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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1998
REGISTRATION NO. 333-51935
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 2
ON
FORM S-3
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PRIME GROUP REALTY TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
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MARYLAND 36-4173047
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) No.)
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77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
(312) 917-1300
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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MICHAEL W. RESCHKE
CHAIRMAN OF THE BOARD
PRIME GROUP REALTY TRUST
77 WEST WACKER DRIVE, SUITE 3900
CHICAGO, ILLINOIS 60601
(312) 917-1300
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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COPIES TO:
WAYNE D. BOBERG, ESQ.
BRIAN T. BLACK, ESQ.
WINSTON & STRAWN
35 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60601
(312) 558-5600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO PUBLIC:
Any time and from time to time after the effective date of this Registration
Statement.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
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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. / /
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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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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE POST-EFFECTIVE
AMENDMENT TO REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND THE SELLING SHAREHOLDERS ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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SUBJECT TO COMPLETION--DATED NOVEMBER 17, 1998
PROSPECTUS
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[LOGO]
2,579,994 Common Shares
PRIME GROUP REALTY TRUST
Common Shares of Beneficial Interest
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We are a fully-integrated, self-administered and self-managed real estate
company which owns a portfolio of office and industrial properties located
primarily in the Chicago, Illinois metropolitan area.
This prospectus relates to the offer and sale from time to time by the holders
listed under the "Selling Shareholders" of up to 2,579,994 of our common shares.
The registration of the Selling Shareholders' common shares does not necessarily
mean that any of them will sell their common shares.
The Selling Shareholders may from time to time offer and sell all or a portion
of their common shares covered by this prospectus in transactions on the New
York Stock Exchange, in the over-the-counter market, or on any other national
securities exchange on which our common shares are listed or traded, in
negotiated transactions or otherwise, at prices then prevailing or related to
the then-current market price or at negotiated prices. See "Plan of
Distribution."
We will not receive any of the proceeds from the Selling Shareholders' sale of
their common shares. We are paying the costs of preparing and filing the
Registration Statement that contains this prospectus.
The common shares are listed on the NYSE under the symbol "PGE." The closing
sale price of the common shares as reported by the NYSE on November 13, 1998 was
$13 13/16 per share.
In order to maintain our qualifications as a real estate investment trust for
federal income tax purposes, ownership by any person of more than 9.9% (by
number or value, whichever is more restrictive) of our outstanding shares of
beneficial interest is restricted by our Declaration of Trust.
INVESTING IN THE COMMON SHARES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" ON
PAGES 1 TO 15.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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THE DATE OF THIS PROSPECTUS IS , 1998.
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TABLE OF CONTENTS
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PAGE
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The Offering.................................... 1
Risk Factors.................................... 1
The Company..................................... 16
Use of Proceeds................................. 17
Price Range of Common Shares and
Distributions................................. 18
Description of Shares of Beneficial Interest.... 20
Certain Provisions of Maryland Law and of The
Company's Declaration of Trust and Bylaws..... 41
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PAGE
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Certain Federal Income Tax Considerations....... 44
ERISA Considerations............................ 62
Selling Shareholders............................ 64
Plan of Distribution............................ 65
Legal Matters................................... 66
Experts......................................... 66
Additional Information.......................... 67
Incorporation of Certain Documents By
Reference..................................... 68
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THE OFFERING
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Common Shares Offered Hereby...... 2,579,994 common shares which may be offered and sold
from time to time by the Selling Shareholders in
transactions on the New York Stock Exchange (the
"NYSE"), in the over-the- counter market, or on any
other national securities exchange on which our common
shares are listed or traded, in negotiated transactions
or otherwise, at prevailing prices or related to the
current market price or at negotiated prices.
Common Shares Outstanding......... As of November 13, 1998, 15,122,594 common shares were
outstanding (including the 2,579,994 common shares
covered by this prospectus).
Use of Proceeds................... We will not receive any proceeds from the Selling
Shareholders' sale of their common shares.
NYSE Symbol....................... PGE.
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RISK FACTORS
In addition to the other information presented or incorporated by reference
in this prospectus, you should carefully consider the following matters before
purchasing the common shares offered hereby (the "Offered Shares").
When used in this prospectus, the words "believe," "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, 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. You
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.
GEOGRAPHIC CONCENTRATION OF THE PROPERTIES IN THE CHICAGO METROPOLITAN AREA,
NASHVILLE, KNOXVILLE, MILWAUKEE AND COLUMBUS; LOCAL ECONOMIC CONDITIONS. The
Company's revenues and the values of its properties may be affected by a number
of factors, including the local economic climate (which may be adversely
impacted by business layoffs or downsizing, industry slowdowns, changing
demographics and other factors) and local real estate conditions (such as
oversupply of or reduced demand for office and industrial properties). Further,
19 of the Company's office properties (which represent approximately 90.1% of
the aggregate net rentable square feet of the Company's office space) and 40 of
the industrial properties (which represent approximately 87.8% of the aggregate
net rentable square feet of the Company's industrial space), are located in the
Chicago metropolitan area. Moreover, the 77 West Wacker Drive Building, which
represents 24.0% of the Annualized Net Rent of the properties, is located in the
Chicago central business district. "Annualized Net Rent" means, with respect to
a lease, the monthly net rent due under the lease as determined in accordance
with Generally Accepted Accounting Principles, annualized for all leases in
effect on June 30, 1998. A material decline in the demand and/or the ability of
tenants to pay rent for office and industrial space in the Chicago metropolitan
area may result in a material decline in the demand for the Company's office or
industrial space and the Company's cash available for distribution. Such a
decline may have a material adverse effect greater than if the Company had a
more geographically diverse portfolio of properties. The local economic
conditions of the Nashville, Tennessee; Knoxville, Tennessee; Milwaukee,
Wisconsin; and Columbus, Ohio metropolitan areas also will affect the Company
due to the location of certain of its properties in such areas.
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CONFLICTS OF INTEREST
ABILITY OF LIMITED PARTNERS, OFFICERS AND TRUSTEES TO INFLUENCE OPERATING
PARTNERSHIP. The Prime Group, Inc. ("PGI") directly owns a 0.2% interest in
Prime Group Realty, L.P. (the "Operating Partnership"), and a joint venture
between PGI and certain affiliates of Blackstone Real Estate Advisors, L.P.,
BRE/ Primestone Investment L.L.C. and BRE/Primestone Management Investors L.L.C.
(the "Primestone Joint Venture") (in which PGI owns a 60.0% interest) owns a
30.7% interest in the Operating Partnership. PGI may be in a position to
exercise significant influence over the affairs of the Company because:
- of PGI's ownership interest in the Operating Partnership;
- Mr. Michael W. Reschke is the Chairman of the Board of the Company and
also an owner of PGI; and
- Mr. Richard S. Curto, President and Chief Executive Officer of the
Company, has the right to receive a substantial, but not controlling,
interest in PGI.
In addition, Mr. Jeffrey A. Patterson, an executive officer of the Company, owns
a 0.4% interest in the Operating Partnership. Certain conflicts exist between
the obligations of Mr. Reschke as a trustee of the Company and his interest as a
limited partner of the Operating Partnership through his ownership of PGI.
Blackstone Real Estate Advisors, L.P. ("Blackstone"), as the 40.0% owner of the
Primestone Joint Venture, designated Mr. Thomas J. Saylak to be elected a
trustee of the Company. In addition, certain entities and persons (all of which
are controlled by or affiliated with Mr. Edward S. Hadesman or Stephen J. Nardi)
which contributed certain properties to the Company in connection with the
Company's formation, own, in the aggregate, a 7.1% interest in the Operating
Partnership. Edward S. Hadesman is an officer of the Company and Stephen J.
Nardi is a trustee and a consultant of the Company. As limited partners, PGI,
the Primestone Joint Venture, the contributors referred to above that are
affiliated with or controlled by Mr. Hadesman, and Mr. Patterson and, as a
general partner, one of the entities referred to above that is controlled by Mr.
Nardi, may suffer different and more adverse tax consequences than the Company
upon the sale or refinancing of certain of the Company's properties. In
addition, PGI has agreed to indemnify the Company for certain amounts the
Company may be required to pay for tax liabilities incurred by certain of the
contributors referred to above upon the sale of properties they contributed to
the Company in connection with the formation, organization and initial public
offering of the Company. Therefore, the limited partners and the general partner
controlled by Mr. Nardi may have different objectives than the Company regarding
the appropriate pricing and timing of any sale or refinancing of such
properties. While the Company, as the managing general partner of the Operating
Partnership, has the ability to determine whether and on what terms to sell or
refinance an individual property, those members of the Company's management and
its board of trustees (the "Board of Trustees") who directly or indirectly hold
partnership interests in the common equity of the Operating Partnership (the
"Common Units"), including Messrs. Reschke, Curto, Patterson, Hadesman and
Nardi, could have an ability to influence the Company not to sell or refinance
certain properties, even though such sale might otherwise be financially
advantageous to the Company, or may influence the Company to refinance a
property with a high level of debt.
MR. RESCHKE CONTINUES TO ENGAGE IN ACTIVITIES OUTSIDE OF THE COMPANY,
INCLUDING REAL ESTATE ACTIVITIES. Under the terms of his employment agreement as
Chairman of the Board of the Company, Mr. Reschke is permitted to devote a
considerable portion of his time to the management of interests outside of the
Company. In addition to serving as Chairman of the Board of the Company, Mr.
Reschke continues to serve as Chairman of the Board of Prime Retail, Inc. (NYSE:
PRT), Chairman of the Board of Brookdale Living Communities, Inc. (Nasdaq:
BLCI), Chairman of the Board and CEO of The Prime Group, Inc., and a director of
Horizon Group Properties, Inc. (Nasdaq: HGPI). As a result of these interests
and the business time he devotes to activities related to them, certain
conflicts of interest may arise between Mr. Reschke's duties and
responsibilities to the Company and his other interests. The Company could be
adversely affected if these conflicts of interest adversely affect his
performance of managerial duties and responsibilities to the Company. PGI and
Mr. Reschke have entered a Non-Compete Agreement with the
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Company (the "Non-Compete Agreement") that contains restrictions on their
ability to compete with the Company. However, there can be no assurance that
these contracts or the Company's policies with respect to conflicts of interest
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 shareholders.
CERTAIN PARTNER APPROVAL RIGHTS LIMIT THE COMPANY'S ABILITY TO TAKE CERTAIN
ACTIONS WITH RESPECT TO THE OPERATING PARTNERSHIP. While the Company is the
managing general partner of the Operating Partnership, and generally has the
ability to exercise full and exclusive responsibility and discretion in the
management and control of the Operating Partnership, certain provisions of the
Amended and Restated Agreement of Limited Partnership of Prime Group Realty,
L.P., (as amended, the "Partnership Agreement") place limitations on the
Company's ability to act with respect to the Operating Partnership. For example:
- the Company cannot withdraw as a general partner of the Operating
Partnership or admit another general partner to the Operating Partnership
without the consent of the Operating Partnership's other general partner
which Mr. Nardi controls;
- the Company cannot, on behalf of the Operating Partnership, take any
action without the prior consent of the holders of more than 50.0% of the
common units representing limited partnership interests in the common
equity of the Operating Partnership (the "LP Common Units") to dissolve
the Operating Partnership;
- except in connection with certain transactions, and in addition to the
required consent of the Operating Partnership's general partner which Mr.
Nardi controls, the Company may not voluntarily withdraw from the
Operating Partnership, or transfer or assign its interest in the Operating
Partnership, unless it obtains the consent of the holders of at least
50.0% of the Common Units (including Common Units held by the Company) and
meets certain other criteria with respect to the consideration to be
received by the limited partners in the Operating Partnership; and
- in connection with certain extraordinary transactions where the limited
partners in the Operating Partnership are treated differently than the
holders of common shares, the consent of those limited partners in the
Operating Partnership holding more than 50.0% of the LP Common Units will
be required.
REAL ESTATE FINANCING RISKS
REQUIRED REPAYMENT OF DEBT OR OF RELATED INTEREST COULD ADVERSELY AFFECT THE
COMPANY. The Company is generally subject to the risks associated with debt
financing. These risks include:
- the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest;
- the risk that the Company will not be able to refinance existing
indebtedness on its properties or that the terms of the refinancing will
not be as favorable to the Company as the terms of existing indebtedness;
and
- the risk that necessary capital expenditures for purposes such as
reletting space will not be able to be financed on favorable terms.
If a property is mortgaged to secure payment of indebtedness and the Company is
unable to meet mortgage payments, the property could be transferred (by
foreclosure or otherwise) to the mortgagee with a consequent loss of any
prospective income and equity value from such property to the Company.
COMPANY'S ABILITY TO INCREASE ITS DEBT COULD ADVERSELY AFFECT THE COMPANY'S
CASH FLOW. Subject to certain limitations in the Company's Declaration of
Trust, as amended by Articles of Amendment and Restatement and Articles
Supplementary (the "Declaration of Trust") with regard to its 7% Series A
Cumulative Convertible Preferred Shares of Beneficial Interest (the "Convertible
Preferred Shares"), the Company's organizational documents do not limit the
level or amount of debt that it may incur and may be
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altered without the consent of the Company's shareholders. The Company's policy
has been to operate with a ratio of debt to total market capitalization at a
level below 50.0%. At September 30, 1998, the Company had outstanding debt of
approximately $510.1 million, which is equal to approximately 47.7% of the total
market capitalization of the Company. If the Company were to incur additional
indebtedness and operate at a higher degree of leverage, debt service
requirements would increase accordingly. Such an increase could adversely affect
the Company's financial condition and results of operations. In addition,
increased leverage could increase the risk of default by the Company on its debt
obligations, with the potential for loss of cash available for distribution, and
asset values, of the Company.
COMPANY'S ABILITY TO OBTAIN PERMANENT FINANCING CANNOT BE ASSURED. The
Company has financed certain acquisitions and will finance certain development
activities in part with proceeds from the credit facility entered into by the
Company with Bank-Boston, N.A. and Prudential Securities Credit Corporation on
November 17, 1997 (as amended, the "Credit Facility"). Certain of such
acquisition and development financing have been, and are expected to continue to
be, replaced by permanent financing. There can be no assurance that the Company
will be able to obtain such permanent financing on acceptable terms. Further, if
market interest rates were to increase at a time when amounts are outstanding
under the Credit Facility or under the Company's floating rate tax-exempt bond
debt, or if other variable rate debt amounts were outstanding, the Company's
debt service obligations likewise would increase, causing potentially adverse
effects on the Company's financial condition and results of operations.
CERTAIN ANTI-TAKEOVER PROVISIONS MAY INHIBIT A CHANGE IN CONTROL OF THE
COMPANY
GENERAL. Certain provisions contained in the Declaration of Trust, as
amended and restated, and Bylaws, as amended and restated, the Maryland General
Corporation Law (the "MGCL"), as applicable to Maryland REITs, and certain
provisions of the Partnership Agreement may have the effect of discouraging
offers to acquire the Company and may thereby delay, deter or prevent a change
in control of the Company or the removal of existing management even if a change
of control or the removal of existing management was in the shareholders'
interest. See "Description of Shares of Beneficial Interest-- Restrictions on
Ownership and Transfer" and "Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws."
In order to, among other things, protect the Company against the risk of
losing REIT status for federal income tax purposes due to a concentration of
ownership among its shareholders, the Declaration of Trust sets forth an
ownership limit. We refer to this as the "Ownership Limit". Such Ownership Limit
provides that, subject to certain specified exceptions, no person or entity
(which does not include certain pension plans and mutual funds) may own, or be
deemed to own by virtue of the applicable constructive ownership provisions of
the Internal Revenue Code of 1986, as amended, (the "Code"), more than 9.9% (by
number or value, whichever is more restrictive) of the outstanding Equity
Shares. Equity Shares means the Company's outstanding Convertible Preferred
Shares and Redeemable Preferred Shares (as defined below). The Board of Trustees
may, but is not required to, waive the Ownership Limit or any other limit
described in the Declaration of Trust, with respect to a particular shareholder
if the Board of Trustees determines that such ownership will not jeopardize the
Company's status as a REIT and the Board of Trustees otherwise decides such
action would be in the best interest of the Company. As a condition of such
waiver, the Board of Trustees may require a ruling from the IRS or an opinion of
counsel satisfactory to it with respect to preserving the REIT status of the
Company. The foregoing ownership limitations may have the effect of precluding
acquisition of control of the Company without the consent of the Board of
Trustees. Consequently, shareholders may be unable to realize a premium for
their shares over the then-prevailing market price (a premium is customarily
associated with such acquisitions).
POTENTIAL EFFECTS OF THE ISSUANCE OF ADDITIONAL PREFERRED SHARES. The
Declaration of Trust permits the Board of Trustees to cause the Company to issue
up to 30.0 million preferred shares of beneficial interest, and to establish the
preferences and rights (including the right to vote, participate in earnings,
and to convert into common shares) of any such preferred shares issued. Of such
30.0 million preferred shares, 2.0 million have been designated and issued as
Convertible Preferred Shares and 4.0 million have been
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designated and issued as 9% Series B Cumulative Redeemable Preferred Shares of
Beneficial Interest (the "Redeemable Preferred Shares"). Thus, the Board of
Trustees could authorize the issuance of preferred shares with terms and
conditions which could discourage a takeover or other transaction in which
holders of some or a majority of the common shares might receive a premium for
their common shares over the then-prevailing market price of such common shares.
See "Description of Shares of Beneficial Interest-- Preferred Shares."
POTENTIAL EFFECTS OF A STAGGERED BOARD. The Board of Trustees has three
classes of trustees. Trustees for each class will be chosen for a three-year
term upon the expiration of the current class term. The term of the first class
expired May 22, 1998. The two trustees comprising such class were each
re-elected to a new three-year term on May 22, 1998 at the Company's initial
annual shareholders' meeting. The terms of the second and third classes will
expire in 1999 and 2000, respectively. Subject to the rights of the holders of
the Convertible Preferred Shares, the Redeemable Preferred Shares and holders of
any future series of preferred shares to elect and/or remove trustees in certain
circumstances, a trustee may be removed only for cause and upon the affirmative
vote of two-thirds of the outstanding common shares. The staggered terms of
trustees may reduce the possibility of a tender offer or an attempt to change
control of the Company, even though a tender offer or a change in control might
be in the best interest of shareholders. See "Certain Provisions of Maryland Law
and of the Company's Declaration of Trust and Bylaws-- Classification of the
Board of Trustees."
CERTAIN PROVISIONS OF THE PARTNERSHIP AGREEMENT COULD INHIBIT ACQUISITIONS
AND CHANGES IN CONTROL. The Partnership Agreement provides that the Company may
not generally engage in any merger, consolidation or other combination with or
into another person or sale of all or substantially all of its assets, or any
reclassification, or any recapitalization or change of outstanding common shares
(a "Business Combination"), unless certain conditions are met. In particular,
the holders of LP Common Units must receive, or have the opportunity to receive,
the same consideration per Common Unit as holders of common shares receive per
common share in the transaction. If holders of LP Common Units will not be
treated in such manner, then the Company may not engage in such transaction
unless Limited Partners holding more than 50.0% of the LP Common Units vote to
approve the Business Combination. In addition, if the Company conducted a vote
of its shareholders regarding a Business Combination, the Company will not
consummate it unless the matter would have been approved had holders of LP
Common Units been able to vote together with the shareholders on the
transaction. In other words, if the Company's shareholders did approve a
Business Combination, the Company cannot consummate it unless all three of the
following conditions are met:
- the Company, as managing general partner of the Operating Partnership,
conducts a vote of all holders of Common Units (both limited partner and
general partner Common Units);
- the Company votes its Common Units in the same proportion as the Company's
shareholders voted their shares at the shareholder meeting; and
- the result of the Common Unit vote is the same as the vote of
shareholders.
These provisions of the Partnership Agreement may inhibit a third party from
making an acquisition proposal that it may otherwise make. The provisions may
also prevent the Company from entering into the Business Combination even though
it had the requisite authority to do so under its Declaration of Trust.
POSSIBLE LIMITATIONS ON CHANGE OF CONTROL PURSUANT TO MARYLAND BUSINESS
COMBINATION STATUTE. Certain provisions of Maryland law prohibit "business
combinations" (including certain issuances of equity securities):
- with any person who beneficially owns ten percent or more of the voting
power of outstanding shares of the trust;
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- with an affiliate or associate of the trust, who, at any time within the
two-year period prior to the date in question, was the owner of ten
percent or more of the voting power of the Company (an "Interested
Shareholder"); or
- with an affiliate of the Interested Shareholder.
These prohibitions last for five years after the most recent date on which the
Interested Shareholder became an Interested Shareholder. After the five-year
period, a business combination with the Interested Shareholder must be approved
by the Board of Trustees and a super-majority shareholder vote unless, among
other things, the holders of shares of beneficial interest receive a minimum
price for their shares and the consideration is received in cash or in the same
form as previously paid by the Interested Shareholder for its shares. The Board
of Trustees of the Company has opted out of the business combinations provisions
with respect to any business combination involving PGI, the Primestone Joint
Venture or any of the Contributors or any of their affiliates (including Mr.
Reschke). Accordingly, the five-year prohibition and the super-majority
shareholder vote requirement will not apply to any business combinations between
PGI, the Primestone Joint Venture or any of the Contributors or their respective
affiliates and the Company. As a result, PGI, the Primestone Joint Venture or
any of the Contributors and their affiliates may be able to enter into business
combinations with the Company, which may or may not be in the best interests of
the shareholders, without the super-majority shareholder approval. Further, the
business combinations statute could discourage offers from third parties to
acquire the Company and increase the difficulty of consummating any such offer.
See "Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws--Business Combinations."
POSSIBLE LIMITATIONS ON CHANGE OF CONTROL PURSUANT TO MARYLAND CONTROL SHARE
ACQUISITION STATUTE. Maryland law provides that, subject to certain exceptions,
"control shares" of a Maryland REIT acquired in a "control share acquisition"
have no voting rights except to the extent approved by a vote of two-thirds of
the votes eligible under the statute to be cast on the matter. "Control shares"
are voting shares of stock or beneficial interest which, if aggregated with all
other such shares of stock or beneficial interest previously acquired by the
acquiror, would entitle the acquiror to exercise voting power in electing
trustees 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 that
the acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval.
If voting rights are not approved at a meeting of shareholders then, subject
to certain conditions and limitations, the trust may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at a
shareholders' meeting and the acquiror becomes entitled to vote a majority of
the shares of beneficial interest entitled to vote, all other shareholders may
exercise appraisal rights.
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
beneficial interest. There can be no assurance that such provision will not be
amended or eliminated at any point in the future. If the foregoing exemption in
the Bylaws is rescinded, the control share acquisition statute could discourage
offers to acquire the Company and increase the difficulty of consummating any
such offer. See "Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and Bylaws--Control Share Acquisitions."
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
TAX LIABILITIES AS A CONSEQUENCE OF FAILURE TO QUALIFY AS A REIT. The
Company operates and intends to continue to operate its business so as to
qualify as a real estate investment trust (a "REIT") under the Code. 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 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
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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 95.0% of the Company's gross
income in any year must be derived from qualifying sources. Also, the Company
must pay distributions to shareholders aggregating annually at least 95.0% of
its REIT taxable income (determined without regard to the dividends paid
deduction and by excluding net capital gains). The fact that the Company holds
its assets through the Operating Partnership and its subsidiaries further
complicates the application of the REIT requirements. In addition, no assurance
can be given that new legislation, 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. The Company, however, is not aware of any pending tax legislation
that would adversely affect the Company's ability to operate as a REIT. The
Company has received the opinion of Winston & Strawn, counsel to the Company,
regarding the Company's ability to qualify as a REIT. See "Certain Federal
Income Tax Considerations--Taxation of the Company" and "Legal Matters." Such
legal opinion is based on various assumptions and factual representations by the
Company regarding the Company's ability to meet the various requirements for
qualification as a REIT. No assurance can be given that actual operating results
will meet these requirements. You should be aware that such legal opinion is not
binding on the IRS or any court.
Among the REIT qualification requirements is that the value of any one
issuer's securities held by a REIT may not exceed 5.0% of the value of the
REIT's total assets on certain testing dates. See "Certain Federal Income Tax
Considerations--Requirements for Qualification." The Company believes that its
allocable share of the aggregate value of the securities of Prime Group Realty
Services, Inc. (the "Services Company") held by the Operating Partnership (i.e.,
the note issued by the Services Company and the preferred stock issued by the
Services Company) will be less than 5.0% of the value of the Company's total
assets. In rendering its opinion as to the qualifications of the Company as a
REIT, Winston & Strawn relied on the conclusion of the Company regarding the
value of the Services Company. In addition to the 5.0% limitation, a REIT is not
permitted to own more than 10.0% of the voting securities of any particular
issuer. The preferred stock and note of the Services Company held by the
Operating Partnership should not be treated as voting securities. However, the
IRS could challenge this conclusion if it determines that the Operating
Partnership does in fact exercise control over and management of the Services
Company.
If the Company fails to satisfy the 5.0% or 10.0% limitations or otherwise
fails to qualify as a REIT in any taxable year, except as to certain failures
for which there may be statutory relief or imposition of intermediate sanctions
in the form of monetary penalties, the Company would be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Also, it would not be allowed a deduction in
computing its taxable income for amounts distributed to its shareholders. This
treatment would reduce the net earnings of the Company available for investment
or distribution to shareholders because of the additional tax liability to the
Company for the years involved. In addition, 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. See "Certain Federal Income Tax Considerations--Failure
to Qualify."
OTHER TAX LIABILITIES. Even if the Company qualifies as and maintains its
status as a REIT, it will be 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 100.0% tax. See
"Certain Federal Income Tax Considerations--Requirements for
Qualification--Penalty Tax on Prohibited Transactions."
DISTRIBUTIONS TO SHAREHOLDERS AFFECTED BY MANY FACTORS. Distributions by
the Company to its shareholders are based principally on cash available for
distribution from the Company's properties. Contractual increases in rent under
the leases of the properties or the receipt of rental revenue in connection with
future acquisitions will increase the Company's cash available for distribution
to shareholders. However, if a lessee defaults under or terminates a lease,
there could be a decrease or cessation of rental payments.
