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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998
REGISTRATION NO. 333-45097
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KILROY REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
95-4598246
(I.R.S. EMPLOYER IDENTIFICATION NO.)
2250 EAST IMPERIAL HIGHWAY, SUITE 1200
EL SEGUNDO, CALIFORNIA 90245
(310) 563-5500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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RICHARD E. MORAN JR.
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND SECRETARY
KILROY REALTY CORPORATION
2250 EAST IMPERIAL HIGHWAY, SUITE 1200
EL SEGUNDO, CALIFORNIA 90245
(310) 563-5500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
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COPIES TO:
EDWARD SONNENSCHEIN, JR., ESQ. J. SCOTT HODGKINS, ESQ. LATHAM & WATKINS 633
WEST FIFTH STREET LOS ANGELES, CALIFORNIA 90071 (213) 485-1234
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time-
to-time after the effective date of this Registration Statement as determined
by market conditions.
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 of 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,
please check the following box. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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EXPLANATORY NOTE
This Registration Statement relates to securities which may be offered from
time to time by the Company. This Registration Statement contains a form of
basic prospectus (the "Prospectus") which will be used in connection with an
offering of securities by the Company. The specific terms of the securities to
be offered will be set forth in a Prospectus Supplement relating to such
securities.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 1998
PROSPECTUS
$400,000,000
KILROY REALTY CORPORATION
COMMON STOCK, PREFERRED STOCK,
DEPOSITARY SHARES AND WARRANTS
Kilroy Realty Corporation (the "Company") may offer from time to time in one
or more series or classes (i) shares of its common stock, par value $.01 per
share (the "Common Stock"), (ii) shares or fractional shares of its preferred
stock, par value $.01 per share (the "Preferred Stock"), (iii) shares of
Preferred Stock represented by depositary shares (the "Depositary Shares") and
(iv) warrants to purchase Preferred Stock or Common Stock, as shall be
designated by the Company at the time of any such offering (the "Warrants")
with an aggregate public offering price of up to $400,000,000 (or its
equivalent in another currency based on the exchange rate at the time of sale)
in amounts, at prices and on terms to be determined at the time of offering.
The Common Stock, Preferred Stock, Depositary Shares and Warrants
(collectively, the "Offered Securities") may be offered, separately or
together, in separate series in amounts, at prices and on terms to be set forth
in one or more supplements to this Prospectus (each such supplement a
"Prospectus Supplement").
The specific terms of the Offered Securities in respect to which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable (i) in the case of Common Stock,
the specific title and any initial public offering price; (ii) in the case of
Preferred Stock, the specific title and any dividend, liquidation, redemption,
conversion, voting and other rights, and any initial public offering price;
(iii) in the case of Depositary Shares, the fractional share of Preferred Stock
represented by each such Depositary Share; and (iv) in the case of Warrants,
the duration, offering price, exercise price and detachability. In addition,
such specific terms may include limitations on actual or constructive ownership
and restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax consequences
relating to, and any listing on a securities exchange of, the Offered
Securities covered by such Prospectus Supplement.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company or to or through underwriters or dealers. If
any agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in the applicable Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of this Prospectus and the applicable Prospectus Supplement
describing the method and terms of the offering of such series of Offered
Securities.
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SEE "RISK FACTORS" BEGINNING ON PAGE 2 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE OFFERED SECURITIES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY 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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CERTAIN PERSONS PARTICIPATING IN AN OFFERING OF SECURITIES MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
SECURITIES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THOSE ACTIVITIES, SEE "UNDERWRITING" IN THE
ACCOMPANYING PROSPECTUS SUPPLEMENT.
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained or incorporated by
reference in this Prospectus or any Prospectus Supplement, and, if given or
made, such information or representation must not be relied upon as having
been authorized by the Company or by any underwriter, agent or dealer. This
Prospectus and any Prospectus Supplement shall not constitute an offer to sell
or a solicitation of an offer to buy any of the Securities offered hereby in
any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus and
any Prospectus Supplement nor any sale made thereunder shall, under any
circumstances, create any implication that the information therein is correct
as of the time subsequent to the date thereof.
Unless the context otherwise requires, (i) the "Company" shall mean Kilroy
Realty Corporation, a Maryland corporation, its Subsidiaries (as defined
below) and includes by reference the operating history of the Kilroy Group,
(ii) the "Subsidiaries" shall mean, collectively, Kilroy Realty, L.P., a
Delaware limited partnership (the "Operating Partnership"), Kilroy Services,
Inc., a Maryland corporation (the "Services Company"), Kilroy Realty Finance,
Inc., a Delaware corporation (the "Finance Company") and Kilroy Realty Finance
Partnership, L.P., a Delaware limited partnership (the "Finance Partnership")
and (iii) the "Kilroy Group" shall mean the Company's predecessors comprised
of Kilroy Industries, a California corporation ("KI"), and certain affiliated
partnerships, limited liability companies and trusts.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the
Commission in accordance with the Exchange Act can be inspected and copied at
the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. If
available, such information also may be accessed through the Commission's
electronic data gathering, analysis and retrieval system ("EDGAR") via
electronic means, including the Commission's home-page on the Internet
(http://www.sec.gov). In addition, certain of the Company's securities are
listed on the New York Stock Exchange and similar information concerning the
Company can be inspected and copied at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") (of which this Prospectus is a part) under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Offered Securities. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus, in any Prospectus Supplement or in
any document incorporated by reference herein or therein, as to the contents
of any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document
filed as an exhibit to, or incorporated by reference in, the Registration
Statement, each such statement being qualified in all respects by such
reference and the exhibits and schedules thereto. For further information
regarding the Company and the Offered Securities, reference is hereby made to
the Registration Statement and such exhibits and schedules which may be
obtained from the Commission at its principal office in Washington, D.C. upon
payment of the fees prescribed by the Commission.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K for the year ended December 31,
1996;
b. The Company's Quarterly Reports on Forms 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997;
c. The Company's Current Reports on Form 8-K dated June 6, 1997, July 3,
1997, July 15, 1997, November 13, 1997, November 21, 1997, December 29, 1997,
January 20, 1998, and February 6, 1998 and on Form 8-K/A dated December 19,
1997; and
d. The reports on the combined summaries of certain revenues and certain
expenses for the Acquired Properties, Post IPO Acquisitions Through June 30,
1997 and Acquired Properties and Pending Acquisitions, each included in the
Company's Registration Statement on Form S-11 (File number 333-32261).
Any document filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Offered Securities to which this
Prospectus relates shall be deemed to be incorporated by reference in this
Prospectus and to be part hereof from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein (or in the applicable Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus and the applicable Prospectus Supplement are delivered upon written
or oral request. Requests should be directed to the Chief Financial Officer,
Kilroy Realty Corporation, 2250 East Imperial Highway, Suite 1200, El Segundo,
California 90245, telephone number (310) 563-5500.
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THE COMPANY
Kilroy Realty Corporation was incorporated in September 1996 and commenced
operations upon the completion of its initial public offering on January 31,
1997. The Company was formed to continue and expand the real estate business
of the Kilroy Group, which, since 1947, was engaged in the business of real
estate ownership, acquisition, development, leasing and management of
principally Class A suburban office and industrial buildings in prime
locations, primarily in Southern California. As of December 31, 1997, the
Company owned 55 suburban office buildings encompassing approximately 4.2
million rentable square feet (the "Office Properties"), and 67 industrial
buildings encompassing approximately 5.0 million rentable square feet (the
"Industrial Properties" and, together with the Office Properties, the
"Properties"). All but 11 of the Properties are located in Southern
California. In addition, as of December 31, 1997, the Company had under
development one office building and two industrial buildings which, when
completed, are expected to encompass approximately 140,000 and 680,000
rentable square feet, respectively. The Company operates as a self-
administered and self-managed real estate company and expects that it has
qualified and that it will continue to qualify as a REIT for federal and state
income tax purposes beginning with the year ended December 31, 1997. See
"Federal Income Tax Consequences--Taxation of the Company."
The Company conducts substantially all of its activities through the
Operating Partnership in which, as of December 31, 1997, it owned an
approximate 87.8% general partner interest. The remaining 12.2% limited
partnership interest in the Operating Partnership is owned by certain members
of the Company's executive officers and directors, certain of their
affiliates, and other outside investors. As the sole general partner of the
Operating Partnership, the Company has control over the management of the
Operating Partnership and over each of the 105 Properties owned by the
Operating Partnership. The remaining 17 Properties are owned by Kilroy Realty
Finance, L.P., a limited partnership in which the Company (through a wholly
owned subsidiary) owns a 1% general partnership interest and the Operating
Partnership owns a 99% limited partnership interest.
The Common Stock is listed on the New York Stock Exchange under the Symbol
"KRC." The Company is a Maryland corporation with its principal executive
offices located at 2250 East Imperial Highway, Suite 1200, El Segundo,
California 90245 and its telephone number is (310) 563-5500.
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RISK FACTORS
An investment in the Offered Securities involves various material risks.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus and the
applicable Prospectus Supplement, in connection with an investment in the
Offered Securities.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, results of operations
and financial position. Prospective investors are cautioned that any forward-
looking statements are not guarantees of future performance and are subject to
risks and uncertainties and that actual results may differ materially from
those included within the forward-looking statements as a result of various
factors. Factors that could cause or contribute to such differences include,
but are not limited to, those described below and elsewhere in this Prospectus
and the applicable Prospectus Supplement.
CONFLICTS OF INTEREST
Certain Limited Partner Approval Rights. While Kilroy Realty Corporation is
the sole general partner of the Operating Partnership, and generally has full
and exclusive responsibility and discretion in the management and control of
the Operating Partnership, certain provisions of the Second Amended and
Restated Agreement of Limited Partnership of the Operating Partnership (the
"Partnership Agreement") place limitations on Kilroy Realty Corporation's
ability to act with respect to the Operating Partnership. The Partnership
Agreement provides that if the limited partners own at least 5% of the
outstanding Operating Partnership units (the "Units") (including Units held by
Kilroy Realty Corporation), Kilroy Realty Corporation shall not, on behalf of
the Operating Partnership, take any of the following actions without the prior
consent of the holders of more than 50% of the limited partnership Units (i)
dissolve the Operating Partnership, other than incident to a merger or sale of
substantially all of the Company's assets, or (ii) prior to January 31, 2004,
sell the Office Property located at 2260 E. Imperial Highway at Kilroy Airport
Center at El Segundo, other than incident to a merger or sale of substantially
all of the Company's assets. Furthermore, the Partnership Agreement provides
that, except in connection with certain transactions, Kilroy Realty
Corporation may not voluntarily withdraw from the Operating Partnership, or
transfer or assign its interest in the Operating Partnership, without the
consent of the holders of at least 60% of the Units (including Units held by
Kilroy Realty Corporation) and without meeting certain other criteria with
respect to the consideration to be received by the limited partners. In
addition, Kilroy Realty Corporation has agreed to use its commercially
reasonable efforts to structure certain merger transactions to avoid causing
the limited partners to recognize gain for federal income tax purposes by
virtue of the occurrence of or their participation in such transactions. The
restrictions on Kilroy Realty Corporation's ability to act as described above
may result in Kilroy Realty Corporation being precluded from taking action
which the Board of Directors believes is in the best interest of all
stockholders. See "Partnership Agreement of the Operating Partnership--
Transferability of Interests" and "--Certain Limited Partner Approval Rights."
Tax Consequences Upon Sale or Refinancing. Holders of Units ("Unitholders")
may suffer different and more adverse tax consequences than the Company upon
the sale or refinancing of certain of the properties owned by the Operating
Partnership, and therefore such Unitholders may have different objectives
regarding the appropriate pricing and timing of any sale or refinancing of
such properties. While Kilroy Realty Corporation, as the sole general partner
of the Operating Partnership, has the authority (subject to certain limited
partner approval rights described above) to determine whether and on what
terms to sell or refinance each property owned solely by the Operating
Partnership, those directors and officers of the Company who hold Units may
seek to influence the Company not to sell or refinance such properties, even
though such a sale might otherwise be financially advantageous to the Company,
or may seek to influence the Company to refinance such properties with a
higher level of debt. The Partnership Agreement provides that if the limited
partners own at least 5% of the outstanding Units (including Units held by the
Company), the Company shall not, on behalf of the Operating Partnership,
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take any of the following actions without the prior consent of the holders of
more than 50% of the limited partnership Units (i) dissolve the Operating
Partnership, other than incident to a merger or sale of substantially all of
the Company's assets, or (ii) prior to January 31, 2004, sell the Office
Property at 2260 E. Imperial Highway at Kilroy Airport Center at El Segundo,
other than incident to a merger or sale of substantially all of the Company's
assets. The Operating Partnership will also use commercially reasonable
efforts to cooperate with the limited partners to minimize any taxes payable
in connection with any repayment, refinancing, replacement or restructuring of
indebtedness, or any sale, exchange or any other disposition of assets, of the
Operating Partnership. See "Partnership Agreement of the Operating
Partnership--Transferability of Interests" and "--Certain Limited Partner
Approval Rights."
Policies with Respect to Conflicts of Interest. The Company has adopted
certain policies designed to eliminate or minimize conflicts of interest.
These policies include (i) provisions in the Company's articles of
incorporation (the "Articles of Incorporation") and bylaws (the "Bylaws")
which require that at least a majority of the directors be directors that are
neither officers or employees of the Company or any of its subsidiaries or
affiliates ("Independent Directors"), (ii) provisions in the Bylaws which
require that a majority of the Independent Directors approve transactions
between the Company and certain Unitholders and the sale or refinancing of the
Properties and (iii) the requirement that certain members of the Board of
Directors of the Company (the "Board of Directors") who are Unitholders (John
B. Kilroy, Sr. and John B. Kilroy, Jr.) abide by their respective
noncompetition agreements with the Company. The provisions contained in the
Articles of Incorporation can be modified only with the approval of two-thirds
of the shares of Common Stock outstanding and entitled to vote thereon, and
the provisions contained in the Bylaws can be modified only with the approval
of a majority of either the Board of Directors or the shares of the Common
Stock outstanding and entitled to vote thereon. However, there can be no
assurance that these policies will not be changed in the future or that they
otherwise always will be successful in eliminating the influence of such
conflicts, and, if they are not successful, decisions could be made that might
fail to reflect fully the interests of all stockholders.
Competitive Real Estate Activities of Management. John B. Kilroy, Sr. and
John B. Kilroy, Jr. have controlling ownership interests in a complex of three
office buildings which are located in the El Segundo submarket in which four
of the Company's office buildings and four of its industrial buildings are
located. These properties and Calabasas Park Centre, an approximately 66-acre
undeveloped site (representing approximately 45 developable acres, net of
acreage required for streets and contractually required open areas) are
managed by the Operating Partnership, and certain of the Company's officers,
directors and employees spend an immaterial portion of their time and effort
managing these interests. The Company is actively marketing the sale of all
but 18 acres of Calabasas Park Centre. Certain of the Company's officers,
directors and employees spend an immaterial amount of time in connection with
any sales of such parcels.
Each of these properties is currently owned by partnerships owned and
controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr. The complex of three
office buildings located on North Sepulveda Boulevard in El Segundo is managed
by the Operating Partnership pursuant to a management agreement on market
terms. Calabasas Park Centre is managed by the Services Company pursuant to a
management agreement on market terms.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The
Company believes that it has operated and intends to continue to operate so as
to qualify as a REIT under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the "Code"), commencing with its taxable year ending
December 31, 1997. Although management believes that the Company is organized
and operates in such a manner, no assurance can be given that the Company will
continue to be organized or be able to operate in a manner so as to qualify or
remain so qualified. Qualification as a REIT involves the satisfaction of
numerous requirements established under highly technical and complex Code
provisions for which there are only limited judicial and administrative
interpretations, and involves the determination of various factual matters and
circumstances not entirely within the Company's control. For example, in order
to qualify as a REIT, at least
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95% of the Company's gross income in any year must be derived from qualifying
sources and the Company must pay distributions to stockholders aggregating
annually at least 95% of its REIT taxable income (determined without regard to
the dividends paid deduction and by excluding net capital gains). The
complexity of these provisions and of the applicable Treasury Regulations that
have been promulgated under the Code is greater in the case of a REIT, such as
the Company, that holds its assets in partnership form. No assurance can be
given that legislation, new regulations, administrative interpretations or
court decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. See "Federal Income Tax Consequences--Taxation of the Company"
and "Legal Matters."
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed 5% of the REIT's total
assets on certain testing dates. See "Federal Income Tax Consequences--
Taxation of the Company--Requirements for Qualification." The Company believes
that its allocable share of the aggregate value of the securities of the
Services Company held by the Operating Partnership will be less than 5% of the
value of the Company's total assets.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would substantially reduce the net
earnings of the Company available for investment or distribution to
stockholders because of the additional tax liability to the Company for the
years involved. In addition, distributions to stockholders would no longer be
required to be made. See "Federal Income Tax Consequences--Taxation of the
Company--Requirements for Qualification."
Other Tax Liabilities. Even if the Company qualifies for and maintains its
REIT status, it is subject to certain federal, state and local taxes on its
income and property. For example, if the Company has net income from a
prohibited transaction, such income will be subject to a 100% tax. In
addition, net income, if any, from the third-party development or other
services conducted through the Services Company is subject to federal income
tax at regular corporate tax rates. See "Federal Income Tax Consequences--
Services Company."
RISKS OF DEVELOPMENT BUSINESS AND RELATED ACTIVITIES BEING CONDUCTED BY THE
SERVICES COMPANY
Tax Liabilities. The Services Company is subject to federal and state income
tax on its taxable income at regular corporate rates. Any federal, state or
local income taxes that the Services Company is required to pay will reduce
the cash available for distribution by the Services Company to the Operating
Partnership.
Adverse Consequences of Lack of Control Over the Businesses of the Services
Company. To comply with the REIT asset tests that restrict ownership of shares
of other corporations, the Operating Partnership owns 100.0% of the nonvoting
preferred stock of the Services Company (representing approximately 95.0% of
its economic value) and John B. Kilroy, Sr. and John B. Kilroy, Jr. own all
the outstanding voting common stock of the Services Company (representing
approximately 5.0% of its economic value). This ownership structure is
necessary to permit the Company to share in the income of the Services Company
and also maintain its status as a REIT. Although the Company receives
substantially all of the economic benefit of the businesses carried on by the
Services Company through the Company's right to receive dividends through the
Operating Partnership, the Company is not able to elect directors or officers
of the Services Company and, therefore, the Company does not have the ability
to influence the operations of the Services Company or require that the
Services Company's board of directors declare and pay a cash dividend on the
nonvoting preferred stock of the Services Company held by the Operating
Partnership. As a result, the board of directors and management of the
Services Company may implement business policies or decisions that would not
have been implemented by persons controlled by the Company and that are
adverse to the interests of the Company or that lead to adverse financial
results, which could adversely impact the Company's net operating income and
cash flow.
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Adverse Consequence of REIT Status on the Businesses of the Services
Company. Certain requirements for REIT qualification may in the future limit
the Company's ability to receive increased distributions from the fee
development operations conducted and related services offered by the Services
Company. See "--Adverse Consequences of Failure to Qualify as a REIT."
CASH FLOW FROM DEVELOPMENT ACTIVITIES IS UNCERTAIN. A portion of the
Company's cash flow is generated from development activities which are
partially dependent on the availability of development opportunities and which
are subject to the risks inherent with development and general economic
conditions. In addition, development activities are subject to limitations
imposed by the REIT tests. See "Federal Income Tax Consequences--Taxation of
the Company--Income Tests." There can be no assurance that the Company will
realize completely such cash flows. See "--Real Estate Investment
Considerations--Risks of Real Estate Acquisition and Development." Also, these
development activities generally are conducted by the Services Company.
Accordingly, cash flow from these activities is further dependent upon the
decision of the Services Company's board of directors to declare and pay a
cash dividend on the nonvoting preferred stock held by the Operating
Partnership. See "--Risks of Development Business and Related Activities Being
Conducted by the Services Company."
DISTRIBUTIONS TO STOCKHOLDERS AFFECTED BY MANY FACTORS. Distributions by the
Company to its stockholders are based principally on cash available for
distribution from the Properties. Contractual increases in base rent under
existing leases, reductions in mortgage indebtedness or decreases in
applicable interest rates each could have the effect of increasing cash
available for distribution. Similarly, and by way of example, increases in
interest rates, the issuance of Common Stock or Units in connection with the
acquisition of properties with cash flow levels lower than that for the
Properties and the use of internally generated cash to fund, in whole or in
part, any development activities or property acquisitions, each could have the
effect of decreasing cash available for distribution. However, in the event of
a default or a lease termination by a lessee, there could be a decrease or
cessation of rental payments and thereby a decrease in cash available for
distribution. In addition, the amount available to make distributions may
decrease if properties acquired in the future yield lower than expected
returns.
The distribution requirements for REITs under federal income tax laws may
limit the Company's ability to finance future developments, acquisitions and
expansions without additional debt or equity financing. If the Company incurs
additional indebtedness in the future, it will require additional funds to
service such indebtedness and as a result amounts available to make
distributions may decrease. Distributions by the Company are also dependent on
a number of other factors, including the Company's financial condition, any
decision to reinvest funds rather than to distribute such funds, capital
expenditures, the annual distribution requirements under the REIT provisions
of the Code and such other factors as the Company deems relevant. In addition,
the Company may issue from time to time additional Units or shares of Common
Stock in connection with the acquisition of properties or in certain other
circumstances. No prediction can be made as to the number of such Units or
shares of Common Stock which may be issued, if any, and, if issued, the effect
on cash available for distribution on a per share basis to holders of Common
Stock. Such issuances, if any, may have a dilutive effect on cash available
for distribution on a per share basis to holders of Common Stock. The
possibility exists that actual results of the Company may differ from the
assumptions used by the Board of Directors in determining the initial
distribution rate.
To obtain the favorable tax treatment associated with REITs, the Company
generally is required to distribute to its stockholders at least 95% of its
taxable income (determined without regard to the dividends paid deduction and
by excluding net capital gains) each year. In addition, the Company is subject
to tax at regular corporate rates to the extent that it distributes less than
100% of its taxable income (including net capital gains) each year. The
Company is also subject to a 4% nondeductible excise tax on the amount, if
any, by which certain distributions paid by it with respect to any calendar
year are less than the sum of 85% of its ordinary income, 95% of its capital
gain net income and 100% of its undistributed income from prior years. The
Company intends to continue to make distributions to its stockholders to
comply with the distribution requirements of the Code and to reduce exposure
to federal income taxes and the nondeductible excise tax. Differences in
timing between
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the receipt of income and the payment of expenses in arriving at taxable
income and the effect of required debt amortization payments could require the
Company to borrow funds on a short-term basis to meet the distribution
requirements that are necessary to achieve the tax benefits associated with
qualifying as a REIT.
REAL ESTATE INVESTMENT CONSIDERATIONS
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the
amount of income earned and capital appreciation generated by the related
properties as well as the expenses incurred in connection therewith. If the
Properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, the ability to make
distributions to the Company's stockholders could be adversely affected.
Income from, and the value of, the Properties may be adversely affected by the
general economic climate, local conditions such as oversupply of office,
industrial or other commercial space or a reduction in demand for office,
industrial or other commercial space in the area, the attractiveness of the
Properties to potential tenants, competition from other office, industrial and
other commercial buildings, and the ability of the Company to provide adequate
maintenance and insurance and increased operating costs (including insurance
premiums, utilities and real estate taxes). In addition, revenues from
properties and real estate values are also affected by such factors as the
cost of compliance with regulations and the potential for liability under
applicable laws, including changes in tax laws, interest rate levels and the
availability of financing. The Company's income would be adversely affected if
a significant number of tenants were unable to pay rent or if office or
industrial space could not be rented on favorable terms. Certain significant
expenditures associated with an investment in real estate (such as mortgage
payments, real estate taxes and maintenance costs) generally are not reduced
when circumstances cause a reduction in income from the investment.
Illiquidity of Real Estate. Real estate investments are relatively illiquid
and, therefore, the Company has a limited ability to vary its portfolio
quickly in response to changes in economic or other conditions. In addition,
the prohibition in the Code and related regulations on a REIT holding property
for sale may affect the Company's ability to sell properties without adversely
affecting distributions to the Company's stockholders.
Competition. The Company plans to continue to expand, primarily through the
acquisition and development of additional office and industrial buildings, in
Southern California and other markets where the acquisition and/or development
of property would, in the opinion of management, result in a favorable risk-
adjusted return on investment. There are a number of developers of office,
industrial and other commercial property types and real estate companies that
compete with the Company in seeking properties for acquisition and land for
development. Substantially all of the Properties are located in developed
areas where there are generally other properties of the same type. Competition
from such other properties may affect the Company's ability to attract and
retain tenants, rental rates and expenses of operation (particularly in light
of the higher vacancy rates of many competing properties which may result in
lower-priced space being available in such properties). In addition, the
Company may be competing with other entities that have greater financial and
other resources than the Company.
