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As filed with the Securities and Exchange Commission on October 14, 1998
Registration No. 333-49295
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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: [_]
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Explanatory Note
This Registration Statement contains two forms of Prospectus: the first
relates to resales from time to time by certain selling shareholders and the
second relates to (i) the primary issuance of shares to Union Bank of
Switzerland, London Branch ("UBS-LB") and (ii) subsequent primary issuances from
time to time to UBS-LB. In addition, this Registration Statement contains a form
of Prospectus Supplement to be used in connection with subsequent primary
issuances from time to time to UBS-LB.
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********************************************************************************
* 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 14, 1998
PROSPECTUS
PRENTISS PROPERTIES TRUST
3890 W. Northwest Highway, Suite 400
DALLAS, TEXAS 75220
(214) 654-0886
4,425,938 Shares
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 4,425,938
common shares of beneficial interest (the "Common Shares") by the selling
shareholders named herein or their 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 that any single person or
affiliated group may own and restricts the transferability of the Common Shares.
The Common Shares trade on the New York Stock Exchange under the symbol
"PP." On October 12, 1998, the last reported sale price of our common stock on
the New York Stock Exchange was $20.1875 per share.
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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.
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The date of this Prospectus is ______________, 1998.
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TABLE OF CONTENTS
PAGE
----
Forward-Looking Statements.................................................. 1
About this Prospectus....................................................... 1
The Company................................................................. 1
Description of Shares of Beneficial Interest................................ 2
Restrictions on Ownership and Transfer...................................... 4
Federal Income Tax Considerations........................................... 6
Selling Shareholders........................................................ 19
Plan of Distribution........................................................ 22
Legal Opinions.............................................................. 23
Experts..................................................................... 23
Where You Can Find More Information......................................... 23
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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 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 post-effective amendment to 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
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 the 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 our properties.
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.
We are a full service real estate company with regional management offices
in Los Angeles, Dallas, Chicago, Washington, D.C., Atlanta and Philadelphia. We
have approximately 700 employees and we benefit from our in-house expertise in
areas such as acquisitions, development, facilities management, property
management and leasing.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The following summary of the material terms of the Common Shares is subject
to the detailed provisions of the Company's Declaration of Trust, as amended,
the Amended and Restated Bylaws as currently in effect (the "Bylaws"), the
Company's Articles Supplementary relating to its Series A Cumulative Convertible
Preferred Shares (the "Series A Preferred Shares") of Beneficial Interest, $.01
par value per share (the "Series A Articles Supplementary"), its Junior
Participating Cumulative Preferred Shares (the "Series B Junior Preferred
Shares") of Beneficial Interest, Series B, $.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, $.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 of the Company allows us to issue 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, conversions 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") and the Maryland
General Corporation Law, as amended from time to time (the "MGCL"). Both the
Maryland REIT Law and the Company's 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 Company's 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 offered hereby are duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of shares of beneficial interest and to the provisions of our Declaration of
Trust regarding Shares-in-Trust (as defined below), holders of Common Shares are
entitled to receive dividends if, as and when authorized and declared by our
Board of Trustees 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 our shareholders in the event of our liquidation, dissolution or
winding-up after payment of, or adequate provision for, all our known debts and
liabilities. The Company intends to pay quarterly dividends to holders of its
Common Shares.
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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. 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 Company's 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 Company's
Declaration of Trust permits such action by the Board of Trustees.
The Transfer Agent and Registrar for the Common Shares is First Chicago
Trust Company of New York. The Common Shares trade on the NYSE under the symbol
"PP."
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 Security Capital Preferred Growth, Incorporated ("SCPG") and its
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 the Company at a price of $0.001 per right at any
time prior to the tenth day 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 SCPG and its affiliates, 11%) of the outstanding Common Shares of the
Company if certain events thereafter occur without the Rights having been
redeemed. However,
3
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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.
PREFERRED SHARES
The Company's Declaration of Trust provides that the Company may issue up
to 20,000,000 Preferred Shares, 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 is required by the Maryland REIT Law and the Company's
Declaration of Trust to set forth for each such series, subject to the
provisions of the Company's 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. As of June 30, 1998, the Board of Trustees
had designated 3,773,585 Series A Preferred Shares, all of which were
outstanding, 1,900,000 Series B Preferred Shares, none of which were
outstanding, and 1,000,000 Series B Junior Preferred Shares, none of which were
outstanding.
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 SCPG,
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
SCPG, 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 (i) an increase
in the number of outstanding Common Shares or (ii) 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 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 owns, 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.
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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 (i)
purchases such Shares-in-Trust for valuable consideration and (ii) 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.
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 (i) that are attributable to any Shares-in-Trust and
(ii) 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 (i) 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 (ii) 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 (i) 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 (ii)
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 (i) the date of the purported transfer which
resulted in such Shares-in-Trust and (ii) 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 shall mean 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"
shall mean 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.
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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 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 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 initial public offering on
October 22, 1996 (the "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.
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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 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 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;
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(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 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 Company's 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 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.
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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 entrance, 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 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
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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.
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
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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 of 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."
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. 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.
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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 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.
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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 (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 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.
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.
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 12 months. Otherwise, such 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.
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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) 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% rate.
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 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.
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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 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.
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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 LEGISLATIVE OR OTHER ACTIONS 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 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
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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 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 are traded
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 will be long-term capital gain, except for any portion of such
gain that is treated as depreciation or cost recovery recapture. Any gain
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
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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
This Prospectus relates to the offer and sale from time to time of Common
Shares by Ameritech Pension Trust ("Ameritech"), Public Employee Retirement
System of Idaho ("PERSI"), American Airlines Inc. Masterfund Benefit Trust
("American Airlines Trust") and the Merged Entity Owners and Merged Entity
Employees (as defined below).
Ameritech, PERSI, and American Airlines Trust (collectively, the
"Continuing Investors") acquired their respective Common Shares (the "Continuing
Investor Shares") from us in connection with our IPO. Pursuant to certain
Purchase Agreements dated October 22, 1996 between the Company and each of the
Continuing Investors, and related Registration Rights Agreements dated October
22, 1996 between the Company and each of the Continuing Investors, we agreed to
file with the Securities and Exchange Commission (the "Commission") a
registration statement, of which this Prospectus is a part, with respect to the
resale of the Continuing Investor Shares and to prepare and file such amendments
and supplements to the registration statement as may be necessary to keep the
registration statement effective until the earlier of (i) the date when all the
Continuing Investor Shares covered hereby are sold, or (ii) the date on which
all Continuing Investors may sell their Continuing Investor Shares without
registration under the Securities Act pursuant to Rule 144(k) thereunder.
Pursuant to their respective agreements, we agreed to indemnify each of the
Continuing Investors and each entities' officers, directors and controlling
persons against certain liabilities, including certain liabilities under the
19
<PAGE>
Securities Act. Insofar as indemnification of the Continuing Investors for
liabilities arising under the Securities Act may be permitted pursuant to their
respective agreements with the Company, we are aware that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and, therefore, may be unenforceable.
In connection with the Company's IPO, certain of the Prentiss Principals
(PDO Three, Inc., Prentiss O'Hare Illinois, Inc., Prentiss Property Acquisition,
Inc., and Prentiss Properties Holding, Inc. (the "Merged Entities")) received
Units in exchange for certain assets contributed to the Operating Partnership.
In February 1998, (i) the Merged Entities distributed 113,500 Units to certain
employees of the Merged Entities listed in the table below (the "Merged Entity
Employees"), (ii) we issued 2,432,541 Common Shares in exchange for all of the
capital stock of the Merged Entities to the owners of the Merged Entities listed
on the table below (the "Merged Entity Owners"), and (iii) the Merged Entity
Employees redeemed their 113,500 Units in exchange for an equal number of Common
Shares. We agreed to file with the Commission a registration statement, of
which this Prospectus is a part, with respect to the resale of the Common Shares
by the Merged Entity Owners and Merged Entity Employees. The Merged Entity
Owners and Merged Entity Employees are not permitted to sell their respective
Common Shares registered pursuant to the registration statement of which this
Prospectus is a part until October 22, 1998.
The Merged Entity Employees either are employees of the Company or have
been employees of the Company within the past three years. The Merged Entity
Owners are current employees of the Company, have been employees of the Company
within the past three years or are trusts established for the benefit of
relatives of certain employees of the Company. In addition, Messrs. Prentiss
and August are members of the Company's Board of Trustees.
We agreed to pay the expenses of registering all of the Common Shares
offered hereby under the Securities Act, including all registration, filing and
exchange listing fees, blue sky expenses, fees of our own counsel and
accountants, and underwriters' fees customarily paid by issuers (excluding
underwriting discounts, commissions and transfer taxes).
It is unknown if, when, or in what amounts any Selling Shareholder may
offer the Common Shares for sale. There can be no assurance that the Selling
Shareholders will sell all or any of the Common Shares offered hereby. Because
the Selling Shareholders may offer all or some of their respective Common
Shares, and because there are currently no agreements, arrangements or
understandings with respect to the sale of any of the Common Shares that will be
held by the Selling Shareholders after the completion of the offering, no
estimate can be given as to the principal amount of the Selling Shareholder's
Common Shares that will be held by each Selling Shareholder after completion of
the offering.
The Selling Shareholders and any broker or dealer through whom any of the
Common Shares are sold may be deemed to be underwriters within the meaning of
the Securities Act with respect to the Common Shares offered hereby, and any
profits realized by the Selling Shareholders or such brokers or dealers may be
deemed to be underwriting commissions. Brokers' commissions and dealer's
discounts, taxes and other selling expenses to be borne by the Selling
Shareholder are not expected to exceed normal selling expenses for such sales.
The registration of the Common Shares offered hereby under the Securities Act
shall not be deemed an admission by the Selling Shareholders or the Company that
the Selling Shareholders are underwriters for purposes of the Securities Act of
any Common Shares offered under this Prospectus.
20
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING MAXIMUM NUMBER OF AFTER THE OFFERING(1)
------------------------ SHARES TO BE SOLD ------------------------
SELLING SHAREHOLDERS SHARES PERCENT(2) IN THE OFFERING SHARES PERCENT(2)
- -------------------- ----------- ----------- ----------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Ameritech Pension Trust 783,363 2.01 783,363 0 -
Public Employee Retirement
System of Idaho 783,363 2.01 783,363 0 -
American Airlines Inc.
Masterfund Benefit Trust 313,171 - 313,171 0 -
Merged Entity Owners(3)
- -----------------------
Michael V. Prentiss(4) 1,679,853 4.32 1,017,952 661,901 -
Thomas F. August(5) 220,653 - 128,030 92,623 -
Dennis J. Dubois(6) 141,809 - 82,240 59,569 -
Richard B. Bradshaw 147,926 - 145,498 2,428 -
Santo Bisignano, Jr., as Trustee of the 58,259 - 57,234 1,025 -
TFA Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 58,259 - 57,234 1,025 -
MJA Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 32,196 - 31,629 567 -
BD Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 32,196 - 31,629 567 -
DJD Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 298,958 - 293,697 5,261 -
PEP Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 298,960 - 293,699 5,261 -
KAP Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 298,960 - 293,699 5,261 -
MBP Grantor Retained Annuity Trust
Merged Entity Employees(3)
- --------------------------
Robert K. Wiberg 6,960 - 5,000 1,960 -
William A. Holvey 2,126 - 2,000 126 -
Peter Teeling 2,000 - 2,000 0 -
Janet S. Davis 3,850 - 3,750 100 -
David C. Robertson 18,014 - 7,500 10,514 -
Louay Alsadek 7,143 - 5,000 2,143 -
Alan DeFrancis 2,631 - 2,000 631 -
Elizabeth Hearle 2,250 - 2,000 250 -
Lawrence Krueger 19,500 - 17,500 2,000 -
Daniel K. Cushing 4,347 - 2,000 2,347 -
Richard Bartel 14,531 - 12,500 2,031 -
Gregory S. Imhoff 5,804 - 5,000 804 -
Thomas P. Simon 5,506 - 5,000 506 -
David E. Rinkliff 4,504 - 3,750 754 -
Kent L. Barner 3,782 - 3,750 32 -
Richard E. Hopwood 2,100 - 2,000 100 -
Sally W. Elliott 2,100 - 2,000 100 -
Elizabeth K. Younglove 4,000 - 2,000 2,000 -
Duane F. Henley 8,500 - 5,000 3,500 -
William J. Reister 6,061 - 5,000 1,061 -
Mark R. Doran 10,400 - 10,000 400 -
Christopher M. Hipps 5,000 - 5,000 0 -
John K. Dilbeck 4,831 - 3,750 1,081 -
---------
TOTAL MAXIMUM NUMBER OF SHARES
TO BE SOLD IN THE OFFERING 4,425,938
=========
- ------------------------
</TABLE>
(1) Assuming all of the maximum number of shares to be sold in the Offering are
sold.
(2) Percentages less than 1% of the outstanding Common Shares are omitted.
(3) Common Shares held by these persons generally may not be sold prior to
October 22, 1998.
(4) Excludes 586,762 Common Shares issuable upon the exercise of options granted
under the 1996 Plan, 386,762 of which vest in equal installments on each of
the first three anniversaries of the date of the grant and 200,000 which
vest in equal installments on each of the third, fourth and fifth
anniversaries of the date of grant. Includes Units redeemable for 336,000
Common Shares which are held in a trust of which Mr. Prentiss is a trustee,
and of which Mr. Prentiss disclaims beneficial ownership. Includes Units
redeemable for 262,733 Common Shares. Excludes 881,095 Common Shares owned
by certain Grantor Retained Annuity Trusts, of which Mr. Prentiss does not
have beneficial ownership.
(5) Excludes 323,944 Common Shares issuable upon the exercise of options granted
under the 1996 Plan, 173,944 of which vest in equal installments on each of
the first three anniversaries of the date of the grant and 150,000 which
vest in equal installments on each of the third, fourth and fifth
anniversaries of the date of grant. Includes
21
<PAGE>
Units redeemable for 88,576 Common Shares. Excludes 114,468 Common Shares
owned by certain Grantor Retained Annuity Trusts, of which Mr. August does
not have beneficial ownership.
(6) Excludes 64,366 Common Shares issuable upon the exercise of options granted
under the 1996 Plan, which vest in equal installments on each of the first
three anniversaries of the date of the grant. Includes Units redeemable for
58,274 Common Shares. Excludes 63,258 Common Shares owned by certain Grantor
Retained Annuity Trusts, of which Mr. DuBois does not have beneficial
ownership.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time of the
Common Shares by the Selling Shareholders. The Company is registering the
Common Shares for sale to provide the holders thereof with freely tradeable
securities. The registration of the Common Shares does not necessarily mean
that any of the Common Shares will be offered or sold by the Selling
Shareholders.
The Company will not receive any proceeds from the offering and sale of the
Common Shares by the Selling Shareholders. The Common Shares may be sold from
time to time to purchasers directly by any of the Selling Shareholders.
Alternatively, the Selling Shareholders may from time to time offer the Common
Shares to or through underwriters, broker-dealers or agents. In connection with
any such sale, any underwriter, broker-dealer or agent may act as agent for the
Selling Shareholders or may purchase from the Selling Shareholders all or a
portion of the Common Shares as principal and may sell such Common Shares by one
or more of the methods described below. Such sales may be made on the NYSE or
other exchanges on which the Common Shares are then traded, in the over-the-
counter market, in negotiated transactions or otherwise at prices related to the
then-current market prices or at prices otherwise negotiated. Underwriters,
broker-dealers or agents may receive compensation in the form of commissions
from the Selling Shareholders and/or the purchasers of the Common Shares for
whom they may act as agent. The Selling Shareholders and any underwriters,
dealers or agents that participate in the distribution of the Common Shares may
be deemed to be "underwriters" within the meaning of the Securities Act, and any
profit or commissions on the sale of Common Shares received by any such
underwriters, dealers or agents may be deemed to be underwriting commissions or
discounts under the Securities Act.
The Common Shares may also be sold in one or more of the following
transactions: (a) block transactions in which a broker-dealer may sell all or a
portion of such shares as agent but may position and resell all or a portion of
the block as principal to facilitate the transaction; (b) purchases by any such
broker-dealer as principal and resale by such broker-dealer for its own account
pursuant to a Prospectus Supplement; (c) a special offering, an exchange
distribution or a secondary distribution in accordance with applicable NYSE or
other stock exchange rules; (d) ordinary brokerage transactions and transactions
in which any such broker-dealer solicits purchasers; (e) sales "at the market"
to or through a market maker or into an existing trading market, on an exchange
or otherwise, for such shares; and (f) sales in other ways not involving market
makers or established trading markets, including direct sales to purchasers. In
effecting sales, broker-dealers engaged by the Selling Shareholders may arrange
for other broker-dealers to participate. Broker-dealers will receive
commissions or other compensation from the Selling Shareholders in amounts to be
negotiated immediately prior to the sale that will not exceed those customary in
the types of transactions involved.
At the time a particular offer of Common Shares is made, a Prospectus
Supplement, if required, will be distributed which will set forth the names of
any underwriters, broker-dealers or agents and any commissions and other terms
constituting compensation from the Selling Shareholders and any other required
information. The Common Shares may be sold from time to time at varying prices
determined at the time of sale or at negotiated prices.
In order to comply with the securities laws of certain states, if
applicable, the Common Shares may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the Common Shares may not
be sold unless they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement is available
and is complied with.
All expenses incident to the offering and sale of the Common Shares, if
any, excluding certain underwriters' discounts and transfer taxes, shall be paid
by the Company. See "Selling Shareholders."
