As filed with the Securities and Exchange Commission on April 20, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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PS BUSINESS PARKS, INC.
(formerly Public Storage Properties XI, Inc.)
(Exact name of registrant as specified in its charter)
California 95-4300881
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
701 Western Avenue HARVEY LENKIN
Glendale, California 91201-2397 PS Business Parks, Inc.
(818) 244-8080 701 Western Avenue
(Address, including zip code, and Glendale, California 91201-2397
telephone number, including area code, (818) 244-8080
of registrant's principal (Name, address, including zip code,
executive offices) and telephone number, including
area code, of agent for service)
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Copies to:
DAVID GOLDBERG, ESQ.
PS Business Parks, Inc.
701 Western Avenue
Glendale, California 91201-2397
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Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this
Registration Statement.
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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. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] _______________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [X]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Maximum Proposed
Offering Maximum
Amount Price per Aggregate Amount of
Title of Each Class of Securities to be Share Offering Registration
to be Registered Registered or Unit Price Fee
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<S> <C> <C> <C> <C>
Preferred Stock, $.01 par value per share.............. <F1><F3> <F2> <F1><F2><F3> N/A
Depositary Shares...................................... <F1><F3> <F2> <F1><F2><F3> N/A
Equity Stock, $.01 par value per share................. <F1><F4> <F2> <F1><F2><F4> N/A
Common Stock, $.01 par value per share................. <F1><F5> <F2> <F1><F2><F5> N/A
Warrants............................................... <F1><F6> <F2> <F1><F2><F6> N/A
Total............................................... $500,000,000 <F2> $500,000,000 $147,500<F7>
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<FN>
<F1> In no event will the aggregate maximum offering price of all securities
issued pursuant to this Registration Statement exceed $500,000,000. Any
securities registered hereunder may be sold separately or as units with
other securities registered hereunder. 4,669,059 shares of Common Stock
at a proposed maximum aggregate offering price of $116,434,659 (pursuant
to Rule 457(c), based on the average of the high and low prices of the
Common Stock on the American Stock Exchange on April 15, 1998) being
registered are being allocated to registered resales in secondary
offerings (includes any securities issuable upon stock splits and
similar transactions pursuant to Rule 416).
<F2> The proposed maximum offering price per unit will be determined, from
time to time, by the Registrant in connection with the issuance by the
Registrant of the securities registered hereunder. No separate
consideration will be received for any Depositary Shares representing
shares of Preferred Stock of the Registrant.
<F3> Subject to Footnote 1, there is being registered hereunder an
indeterminate number of shares of Preferred Stock, and Depositary Shares
representing a fractional interest in a share of Preferred Stock, as may
be sold, from time to time, by the Registrant. In the event Registrant
elects to offer to the public fractional interests in shares of the
Preferred Stock registered hereunder, Depositary Receipts will be
distributed to those persons acquiring such fractional interests and the
shares of Preferred Stock will be issued to a Depositary under a Deposit
Agreement. There is also being registered hereunder an indeterminate
number of shares of Preferred Stock as shall be issuable upon exercise
of Warrants registered hereby.
<F4> Subject to Footnote 1, there is being registered hereunder an
indeterminate number of shares of Equity Stock as may be sold, from time
to time, by the Registrant.
<F5> Subject to Footnote 1, there is being registered hereunder an
indeterminate number of shares of Common Stock as may be sold, from time
to time, by the Registrant. There is also being registered hereunder an
indeterminate number of shares of Common Stock as shall be issuable upon
conversion of the Preferred Stock or the Equity Stock or exercise of
Warrants registered hereby.
<F6> Subject to Footnote 1, there is being registered hereunder an
indeterminate number of Warrants representing rights to purchase
Preferred Stock, Equity Stock or Common Stock, as the case may be,
registered pursuant to this Registration Statement.
<F7> Calculated pursuant to Rule 457(o) of the rules and regulations under
the Securities Act of 1933, as amended. $34,349 of the registration fee
has been allocated to the registration of the securities described in
Footnote 1 for registered resales in secondary offerings.
</FN></TABLE>
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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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<PAGE>
PROSPECTUS
PS Business Parks, Inc.
Preferred Stock
Depositary Shares
Equity Stock
Common Stock
Warrants
PS Business Parks, Inc. (formerly Public Storage Properties XI, Inc.)
(the "Company") may from time to time offer in one or more series (i) shares of
preferred stock, par value $.01 per share (the "Preferred Stock"), and
depositary shares (the "Depositary Shares") representing a fractional interest
in a share of Preferred Stock, (ii) shares of equity stock, par value $.01 per
share (the "Equity Stock"), (iii) shares of common stock, par value $.10 per
share (the "Common Stock"), or (iv) warrants to purchase Preferred Stock, Equity
Stock or Common Stock (the "Warrants"), with an aggregate public offering price
of up to $500,000,000 on terms to be determined at the time of offering. The
Preferred Stock, Depositary Shares, Equity Stock, Common Stock and Warrants
(collectively, the "Securities") may be offered, separately or together (in any
combination), as separate series, in amounts, at prices and on terms to be set
forth in a supplement to this Prospectus (a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus
is being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Preferred Stock and
Depositary Shares, the specific title and stated value, any dividend,
liquidation, redemption, conversion, voting and other rights, the offering price
and whether Depositary Shares will be offered, and if so, the fraction of a
share of Preferred Stock represented by a Depositary Share; (ii) in the case of
Equity Stock, the specific title, any dividend, liquidation, redemption,
conversion, voting and other rights and the offering price; (iii) in the case of
Common Stock, the offering price; and (iv) in the case of Warrants, the
duration, offering price, exercise price and detachability.
The applicable Prospectus Supplement will also contain information, where
applicable, about any listing on a securities exchange of the Securities covered
by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from
time to time by the Company, or to or through underwriters or dealers. If any
agents or underwriters are involved in the sale of any of the Securities, their
names, and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable from
the information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
series of Securities.
This Prospectus may also be used in registered resales as described under
"Plan of Distribution."
Prospective investors should carefully consider the matters discussed
under "Risk Factors" beginning on page 4 in the Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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April ___, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission in Washington,
D.C. and at the Regional Offices of the Commission at 7 World Trade Center, 13th
Floor, New York, New York 10048; and Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained
at prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 or by accessing the Commission's
World Wide Web site at http://www.sec.gov. Such material can also be inspected
at the American Stock Exchange ("AMEX"), 86 Trinity Place, New York, New York
10006.
The Company has filed with the Commission a registration statement on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by the Company with the Commission
pursuant to Section 13 of the Exchange Act (File No. 1-10709), are incorporated
herein by reference: (i) the Annual Report on Form 10-K for the year ended
December 31, 1997 and (ii) the Current Report on Form 8-K/A dated January 29,
1998 and the Current Report on Form 8-K dated March 17, 1998, as amended by a
Form 8-K/A dated April 17, 1998.
All documents filed by the Company pursuant to Section 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 Securities shall be deemed to be
incorporated by reference in this Prospectus.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such information), will be provided without charge
to any person, including any beneficial owner, to whom this Prospectus is
delivered, upon written request. Requests for such copies should be directed to
Investor Services Department, PS Business Parks, Inc., 701 Western Avenue,
Glendale, California 91201-2397.
2
<PAGE>
THE COMPANY
The Company is a self-administered and self-managed real estate
investment trust that acquires, owns and operates commercial properties. The
Company is the sole general partner of PS Business Parks, L.P. (the "Operating
Partnership") through which the Company conducts most of its activities and
owned, as of March 31, 1998, an approximate 57% partnership interest.
Substantially all of the remaining partnership interest is owned by Public
Storage, Inc. ("PSI") and its affiliates.
In a March 1998 merger (the "Merger") with American Office Park
Properties, Inc. ("AOPP"), the Company acquired the commercial property business
previously operated by PSI and was renamed "PS Business Parks, Inc." As of March
31, 1998, the Company and the Operating Partnership owned 65 commercial
properties in 11 states containing approximately 7,600,000 square feet of
commercial space.
The Company has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code") commencing with its taxable year ended
December 31, 1990. To the extent that the Company continues to qualify as a
REIT, it will not be taxed, with certain limited exceptions, on the net income
that is distributed currently to its Shareholders (the "Shareholders"). See
"Certain Federal Income Tax Considerations." The Company was incorporated in
California in 1990; its principal executive offices are located at 701 Western
Avenue, Glendale, California 91201-2397. Its telephone number is (818) 244-8080.
3
<PAGE>
RISK FACTORS
In evaluating the Securities, investors should consider the following
factors, in addition to other matters set forth or incorporated in this
Prospectus (and in the applicable Prospectus Supplement) and the Registration
Statement.
Control and Influence by PSI
- ----------------------------
At March 31, 1998, PSI owned 35.1% of the outstanding shares of Common
Stock (57.3% upon conversion of PSI's interest in the Operating Partnership).
Consequently, PSI has the ability to effectively control all matters submitted
to a vote of Shareholders, including the election of directors, amendment of the
Company's articles of incorporation, dissolution and the approval of other
extraordinary transactions. In addition, this concentration of ownership may
have the effect of delaying or preventing a change in control of the Company.
PSI and an institutional Shareholder owning 37.7% of the Common Stock as
of March 31, 1998 have agreed to vote their respective shares of Common Stock to
support specified nominees to the Board of Directors until the expiration of the
voting agreement, which would not be earlier than December 2001. This voting
agreement will further enhance PSI's control of the Company.
Ownership Limitations and Antitakeover Provisions
- -------------------------------------------------
The Company's articles of incorporation restrict the number of shares
that may be owned by any other person and the partnership agreement of the
Operating Partnership (the "Partnership Agreement") contains an anti-takeover
provision. Unless the restrictions in the articles of incorporation are waived
by the Board of Directors, no Shareholder (other than PSI and certain other
specified Shareholders) may own more than 2% of the outstanding shares of Common
Stock. The principal purpose of the foregoing limitations is to assist in
preventing, to the extent practicable, a concentration of ownership that might
jeopardize the ability of the Company to obtain the favorable tax benefits
afforded a qualified REIT. An incidental consequence of such provisions is to
make a change of control significantly more difficult (if not impossible) even
if it would be favorable to the interests of the public Shareholders. Such
provisions will prevent future takeover attempts which the Board of Directors
has not approved even if a majority of the public Shareholders deem it to be in
their best interests or in which the public Shareholders may receive a premium
for their shares over the then market value.
The Partnership Agreement provides that the Company may not generally
engage in a business consolidation unless the interestholders of the Operating
Partnership are entitled to receive the same proportionate consideration as
holders of Common Stock. In addition, the Company will not engage in a business
combination unless the transaction would have been approved had interestholders
of the Operating Partnership been able to vote together with the Shareholders.
As a result of these provisions, the Company may be precluded from engaging in a
proposed business combination.
PSI's Consent to Certain Property Sales
- ---------------------------------------
For a period of 10 years, the Company will be restricted from selling any
of 13 designated properties without PSI's consent. Since PSI would incur adverse
tax consequences upon a sale of these properties, there may be a conflict
between the interests of PSI and the other Shareholders as to the optimum time
to sell these properties.
Certain Institutional Investors Have Special Rights
- ---------------------------------------------------
After the Merger, certain institutional investors will have rights in the
Company, such as the right to approve nominees to the Company's board of
directors and the right to require registration of their shares, not available
to public Shareholders.
4
<PAGE>
Federal Income Tax Risks
- ------------------------
Reduced Cash Flow to Shareholders if the Company Failed to Qualify as a
REIT. The Company believes that commencing with its taxable year ended December
31, 1990, it has been organized and has operated in such a manner so as to
qualify for taxation as a REIT under the Code, and that its proposed method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a REIT. The Company's qualification and taxation as a REIT
depend upon both (i) the satisfaction in the past by AOPP of the requirements
for qualification and taxation as a REIT and (ii) the Company's ability to meet
on a continuing basis, through actual annual operating and other results, the
various requirements under the Code with regard to, among other things, the
sources of its gross income, the composition of its assets, the level of its
distributions to Shareholders, and the diversity of its stock ownership.
Although management believes that the Company has been and will continue to be
organized and has been and will continue to be operated in such a manner as to
qualify as a REIT, no assurance can be given that the actual results of the
operations of the Company and AOPP, the sources of their income, the nature of
their assets, the level of their distributions to Shareholders and the diversity
of their share ownership for any given taxable year in the past or in the future
will satisfy the requirements under the Code for qualification and taxation as a
REIT. In this regard, the stock ownership limits set forth in the Company's
articles of incorporation do not necessarily ensure that the Company will be
able to satisfy the requirement that it not be "closely held" for any given
taxable year. For any taxable year that the Company fails to qualify as a REIT
and the relief provisions do not apply, the Company would be taxed at the
regular corporate rates on all of its taxable income, whether or not it makes
any distributions to its Shareholders. Those taxes would reduce the amount of
cash available to the Company for distribution to its Shareholders or for
reinvestment. As a result, failure of the Company to qualify during any taxable
year as a REIT could have a material adverse effect upon the Company and its
Shareholders. Furthermore, unless certain relief provisions apply, the Company
would not be eligible to elect REIT status again until the fifth taxable year
that begins after the first year for which the Company fails to qualify.
Reduced Cash Flow to Shareholders if AOPP Failed to Qualify as a REIT.
AOPP elected to qualify for taxation as a REIT effective for its tax year ended
1997. The Company and AOPP believe that AOPP was organized and operated until
the time of the Merger in conformity with the requirements for taxation as a
REIT. If, for any reason, the IRS were subsequently to determine that AOPP
failed to meet the requirements for REIT status, AOPP could lose its REIT
qualification, causing the Company to lose its REIT qualification for the year
of the Merger and for subsequent years. Among other requirements, a REIT is not
permitted to have at the end of any taxable year any undistributed earnings and
profits that are attributable to a "C corporation" taxable year. AOPP was
taxable as a "C corporation" prior to 1997, and believes that at the end of 1996
it did not have any undistributed "C corporation" earnings and profits. However,
neither AOPP nor the Company has sought an opinion of counsel or outside
accountants to the effect that there are no "C corporation earnings and profits"
at that time or as a result of the Merger or to the effect that AOPP otherwise
qualified for taxation as a REIT.
Operating Risks
- ---------------
Value of Investment Reduced by General Risks of Real Estate Ownership.
The Company owns and operates commercial properties and is subject to the risks
of ownership of real estate-related assets generally and of ownership of
commercial properties in particular. These risks include (i) lack of demand for
space in a locale, (ii) changes in general economic or local conditions, (iii)
changes in supply of or demand for similar or competing facilities in an area,
(iv) the impact of environmental protection laws, (v) changes in interest rates
and availability of permanent mortgage funds which may render the sale or
financing of a property difficult or unattractive and (vi) changes in tax, real
estate and zoning laws. If the Company's properties do not generate revenue
sufficient to meet operating expenses, including any debt service, tenant
improvements, leasing commissions, and other capital expenditures, the Company
may have to borrow additional amounts to cover fixed costs and the Company's
cash available for distribution and ability to make expected distributions to
its Shareholders will be adversely affected.