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<PAGE>
Such a decrease could in turn decrease 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/or
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. 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.
To obtain the favorable tax treatment associated with REITs, the Company
generally is required to distribute to its shareholders at least 95.0% of its
REIT taxable income each year. See "Certain Federal Income Tax
Considerations--Requirements for Qualification--Annual Distribution
Requirements." In addition, the Company is subject to tax at regular corporate
rates to the extent that it does not distribute all of its net capital gain or
distributes more than 95.0% but less than 100.0% of its REIT taxable income each
year. The Company is also subject to a 4.0% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it for any calendar year
are less than the sum of 85.0% of its REIT ordinary income, 95.0% of its REIT
capital gain net income and 100.0% of its undistributed income from prior years.
The Company intends to continue to make distributions to its shareholders to
comply with the distribution requirements of the Code and to eliminate, or at
least minimize, exposure to federal income taxes and the nondeductible excise
tax. Differences in timing between 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.
HISTORICAL LOSSES; POSSIBILITY OF FUTURE LOSSES. The Company, through the
properties which PGI contributed to it at the Company's formation, has had
historical accounting losses for certain fiscal years, and there can be no
assurance that the Company will not have similar losses in the future.
ACQUISITION AND DEVELOPMENT RISKS
GENERAL. The Company intends to continue to acquire additional office and
industrial properties. The Company anticipates that future acquisitions will be
financed, in part, through a combination 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, there is a risk that an acquisition of an office or
industrial property 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
also prove inaccurate. Further, there are general investment risks associated
with any real estate investment. See "--General Real Estate Investment Risks."
While the Company expects to continue to limit its business primarily to the
Chicago metropolitan area, and to a lesser extent the rest of the midwestern
United States, it is possible that the Company will in the future expand its
business to new geographic markets. The Company will not initially possess the
same level of familiarity with new markets that it has with respect to the
markets in which it currently operates. Such lack of familiarity could adversely
affect its ability to develop, acquire, manage or lease properties in such
markets.
CASH FLOWS ARE UNCERTAIN. A portion of the Company's anticipated cash
available for distribution may be generated from development activities. These
activities are partially dependent on the availability of development
opportunities and are subject to the risks inherent in development and general
economic
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conditions. There can be no assurance that the Company will realize such
anticipated cash flows from future development projects.
COMPANY'S PERFORMANCE AND VALUE ARE SUBJECT TO REAL ESTATE INVESTMENT RISKS
GENERAL. Real property investments are subject to varying degrees of risk.
If the Company's 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 shareholders could be adversely affected. Income
from, and the value of, the Company's properties may be adversely affected by:
- the general economic climate;
- local conditions such as oversupply of office or industrial space or a
reduction in demand for office or industrial space in the area;
- the attractiveness of the Company's properties to potential tenants;
- competition from other office or industrial 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 affected by
such factors as interest rate levels, the availability of financing, the cost of
compliance with regulations and the potential for liability under applicable
laws, including changes in tax laws.
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 rental income from tenants. It would be very difficult for the
Company to convert a project to an attractive alternative use or to sell a
project to recoup the Company's investment if a project were not successful.
Should such an event occur, the Company's income and funds available for
distribution would be adversely affected.
BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID, THE COMPANY MAY NOT BE ABLE TO
SELL PROPERTIES WHEN APPROPRIATE. Real estate investments generally can not be
sold quickly. Therefore, the Company has a limited ability to vary its portfolio
promptly in response to changes in economic or other conditions. In addition,
the Code and related regulations prohibit a REIT from holding property for sale,
which may affect the Company's ability to sell properties without adversely
affecting distributions to the Company's shareholders.
COMPETITION COULD ADVERSELY AFFECT THE COMPANY. The Company plans to
continue to expand, primarily through the acquisition and development of
additional office and industrial buildings, in the Chicago metropolitan area and
other midwestern 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 office and industrial building developers
and real estate companies that compete with the Company in seeking properties
for acquisition, prospective tenants and land for development. All of the
Company's properties are in developed areas where there are generally other
properties of the same type and quality. Competition from other office and
industrial properties may affect the Company's ability to attract and retain
tenants, rental rate 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). The Company also may be
competing with other entities that have greater financial and other resources
than the Company.
LEASE EXPIRATIONS AND RELETTING EXPENSES COULD ADVERSELY AFFECT THE
COMPANY'S CASH FLOW. Certain leases which will expire during the first several
years after the offering of the common shares described in this prospectus are
at rental rates higher than recently negotiated leases. Such leases, or other
leases of the
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Company, may not be renewed or, if renewed, may be renewed at rental rates lower
than rental rates in effect immediately prior to expiration. 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 relet any of the Company's space
could materially adversely affect the Company and its ability to make
distributions. If the Company is unable to promptly relet or renew the leases
for all or a substantial portion of certain space currently leased or if the
rental rates upon such renewal or reletting is significantly lower than expected
rates, then the Company's cash flow and ability to make expected distributions
to shareholders would be adversely affected.
CAPITAL IMPROVEMENT REQUIREMENTS COULD ADVERSELY AFFECT THE COMPANY'S CASH
FLOW. The Company's properties vary in age and require regular capital
improvements. 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 may be
reduced.
UNINSURED LOSSES COULD ADVERSELY AFFECT THE COMPANY'S CASH FLOW. Management
believes that the Company's properties are covered by adequate comprehensive
liability, fire, flood, extended coverage, 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, such as large deductibles or copayments. Should
an uninsured loss or a loss in excess of insured limits occur, the Company could
lose its investment in and the cash flow from a property and may be obligated on
any mortgage indebtedness or other obligations related to such property. Any
such loss could adversely affect the Company and its ability to make
distributions.
BANKRUPTCY AND FINANCIAL CONDITION OF TENANTS COULD ADVERSELY AFFECT THE
COMPANY'S CASH FLOW. At any time, a tenant of the Company's properties may seek
the protection of the bankruptcy laws, which could result in the rejection and
termination of such tenant's lease and thereby cause a reduction in the cash
available for distribution by the Company. No assurance can be given that
certain 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. In addition, a tenant from time to time may
experience a downturn in its business which may weaken its financial condition
and result in the failure to make rental payments when due, which may adversely
affect the Company's cash flow and its ability to make expected distributions to
shareholders.
RISKS OF 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 shareholders.
Furthermore, if the Company desires to control an issuer of securities, it may
be prevented from doing so by the limitations on the asset and gross income
tests which must be satisfied by the Company in order for the Company to qualify
as a REIT for federal income tax purposes. See "Certain Federal Income Tax
Considerations--Taxation of the Company" and "--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, as amended, and
shareholders will therefore not have the protection of such act.
The Company also may invest in mortgages or other debt instruments secured
by real estate, either solely as an investment or as a strategy to ultimately
acquire the underlying real estate. In general, investments in mortgages include
(i) the risk that borrowers may be unable to make debt service payments or pay
principal when due, (ii) the risk that the value of the mortgaged property may
be less than the principal amount of the mortgage note securing such property
and (iii) 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
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these events, "Funds from Operations" and the Company's ability to make required
distributions to shareholders could be adversely affected. "Funds from
Operations" means funds from operations computed in accordance with the
resolution adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT") in its March 1995 White Paper (with
the exception that the Company reports base rents on a cash basis (i.e., based
on contractual lease terms), rather than a straight-line GAAP basis, which the
Company believes will result in a more accurate presentation of its
actual operating activities), as follows:
- net income (loss) (computed in accordance with GAAP with the exception
that base rents are reported on a cash basis as described above),
excluding gains (or losses) from debt restructuring and sales of real
property,
- plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs), and after adjustments for
unconsolidated partnerships and joint ventures.
CHANGES IN LAWS AND PROPERTY TAX RATES COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL CONDITION. Costs resulting from changes in real estate laws and
property taxes generally may be passed through to tenants of the Company's
properties and should not adversely affect the Company. Increases in taxes on
income, services or transfers, however, generally are not passed through to
tenants and may adversely affect the Company's results of operations and ability
to make distributions to its shareholders. Similarly, changes in laws increasing
the potential liability for environmental conditions existing on properties or
increasing the restrictions on discharges or other conditions, may result in
significant unanticipated expenditures, which could adversely affect the
Company's ability to make distributions to shareholders.
CONSEQUENCES OF FAILURE TO QUALIFY AS PARTNERSHIPS. The Company expects
that the Operating Partnership and each of its property-owning subsidiaries (the
"Property Partnerships") will be organized as partnerships or limited liability
companies and will be treated as partnerships for federal income tax purposes.
If the Operating Partnership or any of the Property Partnerships fails to
qualify as a partnership for federal income tax purposes and instead is taxable
as a corporation, the Company could cease to qualify as a REIT and such
partnership would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. See
"Certain Federal Income Tax Considerations--Failure to Qualify" and "--Tax
Aspects of the Company's Investment in Partnerships--Partnership
Classification." The imposition of a corporate level tax on the Operating
Partnership would reduce the amount of cash available for distribution to the
Company and its shareholders.
CHANGES IN POLICY AND INVESTMENT ACTIVITY WITHOUT SHAREHOLDER APPROVAL
ABILITY TO CHANGE CERTAIN POLICIES WITHOUT SHAREHOLDER APPROVAL. The Board
of Trustees determines the Company's policies relating to the following matters:
<TABLE>
<CAPTION>
- - investing and financing;
<S> <C>
- - acquisitions;
- - developments;
- - expansions;
- - capitalization;
- - distributions; and
- - operations.
</TABLE>
Although the Board of Trustees has no present intention to do so, the Board of
Trustees may amend or revise these and other policies without a vote of the
shareholders of the Company. Change in these policies could adversely affect the
Company's financial condition or results of operations. The Company cannot,
however, change its policy of seeking to maintain its qualification as a REIT
for federal income tax purposes without the approval of the holders of at least
a majority of the outstanding common shares.
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ABILITY TO ENGAGE IN INVESTMENT ACTIVITY WITHOUT SHAREHOLDER APPROVAL. In
the future, the Company expects to acquire and develop additional real estate
assets pursuant to its investment strategies and consistent with its investment
policies. The shareholders of the Company are not entitled to receive historical
financial statements regarding, or to vote on, any such activities. Instead,
they will be required to rely entirely on the decisions of management.
DEPENDENCE ON KEY PERSONNEL. The Company depends on the efforts of certain
of its executive officers and trustees, particularly Mr. Reschke, Chairman of
the Board, and Mr. Curto, President and Chief Executive Officer, for strategic
business direction and experience in the Chicago metropolitan area and other
real estate markets. While the Company believes that it could find replacements
for these key personnel, the loss of their services could have an adverse effect
on the operations of the Company. The Company has entered employment agreements
with Mr. Reschke and Mr. Curto.
DEPENDENCE ON SIGNIFICANT TENANTS. Any of the following events with regard
to a significant tenant of the Company would disproportionately and materially
adversely affect the Company's revenues and cash available for distribution to
shareholders:
- the bankruptcy or insolvency of such tenant;
- a downturn in the business of such tenant;
- the nonrenewal of a lease by such tenant; or
- the renewal of a lease by such tenant on terms less favorable to the
Company than the current terms.
MANAGED PROPERTY BUSINESS AND NON-REIT SERVICES
LACK OF CONTROL OVER 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 preferred stock of the Services Company and
Messrs. Reschke and Curto of the Company hold 100.0% of the voting stock of the
Services Company. This ownership structure is necessary to permit the Company to
share in the income of the Services Company while also maintaining its status as
a REIT. Moreover, Messrs. Reschke and Curto, as the holders of 100.0% of the
voting stock, retain the ability to elect the board of directors of the Services
Company after the terms of the initial directors expire. Although the Company
receives substantially all of the economic benefit of the business carried on by
the Services Company due to (i) the Company's right to receive interest on the
Services Company's note and (ii) dividends on the Services Company's preferred
stock through the Operating Partnership, the Company is not able to elect
directors or officers of the Services Company. Therefore, the Company cannot
directly 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
preferred stock 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 entities controlled by the
Company. These policies or decisions could be adverse to the interests of the
Company or lead to adverse financial results, which could adversely impact the
Company's net operating income and cash flow.
TAX LIABILITIES AND ADVERSE CONSEQUENCES OF REIT STATUS ON THE BUSINESS OF
THE SERVICES COMPANY. The Services Company is subject to federal and state
income tax on its taxable income at regular corporate rates. Certain
requirements for REIT qualification may in the future limit the Company's
ability to receive increased distributions from the Services Company without
jeopardizing the Company's qualifications as a REIT. See "--Adverse Consequences
of Failure to Qualify as a REIT; Other Tax Liabilities."
LIABILITIES FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL CONDITION. Federal, state and local laws and regulations relating to
the protection of the environment may require a current or previous owner or
operator of real estate to investigate and clean up hazardous or toxic
substances at such property. The owner or operator may have to pay a
governmental entity or third parties for property damage and for investigation
and clean-up costs incurred by such parties in connection with the
contamination. These laws often impose liability without regard to whether the
owner or operator was
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<PAGE>
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. The presence of such substances may adversely
affect the owner's or operator's ability to rent or sell such property or to
borrow using such property as collateral and may expose such owner or operator
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 also may 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 also impose liability for release of
asbestos-containing materials into the air. 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. Because
of the Company's 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 substances. As a result, the Company may be potentially
liable for removal or remediation costs, as well as certain other related costs,
including governmental penalties and injuries to persons and property.
All of the Company's properties were subject to Phase I or similar
environmental assessments within approximately the last three years. Phase I
assessments are intended to discover information regarding, and to evaluate the
environmental condition of, the surveyed property and surrounding properties.
The Company is aware of contamination at certain of its older industrial
properties, which are already in remediation programs sponsored by the
appropriate state environmental agencies. PGI has sued a former environmental
consultant and a former tenant of one of these properties for damages. PGI has
contractually agreed to retain liability, and indemnify the Company, for
environmental remediation with regard to these industrial properties, which
environmental consultants have estimated will cost, in the aggregate,
approximately $3.2 million. Based on such estimates, the Company recorded a
provision for environmental remediation costs of $3.2 million. Investigation of
the Chicago Enterprise Center, one of the Company's industrial properties (the
"CEC") by PGI revealed contamination from petroleum underground storage tanks
located on the property. In August 1996, PGI submitted the CEC into the Illinois
Site Remediation Program of the Illinois Environmental Protection Agency (the
"IEPA"). Environmental consultants prepared a site assessment and submitted it
to the IEPA as the basis for a remedial action plan. They estimate the remedial
action will cost approximately $2.5 million. In August 1996, the Company filed
suit against a former tenant, seeking past and future costs of remediation,
which suit was later expanded to also include a current tenant at the CEC. The
suit has since been settled with the former tenant but remains pending with
respect to the current tenant. In June 1997, PGI filed suit against one of its
former environmental consultants for negligence in failing to disclose the
presence of the petroleum underground storage tanks at the CEC. The defendant
filed a motion for summary judgment, which was denied.
Investigation of the East Chicago Enterprise Center (the "ECEC"), an
industrial property, by PGI revealed contamination. In March 1997, PGI submitted
the ECEC into the Indiana Department of Environmental Management ("IDEM")
Voluntary Remediation Program. Upon completion of any necessary remediation, the
Company will receive a covenant not to sue from the Governor of Indiana.
Environmental consultants estimate remedial action will cost approximately
$371,000. The Company is pursuing a prior owner for some or all of these costs,
but the Company cannot predict the outcome of such efforts.
Further, IDEM has requested that the owner of the ECEC participate, along
with other property owners, in the development of a National Resources Damage
Assessment (the "Assessment") for the Grand Calumet River and Indiana Harbor
Canal System in northwest Indiana. The likelihood of liability cannot be
determined because (i) no lawsuit has been filed or threatened and (ii) the
quantity of environmental damage, if any, and the responsible parties will
remain unknown until the Assessment is completed in approximately twelve months.
Further, contamination has been revealed at the Hammond Enterprise Center,
an industrial property (the "HEC"). In March 1997, PGI submitted the HCH unit
the IDEM Voluntary Remediation Program. The program has since accepted it. As
with the ECEC, once any necessary remediation is completed and
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<PAGE>
approved by IDEM, the Company will receive a covenant not to sue from the
Governor of Indiana. Remedial action is expected to cost approximately $295,000.
The Company is pursuing a prior owner for some or all of these remediation
costs.
The Company is also aware of contamination at 455 Academy Drive. This
property has been submitted to the Illinois Environmental Protection Agency
voluntary remediation program. The current tenant has agreed to indemnify the
Company for all costs of remediation on this property caused by it either
knowingly or unknowingly. Clean-up on the property has begun, but is not yet
completed.
Finally, the Company is aware of contamination at 1301 East Tower Road in
Schaumburg, Illinois. This property has been submitted to a remediation program
sponsored by the Illinois Environmental Protection Agency. The Company's
consultants are currently quantifying the remediation costs. On or about July
17, 1998, 1301 E. Tower Road, L.L.C., an affiliate of the Company and the owner
of the property, joined existing litigation as a plaintiff along with LaSalle
National Trust, N.A. Land Trust 11655, the prior owner of the property, and
Tower Road Associates, the owner of the beneficial interest in the Land Trust,
against defendants ECM Motor Co., Environmental Risk Consultants, Inc., Braun
Intertec Environmental, Inc. and Hygienetics, Inc. seeking to recover the costs
of the clean-up of the contamination at the property and damages.
The Company believes that its other properties are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances. 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 in connection with any of its other properties. 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. The
Company's ability to make expected distributions to shareholders could be
adversely affected if compliance with the various laws and regulations, present
and future, exceeds the Company's budgets for such items.
OTHER REGULATIONS COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL
CONDITION. The Company's properties also are subject to various federal, state
and local regulatory requirements, such as state and local fire and 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 its properties are currently in material
compliance with all such regulatory requirements. There can be no assurance,
however, 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 Company's Funds from
Operations and expected distributions.
POSSIBLE ADVERSE EFFECTS ON SHARE PRICE ARISING FROM SHARES ELIGIBLE FOR
FUTURE SALE. No prediction can be made as to the effect, if any, of future
sales of common shares, or the availability of shares for future sales, on the
market price of the common shares. Sales of substantial amounts of common shares
(including common shares issued upon the exercise of options, the exchange of LP
Common Units or conversion of Convertible Preferred Shares), or the perception
that such sales could occur, may adversely affect prevailing market prices for
the common shares.
In connection with the the Company's formation, organization and initial
public offering, 9,067,210 LP Common Units in the aggregate were issued. All of
the applicable limited partners in the Operating Partnership can currently
exchange such LP Common Units for common shares. However, pursuant to "lock-up
agreements", each of those limited partners has agreed not to directly or
indirectly offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose of any LP Common Units or common
shares or other shares of beneficial interest of the Company, (or any securities
convertible or exercisable or exchangeable for any LP Common Units or common
shares or other shares of beneficial interest of the Company) for the period of
time applicable to each limited partner. Certain of these time periods expired
on November 17, 1998. The remaining time periods will expire on November 17,
1999 (the "Holding Periods"). Subject to certain exceptions, such dispositions
are permitted with, in each case, the prior written consent of Prudential
Securities Incorporated, on behalf of the underwriters
14
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used in the Company's initial public offering. Prudential Securities
Incorporated, at any time and without notice, may release all or any portion of
the common shares subject to the foregoing lock-up agreements. Following the
expiration of the foregoing restrictions, any common shares issued to a limited
partner in the Operating Partnership upon exchange of their respective LP Common
Units may be sold in the public market pursuant to the registration statement of
the Company that contains this prospectus or available exemptions from
registration.
As of November 13, 1998, the Company had 15,122,594 common shares
outstanding, of which 12,517,600 common shares are freely tradeable in the
public market without restriction or registration under the Securities Act by
persons other than "affiliates" of the Company, without taking into account
those Offered Shares sold pursuant to the registration statement containing this
prospectus prior to the date hereof. As of the date of this prospectus, 25,000
of the outstanding common shares consist of restricted shares held by
"affiliates" of the Company who received grants of such common shares pursuant
to employment or consulting agreements. The balance of the Company's outstanding
common shares, composed of the portion of the 2,579,994 Offered Shares not
previously sold by the Selling Shareholders, when sold pursuant to the
registration statement that contains the prospectus, will be freely tradeable in
the public market without restriction or registration under the Securities Act
except for any shares purchased by an existing "affiliate" of the Company, which
will be subject to certain resale limitations in the absence of registration
under the Securities Act unless an exemption from registration is available. All
common shares that are issuable upon the exchange of Common Units or the
conversion of the Convertible Preferred Shares will be deemed to be "restricted
securities" within the meaning of Rule 144 under the Securities Act. They may
not be transferred unless such common shares are 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.
Upon completion of the Company's initial public offering on November 17,
1997, the Company granted options to purchase an aggregate of 1,160,500 common
shares at the initial public offering price to certain trustees, executive
officers and other employees of the Company (110,000 of which have been
subsequently terminated). An additional 689,500 common shares were reserved for
issuance upon the exercise of options granted under the Company's share
incentive plan. Since the initial public offering, the Company has granted
additional options to purchase up to 112,000 common shares under its share
incentive plan to certain employees of the Company of which 7,500 have
subsequently been terminated. In addition, the Company may issue from time to
time additional common shares or Common Units in connection with the acquisition
of properties. The Company filed a registration statement with respect to the
common shares issuable under the share incentive plan on October 1, 1998. Such
registration statement generally allows common shares covered thereby, including
common shares issuable upon the exercise of options, to be transferred or resold
without restriction under the Securities Act of 1933, as amended.
MARKET INTEREST RATES COULD AFFECT THE MARKET PRICE OF THE COMMON
SHARES. One of the factors that investors consider important in deciding
whether to buy or sell shares of a REIT is the distribution rates with respect
to such shares (as a percentage of the price of such shares) relative to market
interest rates. If market interest rates go up, prospective purchasers of REIT
shares may expect a higher distribution rate. Higher interest rates would not,
however, result in more funds for the Company to distribute and, in fact, would
likely increase the Company's borrowing costs and potentially decrease funds
available for distribution. Thus, higher interest rates could cause the market
price of our securities to go down. In addition, the market value of the common
shares could be affected substantially by other general market conditions.
Numerous other factors, such as government regulatory action and modification of
tax laws, could have a significant effect on the future market price of the
common shares.
15
<PAGE>
THE COMPANY
The Company is a fully-integrated real estate investment company providing
property management, leasing, marketing, acquisition, development,
redevelopment, construction, finance and other related services. The Company has
elected to be taxed as a REIT for federal income tax purposes beginning with its
taxable period ended December 31, 1997. As of November 13, 1998, the Company
owned 24 office properties, 46 industrial properties, one retail center and one
parking facility. The properties are located primarily in the Chicago
metropolitan area. In addition, the Company owns a mortgage on an office
property. The Company also owns approximately 225.5 acres (including a
development site containing approximately 67,000 square feet located in the
Chicago central business district held by a joint venture with a third party)
and has rights to acquire approximately 325.8 acres of developable land
(including rights to acquire two development sites located in the Chicago
central business district containing approximately 119,000 square feet), which
management believes could be developed with approximately 5.4 million square
feet of additional office space and over 7.6 million square feet of additional
industrial space.
In terms of net rentable square feet, approximately 90.1% of the Company's
office properties and 87.8% of its industrial properties are located in the
Chicago metropolitan area in prime business locations within established
business communities. The properties located in the Chicago metropolitan area
account for approximately 92.6% of the Company's Annualized Net Rent. The
remaining office properties are located in the Nashville, Tennessee; Knoxville,
Tennessee; and Milwaukee, Wisconsin metropolitan areas, and the remaining
industrial properties are located in the Columbus, Ohio metropolitan area. The
Company believes that its properties are well-located, have excellent highway
access, attract high-quality tenants, are well-maintained and professionally
managed. The Company's properties have a diverse and stable base of tenants and
have historically provided steadily increasing rents which the Company believes
is due to the quality of the properties, the existence of long-term leases with
contractual rent escalations and the strength of the markets in which the
properties are located.
The Company's primary business strategy is to achieve its investment and
growth objectives by focusing on the acquisition, development and operation of
office and industrial real estate located in the Chicago metropolitan area and,
to a lesser extent, other midwestern markets. To implement this strategy, the
Company intends to continue to:
- own, acquire, develop, redevelop, lease, manage and operate Class A office
buildings that have below market rents and, therefore, provide the
opportunity to enhance returns as leases expire or are renewed (Class A
office buildings are buildings that are centrally located, professionally
managed and maintained, attract high-quality tenants and command
upper-tier rental rates and are modern structures or have been modernized
to compete with newer buildings);
- acquire distressed, underperforming and undermanaged Class B office
properties in desirable locations and improve the income potential of such
assets by raising these properties to a higher level of operating standard
through value-added renovation programs, professional property management
and aggressive leasing, retenanting and marketing efforts (Class B office
buildings are buildings that have good location, construction and tenancy
and are sometimes considered to be competitive with the lower spectrum of
Class A buildings);
- acquire and develop properties that underutilize their sites or where
there is excess land for future development;
- acquire properties or portfolios of properties from tax-sensitive owners
where the properties can be acquired on a tax-deferred basis using Common
Units of the Operating Partnership as purchase consideration; and
- own, acquire, develop, redevelop, lease, manage and operate bulk
warehouse/distribution facilities and overhead crane/manufacturing
facilities. The Company believes that it can draw upon its extensive
experience and long-term presence in the Chicago metropolitan area to
create a strategic advantage in competing for future development and
acquisition opportunities.
The Company is the managing general partner of, and currently holds 59.5% of
the economic interests in, Prime Group Realty, L.P., a Delaware limited
partnership (the "Operating Partnership"). The Company
16
<PAGE>
conducts substantially all of its business through the Operating Partnership,
except for office and industrial development, leasing and property management
services, which are conducted through Prime Group Realty Services, Inc., a
Maryland corporation (the "Services Company").
