1,379,310 Shares
AMERICAN REAL ESTATE INVESTMENT CORPORATION
Common stock
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PROSPECTUS SUPPLEMENT
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October 7, 1999
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<PAGE>
Prospectus Supplement dated October 7, 1999
PROSPECTUS SUPPLEMENT
- ---------------------
[(To prospectus dated July 10, 1998)
1,379,310 SHARES
AMERICAN REAL ESTATE INVESTMENT CORPORATION
COMMON STOCK
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American Real Estate Investment Corporation is a corporation engaged in
the ownership, acquisition, management and development of industrial and office
properties.
We are offering to sell an aggregate of 1,379,310 shares of common
stock at a price of $14.50 per share, par value $.001 per share, with this
prospectus supplement directly to those persons listed under "Plan of
Distribution." Our common stock is listed for trading on the American Stock
Exchange under the symbol "REA." On October 6, 1999, the last reported sale of
our common stock on the American Stock Exchange was $15.875 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN
THE "RISK FACTORS" SECTION BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
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The date of this prospectus supplement is October 7, 1999
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Supplement
USE OF PROCEEDS..............................................................S-1
PLAN OF DISTRIBUTION.........................................................S-1
DESCRIPTION OF CAPITAL STOCK.................................................S-1
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS...................................S-13
Prospectus
WHERE YOU CAN FIND MORE INFORMATION......................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 2
FORWARD-LOOKING INFORMATION................................................. 3
RISK FACTORS................................................................ 4
THE COMPANY................................................................. 10
USE OF PROCEEDS............................................................. 10
RATIO OF EARNINGS TO FIXED CHARGES.......................................... 11
DESCRIPTION OF CAPITAL STOCK................................................ 11
DESCRIPTION OF DEPOSITARY SHARES............................................ 17
METHOD OF SALE.............................................................. 20
FEDERAL INCOME TAX CONSIDERATIONS........................................... 21
LEGAL MATTERS............................................................... 29
EXPERTS..................................................................... 30
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $19.9 million, after deducting estimated expenses. We will use the
proceeds from the sale of the common stock for general corporate purposes
including working capital and funding acquisitions.
PLAN OF DISTRIBUTION
We are selling an aggregate of 1,379,310 shares of our common stock
directly to Jeffrey E. Kelter, Hudson Bay Partners II, L.P., Michael J. Falcone,
Francesco Galesi, James Mulvihill, Russell Platt, David F. McBride, MS Special
Funds Pte Ltd. and MS Real Estate Special Situations Inc. at a purchase price of
$14.50 per share. Messrs. Kelter, Falcone, Galesi, Mulvihill, Platt and McBride
are members of our board of directors and Hudson Bay Partners II, L.P., MS
Special Funds Pte Ltd. and MS Real Estate Special Situations Inc. are certain of
our principal stockholders.
DESCRIPTION OF CAPITAL STOCK
IN ADDITION TO THE INFORMATION BELOW, YOU SHOULD ALSO READ THE
INFORMATION CONTAINED UNDER THE HEADING "DESCRIPTION OF CAPITAL STOCK" BEGINNING
ON PAGE 11 IN THE ACCOMPANYING PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN
SHARES OF OUR COMMON STOCK. HOWEVER, IF THE INFORMATION SET FORTH BELOW DIFFERS
FROM THE INFORMATION SET FORTH IN THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY
ON THE INFORMATION SET FORTH BELOW.
GENERAL
Under our Charter, the total number of shares of all classes of stock
that we have authority to issue is 65,000,000. Currently, 59,200,000 shares are
classified as common stock, $.001 par value, 800,000 shares are classified as
Series A Convertible Preferred Stock, $.001 par value (the "Series A Preferred
Shares"), 4,200,000 shares are classified as Series B Convertible Preferred
Stock, S.001 par value (the "Series B Preferred Shares") and 800,000 shares are
classified as Series C Convertible Preferred Stock (the "Series C Preferred
Shares"). Our board of directors may classify and reclassify any unissued shares
of capital stock by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of such shares of capital stock subject to the rights of the holders of Series
A, Series B and Series C Preferred Shares described below.
As general partner of our operating partnership, American Real Estate
Investment, L.P., we may authorize the creation of one or more series of
preferred OP Units having such preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such OP Units as we may determine subject to the
rights of the holders of Series B, Series C and Series D Convertible Preferred
Units described below. We also may authorize the issuance of additional common
OP Units on such terms and conditions as we may determine.
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
At the annual meeting of our stockholders held on June 3, 1999, our
stockholders approved our conversion from a Maryland corporation to a Maryland
real estate investment trust. This conversion will be effected through our
merger with and into Keystone Property Trust, a Maryland real estate investment
trust, formed solely for the purposes of this conversion. It is anticipated that
this merger will become effective in October 1999.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters voted on by stockholders, including elections of directors. Except for
the voting rights of the holders of Series A, Series B and Series C Preferred
Shares described below, rights provided in any Articles Supplementary adopted by
our board of directors with respect to any future series of preferred stock or
as otherwise required by law, the holders of shares of common stock possess all
voting power. Our board of directors is divided into three classes. The three
classes have staggered terms of office so that the terms of office of directors
of only one class expires at each annual meeting of stockholders. The directors
of each class are elected for three year terms and until his or her successor is
elected and duly qualified or until his or her earlier death, resignation or
removal. Our Charter does not provide for cumulative voting in the election of
directors. Subject to any preferential rights of any outstanding series of
preferred stock including the Series A, Series B and Series C Preferred Shares,
the holders of shares of common stock are entitled to such dividends as may be
declared from time to time by our board of directors from funds available
therefor and upon liquidation are entitled to receive pro rata all assets of our
company available for distribution to such holders. All shares of common stock
outstanding are fully paid and non-assessable, and the holders thereof have no
preemptive rights under our Charter. However, under an agreement pursuant to
which certain institutional holders (for whom Morgan Stanley Asset Management
Inc. acts as agent) purchased shares of our common stock, if we propose to issue
shares of our common stock for cash, these institutional holders have the right
to purchase, on the same terms, up to an amount of the securities such that,
upon consummation of the proposed issuance, such holders would hold the same
percentage of our common stock as such holders held immediately prior to such
issuance. Holders of our Series A Preferred Stock have similar rights as
described below under "Preferred Stock--Terms of Series A Convertible Preferred
Stock--Preemptive Rights" below.