Capital Improvements. The Properties vary in age and require capital
improvements regularly. If the cost of improvements, whether required to
attract and retain tenants or to comply with governmental requirements,
substantially exceeds management's expectations, cash available for
distribution could be reduced.
Risks of Real Estate Acquisition and Development. The Company intends to
continue to actively seek to acquire principally office and industrial
properties to the extent that they can be acquired on advantageous terms and
meet the Company's investment criteria. Property acquisitions entail risks
that investments will fail to perform in accordance with expectations.
Estimates of the costs of improvements to bring an acquired property up to
standards established for the market position intended for that property may
prove inaccurate. In addition, there are general investment risks associated
with any new real estate investment.
In addition, the Company will continue to pursue development opportunities
both for ownership by the Company and on a fee basis. The real estate
development business involves significant risks in addition to those
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involved in the ownership and operation of developed buildings, including the
risks that financing may not be available on favorable terms for development
projects and construction may not be completed on schedule or within budget,
resulting in increased debt service expense and construction costs and delays
in leasing such properties and generating cash flow. In addition, new
development activities, regardless of whether they are ultimately successful,
typically require a substantial portion of management's time and attention.
Development activities are also subject to risks relating to the inability to
obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy, other required governmental permits and authorizations and the risk
that development properties may not achieve anticipated rent or occupancy
levels.
The Company anticipates that future acquisitions and developments will be
financed, in whole or in part, through additional equity offerings, lines of
credit and other forms of secured or unsecured financing. If new developments
are financed through construction loans, there is a risk that, upon completion
of construction, permanent financing for newly developed properties may not be
available or may be available only on disadvantageous terms. In addition,
equity, rather than debt, financing of future acquisitions or developments may
have a dilutive effect on the interests of existing stockholders of the
Company.
While the Company has focused primarily on the development and ownership of
office and industrial properties, the Company may in the future develop
properties, part or all of which will be for retail use. In addition, while
the Company has historically limited its ownership of properties primarily to
the Southern California market, the Company in the future may expand its
business to geographic markets other than Southern California, where the
acquisition and/or development of property would, in the opinion of
management, result in a favorable risk-adjusted return on investment. The
Company does not possess the same level of familiarity with retail development
or markets outside of those in which the Properties presently are located,
which could adversely affect its ability to acquire or develop properties in
any new localities or to realize expected performance.
Uninsured Losses. Management believes that the Properties are covered by
adequate comprehensive liability, rental loss and all-risk insurance provided
by reputable companies and with commercially reasonable deductibles, limits
and policy specifications customarily carried for similar properties. Certain
types of losses, however, may be either uninsurable or not economically
insurable, such as losses due to floods, riots or acts of war, or may be
insured subject to certain limitations including large deductibles or co-
payments, such as losses due to seismic activity. See discussion of uninsured
losses from seismic activity below. Should an uninsured loss or a loss in
excess of insured limits occur, the Company could lose its investment in and
anticipated profits and cash flow from a property and would continue to be
obligated on any mortgage indebtedness or other obligations related to such
property. Any such loss would adversely affect the Company's financial
condition and its ability to make distributions.
Uninsured Losses from Seismic Activity. A substantial number of the
Properties are located in areas that are subject to earthquake activity,
including concentrations of Properties located in southwest Los Angeles
County. Although the Company has earthquake insurance on a substantial portion
of its Properties, such insurance is not replacement cost and should any
Property sustain damage as a result of an earthquake, or should losses exceed
the amount of such coverage, the Company would incur uninsured losses or
losses due to deductibles or co-payments on insured losses.
Risks of Tenant Bankruptcy. At any time, tenants of the Properties may
become unable to pay their rent or meet their obligations to the Company,
otherwise default under their leases or become debtors in cases under the
Bankruptcy Code. If any tenant becomes a debtor in a case under the Bankruptcy
Code, the Company would not be permitted to evict the tenant solely because of
its bankruptcy, but the bankruptcy court could authorize the tenant to reject
and terminate its lease with the Company. The Company's claim against such a
tenant for unpaid, future rent would be subject to a statutory cap that could
be substantially less than the remaining rent actually owned under the lease.
In any event, the Company's claim for unpaid rent (as capped) would likely not
be paid in full, which could adversely affect the Company's cash flow and its
ability to make distributions to stockholders. Although the Company has not
experienced material losses from tenant bankruptcies, no assurance can be
given that tenants will not file for bankruptcy protection in the future or,
if any tenants file, that they will affirm their leases and continue to make
rental payments in a timely manner.
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Risks Involved in Property Ownership Through Partnerships and Joint
Ventures. Although the Company owns fee simple interests in the Properties
(other than certain Properties, which are held subject to long-term ground
leases), in the future the Company may also participate with other entities in
property ownership through joint ventures or partnerships. Partnership or
joint venture investments may, under certain circumstances, involve risks not
otherwise present, including the possibility that the Company's partners or
co-venturers might become bankrupt which could result in the Company becoming
responsible for the liabilities of the joint venture or partnership, that such
partners or co-venturers might at any time have economic or other business
interests or goals which are inconsistent with the business interests or goals
of the Company, and that such partners or co-venturers may be in a position to
take action contrary to the instructions or the requests of the Company or
contrary to the Company's policies or objectives, including the Company's
policy with respect to maintaining its qualification as a REIT. The Company,
however, will seek to maintain sufficient control of such partnerships or
joint ventures to permit the Company's business objectives to be achieved.
There is no limitation under the Company's organizational documents as to the
amount of available funds that may be invested in partnerships or joint
ventures.
REAL ESTATE FINANCING RISKS. The Company is subject to the risks normally
associated with debt financing, including the risk that the Company's cash
flow will be insufficient to meet required payments of principal and interest,
the risk that indebtedness on the Properties will not be refinanced at
maturity or that the terms of such refinancing will not be as favorable as the
terms of such indebtedness. If the Company were unable to refinance its
indebtedness on acceptable terms, or at all, the Company might be forced to
dispose of one or more of the Properties upon disadvantageous terms, which
might result in losses to the Company and might adversely affect the cash
available for distribution. If prevailing interest rates or other factors at
the time of refinancing result in higher interest rates on refinancings, the
Company's interest expense would increase, which would adversely affect the
Company's cash flow and its ability to pay expected distributions to
stockholders. Further, if a Property is mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, or is in
default under the related mortgage or deed of trust, such Property could be
transferred to the mortgagee, the mortgagee could foreclose upon the Property,
appoint a receiver and receive an assignment of rents and leases or pursue
other remedies, all with a consequent loss of income and asset value to the
Company. Consequently, a default by the Company related to any mortgage loans
could result in foreclosure on the Properties securing such loan. In addition,
if the mortgage loans contain cross default provisions, a default related to
any such mortgage loans could result in a default of such other indebtedness.
Foreclosures could also create taxable income without accompanying cash
proceeds, thereby hindering the Company's ability to meet the REIT
distribution requirements of the Code.
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT STOCKHOLDER
VOTE. Subject to the Company's fundamental investment policy to maintain its
qualification as a REIT (unless a change is approved by the Board of Directors
and stockholders), the Board of Directors determines its investment and
financing policies, its growth strategy, and its debt, capitalization,
distribution and operating policies. Although the Board of Directors has no
present intention to revise or amend these strategies and policies, the Board
of Directors may do so at any time without a vote of the Company's
stockholders. Accordingly, stockholders will have no control over changes in
strategies and policies of the Company, and such changes may not serve the
interests of all stockholders and could adversely affect the Company's
financial condition or results of operations, including its ability to
distribute cash to stockholders.
Issuance of Additional Securities. The Company has authority to offer its
Common Stock or other equity or debt securities in exchange for property or
otherwise. Similarly, the Company may cause the Operating Partnership to offer
additional Units or preferred units of the Operating Partnership, including
offers in exchange for property to sellers who seek to defer certain of the
tax consequences relating to a property transfer. Such issuances could dilute
the ownership interest of the Company in the Operating Partnership. Existing
stockholders have no preemptive rights to acquire any such securities, and any
such issuance of equity securities could result in dilution in an existing
stockholder's investment in the Company.
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Risks Involved in Investments in Securities Related to Real Estate. The
Company may pursue its investment objectives through the ownership of
securities of entities engaged in the ownership of real estate. Ownership of
such securities may not entitle the Company to control the ownership,
operation and management of the underlying real estate. In addition, the
Company may have no ability to control the distributions with respect to such
securities, which may adversely affect the Company's ability to make required
distributions to stockholders. Furthermore, if the Company desires to control
an issuer of securities, it may be prevented from doing so by the limitations
on percentage ownership and gross income tests which must be satisfied by the
Company in order for the Company to qualify as a REIT. See "Federal Income Tax
Consequences--Taxation of the Company--Requirements for Qualification." The
Company operates its business in a manner that does not require the Company to
register under the Investment Company Act of 1940 and stockholders therefore
do not have the protection of that act.
The Company may also invest in mortgages and may do so as a strategy for
ultimately acquiring the underlying property. In general, investments in
mortgages include the risk that borrowers may not be able to make debt service
payments or pay principal when due, the risk that the value of the mortgaged
property may be less than the principal amount of the mortgage note securing
such property and the risk that interest rates payable on the mortgages may be
lower than the Company's cost of funds to acquire these mortgages. In any of
these events, funds from operations and the Company's ability to make required
distributions to stockholders could be adversely affected.
RISK OF OPERATIONS CONDUCTED THROUGH THE OPERATING PARTNERSHIP. The Company
owns its economic interest in the Properties through its Subsidiaries. The
remaining interests in the Operating Partnership are owned by the remaining
Unitholders. Although the number of limited partnership Units is designed to
result in a distribution per Unit equal to a distribution per share of Common
Stock, such distributions are equal only if the Company distributes to
stockholders all amounts it receives in distributions from the Operating
Partnership. In addition, under the terms of the Partnership Agreement, the
limited partners of the Operating Partnership have certain approval rights
with respect to certain transactions that affect all stockholders. See "--
Conflicts of Interest--Certain Limited Partner Approval Rights."
INFLUENCE OF CERTAIN UNITHOLDERS. John B. Kilroy, Sr., the Chairman of the
Board of Directors, and John B. Kilroy, Jr., the Company's President and Chief
Executive Officer and one of its directors, will own, together with the other
limited partner Unitholders, Units exchangeable for shares of Common Stock. In
addition, the Messrs. Kilroy hold two of the Company's seven seats on the
Board of Directors. Under the terms of the Company's charter, no other
stockholder presently is permitted to own, actually or constructively, in
excess of 7.0% of the Common Stock. In addition, although the Messrs. Kilroy
will not be able to take action on behalf of the Company without the
concurrence of other members of the Board of Directors, they will, for so long
as limited partners of the Operating Partnership own at least 5% of the
outstanding Units, be able to block, absent the prior consent of at least a
majority of the limited partners, (i) the dissolution of the Operating
Partnership, or (ii) prior to January 31, 2004, the sale of the Office
Property located at 2260 E. Imperial Highway at Kilroy Airport Center at El
Segundo, in each case other than incident to a merger or sale of all or
substantially all of the Company's assets, and be able to exert substantial
influence over the Company's affairs.
LIMITS ON OWNERSHIP AND CHANGE IN CONTROL. Certain provisions of the
Maryland General Corporation Law (the "MGCL") and the Articles of
Incorporation and Bylaws, and certain provisions of the Partnership Agreement,
could have the effect of delaying, deferring or preventing a change in control
of the Company or the removal of existing management and, as a result, could
prevent the stockholders of the Company from being paid a premium for their
shares of Common Stock over then prevailing market prices.
Limits on Ownership of Common Stock. In order for the Company to maintain
its qualification as a REIT, not more than 50% in value of the outstanding
shares of its capital stock may be owned, actually or constructively, by five
or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first year for which
the election to be treated as a REIT has been made). Furthermore, subject to
certain exceptions, after the first taxable year for which a REIT election is
made, the
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Company's shares of Common Stock must be held by a minimum of 100 persons for
at least 335 days of a 12-month taxable year (or a proportionate part of a
short tax year). In addition, if the Company, or an owner of 10% or more of
the Company, actually or constructively, owns 10% or more of a tenant of the
Company (or a tenant of any partnership in which the Company is a partner),
the rent received by the Company (either directly or through any such
partnership) from such tenant will not be qualifying income for purposes of
the REIT gross income tests of the Code. See "Federal Income Tax
Consequences--Taxation of the Company." In order to protect the Company
against the risk of losing REIT status due to a concentration of ownership
among its stockholders, the Articles of Incorporation limit actual or
constructive ownership of the outstanding shares of Common Stock by any single
stockholder to 7.0% (the "Ownership Limit") of the then outstanding shares of
Common Stock, and limit actual or constructive ownership of the outstanding
shares of Series A Preferred Stock by any single stockholder so that no such
stockholder, taking into account their ownership of any other capital stock of
the Company, may own in excess of 7% (by value) of the outstanding shares of
capital stock of the Company. See "Description of Capital Stock--Restrictions
on Ownership and Transfer." The Board of Directors will consider waiving the
Ownership Limit or the ownership limit relating to Series A Preferred Stock
with respect to a particular stockholder if it is satisfied, based upon the
advice of tax counsel or otherwise, that ownership by such stockholder in
excess of the applicable ownership limit would not jeopardize the Company's
status as a REIT and the Board of Directors otherwise decided such action
would be in the best interests of the Company. The Board of Directors has
waived the Ownership Limit with respect to John B. Kilroy, Sr., John B.
Kilroy, Jr., members of their families and certain affiliated entities and has
permitted such individuals and entities to actually or constructively own, in
the aggregate, up to 19.6% of the outstanding Common Stock.
Actual or constructive ownership of shares of Common Stock in excess of the
Ownership Limit, the ownership limit relating to Series A Preferred Stock or,
with the consent of the Board of Directors, such other limit, will cause the
violative transfer or ownership to be void with respect to the transferee or
owner as to that number of shares in excess of the applicable ownership limit,
and such shares will be automatically transferred to a trust for the benefit
of a qualified charitable organization. Such purported transferee or owner
shall have no right to vote such shares or be entitled to dividends or other
distributions with respect to such shares. See "Description of Capital Stock--
Restrictions on Ownership and Transfer" for additional information regarding
the Ownership Limit and the ownership limit relating to Series A Preferred
Stock.
Staggered Board. The Board of Directors is divided into three classes
serving staggered three-year terms. The terms of the first, second and third
classes expire in 1998, 1999 and 2000, respectively. Directors for each class
will be chosen for a three-year term upon expiration of the term, beginning in
1998.
Future Issuances of Capital Stock. The Articles of Incorporation authorize
the Board of Directors to issue up to 150,000,000 shares of Common Stock and
30,000,000 shares of preferred stock and to establish the rights and
preferences of any shares of preferred stock issued. Of the 30,000,000 shares
of authorized preferred stock, 1,200,000 shares have been designated as the
Company's 8.075% Series A Cumulative Redeemable Preferred Stock, par value
$.01 per share, $50 liquidation value (the "Series A Preferred Stock"),
issuable at the Company's option in exchange on a one for one basis for the
Operating Partnership's 8.075% Series A Cumulative Redeemable Preferred Units
(the "Series A Preferred Units"). No shares of preferred stock are currently
issued or outstanding. See "Description of Capital Stock--Preferred Stock."
Under the Articles of Incorporation, stockholders do not have cumulative
voting rights.
The ownership limits, the staggered terms for directors, the issuance of
additional common or preferred stock in the future and the absence of
cumulative voting rights could have the effect of (i) delaying or preventing a
change of control of the Company even if a change of control were in the
stockholders' interest, (ii) deterring tender offers for the capital stock of
the Company that may be beneficial to the stockholders, or (iii) limiting the
opportunity for stockholders to receive a premium for their capital stock of
the Company that might otherwise exist if an investor attempted to assemble a
block of shares of capital stock of the Company in excess of the applicable
ownership limit or otherwise to effect a change of control of the Company. See
"Description of Capital Stock."
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HISTORICAL OPERATING LOSSES OF CERTAIN PROPERTIES. Although the Office and
Industrial Properties developed by the Company after their construction and
initial lease-up periods have historically generated positive net cash flow,
the effect of depreciation, amortization and other non-cash charges has
resulted in losses before equity in income of subsidiary, minority interest
and extraordinary item for financial reporting purposes in each of the last
five fiscal years. Historical operating results of the Office and Industrial
Properties that were owned by the Company upon consummation of the Company's
initial public offering (the "IPO") may not be comparable to future operating
results of the Company because, prior to the completion of the IPO and the
transactions relating to the organization of the Company and its subsidiaries,
including the transfer of certain of the Properties and other assets to the
Company (the "Formation Transactions") on January 31, 1997, the Office and
Industrial Properties that were owned by the Company upon consummation of the
IPO were encumbered with greater levels of debt (which has the effect of
reducing net income) than that with which the Company currently operates. In
addition, the historical results of operations do not reflect the acquisition
and development of any of the Properties acquired or developed subsequent to
consummation of the IPO. No assurance can be given that any of the Properties
will have profitable results from operations and will not experience losses in
the future.
NO LIMITATION ON DEBT. The Board of Directors currently funds acquisition
opportunities and development partially through short-term borrowings, as well
as out of undistributed cash available for distribution and other available
cash. The Board of Directors expects to refinance projects purchased or
developed with short-term debt either with long-term indebtedness or equity
financing depending upon the economic conditions at the time of refinancing.
The Board of Directors has adopted a policy of limiting its indebtedness to
approximately 50% of its total market capitalization (i.e., the market value
of the issued and outstanding shares of Common Stock, including interests
exchangeable therefor, plus total debt), but the organizational documents of
the Company do not contain any limitation on the amount or percentage of
indebtedness, funded or otherwise, that the Company may incur. The Board of
Directors, without the vote of the Company's stockholders, could alter or
eliminate its current policy on borrowing at any time at its discretion. If
this policy were changed, the Company could become more highly leveraged,
resulting in an increase in debt service that could adversely affect the
Company's cash flow and its ability to make expected distributions to its
stockholders and an increased risk of default on the Company's obligations.
The Company has established its debt policy relative to the market
capitalization of the Company rather than to the book value of its assets, a
ratio that is frequently employed. The Company has used total market
capitalization because it believes that the book value of its assets (which to
a large extent is the depreciated value of real property, the Company's
primary tangible asset) does not accurately reflect its ability to borrow and
to meet debt service requirements. The total market capitalization of the
Company, however, is more variable than book value, and does not necessarily
reflect the fair market value of the underlying assets of the Company at all
times. Although the Company will consider factors other than total market
capitalization in making decisions regarding the incurrence of indebtedness
(such as the acquisition cost of properties to be acquired with debt
financing, the estimated market value of such properties upon refinancing and
the ability of particular properties and the Company as a whole to generate
cash flow to cover expected debt service), there can be no assurance that the
ratio of indebtedness to total market capitalization (or to any other measure
of asset value) will be consistent with the expected level of distributions to
the Company's stockholders.
GOVERNMENT REGULATIONS. Many laws and governmental regulations are
applicable to the Properties and changes in these laws and regulations, or
their interpretation by agencies and the courts, occur frequently.
Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. Compliance with the ADA might require
removal of structural barriers to handicapped access in certain public areas
where such removal is "readily achievable." Noncompliance with the ADA could
result in the imposition of fines or an award of damages to private litigants.
The impact of application of the ADA to the Properties, including the extent
and timing of required renovations, is uncertain. If
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required changes involve a greater amount of expenditures than the Company
currently anticipates or if the changes must be made on a more accelerated
schedule than the Company currently anticipates, the Company's ability to make
expected distributions to stockholders could be adversely affected.
Other Regulations. The Properties are also subject to various federal, state
and local regulatory requirements such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
material compliance with all such regulatory requirements. However, there can
be no assurance that these requirements will not be changed or that new
requirements will not be imposed which would require significant unanticipated
expenditures by the Company and could have an adverse effect on the Funds from
Operations and expected distributions.
The City of Los Angeles has enacted certain regulations relating to the
repair of welded steel moment frame buildings located in certain areas damaged
as a result of the Northridge earthquake in Southern California on January 17,
1994. As currently enacted, such regulations apply to only one of the
Properties, representing approximately 78,000 rentable square feet. The
Company believes that such Property is in compliance with such regulations.
There can be no assurance, however, that similar regulations will not be
adopted by governmental agencies with the ability to regulate the Properties,
that the Company will not acquire additional properties which may be subject
to such regulation or that other requirements affecting the Properties will
not be imposed which would require significant unanticipated expenditures by
the Company and could have a material adverse effect on the Funds from
Operations and cash available for distribution. The Company believes, based in
part on recent engineering reports, that its Properties are in good condition.
Except as described in this Prospectus or any applicable Prospectus
Supplement, there are no other laws or regulations which have a material
effect on the Company's operations, other than typical state and local laws
affecting the development and operation of real property, such as zoning laws.
See "Certain Provisions of Maryland Law and of the Articles of Incorporation
and Bylaws," "Partnership Agreement of the Operating Partnership" and "Federal
Income Tax Consequences."
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. One of the factors
that will influence the market price of the Common Stock in public markets
will be the annual yield on the price paid for shares from distributions by
the Company. An increase in prevailing market interest rates on fixed income
securities may lead prospective purchasers of the Common Stock to demand a
higher annual yield from future distributions. Such an increase in the
required yield from distributions may adversely affect the market price of the
Common Stock. In addition, the market for equity securities can be volatile
and the trading price of the Common Stock could be subject to wide
fluctuations in response to operating results, news announcements, trading
volume, general market trends, changes in interest rates, governmental
regulatory action and changes in tax laws.
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USE OF PROCEEDS
The Company, as general partner of the Operating Partnership, is required
under the terms and conditions of the Partnership Agreement to invest the net
proceeds of any sale of Common Stock, Preferred Stock, Depositary Shares or
Warrants in the Operating Partnership. Unless otherwise indicated in the
applicable Prospectus Supplement, the Operating Partnership intends to use
such net proceeds for general corporate purposes including, without
limitation, the acquisition and development of properties and the repayment of
debt. Net proceeds from the sale of the Offered Securities initially may be
temporarily invested in short-term securities.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the year ended December
31, 1997 was 3.12. The IPO and the other transactions undertaken concurrently
with the IPO permitted the Company to significantly deleverage properties,
resulting in a significantly improved ratio of earnings to fixed charges.
Prior to the completion of the IPO in January 1997, the Kilroy Group operated
in a manner so as to minimize net taxable income to the owners. As a result,
although the Company's properties generally have had positive net cash flow,
the Kilroy Group's computation of the ratio of earnings to fixed charges for
the years ended December 31, 1996, 1995, 1994 and 1993 indicates that earnings
were inadequate to cover fixed charges by approximately $6.8 million, $2.7
million, $8.5 million and $2.1 million, respectively.
For purposes of computing these ratios, earnings consist of income (loss)
before extraordinary items, minority interest in income and interest expense.
Fixed charges consist of interest expense, capitalized interest and
amortization of deferred financing fees, whether expensed or capitalized.
Since the Company's inception it has neither issued any shares of nor paid
any dividends on preferred stock. Accordingly, the ratio of earnings to fixed
charges and preferred stock dividends is not presented.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Articles of Incorporation and Bylaws, copies of which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part. See "Additional Information."
GENERAL
Under the Articles of Incorporation, the authorized capital stock of the
Company consists of 150,000,000 shares of Common Stock and 30,000,000 shares
of Preferred Stock. As of the date of this Prospectus 24,475,000 shares of
Common Stock were issued and outstanding, excluding the 3,406,212 shares of
Common Stock which may be issued upon the exchange of common limited
partnership Units outstanding as of that date. Of the 30,000,000 shares of
authorized preferred stock, 1,200,000 shares have been designated as the
Company's Series A Preferred Stock, issuable at the Company's option in
exchange on a one for one basis for the Operating Partnership's 1,200,000
Series A Preferred Units. No shares of preferred stock are currently issued
and outstanding.
