (the
"Confidentiality Agreement"), from the date hereof until the Closing Date, (i)
each party hereto and its respective Subsidiaries shall afford to the other
party and such other party's accountants, counsel and other representatives full
and reasonable access during normal business hours (and at such other times as
the parties may mutually agree) to its properties, books, contracts,
commitments, records and personnel and, during such period, shall furnish
promptly to such other party (1) a copy of each report, schedule and other
document filed or received by it pursuant to the requirements of the Securities
Act, the Exchange Act and the rules and regulations promulgated thereunder, and
(2) all other information concerning their businesses, personnel and the Company
Properties or Buyer Properties, as applicable, as such other party may
reasonably request. Such other party and its accountants, counsel and other
representatives shall, in the exercise of the rights described in this Section,
not unduly interfere with the operation of the businesses of the party providing
the access and information.
(b) The Company will cooperate with Buyer to the extent reasonably
necessary to enable Buyer to make appropriate filings with the SEC with respect
to the Merger, including assistance in preparing pro forma financial statements
of Buyer reflecting the Merger.
SECTION 5.6 EMPLOYEE AND OTHER ARRANGEMENTS. (a) From and after the
Effective Time, Buyer will cause the Surviving Corporation to honor, in
accordance with their terms, all employment and consulting agreements and other
contracts to which the Company or any of its Subsidiaries are parties relating
to (i) the employment of or rendition of personal services by any individual
and/or (ii) the compensation and/or benefits payable in connection with such
employment or services.
(b) Buyer will cause the Surviving Corporation to take such actions as are
necessary so that, for a period of at least one year from and after the
Effective Time, persons who are employes of the Company and its Subsidiaries as
of the Effective Time (the "Company Employees") will be provided cash
compensation, employee benefits and incentive compensation and similar plans and
programs as will provide compensation and benefits which, in the aggregate and
in all material respects, are no less favorable than those provided to Company
Employees as of the date hereof; provided, however, that it is understood that
after the Effective Time Buyer will have no obligation to issue shares of
capital stock of any entity pursuant to any such plan or program. In addition,
from and after the Effective Time, Buyer shall, and shall cause the Surviving
Corporation to, (i) provide all Company Employees with service credit for all
periods of
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employment with the Company and its Subsidiaries prior to the Effective Time for
purposes of eligibility and vesting under any employee benefit plan program,
policy or arrangement of Buyer, the Surviving Corporation or any of their
affiliates, (ii) waive any pre-existing condition of any Company Employee and
any dependent thereof for purposes of determining eligibility for, and the terms
upon which they participate in, any employee benefit plan, program, policy or
arrangement of Buyer, the Surviving Corporation or any of their affiliates and
(iii) provide each Company Employee, upon the involuntary termination of such
Employee's employment with the Surviving Corporation and any of its Subsidiaries
and affiliates, within one year after the Effective Time, with a severance
benefit determined pursuant to Schedule 3.10.
(c) Buyer agrees that no constraints shall be imposed on any stockholder or
officer of the Company regarding the use or operation of the Excluded Assets to
compete with the Surviving Corporation.
SECTION 5.7 INDEMNIFICATION. (a) Buyer agrees that all rights to
indemnification existing in favor of any director, officer, employee or agent of
the Company and its Subsidiaries (the "Indemnified Parties") as provided in
their respective Articles of Incorporation, by-laws or comparable organizational
documents or in indemnification agreements with the Company or any of its
Subsidiaries, or otherwise in effect as of the date hereof, shall survive the
Merger and shall continue in full force and effect for a period of not less than
six years from the Effective Time; provided that, in the event any claim or
claims are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims shall continue until
final disposition of any and all such claims. Buyer also agrees to indemnify all
Indemnified Parties to the fullest extent permitted by applicable law with
respect to all acts and omissions arising out of such individuals' services as
officers, directors, employees or agents of the Company or any of its
Subsidiaries or as trustees or fiduciaries of any plan for the benefit of
employees or directors of, or otherwise on behalf of, the Company or any of its
Subsidiaries, occurring prior to the Effective Time including, without
limitation, the transactions contemplated by this Agreement. Without limiting
the generality of the foregoing, in the event any such Indemnified Party is or
becomes involved in any capacity in any action, proceeding or investigation in
connection with any matter, including, without limitation, the transactions
contemplated by this Agreement, occurring prior to or at the Effective Time,
Buyer will pay as incurred such Indemnified Party's legal and other expenses
(including the cost of any investigation and preparation) incurred in connection
therewith. From and after the Effective Time, Buyer will pay all expenses,
including attorneys' fees, that may be incurred by any Indemnified Party in
enforcing the indemnity and other obligations provided for in this Section 5.8.
(b) Buyer agrees that it shall (i) cooperate with the Company to obtain
prior to the Effective Time directors' and officers' insurance coverage for a
six-year period following the Effective Time for current and former directors
and officers of the Company covering any actions taken on or prior to the
Effective Time, such coverage to be at least as comprehensive as the Company's
current directors' and officers' liability insurance coverage or (ii) from and
after the Effective Time, cause the Surviving Corporation to cause to be
maintained in effect for not less than six years from the Effective Time the
current policies of the directors' and officers' liability insurance maintained
by the Company; provided, that the Surviving Corporation may substitute therefor
policies of at least the same coverage containing terms and conditions which are
no less advantageous and provided that such substitution shall not result in any
gaps or lapses in coverage with respect to matters occurring prior to the
Effective Time; provided, further, that the Surviving Corporation shall not be
required to pay an annual premium in excess of 200% of the last annual premium
paid by the Company prior to the date hereof and if the Surviving Corporation is
unable to obtain the insurance required by this Section 5.7 it shall obtain as
much comparable insurance as possible for an annual premium equal to such
maximum amount.
SECTION 5.8 NOTIFICATION OF CERTAIN MATTERS. Each of Buyer and the Company
shall use its good faith efforts to notify the other party in writing of its
discovery of any matter that would render any of such party's or the other
party's representations and warranties contained herein untrue or incorrect in
any
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material respect, but the failure of either party to so notify the other party
shall not be deemed a breach of this Agreement.
SECTION 5.9 SEPARATION OF EXCLUDED ASSETS. Both prior to and after the
Effective Time, (i) Buyer shall cooperate in effecting the transfer of ownership
of the Excluded Assets in accordance with arrangements entered into by the
Company prior to the Effective Time and (ii) the Company shall notify Buyer of
any such arrangements. The Company shall cause Newco (as hereinafter defined) to
agree to reimburse Buyer at the Effective Time for expenses or costs, including
any local, state or federal income or transfer tax liability, incurred by the
Company in effecting the transfer of ownership of the Excluded Assets.
SECTION 5.10 NEWCO OBLIGATIONS. (a) At the Effective Time, an entity that
will obtain direct or indirect ownership of some or all of the Excluded Assets
("Newco") shall enter into a master lease agreement with Buyer covering all of
the Company-owned properties, which master lease agreement shall obligate Newco
to pay to Buyer $1,200,000 at the Effective Time and $600,000 on January 1,
1997, as additional rent on the Company-owned properties and as compensation to
Buyer for rent shortfalls and vacancies at such properties.
(b) At or before the Effective Time, the Company shall have caused Newco to
elect to either (i) assume the liability of the Company to indemnify Thomas J.
Crocker and Crocker and Company in the case styled Patrick Jolivet v. Thomas J.
Crocker and Crocker and Company, Case No. 94-8669 or (ii) pay the costs of
insurance to cover such indemnification.
(c) At or before the Effective Time, the Company shall cause Newco to enter
into an agreement with the Company, which agreement shall remain in effect after
the Effective Time, providing that (i) Newco shall reimburse the Company for the
excess, if any, of the Designated Transaction Expenses (as hereinafter defined)
over $9,150,000 and (ii) the Company shall pay to Newco 50% of the excess, if
any, of $8,600,000 over the Designated Transaction Expenses. The amount of the
Designated Transaction Expenses shall be determined on the 20th business day
following the Effective Time, and any amount required to be paid pursuant to
this paragraph shall be paid within five business days thereafter. Buyer and the
Company will jointly prepare a good faith estimate of the Designated Transaction
Expenses two business days prior to the Effective Time. "Designated Transaction
Expenses" shall mean expenses incurred by the Company in connection with its
pending proposed public offering or in connection with this Agreement and the
Merger only in the following categories: (i) fees and expenses of legal counsel;
(ii) fees and expenses of accountants; (iii) fees and expenses of investment
bankers and appraisers; (iv) printing expenses; (v) severance payments to
employees (including officers) generally as set forth on Schedule 3.10 or
pursuant to the Severance Agreements (as defined in the Stock Purchase
Agreement); (vi) payments to the Company's three senior executives pursuant to
Section 2.6 of this Agreement; and (vii) amounts due, if any, to any
solicitation agent in connection with the exercise of the Company's outstanding
warrants.
ARTICLE 6
CONDITIONS TO CLOSINGS
SECTION 6.1 CONDITIONS TO EACH PARTY's OBLIGATION TO EFFECT THE MERGER.
Subject to the provisions of Section 6.4, the respective obligations of each
party to effect the Merger shall be subject to the fulfillment at or prior to
the Effective Time of the following conditions:
(a) if required, the Merger shall have been approved and adopted by the
requisite vote of the holders of the Company Common Stock;
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(b) any waiting period applicable to the consummation of the Merger under
the HSR Act, if applicable, shall have expired or been terminated or the Company
and Buyer shall have mutually concluded that no filing under the HSR Act is
required with respect to the transactions contemplated hereby; and
(c) the consummation of the Merger shall not be restrained, enjoined or
prohibited by any order, judgment, decree, injunction or ruling of a court of
competent jurisdiction.
SECTION 6.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER.
Subject to the provisions of Section 6.4, the obligation of the Company to
effect the Merger shall be subject to the fulfillment at or prior to the
Effective Time of the additional following conditions, unless waived by the
Company:
(a) that the representations and warranties of Buyer contained in the
first two sentences of Section 4.1 (with respect to Buyer only) and in
Section 4.2 shall be true when made and at and as of the Effective Time as
if made at and as of such time, and that Buyer shall have performed in all
material respects its agreements contained in this Agreement required to be
performed at or prior to the Effective Time; and the Company shall have
received a certificate of the Chief Executive Officer or the Chief
Financial Officer of Buyer to that effect.
SECTION 6.3 CONDITIONS TO OBLIGATIONS OF BUYER TO EFFECT THE MERGER.
Subject to the provisions of Section 6.4 the obligations of Buyer to effect the
Merger shall be subject to the fulfillment at or prior to the Effective Time of
the additional following conditions, unless waived by Buyer:
(a) that the representations and warranties of the Company contained in
the first two sentences of Section 3.1 (with respect to the Company only)
and in Section 3.3 shall be true when made and at and as of the Effective
Time as if made at and as of such time, and that the Company shall have
performed in all material respects its agreements contained in this
Agreement required to be performed at or prior to the Effective Time; and
Buyer shall have received a certificate of the Chief Executive Officer or
the Chief Financial Officer of the Company to that effect;
(b) the consents set forth in Schedule 6.3 shall have been received, or
the Company shall have refinanced the indebtedness described in Schedule
6.3 with new indebtedness which is in all respects at least as favorable to
the Company as the indebtedness described in Schedule 6.3 (but under the
terms of which no lender consent is required (or any required consent has
been obtained) to effect the transactions contemplated by this Agreement);
and
(c) the Company shall meet the requirements for qualification as a REIT
under Sections 856-860 of the Code; provided, that if the Company does not
meet such requirements for qualification as a result of any action or
omission of (or any action or omission taken at the direction of) Buyer or
due to the inaccuracy of the representation contained in Section 4.6, the
condition set forth in this Section 6.3(c) shall be deemed to be satisfied.
SECTION 6.4 CONDITIONS TO OBLIGATIONS OF THE COMPANY AND BUYER TO EFFECT
THE MERGER FOLLOWING BUYER's OWNERSHIP OF SHARES. If Buyer becomes the
beneficial owner of a majority of the outstanding shares of Company Common Stock
prior to the Effective Time, the respective obligations of each party to effect
the Merger shall be subject only to the fulfillment at or prior to the Effective
Time of the following conditions:
(a) if required, the Merger shall have been approved and adopted by the
requisite vote of the holders of the Company Common Stock; and
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(b) the consummation of the Merger shall not be restrained, enjoined or
prohibited by any order, judgment, decree, injunction or ruling of a court
of competent jurisdiction.
SECTION 6.5 REPRESENTATIONS AND WARRANTIES. Except as set forth in Sections
6.2 and 6.3, that the representations and warranties contained in Article 3
hereof were true and correct when and as made shall not be a condition to the
obligation of either the Company or Buyer to effect the Merger.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1 TERMINATION. This Agreement may be terminated at any time prior
to the earlier of (i) such time as Buyer becomes the owner, directly or
indirectly, of a majority of the Company Common Stock and (ii) the Effective
Time, whether before or after approval by the stockholders of the Company of the
Merger:
(a) by mutual written consent of Buyer and the Company;
(b) by Buyer, upon a breach of any covenant or agreement on the part of
the Company set forth in this Agreement, such that the condition set forth
in Section 6.3(a) would not be satisfied (a "Terminating Company Breach"),
provided that, if such Terminating Company Breach is curable by the Company
through the exercise of its reasonable best efforts and for so long as the
Company continues to exercise such reasonable best efforts, Buyer may not
terminate this Agreement under this Section 7.1(b);
(c) by the Company, upon breach of any covenant or agreement on the part
of Buyer set forth in this Agreement such that the condition set forth in
Section 6.2(a) would not be satisfied ("Terminating Buyer Breach"),
provided that, if such Terminating Buyer Breach is curable by Buyer through
the exercise of its reasonable best efforts and for so long as Buyer
continues to exercise such reasonable best efforts, the Company may not
terminate this Agreement under this Section 7.1(c);
(d) by Buyer if the Company does not meet the requirements for
qualification as a REIT under Sections 856-860 of the Code; provided that
if the Company does not meet such requirements for qualification as a
result of any action or omission of (or any action or omission taken at the
direction of) Buyer or due to the inaccuracy of the representation
contained in Section 4.6, Buyer shall not have the right to terminate this
Agreement pursuant to this Section 7.1(d).
(e) by Buyer or the Company if any court of competent jurisdiction shall
have issued, enacted, entered, promulgated or enforced any order, judgment,
decree, injunction or ruling which restrains, enjoins or otherwise
prohibits the Merger and such order, judgment, decree, injunction or ruling
shall have become final and nonappealable; provided, however, that the
party seeking to terminate this Agreement pursuant to this Section 7.1(e)
shall have used commercially reasonable best efforts to remove such
injunction or overturn such action; or
(f) by either Buyer or the Company if the meeting of the stockholders of
the Company to approve the Merger (including as such meeting may be
adjourned from time to time), if required, shall have concluded without the
Company having obtained the required stockholder approval.
SECTION 7.2 PROCEDURE AND EFFECT OF TERMINATION. In the event of
termination of this Agreement by either or both of the Company and Buyer
pursuant to Section 7.1, written notice thereof shall forthwith be given by the
terminating party to the other party hereto, and this Agreement shall thereupon
terminate
A-21
<PAGE>
and become void and have no effect, and the transactions contemplated hereby
shall be abandoned without further action by the parties hereto, except that the
provisions of Sections 5.2 (Public Announcements; Confidentiality), 7.3
(Expenses), 8.2 (Governing Law), and 8.4 (Notices) shall survive the termination
of this Agreement; provided, however, that such termination shall not relieve
any party hereto of any liability for any breach of this Agreement.
SECTION 7.3 EXPENSES. Except as set forth in this Agreement, whether or not
the Merger is consummated, all legal and other costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such costs and expenses.
ARTICLE 8
MISCELLANEOUS
SECTION 8.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to the other party. Copies of executed counterparts
transmitted by telecopy, telefax or other electronic transmission service shall
be considered original executed counterparts for purposes of this Section,
provided receipt of copies of such counterparts is confirmed.
SECTION 8.2 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND WITHOUT REFERENCE
TO THE CHOICE OF LAW PRINCIPLES THEREOF.
SECTION 8.3 ENTIRE AGREEMENT. This Agreement (including agreements
incorporated herein) and the Schedules, Annexes and Exhibits hereto, the Stock
Purchase Agreement and the exhibits thereto, the Severance Agreements and the
Confidentiality Agreement contain the entire agreement between the parties with
respect to the subject matter hereof and there are no agreements,
understandings, representations or warranties between the parties other than
those set forth or referred to herein. Except as set forth in Section 8.13, this
Agreement is not intended to confer upon any person not a party hereto (and
their successors and assigns) any rights or remedies hereunder.
SECTION 8.4 NOTICES. All notices and other communications hereunder shall
be sufficiently given for all purposes hereunder if in writing and delivered
personally, sent by documented overnight delivery service or, to the extent
receipt is confirmed, telecopy, telefax or other electronic transmission service
to the appropriate address or number as set forth below.
Notices to the Company shall be addressed to:
Crocker Realty Trust, Inc.
433 Plaza Real, Suite 335
Boca Raton, Florida 33432
Attention: Thomas J. Crocker,
Chairman and Chief Executive Officer
Telecopy Number: (407) 447-1820
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Elliott V. Stein, Esq.
Telecopy Number: (212) 403-2000
A-22
<PAGE>
or at such other address and to the attention of such other person as the
Company may designate by written notice to Buyer. Notices to Buyer shall be
addressed to:
Highwoods Properties, Inc.
3100 Smoketree Court, Suite 700
Raleigh, North Carolina 27604-5001
Attention: Carmen Liuzzo, Chief Financial Officer
Telecopy Number: (919) 876-2448
with a copy to:
Smith, Helms, Mullis and Moore L.L.P.
316 West Edentown Street
Raleigh, North Carolina
Attention: Brad Markoff, Esq.
Telecopy Number: (919) 755-8731
SECTION 8.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors;
provided, however, that this Agreement may not be assigned or transferred by
either of the parties hereto (whether by operation of law or otherwise) without
the prior written consent of the other party.
SECTION 8.6 HEADINGS. The Section, Article and other headings contained in
this Agreement are inserted for convenience of reference only and will not
affect the meaning or interpretation of this Agreement. All references to
Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated.
SECTION 8.7 AMENDMENTS AND WAIVERS. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Either
party hereto may, only by an instrument in writing, waive compliance by the
other party hereto with any term or provision hereof on the part of such other
party hereto to be performed or complied with. The waiver by any party hereto of
a breach of any term or provision hereof shall not be construed as a waiver of
any subsequent breach. In the event that, prior to the Effective Time, Buyer
becomes the owner of a majority of the outstanding shares of Company Common
Stock, any amendment to this Agreement affecting the Merger Consideration, the
timing of the Merger, or Buyer's obligation to complete the Merger shall require
that (i) a majority of the directors of the Company are Continuing Directors and
(ii) such amendment is approved by a majority of the Continuing Directors then
serving. "Continuing Directors" shall mean individuals who, as of the date
hereof, constitute the Board of Directors of the Company; provided, however,
that any individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's stockholders, was approved
by a vote of at least a majority of the Continuing Directors shall be considered
as though such individual were a Continuing Director.
SECTION 8.8 CERTAIN DEFINITIONS; INTERPRETATION; ABSENCE OF PRESUMPTION.
(a) For the purposes hereof, (i) "Material Adverse Effect" shall mean with
respect to either party hereto, a material adverse effect on the financial
condition, results of operations or business of such party and its Subsidiaries
(to the extent of such party's interest therein) taken as a whole, or, if
applicable, on the ability of such party to consummate the Merger and the other
transactions contemplated hereby, (ii) "person" shall mean any individual,
corporation, partnership, limited liability company, joint venture, trust,
unincorporated organization or other form of business or legal entity or
governmental entity and (iii) "subsidiaries" shall mean with respect to any
person, any corporation, partnership, joint venture, business trust or other
entity, of which such person, directly or indirectly, owns or controls at least
50% of the securities or other interests
A-23
<PAGE>
entitled to vote in the election of directors or others performing similar
functions with respect to such corporation or other organization, or to
otherwise control such corporation, partnership, joint venture, business trust
or other entity. Without limiting the generality of the foregoing, Material
Adverse Effect with respect to the Company shall include the Company not meeting
the requirements for qualification as a REIT under Sections 856-860 of the Code,
except to the extent that the Company does not meet such requirements for
qualifiaction as a result of any action or omission of (or any action or
omission taken at the direction of) Buyer or due to the inaccuracy of the
representation contained in Section 4.6. Without limiting the generality of the
foregoing, (a) the Company's Subsidiaries shall include CRT Leasing, Inc. and
(b) Buyer's Subsidiaries shall (i) include Highwoods Services, Inc. and Forsyth
Properties Services, Inc., and (ii) the Operating Partnership and any entity
that is a Subsidiary of the Operating Partnership. For purposes hereof, (i)
words in the singular shall be held to include the plural and vice versa and
words of one gender shall be held to include the other gender as the context
requires, (ii) the terms "hereof", "herein", and "herewith" and words of similar
import shall, unless otherwise stated, be construed to refer to this Agreement
as a whole (including all of the Schedules, Annexes and Exhibits hereto) and not
to any particular provision of this Agreement, and Article, Section, paragraph,
Exhibit, Annex and Schedule references are to the Articles, Sections,
paragraphs, Exhibits, Annexes and Schedules to this Agreement unless otherwise
specified, (iii) the word "including" and words of similar import when used in
this Agreement shall mean "including, without limitation," unless the context
otherwise requires or unless otherwise specified, (iv) the word "or" shall not
be exclusive, and (v) provisions shall apply, when appropriate, to successive
events and transactions.
(b) This Agreement shall be construed without regard to any presumption or
rule requiring construction or interpretation against the party drafting or
causing any instrument to be drafted.
SECTION 8.9 SEVERABILITY. Any provision hereof which is invalid or
unenforceable shall be ineffective to the extent of such invalidity or
unenforceability, without affecting in any way the remaining provisions hereof.
SECTION 8.10 CONFIDENTIALITY AGREEMENT. The Confidentiality Agreement
shall remain in full force and effect.
SECTION 8.11 FURTHER ASSURANCES. The Company and Buyer agree that, from
time to time, whether before, at or after any Closing Date, each of them will
execute and deliver such further instruments of conveyance and transfer and take
such other action as may be necessary to carry out the purposes and intents
hereof.
SECTION 8.12 SPECIFIC PERFORMANCE. Buyer and the Company each acknowledge
that, in view of the uniqueness of the parties hereto, the parties hereto would
not have an adequate remedy at law for money damages in the event that this
Agreement were not performed in accordance with its terms, and therefore agree
that the parties hereto shall be entitled to specific enforcement of the terms
hereof in addition to any other remedy to which the parties hereto may be
entitled at law or in equity.
SECTION 8.13 THIRD PARTY BENEFICIARIES. Nothing in this Agreement, except
for (i) the provisions of Sections 2.1, 2.2 and 5.7 to the extent they apply to
directors and officers of the Company and (ii) the provisions of Sections 5.9
and 5.10 to the extent they apply to Newco, is intended to confer upon any
person other than the parties hereto any rights or remedies hereunder; provided,
however, that if Buyer becomes the beneficial owner of a majority of the
outstanding shares of Company Common Stock and the Effective Time shall not have
occurred within 90 days thereafter, each beneficial owner of Company Common
Stock shall be deemed to be a third-party beneficiary of this Agreement and may
enforce all rights with respect thereto.
A-24
<PAGE>
SECTION 8.14 SURVIVAL. Any covenants or agreements of the parties hereto
(including the Surviving Corporation) which contemplate actions to occur
following the Effective Time shall survive the Effective Time.
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each
of the parties hereto as of the day first above written.
CROCKER REALTY TRUST, INC.
By: /s/ Thomas J. Crocker
---------------------
Name: Thomas J. Crocker
Title: Chief Executive Officer
HIGHWOODS PROPERTIES, INC.
By: /s/ William T. Wilson III
-------------------------
Name: William T. Wilson III
Title: Executive Vice President
CEDAR ACQUISITION CORPORATION
By: /s/ William T. Wilson III
-------------------------
Name: William T. Wilson III
Title: Executive Vice President
A-25
<PAGE>
APPENDIX B
SCHEDULE OF
EXCLUDED PROPERTIES
1. Approximately 230 acres of undeveloped property in Tampa, Florida, owned by
CRT Leasing, Inc.
2. Approximately 7.35 acres of undeveloped property located in Tampa, Florida,
owned by CRT Florida Development, Inc.
3. Approximately 5.9 acres of undeveloped property in Memphis, Tennessee, owned
by CRT Tennessee Development Corp.
4. Approximately 2.6 acres of undeveloped property in Memphis, Tennessee, owned
by CRT Tennessee Development Corp.
5. Approximately 4 acres of undeveloped property owned by Crocker Realty
Investors, Inc. which property is contiguous or proximate to the Crocker
Square property in Boca Raton, Florida.
6. Approximately 8 acres of undeveloped property in Greenville, South Carolina,
owned by CRT South Carolina Development I, Inc.
7. Contract to acquire through the use of partnership interests two office
buildings in Greenville, South Carolina, known as Patewood I and Patewood
II.
8. Partnership interest in Benjamin Center Associates Joint Venture.
9. Partnership interest in Benjamin Center Associates II Joint Venture.
10. All rights under that certain Agreement of Purchase and Sale by and between
Crocker Realty Trust, Inc. and Connecticut General Life Insurance Company
(Gwennett County, Georgia property).
11. All rights under those certain Letters of Intent by and between Crocker
Realty Trust, Inc. and MSS Partners Limited and Woodlands Five Limited
Partnership (Woodlands I, II, III & V and 4.5 excess acres, Mississippi
property).
12. All rights under that certain Land Purchase Agreement between Crocker Realty
Trust, Inc. and Nationsbank, N.A. as Trustee for NCNB Real Estate Fund
(approximately 22.13 acres of undeveloped property located in Deep River
Corporate Center in Greensboro, North Carolina).
13. All rights under that certain Agreement to Form Partnership between
Towermarc Corporation and ADG Interests, Inc. (Shelby County, Tennessee
property).
14. All rights under that certain Agreement or Sale and Purchase of Real
Property between Wager L.L.C. and Deep River Investment Group L.L.C. and
Crocker Realty Trust, Inc. (an approximately 51,000 square foot office
building located in Deep River Corporate Center in Greensboro, North
Carolina).
15. All amounts receivable from CRT Leasing, Inc. by Crocker Realty Trust, Inc.
or any of its affiliates.
16. All cash or other proceed from the sale or other disposition or collection
of any or all of the foregoing items.
17. Furniture, fixture and equipment at the Company's home office as mutually
agreed by the Company and Buyer.
18. Any qualified REIT subsidiary whose only assets are Excluded Assets.
B-1
<PAGE>
APPENDIX C
August 29, 1996
Board of Directors
Crocker Realty Trust, Inc.
433 Plaza Real
Suite 335
Boca Raton, FL 33432
Gentlemen:
Crocker Realty Trust, Inc. (the "Company"), Highwoods Properties, Inc. (the
"Acquiror") and Cedar Acquisition Corporation, a subsidiary of the Acquiror (the
"Acquisition Sub"), have entered into an agreement dated as of April 29, 1996
(the "Agreement") pursuant to which the Company will be merged with the
Acquisition Sub in a transaction (the "Merger") in which each outstanding share
of the Company's common stock, par value $0.01 per share (the "Shares"), will be
converted into the right to receive $11.05243 in cash. In addition, certain
assets and liabilities excluded from the Merger shall be sold for $18,000,000
(the "Proceeds") to a newly formed entity ("Newco") which shall be controlled by
AP CRTI Holdings, L.P. and AEW Partners, L.P., the principal shareholders of the
Company, and operated by certain members of the Company's management, and each
of the Company's shareholders shall receive in the form of a special cash
dividend (the "Special Dividend") $0.60411 per share. The Merger is expected to
be considered by the shareholders of the Company at a special shareholders'
meeting and consummated on or shortly after the date of such meeting.
