<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1998
REGISTRATION NO. 333-50463
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PS BUSINESS PARKS, INC.
(FORMERLY PUBLIC STORAGE PROPERTIES XI, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C>
CALIFORNIA 95-4300881
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
701 WESTERN AVENUE
GLENDALE, CALIFORNIA 91201-2397
(818) 244-8080
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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HARVEY LENKIN
PS BUSINESS PARKS, INC.
701 WESTERN AVENUE
GLENDALE, CALIFORNIA 91201-2397
(818) 244-8080
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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.
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. [_]
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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
AMOUNT OFFERING PRICE MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE PER SHARE OR AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Preferred Stock, $.01 par value
per share...................... (1)(3) (2) (1)(2)(3) N/A
Depositary Shares............... (1)(3) (2) (1)(2)(3) N/A
Equity Stock, $.01 par value per
share.......................... (1)(4) (2) (1)(2)(4) N/A
Common Stock, $.01 par value
per share...................... (1)(5) (2) (1)(2)(5) N/A
Warrants........................ (1)(6) (2) (1)(2)(6) N/A
Total.......................... $500,000,000 (2) $500,000,000 $147,500(7)
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</TABLE>
(1) 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 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).
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) Calculated pursuant to Rule 457(o) of the rules and regulations under the
Securities Act of 1933, as amended. The registration fee was previously
paid in connection with the initial filing on April 20, 1998. $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.
----------------
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 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 THIS PROSPECTUS.
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.
----------------
May 15, 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. The
Company's Common Stock is listed on the American Stock Exchange ("AMEX") and
all such material filed by the Company with AMEX can be inspected at 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") with respect to the Securities offered pursuant to this
Prospectus. 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. Statements contained
in this Prospectus or in any document incorporated herein by reference
regarding the contents of any agreement or other document are not necessarily
complete, and in each instance reference is made to the copy of such agreement
or document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such
reference.
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, (ii) the Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, (iii) the Current Report on Form 8-K/A dated January 29, 1998, the
Current Report on Form 8-K dated March 17, 1998, as amended by a Form 8-K/A
dated April 17, 1998, and the Current Report on Form 8-K dated May 4, 1998 and
(iv) the description of the Company's Common Stock (formerly Common Stock
Series A), $.01 par value per share, contained in the Company's Registration
Statement on Form 8-A, effective March 15, 1991, as supplemented by the
description of the Company's Common Stock contained in this Prospectus.
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 or oral request. Requests for such
copies should be directed to Investor Services Department, PS Business Parks,
Inc., 701 Western Avenue, Glendale, California 91201-2397, telephone number
(818) 244-8080.
2
<PAGE>
THE COMPANY
The Company is a self-advised 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 May
15, 1998, an approximate 66% 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 May
15, 1998, the Company and the Operating Partnership owned 93 commercial
properties in 11 states containing approximately 9,900,000 square feet of
space. The Operating Partnership also manages 35 commercial properties
(approximately 1,000,000 square feet of space) in which it has no ownership
interest.
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 May 15, 1998, PSI owned 26.4% of the outstanding shares of Common Stock
(47.2% 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 28.4% of the Common Stock as of
May 15, 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, and categories of, 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 may prevent future
takeover attempts which the Board of Directors has not approved even if a
majority of the Shareholders deem it to be in their best interests or in which
the Shareholders would receive a premium for their shares over the then market
value. See "Description of Common Stock--Ownership Limitations".
The Board of Directors is authorized, without Shareholder approval, to issue
up to 50,000,000 shares of Preferred Stock and up to 100,000,000 shares of
Equity Stock, in each case in one or more series. Each series of Preferred
Stock or Equity Stock shall have such rights, preferences, privileges and
restrictions as may be determined by the Board of Directors. The Board would
be authorized to establish a class or series of shares that could delay, defer
or prevent a transaction or a change in control of the Company that might
involve a price for the Common Stock or other attributes which the
Shareholders may consider to be desirable. The articles of incorporation and
bylaws of the Company also contain other provisions that may have the effect
of delaying, deferring or preventing a transaction or a change in control of
the Company that might involve a price for the Common Stock or other
attributes that the Shareholders may consider to be desirable. The Company
also may cause the Operating Partnership to offer additional units in the
Operating Partnership in exchange for property or otherwise.
