SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1996
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED NOVEMBER 5, 1996
5,000,000 SHARES
[LOGO]
CARRAMERICA REALTY CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
The Company is a publicly-traded real estate investment trust that focuses
primarily on the acquisition, development, ownership and operation of value
office properties in select suburban growth markets across the United States. As
of November 4, 1996, the Company owned interests in a portfolio of 126 operating
office properties containing approximately 11.5 million square feet of space, of
which 69 properties have been acquired since June 30, 1996.
All of the shares of Common Stock offered hereby are being sold by the
Company. The Common Stock is listed on the New York Stock Exchange under the
symbol "CRE." The last reported sale price for the Common Stock on the NYSE on
November 1, 1996 was $25.25 per share. Subject to certain limited exceptions,
ownership of more than 5% of the Common Stock is restricted in order to preserve
the Company's status as a REIT for federal income tax purposes. In addition, the
Company's charter documents contain certain restrictions on ownership of the
Common Stock by foreign investors. See "Description of Common Stock --
Restrictions on Transfer" and "Risk Factors -- Special Considerations for
Foreign Investors" in the accompanying Prospectus.
A wholly owned subsidiary of Security Capital U.S. Realty (together with
Security Capital U.S. Realty, "USRealty") currently owns 37.3% of the
outstanding shares of Common Stock on a fully diluted basis. USRealty has
indicated that it intends to purchase 2,142,857 shares of Common Stock directly
from the Company in a concurrent offering at the public offering price. Assuming
this purchase is consummated, USRealty will have a 36.2% ownership interest in
the Company on a fully diluted basis immediately following the Offering.
See "Risk Factors" beginning on page 3 of the accompanying Prospectus for a
discussion of certain factors relating to an investment in the Common Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THESECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSEDUPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT ORTHE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
---------------- ---------------- ---------------
Per Share.............. $ $ $
Total(3)............... $ $ $
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933.
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to 750,000 additional shares of Common Stock at the initial public
offering price per share less the underwriting discount, solely to cover
over-allotments, if any. If such option is exercised in full, the total
initial public offering price, underwriting discount and proceeds to
Company will be $, $ and $, respectively. See "Underwriting."
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
November , 1996.
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
LEGG MASON WOOD WALKER WHEAT FIRST BUTCHER SINGER
INCORPORATED
--------------------
The date of this Prospectus Supplement is November , 1996.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus Supplement and the accompanying Prospectus or
incorporated herein and therein by reference. Unless indicated otherwise, the
information contained in this Prospectus Supplement assumes that the
Underwriters' overallotment option is not exercised. As used herein, the term
"Company" includes CarrAmerica Realty Corporation, a Maryland corporation,
and/or one or more of its subsidiaries, as appropriate, and "Common Stock"
refers to the common stock, par value $.01 per share, of the Company.
THE COMPANY
The Company is a publicly-traded real estate investment trust (a "REIT") that
focuses primarily on the acquisition, development, ownership and operation of
value office properties in select suburban growth markets across the United
States. The Company's national value office strategy is responsive to the
growing number of corporate office space users that are relocating their
operations from central business districts to suburban markets to reduce
operating costs and improve their employees' quality of life. "Value office"
property describes office space which combines the elements of affordability,
accessibility and flexibility with regard to customer needs.
As of November 4, 1996, the Company owned interests in a portfolio of 126
operating office properties located in ten target markets, totaling
approximately 11.5 million square feet, and three office properties under
construction, totaling approximately 418,000 square feet (collectively, the
"Properties"). The Company's operating Properties were 91.9% leased as of
September 30, 1996. The Company also provided fee-based real estate management
services for approximately 8.4 million square feet of office space in properties
owned by third parties as of November 4, 1996.
Headquartered in Washington, D.C., the Company and its predecessor, The
Oliver Carr Company ("OCCO"), have successfully developed, owned and operated
office buildings in the Washington D.C. metropolitan area for more than 30
years. In November 1995, the Company announced a strategic alliance with
Security Capital U.S. Realty, a European real estate operating company which
owns strategic positions in selected real estate companies in the United States
(together with its wholly-owned subsidiary, "USRealty"). USRealty initially
invested approximately $250 million in the Company in April 1996 (the "USRealty
Transaction") and has subsequently participated in two stock offerings by the
Company. As of November 1, 1996, USRealty owned approximately 43.4% of the
outstanding Common Stock of the Company (37.3% on a fully diluted basis). The
Company is the exclusive strategic investment of USRealty in the commercial
office property business in the United States. In connection with the USRealty
alliance, the Company changed its name from Carr Realty Corporation to
CarrAmerica Realty Corporation and adopted a national business strategy to take
advantage of what the Company believes is the significant growth potential in
the value office sector of the real estate industry.
RECENT ACQUISITION AND DEVELOPMENT ACTIVITY
Consistent with the Company's strategy of acquiring value office properties
in surburban growth markets, the Company has significantly expanded its
portfolio of office properties. Since March 1, 1996, the Company has acquired
107 operating Properties containing approximately 6.6 million square feet of
office space and two Properties under construction that will contain an
additional 234,000 square feet of office space. These Properties were acquired
for an aggregate purchase price of approximately $674 million. In addition to
acquiring operating office properties, the Company has acquired or has options
to acquire 173.1 acres of developable land in its target markets, which will
support the future development of up to 3.3 million square feet of addtional
office space.
S-1
<PAGE>
As of November 4, 1996, the Company had entered into binding contracts
(subject to certain conditions) or non-binding letters of intent to acquire an
additional 40 operating office properties and 33.5 acres of land which will
support the future development of up to 499,000 square feet of additional office
space, for an aggregate purchase price of approximately $302 million. The
Company expects to close these transactions within 60 days, although there can
be no assurance that any such acquisitions will be consummated.
The following table summarizes the operating Properties acquired by the
Company thus far in 1996 or which the Company currently expects to acquire:
<TABLE>
<CAPTION>
APPROXIMATE
MONTH/EXPECTED NUMBER OF SQUARE
PROPERTY TARGET MARKET MONTH OF ACQUISITION PROPERTIES FEET(1)
- ----------------------------- -------------------------------- --------------------- ------------- --------------
<S> <C> <C> <C> <C>
Completed Acquisitions:
Scenic Business Park......... Southern California March 1996 4 138,000
Harbor Corporate Park........ Southern California March 1996 4 150,000
AT&T Center.................. Northern California March 1996 6 1,082,000
Reston Quadrangle............ Suburban Washington, D.C. March 1996 3 261,000
Harlequin Plaza and Quebec
Court........................ Southeast Denver May 1996 4 613,000
The Quorum................... Southeast Denver June 1996 2 124,000
Parkway North Center......... Suburban Chicago June 1996 2 514,000
Redmond East Business
Campus....................... Suburban Seattle June 1996 10 400,000
Plaza PacifiCare Building ... Southern California June 1996 1 104,000
Parkway One.................. Suburban Washington, D.C. June 1996 1 88,000
Norwood Tower................ Austin, Texas June 1996 1 112,000
Katella Corporate Center .... Southern California July 1996 1 80,000
Warner Center Business Park . Southern California July 1996 12 343,000
Greenwood Centre............. Southeast Denver July 1996 1 75,000
Littlefield Portfolio........ Austin, Texas August 1996 10 877,000
Quebec Centre................ Southeast Denver August 1996 3 107,000
Sunnyvale Research Plaza .... Northern California September 1996 3 126,000
Suburban Atlanta/Southern
Peterson Portfolio........... Florida November 1996 39 1,437,000
------------- --------------
Total for Recent
Acquisitions............... 107 6,631,000
Pending Acquisitions:
NELO/Orchard Portfolio....... Northern California November 1996 21 1,014,000
Greyhound Building........... Suburban Dallas November 1996 1 93,000
Search Plaza................. Suburban Dallas November 1996 1 152,000
Pointe Corridor Centre IV ... Suburban Phoenix November 1996 1 179,000
Rio Robles Technology
Center...................... Northern California November 1996 7 368,000
Cedar Maple Plaza............ Suburban Dallas December 1996 3 113,000
Quorum North................. Suburban Dallas December 1996 1 116,000
Camelback Lakes Corporate
Center...................... Suburban Phoenix December 1996 2 207,000
South Coast Executive
Centre...................... Southern California December 1996 2 162,000
Data I/O Willows............. Suburban Seattle December 1996 1 96,000
------------- --------------
Total for Pending
Acquisitions............... 40 2,500,000
Total...................... 147 9,131,000
============= ==============
</TABLE>
- ----------
(1) Excludes storage space.
S-2
<PAGE>
NATIONAL VALUE OFFICE STRATEGY
The Company's primary business objective is to achieve long-term sustainable
per share cash flow growth by (i) acquiring and developing value office
properties in suburban markets throughout the United States that exhibit strong
growth characteristics and (ii) developing a national operating system that
satisfies and capitalizes on the financial and operational demands of corporate
office space users. The Company believes that growth-oriented companies are
relocating to and expanding in suburban locations that offer lower operating
costs, greater convenience and a higher quality of life than traditional central
business districts. The Company seeks to provide value office space on a
national scale to meet the changing needs of corporate users of office space.
The Company is undertaking a major acquisition initiative as the initial
stage of its national value office strategy. The Company is focusing its
acquisition efforts in regions of the United States which generally possess
strong growth characteristics, and within those regions the Company is targeting
markets in which operating costs for businesses are relatively low, long-term
population and job growth generally are expected to exceed the national average,
and barriers to entry exist for new supply of office space. The Company
currently has identified a number of target markets in which it has acquired
and/or is actively seeking to acquire existing office properties and land to
support future office property development, including the following: suburban
Washington, D.C.; suburban Atlanta; Northern California; Southeast Denver;
Austin, Texas; Southern California; suburban Chicago; suburban Seattle; Southern
Florida; suburban Dallas; and suburban Phoenix.
For each identified target market, the Company has established a set of
general guidelines and physical characteristics to evaluate the acquisition
opportunities available to the Company. All investment decisions are driven by
fundamental real estate research, focusing on variables such as economic base
analysis, job growth and supply and demand fundamentals. The Company's business
strategy is predicated on its becoming one of the major owners and operators of
value office space in each of its selected target markets. By achieving such
critical mass, the Company believes that it will be able to better serve its
customers' needs and realize certain operating efficiencies.
In addition to its office property acquisition activities, the Company is
focused on acquiring land in suburban growth markets. The Company believes that
acquiring land to support future development will provide it with a competitive
advantage in responding to customers' needs for office space in markets with low
vacancy rates. The Company has assembled an experienced office property
development team which is pursuing attractive land acquisition and development
opportunities.
NATIONAL OPERATING SYSTEM
To execute its national value office strategy, the Company is implementing a
national operating system that will provide nationally coordinated customer
service, marketing and development. The Company's national operating system
consists of three components: (i) a Market Officer Group, currently consisting
of nine market officers focused on developing and maintaining strong local
relationships with the Company's customers and identifying investment
opportunities for the Company; (ii) a National Marketing Group, which, when
established, will be dedicated to marketing the Company's products and services
to a targeted list of major corporate users of office space; and (iii) a
National Development Group, which is responsible for developing suburban value
office properties, build-to-suit facilities and business parks.
The Company's national operating system is designed to satisfy and capitalize
on the financial and operational demands of corporate office space users. The
Company believes that through its existing portfolio, property development
capabilities and land acquired for future development, the Company can
accommodate the relocation and expansion needs of many of its customers, both
within a target market and in multiple target markets.
S-3
<PAGE>
PROPERTIES
The following table provides an overview of the Properties as of November 4,
1996 and the areas in which they are located.
APPROXIMATE
NUMBER OF SQUARE
AREA PROPERTIES(1) FEET(1)(2)
---- ------------ -------------
Downtown Washington, D.C.(3)................... 11 2,589,000
Suburban Washington, D.C....................... 8 1,495,000
Suburban Atlanta............................... 39 1,403,000
Northern California............................ 9 1,208,000
Southeast Denver............................... 11 1,025,000
Austin, Texas.................................. 11 989,000
Southern California............................ 22 815,000
Suburban Chicago............................... 2 514,000
Suburban Seattle............................... 10 400,000
Southern Florida............................... 1 162,000
-------- ---------------
Total....................................... 124 10,600,000
======== ===============
- ----------
(1) Includes three Properties currently under construction: 184,000 square feet
in downtown Washington, D.C.; 128,000 square feet in suburban Atlanta; and
106,000 square feet in Southeast Denver.
(2) Excludes storage space.
(3) Excludes five Properties containing approximately 1,300,000 square feet of
office space in which the Company owns less than a 50% interest and which
are not consolidated in the Company's financial statements. Includes two
Properties containing approximately 407,000 square feet of office space in
which the Company owns a 50% interest but which are not consolidated in the
Company's financial statements.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered Hereby (1) ..................... 5,000,000
Common Stock Offered in Concurrent USRealty
Purchase (2) ..................................... 2,142,857
Common Stock Outstanding After the Offering and
Concurrent USRealty Purchase ..................... 42,679,046
Common Stock and Units Outstanding After the
Offering and Concurrent USRealty
Purchase (3) ..................................... 48,191,109
Use of Proceeds...................................... To repay outstanding indebtedness under
the Company's unsecured revolving line of
credit and for general corporate purposes.
</TABLE>
- ----------
(1) See "Price Range of Common Stock and Dividend History" herein and
"Description of Common Stock" in the accompanying Prospectus.
(2) USRealty has indicated that it intends to purchase 2,142,857 shares of
Common Stock directly from the Company in a concurrent offering
simultaneously with the closing of the Offering (the "Concurrent USRealty
Purchase").
(3) "Units" are 4,614,574 units of partnership interest in Carr Realty, L.P.
and 897,489 units of partnership interest in CarrAmerica Realty, L.P. (the
"Carr Partnerships") that are redeemable for cash or, at the option of the
Company, shares of Common Stock on a one-for-one basis.
S-4
<PAGE>
SUMMARY SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial and operating information
for the Company as of and for the nine months ended September 30, 1996 and 1995
and as of and for the years ended December 31, 1995 and 1994. The selected
financial information as of and for the years ended December 31, 1995 and 1994
is derived from the audited financial statements of the Company incorporated by
reference in the accompanying Prospectus. The selected financial information as
of and for the nine months ended September 30, 1996 and 1995 is derived from
unaudited financial statements that, in the opinion of management, include all
material adjustments considered necessary for a fair presentation of the results
of the interim periods.
The following table also sets forth pro forma financial information for the
Company as of and for the nine months ended September 30, 1996 and for the year
ended December 31, 1995, giving effect to (i) the completion of the Offering and
the Concurrent USRealty Purchase, (ii) the closing of the USRealty Transaction
(which occurred on April 30, 1996), (iii) the acquisition of office properties
and land that have been consummated since the beginning of each period presented
and the acquisition of other office properties and land that the Company expects
to consummate in the near future, (iv) the completion of the July 1996 offering
of 10,260,714 shares of Common Stock (the "July 1996 Offering") and the
completion of the October 1996 offering of 1,740,000 shares of Series A
Cumulative Convertible Redeemable Preferred Stock (the "Series A Preferred
Shares"), (v) the completion of the proposed sale of the Company's Property at
2550 M Street in downtown Washington, D.C. (see "Properties -- Asset
Optimization") and (vi) the repayment of a portion of the amount outstanding
under the Company's unsecured revolving line of credit (the "Line of Credit").
See "Pro Forma Financial Information."
The following selected financial and operating information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
S-5
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
----------------------- ----------- ----------------------- ------------
1994 1995 1995 1995 1996 1996
---------- ------------ ----------- ---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Real estate operating revenue:
Rental revenue................ $ 82,665 $ 89,539 $216,974 $ 66,679 $ 100,639 $ 166,228
Real estate service revenue... 8,890 11,315 11,315 7,748 9,265 9,265
Real estate operating expenses:
Property operating expenses... 29,707 31,579 73,421 22,857 33,371 55,993
Interest expense.............. 21,366 21,873 43,601 16,260 21,857 34,929
General and administrative
expenses .................... 9,535 10,711 10,711 7,850 10,661 10,661
Depreciation and amortization. 14,419 18,495 49,989 13,306 25,744 39,481
Net income..................... 12,097 12,067(1) 43,543 10,376 15,502 31,461
Dividends paid to stockholders. 20,204 23,344 NA 17,479 27,367 NA
Per Share Data:
Net income before extraordinary
item.......................... $ 1.06 $ 0.90 $ 0.95(2) $ 0.78 $ 0.70(2) $ 0.69(2)
Dividends paid to stockholders. 1.75 1.75 NA .4375 .4375 NA
Weighted average shares
outstanding................... 11,387 13,338 42,432 13,324 22,891 42,637
Balance Sheet Data (at period
end):
Real estate, before accumulated
depreciation.................. $429,537 $ 480,589 $432,036 $1,022,051 $1,423,829
Total assets................... 407,948 458,860 413,357 1,043,908 1,457,825
Mortgages payable.............. 254,933 317,374 270,359 354,069 416,958
Other indebtedness............. 0 0 0 72,000 180,337
Minority interest.............. 38,644 34,850 36,870 51,611 57,641
Total stockholders' equity..... 106,042 95,543 99,484 545,748 779,088
Other Data:
Net cash provided by operating
activities.................... $ 29,908 $ 35,277 $ 24,356 $ 47,352
Net cash used by investing
activities.................... (67,046) (81,635) (33,794) (484,623)
Net cash provided (used) by
financing activities ......... 32,652 37,113 (1,100) 442,292
Funds from operations before
minority interest of the
unitholders of Carr
Partnerships (3).............. 30,640 33,190(1) 97,097 26,208 43,289 73,168
Weighted average shares and
Units outstanding (4)......... 15,879 18,157 48,152 18,157 27,723 48,175
Number of Properties (at period
end).......................... 16 18 168 17 87 168
Square Footage (in thousands,
at period end)................ 4,006 4,626 14,212 4,211 10,043 14,212
</TABLE>
- ----------
(1) Includes a non-recurring deduction of approximately $1.9 million related to
the termination of an agreement to acquire the development business of The
Evans Company.
(2) Calculation reflects the effect on net income and weighted average shares
for certain minority interests which have a dilutive effect.
(3) The Company believes that funds from operations is an appropriate measure
of the performance of an equity REIT because industry analysts have
accepted it as a performance measure of equity REITs. In accordance with
the final National Association of Real Estate Investment Trusts (NAREIT)
White Paper on Funds From Operations as approved by the Board of Governors
of NAREIT on March 3, 1995, funds from operations represents net income
(loss) (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring or sales
of property, plus depreciation and amortization of assets uniquely
significant to the real estate industry and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect
funds from operations on the same basis. The Company's funds from
operations in 1994 and for the nine months ended September 30, 1995 have
been restated to conform to the new NAREIT definition of funds from
operations. Funds from operations does not represent net income or cash
flow generated from operating activities in accordance with generally
accepted accounting principles and should not be considered an alternative
to net income as an indication of the Company's performance or to cash
flows as a measure of liquidity or the Company's ability to make
distributions.
(4) Includes shares of Common Stock outstanding plus Units that are redeemable
for cash or, at the option of the Company, shares of Common Stock on a
one-for-one basis.
S-6
<PAGE>
THE COMPANY
The Company is a publicly-traded REIT that focuses primarily on the
acquisition, development, ownership and operation of value office properties in
select suburban growth markets across the United States. The Company's national
value office strategy is responsive to the growing number of corporate office
space users that are relocating their operations from central business districts
to suburban markets to reduce operating costs and improve their employees'
quality of life. "Value office" property describes office space which combines
the elements of affordability, accessibility and flexibility with regard to
customer needs.
As of November 4, 1996, the Company owned interests in a portfolio of 126
operating Properties, and three Properties currently under construction, located
in ten target markets, totaling approximately 11.9 million square feet of space.
The Company's operating Properties were 91.9% leased as of September 30, 1996.
In addition, the Company had entered into agreements or letters of intent to
acquire 40 additional operating office properties totaling approximately 2.5
million square feet of space as of November 4, 1996. The Company also provided
fee-based real estate management services for approximately 8.4 million square
feet of office space in properties owned by third parties as of November 4,
1996.
Headquartered in Washington, D.C., the Company and its predecessor, OCCO,
have successfully developed, owned and operated office buildings in the
Washington D.C. metropolitan area for more than 30 years. In November 1995, the
Company announced a strategic alliance with USRealty, a European real estate
operating company which owns strategic positions in selected real estate
companies in the United States. USRealty initially invested approximately $250
million in the Company in April 1996 and has subsequently participated in two
stock offerings by the Company. As of November 1, 1996, USRealty owned
approximately 43.4% of the outstanding Common Stock of the Company (37.3% on a
fully diluted basis). The Company is the exclusive strategic investment of
USRealty in the commercial office property business in the United States. In
connection with the USRealty alliance, the Company changed its name from Carr
Realty Corporation to CarrAmerica Realty Corporation and adopted a national
business strategy to take advantage of what the Company believes is the
significant growth potential in the value office sector of the real estate
industry.
The Company's experienced staff of over 450 employees, including over 325
on-site building employees, provides a full range of real estate services. The
Company's principal executive offices are located at 1700 Pennsylvania Avenue,
N.W., Washington, D.C. 20006, and its telephone number is (202) 624-7500. The
Company was organized as a Maryland corporation on July 9, 1992.
NATIONAL VALUE OFFICE STRATEGY
The Company's primary business objective is to achieve long-term sustainable
per share cash flow growth by (i) acquiring and developing value office
properties in suburban markets throughout the United States that exhibit strong
growth characteristics and (ii) developing a national operating system that
satisfies and capitalizes on the financial and operational demands of corporate
office space users.
The Company's growth strategy is focused on meeting the diverse and changing
needs of office users by acquiring, developing, owning and operating value
office properties throughout the United States in select suburban growth
markets. In the past, corporate office space often was exemplified by downtown
"trophy" buildings with expensive finishes, high maintenance costs and limited
access and flexibility. The Company believes that growth-oriented companies are
relocating to and expanding in suburban locations that offer lower rental rates
and operating costs, greater convenience and a higher quality of life than
traditional central business districts. The resulting increase in demand for
suburban office space has not been met with a corresponding increase in supply;
rather, the volume of new office supply has declined dramatically from the end
of 1986 to the end of 1995. Over the last several years, positive net absorption
has resulted in a decline in national office vacancy rates in suburban markets
from 23.8% at the end of 1986 to 13.4% at the end of 1995. Vacancy rates in
central business districts have not similarly declined.
S-7
<PAGE>
The charts below show national office vacancy rates in suburban markets and
central business districts for the 10 years ended 1995 and new office
construction starts and net absorption in suburban markets over the same period.
#############################################################################
IMAGE OMITTED
(See narrative description below or in "Appendix for Graphics and Images".)
#############################################################################
Although positive net absorption declined in 1995 as compared to 1994, the
Company believes that this decline is attributable to, among other things,
severely constrained supply, leaving suburban office space users in certain
markets with little or no vacant space from which to select.
Value Office Characteristics. A "value office" property typically meets the
customer's needs by combining the following elements:
o Affordability. A primary concern of many corporate customers looking for
office space today is affordability. Expensive lobbies, marble exteriors and
other "image-conscious" concerns are no longer high priorities for many
corporate customers. The Company's value office properties typically are of
low-rise construction, with scaled-down yet attractive common-area finishes,
surface parking and other lower-cost features that generally translate into
lower rental rates per square foot, lower operating costs and lower taxes than
in traditional central business district properties.
o Flexibility. Many companies today are looking for physical and operating
flexibility to accommodate changes in their economic and technological
environments. The Company's suburban office product generally has large, open
floorplates that can be adapted to meet customer needs and allow for the
flexible layout of modular furniture systems as well as telecommunications and
computer networks. Many of the Company's buildings also can be adapted to
accommodate some non-office work environments such as storage, light
manufacturing and truck access. In addition, the Company works closely with its
customers to provide them with the flexibility to manage their office space
requirements, including offering shorter lease terms where appropriate.
o Accessibility. Value office buildings are typically conveniently located in
close proximity to a highly-skilled labor pool and major transportation
arteries, are accessible to mass transit and provide ample surface parking. The
Company's value office properties generally are located in suburban markets that
contain a variety of housing alternatives and amenities such as restaurants,
shopping centers, hotels and services.
Market Selection. The Company's acquisition efforts are focused in the
Pacific, Mountain, Central and Southeast regions of the United States, areas
that the Company believes generally possess strong growth characteristics.
Within these regions, the Company targets markets in which operating costs for
businesses are relatively low, long-term population and job growth generally are
expected to exceed the national average, and barriers to entry exist for new
supply of office space. In addition, the Company targets markets that will
enable it to maintain a diverse tenant base to reduce the risk that the
Company's operations will be
S-8
<PAGE>
adversely affected by a single industry recession. The Company analyzes its
target markets on a quarterly basis to determine if new office supply, expected
vacancies or economic or other factors will materially impact the supply/demand
characteristics in the given markets.
The Company's business strategy is predicated on its becoming one of the
major owners and operators of value office space in each of its selected target
markets. By achieving critical mass in its target markets, the Company believes
that it will be able to better serve its customers' needs and realize certain
operating efficiencies.
Since implementing its national business strategy, the Company has identified
a number of target markets in which it has acquired and/or is actively seeking
to acquire existing office properties and land to support future office property
development, including the following: suburban Washington, D.C.; suburban
Atlanta; Northern California; Southeast Denver; Austin, Texas; Southern
California; suburban Chicago; suburban Seattle; Southern Florida; suburban
Dallas; and suburban Phoenix. These markets fit within the Company's identified
parameters for target market selection. The office properties acquired by the
Company in these markets fall within its general acquisition guidelines, as
described below. The Company also is actively considering other markets in which
it may acquire additional properties.
General Acquisition Guidelines. For each identified target market, the
Company has established a set of general guidelines and physical characteristics
to evaluate the acquisition opportunities available to the Company. These
guidelines include (i) the purchase price of an office property typically should
be at a discount to the replacement cost of a comparable office property, (ii)
rents of existing customers with leases expiring in the near-term typically
should be at or below the current market rents for the given target market, and
(iii) an office property generally should be low-rise, with flexible floor
plates that are conducive to accommodating a variety of office space user needs.
In addition, the Company looks for office properties that have ample parking and
that are conveniently located near amenities and major transportation arteries.
Value Office Development. In addition to its office property acquisition
activities, the Company also is focused on acquiring land in suburban growth
markets. In most of the Company's target markets, suburban office space vacancy
rates have declined over the past five years, and, in many markets, these
vacancy rates are below 10%. The Company believes that acquiring land for future
development will provide it with a competitive advantage in responding to
customer demand for new office construction in markets with low vacancy rates.
As of September 30, 1996, the Company owned (or held options to acquire) an
aggregate of 173.1 acres in four of its target markets which will support the
future development of up to 3.3 million square feet of office space. The
Company's goal is to allocate approximately 5% of its capital to investments in
developable land; however, this capital allocation may change based on market
conditions.
The Company has assembled an experienced office property development team,
the nucleus of which joined the Company as part of its acquisition of OCCO's
development business. This team is pursuing attractive land acquisition and
development opportunities to complement the Company's property acquisition
efforts. In addition, the Company's development team closely analyzes local
entitlement regulations and practice to eliminate discretionary entitlement
risks before any land is acquired. The Company currently has two suburban value
office properties under construction: a 128,000 square foot building in suburban
Atlanta; and a 106,000 square foot building in Southeast Denver.
Research. The Company's acquisition and development decisions are based on
fundamental real estate research. Through Security Capital Investment Research
Incorporated, an affiliate of Security Capital Group Incorporated (a substantial
shareholder of USRealty), the Company has access to extensive research support.
The Company analyzes many variables, such as economic base analysis, job growth,
supply and demand fundamentals, the status of infrastructure and the fiscal
health of government in each of its target markets. The Company also utilizes
its market officers, local brokers and real estate professionals within its
target markets to identify the best available locations within a particular
market. The Company believes that use of its research capabilities enables it to
more efficiently identify, analyze and act upon acquisition opportunities.
S-9
<PAGE>
NATIONAL OPERATING SYSTEM
To execute its national value office strategy, the Company is implementing a
national operating system that will provide nationally coordinated customer
service, marketing and development. The three components of the Company's
national operating system -- the Market Officer Group, the National Marketing
Group and the National Development Group -- will, when fully implemented,
provide a system that is designed to satisfy and capitalize on the financial and
operational demands of corporate office space users. The Company believes that,
through its existing portfolio, property development capabilities and land
acquired for future development, the Company can accommodate the relocation and
expansion needs of many of its customers, both within a target market and in
multiple target markets.
Market Officer Group. The Market Officer Group currently consists of nine
market officers covering each of the target markets in which the Company
currently owns Properties. These market officers are responsible for maximizing
the performance of the Company's Properties in their markets and ensuring that
the needs of the Company's customers are being met. Because they meet with their
customers on a regular basis, they are cognizant of and responsive to customers'
relocation or expansion needs. The market officers, because of their extensive
knowledge of local conditions in their respective markets, also are responsible
for identifying attractive investment opportunities in their markets. In
addition, through their contact with customers, market officers are well
positioned to help the National Marketing Group identify customers with new
build-to-suit and multi-market requirements.
National Marketing Group. The National Marketing Group, when established,
will be dedicated to marketing the Company's properties and the national scope
of the Company's operations to a targeted list of major corporate users of
office space. The National Marketing Group professionals will act as a primary
point of contact for national customers, coordinating all the services the
Company offers and giving corporate customers the opportunity to manage their
national space requirements efficiently and economically.
National Development Group. The National Development Group is responsible for
developing suburban value office properties, build-to-suit facilities and
business parks. The architects, engineers and construction professionals who
comprise the National Development Group oversee every aspect of the Company's
land planning, building design and construction of development properties,
ensuring that all projects meet the same high standards and uniform
specifications in building design and systems. As the Company implements its
national strategy, the National Development Group's expertise should give the
Company a competitive edge in marketing its facilities and services to
customers.
ASSET OPTIMIZATION
As the Company implements its national strategy, it may undertake an asset
optimization strategy which would allow it to sell off assets that are
inconsistent with its long-term return objectives and redeploy the proceeds
utilizing tax-deferred exchanges where possible. Pursuant to this strategy, the
Company has entered into an agreement to sell 2550 M Street, a 188,000 square
foot office building located in the West End sub-market of Washington, D.C.'s
Central Business District, for $40.25 million. The Company will retain
management and leasing for the property under a seven year contract. The Company
intends to redeploy the sales proceeds into new acquisitions in its targeted
markets. The closing of this transaction is subject to certain closing
conditions, and there can be no assurance that this transaction will be
consummated. Closing of the transaction is currently scheduled for late November
1996.
S-10
<PAGE>
REAL ESTATE SERVICES
Historically, the Company has provided operational services for its
properties, and the Company intends, in the long term, to continue to do so.
Certain facts or circumstances, however, may require that the Company use
third-party real estate service providers for certain properties. In particular,
during a transitional period immediately following the acquisition of a
property, the Company may use a third-party real estate service provider. As of
November 4, 1996, the Company provided its own operational services for 118 of
the operating Properties. Six of the eight operating Properties for which the
Company did not provide operational services as of November 4, 1996 were
recently acquired. The Company, through certain management subsidiaries,
provides fee-based real estate services for more than 45 office buildings in the
metropolitan Washington, D.C. area and suburban Atlanta for related and
unrelated parties.
U.S. REALTY ALLIANCE
In November 1995, the Company announced a strategic alliance with USRealty.
USRealty initially invested approximately $250 million in the Company in April
1996, and subsequently participated in a Common Stock offering by the Company in
July 1996 and an offering of Series A Preferred Shares by the Company in October
1996. As of November 1, 1996, USRealty owned approximately 43.4% of the
outstanding Common Stock of the Company (representing 37.3% of the outstanding
Common Stock on a fully diluted basis) and 29.9% of the outstanding Series A
Preferred Shares. In connection with the USRealty Transaction, the Company also
acquired substantially all of the economic interest in the development business
of OCCO, providing the Company with resources to enable it to implement its
national development program.
The Company believes that it has derived a number of significant benefits
from the USRealty Transaction. The capital provided by USRealty enabled the
Company to pursue its national value office strategy. In addition, the USRealty
Transaction substantially increased the Company's equity capitalization and
reduced its leverage, which the Company believes will enable it to have greater
access to the capital markets, enhancing the Company's ability to grow. The
Company also believes that it will benefit from its indirect affiliation with
Security Capital Group Incorporated and the access (through USRealty's
representatives on the Company's board of directors) to the market knowledge,
operating experience and research capabilities of Security Capital Group
Incorporated and its affiliates. The Company is the exclusive strategic
investment of USRealty in the commercial office property business in the United
States.
RECENT ACQUISITION AND DEVELOPMENT ACTIVITY
Consistent with the Company's strategy of acquiring value office properties
in suburban growth markets, the Company has significantly expanded its portfolio
of office properties. Since March 1, 1996, the Company has acquired 107
operating Properties containing approximately 6.6 million square feet of office
space and two Properties under construction that will contain an additional
234,000 square feet of office space. These properties were acquired for an
aggregate purchase price of approximately $674 million.