22
<PAGE>
LEGAL OPINIONS
The legality of the Securities 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 Report 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 the Common Shares
with the SEC. 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 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, 15(d) of the Exchange Act from the date of the initial filing
of the Registration Statement 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/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:
23
<PAGE>
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.
24
<PAGE>
********************************************************************************
*THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE 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 14, 1998
PROSPECTUS
PRENTISS PROPERTIES TRUST
3890 W. NORTHWEST HIGHWAY, SUITE 400
DALLAS, TEXAS 75220
(214) 654-0886
1,600,000 SHARES
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.
We are offering and selling up to 1,600,000 shares of common stock with this
prospectus. An accompanying prospectus supplement will set forth the specific
number of shares of common stock to be sold. 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
that any single person or affiliated group may own and restricts the
transferability of the Common Shares.
SEE "RISK FACTORS" BEGINNING ON PAGE 1 FOR CONSIDERATIONS RELATING TO AN
INVESTMENT IN THE SECURITIES OFFERED BY THIS PROSPECTUS.
Of these securities, we sold 1,100,000 to UBS Limited and Union Bank of
Switzerland, London Branch (together, as succeeded by UBS AG, London Branch,
"UBS-LB") on February 2, 1998 for net proceeds of approximately $29 million. We
will receive no additional proceeds from the sale of any of the 1,600,000 shares
offered with this prospectus. The remaining 500,000 shares, if issued, will also
be issued to UBS-LB under the terms of our agreement with them. A prospectus
supplement will set forth the public offering price per share, the name of any
lead or managing underwriters and the underwriters' discounts and commissions
from the sale. See "Plan of Distribution."
Our shares are listed for trading on the New York Stock Exchange under the
symbol "PP." On October 12, 1998, the last reported sale price of our common
stock on the New York Stock Exchange was $20.1875 per share.
- --------------------------------------------------------------------------------
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................................................. 1
About this Prospectus...................................................... 1
Risk Factors............................................................... 1
Use of Proceeds............................................................ 2
The Company................................................................ 3
Description of Shares of Beneficial Interest............................... 3
Restrictions on Ownership and Transfer..................................... 5
Federal Income Tax Considerations.......................................... 8
Plan of Distribution....................................................... 22
Legal Opinions............................................................. 23
Experts.................................................................... 23
Where You Can Find More Information........................................ 23
<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 post-effective amendment to a registration
statement that we filed with the Securities and Exchange Commission (the "SEC")
utilizing a "shelf registration" process. You should read both this Prospectus
and any prospectus supplement together with the 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 our properties. "Common Shares" shall
mean the Company's common shares of beneficial interest, par value $.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 Common Shares of the Company.
POTENTIAL DILUTION OF CAPITAL STOCK OR DECREASE OF LIQUIDITY IN CONNECTION WITH
SETTLEMENT OF THE UBS FORWARD AGREEMENT
The Company and the Operating Partnership have entered into a Purchase
Agreement dated February 2, 1998, with UBS Limited and Union Bank of
Switzerland, London Branch, acting through its agent UBS Securities LLC (all as
succeeded by UBS AG, London Branch, acting through its agent Warburg Dillon Read
LLC, "UBS-LB") involving the sale of 1,100,000 Common Shares (the "UBS Purchase
Agreement"). The Company and the Operating Partnership have also entered into a
related forward stock contract dated February 2, 1998, with UBS-LB (the "UBS
Forward Agreement"), which provides for certain purchase price adjustments. The
maturity date of the UBS Forward Agreement is February 2, 1999, subject to
acceleration under certain circumstances as described more fully below. See
"Plan of Distribution" at page 22 for additional information about these
agreements.
The UBS Forward Agreement generally provides that if the market price of a
Common Share on the maturity date is less than a certain amount, which we refer
to as the "Forward Price," we must pay UBS-LB the difference multiplied by
1,100,000. Similarly, if the market price of a Common Share is above the
Forward Price, UBS-LB must pay us the difference in Common Shares. If we choose
not to, or if we cannot, settle in freely tradable Common Shares, we must
repurchase the 1,100,000 shares at the Forward Price in cash. Over the life of
the UBS Forward Agreement, the Forward Price will be adjusted by LIBOR plus 135
basis points, minus any dividends received on the Common Shares.
<PAGE>
To secure our obligations thereunder, the UBS Forward Agreement provides
for quarterly payments of collateral equal to 1,100,000 times 105% of the amount
by which the market price of a Common Share is below the Forward Price. The
collateral may be in the form of cash, letters of credit or freely tradable
Common Shares. As of the last recalculation date of the Forward Price, which
was July 30, 1998, the Forward Price was $27.145 per share. Based on the then
current share price of $23.875, this resulted in a collateral requirement of
$3,596,953. We have secured this requirement entirely with letters of credit.
The maturity date of the UBS Forward Agreement is February 2, 1999;
however, if the closing price of the Common Shares falls below $16.40, or if the
market value of our Common Shares (excluding operating partnership units)
declines to or below $600,000,000, UBS-LB has the right to force a complete
settlement under the UBS Forward Agreement (if the closing price of the Common
Shares falls below $18.50, UBS-LB has the right to force a settlement with
respect to 67% of the Transaction). UBS-LB also has the right to force a
complete settlement under the UBS Forward Agreement if, among other things, we
(i) are in default with respect to certain financial covenants under the UBS
Forward Agreement, (ii) are in default under our credit facility with a
syndicate of lenders or any other unsecured lending agreement, or (iii) fail to
post sufficient cash collateral.
In order to have the option of settling the UBS Forward Agreement or paying
collateral in Common Shares, the shares must be freely tradable by UBS-LB
pursuant to an effective registration statement. We can provide no assurance
that a registration statement will be effective at the time of any settlement or
collateral payment. Settlement of the UBS Forward Agreement in cash would
reduce our liquidity. Settlement in cash would involve the repurchase of
1,100,000 shares at a price per share equal to the Forward Price. Assuming the
Forward Price remains at $27.145, our repurchase price would total approximately
$29.9 million.
Settlement of the UBS Forward Agreement in cash would reduce our liquidity.
Settlement in cash would involve the repurchase of 1,100,000 Common Shares at a
price per share equal to the Forward Price. If we settled the UBS Forward
Agreement in cash, we would expect to use borrowings under our existing $300
million corporate revolver, our existing $60 million bridge facility or various
unsecured and secured borrowings which we are currently negotiating.
Additionally, we are pursuing various asset sale alternatives, which if
completed, would provide sufficient proceeds to complete the repurchase.
Quarterly payments of collateral and the ultimate settlement of the UBS
Forward Agreement could adversely affect our liquidity or dilute our Common
Shares. If the market price, is lower than the Forward Price, settlement in
Common Shares would dilute our capital stock. The table below shows the change
in the value of a Common Share as a result of settling the UBS Forward Agreement
at various Market Prices:
INCREASE/(DILUTION) IN VALUE
MARKET PRICE OF COMMON STOCK (1)
------------ ----------------------------
$30 0.27%
$25 (0.24%)
$20 (1.01%)
$15 (2.29%)
$10 (4.84%)
- ---------------
(1) Assumes a Forward Price of $27.145.
USE OF PROCEEDS
Of the shares offered hereby, 1,100,000 Common Shares were purchased by
UBS-LB on February 2, 1998 for net proceeds of approximately $29 million. Such
proceeds were used to discharge indebtedness under the Company's then-existing
$300 million revolving loan. The revolving loan was due to mature on December
31, 2000. Borrowings under such revolving loan bore interest at a rate of LIBOR
plus 137.5 basis points.
The other Common Shares offered hereby are issuable under the terms of the
UBS Forward Agreement. See "Risk Factors Potential Dilution of Capital Stock
or Decrease of Liquidity in Connection with Settlement of UBS Forward Agreement"
above for a description of the UBS Forward Agreement. Other than the
approximately
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$29 million received in February 1998, the Company will not receive any
additional proceeds from any sale of Common Shares by UBS-LB.
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.
We are a full service real estate company with regional management offices
in Los Angeles, Dallas, Chicago, Washington, D.C., Atlanta and Philadelphia. We
have approximately 700 employees and we benefit from our in-house expertise in
areas such as acquisitions, development, facilities management, property
management and leasing.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The following summary of the material terms of the Common Shares is subject
to the detailed provisions of the Company's Declaration of Trust, as amended,
the Amended and Restated Bylaws as currently in effect (the "Bylaws"), the
Company's Articles Supplementary relating to its Series A Cumulative Convertible
Preferred Shares (the "Series A Preferred Shares") of Beneficial Interest, $.01
par value per share (the "Series A Articles Supplementary"), its Junior
Participating Cumulative Preferred Shares (the "Series B Junior Preferred
Shares") of Beneficial Interest, Series B, $.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, $.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 of the Company allows us to issue 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, conversions 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.
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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") and the Maryland
General Corporation Law, as amended from time to time (the "MGCL"). Both the
Maryland REIT Law and the Company's 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 Company's 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 offered hereby are duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of shares of beneficial interest and to the provisions of our Declaration of
Trust regarding Shares-in-Trust (as defined below), holders of Common Shares are
entitled to receive dividends if, as and when authorized and declared by our
Board of Trustees 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 our shareholders in the event of our liquidation, dissolution or
winding-up after payment of, or adequate provision for, all our known debts and
liabilities. The Company intends to pay quarterly dividends to holders of its
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. 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 Company's 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 Company's
Declaration of Trust permits such action by the Board of Trustees.
The Transfer Agent and Registrar for the Common Shares is First Chicago
Trust Company of New York. The Common Shares trade on the NYSE under the symbol
"PP."
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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 Security Capital Preferred Growth Incorporated ("SCPG") and its
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 the Company at a price of $0.001 per right at any
time prior to the tenth day 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 SCPG and its affiliates, 11%) of the outstanding Common Shares of
the Company 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.
PREFERRED SHARES
The Company's Declaration of Trust provides that the Company may issue up
to 20,000,000 Preferred Shares, 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 is required by the Maryland REIT Law and the Company's
Declaration of Trust to set forth for each such series, subject to the
provisions of the Company's 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. As of June 30, 1998, the Board of Trustees
had designated 3,773,585 Series A Preferred Shares, all of which were
outstanding, 1,900,000 Series B Preferred Shares, none of which were
outstanding, and 1,000,000 Series B Junior Preferred Shares, none of which were
outstanding.
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
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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 us 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 SCPG, 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 SCPG, 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 (i) an increase in the number
of outstanding Common Shares or (ii) 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 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 owns, 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 (i)
purchases such Shares-in-Trust for valuable consideration and (ii) 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.
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 (i) that are attributable to any Shares-in-Trust and
(ii) 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 (i) 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 (ii) 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.
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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 (i) 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 (ii)
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 (i) the date of the purported transfer which
resulted in such Shares-in-Trust and (ii) 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 shall mean 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"
shall mean 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 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 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.
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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 initial public offering on
October 22, 1996 (the "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 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.
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(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 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 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 Company's Declaration of Trust provides for restrictions regarding
transfer of its shares that are intended to assist the Company in continuing
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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 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
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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 entrance 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 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
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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.
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.
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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 of 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."
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.
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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 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.
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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 (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 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.
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.
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 12 months. Otherwise, such 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.
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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) 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% rate.
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 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).
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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 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-
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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 LEGISLATIVE OR OTHER ACTIONS 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 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, it 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.
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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 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 are traded
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.
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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.
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.
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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 long-term capital gain, except for any portion of
such gain that is treated as depreciation or cost recovery recapture. Any gain
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.
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PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time of up to an
aggregate of 1,600,000 Common Shares by the Company. Such shares include the
1,100,000 Common Shares (the "UBS Purchase Shares") initially purchased by UBS-
LB pursuant to the UBS Purchase Agreement between the Company and UBS-LB. Up to
500,000 additional Common Shares may be issued by the Company to UBS-LB (the
"UBS Settlement Shares") from time to time until February 2, 1999, pursuant to
the UBS Forward Agreement to settle some or all of the Company's obligations
under the UBS Forward Agreement.
Under the UBS Purchase Agreement, the UBS Purchase Shares were sold to UBS-
LB at $27 per share. An initial placement fee of 2.0% of the gross proceeds or
$594,000 has been paid to UBS-LB or its affiliates pursuant to the UBS Forward
Agreement. A description of the terms of the UBS Forward Agreement is set forth
above at "Risk Factors - Potential Dilution of Capital Stock or Decrease of
Liquidity in Connection with Settlement of the UBS Forward Agreement." The UBS
Forward Agreement provides for certain purchase price adjustments that
essentially guarantee a return to UBS-LB equal to LIBOR plus 135 basis points.
To the extent that the UBS Forward Agreement is settled in Common Shares, UBS-LB
will be entitled to receive a maturity placement fee equal to 1.00% of the
Forward Price times the number of shares delivered in the settlement.
The sale or distribution of all or any portion of the Common Shares may be
effected from time to time by UBS-LB or any of its broker-dealer affiliates, who
may sell Common Shares through brokers or dealers or in a distribution by one or
more additional underwriters on a firm commitment or best efforts basis, on the
NYSE, in the over-the-counter market, on any other national securities exchange
on which shares of the Common Stock are listed or traded, in privately
negotiated transactions or otherwise, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. Except as described above with respect to the 1,100,000 Common Shares
initially purchased by UBS-LB pursuant to the UBS Purchase Agreement, we will
not receive any proceeds from sales of the Common Shares.
In effecting sales, brokers or dealers engaged by UBS-LB may arrange for
other brokers or dealers to participate. Any public offering price and any
discount or concessions allowed or reallowed or paid to dealers may be changed
from time to time. UBS-LB may from time to time deliver all or a portion of the
Common Shares to cover a short sale or sales or upon the exercise, settlement or
closing of a call equivalent position or a put equivalent position.
In connection with a sale of any Common Shares, the following information
will, to the extent then required, be provided in the Prospectus Supplement
relating to such sale or in a post-effective amendment to the Registration
Statement of which this Prospectus is a part: the number of Common Shares to be
sold; the purchase price; the public offering price; the method of
distribution; the name of any underwriter, agent or broker-dealer; and any
applicable commissions, discounts, or other items constituting compensation to
such underwriters, agents or broker-dealers with respect to the particular sale.
UBS-LB and any broker-dealers participating in the distribution of the
Common Shares are "underwriters" within the meaning of the Securities Act and
any profit on the sale of the Common Shares by any of them, together with the
return to UBS-LB and the placement fees described above, will be regarded as
underwriting commissions under the Securities Act. UBS-LB is entitled, under
agreements with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
We will pay all reasonable expenses in connection with the registration of
the Common Shares. The applicable underwriter will be responsible for any
brokerage or underwriting commissions and taxes of any kind (including, without
limitation, transfer taxes) due to a third party with respect to any
disposition, sale or transfer of the Common Shares, and legal, accounting and
other expenses incurred by it.
In connection with the sale or distribution of the Common Shares, the rules
of the Commission permit any underwriter to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
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If any underwriter creates a short position in the Common Stock in
connection with the sale or distribution of the Common Shares -- i.e., if the
underwriter sells more shares of Common Stock than are set forth on the cover
page hereof, such underwriter may reduce that short position by purchasing
Common Stock in the open market.
Any managing underwriter(s) may also impose a penalty bid on certain
underwriters and selling group members. This means that, if any managing
underwriter purchases Common Stock in the open market to reduce any
underwriter's short position, or to stabilize the price of the Common Stock,
such managing underwriter may reclaim the amount of the selling concession from
any such underwriters and selling group members who sold those Common Shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither we nor any underwriter makes any representation or prediction as to
the direction or magnitude of any effect that any of the transactions described
above may have on the price of the Common Stock. In addition, neither we nor any
underwriter makes any representation that any underwriter will engage in any
such transaction or that any such transaction, once commenced, will not be
discontinued without notice.
In order to comply with the securities laws of certain states, if
applicable, the Common Shares offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers.
LEGAL OPINIONS
The legality of the Securities 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 Report 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 the Common Shares
with the SEC. 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
23
<PAGE>
reference is considered to be part of this Prospectus, and later information
filed with the SEC will update and 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, 15(d) of the Exchange Act from the date of the
initial filing of the Registration Statement 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/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.
24
<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated _____________, 1998)
PRENTISS PROPERTIES TRUST
3890 W. NORTHWEST HIGHWAY, SUITE 400
DALLAS, TEXAS 75220
(214) 654-0886
____________ SHARES
COMMON SHARES OF BENEFICIAL INTEREST
This Prospectus Supplement and the accompanying Prospectus relate to the
offer and sale of up to _____________ common shares of beneficial interest, par
value $.01 per share (the "Common Shares"), of Prentiss Properties Trust (the
"Company"). Sales of the Common Shares are being effected by us in connection
with settlement of the UBS Forward Agreement, with UBS AG, London Branch, acting
through its agent Warburg Dillon Read LLC, ("UBS-LB"), as described in the
accompanying Prospectus.
The sale of the Common Shares will be effected through the broker-dealer
affiliates of UBS-LB, who will sell the Common Shares through brokers or dealers
or in a distribution by one or more additional underwriters on a firm commitment
or best efforts basis, on the New York Stock Exchange, in the over-the-counter
market, on any other national securities exchange on which the Common Shares are
listed or traded, in privately negotiated transactions or otherwise. The Common
Shares will be sold at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices.