The Services Company was formed in March 1997 under the laws of the state of
Maryland to provide industrial property management, leasing, construction,
architectural and corporate advisory services business. The Operating
Partnership owns 100.0% of the nonvoting preferred stock of the Services
Company, representing 95.0% of its economic value and also holds the note issued
by the Services Company. The ownership structure of the Services Company is
necessary to permit the Company to share in the Service Company's income and
also maintain its status as a REIT for federal income tax purposes. Although the
Company receives substantially all of the economic benefit of the businesses
carried on by the Services Company by virtue of the Company's rights to receive
(i) dividends through the Operating Partnership's investment in the preferred
stock and (ii) interest payments on the note held by the Operating Partnership,
the Company does not elect the Services Company's officers or directors and,
consequently, does not have the ability to control the operations of the
Services Company or require the declaration of dividends. See "Risk
Factors--Managed Property Business and Non-REIT Services--Lack of Control Over
the Services Company."
The Services Company provides management, leasing, tenant improvement
construction, painting contracting and tenant representation services to
buildings owned by others pursuant to contracts contributed to the Services
Company by the Operating Partnership. The Services Company's leasing division
provides leasing services to certain of the Company's properties and other
property owners for fees that are paid as leases are executed and as the space
is occupied. The Services Company's construction management division provides
construction management services for tenant improvements, renovations and other
construction to the properties managed by the Company.
The Company was formed on July 21, 1997 as a Maryland real estate investment
trust. The Company's executive offices are located at 77 West Wacker Drive,
Suite 3900, Chicago, Illinois 60601, and its telephone number is (312) 917-1300.
USE OF PROCEEDS
The Company will not receive any proceeds from sales of the Offered Shares
by the Selling Shareholders. The Company has agreed to pay all expenses (other
than underwriting discounts, sales and commissions, fees and disbursements of
counsel, and transfer taxes, if any) of effecting the registration of the common
shares offered pursuant to the Registration Statement under the Securities Act
that contains this prospectus.
17
<PAGE>
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The common shares have been traded on the NYSE since November 12, 1997 under
the symbol "PGE." Set forth below (rounded to the nearest $.01) are the high and
low closing prices for the common shares since November 12, 1997, as reported by
the NYSE. Also set forth below are the cash distributions paid by the Company in
each quarter since its formation.
<TABLE>
<CAPTION>
CASH
DISTRIBUTIONS
HIGH LOW PAID (1)
--------------- --------------- ---------------
<S> <C> <C> <C>
FISCAL YEAR 1998:
First Quarter......................... $ 20 7/8 $ 19 3/16 0.$3375
Second Quarter........................ $ 21 1/8 $ 17 1/8 0.$3375
Third Quarter......................... $ 19 15/16 $ 13 1/8 0.$3375
October 1, 1998 to November 13,
1998................................ $ 16 5/8 $ 13 3/8 $--
FISCAL YEAR 1997:
November 12, 1997 to December 31,
1997................................ $ 20 7/16 $ 19 15/16 0.$1664(2)
</TABLE>
- ---------
(1) All distributions are per common share and Common Unit.
(2) This distribution was for a partial quarter. It is equivalent to a quarterly
distribution of $0.3375 per common share and Common Unit.
On November 13, 1998, the last reported price for the common shares was
$13 13/16 per share. As of November 13, 1998, the Company's 15,122,594 common
shares were held by 37 shareholders of record.
The Company currently pays quarterly distributions to holders of common
shares and Common Units. Distributions in respect of the common shares and
Common Units are not permitted unless all current and any accumulated
distributions in respect of the Convertible Preferred Shares and the Redeemable
Preferred Shares and related preferred units in the Operating Partnership (which
represent its preferred equity), have been paid in full. Future distributions by
the Company will be at the direction of the Board of Trustees of the Company and
will depend on the actual cash available for distribution, its financial
condition, capital requirements, the annual distribution requirements under the
REIT provisions of the Code (see "Certain Federal Income Tax
Considerations--Requirements for Qualification"), and such other factors as the
Board of Trustees deems relevant. See "Risk Factors--Changes in Policy and
Investment Activity without Shareholder Approval."
The Company anticipates that its distributions will exceed earnings and
profits for income tax reporting purposes due to non-cash expenses, primarily
depreciation and amortization, to be incurred by the Company. Therefore,
approximately 5.5% (or $0.07 per common share) of the distributions anticipated
to be paid by the Company for the first 12 months subsequent to the IPO are
expected to represent a return of capital for federal income tax purposes and in
such event will not be subject to federal income tax under current law to the
extent such distributions do not exceed a shareholder's basis in his or her
common shares. The nontaxable distributions will reduce the shareholder's tax
basis in the common shares and, therefore, the gain (or loss) recognized on the
sale of such common shares or upon liquidation of the Company will be increased
(or decreased) accordingly. The Company has determined that, for federal income
tax purposes, none of the $.16644 per common share distribution paid for the
partial fourth quarter of 1997 represented a return of capital to shareholders.
The percentage of shareholder distributions that represents a nontaxable return
of capital may vary substantially from year to year.
18
<PAGE>
Federal income tax law requires that a REIT distribute annually at least
95.0% of its REIT taxable income. See "Certain Federal Income Tax
Considerations--Requirements for Qualification--Annual Distribution
Requirements." The amount of distributions on an annual basis necessary to
maintain the Company's REIT status based on pro forma taxable income of the
Operating Partnership for the 12 months ended December 31, 1997, as adjusted for
certain items, would have been approximately $14.8 million. The estimated cash
available for distribution is anticipated to be in excess of the annual
distribution requirements applicable to REITs. Under certain circumstances, the
Company may be required to make distributions in excess of cash available for
distribution in order to meet such distribution requirements. See "Risk
Factors--Adverse Consequences of Failure to Qualify as a REIT; Other Adverse
Consequences." For a discussion of the tax treatment of distributions to holders
of common shares, see "Certain Federal Income Tax Considerations."
19
<PAGE>
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The Company was formed as a real estate investment trust under the laws of
the State of Maryland. Rights of shareholders are governed by Title 8 of the
Corporations and Associations Article, Annotated Code of Maryland (the "Maryland
REIT Law") and certain provisions of the Maryland General Corporation Law (the
"MGCL") and by the Declaration of Trust and the Company's Amended and Restated
Bylaws (the "Bylaws".) The following summary of the terms of the shares of
beneficial interest of the Company does not purport to be complete and is
subject to and qualified in its entirety by reference to the Declaration of
Trust, the Articles Supplementary to the Declaration of Trust relating to the
Company's 9% Series B Cumulative Redeemable Preferred Shares of Beneficial
Interest, par value $0.01 per share and having a liquidation value of $25.00 per
share (the "Redeemable Preferred Shares") and the Bylaws, forms of which are
filed or incorporated by reference as exhibits to the Registration Statement of
which this Prospectus is a part. Immediately prior to the closing of the
Company's offering of 4,000,000 Redeemable Preferred Shares (the "Redeemable
Preferred Share Offering"), the Company amended its Declaration of Trust to
authorize the Redeemable Preferred Shares described below.
AUTHORIZED SHARES
The Declaration of Trust provides that the Company may issue up to 100.0
million common shares, par value $0.01 per share, 65.0 million shares of Excess
Shares, par value $0.01 per share ("Excess Shares"), and 30.0 million Preferred
Shares, par value $0.01 per share (the "Preferred Shares"). The Declaration of
Trust designated 2.0 million Preferred Shares as 7% Series A Cumulative
Convertible Preferred Shares of Beneficial Interest, par value $0.01 per share
(the "Convertible Preferred Shares"). On April 23, 1998, the Board of Trustees
approved the preparation and, in connection with the consummation of the
Redeemable Preferred Share Offering, the filing of Articles Supplementary to the
Declaration of Trust designating up to 4,600,000 of the Preferred Shares as
Redeemable Preferred Shares (the "Articles Supplementary"). These Articles
Supplementary set forth the rights, voting powers, limitations as the dividends
and redemption and the qualifications therefor. Excess Shares are to be issued
automatically upon any automatic conversion of common shares or Preferred Shares
which are purported to be held, transferred or acquired by any person in
violation of the ownership limitations contained in the Declaration of Trust.
See "--Restrictions on Ownership and Transfer." On November 13, 1998, there were
15,122,594 common shares issued and outstanding, 2,000,000 Convertible Preferred
Shares outstanding and 4,000,000 Redeemable Preferred Shares outstanding.
Under the Maryland REIT Law, a shareholder is not liable for obligations of
the Company solely as a result of his status as a shareholder. The Declaration
of Trust provides that no shareholder shall be liable for any debt or obligation
of the Company by reason of being a shareholder. In addition, no shareholder
will be subject to any personal liability in tort, contract or otherwise to any
person in connection with the property or affairs of the Company by reason of
being a shareholder. The Company's Bylaws further provide that the Company
indemnifies each present or former shareholder against any claim or liability to
which the shareholder may become subject by reason of being or having been a
shareholder and that the Company will reimburse each shareholder for all
reasonable expenses incurred by him in connection with any such claim or
liability. However, with respect to tort claims, contractual claims where
shareholder liability is not subject to indemnification, claims for taxes and
certain statutory liability, the shareholders may, in some jurisdictions, be
personally liable to the extent that such claims are not satisfied by the
Company. Inasmuch as the Company carries public liability insurance which it
considers adequate, any risk of personal liability to shareholders is limited to
situations in which the Company's assets plus its insurance coverage would not
be sufficient to satisfy the claims against the Company and its shareholders.
20
<PAGE>
REDEEMABLE PREFERRED SHARES
DIVIDENDS
Subject to the preferential rights of the holders of any Preferred Shares
that rank senior in the payment of dividends to the Redeemable Preferred Shares,
the holders of the Redeemable Preferred Shares shall be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available for the payment of dividends, cumulative preferential dividends
payable in cash in an amount per Redeemable Preferred Share equal to an annual
rate of 9% of the per share liquidation preference of the Redeemable Preferred
Shares (equivalent to $2.25 per Redeemable Preferred Share).
"Dividend Periods" shall mean quarterly dividend periods commencing on
January 1, April 1, July 1 and October 1 of each year and ending on and
including the day preceding the first day of the next succeeding Dividend Period
with respect to any Redeemable Preferred Shares. However, (i) the initial
Dividend Period shall commence on the Issue Date for such Redeemable Preferred
Shares and end on and include the last day of the calendar quarter immediately
following such Issue Date and (ii) the Dividend Period during which any
Redeemable Preferred Shares shall be redeemed as described below shall end on
and include the redemption date with respect to the Redeemable Preferred Shares
being redeemed.
"Dividend Payment Date" shall mean on or about:
- the thirty-first day of each January with respect to the Dividend Period
commencing on October 1 of the then immediately preceding year;
- the thirtieth day of each April with respect to the Dividend Period
commencing on January 1 of such year;
- the thirty-first day of July with respect to the Dividend Period
commencing on April 1 of such year; and
- the thirty-first day of October with respect to the Dividend Period
commencing on July 1 of such year.
Dividends with respect to the Redeemable Preferred Shares shall begin to
accrue and shall be fully cumulative from the first day of the applicable
Dividend Period, whether or not in any Dividend Period or Periods there shall be
funds of the Company legally available for the payment of such dividends, and
shall be payable quarterly, when, as and if declared by the Board of Trustees,
in arrears on Dividend Payment Dates. The aggregate amount of dividends payable
for any period shorter than a full Dividend Period, on the Redeemable Preferred
Shares shall be computed using the following formula: (number of days in such
period/365) X (9%, the annual dividend rate X $25.00, the liquidation preference
per Redeemable Preferred Share). The aggregate amount of dividends payable in
respect of the Redeemable Preferred Shares for each full Dividend Period shall
be computed by dividing the product of the annual dividend rate multiplied by
the liquidation preference of the Redeemable Preferred Shares by four. Dividends
shall be payable in arrears to the holders of record of the Redeemable Preferred
Shares as they appear in the records of the Company at the close of business on
such record dates. The record dates shall be not less than 10 nor more than 50
days preceding such Dividend Payment Dates thereof, as shall be fixed by the
Board of Trustees.
Any dividend payment made on the Redeemable Preferred Shares shall first be
credited against the earliest accrued but unpaid dividend due with respect to
the Redeemable Preferred Shares which remains payable. Holders of Redeemable
Preferred Shares shall not be entitled to any dividends, whether payable in
cash, property or shares, in excess of cumulative dividends on the Redeemable
Preferred Shares. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Redeemable
Preferred Shares which may be in arrears.
21
<PAGE>
So long as any Redeemable Preferred Shares are outstanding, no dividends,
except as described in the immediately following sentence, shall be declared or
paid or set apart for payment on any class or series of preferred shares having
the same or similar preferences (the "Parity Shares") for any period unless full
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such payment
on the Redeemable Preferred Shares for all Dividend Periods terminating on or
prior to the dividend payment date on such class or series of Parity Shares.
When dividends are not paid in full or a sum sufficient for such payment is not
set apart, all dividends declared upon the Redeemable Preferred Shares and all
dividends declared upon any other class or series of Parity Shares shall be
declared ratably in proportion to the respective amounts of dividends
accumulated and unpaid on the Redeemable Preferred Shares and accumulated and
unpaid on such Parity Shares.
So long as any Redeemable Preferred Shares are outstanding, no dividends
(other than dividends or distributions paid solely in shares of, or options,
warrants or rights to subscribe for or purchase shares of, Fully Junior Shares)
shall be declared or paid or set apart for payment, or other distribution shall
be declared or made or set apart for payment, upon Junior Shares, nor shall any
Junior Shares be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of common shares made for purposes of
any employee incentive or benefit plan of the Company or any subsidiary) for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any Junior Shares) by the Company, directly or indirectly
(except by conversion into or exchange for Fully Junior Shares), unless in each
case:
- the full cumulative dividends on all outstanding Redeemable Preferred
Shares and any other Parity Shares of the Company shall have been or
contemporaneously are declared and paid or declared and set apart for
payment for all past Dividend Periods with respect to the Redeemable
Preferred Shares and all past dividend periods with respect to such Parity
Shares; and
- sufficient funds shall have been or contemporaneously are declared and
paid or declared and set apart for the payment of the dividend for the
then current Dividend Period with respect to the Redeemable Preferred
Shares and the then current Dividend Period with respect to such Parity
Shares.
"Fully Junior Shares" mean the Convertible Preferred Shares, the common
shares and any other class or series of shares of beneficial interest of the
Company now or hereafter issued and outstanding over which the Redeemable
Preferred Shares have preference or priority in both (i) the payments of
dividends and (ii) the distribution of assets on any liquidation, dissolution or
winding up of the Company.
"Junior Shares" mean the Convertible Preferred Shares, the common shares and
any other class or series of shares of beneficial interest of the Company now or
hereafter issued and outstanding over which the Redeemable Preferred Shares have
preference or priority in the payment of dividends or in the distribution of
assets on any liquidation, dissolution or winding up of the Company.
No dividends on the Redeemable Preferred Shares shall be declared by the
Board of Trustees or paid or set apart for payment by the Company at such time
as the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such declaration, payment or
setting apart for payment or provides that such declaration, payment or setting
apart for payment would constitute a breach thereof or a default thereunder, or
if such declaration or payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Redeemable Preferred Shares
will accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are authorized.
22
<PAGE>
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, subject to the prior preferences and other
rights of any series of shares of beneficial interest ranking senior to the
Redeemable Preferred Shares upon liquidation, distribution or winding up of the
Company, before any payment or distribution of the assets of the Company
(whether capital or surplus) shall be made to or set apart for the holders of
Junior Shares, the holders of the Redeemable Preferred Shares shall be entitled
to receive twenty-five dollars ($25.00) (the "Liquidation Preference") per
Redeemable Preferred Share, plus an amount equal to all dividends (whether or
not earned or declared) accrued and unpaid thereon to the date of final
distribution to such holders (the "Liquidation Preference Amount").
If, upon any liquidation, dissolution or winding up of the Company, the
assets of the Company, or proceeds thereof, distributable among the holders of
the Redeemable Preferred Shares shall be insufficient to pay in full the
Liquidation Preference Amount and liquidating payments on any other shares of
any class or series of Parity Shares, then such assets, or the proceeds thereof,
shall be distributed among the holders of the Redeemable Preferred Shares and
any such other Parity Shares ratably in accordance with the respective amounts
that would be payable on such Redeemable Preferred Shares and any such other
Parity Shares if all amounts payable thereon were paid in full.
A consolidation or merger of the Company with one or more corporations, real
estate investment trusts or other entities, a sale, lease or conveyance of all
or substantially all of the Company's property or business or a statutory share
exchange shall not be deemed to be a liquidation, dissolution or winding up,
voluntary or involuntary, of the Company. The Redeemable Preferred Shares will
rank senior to and have preference over the Convertible Preferred Shares as to
priority for receiving liquidating distributions upon the liquidation,
dissolution or winding up of the Company.
Subject to the rights of the holders of shares of any series or class or
classes of shares of beneficial interest ranking on a parity with or prior to
the Redeemable Preferred Shares upon liquidation, dissolution or winding up,
upon any liquidation, dissolution or winding up of the Company, after payment
shall have been made in full to the holders of the Redeemable Preferred Shares,
the holders of the Redeemable Preferred Shares shall have no other claim to the
remaining assets of the Company and any other series or class or classes of
Junior Shares shall, subject to the respective terms and provisions (if any)
applying thereof, be entitled to receive any and all assets remaining to be paid
or distributed, and the holders of the Redeemable Preferred Shares shall not be
entitled to share therein.
REDEMPTION
The Redeemable Preferred Shares shall not be redeemable by the Company prior
to June 5, 2003. On and after June 5, 2003, the Company, at its option, may
redeem the Redeemable Preferred Shares, in whole at any time or from time to
time in part out of funds legally available therefor at a redemption price
payable in cash equal to 100.0% of the Liquidation Preference per Redeemable
Preferred Share (plus all accumulated, accrued and unpaid dividends as described
below). The redemption price of the Redeemable Preferred Shares (other than any
portion thereof consisting of accrued and unpaid dividends) shall be paid solely
from the proceeds from the issuance and sale by the Company of other capital
shares of beneficial interest of the Company and not from any other source. For
purposes of the preceding sentence, "capital shares of beneficial interest"
means any equity securities (including common shares and preferred shares),
shares, interests, participations, or other ownership interests (however
designated) and any rights (other than debt securities convertible into or
exchangeable for equity securities) or options to purchase any of the foregoing.
Upon any redemption of Redeemable Preferred Shares, the Company shall pay
all accrued and unpaid dividends, if any, thereon to the redemption date,
without interest. If the redemption date falls after a dividend payment record
date and prior to the corresponding Dividend Payment Date, then each
23
<PAGE>
holder of Redeemable Preferred Shares at the close of business on such divided
payment record date shall be entitled to the dividend payable on such shares on
the corresponding Dividend Payment Date notwithstanding any redemption of such
shares before such Dividend Payment Date. Except as provided above, the Company
shall make no payment or allowance for unpaid dividends, whether or not in
arrears, on Redeemable Preferred Shares called for redemption.
If full cumulative dividends on the Redeemable Preferred Shares and any
other class or series of Parity Shares of the Company have not been declared and
paid or declared and set apart for payment, the Redeemable Preferred Shares may
not be redeemed in part and the Company may not purchase or acquire Redeemable
Preferred Shares, otherwise than pursuant to a purchase or exchange offer made
on the same terms to all holders of Redeemable Preferred Shares.
Notice of the redemption of any Redeemable Preferred Shares (other than as
described below) shall be mailed by first-class mail to each holder of record of
Redeemable Preferred Shares to be redeemed at the address of each such holder as
shown on the Company's records, not less than 30 nor more than 90 days prior to
the redemption date. Neither the failure to mail any required notice nor any
defect therein or in the mailing thereof, to any particular holder, shall affect
the sufficiency of the notice or the validity of the proceedings for redemption
with respect to the other holders. Each such mailed notice shall state, as
appropriate:
- the redemption date;
- the number of Redeemable Preferred Shares to be redeemed;
- the redemption price;
- the place or places at which certificates for such Redeemable Preferred
Shares are to be surrendered; and
- that dividends on the shares to be redeemed shall cease to accrue on such
redemption date except as otherwise provided below.
If fewer than all the Redeemable Preferred Shares held by any holder are to be
redeemed, the notice mailed to such holder shall also specify the number of
Redeemable Preferred Shares to be redeemed from such holder. If notice of
redemption of any Redeemable Preferred Shares has been properly given, from and
after the redemption date (unless the Company shall fail to make available an
amount of cash necessary to effect such redemption), except as otherwise
described below, dividends on the Redeemable Preferred Shares so called for
redemption shall cease to accrue, such shares shall no longer be deemed to be
outstanding and all rights of the holders thereof as holders of Redeemable
Preferred Shares shall cease (except the right to receive the cash payable upon
such redemption, without interest thereon, upon surrender and endorsement of
their certificates if so required and to receive any dividends payable thereon).
If fewer than all the outstanding Redeemable Preferred Shares are to be
redeemed, shares to be redeemed shall be selected by the Company from
outstanding Redeemable Preferred Shares not previously called for redemption pro
rata (as nearly as may be), by lot or by any other method determined by the
Company in its sole discretion to be equitable. If fewer than all the Redeemable
Preferred Shares represented by any certificate are redeemed, then new
certificates representing the unredeemed shares shall be issued without cost to
the holder thereof.
The Redeemable Preferred Shares have no stated maturity and will not be
subject to any sinking fund or mandatory redemption provisions (except as
described below under "--Restrictions on Ownership and Transfer").
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CONVERSION RIGHTS
Except as otherwise described in "--Restrictions on Ownership and Transfer,"
the Redeemable Preferred Shares are not convertible into or exchangeable for any
other property or securities of the Company.
RANKING
Any class or series of shares of beneficial interest of the Company shall be
deemed to rank:
- prior to the Redeemable Preferred Shares, as to the payment of dividends
and as to distribution of assets upon liquidation, dissolution or winding
up, if the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or priority
to the holders of Redeemable Preferred Shares (see "--Voting Rights");
- on a parity with the Redeemable Preferred Shares, as to the payment of
dividends and as to distribution of assets upon liquidation, dissolution
or winding up, whether or not the dividend rates, dividend payment dates
or redemption or liquidation prices per share thereof shall be different
from those of the Redeemable Preferred Shares, if the holders of such
class or series and the Redeemable Preferred Shares shall be entitled to
the receipt of dividends and of amounts distributable upon liquidation,
dissolution or winding up in proportion to their respective amounts of
accrued and unpaid dividends per share or liquidation preferences, without
preference or priority one over the other ("Parity Shares");
- junior to the Redeemable Preferred Shares, as to the payment of dividends
or as to the distribution of assets upon liquidation, dissolution or
winding up, if such class or series (which includes the Convertible
Preferred Shares) shall be Junior Shares; and
- junior to the Redeemable Preferred Shares, as to the payment of dividends
and as to the distribution of assets upon liquidation, dissolution or
winding up, if such class or series (which includes the Convertible
Preferred Shares) shall be Fully Junior Shares.
The Redeemable Preferred Shares will rank senior to the outstanding Convertible
Preferred Shares as to the payment of dividends and as the distribution of
assets upon liquidation, dissolution or winding up.
VOTING RIGHTS
If and whenever six consecutive quarterly dividends payable on the
Redeemable Preferred Shares or any series or class of Parity Shares having
similar voting rights shall be in arrears (which shall, with respect to any such
quarterly dividend, mean that any such dividend has not been paid in full),
whether or not earned or declared, the number of trustees then constituting the
Board of Trustees shall be increased by two. The holders of Redeemable Preferred
Shares, together with the holders of shares of every other series of Parity
Shares (any such other series, the "Voting Preferred Shares"), voting as a
single class regardless of series, shall be entitled to elect the two additional
trustees to serve on the Board of Trustees at any annual meeting of shareholders
of special meeting held in place thereof, or at a special meeting of the holders
of the Redeemable Preferred Shares and the Voting Preferred Shares called as
described below.
Whenever all arrears in dividends on the Redeemable Preferred Shares and the
Voting Preferred Shares then outstanding shall have been paid and dividends
thereon for the current quarterly dividend period shall have been paid or
declared and set apart for payment, then the right of the holders of the
Redeemable Preferred Shares and the Voting Preferred Shares to elect such
additional trustees shall cease (but subject always to the same provision for
the vesting of such voting rights in the case of any similar future arrearage in
quarterly dividends). The terms of office of all persons elected as trustees by
the holders of the Redeemable Preferred Shares and the Voting Preferred Shares
shall, notwithstanding the
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assignment of such trustees to any class pursuant to the Declaration of Trust,
immediately terminate. The number of the Board of Trustees shall be reduced
accordingly.
Subject to the following paragraph, so long as any Redeemable Preferred
Shares are outstanding, in addition to any other vote or consent of shareholders
required by law or by the Declaration of Trust, the affirmative vote of at least
66 2/3% of the votes entitled to be cast by the holders of the Redeemable
Preferred Shares given in person or by proxy, shall be necessary for effecting
or validating:
- any amendment, alteration or repeal of any of the provisions of the
Declaration of Trust that materially and adversely affects the voting
powers, rights or preferences of the holders of the Redeemable Preferred
Shares; PROVIDED, HOWEVER, that the amendment of the provisions of the
Declaration of Trust so as to authorize or create or to increase the
authorized amount of, any Fully Junior Shares, Junior Shares that are not
senior in any respect to the Redeemable Preferred Shares or any Parity
Shares shall not be deemed to materially adversely affect the voting
powers, rights or preferences of the holders of Redeemable Preferred
Shares; or
- a share exchange that affects the Redeemable Preferred Shares, a
consolidation with or merger of the Company into another entity, or a
consolidation with or merger of another entity into the Company, unless in
each such case each Redeemable Preferred Share (A) shall remain
outstanding without a material and adverse change to its terms and rights
or (B) shall be converted into or exchanged for cumulative redeemable
preferred shares of the surviving entity having preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms or conditions of redemption thereof identical to
that of a Redeemable Preferred Share (except for changes that do not
materially and adversely affect the holders of the Redeemable Preferred
Shares);
However, no such vote of the holders of Redeemable Preferred Shares shall be
required if, at or prior to the time when such amendment, alteration or repeal
is to take effect, or when the issuance of any such prior shares or convertible
security is to be made, as the case may be, provision is made for the redemption
of all Redeemable Preferred Shares at the time outstanding to the extent such
redemption is authorized. See "--Redemption." Accordingly, the affirmative vote
of the holders of at least 66 2/3% of the Redeemable Preferred Shares will be
required to permit the Company to issue any class or series of Preferred Shares
having rights senior to the Redeemable Preferred Shares as to the payment of
dividends or as to distribution of assets upon liquidation, dissolution or
winding up.
