<PAGE>
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-50463
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 15, 1998)
2,000,000 Shares [LOGO OF PS BUSINESS PARKS]
PS Business Parks, Inc.
Depositary Shares Each Representing 1/1,000 of a Share of
9 1/4% Cumulative Preferred Stock, Series A
Liquidation Preference Equivalent to $25.00 Per Depositary Share
------------
PS Business Parks, Inc. is a self-advised and self-managed real estate
investment trust that acquires, owns and operates commercial properties.
We are offering to the public 2,000,000 depositary shares each representing
1/1,000 of a share of our 9 1/4% Cumulative Preferred Stock, Series A. The
shares of Preferred Stock represented by the depositary shares will be
deposited with American Stock Transfer & Trust Company as depositary. As a
holder of depositary shares, you will be entitled to all proportional rights,
preferences and privileges of the Preferred Stock. The underwriters named in
this prospectus supplement may purchase up to 300,000 additional depositary
shares from us under certain circumstances. The following is a summary of the
Preferred Stock:
. We will pay cumulative distributions on the Preferred Stock, from the
date of original issuance, at the rate of 9 1/4% of the liquidation
preference per year ($2.3125 per year per depositary share).
. We will pay distributions on the Preferred Stock quarterly, beginning on
June 30, 1999 (with the payment on that date being based pro rata on the
number of days from the original issuance of the Preferred Stock).
. We are not allowed to redeem the Preferred Stock before April 30, 2004,
except in order to preserve our status as a real estate investment
trust.
. On and after April 30, 2004, we may, at our option, redeem the Preferred
Stock by paying you $25.00 per depositary share, plus any accrued and
unpaid distributions.
. The Preferred Stock has no stated maturity and is not subject to any
sinking fund or mandatory redemption and is not convertible into any
other securities.
. Investors in the depositary shares representing interests in the
Preferred Stock generally have no voting rights, except if we fail to
pay distributions for six or more quarters or as required by law.
We have applied to list the depositary shares on the American Stock Exchange
(the "AMEX") under the symbol "PSBPrA." If this application is approved,
trading of the depositary shares on the AMEX is expected to begin within
30 days following initial delivery of the depositary shares.
------------
Investing in the depositary shares involves certain risks. See "Risk Factors"
beginning on page 4 of the accompanying prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
------------
<TABLE>
<CAPTION>
Per
Share Total
-------- -----------
<S> <C> <C>
Public Offering Price.................................. $ 25.00 $50,000,000
Underwriting Discount.................................. $ .7875 $ 1,575,000
Proceeds to PS Business Parks (before expenses)........ $24.2125 $48,425,000
</TABLE>
The underwriters are offering the depositary shares subject to various
conditions. The underwriters expect to deliver the depositary shares to
purchasers on or about April 30, 1999.
------------
Salomon Smith Barney
Donaldson, Lufkin & Jenrette
Morgan Stanley Dean Witter
PaineWebber Incorporated
Sutro & Co. Incorporated
------------
April 28, 1999
<PAGE>
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the securities. Such
transactions may include stabilization, the purchase of securities to cover
syndicate short positions and the imposition of penalty bids. For a
description of these activities, see "Underwriting."
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement or the accompanying prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in or
incorporated by reference in this prospectus supplement or the accompanying
prospectus is accurate as of any date other than the date on the front of this
prospectus supplement.
------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Supplement Summary............................................ S-3
Use of Proceeds ......................................................... S-9
Capitalization........................................................... S-9
Management............................................................... S-10
Selected Financial Data.................................................. S-11
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-12
Description of Preferred Stock and Depositary Shares..................... S-21
Federal Income Tax Considerations........................................ S-27
Underwriting............................................................. S-30
Legal Opinions .......................................................... S-31
Experts.................................................................. S-31
Prospectus
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
The Company.............................................................. 3
Risk Factors............................................................. 4
Use of Proceeds.......................................................... 10
Ratio of Earnings to Fixed Charges....................................... 10
Description of Common Stock.............................................. 10
Description of Preferred Stock........................................... 13
Description of the Depositary Shares..................................... 17
Description of Equity Stock.............................................. 20
Description of Warrants.................................................. 22
Certain Federal Income Tax Considerations................................ 23
Plan of Distribution..................................................... 35
Legal Opinions........................................................... 37
Experts.................................................................. 37
</TABLE>
This prospectus supplement and the accompanying prospectus, including
documents incorporated by reference, contain forward-looking statements.
Forward-looking statements are inherently subject to risk and uncertainties,
many of which cannot be predicted with accuracy and some of which might not
even be anticipated. Future events and actual results, financial and
otherwise, may differ materially from the results discussed in the forward-
looking statements. Factors that might cause such a difference include, but
are not limited to, those discussed in "Risk Factors" in the accompanying
prospectus and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in our most recent annual and quarterly reports.
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights some information in this prospectus supplement and
the accompanying prospectus. Because this is a summary, it may not contain all
of the information that is important to you. You should read this entire
prospectus supplement and the accompanying prospectus carefully before deciding
whether to invest in the Preferred Stock. Unless indicated otherwise, the
information contained in this prospectus supplement assumes no exercise of the
underwriters' over-allotment option.
THE COMPANY
We are a self-advised and self-managed real estate investment trust that
acquires, develops, owns and operates commercial properties. We were formed to
continue and expand the national commercial property business organized by
Public Storage, Inc. in 1985.
At December 31, 1998, we owned 106 commercial properties in 11 states
containing approximately 10.9 million square feet of space, representing an 82%
increase in space between December 31, 1997 and December 31, 1998. During 1998,
our properties had a weighted average occupancy rate of 95.6% and a weighted
average annual rent per net rentable square foot of $9.95. Our commercial
properties include business park (industrial/flex) space and office space, and
most are located in Southern California, Northern California,
Virginia/Maryland, Texas and Oregon. Currently, 91% of our rental income and
net operating income is generated in these five markets. We intend to continue
to acquire commercial properties located throughout the United States,
concentrating on our existing markets.
We conduct most of our activities through our operating partnership, PS
Business Parks, L.P., in which we own an approximate 73% partnership interest
with substantially all of the balance owned by Public Storage. We elected to be
taxed as a real estate investment trust or REIT commencing with our 1990
taxable year. We were incorporated in California in 1990. Our principal
executive offices are located at 701 Western Avenue, Glendale, California
91201, and our telephone number is (818) 244-8080.
ORGANIZATION
The following diagram illustrates our general structure:
<TABLE>
<S> <C>
Other
Shareholders
|
| 78%
|
Public Storage (1) ___________________ PS Business Parks, Inc.
22% |
| 73%
Minority Interest |
(Primarily Public Storage) ___________ PS Business Parks, L.P.
27%
</TABLE>
- --------
(1) Public Storage would own 41% of our common stock upon conversion of its
interest in our operating partnership.
S-3
<PAGE>
Recent Developments
Year End Results
Funds from operations equaled $57.4 million during 1998, compared with $17.6
million during 1997. Net income was $29.4 million or $1.51 per share (based on
weighted average diluted shares outstanding of 19,429,000) during 1998 compared
to $3.8 million or $1.23 per share (based on weighted average diluted shares
outstanding of 3,129,000) during 1997. The increases in funds from operations
and net income reflect the significant growth in our asset base through the
acquisition of commercial properties and higher net operating income from a
group of properties owned during both periods.
Our same-park properties (properties operated for at least three years)
generated net operating income of $24.2 million during 1998, compared with
$22.1 million during 1997, an increase of 9.5%. During 1998, our same-park
properties' weighted average occupancy rose 0.5% to 95.1% and their annualized
realized rent per occupied square foot increased 5.4% to $9.74.
Recent Transactions
Since December 31, 1998, we acquired eight properties in Texas and Northern
Virginia totaling 338,000 square feet of space for approximately $24 million
comprised of $22 million of cash and the assumption of $2 million of debt.
In April 1999, our operating partnership issued $12.75 million of 8 7/8%
cumulative redeemable preferred units, series B at $25 per unit. At any time
after ten years, both the holder of these units and our operating partnership
may exchange the units for shares of 8 7/8% cumulative redeemable preferred
stock, series B on a one for one basis. At any time after five years, these
securities may be redeemed for cash at their original purchase price. The net
proceeds (approximately $12.5 million) were used to repay debt to Public
Storage.
History
We were formed to continue and expand Public Storage's commercial property
business. We assumed this business through a series of transactions in 1997 and
1998 in which we (or our predecessor) acquired from Public Storage a total of
52 commercial properties containing 4.2 million square feet of space. During
this period we also acquired 54 properties containing 6.7 million square feet
of space from third parties, including 2.0 million square feet of space in
California from subsidiaries of the New York State Common Retirement Fund in
exchange for a total of approximately 5.3 million shares of our common stock
and units in our operating partnership, PS Business Parks L.P., 2.3 million
square feet of space in Oregon and Texas from Principal Mutual Life Insurance
Company and its affiliates for cash and 2.4 million square feet of space in
California, Maryland and Virginia from various other third parties primarily
for cash.
We funded our acquisitions through a combination of our common stock, units
in our operating partnership, cash and the assumption of debt. In 1998 we
issued approximately 6.8 million shares of our common stock in a private
placement to a group of institutional investors that included State of Michigan
Retirement Systems, Cohen & Steers Capital Management, Inc., Morgan Stanley
Asset Management, Harvard Private Capital Realty, Inc., ABKB/LaSalle Securities
Limited Partnership, Fidelity Real Estate Investment Portfolio, Stanford
University and State Employees' Retirement Fund of Delaware. In 1998 we also
publicly issued approximately 5 million shares of our common stock.
S-4
<PAGE>
Relationship with Public Storage
Public Storage owns 22% of our outstanding common stock (41% if it converts
its interest in PS Business Parks, L.P.). Harvey Lenkin, the president and a
director of Public Storage, is one of our directors. Ronald L. Havner, Jr., our
chairman and chief executive officer, was a senior vice president and chief
financial officer of Public Storage until December 1996. Mary Jayne Howard, our
executive vice president, was a senior vice president of Public Storage until
December 1996.
PSCC, Inc. was organized to perform centralized administrative services for
us, Public Storage and other property owners affiliated with Public Storage.
These services include accounting and finance, employee relations, management
information systems, legal, office services, marketing, administration and
property management training. In addition, to take advantage of economies of
scale, PSCC purchases supplies and services for the benefit of multiple
property owners and allocates the costs of these supplies and services to the
benefited property owners.