We will use the net proceeds, if any, from the sale of the Common Shares to
settle the UBS Forward Agreement. See "Use of Proceeds" in the accompanying
Prospectus.
The Common Shares are listed on the New York Stock Exchange under the
symbol "PP." On ___________, ____, the last reported sale price of our common
stock on the New York Stock Exchange was $______ per share. No fee or commission
paid in connection with a sale will be in excess of $_____. No discount will be
in excess of $____.
UBS-LB and the broker-dealers participating in the distribution of the
Common Shares are "underwriters" within the meaning of the Securities Act and
any profit on the sale of the Common Shares by any of them, together with the
returns to UBS-LB and the placement fees, if any, will be regarded as
underwriting commissions under the Securities Act.
SEE "RISK FACTORS" BEGINNING ON PAGE 1 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON SHARES.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ 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 SUPPLEMENT OR THE PROSPECTUS TO +
+ WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
The date of this Prospectus Supplement is ________________, 1998.
<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:
Securities and Exchange Commission registration fee............. $ 45,045
New York Stock Exchange listing fee............................. 7,000
Accounting fees and expenses.................................... 19,000
Blue Sky fees and expenses...................................... 1,000
Printing expenses............................................... 5,000
Legal fees and expenses......................................... 40,000
Miscellaneous................................................... 2,955
--------
TOTAL...................................................... $120,000
========
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.
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
II-1
<PAGE>
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 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
- ------- --------
*1.1 -- Purchase Agreement, dated February 2, 1998, between the Company, the
Operating Partnership and UBS-LB.
*1.2 -- Forward Stock Contract, dated February 2, 1998, between the Company,
the Operating Partnership and UBS-LB.
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 on 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 -- 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).
4.3 -- Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
II-2
<PAGE>
*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.
*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 and Ingersoll, LLP.
*23.3 -- Consent of PricewaterhouseCoopers LLP.
24 -- Power of Attorney (included on the signature page of the Company's
Registration Statement on Form S-3, filed on April 2, 1998 and
incorporated by reference herein).
- ---------------------
* 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; 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
II-3
<PAGE>
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 Post-Effective
Amendment No. 1 to Registration Statement 333-49295 to be signed on its behalf
by the undersigned thereunto duly authorized, in the city of Dallas, state of
Texas, on October 13, 1998.
PRENTISS PROPERTIES TRUST
By: /s/ Thomas F. August
--------------------------------------
Thomas F. August
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 1 to Registration Statement 333-49295 has been signed
below on October 13, 1998 by the following persons in the capacities
indicated.
NAME TITLE
- ---- -----
* 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.
* Trustee
- ------------------------------
Barry J.C. Parker
* Trustee
- ------------------------------
Leonard M. Riggs, Jr.
* Trustee
- ------------------------------
Ronald G. Steinhart
* Trustee
- ------------------------------
Lawrence A. Wilson
* Executive Vice President, Chief Financial
- ------------------------------ Officer and Treasurer (Principal
Mark R. Doran Financial Officer)
II-5
<PAGE>
* 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
*By Thomas F. August
Attorney-in-Fact
/s/ Thomas F. August
- ------------------------------
II-6
<PAGE>
EXHIBIT 1.1
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is made as of the 2nd day of February, 1998, by and
among Prentiss Properties Trust (the "Company"), a real estate investment trust
organized under the laws of the State of Maryland, Prentiss Properties
Acquisition Partners, L.P., a Delaware limited partnership (the "Operating
Partnership") and UBS Limited, an English corporation ("UBS Limited") and Union
Bank of Switzerland, London Branch, acting through its agent UBS Securities LLC
("UBS-LB") (UBS Limited and UBS-LB being hereinafter collectively called the
"UBS Parties" and sometimes individually, a "UBS Party"). The Company and the
Operating Partnership are referred to collectively herein as the "Prentiss
Entities."
IN CONSIDERATION of the mutual covenants contained in this Purchase
Agreement, the Company, the Operating Partnership and the UBS Parties agree as
follows:
SECTION 1. Authorization of Sale of the Shares. Subject to the terms and
conditions of this Purchase Agreement, the Company has authorized the sale to
UBS Limited of up to an aggregate of 1,100,000 common shares of beneficial
interest (the "Common Shares"), $.01 par value per share (the "Purchase
Shares"), of the Company. In addition, the Company may issue to UBS-LB
additional Common Shares in settlement of certain of its obligations under the
Forward Stock Purchase Agreement, dated February 2, 1998 (the "Forward Stock
Purchase Agreement"), between the Company and UBS-LB (the "Additional Shares").
The Purchase Shares and the Additional Shares are hereinafter collectively
called the "Shares."
SECTION 2. Agreement to Sell and Purchase the Purchase Shares. Subject to
the terms and conditions of this Purchase Agreement, on the Closing Date (as
defined in Section 3 hereof), the Company will sell to UBS Limited the Purchase
Shares, the number of which shall equal 1,100,000, for a per share purchase
price equal to the Closing Price. The "Closing Price" shall equal the closing
price reported on the New York Stock Exchange for a Common Share on the business
day immediately preceding the Closing Date.
SECTION 3. Delivery of the Shares at the Closing.
3.1. Closing. The completion of the purchase and sale of the Purchase
Shares (the "Closing") shall occur as soon as practicable, on such date to be
agreed upon by the Company and the UBS Parties (hereinafter, the "Closing
Date").
3.2. Conditions. At Closing, the Company shall deliver to UBS Limited one
or more stock certificates registered in the name of UBS Limited representing
the number of Purchase Shares set forth in Section 2 above.
The Company's obligation to complete the purchase and sale of the Purchase
Shares and deliver such stock certificate(s) to UBS Limited at the Closing shall
be subject to the following conditions, any one or more of which may be waived
by the Company: (i) receipt by the Company of Federal Funds (or other mutually
agreed upon form of payment) in the full amount of the purchase price for the
Purchase Shares being purchased hereunder, (ii) the accuracy in all
<PAGE>
material respects, as of the Closing Date, of the representations and warranties
made by the UBS Parties herein and the fulfillment, in all material respects, as
of the Closing Date, of those undertakings of the UBS Parties to be fulfilled
prior to the Closing, (iii) the Forward Stock Purchase Agreement shall have been
fully executed by the parties thereto and (iv) receipt by the Company of a
cross-receipt with respect to the Purchase Shares executed by UBS Limited.
UBS Limited's obligation to accept delivery of such stock certificate(s)
and to pay for the Purchase Shares evidenced thereby shall be subject to the
following conditions: (i) the accuracy in all material respects, as of the
Closing Date, of the representations and warranties made by the Company herein
and the fulfillment in all material respects, as of the Closing Date, of those
undertakings of the Company to be fulfilled prior to Closing and (ii) the UBS
Parties shall have received all opinions and certificates to be delivered
pursuant to this Agreement.
SECTION 4. Representations, Warranties and Covenants of the Company. Each
of the Company and the Operating Partnership, jointly and severally, hereby
represents and warrants to, and covenants with, the UBS Parties as follows:
4.1. Organization and Qualification. The Company is a real estate
investment trust duly formed, validly existing and in good standing under the
laws of the State of Maryland, is duly qualified to do business and is in good
standing in each jurisdiction in which its ownership or lease of property or the
conduct of its business requires such qualification and has all requisite power
and authority to conduct its business as currently conducted. The Operating
Partnership has been duly formed and is validly existing as a limited
partnership under the laws of the State of Delaware, is duly qualified to do
business as a foreign limited partnership in each jurisdiction in which its
ownership or lease of property or the conduct of its business requires such
qualification, and has all partnership power and authority necessary to own or
hold its properties, to conduct the business in which it is engaged and to enter
into and perform the obligations under this Agreement.
4.2. Authorized Capital Stock. The Company has authorized and outstanding
capital stock as set forth in the Most Recent Financial Statements (as defined
below); the issued and outstanding Common Shares have been duly authorized and
validly issued, are fully paid and nonassessable, have been issued in compliance
with all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and conform to the description thereof included or incorporated by
reference in the Company's SEC Filings (as defined below). Other than as
described in the Company's SEC Filings, the Company does not have outstanding
any options to purchase, or any preemptive rights or other rights to subscribe
for or to purchase, any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock or any
such options, rights, convertible securities or obligations, except for options
issued pursuant to employee benefit plans. The description of the Company's
stock, stock bonus and other stock plans or arrangements and the options or
other rights granted and exercised thereunder in the Company's SEC Fillings
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
2
<PAGE>
4.3. Issuance, Sale and Delivery of the Shares. The Purchase Shares to be
sold by the Company have been duly authorized and, when issued, delivered and
paid for in the manner set forth in this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable, and will conform to the
description thereof included in or incorporated by reference in the Registration
Statement (as defined below). The Additional Shares, if and when issued pursuant
to the Forward Stock Purchase Agreement, will be duly authorized, validly
issued, fully paid and nonassessable, and will conform to the description
thereof incorporated by reference in the Registration Statement. None of the
Shares when issued and delivered to the UBS Parties shall be subject to any
lien, security interest, claim, charge or encumbrance of any nature. Other than
the UBS Parties and as set forth in the Company's SEC Filings, no shareholder of
the Company has any right, which has not been waived or has not expired by
reason of lapse of time following notification of the Company's intent to file
the Registration Statement, to require the Company to register the sale of any
shares owned by such shareholder under the Securities Act of 1933, as amended
(the "Securities Act"), in the Registration Statement. No further approval or
authority of the shareholders or the Board of Trustees of the Company will be
required for the issuance and/or sale of the Shares to be sold by the Company as
contemplated herein or in the Forward Stock Purchase Agreement, except such as
shall have been obtained on or before the Closing Date. The issuance and/or sale
of the Shares to the UBS Parties by the Company pursuant to this Agreement or
the Forward Stock Purchase Agreement (as the case may be), the compliance by the
Company with the other provisions of this Agreement or the Forward Stock
Purchase Agreement and the consummation of the other transactions contemplated
hereby or thereby do not require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except such
as shall have been obtained on or before the Closing Date other than the
registration of the resale of the Shares by the UBS Parties with the Securities
and Exchange Commission (the "SEC") and any required Blue Sky filings within the
States. The Company meets and will continue to meet the requirements for use of
Form S-3 under the Securities Act and the rules and regulations promulgated
thereunder (the "Rules and Regulations"). The Company has filed and will file
all documents which it is required to file under the Securities Exchange Act of
1934, as amended (the "Exchange Act") and all such documents (the "Company's SEC
Filings") comply in all material respects with the requirements of the Exchange
Act and the rules and regulations thereunder, as applicable, and none of such
documents, when so filed, contained or will contain any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, and any documents so
filed and incorporated by reference subsequent to the effective date of the
Registration Statement shall, when they are filed with the SEC, conform in all
material respects with the requirements of the Securities Act and the Rules and
Regulations and the Exchange Act and the rules and regulations thereunder, as
applicable. No Registration Statement filed in respect of any of the Shares,
when so filed, contained or will contain any untrue statement of a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.4. Due Execution, Delivery and Performance of the Agreement. Each of the
Company and the Operating Partnership has full legal right, power and authority
to enter into the Purchase Agreement and the Forward Stock Purchase Agreement
and perform the transactions contemplated hereby and thereby. The Purchase
Agreement and the Forward Stock Purchase
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Agreement have been duly authorized, executed and delivered by each of the
Company and the Operating Partnership. The making and performance of the
Purchase Agreement and the Forward Stock Purchase Agreement by each of the
Company and the Operating Partnership and the consummation of the transactions
herein and therein contemplated will not violate any provision of the
declaration of trust or bylaws, or other organizational documents, of the
Company or the Operating Partnership, and will not conflict with, result in the
breach or violation of, or constitute, either by itself or upon notice or the
passage of time or both, a default under any material agreement, mortgage, deed
of trust, lease, franchise, license, indenture, permit or other instrument to
which either the Company or the Operating Partnership is a party or by which the
Company or the Operating Partnership or any of their respective properties may
be bound or affected, any statute or any authorization, judgment, decree, order,
rule or regulation of any court or any regulatory body, administrative agency or
other governmental body applicable to the Company, the Operating Company or any
of their respective properties. No consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other governmental
body is required for the execution and delivery of this Agreement, the Forward
Stock Purchase Agreement or the consummation of the transactions contemplated
hereby or thereby, except in connection with the filing of any Registration
Statements pursuant to Section 7 below or for compliance with the Blue Sky laws
applicable to the offering of the Shares. Upon the execution and delivery
hereof, each of the Purchase Agreement and the Forward Stock Purchase Agreement
will constitute the valid and binding obligation of each of the Company and the
Operating Partnership, enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' and contracting
parties' rights generally and except as enforceability may be subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law) and except as the indemnification agreements
of the Company and the Operating Partnership in Section 7.5 hereof may be
legally unenforceable.
4.5. Accountants. The Company's independent certified public accountants,
who have expressed their opinion with respect to the Most Recent Financial
Statements (as defined below) are independent accountants as required by the
Securities Act and the Rules and Regulations. The Company shall cause the
independent certified public accountants to deliver, on the effective date of
Registration Statement, and at the time of sale pursuant to the Registration
Statement of Shares, a letter stating that such accountants are independent
public accountants within the meaning of the Securities Act and otherwise in
customary form and covering such financial and accounting matters as are
customarily covered by letters of independent certified public accountants
delivered in connection with underwritten public offerings of equity securities;
provided that the UBS Parties shall deliver to such accountants all
representations required by applicable accounting pronouncements.
4.6. No Defaults. Except as to defaults, violations and breaches which
individually or in the aggregate would not be material to the Prentiss Entities
taken as a whole, neither the Company nor the Operating Partnership is in
violation or default of any provision of its declaration of trust or bylaws, or
other organizational documents, or is in breach of or default with respect to
any provision of any agreement, judgment, decree, order, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to which
it is a party or by which it or any of its properties are bound; and, to the
Company's knowledge, there does not exist any
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state of fact which constitutes an event of default on the part of the Company
or Operating Partnership as defined in such documents or which, with notice or
lapse of time or both, would constitute such an event of default except such
defaults which individually or in the aggregate would not be material to the
Prentiss Entities.
4.7. No Actions. Except as otherwise disclosed in the Company's SEC
Filings, there are no legal or governmental actions, suits or proceedings
pending (provided that, for this purpose, a suit or proceeding that can be
commenced without concurrent service of process or written notice to the Company
shall be deemed "pending" only from the time such service of process or written
notice occurs) or, to the best of the Company's knowledge, threatened (which
shall include any suit or proceeding not "pending" because service of process or
written notice has not occurred) to which any of the Prentiss Entities is or may
be a party or of which property owned or leased by any Prentiss Entity is or may
be the subject, or related to environmental or discrimination matters, which
actions, suits or proceedings might, individually or in the aggregate, prevent
or adversely affect the transactions contemplated by this Agreement or result in
a material adverse change in the condition (financial or otherwise), of the
properties, business or results of operations of the Prentiss Entities, and no
labor disturbance by the employees of the Company exists or is imminent which
might be expected to affect adversely such condition, properties, business or
results of operations of the Prentiss Entities. The Company is neither a party
nor subject to the provisions of any material injunction, judgment, decree or
order of any court, regulatory body administrative agency or other governmental
body.
4.8. Properties.
(a) Each of the Prentiss Entities, directly or indirectly, has good and
marketable title to each of the properties and assets reflected as owned by it
in the Most Recent Financial Statements not located in Texas, and has good and
indefeasible title to each of the properties and assets located in Texas, in
each case free and clear of all liens, encumbrances, claims, security interests
and defects, except (i) those, if any, reflected in such financial statements or
the Company's SEC Filings, or (ii) those which are not material in amount and do
not adversely affect the use made and promised to be made of such property by
such Prentiss Entity.
(b) At all times since October 22, 1996, the Company has qualified as a
real estate investment trust (a "REIT") under the Internal Revenue Code of 1986,
as amended, and is organized in conformity with the requirements for
qualification as a REIT, and its manner of operation has enabled it to meet the
requirements for qualification as a REIT as of the date hereof, and its proposed
manner of operation will enable it to meet the requirements for qualification as
a REIT in the future.
4.9. No Material Change. Since the date of the Most Recent Financial
Statements, and except as otherwise disclosed in the Company's SEC Filings as of
the Closing Date or in writing to the UBS Parties (i) neither the Company nor
the Operating Partnership has incurred any material liabilities or obligations,
indirect, or contingent, or entered into any material verbal or written
agreement or other transaction which is not in the ordinary course of business
(it being agreed that for purposes of this sentence the Prentiss Entities'
ordinary course of business shall include the acquisition, directly indirectly,
of real estate properties or businesses of a type
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that may be owned by a REIT); (ii) neither the Company nor the Operating
Partnership has sustained any material loss or interference with its businesses
or properties from fire, flood, windstorm, accident or other calamity, whether
or not covered by insurance; (iii) neither the Company nor the Operating
Partnership is in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in the capital
stock of the Company (other than the sale of the Purchase Shares hereunder and
the sale of Common Stock under the Company's [Dividend Reinvestment and Stock
Purchase Plan]), or indebtedness material to the Company (other than in the
ordinary course of business); and (v) there has not been any material adverse
change in the condition (financial or otherwise), business, properties or
results of operations of the Prentiss Entities taken as a whole.