Recent Acquisitions. As of March 31, 1998, the Company had recently
acquired 13 properties containing approximately 3,375,000 square feet of
commercial space that it did not previously operate.
Lease Expirations. The Company is subject to the risk that, upon
expiration, leases may not be renewed, the space may not be relet, or the terms
5
<PAGE>
of renewal or reletting (including the cost of required renovations) may be less
favorable than the current lease terms. Certain leases pertaining to the
Company's properties grant their tenants early termination rights upon payment
of a termination penalty. The Company has estimated the expenditures for new and
renewal leases for 1998 but no assurances can be given that the Company has
correctly estimated such expenses. Lease expirations will require the Company to
locate new tenants and negotiate replacement leases with such tenants.
Replacement leases typically require the Company to incur tenant improvements,
other tenant inducements and leasing commissions, in each case, which may be
higher than the costs relating to renewal leases. If the Company is unable to
promptly relet or renew leases for all or a substantial portion of expiring
space, if the rental rates upon such renewal or reletting are significantly
lower than expected or if the Company's reserves for these purposes prove
inadequate, the Company's cash available for distribution and ability to make
expected distributions to Shareholders could be adversely affected.
Financially Distressed Tenants. In the event of any lease default by a
tenant, the Company may experience delays in enforcing its rights as a landlord
and may incur substantial costs in protecting its investment. In addition, at
any time, a tenant of one of the Company's properties may seek the protection of
bankruptcy laws, which could result in the rejection and termination of such
tenant's lease and thereby cause a reduction in cash available for distribution
to Shareholders.
Significant Competition Among Commercial Properties. Competition in the
market areas in which many of the Company's properties are located is
significant and has reduced the occupancy levels and rental rates of, and
increased the operating expenses of, certain of these properties. Competition
may be accelerated by any increase in availability of funds for investment in
real estate. Barriers to entry are relatively low for those with the necessary
capital and the Company will be competing for property acquisition and tenants
with entities that have greater financial resources than the Company. Recent
increases in development of commercial properties are expected to further
intensify competition among operators in certain market areas in which the
Company operates.
Reduced Property Income from Changes in Laws. Because increases in
income and service taxes are generally not passed through to tenants under
leases, such increases may adversely affect the Company's cash flow and its
ability to make expected distributions to Shareholders. The Company's properties
are also subject to various federal, state, and local regulatory requirements,
such as requirements of the Americans with Disabilities Act of 1990 and 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 the
Company's properties are currently in material compliance with all such
requirements. However, there can be no assurance that these requirements will
not change 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 cash flow and ability to make distributions.
Lack of Control of Properties by the Company Resulting from Partnership
and Joint Venture Property Ownership Structures. The Company owns most of its
properties through the Operating Partnership. In addition, the Company may also
participate with other entities in property ownership through joint ventures or
partnerships in the future. Partnership or joint venture investments may, under
certain circumstances, involve risks not otherwise present, including the
possibility that the Company's partners or co-venturers might become bankrupt,
that such partners or co-venturers might at any time have economic or other
business interests or goals which are inconsistent with the business interests
or goals of the Company and that such partners or co-venturers may be in a
position to take action contrary to the Company's instructions or requests or
contrary to the Company's policies or objectives, including the Company's policy
with respect to maintaining its qualification as a REIT. The Company will,
however, seek to maintain sufficient control of such partnerships or joint
ventures to permit the Company's business objectives to be achieved. There is no
limitation under the Company's organizational documents as to the amount of
funds that may be invested in partnerships or joint ventures.
Reduced Property Income from Environmental Liabilities. Under various
federal, state and local environmental laws, regulations and ordinances, an
owner or operator of real estate interests may be liable for the costs of
cleaning up, as well as certain damages resulting from, past or present spills,
disposals or other releases of hazardous or toxic substances or wastes on, in or
from a property. Certain environmental laws impose such liability without regard
to whether the owner knew of, or was responsible for, the presence of hazardous
or toxic substances or wastes at or from a property. An owner or operator of
6
<PAGE>
real estate or real estate interests also may be liable under certain
environmental laws that govern activities or operations at a property having
adverse environmental effects, such as discharges to air and water as well as
handling and disposal practices for solid and hazardous or toxic wastes. In some
cases, liability may not be limited to the value of the property. The presence
of such substances or wastes, or the failure to properly remediate any resulting
contamination, also may adversely affect the owner's or operator's ability to
sell, lease or operate its property or to borrow using its property as
collateral.
The Company has conducted preliminary environmental assessments of most
of its properties (and the Company intends to conduct such assessments in
connection with future property acquisitions) to evaluate the environmental
condition of, and potential environmental liabilities associated with, such
properties. Such assessments generally consist of an investigation of
environmental conditions at the subject property (not including soil or
groundwater sampling or analysis), as well as a review of available information
regarding the site and publicly available data regarding conditions at other
sites in the vicinity. Although there can be no assurance, based on the recent
preliminary environmental assessments, the Company believes that it has funds
available to cover any liability from environmental contamination or potential
contamination, and the Company is not aware of any environmental contamination
of its facilities material to its overall business, financial condition or
results of operation.
Financing Risks
- ---------------
Dilution and Subordination. The interest of Shareholders can be diluted
through the issuance of additional securities. If the Company issues preferred
or equity stock, the interest of Shareholders could be subordinated, and if the
Company issues additional Common Stock, the interest of Shareholders could be
diluted.
Increased Risk of Loss of Investment from Debt. The Company may incur
debt. The use of debt increases the risk of loss through foreclosure.
7
<PAGE>
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, primarily to make investments in commercial
properties, including mortgage loans and interests in real estate partnerships,
and to repay outstanding bank borrowings under the Company's credit facility.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to combined fixed charges and preferred stock
dividends is computed by dividing earnings by fixed charges. Earnings consists
of net income before minority interest in income, loss on early extinguishment
of debt and gain on disposition of real estate plus fixed charges less the
portion of minority interest in income which does not contribute to fixed
charges. The ratio is computed using the operations and fixed charges of AOPP,
the predecessor for accounting and financial reporting purposes of the Company.
For the Year Ended December 31,
-------------------------------------------------
1993 1994 1995 1996 1997
-------------------------------------------------
Ratio of earnings to combined
fixed charges and preferred
stock dividends.............. N/A N/A N/A N/A 12,403
N/A-not applicable as the Company did not have any fixed charges in this period.
DESCRIPTION OF COMMON STOCK
The Company is authorized to issue 100,000,000 shares of Common Stock. At
March 31, 1998, the Company had outstanding 14,020,965 shares of Common Stock
(exclusive of an aggregate of approximately 12,380,000 shares issuable upon
exchange of interests in the Operating Partnership, shares issuable in pending
transactions and shares subject to options).
Common Stock
- ------------
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that Common Stock will be
issuable upon conversion of the Preferred Stock or upon the exercise of the
Warrants. The statements below describing the Common Stock are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of the Company's articles of incorporation and bylaws.
Holders of Common Stock will be entitled to receive dividends when, as
and if declared by the Board of Directors, out of funds legally available
therefor. Payment and declaration of dividends on the Common Stock and purchases
of shares thereof by the Company will be subject to certain restrictions if the
Company fails to pay dividends on outstanding preferred stock. See "Description
of Preferred Stock." Upon any liquidation, dissolution or winding up of the
Company, holders of Common Stock will be entitled to share equally and ratably
in any assets available for distribution to them, after payment or provision for
payment of the debts and other liabilities of the Company and the preferential
amounts owing with respect to any outstanding preferred stock. Holders of Common
Stock have no preemptive rights, except such as have been provided to certain
Shareholders by contract, which means public Shareholders have no right to
acquire any additional shares of Common Stock that may be issued by the Company
at a subsequent date.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters presented to such holders for a vote, with the exception that they
have cumulative voting rights with respect to the election of the Board of
Directors, in accordance with California law. Cumulative voting means that each
holder of Common Stock is entitled to cast as many votes as there are directors
to be elected multiplied by the number of shares registered in his or her name.
A holder of Common Stock may cumulate the votes for directors by casting all of
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<PAGE>
the votes for one candidate or by distributing the votes among as many
candidates as he or she chooses. The outstanding shares of Common Stock are, and
additional shares of Common Stock will be, when issued, fully paid and
nonassessable.
Ownership Limitations
- ---------------------
For the Company to qualify as a REIT under the Code, no more than 50% in
value of its outstanding shares of capital stock may be 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 entities) during
the last half of a taxable year. In order to maintain its qualification as a
REIT, the Company's articles of incorporation provide certain restrictions on
the shares of capital stock that any Shareholder may own.
The articles of incorporation provide that, subject to certain
exceptions, no holder may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than (A) 2.0% of the outstanding shares of Common
Stock and (B) 9.9% of the outstanding shares of each class or series of shares
of Preferred Stock or Equity Stock and will further provide that all shares of
stock be imprinted with a legend setting forth such restriction. The articles of
incorporation provide, however, that no person shall be deemed to exceed the
ownership limit solely by reason of the beneficial ownership of shares of any
class of stock to the extent that such shares of stock were beneficially owned
by such person (including PSI) upon completion of, and after giving effect to,
the Merger. Thus, this limitation does not affect the ownership of Common Stock
held by PSI and certain other Shareholders. Furthermore, the limitation does not
apply with respect to shares of stock deemed to be owned by a person as a result
of such person's ownership of shares of PSI (however, such ownership will be
taken into account in determining whether a subsequent acquisition or transfer
of shares of the Company (but not PSI) violates the ownership limit). The
ownership limitation is intended to assist in preserving the Company's REIT
status in view of PSI's substantial ownership interest in the Company and the
Hughes family's substantial ownership interest in PSI. There can be no
assurance, however, that such ownership limit will enable the Company to satisfy
the requirement that a REIT not be "closely held" within the meaning of Section
856(h) of the Code for any given taxable year, in part as a result of the
provision described above providing that the ownership limitation generally does
not apply to shares of the Company deemed to be owned as a result of a person's
ownership of shares of PSI.
The articles of incorporation provide that the Board of Directors, in its
sole and absolute discretion, may grant an exception to the ownership limits to
any person so requesting, so long as (A) the Board of Directors has determined
that the Company would not be "closely held" within the meaning of Section
856(h) of the Code (without regard to whether the event in question takes place
during the second half of a taxable year) and would not otherwise fail to
qualify as a REIT, after giving effect to an acquisition by such person of
beneficial ownership of the maximum amount of capital stock permitted as a
result of the exception to be granted, and taking into account the existing and
permitted ownership by other persons of stock (taking into account any other
exceptions granted) and (B) such person provides to the Board of Directors such
representations and undertakings as the Board of Directors may require.
Notwithstanding any of the foregoing ownership limits, no holder may own or
acquire, either directly, indirectly or constructively under the applicable
attribution rules of the Code, any shares of any class of capital stock if such
ownership or acquisition (i) would cause more than 50% in value of outstanding
capital stock to be owned, either 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), (ii) would result in the Company's
stock being beneficially owned by less than 100 persons (determined without
reference to any rules of attribution), or (iii) would otherwise result in the
Company's failing to qualify as a REIT.
The articles of incorporation provide that the Board of Directors may
terminate the application of the ownership limitations upon determining that it
is no longer in the best interest of the Company to attempt to, or continue to,
qualify as a REIT or that compliance with such limitation is no longer required
in order to qualify as a REIT.
The articles of incorporation provide that if after the Merger any holder
of capital stock purports to transfer shares to a person or there is a change in
the capital structure of the Company and either the transfer or the change in
capital structure would result in the Company failing to qualify as a REIT, or
such transfer or the change in capital structure would cause the transferee to
hold shares in excess of the applicable ownership limit, then the stock being
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<PAGE>
transferred (or in the case of an event other than a transfer, the stock
beneficially owned) which would cause one or more of the restrictions on
ownership or transfer to be violated shall be automatically transferred to a
trust for the benefit of a designated charitable beneficiary. The purported
transferee of such shares shall have no right to receive dividends or other
distributions with respect to such shares and shall have no right to vote such
shares. Any dividends or other distributions paid to such purported transferee
prior to the discovery by the Company that the shares have been transferred to a
trust shall be paid to the trustee of the trust for the benefit of the
charitable beneficiary upon demand. The trustee of the trust will have all
rights to dividends with respect to shares of stock held in trust, which rights
will be exercised for the exclusive benefit of the charitable beneficiary. Any
dividends or distributions paid over to the trustee will be held in trust for
the charitable beneficiary. The trustee shall designate a transferee of such
stock so long as such shares of stock would not violate the restrictions on
ownership or transfer in the articles of incorporation in the hands of such
designated transferee. Upon the sale of such shares, the purported transferee
shall receive the lesser of (A)(i) the price per share such purported transferee
paid for the stock in the purported transfer that resulted in the transfer of
the shares to the trust, or (ii) if the transfer or other event that resulted in
the transfer of the shares of the trust was not a transaction in which the
purported transferee gave full value for such shares, a price per share equal to
the market price on the date of the purported transfer or other event that
resulted in the transfer of the shares to the trust and (B) the price per share
received by the trustee from the sale or other disposition of the shares held in
the trust. Each purported transferee shall be deemed to have waived any claims
such purported transferee may have against the trustee and the Company arising
from the disposition of the shares, except for claims arising from the trustee's
gross negligence, willful misconduct, or failure to make payments when required
by the proposed amendment.
10
<PAGE>
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 50,000,000 shares of Preferred Stock.
At March 31, 1998, the Company had no outstanding shares of Preferred Stock. The
Company's articles of incorporation provide that the Preferred Stock may be
issued from time to time in one or more series and give the Board of Directors
broad authority to fix the dividend and distribution rights, conversion and
voting rights, if any, redemption provisions and liquidation preferences of each
series of Preferred Stock. Holders of Preferred Stock have no preemptive rights.
The Preferred Stock will be, when issued, fully paid and nonassessable.
The issuance of Preferred Stock with special voting rights (or Common
Stock) could be used to deter attempts by a single Shareholder or group of
Shareholders to obtain control of the Company in transactions not approved by
the Board of Directors. The Company has no intention to issue the Preferred
Stock (or Common Stock) for such purposes.
Ownership Limitations
- ---------------------
For a discussion of the ownership limitations that apply to Preferred
Stock, see "Description of Common Stock - Ownership Limitations."
