<PAGE> 1
PROSPECTUS SUPPLEMENT This filing is made pursuant
(TO PROSPECTUS DATED APRIL 11, 1997) to Rule 424(b)(2) under
the Securities Act of
1933 in connection with
Registration No. 333-23611
[LOGO]
PACIFIC GULF PROPERTIES INC.
1,411,765 SHARES
CLASS B SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $21.25 PER SHARE)
------------------------
Dividends on the shares of the Class B Senior Cumulative Convertible
Preferred Stock ("Class B Preferred Stock") of Pacific Gulf Properties Inc., a
Maryland corporation (the "Company"), offered hereby (the "Offering") will be
cumulative from the date of original issuance and will be payable (if declared)
quarterly in arrears on the 15th of February, May, August and November of each
year in respect of the prior quarter in an amount of (i) $0.425 per share of
Class B Preferred Stock per quarter for any quarter that ends on or prior to
December 31, 1997 and (ii) for any subsequent fiscal quarter the greater of (x)
$0.425 per share of Class B Preferred Stock and (y) the product of 1.04
multiplied by the per share quarterly dividend paid with respect to such quarter
in respect of the Company's common stock, par value $.01 per share (the "Common
Stock"). Each share of Class B Preferred Stock will have a liquidation value of
$21.25 per share, plus any accumulated, accrued and unpaid dividends. See
"Description of Class B Preferred Stock -- Dividends."
Shares of Class B Preferred Stock are convertible at any time, unless
previously redeemed, at the option of the holders thereof into the number of
shares of Common Stock obtained by dividing the number of shares of Class B
Preferred Stock being converted by the conversion ratio. The conversion ratio
shall initially be equal to one, subject to adjustment in certain circumstances
(the "Conversion Ratio"). See "Description of Class B Preferred
Stock -- Conversion Rights."
The Class B Preferred Stock will not be redeemable by the Company prior to
April 1, 2002. On and after such date, the Class B Preferred Stock will be
redeemable by the Company, in whole or in part, at the option of the Company at
a price per share equal to $21.25 per share plus accrued and unpaid dividends
(whether or not declared and accrued through the date of payment for redemption
or the date payment is made available for payment to the holder thereof) plus a
premium equal to a percentage of $21.25 initially equal to 6.0% (if redemption
occurs between April 1, 2002 and December 31, 2002) and decreasing one percent
per annum thereafter to 0% (if redemption occurs after December 31, 2009). The
Company has contractually agreed with the Purchaser (as defined below) that if
it redeems any shares of Class B Preferred Stock held by the Purchaser, it will
redeem all shares of Class B Preferred Stock then held by the Purchaser. See
"Description of Class B Preferred Stock -- Redemption."
Except as limited by law, the holder of the Class B Preferred Stock shall be
entitled to vote or consent on all matters submitted to the holders of Common
Stock together with the holders of Common Stock voting as a single class. The
holders of the Class B Preferred Stock will, upon certain conditions, be
entitled to elect one or more directors to the Company's Board of Directors;
these rights, however, are subject to certain significant restrictions described
more fully herein. See "Description of Class B Preferred Stock -- Voting
Rights."
In order to maintain the Company's qualification as a REIT, ownership by any
person of the Common Stock or the Class B Preferred Stock is limited to 9.8% in
value of the outstanding capital stock of the Company. The Company has granted
the Purchaser (as defined below) and certain transferees a waiver of such limit
in connection with the purchase of the shares of Class B Preferred Stock offered
hereby and the shares of Common Stock issuable upon conversion of such shares of
Class B Preferred Stock, subject to the Company's right of first refusal. See
"Related Agreements -- Limited Waiver of Ownership Limit."
The Class B Preferred Stock offered hereby will be sold to Five Arrows
Realty Securities L.L.C., a limited liability company organized under the laws
of the State of Delaware (the "Purchaser"), pursuant to that certain Investment
Agreement, dated as of May 27, 1997, for an aggregate purchase price of
$30,000,000, or $21.25 per share. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN RISK FACTORS RELEVANT TO AN INVESTMENT IN THE CLASS B PREFERRED STOCK.
