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STOCK REDEMPTION AGREEMENTS General On August 22, 1984, the Company entered into agreements (the "Agreements") with Sidney M. Friedberg, Chairman of the Board of Directors of the Company, and Sylvia F. Nachlas, a Direct or of the Company (individually "Stockholder" and collectively "Stockholders"), for the purchase of certain of the shares of stock of the Company owned by the Stockholders upon death. (For information with respect to the ownership of stock of the Company by the Stockholders, see "Directors and Executive Officers - Stock Ownership"). The Stockholders advised the Company that the reason each of them entered into the Agreements was to facilitat e the administration of their respective estates by providing proceeds from the sale of stock of the Company pursuant to the Agreements to discharge Federal and State death taxes. A copy of the Agreements is a ttached to this Proxy Statement as Exhibit 1. The description of the Agreements contained herein is qual ified in its entirety by reference to Exhibit 1. The Board of Directors unanimously approved the Agreements, with the Stockholders abstaining. Under Maryland law, the Company has the power to purchase shares of its outstanding stock without approval of its stockholders. The Board of Directors determined, however, that the stockholders of the Company, other than the Stockholders, should be given the opportunity to approve or disapprove the Agreements. Accordingly, the Agreements provide that approval of the stockholders of the Company by the affirmative vote of a majority of shares present at a m eeting of stockholders and voting on the Agreements, other than shares owned by the Stockholders or their Estates, must be obtained within one year of the date of the Agreements. If such approval i s not obtained, the Agreements terminate. The Board of Directors recommends that the stockholders vote FOR approval of the Agreements. Description of the Agreements The Agreements provide that upon death, the Company will purchase, and the personal representatives of the Stockholder's Estate will sell, that number of shares of Common Stock of the Company determined by dividing the lesser of (i) the sum of the amounts of net Federal Esta te tax and the credit for State death taxes as shown on the Stockholder's Federal Estate Tax R eturn, or (ii) $5,000,000 plus 10% of the Company's stockholders' equity (as reflected on the Company's Consolidated Balance Sheet as of the end of the fiscal quarter of the Company imme diately preceding the date of the Stockholder's death) in excess of $40,000,000 by the purchase price to be paid by the Company for the shares. Based upon the Company's stockholders' equity as of June 30, 1984, if death of a Stockholder had occurred in the quarter ended September 30, 1984 the maximum amount that the Company would have been required to expend to purchase shares of stock pursuant to the Agreements from the Estate of such Stockholder would have been $5,294,400. The number of shares to be purchased cannot, in any event, exceed (i) 40% of the shares of Common Stock of the Company owned by the Stockholder at the time of death, or (ii) the numbe r of shares which can be purchased by the surplus available to the Company under Maryland law a t the time of purchase. The purchase price to be paid by the Company for shares purchased pursuant to the Agreements is the market value of the shares as of the day before the death of the Stockholder less 20%. If the Company's stock is traded in the over-the-counter market, market value is the mean be tween the closing high bid and low asked prices as reported by NASDAQ on the date of valuation; and if traded on an exchange, the last closing price on the date of valuation. Payment of the purchase price may be in cash or, at the sole discretion of the Com pany, by its note payable in five equal annual installments, the first being payable on the earlier of 12 months from the date of closing or 14 months from the date of death of the Stockholder, and the remai ning payments being payable in consecutive annual installments beginning two years from the da te of closing, together with interest at the same rate as the Internal Revenue Servic e rate of interest. Such rate of interest is currently 11% for the period July 1, 1984 through December 31, 1984 and changes each July 1 and January 1 based on the average bank prime interest rate for the prior six m onth period ending March 31 and September 30, respectively. Notwithstanding the foregoing, if the principal amount of any installment exceeds 15 % of the Company's cash flow (net incom e plus depreciation and amortization of property and equipment) for the fiscal year prior to the i nstallment payment date, the Company may defer the amount of such excess to the next insta llment payment date, provided that the entire unpaid balance of principal is paid within six years of closing. The Personal Representatives of the Stockholders' Estates will be entitled to vote t he shares being sold in the period from the date of death to the date of closing and to receive a ll cash dividends paid on such shares during such period. The Company will be entitled to all other dividends and distributions made or to be made with respect to such shares during such period. Closing on the Agreements is to take place 30 days after the later to occur of (i) the mailing or delivery to the Company of certain of the Stockholder's Federal estate tax information required under the Agreement, or (ii) the approval of the Agreements by the Company's stockholders. Consideration by the Board of Directors The Board of Directors of the Company considered the potential impact of the Agreements on the Company's net worth, book value, net income, earnings per share and cash flow. The Board gave great weight to the fact that purchases of shares pursuant to the Agreements would be at a substantial discount from market value as of the day