Terms of Preferred Stock
- ------------------------
The following description of Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's articles of incorporation (including the
applicable form of certificate of determination) and bylaws.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including, where applicable, the
following: (1) the title and stated value of such Preferred Stock; (2) the
number of shares of such Preferred Stock offered, the liquidation preference per
share and the offering price of such Preferred Stock; (3) the dividend rate(s),
period(s) and/or payment date(s) or method(s) of calculation thereof applicable
to such Preferred Stock; (4) the date from which dividends on such Preferred
Stock shall accumulate, if applicable; (5) the provision for a sinking fund, if
any, for such Preferred Stock; (6) the provision for redemption, if applicable,
of such Preferred Stock; (7) any listing of such Preferred Stock on any
securities exchange; (8) the terms and conditions, if applicable, upon which
such Preferred Stock will be convertible into Common Stock, including the
conversion price (or manner of calculation thereof); (9) the voting rights, if
any, of such Preferred Stock; (10) any other specific terms, preferences,
rights, limitations or restrictions of such Preferred Stock; (11) the relative
ranking and preferences of such Preferred Stock as to dividend rights and rights
upon liquidation, dissolution or winding up of the affairs of the Company; and
(12) any limitations on issuance of any series of Preferred Stock ranking senior
to or on a parity with such series of Preferred Stock as to dividend rights and
rights upon liquidation, dissolution or winding up of the affairs of the
Company.
Ranking. The ranking of the Preferred Stock is set forth in the
applicable Prospectus Supplement. Unless otherwise specified in the applicable
Prospectus Supplement, such Preferred Stock will, with respect to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs of
the Company, rank (i) senior to the Common Stock, any additional class of common
stock and any series of Preferred Stock expressly made junior to such Preferred
Stock with respect to dividend rights or rights upon liquidation, dissolution or
winding up of the affairs of the Company; (ii) on a parity with all Preferred
Stock previously issued by the Company the terms of which specifically provide
that such Preferred Stock rank on a parity with the Preferred Stock offered
hereby with respect to dividend rights or rights upon liquidation, dissolution
or winding up of the Company; and (iii) junior to all Preferred Stock previously
issued by the Company the terms of which specifically provide that such
Preferred Stock rank senior to the Preferred Stock offered hereby with respect
to dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
Dividends. Holders of shares of the Preferred Stock of each series
offered hereby shall be entitled to receive, when, as and if declared by the
Board of Directors, out of assets of the Company legally available for payment,
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<PAGE>
cash dividends at such rates and on such dates as will be set forth in the
applicable Prospectus Supplement. Each such dividend shall be payable to holders
of record as they appear on the stock transfer books of the Company on such
record dates as shall be fixed by the Board of Directors.
Dividends on any series of the Preferred Stock offered hereby may be
cumulative or non-cumulative, as provided in the applicable Prospectus
Supplement. Dividends, if cumulative, will be cumulative from and after the date
set forth in the applicable Prospectus Supplement. If the Board of Directors
fails to declare a dividend payable on a dividend payment date on any series of
the Preferred Stock for which dividends are noncumulative, then the holders of
such series of the Preferred Stock will have no right to receive a dividend in
respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such series are declared payable on any future
dividend payment date.
No dividends (other than in Common Stock or other capital stock ranking
junior to the Preferred Stock of any series as to dividends and upon
liquidation) shall be declared or paid or set aside for payment, nor shall any
other distribution be declared or made upon the Common Stock, or any other
capital stock of the Company ranking junior to or on a parity with the Preferred
Stock of such series as to dividends or upon liquidation, nor shall any Common
Stock or any other capital stock of the Company ranking junior to or on a parity
with the Preferred Stock of such series as to dividends or upon liquidation be
redeemed, purchased or otherwise acquired for any consideration (or any moneys
be paid to or made available for a sinking fund for the redemption of any shares
of any such stock) by the Company (except by conversion into or exchange for
other capital stock of the Company ranking junior to the Preferred Stock of such
series as to dividends and upon liquidation) unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends on the
Preferred Stock of such series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for all past dividend periods and the then current dividend period and
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for the then current dividend period.
Any dividend payment made on shares of a series of Cumulative Preferred
Stock offered hereby shall first be credited against the earliest accrued but
unpaid dividend due with respect to shares of such series which remains payable.
Redemption. If so provided in the applicable Prospectus Supplement, the
shares of Preferred Stock will be subject to mandatory redemption or redemption
at the option of the Company, in whole or in part, in each case upon the terms,
at the times and at the redemption prices set forth in such Prospectus
Supplement.
The Prospectus Supplement relating to a series of Preferred Stock offered
hereby that is subject to mandatory redemption will specify the number of shares
of such Preferred Stock that shall be redeemed by the Company in each year
commencing after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accrued and unpaid dividends
thereon (which shall not, if such Preferred Stock does not have a cumulative
dividend, include any accumulation in respect of unpaid dividends for prior
dividend periods) to the date of redemption. The redemption price may be payable
in cash, securities or other property, as specified in the applicable Prospectus
Supplement.
Notwithstanding the foregoing, no shares of any series of Preferred Stock
offered hereby shall be redeemed and the Company shall not purchase or otherwise
acquire directly or indirectly any shares of Preferred Stock of such series
(except by conversion into or exchange for capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation) unless all outstanding shares of Preferred Stock of such series are
simultaneously redeemed unless, in each case, (i) if such series of Preferred
Stock has a cumulative dividend, full cumulative dividends on the Preferred
Stock of such series shall have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for payment
for all past dividend periods and the then current dividend period and (ii) if
such series of Preferred Stock does not have a cumulative dividend, full
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for the then current dividend period; provided, however,
that the foregoing shall not prevent the purchase or acquisition of shares of
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<PAGE>
Preferred Stock of such series pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of Preferred Stock of such
series.
If fewer than all of the outstanding shares of Preferred Stock of any
series offered hereby are to be redeemed, the number of shares to be redeemed
will be determined by the Company and such shares may be redeemed pro rata from
the holders of record of such shares in proportion to the number of such shares
held by such holders (with adjustments to avoid redemption of fractional shares)
or any other equitable method determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the stock transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such Preferred Stock are
to be surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and (vi) the
date upon which the holder's conversion rights, if any, as to such shares shall
terminate. If fewer than all the shares of Preferred Stock of any series are to
be redeemed, the notice mailed to each such holder thereof shall also specify
the number of shares of Preferred Stock to be redeemed from each such holder
and, upon redemption, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof. In order to facilitate the
redemption of shares of Preferred Stock, the Board of Directors may fix a record
date for the determination of shares of Preferred Stock to be redeemed, such
record date to be not less than 30 or more than 60 days prior to the date fixed
for such redemption.
Notice having been given as provided above, from and after the date
specified therein as the date of redemption, unless the Company defaults in
providing funds for the payment of the redemption price on such date, all
dividends on the Preferred Stock called for redemption will cease. From and
after the redemption date, unless the Company so defaults, all rights of the
holders of the Preferred Stock as Shareholders of the Company, except the right
to receive the redemption price (but without interest), will cease.
Subject to applicable law and the limitation on purchases when dividends
on Preferred Stock are in arrears, the Company may, at any time and from time to
time, purchase any shares of Preferred Stock in the open market, by tender or by
private agreement.
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, then, before any
distribution or payment shall be made to the holders of any Common Stock or any
other class or series of capital stock of the Company ranking junior to any
series of the Preferred Stock in the distribution of assets upon any
liquidation, dissolution or winding up of the Company, the holders of such
series of Preferred Stock shall be entitled to receive out of assets of the
Company legally available for distribution to stockholders liquidating
distributions in the amount of the liquidation preference per share (set forth
in the applicable Prospectus Supplement), plus an amount equal to all dividends
accrued and unpaid thereon (which shall not include any accumulation in respect
of unpaid dividends for prior dividend periods if such Preferred Stock does not
have a cumulative dividend). After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Preferred Stock will
have no right or claim to any of the remaining assets of the Company. In the
event that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the legally available assets of the Company are insufficient to pay
the amount of the liquidating distributions on all outstanding shares of any
series of Preferred Stock and the corresponding amounts payable on all shares of
other classes or series of capital stock of the Company ranking on a parity with
the Preferred Stock in the distribution of assets upon liquidation, dissolution
or winding up, then the holders of such series of Preferred Stock and all other
such classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders
of Preferred Stock, the remaining assets of the Company shall be distributed
among the holders of any other classes or series of capital stock ranking junior
to such series of Preferred Stock upon liquidation, dissolution or winding up,
according to their respective rights and preferences and in each case according
to their respective number of shares. For such purposes, the consolidation or
merger of the Company with or into any other corporation, or the sale, lease,
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<PAGE>
transfer or conveyance of all or substantially all of the property or business
of the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
Voting Rights. Holders of the Preferred Stock offered hereby will not
have any voting rights, except as set forth below or as otherwise expressly
required by law or as indicated in the applicable Prospectus Supplement.
If the equivalent of six quarterly dividends payable on any series of
Preferred Stock are in default (whether or not declared or consecutive), the
holders of all such series of Preferred Stock, voting as a single class with all
other series of Preferred Stock upon which similar voting rights have been
conferred and are exercisable, will be entitled to elect two additional
directors until all dividends in default have been paid or declared and set
apart for payment.
Such right to vote separately to elect directors shall, when vested, be
subject, always, to the same provisions for vesting of such right to elect
directors separately in the case of future dividend defaults. At any time when
such right to elect directors separately shall have so vested, the Company may,
and upon the written request of the holders of record of not less than 20% of
the total number of preferred shares of the Company then outstanding shall, call
a special meeting of Shareholders for the election of directors. In the case of
such a written request, such special meeting shall be held within 90 days after
the delivery of such request and, in either case, at the place and upon the
notice provided by law and in the bylaws, provided that the Company shall not be
required to call such a special meeting if such request is received less than
120 days before the date fixed for the next ensuing annual meeting of
Shareholders, and the holders of all classes of outstanding preferred stock are
offered the opportunity to elect such directors (or fill any vacancy) at such
annual meeting of Shareholders. Directors so elected shall serve until the next
annual meeting of Shareholders or until their respective successors are elected
and qualify. If, prior to the end of the term of any director so elected, a
vacancy in the office of such director shall occur, during the continuance of a
default by reason of death, resignation, or disability, such vacancy shall be
filled for the unexpired term of such former director by the appointment of a
new director by the remaining director or directors so elected.
The affirmative vote or consent of the holders of at least a majority of
the outstanding shares of each series of Preferred Stock will be required to
amend or repeal any provision of or add any provision to, the Company's articles
of incorporation, including the certificate of determination, if such action
would materially and adversely alter or change the rights, preferences or
privileges of such series of Preferred Stock.
No consent or approval of the holders of any series of Preferred Stock
offered hereby will be required for the issuance from the Company's authorized
but unissued Preferred Stock of other shares of any series of Preferred Stock
ranking on a parity with or junior to such series of Preferred Stock, or senior
to a series of Preferred Stock expressly made junior to other series of
Preferred Stock as to payment of dividends and distribution of assets, including
other shares of such series of Preferred Stock.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of such series of Preferred Stock
shall have been redeemed or called for redemption upon proper notice and
sufficient funds shall have been deposited in trust to effect such redemption.
Conversion Rights. The terms and conditions, if any, upon which shares of
any series of Preferred Stock offered hereby are convertible into Common Stock
will be set forth in the applicable Prospectus Supplement relating thereto. Such
terms will include the number of shares of Common Stock into which the Preferred
Stock is convertible, the conversion price (or manner of calculation thereof),
the conversion period, provisions as to whether conversion will be at the option
of the Company or the holders of the Preferred Stock or automatically upon the
occurrence of certain events, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such Preferred Stock.
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<PAGE>
DESCRIPTION OF THE DEPOSITARY SHARES
The Company may, at its option, elect to offer Depositary Shares rather
than full shares of Preferred Stock. In the event such option is exercised, each
of the Depositary Shares will represent ownership of and entitlement to all
rights and preferences of a fraction of a share of Preferred Stock of a
specified series (including dividend, voting, redemption and liquidation
rights). The applicable fraction will be specified in the Prospectus Supplement.
The shares of Preferred Stock represented by the Depositary Shares will be
deposited with a Depositary (the "Depositary") named in the applicable
Prospectus Supplement, under a Deposit Agreement (the "Deposit Agreement"),
among the Company, the Depositary and the holders of the Depositary Receipts.
Certificates evidencing Depositary Shares ("Depositary Receipts") will be
delivered to those persons purchasing Depositary Shares in the offering. The
Depositary will be the transfer agent, registrar and dividend disbursing agent
for the Depositary Shares. Holders of Depositary Receipts agree to be bound by
the Deposit Agreement, which requires holders to take certain actions such as
filing proof of residence and paying certain charges.
The summary of terms of the Depositary Shares contained in this
Prospectus does not purport to be complete and is subject to, and qualified in
its entirety by, the provisions of the Deposit Agreement, the Company's articles
of incorporation and the form of certificate of determination for the applicable
series of Preferred Stock.
Dividends
- ---------
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the series of Preferred Stock represented
by the Depositary Shares to the record holders of Depositary Receipts in
proportion to the number of Depositary Shares owned by such holders on the
relevant record date, which will be the same date as the record date fixed by
the Company for the applicable series of Preferred Stock. The Depositary,
however, will distribute only such amount as can be distributed without
attributing to any Depositary Share a fraction of one cent, and any balance not
so distributed will be added to and treated as part of the next sum received by
the Depositary for distribution to record holders of Depositary Receipts then
outstanding.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Receipts
entitled thereto, in proportion, as nearly as may be practicable, to the number
of Depositary Shares owned by such holders on the relevant record date, unless
the Depositary determines (after consultation with the Company) that it is not
feasible to make such distribution, in which case the Depositary may (with the
approval of the Company) adopt any other method for such distribution as it
deems equitable and appropriate, including the sale of such property (at such
place or places and upon such terms as it may deem equitable and appropriate)
and distribution of the net proceeds from such sale to such holders.
Liquidation Preference
- ----------------------
In the event of the liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary, the holders of each Depositary
Share will be entitled to the fraction of the liquidation preference accorded
each share of the applicable series of Preferred Stock, as set forth in the
Prospectus Supplement.
Redemption
- ----------
If the series of Preferred Stock represented by the applicable series of
Depositary Shares is redeemable, such Depositary Shares will be redeemed from
the proceeds received by the Depositary resulting from the redemption, in whole
or in part, of Preferred Stock held by the Depositary. Whenever the Company
redeems any Preferred Stock held by the Depositary, the Depositary will redeem
as of the same redemption date the number of Depositary Shares representing the
Preferred Stock so redeemed. The Depositary will mail the notice of redemption
promptly upon receipt of such notice from the Company and not less than 30 nor
more than 60 days prior to the date fixed for redemption of the Preferred Stock
and the Depositary Shares to the record holders of the Depositary Receipts.