S-1
<PAGE>
PREFERRED STOCK
GENERAL
Under our Charter, our board of directors is authorized to provide for
the issuance of shares of preferred stock in one or more series, to establish
the number of shares in each series and to fix the terms of each series. Our
board of directors could authorize the issuance of additional shares of
preferred stock with terms and conditions that could have the effect of
discouraging a takeover or other transaction that holders of common stock might
believe to be in their best interests or in which holders of some, or a
majority, of the shares of common stock might receive a premium for their shares
over the then market price of such shares of common stock.
TERMS OF SERIES A CONVERTIBLE PREFERRED STOCK
We currently have 800,000 Series A Preferred Shares issued and
outstanding. The Series A Preferred Shares have the following terms:
VOTING RIGHTS. Except in certain limited circumstances and as required
by applicable law, holders of Series A Preferred Shares are not entitled to
vote. The affirmative vote or consent of the holders of at least two-thirds of
the votes entitled to be cast by holders of outstanding Series A Preferred
Shares is required to authorize or increase the number of shares of a class
senior to the Series A Preferred Shares or to authorize any amendment to our
Charter that would materially and adversely affect the voting powers, rights or
privileges of the holders of the Series A Preferred Shares. If and whenever
dividends on any Series A Preferred Shares are in arrears for six or more
quarterly periods (whether or not consecutive), the number of directors then
constituting our board of directors shall be increased by one and the holders of
Series A Preferred Shares, voting as a single class, will be entitled to
nominate and vote for the election of the additional director.
DIVIDENDS. Holders of Series A Preferred Shares are entitled to
cumulative dividends, payable quarterly and in preference to dividends payable
on our common stock and any other shares of our capital stock ranking junior to
the Series A Preferred Shares, when, as and if declared by our board of
directors out of funds legally available for that purpose, at the rate of the
greater of (i) $2.25 per share per year or (ii) an amount per share equal to the
aggregate annual amount of cash dividends paid or payable, if any, with respect
to the number of shares of common stock into which each Series A Preferred Share
is then convertible. Such dividends are cumulative from the date of issuance of
the Series A Preferred Shares and compound quarterly at a rate of 9% per annum.
S-2
<PAGE>
LIQUIDATION. In the event of any (i) liquidation, dissolution or
winding-up of our affairs, (ii) consolidation or merger which results in a
change in control of our company, or (iii) sale or transfer of all or
substantially all of our assets other than to an affiliate (each a "Liquidation
Event"), the holders of Series A Preferred Shares will be entitled to receive,
out of our assets legally available for distribution to our stockholders, before
distributions are made to holders of our common stock or any other shares of our
capital stock ranking junior to the Series A Preferred Shares as to liquidating
distributions, the greater of (i) (A) a liquidation preference equal to the sum
of $25.00 per share and accrued and unpaid dividends plus (B) the applicable
liquidation premium set forth below, or (ii) an amount per share equal to the
amount which would have been payable had each share been converted into shares
of our common stock immediately prior to such liquidation, sale or merger. If,
on or prior to December 15, 2003, there is (i) a consolidation or merger which
results in a change of control of our company and in which the surviving entity
is another entity that is or may be an issuer of senior unsecured debt
securities or preferred stock rated investment grade and that has common equity
securities with an average daily trading volume of $2,475,000 over the prior 30
trading days, the liquidation premium will be 5% of the liquidation preference
or (ii) any other Liquidation Event, the liquidation premium will be 10% of the
liquidation preference. If there is a Liquidation Event after December 15, 2003,
the liquidation premium will be equal to the redemption premium set forth in the
following paragraph.
REDEMPTION. We may not redeem Series A Preferred Shares prior to
December 15, 2003. On or after December 15, 2003, we may redeem for cash all,
but not less than all, of the outstanding Series A Preferred Shares at a price
per share equal to the liquidation preference (which is $25.00 per share) plus a
redemption premium as set forth in the following table:
<TABLE>
<CAPTION>
Redemption Premium as
a Percentage of
Redemption Date Liquidation Preference
-------------------------------------------------------------------- ----------------------
<S> <C>
From December 15, 2003
through and including December 14, 2004........................... 4.5%
From December 15, 2004
through and including December 14, 2005........................... 3.375%
From December 15, 2005
through and including December 14, 2006........................... 2.25%
From December 15, 2006
through and including December 14, 2007........................... 1.125%
Thereafter.......................................................... 0%
</TABLE>
CONVERSION. Each share of Series A Preferred Shares is convertible at
any time into the number of shares of our common stock obtained by dividing the
aggregate liquidation preference (which is $25 per share) of such Series A
Preferred Shares by $16.50. The conversion price is subject to adjustment upon
certain events such as a combination or subdivision of our common stock, the
issuance of rights, options or warrants to holders of our common stock entitling
them to purchase shares of our common stock at a price less than their current
market value or any action affecting our common stock that in the opinion of our
board of directors would materially adversely affect the conversion rights of
the holders of Series A Preferred Shares.