prior to the Stockholder's death. The Board also believed that the stock purchases under the Agreements would, in all likelihood, help to maintain the stability of the market and price of the Company's stock by avoiding the sale by the Stockholders' Estates of two significant blocks of stock in the public market. The Board also took into consideration that the Agreements contained several safeguards designed to prevent the purchases of stock pursuant to the Agreements from becoming financially burdensome to the Company. These protective provisions consist of (i) a dollar limit on the amount the Company is obligated to expend in the purchase of stock from either Stockholder ($5,000,000 plus 10% of net worth in excess of $40,000,000); (ii) an option to pay the purchase price on terms over a five year period; and, (iii) if such option if exercised, the right to defer installments that exceed 15% of annual cash flow. The Board of Directors retained the investment banking firm of Drexel Burnham Lambert Incorporated ("DBL") to advise the Board of Directors on the fairness of the transactions contemplated by the Agreements. The opinion rendered by DBL on August 13, 1984 to the Board took into account several factors, including but not limited to (i) analysis of publicly available information concerning the Company as well as other companies believed comparable or relevant by them, (ii) discussions with management concerning its business and operations, present conditions and future prospects, (iii) analysis of certain financial data of the company (both before and after giving effect to the transactions contemplated by the Agreements) and (iv) certain possible effects of such transactions on the Company. Additionally, DBL did not independently verify the information concerning the Company supplied to them by the Company and consequently relied upon the completeness and accuracy of such information. As of the date of its opinion and based upon and subject to, these factors and other factors set forth therein, DBL has rendered its opinion to the Board to the effect that the transactions contemplated by the Agreements are fair from a financial point of view to the Company and the shareholders of the Company (other than Sidney M. Friedberg and Sylvia F. Nachlas). A copy of this opinion is attached hereto as Exhibit 2. DBL has performed investment banking services for the Company in the past and was the underwriter of its offering of $24,600,000 principal amount of Subordinated Exchangeable Debentures. In addition to the fee for its services in connection with rendering its opinion, the Company has indemnified DBL against certain liabilities. Based on all of the above, the Board of Directors of the Company has concluded that the Agreements are in the best interests of the Company and its stockholders other than Sidney M. Friedberg and Sylvia F. Nachlas, and recommends that stockholders vote in favor of the Agreements. EXHIBIT 1 This Agreement made this 22nd day of August, 1984 by and between (Sidney M. Friedberg) (Sylvia F. Nachlas) (the "Stockholder") and Fair Lanes, Inc., a Maryland corporation (the "Company"). RECITALS a. The Stockholder is a major stockholder of the Company, owning in excess of 20% of the Company's issued and outstanding Common Stock. b. In order to facilitate the administration of (his) (her) estate, the Stockholder desires to obligate (his) (her) Estate to sell to the Company a certain number of the shares of stock of the Company owned by (his) (her) Estate upon (his) (her) death to provide funds for the payment of certain estate taxes. The Stockholder is willing to sell such shares to the Company at a price below the price at which such shares trade in the public market at the time of (his) (her) death. c. The Board of Directors of the Company believes the purchase of such shares to be in the best interests of the Company because it (i) will be at a price below the public market price of the shares, and (ii) will help maintain the stability of the market and the price of the Company's stock by avoiding the sale by the Stockholder's Estate of a significant block of the Company's stock in the public market. Accordingly, the Board of Directors of the Company is willing to obligate the Company to purchase such shares from the Stockholder's Estate and has approved the execution of this Agreement by the Company.Now, therefore, in consideration of the mutual covenants herein contained, it is agreed as follows: 1. Purchase and Sale of Stock upon Death. (a) Upon the death of the Stockholder, the Company shall purchase and the personal representatives of the Stockholder's Estate (the "Personal Representatives") shall sell, at the price per share determined pursuant to Section 1(b) hereof (the "Per Share Value"), that number of full shares of Common Stock of the Company determined pursuant to Section l(c) hereof (the "Shares"). The product of the Per Share Value times the Shares is hereinafter referred to as the "Purchase Price". (b) Per Share Value shall mean the per share market price of the Company's Common Stock as of the day before the date of death of the Stockholder (the "Valuation Date") less twenty percent (20%) thereof. If, on the Valuation Date, the Company's Common Stock is traded in the over-the- counter market, market price shall be the mean between the closing high bid and low asked prices of the Company's Common Stock as reported by NASDAQ on the Valuation Date, and if such date is not a trading day, then on the immediately preceding trading day. If, on the Valuation Date, the Company's Common Stock is traded on a national or regional exchange, the market price shall be the last closing price reported by such exchange on the Valuation Date, and if such date is not a trading day, then on the immediately preceding trading day. (c) The Shares shall be that full number determined by dividing the lesser of (i) the sum of the amounts of net Federal estate tax and the credit for State