COMMON STOCK
Each outstanding share of Common Stock entitles the holder to one vote on
all matters presented to stockholders for a vote, including the election of
directors, and, except as otherwise required by law and except as provided in
any resolution adopted by the Board of Directors with respect to any other
class or series of stock establishing the designation, powers, preferences and
relative, participating, optional or other special rights and powers of such
series, the holders of such shares possess the exclusive voting power, subject
to the provisions of the Articles of Incorporation regarding the ownership of
shares of Common Stock in excess of the Ownership Limit, or such other limit
as provided in the Articles of Incorporation or as otherwise permitted by the
Board of Directors as described below. Holders of shares of Common Stock have
no conversion, exchange, sinking fund, redemption or appraisal rights and have
no preemptive rights to subscribe for any securities of the Company or
cumulative voting rights in the election of directors. All shares of Common
Stock issued and outstanding are duly authorized, fully paid and non-
assessable. Subject to the preferential rights of any other shares or series
of stock and to the provisions of the Articles of Incorporation regarding
ownership of shares of Common Stock in excess of the Ownership Limit, or such
other limit as provided in the Articles of Incorporation or as otherwise
permitted by the Board of Directors as described below, distributions are paid
to the holders of shares of Common Stock if and when authorized and declared
by the Board of Directors out of funds legally available therefor. The Company
currently makes quarterly distributions.
Under Maryland law, stockholders are generally not liable for the Company's
debts or obligations. If the Company is liquidated, subject to the right of
any holders of Preferred Stock to receive preferential distributions, each
outstanding share of Common Stock will be entitled to participate pro rata in
the assets remaining after payment of, or adequate provision for, debts and
liabilities of the Company, including debts and liabilities arising out of its
status as general partner of the Operating Partnership.
Subject to the provisions of the Articles of Incorporation regarding the
ownership of shares of Common Stock in excess of the Ownership Limit, or such
other limit as provided in the Articles of Incorporation or as otherwise
permitted by the Board of Directors described below, all shares of Common
Stock have equal distribution, liquidation and voting rights, and have no
preference or exchange rights. See "--Restrictions on Ownership and Transfer."
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders 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 of the votes entitled to be
cast on the matter) is set forth in the corporation's charter. Under the MGCL,
the term
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"substantially all of the Company's assets" is not defined and is, therefore,
subject to Maryland common law and to judicial interpretation and review in
the context of the unique facts and circumstances of any particular
transaction. The Articles of Incorporation do not provide for a lesser
percentage in any such situation.
The Articles of Incorporation authorize the Board of Directors to reclassify
any unissued shares of capital stock into other classes or series of classes
of stock and to establish the number of shares in each class or series and to
set the preferences, conversion and other rights, voting powers, restrictions,
limitations and restrictions on ownership, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption for
each such class or series.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services.
PREFERRED STOCK
General
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors. No Preferred Stock is currently issued
or outstanding. Prior to the issuance of shares of each series, the Board of
Directors is required by the MGCL and the Articles of Incorporation to fix for
each series the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms or
conditions of redemption, as permitted by Maryland law. Because the Board of
Directors has the power to establish the preferences, powers and rights of
each series of Preferred Stock, it may afford the holders of any series of
Preferred Stock preferences, powers and rights, voting or otherwise, senior to
the rights of holders of shares of Common Stock. The issuance of Preferred
Stock could have the effect of delaying or preventing a change of control of
the Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest.
Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Prospectus Supplement relating to that class or series, including a Prospectus
Supplement providing that Preferred Stock may be issuable upon the exercise of
Warrants issued by the Company. The description of Preferred Stock set forth
below and the description of the terms of a particular class or series of
Preferred Stock set forth in the applicable Prospectus Supplement do not
purport to be complete and are qualified in their entirety by reference to the
articles supplementary relating to that class or series.
The preferences and other terms of the Preferred Stock of each class or
series will be fixed by the articles supplementary relating to such class or
series. A Prospectus Supplement, relating to each class or series, will
specify the terms of the Preferred Stock as follows:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
(3) The dividend rate(s), period(s), and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) Whether such Preferred Stock is cumulative or not and, if cumulative,
the date from which dividends on such Preferred Stock shall accumulate;
(5) The provision for a sinking fund, if any, for such Preferred Stock;
(6) The provision for redemption, if applicable, of such Preferred Stock;
(7) Any listing of such Preferred Stock on any securities exchange;
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(8) The terms and conditions, if applicable, upon which such Preferred
Stock will be converted into Common Stock of the Company, including the
conversion price (or manner of calculation thereof);
(9) A discussion of any material federal income tax consequences
applicable to such Preferred Stock;
(10) Any limitations on actual and constructive ownership and
restrictions on transfer, in each case as may be appropriate to preserve
the status of the Company as a REIT;
(11) The relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(12) Any limitations on issuance of any class or series of preferred
stock ranking senior to or on a parity with such class or series of
Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company;
(13) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock; and
(14) Any voting rights of such Preferred Stock.
Rank. Unless otherwise specified in the applicable Prospectus Supplement,
the Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to all
classes or series of common stock of the Company, and to all equity securities
ranking junior to such Preferred Stock with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company; (ii) on a
parity with all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank on a parity with the
Preferred Stock with respect to dividends rights or rights upon liquidation,
dissolution or winding up of the Company; and (iii) junior to all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
Conversion Rights. The terms and conditions, if any, upon which any shares
of any class or series of Preferred Stock are convertible into Common Stock
will be set forth in the applicable Prospectus Supplement relating thereto.
Such terms will include the number of shares of Common Stock into which the
shares of Preferred Stock are convertible, the conversion price (or manner of
calculation thereof), the conversion period, provisions as to whether
conversion will be at the option of the holders of such class or series of
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such class or series of Preferred Stock.
8.075% Series A Cumulative Redeemable Preferred Stock
General. Each share of Series A Preferred Stock will be entitled to receive
cumulative preferential dividends from the date of issue (including any
accrued but unpaid distributions in respect of Series A Preferred Units (as
defined herein) at the time that such limits are exchanged for shares of
Series A Preferred Stock), payable on or before the 15th of February, May,
August, and November of each year, in cash, at the rate of 8.075% per annum in
preference to any payment made on any other classes of capital stock or other
equity securities of the Company, other than any class or series of equity
securities of the Company expressly designated as ranking on a parity with or
senior to the Series A Preferred Stock.
Redemption. The Series A Preferred Stock may be redeemed, at the Company's
option, on and after February 6, 2003, in whole or in part from time to time,
at a redemption price payable in cash equal to $50.00 per share of Series A
Preferred Stock, plus any accrued but unpaid dividends to the date of
redemption. The redemption price of the Series A Preferred Stock (other than
the portions thereof consisting of accumulated but unpaid dividends) will be
payable solely out of the sale proceeds of capital stock of the Company.
Limited Voting Rights. If at any time full distributions shall not have been
timely made on any Series A Preferred Stock with respect to any six (6) prior
quarterly distribution periods, whether or not consecutive, the holders of
such Series A Preferred Stock, voting together as a single class with the
holders of each class or series of parity preferred stock, will have the right
to elect two additional directors to the Board of Directors at a special
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meeting called by the holders of record of at least 10% of the then
outstanding shares of Series A Preferred Stock, and any parity preferred
stock, or at the next annual meeting of stockholders, and at each subsequent
annual meeting of stockholders or special meeting held in place thereof, until
all such distributions in arrears and distributions for the current quarter
have been paid in full. Thereafter, the holders of Series A Preferred Stock
will be divested of their voting rights and the term of any member of the
Board of Directors elected by the holders of Series A Preferred Stock and
holders of any other shares of parity preferred stock shall terminate. In
addition, for so long as any shares of Series A Preferred Stock are
outstanding, without the consent of two-thirds of the holders of the Series A
Preferred Stock then outstanding, the Company may not (i) designate, authorize
or create, or increase the authorized or issued amount of, reclassify any
authorized class of shares or issue obligations or securities convertible
into, shares of any class of equity securities ranking prior to the Series A
Preferred Stock with respect to distributions or rights upon liquidation,
dissolution, or winding-up, (ii) designate, authorize or create, or increase
the authorized or issued amount of, reclassify any authorized class of shares
or issue obligations or securities convertible into, shares of any class of
equity securities ranking equal to the Series A Preferred Stock with respect
to distributions or rights upon liquidation, dissolution, or winding-up, but
only to the extent that such securities are issued to an affiliate of the
Company, or (iii) either (A) consolidate with, merge into, or transfer or
lease substantially all of the assets to, any corporation or other entity, or
(B) amend or repeal the provisions of the Articles of Incorporation that
adversely affect the powers, special rights, preferences, privileges or voting
power of the Series A Preferred Stock; provided however, that with respect to
clause (iii) above, so long as the Company is the surviving entity and the
Series A Preferred Stock remains outstanding on the same terms, or the
resulting, surviving or transferee entity is a corporation organized under the
laws of any state and substitutes the Series A Preferred Stock for other
preferred stock having substantially the same terms and rights as the Series A
Preferred Stock. The Series A Preferred Stock will have no voting rights other
than as discussed above and as otherwise provided by applicable law.
Liquidation Preference. Each share of Series A Preferred Stock is entitled
to a liquidation preference of $50.00 per share, plus any accrued but unpaid
dividends, in preference to any other class or series of capital stock of the
Company.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Ownership Limits. Subject to certain exceptions, in order for the Company to
qualify as a REIT under the Code, no more than 50% in value of its outstanding
shares of stock may be owned, actually or constructively, by five or fewer
individuals (as defined in the Code to include certain entities) during the
last half of a taxable year (other than the first year for which an election
to be treated as a REIT has been made). In addition, if the Company, or an
owner of 10% or more of the Company, actually or constructively owns 10% or
more of a tenant of the Company (or a tenant of any partnership in which the
Company is a partner), the rent received by the Company (either directly or
through any such partnership) from such tenant will not be qualifying income
for purposes of the REIT gross income tests of the Code. A REIT's stock must
also be beneficially owned by 100 or more persons during at least 335 days of
a taxable year of twelve months or during a proportionate part of a shorter
taxable year (other than the first year for which an election to be treated as
a REIT has been made).
Because the Company will elect to qualify as a REIT beginning with the year
ending December 31, 1997, the Articles of Incorporation contain restrictions
on the ownership and transfer of capital stock of the Company which are
intended to assist the Company in complying with these requirements. The
Ownership Limit relating to Common Stock set forth in the Articles of
Incorporation provides that, subject to certain specified exceptions, no
person or entity may own, or be deemed to own by virtue of the applicable
constructive ownership provisions of the Code, more than 7.0% (by number or
value, whichever is more restrictive) of the outstanding shares of Common
Stock. The ownership limit relating to Series A Preferred Stock set forth in
the Articles of Incorporation provides that, subject to certain specified
exceptions, no person or entity may own, or be deemed to own by virtue of the
constructive ownership provisions of the Code, Series A Preferred Stock which,
taking into account any other capital stock of the Company actually or
constructively owned by such person or entity would cause such ownership to
exceed 7% (by value) of the outstanding shares of capital stock of the
Company. The constructive ownership rules are complex, and may cause shares of
capital stock of the Company owned
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actually or constructively by a group of related individuals and/or entities
to be constructively owned by one individual or entity. As a result, the
acquisition of less than 7.0% of the shares of Common Stock, or the
acquisition of Series A Preferred Stock which, taking into account any other
capital stock of the Company, results in the acquisition of less than 7% (by
value) of the shares of capital stock of the Company (or the acquisition of an
interest in an entity that owns, actually or constructively, Common Stock or
Series A Preferred Stock), by an individual or entity, could, nevertheless
cause that individual or entity, or another individual or entity, to own
constructively in excess of 7.0% of the outstanding Common Stock or capital
stock of the Company, and thus violate the Ownership Limit, or the ownership
limit relating to Series A Preferred Stock or such other limit as provided in
the Articles of Incorporation or as otherwise permitted by the Board of
Directors. In addition, a violation of the ownership limit relating to the
Series A Preferred Stock may occur as a result of a fluctuation in the
relative value of such stock and the Common Stock, even absent a transfer or
other change in actual or constructive ownership of such stock. The Board of
Directors may, but in no event will be required to, waive the Ownership Limit
or the ownership limit relating to Series A Preferred Stock with respect to a
particular stockholder if it determines that such ownership will not
jeopardize the Company's status as a REIT and the Board of Directors otherwise
decides such action would be in the best interest of the Company. As a
condition of such waiver, the Board of Directors may require an opinion of
counsel satisfactory to it and/or undertakings or representations from the
applicant with respect to preserving the REIT status of the Company. The Board
of Directors has obtained such undertakings and representations from John B.
Kilroy, Sr. and John B. Kilroy, Jr. and has waived the Ownership Limit with
respect to the actual and constructive ownership (and to any constructive
ownership of securities therefrom) of Common Stock by John B. Kilroy, Sr. and
John B. Kilroy, Jr. Consequently, John B. Kilroy, Sr., John B. Kilroy, Jr.,
members of their families and entities which are deemed to own Messrs.
Kilroys' Common Stock under the constructive ownership rules of the Code will
be permitted to own, in the aggregate, actually or constructively, up to 19.6%
(by number of shares or value, whichever is more restrictive) of the
outstanding Common Stock.
The Articles of Incorporation further prohibit (i) any person from actually
or constructively owning shares of capital stock of the Company that would
result in the Company being "closely held" under Section 856(h) of the Code or
otherwise cause the Company to fail to qualify as a REIT, and (ii) any person
from transferring shares of stock of the Company if such transfer would result
in shares of stock of the Company being beneficially owned by fewer than 100
persons (determined without reference to any rules of attribution).
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of capital stock of the Company that will or
may violate any of the foregoing restrictions on transferability and ownership
is required to give notice immediately to the Company and provide the Company
with such other information as the Company may request in order to determine
the effect of such transfer on the Company's status as a REIT. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Directors determines that it is no longer in the best interest of the Company
to attempt to qualify, or to continue to qualify, as a REIT. Except as
otherwise described above, any change in the Ownership Limit or the ownership
limit relating to the Series A Preferred Stock would require an amendment to
the Articles of Incorporation. Amendments to the Articles of Incorporation
require the affirmative vote of holders owning at least two-thirds of the
shares of the Company's capital stock outstanding and entitled to vote
thereon.
Pursuant to the Articles of Incorporation, if any purported transfer of
Common Stock or Series A Preferred Stock or any other event would otherwise
result in any person violating the Ownership Limit, the ownership limit
relating to the Series A Preferred Stock or such other limit as provided in
the Articles of Incorporation or as otherwise permitted by the Board of
Directors, then any such purported transfer will be void and of no force or
effect with respect to the purported transferee (the "Prohibited Transferee")
as to that number of shares in excess of the Ownership Limit, the ownership
limit relating to the Series A Preferred Stock or such other limit, and the
Prohibited Transferee shall acquire no right or interest (or, in the case of
any event other than a purported transfer, the person or entity holding record
title to any such excess shares (the "Prohibited Owner") shall cease to own
any right or interest) in such excess shares. Any such excess shares described
above will be transferred automatically, by operation of law, to a trust, the
beneficiary of which will be a qualified charitable organization selected by
the Company (the "Beneficiary"). Such automatic transfer shall be deemed to be
effective as of the
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close of business on the business day prior to the date of such violative
transfer. Within 20 days of receiving notice from the Company of the transfer
of shares to the trust, the trustee of the trust (who shall be designated by
the Company and be unaffiliated with the Company and any Prohibited Transferee
or Prohibited Owner) will be required to sell such excess shares to a person
or entity who could own such shares without violating the Ownership Limit, the
ownership limit relating to the Series A Preferred Stock or such other limit
as provided in the Articles of Incorporation or as otherwise permitted by the
Board of Directors, and distribute to the Prohibited Owner or Prohibited
Transferee, as applicable, an amount equal to the lesser of the price paid by
the Prohibited Transferee or Prohibited Owner for such excess shares or the
sales proceeds received by the trust for such excess shares. In the case of
any excess shares resulting from any event other than a transfer, or from a
transfer for no consideration (such as a gift), the trustee will be required
to sell such excess shares to a qualified person or entity and distribute to
the Prohibited Owner or Prohibited Transferee, as applicable, an amount equal
to the lesser of the Market Price (as defined in the Articles of
Incorporation) of such excess shares as of the date of such event or the sales
proceeds received by the trust for such excess shares. In either case, any
proceeds in excess of the amount distributable to the Prohibited Transferee or
Prohibited Owner, as applicable, will be distributed to the Beneficiary. Prior
to a sale of any such excess shares by the trust, the trustee will be entitled
to receive, in trust for the Beneficiary, all dividends and other
distributions paid by the Company with respect to such excess shares, and also
will be entitled to exercise all voting rights with respect to such excess
shares. Subject to Maryland law, effective as of the date that such shares
have been transferred to the trust, the trustee shall have the authority (at
the trustee's sole discretion) (i) to rescind as void any vote cast by a
Prohibited Transferee or Prohibited Owner, as applicable, prior to the
discovery by the Company that such shares have been transferred to the trust
and (ii) to recast such vote in accordance with the desires of the trustee
acting for the benefit of the Beneficiary. However, if the Company has already
taken irreversible corporate action, then the trustee shall not have the
authority to rescind and recast such vote. Any dividend or other distribution
paid to the Prohibited Transferee or Prohibited Owner (prior to the discovery
by the Company that such shares had been automatically transferred to a trust
as described above) will be required to be repaid to the trustee upon demand
for distribution to the Beneficiary. In the event that the transfer to the
trust as described above is not automatically effective (for any reason) to
prevent violation of the Ownership Limit, the ownership limit relating to the
Series A Preferred Stock or such other limit as provided in the Articles of
Incorporation or as otherwise permitted by the Board of Directors, then the
Articles of Incorporation provide that the transfer of the excess shares will
be void.
In addition, shares of stock of the Company held in the trust shall be
deemed to have been offered for sale to the Company, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the trust (or, in the case of a
devise or gift, the Market Price at the time of such devise or gift) and (ii)
the Market Price on the date the Company, or its designee, accepts such offer.
The Company shall have the right to accept such offer until the trustee has
sold the shares of stock held in the trust. Upon such a sale to the Company,
the interest of the Beneficiary in the shares sold shall terminate and the
trustee shall distribute the net proceeds of the sale to the Prohibited
Transferee or Prohibited Owner.
If any purported transfer of shares of Common Stock or Series A Preferred
Stock would cause the Company to be beneficially owned by fewer than 100
persons, such transfer will be null and void in its entirety and the intended
transferee will acquire no rights to the stock.
All certificates representing shares of Common Stock and Series A Preferred
Stock will bear a legend referring to the restrictions on such class of stock
described above. The foregoing ownership limitations could delay, defer or
prevent a transaction or a change in control of the Company that might involve
a premium price for the Common Stock or Series A Preferred Stock or otherwise
be in the best interest of stockholders.
Under the Articles of Incorporation, every owner of a specified percentage
(or more) of the outstanding shares of Common Stock or Series A Preferred
Stock must file a completed questionnaire with the Company containing
information regarding their ownership of such shares, as set forth in the
Treasury Regulations. Under current Treasury Regulations, the percentage will
be set between 0.5% and 5.0%, depending upon the number of record holders of
the Company's shares of capital stock. In addition, each stockholder shall
upon demand be
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required to disclose to the Company in writing such information as the Company
may request in order to determine the effect, if any, of such stockholder's
actual and constructive ownership of the Company's capital stock on the
Company's status as a REIT and to ensure compliance with the Ownership Limit,
the ownership limit relating to the Series A Preferred Stock or such other
limit as provided in the Articles of Incorporation or as otherwise permitted
by the Board of Directors.
WARRANTS
The Company currently has no Warrants outstanding (other than options issued
under the Company's stock option plan and the redemption and exchange rights
of Unitholders). The Company may issue Warrants for the purchase of Preferred
Stock or Common Stock. Warrants may be issued independently or together with
any other Offered Securities offered by any Prospectus Supplement and may be
attached to or separate from such Offered Securities. Each series of Warrants
will be issued under a separate warrant agreement (each, a "Warrant
Agreement") to be entered into between the Company and a warrant agent
specified in the applicable Prospectus Supplement (the "Warrant Agent"). The
Warrant Agent will act solely as an agent of the Company in connection with
the Warrants of such series and will not assume any obligation or relationship
of agency or trust for or with any provisions of the Warrants offered hereby.
Further terms of the Warrants and the applicable Warrant Agreements will be
set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Warrants
in respect of which this Prospectus is being delivered, including, where
applicable, the following: (1) the title of such Warrants; (2) the aggregate
number of such Warrants; (3) the price or prices at which such Warrants will
be issued; (4) the designation, terms and number of shares of Preferred Stock
or Common Stock purchasable upon exercise of such Warrants; (5) the
designation and terms of the Offered Securities, if any, with which such
Warrants are issued and the number of such Warrants issued with each such
Offered Security; (6) the date, if any, on and after which such Warrants and
the related Preferred Stock or Common Stock will be separately transferable,
including any limitations on ownership and transfer of such Warrants as may be
appropriate to preserve the status of the Company as a REIT; (7) the price at
which each share of Preferred Stock or Common Stock purchasable upon exercise
of such Warrants may be purchased; (8) the date on which the right to exercise
such Warrants shall commence and the date on which such right shall expire;
(9) the minimum or maximum amount of such Warrants which may be exercised at
any one time; (10) information with respect to book-entry procedures, if any;
(11) a discussion of certain federal income tax consequences; and (12) any
other terms of such Warrants, including terms, procedures and limitations
relating to the exchange and exercise of such Warrants.
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue Depositary Shares, each of which will represent a
fractional interest of a share of a particular class or series of Preferred
Stock, as specified in the applicable Prospectus Supplement. Shares of a class
or series of Preferred Stock represented by Depositary Shares will be
deposited under a separate Deposit Agreement (each, a "Deposit Agreement")
among the Company, the depositary named therein (the "Preferred Stock
Depositary") and the holders from time to time of the depositary receipts
issued by the Preferred Stock Depositary which will evidence the Depositary
Shares ("Depositary Receipts"). Subject to the terms of the Deposit Agreement,
each owner of a Depositary Receipt will be entitled, in proportion to the
fractional interest of a share of a particular class or series of Preferred
Stock represented by the Depositary Shares evidenced by such Depositary
Receipt, to all the rights and preferences of the class or series of the
Preferred Stock represented by such Depositary Shares (including dividend,
voting, conversion, redemption and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the
issuance and delivery of the Preferred Stock by the Company to a Preferred
Stock Depositary, the Company will cause such Preferred Stock Depositary to
issue, on behalf of the
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Company, the Depositary Receipts. Copies of the applicable form of Deposit
Agreement and Depositary Receipt may be obtained from the Company upon
request, and the statements made hereunder relating to the Deposit Agreement
and the Depositary Receipt to be issued thereunder are summaries of certain
anticipated provisions thereof and do not purport to be complete and are
subject to, and qualified in their entirety by reference to, all of the
provisions of the applicable Deposit Agreement and related Depositary
Receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions received in respect of a class or series of Preferred Stock
to the record holders of Depositary Receipts evidencing the related Depositary
Shares in proportion to the number of such Depositary Receipts owned by such
holders, subject to certain obligations of holders to file proofs,
certificates and other information and to pay certain charges and expenses to
such Preferred Stock Depositary.
In the event of a distribution other than in cash, the Preferred Stock
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject to certain obligations of
holders to file proofs, certificates and other information and to pay certain
charges and expenses to the Preferred Stock Depositary, unless such Preferred
Stock Depositary determines that it is not feasible to make such distribution,
in which case the Preferred Stock Depositary may, with the approval of the
Company, sell such property and distribute the net proceeds from such sale to
such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any class or series of Preferred Stock converted
into shares in excess of the Ownership Limit or otherwise converted or
exchanged.
WITHDRAWAL OF STOCK
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Stock Depositary (unless the related Depositary Shares have
previously been called for redemption or converted) the holders thereof will
be entitled to delivery at such office, to or upon each such holder's order,
of the number of whole or fractional shares of the class or series of
Preferred Stock and any money or other property represented by the Depositary
Shares evidenced by such Depositary Receipts. Holders of Depositary Receipts
will be entitled to receive whole or fractional shares of the related class or
series of Preferred Stock on the basis of the proportion of Preferred Stock
represented by each Depositary Share as specified in the applicable Prospectus
Supplement, but holders of such shares of Preferred Stock will not thereafter
be entitled to receive Depositary Shares therefor. If the Depositary Receipts
delivered by the holder evidence a number of Depositary Shares in excess of
the number of Depositary Shares representing the number of shares of Preferred
Stock to be withdrawn, the Preferred Stock Depositary will deliver to such
holder at the same time a new Depositary Receipt evidencing such excess number
of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems shares of Preferred Stock held by the Preferred
Stock Depositary, the Preferred Stock Depositary will redeem as of the same
redemption date the number of the Depositary Shares representing shares of
such class or series of Preferred Stock so redeemed, provided the Company
shall have paid in full to the Preferred Stock Depositary the redemption price
of the Preferred Stock to be redeemed plus an amount equal to any accrued and
unpaid dividends thereon to the date fixed for redemption. The redemption
price per Depositary Share will be equal to the corresponding proportion of
the redemption price and any other amounts per share payable with respect to
such class or series of Preferred Stock. If fewer than all the Depositary
Shares are to be redeemed, the Depositary Shares to be redeemed will be
selected pro rata (as nearly as may be practicable without creating fractional
Depositary Shares) or by any other equitable method determined by the Company
that will not result in the issuance of any shares in excess of the Ownership
Limit.