4.10. Intellectual Property. The Prentiss Entities believe they have
sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals and governmental authorizations to conduct their businesses as now
conducted; and the Prentiss entities have no knowledge of any material
infringement by any of them of trademark, trade name rights, patent rights,
copyrights, licenses, trade secrets or other similar rights of others, and, to
the knowledge of the Prentiss Entities, no claim has been made against the
Prentiss Entities regarding trademark, trade name, patent, copyright, license,
trade secrecy or other infringement which could have a material adverse effect
on the condition (financial or otherwise), business or results of operations of
the Prentiss Entities taken as a whole.
4.11. Compliance. Neither the Company nor the Operating Partnership has
been advised, nor has any reason to believe, that it is not conducting business
in compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without limitation,
all applicable local, state and federal environmental laws and regulations;
except where failure to be so in compliance would not materially adversely
affect the condition (financial or otherwise), business or results of operations
of the Prentiss Entities taken as a whole.
4.12. Taxes. Each of the Company and the Operating Partnership has filed
all necessary federal, state and foreign income and franchise tax returns and
has paid or accrued all taxes shown as due thereon, and neither has any
knowledge of any tax deficiency which has been or might be asserted or
threatened against it which could materially adversely affect the business
condition (financial or otherwise) or results of operations of the Prentiss
Entities taken as a whole.
4.13. Transfer Taxes. On the Closing Date, all stock transfer or other
taxes (other than income taxes) which are required to be paid in connection with
the sale and transfer of the Purchase Shares to be sold to UBS Limited hereunder
will be, or will have been, fully paid or provided for by the Company and all
laws imposing such taxes will be or will have been fully complied with.
4.14. Investment Company. The Company is not required to register as an
"investment company" as such term is defined in the Investment Company Act of
1940, as amended.
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4.15. Offering Materials. The Company has not distributed and will not
distribute prior to the Closing Date any offering material in connection with
the offering and sale of the Purchase Shares other than the documents provided
to the UBS Parties pursuant to Section 4.17.
4.16. Insurance. Each of the Company and the Operating Partnership
maintains insurance (or insurance is maintained on its behalf) of the types and
in the amounts generally deemed adequate under customary industry standards for
its business, including, but not limited to, insurance covering all real and
personal property owned or leased by it against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
4.17. SEC Filings. The Company represents and warrants that the information
contained in the following documents, which the Company has furnished to the UBS
Parties, or will furnish prior to the Closing, is or will be true and correct in
all material respects as of their respective filing dates:
(a) Annual Report on Form 10-K for the year ended December 31, 1996,
which Annual Report includes the Company's most recently available
audited financial statements together with the report thereon of the
independent certified public accountants (the "Most Recent Financial
Statements");
(b) Quarterly Report on Form 10-Q for the quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997;
(c) the Company's proxy statements on Form 14A relating to (i) the most
recent Annual Meeting of the Company's Shareholders and (ii) any
Special Meetings of the Company's Shareholders which occurred during
the 12-month period prior to the date hereof or for which a meeting
date has been fixed and a proxy statement distributed; and
(d) all other documents, if any, filed by or with respect to the Company
with the SEC since January 1, 1997 pursuant to Sections 13, 15(d) or
16(a) of the Exchange Act.
4.18. Legal Opinion. Prior to the Closing, counsel to the Company and the
Operating Partnership will deliver its legal opinion to the UBS Parties in
substantially the form of Exhibit A hereto.
4.19. ERISA. The Company and its affiliates are in compliance in all
material respects with all applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended and the rules and regulations
promulgated thereunder ("ERISA"). Neither a Reportable Event (as defined under
ERISA) nor a Prohibited Transaction (as defined under ERISA) has occurred with
respect to any Plan (as defined below) of the Company and/or its affiliates; no
notice of intent to terminate a Plan has been filed nor has any Plan been
terminated within the past five years; no circumstance exists which constitutes
grounds under Section 402 of
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ERISA entitling the Pension Benefit Guaranty Corporation ("PBGC") to institute
proceedings to terminate, or appoint a trustee to administer, a Plan, nor has
the PBGC instituted any such proceedings; the Company and its affiliates have
not completely or partially withdrawn under Sections 4201 or 4202 of ERISA from
any Multiemployer Plan (as defined therein); the Company and its affiliates have
met the minimum funding requirements of Section 412 of the Internal Revenue Code
of 1986, as amended (the "Code") and Section 302 of ERISA with respect to each
Plan and there is no unfunded current liability (as defined below) with respect
to any Plan; the Company and its affiliates have not incurred any liability to
the PBGC under ERISA (other than for the payment of premiums under Section 4007
of ERISA); no part of the funds to be used by the Company in satisfaction of its
obligations under this Purchase Agreement or the Forward Stock Purchase
Agreement constitute "plan assets" of any "employee benefit plan" within the
meaning of ERISA or of any "plan" within the meaning of Section 4975(e)(l) of
the Code, as interpreted by the Internal Revenue Service and the U.S. Department
of Labor in rules, regulations, releases and bulletins or as interpreted under
applicable case law. As used below, "Plan" means an "employee benefit plan" or
"plan" as described in Section 3(3) of ERISA; and "unfunded current liability"
has the meaning provided in Section 302(d)(8)(A) of ERISA.
4.20. Certificate. A certificate of the Company executed by the Chairman of
the Board or President and the chief financial or accounting officer of the
Company and certificate of the Operating Partnership executed by
_______________, to be dated the Closing Date in form and substance satisfactory
to the UBS Parties to the effect that the representations and warranties of the
Company and the Operating Partnership, respectively, set forth in this Section 4
are true and correct as of the date of this Agreement and as of the Closing
Date, and each of the Company and the Operating Partnership has complied with
all the agreements and satisfied all the conditions on its part to be performed
or satisfied on or prior to such Closing Date.
4.21. Environmental Protection. To the knowledge of the Prentiss Entities,
except as disclosed in the Company's SEC Filings, none of the Company's, the
Operating Partnership's or their affiliates' properties has suffered a release
of any Hazardous Materials that, under any Environmental Law, (i) would impose
liability on any of the Company or the Operating Partnership or any affiliate
that is likely to have a material adverse effect on the condition (financial or
other), business or results of operations of the Prentiss Entities or (ii) is
likely to result in the imposition of a lien on any assets owned, directly or
indirectly, by the Prentiss Entities. To the knowledge of the Prentiss Entities,
neither the Company nor the Operating Partnership nor any affiliate is subject
to any existing, pending or threatened investigation or proceeding by any
governmental agency or authority with respect or pursuant to any Environmental
Law, except any which, if adversely determined, would not have a material
adverse effect on the condition (financial or other), business, or results of
operations of the Prentiss Entities taken as a whole. As used herein,
"Environmental Laws" mean all federal, state, local and foreign environmental,
health and safety laws, codes and ordinances and all rules and regulations
promulgated thereunder, including, without limitation laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or wastes
into the environment (including, without limitation, air, surface water, ground
water, land surface or subsurface strata) or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, chemicals, or industrial,
solid, toxic or hazardous substances or wastes; and
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"Hazardous Material" includes, without limitation, (i) all substances which are
designated pursuant to Section 311(b)(2)(A) of the Federal Water Pollution
Control Act ("FWPCA"), 33 U.S.C (S)1251 et seq.; (ii) any element, compound,
mixture, solution, or substance which is designated pursuant to Section 102 of
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), 42 U.S.C. (S)9601 et seq.; (iii) any hazardous waste having the
characteristics which are identified under or listed pursuant to Section 3001 of
the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. (S)6901 et seq.;
(iv) any toxic pollutant listed under Section 307(a) of the FWPCA; (v) any
hazardous air pollutant which is listed under Section 112 of the Clean Air Act,
42 U.S.C. (S)7401 et seq.; (vi) any imminently hazardous chemical substance or
mixture with respect to which action has been taken pursuant to Section 7 of the
Toxic Substances Control Act, 15 U.S.C. (S)2601 et seq.; and (vii) petroleum,
petroleum products, petroleum by-products, petroleum decomposition by-products,
and waste oil.
SECTION 5. Representations, Warranties and Covenants of the UBS Parties.
5.1. Investment. Each of UBS Limited and/or UBS-LB represents and warrants
to, and covenants with, the Prentiss Entities that: (i) UBS Limited, taking into
account the personnel and resources it can practically bring to bear on the
purchase of the Purchase Shares contemplated hereby, is knowledgeable,
sophisticated and experienced in making, and is qualified to make, decisions
with respect to investments in shares presenting an investment decision like
that involved in the purchase of the Purchase Shares, including investments in
securities issued by the Company, and has requested, received, reviewed and
considered all information it deems relevant in making an informed decision to
purchase the Purchase Shares; (ii) UBS Limited is acquiring the number of
Purchase Shares set forth in Section 2 above in the ordinary course of its
business and for its own account for investment (as defined for purposes of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the regulations
thereunder) only and with no present intention of distributing any of such
Purchase Shares or any arrangement or understanding with any other persons
regarding the distribution of such Shares (this representation and warranty not
limiting the rights of either UBS Party to sell pursuant to any Registration
Statement); (iii) neither UBS Party will, directly or indirectly, sell or
otherwise dispose of (or solicit any offers to purchase or otherwise acquire)
any of the Shares except in compliance with the Forward Stock Purchase Agreement
and with the Securities Act, the Rules and Regulations and any applicable state
securities or blue sky laws or pursuant to an available exemption or exclusion
therefrom; (iv) each UBS Party has completed or caused to be completed the
Registration Statement Questionnaire and the Stock Certificate Questionnaire,
both attached hereto as Appendix I, for use in preparation of the Registration
Statement and the answers thereto are true and correct to the best knowledge of
the UBS Parties as of the date hereof and will be true and correct as of the
effective date of the Registration Statement; (v) the UBS Parties have, in
connection with their decision to purchase the number of Purchase Shares set
forth in Section 2 above, relied solely upon the documents identified in Section
4.17, the information referred to in Section 7.7 and the representations and
warranties of the Company contained herein; (vi) each of the UBS Parties is an
"accredited investor" within the meaning of Rule 501 of Regulation D promulgated
under the Securities Act; (vii) the UBS Parties do not directly or indirectly
have an interest of five percent or more of the Common Shares outstanding as
shown in the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 and (viii) the Purchaser understands that the Shares will
contain a legend to the following effect
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THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED [IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE SECURITIES ACT
OF 1933 OR AN OPINION OF THE COMPANY'S COUNSEL THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT.
5.2. Resale. Each UBS Party acknowledges and agrees that the Shares are not
transferable on the books of the Company unless the certificate submitted to the
transfer agent evidencing the Shares is accompanied by a separate officer's
certificate: (i) in the form of Appendix II hereto, (ii) executed by an officer
of, or other authorized person designated by, the UBS Parties, and (iii) to the
effect that (A) the Shares have been sold in accordance with the Registration
Statement, the Securities Act and the Rules and Regulations and any applicable
state securities or blue sky laws or pursuant to valid exemptions or exclusions
therefrom and (B) the requirement under the Securities Act of delivering a
current prospectus has been satisfied. Each UBS Party acknowledges that there
may occasionally be times when the Company must suspend the right of the UBS
Parties to effect sales of the Shares through use of the Prospectus forming a
part of the Registration Statement until such time as an amendment to the
Registration Statement has been filed by the Company and declared effective by
the SEC, or until such time as the Company has filed an appropriate report with
the SEC pursuant to the Exchange Act (each, a "Black-out Period"); provided that
no Black-out Period shall exceed 30 consecutive days and such Black-out Periods
shall not during any 12-month period exceed 90 days in the aggregate; provided
further however that in the case that the Company is required to make a filing
with the SEC, the Company's Black-out Period shall extend through the time
permitted by the SEC for such filing to be made. Each UBS Party hereby covenants
that it will not sell any Shares pursuant to said Prospectus during the period
commencing at the time at which the Company gives the UBS Parties written notice
of the suspension of the use of said Prospectus and ending at the time the
Company gives the UBS Parties written notice that the UBS Parties may thereafter
effect sales pursuant to said Prospectus. Each UBS Party further covenants to
notify the Company promptly of the sale of all of its Shares.
5.3. Due Execution, Delivery and Performance of this Agreement. The UBS
Parties further represent and warrant to, and covenant with, each of the Company
and the Operating Partnership that (i) each UBS Party has full right, power,
authority and capacity to enter into this Agreement and to consummate the
transactions contemplated hereby and has taken all necessary action to authorize
the execution, delivery and performance of this Agreement, and (ii) upon the
execution and delivery of this Agreement, this Agreement shall constitute a
valid and binding obligation of the UBS Parties enforceable in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors' and
contracting parties' rights generally and except as enforceability may be
subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law) and except as
the indemnification agreements of the UBS Parties in Section 7.3 hereof may be
legally unenforceable.
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5.4. Residence of UBS Limited. UBS Limited is organized under the laws of
England and has its principal place of business in London.
SECTION 6. Survival of Representations, Warranties and Agreements.
Notwithstanding any investigation made by any party to this Purchase Agreement,
all covenants, agreements, representations and warranties made by the Company
and the Operating Partnership, and the UBS Parties herein and in the
certificates for the Shares delivered pursuant hereto shall survive the
execution of this Purchase Agreement, the Forward Stock Purchase Agreement, the
delivery to UBS Limited of the Purchase Shares being purchased and the payment
therefor.
SECTION 7. Registration of the Shares; Compliance with the Securities Act.
7.1. Registration Procedures and Expenses. The Company shall:
(a) as soon as practicable after the Closing, prepare and file with the
SEC a Registration Statement (as defined below) covering the resale by
the UBS Parties, from time to time, of up to a number of Shares equal
to 130% of the number of Purchase Shares through the facilities of the
New York Stock Exchange, the automated quotation system of The Nasdaq
Stock Market or the facilities of any other national securities
exchange on which the Company's common stock is then traded or in
privately negotiated transactions (the "Initial Registration
Statement"). If the total number of Shares exceeds the number of
Shares covered by the Initial Registration Statement, then the Company
shall prepare and file with the SEC such additional Registration
Statement or Statements as shall be necessary to cover the resale by
UBS-LB of such excess Shares in the same manner as contemplated by the
Initial Registration Statement for the Shares covered thereby (each,
an "Additional Registration Statement"); provided that prior to
issuing any such excess Shares to UBS-LB, the Company shall cause such
Registration Statement covering such excess shares to have become
effective. For purposes of this Purchase Agreement, "Registration
Statement" means a registration statement under the Securities Act on
Form S-3 covering the resale by one or both UBS Parties of up to a
specified number of Shares, filed and maintained effective by the
Company pursuant to the provisions of this Section 7, including the
Prospectus (as defined below) contained therein, any amendments and
supplements to such registration statement, including all post-
effective amendments thereto, and all exhibits and all material
incorporated by reference into such registration statement;
(b) use all reasonable best efforts to cause the SEC to notify the Company
of the SEC's willingness to declare the Initial Registration Statement
effective within 60 days after the Registration Statement is filed by
the Company; provided that the Company will use its best efforts to
cause such Initial
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Registration Statement to become effective no later than 90 days after
the Closing Date;
(c) prepare and file with the SEC such amendments and supplements to the
Registration Statement and the prospectus used in connection therewith
(the "Prospectus") as may be necessary to keep the Registration
Statement effective until the date on which the Shares may be resold
by the UBS Parties without registration, by reason of Rule 144(k)
under the Securities Act or any other rule of similar effect;
(d) furnish to the UBS Parties with respect to the Shares registered under
the Registration Statement (and to each underwriter, if any, of such
Shares) such reasonable number of copies of Prospectuses, including
any supplements and amendments thereto, an opinion from counsel to the
Company covering the matters set forth on Exhibit B hereto and such
other documents, as the UBS Parties may reasonably request, in order
to facilitate the public sale or other disposition of all or any of
the Shares by the UBS Parties;
(e) use its best efforts to prevent the happening of any event that would
cause such Registration Statement to contain a material misstatement
or omission or to be not effective and usable for resale of the Shares
during the period that such Registration Statement is required to be
effective and usable; provided that this paragraph (e) shall in no way
limit the Company's right to suspend the right of the UBS Parties to
effect sales under the Registration Statement during any Black-out
Period as specified in Section 5.2 above;
(f) file documents required of the Company for normal blue sky clearance
in states specified in writing by the UBS Parties, provided, however,
that the Company shall not be required to qualify to do business or
consent to service of process in any jurisdiction in which it is not
now so qualified or has not so consented; and
(g) bear all expenses in connection with the procedures in paragraphs (a)
through (f) of this Section 7.1 and the registration of the Shares
pursuant to the Registration Statement, including the fees and
expenses of counsel or other advisers to the UBS Parties not to exceed
in the aggregate $5,000, other than underwriting discounts, brokerage
fees and commissions incurred by the UBS Parties, if any.
7.2. Covenants in Connection With Registration.
(a) The Company hereby covenants with the UBS Parties that (i) it shall
not file any Registration Statement or Prospectus or any amendment or supplement
thereto, unless a copy thereof shall have been first submitted to the UBS
Parties and the UBS Parties did not object
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thereto in good faith (provided that if the UBS Parties do not object within two
business days of receiving any such material, they shall be deemed to have no
objection thereto); (ii) it shall immediately notify the UBS Parties of the
issuance by the SEC of any stop order suspending the effectiveness of such
Registration Statement or the initiation of any proceedings for such purpose;
(iii) it shall make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of such Registration Statement at the
earliest possible moment; (iv) it shall notify the UBS Parties of the receipt of
any notification with respect to the suspension of the qualification of the
Shares for sale under the securities or blue sky laws of any jurisdiction or the
initiation of any proceeding for such purpose; and (v) it shall as soon as
practicable notify the UBS Parties in writing of the existence of any fact which
results in any Registration Statement, any amendment or post-effective amendment
thereto, the Prospectus, any prospectus supplement, or any document incorporated
therein by reference containing an untrue statement of a material fact or
omitting to state a material fact required to be stated therein or necessary to
make the statements therein not misleading and shall prepare a supplement or
post-effective amendment to such Registration Statement or 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 Shares, the Prospectus
will not contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading; provided
that this clause (v) shall in no way limit the Company's right to suspend the
right of the UBS Parties to effect sales under the Registration Statement during
any Black-out Period as specified at Section 5.2 above.