The Partnership Agreement provides that the Company may not generally engage
in a business consolidation unless the limited partners 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 the
limited partners 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.
4
<PAGE>
RISKS RELATING TO THE OPERATING PARTNERSHIP
Limited partners of the Operating Partnership (including PSI and its
affiliates) have the right to vote on certain amendments to the Partnership
Agreement. These voting rights may be exercised in a manner that conflicts
with the interests of the Shareholders. Also, the Company, as the general
partner of the Operating Partnership, has fiduciary duties to the limited
partners, the discharge of which may conflict with interests of the
Shareholders.
PSI'S CONSENT TO CERTAIN PROPERTY SALES
Prior to 2007, the Company is 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
Certain institutional investors have rights in the Company, such as the
right to approve nominees to the Company's Board of Directors, the right to
purchase securities offered by the Company in certain circumstances and the
right to require registration of their shares, not available to public
Shareholders.
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.
5
<PAGE>
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.
BORROWINGS MAY BE REQUIRED TO MEET REIT MINIMUM DISTRIBUTION REQUIREMENTS;
POSSIBLE INCURRENCE OF ADDITIONAL DEBT. In order to qualify as a REIT, the
Company generally will be required each year to distribute to the Shareholders
at least 95% of its net taxable income (excluding any net capital gain). In
addition, the Company will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of (i) 85% of its ordinary income for that
year, (ii) 95% of its capital gain net income for that year, and (iii) 100% of
its undistributed taxable income from prior years. The Company intends to make
distributions to the Shareholders to comply with the 95% distribution
requirement and to avoid the nondeductible excise tax. The Company's income
will consist primarily of its share of the income of the Operating
Partnership, and the cash available for distribution by the Company to its
Shareholders will consist of its share of cash distributions from the
Operating Partnership. Differences in timing 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 could require the Company to borrow funds on a short-term (or
possibly long-term) basis to meet the 95% distribution requirement and to
avoid the nondeductible excise tax.
VALUE OF INVESTMENT REDUCED BY GENERAL RISKS OF REAL ESTATE OWNERSHIP
GENERAL REAL ESTATE RISKS. 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) the national, state and local economic climate and
real estate conditions (such as oversupply of or reduced demand for space and
changes in market rental rates), (ii) the perceptions of prospective tenants
of the attractiveness, convenience and safety of the Company's properties,
(iii) the ability of the Company to provide adequate management, maintenance
and insurance, (iv) the Company's ability to collect all rent from tenants on
a timely basis, (v) the expense of periodically renovating, repairing and
reletting spaces and (vi) increasing operating costs (including real estate
taxes and utilities) to the extent that such increased costs cannot be passed
through to tenants, (vi) changes in tax, real estate and zoning laws. Certain
significant costs associated with investments in real estate (such as mortgage
payments, real estate taxes, insurance and maintenance costs) generally are
not reduced when circumstances cause a reduction in rental revenues from a
property and vacancies result in loss of the ability to receive tenant
reimbursements of operating costs customarily borne by commercial real estate
tenants. In addition, real estate values and income from properties are also
affected by such factors as compliance with laws applicable to real property,
including environmental and tax laws, interest rate levels and the
availability of financing. Furthermore, the amount of available rental square
feet of commercial property is often affected by market conditions and may
therefore fluctuate over time.
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. The Company recently has acquired a significant portion
(at May 15, 1998, 41 properties containing approximately 5,600,000 square feet
of space) of its overall portfolio. In addition, the Company anticipates that
it will continue to acquire commercial properties in the future. Newly
acquired properties may have characteristics or deficiencies unknown to the
Company affecting their valuation or revenue potential, and the operating
performance of these properties may therefore be less than anticipated or may
decline. As the Company acquires additional properties, the Company will be
subject to risks associated with managing new properties, including lease-up
and tenant retention. In addition, the Company's ability to manage its growth
effectively will require it to successfully integrate its new acquisitions
into its existing management structure.