Each Redeemable Preferred Share shall have one vote per share, except that
when any other series of Preferred Shares shall have the right to vote with the
Redeemable Preferred Shares as a single class on any matter, then the Redeemable
Preferred Shares and such other series shall have with respect to such matters
one vote per $25.00 of stated liquidation preference.
GENERAL
The Redeemable Preferred Shares have traded on the NYSE since June 23, 1998
under the symbol "PGE PrB."
CONVERTIBLE PREFERRED SHARES
DIVIDENDS
Subject to the preferential rights of the holders of any Preferred Shares
(including the Redeemable Preferred Shares) that rank senior in the payment of
dividends to the Convertible Preferred Shares, the holders of the Convertible
Preferred Shares shall be entitled to receive, when, as and if declared by the
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Board of Trustees, out of funds legally available for the payment of dividends,
cumulative preferential dividends payable in cash in an amount per Convertible
Preferred Share equal to the greater of:
(i) (x)an annual rate equal to the product of the $20.00 per share issue
price (the "Issue Price") multiplied by 0.07 for Dividend Periods ending
before November 17, 1998, and
(y)an annual rate equal to the product of the Issue Price multiplied by
0.075 for Dividend Periods ending after November 17, 1998; or
(ii) the regular cash dividends (determined on each Dividend Payment Date)
on the common shares, or portion thereof, into which a Convertible
Preferred Share is convertible.
The amount of dividends referred to in clause (i) above payable for each
full Dividend Period on the Convertible Preferred Shares, other than the
Dividend Period commencing October 1, 1998, will be computed by dividing the
annual dividend rate by four. For the Dividend Period commencing October 1,
1998, the amount of dividends through November 17, 1998 on the Convertible
Preferred Shares will be computed with the following formula: (Issue Price X
0.07) DIVIDED BY 365) X (the number of days from October 1, 1998 through
November 17, 1998). Dividends from November 18, 1998 through December 31, 1998
on the Convertible Preferred Shares will be computed with the following formula:
((Issue Price X 0.075) DIVIDED BY 365) X (the number of days from November 18,
1998 through December 31, 1998). The amount of dividends referred to in clause
(ii) above will equal the number of common shares, or portion thereof, into
which a Convertible Preferred Share will be convertible on or after the
Conversion Date (as defined below), multiplied by the most current quarterly
dividend on a common Share on or before the applicable Dividend Payment Date.
"Dividend Payment Date" means:
- for any Dividend Period for which the Company pays a dividend on the
common shares, the date on which the dividend is paid, or
- for any Dividend Period for which the Company does not pay a dividend on
the common shares, a date to be set by the Board of Trustees, which date
will not be later than the thirtieth calendar day after the end of the
applicable Dividend Period.
"Dividend Periods" means quarterly dividend periods commencing on January 1,
April 1, July 1 and October 1 of each year and ending on and including the day
preceding the first day of the next succeeding Dividend Period with respect to
any Convertible Preferred Shares. However, the initial Dividend Period commences
on the Issue Date for such Convertible Preferred Shares and end on and include
the last day of the calendar quarter immediately following the Issue Date. Also,
the Dividend Period during which any Convertible Preferred Shares may be
redeemed or converted as described below will end on and include the redemption
date with respect to the Convertible Preferred Shares being redeemed.
Dividends with respect to the Convertible Preferred Shares begin to accrue
and are fully cumulative from the first day of the applicable Dividend Period
(whether or not in any Dividend Period or Periods there are funds of the Company
legally available for the payment of the dividends) and are payable quarterly,
when, as and if declared by the Board of Trustees, in arrears on Dividend
Payment Dates. The amount of dividends payable for any period shorter than a
full Dividend Period on the Convertible Preferred Shares, will be computed by
dividing the number of days in such period by 365 and multiplying the result by
the product of the annual dividend rate multiplied by the Issue Price. Dividends
are payable in arrears to the holders of record of the Convertible Preferred
Shares as they appear in the records of the Company at the close of business on
such record dates. The record dates may not be less than 10 nor more than 50
days preceding the Dividend Payment Dates and shall be fixed by the Board of
Trustees.
Any dividend payment made on the Convertible Preferred Shares will first be
credited against the earliest accrued but unpaid dividend due with respect to
the Convertible Preferred Shares which remains payable. Holders of Convertible
Preferred Shares will not be entitled to any dividends, whether payable in
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cash, property or shares, in excess of cumulative dividends on the Convertible
Preferred Shares. No interest, or sum of money in lieu of interest, will be
payable in respect of any dividend payment or payments on the Convertible
Preferred Shares which may be in arrears.
So long as any Convertible Preferred Shares are outstanding, no dividends,
except as described in the immediately following sentence, will be declared or
paid or set apart for payment on any class or series of Parity Shares (as
defined below) for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on the Convertible Preferred Shares
for all Dividend Periods terminating on or prior to the dividend payment date on
the class or series of Parity Shares. When dividends are not paid in full, or a
sum sufficient for such payment is not set apart, all dividends declared upon
the Convertible Preferred Shares and all dividends declared upon any other class
or series of Parity Shares will be declared ratably in proportion to the
respective amounts of dividends accumulated and unpaid on the Convertible
Preferred Shares and accumulated and unpaid on such Parity Shares.
So long as any Convertible Preferred Shares are outstanding, no dividends
(other than dividends or distributions paid solely in shares of, or options,
warrants or rights to subscribe for or purchase shares of, Fully Junior Shares)
will be declared or paid or set apart for payment or other distribution will be
declared or made or set apart for payment upon Junior Shares, nor will any
Junior Shares be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of common shares made for purposes of
an employee incentive or benefit plan of the Company or any subsidiary) for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any Junior Shares) by the Company, directly or indirectly
(except by conversion into or exchange for Fully Junior Shares), unless in each
case:
- the full cumulative dividends on all outstanding Convertible Preferred
Shares and any other Parity Shares of the Company have been or
contemporaneously are declared and paid or declared and set apart for
payment for all past Dividend Periods with respect to the Convertible
Preferred Shares and all past dividend periods with respect to such Parity
Shares, and
- sufficient funds have been or contemporaneously are declared and paid or
declared and set apart for the payment of the dividend for the current
Dividend Period with respect to the Convertible Preferred Shares and the
current Dividend Period with respect to the Parity Shares.
"Fully Junior Shares" mean the common shares and any other class or series
of shares of beneficial interest of the Company now or hereafter issued and
outstanding over which the Convertible Preferred Shares have preference or
priority in both (i) the payment of dividends and (ii) the distribution of
assets on any liquidation, dissolution or winding up of the Company.
"Junior Shares" mean the common shares and any other class or series of
shares of beneficial interest of the Company now or hereafter issued and
outstanding over which the Convertible Preferred Shares have preference or
priority in the payment of dividends or in the distribution of assets on any
liquidation, dissolution or winding up of the Company.
The Board of Trustees may not declare any dividends on the Convertible
Preferred Shares or pay or set apart for payment such dividends at such time as
the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such declaration, payment or
setting apart for payment or provides that a declaration, payment or setting
apart for payment would constitute a breach thereof or a default thereunder, or
if laws prohibit or restrict such declaration or payment.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, subject to the prior preferences and other
rights of any series of shares of beneficial interest
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ranking senior to the Convertible Preferred Shares upon liquidation,
distribution or winding up of the Company (such as the Redeemable Preferred
Shares), before any payment or distribution of the assets of the Company
(whether capital or surplus) shall be made to or set apart for the holders of
Junior Shares, the holders of the Convertible Preferred Shares shall be entitled
to receive twenty dollars ($20.00) (the "Liquidation Preference") per
Convertible Preferred Share plus an amount equal to all dividends (whether or
not earned or declared) accrued and unpaid thereon to the date of final
distribution to such holders (the "Liquidation Preference Amount").
If, upon any liquidation, dissolution or winding up of the Company, the
assets of the Company, or proceeds thereof, distributable among the holders of
the Convertible Preferred Shares are insufficient to pay in full the Liquidation
Preference Amount and liquidating payments on any other shares of any class or
series of Parity Shares, then the assets, or the proceeds thereof, will be
distributed among the holders of the Convertible Preferred Shares and any such
other Parity Shares ratably in accordance with the respective amounts that would
be payable on such Convertible Preferred Shares and any such other Parity Shares
if all amounts payable thereon were paid in full.
A consolidation or merger of the Company with one or more corporations, real
estate investment trusts or other entities, a sale, lease or conveyance of all
or substantially all of the Company's property or business or a statutory share
exchange will not be deemed to be a liquidation, dissolution or winding up,
voluntary or involuntary, of the Company. The Convertible Preferred Shares will
rank junior to and be subordinate to the Redeemable Preferred Shares as to
priority for receiving liquidating distributions upon the liquidation,
dissolution or winding up of the Company.
Subject to the rights of the holders of shares of any series or class or
classes of shares of beneficial interest ranking on a parity with or prior to
the Convertible Preferred Shares upon liquidation, dissolution or winding up,
upon any liquidation, dissolution or winding up of the Company, after payment
has been made in full to the holders of the Convertible Preferred Shares, the
holders of the Convertible Preferred Shares will have no other claim to the
remaining assets of the Company and any other series or class or classes of
Junior Shares will, subject to the respective terms and provisions (if any)
applying thereto, be entitled to receive any and all assets remaining to be paid
or distributed, and the holders of the Convertible Preferred Shares will not be
entitled to share therein.
REDEMPTION
The Convertible Preferred Shares will not be redeemable by the Company prior
to November 17, 2007 except under certain limited circumstances described below.
On and after November 17, 2007, the Company, at its option, may redeem the
Convertible Preferred Shares, in whole at any time or from time to time in part
out of funds legally available therefor at a redemption price payable in cash
equal to 100.0% of the Liquidation Preference per Convertible Preferred Share
(plus all accumulated, accrued and unpaid dividends as described below).
Upon any redemption of Convertible Preferred Shares, the Company will pay
all accrued and unpaid dividends, if any, thereon to the redemption date,
without interest. If the redemption date falls after a dividend payment record
date and prior to the corresponding Dividend Payment Date, then each holder of
Convertible Preferred Shares at the close of business on such dividend payment
record date will be entitled to the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding any redemption of the shares
before such Dividend Payment Date. Except as provided above, the Company will
make no payment or allowance for unpaid dividends, whether or not in arrears, on
Convertible Preferred Shares called for redemption.
If full cumulative dividends on the Convertible Preferred Shares and any
other class or series of Parity Shares of the Company have not been declared and
paid or declared and set apart for payment, the Convertible Preferred Shares may
not be redeemed in part and the Company may not purchase or acquire
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Convertible Preferred Shares, otherwise than pursuant to a purchase or exchange
offer made on the same terms to all holders of Convertible Preferred Shares.
Notice of the redemption of any Convertible Preferred Shares (other than as
described below) will be mailed by first-class mail to each holder of record of
Convertible Preferred Shares to be redeemed at the address of each such holder
as shown on the Company's records, not less than 30 nor more than 90 days prior
to the redemption date. Neither the failure to mail any required notice nor any
defect therein or in the mailing thereof, to any particular holder, will affect
the sufficiency of the notice or the validity of the proceedings for redemption
with respect to the other holders. Each such mailed notice must state, as
appropriate:
- the redemption date;
- the number of Convertible Preferred Shares to be redeemed;
- the redemption price;
- the place or places at which certificates for such Convertible Preferred
Shares are to be surrendered;
- the then-current conversion price; and
- that dividends on the shares to be redeemed shall cease to accrue on such
redemption date except as otherwise provided below.
If fewer than all the Convertible Preferred Shares held by any holder are to be
redeemed, the notice mailed to such holder shall also specify the number of
Convertible Preferred Shares to be redeemed from such holder. If notice of
redemption of any Convertible Preferred Shares has been properly given, from and
after the redemption date (unless the Company fails to make available an amount
of cash necessary to effect such redemption), except as otherwise described
below, dividends on the Convertible Preferred Shares called for redemption will
cease to accrue, such shares will no longer be deemed to be outstanding and all
rights of the holders thereof as holders of Convertible Preferred Shares will
cease (except the rights to convert and to receive the cash payable upon such
redemption, without interest thereon, upon surrender and endorsement of their
certificates if so required and to receive any dividends payable thereon).
If fewer than all the outstanding Convertible Preferred Shares are to be
redeemed, the Company may select the shares for redemption from outstanding
Convertible Preferred Shares not previously called for redemption pro rata (as
nearly as may be), by lot or by any other method determined by the Company in
its sole discretion to be equitable. If fewer than all the Convertible Preferred
Shares represented by any certificate are redeemed, then new certificates
representing the unredeemed shares will be issued without cost to the holder
thereof.
CONVERSION
A holder of Convertible Preferred Shares has the right, at his or her
option, to convert all or any portion of such shares into the number of fully
paid and non-assessable common shares obtained by dividing the aggregate
Liquidation Preference Amount of such shares by the conversion price by
surrendering the shares to be converted. In the case of Convertible Preferred
Shares called for redemption, conversion rights shall expire at the close of
business on the fifth business day prior to the redemption date fixed for such
redemption.
"Change of Control" means each occurrence of any of the following: (i) the
acquisition, directly or indirectly, by any individual or entity or group (as
such term is used in Section 13(d)(3) of the Exchange Act) of beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act, except that such
individual or entity will be deemed to have beneficial ownership of all shares
that any such individual or entity has the right to acquire, whether the right
is exercisable immediately or only after passage of time) of more than
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25.0% of the Company's outstanding shares of beneficial interest with voting
power, under ordinary circumstances, to elect Trustees of the Company; (ii)
other than with respect to the election, resignation or replacement of any
trustee designated, appointed or elected by the holders of the Convertible
Preferred Shares (each a "Preferred Trustee"), during any period of two
consecutive years, individuals who at the beginning of the period constituted
the Board of Trustees of the Company (together with any new trustees whose
election by such Board of Trustees or whose nomination for election by the
shareholders of the Company was approved by a vote of 66 2/3% of the trustees of
the Company (excluding Preferred Trustees) then still in office who were either
trustees at the beginning of the period, or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Trustees then in office; and (iii) (A) the Company
consolidating with or merging into another entity or conveying, transferring or
leasing all or substantially all of its assets (including, but not limited to,
real property investments) to any individual or entity or (B) any corporation
consolidating with or merging into the Company, which in either event (A) or (B)
is pursuant to a transaction in which the outstanding voting shares of
beneficial interest of the Company is reclassified or changed into or exchanged
for cash, securities or other property; PROVIDED, HOWEVER, that the events
described in clause (iii) above will not be deemed to be a Change of Control (a)
if the sole purpose of such event is that the Company is seeking to change its
domicile or to change its form of organization from a trust to a corporation or
(b) if the holders of the exchanged securities of the Company immediately after
the transaction beneficially own at least a majority of the securities of the
merged or consolidated entity normally entitled to vote in elections of
trustees.
"REIT Termination Event" shall mean the earliest to occur of:
(i) the filing of a federal income tax return by the Company for any
taxable year on which the Company does not elect to be taxed as a real
estate investment trust;
(ii) the approval by the shareholders of the Company of a proposal for
the Company to cease to qualify as a real estate investment trust;
(iii) a determination by the Board of Trustees, based on the advice of
counsel, that the Company has ceased to qualify as a real estate investment
trust; or
(iv) a "determination" within the meaning of Section 1313(a) of the
Code, that the Company has ceased to qualify as a real estate investment
trust.
Holders of Convertible Preferred Shares at the close of business on a
dividend payment record date will be entitled to receive the dividend payable on
such shares on the corresponding Dividend Payment Date notwithstanding the
conversion thereof following such dividend payment record date and prior to such
Dividend Payment Date. However, Convertible Preferred Shares surrendered for
conversion during the period between the close of business on any dividend
payment record date and the opening of business on the corresponding Dividend
Payment Date (except shares converted after the issuance of notice of redemption
with respect to a redemption date during such period, such Convertible Preferred
Shares being entitled to such dividend on the Dividend Payment Date) must be
accompanied by payment of an amount equal to the dividend payable on such shares
on such Dividend Payment Date. A holder of Convertible Preferred Shares on a
dividend payment record date who (or whose transferee) tenders any such shares
for conversion into common shares on the corresponding Dividend Payment Date
will receive the dividend payable by the Company on such Convertible Preferred
Shares on such date, and the converting holder need not include payment of the
amount of such dividend upon surrender of Convertible Preferred Shares for
conversion. Except as provided above, the Company shall make no payment or
allowance for unpaid dividends, whether or not in arrears, on converted shares
or for dividends on the common shares issued upon such conversion.
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the holder surrenders the
certificates for Convertible Preferred Shares and the Company
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receives such notice (and if applicable, the Company receives payment of an
amount equal to the dividend payable on such shares). The person or persons in
whose name or names any certificate or certificates for common shares shall be
issuable upon such conversion will be deemed to have become the holder or
holders of record of the shares represented thereby at such time on such date.
The conversion shall be at the conversion price in effect at such time and on
such date unless the share transfer books of the Company are closed on that
date, in which event such person or persons will be deemed to have become such
holder or holders of record at the close of business on the next succeeding day
on which the share transfer books are open, but such conversion will be at the
conversion price in effect on the date on which such shares shall have been
surrendered and such notice received by the Company.
No fractional shares or scrip representing fractions of common shares will
be issued upon conversion of the Convertible Preferred Shares. Instead of any
fractional interest in a common Share that would otherwise be deliverable upon
the conversion of a Convertible Preferred Share, the Company will pay to the
holder of the share an amount in cash based upon the current market price of the
common shares on the trading day immediately preceding the date of conversion.
If more than one share is surrendered for conversion at one time by the same
holder, the number of full common shares issuable upon conversion thereof will
be computed on the basis of the aggregate number of Convertible Preferred Shares
so surrendered.
The conversion price is subject to adjustments upon the occurrence of any of
the following events:
(i) If the Company, after the Issue Date (A) pays a dividend or makes a
distribution on its capital shares in common shares, (B) subdivides its
outstanding common shares into a greater number of shares, (C) combines its
outstanding common shares into a smaller number of shares or (D) issues any
shares of beneficial interest by reclassification of its common shares;
(ii) If the Company issues, after the Issue Date rights, options or
warrants to all holders of common shares entitling them (for a period
expiring within 45 days after the record date mentioned below) to subscribe
for or purchase common shares at a price per share less than 94.0% (100.0%
if a stand-by underwriter is used and charges the Company a commission) of
the fair market value per common Share on the record date for the
determination of shareholders entitled to receive the rights, options or
warrants;
(iii) If the Company distributes to all holders of its common shares any
securities of the Company (other than common shares) or evidence of its
indebtedness or assets (excluding cumulative cash dividends or distributions
paid with respect to the common shares after December 31, 1996 which are not
in excess of the following: the sum of (A) the Company's cumulative
undistributed Funds from Operations at December 31, 1996, plus (B) the
cumulative amount of Funds from Operations, as determined by the Board of
Trustees, after December 31, 1996, minus (C) the cumulative amount of
dividends accrued or paid in respect of the Convertible Preferred Shares or
any other class or series of preferred shares of beneficial interest of the
Company after the Issue Date or rights, options or warrants to subscribe for
or purchase any of its securities (excluding those rights, options and
warrants issued to all holders of common shares entitling them for a period
expiring within 45 days after the record date referred to in clause (ii)
above to subscribe for or purchase common shares, which rights, options and
warrants are referred to in and treated under clause (ii) above)); or
(iv) In case a tender or exchange offer (which term does not include
open market repurchases by the Company) made by the Company or any
subsidiary of the Company for all or any portion of the common shares
expires and such tender or exchange offer involves the payment by the
Company or such subsidiary of consideration per common Share having a fair
market value (as determined in good faith by the Board of Trustees, whose
determination will be conclusive and must be described in a resolution of
the Board of Trustees), at the last time (the "Expiration Time") tenders or
exchanges may be made pursuant to such tender or exchange offer, that
exceeds the current market price per common Share on the trading day next
succeeding the Expiration Time.
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No adjustment in the conversion price shall be required unless such
adjustment would require a cumulative increase or decrease of at least 1.0% in
such price; provided, however, that any adjustments that by reason of the
immediately preceding clause are not required to be made shall be carried
forward and taken into account in any subsequent adjustment until made. The
adjustments to be made in each such event are set forth in the Declaration of
Trust.
If the Company is a party to any Transaction (as defined below), in each
case as a result of which all or substantially all of the Company's common
shares are converted into the right to receive shares, securities or other
property (including cash or any combination thereof), each Convertible Preferred
Share which is not redeemed or converted into the right to receive shares,
securities or other property prior to such Transaction shall thereafter be
convertible into the kind and amount of shares, securities and other property
(including cash or any combination thereof) receivable upon the consummation of
such Transaction by a holder of that number of common shares into which one
Convertible Preferred Share was convertible immediately prior to such
Transaction. "Transaction" shall mean, without limitation, a merger,
consolidation, statutory share exchange, self tender offer for all or
substantially all of its common shares, sale of all or substantially all of the
Company's assets or recapitalization of the common shares.
LIMITATION ON ISSUANCE OF ADDITIONAL PREFERRED SHARES AND INDEBTEDNESS
Without the written consent of the holders of two-thirds of the issued and
outstanding Convertible Preferred Shares, none of the Company, the Operating
Partnership or any of their subsidiaries may issue any additional preferred
securities of any such entity or incur any indebtedness (other than trade
payables or accrued expenses incurred in the ordinary course of business) if,
immediately following such issuance and after giving effect to such issuance and
the application of the net proceeds therefrom, such entity would be reasonably
expected to not satisfy one or both of the following ratios:
(i) Total Debt and liquidation value of non-convertible preferred shares
of beneficial interest to Total Market Capitalization of less than .65 to
1.0; or
(ii) Consolidated EBITDA to Consolidated Fixed Charges of at least 1.4
to 1.0.
In the event that the Company fails to satisfy one or both of the tests in
clause (i) or (ii) above for two consecutive quarters, the holders of
Convertible Preferred Shares shall have the right to require that the Company,
to the extent that the Company has funds legally available therefor, repurchase
any or all of each holder's Convertible Preferred Shares at a repurchase price
payable in cash in an amount equal to 100% of the liquidation preference
thereof, plus accrued and unpaid dividends whether or not declared, if any (the
"Repurchase Payment"), to the date of repurchase or the date payment is made
available (the "Repurchase Date"), pursuant to the offer described below (the
"Repurchase Offer").
Within 15 days following the second consecutive quarter that the Company
fails to satisfy one or both of the tests in clause (i) or (ii) above, the
Company will mail by first class mail or overnight courier a notice to all
holders of Convertible Preferred Shares stating:
- that the Company failed to satisfy one or both of the tests (naming the
test(s) failed);
- that the holders of Convertible Preferred Shares have the right to require
the Company to repurchase any or all Convertible Preferred Shares then
held by such holder in cash;
- the date of repurchase (which must be a business day, no earlier than 120
days and no later than 150 days from the date such notice is mailed, or
such later date as may be necessary to comply with the requirements of the
Exchange Act);
- the repurchase price for the repurchase; and
- the instructions determined by the Company that the holder must follow in
order to have its Convertible Preferred Shares repurchased.
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On the Repurchase Date, the Company will, to the extent lawful, accept for
payment, Convertible Preferred Shares or portions thereof tendered pursuant to
the Repurchase Offer and promptly mail by first class mail or overnight courier
or by wire transfer of immediately available funds to the holder of Convertible
Preferred Shares, as directed by such holder, payment in an amount equal to the
Repurchase Payment in respect of all Convertible Preferred Shares or portions
thereof so tendered.
"Total Debt" means the sum of (without duplication) any indebtedness,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures, or similar instruments or letters of credit (or reimbursement
agreements in respect thereof) or representing the balance deferred and unpaid
of the purchase price of any property (including pursuant to capital leases),
except any balance that constitutes an accrued expense or trade payable, if and
to the extent such indebtedness would appear as a liability upon a balance sheet
of any entity prepared on a consolidated basis in accordance with Generally
Accepted Accounting Principles ("GAAP"), and also includes, to the extent not
otherwise included, the guarantee of items which would be included within this
definition.
"Total Market Capitalization" means the sum of: (a) the fair market value of
the outstanding common shares, assuming (i) the full exchange of outstanding
Common Units (in each case not held by the Company) of the Operating Partnership
for common shares and (ii) the conversion of the outstanding shares of
Convertible Preferred Shares into common shares; (b) the aggregate Liquidation
Preference of any outstanding preferred shares of beneficial interest other than
the Convertible Preferred Shares; and (c) the Total Debt of the Company.
"Consolidated EBITDA" for any period means the consolidated net income of
the Company (before extraordinary income or gains) as reported in the Company's
financial statements filed with the Securities and Exchange Commission increased
by the sum of the following (without duplication):
(i) all income and state franchise taxes paid or accrued according to
GAAP for the period (other than income taxes attributable to extraordinary,
unusual or non-recurring gains or losses except to the extent that such
gains were not included in Consolidated EBITDA);
(ii) all interest expense paid or accrued in accordance with GAAP for
the period (including financing fees and amortization of deferred financing
fees and amortization of original issue discount);
(iii) depreciation and depletion reflected in such reported net income;
(iv) amortization reflected in such reported net income, including,
without limitation, amortization of capitalized debt issuance costs (only to
the extent that such amounts have not been previously included in the amount
of Consolidated EBITDA pursuant to clause (ii) above), goodwill, other
intangibles and management fees; and
(v) any other non-cash charges or discretionary prepayment penalties, to
the extent deducted from consolidated net income (including, but not limited
to, income allocated to minority interests).