(b) The UBS Parties shall notify the Company at least four business days
prior to the date on which it intends to commence effecting any resales of
Shares under a Registration Statement and if the Company does not, within such
four-day period, advise the UBS Parties of the existence of any facts of the
type referred to in Section 7.2(a)(iv) above, then the Company shall be deemed
to have certified and represented to the UBS Parties that no such facts then
exist and the UBS Parties may rely on such certificate and representation in
making such sales. The preceding sentence shall in no way limit the Company's
obligations under Section 7.2(a) above.
7.3. Extension of Required Effectiveness. In the event that the Company
shall give any notice required by Section 7.2(a)(v) hereof, the period during
which the Company is required to keep such Registration Statement effective and
useable shall be extended by the number of days during the period from and
including the date of the giving of such notice to and including the date when
the UBS Parties are advised in writing by the Company that the use of the
Prospectus may be resumed.
7.4. Transfer of Shares After Registration. Each UBS Party agrees that it
will not effect any disposition of the Shares or its right to purchase the
Shares that would constitute a sale within the meaning of the Securities Act or
pursuant to any applicable state securities or blue sky laws except pursuant to
the Forward Stock Purchase Agreement and as contemplated in each Registration
Statement referred to in Section 7.1 or except pursuant to any exemption from
the registration requirements of the Securities Act (including, without
limitation, Rule 144 promulgated thereunder and any successor thereto) and that
it will promptly notify the Company of any changes in the information set forth
in any such Registration Statement regarding the UBS Parties or its Plan of
Distribution.
13
<PAGE>
7.5. Indemnification. For the purpose of this Section 7.5, the term
"Registration Statement" shall include any final prospectus, exhibit, supplement
or amendment included in or relating to any Registration Statement referred to
in Section 7.1.
(a) Indemnification by Company. The Prentiss Entities jointly and
severally agree to indemnify and hold harmless the UBS Parties and each person,
if any, who controls either UBS Party within the meaning of the Securities Act,
against any losses, claims, damages, liabilities or expenses, joint or several,
to which the UBS Parties or such controlling person may become subject
(including in settlement of any litigation, if such settlement is effected with
the written consent of the Prentiss Entities), insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof as contemplated
below) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement,
including the Prospectus, financial statements and schedules, and all other
documents filed as a part thereof, as amended at the time of effectiveness of
such Registration Statement, including any information deemed to be a part
thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A,
or pursuant to Rule 434, of the Rules and Regulations, or the Prospectus, in the
form first filed with the SEC pursuant to Rule 424(b) of the Regulations, or
filed as part of such Registration Statement at the time of effectiveness if no
Rule 424(b) filing is required, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state in any of
them a material fact required to be stated therein or necessary to make the
statements in any of them not misleading, and will reimburse each UBS Party and
each such controlling person for any legal and other expenses as such expenses
are reasonably incurred by the UBS Parties or such controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action; provided, however, that
the Prentiss Entities will not be liable in any such case to the extent that any
such loss, claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such Registration Statement, such Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with written information
furnished to the Prentiss Entities (i) by or on behalf of the UBS Parties
expressly for use therein or (ii) any statement or omission in any Prospectus
that is corrected in any subsequent Prospectus that was delivered to a UBS Party
prior to the pertinent sale or sales by such UBS Party and not delivered by such
UBS Party in connection with such sale or sales.
(b) Indemnification by UBS Parties. The UBS Parties will indemnify and
hold harmless the Prentiss Entities, each of its directors, each of its officers
who signed any Registration Statement and each person, if any, who controls the
Prentiss Entities within the meaning of the Securities Act, against any losses,
claims, damages, liabilities or expenses, joint and several, to which the
Prentiss Entities, each of its directors, each of its officers who signed any
Registration Statement or any controlling person may become subject (including
in settlement of any litigation, if such settlement is effected with the written
consent of the UBS Parties) insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof as contemplated below) arise out of
or are based upon any untrue or alleged untrue statement of any material fact
contained in such Registration Statement, such Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein
14
<PAGE>
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 was
made in such Registration Statement, such Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to the Prentiss Entities by or on behalf of the UBS Parties expressly
for use therein, and will reimburse the Prentiss Entities, each of its
directors, each of its officers who signed such Registration Statement and each
controlling person for any legal and other expense reasonably incurred by the
Prentiss Entities, each of its directors, each of its officers who signed such
Registration Statement or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action.
(c) Proceedings. Promptly after receipt by an indemnified party under this
Section 7.5 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section 7.5 notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section 7.5 or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 7.5 for any
reasonable legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof unless (i) the indemnified party
shall have employed such counsel in connection with the assumption of legal
defenses in accordance with the proviso to the preceding sentence (it being
understood, however, that the indemnifying party shall be not liable for the
expenses of more than one separate counsel, approved by such indemnifying party
in the case of paragraph (a), representing the indemnified parties who are
parties to such action) or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
action, in each of which cases the fees and expenses of counsel shall be at the
expense of the indemnifying party.
(d) Contribution. If the indemnification provided for in this Section 7.5
is required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b) or (c) of this Section 7.5 in respect
15
<PAGE>
of any losses, claims, damages, liabilities or expenses referred to herein, then
each applicable indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of any losses, claims, damages,
liabilities or expenses referred to herein in such proportion as is appropriate
to reflect the relative benefits received by the Prentiss Entities and the UBS
Parties from the purchase and sale of the Shares and the relative fault of the
Prentiss Entities and the UBS Parties in connection with the statements or
omissions or inaccuracies in the representations and warranties in this
Agreement which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The respective
relative benefits received by the Prentiss Entities on the one hand and the UBS
Parties on the other shall be deemed to be in the same proportion as the amount
paid by the UBS Parties to the Prentiss Entities pursuant to this Agreement for
the Shares purchased by the UBS Parties that were sold pursuant to any
Registration Statement bears to the difference (the "Difference") between the
amount the UBS Parties paid for the Shares that were sold pursuant to such
Registration Statement and the amount received by the UBS Parties from such
sale. The relative fault of the Prentiss Entities and the UBS Parties 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 or the inaccurate or the alleged inaccurate representation
and/or warranty relates to information supplied by the Prentiss Entities or by
the UBS Parties and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in paragraph (c) of this Section 7.5 any
reasonable legal or other fees or expenses incurred by such party in connection
with investigating or defending any action or claim. The provisions set forth in
paragraph (c) of this Section 7.5 with respect to notice of commencement of any
action shall apply if a claim for contribution is to be made under this
paragraph (d); provided, however, that no additional notice shall be required
with respect to any action for which notice has been given under paragraph (c)
for purposes of indemnification. The Prentiss Entities and the UBS Parties agree
that it would not be just and equitable if contribution pursuant to this Section
7.5 were determined solely by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this paragraph. Notwithstanding the provisions of this Section 7.5, the
UBS Parties shall not be required to contribute any amount in excess of the
amount by which the aggregate proceeds received by the UBS Parties from the
transactions contemplated hereby exceeds the amount of any damages that the UBS
Parties has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. 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.
7.6. Termination of Conditions and Obligations. The conditions precedent
imposed by Section 5 or this Section 7 upon the transferability of the Shares
shall cease and terminate as to any particular number of the Purchase Shares
upon the passage of twenty-four months from the purchase of such Shares by UBS
Limited, as to any particular number of the Additional Shares upon the passage
of twenty-four months from the issuance of such Shares to UBS-LB or as to any
particular number of the Shares at such time as an opinion of counsel
satisfactory to the Company shall have been rendered to the effect that such
conditions are not
16
<PAGE>
necessary in order to comply with the Securities Act. At such time, the
Company's obligation to maintain an effective Registration Statement with
respect to such Shares shall cease.
7.7. Information Available. So long as any Registration Statement covering
the resale of any Shares owned by either UBS Party is effective, the Company
will furnish to the UBS Parties:
(a) as soon as practicable after available, one copy of (i) its Annual
Report to Shareholders, (ii) its Annual Report on Form 10-K, (iii) its
Quarterly Reports to Shareholders, (iv) its quarterly reports on Form
10-Q, (v) a full copy of the particular Registration Statement
covering the Shares (the foregoing, in each case, excluding exhibits)
and (vi) upon request, any or all other public filings under the
Exchange Act by the Company; and
(b) upon the reasonable request of either UBS Party, a reasonable number
of copies of the Prospectuses to supply to any other party requiring
such Prospectuses;
and the Company, upon the reasonable request of the UBS Parties, will meet with
the UBS Parties or a representative thereof at the Company's headquarters to
discuss all information relevant for disclosure in such Registration Statement
covering the Shares, subject to appropriate confidentiality limitations.
7.8. Non-Exclusivity. The rights and remedies provided under Section 7.5
hereof shall not be in limitation or exclusion of any other rights or remedies
available to a party, whether by agreement, at law, in equity or otherwise, with
respect to the inaccuracy of any representation or warranty by, or the breach of
any covenant of, the other party made herein or in the Forward Stock Purchase
Agreement.
7.9. Notice Requirement. The Company covenants and agrees that it will
notify the UBS Parties at any time it becomes aware that as a result of a change
in the Company's capital stock the UBS Parties beneficially hold more than 4.9%
of the Company's Common Shares.
7.10. Transfer of Shares. The Company covenants and agrees to use its best
efforts to cause the transfer agent to effect promptly any transfer of the
Shares requested by the UBS Parties and to cause the transfer agent to remove
promptly the restrictive legend from the Shares upon presentation to the
transfer agent of all necessary documentation.
SECTION 8. Reporting Obligations. For so long as the Company is subject to
the reporting requirements of Section 13 or 15 of the Exchange Act, the Company
covenants that it will file the reports required to be filed by it under the
Securities Act and Section 13(a) and 15(d) of the Exchange Act and the rules and
regulations adopted by the Commission thereunder.
SECTION 9. Broker's Fee. Other than any fees payable under or in connection
with the Forward Stock Purchase Agreement, each of the parties hereto hereby
represents that, on
17
<PAGE>
the basis of any actions and agreements by it, there are no brokers or finders
entitled to compensation in connection with the sale or issuance of the Shares
to the UBS Parties.
SECTION 10. Notices. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by first-class
registered or certified airmail, by telegram or telecopy or sent by nationally
recognized overnight express courier postage prepaid, and shall be deemed given
when so mailed or for telecopies, when transmitted and receipt confirmed, and
shall be delivered as addressed as follows:
(a) if to the Company or the Operating Partnership, to:
Thomas F. August
President and Chief Operating Officer
Michael A. Ernst
Vice President and Treasurer
The Plaza on Bachman Creek
3890 West Northwest Highway, Suite 400
Dallas, Texas 75220
Telephone: (214) 654-0886
Telefax: (214) 350-2408
with a copy so mailed to:
Randall S. Parks, Esq.
Hunton & Williams
Riverfront Plaza
951 E. Byrd Street
Richmond, Virginia 23219
Telephone: (804) 788-8200
Telefax: (804) 788-8218
or to such other person at such other place as the Company shall
designate to the UBS Parties in writing; and
(b) if to the UBS Parties, c/o UBS Securities, LLC, 299 Park Avenue, New
York, New York 10171, or at such other address or addresses as may have been
furnished to the Company in writing.
18
<PAGE>
SECTION 11. Changes. Agreement may not be modified or amended except
pursuant to an instrument in writing signed by each of the Company and the
Operating Partnership and the UBS Parties.
SECTION 12. Headings. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement.
SECTION 13. Severability. In case any provision contained in this Agreement
should be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
SECTION 14. Governing Law; Jurisdiction.
14.1. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CONFLICTS OF LAW
PRINCIPLES THEREOF) AND OF THE FEDERAL LAW OF THE UNITED STATES OF AMERICA.
14.2. EACH OF THE COMPANY AND THE OPERATING PARTNERSHIP (i) HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF, AND AGREES THAT ANY SUIT SHALL BE
BROUGHT IN, THE STATE AND FEDERAL COURTS LOCATED IN THE CITY AND COUNTY OF NEW
YORK FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR
BASED UPON THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND (ii)
HEREBY WAIVES TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, AND AGREES NOT TO
ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN ANY SUCH PROCEEDING, ANY
CLAIM THAT IT IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED
COURTS, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT
ANY SUCH PROCEEDING BROUGHT IN ONE OF THE ABOVE-NAMED COURTS IS BROUGHT IN AN
INCONVENIENT FORUM, THAT THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN ONE OF THE
ABOVE-NAMED COURTS IS IMPROPER, OR THAT THIS AGREEMENT, OR THE TRANSACTIONS
CONTEMPLATED HEREBY MAY NOT BE ENFORCED IN OR BY SUCH COURT.
SECTION 15. Transfer to Affiliate. Notwithstanding anything herein to the
contrary, UBS Limited may transfer the Purchase Shares to any affiliate of UBS
Limited, together with all of UBS Limited's rights hereunder; provided that (i)
such affiliate shall assume and be subject to all of UBS Limited's obligations
hereunder and (ii) such affiliate shall be an "accredited investor" within the
meaning of Rule 501 of Regulation D promulgated under the Securities Act. In the
event of such an assignment, such affiliate shall in all respects be substituted
for UBS Limited as a party hereto.
SECTION 16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument, and shall become effective
when one or more counterparts have been signed by each party hereto and
delivered to the other parties.
SECTION 17. Waiver of Trial by Jury. EACH PARTY HEREBY IRREVOCABLY WAIVES
ANY RIGHT IT MAY HAVE TO JURY TRIAL IN
19
<PAGE>
CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
PRENTISS PROPERTIES TRUST
By: /s/ MICHAEL ERNST
----------------------------------------------
Name: Michael Ernst
Title: VP & Treasurer
PRENTISS PROPERTIES ACQUISITION
PARTNERS, L.P.
By: Prentiss Properties I, Inc.,
its general partner
By: /s/ MICHAEL ERNST
----------------------------------------------
Name: Michael Ernst
Title: VP & Treasurer
UBS LIMITED
By: /s/ LARRY WOOD
----------------------------------------------
Name: Larry Wood
Title: Executive Director
By: /s/ ADAM MATTHEWS
----------------------------------------------
Name: Adam Matthews
Title: Director
UNION BANK OF SWITZERLAND
LONDON BRANCH
By: /s/ L. WOOD
----------------------------------------------
Name: L. Wood
Title: Vice President
By: /s/ A.J. MATTHEWS
----------------------------------------------
Name: A.J. Matthews
Title: Vice President
21
<PAGE>
Appendix I
(one of two)
STOCK CERTIFICATE QUESTIONNAIRE
Pursuant to Section 3 of the Agreement, please provide us with the
following information:
1. The exact name that your Shares are to be registered in (this is the name
that will appear on your stock certificate(s)). You may use a nominee name
if appropriate:
----------------------------------
2. All relationships between each UBS Party and the Registered Holder listed
in response to Item 1 above:
----------------------------------
----------------------------------
----------------------------------
3. The mailing address of the Registered Holder listed in response to item I
above:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
4. The Social Security Number or Tax Identification Number of the Registered
Holder listed in response to item 1 above:
----------------------------------
<PAGE>
Appendix I
(two of two)
REGISTRATION STATEMENT QUESTIONNAIRE
In connection with the preparation of the Registration Statement, please
provide us with the following information:
1. Pursuant to the "Selling Shareholders" section of the
Registration Statement, please state your or your organization's name exactly as
it should appear in the Registration Statement:
2. Please provide the number of shares that you or your organization
will own immediately after Closing, including those Shares purchased by you or
your organization pursuant to this Purchase Agreement and those shares purchased
by you or your organization through other transactions:
3. Have you or your organization had any position, office or other
material relationship within the past three years with the Company or its
affiliates?
Yes No
--- ---
If yes, please indicate the nature of any such relationships below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX II
Attention:
PURCHASER'S CERTIFICATE OF SUBSEQUENT SALE
The undersigned, [an officer of, or other person duly authorized by]
___________________________________________________ hereby certifies that he/she
[fill in official name of individual or institution]
[said institution] is the Purchaser of the shares evidenced by the attached
certificate, and as such, sold such shares on __________ in accordance with
[date]
Registration Statement number _________________________________________________,
[fill in the number of or otherwise identify Registration Statement]
the Securities Act of 1933, as amended, and any applicable state securities or
blue sky laws and the requirement of delivering a current prospectus by the
Company has been complied with in connection with such sale.