From and after the date fixed for redemption, all dividends in respect of
the shares of a class or series of Preferred Stock so called for redemption
will cease to accrue, the Depositary Shares so called for redemption
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will no longer be deemed to be outstanding and all rights of the holders of
the Depositary Receipts evidencing the Depositary Shares so called for
redemption will cease, except the right to receive any moneys payable upon
such redemption and any money or other property to which the holders of such
Depositary Receipts were entitled upon such redemption upon surrender thereof
to the Preferred Stock Depositary.
VOTING OF THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of a class or
series of Preferred Stock deposited with the Preferred Stock Depositary are
entitled to vote, the Preferred Stock Depositary will mail the information
contained in such notice of meeting to the record holders of the Depositary
Receipts evidencing the Depositary Shares which represent such class or series
of Preferred Stock. Each record holder of Depositary Receipts evidencing
Depositary Shares on the record date (which will be the same date as the
record date for such class or series of Preferred Stock) will be entitled to
instruct the Preferred Stock Depositary as to the exercise of the voting
rights pertaining to the amount of Preferred Stock represented by such
holder's Depositary Shares. The Preferred Stock Depositary will vote the
amount of such class or series of Preferred Stock represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all reasonable action which may be deemed necessary by the
Preferred Stock Depositary in order to enable the Preferred Stock Depositary
to do so. The Preferred Stock Depositary will abstain from voting the amount
of Preferred Stock represented by such Depositary Shares to the extent it does
not receive specific instructions from the holders of Depositary Receipts
evidencing such Depositary Shares. The Preferred Stock Depositary will not be
responsible for any failure to carry out any instruction to vote, or for the
manner or effect of any such vote made, as long as any such action or non-
action is in good faith and does not result from negligence or willful
misconduct of the Preferred Stock Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company
whether voluntary or involuntary, the holders of each Depositary Receipt will
be entitled to the fraction of the liquidation preference accorded each share
of Preferred Stock represented by the Depositary Share evidenced by such
Depositary Receipt as set forth in the applicable Prospectus Supplement.
CONVERSION
The Depositary Shares, as such, will not be convertible into Common Stock or
any other securities or property of the Company. Nevertheless, if so specified
in the applicable Prospectus Supplement relating to an offering of Depositary
Shares, the Depositary Receipts may be surrendered by holders thereof to the
applicable Preferred Stock Depositary with written instructions to the
Preferred Stock Depositary to instruct the Company to cause conversion of a
class or series of Preferred Stock represented by the Depositary Shares
evidenced by such Depositary Receipts into whole shares of Common Stock, other
shares of a class or series of Preferred Stock (including shares in excess of
the Ownership Limit) of the Company or other shares of stock, and the Company
has agreed that upon receipt of such instructions and any amounts payable in
respect thereof, it will cause the conversion thereof utilizing the same
procedures as those provided for delivery of Preferred Stock to effect such
conversion. If the Depositary Shares evidenced by a Depositary Receipt are to
be converted in part only, a Depositary Receipt or Receipts will be issued for
any Depositary Shares not to be converted. No fractional shares of Common
Stock will be issued upon conversion, and if such conversion will result in a
fractional share being issued, an amount will be paid in cash by the Company
equal to the value of the fractional interest based upon the closing price of
the Common Stock on the last business day prior to the conversion.
AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing Depositary Shares which represent
the Preferred Stock and any provision of the Deposit Agreement may at any time
be amended by agreement between the Company and the Preferred Stock
Depositary. However, any amendment that materially and adversely alters the
rights of the holders of Depositary Receipts or that would be materially and
adversely inconsistent with the rights granted to
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the holders of the related Preferred Stock will not be effective unless such
amendment has been approved by the existing holders of at least two-thirds of
the applicable Depositary Shares evidenced by the applicable Depositary
Receipts then outstanding. No amendment shall impair the right, subject to
certain anticipated exceptions in the Deposit Agreements, of any holder of
Depositary Receipts to surrender any Depositary Receipt with instructions to
deliver to the holder the related class or series of Preferred Stock and all
money and other property, if any, represented thereby, except in order to
comply with law. Every holder of an outstanding Depositary Receipt at the time
any such amendment becomes effective shall be deemed, by continuing to hold
such Depositary Receipt, to consent and agree to such amendment and to be
bound by the applicable Deposit Agreement as amended thereby.
The Deposit Agreement may be terminated by the Company upon not less than 30
days' prior written notice to the Preferred Stock Depositary if (i) such
termination is necessary to preserve the Company's status as a REIT or (ii) a
majority of each series or class of Preferred Stock subject to such Deposit
Agreement consents to such termination, whereupon the Preferred Stock
Depositary will deliver or make available to each holder of Depositary
Receipts, upon surrender of the Depositary Receipts held by such holder, such
number of whole or fractional shares of each Preferred Stock as are
represented by the Depositary Shares evidenced by such Depositary Receipts
together with any other property held by Preferred Stock Depositary with
respect to such Depositary Receipts. The Company has agreed that if the
Deposit Agreement is terminated to preserve the Company's status as a REIT,
then the Company will use its best efforts to list each class or series of
Preferred Stock issued upon surrender of the related Depositary Shares. In
addition, the Deposit Agreement will automatically terminate if (i) all
outstanding Depositary Shares shall have been redeemed, (ii) there shall have
been a final distribution in respect of each class or series of Preferred
Stock in connection with any liquidation, dissolution or winding up of the
Company and such distribution shall have been distributed to the holders of
the Depositary Receipts evidencing the Depositary Shares representing such
class or series of Preferred Stock or (iii) each share of the related
Preferred Stock shall have been converted into stock of the Company not so
represented by Depositary Shares.
CHARGES OF A PREFERRED STOCK DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, the
Company will pay the fees and expenses of the Preferred Stock Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, holders of Depositary Receipts will pay the fees and expenses of the
Preferred Stock Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the Deposit
Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Preferred Stock Depositary may resign at any time by delivering to the
Company notice of its election to do so, and the Company may at any time
remove the Preferred Stock Depositary, any such resignation or removal to take
effect upon the appointment of a successor Preferred Stock Depositary. A
successor Preferred Stock Depositary must be appointed within 60 days after
delivery of the notice of resignation or removal and must be a bank or trust
company having its principal office in the United States and having a combined
capital and surplus of at least $50,000,000.
MISCELLANEOUS
The Preferred Stock Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Stock Depositary with respect to the related Preferred Stock.
Neither the Preferred Stock Depositary nor the Company will be liable if it
is prevented from or delayed in, by law or any circumstances beyond its
control, performing its obligations under the Deposit Agreement. The
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obligations of the Company and the Preferred Stock Depositary under the
Deposit Agreement will be limited to performing their duties thereunder in
good faith and without negligence (in the case of any action or inaction in
the voting of a class or series of Preferred Stock represented by the
Depositary Shares), gross negligence or willful misconduct, and the Company
and the Preferred Stock Depositary will not be obligated to prosecute or
defend any legal proceeding in respect of any Depositary Receipts, Depositary
Shares or shares of a class or series of Preferred Stock represented thereby
unless satisfactory indemnity is furnished. The Company and the Preferred
Stock Depositary may rely on written advice of counsel or accountants, or
information provided by persons presenting shares of Preferred Stock
represented thereby for deposit, holders of Depositary Receipts or other
persons believed in good faith to be competent to give such information, and
on documents believed in good faith to be genuine and signed by a proper
party.
In the event a Preferred Stock Depositary shall receive conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Company, on the other hand, the Preferred Stock Depositary shall
be entitled to act on such claims, requests or instructions received from the
Company.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE ARTICLES OF INCORPORATION AND BYLAWS
The following paragraphs summarize certain provisions of the MGCL and the
Articles of Incorporation and Bylaws. The summary does not purport to be
complete and is subject to and qualified in its entirety by reference to the
MGCL and the Articles of Incorporation and Bylaws, copies of which are
exhibits to the Registration Statement of which this Prospectus is a part.
THE BOARD OF DIRECTORS
The Articles of Incorporation provide that the number of directors of the
Company shall be established pursuant to the Bylaws but shall not be less than
the minimum number required by the MGCL, which in the case of the Company is
three. The Bylaws currently provide that the number of directors shall be
fixed or changed by the then elected directors but will consist of not fewer
than five nor more than 13 members. The number of directors is currently fixed
at seven. Any vacancy (except for a vacancy caused by removal) will be filled,
at any regular meeting or at any special meeting called for that purpose, by a
majority of the remaining directors or, in the case of a vacancy resulting
from an increase in the number of directors, by a majority of the entire Board
of Directors. A vacancy resulting from removal will be filled by the
stockholders at the next annual meeting of stockholders or at a special
meeting of the stockholders called for that purpose. The Articles of
Incorporation and Bylaws provide that a majority of the Board must be
"Independent Directors." An "Independent Director" is a director who is not an
employee, officer or affiliate of the Company or a subsidiary or division
thereof, or a relative of a principal executive officer, or who is not an
individual member of an organization acting as advisor, consultant or legal
counsel, receiving compensation on a continuing basis from the Company in
addition to director's fees.
Pursuant to the Articles of Incorporation, the directors are divided into
three classes as nearly equal in size as practicable. One class holds office
initially for a term expiring at the annual meeting of stockholders to be held
in 1998, another class holds office initially for a term expiring at the
annual meeting of stockholders to be held in 1999 and another class holds
office initially for a term expiring at the annual meeting of stockholders to
be held in 2000. As the term of each class expires, directors in that class
will be elected for a term of three years and until their successors are duly
elected and qualified and the directors in the other two classes will continue
in office. The Company believes that classification of the Board of Directors
helps to assure the continuity and stability of the Company's business
strategies and policies as determined by the Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
a majority of the Board of Directors. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions. Holders of shares of Common Stock will have no right to cumulative
voting for the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the shares of Common Stock will be
able to elect all of the successors of the class of directors whose term
expires at that meeting.
REMOVAL OF DIRECTORS
While the Articles of Incorporation and the MGCL empower the stockholders to
fill vacancies in the Board of Directors that are caused by the removal of a
director, the Articles of Incorporation preclude stockholders from removing
incumbent directors except upon a substantial affirmative vote. Specifically,
the Articles of Incorporation provide that a director may be removed only for
cause and only by the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of directors. Under the MGCL, the term
"cause" is not defined and is, therefore, subject to Maryland common law and
to judicial interpretation and review in the context of the unique facts and
circumstances of any particular situation. This provision, when coupled with
the provision
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in the Bylaws authorizing the Board of Directors to fill vacant directorships,
precludes stockholders from removing incumbent directors except upon a
substantial affirmative vote and filling the vacancies created by such removal
with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between the Company and
any person who beneficially owns, directly or indirectly, 10% or more of the
voting power of the Company's shares, or an affiliate of the Company who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the Company's then
outstanding shares (an "Interested Stockholder") or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the Board of Directors and approved by the
affirmative vote of at least (i) 80% of the votes entitled to be cast by
holders of outstanding shares of the Company's voting stock and (ii) two-
thirds of the votes entitled to be cast by holders of outstanding shares of
the Company's voting stock other than shares held by the Interested
Stockholder with whom the business combination is to be effected, unless,
among other things, the Company's stockholders receive a minimum price (as
defined in the MGCL) for their shares of stock and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the MGCL do not apply,
however, to business combinations that are approved or exempted by the Board
of Directors prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Board of Directors has resolved to opt out of the
business combinations provisions of the MGCL, and such resolutions also
require that any decision to opt back in be subject to the approval of holders
of a majority of the shares of Common Stock. As a result of the Company's
decision to opt out of the business combinations provisions of the MGCL, an
Interested Stockholder would be able to effect a "business combination"
without complying with the requirements set forth above. The decision to opt
out of the provisions may have the effect of making it easier for stockholders
who become Interested Stockholders to consummate a business combination
involving the Company. However, no assurance can be given that any such
business combination would be consummated or, if consummated, would result in
a purchase of shares of Common Stock from any stockholder at a premium.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of the Company acquired in a
"control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares owned by the acquiror or by officers or directors who
are employees of the Company. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired
by the acquiror, or in respect of which the acquiror is able to exercise or
direct the exercise of voting power (except solely by revocable proxy), would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third; (ii) one-third or more but less than a majority; or (iii) a
majority of all voting power. "Control shares" do not include shares of stock
the acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider voting rights for the shares. If
no request for a meeting is made, the Company may itself present the question
at any stockholders' meeting.
If voting rights are not approved at the stockholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the MGCL, then, subject to certain conditions and limitations, the Company may
redeem any or all of the control shares (except those for which voting rights
have previously
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been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders' meeting and the acquiror
becomes entitled to vote a majority of the shares of stock entitled to vote,
all other stockholders may exercise appraisal rights. The fair value of the
shares of stock as determined for purposes of such appraisal rights may not be
less than the highest price per share paid by the acquiror in the control
share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context
of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the Company is a party to the
transaction, or to acquisitions approved or exempted by the Articles of
Incorporation or Bylaws. The Bylaws contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of
the Company's shares of stock and also provide that such provision may not be
altered, amended or repealed except by the affirmative vote of a majority of
all votes entitled to be cast by the holders of the issued and outstanding
shares of Common Stock. As a result of the Company's decision to opt out of
the "control share acquisition" provisions of the MGCL, stockholders who
acquire a substantial block of Common Stock are not precluded from exercising
full voting rights with respect to their shares on all matters without first
obtaining the approval of other stockholders entitled to vote. This may have
the effect of making it easier for any such control share stockholder to
effect a business combination with the Company. However, no assurance can be
given that any such business combination would be consummated or, if
consummated, would result in a purchase of shares of Common Stock from any
stockholder at a premium.
AMENDMENT TO THE ARTICLES OF INCORPORATION AND BYLAWS
The Articles of Incorporation may not be amended without the affirmative
vote of at least two-thirds of the shares of capital stock outstanding and
entitled to vote thereon voting together as a single class. Other than
provisions of the Bylaws (i) opting out of the control share acquisition
statute, (ii) requiring approval by the Independent Directors for selection of
operators of the Properties or of transactions involving John B. Kilroy, Sr.
and John B. Kilroy, Jr. and their affiliates and (iii) those governing
amendment of the Bylaws, each of which may be amended only with the approval
of a majority of the shares of capital stock entitled to vote, the Bylaws may
be amended by the affirmative vote of a majority of the Board of Directors or
of a majority of the issued and outstanding shares of the Common Stock.
MEETINGS OF STOCKHOLDERS
The Bylaws provide for annual meetings of stockholders, commencing with the
year 1998, to elect the Board of Directors and transact such other business as
may properly be brought before the meeting. Special meetings of stockholders
may be called by the President, the Board of Directors or the Chairman of the
Board and shall be called at the request in writing of the holders of 50% or
more of the outstanding stock of the Company entitled to vote.
The MGCL provides that any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right
to dissent is signed by each stockholder entitled to notice of the meeting but
not entitled to vote at it.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (i) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(a) pursuant to the Company's notice of the meeting, (b) by or at the
direction of the Board of Directors or (c) by a stockholder who is entitled to
vote at the meeting and has complied with the advance notice procedures
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set forth in the Bylaws, and (ii) with respect to special meetings of
stockholders, only the business specified in the Company's notice of meeting
may be brought before the meeting of stockholders.
The provisions in the Articles of Incorporation on classification of the
Board of Directors and amendments to the Articles of Incorporation and the
advance notice provisions of the Bylaws could have the effect of discouraging
a takeover or other transaction in which holders of some, or a majority, of
the shares of Common Stock might receive a premium for their shares of Common
Stock over the then prevailing market price or which such holders might
believe to be otherwise in their best interests.
DISSOLUTION OF THE COMPANY
Under the MGCL, the Company may be dissolved by (i) the affirmative vote of
a majority of the entire Board of Directors declaring such dissolution to be
advisable and directing that the proposed dissolution be submitted for
consideration at any annual or special meeting of stockholders, and (ii) upon
proper notice, stockholder approval by the affirmative vote of the holders of
two-thirds of the total number of shares of capital stock outstanding and
entitled to vote thereon voting as a single class.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
The Company's officers and directors are and will be indemnified under
Maryland law, the Articles of Incorporation and the Partnership Agreement
against certain liabilities. The Articles of Incorporation and Bylaws require
the Company to indemnify its directors and officers to the fullest extent
permitted from time to time by the laws of Maryland.
The MGCL permits a corporation to indemnify its directors and officers and
certain other parties 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 (i) the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) the director or officer actually received an
improper personal benefit in money, property or services, or (iii) in the case
of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the
proceeding; provided, however, that if the proceeding is one by or in the
right of the corporation, indemnification may not be made with respect to any
proceeding in which the director or officer has been adjudged to be liable to
the corporation. In addition, a director or officer may not be indemnified
with respect to any proceeding charging improper personal benefit to the
director or officer in which the director or officer was adjudged to be liable
on the basis that personal benefit was received. The termination of any
proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard
of conduct required for indemnification to be permitted.
The MGCL permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to
the corporation and its stockholders for money damages, subject to specified
restrictions, and the Articles of Incorporation contain this provision. The
law does not, however, permit the liability of directors and officers to the
corporation or its stockholders to be limited to the extent that (i) it is
proved that the person actually received an improper personal benefit in
money, property or services, (ii) a judgment or other final adjudication is
entered in a proceeding based on a finding that the person's action, or
failure to act, was committed in bad faith or was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding or (iii) in the case of any criminal proceeding, the director
had reasonable cause to believe that the act or failure to act was unlawful.
This provision does not limit the ability of the Company or its stockholders
to obtain other relief, such as an injunction or rescission.
The Partnership Agreement also provides for indemnification of the Company,
as general partner, and its officers and directors to the same extent
indemnification is provided to officers and directors of the Company in
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its Articles of Incorporation, and limits the liability of the Company and its
officers and directors to the Operating Partnership and the partners of the
Operating Partnership to the same extent liability of officers and directors
of the Company to the Company and its stockholders is limited under the
Articles of Incorporation. See "Partnership Agreement of the Operating
Partnership--Indemnification."
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require,
among other matters, that the Company indemnify its executive officers and
directors to the fullest extent permitted by law and advance to the executive
officers and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under the
agreements, the Company must also indemnify and advance all expenses incurred
by executive officers and directors seeking to enforce their rights under the
indemnification agreements and may cover executive officers and directors
under the Company's directors' and officers' liability insurance. Although the
form of indemnification agreement offers substantially the same scope of
coverage afforded by law, it provides greater assurance to directors and
executive officers that indemnification will be available, because, as a
contract, it cannot be modified unilaterally in the future by the Board of
Directors or the stockholders to eliminate the rights it provides.
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PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP
The following summary of the Second Amended and Restated Agreement of
Limited Partnership of the Operating Partnership (the "Partnership Agreement")
and the descriptions of certain provisions set forth elsewhere in this
Prospectus, are qualified in their entirety by reference to the Partnership
Agreement, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part. See "Available Information."
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. Kilroy Realty Corporation
is the sole general partner of the Operating Partnership. The Company conducts
substantially all of its business through the Operating Partnership, except
for development and certain other services (which are conducted through the
Services Company) in order to preserve the Company's REIT status. The
Operating Partnership owns a 95% economic interest in the Services Company.
Generally, pursuant to the Partnership Agreement, the Company, as the sole
general partner of the Operating Partnership, has full, exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership, including the ability to cause the Operating Partnership to enter
into certain major transactions including acquisitions, dispositions and
refinancings and to cause changes in the Operating Partnership's line of
business and distribution policies. The Operating Partnership has both
preferred limited partnership interests and common limited partnership
interests. As of the date of this Prospectus, the Operating Partnership has
1,200,000 8.075% Series A Cumulative Redeemable Preferred Units (the "Series A
Preferred Units"), and 3,406,212 common units (the "Common Limited Partnership
Units," collectively with the SeriesA Preferred Units, the "Units") issued and
outstanding. The Unitholders, as limited partners of the Operating
Partnership, have no authority to transact business for, or participate in the
management activities or decisions of, the Operating Partnership, except as
provided in the Partnership Agreement and as required by applicable law.
INDEMNIFICATION
To the extent permitted by law, the Partnership Agreement provides for
indemnification of the Company, as general partner, its officers and directors
and such other persons as the Company may designate to the same extent
indemnification is provided to officers and directors of the Company in its
Articles of Incorporation, and limits the liability of the Company and its
officers and directors to the Operating Partnership to the same extent
liability of officers and directors of the Company is limited under the
Articles of Incorporation.
TRANSFERABILITY OF INTERESTS
Except for a transaction described in the following two paragraphs, the
Partnership Agreement provides that the Company may not voluntarily withdraw
from the Operating Partnership, or transfer or assign its interest in the
Operating Partnership, without the consent of the holders of at least 60% of
the partner interests (including the interests of the Company, but excluding
the preferred limited partnership interests). Pursuant to the Partnership
Agreement, the limited partners have agreed not to, prior to January 31, 1999,
transfer, assign, sell, encumber or otherwise dispose of, without the consent
of the Company, their interest in the Operating Partnership, other than to
family members or accredited investors who agree to assume the obligations of
the transferor under the Partnership Agreement subject to a right of first
refusal for the benefit of the Company. The common limited partners and the
preferred limited partners each are subject to additional restrictions on
their respective ability to transfer their partnership interests in the
Operating Partnership.
The Company may not engage in any merger, consolidation or other combination
with or into another person, sale of all or substantially all of its assets or
any reclassification, recapitalization or change of its outstanding equity
interests (each a "Termination Transaction") unless the Termination
Transaction has been approved by holders of at least 60% of the Units
(including Units held by the Company but excluding the Series A Preferred
Units) and in connection with which all common limited partners either will
receive, or will have the right to elect to receive, for each Common Limited
Partnership Unit an amount of cash, securities or
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other property equal to the product of the number of shares of Common Stock
into which each Common Limited Partnership Unit is then exchangeable and the
greatest amount of cash, securities or other property paid to the holder of
one share of Common Stock in consideration of one share of Common Stock
pursuant to the Termination Transaction. If, in connection with the
Termination Transaction, a purchase, tender or exchange offer shall have been
made to and accepted by the holders of the outstanding shares of Common Stock,
each holder of Common Limited Partnership Units will receive, or will have the
right to elect to receive, the greatest amount of cash, securities or other
property which such holder would have received had it exercised its right to
redemption and received shares of Common Stock in exchange for its Common
Limited Partnership Units immediately prior to the expiration of such
purchase, tender or exchange offer and had thereupon accepted such purchase,
tender or exchange offer.
The Company may also merge or otherwise combine its assets with another
entity if the following conditions are met: (i) substantially all of the
assets directly or indirectly owned by the surviving entity are held directly
or indirectly by the Operating Partnership or another limited partnership or
limited liability company which is the survivor of a merger, consolidation or
combination of assets with the Operating Partnership (in each case, the
"Surviving Partnership"); (ii) the common limited partners own a percentage
interest of the Surviving Partnership based on the relative fair market value
of the net assets of the Operating Partnership and the other net assets of the
Surviving Partnership immediately prior to the consummation of such
transaction; (iii) the rights, preferences and privileges of the common
limited partners in the Surviving Partnership are at least as favorable as
those in effect immediately prior to the consummation of such transaction and
as those applicable to any other limited partners or non-managing members of
the Surviving Partnership; and (iv) such rights of the common limited partners
include the right to exchange their interests in the Surviving Partnership for
at least one of the following: (a) the consideration available to such persons
pursuant to the preceding paragraph, or (b) if the ultimate controlling person
of the Surviving Partnership has publicly traded common equity securities,
such common equity securities, with an exchange ratio based on the relative
fair market value of such securities and the Common Stock. For purposes of
this paragraph, the determination of relative fair market values and rights,
preferences and privileges of the limited partners shall be reasonably
determined by the Board of Directors as of the time of the Termination
Transaction and, to the extent applicable, the values shall be no less
favorable to the limited partners than the relative values reflected in the
terms of the Termination Transaction.
In respect of any transaction described in the preceding two paragraphs, the
Company is required to use its commercially reasonable efforts to structure
such transaction to avoid causing the common limited partners to recognize
gain for federal income tax purposes by virtue of the occurrence of or their
participation in such transaction. The Operating Partnership will also use
commercially reasonable efforts to cooperate with the common limited partners
to minimize any taxes payable in connection with any repayment, refinancing,
replacement or restructuring of indebtedness, or any sale, exchange or any
other disposition of assets, of the Operating Partnership.