"Consolidated Fixed Charges" for any period means the sum of:
(i) all interest expense paid or accrued in accordance with GAAP for the
period (including financing fees and amortization of deferred financing fees
and amortization of original issue discount);
(ii) preferred shares of beneficial interest dividend requirements for
the period, whether or not declared or paid; and
(iii) regularly scheduled amortization of principal during the period
(other than any balloon payments at maturity).
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RANKING
Any class or series of shares of beneficial interest of the Company will be
deemed to rank:
- prior to the Convertible Preferred Shares, as to the payment of dividends
and as to distribution of assets upon liquidation, dissolution or winding
up, if the holders of such class or series (which includes the Redeemable
Preferred Shares) will be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as the
case may be, in preference or priority to the holders of Convertible
Preferred Shares;
- on a parity with the Convertible Preferred Shares, as to the payment of
dividends and as to distribution of assets upon liquidation, dissolution
or winding up, whether or not the dividend rates, dividend payment dates
or redemption or liquidation prices per share thereof are different from
those of the Convertible Preferred Shares, if the holders of such class or
series and the Convertible Preferred Shares are entitled to the receipt of
dividends and of amounts distributable upon liquidation, dissolution or
winding up in proportion to their respective amounts of accrued and unpaid
dividends per share or liquidation preferences, without preference or
priority one over the other ("Parity Shares");
- junior to the Convertible Preferred Shares, as to the payment of dividends
or as to the distribution of assets upon liquidation, dissolution or
winding up, if such class or series are Junior Shares; and
- junior to the Convertible Preferred Shares, as to the payment of dividends
and as to the distribution of assets upon liquidation, dissolution or
winding up, if such class or series are Fully Junior Shares.
VOTING RIGHTS
If and whenever (i) two consecutive quarterly dividends payable on the
Convertible Preferred Shares or any series or class of Parity Shares are in
arrears (which, with respect to any such quarterly dividend, means that any such
dividend has not been paid in full), whether or not earned or declared, or (ii)
for two consecutive quarterly dividend periods the Company fails to pay
dividends on the common shares in an amount per share at least equal to $0.3375,
the number of trustees constituting the Board of Trustees will be increased by
one (unless the Board of Trustees consists of more than 10 trustees in which
case the Board of Trustees will be increased by two). The holders of Convertible
Preferred Shares, together with the holders of shares of every other series of
Parity Shares (any such other series, the "Voting Preferred Shares"), voting as
a single class regardless of series, will be entitled to elect the one or two
additional trustees to serve on the Board of Trustees at any annual meeting of
shareholders or special meeting held in place thereof, or at a special meeting
of the holders of the Convertible Preferred Shares and the Voting Preferred
Shares called as described below.
Whenever all arrears in dividends on the Convertible Preferred Shares and
the Voting Preferred Shares then outstanding have been paid and dividends
thereon for the current quarterly dividend period have been paid or declared and
set apart for payment, or the Company has paid dividends on the common shares in
an amount per share at least equal to $0.3375 for two consecutive quarters, then
the right of the holders of the Convertible Preferred Shares and the Voting
Preferred Shares to elect the additional trustee(s) will cease (but subject
always to the same provision for the vesting of such voting rights in the case
of any similar future arrearage in quarterly dividends). Then, the terms of
office of all persons elected as trustees by the holders of the Convertible
Preferred Shares and the Voting Preferred Shares will immediately terminate and
the number of the Board of Trustees will be reduced accordingly.
So long as any Convertible Preferred Shares are outstanding, in addition to
any other vote or consent of shareholders required by law or by the Declaration
of Trust, the affirmative vote of at least 66 2/3% of the votes entitled to be
cast by the holders of the Convertible Preferred Shares given in person or by
proxy,
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either in writing without a meeting or by vote at any meeting called for the
purpose, shall be necessary for effecting or validating:
(i) any amendment, alteration or repeal of any of the provisions of the
Declaration of Trust that materially and adversely affects the voting
powers, rights or preferences of the holders of the Convertible Preferred
Shares; PROVIDED, HOWEVER, that the amendment of the provisions of the
Declaration of Trust so as to authorize or create or to increase the
authorized amount of, any Fully Junior Shares, Junior Shares that are not
senior in any respect to the Convertible Preferred Shares or any Parity
Shares will not be deemed to materially adversely affect the voting powers,
rights or preferences of the holders of Convertible Preferred Shares; or
(ii) a share exchange that affects the Convertible Preferred Shares, a
consolidation with or merger of the Company into another entity, or a
consolidation with or merger of another entity into the Company, unless in
each such case each Convertible Preferred Share (A) will remain outstanding
without a material and adverse change to its terms and rights or (B) will be
converted into or exchanged for convertible preferred shares of the
surviving entity having preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms
or conditions of redemption thereof identical to that of a Convertible
Preferred Share (except for changes that do not materially and adversely
affect the holders of the Convertible Preferred Shares); provided, however,
that no such vote of the holders of Convertible Preferred Shares will be
required if, at or prior to the time when such amendment, alteration or
repeal is to take effect, or when the issuance of any such prior shares or
convertible security is to be made, as the case may be, provision is made
for the redemption of all Convertible Preferred Shares at the time
outstanding to the extent such redemption is authorized.
See "--Redemption." Accordingly, the affirmative vote of the holders of at
least 66 2/3% of the Convertible Preferred Shares will be required to permit the
Company to issue any class or series of Preferred Shares having rights senior to
the Convertible Preferred Shares as to the payment of dividends or as to
distribution of assets upon liquidation, dissolution or winding up. The sole
holder of the Convertible Preferred Shares has consented to the issuance of the
Redeemable Preferred Shares pursuant to the Redeemable Preferred Share Offering.
Each Convertible Preferred Share will have one vote per share, except that
when any other series of Preferred Shares will have the right to vote with the
Convertible Preferred Shares as a single class on any matter, then the
Convertible Preferred Shares and such other series will have with respect to
such matters one vote per $20.00 of stated liquidation preference.
REGISTRATION RIGHTS
The Company has granted Security Capital Preferred Growth certain "demand"
and "piggyback" registration rights with respect to the common shares acquired
by it upon conversion of the Convertible Preferred Shares into common shares.
Subject to certain conditions, the demand registration rights permit holders of
shares to request one demand registration. Subject to certain conditions, the
piggyback registration rights permit the holders of such Shares to include their
common shares in the registration by the Company of its equity securities other
than in connection with the registration by the Company under the Securities Act
of any of its securities (i) pursuant to a shelf registration statement, (ii) in
connection with mergers or acquisitions or (iii) in connection with an employee
benefit, share dividend, share ownership or dividend reinvestment plan.
GENERAL
The Convertible Preferred Shares are not listed or qualified for trading on
any exchange or on the Nasdaq National Market.
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COMMON SHARES
Subject to the preferential rights of the Convertible Preferred Shares and
any other class or series of shares of beneficial interest and to the provisions
of the Declaration of Trust regarding the Excess Shares and Convertible
Preferred Shares, holders of common shares will be entitled to receive
distributions on such shares if, as and when authorized and declared by the
Board of Trustees out of assets legally available therefor and to share ratably
in the assets of the Company legally available for distribution to the
shareholders in the event of the liquidation, dissolution or winding-up of the
Company after payment of, or adequate provision for, all known debts and
liabilities of the Company. The Company currently pays quarterly distributions
on the common shares, which quarterly distributions commenced with the partial
quarter ending December 31, 1997 and intends to continue to pay quarterly
distributions. See "Price Range of Common Shares and Distributions."
The Convertible Preferred Shares are entitled to payment of distributions at
the rate declared on the common shares if the rate is greater than the stated
distribution rate on the Convertible Preferred Shares. Accordingly, at the time
the distribution rate on the common shares is greater than the stated rate on
the Convertible Preferred Shares, holders of Convertible Preferred Shares will
be entitled to participate in any further growth of Funds from Operations
together with the holders of common shares.
Subject to the provisions of the Declaration of Trust regarding Excess
Shares, the Convertible Preferred Shares and the Redeemable Preferred Shares,
each outstanding common share entitles the holder to one vote on all matters
submitted to a vote of shareholders, including the election of trustees and,
except as otherwise required by law or except as provided with respect to any
other class or series of shares of beneficial interest, the holders of such
shares will possess exclusive voting power. There is no cumulative voting in the
election of trustees, which means that the holders of a majority of the
outstanding common shares can elect all of the trustees then standing for
election, and the holders of the remaining shares will not be able to elect any
trustees.
Holders of the common shares have no conversion, sinking fund, redemption
rights, exchange rights or preemptive rights to subscribe for any securities of
the Company.
Subject to the provisions of the Declaration of Trust regarding Excess
Shares, common shares will have equal dividend, distribution, liquidation and
other rights, and will have no preference, appraisal (except as provided by
Maryland law) or exchange rights.
Pursuant to Maryland REIT Law, a Maryland real estate investment trust
generally cannot dissolve, amend its declaration of trust or merge, unless
approved by the affirmative vote or written consent of shareholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the trust's declaration of trust. The Company's
Declaration of Trust contains such a provision providing for a lesser
percentage, a majority of outstanding shares, with respect to transactions
pursuant to which the Company's assets will be combined with those of one or
more other entities (whether by merger, sale or other transfer of assets,
consolidation or share exchange).
The transfer agent and registrar for the common shares is LaSalle National
Bank.
The common shares have traded on the NYSE since November 12, 1997 under the
trading symbol "PGE."
COMMON SHARE REPURCHASE PROGRAM. On September 14, 1998, the Company
established a program to repurchase up to 1.55 million of its common shares in
open market and privately negotiated transactions. As of November 13, 1998, the
Company had repurchased 462,400 common shares for an aggregate purchase price of
approximately $7.1 million.
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REGISTRATION RIGHTS RELATING TO THE OFFERED SHARES
Holders of the Offered Shares are entitled to certain rights with respect to
registration under the Securities Act. Pursuant to a Registration Rights
Agreement by and among the Company and the Selling Shareholders, the Company has
agreed to (i) file with the Commission a shelf registration statement (the
"Shelf Registration Statement") which contains this Prospectus with respect to
the Offered Shares, and (ii) use its best efforts to keep the common shares
listed on the NYSE and/or to qualify the Offered Shares under the various state
securities laws. The Company is required to keep the Shelf Registration
Statement effective until the earlier to occur of (i) March 25, 2000 (or in the
event that a holder or holders of not less than 1,300,000 of the Offered Shares
so request in writing not less than 30 days prior to March 25, 2000, until March
25, 2001) or (ii) such time as all of the Offered Shares have been sold.
ADDITIONAL PREFERRED SHARES
Additional Preferred Shares may be issued from time to time, in one or more
series, as authorized by the Board of Trustees. Other than the Convertible
Preferred Shares and the Redeemable Preferred Shares offered hereby, no
Preferred Shares are currently issued or outstanding. Prior to the issuance of
shares of each series, the Board of Trustees is required by the Maryland REIT
Law and the Declaration of Trust 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 Trustees has the power to
establish the preferences, powers and rights of each series of Preferred Shares,
it may afford the holders of any series of Preferred Shares preferences, powers
and rights, voting or otherwise, senior to the rights of holders of common
shares. The issuance of additional series of Preferred Shares could have the
effect of delaying or preventing a change of control of the Company that might
involve a premium price for shareholders or otherwise be in their best interest.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, among other things, no
more than 50.0% in value of its outstanding shares of beneficial interest may be
owned, actually or constructively under the applicable attribution rules of the
Code, by five or fewer individuals (as defined in the Code to include certain
tax-exempt entities other than, in general, qualified domestic pension funds)
during the last half of a taxable year (other than the first year for which the
election to be taxed as a REIT has been made) or during a proportionate part of
a shorter taxable year (the "five or fewer requirement"). In addition, if the
Company, or an owner of 10.0% or more of the Company, actually or constructively
owns 10.0% 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 or beneficial interests must also be owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year (other than the first year for
which an election to be treated as a REIT has been made).
Because the Company is a REIT, the Declaration of Trust contains
restrictions on the ownership and transfer of Equity Shares which are intended
to assist the Company in complying with these requirements. The Ownership Limit
set forth in the Declaration of Trust 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 9.9%
(by number or value, whichever is more restrictive) of the outstanding Equity
Shares. The constructive ownership rules of the Code are complex, and may cause
Equity Shares owned actually or constructively by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.9% of the Equity Shares (or
the acquisition of an interest in an entity that owns, actually or
constructively, Equity Shares) by an individual or entity, could, nevertheless
cause that individual or entity, or another individual or entity, to be deemed
to own constructively in excess of 9.9% of the outstanding Equity Shares and
thus to violate the Ownership Limit, or any other limit provided in the
Declaration of
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Trust or as otherwise permitted by the Board of Trustees. Pension plans and
mutual funds are among the entities that are not treated as holders of stock or
beneficial interests under the five or fewer requirement and instead the
beneficial owners of such entities are counted as holders for this purpose. The
Board of Trustees may, but in no event will be required to, waive the Ownership
Limit or any other limit provided in the Declaration of Trust with respect to a
particular shareholder if it determines that it will not jeopardize the
Company's status as a REIT and the Board of Trustees otherwise decides such
action would be in the best interest of the Company. As a condition of such
waiver, the Board of Trustees must obtain a ruling from the IRS or an opinion of
counsel satisfactory to it with respect to preserving the REIT status of the
Company.
The Company has waived the Ownership Limit set forth in the Declaration of
Trust with respect to the Equity Shares to permit Security Capital Preferred
Growth to own, at any one time, up to 16 percent, in value or number, of the
total outstanding Equity Shares. Additionally, the Company has waived Ownership
Limit to permit Long Leaf Partners Realty Fund to purchase 2,600,000 common
shares.
The Declaration of Trust further prohibits (i) any person from actually or
constructively owning shares of beneficial interest of the Company that would
result in the Company being "closely held" under Section 856(h) of the Code
(I.E., a violation of the five or fewer requirement) or otherwise cause the
Company to fail to qualify as a REIT and (ii) any person from transferring
shares of beneficial interest of the Company if such transfer would result in
shares of beneficial interest of the Company being owned by fewer than 100
persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of beneficial interest of the Company that will
or may violate any of the foregoing restrictions on transferability of ownership
is required to give notice immediately to the Company and provide the Company
with any other information as the Company may request in order to determine the
effect of such transfer on the Company's status as a REIT.
If any purported transfer of Equity Shares of the Company or any other event
would otherwise result in any person violating the Ownership Limit or such other
limit as provided in the Declaration of Trust, 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 or such other limit as provided in the Declaration of Trust. The
Prohibited Transferee will acquire no right or interest in such excess shares.
Any excess shares described above will be converted automatically into an equal
number of Excess Shares (the "Shares-in-Trust") and transferred automatically,
by operation of law, to a trust (the "Share Trust"), the beneficiary of which
will be selected by the Company (the "Beneficiary"). Such automatic transfer
will be deemed to be effective as of the close of business on the business day
prior to the date of such violative transfer.
At any time after the expiration of a 90-day period which commences upon the
receipt of notice from the Company of the transfer of Shares-in-Trust to the
Share Trust and during which the Company will have the right to purchase such
Shares-in-Trust, the trustee of the Share Trust (who will be designated by the
Company and be unaffiliated with the Company or any Prohibited Transferee) will
have the right to sell such Shares-in-Trust to a person or entity who could own
such shares without violating the Ownership Limit or such other limit as
provided in the Declaration of Trust and distribute to the Prohibited Transferee
an amount equal to the lesser of the price paid by the Prohibited Transferee for
such Shares-in-Trust or the sales proceeds received by the Share Trust for such
Shares-in-Trust. In the case of any Shares-in-Trust issued as a result of 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 Shares-in-Trust to a qualified
person or entity and distribute to the Prohibited Transferee an amount equal to
the lesser of the Market Price (as defined in the Declaration of Trust) of such
Shares-in-Trust as of the date of such event or the sales proceeds received by
the trust for such Shares-in-Trust. In either case, any proceeds in excess of
the amount distributable to the Prohibited Transferee will be distributed to the
Beneficiary.
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Prior to a sale of any such Shares-in-Trust by the Share 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 Shares-in-Trust,
and also will be entitled to exercise all voting rights with respect to such
Shares-in-Trust. Subject to Maryland law, effective as of the date that such
Shares-in-Trust have been transferred to the Share Trust, (i) any vote cast by a
Prohibited Transferee prior to the discovery by the Company that such
Shares-in-Trust have been transferred to the Share Trust will be void and of no
force or effect and (ii) the trustee will have the authority to recast such vote
in accordance with the desires of the trustee acting for the benefit of the
Beneficiary. Any dividend or other distribution paid to the Prohibited
Transferee (prior to the discovery by the Company that such Shares-in-Trust have
been automatically transferred to the Share Trust as described above) will be
required to be repaid to the trustee for distribution to the Beneficiary.
In addition, Shares-in-Trust held in the Share Trust will 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 Share 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 will have
the right to accept such offer for a period of 90 days.
If any purported transfer of Equity Shares 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
Equity Shares.
The foregoing restrictions on transferability and ownership will not apply
if the Board of Trustees 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 and such
determination is approved by an affirmative vote of two-thirds of the votes
entitled to be cast on such matter at a regular or special meeting of the
shareholders of the Company. Except as otherwise described above, any change in
the Ownership Limit would require an amendment to the Declaration of Trust.
Subject to certain limited exceptions, amendments to the Declaration of Trust
require the affirmative vote of holders owning at least two-thirds of the shares
of beneficial interest of the Company outstanding and entitled to vote thereon.
All certificates representing Equity Shares of the Company currently bear a
legend referring to the restrictions described above.
If the transfer restrictions discussed above are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulation, then the
intended transferee of any Excess Shares may be deemed, at the option of the
Company, to have acted as agent on behalf of the Company in acquiring such
Excess Shares and to hold such Excess Shares on behalf of the Company.
Under the Declaration of Trust, every owner of more than 5% (or such lower
percentage as required by the Code or Treasury Regulations) of the outstanding
Equity Shares must file, within 30 days after January 1 of each year, a written
notice with the Company containing information regarding their ownership of such
shares. Under current Treasury Regulations, the percentage will be set between
one-half of 1% and 5%, depending upon the number of record holders of the
Company's shares. Further, each shareholder must upon demand disclose to the
Company in writing any information the Company may request in order to determine
the effect, if any, of such shareholder's actual and constructive ownership of
Equity Shares on the Company's status as a REIT.
The foregoing ownership limitations may have the effect of precluding
acquisition of control of the Company without the consent of the Board of
Trustees and, consequently, shareholders may be unable to realize a premium for
their shares over the then-prevailing market price which is customarily
associated with such acquisitions and to ensure compliance with the Ownership
Limit, or such other limit as provided in the Declaration of Trust.
These restrictions will not preclude settlement for transactions through the
NYSE.
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CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and of
the Declaration of Trust and the Bylaws of the Company. This summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Maryland General Corporation Law (the "MGCL"), Title 8 of the
Corporate and Associations Article of the Annotated Code of Maryland, as amended
(the "Maryland REIT Law"), the Declaration of Trust, the Articles Supplementary
to the Declaration of Trust relating to the Redeemable Preferred Shares and the
Bylaws, forms of which are incorporated by reference as exhibits to the
Registration Statement of which this Prospectus is a part.
CLASSIFICATION OF THE BOARD OF TRUSTEES
The Declaration of Trust provides that the number of trustees of the Company
will be seven (subject to the rights of the holders of Convertible Preferred
Shares and the Redeemable Preferred Shares to elect additional trustees upon the
occurrence of certain events), which number may be increased or decreased
pursuant to the Bylaws, but shall not be fewer than three. The Bylaws currently
provide that the Board of Trustees will consist of not fewer than three nor more
than thirteen trustees. Any vacancy will be filled, at any regular meeting or at
any special meeting called for that purpose, by the affirmative vote of a
majority of the remaining trustees, even though less than a quorum of the Board
of Trustees may exist.
Pursuant to the terms of the Declaration of Trust, the Board of Trustees is
divided into three classes as nearly equal in size as practicable. One class
held office initially for a term expiring at the annual meeting of shareholders
held on May 22, 1998, at which meeting the two trustees comprising such class
were each re-elected to a new three-year term expiring in 2001. A second class
of the Board of Trustees will hold office initially for a term expiring at the
annual meeting of shareholders to be held in 1999. A third class will hold
office initially for a term expiring at the annual meeting of shareholders to be
held in 2000. As the term of each class expires, trustees in that class will be
elected for a term of three years or until their successors are duly elected and
qualified, and the trustees in the other two classes will continue in office.
The Company believes that classification of the Board of Trustees will help to
assure the continuity and stability of the Company's business strategies and
policies as determined by the Board of Trustees.
The classified board provision could have the effect of making the removal
of incumbent trustees more time-consuming and difficult. This 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 shareholders. At least two annual meetings of shareholders, instead of
one, will generally be required to effect a change in a majority of the Board of
Trustees. Thus, the classified board provision could increase the likelihood
that incumbent trustees will retain their positions. Holders of common shares
have no right to cumulative voting for the election of trustees. Consequently,
at each annual meeting of shareholders, the holders of a majority of the common
shares will be able to elect all of the successors of the class of trustees
whose term expires at that meeting. See "Risk Factors."
REMOVAL OF TRUSTEES
While the Declaration of Trust empowers the Company's shareholders to fill
vacancies in the Board of Trustees that are caused by the removal of a trustee,
the Declaration of Trust also precludes shareholders from removing incumbent
trustees except upon a substantial affirmative vote. Specifically, the
Declaration of Trust provides that a trustee may be removed only for cause and
only by the affirmative vote of at least two-thirds of the votes then entitled
to be cast in the election of trustees. Under the Maryland REIT law, 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 in the Bylaws authorizing the Board of Trustees to fill vacant
trusteeships, precludes shareholders from removing incumbent trustees except
upon a substantial affirmative vote and filling the vacancies created by such
removal with their own nominees.
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BUSINESS COMBINATIONS
Under the MGCL, as applicable to Maryland real estate investment trusts,
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 Interested
Shareholder or an affiliate thereof are prohibited for five years after the most
recent date on which the Interested Shareholder became an Interested
Shareholder. Thereafter, any such business combination must be recommended by
the Board of Trustees and approved by the affirmative vote of at least (a) 80.0%
of the votes entitled to be cast by holders of the Company's outstanding voting
shares of beneficial interest and (b) two-thirds of the votes entitled to be
cast by holders of the Company's outstanding voting shares of beneficial
interest other than shares held by the Interested Shareholder with whom the
business combination is to be effected, unless, among other things, the
Company's shareholders receive a minimum price (as defined in the MGCL) for
their shares of beneficial interest and the consideration is received in cash or
in the same form as previously paid by the Interested Shareholder for its
shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the Board of Trustees of the
Company prior to the time that the Interested Shareholder becomes an Interested
Shareholder. As permitted by the MGCL, the Board of Trustees of the Company has
opted out of the business combinations provisions of the MGCL with respect to
any business combination involving PGI, the Primestone Joint Venture or any of
the Contributors, or any of their respective affiliates (including Mr. Reschke).
In addition, the Partnership Agreement requires that any merger or sale of all
or substantially all of the assets of the Operating Partnership be approved by
the holders of at least 50.0% of the Common Units, including the Common Units
held by the Company.
CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to Maryland real estate investment trusts, provides
that "control shares" of a Maryland real estate investment trust 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 of beneficial interest owned by the acquiror or by officers or
trustees who are employees of the trust.
"Control shares" are voting shares which, if aggregated with all other such
shares 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
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing trustees 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 or more of all voting power. Control shares
do not include shares the acquiring person is then entitled to vote as a result
of having previously obtained shareholder 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 Trustees to call a special meeting of shareholders to be
held within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the Company may itself present the question at
any shareholders' meeting.
If voting rights are not approved at the shareholders' 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 trust may
redeem any or all of the control shares (except those for which voting rights
have previously 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 shareholders at
which the voting rights of such shares of beneficial interest are considered and
not approved. If voting rights for control shares are approved at a
shareholders' meeting and the acquiror
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becomes entitled to vote a majority of the shares of beneficial interest
entitled to vote, all other shareholders may exercise appraisal rights. The fair
value of the shares of beneficial interest 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 trust's declaration
of trust 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
beneficial interest. There can be no assurance that such provision will not be
amended or eliminated at any point in the future.
If the foregoing exemption in the Bylaws is rescinded, the control share
acquisition statute could have the effect of discouraging offers to acquire the
Company and of increasing the difficulty of consummating any such offer.
AMENDMENT TO THE DECLARATION OF TRUST
The Declaration of Trust, with limited exceptions, may be amended with the
affirmative vote of the holders of not less than a majority of the aggregate
number of shares of beneficial interest outstanding and entitled to vote thereon
voting generally in the election of trustees. The provisions relating to the
classification of the Board of Trustees and removal of trustees may be amended
only by the affirmative vote of the holders of not less than two-thirds of the
aggregate number of shares of beneficial interest outstanding and then entitled
to vote thereon voting generally in the election of trustees.
Under the Maryland REIT Law, a declaration of trust may permit the trustees,
by a two-thirds vote, to amend the declaration of trust from time to time to
qualify as a REIT under the Code or the Maryland REIT Law without the
affirmative vote or written consent of the shareholders. The Company's
Declaration of Trust permits such action by the Board of Trustees. Also under
the Maryland REIT Law, a declaration of trust may permit the board of trustees
to amend the declaration of trust to increase or decrease the aggregate number
of shares of beneficial interest or the number of shares of any class without
shareholder approval. Pursuant to this statute, the Declaration of Trust
authorizes the Board of Trustees to increase or decrease the aggregate number of
shares of beneficial interest of the Company or the number of shares of
beneficial interest of any class of beneficial interest of the Company without
shareholder approval.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
The Bylaws provide that:
(a) with respect to an annual meeting of shareholders, nominations of
persons for election to the Board of Trustees and the proposal of business
to be considered by shareholders may be made only (i) pursuant to the
Company's notice of the meeting, (ii) by the Board of Trustees or (iii) by a
shareholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Bylaws; and
(b) with respect to special meetings of shareholders, only the business
specified in the Company's notice of meeting may be brought before the
meeting of shareholders and nominations of persons for election to the Board
of Trustees may be made only (i) pursuant to the Company's notice of
meeting, (ii) by the Board of Trustees or (iii) provided that the Board of
Trustees has determined that trustees shall be elected at such meeting, by a
shareholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Bylaws.