Print or Type:
Name of Purchaser
(Individual or
Institution):
----------------------------------
Name of Individual
representing
Purchaser (if an
Institution)
----------------------------------
Title of Individual
representing
Purchaser (if an
Institution):
----------------------------------
Signature by:
Individual Purchaser
or Individual repre-
senting Purchaser:
----------------------------------
<PAGE>
EXHIBIT A
[Form of Closing Opinion of Counsel to the Company and the Operating
Partnership]
January __, 1998
Union Bank of Switzerland
London Branch
[Address]
Ladies and Gentlemen:
We have acted as counsel to Prentiss Properties Trust, a Maryland real
estate investment trust (the "Company"), and Prentiss Properties Acquisition
Partners, L.P., a Delaware limited partnership (the "Operating Partnership") in
connection with (i) the issuance and sale by the Company of [Number] shares of
the Company's common stock, par value $.01 per share ("Common Shares"), pursuant
to that certain Purchase Agreement, dated January __, 1998 (the "Purchase
Agreement"), by and among the Company, the Operating Partnership and Union Bank
of Switzerland, London Branch, acting through its agent UBS Securities LLC,
(the "Purchaser") and (ii) the forward stock purchase transaction evidenced by
the letter agreement, dated January __, 1998 (the "Confirmation") among the
Company, the Operating Partnership and the Purchaser. This opinion is being
rendered to you pursuant to Section 4.17 of the Purchase Agreement in connection
with the Closing of the sale of the Shares. Capitalized terms not otherwise
defined in this opinion have the meaning given them in the Purchase Agreement.
In connection with the opinions expressed herein we have made such
examination of matters of law and of fact as we considered appropriate or
advisable for purposes hereof. As to matters of fact material to the opinions
expressed herein, we have relied upon the representations and warranties as to
factual matters contained in and made by the Company and the Operating
Partnership pursuant to the Purchase Agreement and upon certificates and
statements of government officials and of officers of the Company and the
Operating Partnership. We have also examined originals or copies of such
corporate documents or records of the Company and the Operating Partnership as
we have considered appropriate for the opinions expressed herein. We have
assumed for the purposes of this opinion that the signatures on documents and
instruments examined by us are authentic, that each document is what it purports
to be, and that all documents submitted to us as copies conform with the
originals, which facts we have not independently verified.
<PAGE>
Union Bank of Switzerland
London Branch
[Date]
Page 2
In rendering this opinion we have also assumed that the Purchase Agreement
and the Confirmation have each been duly and validly executed and delivered by
the other parties to such agreements and constitute valid, binding and
enforceable obligations of such other parties.
In our capacity as counsel to the Company and the Operating Partnership, we
have examined, among other things, originals, or copies identified to our
satisfaction as being true copies, of the following: [LIST]
This opinion relates solely to the laws of the State of _____________, and
the federal securities law of the United States, and we express no opinion with
respect to the effect or applicability of the laws in other areas or of other
jurisdictions.
Our opinion in paragraph 4 below is subject to the effect of bankruptcy,
insolvency, moratorium, fraudulent conveyance and similar laws relating to or
affecting creditors' rights generally and we express no opinion with respect to
the application of equitable principles in any proceeding, whether at law or in
equity.
Based upon the foregoing and subject to the limitations, exceptions,
qualifications and assumptions set forth herein, we are of the opinion that as
of the date hereof:
1. The Company is its jurisdiction of incorporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, and the Company has the requisite corporate power and authority
to own its properties and to conduct its business as presently conducted.
[include the Operating Partnership]
2. The Purchase Shares and the Additional Shares have been duly
authorized and, when issued and delivered by the Company in accordance with and
subject to the terms of the Purchase Agreement or the Confirmation (as the case
may be), will be validly issued, nonassessable and fully paid, and are not
subject to any preemptive or similar rights. [include the Operating Partnership]
3. The Company has the power and authority to execute, deliver and
perform the Purchase Agreement and the Confirmation, including issuing, selling
and delivering the Purchase Shares and Additional Shares as contemplated
thereby. [include the Operating Partnership]
4. Each of the Purchase Agreement and the Confirmation have been duly
authorized, executed and delivered by the Company and is a valid and binding
obligation of the Company, enforceable in accordance with its terms. [include
the Operating Partnership]
5. The execution and delivery by the Company of, and the performance by
the Company of its obligations under, the Purchase Agreement and the
Confirmation will not contravene any provision of applicable law or the
declaration of trust or bylaws of the Company,
<PAGE>
Union Bank of Switzerland
London Branch
[Date]
Page 3
or, to the best of our knowledge, any judgment order or decree of any
governmental body, agency or court having jurisdiction over the Company or any
of its property, or, to the best of our knowledge, constitute a breach or
default under any agreement or other instrument binding upon the Company and
filed as an exhibit to the Company's filings with the Securities and Exchange
Commission. [include the Operating Partnership]
6. No consent, approval, authorization or order of or qualification with
any governmental body or agency is required for the performance by the Company
of its obligations under the Purchase Agreement and the Confirmation, except
such as may be required by the securities or blue sky laws of the various states
(on which we express no opinion) in connection with the purchase and sale of the
Shares and except such as may be required in connection with providing the
registration statements contemplated by the Purchase Agreement or the
Confirmation. [include the Operating Partnership]
7. To the best of our knowledge, and except as disclosed in the Company's
public filings with the Securities and Exchange Commission, there is no action,
suit or proceeding pending or threatened in writing against the Company, at law
or in equity, or before any court or governmental agency or instrumentality
which, if resolved against the Company, may materially adversely affect the
financial or business condition of the Company or would prevent the Company from
entering into or performing its obligations under the Purchase Agreement or the
Confirmation.
8. The authorized capital stock of the Company conforms as to legal
matters in all material respects under the heading ["Capitalization"] in the
Company's public filings with the Securities and Exchange Commission, and the
form of certificate used to evidence the Shares complies in all material
respects with all applicable statutory requirements. The outstanding shares of
Common Stock of the Company have been duly and validly authorized and issued,
and are, to our knowledge, fully paid and nonassessable.
Our opinions expressed above are specifically subject to the following
limitations, exceptions, qualifications and assumptions:
(A) We are not called upon to express, and do not express, any view,
opinion or belief as to the financial statements, schedules, statistical data
and other financial data contained in any filings with the Securities and
Exchange Commission.
(B) We express no opinion as to the Company's compliance or noncompliance
with applicable federal or state antitrust statutes, laws, rules and
regulations.
(C) We express no opinion concerning the past, present or future fair
market value of any securities.
This opinion is rendered solely for your benefit in connection with the
Purchase Agreement and the Confirmation and may not be delivered to, quoted or
relied upon by any
<PAGE>
Union Bank of Switzerland
London Branch
[Date]
Page 4
person other than you, or for any other purpose, without our prior written
consent. Our opinion is expressly limited to the matters set forth above and we
render no opinion, whether by implication or otherwise, as to any other matters
relating to the Company or the Operating Partnership. We assume no obligation to
advise you of facts, circumstances, events or developments which hereinafter may
be brought to our attention and which may alter, affect or modify the opinions
expressed herein.
Very truly yours,
<PAGE>
EXHIBIT B
Opinion Matters for Additional Registration Statements
[opinion paragraphs to be delivered in connection with resale registration
statements]
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation, and the
Company has the requisite corporate power and authority to own its properties
and to conduct is business as presently conducted. [include the Operating
Partnership]
2. The Additional Shares have been duly authorized and are validly
issued, nonassessable and fully paid, and are not subject to any preemptive or
similar rights.
3. The Registration Statement has been declared effective under the
Securities Act; to our knowledge, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that purpose
have been instituted or threatened; and the Registration Statement, the Final
Prospectus, and each amendment thereof or supplement thereto (except for the
financial statements, schedules and the notes thereto and the other financial
data included or incorporated by reference therein, as to which we express no
opinion) comply as to form in all material respects with the requirements of the
Securities Act and the Exchange Act and the respective rules of the Commission
thereunder.
While we have not verified, and are not passing upon and do not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement or Final Prospectus, we have
participated in reviews and discussions in connection with the preparation of
the Registration Statement and Final Prospectus, and advise you that, in the
curse of such reviews and discussions, nothing has come to our attention which
would lead us to believe (i) that the Registration Statement at the time it
became effective (except for the financial statements and the notes thereto,
schedules, statistical data and the other financial data included or
incorporated by reference therein, as to which we express no belief) contained
any untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein not misleading or (ii) that the Final
Prospectus on the date thereof or on the date of this opinion (except for the
financial statements and the notes thereto and the other financial data included
or incorporated by reference therein, as to which we express no belief)
contained any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
<PAGE>
EXHIBIT 1.2
FORWARD STOCK CONTRACT
To: Prentiss Properties Trust
3890 West NW Highway, Suite 400
Dallas, TX 75220
Prentiss Properties Acquisition Partners, L.P.
3890 West NW Highway, Suite 400
Dallas, TX 75220
Attn.: Michael A. Ernst
From: Union Bank of Switzerland, London Branch
c/o UBS Securities LLC, as agent
299 Park Avenue
New York, NY 10171
Date: 2 February 1998
Ladies and Gentlemen,
The purpose of this letter agreement (this "Confirmation") is to confirm the
terms and conditions of the Transaction entered into between us on the Trade
Date specified below (the "Transaction"). This Confirmation constitutes a
"Confirmation" as referred to in the ISDA Master Agreement specified below.
This Confirmation supplements, forms a part of, and is subject to, the ISDA
Master Agreement dated as of 2 February 1998, as amended and supplemented from
time to time (the "Agreement"), between you and us. All provisions contained in
the Agreement govern this Confirmation except as expressly modified below. In
the event of any inconsistency between the provisions of that agreement and this
Confirmation, this Confirmation will prevail for the purposes of this
Transaction.
The Agreement and each Confirmation thereunder will be governed by and construed
in accordance with the laws of the State of New York without reference to choice
of law doctrine.
I. THE TRANSACTION
Prentiss Properties Trust (the "Trust") and Prentiss Properties Acquisition
Partners, L.P. ("PPAP") (such entities collectively referred to herein as the
"Company") the Union Bank of Switzerland, London Branch ("UBS") acting through
UBS Securities LLC as its agent for each purchase or sale of Securities ("UBS
LLC"), hereby agree to make the payments and deliveries provided for in Sections
III., IV. and V. hereof, all on the terms more particularly specified herein
(this "Confirmation").
II. DEFINITIONS
For the purposes of this Confirmation, the following terms shall have the
meanings set opposite:
Adjustments: In the event of:
(a) a subdivision, consolidation or reclassification of the
Common Shares, or a free distribution or dividend of any Common
Shares to all existing holders of Common Shares by way of bonus,
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FORWARD STOCK CONTRACT
capitalization or similar issue;
(b) a distribution or dividend to all existing
holders of Common Shares of (i) additional Common
Shares or (ii) other share capital or securities
granting right to payment of dividends and/or the
proceeds of liquidation of the Company equally or
proportionally with such payments to holders of
Common Shares or (iii) any other type of
securities, warrants or other assets, in any case
for payment (cash or otherwise) at less than the
prevailing market price; or
(c) any other event that has a diluting or
concentrative effect on the value of the
Underlying Shares,
an adjustment shall thereupon be effected to the
Forward Price and/or the Underlying Shares at the
time of such event with the intent that following
such adjustment, the value of this Transaction is
economically equivalent to the value immediately
prior to the occurrence of the event causing the
adjustment.
Calculation Agent: UBS, whose calculations and determinations shall
be made in a commercially reasonable manner and
shall be binding absent manifest error.
Calculation Period: Means each period commencing on and including:
(i) in the case of the first Calculation Period,
the Effective Date and ending on but excluding
the first Interim Settlement Date, and
(ii) for each period thereafter, an Interim
Settlement Date and ending on but excluding the
earlier of the next following Interim Settlement
Date or Day S.
If there is a Partial Settlement, then (i) the
Calculation Period for the Settlement Shares
covered by such Partial Settlement Share shall
end on Day S for such Partial Settlement and (ii)
the Calculation Period for the remaining
Underlying Shares shall be determined without
regard to such Partial Settlement.
Collateral Release Shares: Common Shares delivered pursuant to Section V.C.
Collateral Valuation Date: In the event that the Company posts cash
collateral pursuant to Section V. or VI. any day
upon which the amount of collateral required is
calculated.
Common Shares: common shares of Prentiss Properties Trust
(ticker "PP"), par value $0.01.
Compounding Period: Means each period commencing on and including:
(i) in the case of the first Compounding Period,
the Effective Date
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FORWARD STOCK CONTRACT
and ending on but excluding the first Reset Date, and
(ii) for each period thereafter, a Reset Date and
ending on (but excluding) the earlier of the next
following Reset Date or Day S.
If there is a Partial Settlement, then (i) the
Compounding Period for the Settlement Shares covered
by such Partial Settlement shall end on Day S for such
Partial Settlement and (ii) the Compounding Period for
the remaining Underlying Shares shall be determined
without regard to such Partial Settlement.
Customer Account: means the account established in favor of the Company
pursuant to the Customer Agreement dated the date
hereof between the Company and UBS Securities LLC
Daycount Fraction: Actual/360
Day S: For Settlement pursuant to Section III. or VI. or
Interim Net Stock Settlement pursuant to Section IV.,
the day upon which settlement activities shall begin.
Dividend Amount: A) Means, on each Reset Date or Day S an amount in
U.S. Dollars equal to the sum of all cash
distributions paid on a single Common Share during the
relevant Compounding Period; and
B) Separately, and not included in Dividend Amount,
UBS will cause UBS LLC to pay to the Company on the
Business Day after the relevant dividend payment date
declared by the Company's Board of Directors, (i) all
cash dividends or cash distributions on Common Shares
that have gone ex-dividend, but on which such
dividends or cash distributions have not been paid,
prior to the end of the final Compounding Period for
any settlement, based on a number of Common Shares
equal to the number of Settlement Shares for such
settlement, (ii) all cash dividends or cash
distributions received by UBS at any time, on Common
Shares delivered by the Company pursuant to Section
III. E. that have gone ex-dividend after Day S but
prior to the end of the Unwind Period for any
settlement, and (iii) all cash dividends or cash
distributions paid on Common Shares held in the
Customer Account.
Effective Date: 2 February 1998
Equity Capitalization: At any time, the product of Common Shares outstanding
(excluding operating partnership units) times the
Market Price of the Underlying Shares.
Exchange Trading Day: Each day on which the Relevant Exchange is open for
trading.
Forward Price: On each Reset Date or Day S, the Forward Price shall
be determined for such day by:
a) multiplying the Initial Price for the Compounding
Period by the
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FORWARD STOCK CONTRACT
sum of
1 plus the product of the appropriate Daycount
Fraction times the sum of (i) LIBOR, determined
as of the previous Reset Date or, in the case of
the first Reset Date, the Trade Date for a
Designated Maturity of 3 months, plus (ii)
Spread; and
b) subtracting the Dividend Amount at that date;
provided, however that if the Company delivers
Interim Settlement Shares pursuant to Section IV.
or Collateral Release Shares pursuant to Section
V.C. during any Calculation Period, the Forward
Price for purposes of determining the Initial
Price for the first Compounding Period during
such Calculation Period, shall be adjusted to a
price equal to the closing price of the Common
Shares on the Exchange Trading Day immediately
prior to the most recent Interim Settlement Date,
adjusted up for any positive result or down for
any negative result of the following formula:
(i) the Interim Settlement Amount for the most
recent Interim Settlement Date,
minus,
(ii) the product of (a) the number of Interim
Settlement Shares or Collateral Release Shares,
as the case may be, times (b) the average closing
price of the Common Shares on the five (5)
Exchange Trading Days immediately following the
receipt of the Interim Settlement Shares by UBS
pursuant to Section IV. or the Collateral Release
Shares pursuant to Section V.C.,
such result divided by,
(iii) the number of Underlying Shares.
Initial Price: Means, for each Common Share,
a) for the Compounding Period ending on the first
Reset Date, an amount in U.S. Dollars equal to
$27.00, and
b) for each subsequent Reset Date, the Forward
Price as calculated on or adjusted as of the
prior Reset Date.
Interim Settlement Dates: each Reset Date.
Interim Settlement Amount: on any Interim Settlement Date, the product of
(a) the number of Underlying Shares, and (b) the
difference between the Forward Price and the
closing sale price of the Common Shares on the
Relevant Exchange on the Exchange Trading Day
immediately prior to such Interim Settlement
Date.
Interim Settlement Shares: Means the number of Common Shares equal to (i)
105% times (ii) the
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FORWARD STOCK CONTRACT
Interim Settlement Amount divided by (iii) the
closing sale price of the Common Shares on the
Relevant Exchange on the Exchange Trading Day
immediately prior to such Interim Settlement
Date.
LIBOR: "LIBOR" means the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of
1%) appearing on Dow Jones Markets Page 3750 (or
any successor page) as the London interbank
offered rate for deposits in USD at approximately
11:00 a.m. (London time) two (2) Business Days
prior to a Reset Date. If for any reason such
rate is not available, then the term "LIBOR"
shall mean, the rate per annum (rounded upwards,
if necessary, to the nearest 1/100 of 1%)
appearing on Reuters Screen LIBO Page as the
London interbank offered rate for deposits in USD
at approximately 11:00 a.m. (London time) two (2)
Business Days prior to a Reset Date; provided,
however, if more than one rate is specified on
Reuters Screen LIBO Page, then the applicable
rate shall be the arithmetic mean of all such
rates (rounded upwards, if necessary, to the
nearest 1/100 of 1%). For purposes of the First
reset Date LIBOR shall be 5.625%.
Line of Credit: Means the Credit Agreement, dated as of December
30, 1997, among Prentiss Properties Acquisition
Partners, L.P. ("PPAP"), Bank One, Texas, N.A.
and NationsBank of Texas, N.A., as the same may
be amended, restated or superseded from time to
time.