6
<PAGE>
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 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. Numerous commercial
properties compete with the Company's properties in attracting tenants to
lease space and additional properties can be expected to be built in the
markets in which the Company's properties are located. The number and quality
of competitive commercial properties in a particular area will have a material
effect on the Company's ability to lease space at the properties or at newly
acquired properties and on the rents charged. Some of these competing
properties may be newer or better located than the Company's properties. In
addition, the commercial real estate market has become highly competitive.
There is a significant number of buyers of commercial properties, including
other publicly-traded commercial REITs, many of which have significant
financial resources. This has resulted in increased competition in acquiring
attractive commercial properties. Accordingly, it is possible that the Company
may not be able to meet its desired level of property acquisitions due to such
competition or other factors which may have an adverse effect on the Company's
expected growth in 1998 and subsequent years.
UNINSURED LOSSES
The Company carries insurance with respect to its properties with policy
terms and conditions customarily carried for similar properties. No assurance
can be given, however, that material losses in excess of insurance proceeds
will not occur in the future which would adversely affect the business of the
Company and its financial condition and results of operations. In addition,
certain types of losses are, or may become, uninsurable, not fully insurable
or economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in a
property, as well as the anticipated future revenue from such property, and
would continue to be obligated on any mortgage indebtedness or other
obligations related to the property.
POSSIBLE ADVERSE EFFECTS OF ILLIQUIDITY OF REAL ESTATE INVESTMENTS
Equity real estate investments are relatively illiquid. Such illiquidity
will tend to limit the ability of the Company to vary its portfolio promptly
in response to changes in economic or other conditions. In addition, the Code
limits the ability of a REIT to sell properties held for fewer than four
years, which may affect the Company's ability to sell properties without
adversely affecting returns to Shareholders.
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
7
<PAGE>
requirements, such as requirements of the 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.
ADVERSE EFFECT OF POSSIBLE ADDITIONAL COSTS OF COMPLIANCE WITH AMERICANS WITH
DISABILITIES ACT ON CASH FLOW AND DISTRIBUTIONS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations and commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. Existing
commercial properties generally are exempt from the provisions of the ADA but
may be subject to provisions requiring that buildings be made accessible to
people with disabilities. Compliance with the ADA requirements could require
removal of access barriers, and non-compliance could result in imposition of
fines by the U.S. government or an award of damages to private litigants.
While the amounts of such compliance costs, if any, are not currently
ascertainable, they are not expected to have a material effect on the Company.
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.
POSSIBLE 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 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. The preliminary environmental
assessments, including subsequent procedures where applicable, have not
revealed any environmental liability
8
<PAGE>
that the Company believes would have a material adverse effect on the
Company's business, assets or results of operations, nor is the Company aware
of any such material environmental liability. When preliminary environmental
assessments, including subsequent procedures where applicable, have revealed
any potential environmental liability, the Company has obtained an
indemnification from entities which it deems to be creditworthy (including
PSI) or established escrows with funds that would otherwise be payable to
sellers of property to remediate the environmental matter. Nevertheless, it is
possible that the preliminary environmental assessments, relating to the
properties do not reveal all environmental liabilities or that there are
material environmental liabilities of which the Company is unaware. Moreover,
there can be no assurance that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of the properties will not be affected by tenants, by
the condition of land or operations in the vicinity of the properties (such as
the presence of underground storage tanks) or by third parties unrelated to
the Company.
POSSIBLE CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL; NO LIMITATION ON
DEBT
The Company's investment, financing and distribution policies, and its
policies with respect to all other activities, including growth,
capitalization and operations, will be determined by the Board of Directors.
The organizational documents of the Company do not contain any limitation on
the amount of indebtedness the Company may incur. The amount of indebtedness,
and the Company's other investment, financing and distribution policies, may
be changed by the Board of Directors without a vote of the Shareholders. A
change in these policies, including the Company's level of debt, could
adversely affect the Company's financial condition or results of operations or
the market price of the Common Stock.