Business and Growth Strategies
Our primary objective is to maximize shareholder value by achieving long term
growth in funds from operations per common share. We seek to achieve this
objective through internal growth of existing facilities combined with
acquisitions and development of quality commercial properties in growth markets
and submarkets. We intend to continue investing in properties and markets that
have characteristics which enable us to be competitive in the short and long
term. We seek markets with above average population growth, education levels
and personal income. In addition, we target properties in those markets where
we believe supply is constrained and where properties have easy access to major
transportation arteries and are close to important services.
We attempt to limit the risk in our portfolio through attracting a
diversified tenant base, both in size and industry focus. We focus on
properties that can easily be reconfigured and therefore appeal to a wide range
of potential tenants. This property flexibility allows us to better serve
existing tenants by accommodating their inevitable expansion and contraction
needs. In addition, we believe that project flexibility helps us maintain high
occupancy rates, particularly when market conditions are less favorable.
By focusing on projects that can be reconfigured easily for a wide range of
tenants, we seek to control capital expenditures associated with re-leasing
space. We also attempt to limit tenant improvement expenditures to those that
are appropriate for a high number of users.
We seek to provide a superior level of service to our tenants to achieve high
occupancy and rental rates, as well as low turnover. Our property management
offices are located on-site, providing tenants with convenient access to
management. On-site staff enables our properties to be well maintained and to
convey a sense of quality, order and security. We also have significant
experience in acquiring properties managed by others and improving tenant
satisfaction, occupancy levels, renewal rates and rental income by implementing
our tenant service programs.
Our growth strategies focus on improving the operating performance of our
existing properties and on increasing our ownership of flex space facilities
through additional investments. Major elements of these strategies are as
follows:
Increase Net Cash Flow Of Existing Properties: We seek to increase the net
cash flow generated by our existing properties by (1) increasing average
occupancy rates, (2) achieving higher levels of realized monthly rents per
occupied square foot and (3) reducing our operating cost structure by improving
efficiencies and
S-5
<PAGE>
economies of scale. We believe that our proactive property management personnel
and systems combined with strong markets and increasing economies of scale will
enhance our ability to meet these goals.
Acquire Additional Properties: We believe our presence in and knowledge of
our markets enhance our ability to identify attractive acquisition
opportunities and capitalize on the overall fragmentation in our industry. We
maintain local market information on rates, occupancy and competition in each
of the markets in which we operate. We believe that the industry remains
fragmented with few national operators. During 1998, we acquired 44 facilities
from unaffiliated third parties. We expect acquisitions to be our most
significant growth area during 1999 if attractive investment opportunities
continue to be available.
Develop Properties In Existing Markets: We seek to selectively construct new
properties next to our existing business parks. In 1998, we commenced
construction on approximately 130,000 square feet of office and flex space next
to facilities in Beaverton, Oregon and Las Colinas, Texas. These developments
are expected to be completed in June 1999. We currently plan to keep
development activity below 10% of the portfolio.
Financing Strategies
Retain Operating Cash Flow: We seek to retain significant funds, after
funding our distributions and capital improvements, for additional investments
and debt reduction. During 1998, we distributed 51% of our funds from
operations allocable to common stock and retained $19.7 million, which was
available for principal payments on debt and reinvestment into real estate
assets.
Revolving Line Of Credit: We currently have a $100 million unsecured credit
facility with Wells Fargo Bank, which we use as a temporary source of
acquisition financing. To minimize refinancing and interest rate risk, we
ultimately seek to finance all acquisitions with equity securities of our
company and our operating partnership and retained cash flow. We believe this
strategy provides us with the lowest long-term cost of capital.
Access To Acquisition Capital: We believe that our strong financial position
enables us to access capital to finance our growth. In 1998, we issued
approximately $322 million of common equity to finance our acquisitions. We
plan to add leverage to our capital structure through the use of perpetual
preferred stock. We may also issue preferred interests in our operating
partnership. Our debt as a percentage of total book capitalization was 7% at
December 31, 1998, which significantly reduces refinancing risks. We seek to
maintain a target ratio of debt and preferred stock to total book
capitalization of approximately 40%, although our actual ratio may differ.
The Properties
Our properties are primarily business parks/flex space that can be configured
as light industrial or as suburban office. We believe that our properties are
generally well located in markets that exhibit strong growth characteristics,
are well maintained and professionally managed, and are generally capable of
attracting and retaining high quality tenants while maintaining competitive
rents and occupancy rates. The average building size at the properties is
approximately 29,000 square feet and the average age of the properties is 13
years. The properties are leased to over 3,000 tenants with a wide range of
uses: office (58%), industrial/R&D (29%), warehouse/industrial (8%) and retail
(5%). Over 50 industries are represented in the top 100 tenants which decreases
our exposure to the performance or the cyclical nature of specific industries.
The average lease term is four years and the average tenant occupies
approximately 3,300 square feet.
S-6
<PAGE>
The following table sets forth information relating to our properties as of
December 31, 1998:
<TABLE>
<CAPTION>
Business Park Properties/
Flex Space Office Properties
---------------------------- ----------------------------
Number of Rentable % of Number of Rentable % of
Market Properties Square Feet Total Properties Square Feet Total Occupancy
------ ---------- ----------- ----- ---------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Arkansas................ 1 91,100 0.9% -- -- -- 95%
Arizona................. 4 369,300 3.8 -- -- -- 100%
Northern California..... 7 1,065,500 11.0 2 39,500 3.2% 95%
Southern California..... 17 2,764,000 28.5 5 321,000 26.2 96%
Kansas.................. 1 61,800 0.6 -- -- -- 99%
Maryland................ 4 837,400 8.6 2 269,900 22.0 94%
Oklahoma................ 2 144,500 1.5 -- -- -- 89%
Oregon.................. 14 981,300 10.1 2 121,000 9.9 98%
Tennessee............... 2 138,000 1.4 -- -- -- 98%
Texas................... 27 2,159,800 22.3 3 329,900 26.9 94%
Virginia................ 10 1,063,800 11.0 2 144,200 11.8 98%
Washington.............. 1 27,900 0.3 -- -- -- 77%
--- --------- ---- --- --------- ---- ---
Totals/Average........ 90 9,704,400 100% 16 1,225,500 100% 96%
=== ========= ==== === ========= ==== ===
</TABLE>
The following table sets forth the lease expirations for our properties as of
December 31, 1998:
<TABLE>
<CAPTION>
Rentable Percentage of Total
Square Footage Annual Base Annual Base Rents
Subject to Rents Under Represented by
Year of Lease Expiration Expiring Leases Expiring Leases Expiring Leases
------------------------ --------------- --------------- -------------------
<S> <C> <C> <C>
1999.................... 3,023,000 $24,869,000 25.9%
2000.................... 2,589,000 24,417,000 25.4%
2001.................... 1,763,000 16,140,000 16.8%
2002.................... 1,263,000 11,611,000 12.1%
2003.................... 1,009,000 9,873,000 10.3%
Thereafter.............. 894,000 9,180,000 9.5%
---------- ----------- -----
Total................. 10,541,000 $96,090,000 100.0%
========== =========== =====
</TABLE>
S-7
<PAGE>
The Offering
<TABLE>
<C> <S>
Securities Offered............... 2,000,000 depositary shares each
representing 1/1,000 of a share of our 9 1/4%
Cumulative Preferred Stock, Series A
(2,300,000 depositary shares if the
underwriters' over-allotment option is
exercised in full).
Price per Share.................. $25.
Use of Proceeds.................. To repay debt and to invest in commercial
real estate.
Ranking.......................... With respect to the payment of
distributions and amounts upon liquidation,
the Series A Preferred Stock will rank:
. on a parity with any other preferred
shares that are not by their terms
subordinated to the Series A Preferred
Stock, and
. senior to our common stock and any other
of our equity securities that by their
terms rank junior to the Series A
Preferred Stock
Distributions.................... Distributions on the Series A Preferred
Stock are cumulative from the date of
original issue and will be payable
quarterly in arrears on or before the last
day of March, June, September and December
of each year, commencing on June 30, 1999,
at the rate of 9 1/4% of the liquidation
preference per year ($2.3125 per year per
depositary share). The first distribution
will be for less than a full quarter.
Distributions on the Series A Preferred
Stock will accumulate whether or not we
have earnings, whether or not we have funds
legally available for the payment of such
distributions and whether or not we declare
distributions.
Liquidation Rights............... The Series A Preferred Stock will have a
liquidation preference equal to $25 per
depositary share, plus accrued and unpaid
distributions, if any.
Redemption ...................... We are not allowed to redeem the Series A
Preferred Stock before April 30, 2004,
except in order to preserve our status as a
REIT. On and after April 30, 2004, we may,
at our option, redeem the Series A
Preferred Stock by paying you $25 per
depositary share, plus any accrued and
unpaid distribution.
Voting Rights.................... If distributions on the Series A Preferred
Stock are in arrears for six or more
quarterly periods, whether or not such
quarterly periods are consecutive, holders
of Series A Preferred Stock (voting
together with all other series of preferred
shares that have similar voting rights)
will be entitled to vote for the election
of two additional directors to serve on our
board of directors until all such
arrearages have been paid, at which time
such directors will resign from our board
of directors. The approval of holders of
two-thirds of the outstanding Series A
Preferred Stock voting as a single class is
required in order to change the terms of
the Series A Preferred Stock in a way that
is material and adverse to you.
No Conversion.................... The Series A Preferred Stock is not
convertible into or exchangeable for any
other of our property or securities.
Trading.......................... We have applied to list the depositary
shares on the AMEX under the symbol PSBPrA.
If approved, trading is expected to begin
within 30 days after the initial delivery
of the depositary shares.
</TABLE>
S-8
<PAGE>
USE OF PROCEEDS
We estimate net proceeds from this offering of approximately $48.3 million
after all anticipated issuance costs (approximately $55.6 million if the
underwriters' over-allotment option is exercised in full). We intend to use
the net proceeds to repay outstanding debt to Public Storage, to repay $11
million of mortgage debt and to make investments in real estate, primarily
office/industrial properties, and for other general corporate purposes.
As of April 27, 1999, we had total borrowings of approximately $11 million
under a short term borrowing agreement with Public Storage at an interest rate
of 5.5% per year. The proceeds from the borrowing were used to repay our bank
credit facility. The mortgage debt being repaid bears interest at 7.65% per
year.