Mandatory Unwind Date: In the case of a Mandatory Unwind Event specified
in clause (i) of the definition thereof, 1
Exchange Trading Day after such Mandatory Unwind
Event occurs. In the case of a Mandatory Unwind
Event specified in clause (ii) of such provision,
the date specified in the notice delivered to the
Company (which date shall be at least 5 Business
Days after the date such notice becomes
effective).
Mandatory Unwind
Thresholds: Mandatory
Unwind Thresholds Unwind Share Limit
----------------- ------------------
$20.50 up to 40.0% of Underlying
Shares
$18.50 67.0%
$16.40 100.0%
$600,000,000 Equity
Capitalization 100.0%
Market Price: With respect to any security that is traded on a
Stock Exchange, means the average of the closing
sale prices on such Stock Exchange for such
security for the 10 Exchange Trading Days
immediately prior to the calculation date.
Maturity Date: One (1) year after the Effective Date, subject to
extension upon the written approval of UBS in its
sole discretion.
Maturity Placement Fee: 1.00%, based on the mechanics in Section III. E.
The parties may agree to alter the settlement
mechanics which may result in a different
Maturity Placement Fee.
Relevant Exchange: Means, with respect to any Exchange Trading Day,
the principal
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FORWARD STOCK CONTRACT
Stock Exchange on which the Common Shares are
traded on that day.
Reset Dates: 30 April 1998, 30 July 1998, 30 October 1998,
subject to adjustment in accordance with the
Modified Following Business Day convention.
Settlement Amount: The product of the Settlement Price times the
Settlement Shares.
Settlement Disruption Event: Means an event beyond the control of the parties
as a result of which The Depository Trust Company
("DTC") or any successor depository cannot effect
a transfer of the Settlement Shares or the Common
Shares. If there is a Settlement Disruption Event
on a Valuation Date, then the transfer of the
Common Shares that would otherwise be due to be
made by UBS LLC for the account of UBS or the
transfer of the Common Shares that would
otherwise be due to be made by the Company, as
applicable, on that date shall take place on the
first succeeding Exchange Trading Day on which
settlement can take place through DTC, provided
that if such a Settlement Disruption Event
persists for five consecutive Business Days, then
the Party obliged to deliver such Settlement
Shares shall use its best efforts to cause such
Shares to be delivered promptly thereafter to the
other Party in any commercially reasonable
manner.
Settlement Price: If Day S is a Reset Date, the Forward Price. If
Day S is not a Reset Date, the Forward Price
adjusted for LIBOR breakage adjustments (either
positive or negative) for the Settlement Shares
for the period from Day S to the next following
Reset Date. Any breakage adjustments shall be
calculated by the Calculation Agent in accordance
with the provisions for similar calculations set
forth in the Line of Credit.
Settlement Shares: The number of shares up to the full number of
Underlying Shares subject to settlement under
Section III. or VI.
Spread: 1.35% per annum. In the event the company's
securities or any securities of PPAP are rated
BBB- or the equivalent or higher, then on the
next Reset Date, this Spread will be adjusted to
equal the spread over LIBOR then provided for in
the Line of Credit, for the Company's unsecured
borrowing rate.
Stock Exchange: Means the New York Stock Exchange, the American
Stock Exchange or The NASDAQ Stock Market.
Stock Settlement
Unwind Price: The daily average closing sale price of the
Common Shares on the Relevant Exchange for the
Exchange Trading Days during the Unwind Period.
In the event of an extension of the Unwind Period
after the Unwind Period has commenced, such
average may be adjusted by the Calculation Agent,
in a commercially reasonable manner, to reflect
the effect if any of such extension.
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<PAGE>
FORWARD STOCK CONTRACT
Trade Date: 2 February 1998
UBS LLC: UBS Securities LLC
Unwind Period: In the event of Stock Settlement or Net Stock
Settlement, such number of Exchange Trading Days
as the Company shall specify in a Settlement
Notice (which shall not be more than 60; subject
to change based on mutual agreement) beginning on
Day S; provided that such period may be extended
upon at least two (2) Exchange Trading Days
written notice by either the Company or UBS for
up to an additional 10 Exchange Trading Days and
shall also be extended for a number of Exchange
Trading Days equal to the number of Exchange
Trading Days during which any Market Disruption
Event occurs during the Unwind Period.
Underlying Shares: 1,100,000 Common Shares of the Company (ticker
"PP"), subject to adjustment in the event of
Partial Settlements.
Valuation Date: In the case of determining any Physical
Settlement value, Net Stock Settlement Shares or
Stock Settlement Shares, Day S, the day preceding
Day S and all Exchange Trading Days during the
Unwind Period respectively; in the case of
determining any Preliminary Stock Settlement
Shares or Preliminary Net Stock Settlement
Shares, the Exchange Trading Day immediately
preceding Day S; in the case of determining the
Interim Settlement Amount and related
calculation, the day prior to the Interim
Settlement Date, and the five (5) Exchange
Trading Days following receipt of Interim
Settlement Shares by UBS.
Valuation Time: 4:00 pm EST, or in the event the Relevant
Exchange closes early, such closing time.
III. SETTLEMENT
A. NOTICE AND PROCEDURES
1. The Company may on any Exchange Trading Day up to and including the
Maturity Date, upon the giving of at least five (5) Business Days
telephonic notice to UBS (the "Settlement Notice"), settle all or part of
this Transaction. The Settlement Notice shall specify:
(i) the Settlement Shares,
(ii) the settlement method (Physical, Stock or Net Stock Settlement,
as such methods are described below);
(iii) the number of Exchange Trading Days in the Unwind Period, and
(iv) Day S, which must be an Exchange Trading Day; provided however,
that if Physical or Net Stock Settlement is selected and in UBS'
reasonable judgement the settlement of the Settlement Shares would
potentially violate or contravene any legal or regulatory prohibition
or requirement applicable to UBS or cause UBS to contravene any
established UBS corporate policy or compliance policy of general
7
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FORWARD STOCK CONTRACT
application which relates to any legal or regulatory prohibition or
requirement applicable to UBS (other than any corporate policy
limiting the amount of UBS's investment in another entity) then UBS
shall at least three (3) Business Days prior to the proposed Day S,
notify the Company telephonically (confirmed by writing) of any such
impediment and its estimate of the period during which such impediment
will preclude UBS' ability to settle all or part of this Transaction.
The Settlement Notice shall be effective only if the notice
requirements specified above are fulfilled; provided, that if no
settlement method is specified, then the settlement method shall be
deemed to be Physical Settlement and provided further that the Company
may upon telephonic notice to UBS at least one (1) Exchange Trading
Day prior to the proposed Day S withdraw any Settlement Notice.
In the case of any Partial Settlement, following such settlement the number
of Underlying Shares to which this Transaction shall relate shall be
adjusted, as of Day S, by subtracting the number of Settlement Shares from
the number of Underlying Shares (as the same may have been adjusted prior
to such Partial Settlement) immediately prior to such Day S. The Settlement
Shares shall not be subject to forward accretion and shall be treated
separately from the remaining Underlying Shares during any Unwind Period.
2. On Day S, the Settlement Price for the Settlement Shares and the Settlement
Amount shall be determined for Day S.
3. The Settlement Amount shall be settled pursuant to the settlement method
(B, C, or D of this section III.) selected by the Company in its sole
discretion.
4. If settlement with respect to the Settlement Shares shall occur pursuant to
Section III.A.1. (but not as a result of a Mandatory Unwind Event) on or
before the 270th day following the Effective Date, then the Settlement
Price for purposes of such settlement shall be increased by any positive
amount, calculated by UBS as follows:
Spread x Forward Price x (270 - calendar days since Trade Date)
--------------------------------------
360
provided, that such increase shall not apply to up to 25% of the Underlying
Shares to be settled on or after the 90th day following the Effective Date
and up to 50% of the Underlying Shares to be settled on or after the 180th
day following the Effective Date.
5. It shall be a condition precedent to any right of the Company to elect
Stock Settlement (III. C. below) or Net Stock Settlement (III. D. below),
that the Company must (i) notify UBS of such election at least 5 Business
Days prior to Day S and (ii) prior to Day S, cause to be filed with the
Securities and Exchange Commission (the "Commission") and cause to become
effective under the Securities Act of 1933, as amended (the "Securities
Act") a registration statement that results in UBS being able to resell all
Common Shares to be delivered by the Company to UBS LLC for the account of
UBS in effecting such Stock Settlement or Net Stock Settlement without
further registration under the Securities Act of 1933, as amended, such
registration statement to include one or more preliminary prospectuses,
prospectuses, and any amendments and supplements thereto such that any
preliminary prospectus or prospectus, as amended or supplemented, shall not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they are
made. In addition, the Company shall not deliver any Common Shares to UBS
LLC for the account of UBS pursuant
8
<PAGE>
FORWARD STOCK CONTRACT
to Sections IV. or V.C. below unless at the time of such delivery a
registration statement has become effective under the Securities Act that
results in UBS being able to resell such Common Shares without further
registration under the Securities Act, such Registration Statement to
include one or more preliminary prospectuses, prospectus and any amendments
or supplements thereto such that any preliminary prospectus or prospectus,
as amended or supplemented, shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances under which they are made. The Company further agrees
that it will cause any such Registration Statement referred to in this
paragraph 5 of Section III.A. to remain in effect until the earliest of the
date on which (i) all Common Shares issued pursuant hereto and not required
to be delivered to the Company hereunder have been sold by UBS LLC for the
account of UBS and UBS agrees to notify the Company of such fact, within
two (2) Business Days of its occurrence, (ii) UBS LLC for the account of
UBS is able to sell the Common Shares subject thereto under Rule 144(k), or
(iii) UBS has advised the Company that it no longer requires that such
registration statement be effective; provided, however, that in no event
shall the Company be obligated to keep such Registration Statement
effective for more than 10 Exchange Trading Days after the end of the
applicable Unwind Period.
B. PHYSICAL SETTLEMENT
If the Company elects Physical Settlement, the Company shall settle by
delivering cash in an amount equal to the Settlement Amount in exchange for
the Settlement Shares ("Physical Settlement") on the Exchange Trading Day
immediately succeeding Day S. UBS shall cause UBS LLC for the account of
UBS to deliver the Settlement Shares to the Company on the Exchange Trading
Day immediately succeeding Day S upon receipt of such Physical Settlement.
C. STOCK SETTLEMENT
If the Company elects to settle the Settlement Amount by delivering Common
Shares in exchange for the Settlement Shares ("Stock Settlement"), the
number of Common Shares to be delivered (the "Stock Settlement Shares")
shall be equal to (a) the Settlement Amount divided by (b) the Stock
Settlement Unwind Price. The mechanics for settlement are set forth in
Section III. E. below and Section VI.
D. NET STOCK SETTLEMENT
If the Company elects to settle the Settlement Amount on a net stock basis
("Net Stock Settlement"), the number of net stock settlement shares (the
"Net Stock Settlement Shares") shall equal:
i) the number of Settlement Shares, times
ii) the Settlement Price minus the Stock Settlement Unwind Price,
divided by
iii) the Stock Settlement Unwind Price.
If such calculation yields a negative number, this shall indicate the
number of Common Shares to be delivered from UBS LLC for the account of UBS
to the Company. The mechanics for settlement are set forth in Section III.
E. below and Article VI. (This section
9
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FORWARD STOCK CONTRACT
does not apply for purposes of Interim Net Stock Settlement.)
E. STOCK AND NET STOCK SETTLEMENT MECHANICS
1. Preliminary Stock Settlement:
If the Company has chosen Stock Settlement, the Company shall deliver
to UBS LLC for the account of UBS, by 11:00 a.m. on Day S, that number
of Common Shares (the "Preliminary Stock Settlement Shares"), equal to
the product of (i)(a) the Settlement Amount divided by (b) the closing
price of the Common Shares on the Exchange Trading Day immediately
preceding Day S, times (ii) 110%. Upon receipt of the Preliminary
Stock Settlement Shares, UBS will cause UBS LLC to deposit the
Settlement Shares in the Company's Customer Account.
2. Preliminary Net Stock Settlement:
If the Company has chosen Net Stock Settlement and if the Settlement
Price exceeds the closing price of the Common Shares on the Exchange
Trading Day immediately preceding Day S, the Company shall deliver to
UBS LLC for the account of UBS by 11:00 a.m. on Day S, that number of
Common Shares (the "Preliminary Net Stock Settlement Shares") equal to
(i)(a) the number of Settlement Shares times (b) the difference
between the Settlement Price and the closing price of the Common
Shares on the Exchange Trading Day immediately preceding Day S divided
by (ii) the closing price of the Common Shares on the Exchange Trading
Day immediately preceding Day S times (iii) 125%. If the closing price
of the Common Shares on the Exchange Trading Day immediately preceding
Day S exceeds the Settlement Price, the Company shall not be required
to deliver any shares to UBS LLC for the account of UBS under this
subsection III.E.2.
3. By 11:00 a.m. on every fifth (5th) Exchange Trading Day (other than
the final Exchange Trading Day) during the Unwind Period and on the
Business Day following the final Exchange Trading Day of the Unwind
Period:
A. For Stock Settlement:
Stock Settlement Shares shall be calculated as if such Exchange
Trading Day were Day S, except that (a) there shall be no
recalculation of the Settlement Amount and (b) for purposes of
calculating the Stock Settlement Unwind Price, the Unwind Period shall
be deemed to have ended on the Exchange Trading Day for which the
calculation is made.
(i) if (a) Stock Settlement Shares (calculated as set forth above) are
greater than (b) the sum of (x) Preliminary Stock Settlement Shares
plus (y) any shares previously delivered pursuant to this subparagraph
(i), then the Company shall deliver that number of Common Shares equal
to the difference between (a) and (b) to UBS LLC for the account of
UBS, and
(ii) as of the final day of the Unwind Period, if (a) the sum of (x)
Preliminary Stock Settlement Shares plus (y) any shares previously
delivered pursuant to this settlement under subparagraph (i), above is
greater than Stock Settlement Shares, then UBS LLC, for the account of
UBS, shall deliver that number of Common Shares equal to
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FORWARD STOCK CONTRACT
the difference between (a) and (b) above to the Company's Customer Account,
B. For Net Stock Settlement:
Net Stock Settlement Shares shall be calculated as if such Exchange Trading
Day were Day S except that (a) there shall be no recalculation of the
Settlement Amount and (b) for purposes of calculating the Stock Settlement
Unwind Price, the Unwind Period shall be deemed to have ended on the
Exchange Trading Day for which the calculation is made.
(i) if (a) Net Stock Settlement Shares are greater than (b) the sum of (x)
Preliminary Net Stock Settlement Shares plus (y) any shares previously
delivered pursuant to this settlement under this subparagraph (i), then the
Company shall deliver Common Shares (which Common Shares may be delivered
from its Margin Account) equal in number to the difference between (a) and
(b) to UBS LLC for the account of UBS, or
(ii) as of the final day of the Unwind Period, if (a) the sum of (x)
Preliminary Net Stock Settlement Shares plus (y) any shares previously
delivered pursuant to this settlement under subparagraph (i), above is
greater than (b) Net Stock Settlement Shares, then UBS LLC, for the account
of UBS, shall deliver that number of Common Shares equal to the difference
between (a) and (b) above to the Company's Customer Account.
4. The Company shall cause all shares delivered by it to UBS LLC for the
account of UBS to be delivered within two Exchange Trading Days following
its receipt of a statement showing the calculation of the number of shares
to be delivered and to be fully and effectively registered under the
Securities Act (as provided in Section III.A.5. above).
5. As of 11:00 a.m. on the Exchange Trading Day following the final Exchange
Trading Day of the Unwind Period, UBS LLC for the account of UBS shall (i)
release all claims to Common Shares held in the Company's Customer Account,
including any Settlement Shares delivered pursuant to Preliminary Stock
Settlement (Section III.E.1. above), and deliver all such Common Shares
to the Company with the dollar value of all fractional shares settled in
cash and (ii) release to the Company all Cash Collateral held by UBS.
6. In the event of Stock or Net Stock Settlement pursuant to Section III.C. or
III.D., the Company shall pay an unwind accretion fee, in cash or stock,
calculated in accordance with the following formula:
Settlement Amount x (days in Unwind Period) x (1 month LIBOR + Spread)
----------------- ---------------------
2 360
7. In the event of Stock or Net Stock Settlement pursuant to Section III.C. or
III.D., the Company shall pay a placement fee to UBS LLC for the account of
UBS calculated as:
Settlement Amount x Maturity Placement Fee%
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FORWARD STOCK CONTRACT
IV. INTERIM NET STOCK SETTLEMENT
On each Interim Settlement Date, if the Interim Settlement Shares is a
positive number, then on the Business Day following the fifth (5th)
Exchange Trading Day thereafter the Company shall deliver a number of
Common Shares to UBS LLC for the account of UBS equal to the Interim
Settlement Shares; provided, however, that if the Company is restricted by
law or regulation or self-regulatory requirements or related policies and
procedures, whether or not such requirements, policies or procedures are
imposed by law directly or have been voluntarily adopted by the Company to
insure compliance with applicable laws, or in its reasonable judgement is
otherwise unable or unwilling to deliver registered Common Shares, the
Company shall deliver Cash Collateral to UBS as described in Section V.B.
below.