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The provisions in the Declaration of Trust on classification of the Board of
Trustees, amendments to the Declaration of Trust and removal of trustees and, if
the applicable provision in the Bylaws is rescinded, the control share
acquisition provisions of the MGCL, and the advance notice provisions of the
Bylaws could have the effect of discouraging a takeover or other transaction
which shareholders might believe to be otherwise in their best interests.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland REIT, the Maryland REIT Law
requires that the Company hold, either directly or indirectly, at least 75.0% of
the value of its assets in real estate assets, mortgages or mortgage related
securities, government securities, cash and cash equivalent items, including
high-grade short-term securities and receivables. The Maryland REIT Law also
prohibits using or applying land for farming, agricultural, horticultural or
similar purposes.
MEETINGS OF SHAREHOLDERS
The Declaration of Trust and the Bylaws provide for annual meetings of
shareholders to elect the Board of Trustees and transact any other business as
may properly be brought before the meeting. Special meetings of shareholders may
be called by the President, the Board of Trustees or the Chairman of the Board
and will be called at the request in writing of the holders of 50.0% or more of
the outstanding shares of beneficial interest of the Company entitled to vote.
The Bylaws provide that any action required or permitted to be taken at a
meeting of shareholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
shareholder entitled to vote on the matter and a written waiver of any right to
dissent is signed by each shareholder entitled to notice of the meeting but not
entitled to vote at it.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of common shares who purchases such
shares in the offering of the Offered Shares. Winston & Strawn has acted as tax
counsel ("Tax Counsel") to the Company in connection with the offering and the
preparation of this prospectus. This summary should not be construed as tax
advice. The discussion contained herein does not address all aspects of federal
income taxation that may be relevant to particular holders in light of their
personal investment or tax circumstances, or to certain types of holders
(including, without limitation, insurance companies, financial institutions,
broker-dealers, persons whose functional currency is other than the United
States dollar, persons who hold the common shares as part of a straddle,
hedging, or conversion transaction or, except as specifically described herein,
tax-exempt entities and foreign persons) who are subject to special treatment
under the federal income tax laws. In addition, this summary is generally
limited to investors who will hold the common shares as "capital assets"
(generally, property held for investment) within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code").
The statements in this summary are based on current provisions of the Code,
Treasury Regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. The provisions of the Code, the
Treasury Regulations promulgated thereunder and the administrative and judicial
interpretations thereof that concern REITs are highly technical and complex, and
this summary is qualified in its entirety by such Code provisions, Treasury
Regulations, and administrative and judicial interpretations. No assurance can
be given that future legislative, judicial, or administrative actions or
decisions will not affect the accuracy of any statements in this summary. In
addition, no ruling will be sought from the Internal Revenue Service (the "IRS")
with respect to any matter discussed herein, and there can be no assurance that
the IRS or a court will agree with the statements made herein.
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EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALE OF COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED
AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Company has elected to be taxed as a REIT under Sections 856 through 860
of the Code and the applicable Treasury Regulations promulgated thereunder,
which together set forth the requirements for qualifying as a REIT (the "REIT
Requirements"), beginning with its taxable year ended December 31, 1997. The
Company believes that it is organized and has operated and will continue to
operate in a manner to qualify for taxation as a REIT under the Code. No
assurance can be given, however, that the Company has actually operated in a
manner to qualify as a REIT or will continue to operate in a manner to remain
qualified as a REIT.
Subject to the qualifications stated herein and in its opinion, Tax Counsel
has given the Company an opinion that the Company is organized in conformity
with the requirements for qualification as a REIT under the Code, and the
Company's method of operation has enabled it to meet the requirements for
qualification and taxation as a REIT under the Code and its method of operation
enables it to continue to meet the requirements for qualification as a REIT. An
opinion of counsel is not binding on the IRS or a court and there can be no
assurance that the IRS or a court will not take a position different from that
expressed by Tax Counsel. It also must be emphasized that Tax Counsel's opinion
is based on various assumptions and is conditioned upon numerous representations
made by the Company and the Operating Partnership as to factual matters,
including those related to their businesses and properties as set forth in this
Prospectus. Tax Counsel has not independently verified the Company's
representations. Moreover, the Company's qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis the actual
operating results, distribution levels, diversity of ownership and the various
other qualification tests imposed by the Code as discussed below. Tax Counsel
will not review the Company's compliance with these tests on a continuing basis.
Accordingly, no assurance can be given that the actual results of the Company's
operations for any given taxable year will satisfy the requirements for
qualification and taxation as a REIT. See "--Failure to Qualify."
TAXATION OF THE COMPANY
For any taxable year in which the Company qualifies for taxation as a REIT,
it generally will not be subject to federal corporate income tax on that portion
of its ordinary income or capital gain that is currently distributed to its
shareholders. The REIT provisions of the Code generally allow a REIT to deduct
dividends paid to its shareholders in calculating its taxable income. This
deduction for dividends paid to shareholders substantially eliminates the
federal "double taxation" on earnings (once at the corporate level and once
again at the shareholder level) that generally results from an investment in a
corporation.
Even if the Company continues to qualify for taxation as a REIT, it may be
subject to federal income tax in certain circumstances. First, the Company will
be taxed at regular corporate rates on any undistributed "REIT taxable income"
and undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the corporate "alternative minimum tax" on its items
of tax preference, if any. Third, if the Company has (i) net income from the
sale or other disposition of "foreclosure property" which is held primarily for
sale to customers in the ordinary course of business or (ii) other nonqualifying
income from foreclosure property, the Company will be subject to tax on such
income at the highest regular corporate rate (currently 35%). 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
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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 nonetheless maintains its qualification as a REIT because certain
other requirements are met, the Company will be subject to a 100% tax on the
greater of the amount by which the Company fails the 75% or the 95% test,
multiplied by a fraction intended to reflect the Company's profitability. Sixth,
if the Company should fail to distribute for 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 will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
However, to the extent the Company elects to retain and pay income tax on net
long-term capital gains it received during the year such amounts will be treated
as having been distributed for purposes of the 4.0% excise tax. Finally, if the
Company acquires any asset from a C corporation (I.E., generally a corporation
subject to full corporate level tax) in a transaction in which the basis of the
asset in the Company's hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation, and the Company
subsequently recognizes gain on the disposition of such asset during the
ten-year period (the "Recognition Period") beginning on the date on which the
asset was acquired by the Company, then, pursuant to guidelines issued by the
IRS, the C corporation from which the Company acquired the asset will be taxable
on the amount of gain that would have been realized if the C corporation had
liquidated on the last day before the date on which the Company acquired the
asset. Alternatively, the Company may elect, in lieu of the treatment described
above, to be subject to tax at the highest regular corporate tax rate on the
excess, if any, of (i) the fair market value of the asset as of the beginning of
the applicable Recognition Period, over (ii) the Company's adjusted basis in
such asset as of the beginning of such Recognition Period (I.E., "built-in
gain"). The Company also will be taxed on any built-in gains during the
Recognition Period attributed to the disposition of assets of an acquired
corporation which is a "qualified REIT subsidiary." See "--Requirements for
Qualification--Qualified REIT Subsidiary."
If the Company invests in properties in foreign countries, the Company's
profits from those investments will generally be subject to tax in the countries
where such properties are located. The precise nature and amount of any taxation
will depend on the laws of the countries where the properties are located. If
the Company satisfies the annual distribution requirements for qualification as
a REIT and is therefore not subject to federal corporate income tax on that
portion of its ordinary income and capital gain that is currently distributed to
its shareholders, the Company will generally not be able to recover the cost of
any foreign tax imposed on profits from its foreign investments by claiming
foreign tax credits against its U.S. tax liability on such profits. Moreover, a
REIT is not able to pass foreign tax credits through to its shareholders.
The Company uses the calendar year for both federal income tax purposes and
financial reporting purposes.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must have met and continue to meet the
requirements, discussed below, relating to the Company's organization, the
sources of its gross income, the nature of its assets, and the level of
distributions to its shareholders.
ORGANIZATIONAL REQUIREMENTS
The Code requires that a REIT be 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;
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(iii) which would be taxable as a domestic corporation but for compliance
with the REIT requirements;
(iv) which is neither a financial institution nor an insurance company
subject to certain special provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons;
(vi) at any time during the last half of each taxable year not more than 50%
in value of the outstanding stock or shares of beneficial interest of
which is owned, directly or indirectly through the application of
certain attribution rules, by or for five or fewer individuals (as
defined in the Code to include certain tax-exempt entities other than,
in general, qualified domestic pension funds); and
(vii) which meets certain other tests, described below, regarding the nature
of its income and assets and distribution requirements.
The Code provides that conditions (i) through (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 12 months, or during a proportionate part of
a taxable year of less than 12 months. A corporation may not elect to become a
REIT unless its taxable year is a calendar year.
The Company has issued sufficient shares to enough holders to allow the
Company to satisfy the requirement set forth in (v) above (the "100 holder"
requirement). For purposes of determining ongoing compliance with the 100 holder
requirement, Treasury Regulations require the Company to issue letters to
certain shareholders demanding information regarding the amount of shares each
such shareholder actually or constructively owns ("shareholder demand letters").
Although any failure by the Company to comply with the shareholder demand
letters requirement should not jeopardize its REIT status, such failure would
subject the Company to financial penalties. A list of those shareholders failing
or refusing to comply with this demand must be maintained as part of the
Company's records. A shareholder who fails or refuses to comply with the demand
must submit a statement with its tax return disclosing the actual ownership of
the shares and other information.
As set forth in (vi) above, to qualify as a REIT, the Company must also
satisfy the requirement set forth in Section 856(a)(6) of the Code that it not
be closely held. The Company will not be closely held so long as at all times
during the last half of any taxable year of the Company (other than the first
taxable year for which the REIT election is made) not more than 50% in value of
its outstanding shares of beneficial interest is owned, directly or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain tax-exempt
entities, other than, in general, qualified domestic pension funds) (the "5/50
Rule"). Although the Company's Declaration of Trust contains certain
restrictions on the ownership and transfer of the Equity Shares (which include
the Convertible Preferred Shares), the restrictions do not ensure that the
Company will be able to satisfy the "five or fewer" requirement. If the Company
fails to satisfy the "five or fewer" requirement, the Company's status as a REIT
will terminate, and the Company will not be able to prevent such termination.
However, for taxable years beginning after August 5, 1997, if the Company
complies with the procedures prescribed in Treasury Regulations for issuing
shareholder demand letters and does not know, or with the exercise of reasonable
diligence would not have known, that the 5/50 Rule was violated, the requirement
that the Company not be closely held will be deemed to be satisfied for the
year. See "Certain Federal Income Tax Considerations--Failure to Qualify."
OWNERSHIP OF A PARTNERSHIP INTEREST
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership corresponding to the REIT's capital interest in
such partnership and is deemed to earn such proportionate share of the income of
the
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partnership. In addition, the assets and gross income of the partnership retain
the same character in the hands of the REIT for purposes of the REIT
Requirements, including satisfying the gross income tests and the asset tests.
Accordingly, the Company's proportionate share of the assets, liabilities and
items of income of the Operating Partnership, including the Operating
Partnership's proportionate share of the assets, liabilities and items of income
of each Property Partnership, are treated as assets, liabilities and items of
income of the Company for purposes of applying the REIT Requirements, provided
that the Operating Partnership and each of the Property Partnerships are treated
as partnerships for federal income tax purposes. See "Certain Federal Income Tax
Considerations--Tax Aspects of the Company's Investments in
Partnerships--Partnership Classification."
QUALIFIED REIT SUBSIDIARY
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
within the meaning of section 856(i) of the Code, that subsidiary is disregarded
for federal income tax purposes, and all assets, liabilities, and items of
income, deduction, and credit of the subsidiary are treated as assets,
liabilities and such items of the REIT itself. A "qualified REIT subsidiary" is
a corporation all of the capital stock of which is owned by the REIT. However,
if an existing corporation is acquired by a REIT and becomes a "qualified REIT
Subsidiary" of such REIT, all of its pre-acquisition earnings and profits must
be distributed before the end of the REIT's taxable year. Any corporation formed
directly by the Company to act as a general partner in any of the Property
Partnerships will be a "qualified REIT subsidiary" and thus all of such
subsidiary corporation's assets, liabilities, and items of income, deduction,
and credit will be treated as assets, liabilities, and items of income,
deduction and credit of the Company.
INCOME TESTS
To maintain its qualification as a REIT, the Company must satisfy two gross
income requirements annually. 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 and from dividends, interest, and gain from the sale or
disposition of stock or securities or from any combination of the foregoing.
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 received or accrued with
respect to any property must not be based in whole or in part on the income or
profits derived by any person from such property, although 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 gross
receipts or gross sales. Rents received from a tenant that are based on the
tenant's income from the property will not be treated as rents based on income
or profits and thus excluded from the term "rents from real property" if the
tenant derives substantially all of its income with respect to such property
from the leasing or subleasing of substantially all of such property, provided
that the tenant receives from subtenants only amounts that would be treated as
rents from real property if received directly by a REIT. Second, rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the REIT, or an owner of 10% or more of the REIT, directly
or constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of 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, a REIT generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an "independent contractor" from whom the REIT
derives no income. However, the Company (or its affiliates) are
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permitted to directly perform services that are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered rendered for the convenience of the occupant of the
property. A de minimis exception allows a REIT to provide non-customary services
to its tenants and not disqualify income as rents from real property so long as
the value of the impermissible services does not exceed 1.0% of the gross income
for the property. For these purposes, the amount the Company receives that is
attributable to impermissible services may not be valued at less than 150% of
the Company's direct cost of providing these services.
Substantially all of the gross income of the Company is attributable to
investments in real property and specifically to rents attributable to and gains
from the disposition of real property. The Company believes that it does not
receive rents based on the net income or profits of a tenant. Moreover, the
Company believes that it does not receive rents in excess of a DE MINIMIS amount
(generally rent from certain office space leased to PGI affiliates) from a
Related Party Tenant. The Company also believes that it does not receive any
rent attributable to personal property leased in connection with a lease of real
property that exceeds 15% of the total rents received under any such lease (for
this purpose the Company took into account as personal property the overhead
cranes in use at certain of its industrial properties).
The Operating Partnership provides certain services with respect to the
Company's properties, but does not satisfy the "independent contractor"
requirements described above. To the extent necessary to preserve the Company's
status as a REIT, the Operating Partnership will arrange to have services
provided by independent contractors from whom the Company or Operating
Partnership does not derive or receive any income.
The Operating Partnership also receives fees in exchange for the performance
of certain usual and customary services relating to properties not owned
entirely by the Operating Partnership. The ratable portion of these fees
attributable to the part of the property not owned by the Operating Partnership
does not constitute qualifying income under the 75% or 95% gross income tests.
The remainder of these fees is ignored under the 75% and 95% gross income test
so long as the Company has a significant interest in such property. The Company
believes that the aggregate amount of such nonqualifying fees (and any other
nonqualifying income) in any taxable year will not exceed the limits on
nonqualifying income under the gross income tests described above.
The Company's properties include a 398-space parking facility for which the
Company, through the Operating Partnership, receives fees. This parking facility
is operated through an independent contractor from whom the Company derives no
income.
The Services Company, pursuant to contractual arrangements, performs
management services with respect to properties not owned by the Company or the
Operating Partnership. The health club located in the 77 West Wacker Drive
Building (which is available for use at certain membership fees by employees of
tenants as well as by the general public) is owned by the Services Company. The
income from such services and the revenues from the health club is taxed to the
Services Company at the regular corporate tax rates. Note payments and dividends
paid by the Services Company to the Operating Partnership will constitute
qualifying income for purposes of the 95% gross income test but not for the
purposes of the 75% gross income test.
Should the potential amount of nonqualifying income in the future create a
risk as to the qualification of the Company as a REIT, the Company intends to
take action to avoid not qualifying as a REIT. The Company may for instance
transfer certain nonqualifying activities to a taxable corporation such as the
Services Company, from which it would receive dividends. If this should occur,
the Operating Partnership would be entitled to receive dividends as a
stockholder of such corporation. The amount of dividends available for
distribution to the Company would be reduced below the comparable amount of fee
income that would otherwise be received by the Operating Partnership because
such a corporation would be subject to a corporate level tax on its taxable
income, thereby reducing the amount of cash available for distribution.
Furthermore, the Company would be required to structure the stock interest owned
by the
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Operating Partnership in such a corporation to ensure that the various asset
tests described below were not violated (I.E., the Operating Partnership would
not own more than 10% of the voting securities of such corporation and the value
of the stock interest would not exceed 5% of the value of the Company's total
assets).
If the Company fails to satisfy one or both of the 75% or the 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 (i) the Company's failure
to meet such test(s) was due to reasonable cause and not due to willful neglect,
(ii) the Company reported the nature and amount of each item of its income
included in the test(s) for such taxable year on a schedule attached to its
return, and (iii) 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 earns 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. As discussed above in
"--Taxation of the Company" even if these relief provisions apply, the Company
will still be subject to a 100% tax on the greater of the amount by which the
Company failed the 75% or the 95% test, multiplied by a fraction intended to
reflect the Company's profitability. See "--Failure to Qualify."
ASSET TESTS
At the close of each quarter of its taxable year, the Company also must
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 assets
held by the Operating Partnership and each of the Operating Partnership's
property owning subsidiaries (each individually, a "Property Partnership") in
which the Operating Partnership is a partner, must be represented by real estate
assets (which for this purpose includes stock or debt instruments held for not
more than one year purchased with proceeds of a stock offering or a long-term
(at least five years) debt offering of the Company), cash, cash items and U.S.
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. By virtue of its partnership interest in
the Operating Partnership, the Company will be deemed to own for purposes of the
three asset tests its pro rata share of the assets of the Operating Partnership,
and the assets of each Property Partnership in which the Operating Partnership
is a partner. The Operating Partnership owns 100% of the preferred stock of the
Services Company and the note issued by the Services Company, but none of that
corporation's voting stock. The Company does not believe that its pro rata share
of the stock and securities (I.E., the note) owned by the Operating Partnership
in such corporation exceeds 5% of the total value of the Company's assets. No
independent appraisals will be obtained to support this conclusion, and Tax
Counsel, in rendering its opinion as to the qualification of the Company as a
REIT, is relying on the Company's representation that the preferred stock and
note issued by the Services Company and held by the Operating Partnership does
not cause the Company to fail the 5% value test.
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 any of 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, the failure can be cured by
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
action within 30 days after the close of any quarter as may be required to cure
any noncompliance.
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ANNUAL DISTRIBUTION REQUIREMENTS
To continue to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its shareholders each year 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 the
Company's net capital gain) plus (B) 95% of the net income (after tax), if any,
from foreclosure property, minus (ii) the sum of certain items of non-cash
income. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. A distribution which is not pro rata
within a class of beneficial interest entitled to a dividend or which is not
consistent with the rights to distributions between classes of beneficial
interest (a "preferential dividend") is not taken into consideration for the
purpose of meeting the distribution requirement. Accordingly, the payment of a
preferential dividend could affect the Company's ability to meet this
distribution requirement.
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 on the undistributed amount at
regular capital gains or ordinary corporate tax rates, as the case may be.
Furthermore, if the Company should fail to distribute for 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, plus (iii) any undistributed
taxable income from prior periods, the Company will be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed. However, to the extent the Company elects to retain and pay income
tax on net long-term capital gains it received during the year such amounts will
be treated as having been distributed for purposes of the 4.0% excise tax.
The Company has and intends to continue to make timely distributions
sufficient to satisfy all of the annual distribution requirements. The Company
anticipates that it will generally have sufficient cash or liquid assets to
enable it to satisfy these distribution requirements. It is possible that, from
time to time, the Company may not have sufficient cash or other liquid assets to
meet the 95% distribution requirement due to the insufficiency of cash flow from
the Operating Partnership in a particular year or to timing differences between
the actual receipt of income and actual payment of deductible expenses, on the
one hand, and the inclusion of such income and deduction of such expenses in
computing the Company's "REIT taxable income," on the other hand. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement, the Company may find it necessary to cause the
Operating Partnership to make distributions, to borrow funds, or to liquidate
assets.
If the Company fails to meet the 95% distribution requirement as a result of
an adjustment to the Company's tax return by the IRS upon audit, the Company may
retroactively cure the failure by paying "deficiency dividends" to its
shareholders in a later year, which may then be included in the Company's
deduction for dividends paid for the earlier year. The Company may thus be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest to the IRS based upon the amount of
any deduction taken for deficiency dividends.
PENALTY TAX ON PROHIBITED TRANSACTIONS
The Company's share of any gain realized on the sale of any property held as
inventory or otherwise primarily for sale to customers in the ordinary course of
its trade or business generally will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. 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, through the Property Partnerships, intends to hold the
Company's properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, developing, owning and operating the
properties and to make such occasional sales of the Properties as are
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consistent with the Company's investment objectives. Based upon such investment
objectives, the Company believes that in general the Properties should not be
considered inventory or other property held primarily for sale to customers in
the ordinary course of a trade or business and that the amount of income from
prohibited transactions, if any, will not be material.
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 shareholders in any year in which the
Company fails to qualify as a REIT will not be required and, if made, will not
be deductible by the Company. As a result, the Company's failure to qualify as a
REIT will reduce the cash available for distribution by the Company to its
shareholders. In addition, if the Company fails to qualify as a REIT, all
distributions to the Company's shareholders will be taxable as ordinary dividend
income to the extent of the Company's then current and accumulated earnings and
profits, and, subject to certain limitations in the Code, corporate distributees
may be eligible for the dividends-received deduction. Unless entitled to relief
under specific statutory provisions, the Company also will be ineligible for
qualification as a REIT during the four taxable years following the year during
which qualification was lost. It is not possible to determine whether the
Company would be entitled to such statutory relief in all circumstances.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS
The Company holds direct or indirect interests in the Operating Partnership
and each of the Property Partnerships (each individually a "Partnership" and,
collectively, the "Partnerships"). The following discussion summarizes certain
federal income tax considerations applicable solely to the Company's investments
in the Partnerships. The discussion does not address state or local tax laws or
any federal tax laws other than income tax laws.
PARTNERSHIP CLASSIFICATION
The Company will include in its income its distributive share of the income
and will deduct its distributive share of the losses, of each of the
Partnerships only if each such Partnership is classified for federal income tax
purposes as a partnership rather than as an association (or publicly-traded
partnership) taxable as a corporation.
Prior to January 1, 1997, an organization formed as a partnership was
treated as a partnership for federal income tax purposes rather than a
corporation only if it had no more than two of the four corporate
characteristics that the Treasury Regulations in effect at that time used to
distinguish a partnership from a corporation for tax purposes. These four
characteristics were (i) continuity of life, (ii) centralization of management,
(iii) limited liability and (iv) free transferability of interests. Under final
Treasury Regulations which became effective January 1, 1997, the four factor
test has been eliminated, and an entity with two or more members formed as a
partnership under relevant state law will be taxed as a partnership for federal
income tax purposes unless it specifically elects otherwise. The final
regulations also provide that the IRS will not challenge the classification of
an existing partnership for tax periods prior to January 1, 1997 so long as (1)
the entity had a reasonable basis for its claimed classification, (2) the entity
and all its members recognized the federal income tax consequences of any
changes in the entity's classification within the 60 months prior to January 1,
1997, and (3) neither the entity nor any member of the entity had been notified
in writing on or before May 8, 1996, that the classification of the entity was
under examination by the IRS.
The Company believes that each Partnership formed on or after January 1,
1997 will be treated as a partnership for federal income tax purposes because
each was or will be formed as a partnership under state law and will have two or
more partners. Further, for each Partnership that was formed prior to
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January 1, 1997, the Company expects that such Partnership will be treated as a
partnership for federal income tax purposes for the periods before January 1,
1997 as (1) such Partnership had a reasonable basis for its claimed
classification, (2) such Partnership and all its partners recognized the federal
income tax consequences of any changes in the partnership's classification
within the 60 months prior to January 1, 1997, and (3) neither the Partnership
nor any member of the Partnership had been notified in writing on or before May
8, 1996, that the classification of the entity was under examination by the IRS.
Additionally, the Company believes that none of the Partnerships will be
treated as publicly traded partnerships within the meaning of Code Section 7704
that is taxed as a corporation for federal income tax purposes because, under
the applicable Treasury Regulations, none of the interests in the Partnerships
are registered under the Securities Act or traded on an established securities
market and none of the Partnerships have more than 100 partners for purposes of
Code Section 7704 (or will otherwise fall within one of the other "safe harbors"
for the Partnership to avoid being treated as having interests which are
"readily tradeable on a secondary market (or the substantial equivalent
thereof)"). The Company further believes that none of the Partnerships will be
treated as a publicly traded partnership on the basis of the gross income
exception that 90% or more of its annual gross income will be from certain
passive sources, such as rents from real property, interest, and the sale or
disposition of real property and capital assets, and that none of the
Partnerships would be described as an investment company if it were a domestic
corporation.
