<PAGE> 1
INFORMATION CONTAINED
HEREIN IS SUBJECT TO COMPLETION ON AMENDMENT.
SUBJECT TO COMPLETION, DATED OCTOBER 13, 1997
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED OCTOBER 1, 1997
10,000,000 SHARES
SPIEKER PROPERTIES, INC.
COMMON STOCK
SPIEKER LOGO (PAR VALUE $.0001 PER SHARE)
------------------------
Spieker Properties, Inc. is a leading real estate investment trust that
specializes in the acquisition, development and management of suburban office
and industrial properties. As of September 30, 1997, the Company owned and
operated 185 income-producing properties primarily in California, Oregon and
Washington, aggregating 29.1 million square feet. In 1997 through the date of
this Prospectus Supplement, the Company acquired 26 office properties and seven
industrial properties aggregating 8.5 million square feet for a total investment
of $919.0 million. In addition, the Company and its affiliates have entered into
contracts to acquire 53 additional properties, including two mortgages and a
portfolio of 44 properties, aggregating 8.2 million square feet for an estimated
total purchase price of $997.0 million. The Company intends to fund these
pending acquisitions in part with the proceeds of this offering and expects to
complete most of such acquisitions in the fourth quarter of 1997. The Company
also is in the process of developing 20 properties in California, Oregon and
Washington aggregating 3.2 million square feet for a total investment of $285.1
million.
The 10,000,000 shares of Common Stock of the Company offered hereby are
being sold by the Company. The Common Stock is listed on the New York Stock
Exchange under the symbol "SPK." The last reported sale price of the shares of
Common Stock on the New York Stock Exchange on October 10, 1997 was $41 7/8 per
share. See "Price Range of Common Stock and Dividends."
The shares of Common Stock are subject to certain restrictions on ownership
designed to preserve the Company's status as a real estate investment trust for
federal income tax purposes. See "Description of Common Stock" in the
accompanying Prospectus.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total(3)..................................... $ $ $
</TABLE>
- ---------------
(1) The Company and the Operating Partnership have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting estimated expenses of $900,000 payable by the Company.
(3) The Company has granted the Underwriters an option exercisable for 30 days
after the date hereof to purchase up to 1,500,000 additional shares of
Common Stock at the initial public offering price per share, less the
underwriting discount, solely to cover over-allotments. 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."
------------------------
These shares 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 October , 1997,
against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
NATIONSBANC MONTGOMERY SECURITIES, INC.
PRUDENTIAL SECURITIES INCORPORATED
------------------------
The date of this Prospectus Supplement is October , 1997.
<PAGE> 2
IN CONNECTION WITH THE 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.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SHARES, AND
THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus and incorporated herein and therein by reference. The
information contained in this Prospectus Supplement assumes no exercise of the
Underwriters' over-allotment option, unless indicated otherwise. The offering of
10,000,000 shares of Common Stock, par value $.0001 per share (the "Common
Stock"), made hereby is herein referred to as the "Offering." All references to
the "Company" in this Prospectus Supplement and the accompanying Prospectus
include Spieker Properties, Inc., those entities controlled by Spieker
Properties, Inc. and predecessors of Spieker Properties, Inc., unless the
context indicates otherwise. Information regarding shares of Common Stock,
unless otherwise indicated, is based on a per-share market price of $41,875.
This Prospectus Supplement and the accompanying Prospectus contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company's
actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
are discussed in the section entitled "Special Considerations" beginning on page
5 of the accompanying Prospectus.
THE COMPANY
Spieker Properties, Inc. is a leading real estate investment trust ("REIT")
that specializes in the acquisition, development and management of suburban
office and industrial properties. As of September 30, 1997, the Company owned
and operated 185 income-producing properties (the "Properties," and each a
"Property") primarily in California, Oregon and Washington, aggregating 29.1
million square feet and comprised of 17.0 million square feet of industrial
Properties and 12.1 million square feet of office Properties. In 1997 through
the date of this Prospectus Supplement, the Company acquired 26 office
Properties and seven industrial Properties aggregating 8.5 million square feet
for a total investment of $919.0 million. In addition, the Company and its
affiliates have entered into contracts to acquire 53 additional properties,
including two mortgages and a portfolio of 44 Properties (the "WCB Portfolio"),
aggregating 8.2 million square feet for an estimated total purchase price of
$997.0 million. See "-- Recent Activities and Continued Growth." The Company
intends to fund these pending acquisitions in part with the proceeds of this
Offering and expects to complete most of such acquisitions in the fourth quarter
of 1997. The Company also is in the process of developing 20 properties in
California, Oregon and Washington aggregating 3.2 million square feet for a
total investment of $285.1 million.
The Company's principal objective is to achieve sustainable long-term
growth in Funds from Operations per share by:
- acquiring quality commercial property and portfolios in regions with
strong prospects for continued economic growth, generally at prices at or
below replacement cost,
- capitalizing on its proven expertise and market opportunities to develop
additional properties,
- becoming one of the most significant commercial landlords in each of the
submarkets in which it operates,
- achieving internal growth by providing a superior level of service to its
diversified tenant base and increasing rents to market rates as leases
roll over,
- maximizing the benefits from economies of scale as the size of the
Company increases, and
- continuing to attract and retain the best real estate professionals in
the industry.
The Company's 26 most senior members of management in charge of
implementing the Company's business strategy collectively own approximately
$240.6 million of the aggregate market value of the Company's outstanding Common
Stock on a fully-converted basis.
<PAGE> 4
The Company's revenues increased 53.0% from $93.0 million for the six
months ended June 30, 1996 to $142.3 million for the six months ended June 30,
1997. The Company's earnings before interest expense, depreciation,
amortization, and minority interests ("EBIDA") increased 48.0% from $66.0
million for the six months ended June 30, 1996 to $97.6 million for the six
months ended June 30, 1997. In addition, the Company's funds from operations
(calculated by adjusting net income before minority interest for certain
non-cash items, principally the amortization and depreciation of real property
and for dividends on equity securities that are not convertible into shares of
Common Stock, "Funds from Operations") increased 51.8% from $44.4 million for
the six months ended June 30, 1996 to $67.5 million for the six months ended
June 30, 1997. The Company believes that EBIDA and Funds from Operations are
useful financial performance measures of the operating performance of an equity
REIT. EBIDA and Funds from Operations do not represent net income or cash flows
from operating, financing and investing activities as defined by generally
accepted accounting principles ("GAAP") and do not necessarily indicate that
cash flows will be sufficient to fund cash needs. EBIDA and Funds from
Operations should not be considered as alternatives to net income as an
indicator of the Company's operating performance or to cash flows as a measure
of liquidity. Furthermore, Funds from Operations as disclosed by other REITs may
not be comparable to the Company's calculation of Funds from Operations. For a
further discussion of EBIDA and Funds from Operations, net income and cash flow
from operations, see "-- Summary Financial and Other Data."
RECENT ACTIVITIES AND CONTINUED GROWTH
The Company has been an active acquiror of office and industrial properties
and believes that attractive opportunities continue to exist to purchase
properties and portfolios, often at prices below replacement costs due to, among
other factors, the changing composition of ownership of institutional-grade
commercial property. See "-- Acquiring Office and Industrial Properties." The
Company also has extensive experience in developing new properties and is in the
process of developing 20 properties in California, Oregon and Washington for a
total investment of $285.1 million. The Company completed the development of
seven Properties in the first nine months of 1997 for a total investment of
$59.1 million. The Company believes that lower vacancy rates and continued
strong demand for commercial property in most of the Company's markets will lead
to additional attractive development opportunities. See "-- Developing New
Properties." The Company's existing Properties also continue to generate
increasing cash flow due to high average occupancy rates, increasing rental
rates, controlled capital expenditures and strength in its real estate markets
in general. During the first nine months of 1997, the Company completed 548
lease transactions for the renewal or re-leasing of 3.5 million square feet of
second-generation space at an average 22.7% increase in effective rates over
expiring contract rents. See "-- Growth in Operating Income from Existing
Properties."
ACQUIRING OFFICE AND INDUSTRIAL PROPERTIES
Pending Acquisitions
As of the date of this Prospectus Supplement, the Company and its
affiliates had entered into contracts to purchase 51 additional properties (the
"Pending Acquisitions") and two mortgages aggregating 8.2 million square feet,
for an estimated total investment of $997.0 million. Excluding certain
properties in the WCB Portfolio which the Company and its affiliates intend to
dispose of through sales or like-kind exchanges, the Pending Acquisitions are
predominately high quality, recently constructed office and industrial
properties that are similar in type and location to the Company's existing
Properties. The Company believes the Pending Acquisitions' purchase prices are
below their replacement costs and that rental income from the Pending
Acquisitions can be increased while maintaining controlled capital expenditures.
Of the $997.0 million estimated total investment in the Pending Acquisitions,
$911.0 million will be paid in cash, $11.0 million will be assumption of debt,
and the remainder will be paid in the form of convertible preferred partnership
units in Spieker Properties, L.P. (the "Operating Partnership"). Affiliates of
Whitehall Street Real Estate Limited Partnership ("Whitehall Street"), an
affiliate of Goldman, Sachs & Co., will receive $75.0 million of partnership
units in the Operating Partnership in connection with
<PAGE> 5
the acquisition of the WCB Portfolio. The cash investment in the Pending
Acquisitions will be financed with proceeds from this Offering, a recently
completed offering of the Company's Preferred Stock, a $200 million bridge
financing facility with Wells Fargo Bank and other borrowings. See "-- Financing
Transactions." The purchase of a number of the Pending Acquisitions is subject
to customary conditions, including with respect to eight properties and related
land in the WCB Portfolio that consents to transfer such properties or waivers
of third party purchase rights be obtained. Accordingly, there can be no
assurance that the Company will acquire any or all of the Pending Acquisitions.
See "Special Considerations -- Acquisition and Development Activities" in the
accompanying Prospectus.
The following table and discussion set forth certain information regarding
the Pending Acquisitions.
PENDING ACQUISITIONS
<TABLE>
<CAPTION>
PROPERTY TOTAL
PROPERTY NAME LOCATION TYPE SQUARE FEET
----------------------------------- ---------------- ----------------- ----------- TOTAL
PURCHASE
PRICE
-------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
WCB Portfolio(1)................... Various Primarily Office 6,354,450 $ 725.0(2)
and Industrial
The City Office Portfolio.......... Orange, CA Office 730,000 97.2
Plaza Center/U.S. Bank Center...... Bellevue, WA Office 458,000 80.5
La Jolla Office Properties(3)...... La Jolla, CA Office 225,983 39.0
San Mateo Bay Center II(4)......... San Mateo, CA Office 119,152 24.8
Douglas Corporate Center........... Roseville, CA Office 100,000 12.0
ABAM Property...................... Federal Way, WA Office 50,000 4.9
California Circle.................. Milpitas, CA Industrial 98,000 10.5
Borregas Avenue.................... Sunnyvale, CA Industrial 40,000 3.1
----------- -------------
Total............................................................ 8,175,585 $ 997.0(2)
========== ==========
</TABLE>
- ---------------
(1) Includes 141.7 acres of undeveloped land. See "-- WCB Portfolio."
(2) Includes $200 million of properties that the Company and its affiliates
intend to dispose through sales or like-kind exchanges. See "-- WCB
Portfolio -- Disposition Properties."
(3) Represents an investment in two mortgages with an aggregate face value of
$46.0 million secured by these properties.
(4) This property is being acquired from a partnership owned by certain officers
of the Company in part with issuances of partnership units in the Operating
Partnership.
WCB Portfolio. The WCB Portfolio consists of 44 properties in twelve states
aggregating 6.4 million square feet, as well as 141.7 acres of land. Within such
portfolio, the Company intends to (i) retain 26 properties aggregating 3.8
million square feet in California and Oregon (the "Core Properties"), (ii)
explore opportunities relating to five properties aggregating 0.6 million square
feet in Arizona, Colorado and Texas (the "Potential New Market Properties") and
(iii) dispose of 13 properties aggregating 2.0 million square feet in nine
states consisting of retail properties or properties outside of the Company's
current geographic focus (the "Disposition Properties").
The Company believes that the WCB Portfolio has a number of important
attributes that will have a positive impact on the Company. Most of the Core
Properties are adjacent to existing Properties, affording the Company the
benefits associated with submarket dominance and economies of scale. This
portfolio is being purchased below replacement cost and the Company believes
that the level of in place rents should allow for revenue growth as existing
leases expire. This acquisition also provides the Company with the opportunity
to investigate the viability of extending its operations into other markets in
the Western United States, including Austin, Colorado Springs, Denver and
Phoenix.
Core Properties. The Core Properties include 11 office properties
aggregating 2,130,655 square feet and 15 industrial properties aggregating
1,661,639 square feet located in California and Oregon. The Core Properties are
generally similar in type and location to the Company's existing properties. The
WCB
<PAGE> 6
Portfolio also includes 83.8 acres of land adjacent to seven of the Core
Properties that the Company may develop or sell to third parties.
The office Core Properties are high quality, two- to twelve-story
structures, with steel frames and glass or brick wall exteriors. The 11 office
Core Properties include:
- Kruse Woods -- three office properties located in Lake Oswego, Oregon
consisting of eight buildings constructed between 1985 and 1997 totaling
656,670 square feet. These properties will significantly increase the
Company's position as the dominant landlord in this submarket of
Portland, as the Company currently owns 196,833 square feet of adjacent
office property, is developing 125,000 square feet of office property and
has options to purchase land on which it may develop an additional 72,000
square feet of office property. Following this acquisition, the Company
will own approximately 83% of the Class A office space in this submarket.
The Kruse Way office submarket is one of the strongest in Portland, with
an overall vacancy rate of 2.7% (excluding the recently completed Kruse
Woods III building which is part of the WCB Portfolio) as of June 30,
1997, according to REAL-NET Commercial Property Database Services
("REAL-NET").
- One Pacific Square -- a 228,169 square feet nine-story office property
constructed in 1984 and located on the outskirts of downtown Portland
approximately one mile from John's Landing, where the Company owns
324,042 square feet of office property. Class A office properties in the
John's Landing submarket have an overall vacancy rate of 0.8% as of June
30, 1997, according to REAL-NET.
- Vintage Park -- an office complex located in Foster City, California
consisting of 22 one- and two-story buildings constructed between 1984
and 1989 totaling 658,197 square feet. This property is adjacent to three
existing office properties totaling 320,000 square feet owned by the
Company. The Company believes this submarket of the South San Francisco
Bay Area is very attractive to high tech and biotech companies given its
proximity to the San Francisco International Airport, Silicon Valley and
nearby housing markets. As of June 30, 1997, the vacancy rate for office
property in Foster City was 0.7% and asking rents have increased 53%
since 1995, according to BT Commercial Real Estate.
- Stadium Towers Plaza -- a 12-story office building constructed in 1988
and an adjacent restaurant located in Anaheim, California totaling
255,531 square feet. This property also includes 6.3 acres of adjacent
undeveloped land on which the Company may construct an additional 270,000
square feet of office property at some point in the future. This property
has immediate access to the 57 freeway and is adjacent to Anaheim
Stadium. The Company owns an additional 0.8 million square feet of
property in this submarket and an additional 1.2 million square feet of
office property in central Orange County, California.
- East Hills Office Park -- a 57,243 square feet office property
constructed in 1988 located in Anaheim, California adjacent to the 91
freeway. This property also includes 4.5 acres of adjacent undeveloped
land on which the Company may construct an additional 70,000 square feet
of office property at some point in the future. Office properties in the
Anaheim submarket, including Stadium Towers Plaza and East Hills Office
Park, had an overall vacancy rate of 9.4% according to CB Commercial Real
Estate Group, Inc. at June 30, 1997, down from 16.5% at the end of 1995.
<PAGE> 7
The four remaining office Core Properties aggregate 274,845 square feet and
include one property in Sacramento totaling 52,661 square feet, one property in
Silicon Valley totaling 26,973 square feet, one property in the Inland Empire
area of Los Angeles totaling 128,620 square feet and one property in south
Orange County totaling 66,591 square feet. The Sacramento property includes 20.2
acres of adjacent undeveloped land, which the Company may develop or sell to
third parties.
The industrial Core Properties are generally multi-tenant industrial or
bulk warehouse properties with concrete tilt-up construction. The 15 industrial
Core Properties include:
- Wilsonville Business Center -- a distribution and service center located
in Wilsonville, Oregon consisting of nine buildings constructed between
1987 and 1993 totaling 530,038 square feet. This property also includes
20.8 acres of adjacent undeveloped land on which the Company may
construct 350,000 square feet of property in the future. The Company
currently owns a 176,000 square feet industrial warehouse in this
submarket of Portland.
- Fremont 3 and LSI Logic -- two research and development properties
located in Fremont, California totaling 138,000 square feet. The Company
currently owns 636,579 square feet of industrial property in this
submarket of the Silicon Valley. Research and development properties had
an overall vacancy rate of 4.4% in this submarket as of July 1, 1997,
according to Cornish & Carey Commercial.
- Overland Court and Port Plaza -- four industrial properties located in
the Port of Sacramento industrial area totaling 358,541 square feet. Two
of these properties also include a total of 13.9 acres of adjacent
undeveloped land on which the Company may construct 200,000 square feet
of industrial property in the future. The Company currently owns 190,802
square feet of property and is developing another 199,553 square feet in
this submarket of Sacramento, California.
The eight remaining industrial Core Properties aggregate 635,060 square
feet and include one property in Sacramento totaling 105,445 square feet, two
properties in Silicon Valley totaling 70,943 square feet, two properties in the
Inland Empire area of Los Angeles totaling 207,041 square feet and three
properties in northern San Diego totaling 251,631 square feet. One Inland Empire
property includes 18.1 acres of adjacent undeveloped land on which the Company
may develop 320,000 square feet of industrial property in the future.
Potential New Market Properties. The Potential New Market Properties
include three office properties aggregating 374,401 square feet and two
industrial properties aggregating 196,950 square feet located in Austin,
Colorado Springs, Denver and Phoenix. The Austin property includes 3.1 acres of
undeveloped adjacent land. The Company intends to further investigate the
viability of extending its operations into these new markets. Upon completion of
such investigation, the Company may seek to acquire additional industrial and
office properties in these markets or may seek to dispose of certain of the
Potential New Market Properties in such markets.
Disposition Properties. The Disposition Properties include eight office and
industrial properties aggregating 1,552,335 square feet located in Arizona,
Florida, Georgia, Massachusetts, Michigan, New Mexico, Pennsylvania and
Washington and five retail properties aggregating 438,470 square feet located in
Oregon. These properties do not meet the Company's current strategic objectives
based on their location or property type and the Company and its affiliates
intend to dispose of such properties through sales or like-kind exchanges, as
conditions warrant. The WCB Portfolio also includes 54.8 acres of land adjacent
to six of the Disposition Properties, which the Company and its affiliates also
intend to dispose. The Company expects to generate approximately $200 million in
capital from the sale of the Disposition Properties for investment in other
properties or the repayment of debt incurred under the new bridge financing
facility. Sales of the Disposition Properties will be subject to the negotiation
of acceptable terms and other customary conditions. There can be no assurance
that the Company or its affiliates will dispose of any or all of the Disposition
Properties or, if disposed, that the Disposition Properties will generate the
expected capital.
<PAGE> 8
Other Pending Acquisitions. Other Pending Acquisitions include six office
properties and two industrial properties aggregating 1.8 million square feet,
for an estimated total investment of $272.0 million. The largest is The City
Office Portfolio, a portfolio consisting of two office buildings located in
Orange, California with 730,000 total square feet. The Company currently owns
430,000 square feet and is redeveloping 146,300 square feet of office property
in this submarket.
The Company has also entered into a contract to purchase mortgages on two
office buildings, La Jolla Center I and UTC Park Plaza, aggregating 226,000
square feet in La Jolla, California for a purchase price of $39.0 million. La
Jolla Center I is substantially identical to an adjacent building, La Jolla
Center II, currently owned by the Company.
<PAGE> 9
1997 Completed Acquisitions
In 1997 through the date of this Prospectus Supplement, the Company
acquired 26 office Properties and seven industrial properties aggregating 8.5
million square feet for a total investment of $919.0 million. The following
table sets forth certain information regarding these completed acquisitions.
ACQUISITIONS COMPLETED IN 1997
<TABLE>
<CAPTION>
TOTAL
ACQUISITION SQUARE
PROPERTY NAME LOCATION DATE FEET
----------------------------- ------------------- --------------- --------- TOTAL
INVESTMENT(1)
-------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
OFFICE PROPERTIES
Emeryville Portfolio....... Emeryville, CA January 1997 946,385 $ 134.2
Mission West Portfolio..... San Diego, CA January 1997 619,935 46.6
Brea Park Centre........... Brea, CA January 1997 141,837 11.9
555 Twin Dolphin Drive..... Redwood Shores, CA February 1997 198,494 43.4
North Creek Parkway
Center................... Bothell, WA February 1997 204,871 23.1
Riverside Center........... Portland, OR February 1997 98,434 9.5
1740 Technology Drive...... San Jose, CA March 1997 194,538 40.2
Fountaingrove Center....... Santa Rosa, CA March 1997 160,808 17.2
Metro Plaza................ San Jose, CA March 1997 911,288 75.6
Pasadena Financial
Center................... Pasadena, CA April 1997 145,702 26.7
Century Square............. Pasadena, CA April 1997 205,653 41.5
Point West Corporate Center
I Sacramento, CA May 1997 145,184 17.0
Sierra Point............... Brisbane, CA May 1997 99,150 11.0
Brea Corporate Plaza....... Orange County, CA June 1997 119,406 12.1
McKesson Building.......... Pasadena, CA June 1997 150,951 19.4
Lafayette Terrace.......... Lafayette, CA June 1997 47,392 7.7
Brea Corporate Place....... Brea, CA July 1997 489,574 62.9
Sepulveda Center........... Los Angeles, CA August 1997 170,134 26.1
790 Colorado............... Pasadena, CA August 1997 129,170 19.6
Nimbus Corporate Center.... Portland, OR August 1997 688,186 73.6
Redmond Heights Tech
Center................... Redmond, WA August 1997 126,480 12.4
Washington Park............ Federal Way, WA September 1997 50,000 5.6
Nobel Corporate Plaza...... San Diego, CA September 1997 102,763 16.9
Tower 17................... Irvine, CA September 1997 229,133 40.1
Johnson Ranch.............. Roseville, CA October 1997 142,363 18.9
Southgate Office Plaza..... Renton, WA October 1997 268,000 29.1
--------- -------------
Subtotal......................................................... 6,785,831 $ 842.3
INDUSTRIAL PROPERTIES
Southcenter West Business
Park..................... Tukwila, WA January 1997 286,921 $ 6.5
Coral Tree Commerce
Center................... Vista, CA June 1997 130,866 8.6
Progress Industrial Park... Vista, CA June 1997 123,275 7.6
Parkway Industrial......... Portland, OR July 1997 176,634 7.6
Huntwood Business Center... Hayword, CA August 1997 174,748 11.9
Fremont Commerce Center.... Fremont, CA August 1997 269,983 17.5
Kelley Point Distribution
Center................... Portland, OR September 1997 500,000 17.0
--------- -------------
Subtotal......................................................... 1,662,427 $ 76.7
--------- -------------
Total....................................................... 8,448,258 $ 919.0
======== ===========
</TABLE>
- ---------------
(1) Represents capitalized cost as of September 30, 1997 plus estimated
repositioning costs.
<PAGE> 10
DEVELOPING NEW PROPERTIES
Property Developments in Process
As of the date of this Prospectus Supplement, the Company was in the
process of developing 20 properties aggregating 3.2 million square feet for a
total estimated investment of $285.1 million. The following table sets forth
certain information regarding these properties under development.
PROPERTY DEVELOPMENTS IN PROCESS
<TABLE>
<CAPTION>
ACTUAL OR
ESTIMATED SHELL TOTAL
COMPLETION SQUARE
PROPERTY NAME LOCATION DATE(1) FEET
--------------------------------- ----------------- --------------- --------- TOTAL
INVESTMENT(2)
-------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
OFFICE PROPERTIES
Bellefield Maplewood........... Seattle, WA January 1997 34,570 $ 5.2
Ryan Ranch III................. Monterey, CA February 1997 24,548 3.0
The City -- 3800 Chapman(3).... Orange, CA July 1997 146,300 9.8
4949 Meadows................... Portland, OR November 1997 125,000 16.4
Eastgate Technology Park....... San Diego, CA April 1998 225,000 22.8
Gateway Office III............. San Jose, CA May 1998 121,500 21.6
Carlsbad Ranch................. Carlsbad, CA September 1998 121,000 17.2
Arboretum Courtyard............ Santa Monica, December 1998 131,000 32.2
CA...............
Treat Tower Walnut Creek, CA December 1998 375,000 64.0
--------- -------------
Subtotal........................................................... 1,303,918 $ 192.2
INDUSTRIAL PROPERTIES
Ryan Ranch Industrial.......... Monterey, CA April 1996 14,664 $ 1.8
Woodinville III................ Seattle, WA May 1996 244,362 11.7
Sorrento Vista................. San Diego, CA March 1997 228,130 10.0
Riverside Business Center...... Sacramento, CA June 1997 174,624 7.4
Marine Drive III............... Portland, OR July 1997 258,500 8.6
Bay Center Business Park III... Hayward, CA August 1997 116,941 6.6
Seaport Distribution Center.... Sacramento, CA August 1997 199,553 6.5
Dixon Landing North I.......... Milpitas, CA August 1997 116,890 11.0
Dixon Landing North II......... Milpitas, CA September 1997 85,290 7.4
158th Commerce Park............ Portland, OR March 1998 381,750 16.6
Kirkland 118 Corporate Kirkland, WA March 1998 77,000 5.3
Center.......................
--------- -------------
Subtotal........................................................... 1,897,704 $ 92.9
--------- -------------
Total......................................................... 3,201,622 $ 285.1
======== ===========
</TABLE>
- ---------------
(1) Shell completion date refers to the date when the Property is first
available for occupancy.
(2) Represents total estimated cost of development.
(3) This is a redevelopment of an acquired Property.
<PAGE> 11
1997 Completed Property Developments
During the first nine months of 1997, the Company completed development of
seven Properties, aggregating 1,576,962 square feet for a total investment of
$59.1 million. The following table sets forth certain information regarding
these recently completed developments.
OFFICE AND INDUSTRIAL PROPERTY DEVELOPMENTS COMPLETED IN 1997
<TABLE>
<CAPTION>
TOTAL
RENTABLE
PROPERTY NAME LOCATION SQUARE FEET
-------------------------------------------------- --------------- ----------- TOTAL
INVESTMENT(1)
-------------
(IN MILLIONS)
<S> <C> <C> <C>
OFFICE PROPERTIES
Gateway Oaks III................................ Sacramento, CA 46,227 $ 5.6
Bellefield Building N........................... Seattle, WA 46,070 6.1
Ridder Park..................................... San Jose, CA 83,841 8.5
----------- ------
Subtotal........................................................ 176,138 $20.2
INDUSTRIAL PROPERTIES
Concord North Commerce Center................... Concord, CA 193,590 9.1
Airport Way..................................... Portland, OR 205,000 7.5
Benicia Industrial II(2)........................ Benicia, CA 896,234 18.9
Marine Drive II................................. Portland, OR 106,000 3.4
----------- ------
Subtotal........................................................ 1,400,824 $38.9
----------- ------
Total...................................................... 1,576,962 $59.1
========== ===========
</TABLE>
- ---------------
(1) Represents capitalized cost as of September 30, 1997.