V. COLLATERAL PROVISIONS
A. If the Company fails to deliver an effective resale registration statement
within 90 days of the Trade Date, then until an effective resale
registration statement is provided and an Interim Net Stock Settlement can
be effected, the Company shall deliver Cash Collateral to a Cash Collateral
Account at UBS in an amount equal to any Interim Settlement Amount due to
UBS. If Cash Collateral is delivered pursuant to this Section V.A., then
until an Interim Net Settlement can be effected or the transaction is
settled on a Physical Settlement basis or a registration statement becomes
effective, the Interim Settlement Amount shall be recalculated twice per
month thereafter (each such date being a Collateral Adjustment Date) until
an effective resale registration statement is delivered and the amount of
Cash Collateral shall be adjusted to equal such recalculated Interim
Settlement Amount.
B. In the event that the Company does not deliver Common Shares pursuant to
Paragraph IV. for one or more of the reasons described in the provision at
the end of such paragraph, then, unless Cash Collateral has been delivered
pursuant to Section V.A. above, the Company shall deliver Cash Collateral
in an amount equal to the Interim Settlement Amount to a Cash Collateral
Account at UBS as promptly as practicable, but not later than the Business
Day following the fifth (5th) Exchange Trading Day after the applicable
Interim Settlement Date.
C. If the Company has delivered Cash Collateral to UBS pursuant to paragraphs
A. or B. above, at the Company's option, the Company may deliver freely
saleable registered Common Shares to UBS equal in saleable market value,
based on closing sale prices of Common Shares on the Relevant Exchange on
the Exchange Trading Day prior to such delivery, to the value of the Cash
Collateral held in the Cash Collateral Account at UBS. Simultaneously with
the delivery of such Common Shares, UBS shall release all claims to Cash
Collateral held in the Cash Collateral Account and deliver such amounts to
the Company by 11:00 a.m. on the second (2nd) subsequent Exchange Trading
Day. On any subsequent Interim Settlement Date, if Cash Collateral is held
by UBS, UBS shall deliver to the Company by 11:00 a.m. on the second (2nd)
subsequent Exchange Trading Day after such Interim Settlement Date, the
amount by which the amount of Cash Collateral exceeds the Interim
Settlement Amount.
12
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FORWARD STOCK CONTRACT
D. Security Interest
The Company hereby pledges to UBS, as security for its obligations herein,
a first priority continuing security interest in, lien on and right of set-
off against all Cash Collateral Paid to UBS, or UBS Securities LLC, as its
agent. Upon release to the Company by UBS of such Cash Collateral, the
security interest and lien granted hereunder will be released immediately,
and, to the extent possible, without any further action by either party.
E. Representations
The Company represents to UBS (which representations will be deemed to be
repeated as of each date that the Company Pays Cash Collateral to UBS)
that:
(i) it has the power to grant a security interest in and lien on any Cash
Collateral it Pays to UBS and has taken all necessary actions to authorize
the granting of that security interest and lien;
(ii) it is the sole owner of or otherwise has the right to Pay all Cash
Collateral to UBS hereunder, free and clear of any security interest, lien,
encumbrance or other restrictions other than the security interest and lien
created hereby;
(iii) upon Payment of any Cash Collateral to UBS under the terms of this
Confirmation, UBS will have a valid and perfected first priority security
interest therein (assuming that any third-party financial intermediary or
other entity not within its control involved in the transfer of the Cash
Collateral gives the notices and takes the action required of it under
applicable law for perfection of that interest), and
(iv) the performance by it of its obligations under this Confirmation will
not result in the creation of any security interest, lien or other
encumbrance on any Cash Collateral other than the security interest and
lien granted hereunder.
F. Return of Collateral
(i) On each Interim Settlement Date or Collateral Adjustment Date the
Interim Settlement Amount shall be calculated and compared to the existing
cash Collateral as of the prior Exchange Trading Day. No later than 11:00
a.m. on the second (2nd) subsequent Exchange Trading Day the parties shall
exchange payments such that the Cash Collateral amount will then equal the
calculated Interim Settlement Amount.
(ii) Any Cash Collateral held by UBS or UBS Securities LLC, as agent,
during settlement of the Transaction pursuant to Sections III. or VI. shall
be held until the end of the applicable Unwind Period and shall be released
upon the final Settlement Date for that Unwind Period.
G. Interest on Cash Collateral
Any Cash Collateral Paid in USD and held by UBS shall accrue interest at 1
month LIBOR (LIBOR shall be established on the collateral delivery date).
In the event that Collateral Release Shares are delivered and the Forward
Price is adjusted to reflect such delivery, no interest will be paid on the
collateral returned by UBS to the Company.
13
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FORWARD STOCK CONTRACT
H. Definitions related to Collateral Provisions
"Cash Collateral" means the amount of cash, cash equivalents or letters of
credit issued in favor of UBS by one or more banks having a credit rating
with respect to their unsecured debt of at least A- or the equivalent and
having expiration dates not less than 70 Exchange Trading Days after the
Maturity Date, all denominated in USD, if any, Paid by the Company to or
for the benefit of UBS, acting through UBS Securities LLC as its agent,
pursuant to sections IV. or V. of this Confirmation.
"Collateral Adjustment Date" means any day upon which the amount of Cash
Collateral required pursuant to Section V.A. of this Confirmation is
calculated.
"Local Business Day" means a day on which commercial banks in New York, New
York are open for business (including dealings in foreign exchange).
"Paid", "Pays" or "Payment" means payment in same day funds in the same
manner provided for payments to be made to UBS, or UBS Securities LLC as
its agent under this Forward Stock Contract.
VI. CERTAIN COVENANTS AND OTHER PROVISIONS
Ability to Settle in Stock: As of the date hereof, the Company has not, and
after the date hereof, the Company will not,
enter into any obligation that would
contractually prohibit the Company from Stock
Settlement of any shares under this Agreement.
Condition Precedent to
Physical Settlement: It shall be a condition precedent to any right of
the Company to elect Physical Settlement, that
the Company must not more than 180 days prior to
such Day S have completed the private placement
or public offering of such number of Common
Shares or any security that may be converted,
exchanged or exercised into Common Shares, having
such initial purchase price so as to provide the
Company with net cash proceeds in an amount not
less than the Settlement Amount.
Joint and Several Liability: All obligations of the Trust or PPAP hereunder
shall be joint and several obligations of the
Trust and PPAP.
Mandatory Unwind Event: If at any time prior to the Maturity Date:
(i) the average closing price on the Relevant
Exchange of the Common Shares on any three (3)
consecutive Exchange Trading Days, or the Equity
Capitalization, is equal to or less than any of
the Mandatory Unwind Thresholds, then such day
shall be declared a Reset Date, and UBS shall
have the right, upon written notice to the
Company, to require the parties to settle all or
a portion of the Transaction (up to the
cumulative Unwind Share Limit for the
corresponding Mandatory Unwind Threshold) on the
Mandatory Unwind Date pursuant to the settlement
procedures set forth in Section III. above,
Once a Mandatory Unwind Event has occurred, if
the trading price of
14
<PAGE>
FORWARD STOCK CONTRACT
the Common Shares is less than a lower Mandatory
Unwind Threshold, UBS shall have the right upon
providing written notice to the Company, to require
the parties to settle on the Mandatory Unwind Date
pursuant to Section III. above, all or a portion of
the Transaction, up to a number of Common Shares equal
to the number of Underlying Shares multiplied by the
corresponding cumulative Unwind Share Limit, on the
mandatory Unwind Date pursuant to the settlement
procedures set forth in Section III. above.
or,
(ii) if any of the following events occur:
(1) any Financial Covenant Default as more
particularly described in Exhibit A attached hereto;
(2) any Event of Default that has not been cured or
waived by the respective lender(s) under the Company's
Line of Credit.
(3) any Event of Default that has not been cured or
waived by the respective lender(s) under any other
unsecured and/or recourse lending agreement involving
the Company involving Specified Indebtedness in
aggregate amount of no less than the Threshold Amount;
(4) Bankruptcy or Insolvency (as such terms are
defined in the Agreement); and/or
(5) any failure of the Company to post Cash Collateral
pursuant to IV.C. herein if such failure is not
remedied on or before the third Local Business Day
after notice of such failure is given to such party.
then, UBS LLC for the account of UBS may require all
or part of the Transaction to be settled early on the
Mandatory Unwind Date pursuant to the settlement
procedures set forth in Section III.
For purposes of the settlement procedures set forth in
Section III, "Day S" shall be the Mandatory Unwind
Date and the "Settlement Shares" shall be the number
of Common Shares to be settled pursuant to clause (i)
or (ii) above. The Company may elect the method of
settlement for such early settlement in accordance
with the settlement provisions set forth herein;
provided, however, that if Stock Settlement or Net
Stock Settlement is elected, and (1) no resale
Registration Statement has been provided and declared
effective prior to Day S or (2) any resale
Registration Statement so provided and declared
effective becomes, on Day S or during an Unwind
Period, the subject of a stop order suspending its
effectiveness or is the subject of any proceeding for
that purpose or any such proceeding is threatened by
the Commission, then the Company at its sole option
may choose to (A) cash collateralize 125% of its
obligation to UBS in a manner similar to that
described in Section V. (including the applicable
periods for delivery of cash collateral), (B)
15
<PAGE>
FORWARD STOCK CONTRACT
effect Physical Settlement as to all of the Settlement
Shares in accordance with Section III.B. hereof on the
Exchange Trading Day immediately succeeding the
occurrence of one of the events specified in (1) or
(2) above or (C) effect settlement with Common Shares
that are not subject to a resale Registration
Statement to allow UBS to unwind the Transaction and
liquidate any position it may hold in such
unregistered Settlement Shares by means of negotiated
private resales reasonably acceptable to the Company,
to the extent and in the manner permitted by
applicable federal and state securities laws. In
recognition that such negotiated private resales, if
any, are likely to be completed at prices reflective
of a discount to the prevailing open market prices for
any freely tradeable Common Shares, the Company agrees
to deliver such number of supplemental Common Shares
as UBS may reasonably request to which UBS shall
assign a dollar price in order to approximate an
aggregate amount equal to the aggregate discount
accepted by UBS in connection with the resale of the
Settlement Shares or the Company shall pay an amount
to UBS equal to the aggregate discount accepted by UBS
in connection with the resale of the Settlement
Shares.
Upon completion of all settlement activities, UBS LLC
for the account of UBS, will promptly return all
remaining shares in the Company's Customer Account to
the Company.
Market Disruption Event: The occurrence or existence on any Exchange Trading
Day during the one-half hour period that ends at the
Valuation Time of any suspension of or limitation
imposed on trading on (i) any of the Relevant
Exchanges or (ii) any of the exchange or boards of
trade or futures contract market on which options or
future contracts on the Common Shares of the Company
are traded if, in the reasonable determination of the
Calculation Agent, such suspension or limitation is
material. In the event that a Market Disruption Event
occurs or is continuing on a Valuation Date, then any
determination of the closing sale price of the Common
Shares shall be postponed to the first succeeding
Exchange Trading Day on which there is no Market
Disruption Event, provided that if there is a Market
Disruption Event on each of the five Exchange Trading
Days immediately following the original Valuation Date
that but for the Market Disruption Event would have
been a day on which the closing sale price of the
Common Shares would have been determined, such fifth
Exchange Trading Day shall be deemed to be such
Valuation Date notwithstanding the Market Disruption
Event and the Calculation Agent shall, in consultation
with the Company, determine the closing sale price for
that Valuation Date based upon the last closing sale
price prior to such Market Disruption Event, and if
applicable, shall effect the settlement of the
Underlying Shares by using such last closing sale
price for the determination of the Stock Settlement
Unwind Price.
The Calculation Agent shall within one (1) Business
Day notify the other party of the existence or
occurrence of a Market Disruption Event on any day
that but for the occurrence or existence of a Market
16
<PAGE>
FORWARD STOCK CONTRACT
Disruption Event would have been a Valuation
Date.
Regulatory Compliance: Each party agrees that if the delivery of shares
upon settlement is subject to any restriction
imposed by a regulatory authority, it shall not
be an event of default, and the parties will
negotiate in good faith a procedure to effect
settlement of such shares in a manner which
complies with any relevant rules of such
regulatory authority and which is satisfactory in
form and substance to their respective counsel.
Securities Law Compliance: Each party agrees that it will comply, in
connection with this Transaction and all related
or contemporaneous sales and purchases of the
Company's Common Shares, with the applicable
provisions of the Securities Act, the Securities
Exchange Act of 1934 (the "Exchange Act") and the
rules and regulations thereunder.
Settlement: All settlements shall occur through DTC or any
other mutually acceptable depository.
Settlement Stock Delivery: Pursuant to the Stock Settlement and Net Stock
Settlement provisions under Section III. above,
UBS LLC for the account of UBS shall deliver all
Settlement Shares to the Company's Customer
Account. Such Common Shares will serve as
collateral until released by UBS LLC for the
account of UBS in accordance with the settlement
mechanics noted under III.E. above, or delivered
to the Company pursuant to Section III.E.5.
Common Shares held in the Company's Customer
Account shall not be voted.
The Company covenants and agrees with UBS that
Common Shares delivered by the Company pursuant
to settlement events in accordance herewith will
be duly authorized, validly issued and, upon
receipt of the consideration therefor, fully paid
and non-assessable. The issuance of such Common
Shares will not require the consent, approval,
authorization, registration, or qualification of
any government authority, except such as shall
have been obtained on or before the delivery date
to UBS LLC for the account of UBS in connection
with any registration statement filed with
respect to any share or otherwise.
Solvency: Immediately following the execution of this
agreement, the Company will be solvent and able
to pay its debts as they mature, will have
capital sufficient to carry on business and all
businesses in which it engages, and will have
assets which will have a present fair market
valuation greater than the amount of all of its
liabilities.
Trading Authorization: The following individuals and/or any individual
authorized in writing by the Chairman, President,
Chief Financial Officer or Treasurer of the
Company are authorized by the Company to provide
trading instructions to UBS LLC for the account
of UBS with regard to this transaction.
Michael V. Prentiss Thomas F. August,
17
<PAGE>
FORWARD STOCK CONTRACT
Mark R. Doran, Michael A. Ernst
UBS shall consult with the Company in advance
with respect to the method and timing of any
disposition that it proposes to make of any
Common Shares delivered to it pursuant this
Agreement or the related Purchase Agreement. UBS
shall use its best efforts to cause such
disposition to be made pursuant to the method and
timetable and to the individuals or classes of
individuals designated by the Company, provided
that any such disposition pursuant to a Stock
Settlement or Net Stock Settlement shall be
completed within the applicable Unwind Period.
18
<PAGE>
FORWARD STOCK CONTRACT
VII. DELIVERY INSTRUCTIONS:
Party A: Chase, NYC
UBS Securities LLC
ABA 021000021
A/C No. ###-##-####
Attn: GED
Party B: Bank One Texas, NA
Acct. #010 990 4045
ABA 111 000 614
Location: Dallas
Re: Prentiss Properties
Attn: D. Pennington
Please confirm that the foregoing correctly sets
forth the terms of our agreement by executing the
copy of this Confirmation enclosed for that
purpose and returning it to Ms. Gale Herzing,
29th. Floor.
Yours faithfully,
Union Bank of Switzerland, London Branch:
By: /s/ L. Wood By: /s/ Adam Matthews
-------------------------- ---------------------------
Name: L. Wood Name: Adam Matthews
Title: Vice President Title: Vice President
Date: Date:
Prentiss Properties Trust
By: /s/ Michael Ernst By: /s/ Mark R. Doran
-------------------------- ---------------------------
Name: Michael Ernst Name: Mark R. Doran
Title: VP & Treasurer Title: EVP & CFO
Date: Date:
Prentiss Properties Acquisition Partners, L.P.
By: Prentiss Properties I, Inc. its general partner:
By: /s/ Michael Ernst By: /s/ Mark R. Doran
-------------------------- ---------------------------
Name: Michael Ernst Name: Mark R. Doran
Title: VP & Treasurer Title: EVP & CFO
Date: Date:
19
<PAGE>
EXHIBIT 5
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
October 14, 1998
Prentiss Properties Trust
3890 West Northwest Highway, Suite 400
Dallas, Texas 75220
Re: Prentiss Properties Trust
Post-Effective Amendment to 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 Post-Effective
Amendment No. 1 to 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 1,100,000 common shares of beneficial
interest, par value $0.01 per share (the "Common Shares") that were issued to
UBS AG, London Branch, acting through its agent Warburg Dillon Read LLC ("UBS-
LB") on February 2, 1998, (ii) up to an aggregate of 500,000 Common Shares
issuable from time to time by the Company to UBS-LB, and (iii) up to an
aggregate of 4,425,938 Common Shares to be offered from time to time by certain
Selling Shareholders, in each case 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 Common Shares have been or will be issued for
at least the par value thereof. As to all questions of fact material to this
opinion that
<PAGE>
Prentiss Properties Trust
October 14, 1998
Page 2
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 the Common Shares have been duly authorized and are validly issued,
fully paid and nonassessable.
In rendering the foregoing opinion, we have relied solely upon the
opinion of Ballard Spahr Andrews and Ingersoll, LLP with respect to matters of
Maryland law, and our opinion is 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 Securities and
Exchange Commission as Exhibit 5 to the Registration Statement and the reference
to this firm under the caption "Legal Matters" in the Prospectuses 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 14, 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 14, 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 14, 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 Offered
Securities.
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.
<PAGE>
Exhibit 23.2
FILE NUMBER
866179
October 13, 1998
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
Re: Prentiss Properties Trust: Registration Statement
on Form S-3 (Registration No. 333-49295)
--------------------------------------------------
Ladies and Gentlemen:
We hereby consent to the use 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 PUBLIC 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