ISSUANCE OF ADDITIONAL UNITS
As sole general partner of the Operating Partnership, the Company has the
ability to cause the Operating Partnership to issue additional Units
representing general and limited partnership interests in the Operating
Partnership, including preferred Units of limited partnership interests.
CAPITAL CONTRIBUTION
The Partnership Agreement provides that if the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowings or capital
contributions, the Company may borrow such funds from a financial institution
or other lender or through public or private debt offerings and lend such
funds to the Operating Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. As an alternative to
borrowing funds required by the Operating Partnership, the Company may
contribute the amount of such required funds as an additional capital
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contribution to the Operating Partnership. If the Company so contributes
additional capital to the Operating Partnership, the Company's partnership
interest in the Operating Partnership will be increased on a proportionate
basis. Conversely, the partnership interests of the limited partners will be
decreased on a proportionate basis in the event of additional capital
contributions by the Company.
AWARDS UNDER STOCK INCENTIVE PLAN
If options granted in connection with the Stock Incentive Plan are exercised
at any time or from time to time, or restricted shares of Common Stock are
issued under the Stock Incentive Plan, the Partnership Agreement requires the
Company to contribute to the Operating Partnership as an additional
contribution the exercise price received by the Company in connection with the
issuance of shares of Common Stock to such exercising participant or the
proceeds received by the Company upon issuance of the shares. Upon such
contribution the Company will be issued a number of Units in the Operating
Partnership equal to the number of shares of Common Stock so issued.
TAX MATTERS
Pursuant to the Partnership Agreement, the Company is the tax matters
partner of the Operating Partnership and, as such, has authority to make tax
elections under the Code on behalf of the Operating Partnership.
The net income of the Operating Partnership will generally be allocated
first to the holders of Series A Preferred Units in an amount equal to an
8.075% per annum cumulative return on the stated value of $50 per Series A
Preferred Unit. Thereafter, remaining net income will be allocated to the
Company and the common limited partners in accordance with their respective
percentage interests in the Operating Partnership. In general, net loss of the
Operating Partnership will be allocated first to the Company and the common
limited partners in accordance with their respective percentage interests and
thereafter to the holders of the Series A Preferred Units, in each case only
to the extent such allocation does not cause a partner to have a negative
adjusted capital account. Any remaining net loss will be allocated to the
Company. Each of the allocation provisions described above are subject to
certain special allocations relating to depreciation deductions and to
compliance with the provisions of Sections 704(b) and 704(c) of the Code and
the Treasury Regulations promulgated thereunder. See "Federal Income Tax
Consequences--Tax Aspects of the Partnerships."
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any federal income tax liability.
The Partnership Agreement provides that the net operating cash revenues of the
Operating Partnership, as well as net sales and refinancing proceeds, will be
distributed from time to time as determined by the Company (but not less
frequently than quarterly) pro rata in accordance with the partners'
respective percentage interests, subject to the distribution preferences with
respect to the Series A Preferred Units. Pursuant to the Partnership
Agreement, the Operating Partnership assumes and pays when due, or reimburses
the Company for payment of, all expenses it incurs relating to the ownership
and operation of, or for the benefit of, the Operating Partnership and all
costs and expenses relating to the operations of the Company.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2095 or until sooner dissolved pursuant to the terms of the
Partnership Agreement.
8.075% SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS
General. Each Series A Preferred Unit is entitled to receive cumulative
preferential distributions from the date of issue, payable on or before the
15th of February, May, August and November of each year, in cash, at
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the rate per annum of 8.075% of the original capital contribution per Series A
Preferred Unit in preference to any payment made on any other classes of
partnership units of the Operating Partnership, other than any class or series
of partnership interests of the Operating Partnership expressly designated as
ranking on a parity with or senior to the Series A Preferred Units.
Exchange Rights. The Series A Preferred Units are exchangeable in whole at
anytime on or after February 6, 2008, at the option of the majority of the
holders of the Series A Preferred Units, on a one for one basis for shares of
the Company's Series A Preferred Stock. In addition, the Series A Preferred
Units are exchangeable in whole at any time at the option of the majority of
the holders of the Series A Preferred Stock if (i) at any time full
distribution shall not have been timely made on any Series A Preferred Unit
with respect to six prior quarterly distribution periods or (ii) if the
Company or one of its subsidiaries, or any successor general partner to the
Company, takes the position, and the holder or holders receive an opinion of
independent counsel, that the Operating Partnership likely is or upon the
happening of a certain event likely will be a publicly traded partnership
within the meaning of Section 7704 of the Code. The Series A Preferred Units
are also exchangeable on or after February 6, 2001 if the holders deliver to
the Company either a private letter ruling or an opinion of counsel stating
than an exchange at such time would not cause the Series A Preferred Units to
be considered "stock and securities" within the meaning of Section 351(e) of
the Code for purposes of determining whether the holder of such Series A
Preferred Units is an "investment company" under Section 721(b) of the Code.
However, in lieu of an exchange for Series A Preferred Stock, the Company may
elect to cause the Operating Partnership to redeem such Series A Preferred
Units for cash in an amount equal to the original capital account balance of
such Series A Preferred Units plus all accrued and unpaid distributions to the
date of redemption.
Redemption. The Series A Preferred Units may be redeemed, at the Operating
Partnership's option, on and after February 6, 2003, in whole or in part or
from time to time, at a redemption price payable in cash equal to the capital
account balance of such partner, provided that such amount shall not be less
than $50.00 per Series A Preferred Unit, plus any accrued but unpaid
distributions to the date of redemption. The redemption price of the Series A
Preferred Units (other than the portions thereof consisting of accumulated but
unpaid distributions) will be payable solely out of the sale proceeds of
capital stock of the Company or interests in the Operating Partnership and
from no other source. The Operating Partnership may not redeem fewer than all
of the Series A Preferred Units unless all accumulated and unpaid
distributions have been paid on all Series A Preferred Units for all quarterly
distribution periods terminating on or prior to the date of redemption. In
addition, the Company may, at its option, acquire the Series A Preferred Units
presented to it for exchange for shares of the Company's Series A Preferred
Stock. See "--Exchange Rights."
Limited Approval Rights. For so long as any Series A Preferred Units are
outstanding, without the consent of two-thirds of the holders of the Series A
Preferred Units then outstanding, the Operating Partnership may not (i)
authorize or create, or increase the authorized or issued amount of, or
reclassify, any class or series of partnership interests, or issue any
obligations or security convertible into or evidencing a right to purchase any
partnership interests of any class, ranking prior to the Series A Preferred
Units with respect to distributions or rights upon liquidation, dissolution,
or winding-up, (ii) authorize or create, or increase the authorized or issued
amount of, or reclassify, any class or series of partnership interests, or
issue any obligations or security convertible into or evidencing a right to
purchase any partnership interests of any class, ranking equal to the Series A
Preferred Units with respect to distributions or rights upon liquidation,
dissolution, or winding-up, but only to the extent that such securities are
issued to an affiliate of the Operating Partnership, other than the Company to
the extent that the issuance of such interests was to allow the Company to
issue corresponding shares of Series A Preferred Stock to persons who are not
affiliates of the Operating Partnership, or (iii) either consolidate, merge
into or with, or convey, transfer or lease substantially all of the assets to,
any corporation or other entity, or amend or repeal the provisions of the
Partnership Agreement that adversely affect the powers, special rights,
preferences, privileges or voting power of the Series A Preferred Units;
provided however, that with respect to clause (iii) above, so long as the
Operating Partnership is the surviving entity and the Series A Preferred Units
remain outstanding on the same terms, or the resulting, surviving or
transferee entity is a domestic partnership, limited liability company or
other pass-through entity and substitutes the Series A Preferred
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Units for other interests in such entity having substantially the same terms
and rights as the Series A Preferred Units, including with respect to
distributions, voting rights, and rights upon liquidation, dissolution or
winding-up. Other than as discussed above or elsewhere in this Prospectus, the
Series A Preferred Units have no voting rights other than as otherwise
provided by applicable law.
Liquidation Preference. The distribution and income allocation provisions of
the Partnership Agreement have the effect of providing each Series A Preferred
Unit with a liquidation preference to each holder of such Units equal to such
holder's capital contributions, plus any accrued but unpaid distributions, in
preference to any other class or series of partnership interest of the
Operating Partnership.
COMMON LIMITED PARTNERSHIP UNITS
General. Pursuant to the terms of the Partnership Agreement, each Common
Limited Partnership Unit is entitled to receive quarterly distributions of
available cash on a pro rata basis in accordance with their respective
percentage interests in the Operating Partnership, subject to the distribution
preferences of the Series A Preferred Units.
Redemption/Exchange Rights. Common limited partners have rights to require
the Operating Partnership to redeem part or all of their Common Limited
Partnership Units for cash (based upon the fair market value of an equivalent
number of shares of Common Stock at the time of such redemption) or the
Company may elect to acquire such Units in exchange for shares of Common Stock
(on a one-for-one basis, subject to adjustment in the event of stock splits,
stock dividends, issuance of certain rights, certain extraordinary
distributions and similar events); provided, however, that if the Company does
not elect to acquire such Units in exchange for shares of Common Stock, a
holder of Common Limited Partnership Units that are corporations or limited
liability companies may require the Company to issue Common Stock in lieu
thereof, subject to the Ownership Limit or such other limit as provided in the
Articles of Incorporation or as otherwise permitted by the Board of Directors,
as applicable. The Company presently anticipates that it will elect to issue
Common Stock in exchange for Common Limited Partnership Units in connection
with each such redemption request, rather than having the Operating
Partnership pay cash. With each such redemption or exchange, the Company's
percentage ownership interest in the Operating Partnership will increase. This
redemption/exchange right may be exercised by common limited partners from
time to time, in whole or in part, subject to the limitations that such right
may not be exercised (i) prior to January 31, 1999 or (ii) at any time to the
extent such exercise would result in any person actually or constructively
owning capital stock in excess of the Ownership Limit or such other amount as
provided in the Articles of Incorporation or as otherwise permitted by the
Board of Directors, as applicable, assuming Common Stock was issued in such
exchange. See "Description of Capital Stock--Restrictions on Ownership and
Transfer." In addition, under certain circumstances 50% of the Common Limited
Partnership Units received by John B. Kilroy, Sr., John B. Kilroy, Jr. and KI
may be redeemed prior to January 31, 1999 in connection with the obligation of
such Unitholders to indemnify the Company in connection with the Formation
Transactions.
Certain Common Limited Partner Approval Rights. The Partnership Agreement
provides that if the common limited partners own at least 5% of the
outstanding Units (including Units held by the Company but excluding the
Series A Preferred Units), the Company shall not, on behalf of the Operating
Partnership, take any of the following actions without the prior consent of
the holders of more than 50% (excluding Units held by the Company and all
Series A Preferred Units) of the Units representing limited partner interests:
(i) dissolve the Operating Partnership, other than incident to a merger or
sale of substantially all of the Company's assets; or (ii) prior to January
31, 2004, sell the Office Property located at 2260 E. Imperial Highway, at
Kilroy LAX, other than incident to a merger or sale of substantially all of
the Company's assets. In addition, in connection with the acquisition of the
Warren Technology Center and the office building located at 111 Pacifica,
Irvine, California, the Company agreed not to dispose of such Properties in a
taxable transaction before January 31, 1999, or thereafter unless a shelf
registration statement is then in effect with respect to the shares of Common
Stock issuable upon the exchange of the 165,102 Common Limited Partnership
Units issued to limited partners in connection with the acquisition of such
Properties.
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FEDERAL INCOME TAX CONSEQUENCES
The following summary of material federal income tax consequences regarding
the Company is based on current law, is for general information only and is
not tax advice. The tax treatment of a holder of any of the Offered Securities
will vary depending upon the terms of the specific securities acquired by such
holder, as well as his or her particular situation, and the summary below does
not attempt to address any aspects of federal income taxation relating to
holders of Offered Securities. Certain federal income tax considerations
relevant to holders of the Offered Securities will be provided in the
applicable Prospectus Supplement relating thereto. The information set forth
below, to the extent that it constitutes matters of law, summaries of legal
matters or legal conclusions, is the opinion of Latham & Watkins, tax counsel
to the Company. The summary below does not consider the effect of any foreign,
state, local or other tax laws that may be applicable to the Company.
The information in this section is based on the Code, current, temporary and
proposed Treasury Regulations promulgated thereunder, the legislative history
of the Code, current administrative interpretations and practices of the
Internal Revenue Service (the "IRS") (including its practices and policies as
expressed in certain private letter rulings which are not binding on the IRS
except with respect to the particular taxpayers who requested and received
such rulings), and court decisions, all as of the date hereof. No assurance
can be given that future legislation, Treasury Regulations, administrative
interpretations and practices and/or court decisions will not alter the Code
or existing interpretations thereof, and any such change could apply
retroactively to transactions preceding the date of the change. The Company
has not requested, and does not plan to request, any ruling from the IRS
concerning the tax treatment of the Company or the Operating Partnership.
Thus, no assurance can be provided that the statements set forth herein (which
are, in any event, not binding on the IRS or courts) will not be challenged by
the IRS or will be sustained by a court if so challenged.
EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS
WELL AS HIS OR HER TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OR HER
OF THE ACQUISITION, OWNERSHIP AND SALE OF THE OFFERED SECURITIES, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN THE APPLICABLE TAX
LAWS.
TAXATION OF THE COMPANY
General. The Company intends to make an election to be taxed as a REIT under
Sections 856 through 860 of the Code commencing with its taxable year ending
December 31, 1997. The Company believes that, commencing with its taxable year
ending December 31, 1997, it has been organized and has operated in such a
manner as to qualify for taxation as a REIT under the Code commencing with
such taxable year, and the Company intends to continue to operate in such a
manner, but no assurance can be given that it has operated or will continue to
operate in such a manner so as to qualify or remain qualified.
These sections of the Code and the corresponding Treasury Regulations are
highly technical and complex. The following sets forth the material aspects of
the sections that govern the federal income tax treatment of a REIT. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof. Latham & Watkins has acted as tax counsel to the
Company in connection with the IPO, subsequent offerings of Common Stock, and
the Company's election to be taxed as a REIT.
As a condition to the closing of each offering of Offered Securities, other
than specified in the applicable Prospectus Supplement, tax counsel to the
Company will render an opinion to the underwriters of such offering to the
effect that, commencing with the Company's taxable year ended December 31,
1997, the Company has been organized and operated in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
will enable it to continue to meet the requirements for qualification and
taxation as a REIT under the Code. It must be emphasized that each such
opinion will be based on various factual assumptions relating to the
organization and operation of the Company, including the Finance Company, the
Operating
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Partnership, the Finance Partnership and the Services Company and will be
conditioned upon certain representations to be made by the Company as to
factual matters, and that such tax counsel to the Company undertakes no
obligation hereby to update any such opinion subsequent to its date. In
addition, such opinions will be based upon the factual representations of the
Company as set forth in this Prospectus and any applicable Prospectus
Supplement or Supplements, and assume that the actions described in this
Prospectus and any such Supplement or Supplements will be completed by the
Company in a timely fashion. Moreover, such qualification and taxation as a
REIT depends upon the Company's ability to meet (through actual annual
operating results, distribution levels and diversity of stock ownership) the
various qualification tests imposed under the Code and discussed below, the
results of which have not been and will not be reviewed by such tax counsel to
the Company. Accordingly, no assurance can be given that the actual results of
the Company's operation during any particular taxable year will satisfy such
requirements. See "--Failure to Qualify." Further, the anticipated income tax
treatment described in the Prospectus or in any Prospectus Supplement or
Supplements may be changed, perhaps retroactively, by legislation,
administrative or judicial action at any time.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax as follows. First, the Company will be required
to pay tax at regular corporate rates on any undistributed "REIT taxable
income," including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference. Third, if the Company has (i) net income from the
sale or other disposition of "foreclosure property" (defined generally as
property acquired by the Company through foreclosure or otherwise after a
default on a loan secured by the property or a lease of the property) which is
held primarily for sale to customers in the ordinary course of business or
(ii) other nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income. Fourth, if the Company
has net income from prohibited transactions (which are, in general, certain
sales or other dispositions of property held primarily for sale to customers
in the ordinary course of business other than foreclosure property), such
income will be subject to a 100% tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), but has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on
an amount equal to (a) the gross income attributable to the greater of the
amount by which the Company fails the 75% or 95% test multiplied by (b) a
fraction intended to reflect the Company's profitability. Sixth, if the
Company should fail to distribute during each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) 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. Seventh, with respect to any asset (a "Built-In Gain Asset")
acquired by the Company from a corporation which is or has been a C
corporation (i.e., generally a corporation subject to full corporate-level
tax) in a transaction in which the basis of the Built-In Gain Asset in the
hands of the Company is determined by reference to the basis of the asset in
the hands of the C corporation, if the Company recognizes gain on the
disposition of such asset during the ten-year period (the "Recognition
Period") beginning on the date on which such asset was acquired by the
Company, then, to the extent of the Built-In Gain (i.e., the excess of (a) the
fair market value of such asset over (b) the Company's adjusted basis in such
asset, determined as of the beginning of the Recognition Period), such gain
will be subject to tax at the highest regular corporate rate pursuant to
Treasury Regulations that have not yet been promulgated. The results described
above with respect to the recognition of Built-In Gain assume that the Company
will make an election pursuant to Internal Revenue Service ("IRS") Notice 88-
19 and that the availability or nature of such election is not modified as
proposed in President Clinton's 1999 Federal Budget Proposal.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest; (iii) which
would be taxable as a domestic corporation, but for Sections 856 through 859
of the Code; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half
of each taxable year not more than 50% in value of the outstanding
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stock of which is owned, actually or constructively, by five or fewer
individuals (as defined in the Code to include certain entities); and (vii)
which meets certain other tests, described below, regarding the nature of its
income and assets and the amount of its distributions. The Code provides that
conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that condition (v) must be met during at least 335 days of a taxable year
of twelve months, or during a proportionate part of a taxable year of less
than twelve months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made to be taxed as a REIT. For
purposes of conditions (v) and (vi), pension funds and certain other tax-
exempt entities are treated as individuals, subject to a "look-through"
exception in the case of condition (vi).
The Company believes that the conditions set forth in (i) through (iv) above
have been satisfied. The Company also believes that it has issued sufficient
shares of Common Stock with sufficient diversity of ownership pursuant to the
Offering to allow it to satisfy conditions (v) and (vi). In addition, the
Articles of Incorporation provide for restrictions regarding the transfer and
ownership of shares, which restrictions are intended to assist the Company in
continuing to satisfy the share ownership requirements described in (v) and
(vi) above. Such ownership and transfer restrictions are described in
"Description of Capital Stock--Restrictions on Ownership and Transfer." These
restrictions, however, may not ensure that the Company will, in all cases, be
able to satisfy the share ownership requirements described above. If the
Company fails to satisfy such share ownership requirements, the Company's
status as a REIT will terminate; provided, however, beginning January 1, 1998,
if the Company complies with the rules contained in the applicable Treasury
Regulations requiring the Company to attempt to ascertain the actual ownership
of its shares, and the Company does not know, and would not have known through
the exercise of reasonable diligence, whether it failed to meet the
requirement set forth in condition (vi) above, the Company will be treated as
having met such requirement. See "-- Failure to Qualify." In addition, a
corporation may not elect to become a REIT unless its taxable year is the
calendar year. The Company has a calendar taxable year.
Ownership of a Partnership Interest. In the case of a REIT which is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and
will be deemed to be entitled to the income of the partnership attributable to
such share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income
tests and the asset tests. Thus, the Company's proportionate share of the
assets and items of income of the Operating Partnership (including the
Operating Partnership's share of such items of any subsidiary partnerships)
will be treated as assets and items of income of the Company for purposes of
applying the requirements described herein. A summary of the rules governing
the federal income taxation of partnerships and their partners is provided
below in "--Tax Aspects of the Partnerships." The Company has direct control
of the Operating Partnership and operates it consistently with the
requirements for qualification as a REIT.
Ownership of Qualified REIT Subsidiaries. For taxable years beginning on or
prior to August 5, 1997, a corporation will qualify as a qualified REIT
subsidiary (a "QRS") under the Code if 100% of its stock has been held by the
Company at all times during the period such corporation was in existence. For
taxable years beginning after such date, if the Company owns 100% of a
corporation's stock, such corporation will qualify as a QRS during such time
period (without regard to prior ownership). The Company's ownership of the
stock of the Finance Company satisfies such tests and, accordingly, the
Finance Company will qualify as a QRS. A QRS will not be treated as a separate
corporation, and all assets, liabilities, and items of income, deduction, and
credit of a QRS will be treated as assets, liabilities and such items (as the
case may be) of the Company for all purposes of the Code including the REIT
qualification tests. For this reason, references under "Federal Income Tax
Consequences" to the income and assets of the Company include the income and
assets of the Finance Company. A QRS will not be subject to federal income tax
and the Company's ownership of the voting stock of such a subsidiary will not
violate the restrictions against ownership of securities of any one issuer
which constitute more than 10% of such issuer's voting securities or more than
5% of the value of the Company's total assets, described below under "--Asset
Tests."
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Income Tests. In order to maintain its qualification as a REIT, the Company
annually must satisfy certain gross income requirements. First, at least 75%
of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be 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 from certain types of temporary investments. 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 investments,
dividends, interest and gain from the sale or disposition of stock or
securities (or from any combination of the foregoing). Third, for taxable
years beginning on or prior to August 5, 1997, short-term gain from the sale
or other disposition of stock or securities, gain from prohibited transactions
and gain on the sale or other disposition of real property held for less than
four years (apart from involuntary conversions and sales of foreclosure
property) must represent less than 30% of the Company's gross income
(including gross income from prohibited transactions). For purposes of
applying the 30% gross income test, the holding period of Properties acquired
by the Operating Partnership at the time of the IPO will be deemed to have
commenced on the date of acquisition. The 30% gross income test was repealed,
and will not apply beginning with the Company's 1998 taxable year.
Rents received by the Company 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 Code provides that rents
received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the REIT, or an actual or constructive
owner of 10% or more of the REIT, actually 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 real 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 rents received to qualify as "rents from real
property," the REIT generally must not operate or manage the property or
furnish or render services to the tenants of such property (subject to a 1% de
minimis exception applicable to the Company for its taxable years beginning in
1998), other than through an independent contractor from whom the REIT derives
no revenue; provided however, the REIT may directly perform certain services
that are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant" of the property. The Company does not and will not, and as general
partner of the Operating Partnership, will not permit the Operating
Partnership to: (i) charge rent for 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 percentage of receipts or sales, as described above); (ii) rent any
property to a Related Party Tenant; (iii) derive rental income attributable to
personal property (other than personal property leased in connection with the
lease of real property, the amount of which is less than 15% of the total rent
received under the lease); or (iv) perform services considered to be rendered
to the occupant of the property, other than through an independent contractor
from whom the Company derives no revenue. Notwithstanding the foregoing, the
Company may have taken and may continue to take certain of the actions set
forth in (i) through (iv) above to the extent such actions will not, based on
the advice of tax counsel to the Company, jeopardize the Company's tax status
as a REIT.
The Services Company receives fees in exchange for the performance of
certain development activities. Such fees do not accrue to the Company, but
the Company derives its allocable share of dividends from the Services Company
through its interest in the Operating Partnership, which qualify under the 95%
gross income test, but not the 75% gross income test. The Company believes
that the aggregate amount of its nonqualifying income, from all sources, in
any taxable year will not exceed the limit on nonqualifying income under the
gross income tests.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends
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 "interest"
solely by reason of being
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based on a fixed percentage or percentages of receipts or sales. The Company
has not and does not expect to derive significant amounts of interest that
fail to qualify under the 75% or 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will be generally available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its federal income
tax 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 these relief
provisions. For example, if the Company fails to satisfy the gross income
tests because nonqualifying income that the Company intentionally incurs
exceeds the limits on such income, the IRS could conclude that the Company's
failure to satisfy the tests was not due to reasonable cause. If these relief
provisions are inapplicable to a particular set of circumstances involving the
Company, the Company would not qualify as a REIT. As discussed above in "--
Taxation of the Company--General," even if these relief provisions apply, a
100% tax would be imposed on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company failed the 75%
or 95% test multiplied by (b) a fraction intended to reflect the Company's
profitability. No similar mitigation provision provides relief if the Company
failed the 30% gross income test. In such case, the Company would have ceased
to qualify as a REIT.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the
ordinary course of business (including the Company's share of any such gain
realized by the Operating Partnership or the Finance Partnership) will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. Such prohibited transaction income may also have an adverse
effect upon the Company's ability to satisfy the income tests for
qualification as a REIT. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of a trade
or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. The Operating
Partnership and the Finance Partnership hold the Properties for investment
with a view to long-term appreciation, engage in the business of acquiring,
developing, owning, and operating the Properties (and other properties) and
make such occasional sales of the Properties as are consistent with the
Operating Partnership's and the Finance Partnership's investment objectives.