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Voting
- ------
Promptly upon receipt of notice of any meeting at which the holders of
the series of Preferred Stock represented by the applicable series of Depositary
Shares are entitled to vote, the Depositary will mail the information contained
in such notice of meeting to the record holders of the Depositary Receipts as of
the record date for such meeting. Each such record holder of Depositary Receipts
will be entitled to instruct the Depositary as to the exercise of the voting
rights pertaining to the number of shares of Preferred Stock represented by such
record holder's Depositary Shares. The Depositary will endeavor, insofar as
practicable, to vote such Preferred Stock represented by such Depositary Shares
in accordance with such instructions, and the Company will agree to take all
action which may be deemed necessary by the Depositary in order to enable the
Depositary to do so. The Depositary will abstain from voting any of the
Preferred Stock to the extent that it does not receive specific instructions
from the holders of Depositary Receipts.
Withdrawal of Preferred Stock
- -----------------------------
Upon surrender of Depositary Receipts at the principal office of the
Depositary, upon payment of any unpaid amount due the Depositary, and subject to
the terms of the Deposit Agreement, the owner of the Depositary Shares evidenced
thereby is entitled to delivery of the number of whole shares of Preferred Stock
and all money and other property, if any, represented by such Depositary Shares.
Partial shares of Preferred Stock will not be issued. If the Depositary Receipts
delivered by the holder evidence a number of Depositary Shares in excess of the
number of Depositary Shares representing the number of whole shares of Preferred
Stock to be withdrawn, the Depositary will deliver to such holder at the same
time a new Depositary Receipt evidencing such excess number of Depositary
Shares. Holders of Preferred Stock thus withdrawn will not thereafter be
entitled to deposit such shares under the Deposit Agreement or to receive
Depositary Receipts evidencing Depositary Shares therefor.
Amendment and Termination of Deposit Agreement
- ----------------------------------------------
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time and from time to time be
amended by agreement between the Company and the Depositary. However, any
amendment which materially and adversely alters the rights of the holders (other
than any change in fees) of Depositary Shares will not be effective unless such
amendment has been approved by at least a majority of the Depositary Shares then
outstanding. No such amendment may impair the right, subject to the terms of the
Deposit Agreement, of any owner of any Depositary Shares to surrender the
Depositary Receipt evidencing such Depositary Shares with instructions to the
Depositary to deliver to the holder the Preferred Stock and all money and other
property, if any, represented thereby, except in order to comply with mandatory
provisions of applicable law. The Deposit Agreement may be terminated by the
Company or the Depositary only if (i) all outstanding Depositary Shares have
been redeemed or (ii) there has been a final distribution in respect of the
Preferred Stock in connection with any liquidation, dissolution or winding up of
the Company and such distribution has been made to all the holders of Depositary
Shares.
Charges of Depositary
- ---------------------
The Company will pay all transfer and other taxes and governmental
charges arising solely from the existence of the depositary arrangements. The
Company will pay charges of the Depositary in connection with the initial
deposit of the Preferred Stock and the initial issuance of the Depositary
Shares, and redemption of the Preferred Stock and all withdrawals of Preferred
Stock by owners of Depositary Shares. Holders of Depositary Receipts will pay
transfer, income and other taxes and governmental charges and certain other
charges as are provided in the Deposit Agreement to be for their accounts. In
certain circumstances, the Depositary may refuse to transfer Depositary Shares,
may withhold dividends and distributions and sell the Depositary Shares
evidenced by such Depositary Receipt if such charges are not paid.
Miscellaneous
- -------------
The Depositary will forward to the holders of Depositary Receipts all
reports and communications from the Company which are delivered to the
Depositary and which the Company is required to furnish to the holders of the
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Preferred Stock. In addition, the Depositary will make available for inspection
by holders of Depositary Receipts at the principal office of the Depositary, and
at such other places as it may from time to time deem advisable, any reports and
communications received from the Company which are received by the Depositary as
the holder of Preferred Stock.
Neither the Depositary nor the Company assumes any obligation or will be
subject to any liability under the Deposit Agreement to holders of Depositary
Receipts other than for its negligence or willful misconduct. Neither the
Depositary nor the Company will be liable if the Depositary is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under the Deposit Agreement. The obligations of the Company and the
Depositary under the Deposit Agreement will be limited to performance in good
faith of their duties thereunder, and they will not be obligated to prosecute or
defend any legal proceeding in respect of any Depositary Shares or Preferred
Stock unless satisfactory indemnity is furnished. The Company and the Depositary
may rely on written advice of counsel or accountants, on information provided by
holders of Depositary Receipts or other persons believed in good faith to be
competent to give such information and on documents believed to be genuine and
to have been signed or presented by the proper party or parties.
Resignation and Removal of Depositary
- -------------------------------------
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 60 days after delivery of the notice for
resignation or removal and must be a bank or trust company having its principal
office in the United States of America and having a combined capital and surplus
of at least $150,000,000.
Federal Income Tax Considerations
- ---------------------------------
Owners of the Depositary Shares will be treated for federal income tax
purposes as if they were owners of the Preferred Stock represented by such
Depositary Shares. Accordingly, such owners will be entitled to take into
account, for federal income tax purposes, income and deductions to which they
would be entitled if they were holders of such Preferred Stock. In addition, (i)
no gain or loss will be recognized for federal income tax purposes upon the
withdrawal of Preferred Stock in exchange for Depositary Shares, (ii) the tax
basis of each share of Preferred Stock to an exchanging owner of Depositary
Shares will, upon such exchange, be the same as the aggregate tax basis of the
Depositary Shares exchanged therefor, and (iii) the holding period for Preferred
Stock in the hands of an exchanging owner of Depositary Shares will include the
period during which such person owned such Depositary Shares.
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DESCRIPTION OF EQUITY STOCK
The Company is authorized to issue 100,000,000 shares of Equity Stock. At
March 31, 1998, the Company had no outstanding shares of Equity Stock. The
Company's articles of incorporation provide that the Equity Stock may be issued
from time to time in one or more series and give the Board of Directors broad
authority to fix the dividend and distribution rights, conversion and voting
rights, redemption provisions and liquidation rights of each series of Equity
Stock. Holders of Equity Stock have no preemptive rights. The shares of Equity
Stock will be, when issued, fully paid and nonassessable.
The issuance of Equity Stock with special voting rights (or Common Stock)
could be used to deter attempts by a single Shareholder or group of Shareholders
to obtain control of the Company in transactions not approved by the Board of
Directors. The Company has no intention to issue the Equity Stock (or Common
Stock) for such purposes.
Ownership Limitations
- ---------------------
For a discussion of the ownership limitations that apply to Equity Stock,
see "Description of Common Stock Ownership Limitations."
Terms of Equity Stock
- ---------------------
The following description of Equity Stock sets forth certain general
terms and provisions of the Equity Stock to which any Prospectus Supplement may
relate. The statements below describing the Equity Stock are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of the Company's articles of incorporation (including the applicable
form of certificate of determination) and Bylaws.
Reference is made to the Prospectus Supplement relating to the Equity
Stock offered thereby for specific terms, including, where applicable, the
following: (1) the designation of such Equity Stock; (2) the number of shares of
such Equity Stock offered, the liquidation rights and the offering price of such
Equity Stock; (3) the dividend rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Equity Stock; (4) the
provision for redemption, if applicable, of such Equity Stock; (5) any listing
of such Equity Stock on any securities exchange; (6) the terms and conditions,
if applicable, upon which such Equity Stock will be convertible into Common
Stock, including the conversion price (or manner of calculation thereof); (7)
the voting rights, if any, of such Equity Stock; (8) any other specific terms,
rights, limitations or restrictions of such Equity Stock; and (9) the relative
ranking of such Equity Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company.
Ranking. The ranking of the Equity Stock is set forth in the applicable
Prospectus Supplement. Unless otherwise specified in the applicable Prospectus
Supplement, such Equity Stock will, with respect to dividend rights and rights
upon liquidation, dissolution or winding up of the affairs of the Company, rank
on a parity with the Common Stock.
Dividends. Holders of shares of the Equity Stock of each series offered
hereby shall be entitled to receive, when, as and if declared by the Board of
Directors, out of assets of the Company legally available for payment, cash
dividends at such rates and on such dates as will be set forth in the applicable
Prospectus Supplement. Each such dividend shall be payable to holders of record
as they appear on the stock transfer books of the Company on such record dates
as shall be fixed by the Board of Directors. Unless otherwise specified in the
applicable Prospectus Supplement, dividends on such Equity Stock will be
non-cumulative.
Redemption. If so provided in the applicable Prospectus Supplement, the
shares of Equity Stock will be subject to mandatory redemption or redemption at
the option of the Company, in whole or in part, in each case upon the terms, at
the times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Equity Stock offered
hereby that is subject to mandatory redemption will specify the number of shares
of such Equity Stock that shall be redeemed by the Company in each year
commencing after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accrued and unpaid dividends
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thereon (which shall not, if such Equity Stock does not have a cumulative
dividend, include any accumulation in respect of unpaid dividends for prior
dividend periods) to the date of redemption. The redemption price may be payable
in cash, securities or other property, as specified in the applicable Prospectus
Supplement.
If fewer than all of the outstanding shares of Equity Stock of any series
offered hereby are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares held
by such holders (with adjustments to avoid redemption of fractional shares) or
any other equitable method determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Equity Stock of any
series to be redeemed at the address shown on the stock transfer books of the
Company. Each notice shall state: (i) the redemption date; (ii) the number of
shares and series of the Equity Stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such Equity Stock are to
be surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and (vi) the
date upon which the holder's conversion rights, if any, as to such shares shall
terminate. If fewer than all the shares of Equity Stock of any series are to be
redeemed, the notice mailed to each such holder thereof shall also specify the
number of shares of Equity Stock to be redeemed from each such holder and, upon
redemption, a new certificate shall be issued representing the unredeemed shares
without cost to the holder thereof. In order to facilitate the redemption of
shares of Equity Stock, the Board of Directors may fix a record date for the
determination of shares of Equity Stock to be redeemed, such record date to be
not less than 30 or more than 60 days prior to the date fixed for such
redemption.
Notice having been given as provided above, from and after the date
specified therein as the date of redemption, unless the Company defaults in
providing funds for the payment of the redemption price on such date, all
dividends on the Equity Stock called for redemption will cease. From and after
the redemption date, unless the Company so defaults, all rights of the holders
of the Equity Stock as Shareholders of the Company, except the right to receive
the redemption price (but without interest), will cease.
Liquidation Rights. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, then, before any
distribution or payment shall be made to the holders of the Equity Stock or any
other class or series of capital stock of the Company ranking junior to any
series of the Preferred Stock in the distribution of assets upon any
liquidation, dissolution or winding up of the Company, the holders of such
series of Preferred Stock shall be entitled to receive out of assets of the
Company legally available for distribution to stockholders liquidating
distributions in the amount of the liquidation preference per share, plus an
amount equal to all dividends accrued and unpaid thereon (which shall not
include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Stock does not have a cumulative dividend). After
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of Preferred Stock will have no right or claim to any of
the remaining assets of the Company. In the event that, upon any such voluntary
or involuntary liquidation, dissolution or winding up, the legally available
assets of the Company are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of any series of Preferred Stock and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Preferred Stock in the
distribution of assets upon liquidation, dissolution or winding up, then the
holders of such series of Preferred Stock and all other such classes or series
of capital stock shall share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled.
If liquidating distributions shall have been made in full to all holders
of Preferred Stock, the remaining assets of the Company shall be distributed
among the holders of any other classes or series of capital stock ranking junior
to such series of Preferred Stock upon liquidation, dissolution or winding up,
including the Equity Stock, according to their respective rights and in each
case according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other corporation, or
the sale, lease, transfer or conveyance of all or substantially all of the
property or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
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Unless otherwise specified in the applicable Prospectus Supplement, upon
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Company, holders of the Equity Stock will rank on a parity with
the holders of the Common Stock, subject to any maximum or minimum distribution
to holders of Equity Stock specified in such Prospectus Supplement.
Voting Rights. Unless otherwise specified in the applicable Prospectus
Supplement, holders of the Equity Stock will have the same voting rights as
holders of the Common Stock.
No consent or approval of the holders of any series of Equity Stock will
be required for the issuance from the Company's authorized but unissued Equity
Stock of other shares of any series of Equity Stock including shares of such
series of Equity Stock.
Conversion Rights. The terms and conditions, if any, upon which shares of
any series of Equity Stock offered hereby are convertible into Common Stock will
be set forth in the applicable Prospectus Supplement relating thereto. Such
terms will include the number of shares of Common Stock into which the Equity
Stock is convertible, the conversion price (or manner of calculation thereof),
the conversion period, provisions as to whether conversion will be at the option
of the Company or the holders of the Equity Stock or automatically upon the
occurrence of certain events, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such Equity Stock.
DESCRIPTION OF WARRANTS
The Company has no Warrants outstanding (other than options issued under
the Company's stock option plan). The Company may issue Warrants for the
purchase of Preferred Stock, Equity Stock or Common Stock. Warrants may be
issued independently or together with any other Securities offered by any
Prospectus Supplement and may be attached to or separate from such Securities.
Each series of Warrants will be issued under a separate warrant agreement (each,
a "Warrant Agreement") to be entered into between the Company and a warrant
agent specified in the applicable Prospectus Supplement (the "Warrant Agent").