Fifty-five of the 107 operating Properties acquired by the Company in 1996
have been acquired since August 1, 1996. Set forth below is a brief summary of
the Properties acquired by the Company since August 1, 1996 and certain
information concerning the target markets in which they are located. Information
set forth below with respect to market data has been provided by CB
Commercial/Torto Wheaton Research.
NORTHERN CALIFORNIA
In Northern California, the Company currently owns nine office properties
containing an aggregate of approximately 1,208,000 square feet of office space
and has entered into agreements to acquire approximately 1,382,000 additional
square feet of office space.
S-11
<PAGE>
The table below sets forth certain market information regarding the
sub-markets in Northern California in which the Company has acquired operating
properties since August 1, 1996 or in which such acquisitions are pending:
<TABLE>
<CAPTION>
COMPANY ACQUISITIONS SUB-MARKET VACANCY RATE AS OF
--------------------- TOTAL OFFICE -------------------------------------
SINCE SPACE IN DECEMBER 31, JUNE 30,
8/1/96 PENDING SUB-MARKET --------------------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(sq. ft.) (sq. ft.) (sq. ft.) 1992 1993 1994 1995 1996
--------- --------- --------- ---- ---- ---- ---- ----
Sunnyvale...... 126,000 -- 613,000 9.8% 14.2% 13.4% 2.5% 4.2%
North San Jose. -- 1,382,000 3,989,000 13.5 12.2 13.8 13.2 7.2
</TABLE>
RECENT ACQUISITIONS
Sunnyvale Research Plaza. In September 1996, the Company acquired three
buildings which comprise Sunnyvale Research Plaza, located in the Sunnyvale
sub-market of the Silicon Valley. These properties, which contain approximately
126,000 square feet of office space, were acquired for an aggregate purchase
price of approximately $16 million. Built in 1985, the buildings are well
located at a prominent intersection near significant transportation arteries. As
of September 1996, Sunnyvale Research Plaza was 100% leased to four customers.
PENDING ACQUISITIONS
NELO/Orchard Portfolio. The Company has entered into a contract to acquire 21
buildings, referred to as the NELO/Orchard Portfolio, in the North San Jose
sub-market of the area commonly referred to as Silicon Valley for an aggregate
purchase price of approximately $124 million. As part of the purchase price, the
Company will assume approximately $41 million in debt that bears interest at an
annual rate of 8.25% and matures in 2001. The properties, which were built from
1979 to 1985, contain an aggregate of approximately 1,014,000 square feet of
office space. The NELO/Orchard properties are located in the North First Street
Corridor near the San Jose airport, within close proximity to the Company's
Sunnyvale Research Plaza, and have excellent access to major highways. As of
September 1996, the NELO/Orchard Portfolio was 100% leased to a variety of high
technology and biotechnology customers. The closing of this transaction is
subject to certain closing conditions, and there can be no assurance that this
transaction will be consummated. Closing of the transaction is currently
scheduled for early November 1996.
Rio Robles Technology Center. The Company has entered into a non-binding
letter of intent to acquire seven office buildings which comprise the Rio Robles
Technology Center located in the North San Jose sub-market of the Silicon
Valley, for an aggregate purchase price of approximately $46 million in cash.
Built in 1983, the buildings contain approximately 368,000 square feet of office
space in a park-like setting. As of October 1996, the property was 100% leased
to four customers. The closing of this transaction is subject to completion of
definitive documentation, the Company's due diligence and certain other closing
conditions, and there can be no assurance that this transaction will be
consummated. Closing of the transaction is currently scheduled for late November
1996.
LEASING ACTIVITY
The Company has entered into a new lease with AT&T for approximately 477,000
square feet of office space and 12,000 square feet of storage space at the
Company's AT&T Center in Pleasanton, California. At the time the Company
acquired AT&T Center in March 1996, AT&T leased 100% of the space at the
Property (approximately 1,082,000 square feet) under a lease that expired
incrementally on various dates in 1998 and 1999. AT&T subleased 47% of the space
to other users, including Peoplesoft (181,000 square feet), GTE (71,000 square
feet) and Pacific Bell Mobile Services (145,000 square feet).
The new lease with AT&T, effective as of October 1, 1996, provides for the
lease with respect to 227,000 square feet to expire in November 2008, 140,000
square feet to expire in May 2006 and 110,000 square feet to expire in November
2003. The new annual base office rental rate is $13.20 per
S-12
<PAGE>
square foot, triple net, subject to increase every three years in an amount
equal to the sum of 6% plus 200% of the consumer price index increase for the
prior three years (with the total not to exceed 12%). AT&T's existing lease was
modified to provide for the lease of 430,000 square feet (all of the subleased
space), expiring during 1998 and 1999, at an average annual base rent of $17.04
per square foot, triple net. The Company has begun discussions with AT&T's
primary sub-tenants to directly lease office space to them.
SUBURBAN ATLANTA
In suburban Atlanta, the Company currently owns 38 buildings containing an
aggregate of 1,275,000 square feet of office space and one building currently
under construction which when complete will contain approximately 128,000 square
feet.
The table below sets forth certain market information regarding the
sub-markets in suburban Atlanta in which the Company acquired operating
Properties since August 1, 1996:
<TABLE>
<CAPTION>
COMPANY ACQUISITIONS SUB-MARKET VACANCY RATE AS OF
-------------------- TOTAL OFFICE ---------------------------------------
SINCE SPACE IN DECEMBER 31, JUNE 30,
8/1/96 PENDING SUB-MARKET -------------------------- ----------
SUB-MARKET (sq. ft.) (sq. ft.) (sq. ft.) 1992 1993 1994 1995 1996
---------- --------- --------- --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Northeast .................... 719,000 -- 5,909,000 18.1% 12.5% 9.6% 8.8% 7.6%
Northwest .................... 231,000 -- 18,076,000 16.2 14.8 11.7 10.3 7.9
Central Perimeter ............ 160,000 -- 18,684,000 17.3 10.5 7.2 6.2 5.0
Northlake .................... 165,000 -- 10,301,000 14.7 16.9 12.1 9.1 9.2
</TABLE>
RECENT ACQUISITIONS
Peterson Portfolio. On November 1, 1996, the Company acquired 38 buildings,
and one building currently under construction, containing a total of
approximately 1,403,000 square feet of office space and referred to as the
Peterson Portfolio, all located in suburban Atlanta, Georgia. The transaction
also included the acquisition of one building located in Boca Raton, Florida
containing 162,000 square feet of office space (described below) as well as the
rights to manage 10 properties for third parties. The aggregate purchase price
for the Peterson Portfolio was approximately $128 million, and was paid through
a combination of cash, the issuance of 62,696 shares of Common Stock, and the
assumption of approximately $22 million in debt that bears interest at an annual
rate of 7.2% and matures in January 2006. As of September 30, 1996, the 38
operating properties were 97% leased, and the building under construction,
scheduled to be completed in May 1997, was 58% pre-leased.
AUSTIN, TEXAS
In Austin, Texas, the Company currently owns 11 office buildings containing
an aggregate of approximately 989,000 square feet of office space. In addition,
the Company owns or has options to acquire land which in the aggregate will
support future development of up to 1,704,000 square feet of office space.
The table below sets forth certain market information regarding the
sub-markets in Austin in which the Company has acquired operating Properties
since August 1, 1996:
<TABLE>
<CAPTION>
COMPANY ACQUISITIONS SUB-MARKET VACANCY RATE AS OF
-------------------- TOTAL OFFICE ---------------------------------------
SINCE SPACE IN DECEMBER 31, JUNE 30,
8/1/96 PENDING SUB-MARKET -------------------------- ----------
SUB-MARKET (sq. ft.) (sq. ft.) (sq. ft.) 1992 1993 1994 1995 1996
---------- --------- --------- --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Northwest Suburban....... 345,000 -- 7,733,000 14.6% 10.5% 6.7% 5.9% 6.4%
Southwest Suburban ...... 136,000 -- 3,011,000 8.1 5.9 4.4 3.7 2.8
Central Business District......... 397,000 -- 6,605,000 25.2 23.1 22.1 19.8 16.6
</TABLE>
RECENT ACQUISITIONS
Littlefield Portfolio. In August 1996, the Company acquired ten properties,
certain land, and an option to acquire land for future development in Austin,
Texas for an aggregate purchase price of approximately $100 million. The
consideration for this transaction was paid through a combination of
S-13
<PAGE>
cash, the issuance of limited partnership interests, the assumption and
immediate repayment of indebtedness, and the assumption of approximately $9.7
million in debt which bears interest at an annual rate of 7.375% and matures in
March 1999. The ten properties contain an aggregate of approximately 877,000
square feet with 481,000 square feet of office space located in the Northwest
and Southwest suburban sub-markets, and the remaining office space located in
Austin's Central Business District. As of August 31, 1996, the buildings were
78% leased to 97 tenants. This transaction also included land and options to
acquire land which will support the future development of up to approximately
1,484,000 square feet of office space.
Riata Land. In August 1996, the Company acquired 15.1 acres of land in
Austin's Northwest sub-market for an aggregate purchase price of $1.6 million.
This land will support the future development of up to 220,000 square feet of
office space.
SUBURBAN SEATTLE
In suburban Seattle, the Company currently owns 10 buildings containing an
aggregate of approximately 400,000 square feet of office space and land which
will support future development of up to approximately 95,000 square feet in
Seattle's Bellevue sub-market, and has entered into an agreement to acquire an
additional 96,000 square feet of office space and land which will support the
future development of up to approximately 310,000 additional square feet of
office space.
The table below sets forth certain market information regarding the Bellevue
sub-market in suburban Seattle, in which the Company has an acquisition pending:
<TABLE>
<CAPTION>
COMPANY ACQUISITIONS SUB-MARKET VACANCY RATE AS OF
-------------------- TOTAL OFFICE ---------------------------------------
SINCE SPACE IN DECEMBER 31, JUNE 30,
8/1/96 PENDING SUB-MARKET -------------------------- ----------
SUB-MARKET (sq. ft.) (sq. ft.) (sq. ft.) 1992 1993 1994 1995 1996
---------- --------- --------- --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BELLEVUE............................. -- 96,000 15,701,000 11.9% 9.1% 7.4% 5.8% 4.7%
</TABLE>
RECENT ACQUISITIONS
Redmond Hilltop. On October 15, 1996, the Company acquired 4.35 acres of land
in Redmond, Washington which will support future development of up to
approximately 95,000 square feet of office space, for an aggregate purchase
price of $1.6 million. The prior owner of Redmond Hilltop had already completed
a substantial portion of the entitlement and public approval process, giving the
Company a significant competitive advantage in light of the fact that the City
of Redmond is recognized as a difficult jurisdiction from which to obtain public
approvals for office development. Redmond Hilltop's location adjacent to the
Company's Redmond East Business Campus will enable the Company to accommodate
the increasing space needs of customers by offering expansion space in closely
proximate facilities.
PENDING ACQUISITIONS
Data I/O Willows. The Company has entered into an agreement to acquire
property in Redmond, Washington known as Data I/O Willows, which is comprised of
an office building containing approximately 96,000 square feet of office space
and land which will support the development of up to an additional approximately
310,000 square feet of office space, for an aggregate purchase price of
approximately $14 million in cash, with an estimated total investment upon
completion of additional facilities of approximately $39 million. The property
is located in the Redmond area of the Bellevue sub-market. The closing of this
transaction is subject to the Company's due diligence and certain other closing
conditions, including a 10 year lease with Data I/O to occupy 100% of the
building, and there can be no assurance that this transaction will be
consummated. Closing of the transaction is currently scheduled for late December
1996.
S-14
<PAGE>
SUBURBAN DALLAS
In suburban Dallas, the Company has entered into agreements to acquire an
aggregate of approximately 474,000 square feet of office space.
The table below sets forth certain market information regarding the
sub-markets in suburban Dallas in which the Company has acquisitions pending:
<TABLE>
<CAPTION>
COMPANY ACQUISITIONS SUB-MARKET VACANCY RATE AS OF
-------------------- TOTAL OFFICE ---------------------------------------
SINCE SPACE IN DECEMBER 31, JUNE 30,
8/1/96 PENDING SUB-MARKET -------------------------- ----------
SUB-MARKET (sq. ft.) (sq. ft.) (sq. ft.) 1992 1993 1994 1995 1996
---------- --------- --------- --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LBJ/Quorum............................ -- 209,000 22,765,000 22.0% 20.2% 15.9% 9.3% 6.8%
Oaklawn/turtle Creek ................. -- 113,000 6,455,000 18.8 15.9 14.2 14.2 16.9
North Central Expressway.............. -- 152,000 4,436,000 32.6 31.7 27.9 23.7 15.8
</TABLE>
PENDING ACQUISITIONS
The Greyhound Building. The Company has entered into an agreement to acquire
the Greyhound Building, a six-story office building, for an aggregate purchase
price of approximately $9 million in cash. The building, which was built in
1982, contains approximately 93,000 square feet of office space and is located
in the LBJ/Quorum sub-market. As of August 1996, the property was 100% leased to
Greyhound Lines, Inc. pursuant to a lease that expires in 2004. The closing of
this transaction is subject to the Company's due diligence and certain other
closing conditions, and there can be no assurance that this transaction will be
consummated. Closing of the transaction is currently scheduled for November
1996.
Cedar Maple Plaza. The Company has entered into a non-binding letter of
intent to acquire three office buildings which comprise Cedar Maple Plaza for an
aggregate purchase price of approximately $13 million in cash. The buildings,
which were built in 1985, contain approximately 113,000 square feet of office
space and are located in the Oaklawn/Turtle Creek sub-market of Dallas near many
restaurants and other retail establishments. As of July 1996, the property was
91.8% leased to 27 tenants. The closing of this transaction is subject to
completion of definitive documentation, the Company's due diligence and certain
other closing conditions, and there can be no assurance that this transaction
will be consummated. Closing of the transaction is currently scheduled for
December 1996.
Search Plaza. The Company has entered into a non-binding letter of intent to
acquire Search Plaza, an office building containing approximately 152,000 square
feet of office space and located in the North Central Expressway sub-market, for
an aggregate purchase price of approximately $15 million. Search Plaza has
access to the North Central Expressway, and because of its high quality finish,
is considered one of the premier office properties in this sub-market. As of
September, 1996, Search Plaza was 100% leased. The closing of this acquisition
is subject to completion of definitive documentation, the Company's due
diligence and certain other closing conditions, and there can be no assurance
that this transaction will be consummated. Closing of the transaction is
currently scheduled for late November 1996.
Quorum North. The Company has entered into a non-binding letter of intent to
acquire Quorum North, an office building containing approximately 116,000 square
feet of office space and located in the LBJ/Quorum sub-market, for an aggregate
purchase price of approximately $11 million. Quorum North is well-located within
one of Dallas' strongest sub-markets. As of September 1996, Quorum North was
89.7% leased. The closing of this acquisition is subject to completion of
definitive documentation, the Company's due diligence and certain other closing
conditions. Closing of the transaction is currently scheduled for December 1996.
SUBURBAN PHOENIX
In suburban Phoenix, the Company has entered into agreements to acquire an
aggregate of 386,000 square feet of office space.
S-15
<PAGE>
The table below sets forth certain market information regarding the
sub-markets in suburban Phoenix in which the Company has acquisitions
pending:
<TABLE>
<CAPTION>
COMPANY ACQUISITIONS SUB-MARKET VACANCY RATE AS OF
-------------------- TOTAL OFFICE ---------------------------------------
SINCE SPACE IN DECEMBER 31, JUNE 30,
8/1/96 PENDING SUB-MARKET -------------------------- ----------
SUB-MARKET (sq. ft.) (sq. ft.) (sq. ft.) 1992 1993 1994 1995 1996
---------- --------- --------- --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Camelback Corridor................. -- 207,000 7,895,000 21.2% 18.2% 11.0% 10.6% 6.5%
Paradise Valley ................... -- 179,000 1,022,000 15.1 13.6 9.1 4.4 5.4
</TABLE>
PENDING ACQUISITIONS
Camelback Lakes Corporate Center. The Company has entered into a non-binding
letter of intent to acquire two office buildings comprising approximately
201,000 square feet in Phoenix's Camelback Corridor sub-market and which is
referred to as Camelback Lakes Corporate Center. In addition, the transaction
includes the acquisition of a retail building (5,800 square feet) leased 100% to
Chevy's Restaurant, a subsidiary of Pepsico, and a fee interest in a ground
lease. The aggregate purchase price is approximately $27 million. As of
September 1996, the buildings were 92.2% leased to 28 tenants. The closing of
this transaction is subject to completion of definitive documentation, the
Company's due diligence and certain other closing conditions, and there can be
no assurance that this transaction will be consummated. Closing of the
transaction is currently scheduled for December 1996.
Pointe Corridor Centre IV. The Company has entered into an agreement to
acquire Pointe Corridor Centre IV, an office building containing approximately
179,000 square feet, for an aggregate purchase price of approximately $15
million. The building, which was built in 1990, is located in the Squaw Peak
area of the Paradise Valley sub-market. As of September 1996, the property was
96.6% leased to 13 tenants. The building is located near the Squaw Peak Parkway
and Interstate 17, major transportation arteries in the Phoenix metropolitan
area. The closing of this transaction is subject to the Company's due diligence
and certain other closing conditions, and there can be no assurance that this
transaction will be consummated. Closing of the transaction is currently
scheduled for November 1996.
SOUTHEAST DENVER
In Southeast Denver, the Company currently owns 11 office properties
containing an aggregate of approximately 919,000 square feet and has entered
into an agreement to construct a build-to-suit development in the Denver Tech
Center, which when completed will contain approximately 189,000 square feet of
office space. The Company also owns a 106,000 square foot building under
construction and options to acquire land which will support the future
development of up to 814,000 square feet of office space.
The table below sets forth certain market information regarding the Southeast
I-25 Corridor sub-market in Southeast Denver, in which the Company has acquired
one operating Property since August 1, 1996:
<TABLE>
<CAPTION>
COMPANY ACQUISITIONS SUB-MARKET VACANCY RATE AS OF
-------------------- TOTAL OFFICE ---------------------------------------
SINCE SPACE IN DECEMBER 31, JUNE 30,
8/1/96 PENDING SUB-MARKET -------------------------- ----------
SUB-MARKET (sq. ft.) (sq. ft.) (sq. ft.) 1992 1993 1994 1995 1996
---------- --------- --------- --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTHEAST I-25 CORRIDOR............. 107,000 -- 20,513,000 16.9% 12.4% 9.7% 6.1% 6.6%
</TABLE>
RECENT ACQUISITIONS
Panorama Corporate Center. In August 1996, the Company acquired Panorama
Corporate Center, located one mile south of the Denver Tech Center in the
Southeast I-25 Corridor sub-market, for approximately $17.5 million. The
acquisition includes a 106,000 square foot building currently under construction
and options to acquire additional land which will support the uture development
of up to approximately 714,000 square feet of office space. Panorama I, which is
expected to be completed in November 1996, is 87% pre-leased. One of Denver's
largest office sub-markets, the Southeast I-25
S-16
<PAGE>
Corridor includes major office concentrations in the Denver Tech Center,
Inverness, Meridian and Greenwood Village. The Panorama Corporate Center has
been designed as a technologically-advanced development, enabling the Company to
deliver state-of-the-art technological benefits, and potentially to accommodate
the expansion needs of its customers in the same development.
Quebec Centre. In August 1996, the Company acquired three office buildings
which comprise Quebec Centre, in the Southeast I-25 Corridor sub-market, for an
aggregate purchase price of approximately $7 million. Built in 1982, the
buildings contain approximately 107,000 square feet of office space. As of
September 1996, Quebec Centre was 98% leased to approximately 30 customers.
PENDING ACQUISITIONS
J.D. Edwards. The Company has entered into a non-binding letter of intent
with J.D. Edwards, a national producer of business applications software, to
develop a 189,000 square foot office building in the Denver Tech Center which
will be 100% leased by J.D. Edwards for 15 years. The aggregate purchase price
of the land and the construction costs incurred by J.D. Edwards is approximately
$7 million. The building, when completed in August 1997, will have access to two
major highways. The closing of this transaction is subject to completion of
definitive documentation, the Company's due diligence and certain other closing
conditions, and there can be no assurance that this transaction will be
consummated. Closing of the transaction is currently scheduled for late November
1996.
SOUTHERN CALIFORNIA
In Southern California, the Company currently owns 22 office properties
containing an aggregate of approximately 815,000 square feet and has entered
into an agreement to acquire approximately 162,000 additional square feet of
office space.
The table below sets forth certain market information regarding the Greater
Orange County Airport sub-market in Southern California, in which the Company
has an acquisition pending:
<TABLE>
<CAPTION>
COMPANY ACQUISITIONS SUB-MARKET VACANCY RATE AS OF
-------------------- TOTAL OFFICE ---------------------------------------
SINCE SPACE IN DECEMBER 31, JUNE 30,
8/1/96 PENDING SUB-MARKET -------------------------- ----------
SUB-MARKET (sq. ft.) (sq. ft.) (sq. ft.) 1992 1993 1994 1995 1996
---------- --------- --------- --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Greater Orange County
Airport........................ -- 162,000 25,606,000 17.9% 14.7% 14.3% 11.5% 10.2%
</TABLE>
PENDING ACQUISITIONS
South Coast Executive Centre. The Company has entered into a non-binding
letter of intent to acquire two office buildings which comprise the South Coast
Executive Centre in Costa Mesa, California for an aggregate purchase price of
approximately $21 million. The consideration for this transaction will be paid
through a combination of cash, the assumption and immediate repayment of
indebtedness and the issuance of limited partnership interests. The buildings,
which were built in 1987, contain approximately 162,000 square feet of office
space and are located in the Greater Orange County Airport sub-market. As of
September 1996, the property was 97% leased to 16 tenants. The closing of this
transaction is subject to completion of definitive documentation, the Company's
due diligence and certain other closing conditions, and there can be no
assurance that this transaction will be consummated. Closing of the transaction
is currently scheduled for late December 1996.
S-17
<PAGE>
SOUTHERN FLORIDA
In Southern Florida, the Company currently owns approximately 162,000 square
feet of office space.
The table below sets forth certain market information regarding the Boca
Raton sub-market in Southern Florida, in which the Company acquired an operating
Property since August 1, 1996.
<TABLE>
<CAPTION>
COMPANY ACQUISITIONS SUB-MARKET VACANCY RATE AS OF
-------------------- TOTAL OFFICE ---------------------------------------
SINCE SPACE IN DECEMBER 31, JUNE 30,
8/1/96 PENDING SUB-MARKET -------------------------- ----------
SUB-MARKET (sq. ft.) (sq. ft.) (sq. ft.) 1992 1993 1994 1995 1996
---------- --------- --------- --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Boca Raton .......................... 162,000 -- 6,724,000 29.3% 19.3% 15.7% 9.5% 7.2%
</TABLE>
RECENT ACQUISITIONS
On November 1, 1996, as part of the Peterson Portfolio transaction described
earlier, the Company acquired Lake Wyman Plaza, containing approximately 162,000
square feet of office space, located in the East Boca area of the Boca Raton
submarket.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby and the Concurrent USRealty Purchase are estimated to be
approximately $171.5 million ($189.3 million if the Underwriters' over-allotment
option is exercised in full). The Company intends to use the net proceeds to
repay a portion of amounts outstanding under the Line of Credit and for general
corporate purposes. Pending such uses, the net proceeds may be invested in
short-term, income-producing investments such as commercial paper, government
securities or money market funds that invest in government securities.
Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan
Securities Inc., currently is the lead lender under the Line of Credit and, in
its capacity as agent for the other lenders, is expected to receive all of the
net proceeds from the Offering and the Concurrent USRealty Purchase. See
"Underwriting." Thereafter, the Company expects the Line of Credit to be
available primarily to facilitate future acquisitions.
S-18
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY
The shares of Common Stock are traded on the NYSE under the symbol "CRE". As
of October 31, 1996 there were 411 stockholders of record. The following table
sets forth the high and low sales prices per share for the periods indicated as
reported on the NYSE and the dividends per share paid by the Company with
respect to the periods noted.
CALENDAR PERIOD HIGH LOW DIVIDENDS
- ---------------------- ------ ------ ------------
1994:
First Quarter........ $ 24 1/2 $ 22 1/8 $.4375
Second Quarter....... $ 23 7/8 $ 21 1/2 $.4375
Third Quarter........ $ 21 5/8 $ 19 3/4 $.4375
Fourth Quarter....... $ 20 3/8 $ 17 3/8 $.4375
1995:
First Quarter........ $ 18 1/4 $ 17 1/8 $.4375
Second Quarter....... $ 19 3/4 $ 16 3/4 $.4375
Third Quarter........ $ 19 3/4 $ 17 1/4 $.4375
Fourth Quarter....... $ 24 5/8 $ 18 1/2 $.4375
1996:
First Quarter........ $ 24 3/4 $ 23 7/8 $.4375
Second Quarter....... $ 25 1/4 $ 23 3/4 $.4375
Third Quarter ....... $ 25 3/4 $ 22 $.4375(1)
October 1 to November 1. $ 25 3/4 $ 25 --
- ----------
(1) The dividend for the third quarter of 1996 was declared by the Board of
Directors on October 25, 1996 and is payable on November 22, 1996 to
holders of record of Common Stock on November 8, 1996. Purchasers in this
Offering will not receive the third quarter dividend.
The Company, in order to qualify as a REIT, is required to make distributions
(other than capital gain distributions) to its stockholders in amounts at least
equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without
regard to the dividends paid deduction and its 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. The Company's distribution strategy is
to distribute what it believes is a conservative percentage of its cash flow,
permitting the Company to retain funds for capital improvements and other
investments while funding its distributions.
For Federal income tax purposes, distributions may consist of ordinary
income, capital gains, nontaxable return of capital or a combination thereof.
Distributions that exceed the Company's current and accumulated earnings and
profits (calculated for tax purposes) constitute a return of capital rather than
a dividend and reduce the stockholder's basis in his or her shares of Common
Stock. To the extent that a distribution exceeds both current and accumulated
earnings and profits and the stockholder's basis in his or her shares, it will
generally be treated as gain from the sale or exchange of that stockholder's
shares. The Company annually notifies stockholders of the taxability of
distributions paid during the preceding year. The following table sets forth the
taxability of distributions paid in 1995, 1994 and 1993:
1995 1994 1993
------ ----- -----
Ordinary income .............. 85% 75% 60%
Capital gain ................. -- -- --
Return of capital............. 15% 25% 40%
S-19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 on an historical basis and on a pro forma basis, giving
effect to (i) completion of the Offering and the Concurrent US Realty Purchase,
(ii) the acquisition of office properties and land that have been consummated
since September 30, 1996 and the acquisition of other office properties and land
that the Company expects to consummate in the near future, (iii) the completion
of the October 1996 offering of Series A Preferred Shares, (iv) completion of
the proposed sale of the Company's property at 2550 M Street in downtown
Washington, D.C., and (v) the repayment of a portion of the amount outstanding
under the Line of Credit. See "Pro Forma Financial Information."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
HISTORICAL PRO FORMA
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Mortgage debt .................................................................. $ 354,069 $ 416,958
Line of Credit ................................................................. 72,000 180,337
Other liabilities .............................................................. 20,480 23,801
----------- -----------
Total liabilities ............................................................. $ 446,549 $ 621,096
----------- -----------
Minority interest .............................................................. 51,611 57,641
Stockholders' equity:
Series A Preferred Shares, $.01 par value; 15,000,000 total preferred shares
authorized; none issued and outstanding; 1,740,000 Series A Preferred Shares
issued and outstanding
on a pro forma basis ......................................................... -- 17
Common Stock, $.01 par value, 90,000,000 shares authorized;
35,473,493 shares issued and outstanding; 42,679,046 shares
issued and outstanding on a pro forma basis .................................. 355 427
Additional paid-in capital .................................................... 588,684 804,519
Cumulative dividends paid in excess of net income ............................. (43,291) (25,875)
----------- -----------
Total stockholders' equity .................................................... $ 545,748 $ 779,088
----------- -----------
Total capitalization .......................................................... $ 1,043,908 $ 1,457,825
=========== ===========
</TABLE>
S-20
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following tables set forth unaudited pro forma financial information for
the Company as of and for the nine months ended September 30, 1996 and for the
year ended December 31, 1995 after giving effect to (i) the acquisition of
office properties and land that have been consummated since the beginning of the
periods presented and the acquisition of other office properties and land that
the Company expects to consummate in the near future, (ii) the sale of shares of
Common Stock to USRealty in April 1996, (iii) the completion of the July 1996
Offering, (iv) the completion of the Offering and Concurrent USRealty Purchase,
(v) the completion of the October 1996 offering of the Series A Preferred Shares
(the "Series A Preferred Stock Offering"), (vi) the sale of 2550 M Street in
downtown Washington, D.C., and (vii) the repayment of draws on the Line of
Credit.
The unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as
if the following transactions had been consummated on September 30, 1996: (a)
the purchase of the Peterson Portfolio; (b) the purchase of the NELO/Orchard
Portfolio; (c) the purchase of the Greyhound Building; (d) the purchase of
Pointe Corridor Centre IV; (e) the purchase of the Camelback Lakes Corporate
Center; (f) the purchase of Cedar Maple Plaza; (g) the purchase of Rio Robles
Technology Center; (h) the purchase of Search Plaza and Quorum North; (i) the
purchase of South Coast Executive Centre; (j) the purchase of J.D. Edwards; (k)
the purchase of Data I/O Willows; (l) the sale of 2550 M Street (m) the
completion of the Offering and the Concurrent USRealty Purchase; (n) the
completion of the Series A Preferred Stock Offering; and (o) the repayment of
draws on the Line of Credit.
The unaudited Pro Forma Condensed Consolidated Statements of Operations are
presented as if the following transactions had been consummated as of the
beginning of the respective periods: (a) the purchase of One Rock Spring Plaza;
(b) the purchase of Tycon Courthouse; (c) the purchase of an additional 7.58%
ownership interest in Square 24 Associates, the partnership owning 2445 M
Street, Washington, D.C.; (d) the purchase of the Scenic Business Park; (e) the
purchase of the Harbor Corporate Park; (f) the purchase of AT&T Center; (g) the
purchase of Reston Quadrangle; (h) the purchase of Harlequin Plaza North and
South and Quebec Court I and II; (i) the purchase of The Quorum; (j) the
purchase of Parkway North Center; (k) the purchase of the Redmond East Business
Campus; (l) the purchase of the Plaza PacifiCare Building; (m) the purchase of
Parkway One; (n) the purchase of Norwood Tower; (o) the purchase of the Warner
Center Business Park; (p) the purchase of the Littlefield Portfolio; (q) the
purchase of Riata Land; (r) the purchase of Katella Corporate Center; (s) the
purchase of Greenwood Centre; (t) the purchase of Panorama Corporate Center; (u)
the purchase of Quebec Centre; (v) the purchase of the Sunnyvale Research Plaza;
(w) the purchase of the Peterson Portfolio; (x) the purchase of the NELO/Orchard
Portfolio; (y) the purchase of the Greyhound Building; (z) the purchase of
Pointe Corridor Centre IV; (aa) the purchase of the Camelback Lakes Corporate
Center; (bb) the purchase of Cedar Maple Plaza; (cc) the purchase of Rio Robles
Technology Center; (dd) the purchase of Search Plaza and Quorum North; (ee) the
purchase of South Coast Executive Centre; (ff) the purchase of J.D. Edwards;
(gg) the purchase of Data I/O Willows; (hh) the sale of 2550 M Street; (ii) the
completion of the July 1996 Offering; (jj) the completion of the Offering and
the Concurrent USRealty Purchase; (kk) the Series A Preferred Stock Offering;
and (ll) the repayment of draws on the Line of Credit.
In management's opinion, all material adjustments necessary to reflect the
transactions described above are presented in the pro forma adjustments columns,
which are further described in the notes to the unaudited pro forma financial
information.
The unaudited Pro Forma Condensed Consolidated Balance Sheet and the
unaudited Pro Forma Condensed Consolidated Statements of Operations should be
read in conjunction with the Consolidated Financial Statements of the Company
and Notes thereto incorporated by reference in the accompanying Prospectus. The
unaudited Pro Forma Condensed Consolidated Balance Sheet is not necessarily
indicative of what the actual financial position would have been at September
30, 1996, had the aforementioned transactions occurred on such date, nor does it
purport to represent the future financial position of the Company. The unaudited
Pro Forma Condensed Consolidated Statements of Operations are not necessarily
indicative of what actual results of operations of the Company would have been
assuming the aforementioned transactions had been consummated as of the
beginning of the respective periods, nor do they purport to represent the
results of operations for future periods.