If for any reason any of the Partnerships were taxable as a corporation
rather than as a partnership for federal income tax purposes, the character of
the Company's assets and items of gross income would change, and, as a result,
the Company would most likely be unable to satisfy the income and asset tests,
which would thus prevent the Company from qualifying as a REIT. In addition, any
change in the status for tax purposes of any of the Partnerships might be
treated as a taxable event, in which case the Company could incur a tax
liability without any related cash distribution. Further, if any of the
Partnerships were to be treated as an association taxable as a corporation,
items of income, gain, loss, deduction and credit of such Partnership would not
pass through to its partners; instead, the Partnership would be taxable as a
corporation, subject to entity-level taxation on its net income at regular
corporate tax rates. The partners of any such Partnership would be treated for
federal income tax purposes as stockholders, with distributions to such partners
being treated as dividends. See "--Requirements for Qualification--Income Tests"
and "--Asset Tests."
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
PARTNERS, NOT PARTNERSHIPS, SUBJECT TO TAX
A partnership (that is not a publicly traded partnership) is not subject to
tax as an entity for federal income tax purposes. Rather, partners are allocated
their proportionate share of the items of income, gain, loss, deduction and
credit of the partnership, and are potentially subject to tax thereon, without
regard to whether the partners receive any distributions from the partnership.
The Company will be required to take into account its allocable share of the
foregoing items of the Partnerships for purposes of the various REIT income
tests and in the computation of its "REIT taxable income." See "--Requirements
for Qualification--Income Tests."
PARTNERSHIP ALLOCATIONS
Although a partnership agreement will generally determine the allocation of
a partnership's income and losses among the partners, such allocations will be
disregarded for tax purposes under Section 704(b) of the Code if they do not
comply with the provisions of Section 704(b) and the Treasury Regulations
promulgated thereunder. If an allocation is not recognized for federal income
tax purposes, the item subject to the allocation will be reallocated in
accordance with the partners' interests in the partnership, which will be
determined by taking into account all of the facts and circumstances relating to
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the economic arrangement of the partners with respect to such item. The Company
believes that the allocations of taxable income and loss contained in the
partnership agreements for each of the Partnerships complies with the
requirements of Section 704(b) 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 that is contributed to a
partnership (such as interests in the Property Partnerships that own the
Company's properties) in exchange for an interest in the partnership must be
allocated for federal income tax purposes 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 the contributed property at the time
of contribution and the adjusted tax basis of such property at the time of
contribution (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, including
contributions of appreciated property (including interests in the Property
Partnerships that own the Properties), by certain limited partners.
Consequently, the Partnership Agreement requires allocations of income, gain,
loss and deduction attributable to such contributed property to be made in a
manner that is consistent with Section 704(c) of the Code.
In general, these allocations tend to eliminate the Book-Tax Differences
over the life of the Partnerships by allocating to the limited partners of the
Operating Partnership, solely for tax purposes, lower amounts of depreciation
deductions and increased taxable income and gain on the sale by the Property
Partnerships of the Properties than would ordinarily be the case for economic or
book purposes. The Operating Partnership and the Company will elect to use the
"traditional method" under Treasury Regulation section 1.704-3(c) as the method
of accounting for the Book-Tax Differences with respect to properties
contributed to the Partnerships. However, this allocation method may not always
entirely rectify a Book-Tax Difference on an annual basis or with respect to a
specific taxable transaction such as a sale. Moreover, the application of
Section 704(c) principles in tiered partnership arrangements is not entirely
clear. Accordingly, the IRS may assert that a different allocation should be
used to eliminate any such Book-Tax Difference.
With respect to any property purchased by any of the Property Partnerships
subsequent to the formation of the Company, such property will initially have a
tax basis equal to its fair market value and Section 704(c) of the Code will not
apply.
DEPRECIATION DEDUCTIONS AVAILABLE TO THE OPERATING PARTNERSHIP
Certain assets owned by the Operating Partnership and the Property
Partnerships consist of property contributed by their partners. In general, when
property is contributed in a tax-free transaction under Section 721 of the Code,
the transferee partnership is treated in the same manner as the contributing
partner for purposes of computing depreciation. The effect of this rule is to
continue the historic basis, placed in service dates and depreciation methods
with respect to property contributed to a partnership. In general, this will
result in the Operating Partnership and the Property Partnerships claiming less
depreciation than if they had purchased the contributed properties in a taxable
transaction and could result in the Company being allocated less depreciation
than if the contributed properties were purchased in a taxable transaction.
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BASIS IN PARTNERSHIP INTEREST
The Company's adjusted tax basis in its partnership interest in the
Operating Partnership is generally (i) equal to the amount of cash and the basis
of any other property contributed to the Operating Partnership by the Company,
(ii) increased by (A) the Company's allocable share of the Operating
Partnership's income and (B) the Company's allocable share of indebtedness of
the Operating Partnership, and (iii) reduced, but not below zero, by (A) the
Company's allocable share of the Operating Partnership's losses and (B) the
amount of cash and the basis of any other property distributed by the Operating
Partnership to the Company, including any constructive cash distributions
resulting from a reduction in the Company's allocable share of indebtedness of
the Operating Partnership.
If the allocation to the Company of its distributive share of any loss of
the Operating Partnership would reduce the adjusted tax basis in its partnership
interest in the Operating Partnership below zero, the recognition of such excess
loss will be deferred until such time and to the extent that the Company has
sufficient tax basis in its partnership interest so that the recognition of such
loss would not reduce the amount of such tax basis below zero. To the extent
that the Operating Partnership's distributions, or any decrease in the Company's
share of the indebtedness of the Operating Partnership (each such decrease being
considered a constructive cash distribution to the Company), would reduce the
Company's adjusted tax basis in its partnership interest below zero, such excess
distributions (including such constructive distributions) would constitute
taxable income to the Company. Such distributions and constructive distributions
will normally be characterized as a capital gain, and if the Company has held
its partnership interest in the Operating Partnership for longer than the
long-term capital gain holding period (currently eighteen months), the
distributions and constructive distributions will constitute long-term capital
gains.
The rules described above with respect to basis apply equally to the
Operating Partnership in its capacity as a partner in any Property Partnership,
as well as to the Company in its capacity as a partner in any Property
Partnership.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As used herein, the term "U.S. Shareholder" means a holder of common shares
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 a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust or (iv) is an estate subject to taxation
in the United States, regardless of its source of income.
As long as the Company continues to qualify 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
U.S. Shareholders as ordinary income. Such distributions will not be eligible
for the dividends-received deduction in the case of U.S. Shareholders that are
corporations.
Dividends paid to U.S. Shareholders will be treated as portfolio income.
Such income, therefore, will not be subject to reduction by losses from passive
activities (i.e., any interest in a rental activity or in a trade or business in
which the holder does not materially participate, such as certain interests held
as a limited partner) of any holder who is subject to the passive activity loss
rules. Such distributions will, however, be considered investment income which
may be offset by certain investment expense deductions.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to U.S. Shareholders as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain of the taxable year) without regard to the period for
which a U.S. Shareholder has held his/her common shares. The highest marginal
individual income tax rate (which applies to ordinary income and gain from the
sale or exchange of capital assets held for one year or less)
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currently is 39.6%. The maximum tax rate on mid-term capital gains applicable to
noncorporate taxpayers is 28.0% for sales and exchange of assets held for more
than one year but not more than 18 months and the maximum tax rate on long-term
capital gains applicable to noncorporate taxpayers is 20.0% for sales and
exchange of assets held for more than 18 months. The maximum tax rate applicable
to noncorporate taxpayers on long-term capital gain from the sale or exchange of
"section 1250 property" (I.E., depreciable real property) is 25.0% to the extent
that such gain would have been treated as ordinary income if the property were
"section 1245 property." With respect to distributions designated by the Company
as capital gain dividends and retained capital gains that the Company is deemed
to distribute, the Company may designate (subject to certain limits) whether the
distribution is taxable to its noncorporate shareholders at a 20.0%, 25.0%, or
28.0% rate. Thus, the tax rate differential between capital gain and ordinary
income for noncorporate taxpayers may be significant. In addition, the
characterization of income as capital gain or ordinary income may affect the
deductibility of capital losses. Capital losses not offset by capital gains may
be deducted against noncorporate taxpayers' ordinary income only up to a maximum
annual amount of $3,000. Unused capital losses may be carried forward
indefinitely by noncorporate taxpayers. All net capital gain of a corporate
taxpayer is subject to tax at ordinary corporate rates. A corporate taxpayer can
deduct capital losses only to the extent of capital gains, with unused losses
being carried back three years and forward five years. U.S. Shareholders that
are corporations may, however, be required to treat up to 20.0% of certain
capital gain dividends as ordinary income.
The Company may elect to retain amounts representing long-term capital gain
income on which the Company will be taxed at regular corporate rates. In that
case, each shareholder will be taxed on a proportionate share of the total
long-term capital gains retained by the Company and will also receive a credit
for a proportionate share of the tax paid by the Company. Finally, each
shareholder shall increase the adjusted basis in his/her shares by the
difference between the allocable amount of long-term capital gain and the tax
deemed paid by the shareholder. If the Company should elect to retain long-term
capital gains, it will notify each shareholder of the relevant tax information
within 60 days after the close of the taxable year.
To the extent that the Company makes distributions (not designated as
capital gain dividends or retained capital gains) 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. Shareholder, reducing the adjusted basis
which such U.S. Shareholder has in his/her common shares for tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a U.S. Shareholder's adjusted basis in his/her shares taxable as capital
gains (provided that the shares have been held as a capital asset). 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 shareholder 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. Shareholders may
not include in their own income tax returns any net operating losses or capital
losses of the Company.
Upon any sale or other disposition of common shares, the holder will
generally 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 the shares. Such gain or loss will generally be
capital gain or loss and will be taxable at a rate of 28.0% if such shares have
been held for more than one year but not more than 18 months or 20.0% if such
shares have been held for more than eighteen months. In general, any loss
recognized by a U.S. Shareholder upon the sale or other disposition of common
shares 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. Shareholder from the Company which were
required to be treated as long-term capital gains.
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TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income("UBTI"). While many investments in
real estate generate UBTI, the IRS has issued a revenue ruling in which it held
that amounts distributed by a REIT to a tax-exempt employees' pension trust do
not constitute UBTI, even though the REIT may have financed certain of its
activities with acquisition indebtedness. Although revenue rulings are
interpretive in nature and are subject to revocation or modification by the IRS,
based upon the revenue ruling and the analysis therein, distributions made by
the Company to a U.S. Shareholder that is a tax-exempt entity (such as an
individual retirement account ("IRA") or a 401(k) plan) should not constitute
UBTI unless such tax-exempt U.S. Shareholder has financed the acquisition of its
shares with "acquisition indebtedness" within the meaning of the Code, or the
shares are otherwise used in an unrelated trade or business conducted by such
U.S. Shareholder.
Special rules apply to certain tax-exempt pension funds (including 401(k)
plans but excluding IRAs or government pension plans) that own more than 10%
(measured by value) of a "pension-held REIT" at any time during a taxable year
beginning after December 31, 1993. Such a pension fund may be required to treat
a certain percentage of all dividends received from the REIT during the year as
UBTI. The percentage is equal to the ratio of the REIT's gross income (less
direct expenses related thereto) derived from the conduct of unrelated trades or
businesses determined as if the REIT were a tax-exempt pension fund, to the
REIT's gross income (less direct expenses related thereto) from all sources. The
special rules will not apply to require a pension fund to recharacterize a
portion of its dividends as unrelated business taxable income unless the
percentage computed is at least 5%.
A REIT will be treated as a "pension-held REIT" if the REIT is predominantly
held by tax-exempt pension funds and if the REIT would otherwise fail to satisfy
the "5/50 Rule" discussed above, see "--Requirements for
Qualification--Organizational Requirements," if the stock or beneficial
interests of the REIT held by such tax-exempt pension funds were not treated as
held directly by their respective beneficiaries. A REIT is predominantly held by
tax-exempt pension funds if at least one tax-exempt pension fund holds more than
25% (measured by value) of the REIT's stock or beneficial interests, or if one
or more tax-exempt pension funds (each of which owns more than 10% (measured by
value) of the REIT's stock or beneficial interests) own in the aggregate more
than 50% (measured by value) of the REIT's stock or beneficial interests. The
Company believes that it will not be treated as a pension-held REIT. However,
because the shares of the Company will be publicly traded, no assurance can be
given that the Company is not or will not become a pension-held REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States federal income taxation of any person
other than (i) a citizen or resident of the United States, (ii) a corporation or
partnership created in the United States or under the laws of the United States
or of any state thereof, (iii) an estate whose income is includable in income
for U.S. federal income tax purposes regardless of its source or (iv) a trust if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States fiduciaries have
the authority to control all substantial decisions of the trust (collectively,
"Non-U.S. Shareholders") are highly complex, and the following discussion is
intended only as a summary of such rules. PROSPECTIVE NON-U.S. SHAREHOLDERS
SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF UNITED
STATES FEDERAL, STATE, AND LOCAL INCOME TAX LAWS ON AN INVESTMENT IN COMMON
SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
In general, Non-U.S. Shareholders are subject to regular United States
income tax with respect to their investment in common shares in the same manner
as a U.S. Shareholder if such investment is
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"effectively connected" with the Non-U.S. Shareholder's conduct of a trade or
business in the United States. A corporate Non-U.S. Shareholder that receives
income with respect to its investment in common shares that is (or is treated
as) effectively connected with the conduct of a trade or business in the United
States also may be subject to the 30% branch profits tax imposed by the Code,
which is payable in addition to regular United States corporate income tax. The
following discussion addresses only the United States taxation of Non-U.S.
Shareholders whose investment in common shares is not effectively connected with
the conduct of a trade or business in the United States.
ORDINARY DIVIDENDS
Distributions made by the Company that are not attributable to gain from the
sale or exchange by the Company of United States real property interests and
that are not designated by the Company as capital gain dividends will be treated
as ordinary income dividends to the extent made out of current or accumulated
earnings and profits of the Company. Generally, such ordinary income dividends
will be subject to United States withholding tax at the rate of 30% on the gross
amount of the dividends paid unless reduced or eliminated by an applicable
United States income tax treaty. The Company expects to withhold United States
income tax at the rate of 30% on the gross amount of any such dividends paid to
a Non-U.S. Shareholder unless a lower treaty rate applies and the Non-U.S.
Shareholder has filed an IRS Form 1001 with the Company, certifying the Non-U.S.
Shareholder's entitlement to treaty benefits. The IRS has issued final
regulations regarding the backup withholding rules as applied to Non-U.S.
Shareholders. These regulations alter the current system of backup withholding
compliance and are effective for distributions made after December 31, 1999.
NON-DIVIDEND DISTRIBUTIONS
Unless common shares constitute a United States Real Property Interest (a
"USRPI"), distributions made by the Company in excess of its current and
accumulated earnings and profits will be treated first as a tax-free return of
capital to each Non-U.S. Shareholder, reducing the adjusted basis which such
Non-U.S. Shareholder has in his common shares for U.S. tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a Non-U.S. Shareholder's adjusted basis in his shares being treated as gain
from the sale or exchange of such shares, the tax treatment of which is
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of the Company's current and
accumulated earnings and profits, the distribution will be subject to
withholding at the rate applicable to a dividend distribution. However, the
Non-U.S. Shareholder may seek a refund from the IRS of any amount withheld if it
is subsequently determined that such distribution was, in fact, in excess of the
Company's then current and accumulated earnings and profits.
If common shares constitute a USRPI, such distributions will be subject to
10% withholding and taxed pursuant to the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA") at a rate of 35% to the extent such distributions
exceed a Non-U.S. Shareholder's basis in its common shares. The common shares
will not constitute a USRPI so long as the Company is a "domestically controlled
REIT." A "domestically controlled REIT" is a REIT in which, at all times during
a specified testing period, less than 50% in value of its stock or beneficial
interests are held directly or indirectly by Non-U.S. Shareholders. The Company
believes that it will be a "domestically controlled REIT," and therefore that
the common shares will not be treated as USRPIs under FIRPTA. However, because
the common shares will be publicly traded, no assurance can be given that the
Company is or will continue to be a "domestically-controlled REIT."
If the Company did not constitute a "domestically-controlled REIT," the
common shares would be treated as USRPIs subject to United States taxation under
FIRPTA unless (i) the common shares are "regularly traded" (as defined in the
applicable Treasury regulations) and (ii) the Non-U.S. Shareholder's interest
(after application of certain constructive ownership rules) in the Company is
5.0% or less at all times during the five years preceding the sale or exchange.
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CAPITAL GAINS DIVIDENDS
As long as the Company continues to qualify as a REIT, distributions made by
the Company that are attributable to gain from the sale or exchange by the
Company of any USRPI will be taxed to a Non-U.S. Shareholder under FIRPTA. Under
FIRPTA, such distributions are taxed to a Non-U.S. Shareholder as if such
distributions were gains "effectively connected" with the conduct of a trade or
business in the United States. Accordingly, a Non-U.S. Shareholder will be taxed
on such distributions at the same capital gain rates applicable to U.S.
Shareholders (subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of non-resident alien individuals).
Distributions subject to FIRPTA also may be subject to the 30% branch profits
tax in the case of a corporate Non-U.S. Shareholder that is not entitled to
treaty relief or exemption. The Company will be required to withhold tax from
any distribution to a Non-U.S. Shareholder that could be designated by the
Company as a USRPI capital gain dividend in an amount equal to 35% of the gross
distribution. The amount of tax withheld is fully creditable against the
Non-U.S. Shareholder's FIRPTA tax liability, and if such amount exceeds the Non-
U.S. Shareholder's federal income tax liability for the applicable taxable year,
the Non-U.S. Shareholder may seek a refund of the excess from the IRS. In
addition, if the Company designates prior distributions as capital gain
dividends, subsequent distributions, up to the amount of such prior
distributions, will be treated as capital gain dividends for purposes of
withholding.
Pursuant to Treasury Regulations effective through December 31, 1999,
dividends paid to an address in a country outside the United States are
generally presumed to be paid to a resident of such country for purposes of
determining the applicability of withholding requirements discussed above and
the applicability of any treaty rate. Under revised Treasury Regulations
effective January 1, 2000, different presumptions and procedures apply to
determine whether or not a dividend is subject to withholding and whether a
possibly reduced treaty rate of withholding is available. In addition, new rules
apply to dividends to foreign entities, including partnerships and other
pass-through entities. Distributions in excess of current or accumulated
earnings and profits of the Company to a Non-U.S. Shareholder may, to the extent
they are not subject to 30% withholding or are subject to a lower treaty rate,
may nevertheless be subject to separate withholding at a rate of 10%
nevertheless under the rules of Code Section 1445. Non-U.S. Shareholders should
discuss these new complex withholding rules with their tax advisors.
DISPOSITION OF SHARES OF BENEFICIAL INTEREST OF THE COMPANY
Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
common shares generally will not be subject to United States taxation unless the
common shares constitute a USRPI within the meaning of FIRPTA (as described
above).
If the common shares were treated as USRPI so that gain on the sale or
exchange of the common shares would be subject to taxation under FIRPTA, the
Non-U.S. Shareholder would be subject to regular United States income tax with
respect to such gain in the same manner as a U.S. Shareholder (subject to any
applicable alternative minimum tax, a special alternative minimum tax in the
case of nonresident alien individuals and the possible application of the 30%
branch profits tax in the case of foreign corporations), and the purchaser of
the common shares (including the Company) would be required to withhold and
remit to the IRS 10% of the purchase price. Additionally, in such case,
distributions on the common shares to the extent they represent a return of
capital or capital gain from the sale of the common shares, rather than
dividends, would be subject to a 10% withholding tax.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Shareholder in two cases; (i) if the Non-U.S.
Shareholder's investment in the common shares of the Company is effectively
connected with a U.S. trade or business conducted by such Non-U.S. Shareholder,
the Non-U.S. Shareholder will be subject to the same treatment as a U.S.
shareholder with respect to such gain, or (ii) if the Non-U.S. Shareholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, the
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<PAGE>
nonresident alien individual will be subject to a 30% withholding tax on the
amount of such individual's capital gain.
ESTATE TAX
Common Shares of the Company owned or treated as owned by an individual who
is not a citizen or resident (as specially defined for U.S. federal estate tax
purposes) of the United States at the time of death will be includable in the
individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. Such individual's estate may be
subject to U.S. federal estate tax on the property includable in the estate for
U.S. federal estate tax purposes.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its U.S. Shareholders and to the IRS the amount
of dividends paid during each calendar year and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a U.S.
Shareholder may be subject to backup withholding at the rate of 31% on dividends
paid unless such U.S. Shareholder (i) is a corporation or falls within certain
other exempt categories and, when required, can demonstrate this fact, or (ii)
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. Shareholder who does not provide the
Company with his correct taxpayer identification number also may be subject to
penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the U.S. Shareholder's federal income tax liability. In
addition, the Company may be required to withhold a portion of any capital gain
distributions made to U.S. Shareholders who fail to certify their non-foreign
status to the Company. See "--Taxation of Non-U.S. Shareholders." The IRS has
issued final regulations regarding the backup withholding rules as applied to
Non-U.S. Shareholders. These regulations alter the current system of backup
withholding compliance and are effective for distributions made after December
31, 1999.
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Shareholders, and Non-U.S. Shareholders
should consult their tax advisors with respect to any such information reporting
and backup withholding requirements.
OTHER TAX CONSIDERATIONS
CLINTON REIT PROPOSALS
The Clinton Administration budget proposals for fiscal year 1999 include
various proposed changes with respect to the REIT federal income tax laws. Most
significant to the Company is a proposal that would prohibit a REIT from owning
more than 10% of the value of the outstanding stock of any corporation (other
than a qualified REIT subsidiary). Under current law, a REIT is only prohibited
from owning more than 10% of the voting stock of a corporation. The Company's
ownership of all of the non-voting preferred stock of the Services Company
complies with current REIT qualification rules while allowing the Company to
receive substantially all of the economic benefit (I.E., 95%) of the Services
Company's income-producing activities on an after-tax basis. If enacted, the
administration's proposal would limit the value of the Company's investment in
the Services Company to no more than 10% of such economic benefits. Although it
is possible that transition rules could be enacted which would allow the Company
to maintain its existing ownership of the Services Company preferred stock,
there can be no assurance that any such transition rules will be adopted.
Moreover, even if transition rules are adopted, the future ability of the
Company to receive increased amounts of distributions from the Services Company
of the future ability of the Services Company to increase its level of
operations may be substantially restricted.
The Clinton Administration proposals would also eliminate the ability of an
existing C corporation which elects REIT status to defer recognition of built-in
gain on assets until such assets are disposed of during a 10 year period (under
current law, thereafter no gain is recognized). The proposal would limit the
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availability of that built-in gain deferral provision to small C corporations
(I.E., corporations the value of whose stock is $5,000,000 or less). This
proposal, if enacted, could adversely affect the ability of the Company to
acquire substantially all of the assets of existing C corporations and thus
potentially limit the Company's growth.
No prediction can be made as to the likelihood of passage into law of the
administration's REIT proposals or as to the effective date of any changes.
OTHER POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective holders should recognize that the present federal income tax
treatment of the Company may be modified by future legislative, judicial or
administrative actions or decisions at any time, which may be retroactive in
effect, and, as a result, any such action or decision may affect investments and
commitments previously made. The rules dealing with federal income taxation are
constantly under review by persons involved in the legislative process and by
the IRS and the Treasury Department, resulting in statutory changes as well as
promulgation of new, or revisions to existing, regulations and revised
interpretations of established concepts. No prediction can be made as to the
likelihood of passage of any new tax legislation or other provisions either
directly or indirectly affecting the Company or its shareholders. Revisions in
federal income tax laws and interpretations thereof could adversely affect the
tax consequences of an investment in the common shares.
STATE AND LOCAL TAXES
The Company and its shareholders 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 shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective holders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the common shares.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to a prospective purchaser (including, with respect to the
discussion contained in "--Status of the Company under ERISA," to a prospective
purchaser that is not an employee benefit plan, another tax-qualified retirement
plan or an IRA). This discussion does not propose to deal with all aspects of
ERISA or Section 4975 of the Code or, to the extent not pre-empted, state law
that may be relevant to particular employee benefit plan shareholders (including
plans subject to Title I of ERISA, other employee benefit plans and IRAs subject
to the prohibited transaction provisions of Section 4975 of the Code, and
governmental plans and church plans that are exempt from ERISA and Section 4975
of the Code but that may be subject to state law requirements) in light of their
particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN COMMON SHARES ON BEHALF OF A
PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED RETIREMENT PLAN,
AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL
ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975
OF THE CODE, AND (TO THE EXTENT NOT PRE-EMPTED) STATE LAW WITH RESPECT TO THE
PURCHASE, OWNERSHIP OR SALE OF COMMON SHARES BY SUCH PLAN OR IRA. Plans should
also consider the entire discussion under the heading "Certain Federal Income
Tax Considerations," as material contained therein is relevant to any decision
by an employee benefit plan, tax-qualified retirement plan or IRA to purchase
the common shares.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to Title I of ERISA (an
"ERISA Plan") should carefully consider whether an investment in common shares
is consistent with its fiduciary responsibilities under ERISA. In particular,
the fiduciary requirements of Part 4 of Title I of ERISA require (i) an ERISA
Plan's investments to be prudent and in the best interests of the ERISA Plan,
its participants and beneficiaries, (ii) an ERISA Plan's investments to be
diversified in order to reduce the risk of large losses, unless it is clearly
prudent not to do so, (iii) an ERISA Plan's investments to be authorized under
ERISA and the terms of the governing documents of the ERISA Plan and (iv) that
the fiduciary not cause the ERISA Plan to enter into transactions prohibited
under Section 406 of ERISA. In determining whether an investment in common
shares is prudent for purposes of ERISA, the appropriate fiduciary of an ERISA
Plan should consider all of the facts and circumstances, including whether the
investment is reasonably designed, as a part of the ERISA Plan's portfolio for
which the fiduciary has investment responsibility, to meet the objectives of the
ERISA Plan, taking into consideration the risk of loss and opportunity for gain
(or other return) from the investment, the diversification, cash flow and
funding requirements of the ERISA Plan and the liquidity and current return of
the ERISA Plan's portfolio. A fiduciary should also take into account the nature
of the Company's business, the length of the Company's operating history and
other matters described under "Risk Factors."