You have asked whether, in our opinion, the proposed consideration to be
received by the holders of the Shares other than the Acquiror and its affiliates
and the equity participants in Newco and their affiliates in the Merger plus the
Special Dividend is fair to the Company's shareholders from a financial point of
view.
In arriving at the opinion set forth below, we have, among other things:
1. Reviewed the Company's Annual Report, Form 10-K and related financial
information for the fiscal year ended December 31, 1995;
2. Reviewed the Company's Form S-11 dated March 18, 1996;
3. Reviewed the Company's quarterly report on Form 10-Q and related
unaudited financial information for the quarterly period ended March 31,
1996;
4. Reviewed the Company's quarterly report on Form 10-Q and related
unaudited financial information for the quarterly period ended June 30,
1996;
5. Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, funds from operations, assets and
prospects of the Company, furnished to us by the Company;
6. Conducted discussions with members of senior management of the Company
concerning the business and prospects of the Company;
C-1
<PAGE>
7. Reviewed the historical market prices and trading activity for the
Shares and compared them with those of certain publicly traded companies
which we deemed to be reasonably similar to the Company;
8. Compared the results of operations of the Company with those of certain
companies which we deemed to be reasonably similar to the Company;
9. Compared the underlying real estate assets of the Company with other
real estate assets which were deemed to be reasonably similar to those
of the Company;
10. Reviewed the Agreement; and
11. Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary.
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by the Company,
and we have not independently verified such information or undertaken an
independent asset-by-asset appraisal of the assets of the Company. With respect
to the financial forecasts furnished by the Company, we have assumed that they
have been reasonably prepared and reflect the best currently available estimates
and judgment of the Company's management as to the expected future financial
performance of the Company.
In connection with the preparation of this opinion, we have not been
authorized by the Company or the Board of Directors to solicit, nor have we
solicited, third-party indications of interest for the acquisition of all or any
part of the Company.
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services which is contingent upon the
consummation of the Merger. In addition, the Company has agreed to indemnify us
for certain liabilities which may arise out of the rendering of this opinion. We
have, in the past, provided financial advisory and financing services to the
Acquiror and have received fees for the rendering of such services. We acted as
underwriter in connection with a recent offering of the Acquiror's securities,
in part for the purpose of providing funds to be used by the Acquiror in
financing the Merger. In the ordinary course of our business, we may trade in
the equity securities of the Company and the Acquiror for our own account and
for the accounts of our customers.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed consideration to be received by the holders of the Shares other
than the Acquiror and its affiliates and the equity participants in Newco and
their affiliates pursuant to the Merger plus the Special Dividend is fair to
such shareholders from a financial point of view.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
C-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CROCKER REALTY TRUST, INC.
Pro Forma Financial Statements
Pro Forma Consolidated Balance Sheet as of June 30, 1996....................................................... F-5
Notes to Pro Forma Consolidated Balance Sheet as of June 30, 1996.............................................. F-6
Pro Forma Consolidated Statement of Operations for the six months ended June 30, 1996.......................... F-7
Notes to Pro Forma Consolidated Statement of Operations
for the six months ended June 30, 1996...................................................................... F-8
Pro Forma Consolidated Statement of Operations for the year ended December 31, 1995............................ F-9
Notes to Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1995........................................................................ F-10
Financial Statements
Consolidated Balance Sheets of the Company as of June 30, 1996 and December 31, 1995........................... F-12
Consolidated Statements of Operations of the Company
for the six months and three months ended June 30, 1996 and 1995............................................ F-13
Consolidated Statements of Cash Flows of the Company
for the six months ended June 30, 1996 and 1995............................................................. F-14
Notes to Consolidated Financial Statements..................................................................... F-16
Independent Auditors' Report................................................................................... F-21
Independent Auditors' Report................................................................................... F-22
Report of Independent Accountants.............................................................................. F-23
Independent Auditors' Report................................................................................... F-24
Consolidated Balance Sheet of the Company as of December 31, 1995
and Combined Balance Sheet of the Predecessor Entities as of December 31, 1994.............................. F-25
Consolidated Statement of Operations of the Company for the year ended December 31, 1995
and Combined Statements of Operations of the Predecessor Entities for the
year ended December 31, 1994, and the period from November 17, 1993
(Inception for AP Southeast Portfolio Partners, L.P.) to December 31, 1993
and the period from
October 28, 1993 (Inception for AP Fontaine III Partners, L.P.) to December 31, 1993........................ F-27
Consolidated Statement of Stockholders' Equity of the Company for the year ended December 31, 1995 and Combined
Statements of Owners' Equity of the Predecessor Entities for the year
ended December 31, 1994, and the period from November 17, 1993
(Inception for AP Southeast Portfolio Partners, L.P.) to December 31, 1993 and the period from
October 28, 1993 (Inception for AP Fontaine III Partners, L.P.) to December 31, 1993........................ F-28
Consolidated Statement of Cash Flows of the Company for the year ended December 31, 1995 and Combined
Statements of Cash Flows of the Predecessor Entities for the year ended
December 31, 1994, and the period from November 17, 1993
(Inception for AP Southeast Portfolio Partners, L.P.) to December 31, 1993 and the period
from October 28, 1993 (Inception for AP Fontaine III Partners, L.P.) to December 31, 1993................... F-29
Notes to Consolidated and Combined Financial Statements........................................................ F-32
Schedule III--Real Estate and Accumulated Depreciation......................................................... F-46
F-1
<PAGE>
PAGE
----
CRT ACQUIRED PROPERTIES
Certain Properties Owned by Towermarc Corporation
Report of Independent Auditors................................................................................. F-50
Historical Summary of Gross Income and Direct Operating Expenses
for the year ended December 31, 1995........................................................................ F-51
Notes to Historical Summary of Gross Income and Direct Operating Expenses...................................... F-52
Sabal Corporation and Subsidiaries
Report of Independent Accountants.............................................................................. F-54
Historical Summary of Consolidated Gross Revenue and Direct Operating Expenses
for the period January 1, 1995 through December 29, 1995.................................................... F-55
Notes to Historical Summary of Consolidated Gross Revenue and Direct Operating Expenses........................ F-56
CROCKER REALTY INVESTORS, INC.
Balance Sheets as of June 30, 1995 and December 31, 1994 (unaudited)........................................... F-60
Statements of Operations for the six months and three months ended June 30, 1995 and 1994 (unaudited).......... F-61
Statements of Cash Flows for the six months ended June 30, 1995 and 1994 (unaudited)........................... F-62
Notes to Financial Statements.................................................................................. F-64
Independent Auditors' Report................................................................................... F-68
Balance Sheet as of December 31, 1994 and 1993................................................................. F-69
Statements of Operations for the years ended December 31, 1994 and 1993........................................ F-70
Statements of Stockholders' Equity for the years ended December 31, 1994 and 1993.............................. F-71
Statements of Cash Flows for the years ended December 31, 1994 and 1993........................................ F-72
Notes to Financial Statements.................................................................................. F-74
CROCKER & SONS, INC.
Balance Sheets as of June 29, 1995 and December 31, 1994 (unaudited)........................................... F-83
Statement of Operations for the period from January 1, 1995 through June 29, 1995 (unaudited).................. F-84
Statement of Stockholders' Equity for the period from January 1, 1995 through June 29, 1995 (unaudited)........ F-85
Statement of Cash Flows for the period from January 1, 1995 through June 29, 1995 (unaudited).................. F-86
Notes to Financial Statements.................................................................................. F-87
Independent Auditors' Report................................................................................... F-91
Balance Sheet as of December 31, 1994.......................................................................... F-92
Statement of Operations for the year ended December 31, 1994................................................... F-93
Statement of Stockholders' Equity (Deficit) for the year ended December 31, 1994............................... F-94
Statement of Cash Flows for the year ended December 31, 1994................................................... F-95
Notes to Financial Statements.................................................................................. F-96
</TABLE>
F-2
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS
The pro forma consolidated balance sheet as of June 30, 1996 has been
presented as if Crocker Realty Trust, Inc.'s (the Company) August 1996 sale to
Newco of the Excluded Assets, the assumption by Newco of Excluded Liabilities,
and the special cash dividend related thereto for stockholders of record on
August 26, 1996 payable on August 30, 1996, had all occurred on June 30, 1996.
The Excluded Assets consist of parcels of undeveloped land owned by the Company
with a book value of $17.2 million as of June 30, 1996 and contracts to acquire
new properties. Such contracts have no book value at June 30, 1996. If the
Merger is not ultimately consummated, the Company may elect to require Newco to
transfer the Excluded Assets back to the Company at Newco's cost. The historical
financial statements of operating properties subject to the existing purchase
contracts that are included in the Excluded Assets, and the pro forma effects
thereof, have not been provided and are not included in this pro forma
consolidated balance sheet because management currently considers the likelihood
of exercising its election to reacquire the Excluded Assets from Newco to be
remote and such information is not otherwise considered by management to be
material to investors.
The pro forma statement of operations for the six months ended June 30,
1996 has been presented as if (a) the Company had issued 1,875,000 shares of
Common Stock at $0.01 par value for $8.00 per share in the Company's January 12,
1996 private placement on January 1, 1996 and used the proceeds thereof as
described in the Notes hereto, (b) the acquisition of certain properties from
Towermarc Corporation on January 16, 1996 on January 1, 1996, and (c) the
Company's August 1996 sale to Newco of the Excluded Assets, the assumption by
Newco of Excluded Liabilities, and the special cash dividend related thereto
occurred as of December 31, 1995. In management's opinion, all adjustments
necessary to reflect the above transactions have been made.
The pro forma statement of operations for the year ended December 31, 1995
has been presented as if (a) the Company had issued 1,875,000 shares of Common
Stock at $0.01 par value for $8.00 per share in the Company's January 12, 1996
private placement on January 1, 1995 and used the proceeds thereof as described
in the Notes hereto, (b) the acquisition of certain properties from Towermarc
Corporation on January 16, 1996 on January 1, 1995, (c) the acquisition of
certain properties from Sabal Corporation and Subsidiaries on December 29, 1995
on January 1, 1995, (d) the Company had issued 8,818,231 shares of Common Stock
at $0.01 par value for $7.35 per share in the Company's December 28, 1995
private placement on January 1, 1995 and used the proceeds thereof as described
in the Notes hereto, (e) the acquisition by merger of CRI on July 1, 1995 and
CSI and CRMSI on June 30, 1995 had occurred on January 1, 1995, and (f ) the
Company's August 1996 sale to Newco of the Excluded Assets, the assumption by
Newco of Excluded Liabilities, and the special cash dividend related thereto
occurred as of December 31, 1994. In management's opinion, all adjustments
necessary to reflect the above transactions have been made.
The pro forma balance sheet and statement of operations should be read in
conjunction with the consolidated historical financial statements of the Company
included elsewhere herein.
The pro forma balance sheet and statement of operations are not necessarily
indicative of what the actual financial position and results of operations would
have been as of and for the period indicated, nor does it purport to represent
the future financial postition and results of operations of the Company.
F-3
<PAGE>
CROCKER REALTY TRUST, INC.
PRO FORMA FINANCIAL STATEMENTS
F-4
<PAGE>
CROCKER REALTY TRUST, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE PRO FORMA
COMPANY ADJUSTMENTS PRO FORMA
------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Investment in real estate:
Rental properties, net....................................... $ 355,108 (810)(A) 354,298
Office building under construction........................... 3,858 -- 3,858
Land held for investment..................................... 16,396 (16,396)(A) --
Other assets:
Cash & cash equivalents...................................... 9,752 -- 9,752
Restricted cash.............................................. 11,997 -- 11,997
Rents and expense reimbursements receivable, net............. 1,079 -- 1,079
Accounts receivable from managed properties.................. 562 -- 562
Deferred straight-line rents receivable...................... 3,802 -- 3,802
Deferred acquisition and offering costs...................... 100 -- 100
Deferred loan costs, net..................................... 4,094 -- 4,094
Deferred leasing costs, net.................................. 3,142 -- 3,142
Prepaid expenses and other assets............................ 611 -- 611
Furniture, fixtures and equipment, net....................... 649 -- 649
Management contracts, net.................................... 1,221 -- 1,221
Goodwill, net................................................ 3,776 -- 3,776
---------- ------- -------
Total assets................................................... $ 416,147 (17,206) 398,941
========== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable................................................ 244,267 -- 244,267
Accounts payable and accrued expenses........................ 2,632 -- 2,632
Accrued interest expense..................................... 198 -- 198
Accrued real estate taxes.................................... 3,304 -- 3,304
Accrued acquisition and offering costs....................... 40 -- 40
Dividend payable............................................. 4,155 -- 4,155
Rents paid in advance........................................ 1,253 -- 1,253
Tenant security deposits..................................... 1,402 -- 1,402
Deferred straight-line rents payable......................... 311 -- 311
Other liabilities............................................ 1,894 -- 1,894
---------- ------- -------
Total liabilities.............................................. 259,456 -- 259,456
========== ======= =======
Stockholders' equity:
Preferred stock.............................................. -- -- --
Common stock................................................. 270 -- 270
Additional paid-in capital................................... 156,421 (17,206)(A) 139,215
Retained earnings (deficit).................................. -- -- --
---------- ------- -------
Total stockholders' equity..................................... 156,691 (17,206) 139,485
---------- ------- -------
Total liabilities and stockholders' equity..................... $ 416,147 (17,206) 398,941
========== ======= =======
</TABLE>
See accompanying notes to Pro Forma Consolidated Balance Sheet.
F-5
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
ADJUSTMENTS
(A) Reflects the August 1996 sale to Newco of the Excluded Assets, the
assumption by Newco of Excluded Liabilities, and the special cash dividend
related thereto for stockholders of record on August 26, 1996 payable on
August 30, 1996, as if each of the above occurred on June 30, 1996. The
Excluded Assets consist of parcels of undeveloped land owned by the Company
with a book value of $17.2 million as of June 30, 1996 and contracts to
acquire new properties. Such contracts have no book value at June 30, 1996.
If the Merger is not ultimately consummated, the Company may elect to
require Newco to transfer the Excluded Assets back to the Company at Newco's
cost. The historical financial statements of operating properties subject to
the existing purchase contracts that are included in the Excluded Assets,
and the pro forma effects thereof, have not been provided and are not
included in this pro forma consolidated balance sheet because management
currently considers the likelihood of exercising its election to reacquire
the Excluded Assets from Newco to be remote and such information is not
otherwise considered by management to be material to investors.
The Excluded Liabilities to be assumed by Newco are (i) the payment
obligations under a master lease to be entered into between Newco and
Highwoods, which total $1.8 million, (ii) any liability arising out of the
Company's indemnification obligation with respect to a particular lawsuit,
(iii) amounts payable to Highwoods relating to expenses incurred by the
Company in connection with the Merger (including solicitation fees payable,
if any, in connection with the exercise of the Public Warrants), in excess of
$9,150,000, if any. No adjustments are required to the pro forma consolidated
balance sheet of the Company as of June 30, 1996 to reflect the assumption of
the Excluded Liabilities by Newco.
F-6
<PAGE>
CROCKER REALTY TRUST, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT COMMON STOCK AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-----------
(A) PRO FORMA
ACQUISITION ------------
THE AND CROCKER
COMPANY PRIVATE REALTY
HISTORICAL PLACEMENT TRUST, INC.
---------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Rental income and tenant reimbursements..................... $ 34,604 520 35,124
Management fees--building, development
and construction......................................... 828 11 839
Leasing commissions......................................... 334 -- 334
--- --- ---
Total revenue............................................ 35,766 531 36,297
------ --- ------
Operating expenses:
Rental property operating expenses.......................... 8,845 125 8,970
Real estate taxes and insurance............................. 3,559 (171) 3,388
Management fees............................................. 203 -- 203
Amortization of deferred leasing costs...................... 420 1 421
Depreciation and amortization of property and equipment..... 5,634 107 5,741
Amortization of goodwill and management contracts........... 268 -- 268
General and administrative expenses......................... 2,896 -- 3,896
Costs incurred for terminated offering...................... 486 -- 486
--- ---
Total operating expenses................................. 22,311 62 22,373
------ -- ------
Operating income (loss).................................. 13,455 469 13,924
------ --- ------
Other income (expense):
Interest and other income................................... 671 1 672
Interest expense............................................ (10,420) (215) (10,635)(B)
------- ---- -------
Total other income (expense)............................. (9,749) (214) (9,963)
------ ---- ------
Net income.................................................... $ 3,706 255 3,961
========= === =====
Number of outstanding shares of common stock(C)............... 26,958,145
==========
Net income per share(C)....................................... $ 0.15
============
</TABLE>
F-7
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
ADJUSTMENTS
(A) Reflects the historical operations of the Towermarc Properties, which were
acquired by the Company on January 16, 1996, adjusted on a pro forma basis
for interest (assumed debt of $57.8 million, net of $9.4 million prepaid
using the proceeds of the Fortis private placement, at an effective rate of
9.0%) and depreciation expense, for the period from January 1, 1996 to
January 16, 1996, the date of acquisition of Towermarc. Depreciation expense
is calculated on the purchase price allocated to buildings ($61.1 million),
site improvements ($5.2 million) and tenant improvements ($2.0 million) with
depreciation calculated on a straight-line basis over useful lives of 40
years, 15 years, and the life of the respective leases, respectively.
Also reflects the August 1996 sale to Newco of the Excluded Assets, the
assumption by Newco of Excluded Liabilities, and the special cash dividend
related thereto for stockholders of record on August 26, 1996 payable on
August 30, 1996, as if each of the above occurred on December 31, 1995. The
Excluded Assets consist of parcels of undeveloped land owned by the Company
with a book value of $17.2 million as of June 30, 1996 and contracts to
acquire new properties. If the Merger is not ultimately consummated, the
Company may elect to require Newco to transfer the Excluded Assets back to
the Company at Newco's cost. The historical financial statements of
operating properties subject to the existing purchase contracts that are
included in the Excluded Assets, and the pro forma effects thereof, have not
been provided and are not included in this pro forma consolidated statement
of operations because management currently considers the likelihood of
exercising its election to reacquire the Excluded Assets from Newco to be
remote and such information is not otherwise considered by management to
be material to investors. The pro forma impact as a result of excluding the
undeveloped land for the six months ended June 30, 1996 resulted in a
decrease in real estate taxes of $225,000.
(B) Pro forma interest expense for the six months ended June 30, 1996 includes
amortization of deferred loan costs of $584,000.
(C) Reflects income per share based on 26,958,145 shares of Common Stock assumed
outstanding during the period after adjusting for the shares issued for the
acquisition of the Towermarc Properties and the Fortis private placement as
if they were issued on January 1, 1996.
F-8
<PAGE>
CROCKER REALTY TRUST, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT COMMON STOCK AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-----------
(A) PRO FORMA
ACQUISITIONS -----------
THE AND CROCKER
COMPANY PRIVATE REALTY
HISTORICAL PLACEMENTS TRUST, INC.
---------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Rental income and tenant reimbursements..................................... $ 42,489 23,985 66,474
Management fees--building, development
and construction 618 1,051 1,669
Leasing commissions......................................................... 152 833 985
--- --- ---
Total revenue............................................................ 43,259 25,869 69,128
------ ------ ------
Operating expenses:
Rental property operating expenses.......................................... 8,632 7,016 15,648
Real estate taxes and insurance............................................. 3,680 2,998 6,678
Management fees............................................................. 1,289 (845) 444
Amortization of deferred leasing costs...................................... 682 -- 682
Depreciation and amortization of property
and equipment............................................................ 6,414 4,616 11,030
Amortization of goodwill and management contracts........................... 270 265 535
General and administrative expenses......................................... 2,813 2,376 5,189
----- ----- -----
Total operating expenses................................................. 23,780 16,426 40,206
------ ------ ------
Operating income (loss).................................................. 19,479 9,443 28,922
------ ----- ------
Other income (expense):
Interest and other income................................................... 883 226 1,109
Gain from sale of land...................................................... 124 -- 124
Interest expense............................................................ (16,212) (5,689) (21,901)(B)
------- ------ -------
Total other income (expense)............................................. (15,205) (5,463) (20,668)
------- ------ -------
Income (loss) before extraordinary item (C)................................... $ 4,274 3,980 8,254
========== ===== =====
Number of outstanding shares of common stock (D).............................. 26,925,431
==========
Income per share before extraordinary item (D)................................ $ 0.31
==========
</TABLE>
See accompanying notes to Pro Forma Consolidated Statement of Operations.
F-9
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
ADJUSTMENTS
(A) Reflects the historical operations of CRI, CSI, CRMSI, the Sabal Properties
and the Towermarc Properties, adjusted on a pro forma basis for interest and
depreciation expense, for the period of time during 1995 prior to
acquisition by the Company.
Interest expense reflects incremental indebtedness (net of $9.4 million of
debt prepaid with the proceeds of the private placement with Fortis) of
approximately $97.4 million (debt on Towermarc and CRI Properties) for the
first half of 1995 at an effective rate of 9.91% (the rates in effect at the
acquisition date) and $57.8 million (debt on Towermarc Properties) for the
second half of 1995 at an effective rate of 9.54% (the rate in effect at the
acquisition date) plus loan cost amortization of $292,000. The interest
rates used are based on the terms of the notes acquired from CRI and
Towermarc for the period presented. Historical indebtedness was also reduced
by $20 million which was prepaid on December 28, 1995 using the proceeds of
the private placement with AEW. The $20 million had a fixed rate of interest
of 11.5%. Depreciation is calculated using the respective purchase prices
allocated to buildings, site improvements and tenant improvements with
depreciation calculated on a straight-line basis over useful lives of 40
years, 15 years, and the life of the respective leases, respectively.
Also reflects the August 1996 sale to Newco of the Excluded Assets, the
assumption by Newco of Excluded Liabilities, and the special cash dividend
related thereto for stockholders of record on August 26, 1996 payable on
August 30, 1996, as if each of the above occurred on December 31, 1994. The
Excluded Assets consist of parcels of undeveloped land owned by the Company
with a book value of $17.2 million as of June 30, 1996 and contracts to
acquire new properties. If the Merger is not ultimately consummated, the
Company may elect to require Newco to transfer the Excluded Assets back to
the Company at Newco's cost. The historical financial statements of
operating properties subject to the existing purchase contracts that are
included in the Excluded Assets, and the pro forma effects thereof, have not
been provided and are not included in this pro forma consolidated statement
of operations because management currently considers the likelihood of
exercising its election to reacquire the Excluded Assets from Newco to be
remote and such information is not otherwise considered by management to be
material to investors. The pro forma impact as a result of excluding the
undeveloped land for the year ended December 31, 1995 resulted in a decrease
in real estate taxes of $450,000.
(B) Pro forma interest expense for the year ended December 31, 1995 includes
amortization of deferred loan costs of $1,029,000.
(C) Income before extraordinary item is presented as the last line item of the
pro forma statement of operations, since the statement excludes the
significant non-recurring charge of the extraordinary loss on early
extinguishment of debt.
(D) Reflects income per share based on 26,925,431 shares of Common Stock
outstanding after issuing 1,875,000 shares of Common Stock in the Fortis
private placement on January 12, 1996 and issuing 1,687,939 shares of Common
Stock in the acquisition of the Towermarc properties on January 16, 1996.
F-10
<PAGE>
CROCKER REALTY TRUST, INC.
FINANCIAL STATEMENTS
F-11
<PAGE>
CROCKER REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
ASSETS
<S> <C> <C>
Investment in real estate:
Rental properties, net of accumulated depreciation of $17,080 and $11,590 at June 30, 1996
and December 31, 1995, respectively..................................................... $ 355,108 279,407
Office building under construction.......................................................... 3,858 --
Land held for investment.................................................................... 16,396 11,159
Other assets:
Cash and cash equivalents................................................................... 9,752 5,719
Restricted cash............................................................................. 11,997 9,007
Rents and expense reimbursements receivable, net of allowance for doubtful accounts of
$135 and $141 at June 30, 1996 and December 31, 1995, respectively........................ 1,079 969
Accounts receivable from managed properties................................................. 562 219
Deferred straight-line rents receivable..................................................... 3,802 3,148
Deferred acquisition, offering and merger costs............................................. 100 2,156
Deferred loan costs, net of accumulated amortization of $1,908 and $1,312 at
June 30, 1996 and December 31, 1995, respectively......................................... 4,094 3,821
Deferred leasing costs, net of accumulated amortization of $1,411 and $1,025 at
June 30, 1996 and December 31, 1995, respectively......................................... 3,142 2,689
Prepaid expenses and other assets........................................................... 611 666
Furniture, fixtures and equipment, net of accumulated depreciation of $142 and $60 at
June 30, 1996 and December 31, 1995, respectively......................................... 649 451
Management contracts, net of accumulated amortization of $208 and $105 at
June 30, 1996 and December 31, 1995, respectively......................................... 1,221 1,324
Goodwill, net of accumulated amortization of $330 and $165 at June 30, 1996 and
December 31, 1995, respectively........................................................... 3,776 3,941
----- -----
Total assets......................................................................... $ 416,147 324,676
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable............................................................................... $ 244,267 181,873
Accounts payable and accrued expenses....................................................... 2,632 2,121
Accrued interest expense.................................................................... 198 361
Accrued real estate taxes................................................................... 3,304 254
Accrued acquisition, offering and merger costs.............................................. 40 1,805
Dividend payable............................................................................ 4,155 --
Rents paid in advance....................................................................... 1,253 679
Tenant security deposits.................................................................... 1,402 1,369
Deferred straight-line rents payable........................................................ 311 156
Other liabilities........................................................................... 1,894 1,919
----- -----
Total liabilities.................................................................... 259,456 190,537
------- -------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized and unissued 10,000,000 shares.................. -- --
Common stock, $.01 par value. Authorized 50,000,000 shares; issued and outstanding
26,989,587 shares at June 30, 1996 and 23,362,492 shares at December 31, 1995........... 270 234
Additional paid-in capital.................................................................. 156,421 132,721
Retained earnings........................................................................... -- 1,184
------- -----
Total stockholders' equity........................................................... 156,691 134,139
------- -------
Total liabilities and stockholders' equity........................................... $ 416,147 324,676
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
CROCKER REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Rental income and tenant reimbursements.......................... $ 34,604 18,537 17,634 9,376
Management fees--building, development and construction.......... 828 -- 436 --
Leasing commissions.............................................. 334 -- 136 --
------ ------ ------ -----
35,766 18,537 18,206 9,376
------ ------ ------ -----
Expenses:
Rental property operating expenses............................... 8,845 2,964 4,251 1,645
Real estate taxes and insurance.................................. 3,559 1,619 1,958 798
Management fees.................................................. 203 1,016 88 505
Amortization of deferred leasing costs........................... 420 306 223 153
Depreciation and amortization of property and equipment.......... 5,634 2,712 2,971 1,400
Amortization of goodwill and management contracts................ 268 -- 134 --
General and administrative expenses.............................. 2,896 319 1,416 40
Costs incurred for terminated offering........................... 486 -- 96 --
------ ------ ------ -----
22,311 8,936 11,137 4,541
------ ------ ------ -----
Operating income.......................................... 13,455 9,601 7,069 4,835
------ ------ ------ -----
Other income (expense):
Interest and other income........................................ 671 492 371 254
Interest expense................................................. (10,420) (6,991) (5,365) (3,489)
------ ------ ------ -----
Total other income (expense).............................. (9,749) (6,499) (4,994) (3,235)
------ ------ ------ -----
Net income................................................ $ 3,706 3,102 2,075 1,600
=========== ===== ===== =====
Net income per share of common stock............................... $ .14 0.25 0.08 0.13
=========== ==== ==== ====
Weighted average number of shares outstanding...................... 26,705,705 12,565,071 26,982,296 12,598,825
=========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
CROCKER REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except for shares issued)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................... $ 3,706 3,102
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment.................................... 5,634 2,712
Amortization of loan costs................................................................. 571 325
Amortization of deferred leasing costs..................................................... 420 334
Amortization of organization costs......................................................... 2 2
Amortization of goodwill and management contracts.......................................... 268 --
Bad debt expense........................................................................... 33 23
Stock bonuses.............................................................................. 261 --
(Increase) decrease in operating assets:
Deferred straight-line rents receivable.................................................. (654) (636)
Rents and other receivables.............................................................. (486) 235
Prepaid expenses and other assets........................................................ 55 (419)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses.................................................... 547 (427)
Accrued interest......................................................................... (401) --
Accrued real estate taxes................................................................ 2,979 1,161
Rents paid in advance.................................................................... 574 (97)
Tenant security deposits................................................................. 33 320
Deferred straight-line rents payable..................................................... 155 --
----- -----
Total adjustments..................................................................... 9,991 3,533
----- -----
Net cash provided by operating activities............................................. 13,697 6,635
------ -----
Cash flows from investing activities:
Acquisition of rental properties and land.................................................... (1,659) --
Acquisition of land held for investment...................................................... (1,776) --
Office building under construction........................................................... (3,293) --
Payments for building and tenant improvements................................................ (2,292) (2,140)
Payment of deferred leasing costs............................................................ (830) (915)
Payments for furniture, fixtures and equipment............................................... (284) (245)
Refund of deferred acquisition costs, net.................................................... 95 --
Cash received from acquisition of management companies....................................... -- 3
----- -----
Net cash used in investing activities................................................. (10,039) (3,297)
------- ------
Cash flows from financing activities:
Proceeds from issuance of common stock....................................................... $ 15,085 --
Proceeds from borrowing under line of credit................................................. 5,000 --
Capital contribution......................................................................... -- 3,356
Net increase in restricted cash.............................................................. (2,989) (1,123)
Payments under notes payable................................................................. (9,843) --
Dividends paid............................................................................... (4,856) (2,137)
Payment of offering costs.................................................................... (964) (620)
Payment of financing costs................................................................... (998) --
Payment of deferred merger costs............................................................. (60) --
----- -----
Net cash provided by (used in) financing activities................................... 375 (524)
----- -----
Net increase in cash and cash equivalents............................................. 4,033 2,814
Cash and cash equivalents at beginning of period............................................... 5,719 132
----- ---
Cash and cash equivalents at end of period..................................................... $ 9,752 2,946
========= =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid................................................................................ $ 10,337 6,666
========= =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
CROCKER REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(in thousands, except for shares issued)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1995, the Company exchanged 62,500
shares of common stock for the shares of common stock of Options Corp. held by
the Apollo Fund, 1,110 shares of common stock for the outstanding shares of
common stock of Operating Corp. held by an affiliate of the Apollo Fund, and 31
shares of common stock for the outstanding shares of common stock of Fontaine
Operating Corp. held by an affiliate of the Apollo fund.