There can be no assurance, however, that the IRS might not contend that one or
more of such sales is subject to the 100% penalty tax.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets (including its allocable
share of the assets held by partnerships in which it has a direct or indirect
interest, including the Operating Partnership and the Finance Partnership)
must be represented by real estate assets, stock or debt instruments held for
not more than one year purchased with the proceeds of a stock offering or
long-term (at least five years) public debt offering of the Company, cash,
cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in
the 75% asset class. Third, of the investments included in the 25% 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.
As described above, the Operating Partnership owns 100% of the non-voting
preferred stock of the Services Company, and by virtue of its ownership of
interests in the Operating Partnership, the Company is considered to own its
pro rata share of such stock. The stock of the Services Company held by the
Company (through the Operating Partnership) will not be a qualifying real
estate asset. The Operating Partnership does not and will not own any of the
voting securities of the Services Company, and therefore the Company will not
be considered to own more than 10% of the voting securities of the Services
Company. In addition, the Company believes (and will represent to tax counsel
to the Company for purposes of its opinion, as described above) that the value
of its pro rata share of the securities of the Services Company held by the
Operating Partnership does not exceed 5% of the total value of the Company's
assets, and will not exceed such amount in the future. Tax counsel, in
rendering its opinion as to the qualification of the Company as a REIT, will
rely on the representation of the
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Company to such effect. No independent appraisals have been obtained to
support this conclusion. There can be no assurance that the IRS will not
contend that the value of the securities of the Services Company held by the
Company (through the Operating Partnership) exceeds the 5% value limitation.
The 5% value test must be satisfied not only on the date that the Company
(directly or through the Operating Partnership) acquires securities in the
Services Company, but also each time the Company increases its ownership of
securities of the Services Company (including as a result of increasing its
interest in the Operating Partnership as a result of Company capital
contributions to the Operating Partnership or as limited partners exercise
their redemption/exchange rights). Although the Company plans to take steps to
ensure that it satisfies the 5% value test for any quarter with respect to
which retesting is to occur, there can be no assurance that such steps will
always be successful, or will not require a reduction in the Operating
Partnership's overall interest in the Services Company.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter (including as a result of the
Company increasing its interest in the Operating Partnership), the failure can
be cured by the disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests
and to take such other actions within 30 days after the close of any quarter
as may be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company would
cease to qualify as a REIT.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (i) the sum of (a) 95% of
the Company's "REIT taxable income" (computed without regard to the dividends
paid deduction and by excluding the Company's net capital gain) and (b) 95% of
the excess of the net income, if any, from foreclosure property over the tax
imposed on such income, minus (ii) the excess of the sum of certain items of
noncash income (i.e., income attributable to leveled stepped rents, original
issue discount or purchase money debt, or a like-kind exchange that is later
determined to be taxable) over 5% of "REIT Taxable Income" as described in
clause (i)(a) above. In addition, if the Company disposes of any Built-In Gain
Asset during its Recognition Period, the Company will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at
least 95% of the Built-in Gain (after tax), if any, recognized on the
disposition of such asset. 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 tax return for such year and if paid on or before the
first regular dividend payment after such declaration. Such distributions are
taxable to holders of Common Stock (other than tax-exempt entities, as
discussed below) in the year in which paid, even though such distributions
relate to the prior year for purposes of the Company's 95% distribution
requirement. The amount distributed must not be preferential--i.e., each
holder of shares of Common Stock must receive the same distribution per share.
A REIT may have more than one class of capital stock, as long as distributions
within each class are pro rata and non-preferential. 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 ordinary and capital gain corporate
tax rates. The Company currently makes timely distributions sufficient to
satisfy these annual distribution requirements. In this regard, the
Partnership Agreement authorizes the Company, as general partner, to take such
steps as may be necessary to cause the Operating Partnership to distribute to
its partners an amount sufficient to permit the Company to meet these
distribution requirements.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it
will generally have sufficient cash or liquid assets to enable it to satisfy
the distribution requirements described above. It is possible, however, that
the Company, from time to time, may not have sufficient cash or other liquid
assets to meet these distribution requirements due to timing differences
between
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(i) the actual receipt of income and actual payment of deductible expenses and
(ii) the inclusion of such income and deduction of such expenses in arriving
at taxable income of the Company. In the event that such timing differences
occur, in order to meet the distribution requirements, the Company may find it
necessary to arrange for short-term, or possibly long-term, borrowings, to pay
dividends in the form of taxable stock dividends.
If the Company fails to meet the 95% distribution test due to certain
adjustments (e.g., an increase in the Company's income or a decrease in its
deduction for dividends paid) by reason of a judicial decision or by agreement
with the IRS, the Company may pay a "deficiency dividend" to holders of shares
of Common Stock in the taxable year of the adjustment, which dividend would
relate back to the year being adjusted. In such case, the Company would also
be required to pay interest to the IRS and would be subject to any applicable
penalty provisions.
Furthermore, if the Company should fail to distribute during each calendar
year (or, in the case of distributions with declaration and record dates
falling in the last three months of the calendar year, by the end of the
following January) at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain income for such year, and (iii)
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. Any REIT taxable income and net capital gain
on which this excise tax is imposed for any year is treated as an amount
distributed during that year for purposes of calculating such tax.
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 stockholders 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. As a result, the Company's failure to qualify as
a REIT would substantially reduce the cash available for distribution by the
Company to its stockholders. In addition, if the Company fails to qualify as a
REIT, all distributions to stockholders will be taxable as ordinary income, to
the extent of the Company's current and accumulated earnings and profits, 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 will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief. In
addition, a recent federal budget proposal contains a provision which, if
enacted in its present form, would result in the immediate taxation of all
gain inherent in a C corporation's assets upon an election by the corporation
to become a REIT in taxable years beginning after January 1, 1999, and thus
could effectively preclude the Company from re-electing to be taxed as a REIT
following a loss of its REIT status.
TAX ASPECTS OF THE PARTNERSHIPS
General. Substantially all of the Company's investments are held indirectly
through the Operating Partnership and the Finance Partnership. In general,
partnerships are "pass-through" entities which are not subject to federal
income tax. Rather, partners are allocated their proportionate shares of the
items of income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. The Company includes in its
income its proportionate share of the foregoing partnership items for purposes
of the various REIT income tests and in the computation of its REIT taxable
income. Moreover, for purposes of the REIT asset tests, the Company includes
its proportionate share of assets held by the Operating Partnership. See "--
Taxation of the Company."
Entity Classification. The Company's interests in the Operating Partnership
and the Finance Partnership involve special tax considerations, including the
possibility of a challenge by the IRS of the status of the Operating
Partnership or the Finance Partnership as a partnership (as opposed to an
association taxable as a corporation) for federal income tax purposes. If the
Operating Partnership or the Finance Partnership were treated
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as an association, it would be taxable as a corporation and therefore be
subject to an entity-level tax on its income. In such a situation, the
character of the Company's assets and items of gross income would change and
preclude the Company from satisfying the asset tests and possibly the income
tests (see "--Taxation of the Company--Asset Tests" and "--Income Tests"),
and, in turn, would prevent the Company from qualifying as a REIT. See "--
Taxation of the Company" and "--Failure to Qualify" above for a discussion of
the effect of the Company's failure to meet such tests for a taxable year. In
addition, a change in the Operating Partnership's or Finance 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 distributions.
The IRS recently finalized and published certain Treasury Regulations (the
"Final Regulations") which provide that a domestic business entity not
otherwise classified as a corporation and which has at least two members (an
"Eligible Entity") may elect to be taxed as a partnership for federal income
tax purposes. The Final Regulations apply for tax periods beginning on or
after January 1, 1997 (the "Effective Date"). Unless it elects otherwise, an
Eligible Entity in existence prior to the Effective Date will have the same
classification for federal income tax purposes that it claimed under the
entity classification Treasury Regulations in effect prior to the Effective
Date. In addition, an Eligible Entity which did not exist, or did not claim a
classification, prior to the Effective Date, will be classified as a
partnership for federal income tax purposes unless it elects otherwise. Each
of the Operating Partnership and Finance Partnership intends to claim
classification as a partnership under the Final Regulations.
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic
arrangement of the partners.
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. The Operating 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.
The Partnership Agreement provides that net income or net loss of the
Operating Partnership will generally be allocated to the Company and the
limited partners in accordance with their respective percentage interests in
the Operating Partnership. Notwithstanding the foregoing, such agreement
provides that certain interest deductions and income from the discharge of
certain indebtedness of the Operating Partnership, attributable to loans
transferred to the Operating Partnership by certain Unitholders, will be
allocated disproportionately to such Unitholders. In addition, allocations of
net income or net loss are subject to compliance with the provisions of
Sections 704(b) and 704(c) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations with Respect to the Properties. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property (such as the Properties) that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated
in a manner such that the contributing partner is charged with, or benefits
from, respectively, 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 contributed property at the time of contribution and the
adjusted tax basis of such property at such time (a "Book-Tax Difference").
Such allocations are solely for federal income tax purposes and do not affect
the book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property (including certain Properties). Consequently, the
Partnership Agreement requires that such allocations be made in a manner
consistent with Section 704(c) of the Code.
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In general, the principals of KI and other Unitholders who are limited
partners of the Operating Partnership and who contributed assets having an
adjusted tax basis less than the fair market value of such assets at the time
they were contributed will be allocated depreciation deductions for tax
purposes which are lower than such deductions would be if determined on a pro
rata basis. In addition, in the event of the disposition of any of the
contributed assets which have a Book-Tax Difference, all income attributable
to such Book-Tax Difference will generally be allocated to such limited
partners, and the Company will generally be allocated only its share of
capital gains attributable to appreciation, if any, occurring after the date
the Operating Partnership acquired such assets. This will tend to eliminate
the Book-Tax Difference over the life of the Operating Partnership. However,
the special allocation rules of Section 704(c) do not always entirely
eliminate the Book-Tax Difference on an annual basis or with respect to a
specific taxable transaction such as a sale. Thus, the carryover basis of the
contributed assets in the hands the Operating Partnership may cause the
Company to be allocated lower depreciation and other deductions, and possibly
an amount of taxable income in the event of a sale of such contributed assets
in excess of the economic or book income allocated to it as a result of such
sale. Such an allocation 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 requirements. See "--Taxation of the
Company--Annual Distribution Requirements."
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the "traditional method" or the election of certain
methods which would permit any distortions caused by a Book-Tax Difference to
be entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Operating Partnership Agreement provides that
it will use the traditional method with respect to the assets it acquired at
the time of the IPO, and the Operating Partnership has agreed to use such
method with respect to certain assets it acquired subsequent to the IPO. The
selection of this method will cause the Company to be allocated depreciation
deductions for tax purposes which are lower than such deductions would be if
the Company directly had acquired its pro rata share of the Operating
Partnership property in exchange for cash or if other methods were chosen to
eliminate Book-Tax Differences. The Operating Partnership and the Company have
not yet decided which method will be used to account for Book-Tax Differences
with respect to properties to be acquired by the Operating Partnership in the
future.
With respect to any property purchased by the Operating Partnership in a
taxable transaction (e.g., properties acquired in exchange for cash)
subsequent to the admission of the Company to the Operating Partnership, such
property will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Code will not apply.
SERVICES COMPANY
A portion of the cash to be used by the Operating Partnership to fund
distributions to partners, and in turn to fund distributions by the Company to
its stockholders, is expected to come from the Services Company, through
dividends on nonvoting preferred stock to be held by the Operating
Partnership. The Services Company will not qualify as a REIT and will pay
federal, state and local income taxes on its taxable income at normal
corporate rates. The federal, state and local income taxes that the Services
Company is required to pay will reduce the cash available for distribution by
the Company to its stockholders.
As described above, the value of the Company's indirect interest in the
securities of the Services Company held by the Operating Partnership cannot
exceed 5% of the value of the Company's total assets at the end of any
calendar quarter in which the Company acquires such securities or increases
its interest in such securities (including as a result of the Company
increasing its interest in the Operating Partnership). See "--Taxation of the
Company--Asset Tests." This limitation may restrict the ability of the
Services Company to increase the size of its business, or may cause the
Operating Partnership to sell all or a portion of its stock in the Services
Company, unless the value of the assets of the Company or the Operating
Partnership is increasing at a commensurate rate. In addition, a recent
federal budget proposal includes a provision which, if enacted in its present
form, would significantly curtail the ability of REITs, such as the Company,
to form and then hold
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preferred non-voting interests in corporations like the Services Company.
Under this proposal, the "grandfathered" status of any such existing entity
would terminate if such entity engaged in a new trade or business or acquired
substantial new assets after the date of first committee action.
OTHER TAX CONSEQUENCES
The Company may be subject to state or local taxation in various state or
local jurisdictions, including those in which it transacts business or owns
property. The state and local tax treatment of the Company may not conform to
the federal income tax consequences discussed above.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to
investors directly or through agents, which agents may be affiliated with the
Company. Any such underwriter or agent involved in the offer and sale of the
Offered Securities will be named in the applicable Prospectus Supplement.
Sales of Offered Securities offered pursuant to any applicable Prospectus
Supplement may be effected from time to time in one or more transactions at a
fixed price or prices which may be changed, at prices related to the
prevailing market prices at the time of sale, or at negotiated prices. The
Company also may, from time to time, authorize underwriters acting as the
Company's agents to offer and sell the Offered Securities upon the terms and
conditions as set forth in the applicable Prospectus Supplement. In connection
with the sale of Offered Securities, underwriters may be deemed to have
received compensation from the Company in the form of underwriting discounts
or commissions and may also receive commissions from purchasers of Offered
Securities for whom they may act as agent. Underwriters may sell Offered
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Offered Securities
may be deemed to be underwriters, and any discounts and commissions received
by them and any profit realized by them on resale of the Offered Securities
may be deemed to be underwriting discounts and commissions under the
Securities Act. Underwriters, dealers and agents may be entitled, under
agreements entered into with the Company and the Operating Partnership, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act. Any such indemnification
agreements will be described in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Offered Securities will be a new issue with no established trading
market, other than the Common Stock which is listed on the New York Stock
Exchange. Any shares of Common Stock sold pursuant to a Prospectus Supplement
will be listed on such exchange, subject to official notice of issuance. The
Company may elect to list any other series of Preferred Stock and any
Depository Shares or Warrants on any exchange, but is not obligated to do so.
It is possible that one or more underwriters may make a market in a series of
Offered Securities, but will not be obligated to do so and may discontinue any
market making at any time without notice. Therefore, no assurance can be given
as to the liquidity of the trading market for the Offered Securities
If so indicated in the applicable Prospectus Supplement, the Company may
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the
date or dates stated in such Prospectus Supplement.
44
<PAGE>
Each Contract will be for an amount not less than, and the aggregate principal
amount of Offered Securities sold pursuant to Contracts shall be not less nor
more than, the respective amounts stated in the applicable Prospectus
Supplement. Institutions with whom Contracts, when authorized, may be made
include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions, and other
institutions but will in all cases be subject to the approval of the Company.
Contracts will not be subject to any conditions except (i) the purchase by an
institution of the Offered Securities covered by its Contracts shall not at
the time of delivery be prohibited under the laws of any jurisdiction in the
United States to which such institution is subject, and (ii) if the Offered
Securities are being sold to underwriters, the Company shall have sold to such
underwriters the total principal amount of the Offered Securities less the
principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for, the Company in the ordinary
course of business.
EXPERTS
The combined financial statements incorporated into this Prospectus by
reference from the Kilroy Group's Annual Report on Form 10-K for the year
ended December 31, 1996, the combined summaries of certain revenues and
certain expenses for the year ended December 31, 1996 of the Acquisition
Properties, the Post IPO Properties Through June 30, 1997, and the Acquired
Properties and Pending Acquisitions each incorporated by reference into this
Prospectus from the Company's registration statement (No. 333-32261) on
Form S-11, and the combined summaries of certain revenues and certain expenses
for the year ended December 31, 1996 of the Eight Acquired Properties and the
Four Acquired incorporated by reference into this Prospectus from the
Company's Current Report on Form 8-K/A have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports, which are incorporated
herein by reference, and have been so incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for the Company
by Ballard Spahr Andrews & Ingersol, Baltimore, Maryland. Latham & Watkins
will rely as to certain matters of Maryland law, including the legality of the
Common Stock, on the opinion of Ballard Spahr Andrews & Ingersoll.
45
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY , 1998)
- --------------------------------------------------------------------------------
KILROY REALTY CORPORATION
Common Stock
- --------------------------------------------------------------------------------
Kilroy Realty Corporation and its subsidiaries (the "Company") are engaged in
the business of owning, acquiring, developing, managing and leasing principally
Class A suburban office and industrial buildings in prime locations, primarily
in Southern California. As of February 10, 1998, the Company's portfolio was
comprised of 62 suburban office buildings (the "Office Properties"),
encompassing approximately 4.5 million rentable square feet, and 79 industrial
buildings (the "Industrial Properties"), encompassing approximately 5.4 million
rentable square feet (collectively, the "Properties"). All but 14 of the
buildings are located in Southern California.
The Company is self-administered and self-managed, intends to continue to
operate as a REIT for federal income tax purposes and expects to continue to
pay regular quarterly dividends to its stockholders, subject to the discretion
of the Company's Board of Directors. See "Price Range of Common Stock and
Distribution History."
All of the shares of common stock of the Company, par value $.01 per share (the
"Common Stock"), offered hereby are being sold by the Company (the "Offering").
The Company expects to issue $20 million to $25 million of its Common Stock at
a price per share to be determined at the time of pricing. To assist the
Company in maintaining its qualification as a REIT for federal income tax
purposes, ownership by any person generally is limited to 7.0% of the then
outstanding Common Stock, which limit can be waived by the Board of Directors.
See "Description of Capital Stock--Restrictions on Ownership and Transfer" in
the accompanying Prospectus.
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "KRC." On February 10, 1998, the last reported sales price of the
Common Stock on the NYSE was $27.75 per share. See "Price Range of Common Stock
and Distribution History."
SEE "RISK FACTORS" ON PAGES S-3 TO S-7 OF THIS PROSPECTUS SUPPLEMENT AND ON
PAGES 2 TO 12 OF THE ACCOMPANYING PROSPECTUS FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON STOCK OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Underwriter has agreed to purchase the shares of Common Stock from the
Company at a price of $ per share, resulting in aggregate proceeds to the
Company of $ before payment of expenses by the Company estimated at $ ,
subject to the terms and conditions in the Underwriting Agreement. The
Underwriter intends to deposit the shares of Common Stock with the trustee of
National Equity Trust Equity Portfolio Series 2 (REIT Portfolio) (the "Trust")
in exchange for units in the Trust. If all of the shares of Common Stock so
deposited with the trustee of the Trust are valued at their reported last sale
price on February , 1998, the aggregate underwriting discount would be $ .
See "Underwriting."
The shares of Common Stock are offered by the Underwriter, subject to delivery
by the Company and acceptance by the Underwriter, to prior sale and withdrawal,
cancellation or modification of the offer without notice. Delivery of the
shares to the Underwriter is expected to be made at the office or Prudential
Securities Incorporated, One New York Plaza, New York, on or about February ,
1998.
PRUDENTIAL SECURITIES INCORPORATED
February , 1998
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial information appearing elsewhere in this Prospectus
Supplement or incorporated herein by reference.
THE COMPANY
Kilroy Realty Corporation was incorporated in September 1996 and commenced
operations upon the completion of its initial public offering (the "IPO") on
January 31, 1997. The Company was formed to continue and expand the real estate
business of the Kilroy Group, which, since 1947, was engaged in the business of
real estate ownership, acquisition, development, leasing and management of
principally Class A suburban office and industrial buildings in prime
locations, primarily in Southern California. As of February 10, 1998, the
Company owned 62 suburban office buildings encompassing approximately 4.5
million rentable square feet, and 79 industrial buildings encompassing
approximately 5.4 million rentable square feet. All but 14 of the Properties
are located in Southern California. In addition, as of February 10, 1998, the
Company had under development one office building and two industrial buildings,
which, when completed, are expected to encompass approximately 140,000 and
680,000 rentable square feet, respectively. The Company operates as a
self-administered and self-managed real estate company and expects that is has
qualified and that it will continue to qualify as a REIT for federal and state
income tax purposes beginning with the year ended December 31, 1997. See
"Federal Income Tax Consequences--Taxation of the Company."
The Company conducts substantially all of its activities through Kilroy
Realty, L.P. (the "Operating Partnership") in which, as of December 31, 1997,
the Company owned an approximate 87.8% general partner interest. The remaining
12.2% limited partnership interest in the Operating Partnership is owned by
certain members of the Company's executive officers and directors, certain of
their affiliates, and other outside investors. As the sole general partner of
the Operating Partnership, the Company has control over the management of the
Operating Partnership and over each of the 124 Properties owned by the
Operating Partnership. The remaining 17 Properties are owned by Kilroy Realty
Finance, L.P., a limited partnership in which the Company (through a wholly
owned subsidiary) owns a 1% general partnership interest and the Operating
Partnership owns a 99% limited partnership interest.
S-2
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves various material
risks. Prospective investors should carefully consider the risk factors below
and in the accompanying Prospectus in addition to the other information set
forth herein and therein, in connection with an investment in the Common
Stock. When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify 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, regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, results of operations
and financial position. Prospective investors are cautioned that any forward-
looking statements are not guarantees of future performance and are subject to
risks and uncertainties and that actual results may differ materially from
those included within the forward-looking statements as a result of various
factors. Factors that could cause or contribute to such differences include,
but are not limited to, those under the heading "Risk Factors" in this
Prospectus Supplement and the accompanying Prospectus, and under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, which is incorporated herein by reference.
DEPENDENCE ON SOUTHERN CALIFORNIA MARKET. As of February 10, 1998, the
Company's portfolio was comprised of 141 buildings, 127 of which are located
in Southern California and encompass an aggregate of approximately 8.2 million
rentable square feet (representing approximately 83.5% of the aggregate
rentable square feet of all of the Properties as of such date). Consequently,
the Company's performance is linked to economic conditions and the demand for
office and industrial space in this region. The Southern California economy
experienced significant recessionary conditions during the early and mid
1990s, primarily as a result of the downsizing of the aerospace and defense
industries; there is still a dependence on these industries in the Company's
El Segundo and Long Beach Airport area submarkets. The recessionary conditions
resulted in a general increase in vacancies and a general decrease in net
absorption and rental rates in the Company's El Segundo and Long Beach Airport
area submarkets. Although the recently announced disposition of defense and
satellite services businesses of Hughes Electronics Corporation does not
directly affect any of the Properties, any resulting vacancy in the Company's
submarkets may have an adverse effect on rental rates and occupancy at the
Properties. Eight office buildings, representing approximately 29.6% of the
aggregate office space of all of the Office Properties as of February 10,
1998, are located in two office parks in El Segundo, California, and Long
Beach, California, respectively. Any decline in the Southern California
economy generally may result in a material decline in the demand for office
and industrial space, may have a material adverse effect greater than if the
Company had a more geographically diverse portfolio of properties, and may
materially and adversely affect the ability of the Company to make
distributions to stockholders.
DEPENDENCE ON SIGNIFICANT TENANTS. The Company's 20 largest tenants
represented approximately 43.4% of total base rent revenues for the year ended
December 31, 1997. Of this amount, its largest tenant, Hughes Space &
Communications ("Hughes"), currently leases approximately 405,000 rentable
square feet of office space in Kilroy Airport Center at El Segundo,
representing approximately 14.7% of the Company's total base rents for the
year ended December 31, 1997. Based on annualized base rent as of December 31,
1997, and giving pro forma effect to the lease with The Boeing Company
("Boeing") (which was executed in June 1997), the Hughes leases as a
percentage of the Company's total base rents is 9.6%. The base periods of the
Hughes Space & Communications leases expire beginning in January 1999. The
Company's revenues and cash available for distribution to stockholders would
be disproportionately and materially adversely affected in the event of
bankruptcy or insolvency of, or a downturn in the business of, or the
nonrenewal of leases by, any of its significant tenants, or the renewal of
such leases on terms less favorable to the Company than their current terms.
