<PAGE>
As filed with the Securities and Exchange Commission on October 15, 1998
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
PRENTISS PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 75-2261588
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
3890 W. NORTHWEST HIGHWAY, SUITE 400 J. KEVAN DILBECK
DALLAS, TEXAS 75220 PRENTISS PROPERTIES TRUST
(214) 654-0886 3890 W. NORTHWEST HIGHWAY, SUITE 400
(Address, including zip code, and DALLAS, TEXAS 75220
telephone number, including area code, of (214) 654-0886
registrant's principal executive offices) (Name, address, including zip code,
and telephone number, including
area code, of agent for service)
COPY TO:
Michael E. Dillard, P.C.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1700 PACIFIC AVENUE, SUITE 4100
DALLAS, TEXAS 75201
(214) 969-2800
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement in light of
market conditions and other factors.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box: [_]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
AGGREGATE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS AGGREGATE AMOUNT OFFERING PRICE PER OFFERING PRICE REGISTRATION
OF SECURITIES TO BE REGISTERED TO BE REGISTERED UNIT (1) (1) FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Shares of Beneficial Interest,
Series A, $.01 par value per share 3,773,585 $18.9375 $71,462,266 $21,081.37
Common Shares of Beneficial Interest,
$.01 par value per share (3) 3,773,585 (2)
===============================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(i) under the Securities Act of 1933, as amended. No separate
consideration will be received for Common Shares as may be issued from time
to time upon conversion of Series A Preferred Shares. The amount of the
registration fee is based on the average of the high and low prices of the
Common Stock reported by the New York Stock Exchange on October 8, 1998.
(2) Such number represents the number of Common Shares initially issuable upon
conversion of the Series A Preferred Shares registered hereby and, pursuant
to Rule 416 under the Securities Act of 1933, as amended, such indeterminate
number of Common Shares as may be issued from time to time upon conversion
of the Series A Preferred Shares by reason of adjustment of the conversion
price under certain circumstances outlined in the Prospectus.
(3) Rights to Purchase Junior Participating Cumulative Preferred Shares of
Beneficial Interest, Series B, par value $.01 per share, are attached to and
trade with the Common Shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ The information in this Prospectus is not complete and may be changed. The +
+ selling shareholders may not sell these securities until the Registration +
+ Statement filed with the Securities and Exchange Commission is effective. +
+ This Prospectus is not an offer to sell these securities and is not +
+ soliciting an offer to buy these securities in any state where the offer +
+ or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1998
PROSPECTUS
PRENTISS PROPERTIES TRUST
3890 W. NORTHWEST HIGHWAY, SUITE 400
DALLAS, TEXAS 75220
(214) 654-0886
3,773,585 SERIES A CUMULATIVE CONVERTIBLE PREFERRED SHARES
OF BENEFICIAL INTEREST
3,773,585 COMMON SHARES OF BENEFICIAL INTEREST
We are a self-administered and self-managed Maryland real estate investment
trust that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States.
This Prospectus relates to the public offer and sale of up to 3,773,585 Series
A Cumulative Convertible Preferred Shares (the "Series A Preferred Shares") and
up to 3,773,585 common shares of beneficial interest (the "Common Shares") that
we may issue upon conversion of the Series A Preferred Shares by the selling
shareholder named herein or its transferees, pledgees, donees or successors. To
ensure compliance with certain requirements related to the Company's
qualification as a real estate investment trust under the Internal Revenue Code
of 1986, as amended, the Company's Amended and Restated Declaration of Trust
generally limits the number of Common Shares and Series A Preferred Shares that
any single person or affiliated group may own and restricts the transferability
of Common Shares and Series A Preferred Shares.
We originally issued the Series A Preferred Shares in December 1997 and March
1998 in a private placement. Prior to the date of this Prospectus, no public
market for the Series A Preferred Shares existed and there can be no assurance
that an active trading market will develop. The Common Shares trade on the New
York Stock Exchange under the symbol "PP."
--------------------
See "Risk Factors" beginning on page 3 for considerations relating to an
investment in the securities offered by this Prospectus.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
The date of this Prospectus is ______________, 1998.
<PAGE>
TABLE OF CONTENTS
Page
----
Forward-Looking Statements................................................. 3
About this Prospectus...................................................... 3
Risk Factors............................................................... 3
The Company................................................................ 4
The Private Placement...................................................... 4
Use of Proceeds............................................................ 4
Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends.. 4
Description of Shares of Beneficial Interest............................... 5
Registration Rights........................................................ 12
Restrictions on Ownership and Transfer..................................... 13
Federal Income Tax Considerations.......................................... 15
Selling Shareholders....................................................... 29
Plan of Distribution....................................................... 30
Legal Opinions............................................................. 31
Experts.................................................................... 31
Where You Can Find More Information........................................ 31
2
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus, any Prospectus Supplement and the documents incorporated
by reference herein may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including, without limitation, statements containing the words
"believes," "anticipates," "expects" and words of similar import. Such forward-
looking statements relate to future events, the future financial performance of
the Company or the Operating Partnership (as defined herein), and involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, Operating Partnership or
industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. You should
specifically consider the various factors identified in this Prospectus, any
Prospectus Supplement and the documents incorporated by reference herein, which
could cause actual results to differ, including particularly those discussed in
the section entitled "Risk Factors" in this Prospectus and in the Company's
Exchange Act filings. We disclaim any obligation to update any such factors or
to publicly announce the result of any revisions to any statements to reflect
future events or developments.
ABOUT THIS PROSPECTUS
This Prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (the "SEC") utilizing a "shelf registration"
process. Under this shelf process, the selling shareholder or its transferees,
pledgees, donees or successors, (the "Selling Shareholders") may, from time to
time, sell the securities described in this Prospectus. You should read both
this Prospectus and any Prospectus Supplement together with additional
information described under the heading "Where You Can Find More Information."
Unless the context otherwise requires, all references in this Prospectus to
"we," "us," "our," or the "Company" means Prentiss Properties Trust and its
subsidiaries on a combined basis, including (1) Prentiss Properties I, Inc. (the
"General Partner"), (2) Prentiss Properties Acquisition Partners, L.P. (the
"Operating Partnership") and its subsidiaries, (3) Prentiss Properties Limited,
Inc. ("PPL") (the "Manager"), and (4) entities through which the Operating
Partnership owns interests in certain of the Properties (as defined herein); and
"Series A Preferred Shares" means the Company's Series A Cumulative Convertible
Preferred Shares of beneficial interest, par value $0.01 per share, and "Common
Shares" means the Company's common shares of beneficial interest, par value
$0.01 per share.
RISK FACTORS
You should carefully consider the following information in conjunction with
the other information contained in this Prospectus, any Prospectus Supplement
and the documents and risk factors incorporated by reference herein, before
deciding to invest in the Series A Preferred Shares or the Common Shares
issuable upon conversion of the Series A Preferred Shares.
NO CURRENT MARKET FOR SERIES A PREFERRED SHARES; RISK THAT MARKET FOR THE SERIES
A PREFERRED SHARES WILL NOT DEVELOP
There is no established trading market for the Series A Preferred Shares.
We do not currently intend to list the Series A Preferred Shares on a national
securities exchange or the Nasdaq National Market, and even if we did, the
Series A Preferred Shares do not currently meet the listing requirements of any
national exchange or the Nasdaq National Market. Accordingly, we cannot give
assurance as to (1) the likelihood that an active market for the Series A
Preferred Shares will develop, (2) the liquidity of any such market, (3) the
ability of the security holders to sell their Series A Preferred Shares or (4)
the prices that security holders may obtain for their Series A Preferred Shares.
3
<PAGE>
THE COMPANY
The Company is a self-administered and self-managed Maryland real estate
investment trust ("REIT") that acquires, owns, manages, leases, develops and
builds office and industrial properties throughout the United States. We operate
principally through the Operating Partnership and its subsidiaries and the
Manager.
As of June 30, 1998, we owned interests in a diversified portfolio of 240
primarily suburban Class A office and suburban industrial properties containing
approximately 22.2 million net rentable square feet. The properties are located
in 20 major U.S. markets and consist of 115 office buildings (the "Office
Properties") containing approximately 13.0 million net rentable square feet and
125 industrial buildings (the "Industrial Properties" and, together with the
Office Properties, the "Properties") containing approximately 9.2 million net
rentable square feet. The Properties include 11 office and two industrial
development projects, including one expansion of an existing Property, totaling
approximately 1.8 million square feet. Exclusive of the development projects, as
of June 30, 1998, the Office Properties were approximately 95% leased to
approximately 1,142 tenants, and the Industrial Properties were approximately
96% leased to approximately 348 tenants. In addition to the 240 Properties
owned, we manage approximately 29.2 million net rentable square feet in 256
office and industrial properties, in 19 U.S. markets, that are owned by third
parties.
The Company is a full service real estate company with regional management
offices in Los Angeles, Dallas, Chicago, Washington, D.C., Atlanta and
Philadelphia. The Company has approximately 700 employees and benefits from its
in-house expertise in areas such as acquisitions, development, facilities
management, property management and leasing.
THE PRIVATE PLACEMENT
In December 1997 and March 1998, the Company issued, in two tranches, an
aggregate of 3,773,585 Series A Preferred Shares to Security Capital Preferred
Growth Incorporated (the "Private Placement"). The aggregate net proceeds to
the Company from the Private Placement were approximately $100,000,000. The
Company contributed the aggregate net proceeds of the sale of the Series A
Preferred Shares to the Operating Partnership in exchange for an equal amount of
Preferred Units in the Operating Partnership which have identical terms as the
Series A Preferred Shares.
Pursuant to a Registration Rights Agreement (the "Registration Rights
Agreement"), between the Company and Security Capital Preferred Growth
Incorporated, the Company agreed to file a shelf registration statement under
the Securities Act (together with all exhibits, schedules and amendments
thereto, the "Registration Statement"), of which this Prospectus forms a part,
relating to resales of the Series A Preferred Shares and the Common Shares
issuable upon conversion of the Series A Preferred Shares. The Company is
required under the Registration Rights Agreement to maintain the effectiveness
of the Registration Statement until December 29, 2000 (or such shorter period
that will terminate when all Series A Preferred Shares and Common Shares covered
by the Registration Statement have been sold pursuant to the Registration
Statement or may be sold in accordance with Rule 144(k) under the Securities
Act).
USE OF PROCEEDS
We will not receive any proceeds from the sale of Common Shares or Series A
Preferred Shares by the Selling Shareholders. We will not receive any proceeds
from the issuance of Common Shares upon conversion of the Series A Preferred
Shares.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
The following table sets forth the Company's (or Predecessor Company's)
consolidated ratios of earnings to combined fixed charges and Preferred Share
(as defined herein) dividends for the six months ended June 30, 1998, the year
ended December 31, 1997, and for each of the last five fiscal years. We did not
pay any significant dividends on our outstanding Preferred Shares in 1997.
Accordingly, the ratio of earnings to fixed charges and
4
<PAGE>
Preferred Share dividends is identical to the ratio of earnings to fixed
charges. The Company data from the period prior to the Company's initial public
offering ("IPO") of its Common Shares and the commencement of its intent to
qualify as a REIT on October 22, 1996, reflects the operations of the
Predecessor Company.
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR COMPANY
------------------------------------------------------------- -------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------
SIX MONTHS YEAR ENDED OCTOBER 22, 1996 TO JANUARY 1, 1996 TO
ENDED JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 OCTOBER 21, 1996 1995 1994 1993
------------------- ----------------- ------------------- ------------------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings
to combined fixed
charges and
preferred share
dividends 2.40 2.68 7.90 1.80 3.57 3.30 2.98
</TABLE>
These computations include us and our subsidiaries, and 50% or less equity
companies. For these ratios, "earnings" is determined by adding "total fixed
charges" (excluding interest capitalized), income taxes, minority common
stockholders equity in net income and amortization of interest capitalized to
income from continuing operations after eliminating equity in undistributed
earnings and adding back losses of companies in which at least 20% but less than
50% equity is owned. For this purpose, "total fixed charges" consists of (1)
interest on all indebtedness and amortization of debt discount and expense, (2)
interest capitalized and (3) an interest factor attributable to rentals.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
General
The following summary of the material terms of the Series A Preferred
Shares and the Common Shares issuable upon conversion thereof is subject to the
detailed provisions of the Company's Amended and Restated Declaration of Trust
(the "Declaration of Trust"), the Amended and Restated Bylaws as currently in
effect (the "Bylaws"), the Company's Articles Supplementary relating to its
Series A Preferred Shares (the "Series A Articles Supplementary"), its Junior
Participating Cumulative Preferred Shares (the "Series B Junior Preferred
Shares") of beneficial interest, Series B, $0.01 par value per share (the
"Series B Junior Articles Supplementary") and its 8.30% Series B Cumulative
Redeemable Perpetual Preferred Shares (the "Series B Preferred Shares") of
beneficial interest, $0.01 par value per share (the "Series B Articles
Supplementary" and, together with the Series A Articles Supplementary and the
Series B Junior Articles Supplementary, the "Articles Supplementary"). These
statements do not purport to be complete, or to give full effect to the
provisions of statutory or common law and should be read in conjunction with the
terms of the Declaration of Trust, Bylaws and Articles Supplementary.
The Declaration of Trust allows us to issue up to 100,000,000 Common Shares
and 20,000,000 preferred shares of beneficial interest, $0.01 par value per
share ("Preferred Shares"). The Preferred Shares may be issued from time to
time in one or more series, without shareholder approval, with such
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption thereof as shall be established by the
Board of Trustees. Thus, without shareholder approval, we could authorize the
issuance of Preferred Shares with voting, conversion and other rights that could
dilute the voting power and other rights of the holders of Common Shares. As of
June 30, 1998, there were 39,905,363 Common Shares, 3,773,585 Series A Preferred
Shares, no Series B Junior Preferred Shares and no Series B Preferred Shares
issued by the Company and outstanding. As permitted by the Maryland REIT Law
(as defined below), the Declaration of Trust contains a provision permitting the
Board of Trustees, without any action by our shareholders, to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of shares of beneficial
interest that we have authority to issue.
As a Maryland REIT, the Company is subject to various provisions of Title
8, as amended from time to time, of the Corporations and Associations Article of
the Annotated Code of Maryland (the "Maryland REIT Law")
5
<PAGE>
and the Maryland General Corporation Law, as amended from time to time (the
"MGCL"). Both the Maryland REIT Law and the Declaration of Trust provide that
shareholders of the Company will not be personally liable for any obligation of
the Company solely as a result of their status as a shareholder of the Company.
The Bylaws further provide that the Company shall indemnify each shareholder
against any claim or liability to which the shareholder may become subject by
reason of his being or having been a shareholder or former shareholder and that
the Company shall pay or reimburse each shareholder or former shareholder for
all legal and other expenses reasonably incurred by him in connection with any
such claim or liability. In addition, it is the Company's policy to include a
clause in its contracts which provides that shareholders will not be personally
liable for obligations entered into on behalf of the Company. However, with
respect to tort claims, contractual claims where shareholder liability is not
removed, claims for taxes and certain statutory liability, the shareholders may,
in some jurisdictions, be personally liable to the extent that such claims are
not satisfied by the Company. Inasmuch as the Company carries public liability
insurance which it considers adequate, any risk of personal liability to
shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.
COMMON SHARES
All Common Shares issuable upon conversion of the Series A Preferred Shares
will be duly authorized, fully paid and nonassessable when issued, and the
holders thereof will not have preemptive rights. Subject to the preferential
rights of any other shares or series of shares of beneficial interest and to the
provisions of the Declaration of Trust regarding Shares-in-Trust, holders of
Common Shares are entitled to receive dividends if, as and when authorized and
declared by the Board of Trustees of the Company out of assets legally available
for the purpose of paying dividends. Holders of Common Shares are also entitled,
subject to the preferential rights of any other shares or series of shares of
beneficial interest, to share ratably in the assets of the Company legally
available for distribution to its shareholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all known
debts and liabilities of the Company. We intend to pay quarterly dividends to
the holders of our Common Shares.
The holders of Common Shares are entitled to one vote per share on all
matters voted on by shareholders, including elections of trustees. Except as
otherwise required by law or provided in any Articles Supplementary approved by
resolution of the Board of Trustees and filed with and accepted for record by
the State Department of Assessments and Taxation of Maryland setting the
preferences, rights, and other terms of any series of Preferred Shares, the
holders of such Common Shares exclusively possess all voting power. See "Series
A Preferred Shares--Voting Rights." The Declaration of Trust does not provide
for cumulative voting in the election of trustees, which means the holders of a
majority of the outstanding Common Shares can elect all of the trustees then
standing for election. Subject to any preferential rights of any outstanding
series of Preferred Shares, the holders of Common Shares are entitled to such
distributions as may be declared from time to time by the Board of Trustees from
funds available for such purposes.
Pursuant to the Maryland REIT Law, a REIT generally cannot amend its
declaration of trust or merge unless approved by the affirmative vote of
shareholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all the votes
entitled to be cast on the matter) is set forth in the REIT's declaration of
trust. The Declaration of Trust provides for approval by a majority of all the
votes entitled to be cast on the matter in all situations permitting or
requiring action by the shareholders except with respect to: (1) the removal of
trustees (which requires the affirmative vote of the holders of two-thirds of
the outstanding voting shares of the Company); (2) the amendment of the
Declaration of Trust by shareholders (which requires the affirmative vote of a
majority of votes entitled to be cast on the matter, except under certain
circumstances specified in the Declaration of Trust which require the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter); and (3) the termination of the Company (which requires the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter). A
declaration of trust may permit the trustees by a two-thirds vote to amend the
declaration of trust from time to time to qualify as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"), or the Maryland REIT Law without
the affirmative vote or written consent of the shareholders. The Declaration of
Trust permits such action by the Board of Trustees.