The Warrant Agent will act solely as an agent of the Company in connection with
the Warrants of such series and will not assume any obligation or relationship
of agency or trust for or with any holders or beneficial owners of Warrants. The
following sets forth certain general terms and provisions of the Warrants
offered hereby. Further terms of the Warrants and the applicable Warrant
Agreement will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the
Warrants in respect of which this Prospectus is being delivered, including,
where applicable, the following: (1) the title of such Warrants; (2) the
aggregate number of such Warrants; (3) the price or prices at which such
Warrants will be issued; (4) the designation, number and terms of the shares of
Preferred Stock, Equity Stock or Common Stock purchasable upon exercise of such
Warrants; (5) the designation and terms of the other Securities, if any, with
which such Warrants are issued and the number of such Warrants issued with each
such Security; (6) the date, if any, on and after which such Warrants and the
related Preferred Stock, Equity Stock or Common Stock, if any, will be
separately transferable; (7) the price at which each share of Preferred Stock,
Equity Stock or Common Stock purchasable upon exercise of such Warrants may be
purchased; (8) the date on which the right to exercise such Warrants shall
commence and the date on which such right shall expire; (9) the minimum or
maximum amount of such Warrants which may be exercised at any one time; and (10)
any other terms of such Warrants, including terms, procedures and limitations
relating to the exchange and exercise of such Warrants.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax
considerations relating to a holder of Common Stock. The applicable Prospectus
Supplement will contain information about additional federal income tax
considerations, if any, relating to Securities other than Common Stock. The
following discussion, which is not exhaustive of all possible tax
considerations, does not give a detailed description of any state, local, or
foreign tax considerations. Nor does it discuss all of the aspects of federal
income taxation that may be relevant to a prospective Shareholder in light of
his or her particular circumstances or to certain types of Shareholders
(including insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) who are subject to special treatment under
federal income tax laws. The information in this section is based on the Code,
including the provisions of the Taxpayer Relief Act of 1997 (the "1997 Act"),
current, temporary and proposed Treasury Regulations thereunder, the legislative
history of the Code, current administrative interpretations and practices of the
IRS (including its practices and policies as endorsed in private letter rulings,
which are not binding on the IRS except with respect to the taxpayer that
receives such a ruling), and court decisions, all as of the date hereof. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and court decisions will not significantly change
current law or adversely affect existing interpretations of current law. Any
such change could apply retroactively to transactions preceding the date of the
change. The Company has not requested and does not plan to request any rulings
from the IRS concerning the tax treatment of the Company or the Operating
Partnership. Thus, no assurance can be provided that the statements set forth
herein (which do not bind the IRS or the courts) will not be challenged by the
IRS or will be sustained by a court if so challenged.
EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS
SUPPLEMENT, AS WELL AS HIS OR HER TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO
HIM OR HER OF THE ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
As used under this heading, the term "Company" refers solely to PS
Business Parks, Inc.
Taxation of the Company
- -----------------------
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Code commencing with its taxable year ended December 31, 1990. The
Company believes that its has been organized and operated in a manner so as to
qualify as a REIT, and the Company intends to continue to operate in such a
manner. So long as the Company qualifies for taxation as a REIT, it generally
will not be subject to federal corporate income taxes on net income that it
distributes currently to Shareholders. However, the Company will be subject to
federal income tax in the following circumstances. First, the Company will be
taxed at regular corporate rates on any undistributed REIT taxable income,
including undistributed net capital gains. Second, under certain circumstances,
the Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property acquired
by foreclosure or otherwise on default of a lease or a loan secured by the
property) which is held primarily for sale to customers in the ordinary course
of business or (ii) other nonqualifying income from foreclosure property, it
will be subject to tax at the highest corporate rate on such income. Fourth, if
the Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), and has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods, it
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, if the Company acquires or has
acquired any asset from a C corporation (i.e., a corporation generally subject
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to full corporate-level tax) in a transaction in which the basis of the asset in
the acquiror's hands is determined by reference to the basis of the asset (or
any other asset) in the hands of the C corporation and the acquiror recognizes
gain on the disposition of such asset during the 10 year period beginning on the
date on which such asset was acquired by it, then to the extent of such asset's
"Built-in Gain" (i.e., the excess of (a) the fair market value of such asset at
the time of the acquisition by the Company over (b) the adjusted basis in such
asset, determined at the time of such acquisition), such gain will be subject to
tax at the highest regular corporate rate applicable, pursuant to anticipated
Treasury Regulations that have yet to be promulgated. The results described
above with respect to the recognition of Built-In Gain assume that the Company
will make an election pursuant to Notice 88-19 with respect to any such
acquisition. Prior to 1997, AOPP was taxable as a regular C corporation. In
making its election to be taxed as a REIT for 1997, AOPP elected to be subject
to the Built-In Gain rules of Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors,
(2) the beneficial ownership of which is evidenced by transferable shares of
stock, or by transferable certificates of beneficial interest, (3) that would be
taxable as a domestic corporation, but for Sections 856 through 859 of the Code,
(4) that is neither a financial institution nor an insurance company subject to
certain provisions of the Code, (5) the beneficial ownership of which is held by
100 or more persons, (6) that during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities), and (7) that meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(1) through (4), inclusive, must be met during the entire taxable year and that
condition (5) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
The Company's Articles of Incorporation contain restrictions regarding
the transfer of its capital stock that are intended to assist the Company in
continuing to satisfy the stock ownership requirements described in conditions
(5) and (6). See "Description of Common Stock-Restrictions on Transfer."
Moreover, pursuant to the 1997 Act, for the Company's taxable years commencing
on or after January 1, 1998, if the Company complies with regulatory rules
pursuant to which it is required to send annual letters to holders of its
capital stock requesting information regarding the actual ownership of the
capital stock, and the Company does not know, or exercising reasonable diligence
would not have known, whether it failed to meet requirement (6) above, the
Company will be treated as having met the requirement.
The ownership restrictions in the Company's articles of incorporation
generally prohibit the actual or constructive ownership of more than 2% of the
outstanding shares of Common Stock (excluding the interest held by PSI) or more
than 9.9% of the outstanding shares of each class or series of shares of
Preferred Stock, unless an exception is established by the Board of Directors.
The restrictions provide that if, at any time, for any reason, those ownership
limitations are violated or more than 50% in value of the Company's outstanding
stock otherwise would be considered owned by five or fewer individuals, then a
number of shares of stock necessary to cure the violation will automatically and
irrevocably be transferred from the person causing the violation to a designated
charitable beneficiary.
The REIT protective provisions are modeled after certain arrangements
that the IRS has ruled in private letter rulings will preclude a REIT from being
considered to violate the ownership restrictions so long as the arrangements are
enforceable as a matter of state law and the REIT seeks to enforce them as and
when necessary. There can be no assurance, however, that the IRS might not seek
to take a different position with respect to the Company (a private letter
ruling is legally binding only with respect to the taxpayer to whom it was
issued and the Company will not seek a private ruling on this or any other
issue) or contend that the Company failed to enforce these various arrangements.
Moreover, the Company's limitations will not apply to the ownership of shares at
the time of the Merger, or to shares of stock of the Company deemed to be owned
by a person as a result of such person's ownership of shares of PSI (however,
such deemed ownership will be taken into account in determining whether a
subsequent acquisition or transfer of shares of the Company (but not PSI)
violates the limitations), exceptions not contained in the private letter
rulings previously issued by the IRS. Accordingly, there can be no assurance
that these arrangements necessarily will preserve the Company's REIT status. The
Company believes, however, that it has issued and outstanding sufficient shares
with sufficient diversity of ownership to allow it to satisfy the REIT ownership
requirements.
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A REIT is not permitted to have at the end of any taxable year any
undistributed earnings and profits that are attributable to a "C corporation"
taxable year. As a result of the Merger, the Company succeeded to various tax
attributes of AOPP, including any undistributed earnings and profits. AOPP was
taxable as a "C corporation" prior to 1997, and does not believes that it has
transferred any undistributed "C corporation earnings and profits" to the
Company. However, neither AOPP nor the Company has sought an opinion of counsel
or outside accountants to the effect that the Company has not acquired any "C
corporation earnings and profits" from AOPP. There can be no assurance that the
IRS would not contend otherwise on a subsequent audit of AOPP. Recently
finalized Treasury Regulations provide for certain "deficiency dividend"
distribution procedures. Although the application of the Treasury Regulations is
not entirely clear, it appears that a REIT may be able to use such "deficiency
dividend" procedures to distribute any C corporation earnings and profits deemed
to have been acquired from a C corporation. In order to use this procedure, an
affected REIT would have to make an additional distribution to its shareholders
(in addition to distributions made for purposes of satisfying the normal REIT
distribution requirements), within 90 days of the IRS determination. In
addition, the REIT would have to pay to the IRS an interest charge of 50% of the
acquired C corporation earnings and profits that were not distributed prior to
the end of the REIT's taxable year in which they were acquired. If C corporation
earnings and profits were deemed to have been acquired by the Company, there can
be no assurance, however, that the IRS would not take the position either that
the procedure is not available at all (in which case the Company would fail to
qualify as a REIT) or, alternatively, that even if the procedure is available,
the Company cannot qualify as a REIT for its taxable year in which the earnings
and profits were acquired, but it could qualify as a REIT for subsequent taxable
years. Finally, if AOPP were determined not to have qualified as a REIT for the
taxable year ended December 31, 1997 or its short taxable year ending at the
time of the Merger, the Company would not be eligible to elect REIT status for
up to four years after the year in which AOPP failed to qualify as a REIT. AOPP
made an election to be taxed as a REIT commencing with its taxable year ended
December 31, 1997. The Company and AOPP believe that AOPP's election is valid
and that AOPP was organized, and operated in 1997 and until the time of the
Merger, in conformity with the requirements for taxation as a REIT.
Income Tests. In order to maintain qualification as a REIT, the Company
must satisfy certain gross income requirements, which are applied on an annual
basis. 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 the same items which
qualify under the 75% income test, and from dividends, interest and gain from
the sale or disposition of stock or securities, or from any combination of the
foregoing. For its taxable years ending on or before December 31, 1997, the
Company was subject to a third gross income test which required that short-term
gain from the sale or other disposition of stock or securities, gain from
prohibited transactions and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must have represented less than 30% of the
Company's gross income (including gross income from prohibited transactions).
Pursuant to the 1997 Act, the Company will not have to meet this 30% gross
income test in 1998 and subsequent years.
Rents received by the Company will qualify as "rents from real property"
in satisfying the gross income requirements described above only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. The Company anticipates that none of its annual gross income will be
attributable to rents that are based in whole or in part on the income of any
person (excluding rents based on a percentage of receipts or sales, which, as
described above, are permitted). Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if the Company, or
an owner of 10% or more of the Company, directly or constructively owns 10% or
more of such tenant (a "Related Party Tenant"). The Company does not anticipate
that it will receive income from Related Party Tenants. 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." The Company does not anticipate deriving rent
attributable to personal property leased in connection with real property that
exceeds 15% of the total rents. Finally, for rents received to qualify as "rents
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from real property," the Company generally must not operate or manage the
property or furnish or render services to tenants, other than through an
"independent contractor" which is adequately compensated and from whom the
Company derives no revenue. The "independent contractor" requirement, however,
does not apply to the extent the services provided by the Company are "usually
or customarily rendered" in connection with the rental of space for occupancy
only and are not otherwise considered "rendered to the occupant." Any services
with respect to certain properties that the Company believes may not be provided
by the Company directly without jeopardizing the qualification of rent as "rents
from real property" will be performed by "independent contractors."
Pursuant to the 1997 Act, for the Company's taxable years commencing on
or after January 1, 1998, rents received generally will qualify as rents from
real property even if the Company were to provide services that are not
permissible services so long as the amount received for such services meets a de
minimis standard. The amount received for "impermissible services" with respect
to a property (or, if services are available only to certain tenants, possibly
with respect to such tenants) cannot exceed 1% of all amounts received, directly
or indirectly, by the Company with respect to such property (or, if services are
available only to certain tenants, possibly with respect to such tenants). In
computing any such amounts, the amount that the Company would be deemed to have
received for performing "impermissible services" will be the greater of the
actual amount so received or 150% of the direct cost to the Company of providing
those services.
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code. It
is not possible, however, to state whether in all circumstances the Company
would be entitled to the benefit of these relief provisions. Even if these
relief provisions were to apply, however, a 100% tax would be imposed with
respect to the "excess net income" attributable to the failure to satisfy the
75% and 95% gross income tests.
Asset Tests. Generally, 75% by value of the Company's investments must be
in real estate, mortgages secured by real estate, cash, or government securities
(including its allocable share of real estate assets held by any partnerships in
which the Company owns an interest). Not more than 25% of the Company's total
assets may be represented by securities other than those in the 75% asset class.
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. The 5% test generally must be met for
any quarter in which the Company acquires securities of an issuer. The Company
believes that it satisfies these tests.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders 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) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of non-cash income. In addition, if the Company disposes of any Built-In
Gain Asset during the 10 year period beginning on the date the Company acquired
that asset, the Company will be required, pursuant to Treasury Regulations which
have not yet been promulgated, to distribute at least 95% of the Built-In Gain
(after tax), if any, recognized on the disposition of such asset. See "-
General" above for a discussion of "Built-In Gain Assets." 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 date after such
declaration.
To the extent that the Company does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its "REIT taxable
income," as adjusted, it will be subject to tax thereon at regular ordinary and
capital gain corporate tax rates. The Company may elect to require the
shareholders to include the Company's undistributed net capital gains in their
income by designating, in a written notice to shareholders, those amounts as
undistributed capital gains in respect of its shareholders' shares. If the
Company makes such an election, the shareholders will (i) include in their
income as capital gains their proportionate share of such undistributed capital
gains and (ii) be deemed to have paid their proportionate share of the tax paid
by the Company on such undistributed capital gains and thereby receive a credit
or refund for such amount. A shareholder will increase the basis in its Common
Shares by the difference between the amount of capital gain included in its
income and the amount of the tax that the Company is deemed to have paid on the
shareholder's behalf. The earnings and profits of the Company will be adjusted
24
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appropriately. For a more detailed description of the tax consequences to a
shareholder of such a designation, see "- Taxation of U.S. Shareholders Holding
Common Stock."
In addition, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the sum of
amounts actually distributed during the calendar year by the REIT and the
amount, if any, on which the REIT paid income tax for such year.
The Company intends to make timely distributions sufficient to satisfy
its annual distribution requirements. It is expected that the Company's REIT
taxable income will be less than its cash flow due to the allowance of
depreciation and other non-cash charges in computing REIT taxable income.
Accordingly, the Company anticipates that it will generally have sufficient cash
or liquid assets to enable it to satisfy the distribution requirements described
above. It is possible, however, that the Company, from time to time, may not
have sufficient cash or other liquid assets to meet these distribution
requirements due to timing differences between (i) the actual receipt of income
and actual payment of deductible expenses and (ii) the inclusion of such income
and deduction of such expenses in arriving at taxable income of the Company. If
such timing differences occur, in order to meet the distribution requirements,
the Company may find it necessary to arrange for short-term, or possibly
long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
Failure of the Company to Qualify as a REIT. For any taxable year that
the Company fails to qualify as a REIT, the Company would be taxed at the usual
corporate rates on all of its taxable income. Those taxes would reduce the
amount of cash available to the Company for distribution to its Shareholders.
Distributions to shareholders in any year in which the Company fails to qualify
as a REIT will not be deductible and will not be required to be made. In
addition, if the Company fails to qualify as a REIT, all distributions to
shareholders will be taxed as ordinary income, to the extent of the Company's
current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction.
Unless certain relief provisions apply, the Company's election to be
treated as a REIT will terminate automatically if the Company fails to meet the
qualification requirements described above and the Company will not be eligible
to elect REIT status again until the fifth taxable year that begins after the
first year for which the Company's election was terminated (or revoked). If the
Company loses its REIT status, but later qualifies and elects to be taxed as a
REIT again, the Company may face significant adverse tax consequences.