S-21
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996 (UNAUDITED)
PRO FORMA ADJUSTMENTS
--------------------------------------------------------------------------
SERIES A OFFERING AND
SALE OF PREFERRED CONCURRENT
ACQUIRED PROBABLE 2550 M STOCK USREALTY PRO FORMA
HISTORICAL(A) PROPERTIES(B) ACQUISITIONS(C) STREET(D) OFFERING(E) PURCHASE(F) CONSOLIDATED
------------- ------------ ------------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Rental property, net.................. $ 906,342 $122,633 (1) $ 289,787 (4) $ (10,642) $ -- $ -- $1,308,120
Development property.................. 40,449 5,579 (1) 12,665 (4) -- -- -- 58,693
Restricted and unrestricted cash ..... 22,882 -- -- -- -- -- 22,882
Other assets.......................... 74,235 -- (1,593)(5) (4,512) -- -- 68,130
----------- ------------ ------------ ----------- ------------- ----------- -------------
Total assets ....................... $1,043,908 $128,212 $ 300,859 $ (15,154) $ -- $ -- $1,457,825
=========== ============ ============ =========== ============= =========== =============
Liabilities:
Mortgages and notes payable........... $ 426,069 $126,712 (2) $ 297,438 (5) $ (38,500) $(42,915) $(171,509) $ 597,295
Other liabilities..................... 20,480 -- 3,321 (5) -- -- -- 23,801
----------- ------------ ------------ ------------ ------------ ----------- -------------
Total liabilities................... 446,549 126,712 300,759 (38,500) (42,915) (171,509) 621,096
Minority interest..................... 51,611 -- 100 (6) 5,930 -- -- 57,641
----------- ------------ ------------ ------------ ------------ ----------- -------------
Stockholders' Equity:
Preferred stock ...................... -- -- -- -- 17 -- 17
Common stock.......................... 355 1 (3) -- -- -- 71 427
Additional paid-in capital ........... 588,684 1,499 (3) -- -- 42,898 171,438 804,519
Dividends paid in excess of earnings . (43,291) -- -- 17,416 -- -- (25,875)
----------- ------------ ------------ ----------- ------------- ---------- -------------
Total stockholders' equity.......... 545,748 1,500 -- 17,416 42,915 171,509 779,088
----------- ------------ ------------ ----------- ------------- ---------- -------------
Total liabilities and stockholders'
equity............................. $1,043,908 $128,212 $ 300,859 $ (15,154) $ -- $ -- $1,457,825
=========== ============ ============ =========== ============= ========== =============
</TABLE>
S-22
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ADJUSTMENTS (DOLLARS IN THOUSANDS):
(A) Reflects the Company's historical consolidated balance sheet as of
September 30, 1996.
(B) Reflects the following pro forma adjustments related to the Peterson
Portfolio:
(1) total acquisition costs of $128,212;
(2) the assumption of existing debt ($22,000) and a draw on the Line of
Credit ($104,712); and
(3) the issuance of 62,696 shares of Common Stock in connection with the
purchase of the Peterson Portfolio.
(C) Reflects the following pro forma adjustments related to the anticipated
effects of probable acquisitions:
(4) total acquisition costs of $302,452 ($123,850 related to the NELO/Orchard
Portfolio; $9,350 related to the Greyhound Building, $15,100 related to Pointe
Corridor Center IV, $26,900 related to Camelback Lakes Corporate Center, $13,000
related to Cedar Maple Plaza, $46,250 related to Rio Robles Technology Center,
$26,021 related to Search Plaza and Quorum North, $20,650 related to South Coast
Executive Centre, $7,138 related to J.D. Edwards and $14,193 related to Data I/O
Willows);
(5) the assumption of existing debt ($40,889) and other liabilities ($3,321)
related to the acquisition of the NELO/Orchard Portfolio, a draw on the Line of
Credit ($256,549) and use of the Company's purchase deposits (totaling $1,593)
toward the acquisitions; and
(6) the value of 4,000 dividend-paying Units in CarrAmerica Realty, L.P. to
be issued in connection with the purchase of South Coast Executive Centre.
(D) Reflects the anticipated sale of the building located at 2550 M Street in
Washington, D.C. for $40,250 less estimated transaction costs of $1,750.
(E) Reflects the issuance of 1,740,000 Series A Preferred Shares at the price
of $25 per share. Transaction costs of $585 were incurred. The Company used all
of the proceeds to pay down amounts outstanding under its Line of Credit.
(F) Reflects the issuance of 7,142,857 shares of Common Stock at the
anticipated price of $25 per share. Transaction costs of $7,063 are expected to
be incurred. The Company expects to use all of the proceeds to pay down amounts
outstanding under its Line of Credit.
S-23
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
----------------------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------------------------------------------
SERIES A OFFERING AND
SALE OF PREFERRED CONCURRENT
ACQUIRED PROBABLE 2550 M STOCK USREALTY PRO FORMA
HISTORICAL(A) PROPERTIES(B)ACQUISITIONS(C) STREET(D) OFFERING(E) PURCHASE CONSOLIDATED
------------- ------------ ------------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate operating revenue:
Rental revenue ....................... $100,639 $ 46,513 (1) $ 23,636 (6) $(4,560) $ -- $ -- $166,228
Real estate service income............ 9,265 -- -- -- -- -- 9,265
----------- ------------ ------------- --------- ----------- --------- -------------
Total revenues ...................... 109,904 46,513 23,636 (4,560) -- -- 175,493
----------- ------------ ------------- --------- ----------- --------- -------------
Real estate operating expenses:
Property operating expenses .......... 33,371 17,152 (4) 7,166 (8) (1,696) -- -- 55,993
Interest expense ..................... 21,857 11,049 (2) 16,249 (9) (2,166) (2,413) (9,647) 34,929
General and administrative............ 10,661 -- -- -- -- -- 10,661
Depreciation and amortization......... 25,744 9,688 (3) 4,862 (7) (813) -- -- 39,481
----------- ------------ ------------- ---------- ----------- ---------- -------------
Total operating expenses............. 91,633 37,889 28,277 (4,675) (2,413) (9,647) 141,064
----------- ------------ ------------- ---------- ----------- ---------- -------------
Real estate operating income......... 18,271 8,624 (4,641) 115 2,413 9,647 34,429
Other operating income (expense)...... 1,610 4 (1) -- (20) -- -- 1,594
----------- ------------ ------------- --------- ----------- --------- -------------
Income before minority interest....... 19,881 8,628 (4,641) 95 2,413 9,647 36,023
----------- ------------ ------------- --------- ----------- --------- -------------
Minority interest...................... (3,895) (526)(5) (117)(10) (24) -- -- (4,562)
----------- ------------ ------------- --------- ----------- --------- -------------
Income from continuing operations .... $ 15,986 $ 8,102 $ (4,758) $ 71 $ 2,413 $ 9,647 $ 31,461
=========== ============ ============= ========= =========== ========= ==============
Earnings from continuing operations per
common share(G) ...................... $ 0.70 $ 0.69
=========== ==============
</TABLE>
S-24
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
-------------------------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------------------------------------------------------
SERIES A OFFERING AND
SALE OF PREFERRED CONCURRENT
ACQUIRED PROBABLE 2550 M STOCK USREALTY PRO FORMA
HISTORICAL(A) PROPERTIES(B)ACQUISITIONS(C) STREET(D) OFFERING(E) PURCHASE(F) CONSOLIDATED
------------- ------------- ------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate operating revenue:
Rental revenue ......................... $ 89,539 $ 103,590 (1) $ 29,531 (6) $(5,686) $ -- $ -- $216,974
Real estate service income.............. 11,315 -- -- -- -- -- 11,315
----------- ------------- ------------- ---------- ----------- ----------- ------------
Total revenues ........................ 100,854 103,590 29,531 (5,686) -- -- 228,289
----------- ------------- ------------- ---------- ----------- ----------- ------------
Real estate operating expenses:
Property operating expenses ............ 31,579 34,486 (4) 9,668 (8) (2,312) -- -- 73,421
Interest expense ....................... 21,873 19,060 (2) 22,408 (9) (3,005) (3,349) (13,386) 43,601
General and administrative.............. 10,711 -- -- -- -- -- 10,711
Depreciation and amortization........... 18,495 26,038 (3) 6,479 (7) (1,023) -- -- 49,989
----------- ------------- ------------- ---------- ----------- ----------- ------------
Total operating expenses............... 82,658 79,584 38,555 (6,340) (3,349) (13,386) 177,722
----------- ------------- ------------- ---------- ----------- ----------- ------------
Real estate operating income........... 18,196 24,006 (9,024) 654 3,349 13,386 50,567
Other operating income (expense)......... (912) 19 (1) 62 (6) (39) -- -- (870)
Income before minority interest ......... 17,284 24,025 (8,962) 615 3,349 13,386 49,697
----------- ------------- ------------- ---------- ----------- ---------- -------------
Minority interest ....................... (5,217) (638)(5) (136)(10) (163) -- -- (6,154)
----------- ------------- ------------- ---------- ----------- ---------- -------------
Income from continuing operations ...... $ 12,067 $ 23,387 $ (9,098) $ 452 $ 3,349 $13,386 $ 43,543
=========== ============= ============= ========== =========== ========== =============
Earnings from continuing operations per
common share(G) ....................... $ 0.90 $ 0.95
=========== =============
</TABLE>
S-25
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE YEAR ENDED
DECEMBER 31, 1995
(UNAUDITED)
ADJUSTMENTS (DOLLARS IN THOUSANDS):
(A) Reflects the Company's historical consolidated statements of operations
for the nine months ended September 30, 1996 and the year ended December 31,
1995.
(B) Pro forma adjustments for the purchases of the acquired properties
reflect:
(1) the historical operating activity of the properties acquired;
(2) the additional interest expense on the Line of Credit ($7,775 of interest
costs net of $1,871 capitalized for the nine months ended September 30, 1996 and
$9,964 of interest costs net of $3,329 capitalized in 1995) and interest expense
on debt assumed in certain acquisitions ($5,145 for the nine months ended
September 30, 1996 and $12,425 in 1995);
(3) the depreciation expense for the acquisitions based on the new accounting
basis for the rental property acquired;
(4) the historical operating activity of the rental property ($18,848 for the
nine months ended September 30, 1996 and $37,643 in 1995) reduced by the
elimination of management fee expenses that will not be incurred by the Company
upon purchase of the properties ($1,696 for the nine months ended September 30,
1996 and $3,157 in 1995); and
(5) the minority interest share of earnings.
(C) Pro forma adjustments for the probable acquisitions reflect:
(6) the historical operating activity of the properties to be acquired;
(7) the depreciation expense for the probable acquisitions based on the new
accounting basis for the rental property to be acquired;
(8) the historical operating activity of the rental property to be acquired
($7,648 for the nine months ended September 30, 1996 and $10,360 in 1995)
reduced by the elimination of management fee expenses that will not be incurred
by the Company upon purchase of the properties ($482 for the nine months ended
September 30, 1996 and $692 in 1995);
(9) the additional interest expense on the Line of Credit ($14,431 of
interest costs net of $712 capitalized for the nine months ended September 30,
1996 and $20,024 of interest costs net of $989 capitalized in 1995) and interest
expense on debt assumed in the anticipated acquisition of NELO/Orchard ($2,530
for the nine months ended September 30, 1996 and $3,373 for 1995); and
(10) the minority interest share of earnings.
S-26
<PAGE>
(D) Reflects the elimination of the operating activity and effect on minority
interest of the building expected to be sold located at 2550 M Street in
Washington, D.C. and the reduction in interest expense associated with the pay
down of amounts outstanding under the Line of Credit with the sales proceeds.
The estimated gain on the anticipated sale of $23,346 is not reflected in the
pro forma condensed consolidated statements of operations.
(E) Pro forma adjustment reflects the reduction in interest expense
associated with the pay down of amounts outstanding under the Line of Credit
with the proceeds from the Series A Preferred Stock Offering.
(F) Pro forma adjustment reflects the reduction in interest expense
associated with the pay down of amounts outstanding under the Line of Credit
with the proceeds from the Offering and Concurrent USRealty Purchase.
(G) Based upon 48,174,792 and 48,152,350 pro forma shares of Common Stock
outstanding and common stock equivalents on a weighted average basis during the
nine months ended September 30, 1996 and the year ended December 31, 1995,
respectively. Net income and weighted average shares outstanding have been
adjusted for certain minority interests which have a dilutive effect on earnings
per share.
S-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is based primarily on the Condensed Consolidated
Financial Statements of the Company as of September 30, 1996 and December 31,
1995, and for the three and nine months ended September 30, 1996 and 1995. This
information should be read in conjunction with the Condensed Consolidated
Financial Statements and notes thereto incorporated by reference in the
accompanying Prospectus. These financial statements include all adjustments
which are, in the opinion of management, necessary to reflect a fair
presentation of the results for the interim periods, and all such adjustments
are of a normal, recurring nature.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REAL ESTATE OPERATING REVENUE
Total real estate operating revenue increased $20.8 million, or 81.8%, to
$46.1 million for the three months ended September 30, 1996 as compared to $25.4
million for the three months ended September 30, 1995. The increase in revenue
was primarily attributable to a $19.8 million and a $1.0 million increase in
rental revenue and real estate service revenue, respectively. The Company
experienced net growth in its rental revenue as a result of its acquisitions
since the third quarter of 1995 which contributed approximately $21.6 million of
additional rental revenue in the three month period ended September 30, 1996.
Rental revenue from properties that were fully operating throughout both periods
decreased by approximately $1.8 million as a result of increased vacancies
experienced in these properties. Real estate service revenue increased by $1.0
million, or 37.7%, for the three months ended September 30, 1996 to $3.6 million
as compared to $2.6 million for the three months ended September 30, 1995,
primarily as a result of development fees earned by Carr Development &
Construction, Inc., which was acquired by the Company in May 1996.
REAL ESTATE OPERATING EXPENSES
Total real estate operating expenses increased $16.7 million for the three
months ended September 30, 1996, or 80.5%, to $37.5 million as compared to $20.8
million for the three months ended September 30, 1995. The net increase in
operating expenses was attributable to a $5.9 million increase in property
operating expenses, a $2.3 million increase in interest expense, a $1.4 million
increase in general and administrative expenses, and a $7.1 million increase in
depreciation and amortization. The increase in property operating expenses was
primarily attributable to property acquisitions since the third quarter of 1995.
The increase in the Company's interest expense is primarily related to
borrowings for acquisitions. The increase in general and administrative expenses
is predominately a result of the addition of new staff to implement the
Company's new business strategy, the addition of approximately $.6 million of
expenses associated with Carr Development & Construction, Inc., and inflation.
The increase in depreciation and amortization is predominately a result of
additional depreciation and amortization on the Company's real estate
acquisitions.
OTHER OPERATING INCOME (EXPENSE)
Other operating income increased $.3 million for the three months ended
September 30, 1996, to $.5 million as compared to $.2 million for the three
months ended September 30, 1995, primarily due to an increase in interest income
and the addition of equity in earnings of CC-JM II Associates. The Company is a
50% venturer in this entity, which constructed the Booz-Allen & Hamilton
Building that was placed in service in January 1996.
S-28
<PAGE>
NET INCOME
Net income of $7.9 million was earned for the three months ended September
30, 1996 as compared to $3.4 million during the three month period ended
September 30, 1995. The comparability of net income between the two periods is
impacted by the acquisitions the Company made and the other changes described
above.
CASH FLOWS
Net cash provided by operating activities increased $20.6 million, or 320.4%,
to $27 million for the three months ended September 30, 1996 as compared to $6.4
million for the three months ended September 30, 1995, primarily as a result of
the acquisitions made by the Company. Net cash used by investing activities
increased $144.0 million to $162.3 million for the three months ended September
30, 1996 as compared to $18.3 million for the three months ended September 30,
1995, primarily as a result of capital deployed by the Company for acquisitions
of office properties, land held for future development and construction in
process. Net cash provided by financing activities increased $130.9 million to
$136.5 million provided for the three months ended September 30, 1996 as
compared to $5.6 million used for the three months ended September 30, 1995,
primarily as a result of proceeds from the sale of Common Stock, partially
offset by net repayments on the Line of Credit.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REAL ESTATE OPERATING REVENUE
Total real estate operating revenue increased $35.5 million, or 47.7%, to
$109.9 million for the nine months ended September 30, 1996 as compared to $74.4
million for the nine months ended September 30, 1995. The increase in revenue
was primarily attributable to a $34.0 million and a $1.5 million increase in
rental revenue and real estate service revenue, respectively. The Company
experienced net growth in its rental revenue as a result of its acquisitions
since the third quarter of 1995 which contributed approximately $36.8 million of
additional rental revenue in the nine month period ended September 30, 1996.
Rental revenue from properties that were fully operating throughout both periods
decreased by approximately $2.8 million due to increased vacancies experienced
in those properties. Real estate service revenue increased by $1.5 million, or
19.6%, for the nine months ended September 30, 1996 to $9.3 million as compared
to $7.7 million for the nine months ended September 30, 1995. The increase was
primarily as a result of an increase in leasing commissions earned in the first
quarter of 1996 and development fees earned by Carr Development & Construction,
Inc., which was acquired by the Company in May 1996.
REAL ESTATE OPERATING EXPENSES
Total real estate operating expenses increased $31.3 million for the nine
months ended September 30, 1996, or 52.0%, to $91.6 million as compared to $60.3
million for the nine months ended September 30, 1995. The net increase in
operating expenses was attributable to a $10.5 million increase in property
operating expenses, a $5.6 million increase in interest expense, a $2.8 million
increase in general and administrative expenses, and a $12.4 million increase in
depreciation and amortization. The increase in property operating expenses was
primarily attributable to $7.0 million in operating expenses associated with
property acquisitions since September 30, 1995. Exclusive of operating expenses
attributable to new property acquisitions, property operating expenses increased
by $.8 million for the nine months ended September 30, 1996 predominately as a
result of higher real estate tax assessments and repairs and maintenance costs.
The increase in the Company's interest expense is primarily related to
borrowings for acquisitions. The increase in general and administrative expenses
is predominately a result of the addition of new staff to implement the
Company's new business strategy, the addition of approximately $1.1 million of
expenses associated with Carr Development & Construction, Inc., and inflation.
The increase in depreciation and amortization is predominately a result of
additional depreciation and amortization on the Company's real estate
acquisitions.
S-29
<PAGE>
OTHER OPERATING INCOME (EXPENSE)
Other operating income increased $.9 million for the nine months ended
September 30, 1996, to $1.6 million as compared to $.7 million for the nine
months ended September 30, 1995, primarily due to an increase in interest income
and the addition of equity in earnings of CC-JM II Associates. The Company is a
50% venturer in this entity, which constructed the Booz-Allen & Hamilton
Building that was placed in service in January 1996.
NET INCOME
Net income of $15.5 million was earned for the nine months ended September
30, 1996 as compared to $10.4 million during the nine month period ended
September 30, 1995. The comparability of net income between the two periods is
impacted by the acquisitions the Company made and the other changes described
above.
CASH FLOWS
Net cash provided by operating activities increased $23.0 million, or 94.4%,
to $47.4 million for the nine months ended September 30, 1996 as compared to
$24.4 million for the nine months ended September 30, 1995, primarily as a
result of the acquisitions made by the Company. Net cash used by investing
activities increased $450.8 million, to $484.6 million for the nine months ended
September 30, 1996 as compared to $33.8 million for the nine months ended
September 30, 1995, primarily as a result of capital deployed by the Company for
acquisitions of office properties, land held for future development and
construction in progress. Net cash provided by financing activities increased
$443.4 million to $442.3 million provided for the nine months ended September
30, 1996 as compared to $1.1 million used for the nine months ended September
30, 1995, primarily as a result of the proceeds from the sale of Common Stock
and the net borrowings necessary for the Company's acquisitions.
PRO FORMA INFORMATION
Balance Sheet at September 30, 1996. On a pro forma basis, the Company's
total assets increased $413.9 million to $1,457.8 million. The increase resulted
primarily from the acquisition and probable acquisition of $429.1 million of
office and development properties, partially offset by the probable sale of 2550
M Street in downtown Washington, D.C.
Results of Operations for the Nine Months Ended September 30, 1996. On a pro
forma basis, the Company's net income for the nine months ended September 30,
1996 increased $15.5 million to $31.5 million. The pro forma adjustments reflect
an $8.1 million increase in net income from the acquisition of properties, a
$4.8 million decrease in net income from probable acquisitions, a $.1 million
increase in net income from the sale of 2550 M Street and a $12.1 million
increase in net income from reduced interest expense resulting from the
repayment of debt. Earnings per share of Common Stock for the nine months ended
September 30, 1996, on a pro forma basis, were $.69 per share, which was $.01
per share less than the historical amount.
Results of Operations for the Year Ended December 31, 1995. On a pro forma
basis, the Company's net income for the year ended December 31, 1995 increased
$31.5 million to $43.5 million. The pro forma adjustments reflect a $23.4
million increase in net income from the acquisition of properties, a $9.1
million decrease in net income from probable acquisitions, a $.5 million
increase in net income from the sale of 2550 M Street and a $16.7 million
increase in net income from reduced interest expense resulting from the
repayment of debt. Earnings per share of Common Stock for the year ended
December 31, 1995, on a pro forma basis, were $.95 per share, which was $.05 per
share greater than the historical amount.
Pro Forma Indebtedness at September 30, 1996. On a pro forma basis, the
Company's consolidated indebtedness at September 30, 1996 was $597.3 million, of
which $417.0 million was fixed rate indebtedness at a weighted average interest
rate of 8.2% and a weighted average term to maturity of 6.2 years. The Company's
LIBOR-based pro forma floating rate debt of $180.3 million bore a weighted
S-30
<PAGE>
average interest rate of 7.5%. Based upon the Company's pro forma total market
capitalization at September 30, 1996 of $1,845.6 million (based on a Common
Stock price of $25.00 per share and total common and preferred shares/Units
outstanding of 49,931,109), the Company's pro forma debt at September 30, 1996
represented 32.4% of its pro forma total market capitalization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total indebtedness at September 30, 1996 was $426.1 million, of
which $72.0 million or 16.9%, had a LIBOR-based floating interest rate. The
Company's fixed rate indebtedness had a weighted average interest rate of 8.3%
and had a weighted average term to maturity of 6.2 years. In addition to the
indebtedness outstanding, the Company can borrow up to an additional $143.0
million under the Line of Credit which bears interest at a LIBOR-based floating
rate (see below). Based upon the Company's total market capitalization at
September 30, 1996 of $1,450.7 million (the stock price was $25.00 per share and
the total shares/Units outstanding were 40,985,556), the Company's debt
represented 29.4% of its total market capitalization.
In May 1996, the Company entered into a revolving credit agreement providing
for unsecured borrowings of up to $215 million. The Line of Credit, which has
been utilized to fund a portion of the Company's recent acquisitions, will be
used to fund future acquisitions, future office property development and capital
expenditures and for working capital purposes. The facility is scheduled to
mature on July 30, 1998, subject to a one-year extension if requested by the
Company and approved by the lenders. The Company is subject to a number of
financial covenants under the terms of the Line of Credit. See "Properties --
Debt Financing -- Line of Credit." As of September 30, 1996, approximately
$188.0 million was available for draw under the Line of Credit, of which $72.0
million had been drawn by the Company. The Line of Credit bore interest at the
rate of 7.25% as of September 30, 1996.
In October 1996, the amount of the Line of Credit was increased from $215
million to $325 million. As of November 1, 1996, approximately $252.0 million
was available for draw under the Line of Credit, of which $143.0 million had
been drawn by the Company.
In July 1996, the Company consummated a public offering and a concurrent
private placement of its Common Stock that raised net procceds of approximately
$216.2 million. In October 1996, the Company consummated an offering of Series A
Preferred Shares that raised net proceeds of approximately $43 million. For a
description of the terms of the Series A Preferred Shares, see "Description of
Series A Preferred Shares" in the accompanying Prospectus. The net proceeds of
both of the July and October offerings were used to pay down indebtedness under
the Line of Credit and to acquire properties.
The Company expects to enter into a short-term borrowing arrangement with
Security Capital U.S. Realty pursuant to which it may borrow up to $37 million
(the "USRealty Facility"). Although no formal agreement has been executed, the
Company expects that any borrowings under the USRealty Facility will be
repayable within 30 days (with two 30-day extension rights), with interest
incurred at the prime rate. The USRealty Facility will terminate upon
consummation of the Offering. The Company will use the proceeds of the USRealty
Facility, if necessary, to fund acquisitions and for working capital purposes
prior to the consummation of the Offering.
The Company's operating properties require periodic investments of capital
for tenant-related capital expenditures and for general capital improvement
projects. The Company has recently completed large-scale renovations of certain
of the Company's Washington, D.C. properties to improve these properties' market
position and to bring the properties into compliance with certain new local and
federal laws. As a result, the Company expects that general capital expenditures
for its Washington, D.C. properties will be lower than the general capital
expenditures the Company has incurred for these properties over the last three
years. The Company has recently begun renovating several garages at its
Washington, D.C. properties at an estimated total cost of approximately $3.5
million, or $1.45 per square foot of the Company's Washington, D.C. properties,
to be spent over the next two years. Exclusive of the garage renovations,
general capital expenditures for the Company's Washington, D.C. properties are
expected to be approximately $1.0 million or less annually, or $.40 or less per
square foot annually. With respect to the Company's recent acquisitions in
select suburban growth markets, the Company expects that the annual capital
expen
S-31
<PAGE>
ditures for these properties will be substantially less than the Company has
incurred for its Washington, D.C. properties. Based on current market conditions
in its target markets, the Company expects that tenant-related capital
expenditures for its recent acquisitions will be approximately $7.75 to $8.25
per square foot leased for leases entered into in the next 12 months. The
Company expects that this amount should decline if market conditions in its
target markets continue to improve. The Company believes that general capital
expenditures will average approximately $.30 per square foot owned on an annual
basis for its recent acquisitions. The Company anticipates funding the capital
requirements of its Washington, D.C. properties and of its new acquisitions with
cash flow from operations and, if necessary, with proceeds from the Line of
Credit.
The Company's estimates regarding capital expenditures set forth above are
forward-looking information representing the Company's best estimates based on
currently available information. As with any estimates, they are based on a
number of assumptions, any of which, if unrealized, could adversely affect the
accuracy of the estimates. These assumptions include that (i) the Company
experiences tenant retention rates consistent with its expectations, (ii) the
supply/demand characteristics for office space in the Company's target markets
do not vary materially from the Company's expectations, (iii) leasing
commissions associated with obtaining new tenants or retaining existing tenants
are consistent with the Company's past experience and future expectations, and
(iv) the Company does not acquire operating office properties in the future that
require substantial renovations.
Net cash provided by operating activities was $27.0 million for the three
months ended September 30, 1996, compared to $6.4 million for the three months
ended September 30, 1995. The increase in net cash provided by operating
activities was primarily as a result of acquisitions made by the Company
partially offset by decreased net income at certain of its operating properties.
The Company's investing activities used approximately $162.3 million and $18.3
million for the three months ended September 30, 1996, and 1995, respectively.
The Company's investment activities included the acquisitions of office
buildings, land held for development and additions to construction in progress
for approximately $157.4 million for the three months ended September 30, 1996,
as compared to $18.4 million in acquisitions during the same period and in 1995.
Additionally, the Company invested approximately $3.9 million and $2.7 million
in its existing real estate assets for the three months ended September 30, 1996
and 1995, respectively. Net of distributions to the Company's shareholders and
minority interest, the Company's financing activities provided net cash of
$153.8 million and $13.3 million for the three months ended September 30, 1996
and 1995, respectively. For the three months ended September 30, 1996, the
Company used $216.7 million of net proceeds from the July 1996 Offering to repay
$62.0 million borrowed under the Line of Credit and to fund acquisitions. For
the three months ended September 30, 1995 the Company borrowed approximately
$14.3 million to provide adequate capital for the Company's investing
activities.
Net cash provided by operating activities was $47.4 million for the nine
months ended September 30, 1996, compared to $24.4 million for the nine months
ended September 30, 1995. The increase in net cash provided by operating
activities was primarily as a result of acquisitions made by the Company,
partially offset by decreased net income at certain of its operating properties.
The Company's investing activities used approximately $484.6 million and $33.8
million for the nine months ended September 30, 1996 and 1995, respectively. The
Company's investment activities included the acquisitions of office buildings,
land held for development and additions to construction in progress of
approximately $469.6 million and the acquisition of real estate service
contracts for approximately $1.8 million for the nine months ended September 30,
1996, as compared to acquisition activity of $18.4 million of office buildings
and $7.4 million of service contracts during the same period in 1995.
Additionally, the Company invested approximately $5.8 million and $7.7 million
in its existing real estate assets for the nine months ended September 30, 1996
and 1995, respectively. Exclusive of distributions to the Company's shareholders
and minority interest, the Company's financing activities provided net cash of
$475.0 million and $22.1 million for the nine months ended September 30, 1996
and 1995, respectively. For the nine months ended September 30, 1996, the
Company raised $461.3 million through the sale of Common Stock and borrowed
$72.0 million on the Line of Credit and repaid $56.4 million of indebtedness to
provide adequate capital for the Company's investing activities as compared
S-32
<PAGE>
to borrowing approximately $24.0 million for the nine months ended September 30,
1995.
Rental revenue and real estate service revenue have been the principal
sources of capital to fund the Company's operating expenses, debt service and
capital expenditures, excluding non-recurring capital expenditures. The Company
believes that rental revenue and real estate service revenue will continue to
provide the necessary funds for its operating expenses and debt service. The
Company expects to fund capital expenditures, including tenant concession
packages and building renovations from (a) available cash flow from operations;
(b) existing capital reserves; and (c) if necessary, credit facilities
established with third party lenders. If these sources of funds are
insufficient, the Company's ability to make expected dividends may be adversely
impacted. At September 30, 1996, the Company had cash of $22.9 million, of which
$8.6 million was restricted.
The Company's dividends are paid quarterly. Amounts accumulated for
distribution will predominantly be invested by the Company in short-term
investments that are collateralized by securities of the United States
Government or any of its agencies.
Management believes that the Company will have access to the capital
resources necessary to expand and develop its business. Accordingly, the Company
may seek to obtain funds through additional equity offerings, joint ventures,
asset sales, or debt financing in a manner consistent with its intention to
operate with a conservative borrowing policy. The Company anticipates that
adequate cash will be available to fund its operating and administrative
expenses to continuing debt service obligations, to pay dividends in accordance
with REIT requirements, and to acquire additional rental properties.
The Company believes that funds from operations is an appropriate measure of
the performance of an equity REIT because industry analysts have accepted it as
a performance measure of equity REITs. In accordance with the final NAREIT White
Paper on Funds From Operations as approved by the Board of Governors of NAREIT
on September 3, 1995, funds from operations represents net income (loss)
(computed in accordance with generally accepted accounting principles),
excluding gains (losses) from debt restructuring or sales of property, plus
depreciation and amortization of assets uniquely significant to the real estate
industry and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect funds from operations on the same basis. The Company's
funds from operations presented below conform to the new NAREIT definition of
funds from operations. Funds from operations does not represent net income or
cash flows generated from operating activities in accordance with generally
accepted accounting principles and should not be considered an alternative to
net income as an indication of the Company's performance or to cash flows as a
measure of liquidity or the Company's ability to make distributions.
The following table provides the calculation of the Company's funds from
operations on a pro forma and historical basis for the nine months ended
September 30, 1996 and for the year ended December 31, 1995 (for a discussion of
the pro forma adjustments made, see "Pro Forma Financial Information"):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
----------- ------------ ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income before minority interest................. $36,023 $19,881 $49,697 $17,284
Adjustments to derive funds from operations:
Add: Depreciation and amortization................. 37,908 24,171 49,058 17,564
Deduct: Minority interests' (non-Unit holders)
share of depreciation, amortization and net
income............................................ (763) (763) (1,658) (1,658)
----------- ------------ ----------- -------------
Funds from operations before allocation to the
minority Unit holders ............................ 73,168 43,289 97,097 33,190
Less: Funds from operations allocable to the
minority Unit holders ............................ (7,660) (6,761) (9,871) (7,876)
----------- ------------ ----------- -------------
Funds from operations allocable to CarrAmerica
Realty Corporation................................. $65,508 $36,528 $87,226 $25,314
=========== ============ =========== =============
</TABLE>
Changes in funds from operations are largely attributable to changes in net
income between the periods as previously discussed.
S-33
<PAGE>
PROPERTIES
GENERAL
The following table sets forth certain lease-related information about each
Property as of September 30, 1996.