On June 30, 1995, the Company issued 637,500 shares of common stock for all
of the outstanding common stock of CSI and CRMSI. In connection with the
acquisition, the Company succeeded to the interests in the assets of CSI and
CRMSI with a fair value of approximately $6,105,000 and to the liabilities of
CSI and CRMSI of approximately $904,000.
During the six months ended June 30, 1996, the Company issued 24,000 shares
of common stock which are fully-vested and 31,656 shares of common stock which
vest 100% in three years to certain officers of the Company.
On January 16, 1996, the Company issued 1,687,939 shares of common stock in
connection with the Towermarc acquisition. Details of assets acquired,
liabilities assumed and common stock issued in connection with the Towermarc
acquisition is as follows (in thousands):
Rental properties........................................ $(79,143)
Land held for investment................................. (3,460)
Deferred acquisition costs............................... 1,713
Mortgage notes payable................................... 67,237
Accrued interest expense................................. 238
Accrued real estate taxes................................ 71
Accrued acquisition costs................................ (975)
Common stock............................................. 17
Additional paid-in capital............................... 12,643
--------
Net cash used in acquisition............................. $ (1,659)
========
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND FORMATION TRANSACTIONS
Crocker Realty Trust, Inc. (the "Company') was incorporated under the
Maryland General Corporation Law on September 21, 1994 under the name of
Southeast Realty Corp. On June 30, 1995, the Company changed its name to Crocker
Realty Trust, Inc. The Company was formed to succeed to the interests of Apollo
Real Estate Investment Fund, L.P. (the "Apollo Fund") and its affiliates in AP
Southeast Portfolio Partners, L.P. ("AP Southeast Partnership"), AP-GP Southeast
Portfolio Partners, L.P., Southeast Portfolio Operating Corporation, AP Fontaine
III Partners, L.P., AP-GP Fontaine III Partners, L.P., Fontaine III Operating
Corporation and Southeast Options Operating Corporation (collectively, the
"Predecessor Entities"), which collectively include a portfolio of 47 office and
office/service properties and options to acquire up to five parcels of
undeveloped land adjacent to certain of such properties.
The Company accounted for the acquisitions of the interests of the Apollo
Fund and its affiliates at historical cost in a manner similar to that in a
pooling of interests accounting due to the above entities being under the common
control of the Apollo Fund and its affiliates.
On June 30, 1995, pursuant to an Agreement and Plan of Merger, dated as of
September 29, 1994, as amended (the "CRMSI Merger Agreement") among the Company,
SER Management, Inc. ("SER Management"), Crocker Realty Management Services,
Inc. ("CRMSI") and Crocker & Sons, Inc. ("CSI"), CRMSI and CSI merged with and
into SER Management, a wholly-owned subsidiary of the Company (the "CRMSI
Merger"). The outstanding shares of CRMSI and CSI were exchanged for 637,500
shares of the Company's common stock, of which 457,531 shares were issued to the
Chairman of the Board and Chief Executive Officer of the Company and his spouse,
149,974 shares were issued to the President and Chief Operating Officer of the
Company and 29,995 shares were issued to the Executive Vice President and Chief
Financial Officer of the Company.
As a result of the CRMSI Merger, the Company succeeded to the interests of
the property, asset and construction management business and leasing and
brokerage business of CRMSI and CSI and to their respective assets and
liabilities.
On July 1, 1995, pursuant to an Agreement and Plan of Merger, dated as of
September 29, 1994, as amended, (the "CRI Merger Agreement"), among the Company,
SER Acquisition, Inc. ("SER Acquisition") and Crocker Realty Investors, Inc.
("CRI"), CRI merged with and into SER Acquisition, a wholly-owned subsidiary of
the Company (the "CRI Merger"). Upon consummation of the CRI Merger; (i) the
outstanding shares of common stock of CRI were exchanged for 1,020,000 shares of
the Company's common stock, (ii) the 2,340,000 CRI public warrants each
entitling the holder thereof to purchase, during the four year period ending
January 21, 1998, one share of CRI common stock at $10.00 per share (subject to
adjustment), were assumed by the Company and entitle the holders thereof to
purchase shares of the Company's common stock at the same price and on the same
terms and conditions as set forth in the CRI public warrants, and (iii) purchase
options held by certain individuals and GKN Securities Corp. (the Underwriter of
CRI's 1993 initial public offering) to purchase an aggregate of 210,292 shares
of CRI common stock at an exercise price of $7.85 per share of CRI common stock
and the warrant held by General Electric Capital Corporation to purchase an
aggregate of 160,000 shares of CRI common stock at an exercise price of $10.00
per share of CRI common stock were assumed by the Company and entitle the
holders thereof to purchase shares of the Company's common stock at the same
price and on the same terms and conditions as set forth in the instruments
pursuant to which such options and warrant were issued. On December 28, 1995,
the Company entered into an agreement to pay $360,000 to certain individuals and
GKN Securities Corp. for their purchase options and other rights held by GKN
Securities Corp. The amount was accrued and charged to additional paid-in
capital at December 31, 1995 and was paid in January 1996.
F-16
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) ORGANIZATION AND FORMATION TRANSACTIONS--(CONTINUED)
As a result of the CRI Merger, the Company succeeded to the interests of
CRI in a portfolio of three office properties and to all of the assets and
liabilities of CRI.
(2) BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been
prepared by the Company without audit. The statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the Company's financial
position as of June 30, 1996 and December 31, 1995, and the results of its
operations for the six months and three months ended June 30, 1996 and 1995, and
cash flows for the six months ended June 30, 1996 and 1995. These consolidated
financial statements should be read in conjunction with the 1995 financial
statements and notes thereto included in the Company's Form 10-K.
The consolidated results of operations for the six and three months ended
June 30, 1996 and 1995 are not necessarily indicative of the results to be
expected for the full year.
Certain reclassifications have been made to the prior year balances in
order to conform to the presentation used in the current period.
(3) INCOME TAXES
The Company qualifies as a real estate investment trust ("REIT") under the
provisions of the Internal Revenue Code. Under these provisions, the Company is
required to distribute at least 95% of its taxable income to its shareholders to
maintain this qualification and not be subject to federal income taxes for the
portion of taxable income distributed. To maintain REIT qualification, the
Company must also satisfy tests concerning the nature of its assets and income
and meet certain recordkeeping requirements.
(4) ACQUISITIONS AND PRIVATE PLACEMENTS
As a result of the July 1, 1995 CRI Merger and the June 30, 1995 CRMSI
Merger, the Company succeeded to the interests of CRI in a portfolio of three
office properties and to the property, asset and construction management
business and leasing and brokerage business of CRMSI and CSI and to all of the
assets and liabilities of the respective entities.
The CRMSI Merger was accounted for under the purchase method of accounting
based on the estimated fair value of the assets acquired as there was no
established market for the Company's common stock prior to the consummation of
the CRMSI Merger. The assets acquired in the CRMSI Merger are comprised
primarily of building, construction and leasing management agreements and
leasing and brokerage operations. Of the total estimated fair value of the
assets acquired, approximately $1.4 million was classified as Management
Contracts, and approximately $3.7 million was classified as Goodwill. The
Company owns 100% of the issued and outstanding non-voting preferred stock and
9.9% of the issued and outstanding common stock of the leasing company, CRT
Leasing, Inc., a Delaware corporation, which provides leasing and brokerage
services to
F-17
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) ACQUISITIONS AND PRIVATE PLACEMENTS--(CONTINUED)
properties not owned by the Company. CRT Leasing, Inc. has been consolidated
into the Company's financial statements. The non-voting preferred stock
generally is entitled to dividends equal to 95% of all distributions of CRT
Leasing, Inc. The portion of the estimated fair value allocated to Management
Contracts is being amortized over a period of 5-10 years and the portion
attributable to Goodwill is being amortized over a period of 20 years.
The CRI Merger was accounted for under the purchase method of accounting
based on the estimated fair value of the assets and liabilities acquired as
there was no established market for the Company's common stock prior to the
consummation of the CRI Merger. The assets acquired were comprised primarily of
three office properties with a combined appraised value of approximately $48.1
million encumbered by approximately $41.4 million of variable interest rate
mortgage notes payable.
On December 28, 1995, the Company sold 8,818,231 shares of Common Stock to
AEW Partners, L.P., a pension fund advisor ("AEW"), in a private placement
transaction for $64.8 million (approximately $7.35 per share).
On December 29, 1995, the Company completed the acquisition of 11 buildings
and approximately 278 acres of land within Sabal Park in Tampa, Florida, from
Sabal Corporation, a wholly-owned subsidiary of Stone and Webster Incorporated.
The assets were acquired for an aggregate cash consideration of $42.5 million.
In a concurrent transaction, the Company contracted to sell approximately 63
acres of the land acquired from Sabal Corporation to Security Capital Industrial
Trust and sold approximately 48 of such acres for $2.1 million on December 29,
1995 with the sale of remaining land (consisting of two parcels) contingent upon
the resolution or satisfaction of certain conditions.
On January 12, 1996, the Company sold 1,875,000 shares of the Common Stock
to Fortis Benefits Insurance Company and its affiliate, Time Insurance Company,
in a private placement transaction for $15.0 million ($8.00 per share).
On January 16, 1996, the Company and certain of its subsidiaries completed
the acquisition of (i) nine office buildings located in Memphis, Tennessee, and
in Tampa and Jacksonville, Florida, (ii) four parcels of land in Memphis and
Tampa and (iii) management contracts for an aggregate of approximately 700,000
square feet of space in Memphis and Tampa, each from affiliates of Towermarc
Corporation.
The following unaudited pro forma consolidated results of operations for
the six months ended June 30, 1996 and 1995 have been prepared assuming the
above transactions occurred at the beginning of each such period, after giving
effect to certain adjustments, including depreciation and amortization. The
following unaudited pro forma consolidated results of operations is not
necessarily indicative of results of operations that would have occurred had the
transactions been made as of those dates or of results that may occur in the
future (in thousands except share and per share amounts):
JUNE 30,
-------------------------
1996 1995
----------- ----------
(UNAUDITED)
Revenue............................................... $ 36,298 34,564
=========== ==========
Net income............................................ $ 3,736 3,840
=========== ==========
Net income per common share........................... $ 0.14 0.14
=========== ==========
Weighted average number of common shares outstanding.. 26,958,145 26,925,431
F-18
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) ACQUISITIONS AND PRIVATE PLACEMENTS--(CONTINUED)
Pro forma net income for the six months ended June 30, 1996 is lower than
the respective period in 1995 primarily due to the incurrence of $486,000 of
costs for a secondary offering during the first half of 1996 which was
terminated.
The Company has made other acquisitions during the first half of 1996 which
are not included in the above pro forma consolidated results of operations as
follows:
The Company is currently developing an office building in Center Point
Office Park in Columbia, South Carolina. The total cost of the project is
expected to be approximately $7.6 million, which includes the January 4, 1996
purchase of land for approximately $1.2 million and the construction of an
approximately 81,000 square foot office building. Pursuant to a contract entered
into with the builder, the construction costs are fixed. The building is
expected to be completed in the fourth quarter of 1996 and is approximately 50%
pre-leased.
On March 27, 1996, the Company acquired eight acres of land in Greenville,
South Carolina, for approximately $1.6 million. The Company believes that it can
develop 100,000 square feet of rentable space on this land.
(5) COMMITMENTS AND CONTINGENCIES
Under the terms of the original purchase agreement pursuant to which AP
Southeast Partnership acquired its 46 properties from NationsBank of North
Carolina, N.A., in November 1993, AP Southeast Partnership is obligated to pay a
Deferred Contingent Purchase Price, as defined in the AP Southeast Partnership
purchase agreement. This contingent payment, which will in no event exceed $4.4
million, is due on April 1, 1998, if the actual four-year cumulative cash flow
of the AP Southeast Partnership properties (as defined) exceeds the projected
four-year cash flow (as defined). Based on actual results to date and estimates
of future operations, management does not believe that any Deferred Contingent
Purchase Price will be payable.
The Company is not currently involved in any material litigation, nor, to
its knowledge, is any material litigation currently threatened against it or any
of its properties, except for routine litigation arising in the ordinary course
of business, most of which is expected to be covered by liability insurance.
While the resolution of these matters cannot be predicted with certainty,
management believes that the final outcome of such matters will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
Management believes that any costs associated with environmental risks or
compliance with applicable environmental laws or regulations to which the
Company may be subject would not have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
A number of federal, state and local laws exist, such as the Americans with
Disabilities Act, which may require modifications to existing buildings to
improve, or restrict certain renovations, by requiring access to such buildings
by disabled persons. Additional legislation may impose further requirements on
owners with respect to access by disabled persons. The costs of compliance with
such laws may be substantial and may reduce overall returns of the Company's
investments. The Company believes that all of its properties are in substantial
compliance with laws currently in effect, and will review its properties,
periodically, to determine continuing compliance with existing laws and any
additional laws that are hereafter promulgated.
F-19
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) PROPOSED MERGER
On April 29, 1996, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Highwoods Properties, Inc ("Highwoods"). As a
result of the Merger, the outstanding shares of common stock of the Company will
be converted into the right to receive $11.02 per share in cash, subject to
certain adjustments. The Merger is conditioned upon, among other things,
approval by holders of at least two-thirds of the outstanding Common Stock and
the continued qualification of the Company as a real estate investment trust.
Holders of approximately 83% of the Common Stock have entered into an agreement
with Highwoods pursuant to which such holders have agreed to vote in favor of
the Merger.
In the course of the negotiations leading to the Merger Agreement, the
Company and Highwoods were unable to agree on a mutually acceptable price for
certain assets of the Company that were not producing current income. These
assets (the "Excluded Assets") primarily consist of undeveloped land (which has
a book value of approximately $17.2 million as of June 30, 1996) and contracts
to acquire certain new properties. In addition, Highwoods indicated that its
willingness to pay the price it was offering for the Company depended on certain
contingent liabilities (the "Excluded Liabilities") being effectively removed
from the Company prior to the Merger. The Company determined that in order to
maximize the value of the Merger to the Stockholders of the Company, it was
necessary to form a new entity ("Newco") that would own the Excluded Assets and
assume the Excluded Liabilities at or prior to the Merger. The Company
determined that the most efficient method of distributing the fair market value
of Newco to all of its Stockholders would be to (i) organize Newco as a private
company controlled by the two principal Stockholders and operated by the
Company's current management, (ii) sell the Excluded Assets, subject to the
Excluded Liabilities, to Newco for cash in an amount of $18 million, the net
fair market value of the Excluded Assets and Excluded Liabilities (the "Newco
Transaction") and (iii) distribute to all of the Stockholders the proceeds of
the Newco Transaction in the form of a special cash dividend.
(7) SUBSEQUENT EVENT
On July 1, 1996, 707,870 shares of Common Stock were issued when the
Company received $7.1 million as a result of the conversion of CRI public
warrants at $10.00 per share. After this conversion, there are 1,623,630 CRI
public warrants outstanding with the right to convert each CRI public warrant
into one share of Common Stock for $10.00 per share.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Crocker Realty Trust, Inc.:
We have audited the accompanying consolidated balance sheet of Crocker
Realty Trust, Inc. as of December 31, 1995, the related consolidated statements
of operations, stockholders' equity and cash flows for the year ended December
31, 1995. In connection with our audit, we also have audited the financial
statement schedule as listed in the accompanying index as of and for the year
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Crocker
Realty Trust, Inc. at December 31, 1995, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set
forth therein.
KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
March 4, 1996
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Crocker Realty Trust, Inc.
We have audited the accompanying combined balance sheet of Southeast Realty
Corp., AP Southeast Portfolio Partners, L.P. and AP Fontaine III Partners, L.P.
(the "Predecessor Entities") as of December 31, 1994, and the related combined
statements of operations, owners' equity and cash flows for the year then ended.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on the financial statements based upon
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of the Predecessor Entities as of
December 31, 1994, and the combined results of their operations and their cash
flows for the year ended December 31, 1994, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
February 21, 1995
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of AP Southeast Portfolio Partners, L.P.
In our opinion, the accompanying statements of income, of partner's capital and
of cash flows for the period from inception (November 17, 1993) through December
31, 1993 of AP Southeast Portolio Partners, L.P. present fairly, in all material
respects, the results of its operations and its cash flows for the period from
inception (November 17, 1993) through December 31, 1993 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe our audit
provides a reasonable basis for the opinion expressed above. We have not audited
the financial statements of AP Southeast Portfolio Partners, L.P. for any period
subsequent to December 31, 1993.
Price Waterhouse LLP
PRICE WATERHOUSE LLP
Dallas, Texas
March 7, 1994
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Crocker Realty Trust, Inc.:
We have audited the accompanying statements of operations, owners' equity
and cash flows for the period from October 28, 1993 (date of inception) to
December 31, 1993 of AP Fontaine III Partners, L.P. These financial statements
are the responsibility of management. Our responsibility is to express an
opinion on the financial statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations, owners' equity and cash flows of AP
Fontaine III Partners, L.P. for the period from October 28, 1993 (date of
inception) to December 31, 1993, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Dallas, Texas
February 10, 1995
F-24
<PAGE>
CROCKER REALTY TRUST, INC. (THE COMPANY) AND
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES (PREDECESSOR ENTITIES)
CONSOLIDATED BALANCE SHEET OF THE COMPANY AND
COMBINED BALANCE SHEET OF THE PREDECESSOR ENTITIES
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
THE COMPANY ENTITIES
------------ ------------
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
ASSETS
<S> <C> <C>
Investment in real estate (note 3):
Rental properties, net of accumulated depreciation of $11,590 and $5,279 at December 31,
1995 and 1994, respectively........................................................... $279,407 203,265
Land held for investment................................................................ 11,159 --
Other assets:
Cash and cash equivalents (note 11)..................................................... 5,719 132
Restricted cash (note 11)............................................................... 9,007 10,318
Rents and expense reimbursements receivable, net of allowance for doubtful accounts of
$141 at December 31, 1995 (note 11)................................................. 969 818
Accounts receivable from managed properties............................................. 219 --
Deferred straight-line rents receivable 3,148 1,902
Deferred acquisition and offering costs (note 12) 2,156 556
Deferred loan costs, net of accumulated amortization of $1,312 and $750 at December 31,
1995 and 1994, respectively (note 4).................................................. 3,821 4,114
Deferred leasing costs, net of accumulated amortization of $1,025 and $354 at December
31, 1995 and 1994, respectively..................................................... 2,689 1,911
Prepaid expenses and other assets....................................................... 666 195
Furniture, fixtures and equipment, net of accumulated depreciation of $60
at December 31, 1995.................................................................. 451 --
Management contracts, net of accumulated amortization of $105 at December 31, 1995
(note 9).............................................................................. 1,324 --
Goodwill, net of accumulated amortization of $165 at December 31, 1995 (note 9)......... 3,941 --
-------- -------
Total assets........................................................................ $324,676 223,211
======== =======
</TABLE>
(continued)
See accompanying notes to consolidated and combined financial statements.
F-25
<PAGE>
CROCKER REALTY TRUST, INC. (THE COMPANY) AND
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES (PREDECESSOR ENTITIES)
CONSOLIDATED BALANCE SHEET OF THE COMPANY AND
COMBINED BALANCE SHEET OF THE PREDECESSOR ENTITIES (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
THE COMPANY ENTITIES
------------ ------------
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
LIABILITIES AND STOCKHOLDERS' AND OWNERS' EQUITY
<S> <C> <C>
Liabilities:
Notes payable (note 4).................................................................. $181,873 160,000
Accounts payable and accrued expenses................................................... 2,121 1,702
Accrued interest expense (note 4)....................................................... 361 1,111
Accrued real estate taxes............................................................... 254 264
Accrued acquisition and offering costs (notes 9 and 12)................................. 1,805 --
Due to affiliates (notes 5, 6, and 7)................................................... -- 487
Rents paid in advance................................................................... 679 1,001
Tenant security deposits................................................................ 1,369 757
Deferred straight-line rents payable.................................................... 156 --
Other liabilities, net (notes 4 and 10)................................................. 1,919 --
-------- -------
Total liabilities................................................................... 190,537 165,322
-------- -------
Stockholders' equity (notes 1, 6, and 7):
Preferred stock, $.01 par value. Authorized and unissued 10,000,000 shares -- --
Common stock, $.01 par value. Authorized 50,000,000 shares; issued and outstanding
23,362,492 shares and 12,528,859 shares at December 31, 1995 and 1994, respectively... 234 125
Additional paid-in capital.............................................................. 132,721 57,759
Retained earnings....................................................................... 1,184 --
-------- -------
Total stockholders' equity.......................................................... 134,139 57,884
-------- -------
Owners' equity (note 1)................................................................... -- 5
-------- -------
Commitments and contingencies (notes 3, 4, 6, 7, 9, 10, 11 and 12)
Total liabilities and stockholders' and owners' equity.............................. $324,676 223,211
======== =======
See accompanying notes to consolidated and combined financial statements.
</TABLE>
F-26
<PAGE>
CROCKER REALTY TRUST, INC. (THE COMPANY) AND
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES ( PREDECESSOR ENTITIES)
CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY AND
COMBINED STATEMENTS OF OPERATIONS OF THE PREDECESSOR ENTITIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE
COMPANY PREDECESSOR ENTITIES
------------ ------------------------------------------------------------
AP SOUTHEAST
PORTFOLIO AP FONTAINE III
PARTNERS, L.P. PARTNERS, L.P.
-------------- ---------------
PERIOD FROM PERIOD FROM
NOVEMBER 17, OCTOBER 28,
1993 1993
YEAR ENDED YEAR ENDED (INCEPTION) TO (INCEPTION TO)
DECEMBER 31, DECEMBER 31, COMBINED DECEMBER 31, DECEMBER 31,
1995 1994 1993 1993 1993
------------ ------------ -------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue (note 3):
Rental income and tenant reimbursements............. $ 42,489 37,047 3,813 3,809 4
Management fees--building, development and
construction...................................... 618 -- -- -- --
Leasing commissions................................. 152 -- -- -- --
------- ------- ------ ------ ---
43,259 37,047 3,813 3,809 4
------- ------- ------ ------ ---
Expenses:
Rental property operating expenses.................. 8,632 5,601 611 603 8
Real estate taxes and insurance..................... 3,680 3,343 359 353 6
Management fees (note 5)............................ 1,289 2,122 219 219 --
Amortization of deferred leasing costs.............. 682 349 7 7 --
Depreciation and amortization of property and
equipment (note 3)................................ 6,414 4,761 518 512 6
Amortization of goodwill and management contracts
(note 9) 270 -- -- -- --
General and administrative expenses (note 6)........ 2,813 505 135 135 --
------- ------- ------ ------ ---
23,780 16,681 1,849 1,829 20
------- ------- ------ ------ ---
Operating income (loss)......................... 19,479 20,366 1,964 1,980 (16)
------- ------- ------ ------ ---
Other income (expense):
Interest and other income........................... 883 318 155 155 --
Gain from sale of land (note 9)..................... 124 -- -- -- --
Interest expense (note 4) (16,212) (14,001) (1,563) (1,563) --
------- ------- ------ ------ ---
Total other income (expense).................... (15,205) (13,683) (1,408) (1,408) --
------- ------- ------ ------ ---
Income (loss) before extraordinary loss............... 4,274 6,683 556 572 (16)
Extraordinary loss on early extinguishment of debt
(note 4)............................................ (429) -- -- -- --
------- ------- ------ ------ ---
Net income (loss)............................... $ 3,845 6,683 556 572 (16)
========== ======= ====== ====== ===
Earnings per common share:
Income before extraordinary loss.................... $ 0.31 N/A N/A N/A N/A
Extraordinary loss.................................. (0.03) N/A N/A N/A N/A
----------
Net income.......................................... 0.28 N/A N/A N/A N/A
==========
Weighted average number of shares outstanding......... 13,537,976 N/A N/A N/A N/A
==========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-27
<PAGE>
CROCKER REALTY TRUST, INC. (THE COMPANY) AND
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES (PREDECESSOR ENTITIES)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY OF THE COMPANY AND
COMBINED STATEMENTS OF OWNERS' EQUITY OF THE PREDECESSOR ENTITIES
(IN THOUSANDS, EXCEPT FOR SHARES ISSUED)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR ENTITIES
STOCKHOLDERS' EQUITY OWNERS' EQUITY
----------------------------------------------- ------------------------------------------
COMMON STOCK
---------------- ADDITIONAL AP SOUTHEAST
SHARES PAID-IN RETAINED PORTFOLIO AP FONTAINE III
ISSUED AMOUNT CAPITAL EARNINGS TOTAL PARTNERS, L.P. PARTNERS, L.P. COMBINED
------ ------ ---------- -------- ----- -------------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
October 28, 1993 (Inception)... -- $ -- -- -- -- -- -- --
November 17, 1993 (Inception).. -- -- -- -- -- 5,000 -- 5,000
Contributions................ -- -- -- -- -- 49,489 2,261 51,750
Net income................... -- -- -- -- -- 572 (16) 556
---------- ---- ------- ------ ------ ------ ----- -------
December 31, 1993.............. -- -- -- -- -- 55,061 2,245 57,306
====== =====
Contributions................ -- -- -- -- -- 400
Distributions................ -- -- -- -- -- (6,500)
Net income................... -- -- -- -- -- 6,683
Issuance of common stock
(note 1)................... 12,528,859 125 57,759 -- 57,884 (57,884)
---------- ---- ------- ------ ------ -------
December 31, 1994.............. 12,528,859 125 57,759 -- 57,884 5
Contributions (note 1)....... -- -- 1,769 -- 1,769 --
Distributions (note 1)....... -- -- -- (2,661) (2,661) --
Net income................... -- -- -- 3,845 3,845 --
Issuances of common stock
(notes 1 and 9)............ 10,833,633 109 73,193 -- 73,302 (5)
---------- ---- ------- ------ ------- -------
December 31, 1995.............. 23,362,492 $234 132,721 1,184 134,139 --
========== ==== ======= ====== ======= =======
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-28
<PAGE>
CROCKER REALTY TRUST, INC. (THE COMPANY) AND
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES (PREDECESSOR ENTITIES)
CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND
COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR ENTITIES
(IN THOUSANDS, EXCEPT FOR SHARES ISSUED)
<TABLE>
<CAPTION>
THE
COMPANY PREDECESSOR ENTITIES
------------ -----------------------------------------------------------
AP SOUTHEAST
PORTFOLIO AP FONTAINE III
PARTNERS, L.P. PARTNERS, L.P.