REAL ESTATE INVESTMENT CONSIDERATIONS
Risk of Tenant Nonrenewal. The Company faces competition from a number of
other office and industrial building developers and real estate companies that
compete with the Company in seeking properties for
S-3
<PAGE>
acquisition, prospective tenants and land for development. Competition from
other office and industrial properties may affect the Company's ability to
attract and retain tenants, maintain its rental rates and manage its expenses
of operation (particularly in light of the higher vacancy rates of many
competing properties which may result in lower-priced space being available in
such properties). During the period beginning January 1, 1994 and ending
December 31, 1997, the weighted average renewal rate, based on rentable square
footage, was 68.7% for the Properties owned by the Company upon consummation
of the IPO located in the Southern California Area and 59.0% for the
Properties overall. The lower retention rate for all of the Properties overall
is due primarily to the termination in 1993 of a lease with Boeing, scheduled
to expire in 1995, for approximately 211,000 rentable square feet at the
SeaTac Office Center. This office space was re-leased by Boeing on June 20,
1997.
Lease Expirations. Certain leases expiring during the next several years are
at rental rates higher than those attained by the Company in its recent
leasing activity. Such leases, or other leases of the Company, may not be
renewed or, if renewed, may be renewed at rental rates lower than rental rates
in effect immediately prior to expiration. While the Company believes that the
average rental rates for most of its Properties are below the market rates in
the respective submarkets, no assurance can be given that the Properties will
be re-leased at rental rates equal to or above the Properties' current rental
rates. Decreases in the rental rates for the Company's properties, the failure
of tenants to renew any such leases or the failure of the Company to re-lease
any of the Company's space could materially adversely affect the Company and
its ability to make distributions. During the three calendar years ending
December 31, 2000, the Company will have expiring leases for its Office
Properties covering approximately 1.4 million rentable square feet, and
expiring leases for Industrial Properties covering approximately 2.0 million
rentable square feet.
Ground Leases. The eight office buildings (plus one office building
currently under development) located at Kilroy Airport Center in Long Beach
and the SeaTac Office Center are held subject to ground leases. A default by
the Company under the terms of a ground lease could result in the loss of such
Properties located on the respective parcel, unless the default under the
lease is cured or waived. In addition, upon expiration of the ground leases,
including the options thereon, there is no assurance that the Company will be
able to negotiate new ground leases at all or, if any leases were renewed,
that they will be on terms consistent with or more favorable than existing
terms, which may result in the loss of such Properties or increased rental
expense to the Company. The ground leases for the Kilroy Airport Center Long
Beach will expire in 2035. The ground leases for the SeaTac Office Center
(including renewal options) will expire in 2062.
DISTRIBUTION PAYOUT PERCENTAGE. The Company declared distributions per share
of Common Stock of $1.42 for the eleven months ended December 31, 1997, and
$0.39 for the fourth quarter of 1997. A failure to make expected distributions
could result in a decrease in the market price of the Common Stock. See "Price
Range of Common Stock and Distributions."
ENVIRONMENTAL REGULATIONS. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the
owner was responsible for, or even knew of, the presence of such hazardous or
toxic substances. The costs of investigation, removal or remediation of such
substances may be substantial, and the presence of such substances may
adversely affect the owner's ability to rent or sell the property or to borrow
using such property as collateral and may expose it to liability resulting
from any release of or exposure to such substances. Persons who arrange for
the disposal or treatment of hazardous or toxic substances at another location
may also be liable for the costs of removal or remediation of such substances
at the disposal or treatment facility, whether or not such facility is owned
or operated by such person. Certain environmental laws impose liability for
release of asbestos-containing materials into the air, and third parties may
also seek recovery from owners or operators of real properties for personal
injury associated with asbestos-containing materials and other hazardous or
toxic substances. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company may be
considered an owner or operator of such properties or as having arranged for
the disposal or treatment of hazardous or toxic
S-4
<PAGE>
substances and, therefore, potentially liable for removal or remediation
costs, as well as certain other related costs, including governmental
penalties and injuries to persons and property.
Certain of the Company's tenants routinely handle hazardous substances and
wastes as part of their operations on the Company's properties. Such tenants
are subject to environmental laws and regulations governing the use, storage,
handling and disposal of such materials and such laws and regulations also
could subject the Company to liability resulting from such activities. The
Company's leases generally provide that the tenant must comply with such laws
and regulations and indemnify the Company for any related liabilities. As a
result, the Company does not believe that such matters will have a material
adverse effect on its operations. The Company has not been notified by any
governmental authority, and is not otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
petroleum products in connection with any of its Properties.
All of the Properties have been subject to Phase I or similar environmental
assessments by independent environmental consultants. Phase I assessments are
intended to discover information regarding, and to evaluate the environmental
condition of, the surveyed property and surrounding properties. Phase I
assessments generally include an historical review, a public records review,
an investigation of the surveyed site and surrounding properties, and
preparation and issuance of a written report, but do not include soil sampling
or subsurface investigations. Such reports have revealed that some of the
Company's properties contain asbestos-containing materials, and that
historical operations at or in the vicinity of certain of the Properties,
including the operation of underground storage tanks, may have caused soil or
groundwater contamination on such properties. The Company's investigations
have revealed the presence of groundwater contamination at one of its
properties. Prior to the Company's ownership of this property, soil
remediation was conducted for which agency closures were issued. The Company
does not believe that further soil remediation will be required. The Company
has obtained environmental insurance for soil and groundwater contamination at
the site which it believes will be sufficient to cover any potential liability
relating to such conditions. There can be no assurance, however, that such
insurance will be adequate to cover any potential liability or that any such
liability will not have a material adverse effect on the Company's financial
condition or results of operations taken as a whole.
None of the Company's environmental assessments of the other Properties has
revealed any environmental liability that the Company believes would have a
material adverse effect on the Company's financial condition or results of
operations taken as a whole, nor is the Company aware of any such material
environmental liability. Nonetheless, it is possible that the Company's
assessments do not reveal all environmental liabilities or that there are
material environmental liabilities of which the Company is unaware. Moreover,
there can be no assurance that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of the Properties will not be affected by tenants, by
the condition of land or operations in the vicinity of the Properties (such as
the presence of underground storage tanks), or by third parties unrelated to
the Company. If compliance with the various laws and regulations, now existing
or hereafter adopted, exceeds the Company's budgets for such items, the
Company's ability to make expected distributions to stockholders could be
adversely affected.
The Company is negotiating the purchase of a 32-acre portion of a 100-acre
property located in Burbank, California. The property, including the portion
being considered by the Company, is part of the San Fernando Valley Superfund
Site. Pursuant to agreements with the United States Environmental Protection
Agency and the California Environmental Protection Agency, the current owner
of the property has agreed to remediate groundwater and soil contamination
associated with the property. The Company has identified residual soil
contamination on the property and has conditioned its purchase of the property
on obtaining environmental indemnification from the current owner, as well as
the seller of the 32-acre parcel to the Company, and satisfactory commitment
from the current owner to complete the remediation of the residual soil
contamination.
SHARES ELIGIBLE FOR FUTURE SALE. No prediction can be made as to the effect,
if any, that future sales of shares, or the availability of shares for future
sale, will have on the market price of the Common Stock. Sales of
S-5
<PAGE>
substantial amounts of shares of Common Stock in the public market (or upon
exchange of common limited partnership units) or the perception that such
sales might occur could adversely affect the market price of the shares of
Common Stock.
Upon the consummation of the Offering, the Company will have shares
of Common Stock outstanding, of which all but the 100,000 restricted shares of
Common Stock will be freely tradable in the public market by persons other
than "affiliates" of the Company without restriction or registration under the
Securities Act. The remaining 100,000 restricted shares of Common Stock and
all of the shares of Common Stock that are issuable upon the redemption of
limited partnership Units will be deemed to be "restricted securities" within
the meaning of Rule 144 promulgated under the Securities Act ("Rule 144") and
may not be transferred unless registered under the Securities Act or an
exemption from registration is available, including any exemption from
registration provided under Rule 144. In general, upon satisfaction of certain
conditions, Rule 144 permits the sale of certain amounts of restricted
securities one year following the date of acquisition of the restricted
securities from the Company and, after two years, permits unlimited sales by
persons unaffiliated with the Company. In addition, the Commission has
recently suggested further revisions to the holding and volume limitations
contained in Rule 144. The adoption of amendments effecting such suggested
revisions may result in resales of restricted securities sooner than would be
the case under Rule 144 as currently in effect. However, there can be no
assurance of when, if ever, such suggested amendments will be proposed or
adopted.
The Operating Partnership presently has an aggregate of 3,406,212 common
limited partnership Units (as defined in the accompanying Prospectus) which
may be redeemed by the Operating Partnership on or after January 31, 1999 at
the request of the holders thereof for cash (based on the fair market value of
an equivalent number of shares of Common Stock at the time of such redemption)
or, at the Company's option, exchanged for an equal number of shares of Common
Stock, subject to certain anti-dilution adjustments and, with respect to 50%
of the Units issued to John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy
Industries, a corporation owned by Messrs. Kilroy ("KI"), the obligation of
the holders of such Units to indemnify the Company in connection with the
formation of the Operating Partnership and the Company and the consummation of
the IPO (the "Formation Transactions"). However, if the Company does not elect
to exchange such Units for shares, a holder of such Units that is a
corporation or a limited liability company may require the Company to issue
shares of Common Stock in lieu of cash, subject to the ownership limit set
forth in the Company's Articles of Incorporation, as described in the
accompanying Prospectus (the "Ownership Limit"), or, with the consent of the
Board of Directors, such other limit which does not result in the failure of
the Company to qualify as a REIT. See "Partnership Agreement of the Operating
Partnership--Redemption/Exchange Rights." The Company has granted options to
purchase an aggregate of approximately 1,185,000 shares of Common Stock to
certain directors, executive officers and other employees of the Company and
an additional approximately 215,000 shares of Common Stock have been reserved
for issuance either as restricted shares of Common Stock or upon the exercise
of options granted under the Company's 1997 Stock Option and Incentive Plan
(the "Stock Incentive Plan"). In addition, the Company may issue from time to
time additional shares of Common Stock or Units in connection with the
acquisition of properties. The Company has agreed to file and generally will
keep continuously effective beginning on January 31, 1999 a registration
statement covering the issuance of shares upon the exchange of common limited
partnership Units and the resale thereof and has agreed to provide piggyback
registration rights with respect to shares of Common Stock which may be
acquired by the holders of such Units and certain other persons. The Company
has filed a registration statement with respect to the shares of Common Stock
issuable under the Stock Incentive Plan. Such registration statements and
registration rights generally allow or will allow shares of Common Stock
covered thereby, including shares of Common Stock issuable upon exchange of
common limited partnership Units or the exercise of options or restricted
shares of Common Stock to be transferred or resold without restriction under
the Securities Act.
In addition to the limits placed on the sale of shares of Common Stock by
operation of Rule 144 and other provisions of the Securities Act, (i) all but
four of the common limited partners (who hold an aggregate of 165,102 Units)
have agreed not to, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise dispose or
transfer (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other disposition or transfer) of
any Units or shares of Common
S-6
<PAGE>
Stock or other capital stock of the Company, or of securities substantially
similar thereto, or any other securities convertible into, or exercisable or
exchangeable for, any Units or shares of Common Stock or other capital stock
of the Company, or such similar securities, for a period of two years from
January 28, 1997 and (ii) four common limited partners who hold a total of
165,102 Units agreed in connection with the issuance of such Units not to
exchange such Units for shares of Common Stock prior to January 29, 1999. At
the conclusion of such two-year period on January 28, 1999, Common Stock
issued upon the subsequent exchange of limited partnership Units may be sold
in the public market pursuant to the registration rights described above.
Notwithstanding the foregoing, 50% of the Units received by John B. Kilroy,
Sr., John B. Kilroy, Jr. and KI in connection with the Formation Transactions
have been pledged to secure their indemnification obligations pursuant to an
agreement with the Company. Future sales of the shares of Common Stock could
have an adverse effect on the market price of the shares of Common Stock and
the existence of Units, options, shares of Common Stock reserved for issuance
as restricted shares of Common Stock or upon exchange of Units and the
exercise of options and registration may adversely affect the terms upon which
the Company may be able to obtain additional capital through the sale of
equity securities.
S-7
<PAGE>
RECENT DEVELOPMENTS
Fourth Quarter Results of Operations. For the eleven-month period ended
December 31, 1997, the Company had revenues of $66.1 million, net income of
$22.1 million or $1.20 per share ($1.19 per share diluted), and funds from
operations of $39.1 million. For the fourth quarter ended December 31, 1997,
the Company had revenues of $23.5 million, net income of $8.8 million or $0.36
per share (basic and diluted), and funds from operations of $15.0 million.
Acquisitions. Since September 30, 1997, the Company has acquired 25 Office
Properties, representing an aggregate of 1.4 million rentable square feet, and
25 Industrial Properties representing an aggregate of 1.6 million rentable
square feet, at an aggregate purchase price of $291.7 million, principally
from borrowings under the Operating Partnership's revolving credit facility.
Management. In addition, since September 30, 1997, in connection with the
acquisition of The Allen Group and otherwise, the Company hired two Executive
Vice Presidents responsible for acquisitions and development to oversee the
Company's operations in each of the Orange County and San Diego markets. In
addition, the Company hired a Senior Vice President of Acquisitions and
Leasing.
Financing Transactions. On February 6, 1998, the Operating Partnership
completed the private placement of 1,200,000 8.075% Series A Preferred
Cumulative Redeemable Units representing limited partnership interests to an
institutional investor for an aggregate contribution to the Operating
Partnership of $60,000,000. The Operating Partnership plans to use
contribution proceeds, less applicable transaction costs and expenses of
approximately $1.7 million, for the repayment of indebtedness. See
"Partnership Agreement of the Operating Partnership--Series A Preferred Units"
in the accompanying Prospectus.
USE OF PROCEEDS
The Company, as general partner of the Operating Partnership, is required
under the terms and conditions of the Second Amended and Restated Agreement of
Limited Partnership of the Operating Partnership (the "Partnership Agreement")
to invest the net proceeds of the Offering in the Operating Partnership. The
Operating Partnership intends to use such net proceeds for general corporate
purposes including, without limitation, the acquisition and development of
properties and the repayment of debt. Net proceeds from the Offering initially
may be temporarily invested in short-term securities.
S-8
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
Since the completion of the IPO, the Common Stock has been listed on the
NYSE under the symbol "KRC." The following sets forth the high and low closing
sale prices for the Common Stock for the fiscal periods indicated as reported
by the NYSE Composite Tape and the dividends declared by the Company with
respect to each such period.
<TABLE>
<CAPTION>
YEAR HIGH LOW DIVIDEND
---- ------- ------- --------
<S> <C> <C> <C>
1997
First Quarter (from January 28).................... $28 1/8 $24 7/8 $0.2583
Second Quarter..................................... 26 5/8 23 1/8 0.3875
Third Quarter...................................... 27 24 0.3875
Fourth Quarter..................................... 28 7/8 25 3/4 0.3875
1998
First Quarter (through February 10)................ 29 1/4 27 1/2
</TABLE>
On February 10, 1998, the last reported sale price of the Common Stock on
the NYSE was $27 3/4 per share. Dividends will be paid on or about the 10th
day of each January, April, July and October to its common stockholders at the
discretion of the Board of Directors and will depend on the funds from
operations of the Company, its financial condition, capital requirements, the
annual distribution requirements under the REIT provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and such other factors as the
Board of Directors deems relevant.
Distributions by the Company to the extent of its current earnings and
profits for federal income tax purposes are taxable to stockholders as
ordinary dividend income. Distributions in excess of earnings and profits
generally are treated as a non-taxable return of capital to the extent of a
stockholder's basis in the Common Stock. A return of capital distribution has
the effect of deferring taxation until a stockholder's sale of the Common
Stock.
S-9
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX
CONSIDERATIONS TO HOLDERS OF COMMON STOCK
The following summary of certain U.S. federal income tax considerations to
holders of Common Stock is based on current law, is for general information
only, and is not tax advice. This discussion does not purport to deal with all
aspects of taxation that may be relevant to particular stockholders in light
of their personal investment or tax circumstances, or to certain types of
stockholders subject to special treatment under the federal income tax laws,
including, without limitation, insurance companies, tax exempt organizations
(except to the extent discussed under the heading "--Taxation of Certain Tax-
Exempt Stockholders"), stockholders holding Common Stock as part of a
conversion transaction, as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes, certain financial institutions,
broker-dealers, foreign corporations, foreign partnerships and persons who are
not citizens or residents of the United States (except to the extent discussed
under the heading "--Taxation of Non-U.S. Stockholders"). This discussion
should be read in conjunction with the discussion under "Federal Income Tax
Consequences" in the Prospectus. In addition, the summary below does not
consider the effect of any foreign, state, local or other tax laws that may be
applicable to prospective purchasers of Common Stock or the effect of any
changes in applicable tax laws.
This Prospectus Supplement does not address the taxation of the Company or
the impact on the Company of its election to be taxed as a REIT. The federal
income tax treatment of the Company is set forth in the Prospectus under the
heading "Federal Income Tax Consequences." The discussion below assumes that
the Company qualifies as a REIT under the Code. If in any taxable year the
Company were to fail to qualify as a REIT, the Company would not be allowed a
deduction for dividends paid to stockholders in computing taxable income and
would be subject to federal income tax on its taxable income at regular
corporate rates. As a result, the funds available for distribution to the
Company's stockholders would be reduced. See "Risk Factors--Adverse
Consequences of Failure to Qualify as a REIT" and "Federal Income Tax
Consequences--Failure to Qualify" in the Prospectus.
EACH INVESTOR IS ADVISED TO CONSULT THE PROSPECTUS FOR INFORMATION REGARDING
THE FEDERAL INCOME TAX CONSIDERATIONS TO THE COMPANY OF ITS ELECTION TO BE
TAXED AS A REIT. EACH INVESTOR IS ALSO ADVISED TO CONSULT HIS OR HER TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
ACQUISITION, OWNERSHIP AND SALE OF THE COMMON STOCK OF THE COMPANY, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN THE APPLICABLE TAX
LAWS.
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, (iii) is an estate the income of
which is subject to United States federal income taxation regardless of its
source or (iv) is a trust the administration of which is subject to the
primary supervision of a United States court and which has one or more United
States persons who have the authority to control all substantial decisions of
the trust.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction otherwise available with respect
to dividends received by U.S. Stockholders that are corporations.
Distributions made by the Company that are properly designated by the Company
as capital gain
S-10
<PAGE>
dividends will be taxable to taxable U.S. Stockholders as gains (to the extent
that they do not exceed the Company's actual net capital gain for the taxable
year) from the sale or disposition of a capital asset. Depending upon the
period of time that the Company held the assets to which such gains were
attributable, and upon certain designations, if any, which may be made by the
Company, such gains will be taxable to non-corporate U.S. Stockholders at a
rate of either 20%, 25% or 28%. U.S. Stockholders that are corporations may,
however, be required to treat up to 20% of certain capital gain dividends as
ordinary income. To the extent that the Company makes distributions (not
designated as capital gain dividends) in excess of its current and accumulated
earnings and profits, such distributions will be treated first as a tax free
return of capital to each U.S. Stockholder, reducing the adjusted basis which
such U.S. Stockholder has in his or her shares of Common Stock for tax
purposes by the amount of such distribution (but not below zero), with
distributions in excess of a U.S. Stockholder's adjusted basis in his or her
shares taxable as capital gains (provided that the shares have been held as a
capital asset). With respect to non-corporate U.S. Stockholders, amounts
described as being treated as capital gains in the preceding sentence will be
taxable as long-term capital gains if the shares to which such gains are
attributable have been held for more than eighteen months, mid-term capital
gains if such shares have been held for more than one year but not more than
eighteen months, or short-term capital gains if such shares have been held for
one year or less. Dividends declared by the Company in October, November, or
December of any year and payable to a stockholder of record on a specified
date in any such month shall be treated as both paid by the Company and
received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company on or before January 31 of the
following calendar year. Stockholders may not include in their own income tax
returns any net operating losses or capital losses of the Company.
Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be
able to apply any "passive losses" against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment interest limitation. Gain arising from the sale or other
disposition of Common Stock (or distributions treated as such), however, will
not be treated as investment income unless the U.S. Stockholder elects to
reduce the amount of such U.S. Stockholder's total net capital gain eligible
for the capital gains rate by the amount of such gain with respect to such
Common Stock.
The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would
pay tax on such retained net long-term capital gains. In addition, to the
extent designated by the Company, a U.S. Stockholder generally would (i)
include its proportionate share of such undistributed long-term capital gains
in computing its long-term capital gains in its return for its taxable year in
which the last day of the Company's taxable year falls (subject to certain
limitations as to the amount so includable), (ii) be deemed to have paid the
capital gains tax imposed on the Company on the designated amounts included in
such U.S. Stockholder's long-term capital gains, (iii) receive a credit or
refund for such amount of tax deemed paid by it, (iv) increase the adjusted
basis of its Shares by the difference between the amount of such includable
gains and the tax deemed to have been paid by it, and (v) in the case of a
U.S. Stockholder that is a corporation, appropriately adjust its earnings and
profits for the retained capital gains in accordance with Treasury Regulations
to be prescribed by the IRS.
Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to
the difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Common Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and with respect to non-corporate U.S.
Stockholders, will be mid-term or long-term gain or loss if such shares have
been held for more than one year or eighteen months, respectively. In general,
any loss recognized by a U.S. Stockholder upon the sale or other disposition
of shares of Common Stock that have been held 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 received by such U.S. Stockholder from
the Company which were required to be treated as long term capital gains.
S-11
<PAGE>
BACKUP WITHHOLDING
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Stockholder that does not provide the Company
with his correct taxpayer identification number may also be subject to
penalties imposed by the IRS. Backup withholding is not an additional tax. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any stockholders who fail to certify
their non foreign status to the Company. See "Taxation of Non U.S.
Stockholders."
TAXATION OF TAX EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by
a tax exempt entity. Based on that ruling, provided that a tax exempt
stockholder (except certain tax exempt stockholders described below) has not
held its shares of Common Stock as "debt financed property" within the meaning
of the Code (generally, shares of Common Stock, the acquisition of which was
financed through a borrowing by the tax exempt stockholder) and such shares
are not otherwise used in a trade or business, dividend income received from
the Company will not be UBTI to a tax exempt stockholder. Similarly, income
from the sale of Common Stock will not constitute UBTI unless such tax exempt
stockholder has held such shares as "debt financed property" within the
meaning of the Code or has used the shares in a trade or business.
For tax exempt stockholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
properly to deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their tax advisors concerning these "set
aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax exempt under Section
501(a) of the Code, and (iii) holds more than 10% (by value) of the interests
in the REIT. Tax exempt pension funds that are described in Section 401(a) of
the Code are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code provides that stock owned
by qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself), and (ii) either (a) at least one such qualified trust holds
more than 25% (by value) of the interests in the REIT, or (b) one or more such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests
in the REIT. The percentage of any REIT dividend treated as UBTI is equal to
the ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were
a qualified trust and therefore subject to tax on UBTI) to (ii) the total
gross income of the REIT. A de minimis exception applies if the percentage is
less than 5% for any year. The provisions requiring qualified trusts to treat
a portion of REIT distributions as UBTI will not apply if the REIT is able to
satisfy the "not closely held" requirement without relying upon the "look
through" exception with respect to qualified trusts. As a result of certain
limitations on transfer and ownership of Common Stock contained in the
Charter, the Company is not now, and does not in the future expect to be
classified as a "pension held REIT."
S-12
<PAGE>
TAXATION OF NON U.S. STOCKHOLDERS
The preceding discussion does not address the rules governing United States
federal income taxation of the ownership and disposition of Common Stock by
persons that are not U.S. Stockholders ("Non-U.S. Stockholders"). In general,
Non-U.S. Stockholders may be subject to special tax withholding requirements
on distributions from the Company and with respect to their sale or other
disposition of Common Stock of the Company, except to the extent reduced or
eliminated by an income tax treaty between the United States and the Non-U.S.
Stockholder's country. A Non-U.S. Stockholder who is a stockholder of record
and is eligible for reduction or elimination of withholding must file an
appropriate form with the Company in order to claim such treatment. Non-U.S.
Stockholders should consult their tax advisors concerning the federal income
tax consequences to them of an acquisition of shares of Common Stock,
including the federal income tax treatment of dispositions of interests in,
and the receipt of distributions from, the Company.
OTHER TAX CONSIDERATIONS
The Company's stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.
S-13
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
dated the date hereof (the "Underwriting Agreement"), between Prudential
Securities Incorporated (the "Underwriter") and the Company, the Underwriter
has agreed to purchase from the Company, and the Company has agreed to sell to
the Underwriter, shares of Common Stock at a price of $ per share, resulting
in aggregate proceeds to the Company of $ before payment of expenses by the
Company estimated at $ .
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the shares of Common Stock are subject to
approval of certain legal matters by its counsel and to certain other
conditions. The Underwriter is obligated to take and pay for all shares of
Common Stock offered hereby if any such shares of Common Stock are taken.