<TABLE>
<CAPTION>
NET AVERAGE
COMPANY'S RENTABLE BASE RENT
NUMBER DATE BUILT EFFECTIVE AREA PER LEASED
OF OR PROPERTY (SQUARE PERCENT SQUARE
PROPERTY PROPERTIES REDEVELOPED OWNERSHIP FEET)(1) LEASED(2) FOOT(3) MAJOR TENANTS (20% OR MORE OF SQUARE FEET)
-------- ---------- ----------- --------- -------- --------- ------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Properties
Downtown Washington, D.C.:
International Square..... 3 1977-1982 100.0% 1,017,899 90.7% $33.02 International Monetary Fund (43%)
1730 Pennsylvania Avenue. 1 1972 100.0 229,500 96.2 38.16 Federal Deposit Insurance Corporation (52%);
King & Spalding (26%)
2550 M Street............ 1 1978 100.0 187,931 100.0 31.05 Patton Boggs (86%)
1775 Pennsylvania Avenue. 1 1975 100.0 143,981 99.1 21.87 Citibank, F.S.B. (81%)
900 19th Street.......... 1 1986 100.0 101,186 89.3 29.95 Potomac Capital Investment Corporation (42%)
1747 Pennsylvania Avenue. 1 1970 89.7 152,314 74.9 30.58 --
1255 23rd Street......... 1 1983 75.0 303,831 70.3 28.44 Seabury & Smith (20%)
2445 M Street............ 1 1986 74.0 266,902 89.4 28.02 Wilmer, Cutler & Pickering (77%)
Suburban Washington, D.C.:
One Rock Spring Plaza.... 1 1989 100.0 205,298 98.3 21.30 Sybase (27%); Caterair (22%)
Tycon Courthouse......... 1 1983 100.0 414,595 96.5 19.60 --
Three Ballston Plaza..... 1 1991 100.0 302,797 99.1 23.08 CACI (50%); Eastman Kodak (20%)
Reston Quadrangle........ 3 1987-89 100.0 261,175 99.8 20.60 Software AG (66%)
Parkway One.............. 1 1985 100.0 87,842 100.0 15.06 EIS International (71%)
Southern California:
Scenic Business Park..... 4 1985 100.0 137,436 89.7 10.76 FHP, Inc. (51%)
Harbor Corporate Park.... 4 1987 100.0 149,938 54.1 12.90 --
Plaza PacifiCare......... 1 1986 100.0 104,377 100.0 8.99 PacifiCare Health Systems, Inc(100%)
Katella Corporate Center. 1 1982 100.0 80,204 92.7 16.02 --
Warner Center ........... 12 1981-1985 100.0 342,959 94.5 22.87 --
Northern California:
AT&T Center.............. 6 1988 100.0 1,082,032 100.0 14.95 AT&T (100%)
Sunnyvale Research Plaza 3 1985 100.0 126,000 100.0 12.27 Cisco Systems (37%); AEA Credit Union (27%)
Cadence Design (31%)
Southeast Denver:
Harlequin Plaza.......... 2 1981 100.0 327,623 94.4 12.61 --
Quebec Court............. 2 1979/1980 100.0 285,829 100.0 9.61 Intelligent Electronics (45%);
Alert Centre (37%)
The Quorum .............. 2 1975 100.0 123,900 80.8 13.49 Chatfield Dean & Company (21%)
Greenwood Center......... 1 1985 100.0 74,853 94.1 15.13 --
Quebec Center ........... 3 1982 100.0 106,786 97.7 12.62 General Motors (33%)
Suburban Seattle:
Redmond East ............ 10 1988-1992 100.0 400,297 98.1 10.66 Digital Systems International(21%)
Suburban Chicago:
Parkway North ........... 2 1986-1989 100.0 514,029 96.4 16.41 Alliant Foodservice (21%); Fujisawa USA(26%)
</TABLE>
S-34
<PAGE>
<TABLE>
<CAPTION>
NET AVERAGE
COMPANY'S RENTABLE BASE RENT
NUMBER DATE BUILT EFFECTIVE AREA PER LEASED
OF OR PROPERTY (SQUARE PERCENT SQUARE
PROPERTY PROPERTIES REDEVELOPED OWNERSHIP FEET)(1) LEASED(2) FOOT(3) MAJOR TENANTS (20% OR MORE OF SQUARE FEET)
-------- ---------- ----------- --------- -------- --------- ------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Austin, Texas:
Norwood Tower................. 1 1929/1982 100.0% 111,444 86.5% $ 8.38 --
Littlefield Complex .......... 2 1910/1980 100.0 128,625 46.9 11.91 --
First State Bank Tower........ 1 1980/1995 100.0 268,244 68.0 10.76 --
Great Hills Plaza............. 1 1985 100.0 135,335 87.3 14.76 Blue Cross & Blue Shield (24%); First
USA Management, Inc. (48%
Balcones Center............... 1 1985 100.0 75,761 83.5 14.47 Media Net (37%)
Park North ................... 2 1981 100.0 132,935 98.3 15.64 Austin Regional Clinic (22%)
The Settings ................. 3 1985 100.0 136,183 95.3 16.18 Holt Rinehart &Winston, Inc.(76%)
Total Consolidated Properties
/Weighted Average 81 8,520,041 92.0% $19.73
UNCONSOLIDATED PROPERTIES
Downtown Washington, D.C.(4):
AARP Headquarters............... 1 1991 24.0 477,187 98.9 36.63 American Association of Retired Persons
(98%)
Bond Building................... 1 1986 15.0 162,097 100.0 30.79 General Services Administration
Department of Justice (93%)
1776 Eye Street................. 1 1988 5.0 212,774 92.8 35.26 --
Willard Office/Hotel............ 1 1901/1986 5.0 242,787 93.0 36.99 Vinson & Elkins (27%)
1575 Eye Street................. 1 1978 2.0 205,441 52.5 21.25 --
Suburban Washington, D.C.:
Booz-Allen & Hamilton Building.. 1 1996 50.0 222,989 100.0 14.40(4) Booz Allen & Hamilton (100%)
Total Unconsolidated Properties
/Weighted Average 6 1,523,275 91.1% $31.05
TOTAL ALL PROPERTIES/WEIGHTED
AVERAGE(5) ................. 87 10,043,316 91.9% $21.44
</TABLE>
- ----------
(1) Excludes storage space.
(2) Includes space for leases that have been executed and have commenced as of
September 30, 1996.
(3) Average base rent is based on executed and commenced leases as of September
30, 1996 and is the original base rent, including historical contractual
increases and excluding (i) percentage rents, (ii) additional rent payable
by tenants such as common area maintenance, real estate taxes and other
expense reimbursements, (iii) future contractual or contingent rent
escalations, and (iv) parking rents.
(4) Excludes the Company's 50% interest in 1717 Pennsylvania Avenue, N.W., a
property undergoing redevelopment. The renovation at this property is
substantially complete, and the property was 29% leased as of September 30,
1996. The Company contemplates placing the property in service in late
1996.
(5) Excludes 40 Properties (the Peterson Portfolio) acquired subsequent to
September 30, 1996.
S-35
<PAGE>
TENANT INFORMATION
LEASE EXPIRATIONS
The following table sets forth, on a market-by-market basis, a schedule of
lease expirations for executed leases as of September 30, 1996, for each of the
10 years beginning with 1996, for the 81 Properties owned by the Company as of
September 30, 1996 and consolidated for financial statement purposes, assuming
that no tenants exercise renewal or early termination options:
<TABLE>
<CAPTION>
TOTAL VACANT
SQUARE SQUARE
FEET FEET 1996(5) 1997 1998 1999 2000 2001
----------- ---------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Downtown Washington D.C........... 2,404,955 263,807
Expiring Square Feet:(1)......... 79,600 216,984 548,819 153,986 115,818 20,779
Percentage Expiring Square
Feet:(2)........................ 3.7% 10.1% 35.6% 7.2% 5.4% 1.0%
Annual Rent:($)(3)............... 2,877,130 7,071,301 19,497,694 4,691,261 3,622,568 784,099
Annual Rent/Square Feet:($)(4)... 36.14 32.59 35.53 30.47 31.28 37.74
Northern California............... 1,208,032 0
Expiring Square Feet:(1)......... 15,646 0 439,332 144,581 39,305 46,000
Percentage Expiring Square
Feet:(2)........................ 1.3% 0 36.4% 12.0% 3.83% 3.8%
Annual Rent:($)(3)............... 242 0 7,231,785 1,803,977 509,388 607,200
Annual Rent/Square Feet:($)(4)... 0 16.46 12.48 12.96 13.20
Suburban Washington, D.C. ........ 1,270,307 20,032
Expiring Square Feet:(1)......... 2,013 69,070 46,533 165,994 74,150 205,518
Percentage Expiring Square
Feet:(2)........................ .2% 5.5 3.7 13.3% 5.9% 16.4%
Annual Rent:($)(3)............... 28,096 1,491,261 963,049 4,020,654 1,943,063 5,216,356
Annual Rent/Square Feet:($)(4)... 13.96 20.70 20.70 24.22 26.20 25.38
Southeast Denver.................. 918,991 48,778
Expiring Square Feet:(1)......... 23,045 112,155 117,146 135,927 44,172 380,781
Percentage Expiring Square
Feet:(2)........................ 2.6% 12.9% 13.5% 15.6% 5.1% 43.8%
Annual Rent:($)(3)............... 227,543 1,562,418 1,687,757 1,793,234 645,661 6,010,778
Annual Rent/Square Feet:($)(4)... 9.87 13.14 14.41 13.19 14.62 15.79
Austin, Texas..................... 988,527 207,355
Expiring Square Feet:(1)......... 88,704 127,900 175,158 65,076 89,765 68,325
Percentage Expiring Square
Feet:(2)........................ 11.4% 15.4% 22.4% 8.4% 11.5% 8.7%
Annual Rent:($)(3)............... 915,898 1,573,804 3,007,857 1,060,029 1,787,186 1,231,853
Annual Rent/Square Feet:($)(4)... 10.33 12.34 17.17 16.29 19.91 18.03
Southern California............... 814,914 107,651
Expiring Square Feet:(1)......... 12,258 50,136 67,612 82,647 126,464 96,865
Percentage Expiring Square
Feet:(2)........................ 1.73% 7.0% 9.5% 11.7% 17.9% 13.7%
Annual Rent:($)(3)............... 132,795 854,830 1,134,318 1,272,820 2,168,829 1,865,328
Annual Rent/Square Feet:($)(4)... 10.83 17.05 16.78 15.40 17.15 18.80
Suburban Chicago.................. 514,029 18,740
Expiring Square Feet:(1)......... 7,228 39,960 122,915 11,550 178,822 94,957
Percentage Expiring Square
Feet:(2)........................ 1.5% 8.1% 24.8% 2.3% 36.1% 19.2%
Annual Rent:($)(3)............... 31,691 1,126,295 2,577,111 275,989 4,957,525 2,087,868
Annual Rent/Square Feet:($)(4)... 4.39 28.19 20.97 23.90 27.72 21.99
Suburban Seattle.................. 400,286 7,701
Expiring Square Feet:(1)......... 7,138 57,554 91,002 86,257 95,682 0
Percentage Expiring Square
Feet:(2)........................ 1.8% 14.7% 23.2% 22.0% 24.4% 0
Annual Rent:($)(3)............... 68,014 687,365 1,032,064 1,160,076 1,495,841 0
Annual Rent/Square Feet:($)(4)... 9.53 11.94 11.34 13.45 15.63 0
Totals:
Expiring Square Feet............ 8,520,041 674,064 235,632 673,759 1,608,517 846,018 764,178 913,225
Percentage Expiring Square Feet. 3.0% 8.6% 20.5% 10.8% 9.7% 11.5%
Annual Rent($).................. $4,523,367 $14,278,582 $37,131,635 $16,078,040 17,130,061 17,759,178
Annual Rent/Square Feet ($)..... 19.20 21.19 23.08 19.00 22.42 19.45
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
2006 AND
2002 2003 2004 2005 THEREAFTER
----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Downtown Washington D.C...........
Expiring Square Feet:(1)......... 373,500 61,209 135,733 44,417 390,303
Percentage Expiring Square
Feet:(2)........................ 17.5% 2.9% 6.3% 12.0% 18.2%
Annual Rent:($)(3)............... 13,406,640 2,676,068 4,667,846 1,754,153 15,538,128
Annual Rent/Square Feet:($)(4)... 35.89 43.72 34.39 38.49 39.81
Northern California...............
Expiring Square Feet:(1)......... 0 144,242 0 0 378,926
Percentage Expiring Square
Feet:(2)........................ 0 11.9% 0 0 31.4%
Annual Rent:($)(3)............... 0 1,898,842 0 0 4,919,990
Annual Rent/Square Feet:($)(4)... 0 13.16 0 0 12.98
Suburban Washington, D.C. ........
Expiring Square Feet:(1)......... 154,111 118,350 79,789 223,376 111,371
Percentage Expiring Square
Feet:(2)........................ 12.3% 9.5 6.4 17.9% 8.9%
Annual Rent:($)(3)............... 3,989,990 2,493,810 1,949,100 5,891,869 3,031,988
Annual Rent/Square Feet:($)(4)... 25.89 21.07 24.44 26.38 27.22
Southeast Denver..................
Expiring Square Feet:(1)......... 0 56,987 0 0 0
Percentage Expiring Square
Feet:(2)........................ 0 6.5% 0 0 0
Annual Rent:($)(3)............... 0 875,316 0 0 0
Annual Rent/Square Feet:($)(4)... 0 15.36 0 0 0
Austin, Texas.....................
Expiring Square Feet:(1)......... 144,299 14,579 2,171 5,195
Percentage Expiring Square
Feet:(2)........................ 18.5% 1.9% 0 0.3% 0.7%
Annual Rent:($)(3)............... 2,941,749 331,270 0 48,982 133,777
Annual Rent/Square Feet:($)(4)... 20.39 22.72 0 22.56 25.75
Southern California...............
Expiring Square Feet:(1)......... 104,377 76,677 0 17,677 72,550
Percentage Expiring Square
Feet:(2)........................ 14.8% 10.8% 0 2.5% 10.3%
Annual Rent:($)(3)............... 1,056,900 1,486,033 0 445,062 2,174,748
Annual Rent/Square Feet:($)(4)... 10.13 19.38 0 25.18 29.98
Suburban Chicago..................
Expiring Square Feet:(1)......... 15,436 12,921 11,500 0 0
Percentage Expiring Square
Feet:(2)........................ 3.1% 2.6% 2.3% 0 0
Annual Rent:($)(3)............... 267,592 291,327 176,931 0 0
Annual Rent/Square Feet:($)(4)... 17.34 22.55 15.39 0 0
Suburban Seattle..................
Expiring Square Feet:(1)......... 0 0 0 54,952 0
Percentage Expiring Square
Feet:(2)........................ 0 0 0 14.00% 0
Annual Rent:($)(3)............... 0 0 0 940,200 0
Annual Rent/Square Feet:($)(4)... 0 0 0 17.11 0
Totals:
Expiring Square Feet............ 791,723 484,965 227,022 342,593 958,345
Percentage Expiring Square Feet. 10.1% 5.2% 2.9% 4.4% 12.2%
Annual Rent($).................. 21,662,871 10,052,666 6,794,477 9,080,288 25,796,531
Annual Rent/Square Feet ($)..... 27.36 20.73 29.93 28.50 26.92
</TABLE>
- ----------
(1) Total area in square feet covered by such leases.
(2) Percent of total square feet represented by such leases.
(3) Annualized base rental income represented by such leases in the year of
expiration plus 1995 tenant payments on account of real estate tax and operating
expense escalations except leases with CPI increases in lieu of expense
recoveries.
(4) Calculated as annual rent divided by square feet.
(5) 1996 lease expirations include an aggregate of 42,213 expiring square
feet occupied by the Company's management personnel, with respect to which no
rent is paid.
S-36
<PAGE>
TENANTS BY INDUSTRY
The following table breaks down by industry the tenants at the 81 Properties
that were owned by the Company as of September 30, 1996 and consolidated for
financial statement purposes:
PERCENT ANNUALIZED PERCENT
OF TOTAL BASE RENT OF TOTAL
SQUARE SQUARE (IN ANNUALIZED
INDUSTRY NAME FOOTAGE(1) FOOTAGE THOUSANDS) BASE RENT
- --------------------------- ----------- ---------- -------------- -------------
Technology &
Communications............. 2,574,000 32.8% $41,252 26.6%
Professional Services ..... 1,663,000 21.2 36,889 23.8
Financial Services......... 1,211,000 15.5 21,492 13.8
Quasi-Governmental......... 465,000 6.0 14,991 9.7
Government (Federal &
State)..................... 301,000 3.9 8,647 5.6
Government Contractors .... 234,000 3.0 4,891 3.1
Not-For-Profit............. 215,000 2.7 4,713 3.0
Retail..................... 168,000 2.1 3,841 2.5
Other...................... 1,006,000 12.8 18,421 11.9
- ----------
(1) Excludes vacant space of 683,000 square feet.
TEN LARGEST TENANTS
The following table sets forth the ten largest tenants at the 81 Properties
that were owned by the Company as of September 30, 1996 and consolidated for
financial statement purposes:
TOTAL
PERCENT ANNUALIZED PERCENT
OF TOTAL BASE RENT(1) OF TOTAL
ANNUALIZED (IN SQUARE SQUARE
TENANT NAME BASE RENT THOUSANDS) FOOTAGE FOOTAGE
- ----------------------------- ------------- ------------- ----------- ---------
AT&T......................... 10.6% $16,181 1,082,032 12.7%
International Monetary
Fund(2)...................... 9.6 14,673 435,091 5.1
Wilmer, Cutler & Pickering .. 3.7 5,631 210,432 2.5
Patton Boggs................. 3.4 5,184 161,228 1.9
Federal Deposit Insurance
Co........................... 3.1 4,678 119,700 1.4
Software AG.................. 2.1 3,233 173,419 2.0
CACI......................... 2.0 3,073 152,720 1.8
Fujisawa USA, Inc............ 1.9 2,959 135,286 1.6
Citibank..................... 1.8 2,687 118,834 1.4
King & Spalding.............. 1.5 2,350 58,821 0.7
- ----------
(1) Total annualized base rent is based on executed and commenced leases as of
September 30, 1996. Total annualized base rent equals total original base
rent, including historical contractual increases and excluding (i)
percentage rents, (ii) additional rent payable by tenants such as common
area maintenance, real estate taxes, and other expense reimbursements,
(iii) future contractual or contingent rent escalations, and (iv) parking
rents.
(2) Under its existing lease, the International Monetary Fund ("IMF") was to
vacate 375,000 square feet in 1998 to occupy as owner a new building
currently under construction. The Company and IMF are currently negotiating
a restructured lease which would provide for an extension of IMF's
occupancy of substantially all of the space it currently occupies to May
1999 and then an incremental move-out from 160,000 square feet which will
not occur until, at the earliest, 2001, or at the latest, 2004.
S-37
<PAGE>
DOWNTOWN WASHINGTON, D.C. MARKET
Ten of the Company's consolidated properties (containing 2.4 million square
feet and representing approximately 32.6% of the Company's pro forma rental
revenue for the nine months ended September 30, 1996 and 17.7% of the aggregate
square footage of the Properties and the pending acquisitions described under
"Recent Acquisition and Development Activity") are located in the downtown
Washington, D.C. office market. This office market, which is comprised of 76
million square feet, had a vacancy rate of 10.1%, 9.0%, 8.1% and 9.5% as of
December 31 in each of 1992 through 1995, respectively. As of June 30, 1996, the
vacancy rate for downtown Washington, D.C. was 10.6%. The Company's downtown
Washington, D.C. properties are generally considered to be Class A/B+
properties. The Class A vacancy rate in Washington, D.C. was 10.1% as of June
30, 1996.
In 1993 and 1994, the Washington, D.C. market had positive net absorption of
895,000 square feet and 669,000 square feet, respectively. In 1995, however,
Washington, D.C. experienced additions to vacancy of 741,000 square feet
primarily as a result of the delivery of approximately 510,000 square feet of
new office space and the addition to availability of large and medium-sized
blocks of space. The Washington, D.C. office market is currently experiencing
steady demand from law firms, professional service firms and associations. The
federal government's moratorium established in 1995 on leasing new space has now
ended; federal government demand for swing space has increased recently.
Notwithstanding the Washington, D.C. market's performance in the past year, the
Company believes that the supply/demand characteristics of the Washington, D.C.
market will improve and that its long-term growth prospects are strong.
UNCONSOLIDATED PROPERTIES
The following table sets forth certain information related to the seven
Properties in which the Company has an equity investment:
SELECTED OPERATING STATEMENT INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FUNDS FROM
DEPRECIATION NET OPERATIONS
COMPANY'S RENTAL & INTEREST AND OTHER INCOME CONTRIBUTION TO
PROPERTY OWNERSHIP OTHER REVENUE EXPENSE AMORTIZATION EXPENSES (LOSS) THE COMPANY(1)
- ----------------------------- ----------- --------------- ---------- -------------- ---------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
AARP Headquarters............ 24% $21,371 $12,593 $3,334 $ 6,114 $ (670) $639
1776 Eye Street.............. 5 7,943 4,456 1,393 2,599 (504) 30
Willard Office/Hotel......... 5 43,530 8,315 4,440 28,642 2,132 --
1575 Eye Street.............. 2 5,759 2,329 538 2,239 652 --
Bond Building................ 15 5,281 3,620 1,643 1,592 (1,574) --
Booz-Allen & Hamilton
Building..................... 50 (2) (2) (2) (2) (2) --
1717 Pennsylvania Avenue .... 50 (2) (2) (2) (2) (2) --
</TABLE>
SELECTED BALANCE SHEET INFORMATION
AS OF SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MATURITY OF
COMPANY'S RENTAL TOTAL MORTGAGE INTEREST MORTGAGE
PROPERTY OWNERSHIP PROPERTY, NET CASH ASSETS PAYABLE RATE PAYABLE
- ------------------------------ ----------- --------------- -------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AARP Headquarters............. 24% $111,517 $2,082 $137,331 $146,506 8.07% 7/31/02
1776 Eye Street............... 5 35,999 1,418 39,994 44,168 10.00 10/1/23
Willard Office/Hotel.......... 5 75,342 5,993 87,246 88,008 9.40 11/1/01
1575 Eye Street............... 2 9,037 3,103 12,934 22,717 10.15 9/10/21
Bond Building................. 15 15,589 681 17,131 37,542 9.53 11/1/96
Booz-Allen & Hamilton
Building...................... 50 26,842 390 30,578 24,435 7.00 8/1/13
1717 Pennsylvania Avenue ..... 50 80,410 0 171 -- -- --
</TABLE>
- ----------
(1) Represents the Funds from Operations Contribution to the Company from each
property included in funds from operations before minority interest of
holders of Units as set forth in "Summary -- Summary Selected Financial
Information."
(2) Property was under construction as of December 31, 1995.
S-38
<PAGE>
HISTORICAL RECURRING CAPITAL EXPENDITURES, TENANT IMPROVEMENT COSTS AND
TENANT LEASING COSTS
The following table sets forth annual and per square foot recurring capital
expenditures, tenant improvement costs and tenant leasing costs attributable to
existing leased space for the period from February 16, 1993 (inception of
operations) to December 31, 1993, the years ended December 31, 1994 and 1995,
and the nine months ended September 30, 1996 for the Properties consolidated in
the Company's financial statements during the periods presented. In light of the
Company's change in business strategy away from downtown office buildings and
toward suburban office buildings, the Company believes that the historical
capital expenditures, tenant improvement costs and tenant leasing costs set
forth below are not indicative of the Company's future recurring capital
expenditures, tenant improvement costs and tenant leasing costs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30,
1993 1994 1995 1996
-------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Capital Expenditures:
Capital Expenditures (in thousands)............. $9,964 $5,177 $1,815 $4,255
Per square foot................................. 5.00 2.09 .65 .77
Tenant Improvement Costs and Tenant Leasing
Costs:
Tenant Improvement Costs (in thousands)......... 8,510 5,524 2,582 2,274
Per square foot leased.......................... 32.22 19.65 15.72 9.37
Tenant Leasing Costs (in thousands) ............ 1,757 866 632 599
Per square foot leased.......................... 4.92 3.08 3.85 2.47
Total per square foot.......................... 37.14 22.73 19.57 11.84
</TABLE>
DEBT FINANCING
As of September 30, 1996, the Company had outstanding existing long-term
indebtedness in an aggregate principal amount of $426.1 million, of which $72.0
million (all of which represents draws under the Line of Credit), or 16.9%, bore
interest at a floating interest rate. At that date, the Company's fixed rate
debt bore a weighted average interest rate of 8.3% and had a weighted average
maturity of 6.2 years (assuming loans callable before maturity are called as
early as possible).
Mortgage Debt
The existing mortgage indebtedness on the Properties that were owned by the
Company as of September 30, 1996 and consolidated for financial statement
purposes is set forth in the table below:
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE ESTIMATED
AS OF ANNUAL DEBT BALANCE
9/30/96 SERVICE DUE AT
INTEREST (IN (IN MATURITY MATURITY
PROPERTY RATE THOUSANDS) THOUSANDS) DATE (IN THOUSANDS)
- ------------------------------------------- ---------- -------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
International Square, 1730 Pennsylvania
Avenue and 1255 23rd Street (1) ......... 8.25% $183,500 $15,148 2/1/03 $170,113
900 19th Street............................ 8.25 17,020 1,656 7/15/19 (2) (2)
1747 Pennsylvania Ave ..................... 9.50 15,674 1,730 7/10/17 (3) (3)
2445 M Street.............................. 8.90 38,471 4,646 6/1/02 26,925
1775 Pennsylvania Ave ..................... 7.50 6,375 586 2/1/99 6,109
Parkway North.............................. 7.96 29,250 2,328 12/1/03 29,250
Redmond East............................... 8.38 28,110 2,648 1/1/06 24,022
Warner Center.............................. 7.40 26,000 1,924 12/1/00 26,000
First State Bank Building.................. 7.38 9,669 864 3/1/99 9,244
Total (4)................................. $354,069 $31,530
============== ==============
</TABLE>
- ----------
(1) Consists of four loans secured by these three Properties. Interest Rate
represents the weighted average interest rate on the four loans.
(2) Note is callable by the lender after July 1, 2004. The estimated principal
balance at July 1, 2004 will be $14,262,000.
(3) Note is callable by the lender after June 30, 2002. The estimated principal
balance at June 30, 2002 will be $13,840,000.
(4) Excludes debt assumed in connection with the acquisition of Peterson
Portfolio and proposed to be assumed in connection with the acquisition of
the NELO/Orchard Portfolio. The Peterson Portfolio loan is in the principal
amount of approximately $22.2 million, bears interest at a rate of 7.20%
per annum and matures in January 2006. The NELO/Orchard Portfolio loan is
in the principal amount of approximately $40.9 million, bears interest at a
rate of 8.25% per annum and matures in 2001.
S-39
<PAGE>
Line of Credit
In May 1996, the Company entered into a revolving credit agreement providing
for unsecured borrowings of up to $215 million. As of September 30, 1996, $188
million was available to be drawn under the Line of Credit, of which $72 million
had been drawn by the Company. In October 1996, the maximum amount available for
borrowings under the Line of Credit was increased to $325 million.
Borrowings under the Line of Credit bear interest at a floating rate of 175
basis points over LIBOR (which rate will be reduced in the event the Company
obtains an investment grade rating on its senior, unsecured debt). The Line of
Credit contains a number of financial and other covenants with which the Company
must comply, including, but not limited to, covenants relating to ratios of
annual EBITDA (earnings before interest, taxes, depreciation and amortization)
to interest expense, annual EBITDA to debt service, and total debt to tangible
fair market value of the Company's assets, and restrictions on the ability of
the Company to make dividend distributions in excess of 90% of funds from
operations. Availability under the Line of Credit is also limited to a specified
percentage of the Company's unsecured Properties.
S-40
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
directors, executive officers and certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES HELD
- ----------------------- ----- -----------------------------------------------------
<S> <C> <C>
Oliver T. Carr, Jr. ... 71 Chairman of the Board and Chief Executive Officer
Thomas A. Carr......... 38 President, Chief Operating Officer and Director
Robert O. Carr......... 47 President of Carr Real Estate Services, Inc. and
Director
David Bonderman........ 53 Director
Andrew F. Brimmer...... 70 Director
A. James Clark......... 68 Director
Anthony R. Manno, Jr. . 44 Director
Caroline S. McBride ... 43 Director
J. Marshall Peck....... 44 Director
George R. Puskar....... 53 Director
William D. Sanders .... 54 Director
Wesley S. Williams,Jr.. 53 Director
Brian K. Fields........ 37 Chief Financial Officer
Philip L. Hawkins...... 40 Managing Director of Asset Management
Robert E. Peterson .... 44 Regional Managing Director, Southeast Region
Robert G. Stuckey...... 34 Managing Director of Acquisitions and Development
Paul R. Adkins......... 38 Vice President, Market Officer -- Washington, D.C.
Andrea F. Bradley...... 36 Vice President, General Counsel and Corporate
Secretary
Clete Casper........... 37 Vice President, Market Officer -- Suburban Seattle
Joel DeSpain........... 45 Vice President, Market Officer -- Austin, Texas
Karen B. Dorigan....... 31 Vice President -- Land Due Diligence
J. Thad Ellis.......... 36 Vice President, Market Officer -- Suburban Atlanta
John S. Herr........... 40 Vice President, Market Officer -- Northern
California
Austin W. Lehr ........ 35 Vice President, Market Officer -- Southeast Denver
Dwight L. Merriman ... 35 Vice President, Market Officer -- Southern
California
Gerald J. O'Malley .... 52 Vice President, Market Officer -- Suburban Chicago
James D. Peterson...... 49 Vice President, Market Officer -- Southern Florida
Matthew L. Richardson . 37 Senior Vice President of Carr Development &
Construction, Inc.
Debra A. Volpicelli ... 32 Treasurer and Controller
Joseph D. Wallace...... 33 Vice President -- Building Due Diligence
James S. Williams...... 39 Senior Vice President of Carr
Development & Construction, Inc.
</TABLE>
S-41
<PAGE>
The following are biographical summaries of the Directors, Executive Officers
and certain key employees of the Company:
DIRECTORS
Oliver T. Carr, Jr., has been the Chief Executive Officer and Chairman of the
Board of Directors of the Company since its commencement of operations. Mr. Carr
founded OCCO in 1962 and since that time has been its Chairman of the Board and
a director. In addition, Mr. Carr has served as President of OCCO since February
1993. He was Chairman of the Board of Trustees of the George Washington
University until May 1995 and currently is Chairman of the Community Partnership
for The Prevention of Homelessness.
Thomas A. Carr has been President and a director of the Company since its
commencement of operations. Mr. Carr has also been the Chief Operating Officer
of the Company since May 1995. Prior to that time, Mr. Carr was the Chief
Financial Officer since the Company's commencement of operations. Mr. Carr was
President of Carr Partners, Inc., a financial services affiliate of OCCO, from
1991 until February 1993, when Carr Partners, Inc. ceased operations. Prior to
becoming President of Carr Partners, Inc., Mr. Carr was Vice President of
Suburban Development and Regional Development Partner for Montgomery County for
OCCO, beginning in 1985. Mr. Carr is a director of OCCO. Mr. Carr holds a
Masters degree in Business Administration from Harvard Business School, and a
Bachelor of Arts degree from Brown University. Mr. Carr is a member of the Board
of Governors of the National Association of Real Estate Investment Trusts and a
director of Lafayette Square Partners, Inc. Mr. Carr is the son of Oliver T.
Carr, Jr. and the brother of Robert O. Carr.
Robert O. Carr has been a director of the Company and President and a
director of Carr Real Estate Services, Inc., since the commencement of their
operations. Mr. Carr is a director of OCCO and, from 1987 until February 1993,
Mr. Carr served as President of OCCO. Mr. Carr joined OCCO in 1973 and has
served in a number of positions. Mr. Carr is a member of the Greater Washington
Board of Trade, The District of Columbia Public Affairs Council and The Urban
Land Institute. Mr. Carr holds a Bachelor of Arts degree from Trinity College.
Mr. Carr is the son of Oliver T. Carr, Jr. and the brother of Thomas A. Carr.
David Bonderman has been a director of the Company since its commencement of
operations. He is the managing general partner of TPG Partners, L.P., a private
investment partnership. From October 1971 through June 1983, Mr. Bonderman was
an associate and then partner in the law firm of Arnold & Porter, Washington,
D.C. From July 1983 through August 1992, Mr. Bonderman served as the Vice
President and Chief Operating Officer of Keystone, Inc. (formerly the Robert M.
Bass Group, Inc.). Mr. Bonderman also serves as a director of Bell & Howell
Holdings Company, National Re Corporation, American Savings Bank, F.A., National
Education Corporation and Continental Airlines, Inc. Mr. Bonderman holds a
Bachelor of Arts degree from University of Washington and an L.L.B. degree from
Harvard University.
Andrew F. Brimmer has been a director of the Company since its commencement
of operations. He has been the President of Brimmer & Company, Inc., an economic
and financial consulting firm, since 1976. During 1995, Dr. Brimmer was
appointed chairman of the District of Columbia Financial Control Board. Dr.
Brimmer was a member of the Board of Governors of the Federal Reserve System
from 1966 through 1974. He is also the Wilmer D. Barrett Professor of Economics
at the University of Massachusetts--Amherst. Dr. Brimmer serves as a director of
BankAmerica Corporation and Bank of America, BlackRock Investment Income Trust,
Inc. (and other funds), PHH Corporation, E.I. du Pont de Nemours & Company,
Navistar International Corporation, Gannett Company and Airborne Express. Dr.
Brimmer received a B.A. and a masters degree in Economics from University of
Washington and holds a Ph.D. in Economics from Harvard University.
A. James Clark has been a director of the Company since its commencement of
operations. He has been Chairman of the Board and President of Clark
Enterprises, Inc., a Bethesda, Maryland-based company involved in real estate,
communications, and commercial and residential construction, since 1972. The
Clark Construction Group, Inc. a subsidiary of Clark Enterprises, Inc., is one
of the nation's largest general building contractors. Mr. Clark is a member of
the University of Maryland Foundation, and serves on the Board of Trustees of
The Johns Hopkins University. He is also a member of the PGA Tour Investments
Policy Board and a director of Lockheed Martin Corporation and Potomac Electric
Power Company. Mr. Clark is a graduate of University of Maryland.