-------------- ---------------
PERIOD FROM PERIOD FROM
NOVEMBER 17, OCTOBER 28,
1993 1993
YEAR ENDED YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, DECEMBER 31, COMBINED DECEMBER 31, DECEMBER 31,
1995 1994 1993 1993 1993
------------ ------------ -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 3,845 6,683 556 572 (16)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization of property and
equipment....................................... 6,414 4,761 518 512 6
Amortization of loan costs........................ 737 667 84 84 --
Amortization of deferred leasing costs............ 682 349 7 7 --
Amortization of organization costs................ 4 3 -- -- --
Amortization of goodwill and management
contracts......................................... 270 -- -- -- --
Bad debt expense.................................. 141 150 -- -- --
Loss on early extinguishment of debt.............. 429 -- -- -- --
Gain on sale of land.............................. (124) -- -- -- --
(Increase) decrease in operating assets:
Deferred straight-line rents receivable......... (1,257) (1,558) (344) (344) --
Rents and other receivables..................... (68) (462) (455) (452) (3)
Prepaid expenses and other assets............... (277) 162 (344) (338) (6)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses........ (1,397) 192 1,440 1,433 7
Accrued interest expense..................... (1,104) (386) 1,497 1,497 --
Accrued real estate taxes.................... (506) (592) 805 793 12
Rents paid in advance........................ (419) 765 236 236 --
Tenant security deposits..................... 245 96 661 661 --
Deferred straight-line rents payable......... 156 -- -- -- --
----- ----- ----- ----- ---
Total adjustments.......................... 3,926 4,147 4,105 4,089 16
----- ----- ----- ----- ---
Net cash provided by operating activities.. 7,771 10,830 4,661 4,661 --
----- ----- ----- ----- ---
</TABLE>
(continued)
See accompanying notes to consolidated and combined financial statements.
F-29
<PAGE>
CROCKER REALTY TRUST, INC. (THE COMPANY) AND
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES (PREDECESSOR ENTITIES)
CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND
COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR ENTITIES, CONTINUED
(IN THOUSANDS, EXCEPT FOR SHARES ISSUED)
<TABLE>
<CAPTION>
THE
COMPANY PREDECESSOR ENTITIES
------------ -----------------------------------------------------------
AP SOUTHEAST
PORTFOLIO AP FONTAINE III
PARTNERS, L.P. PARTNERS, L.P.
-------------- ---------------
PERIOD FROM PERIOD FROM
NOVEMBER 17, OCTOBER 28,
1993 1993
YEAR ENDED YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, DECEMBER 31, COMBINED DECEMBER 31, DECEMBER 31,
1995 1994 1993 1993 1993
------------ ------------ -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Net proceeds from sale of land...................... $ 2,065 -- -- -- --
Acquisition of rental properties and land........... (42,550) -- (202,559) (200,298) (2,261)
Payments for building and tenant improvements....... (4,574) (4,777) (1,208) (1,208) --
Payment of deferred leasing costs................... (1,473) (1,790) (476) (476) --
Payments for furniture, fixtures and equipment...... (426) -- -- -- --
Payment of deferred acquisition costs............... (997) -- -- -- --
Cash received from acquisitions..................... 896 -- -- -- --
------- ------ -------- -------- ---
Net cash used in investing activities...... (47,059) (6,567) (204,243) (201,982) (2,261)
------- ------ -------- -------- ---
Cash flows from financing activities:
Proceeds from issuances of common stock............. 66,883 -- -- -- --
Net (increase) decrease in restricted cash.......... 1,829 1,092 (6,410) (6,410) --
Borrowings under notes payable...................... 482 -- 160,00 160,000 --
Capital contributions............................... 1,282 400 51,750 49,489 2,261
Repayment of note payable........................... (20,000) -- -- -- --
Dividends and Distributions......................... (2,661) (6,500) -- -- --
Payment of offering and deferred offering costs..... (2,940) -- -- -- --
Payment of financing costs.......................... -- (65) (4,801) (4,801) --
Payment of organization costs....................... -- -- (15) (15) --
------- ------ -------- -------- ---
Net cash provided by (used in) financing
activities............................... 44,875 (5,073) 200,524 198,263 2,261
------- ------ -------- -------- ---
Net increase (decrease) in cash and cash
equivalents.............................. 5,587 (810) 942 942 --
Cash and cash equivalents at beginning of period...... 132 942 -- -- --
------- ------ -------- -------- ---
Cash and cash equivalents at end of period............ $ 5,719 132 942 942 --
======= ====== ======== ======== ===
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid....................................... $16,580 13,702 -- -- --
======= ====== ======== ======== ===
</TABLE>
(continued)
See accompanying notes to consolidated and combined financial statements.
F-30
<PAGE>
CROCKER REALTY TRUST, INC. (THE COMPANY) AND
CROCKER REALTY TRUST, INC. PREDECESSOR ENTITIES (PREDECESSOR ENTITIES)
CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND
COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR ENTITIES, CONTINUED
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1995, the Company received a capital
contribution of the amount due to the Apollo Real Estate Investment Fund, L.P.
("Apollo Fund") at December 31, 1994 ($487,000) and recorded it as additional
paid in capital.
During the six months ended June 30, 1995, the Company exchanged 62,500
shares of common stock for the shares of common stock of Options Corp. held by
the Apollo Fund, 1,110 shares of common stock for the outstanding shares of
common stock of Operating Corp. held by an affiliate of the Apollo Fund and 31
shares of common stock for the outstanding shares of common stock of Fontaine
Operating Corp. held by an affiliate of the Apollo Fund. In addition, the
Company issued 35,000 shares of common stock to Victor Capital Group for its
financial advisory services related to the merger transactions.
On June 30, 1995, the Company issued 637,500 shares of common stock for all
of the outstanding common stock of CSI and CRMSI. In connection with the
acquisition, the Company succeeded to the interests in the assets of CSI and
CRMSI with a fair value of approximately $6.1 million and to the liabilities of
CSI and CRMSI of approximately $904,000.
On July 1, 1995, the Company issued 1,020,000 shares of common stock for
all of the outstanding common stock of CRI. In connection with the acquisition,
the Company succeeded to the interests of CRI in a portfolio of three office
properties with a fair value of approximately $48.1 million and to all of the
remaining assets of CRI with a fair value of approximately $2.4 million and to
the liabilities of CRI with a fair value of approximately $45.4 million.
Details of the assets acquired, liabilities assumed, and common stock
issued in connection with acquisitions are as follows (in thousands):
<TABLE>
<CAPTION>
ACQUISITION
CRMSI CRI OF SABAL
MERGER MERGER PROPERTIES COMBINED
------ ------ ----------- --------
<S> <C> <C> <C> <C>
Rental properties.............................. $ -- (48,130) (29,736) (77,866)
Land held for investment....................... -- -- (13,085) (13,085)
Restricted cash................................ -- (518) -- (518)
Rents and expense reimbursements receivable.... -- (99) (6) (105)
Accounts receivable from managed properties.... (875) -- -- (875)
Deferred loan costs............................ -- (713) (12) (725)
Prepaid expenses and other assets.............. (9) (188) -- (197)
Furniture, fixtures and equipment.............. (87) -- -- (87)
Management contracts........................... (1,429) -- -- (1,429)
Goodwill....................................... (3,702) -- -- (3,702)
Mortgage notes payable......................... -- 41,383 8 41,391
Accounts payable and accrued expenses.......... 904 818 281 2,003
Accrued interest expense....................... -- 354 -- 354
Accrued real estate taxes...................... -- 496 -- 496
Rents paid in advance.......................... -- 97 -- 97
Tenant security deposits....................... -- 367 -- 367
Other liabilities.............................. -- 1,924 -- 1,924
Common stock................................... 6 10 -- 16
Additional paid-in capital..................... 5,195 5,092 -- 10,287
------ ----- ------- -------
Net cash provided by (used in) acquisitions.... $ 3 893 (42,550) (41,654)
====== ===== ======= =======
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-31
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION AND FORMATION TRANSACTIONS
Crocker Realty Trust, Inc. (the "Company") was incorporated under the
Maryland General Corporation Law on September 21, 1994 under the name of
Southeast Realty Corp. On June 30, 1995, the Company changed its name to Crocker
Realty Trust, Inc. The Company was formed to succeed to the interests of Apollo
Real Estate Investment Fund, L.P. (the "Apollo Fund") and its affiliates in AP
Southeast Portfolio Partners, L.P. ("AP Southeast Partnership") and AP Fontaine
III Partners, L.P. ("Fontaine Partnership"), (collectively, the "Predecessor
Entities"), which collectively include a portfolio of 47 office properties.
The Company intends to qualify as a real estate investment trust ("REIT")
for Federal income tax purposes.
On December 31, 1994, the Apollo Fund transferred to the Company its 99%
limited partnership interests in (i) AP Southeast Partnership, (ii) AP-GP
Southeast Portfolio Partners, L.P. ("AP Southeast GP"), which holds a 1% general
partnership interest in AP Southeast Partnership, (iii) Fontaine Partnership,
and (iv) AP-GP Fontaine III Partners, L.P. ("Fontaine GP"), which holds a 1%
general partnership interest in Fontaine Partnership (collectively, the "Limited
Partnerships") in exchange for 12,528,759 shares of common stock of the Company.
The Company is the sole limited partner of AP Southeast GP and the AP
Southeast Partnership. On June 27, 1995, pursuant to the Amended and Restated
Transfer Agreement, dated as of September 29, 1994, between the Company and
Southeast Portfolio Operating Corporation ("Operating Corp."), the general
partner of AP Southeast GP, Operating Corp. merged with and into a wholly-owned
subsidiary of the Company, Southeast Realty GP Corp. ("GP Corp."), a Delaware
corporation. As a result of such merger, GP Corp. is the sole general partner
of, and holds a 1% general partnership interest in AP Southeast GP and the
outstanding shares of common stock of Operating Corp. held by an affiliate of
the Apollo Fund were exchanged for 1,110 shares of common stock of the Company.
AP Southeast GP is a Delaware limited partnership and the sole general partner
of the AP Southeast Partnership. The AP Southeast Partnership is a Delaware
limited partnership. All of the assets of each of these entities are owned by
each such entity and each such entity is a separate entity with its own separate
creditors which will be entitled to be satisfied out of its assets prior to any
value therein becoming available to its equity holders.
The Company is the sole limited partner of Fontaine GP and the Fontaine
Partnership. On April 3, 1995, pursuant to the Amended and Restated Transfer
Agreement, dated as of September 29, 1994, between the Company and Fontaine III
Operating Corporation ("Fontaine III Operating Corp."), the general partner of
Fontaine GP, Fontaine III Operating Corp., merged with and into a wholly-owned
subsidiary of the Company, Southeast Fontaine GP Corp. ("SF-GP Corp."), a
Delaware corporation. As a result of such merger, SF-GP Corp. is the sole
general partner of, and holds a 1% general partnership interest in Fontaine GP
and the outstanding shares of common stock of Fontaine Operating Corp. held by
an affiliate of the Apollo Fund were exchanged for 31 shares of common stock of
the Company. Fontaine GP is a Delaware limited partnership and the sole general
partner of the Fontaine Partnership. The Fontaine Partnership is a Delaware
limited partnership.
On March 29, 1995, pursuant to the Amended and Restated Transfer Agreement,
dated as of September 29, 1994, between the Company and Options Corp., whose
sole assets are the land options referred to above, Southeast Options Operating
Corporation ("Options Corp.") merged with and into Southeast Realty Options
Corp., a wholly-owned subsidiary of the Company, and the shares of capital stock
of Options Corp. held by the Apollo Fund were exchanged for 62,500 shares of
common stock of the Company.
The Company has accounted for all of the foregoing acquisitions of the
Predecessor Entities at historical cost in a manner similar to that in a pooling
of interests accounting due to the above entities being under the common
F-32
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(1) ORGANIZATION AND FORMATION TRANSACTIONS--(CONTINUED)
control of the Apollo Fund and its affiliates. Accordingly, the Company's
consolidated and combined financial statements include the restatement of the
above entities' financial position, results of operations and cash flows on a
combined basis for the periods of inception during 1993 to December 31, 1994.
The consolidated and combined financial information does not contain any
material adjustments to conform to the accounting policies used by the
Predecessor Entities to that of the Company. All intercompany transactions have
been eliminated.
On June 30, 1995, pursuant to an Agreement and Plan of Merger, dated as of
September 29, 1994, as amended (the "CRMSI Merger Agreement") among the Company,
SER Management, Inc. ("SER Management"), Crocker Realty Management Services,
Inc. ("CRMSI") and Crocker & Sons, Inc. ("CSI"), CRMSI and CSI merged with an
into SER Management, a wholly-owned subsidiary of the Company (the "CRMSI
Merger"). The outstanding shares of CRMSI and CSI were exchanged for 637,500
shares of the Company's common stock, of which 457,531 shares were issued to the
Chairman of the Board and Chief Executive Officer of the Company and his spouse,
149,974 shares were issued to the President and Chief Operating Officer of the
Company and 29,995 shares were issued to the Executive Vice President and Chief
Financial Officer of the Company.
As a result of the CRMSI Merger, the Company succeeded to the interests of
the property, asset and construction management business and leasing and
brokerage business of CRMSI and CSI and to their respective assets and
liabilities.
On July 1, 1995, pursuant to an Agreement and Plan of Merger, dated as of
September 29, 1994, as amended, (the "CRI Merger Agreement"), among the Company,
SER Acquisition, Inc. ("SER Acquisition") and Crocker Realty Investors, Inc.
("CRI"), CRI merged with and into SER Acquisition, a wholly-owned subsidiary of
the Company (the "CRI Merger"). Upon consummation of the CRI Merger; (i) the
outstanding shares of common stock of CRI were exchanged for 1,020,000 shares of
the Company's common stock, (ii) the 2,340,000 CRI public warrants each
entitling the holder thereof to purchase, during the four year period ending
January 21, 1998, one share of CRI common stock at $10.00 per share (subject to
adjustment), were assumed by the Company and entitle the holders thereof to
purchase shares of the Company's common stock at the same price and on the same
terms and conditions as set forth in the CRI public warrants, and (iii) purchase
options held by certain individuals and GKN Securities Corp. (the underwriter of
CRI's 1993 initial public offering) to purchase an aggregate of 210,292 shares
of CRI common stock at an exercise price of $7.85 per share of CRI common stock
and the warrant held by General Electric Capital Corporation (see note 4) to
purchase an aggregate of 160,000 shares of CRI common stock at an exercise price
of $10.00 per share of CRI common stock were assumed by the Company and entitle
the holders thereof to purchase shares of the Company's common stock at the same
price and on the same terms and conditions as set forth in the instruments
pursuant to which such options and warrant were issued. On December 28, 1995,
the Company entered into an agreement to pay $360,000 to certain individuals and
GKN Securities Corp. for their purchase options and other rights held by GKN
Securities Corp. The amount was accrued and charged to additional paid-in
capital at December 31, 1995 and was paid in January 1996.
As a result of the CRI Merger, the Company succeeded to the interests of
CRI in a portfolio of three office properties and to all of the assets and
liabilities of CRI.
Pursuant to the Amended and Restated Transfer Agreement, dated as of
September 29, 1994, between the Apollo Fund and the Company, as amended ("the
Apollo Fund Transfer Agreement"), the Apollo Fund was entitled to receive
additional shares of the Company's common stock at a price of $8.00 per share
based on the
F-33
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(1) ORGANIZATION AND FORMATION TRANSACTIONS--(CONTINUED)
excess Cash Balance (as defined in the Apollo Fund Transfer Agreement), at June
30, 1995. These shares, which totaled 259,261, were issued on December 19, 1995.
Distributions and contributions of $2.9 million each, previously disclosed
for the period from January 1, 1995 through June 30, 1995, were rescinded.
The following condensed combining schedule of the Predecessor Entities as
of and for the year ended December 31, 1994 includes each entity combined (in
thousands):
<TABLE>
<CAPTION>
AP CROCKER
SOUTHEAST FONTAINE REALTY ELIMINATION PREDECESSOR
PARTNERSHIP PARTNERSHIP TRUST ENTRIES ENTITIES
----------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1994:
Total revenue................................ $ 36,990 57 -- -- 37,047
Total expenses............................... 16,430 251 -- -- 16,681
Total other income (expense)................. (13,685) 2 -- -- (13,683)
-------- ----- ------ ------- -------
Net income (loss)............................ 6,875 (192) -- -- 6,683
======== ===== ====== ======= =======
As of December 31, 1994:
Total assets................................. $220,169 2,486 58,445 (57,889) 223,211
======== ===== ====== ======= =======
Total liabilities............................ $164,733 33 556 -- 165,322
======== ===== ====== ======= =======
</TABLE>
The combined financial statements of the Predecessor Entities have been
presented using the historical cost of those Predecessor Entities under the
common control of the Apollo Fund and its affiliates in a manner similar to that
in a pooling of interests accounting. No material adjustments were required to
conform the accounting policies of the entities consolidated.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
Commencing January 1, 1995, the financial statements of the Company are
consolidated and include all accounts of the Company, its wholly-owned
subsidiaries, and a controlled subsidiary. The equity interests in the
controlled subsidiary not owned by the Company are immaterial. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
(b) Real Estate Investments
Real estate investments are carried at cost, which is not in excess of each
property's estimated net realizable value. Cost includes all costs directly
related to the acquisition of each property, including legal fees and
commissions, and all costs of making improvements to the acquired properties.
Depreciation on the building and improvements is computed using the
straight-line method over estimated useful lives. Amortization of tenant
improvements is computed using the straight-line method over the initial lease
terms of the respective leases. Repairs and maintenance are charged to expense
as incurred.
F-34
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(c) Offering Costs
Offering costs are comprised of legal, accounting, financial advisory,
printing, commissions and other costs incurred in connection with the offering
of securities on July 1, 1995 and the private placement of common stock on
December 28, 1995. These costs totaling $3.9 million were charged to
shareholders' equity upon consummation of the offering and private placement,
$830,000 of which was accrued at December 31, 1995.
(d) Cash and Cash Equivalents and Restricted Cash
Cash and Cash Equivalents--Includes cash, time deposits, money market
accounts and all highly liquid investments with original maturities of three
months or less when purchased.
Restricted Cash--Principally is comprised of amounts held directly or
indirectly by Bankers Trust Company pursuant to the terms of the AP Southeast
Partnership Indenture (see note 4). Such amounts include $7.0 million which the
Company has deposited as additional security for the senior mortgage, which will
be disbursed to the Company for tenant lease-up costs in the event the Company
has insufficient cash to cover such costs. Restricted cash also includes amounts
escrowed for real estate taxes pursuant to the terms of the GECC mortgage notes
payable (see note 4).
(e) Deferred Costs
Deferred loan costs incurred in connection with financing are amortized
using the interest method over the term of the loan. Amortization of deferred
loan costs is included in interest expense in the accompanying consolidated and
combined financial statements. Deferred leasing costs are comprised primarily of
leasing commissions and are amortized on a straight-line basis over the initial
term of the respective leases.
(f) Goodwill and Management Contracts
Goodwill and management contracts related to the acquisition of CSI and
CRMSI is being amortized over the anticipated period of benefit, which ranges
from five to twenty years, on a straight-line basis. Goodwill related to the
costs incurred by the Company in excess of the fair value of the net assets
acquired from CRI is being amortized on a straight-line basis over five years.
The Company periodically reevaluates the recoverability of its intangible
assets as well as their amortization periods to determine whether an adjustment
to the carrying value or a revision to the estimated useful lives is
appropriate. The primary indicators of recoverability for the Company's
intangible assets are the current and forecasted operating cash flows which
pertain to a particular management agreement. A management agreement that has a
deficit in its cash flow from the management of properties for a full fiscal
year, in light of the surrounding economic environment, is viewed by the Company
as a situation which could indicate impairment of value. Taking into account the
above factors, the Company determines that an impairment loss has been triggered
when the future undiscounted cash flows associated with the intangible asset
does not exceed its current carrying amount and the amount of the impairment
loss to be recorded is the difference between the current carrying amount and
the future projected undiscounted cash flows. The Company currently is not
experiencing a deficit in cash flows from the management of properties. Based on
the Company's policy, management believes that there is no impairment of value
related to the intangible assets as of December 31, 1995.
F-35
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(g) Organization Costs
Organization costs are amortized using the straight-line method over five
years.
(h) Revenue Recognition
Rental income adjusted for concessions and fixed escalations is recognized
for financial reporting purposes on a straight-line basis over the initial term
of each lease. Deferred rent on each lease is recognized for the difference
between rental income calculated on the straight-line basis and the rental
payments actually required under the terms of each lease. Any such amounts
deemed uncollectible are reserved in the period such a determination is made.
For sales of real estate, profit is recognized in full when the collectibility
of the sales price is reasonably assured and the earnings process is virtually
complete. When the sale does not meet the requirements for recognition of
income, profit is deferred until such requirements are met.
(i) Earnings Per Share of Common Stock
Earnings per share of common stock for the Company for the year ended
December 31, 1995 has been computed by dividing income before extraordinary
item, the extraordinary item, and net income by the weighted average number of
shares of common stock outstanding during the period (see note 1). Common stock
equivalents included in the computation represent shares issuable upon assumed
exercise of stock options and warrants which would have a dilutive effect. All
of the stock warrants and the vast majority of the stock options were
antidilutive. The stock options which had a dilutive effect diluted the per
share amounts by less than 3% and were not considered in computing the weighted
average number of shares outstanding during the year ended December 31, 1995.
Earnings per share information is not presented for the Predecessor Entities for
the year ended December 31, 1994 or the periods of inception during 1993 to
December 31, 1993 as the Predecessor Entities were partnerships.
(j) Income Taxes
The Company intends to qualify as a real estate investment trust "REIT"
under the provisions of the Internal Revenue Code for 1995. Under these
provisions, the Company is required to distribute at least 95% of its taxable
income to its shareholders to maintain this qualification and not be subject to
federal income taxes for the portion of taxable income distributed. As of
December 31, 1995, the Company had not distributed at least 95% of its taxable
income to its shareholders. The Company will elect under Internal Revenue Code
section 858 to declare a dividend in 1996 and take a dividends paid deduction
for it in 1995, in order for the Company to effectively distribute at least 100%
of its 1995 taxable income. After this section 858 dividend is paid, the
Company's effective distributions will equal or exceed the Company's 1995
taxable income, and therefore no provision for federal income taxes has been
made. To maintain REIT qualification, the Company must also satisfy tests
concerning the nature of its assets and income and meet certain recordkeeping
requirements.
The estimated taxable income for the year ended December 31, 1995, is
approximately $3.5 million prior to the dividends paid deduction. The difference
between net income for financial reporting purposes and taxable income is
primarily due to the recognition of rental income on a straight-line basis for
financial reporting purposes and differences in depreciable lives of the rental
properties and improvements thereto. The differences between the tax basis and
the reported amounts of assets and liabilities is approximately $3.0 million and
$2.0 million less, respectively, compared to financial reporting amounts.
F-36
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(k) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(l) Reclassifications
The 1993 and 1994 financial statements have been reclassified to conform to
the current period presentation.
(3) INVESTMENTS IN REAL ESTATE
Components of rental properties as of December 31, 1995 and 1994, are
summarized as follows (in thousands):
ESTIMATED
1995 1994 USEFUL LIVES
---- ---- ------------
Rental property land............. $ 54,493 42,375 --
Buildings and improvement........ 222,417 160,765 10 to 40 years
Tenant improvements.............. 13,585 5,404 Life of lease
Construction in progress......... 502 -- --
-------- -------
290,997 208,544
-------- -------
Accumulated depreciation......... (11,590) (5,279)
-------- -------
$279,407 203,265
======== =======
Forty-six of the Company's 61 rental properties with a net book value of
$199.0 million are pledged as security for the Company's $140.0 million mortgage
note (see note 4). Three of the rental properties with a net book value of $48.0
million are pledged as security for the Company's two mortgage notes payable
held by GECC (see note 4).
Space in the properties is leased to tenants under month-to-month leases as
well as operating leases with initial terms ranging from one to twenty years.
Leases provide for base rent plus reimbursement of certain operating expenses.
Commitments to complete improvements on rental properties as they are
occupied total approximately $200,000 at December 31, 1995.
F-37
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(3) INVESTMENTS IN REAL ESTATE--(CONTINUED)
Future minimum rentals, excluding tenant reimbursements of operating
expenses, under noncancelable operating leases as of December 31, 1995 are (in
thousands):
YEAR ENDING DECEMBER 31:
- ------------------------
1996....................................... $ 42,554
1997....................................... 36,807
1998....................................... 30,180
1999....................................... 22,927
2000....................................... 16,441
Thereafter................................. 32,412
--------
Total future minimum rentals........... $181,321
========
As discussed in note 9, the Company acquired approximately 278 acres of
undeveloped land and simultaneously sold approximately 48 of such acres for $2.1
million and recognized a gain on the sale of $124,000.
(4) MORTGAGE NOTES PAYABLES
Mortgage notes payable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Mortgage note payable to Kidder Peabody Acceptance Corporation I ("KPAC"), with
monthly payments of interest at 7.88% with all principal due on January 31, 2001
and secured by 46 of the Company's rental properties with a net book value of
$199.0 million, as well as an assignment of rents and other items at the
properties....................................................................... $140,000 140,000
Mortgage note payable to General Electric Capital Corporation ("GECC"), as
modified, with monthly payments of interest at GECC's Composite Commercial Paper
Rate plus 4.25% (10.08% at December 31, 1995) with all principal due on April 27,
1999 and secured by three of the Company's rental properties with a net book
value of $48.0 million, as well as an assignment of rents and other items at the
properties....................................................................... 30,500 --
Mortgage note payable to GECC with monthly payments of interest at GECC's Composite
Commercial Paper Rate plus 4.00% (9.83% at December 31, 1995) with a maturity
date of April 27, 1999 and secured by the same three rental properties noted
above as well as an assignment of rents and other items at the properties........ 11,365 --
Unsecured note payable with monthly payments of interest at 11.50%. This note was
paid in full on December 28, 1995................................................ -- 20,000
Other.............................................................................. 8 --
-------- -------
$181,873 160,000
======== =======
</TABLE>
F-38
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(4) MORTGAGE NOTES PAYABLES--(CONTINUED)
Pursuant to an Indenture, dated March 1, 1994 (the "AP Southeast
Partnership Indenture"), amount AP Southeast Partnership, Bankers Trust Company
of California, N.A. and Bankers Trust Company, AP Southeast Partnership issued a
Mortgage Note in the principal amount of $140.0 million (the "Mortgage Note") to
Kidder Peabody Acceptance Corporation I ("KPAC"). The Mortgage Note bears
interest at the rate of 7.88% per annum and the entire $140.0 million principal
balance is due on January 31, 2001. The Mortgage Note is secured by a blanket
first mortgage lien on all 46 of the AP Southeast Partnership properties. The
Mortgage Note is further secured by (i) a first priority assignment of all
present and future lease encumbering portions of the AP Southeast Partnership
properties, (ii) a security interest in any personal property owned by AP
Southeast Partnership and (iii) a collateral assignment of the right, title and
interest of AP Southeast Partnership in and rights to all management agreements
relating to the AP Southeast Partnership properties.