Pending investment in real estate assets, a portion of the offering will be
deposited in interest bearing accounts or invested in certificates of deposit,
United States government obligations or other short-term, high quality debt
instruments selected at the discretion of our authorized officers.
CAPITALIZATION
The following table sets forth as of December 31, 1998 (1) our historical
consolidated capitalization and (2) our pro forma consolidated capitalization
to give effect to the issuance of the depositary shares representing interests
in the Preferred Stock, the issuance of preferred units by our operating
partnership and the application of the estimated net proceeds therefrom to
repay debt.
<TABLE>
<CAPTION>
December 31, 1998
---------------------
Actual As Adjusted
-------- -----------
(Dollars in
Thousands)
<S> <C> <C>
Total debt:
Line of credit with bank(1)....................... $ 12,500 --
Mortgage notes payable(2)......................... 38,041 27,041
-------- --------
Total debt........................................ 50,541 27,041
Minority interest................................... 153,015 165,490 (3)
Preferred Stock, $0.01 par value, 50,000,000 shares
authorized, 2,000 shares (2,000,000 depositary
shares) issued and outstanding, as adjusted........ -- 48,300
Common Stock, $0.01 par value, 100,000,000 shares
authorized, 23,635,650 shares issued and
outstanding........................................ 236 236
Paid-in capital..................................... 482,471 482,471
Cumulative net income............................... 32,554 32,554
Cumulative distributions............................ (25,356) (25,356)
-------- --------
Total Shareholders equity......................... 489,905 538,205
-------- --------
Total Capitalization.............................. $693,461 $730,736
======== ========
</TABLE>
- --------
(1) As of April 27, 1999, the amount outstanding from Public Storage was $11
million, all of which will be repaid with the proceeds of this offering.
(2) A portion of the proceeds will be used to repay approximately $11 million
of mortgage notes payable.
(3) Reflects issuance of $12.75 million of partnership preferred units in
April 1999. See "Prospectus Supplement Summary--Recent Developments--
Recent Transactions."
S-9
<PAGE>
MANAGEMENT
The following sets forth information on our executive officers and
directors:
Ronald L. Havner, Jr., age 41, became president of our predecessor in
December 1996 and our chairman in March 1998. He was senior vice president and
chief financial officer of Public Storage and certain other REITs affiliated
with Public Storage until December 1996.
Mary Jayne Howard, age 53, became our executive vice president in March 1998
with overall responsibility for property operations. Ms. Howard has been a
senior officer of our predecessor since December 1985 with overall
responsibility for commercial property operations and was a senior vice
president of Public Storage from November 1985 until December 1996.
Jack E. Corrigan, age 38, a certified public accountant, became our vice
president, chief financial officer and secretary in June 1998. From February
1991 until June 1998, Mr. Corrigan was a partner of LaRue, Corrigan &
McCormick with responsibility for the audit and accounting practice. He was
vice president and controller of Public Storage from 1989 until February 1991.
J. Michael Lynch, age 46, became our vice president--director of
acquisitions and development in June 1998. Mr. Lynch was vice president of
acquisitions and development of Nottingham Properties, Inc. from 1995 until
May 1998. He has 16 years of real estate experience, primarily in acquisitions
and development. From 1988 until 1995, Mr. Lynch was a development project
manager for The Parkway Companies. From 1983 until 1988, he was an assistant
vice president, real estate investment department of First Wachovia
Corporation.
Harvey Lenkin, age 63, became a director in 1998. Mr. Lenkin has been
employed by Public Storage for 21 years and has been president and a director
of Public Storage since November 1991. Mr. Lenkin is a member of the Board of
Governors of the National Association of Real Estate Investment Trusts
(NAREIT).
Vern O. Curtis, age 64, became a director in 1990. Mr. Curtis is a private
investor. Mr. Curtis was Dean of Business School of Chapman College from 1988
to 1990 and president and chief executive officer of Denny's, Inc. from 1980
to 1987.
Arthur M. Friedman, age 63, became a director in 1998. Mr. Friedman is a
certified public accountant and has been an independent business and tax
consultant since 1995. He was a partner of Arthur Andersen from 1968 until
1995.
James H. Kropp, age 50, became a director in 1998. Mr. Kropp has been
director of investment management and banking of Christopher Weil & Company,
Inc., a securities broker-dealer and registered investment adviser, since
1995.
Alan K. Pribble, age 56, became a director in 1998. Mr. Pribble has been an
independent business consultant since 1997. Mr. Pribble was employed by Wells
Fargo Bank, N.A. for 30 years until 1997. He was a senior vice president of
Wells Fargo from 1984 until 1997.
Jack D. Steele, age 75, became a director in 1990. Mr. Steele is a business
consultant. He was chairman--board services of Korn/Ferry International from
1986 to 1988 and Dean of School of Business and professor at the University of
Southern California from 1975 to 1986.
S-10
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for us for each of the five years ended December 31, 1998. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
financial information included in our Annual Report on Form 10-K for the year
ended December 31, 1998, which is incorporated herein by reference. The
selected financial information for periods before March 17, 1998 refers to our
predecessor, American Office Park Properties, Inc.
<TABLE>
<CAPTION>
For the Periods(1)
For the Year ---------------------------
Ended April 1, January 1, 1997 For the Years
December 31, 1997 through through Ended December 31,
------------ December 31, March 31, -----------------------
1998 1997 1997 1996 1995 1994
------------ ------------ --------------- ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income........... $ 88,320 $ 24,364 $ 5,805 $ -- $ -- $ --
Facility management
fees................... 529 709 247 2,133 2,044 1,973
Interest income......... 1,411 424 29 43 37 40
--------- -------- -------- ------ ------ ------
90,260 25,497 6,081 2,176 2,081 2,013
--------- -------- -------- ------ ------ ------
Expenses:
Cost of operations...... 26,073 9,837 2,493 -- -- --
Cost of facility
management............. 77 129 60 514 570 523
Depreciation and
amortization........... 18,908 4,375 820 -- -- --
General and
administrative......... 2,233 1,248 213 1,143 319 245
Interest expense........ 2,361 1 -- -- -- --
--------- -------- -------- ------ ------ ------
49,652 15,590 3,586 1,657 889 768
--------- -------- -------- ------ ------ ------
Income before minority
interest............... 40,608 9,907 2,495 519 1,192 1,245
Minority interest in
income................. (11,208) (6,753) (1,813) -- -- --
--------- -------- -------- ------ ------ ------
Income before income
taxes.................. 29,400 3,154 682 519 1,192 1,245
Income tax expense(1)... -- -- -- (216) (472) (488)
--------- -------- -------- ------ ------ ------
Net income.............. $ 29,400 $ 3,154 $ 682 $ 303 $ 720 $ 757
========= ======== ======== ====== ====== ======
Per Common Share:
Distribution............ $ 1.10 $ 0.68 $ 0.00 $ 0.43 $ 0.90 $ 0.64
Net income--Basic....... $ 1.52 $ 0.92 $ 0.31 $ 0.32 $ 0.80 $ 0.84
Net income--Diluted..... $ 1.51 $ 0.92 $ 0.31 $ 0.32 $ 0.80 $ 0.84
Weighted average common
shares-Basic........... 19,361 3,414 2,193 947 905 900
Weighted average common
shares-Diluted......... 19,429 3,426 2,193 947 905 900
Balance Sheet Data
Total assets............ $ 709,414 $323,454 $136,922 $1,941 $1,110 $ 326
Total debt.............. 50,541 3,500 -- -- -- --
Minority interest....... 153,015 168,665 97,180 -- -- --
Shareholders' equity.... $ 489,905 $142,958 $ 36,670 $1,734 $1,041 $ 343
Other Data
Net cash provided by
operating activities... $ 60,228 $ 13,597 $ 5,840 $ 413 $ 950 $ 571
Net cash used in
investing activities... (308,646) (47,105) (582) -- -- --
Net cash provided by
(used in) financing
activities............. 250,602 31,443 (228) (378) (84) (563)
Funds from
operations(2).......... $ 57,430 $ 14,282 $ 3,315 $ 303 $ 720 $ 757
Square footage owned at
end of period.......... 10,930 6,049 3,014 -- -- --
</TABLE>
- --------
(1) In accordance with generally accepted accounting principles ("GAAP"), due
to the changes in the basis of certain assets, these periods are presented
separately. See Note 2 of the Notes to Consolidated Financial Statements.
(2) We define funds from operations as net income, computed in accordance with
GAAP before depreciation, amortization, minority interest in income,
straight line rent adjustments and extraordinary or non-recurring items.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Funds from
Operations."
S-11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operation and
financial condition should be read in conjunction with our selected financial
information and financial statements. References to us for periods before
March 17, 1998 refer to our predecessor, American Office Park Properties,
Inc..
Comparison of 1998 to 1997
Overview: During 1998, we identified and completed strategic acquisition
transactions and focused on increasing cash flow from our existing core
portfolio of properties. In addition, we began limited development in two of
our core markets. We strengthened our balance sheet primarily through common
equity offerings and a conservative distribution policy that maximizes cash
flow retention. We also established a capital structure that allows us to take
advantage of attractive growth opportunities.
During 1998, we added a total of 4.9 million square feet of space in each of
our existing core markets at a cost of approximately $378 million: 1,687,000
square feet in Texas for approximately $102 million; 1,001,000 square feet in
Portland, Oregon for approximately $115 million; 1,442,000 square feet in the
Northern Virginia/Maryland market for approximately $108 million; 422,000
square feet in Southern California for approximately $25 million; and 307,000
square feet in Northern California for approximately $25 million.
We were able to increase rents and maintain expenses at a stable level at
our Same Park facilities during 1998. Revenue increased 5.9%, while expenses
remained flat, resulting in a 9.5% increase in net operating income (rental
income less cost of operations before depreciation expense). We define Same
Park facilities as 51 facilities that were owned or operated by us or our
predecessor since January 1, 1996. See "Supplementary Property Data and
Trends", below.
Net income for 1998 was $29,400,000 compared to $3,836,000 for 1997. Net
income per common share on a diluted basis was $1.51 (based on weighted
average diluted shares outstanding of 19,429,000) for 1998 compared to net
income per common share on a diluted basis of $1.23 (based on diluted weighted
average shares outstanding of 3,129,000) for 1997, representing an increase of
22.8%. The increases in net income and net income per share reflect the
significant growth in our asset base through the acquisition of commercial
properties and increase in net operating income from a group of properties
owned during both periods.