death taxes as shown on the Federal Estate Tax Return as filed by the Personal Representatives, or (ii) Five Million Dollars ($5,000,000) plus ten percent (10%) of the Company's stockholder equity (as reflected on the Company's Consolidated Balance Sheet as of the end of the fiscal quarter of the Company immediately preceding the date of the Stockholder's death) in excess of Forty Million Dollars ($40,000,000), by the Per Share Value. Notwithstanding the foregoing, Shares will not exceed the lesser of (i) the number of Shares determined pursuant to the provisions of Section 6(a) hereof, and (ii) the full number of shares of Common Stock of the Company which do not exceed forty percent (40%) of the total number of such shares owned by the Stockholder on the date of (his) (her) death and included in determining the gross estate of the Stockholder for Federal estate tax purposes as shown in the Federal Estate Tax Return fried by the Personal Representatives. 2 . Payment of Purchase Price. Payment of the Purchase Price for the Shares shall be payable by certified or cashier's check or, at the sole discretion of the Board of Directors of the Company, in whole or in part, by delivery of a promissory note in the form of the note attached hereto and marked "Exhibit A". . Covenants Prior to Closing. (a) At all times in the period from the date of death of the Stockholder to the date of Closing hereunder, the Personal Representatives shall retain in the Stockholder's Estate free and clear of all liens and encumbrances a sufficient number of shares of Common Stock of the Company to fulfill its obligations hereunder. (b) The Personal Representatives shall mail or deliver to the Company a copy of the first page of the Federal Estate Tax Return filed by them within ten (10) days of such filing, together with a statement in writing certifying as to the total number of shares of Common Stock of the Company owned by the Stockholder at the time of (his) (her) death and which are included in determining the gross estate of the Stockholder for Federal estate tax purposes. (c) The Company shall submit this Agreement to its stockholders for consideration and vote at a duly called meeting of its stockholders within one year from the date hereof. The Company shall promptly advise the Stockholder or the Personal Representatives, as the case may be, in writing of the results of such vote. If this Agreement is not approved at such stockholders meeting by the affirmative vote of the holders of a majority of all shares present at such meeting in person or by proxy and voting on the matter, other than any shares owned of record or beneficially by the Stockholder or the Stockholder's Estate, as the case may be, and by (Sylvia F. Nachlas) (Sidney M. Friedberg) or (her) (his) Estate, as the case may be, then this Agreement shall terminate and neither the Company nor the Stockholder or the Stockholder's Estate shall have any further liability or obligation to the other hereunder. 4 . Period from Death to Closing. (a) The Personal Representatives shall be entitled to vote the Shares in the period from the date of the Stockholder's death to the date of Closing hereunder and to receive all cash dividends paid on the Shares during such period. (b) The Company shall be entitled to all dividends and distributions, other than cash dividends, made or to be made with respect to the Shares after the date of the Stockholder's death, including, but not limited to, all cash, shares or other property distributed on or in exchange for the Shares in connection with (i) a merger, consolidation, or similar transaction, (ii) stock split, stock dividend, reorganization, recapitalization or similar transaction, or (iii) liquidation or partial liquida tion of the Company. At Closing the Personal Representatives shall pay and/or deliver to the Company all such cash, shares and other property. Any such cash payments shall be made by check, any such delivery of shares shall be made in the same manner as set forth in Section 5(b) (i) below, and any such delivery of other property shall be made in an appropriate manner so as transfer good and marketable title thereto to the Company. At Closing the Personal Representative shall also assign to the Company in form satisfactory to the Company all rights of the Personal Representatives to receive all such cash, stock or other property and which is either unpaid or has not yet been received by the Personal Representatives as of the date of Closing hereunder. 5. Closing. (a) Closing of this Agreement shall take place thirty (30) days after the later to occur of (i) the mailing or delivery to the Company of the Stockholder's Federal estate tax information required pursuant to Section 3(b) hereof, and (ii) the approval of this Agreement by the Company's stockholders. Closing shall take place at the principal office of the Company at 10:00 o'clock a.m. or at such other time and place as may be mutually agreeable to the parties hereto.(b) At Closing the Personal Representatives (i) shall deliver to the Company stock certificates representing the Shares together with stock powers duly endorsed by each of the Personal Representatives and with their signatures guaranteed by an officer or authorized representative of a national bank or a member of the National Association of Securities Dealers, (ii) shall pay and/or deliver to the Company the cash, stock and property required by Section 4(b) hereof, and (iii) shall make the assignment required by Section 4(b) hereof. At Closing, the Company shall pay to the Personal Representatives the Purchase Price in the manner provided for in Section 2 hereof. The Stockholder represents and warrants that the Shares and all other shares and property to be delivered at Closing shall be free and clear of all liens and encumbrances, and that the Company will acquire good and marketable title thereto upon delivery thereof. 