Taxation of U.S. Shareholders Holding Common Stock
- --------------------------------------------------
As used herein, the term "U.S. Shareholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) is an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) is a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more Untied States
persons who have the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to such date that elect to continue to be treated as
United States persons, shall also be considered U.S. Shareholders.
Distributions by the Company. As long as the Company qualifies as a REIT,
distributions made to the Company's taxable U.S. Shareholders (and not
designated as capital gain dividends) will generally be taxable to such
Shareholders as ordinary income to the extent of the Company's earnings and
profits. For purposes of determining whether distributions on shares of Common
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<PAGE>
Stock are out of current or accumulated earnings and profits, the earnings and
profits of the Company will be allocated first to shares of Preferred Stock and
second to shares of Common Stock. There can be no assurance that the Company
will have sufficient earnings and profits to cover distributions on any shares
of Preferred Stock. Such distributions will not be eligible for the dividends
received deductions in the case of Shareholders that are corporations. Dividends
declared during the last quarter of a calendar year and actually paid during
January of the immediately following calendar year generally are treated as if
received by the Shareholders on December 31 of the calendar year during which
they were declared.
Distributions designated by the Company as capital gain dividends
generally will be taxed as gain from the sale or exchange of a capital asset
held for more than one year (to the extent that the distributions do not exceed
the Company's actual net capital gain for the taxable year) without regard to
the period for which the Shareholder has held its stock. Corporate Shareholders
however, may be required to treat up to 20% of certain capital gain dividends as
ordinary income.
Shareholders may not include in their individual income tax returns any
net operating losses or capital losses of the Company. Instead, such losses
would be carried over by the Company for potential offset against future income
(subject to certain limitations). Distributions made by the Company and gain
arising from the sale or exchange by a holder of Common Stock will not be
treated as passive activity income, and, as a result, holders of Common Stock
generally will not be able to apply any "passive losses" against such income or
gain. Future regulations may require that Shareholders take into account, for
purposes of computing their individual alternative minimum tax liability,
certain tax preference items of the Company.
Distributions in excess of current or accumulated earnings and profits
will not be taxable to a U.S. shareholder to the extent that they do not exceed
the adjusted basis of the shareholder's shares of Common Stock, but rather will
reduce the adjusted basis of such shares of Common Stock. To the extent that
such distributions exceed the adjusted basis of a U.S. shareholder's shares of
Common Stock, they will be included in income as capital gains, assuming the
shares of Common Stock are a capital asset in the hands of the U.S. Shareholder.
Pursuant to the 1997 Act, for the Company's taxable years commencing on
or after January 1, 1998, the Company may elect to require the holders of Common
Stock to include the Company's undistributed net long-term capital gains in
their income. If the Company makes such an election, the holders of Common Stock
will (i) include in their income as long-term capital gains their proportionate
share of such undistributed capital gains and (ii) be deemed to have paid their
proportionate share of the tax paid by the Company on such undistributed capital
gains and thereby receive a credit or refund for such amount. A holder of Common
Stock will increase the basis in its Common Stock by the difference between the
amount of capital gain included in its income and the amount of the tax it is
deemed to have paid. The earnings and profits of the Company will be adjusted
appropriately. As described below in "-Recent Legislation," with respect to such
long-term capital gain of a taxable domestic shareholder that is an individual
or an estate or trust, the IRS has authority to issue regulations that could
apply the special tax rate applicable to sales of depreciable real property by
an individual or an estate or trust to the portion of the long-term capital
gains of an individual or an estate or trust attributable to deductions for
depreciation taken with respect to depreciable real property.
Sales of Shares. In general, a U.S. Shareholder will realize capital gain
or loss on the disposition of shares of Common Stock equal to the difference
between (i) the amount of cash and the fair market value of any property
received on such disposition and (ii) the shareholder's adjusted basis of such
shares of Common Stock. With respect to dispositions occurring after July 28,
1997, in the case of a taxable U.S. Shareholder who is an individual or an
estate or trust, such gain or loss will be long-term capital gain or loss,
subject to a 28% tax rate, if such shares have been held for more than one year
but not more than 18 months and long-term capital gain or loss, subject to a 20%
tax rate, if such shares have been held for more than 18 months. In the case of
a taxable U.S. Shareholder that is a corporation, such gain or loss will be
long-term capital gain or loss if such shares have been held for more than one
year. Loss upon a sale or exchange of shares of Common Stock by a shareholder
who has held such shares of Common Stock for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from the Company required to be treated by such
shareholder as long-term capital gain.
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1997 Act Changes to Capital Gain Taxation. As described below in "-
Recent Legislation," the 1997 Act changed significantly the taxation of capital
gains by taxpayers who are individuals, estates, or trusts. On November 10,
1997, the IRS issued IRS Notice 97-64, which provides generally that the Company
may classify portions of its designated capital-gain dividend as (i) a 20% rate
gain distribution (which would be taxed as long-term capital gain in the 20%
group), (ii) an unrecaptured Section 1250 gain distribution (which would be
taxed as long-term capital gain in the 25% group), or (iii) a 28% rate gain
distribution (which would be taxed as long-term capital gain in the 28% group).
(If no designation is made, the entire designated capital gain dividend will be
treated as a 28% rate gain distribution.) IRS Notice 97-64 provides that a REIT
must determine the maximum amounts that it may designate as 20% and 25% rate
capital gain dividends by performing the computation required by the Code as if
the REIT were an individual whose ordinary income were subject to a marginal tax
rate of at least 28%. The Notice further provides that designations made by the
REIT will only be effective to the extent that they comply with Revenue Ruling
89-81, which requires that distributions made to different classes of shares be
composed proportionately of dividends of a particular type.
Backup Withholding. The Company will report to its domestic shareholders
and 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 shareholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number and
certifies as to no loss of exemption from backup withholding. Amounts withheld
as backup withholding will be creditable against the stockholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain distributions made to any shareholders who fail to certify their
non-foreign status to the Company. See "-Taxation of Non-U.S. Shareholders"
below.
Taxation of Tax-Exempt Shareholders. As a general rule, amounts
distributed to a tax-exempt entity by a corporation do not constitute "unrelated
business taxable income" ("UBTI"), and thus distributions by the Company to a
stockholder that is a tax-exempt entity generally should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
shares of Common Stock with "acquisition indebtedness" within the meaning of the
Code and the shares of Common Stock are not otherwise used in an unrelated trade
or business of the tax-exempt entity. However, distributions by a REIT to a
tax-exempt employee's pension trust that owns more than 10% of the REIT will be
treated as UBTI in an amount equal to the percentage of gross income of the REIT
that is derived from an "unrelated trade or business" (determined as if the REIT
were a pension trust) divided by the gross income of the REIT for the year in
which the dividends are paid. This rule only applies, however, if (i) the
percentage of gross income of the REIT that is derived from an unrelated trade
or business for the year in which the dividends are paid is at least 5%, (ii)
the REIT qualifies as a REIT only because the pension trust is not treated as a
single individual for purposes of the "five-or-fewer rule" (see "-Taxation of
the Company-Requirements for Qualification" above), and (iii) (A) one pension
trust owns more than 25 percent of the value of the REIT or, (B) a group of
pension trusts individually holding more than 10 percent of the value of the
REIT collectively own more than 50 percent of the value of the REIT. The Company
currently does not expect that this rule will apply.
Taxation of Non-U.S. Shareholders
- ---------------------------------
The rules governing U.S. federal income taxation of non-U.S. Shareholders
are complex, and the following discussion is intended only as a summary of such
rules. Prospective non-U.S. Shareholders should consult with their tax advisors
to determine the impact of U.S. federal, state, and local income tax laws on an
investment in the Company, including any reporting requirements, as well as the
tax treatment of such an investment under their home country laws including any
reporting requirements.
Distributions by the Company. Distributions to a non-U.S. Shareholder
that are not attributable to gain from sales or exchanges by the Company of U.S.
real property interests and not designated by the Company as capital gain
dividends will generally be subject to tax as ordinary income to the extent of
the Company's current or accumulated earnings and profits as determined for U.S.
federal income tax purposes. Such distributions will generally be subject to a
withholding tax equal to 30% of the gross amount of the distribution, unless
reduced by an applicable tax treaty or unless such dividends are treated as
effectively connected with a United States trade or business. If the amount
distributed exceeds a non-U.S. Shareholder's allocable share of such earnings
27
<PAGE>
and profits, the excess will be treated as a tax-free return of capital to the
extent of such non-U.S. Shareholder's adjusted basis in the Common Stock. To the
extent that such distributions exceed the adjusted basis of a non-U.S.
Shareholder's Common Stock, such distributions will generally be subject to tax
if such non-U.S. Shareholder would otherwise be subject to tax on any gain from
the sale or disposition of its Common Stock, as described below.
For withholding tax purposes, the Company currently is required to treat
all distributions as if made out of its current or accumulated earnings and
profits and thus intends to withhold at the rate of 30% (or a reduced treaty
rate if applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Shareholder. Under
regulations generally effective for distributions on or after January 1, 1999,
the Company would not be required to withhold at the 30% rate on distributions
it reasonably estimates to be in excess of the Company's current and accumulated
earnings and profits. If it cannot be determined at the time a distribution is
made whether such distribution will be in excess of current and accumulated
earnings and profits, the distribution will be subject to withholding at the
rate applicable to ordinary dividends. As a result of a legislative change made
by the Small Business Job Protection Act of 1996, under current law, it appears
that the Company will be required to withhold 10% of any distribution to a
non-U.S. Shareholder in excess of the Company's current and accumulated earnings
and profits. Consequently, although the Company intends to withhold at a rate of
30% on the entire amount of any distribution to a non-U.S. Shareholder (or lower
applicable treaty rate), to the extent the Company does not do so, any portion
of such a distribution not subject to withholding at a rate of 30% (or lower
applicable treaty rate) will be subject to withholding at a rate of 10%.
However, the non-U.S. Shareholder may seek a refund of such amounts from the IRS
if it subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Company, and the amount
withheld exceeded the non-U.S. Shareholder's United States tax liability, if
any, with respect to the distribution.
Distributions to a non-U.S. Shareholder that are designated by the
Company at the time of distribution as capital gains dividends (other than those
arising from the disposition of a United States real property interest)
generally will not be subject to United States federal income taxation, unless
(i) the investment in the Common Stock is effectively connected with the
non-U.S. Shareholder's United States trade or business, in which case the
non-U.S. Shareholder will be subject to the same treatment as U.S. Shareholders
with respect to such gain (except that a shareholder that is a foreign
corporation may also be subject to the 30% branch profits tax) or (ii) the
non-U.S. Shareholder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and certain other
requirements are met, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains.
Under the Foreign Investment in Real Property Tax Act ("FIRPTA"),
distributions to a non-U.S. Shareholder that are attributable to gain from sales
or exchanges by the Company of United States real property interests (whether or
not designated as a capital gain dividend) will be taxed to a non-U.S.
Shareholder at the normal capital gains rates applicable to domestic
Shareholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals). Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a non-U.S. Shareholder that
is a corporation and that is not entitled to treaty relief or exemption. The
Company is required by applicable FIRPTA Treasury Regulations to withhold 35% of
any such distribution that is or could be designated by the Company as a capital
gain dividend. That amount is creditable against the non-U.S. Shareholder's
United States FIRPTA tax liability.
Amounts designated by the Company pursuant to the 1997 Act as
undistributed capital gains in respect of shares of Common Stock (see "Taxation
of Taxable Domestic Holders of Common Stock" above) would be treated with
respect to non-U.S. Shareholders in the manner outlined in the preceding
paragraph for actual distributions by the Company of capital gain dividends.
Under that approach, the non-U.S. Shareholders would be able to offset as a
credit against their United States federal income tax liability resulting
therefrom their proportionate share of the tax paid by the Company on such
undistributed capital gains (and to receive from the IRS a refund to the extent
their proportionate share of such tax paid by the Company were to exceed their
actual United States federal income tax liability).
Sale of Common Stock. Gain recognized by a non-U.S. Shareholder upon a
sale of its Common Stock will generally not be subject to tax under FIRPTA if
the Company is a "domestically controlled REIT," which is defined generally as a
REIT in which at all times during a specified testing period less than 50% in
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value of its shares were held directly or indirectly by non-U.S. persons.
Because only a minority of the Shareholders are non-U.S. Shareholders, the
Company expects to qualify as a "domestically controlled REIT." Accordingly, a
non-U.S. Shareholder should not be subject to U.S. tax on gains recognized upon
disposition of the Common Stock, provided that such gain is not effectively
connected with the conduct of a United States trade or business and, in the case
of an individual Shareholder, such holder is not present in the United States
for 183 days or more during the year of sale and certain other requirements are
met.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at a rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends, or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply, however,
to a payment of the proceeds of a sale of Common Stock by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (c) is a "controlled foreign corporation" (generally a foreign
corporation controlled by United States Shareholders) for United States tax
purposes, unless the broker has documentary evidence in its records that the
holder is a non-U.S. Shareholder and certain other conditions are met, or the
Shareholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of Common Stock is subject
to both backup withholding and information reporting unless the Shareholder
certifies under penalty of perjury that the Shareholder is a non-U.S.
Shareholder, or otherwise establishes an exemption. A non-U.S. Shareholder may
obtain a refund of any amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.
The United States Treasury Department has recently finalized regulations
regarding the withholding and information reporting rules discussed above. In
general, these regulations do not alter the substantive withholding and
information reporting requirements but unify certification procedures and forms
and clarify and modify reliance standards. These regulations generally are
effective for payments made after December 31, 1999, subject to certain
transition rules. A non-U.S. Shareholder should consult its advisor regarding
the effect of the new Treasury Regulations.
Recent Legislation
- ------------------
As described above, the 1997 Act contains certain changes to the REIT
qualification requirements and to the taxation of REITs. The 1997 Act also
contains certain changes to the taxation of capital gains of individuals, trusts
and estates.
Capital Gain Rates. Under the 1997 Act, individuals, trusts and estates
that hold certain investments for more than 18 months may be taxed at a maximum
long-term capital gain rate of 20% on the sale or exchange of those investments.
Individuals, trusts and estates that hold certain assets for more than one year
but not more than 18 months may be taxed at a maximum mid-term capital gain rate
of 28% on the sale or exchange of those investments. The 1997 Act also provides
a maximum rate of 25% for "unrecaptured section 1250 gain" for individuals,
trusts and estates, special rules for "qualified 5-year gain," and other changes
to prior law. The 1997 Act allows the IRS to prescribe regulations on how the
1997 Act's new capital gain rates will apply to sales of capital assets by
"pass-through entities," including REITs and to sales of interests in
"pass-through entities." For a discussion of new rules under the 1997 Act that
apply to the taxation of distributions by the Company to Shareholders that are
designated by the Company as "capital gain dividends," see "- Taxation of U.S.