RIGHTS UPON CERTAIN TRANSACTIONS. We may not enter into certain
transactions in which shares of our common stock are converted into the right to
receive securities or other property (including cash), unless each Series A
Preferred Share that is not redeemed or converted into the right to receive
securities or other property will be converted into the securities or other
property that would have been received if such Series A Preferred Shares were
converted into common stock immediately prior to the transaction. We may not
agree to enter into such a transaction unless provisions are made that enable
holders of Series A Preferred Shares that remain outstanding after the
transaction to convert their shares into the consideration received by holders
of common stock at the conversion price in effect immediately prior to the
transaction. Furthermore, in the event of a consolidation or merger with an
unaffiliated entity in which our company is not the surviving entity, the
holders of Series A Preferred Shares may require us to make provision for the
Series A Preferred Shares in accordance with the immediately preceding sentences
unless we redeem all of the Series A Preferred Shares for an amount equal to the
liquidation preference, plus a redemption premium of 10% of the liquidation
preference.
S-3
<PAGE>
PREEMPTIVE RIGHTS. If we propose to issue for cash either shares of our
common stock or securities convertible into shares of our common stock (with the
exception of limited partner interests in our operating partnership), we must
give each holder of Series A Preferred Shares the right to purchase, on the same
terms, up to an amount of our common stock or other securities issued so that,
upon consummation of the proposed issuance, such holder would hold the same
percentage of our common stock that it held immediately prior to the proposed
issuance (assuming conversion to shares of common stock of all Series A
Preferred Shares held by such holder).
TERMS OF SERIES B CONVERTIBLE PREFERRED STOCK
We currently have 1,600,000 Series B Preferred Shares issued and
outstanding. The Series B Preferred Shares will have the following terms:
VOTING RIGHTS. Except in certain limited circumstances and as required
by applicable law, holders of Series B Preferred Shares are not entitled to
vote. The affirmative vote of at least two-thirds of the votes cast by holders
of outstanding Series B Preferred Shares is required to authorize or increase
the number of shares of another class ranking senior to the Series B Preferred
Shares or to authorize an amendment to our Charter that would materially and
adversely affect the voting powers, rights or privileges of the holders of the
Series B Preferred Shares. If and whenever (i) dividends on any Series B
Preferred Shares are in arrears for six or more quarterly periods (whether or
not consecutive), (ii) we breach certain fixed charge coverage ratios, (iii) our
aggregate dividends declared or paid on our common stock and preferred stock
from the issue date of any Series B Preferred Shares exceeds our cumulative
funds from operations plus capital gains not included in our funds from
operation from such issue date or (iv) we breach any covenant granted to holders
of future series of our preferred stock that restricts the total amount of our
indebtedness and preferred stock to a specified percentage of the value or our
assets or real estate, the number of directors then constituting our board of
directors shall be increased by one and the holders of Series B Preferred
Shares, voting as a single class, will be entitled to nominate and vote for the
election of the additional director.
DIVIDENDS. Holders of Series B Preferred Shares are entitled to
cumulative dividends, payable quarterly and in preference to dividends payable
on our common stock, and any other shares of our capital stock ranking junior to
the Series B Preferred Shares, when, as and if declared by our board of
directors out of funds legally available for that purpose, at the rate of
$2.4375 per share per year plus the amount by which cash dividends with respect
to our common stock exceeds a rate of $1.56 (subject to adjustment) per share
per year. Such dividends shall be cumulative from the date of issuance of the
Series B Preferred Shares and shall compound at a rate per annum equal to 9.75%.
LIQUIDATION. In the event of any (i) liquidation, dissolution or
winding-up of our affairs, (ii) consolidation or merger which results in a
change in control of our company, or (iii) sale or transfer of all or
substantially all of our assets other than to an affiliate (each a "Liquidation
Event"), the holders of Series B Preferred Shares will be entitled to receive,
out of our assets legally available for distribution to our stockholders, before
distributions are made to holders of our common stock or any other shares of our
capital stock ranking junior to the Series B Preferred Shares as to liquidation
distributions, the greater of (i) (A) a liquidation preference in an amount
equal to the sum of $25.00 per share and accrued and unpaid dividends plus (B)
the applicable liquidation premium set forth below, or (ii) an amount per share
equal to the amount which would have been payable had each share been converted
into shares of common stock immediately prior to such Liquidation Event. If, on
or prior to December 15, 2003, there is (i) a consolidation or merger which
results in a change of control of our company and in which the surviving entity
is another entity that is or may be the issuer of senior unsecured debt
securities or preferred stock rated investment grade, the liquidation premium
will be 5% of the liquidation preference or (ii) any other Liquidation Event,
the liquidation premium will be 10% of the liquidation preference. If, after
December 15, 2003, there is a Liquidation Event the liquidation premium will be
the same as the redemption premium set forth in the following paragraph.