6
<PAGE>
The Transfer Agent and Registrar for the Common Shares is First Chicago
Trust Company of New York. The Common Shares trade on the New York Stock
Exchange (the "NYSE") under the symbol "PP." We will apply to the NYSE to list
the additional Common Shares to be issued upon conversion of the Series A
Preferred Shares, and the Company anticipates that such shares will be so
listed.
PREFERRED SHARE PURCHASE RIGHTS
On February 17, 1998, pursuant to the Company's Rights Plan, dated February
6, 1998, between the Company and First Chicago Trust Company of New York, as
rights agent, we distributed as a dividend one right ("Right") for each
outstanding Common Share. Each Right entitles the holder to buy one one-
thousandth of a share (a "Preferred Share Unit") of the Series B Junior
Preferred Shares at an exercise price of $85, subject to adjustment. Each
Preferred Share Unit of a Series B Junior Preferred Share is structured to be
the equivalent of one Common Share.
The Rights will become exercisable only if a person or group acquires,
obtains the right to acquire or announces a tender offer to acquire 10% (or, in
the case of the Selling Shareholders (the holders of all of the Series A
Preferred Shares) and their affiliates, 11%) or more of the outstanding Common
Shares. When exercisable, each Right entitles the holder, upon payment of the
exercise price, to acquire Series B Junior Preferred Shares or, at the option of
the Company, Common Shares (or in certain circumstances, cash, property or other
securities), having a value equal to twice the Right's exercise price. If we are
acquired in a merger or other business combination or if 50% or more of our
assets or earning power is transferred, each Right will entitle the holder,
other than the acquiring person, to purchase securities of the surviving company
having a market value equal to twice the exercise price of the Right.
Until a person or group acquires or announces a tender offer to acquire 10%
or more of the Common Shares, the Rights will be evidenced by the Common Share
certificates and will be transferred with and only with such Common Share
certificates, and the surrender or transfer of any certificate for Common Shares
will also constitute the transfer of the Rights associated with the Common
Shares represented by such certificate. The Rights will expire on February 17,
2008 and may be redeemed by us at a price of $0.001 per Right at any time until
ten days after an announcement that a 10% position has been acquired.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that acquires more than 10% (or, in
the case of the Selling Shareholders and their affiliates, 11%) of the
outstanding Common Shares if certain events thereafter occur without the Rights
having been redeemed. However, because the Rights are redeemable by the Board of
Trustees in certain circumstances, the Rights should not interfere with any
merger or other business combination approved by the Board of Trustees.
PREFERRED SHARES
Preferred Shares may be issued from time to time, in one or more series, as
authorized by the Board of Trustees. Prior to issuance of shares of each series,
the Board of Trustees is required by the Maryland REIT Law and the Declaration
of Trust to set forth for each such series, subject to the provisions of the
Declaration of Trust regarding Shares-in-Trust, the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
series. The Board of Trustees could authorize the issuance of Preferred Shares
with terms and conditions that could have the effect of delaying, deferring or
preventing a takeover or other transaction which holders of some, or a majority,
of the Common Shares might believe to be in their best interests or in which
holders of some, or a majority, of the Common Shares might receive a premium for
their Common Shares over the then-market-price of such Common Shares.
SERIES A PREFERRED SHARES
In December 1997 and March 1998, the Company issued an aggregate of
3,773,585 Series A Preferred Shares in the Private Placement. The Series A
Preferred Shares are validly issued, fully paid and nonassessable.
7
<PAGE>
The holders of the Series A Preferred Shares have no preemptive rights with
respect to any shares of the capital stock of the Company or any other
securities of the Company convertible into or carrying rights or options to
purchase any such shares. The Series A Preferred Shares are not subject to any
sinking fund or other similar obligation of the Company to redeem or retire the
Series A Preferred Shares. The Company does not currently intend to list the
Series A Preferred Shares on a national securities exchange or the Nasdaq
National Market. See "Risk Factors--No Current Market for Series A Preferred
Shares; Risk that Market for the Series A Preferred Shares will Not Develop."
Transfer Agent. We currently act as Transfer Agent for the Series A
Preferred Shares.
Dividends. Holders of the Series A Preferred Shares will be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds legally
available for the payment of dividends, cumulative preferential cash dividends
in an amount per share equal to the greater of an annual dividend of $1.60 or
the regular cash dividend on the Common Shares, or portion thereof, into which a
Series A Preferred Share is convertible. See "--Conversion." Such dividends are
cumulative from the date of original issue and payable quarterly in arrears on a
date to be determined by the Board of Trustees (each, a "Dividend Payment Date")
which shall be no later than the thirtieth day after the last day of each March,
June, September and December. The Board of Trustees will establish the record
date for the payment of dividends to record holders. Such record date may not
be less than 10 nor more than 50 days preceding the applicable Dividend Payment
Dates.
Dividends on Series A Preferred Shares will accrue whether or not we have
earnings, whether or not there are funds legally available for the payment of
such dividends and whether or not such dividends are declared. No interest, or
sum of money in lieu of interest, will be payable in respect of any dividend
payment or payments on the Series A Preferred Shares that may be in arrears.
Holders of Series A Preferred Shares will not be entitled to any dividends,
whether payable in cash, property or shares of stock, in excess of the full
cumulative dividends, as described herein, on the Series A Preferred Shares.
So long as any Series A Preferred Shares are outstanding, no dividends will
be declared or paid on any class or shares of beneficial interest of the Company
ranking on a parity with the Series A Preferred Shares ("Parity Shares"), unless
full cumulative dividends have been declared and paid or are contemporaneously
declared and funds sufficient for the payment thereof set aside for such payment
on the Series A Preferred Shares for all dividend periods terminating on or
prior to the dividend payment date on such class or series of Parity Shares.
However, if accrued dividends on the Series A Preferred Shares for all prior
dividend periods have not been paid in full, then any dividend declared on the
Series A Preferred Shares and on any Parity Shares for any dividend period will
be declared ratably in proportion to accrued and unpaid dividends on the Series
A Preferred Shares and such Parity Shares.
So long as any Series A Preferred Shares are outstanding, we will not
declare, pay or set apart funds for the payment of any dividend or other
distribution with respect to any Junior Shares (as defined below) or redeem,
purchase or otherwise acquire for consideration any Junior Shares through a
sinking fund or otherwise (other than a redemption or purchase or other
acquisition of Common Shares made for purposes of any employee, incentive or
benefit plan of the Company or any subsidiary), unless (1) all cumulative
dividends with respect to the Series A Preferred Shares and any Parity Shares at
the time such dividends are payable have been paid or declared and funds have
been set apart for payment of such dividends and (2) sufficient funds have been
paid or declared and set apart for the payment of the dividend for the current
Dividend Period with respect to the Series A Preferred Shares and any Parity
Shares.
We will first credit any dividend payment which we make on the Series A
Preferred Shares against the earliest accrued but unpaid dividend due with
respect to the Series A Preferred Shares which remains payable.
As used herein, (1) the term "dividend" does not include dividends or other
distributions payable solely in Fully Junior Shares, or in options, warrants or
rights to subscribe for or purchase any Fully Junior Shares, (2) the term
"Junior Shares" means the Common Shares and any other class or series of shares
of beneficial interest of the Company now or hereafter issued and outstanding
that ranks junior to the Series A Preferred Shares as to the
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payment of dividends or in the distribution of assets or amounts upon
liquidation, dissolution and winding up and (3) the term "Fully Junior Shares"
means Junior Shares that rank junior to the Series A Preferred Shares both as to
the payment of dividends and the distribution of assets upon liquidation,
dissolution and winding up.
Liquidation Rights. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series A Preferred
Shares will be entitled to receive out of assets of the Company legally
available for distribution to shareholders a liquidation preference of $26.50
per Series A Preferred Share, plus an amount per Series A Preferred Share equal
to all dividends (whether or not earned or declared) accrued and unpaid thereon
to the date of final distribution to such holders, and no more.
Until the holders of Series A Preferred Shares and Parity Shares have been
paid their liquidation preference in full, no payment will be made to any holder
of Junior Shares. If the assets of the Company, or proceeds thereof,
distributable among the holders of the Series A Preferred Shares are
insufficient to pay in full the amount payable upon liquidation with respect to
the Series A Preferred Shares and any other Parity Shares, then such assets, or
the proceeds thereof, will be distributed among the holders of Series A
Preferred Shares and any such Parity Shares ratably in accordance with the
respective amounts which would be payable on such Series A Preferred Shares and
any such Parity Shares if all amounts payable thereon were paid in full. Neither
a consolidation or merger of the Company with another entity, a statutory share
exchange by the Company nor a sale, lease or transfer of all or substantially
all of the Company's assets will be considered a liquidation, dissolution or
winding up, voluntary or involuntary, of the Company.
In determining whether a distribution (by dividend, redemption or other
acquisition of shares or otherwise) to shareholders of the Company whose rights
on dissolution are junior to those of holders of Series A Preferred Shares is
permitted under Maryland law, no effect shall be given to the amounts that would
be needed, if the Company were to be dissolved at the time of the distribution,
to satisfy the preferential rights upon dissolution of holders of Series A
Preferred Shares.
Redemption at the Option of the Company. Except as may be required under
the Ownership Limitation (as defined below), we may not redeem the Series A
Preferred Shares prior to December 29, 2004. On and after December 29, 2004, we,
at our option, by giving no less than 30 nor more than 90 days written notice,
may redeem the Series A Preferred Shares, in whole or in part, at any time or
from time to time, for cash out of legally available funds, at a redemption
price of $26.50 per share, plus accumulated, accrued and unpaid dividends
thereon to the date fixed for redemption, without interest.
If we mail notice of redemption of any Series A Preferred Shares and we
deposit the funds necessary for the redemption in trust, dividends will cease to
accrue on the Series A Preferred Shares being redeemed, those shares will no
longer be deemed to be outstanding and all rights of the holders of those shares
will cease, except the right to convert such shares into Common Shares (as
discussed below) and the right to receive the redemption price. If we redeem
fewer than all the outstanding Series A Preferred Shares, we will select the
shares to be redeemed by lot or by any other method.
Conversion. By giving 60 days prior written notice no earlier than November
1, 1998, the holders of the Series A Preferred Shares will have, beginning on
January 1, 1999, the right to convert all or any portion of such shares into a
number of Common Shares based on a conversion price of $26.50 per Common Share,
subject to adjustment (the "Conversion Price"). Such conversion may occur
earlier than January 1, 1999, in the event of a change of control of the Company
or the termination of our status as a REIT, or as otherwise determined by the
Company. The right to convert Series A Preferred Shares called for redemption
will terminate at the close of business on the fifth business day prior to the
redemption date for such Series A Preferred Shares unless the Company does not
pay the applicable redemption price. Holders of Series A Preferred Shares may
convert those shares by surrendering the certificate representing those shares
endorsed to us or in blank at the office of the Transfer Agent, together with a
written notice of conversion.
Holders of Series A Preferred Shares at the close of business on a dividend
record date will be entitled to receive that dividend on the corresponding
Dividend Payment Date, even if they convert the Series A Preferred
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Shares between those dates. Holders of Series A Preferred Shares who surrender
such shares for conversion during the period between the close of business on
any dividend record date and the opening of business on the corresponding
Dividend Payment Date (except shares converted after the issuance of a
redemption notice during such period) must be accompanied by payment of an
amount equal to the dividend payable on such shares on such Dividend Payment
Date. Holders of Series A Preferred Shares on a dividend payment record date who
(or whose transferee) tender any such shares for conversion into Common Shares
on the corresponding Dividend Payment Date will receive the dividend payable by
us on such Series A Preferred Shares on such date, and the converting holder
need not include payment of the amount of such dividend upon surrender of Series
A Preferred Shares for conversion. We will not otherwise make any payment or
allowance for unpaid dividends, whether or not in arrears, on converted Series A
Preferred Shares or for dividends on the Common Shares issued upon such
conversion.
Conversion Price Adjustments. The Conversion Price is subject to adjustment
upon certain events, including (1) the payment of dividends and other
distributions payable in Common Shares on any class of shares of beneficial
interest of the Company; (2) the subdivision, combination and reclassification
of Common Shares; (3) the issuance to all holders of Common Shares of certain
rights, options or warrants entitling them to subscribe for or purchase Common
Shares at a price per share less than 100% of the fair market value per Common
Share (as defined in the Series A Articles Supplementary); (4) the distribution
to all holders of Common Shares of any securities of the Company (other than
Common Shares), evidence of its indebtedness or assets (excluding cumulative
cash dividends or distributions not in excess of certain amounts), or rights,
options or warrants to subscribe for or purchase any of the Company's securities
(excluding those rights, options and warrants referred to in clause (3) above);
and (5) a tender or exchange offer made by the Company for all or any portion of
the Common Shares which involves the payment of consideration per Common Share
having a fair market value that exceeds the Current Market Price per Common
Share (as defined in the Series A Articles Supplementary).
If the Company is a party to any transaction (including, without
limitation, a merger, consolidation, statutory share exchange, self tender offer
for all or substantially all of the Common Shares, sale of all or substantially
all of the Company's assets or recapitalization of the Common Shares), in which
Common Shares will be converted into the right to receive shares, securities or
other property (including cash or any combination thereof), each Series A
Preferred Share, which is not redeemed or converted into the right to receive
shares, securities or other property prior to such transaction, will thereafter
be convertible into the kind and amount of shares of beneficial interest,
securities and other property (including cash or any combination thereof)
receivable upon the consummation of such transaction by a holder of that number
of Common Shares into which one Series A Preferred Share was convertible
immediately prior to such transaction (assuming such holder of Common Shares (1)
is not a person with which the Company consolidated or into which the Company
merged or which merged into the Company or to which such sale or transfer was
made, as the case may be, and (2) failed to exercise any rights of election as
to the kind or amount of shares, securities and other property receivable upon
such transaction). The Company may not become a party to any such transaction
unless the terms thereof are consistent with the foregoing.
No adjustment of the Conversion Price is required to be made in any case
until cumulative adjustments amount to 1% or more of the Conversion Price. Any
adjustments not so required to be made will be carried forward and taken into
account in subsequent adjustments.
Limitation on Issuance of Additional Preferred Shares and Indebtedness.
Without the written consent of the holders of a majority of the issued and
outstanding Series A Preferred Shares, neither the Company nor the Operating
Partnership (or either of their subsidiaries) may issue any class of preferred
securities or incur any indebtedness (other than trade payables or accrued
expenses incurred in the ordinary course of business) if immediately following
such issuance and after giving effect to such issuance and the application of
the net proceeds therefrom, our ratio of Consolidated EBITDA to Consolidated
Fixed Charges for the four fiscal quarters immediately preceding such issuance
would be less than 1.75 to 1.0.
For purposes of the test described above, "Consolidated EBITDA" means our
consolidated net income (before extraordinary income and gains) plus (1) all
income and state franchise taxes we paid or accrued, (2) interest expense we
paid or accrued, (3) depreciation and depletion, (4) amortization and (5) any
other non-cash charges or discretionary prepayment penalties deducted from
consolidated net income. For purposes of the test, "Consolidated
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Fixed Charges" means the sum of (1) interest expense we paid or accrued, (2)
preferred stock dividends we are required to pay (whether or not actually
declared or paid) and (3) regularly scheduled amortization of principal amounts
due on indebtedness (other than any balloon payments at maturity).
Ranking. With respect to payment of dividends and amounts upon liquidation,
dissolution or winding up, the Series A Preferred Shares will rank as follows:
(1) senior to the Common Shares and any other class or series of shares of
beneficial interest of the Company over which the Preferred Shares
have preference or priority in the payment of dividends or
distributions upon liquidation, dissolution or winding up of the
Company;
(2) on a parity with all equity securities issued by the Company the terms
of which provide that the holders of such class or series and the
holders of Series A Preferred Shares shall be entitled to the receipt
of dividends and amounts distributable upon liquidation, dissolution
or winding up in proportion to their respective amounts of accrued and
unpaid dividends per share or liquidation preference, without the
preference or priority of one over the other; and
(3) junior to all of the Company's existing and future indebtedness and
the Company's equity securities the terms of which provide that the
holders thereof are entitled to receipt of dividends or amounts
distributable upon liquidation, dissolution or winding up, as the case
may be, in preference or priority to the holders of the Series A
Preferred Shares. The term "equity securities" does not include
convertible debt securities, which will rank senior to the Series A
Preferred Stock prior to conversion.
Voting Rights. Except as indicated below, or except as otherwise from time
to time required by applicable law, the holders of Series A Preferred Shares
will have no voting rights.