DILUTION AND SUBORDINATION
The interest of Shareholders can be diluted through the issuance of
additional securities. If the Company issues Preferred Stock 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.
POSSIBLE ADVERSE EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that is expected to influence the market price of the
Common Stock is the annual distribution rate on the Common Stock. An increase
in market interest rates may lead prospective purchasers of the Common Stock
to demand a higher annual distribution rate for future distributions. Such an
increase in the required distribution rate may adversely affect the market
price of the Common Stock.
POSSIBLE ADVERSE EFFECT ON PRICE OF COMMON SHARES OF SHARES AVAILABLE FOR
FUTURE SALE
Sales of a substantial number of shares of Common Stock or other Securities,
or the perception that such sales could occur, could adversely affect
prevailing market prices of the Common Stock or other Securities. Certain
Shareholders hold significant numbers of shares of Common Stock and, subject
to compliance with applicable securities laws, could determine to reduce or
liquidate such holdings through sales in the public markets or otherwise.
Because certain of these shares of Common Stock were sold to the holders
thereof in offerings exempt from the registration provisions of the Securities
Act, resale is restricted for prescribed times and manners pursuant to Rule
144 under the Securities Act. However, these restrictions lapse at the times
and in the manner specified in such Rule. In addition, certain of the
Shareholders whose shares of Common Stock are subject to restriction on resale
under Rule 144 have certain rights to require that the Company register such
shares for offer or sale to the public.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers, including
Ronald L. Havner, Jr., the Company's chief executive officer and president,
and Mary Jayne Howard, the Company's chief operating officer and executive
vice president. The loss of either of their services may have an adverse
effect on the operations of the Company. The Company maintains no key person
insurance with respect to either of these individuals.
9
<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 entities,
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.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED DECEMBER
MARCH 31, 31,
-------------- -----------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------ --------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined
fixed charges and preferred
stock dividends.............. 29.92 N/A 12,403.00 N/A N/A N/A N/A
</TABLE>
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
May 15, 1998, the Company had outstanding 18,609,850 shares of Common Stock
(exclusive of an aggregate of approximately 8,142,000 shares issuable upon
exchange of interests in the Operating Partnership 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 Preferred Stock or upon the exercise of
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
10
<PAGE>
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 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.
The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock or Equity Stock which the Company may
designate and issue in the future. See "Description of Preferred Stock" and
"Description of Equity Stock."
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 Company's 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 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 at the time of the
Merger. 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. In any case, 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
11
<PAGE>
as a REIT. Pursuant to authority in the Company's articles of incorporation,
the Board of Directors has granted an exception to the ownership limits to
permit any person that is eligible to file schedule 13G pursuant to rule 13d-
1(b)(1)(ii) under the Exchange Act, i.e., generally an institutional investor,
to own or acquire up to 7% of the outstanding shares of Common Stock.
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
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 to 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 or the Company's
gross negligence, willful misconduct, or failure to make payments when
required by the articles of incorporation.
12
<PAGE>
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 50,000,000 shares of Preferred Stock. At
May 15, 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.
13
<PAGE>
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, 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
14
<PAGE>
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 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
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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, 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.
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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.
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
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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.
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
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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
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
May 15, 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.
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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
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
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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.
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
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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 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
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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.
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 up to 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.
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
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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 to qualify as "rents 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" that 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.
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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 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 or due to the need to make nondeductible payments, such as
principal payments on any indebtedness it may have. If such circumstances
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.
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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 current or
accumulated earnings and profits. For purposes of determining whether
distributions on shares of Common 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
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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. 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.
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
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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 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
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<PAGE>
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
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
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<PAGE>
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." Currently no such regulations
have been promulgated or proposed. 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.
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
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<PAGE>
income of the partnership attributable to that share, in each case 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).
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. Similar rules can
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<PAGE>
apply in the case of appreciated or depreciated properties held by a
partnership at the time of new contributions by the partnership. 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 assets
will be allocated differing 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.