S-4
<PAGE>
REDEMPTION. We may redeem for cash, at any time, all or part of the
outstanding Series B Preferred Shares. On or before the fifth anniversary of the
date of issuance of the shares we may redeem the shares for cash at a redemption
price per share equal to the amount necessary to produce a 17% internal rate of
return. After the fifth anniversary of the date of issuance, we may redeem for
cash the shares at a redemption price equal to the liquidation preference (which
is $25.00 per share) plus a redemption premium as set forth in the following
table:
<TABLE>
<CAPTION>
Redemption Premium as
a Percentage of
Redemption Date Liquidation Preference
-------------------------------------------------------------------- ----------------------
<S> <C>
From the fifth anniversary of the date of issuance
to and including the sixth anniversary of the date of issuance...... 4.825%
From the sixth anniversary of the date of issuance
to and including the seventh anniversary of the date of issuance.... 3.62%
From the seventh anniversary of the date of issuance
to and including the eighth anniversary of the date of issuance..... 2.41%
From the eighth anniversary of the date of issuance
to and including the ninth anniversary of the date of issuance...... 1.21%
Thereafter.......................................................... 0%
</TABLE>
If we call less than all the Series B Preferred Shares for redemption, shares
will be redeemed pro rata on the basis of the number of shares owned. In the
event of a change in control in which the surviving entity does not have or may
not have senior unsecured indebtedness or preferred stock rated investment
grade, each holder of Series B Preferred Shares shall have the right to require
us to redeem all, but not less than all, outstanding Series B Preferred Shares
owned by such holder for an amount per share equal to the liquidation preference
plus a premium equal to 10% of the liquidation preference.
In addition, pursuant to the rules of the American Stock Exchange, we
are not permitted to issue common stock or securities convertible into common
stock in one transaction or a series of related transactions which would result
in the issuance of more than 19.9% of our issued and outstanding common stock
unless our stockholders approve such issuance. As a result, the preferred stock
and preferred OP Units received by the parties in the Reckson Transaction may
not be converted into our common stock to the extent that the common stock they
would receive upon the conversion combined with our common stock they receive in
the transaction, exceeds 19.9% of the total number of shares of our issued and
outstanding common stock unless approved by our stockholders prior to any
conversion. We have agreed that if our stockholders fail to approve the issuance
within one year from the date the preferred stock was received and two years
from the date the preferred OP Units were received, each holder of the preferred
stock or the preferred OP Units, as the case may be, received by the parties in
the Reckson Transaction will be entitled to redeem for cash, at the applicable
redemption price, all preferred stock or units, as the case may be, that may not
be converted into our common stock without violating this rule. Additionally, we
agreed in the Reckson Transaction to grant the parties a similar redemption
right if we fail to file a proxy statement with the Securities and Exchange
Commission within six months of the first closing of the Reckson Transaction and
hold a meeting of our stockholders within one year of the first closing of the
Reckson Transaction. Furthermore, we agreed to grant a limited redemption right
to certain of the Reckson entities in certain circumstances if we fail to
provide evidence of our qualification as a real estate investment trust under
the Internal Revenue Code of 1986, as amended (the "Code").
S-5
<PAGE>
CONVERSION. Subject to obtaining stockholder approval as described
above, each holder of Series B Preferred Shares has the right, at his or her
option, at any time and from time to time, to convert such shares into the
number of shares of our common stock obtained by dividing the aggregate
liquidation preference of such Series B Preferred Shares by a conversion price
of $16.00. The conversion price is subject to adjustment upon certain events
such as a combination or subdivision of our common stock or any action affecting
our common stock that in the opinion of our board of directors would materially
adversely affect the conversion rights of the holders of Series B Preferred
Shares.
FAVORED STATUS. Pursuant to the contribution agreement executed in
connection with the Reckson Transaction, we and our operating partnership have
agreed that the Reckson and Morris entities receiving our preferred stock or
preferred OP Units will be entitled the benefit of any change or supplement to
the terms of our Series C Preferred Shares which was previously disclosed to
Reckson and Morris, if the change or supplement is beneficial to the purchasers
of the Series C Preferred Shares.
TERMS OF SERIES C CONVERTIBLE PREFERRED STOCK
We currently have 800,000 shares of Series C Preferred Shares issued
and outstanding. The Series C Preferred Shares have the following terms:
VOTING RIGHTS. Except in certain limited circumstance and as required
by applicable law, the Series C Preferred Shares are not entitled to vote. The
affirmative vote of at least two-thirds of the votes cast by the holders of the
Series C Preferred Shares is required to authorize or increase the number of
shares of a class senior to, or on parity with the Series C Preferred Shares or
to authorize an amendment to our Charter that would materially and adversely
affect the voting powers, rights or privileges of the holders of the Series C
Preferred Shares.
DIVIDENDS. The holders of Series C Preferred Shares are entitled to
cumulative dividends, payable quarterly and in preference to dividends payable
on our common stock and any other shares of our capital stock ranking junior to
the Series C Preferred Shares, when, as and if authorized and declared by our
board of directors out of funds legally available for that purpose, cumulative
dividends payable quarterly in cash at the rate of $2.4375 per share per year
plus the amount by which cash dividends with respect to one share of our common
stock exceeds a rate of $1.54 (subject to adjustment) per year multiplied by the
conversion ratio then in effect for the Series C Preferred Shares. Such
dividends shall be cumulative from the date of issuance of the Series C
Preferred Shares and compound quarterly at a rate of 9.75% per annum.
LIQUIDATION. In the event of any Liquidation Event, the holders of
Series C Preferred Shares will be entitled to receive, out of our assets legally
available for distribution to our stockholders, before distributions are made to
holders of our common stock or any other shares of our capital stock ranking
junior to the Series C Preferred Shares as to liquidation distributions, the
greater of (i) (A) a liquidation preference in an amount equal to the sum of
$25.00 per share and accrued and unpaid dividends plus (B) the applicable
liquidation premium set forth below, or (ii) an amount per share equal to the
amount which would have been payable had each share been converted into shares
of common stock immediately prior to such Liquidation Event. If, on or prior to
December 15, 2003, there is (i) a consolidation or merger which results in a
change of control of our company and in which the surviving entity is another
entity that is or may be the issuer of senior unsecured debt securities or
preferred stock rated investment grade, the liquidation premium will be 5% of
the liquidation preference or (ii) any other Liquidation Event, the liquidation
premium will be 10% of the liquidation preference. If, after December 15, 2003,
there is a Liquidation Event, the liquidation premium will be the same as the
redemption premium set forth in the following paragraph.