So long as any Series A Preferred Shares are outstanding, if for two
consecutive quarterly periods, (1) dividends payable on the Series A Preferred
Shares are in arrears, whether or not earned or declared; (2) we fail to pay
dividends on the Common Shares of at least $0.38 per share (subject to
adjustment), or (3) we fail to maintain a ratio of Consolidated EBITDA to
Consolidated Fixed Charges of at least 1.75, then the number of Trustees then
constituting the Board of Trustees of the Company will be increased by two. The
holders of Series A Preferred Shares, voting as a single class, will have the
right to elect the two additional Trustees to serve on the Company's Board of
Trustees at any annual meeting of shareholders or a properly called special
meeting of the holders of the Series A Preferred Shares. Whenever all of the
above three conditions cease to exist, then such voting rights will terminate,
and the number of Trustees on the Board of Trustees shall be reduced
accordingly. The term of office of all Trustees so elected will terminate with
the termination of such voting rights.
The approval of at least 51% of holders of the outstanding Series A
Preferred Shares, voting as a single class, is required in order to:
(1) amend, alter or repeal the Declaration of Trust (including the
Articles Supplementary) to affect materially and adversely the rights,
preferences or voting power of the holders of the Series A Preferred
Shares. The amendment of the Declaration of Trust to create, authorize
or increase the authorized number of any Parity Shares, Junior Shares
or Fully Junior Shares shall not be deemed to materially and adversely
affect the holders of the Series A Preferred Shares;
(2) enter into a share exchange that affects the Series A Preferred
Shares; or
(3) consolidate with or merge with another entity, or consolidate or merge
another entity with and into the Company.
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The approval of the holders of the outstanding Series A Preferred Shares is
not required in connection with a merger or consolidation if each Series A
Preferred Share remains outstanding without a material and adverse change to its
terms and rights or is converted into or exchanged for convertible preferred
shares of the surviving entity having preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption thereof identical to that of the Series A
Preferred Shares (except for changes that do not materially and adversely affect
the holders of Series A Preferred Shares). Additionally, no such vote of the
holders of the Series A Preferred Shares is required if, at or prior to the time
that an amendment, alteration or repeal is to take effect, or when the issuance
of any such prior shares or convertible security is to be made, as the case may
be, provision is made for the redemption of all Series A Preferred Shares at the
time outstanding to the extent such redemption is authorized by the Series A
Articles Supplementary and the Declaration of Trust.
SERIES B PREFERRED SHARES
In connection with its Shareholder Rights Plan, the Company designated
1,000,000 Series B Junior Preferred Shares, which, under certain circumstances,
may be issued to holders of Rights if such Rights become exercisable. See "--
Preferred Share Purchase Rights." As of the date hereof, no Series B Junior
Preferred Shares were issued or outstanding.
On June 25, 1998, we privately placed 1,900,000 8.30% Series B Cumulative
Redeemable Perpetual Preferred Units of the Operating Partnership (the "Series B
Preferred Units") with Belaire Capital Fund LLC. In connection with the private
placement, on June 25, 1998, we designated 1,900,000 Series B Preferred Shares.
Upon the occurrence of certain conditions, the holders of the Series B Preferred
Units may exchange the Series B Preferred Units at any time on or after June 25,
2008. The Series B Preferred Units are exchangeable for Series B Preferred
Shares at an exchange rate of one Series B Preferred Share for one Series B
Preferred Unit, subject to certain adjustments. As of the date hereof, no
Series B Preferred Shares were issued or outstanding.
REGISTRATION RIGHTS
This summary of the material terms of the Registration Rights Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Registration Rights
Agreement.
Pursuant to the Registration Rights Agreement, the Company has agreed with
Security Capital Preferred Growth Incorporated, for the benefit of holders of
the Series A Preferred Shares and of any Common Shares issued upon the
conversion thereof, that the Company will, at its cost, keep the Registration
Statement effective until December 29, 2000 (or such period that will terminate
when all Series A Preferred Shares and Common Shares covered by the Registration
Statement have been sold pursuant to the Registration Statement or may be sold
in accordance with Rule 144(k) under the Securities Act).
The Company will provide to each Selling Shareholder copies of the
Registration Statement, any amendment thereto, the prospectus that is a part of
the Registration Statement and such other documents as the Selling Shareholders
may reasonably request and take certain other actions as are required to permit
unrestricted resales of the Series A Preferred Shares or the Common Shares
covered thereby, as the case may be. A Selling Shareholder selling Series A
Preferred Shares or Common Shares pursuant to the Registration Statement
generally will be required to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such Selling Shareholder
(including certain indemnification obligations). Additionally, prospective
investors should be aware that if such a Selling Shareholder wishes to sell such
Series A Preferred Shares or Common Shares through a broker-dealer, the broker-
dealer may be unwilling to proceed with such sale unless the Selling Shareholder
indemnifies it against certain securities law liabilities such broker-dealer may
face as a result of participating in a registered distribution.
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RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order to qualify as a REIT under the Code, we must meet certain
requirements concerning the ownership of our outstanding shares of beneficial
interest. Specifically, no more than 50% in value of our outstanding shares of
beneficial interest may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a taxable year (other than its 1996 taxable year), and the Company must
be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year (other than its 1996 taxable year). See "Federal Income Tax
Considerations--Requirements for Qualification."
Because the Board of Trustees believes it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below, provides that no person may own, or be deemed to own
by virtue of the attribution provisions of the Code, more than 8.5% of the
number of outstanding Common Shares (other than Michael V. Prentiss, who
currently may own up to 15% of the number of outstanding Common Shares and the
Selling Shareholders, which may own up to 11% of the number of outstanding
Common Shares) or more than 9.8% of the number of outstanding Preferred Shares
of any series (other than the Selling Shareholders, which may own all of the
Series A Preferred Shares) (the "Ownership Limitation"). The Board of Trustees
may, but is not required to, decrease the ownership limit applicable to Mr.
Prentiss' ownership of Common Shares to 9.8% (but not less than 9.8%) of the
outstanding Common Shares upon (1) an increase in the number of outstanding
Common Shares or (2) a reduction of the number of Common Shares owned, directly
or indirectly, by Mr. Prentiss. Upon any such adjustment, the Ownership
Limitation applicable to other shareholders with respect to the Common Shares
will be increased proportionately to a maximum of 9.8% of the number of
outstanding Common Shares. Any transfer of Common or Preferred Shares that
causes any one of the following conditions to exist will be null and void, and
the intended transferee will acquire no rights in such Common or Preferred
Shares:
(1) any person owning, directly or indirectly, Common or Preferred Shares
in excess of the Ownership Limitation,
(2) the Company's outstanding shares being owned by fewer than 100 persons
(determined without reference to any rules of attribution),
(3) the Company being "closely held" within the meaning of Section 856(h)
of the Code, or
(4) the Company owning, directly or constructively, 10% or more of the
ownership interests in a tenant of the Company's or the Operating
Partnership's real property, within the meaning of Section
856(d)(2)(B) of the Code.
Subject to certain exceptions described below, if any purported transfer of
Common or Preferred Shares results in any of the four above conditions, the
Common or Preferred Shares in excess of the applicable limitation will be
designated as "Shares-in-Trust" and transferred automatically to a trust (the
"Share Trust") effective on the day before the purported transfer of such Common
or Preferred Shares. The record holder of the Common or Preferred Shares that
are designated as Shares-in-Trust (the "Prohibited Owner") will be required to
submit such number of Common or Preferred Shares to us for registration in the
name of the Share Trust. The Share Trustee will be designated by us but will not
be affiliated with us. We will name one or more charitable organizations as the
beneficiary of the Share Trust (the "Beneficiary").
Shares-in-Trust will remain issued and outstanding Common or Preferred
Shares and will be entitled to the same rights and privileges as all other
shares of the same class or series. The Share Trust will receive all dividends
and distributions on the Shares-in-Trust and will hold such dividends and
distributions in trust for the benefit of the Beneficiary. The Share Trustee
will vote all Shares-in-Trust. The Share Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (1)
purchases such Shares-in-Trust for valuable consideration and (2) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Share Trust and resulting in the redesignation of such Common or Preferred
Shares as Shares-in-Trust.
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The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Share Trust the amount of any dividends or distributions received
by the Prohibited Owner (1) that are attributable to any Shares-in-Trust and (2)
the record date for which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Share
Trustee the lesser of (1) the price per share such Prohibited Owner paid for the
Common or Preferred Shares that were designated as Shares-in-Trust (or, in the
case of a gift or devise, the Market Price (as defined below) per share on the
date of such transfer) and (2) the price per share received by the Share Trustee
from the sale of such Shares-in-Trust. Any amounts received by the Share
Trustee in excess of the amounts to be paid to the Prohibited Owner will be
distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to us, or
our designee, at a price per share equal to the lesser of (1) the price per
share in the transaction that created such Shares-in-Trust (or, in the case of a
gift or devise, the Market Price per share on the date of such transfer) or (2)
the Market Price per share on the date that the Company, or its designee,
accepts such offer. We will have the right to accept such offer for a period of
ninety days after the later of (1) the date of the purported transfer which
resulted in such Shares-in-Trust and (2) the date the Company determines in good
faith that a transfer resulting in such Shares-in-Trust occurred.
"Market Price" on any date means the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date means the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the NYSE or, if the Common or Preferred Shares
are not listed or admitted to trading on the NYSE, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common or Preferred
Shares are listed or admitted to trading or, if the Common or Preferred Shares
are not listed or admitted to trading on any national securities exchange, the
last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported on the Nasdaq National
Market or, if such system is no longer in use, the principal automated
quotations system that may then be in use or, if the Common or Preferred Shares
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Common or Preferred Shares selected by the Board of Trustees. "Trading Day"
means a day on which the principal national securities exchange on which the
Common or Preferred Shares are listed or admitted to trading is open for the
transaction of business or, if the Common or Preferred Shares are not listed or
admitted to trading on any national securities exchange, shall mean any day
other than a Saturday, a Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or executive order to
close.
Any person who acquires or attempts to acquire Common or Preferred Shares
in violation of the foregoing restrictions, or any person who owned Common or
Preferred Shares that were transferred to a Share Trust, is required to
immediately give written notice to us and to provide us such other information
as we may request in order to determine the effect, if any, of such transfer on
our status as a REIT.
The Declaration of Trust requires all persons who own, directly or
indirectly, more than 5% (or such lower percentages as required pursuant to
regulations under the Code) of the outstanding Common and Preferred Shares,
within 30 days after January 1 of each year, to provide us a written statement
or affidavit stating the name and address of such direct or indirect owner, the
number of Common and Preferred Shares owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
shareholder shall provide us such additional information as we may request in
order to determine the effect, if any, of such ownership on the Company's status
as a REIT and to ensure compliance with the Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
Common or Preferred Shares by an underwriter that participates in a public
offering of such shares. In addition, the Board of Trustees, upon receipt of a
ruling from the Service or an opinion of counsel and upon such other conditions
as the Board of Trustees may direct, may exempt a person from the Ownership
Limitation under certain circumstances. However, the Board of Trustees may not
grant an exemption from the Ownership Limitation to any proposed transferee
whose ownership, direct or indirect, of shares of beneficial interest of the
Company in excess of the Ownership Limitation would result
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in the termination of our status as a REIT. The foregoing restrictions will
continue to apply until the Board of Trustees determines that it is no longer in
our best interests to attempt to qualify, or to continue to qualify, as a REIT
and there is an affirmative vote of a majority of the votes entitled to be cast
on such matter at a regular or special meeting of the shareholders of the
Company.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for the Common Shares or otherwise be in the best
interest of the shareholders of the Company. All certificates representing
Common Shares or Preferred Shares will bear a legend referring to the
restrictions described above.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations that may be relevant to a prospective holder of the Offered
Securities. This discussion does not address all aspects of taxation that may
be relevant to particular shareholders in light of their personal investment or
tax circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations (except to the extent described below),
financial institutions or broker-dealers, foreign corporations, and persons who
are not citizens or residents of the United States (except to the extent
described below) subject to special treatment under the federal income tax laws.
This discussion is based on current provisions of the Code, existing,
temporary, and currently proposed Treasury Regulations promulgated under the
Code, the legislative history of the Code, existing administrative rulings and
practices of the Internal Revenue Service (the "Service"), and judicial
decisions. No assurance can be given that future legislative, judicial, or
administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this Prospectus with respect to the
transactions entered into or contemplated prior to the effective date of such
changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
The Company elected to be taxed as a REIT within the meaning of and under
sections 856 through 860 of the Code, effective for its short taxable year
beginning on the day prior to the closing of its IPO and ending on December 31,
1996. The Company believes that, commencing with such taxable year, it has been
organized and has operated in such a manner so as to qualify for taxation as a
REIT under the Code, and the Company intends to continue to operate in such a
manner, but no assurance can be given that the Company has or will remain so
qualified.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
Qualification and taxation as a REIT depend upon the Company's ability to
meet on a continuing basis, through actual annual operating results,
distribution levels, and share ownership, the various qualification tests
imposed under the Code discussed below. No assurance can be given that the
actual results of the Company's operations for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "-- Failure to Qualify."
As a REIT, the Company generally is not subject to federal corporate income
tax on its net income that is distributed currently to its shareholders. That
treatment substantially eliminates the "double taxation" (i.e., taxation
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at both the corporate and shareholder levels) that generally results from an
investment in a corporation. However, the Company will be subject to federal
income tax in the following circumstances:
(1) the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
(2) under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its undistributed items of tax
preference, if any.
(3) if the Company has (1) net income from the sale or other disposition
of "foreclosure property" that is held primarily for sale to customers
in the ordinary course of business or (2) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest
corporate rate on such income.
(4) if the Company has net income from prohibited transactions (which are,
in general, certain sales or other dispositions of property (other
than foreclosure property) held primarily for sale to customers in the
ordinary course of business), such income will be subject to a 100%
tax.
(5) if the Company should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), and nonetheless has
maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on (1)
the gross income attributable to the greater of the amount by which
the Company fails the 75% or 95% gross income test multiplied by (2) a
fraction intended to reflect the Company's profitability.
(6) if the Company should fail to distribute during each calendar year at
least the sum of (1) 85% of its REIT ordinary income for such year,
(2) 95% of its REIT capital gain net income for such year, and (3) any
undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. To the extent that the Company
elects to retain and pay income tax on the net long-term capital gain
that it receives in a taxable year, such retained amounts will be
treated as having been distributed for purposes of the 4% excise tax.
(7) if the Company acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a
transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset)
in the hands of the C corporation and the Company recognizes gain on
the disposition of such asset during the 10-year period beginning on
the date on which such asset was acquired by the Company, then to the
extent of such asset's "built-in-gain" (i.e., the excess of the fair
market value of such asset at the time of acquisition by the Company
over the adjusted basis in such asset at such time), such gain will be
subject to tax at the highest regular corporate rate applicable (as
provided in Treasury Regulations that have not yet been promulgated).
The results described above with respect to the recognition of "built-
in-gain" assume that the Company will make an election pursuant to
Internal Revenue Service (the "IRS") Notice 88-19 if it were to make
any such acquisition. See "-- Possible Legislative or Other Actions
Affecting Tax Consequences."
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (1) that is
managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (3) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (4) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons; (6) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(7) that makes an election to be a
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REIT (or has made such election for a previous taxable year) and satisfies all
relevant filing and other administrative requirements established by the Service
that must be met in order to elect and maintain REIT status; (8) that uses a
calendar year for federal income tax purposes and complies with the
recordkeeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (9) that meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (1) to
(4), inclusive, must be met during the entire taxable year and that condition
(5) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. Conditions
(5) and (6) will not apply until after the first taxable year for which an
election is made by the Company to be taxed as a REIT. Beginning with its 1998
taxable year, if the Company complies with the requirements for ascertaining the
ownership of its outstanding shares of beneficial interest and does not know or
have reason to know that it has violated the 5/50 Rule, it will be deemed to
satisfy the 5/50 Rule for the taxable year. The Company has issued sufficient
Common Shares with sufficient diversity of ownership to allow it to satisfy
requirements (5) and (6). In addition, the Declaration of Trust provides for
restrictions regarding transfer of its shares that are intended to assist the
Company in continuing to satisfy the share ownership requirements described in
clauses (5) and (6) above. Such transfer restrictions are described in
"Restrictions on Ownership and Transfer."
For purposes of determining stock ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code section 401(a), however, generally is not considered an
individual and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.
The Company currently has three wholly-owned subsidiaries, the General
Partner, the general partner of Prentiss Properties Real Estate Fund I, L.P. and
the general partner of Prentiss Austin Properties, L.P., and may have additional
wholly-owned subsidiaries in the future. Code section 856(i) provides that a
corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation all of the capital stock of which
is owned by the REIT. In applying the requirements described herein, any
"qualified REIT subsidiaries" of the Company will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such subsidiaries
will be treated as assets, liabilities, and items of income, deduction, and
credit of the Company. All of the Company's corporate subsidiaries are
"qualified REIT subsidiaries." Those subsidiaries, therefore, will not be
subject to federal corporate income taxation, although they may be subject to
state and local taxation.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
(determined on the basis of the REIT's capital interest in the partnership) of
the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. Thus, the Company's proportionate
share of the assets, liabilities, and items of income of the Operating
Partnership and the noncorporate subsidiaries of the Operating Partnership (the
"Noncorporate Subsidiaries") will be treated as assets, liabilities, and items
of income of the Company for purposes of applying the requirements described
herein.
INCOME TESTS
In order for the Company to qualify and to maintain its qualification as a
REIT, two requirements relating to the Company's gross income must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and
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gain from the sale or disposition of stock or securities, or from any
combination of the foregoing. The specific application of these tests to the
Company is discussed below.