S-12
<PAGE>
Comparison with 1997 Results: On March 31, 1997, Public Storage exchanged its
non-voting preferred stock for voting common stock of American Office Park
Properties in a transaction accounted for as a purchase of American Office Park
Properties by Public Storage. As a result of Public Storage attaining a 95%
ownership interest in American Office Park Properties' voting common stock, the
financial results for 1997 are presented separately for the period before the
exchange transaction (January 1, 1997 to March 31, 1997) and after the exchange
transaction (April 1, 1997 to December 31, 1997). To facilitate a comparison of
1997 results with results for other years, the amounts for 1997 have been
combined as follows:
<TABLE>
<CAPTION>
April 1,
1997 For the
through January 1, 1997 Year Ended
December through December
31, 1997 March 31, 1997 31, 1997
----------- --------------- -----------
<S> <C> <C> <C>
Revenues:
Rental income...................... $24,364,000 $ 5,805,000 $30,169,000
Facility management fees from
affiliates........................ 709,000 247,000 956,000
Interest income.................... 424,000 29,000 453,000
----------- ----------- -----------
25,497,000 6,081,000 31,578,000
=========== =========== ===========
Expenses:
Cost of operations................. 9,837,000 2,493,000 12,330,000
Cost of facility management........ 129,000 60,000 189,000
Depreciation and amortization...... 4,375,000 820,000 5,195,000
General and administrative......... 1,248,000 213,000 1,461,000
Interest expense................... 1,000 -- 1,000
----------- ----------- -----------
15,590,000 3,586,000 19,176,000
----------- ----------- -----------
Income before minority interest...... 9,907,000 2,495,000 12,402,000
Minority interest in income........ (6,753,000) (1,813,000) (8,566,000)
----------- ----------- -----------
Net income........................... $ 3,154,000 $ 682,000 $ 3,836,000
=========== =========== ===========
</TABLE>
Results of Operations: Our property operations account for almost all of our
income. The following table summarizes our 1998 and 1997 rental income and net
operating income:
<TABLE>
<CAPTION>
1998 1997 Change
----------- ----------- -------
<S> <C> <C> <C>
Rental income:
Facilities owned throughout each period (35
facilities, 3.0 million net rentable square
feet)...................................... $25,045,000 $23,936,000 4.6%
Facilities acquired between March 31, 1997
and December 31, 1998 (71 facilities, 7.9
million net rentable square feet).......... 63,275,000 6,233,000 915.2%
----------- ----------- -------
Total rental income......................... $88,320,000 $30,169,000 192.8%
=========== =========== =======
Cost of operations (excluding depreciation):
Facilities owned throughout each period..... $10,023,000 $10,073,000 (0.5%)
Facilities acquired between March 31, 1997
and December 31, 1998...................... 16,050,000 2,257,000 611.1%
----------- ----------- -------
Total cost of operations.................... $26,073,000 $12,330,000 111.5%
=========== =========== =======
Net operating income (rental income less
cost of operations before depreciation
expense):
Facilities owned throughout each period..... $15,022,000 $13,863,000 8.4%
Facilities acquired between March 31, 1997
and December 31, 1998...................... 47,225,000 3,976,000 1,087.8%
----------- ----------- -------
Total net operating income.................. $62,247,000 $17,839,000 248.9%
=========== =========== =======
</TABLE>
S-13
<PAGE>
The following table summarizes our 1998 rental income and net operating
income (NOI) by major geographic regions:
<TABLE>
<CAPTION>
Percent
Square of Rental Percent of Percent of
Region Footage Total Income Total NOI Total
- ------ ---------- ------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Southern California..... 3,085,000 28.2% $28,930,000 32.7% $20,803,000 33.4%
Northern California..... 1,105,000 10.1% 7,557,000 8.6% 5,513,000 8.9%
Virginia/Maryland....... 2,315,300 21.2% 22,710,000 25.7% 15,864,000 25.5%
Texas................... 2,489,700 22.8% 13,927,000 15.8% 8,865,000 14.2%
Oregon.................. 1,102,300 10.1% 9,725,000 11.0% 7,652,000 12.3%
Other................... 832,600 7.6% 5,471,000 6.2% 3,550,000 5.7%
---------- ----- ----------- ----- ----------- -----
Total................... 10,929,900 100.0% $88,320,000 100.0% $62,247,000 100.0%
========== ===== =========== ===== =========== =====
</TABLE>
Supplemental Property Data and Trends: In order to evaluate the performance
of our overall portfolio, we analyze our same park facilities: a consistent
group of 51 properties (4.2 million net rentable square feet). These 51
properties represent a mature group of properties that have been managed by us
for at least three years and, as of March 17, 1998, were owned by us.
The following table summarizes the 1998 and 1997 rental income and net
operating income of the "Same Park" facilities:
<TABLE>
<CAPTION>
1998(1) 1997(1) Change
----------- ----------- ------
<S> <C> <C> <C>
Rental income (2)............................ $38,927,000 $36,760,000 5.9%
Cost of operations........................... 14,718,000 14,655,000 0.4%
----------- ----------- ---
Net operating income........................ $24,209,000 $22,105,000 9.5%
=========== =========== ===
Gross margin (3)........................... 62.2% 60.1% 2.1%
Annualized realized rent per occupied square
foot (4).................................... $ 9.74 $ 9.24 5.4%
Weighted average occupancy for the period.... 95.1% 94.6% 0.5%
</TABLE>
- --------
(1) Operations for 1998 represent the historical operations of the "Same Park"
facilities. Since we did not own all of these properties throughout all
periods presented, all of their operations are not reflected in our
historical operating results. All properties were owned as of March 17,
1998.
(2) Rental income does not include the effect of straight-line accounting.
(3) Gross margin is computed by dividing property net operating income by
rental income.
(4) Realized rent per square foot represents the actual revenue earned per
occupied square foot.
The following table summarizes 1998 and 1997 rental income and net operating
income (NOI) of the "Same Park" facilities by major geographic regions:
<TABLE>
<CAPTION>
Rental Rental Percentage Percentage
Income 1998 Income 1997 Increase NOI 1998 NOI 1997 Increase
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Southern California..... $14,965,000 $14,362,000 4.2% $ 9,639,000 $ 9,075,000 6.2%
Northern California..... 5,668,000 5,227,000 8.4% 3,836,000 3,472,000 10.5%
Virginia/Maryland....... 5,271,000 4,953,000 6.4% 3,314,000 2,854,000 16.1%
Texas................... 6,649,000 6,394,000 4.0% 3,407,000 3,206,000 6.3%
Arizona................. 2,728,000 2,477,000 10.1% 1,731,000 1,488,000 16.3%
Other................... 3,646,000 3,347,000 8.9% 2,282,000 2,010,000 13.5%
----------- ----------- ---- ----------- ----------- ----
Total................... $38,927,000 $36,760,000 5.9% $24,209,000 $22,105,000 9.5%
=========== =========== ==== =========== =========== ====
</TABLE>
These increases reflect the performance of our existing markets. All major
markets reflected increases in rental rates without corresponding increases in
expenses.
S-14
<PAGE>
Facility Management Operations: Facility management fees account for a small
portion of our income. During 1998, $452,000 in net income was recognized from
facility management fees compared to $767,000 for 1997. Facility management
fees have decreased due to our acquisition of properties previously managed.
Interest Income: Interest income reflects earnings on cash balances.
Interest income was $1,411,000 for 1998 compared to $453,000 for 1997. The
increase is attributable to increased average cash balances primarily due to
issuances of our common stock in January and May 1998 and the timing of
investing these funds in real estate facilities. Average cash balances in 1998
were approximately $28 million compared to $9 million in 1997.
Cost of Operations: Cost of operations in 1998 was $26,073,000 compared to
$12,330,000 in 1997. The increase is due primarily to the growth in the total
square footage of our portfolio of properties. Cost of operations as a
percentage of rental income decreased from 40.9% for 1997 to 29.5% for 1998 as
a result of economies of scale achieved through the acquisition of properties
in existing markets. Cost of operations in 1998 consisted primarily of
property taxes ($6,967,000), property maintenance ($4,643,000), utilities
($4,558,000) and direct payroll ($3,981,000).
Depreciation and Amortization Expense: Depreciation and amortization expense
for 1998 was $18,908,000 compared to $5,195,000 for 1997. The increase is due
to the acquisition of real estate facilities in 1997 and 1998.
General and Administrative Expense: General and administrative expense was
$2,233,000 for 1998 compared to $1,461,000 for 1997. The increase is due to
our increased size and acquisition activities. Included in general and
administrative costs are acquisition costs and abandoned transaction costs.
Acquisition expenses for 1998 and 1997 were $844,000 and $177,000,
respectively. Abandoned transaction costs for 1998 and 1997 were $65,000 and
$5,000, respectively.
Interest Expense: Interest expense was $2,361,000 for 1998 compared to
$1,000 for 1997. The increase is attributable to mortgage notes assumed in
connection with the acquisition of real estate facilities totaling
approximately $38 million at December 31, 1998 ($1.5 million in interest
expense), temporary financing in connection with acquisitions ($0.5 million in
interest expense), costs to establish the line of credit ($0.5 million) and
commitment fees ($0.1 million) net of $268,000 of interest expense capitalized
to ongoing construction projects.
Minority Interest in Income: Minority interest in income reflects the income
allocable to equity interests in our operating partnership, PS Business Parks,
L.P., that are not owned by us. Minority interest in income for 1998 was
$11,208,000 compared to $8,566,000 for 1997. The increase in minority interest
in income is due to improved operating results and the issuance of additional
units in our operating partnership, primarily in connection with the
acquisition of real estate facilities in January and April 1997.
Comparison of 1997 to 1996
Overview: During 1997, we identified and completed strategic acquisition
transactions and focused on increasing cash flow from our existing core
portfolio of properties. We strengthened our balance sheet primarily by
issuing common stock and units in our operating partnership in exchange for
real estate. By maintaining low leverage, we facilitated future growth.
During 1997, we acquired 6.0 million square feet. The cost of these
acquisitions was approximately $308 million. We acquired 39 properties (3.4
million square feet) from Public Storage, which we had been managing. In
addition, we acquired 10 properties (2.6 million square feet) from third
parties, primarily in the Southern California and the Maryland/Northern
Virginia markets.