S-42
<PAGE>
Anthony R. Manno, Jr., has been a director of the Company since May 1, 1996.
Mr. Manno is a Managing Director of Security Capital Investment Research
Incorporated, an affiliate of Security Capital Group, where he is responsible
for corporate acquisitions. Prior to joining Security Capital Investment
Research Incorporated, Mr. Manno was a managing director of LaSalle Partners
Limited where he served in various capacities, including client manager for
LaSalle Partners Limited's joint venture partner, Dai-ichi Mutual Life Insurance
Company; manager of LaSalle Partners Limited's property finance group; and a
member of LaSalle Partners Limited's investment committee. Prior thereto, Mr.
Manno was a commercial real estate loan officer of The First National Bank of
Chicago. Mr. Manno is a Certified Public Accountant. Mr. Manno received his
Masters in Business Administration, with a concentration in Finance, from the
University of Chicago School of Business and his M.A. and B.A. in Economics from
Northwestern University.
Caroline S. McBride has been a director of the Company since July 26, 1996.
Mrs. McBride is a Managing Director of Security Capital Investment Research
Incorporated, where she is responsible for investment oversight of strategic
investments in public and private U.S. real estate operating companies. Until
June 1, 1996, Mrs. McBride was the director of private market investments for
the IBM Retirement Fund where she was responsible for a $3.7 billion real estate
portfolio primarily invested in retail, office and industrial properties and a
private equity portfolio of buy-out funds, venture capital, mezzanine debt and
oil and gas. She joined the IBM Retirement Fund in 1992. Prior to that, Mrs.
McBride was director of finance, investments and asset management for IBM's
corporate real estate division where she was responsible for investments in real
estate joint ventures worldwide as well as the disposition of surplus corporate
real estate property. Mrs. McBride is on the Board of Directors of the Pension
Real Estate Association (PREA) and the Real Estate Research Institute. Mrs.
McBride received her Masters in Business Administration from New York University
and a Bachelor of Arts degree from Middlebury College.
J. Marshall Peck has been a director of the Company since June 12, 1996. Mr.
Peck is a Managing Director of Security Capital Investment Research
Incorporated, where he is responsible for the operations and oversight of
strategic investments. Prior to joining Security Capital Investment Research
Incorporated in May 1996, Mr. Peck was a Managing Director of LaSalle Partners
Limited since January 1989, where he served in various capacities over his
14-year tenure with LaSalle Partners Limited, with responsibility for operating
groups within both the investment and services businesses and was a member of
its management committee. Prior thereto, Mr. Peck held various marketing and
management positions in the Data Processing Division of IBM. Mr. Peck is past
Chairman of the Pension Real Estate Association and serves on the National Real
Estate Advisory Board of the Nature Conservancy. Mr. Peck received his B.A.
degree from University of North Carolina at Chapel Hill.
George R. Puskar has been a director of the Company since its commencement of
operations. He has served as the Chairman and Chief Executive Officer of
Equitable Real Estate Investment Management, Inc. ("Equitable Real Estate")
since 1988 and a vice president of The Equitable Life Assurance Society of the
United States ("ELAS"). Mr. Puskar joined ELAS in 1966 in its local field office
in Pittsburgh. Mr. Puskar became the President of Equitable Real Estate, a
diversified real estate organization which is a subsidiary of ELAS, in 1984. Mr.
Puskar is a board member of the International Council of Shopping Centers, Clark
Atlanta University, The Atlanta Chamber of Commerce, the Vice Chairman and a
board member of the National Realty Committee, and a member of the Advisory
Board of the Wharton School's Real Estate Center in Philadelphia.
William D. Sanders has been a director of the Company since May 1, 1996. Mr.
Sanders is the Founder and Chairman of Security Capital Group. Mr. Sanders
retired on January 1, 1990, as chief executive officer of LaSalle Partners
Limited, a firm he founded in 1968. LaSalle Partners Limited is a major real
estate services firm representing financial institutions and corporations in the
United States and abroad with more than 700 employees. Mr. Sanders is a director
of R.R. Donnelley & Sons Company and was formerly a director of Continental Bank
Corporation, Continental Bank, N.A., King Ranch, Inc., LaSalle Partners Limited
and its affiliates and Lone Star Technologies, Inc. Mr. Sanders is a former
trustee and member of the executive committee of the University of Chicago and a
former trustee fellow of Cornell University. Mr. Sanders received his Bachelor
of Science from Cornell University.
S-43
<PAGE>
Wesley S. Williams, Jr., has been a director of the Company since its
commencement of operations. Mr. Williams has been a partner of the law firm of
Covington & Burling since 1975. He was adjunct professor of real estate finance
law at the Georgetown University Law Center from 1971 to 1973 and is a
contributing author to several texts on banking law and on real estate finance
and investment. Mr. Williams is also on the Editorial Advisory Board of the
District of Columbia Real Estate Reporter. Mr. Williams serves as the Vice
Chairman of the Boards of Directors of the Blackstar Communications Corporations
of Florida, Michigan, Oregon and Washington, D.C. Mr. Williams also is Vice
Chairman and co-Chief Executive Officer of the Board of Directors of The
Lockhart Companies, Inc., and is a member of the Executive Committee of the
Board of Trustees of Penn Mutual Life Insurance Company. Mr. Williams received a
B.A. and J.D. from Harvard University, an M.A. from the Fletcher School of Law
and Diplomacy and an L.L.M. from Columbia University.
EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES OF THE COMPANY
Brian K. Fields is the Chief Financial Officer of the Company and has been
since May 1995. Prior to that time, Mr. Fields served as Vice President,
Treasurer and Controller of the Company since the Company's commencement of
operations. Mr. Fields served as Treasurer and Controller of OCCO from 1990 to
February 1993. Prior to that time, Mr. Fields was a Senior Manager with KPMG
Peat Marwick LLP in Washington, D.C. Mr. Fields was employed by KPMG Peat
Marwick LLP for eight years. He holds a Bachelor of Science degree in Accounting
from Virginia Tech and is a Certified Public Accountant.
Philip L. Hawkins is the Managing Director of Asset Management of the Company
and has been since February 12, 1996. Prior to that time, Mr. Hawkins was
employed by LaSalle Partners Limited since 1982. Mr. Hawkins served as the
Senior Vice President, Eastern Division, Asset Management Group since 1995; the
Senior Vice President, Northeast Region, Asset Management Group from 1990 to
1994 and in other asset management positions prior to that time. Mr. Hawkins
holds a Masters in Business Administration from the University of Chicago School
of Business and a Bachelor of Arts degree from Hamilton College.
Robert E. Peterson is the Regional Managing Director, Southeast Region for
the Company and has been since November 1, 1996. Mr. Peterson has over 23 years
of real estate experience. Mr. Peterson's most recent experience includes 18
years as President of Peterson Properties, which he co-founded in 1978. Prior to
forming Peterson Properties, Mr. Peterson was Vice President of Arthur Rubloff &
Company, where he spent five years specializing in office and industrial leasing
and investment property brokerage. Mr. Peterson is a former member of the
Society of Industrial and Office Realtors and serves on the Developer Advisory
council for the Georgia Chapter of the National Association of Industrial and
Office Parks. He graduated from University of North Carolina, Chapel Hill, with
a B.S. in Business Administration.
Robert G. Stuckey is the Managing Director of Acquisitions and Development of
the Company and has been since February 26, 1996. Prior to that time, Mr.
Stuckey was employed by Security Capital Industrial Trust, an affiliate of
Security Capital Group, since January 1993 as a Senior Vice President managing
the operations of the development group since November 1994 and as a Vice
President supervising acquisition due diligence from May 1993 to November 1994.
Prior to that time, Mr. Stuckey had seven years of experience with Trammell Crow
Company. His most recent position there was as Chief Financial Officer for
Trammel Crow Company NE, Inc. Mr. Stuckey holds a Masters in Business
Administration from Harvard Business School and a Bachelor of Science in Finance
from University of Nebraska.
Paul R. Adkins is the Company's Vice President, Market Officer for
Washington, D.C. and has been since August 1996. Mr. Adkins has been with the
Company for over 14 years. Mr. Adkins' most recent experience with the Company
includes 2 years as Vice President of Acquisitions. Prior to that, Mr. Adkins
served in a variety of other capacities with the Company, with over 12 years in
commercial real estate leasing. Mr. Adkins holds a Bachelor of Arts degree from
Bucknell University.
Andrea F. Bradley is Vice President, General Counsel and Corporate Secretary
of the Company and has been since August 1993. Mrs. Bradley was an attorney with
the law firm of Shaw, Pittman, Potts and Trowbridge from 1991 to August 1993 and
an attorney with the law firm of Paul, Hastings,
S-44
<PAGE>
Janofsky & Walker from 1985 to 1991, where she practiced primarily corporate
finance and securities law. Mrs. Bradley holds a Juris Doctor from University of
California at Los Angeles and an A.B. degree in American Studies from Stanford
University.
Clete Casper is the Company's Vice President, Market Officer for suburban
Seattle and has been since July 1996. Mr. Casper has over 10 years experience in
the real estate and marketing field. Mr. Casper's most recent experience
includes 1 year as a Senior Associate with CB Commercial Real Estate Group,
Incorporated, Seattle, Washington. Prior to that, Mr. Casper was with Sabey
Corporation in Seattle, Washington serving in the following capacities: 4 years
as Development Manager and 5 years as a Marketing Associate. Mr. Casper is a
graduate of Washington State University.
Joel DeSpain is the Company's Vice President, Market Officer for Austin,
Texas and has been since August, 1996. Mr. DeSpain has over 18 years experience
in the real estate and marketing field. Mr. DeSpain's most recent experience
includes 2 years as a Vice President of Littlefield Real Estate Company in
Austin, Texas. Prior to that, Mr. DeSpain spent 2 years with Faison-Stone in
Austin, Texas as Vice President, 5 years with Grubb & Ellis in Austin, Texas as
President, 2 years with Paragon Properties in Austin, Texas as Executive Vice
President, and 7 years with The Horne Company Realtors in Houston, Texas as
Marketing Director. Mr. DeSpain holds a Doctor of Jurisprudence from South Texas
College of Law and a BBA in marketing from University of Houston.
Karen B. Dorigan is Vice President -- Land Due Diligence of the Company and
has been since January 1996. Prior to that time and for more than 9 years, Mrs.
Dorigan served in a variety of capacities in OCCO's development business. Mrs.
Dorigan holds a Bachelor of Science degree in Economics from the University of
Pennsylvania, Wharton School.
J. Thad Ellis is the Company's Vice President, Market Officer for suburban
Atlanta and has been since November 1996. Mr. Ellis has over 12 years experience
in the real estate field. Mr. Ellis' most recent experience includes 10 years
with Peterson Properties where his primary responsibility was to oversee and
coordinate the leasing and property management for the management services
portfolio. Prior to that, Mr. Ellis spent two years with another Atlanta
development company. Mr. Ellis is a graduate of Washington & Lee University and
is involved with the National Association of Industrial and Office Parks and
Atlanta's Chamber of Commerce and is also on the Advisory Board of Black's
Guide.
John S. Herr is the Company's Vice President, Market Officer for Northern
California and has been since September 1996. Mr. Herr has over 12 years
experience in the real estate and marketing field. Mr. Herr's most recent
experience includes 2 1/2 years as the President and Chief Executive Officer of
Simeon Commercial Properties in San Francisco, California. Prior to that, Mr.
Herr spent 8 years with Trammell Crow serving in the following capacities: 2
years as Principal and Executive Vice President in San Francisco; 3 years as
Partner in Richmond, Virginia; and 4 years as Marketing Representative in
Washington, D.C. Mr. Herr holds a Masters in Business Administration from
Stanford University and a Bachelors degree from the U.S.
Naval Academy.
Austin W. Lehr is the Company's Vice President, Market Officer for Southeast
Denver and has been since July 1996. Mr. Lehr has over 10 years experience in
the real estate and marketing field. Mr. Lehr's most recent experience includes
4 years as a Vice President with Southwest Value Partners and Affiliates in
Phoenix, Arizona. Prior to that, Mr. Lehr spent 4 years with Draper and Kramer,
Incorporated in Washington, D.C. as the Director of Development and Marketing,
and 2 years as a Vice President at Guaranty Federal Savings and Loan in Dallas,
Texas. Mr. Lehr holds a Master of Management Degree from Northwestern University
and a Bachelor of Arts Degree from Williams College.
Dwight L. Merriman is the Company's Vice President, Market Officer for
Southern California and has been since September 1, 1996. Mr. Merriman has over
12 years experience in the real estate and marketing field. Mr. Merriman's most
recent experience includes 1 year as Vice President with Security Capital
Industrial in Irvine, California. Prior to that, Mr. Merriman spent 11 years
with Overton, Moore in Los Angeles in the following capacities: 5 years as the
Director of Marketing -- Asset Management (Partner), 4 years as Director of
Marketing -- Development (Partner) and 2 years as a Marketing Associate. Mr.
Merriman holds a Masters in Business Administration from University of
California at Los Angeles and a Bachelors Degree from University of Southern
California.
S-45
<PAGE>
Gerald J. O'Malley is the Company's Vice President, Market Officer for
suburban Chicago and has been since July 1996. Mr. O'Malley has over 29 years
experience in the real estate and marketing field. Mr. O'Malley's most recent
experience includes 10 years as founder and President of G. J. O'Malley &
Company, a real estate office leasing company. Prior to that, Mr. O'Malley spent
6 years as a leasing agent for LaSalle Partners in Chicago, Illinois, 4 years as
a leasing and sales agent for the firm of Bennett and Kahnweiler, in Chicago,
Illinois, and 8 years with Whiston Group as a property and leasing manager. Mr.
O'Malley holds a Bachelors Degree from Loyola University.
James D. Peterson is the Company's Vice President, Market Officer for
Southern Florida and has been since November 1, 1996. Mr. Peterson has over 25
years experience in the real estate field. Mr. Peterson's most recent experience
includes 3 years (from 1993 to October 1996) as Vice President with
responsibility for property operations in Southern Florida, and 3 more years
from 1978 to 1981, as President, of Peterson Properties, which he co-founded.
Mr. Peterson also spent 4 years with the Investment Life Insurance Company of
America as Chairman and Chief Executive Officer; 7 years as Chairman of
Cavanaugh Development Company, a general contractor and developer of office and
industrial parks in San Diego, California, which he co-founded; and 7 years with
Wachovia Bank and Trust Company. Mr. Peterson is involved with the National
Association of Industrial and Office Parks and is a member of Boca Raton's
Chamber of Commerce. Mr. Peterson holds a Masters in Business Administration
from University of Texas -- Austin and a Bachelor of Science degree in Economics
from University of North Carolina, Chapel Hill.
Matthew L. Richardson is a Senior Vice President of Carr Development &
Construction, Inc. and has been since January 1996. Prior to that time and for
more than 8 years, Mr. Richardson served in a variety of capacities in OCCO's
development business. Mr. Richardson holds a Masters of Business Administration
and a Bachelor of Urban Planning degree from University of Virginia.
Debra A. Volpicelli is Treasurer and Controller of the Company and has been
since May 1995. Prior to that time, Mrs. Volpicelli served as Tax Manager of the
Company since the Company's commencement of operations. Mrs. Volpicelli served
as Tax Manager for OCCO from 1990 to February 1993. Prior to that time, Mrs.
Volpicelli was in the tax department of Arthur Andersen & Co., SC. Mrs.
Volpicelli holds a Bachelor of Science degree in Business Administration from
Georgetown University and is a Certified Public Accountant.
Joseph D. Wallace is Vice President -- Building Due Diligence of the Company
and has been since January 1996. Prior to that time and since the Company's
commencement of operations, Mr. Wallace was the Company's Vice President --
Asset Management. Mr. Wallace was Vice President of Carr Partners, Inc. from
1990 to February 1993. Prior to that, Mr. Wallace was co-Director of Asset
Management for OCCO responsible for the investment oversight of OCCO's portfolio
of commercial properties in the Washington, D.C. metropolitan area. Mr. Wallace
holds a Bachelor of Science degree in Commerce from University of Virginia.
James S. Williams is a Senior Vice President of Carr Development &
Construction, Inc. with responsibility for oversight of all project management,
design and construction operations. Mr. Williams rejoined the Company in October
1996 after 2 years as Vice President of Operations of Chadwick International.
Mr. Williams' initial tenure with the Company was from 1983 to 1994, during
which time he served in a variety of capacities in OCCO's development business.
Prior to that, Mr. Williams was employed by Holland & Lyons where he worked in
project management of commercial and residential real estate development. Mr.
Williams is a guest lecturer at George Washington University. Mr. Williams holds
a Bachelor of Science degree in Business Administration from West Virginia
University.
S-46
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
the Underwriters, for whom Goldman, Sachs & Co., J.P. Morgan Securities Inc.,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Prudential Securities Incorporated, Legg Mason Wood Walker, Incorporated and
Wheat, First Securities, Inc. are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite its name below:
NUMBER
OF SHARES OF
UNDERWRITER COMMON STOCK
-------------
Goldman, Sachs & Co. ...............................
J. P. Morgan Securities Inc.........................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
Lehman Brothers Inc. ...............................
Prudential Securities Incorporated .................
Legg Mason Wood Walker, Incorporated................
Wheat, First Securities, Inc. ......................
-------------
Total ............................................. 5,000,000
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares of Common
Stock, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus Supplement, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the Representatives.
The Company has granted to the Underwriters an option exercisable for 30 days
after the date of this Prospectus Supplement to purchase up to an aggregate of
750,000 additional shares of Common Stock solely to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 5,000,000 shares of Common
Stock offered.
The Company and USRealty have agreed that for a period of 90 days from the
date of this Prospectus Supplement they will not, without prior written consent
of the Representatives, offer, sell or otherwise dispose of any securities or
any security convertible into or exercisable for Common Stock (except for
issuances by the Company pursuant to stock option or dividend reinvestment plans
and certain other agreements).
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
S-47
<PAGE>
USRealty has indicated that it intends to purchase 2,142,857 shares of Common
Stock from the Company in a concurrent offering at the public offering price
simultaneously with the closing of the Offering. No underwriting discount will
be applied to any shares of Common Stock purchased by USRealty directly from the
Company.
Certain of the Underwriters and their affiliates have from time to time
performed, and may continue to perform in the future, various investment banking
and commercial banking services for the Company, for which customary
compensation has been received. Morgan Guaranty Trust Company of New York
("MGT"), as lead lender under the Line of Credit, is expected to receive, as
agent for the other lenders, all of the net proceeds of the Offering and the
Concurrent USRealty Purchase (as described under "Use of Proceeds"). MGT is an
affiliate of J.P. Morgan Securities Inc.
The Common Stock is listed on the NYSE under the symbol "CRE."
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock pursuant to this
Prospectus Supplement will be passed upon for the Company by Hogan & Hartson
L.L.P., Washington, D.C. Certain legal matters will be passed upon for the
Underwriters by Rogers & Wells, New York, New York.
S-48
<PAGE>
PROSPECTUS
$600,000,000
CARRAMERICA REALTY CORPORATION
DEBT SECURITIES, PREFERRED STOCK, COMMON STOCK AND COMMON STOCK WARRANTS
CarrAmerica Realty Corporation (the "Company") may from time to time offer in
one or more series its (i) unsecured debt securities ("Debt Securities"), (ii)
preferred stock ("Preferred Stock"), (iii) common stock, $.01 par value ("Common
Stock"), and (iv) warrants exercisable for Common Stock ("Common Stock
Warrants"), with an aggregate public offering price of up to $600,000,000 (or
its equivalent based on the exchange rate at the time of sale) in amounts, at
prices and on terms to be determined at the time of offering. The Debt
Securities, Preferred Stock, Common Stock and Common Stock Warrants
(collectively, the "Offered Securities") may be offered, separately or together,
in separate series, in amounts, at prices and on terms to be described in one or
more supplements to this Prospectus (each 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 Debt Securities, the specific
title, aggregate principal amount, currency, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, any terms for
redemption at the option of the Company or repayment at the option of the
holder, any terms for any sinking fund payments, any terms for conversion into
Preferred Stock or Common Stock of the Company, covenants and any public
offering price; (ii) in the case of Preferred Stock, the specific title and
stated value, any dividend, liquidation, redemption, conversion, voting and
other rights, and any public offering price; (iii) in the case of Common Stock,
any public offering price; and (iv) in the case of Common Stock Warrants, the
specific title and aggregate number, the issue price and the exercise price. In
addition, such specific terms may include limitations on direct or beneficial
ownership and restrictions on transfer of the Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust for federal income tax purposes.
The applicable Prospectus Supplement also will contain information, where
applicable, about certain U.S. federal income tax considerations relating to,
and 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 with,
between or among them, will be set forth, or will be calculable from the
information set forth, in an accompanying Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of a Prospectus
Supplement describing the method and terms of the offering of such Securities.
See "Risk Factors" beginning on page 3 for certain factors relating to an
investment in the Securities.
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.
--------------------
The date of this Prospectus is November 5, 1996.
<PAGE>
THE COMPANY
The Company is a publicly-traded REIT that focuses primarily on the
acquisition, development, ownership and operation of value office properties in
select suburban growth markets across the United States.
The Company is a Maryland corporation that was formed in July 1992. The
principal executive offices of the Company are located at 1700 Pennsylvania
Avenue, Washington, D.C. 20006, and its telephone number is (202) 624-7500.
2
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below.
REAL ESTATE INVESTMENT RISKS
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate and the Company's
ability to service debt will depend in large part on the amount of income
generated, expenses incurred and capital expenditures required. The Company's
income from office properties may be adversely affected by a number of factors,
including the general economic climate and local real estate conditions, such as
an oversupply of, or a reduction in demand for, office space in the area and the
attractiveness of the properties to tenants. In addition, income from properties
and real estate values also are affected by such factors as the cost of
compliance with government regulation, including zoning and tax laws, the
potential for liability under applicable laws, interest rate levels and the
availability of financing. Certain significant expenditures associated with each
equity investment by the Company in a property (such as mortgage payments, if
any, real estate taxes and maintenance costs) also are generally not reduced
when circumstances cause a reduction in income from the property.
Debt Financing. The Company is subject to the risks associated with debt
financing, including the risk that the cash provided by the Company's operating
activities will be insufficient to meet required payments of principal and
interest, the risk of rising interest rates on the Company's floating rate debt,
the risk that the Company will not be able to prepay or refinance existing
indebtedness on its properties (which generally will not have been fully
amortized at maturity) or that the terms of such refinancing will not be as
favorable as the terms of existing indebtedness. In the event the Company is
unable to secure refinancing of such indebtedness on acceptable terms, the
Company might be forced to dispose of properties upon disadvantageous terms,
which might result in losses to the Company and might adversely affect the cash
flow available for distribution to equity holders or debt service. In addition,
if a property or properties are mortgaged to secure payment of indebtedness and
the Company is unable to meet mortgage payments, the mortgage securing the
property could be foreclosed upon by, or the property could be otherwise
transferred to, the mortgagee with a consequent loss of income and asset value
to the Company.
Renewal of Leases and Reletting of Space. The Company is subject to the risks
that upon expiration of leases for space located at its properties, the leases
may not be renewed, the space may not be relet or the terms of the renewal or
reletting (including the cost of required renovations or concessions to tenants)
may be less favorable than current lease terms. In particular, as of September
30, 1996, two of the Company's tenants leased space representing approximately
13% and 5%, respectively, of the total square footage of its properties pursuant
to leases that expire beginning in 1998. Although the Company has established an
annual budget for renovation and reletting costs that it believes are reasonable
in light of each property's situation, no assurance can be given that this
budget will be sufficient to cover these costs. If the Company is unable to
promptly relet or renew leases for all or substantially all of the space at its
properties, 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, then the Company's cash provided by operating activities and ability
to make expected distributions to shareholders or debt service payments could be
adversely affected.
Possible Environmental Liabilities. Under various Federal, state and local
laws, ordinances and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up certain hazardous
substances released at the property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and cleanup
costs incurred by such parties in connection with the contamination. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. The presence of contamination or the failure to remediate
contamination may adversely affect the owner's ability to sell or lease real
estate or to borrow using the real estate as collateral. The owner or operator
of a site may be liable under common law to third parties for damages and
injuries resulting from environmental contamination emanating from the site. The
Company has not
3
<PAGE>
been notified by any governmental authority of any material non-compliance,
liability or other claim in connection with any of its properties and the
Company is not aware of any other material environmental condition with respect
to any of its properties. No assurance, however, can be given that no prior
owner created any material environmental condition not known to the Company,
that no material environmental condition with respect to any property has
occurred during the Company's ownership thereof, or that future uses or
conditions (including, without limitation, changes in applicable environmental
laws and regulations) will not result in imposition of environmental liability.
CONFLICTS OF INTEREST
Certain members of the Company's board of directors (the "Board") and
officers own limited partnership interests ("Units") of Carr Realty, L.P. and,
thus, may have interests that conflict with shareholders with respect to
business decisions affecting the Company and Carr Realty, L.P. In particular, a
holder of Units may suffer different and/or more adverse tax consequences than
the Company upon the sale or refinancing of some of the properties as a result
of unrealized gain attributable to certain properties. These Unit holders and
the Company, therefore, may have different objectives regarding the appropriate
pricing and timing of any sale or refinancing of properties. Although the
Company, as the sole general partner of Carr Realty, L.P., has the exclusive
authority as to whether and on what terms to sell or refinance an individual
property, these Unit holders might seek to influence the Company not to sell or
refinance the properties, even though such sale might otherwise be financially
advantageous to the Company, or may seek to influence the Company to refinance a
property with a higher level of debt than would be in the best interests of the
Company. Although the Company believes that the change in operational structure
from an "UPREIT" to a "DownREIT" should reduce, over time, these potential
conflicts of interest, assets will continue to be owned by Carr Realty, L.P.,
diminishing the effects of this structural modification.
ACQUISITION AND DEVELOPMENT RISKS
The Company intends to continue acquiring and developing office properties in
markets where it believes that such acquisition or development is consistent
with the business strategies of the Company. Acquisitions entail risks that
investments will fail to perform in accordance with expectations and that
judgments with respect to the costs of improvements to bring an acquired
property up to standards established for the market position intended for that
property will prove inaccurate, as well as general investment risks associated
with any new real estate investment. See "Real Estate Investment Risks" above.
New office development also is subject to a number of risks, including
construction delays or cost overruns that may increase project costs, financing
risks as described above, the failure to meet anticipated occupancy or rent
levels, failure to receive required zoning, occupancy and other governmental
permits and authorizations and changes in applicable zoning and land use laws,
which may result in the incurrence of development costs in connection with
projects that are not pursued to completion. In addition, because the Company
must distribute 95% of its taxable income in order to maintain its qualification
as a REIT, the Company anticipates that new acquisitions and developments will
be financed primarily through periodic equity offerings, lines of credit or
other forms of secured or unsecured construction financing. If permanent debt or
equity financing is not available on acceptable terms to refinance such new
acquisitions or developments are undertaken without permanent financing, further
acquisitions or development activities may be curtailed or cash available for
distribution to shareholders or to meet debt service obligations may be
adversely affected.
CHANGE IN BUSINESS STRATEGY; RISKS ASSOCIATED WITH THE ACQUISITION OF
SUBSTANTIAL NEW PROPERTIES
The Company's move toward a more national business focus represents a
significant shift in the business strategy of the Company. Although the Board
believes that such a shift in strategy is warranted in light of the
opportunities that the USRealty Transaction represents, there is no assurance
that the Company's efforts to establish a national office REIT will be
successful.
4
<PAGE>
Consistent with the Company's strategy of acquiring value office properties
in suburban growth markets, the Company has significantly expanded its portfolio
of office properties in 1996. These properties have a relatively short operating
history under the Company's management and they may have characteristics or
deficiencies unknown to the Company affecting their valuation or revenue
potential.
DEPENDENCE ON WASHINGTON, D.C. MARKET
Although the Company's business strategy is to move toward a more national
business focus, at September 30, 1996, the Company's consolidated Properties
located in downtown Washington, D.C. represented approximately 28.2% of the
consolidated Properties in terms of square footage. The Company's performance
and its ability to make expected distributions to stockholders could be
adversely affected by economic or other conditions in downtown Washington, D.C.
that are beyond the control of the Company.
SUBSTANTIAL OWNERSHIP OF COMMON STOCK
As of November 1, 1996, USRealty owned 43.4% of the outstanding shares of the
Company's Common Stock (37.3% of the Common Stock on a fully-diluted basis), and
USRealty has the right to nominate a proportionate number of the directors of
the Board based upon its ownership of stock on a fully-diluted basis, rounded
down to the nearest whole number (but in no event more than 40% of the
directors). As a result, USRealty is the largest single stockholder of the
Company, while no other stockholder is permitted to own more than 5% of the
Company's Common Stock, subject to certain exceptions set forth in the Articles
of Incorporation or approved by the Board. Although certain standstill
provisions preclude USRealty from increasing its percentage interest in the
Company for a period of at least five years (subject to certain exceptions) and
the Articles of Incorporation preclude it from increasing such percentage
interest thereafter, and USRealty agreed to certain limitations on its voting
rights with respect to its shares of Common Stock, USRealty nonetheless has a
substantial influence over the affairs of the Company as a result of the
USRealty Transaction. This concentration of ownership in one stockholder could
potentially be disadvantageous to other stockholders' interests. In addition, so
long as USRealty owns at least 25% of the outstanding Common Stock of the
Company on a fully diluted basis, USRealty will be entitled (except in certain
limited circumstances), upon compliance with certain specified conditions, to a
participation right to purchase or subscribe for, either as part of such
issuance or in a concurrent issuance, a total number of shares of Common Stock
or Preferred Stock, as the case may be, equal to up to 30% (or 35% in certain
circumstances) of the total number of shares or of Common Stock or Preferred
Stock, as applicable, proposed to be issued by the Company.
LIMITATIONS ON CORPORATE ACTIONS
In conjunction with the USRealty Transaction, the Company agreed to certain
limitations on its operations, including restrictions relating to incurrence of
additional indebtedness, retention of third-party managers for the Company's
properties, investments in properties other than office buildings, issuances of
Units by Carr Realty, L.P., and certain other matters. The Company may take
actions relating to these matters only with the consent of USRealty. In
addition, the Company has agreed to certain limitations on the amount of assets
that it owns indirectly through other entities and the manner in which it
conducts its business (including the types of assets that it can acquire and own
and the manner in which such assets are operated). These limitations, which are
intended to permit USRealty to comply with certain requirements of the Internal
Revenue Code and other countries' tax laws applicable to foreign investors,
limit somewhat the flexibility of the Company to structure transactions that
might otherwise be advantageous to the Company. Although the Company does not
believe that the limitations imposed on the Company's activities will materially
impair the Company's ability to conduct its business, there can be no assurance
that these limitations will not adversely affect the Company's operations in the
future.
MANAGEMENT, LEASING AND BROKERAGE RISKS
The Company is subject to the risks associated with the property management,
leasing and brokerage businesses. These risks include the risk that management
contracts or service agreements with third-party owners will be lost to
competitors, that a property will be sold and the Company will lose the
5
<PAGE>
contract, that contracts will not be renewed upon expiration or will not be
renewed on terms consistent with current terms and that leasing and brokerage
activity generally may decline. Each of these developments could adversely
affect the ability of the Company to make expected distributions to shareholders
or debt service payments.
LACK OF VOTING CONTROL OF OPERATING SUBSIDIARIES
The Company does not have voting control of Carr Real Estate Services, Inc.
("Carr Services, Inc."), Carr Real Estate Services of Northern Virginia, Inc.
("CRESNOVA") or Carr Development & Construction, Inc. ("Carr Development &
Construction") (collectively, the "Operating Subsidiaries"). The capital stock
of Carr Services, Inc., which conducts fee-based management and leasing in the
Washington, D.C. metropolitan area, is divided into two classes: voting common
stock, approximately 92% and 8% of which is held by The Oliver Carr Company
("OCCO") and Carr Realty, L.P., respectively, and nonvoting preferred stock,
approximately 95% and 5% of which is held by Carr Realty, L.P. and OCCO,
respectively. OCCO, as the holder of 92% of the voting common stock, has the
ability to elect the board of directors of Carr Services, Inc.
The capital stock of CRESNOVA, which conducts fee-based management and
leasing in northern Virginia, is divided into two classes: voting common stock,
92% and 8% of which is held by OCCO and Carr Realty, L.P., respectively, and
nonvoting common stock, 100% of which is held by Carr Realty, L.P. OCCO, as the
holder of 92% of the voting common stock, has the ability to elect the board of
directors of CRESNOVA.
The capital stock of Carr Development & Construction, Inc. which conducts
fee-based development, is divided into two classes: voting common stock, 99% and
1% of which is held by OCCO and the Company, respectively, and nonvoting common
stock, 96% and 4% of which is held by the Company and OCCO, respectively. OCCO,
as the holder of 99% of the voting common stock, has the ability to elect the
board of directors of Carr Development & Construction after the terms of the
initial directors expire.