The rent received by the Company from its tenants ("Rent") will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
Rent must not be based, in whole or in part, on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Rent received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the Company, or a direct or indirect owner of 10% or more
of the Company, directly or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if Rent attributable to personal property,
leased in connection with a lease of a Property, is greater than 15% of the
total Rent received under the lease, then the portion of Rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for the Rent to qualify as "rents from real property," the Company generally
must not operate or manage the Properties or furnish or render services to the
tenants of such Properties, other than through an "independent contractor" who
is adequately compensated and from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only (e.g. furnishing water,
heat, light, and air conditioning and cleaning windows, public entrances, and
lobbies) and are not otherwise considered "rendered to the occupant" (e.g.
renting parking spaces on a reserved basis to tenants). In addition, the
Company may furnish or render a de minimis amount of "noncustomary services" to
the tenants of a Property other than through an independent contractor as long
as the amount that the Company receives that is attributable to such services
does not exceed 1% of its total receipts from the Property. For that purpose,
the amount attributable to the Company's noncustomary services will be at least
equal to 150% of the Company's cost of providing the services.
The Company does not charge Rent for any portion of any Property that is
based, in whole or in part, on the income or profits of any person (except by
reason of being based on a fixed percentage or percentages of receipts or sales,
as described above). Furthermore, the Company expects that, with respect to
other properties that it may acquire in the future, it will not charge Rent for
any portion of any property that is based, in whole or in part, on the income or
profits of any person to the extent that the receipt of such Rent would
jeopardize the Company's status as a REIT. In addition, the Company currently
does not receive any Rent from a Related Party Tenant, and the Company expects
that, to the extent that it receives Rent from a Related Party Tenant in the
future, such Rent will not cause the Company to fail to satisfy either the 75%
or 95% gross income test. The Company also currently does not receive Rent
attributable to personal property that is greater than 15% of the Rent received
under the applicable Lease. The Company expects that, in the future, it will not
allow the Rent attributable to personal property leased in connection with any
lease of real property to exceed 15% of the total Rent received under the lease,
if the receipt of such Rent would cause the Company to fail to satisfy either
the 75% or 95% gross income test.
Through the Operating Partnership and the Noncorporate Subsidiaries, none
of which constitutes a qualifying independent contractor, the Company provides
and will provide in the future certain services to its tenants. The Company
believes that all such services are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
"rendered to the occupant," so that the provision of such services does not
jeopardize the qualification of the Rent as "rents from real property." In the
case of any services that are not "usual and customary" under the foregoing
rules, the Company employs and will continue to employ qualifying independent
contractors to provide such services. Furthermore, the Company expects that it
will not provide noncustomary services with respect to other properties that it
acquires in the future (other than through a qualifying independent contractor)
to the extent that the provision of such services would cause the Company to
fail to satisfy either the 75% or 95% gross income test.
If any portion of the Rent does not qualify as "rents from real property"
because such Rent is attributable to personal property and exceeds 15% of the
total Rent received under the applicable lease, the portion of the Rent that is
attributable to the personal property will not be qualifying income for purposes
of either the 75% or 95% gross income test. Thus, if the Rent attributable to
such personal property, plus any other income received by the
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Company during a taxable year that is not qualifying income for purposes of the
95% gross income test, exceeds 5% of the Company's gross income during such
year, the Company likely would lose its REIT status. If, however, any portion of
the Rent received under a lease does not qualify as "rents from real property"
because either the Rent is considered based on the income or profits of any
person or the tenant is a Related Party Tenant, none of the Rent received by the
Company under such lease would qualify as "rents from real property." In that
case, if the Rent received by the Company under such lease, plus any other
income received by the Company during the taxable year that is not qualifying
income for purposes of the 95% gross income test, exceeds 5% of the Company's
gross income for such year, the Company likely would lose its REIT status.
Finally, if any portion of the Rent does not qualify as "rents from real
property" because the Company furnishes noncustomary services to the tenants of
a Property other than through a qualifying independent contractor, none of the
Rent received by the Company with respect to the related Property would qualify
as "rents from real property." In that case, if the Rent received by the Company
with respect to the related Property, plus any other income received by the
Company during the taxable year that is not qualifying income for purposes of
the 95% gross income test, exceeds 5% of the Company's gross income for such
year, the Company would lose its REIT status.
The Company, through the Operating Partnership, may receive other types of
income that will not qualify for purposes of the 75% or 95% gross income test.
In particular, dividends paid with respect to the stock of the Manager owned by
the Operating Partnership will be qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test. In addition, the
Operating Partnership has received and in the future will receive indirectly
certain fees for the performance of certain services by a Noncorporate
Subsidiary with respect to Properties that are owned, directly or indirectly, by
the Operating Partnership. Although the law is not entirely clear, to the
extent that the Operating Partnership owns, directly or indirectly, both an
interest in such Properties and an interest in the Noncorporate Subsidiary
providing the services, such fees should be disregarded for purposes of the 75%
and 95% gross income tests. However, the remainder of such fees received by the
Operating Partnership (i.e., any portion of the fees that is attributable to a
third party's ownership interest in the Properties) will be nonqualifying income
for purposes of the 75% and 95% gross income tests. In addition, any fees
received, directly or indirectly, by the Operating Partnership in exchange for
providing services with respect to properties owned by unrelated third parties
will not be qualifying income for purposes of the 75% and 95% gross income
tests. Furthermore, to the extent that the Company receives interest that is
accrued on the late payment of the Rent, such amounts will not qualify as "rents
from real property" and, thus, will not be qualifying income for purposes of the
75% gross income test, but instead will be treated as interest that qualifies
for the 95% gross income test. The Company believes that the aggregate amount
of any such nonqualifying income in any taxable year has not caused and will not
cause the Company to fail to satisfy either the 75% or 95% gross income test.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (1) that is acquired by a REIT as the
result of such REIT having bid on such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (2) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (3) for which such REIT makes a
proper election to treat such property as foreclosure property. The Company
does not anticipate that it will receive any income from foreclosure property
that is not qualifying income for purposes of the 75% gross income test, but, if
the Company does receive any such income, the Company will make an election to
treat the related property as foreclosure property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes of
the 75% or 95% gross income test. The Company anticipates that any income it
receives with respect to Ineligible Property will be qualifying income for
purposes of the 75% and 95% gross income tests.
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The net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. The
Company believes that no asset owned by the Company or the Operating Partnership
will be held for sale to customers and that a sale of any such asset will not be
in the ordinary course of the Company's or the Operating Partnership's business.
Whether an asset is held "primarily for sale to customers in the ordinary course
of a trade or business" depends, however, on the facts and circumstances in
effect from time to time, including those related to a particular asset.
Nevertheless, the Company will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be characterized as
prohibited transactions. Complete assurance cannot be given, however, that the
Company can comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
It is possible that, from time to time, the Company or the Operating
Partnership will enter into hedging transactions with respect to one or more of
its assets or liabilities. Any such hedging transactions could take a variety
of forms, including interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts, and options. To the extent that the
Company or the Operating Partnership enters into an interest rate swap, cap
agreement, option, futures contract, forward rate agreement, or similar
financial instrument to reduce the interest rate risks with respect to
indebtedness incurred or to be incurred to acquire or carry real estate assets,
any periodic income or gain from the disposition of such contract should be
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. To the extent that the Company or the Operating Partnership
hedges with other types of financial instruments or in other situations, it may
not be entirely clear how the income from those transactions will be treated for
purposes of the various income tests that apply to REITs under the Code. The
Company intends to structure any hedging transactions in a manner that does not
jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations--Taxation of the Company,"
even if those relief provisions apply, a 100% tax would be imposed on (1) the
gross income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test multiplied by (2) a fraction intended to
reflect the Company's profitability.
ASSET TESTS
The Company, at the close of each quarter of each taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the principal
balance of a mortgage does not exceed the value of the associated real property
as of the date of the REIT's loan commitment or, in the case of a purchase or a
mortgage, the date of the loan purchase commitment, and shares of other REITs.
For purposes of the 75% asset test, the term "interest in real property"
includes an interest in land and improvements thereon, such as buildings or
other inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold of real property, and
an option to acquire real property (or a leasehold of real property). Second,
of the investments not included in the 75% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities (except for its interests in the
Operating Partnership, the Noncorporate Subsidiaries, and any qualified REIT
subsidiary). See "Possible Legislative or Other Actions Affecting Tax
Consequences."
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For purposes of the asset tests, the Company is deemed to own its
proportionate share of the assets of the Operating Partnership and each
Noncorporate Subsidiary, rather than its interests in those entities. At least
75% of the value of the Company's total assets has been and will be represented
by real estate assets, cash and cash items (including receivables), and
government securities. The Company, through the Operating Partnership, owns 100%
of the nonvoting stock of the Manager and holds certain unsecured notes issued
by the Manager. The Company does not own, directly or indirectly, any of the
voting stock of the Manager and believes that the value of its ownership
interest in the Manager does not exceed 5% of the value of its total assets. In
addition, the Company has not owned, and will not own securities of any one
issuer the value of which exceeds 5% of the value of the Company's total assets
or more than 10% of any one issuer's outstanding voting securities (except for
its interests in the Operating Partnership, the Noncorporate Subsidiaries, and
any qualified REIT subsidiary). In addition, the Company will not acquire or
dispose, or cause the Operating Partnership to acquire or dispose, of assets in
the future in a way that would cause it to violate either asset test.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(1) it satisfied the asset tests at the close of the preceding calendar quarter
and (2) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by an acquisition of nonqualifying assets. If the
condition described in clause (2) of the preceding sentence were not satisfied,
the Company still could avoid disqualification by eliminating any discrepancy
within 30 days after the close of the calendar quarter in which it arose.
DISTRIBUTION REQUIREMENTS
The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute with respect to each taxable year
dividends (other than capital gain dividends and retained capital gains) to its
shareholders in an aggregate amount at least equal to (1) the sum of (A) 95% of
its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain) and (B) 95% of the net income (after tax),
if any, from foreclosure property, minus (2) the sum of certain items of noncash
income. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its federal income tax return for such year and if paid on or before the
first regular dividend payment date after such declaration. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it
will be subject to tax thereon at regular corporate tax rates. Furthermore, if
the Company should fail to distribute during each calendar year at least the sum
of (1) 85% of its REIT ordinary income for such year, (2) 95% of its REIT
capital gain income for such year, and (3) any undistributed taxable income from
prior periods, the Company would be subject to a 4% nondeductible excise tax on
the excess of such required distribution over the amounts actually distributed.
The Company has made, and intends to continue to make, timely distributions
sufficient to satisfy the annual distribution requirement. The Company may elect
to retain and pay income tax on its long-term capital gains. Any such retained
amount will be treated as having been distributed by the Company for purposes of
the 4% excise tax described above.
It is possible that, from time to time, the Company may experience timing
differences between (1) the actual receipt of income and actual payment of
deductible expenses and (2) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. Further, it is possible that,
from time to time, the Company may be allocated a share of net capital gain
attributable to the sale of depreciated property that exceeds its allocable
share of cash attributable to that sale. Therefore, the Company may have less
cash than is necessary to meet its annual 95% distribution requirement or to
avoid corporate income tax or the excise tax imposed on certain undistributed
income. In such a situation, the Company may find it necessary to arrange for
short-term (or possibly long-term) borrowings or to raise funds through the
issuance of Preferred Shares or Common Shares.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement, for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid
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being taxed on amounts distributed as deficiency dividends, it will be required
to pay to the Service interest based upon the amount of any deduction taken for
deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, the Company must maintain
certain records and request on an annual basis certain information from its
shareholders designed to disclose the actual ownership of its outstanding
shares. The Company has complied and intends to continue to comply with such
requirements in the future.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's shareholders in any
year in which the Company fails to qualify will not be deductible by the Company
nor will they be required to be made. In such event, to the extent of the
Company's current and accumulated earnings and profits, all distributions to
shareholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which the Company
ceased to qualify as a REIT. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends or retained capital gains)
will be taken into account by such U.S. shareholders as ordinary income and will
not be eligible for the dividends received deduction generally available to
corporations. For purposes of determining whether distributions are made out of
the Company's current or accumulated earnings and profits, the Company's
earnings and profits will be allocated first to the Preferred Shares and then to
the Common Shares. As used herein, the term "U.S. shareholder" means a holder
of Offered Securities that for U.S. federal income tax purposes is (1) a citizen
or resident of the U.S., (2) a corporation, partnership, or other entity created
or organized in or under the laws of the U.S. or of any political subdivision
thereof, (3) an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United States,
or (4) any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or more
U.S. fiduciaries have the authority to control all substantial decisions of the
trust. Distributions that are designated as capital gain dividends generally
will be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the shareholder has held his Offered Securities. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. The Company may elect to retain and pay
income tax on its net long-term capital gains. In that case, the Company's
shareholders would include in income their proportionate share of the Company's
undistributed long-term capital gains. In addition, the shareholders would be
deemed to have paid their proportionate share of the tax paid by the Company,
which would be credited or refunded to the shareholders. Each shareholder's
basis in his shares would be increased by the amount of the undistributed long-
term capital gain included in the shareholder's income, less the shareholder's
share of the tax paid by the Company.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Offered Securities, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a shareholder's Offered Securities, such distributions will be included in
income as gains from the sale or exchange of a capital asset, assuming the
Offered Securities are capital assets in the hands of the shareholder. In
addition, any distribution declared by the Company in October, November, or
December of any year and payable to a shareholder of record on a specified date
in any such month
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shall be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the distribution is actually paid by the
Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Offered Securities will not be treated as
passive activity income and, therefore, shareholders generally will not be able
to apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which a shareholder is a limited partner) against such
income. In addition, taxable distributions from the Company generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Offered Securities (or
distributions treated as such), however, will be treated as investment income
only if the shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. The Company has notified and will continue to
notify shareholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income, return of capital, and capital gain.
TAX CONSEQUENCES UPON CONVERSION OF SERIES A PREFERRED SHARES INTO COMMON
SHARES
Generally, except with respect to cash received in lieu of fractional
shares, no gain or loss will be recognized upon the conversion of the Preferred
Shares into Common Shares. The tax basis of a holder of Preferred Shares (a
"Preferred Holder") in the Common Shares received will equal that holder's tax
basis in the Preferred Shares surrendered in the conversion reduced by any basis
attributable to fractional shares deemed received and the holding period for the
Common Shares will include the Preferred Holder's holding period for the
Preferred Shares. Based on the Internal Revenue Service's present advance ruling
policy, cash received in lieu of a fractional Common Share upon conversion of
Preferred Shares should be treated as a payment in redemption of the fractional
share interest in those Common Shares. See "--Redemption of Preferred Shares"
below.
DEEMED DIVIDENDS ON SERIES A PREFERRED SHARES
The conversion price of the Preferred Shares may be adjusted if the Company
makes certain distributions of stock, cash, or other property to its
shareholders. While the Company does not presently contemplate making such a
distribution, if the Company makes a distribution of cash or property resulting
in an adjustment to the conversion price, a Preferred Holder may be viewed as
receiving a "deemed distribution" which is taxable as a dividend under Section
301 and 305 of the Code.
REDEMPTION OF A SERIES A PREFERRED SHARES
The treatment to be accorded to any redemption by the Company of Preferred
Shares can only be determined on the basis of particular facts as to each
Preferred Holder at the time of redemption. In general, a Preferred Holder will
recognize capital gain or loss measured by the difference between the amount
realized by the Preferred Holder upon the redemption and that holder's adjusted
tax basis in the Preferred Shares redeemed (provided the Preferred Shares are
held as a capital asset) if that redemption (i) results in a "complete
termination" of the Preferred Holder's share interest in all classes of shares
of the Company under Section 302(b)(3) of the Code, (ii) is "substantially
disproportionate" with respect to the holder's interest in the Company under
Section 302(b)(2) of the Code (which generally will not be the case if only the
Preferred Shares are redeemed, since they generally do not have voting rights)
or (iii) is "not essentially equivalent to a dividend" with respect to the
Preferred Holder under Section 302(b)(1) of the Code. In determining whether any
of these tests have been met, shares considered to be owned by the Preferred
Holder by reason of certain constructive ownership rules set forth in the Code,
as well as shares actually owned, must generally be taken into account. To the
extent a minority shareholder's interest in the Company is minimal, any
reduction of such shareholder's interest in the Company by a redemption should
be treated as a sale or exchange of such stock interest. See Rev. Rul. 76-385,
1976-D C.B.92. However, to the extent a redemption does not change the
shareholder's net ownership in the Company, such a redemption will be treated as
a distribution under Section 301 to such redeeming shareholder. See Rev. Rul.
81-289, 1981-2 C.B.82. Because the determination as to whether any of the
alternative tests of Section 302(b) of the Code will be satisfied with respect
to any particular Preferred Holder depends upon the facts and circumstances at
the time when the determination must be made, prospective investors are advised
to consult their own tax advisors to determine their tax treatment.