34
<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.
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<PAGE>
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 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>
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK OUTSTANDING SHARES
STOCK PERCENTAGE OF COMMON STOCK BENEFICIALLY OF COMMON STOCK
BENEFICIALLY OUTSTANDING SHARES BEING REGISTERED OWNED AFTER BENEFICIALLY OWNED
NAME OWNED(1) OF COMMON STOCK(1) FOR RESALE(2) RESALE(1) AFTER 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
State of Delaware...... 30,911 (4) 20,940 9,971 (4)
J.W. McConnell Family
Foundation............. 7,821 (4) 5,298 2,523 (4)
</TABLE>
- --------
(1) Reflects 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 issued
pursuant to the Agreement and the Plan of Reorganization in March 1998 and
an aggregate of 4,588,885 shares issued pursuant to the Agreement in May
1998.
(2) Reflects an aggregate of 4,588,885 shares issued pursuant to the Agreement
in May 1998.
(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%.
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<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 SHARES OF COMMON
STOCK BENEFICIALLY STOCK BEING REGISTERED STOCK BENEFICIALLY
NAME OWNED(1)(2) FOR RESALE(1) OWNED 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 all 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 financial statements of Public Storage Properties XI, Inc. as of
December 31, 1997 and 1996 and for the three years in the period ended
December 31, 1997 which are included in the Company's Annual Report on Form
10-K, 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, and the combined statement of revenues and certain
operating expenses of the Principal Properties (as defined in Note 1 to such
combined statement) for the year ended December 31, 1997 which is included in
the Company's Current Report on Form 8-K dated May 4, 1998 have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports with
respect thereto and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
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<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:
<TABLE>
<S> <C>
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
========
</TABLE>
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) 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;
II-1
<PAGE>
(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
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-2
<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 15th day of
May, 1998.
PS BUSINESS PARKS, INC.
/s/ Ronald L. Havner, Jr.
By: _________________________________
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 May 15, 1998
____________________________________ Executive Officer,
Ronald L. Havner, Jr. President, Chief Financial
Officer and Director
(principal executive
officer, principal
financial officer and
principal accounting
officer)
/s/ Harvey Lenkin Director May 15, 1998
____________________________________
Harvey Lenkin
/s/ Vern O. Curtis Director May 15, 1998
____________________________________
Vern O. Curtis
/s/ Arthur M. Friedman Director May 15, 1998
____________________________________
Arthur M. Friedman
/s/ James H. Kropp Director May 15, 1998
____________________________________
James H. Kropp
/s/ Alan K. Pribble Director May 15, 1998
____________________________________
Alan K. Pribble
/s/ Jack D. Steele Director May 15, 1998
____________________________________
Jack D. Steele
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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)
Opinion of David Goldberg as to the legality of the securities being
5.1 registered.(3)
8.1 Opinion of Hogan & Hartson L.L.P. re tax matters.(3)
12.1 Statement on computation of ratio of earnings to fixed charges.(4)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of David Goldberg (included in Exhibit 5.1).(3)
23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1).(3)
24.1 Power of Attorney (included on page II-3).
</TABLE>
- --------
(1) To be filed by amendment or as an exhibit to a document to be incorporated
by reference herein 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.
(3) Previously filed.
(4) Filed with the registrant's Form 10-Q for the quarterly period ended March
31, 1998 and incorporated herein by reference.
II-4
<PAGE>
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., formerly Public Storage Properties XI,
Inc. (included in Amendment No. 1 to the Registration Statement on Form S-3
(No. 333-50463)) 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 (i) our report dated February 18,
1998 with respect to the financial statements of Public Storage Properties XI,
Inc. in its Annual Report on Form 10-K for the year ended December 31, 1997,
(ii) 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. and (iii) our report dated April 21, 1998 on the combined
statement of revenues and certain operating expenses of the Principal
Properties for the year ended December 31, 1997 included in the Current Report
on Form 8-K dated May 4, 1998 of PS Business Parks, Inc.
/s/ Ernst & Young LLP
Los Angeles, California
May 15, 1998