(2) This is a redevelopment of an acquired Property.
GROWTH IN OPERATING INCOME FROM EXISTING PROPERTIES
The Company seeks to increase Funds from Operations by maximizing cash flow
from existing Properties through active leasing and property management and
capitalizing on the strength in its property markets. See "-- Strength in
Property Markets." The Company's objectives include increasing the occupancy of
all Properties that are not fully leased, maintaining high average occupancy
rates, increasing effective rental rates and strictly controlling operating
expenses and capital expenditures.
As of September 30, 1997, the occupancy rate of the Properties owned and
operated by the Company was 95.1%. Effective rental rates on the 548 leases
(representing 3.5 million square feet) signed by the Company during the nine
months ended September 30, 1997 were on average 22.7% higher than the ending
contract rental rates on the expiring leases for the same space. The Company
believes that as a result of the low vacancy rates, the absence of significant
new construction, higher average market rental rates and good demand for
commercial property in its real estate markets in general it will continue to
achieve growth in effective rental rates on leases in its Properties.
Approximately 81.9% of the Company's 23.8 million square feet occupied at June
30, 1997 is subject to scheduled lease expirations through the end of 2001.
The Company focuses on controlling capital expenditures associated with
re-leasing space by concentrating on general purpose properties that are easily
divisible so as to accommodate users of various sizes. In addition, the Company
seeks to limit tenant improvement expenditures to those which are in demand by,
and adaptable to, a high number of users. For the five-year period ended
December 31, 1996 on an average annual basis and for the six months ended June
30, 1997, the Company's office Properties averaged $4.19 and $3.54,
respectively, and its industrial Properties averaged $1.19 and $0.79,
respectively, per square foot in capitalized tenant improvements and leasing
commissions on renewed or re-leased space.
<PAGE> 12
PROPERTY DISPOSITIONS
The Company has a policy of disposing of properties through sales or
like-kind exchanges that do not meet the Company's strategic objectives. For the
six months ended June 30, 1997, the Company disposed of seven retail properties
totaling 0.7 million square feet of net rentable space for $78.4 million. During
the third quarter of 1997, the Company disposed of one industrial property
totaling 49,750 square feet for $2.4 million and one retail property totaling
164,653 square feet for $21.7 million. The Company also intends to dispose of
certain properties acquired through the WCB portfolio. See "-- WCB
Portfolio -- Disposition Properties." In addition, the Company and its
affiliates have entered into contracts to sell two office properties and one
retail property for approximately $22.0 million. The sale of such properties is
subject to customary conditions.
STRENGTH IN PROPERTY MARKETS
The Company's existing Properties are primarily located in seven geographic
regions: Seattle, WA; Portland, OR; Sacramento/Central Valley, CA; East San
Francisco Bay Area, CA; South San Francisco Bay Area, CA; Orange and Los Angeles
Counties, CA; and San Diego, CA. The Company has experienced significant
improvements in most of the markets in which the Company owns and operates
Properties, including decreasing vacancy rates and increasing rental rates. The
Company believes that these markets continue to offer opportunities for
profitable investment because of the strengths of the local economies and the
improvement over the last several years in the property markets themselves. The
acquisition of the WCB Portfolio has the potential to expand the Company's
geographic presence to Austin, Colorado Springs, Denver and Phoenix. The Company
believes that these markets may possess many of the attractive characteristics
of the markets in which it currently operates.
As reported in the Urban Land Institute 1997 Mid-Year Outlook, California
was viewed as the best place for overall real estate investment. As set forth
below, San Francisco, San Jose and Orange County ranked as the top three markets
in the nation based on total return potential. Seattle, Oakland-East San
Francisco Bay Area, San Diego and Portland were also included in the top ten
markets. In addition, the Fall 1996 issue of MarketScore, a publication of KOLL
(a real estate services company), ranked San Francisco, Portland and San Jose
among the top four markets for suburban office property investment and San Jose
and Portland among the top three markets for industrial property investment for
relative total return for a two-year time horizon. Such publication also ranked
Phoenix and Austin, two of the Company's potential new markets, among the top
five markets for suburban office property investment and Austin in the top two
markets for industrial property investment.
<TABLE>
<CAPTION>
TOP OVERALL REAL ESTATE TOP MARKETS FOR SUBURBAN TOP MARKET FOR
MARKETS IN THE U.S. OFFICE PROPERTY INDUSTRIAL
1997(1) INVESTMENT(2) PROPERTY INVESTMENT(2)
--------------------------- --------------------------- ---------------------------
<S> <C> <C>
1. SAN FRANCISCO 1. SAN FRANCISCO 1. SAN JOSE
2. SAN JOSE 2. Phoenix 2. Austin
3. ORANGE COUNTY 3. PORTLAND 3. PORTLAND
4. Boston 4. SAN JOSE 4. Milwaukee
5. SEATTLE 5. Austin 5. Grand Rapids
6. Minneapolis-St.
6. OAKLAND-EAST BAY Paul 6. Tulsa
7. Minneapolis-St. Paul
8. New York
9. SAN DIEGO
10. PORTLAND
</TABLE>
- ---------------
(1) Source: National Real Estate Index
(2) Source: MarketScore, Volume 15 (KOLL)
<PAGE> 13
FINANCING TRANSACTIONS
During 1997, the Company continued to extend its fixed-rate debt maturities
and decreased its exposure to floating interest rate risk through the issuance
of $150 million of 7.125% Notes due July 1, 2009 (the "July 1997 Offering") and
$150 million of 7.50% Debentures due October 1, 2027 (the "September 1997
Offering"). The net proceeds from these notes and debentures were used primarily
to repay borrowings on the Company's line of credit which are subject to
floating interest rates.
On October 10, 1997, the Company issued $150 million of its Series C
Cumulative Redeemable Preferred Stock, $25.00 liquidation preference ("Series C
Preferred Stock"), through an underwritten public offering and a direct
placement to an institutional investor (the "Series C Preferred Offering").
Dividends on the Series C Preferred Stock are cumulative and are payable at the
rate of 7 7/8% of the liquidation preference per annum. The Series C Preferred
Stock may be redeemed for cash at the option of the Company on or after October
10, 2002. The net proceeds from the sale of the Series C Preferred Stock,
together with the proceeds of this Offering, the bridge financing facility
described below and other borrowings, will be used to fund the cash investment
in the Pending Acquisitions. Pending such uses, the proceeds from the Series C
Preferred Offering were used to repay borrowings under the Company's unsecured
credit facility.
The Company intends to enter into a 24-month, $200 million bridge financing
facility with Wells Fargo Bank to finance a portion of the WCB Portfolio. The
facility is expected to bear interest at a floating rate based on the London
Interbank Offered Rate plus 65 basis points. The Company intends to use proceeds
from the disposition of the Disposition Properties to repay borrowings under
such bridge facility.
The purchase price of the WCB Portfolio will be paid to affiliates of
Whitehall Street with $650.0 million in cash and $75.0 million in preferred
partnership units in the Operating Partnership. Such partnership units will have
a cumulative preferred dividend equal to 6.75% of the issue price and will be
convertible at any time after six months from the date of issuance into common
partnership units of the Operating Partnership or Common Stock of the Company at
a conversion price of $41.10 per partnership unit or share.
As of June 30, 1997, the Company's ratio of total indebtedness to total
market capitalization was 27.6%. On a pro forma basis, giving effect to the July
1997 Offering, the September 1997 Offering, the Series C Preferred Offering and
this Offering and the application of the net proceeds therefrom as described in
"Use of Proceeds," the ratio of total indebtedness to total market
capitalization would be 32.2%. The Company believes that such a leverage level
will allow it to use debt financing to fund a significant amount of future
acquisition and development activities. Total market capitalization is
calculated based on (i) the aggregate market value of the Company's Common
Stock, assuming conversion of all Class B Common Stock, Class C Common Stock,
Series A Preferred Stock and partnership units and convertible preferred
partnership units in the Operating Partnership, (ii) the aggregate liquidation
value of the Series B Preferred Stock and Series C Preferred Stock and (iii) the
Company's total indebtedness.
<PAGE> 14
THE PROPERTIES
The following table sets forth, as of September 30, 1997, the location and
type of the Properties by square feet on a pro forma basis, assuming the
acquisition of all of the Pending Acquisitions (other than two mortgages) and
the disposition of all of the Disposition Properties, as if such transactions
had occurred on September 30, 1997. For similar information regarding the
Properties actually owned by the Company as of September 30, 1997, see "The
Company -- Rentable Square Footage."
PRO FORMA RENTABLE SQUARE FOOTAGE OF PROPERTIES BY LOCATION AND TYPE OF PROPERTY
<TABLE>
<CAPTION>
PERCENT
GEOGRAPHIC AREA INDUSTRIAL OFFICE TOTAL OF TOTAL
- ---------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Seattle, WA/Boise, ID................... 3,381,464 1,871,875 5,253,339 14.8%
Portland, OR............................ 3,226,549 2,090,683 5,317,232 15.0%
Sacramento, CA.......................... 1,489,955 1,708,766 3,198,721 9.0%
East San Francisco Bay Area, CA......... 5,515,521 2,578,696 8,094,217 22.8%
South San Francisco Bay Area, CA........ 3,223,803 2,800,496 6,024,299 16.9%
Los Angeles and Orange Counties, CA..... 1,361,091 4,106,813 5,467,904 15.4%
San Diego, CA........................... 598,818 990,643 1,589,461 4.5%
Arizona-Colorado-Texas.................. 196,950 374,401 571,351 1.6%
---------- ---------- ---------- ------
Total................................. 18,994,151 16,522,373 35,516,524 100.0%
========== ========== ========== ======
Percent of Total...................... 53.5% 46.5% 100.0%
Number of Properties.................. 115 110 225
</TABLE>
<PAGE> 15
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby.................. 10,000,000 shares of Common Stock
Common Stock to be outstanding after the 53,532,923 shares of Common Stock(1)
Offering...................................
Use of proceeds from the Offering............ To fund in part the Pending Acquisitions,
repay indebtedness and for general corporate
purposes.
New York Stock Exchange Symbol............... "SPK"
</TABLE>
- ---------------
(1) If all of the partnership units in the Operating Partnership were exchanged
for Common Stock and all of the outstanding shares of Series A Preferred
Stock, Class B Common Stock and Class C Common Stock were converted into
Common Stock, the total number of shares of Common Stock outstanding would
be 67,684,085, which includes 9,223,534 shares of Common Stock issuable upon
exchange of partnership units in the Operating Partnership. Excludes
4,160,000 shares of Common Stock that may also be issued pursuant to the
exercise of outstanding employee stock options granted under the Spieker
Properties, Inc. 1993 Stock Incentive Plan, as restated and amended, and the
1993 Directors Stock Option Plan, as restated and amended, at an average
exercise price of $28.56 per share.
<PAGE> 16
SUMMARY FINANCIAL AND OTHER DATA
The Company's consolidated summary financial and other data is presented on
a historical basis for the six months ended June 30, 1997 and 1996 and the years
ended December 31, 1996 and 1995, and on a pro forma basis for the six months
ended June 30, 1997 and the year ended December 31, 1996. The Company's
consolidated balance sheet data is presented on a historical basis as of June
30, 1997 and December 31, 1996 and 1995 and on a pro forma basis as of June 30,
1997. Pro forma operating and other data are presented as if the July 1997
Offering, the September 1997 Offering, the Series C Preferred Offering, this
Offering, the Pending Acquisitions and certain other financial transactions
described in the Company's pro forma financial statements and notes thereto
included elsewhere herein, had been completed on January 1, 1996. Pro forma
balance sheet data are presented as if the July 1997 Offering, the September
1997 Offering, the Series C Preferred Offering, this Offering, the Pending
Acquisitions and certain other transactions described in the Company's pro forma
financial statements and notes thereto included elsewhere herein had been
completed on June 30, 1997. See "Spieker Properties, Inc. Pro Forma Financial
Information."
The summary financial and other data should be read in conjunction with the
consolidated financial statements and notes thereto of the Company included
elsewhere herein and included in the Company's filings under the Exchange Act,
which are incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus.
SUMMARY FINANCIAL AND OTHER DATA
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------------ -------------------------------
PRO FORMA ACTUAL ACTUAL PRO FORMA ACTUAL ACTUAL
1997(1) 1997 1996 1996(1) 1996 1995
--------- -------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues................................ $220,696 $142,295 $93,014 $416,976 $200,699 $153,391
Income from operations before
disposition of property, minority
interests and extraordinary items..... 70,676 49,923 32,110 120,266 65,764 30,335
Income before extraordinary items....... 61,053 56,284 27,816 103,899 64,190 24,666
Net income (loss)....................... 61,053 56,284 27,816 103,899 64,190 (8,837)
Net income (loss) allocable to common
shares................................ 48,981 50,118 21,748 79,947 52,051 (11,471)
Net income per share of common stock
before extraordinary items(2)......... 0.85 1.09 0.65 1.38 1.50 0.84
Net income (loss) per share of common
stock(2).............................. 0.85 1.09 0.65 1.38 1.50 (0.44)
Dividends and distributions per share:
Series A Preferred Stock.............. 1.15 1.15 1.05 2.10 2.10 2.05
Series B Preferred Stock.............. 1.18 1.18 1.18 2.36 2.36 0.14
Series C Preferred Stock.............. 0.98 -- -- 1.97 -- --
Common Stock(2)....................... 0.98 0.98 0.91 1.77 1.77 1.74
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 AS OF DECEMBER 31,
------------------------- -------------------------
PRO FORMA(1) ACTUAL ACTUAL 1996 ACTUAL 1995
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate (before accumulated
depreciation)................................... $3,236,576 $1,990,272 $ 1,447,173 $ 1,098,871
Net investment in real estate..................... 3,160,025 1,844,700 1,319,472 974,259
Total assets...................................... 3,210,530 1,892,504 1,390,314 1,011,497
Property indebtedness, net........................ 105,736 94,745 45,997 112,702
Unsecured debt.................................... 1,364,809 692,000 84,997 377,700
Total debt........................................ 1,470,545 786,745 719,997 490,402
Stockholders' equity.............................. 1,498,963 947,243 563,928 419,847
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------------------- ---------------------------------------
PRO FORMA PRO FORMA
1997(1) ACTUAL 1997 ACTUAL 1996 1996(1) ACTUAL 1996 ACTUAL 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(3)......... $ 91,324 $ 67,455 $ 44,428 $ 161,775 $ 93,293 $ 61,428
Weighted average share
equivalents(4)................. 66,475,976 54,466,117 41,271,774 66,475,976 42,460,000 33,769,742
EBIDA(5)......................... 156,045 97,638 66,131 292,452 140,384 108,323
Cash flow provided by (used in):
Operating activities........... 105,733 93,960 50,477 189,662 103,607 72,210
Investing activities........... (3,200) (455,783) (155,698) (2,138,875) (378,593) (196,254)
Financing activities........... (47,995) 341,736 109,588 1,805,129 296,749 121,954
Total square footage of
properties at end of period.... 36,532 24,808 17,114 -- 21,430 16,282
Number of properties at end of
period......................... 236 174 128 -- 156 128
Occupancy rate at end of
period......................... -- 95.8 % 96.2 % -- 96.6 % 96.9 %
Ratio of earnings to fixed
charges(6)..................... 2.29x 2.74x 2.73x 2.11x 2.56x 1.61x
Ratio of earnings to combined
fixed charges and preferred
stock dividends and Preferred
Operating Partnership Unit
distributions(7)............... 1.79x 2.23x 2.04x 1.65x 1.97x 1.53x
Ratio of FFO before interest
expense, Series B and C
Preferred Stock dividends and
Preferred Operating Partnership
Unit distributions to interest
expense(8)..................... 3.08x 3.93x 3.96x 2.84x 3.78x 2.34x
Total market equity(9)........... $ 3,090,521 $2,065,287 $1,284,105 -- $1,665,025 $1,036,895
</TABLE>
- ---------------
(1) See "Spieker Properties, Inc. Pro Forma Financial Information." Pro forma
amounts exclude gains on disposition of property of $14,180 and $8,350
recognized on a historical basis for the six months ended June 30, 1997 and
the year ended December 31, 1996, respectively.
(2) Per share amounts are presented for the six months ended June 30, 1997 and
1996 and for the years ended December 31, 1996 and 1995 based upon weighted
average common shares outstanding of 46,120,388, 33,502,443, 34,691,140 and
26,140,488, respectively. The pro forma per share amounts have been based
upon weighted average common shares outstanding of 57,919,448 for the six
months ended June 30, 1997 and the year ended December 31, 1996. There is no
material difference between primary and fully diluted amounts.
Had Statement and Financial Accounting Standards No. 128 --"Earnings Per
Share" been adopted as of January 1, 1996, per share amounts would have been
$0.83 and $0.86 on an historical and pro forma basis, respectively, for the
six months ended June 30, 1997, and $1.31 and $1.40 on an historical and pro
forma basis, respectively, for the year ended December 31, 1996.
(3) Funds from Operations means income (loss) from operations before disposal of
real estate properties, minority interests and extraordinary items plus
depreciation and amortization and an adjustment for straight-lined rents
less cash distributable to minority interests in certain properties owned by
the Company. Management generally considers Funds from Operations to be a
useful financial performance measure of the operating performance of an
equity REIT because, together with net income and cash flows, Funds from
Operations provides investors with an additional basis to evaluate the
ability of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. Funds from Operations does not represent net
income or cash flows from operations as defined by GAAP and does not
necessarily indicate that cash flows will be sufficient to fund cash needs.
It should not be considered as an alternative to net income as an indicator
of the Company's operating performance or to cash flows as a measure of
liquidity. Funds from Operations does not measure whether cash flow is
sufficient to fund all of the Company's cash needs including principal
amortization, capital improvements and distributions to stockholders. Funds
from Operations also does not represent cash flows generated from operating,
investing or financing activities as defined by GAAP. Further, Funds from
Operations as disclosed by other REITs may not be comparable to the
Company's calculation of Funds from Operations.
(4) Assumes conversion of shares of Class B Common Stock, Class C Common Stock,
Series A Preferred Stock and partnership units in the Operating Partnership
into shares of Common Stock.
<PAGE> 18
(5) EBIDA means earnings before interest expense, depreciation, amortization,
disposal of real estate properties and minority interests. EBIDA is computed
as income from operations before minority interests and extraordinary items
plus interest expense, depreciation and amortization. The Company believes
that in addition to cash flows and net income, EBIDA is a useful financial
performance measure for assessing the operating performance of an equity
REIT because, together with net income and cash flows, EBIDA provides
investors with an additional basis to evaluate the ability of a REIT to
incur and service debt and to fund acquisitions and other capital
expenditures. To evaluate EBIDA and the trends it depicts, the components of
EBIDA, such as rental revenues, rental expenses, real estate taxes and
general and administrative expenses, should be considered. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Excluded from EBIDA are financing costs such as interest as well as
depreciation and amortization, each of which can significantly affect a
REIT's results of operations and liquidity and should be considered in
evaluating a REIT's operating performance. Further, EBIDA does not represent
net income or cash flows from operating, financing and investing activities
as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows will be sufficient to fund cash needs.
It should not be considered as an alternative to net income as an indicator
of the Company's operating performance or to cash flows as a measure of
liquidity.
(6) The ratio of earnings to fixed charges is computed as income (loss) from
operations, before gains or losses on sales of properties, extraordinary
items, plus fixed charges (excluding capitalized interest) divided by fixed
charges. Fixed charges consist of interest costs including amortization of
debt discount and deferred financing fees, whether capitalized or expensed,
and the interest component of rental expense.
(7) The ratio of earnings to combined fixed charges and preferred stock
dividends and preferred Operating Partnership unit distributions is computed
as income (loss) from operations, before gains or losses on sales of
properties, and extraordinary items, plus fixed charges (excluding
capitalized interest) divided by fixed charges plus dividends on preferred
stock and distributions on preferred Operating Partnership units.
(8) The ratio of Funds from Operations before interest expense, dividends on
Series B and C Preferred Stock and Operating Partnership unit distributions
to interest expense is calculated as Funds from Operations plus interest
expense, excluding amortization of prepaid interest and deferred financing
fees, dividends on Series B and C Preferred Stock and distributions on
preferred Operating Partnership units divided by interest expense. The
Company believes that in addition to the ratio of earnings to fixed charges,
this ratio provides a useful measure of a REIT's ability to service its debt
because of the exclusion of non-cash items such as depreciation and
amortization from the definition of Funds from Operations. This ratio
differs from a GAAP-based ratio of earnings to fixed charges and should not
be considered as an alternative to that ratio. Further, Funds from
Operations as disclosed by other REITs may not be comparable to the
Company's calculation of Funds from Operations.
(9) Total market equity is presented as of the end of the period and is
calculated as the sum of (i) the total number of shares of Common Stock
outstanding, assuming conversion into Common Stock of the Series A Preferred
Stock, Class B Common Stock, Class C Common Stock and the partnership units
in the Operating Partnership, multiplied by the closing price of the Common
Stock as of the end of the period and (ii) the total number of shares of
Series B and C Preferred Stock multiplied by their liquidation preference of
$25.00 per share. The closing prices of the Common Stock on the New York
Stock Exchange for the periods ended June 30, 1997 and 1996 and December 31,
1996 and 1995, which were used in calculating total market equity, were
$35.188, $27.25, $36.00 and $25.125, respectively. Pro forma total market
equity is calculated based upon the last reported price of the Common Stock
on the New York Stock Exchange on October 10, 1997 of $41.875 per share of
Common Stock. The Company believes that total market equity is an indicator
of the Company's relative size as compared to other public REITs and can be
used to evaluate the Company's total market capitalization, which includes
indebtedness and total market equity. The Company believes that total market
equity has gained acceptance as an indicator of leverage for a company whose
assets are primarily operating real estate. Total market equity, however,
does not represent the Company's assets or net assets on a GAAP or fair
market basis.
<PAGE> 19
THE COMPANY
GENERAL
The Company is a leading REIT that specializes in the acquisition,
development and management of suburban office and industrial properties. As of
September 30, 1997, the Company owned and operated 185 income-producing
Properties primarily in California, Oregon and Washington, aggregating 29.1
million square feet and comprised of 17.0 million square feet of industrial
Properties and 12.1 million square feet of office Properties. In 1997 through
the date of this Prospectus Supplement, the Company acquired 26 office
Properties and seven industrial Properties aggregating 8.5 million square feet
for a total investment of $919.0 million. In addition, the Company and its
affiliates have entered into contracts to acquire 53 additional properties,
including two mortgages and the WCB Portfolio, aggregating 8.2 million square
feet for an estimated total investment of $997.0 million. See "Prospectus
Supplement Summary -- Recent Activities and Continued Growth." The Company
intends to fund these pending acquisitions in part with the proceeds of this
Offering and expects to complete most of such acquisitions in the fourth quarter
of 1997. The Company also is in the process of developing 20 properties in
California, Oregon and Washington aggregating 3.2 million square feet for a
total investment of $285.1 million.
The Company's revenues increased 53.0% from $93.0 million for the six
months ended June 30, 1996 to $142.3 million for the six months ended June 30,
1997. The Company's EBIDA increased 48.0% from $66.0 million for the six months
ended June 30, 1996 to $97.6 million for the six months ended June 30, 1997. In
addition, the Company's Funds from Operations increased 51.8% from $44.4 million
for the six months ended June 30, 1996 to $67.5 million for the six months ended
June 30, 1997. The Company believes that EBIDA and Funds from Operations are
useful financial performance measures of the operating performance of an equity
REIT. EBIDA and Funds from Operations do not represent net income or cash flows
from operating, financing and investing activities as defined by GAAP and do not
necessarily indicate that cash flows will be sufficient to fund cash needs.
EBIDA and Funds from Operations should not be considered as alternatives to net
income as an indicator of the Company's operating performance or to cash flows
as a measure of liquidity. Funds from Operations as disclosed by other REITs may
not be comparable to the Company's calculation of Funds from Operations. For a
further discussion of EBIDA and Funds from Operations, net income and cash flow
from operations, see "Selected Financial and Other Data."
The Company's Common Stock is listed on the New York Stock Exchange under
the Symbol "SPK." The Company was incorporated in Maryland in August 1993. The
Company's executive offices are located at 2180 Sand Hill Road, Menlo Park,
California 94025 and the telephone number is (650) 854-5600.
BUSINESS STRATEGY AND OPERATIONAL PHILOSOPHY
The Company's principal objective is to achieve sustainable long-term
growth in Funds from Operations per share. The Company has pursued this goal
since its inception through focused business strategies and operational
philosophies.
Business Strategy
Focus on Quality Commercial Property. The Company invests in quality office
and industrial properties that possess attributes that enable the properties to
be competitive in both the short and the long run. The Company seeks to own
properties in locations which provide easy access to major transportation
arteries and are close to important services. With more than 25 years of
experience in owning and operating income-producing properties, the Company's
management possesses a high degree of knowledge of the physical and locational
characteristics that give a property long term viability.
The Company takes significant steps to differentiate its Properties from
those of nearby competitors so as to maximize their attractiveness to potential
users. The Company focuses on office properties that
<PAGE> 20
have ample glass line per square foot of office space, and user friendly common
areas, stairs, elevators and restrooms, convenient parking and efficient suite
layouts. Additionally, the Company seeks to provide amenities and services such
as conference rooms and health clubs. The Company's warehouse Properties
typically have high clear heights, numerous dock facilities, appropriate truck
staging and high capacity sprinkler systems. The Company also seeks to
differentiate its industrial Properties through the use of landscaping as well
as exterior glass walls.
The Company pays careful attention to the long term quality of the
buildings that it develops by emphasizing first class materials, systems and
workmanship during their construction. The exterior appearances of the Company's
Properties are designed to be attractive, enduring and appropriately simple. The
Company avoids projects which are lavish or unnecessarily intricate as these
features tend to prematurely date buildings and often fail to deliver value from
the tenants' perspective.
Serve Wide Range of Tenants and Limit Capital Expenditures. The Company
focuses on leasing space to tenants of various sizes and on owning properties
that are easily divisible and therefore appeal to a wide range of potential
tenants. Such property flexibility also allows the Company to better serve
existing tenants by accommodating their inevitable expansion and contraction
needs. In addition, the Company's experience is that such project flexibility
helps it maintain high occupancy rates particularly when market conditions are
less favorable.
By focusing on divisible projects and a wide range of tenants, the Company
has been able to control the capital expenditures associated with releasing
space. Consequently, the Company's capital expenditure requirements are
relatively lower than those associated with downtown office buildings or large
single tenant suburban projects. The Company also attempts to limit tenant
improvement expenditures to those which are in demand by, and adaptable to, a
high number of users.
Invest in Growing Regions. The Company focuses its activities primarily in
California, Washington and Oregon. The Company believes these regions possess
diverse and vibrant economies with strong prospects for continued economic
growth due to their Pacific Rim location, quality of life, well developed
transportation infrastructures, high technology industries, well-educated
employee base and excellent universities. Within these states, the Company
focuses its activities on the major metropolitan areas of Seattle, Portland, San
Francisco, San Jose, Sacramento, Los Angeles, Orange County and San Diego, which
have shown to be desired locations of a large number of businesses. The Company
also intends to explore opportunities in other markets where similar
characteristics may exist, including Austin, Colorado Springs, Denver and
Phoenix as a result of the acquisition of the WCB Portfolio.