S-6
<PAGE>
REDEMPTION. At any time following the fifth anniversary of the date of
issuance of the Series C Preferred Shares, we may redeem for cash all or part of
the outstanding Series C Preferred Shares at a price per share equal to the
liquidation preference (which is $25.00 per share) plus a redemption premium as
set forth in the following table:
<TABLE>
<CAPTION>
Redemption Premium as a
Percentage of
Redemption Date Liquidation Preference
-------------------------------------------------------------------- ----------------------
<S> <C>
From the fifth anniversary of the date of issuance
to and including the sixth anniversary of the date of issuance.... 4.75%
From the sixth anniversary of the date of issuance
to and including the seventh anniversary of the date of issuance.. 3.5625%
From the seventh anniversary of the date of issuance
to and including the eighth anniversary of the date of issuance... 2.375%
From the eighth anniversary of the date of issuance
to and including the ninth anniversary of the date of issuance...... 1.1875%
Thereafter.......................................................... 0%
</TABLE>
If we call less than all of the outstanding Series C Preferred Shares for
redemption, shares will be redeemed PRO RATA in proportion to the number shares
owned.
CONVERSION. Each holder of Series C Preferred Shares may at any time
convert such shares into the number of our shares of common stock obtained by
dividing the aggregate liquidation preference of such Series C Preferred Shares
by a conversion price of $15.75. The conversion price is subject to adjustment
upon certain events such as a combination or subdivision of our common stock,
the granting of rights, options or warrants to holders of our common stock
entitling them to purchase shares of our common stock at a price less than their
current market value or any action affecting our common stock that in the
opinion of our board of directors would materially adversely affect the
conversion rights of the holders of Series C Preferred Shares.
OP UNITS
Our operating partnership has, in addition to common OP Units, six
series of convertible preferred OP Units outstanding (Series A, B, C, D, E and
F). The following is a description of the common OP Units and each series of
preferred OP Units.
COMMON UNITS
As of September 21, 1999, there were 14,534,286 common OP Units
outstanding of which we owned approximately 52%. On a fully-diluted basis, we
would own approximately 53 % of the common OP Units (assuming the exchange or
conversion of all preferred OP Units that are exchangeable for common OP Units
and the exercise of all warrants to purchase common OP Units). The remaining
common OP Units are owned by limited partners of the operating partnership. Each
common OP Unit may be converted by the holder into one share of our common stock
(subject to certain anti-dilution provisions), or in certain cases, at our
option, the cash value of one share of common stock.
S-7
<PAGE>
SERIES A CONVERTIBLE PREFERRED UNITS
We currently hold all of the outstanding Series A Convertible Preferred
Units. Each of these OP Units has a liquidation and dividend preference
identical to the preference of one share of Series A Convertible Preferred
Stock. Upon the conversion or redemption of shares of Series A Convertible
Preferred Stock for shares of our common stock, we are required to convert an
equal number of Series A Convertible Preferred Units into common OP Units.
SERIES B CONVERTIBLE PREFERRED UNITS
The operating partnership currently has 300,000 Series B Convertible
Preferred Units issued and outstanding. The Series B Convertible Preferred Units
have the following terms:
VOTING RIGHTS. Except in limited circumstances and as required by
applicable law, holders of Series B Convertible Preferred Units are not entitled
to vote. The affirmative vote of at least two-thirds of the votes cast by
holders of outstanding Series B Convertible Preferred Units is required to
authorize or increase the number of units of another class ranking senior to the
Series B Convertible Preferred Units or to authorize an amendment to the
operating partnership's partnership agreement that would materially and
adversely affect any power, preference or special right of the holders of the
Series B Convertible Preferred Units.
DISTRIBUTIONS. Holders of Series B Convertible Preferred Units are
entitled to cumulative cash distributions, payable quarterly and in preference
to cash distributions, payable on the operating partnership's common OP Units,
and any other units ranking on a parity with or junior to the Series B
Convertible Preferred Units, when, as and if declared by us, as general partner
of the operating partnership, out of net operating cash flow at a rate of $2.375
per unit per year. Such cash distributions are cumulative from the date of
issuance of the Series B Convertible Preferred Units and shall compound at a
rate per annum equal to 9.50%.
LIQUIDATION. In the event of any (a) dissolution or winding up of the
operating partnership or us or (b) a sale or transfer of all or substantially
all of the operating partnership's or our assets other than to an affiliate of
the operating partnership or us, the holders of the Series B Convertible
Preferred Units will be entitled to receive out of capital, surplus or earnings,
before distributions are made to the holders of any of the operating
partnership's common OP Units or any other units ranking junior to the Series B
Convertible Preferred Units as to liquidation distributions an amount equal to
$25.00 per Series B Convertible Preferred Unit and accrued and unpaid cash
distributions.
REDEMPTION. The operating partnership may redeem for cash all or part
of the outstanding Series B Convertible Preferred Units at a price per unit
equal to the liquidation preference (which is $25.00 per unit) plus accrued and
unpaid cash distributions. Upon notice from the operating partnership of its
intention to redeem the Series B Convertible Preferred Units, the holders of the
Series B Convertible Preferred Units shall be entitled to convert such Series B
Convertible Preferred Units into shares of our Common stock as described in the
following paragraph.