We did not own properties during 1996. However, we managed all 51 of the
"Same Park" facilities in 1996. We were able to increase rents and maintain
expenses at a stable level at our "Same Park" facilities during 1997. Revenue
increased 5.4% and expenses remained flat, resulting in a 7.8% increase in net
operating income.
S-15
<PAGE>
Net income for 1997 was $3,836,000 compared to $303,000 for 1996. Net income
per common share on a diluted basis was $1.23 (based on weighted average
diluted shares outstanding of 3,129,000) for 1997 compared to net income per
common share on a diluted basis of $0.32 (based on diluted weighted average
shares outstanding of 947,000) for 1996. The increases in net income and net
income per share reflect the significant growth in our asset base through the
acquisition of commercial properties.
Results of Operations: The following table summarizes our 1997 rental income
and net operating income (NOI) by major geographical regions:
<TABLE>
<CAPTION>
Square Percent of Rental Percent of Percent of
Region Footage Total Income Total NOI Total
- ------ --------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Southern California..... 2,669,000 44.1% $10,240,000 33.9% $ 6,284,000 35.2%
Northern California..... 798,000 13.2% 3,229,000 10.7% 2,155,000 12.1%
Virginia/Maryland....... 873,000 14.4% 5,122,000 17.0% 3,243,000 18.2%
Texas................... 843,000 13.9% 6,394,000 21.2% 3,076,000 17.2%
Arizona................. 369,000 6.1% 2,477,000 8.2% 1,455,000 8.2%
Other................... 503,000 8.3% 2,707,000 9.0% 1,626,000 9.1%
--------- ----- ----------- ----- ----------- -----
Total................... 6,055,000 100.0% $30,169,000 100.0% $17,839,000 100.0%
========= ===== =========== ===== =========== =====
</TABLE>
Supplemental Property Data and Trends: The following table summarizes our
1997 and 1996 rental income and net operating income (NOI) of the "Same Park"
facilities:
<TABLE>
<CAPTION>
1997(1) 1996(1) Change
----------- ----------- ------
<S> <C> <C> <C>
Rental income(2)............................ $36,760,000 $34,891,000 5.4%
Cost of operations.......................... 14,655,000 14,381,000 1.9%
----------- ----------- ----
Net operating income........................ $22,105,000 $20,510,000 7.8%
=========== =========== ====
Gross margin(3)............................. 60.1% 58.8% 1.3%
Annualized realized rent per occupied square
foot(4).................................... $ 9.24 $ 8.74 5.7%
Weighted average occupancy for the period... 94.6% 94.9% (0.3)%
</TABLE>
- --------
(1) Operations for 1997 represent the historical operations of the "Same Park"
facilities. Since we did not own all of these properties throughout all
periods presented, all of their operations are not reflected in our
historical operating results. All properties were owned as of March 17,
1998.
(2) Rental income does not include the effect of straight-line accounting.
(3) Gross margin is computed by dividing property net operating income by
rental income.
(4) Realized rent per square foot represents the actual revenue earned per
occupied square foot.
The following table summarizes 1997 and 1996 rental income and net operating
income (NOI) of the "Same Park" facilities by major geographic regions:
<TABLE>
<CAPTION>
Rental Rental Percentage Percentage
Income 1997 Income 1996 Increase NOI 1997 NOI 1996 Increase
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Southern California..... $14,362,000 $13,441,000 6.9% $ 9,075,000 $ 8,306,000 9.3%
Northern California..... 5,227,000 4,911,000 6.4% 3,472,000 3,187,000 8.9%
Virginia/Maryland....... 4,953,000 4,808,000 3.0% 2,854,000 2,657,000 7.4%
Texas................... 6,394,000 6,231,000 2.6% 3,206,000 3,049,000 5.1%
Arizona................. 2,477,000 2,232,000 11.0% 1,488,000 1,295,000 14.9%
Other................... 3,347,000 3,268,000 2.4% 2,010,000 2,016,000 (0.3)%
----------- ----------- ---- ----------- ----------- ----
Total................... $36,760,000 $34,891,000 5.4% $22,105,000 $20,510,000 7.8%
=========== =========== ==== =========== =========== ====
</TABLE>
These increases reflect the performance of our existing markets. All major
markets reflected increases in rental rates without corresponding increases in
expenses.
S-16
<PAGE>
Facility Management Operations: Facility management fees accounted for a
small portion of our income during 1997 and the majority of our income during
1996. During 1997, $767,000 in net income was recognized from facility
management fees compared to $1,619,000 for 1996. Facility management fees have
decreased due to our acquisition of properties previously managed.
Interest Income: Interest income reflects earnings on cash balances.
Interest income was $453,000 for 1997 compared to $43,000 for 1996. The
increase is attributable to increased average cash balances primarily due to
our increased cash flow. Average cash balances in 1997 were approximately $9
million compared to $1 million for 1996.
Cost of Operations: Cost of operations for 1997 was $12,330,000 compared to
none in 1996. The increase is due to the acquisition of real estate facilities
in 1997. We did not own real estate facilities prior to 1997 and served as a
manager of commercial properties owned by Public Storage and its related
entities. For 1997, cost of operations consisted primarily of property taxes
($2,653,000), property maintenance ($1,882,000), utilities ($2,156,000) and
direct payroll ($2,648,000).
Depreciation and Amortization Expense: Depreciation and amortization expense
for 1997 was $5,195,000 compared to none for 1996. The increase is due to the
acquisition of real estate facilities in 1997.
General and Administrative Expense: General and administrative expense was
$1,461,000 for 1997 compared to $1,143,000 for 1996. The increase is due to
our increased size and acquisition activities. Included in general and
administrative costs are acquisition costs and abandoned transaction costs.
Acquisition expenses for 1997 were $177,000 and none in 1996. Abandoned
transaction costs for 1997 were $5,000 and none in 1996.
Minority Interest in Income: Minority interest in income reflects the income
allocable to equity interests in PS Business Parks, L.P. that are not owned by
us. Minority interest in income for 1997 was $8,566,000 compared to none for
the same period in 1996. The increase in minority interest in income is due to
the issuance of units in PS Business Parks, L.P., primarily in connection with
the acquisition of real estate facilities in January and April 1997.
Liquidity and Capital Resources
Net cash provided by operating activities for 1998 and 1997 was $60,228,000
and $19,437,000, respectively. We believe that our internally generated net
cash provided by operating activities will continue to be sufficient to enable
us to meet our operating expenses, capital improvements, debt service
requirements and to maintain the current level of distributions to our
shareholders.
The following table summarizes our ability to make capital improvements to
maintain our facilities through the use of cash provided by operating
activities. The remaining cash flow is available to pay distributions to
shareholders and acquire property interests.
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net income.......................................... $ 29,400,000 $ 3,836,000
Depreciation and amortization....................... 18,908,000 5,195,000
Change in working capital........................... 712,000 1,840,000
Minority interest in income......................... 11,208,000 8,566,000
------------ -----------
Net cash provided by operating activities........... 60,228,000 19,437,000
Maintenance capital expenditures.................... (3,376,000) (1,442,000)
Tenant improvements................................. (5,258,000) (1,415,000)
Capitalized lease commissions....................... (1,979,000) (359,000)
------------ -----------
Funds available for distribution to shareholders,
minority interests, Acquisitions and other
corporate purposes................................. 49,615,000 16,221,000
Cash distributions to shareholders and minority
interests.......................................... (29,904,000) (6,992,000)
------------ -----------
Excess funds available for acquisitions and other
corporate purposes................................. $ 19,711,000 $ 9,229,000
============ ===========
</TABLE>
S-17
<PAGE>
Our capital structure is characterized by a low level of leverage. At
December 31, 1998 we had six fixed rate mortgage notes payable totaling
$38,041,000, and $12,500,000 drawn on our line of credit which represented 7%
of our total capitalization (based on book value, including minority interests
and debt). The weighted average interest rate for the mortgages was 7.82%. The
line of credit bears interest at LIBOR plus 0.80% (5.93% at December 31,
1998).
On August 6, 1998, we entered into an unsecured line of credit with a
commercial bank. This line of credit has a borrowing limit of $100 million and
expires on August 5, 2000. The expiration date may be extended by one year on
each anniversary of the credit agreement. Interest on outstanding borrowings
is payable monthly. At our option, the rate of interest charged is equal to
(i) the prime rate or (ii) a rate ranging from LIBOR plus 0.55% to LIBOR plus
0.95% depending on our credit ratings and interest coverage ratios, as defined
(currently LIBOR plus 0.80%). In addition, we are required to pay an annual
commitment fee of 0.25%.
We expect to fund our growth strategies with internally generated retained
cash flows and temporary borrowings from our line of credit. We intend to
repay amounts borrowed under the credit facility from undistributed cash flow
or, as market conditions permit and as determined to be advantageous, from the
public or private sale of preferred and common stock or formation of joint
ventures. We target a leverage ratio of 40% and a funds from operations to
fixed charges ratio of 3.0 to 1.0. As of December 31, 1998 and for the year
then ended, the leverage ratio was 7% and the funds from operations to fixed
charges coverage ratio was 22.74 to 1.0.
In January 1998, we entered into an agreement with institutional investors
whereby we agreed to issue 6,774,072 shares of our common stock for cash ($155
million) in separate tranches. The first tranche, representing 2,185,187 share
or $50 million, was issued in January 1998. We incurred $2.4 million in costs
associated with the issuance. The remainder of the common shares (4,588,885)
were issued on May 6, 1998 and the net proceeds ($105 million) were used to
repay short-term borrowings.
In May 1998, we completed two common stock offerings, raising net proceeds
totaling $118.9 million. In the first offering, we sold 4,000,000 shares of
common stock to an underwriter, resulting in approximately $95.2 million of
net proceeds. These shares were resold to various institutional investors. A
portion of the proceeds was used to retire debt incurred as a result of a $190
million property portfolio acquisition. In the second common stock offering,
we sold 1,025,800 common shares to an underwriter, resulting in net proceeds
of $23.7 million. These proceeds were used for subsequent acquisitions.