Own Suburban Properties. The Company focuses its efforts on properties in
suburban markets surrounding major metropolitan areas. The Company believes that
a number of significant demographic and technological factors have caused, and
will continue to cause, properties in suburban areas to perform better than
properties in central business districts. The desire of employees to work near
their residence as well as transportation difficulties and safety concerns
associated with central business districts have generally caused employers to
seek facilities in the suburbs in the recent past. These factors are reinforced
by technological changes which have enabled companies to operate efficiently
from disparate locations. However, the Company may consider the possibility of
acquiring properties in dynamic downtown markets that exhibit prospects for
sustainable long-term growth.
Dominate Submarkets. In each specific submarket of a suburban area in which
it operates, the Company generally seeks to own a number of properties and to be
one of the most significant commercial landlords in that market. The Company
believes that this strategy gives it a measure of control over the rental rates
it charges for its Properties as well as the amount of tenant improvements it
must undertake to provide. Through this approach, the Company can also offer
prospective tenants a variety of property options and can provide existing
tenants, who are growing, additional space in Properties owned by the Company in
the same area. The Company believes that it has achieved significant market
penetration within a number of the submarkets in which it operates. Such market
focus enables the Company to maximize synergistic opportunities and economies of
scale and allows management to concentrate its expertise on specific markets and
local conditions.
<PAGE> 21
Provide Superior Level of Service. The Company's goal is to provide a
superior level of service to its tenants in order to achieve high occupancy and
rental rates as well as low turnover. The Company's office property managers are
located on-site, providing tenants with convenient access to management and
allowing tenants to focus on their business rather than on property issues.
On-site staff enable the Company's properties to be well maintained and to
convey a sense of quality, order and security that complements the suburban
environments in which the properties are located. The Company has significant
experience in acquiring properties managed by others and thereafter improving
tenant satisfaction, occupancy levels, renewal rates and rental income by
implementing the Company's tenant service programs.
Operating Philosophy
Fully Integrated Management Capabilities. The Company has had and will
continue to have a philosophy of maintaining in-house resources to add value to
properties through the entire cycle of acquisition, development, and ownership
including design, construction, leasing and management. The Company utilizes
in-house resources to market, lease and manage its properties and does not
typically list its properties with outside businesses or use third party
management contractors. All of the Company's officers with real estate
responsibility have had extensive experience marketing various properties and
have, at least one time in their careers, been directly responsible for leasing
specific properties. The Company believes this approach gives it a significant
advantage as such depth of experience provides it with a detailed knowledge of
markets and tenant preferences.
Accountability. The Company has a philosophy of holding one Senior Officer
or a small group of Senior Officers accountable, under the supervision and
direction of the Company's executive officers, for all phases of a property's
development, from purchase, design and budgeting through construction, leasing
and ongoing management. The Company believes that this approach increases the
likelihood of a project's success because of the Senior Officer's
accountability, continuity of involvement in the project and resulting detailed
knowledge of the property and its tenants, particularly as compared to a
compartmentalized approach to the real estate business where individuals are
responsible for only certain limited areas of a project.
Training and Retention. The Company's hiring, training and retention of a
talented management group has been a important factor in its success. The
Company expends significant efforts in the training of new employees in
fundamental real estate skills as well as in the continuing education of
existing employees. All of the Company's officers, including the executive
officers, are involved in the education program, which reinforces the program's
importance to the Company and its personnel. The Company's officer compensation
program includes cash bonuses and restricted stock payments tied largely to
growth in net operating income from existing properties under their management,
as well as contribution to Funds from Operations from new acquisitions and
developments in their regions. Non-officer compensation includes subjective
bonuses based upon, among other factors, tenant satisfaction and leasing and
releasing success. The Company also believes that stock options are an effective
means of linking employees' actions to stockholder value and generally grants
options to all full-time employees upon the completion of one year of service
with the Company.
Maximize Economies of Scale. As a result of the Company's rapid growth over
the last few years, it has become one of the largest owners and operators of
commercial property in California and the Pacific Northwest. This size will
continue to enable the Company to achieve benefits from the economies of scale
in its leasing, financing and administrative operations. The Company believes
that it can also achieve operational synergies resulting from the number of
properties it operates in each submarket.
<PAGE> 22
THE LOCATION AND TYPE OF THE COMPANY'S PROPERTIES
The following tables set forth certain information relating to rentable
square footage, property operating income, average occupancy rates and lease
expirations of the Company's properties.
RENTABLE SQUARE FOOTAGE
The following table sets forth, as of September 30, 1997, the location and
type of Properties by rentable square footage.
RENTABLE SQUARE FOOTAGE OF PROPERTIES BY LOCATION AND TYPE OF PROPERTY
<TABLE>
<CAPTION>
PERCENT
GEOGRAPHIC AREA INDUSTRIAL OFFICE TOTAL OF TOTAL
---------------------------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Seattle, WA/Boise, ID............. 3,381,464 1,095,875 4,477,339 15.3%
Portland, OR...................... 2,696,511 1,205,844 3,902,355 13.4
Sacramento, CA.................... 1,025,969 1,413,742 2,439,711 8.4
East San Francisco Bay Area, CA... 5,377,521 1,801,347 7,178,868 24.6
South San Francisco Bay Area,
CA.............................. 3,014,860 2,773,523 5,788,383 19.9
Los Angeles and Orange Counties,
CA.............................. 1,154,050 2,868,828 4,022,878 13.8
San Diego, CA..................... 347,187 990,643 1,337,830 4.6
---------- ---------- ---------- -----
Total................... 16,997,562 12,149,802 29,147,364 100.0%
========== ========== ========== =====
Percent of Total........ 58.3% 41.7% 100.0%
Number of Properties.... 89 96 185
</TABLE>
PROPERTY OPERATING INCOME
The following table sets forth for the quarter ended June 30, 1997, the
Company's Property operating income, which is rental revenue less rental
expenses and real estate taxes and excluding interest, depreciation and
amortization and general and administrative expenses, on a percentage basis by
the location and type of the Company's Properties.
PERCENTAGE OF PROPERTY OPERATING INCOME BY LOCATION AND TYPE OF PROPERTY
FOR THE QUARTER ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PERCENT
GEOGRAPHIC AREA INDUSTRIAL OFFICE OF TOTAL
-------------------------------------------------------- ---------- ------ --------
<S> <C> <C> <C>
Seattle, WA/Boise, ID................................... 6.8% 5.2% 12.0%
Portland, OR............................................ 4.7 2.4 7.1
Sacramento, CA.......................................... 1.7 7.3 9.0
East San Francisco Bay Area, CA......................... 9.2 11.4 20.6
South San Francisco Bay Area, CA........................ 10.1 21.1 31.2
Los Angeles and Orange Counties, CA..................... 2.0 7.7 9.7
San Diego, CA........................................... 2.2 8.2 10.4
---- ---- -----
Percent of Total.............................. 36.7% 63.3% 100.0%
==== ==== =====
</TABLE>
<PAGE> 23
AVERAGE OCCUPANCY RATES
The following table sets forth the aggregate average occupancy rates as of
June 30, 1997 of the Properties in terms of the location and type of the
Company's Properties.
AVERAGE OCCUPANCY RATE BY LOCATION AND TYPE OF PROPERTY
<TABLE>
<CAPTION>
GEOGRAPHIC AREA INDUSTRIAL OFFICE TOTAL
---------------------------------------------------------- ---------- ------ -----
<S> <C> <C> <C>
Seattle, WA/Boise, ID..................................... 93.0% 98.6% 94.1%
Portland, OR.............................................. 96.9 99.9 97.6
Sacramento, CA............................................ 95.8 92.3 93.7
East San Francisco Bay Area, CA........................... 98.1 95.7 97.3
South San Francisco Bay Area, CA.......................... 98.5 97.6 98.0
Los Angeles and Orange Counties, CA....................... 92.6 91.8 92.1
San Diego, CA............................................. 97.9 91.3 93.1
---- ---- ----
Weighted Average................................ 96.2% 95.1% 95.8%
==== ==== ====
</TABLE>
LEASE EXPIRATIONS OF THE COMPANY'S PORTFOLIO
The following tables set forth scheduled lease expirations for leases in
effect as of June 30, 1997, for each of the next ten years, for (i) all of the
Company's office and industrial Properties, (ii) all of the Company's office
Properties and (iii) all of the Company's industrial Properties. The tables
assume that none of the tenants exercises renewal options or termination rights.
LEASE EXPIRATIONS OF THE COMPANY'S PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
ANNUAL BASE RENT ANNUAL BASE RENT
SQUARE FEET SUBJECT UNDER EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION TO EXPIRING LEASES LEASES(1) EXPIRING LEASES(2)
--------------------------------- ------------------- ---------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
1997(3).......................... 3,015,270 $ 12,221 4.9%
1998............................. 4,731,763 47,607 18.9
1999............................. 3,335,539 39,817 15.8
2000............................. 4,149,045 47,052 18.7
2001............................. 4,230,845 48,778 19.4
2002............................. 2,110,911 26,284 10.5
2003............................. 480,621 7,299 2.9
2004............................. 800,193 8,395 3.3
2005............................. 181,060 1,546 0.6
2006............................. 177,964 3,047 1.2
2007 and thereafter.............. 543,624 9,439 3.8
---------- -------- -----
Total.................. 23,756,835 $251,485 100.0%
========== ======== =====
</TABLE>
<PAGE> 24
LEASE EXPIRATIONS OF THE OFFICE PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
ANNUAL BASE RENT ANNUAL BASE RENT
SQUARE FEET SUBJECT UNDER EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION TO EXPIRING LEASES LEASES(1) EXPIRING LEASES(2)
--------------------------------- ------------------- ---------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
1997(3).......................... 718,803 $ 6,596 3.7%
1998............................. 1,809,707 31,949 18.0
1999............................. 1,607,054 30,233 17.0
2000............................. 1,592,205 32,362 18.2
2001............................. 1,825,052 34,878 19.6
2002............................. 1,137,512 21,430 12.1
2003............................. 276,202 5,143 2.9
2004............................. 211,473 4,009 2.2
2005............................. 24,870 563 0.3
2006............................. 98,027 2,298 1.3
2007 and thereafter.............. 356,627 8,287 4.7
--------- -------- -----
Total.................. 9,657,532 $177,748 100.0%
========= ======== =====
</TABLE>
LEASE EXPIRATIONS OF THE INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
ANNUAL BASE RENT ANNUAL BASE RENT
SQUARE FEET SUBJECT UNDER EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION TO EXPIRING LEASES LEASES(1) EXPIRING LEASES(2)
--------------------------------- ------------------- ---------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
1997(3).......................... 2,296,467 $ 5,625 7.6%
1998............................. 2,922,056 15,658 21.2
1999............................. 1,728,485 9,584 13.0
2000............................. 2,556,840 14,690 19.9
2001............................. 2,405,793 13,900 18.9
2002............................. 973,399 4,854 6.6
2003............................. 204,419 2,156 2.9
2004............................. 588,720 4,386 6.0
2005............................. 156,190 983 1.3
2006............................. 79,937 749 1.0
2007 and thereafter.............. 186,997 1,152 1.6
--------- ------- -----
Total.................. 14,099,303 $ 73,737 100.0%
========= ======= =====
</TABLE>
- ---------------
(1) Annual Base Rent means the sum of amounts contractually due on an annual
basis, which in addition to standard rent may in some cases include taxes,
insurance and common area maintenance.
(2) Calculated by dividing Annual Base Rent as adjusted for contractual
increases for leases expiring during each period by the total Annual Base
Rent inclusive of contractual increases.
(3) Represents leases expiring between July 1, 1997 and December 31, 1997.
<PAGE> 25
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "SPK." The following table sets forth the high and low sales prices
for the Common Stock and dividends declared by the Company for each quarterly
period indicated, as reported by the New York Stock Exchange Composite Tape. On
October 10, 1997, the last reported sale price on the New York Stock Exchange
was $41 7/8 per share.
<TABLE>
<CAPTION>
COMMON STOCK
DIVIDENDS
QUARTERLY PERIOD HIGH LOW DECLARED
------------------------------------------- ---- ---- ------------
<S> <C> <C> <C>
1996
First quarter............................ $27 $24 5/8 $.43
Second quarter........................... $27 7/8 $23 7/8 $.43
Third quarter............................ $30 3/8 $27 1/8 $.43
Fourth quarter........................... $36 $29 $.43
1997
First quarter............................ $40 3/8 $33 1/2 $.43
Second quarter........................... $38 $33 1/4 $.47
Third quarter............................ $40 9/16 $35 3/16 $.47
Fourth quarter(1)(2)..................... $43 $41
</TABLE>
- ---------------
(1) Through October 10, 1997.
(2) Dividends for the quarter ending December 31, 1997 had not been declared as
of the date of this Prospectus Supplement.
Since the Company's initial public offering in November 1993, the Company
has declared regular quarterly dividends to its stockholders. Federal income tax
law requires that a REIT distribute annually at least 95% of its REIT taxable
income. See "Federal Income Tax Considerations -- Annual Distribution
Requirements" in the accompanying Prospectus. In addition to the dividends
declared to holders of Common Stock, the Company also declared dividends to
holders of its Series A Preferred Stock, Series B Preferred Stock, Class B
Common Stock and Class C Common Stock. Future dividends by the Company will be
at the discretion of the Board of Directors and will depend upon the actual
Funds from Operations of the Company, its financial condition, capital
requirements, the annual distribution requirements under the REIT provisions of
the Internal Revenue Code, applicable legal restrictions and such other factors
as the Board of Directors deems relevant. Although the Company intends to
continue to make quarterly distributions to its stockholders, no assurances can
be given as to the amounts of dividends, if any, distributed in the future.
The Company has an automatic dividend reinvestment plan which allows
stockholders to acquire additional shares of Common Stock through the automatic
reinvestment of cash dividends, without payment of any brokerage commission.
HISTORICAL TOTAL RETURN
An investor who purchased Common Stock in the Company's initial public
offering on November 18, 1993, who reinvested all dividends paid in additional
shares of Common Stock, and who held such shares through the close of business
on September 30, 1997 would have had a cumulative pretax total return of 148.6%
or an annual compounded pretax return of 26.6% based upon the closing price of
the Common Stock on September 30, 1997 of $40 7/16 per share. Past performance,
however, is not necessarily indicative of the results that will be obtained in
the future from an investment in the Company's Common Stock, and no assurance
can be given that an investor in this Offering will achieve similar results. See
"Special Considerations" in the accompanying Prospectus for a discussion of
risks associated with the Company's future performance.
<PAGE> 26
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are expected to be approximately $398 million ($457.8 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to contribute such proceeds to the Operating Partnership, of which the Company
is the sole general partner, to purchase an estimated additional partnership
units in the Operating Partnership. On a pro forma basis, the Company would own
approximately 86.37% of the Operating Partnership.
As discussed under "Prospectus Summary -- Financing Transactions," the
Company contemplates financing the acquisition of the Pending Acquisitions with
proceeds from the Offering, issuances of $82.5 million of limited partnership
units in the Operating Partnership, $150 million of Series C Cumulative
Redeemable Preferred Stock and borrowings under a new bridge financing facility
and the Company's unsecured line of credit. See "Capitalization" and "Spieker
Properties, Inc. Pro Forma Financial Information."
Pending such application, the Operating Partnership will use a portion of
the net proceeds to repay borrowings on the Company's unsecured line of credit
and for general corporate purposes. As of September 30, 1997, the weighted
average interest rate on indebtedness expected to be repaid with the net
proceeds of the Offering was 6.5%.
<PAGE> 27
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997, and on a pro forma basis as if the July 1997 Offering, the September
1997 Offering, the Series C Preferred Offering, this Offering, the Pending
Acquisitions and certain other transactions described in the Company's pro forma
financial statements and notes thereto included elsewhere herein had been
completed on June 30, 1997. See "Spieker Properties, Inc. Pro Forma Financial
Information." The capitalization table should be read in conjunction with the
Company's consolidated financial statements included or incorporated by
reference in the Prospectus Supplement and the accompanying Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------
ACTUAL PRO FORMA
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage loans, net..................................... $ 94,745 $ 105,736
Unsecured line of credit................................ 57,000 229,809
Unsecured debt securities(1)............................ 635,000 935,000
Bridge financing facility............................... -- 200,000
Total debt........................................... 786,745 1,470,545
---------- ----------
Minority interest......................................... 72,465 154,971
---------- ----------
Stockholders' equity (deficit):
Series A Preferred Stock: $.0001 par value, 1,000,000
authorized, 1,000,000 issued and outstanding......... 23,949 23,949
Series B Preferred Stock: $.0001 par value, 5,000,000
authorized, 4,250,000 issued and outstanding......... 102,064 102,064
Series C Preferred Stock: $.0001 par value, 6,000,000
authorized, issued and outstanding pro forma......... -- 146,135
Common Stock: $.0001 par value; 660,500,000 (654,500,000
pro forma) authorized, 43,532,923 (53,532,923 pro
forma) issued and outstanding........................ 4 5
Class B Common Stock: $.0001 par value, 2,000,000
authorized, issued and outstanding................... -- --
Class C Common Stock: $.0001 par value, 1,500,000
authorized, 1,176,470 issued and outstanding......... -- --
Excess Stock: $.0001 par value per share, 330,000,000
shares authorized, no shares issued or outstanding... -- --
Additional paid-in capital.............................. 816,274 1,214,232
Deferred compensation................................... (753) (753)
Retained earnings....................................... 5,705 13,331
---------- ----------
Total stockholders' equity........................... 947,243 1,498,963
---------- ----------
Total capitalization............................ $1,806,453 $3,124,479
========== ==========
</TABLE>
- ---------------
(1) The pro forma balance reflects the issuance of $150,000 of unsecured debt
securities on July 10, 1997 and the issuance of $150,000 of unsecured debt
securities on September 29, 1997.
<PAGE> 28
SELECTED FINANCIAL AND OTHER DATA
The Company's consolidated selected financial and other data is presented
on a historical basis for the six months ended June 30, 1997 and 1996 and the
years ended December 31, 1996 and 1995, and on a pro forma basis for the six
months ended June 30, 1997 and the year ended December 31, 1996. The Company's
consolidated balance sheet data is presented on a historical basis as of June
30, 1997 and December 31, 1996 and 1995 and on a pro forma basis as of June 30,
1997. Pro forma operating and other data are presented as if the July 1997
Offering, the September 1997 Offering, the Series C Preferred Offering, this
Offering, the Pending Acquisitions and certain other transactions described in
the Company's pro forma financial statements and notes thereto included
elsewhere herein had been completed on January 1, 1995. Pro forma balance sheet
data are presented as if the July 1997 Offering, the September 1997 Offering,
the Series C Preferred Offering, this Offering, the Pending Acquisitions and
certain other transactions described in the pro forma financial statements and
notes thereto included elsewhere herein had been completed on June 30, 1997. See
"Spieker Properties, Inc. Pro Forma Financial Information."
The selected financial and other data should be read in conjunction with
the consolidated financial statements and notes thereto of the Company included
elsewhere herein and included in the Company's filings under the Exchange Act,
which are incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus.
SELECTED FINANCIAL AND OTHER DATA
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------------- ---------------------------------
PRO FORMA ACTUAL ACTUAL PRO FORMA ACTUAL ACTUAL
1997 (1) 1997 1996 1996 (1) 1996 1995
--------- -------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues......................................... $220,696 $142,295 $93,014 $416,976 $200,699 $153,391
Income from operations before disposition of
property, minority interests and extraordinary
items.......................................... 70,676 49,923 32,110 120,266 65,764 30,335
Income before extraordinary items................ 61,053 56,284 27,816 103,899 64,190 24,666
Net income (loss)................................ 61,053 56,284 27,816 103,899 64,190 (8,837)
Net income (loss) allocable to common shares..... 48,981 50,118 21,748 79,947 52,051 (11,471)
Net income per share of common stock before
extraordinary items (2)........................ 0.85 1.09 0.65 1.38 1.50 0.84
Net income (loss) per share of common stock
(2)............................................ 0.85 1.09 0.65 1.38 1.50 (0.44)
Dividends and distributions per share:
Series A Preferred Stock....................... 1.15 1.15 1.05 2.10 2.10 2.05
Series B Preferred Stock....................... 1.18 1.18 1.18 2.36 2.36 0.14
Series C Preferred Stock....................... 0.98 -- -- 1.97 -- --
Common Stock(2)................................ 0.98 0.98 0.91 1.77 1.77 1.74
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 AS OF DECEMBER 31,
--------------------------- --------------------------
PRO FORMA (1) ACTUAL ACTUAL 1996 ACTUAL 1995
------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate (before accumulated
depreciation)............................................ $ 3,236,576 $1,990,272 $1,447,173 $1,098,871
Net investment in real estate.............................. 3,160,025 1,844,700 1,319,472 974,259
Total assets............................................... 3,210,530 1,892,504 1,390,314 1,011,497
Property indebtedness, net................................. 105,736 94,745 45,997 112,702
Unsecured debt............................................. 1,364,809 692,000 84,997 377,700
Total debt................................................. 1,470,545 786,745 719,997 490,402
Stockholders' equity....................................... 1,498,963 947,243 563,928 419,847
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
----------------------------------------- -----------------------------------------
PRO FORMA PRO FORMA
1997 (1) ACTUAL 1997 ACTUAL 1996 1996 (1) ACTUAL 1996 ACTUAL 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Funds from Operations (3)............... $ 91,324 $ 67,455 $ 44,428 $ 161,775 $ 93,293 $ 61,428
Weighted average share equivalents
(4)................................... 66,475,976 54,466,117 41,271,774 66,475,976 42,460,000 33,769,742
EBIDA(5)................................ 156,045 97,638 66,131 292,452 140,384 108,323
Cash flow provided by (used in):
Operating activities.................. 105,733 93,960 50,477 189,662 103,607 72,210
Investing activities.................. (3,200) (455,783) (155,698) (2,138,875) (378,593) (196,254)
Financing activities.................. (47,995) 341,736 109,588 1,805,129 296,749 121,954
Total square footage of properties at
end of period......................... 36,532 24,808 17,114 -- 21,430 16,282
Number of properties at end of period... 236 174 128 -- 156 128
Occupancy rate at end of period......... -- 95.8% 96.2% -- 96.6% 96.9%
Ratio of earnings to fixed charges(6)... 2.29x 2.74x 2.73x 2.11x 2.56x 1.61x
Ratio of earnings to combined fixed
charges and preferred stock dividends
and Preferred Operating Partnership
Unit distributions(7)................. 1.79x 2.23x 2.04x 1.65x 1.97x 1.53x
Ratio of FFO before interest expense,
Series B and C Preferred Stock
dividends and Preferred Operating
Partnership Unit distributions to
interest expense(8)................... 3.08x 3.93x 3.96x 2.84x 3.78x 2.34x
Total market equity (9)................. $ 3,090,521 $2,065,287 $1,284,105 -- $1,665,025 $1,036,895
</TABLE>
- ---------------
(1) See "Spieker Properties, Inc. Pro Forma Financial Information." Pro forma
amounts exclude gains on disposition of property of $14,180 and $8,350
recognized on a historical basis for the six months ended June 30, 1997 and
the year ended December 31, 1996, respectively.
(2) Per share amounts are presented for the six months ended June 30, 1997 and
1996 and for the years ended December 31, 1996 and 1995 based upon weighted
average common shares outstanding of 46,120,488, 33,502,443, 34,691,140 and
26,140,488, respectively. The pro forma per share amounts have been based
upon weighted average common shares outstanding of 57,919,448 for the six
months ended June 30, 1997 and the year ended December 31, 1996. There is no
difference between primary and fully diluted amounts.
Had Statement and Financial Accounting Standards No. 128 -- "Earnings Per
Share" been adopted as of January 1, 1996, per share amounts would have been
$0.83 and $0.86 on an historical and pro forma basis, respectively, for the
six months ended June 30, 1997, and $1.31 and $1.40 on an historical and pro
forma basis, respectively, for the year ended December 31, 1996.
(3) Funds from Operations means income (loss) from operations before disposal of
real estate properties, minority interests and extraordinary items plus
depreciation and amortization and an adjustment for straight-lined rents
less cash distributable to minority interests in certain properties owned by
the Company. Management generally considers Funds from Operations to be a
useful financial performance measure of the operating performance of an
equity REIT because, together with net income and cash flows, Funds from
Operations provides investors with an additional basis to evaluate the
ability of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. Funds from Operations does not represent net
income or cash flows from operations as defined by GAAP and does not
necessarily indicate that cash flows will be sufficient to fund cash needs.
It should not be considered as an alternative to net income as an indicator
of the Company's operating performance or to cash flows as a measure of
liquidity. Funds from Operations does not measure whether cash flow is
sufficient to fund all of the Company's cash needs including principal
amortization, capital improvements and distributions to stockholders. Funds
from Operations also does not represent cash flows generated from operating,
investing or financing activities as defined by GAAP. Further, Funds from
Operations as disclosed by other REITs may not be comparable to the
Company's calculation of Funds from Operations.
(4) Assumes conversion of shares of Class B Common Stock, Class C Common Stock,
Series A Preferred Stock and partnership units in the Operating Partnership
into shares of Common Stock.
(5) EBIDA means earnings before interest expense, depreciation, amortization,
disposal of real estate properties and minority interests. EBIDA is computed
as income from operations before minority interests
<PAGE> 30
and extraordinary items plus interest expense, depreciation and
amortization. The Company believes that in addition to cash flows and net
income, EBIDA is a useful financial performance measure for assessing the
operating performance of an equity REIT because, together with net income
and cash flows, EBIDA provides investors with an additional basis to
evaluate the ability of a REIT to incur and service debt and to fund
acquisitions and other capital expenditures. To evaluate EBIDA and the
trends it depicts, the components of EBIDA, such as rental revenues, rental
expenses, real estate taxes and general and administrative expenses, should
be considered. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Excluded from EBIDA are financing
costs such as interest as well as depreciation and amortization, each of
which can significantly affect a REIT's results of operations and liquidity
and should be considered in evaluating a REIT's operating performance.
Further, EBIDA does not represent net income or cash flows from operating,
financing and investing activities as defined by generally accepted
accounting principles and does not necessarily indicate that cash flows will
be sufficient to fund cash needs. It should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
(6) The ratio of earnings to fixed charges is computed as income (loss) from
operations, before gains or losses on sales of properties, extraordinary
items, plus fixed charges (excluding capitalized interest) divided by fixed
charges. Fixed charges consist of interest costs including amortization of
debt discount and deferred financing fees, whether capitalized or expensed,
and the interest component of rental expense.
(7) The ratio of earnings to combined fixed charges and preferred stock
dividends and preferred Operating Partnership unit distributions is computed
as income (loss) from operations, before gains or losses on sales of
properties, and extraordinary items, plus fixed charges (excluding
capitalized interest) divided by fixed charges plus dividends on preferred
stock and distributions on preferred Operating Partnership units.