If the redemption does not meet any of the tests under Section 302 of the
Code, then the redemption proceeds received from the Preferred Shares will be
treated as a distribution on the Preferred Shares as described under "--Taxation
of Taxable Domestic Shareholders." If the redemption is taxed as a dividend, the
Preferred Holder's adjusted tax basis in the Preferred Shares will be
transferred to any other share holdings of that holder in the Company. If,
however, the Preferred Holder has no remaining share holdings in the Company,
that basis could be transferred to a related person or it may be lost.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
Offered Securities by a shareholder who is not a dealer in securities will be
treated as capital gain or loss if the Offered Securities have been held as a
capital asset. Such gain or loss will generally constitute long-term capital
gain or loss and will be taxable at a rate of 20% if the Offered Securities have
been held for more than twelve months. Otherwise, such a gain will be taxed at
the holder's regular marginal tax rate. However, any loss upon a sale or
exchange of Offered Securities by a shareholder who has held such shares for six
months or less (after applying certain holding period rules), will be treated as
a long-term capital loss to the extent of distributions from the Company
required to be treated by such shareholder as long-term capital gain. All or a
portion of any loss realized upon a taxable disposition of the Offered
Securities may be disallowed if other Offered Securities are purchased within 30
days before or after the disposition.
CAPITAL GAINS AND LOSSES
The highest marginal individual income tax rate is 39.6%. The maximum tax
rate on net capital gains applicable to noncorporate taxpayers is 20% for sales
and exchanges of assets held for more than one year. The maximum tax rate on
long-term capital gain from the sale or exchange of "section 1250 property"
(i.e., depreciable real property) held for more than 18 months is 25% to the
extent that such gain would have been treated as ordinary income if the property
were "section 1245 property." With respect to distributions designated by the
Company as capital gain dividends and any retained capital gains that the
Company is deemed to distribute, the Company may designate (subject to certain
limits) whether such a distribution is taxable to its noncorporate stockholders
at a 20%, or 25%. Thus, the tax rate differential between capital gain and
ordinary income for noncorporate taxpayers may be significant. In addition, the
characterization of income as capital or ordinary may affect the deductibility
of capital losses. Capital losses not offset by capital gains may be deducted
against a noncorporate taxpayer's ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward. All net
capital gain of a corporate taxpayer is subject to tax at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company reports and will continue to report to its U.S. shareholders
and to the Service the amount of distributions paid during each calendar year,
and the amount of tax withheld, if any. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% with respect
to distributions paid unless such holder is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with the applicable requirements
of the backup withholding rules. A shareholder who does not provide the Company
with his correct taxpayer identification number also may be subject
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to penalties imposed by the Service. Any amount paid as backup withholding will
be creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any shareholders who fail to certify their nonforeign status to the Company. The
Service has issued final regulations regarding the backup withholding rules as
applied to Non-U.S. Shareholders. Those regulations alter the current system of
backup withholding compliance and will be effective for distributions made after
December 31, 1998. See "--Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by the Company to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Offered Securities with debt, a
portion of its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17), and (20), respectively, of Code section 501(c) are subject to
different UBTI rules, which generally will require them to characterize
distributions from the Company as UBTI. In addition, in certain circumstances,
a pension trust that owns more than 10% of the Company's shares is required to
treat a percentage of the dividends from the Company as UBTI (the "UBTI
Percentage"). The UBTI Percentage is the gross income derived by the Company
from an unrelated trade or business (determined as if the Company were a pension
trust) divided by the gross income of the Company for the year in which the
dividends are paid. The UBTI rule applies to a pension trust holding more than
10% of the Company's stock only if (1) the UBTI Percentage is at least 5%, (2)
the Company qualifies as a REIT by reason of the modification of the 5/50 Rule
that allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interests in the pension
trust, and (3) the Company is a "pension-held" REIT (i.e., either (A) one
pension trust owns more than 25% of the value of the Company's shares or (B) a
group of pension trusts individually holding more than 10% of the value of the
Company's shares collectively owns more than 50% of the value of the Company's
shares). Because the Ownership Limitation prohibits any pension trust from
owning more than 8.5% of the Common Shares or more than 9.8% of any class or
series of the Preferred Shares, the Company should not be a "pension-held" REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE OFFERED SECURITIES, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends or retained capital
gains will be treated as dividends of ordinary income to the extent that they
are made out of current or accumulated earnings and profits of the Company. Such
distributions ordinarily will be subject to a withholding tax equal to 30% of
the gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Offered
Securities is treated as effectively connected with the Non-U.S. Shareholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will be
subject to federal income tax at graduated rates, in the same manner as U.S.
shareholders are taxed with respect to such distributions (and also may be
subject to the 30% branch profits tax in the case of a Non-U.S. Shareholder that
is a non-U.S. corporation). The Company expects to withhold U.S. income tax at
the rate of 30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless a lower treaty rate applies and any required form
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evidencing eligibility for that reduced rate is filed with the Company or the
Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that the
distribution is effectively connected income. The Service has issued final
regulations that modify the manner in which the Company complies with the
withholding requirements. Those regulations are effective for distributions made
after December 31, 1998. Distributions in excess of current and accumulated
earnings and profits of the Company will not be taxable to a shareholder to the
extent that such distributions do not exceed the adjusted basis of the
shareholder's Common Shares, but rather will reduce the adjusted basis of such
shares. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a Non-U.S. Shareholder's
Offered Securities, such distributions will give rise to tax liability if the
Non-U.S. Shareholder would otherwise be subject to tax on any gain from the sale
or disposition of his Offered Securities, as described below. Because it
generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. Amounts so withheld, however, are
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company.
The Company is required to withhold 10% of any distribution in excess of
the Company's current and accumulated earnings and profits. Consequently,
although the Company intends to withhold at a rate of 30% on the entire amount
of any distribution, to the extent that the Company does not do so, any portion
of a distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Shareholders thus would be taxed at
the normal capital gain rates applicable to U.S. shareholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to the 30% branch profits tax in the hands of a non-U.S.
corporate shareholder not entitled to treaty relief or exemption. The Company
is required to withhold 35% of any distribution that is designated by the
Company as a capital gains dividend. The amount withheld is creditable against
the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by non-U.S. persons. However, because the Offered Securities will
be publicly traded, no assurance can be given that the Company is or will
continue to be a "domestically controlled REIT." In addition, a Non-U.S.
Shareholder that owned, actually or constructively, 5% or less of the Common
Shares or Preferred Shares at all times during a specified testing period will
not be subject to tax under FIRPTA if the Common or Preferred Shares, as
applicable, are "regularly traded" on an established securities market.
Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (1) investment in the Offered Securities is effectively connected
with the Non-U.S. Shareholder's U.S. trade or business, in which case the Non-
U.S. Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain, or (2) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the U.S. for 183 days or more during the taxable
year and certain other conditions apply, in which case the nonresident alien
individual will be subject to a 30% tax on the individual's capital gains. If
the gain on the sale of the Offered Securities were to be subject to taxation
under FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as
U.S. shareholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations).
POSSIBLE LEGISLATION OR OTHER ACTION AFFECTING TAX CONSEQUENCES
The rules dealing with Federal income taxation are constantly under review
by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. Changes to the Federal laws and
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interpretations thereof could adversely affect an investment in the Company. For
example, a proposal issued by President Clinton on February 2, 1998, if enacted
into law, may adversely affect the ability of the Company to expand the present
activities of its management subsidiaries. It cannot be predicted whether, when,
in what forms, or with what effective dates, the tax laws applicable to the
Company or an investment in the Company will be changed.
OTHER TAX CONSEQUENCES
The Company, the General Partner, the Operating Partnership, the Manager, a
Noncorporate Subsidiary, or the Company's shareholders may be subject to state
or local taxation in various state or local jurisdictions, including those in
which it or they own property, transact business, or reside. Such state and
local tax treatment may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN
INVESTMENT IN THE COMPANY.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas, including REITs that
are organized as corporations. While the Trust is organized as a Maryland real
estate investment trust and is therefor not subject to the Texas franchise tax,
it owns, directly or indirectly, certain qualified REIT subsidiaries and limited
liability companies that are subject to the tax. The Texas franchise tax imposed
on a corporation doing business in Texas generally is equal to the greater of
(1) .25% of "taxable capital" (generally, financial accounting net worth with
certain adjustments) apportioned to Texas; or (2) 4.5% of "taxable earned
surplus" (generally, federal taxable income with certain adjustments)
apportioned to Texas. A corporation's taxable capital and taxable earned surplus
are apportioned to Texas based upon a fraction, the numerator of which is the
corporation's gross receipts from business transacted in Texas and the
denominator of which is the corporation's gross receipts from all sources.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE NONCORPORATE SUBSIDIARIES
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in the
Operating Partnership and the Noncorporate Subsidiaries (each of the Operating
Partnership and the Noncorporate Subsidiaries is referred to herein as a
"Partnership"). The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
CLASSIFICATION AS A PARTNERSHIP
The Company will be entitled to include in its income its distributive
share of each Partnership's income and to deduct its distributive share of each
Partnership's losses only if each Partnership is classified for federal income
tax purposes as a partnership rather than as a corporation or an association
taxable as a corporation. An entity will be classified as a partnership rather
than as a corporation for federal income tax purposes if the entity is treated
as a partnership under Treasury regulations, effective January 1, 1997, relating
to entity classification (the "Check-the-Box Regulations") and is not a
"publicly traded" partnership.
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make
an election, it generally will be treated as a partnership for federal income
tax purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnerships, will be respected
for all periods prior to January 1, 1997 if (1) the entity had a reasonable
basis for its claimed classification, (2) the entity and all members of the
entity recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (3) neither
the entity nor any of its members was notified in writing by a taxing authority
on or before May 8, 1996 that the classification of the entity was under
examination. Each Partnership in existence on January 1, 1997 reasonably
claimed partnership classification under the Treasury Regulations relating to
entity classification in effect prior to January 1, 1997, and such
classification should be respected for federal income tax purposes. In
addition, no Partnership was notified by a taxing authority on or before May 8,
1996 that its classification was under examination. The Partnerships intend
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to continue to be classified as partnerships and no Partnership will elect to be
treated as an association taxable as a corporation for federal income tax
purposes under the Check-the-Box Regulations. The Company has represented that,
to the best of its knowledge, each Partnership will be treated as a
"partnership" for federal income tax purposes.
A publicly traded partnership is a partnership whose interests trade on an
established securities market or are readily tradable on a secondary market (or
the substantial equivalent thereof). A publicly traded partnership will be
treated as a corporation for federal income tax purposes unless at least 90% of
such partnership's gross income for a taxable year consists of "qualifying
income" under section 7704(d) of the Code, which generally includes any income
that is qualifying income for purposes of the 95% gross income test applicable
to REITs (the "90% Passive-Type Income Exception"). See "-- Requirements for
Qualification--Income Tests." The U.S. Treasury Department has issued
regulations (the "PTP Regulations") that provide limited safe harbors from the
definition of a publicly traded partnership. Pursuant to one of those safe
harbors (the "Private Placement Exclusion"), interests in a partnership will not
be treated as readily tradable on a secondary market or the substantial
equivalent thereof if all interests in the partnership were issued in a
transaction (or transactions) that was not required to be registered under the
Securities Act, and the partnership does not have more than 100 partners at any
time during the partnership's taxable year. In determining the number of
partners in a partnership, a person owning an interest in a flow-through entity
(i.e., a partnership, grantor trust, or S corporation) that owns an interest in
the partnership is treated as a partner in such partnership only if
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and a principal purpose of the use of the flow-
through entity is to permit the partnership to satisfy the 100-partner
limitation. Each Partnership qualifies for the Private Placement Exclusion. If
a Partnership is considered a publicly traded partnership under the PTP
Regulations because it is deemed to have more than 100 partners, such
Partnership should not be treated as a corporation because it should be eligible
for the 90% Passive-Type Income Exception.
If for any reason one of the Partnerships were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company
likely would not be able to qualify as a REIT. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests" and "--
Requirements for Qualification--Asset Tests." In addition, any change in a
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations--Requirements for
Qualification--Distribution Requirements." Further, items of income and
deduction of such Partnership would not pass through to its partners, and its
partners would be treated as shareholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute dividends that
would not be deductible in computing such Partnership's taxable income.
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
Partners, not Partnerships, Subject to Tax. A partnership is not a taxable
entity for federal income tax purposes. Rather, the Company will be required to
take into account its allocable share of each Partnership's income, gains,
losses, deductions, and credits for any taxable year of such Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution from such Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under section 704(b) of the Code if they do
not comply with the provisions of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
Each Partnership's allocations of taxable income and loss are intended to comply
with the requirements of section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
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Tax Allocations with Respect to Contributed Properties. Pursuant to
section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department has issued
regulations requiring partnerships to use a "reasonable method" for allocating
items affected by section 704(c) of the Code and outlining several reasonable
allocation methods. The Operating Partnership generally has elected to use the
traditional method for allocating Code section 704(c) items with respect to the
Properties it acquires in exchange for Units.
Under the Operating Partnership Agreement, depreciation or amortization
deductions of the Operating Partnership generally are allocated among the
partners in accordance with their respective interests in the Operating
Partnership, except to the extent that the Operating Partnership is required
under Code section 704(c) to use a method for allocating tax depreciation
deductions attributable to the Properties that results in the Company receiving
a disproportionately large share of such deductions. In addition, gain on the
sale of a Property contributed to the Operating Partnership in exchange for
Units will be specially allocated to the contributor to the extent of any
"built-in" gain with respect to such Property for federal income tax purposes.
Depending on the allocation method elected under Code section 704(c), it is
possible that the Company may be allocated lower amounts of depreciation
deductions for tax purposes with respect to contributed Properties than would be
allocated to the Company if such Properties were to have a tax basis equal to
their fair market value at the time of contribution and may be allocated taxable
gain in the event of a sale of such contributed Properties in excess of the
economic profit allocated to the Company as a result of such sale. These
allocations may cause the Company to recognize taxable income in excess of cash
proceeds, which might adversely affect the Company's ability to comply with the
REIT distribution requirement, although the Company does not anticipate that
this event will occur. The foregoing principles also will affect the
calculation of the Company's earnings and profits for purposes of determining
which portion of the Company's distributions is taxable as a dividend. The
allocations described in this paragraph may result in a higher portion of the
Company's distributions being taxed as a dividend than would have occurred had
the Company purchased the Properties for cash.
Basis in Operating Partnership Interest. The Company's adjusted tax basis
in its partnership interest in the Operating Partnership generally is equal to
(1) the amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (2) increased by (A) its allocable share
of the Operating Partnership's income and (B) its allocable share of
indebtedness of the Operating Partnership, and (3) reduced, but not below zero,
by (A) the Company's allocable share of the Operating Partnership's loss and (B)
the amount of cash distributed to the Company, including constructive cash
distributions resulting from a reduction in the Company's share of indebtedness
of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition of
such loss will be deferred until such time as the recognition of such loss would
not reduce the Company's adjusted tax basis below zero. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decrease being considered a
constructive cash distribution to the partners), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) will constitute taxable income to the Company. Such
distributions and constructive distributions normally will be characterized as
capital gain, and, if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
will constitute long-term capital gain.
SALE OF THE OPERATING PARTNERSHIP'S OR A NONCORPORATE SUBSIDIARY'S PROPERTY
Generally, any gain realized by a Partnership on the sale of property held
for more than one year will be mid-term capital gain, and any gain realized on
the sale of property held for more than 18 months will be long-term capital
gain, except for any portion of such gain that is treated as depreciation or
cost recovery recapture. Any gain
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recognized by a Partnership on the disposition of the Properties contributed to
the Partnership in exchange for partnership interests therein will be allocated
first to the contributor under section 704(c) of the Code to the extent of the
contributor's "built-in gain" on those Properties for federal income tax
purposes. The contributors' "built-in gain" on the Properties sold will equal
the excess of the contributors' proportionate share of the book value of those
Properties over the contributors' tax basis allocable to those Properties at the
time of the sale. Any remaining gain recognized by a Partnership on the
disposition of the contributed Properties, and any gain recognized upon the
disposition of the Properties acquired by a Partnership for cash, will be
allocated among the partners in accordance with their respective percentage
interests in the Partnership. The Bylaws of the Company provide that any
decision to sell any real estate asset in which a trustee, or officer of the
Company, or any Affiliate of the foregoing, has a direct or indirect interest,
will be made by a majority of the Trustees including a majority of the
Independent Trustees.
The Company's share of any gain realized by a Partnership on the sale of
any property held by the Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Such prohibited transaction income also may
have an adverse effect upon the Company's ability to satisfy the income tests
for REIT status. See "Federal Income Tax Considerations--Requirements For
Qualification--Income Tests" above. The Company, however, does not presently
intend to acquire or hold or to allow a Partnership to acquire or hold any
property that represents inventory or other property held primarily for sale to
customers in the ordinary course of the Company's or the Partnership's trade or
business.
MANAGER
The Operating Partnership owns 100% of the nonvoting stock of the Manager,
which stock represents in the aggregate a 95% economic interest in the Manager.
The Operating Partnership also holds notes issued by the Manager in the
aggregate initial principal amount of $34.75 million. By virtue of its
ownership of the Operating Partnership, the Company is considered to own its pro
rata share of such stock and notes.
As noted above, for the Company to qualify as a REIT the value of the
equity and debt securities of the Manager held, directly or indirectly, by the
Company may not exceed 5% of the total value of the Company's assets. In
addition, the Company may not own, directly or indirectly, more than 10% of the
voting stock of the Manager. The Company does not own, directly or through the
Operating Partnership, any of the voting securities of the Manager. In
addition, the Company believes that the value of the equity and debt securities
of the Manager is significantly less than 5% of the total value of its assets.
However, if the Service were to successfully challenge these determinations and
conclude that the value of the equity and debt securities of the Manager
exceeded 5% of the total assets of the Company, the Company likely would fail to
qualify as a REIT. See "--Possible Legislative or Other Actions Affecting Tax
Consequences."