Shareholders Holding Common Stock Distributions by the Company." Shareholders
are urged to consult with their tax advisors with respect to the new rules
contained in the 1997 Act.
REIT Provisions. In addition to the provisions discussed above, the 1997
Act contains a number of technical provisions that either (i) reduce the risk
that the Company will inadvertently cease to qualify as a REIT, or (ii) provide
additional flexibility with which the Company can meet the REIT qualification
requirements. These provisions are effective for the Company's taxable years
commencing on or after January 1, 1998.
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Recent Tax Proposal
- -------------------
The administration's budget proposal announced on February 2, 1998
includes a proposal to amend the REIT asset tests with respect to non-qualified
REIT subsidiaries. The proposal would require a REIT to own no more than 10% of
the vote or value of the outstanding stock of any non-qualified REIT subsidiary.
Existing non-qualified REIT subsidiaries would be grandfathered, and therefore
subject to the existing 5% asset test and 10% voting securities test (see "- Tax
Treatment of the Company"), except that such grandfathered status would
terminate if the non-qualified REIT subsidiary engaged in a new trade or
business or acquired substantial new assets on or after the effective date of
the proposal. Although the Company does not now have any such subsidiaries, the
proposal, if enacted, could materially impede the Company's ability to engage in
other activities through non-qualified REIT subsidiaries without jeopardizing
the Company's REIT status. This would limit the Company's ability to derive
economic benefit from engaging in activities which were related to the Company's
businesses, but which were not qualified REIT activities.
Tax Aspects of the Company's Ownership of Interests in the Operating Partnership
- --------------------------------------------------------------------------------
General. A significant portion of the Company's investments will be held
indirectly through the Operating Partnership. In general, partnerships are
"pass-through" entities that are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income, gain,
loss, deduction and credit of a partnership, and are potentially subject to tax
on those items, without regard to whether the partners receive a distribution
from the partnership. In the case of a REIT which is a partner in a partnership,
Treasury Regulations provide that for purposes of applying the REIT gross income
and gross asset tests, the REIT will be deemed to own its proportionate share of
the assets of the partnership and will be deemed to be entitled to the income of
the partnership attributable to that share, based on its "capital interest" in
the partnership. In addition, the character of the gross income and assets of
the partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code which includes the gross income and asset
tests described above. The Company will have direct control of the Operating
Partnership and intends to operate it consistent with the requirements for
qualification as a REIT. The Company will include in its income its
proportionate share of the foregoing partnership items for purposes of the
various REIT income tests and will take into account its distributive share of
partnership items in the computation of its REIT taxable income. Moreover, for
purposes of the REIT asset tests, the Company will include its proportionate
share of assets held through the Operating Partnership.
Entity Classification. If the Operating Partnership were treated as an
association, the entity would be taxable as a corporation and therefore would be
subject to an entity level tax on its income. In such a situation, the character
of the Company's assets and items of gross income would change and would
preclude the Company from qualifying as a REIT. The same result could occur if
any subsidiary partnership failed to qualify for treatment as a partnership.
Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company was treated as a partnership for federal income tax
purposes rather than as 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 that became effective January 1, 1997,
the four factor test has been eliminated and an entity formed as a partnership
or as a limited liability company will be taxed as a partnership for federal
income tax purposes unless it specifically elects otherwise. The Treasury
Regulations provide that the IRS will not challenge the classification of an
existing partnership or limited liability company 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 the Operating Partnership will be treated as a
partnership for federal income tax purposes (and not as an association taxable
as a corporation).
30
<PAGE>
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, those allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the related Treasury Regulations. Generally,
those provisions require that partnership allocations reflect the economic
arrangement of the partners. The allocations of taxable income and loss provided
for in the Operating Partnership Agreement are intended to comply with the
requirements of Section 704(b) of the Code and the related Treasury Regulations.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to that item.
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 in exchange for an
interest in the partnership, must be allocated in a manner so 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 the unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of the property
at that time (a "Book-Tax Difference"). These allocations are solely for federal
income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. The Operating Partnership was
formed by way of contributions of appreciated and depreciated properties.
Consequently, the Operating Partnership Agreement requires that those
allocations be made in a manner consistent with Section 704(c) of the Code.
In general, the partners of the Operating Partnership who contributed
appreciated assets will be allocated larger depreciation deductions than if they
had retained the contributed property, while those who contributed depreciated
assets will be allocated smaller depreciation deductions than if they had
retained the contributed property. In addition, on the disposition of any
contributed asset that has a Book-Tax Difference, the income or loss
attributable to the Book-Tax Difference generally will be allocated to the
contributing partner. These allocations will tend to eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the hands
of the Operating Partnership may cause the Company to be allocated lower
depreciation and other deductions, and possibly an amount of taxable income in
the event of a sale of the contributed assets in excess of the economic or book
income allocated to it as a result of that sale. Such an allocation might cause
the Company to recognize taxable income in excess of cash proceeds, which might
adversely affect the Company's ability to comply with the REIT distribution
requirements.
Treasury Regulations under Section 704(c) of the Code provide
partnerships with a choice of several methods of accounting for Book-Tax
Differences, including the "traditional method" or the election of certain
methods that would permit any distortions caused by a Book-Tax Difference to be
entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Operating Partnership and the Company will
determine with respect to each contribution to the Operating Partnership which
method to use.
Taxation of Holders of Preferred Stock, Equity Stock, Depositary Shares
and Warrants
- -----------------------------------------------------------------------
If the Company offers one or more series of Preferred Stock, Equity
Stock, Depositary Shares or Warrants, there may be tax consequences for the
holders of such Securities not discussed herein. For a discussion of any such
additional consequences, see the applicable Prospectus Supplement.
State and Local Taxes
- ---------------------
The tax treatment of the Company and the Shareholders in states having
taxing jurisdiction over them may differ from the federal income tax treatment.
Accordingly, no discussion of state taxation of the Company and the Shareholders
is provided nor is any representation made as to the tax status of the Company
in such states. All investors should consult their tax advisors as to the
treatment of the Company under the respective state tax laws applicable to them.
31
<PAGE>
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for
public offering and sale by them or may sell the Securities to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Securities will be named in the applicable Prospectus
Supplement.
Direct sales to investors may be accomplished through subscription
offerings or through shareholder purchase rights distributed to Shareholders. In
connection with subscription offerings or the distribution of shareholder
purchase rights to Shareholders, if all of the underlying Securities are not
subscribed for, the Company may sell such unsubscribed Securities to third
parties directly or through underwriters or agents and, in addition, whether or
not all of the underlying Securities are subscribed for, the Company may
concurrently offer additional Securities to third parties directly or through
underwriters or agents. Any such underwriter or agent involved in the offer and
sale of the Securities will be named in the applicable Prospectus Supplement. If
Securities are to be sold through shareholder purchase rights, such shareholder
purchase rights will be distributed as a dividend to the Shareholders for which
they will pay no separate consideration. The Prospectus Supplement with respect
to the offer of Securities pursuant to shareholder purchase rights will set
forth the relevant terms of the shareholder purchase rights, including (i)
whether common shares or common share warrants, or both, will be offered
pursuant to the shareholder purchase rights and the number of common shares and
common share warrants, as applicable, which will be offered pursuant to the
shareholder purchase rights, (ii) the period during which and the price at which
the shareholder purchase rights will be exercisable, (iii) the number of
shareholder purchase rights then outstanding, (iv) any provisions for changes to
or adjustments in the exercise price of the shareholder purchase rights and (v)
any other material terms of the shareholder purchase rights.
Underwriters may offer and sell the Securities at a fixed price or
prices, which may be changed, at prices related to the prevailing market prices
at the time of sale or at negotiated prices. The Company also may, from time to
time, authorize underwriters acting as the Company's agents to offer and sell
the Securities upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of Securities, underwriters
may be deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Securities may be deemed to
be underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the Securities may be deemed to be
underwriting discounts and commissions, under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with the
Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
Securities may also be offered and sold, if so indicated in the
applicable Prospectus Supplement, in connection with a remarketing upon their
purchase, in accordance with a redemption or repayment pursuant to their terms,
or otherwise, by one or more firms ("remarketing firms"), acting as principals
for their own accounts or as agents for the Company. Any remarketing firm will
be identified and the terms of its agreement, if any, with the Company and its
compensation will be described in the applicable Prospectus Supplement.
Remarketing firms may be deemed to be underwriters in connection with the
Securities remarketed thereby. Remarketing firms may be entitled under
agreements which may be entered into with the Company to indemnification by the
Company against certain liabilities, including liabilities under the Securities
Act, and may be customers of, engage in transactions with or perform services
for the Company in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the offering price set
forth in such Prospectus Supplement pursuant to Delayed Delivery Contracts
("Contracts") providing for payment and delivery on the date or dates stated in
32
<PAGE>
such Prospectus Supplement. Each Contract will be for an amount not less than,
and the aggregate principal amount of Securities sold pursuant to Contracts
shall be not less nor more than, the respective amounts stated in the applicable
Prospectus Supplement. Institutions with whom Contracts, when authorized, may be
made include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions, and other
institutions but will in all cases be subject to the approval of the Company.
Contracts will not be subject to any conditions except (i) the purchase by an
institution of the Securities covered by its Contracts shall not at the time of
delivery be prohibited under the laws of any jurisdiction in the United States
to which such institution is subject, and (ii) if the Securities are being sold
to underwriters, the Company shall have sold to such underwriters the total
principal amount of the Securities less the principal amount thereof covered by
Contracts. Agents and underwriters will have no responsibility in respect of the
delivery or performance of Contracts.
Certain of the underwriters, if any, and their affiliates may be
customers of, engage in transactions with and perform services for the Company
in the ordinary course of business.
This Prospectus may also be used in registered resales by the following
holders of Common Stock:
<TABLE>
<CAPTION>
Percentage of
Percentage of Shares of Shares of Outstanding
Shares of Common Outstanding Common Stock Common Stock Shares of Common
Stock Shares of Being Beneficially Stock Beneficially
Beneficially Common Registered for Owned After Owned After
Name Owned(1) Stock(1) Resale(2) Resale(1) Resale(1)
---- ----------------- ------------- -------------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
State of Michigan
Retirement Systems 1,311,111 7.0% 888,172 422,939 2.3%
Cohen & Steers Capital
Management, Inc. (3) 1,311,111 7.0% 888,171 422,940 2.3%
Morgan Stanley Asset
Management (3) 1,092,593 5.9% 740,143 352,450 1.9%
Harvard Private Capital
Realty, Inc. 874,074 4.7% 592,114 281,960 1.5%
ABKB/LaSalle Securities
Limited Partnership (3) 874,074 4.7% 592,113 281,961 1.5%
Fidelity Real Estate
Investment Portfolio 769,294 4.1% 521,134 248,160 1.3%
Stanford University 437,037 2.3% 296,058 140,979 (4)
The Fidelity REIT
Collective Pool 66,048 (4) 44,742 21,306 (4)
State Employees'
Retirement Fund of the 30,911 (4) 20,940 9,971 (4)
State of Delaware
J.W. McConnell Family
Foundation 7,821 (4) 5,298 2,523 (4)
</TABLE>
- ---------------
(1) Assumes issuance of an aggregate of 6,774,074 shares of Common Stock to
these holders pursuant to the Common Stock Purchase Agreement dated as of
January 23, 1998 (the "Agreement") and the Amended and Restated Agreement
and Plan of Reorganization dated as of December 17, 1997 (the "Plan of
Reorganization"), consisting of an aggregate of 2,185,189 shares
previously issued pursuant to the Agreement and the Plan of
Reorganization and an aggregate of 4,588,885 shares expected to be issued
in subsequent issuances through July 1998 pursuant to the Agreement.
(2) Reflects an aggregate of 4,588,885 shares expected to be issued in
subsequent issuances through July 1998 pursuant to the Agreement.
(3) All shares of Common Stock held as agent for and for the benefit of
certain of such holder's clients.
(4) Less than 1%.
33
<PAGE>
This Prospectus may also be used in registered resales of Common Stock by
the following persons upon exchange of interests in the Operating Partnership
for Common Stock:
<TABLE>
<CAPTION>
Shares of Common Shares of Common Stock Shares of Common Stock
Stock Beneficially Being Registered for Beneficially Owned
Name Owned(1)(2) Resale(1) After Resale
---- ----------- --------- ------------
<S> <C> <C> <C>
Galaxy Partnership 14,384 14,384 0
Galaxy Associates, L.L.C. 64,042 64,042 0
Faraton Corp. 1,748 1,748 0
</TABLE>
- ---------------
(1) Reflects shares to be issued upon exchange of interests in the Operating
Partnership.
(2) Less than 1% of the outstanding shares of Common Stock.
The Company has registered the shares of Common Stock by the holders in
the tables above to provide such holders with freely tradeable Common Stock, but
the registration of such shares does not necessarily mean that any of such
shares will be issued by the Company or any will be offered or sold by such
holders. The Company will not receive any proceeds from the offering by such
holders.
The holders in the tables above may sell the shares of Common Stock to
investors directly or through agents or to one or more underwriters for public
offering and sale by them in any of the types of transactions described above.
Any such underwriter or agent involved in the offer and sale of such shares will
be named in the applicable Prospectus Supplement.
Any profits realized on sales pursuant to this Prospectus by the holders
in the tables above of such shares may be regarded as underwriting compensation.
All expenses incident to the offering and sale of such shares, other than
commissions, discounts and fees of underwriters, broker-dealers or agents, shall
be paid by the Company. The Company has agreed to indemnify the holders of such
shares against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
LEGAL OPINIONS
David Goldberg, vice president and counsel of the Company, has delivered
an opinion to the effect that the securities offered by this Prospectus will be
validly issued, fully paid and nonassessable. Hogan & Hartson L.L.P.,
Washington, D.C., has delivered an opinion as to the status of the Company as a
REIT. See "Certain Federal Income Tax Considerations." Mr. Goldberg owns 4,256
shares of Common Stock, and has options to acquire an additional 7,991 shares of
Common Stock.
EXPERTS
The consolidated financial statements of PS Business Parks, Inc.