CONVERSION. Each holder of Series B Convertible Preferred Units has the
right, at his or her option, at any time and from time to time, to convert such
units into the number of shares of our common stock based upon the conversion
price. Based upon the current conversion price, the holders of the Series B
Convertible Preferred Units are entitled to 454,545 shares of our common stock
upon conversion. The conversion price is subject to adjustment upon certain
events such as a combination or subdivision of our common stock.
SERIES C CONVERTIBLE PREFERRED UNITS
The operating partnership currently has 1,441,947 Series C Convertible
Preferred Units issued and outstanding. We anticipate that upon completion of
two subsequent closings of a transaction with affiliates of Reckson Associates
Realty Corporation and Robert Morris, Joseph Morris and certain of their
affiliates, the operating partnership will have a total of 2,508,523 Series C
Convertible Preferred Shares issued and outstanding (assuming that no Series C
Convertible Preferred Units are converted). The Series C Convertible Preferred
Units will have the following terms:
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VOTING RIGHTS. Except in certain limited circumstances and as required
by applicable law, holders of Series C Convertible Preferred Units are not
entitled to vote. The affirmative vote of at least two-thirds of the votes cast
by holders of outstanding Series C Convertible Preferred Units is required to
authorize or increase the number of units of another class ranking senior to the
Series C Convertible Preferred Units or to authorize an amendment to the
operating partnership's partnership agreement that would materially and
adversely affect the voting powers, rights or privileges of the holders of the
Series C Convertible Preferred Units.
DISTRIBUTIONS. Holders of Series C Convertible Preferred Units are
entitled to cumulative cash distributions, payable quarterly and in preference
to dividends payable on our common OP Units, and any other units ranking junior
to the Series C Convertible Preferred Units, when, as and if declared by us, as
general partner of the operating partnership, out of funds legally available for
that purpose, at the rate of $2.4375 per share per year plus the amount by which
cash dividends with respect to our common stock exceeds a rate of $1.56 (subject
to adjustment) per share per year. Such dividends shall be cumulative from the
date of issuance of the Series C Convertible Preferred Units and shall compound
at a rate per annum equal to 9.75%.
LIQUIDATION. In the event of any Liquidation Event involving the
operating partnership or us, the holders of Series C Convertible Preferred Units
will be entitled to receive, out of our assets legally available for
distribution to our OP Unit holders, before distributions are made to holders of
our common OP Units or any other units ranking junior to the Series C
Convertible Preferred Units as to liquidation distributions, the greater of (i)
(A) a liquidation preference in an amount equal to the sum of $25.00 per unit
and accrued and unpaid cash distribution plus (B) the applicable liquidation
premium set forth below, or (ii) an amount per unit equal to the amount which
would have been payable had each unit been converted into shares of common stock
immediately prior to such Liquidation Event. If, on or prior to December 15,
2003, there is (i) a consolidation or merger which results in a change of
control of the operating partnership or us and in which the surviving entity is
another entity that is or may be the issuer of senior unsecured debt securities
or preferred stock rated investment grade, the liquidation premium will be 5% of
the liquidation preference or (ii) any other Liquidation Event, the liquidation
premium will be 10% of the liquidation preference. If, after December 15, 2003,
there is a Liquidation Event the liquidation premium will be the same as the
redemption premium set forth in the following paragraph.
REDEMPTION. At any time following the fifth anniversary of the date of
issuance of the Series C Convertible Preferred Units, the operating partnership
may redeem for cash or common OP Units (at the holder's option) all or part of
the outstanding Series C Convertible Preferred Units price per unit equal to the
liquidation preference (which is $25.00 per unit) plus a redemption premium as
set forth in the following table:
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<TABLE>
<CAPTION>
Redemption Premium as
a Percentage of
Redemption Date Liquidation Preference
-------------------------------------------------------------------- ----------------------
<S> <C>
From the fifth anniversary of the date of issuance
to and including the sixth anniversary of the date of issuance...... 4.825%
From the sixth anniversary of the date of issuance
to and including the seventh anniversary of the date of issuance.... 3.62%
From the seventh anniversary of the date of issuance
to and including the eighth anniversary of the date of issuance..... 2.41%
From the eighth anniversary of the date of issuance
to and including the ninth anniversary of the date of issuance...... 1.21%
Thereafter.......................................................... 0%
</TABLE>
If we call less than all the Series C Convertible Preferred Units for
redemption, units will be redeemed pro rata on the basis of the number of units
owned. In the event of a change in control in which the surviving entity does
not have or may not have senior unsecured indebtedness or preferred stock rated
investment grade, each holder of Series C Convertible Preferred Units shall have
the right to require us to redeem all, but not less than all, outstanding Series
C Convertible Preferred Units owned by such holder for an amount per unit equal
to the liquidation preference plus a premium equal to 10% of the liquidation
preference.
In the event a holder of the Series C Convertible Preferred Units
elects to receive common OP Units, the holder will be entitled to receive the
amount of common OP Units equal to the liquidation preference divided by the
current market price of our common stock.