The Manager is organized as a corporation and pays federal, state and local
income taxes on its taxable income at normal corporate rates. Any such taxes
reduce amounts available for distribution by the Manager, which in turn reduce
amounts available for distribution to the Company's shareholders.
SELLING SHAREHOLDERS
The Selling Shareholders are the holder listed below and its transferees,
pledgees, donees or other successors, if not identified hereunder, then so
identified in supplements to this Prospectus. The following table sets forth,
as of a recent practicable date prior to the effectiveness of the Registration
Statement of which this Prospectus forms a part, certain information with
respect to the Selling Shareholders named below and the respective number of
Series A Preferred Shares and Common Shares issuable upon the conversion of
Series A Preferred Shares owned by each Selling Shareholder that may be offered
pursuant to this Prospectus. Each Selling Shareholder is registering the entire
amount of the Series A Preferred Shares and Common Shares set forth opposite its
name below.
29
<PAGE>
<TABLE>
<CAPTION>
SERIES A PREFERRED COMMON SHARES
SERIES A PREFERRED SHARES REGISTERED REGISTERED
SELLING SHAREHOLDERS SHARES OWNED HEREUNDER HEREUNDER
- ---------------------------- ------------------ ------------------ -------------
<S> <C> <C> <C>
Security Capital Preferred 3,773,585 3,773,585 3,773,585
Growth Incorporated
</TABLE>
Because each of the Selling Shareholders may offer all, some or none of the
Series A Preferred Shares or Common Shares issuable upon conversion of the
Series A Preferred Shares, and because the offering contemplated by this
Prospectus is currently not being underwritten, no estimate can be given as to
the number of Series A Preferred Shares or Common Shares issuable upon
conversion of the Series A Preferred Shares which will be held by each of the
Selling Shareholders upon or prior to termination of this offering. Such
information has been obtained from the Selling Shareholders.
PLAN OF DISTRIBUTION
The Selling Shareholders may from time to time offer and sell the Common
Shares issuable upon conversion of the Series A Preferred Shares on the NYSE, in
the over-the-counter market or otherwise, and they may sell the Series A
Preferred Shares or the Common Shares issuable upon conversion of the Series A
Preferred Shares in ordinary brokerage transactions, in block transactions, in
privately negotiated transactions, through put or call transactions, through
short sales, pursuant to Rule 144 or otherwise. Those transactions may or may
not involve brokers or dealers. The Selling Shareholders may include Merrill
Lynch International Private Finance Limited, a Delaware corporation and pledgee
of Security Capital, or any donees or other pledgees of the Selling Shareholders
after the date of this Prospectus. If the Selling Shareholders sell the Series
A Preferred Shares or the Common Shares issuable upon conversion of the Series A
Preferred Shares through brokers, they expect to pay customary brokerage
commissions and charges. We will pay all expenses incident to the offering and
sale of the Series A Preferred Shares and the Common Shares hereunder other than
underwriting discounts, selling commissions and fees, and legal and accounting
fees incurred by the Selling Shareholders.
We are registering the Series A Preferred Shares and the Common Shares
issuable upon conversion of the Series A Preferred Shares to permit the Selling
Shareholders to resell the Series A Preferred Shares and the Common Shares
issuable upon conversion of the Series A Preferred Shares and to permit public
secondary trading of the Common Shares issuable upon conversion of the Series A
Preferred Shares from time to time. We are required to register the Series A
Preferred Shares and the Common Shares issuable upon conversion of the Series A
Preferred Shares under the terms of the Registration Rights Agreement. For
additional information concerning the registration rights of the Selling
Shareholders, see "Registration Rights."
There is no assurance that the Selling Shareholders will sell any or all of
the Series A Preferred Shares or the Common Shares issuable upon conversion of
the Series A Preferred Shares offered pursuant to this Prospectus. Each of the
Selling Shareholders reserves the right to accept and, together with its agents
from time to time, to reject in whole or in part any proposed purchase of the
Series A Preferred Shares or the Common Shares issuable upon conversion of the
Series A Preferred Shares to be made directly or through agents.
To the extent required, the aggregate principal amount of the Series A
Preferred Shares and the number of the Common Shares issuable upon conversion of
the Series A Preferred Shares to be sold, the names of the Selling Shareholders,
the purchase price, the name of any agent, dealer or underwriter and any
applicable commission with respect to a particular offer will be set forth in an
accompanying Prospectus Supplement or, if appropriate, a post-effective
amendment to the Registration Statement of which this Prospectus is a part. The
Selling Shareholders and any agents, broker-dealers or underwriters that
participate with the Selling Shareholders in the distribution of the Series A
Preferred Shares or the Common Shares issuable upon conversion of the Series A
Preferred Shares may be deemed to be "underwriters" within the meaning of the
Securities Act, in which event any discounts, commissions or concessions
received by such broker-dealers, agents or underwriters and any profit on the
resale of the Series A Preferred Shares or the Common Shares issuable upon
conversion of the Series A
30
<PAGE>
Preferred Shares purchased by them may be deemed to be underwriting discounts or
commissions under the Securities Act.
To comply with the securities laws of certain states, if applicable, the
Series A Preferred Shares and the Common Shares issuable upon conversion of the
Series A Preferred Shares must be sold in such states only through registered or
licensed brokers or dealers. In addition, in certain states the Series A
Preferred Shares and the Common Shares issuable upon conversion of the Series A
Preferred Shares may not be offered or sold unless they have been registered or
qualified for sale in such state or an exemption from the registration or
qualification requirement is available and is complied with.
We have agreed to indemnify the Selling Shareholders and their respective
directors, officers and controlling persons against certain liabilities relating
to the Registration Statement, including certain liabilities under the
Securities Act. Each Selling Shareholder has agreed to indemnify us and our
directors, officers and controlling persons against certain liabilities relating
to information given to us by that Selling Shareholder in writing for inclusion
in the Registration Statement, including certain liabilities under the
Securities Act.
LEGAL OPINIONS
The legality of the issuance of the Company's Series A Preferred Shares and
the Common Shares issuable upon conversion of the Series A Preferred Shares will
be passed upon by Akin, Gump, Strauss, Hauer & Feld, L.L.P., who will rely on
Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland, as to certain
matters of Maryland law.
EXPERTS
The consolidated and combined financial statements of the Company as of
December 31, 1997 and 1996 and for the year ended December 31, 1997 and the
period October 22, 1996 (inception of operations) to December 31, 1996, and the
Predecessor Company (as defined therein) for the period January 1, 1996 through
October 21, 1996, and the year ended December 31, 1995, included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, the
combined statements of revenue and certain operating expenses of the Silicon
Valley Properties and the Newport National Properties and the statement of
revenue and certain operating expenses of the Carrara Place Property included in
the Company's Current Reports on Form 8-K, filed February 10, 1998 and the
combined statement of revenues and certain operating expenses of the Willow Oaks
Properties and the statement of revenues and certain operating expenses of the
Ordway Property included in the Company's Current Report on Form 8-K, filed
October 9, 1998, all incorporated by reference in this Prospectus, have been
incorporated herein in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants given on the authority of that firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from our web site at http://www.pplinc.com or at the SEC's web
site at http://www.sec.gov.
We filed a Registration Statement on Form S-3 to register with the SEC the
Series A Preferred Shares and the Common Shares issuable upon conversion
thereof. This Prospectus is a part of that Registration Statement. As allowed
by SEC rules, this Prospectus does not contain all of the information you can
find in the Registration Statement or the exhibits to the Registration
Statement.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this Prospectus, and later information filed with the
SEC will update and
31
<PAGE>
supersede this information. We incorporate by reference the documents listed
below and any future filings made with the SEC under Section 13(a), 13(c), 14 or
15(d) of the Exchange Act until our offering is completed.
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1997;
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31 and June 30, 1998; and
3. The Company's Current Reports on Form 8-K filed on January 15, 1998,
February 10, 1998, February 17, 1998, February 25, 1998, July 1, 1998
and October 9, 1998.
4. The description of the Common Shares contained in the Company's
Registration Statement on Form 8-A, filed on October 17, 1996, under
the Exchange Act, including any reports filed under the Exchange Act
for the purpose of updating such description.
5. The description of the Series B Junior Preferred Shares contained in
the Company's Registration Statement on Form 8-A, filed on February
17, 1998, as amended by the Company's Registration Statement of Form
8-A, filed on March 10, 1998, including any reports filed under the
Exchange Act for the purpose of updating such description.
You may request a copy of these filings, at no cost, by writing or
telephoning:
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas
(214) 654-0886
You should rely on the information incorporated by reference or provided in
this Prospectus or any Prospectus Supplement. We have authorized no one to
provide you different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this Prospectus or any Prospectus Supplement is accurate
as of any date other than the date on the front of the document.
32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following sets forth the estimated expenses (other than underwriting
discounts and commissions) in connection with the issuance and distribution of
the securities being registered hereby, all of which will be paid by the
Company:
Securities and Exchange Commission registration fee............ $ 19,866
Accounting fees and expenses................................... 4,000
Blue Sky fees and expenses..................................... 1,000
Legal fees and expenses........................................ 25,000
Printing....................................................... 5,000
Miscellaneous.................................................. 1,134
-----------
TOTAL..................................................... $ 56,000
===========
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by the Maryland REIT Law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a trustee, director, officer or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as present
or former shareholder. The Bylaws of the Company obligate it, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former Trustee or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Declaration of Trust and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any of
the capacities described above and to any employee or agent of the Company or a
predecessor of the Company. The Bylaws require the Company to indemnify a
Trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity.
II-1
<PAGE>
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as is permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that a
personal benefit was improperly received unless a court orders indemnification
and then only for expenses. In accordance with the MGCL, the Bylaws of the
Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the Trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the Bylaws and (b) a written undertaking by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER EXHIBITS
- ------- --------
3.1 -- Form of Amended and Restated Declaration of Trust of the Company
(filed as Exhibit 3.1 to the Company's Registration Statement on
Amendment No. 1 of Form S-11, File No. 333-09863, and
incorporated by reference herein).
3.2 -- Articles Supplementary to the Amended and Restated Declaration of
Trust Classifying and Designating the Series A Preferred Shares
(filed as Exhibit 3.1 to the Company's Current Report on Form 8-K
filed January 15, 1998 and incorporated by reference herein).
3.3 -- Articles Supplementary, dated February 17, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest
as Junior Participating Cumulative Convertible Redeemable
Preferred Shares of Beneficial Interest, Series B, and Fixing
Distribution and Other Preferences and Rights of Such Shares
(filed as Exhibit 3 to the Company's Registration Statement on
Form 8-A filed on February 17, 1998, File No. 000-23813).
3.4 -- Articles Supplementary, dated June 25, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest
as Series B Cumulative Redeemable Perpetual Preferred Shares of
Beneficial Interest and Fixing Distribution and Other Preferences
and Rights of Such Shares (filed as Exhibit 3.5 to the Company's
Form 10-Q filed August 12, 1998 and incorporated by reference
herein).
3.5 -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Amendment No. 1 of Form S-11, File No.
333-09863, and incorporated by reference herein).
4.1 -- Form of Common Shares Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Amendment No. 1 of Form S-11,
File No. 333-09863, and incorporated by reference herein).
*4.2 -- Form of Series A Preferred Share Certificate.
II-2
<PAGE>
4.3 -- Rights Agreement, dated February 6, 1998, between the Company and
First Chicago Trust Company of New York, as Rights Agent (filed
as Exhibit 4.1 to the Company's Registration Statement on Form
8-A filed on February 17, 1998 and incorporated by reference
herein).
4.4 -- Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
*5 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*8 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. regarding
certain tax matters.
*10 -- Registration Rights Agreement, dated December 29, 1997, between
the Company and Security Capital Preferred Growth Incorporated.
*12 -- Statement regarding Computation of Ratios of Earnings to Combined
Fixed Charges and Preferred Share Dividends.
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibits 5 and 8).
*23.2 -- Consent of Ballard Spahr Andrews & Ingersoll, LLP.
*23.3 -- Consent of PricewaterhouseCoopers LLP.
*24 -- Power of Attorney (included on the signature page of this
Registration Statement).
- ----------------------------
* Filed herewith.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement (notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement); and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
II-3
<PAGE>
provided, however, that the undertakings set forth in subparagraphs (i) and (ii)
above do not apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Commission by the registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in this registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that the in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted against the
registrant by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
their counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant further hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned thereunto duly
authorized, in the city of Dallas, state of Texas, on October 15, 1998.
PRENTISS PROPERTIES TRUST
By: /s/ THOMAS F. AUGUST
-------------------------------------
Thomas F. August
President and Chief Operating Officer
Each person whose signature appears below hereby constitutes and appoints
Michael V. Prentiss, Thomas F. August and Gregory S. Imhoff, or any of them, his
true and lawful attorney-in-fact, for him and in his name, place and stead, to
sign any and all amendments (including post-effective amendments) to this
Registration Statement, to sign any Registration Statements filed pursuant to
Rule 462(b) of the Securities Act of 1933, and to cause the same to be filed
with the Securities and Exchange Commission, hereby granting to said attorneys-
in-fact full power and authority to do and perform all and every act and thing
whatsoever requisite or desirable to be done in and about the premises as fully
to all intents and purposes as the undersigned might or could do in person,
hereby ratifying and confirming all acts and things that said attorneys-in-fact
may do or cause to be done by virtue of these presents.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on October 15, 1998 by the
following persons in the capacities indicated.
NAME TITLE
- ---- -----
/s/ MICHAEL V. PRENTISS Chairman of the Board and Chief Executive
- ------------------------ Officer (Principal Executive Officer)
Michael V. Prentiss
/s/ THOMAS F. AUGUST President, Chief Operating Officer and
- ------------------------ Trustee
Thomas F. August
Trustee
- ------------------------
Thomas J. Hynes, Jr.
/s/ BARRY J.C. PARKER Trustee
- ------------------------
Barry J.C. Parker
Trustee
- ------------------------
Leonard M. Riggs, Jr.
II-5
<PAGE>
/s/ RONALD G. STEINHART Trustee
- ------------------------
Ronald G. Steinhart
/s/ LAWRENCE A. WILSON Trustee
- ------------------------
Lawrence A. Wilson
/s/ MARK R. DORAN Executive Vice President, Chief Financial
- ------------------------ Officer and Treasurer (Principal
Mark R. Doran Financial Officer)
/s/ RICHARD J. BARTEL Executive Senior Vice President--Financial
- ------------------------ Operations and Administration, and Chief
Richard J. Bartel Administrative Officer
/s/ THOMAS P. SIMON Vice President
- ------------------------ (Chief Accounting Officer)
Thomas P. Simon
II-6
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBITS
------- --------
3.1 -- Form of Amended and Restated Declaration of Trust of the Company
(filed as Exhibit 3.1 to the Company's Registration Statement on
Amendment No. 1 of Form S-11, File No. 333-09863, and
incorporated by reference herein).
3.2 -- Articles Supplementary to the Amended and Restated Declaration of
Trust Classifying and Designating the Series A Preferred Shares
(filed as Exhibit 3.1 to the Company's Current Report on Form 8-K
filed January 15, 1998 and incorporated by reference herein).
3.3 -- Articles Supplementary, dated February 17, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest
as Junior Participating Cumulative Convertible Redeemable
Preferred Shares of Beneficial Interest, Series B, and Fixing
Distribution and Other Preferences and Rights of Such Shares
(filed as Exhibit 3 to the Company's Registration Statement on
Form 8-A filed on February 17, 1998, File No. 000-23813).
3.4 -- Articles Supplementary, dated June 25, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest
as Series B Cumulative Redeemable Perpetual Preferred Shares of
Beneficial Interest and Fixing Distribution and Other Preferences
and Rights of Such Shares (filed as Exhibit 3.5 to the Company's
Form 10-Q filed August 12, 1998 and incorporated by reference
herein).
3.5 -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Amendment No. 1 of Form S-11, File No.
333-09863, and incorporated by reference herein).
4.1 -- Form of Common Shares Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Amendment No. 1 of Form S-11,
File No. 333-09863, and incorporated by reference herein).
*4.2 -- Form of Series A Preferred Share Certificate.
4.3 -- Rights Agreement, dated February 6, 1998, between the Company and
First Chicago Trust Company of New York, as Rights Agent (filed
as Exhibit 4.1 to the Company's Registration Statement on Form
8-A filed on February 17, 1998 and incorporated by reference
herein).
4.4 -- Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
*5 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*8 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. regarding
certain tax matters.
*10 -- Registration Rights Agreement, dated December 29, 1997, between
the Company and Security Capital Preferred Growth Incorporated.
*12 -- Statement regarding Computation of Ratios of Earnings to Combined
Fixed Charges and Preferred Share Dividends.
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibits 5 and 8).
*23.2 -- Consent of Ballard Spahr Andrews & Ingersoll, LLP.
*23.3 -- Consent of PricewaterhouseCoopers LLP.
<PAGE>
*24 -- Power of Attorney (included on the signature page of this
Registration Statement).
- ----------------------------
* Filed herewith.