Oliver T. Carr, Jr., who is Chairman of the Board and Chief Executive Officer
and a significant stockholder of the Company, beneficially owns a majority of
the voting stock of OCCO, which will control the election of directors of the
Operating Subsidiaries. Although neither the Company's right to receive
preferred distributions with respect to its preferred stock of Carr Services,
Inc. nor the terms of the promissory notes made by each of the Operating
Subsidiaries and held by Carr Realty, L.P. or the Company, as applicable, can be
changed by OCCO, the Company will not be able to elect directors of each of the
Operating Subsidiaries, and its ability to influence the day-to-day decisions of
the Operating Subsidiaries is limited. As a result, the board of directors and
management of each of the Operating Subsidiaries may implement business policies
or decisions that might not have been implemented by persons elected by the
Company and that are adverse to the interests of the Company or that lead to
adverse financial results, which could adversely impact the Company's operating
income and funds from operations.
CHANGES IN POLICIES
The major policies of the Company, including its policies with respect to
development, acquisitions, financing, growth, operations, debt capitalization
and distributions, are determined by its Board. Although it has no present
intention to do so, the board may amend or revise these and other policies from
time to time without a vote of the shareholders of the Company. A change in
these policies could adversely affect the Company's financial condition, results
of operations, funds available for distributions to shareholders, debt service
or the market price of the Securities. The Company cannot change its policy of
seeking to maintain its qualification as a REIT without the approval of the
holders of a majority of the Common Stock.
CERTAIN TAX RISKS
Tax Liabilities as a Consequence of the Failure to Qualify as a REIT. The
Company believes that it has operated so as to qualify and has qualified as a
REIT under the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ended December 31, 1993, and intends to
6
<PAGE>
continue to so operate. No assurance, however, can be given that the Company has
so qualified or will be able to remain so qualified. Qualification as a REIT
involves the application of highly technical and complex Code provisions as to
which there are only limited judicial and administrative interpretations.
Certain facts and circumstances that may be wholly beyond the Company's control
may affect its ability to qualify or to continue to qualify as a REIT. In
addition, no assurance can be given that new legislation, Treasury Regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to the qualification as a REIT or the Federal income
consequences of such qualification to the Company. If the Company fails to
qualify as a REIT, it will be subject to Federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. In addition, unless entitled to relief under certain statutory
provisions, the Company would be disqualified from treatment as a REIT for the
four taxable years following the year during which qualification is lost. The
additional tax incurred in such event would significantly reduce the cash flow
available for distribution to shareholders and to meet debt service obligations.
See "Federal Income Tax Considerations -- Taxation of the Company."
REIT Distribution Requirements and Potential Impact of Borrowings. To obtain
the favorable tax treatment associated with qualifying as a REIT under the Code,
the Company generally is required each year to distribute to its shareholders at
least 95% of its net taxable income. See "Federal Income Tax
Considerations-Taxation of the Company (Annual Distribution Requirements)." 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 85% of its ordinary income, 95% of its
capital gain net income and 100% of its undistributed income from prior years.
Differences in timing between the receipt of income, the payment of expenses and
the inclusion of such income and the deduction of such expenses in arriving at
taxable income (of the Company or Carr Realty, L.P.), or the effect of
nondeductible capital expenditures, the creation of reserves or required debt or
amortization payments, could require the Company, directly or through Carr
Realty, L.P., to borrow funds on a short-term basis to meet the distribution
requirements that are necessary to achieve the tax benefits associated with
qualifying as a REIT. In such instances, the Company might need to borrow funds
in order to avoid adverse tax consequences even if management believed that then
prevailing market conditions were not generally favorable for such borrowings.
Other Tax Liabilities. Even if the Company qualifies as a REIT, the Company
and certain of its subsidiaries will be subject to certain Federal, state and
local taxes on its income and property. See "Federal Income Tax Considerations
- -- Taxation of the Company and Other Tax Considerations."
Consequences of Failure of the Carr Realty, L.P. to be Treated as a
Partnership. The Company believes that the Carr Realty, L.P. and each other
partnership and limited liability company in which it holds an interest are
properly treated as partnerships for Federal income tax purposes. See "Federal
Income Tax Considerations -- Other Tax Considerations (Effect of Tax Status of
Carr Realty, L.P. and Other Partnerships on REIT Status)." If the Internal
Revenue Service (the "IRS") were to challenge successfully the tax status of
Carr Realty, L.P., or any other partnership in which the Company holds an
interest, as a partnership for Federal income tax purposes, Carr Realty, L.P. or
the affected partnership would be taxable as a corporation. In such event, since
the value of the Company's ownership interest in Carr Realty, L.P. exceeds, and
the value of Carr Realty, L.P.'s ownership interest in the affected partnership
could exceed, 5% of the Company's assets, the Company could cease to qualify as
a REIT. See "Federal Income Tax Considerations -- Taxation of the Company (Asset
Tests)." In addition, the imposition of a corporate tax on Carr Realty, L.P. or
any of the other partnerships in which it holds an interest would reduce the
amount of funds available for distribution to the Company and its stockholders.
SPECIAL CONSIDERATIONS FOR FOREIGN INVESTORS
In order to assist the Company in qualifying as a "domestically controlled
REIT," the Articles of Incorporation contain certain provisions generally
preventing foreign investors (other than USRealty and its affiliates) from
acquiring additional shares of the Company's capital stock if, as a result of
such acquisition, the Company would fail to qualify as a "domestically
controlled REIT." See "Federal Income
7
<PAGE>
Tax Considerations -- Taxation of Holders of Common Stock -- Taxation of
Non-U.S. Shareholders." Accordingly, an acquisition of the Company's capital
stock would not likely be a suitable investment for Non-U.S. Shareholders other
than USRealty.
PRICE FLUCTUATIONS OF THE COMMON STOCK AND TRADING VOLUME; SHARES AVAILABLE
FOR FUTURE SALE
A number of factors may adversely influence the price of the Company's Common
Stock in the public markets, many of which are beyond the control of the
Company. These factors include possible increases in market interest rates,
which may lead purchasers of Common Stock to demand a higher annual yield from
distributions by the Company in relation to the price paid for Common Stock, the
relatively low daily trading volume of REITs in general, including the Common
Stock, and any inability of the Company to invest the proceeds of a future
offering of Securities in a manner that will increase earnings per share. Sales
of a substantial number of shares of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for shares.
The Company also may issue shares of Common Stock (subject to the Ownership
Limit, as defined below) upon redemption of Units issued in connection with the
formation of the Company and subsequent acquisitions. In addition, 1,436,900
shares of Common Stock of the Company have been issued or reserved for issuance
pursuant to stock and unit options, and these shares will be available for sale
in the public markets from time to time pursuant to exemptions from registration
requirements or upon registration. In connection with the USRealty Transaction,
the Company granted USRealty the right to require the Company to file, at any
time requested by USRealty, a registration statement under the Securities Act of
1933 covering all or any of the shares of Common Stock acquired by USRealty. No
prediction can be made about the effect that future sales of Common Stock will
have on the market prices of shares.
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF SHARES
In order to assist the Company in maintaining its qualification as a REIT,
the Articles of Incorporation contain certain provisions generally limiting the
ownership of shares of capital stock by any single shareholder to 5% of the
outstanding Common Stock and/or 5% of any class or series of Preferred Stock
(with exceptions for persons who received more than 5% of the equity of the
Company pursuant to the contribution of assets to the Company in connection with
the initial public offering of the Company and USRealty and its affiliates). The
Board could waive this restriction if it were satisfied that ownership in excess
of the above ownership limit would not jeopardize the Company's status as a REIT
and the Board otherwise decided such action would be in the best interests of
the Company. Capital stock acquired or transferred in breach of the limitation
will be automatically transferred to a trust for the benefit of a designated
charitable beneficiary. See "Description of Common Stock -- Restrictions on
Transfer" for additional information regarding the limits on ownership of shares
of capital stock.
RESTRICTIONS ON ACQUISITION AND CHANGE IN CONTROL
Various provisions of the Company's Articles of Incorporation, as amended
(the "Articles of Incorporation"), restrict the possibility for acquisition or
change in control of the Company, even if such acquisition or change in control
were in the shareholders' interest, including the Ownership Limit, the staggered
terms of the Company's directors and the ability of the Board to authorize the
issuance of preferred stock without stockholder approval.
8
<PAGE>
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the net
proceeds from the sale of the Offered Securities will be used for the
acquisition and development of additional office properties, as suitable
opportunities arise, for the repayment of certain outstanding indebtedness at
such time, for capital improvements to property and for working capital and
other general corporate purposes.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the three months ending
March 31, 1996 was 1.64, and for the period from February 16, 1993 (commencement
of operations) to December 31, 1993 and for the years ended December 31, 1994
and 1995 was 1.75, 1.81, and 1.91 respectively.
The ratios of earnings to fixed charges were computed by dividing earnings by
fixed charges. For this purpose, earnings consist of income (loss) before gains
from sales of property and extraordinary items plus fixed charges. Fixed charges
consist of interest expense (including interest costs capitalized), the
amortization of debt issuance costs and rental expense deemed to represent
interest expense. There was no preferred stock outstanding for any of the
periods shown above. Accordingly, the ratio of earnings to combined fixed
charges and preferred stock dividends is identical to the ratio of earnings to
fixed charges.
9
<PAGE>
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions of
the Debt Securities to which this Prospectus and any applicable Prospectus
Supplement may relate. The particular terms of the Debt Securities being offered
and the extent to which such general provisions may apply will be set forth in
the applicable indenture or in one or more indentures supplemental thereto and
described in a Prospectus Supplement relating to such Debt Securities. The forms
of the Senior Indenture (as defined herein) and the Subordinated Indenture (as
defined herein) have been filed as exhibits to the Registration Statement of
which this Prospectus is a part.
GENERAL
The Debt Securities will be direct, unsecured obligations of the Company and
may be either senior Debt Securities ("Senior Securities") or subordinated Debt
Securities ("Subordinated Securities"). The Debt Securities will be issued under
one or more indentures (the "Indentures"). Senior Securities and Subordinated
Securities will be issued pursuant to separate indentures (respectively, a
"Senior Indenture" and a "Subordinated Indenture"), in each case between the
Company and a trustee (a "Trustee"). The Indentures will be subject to and
governed by the Trust Indenture Act of 1939, as amended (the "TIA"). The
statements made under this heading relating to the Debt Securities and the
Indentures are summaries of the anticipated provisions thereof, do not purport
to be complete and are qualified in their entirety by reference to the
Indentures and such Debt Securities. All section references appearing herein are
to sections of each Indenture unless otherwise indicated and capitalized terms
used but not defined below shall have the respective meanings set forth in each
Indenture.
The indebtedness represented by Subordinated Securities will be subordinated
in right of payment to the prior payment in full of the Senior Debt of the
Company as described under "Subordination."
Except as set forth in the applicable Indenture or in one or more indentures
supplemental thereto and described in a Prospectus Supplement relating thereto,
the Debt Securities may be issued without limit as to aggregate principal
amount, in one or more series, in each case as established from time to time in
or pursuant to authority granted by a resolution of the Board of the Company or
as established in the applicable Indenture or in one or more indentures
supplemental to such Indenture. All Debt Securities of one series need not be
issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the Holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series.
It is anticipated that each Indenture will provide that there may be more
than one Trustee thereunder, each with respect to one or more series of Debt
Securities. Any Trustee under an Indenture may resign or be removed with respect
to one or more series of Debt Securities, and a successor Trustee may be
appointed to act with respect to such series. In the event that two or more
persons are acting as Trustee with respect to different series of Debt
Securities, each such Trustee shall be a director of a trust under the
applicable Indenture separate and apart from the trust administered by any other
Trustee, and, except as otherwise indicated herein, any action described herein
to be taken by each Trustee may be taken by each such Trustee with respect to,
and only with respect to, the one or more series of Debt Securities for which it
is Trustee under the applicable Indenture.
The Prospectus Supplement relating to any series of Debt Securities being
offered will contain the specific terms thereof, including, without limitation:
(1) The title of such Debt Securities and whether such Debt Securities are
Senior Securities or Subordinated Securities;
(2) The aggregate principal amount of such Debt Securities and any limit on
such aggregate principal amount;
(3) The percentage of the principal amount at which such Debt Securities will
be issued and, if other than the principal amount thereof, the portion of the
principal amount thereof payable upon declaration of acceleration of the
maturity thereof;
10
<PAGE>
(4) If convertible in whole or in part into Common Stock or Preferred Stock,
the terms on which such Debt Securities are convertible, including the initial
conversion price or rate (or method for determining the same), the portion that
is convertible and the conversion period, and any applicable limitations on the
ownership or transferability of the Common Stock or Preferred Stock receivable
on conversion;
(5) The date or dates, or the method for determining such date or dates, on
which the principal of such Debt Securities will be payable;
(6) The rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities will
bear interest, if any;
(7) The date or dates, or the method for determining such date or dates, from
which any such interest will accrue, the dates on which any such interest will
be payable, the regular record dates for such interest payment dates, or the
method by which such dates shall be determined, the persons to whom such
interest shall be payable, and the basis upon which interest shall be calculated
if other than that of a 360-day year of twelve 30-day months;
(8) The place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange and where notices or demands to or upon the Company in respect of such
Debt Securities and the applicable Indenture may be served;
(9) The period or periods within which, the price or prices at which and the
other terms and conditions upon which such Debt Securities may be redeemed, in
whole or in part, at the option of the Company, if the Company is to have such
an option;
(10) The obligation, if any, of the Company to redeem, repay or purchase such
Debt Securities pursuant to any sinking fund or analogous provision or at the
option of a Holder thereof, and the period or periods within which or the date
and dates on which, the price or prices at which and the other terms and
conditions upon which such Debt Securities will be redeemed, repaid or
purchased, in whole or in part, pursuant to such obligation;
(11) If other than U.S. dollars, the currency or currencies in which such
Debt Securities are denominated and payable, which may be a foreign currency or
units of two or more foreign currencies or a composite currency or currencies,
and the terms and conditions relating thereto;
(12) Whether the amount of payments of principal of (and premium, if any) or
interest, if any, on such Debt Securities may be determined with reference to an
index, formula or other method (which index, formula or method may, but need not
be, based on a currency, currencies, currency unit or units or composite
currency or currencies) and the manner in which such amounts shall be
determined;
(13) Any additions to, modifications of or deletions from the terms of such
Debt Securities with respect to Events of Default or covenants set forth in the
applicable Indenture;
(14) Whether such Debt Securities will be issued in certificate or book-entry
form;
(15) Whether such Debt Securities will be in registered or bearer form and,
if in registered form, the denominations thereof if other than $1,000 and any
integral multiple thereof and, if in bearer form, the denominations thereof and
terms and conditions relating thereto;
(16) The applicability, if any, of the defeasance and covenant defeasance
provisions of Article Fourteen of the applicable Indenture;
(17) Whether and under what circumstances the Company will pay any additional
amounts on such Debt Securities in respect of any tax, assessment or
governmental charge and, if so, whether the Company will have the option to
redeem such Debt Securities in lieu of making such payment; and
11
<PAGE>
(18) Any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture (Section 301).
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). Special federal income tax, accounting
and other considerations applicable to Original Issue Discount Securities will
be described in the applicable Prospectus Supplement.
Except as set forth in the applicable Indenture or in one or more indentures
supplemental thereto, the applicable Indenture will not contain any provisions
that would limit the ability of the Company to incur indebtedness or that would
afford Holders of Debt Securities protection in the event of a highly leveraged
or similar transaction involving the Company or in the event of a change of
control. Restrictions on ownership and transfers of the Company's Common Stock
and Preferred Stock are designed to preserve its status as a REIT and,
therefore, may act to prevent or hinder a change of control. See "Description of
Preferred Stock -- Restrictions on Ownership" and "Description of Common Stock
- -- Restrictions on Transfer." Reference is made to the applicable Prospectus
Supplement for information with respect to any deletions from, modifications of
or additions to the Events of Default or covenants of the Company that are
described below, including any addition of a covenant or other provision
providing event risk or similar protection.
DENOMINATION, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof (Section 302).
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of Debt
Securities will be payable at the corporate trust office of the Trustee, the
address of which will be stated in the applicable Prospectus Supplement;
provided that, at the option of the Company, payment of interest may be made by
check mailed to the address of the person entitled thereto as it appears in the
applicable register for such Debt Securities or by wire transfer of funds to
such person at an account maintained within the United States (Sections 301,
305, 306, 307 and 1002).
Any interest not punctually paid or duly provided for on any Interest Payment
Date with respect to a Debt Security ("Defaulted Interest") will forthwith cease
to be payable to the Holder on the applicable regular record date and may either
be paid to the person in whose name such Debt Security is registered at the
close of business on a special record date (the "Special Record Date") for the
payment of such Defaulted Interest to be fixed by the Trustee, notice whereof
shall be given to the Holder of such Debt Security not less than ten days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner, all as more completely described in the Indenture (Section 307).
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the applicable Trustee referred
to above. In addition, subject to certain limitations imposed upon Debt
Securities issued in book-entry form, the Debt Securities of any series may be
surrendered for conversion or registration of transfer or exchange thereof at
the corporate trust office of the applicable Trustee. Every Debt Security
surrendered for conversion, registration of transfer or exchange must be duly
endorsed or accompanied by a written instrument of transfer. No service charge
will be made for any registration of transfer or exchange of any Debt
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. If the
applicable Prospectus Supplement refers to any transfer agent (in addition to
the applicable Trustee) initially designated by the Company with respect to any
series of Debt Securities, the Company may at any time rescind the designation
of any such transfer agent or approve a change in the location through which any
such transfer agent acts, except that the Company will be required to maintain a
transfer agent in each place of payment for such series. The Company may at any
time designate additional transfer agents with respect to any series of Debt
Securities (Section 1002).
12
<PAGE>
Neither the Company nor any Trustee shall be required to (i) issue, register
the transfer of or exchange Debt Securities of any series during a period
beginning at the opening of business 15 days before any selection of Debt
Securities of that series to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption; (ii) register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed in
part; or (iii) issue, register the transfer of or exchange any Debt Security
that has been surrendered for repayment at the option of the Holder, except the
portion, if any, of such Debt Security not to be so repaid (Section 305).
MERGER, CONSOLIDATION OR SALE
The Company will be permitted to consolidate with, or sell, lease or convey
all or substantially all of its assets to, or merge with or into, any other
entity provided that (a) either the Company shall be the continuing entity, or
the successor entity (if other than the Company) formed by or resulting from any
such consolidation or merger or which shall have received the transfer of such
assets shall expressly assume payment of the principal of (and premium, if any)
and interest on all of the Debt Securities and the due and punctual performance
and observance of all of the covenants and conditions contained in each
Indenture; (b) immediately after giving effect to such transaction and treating
any indebtedness that becomes an obligation of the Company or any Subsidiary as
a result thereof as having been incurred by the Company or Subsidiary at the
time of such transaction, no Event of Default under the Indentures, and no event
which, after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's certificate
and legal opinion covering such conditions shall be delivered to each Trustee
(Sections 801 and 803).
CERTAIN COVENANTS
Existence. Except as described above under "Merger, Consolidation or Sale",
the Company will be required to do or cause to be done all things necessary to
preserve and keep in full force and effect its existence, rights (by articles of
incorporation, by-laws and statute) and franchises; provided, however, that the
Company shall not be required to preserve any right or franchise if it
determines that the preservation thereof is no longer desirable in the conduct
of its business and that the loss thereof is not disadvantageous in any material
respect to the Holders of the Debt Securities.
Maintenance of Properties. The Company will be required to cause all of its
material properties used or useful in the conduct of its business or the
business of any Subsidiary to be maintained and kept in good condition, repair
and working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times (Section 1007); provided, however, that the Company shall
not be prevented from selling or otherwise disposing for value its properties in
the ordinary course of business.
Insurance. The Company will be required to, and will be required to cause
each of its Subsidiaries, defined below, to keep all of its insurable properties
insured against loss or damage at least equal to their then full insurable value
with insurers of recognized responsibility and, if described in the applicable
Prospectus Supplement, having a specified rating from a recognized insurance
rating service (Section 1008).
Payment of Taxes and Other Claims. The Company will be required to pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any Subsidiary or upon the income, profits or property of the
Company or any Subsidiary, and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Company or any Subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings (Section 1009).
13
<PAGE>
Provision of Financial Information. Whether or not the Company is subject to
Section 13 or 15(d) of the Exchange Act, the Company will be required, to the
extent permitted under the Exchange Act, to file with the Commission the annual
reports, quarterly reports and other documents which the Company would have been
required to file with the Commission pursuant to such Sections 13 or 15(d) if
the Company were so subject (the "Financial Information"), such documents to be
filed with the Commission on or prior to the respective dates (the "Required
Filing Dates") by which the Company would have been required so to file such
documents if the Company were so subject. The Company also will in any event (x)
within 15 days of each Required Filing Date (i) transmit by mail to all Holders
of Debt Securities, as their names and addresses appear in the Security
Register, without cost to such Holders, copies of the Financial Information and
(ii) file with the Trustee copies of the Financial Information, and (y) if
filing such documents by the Company with the Commission is not permitted under
the Exchange Act, promptly upon written request and payment of the reasonable
cost of duplication and delivery, supply copies of such documents to any
prospective Holder (Section 1010).
ADDITIONAL COVENANTS AND/OR MODIFICATIONS TO THE COVENANTS DESCRIBED ABOVE
Any additional covenants of the Company and/or modifications to the covenants
described above with respect to any Debt Securities or series thereof, including
any covenants relating to limitations on incurrence of indebtedness or other
financial covenants, will be set forth in the applicable Indenture or an
indenture supplemental thereto and described in the Prospectus Supplement
relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each Indenture will provide that the following events are "Events of Default"
with respect to any series of Debt Securities issued thereunder: (i) default for
30 days in the payment of any installment of interest on any Debt Security of
such series; (ii) default in the payment of principal of (or premium, if any,
on) any Debt Security of such series at its maturity; (iii) default in making
any sinking fund payment as required for any Debt Security of such series; (iv)
default in the performance or breach of any other covenant or warranty of the
Company contained in the applicable Indenture (other than a covenant added to
the Indenture solely for the benefit of a series of Debt Securities issued
thereunder other than such series), continued for 60 days after written notice
as provided in the applicable Indenture; (v) default in the payment of an
aggregate principal amount exceeding $10,000,000 of any indebtedness of the
Company or any mortgage, indenture or other instrument under which such
indebtedness is issued or by which such indebtedness is secured, such default
having occurred after the expiration of any applicable grace period and having
resulted in the acceleration of the maturity of such indebtedness, but only if
such indebtedness is not discharged or such acceleration is not rescinded or
annulled; (vi) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Company or any
Significant Subsidiary, as defined below, or either of its property; and (vii)
any other Event of Default provided with respect to a particular series of Debt
Securities (Section 501).
"Significant Subsidiary" means any Subsidiary that is a "significant
subsidiary" (within the meaning of Regulation S-X promulgated under the
Securities Act) of the Company.
"Subsidiary" means a corporation, partnership or entity such as a limited
liability company, in which a majority of the outstanding voting stock or
partnership interests, as the case may be, is owned or controlled, directly or
indirectly, by the Company or by one or more other Subsidiaries of the Company.
For the purposes of this definition, "voting stock" means stock having voting
power for the election of directors, or managers or other voting members of the
governing body of such entities, whether at all times or only so long as no
senior class of stock has such voting power by reason of any contingency. The
term "Subsidiary" does not include Carr Services, Inc., CRESNOVA, or Carr
Development & Construction as the Company does not own or control a majority of
the outstanding voting stock of such entities.
If an Event of Default under any Indenture with respect to Debt Securities of
any series at the time outstanding occurs and is continuing, then in every such
case the applicable Trustee or the Holders of not less than 25% of the principal
amount of the Outstanding Debt Securities of that series will have the
14
<PAGE>
right to declare the principal amount (or, if the Debt Securities of that series
are Original Issue Discount Securities or indexed securities, such portion of
the principal amount as may be specified in the terms thereof) of all the Debt
Securities of that series to be due and payable immediately by written notice
thereof to the Company (and to the applicable Trustee if given by the Holders).
However, at any time after such a declaration of acceleration with respect to
Debt Securities of such series (or of all Debt Securities then Outstanding under
any Indenture, as the case may be) has been made, but before a judgment or
decree for payment of the money due has been obtained by the applicable Trustee,
the Holders of not less than a majority in principal amount of Outstanding Debt
Securities of such series (or of all Debt Securities then Outstanding under the
applicable Indenture, as the case may be) may rescind and annul such declaration
and its consequences if (a) the Company shall have deposited with the applicable
Trustee all required payments of the principal of (and premium, if any) and
interest on the Debt Securities of such series (or of all Debt Securities then
Outstanding under the applicable Indenture, as the case may be), plus certain
fees, expenses, disbursements and advances of the applicable Trustee and (b) all
events of default, other than the non-payment of accelerated principal (or
specified portion thereof), with respect to Debt Securities of such series (or
of all Debt Securities then Outstanding under the applicable Indenture, as the
case may be) have been cured or waived as provided in such Indenture (Section
502). Each Indenture also will provide that the Holders of not less than a
majority in principal amount of the Outstanding Debt Securities of any series
(or of all Debt Securities then Outstanding under the applicable Indenture, as
the case may be) may waive any past default with respect to such series and its
consequences, except a default (x) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (y) in
respect of a covenant or provision contained in the applicable Indenture that
cannot be modified or amended without the consent of the Holder of each
Outstanding Debt Security affected thereby (Section 513).
Each Trustee will be required to give notice to the Holders of Debt
Securities within 90 days of a default under the applicable Indenture unless
such default shall have been cured or waived; provided, however, that such
Trustee may withhold notice to the Holders of any series of Debt Securities of
any default with respect to such series (except a default in the payment of the
principal of (or premium, if any) or interest on any Debt Security of such
series or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if specified responsible officers of such Trustee
consider such withholding to be in the interest of such Holders (Section 601).
Each Indenture will provide that no Holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to such
Indenture or for any remedy thereunder, except in the cases of failure of the
applicable Trustee, for 60 days, to act after it has received a written request
to institute proceedings in respect of an Event of Default from the Holders of
not less than 25% in principal amount of the Outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it (Section
507). This provision will not prevent, however, any Holder of Debt Securities
from instituting suit for the enforcement of payment of the principal of (and
premium, if any) and interest on such Debt Securities at the respective due
dates thereof (Section 508).
Subject to provisions in each Indenture relating to its duties in case of
default, no Trustee will be under any obligation to exercise any of its rights
or powers under an Indenture at the request or direction of any Holders of any
series of Debt Securities then Outstanding under such Indenture, unless such
Holders shall have offered to the Trustee thereunder reasonable security or
indemnity (Section 602). The Holders of not less than a majority in principal
amount of the Outstanding Debt Securities of any series (or of all Debt
Securities then Outstanding under an Indenture, as the case may be) shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the applicable Trustee, or of exercising any trust or
power conferred upon such Trustee. However, a Trustee may refuse to follow any
direction which is in conflict with any law or the applicable Indenture, which
may involve such Trustee in personal liability or which may be unduly
prejudicial to the Holders of Debt Securities of such series not joining therein
(Section 512).
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to each Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the applicable Indenture and, if so, specifying each such default
and the nature and status thereof (Section 1011).
15
<PAGE>
MODIFICATION OF THE INDENTURES
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the Holders of not less than a majority in principal
amount of all Outstanding Debt Securities issued under such Indenture which are
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the Holder of each such
Debt Security affected thereby, (a) change the stated maturity of the principal
of, or any installment of interest (or premium, if any) on, any such Debt
Security; (b) reduce the principal amount of, or the rate or amount of interest
on, or any premium payable on redemption of, any such Debt Security, or reduce
the amount of principal of an Original Issue Discount Security that would be due
and payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment of the Holder
of any such Debt Security; (c) change the place of payment, or the coin or
currency, for payment of principal or premium, if any, or interest on any such
Debt Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security; (e) reduce the
above-stated percentage of Outstanding Debt Securities of any series necessary
to modify or amend the applicable Indenture, to waive compliance with certain
provisions thereof or certain defaults and consequences thereunder or to reduce
the quorum or voting requirements set forth in the applicable Indenture; or (f)
modify any of the foregoing provisions or any of the provisions relating to the
waiver of certain past defaults or certain covenants, except to increase the
required percentage to effect such action or to provide that certain other
provisions may not be modified or waived without the consent of the Holder of
such Debt Security (Section 902).
The Holders of not less than a majority in principal amount of Outstanding
Debt Securities of each series affected thereby will have the right to waive
compliance by the Company with certain covenants in such Indenture (Section
1013).
Modifications and amendments of an Indenture will be permitted to be made by
the Company and the respective Trustee thereunder without the consent of any
Holder of Debt Securities for any of the following purposes: (i) to evidence the
succession of another person to the Company as obligor under such Indenture;
(ii) to add to the covenants of the Company for the benefit of the Holders of
all or any series of Debt Securities or to surrender any right or power
conferred upon the Company in the Indenture; (iii) to add Events of Default for
the benefit of the Holders of all or any series of Debt Securities; (iv) to add
or change any provisions of an Indenture to facilitate the issuance of, or to
liberalize certain terms of, Debt Securities in bearer form, or to permit or
facilitate the issuance of Debt Securities in uncertificated form, provided that
such action shall not adversely affect the interests of the Holders of the Debt
Securities of any series in any material respect; (v) to change or eliminate any
provisions of an Indenture, provided that any such change or elimination shall
become effective only when there are no Debt Securities Outstanding of any
series created prior thereto which are entitled to the benefit of such
provision; (vi) to secure the Debt Securities; (vii) to establish the form or
terms of Debt Securities of any series, including the provisions and procedures,
if applicable, for the conversion of such Debt Securities into Common Stock or
Preferred Stock of the Company; (viii) to provide for the acceptance of
appointment by a successor Trustee or facilitate the administration of the
trusts under an Indenture by more than one Trustee; (ix) to cure any ambiguity,
defect or inconsistency in an Indenture, provided that such action shall not
adversely affect the interests of Holders of Debt Securities of any series
issued under such Indenture in any material respect; or (x) to supplement any of
the provisions of an Indenture to the extent necessary to permit or facilitate
defeasance and discharge of any series of such Debt Securities, provided that
such action shall not adversely affect the interests of the Holders of the Debt
Securities of any series in any material respect (Section 901).
Each Indenture will provide that in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of Holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be Outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of any Debt Security denominated in a foreign currency that shall be deemed
Outstanding shall be the
16
<PAGE>
U.S. dollar equivalent, determined on the issue date for such Debt Security, of
the principal amount (or, in the case of an Original Issue Discount Security,
the U.S. dollar equivalent on the issue date of such Debt Security of the amount
determined as provided in (i) above), (iii) the principal amount of an indexed
security that shall be deemed Outstanding shall be the principal face amount of
such indexed security at original issuance, unless otherwise provided with
respect to such indexed security pursuant to the applicable Indenture, and (iv)
Debt Securities owned by the Company or any other obligor upon the Debt
Securities or any affiliate of the Company or of such other obligor shall be
disregarded.
Each Indenture will contain provisions for convening meetings of the Holders
of Debt Securities of a series (Section 501). A meeting will be permitted to be
called at any time by the applicable Trustee, and also, upon request, by the
Company or the Holders of at least 10% in principal amount of the Outstanding
Debt Securities of such series, in any such case upon notice given as provided
in the Indenture. Except for any consent that must be given by the Holder of
each Debt Security affected by certain modifications and amendments of an
Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present may be adopted by the affirmative vote
of the Holders of a majority in principal amount of the Outstanding Debt
Securities of that series; provided, however, that, except as referred to above,
any resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
Holders of a specified percentage, which is less than a majority, in principal
amount of the Outstanding Debt Securities of a series may be adopted at a
meeting or adjourned meeting or adjourned meeting duly reconvened at which a
quorum is present by the affirmative vote of the Holders of such specified
percentage in principal amount of the Outstanding Debt Securities of that
series. Any resolution passed or decision taken at any meeting of Holders of
Debt Securities of any series duly held in accordance with an Indenture will be
binding on all Holders of Debt Securities of that series. The quorum at any
meeting called to adopt a resolution, and at any reconvened meeting, will be
persons holding or representing a majority in principal amount of the
Outstanding Debt Securities of a series; provided, however, that if any action
is to be taken at such meeting with respect to a consent or waiver which may be
given by the Holders of not less than a specified percentage in principal amount
of the Outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the Outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, each Indenture will provide that if
any action is to be taken at a meeting of Holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver and other action that such Indenture expressly provides may be
made, given or taken by the Holders of a specified percentage in principal
amount of all Outstanding Debt Securities affected thereby, or the Holders of
such series and one or more additional series: (i) there shall be no minimum
quorum requirement for such meeting, and (ii) the principal amount of the
Outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under such Indenture.
SUBORDINATION
The terms and conditions, if any, upon which the Debt Securities are
subordinated to other indebtedness of the Company will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include a
description of the indebtedness ranking senior to the Debt Securities, the
restrictions on payments to the Holders of such Debt Securities while a default
with respect to such senior indebtedness in continuing, the restrictions, if
any, on payments to the Holders of such Debt Securities following an Event of
Default, and provisions requiring Holders of such Debt Securities to remit
certain payments to holders of senior indebtedness.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Company may be permitted under the applicable Indenture to discharge
certain obligations to Holders of any series of Debt Securities issued
thereunder that have not already been delivered to the applicable Trustee for
cancellation and that either have become due and payable or will become due
17
<PAGE>
and payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the applicable Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal (and
premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or redemption
date, as the case may be.