The Mortgage Note is a limited recourse obligation of AP Southeast
Partnership as to which, in the event of a default under the Indenture of the
Mortgage, recourse may be had only against the specific AP Southeast Partnership
properties and other assets that have been pledged as security thereof.
The Mortgage Note held by KPAC was then deposited into a Real Estate
Mortgage Investment Conduit ("REMIC") Trust, whose pass-through certificates
were sold to the public. This transaction had no material impact on the
financial position of the AP Southeast Partnership.
The AP Southeast Partnership also had an unsecured junior note financing of
$20.0 million which had a fixed rate of interest of 11.5% and was repayable in
full on February 15, 2019. The junior note was subordinated to the Mortgage
Note, was nonrecourse to the AP Southeast Partnership and contained restrictive
covenants regarding repayment and property operations. The junior lender is an
affiliate of a limited partner of the Apollo Fund, the principal stockholder of
the Company. The junior note was paid off in full on December 28, 1995. An
extraordinary loss of $429,000 resulted from this transaction related to the
write-off of unamortized deferred loan costs.
The Company acquired two loans with General Electric Capital Corporation
("GECC") in connection with the Company's acquisition of Crocker Realty
Investors, Inc. Both of the loans have floating interest rates based on the GECC
Composite Commercial Paper Rate, which was 5.83% at December 31, 1995. The first
loan (as amended on April 27, 1994), which at December 31, 1995 had an
outstanding principal balance of $11.4 million and approximately $85,000
available to be drawn upon, bears interest at the rate of 9.83% per annum (at
December 31, 1995). The second loan, which had an outstanding principal balance
of $30.5 million at December 31, 1995, bears interest at the rate of 10.08% per
annum (at December 31, 1995). Both loans require monthly payments of interest.
The outstanding principal balance of the first loan is due at maturity on April
27, 1999. The outstanding principal balance of the second loan is payable in an
amount equal to 50% of the annual cash flow generated by the One Boca Place
property after payment of interest on the loan and tenant improvements and
expenses on the One Boca Place property for each calendar year subsequent to
1995. This payment is limited to a maximum amount of $750,000 per year. All
remaining unpaid principal on the second loan is payable at maturity on April
27, 1999.
An additional interest amount of $115,000 and $1.6 million payable on the
first and second GECC loans noted above, respectively, is due upon any
prepayment (at GECC's option) or at the respective loan's maturity. These
additional interest amounts were included in the Company's calculation of the
fair value of debt acquired in the CRI Merger. The difference between the amount
calculated as the fair value of debt acquired, including the additional interest
amounts, and the outstanding principal balance of the GECC loans at the date of
the CRI Merger, $1.9 million, was recorded as Other Liabilities and is reflected
as such in the financial statements. This
F-39
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(4) MORTGAGE NOTES PAYABLES--(CONTINUED)
amount is being amortized using the interest method down to the actual amount of
additional interest payable of $1.7 million at the maturity date of the loans,
April 27, 1999.
In connection with the second GECC loan noted above, GECC was issued a
warrant that, after adjustments, currently entitles it to purchase 173,102
shares of the Company's common stock at an exercise price of $9.24 per share.
The warrant contains anti-dilutive provisions which may result in an adjustment
to the actual number of shares and exercise price per share each time the
Company issues more shares of common stock. Upon any prepayment of the loan or
at the loan's maturity (whether by acceleration or otherwise), GECC will, at its
option, be entitled to exercise the warrant by making a payment of $1.6 million
to the Company.
(5) TRANSACTIONS WITH RELATED PARTIES
Direct acquisition costs, which have been capitalized to land and
buildings, include fees paid in 1993 to Patriot American Asset Management
Corporation ("Patriot American") in the amount of $1,996,000. Patriot American
served as the asset manager for the AP Southeast Partnership and Fontaine
Partnership portfolios of properties on an ongoing basis and served as property
manager on certain of the properties. Management fees for the years ended
December 31, 1995 and 1994, and the periods of inception during 1993 to December
31, 1993, include Patriot American asset management fees of $475,000, $1,072,000
and $100,000, respectively. Patriot American also provided asset management
services to the general partner of the Apollo Fund for other unrelated
investments. Additionally, the controlling investor of Patriot American is also
an investor as a limited partner in the general partner of the Apollo Fund.
Patriot American's contract was terminated on June 30, 1995.
At December 31, 1994, the Company owed the Apollo Fund $487,000. During the
year ended December 31, 1995, this amount was forgiven by the Apollo Fund and
was recorded as additional paid-in capital by the Company.
(6) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, effective as of July 1,
1995, with each of Messrs. Crocker, Ackerman and Onisko. The agreements with
Messrs. Crocker and Ackerman have five-year terms; the agreement with Mr. Onisko
has a three-year term. Under their respective employment agreements, Mr. Crocker
will serve as Chairman of the Board and Chief Executive Officer, Mr. Ackerman
will serve as President and Chief Operating Officer and Mr. Onisko will serve as
Executive Vice President and Chief Financial Officer. The agreements provide for
base annual salaries of $275,000 for Mr. Crocker, $225,000 for Mr. Ackerman and
$150,000 for Mr. Onisko and bonuses, if any, in the sole discretion of the
Company's Board of Directors. As noted below, the Company has granted
non-qualified stock options to purchase 500,000 shares of Common Stock to each
of Messrs. Crocker and Ackerman, and non-qualified stock options to purchase
50,000 shares of Common Stock to Mr. Onisko, in each case pursuant to the
Company's 1995 Stock Option Plan (see note 7). These options were granted upon
consummation of the CRI Merger and are exercisable at $10.00 per share as
follows: (a) with respect to options granted to Messrs. Crocker and Ackerman,
(i) for 20% of the shares covered thereby after the first anniversary of the
date of grant; (ii) for an additional 20% of the shares covered thereby on each
of the second, third and fourth anniversaries; and (iii) for the balance after
the fifth anniversary and (b) with respect to options granted to Mr. Onisko, for
33 1/3% of the shares covered thereby on each of the first, second and third
anniversaries of the date of grant. All of the options will expire on the tenth
anniversary of the date of grant.
F-40
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(7) 1995 STOCK OPTION PLAN
The Company has adopted the 1995 Stock Option Plan (the "Stock Option
Plan"). The Stock Option Plan provides for the granting of non-qualified stock
options to purchase Common Stock to employees and, as described below,
non-employee directors of the Company. The Stock Option Plan will be
administered by the Compensation Committee or another committee appointed from
time to time by the Company's Board of Directors. The Stock Option Plan will
terminate in May 2005, unless sooner terminated by the Company's Board of
Directors.
A maximum of 1,275,000 shares of Common Stock (subject to adjustment under
certain circumstances) may be issued under the Stock Option Plan. Under the
terms of the Stock Option Plan, no person may be granted options in any calendar
year to purchase more than 500,000 shares of Common Stock.
As of December 31, 1995, options to purchase an aggregate of 1,050,000
shares of Common Stock are outstanding to Messrs. Crocker, Ackerman and Onisko,
options to purchase 192,000 shares of Common Stock are outstanding to other
officers, and options to purchase an aggregate of 21,000 shares of Common Stock
are outstanding to the seven non-employee directors. The exercise price of the
options granted to the officers and directors is $10.00 and $8.00 per share,
respectively. One-third of the options of the non-employee directors become
exercisable on the date of grant and the balance will become exercisable in two
equal annual installments, beginning on the first anniversary of the date of
grant, and will have a term of ten years.
The Stock Option Plan provides that the option exercise price may not be
less than the fair market value of the shares of Common Stock on the date of the
grant of the option.
(8) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instrments" (FAS 107). The estimated
fair value amounts have been determined by management of the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
At December 31, 1995, the carrying amount and the fair value of the
Company's financial instruments, as determined under FAS 107, were as follows
(in thousands):
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
Senior mortgage financing notes............ $140,000 133,000
GECC note.................................. $ 30,500(A) 32,200
GECC note.................................. $ 11,365(A) 11,500
Other...................................... $ 8 8
- ----------
(A) The $1.9 million difference between the amount calculated as the fair value
of debt acquired and the outstanding principal balance of the GECC loans at
the date of the CRI Merger was recorded as Other Liabilities and is
reflected as such in the financial statements. (See note 4)
F-41
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(8) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The estimated fair value of the notes was based upon current market values
for instruments with similar terms.
(9) ACQUISITIONS AND PRIVATE PLACEMENTS
As a result of the July 1, 1995 CRI Merger and the June 30, 1995 CRMSI
Merger, the Company succeeded to the interests of Crocker Realty Investors, Inc.
("CRI") in a portfolio of three office properties and to the property, asset and
construction management business and leasing and brokerage business of CRMSI and
CSI and to all of the assets and liabilities of the respective entities.
The CRMSI Merger was accounted for under the purchase method of accounting
based on the estimated fair value of the assets acquired as there was no
established market for the Company's common stock prior to the consummation of
the CRMSI Merger. The assets acquired in the CRMSI Merger are comprised
primarily of building, construction and leasing management agreements and
leasing and brokerage operations. Of the total estimated fair value of the
assets acquired, approximately $1.4 million is classified as Management
Contracts, and approximately $3.7 million is classified as Goodwill. The Company
owns 100% of the issued and outstanding non-voting preferred stock and 3% of the
issued and outstanding common stock of the leasing company which provides
leasing and brokerage services to properties not owned by the Company, CRT
Leasing, Inc., a Delaware corporation. CRT Leasing, Inc. has been consolidated
into the Company's financial statements. The non-voting preferred stock
generally is entitled to dividends equal to 95% of all distributions of CRT
Leasing, Inc. The portion of the estimated fair value allocated to Management
Contracts is being amortized over a period of 5-10 years and the portion
attributable to Goodwill is being amortized over a period of 20 years.
The CRI Merger was accounted for under the purchase method of accounting
based on the estimated fair value of the assets and liabilities acquired as
there was no established market for the Company's common stock prior to the
consummation of the CRI Merger. The assets acquired were comprised primarily of
three office properties with a combined appraised value of approximately $48.1
million encumbered by approximately $41.4 million of variable interest rate
mortgage notes payable.
On December 28, 1995, the Company sold 8,818,231 shares of Common Stock to
AEW Partners, L.P., a pension fund advisor ("AEW"), in a private placement
transaction for $64.8 million (approximately $7.35 per share). Additional shares
may be issued to AEW in the event certain purchase price adjustments are
triggered. Management believes the number of additional shares which may be
issued to AEW will not be material to the number of shares originally issued to
AEW.
On December 29, 1995, the Company completed the acquisition of 11 buildings
and approximately 278 acres of land within Sabal Park in Tampa, Florida, from
Sabal Corporation, a wholly owned subsidiary of Stone and Webster Incorporated.
The assets were acquired for an aggregate cash consideration of $42.5 million.
In a concurrent transaction, the Company contracted to sell approximately 63
acres of the land acquired from Sabal Corporation to Security Capital Industrial
Trust and sold approximately 48 of such acres on December 29, 1995 with the sale
of remaining land (consisting of two parcels) contingent upon the resolution or
satisfaction of certain conditions.
On January 12, 1996, the Company sold 1,875,000 shares of the Common Stock
to Fortis Benefits Insurance Company and its affiliate, Time Insurance Company,
in a private placement transaction for $15.0 million ($8.00 per share).
F-42
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(9) ACQUISITIONS AND PRIVATE PLACEMENTS--(CONTINUED)
On January 16, 1996, the Company and certain of its subsidiaries
completed the acquisition of (i) nine office buildings located in Memphis,
Tennessee, and in Tampa and Jacksonville, Florida, (ii) four parcels of land in
Memphis and Tampa and (iii) management contracts for an aggregate of
approximately 700,000 square feet of space in Memphis and Tampa, each from
affiliates of Towermarc Corporation (see note 12).
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1995 and 1994 have been prepared assuming the above
transactions occurred at the beginning of each such period, after giving effect
to certain adjustments, including the amortization of goodwill and management
contracts. The following unaudited pro forma consolidated results of operations
is not necessarily indicative of results of operations that would have occurred
had the transactions been made as of those dates or of results that may occur in
the future (dollars in thousands except per share amounts):
DECEMBER 31,
------------------------
1995 1994
---------- ----------
(UNAUDITED)
Revenue................................................ $ 69,128 67,083
========== ==========
Net income............................................. $ 8,074 9,348
========== ==========
Net income per common share............................ $ 0.30 0.35
========== ==========
Weighted average number of common shares outstanding... 26,925,431 26,925,431
========== ==========
Pro forma net income is approximately $1,274,000 lower for the year ended
December 31, 1995 compared to the year ended December 31, 1994, even though pro
forma revenue (excluding interest and other income) increased during the
respective periods by approximately $2,045,000. This is primarily due to
decreases in sales commission and lease termination fee revenue. A sales
commission of $1,157,000 was earned during the year ended December 31, 1994 on
the sale of two third-party owned properties. Lease termination fee revenue was
approximately $291,000 and $575,000 for the years ended December 31, 1995 and
1994.
(10) COMMITMENTS AND CONTINGENCIES
Under the terms of the original purchase agreement pursuant to which AP
Southeast Partnership acquired its 46 properties from NationsBank of North
Carolina, N.A., in November 1993, AP Southeast Partnership is obligated to pay a
Deferred Contingent Purchase Price, as defined in the AP Southeast Partnership
purchase agreement. This contingent payment, which will in no event exceed $4.4
million, is due on April 1, 1998, if the actual four-year cumulative cash flow
for fiscal years 1994 to 1997 of the AP Southeast Partnership properties (as
defined) exceeds the projected four-year cash flow (as defined). Based on actual
results for 1994 and 1995 and estimates of future operations, management does
not believe that any Deferred Contingent Purchase Price will be payable.
The Company is not currently involved in any material litigation, nor, to
its knowledge, is any material litigation currently threatened against it or any
of its properties, except for routine litigation arising in the ordinary course
of business, most of which is expected to be covered by liability insurance.
While the resolution of these matters cannot be predicted with certainty,
management believes that the final outcome of such matters will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
F-43
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(10) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Management believes that any costs associated with environmental risks or
compliance with applicable environmental laws or regulations to which the
Company may be subject would not have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
A number of federal, state and local laws exist, such as the Americans with
Disabilities Act, which may require modifications to existing buildings to
improve, or restrict certain renovations, by requiring access to such buildings
by disabled persons. Additional legislation may impose further requirements on
owners with respect to access by disabled persons. The costs of compliance with
such laws may be substantial and may reduce overall returns of the Company's
investments. The Company believes that all of its properties are in substantial
compliance with laws currently in effect, and will review its properties,
periodically, to determine continuing compliance with existing laws and any
additional laws that are hereafter promulgated.
(11) CONCENTRATIONS OF CREDIT RISK
The Company owns office properties located in seven different states in the
Southeast United States, including Alabama, Georgia, Florida, North Carolina,
South Carolina, Tennessee and Virginia. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash,
cash equivalents and trade receivables.
As required under the terms of the AP Southeast Partnership Indenture (see
note 4), certain receipts arising from the operations of the encumbered
properties are required to be deposited in lockbox accounts maintained at
NationsBank, N.A. These amounts, which total approximately $0.7 million and $0.8
million at December 31, 1995 and 1994, respectively, are swept periodically into
trust accounts maintained by the Indenture Trustee, Bankers Trust Company of
California, N.A. ("Trustee"). Funds held by the Trustee at both December 31,
1995 and 1994 include $7 million deposited as additional security for the senior
mortgage note of which $6.5 million is continually invested in corporate
commercial paper with a maturity of approximately 30 days and $0.5 million is
continually maintained in one of the Trustee's treasury money funds. All other
funds deposited with the Trustee, totaling approximately $0.6 million and $2.2
million at December 31, 1995 and 1994, respectively, are also maintained in one
of the Trustee's treasury money funds. The carrying value of the investments
approximates fair market value because of the short maturity of the investments
and the Company believes that it is not exposed to any significant risk on such
investments. In accordance with the AP Southeast Partnership Indenture, certain
funds are transferred monthly to the Company to fund operations and capital
expenditures.
The Company places the vast majority of its cash and cash equivalents with
First Union National Bank, N.A. ("First Union"). Such amounts are generally held
in either noninterest bearing accounts or money market accounts, and the total
amount held by First Union at any given time usually substantially exceeds the
amounts that would be guaranteed by agencies of the United States Government in
the event that First Union defaults.
The majority of available funds held in the Company's primary operating
account at First Union are invested nightly by First Union in reverse purchase
agreements. At December 31, 1995, the Company held $5.5 million of such
securities under agreements to resell. Generally, the maturity date of the
Company's reverse repurchase agreements is the next day of business. Due to the
short-term nature of the agreements, the Company does not take possession of the
securities, which are instead held at First Union from which it purchases the
securities. The carrying value of the agreements approximates fair market value
because of the short maturity of the investments and the Company believes that
it is not exposed to any significant risk on such investments.
F-44
<PAGE>
CROCKER REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--CONTINUED
(11) CONCENTRATIONS OF CREDIT RISK--(CONTINUED)
Concentrations of credit risk with respect to trade receivables are limited
because of the large number of geographically diverse customers which make up
the Company's customer base, thus spreading the credit risk. The carrying value
of trade receivables approximates fair market value because of the short
maturity of the receivables and the Company believes that it is not exposed to
any significant risk on such receivables.
(12) SUBSEQUENT EVENTS
On January 12, 1996, the Company sold 1,875,000 shares of the Common Stock
to Fortis Benefits Insurance Company and its affiliate, Time Insurance Company,
in a private placement transaction for $15.0 million ($8.00 per share).
On January 16, 1996, the Company and certain of its subsidiaries completed
the acquisition of (i) nine office buildings located in Memphis, Tennessee, and
in Tampa and Jacksonville, Florida, (ii) four parcels of land in Memphis and
Tampa and (iii) management contracts for an aggregate of approximately 700,000
square feet of space in Memphis and Tampa, each from affiliates of Towermarc
Corporation. The aggregate consideration for the acquisitions was approximately
$81.4 million and was paid as follows: (i) $900,000 in cash; (ii) $67.2 million
in the form of assumption of indebtedness; and (iii) 1,687,939 shares of common
stock of the Company. Subsequent to the closing, the Company paid down an
aggregate of approximately $9.4 million of the debt assumed.
The Company is currently developing an office building in Center Point
Office Park in Columbia, South Carolina. The total cost of the project is
expected to be approximately $7.6 million, which includes the purchase of land
for approximately $1.2 million and the construction of an approximately 81,000
square foot office building. Pursuant to a contract entered into with the
builder, the construction costs are fixed. The entire building has been leased
to a single tenant.
The Company has entered into a contract to acquire eight acres of land in
Greenville, South Carolina, for $1.6 million. The Company believes that it can
develop 100,000 square feet of rentable space on this land.
F-45
<PAGE>
CROCKER REALTY TRUST, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS GROSS AMOUNT AT WHICH
INITIAL COST CAPITALIZED CARRIED AT CLOSE OF PERIOD
--------------- SUBSEQUENT TO --------------------------
BUILDINGS ACQUISITION BUILDINGS
AND --------------- AND ACCUMULATED
IMPROVE- IMPROVE- IMPROVE- DEPRECIATION DATE
DESCRIPTION ENCUMBRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL(A) (A)(B) ACQUIRED
----------- ------------ ---- -------- ---- -------- ---- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oakhill Business Park--English
Oak (Charlotte, NC)......... $1,968 598 1,915 3 320 601 2,235 2,836 138 11/22/93
Oakhill Business Park--Laurel
Oak (Charlotte, NC)......... 1,448 563 1,285 4 267 567 1,552 2,119 102 11/22/93
Oakhill Business Park--Scarlet
Oak (Charlotte, NC)......... 2,177 1,229 2,246 8 284 1,237 2,530 3,767 222 11/22/93
Oakhill Business Park--Twin
Oaks (Charlotte, NC)........ 3,406 1,259 3,202 8 138 1,267 3,340 4,607 218 11/22/93
Oakhill Business Park--Willow
Oak (Charlotte, NC)......... 1,234 584 1,332 4 27 588 1,359 1,947 72 11/22/93
Oakhill Business Park--Water
Oak (Charlotte, NC)......... 5,097 886 5,773 6 284 892 6,057 6,949 407 11/22/93
One North Commerce Center--
Phase 1 (Raleigh, NC)....... 1,988 985 3,594 6 139 991 3,733 4,724 232 11/22/93
One North Commerce Center--
5200 Green's Dairy
(Raleigh, NC)............... 593 230 527 2 7 232 534 766 30 11/22/93
One North Commerce Center--
5220 Green's Dairy
(Raleigh, NC)............... 1,072 362 1,007 3 127 365 1,134 1,499 93 11/22/93
One North Commerce Center--
5301 Departure (Raleigh, NC) 2,466 597 3,202 4 20 601 3,222 3,823 205 11/22/93
One North Commerce Center--
3645 Trust (Raleigh, NC).... 1,778 642 1,628 4 302 646 1,930 2,576 135 11/22/93
One North Commerce Center--
W Building (Raleigh, NC).... 3,789 1,437 3,850 8 80 1,445 3,930 5,375 224 11/22/93
Ridgefield I (Asheville, NC).. 1,685 543 2,087 3 22 546 2,109 2,655 130 11/22/93
Ridgefield II (Asheville, NC). 1,837 599 2,306 4 386 603 2,692 3,295 194 11/22/93
Deep River I (Greensboro, NC). 2,305 546 2,847 3 115 549 2,962 3,511 200 11/22/93
Forsyth I (Winston-Salem, NC). 1,963 788 1,636 4 90 792 1,726 2,518 94 11/22/93
Fontaine I (Columbia, SC)..... 3,520 1,113 2,942 6 121 1,119 3,063 4,182 169 11/22/93
Fontaine II (Columbia, SC).... 1,807 728 2,135 4 307 732 2,442 3,174 215 11/22/93
Fontaine III (Columbia, SC)... -- 459 1,802 -- 241 459 2,043 2,502 127 11/22/93
Fontaine V (Columbia, SC)..... 1,192 286 1,236 1 7 287 1,243 1,530 66 11/22/93
Brookfield--CRS Sirrine
(Greenville, SC)............ 12,049 1,973 14,198 12 89 1,985 14,287 16,272 760 11/22/93
Brookfield Plaza
(Greenville, SC)............ 4,768 814 6,203 5 320 819 6,523 7,342 411 11/22/93
Brookfield YMCA
(Greenville, SC)............ 429 166 547 1 3 167 550 717 29 11/22/93
Patewood Business Center
(Greenville, SC)............ 2,576 1,528 2,678 9 601 1,537 3,279 4,816 280 11/22/93
Patewood III (Greenville, SC). 5,417 677 2,609 4 299 681 2,908 3,589 175 11/22/93
Patewood IV (Greenville, SC).. (C) 748 2,882 4 18 752 2,900 3,652 154 11/22/93
Patewood V (Greenville, SC)... 4,779 1,065 5,037 6 606 1,071 5,643 6,714 421 11/22/93
Centerpoint I (Columbia, SC).. 3,549 550 3,981 3 162 553 4,143 4,696 254 11/22/93
</TABLE>
F-46
<PAGE>
CROCKER REALTY TRUST, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS GROSS AMOUNT AT WHICH
INITIAL COST CAPITALIZED CARRIED AT CLOSE OF PERIOD
--------------- SUBSEQUENT TO --------------------------
BUILDINGS ACQUISITION BUILDINGS
AND --------------- AND ACCUMULATED
IMPROVE- IMPROVE- IMPROVE- DEPRECIATION DATE
DESCRIPTION ENCUMBRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL(A) (A)(B) ACQUIRED
----------- ------------ ---- -------- ---- -------- ---- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Grandview I (Birmingham, AL).. 5,154 1,804 6,226 11 539 1,815 6,765 8,580 409 11/22/93
Battlefield I (Chesapeake, VA) 2,717 957 2,512 6 15 963 2,527 3,490 134 11/22/93
Greenbrier Business Center
(Chesapeake, VA)............ 2,768 568 2,967 3 728 571 3,695 4,266 202 11/22/93
Oakbrook I (Norcross, GA)..... 2,013 924 3,411 6 113 930 3,524 4,454 223 11/22/93
Oakbrook II (Norcross, GA).... 3,463 987 4,776 5 304 992 5,080 6,072 337 11/22/93
Oakbrook III (Norcross, GA)... 3,931 1,063 5,263 6 290 1,069 5,553 6,622 344 11/22/93
Oakbrook IV (Norcross, GA).... 2,381 532 3,122 3 167 535 3,289 3,824 235 11/22/93
Oakbrook V (Norcross, GA)..... 5,664 1,667 7,734 10 517 1,677 8,251 9,928 606 11/22/93
Grassmere I (Nashville, TN)... 2,856 1,526 3,650 9 54 1,535 3,704 5,239 284 11/22/93
Grassmere II (Nashville, TN).. 4,401 1,964 4,663 13 283 1,977 4,946 6,923 322 11/22/93
Grassmere III (Nashville, TN). 5,053 1,577 4,874 10 30 1,587 4,904 6,491 261 11/22/93
Sabal II (Tampa, FL).......... 1,235 343 1,234 2 133 345 1,367 1,712 93 11/22/93
Sabal III (Tampa, FL)......... 852 164 701 1 204 165 905 1,070 91 11/22/93
Sabal IV (Tampa, FL).......... 2,107 450 1,917 3 296 453 2,213 2,666 136 11/22/93
Sabal V (Tampa, FL)........... 2,532 431 2,802 3 113 434 2,915 3,349 172 11/22/93
Sabal VI (Tampa, FL).......... 5,919 1,330 7,224 8 45 1,338 7,269 8,607 387 11/22/93
Sabal VII (Tampa, FL)......... 4,815 503 5,645 3 35 506 5,680 6,186 302 11/22/93
Atrium (Tampa, FL)............ 1 821 5,046 -- -- 822 5,046 5,868 -- 12/29/95
Registry I (Tampa, FL)........ 1 509 3,128 -- -- 509 3,128 3,637 -- 12/29/95
Registry II (Tampa, FL)....... 1 522 3,207 -- -- 522 3,207 3,729 -- 12/29/95
Progressive Insurance
(Tampa, FL)................. 1 644 3,958 -- -- 644 3,958 4,602 -- 12/29/95
Sabal Business Center I
(Tampa, FL)................. -- 243 1,491 -- -- 243 1,491 1,734 -- 12/29/95
Sabal Park Plaza (Tampa, FL).. 1 328 2,014 -- -- 328 2,014 2,342 -- 12/29/95
Sabal Lake Building
(Tampa, FL)................. 1 402 2,467 -- -- 402 2,467 2,869 -- 12/29/95
Registry Square (Tampa, FL)... 1 195 1,199 -- -- 195 1,199 1,394 -- 12/29/95
Sabal Tech Center
(Tampa, FL)................. 1 370 2,270 -- -- 370 2,270 2,640 -- 12/29/95
Expo Building (Tampa, FL)..... -- 91 560 -- -- 91 560 651 -- 12/29/95
Day Care Center (Tampa, FL)... -- 38 232 -- -- 38 232 270 -- 12/29/95
Land (Tampa, FL).............. -- 11,159 -- -- -- 11,159 -- 11,159 -- 12/29/95
Southwest Corporate Center
(Orlando, FL)............... 3,717 1,828 3,171 11 19 1,839 3,190 5,029 170 11/22/93
Metrowest I (Orlando, FL)..... 3,530 1,550 3,857 10 312 1,560 4,169 5,729 302 11/22/93
Crocker Financial Plaza
(Boca Raton, FL)............ 4,263(D) 970 5,346 -- 444 970 5,790 6,760 163 07/01/95
Scott Center (Boca Raton, FL). 7,102(D) 2,185 8,417 -- 662 2,185 9,079 11,264 182 07/01/95
One Boca Place
(Boca Raton, FL)............ 30,500(D) 4,800 25,892 -- 155 4,800 26,047 30,847 478 07/01/95
-------- ------ ------- --- ------ ------ ------- ------- ------
$181,873 65,400 225,663 252 10,840 65,653 236,503 302,156 11,590
======== ====== ======= === ====== ====== ======= ======= ======
</TABLE>
F-47
<PAGE>
CROCKER REALTY TRUST, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
A RECONCILIATION OF CARRYING COSTS (IN THOUSANDS):
ACCUMULATED
COST DEPRECIATION
---- ------------
Initial acquisitions in 1993............... $202,559 --
Additions................................ 1,208 518
Dispositions and retirements............. -- --
-------- ------
Balance, December 31, 1993................. 203,767 518
Additions................................ 4,778 4,761
Dispositions and retirements............. -- --
-------- ------
Balance, December 31, 1994................. 208,545 5,279
Additions................................ 82,735 6,325
Dispositions and retirements............. (283) (14)
-------- ------
Balance, December 31, 1995................. $290,997 11,590
======== ======
B COMPUTATION OF DEPRECIATION:
Depreciation of buildings and other building improvements is computed using
the straight-line method over an estimated useful life of 10 to 40 years.