<PAGE>
EXHIBIT 4.2
ORGANIZED UNDER THE LAWS OF THE STATE OF MARYLAND
NO. 1 2,830,189 Shares
PRENTISS PROPERTIES TRUST
2,830,189 Shares
Series A Cumulative Convertible Redeemable Preferred
Shares of Beneficial Interest
THIS CERTIFIES THAT Security Capital Preferred Growth Incorporated is the owner
of Two Million Eight Hundred Thirty One Hundred Eighty-Nine Shares of the
Capital Stock of SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED SHARES OF
BENEFICIAL INTEREST OF PRENTISS PROPERTIES TRUST transferable only on the books
of the Corporation by the holder hereof in person or by Attorney upon surrender
of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this
Certificate to be signed by its duly authorized officers and its
Corporate Seal to be hereunto affixed this 29th day of December,
A.D. 1997
[CORPORATE SEAL
APPEARS HERE]
Vice President and Treasurer Secretary
SHARES Par Value EACH
$.01
<PAGE>
For Value Received, _______ hereby sell, assign and transfer unto
________________________________________________________________________________
_____________________________________________________________ Shares of the
Capital Stock represented by the within Certificate and do hereby constitute and
appoint _____________________________________________________ Attorney to
transfer the said Stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated ____________________________________________________________
In presence of
__________________________________________________________________
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
CERTIFICATE
FOR
2,830,189
SHARES
OF THE
CAPITAL STOCK
---------------------
(Series A Cumulative
Convertible Redeemable
Preferred Shares of
Beneficial Interest)
of
PRENTISS PROPERTIES TRUST
---------------------
ISSUED TO
Security Capital Preferred
Growth, Incorporated
DATE
December 29, 1997
The Trust will furnish to any shareholder, on request and without charge, a
full statement of the information required by Section 8-203(d) of the
Corporations and Associations Articles of the Annotated Code of Maryland with
respect to the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends and other
distributions, qualifications, and terms and conditions of redemption of the
shares of each class of beneficial interest which the Trust has authority to
issue and, if the Trust is authorized to issue any preferred or special class in
series, (i) the differences in the relative rights and preferences between the
shares of each series to the extent set, and (ii) the authority of the Board of
Trustees to set such rights and preferences of subsequent series. The foregoing
summary does not purport to be complete and is subject to and qualified in its
entirety by reference to the Amended and Restated Declaration of Trust of the
Trust, a copy of which will be sent without charge to each shareholder who
requests. Such request must be made to the Secretary of the Trust as its
principal office.
The Shares represented by this certificate are subject to restrictions on
transfer for the purpose of the Trust's maintenance of its status as a real
estate investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"). Subject to certain further restrictions and except as provided in the
Amended and Restated Declaration of Trust of the Trust, no Person may (i)
Beneficially or Constructively Own Common Shares in excess of 8.5% (or such
other percentage as may be determined by the Board of Trustees) of the number
of outstanding Common Shares, (ii) Beneficially or Constructively Own
Preferred Shares of any series of Preferred Shares in excess of 9.8% of the
number of outstanding Preferred Shares of such series, (or such other percentage
as may be determined by the Board of Trustees), (iii) Beneficially Own Equity
Shares that would result in the Equity Shares being beneficially owned by fewer
than 100 Persons (determined without reference to any rules of attribution),
(iv) Beneficially Own Equity Shares that would result in the Trust being
"closely held" under Section 856(h) of the Code, or (v) Constructively Own
Equity Shares that would cause the Trust to Constructively Own 10% or more of
the ownership interests in a tenant of the Trust's real property, within the
meaning of Section 856(d)(2)(B) of the Code. Any Person who attempts to
Beneficially or Constructively Own shares of Equity Shares in excess of the
above limitations must immediately notify the Trust in writing. If any
restrictions above are violated, the Equity Shares represented hereby will be
transferred automatically to a Share Trust and shall be designated Shares in
Trust to a trustee of a trust for the benefit of one or more charitable
beneficiaries. In addition, upon the occurrence of certain events, attempted
transfers in violation of the restrictions described above may be void ab
initio. All capitalized terms in this legend have the meanings defined in the
Trust's Amended and Restated Declaration of Trust, as the same may be further
amended from time to time, a copy of which, including the restrictions on
transfer, will be sent without charge to each shareholder who so requests. Such
requests may be made to the secretary of the trust at its principal office or to
the transfer agent.
The Shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, or state securities laws and may not be
transferred except pursuant to a registration or an opinion of counsel
reasonably satisfactory to the Trust that such registration is not required.
<PAGE>
EXHIBIT 5
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
October 15, 1998
Prentiss Properties Trust
3890 West Northwest Highway, Suite 400
Dallas, Texas 75220
Re: Prentiss Properties Trust
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Prentiss Properties Trust, a Maryland real
estate investment trust (the "Company"), in connection with the Registration
Statement on Form S-3 (the "Registration Statement"), filed by the Company under
the Securities Act of 1933, as amended, relating to the sale from time to time
of (i) up to an aggregate of 3,773,585 Series A Cumulative Convertible Preferred
Shares of Beneficial Interest of the Company, par value $0.01 per share (the
"Series A Preferred Shares") as designated in the Articles Supplementary of the
Board of Trustees, dated as of December 18, 1997 (the "Articles Supplementary"),
and (ii) up to an aggregate of 3,773,585 common shares of beneficial interest of
the Company, par value $0.01 per share, that are issuable upon conversion of the
Series A Preferred Shares (the "Common Shares") as described in the Registration
Statement.
We have, as counsel, examined originals or copies, certified or otherwise
identified to our satisfaction, of such corporate records, agreements, documents
and other instruments, and such certificates or comparable documents of public
officials and of officers and representatives of the Company, and have made such
inquiries of such officers and representatives as we have deemed relevant and
necessary as a basis for the opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such latter documents. In
addition, we have assumed that the Series A Preferred Shares have been issued
for at least the par value thereof and that the price at which the Series A
Preferred Shares can be converted into Common Shares will be at least the par
value of the Common Shares. As to all questions
<PAGE>
Prentiss Properties Trust
October 15, 1998
Page 2
of fact material to this opinion that have not been independently
established, we have relied upon certificates or comparable documents of
officers and representatives of the Company.
Based upon such examination and representations, we advise you that, in our
opinion:
1. The Series A Preferred Shares have been duly authorized and are validly
issued, fully paid and nonassessable.
2. The Common Shares issuable upon conversion of the Series A Preferred
Shares, when issued and delivered in accordance with the terms of the Articles
Supplementary, will be duly and validly issued, fully paid and nonassessable.
In rendering the foregoing opinions, we have relied solely upon the opinion
of Ballard Spahr Andrews and Ingersoll, LLP with respect to matters of Maryland
law, and our opinions are subject to the same assumptions, qualifications and
limitations as those set forth in their opinion.
We consent to the filing of this opinion with the Commission as Exhibit 5.1
to the Registration Statement and the reference to this firm under the caption
"Legal Matters" in the Prospectus contained therein.
This opinion is rendered solely to you in connection with the above matter.
This opinion may not be relied upon by you for any other purpose or relied upon
by or furnished to any other person without our prior written consent.
Very truly yours,
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
EXHIBIT 8
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
October 15, 1998
Prentiss Properties Trust
3890 W. Northwest Highway
Suite 400
Dallas, Texas 75220
Dear Sir or Madam:
You have requested our opinion that Prentiss Properties Trust ("PPT")
was organized and has operated in conformity with the requirements for
qualification as a "real estate investment trust" (a "REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"), beginning with its taxable year
ending December 31, 1996 and through the date hereof and its current and
proposed method of operation will enable PPT to continue to qualify as a REIT.
In rendering our opinion, we have examined such documents as we have deemed
necessary. We have assumed the current and continued correctness of the
representations made to us by PPT and we have made no independent verification
as to the correctness of such representations. Where any such factual
representation is qualified to the best knowledge of a person, we have assumed
that the representation is correct without regard to such qualification.
Further, we assume that all representations by PPT as to value are correct and
we have made no independent verification as to such values.
Our opinion is based on the provisions of the Code, Treasury Regulations
promulgated under the Code, judicial authority and currently published revenue
rulings and procedures, all as of the date of this letter, and all of which may
change at any time. Any change in the relevant facts (including any assumptions
upon which this opinion is, in part, based) or law could change our conclusions
and would render our opinion inapplicable. This opinion represents our best
legal judgment and has no binding effect on the IRS. Accordingly, no assurance
can be given that the IRS or a court would concur with the conclusions reached
herein.
<PAGE>
Prentiss Properties Trust
Page 2
October 15, 1998
Based on the foregoing, assuming that the election and actions of PPT
represented to us are and will be observed and completed as applicable in a
timely fashion, we are of the opinion that (i) PPT was organized and has
operated in conformity with the requirements for qualification as a REIT under
the Code beginning with its taxable year ending December 31, 1996 and through
the date hereof and its current and proposed method of operation will enable PPT
to continue to qualify as a REIT and (ii) the descriptions of the law and the
legal conclusions discussed in the Form S-3 Registration Statement filed with
the SEC on October 15, 1998 (the "Registration Statement") under the caption
"Federal Income Tax Considerations" fairly summarize the federal income tax
considerations that are likely to be material to a holder of the Series A
Preferred Shares or Common Shares issuable upon the conversion of the Series A
Preferred Shares.
We express no opinion as to any other matter. No reference may be made
to this opinion letter in any financial statement, or document, nor may this
opinion letter be distributed in any manner without our prior written consent,
except (i) such opinion may be furnished to the IRS in connection with an
examination and (ii) we consent to the filing of this opinion as an Exhibit to
the Registration Statement.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
/s/ Akin, Gump, Strauss, Hauer & Feld, L.L.P.
<PAGE>
EXHIBIT 10
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of December 29, 1997 (this
"Agreement"), by and between Prentiss Properties Trust, a Maryland real estate
investment trust (the "Company"), and Security Capital Preferred Growth
Incorporated, a Maryland corporation (the "Investor").
WHEREAS, pursuant to that certain Series A Preferred Securities
Purchase Agreement, dated as of December 2, 1997 (the "Purchase Agreement"), by
and among the Company, Prentiss Properties Acquisition Partners, L.P., a
Delaware limited partnership, and the Investor, the Investor has agreed to
acquire 3,773,585 shares of Series A Cumulative Convertible Preferred Shares of
Beneficial Interest, par value $.01 per share, of the Company (the "Preferred
Shares"), all of which may be converted into the Company's common shares of
beneficial interest, par value $.0l per share (the "Common Shares"), pursuant to
the terms of the Preferred Shares; and
WHEREAS, in connection with the Purchase Agreement, the Company has
agreed to register for sale by the Investor and certain transferees, the
Preferred Shares and Common Shares received by the Investor upon conversion of
Preferred Shares (collectively, the "Registrable Shares"); and
WHEREAS, the parties hereto desire to enter into this Agreement to
evidence the foregoing agreement of the Company and the mutual covenants of the
parties relating thereto.
NOW, THEREFORE, in consideration of the foregoing and the covenants of
the parties set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, subject to the terms
and conditions set forth herein, the parties hereby agree as follows:
Section 1. Certain Definitions. In this Agreement the following terms
shall have the following respective meanings:
"Accredited Investor" shall have the meaning set forth in Rule 501 of
the General Rules and Regulations promulgated under the Securities Act.
"Affiliate" shall mean, when used with respect to a specified Person,
another Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
<PAGE>
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder, all as the
same shall be in effect at the relevant time.
"Holders" shall mean (i) the Investor and (ii) each Person holding
Registrable Shares (which term, for purposes of this definition shall include
Common Shares that may be issued upon conversion of outstanding Preferred
Shares) as a result of a transfer or assignment to that Person of Registrable
Shares other than pursuant to an effective registration statement or Rule 144
under the Securities Act.
"Indemnified Party" shall have the meaning ascribed to it in Section
6(c) of this Agreement.
"Indemnifying Party" shall have the meaning ascribed to it in Section
6(c) of this Agreement.
"Person" shall mean an individual, corporation, partnership, estate,
trust, association, private foundation, joint stock company or other entity.
"Piggyback Notice" shall have the meaning ascribed to it in Section
3(a) of this Agreement.
"Piggyback Registration" shall have the meaning ascribed to it in
Section 3(a) of this Agreement.
"Preferred Shares" shall have the meaning ascribed to it in the
recitals to this Agreement.
The terms "Register," "Registered" and "Registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act providing for the sale by the Holders of
Registrable Shares in accordance with the method or methods of distribution
designated by the Holders, and the declaration or ordering of the effectiveness
of such registration statement by the Commission.
"Registrable Shares" shall have the meaning ascribed to it in the
recitals to this Agreement, except that as to any particular Registrable Shares,
once issued such securities shall cease to be Registrable Shares when (a) a
registration statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
disposed of in accordance with such registration statement, or (b) such
securities shall have been sold in accordance with Rule 144 (or any successor
provision) under the Securities Act.
"Registration Expenses" shall mean all out-of-pocket expenses
(excluding Selling Expenses) incurred by the Company in complying with Sections
2, 3 and 4 hereof, including, without limitation, the following: (a) all
registration, filing and listing fees; (b) fees and expenses
2
<PAGE>
of compliance with federal and state securities or real estate syndication laws
(including, without limitation, reasonable fees and disbursements of counsel in
connection with state securities and real estate syndication qualifications of
the Registrable Shares under the laws of such jurisdictions as the Holders may
reasonably designate); (c) printing (including, without limitation, expenses of
printing or engraving certificates for the Registrable Shares in a form eligible
for deposit with The Depository Trust Company and otherwise meeting the
requirements of any securities exchange on which they are listed and of printing
registration statements and prospectuses), messenger, telephone, shipping and
delivery expenses; (d) fees and disbursements of counsel for the Company; (e)
fees and disbursements of all independent public accountants of the Company
(including without limitation the expenses of any annual or special audit and
"cold comfort" letters required by the managing underwriter); (f) Securities Act
liability insurance if the Company so desires; (g) fees and expenses of other
Persons reasonably necessary in connection with the registration, including any
experts, retained by the Company; (h) fees and expenses incurred in connection
with the listing of the Registrable Shares on each securities exchange on which
securities of the same class or series are then listed; and (i) fees and
expenses associated with any filing with the National Association of Securities
Dealers, Inc. required to be made in connection with the registration statement.
"Registration Request" shall have the meaning ascribed to it in
Section 2(a) of this Agreement.
"Rule 144" shall mean Rule 144 promulgated by the Commission under the
Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder, all as the same
shall be in effect at the relevant time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to any sale of Registrable
Shares.
Section 2. Demand Registration.
(a) Upon receipt of a written request (a "Registration
Request"), which shall include a description of such Holders' proposed method of
distribution, delivered not earlier than 120 days prior to the first anniversary
of this Agreement from Holders holding at least 50% of the aggregate of the
number of Registrable Shares then outstanding (but at least 10% of the
Registrable Shares), the Company shall (i) promptly give notice of the
Registration Request to all non-requesting Holders and (ii) prepare and file
with the Commission, within 45 days after its receipt of such Registration
Request a registration statement for the purpose of effecting a Registration of
the sale of all Registrable Shares by the requesting Holders and any other
Holder who requests to have his Registrable Shares included in such registration
statement within 10 days after receipt of notice by such Holder of the
Registration Request. The Company shall use its reasonable best efforts to
effect such Registration within 120 days after its receipt of
3
<PAGE>
such Registration Request (including, without limitation, the execution of an
undertaking to file post-effective amendments and appropriate qualification
under applicable state securities and real estate syndication laws); and shall
keep such Registration continuously effective until the earlier of (i) in the
case of a registration statement filed pursuant to Rule 415 relating to the
resale of Registrable Shares in open market or block transactions, the third
anniversary of the date hereof, or in the case of other registration statements,
four months, (ii) the date on which all Registrable Shares have been sold
pursuant to such registration statement or Rule 144, and (iii) the date on
which, in the reasonable opinion of counsel to the Holders, all of the
Registrable Shares may be sold in accordance with Rule 144(k); provided,
however, that the Company shall not be obligated to take any action to effect
any such Registration, qualification or compliance pursuant to this Section 2 in
any particular jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such Registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction.
Notwithstanding the foregoing, the Company shall have the right (the
"Suspension Right") to defer such filing (or suspend sales under any filed
registration statement or defer the updating of any filed registration statement
and suspend sales thereunder) for a period of not more than 105 days during any
one-year period ending on December 31, if the Company shall furnish to the
Holders a certificate signed by an executive officer or any trustee of the
Company stating that, in the good faith judgment of the Company, it would be
detrimental to the Company and its shareholders to file such registration
statement or amendment thereto at such time (or continue sales under a filed
registration statement) and therefore the Company has elected to defer the
filing of such registration statement (or suspend sales under a filed
registration statement).
(b) The Company shall not be required to effect more than two
(2) Registrations pursuant to this Section 2.
Section 3. Piggyback Registrations.
(a) On and after the Conversion Date (as defined in the Series
A Preferred Articles Supplementary), so long as the Investor and its Affiliates
hold at least 25% of the Registrable Shares, if the Company proposes to register
any of its common equity securities or any securities convertible into its
common equity securities under the Securities Act (other than pursuant to (i) a
registration statement filed pursuant to Rule 415 under the Securities Act, (ii)
a registration on Form S-4 or any successor form, or (iii) an offering of
securities in connection with an employee benefit, share dividend, share
ownership or dividend reinvestment plan) and the registration form to be used
may be used for the registration of Registrable Shares, the Company will give
prompt written notice to all holders of Registrable Shares of its intention to
effect such a registration (each a "Piggyback Notice") and, subject to
subparagraph 3(c) below, the Company will include in such registration all
Registrable Shares with respect to which the Company has received written
requests for inclusion therein within ten days after the date of sending the
Piggyback Notice (a "Piggyback Registration"), unless, if the Piggyback
Registration is not an underwritten offering, the Company in its reasonable
judgement
4
<PAGE>
determines that, or in the case of an underwritten Piggyback Registration, the
managing underwriters advise the Company in writing that in their opinion, the
inclusion of Registrable Shares would adversely interfere with such offering,
affect the Company's securities in the public markets, or otherwise adversely
affect the Company. Nothing herein shall affect the right of the Company to
withdraw any such registration in its sole discretion.