(8) The ratio of Funds from Operations before interest expense, dividends on
Series B and C Preferred Stock and Operating Partnership Unit distributions
to interest expense is calculated as Funds from Operations plus interest
expense, excluding amortization of prepaid interest and deferred financing
fees, dividends on Series B and C Preferred Stock and distributions on
preferred Operating Partnership units divided by interest expense. The
Company believes that in addition to the ratio of earnings to fixed charges,
this ratio provides a useful measure of a REIT's ability to service its debt
because of the exclusion of non-cash items such as depreciation and
amortization from the definition of Funds from Operations. This ratio
differs from a GAAP-based ratio of earnings to fixed charges and should not
be considered as an alternative to that ratio. Further, Funds from
Operations as disclosed by other REITs may not be comparable to the
Company's calculation of Funds from Operations.
(9) Total market equity is presented as of the end of the period and is
calculated as the sum of (i) the total number of shares of Common Stock
outstanding, assuming conversion into Common Stock of the Series A Preferred
Stock, Class B Common Stock, Class C Common Stock and the partnership units
in the Operating Partnership, multiplied by the closing price of the Common
Stock as of the end of the period and (ii) the total number of shares of
Series B and C Preferred Stock multiplied by their liquidation preference of
$25.00 per share. The closing prices of the Common Stock on the New York
Stock Exchange for the periods ended June 30, 1997 and 1996 and December 31,
1996 and 1995, which were used in calculating total market equity, were
$35.188, $27.25, $36.00 and $25.125, respectively. Pro forma total market
equity is calculated based upon the last reported price of the Common Stock
on the New York Stock Exchange on October 10, 1997 of $41.875 per share of
Common Stock. The Company believes that total market equity is an indicator
of the Company's relative size as compared to other public REITs and can be
used to evaluate the Company's total market capitalization, which includes
indebtedness and total market equity. The Company believes that total market
equity has gained acceptance as an indicator of leverage for a company whose
assets are primarily operating real estate. Total market equity, however,
does not represent the Company's assets or net assets on a GAAP or fair
market basis.
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected
financial data and the Company's financial statements included elsewhere or
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus.
OVERVIEW
During the six month period ended June 30, 1997, the Company continued to
generate growth through its abilities in both managing and leasing commercial
property space and in finding attractive acquisition and development
opportunities. As of June 30, 1997, the Company's portfolio of Properties was in
excess of 95.8% leased. The Company's commitment to superior tenant service and
to maintaining a strong local presence in each of its markets enabled the
Company to lease 3.4 million square feet of space during this period.
Significantly, effective rents on the 2.4 million square feet of second
generation space leased increased by 21.3% as compared to the rents of expiring
leases. Also, during the six month period ended June 30, 1997, the Company
acquired 18 Properties aggregating over 4.5 million square feet for a total
investment of $530.6 million, acquired five parcels of land for development at a
total initial cost of $17.1 million and completed development of three
properties aggregating 236,068 square feet for a total investment of $17.5
million.
The following comparison is of the Company's consolidated operations for the
three and six month periods ended June 30, 1997, as compared to the
corresponding periods ended June 30, 1996.
Rental revenues for the second quarter of 1997 increased by $27.8 million
or 59.5% to $74.5 million, as compared with $46.7 million for the quarter ended
June 30, 1996. Of this increase, $17.7 million was generated by properties
acquired during the first six months of 1997 (the "1997 Acquisitions"). In the
second quarter of 1997 the Company acquired properties totaling 1.2 million
square feet for a total investment of $152.6 million. During the first six
months of 1997 the Company acquired properties totaling 4.4 million square feet
for a total investment of $560.5 million. As used herein, the terms "invested"
and "total investment" represent the initial purchase price of acquisitions,
plus projected cost of certain repositioning and rehab capital expenditures
anticipated at the time of purchase. The properties acquired in the second
quarter were acquired on various dates throughout the quarter and, as such, a
full quarter's revenue and expenses was not recognized during the quarter.
$9.1 million of the rental revenue increase in the second quarter of 1997
was generated by properties acquired during 1996. During 1996, the Company
invested $329.3 million to acquire properties totaling 4.7 million square feet
(the "1996 Acquisitions").
$2.5 million of the increase in rental revenues is attributable to revenue
increases in properties owned at January 1, 1996, and still owned at June 30,
1997 (the "Core Portfolio"). This increase in the Core Portfolio is due to
increased rental rates realized on the renewal and releasing of
second-generation space and contractual rent increases in existing leases.
During the quarter ended June 30, 1997, the Company completed 221 lease
transactions for the renewal or releasing of 1.2 million square feet of
second-generation space. On average for the quarter, the new effective rates
were 33.8% higher than the expiring coupon rent. This brings the total
second-generation activity for the first half of 1997 to 399 completed lease
transactions for 2.4 million square feet at a 21.3% increase in effective rates,
over expiring coupon rents.
$2.1 million of the rental revenue increase in the second quarter of 1997
was generated by properties developed by the Company (the "Developments"). The
Developments include both properties completed and added to the Company's
portfolio of stabilized properties during 1996 and 1997, as well as properties
currently under development. During the six months ended June 30, 1997, three
properties totaling 236,100 square feet have been completed and added to the
Company's portfolio of stabilized properties. The total cost of these
properties, including the estimated cost to complete initial tenant
improvements, is $17.5 million. The Company also has a current development
pipeline of
<PAGE> 32
3.2 million square feet representing a total projected cost of $168.6 million.
Certain of the properties in the development pipeline are shell complete and
partially occupied.
The increases in rental revenue are partially offset by a decrease of $3.6
million attributable to the disposition or properties which were owned by the
Company during the quarter ended June 30, 1996 (the "Property Dispositions").
Rental revenues for the six month period ended June 30, 1997, increased by
$47.8 million or 52.5% to $138.9 million as compared to $91.1 million for the
same period ended June 30, 1996. $25.3 million and $19.5 million, respectively,
of this increase was attributable to the 1997 and 1996 Acquisitions; $4.2
million relates to the Core Portfolio, $3.8 million is attributable to the
Developments, with the remainder attributable to a $5.0 million decrease from
Property Dispositions.
In December 1996, the Company announced the strategic decision to divest
itself of its retail properties and focus exclusively on office and industrial
properties. As such, the following analysis of the office and industrial
properties (i.e. non-retail properties) is presented: Rental revenues net of
property operating expenses increased by $21.1 million or 69.6% to $51.4
million, as compared to $30.3 million for the quarter ended June 30, 1996. Of
this increase, $11.5 million and $5.9 million relates to the 1997 and 1996
Acquisitions, $1.7 million is attributable to the Developments, and $2.0 million
is attributable to the Core Portfolio. For the six month period ended June 30,
1997, rental revenues net property operating expenses increased by $35.6 million
or 59.6% from $59.7 million to $95.3 million at June 30, 1997. $16.8 million and
$13.2 million related to the 1997 and 1996 Acquisitions, $3.0 million is
attributed to the Developments, and $2.6 million is related to the Core
Portfolio.
As a result of the 1997 Acquisitions, the 1996 Acquisitions, and the
Developments, the Company's rentable square footage, not including retail
properties, increased by 7.7 million square feet or 45.0% to 24.8 million square
feet on June 30, 1997, from 17.1 million on June 30, 1996. At June 30, 1997, the
portfolio of stabilized properties was 95.8% occupied. By property type, the
office portfolio was 95.1% occupied and the industrial portfolio was 96.2%
occupied.
Interest and other income increased by $0.4 million and $1.4 million or
40.0% and 70.0% for the three and six month periods ended June 30, 1997, over
the same respective periods ended June 30, 1996. The net increase in interest
and other income is due to higher average cash balances of $29.9 million and
$57.9 million for the three and six month periods ended June 30, 1997, as
compared to $9.5 million and $9.4 million for the corresponding periods in 1996.
Rental expenses increased by $7.9 million or 105.3% for the three months
ended June 30, 1997, as compared with the same period in 1996. Real estate taxes
increased by $1.9 million or 48.7% for the three months ended June 30, 1997, as
compared with the same period in 1996. The overall increase in rental expenses
and real estate taxes (collectively referred to as "property operating
expenses") is primarily a result of the growth in the total square footage of
the Company's portfolio of properties. Of the total $9.8 million increase in
property operating expenses $6.2 million is attributable to the 1997
Acquisitions, $3.2 million is attributable to the 1996 Acquisitions, $0.6
million is attributable to the Core Portfolio, $0.4 million is attributable to
the Developments, and there is a $0.6 million decrease attributable to the
Property Dispositions. On a percentage basis, property operating expenses were
28.5% and 24.4% of rental revenues for the quarters ended June 30, 1997, and
June 30, 1996, respectively. The increase in property operating expenses as a
percentage of rental revenues is attributable to the increased percentage of
office properties in the Company's portfolio. For the quarter ended June 30,
1997, 60.6% of the Company's net operating income (rental revenues less property
operating expenses) was generated by office properties as compared with 45.6%
during the same period in 1996.
For the six month period ended June 30, 1997, rental expenses increased by
$12.3 million from $14.8 million for the six months ended June 30, 1996. This
represents a 83.1% increase year over year. Real estate taxes increased by $3.7
million or 50.7% to $11.0 million for the first half of 1997 as compared to $7.3
million for the same period in 1996. The total increase in the property
operating expenses is attributable to a $8.5 million increase for the 1997
Acquisitions, a $6.3 million increase for the
<PAGE> 33
1996 Acquisitions, a $1.2 million increase in the Core Portfolio, a $0.8 million
increase for the Developments, and a $0.8 million reduction attributable to the
Property Dispositions. On a percentage basis property operating expenses were
27.4% and 24.3% of rental revenues for the six months ended June 30, 1997, and
1996, respectively.
Interest expense increased by $4.9 million or 62.8% to $12.7 million for
the three months ended June 30, 1997, from $7.8 million for the same period in
1996. For the six month period ended June 30, 1997, interest expense increased
by $8.0 million or 47.9% to $24.7 million from $16.7 million for the same period
in 1996. These increases in interest expense are due to increases in the total
average outstanding debt balances. The average outstanding debt for the three
months ended June 30, 1997, and 1996 was $755.1 million and $459.4 million
respectively. The average balance outstanding for the six months ended June 30,
1997, was $728.2 million and $494.5 million for the same period in 1996. The
increases in the average outstanding debt balances are consistent with the
increases in the size of the Company's portfolio of properties.
Depreciation and amortization expenses increased by $3.6 million and $5.7
million or 40.9% and 32.9% for the three and six month periods ended June 30,
1997, as compared with the same periods in 1996, due to the 1997 and 1996
Acquisitions and the completed Developments.
General and administrative expenses and other expenses increased by $1.0
million and $1.7 million for the three and six month periods ended June 30,
1997, respectively, as compared with the same periods in 1996, primarily as a
result of the increased number of employees. On a percentage basis, general and
administrative expenses were 4.7% of rental revenues for both the three and six
month periods ended June 30, 1997, respectively, as compared with 5.4% and 5.3%
for the same periods in 1996.
During the second quarter of 1997, the Company disposed of an additional
six retail properties resulting in a gain on disposition of $12.7 million. This
brings the total gain on disposition of property for the first half of 1997 to
$14.2 million on seven retail properties sold.
Net income before minority interests and disposition of property increased
by $9.0 million or 52.6% to $26.1 million for the three month period ended June
30, 1997, from $17.1 million for the same period in 1996. For the six month
period ended June 30, 1997, net income before minority interests and disposition
of property increased by $17.8 million or 55.5% to $49.9 million, from $32.1
million for the same period in 1996. The increase in net income is principally
due to the 1997 and 1996 Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period ended June 30, 1997, cash provided by operating
activities increased by $43.5 million or 86.1% to $94.0 million, as compared to
$50.5 million for the same period in 1996. The increase is primarily due to the
increase in net income resulting from the 1996 and 1997 Acquisitions, a decrease
in prepaid expenses and other assets, and an increase in unearned rental income.
Cash used for investing activities increased by $300.1 million or 192.7% to
$455.8 million for the first six months of 1997, as compared to $155.7 million
for the same period in 1996. The increase is attributable to the Company's
ongoing acquisition and development of suburban office and industrial
properties. Cash provided by financing activities increased by $232.1 million or
211.8% to $341.7 million for the first six months of 1997, as compared to $109.6
million for the same period in 1996. During the first six months of 1997, cash
provided by financing activities consisted, primarily, of $374.8 million in net
proceeds from the sale of Common Stock, net borrowings of $18.0 million on the
line of credit and net payments of $3.1 million on mortgage loans. Additionally,
payments of distributions increased by $12.9 million to $49.7 million for the
first six months of 1997, as compared with $36.8 million for the same period in
1996. The increase is due to the greater number of shares outstanding and a 9.3%
increase in the distribution rate.
The principal sources of funding for acquisitions, development, expansion
and renovation of the properties are an unsecured line of credit, public and
privately placed equity financing, public unsecured
<PAGE> 34
debt financing, the issuance of partnership units in the Operating Partnership,
the assumption of secured debt on properties acquired and cash flow provided by
operations. The Company believes that its liquidity and capital resources are
adequate to continue to meet liquidity requirements for the foreseeable future.
At June 30, 1997, the Company had no material commitments for capital
expenditures related to the renewal or releasing of space. The Company believes
that the cash provided by operations and its line of credit provide sufficient
sources of liquidity to fund capital expenditure costs associated with the
renewal or re-leasing of space.
Prior to its amendment in the third quarter of 1997, the Company had a
$150.0 million unsecured line of credit facility (the "Facility") with interest
at London Interbank Offered Rates ("LIBOR") plus 1.25%. The Facility matured in
November 1997 and the Company had an option to extend the Facility for one year
upon payment of a fee equal to 0.12% of the total Facility. The Facility also
included a fee on average unused funds, which varied between 0.125% and 0.20%
based on the average outstanding balance. At June 30, 1997, the Company had
$57.0 million outstanding under the Facility.
Subsequent to the end of the quarter, the Company amended the current
unsecured line of credit facility, increasing the available funds to $250.0
million and reducing the interest rate to LIBOR plus 0.8%. The amended facility
matures in August 2001. This increased facility has a competitive bid option
that allows the Company to request bids from the lenders for advances up to
$150.0 million.
On January 19, 1996, the Company issued $100.0 million of investment grade
rated unsecured notes. The notes carry an interest rate of 6.90%, were priced to
yield 6.97%, and mature on January 15, 2004. Net proceeds of $98.9 million were
used to repay borrowings on the unsecured line of credit. In June 1996, the
Company commenced a $200.0 million medium-term note program. In July 1996, the
Company issued $100.0 million of 8.00% medium-term notes due July 19, 2005, and
$50.0 million of 7.58% medium-term notes due December 17, 2001 (the "July 1996
Notes"). The net proceeds of $149.2 million from the issuance of the July 1996
Notes were used to repay borrowings on the line of credit and to fund ongoing
acquisition and development projects. In December 1996, the Company issued
$100.0 million of 7.125% investment grade rated unsecured notes, priced to yield
7.14% and maturing on December 1, 2006, and $25.0 million of 7.875% investment
grade rated unsecured notes, priced to yield 7.91% and maturing on December 1,
2016. The net proceeds of $123.9 million were used to pay down borrowings on the
line of credit and to fund the ongoing acquisition and development of
properties. As of June 30, 1997, $50.0 million of debt securities remained
available for issuance under the medium-term note program.
As of June 30, 1997, the Company had $635 million of investment grade rated
unsecured notes and $94.7 million of secured indebtedness (the "Mortgages")
outstanding. The notes have interest rates which vary from 6.65% to 8.00%, and
various maturity dates which range from 2000 to 2016. The Mortgages have
interest rates varying from 7.37% to 9.75% and maturity dates from 1997 to 2012.
The Mortgages are secured by a first or second deed of trust on the related
properties and generally require monthly principal and interest payments. The
Company also had $5.3 million of assessment bonds outstanding as of June 30,
1997.
In January 1997, the Company sold 11,500,000 shares of Common Stock
(including 1,500,000 shares sold to the underwriters in the exercise of their
over-allotment option in February 1997) through an underwritten public offering
at $34.50 per share. The net proceeds of $374.8 million were used to purchase
properties during the first quarter of 1997, many of which were under contract
or letter of intent at the time of the offering, and to repay indebtedness.
Also, in January 1997, the Company and the Operating Partnership filed a shelf
registration statement (the "January 1997 Shelf Registration Statement") with
the SEC which registered $500.0 million of equity securities of the Company and
$500.0 million of debt securities of the Operating Partnership and became
effective in January 1997.
On July 14, 1997, the Company issued $150.0 million of investment grade
rated unsecured notes. The notes carry an interest rate of 7.125%, were priced
to yield 7.183%, and mature on July 1, 2009. Net
<PAGE> 35
proceeds of $146.1 million were used to repay borrowings on the unsecured line
of credit and to fund the ongoing acquisition and development of properties.
In September 1997, the Company issued $150,000,000 of investment grade
rated unsecured debentures. The debentures carry an interest rate of 7.5% and
mature on October 1, 2027. Net proceeds of $146.1 million were used to repay
borrowings on the unsecured line of credit and to fund the ongoing acquisition
and development of properties. Also, in September 1997, the Company and the
Operating Partnership filed a shelf registration statement (the "September 1997
Shelf Registration Statement") with the SEC which registered $500.0 million of
equity securities of the Company and $500.0 million of debt securities of the
Operating Partnership and became effective in October 1997.
In October 1997, the Company sold 6,000,000 shares of Series C Preferred
Stock through an underwritten public offering and a direct placement to an
institutional investor. The Series C Preferred Stock has a dividend rate of
7 7/8% and is redeemable on and after October 10, 2002. The net proceeds of
$146.1 million will be used to fund in part pending property acquisitions.
After completion of the January 1997 common stock offering, the July and
September 1997 debt offerings and the October 1997 preferred stock offering the
Company has the capacity pursuant to the January 1997 Shelf Registration
Statement and the September 1997 Shelf Registration Statement to issue up to
approximately $850.0 million in equity securities and the Operating Partnership
has the capacity pursuant to the January 1997 Shelf Registration Statement and
the September 1997 Shelf Registration Statement to issue up to $815.0 million in
debt securities (including the $50.0 million of medium-term notes available
under the Company's existing medium-term note program).
FUNDS FROM OPERATIONS
The Company considers Funds from Operations to be a useful financial
measure of the operating performance of an equity REIT because, together with
net income and cash flows, Funds from Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt and
to fund acquisitions, developments, and other capital expenditures. Funds from
Operations does not represent net income or cash flows from operations as
defined by generally accepted accounting principles ("GAAP") and Funds from
Operations should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to cash
flows as a measure of liquidity. Funds from Operations does not measure whether
cash flow is sufficient to fund all of the Company's cash needs including
principal amortization, capital improvements, and distributions to stockholders.
Funds from Operations does not represent cash flows from operating, investing,
or financing activities as defined by GAAP. Further, Funds from Operations as
disclosed by other REITs may not be comparable to the Company's calculation of
Funds from Operations, as described below.
Pursuant to the National Association of Real Estate Investment Trusts
("NAREIT") revised definition of Funds from Operations, beginning with the
quarter ended March 31, 1996, the Company calculated Funds from Operations by
adjusting net income before minority interest, calculated in accordance with
GAAP, for certain non-cash items, principally the amortization and depreciation
of real property and for dividends on shares and other equity interests that are
not convertible into shares of Common Stock. The Company does not add back the
depreciation of corporate items, such as computers or furniture and fixtures, or
the amortization of deferred financing costs or debt discount. However, the
Company includes an adjustment for the straight-lining of rent under GAAP, as
management believes this presents a more meaningful picture of rental income
over the reporting period.
Funds from Operations per share is calculated based on weighted average
shares equivalents outstanding, assuming the conversion of all shares of Series
A Preferred Stock, Class B Common Stock, Class C Common Stock and all
partnership units in the Operating Partnership into shares of Common Stock, and
including the dilutive effect of stock options. Assuming such conversion, the
average number of shares outstanding for the three and six months ended June 30,
1997, are 56,352,635 and 54,466,117, respectively, and 43,438,132 and 41,271,774
for the same periods in 1996.
<PAGE> 36
STATEMENT OF FUNDS FROM OPERATIONS
(BASED ON THE NEW NAREIT DEFINITION)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income before minority
interest and disposal of real
estate properties.............. $ 26,111 $ 17,131 $ 49,923 $ 32,110(1)
Add:
Depreciation and Amortization.... 12,276 8,723 22,753 17,197
Dividends on Series B Preferred
Stock.......................... (2,510) (2,510) (5,020) (5,020)
Other, net....................... 187 120 375 86(1)
Straight-lined rent.............. (579) 125 (576) 55
------- ------- ------- -------
Funds from Operations............ $ 35,485 $ 23,589 $ 67,455 $ 44,428
======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes reclassification of extraordinary gain realized on the early
extinguishment of debt of $150.
<PAGE> 37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the Directors and Executive Officers of the
Company, and their ages as of September 30, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------------------
<S> <C> <C>
Warren E. Spieker, Jr. ..... 53 Chairman of the Board and Chief Executive Officer
John K. French.............. 53 Director, Executive Vice President and Chief Operating
Officer
Dennis E. Singleton......... 53 Director, Executive Vice President and Chief Investment
Officer
Craig G. Vought............. 37 Executive Vice President and Chief Financial Officer
Richard J. Bertero.......... 58 Director; Partner, Hogland, Bogart & Bertero; former
Partner of the RREEF Funds
Harold M. Messmer........... 51 Director; Chairman and Chief Executive Officer of Robert
Half International, Inc.
David M. Petrone............ 52 Director; Chairman, Housing Capital Company; former Vice
Chairman of Wells Fargo and Company
William S. Thompson, Jr. ... 52 Director; Managing Director and Chief Executive Officer
of Pacific Investment Management Company; former
Chairman of Salomon Brothers Asia Ltd.
</TABLE>
SENIOR OFFICERS
The Senior Officers include the Executive Officers listed above and the
officers listed in the table below, which also sets forth the ages of such
officers as of September 30, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------------------
<S> <C> <C>
Bruce E. Hosford............ 48 Executive Vice President
John G. Davenport........... 40 Regional Senior Vice President -- Southern California
James C. Eddy............... 46 Regional Senior Vice President -- Oregon
John A. Foster.............. 39 Regional Senior Vice President -- South Bay
Donald S. Jefferson......... 45 Regional Senior Vice President -- Washington/Idaho
Peter H. Schnugg............ 46 Regional Senior Vice President -- East Bay/Sacramento
Vincent D. Mulroy........... 40 Senior Vice President -- North Bay
Richard L. Romney........... 43 Senior Vice President -- San Diego
Joseph D. Russell, Jr. ..... 38 Senior Vice President -- South Bay
John B. Souther, Jr. ....... 38 Senior Vice President -- Portland
Frank L. Alexander.......... 39 Vice President -- North Bay
Richard P. Gervais.......... 37 Vice President -- Seattle
Susan B. Hawkins............ 45 Vice President -- Central Valley
Eli Khouri.................. 38 Vice President -- Investments
Richard T. Leider........... 40 Vice President -- Seattle
Jeffrey K. Nickell.......... 40 Vice President -- Los Angeles
Sara H. Reynolds............ 37 Vice President -- General Counsel and Secretary
Stuart A. Rothstein......... 31 Vice President -- Finance
Elke Strunka................ 55 Vice President -- Principal Accounting Officer
Peter C. Thompson........... 37 Vice President -- Sacramento
John R. Winther............. 31 Vice President -- East Bay
James R. Wood, Jr. ......... 32 Vice President -- Orange County
</TABLE>
<PAGE> 38
MANAGEMENT'S OWNERSHIP
After giving effect to the Offering, the Senior Officers will beneficially
own Common Stock and partnership units exchangeable for Common Stock
representing approximately 5,746,101 shares of Common Stock, equaling
approximately 10% of the Company's outstanding Common Stock on a fully-converted
basis or approximately $240.6 million of the aggregate market value of the
Company's outstanding Common Stock on a fully-converted basis, based on the last
reported sale price of the Common Stock on the New York Stock Exchange on
October 10, 1997.
<PAGE> 39
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement and
related Pricing Agreement, the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Goldman, Sachs
& Co., Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated,
NationsBanc Montgomery Securities, Inc. and Prudential Securities Incorporated
are acting as representatives, has severally agreed to purchase from the
Company, the respective number of shares of Common Stock set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERWRITERS OF COMMON STOCK
------------------------------------------------------------ ---------------
<S> <C>
Goldman, Sachs & Co. .......................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Morgan Stanley & Co. Incorporated...........................
NationsBanc Montgomery Securities, Inc......................
Prudential Securities Incorporated..........................
----------
Total............................................. 10,000,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement and the
related Pricing Agreement, the Underwriters are committed to take all of the
shares of Common Stock, if any are taken.
The Underwriters propose to offer the 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 re-allow, 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 the Underwriters an option exercisable for 30 days
after the date of this Prospectus Supplement to purchase up to an aggregate of
1,500,000 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 which the number of shares to be purchased by each
of them, as shown in the foregoing table, bears to the 10,000,000 shares of
Common Stock offered.
The Company has agreed that during the period beginning from the date of
this Prospectus Supplement and continuing to and including the date 90 days
after the date of this Prospectus Supplement, not to sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities of the Company
that are substantially similar to the shares of Common Stock, or any other
security convertible into or exchangeable for, or represent the right to
receive, shares of Common Stock or any such similar securities, except for (i)
shares of Common Stock issuable pursuant to employee stock option plans existing
on, or upon the conversion of convertible or exchangeable securities existing
on, or upon the conversion of convertible or exchangeable securities outstanding
as of, the date of this Prospectus Supplement, and (ii) shares of Common Stock
issuable upon the exchange of partnership units in the Operating Partnership or
for the issuance of partnership units in the Operating Partnership
<PAGE> 40
(which may be exchangeable for Common Stock no earlier than 90 days after the
date of this Prospectus Supplement), without the prior written consent of the
Underwriters.
Certain of the Underwriters have provided various investment banking
services to the Company and its affiliates from time to time, for which they
have received customary compensation.
The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
In connection with the Offering, the Underwriters may purchase and sell the
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the shares, and syndicate short
positions involve the sale by the Underwriters of a greater number of shares
than they are required to purchase from the Company in the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the shares of Common
Stock sold in the Offering for their account may be reclaimed by the syndicate
if such shares are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the shares, which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the New York
Stock Exchange, in the over-the-counter market or otherwise.
The Company is acquiring the WCB Portfolio from an affiliate of Goldman,
Sachs & Co. To the extent the proceeds from the Offering are used to consummate
such acquisition, the affiliate of Goldman, Sachs & Co. will receive its share
of such proceeds.
VALIDITY OF COMMON STOCK
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Sullivan & Cromwell, Los Angeles, California, and for
the Underwriters by Willkie Farr & Gallagher, New York, New York. Sullivan &
Cromwell and Willkie Farr & Gallagher will rely upon the opinion of Piper &
Marbury L.L.P., Baltimore, Maryland as to certain matters of Maryland law.
<PAGE> 41
SPIEKER PROPERTIES, INC.
PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed consolidated balance sheet
has been prepared to reflect (i) the acquisition of Properties subsequent to
June 30, 1997, (ii) the disposition or pending disposition of five properties
subsequent to June 30, 1997, (iii) the issuance of $150 million of Series C
Preferred Stock and $300 million aggregate principal amount of unsecured debt
securities, the funding of a $200 million bridge facility and the issuance of
$75.0 million of convertible preferred partnership units in the Operating
Partnership, all subsequent to June 30, 1997, (iv) the completion of this
Offering and the application of the net proceeds therefrom as described in "Use
of Proceeds" and (v) the acquisition of the Pending Acquisitions, as if such
transactions had all occurred on June 30, 1997. The accompanying unaudited pro
forma condensed consolidated statements of operations for the six months ended
June 30, 1997 and the year ended December 31, 1996 have been prepared to reflect
(i) the incremental effect of Properties and mortgages acquired in 1996 and 1997
and developments completed in 1996 and 1997, (ii) the incremental effect of
properties disposed of in 1996 and 1997, (iii) an adjustment to interest expense
based upon pro forma debt, (iv) the acquisition of the Pending Acquisitions and
(v) certain other adjustments, as if such transactions had all occurred on
January 1, 1996. None of such pro forma financial information assumes the
disposition of any of the Disposition Properties.
These pro forma condensed consolidated statements should be read in
conjunction with the respective consolidated financial statements and notes
thereto of the Company and certain of the documents incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus. In the opinion of
management, the unaudited pro forma condensed consolidated financial information
provides all adjustments necessary to reflect the effects of the transactions
described herein.
The pro forma condensed consolidated information is unaudited and not
necessarily indicative of the consolidated results which would have occurred if
the transactions had been consummated in the periods presented, or on any
particular date in the future, nor does it purport to represent the financial
position, results of operations or changes in cash flows for future periods.
F-1
<PAGE> 42
SPIEKER PROPERTIES, INC.
PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 PROPERTY FINANCING PENDING
HISTORICAL(1) ACQUISITIONS(2) DISPOSITIONS(3) TRANSACTIONS(4) OFFERINGS(5) ACQUISITIONS(6) PRO FORMA
------------- -------------- --------------- --------------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in
real estate,
net.......... $ 1,844,700 $353,916 $ (38,991) $ -- $ -- $ 1,000,400 $3,160,025
Cash and cash
equivalents... 9,249 -- 46,617 345,938 509,099 (906,903) 4,000
Financing and
leasing
costs, net... 16,935 -- -- 7,950 -- -- 24,885
Other assets... 21,620 -- -- -- -- -- 21,620
---------- -------- -------- --------- -------- ---------- ----------
$ 1,892,504 $353,916 $ 7,626 $ 353,888 $509,099 $ 93,497 $3,210,530
---------- -------- -------- --------- -------- ---------- ----------
LIABILITIES
Mortgage loans,
net.......... $ 94,745 $ -- -- $ -- $ -- $ 10,991 $ 105,736
Unsecured lines
of credit.... 57,000 353,916 -- (146,112) (34,995) -- 229,809
Unsecured debt
securities... 635,000 -- -- 300,000 -- -- 935,000
Bridge
financing
facility..... -- -- -- 200,000 -- -- 200,000
Other
liabilities... 86,051 -- -- -- -- -- 86,051
---------- -------- -------- --------- -------- ---------- ----------
Total
liabilities... 872,796 353,916 -- 353,888 (34,995) 10,991 1,556,596
---------- -------- -------- --------- -------- ---------- ----------
MINORITY
INTEREST..... 72,465 -- -- -- 82,506 154,971
STOCKHOLDERS
EQUITY
Series A
preferred
stock........ 23,949 -- -- -- -- -- 23,949
Series B
preferred
stock........ 102,064 -- -- -- -- -- 102,064
Series C
preferred
stock........ -- -- -- 146,135 -- 146,135
Common
shares....... 4 -- -- -- 1 -- 5
Additional
paid-in
capital...... 816,274 -- -- -- 397,958 -- 1,214,232
Deferred
compensation... (753) -- -- -- -- -- (753)
Retained
earnings..... 5,705 -- 7,626 -- -- -- 13,331
---------- -------- -------- --------- -------- ---------- ----------
Total
equity... 947,243 -- 7,626 -- 544,094 -- 1,498,963
---------- -------- -------- --------- -------- ---------- ----------
$ 1,892,504 $353,916 $ 7,626 $ 353,888 $509,099 $ 93,497 $3,210,530
========== ======== ======== ========= ======== ========== ==========
</TABLE>
F-2
<PAGE> 43
SPIEKER PROPERTIES, INC.
NOTES AND ADJUSTMENTS TO PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
1. Reflects the historical consolidated balance sheet of the Company as of June
30, 1997.
2. Reflects the completed acquisition of approximately 3.5 million square feet
of net rentable property subsequent to June 30, 1997, at an aggregate cost of
approximately $354 million, including purchase prices paid to the sellers and
other miscellaneous acquisition costs. These acquisitions were funded
primarily with borrowings on the Company's line of credit and issuance of
unsecured debt securities.
3. Reflects the disposition or pending disposition by the Company of five of its
properties subsequent to June 30, 1997 for an aggregate price of
approximately $46,617. In connection with these dispositions, the Company
recognized gains totaling approximately $7,626.
4. Reflects the issuance of unsecured investment grade debt securities of
$150,000 in July 1997 and $150,000 in September 1997, bearing interest at
7.125% and 7.50% per annum, respectively. The proceeds from these issuances
were used to repay borrowings on the Company's line of credit and to fund
certain Pending Acquisitions other than the WCB Portfolio.
Also reflects a $200,000 borrowing under an unsecured bridge financing
facility at LIBOR plus 0.65% (assumed to be 6.338%). The proceeds from the
bridge loan borrowings are to be used to fund certain Pending Acquisitions.
In connection with these debt securities and bridge loan borrowings, the
Company incurred costs of approximately $7,950.
5. Reflects the estimated net proceeds from the Offering of approximately
$397,959 and the net proceeds from the issuance of 6,000,000 shares of Series
C Preferred Stock of approximately $146,135. Such proceeds, together with the
bridge loan and other borrowings, will be used to fund the cash investments
in the Pending Acquisitions. The Company expects to incur costs totaling
$24,656 in connection with this Offering and the issuance of the Series C
Preferred Stock.
6. Reflects the completion of the Pending Acquisitions at an aggregate total
investment of $1,000,400, consisting of cash from the transactions discussed
above of approximately $906,903, the assumption of $10,991 of mortgage loans,
the issuance of limited partnership units of the Operating Partnership
totaling $7,506 and the issuance of convertible preferred units of the
Operating Partnership totaling $75,000.
F-3
<PAGE> 44
SPIEKER PROPERTIES, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
INTEREST
COMPLETED PENDING PROPERTY EXPENSE OTHER
HISTORICAL ACQUISITIONS ACQUISITIONS DISPOSITIONS ADJUSTMENT ADJUSTMENTS
(1) (2) (3) (4) (5) (6) PRO FORMA
---------- ------------ ------------ ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income.................. $ 138,921 $ 35,642 $ 51,246 $ (6,163) $ -- $ (12,240) $ 207,406
Interest and other income...... 3,374 -- 1,365 -- -- 8,551 13,290
---------- ------- ------- ------- -------- -------- ----------
Total revenues........ 142,295 35,642 52,611 (6,163) -- (3,689) 220,696
---------- ------- ------- ------- -------- -------- ----------
OPERATING EXPENSES
Rental expenses................ 27,083 6,974 11,823 (1,075) -- (2,680) 42,125
Real estate taxes.............. 11,039 2,520 4,099 (658) -- (1,009) 15,991
Interest expense............... 24,700 -- -- -- 25,612 -- 50,312
Depreciation and
amortization................. 23,015 5,345 9,045 (423) -- (1,925) 35,057
General and administrative and
other........................ 6,535 -- -- -- -- -- 6,535
---------- ------- ------- ------- -------- -------- ----------
Total operating
expenses............ 92,372 14,839 24,967 (2,156) 25,612 (5,614) 150,020
---------- ------- ------- ------- -------- -------- ----------
Income from operations before
disposition of property and
minority interests........... 49,923 20,803 27,644 (4,007) (25,612) 1,925 70,676
---------- ------- ------- ------- -------- -------- ----------
Minority interests............. (5,957) -- -- -- -- (3,665) (9,622)
---------- ------- ------- ------- -------- -------- ----------
Net income before disposition
of property and preferred
stock dividends.............. 43,966 20,803 27,644 (4,007) (25,612) (1,740) 61,053
Series A Preferred dividends... (1,146) -- -- -- -- -- (1,146)
Series B Preferred dividends... (5,020) -- -- -- -- -- (5,020)
Series C Preferred dividends... -- -- -- -- (5,906) -- (5,906)
---------- ------- ------- ------- -------- -------- ----------
Net income before disposition
of property allocable to
common shares................ $ 37,800 $ 20,803 $ 27,644 $ (4,007) $ (31,518) $ (1,740) $ 48,981
========== ======= ======= ======= ======== ======== ==========
Net income per common share.... $ 0.82 $ 0.85
========== ==========
Weighted average common shares
outstanding.................. 46,120,388 57,919,448
========== ==========
</TABLE>
F-4
<PAGE> 45
SPIEKER PROPERTIES, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMPLETED
ACQUISITIONS INTEREST
AND PENDING PROPERTY EXPENSE OTHER
HISTORICAL DEVELOPMENTS ACQUISITIONS DISPOSITIONS ADJUSTMENT ADJUSTMENTS
(1) (2) (3) (4) (5) (6) PRO FORMA
---------- ------------ ------------ ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rental Income................. $ 196,471 $143,523 $ 99,454 $(22,034) $ -- $ (23,915) $ 393,499
Interest and other income..... 4,228 90 2,729 -- -- 16,430 23,477
---------- -------- -------- -------- -------- -------- ----------
Total Revenues....... 200,699 143,613 102,183 (22,034) -- (7,485) 416,976
---------- -------- -------- -------- -------- -------- ----------
OPERATING EXPENSES
Rental expenses............... 34,690 34,322 24,493 (2,724) -- (5,559) 85,222
Real estate taxes............. 15,510 9,818 7,927 (2,142) -- (1,926) 29,187
Interest expense.............. 37,235 -- -- -- 65,555 -- 102,790
Depreciation and
amortization................ 37,385 21,223 18,090 (3,452) -- (3,850) 69,396
General and admin. and
other....................... 10,115 -- -- -- -- -- 10,115
---------- -------- -------- -------- -------- -------- ----------
Total operating
expenses........... 134,935 65,363 50,510 (8,318) 65,555 (11,335) 296,710
---------- -------- -------- -------- -------- -------- ----------
Income from operations before
disposition of properties
and minority interests...... 65,764 78,250 51,673 (13,716) (65,555) (3,850) 120,266
---------- -------- -------- -------- -------- -------- ----------
Minority interests............ (8,645) -- -- -- -- (7,723) (16,367)
---------- -------- -------- -------- -------- -------- ----------
Net income before disposition
of property and preferred
stock dividends............. 57,119 78,250 51,673 (13,716) (65,555) (3,873) 103,899
Series A Preferred
dividends................... (2,098) -- -- -- -- -- (2,098)
Series B Preferred
dividends................... (10,041) -- -- -- -- -- (10,041)
Series C Preferred
dividends................... -- -- -- -- (11,813) -- (11,813)
---------- -------- -------- -------- -------- -------- ----------
Net income before disposition
of property allocable to
common shares............... $ 44,980 $ 78,250 $ 51,673 $(13,716) $ (77,368) $ (3,873) $ 79,947
========== ======== ======== ======== ======== ======== ==========
Net income per common share... $ 1.30 $ 1.38
========== ==========
Weighted average common shares
outstanding................. 34,691,140 57,919,448
========== ==========
</TABLE>
F-5
<PAGE> 46
SPIEKER PROPERTIES, INC.
NOTES AND ADJUSTMENTS TO PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
1. Reflects the historical consolidated statements of operations of the Company
for the six months ended June 30, 1997 and for the year ended December 31,
1996, excluding gains on the disposition of property of $14,180 and $8,350,
respectively.
2. Reflects the incremental effect on the Company's revenues, rental expenses,
and estate taxes and depreciation of the acquisitions completed during 1996
and 1997 and developments completed during 1996 and 1997. Such amounts
represent the operations of the acquired and developed Properties.
Depreciation has been based upon asset lives of 40 years.
3. Reflects the revenues, including rental and mortgage interest income, rental
expenses, real estate taxes and depreciation of the Pending Acquisitions.
Depreciation has been based upon asset lives of 40 years.
4. Reflects the elimination of the operations of properties sold in 1996 and
1997 included in historical consolidated statements of operations of the
Company.
5. Reflects an adjustment to historical interest expense to give effect to pro
forma debt. The components of pro forma interest expense are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Unsecured debt securities, $935,000, weighted average
interest rate of 7.21%................................... $ 33,708 $ 67,417
Mortgage loans, net $105,736, weighted average interest
rate of 8.10%............................................ 4,283 8,565
Bridge facility, $200,000, interest at LIBOR plus .65%
(assumed to be 6.338%)................................... 6,338 12,675
Unsecured line of credit, $229,809, interest at LIBOR plus
.80% (assumed to be 6.488%).............................. 7,454 14,908
Annual facility fees....................................... 275 550
Amortization of financing fees............................. 896 1,791
---------- ------------
Total pro forma interest......................... 52,954 105,906
Less: capitalized interest................................. (2,642) (3,116)
---------- ------------
Pro forma interest expense....................... $ 50,312 $102,790
---------- ------------
</TABLE>
Also reflects the incremental effect of dividends on the Series C Preferred
Stock at a rate of 7.875%. The bridge facility and the Company's line of
credit are subject to changes in LIBOR.
6. Reflects the reduction in revenue and expenses for the portion of the WCB
Portfolio, aggregating 1.7 million square feet of property, purchased by an
affiliate of the Company.
Also reflects an increase in management fee and interest income from an
affiliate of the Company related to the 1.7 million square feet of property
to be purchased by the affiliate.
Also reflects the allocation of the pro forma adjustments to minority
interests based upon pro forma minority ownership of the Operating
Partnership of approximately 13.63%.
7. The Company's pro forma taxable income for the 12 month period ended June 30,
1997, is approximately $148 million, which has been calculated as the pro
forma income from operations
F-6
<PAGE> 47
before minority interests for the same period of approximately $131 million
plus GAAP depreciation and amortization of approximately $70 million less tax
basis depreciation and amortization and other tax differences of
approximately $53 million.
8. Per share amounts include the assumed issuance of common stock described in
note 5 to the condensed consolidated balance sheet as of June 30, 1997 and
reflect the dilutive effects, if any, of outstanding options on an historical
basis as of June 30, 1997, and December 31, 1996, respectively, based upon
the average price per share for the period presented. Pro forma per share
amounts for the same periods assume an average price per share of $41.875.
There is no material difference between primary and fully diluted amounts.
Had Statement and Financial Accounting Standards No. 128 -- "Earnings Per
Share" been adopted as of January 1, 1996, per share amounts would have been
$0.83 and $0.86 on an historical and pro forma basis, respectively, for the
six months ended June 30, 1997, and $1.31 and $1.40 on an historical and pro
forma basis, respectively, for the year ended December 31, 1996.
F-7
<PAGE> 48
$1,815,000,000
SPIEKER PROPERTIES, INC.
COMMON STOCK, PREFERRED STOCK,
DEPOSITARY SHARES,
SPIEKER LOGO WARRANTS AND GUARANTEES
SPIEKER PROPERTIES, L.P.
DEBT SECURITIES
------------------------
Spieker Properties, Inc. (the "Company") may from time to time offer in one
or more series or classes (i) shares of its common stock, par value $0.0001 per
share (the "Common Stock"), (ii) shares or fractional shares of its preferred
stock, par value $0.0001 per share (the "Preferred Stock"), (iii) shares of
Preferred Stock represented by Depositary Shares (the "Depositary Shares"), (iv)
warrants to purchase Preferred Stock or Common Stock (the "Warrants"), and (v)
unconditional guarantees (the "Guarantees") of unsecured Debt Securities (as
defined below) issued by Spieker Properties, L.P. (the "Operating Partnership")
in amounts, at prices and on terms to be determined at the time of offering,
with an aggregate public offering price of up to $1,000,000,000 (or its
equivalent in another currency 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
Operating Partnership may from time to time offer in one or more series
unsecured non-convertible investment grade debt securities, which may be either
senior debt securities ("Senior Securities") or subordinated debt securities
("Subordinated Securities," and together with the Senior Securities, the "Debt
Securities"), with an aggregate public offering price of up to $815,000,000 (or
its equivalent in another currency 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 may be guaranteed by Guarantees of the Company as
to payment of principal, premium, if any, and interest. The Common Stock,
Preferred Stock, Depositary Shares, Warrants and Debt Securities (collectively,
the "Offered Securities") may be offered, separately or together, in separate
series in amounts, at prices and on terms to be set forth in one or more
supplements to the Prospectus (a "Prospectus Supplement").
The specific terms of the Offered Securities in respect to 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 Common Stock,
the specific title and stated value and any initial 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
initial public offering price; (iii) in the case of Depositary Shares, the
fractional share of Preferred Stock represented by each such Depositary Share;
(iv) in the case of Warrants, the duration, offering price, exercise price and
detachability; and (v) 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, terms for redemption at
the option of the Operating Partnership or repayment at the option of the
holder, terms for sinking fund payments, covenants, applicability of any
Guarantees and any initial public offering price. In addition, such specific
terms may include limitations on direct or beneficial ownership and restrictions
on transfer of the Offered Securities, in each case as may be appropriate to
preserve the status of the Company as a real estate investment trust ("REIT")
for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by such Prospectus Supplement.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company or the Operating Partnership, or to or through
underwriters or dealers. If any agents or underwriters are involved in the sale
of any of the Offered Securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them, will be
set forth, or will be calculable from the information set forth, in the
applicable Prospectus Supplement. See "Plan of Distribution." No Offered
Securities may be sold without delivery of the applicable Prospectus Supplement
describing the method and terms of the offering of such series of Offered
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 OCTOBER 1, 1997.
<PAGE> 49
AVAILABLE INFORMATION
The Company and the Operating Partnership are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith the Company and the Operating Partnership
file reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information filed can be inspected and copied at the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C., 20549, and at the
following regional offices of the Commission: Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. 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. The Commission also maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants, such as the Company and the Operating
Partnership, that file electronically with the Commission. The address of the
Commission's site is http://www.sec.gov. In addition, the Company's Common Stock
and Series B Preferred Stock are listed on the New York Stock Exchange and
similar information concerning the Company can be inspected and copied at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
The Company and the Operating Partnership have filed with the Commission
registration statements on Form S-3 (the "Registration Statements") (of which
this Prospectus is a part) under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Offered Securities. This Prospectus does
not contain all of the information set forth in the Registration Statements,
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 other document
filed as an exhibit to the Registration Statements, each such statement being
qualified in all respects by such reference and the exhibits and schedules
thereto. For further information regarding the Company, the Operating
Partnership and the Offered Securities, reference is hereby made to the
Registration Statements 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.
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:
a. The Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
b. The Company's Quarterly Reports on Forms 10-Q for the quarters
ended March 31, 1997 and June 30, 1997;
c. The Company's Current Reports on Form 8-K dated February 3, 1997,
June 27, 1997 and September 22, 1997;
d. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A (File No. 1-12528); and
e. The description of the Company's Series B Preferred Stock contained
in the Company's Registration Statement on Form 8-A (File No. 1-12528).
The documents listed below have been filed by the Operating Partnership
under the Exchange Act with the Commission and are incorporated by reference
herein.
a. The Operating Partnership's Annual Report on Form 10-K for the year
ended December 31, 1996;
b. The Operating Partnership's Quarterly Reports on Forms 10-Q for the
quarters ended March 31, 1997 and June 30, 1997; and
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c. The Operating Partnership's Current Report on Form 8-K dated
February 3, 1997, June 27, 1997 and September 22, 1997.
Each document filed by the Company or the Operating Partnership pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of all Offered
Securities to which this Prospectus relates shall be deemed to be incorporated
by reference in this Prospectus and to be part hereof from the date of filing
such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered upon written or oral request. Requests should be
directed to the Investor Relations Coordinator, Spieker Properties, Inc., 2180
Sand Hill Road, Menlo Park, California 94025, telephone number: (650) 854-5600.
THE COMPANY AND THE OPERATING PARTNERSHIP
Spieker Properties, Inc. (the "Company") is a self-administered and
self-managed equity real estate investment trust ("REIT") that was formed in
1993 to continue and to expand the business of owning, operating, managing,
leasing, acquiring, developing and redeveloping commercial property previously
conducted by Spieker Partners. As of June 30, 1997, the Company owned and
operated 180 income-producing properties (the "Properties"), aggregating
approximately 24.8 million rentable square feet. All of the Properties are
located in California, and in Washington, Oregon and Idaho (the "Pacific
Northwest").
The Company conducts substantially all of its activities through Spieker
Properties, L.P. (the "Operating Partnership") in which it owns an approximate
87.0% general partnership interest, as of June 30, 1997. An approximate 13.0%
limited partnership interest in the Operating Partnership is owned by senior
members of the Company's management and certain outside investors, as of June
30, 1997. As the sole general partner of the Operating Partnership, the Company
has control over the management of the Operating Partnership and over each of
the Properties.
The Company's Common Stock is listed on the New York Stock Exchange under
the Symbol "SPK." The Company is a Maryland corporation and the Operating
Partnership is a California limited partnership. The Operating Partnership was
formed in 1993 in connection with the formation of the Company. The Company's
and the Operating Partnership's executive offices are located at 2180 Sand Hill
Road, Menlo Park, California 94025 and telephone number is (415) 854-5600.
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USE OF PROCEEDS
The Company intends to invest the net proceeds of any sale of Common Stock,
Preferred Stock, Depositary Shares or Warrants in the Operating Partnership.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Operating Partnership intends to use such net proceeds and the net proceeds from
the sale of any Debt Securities for general corporate purposes including,
without limitation, the acquisition and development of industrial and office
properties and the repayment of debt. Net proceeds from the sale of the Offered
Securities initially may be temporarily invested in short-term securities.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's and the Operating Partnership's ratio of earnings to fixed
charges for the six months ended June 30, 1997 was 2.76x and for the years ended
December 31, 1994, 1995 and 1996 was 1.29x, 1.61x and 2.56x, respectively. The
Company's ratio of earnings to combined fixed charges and preferred stock
dividends for the six months ended June 30, 1997 was 2.26x and for the years
ended December 31, 1994, 1995 and 1996 was 1.26x, 1.53x and 1.97x, respectively.
For purposes of computing these ratios, earnings have been calculated by
adding fixed charges (excluding capitalized interest) to income (loss) from
operations, before extraordinary items. Fixed charges consist of interest costs,
whether expensed or capitalized, the interest component of rental expense, and
amortization of debt discounts and deferred financing fees, whether expensed or
capitalized.
Prior to the completion of the Company's initial public offering ("IPO") in
November 1993, the Company's predecessors (collectively, "SPP") operated in a
manner as to minimize net taxable income to the owners. As a result, although
the Company's properties historically have generally positive net cash flow, SPP
had net losses for the years ended December 31, 1992 and 1993. Consequently, the
computation of the ratio of earnings to fixed charges indicates that earnings
were inadequate to cover fixed charges by approximately $9.4 million and $13.5
million for 1992 and 1993 (which includes the Company's results of operations
for the period of November 19, 1993 through December 31, 1993, during which the
Company had no outstanding preferred stock), respectively.
The Company's IPO and the other transactions undertaken concurrently with
the IPO permitted the Company to significantly deleverage properties, resulting
in a significantly improved ratio of earnings to fixed charges.
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SPECIAL CONSIDERATIONS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus and the
applicable Prospectus Supplement before purchasing Offered Securities.
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments are subject to varying degrees of risk. The
yields available from investments in real estate depend on the amount of income
and capital appreciation generated by the related properties. If the Properties
do not generate sufficient income to meet operating expenses, including debt
service, ground lease payments, tenant improvements, third-party leasing
commissions and other capital expenditures, the Company's income and ability to
make distributions to its stockholders and the Operating Partnership's ability
to make payments of any interest and principal on any Debt Securities will be
adversely affected. The performance of the economy in each of the regions in
which the Properties are located affects occupancy, market rental rates and
expenses and, consequently, has an impact on the income from the Properties and
their underlying values. The financial results of major local employers also may
have an impact on the cash flow and value of certain Properties. In terms of
rentable square feet, over 45% of the Properties as of June 30, 1997, were
located in the San Francisco Bay Area. As a result of this geographic
concentration, the performance of the San Francisco Bay Area commercial real
estate market will affect the value of the Properties in that area and, in turn,
the value of the Company.
Income from the Properties may be further adversely affected by the general
economic climate, local economic conditions in which the Properties are located,
such as oversupply of space or a reduction in demand for rental space, the
attractiveness of the Properties to tenants, competition from other available
space, the ability of the Company to provide for adequate maintenance and
insurance and increased operating expenses. There is also the risk that as
leases on the Properties expire, tenants will enter into new leases on terms
that are less favorable to the Company. Income and real estate values may also
be adversely affected by such factors as applicable laws (e.g., ADA and tax
laws), interest rate levels and the availability of financing. In addition, real
estate investments are relatively illiquid and, therefore, will tend to limit
the ability of the Company to vary its portfolio promptly in response to changes
in economic or other conditions.
COMPETITION
Numerous industrial, office and retail properties compete with the
Properties in attracting tenants to lease space. Some of these competing
properties are newer, better located or better capitalized than the Company's
Properties. The number of competitive commercial properties in a particular area
could have a material effect on the Company's ability to lease space in the
Properties or at newly developed or acquired properties and on the rents
charged.
ACQUISITION AND DEVELOPMENT ACTIVITIES
The Company intends to acquire existing commercial properties to the extent
that they can be acquired on advantageous terms and meet the Company's
investment criteria. Acquisitions of commercial properties entail general
investment risks associated with any real estate investment, including the risk
that investments will fail to perform as expected or that estimates of the cost
of improvements to bring an acquired property up to standards established for
the intended market position may prove inaccurate.
The Company intends to pursue commercial property development projects and
to develop certain landholdings as to which it has certain options. Such
projects generally require various governmental and other approvals, the receipt
of which cannot be assured. The Company's development activities will entail
certain risks, including the expenditure of funds on and devotion of
management's time to projects which may not come to fruition; the risk that
construction costs of a project may exceed original estimates,
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possibly making the project uneconomic; the risk that occupancy rates and rents
at a completed project will be less than anticipated; and the risk that expenses
at a completed development will be higher than anticipated. These risks may
result in a reduction in the funds available for distribution.
DEBT FINANCING
The Company will be subject to the risks normally associated with debt
financing, including the risk that the Company's cash flow will be insufficient
to meet required payments of principal and interest, the risk that existing
indebtedness on the Properties cannot be refinanced or that the terms of such
refinancing will not be as favorable as the terms of existing indebtedness.
ENVIRONMENTAL MATTERS
Under various Federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's or operator's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at a disposal or treatment facility, whether or not such
facility is owned or operated by such person. Certain environmental laws impose
liability for release of asbestos-containing materials into the air, and third
parties may seek recovery from owners or operators of real properties for
personal injuries associated with asbestos-containing materials. In connection
with the ownership (direct or indirect), operation, management and development
of real properties, the Company may be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, may be potentially liable for removal or
remediation costs, as well as certain other costs, including governmental fines
and injuries to persons and property.
The Company is not aware of any environmental liability with respect to the
Properties that would have a material adverse effect on the Company's business,
assets or results of operations. There can be no assurance that such a material
environmental liability does not exist. The existence of any such material
environmental liability would have an adverse effect on the Company's results of
operations and cash flow.