Tenant improvements are capitalized and amortized over the term of the
respective leases.
C Patewood III and IV are considered one property for encumbrance purposes.
D Crocker Financial Plaza, Scott Center and One Boca Place are
cross-collateralized for the two GECC notes.
F-48
<PAGE>
CRT ACQUIRED PROPERTIES
F-49
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Crocker Realty Trust, Inc.:
We have audited the accompanying Historical Summary of Gross Income and
Direct Operating Expenses ("Historical Summary") for certain properties owned by
Towermarc Corporation (the "Properties") for the year ended December 31, 1995.
This Historical Summary is the responsibility of the Properties' management. Our
responsibility is to express an opinion on the Historical Summary based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is free material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Historical Summary. An audit also includes
assessing the basis of accounting used and significant estimates made by
management, as well as evaluating the overall presentation of the Historical
Summary. We believe that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in the Registration Statement on Form S-11 of Crocker
Realty Trust, Inc. as described in Note 1 and are not intended to be a complete
presentation of the Properties' revenues and expenses.
In our opinion, the Historical Summary referred to above presents fairly,
in all material respects, the gross income and direct operating expenses
described in Note 1 of the Properties for the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
February 26, 1996
F-50
<PAGE>
HISTORICAL SUMMARY OF GROSS INCOME
AND DIRECT OPERATING EXPENSES
FOR CERTAIN PROPERTIES OWNED BY TOWERMARC CORPORATION
FOR THE YEAR ENDED DECEMBER 31, 1995
Gross Income
Rental Income........................................... $11,510,000
Other Income............................................ 208,000
-----------
11,718,000
-----------
Direct Operating Expenses
Rental Property Operating Expenses...................... 2,919,000
Real Estate Taxes and Insurance......................... 1,632,000
General and Administrative.............................. 82,000
-----------
4,633,000
-----------
Gross Income in excess of Direct Operating Expenses..... $ 7,085,000
-----------
F-51
<PAGE>
NOTE TO HISTORICAL SUMMARY OF GROSS INCOME AND
DIRECT OPERATING EXPENSES
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying Historical Summary of Gross Income and Direct Operating
Expenses (the "Historical Summary") relate to three office buildings and one
parcel of land located in Tampa, Florida, one office building located in
Jacksonville, Florida and five office buildings and two parcels of land located
in Memphis, Tennessee (collectively, the "Properties"), all owned and operated
by Towermarc Corporation. The office buildings aggregate approximately 680,000
rentable square feet. On January 16, 1996 Crocker Realty Trust Inc. acquired
these properties from Towermarc Corporation and from its subsidiaries and
majority owned partnerships.
BASIS OF PRESENTATION
The accompanying Historical Summary has been prepared in accordance with
the applicable rules and regulations of the Securities and Exchange Commission
for the acquisition of real estate operations for inclusion in the Registration
Statement on Form S-11 of the acquirer, Crocker Realty Trust, Inc. Accordingly,
certain historical expenses which may not be comparable to the expenses expected
to be incurred in the proposed future operations of the Properties have been
excluded. Excluded expenses consist of depreciation and amortization, interest
expense and certain professional and administrative costs not directly related
to future operations.
REVENUE AND EXPENSE RECOGNITION
The accompanying Historical Summary has been prepared on the accrual basis
of accounting. In accordance with industry practice the properties may provide
certain rent concessions for new tenants. These concessions generally take the
form of several months free or reduced rent. Income from operating leases which
provide for varying rents over the lease term is recognized on a straight-line
basis over the lease term. During the year ended December 31, 1995 a reduction
to rental income of approximately $335,000 was recorded to recognize the
property's rental income on a straight line basis. Other income includes a
$125,000 lease termination payment received by the Properties in 1995.
The individual leases on these Properties are generally for a term of at
least three years and provide for operating expense, a real estate tax
escalations and in certain cases for increases in minimum rent. Minimum future
rentals under non-cancelable leases in effect at December 31, 1995, with terms
greater than one year, under which the Properties is the lessor, are summarized
as follows:
YEAR
----
1996.......................................... $10,943,000
1997.......................................... 9,828,000
1998.......................................... 8,275,000
1999.......................................... 5,821,000
2000.......................................... 3,771,000
Thereafter...................................... 5,638,000
-----------
$44,276,000
===========
F-52
<PAGE>
SABAL CORPORATION AND SUBSIDIARIES
REPORT ON AUDIT OF THE HISTORICAL SUMMARY OF CONSOLIDATED
GROSS REVENUES AND DIRECT OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 1995 THROUGH DECEMBER 29, 1995
F-53
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Crocker Realty Trust, Inc.
We have audited the accompanying historical summary of consolidated gross
revenue and direct operating expenses (the Historical Summary) of Sabal
Corporation and subsidiaries (the Company) described in Note 1 to the Historical
Summary for the period January 1, 1995 through December 29, 1995. The Historical
Summary is the responsibility of the management of Sabal Corporation and
subsidiaries. Our responsibility is to express an opinion on the Historical
Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Historical Summary. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Historical
Summary. We believe that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission pursuant to the transaction as described in Note 1 to the Historical
Summary, and is not intended to be a complete presentation of the Company's
expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the historical summary of consolidated gross revenue
and direct operating expenses described in Note 1 to the Historical Summary of
Sabal Corporation and subsidiaries for the period January 1, 1995 through
December 29, 1995, in conformity with generally accepted accounting principles.
Coopers & Lybrand LLP
Tampa, Florida
July 18, 1996
F-54
<PAGE>
SABAL CORPORATION AND SUBSIDIARIES
HISTORICAL SUMMARY OF CONSOLIDATED GROSS REVENUE AND
DIRECT OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 1995 THROUGH DECEMBER 29, 1995
Rental income.............................................. $5,083,481
Other income............................................... 92,019
----------
Total gross revenue................................... 5,175,500
----------
Direct operating expenses:
Rental property operations............................... 1,305,633
Real estate taxes, other taxes and insurance............. 1,053,899
HVAC maintenance......................................... 46,957
----------
Total direct expenses................................. 2,406,489
----------
Gross revenue in excess of direct operating expenses....... $2,769,011
==========
The accompanying notes are an integral part
of this consolidated financial statement.
F-55
<PAGE>
SABAL CORPORATION AND SUBSIDIARIES
NOTES TO HISTORICAL SUMMARY OF CONSOLIDATED GROSS REVENUE
AND DIRECT OPERATING EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF OPERATIONS--Sabal Corporation (Sabal) and subsidiaries (the
Company) engage in the sale of developed land and the development, leasing and
management of office and industrial buildings. The Company is a wholly owned
subsidiary of Stone & Webster, Incorporated (Stone & Webster).
BASIS OF PRESENTATION--The historical summary of consolidated gross revenue
and direct operating expenses for the period January 1, 1995 through December
29, 1995 (the Historical Summary) relates to the leasing and management of 11
office and industrial buildings, along with the operating and administrative
costs of the Company located in Tampa, Florida. The Historical Summary includes
the gross revenue and direct operating expenses of the following entities: Sabal
Corporation, Queen Palm Corporation, Coconut Palm Corporation, Princess Palm
Corporation, King Palm Corporation, Sabal Realty Management Corporation (Sabal
Realty), Sabal Park Plaza Corporation, Coconut Center Corporation, Park
Progressive Corporation, Registry Building Corporation, Tech Center Corporation,
Registry Square Corporation, and Atrium S.C. Ltd. (See Note 2).
During November 1995, Stone & Webster entered into an agreement to sell
substantially all of the operating assets and certain land parcels of the
Company to Crocker Realty Trust, Inc. (Crocker). This transaction closed on
December 29, 1995. The Historical Summary has been prepared for the purpose of
complying with Rule 3-14 of the Securities and Exchange Commission Regulation
S-X and excludes material expenses. The Historical Summary does not include
certain historical expenses of the Company such as mortgage interest,
depreciation and amortization, management fees, advertising, indirect costs,
general and administrative expenses and income taxes. Therefore, the Historical
Summary is not representative of the actual operations of the Company for the
period presented.
The Historical Summary has been prepared on the accrual basis of
accounting. Consequently revenues and gains are recognized when earned and
expenses and losses are recognized when incurred.
RENTAL REVENUES--Rental revenues are recorded in accordance with Financial
Accounting Standards Board Statement No. 13, "Accounting for Leases," whereby
rental revenue is recognized on a straight-line method by totaling all rents due
under the lease, including fixed increases, and dividing by total months of
occupancy, including free rent periods.
The Company has entered into tenant leases for terms ranging from one to 15
years. All leases are accounted for as operating leases. The majority of the
tenant leases provide for the tenants to share in increases in operating
expenses and real estate taxes. These charges are included in rental income.
F-56
<PAGE>
SABAL CORPORATION AND SUBSIDIARIES
NOTES TO HISTORICAL SUMMARY OF CONSOLIDATED GROSS REVENUE AND
DIRECT OPERATING EXPENSES--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Minimum rents to be received from tenants under operating leases in effect
at December 29, 1995 are approximately as follows:
AMOUNT
-----------
1996.......................................... $ 5,112,000
1997.......................................... 3,983,000
1998.......................................... 2,512,000
1999.......................................... 1,560,000
2000.......................................... 1,135,000
Thereafter.................................... 823,000
-----------
$15,125,000
===========
These amounts will be recognized as discussed under rental revenues in Note
1.
2. JOINT VENTURE:
During 1988, Sabal, acting as general partner, formed a joint venture with
a limited partner to build, own, and operate a 130,000 square foot office
building known as the Atrium S.C. building (the Atrium). Sabal owned 50% of the
Atrium. On September 1, 1995, Sabal acquired the remaining 50% interest in the
Atrium by purchasing the limited partner's interest in the joint venture. The
historical gross revenue and direct operating expenses related to Atrium for the
period September 1, 1995 through December 29, 1995 are reflected in the
Historical Summary for the period January 1, 1995 through December 29, 1995.
Prior to September 1, 1995, Sabal accounted for the Atrium on the equity
method and thus the joint venture's revenue and expenses for the period January
1, 1995 through August 31, 1995 were not reflected in the Historical Summary.
The following unaudited pro forma condensed Historical Summary is presented as
if Sabal's acquisition of the Atrium had occurred on January 1, 1995. This
unaudited pro forma condensed Historical Summary is not necessarily indicative
of what actual gross revenue in excess of direct operating expenses of the
Company would
F-57
<PAGE>
SABAL CORPORATION AND SUBSIDIARIES
NOTES TO HISTORICAL SUMMARY OF CONSOLIDATED GROSS REVENUE AND
DIRECT OPERATING EXPENSES--(CONTINUED)
2. JOINT VENTURE:--(CONTINUED)
have been assuming such transaction had been completed as of January 1, 1995,
nor does it purport to represent the gross revenue in excess of direct operating
expenses for future periods.
<TABLE>
<CAPTION>
THE COMPANY ATRIUM PRO FORMA
----------------- --------------- FOR THE PERIOD
JANUARY 1, 1995 JANUARY 1, 1995 JANUARY 1, 1995
TO TO THROUGH
DECEMBER 29, 1995 AUGUST 31, 1995 DECEMBER 29, 1995
(AUDITED) (AUDITED) (UNAUDITED)
----------------- --------------- -----------------
<S> <C> <C> <C>
Rental income................................................... $5,083,481 $1,324,147 $6,407,626
Other income.................................................... 92,019 10,277 102,296
---------- ---------- ----------
Total gross revenue........................................ 5,175,500 1,334,424 6,509,924
---------- ---------- ----------
Direct operating expenses:
Rental property operations.................................... 1,305,633 387,289 1,692,922
Real estate taxes, other taxes and insurance.................. 1,053,899 137,110 1,191,009
HVAC maintenance.............................................. 46,957 0 46,957
---------- ---------- ----------
Total direct expenses...................................... 2,406,489 524,399 2,930,888
---------- ---------- ----------
Gross revenue in excess of direct operating expenses............ $2,769,011 $ 810,025 $3,579,036
========== ========== ==========
</TABLE>
3. RELATED PARTY TRANSACTIONS:
Sabal provided management services for the individual companies for the
period January 1, 1995 through December 29, 1995. The associated management fees
remitted to Sabal varied with each company and were either a predetermined
annual fee or 4% of rental income. Intercompany management fees of approximately
$221,000 are excluded from the Historical Summary.
F-58
<PAGE>
CROCKER REALTY INVESTORS, INC.
INTERIM FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
F-59
<PAGE>
CROCKER REALTY INVESTORS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1995 1994
------ -------- ------------
(UNAUDITED)
<S> <C> <C>
Investment in real estate:
Rental properties, net of accumulated depreciation of $2,110,157 and
$1,336,366 at June 30, 1995 and December 31, 1994 respectively.............. $47,203,511 $46,390,687
Other assets:
Cash.......................................................................... 893,105 653,623
Rents and expense reimbursements receivable, net of allowance for doubtful
accounts of $9,420 and $10,240 at June 30, 1995 and December 31, 1994,
respectively................................................................ 98,516 213,472
Real estate tax escrows....................................................... 518,305 44,623
Deferred straight-line rents receivable....................................... 486,605 328,923
Preacquisition and deferred merger costs...................................... 1,024,552 321,204
Deferred loan costs, net of accumulated amortization of $253,531 and $161,992
at June 30, 1995 and December 31, 1994, respectively...................... 712,969 804,508
Deferred leasing costs, net of accumulated amortization of $83,806 and $38,678
at June 30, 1995 and December 31, 1994, respectively............................. 783,913 539,247
Prepaid expenses.............................................................. 64,694 194,510
Organization costs, net of accumulated amortization of $28,750 and $23,000 at
June 30, 1995 and December 31, 1994, respectively................................ 28,750 34,500
Other assets.................................................................. 123,931 122,431
----------- -----------
Total assets............................................................. $51,938,851 $49,647,728
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Mortgage notes payable........................................................ $41,383,346 $39,845,438
Accounts payable and accrued expenses......................................... 268,652 388,321
Accrued interest expense...................................................... 353,932 327,034
Accrued real estate taxes..................................................... 495,870 --
Accrued deferred merger costs................................................. 819,120 204,334
Due to affiliates............................................................. 548,938 339,326
Rents paid in advance......................................................... 96,894 43,984
Deferred straight-line rent payable........................................... 268,351 146,000
Tenant security deposits...................................................... 366,528 384,935
Other liabilities............................................................. 405,144 238,678
---------- ----------
Total liabilities........................................................ 45,006,775 41,918,050
---------- ----------
Stockholders' equity:
Common stock, $.001 par value. Authorized 10,000,000 shares; issued and
outstanding 1,020,000 shares at June 30, 1995 and December 31, 1994,
respectively................................................................ 1,020 1,020
Additional paid-in capital.................................................... 8,909,735 8,909,735
Accumulated deficit........................................................... (1,978,679) (1,181,077)
---------- ----------
Total stockholders' equity............................................... 6,932,076 7,729,678
---------- ----------
Total liabilities and stockholders' equity............................... $51,938,851 $49,647,728
=========== ===========
</TABLE>
Unaudited--See accompanying notes to financial statements.
F-60
<PAGE>
CROCKER REALTY INVESTORS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Rental income....................................... $3,010,846 $1,691,528 $1,525,387 $1,167,074
Common area maintenance reimbursement............... 1,870,839 859,258 948,837 623,750
---------- ---------- ---------- ----------
4,881,685 2,550,786 2,474,224 1,790,824
---------- ---------- ---------- ----------
Expenses:
Rental property operating expenses.................. 1,212,082 860,610 638,953 573,148
Real estate taxes and insurance..................... 625,059 352,434 316,420 259,466
Property management fees to related party........... 249,670 115,729 126,517 78,986
Amortization of deferred leasing costs.............. 53,064 9,679 25,266 6,503
Depreciation and amortization of rental property 819,803 411,259 411,885 286,600
General and administrative expenses................. 386,358 248,183 196,857 110,461
Loss on tenant defaults............................. 23,558 45,030 19,822 23,697
---------- ---------- ---------- ----------
3,369,594 2,042,924 1,735,720 1,338,861
---------- ---------- ---------- ----------
Operating income............................... 1,512,091 507,862 738,504 451,963
---------- ---------- ---------- ----------
Other income (expense):
Interest and other income........................... 25,475 13,174 17,313 12,024
Interest expense.................................... (2,335,168) (903,147) (1,194,973) (722,024)
---------- ---------- ---------- ----------
Total other income (expense)................... (2,309,693) (889,973) (1,177,660) (710,000)
---------- ---------- ---------- ----------
Net loss....................................... $ (797,602) $ (382,111) $ (439,156) $ (258,037)
========== ========== ========== ==========
Net loss per share of common stock....................... $ (0.78) $ (0.37) $ (0.43) $ (0.25)
========== ========== ========== ==========
Weighted average number of shares outstanding............ 1,020,000 1,020,000 1,020,000 1,020,000
========== ========== ========== ==========
</TABLE>
Unaudited--See accompanying notes to financial statements.
F-61
<PAGE>
CROCKER REALTY INVESTORS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
<S> <C> <C>
1995 1994
---- ----
Cash flows from operating activities:
Net loss........................................................................ $ (797,602) $ (382,111)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of rental properties......................... 819,803 411,259
Amortization and accretion of loan costs................................... 258,005 135,071
Amortization of deferred leasing costs..................................... 53,064 9,679
Amortization of organization costs......................................... 5,750 5,750
Bad debt expense........................................................... 9,420 --
Loss on tenant defaults.................................................... 23,558 45,030
(Increase) decrease in operating assets:
Deferred straight-line rents receivable............................... (157,682) (78,724)
Rents and other receivables........................................... 105,536 (208,699)
Real estate tax escrow................................................ (473,682) (403,300)
Prepaid expenses and other assets..................................... 128,316 (87,243)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses................................. (119,669) 340,691
Accrued interest expense.............................................. 26,898 270,059
Accrued real estate taxes............................................. 495,870 281,751
Rents paid in advance................................................. 52,910 (19,389)
Tenant security deposits.............................................. (18,407) 40,327
Deferred straight-line rent payable................................... 122,351 38,473
Due to affiliates, net................................................ (76,298) 79,743
---------- ----------
Total adjustments................................................ 1,255,743 860,478
---------- ----------
Net cash provided by operating activities........................ 458,141 478,367
---------- ----------
Cash flows from investing activities:
Acquisition of rental property.................................................. -- (29,878,467)
Payments for building and tenant improvements................................... (1,226,047) (639,327)
Payments for deferred leasing costs............................................. (441,958) (166,287)
Payment of deposits, pre-acquisition and deferred merger costs.................. (88,562) (978,507)
Refund of deposits.............................................................. -- 1,500,000
---------- ----------
Net cash used in investing activities............................ (1,756,567) (30,162,588)
---------- ----------
Cash flows from financing activities:
Proceeds from borrowing under mortgage note payable............................. 1,537,908 31,059,949
Loan fees....................................................................... -- (594,555)
Due to affiliates, net.......................................................... -- (100,000)
---------- ----------
Net cash provided by financing activities........................ 1,537,908 30,365,394
---------- ----------
Net increase in cash................................................................. 239,482 681,173
Cash at beginning of period..................................................... 653,623 24,579
---------- ----------
Cash at end of period........................................................... $ 893,105 $ 705,752
=========== ============
</TABLE>
Unaudited--See accompanying notes to financial statements.
F-62
<PAGE>
CROCKER REALTY INVESTORS, INC.
STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid...................................................................... $ 2,050,265 $498,017
=========== ========
Supplemental disclosure of noncash investing and financing activities:
The Company acquired a rental property in the six months ended June 30,
1994. Assets and liabilities assumed in conjunction with the acquisition
were as follows:
Land.................................................................................... $ 4,800,000
Building and improvements............................................................... 25,379,228
Tenant improvement escrow............................................................... 142,572
Accounts payable and accrued expenses................................................... (159,700)
Rents paid in advance................................................................... (26,508)
Security deposits....................................................................... (257,125)
-----------
Net cash used in acquisition of real estate................................... $29,878,467
===========
</TABLE>
Unaudited--See accompanying notes to financial statements.
F-63
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) FINANCIAL STATEMENTS
The interim financial statements included herein have been prepared by
Crocker Realty Investors, Inc. (The Company) without audit. The statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-QSB and Rule 310(b) of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the Company's financial
position as of June 30, 1995 and December 31, 1994, and the results of its
operations and cash flows for the six and three months ended June 30, 1995
and 1994. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1994 ("1994
Form 10-KSB").
The results of operations for the six and three months ending June 30, 1995
and 1994 are not necessarily indicative of the results to be expected for
the full year.
The accounting policies followed by the Company are set forth in note 1 to
the Company's financial statements included in its 1994 Form 10-KSB. Certain
reclassifications have been made to the June 30, 1994 balances in order to
conform to the presentation used at June 30, 1995.
(2) INCOME TAXES
The Company qualifies as a real estate investment trust REIT under the
provisions of the Internal Revenue Code. Under these provisions, the Company
is required to distribute at least 95% of its taxable income to its
shareholders to maintain this qualification and not be subject to federal
income taxes for the portion of taxable income distributed. The Company did
not have taxable income during the first six months of 1995 or 1994. To
maintain REIT qualification, the Company must also satisfy tests concerning
the nature of its assets and income and meet certain recordkeeping
requirements.
(3) RELATED PARTY TRANSACTIONS
On January 21, 1993, the Company entered into a one year property management
agreement with Crocker Realty Management Services, Inc. (CRMS), an affiliate
of Thomas J. Crocker, Chairman and a stockholder of the Company. CRMS also
acts as exclusive leasing agent and construction manager. CRMS is paid 5% of
aggregate gross revenue for each year for its property management services;
6% of aggregate fixed annual rental of each lease procured by CRMS for the
first five years of a lease term and 4% for the next five years for each new
lease and lesser amounts for renewals; and 8% of tenant improvement and
other construction costs incurred by the Company for construction management
services. In addition, CRMS will be reimbursed for all out-of-pocket
expenses paid to third parties in connection with the rendition of services
and all salaries and other expenses of on-site personnel and the allocable
portion of salaries, other compensation and overhead of personnel employed
by the manager who perform any portion of services contemplated under the
agreement. CRMS is responsible for any co-broker leasing commissions. The
agreement is automatically extended for successive one year periods unless
terminated by either party upon written notice at least 90 days prior to the
expiration date. In management's opinion, these fees are at rates not less
favorable to the Company than that available from unaffiliated third
parties.
The Company has also retained affiliates of Thomas J. Crocker to provide
administrative support services necessary for the day-to-day operations of
the Company. The company reimburses such affiliates for: (a) the actual cost
to the affiliates for goods, materials and services used for and by the
Company obtained from unaffiliated parties, (b) administrative services
necessary to the operation of the Company, including secretarial,
bookkeeping, data processing and other office services, and (c) the services
of certain personnel
F-64
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
utilized by the Company directly involved in the organization and business
of the Company, including persons who may be employees or officers of the
affiliates, but not executive officers of the Company. The Company's offices
have been provided free of charge by Crocker & Sons, Inc., an affiliate of
Thomas J. Crocker. On April 1, 1995, the Company began paying rent to such
affiliate, at a rate of $3,910 per month. On October 1, 1994, Crocker and
Sons, Inc. began allocating payroll costs to the Company in accordance with
item (c) above, and will continue to allocate these costs on an ongoing
basis.
The amounts earned by affiliated companies for the six months ended June 30,
1995 and 1994 and amounts included in due to affiliates at June 30, 1995 and
December 31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
EARNED DURING THE SIX DUE TO AFFILIATES AT
MONTHS ENDED JUNE 30, --------------------------
-------------------------- JUNE 30, DECEMBER 31,
1995 1994 1995 1994 DESCRIPTION
---- ---- -------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Crocker Realty
Management
Services,Inc.............. $249,670 $115,729 $ 46,472 $ 50,608 Property management
32,797 34,025 -- 42,771 Construction management
42,464 29,971 -- 129,763 Leasing commissions
Crocker & Sons, Inc........ N/A N/A 502,466 44,020 Building and tenant improvements
-- 28,014 -- -- Interest and loan fees
94,856 -- -- 72,164 Payroll allocations
-------- -------- -------- --------
$419,787 $207,739 $548,938 $339,326
======== ======== ======== ========
</TABLE>
Crocker & Sons, Inc. provided $1,100,000 for deposits made towards the purchase
of a rental property acquired on April 27, 1994. This loan was repaid after the
acquisition, including interest and loan fees.
(4) CONDENSED PRO FORMA FINANCIAL INFORMATION
On April 27, 1994, the Company purchased One Boca Place for $30,179,228 paid
for with cash from proceeds from a mortgage note payable.
The following unaudited pro forma summary presents the condensed results of
operations as if the 1994 acquisition had occurred as of January 1, 1994,
and does not purport to be indicative of what would have occurred had the
1994 acquisition actually occurred as of January 1, 1994, or of results
which may occur in the future.
SIX MONTHS ENDED
JUNE 30, 1994
----------------
(UNAUDITED)
Revenues............................................... $4,155,000
==========
Net loss............................................... $ (680,000)
==========
Net loss per common share.............................. $ (0.67)
==========
Weighted average number of common shares outstanding... 1,020,000
===========
(5) SUBSEQUENT EVENT--MERGER
On July 1, 1995, pursuant to an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of September 29, 1994, the Company was merged (the
"Merger") into a wholly-owned subsidiary of Crocker Realty Trust, Inc., a
Maryland corporation which changed its name from Southeast Realty Corp. to
Crocker Realty Trust, Inc. on June 30, 1995. Upon consummation of the
Merger, Crocker Realty Trust, Inc. owns 50
F-65
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
properties, including the Company's properties. On June 30, 1995, Crocker
Realty Management Services, Inc. and Crocker & Sons, Inc., companies which
were controlled by Thomas J. Crocker, were also merged into a wholly-owned
subsidiary of Crocker Realty Trust, Inc. The consummation of the Merger was
subject to various conditions, including, among other conditions, the
approval of a majority of the outstanding shares of the Company.
Shareholders of more than a majority of the outstanding shares of the
Company approved the Merger at the Company's Special Meeting of Shareholders
held on June 29, 1995.
As of June 30, 1995 and December 31, 1994, the Company incurred costs
related to the Merger of approximately $1,025,000 and $310,000,
respectively, net of total reimbursements received from Crocker Realty
Trust, Inc. of approximately $147,000 as of both dates. Of the $1,025,000
incurred by the Company, approximately $819,000 remains unpaid as of June
30, 1995 and will be paid by Crocker Realty Trust, Inc. On July 1, 1995, the
approximately $206,000 of deferred merger costs which were not reimbursed or
paid by Crocker Realty Trust, Inc. were written off.