Funds from Operations: We define funds from operations as net income,
computed in accordance with generally accepted accounting principles or GAAP,
before depreciation, amortization, minority interest in income, straight line
rent adjustments and extraordinary or non-recurring items. We consider funds
from operations to be a useful measure of the operating performance of a REIT
which, together with net income and cash flows, provides investors with a
basis to evaluate the operating and cash flow performances of a REIT. Funds
from operations does not represent net income or cash flows from operations as
defined by GAAP. Funds from operations does not take into consideration
scheduled principal payments on debt and capital improvements. Accordingly,
funds from operations is not a substitute for cash flow or net income and may
not be the most appropriate measure of liquidity or operating performance or
ability to make acquisitions and capital improvements or ability to pay
distributions or debt principal payments. Also, funds from operations as
computed and disclosed by us may not be comparable to funds from operations
computed and disclosed by other REITs.
S-18
<PAGE>
Our funds from operations is computed as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net income.......................................... $29,400,000 $ 3,836,000
Depreciation and amortization....................... 18,908,000 5,195,000
Minority interest in income......................... 11,208,000 8,566,000
Effects of straight line rents...................... (2,086,000) --
----------- -----------
Subtotal............................................ 57,430,000 17,597,000
Funds from operations allocated to minority
interests.......................................... (15,852,000) (12,153,000)
----------- -----------
Funds from operations allocated to shareholders..... $41,578,000 $ 5,444,000
=========== ===========
</TABLE>
Capital Expenditures: During 1998, we incurred $10.6 million in capital
expenditures, tenant improvements and capitalized leasing commissions. In
addition, we made $0.5 million of renovation expenditures. On a recurring
annual basis, we expect $0.90 to $1.20 per square foot in recurring capital
expenditures in 1999 ($10--$13 million based on current square footage). In
addition, we expect to make $3 million in expenditures to continue renovation
on two properties in Texas.
Distributions: We have elected and intend to qualify as a REIT for federal
income tax purposes. As a REIT, we must meet, among other tests, sources of
income, share ownership and certain asset tests. In addition, we are not taxed
on that portion of our taxable income that is distributed to our shareholders
provided that at least 95% of our taxable income is distributed to our
shareholders before filing our tax return.
On February 3, 1999, we declared a regular dividend of $0.25 per share
payable on March 31, 1999 to shareholders of record on March 15, 1999. Our
board of directors has established a distribution policy to maximize the
retention of operating cash flow and only distribute the minimum amount
required for us to maintain our tax status as a REIT.
Impact of Year 2000
We utilized Public Storage's information systems in connection with a cost
sharing and administrative services agreement. We and Public Storage have
completed an assessment of all of our hardware and software applications
including those affecting us to identify susceptibility to what is commonly
referred to as the "Y2K Issue" whereby certain computer programs have been
using two digits rather than four to define the applicable year. Certain
computer programs or hardware with the Y2K Issue have date-sensitive
applications or embedded chips that may recognize a date using "00" as the
year 1900 rather than the year 2000, resulting in miscalculations or system
failure and disruptions to operations.
Together with Public Storage, we have implemented a process for critical
applications, including our general ledger and related systems, that are
believed to have Y2K issues. We and Public Storage expect the implementation
to be complete by June 1999. Contingency plans have been developed for use in
case the implementations are not completed on a timely basis. We presently
believe that the impact of the Y2K Issue on our system can be mitigated.
However, if the plan for ensuring Y2K compliance and the related contingency
plans were to fail, be insufficient, or not be implemented on a timely basis,
our operations could be materially impacted.
Certain of our other non-computer related systems that may be impacted by
the Y2K Issue, such as security systems, are currently being evaluated, and we
expect the evaluation to be complete by June 1999. We expect the
implementation of any required solutions to be complete in advance of December
31, 1999. We have not fully evaluated the impact of lack of Y2K compliance on
these systems, but we have no reason to believe that lack of compliance would
materially impact our operations.
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We exchange electronic data with certain outside vendors in the banking and
payroll processing areas. We have been advised by these vendors that their
systems are or will be Y2K compliant and have requested a Y2K compliance
certification from these entities. We are not aware of any other vendors,
suppliers, or other external agents with a Y2K Issue that would materially
impact our results of operations, liquidity, or capital resources. However, we
have no means of ensuring that external agents will be Y2K compliant, and
there can be no assurance that we have identified all such external agents.
The inability of external agents to complete their Year 2000 compliance
process in a timely fashion could materially impact us. The effect of non-
compliance by external agents is not determinable.
The total cost of Public Storage's Y2K compliance activities (which
primarily consists of the costs of implementing new systems) will be allocated
to all entities that use the Public Storage computer systems. The amount to be
allocated to us is estimated at $250,000.
The costs of the projects and the date on which we and Public Storage
believe that we will be Y2K compliant are based upon our best estimates, and
were derived utilizing numerous assumptions of future events. There can be no
assurance that these estimates will be achieved, and actual results could
differ materially from those anticipated. There can be no assurance that we
and Public Storage have identified all potential Y2K issues either within our
companies or at external agents. In addition, the impact of the Y2K issue on
governmental entities and utility providers and the resulting impact on us, as
well as disruptions in the general economy, may be material but cannot be
reasonably determined or quantified.
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DESCRIPTION OF PREFERRED STOCK AND DEPOSITARY SHARES
General
Under our Articles of Incorporation, as amended, the Board of Directors is
authorized without further shareholder action to provide for the issuance of
up to 50,000,000 shares of preferred stock, in one or more series, with such
voting powers, full or limited, and with such designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be set forth in resolutions
providing for the issue of preferred stock adopted by the Board of Directors.
We have no outstanding shares of preferred stock.
Prior to issuance, the Board of Directors will have adopted resolutions
creating the 9 1/4% Cumulative Preferred Stock, Series A (the "Preferred
Stock"). When issued, the Preferred Stock will have a liquidation value of
$25,000 per share, will be fully paid and nonassessable, will not be subject
to any sinking fund or other obligation of PS Business Parks, Inc. (the
"Company") to repurchase or retire the Preferred Stock, and will have no
preemptive rights.
American Stock Transfer & Trust Company will be the transfer agent and
dividend disbursing agent for the Preferred Stock.
Each Depositary Share represents 1/1,000 of a share of Preferred Stock. The
shares of the Preferred Stock will be deposited with American Stock Transfer &
Trust Company, as Depositary (the "Preferred Stock Depositary"), under a
Deposit Agreement among the Company, the Preferred Stock Depositary and the
holders from time to time of the depositary receipts (the "Depositary
Receipts") issued by the Preferred Stock Depositary under the Deposit
Agreement. The Depositary Receipts will evidence the Depositary Shares.
Subject to the terms of the Deposit Agreement, each holder of a Depositary
Receipt evidencing a Depositary Share will be entitled, proportionately, to
all the rights and preferences of, and subject to all of the limitations of,
the interest in the Preferred Stock represented by the Depositary Share
(including dividend, voting, redemption and liquidation rights and
preferences). See "Description of Depositary Shares" in the accompanying
Prospectus and "--Depositary Shares," below.
Immediately following our issuance of the Preferred Stock, we will deposit
the Preferred Stock with the Preferred Stock Depositary, which will then issue
and deliver the Depositary Receipts to us. We will, in turn, deliver the
Depositary Receipts to the underwriters. Depositary Receipts will be issued
evidencing only whole Depositary Shares.
We have applied to list the Depositary Shares on the AMEX. The Preferred
Stock will not be listed and we do not expect that there will be any trading
market for the Preferred Stock except as represented by the Depositary Shares.
Ownership Restrictions
For a discussion of ownership limitations that apply to the Preferred Stock
and related Depositary Shares, see "Description of Common Stock--Ownership
Limitations" in the accompanying Prospectus.
Preferred Stock
The following is a brief description of the terms of the Preferred Stock
which does not purport to be complete and is subject to and qualified in its
entirety by reference to the Certificate of Determination of the Preferred
Stock, the form of which is filed as an exhibit to, or incorporated by
reference in, the Registration Statement of which this Prospectus Supplement
constitutes a part.
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Ranking
With respect to the payment of dividends and amounts upon liquidation, the
Preferred Stock will rank pari passu with any shares of preferred stock
hereafter issued by us ranking pari passu with the Preferred Stock, and will
rank senior to the Common Stock and any other capital stock of the Company
ranking junior to the Preferred Stock.
Dividends
Holders of shares of Preferred Stock, in preference to the holders of shares
of the Common Stock, and of any other capital stock issued by us ranking
junior to the Preferred Stock as to payment of dividends, will be entitled to
receive, when and as declared by the Board of Directors out of assets of the
Company legally available for payment, cash dividends payable quarterly at the
rate of 9 1/4% of the liquidation preference per year ($2,312.50 per year per
share, equivalent to $2.3125 per year per Depositary Share). Dividends on the
shares of Preferred Stock will be cumulative from the date of issue and will
be payable quarterly on or before March 31, June 30, September 30 and December
31, commencing on or before June 30, 1999, to holders of record as they appear
on the stock register of the Company on such record dates, not less than 15 or
more than 45 days preceding the payment dates thereof, as shall be fixed by
the Board of Directors. After full dividends on the Preferred Stock have been
paid or declared and funds set aside for payment for all past dividend periods
and for the then current quarter, the holders of shares of Preferred Stock
will not be entitled to any further dividends with respect to that quarter.
When dividends are not paid in full upon the Preferred Stock and any other
shares of preferred stock of the Company ranking on a parity as to dividends
with the Preferred Stock (including the other series of Senior Preferred
Stock), all dividends declared upon the Preferred Stock and any other
preferred shares of the Company ranking on a parity as to dividends with the
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share on such Preferred Stock and such other shares shall in all
cases bear to each other the same ratio that the accrued dividends per share
on the Preferred Stock and such other preferred shares bear to each other.
Except as set forth in the preceding sentence, unless full dividends on the
Preferred Stock have been paid for all past dividend periods, no dividends
(other than in Common Stock or other shares of capital stock issued by us
ranking junior to the Preferred Stock as to dividends and upon liquidation)
shall be declared or paid or set aside for payment, nor shall any other
distribution be made on the Common Stock or on any other shares of capital
stock issued by us ranking junior to or on a parity with the Preferred Stock
as to dividends or upon liquidation.