Each Indenture will provide that, if the provisions of Article Fourteen are
made applicable to the Debt Securities of or within any series pursuant to
Section 301 of such Indenture, the Company may elect either (a) to defease and
be discharged from any and all obligations with respect to such Debt Securities
(except for the obligation to pay additional amounts, if any, upon the
occurrence of certain events of tax, assessment or governmental charge with
respect to payments on such Debt Securities, and the obligations to register the
transfer or exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities, to maintain an office or agency in
respect of such Debt Securities and to hold moneys for payment in trust)
("defeasance") (Section 1402) or (b) to be released from its obligations with
respect to such Debt Securities under certain specified sections of Article Ten
of such Indenture as specified in the applicable Prospectus Supplement and any
omission to comply with such obligations shall not constitute an Event of
Default with respect to such Debt Securities ("covenant defeasance") (Section
1403), in either case upon the irrevocable deposit by the Company with the
applicable Trustee, in trust, of an amount, in such currency or currencies,
currency unit or units or composite currency or currencies in which such Debt
Securities are payable at stated maturity, or Government Obligations (as defined
below), or both, applicable to such Debt Securities which through the scheduled
payment of principal and interest in accordance with their terms will provide
money in an amount sufficient without reinvestment to pay the principal of (and
premium, if any) and interest on such Debt Securities, and any mandatory sinking
fund or analogous payments thereon, on the scheduled due dates therefor.
Such a trust will only be permitted to be established if, among other things,
the Company has delivered to the applicable Trustee an opinion of counsel (as
specified in the applicable Indenture) to the effect that the Holders of such
Debt Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance or covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such defeasance or covenant defeasance
had not occurred, and such opinion of counsel, in the case of defeasance, will
be required to refer to and be based upon a ruling of the Internal Revenue
Service or a change in applicable U.S. federal income tax law occurring after
the date of the Indenture (Section 1404).
"Government Obligations" means securities which are (i) direct obligations of
the United States of America or the government which issued the foreign currency
in which the Debt Securities of a particular series are payable, for the payment
of which its full faith and credit is pledged or (ii) obligations of a person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America or such government which issued the foreign currency in
which the Debt Securities of such series are payable, the timely payment of
which is unconditionally guaranteed as a full faith and credit obligation of the
United States of America or such government, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the Holder of a depository receipt, provided that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the Holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt (Section 101).
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the Holder of a Debt Security of such series is entitled to,
18
<PAGE>
and does, elect pursuant to the applicable Indenture or the terms of such Debt
Security to receive payment in a currency, currency unit or composite currency
other than that in which such deposit has been made in respect of such Debt
Security, or (b) a Conversion Event (as defined below) occurs in respect of the
currency, currency unit or composite currency in which such deposit has been
made, the indebtedness represented by such Debt Security will be deemed to have
been, and will be, fully discharged and satisfied through the payment of the
principal of (and premium, if any) and interest on such Debt Security as they
become due out of the proceeds yielded by converting the amount so deposited in
respect of such Debt Security into the currency, currency unit or composite
currency in which such Debt Security becomes payable as a result of such
election or such cessation of usage based on the applicable market exchange
rate. "Conversion Event" means the cessation of use of (i) a currency, currency
unit or composite currency both by the government of the country which issued
such currency and for the settlement of transactions by a central bank or other
public institutions of or within the international banking community, (ii) the
ECU both within the European Monetary System and for the settlement of
transactions by public institutions of or within the European Communities or
(iii) any currency unit or composite currency other than the ECU for the
purposes for which it was established. Unless otherwise provided in the
applicable Prospectus Supplement, all payments of principal of (and premium, if
any) and interest on any Debt Security that is payable in a foreign currency
that ceases to be used by its government of issuance shall be made in U.S.
dollars.
In the event the Company effects covenant defeasance with respect to any Debt
Securities and such Debt Securities are declared due and payable because of the
occurrence of any Event of Default other than the Event of Default described in
clause (iv) under "Events of Default, Notice and Waiver" with respect to certain
specified sections of Article Ten of each Indenture (which sections would no
longer be applicable to such Debt Securities as a result of such covenant
defeasance) or described in clause (vii) under "Events of Default, Notice and
Waiver" with respect to any other covenant as to which there has been covenant
defeasance, the amount in such currency, currency unit or composite currency in
which such Debt Securities are payable, and Government Obligations on deposit
with the applicable Trustee, will be sufficient to pay amounts due on such Debt
Securities at the time of their stated maturity but may not be sufficient to pay
amounts due on such Debt Securities at the time of the acceleration resulting
from such Default. However, the Company would remain liable to make payment of
such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the Holders
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities and any restrictions on conversion, including restrictions directed
at maintaining the Company's REIT status.
REDEMPTION OF SECURITIES
The Indenture provides that the Debt Securities may be redeemed at any time
at the option of the Company, in whole or in part, at the redemption price,
except as may otherwise be provided in connection with any Debt Securities or
series thereof.
From and after notice has been given as provided in the Indenture, if funds
for the redemption of any Debt Securities called for redemption shall have been
made available on such redemption date, such Debt Securities will cease to bear
interest on the date fixed for such redemption specified in such notice, and the
only right of the Holders of the Debt Securities will be to receive payment of
the redemption price.
19
<PAGE>
Notice of any optional redemption of any Debt Securities will be given to
Holders at their addresses, as shown in the Company's books and records, not
more than 60 nor less than 30 days prior to the date fixed for redemption. The
notice of redemption will specify, among other items, the redemption price and
the principal amount of the Debt Securities held by such Holder to be redeemed.
If the Company elects to redeem Debt Securities, it will notify the Trustee
at least 45 days prior to the redemption date (or such shorter period as
satisfactory to the Trustee) of the aggregate principal amount of Debt
Securities to be redeemed and the redemption date. If less than all the Debt
Securities are to be redeemed, the Trustee shall select the Debt Securities to
be redeemed pro rata, by lot or in such manner as it shall deem fair and
appropriate.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the form
of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depository identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depository arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
20
<PAGE>
DESCRIPTION OF SERIES A PREFERRED SHARES
The Company is authorized to issue 1,740,000 shares of Series A Cumulative
Convertible Redeemable Preferred Stock (the "Series A Preferred Shares"). As of
November 1, 1996 there were 1,740,000 Series A Preferred Shares outstanding.
The summary of certain terms and provisions of the Series A Preferred Shares
contained in this Prospectus does not purport to be complete and is subject to
and qualified in its entirety by reference to the terms and provisions of the
Articles Supplementary relating to the Series A Preferred Shares (the "Articles
Supplementary").
GENERAL
The Company's Board of Directors is authorized to issue, from the authorized
but unissued shares of capital stock of the Company, preferred shares in series
and to establish from time to time the number of preferred shares to be included
in such series and to fix the designation and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of each such
series.
When issued, the Series A Preferred Shares will be validly issued, fully paid
and nonassessable. The holders of the Series A Preferred Shares will have no
preemptive rights with respect to any shares of capital stock of the Company or
any other securities of the Company convertible into or carrying rights or
options to purchase any such shares. The Series A Preferred Shares will not be
subject to any sinking fund or other obligation of the Company to redeem or
retire the Series A Preferred Shares.
The transfer agent, registrar and dividend disbursing agent for the Series A
Preferred Shares will be Boston EquiServe.
RANKING
The Series A Preferred Shares will rank senior to the Common Stock with
respect to payment of dividends and amounts upon liquidation, dissolution or
winding up.
While any Series A Preferred Shares are outstanding, the Company may not
authorize, create or increase the authorized amount of any class or any security
convertible into shares of any class that ranks senior to the Series A Preferred
Shares with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding up without the consent of the holders of two-thirds of
the outstanding Series A Preferred Shares and Parity Shares (as defined below),
voting as a single class. However, the Company may create additional classes of
stock, increase the authorized number of preferred shares or issue series of
preferred shares ranking on a parity with the Series A Preferred Shares with
respect, in each case, to the payment of dividends and amounts upon liquidation,
dissolution and winding up (a "Parity Share") without the consent of any holder
of Series A Preferred Shares. See "--Voting Rights" below.
DIVIDENDS
Holders of the Series A Preferred Shares shall be entitled to receive, when
and as declared by the Board of Directors, out of funds legally available for
the payment of dividends, cumulative preferential cash dividends in an amount
per share equal to the greater of (i) $1.75 per annum or (ii) the cash dividends
(determined on each of the quarterly dividend payment dates referred to below)
paid on the number of shares of Common Stock, or portion thereof, into which a
Series A Preferred Share is convertible. Such dividends shall be cumulative from
the date of original issue and shall be payable quarterly in arrears on the last
calendar day (or if such day is not a business day, the next business day
thereafter) of each February, May, August and November (each, a "Dividend
Payment Date"). The first dividend, which will be paid on or about November 30,
1996, will be for less than a full quarter. Such dividends and any dividends
payable on the Series A Preferred Shares for any partial dividend period will be
computed on the basis of the actual number of days in such period. Dividends
will be payable to holders of record as they appear in the records of the
Company at the close of business on the
21
<PAGE>
applicable record date, which shall be on such date designated by the Board of
Directors of the Company for the payment of dividends that is not more than 50
days prior to such Dividend Payment Date (each, a "Dividend Record Date").
Accrued and unpaid dividends for any past dividend periods may be declared and
paid at any time and for such interim periods to holders of record on the
Dividend Record Date. Any dividend payment made on the Series A Preferred Shares
will first be credited against the earliest accrued but unpaid dividend due with
respect to the Series A Preferred Shares that remains payable.
Except as provided in the next sentence, no dividends will be declared or
paid on any Parity Shares unless full cumulative dividends have been declared
and paid or are contemporaneously declared and funds sufficient for payment set
aside on the Series A Preferred Share for all prior dividend periods. If accrued
dividends on the Series A Preferred Shares for all prior dividend periods have
not been paid in full, then any dividend declared on the Series A Preferred
Shares and on any Parity Shares for any dividend period will be declared ratably
in proportion to accrued and unpaid dividends on the Series A Preferred Shares
and such Parity Shares.
The Company will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Shares (as defined
below) or (ii) redeem, purchase or otherwise acquire for consideration any
Junior Shares through a sinking fund or otherwise (other than a redemption or
purchase or other acquisition of Common Stock made for purposes of any employee
incentive or benefit plan of the Company or any subsidiary), unless (A) all
cumulative dividends with respect to the Series A Preferred Shares and any
Parity Shares at the time such dividends are payable have been paid or declared
and funds have been set apart for payment of such dividends and (B) sufficient
funds have been paid or declared and set apart for the payment of the dividend
for the current dividend period with respect to the Series A Preferred Shares
and any Parity Shares.
As used herein, (i) the term "dividend" does not include dividends or other
distributions payable solely in Fully Junior Shares, or in options, warrants or
rights to subscribe for or purchase any Fully Junior Shares, (ii) the term
"Junior Shares" means the Common Stock and any other class or series of shares
of capital stock of the Company now or hereafter issued and outstanding that
ranks junior to the Series A Preferred Shares as to the payment of dividends or
in the distribution of assets or amounts upon liquidation, dissolution and
winding up and (iii) the term "Fully Junior Shares" means Junior Shares that
rank junior to the Series A Preferred Shares both as to the payment of dividends
and distribution of assets upon liquidation, dissolution and winding up.
REDEMPTION
Except as required by the limitation on ownership (see "--Restrictions on
Transfer; Ownership Limits" below), the Series A Preferred Shares are not
redeemable prior to October 25, 1999. On and after October 25, 1999 the Company,
at its option, upon not less than 30 nor more than 90 days' written notice, may
redeem the Series A Preferred Shares, in whole or in part, at any time or from
time to time, at a redemption price equal to $25.00 per share, plus accumulated,
accrued and unpaid dividends thereon to the date fixed for redemption. If fewer
than all of the outstanding Series A Preferred Shares 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), by lot or by any other method
determined by the Company in its sole discretion to be equitable.
Unless full cumulative dividends on all Series A Preferred Shares and any
Parity Shares shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period, no Series A
Preferred Shares shall be redeemed or purchased by the Company except pursuant
to a purchase or exchange offer made on the same terms to holders of all
outstanding Series A Preferred Shares.
Notice of redemption will be mailed at least 30 days but not more than 90
days before the redemption date to each holder of record of Series A Preferred
Shares at the address shown on the stock transfer books of the Company. Each
notice shall state: (i) the redemption date; (ii) the number of
22
<PAGE>
Series A Preferred Shares to be redeemed; (iii) the place or places where
certificates for Series A Preferred Shares are to be surrendered for payment of
the redemption price; (iv) the then-current Conversion Price (as defined below);
and (v) that dividends on the Series A Preferred Shares will cease to accrue on
such redemption date. If fewer than all Series A Preferred Shares are to be
redeemed, the notice mailed to each such holder thereof shall also specify the
number of Series A Preferred Shares to be redeemed from each such holder. If
notice of redemption of any Series A Preferred Shares has been given and if the
funds necessary for such redemption have been set aside by the Company in trust
for the benefit of the holders of Series A Preferred Shares so called for
redemption, then from and after the redemption date, dividends will cease to
accrue on the Series A Preferred Shares, such Series A Preferred Shares shall no
longer be deemed outstanding and all rights of the holders of such shares will
terminate, except the right to receive the redemption price.
The holders of Series A Preferred Shares at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to such Series A Preferred Shares on the corresponding Dividend Payment
Date notwithstanding the redemption thereof between such Dividend Record Date
and the corresponding Dividend Payment Date or the Company's default in the
payment of the dividends due. Except as provided above, the Company will make no
payment or allowance for unpaid dividends, whether or not in arrears, on Series
A Preferred Shares which have been called for redemption.
The Series A Preferred Shares have no stated maturity and will not be subject
to any sinking fund or mandatory redemption. However, in order to preserve the
Company's status as a REIT, as defined in the Code, the Series A Preferred
Shares may be subject to redemption or exchange as described in the Company's
Articles of Incorporation. See "--Restrictions on Transfer; Ownership Limits"
below.
LIQUIDATION PREFERENCE
The holders of Series A Preferred Shares will be entitled to receive in the
event of any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, $25.00 per Series A Preferred Share plus an amount per
Series A Preferred Share equal to all dividends (whether or not earned or
declared) accrued and unpaid thereon to the date of final distribution to such
holders, and no more.
Until the holders of Series A Preferred Shares and Parity Shares have been
paid their liquidation preference in full, no payment will be made to any holder
of Junior Shares upon the liquidation, dissolution or winding up of the Company.
If upon any liquidation, dissolution or winding up of the Company, the assets of
the Company, or proceeds thereof, distributable among the holders of the Series
A Preferred Shares are insufficient to pay in full the liquidation preference
with respect to the Series A Preferred Shares and any other Parity Shares, then
such assets, or the proceeds thereof, will be distributed among the holders of
Series A Preferred Shares and any such Parity Shares ratably in accordance with
the respective amounts which would be payable on such Series A Preferred Shares
and any such Parity Shares if all amounts payable thereon were paid in full.
Neither a consolidation or merger of the Company with another corporation, a
statutory share exchange by the Company nor a sale or transfer of all or
substantially all of the Company's assets will be considered a liquidation,
dissolution or winding up, voluntary or involuntary, of the Company.
VOTING RIGHTS
Except as indicated below, or except as otherwise from time to time required
by applicable law, the holders of Series A Preferred Shares will have no voting
rights.
If six consecutive quarterly dividends payable on the Series A Preferred
Shares or any Parity Shares are in arrears, whether or not earned or declared,
the number of directors then constituting the Board of Directors of the Company
will be increased by two, and the holders of Series A Preferred Shares, voting
together as a class with the holders of any other series of Parity Shares, will
have the right to elect two additional directors to serve on the Company's Board
of Directors at any annual meeting of shareholders or a properly called special
meeting of the holders of Series A Preferred
23
<PAGE>
Shares and such voting Parity Shares and at each subsequent annual meeting of
shareholders until all such dividends and dividends for the current quarterly
period on the Series A Preferred Shares and such other voting Parity Shares have
been paid or declared and paid or set aside for payment. Such voting right will
terminate when all such accrued and unpaid dividends have been declared and paid
or set aside for payment. The term of office of all directors so elected will
terminate with the termination of such voting rights.
The approval of two-thirds of the outstanding Series A Preferred Shares and
all other series of voting Parity Shares similarly affected, voting as a single
class, is required in order to (i) amend the Company's Articles of Incorporation
to affect materially and adversely the rights, preferences or voting powers of
the holders of the Series A Preferred Shares or the voting Parity Shares, (ii)
enter into a share exchange that affects the Series A Preferred Shares,
consolidate with or merge into another entity, or permit another entity to
consolidate with or merge into the Company, unless in each such case each Series
A Preferred Share remains outstanding without a material adverse change to its
terms and rights or is converted into or exchanged for convertible preferred
stock of the surviving entity having preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms or conditions of redemption thereof identical to that of a Series A
Preferred Share (except for changes that do not materially and adversely affect
the holders of the Series A Preferred Shares), or (iii) authorize, reclassify,
create, or increase the authorized amount of any class of capital stock having
rights senior to the Series A Preferred Shares with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up. However, the
Company may create additional classes of Parity Shares and Junior Shares,
increase the authorized number of Parity Shares and Junior Shares and issue
additional series of Parity Shares and Junior Shares without the consent of any
holder of Series A Preferred Shares.
Except as provided above and as required by law, the holders of Series A
Preferred Shares are not entitled to vote on any merger or consolidation
involving the Company or a sale of all or substantially all of the assets of the
Company.
CONVERSION RIGHTS
The Series A Preferred Shares will be convertible, in whole or in part, at
the option of the holders thereof, at any time after April 25, 1997, into
authorized but previously unissued shares of Common Stock at a conversion price
of $25.00 per Common Stock (equivalent to a conversion rate of one share of
Common Stock for each Series A Preferred Share), subject to adjustment as
described below (the "Conversion Price"). See "--Conversion Price Adjustments"
below. The right to convert Series A Preferred Shares called for redemption will
terminate at the close of business on the fifth business day prior to the
redemption date for such Series A Preferred Shares. For information as to
notices of redemption, see "--Redemption" above. For a description of the
Company's Common Stock, see "Description of Common Stock" in the accompanying
Prospectus.
Conversion of Series A Preferred Shares, or a specified portion thereof, may
be effected by delivering certificates evidencing such shares, together with
written notice of conversion and a proper assignment of such certificates to the
Company or in blank, to the office or agency to be maintained by the Company for
that purpose. Initially such office will be the office of the Transfer Agent.
Each conversion will be deemed to have been effected immediately prior to the
close of business on the date on which the certificates for Series A Preferred
Shares shall have been surrendered and notice shall have been received by the
Company as aforesaid (and if applicable, payment of an amount equal to the
dividend payable on such shares shall have been received by the Company as
described below) and the conversion shall be at the Conversion Price in effect
at such time and on such date.
Holders of Series A Preferred Shares at the close of business on a Dividend
Record Date will be entitled to receive the dividend payable on such shares on
the corresponding Dividend Payment Date notwithstanding the conversion of such
shares following such Dividend Record Date and prior to such Dividend Payment
Date. However, Series A Preferred Shares surrendered for conversion during the
period between the close of business on any Dividend Record Date and the opening
of business on the
24
<PAGE>
corresponding Dividend Payment Date (except shares converted after the issuance
of a notice of redemption with respect to a redemption date during such period,
which will be entitled to such dividend) must be accompanied by payment of an
amount equal to the dividend payable on such shares on such Dividend Payment
Date. A holder of Series A Preferred Shares on a Dividend Record Date who (or
whose transferee) tenders any such shares for conversion into shares of Common
Stock on such Dividend Payment Date will receive the dividend payable by the
Company on such Series A Preferred Shares on such date, and the converting
holder need not include payment of the amount of such dividend upon surrender of
Series A Preferred Shares for conversion. Except as provided above, the Company
will make no payment or allowance for unpaid dividends, whether or not in
arrears, on converted shares or for dividends on the shares of Common Stock
issued upon such conversion.
The Company will not issue fractional shares of Common Stock upon conversion
but in lieu thereof will pay cash at the current market price of the Common
Stock on the day prior to the conversion date.
CONVERSION PRICE ADJUSTMENTS
The Conversion Price is subject to adjustment upon certain events, including
without limitation (i) dividends (and other distributions) payable in Common
Stock, (ii) the issuance to all holders of Common Stock of certain rights or
warrants entitling them to subscribe for or purchase Common Stock at a price per
share less than the fair market value per share of Common Stock (which, as
defined, includes an adjustment for underwriting commissions avoided in rights
offerings to shareholders), (iii) subdivisions, combinations and
reclassifications of Common Stock, and (iv) distributions to all holders of
Common Stock of any capital stock of the Company (other than Common Stock),
evidences of indebtedness of the Company or assets (including securities, but
excluding those dividends, rights, warrants and distributions referred to above
and excluding Permitted Common Stock Cash Distributions, as herein defined).
"Permitted Common Stock Cash Distributions" are those cumulative cash dividends
and distributions paid with respect to the Common Stock after December 31, 1995
which are not in excess of the following: the sum of (i) the Company's
cumulative undistributed funds from operations at December 31, 1995, plus (ii)
the cumulative amount of funds from operations, as determined by the Board of
Directors of the Company, after December 31, 1995, minus (iii) the cumulative
amount of distributions accrued or paid on the Series A Preferred Shares or any
other class of preferred stock after the date of this Prospectus Supplement. In
addition to the foregoing adjustments, the Company will be permitted to make
such reductions in the Conversion Price as it considers to be advisable in order
that any event treated for federal income tax purposes as a dividend of stock or
stock rights will not be taxable to the holders of the Common Stock.
In the event that the Company shall be a party to any transaction (including
without limitation a merger, consolidation, statutory share exchange, self
tender offer for all or substantially all of the Common Stock or sale of all or
substantially all of the Company's assets or certain recapitalizations of the
Common Stock), in each case as a result of which all or substantially all Common
Stock is converted into the right to receive stock, securities or other property
(including cash or any combination thereof), each Series A Preferred Share that
is not redeemed or converted prior to such transaction, will thereafter be
convertible into the kind and amount of shares of stock and other securities and
property receivable (including cash or any combination thereof) upon the
consummation of such transaction by a holder of that number of shares of Common
Stock or fraction thereof into which one Series A Preferred Share was
convertible immediately prior to such transaction (assuming such holder of
Common Stock failed to exercise any rights of election and received per share
the kind and amount received per share by a plurality of non-electing shares).
The Company may not become a party to any such transaction unless the terms
thereof are consistent with the foregoing.
No adjustment of the Conversion Price will be required to be made in any case
until cumulative adjustments amount to 1% or more of the Conversion Price. Any
adjustments not so required to be made will be carried forward and taken into
account in subsequent adjustments.
RESTRICTIONS ON TRANSFER; OWNERSHIP LIMITS
For the Company to qualify as a REIT under the Code, no more than 50% in
value of its outstanding stock may be owned, directly or indirectly, by five or
fewer "individuals" during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year. Under
25
<PAGE>
the constructive ownership provisions of the Code, stock owned by an entity,
including a corporation, life insurance company, mutual fund or pension trust,
is treated as owned by the ultimate individual beneficial owners of the entity.
Because the Company intends to maintain its qualification as a REIT, the
Company's Articles of Incorporation contain certain restrictions on the
ownership and transfer of capital stock, including the Series A Preferred
Shares, intended to ensure compliance with these requirements. For a complete
description of these restrictions, see "Common Stock--Restrictions on Transfer"
in the accompanying Prospectus.
Subject to certain exceptions specified in the Articles of Incorporation, no
holder may own, or be deemed to own by virtue of certain attribution provisions
of the Code, more than 5% of any class or series of Preferred Stock. The Board
of Directors of the Company has waived this restriction with respect to the
acquisition of Series A Preferred Shares for a holder who is not an "individual"
within the meaning of Section 542(a)(2) of the Code, so long as, through such
holder's ownership of such Series A Preferred Shares, no "individual" would be
considered the beneficial owner of more than 5% of the Series A Preferred
Shares. If a holder were to acquire more than 5% of the Series A Preferred
Shares and such holder did not meet the criteria set forth in the preceding
sentence, such holder's shares of Series A Preferred Shares would be subject to
the provisions in the Articles of Incorporation relating to a violation of the
ownership limits as described in the accompanying Prospectus under the caption
"Description of Common Stock--Restrictions on Transfer--Violation of Ownership
Limits."
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 15,000,000 shares of Preferred Stock. As
of November 1, 1996, there were no shares of Preferred Stock outstanding other
than the Series A Preferred Shares described in "Description of Series A
Preferred Shares" herein.
Under the Company's Articles of Incorporation, the Board may from time to
time establish and issue one or more series of Preferred Stock. The Board may
classify or reclassify any unissued Preferred Stock by setting or changing the
number, designation, preference, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms or
conditions of redemption of such series (a "Designating Amendment").
The following description of the 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 and the
Company's bylaws (the "Bylaws").
GENERAL
The Board is empowered by the Company's Articles of Incorporation to
designate and issue from time to time one or more series of Preferred Stock
without shareholder approval. The Board may determine the relative rights,
preferences and privileges of each series of Preferred Stock so issued. Because
the Board has the power to establish the preferences and rights of each series
of Preferred Stock, it may afford the holders of any series of Preferred Stock
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of Common Stock. The Preferred Stock will, when issued, be fully paid
and nonassessable.
The Prospectus Supplement relating to any Preferred Stock offered thereby
will contain the specific terms thereof, including, without limitation:
(1) The title and stated value of such Preferred Stock;
(2) The number of such shares of 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;
26
<PAGE>
(4) The date from which dividends on such Preferred Stock will accumulate,
if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred Stock;
(7) The provision for redemption, if applicable, of such Preferred Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred Stock
will be convertible into Common Stock of the Company, including the conversion
price (or manner of calculation thereof);
(10) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(11) A discussion of federal income tax considerations applicable to such
Preferred Stock;
(12) 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;
(13) 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; and
(14) Any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve the status of the
Company as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred Stock
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company, rank (i) senior to all classes or series of Common
Stock of the Company, and to all equity securities ranking junior to such
Preferred Stock; (ii) on a parity with all equity securities issued by the
Company the terms of which specifically provide that such equity securities rank
on a parity with the Preferred Stock; and (iii) junior to all equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank senior to the Preferred Stock. The term "equity securities" does
not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board, out of assets of the Company legally
available for payment, cash dividends (or dividends in kind or in other property
if expressly permitted and described in the applicable Prospectus Supplement) at
such rates and on such dates as will be set forth in the applicable Prospectus
Supplement. Each such dividend will be payable to holders of record as they
appear on the stock transfer books of the Company on such record dates as are
fixed by the Board.
Dividends on any series of Preferred Stock 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 fails to declare a dividend
payable on a dividend payment date on any series of the Preferred Stock for
which dividends are non-cumulative, 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.
Unless otherwise specified in the Prospectus Supplement, if any shares of
Preferred Stock of any series are outstanding, no full dividends will be
declared or paid or set apart for payment on any capital stock of the Company of
any other series ranking, as to dividends, on a parity with or junior to the
27
<PAGE>
Preferred Stock of such series for any period unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the Preferred Stock of such
series for all past dividend periods and the then current dividend period or
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends for the then current dividend period have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for such payment on the Preferred Stock of such series. When dividends
are not paid in full (or a sum sufficient for such full payment is not so set
apart) upon Preferred Stock of any series and the shares of any other series of
Preferred Stock ranking on a parity as to dividends with the Preferred Stock of
such series, all dividends declared upon Preferred Stock of such series and any
other series of Preferred Stock ranking on a parity as to dividends with such
Preferred Stock will be declared pro rata so that the amount of dividends
declared per share of Preferred Stock of such series and such other series of
Preferred Stock will in all cases bear to each other the same ratio that accrued
dividends per share on the Preferred Stock of such series (which will not
include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Stock do not have a cumulative dividend) and such
other series of Preferred Stock bear to each other. No interest, or sum of money
in lieu of interest, will be payable in respect of any dividend payment or
payments on Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, 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, no
dividends (other than in Common Stock or other capital stock ranking junior to
the Preferred Stock of such series as to dividends and upon liquidation) will be
declared or paid or set aside for payment or other distribution 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 will 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 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).
If for any taxable year, the Company elects to designate as "capital gains
dividends" (as defined in Section 857 of the Code) any portion (the "Capital
Gains Amount") of the dividends (within the meaning of the Code) paid or made
available for the year to holders of all classes of shares of beneficial
interest (the "Total Dividends"), then the portion of the Capital Gains Amount
that will be allocable to the holders of shares of Preferred Stock will be the
Capital Gains Amount multiplied by a fraction, the numerator of which shall be
the total dividends (within the meaning of the Code) paid or made available to
the holders of shares of Preferred Stock for the year and the denominator of
which shall be the Total Dividends.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the 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 that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that will 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
will not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of
28
<PAGE>
unpaid dividends for prior dividend periods) to the date of redemption. The
redemption price may be payable in cash or other property, as specified in the
applicable Prospectus Supplement. If the redemption price for Preferred Stock of
any series is payable only from the net proceeds of the issuance of capital
stock of the Company, the terms of such Preferred Stock may provide that, if no
such capital stock shall have been issued or to the extent the net proceeds from
any issuance are insufficient to pay in full the aggregate redemption price then
due, such Preferred Stock will automatically and mandatorily be converted into
the applicable capital stock of the Company pursuant to conversion provisions
specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all Preferred Stock of
any series shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the current dividend period and (ii) if such
series of Preferred Stock does not have a cumulative dividend, full dividends of
the Preferred Stock of any 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, no Preferred Stock of any series
shall be redeemed unless all outstanding Preferred Stock of such series are
simultaneously redeemed; provided, however, that the foregoing shall not prevent
the purchase or acquisition of Preferred Stock of such series to preserve the
REIT status of the Company or pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding Preferred Stock of such series. In
addition, unless (i) if such series of Preferred Stock has a cumulative
dividend, full cumulative dividends on all outstanding shares of any series of
Preferred Stock 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
dividends 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 any 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, the Company will not purchase or
otherwise acquire directly or indirectly any 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); provided, however, that the foregoing will not prevent the
purchase or acquisition of Preferred Stock of such series to preserve the REIT
status of the Company or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Preferred Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any series
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 or for which
redemption is requested by such holder (with adjustments to avoid redemption of
fractional shares) or by lot in a manner 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 will state: (i) the redemption date; (ii) the number of
shares and series of 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 of the Preferred Stock of any series are to be
redeemed, the notice mailed to each such holder thereof will also specify the
number of shares of Preferred Stock to be redeemed from each such holder. If
notice of redemption of any Preferred Stock has been given and if the funds
necessary for such redemption have been set aside by the Company in trust for
the benefit of the holders of any Preferred Stock so called for redemption, then
from and after the redemption date dividends will cease to accrue on such
Preferred Stock, and all rights of the holders of such shares will terminate,
except the right to receive the redemption price.
29
<PAGE>
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment is made to
the holders of any Common Stock or any other class or series of capital stock of
the Company ranking junior to the Preferred Stock in the distribution of assets
upon any liquidation, dissolution or winding up of the Company, the holders of
each 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 will 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 available assets of the Company are insufficient to pay the
amount of the liquidating distributions on all outstanding 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, then the holders of the 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 will be distributed among
the holders of any other classes or series of capital stock ranking junior to
the 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, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, will not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of Preferred Stock will not have any voting rights, except as set
forth below or as otherwise from time to time required by law or as indicated in
the applicable Prospectus Supplement.
Whenever dividends on any Preferred Stock shall be in arrears for six or more
consecutive quarterly periods, the holders of such Preferred Stock (voting
separately as a class with all other series of Preferred Stock upon which like
voting rights have been conferred and are exercisable) will be entitled to vote
for the election of two additional directors of the Company at a special meeting
called by the holders of record of at least ten percent (10%) of any series of
Preferred Stock so in arrears (unless such request is received less than 90 days
before the date fixed for the next annual or special meeting of the
shareholders) or at the next annual meeting of shareholders, and at each
subsequent annual meeting until (i) if such series of Preferred Stock has a
cumulative dividend, all dividends accumulated on such shares of Preferred Stock
for the past dividend periods and the then current dividend period shall have
been fully paid or declared and a sum sufficient for the payment thereof set
aside for payment or (ii) if such series of Preferred Stock do not have a
cumulative dividend, four consecutive quarterly dividends shall have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment. In such case, the entire Board will be increased by two directors.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock remain outstanding, the Company will not, without the
affirmative vote or consent of the holders of at least two-thirds of each series
of shares of Preferred Stock outstanding at the time, given in person or by
proxy, either in writing or at a meeting (such series voting separately as a
class), (i) authorize or create, or increase the authorized or issued amount of,
any class or series of capital stock ranking prior to such series of Preferred
Stock with respect to the payment of dividends or the distribution of assets
upon liquidation, dissolution or winding up or reclassify any authorized capital
stock of the Company into such shares, or create, authorize or issue any
obligation or security convertible into or
30
<PAGE>
evidencing the right to purchase any such shares; or (ii) amend, alter or repeal
the provisions of the Company's Articles of Incorporation or the Designating
Amendment for such series of Preferred Stock, whether by merger, consolidation
or otherwise (an "Event"), so as to materially and adversely affect any right,
preference, privilege or voting power of such series of Preferred Stock or the
holders thereof; provided, however, with respect to the occurrence of any of the
Events set forth in (ii) above, so long as the shares of Preferred Stock remain
outstanding with the terms thereof materially unchanged, taking into account
that upon the occurrence of an Event, the Company may not be the surviving
entity, the occurrence of any such Event will not be deemed to materially and
adversely affect such rights, preferences, privileges or voting power of holders
of Preferred Stock and provided further that (x) any increase in the amount of
the authorized Preferred Stock or the creation or issuance of any other series
of Preferred Stock, or (y) any increase in the amount of authorized shares of
such series or any other series of Preferred Stock, in each case ranking on a
parity with or junior to the Preferred Stock of such series with respect to
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up, will not be deemed to materially and adversely affect such
rights, preferences, privileges or voting powers.