F-66
<PAGE>
CROCKER REALTY INVESTORS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-67
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Crocker Realty Investors, Inc.:
We have audited the financial statements of Crocker Realty Investors, Inc. as of
December 31, 1994 and 1993, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Crocker Realty Investors,
Inc. at December 31, 1994 and 1993, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
February 3, 1995
F-68
<PAGE>
CROCKER REALTY INVESTORS, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Investment in real estate:
Rental properties, net of accumulated depreciation of
$1,336,366 and $140,188 at December 31, 1994
and 1993, respectively (notes 3, 4 and 5)............................................ $46,390,687 $15,796,247
Other assets:
Cash.................................................................................... 653,623 24,579
Rents and expense reimbursements receivable, net of allowance for doubtful accounts of
$10,240 at December 31, 1994 (notes 3 and 4)......................................... 213,472 35,394
Deferred straight-line rents receivable (note 3)........................................ 328,923 74,185
Deposits, preacquisition and deferred merger costs (notes 3, 5 and 9)................... 321,204 604,000
Deferred loan costs, net of accumulated amortization of $161,992 and $16,324 at December
31, 1994 and 1993, respectively (note 4)............................................. 804,508 355,621
Deferred leasing costs, net of accumulated amortization of $38,678 and $2,887 at
December 31, 1994 and 1993, respectively (notes 3 and 5)............................. 539,247 59,498
Prepaid expenses........................................................................ 194,510 49,498
Organization costs, net of accumulated amortization of $23,000 and $19,020 at December
31, 1994 and 1993, respectively...................................................... 34,500 46,000
Other assets............................................................................ 167,054 56,260
----------- ----------
Total assets....................................................................... $49,647,728 17,101,282
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable (note 4)......................................................... $39,845,438 7,911,062
Accounts payable and accrued expenses................................................... 388,321 131,628
Accrued interest expense (note 4)....................................................... 327,034 --
Accrued deferred merger costs........................................................... 204,334 --
Due to affiliates (note 5).............................................................. 339,326 140,268
Rents paid in advance................................................................... 43,984 50,536
Deferred straight-line rent payable (note 3)............................................ 146,000 --
Tenant security deposits................................................................ 384,935 149,754
Other liabilities (note 4).............................................................. 238,678 4,477
----------- ----------
Total liabilities.................................................................. 41,918,050 8,387,725
----------- ----------
Stockholders' equity (notes 2, 4, 6, 7 and 9):
Common stock, $.001 par value. Authorized 10,000,000 shares; issued and outstanding
1,020,000 shares at December 31, 1994 and 1993....................................... 1,020 1,020
Additional paid-in capital.............................................................. 8,909,735 8,909,735
Accumulated deficit..................................................................... (1,181,077) (197,198)
---------- ----------
Total stockholders' equity......................................................... 7,729,678 8,713,557
---------- ----------
Commitments and contingencies (notes 3, 4, 5, 6, 7 and 9)
Total liabilities and stockholders' equity......................................... $49,647,728 17,101,282
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE>
CROCKER REALTY INVESTORS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Revenue (note 3):
Rental income ................................................ $ 4,471,361 597,673
Common area maintenance reimbursement ........................ 2,613,357 256,541
Lease termination fee ........................................ 100,000 --
----------- ---------
7,184,718 854,214
----------- ---------
Expenses:
Rental property operating expenses ........................... 2,229,056 351,279
Real estate taxes ............................................ 706,583 86,924
Property management fees to related party (note 5) ........... 345,610 36,374
Amortization of deferred leasing costs (note 5) .............. 38,802 2,887
Depreciation and amortization of rental property (note 3) .... 1,247,744 140,188
General and administrative expenses (notes 5 and 6) .......... 639,430 432,431
Loss on tenant defaults ...................................... 38,374 --
---------- ---------
5,245,599 1,050,083
---------- ---------
Operating income (loss) ................................. 1,939,119 (195,869)
---------- ---------
Other income (expense):
Interest and other income .................................... 36,093 142,505
Interest and amortization and accretion of loan costs (note 4) (2,959,091) (143,834)
---------- --------
Total other income (expense) ............................ (2,922,998) (1,329)
---------- --------
Net loss ................................................ $ (983,879) (197,198)
========== ========
Net loss per share of common stock ............................. $ (0.96) (0.21)
========== ========
Weighted average number of shares outstanding .................. 1,020,000 946,027
========== ========
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
CROCKER REALTY INVESTORS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992............................... 20,000 $ 20 199,980 -- 200,000
Issuance of common stock and common stock purchase warrants
at January 28, 1993 (note 2)............................. 1,000,000 1,000 8,705,655 -- 8,706,655
Issuance of common stock purchase warrants at January 28,
1993 pursuant to employment agreements (note 6).......... -- -- 4,000 -- 4,000
Issuance of common stock purchase options at January 28,
1993 (note 2)............................................ -- -- 100 -- 100
Net loss................................................... -- -- -- (197,198) (197,198)
--------- ------ --------- ---------- ---------
Balance at December 31, 1993............................... 1,020,000 1,020 8,909,735 (197,198) 8,713,557
Net loss................................................... -- -- -- (983,879) (983,879)
--------- ------ --------- ---------- ---------
Balance at December 31, 1994............................... 1,020,000 $1,020 8,909,735 (1,181,077) 7,729,678
========= ====== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
CROCKER REALTY INVESTORS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................................ $ (983,879) (197,198)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of rental properties ...................................... 1,247,744 140,188
Amortization and accretion of loan costs .............................................. 390,869 16,324
Amortization of deferred leasing costs ................................................ 38,802 2,887
Amortization of organization costs .................................................... 11,500 19,020
Bad debt expense ...................................................................... 14,535 --
Loss on tenant defaults ............................................................... 38,374 --
(Increase) decrease in operating assets:
Deferred straight-line rents receivable ............................................. (261,216) (74,185)
Rents and expense reimbursements receivables ........................................ (189,059) (35,394)
Deferred leasing costs .............................................................. (524,920) (62,385)
Prepaid expenses and other assets ................................................... (255,806) (105,758)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses ............................................... 96,993 (58,196)
Accrued interest expense ............................................................ 327,034 --
Accrued deferred merger costs ....................................................... 204,334 --
Rents paid in advance ............................................................... (33,060) (60,231)
Tenant security deposits ............................................................ (21,944) 24,888
Deferred straight-line rent payable ................................................. 146,000 --
Due to affiliates, net .............................................................. 222,038 --
Total adjustments ................................................................ 1,452,218 (192,842)
----------- ----------
Net cash provided by (used in) operating activities .............................. 468,339 (390,040)
----------- ----------
Cash flows from investing activities:
Acquisition of rental properties ........................................................ (29,735,895) (15,085,967)
Payments for building and tenant improvements ........................................... (1,615,017) (420,534)
Purchase of securities held for sale .................................................... -- (5,085,546)
Proceeds from sales of securities held for sale ......................................... -- 5,085,546
Payment of deposits, pre-acquisition and deferred merger costs .......................... (1,217,204) (604,000)
Refund of deposits ...................................................................... 1,500,000 --
----------- -----------
Net cash used in investing activities ............................................ (31,068,116) (16,110,501)
----------- -----------
(continued)
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
CROCKER REALTY INVESTORS, INC.
STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
1994 1993
------------ ----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock, warrants and options, net of $1,127,428 deducted
for underwriting costs.................................................................. $ -- 9,106,672
Proceeds from borrowing under mortgage notes payable...................................... 31,934,376 7,911,062
Offering costs............................................................................ -- (262,477)
Loan fees................................................................................. (605,555) (371,945)
Due to affiliates, net.................................................................... (100,000) 84,043
------------ ----------
Net cash provided by financing activities.......................................... 31,228,821 16,467,355
------------ ----------
Net increase (decrease) in cash............................................................. 629,044 (33,186)
Cash at beginning of period............................................................... 24,579 57,765
------------ ----------
Cash at end of period..................................................................... $ 653,623 24,579
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................................................ $ 2,241,188 123,033
============ ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company acquired certain rental properties in April 1994, October 1993
and June 1993. Assets and liabilities assumed in conjunction with these
acquisitions were as follows:
<TABLE>
<CAPTION>
1994 1993
------------ ----------
<S> <C> <C>
Land........................................................................................ $ 4,800,000 3,154,604
Building and improvements................................................................... 25,379,228 12,361,297
Accounts payable and accrued expenses....................................................... (159,700) (194,301)
Rents paid in advance....................................................................... (26,508) (110,767)
Security deposits........................................................................... (257,125) (124,866)
------------ ----------
Net cash used in acquisition of real estate........................................ $ 29,735,895 15,085,967
============ ==========
</TABLE>
See accompanying notes to financial statements.
F-73
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Crocker Realty Investors, Inc. ("CRI") was formed as a Delaware corporation
on September 30, 1992 with the intent of qualifying as a real estate investment
trust ("REIT") for Federal income tax purposes. On December 31, 1992, Crocker
Acquisition Company, Inc. ("CAC"), a Florida corporation, was incorporated by
the two 50% shareholders of CRI. CAC had an authorized capital stock consisting
of 10,000,000 shares of common stock with a par value of $.001 per share. At the
formation of CAC, each of the 50% shareholders of CRI received one share of the
common stock of CAC. On December 31, 1992, CRI was merged into CAC with each of
the 50% shareholders of CRI receiving 9,999 shares of CAC common stock in
exchange for each of their 10,000 shares of CRI common stock, at which time CRI
ceased to exist. Simultaneously with the merger, CAC changed its name to Crocker
Realty Investors, Inc. (the "Company"). The Company was organized to acquire
equity interests in office buildings, retail facilities or mixed-use facilities
located in the continental United States, primarily in South Florida. The
Company currently owns and operates three rental properties located in Boca
Raton, Florida. The Company had no significant financial operations in 1992.
(b) Rental Property
Rental properties are carried at cost, which is not in excess of each
property's estimated net realizable value. Cost includes all costs directly
related to the acquisition of each property, including legal fees and
commissions, and all costs of making improvements to the acquired properties.
Depreciation on the building and improvements is computed using the
straight-line method over estimated useful lives. Amortization of tenant
improvements is computed using the straight-line method over the initial lease
terms of the respective leases. Repairs and maintenance are charged to expense
as incurred.
(c) Offering Costs
Offering costs are comprised of legal, accounting, printing, discounts,
commissions and other costs incurred in connection with the offering of
securities. These costs totaling $1,523,345 were charged to shareholders' equity
upon consummation of the offering on January 28, 1993.
(d) Deferred Costs
Deferred loan costs incurred in connection with financing are amortized
using the interest method over the term of the loan. Deferred leasing costs are
comprised primarily of leasing commissions and are amortized on a straight-line
basis over the initial term of the respective leases.
(e) Organizational Costs
Organization costs are amortized using the straight-line method over five
years.
(f) Revenue Recognition
Rental income adjusted for concessions and fixed escalations is recognized
for financial reporting purposes on a straight-line basis over the initial term
of each lease. Deferred rent on each lease is recognized for the difference
between rental income calculated on the straight-line basis and the rental
payments actually required
F-74
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
under the terms of each lease. Any such amounts deemed uncollectible are
reserved in the period such a determination is made.
(g) Net Loss Per Share of Common Stock
Net loss per share of common stock is computed by dividing the net loss by
the weighted average number of shares of common stock outstanding during the
period. Stock option and warrants had no effect on the calculation as their
effect is antidilutive.
(h) Income Taxes
The Company qualifies as a real estate investment trust "REIT" under the
provisions of the Internal Revenue Code. Under these provisions, the Company is
required to distribute at least 95% of its taxable income to its shareholders to
maintain this qualification and not be subject to federal income taxes for the
portion of taxable income distributed. The Company did not have taxable income
during 1994 or 1993. To maintain REIT qualification, the Company must also
satisfy tests concerning the nature of its assets and income and meet certain
recordkeeping requirements.
The estimated tax loss for the year ended December 31, 1994 is
approximately $1.8 million and was $310,000 for the year ended December 31,
1993. The difference between net loss for financial reporting purposes and tax
loss is primarily due to the recognition of rental income on a straight-line
basis for financial reporting purposes and differences in depreciable lives of
the rental properties and improvements thereto. The differences between the tax
basis and the reported amounts of assets and liabilities is immaterial.
(i) Reclassifications
The 1993 financial statements have been reclassified to conform to the
current period presentation.
(2) PUBLIC OFFERING
The Company sold through a public offering, which was consummated on
January 28, 1993, 1,000,000 shares of Common Stock at an offering price of $10
per share and 2,300,000 Warrants at a price of $.10 per Warrant. Until the
completion of the offering, the shares of the Common Stock and the Warrants
could only be purchased together on the basis of one share of Common Stock and
two Warrants (except for the Underwriter's option to purchase up to 150,000
shares of Common Stock and/or 300,000 Warrants, solely for the purpose of
covering over allotments). The Underwriter exercised only its option to purchase
300,000 Warrants. Each Warrant entitles the holder to purchase, during the
four-year period commencing one year after the date of the offering, one share
of Common Stock at $10.00 per share. Each Warrant can be exercised only if a
registration statement covering the shares of Common Stock issuable upon
exercise of the Warrant is current at the time of exercise and such shares of
Common Stock have been registered or are qualified under Federal and state law
or there is an exemption from such registration or qualification requirements.
The Underwriter received an underwriting discount equal to $716,100 and it also
received (1) an expense allowance on a non-accountable basis equal to $306,900,
(2) reimbursement for bona fide due diligence expenses of $51,150, (3) options
(at the aggregate purchase price of $100) to purchase 100,000 shares of Common
Stock at an initial exercise price of $16.50 per share, subject to adjustment to
prevent dilution, for the four-year period commencing one year from the date of
the offering, (4) reimbursement of certain advertising and mailing costs of
$28,003, and
F-75
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(2) PUBLIC OFFERING (CONTINUED)
(5) reimbursement of other costs equal to $25,375. The Underwriter will also
receive in certain circumstances a Warrant solicitation fee equal to 5% of the
exercise price for each Warrant exercised.
(3) RENTAL PROPERTY
In 1994 and 1993, the Company purchased office buildings and associated
land located in Boca Raton, Florida, as follows:
<TABLE>
<CAPTION>
CROCKER
ONE BOCA PLACE CROCKER SQUARE FINANCIAL PLAZA
-------------- -------------- ---------------
<S> <C> <C> <C>
Date acquired............................. April 27, 1994 October 14, 1993 June 28, 1993
Land...................................... $4,800,000 2,184,604 970,000
Building and improvements................. 25,379,228 8,600,000 3,761,297
----------- ---------- ---------
$30,179,228 10,784,604 4,731,297
=========== ========== =========
</TABLE>
Components of rental properties are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- ESTIMATED
1994 1993 USEFUL LIVES
---- ---- ------------
<S> <C> <C> <C>
Land ...................... $ 7,954,604 3,154,604 --
Buildings ................. 35,852,213 11,652,119 40 years
Parking lots .............. 430,000 430,000 15 years
Building improvements ..... 368,971 10,363 10 years
Tenant improvements ....... 3,082,909 475,539 Life of lease
Equipment ................. 4,702 -- 3 years
Construction in progress... 33,654 213,810 --
------------ ----------
47,727,053 15,936,435
Accumulated depreciation... (1,336,366) (140,188)
------------ ----------
$ 46,390,687 15,796,247
============ ==========
</TABLE>
All rental properties are pledged as security for the Company's mortgage
notes payable (See note 4).
Space in the properties are leased to tenants under month-to-month leases
as well as operating leases with initial terms ranging from two to twenty years.
Leases provide for base rent plus reimbursement of certain operating expenses.
Commitments to complete improvements on rental properties as they are
occupied totals approximately $364,000 at December 31, 1994.
F-76
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(3) RENTAL PROPERTY--(CONTINUED)
Future minimum rentals, excluding tenant reimbursements of operating
expenses, under noncancelable operating leases as of December 31, 1994 are:
YEAR ENDING DECEMBER 31:
- ------------------------
1995............................................................ $ 5,355,000
1996............................................................ 4,539,000
1997............................................................ 3,377,000
1998............................................................ 3,115,000
1999............................................................ 2,340,000
Thereafter...................................................... 3,967,000
-----------
Total future minimum rentals.................................... $22,693,000
===========
(4) MORTGAGE NOTES PAYABLE
Mortgage notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1993
---- ----
<S> <C> <C>
Mortgage note payable to General Electric Capital Corporation ("GECC"), as
modified, with monthly payments of interest at GECC's Composite Commercial
Paper Rate plus 4.00% (9.34% and 7.19% at December 31, 1994 and 1993,
respectively) with all principal due on April 27, 1999 and secured by all
three of the Company's rental properties as well as an
assignment of rents and other items at the properties......................... $ 9,345,438 7,911,062
Mortgage note payable to GECC with monthly payments of interest at GECC's
Composite Commercial Paper Rate plus 4.25% (9.59% at December 31, 1994) with a
maturity date of April 27, 1999 and secured by all three of the Company's
rental properties as well as an assignment of rents and other
items at the properties....................................................... 30,500,000 --
----------- ---------
$39,845,438 7,911,062
=========== =========
</TABLE>
On October 13, 1993, the Company entered into a $10,302,000 credit facility
with GECC. This facility was modified on April 27, 1994, which, among other
changes, included an increase in the credit facility to $11,564,500. $9,345,438
has been advanced as of December 31, 1994 and was used to finance the
acquisition of the Crocker Square property acquired as described in note 3, and
to fund certain renovations and tenant improvements to Crocker Square and
Crocker Financial Plaza, as well as to fund $242,763 in loan closing costs, and
set up a $258,925 escrow for real estate taxes. The remaining undisbursed funds
will be advanced for specified purposes including payment for certain additional
renovations, tenant improvements, leasing costs, and the payment of a $114,500
additional interest amount which is due upon any prepayment of the loan, or at
the loan's maturity date (whether by acceleration or otherwise). The $114,500
held back will only be funded in the
F-77
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(4) MORTGAGE NOTES PAYABLE--(CONTINUED)
event of a default by the Company. The additional interest amount is being
accrued using the interest method over the life of the loan and is included in
other liabilities on the balance sheet.
The mortgage note payable may be prepaid in whole, but not in part, without
penalty, at any time after April 27, 1995. Prior to that date, a prepayment fee
equal to 5% of the outstanding principal balance will be charged in addition to
the additional interest amount.
On April 27, 1994, the Company purchased the One Boca Place property as
described in note 3. The Company financed the entire purchase price with a $32.1
million loan from GECC. $30.5 million was received at closing and $1.6 million
has been held back by GECC to fund the $1.6 million additional interest amount
which is due upon prepayment of the loan, or at the loan's maturity date
(whether by acceleration or otherwise). The $1.6 million held back will only be
funded in the event of a default by the Company. The additional interest amount
is being accrued using the interest method over the life of the loan and is
included in other liabilities in the balance sheet. In addition to financing the
acquisition, the $30.5 million received was used to fund $489,787 of the
$554,787 in loan closing costs, and set up a $259,084 escrow for real estate
taxes. The proceeds of the loan were also used to repay the $1.1 million
outstanding principal amount due under a loan made by Crocker & Sons, Inc., an
affiliate of Thomas J. Crocker, in connection with deposits made on the purchase
price of the property. The outstanding principal balance of the loan is payable
in an amount equal to 50% of the annual cash flow generated by the property
after payment of interest on the loan, and tenant improvements and expenses at
the property, for each calendar year subsequent to 1995. This payment is limited
to a maximum amount of $750,000 per year. All remaining unpaid principal is
payable at maturity on April 27, 1999.
The mortgage note payable may be prepaid in whole or in part, without
penalty, with a requirement that an initial prepayment be not less than $12
million. Upon an initial prepayment, the additional interest amount may be
accelerated at GECC's sole option.
In connection with the $32.1 million loan, the Company issued to GECC a
warrant to purchase 160,000 shares of the common stock of the Company at an
exercise price of $10.00 per share, subject to adjustment (the "Warrant"). Upon
any prepayment of the loan, or at the loan's maturity (whether by acceleration
or otherwise), GECC will, at its option, be entitled to exercise the Warrant by
waiving the Company's obligation to pay the $1.6 million additional interest
amount. If the issuance of the 160,000 shares would cause GECC to own in excess
of 9.8% of the outstanding common stock of the Company, the Company would then
issue only a number of shares equal to 9.8% of the outstanding common stock of
the Company (giving effect to such issuance), and pay to GECC an amount equal to
the current market price of the Company's common stock, as defined, multiplied
by an amount equal to the excess of 160,000 shares over the actual number of
shares issued.
(5) RELATED PARTY TRANSACTIONS
On January 21, 1993, the Company entered into a one year property
management agreement with Crocker Realty Management Services, Inc. ("CRMS"), an
affiliate of Thomas J. Crocker, Chairman and a stockholder of the Company. CRMS
also acts as exclusive leasing agent and construction manager. CRMS is paid 5%
of aggregate gross revenue for each year for its property management services;
6% of aggregate fixed annual rental of each lease procured by CRMS for the first
five years of a lease term and 4% for the next five years for each new lease and
lesser amounts for renewals; and 8% of tenant improvement and other construction
costs incurred by the Company for construction management services. In addition,
CRMS will be reimbursed for all out-of-pocket expenses paid to third parties in
connection with the rendition of services and all salaries and other
F-78
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(5) RELATED PARTY TRANSACTIONS--(CONTINUED)
expenses of on-site personnel and the allocable portion of salaries, other
compensation and overhead of personnel employed by the manager who perform any
portion of services contemplated under the agreement. CRMS is responsible for
any co-broker leasing commissions. The agreement is automatically extended for
successive one year periods unless terminated by either party upon written
notice at least 90 days prior to the expiration date. In management's opinion,
these fees are at rates not less favorable to the Company than that available
from unaffiliated third parties.
The Company has also retained affiliates of Thomas J. Crocker to provide
administrative support services necessary for the day-to-day operations of the
Company. The Company reimburses such affiliates for: (a) the actual cost to the
affiliates for goods, materials and services used for and by the Company
obtained from unaffiliated parties, (b) administrative services necessary to the
operation of the Company, including secretarial, bookkeeping, data processing
and other office services, and (c) the services of certain personnel utilized by
the Company directly involved in the organization and business of the Company,
including persons who may be employees or officers of the affiliates but not
executive officers of the Company. The Company's offices have been provided free
of charge by Crocker & Sons, Inc., an affiliate of Thomas J. Crocker. In the
future, the Company may be required to pay rent to such affiliate, at a rate not
less favorable to the Company than that available from unaffiliated third
parties. On October 1, 1994, Crocker and Sons, Inc. began allocating payroll
costs to the Company in accordance with item (c) above, and will continue to
allocate these costs on an ongoing basis.
The amounts earned by affiliated companies for the years ended December 31,
1994 and 1993 and amounts included in due to affiliates at December 31, 1994 and
1993 are summarized as follows:
<TABLE>
<CAPTION>
EARNED DURING
YEAR ENDED DUE TO AFFILIATES AT
DECEMBER 31, DECEMBER 31,
--------------------- --------------------
1994 1993 1994 1993 DESCRIPTION
---- ---- ---- ---- ------------------------
<S> <C> <C> <C> <C> <C>
Crocker Realty
Management
Services, Inc................ $ 345,610 36,374 50,608 15,467 Property management
122,697 22,569 42,771 19,701 Construction management
486,521 2,370 129,763 -- Leasing commissions
Crocker & Sons, Inc............ N/A N/A -- 100,000 Purchase deposit
N/A N/A -- 5,100 Out-of-pocket expenses
Building and tenant
N/A N/A 44,020 -- improvements
28,014 -- -- -- Interest and loan fees
72,164 -- 72,164 -- Payroll allocations
---------- ------ ------- -------
$1,055,006 61,313 339,326 140,268
========== ====== ======= =======
</TABLE>
As discussed in note 4, Crocker & Sons, Inc. provided $1,100,000 for
deposits made towards the purchase of a rental property acquired on April 27,
1994. This loan was repaid after the acquisition, including interest and loan
fees.
F-79
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(6) EMPLOYMENT AGREEMENTS
On the effective date of the public offering, the Company entered into
five-year employment agreements with Thomas J. Crocker, who serves as Chairman
of the Board and Chief Executive Officer, and Richard S. Ackerman, who serves as
President. Each of the officers are paid a base annual salary of $25,000 and are
entitled to incentive compensation in an amount (not to exceed $150,000 for each
in any fiscal year) equal to a percentage of the amount of total dividends
distributed to stockholders during each fiscal year of the Company if such
dividends equal at least 9% of stockholders' invested capital. Such percentage
ranges between 3.5% and 9.5%, increasing gradually until the highest percentage
is reached when annual dividends distributed are at least 14% of stockholders'
invested capital. The amount of dividends to be distributed to stockholders will
be determined by a majority of the disinterested directors (including a majority
of the independent directors). Upon termination of Mr. Crocker's employment by
the Company, the Company must cease to conduct business under or use the
"Crocker" name, and any derivative thereof, and the logo associated with Mr.
Crocker's affiliates.
Upon consummation of the offering, the employment contracts also obligated
the Company: (a) to grant each of two executive officers options to purchase
75,000 shares of the Common Stock, at an exercise price of $10.00 per share,
pursuant to the Company's 1993 Stock Option Plan described further in note 7,
and (b) to sell to each of two executive officers, at a purchase price of $.10
per Warrant, Warrants to purchase 20,000 shares of the Common Stock at an
exercise price of $10.00 per share exercisable during the four-year period
commencing one year after the effective date of the offering. On January 28,
1993, the officers purchased the Warrants for an aggregate purchase price of
$4,000. On February 24, 1993, the Company granted stock options to the executive
officers as described further in note 7.
(7) STOCK OPTIONS
In 1993, the Company established a key employee stock option plan reserving
250,000 shares of common stock for sale to key employees at an option price that
shall not be less than fair market value at the time the option is granted. The
options will expire not more than ten years from the date of the grant. Pursuant
to employment contracts, on February 24, 1993, the Company granted an option to
purchase up to 75,000 shares of the Common Stock to each of two executive
officers and an option to purchase up to 10,000 shares of the Common Stock to
the Treasurer. On November 19, 1993, the Board of Directors granted an option to
purchase up to 45,000 shares of common stock to each of the two executive
officers. All options are exercisable at $10.00 per share as follows: (i) for
one-third of the shares covered thereby after the first anniversary of the date
of grant; (ii) for an additional one-third of the shares covered thereby after
the second anniversary, and (iii) for the balance after the third anniversary.
On January 28, 1993, the Company also granted an option to purchase 100,000
shares of Common Stock at $16.50 per share to the Underwriter as described in
note 2. As a result of the Company issuing Warrants to GECC as described in note
4, the Underwriter's option exercise price and the number of shares underlying
the option have been adjusted in accordance with provisions of the option to
$7.85 per share and 210,292 shares, respectively.
(8) CONDENSED PRO FORMA FINANCIAL INFORMATION
On April 27, 1994, the Company purchased One Boca Place for $30,179,228 paid for
with cash from proceeds from a mortgage note payable. On October 14, 1993, the
Company purchased Crocker Square for $10,784,604 paid for with cash from
proceeds of the offering and proceeds from a mortgage note payable. OnJune 28,
1993, the Company purchased Crocker Financial Plaza for $4,731,297 paid in cash
from proceeds of the offering.
F-80
<PAGE>
CROCKER REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(8) CONDENSED PRO FORMA FINANCIAL INFORMATION--(CONTINUED)
The following unaudited pro forma summary presents the condensed results of
operations as if the 1994 acquisition and 1993 acquisitions and initial public
offering had occurred as of January 1, 1993, and does not purport to be
indicative of what would have occurred had the 1994 acquisition and 1993
acquisitions and initial public offering actually occurred as of January 1,
1993, or of results which may occur in the future.
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993
---- ----
(UNAUDITED) (UNAUDITED)
Revenues.............................................. $ 8,670,000 7,240,000
=========== =========
Net loss.............................................. $(1,360,000) (1,150,000)
=========== ==========
Net loss per common share............................. $ (1.33) (1.13)
=========== ==========
Weighted average number of common shares outstanding... 1,020,000 1,020,000
=========== ==========
(9) PROPOSED MERGER
On September 29, 1994, the Company and Southeast Realty Corp., a newly
formed Maryland corporation, entered into an agreement (the "Merger Agreement")
pursuant to which, among other transactions, the Company will be merged into a
wholly-owned subsidiary of Southeast Realty Corp. (the "Merger"). Upon the
effectiveness of the Merger, Southeast Realty Corp. will own 50 properties.