GENERAL UNINSURED LOSSES/SEISMIC ACTIVITY
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance with policy specifications, limits and deductibles
customarily carried for similar properties. There are, however, certain types of
extraordinary losses which may be either uninsurable, or not economically
insurable. Further, a substantial number of the Properties are located in areas
that are subject to earthquake activity. Although the Company has obtained
certain limited earthquake insurance policies, should a Property sustain damage
as a result of an earthquake, the Company may incur substantial losses due to
insurance deductibles, co-payments on insured losses or uninsured losses.
Additionally, earthquake insurance may not be available for certain of the
Company's Properties, or if available, may not be available on terms acceptable
to the Company. Should an uninsured loss occur, the Company could lose its
investment in, and anticipated profits and cash flows from, a number of
Properties.
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DESCRIPTION OF DEBT SECURITIES
The following sets forth certain general terms and provisions of the
Indenture under which the Debt Securities are to be issued. The particular terms
of the Debt Securities will be set forth in a Prospectus Supplement relating to
such Debt Securities.
Unless otherwise specified in the applicable Prospectus Supplement, the
Debt Securities are to be issued under an Indenture dated December 6, 1995, as
amended or supplemented from time to time (the "Indenture"), among the Operating
Partnership, the Company and State Street Bank and Trust Company, as trustee
(together with any other trustee(s) appointed in a supplemental indenture with
respect to a particular series, the "Trustee"). The Indenture is available for
inspection at the corporate trust office of the Trustee, or as described above
under "Available Information." The Indenture is subject to, and governed by, the
Trust Indenture Act of 1939, as amended. The statements made hereunder relating
to the Indenture and the Debt Securities to be issued hereunder are summaries of
certain provisions thereof and do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all provisions of the
Indenture and such Debt Securities. All section references appearing herein are
to sections of the Indenture, and capitalized terms used but not defined herein
shall have the respective meanings set forth in the Indenture.
GENERAL
The Debt Securities will be direct, unsecured obligations of the Operating
Partnership. Except for any series of Debt Securities which is specifically
subordinated to other indebtedness of the Operating Partnership, the Debt
Securities will rank pari passu with all other unsecured and unsubordinated
indebtedness of the Operating Partnership. Under the Indenture, 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 Directors of the Company as
sole general partner of the Operating Partnership or as established in one or
more indentures supplemental to the 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 (Section
301).
The Debt Securities may be unconditionally guaranteed by the Company as to
payment of principal, premium, if any, and interest. (Section 1601).
The Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
the Indenture may resign or be removed with respect to one or more series of
Debt Securities, and a successor Trustee will be appointed to act with respect
to such series (Section 608). 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 trustee of a trust under the Indenture separate and apart
from the trust administered by any other Trustee (Section 609), and, except as
otherwise indicated herein, any action described herein to be taken by the
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
Indenture.
TERMS
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including:
(1) the title of such Debt Securities, whether such Debt Securities
are Senior Securities or Subordinated Securities and whether such Debt
Securities are guaranteed by a Guarantee;
(2) the aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
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(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;
(4) the date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable;
(5) 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;
(6) the date or dates, or the method for determining such date or
dates, from which any such interest will accrue, the Interest Payment 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 Person 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;
(7) the place or places where (i) the principal of (and premium, if
any) and interest, if any, on such Debt Securities will be payable, (ii)
such Debt Securities may be surrendered for registration of transfer,
exchange or conversion and (iii) notices or demands to or upon the
Operating Partnership in respect of such Debt Securities, any applicable
Guarantees and the Indenture may be served;
(8) the period or periods within which, or the date or dates on which,
the price or prices at which and the terms and conditions upon which such
Debt Securities may be redeemed, as a whole or in part, at the option of
the Operating Partnership, if the Operating Partnership is to have such an
option;
(9) the obligation, if any, of the Operating Partnership to redeem,
repay or repurchase such Debt Securities pursuant to any sinking fund or
analogous provisions or at the option of a Holder thereof, and the period
or periods within which, or the date or dates on which, the price or prices
at which and the terms and conditions upon which such Debt Securities are
required to be redeemed, repaid or purchased, as a whole or in part,
pursuant to such obligation;
(10) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and/or 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;
(11) 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;
(12) any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the Events of Default or covenants or
other provisions set forth in the Indenture;
(13) whether such Debt Securities will be issued in certificated
and/or book-entry form;
(14) 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;
(15) the applicability, if any, of the defeasance and covenant
defeasance provisions of Article XIV of the Indenture, or any modification
thereof;
(16) the terms and conditions, if any, upon which such Debt Securities
may be subordinated to other indebtedness of the Operating Partnership;
(17) whether and under what circumstances the Operating Partnership
will pay Additional Amounts as contemplated in the Indenture on such Debt
Securities in respect of any tax,
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assessment or governmental charge and, if so, whether the Operating
Partnership will have the option to redeem such Debt Securities in lieu of
making such payment; and
(18) any other terms of such Debt Securities not inconsistent with the
provisions of the 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 U.S. federal income tax,
accounting and other considerations applicable to the Original Issue Discount
Securities will be described in the applicable Prospectus Supplement.
The Indenture does not contain any provisions that would limit the ability
of the Operating Partnership to incur indebtedness or that would afford Holders
of Debt Securities protection in the event of a highly leveraged or similar
transaction involving the Operating Partnership. However, restrictions on
ownership and transfers of the Company's common stock and preferred stock,
designed to preserve the Company's status as a REIT, may prevent or hinder a
change of control. 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 Operating Partnership that are
described below, including any addition of a covenant or other provision
providing event risk or similar protection.
GUARANTEES
The Debt Securities may be unconditionally and irrevocably guaranteed by
Guarantees of the Company, on a senior or subordinated basis, which will
guarantee the due and punctual payment of principal of, premium, if any, and
interest on such Debt Securities, and the due and punctual payment of any
sinking fund payments thereon, when and as the same shall become due and payable
whether at a maturity date, by declaration of acceleration, call for redemption
or otherwise. The applicability and terms of any such Guarantee relating to a
series of Debt Securities will be set forth in the Prospectus Supplement
relating to such Debt Securities. (Section 1601).
DENOMINATIONS, 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 premium, if any) and interest on any series of Debt Securities
will be payable at the corporate trust office of the Trustee, provided that, at
the option of the Holder, payment of interest may be made by check mailed to the
address of the Person entitled thereto as it appears in the Security Register or
by wire transfer of funds to such Person at an account maintained within the
United States (Sections 301, 305, 307 and 1002).
All amounts paid by the Operating Partnership to a paying agent or a
Trustee for the payment of the principal of or any premium or interest on any
Debt Security which remain unclaimed at the end of two years after the
principal, premium or interest has become due and payable will be repaid to the
Operating Partnership, and the holder of the Debt Security thereafter may look
only to the Operating Partnership for payment thereof. (Section 1003).
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 10 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
(Sections 101 and 307).
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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, 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 Trustee. 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 thereof at the corporate trust office of the Trustee referred to
above. Every Debt Security surrendered for conversion, redemption, registration
of transfer or exchange shall 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 Operating Partnership may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith (Section 305). If the applicable
Prospectus Supplement refers to any transfer agent (in addition to the Trustee)
initially designated by the Operating Partnership with respect to any series of
Debt Securities, the Operating Partnership 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 Operating
Partnership will be required to maintain a transfer agent in each Place of
Payment for such series. The Operating Partnership may at any time designate
additional transfer agents with respect to any series of Debt Securities
(Section 1002).
Neither the Operating Partnership nor the 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 of 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 which has been surrendered for repayment at the option of the Holder,
except that portion, if any, of such Debt Security which is not to be so repaid
(Section 305).
MERGER, CONSOLIDATION OR SALE
The Operating Partnership may consolidate with, or sell, lease or convey
all or substantially all of its assets to, or merge with or into, any other
person, provided (a) either the Operating Partnership shall be the continuing
person, or the successor (if other than the Operating Partnership) 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 the Indenture; (b) immediately after giving effect to such
transaction and treating any indebtedness which becomes an obligation of the
Operating Partnership or any Subsidiary as a result thereof as having been
incurred by the Operating Partnership or such Subsidiary at the time of such
transaction, no Event of Default under the Indenture, 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 officers' certificate of the
Company as General Partner of the Operating Partnership and an opinion of
counsel covering such conditions shall be delivered to the Trustee (Sections 801
and 803).
CERTAIN COVENANTS
Existence. Except as permitted under "Merger, Consolidation or Sale," the
Indenture requires each of the Operating Partnership and the Company (if the
Company has guaranteed any Debt Securities) to do or cause to be done all things
necessary to preserve and keep in full force and effect its existence, rights
(partnership and statutory) and franchises; provided, however, that each of the
Operating Partnership and the Company shall not be required to preserve any
right or franchise if the Board of Directors of the Company determines that the
preservation thereof is no longer desirable in the conduct of the business of
the Operating Partnership and that the loss thereof is not disadvantageous in
any material respect to the Holders of the Debt Securities (Section 1004).
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Maintenance of Properties. The Indenture requires each of the Operating
Partnership and the Company (if the Company has guaranteed any Debt Securities)
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, all as in the judgment of the Operating
Partnership may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that the Operating Partnership or the Company, as the case may be, and
its Subsidiaries shall not be prevented from selling or otherwise disposing of
their properties for value in the ordinary course of business. (Section 1006).
Insurance. The Indenture requires the Operating Partnership and each of
its Subsidiaries to keep its insurable Properties insured against loss or damage
with commercially reasonable amounts and types of insurance provided by insurers
of recognized responsibility. (Section 1007).
Payment of Taxes and Other Claims. The Indenture requires each of the
Operating Partnership and the Company (if the Company has guaranteed any Debt
Securities) 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 its income, profits
or property or that of 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 Operating Partnership or any Subsidiary; provided, however, that
the Operating Partnership or the Company shall not be required to pay or
discharge or cause to be paid or discharged any tax, assessment, charge or claim
whose amount or applicability is being contested in good faith. (Section 1008).
Provision of Financial Information. The Operating Partnership will file
with the Trustee copies of annual reports, quarterly reports and other documents
(the "Financial Reports") which the Operating Partnership files with the
Commission or would be required to file with the Commission pursuant to Sections
13 or 15(d) of the Exchange Act if the Operating Partnership were subject to
such Sections; provided, however, that if the Operating Partnership is not
subject to such Sections, it may, in lieu of filing Financial Reports of the
Operating Partnership with the Trustee, file Financial Reports of the Company if
they would be materially the same as those that would have been filed by the
Operating Partnership with the Commission pursuant to Sections 13 or 15(d) of
the Exchange Act.
Additional Covenants. Reference is made to the applicable Prospectus
Supplement for information with respect to any additional covenants specific to
a particular series of Debt Securities.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the Prospectus Supplement, the Indenture
provides that the following events are "Events of Default" with respect to any
series of Debt Securities issued thereunder: (a) default for 30 days in the
payment of any interest on any Debt Security of such series; (b) default in the
payment of any principal of (or premium, if any, on) any Debt Security of such
series when due; (c) default in making any sinking fund payment as required for
any Debt Security of such series; (d) default in the performance of any other
covenant or warranty of the Operating Partnership or the Company contained in
the Indenture with respect to any Debt Security of such series, continued for 60
days after written notice as provided in the Indenture; (e) default in the
payment of an aggregate principal amount exceeding $10,000,000 of any evidence
of indebtedness of the Operating Partnership or the Company (if the Company or
any subsidiary of the Company has guaranteed any indebtedness of the Operating
Partnership) or any mortgage, indenture, note, bond, capitalized lease or other
instrument under which such indebtedness is issued or by which such indebtedness
is secured, such default having continued 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; (f) certain events of bankruptcy,
insolvency or reorganization, or court appointment of a receiver, liquidator or
trustee of the Operating Partnership and the Company (if the Company has
guaranteed any Debt Securities), or any Significant Subsidiary or all or
substantially all of any of their respective property; and (g) any other Event
of Default provided with respect to a particular
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series of Debt Securities (Section 501). The term "Significant Subsidiary" means
each significant Subsidiary (as defined in Regulation S-X promulgated under the
Securities Act) of the Operating Partnership or the Company, as the case may be.
(Section 101).
If an Event of Default under the Indenture with respect to Debt Securities
of any series at the time Outstanding occurs and is continuing, then in every
such case the Trustee or the Holders of not less than a majority in principal
amount of the Outstanding Debt Securities of that series may 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 of the Debt Securities of that
series to be due and payable immediately by written notice thereof to the
Company (if the Company has guaranteed any Debt Securities under such Indenture)
and the Operating Partnership (and to the Trustee if given by the Holders).
However, any time after such a declaration of acceleration with respect to Debt
Securities of such series has been made, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the Holders of not
less then a majority in principal amount of Outstanding Debt Securities of such
series may rescind and annul such declaration and its consequences if (a) the
Operating Partnership shall have paid or deposited with the Trustee all required
payments of the principal of (and premium, if any) and interest on the Debt
Securities of such series plus certain fees, expenses, disbursements and
advances of the Trustee and (b) all Events of Default, other than the nonpayment
of accelerated principal or interest with respect to Debt Securities of such
series have been cured or waived as provided in the Indenture (Section 502). The
Indenture also provides that the Holders of not less than a majority in
principal amount of the Outstanding Debt Securities of any series 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 Indenture that cannot be modified or amended without the
consent of the Holder of each Outstanding Debt Security affected thereby
(Section 513).
The Trustee is required to give notice to the Holders of Debt Securities
within 90 days of a default under the Indenture; provided, however, that the
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 the Responsible Officers of the Trustee consider
such withholding to be in the interest of such Holders (Section 601).
The Indenture provides that no Holders of Debt Securities of any series may
institute any proceedings, judicial or otherwise, with respect to the Indenture
or for any remedy thereunder, except in the case of failure of the 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 a majority
in principal amount of the Outstanding Debt Securities of that series, as well
as an offer of reasonable indemnity (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 date thereof (Section 508).
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any Holders of Debt
Securities of any series then Outstanding under the Indenture, unless such
Holders shall have offered to the Trustee 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 shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or of exercising any trust or power conferred upon the Trustee.
However, the Trustee may refuse to follow any direction which is in conflict
with any law or the Indenture, which may involve the Trustee in personal
liability or which may be unduly prejudicial to the Holders of Debt Securities
of such series not joining therein (Section 512).
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Within 120 days after the close of each fiscal year, the Operating
Partnership and the Company (if the Company has guaranteed any Debt Securities)
must deliver to the Trustee a certificate, signed by one of several specified
officers of the Company, stating whether or not such officer has knowledge of
any default under the Indenture and, if so, specifying each such default and the
nature and status thereof (Section 1005).
MODIFICATION OF THE INDENTURE
Modifications and amendments of provisions of the Indenture applicable to
any series may be made only with consent of the Holders of not less than a
majority in principal amount of all Outstanding Debt Securities 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 principal of or 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 of, 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 on or
after the Stated Maturity thereof; (e) reduce the above-stated percentage of
Outstanding Debt Securities of any series necessary to modify or amend the
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 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 a particular series have the right to waive compliance by the
Operating Partnership or the Company with certain covenants in the Indenture
relating to such series (Section 1010).
Modifications and amendments of the Indenture may be made by the Operating
Partnership and the Company (if the Company has guaranteed any Debt Securities)
and the Trustee 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
Operating Partnership as obligor under the Indenture or succession of another
Person as Guarantor; (ii) to add to the covenants of the Operating Partnership
and the Company (if the Company has guaranteed any Debt Securities) for the
benefit of the Holders of all or any series of Debt Securities or to surrender
any right or power conferred upon the Operating Partnership or 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
the Indenture to facilitate the issuance 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 the Indenture, provided that any such
change or elimination shall become effective only when there are not Debt
Securities Outstanding of any series created prior thereto which are entitled to
the benefit of such provision; (vi) to secure the Debt Securities or Guarantees;
(vii) to establish the form or terms of Debt Securities of any series and any
related Guarantees; (viii) to provide for the acceptance of appointment by a
successor Trustee or facilitate the administration of the trust under the
Indenture by more than one Trustee; (ix) to cure any ambiguity, defect or
inconsistency in the Indenture, provided that such action shall not adversely
affect the interests of Holders of Debt Securities of any series in any material
respect; and (x) to supplement any of the provisions of the 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
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adversely affect the interests of the Holders of the Debt Securities of any
series in any material respect (Section 901).
The Indenture provides 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 a Debt Security denominated in a Foreign Currency that shall be deemed
outstanding shall be the 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
Section 301 of the Indenture, and (iv) Debt Securities owned by the Operating
Partnership or any other obligor upon the Debt Securities or any Affiliate of
the Operating Partnership or of such other obligor shall be disregarded (Section
101).
The Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series (Section 1501). A meeting may be called at any time
by the Trustee, and also, upon request, by the Operating Partnership or the
Holders of at least 25% in principal amount of the Outstanding Debt Securities
of such series, in any such case upon notice given as provided in the Indenture
(Section 1502). Except for any consent that must be given by the Holder of each
Debt Security affected by certain modifications and amendments of the 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 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
the 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 (Section 1504).
Notwithstanding the foregoing provisions, 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 or other action that
the 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 of 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 the Indenture (Section
1504).
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DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise provided in the Prospectus Supplement, the Operating
Partnership or the Company (if the Company has guaranteed any Debt Securities
under such Indenture) may discharge certain obligations to Holders of any series
of Debt Securities that have not already been delivered to the Trustee for
cancellation and that either have become due and payable or will become due and
payable within one year (or are scheduled for redemption within one year) by
irrevocably depositing with the 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 (Section 401).
The Indenture provides that, unless otherwise provided in the Prospectus
Supplement, if the provisions of Article Fourteen are made applicable to the
Debt Securities of any series pursuant to Section 301 of the Indenture, the
Operating Partnership may elect either (a) to decease 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 to compensate the Trustee 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 Sections 1006 through 1008, inclusive, of
the Indenture (being the restrictions described under "Certain Covenants") or,
if provided pursuant to Section 301 of the Indenture, its obligations with
respect to any other covenant, and any omission to comply with such obligations
shall not constitute a default or an Event of Default with respect to such Debt
Securities ("covenant defeasance") (Section 1403), in either case upon the
irrevocable deposit by the Operating Partnership or the Company, as the case may
be, with the Trustee, in trust, of any 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 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 may only be established if, among other things, the Operating
Partnership has delivered to the Trustee an Opinion of Counsel (as specified in
the Indenture) to the effect that the Holders of such Debt Securities will not
recognize income, gain or loss for U.S. federal income tax purposes as a result
of such defeasance or covenant defeasance and will be subject to U.S. 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, must refer to
and be based upon a ruling of the Internal Revenue Service or a change in
applicable United States 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 payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other 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
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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 Operating Partnership or the Company, as the case may be, 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, and does, elect pursuant to Section 301 of the
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 shall 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 the same becomes 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 (Section 1405). "Conversion Event"
means the cessation of use of (i) a currency, currency unit or composite
currency either by the government of the country which issued such currency and
for the settlement of transactions by a central bank or other public
institutions or within the international banking community, (ii) the ECU either
within the European Monetary System or 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. (Section 101.) 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 cease
to be used by its government of issuance shall be made in U.S. dollars.
In the event the Operating Partnership or the Company, as the case may be,
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 (d) under "Events
of Default, Notice and Waiver" with respect to Section 1006 through 1008 of the
Indenture (which Sections would no longer be applicable to such Debt Securities)
or described in clause (g) 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
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 Event
of Default. However, the Operating Partnership and the Company (if the Company
has guaranteed any Debt Securities) 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 a particular series.
SUBORDINATION
The terms and conditions, if any, upon which the Debt Securities are
subordinated to other indebtedness of the Operating Partnership 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.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
As of June 30, 1997, the total number of shares of all classes of capital
stock that the Company had authority to issue was 1,000,000,000 shares,
consisting of (i) 660,500,000 shares of Common Stock, par value $0.0001 per
share, (ii) 2,000,000 shares of Class B Common Stock, par value $0.0001 per
share, (iii) 1,500,000 shares of Class C Common Stock, par value $0.0001 per
share, (iv) 1,000,000 shares of Series A Preferred Stock, par value $0.0001 per
share, (v) 5,000,000 shares of Series B Cumulative Redeemable Preferred Stock
("Series B Preferred Stock"), par value $0.0001 per share, and (vi) 330,000,000
shares of excess stock (the "Excess Stock").
As of June 30, 1997, there were (i) 43,532,923 shares of Common Stock
issued and outstanding, (ii) 2,000,000 shares of Class B Common Stock issued and
outstanding, (iii) 1,176,470 shares of Class C Common Stock issued and
outstanding, (iv) 1,000,000 shares of Series A Preferred Stock issued and
outstanding, and (v) 4,250,000 shares of Series B Preferred Stock, issued and
outstanding. At any given time, there are reserved for issuance under the
Spieker Properties, Inc. 1993 Stock Incentive Plan (the "Plan") shares of the
Company's Common Stock equal to 9.9% of the number of shares of the Company's
stock outstanding (including shares of Common Stock issuable upon conversion of
partnership units in the Operating Partnership, Series A Preferred Stock, Class
B Common Stock and Class C Common Stock, and all classes of convertible
securities of the Company that may be issued in the future) as of the last day
of the immediately preceding quarter reduced by the number of shares of Common
Stock reserved for issuance under other stock compensation plans of the Company.
As of June 30, 1997, the Company had reserved for issuance under the Plan
5,361,748 shares of the Company's Common Stock and 150,000 shares of Common
Stock was reserved for issuance under the Spieker Properties, Inc. 1993
Directors Stock Option Plan. In addition, 2,531,645 shares of Common Stock have
been reserved for issuance upon the conversion of Class B Common Stock,
1,176,470 shares of Common Stock have been reserved for issuance upon the
conversion of Class C Common Stock and 1,219,512 shares of Common Stock have
been reserved for issuance upon the conversion of the Series A Preferred Stock.
Further, 7,239,389 shares of Common Stock have been reserved for issuance upon
the conversion of limited partnership units in the Operating Partnership.
COMMON STOCK
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that Common Stock will be
issuable upon conversion of Preferred Stock or Depositary Shares or upon the
exercise of Warrants issued by the Company. This description is in all respects
subject to and qualified in its entirety by reference to the applicable
provisions of the Company's Articles of Incorporation, as amended and restated
to date, and Articles Supplementary (collectively, the "Charter") and its
Bylaws. The Common Stock is listed on the New York Stock Exchange under the
symbol "SPK." The Bank of New York is the Company's transfer agent.
The holders of the outstanding Common Stock are entitled to one vote per
share for each director being elected and on all other matters voted on by
stockholders. The Charter does not provide for cumulative voting in the election
of directors.
The shares of Common Stock offered hereby will, when issued, be fully paid
and nonassessable and will not be subject to preemptive or similar rights.
Subject to the preferential rights of the Series A Preferred Stock, Series B
Preferred Stock and any preferential rights of any other outstanding series of
capital stock, the holders of Common Stock are entitled to such distributions as
may be declared from time to time by the Board of Directors from funds available
for distribution to such holders. The Company currently pays regular quarterly
dividends to holders of Common Stock.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to receive ratably the assets remaining
after satisfaction of all liabilities and payment of
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liquidation preferences and accrued dividends, if any, on Series A Preferred
Stock, Series B Preferred Stock, Class B Common Stock and Class C Common Stock
and any other series of capital stock that has a liquidation preference. The
rights of holders of Common Stock are subject to the rights and preferences
established by the Board of Directors for any capital stock that may
subsequently be issued by the Company.
Subject to limitations prescribed by Maryland law and the Company's
Charter, the Board of Directors is authorized to reclassify any unissued portion
of the authorized shares of capital stock to provide for the issuance of shares
in other classes or series, including other classes or series of Common Stock,
to establish the number of shares in each class or 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 such class or series. The rights, preferences,
privileges and restrictions of such class or series will be fixed by the
articles supplementary relating to such class or series. A Prospectus Supplement
will specify the terms of such class or series.
CLASS B COMMON STOCK
The following description of the Company's Class B Common Stock is in all
respects subject to and qualified in its entirety by reference to the applicable
provisions of the Company's Charter, including the Articles Supplementary
applicable to the Class B Common Stock, and Bylaws. The Company has issued
2,000,000 shares of Class B Common Stock, par value $0.0001 per share, all of
which were outstanding as of June 30, 1997.
The Class B Common Stock ranks on a parity with the Company's Common Stock
with respect to dividends. The Class B Common Stock was sold in May 1995 to an
institutional investor at a price per share of $25.00. The initial per share
dividend of the Class B Common Stock was set at $2.19, which was at a rate that
was equal to the dividend yield on shares of Common Stock sold concurrently with
the Class B Common Stock plus 0.25%. The dividend per share on the Class B
Common stock is increased or decreased by the same dollar amount as any increase
or decrease in the dividend distributions made to the holders of Common Stock.
The Company currently pays regular dividends to holders of Class B Common Stock.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Class B Common Stock are entitled to receive, on a parity with
the holders of Class C Common Stock and prior and in preference to the holders
of Common Stock, an amount per share of Class B Common Stock equal to all
declared but unpaid dividends for each share of Class B Common Stock. The Class
B Common Stock has not been registered under the Securities Act. The
institutional investor who purchased the shares of Class B Common Stock has
certain demand registration rights for eight years following the May 1995 sale
of such shares to register in each instance Common Stock having a market value
of $1.0 million or more. Subject to certain limitations, the Class B Common
Stock may be converted into Common Stock based on a certain formula three years
after the May 1995 sale or earlier upon the occurrence of certain events
including a change in management. Under such formula, 2,000,000 outstanding
shares of Class B Common Stock are currently convertible into 2,531,645 shares
of Common Stock. The holder of Class B Common Stock is not entitled to vote on
matters voted on by stockholders of the Company.
CLASS C COMMON STOCK
The following description of the Company's Class C Common Stock is in all
respects subject to and qualified in its entirety by reference to the applicable
provisions of the Company's Charter, including the Articles Supplementary
applicable to the Class C Common Stock, and Bylaws. The Company has issued
1,176,470 shares of Class C Common Stock, par value $0.0001 per share, all of
which were outstanding as of June 30, 1997.
The Class C Common Stock ranks on a parity with the Company's Common Stock
and Class B Common Stock with respect to dividends. The Class C Common Stock was
sold in March 1996 to an institutional investor at a price per share of $25.50.
The initial per share dividend of the Class C Common
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Stock was set at $1.73. The dividend per share on the Class C Common Stock is
increased or decreased by the same dollar amount as any increase or decrease in
the dividend distributions made to the holders of Common Stock. The Company
currently pays regular dividends to the holder of Class C Common Stock.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Class C Common Stock are entitled to receive, on a parity with
the holders of Class B Common Stock and prior and in preference to the holders
of Common Stock, an amount per share of Class C Common Stock equal to all
declared but unpaid dividends for each share of Class C Common Stock. The Class
C Common Stock has not been registered under the Securities Act. The
institutional investor who purchased the shares of Class C Common Stock has
certain demand registration rights for eight years following the March 1996 sale
of such shares to register in each instance Common Stock having a market value
of $1.0 million or more. Subject to certain limitations, the Class C Common
Stock may be converted into Common Stock on a one-for-one basis three years
after the March 1996 sale or earlier upon the occurrence of certain events
including a change in management. The holders of Class C Common Stock are not
entitled to vote on matters voted on by stockholders of the Company.