In addition, pursuant to the rules of the American Stock Exchange, we
are not permitted to issue common stock or securities convertible into common
stock in one transaction or a series of related transactions which would result
in the issuance of more than 19.9% of our issued and outstanding common stock
unless our stockholders approve such issuance. As a result, the preferred stock
and preferred OP Units received by the parties in the Reckson Transaction may
not be converted into our common stock to the extent that the common stock they
would receive upon the conversion combined with our common stock they receive in
the transaction, exceeds 19.9% of the total number of shares of our issued and
outstanding common stock unless approved by our stockholders prior to any
conversion. We have agreed that if our stockholders fail to approve such
issuance within one year from the date the preferred stock was received and two
years from the date the preferred OP Units were received, each holder of the
preferred stock or the preferred OP Units, as the case may be, received by the
parties in the Reckson Transaction will be entitled to redeem for cash, at the
applicable redemption price, all preferred stock or units, as the case may be,
that may not be converted into our common stock without violating this rule.
Additionally, we agreed in the Reckson Transaction to grant the parties a
similar redemption right if we fail to file a proxy statement with the
Securities and Exchange Commission within six months of the first closing of the
Reckson Transaction and hold a meeting of our stockholders within one year of
the first closing of the Reckson Transaction.
CONVERSION. Subject to obtaining stockholder approval as described
above, each holder of Series C Convertible Preferred Units has the right, at his
or her option, at any time and from time to time, to convert such units into (a)
the amount of cash obtained by multiplying the current market price per share of
our common stock by a fraction, the numerator of which is the liquidation
preference (which is $25.00 per unit) and the denominator of which is the
conversion price (which is $15.75 per unit), or, if the operating partnership
does not elect to give this cash payment, (b) at the election of the holder, (1)
the number of shares of our common stock obtained by dividing the liquidation
preference by the conversion price or (2) the number of Series B Preferred
Shares identical to the number of Series C Convertible Preferred Units being
converted. The conversion price is subject to adjustment upon certain events
such as a combination or subdivision of our common stock or any action affecting
our common stock that in our opinion would materially adversely affect the
conversion rights of the holders of Series C Convertible Preferred Units.
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<PAGE>
FAVORED STATUS. Pursuant to the contribution agreement executed in
connection with the Reckson Transaction, we and the operating partnership have
agreed that the Reckson and Morris entities receiving our preferred stock or
preferred OP Units will be entitled the benefit of any change or supplement to
the terms of our Series C Preferred Shares which was previously disclosed to
Reckson and Morris if the change or supplement is beneficial to the purchasers
of the Series C Preferred Shares.
SERIES D CONVERTIBLE PREFERRED UNITS
The operating partnership currently has 450,700 Series D Convertible
Preferred Units issued and outstanding. The Series D Convertible Preferred Units
have the following terms:
VOTING RIGHTS. Except in certain limited circumstances and as required
by applicable law, holders of Series D Convertible Preferred Units are not
entitled to vote. The affirmative vote of at least two-thirds of the votes cast
by the holders of outstanding Series D Convertible Preferred Units is required
to authorize or increase the number of units of another class ranking senior to
the Series D Convertible Preferred Units or to authorize an amendment to the
operating partnership's partnership agreement that would materially and
adversely affect any power, preference or special right of the holders of the
Series D Convertible Preferred Unit.
DISTRIBUTIONS. Holders of Series D Convertible Preferred Units are
entitled to cumulative cash distributions, payable quarterly and in preference
to cash distributions on the operating partnership's common OP Units and any
other units ranking junior to the Series D Convertible Preferred Units, when, as
and if declared by us, in our capacity as general partner of the operating
partnership, out of funds legally available for that purpose, at the rate of the
greater of (a) $2.25 per unit per year or (b) an amount per unit equal to the
aggregate annual amount of cash dividends paid or payable, if any, with respect
to that number of shares of our common stock into which each Series D
Convertible Preferred Unit is then convertible. However, on and after the ten
year anniversary of the date of issuance of the Series D Convertible Preferred
Units, the holders of the Series D Convertible Preferred Units shall be entitled
to receive a cash distribution in an amount equal to the greater of (x) $4.50
per unit per year or (y) an amount per unit equal to the aggregate annual amount
of cash dividends paid or payable, if any, with respect to that number of shares
of our common stock into which each Series D Convertible Preferred Unit is then
convertible. Such cash distributions shall be cumulative from the date of
issuance of the Series D Convertible Preferred Units and compound quarterly at a
rate per annum equal to (1) on or prior to the tenth anniversary of the date of
issuance of the Series D Convertible Preferred Units, 9% or (2) after the tenth
anniversary of date of issuance of the Series D Convertible Preferred Units,
18%.
LIQUIDATION. In the event of any (a) dissolution or winding up of the
operating partnership or us or (b) sale or transfer of all or substantially all
of the operating partnership's or our assets other than to an affiliate of
either the operating partnership or us or (c) a consolidation or merger of the
operating partnership or us with and into one or more entities which are not
affiliates of the operating partnership or us which could result in a change in
control, the holders of the Series D Convertible Preferred Units will be
entitled to receive out of capital, surplus or earnings, before distributions
are made to the holders of any of the operating partnership's common OP Units or
any other units ranking junior to the Series D Convertible Preferred Units as to
liquidation distributions an amount equal to the greater of (i)(a) a liquidation
preference in an amount equal to the sum of $25.00 per unit and accrued and
unpaid cash distributions plus (b) the applicable liquidation premium set forth
below, or (ii) an amount per unit equal to the amount which would have been
payable had each Series D Convertible Preferred Unit been converted into shares
of common stock immediately prior to such liquidation, sale or merger. The
liquidation premium referenced above shall mean (x) on or prior to the fifth
anniversary of the date of the issuance of the Series D Convertible Preferred
Units, an amount equal to 10% of the liquidation preference, or (y) after the
fifth anniversary of the date of the issuance of the Series D Convertible
Preferred Units, an amount equal to the redemption premium which will be payable
on the Series D Convertible Preferred Units if such units were called for
redemption by us, as general partner of the Operating partnership.