(successor to American Office Park Properties, Inc.) as of December 31, 1997 and
1996 and for the period from April 1, 1997 through December 31, 1997, from
January 1, 1997 through March 31, 1997, and the years ended December 31, 1996
and 1995, which are included in the Company's Current Report on Form 8-K/A dated
April 17, 1998 have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report with respect thereto and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
34
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
--------------------------------------------
The estimated expenses, other than underwriting discounts and
commissions, in connection with the offerings of the Securities, are as follows:
Registration Fee--
Securities and Exchange Commission $147,500
Transfer Agent and Depositary Fees 125,000
Rating Agency Fees 100,000
Printing and Engraving Expenses 200,000
Legal Fees and Expenses 100,000
Accounting Fees and Expenses 100,000
Miscellaneous 27,500
--------
TOTAL $800,000
========
Item 15. Indemnification of Directors and Officers.
------------------------------------------
The Company's Articles of Incorporation provide that the Company may
indemnify the agents of the Company to the maximum extent permitted under
California law. See Articles V and VI of the Restated Articles of Incorporation
(Exhibit 3.1) and Article VII of the Restated Bylaws (Exhibit 3.2) which are
incorporated herein by this reference. The Company has also entered into
indemnity agreements with its management and non-management directors and
executive officers. The agreements permit the Company to indemnify directors and
executive officers to the maximum extent permitted under California law and
prohibit the Company from terminating its indemnification obligations as to acts
or omissions of any director or executive officer occurring before the
termination. The indemnification and limitations on liability permitted by the
Articles of Incorporation and the agreements are subject to the limitations set
forth by California law. The Company believes the indemnification agreements
will assist it in attracting and retaining qualified individuals to serve as
directors and executive officers of the Company.
Item 16. Exhibits.
---------
See Exhibit Index contained herein.
Item 17. Undertakings.
-------------
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
II-1
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement;
provided, however, that subparagraphs (i) and (ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) That, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(4) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remains unsold at the termination
of the offering.
(6) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(7) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
II-2
<PAGE>
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Glendale, State of California, on the 20th day of
April, 1998.
PS BUSINESS PARKS, INC.
By: /s/ RONALD L. HAVNER, JR.
________________________________
Ronald L. Havner, Jr., President
Each person whose signature appears below hereby authorizes Ronald L.
Havner, Jr. and Harvey Lenkin, and each of them, as attorney-in-fact, to sign on
his behalf, individually and in each capacity stated below, any amendment,
including post-effective amendments to this Registration Statement, and to file
the same, with all exhibits thereto, and all documents in connection therewith,
with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ RONALD L. HAVNER, JR. Chairman of the Board, Chief Executive
_________________________ Officer, President, Chief Financial Officer April 20, 1998
Ronald L. Havner, Jr. and Director (principal executive officer,
principal financial officer and principal
accounting officer)
/s/ HARVEY LENKIN
_________________________ Director April 20, 1998
Harvey Lenkin
/s/ VERN O. CURTIS
_________________________ Director April 20, 1998
Vern O. Curtis
/s/ ARTHUR M. FRIEDMAN
_________________________ Director April 20, 1998
Arthur M. Friedman
/s/ JAMES H. KROPP
_________________________ Director April 20, 1998
James H. Kropp
/s/ ALAN K. PRIBBLE
_________________________ Director April 20, 1998
Alan K. Pribble
/s/ JACK D. STEELE
_________________________ Director April 20, 1998
Jack D. Steele
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement.(1)
3.1 Restated Articles of Incorporation.(2)
3.2 Restated Bylaws.(2)
4.1 Form of Certificate of Determination for series of Preferred
Stock.(1)
4.2 Form of Deposit Agreement.(1)
4.3 Form of Certificate of Determination for series of Equity Stock.(1)
4.4 Form of Warrant Agreement.(1)
5.1 Opinion of David Goldberg as to the legality of the securities
being registered.
8.1 Opinion of Hogan & Hartson L.L.P. re tax matters.
12.1 Statement on computation of ratio of earnings to fixed charges.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of David Goldberg (included in Exhibit 5.1).
23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1).
24.1 Power of Attorney (included on page II-4).
- ---------------
(1) To be filed by amendment or incorporated by reference in connection with the
offering of Securities.
(2) Filed with the registrant's Current Report on Form 8-K dated March 17, 1998
and incorporated herein by reference.
II-5
Exhibit 5.1
David Goldberg
Vice President and Counsel
PS Business Parks, Inc.
701 Western Avenue
Glendale, California 91201-2397
April 20, 1998
PS Business Parks, Inc.
701 Western Avenue
Glendale, California 91201-2397
Gentlemen:
As Vice President and Counsel of PS Business Parks, Inc. (the
"Company"), I have examined the Registration Statement on Form S-3, which is
expected to be filed by the Company with the Securities and Exchange Commission
on or about the date of delivery of this opinion (the "Registration Statement"),
which relates to the offer and sale of up to $500,000,000 stated amount of (i)
shares of preferred stock, par value $.01 per share (the "Preferred Shares"),
(ii) depositary shares (the "Depositary Shares") representing a fractional
interest in a Preferred Share, (iii) shares of equity stock, par value $.01 per
share (the "Equity Shares"), (iv) shares of common stock, par value $.01 per
share (the "Common Shares") and (v) warrants (the "Warrants").
I am familiar with the proceedings taken or to be taken by the Company
relating to the authorization and issuance of the Preferred Shares, the
Depositary Shares, the Equity Shares, the Common Shares and the Warrants in the
manner set forth in the Registration Statement. I have also examined the
Company's Restated Articles of Incorporation and Restated Bylaws and have made
such other investigation as I have deemed necessary in order to express the
opinions contained herein.
It is my opinion that:
1. The Company is a corporation duly organized and validly existing in
good standing under the laws of the State of California.
2. The Preferred Shares, the Depositary Shares, the Equity Shares, the
Common Shares and the Warrants, when issued and delivered in the manner and on
the terms described in the Registration Statement and payment of the agreed
consideration therefor has been received by the Company, will be legally issued,
fully paid and nonassessable.
I hereby consent to the reference to me under the caption "Legal
Opinions" in the Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement or amendments thereto.
Very truly yours,
/s/ DAVID GOLDBERG
DAVID GOLDBERG
Exhibit 8.1
[LETTERHEAD OF HOGAN & HARTSON L.L.P.]
April 20, 1998
PS Business Parks, Inc.
701 Western Ave., Suite 200
Glendale, California 91201-2397
Ladies and Gentlemen:
We have acted as counsel to PS Business Parks, Inc., a California
corporation (the "Company"), in connection with the registration of shares of
preferred stock, par value $.01 per share (the "Preferred Stock"), shares of
equity stock, par value $.01 per share (the "Equity Stock"), shares of common
stock, par value $.01 per share (the "Common Stock"), warrants to purchase
Preferred Stock, Equity Stock or Common Stock (the "Warrants") and depositary
shares representing a fractional interest in a share of Preferred Stock (the
"Depositary Shares"), with an aggregate public offering price of up to
$500,000,000 on terms to be determined at the time of offering as more fully
described in the Company's Registration Statement filed with the Securities and
Exchange Commission on or about the date hereof ("Registration Statement," which
includes the "Prospectus"). In connection with such registration, we have been
asked to provide you with an opinion regarding certain federal income tax
matters related to the Company. Capitalized terms used in this letter and not
otherwise defined herein have the meaning set forth in the Prospectus.
Basis for Opinions
- ------------------
The opinions set forth in this letter are based on relevant provisions
of the Code, Treasury Regulations thereunder (including proposed and temporary
Regulations), and interpretations of the foregoing as expressed in court
decisions, the legislative history, and existing administrative rulings and
practices of the Internal Revenue Service ("IRS") (including its practices and
policies in issuing private letter rulings, which are not binding on the IRS
except with respect to a taxpayer that receives such a ruling), all as of the
date hereof. These provisions and interpretations are subject to change, which
may or may not be retroactive in effect, that might result in modifications of
our opinions.
In rendering our opinions, we have examined the following documents:
(1) the Prospectus; (2) the Amended and Restated Agreement and Plan of
<PAGE>
Reorganization (the "Merger Agreement") dated as of December 17, 1997, by and
among Public Storage Properties XI, Inc. (the predecessor to the Company),
American Office Park Properties, Inc., a California corporation ("AOPP") and
Public Storage, Inc. ("PSI"); (3) the Agreement of Limited Partnership of PS
Business Parks, L.P. (the "Operating Partnership") dated as of March 17, 1998,
as amended through the date hereof; (4) the Restated Articles of Incorporation
of the Company as filed with the California Secretary of State on March 17,
1998, as amended through the date hereof (the "Articles of Incorporation"); (5)
the Agreement of Contribution and Merger dated December 23, 1997, by and among
AOPP, New York State Common Retirement Fund, Acquiport Two Corporation,
Acquiport Three Corporation and AOPP Acquisition Corp. Three; and (6) the Common
Stock Purchase Agreement, dated January 23, 1998, by and among AOPP, ABKB/La
Salle Securities Limited Partnership, Harvard Private Capital Realty, Inc.,
Cohen & Steers Capital Management, Inc., Morgan Stanley Asset Management,
certain Fidelity entities and Stanford University. The opinions set forth in
this letter also are premised on certain written representations of the Company
contained in a letter of even date herewith (the "Management Representation
Letter").
For the purposes of our opinion, we have not made an independent
investigation or audit of the facts set forth in the above referenced documents,
including the Prospectus and the Management Representation Letter. We
consequently have assumed that the information presented in such documents or
otherwise furnished to us accurately and completely describes all material facts
relevant to our opinion.
In our review, we have assumed that all of the representations and
statements set forth in the documents (including, without limitation, the
Management Representation Letter) we reviewed are true and correct, and all of
the obligations imposed by any such documents on the parties thereto, including
obligations imposed under the Articles of Incorporation, have been and will be
performed or satisfied in accordance with their terms. We also have assumed the
genuineness of all signatures, the proper execution of all documents, the
authenticity of all documents submitted to us as originals, the conformity to
originals of documents submitted to us as copies, and the authenticity of the
originals from which any copies were made. Moreover, we have assumed that the
Company and the Operating Partnership have been and will continue to be operated
in the manner described in the relevant partnership agreement, articles (or
certificate) of incorporation or other organizational documents and in the
Prospectus.
We assume for the purposes of this opinion that the Company is a
validly organized and duly incorporated corporation under the laws of the State
of California and that the Operating Partnership is a duly organized and validly
existing partnerships under the applicable laws of the State of California.
2
<PAGE>
We further assume that AOPP will make an election to be taxed as a REIT
for its taxable year ended December 31, 1997, and will not revoke such election
for its short taxable year ending at the effective time of the merger of AOPP
with and into the Company and that as of December 31, 1997, AOPP did not have
any undistributed "earnings and profits" (as defined for purposes of Section
857(a)(2) of the Code) that were accumulated in a taxable year of AOPP,
Acquiport Two Corporation, or any other "C corporation" prior to December 31,
1997.
Opinions
- --------
Based upon, subject to, and limited by the assumptions and
qualifications set forth herein, we are of the opinion that:
1. The Company was organized and has operated in conformity with the
requirements for qualification and taxation as a real estate investment trust
("REIT") under the Code for the taxable year ended December 31, 1997 and the
Company's current organization and method of operation (as described in the
Prospectus and the Management Representation Letter) will enable it to continue
to meet the requirements for qualification and taxation as a REIT.
2. The discussion in the Prospectus under the heading "Certain Federal
Income Tax Considerations," to the extent it describes matters of law or legal
conclusions, is correct in all material respects.
We assume no obligation to advise you of any changes in our opinion
subsequent to the delivery of this opinion letter. The Company's qualification
and taxation as a REIT depends upon the Company's ability to meet on a
continuing basis, through actual annual operating and other results, the various
requirements under the Code with regard to, among other things, the sources of
its gross income, the composition of its assets, the level of its distributions
to stockholders, and the diversity of its stock ownership. We will not review
the Company's compliance with these requirements on a continuing basis.
Accordingly, no assurance can be given that the actual results of the operations
of the Company or the Operating Partnership, the sources of their income, the
nature of their assets, the level of the Company's distributions to its
stockholders and the diversity of the Company's stock ownership for any given
taxable year will satisfy the requirements under the Code for qualification and
taxation as a REIT.
An opinion of counsel merely represents counsel's best judgment with
respect to the probable outcome on the merits and is not binding on the IRS or
the courts. There can be no assurance that positions contrary to our opinions
will not be taken by the IRS, or that a court considering the issues would not
hold contrary to such opinions.
3
<PAGE>
We note that the Prospectus does not currently address the federal
income tax considerations that may be relevant to a holder of the Preferred
Stock, the Equity Stock, the Warrants or the Depositary Shares. It is our
understanding that in the event the Company issues Preferred Stock, Equity
Stock, Warrants, or Depositary Shares the Company will prepare a supplement to
the Prospectus, which supplement will address the federal income tax
considerations that are likely to be material to a holder of such securities.
This opinion letter has been prepared solely for your benefit in
connection with the filing of the Registration Statement. This opinion may not
be used or relied upon by any other person or for any other purpose and may not
be disclosed, quoted, or filed with a governmental agency or otherwise referred
to without our prior written consent. We hereby consent to the filing of this
opinion letter as Exhibit 8.1 to the Registration Statement and to the reference
to this firm under the caption "Legal Matters" in the Prospectus. In giving this
consent, we do not thereby admit that we are an "expert" within the meaning of
the Securities Act of 1933, as amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
4
Exhibit 12.1
PS BUSINESS PARKS, INC.
(SUCCESSOR TO AMERICAN OFFICE PARK PROPERTIES, INC.)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings:
Net income before minority
interest and taxes $12,402,000 $ 519,000 $ 1,192,000 $ 1,245,000 $ 1,517,000
Add: fixed charges 1,000 -- -- -- --
----------- ---------- ----------- ----------- -----------
Earnings before fixed charges $12,403,000 $ 519,000 $ 1,192,000 $ 1,245,000 $ 1,517,000
=========== ========== =========== =========== ===========
Fixed charges:
Interest expense $ 1,000 $ -- $ -- $ -- $ --
Ratio of earnings to fixed
charges 12,403 N/A (1) N/A (1) N/A (1) N/A (1)
</TABLE>
(1) The ratio of earnings to fixed charges is not applicable for this year as
there were no fixed charges incurred by the Company.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" in
the Prospectus of PS Business Parks, Inc. (included in the Registration
Statement on Form S-3 (No. 333-__________)) for the registration of shares of
its preferred stock, its depositary shares, its equity stock, shares of its
common stock and warrants for the purchase of its preferred stock, equity stock
and common stock and to the incorporation by reference therein of our report
dated February 23, 1998 except for Note 9 as to which the date is March 18, 1998
with respect to the consolidated financial statements of PS Business Parks, Inc.
(successor to American Office Park Properties, Inc.) included in the Current
Report on Form 8-K/A dated April 17, 1998 of PS Business Parks, Inc.
/s/ ERNST & YOUNG LLP
Los Angeles, California
April 20, 1998