Contemporaneously with the Merger, Crocker Realty Management Services, Inc. and
Crocker & Sons, Inc., companies which are controlled by Thomas J. Crocker, will
be merged with a subsidiary of Southeast Realty Corp. The Merger Agreement
provided for a due diligence period which expired on October 30, 1994. The
consummation of the Merger is subject to various conditions, including, among
other conditions, the approval of a majority of the outstanding shares of the
Company, the representations and warranties of the parties shall be accurate in
all material respects, no governmental entity or Federal or State court shall
have issued any injunction or other order which restrains or prohibits the
consummation of the Merger, all authorizations, waivers and consents required to
be obtained in order to consummate the Merger shall have been obtained, and the
number of shareholders dissenting to the Merger shall not exceed a specified
number. The Merger Agreement may be terminated at any time by the mutual written
consent of the parties or upon the occurrence of certain events. If the Merger
is not consummated, the parties will not have liability to each other unless
such failure to consummate is a result of a willful misrepresentation or breach
of warranty or covenant contained in the Merger Agreement. The amount of damages
recoverable by the non-breaching party is limited.
As of December 31, 1994, the Company has incurred costs related to the
Merger of approximately $310,000, net of reimbursements received from an
affiliate of the proposed merger entity of approximately $147,000. Upon
consummation of the Merger Agreement, all deferred merger costs will be
expensed. Under certain circumstances, if the Merger does not take place, the
Company will be required to repay the $147,000 in the form of shares of the
Company's common stock based upon the lesser of the stock's trading price on the
date of termination or $8.00 per share.
Upon consummation of the Merger Agreement, the employment agreements and
stock options described in notes 6 and 7, respectively, will be terminated, and
new employment agreements and stock option plans will be implemented by the new
entity.
F-81
<PAGE>
CROCKER & SONS, INC.
Financial Statements
As of June 29, 1995 and December 31, 1994, and for the period
from January 1, 1995 through June 29, 1995
(Unaudited)
F-82
<PAGE>
CROCKER & SONS, INC.
BALANCE SHEETS
As of June 29, 1995 and December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
JUNE 29, DECEMBER 31,
ASSETS 1995 1994
------ --------- ------------
<S> <C> <C>
Current assets:
Cash............................................................................. $ 2,706 $ 8,271
Management fee receivable (note 4)............................................... 77,300 113,966
Development fee receivable from affiliate of stockholder (note 4)................ -- 63,000
Reimbursable costs (note 7)...................................................... -- 88,390
Due from employees and stockholder............................................... 4,421 3,195
Due from affiliates of stockholder, net (note 4)................................. 797,751 45,881
Prepaid insurance................................................................ 4,867 20,412
------- -------
Total current assets........................................................ 887,045 343,115
------- -------
Property and equipment (note 3)....................................................... 450,896 428,795
Less accumulated depreciation.................................................... (363,718) (352,718)
-------- --------
87,178 76,077
------ ------
Total assets................................................................ $974,223 $419,192
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses............................................ $896,252 $ 65,085
Accrued payroll and payroll taxes................................................ 4,199 2,733
Other liabilities................................................................ 3,625 14,486
----- ------
Current liabilities......................................................... 904,076 82,304
------- ------
Stockholders' equity (notes 6 and 7):
Common stock, $1 par value. Authorized 7,500 shares; Issued and outstanding
7,500........................................................................ 7,500 7,500
Additional paid-in capital....................................................... 449,388 329,388
Accumulated deficit.............................................................. (386,741) --
--------
Total stockholders' equity.................................................. 70,147 336,888
------ -------
Total liabilities and stockholders' equity.................................. $974,223 $419,192
======== ========
</TABLE>
Unaudited--See accompanying notes to financial statements.
F-83
<PAGE>
CROCKER & SONS, INC.
STATEMENT OF OPERATIONS
For the period from January 1, 1995
through June 29, 1995
(Unaudited)
Revenues (note 4):
Management fees--buildings:
Related parties.............................................. $ 527,597
Unrelated party.............................................. 15,233
Management fees--development and construction:
Related parties.............................................. 143,569
Other
Related parties.............................................. 71,376
------
Total revenues............................................. 757,775
-------
Expenses:
Payroll and related costs....................................... 1,933,239
General and administrative (note 4)............................. 112,176
Depreciation.................................................... 11,000
Professional fees............................................... 31,602
Communications.................................................. 39,755
Less: Allocation of costs to affiliate related to
management activities (note 4)............................... (94,856)
Less: Allocation of costs to affiliate related to leasing,
building and construction management
activities (note 4).......................................... (874,230)
- --------
Total expenses............................................. 1,158,686
---------
Operating loss............................................. (400,911)
--------
Other income:
Interest income................................................. 14,170
------
Total other income......................................... 14,170
------
Net loss................................................... $ (386,741)
==========
Pro forma data (unaudited--see notes 2(d) and 5):
Historical net loss............................................. $ (386,741)
Provision for pro forma income tax expense...................... (149,523)
--------
Pro forma net loss......................................... $ (536,264)
==========
Pro forma net loss per share of common stock...................... $ (71.50)
==========
Weighted average number of shares outstanding..................... 7,500
-----
Unaudited--See accompanying notes to financial statements.
F-84
<PAGE>
CROCKER & SONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the period from January 1, 1995
through June 29, 1995
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1994................................... 7,500 $7,500 $329,388 -- $336,888
Stockholder contribution.............................. -- -- 120,000 -- 120,000
Net loss for the period from January 1, 1995 through
June 29, 1995.................................... -- -- -- $(386,741) (386,741)
----- ------ -------- ---------
Balance at June 29, 1995.............................. 7,500 $7,500 $449,388 $(386,741) $ 70,147
===== ====== ======== =========
</TABLE>
Unaudited--See accompanying notes to financial statements.
F-85
<PAGE>
CROCKER & SONS, INC.
STATEMENT OF CASH FLOWS
For the period from January 1, 1995
through June 29, 1995
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Cash flow from operating activities:
Net loss.......................................................................... $(386,741)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation.................................................................... 11,000
Change in operating assets (increase) decrease:
Management fee receivable..................................................... 36,666
Development fee receivable from affiliate of stockholder...................... 63,000
Reimbursable costs............................................................ 88,390
Due from affiliates of stockholder, net....................................... (751,870)
Due from employees and stockholder............................................ (1,226)
Prepaid insurance............................................................. 15,545
Change in operating liabilities increase (decrease):
Accounts payable and accrued expenses........................................... 831,167
Accrued payroll and payroll taxes............................................. 1,466
Other liabilities............................................................. (10,861)
-------
Total adjustments........................................................ 283,277
-------
Net cash used in operating activities.................................... (103,464)
--------
Cash flows from investing activities:
Purchase of property and equipment................................................. (22,101)
-------
Net cash used in investing activities.................................... (22,101)
-------
Cash flows from financing activities:
Stockholder contribution........................................................... 120,000
-------
Net cash provided by financing activities................................ 120,000
-------
Net decrease in cash................................................................. (5,565)
Cash at beginning of period.......................................................... 8,271
-----
Cash at end of period................................................................ $ 2,706
========
</TABLE>
Unaudited--See accompanying notes to financial statements.
F-86
<PAGE>
CROCKER & SONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 29, 1995
(1) BUSINESS
Crocker & Sons, Inc. (the Company) is a real estate management company that
provides sales promotion, operations, administration, accounting and
collection services. Prior to September 22, 1994, Thomas J. Crocker was the
Company's sole stockholder. As of June 29, 1995, Mr. Crocker is the majority
stockholder.
The Company was formed in 1989 when Thomas J. Crocker purchased the assets
of WJC & Sons, Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) REVENUE RECOGNITION
Management fee revenue is recognized when earned in accordance with the
terms of each respective management agreement.
(B) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of property and
equipment has been provided on the straight-line method based upon
estimated useful lives as follows:
Equipment.............................. 5 years
Furniture and fixtures................. 5 years
Automobiles............................ 5 years
(C) INCOME TAXES
The Company is a subchapter "S" corporation. As such, the stockholders
are personally responsible for any income tax expense on the Company's
taxable income. Accordingly, the statements do not include any provision
for income taxes which are the responsibility of the stockholders.
(D) PRO FORMA INCOME TAX PROVISION
Under the terms of a proposed merger (see note 7), the leasing operations
of Crocker & Sons, Inc. will be transferred to any entity which is
expected to be taxable as a C Corporation under the Internal Revenue
Code. The remaining operations will be merged into a subsidiary of a
proposed real estate investment trust, which is expected to qualify as
such under the Internal Revenue Code and thus will not be subject to
Federal income tax to the extent it distributes all of its taxable income
to shareholders and meets certain other requirements.
The pro forma tax provision has been calculated as if the leasing
operations of Crocker & Sons, Inc. are part of a separate wholly-owned
entity which is subject to taxation as a C Corporation.
The pro forma net loss per share is based on the average number of common
shares outstanding as shown in the Statement of Operations.
F-87
<PAGE>
CROCKER & SONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
June 29, 1995
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment as of June 29, 1995 and December 31, 1994
is as follows:
JUNE 29, DECEMBER 31,
1995 1994
---- ----
Equipment................................. $ 373,834 351,733
Furniture and fixtures.................... 70,241 70,241
Automobiles............................... 6,821 6,821
----- -----
$ 450,896 428,795
========== =======
(4) RELATED PARTY AND SIGNIFICANT CUSTOMER TRANSACTIONS
Substantially all of the Company's management fee revenue is earned from
properties owned by or affiliated with Thomas J. Crocker or his father, from
the development, construction and management of a property known as Mizner
Park, in which Thomas J. Crocker has a minority ownership interest and which
is majority-owned by Teachers Insurance and Annuity, from the development and
management of a property known as the Arbors Office Park, in which Thomas J.
Crocker has a minority ownership interest and which is majority-owned by an
affiliate of The State Teachers Retirement System of Ohio, and from the
management of other properties owned by Teachers Insurance and Annuity.
Building management fees generally range from 1% to 5% of gross receipts
collected by the property being managed. Development management fees are
generally an agreed-upon amount with the property owner. Construction
management fees are generally 8% of the total job cost.
At the end of 1991, Crocker Realty Management Services, Inc. (CRMSI), an
affiliate of the stockholder, was established to act as the leasing agent for
properties managed by the Company. CRMSI has no employees and the Company
allocates costs to CRMSI for the use of its personnel and services in
connection with these leasing activities. The Company also allocates costs to
CRMSI related to building management of buildings owned by Crocker Realty
Investors, Inc. The allocation of costs is based on revenues earned by CRMSI.
The Company had transactions with related parties and significant building
owners as follows:
<TABLE>
<CAPTION>
RELATED PARTY
-------------------------------------------- TRACHERS
MIZNER ARBORS INSURANCE
AFFILIATES PARK OFFICE PARK TOTAL AND ANNUITY
---------- ---- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
Period from January 1, 1995 through June 29, 1995:
Building management fees........................... $256,402 $221,395 $49,800 $527,597 $15,233
Development and construction management fees....... 54,485 42,000 47,084 143,569 --
Other.............................................. -- 630 70,746 71,376 --
As of June 29, 1995:
Management fee receivable.......................... 77,300 -- -- 77,300 --
Net due from affiliates of stockholder............. 737,572 60,179 -- 797,751 --
As of December 31, 1994:
Management fee receivable.......................... 74,803 36,624 -- 111,427 2,539
Development fee receivable......................... -- 63,000 -- 63,000 --
Net due from affiliates of stockholder............. 45,881 -- -- 45,881 --
</TABLE>
F-88
<PAGE>
CROCKER & SONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
June 29, 1995
(5) PRO FORMA INCOME TAXES
The pro forma income tax expense attributable to earnings from the leasing
operations, as described in note 2(d), for the period from January 1, 1995
through June 29, 1995 differ from the amounts computed by applying the U.S.
Federal tax rate of 34 percent to pro forma pretax loss from the operations
of the Company as a result of the following:
Computed "expected" tax expense for the Company........... $(131,492)
Effect of taxable loss for the non-leasing operations
of the Company......................................... 266,591
State income taxes, net of Federal income tax
benefit................................................. 14,424
------
Pro forma income tax expense.............................. $149,523
========
The pro forma income taxes calculated above were prepared in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
(6) STOCKHOLDERS' EQUITY
On June 29, 1995, the Company received a $120,000 capital contribution from
Thomas J. Crocker.
(7) SUBSEQUENT EVENT--MERGER
On June 30, 1995, pursuant to an Agreement and Plan of Merger (the Merger
Agreement), dated as of September 29, 1994, the Company and Crocker Realty
Management Services, Inc. (CRMSI) were merged (the Merger) into a
wholly-owned subsidiary of Crocker Realty Trust, Inc., a Maryland corporation
which changed its name from Southeast Realty Corp. to Crocker Realty Trust,
Inc. on June 30, 1995. Upon consummation of the Merger, the shareholders of
the Company and CRMSI received, in the aggregate, 637,500 shares of Crocker
Realty Trust, Inc.'s common stock, representing approximately 4.5% of the
outstanding shares of Crocker Realty Trust, Inc.'s common stock.
The Merger Agreement provided for Crocker Realty Trust, Inc. to reimburse
the Company for all expenses and costs of the Company, in assuming the
management and accounting of Crocker Realty Trust, Inc.'s 50 properties,
which are incurred prior to June 30, 1995. On March 16, 1995, the Company was
reimbursed $88,390 of such costs incurred during the year ended December 31,
1994. This amount was reflected in these financial statements as reimbursable
costs as of December 31, 1994.
F-89
<PAGE>
CROCKER & SONS, INC.
FINANCIAL STATEMENTS
F-90
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder
Crocker & Sons, Inc.:
We have audited the accompanying balance sheet of Crocker & Sons, Inc. as
of December 31, 1994, and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Crocker & Sons, Inc. as of
December 31, 1994, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
February 23, 1995
F-91
<PAGE>
CROCKER & SONS, INC.
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
Current assets:
Cash............................................................... $ 8,271
Management fees receivable (note 4)................................ 113,966
Development fee receivable from affiliate of stockholder (note 4).. 63,000
Reimbursable costs (note 7)........................................ 88,390
Due from employees and stockholder................................. 3,195
Due from affiliates of stockholder, net (note 4)................... 45,881
Prepaid insurance.................................................. 20,412
------
Total current assets.......................................... 343,115
-------
Property and equipment (note 3)...................................... 428,795
Less accumulated depreciation........................................ (352,718)
--------
76,077
------
Total assets.................................................. $419,192
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................. 65,085
Accrued payroll and payroll taxes.................................. 2,733
Other liabilities.................................................. 14,486
------
Total current liabilities..................................... 82,304
------
Stockholders' equity (notes 6 and 7):
Common stock, $1 par value. Authorized, issued and outstanding
7,500 shares......................................................... 7,500
Additional paid-in capital......................................... 329,388
-------
Total stockholders' equity.................................... 336,888
-------
Total liabilities and stockholders' equity.................... $419,192
========
F-92
See accompanying notes to financial statements.
<PAGE>
CROCKER & SONS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
Revenues (note 4):
Management fees--buildings:
Related parties.............................................. $ 695,214
Unrelated party.............................................. 217,774
Management fees--development and construction:
Related parties.............................................. 315,651
Other:
Related parties.............................................. 177,245
Unrelated party.............................................. 19,949
------
Total revenues............................................. 1,425,833
---------
Expenses:
Payroll and related costs....................................... 2,147,368
General and administrative (note 4)............................. 309,941
Depreciation.................................................... 29,075
Professional fees............................................... 103,745
Communications.................................................. 66,596
Less: Allocation of costs to affiliate related to management
activities (note 4)............................................... (72,164)
Less: Allocation of costs to affiliate related to leasing and
building management activities (note 4)........................... (811,208)
- --------
Total expenses............................................. 1,773,353
---------
Operating loss............................................. (347,520)
--------
Other income:
Interest income................................................. 69,693
Sales commission (note 4)....................................... 1,157,437
Miscellaneous income.............................................. 215,243
-------
Total other income......................................... 1,442,373
---------
Net income................................................. $1,094,853
==========
Pro forma data (unaudited--see notes 2 and 5):
Historical net income........................................... 1,094,853
Provision for pro forma income taxes............................ 104,488
-------
Pro forma net income....................................... $ 990,365
==========
Pro forma net income per common share............................. $ 465.62
==========
Weighted average number of shares outstanding..................... 2,127
=====
See accompanying notes to financial statements.
F-93
<PAGE>
CROCKER & SONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
------ ------ ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1993........................................ 100 $ 100 1,050,992 (1,065,375) (14,283)
Issuance of stock to majority stockholder.................. 4,994 4,994 (4,994) -- --
Proceeds from issuance of stock to officers................ 2,406 2,406 255,594 -- 258,000
Distribution to majority stockholder....................... -- -- (972,204) (29,478) (1,001,682)
Net income................................................. -- -- -- 1,094,853 1,094,853
---- ------ ------- --------- ---------
Balance at
December 31, 1994........................................ 7,500 $7,500 329,388 -- 336,888
===== ====== ======= ========= =======
</TABLE>
See accompanying notes to financial statements.
F-94
<PAGE>
CROCKER & SONS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
Cash flow from operating activities:
Net income.................................................... $1,094,853
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................... 29,075
(Increase) decrease in operating assets:
Management fees receivable............................... (17,403)
Development fee receivable............................... (63,000)
Reimbursable costs....................................... (88,390)
Due from employees and stockholder....................... 9,400
Prepaid insurance........................................ 9,677
Utility deposits......................................... 81,250
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses.................... 12,968
Accrued payroll and payroll taxes........................ (3,993)
Other liabilities........................................ (940)
----
Total adjustments.................................. (31,356)
-------
Net cash provided by operating activities.......... 1,063,497
---------
Cash flows from investing activities:
Purchase of property and equipment............................ (40,482)
-------
Net cash used in investing activities.............. (40,482)
-------
Cash flows from financing activities:
Due to/from affiliates of stockholder, net.................... (292,991)
Proceeds from issuance of stock............................... 258,000
Distribution to majority stockholder.......................... (1,001,682)
----------
Net cash used in financing activities.............. (1,036,673)
----------
Net decrease in cash............................................ (13,658)
Cash at beginning of year....................................... 21,929
------
Cash at end of year............................................. $ 8,271
==========
See accompanying notes to financial statements.
F-95
<PAGE>
CROCKER & SONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) BUSINESS
Crocker & Sons, Inc. (the "Company") is a real estate management company
that provides sales promotion, operations, administration, accounting and
collection services. Prior to September 22, 1994, Thomas J. Crocker was the
Company's sole stockholder. As of December 31, 1994, Mr. Crocker is the majority
stockholder (see note 6 below).
The Company was formed in 1989 when Thomas J. Crocker purchased the assets
of WJC & Sons, Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
Management fee revenue is recognized when earned in accordance with the
terms of each respective management agreement.
(b) Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment has been provided on the straight-line method based upon estimated
useful lives as follows:
Equipment....................................... 5 years
Furniture and fixtures.......................... 5 years
Automobiles..................................... 5 years
(c) Income Taxes
The Company is a subchapter "S" corporation. As such, the stockholder is
personally responsible for any income tax expense on the Company's taxable
income. Accordingly, the statements do not include any provision for income
taxes which are the responsibility of the stockholder.
(d) Pro Forma Income Tax Provision
Under the terms of a proposed merger, the leasing operations of Crocker &
Sons, Inc. will be transferred to an entity which is expected to be taxable as a
C Corporation under the Internal Revenue Code. The remaining operations will be
merged into a subsidiary of a proposed real estate investment trust, which is
expected to qualify as such under the Internal Revenue Code and thus will not be
subject to Federal income tax to the extent it distributes all of its taxable
income to shareholders and meets certain other requirements.
The pro forma tax provision has been calculated as if the leasing
operations of Crocker & Sons, Inc. are part of a separate wholly-owned entity
which is subject to taxation as a C Corporation. Such presentation included the
assumption that taxable net operating losses of the leasing operations would be
carried forward to offset taxable income generated through December 31, 1994.
The pro forma net income per share is based on the average number of common
shares outstanding as shown in the Statement of Operations.
F-96
<PAGE>
CROCKER & SONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 31, 1994 is as follows:
Equipment............................... $ 351,733
Furniture and fixtures.................. 70,241
Automobiles............................. 6,821
-----
$ 428,795
==========
(4) RELATED PARTY AND SIGNIFICANT CUSTOMER TRANSACTIONS
Substantially all of the Company's management fee revenue is earned from
properties owned by or affiliated with Thomas J. Crocker or his father, from the
development, construction and management of a property known as Mizner Park, in
which Thomas J. Crocker has a minority ownership interest and which is
majority-owned by Teachers Insurance and Annuity, from the development and
management of a property known as the Arbors Office Park, in which Thomas J.
Crocker has a minority ownership interest and which is majority-owned by an
affiliate of The State Teachers Retirement System of Ohio, and from the
management of other properties owned by Teachers Insurance and Annuity.
Building management fees generally range from 1% to 5% of gross receipts
collected by the property being managed. Development management fees are
generally an agreed-upon amount with the property owner. Construction management
fees are generally 8% of the total job cost.
At the end of 1991, Crocker Realty Management Services, Inc. ("CRMSI"),
an affiliate of the stockholder, was established to act as the leasing agent for
properties managed by the Company. CRMSI has no employees and the Company
allocates costs to CRMSI for the use of its personnel and services in connection
with these leasing activities. The Company also allocates costs to CRMSI related
to building management of buildings owned by Crocker Realty Investors, Inc. The
allocation of costs is based on revenues earned by CRMSI.
The Company had transactions with related parties and significant building
owners as follows:
<TABLE>
<CAPTION>
RELATED PARTY
--------------------------------------------- TEACHERS
MIZNER ARBORS INSURANCE
AFFILIATES PARK OFFICE PARK TOTAL AND ANNUITY
---------- ---- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Building management fees..................... $260,251 312,030 122,933 695,214 217,774
Development and construction management
fees.................................... -- 226,382 89,269 315,651 --
Other........................................ 5,645 28,195 143,405 177,245 19,949
As of December 31, 1994:
Management fee receivable.................... 74,803 36,624 -- 111,427 2,539
Development fee receivable................... -- 63,000 -- 63,000 --
Net due to/from affiliates
of stockholder............................ 45,881 -- -- 45,881 --
</TABLE>
F-97
<PAGE>
CROCKER & SONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994
(4) RELATED PARTY AND SIGNIFICANT CUSTOMER TRANSACTIONS--(CONTINUED)
On February 17, 1994, the Company received a commission of $1,157,437 for
the sale of two buildings owned by The State Teachers Retirement System of Ohio
which were managed by the Company prior to the sale. Building, development and
construction management fee revenue from these buildings for the year ended
December 31, 1994 totaled approximately $34,000.
On May 16, 1994, the Company ceased managing several buildings owned by
Teachers Insurance and Annuity containing a total of approximately 606,000
rentable square feet. Building, development and construction management fee
revenue and allocation of costs related to leasing activities earned from these
buildings for the year ended December 31, 1994, totaled approximately $321,000.
On March 9, 1994, the Company began managing a building containing
approximately 315,000 rentable square feet, owned by an affiliate of the
stockholder. On April 27, 1994, the Company began allocating costs to Crocker
Realty Management Services, Inc., which began managing a building containing
approximately 280,000 rentable square feet, which is owned by a company in which
the stockholder is an officer. Building management fee revenue and allocation of
costs related to leasing and building management activities from these buildings
totaled approximately $427,000 for the year ended December 31, 1994.
Starting on October 1, 1994, the Company began allocating certain payroll
costs to Crocker Realty Investors Inc. ("CRI") relating to services of certain
personnel utilized by CRI directly involved in the organization and business of
CRI, excluding executive officers of CRI.
(5) PRO FORMA INCOME TAXES
The pro forma income tax expense attributable to earnings from the leasing
operations, as described in note 2(d), for the year ended December 31, 1994
differs from the amounts computed by applying the U.S. Federal tax rate of 34
percent to pro forma pretax earnings from the leasing operations as a result of
the following:
Computed "expected" tax expense for the Company................... $ 372,250
Effect of assumed 100% distribution of real estate investment
trust taxable income, for the non-leasing operations of the
Company, to its shareholders.................................... (5,157)
State income taxes, net of Federal income tax benefit............. 39,193
Benefit of operating loss carry-forwards of the
leasing operations.............................................. (301,798)
--------
Pro forma income tax expense...................................... $ 104,488
===========
The pro forma income tax calculated above was prepared in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
(6) STOCKHOLDERS' EQUITY
On September 22, 1994, the Company issued 7,400 shares of stock. 4,994 of
these shares were issued to Thomas J. Crocker with no corresponding
contribution. Additional paid-in capital of $4,994 representing the par value of
the common stock was transferred to the common stock account. The remaining
2,406 shares were issued to two officers of the Company in exchange for
$258,000.
F-98
<PAGE>
(6) STOCKHOLDERS' EQUITY (CONTINUED)
Prior to the issuance of the above-mentioned shares of stock, the Company
paid a stockholder distribution to Thomas J. Crocker of $1,001,682 or
approximately $10,017 per share.
(7) PROPOSED MERGER
On September 29, 1994, the Company and Southeast Realty Corp., a newly
formed Maryland corporation ("Southeast Realty"), entered into an agreement (the
"Merger Agreement") pursuant to which, among other transactions, the Company and
Crocker Realty Management Services, Inc. ("CRMSI") will be merged into a
wholly-owned subsidiary of Southeast Realty. Upon consummation of the Merger,
the shareholders of the Company and CRMSI will receive, in the aggregate,
637,500 shares of Southeast Realty's common stock, representing approximately
4.5% of the outstanding shares of Southeast Realty's common stock. The
consummation of the Merger is subject to various conditions including, the
satisfaction or waiver of the conditions to consummation of a merger ("the CRI
Merger") of Crocker Realty Investors, Inc. ("CRI") with and into a wholly-owned
subsidiary of Southeast Realty, pursuant to a merger agreement between CRI and
Southeast Realty. The CRI Merger requires the approval of the holders of a
majority of the outstanding shares of Crocker Realty Investors, Inc. Upon
consummation of the mergers, Southeast Realty will own interests in 50 office
properties.
The Merger Agreement provides for Southeast Realty to reimburse the Company
for all expenses and costs of the Company, in assuming the management and
accounting of the 50 properties, which are incurred prior to the closing date of
the merger. Subsequent to December 31, 1994, the Company was reimbursed $88,390
of such costs incurred during the year ended December 31, 1994. This amount has
been reflected in these financial statements as reimbursable costs as of
December 31, 1994.
F-99
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CROCKER REALTY TRUST, INC.
433 PLAZA REAL, SUITE 335
BOCA RATON, FLORIDA 33432
The undersigned hereby appoints Thomas J. Crocker and Richard S. Ackerman,
and each of them acting alone, with the power to appoint his substitute proxy to
represent the undersigned and vote as designated below all of the shares of
common stock, par value $.01 per share, of Crocker Realty Trust, Inc. (the
Common Stock) held of record by the undersigned at the close of business on
August 26, 1996, at the Special Meeting of Stockholders to be held on September
20, 1996 and at any adjournment thereof.
1. Approval and adoption of an Agreement and Plan of Merger, dated as of April
29, 1996, by and among Highwoods Properties, Inc., a Maryland corporation
(Highwoods), Cedar Acquisition Corp., a Maryland corporation and a subsidiary
of Highwoods (CAC), and the Company, pursuant to which, among other things,
(a) CAC will be merged with and into the Company; (b) each share of Common
Stock (other than shares held by the Company or Highwoods or any wholly-owned
subsidiary of Highwoods or the Company which will be cancelled) will be
converted automatically into a right to receive $11.05243 in cash, without
interest; and (c) the Company will become a subsidiary of Highwoods.
FOR /_/ AGAINST /_/ ABSTAIN /_/
2. In his discretion, the proxy is authorized to vote upon such other matters as
may properly come before 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 PROPOSAL 1.
Dated: ------------------------
Signature ---------------------
-------------------------------
Signature if held jointly
Please sign exactly as name
appears to the left. When
shares are held by joint
tenants, both should sign. When
signing as attorney, executor,
administrator, trustee or
guardian, please give full
title as such. If a
corporation, please sign in
full corporate name by
President or other authorized
officer. If a partnership,
please sign in partnership name
by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