S-11
<PAGE>
REDEMPTION. At any time following the fifth anniversary of the date of
issuance of the Series D Convertible Preferred Units, the operating partnership
may redeem for cash all, but not less than all, of the outstanding Series D
Convertible Preferred Units at a price per unit equal to the liquidation
preference (which is $25.00 per unit) plus a redemption premium as set forth in
the following table:
<TABLE>
<CAPTION>
Redemption Premium as
a Percentage of
Redemption Date Liquidation Preference
-------------------------------------------------------------------- ----------------------
<S> <C>
From the fifth anniversary of the date of issuance
to and including the sixth anniversary of the date of issuance...... 4.5%
From the sixth anniversary of the date of issuance
to and including the seventh anniversary of the date of issuance.... 3.375%
From the seventh anniversary of the date of issuance
to and including the eighth anniversary of the date of issuance..... 2.25%
Thereafter.......................................................... 0%
</TABLE>
CONVERSION. Each Series D Convertible Preferred Unit is convertible at
any time at the election of the holder into (i) cash, or if the operating
partnership does not elect to give cash, (ii) the number of shares of our common
stock or the operating partnership's common OP Units (at such holder's election)
obtained by multiplying the current market price per share of our common stock
by a fraction, the numerator of which is the aggregate liquidation preference
(which is $25.00 per unit) and the denominator of which is the conversion price
(which is $16.50 per unit). The conversion price is subject to adjustment upon
certain events such as the combination or subdivision of our Common stock or the
issuance by us of certain rights, options or warrants to all holders of our
common stock under certain circumstances.
SERIES E CONVERTIBLE PREFERRED UNITS
We currently hold all of the outstanding Series E Convertible Preferred
Units. Each of these OP Units has a liquidation and dividend preference
identical to the preference of one share of Series C Convertible Preferred
Stock. Upon the conversion or redemption of shares of Series C Convertible
Preferred Stock for shares of our common stock, we will be required to convert
an equal number of Series E Convertible Preferred Units for common OP Units.
SERIES F CONVERTIBLE PREFERRED UNITS
We currently hold all of the outstanding Series F Convertible Preferred
Units. Each of these OP Units has a liquidation and dividend preference
identical to the preference of one share of Series C Convertible Preferred
Stock. Upon the conversion or redemption of shares of Series C Convertible
Preferred Stock for shares of our common stock, we will be required to convert
and equal number of Series F Convertible Preferred Units for common OP Units.
S-12
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain federal income tax considerations
that may be relevant to a U.S. person who holds common stock, is based on
current law, and is not intended and should not be construed as tax advice. The
following discussion, which is not exhaustive of all possible tax
considerations, does not include a detailed discussion of any state, local or
foreign tax considerations. In addition, this discussion is intended to address
only those federal income tax considerations that are generally applicable to
all prospective U.S. stockholders and does not discuss all of the aspects of
federal income taxation that may be relevant to a prospective U.S. stockholder
in light of his or her particular circumstances or to certain types of
stockholders (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. This discussion supplements and supersedes
(to the extent inconsistent therewith) the discussion set forth in the
accompanying prospectus under the heading "Federal Income Tax Considerations."
EACH PROSPECTIVE PURCHASER OF COMMON STOCK 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 COMMON 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 SHAREHOLDERS; CAPITAL GAINS AND LOSSES.
The maximum marginal individual federal income tax rate is currently
39.6%. The maximum tax rate on net capital gains applicable to individuals,
trusts and estates from the sale or exchange of capital assets held for more
than one year is 20%, and the maximum rate is reduced to 18% for assets acquired
after December 31, 2000 and held for more than five years. For individuals,
trusts and estates who would be subject to a maximum tax rate of 15%, the rate
on net capital gains is reduced to 10%, and, effective for taxable years
commencing after December 31, 2000, the rate is reduced to 8% for assets held
for more than five years. The maximum rate for net capital gains attributable to
the sale of depreciable real property held for more than one year is 25% to the
extent of prior deductions for depreciation (other than certain depreciation
recapture taxable as ordinary income) with respect to such property.
Accordingly, the tax rate differential between capital gain and ordinary income
for noncorporate taxpayers may be significant. In addition, the characterization
of income as capital or ordinary may affect the deductibility of capital losses.
POTENTIAL LEGISLATIVE ACTION REGARDING REITS.
On February 2, 1999, the Clinton Administration released a summary of
its proposed budget plan and on August 5, 1999 the Taxpayer Refund and Relief
Act of 1999 was approved by Congress, both of which contained several provisions
affecting REITs. One such provision of the Taxpayer Refund and Relief Act of
1999, if enacted in its present form, would (subject to certain grandfather
rules) prohibit a REIT from holding securities representing more than 10% of the
value of all classes of stock of a corporation, other than a qualified REIT
subsidiary or another REIT. However, REITs would, subject to certain
limitations, be allowed to hold "taxable REIT subsidiaries" which would be
subject to full corporate level taxation. Under such provision, we would be
allowed to combine or convert our existing stock interest in the Management
Company into a "taxable REIT subsidiary" or continue to hold such interest
subject to certain transition rules. If we did not elect to convert the
Management Company to a taxable REIT subsidiary, such provision, if enacted in
its present form, may limit the future activities and growth of the Management
Company. No prediction can be made as to whether such legislation or any other
legislation affecting REITs will be enacted and the impact of any such
legislation on our operations.
S-13
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