Unless full dividends on the Preferred Stock have been paid for all past
dividend periods, we and our subsidiaries may not redeem, repurchase or
otherwise acquire for any consideration (nor may we or they pay or make
available any moneys for a sinking fund for the redemption of) any shares of
Common Stock or any other shares of capital stock issued by us ranking junior
to or on a parity with the Preferred Stock as to dividends or upon liquidation
except by conversion into or exchange for shares of capital stock issued by us
ranking junior to the Preferred Stock as to dividends and upon liquidation.
Our revolving credit facility with a commercial bank restricts our ability
to pay distributions in excess of "Funds from Operations" for the prior four
fiscal quarters less scheduled principal payments and less capital
expenditures. Funds from operations is defined in the loan agreement generally
as net income before gain on sale of real estate, extraordinary loss on early
retirement of debt and deductions for depreciation, amortization and non-cash
charges. Our management believes that this restriction will not impede our
ability to pay the dividends on the Preferred Stock in full.
No Conversion Rights
The Preferred Stock will not be convertible into shares of any other class
or series of capital stock of the Company.
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Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Preferred Stock will be entitled
to receive out of our assets available for distribution to stockholders,
before any distribution of assets is made to holders of Common Stock or of any
other shares of capital stock issued by us ranking as to such distribution
junior to the Preferred Stock, liquidating distributions in the amount of
$25,000 per share (equivalent to $25 per Depositary Share), plus all accrued
and unpaid dividends (whether or not earned or declared) for the then current,
and all prior, dividend periods. If upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the amounts payable
with respect to the Preferred Stock and any other shares of stock issued by us
ranking as to any such distribution on a parity with the Preferred Stock are
not paid in full, the holders of the Preferred Stock and of such other shares
will share ratably in any such distribution of assets of the Company in
proportion to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating distribution to
which they are entitled, the holders of the Preferred Stock will not be
entitled to any further participation in any distribution of assets by us.
For purposes of liquidation rights, a consolidation or merger of the Company
with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Company is not a liquidation,
dissolution or winding up of the Company.
Redemption
Except in certain circumstances relating to our qualification as a REIT, we
may not redeem the shares of Preferred Stock prior to April 30, 2004. On and
after April 30, 2004, at any time or from time to time, we may redeem the
shares of Preferred Stock in whole or in part at our option at a cash
redemption price of $25,000 per share of Preferred Stock (equivalent to $25
per Depositary Share), plus all accrued and unpaid dividends to the date of
redemption. If fewer than all the outstanding shares of Preferred Stock are to
be redeemed, the shares to be redeemed will be determined by the Board of
Directors of the Company, and such shares shall 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 by lot in a manner determined by the Board of Directors of the
Company.
Notwithstanding the foregoing, if any dividends, including any accumulation,
on the Preferred Stock are in arrears, we may not redeem any Preferred Stock
unless we redeem simultaneously all outstanding Preferred Stock, and we may
not purchase or otherwise acquire, directly or indirectly, any Preferred
Stock; provided, however, that this shall not prevent the purchase or
acquisition of the Preferred Stock pursuant to a purchase or exchange offer if
such offer is made on the same terms to all holders of the Preferred Stock.
Notice of redemption of the Preferred Stock will be given by publication in
a newspaper of general circulation in the County of Los Angeles and the City
of New York, such publication to be made once a week for two successive weeks
commencing not less than 30 nor more than 60 days prior to the redemption
date. A similar notice will be mailed by us, postage prepaid, not less than 30
or more than 60 days prior to the redemption date, addressed to the respective
holders of record of shares of Preferred Stock to be redeemed at their
respective addresses as they appear on the stock transfer records of the
Company. Each notice shall state: (i) the redemption date; (ii) the number of
shares of Preferred Stock to be redeemed; (iii) the redemption price per share
of Preferred Stock; (iv) the place or places where certificates for the
Preferred Stock are to be surrendered for payment of the redemption price; and
(v) that dividends on the shares of Preferred Stock to be redeemed will cease
to accrue on such redemption date. If fewer than all the shares of Preferred
Stock held by any holder are to be redeemed, the notice mailed to such holder
shall also specify the number of shares of Preferred Stock to be redeemed from
such holder. 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 nor more than 60 days prior to the date fixed for such redemption.
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Notice having been given as provided above, from and after the date
specified therein as the date of redemption, unless we default 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 we so default, all rights of the holders of the
Preferred Stock as stockholders of the Company, except the right to receive
the redemption price (but without interest), will cease. Upon surrender in
accordance with such notice of the certificates representing any such shares
(properly endorsed or assigned for transfer, if the Board of Directors of the
Company shall so require and the notice shall so state), the redemption price
set forth above shall be paid out of the funds provided by the Company. If
fewer than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares without
cost to the holder thereof.
Subject to applicable law and the limitation on purchases when dividends on
the Preferred Stock are in arrears, we 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.
Voting Rights
Except as indicated below, or except as expressly required by applicable
law, holders of the Preferred Stock will not be entitled to vote.
If the equivalent of six quarterly dividends payable on the Preferred Stock
or any other series of preferred stock are in default (whether or not declared
or consecutive), holders of the Preferred Stock (voting as a class with all
other series of preferred stock) 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, we 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 our Bylaws, provided that we 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
(in the case of dividend defaults) 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 our
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 in
dividends on preferred shares of the Company 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 66 2/3% of the
outstanding shares of the Preferred Stock and any other series of preferred
stock ranking on a parity with the Preferred Stock as to dividends or upon
liquidation, voting as a single class, will be required to authorize another
class of shares senior to the Preferred Stock with respect to the payment of
dividends or the distribution of assets on liquidation. The affirmative vote
or consent of the holders of at least 66 2/3% of the outstanding shares of the
Preferred Stock will be required to amend or repeal any provision of or add
any provision to, the Articles of Incorporation, including the Certificate of
Determination, if such action would materially and adversely alter or change
the rights, preferences or privileges of the Preferred Stock.
No consent or approval of the holders of shares of the Preferred Stock 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 the Preferred Stock as to payment of dividends and
distribution of assets, including other shares of Preferred Stock.
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Depositary Shares
The following is a brief description of the terms of the Depositary Shares
which does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Deposit Agreement (including
the form of Depositary Receipt contained therein), which is filed as an
exhibit to, or incorporated by reference in, the Registration Statement of
which this Prospectus Supplement constitutes a part.
Dividends
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Preferred Stock 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 us for the Preferred Stock. In the event that the
calculation of such amount to be paid results in an amount which is a fraction
of one cent, the amount the Depositary shall distribute to such record holder
shall be rounded to the next highest whole cent.
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 us) that it is
not feasible to make such distribution, in which case the Depositary may (with
our approval) 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 1/1000th of the liquidation preference accorded each
share of the Preferred Stock.
Redemption
Whenever we redeem 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
publish a notice of redemption of the Depositary Shares containing the same
type of information and in the same manner as our notice of redemption and
will mail the notice of redemption promptly upon receipt of such notice from
us 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. In case less than all the outstanding
Depositary Shares are to be redeemed, the Depositary Shares to be so redeemed
shall be determined pro rata or by lot in a manner determined by the Board of
Directors.
Voting
Promptly upon receipt of notice of any meeting at which the holders of the
Preferred Stock 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 we 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.
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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 us 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 the holders of 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 us 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
dissolution of the Company and such distribution has been made to all the
holders of Depositary Shares.
Charges of Depositary
We will pay all transfer and other taxes and governmental charges arising
solely from the existence of the depositary arrangements. We will pay charges
of the Depositary in connection with the initial deposit of the Preferred
Stock and the initial issuance of the Depositary Shares, and redemption of the
Preferred Stock and all withdrawals of Preferred Stock by owners of Depositary
Shares. Holders of Depositary Receipts will pay transfer, income and other
taxes and governmental charges and certain other charges as are provided in
the Deposit Agreement to be for their accounts. In certain circumstances, the
Depositary may refuse to transfer Depositary Shares, may withhold dividends
and distributions and sell the Depositary Shares evidenced by such Depositary
Receipt if such charges are not paid.
Miscellaneous
The Depositary will forward to the holders of Depositary Receipts all
reports and communications from us which are delivered to the Depositary and
which we are 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 any Depositary's Agent (as defined in the Deposit
Agreement), nor the Registrar (as defined in the Deposit Agreement) 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 gross
negligence, willful misconduct or bad faith. Neither the Depositary, any
Depositary's Agent, the Registrar nor the Company will liable if it is
prevented or delayed by law or any circumstance beyond its control in
performing its obligations under the Deposit Agreement. The Company and the
Depositary are not obligated to prosecute or defend any
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legal proceeding in respect of any Depositary Shares, Depositary Receipts or
Preferred Stock unless reasonably 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 us notice of its
election to do so, and we 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
The following is a summary of certain federal income tax considerations
pertaining to the acquisition, ownership and disposition of the Depositary
Shares. The following summary relates solely to the tax considerations
relevant specifically to the acquisition, ownership and disposition of
Depositary Shares. For a discussion of the taxation of the Company and the tax
considerations relevant to shareholders generally, see "Certain Federal Income
Tax Considerations--Taxation of the Company" and "--Taxation of U.S.
Shareholders Holding Common Stock" in the accompanying Prospectus. This
discussion is general in nature and not exhaustive of all possible tax
considerations, nor does the discussion address any state, local or foreign
tax considerations. The discussion is based on current law and does not
purport to deal with all aspects of federal income taxation that may be
relevant to a prospective shareholder in light of its particular circumstances
or to certain types of shareholders (including insurance companies, financial
institutions, broker-dealer, tax exempt investors, foreign corporations and
persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws. We have not requested and
will not request a ruling from the Internal Revenue Service (the "Service")
with respect to any of the federal income tax issues discussed below.
Prospective investors should consult, and must depend on, their own tax
advisors regarding the federal, state, local, foreign and other tax
consequences of holding and disposing of the Depositary Shares.
Taxation of Holders of Depositary Shares
General. 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. See
"Description of The Depositary Shares--Federal Income Tax Considerations" in
the accompanying Prospectus.
Dividends and Other Distributions; Backup Withholding. For a discussion of
the taxation of the Company, the treatment of dividends and other
distributions with respect to shares of the Company, and the backup
withholding rules, see "Certain Federal Income Tax Considerations--Taxation of
the Company" and "--Taxation of U.S. Shareholders Holding Common Stock" in the
accompanying Prospectus.