SERIES A PREFERRED STOCK
The following description of the Company's Series A Preferred Stock is in
all respects subject to and qualified in its entirety by reference to the
applicable provisions of the Company's Charter, including the Articles
Supplementary applicable to the Series A Preferred Stock, and Bylaws. The
Company is authorized to issue 1,000,000 shares of Series A Preferred Stock, all
of which were issued and outstanding as of June 30, 1997 and held of record by
one private investor. The Series A Preferred Stock ranks senior to the Company's
Common Stock, Class B Common Stock and Class C Common Stock as to dividends and
liquidation amounts. The dividend per share on the Series A Preferred Stock is
equal to the dividend per share on the Common Stock as multiplied by the number
of shares of Common Stock into which each share of Series A Preferred Stock is
convertible, provided that the dividend rate on the Series A Preferred Stock may
not be less than the initial dividend rate thereof. The dividends on the Series
A Preferred Stock are cumulative. The Company currently pays regular dividends
to holders of Series A Preferred Stock.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A Preferred Stock are entitled to receive on a parity with
the holders of Series B Preferred Stock, prior and in preference to any
distribution to the holders of Common Stock, Class B Common Stock and Class C
Common Stock, an amount per share of Series A Preferred Stock equal to the sum
of $25.00 and any accrued but unpaid dividends with respect thereto. The Company
may redeem, subject to certain exceptions, from any source of funds legally
available therefor, on or at any time after May 13, 1999, any or all outstanding
shares of Series A Preferred Stock at the option of the Company by paying in
cash therefor an amount per share equal to the sum of $25.00 and any accrued but
unpaid dividends with respect thereto.
Each share of Series A Preferred Stock is convertible, at the option of the
holder thereof at any time prior to a redemption date, into shares of Common
Stock based on a certain formula. Under such formula, the 1,000,000 outstanding
shares of Series A Preferred Stock are convertible into 1,219,512 shares of
Common Stock. The holder of each share of Series A Preferred Stock has the right
to one vote for each share of Common Stock into which such Series A Preferred
Stock can be converted, and with respect to such vote, such holder has the
voting rights and powers of the holders of each share of Common Stock, and is
entitled to notice of any stockholders' meeting in accordance with the Bylaws of
the Company, and is entitled to vote, together with holders of Common Stock,
with respect to any question upon which holders of Common Stock have the right
to vote.
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SERIES B PREFERRED STOCK
The following description of the Company's Series B Preferred Stock is in
all respects subject to and qualified in its entirety by reference to the
applicable provisions of the Charter, including the Company's Articles
Supplementary applicable to the Series B Preferred Stock, and Bylaws. The
Company is authorized to issue 5,000,000 shares of Series B Preferred Stock, of
which 4,250,000 shares were issued and outstanding as of June 30, 1997. The
holders of the Series B Preferred Stock are entitled to receive cumulative,
preferential cash dividends, when and as declared by the Board of Directors, of
$2.3625 per share. The Company currently pays regular dividends to holders of
Series B Preferred Stock.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series B Preferred Stock are entitled to receive on a parity with
the holders of Series A Preferred Stock, prior and in preference to any
distribution to the holders of Common Stock, Class B Common Stock and Class C
Common Stock, an amount per share of Series B Preferred Stock equal to the sum
of $25.00 and any accrued but unpaid dividends with respect thereto. The Company
may redeem, subject to certain exceptions, from any source of funds legally
available therefor, on or at any time after December 11, 2000, any or all
outstanding shares of Series B Preferred Stock at the option of the Company by
paying in cash therefor an amount per share equal to the sum of $25.00 and any
accrued but unpaid dividends with respect thereto, without interest.
The Series B Preferred Stock is not convertible into or exchangeable for
any other property or securities of the Company at the option of the holder.
However, in order to preserve the Company's status as a REIT for federal income
tax purposes, the Series B Preferred Stock may be exchanged for Excess Stock.
See "Description of Common Stock -- General." Except in limited circumstances,
the holders of shares of Series B Preferred Stock have no voting rights.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code) during the last half of a taxable year, the stock must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year and
certain percentages of the Company's gross income must be from particular
activities (see "Federal Income Tax Considerations -- Requirements for
Qualification -- Gross Income Tests"). To enable the Company to continue to
qualify as a REIT, the Charter restricts the acquisition of shares of common
stock and preferred stock.
The Charter provides that, subject to certain exceptions specified in the
Charter, no stockholder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.9% of the value of the
outstanding common stock and preferred stock (the "Ownership Limit"). The Board
of Directors may waive the Ownership Limit in certain limited situations if the
Board receives a ruling of the Internal Revenue Service (the "IRS")or an opinion
of counsel to the effect that such ownership will not jeopardize the Company's
status as a REIT. As a condition to such waiver, the Board of Directors may
require representations and undertakings from the applicant with respect to
preserving the REIT status of the Company. The Ownership Limit will not apply if
the Board of Directors and the stockholders of the Company determine that it is
no longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT. If the issuance or transfer of shares of common
stock or preferred stock to any person would cause such person to exceed the
Ownership Limit (unless a waiver of the Board of Directors has been obtained),
would cause the Company to be beneficially owned by fewer than 100 persons or
cause the Company to become "closely held" under Section 856(h) of the Code,
such issuance or transfer shall be null and void and the intended transferee
will acquire no rights to such shares.
The Charter also provides that shares involved in a transfer or change in
capital structure that results in a person owning in excess of the Ownership
Limit (unless a waiver of the Board of Directors has been obtained), would cause
the Company to be beneficially owned by fewer than persons, or would cause
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the Company to become "closely held" within the meaning of Section 856(h) of the
Code will automatically be exchanged for Excess Stock. All Excess Stock will be
transferred, without action by the stockholder, to the Company as trustee of a
trust for the exclusive benefit of the transferee or transferees to whom the
Excess Stock is ultimately transferred. While the Excess Stock is held in trust,
it will not be entitled to vote, it will not be considered for purposes of any
stockholder vote or the determination of a quorum for such vote and it will not
be entitled to participate in any distributions made by the Company, except upon
liquidation. The Company would have the right, for a period of 90 days during
the time the Excess Stock is held by the Company in trust, to purchase all or
any portion of the Excess Stock from the intended transferee at the lesser of
the price paid for the stock by the intended transferee and the closing market
price for the stock on the date the Company exercises its option to purchase.
The Ownership Limit provision of the Charter will not be automatically
removed even if the real estate investment trust provisions of the Code are
changed so as to no longer contain any ownership concentration limitation or if
the ownership concentration limitation is increased. Except as otherwise
described above, any change in the Ownership Limit would require an amendment to
the Charter. Such amendments to the Charter require the affirmative vote of
holders owning a majority of the total number of shares of all classes of stock
outstanding and entitled to vote thereon. In addition to preserving the
Company's status as a real estate investment trust, the Ownership Limit may have
the effect of precluding an acquisition of control of the Company.
All certificates representing shares of common stock and preferred stock
will bear a legend referring to the restrictions described above.
All persons who own of record, more than 5% of the outstanding common stock
and preferred stock (or 1% if there are more than 200 but fewer than 2,000
stockholders or one-half of 1% if there are 200 or less stockholders of record)
must file an affidavit with the Company containing the information specified in
the Charter within 30 days after January 1 of each year. In addition, each
stockholder shall upon demand be required to disclose to the Company in writing
such information with respect to the direct, indirect and constructive ownership
of shares as the Board of Directors deems necessary to determine the Company's
status as a real estate investment trust and to ensure compliance with the
Ownership Limit.
The articles supplementary, if applicable, for the Offered Securities may
also contain provisions that further restrict the ownership and transfer of the
Offered Securities. The applicable Prospectus Supplement will specify any
additional ownership limitation relating to the Offered Securities.
DESCRIPTION OF PREFERRED STOCK
GENERAL
Subject to limitations prescribed by Maryland law and the Company's
Charter, the Board of Directors is authorized to issue, from the authorized but
unissued shares of capital stock of the Company, Preferred Stock in such classes
or series as the Board of Directors may determine and to establish from time to
time the number of shares of Preferred Stock to be included in any such class or
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 any such class or
series, and such other subjects or matters as may be fixed by resolution of the
Board of Directors. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company.
Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Prospectus Supplement relating to that class or series, including a Prospectus
Supplement providing that Preferred Stock may be issuable upon the exercise of
Warrants issued by the Company. The description of Preferred Stock set forth
below and the description of the terms of a particular class or
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series of Preferred Stock set forth in a Prospectus Supplement do not purport to
be complete and are qualified in their entirety by reference to the articles
supplementary relating to that class or series.
The preferences and other terms of the Preferred Stock of each class or
series will be fixed by the articles supplementary relating to such class or
series. A Prospectus Supplement, relating to each class or series, will specify
the terms of the Preferred Stock as follows:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(3) The dividend rate(s), period(s), and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Stock;
(4) Whether such Preferred Stock is cumulative or not and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(5) The provision for a sinking fund, if any, for such Preferred
Stock;
(6) The provision for redemption, if applicable, of such Preferred
Stock;
(7) Any listing of such Preferred Stock on any securities exchange;
(8) The terms and conditions, if applicable, upon which such Preferred
Stock will be converted into Common Stock of the Company, including the
conversion price (or manner of calculation thereof);
(9) A discussion of any material federal income tax considerations
applicable to such Preferred Stock;
(10) 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;
(11) The relative ranking and preferences of such Preferred Stock as
to dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(12) Any limitations on issuance of any class or series of preferred
stock ranking senior to or on a parity with such class or series of
Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company;
(13) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock; and
(14) Any voting rights of such Preferred Stock.
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 and excess stock of the Company, and to all equity
securities ranking junior to such Preferred Stock with respect to dividend
rights and rights upon liquidation, dissolution or winding up of the Company;
(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 with respect to dividends rights or rights upon liquidation,
dissolution or winding up of the Company; 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 with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
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CONVERSION RIGHTS
The terms and conditions, if any, upon which any shares of any class or
series of Preferred Stock are convertible into Common Stock will be set forth in
the applicable Prospectus Supplement relating thereto. Such terms will include
the number of shares of Common Stock into which the shares of 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 such class or series of 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 class or series of Preferred
Stock.
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue Depositary Shares, each of which will represent a
fractional interest of a share of a particular class or series of Preferred
Stock, as specified in the applicable Prospectus Supplement. Shares of a class
or series of Preferred Stock represented by Depositary Shares will be deposited
under a separate Deposit Agreement (each, a "Deposit Agreement") among the
Company, the depositary named therein (the "Preferred Stock Depositary") and the
holders from time to time of the depositary receipts issued by the Preferred
Stock Depositary which will evidence the Depositary Shares ("Depositary
Receipts"). Subject to the terms of the Deposit Agreement, each owner of a
Depositary Receipt will be entitled, in proportion to the fractional interest of
a share of a particular class or series of Preferred Stock represented by the
Depositary Shares evidenced by such Depositary Receipt, to all the rights and
preferences of the class or series of the Preferred Stock represented by such
Depositary Shares (including dividend, voting, conversion, redemption and
liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the Preferred Stock by the Company to a Preferred Stock
Depositary, the Company will cause such Preferred Stock Depositary to issue, on
behalf of the Company, the Depositary Receipts. Copies of the applicable form of
Deposit Agreement and Depositary Receipt may be obtained from the Company upon
request, and the statements made hereunder relating to the Deposit Agreement and
the Depositary Receipt to be issued thereunder are summaries of certain
anticipated provisions thereof and do not purport to be complete and are subject
to, and qualified in their entirety by reference to, all of the provisions of
the applicable Deposit Agreement and related Depositary Receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions received in respect of a class or series of Preferred Stock
to the record holders of Depositary Receipts evidencing the related Depositary
Shares in proportion to the number of the such Depositary Receipts owned by such
holders, subject to certain obligations of holders to file proofs, certificates
and other information and to pay certain charges and expenses to such Preferred
Stock Depositary.
In the event of a distribution other than in cash, the Preferred Stock
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject to certain obligations of holders
to file proofs, certificates and other information and to pay certain charges
and expenses to the Preferred Stock Depositary, unless such Preferred Stock
Depositary determines that it is not feasible to make such distribution, in
which case the Preferred Stock Depositary may, with the approval of the Company,
sell such property and distribute the net proceeds from such sale to such
holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any class or series of Preferred Stock converted into
Excess Stock or otherwise converted or exchanged.
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WITHDRAWAL OF STOCK
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Stock Depositary (unless the related Depositary Shares have
previously been called for redemption or converted or converted into Excess
Stock or otherwise), the holders thereof will be entitled to delivery at such
office, to or upon each such holder's order, of the number of whole or
fractional shares of the class or series of Preferred Stock and any money or
other property represented by the Depositary Shares evidenced by such Depositary
Receipts. Holders of Depositary Receipts will be entitled to receive whole or
fractional shares of the related class or series of Preferred Stock on the basis
of the proportion of Preferred Stock represented by each Depositary Share as
specified in the applicable Prospectus Supplement, but holders of such shares of
Preferred Stock will not thereafter be entitled to receive Depositary Shares
therefor. If the Depositary Receipts delivered by the holder evidence a number
of Depositary Shares in excess of the number of Depositary Shares representing
the number of shares of Preferred Stock to be withdrawn, the Preferred Stock
Depositary will deliver to such holder at the same time a new Depositary Receipt
evidencing such excess number of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems shares of Preferred Stock held by the
Preferred Stock Depositary, the Preferred Stock Depositary will redeem as of the
same redemption date the number of the Depositary Shares representing shares of
such class or series of Preferred Stock so redeemed, provided the Company shall
have paid in full to the Preferred Stock Depositary the redemption price of the
Preferred Stock to be redeemed plus an amount equal to any accrued and unpaid
dividends thereon to the date fixed for redemption. The redemption price per
Depositary Share will be equal to the corresponding proportion of the redemption
price and any other amounts per share payable with respect to such class or
series of Preferred Stock. If fewer than all the Depositary Shares are to be
redeemed, the Depositary Shares to be redeemed will be selected pro rata (as
nearly as may be practicable without creating fractional Depositary Shares) or
by any other equitable method determined by the Company that will not result in
the issuance of any Excess Stock.
From and after the date fixed for redemption, all dividends in respect of
the shares of a class of series of Preferred Stock so called for redemption will
cease to accrue, the Depositary Shares so called for redemption will no longer
be deemed to be outstanding and all rights of the holders of the Depositary
Receipts evidencing the Depositary Shares so called for redemption will cease,
except the right to receive any moneys payable upon such redemption and any
money or other property to which the holders of such Depositary Receipts were
entitled upon such redemption upon surrender thereof to the Preferred Stock
Depositary.
VOTING OF THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of a class or
series of Preferred Stock deposited with the Preferred Stock Depositary are
entitled to vote, the Preferred Stock Depositary will mail the information
contained in such notice of meeting to the record holders of the Depositary
Receipts evidencing the Depositary Shares which represent such class or series
of Preferred Stock. Each record holder of Depositary Receipts evidencing
Depositary Shares on the record date (which will be the same date as the record
date for such class or series of Preferred Stock) will be entitled to instruct
the Preferred Stock Depositary as to the exercise of the voting rights
pertaining to the amount of Preferred Stock represented by such holder's
Depositary Shares. The Preferred Stock Depositary will vote the amount of such
class or series of Preferred Stock represented by such Depositary Shares in
accordance with such instructions, and the Company will agree to take all
reasonable action which may be deemed necessary by the Preferred Stock
Depositary in order to enable the Preferred Stock Depositary to do so. The
Preferred Stock Depositary will abstain from voting the amount of Preferred
Stock represented by such Depositary Shares to the extent it does not receive
specific instructions from the holders of Depositary Receipts evidencing such
Depositary Shares. The Preferred Stock Depositary will not be responsible for
any failure to carry out any instruction to vote, or for the manner or effect of
any such vote
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made, as long as any such action or non-action is in good faith and does not
result from negligence or willful misconduct of the Preferred Stock Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company
whether voluntary or involuntary, the holders of each Depositary Receipt will be
entitled to the fraction of the liquidation preference accorded each share of
Preferred Stock represented by the Depositary Share evidenced by such Depositary
Receipt as set forth in the applicable Prospectus Supplement.
CONVERSION OF PREFERRED STOCK
The Depositary Shares, as such, will not be convertible into Common Stock
or any other securities or property of the Company, except in connection with
certain exchanges in connection with the preservation of the Company's status as
a REIT. See "Description of Common Stock -- Restrictions on Transfer."
Nevertheless, if so specified in the applicable Prospectus Supplement relating
to an offering of Depositary Shares, the Depositary Receipts may be surrendered
by holders thereof to the applicable Preferred Stock Depositary with written
instructions to the Preferred Stock Depositary to instruct the Company to cause
conversion of a class or series of Preferred Stock represented by the Depositary
Shares evidenced by such Depositary Receipts into whole shares of Common Stock,
other shares of a class or series of Preferred Stock (including Excess Stock) of
the Company or other shares of stock, and the Company has agreed that upon
receipt of such instructions and any amounts payable in respect thereof, it will
cause the conversion thereof utilizing the same procedures as those provided for
delivery of Preferred Stock to effect such conversion. If the Depositary Shares
evidenced by a Depositary Receipt are to be converted in part only, a Depositary
Receipt or Receipts will be issued for any Depositary Shares not to be
converted. No fractional shares of Common Stock will be issued upon conversion,
and if such conversion will result in a fractional share being issued, an amount
will be paid in cash by the Company equal to the value of the fractional
interest based upon the closing price of the Common Stock on the last business
day prior to the conversion.
AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing Depositary Shares which represent
the Preferred Stock and any provision of the Deposit Agreement may at any time
be amended by agreement between the Company and the Preferred Stock Depositary.
However, any amendment that materially and adversely alters the rights of the
holders of Depositary Receipts or that would be materially and adversely
inconsistent with the rights granted to the holders of the related Preferred
Stock will not be effective unless such amendment has been approved by the
existing holders of at least two-thirds of the applicable Depositary Shares
evidenced by the applicable Depositary Receipts then outstanding. No amendment
shall impair the right, subject to certain anticipated exceptions in the Deposit
Agreements, of any holder of Depositary Receipts to surrender any Depositary
Receipt with instructions to deliver to the holder the related class or series
of Preferred Stock and all money and other property, if any, represented
thereby, except in order to comply with law. Every holder of an outstanding
Depositary Receipt at the time any such amendment becomes effective shall be
deemed, by continuing to hold such Depositary Receipt, to consent and agree to
such amendment and to be bound by the applicable Deposit Agreement as amended
thereby.
The Deposit Agreement may be terminated by the Company upon not less than
30 days' prior written notice to the Preferred Stock Depositary if (i) such
termination is necessary to preserve the Company's status as a REIT or (ii) a
majority of each series class or of Preferred Stock subject to such Deposit
Agreement consents to such termination, whereupon the Preferred Stock Depositary
will deliver or make available to each holder of Depositary Receipts, upon
surrender of the Depositary Receipts held by such holder, such number of whole
or fractional shares of each Preferred Stock as are represented by the
Depositary Shares evidenced by such Depositary Receipts together with any other
property held by preferred Stock Depositary with respect to such Depositary
Receipts. The Company has agreed that if
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the Deposit Agreement is terminated to preserve the Company's status as a REIT,
then the Company will use its best efforts to list each class or series of
Preferred Stock issued upon surrender of the related Depositary Shares. In
addition, the Deposit Agreement will automatically terminate if (i) all
outstanding Depositary Shares shall have been redeemed, (ii) there shall have
been a final distribution in respect of each class or series of Preferred Stock
in connection with any liquidation, dissolution or winding up of the Company and
such distribution shall have been distributed to the holders of the Depositary
Receipts evidencing the Depositary Shares representing such class or series of
Preferred Stock or (iii) each share of the related Preferred Stock shall have
been converted into stock of the Company not so represented by Depositary
Shares.
CHARGES OF A PREFERRED STOCK DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, the
Company will pay the fees and expenses of the Preferred Stock Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, holders of Depositary Receipts will pay the fees and expenses of the
Preferred Stock Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the Deposit
Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Preferred Stock Depositary may resign at any time by delivering to the
Company notice of its election to do so, and the Company may at any time remove
the Preferred Stock Depositary, any such resignation or removal to take effect
upon the appointment of a successor Preferred Stock Depositary. A successor
Preferred Stock Depositary must be appointed within 60 days after delivery of
the notice of resignation or removal and must be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
The Preferred Stock Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Stock Depositary with respect to the related Preferred Stock.
Neither the Preferred Stock Depositary nor the Company will be liable if it
is prevented from or delayed in, by law or any circumstances beyond its control,
performing its obligations under the Deposit Agreement. The obligations of the
Company and the Preferred Stock Depositary under the Deposit Agreement will be
limited to performing their duties thereunder in good faith and without
negligence (in the case of any action or inaction in the voting of a class or
series of Preferred Stock represented by the Depositary Shares), gross
negligence or willful misconduct, and the Company and the Preferred Stock
Depositary will not be obligated to prosecute or defend any legal proceeding in
respect of any Depositary Receipts, Depositary Shares or shares of a class or
series of Preferred Stock represented thereby unless satisfactory indemnity is
furnished. The Company and the Preferred Stock Depositary may rely on written
advice of counsel or accountants, or information provided by persons presenting
shares of Preferred Stock represented thereby for deposit, holders of Depositary
Receipts or other persons believed in good faith to be competent to give such
information, and on documents believed in good faith to be genuine and signed by
a proper party.
In the event a Preferred Stock Depositary shall receive conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Company, on the other hand, the Preferred Stock Depositary shall
be entitled to act on such claims, requests or instructions received from the
Company.
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DESCRIPTION OF WARRANTS
The Company has no Warrants outstanding (other than options issued under
the Company's employee stock option plan). The Company may issue Warrants for
the purchase of Preferred Stock or Common Stock. Warrants may be issued
independently or together with any other Offered Securities offered by any
Prospectus Supplement and may be attached to or separate from such Offered
Securities. Each series of Warrants will be issued under a separate warrant
agreement (each, a "Warrant Agreement") to be entered into between the Company
and a warrant agent specified in the applicable Prospectus Supplement (the
"Warrant Agent"). The Warrant Agent will act solely as an agent of the Company
in connection with the Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any provisions of the
Warrants offered hereby. Further terms of the 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
Warrants in respect of which this Prospectus is being delivered, including,
where applicable, the following: (1) the title of such Warrants; (2) the
aggregate number of such Warrants; (3) the price or prices at which such
Warrants will be issued; (4) the designation, terms and number of shares of
Preferred Stock or Common Stock purchasable upon exercise of such Warrants; (5)
the designation and terms of the Offered Securities, if any, with which such
Warrants are issued and the number of such Warrants issued with each such
Offered Security; (6) the date, if any, on and after which such Warrants and the
related Preferred Stock or Common Stock will be separately transferable; (7) the
price at which each share of Preferred Stock or Common Stock purchasable upon
exercise of such Warrants may be purchased; (8) the date on which the right to
exercise such Warrants shall commence and the date on which such right shall
expire; (9) the minimum or maximum amount of such Warrants which may be
exercised at any one time; (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 Warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
Warrants.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
Certain provisions of the Company's Charter and Bylaws might discourage
certain types of transactions that involve an actual or threatened change of
control of the Company. The Ownership Limit may delay or impede a transaction or
a change in control of the Company that might involve a premium price for the
Company's capital stock or otherwise be in the best interest of the
stockholders. See "Description of Common Stock -- Restrictions on Transfer."
Pursuant to the Company's Charter and Bylaws, the Company's Board of Directors
is divided into three classes of directors, each class serving staggered
three-year terms. In addition, directors may only be removed for cause and with
the vote of 80% of the shares eligible to vote. These provisions may reduce the
possibility of a tender offer or an attempt to change control of the Company.
The issuance of Preferred Stock by the Board of Directors may also have the
effect of delaying, deferring or preventing a change in control of the Company.
See "Description of Preferred Stock -- General."
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations is
based on current law and does not purport to deal with all aspects of taxation
that may be relevant to particular stockholders in light of their personal
investment or tax circumstances, or to certain types of stockholders (including
insurance companies, financial institutions and broker-dealers) subject to
special treatment under the federal income tax laws. Certain federal income tax
considerations relevant to holders of the Offered Securities will be provided in
the applicable Prospectus Supplement relating thereto.
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EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES.
GENERAL
The Company believes that since its formation it has operated in a manner
that permits it to satisfy the requirements for taxation as a REIT under the
applicable provisions of the Code. The Company intends to continue to operate to
satisfy such requirement. No assurance can be given, however, that such
requirements will be met.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following sets forth the material aspects
of the laws that govern the federal income tax treatment of a REIT and its
stockholders. This summary is qualified in its entirety by the applicable Code
provisions, rules and regulations thereunder, and administrative and judicial
interpretations thereof. Morrison & Foerster LLP has acted as tax counsel to the
Company in connection with the Company's election to be taxed as a REIT.
In the opinion of Morrison & Foerster LLP, commencing with the Company's
taxable year ended December 31, 1993, the Company has been organized in
conformity with the requirements for qualification as a REIT, and its method of
operation has and will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet,
through actual annual operating results, distribution levels and diversity of
stock ownership, the various qualification tests imposed under the Code
discussed below, the results of which will not be reviewed by Morrison &
Foerster LLP. Accordingly, no assurance can be given that the actual results of
the Company's operations for any particular taxable year will satisfy such
requirements. See "-- Failure to Qualify."
In brief, if certain detailed conditions imposed by the REIT provisions of
the Code are satisfied, entities, such as the Company, that invest primarily in
real estate and that otherwise would be treated for federal income tax purposes
as corporations, are generally not taxed at the corporate level on their "REIT
taxable income" that is currently distributed to stockholders. This treatment
substantially eliminates the "double taxation" (i.e., taxation at both the
corporate and stockholder levels) that generally results from investing in
corporations.
If the Company fails to qualify as a REIT in any year, however, it will be
subject to federal income tax as if it were a domestic corporation, and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. In this event, the Company could be subject to potentially
significant tax liabilities and the amount of cash available for distribution to
its stockholders could be reduced.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, in general it will
not be subject to federal income tax on that portion of its net income that it
distributes to stockholders. However, the Company will be subject to federal
income tax as follows: First, the Company will be taxed at regular corporate
rates on any undistributed real estate investment trust taxable income,
including undistributed net capital gains. (However, beginning in 1998, a REIT
can elect to "pass through" any of its taxes paid on its undistributed net
capital gains income to its stockholders on a pro rata basis.) Second, under
certain circumstances, the Company may be subject to the "alternative minimum
tax" on its items of tax preference. Third, if the Company has (i) net income
from the sale or other disposition of "foreclosure property" which is held
primarily for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general,
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certain sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business, other than property held for at
least four years, foreclosure property, and, beginning in 1998, property
involuntarily converted), such income will be subject to a 100% tax. Fifth, if
the Company should fail to satisfy the 75% or the 95% tests (as discussed
below), and has nonetheless maintained its qualification as a REIT because
certain other requirements have been satisfied, it will be subject to a 100% tax
on the net income attributable to the greater of the amount by which the REIT
fails the 75% or 95% test. Sixth, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its real estate
investment trust ordinary income for such year, (ii) 95% of its real estate
investment trust capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if the Company acquires any asset from a C
corporation (i.e., generally a corporation subject to full corporate-level tax)
in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other property) in the
hands of the C corporation, and the Company recognizes gain on the disposition
of such asset during the 10 year period beginning on the date on which such
asset was acquired by the REIT, then, to the extent of any built-in gain at the
time of acquisition, such gain will be subject to tax at the highest regular
corporate rate.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (1) which is
managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (3) which would be taxable as a domestic corporation, but
for Sections 856 through 860 of the Code; (4) which 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) 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) at any time
during the last half of each taxable year; and (7) which meets certain other
tests, described below, regarding the nature of income and assets. The Code
provides that conditions (1) to (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. Conditions (5) and (6) will not apply until after the first
taxable year for which an election is made by the Company to be taxed as a REIT.