The Underwriter intends to deposit the shares of Common Stock with the
trustee of the Trust, a registered unit investment trust under the Investment
Company Act of 1940, as amended, in exchange for units in the Trust. If all of
the shares of Common Stock so deposited with the trustee of the Trust are
valued at their reported last sale price on February , 1998, the aggregate
underwriting discount would be $ . The Underwriter is acting as sponsor and
depositor of the Trust and is therefore considered an affiliate of the Trust.
The Underwriting Agreement contains covenants of indemnity between the
Underwriter and the Company against certain liabilities, including liabilities
under the Securities Act.
The Underwriter and its affiliates have from time to time performed, and may
continue to perform in the future, various investment banking services for the
Company, for which customary compensation has been received.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. Latham &
Watkins will rely as to certain matters of Maryland law, including the
legality of the Common Stock, on the opinion of Ballard Spahr Andrews &
Ingersoll. Certain legal matters will be passed upon for the Underwriter by
Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California.
S-14
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRE-
SENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
ANY OF THE UNDERWRITERS. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANY-
ING PROSPECTUS CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DO THEY CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURI-
TIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SO-
LICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............................................. S-2
Risk Factors.............................................................. S-3
Recent Developments....................................................... S-8
Use of Proceeds........................................................... S-8
Price Range of Common Stock and Distributions............................. S-9
Certain U.S. Federal Income Tax Considerations to Holders of Common Stock. S-10
Underwriting.............................................................. S-14
Legal Matters............................................................. S-14
PROSPECTUS
Available Information..................................................... i
Incorporation of Certain Documents by Reference........................... ii
The Company............................................................... 1
Risk Factors.............................................................. 2
Use of Proceeds........................................................... 13
Ratio of Earnings to Fixed Charges........................................ 13
Description of Capital Stock.............................................. 14
Warrants.................................................................. 20
Description of Depositary Shares.......................................... 20
Certain Provisions of Maryland Law and of the Articles of Incorporation
and Bylaws............................................................... 25
Partnership Agreement of the Operating Partnership........................ 30
Federal Income Tax Consequences........................................... 35
Other Tax Consequences.................................................... 44
Plan of Distribution...................................................... 44
Experts................................................................... 45
Legal Matters............................................................. 45
</TABLE>
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KILROY REALTY CORPORATION
Common Stock
---------------------
PROSPECTUS SUPPLEMENT
---------------------
PRUDENTIAL SECURITIES INCORPORATED
February , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses, other than underwriting discounts and commissions, in
connection with the offering of the securities being registered are set forth
below. All of such expenses are estimates.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $118,000
NYSE Filing Fee.................................................... 21,000
Printing........................................................... 50,000
Legal Fees and Expenses............................................ 75,000
Accounting Fees and Expenses....................................... 50,000
Registrar and Transfer Agent Fees and Expenses..................... 5,000
Blue Sky Fees and Expenses......................................... 15,000
NASD Filing Fee.................................................... 30,000
Trustee Fees and Expenses.......................................... 15,000
Miscellaneous Expenses............................................. 51,000
--------
Total............................................................ $430,000
========
</TABLE>
All of the costs identified above will be paid by the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's officers and directors are and will be indemnified under
Maryland law, the Articles of Incorporation and the Partnership Agreement
against certain liabilities. The Articles of Incorporation and Bylaws require
the Company to indemnify its directors and officers to the fullest extent
permitted from time to time by the laws of Maryland.
The MGCL permits a corporation to indemnify its directors and officers and
certain other parties 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 (i) the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) the director or officer actually received an
improper personal benefit in money, property or services, or (iii) in the case
of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the
proceeding; provided, however, that if the proceeding is one by or in the
right of the corporation, indemnification may not be made with respect to any
proceeding in which the director or officer has been adjudged to be liable to
the corporation. In addition, a director or officer may not be indemnified
with respect to any proceeding charging improper personal benefit to the
director or officer in which the director or officer was adjudged to be liable
on the basis that personal benefit was received. The termination of any
proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard
of conduct required for indemnification to be permitted.
The MGCL permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to
the corporation and its stockholders for money damages, subject to specified
restrictions, and the Articles of Incorporation contain this provision. The
law does not, however, permit the liability of directors and officers to the
corporation or its stockholders to be limited to the extent that (i) it is
proved that the person actually received an improper personal benefit in
money, property or services, (ii) a
II-1
<PAGE>
judgment or other final adjudication is entered in a proceeding based on a
finding that the person's action, or failure to act, was committed in bad
faith or was the result of active and deliberate dishonesty and was material
to the cause of action adjudicated in the proceeding or (iii) in the case of
any criminal proceeding, the director had reasonable cause to believe that the
act or failure to act was unlawful. This provision does not limit the ability
of the Company or its stockholders to obtain other relief, such as an
injunction or rescission.
The Partnership Agreement also provides for indemnification of the Company,
as general partner, and its officers and directors to the same extent
indemnification is provided to officers and directors of the Company in its
Articles of Incorporation, and limits the liability of the Company and its
officers and directors to the Operating Partnership and the partners of the
Operating Partnership to the same extent liability of officers and directors
of the Company to the Company and its stockholders is limited under the
Articles of Incorporation. See "Partnership Agreement of the Operating
Partnership--Indemnification."
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company has entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require,
among other matters, that the Company indemnify its executive officers and
directors to the fullest extent permitted by law and advance to the executive
officers and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under the
agreements, the Company must also indemnify and advance all expenses incurred
by executive officers and directors seeking to enforce their rights under the
indemnification agreements and may cover executive officers and directors
under the Company's directors' and officers' liability insurance. Although the
form of indemnification agreement offers substantially the same scope of
coverage afforded by law, it provides greater assurance to directors and
executive officers that indemnification will be available, because, as a
contract, it cannot be modified unilaterally in the future by the Board of
Directors or the stockholders to eliminate the rights it provides.
II-2
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
3.1 Articles of Amendment and Restatement of Registrant(1)
3.2 Amended and Restated Bylaws of the Registrant(1)
3.3 Articles Supplementary of the Registrant(2)
4.1 Form of Certificate for Common Stock of the Registrant(1)
5.1 Opinion of Ballard Spahr Andrews & Ingersoll
8.1 Opinion of Latham & Watkins regarding certain federal income tax
matters
10.1 Second Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P.(2)
12.1 Calculation of Ratio of Earnings to Fixed Charges
23.1 Consent of Latham & Watkins (filed with Exhibit 8.1)
23.2 Consent of Ballard Spahr Andrews & Ingersoll (filed with Exhibit 5.1)
23.3 Consent of Deloitte & Touche LLP
*24.1 Power of Attorney
</TABLE>
- --------
*Previously filed.
(1) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) as declared effective on January 28, 1997 and
incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's current report on Form
8-K dated February 6, 1998 and incorporated herein by reference.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, 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 this
registration statement. Notwithstanding the foregoing, any increase or
decrease in 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 price
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 this registration statement or any
material change to such information in this registration statement.
II-3
<PAGE>
Provided, however, That subparagraphs (i) and (ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed by the Registrants
pursuant to Section 13 or Section 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 herein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(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 the purposes
of determining any liability under the Securities Act of 1933, the filing of
the Registrant's annual reports pursuant to Section 13(a) or 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.
The undersigned Registrant hereby further 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 under Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4),
or 497(h) under the Securities Act of 1933 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.
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 provisions described under Item 15 of this
registration statement, or otherwise (other than insurance), the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in such 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 by such director, officer or controlling person in connection with
the Securities being registered, the Registrant will, unless in the opinion of
its 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 such Act and will be governed by
the final adjudication of such issue.
The undersigned registrant 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 a 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, as amended, the
Registrant certifies that it has reasonable grounds to believe that the
Company meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of El Segundo, State of
California, on this 11th day of February 1998.
KILROY REALTY CORPORATION
*
By: _________________________________
John B. Kilroy, Jr.
President, Chief Executive
Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board and February 11, 1998
____________________________________ Director
John B. Kilroy, Sr.
* President, Chief Executive February 11, 1998
____________________________________ Officer
John B. Kilroy, Jr. and Director (Principal
Executive Officer)
* Director February 11, 1998
____________________________________
Richard S. Allen
* Director February 11, 1998
____________________________________
John R. D'Eathe
* Director February 11, 1998
____________________________________
William P. Dickey
* Director February 11, 1998
____________________________________
Matthew J. Hart
* Director February 11, 1998
____________________________________
Dale F. Kinsella
* Executive Vice President, February 11, 1998
____________________________________ Chief Financial Officer and
Richard E. Moran Jr. Secretary (Principal
Financial Officer)
/s/ Ann Marie Whitney Vice President and February 11, 1998
____________________________________ Controller
Ann Marie Whitney (Principal Accounting
Officer)
*By: /s/ Ann Marie Whitney
____________________________________
Ann Marie Whitney
Attorney-in-Fact
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Articles of Amendment and Restatement of Registrant(1)
3.2 Amended and Restated Bylaws of the Registrant(1)
3.3 Articles Supplementary of the Registrant(2)
4.1 Form of Certificate for Common Stock of the Registrant(1)
5.1 Opinion of Ballard Spahr Andrews & Ingersoll
8.1 Opinion of Latham & Watkins regarding certain federal income tax
matters
10.1 Second Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P.(2)
12.1 Calculation of Ratio of Earnings to Fixed Charges
23.1 Consent of Latham & Watkins (filed with Exhibit 8.1)
23.2 Consent of Ballard Spahr Andrews & Ingersoll (filed with Exhibit 5.1)
23.3 Consent of Deloitte & Touche LLP
*24.1 Power of Attorney
</TABLE>
- --------
*Previously filed.
(1) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) as declared effective on January 28, 1997 and incorporated
herein by reference.
(2) Previously filed as an exhibit to the Registrant's current report on Form
8-K dated February 6, 1998 and incorporated herein by reference.
<PAGE>
EXHIBIT 5.1
February 11, 1998
Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245
Re: Kilroy Realty Corporation (the "Company") Amendment No. 1 to
Registration Statement on Form S-3 pertaining to $400,000,000 maximum
aggregate initial offering price of (i) shares of common stock of the
Company, par value $.01 per share ("Common Stock"); (ii) shares of
preferred stock of the Company, par value $.01 per share ("Preferred
Stock"); and (iii) warrants to purchase shares of Common Stock or
shares of Preferred Stock ("Warrants")
--------------------------------------------------------------------
Ladies and Gentlemen:
In connection with the registration of shares of Common Stock, shares of
Preferred Stock and Warrants (collectively, the "Securities") under the
Securities Act of 1933, as amended (the "Act"), by the Company on Form S-3,
filed with the Securities and Exchange Commission (the "Commission") on January
28, 1998 (the "Registration Statement") and Amendment No. 1 to the Registration
Statement filed or to be filed with the Commission on or about February 11,
1998, you have requested our opinion with respect to the matters set forth
below. Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the Registration Statement.
We have acted as special Maryland corporate counsel to the Company in
connection with the matters described herein. In our capacity as special
Maryland corporate counsel to the Company, we have reviewed and are familiar
with the charter of the Company (the "Charter"), consisting of Articles of
Incorporation filed with the Maryland State Department of Assessments and
Taxation (the "Department") on September 13, 1996 and Articles of Amendment and
Restatement filed with the Department on January 21, 1997; the Amended and
Restated Bylaws of the Company (the "Bylaws"), which were duly adopted by the
Board of Directors of the Company on January 26, 1997; and certain resolutions
adopted and actions taken by the Board of Directors of the Company (the "Board
of Directors")
<PAGE>
BALLARD SPAHR ANDREWS & INGERSOLL
Kilroy Realty Corporation
February 11, 1998
Page 2
on or before the date hereof and in full force and effect on the date hereof
including, but not limited to, those certain resolutions adopted by the Board of
Directors on December 16, 1997. We have also examined the Registration
Statement, other documents, corporate and other records of the Company and
certificates of public officials and officers of the Company including, without
limitation, a status certificate of recent date issued by the Department to the
effect that the Company is duly incorporated and existing under the laws of the
State of Maryland, and a Certificate of Officers of the Company of recent date
to the effect that, among other things, the Charter and Bylaws of the Company
and the resolutions and actions by the Board of Directors which we have examined
are true, correct and complete, have not been rescinded or modified and are in
full force and effect on the date of such certificate. We have also made such
further legal and factual examinations as we have deemed necessary or
appropriate to provide a basis for the opinion set forth below.
In reaching the opinions set forth below, we have assumed the following:
(a) each person executing any instrument, document or agreement on behalf of any
party (other than the Company) is duly authorized to do so; (b) each natural
person executing any instrument, document or agreement is legally competent to
do so; (c) all documents submitted to us as originals are authentic; all
documents submitted to us as certified, facsimile or photostatic copies conform
to the original document; all signatures on all documents submitted to us for
examination are genuine; and all public records reviewed are accurate and
complete; (d) the resolutions adopted and to be adopted, and the actions taken
and to be taken by the Board of Directors including, but not limited to, the
adoption of all resolutions and the taking of all action necessary to authorize
the issuance and sale of the Securities in accordance with the procedures set
forth in paragraphs 1, 2 and 3 below, have occurred or will occur at duly called
meetings at which a quorum of the incumbent directors of the Company were or are
present and acting throughout, or by unanimous written consent of all incumbent
directors, all in accordance with the Charter and Bylaws of the Company and
applicable law; (e) the number of shares of Preferred Stock and the number of
shares of Common Stock to be offered and sold under the Registration Statement,
together with the number of shares of Preferred Stock and the number of shares
of Common Stock issuable upon exercise of the Warrants, will not, in the
aggregate, exceed the number of shares of Preferred Stock, and the number of
shares of Common Stock, respectively, authorized in the Charter of the Company,
less the number of shares of Preferred
<PAGE>
BALLARD SPAHR ANDREWS & INGERSOLL
Kilroy Realty Corporation
February 11, 1998
Page 3
Stock and the number of shares of Common Stock, respectively, authorized and
reserved for issuance and issued and outstanding on the date on which the
Securities are authorized, the date on which the Securities are issued and
delivered, the date on which the Warrants are exercised and the date on which
shares of Preferred Stock and shares of Common Stock, respectively, are issued
pursuant to exercise of Warrants; (f) none of the terms of any Security to be
established subsequent to the date hereof, nor the issuance and delivery of such
Security nor the compliance by the Company with the terms of such Security will
violate any applicable law or will conflict with, or result in a breach or
violation of, the Charter or Bylaws of the Company, or any instrument or
agreement to which the Company is a party or by which the Company is bound or
any order or decree of any court, administrative or governmental body having
jurisdiction over the Company; and (g) none of the Securities, and none of the
shares of Preferred Stock or shares of Common Stock issuable upon exercise of
the Warrants, will be issued and sold to an Interested Stockholder of the
Company or an Affiliate thereof, all as defined in Subtitle 6 of Title 3 of the
Maryland General Corporation Law, or in violation of the provisions of Article
IV, Section E of the Charter of the Company entitled "Restrictions on Ownership
and Transfer to Preserve Tax Benefits."
Based on the foregoing, and subject to the assumptions and qualifications
set forth herein, it is our opinion that:
1. Upon due authorization by the Board of Directors of a designated
number of shares of Common Stock for issuance at a minimum price or value of
consideration to be set by the Board of Directors, all necessary corporate
action on the part of the Company will have been taken to authorize the issuance
and sale of such shares of Common Stock, and when such Common Shares are issued
and delivered against payment of the consideration therefor as set by the Board
of Directors, such shares of Common Stock will be validly issued, fully paid and
non-assessable.
2. Upon: (a) designation by the Board of Directors of one or more
classes of Preferred Stock to distinguish each such class from other than
outstanding classes of Preferred Stock; (b) setting by the Board of Directors of
the number of shares of Preferred Stock to be included in each such class; (c)
establishment by the Board of Directors of the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of each such class of Preferred Stock;
(d) filing by the Company with the
<PAGE>
BALLARD SPAHR ANDREWS & INGERSOLL
Kilroy Realty Corporation
February 11, 1998
Page 4
Department of Articles Supplementary setting forth a description of each such
class of Preferred Stock, including the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption as set by the Board of Directors and a
statement that the Preferred Stock has been classified by the Board of Directors
under the authority contained in the Charter, and the acceptance for record by
the Department of such Articles Supplementary; and (e) due authorization by the
Board of Directors of a designated number of shares of Preferred Stock for
issuance at a minimum price or value of consideration to be set by the Board of
Directors, all necessary corporate action on the part of the Company will have
been taken to authorize the issuance and sale of such shares of Preferred Stock
and when such shares of Preferred Stock are issued and delivered against payment
of the consideration therefor as set by the Board of Directors, such shares of
Preferred Stock will be validly issued, fully paid and non-assessable.
3. Upon: (a) designation and titling by the Board of Directors of the
Warrants; (b) setting by the Board of Directors of the number of Warrants to be
issued; (c) establishment by the Board of Directors of the terms, conditions and
provisions of the Warrants; (d) due authorization by the Board of Directors of
the Warrants for issuance at a minimum price or value of consideration to be set
by the Board of Directors; and (e) reservation and due authorization by the
Board of Directors of the shares of Common Stock and the shares of Preferred
Stock of the Company issuable upon exercise of such Warrants in accordance with
the procedures set forth in paragraphs 1 and 2 above, at a minimum price or
value of consideration to be set by the Board of Directors, all necessary
corporate action on the part of the Company will have been taken to authorize
the issuance and sale of the Warrants, and when such Warrants are issued and
delivered against payment of the consideration therefor as set by the Board of
Directors, in accordance with the authorization by the Board of Directors and
the terms of any Warrants Agreement, and authenticated by the Warrant Agent,
such Warrants will constitute valid and binding obligations of the Company,
subject to bankruptcy, insolvency, reorganization and other laws affecting the
rights of creditors generally and the exercise of judicial discretion in
accordance with general principles of equity.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and further consent to the filing of this opinion as an exhibit to
applications to the securities
<PAGE>
BALLARD SPAHR ANDREWS & INGERSOLL
Kilroy Realty Corporation
February 11, 1998
Page 5
commissioners of the various states of the United States for registration of the
Securities. We also consent to the identification of our firm as Maryland
counsel to the Company in the section of the Prospectus (which is a part of the
Registration Statement) entitled "Legal Matters."
This opinion is limited to the present corporate laws of the State of
Maryland and we express no opinion with respect to the laws of any other
jurisdiction. Furthermore, the opinions presented in this letter are limited to
the matters specifically set forth herein and no other opinion shall be inferred
beyond the matters expressly set forth herein. Without limiting the generality
of the foregoing, we express no opinion with respect to any securities laws.
The opinions set forth in this letter are rendered as of the date hereof
and are necessarily limited to laws now in effect and facts and circumstances
presently existing and brought to our attention. We assume no obligation to
supplement this opinion if any applicable law is changed after the date hereof
or if we become aware of any facts or circumstances which now exist or which
occur or arise in the future and may change the opinions expressed herein after
the date hereof.
The opinions expressed in this letter are for your use and the use of your
securities counsel, Latham & Watkins, in connection with the filing of the
Registration Statement and the rendering of opinions by Latham & Watkins in
connection therewith, and may not be relied upon by you or Latham & Watkins for
any other purpose, without our prior written consent.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF LATHAM & WATKINS]
February 11, 1998
Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245
Re: Certain Federal Income Tax Consequences
---------------------------------------
Ladies and Gentlemen:
We have acted as tax counsel to Kilroy Realty Corporation, a Maryland
corporation (the "Company"), in connection with with its issuance of up to
$400,000,000 aggregate maximum offering price of shares of $.01 par value common
stock of the Company pursuant to a registration statement filed with the
Securities and Exchange Commission on Form S-3 on January 28, 1998, (file No.
333-45097) as amended as of the time it became effective (the "Registration
------------
Statement").
- ---------
You have requested our opinion concerning certain of the federal
income tax consequences to the Company in connection with the sale described
above. This opinion is based on various factual assumptions, including the
facts set forth in the Registration Statement, concerning the business,
properties and governing documents of the Company, Kilroy Realty, L.P., (the
"Operating Partnership") and their subsidiaries. We have also been furnished
with, and with your consent have relied upon, certain representations made by
the Company, the Operating Partnership and their subsidiaries with respect to
certain factual matters through a certificate of an officer of the Company (the
"Officer's Certificate").
In our capacity as tax counsel to the Company, we have made such legal
and factual examinations and inquiries, including an examination of originals or
copies certified or otherwise identified to our satisfaction of such documents,
corporate records and other instruments as we have deemed necessary or
appropriate for purposes of this opinion. In our examination, we have assumed
the authenticity of all documents submitted to us as originals,
<PAGE>
Kilroy Realty Corporation
February 11, 1998
Page 2
the genuineness of all signatures thereon, the legal capacity of natural persons
executing such documents and the conformity to authentic original documents of
all documents submitted to us as copies.
We are opining herein as to the effect on the subject transaction only
of the federal income tax laws of the United States and we express no opinion
with respect to the applicability thereto, or the effect thereon, of other
federal laws, the laws of any state or other jurisdiction or as to any matters
of municipal law or the laws of any other local agencies within any state.
Based on such facts, assumptions and representations, it is our
opinion that the statements in the Registration Statement, set forth under the
headings "Federal Income Tax Consequences," insofar as such statements describe
statutes, rules or regulations, legal conclusions with respect to their
application or provisions of the organizational documents of the Company, have
been reviewed by us and are correct in all material respects.
No opinion is expressed as to any matter not discussed herein.
This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. Also, any variation or
difference in the facts from those set forth in the Registration Statement or
the Officer's Certificate may affect the conclusions stated herein. Moreover,
the Company's qualification and taxation as a real estate investment trust
depends upon the Company's ability to meet (through actual annual operating
results, distribution levels and diversity of stock ownership) the various
qualification tests imposed under the Code, the results of which have not been
and will not be reviewed by Latham & Watkins. Accordingly, no assurance can be
given that the actual results of the Company's operation for any one taxable
year will satisfy such requirements.
This opinion is rendered only to you and is solely for your use in
connection with the Registration Statement. This opinion may not be relied upon
by you for any other purpose, or furnished to, quoted to, or relied upon by any
other person, firm or corporation, for any purpose, without our prior written
consent.
Very truly yours,
/s/ Latham & Watkins
<PAGE>
EXHIBIT 12.1
KILROY REALTY CORPORATION
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Income (Loss).................. $22,060 $13,267 $12,614 $(6,668) $(2,076)
Net Income (Loss) Before
Extraordinary Item and Minority
Interest in Income (Loss)......... 25,473 (6,828) (2,653) (8,515) (2,076)
Add back:
Interest Expense................... 9,738 21,853 24,159 25,376 25,805
------- ------- ------- ------- -------
Earnings Available for Fixed
Charges........................... $35,211 $15,025 $21,506 $16,861 $23,729
------- ------- ------- ------- -------
Fixed Charges
Interest Expense................... $ 9,738 $21,853 $24,159 $25,376 $25,805
Capitalized Interest............... 1,546
------- ------- ------- ------- -------
Fixed Charges...................... $11,284 $21,853 $24,159 $25,376 $25,805
------- ------- ------- ------- -------
Ratio of Earnings to Fixed Charges. 3.12 0.69 0.89 0.66 0.92
Excess of Fixed Charges Over
Earnings.......................... $ 6,828 $ 2,653 $ 8,515 $ 2,076
</TABLE>
- --------
For the purposes of computing the consolidated ratio of earnings to fixed
charges, earnings consist of income (loss) before extraordinary items,
minority interest in income (loss) and interest expense. Fixed Charges consist
of interest expense, capitalized interest, and amortization of deferred
financing fees, whether expensed or amortized.
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Amendment No. 1 to
Registration Statement (No. 333-45097) of Kilroy Realty Corporation on Form S-
3 of our report dated March 21, 1997 (July 11, 1997 as to Note 12), appearing
in the Annual Report on Form 10-K of Kilroy Group for the year ended December
31, 1996, our reports on the combined historical summaries of certain revenues
and certain expenses of the Acquired Properties dated July 11, 1997, the Post
IPO Acquisitions Through June 30, 1997 dated July 31, 1997, and the Acquired
Properties and Pending Acquisitions dated July 31, 1997, each appearing in the
Kilroy Realty Corporation's registration statement (No. 333-32261) on Form S-
11, and our reports on the combined historical summaries of certain revenues
and certain expenses of the Eight Acquired Properties dated September 12, 1997
and the Four Acquired Properties dated November 26, 1997, each appearing in
the Kilroy Realty Corporation's Current Report on Form 8-K/A dated December
19, 1997, and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
Deloitte & Touche LLP
Los Angeles, California
February 10, 1998