The fiduciary of an IRA or of an employee benefit plan not subject to Title
I of ERISA because it is a governmental or church plan, or because it does not
cover common law employee (a "Non-ERISA Plan"), should consider that such an IRA
or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Section 4975 of the Code
and permitted under applicable state law.
STATUS OF THE COMPANY UNDER ERISA
A prohibited transaction may occur if the assets of the Company are deemed
to be assets of the investing Plans and "parties in interest" or "disqualified
persons" as defined in ERISA and Section 4975 of the Code, respectively, deal
with such assets. In certain circumstances where a Plan holds an interest in an
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entity, the assets of the entity are deemed to be Plan assets (the "look-through
rule"). Under such circumstances, any person that exercises authority or control
with respect to the management or disposition of such assets is a Plan
fiduciary. Plan assets are not defined in ERISA or the Code, but the United
States Department of Labor has issued regulations, effective March 13, 1987 (the
"Regulations"), that outline the circumstances under which a Plan's interest in
an entity will be subject to the look-through rule.
The Regulations apply only to the purchase by a Plan of an "equity interest"
in an entity, such as common stock or common shares of beneficial interest of a
REIT. However, the Regulations provide an exception to the look-through rule for
equity interests that are "publicly-offered securities."
Under the Regulations, a "publicly-offered security" is a security that is
(i) freely transferable, (ii) part of a class of securities that is widely held
and (iii) either (a) part of a class of securities that is registered under
section 12(b) or 12(g) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), or (b) sold to a Plan as part of an offering of securities
to the public pursuant to an effective registration statement under the
Securities Act and the class of securities of which such security is a part is
registered under the Exchange Act within 120 days (or such longer period allowed
by the Securities and Exchange Commission) after the end of the fiscal year of
the issuer during which the offering of such securities to the public occurred.
Whether a security is considered "freely transferable" depends on the facts and
circumstances of each case. Generally, if the security is part of an offering in
which the minimum investment is $10,000 or less, any restriction on or
prohibition against any transfer or assignment of such security for the purposes
of preventing a termination or reclassification of the entity for federal or
state tax purposes will not of itself prevent the security from being considered
freely transferable. A class of securities is considered "widely held" if it is
a class of securities that is owned by 100 or more investors independent of the
issuer and of one another.
The Company anticipates that the common shares will meet the criteria of the
publicly-offered securities exception to the look-through rule. First, the
Company anticipates that the common shares will be considered to be freely
transferable, as the minimum investment will be less than $10,000 and the only
restrictions upon its transfer are those required under federal tax laws to
maintain the Company's status as a REIT. Second, the Company believes that the
common shares will be held by 100 or more investors and that at least 100 or
more of these investors will be independent of the Company and of one another.
Third, the common shares will be part of an offering of securities to the public
pursuant to an effective registration statement under the Securities Act and
will be registered under the Exchange Act within 120 days after the end of the
fiscal year of the Company during which the offering of such securities to the
public occurs. Accordingly, the Company believes that if a Plan purchases common
shares, the Company's assets should not be deemed to be Plan assets and,
therefore, a person who exercises authority or control with respect to the
Company's assets should not be treated as a Plan fiduciary for purposes of the
prohibited transaction rules of ERISA and Section 4975 of the Code.
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SELLING SHAREHOLDERS
The table below sets forth certain information concerning the Selling
Shareholders. The Offered Shares, respectively, are beneficially owned by
certain clients of Cohen & Steers Capital Management, Inc. ("Cohen & Steers"),
Morgan Stanley Asset Management, Inc. ("Morgan Stanley") and Southeastern Asset
Management, Inc. ("Southeastern" and collectively with Cohen & Steers and Morgan
Stanley, the "Advisors"), respectively, for which Cohen & Steers, Morgan Stanley
and Southeastern act as investment advisors. The Advisors, acting on behalf of
such clients, purchased the Offered Shares from the Company pursuant to a
Purchase Agreement dated as of March 25, 1998. Neither the Advisors nor any of
the Selling Shareholders have held any position or office or, to the knowledge
of the Company, has had any material relationship with the Company or any of the
Company's affiliates or predecessors within the past three years (except for
prior ownership of common shares of the Company).
The Offered Shares represent approximately 17.1% of the number of common
shares outstanding as of November 13, 1998. Because the Selling Shareholders may
sell all or some of their Offered Shares, no estimate can be made of the number
owned, beneficially or otherwise, by each Selling Shareholder upon completion of
the Offering. There is no assurance that the Selling Shareholders will sell any
of the Offered Shares.
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES
OWNED AND
NAME OF SELLING SHAREHOLDER OFFERED HEREBY
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Cohen & Steers Realty Shares, Inc.(1)........................................ 1,157,800
Cohen & Steers Special Equity Fund, Inc.(1).................................. 122,000
Cohen & Steers Equity Income Fund, Inc.(1)................................... 30,000
Cohen & Steers Realty Income Fund, Inc.(1)................................... 33,000
Cohen & Steers Total Return Realty Fund, Inc.(1)............................. 130,000
Cohen & Steers Managed Retirement Fund(1).................................... 48,000
Stichting Pensioenfonds ABP(2)............................................... 154,839
Stichting Bedrijfspensioenfonds voor de Metaalnijverheid(2).................. 103,226
Morgan Stanley Real Estate Special Situations, Inc.(2)....................... 34,658
Morgan Stanley Real Estate Special Situations Fund I, LP(2).................. 156,403
Morgan Stanley Real Estate Special Situations Fund II, LP(2)................. 208,537
MS Special Funds Pte. Ltd.(2)................................................ 103,226
Morgan Stanley Real Estate Special Situations Investors, L.P.(2)............. 13,305
Yale University(3)........................................................... 285,000
---------------
TOTAL.................................................................... 2,579,994
---------------
---------------
</TABLE>
- ---------
(1) Cohen & Steers acts as investment advisor to the accounts that beneficially
own these common shares.
(2) Morgan Stanley acts as investment advisor to the accounts that beneficially
own these common shares.
(3) Southeastern acts as an investment advisor to this holder of these common
shares.
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PLAN OF DISTRIBUTION
The Company will not receive any proceeds from the offering by the Selling
Shareholders. Any of the Selling Shareholders may from time to time, in one or
more transactions, or a series of transactions, sell all or a portion of the
Offered Shares on the NYSE, in the over-the-counter market, or on any other
national securities exchange or trading system on which the common shares are
listed or traded, in negotiated transactions, in underwritten transactions or
otherwise, at prices then prevailing or related to the then current market price
or at negotiated prices. The offering price of the Offered Shares from time to
time will be determined by the Selling Shareholders and, at the time of such
determination, may be higher or lower than the market price of the common shares
on the NYSE or other exchange or trading system on which the common shares are
admitted for trading privileges. In connection with an underwritten offering,
underwriters or agents may receive compensation in the form of discounts,
concessions or commissions from a Selling Shareholder or from purchasers of
Offered Shares for whom they may act as agents, and underwriters may sell
Offered Shares 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 agents. Under
agreements that may be entered into by the Company, underwriters, dealers and
agents who participate in the distribution of Offered Shares may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act, or to contribution with respect to
payments which such underwriters, dealers or agents may be required to make in
respect thereof. The Offered Shares may be sold directly or through
broker-dealers acting as principal or agent, or pursuant to a distribution by
one or more underwriters on a firm commitment or best-efforts basis. Each of the
Selling Shareholders receives the right to accept or reject, in whole or in
part, any proposed purchase of the Offered Shares made directly or through
agents.
The methods by which the Offered Shares may be sold include:
- a block trade in which the broker-dealer so engaged will attempt to sell
the Offered Shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by such broker-dealer
for its account pursuant to this Prospectus;
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
- an exchange distribution in accordance with the rules of the NYSE or other
exchange or trading system on which the common shares are admitted for
trading privileges;
- privately-negotiated transactions; and
- underwritten transactions.
The Selling Shareholders and any agents or broker-dealers participating in
the distribution of the Offered Shares may be deemed to be "underwriters" within
the meaning of the Securities Act, and any profit on the sale of the Offered
Shares by the Selling Shareholders and any commissions received by any such
agents or broker-dealers may be deemed to be underwriting commissions or
discounts under the Securities Act.
When a Selling Shareholder elects to make a particular offer of Offered
Shares, a prospectus supplement, if required, will be distributed which will
identify any underwriters, dealers or agents and any discounts, commissions and
other terms constituting compensation from such Selling Shareholder and any
other required information.
In order to comply with the securities laws of certain states, if
applicable, the Offered Shares may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the Offered Shares may not
be sold unless they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement is available
and is complied with.
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The Company has registered the Offered Shares as required under the terms of
certain agreements between the Company and the Selling Shareholders. The Company
has agreed to pay all costs and expenses incurred in connection with the
registration under the Securities Act of the Offered Shares, including without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, fees and disbursements of all
independent certified accountants and fees and expenses incurred in connection
with listing the Offered Shares on NYSE. The Selling Shareholders will pay any
underwriting discounts, sales and commissions, fees and disbursements of counsel
for the Selling Shareholders and transfer taxes, if any. The Company also has
agreed to indemnify each of the Selling Shareholders and their respective
officers, directors, agents, investment advisors and employees and each person
who controls (within the meaning of the Securities Act) such Selling Shareholder
and the officers, directors, agents and employees of such controlling person,
against certain losses, claims, damages, liabilities and expenses arising under
the securities laws in connection with this Offering. Each of the Selling
Shareholders has agreed to indemnify the Company, its officers, trustees, agents
and employees and each person who controls (within the meaning of the Securities
Act) the Company and the officers, directors, agents and employees of each such
controlling person against certain losses, claims, damages, liabilities and
expenses arising under the securities laws in connection with this Offering with
respect to certain written information furnished to the Company by such Selling
Shareholder, provided, however, that the indemnification obligation is several,
not joint, as to each Selling Shareholder, provided further, however, that each
Selling Shareholder shall not be obligated to provide such indemnification to
the extent liability resulted from the Company's failure to amend or take action
promptly to correct or supplement any Registration Statement or Prospectus after
receiving written notice from the Selling Shareholder of an untrue statement of
material fact or an omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading. In no event shall the
liability of any Selling Shareholder be greater than the dollar amount of the
proceeds received by such Selling Shareholder upon the sale of the Offered
Shares giving rise to such indemnification obligation.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Winston & Strawn, Chicago, Illinois. Legal matters relating
to Maryland law, including the validity of the issuance of the common shares
offered hereby, will be passed upon for the Company by Miles & Stockbridge P.C.,
Baltimore, Maryland. In addition, the description of federal income tax
consequences contained in this Prospectus under "Certain Federal Income Tax
Considerations" is, to the extent that it constitutes matters of law, summaries
of legal matters or legal conclusions, the opinion of Winston & Strawn, special
tax counsel to the Company as to the material federal income tax consequences of
the Offering. Governor James R. Thompson, Chairman of Winston & Strawn, is a
trustee of the Company.
EXPERTS
The consolidated financial statements of Prime Group Realty Trust as of
December 31, 1997 and for the period from November 17, 1997 to December 31, 1997
and the combined financial statements of the Predecessor Properties as of
December 31, 1996 and for the period from January 1, 1997 to November 16, 1997,
and for each of the two years in the period ended December 31, 1996 included in
the Company's Annual Report on Form 10-K (as amended by Form 10-K/A), the
statement of revenue and certain expenses of Continental Office Towers for the
year ended December 31, 1996, and the statement of revenue and certain expenses
of 180 North LaSalle Street for the year ended December 31, 1996, included in
the Company's Current Report on Form 8-K dated December 15, 1997 (as amended by
Form 8-K/A thereto filed on February 27, 1998), the statement of revenue and
certain expenses of 2675 Mayfair for the period from January 1, 1997 to
September 30, 1997, included in the Company's Current Report on Form 8-K dated
December 30, 1997 (as amended by Form 8-K/A dated December 15, 1997 filed on
February 27, 1998), the statement of revenue and certain expenses of 33 North
Dearborn for the year ended December 31, 1996 included in the Company's Current
Report on Form 8-K dated January 14, 1998
66
<PAGE>
(as amended by Form 8-K/A thereto filed on March 31, 1998), the statement of
revenue and certain expenses of Commerce Point for the year ended December 31,
1996 included in the Company's Current Report on Form 8-K dated February 20,
1998 (as amended by Form 8-K/A thereto filed on May 5, 1998), the statement of
revenue and certain expenses of 208 South LaSalle for the year ended December
31, 1997 and the statement of revenue and certain expenses of 122 South Michigan
Avenue for the year ended December 31, 1997 included in the Company's Current
Report on Form 8-K dated March 31, 1998, the statement of revenue and certain
expenses of 6400 Shafer Court for the year ended December 31, 1997 and the
statement of revenue and certain expenses of Two Century Centre for the year
ended December 31, 1997 included in the Company's Current Report on Form 8-K
dated May 29, 1998, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the information 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"). Such reports, proxy
statements and other information can be inspected without charge and copied upon
payment of the prescribed fee at the Public Reference Section of the Commission
at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the following regional offices of the Commission: Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, 13th Floor, New York, New York 10048. Such material can also be obtained
from the Commission's worldwide web site at http://www.sec.gov. The Company's
outstanding common shares are listed on the NYSE under the symbol "PGE" and all
such reports, proxy statements and other information filed by the Company with
the NYSE may be inspected at the NYSE's offices at 20 Broad Street, New York,
New York 10005.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street N.W., Washington, D.C. 20549, a Registration
Statement (of which this prospectus is a part) on Form S-3 under the Securities
Act and the rules and regulations promulgated thereunder with respect to the
securities offered hereby. This prospectus does not contain all the information
set forth in the Registration Statement and the exhibits and financial
statements thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. Statements contained in this
prospectus or in any document incorporated by reference herein or therein, as to
the content 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 the Registration Statement, each such statement
being qualified in all respects by such reference and the exhibits and schedules
hereto. For further information regarding the Company and the common shares
offered hereby, reference is hereby made to the Registration Statement and such
exhibits and schedules.
67
<PAGE>
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/A for the year ended December
31, 1997;
b. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, June 30, and September 30, 1998; and
c. The Company's Current Reports on Form 8-K dated January 14, 1998 (as
amended on Form 8-K/A filed on March 31, 1998), February 20, 1998 (as amended on
Form 8-K/A filed on May 5, 1998), March 19, 1998, March 31, 1998 (as amended on
Form 8-K/A filed on June 15, 1998), and May 29, 1998, and the Company's two
Current Reports on Form 8-K/A filed on February 27, 1998.
Any documents 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 Shares 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,
in an accompanying prospectus supplement (if any) 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, or in an accompanying prospectus
supplement (if any).
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 by the Company
without charge to each person, including any beneficial owner, to whom this
prospectus are delivered upon written or oral request. Requests should be
directed to the Secretary/ General Counsel, Prime Group Realty Trust, 77 West
Wacker Drive, Chicago, Illinois, 60601, telephone number (312) 917-1300.
68
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,579,994 Shares
[LOGO]
PRIME GROUP REALTY TRUST
Common Shares of Beneficial Interest
-------------------
P R O S P E C T U S
-------------------
, 1998
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO GIVE YOU
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS TO YOU OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF
GIVEN OR MADE, YOU MUST NOT REPLY UPON SUCH INFORMATION OR REPRESENTATIONS AS
HAVING BEEN AUTHORIZED BY US OR ANY OF THE SELLING SHAREHOLDERS. THIS PROSPECTUS
IS NOT AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR IS IT AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION 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 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 15,938
NYSE listing fee............................................ 9,030
Printing and engraving expenses............................. 1,200,000
Legal fees and expenses..................................... 900,000
Accounting and due diligence fees and expenses.............. 975,000
Miscellaneous............................................... 200,000
------------
Total................................................... $ 3,299,968
------------
------------
</TABLE>
- ---------
All expenses of registration incurred in connection with the Offering are being
borne by the Company, but all selling and other expenses incurred by an
individual Selling Shareholder will be borne by such Selling Shareholder.
ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS.
The Declaration of Trust and Bylaws authorize the Company to indemnify its
present and former trustees and officers and to pay or reimburse expenses for
such individuals in advance of the final disposition of a proceeding to the
maximum extent permitted from time to time under Maryland law. The MGCL, as
applicable to Maryland REITs, currently provides that indemnification of a
person who is a party, or threatened to be made a party, to legal proceedings by
reason of the fact that such a person is or was a trustee, officer, employee or
agent of a corporation or other firm at the request of a corporation, or is or
was serving as a trustee, officer, employee or agent of a corporation or other
firm at the request of a corporation, against judgments, fines, penalties,
amounts paid in settlement and reasonable expenses, is mandatory in certain
circumstances and permissive in others, subject to authorization by the board of
trustees, a committee of the board of trustees consisting of two or more
trustees not parties to the proceeding (if there does not exist a majority vote
quorum of the board of trustees consisting of trustees not parties to the
proceeding), special legal counsel appointed by the board of trustees or such
committee of the board of trustees, or by the shareholders, so long as it is not
established that the act or omission of such person was material to the matter
giving rise to the proceedings and was committed in bad faith, was the result of
active and deliberate dishonesty, involved such person receiving an improper
personal benefit in money, property or services, or, in the case of criminal
proceedings, such person had reason to believe that his or her act or omission
was unlawful.
The Company's officers and trustees are also indemnified pursuant to the
Partnership Agreement and their respective employment agreements, which
agreements are filed as exhibits hereto.
The Company purchased an insurance policy which purports to insure the
officers and trustees of the Company against certain liabilities incurred by
them in the discharge of their functions as such officers and trustees, except
for liabilities resulting from their own malfeasance.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Amendment and Restatement of Declaration of Trust of Prime Group Realty Trust as filed as an
exhibit to the Company's 1997 Annual Report on Form 10-K and incorporated herein by reference
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.2 Articles Supplementary to the Articles of Amendment and Restatement of Declaration of Trust of Prime
Group Realty Trust as filed as an exhibit to the Company's Quarterly Report on Form 10-Q and
incorporated herein by reference
3.3 Amended and Restated Bylaws of Prime Group Realty Trust as filed as an exhibit to the Company's 1997
Annual Report on Form 10-K and incorporated herein by reference
3.4 Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. (the "Amended and
Restated Agreement of Limited Partnership") as filed as an exhibit to the Company's 1997 Annual Report
on Form 10-K and incorporated herein by reference
3.5 Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership dated as of December 15,
1998 as filed as an exhibit to the Company's Registration Statement on Form S-11 (No. 333-51599) and
incorporated herein by reference
3.6 Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership dated as of December 15,
1998 as filed as an exhibit to the Company's Registration Statement on Form S-11 (No. 333-51599) and
incorporated herein by reference
3.7 Amendment No. 3 to the Amended and Restated Agreement of Limited Partnership dated as of January 15,
1998 as filed as an exhibit to the Company's Registration Statement on Form S-11 (No. 333-51599) and
incorporated herein by reference
3.8 Amendment No. 4 to the Amended and Restated Agreement of Limited Partnership dated as of February 13,
1998 as filed as an exhibit to the Company's Registration Statement on Form S-11 (No. 333-51599) and
incorporated herein by reference
3.9 Amendment No. 5 to the Amended and Restated Agreement of Limited Partnership dated as of March 13, 1998
as filed as an exhibit to the Company's Registration Statement on Form S-11 (No. 333-51599) and
incorporated herein by reference
3.10 Amendment No. 6 to the Amended and Restated Agreement of Limited Partnership dated as of March 25, 1998
as filed as an exhibit to the Company's Registration Statement on Form S-11 (No. 333-51599) and
incorporated herein by reference
3.11 Amendment No. 7 to the Amended and Restated Agreement of Limited Partnership dated as of April 15, 1998
as filed as an exhibit to the Company's Registration Statement on Form S-11 (No. 333-51599) and
incorporated herein by reference
3.12 Amendment No. 8 to the Amended and Restated Agreement of Limited Partnership dated as of May 15, 1998 as
filed as an exhibit to the Company's Registration Statement on Form S-11 (No. 333-51599) and
incorporated herein by reference
3.13 Amendment No. 9 to the Amended and Restated Agreement of Limited Partnership dated as of June 5, 1998 as
filed as an exhibit to Company's Quarterly Report on Form 10-Q and incorporated herein by reference
3.14 Amendment No. 10 to the Amended and Restated Agreement of Limited Partnership dated as of June 15, 1998
as filed as an exhibit to Company's Quarterly Report on Form 10-Q and incorporated herein by reference
3.15* Amendment No. 11 to the Amended and Restated Agreement of Limited Partnership dated as of July 15, 1998
3.16* Amendment No. 12 to the Amended and Restated Agreement of Limited Partnership dated as of August 14,
1998
3.17* Amendment No. 13 to the Amended and Restated Agreement of Limited Partnership dated as of September 15,
1998
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.18 Amendment No. 13 to the Amended and Restated Agreement of Limited Partnership dated as of October 15,
1998 as filed as an exhibit to the Company's Quarterly Report on Form 10-Q and incorporated herein by
reference
5.1* Opinion of Miles & Stockbridge regarding the validity of the common shares being registered
8.1* Opinion of Winston & Strawn regarding tax matters
23.1* Consent of Miles & Stockbridge (included in Exhibit 5.1)
23.2* Consent of Winston & Strawn (included in Exhibit 8.1)
23.3 Consent of Ernst & Young LLP
24.1* Powers of Attorney (included on signature page in Part II of the initial filing)
</TABLE>
- ---------
* previously filed
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the registrant pursuant to the provisions described under Item 33 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act of 1933 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 trustee, officer, or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, 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 the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(b) 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 end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) herein do not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by
II-3
<PAGE>
the undersigned registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the registration statement.
(2) To remove from registration by means of a post-effective amendment
any of the Offered Shares being registered which remain unsold at the
termination of the Offering.
(3) That for purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that the shall be deemed to be the initial
bona fide offering thereof.
(c) The registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the 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.
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 it meets all
of the requirements for filing on Form S-3 and has duly caused this
post-effective amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago,
State of Illinois, on November 16, 1998.
<TABLE>
<S> <C> <C>
PRIME GROUP REALTY TRUST
By: /s/ RICHARD S. CURTO
-----------------------------------------
Richard S. Curto
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
post-effective amendment to the registration statement has been signed below on
November 16, 1998 by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ ----------------------------------------------
<C> <S>
MICHAEL W. RESCHKE*
- ------------------------------ Chairman of the Board, Truste
Michael W. Reschke
/s/ RICHARD S. CURTO
- ------------------------------ President and Chief Executive Officer
Richard S. Curto (principal executive officer), Trustee
WILLIAM M. KARNES*
- ------------------------------ Executive Vice President and Chief Financial
William M. Karnes Officer (principal financial officer)
ROY P. RENDINO* Senior Vice President--Finance and Chief
- ------------------------------ Accounting Officer (principal accounting
Roy P. Rendino officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ ----------------------------------------------
<C> <S>
JACQUE M. DUCHARME*
- ------------------------------ Trustee
Jacque M. Ducharme
STEPHEN J. NARDI*
- ------------------------------ Trustee
Stephen J. Nardi
CHRISTOPHER J. NASSETTA*
- ------------------------------ Trustee
Christopher J. Nassetta
THOMAS J. SAYLAK*
- ------------------------------ Trustee
Thomas J. Saylak
JAMES R. THOMPSON*
- ------------------------------ Trustee
James R. Thompson
</TABLE>
<TABLE>
<S> <C> <C>
*By: /s/ RICHARD S. CURTO
-------------------------
Richard S. Curto
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Post-Effective Amendment No. 2 on Form S-3 to Form S-11
No. 333-51935) and related Prospectus of Prime Group Realty Trust for the
registration of 2,579,994 Common Shares of Beneficial Interest and to the
incorporation by reference therein of our reports indicated below with
respect to the financial statements indicated below included in Prime Group
Realty Trust's filings as indicated below, filed with the Securities and
Exchange Commission.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Date of Auditors'
Financial Statements Report Filing
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consolidated financial statements of Prime Group March 27, 1998 1997 Annual Report on
Realty Trust at December 31, 1997, and for the period Form 10-K, as amended
from November 17, 1997 to December 31, 1997 and the by Form 10-K/A
combined financial statements of the Predecessor
Properties at December 31, 1996, and for the period
from January 1, 1997 to November 16, 1997 and for the
two years in the period ended December 31, 1996
Statement of revenue and certain expenses of December 5, 1997 Current Report on Form
Continental Office Towers for the year ended December 8-K, as amended by Form
31, 1996 8-K/A dated December 15,
1997
Statement of revenue and certain expenses of December 2, 1997 Current Report on Form
180 North LaSalle Street for the year ended December 8-K, as amended by Form
31, 1996 8-K/A dated December 15,
1997
Statement of revenue and certain expenses of 2675 December 4, 1997 Current Report on Form
Mayfair for the period from January 1, 1997 to 8-K dated December 30,
September 30, 1997 1997, as amended by the
Form 8-K/A dated
December 15, 1997 (filed
on February 27, 1998)
Statement of revenue and certain expenses of 33 North November 24, 1997 Current Report on Form
Dearborn for the year ended December 31, 1996 8-K, as amended by Form
8-K/A dated January 14,
1998
Statement of revenue and certain expenses of Commerce December 20, 1997 Current Report on Form
Point for the year ended December 31, 1996 8-K, as amended by Form
8-K/A dated February
20, 1998
Statement of revenue and certain expenses of 208 January 30, 1998 Current Report on Form
South LaSalle for the year ended December 31, 1997 8-K dated March 31,
1998
<PAGE>
Statement of revenue and certain expenses of 122 January 30, 1998 Current Report on Form
South Michigan Avenue for the year ended December 31, 8-K dated March 31,
1997 1998
Statement of revenue and certain expenses of 6400 April 16, 1998 Current Report on Form
Shafer Court for the year ended December 31, 1997 8-K dated May 29, 1998
Statement of revenue and certain expenses of Two April 23, 1998 Current Report on Form
Century Centre for the year ended December 31, 1997 8-K dated May 29, 1998
</TABLE>
Ernst & Young LLP
Chicago, Illinois
November 13, 1998