Beginning in 1998, a REIT's failure to satisfy condition (6) during a taxable
year will not result in its disqualification as REIT under the Code for such
taxable year as long as (i) the REIT satisfies the stockholder demand statement
requirements described in the succeeding paragraph and (ii) the REIT did not
know, and exercising due diligence, would not have known, whether it had failed
condition (6).
In order to ensure compliance with the ownership tests described above, the
Company has placed certain restrictions on the transfer of the Common Stock and
Preferred Stock to prevent further concentration of stock ownership. Moreover,
to evidence compliance with these requirements, the Company must maintain
records which disclose the actual ownership of its outstanding Common Stock and
Preferred Stock. In fulfilling its obligations to maintain records, the Company
must and will demand written statements each year from the record holders of
designated percentages of its Common Stock and Preferred Stock disclosing the
actual owners of such Common Stock and Preferred Stock. A list of those persons
failing or refusing to comply with such demand must be maintained as part of the
Company's records. A stockholder failing or refusing to comply with the
Company's written demand must submit with his tax returns a similar statement
disclosing the actual ownership of Common Stock and Preferred Stock and certain
other information. In addition, the Company's Charter provides restrictions
regarding the transfer of its shares that are intended to assist the Company in
continuing to satisfy the share ownership requirements. See "Description of
Common Stock -- Restrictions on Transfer."
Although the Company intends to satisfy the stockholder demand statement
requirements described in the preceding paragraph, beginning in 1998, its
failure to satisfy these requirements will not result in
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its disqualification as a REIT under the Code but may result in the imposition
of IRS penalties against the Company.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of a partnership shall retain the same character in the
hands a partner qualifying as a REIT for purposes of Section 856 of the Code,
including satisfying the gross income tests and the asset tests, described
below. Thus, the Company's proportionate share of the assets, liabilities and
items of income of the Operating Partnership will be treated as assets,
liabilities and items of income of the Company for purposes of applying the
requirements described below.
ASSET TESTS
At the close of each quarter of the Company's taxable year, the Company
must satisfy two tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by interests in
real property, interests in mortgages on real property, shares in other REITs,
cash, cash items and government securities (as well as certain temporary
investments in stock or debt instruments purchased with the proceeds of new
capital raised by the Company). Second, although the remaining 25% of the
Company's assets generally may be invested without restriction, securities in
this class may not exceed either (i) 5% of the value of the Company's total
assets as to any one nongovernment issuer, or (ii) 10% of the outstanding voting
securities of any one issuer. The Company's investment in the Properties through
its interest in the Operating Partnership constitutes qualified assets for
purposes of the 75% asset test. In addition, the Company may own 100% of
"qualified REIT subsidiaries," which are, in general, 100% owned, corporate
subsidiaries of a REIT. All assets, liabilities, and items of income, deduction,
and credit of such a qualified REIT subsidiary will be treated as owned and
realized directly by the Company. The Company's investment in Spieker Northwest,
Inc. is not a qualifying asset for purposes of the 75% asset test. The Company
expects, however, that such investment will continue to represent less than 5%
of the Company's total assets and, together with any other nonqualifying assets,
will continue to represent less than 25% of the Company's total assets.
GROSS INCOME TESTS
There are three separate percentage tests (two beginning in 1998)relating
to the sources of the Company's gross income which must be satisfied for each
taxable year. For purposes of these tests, where the Company invests in a
partnership, the Company will be treated as receiving its share of the income
and loss of the partnership, and the gross income of the partnership will retain
the same character in the hands of the Company as it has in the hands of the
partnership. See "-- Tax Aspects of the Company's Investment in the Operating
Partnerships -- General."
The 75% Test. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes (i) rents
from real property (except as modified below); (ii) interest on obligations
collateralized by mortgages on, or interests in, real property; (iii) gains from
the sale or other disposition of interests in real property and real estate
mortgages, other than gain from property held primarily for sale to customers in
the ordinary course of the Company's trade or business ("dealer property"); (iv)
dividends or other distributions on shares in other REITs, as well as gain from
the sale of such shares; (v) abatements and refunds of real property taxes; (vi)
income from the operation, and gain from the sale, of property acquired at or in
lieu of a foreclosure of the mortgage collateralized by such property
("foreclosure property"); and (vii) commitment fees received for agreeing to
make loans collateralized by mortgages on real property or to purchase or lease
real property.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% test described below) if the
Company, or an owner of 10% or more of the Company, directly or constructively
owns 10% or more of such tenant (a "related party tenant"). In addition, if rent
attributable to personal property, leased in connection with a lease of real
property, is
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greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as rents from real
property. Moreover, an amount received or accrued generally will not qualify as
rents from real property (or as interest income) for purposes of the 75% and 95%
tests if it is based in whole or in part on the income or profits of any person.
Rent or interest will not be disqualified, however, solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Finally, for
rents received to qualify as rents from real property, the Company generally
must not operate or manage the property or furnish or render services to
tenants, other than through an "independent contractor" from whom the Company
derives no revenue. The "independent contractor" requirement, however, does not
apply to the extent that the services provided by the Company are "usually or
customarily rendered" in connection with the rental of space for occupancy only,
and are not otherwise considered "rendered to the occupant." For both the
related party tenant rules and determining whether an entity qualifies as an
independent contractor of a REIT, certain attribution rules of the Code apply,
pursuant to which shares of a REIT held by one entity are deemed held by
another.
Under current law, if a REIT provides impermissible services to its
tenants, all of the rent from those tenants can be disqualified from satisfying
the 75% test and 95% test (described below). Beginning in 1998, however, rents
will not be disqualified if a REIT provides de minimis, impermissible services.
For this purpose, services provided to tenants of a property are considered de
minimis where income derived from the services rendered equals 1% or less of all
income derived from the property (threshold determined on a property-by-property
basis).
The Company, through the Operating Partnership (which is not an independent
contractor of the Company), will provide certain services with respect to the
Properties and any newly acquired Properties. The Company believes that the
services provided by the Operating Partnership are usually or customarily
rendered in connection with the rental of space of occupancy only, and therefore
that the provision of such services will not cause the rents received with
respect to the Properties to fail to qualify as rents from real property for
purposes of the 75% and 95% tests. The Company does not intend to rent to
related party tenants or to charge rents that would not qualify as rents from
real property because the rents are based on the income or profits of any person
(other than rents that are based on a fixed percentage or percentages of
receipts or sales).
The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company's gross income for the taxable
year must be derived from the above-described qualifying income, or from
dividends, interest or gains from the sale or disposition of stock or other
securities that are not dealer property. Dividends and interest on any
obligation not collateralized by an interest on real property are included for
purposes of the 95% test, but not for purposes of the 75% test. For purposes of
determining whether the Company complies with the 75% and 95% tests, gross
income does not include income from prohibited transactions. A "prohibited
transaction" is a sale of dealer property, excluding certain property held by
the Company for at least four years and foreclosure property. See "-- Taxation
of the Company" and "-- Tax Aspects of the Company's Investment in the Operating
Partnership -- Sale of the Properties."
The Company believes that it and the Operating Partnership has held and
managed the Properties in a manner that has given rise to rental income
qualifying under the 75% and 95% tests. Gains on sales of the Properties will
generally qualify under the 75% and 95% tests.
Even if the Company fails to satisfy one or both of the 75% or 95% tests
for any taxable year, it may still qualify as a REIT for such year if it is
entitled to relief under certain provisions of the Code. These relief provisions
will generally be available if: (i) the Company's failure to comply was due to
reasonable cause and not to willful neglect; (ii) the Company reports the nature
and amount of each item of its income included in the 75% and 95% tests on a
schedule attached to its tax return; and (iii) any incorrect information on this
schedule is not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances the Company would be entitled to
the benefit of these relief provisions. If these relief provisions apply, the
Company will, however, still be subject to a special tax upon the greater of the
amount by which it fails either the 75% or 95% test for that year.
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The 30% Test. The Company must derive less than 30% of its gross income
for each taxable year from the sale or other disposition of (i) real property
held for less than four years (other than foreclosure property and involuntary
conversions), (ii) stock or securities held for less than one year, and (iii)
property in a prohibited transaction. The Company does not anticipate that it
will have any substantial difficulty in complying with this test. The 30% test
has been repealed, effective for tax years beginning after December 31, 1997.
ANNUAL DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders each year in
an amount at least equal to (A) the sum of (i) 95% of the Company's REIT taxable
income (computed without regard to the dividends paid deduction and the REIT's
net capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute all
of its net capital gain or distributes at least 95%, but less than 100%, of its
REIT taxable income, as adjusted, it will be subject to tax on the undistributed
amount at regular capital gains or ordinary corporate tax rates, as the case may
be. (However, beginning in 1998, a REIT can elect to "pass through" any of its
taxes paid on its undistributed net capital gains income to its stockholders on
a pro rata basis.) Furthermore, if the REIT should fail to distribute during
each calendar year at least the sum of (i) 85% of its ordinary income for such
year, (ii) 95% of its net capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the REIT would be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed.
The Company believes that it has made timely distributions sufficient to
satisfy the annual distribution requirements. In this regard, the partnership
agreement of the Operating Partnership authorizes the Company, as general
partner, to take such steps as may be necessary to cause the Operating
Partnership to distribute to its partners an amount sufficient to permit the
Company to meet these distribution requirements. It is possible that in the
future the Company may not have sufficient cash or other liquid assets to meet
the 95% distribution requirement, due to timing differences between the actual
receipt of income and actual payment of expenses on the one hand, and the
inclusion of such income and deduction of such expenses in computing the
Company's REIT taxable income on the other hand. Further, as described below, it
is possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciated property that exceeds its
allocable share of cash attributable to that sale. To avoid any problem with the
95% distribution requirement, the Company will closely monitor the relationship
between its REIT taxable income and cash flow and, if necessary, will borrow
funds (or cause the Operating Partnership or other affiliates to borrow funds)
in order to satisfy the distribution requirement. The Company (through the
Operating Partnership) may be required to borrow funds at times when market
conditions are not favorable.
If the Company fails to meet the 95% distribution requirement as a result
of an adjustment to the Company's tax return by the IRS, the Company may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company, nor will they be
required to be made. In such event, to the extent of the Company's current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific
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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 the Company would be entitled to
such statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
GENERAL
The Company holds a direct ownership interest in the Operating Partnership.
In general, partnerships are "pass-through" entities which are not subject to
federal income tax. Rather, partners are allocated their proportionate shares of
the items of income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. The Company includes its
proportionate share of the foregoing Operating Partnership items for purposes of
the various REIT income tests and in the computation of its REIT taxable income.
See "-- Taxation of the Company" and "-- Requirements for Qualification -- Gross
Income Tests." Any resultant increase in the Company's REIT taxable income
increases its distribution requirements (see "-- Requirements for
Qualification -- Annual Distribution Requirements"), but is not subject to
federal income tax in the hands of the Company provided that such income is
distributed by the Company to its stockholders. Moreover, for purposes of the
REIT asset tests (see "-- Requirements for Qualification -- Asset Tests"), the
Company includes its proportionate share of assets held by the Operating
Partnership.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership (such as certain of
the Properties), must be allocated in a manner such that the contributing
partner is charged with, or benefits from, respectively, the unrealized gain or
unrealized loss associated with the property at the time of the contribution.
The amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of contributed property at the time of
contribution, and the adjusted tax basis of such property at the time of
contribution (a "Book-Tax Difference"). Such allocations are solely for federal
income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. The Operating Partnership was
initially formed by way of contributions of appreciated property (including
certain of the Properties). Consequently, the partnership agreement of the
Operating Partnership requires such allocations to be made in a manner
consistent with Section 704(c) of the Code.
In general, the limited partners of the Operating Partnership will be
allocated lower amounts of depreciation deductions for tax purposes and
increased taxable income and gain on sale by the Operating Partnership of the
contributed assets (including certain of the Properties). This will tend to
eliminate the Book-Tax Difference over the life of the Operating Partnership.
However, the special allocation rules under Section 704(c) of the Code do not
always entirely rectify the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Thus, the carryover
basis of the contributed assets in the hands of the Operating Partnership may
cause the company to be allocated lower depreciation and other deductions, and
possibly greater amounts of taxable income in the event of a sale of such
contributed assets in excess of the economic or book income allocated to it as a
result of such sale. This may cause the Company to recognize taxable income in
excess of cash proceeds, which might adversely affect the Company's ability to
comply with the REIT distribution requirements. See "-- Requirements for
Qualification -- Annual Distribution Requirements." In addition, the application
of Section 704(c) of the Code to the Operating Partnership is not entirely clear
and may be affected by authority that may be promulgated in the future.
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SALE OF THE PROPERTIES
Generally, any gain realized by the Operating Partnership on the sale of
property held by the Operating Partnership will be capital gain, except for any
portion of such gain that is treated as certain depreciation or cost recovery
recapture. The Company's share of any gain realized by the Operating Partnership
on the sale of any dealer property generally will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See "Taxation of
the Company" and "-- Requirements for Qualification -- Gross Income Tests -- The
95% Test." Under existing law, whether property is dealer property is a question
of fact that depends on all the facts and circumstances with respect to the
particular transaction. The Operating Partnership intends to hold the Properties
for investment with a view to long-term appreciation, to engage in the business
of acquiring, developing, owning and operating the Properties, and to make such
occasional sales of the Properties as are consistent with the Company's
investment objectives. Based upon such investment objectives, the Company
believes that in general the Properties should not be considered dealer property
and that the amount of income from prohibited transactions, if any, will not be
material.
TAXATION OF STOCKHOLDERS
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic stockholders 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. Stockholders that are corporations will not
be entitled to a dividends received deduction. To the extent that the Company
makes distributions in excess of current and accumulated earnings and profits,
these distributions are treated first as a tax-free return of capital to the
stockholder, reducing the tax basis of a stockholder's Common Stock by the
amount of such distribution (but not below zero), with distributions in excess
of the stockholders tax basis taxable as capital gains (if the Common Stock is
held as a capital asset). In addition, any dividend declared by the Company in
October, November or December of any year and 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 general, distributions which are designed by the Company as capital gain
dividends will be taxed to stockholders as gain from the sale of assets held for
greater than 1 year, or "long-term term capital gain," without regard to the
period for which a stockholder has held his stock upon which the capital gain
dividend is paid. However, corporate stockholders may be required to treat up to
20% of certain capital gain dividends as ordinary income.
The Taxpayer Relief Act of 1997 (the "1997 Act") created several new
categories of capital gains applicable to noncorporate taxpayers. Under prior
law, noncorporate taxpayers were generally taxed at a maximum rate of 28% on net
capital gain (generally, the excess of net long-term capital gain over net
short-term capital loss). Noncorporate taxpayers are now generally taxed at a
maximum rate of 20% on net capital gain attributable to gains realized on the
sale of property held for greater than 18 months, and a maximum rate of 28% on
net capital gain attributable to gain realized on the sale of property held for
greater than 1 year and 18 months or less. In addition, a 25% rate now applies
to noncorporate taxpayers on certain gains realized on the sale of real
property. The 1997 Act retains the treatment of short-term capital gain and did
not affect the taxation of corporate taxpayers.
The Treasury is authorized to issue regulations for application of the
reduced capital gains tax rates enacted under the 1997 Act to pass-through
entities, including REITs and partnerships (such as the Operating Partnership).
Noncorporate stockholders of the Company may therefore qualify for the reduced
rate of tax on capital gain dividends paid by the Company.
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Beginning in 1998, an election will be available under which a REIT may
retain its capital gains and pay tax thereon, and its stockholders will be
deemed to have received the capital gains and paid the tax. If the Company makes
this election, a stockholder will be deemed to have received his pro rata share
of the Company's capital gains and may claim a credit against his federal income
tax liability for his share of taxes paid by the Company on such gains.
In general, any loss upon a sale or exchange of Common Stock by a
stockholder who has held such 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
stockholder as long-term capital gain.
BACKUP WITHHOLDING
The Company will report to its domestic stockholders and to the Service 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
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid and redemption proceeds unless such stockholder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. The
Company may nevertheless institute backup withholding with respect to a
stockholder if instructed to do so by the IRS. A stockholder that does not
provide the Company with its correct taxpayer identification number may also be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the stockholder's income tax liability.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Based upon a published ruling by the IRS, distribution by the Company to a
stockholder that is a tax-exempt entity will not constitute "unrelated business
taxable income" ("UBTI") provided that the tax-exempt entity has not financed
the acquisition of its shares with "acquisition indebtedness" within the meaning
of the Code and the shares are not otherwise used in an unrelated trade or
business of the tax-exempt entity.
Notwithstanding the preceding paragraph, however, a portion of the
dividends paid by the Company may be treated as UBTI to certain domestic private
pension trusts if the Company is treated as a "pension-held REIT." The Company
believes that it is not, and does not expect to become a "pension-held REIT." If
the Company were to become a pension-held REIT, these rules generally would only
apply to certain pension trusts that held more than 10% of the Company's stock.
TAXATION OF FOREIGN STOCKHOLDERS
The following is a discussion of certain anticipated U.S. federal income
tax consequences of the ownership and disposition of the Company's stock
applicable to Non-U.S. Holders of such stock. A "Non-U.S. Holder" is any person
other than (i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States or of any state thereof, or (iii) an estate or trust whose income
is includable in gross income for U.S. federal income tax purposes regardless of
its source. The discussion is based on current law and is for general
information only. The discussion addresses only certain and not all aspects of
U.S. federal income taxation.
DISTRIBUTIONS FROM THE COMPANY
1. Ordinary Dividends. The portion of dividends received by Non-U.S.
Holders payable out of the Company's current and accumulated earnings and
profits which are not attributable to capital gains of the Company and which are
not effectively connected with a U.S. trade or business of the Non-U.S. Holder
will be subject to U.S. withholding tax at the rate of 30% (unless reduced by
treaty). In general,
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Non-U.S. Holders will not be considered engaged in a U.S. trade or business
solely as a result of their ownership of stock of the Company. In cases where
the dividend income from a Non-U.S. Holder's investment in stock of the company
is (or is treated as) effectively connected with the Non-U.S. Holder's conduct
of a U.S. trade or business, the Non-U.S. Holder generally will be subject to
U.S. tax at graduated rates, in the same manner as U.S. stockholders are taxed
with respect to such dividends (and may also be subject to the 30% branch
profits tax in the case of a Non-U.S. Holder that is a foreign corporation).
2. Non-Dividend Distributions. Unless the Company's stock constitutes a
USRPI (as defined below), distributions by the Company which are not paid out of
the current and accumulated earnings and profits of the company will not be
subject to U.S. income or withholding tax. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of current and accumulated earnings and profits, the distribution will be
subject to withholding at the rate applicable to dividends. However, the
Non-U.S. Holder may seek a refund of such amounts from the Service if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company. If the Company's
stock constitutes a USRPI, such distribution shall be subject to 10% withholding
tax and may be subject to additional taxation under FIRPTA (as defined below).
3. Capital Gain Dividends. Under the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-US.
Holder, to the extent attributable to gains ("USRPI Capital Gains") from
dispositions of United States Real Property Interests ("USRPIs"), which includes
the properties beneficially owned by the Company, will be considered effectively
connected with a U.S. trade or business of the Non-U.S. Holder and therefore
will be subject to U.S. income tax at the rate applicable to U.S. individuals or
corporations, without regard to whether such distribution is designated as a
capital gain dividend. In addition, the Company will be required to withhold tax
equal to 35% of the amount of dividends to the extent such dividends constitute
USRPI Capital Gains. Distributions subject to FIRPTA may also be subject to a
30% branch profits in tax in the hands of a foreign corporate stockholder that
is not entitled to treaty exemption.
Disposition of Stock of the Company. Unless the Company's stock
constitutes a USRPI, a sale of such stock by a Non-U.S. Holder generally will
not be subject to U.S. taxation under FIRPTA. The stock will not constitute a
USRPI if the Company is a "domestically controlled REIT." A domestically
controlled REIT is a REIT in which, at all times during a specified testing
period, less than 50% in value of its shares is held directly or indirectly by
Non-U.S. Holders. The Company believes that it is, and it expects to continue to
be a domestically controlled REIT, and therefore that the sale of the Company's
stock will not be subject to taxation under FIRPTA. Because the Company's stock
will be publicly traded, however, no assurance can be given the Company will
continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a
Non-U.S. Holder's sale of stock generally will still not be subject to tax under
FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly traded"
(as defined by applicable Treasury regulations) on an established securities
market and (ii) the selling Non-U.S. Holder held 5% or less of the Company's
outstanding stock at all times during a specified testing period.
If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S.
stockholder 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 stock could be required to withhold 10% of
the purchase price and remit such amount to the Service.
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OTHER TAX CONSIDERATIONS
DIVIDEND REINVESTMENT PROGRAM
Under the Company's dividend reinvestment program, stockholders
participating in the program will be deemed to have received the gross amount of
any cash distributions which would have been paid by the Company to such
stockholders had they not elected to participate. These deemed distributions
will be treated as actual distributions from the Company to the participating
stockholders and will retain the character and tax effect applicable to
distributions from the Company generally. See "Federal Income Tax
Considerations -- Taxation of Stockholders." Participants in the dividend
reinvestment program are subject to federal income tax on the amount of the
deemed distributions to the extent that such distributions represent dividends
or gains, even though they receive no cash. Shares of Common Stock received
under the program will have a holding period beginning with the day after
purchase, and a tax basis equal to their cost (which is the gross amount of the
deemed distribution).
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local taxation
in various 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.
Consequently, prospective stockholders should consult their own tax advisers
regarding the effect of state and local tax laws on an investment in the Common
Stock of the Company.
PLAN OF DISTRIBUTION
The Company and the Operating Partnership may sell the Offered Securities
to one or more underwriters for public offering and sale by them or may sell the
Offered Securities to investors directly or through agents, which agents may be
affiliated with the Company or the Operating Partnership. Any such underwriter
or agent involved in the offer and sale of the Offered Securities will be named
in the applicable Prospectus Supplement.
Sales of Offered Securities offered pursuant to any applicable Prospectus
Supplement may be effected from time to time in one or more transactions 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 and the
Operating Partnership also may, from time to time, authorize underwriters acting
as the Company's agents to offer and sell the Offered Securities upon the terms
and conditions as set forth in the applicable Prospectus Supplement. In
connection with the sale of Offered Securities, underwriters may be deemed to
have received compensation from the Company or from the Operating Partnership in
the form of underwriting discounts or commissions and may also receive
commissions from purchasers of Offered Securities for whom they may act as
agent. Underwriters may sell Offered 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 or the Operating
Partnership to underwriters or agents in connection with the offering of Offered
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 Offered 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 Offered Securities may be deemed to be underwriting discounts and
commissions under the Securities Act. Underwriters, dealers and agents may be
entitled, under agreements entered into with the Company and the Operating
Partnership, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act. Any such
indemnification agreements will be described in the applicable Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, each
series of Offered Securities will be a new issue with no established trading
market, other than the Common Stock and Series B
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Preferred Stock which are listed on the New York Stock Exchange. Any shares of
Common Stock and Series B Preferred Stock sold pursuant to a Prospectus
Supplement will be listed on such exchange, subject to official notice of
issuance. The Company or the Operating Partnership may elect to list any other
series of Preferred Stock and any series of Debt Securities, Depository Shares
or Warrants on any exchange, but neither is obligated to do so. It is possible
that one or more underwriters may make a market in a series of Offered
Securities, but will not be obligated to do so and may discontinue any market
making at any time without notice. Therefore, no assurance can be given as to
the liquidity of the trading market for the Offered Securities.
If so indicated in the applicable Prospectus Supplement, the Company or the
Operating Partnership, as the case may be, may authorize dealers acting as the
Company's or the Operating Partnership's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company or the Operating
Partnership 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 Offered 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 or the Operating
Partnership, as the case may be. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Offered 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 Offered Securities are being sold to underwriters, the Company or
the Operating Partnership, as the case may be, shall have sold to such
underwriters the total principal amount of the Offered 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 or the
Operating Partnership in the ordinary course of business.
EXPERTS
The consolidated financial statements and related financial statement
schedules of the Company and the Operating Partnership included in the Company's
and the Operating Partnership's respective Annual Reports on Form 10-K for the
year ended December 31, 1996, incorporated by reference herein, and the reports
on the combined statements of revenues and certain expenses of the Pasadena
Portfolio, Metro Plaza and the Three Property Transactions, dated April 29,
1997, April 29, 1997, and December 20, 1996, respectively, included in the
Company's and the Operating Partnership's respective Current Reports on Form 8-K
each dated June 27, 1997, incorporated by reference herein, have been audited by
Arthur Andersen LLP, independent public accountants, to the extent and for the
periods indicated in their reports and have been incorporated herein in reliance
on such reports given on the authority of that firm as experts in accounting and
auditing.
VALIDITY OF THE OFFERED SECURITIES
The validity of the Offered Securities will be passed upon for the Company
and the Operating Partnership by Sullivan & Cromwell, Los Angeles, California.
The description of the Company's qualification and taxation as a REIT under the
Code contained in this Prospectus under the caption entitled "Federal Income Tax
Considerations -- General" is based upon the opinion of Morrison & Foerster LLP.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT RELATES 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 AND
THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER 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 ITS DATE.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary.......... S-3
The Company............................ S-19
Price Range of Common Stock and
Dividends............................ S-25
Use of Proceeds........................ S-26
Capitalization......................... S-27
Selected Financial and Other Data...... S-28
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations........................... S-31
Management............................. S-37
Underwriting........................... S-39
Validity of Common Stock............... S-40
Pro Forma Financial Information........ F-1
PROSPECTUS
Available Information.................. 2
Incorporation of Certain Documents by
Reference............................ 2
The Company and the Operating
Partnership.......................... 3
Use of Proceeds........................ 4
Ratio of Earnings to Fixed Charges..... 4
Special Considerations................. 5
Description of Debt Securities......... 7
Description of Capital Stock........... 17
Description of Preferred Stock......... 21
Description of Depositary Shares....... 23
Description of Warrants................ 27
Certain Provisions of the Company's
Charter and Bylaws................... 27
Federal Income Tax Considerations...... 27
Plan of Distribution................... 37
Experts................................ 38
Validity of the Offered Securities..... 38
</TABLE>
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10,000,000 SHARES
SPIEKER PROPERTIES, INC.
COMMON STOCK
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SPIEKER LOGO
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GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
NATIONSBANC MONTGOMERY
SECURITIES, INC.
PRUDENTIAL SECURITIES INCORPORATED
REPRESENTATIVES OF THE UNDERWRITERS
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