Sale or Exchange of Depositary Shares. Upon the sale or exchange of a
Depositary Share to a party other than the Company, a holder of Depositary
Shares will realize capital gain or loss measured by the difference between
the amount realized on the sale or other disposition and adjusted tax basis in
the Depositary Shares (provided the Depositary Shares are held as a capital
asset). On July 22, 1998, as part of the IRS Restructuring and Reform Act of
1998, the holding period requirement for the application of the 20% capital
gain tax rate, which is generally applicable to shareholders who are
individuals, estates or trusts, was reduced to 12 months
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from 18 months for sales of capital assets on or after January 1, 1998. Gain
recognized from the sale of a capital asset that has been held for 12 months
or less will be subject to tax at ordinary income tax rates. In addition,
capital gain recognized by a corporate taxpayer will continue to be subject to
tax at the ordinary income tax rates applicable to corporations. Any loss on a
sale of Depositary Shares which were held for six months or less and with
respect to which a capital gain dividend was received will be treated as a
long term capital loss, up to the amount of the capital gain dividend received
with respect to such Shares.
Redemption of Depositary Shares. 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 treatment to a holder of Depositary Shares accorded to
any redemption by the Company (as distinguished from a sale, exchange or other
disposition) of Preferred Stock held by the Depositary and corresponding
redemption of Depositary Shares can only be determined on the basis of
particular facts as to the holder of Depositary Shares at the time of
redemption. In general, a holder of Depositary Shares will recognize capital
gain or loss measured by the difference between the amount received upon the
redemption and the holder of the Depositary Shares' adjusted tax basis in the
Depositary Shares redeemed (provided the Depositary Shares are held as a
capital asset) if such redemption (i) results in a "complete termination" of a
holder's interest in all classes of stock of the Company under Section
302(b)(3) of the Code, or (ii) is "not essentially equivalent to a dividend"
with respect to the holder under Section 302(b)(1) of the Code. In applying
these tests, there must be taken into account not only any Depositary Shares
owned by the holder, but also such holder's ownership of Common Stock, other
series of preferred stock and any other options (including stock purchase
rights) to acquire any of the foregoing. The holder also must take into
account any such securities (including options) which are considered to be
owned by such holder by reason of the constructive ownership rules set forth
in Sections 318 and 302(c) of the Code.
If a particular holder of Depositary Shares owns (actually or
constructively) no shares of Common Stock of the Company or an insubstantial
percentage of the outstanding shares of Common Stock of the Company, based
upon current law, it is probable that the redemption of Depositary Shares from
such a holder would be considered "not essentially equivalent to a dividend."
However, whether a distribution is "not essentially equivalent to a dividend"
depends on all of the facts and circumstances, and a holder of Depositary
Shares intending to rely on any of these tests at the time of redemption
should consult its own tax adviser to determine their application to its
particular situation.
If the redemption does not meet any of the tests under Section 302 of the
Code, then the redemption proceeds received from the Depositary Shares will be
treated as a distribution on the Depositary Shares as described under "Certain
Federal Income Tax Considerations--Taxation of U.S. Shareholders Holding
Common Stock" in the accompanying Prospectus. If the redemption is taxed as a
dividend, the holder of Depositary Shares' adjusted tax basis in the
Depositary Shares will be transferred to any other stockholdings of the holder
of Depositary Shares in the Company. If the holder of Depositary Shares owns
no other stockholdings in the Company, under certain circumstances, such basis
may be transferred to a related person, or it may be lost entirely.
Administration's Proposed Changes to REIT Qualification Requirements
The administration's fiscal year 2000 budget proposal, announced February 1,
1999, includes a proposal that would change the 10% voting securities test to
a 10% vote or value test. Under the proposal, a REIT would not be able to own
more than 10% of the vote or value of the outstanding securities of any
corporation, except for a qualified REIT subsidiary or another REIT (see
"Certain Federal Income Tax Considerations" in the accompanying Prospectus).
The proposal also contains an exception to the 5% and 10% asset tests that
would allow a REIT to have "taxable REIT subsidiaries," including both
"qualified independent contractor subsidiaries," which could perform
noncustomary and other currently prohibited services for tenants and other
customers, and "qualified business subsidiaries," which could undertake third-
party management and development activities as well as other non-real estate
related activities. Under the proposal, no more than 15% of a REIT's total
assets could consist of taxable REIT subsidiaries and no more than 5% of a
REIT's total assets could consist of qualified independent contractor
subsidiaries. Under the budget proposal, a taxable REIT
S-28
<PAGE>
subsidiary would not be entitled to deduct any interest on debt funded
directly or indirectly by the REIT. This proposal would be effective after the
date of enactment and a REIT would be allowed to combine and convert existing
corporate subsidiaries into taxable REIT subsidiaries tax-free prior to a
certain date. A transition period would allow for conversion of existing
corporate subsidiaries before the 10% vote or value test would become
effective. For the Company's taxable years after the effective date of the
proposal and after any applicable transition period, the 10% vote or value
test would apply to the Company's ownership in any of the non-qualified REIT
subsidiaries not converted into taxable REIT subsidiaries. It is presently
uncertain whether any proposal regarding REIT subsidiaries, including the
budget proposal, will be enacted or, if enacted, what the terms, including the
effective date, of such proposal will be.
S-29
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and the Company has agreed to sell to such underwriter, the number
of shares set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Salomon Smith Barney Inc. ......................................... 378,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 375,000
Morgan Stanley & Co. Incorporated.................................. 375,000
PaineWebber Incorporated........................................... 375,000
Sutro & Co. Incorporated........................................... 200,000
ABN AMRO Incorporated.............................................. 33,000
BancBoston Robertson Stephens Inc. ................................ 33,000
Christopher Weil & Company......................................... 33,000
Dain Rauscher Incorporated......................................... 33,000
A.G. Edwards & Sons, Inc. ......................................... 33,000
EVEREN Securities, Inc. ........................................... 33,000
Goldman, Sachs & Co. .............................................. 33,000
The Robinson-Humphrey Company, LLC................................. 33,000
SG Cowen Securities Corporation.................................... 33,000
---------
Total.......................................................... 2,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other
considerations. The underwriters are obligated to purchase all of the shares
(other than those covered by the over-allotment option described below) if
they purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, Morgan Stanley & Co. Incorporated,
PaineWebber Incorporated and Sutro & Co. Incorporated, are acting as
representatives, propose to offer some of the shares directly to the public at
the public offering price set forth on the cover page of this prospectus
supplement and some of the shares to certain dealers at the public offering
price less a concession not in excess of $.50 per share. The underwriters may
allow, and such dealers may reallow, a concession not in excess of $.30 per
share on sales to certain other dealers. After the initial offering of the
shares to the public, the public offering price and such concessions may be
changed by the representatives.
The Company has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus supplement, to purchase up to 300,000
additional depositary shares at the public offering price less the
underwriting discount. The underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, in connection with this
offering. To the extent such option is exercised, each underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
shares approximately proportionate to such underwriter's initial purchase
commitment.
The Company has applied to list the depositary shares on the AMEX.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by the Company in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional depositary shares.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.......................................... $ .7875 $ .7875
Total.............................................. $1,575,000 $1,811,250
</TABLE>
S-30
<PAGE>
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may over-allot, or engage in syndicate covering
transactions, stabilizing transactions and penalty bids. Over-allotment
involves syndicate sales of depositary shares in excess of the number of
shares to be purchased by the underwriters in this offering, which creates a
syndicate short position. Syndicate covering transactions involve purchases of
the depositary shares in the open market after the distribution has been
completed in order to cover syndicate short positions. Stabilizing
transactions consist of certain bids or purchases of depositary shares made
for the purpose of preventing or retarding a decline in the market price of
the depositary shares while this offering is in progress. The underwriters
also may impose a penalty bid. Penalty bids permit the underwriters to reclaim
a selling concession from a syndicate member when Salomon Smith Barney Inc.,
in covering syndicate short positions or making stabilizing purchases,
repurchases shares originally sold by that syndicate member.
These activities may cause the price of the depositary shares to be higher
than the price that otherwise would exist in the open market in the absence of
such transactions. These transactions may be effected on the AMEX or in the
over-the-counter market, or otherwise, and, if commenced, may be discontinued
at any time.
The Company estimates that the total expenses of this offering will be
$100,000.
The underwriters have performed certain investment banking and advisory
services for the Company from time to time for which they have received
customary fees and expenses. The underwriters may, from time to time, engage
in transactions with and perform services for the Company in the ordinary
course of their business.
The Company has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the underwriters may be required to make
in respect of any of those liabilities.
LEGAL OPINIONS
The validity of the Preferred Stock and the Depositary Shares offered hereby
will be passed upon for the Company by David Goldberg, vice-president and
counsel of the Company, and for the underwriters by Hale and Dorr LLP,
Washington, D.C. 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" in the accompanying Prospectus. Mr. Goldberg owns 4,256
shares of common stock and has options to acquire an additional 7,991 shares
of common stock. Hale and Dorr LLP has from time to time represented the
Company on other matters. Hale and Dorr LLP may rely upon Mr. Goldberg with
respect to matters governed by California law.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K
for the year ended December 31, 1998, as set forth in their report, which is
incorporated by reference in this prospectus supplement and accompanying
prospectus and elsewhere in the registration statement. Our financial
statements and schedule are incorporated by reference in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
S-31
<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 $.01 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 in a taxable
transaction 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 primarily of its share of cash distributions from
the Operating Partnership. Differences in timing between the actual receipt of
income and actual payment of deductible expenses and the inclusion of such
income and deduction of such expenses in arriving at taxable income of the
Company or the possible need to make nondeductible payments, such as principal
payments on any indebtedness, 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 are 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 8,062,075 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 exceptions to the ownership limits, 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 an excepted 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) the excepted persons provide 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 as a REIT. Pursuant
11
<PAGE>
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 out of any proceeds remaining after payment
of expenses of the charitable trust and the Company 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
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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 on 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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<PAGE>
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 to 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.
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<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.
37
<PAGE>
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2,000,000 Shares
PS Business Parks, Inc.
Depositary Shares
Each Representing 1/1,000 of a Share of
9 1/4% Cumulative Preferred Stock, Series A
[LOGO OF PS BUSINESS PARKS]
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PROSPECTUS SUPPLEMENT
April 28, 1999
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Salomon Smith Barney
Donaldson, Lufkin & Jenrette
Morgan Stanley Dean Witter
PaineWebber Incorporated
Sutro & Co. Incorporated
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