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 Preferred Stock of such series shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock is
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 are convertible, the conversion
price (or manner of calculation thereof), the conversion period, provisions as
to whether conversion will be at the option of the holders of the Preferred
Stock or the Company, the events requiring an adjustment of the conversion price
and provisions affecting conversion in the event of the redemption of such
series of Preferred Stock.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Stock -- Restrictions on
Transfer -- Ownership Limits," for the Company to qualify as a REIT under the
Code, not more than 50% in value of its outstanding capital stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year. To assist the
Company in meeting this requirement, the Articles of Incorporation provide that
no holder of Preferred Stock may own, or be deemed to own by virtue of certain
attribution provisions of the Code, more than 5% of any class or series of
Preferred Stock and/or more than 5% of the issued and outstanding shares of
Common Stock, subject to certain exceptions specified in the Articles of
Incorporation. See "Description of Common Stock -- Restrictions on Transfer --
Ownership Limits."
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Preferred Stock will be set forth in
the applicable Prospectus Supplement.
DESCRIPTION OF COMMON STOCK
GENERAL
The Company is authorized to issue 90,000,000 shares of Common Stock. The
outstanding Common Stock entitles the holder to one vote on all matters
presented to shareholders for a vote. Holders of Common Stock have no preemptive
rights. At September 30, 1996, there were 35,473,493 shares of Common Stock
outstanding.
31
<PAGE>
Shares of Common Stock currently outstanding are listed for trading on the
New York Stock Exchange (the "NYSE"). The Company will apply to the NYSE to list
the additional Common Stock to be sold pursuant to any Prospectus Supplement,
and the Company anticipates that such shares will be so listed.
Subject to such preferential rights as may be granted by the Board in
connection with the future issuance of Preferred Stock, holders of Common Stock
are entitled to one vote per share on all matters to be voted on by stockholders
and are entitled to receive ratably such dividends as may be declared on the
Common Stock by the Board in its discretion from funds legally available
therefor. In the event of the liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of all debts and other liabilities and any liquidation
preference of the holders of Preferred Stock. Holders of Common Stock have no
subscription, redemption, conversion or preemptive rights. Matters submitted for
stockholder approval generally require a majority vote of the shares present and
voting thereon.
Advance Notice of Director Nominations and New Business. The Bylaws of the
Company provide that, with respect to an annual meeting of stockholders, the
proposal of business to be considered by stockholders may be made only (i) by or
at the direction of the Board or (ii) by a stockholder who is entitled to vote
at the meeting and who has complied with the advance notice procedures set forth
in the Bylaws. In addition, with respect to any meeting of stockholders,
nominations of persons for election to the Board may be made only (i) by or at
the direction of the Board or (ii) by any stockholder of the Company who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
RESTRICTIONS ON TRANSFER
Ownership Limits. The Company's Articles of Incorporation contain certain
restrictions on the number of shares of Common Stock that individual
shareholders may own. For the Company to qualify as a REIT under the Code, no
more than 50% in value of its outstanding capital stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year. The capital
stock also must be beneficially owned by 100 or more persons during at least 335
days of a taxable year or during a proportionate part of a shorter taxable year.
Because the Company intends to maintain its qualification as a REIT, the
Company's Articles of Incorporation contain certain restrictions on the
ownership and transfer of capital stock, including Common Stock, intended to
ensure compliance with these requirements.
Subject to certain exceptions specified in the Articles of Incorporation, no
holder may own, or be deemed to own by virtue of certain attribution provisions
of the Code, more than (A) 5% of the issued and outstanding shares of Common
Stock ("Common Stock Ownership Limit") and/or (B) more than 5% of any class or
series of Preferred Stock. (This limit, in addition to the Existing Holder
Limit, the Special Shareholder Limit, and the Non U.S. Shareholder Limit, all as
defined below, are referred to collectively herein as the "Ownership Limits.")
Existing Holders, including Clark Enterprises Inc., The Equitable Life Assurance
Society of the United States, Equitable Variable Life Insurance Company, FW
REIT, L.P., The Oliver Carr Company, Oliver T. Carr, Jr., or A. James Clark, are
not subject to the Common Stock Ownership Limit, but they are subject to special
ownership limitations (the "Existing Holder Limit"). Furthermore, USRealty and
its affiliates are not subject to the Common Stock Ownership Limit, but are
subject to a special ownership limit of 48% of the outstanding shares of Common
Stock and 48% of the outstanding shares of each class or series of preferred
stock of the Company (the "Special Shareholder Limit"). Furthermore, all holders
are prohibited from acquiring any capital stock if such acquisition would cause
five beneficial owners of capital stock to beneficially own in the aggregate
more than 50% in value of the outstanding capital stock.
In addition to the above restrictions on ownership of shares of capital stock
of the Company, in order to assist the Company in qualifying as a "domestically
controlled REIT," the Articles of Incorporation contain certain provisions
preventing any Non-U.S. Shareholder, as defined below (other than USRealty and
its affiliates), from acquiring additional shares of the Company's capital stock
if, as a
32
<PAGE>
result of such acquisition, the Company would fail to qualify as a "domestically
controlled REIT" (computed assuming that USRealty owns the maximum percentage of
the Company's capital stock that it is permitted to own under the Special
Shareholder Limit) ("Non-U.S. Shareholder Limit"). A Non-U.S. Shareholder is a
nonresident alien individual, foreign corporation, foreign partnership and any
other foreign shareholder. For a discussion of the taxation of a Non-U.S.
Shareholder and the requirements for the Company to qualify as a "domestically
controlled REIT, see "Federal Income Tax Considerations--Taxation of Holders of
Common Stock--Taxation of Non-U.S. Shareholders." The Company is unlikely to be
able to advise a prospective Non-U.S. Shareholder that its purchase of any
shares of the Company's capital stock would not violate this prohibition,
thereby subjecting such prospective Non-U.S. Shareholder to the adverse
consequences described below under "Violation of Ownership Limitations."
Accordingly, an acquisition of the Company's capital stock would not likely be a
suitable investment for Non-U.S. Shareholders other than USRealty.
The Board may increase the Ownership Limits from time to time, but may not do
so to the extent that after giving effect to such increase five beneficial
owners of shares of capital stock could beneficially own in the aggregate more
than 49.5% of the Company's outstanding shares of capital stock. The Board, in
its sole discretion, may waive the Ownership Limits with respect to a holder if
such holder's ownership will not then or in the future jeopardize the Company's
status as a REIT.
Violation of Ownership Limits. The Articles of Incorporation provide that, if
any holder of capital stock of the Company 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 (including the Non-U.S. Shareholder Limit), then the capital
stock being transferred (or in the case of an event other than a transfer, the
capital stock beneficially owned) that would cause one or more of the
restrictions on ownership or transfer to be violated will 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 upon demand to the trustee of the trust for
the benefit of the charitable beneficiary. The trustee of the trust will have
all rights to dividends with respect to the shares of capital 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 Ownership Limitations in the hands of such designated transferee.
Upon the sale of such shares, the purported transferee shall receive the lesser
of (A) (i) the price per share such purported transferee paid for the capital
stock in the purported transfer that resulted in the transfer of shares of
capital stock to the trust, or (ii) if the transfer or other event that resulted
in the transfer of shares of capital stock to the trust was not a transaction in
which the purported record transferee of shares of capital stock 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
disposition of the shares held in the trust.
All certificates representing Common Stock will bear a legend referring to
the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the Code
or regulations thereunder) of the issued and outstanding shares of Common Stock
must file a written notice with the Company containing the information specified
in the Articles of Incorporation no later than December 31 of each year. In
addition, each shareholder shall upon demand be required to disclose to the
Company in writing such information as the Company may request in good faith in
order to determine the Company's status as a REIT.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Common Stock is Boston EquiServe.
33
<PAGE>
DESCRIPTION OF COMMON STOCK WARRANTS
The Company may issue Common Stock Warrants for the purchase of Common Stock.
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 Common Stock 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 Common Stock 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 Common Stock Warrants. The following
sets forth certain general terms and provisions of the Common Stock Warrants
offered hereby. Further terms of the Common Stock Warrants and the applicable
Warrant Agreements will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Common
Stock Warrants in respect of which this Prospectus is being delivered,
including, where applicable, the following: (1) the title of such Common Stock
Warrants; (2) the aggregate number of such Common Stock Warrants; (3) the price
or prices at which such Common Stock Warrants will be issued; (4) the
designation, number and terms of the shares of Common Stock purchasable upon
exercise of such Common Stock Warrants; (5) the designation and terms of the
other Securities offered thereby with which such Common Stock Warrants are
issued and the number of such Common Stock Warrants issued with each such
Security offered thereby; (6) the date, if any, on and after which such Common
Stock Warrants and the related Common Stock will be separately transferable; (7)
the price at which each of the shares of Common Stock purchasable upon exercise
of such Common Stock Warrants may be purchased; (8) the date on which the right
to exercise such Common Stock Warrants shall commence and the date on which such
right shall expire; (9) the minimum or maximum number of such Common Stock
Warrants which may be exercised at any one time; (10) information with respect
to book entry procedures, if any; (11) a discussion of certain federal income
tax considerations; and (12) any other terms of such Common Stock Warrants,
including terms, procedures and limitations relating to the exchange and
exercise of such Common Stock Warrants.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a description of certain Federal income tax consequences to
the Company and the holders of Common Stock, Preferred Stock and Common Stock
Warrants of the treatment of the Company as a REIT under applicable provisions
of the Code. The following discussion, which is not exhaustive of all possible
tax considerations, does not give a detailed discussion 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 the
Federal income tax laws. As used in this section, the term "Company" refers
solely to CarrAmerica Realty Corporation.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
General. The Company, which is considered a corporation for Federal income
tax purposes, has elected to be taxed as a REIT under Sections 856 through 860
of the Code effective as of its taxable year ended December 31, 1993. The
Company believes that it is organized and has operated in such
34
<PAGE>
a manner so as to qualify for taxation as a REIT under the Code, and the Company
intends to continue to operate in such a manner. No assurance, however, can be
given that the Company has operated in a manner so as to qualify as a REIT or
that it will continue to operate in such a manner in the future. Qualification
and taxation as a REIT depends upon the Company's ability to meet on a
continuing basis, through actual annual operating results, distribution levels
and diversity of stock ownership, the various qualification tests imposed under
the Code on REITs, some of which are summarized below. While the Company intends
to operate so that it qualifies as a RElT, given the highly complex nature of
the rules governing REITs, the ongoing importance of factual determinations, and
the possibility of future changes in circumstances of the Company, no assurance
can be given that the Company satisfies such tests or will continue to do so.
See "Failure to Qualify" below.
The following is a general summary of the Code provisions that govern the
Federal income tax treatment of a REIT and its shareholders. These provisions of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, Treasury Regulations and
administrative and judicial interpretations thereof.
If 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 on any income that it does not distribute and will be subject to
Federal income tax in certain circumstances on certain types of income even
though that income is distributed.
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
(l) 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 (5) and (6)
above. See "Description of Common Stock-Restrictions on Transfer."
Income Tests. In order to maintain qualification as a REIT, there are three
gross income requirements that must be satisfied annually. First, at least 75%
of the REIT'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 REIT'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. Third, short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions and gain on the sale or other disposition of real property held for
less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of the REIT's gross income
(including gross income from prohibited transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions (related to the identity of the tenant, the computation of
the rent payable, and the nature of the property leased) are met. The Company
does not anticipate receiving rents in excess of 1% of gross revenue that fail
to meet these conditions. In addition, for rents received to qualify as "rents
from real property," the Company generally
35
<PAGE>
must not operate or manage the property or furnish or render services to
tenants, other than through an "independent contractor" 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 space for occupancy only and
are not otherwise considered "rendered to the occupant." The Company will
provide certain services with respect to the properties through entities that do
not satisfy the "independent contractor" requirements described above. The
Company has received a ruling from the IRS that the provision of certain
services will not cause the rents received with respect to the properties to
fail to qualify as "rents from real property." Based upon the IRS ruling and its
experience in the office rental markets in which the Company's properties are
located, the Company believes that all services provided to tenants will be
considered "usually or customarily rendered" in connection with the rental of
office space for occupancy, although there is no assurance that the IRS will not
contend otherwise. If the Company contemplates providing services, either
directly, or through another entity, in the future that reasonably might be
expected not to meet the "usual or customary" standard, it will arrange to have
such services provided by an independent contractor from which the Company will
receive no income.
The Company may receive fees in consideration of the performance of
management and administrative services with respect to properties that are not
owned entirely by the Company. A portion of such management and administrative
fees (corresponding to that portion of a property owned by a third party)
generally will not qualify under the 75% or 95% gross income tests. The Company
also may receive other types of income with respect to the properties that it
owns that will not qualify for the 75% or 95% gross income tests. The Company
believes, however, that the aggregate amount of such fees and other
non-qualifying income in any taxable year will not cause the Company to exceed
the limits on non-qualifying income under the 75% and 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code. 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 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. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets: (i) at least
75% of the value of the Company's total assets must be represented by "real
estate assets," cash, cash items and government securities; (ii) not more than
25% of the Company's total assets may be represented by securities other than
those in the 75% asset class; and (iii) of the investments included in the 25%
asset class, the value of any one issuer's securities (other than an interest in
a partnership, shares of a "qualified REIT subsidiary" or another REIT, but
including any unsecured debt of Carr Realty, L.P.) 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 (other than
an interest in a partnership, shares of a "qualified REIT subsidiary" or another
REIT). By virtue of its ownership of Units, the Company will be considered to
own its pro rata share of the assets of Carr Realty, L.P., including the
securities of Carr Services, Inc., and CRESNOVA. (Carr Services, Inc., CRESNOVA
and Carr Development & Construction are referred to collectively herein as the
"Non-qualified REIT Subsidiaries.") Neither Carr Realty, L.P. nor the Company
will own more than 10% of the voting securities of any Non-qualified REIT
Subsidiary. In addition, the Company and its senior management believe that the
Company's pro rata share of the value of the securities of each of such
Non-qualified REIT Subsidiary and of any unsecured debt of Carr Realty, L.P.
owned by the Company will not exceed 5% of the total value of the Company's
assets. There can be no assurance, however, that the IRS might not contend
otherwise. Although the Company plans to take steps to ensure that it continues
to satisfy the 5% test, there can be no assurance that such steps will be
successful or will not require a reduction in the Company's overall interest in
one or more of the Non-qualified REIT Subsidiaries.
36
<PAGE>
Annual Distribution Requirements. To qualify as a REIT, the Company generally
must distribute to its shareholders at least 95% of its income each year. In
addition, the Company will be subject to tax on the undistributed amount at
regular capital gains and ordinary corporate tax rates and also may be subject
to a 4% excise tax on undistributed income in certain events.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT in
any taxable year, the Company will be subject to tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Unless entitled to relief under specific statutory provisions, the Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXATION OF HOLDERS OF COMMON STOCK
Taxation of Taxable Domestic Shareholders. As long as the Company qualifies
as a REIT, distributions made to the Company's taxable domestic shareholders out
of current or accumulated earnings and profits (and not designated as capital
gain dividends) will be taken into account by them as ordinary income, and
corporate shareholders will not be eligible for the dividends received deduction
as to such amounts. For purposes of determining whether distributions on the
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, if any, and second to the 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. Distributions that are
designated as capital gain dividends will be taxed as long-term capital gains
(to the extent they 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. However, corporate shareholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income. Distributions in excess of
current or accumulated earnings and profits will not be taxable to a 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 shareholder's shares of Common Stock, they will be included in income as
long-term capital gain (or short-term capital gain if the shares of Common Stock
have been held for one year or less), assuming the shares of Common Stock are a
capital asset in the hands of the shareholder. In addition, any dividend
declared by the Company in October, November or December of any year payable to
a stockholder of record on a specific date in any such month shall be treated as
both paid by the Company and received by the stockholder on December 31 of such
year, provided that the dividend is actually paid by the Company during January
of the following calendar year. Stockholders may not include in their individual
income tax returns any net operating losses or capital losses of the Company.
In addition, distributions from the Company and gain from the disposition of
shares of Common Stock will not be treated as "passive activity" income and
therefore stockholders will not be able to apply losses from "passive
activities" to offset such income.
In general, a domestic 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. Such gain or loss generally will constitute long-term capital gain or
loss if the shareholder has held such shares 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.
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
37
<PAGE>
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. Additional issues may arise pertaining to
information reporting and backup withholding with respect to Non-U.S.
Shareholders (persons other than (i) citizens or residents of the United States,
(ii) corporations, partnerships or other entities created or organized under the
laws of the United States or any political subdivision thereof, and (iii)
estates or trusts the income of which is subject to United States Federal income
taxation regardless of its source) and Non-U.S. Shareholders should consult
their tax advisors with respect to any such information reporting and backup
withholding requirements.
The Treasury Department has recently issued proposed regulations regarding
the withholding and information reporting rules discussed above. In general, the
proposed regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and forms and
clarify and modify reliance standards. If finalized in their current form, the
proposed regulations would generally be effective for payments made after
December 31, 1997, subject to certain transition rules.
Taxation of Tax-Exempt Shareholders. As a general rule, amounts distributed
to a tax-exempt entity do not constitute "unrelated business taxable income"
("UBTI"), and thus distributions by the Company to a stockholder that is a
tax-exempt entity should also 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 is not otherwise used in an unrelated trade or business of the
tax-exempt entity. However, under the Revenue Reconciliation Act of 1993,
distributions by a REIT to a tax-exempt employee's pension trust that owns more
than 10 percent 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 five percent, (ii) the REIT qualifies as a REIT only
because the pension trust is not treated as a single individual for purposes of
the "five-or-fewer rule" (see "--Taxation of the Company (Requirements for
Qualification)" above), and (iii) (A) one pension trust owns more than 25
percent of the value of the REIT or, (B) a group of pension trusts individually
holding more than 10 percent of the value of the REIT collectively own more than
50 percent of the value of the REIT. The Company currently does not expect that
this rule will apply.
Taxation of Non-U.S. Shareholders. The rules governing U.S. Federal income
taxation of Non-U.S. Shareholders are complex, and no attempt will be made
herein to provide more than a limited summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of U.S. Federal, state and local income tax laws with regard to an
investment in Common Stock, including any reporting requirements.
Distributions 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 be treated as dividends of ordinary income to the
extent that they are made out of current or accumulated earnings and profits of
the Company. Such distributions, ordinarily, will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces that tax. Distributions in excess of current and accumulated
earnings and profits of the Company will not be taxable to a Non-U.S.
Shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Stock, but rather will reduce the adjusted basis of such
Common Stock. To the extent that such distributions exceed the adjusted basis of
a Non-U.S. Shareholder's Common Stock, they will give rise to tax liability if
the Non-U.S. Shareholder would otherwise be subject to tax on any gain from the
sale or disposition of his Common Stock as described below (in which case they
also may be subject to a 30% branch profits tax if the shareholder is a foreign
corporation). If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current or accumulated
38
<PAGE>
earnings and profits, the entire distribution will be subject to withholding at
the rate applicable to dividends. However, the Non-U.S. Shareholder may seek a
refund of such amounts from the IRS if it is subsequently determined that such
distribution was, in fact, in excess of current or accumulated earnings and
profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") at the
normal capital gain rates applicable to domestic shareholders (subject to
applicable alternative minimum tax and 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 corporate Non-U.S.
Shareholder not entitled to treaty relief or exemption. The Company is required
by applicable Treasury Regulations to withhold 35% of any distribution that is
or could be designated by the Company as a capital gain dividend. The amount
withheld is creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. Following the USRealty Transaction, USRealty,
a Luxembourg corporation, holds approximately 46.5% in value of the securities
of the Company. In the event that USRealty and other stockholders of the Company
who are Non-U.S. Shareholders own collectively 50% or more, in value, of the
outstanding stock of the Company, the Company would cease to be a "domestically
controlled REIT."
If the Company does not qualify as a "domestically controlled REIT," a
Non-U.S. Shareholder's sale of securities of the Company generally still will
not be subject to U.S. tax under FIRPTA as a sale of a U.S. real property
interest, provided that (i) the securities are "regularly traded" (as defined by
the applicable Treasury regulations) on an established securities market, and
(ii) the selling Non-U.S. Shareholder held 5% or less of the Company's
outstanding securities at all times during a specified testing period. The
Company believes the Common Stock would be considered to be "regularly traded"
for this purpose, and the Company has no actual knowledge of any Non-U.S.
Shareholder (other than USRealty) that holds in excess of 5% of the Company's
stock. In order to assist the Company in qualifying as a "domestically
controlled REIT," the Articles of Incorporation contain certain provisions
preventing any Non-U.S. Shareholder (other than USRealty and its affiliates)
from acquiring additional shares of the Company's capital stock if, as a result
of such acquisition, the Company would fail to qualify as a "domestically
controlled REIT" (computed assuming that USRealty owns the maximum percentage of
the Company's capital stock that it is permitted to own under the Special
Shareholder Limit). The Company is unlikely to be able to advise a prospective
Non-U.S. Shareholder that its purchase of any shares of the Company's capital
stock would not violate this prohibition, thereby subjecting such prospective
Non-U.S. Shareholder to the adverse consequences described under "Description of
Common Stock--Restrictions on Transfer--Violation of Ownership Limitations."
Accordingly, an acquisition of the Company's capital stock would not likely be a
suitable investment for Non-U.S. Shareholders other than USRealty.
If the gain on the sale of Common Stock were to be subject to tax under
FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as
domestic shareholders with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals), and the purchaser of the Common Stock would be
required to withhold and remit to the IRS 10% of the purchase price.
Finally, Congress is considering legislation that could require the Company,
if it were not to qualify as a "domestically controlled REIT," to withhold and
remit to the IRS 10% of all distributions that are not treated either as
ordinary dividends or "capital gain dividends" and that are made to Non-U.S.
Shareholders who hold more than 5% of the Company's stock. The applicable
Non-U.S. Shareholder could seek a refund of such withheld amounts to the extent
the Non-U.S. Shareholder did not recognize taxable gain as a result of such
distribution.
39
<PAGE>
TAXATION OF HOLDERS OF PREFERRED STOCK OR COMMON STOCK WARRANTS
Additional Tax Consequences for Holders of Preferred Stock or Common Stock
Warrants. If the Company offers one or more series of Preferred Stock or Common
Stock Warrants, then 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.
OTHER TAX CONSIDERATIONS
Effect of Tax Status of Carr Realty, L.P. and Other Partnerships on REIT
Qualification. The Company believes that Carr Realty, L.P., CarrAmerica Realty,
L.P., and each other partnership and limited liability company in which it holds
an interest are properly treated as partnerships for tax purposes (and not as
associations taxable as corporations). If, however, either Carr Realty, L.P. or
CarrAmerica Realty, L.P. were treated as an association taxable as a
corporation, the Company would cease to qualify as a REIT. If any of the other
partnerships were treated as an association taxable as a corporation and the
Company's interest in such partnership exceeded 10% of the partnership's voting
interests or the value of such interest exceeded 5% of the value of the
Company's assets, the Company would cease to qualify as a REIT. Furthermore, in
such a situation, any partnership treated as a corporation would be subject to
corporate income taxes, and distributions from any such partnership to the
Company would be treated as dividends, which are not taken into account in
satisfying the 75% gross income test described above and which therefore could
make it more difficult for the Company to meet the 75% asset test described
above. Finally, in such a situation, the Company would not be able to deduct its
shares of any losses generated by any such partnership in computing its taxable
income.
Tax Allocations with Respect to the Properties. Carr Realty, L.P. was formed
by way of contributions of appreciated property. When property is contributed to
a partnership in exchange for an interest in the partnership, the partnership
generally takes a carryover basis in that property for tax purposes equal to the
adjusted basis of the contributing partner in the property, rather than a basis
equal to the fair market value of the property at the time of contribution (this
difference is referred to as "Book-Tax Difference"). The Carr Realty, L.P.
partnership agreement requires allocations of income, gain, loss and deduction
with respect to the contributed Property be made in a manner consistent with the
special rules in 704(c) of the Code and the regulations thereunder, which will
tend to eliminate the Book-Tax Differences with respect to the contributed
Properties over the life of Carr Realty, L.P. However, because of certain
technical limitations, the special allocation rules of Section 704(c) may 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 Properties in the hands of Carr Realty, L.P. could
cause the Company (i) to be allocated lower amounts of depreciation and other
deductions for tax purposes than would be allocated to the Company if all
Properties were to have a tax basis equal to their fair market value at the time
the Properties were contributed to Carr Realty, L.P., and (ii) possibly to be
allocated taxable gain in the event of a sale of such contributed Properties in
excess of the economic or book income allocated to the Company as a result of
such sale.
Non-Qualified REIT Subsidiaries. The Non-qualified REIT Subsidiaries do not
qualify as REITs and thus pay Federal, state and local income taxes (including
District of Columbia franchise tax) on their net income at normal corporate
rates. To the extent the Non-qualified REIT Subsidiaries are required to pay
Federal, state and local income taxes, the cash available for distribution to
stockholders will be reduced accordingly.
State and Local Taxes; District of Columbia Unincorporated Business Tax. The
Company and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the Federal income tax consequences
discussed above. In this regard, the District of Columbia imposes an
unincorporated business income tax, at the rate of 9.975%, on the "District of
Columbia taxable income" of partnerships doing business in the District of
Columbia. Because many of the Properties owned by Carr Realty, L.P. are located
in the District of Columbia, the Company's share of the "District of Columbia
taxable income" of Carr Realty, L.P. will be subject to this tax. Carr Realty,
L.P. has taken steps to attempt to reduce the amount of income that is
40
<PAGE>
considered "District of Columbia taxable income," but it is likely that at least
some portion of the income attributable to the Properties located in the
District of Columbia will be subject to the District of Columbia tax. To the
extent Carr Realty, L.P. is required to pay the District of Columbia
unincorporated business income tax, the cash available for distribution to the
Company and, therefore, to its stockholders as dividends will be reduced
accordingly. This tax would not apply if the Company were to own and operate its
assets directly, rather than through Carr Realty, L.P.; however, the Company's
ability to eliminate Carr Realty, L.P. and thus own directly the assets
currently owned by Carr Realty, L.P. is severely limited.
PLAN OF DISTRIBUTION
GENERAL
The Company may sell Securities in or through underwriters for public offer
and sale by them, and also may sell Securities offered hereby 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.
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
Securities upon terms and conditions set forth in the applicable Prospectus
Supplement. In connection with the sale of the 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 the 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 the 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 to be entered into with the
Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
at the public offering price set forth in such Prospectus Supplement pursuant to
delayed delivery contracts ("Contracts") providing for payment and delivery on
the date or dates stated in such Prospectus Supplement. 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.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for the Company and its Subsidiaries
in the ordinary course of business.
41
<PAGE>
PARTICIPATION RIGHTS
In conjunction with the USRealty Transaction, so long as USRealty owns at
least 25% of the outstanding Common Stock of the Company on a fully diluted
basis, USRealty will be entitled (except in certain limited circumstances), upon
compliance with certain specified conditions, to a participation right to
purchase or subscribe for, either as part of such issuance or in a concurrent
issuance, a total number of shares of Common Stock or Preferred Stock, as the
case may be, equal to up to 30% (or 35% in certain circumstances) of the total
number of shares or of Common Stock or Preferred Stock, as applicable, proposed
to be issued by the Company. All purchases pursuant to such participation rights
will be at the same price and on the same terms and conditions as are applicable
to other purchasers hereunder.
LEGAL MATTERS
The legality of the Debt Securities, the Preferred Stock, the Common Stock
and the Common Stock Warrants offered hereby will be passed upon for the Company
by Hogan & Hartson L.L.P., Washington, D.C. Certain federal tax matters will be
passed upon for the Company by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements and financial statement schedule of the
Company and the combined financial statements of the Carr Group, each
incorporated herein by reference, have been incorporated in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
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"). Such reports, proxy statements and other
information can be inspected at the Public Reference Section maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and the
following regional offices of the Commission: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Company's Common Stock are listed
on the New York Stock Exchange and such reports, proxy statements and other
information concerning the Company can be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005. The Commission
maintains a "web site" that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. The address of such site is "http://www.sec.gov".
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement"), of which this Prospectus is a part, under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other documents are not necessarily complete, and in each instance, reference is
made to the copy of such contract or documents filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Securities, reference is hereby made to the
Registration Statement and such exhibits and schedules which may be obtained
from the Commission at its principal office in Washington, D.C. upon payment of
the fees prescribed by the Commission.
42
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1995;
2. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996; the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996 and a related Report on Form 10-QA filed on October 16, 1996; and the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996; and
3. The Company's Current Report on Form 8-K filed with the Commission on
April 10, 1996, and a Form 8-K/A related thereto and filed with the Commission
on May 14, 1996; the Company's Current Report on Form 8-K filed with the
Commission on May 16, 1996; the Company's Current Report on Form 8-K filed with
the Commission on May 24, 1996; the Company's Current Report on Form 8-K filed
with the Commission on June 27, 1996, and a Form 8-K/A related thereto filed
with the Commission on July 16, 1996; the Company's Current Report on Form 8-K
filed with the Commission on July 10, 1996; the Company's Current Report on Form
8-K filed with the Commission on July 11, 1996; the Company's Current Report on
Form 8-K filed with the Commission on October 16, 1996; the Company's Current
Report on Form 8-K filed with the Commission on October 24, 1996; and the
Company's Current Report on Form 8-K filed with the Commission on November 4,
1996.
All documents filed subsequent to the date of this Prospectus pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to termination
of the offering of all Securities to which this Prospectus relates shall be
deemed to be incorporated by reference in this Prospectus and shall be part
hereof from the date of filing of such document.
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 in this
Prospectus (in the case of a statement in a previously filed document
incorporated or deemed to be incorporated by reference herein), in any
accompanying Prospectus Supplement relating to a specific offering of Securities
or in any other subsequently filed document that is also incorporated or deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus or any
accompanying Prospectus Supplement. Subject to the foregoing, all information
appearing in this Prospectus and each accompanying Prospectus Supplement is
qualified in its entirety by the information appearing in the documents
incorporated by reference.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon their
written or oral request, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference in such documents). Written requests
for such copies should be addressed to Secretary, CarrAmerica Realty
Corporation, 1700 Pennsylvania Avenue, N.W., Washington, D.C. 20006, telephone
number (202) 624-7500.
43
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus Supplement or the
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. This Prospectus Supplement and the
Prospectus do not constitute an offer to sell or the solicitation of an offer to
buy any securities other than the securities described in this Prospectus
Supplement or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus Supplement or the Prospectus nor any
sale made hereunder or thereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of the Company since
the date hereof or that the information contained herein or therein is correct
as of any time subsequent to the date of such information.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
-----
Prospectus Supplement Summary .......................................... S-1
The Company ............................................................ S-7
Recent Acquisition and Development Activity ............................ S-11
Use of Proceeds ........................................................ S-18
Price Range of Common Stock and Dividend History ....................... S-19
Capitalization ......................................................... S-20
Pro Forma Financial Information ........................................ S-21
Management's Discussion and Analysis of Financial Condition and Results
of Operations ......................................................... S-28
Properties ............................................................. S-34
Management ............................................................. S-41
Underwriting ........................................................... S-47
Legal Matters .......................................................... S-48
Prospectus
The Company ............................................................ 2
Risk Factors ........................................................... 3
Use of Proceeds ........................................................ 9
Ratios of Earnings to Fixed Charges .................................... 9
Description of Debt Securities ......................................... 10
Description of Series A Preferred Shares ............................... 21
Description of Preferred Stock ......................................... 26
Description of Common Stock ............................................ 31
Description of Common Stock Warrants ................................... 34
Federal Income Tax Considerations ...................................... 34
Plan of Distribution ................................................... 41
Legal Matters .......................................................... 42
Experts ................................................................ 42
Available Information .................................................. 42
Incorporation of Certain Documents by Reference ........................ 43
================================================================================
================================================================================
5,000,000 SHARES
CARRAMERICA
REALTY CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
--------------------
[LOGO]
--------------------
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
LEGG MASON WOOD WALKER
INCORPORATED
WHEAT FIRST BUTCHER SINGER
REPRESENTATIVES OF THE UNDERWRITERS
================================================================================