6 . Surplus of Company. (a) Notwithstanding anything to the contrary herein contained, if, on the date of Closing hereunder, the Company does not have sufficient surplus to purchase all of the number of share of Common Stock of the Company to be purchased pursuant to Section l(a) hereof, the Company shall purchase only that number of full shares of such stock which may be purchased by it based upon its then existing surplus, which number of shares shall become the "Shares" for all purposes of this Agreement. In such event, the Company shall have no further obligation to purchase and the Personal Representatives shall have no further obligation to sell any additional shares of Common Stock of the Company hereunder. (b) In the event that on the due date of any installment of principal or interest of any promissory note issued by the Company pursuant to Section 2 hereof, the Company does not have sufficient surplus to make such payments, then the Company shall in good faith take such lawful action as may be required to create surplus in such amounts which will permit it to make such payments. In no event, however, shall the Company's insufficient surplus relieve it from any obligation to pay any installment of principal or interest of any promissory note issued hereunder at such time as it may lawfully do so. 7. Notices. Any and all communications provided for herein shall be given in writing by delivery or by registered or certified mail, postage prepaid, and addressed, if to the Company, to its principal office, and if to the Stockholder or (his) (her) Estate, to his or its address, as the case may be, appearing in the stock records of the Company or to such other address as may be designated by him or the Personal Representatives in writing addressed to the Company, together with a copy to Gordon, Feinblatt, Rothman, Hoffberger and Hollander, 233 E. Redwood Street, Baltimore, Maryland 21202, ATTN: David P. Gordon. Such communications shall be deemed to have been given on the date of such delivery or mailing. 8. Binding Effect. This Agreement shall be binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns. 9 . Governing Law. This agreement shall be governed by and construed under the laws ofthe State of Maryland. IN WITNESS WHEREOF, the parties hereto have executed and sealed this Agreement as of the day and year first above written with the intention of making this a sealed agreement. ATTEST: WITNESS: EXHIBIT A PROMISSORY NOTE $ ____________________ Baltimore, Maryland ____________________, 19 FOR VALUED RECEIVED, Fair Lanes, Inc. a Maryland corporation (the "Corporation") promises to pay to the order of the Estate of (Sidney M. Friedberg) (Sylvia F. Nachlas) (the "Estate") the principal sum of __________________________________ Dollars ($________________) payable in five (5) equal installments of __________________________________ Dollars ($ _____________) each, the first of such installments being due and payable on the earlier of twelve (12) months from the date hereof or fourteen (14) months from the date of death of (Sidney M. Friedberg) (Sylvia F. Nachlas) and the remaining payments being due and payable in consecutive annual installments beginning two (2) years from the date hereof, together with intere st at the same rate as established pursuant to Section 6621 of the Internal Revenue Code (or any Section whi ch is a successor thereto) as such rate may exist from time to time, payable quarterly on the unpaid principal balance hereof. Notwithstanding the foregoing, if the principal amount of any installment due hereunder shall exceed fifteen percent (15%) of the cash flow (net income plus depreciation and amorti zation of property and equipment) of the Corporation for the fiscal year immediately preceding the installment payment date as reflected in the Corporation's audited financial st atements for such year, the amount of such excess may, at the option of the Corporation, be deferred to the next i nstallment payment date. The amount of such deferral shall be deemed to be principal for the purpose of determining whether the required payment of principal exceeds the foregoing cash flow percent age at the time of each installment payment date thereafter. If any deferred princi pal exists at the time of the fifth installment due hereunder, it shall be payable one year thereafter. Nothing herein shall be deemed to modify or restrict in any manner the obligation of the Corporation to pay interest quarterly on the unpaid principal balance hereof. The Corporation shall have the privilege at any time of prepaying the whole or any part of the unpaid principal balance hereof without penalty or premium, provided that with each pre payment the Corporation shall pay accrued interest on the principal so prepaid to the date of suc h prepayment. All such prepayments shall be applied to installments payable hereunder i n their order of maturity. All payments of principal and interest shall be made to the Estate, care of Gordon, Fe inblatt, Rothman, Hoffberger & Hollander, 233 East Redwood Street, Baltimore, Maryland 21202, or at any such other place as may be designated by the Estate or any holder hereof in writing. In the event of a default in the payment of any installment of principal or interest required to be made pursuant to the terms and provisions of this Note, and such default continues for a period of sixty (60) days after receipt by the Company of written notice from the holder hereof, the e ntire unpaid balance of this Note may, at the option of the holder hereof, be declared imme diately due and payable. The Corporation shall bear and pay all costs of collection of this Note, including reasonable attorney's fees, in the event of the acceleration of this Note upon default. IN WITNESS WHEREOF, this Note has been executed the day and year first above written by the Corporation under seal with the intention to make this Note a sealed instrument. ATTEST: FAIR LANES, INC. __________________________________ By: ________________________ (SEAL) Secretary President