(b) If a Piggyback Registration is a primary registration on behalf of
the Company and, if the Piggyback Registration is not an underwritten offering,
the Company in its reasonable judgement determines that, or in the case of an
underwritten Piggyback Registration, the managing underwriters advise the
Company in writing that in their opinion, the number of securities requested to
be included in such registration exceeds the number which can be sold in an
orderly manner within a price range acceptable to the Company, the Company will
include in such registration (i) first, the securities the Company proposes to
sell and (ii) second, the Registrable Shares requested to be included in such
Registration and any other securities requested to be included in such
registration, pro rata among the holders of Registrable Shares requesting such
registration and the holders of such other securities on the basis of the number
of Shares requested for inclusion in such registration by each such holder.
(c) If a Piggyback Registration is a secondary registration behalf
of holders of the Company's securities other than the holders of Registrable
Shares, and, if the Piggyback Registration is not an underwritten offering, the
Company determines that, or in the case of an underwritten Piggyback
Registration, the managing underwriters advise the Company in writing that in
their opinion, the number of securities requested to be included in such
registration exceeds the number which can be sold in an orderly manner in such
offering within a price range acceptable to the holders initially requesting
such registration, the Company will include in such registration the securities
requested to be included therein by the holders requesting such registration and
the Registrable Shares requested to be included in such registration, pro rata
among the holders of securities requesting such registration on the basis of the
number of Shares requested for inclusion in such registration by each such
holder.
(d) In the case of an underwritten Piggyback Registration, the Company
will have the right to select the investment banker(s) and manager(s) to
administer the offering. If requested by the underwriters for any underwritten
offerings by Holders, under a registration requested pursuant to Section 2(a),
the Company will enter into a customary underwriting agreement with such
underwriters for such offering, to contain such representations and warranties
by the Company and such other terms as are customarily contained in agreements
of that type. The Holders shall be a party to such underwriting agreement and
may, at their option, require that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to the obligations of Holders. The Holders shall not be required to
make any representations or warranties to or agreement with the Company or the
underwriters other than representations, warranties or agreements regarding the
Holders and the Holders' intended method of distribution and any other
representation or warranties required by law.
5
<PAGE>
Section 4. Registration Procedures.
(a) The Company shall promptly notify the Holders of the
occurrence of the following events:
(i) when any registration statement relating to the
Registrable Shares or post-effective amendment thereto filed with the
Commission has become effective;
(ii) the issuance by the Commission of any stop order
suspending the effectiveness of any registration statement relating to the
Registrable Shares;
(iii) the suspension of an effective registration
statement by the Company in accordance with the last paragraph of Section
2(a) hereof;
(iv) the Company's receipt of any notification of the
suspension of the qualification of any Registrable Shares covered by a
registration statement for sale in any jurisdiction; and
(v) the existence of any event, fact or circumstance
that results in a registration statement or prospectus relating to
Registrable Shares or any document incorporated therein by reference
containing an untrue statement of material fact or omitting to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading during the distribution of securities.
The Company agrees to use its reasonable best efforts to obtain the
withdrawal of any order suspending the effectiveness of any such registration
statement or any state qualification as promptly as possible. The Investor
agrees by acquisition of the Registrable Shares that upon receipt of any notice
from the Company of the occurrence of any event of the type described in Section
4(a)(ii), (iii), (iv) or (v) to immediately discontinue its disposition of
Registrable Shares pursuant to any registration statement relating to such
securities until the Investor's receipt of written notice from the Company that
such disposition may be made.
(b) The Company shall provide to the Holders, at no cost to
the Holders, a copy of the registration statement and any amendment thereto used
to effect the Registration of the Registrable Shares, each prospectus contained
in such registration statement or post-effective amendment and any amendment or
supplement thereto and such other documents as the requesting Holders may
reasonably request in order to facilitate the disposition of the Registrable
Shares covered by such registration statement. The Company consents to the use
of each such prospectus and any supplement thereto by the Holders in connection
with the offering and sale of the Registrable Shares covered by such
registration statement or any
6
<PAGE>
amendment thereto. The Company shall also file a sufficient number of copies of
the prospectus and any post-effective amendment or supplement thereto with the
New York Stock Exchange, Inc. (or, if the Common Shares are no longer listed
thereon, with such other securities exchange or market on which the Common
Shares are then listed) so as to enable the Holders to have the benefits of the
prospectus delivery provisions of Rule 153 under the Securities Act.
(c) The Company agrees to use its reasonable best efforts to cause the
Registrable Shares covered by a registration statement to be registered with or
approved by such state securities authorities as may be necessary to enable the
Holders to consummate the disposition of such shares pursuant to the plan of
distribution set forth in the registration statement; provided, however, that
the Company shall not be obligated to take any action to effect any such
Registration, qualification or compliance pursuant to this Section 4 in any
particular jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such Registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction.
(d) Subject to the Company's Suspension Right, if any event, fact or
circumstance requiring an amendment to a registration statement relating to the
Registrable Shares or supplement to a prospectus relating to the Registrable
Shares shall exist, immediately upon becoming aware thereof the Company agrees
to notify the Holders and prepare and furnish to the Holders a post-effective
amendment to the registration statement or supplement to the prospectus or any
document incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of the Registrable Shares,
the prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading.
(e) The Company agrees to use its reasonable best efforts (including
the payment of any listing fees) to obtain the listing of all Registrable Shares
covered by the registration statement on each securities exchange on which
securities of the same class or series are then listed.
(f) The Company agrees to use its reasonable best efforts to comply
with the Securities Act and the Exchange Act in connection with the offer and
sale of Registrable Shares pursuant to a registration statement, and, as soon as
reasonably practicable following the end of any fiscal year during which a
registration statement effecting a Registration of the Registrable Shares shall
have been effective, to make available to its security holders an earnings
statement satisfying the provisions of Section 11(a) of the Securities Act.
(g) The Company agrees to cooperate with the selling Holders to
facilitate the timely preparation and delivery of certificates representing
Registrable Shares to be sold pursuant to a Registration and not bearing any
Securities Act legend; and enable certificates for such Registrable Shares to be
issued for such numbers of shares and registered in such names as the Holders
may reasonably request at least two business days prior to any sale of
Registrable Shares.
7
<PAGE>
Section 5. Expenses of Registration. The Company shall pay all
Registration Expenses incurred in connection with the registration,
qualification or compliance pursuant to Sections 2, 3 and 4 hereof. All Selling
Expenses incurred in connection with the sale of Registrable Shares by any of
the Holders shall be borne by the Holder selling such Registrable Shares. Each
Holder shall pay the expenses of its own counsel.
Section 6. Indemnification.
(a) The Company will indemnify each Holder, each Holder's
officers and directors, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (including reasonable legal expenses), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement or prospectus relating to
the Registrable Shares, or any amendment or supplement thereto, or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
provided, however, that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with information furnished in
writing to the Company by such Holder or underwriter for inclusion therein.
(b) Each Holder will indemnify the Company, each of its
trustees and each of its officers who signs the registration statement, each
underwriter, if any, of the Company's securities covered by such registration
statement, and each person who controls the Company or such underwriter within
the meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (including reasonable legal fees and expenses) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement or prospectus, or any
amendment or supplement thereto, or based on any omission (or alleged omission)
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement or
prospectus, in reliance upon and in conformity with information furnished in
writing to the Company by such Holder for inclusion therein.
(c) Each party entitled to indemnification under this Section
6 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, but the
omission to so notify the Indemnifying Party shall not relieve it from any
liability which it may have to the Indemnified Party pursuant to the provisions
of this Section 6 except to the extent of the actual damages suffered by such
delay in notification. The Indemnifying Party shall assume the defense of such
action, including the employment of counsel to be chosen by the Indemnifying
Party to be reasonably satisfactory to the Indemnified Party, and payment of
expenses. The Indemnified Party shall have the right to
8
<PAGE>
employ its own counsel in any such case, but the legal fees and expenses of such
counsel shall be at the expense of the Indemnified Party, unless the employment
of such counsel shall have been authorized in writing by the Indemnifying Party
in connection with the defense of such action, or the Indemnifying Party shall
not have employed counsel to take charge of the defense of such action or the
Indemnified Party shall have reasonably concluded that there may be defenses
available to it or them which are different from or additional to those
available to the Indemnifying Party (in which case the Indemnifying Party shall
not have the right to direct the defense of such action on behalf of the
Indemnified Party), in any of which events such fees and expenses shall be borne
by the Indemnifying Party. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation.
(d) If the indemnification provided for in this Section 6 is
unavailable to a party that would have been an Indemnified Party under this
Section 6 in respect of any expenses, claims, losses, damages and liabilities
referred to herein, then each party that would have been an Indemnifying Party
hereunder shall, in lieu of indemnifying such Indemnified Party, contribute to
the amount paid or payable by such Indemnified Party as a result of such
expenses, claims, losses, damages and liabilities in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party on the one
hand and such Indemnified Party on the other in connection with the statement or
omission which resulted in such expenses, claims, losses, damages and
liabilities, as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Indemnifying Party or such Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and each Holder agree that it would not be
just and equitable if contribution pursuant to this Section were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 6(d).
(e) No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(f) In no event shall any Holder be liable for any expenses,
claims, losses, damages or liabilities pursuant to this Section 6 in excess of
the net proceeds to such Holder of any Registrable Shares sold by such Holder.
Section 7. Information to be Furnished by Holders. Each Holder shall
furnish to the Company such information as the Company may reasonably request
and as shall be required in connection with the Registration and related
proceedings referred to in Section 2 or Section 3 hereof. If any Holder fails to
provide the Company with such information within 10
9
<PAGE>
days of receipt of the Company's request, the Company's obligations under
Section 2 or Section 3 hereof, as applicable, with respect to such Holder or the
Registrable Shares owned by such Holder shall be suspended until such Holder
provides such information.
Section 8. Undertaking to Participate in Underwriting. If the Holders
of at least $20 million of the Registrable Shares shall propose to sell
Registrable Shares in an underwritten public offering, the Company shall make
available members of the management of the Company and its affiliates for
reasonable assistance in selling efforts relating to such offering, to the
extent customary for a public offering (including, without limitation, to the
extent customary, senior management attendance at due diligence meetings with
the underwriters and their counsel and road shows) and shall enter into
underwriting agreements containing usual and customary terms and conditions
reasonably acceptable to the Company for such types of offerings. The Holders
and the Company shall agree upon who shall serve as the managing underwriter of
such offering.
Section 9. Rule 144 Sales.
(a) The Company covenants that it will file the reports
required to be filed by the Company under the Exchange Act, so as to enable any
Holder to sell Registrable Shares pursuant to Rule 144 under the Securities Act.
(b) In connection with any sale, transfer or other disposition
by any Holder of any Registrable Shares pursuant to Rule 144 under the
Securities Act, the Company shall cooperate with such Holder to facilitate the
timely preparation and delivery of certificates representing Registrable Shares
to be sold and not bearing any Securities Act legend, and enable certificates
for such Registrable Shares to be for such number of shares and registered in
such names as the selling Holder may reasonably request at least two business
days prior to any sale of Registrable Shares.
Section 10. Miscellaneous.
(a) Governing Law. This Agreement shall be governed in all
respects by the laws of the State of Maryland.
(b) Entire Agreement. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subject matter hereof.
(c) Amendment. No supplement, modification, waiver or
termination of this Agreement shall be binding unless executed in writing by the
party to be bound thereby.
(d) Notices, etc. Each notice, demand, request, request for
approval, consent, approval, disapproval, designation or other communication
(each of the foregoing being referred to herein as a notice) required or desired
to be given or made under this Agreement shall be in writing (except as
otherwise provided in this Agreement), and shall be effective and
10
<PAGE>
deemed to have been received (i) when delivered in person, (ii) when sent by fax
with receipt acknowledged, (iii) five (5) days after having been mailed by
certified or registered United States mail, postage prepaid, return receipt
requested, or (iv) the next business day after having been sent by a nationally
recognized overnight mail or courier service, receipt requested. Notices shall
be addressed as follows: (a) if to the Investor, at the Investor's address or
fax number set forth below its signature hereon, or at such other address or fax
number as the Investor shall have furnished to the Company in writing, or (b) if
to any assignee or transferee of an Investor, at such address or fax number as
such assignee or transferee shall have furnished the Company in writing, or (c)
if to the Company, at the address of its principal executive offices and
addressed to the attention of the President, or at such other address or fax
number as the Company shall have furnished to the Investors or any assignee or
transferee. Any notice or other communication required to be given hereunder to
a Holder in connection with a registration may instead be given to the
designated representative of such Holder.
(e) Counterparts. This Agreement may be executed in any number
of counterparts, each of which may be executed by fewer than all of the parties
hereto (provided that each party executes one or more counterparts), each of
which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
(f) Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision.
(g) Section Titles. Section titles are for descriptive
purposes only and shall not control or alter the meaning of this Agreement as
set forth in the text.
(h) Successors and Assigns. This Agreement shall be binding
upon the parties hereto and their respective successors and assigns.
(i) Remedies. The Company and the Investor acknowledge that
there would be no adequate remedy at law if any party fails to perform any of
its obligations hereunder, and accordingly agree that the Company and each
Holder, in addition to any other remedy to which it may be entitled at law or in
equity, shall be entitled to compel specific performance of the obligations of
another party under this Agreement in accordance with the terms and conditions
of this Agreement in any court of the United States or any State thereof having
jurisdiction.
(j) Attorneys' Fees. If the Company or any Holder brings an
action to enforce its rights under this Agreement, the prevailing party in the
action shall be entitled to recover its costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred in connection with such action,
including any appeal of such action.
[signature page follows]
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
PRENTISS PROPERTIES TRUST
By: /s/ MICHAEL A. ERNST
-------------------------------------
Name: Michael A. Ernst
Title: Vice President, Treasurer
SECURITY CAPITAL PREFERRED GROWTH
INCORPORATED
By: /s/ DAVID ROSENBAUM
------------------------------------
Name: David Rosenbaum
Title: Vice President
12
<PAGE>
EXHIBIT 12
CALCULATION OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS
<TABLE>
<CAPTION>
SIX MONTHS YEAR OCT. 22, 1996 JAN. 1, 1996 YEAR YEAR YEAR
ENDED ENDED TO TO ENDED ENDED ENDED
JUNE 30, 1998 1997 DEC. 31, 1996 OCT. 21, 1996 1995 1994 1993
------------- ------- ------------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income 28,547 35,946 4,996 5,118 9,970 9,072 2,857
Adjustments:
Gain on sale (3,824) (641) (378) (1,718)
Extraordinary item 8,908 878
Minority interest 2,179 5,235 844 -
Interest expense 16,679 21,131 759 4,549 3,783 3,120 1,444
Amortization of deferred financing 396 824 87 1,402 99 71 -
------ ------ ----- ------ ------ ------ -----
Earnings 52,885 64,373 6,686 10,691 13,852 10,545 4,301
Fixed Charges
Interest expense 16,679 21,131 759 4,549 3,783 3,120 1,444
Amortization of deferred financing 396 824 87 1,402 99 71 -
Perpetual preferred dividends 131
Convertible preferred dividends 2,641
Capitalized interest 2,226 2,022
------ ------ ----- ------ ------ ------ -----
22,073 23,977 846 5,951 3,882 3,191 1,444
Earnings to Fixed Charges 2.40 2.68 7.90 1.80 3.57 3.30 2.98
</TABLE>
<PAGE>
EXHIBIT 23.2
October 14, 1998
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
Re: Registration Statement on Form S-3: 3,773,585
Series A Cumulative Convertible Redeemable
Preferred Shares of Beneficial Interest and
3,773,585 Common Shares of Beneficial Interest
----------------------------------------------
Ladies and Gentlemen:
We hereby consent to the use of the name of our firm in the
above-referenced Registration Statement under the caption "Legal Opinions." In
giving this consent, we do not admit that we are within the category of persons
whose consent is required by Section 7 of the 1933 Act.
Very truly yours,
Ballard Spahr Andrews & Ingersoll, LLP
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
on Form S-3 of our reports dated (i) February 5, 1998 on our audits of the
consolidated and combined financial statements and financial statements schedule
of Prentiss Properties Trust and the Predecessor Company, (ii) October 20, 1997
on our audit of the combined statement of revenues and certain operating
expenses of the Silicon Valley Properties, (iii) February 6, 1998 on our audits
of the combined statement of revenues and certain operating expenses of the
Newport National Properties and the statement of revenues and certain operating
expenses of the Carrara Place Property, (iv) August 12, 1998 on our audit of the
statement of revenues and certain operating expenses of the Ordway Property, and
(v) September 30, 1998 on our audit of the combined statement of revenues and
certain operating expenses of the Willow Oaks Properties. We also consent to the
reference to our firm under the caption "Experts".
PricewaterhouseCoopers LLP
Dallas, Texas
October 8, 1998