------------------------
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 Supplement is May 27, 1997
<PAGE> 2
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Supplement Summary.......................................................... S-3
Use of Proceeds........................................................................ S-5
Description of Class B Preferred Stock................................................. S-5
Ratio of Earnings to Fixed Charges..................................................... S-14
Related Agreements..................................................................... S-14
Plan of Distribution................................................................... S-15
Legal Matters.......................................................................... S-16
PROSPECTUS
Available Information.................................................................. 2
Incorporation of Certain Documents by Reference........................................ 3
The Company............................................................................ 4
Use of Proceeds........................................................................ 4
Ratio of Earnings to Fixed Charges..................................................... 5
Selling Stockholder.................................................................... 5
Plan of Distribution................................................................... 5
Risk Factors........................................................................... 7
Description of Common Stock............................................................ 11
Description of Preferred Stock......................................................... 12
Restrictions on Transfer of Capital Stock.............................................. 16
Certain Provisions of Maryland Law and of the
Company's Articles of Incorporation and Bylaws....................................... 17
Federal Income Tax Considerations...................................................... 21
Legal Matters.......................................................................... 21
Experts................................................................................ 21
</TABLE>
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PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus Supplement or the
accompanying Prospectus or incorporated herein or therein by reference.
Capitalized terms used but not otherwise defined in this Prospectus Supplement
Summary have the meanings set forth elsewhere in the Prospectus Supplement or
the accompanying Prospectus.
THE OFFERING
ISSUER..................... Pacific Gulf Properties Inc. (the "Company")
PURCHASER.................. Five Arrows Realty Securities L.L.C. (the
"Purchaser")
SECURITIES OFFERED......... 1,411,765 shares of Class B Cumulative Convertible
Preferred Stock (the "Class B Preferred Stock")
PURCHASE PRICE............. $30,000,000 ($21.25 per share)
DIVIDENDS.................. Cumulative from the date of original issuance and
payable (if declared) quarterly in arrears on the
15th of February, May, August and November of each
year in respect of the prior quarter in an amount
of (i) $0.425 per share of Class B Preferred Stock
per quarter for any quarter that ends on or prior
to December 31, 1997 and (ii) for any subsequent
fiscal quarter the greater of (x) $0.425 per share
of Class B Preferred Stock and (y) the product of
1.04 multiplied by the per share quarterly dividend
paid with respect to such quarter in respect of the
Common Stock. If any dividends are paid on either
the Class A Preferred Stock or the Class B
Preferred Stock, no less than the full dividend on
both the Class A Preferred Stock and the Class B
Preferred Stock may be paid.
CONVERSION RIGHTS.......... Shares of Class B Preferred Stock are convertible
at any time, unless previously redeemed, at the
option of the holders thereof into the number of
shares of Common Stock obtained by dividing the
number of shares of Class B Preferred Stock being
converted by the conversion ratio. The conversion
ratio shall initially be equal to one, subject to
adjustment in certain circumstances (the
"Conversion Ratio").
LIQUIDATION PREFERENCE..... $21.25 per share, plus an amount equal to any
accumulated, accrued and unpaid dividends.
REDEMPTION AT OPTION OF THE
COMPANY.................. The Class B Preferred Stock will not be redeemable
by the Company prior to April 1, 2002. On and after
such date, the Class B Preferred Stock will be
redeemable by the Company, in whole or in part, at
the option of the Company at a price per share
equal to $21.25 per share plus accrued and unpaid
dividends (whether or not declared and accrued
through the date of payment for redemption or the
date payment is made available for payment to the
holder thereof) plus a premium equal to a
percentage of $21.25 initially equal to 6.0% (if
redemption occurs between April 1, 2002 and
December 31, 2002) and decreasing one percent per
annum thereafter to 0% (if redemption occurs after
December 31, 2009). The Company has contractually
agreed with the Purchaser (as defined below) that
if it redeems any shares of Class B Preferred Stock
held by the Purchaser, it will redeem all shares of
Class B Preferred Stock then held by the Purchaser.
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VOTING RIGHTS.............. Except as limited by law, the holders of the Class
B Preferred Stock shall be entitled to vote or
consent on all matters submitted to the holders of
Common Stock together with the holders of Common
Stock voting as a single class. Additionally,
except as set forth below under "Restrictions on
Voting Rights," until the Purchaser (as defined
below) or certain related entities cease to own
either (i) all of the outstanding shares of Class B
Preferred Stock or (ii) an amount of voting
securities of the Company which, if converted into
Common Stock, would exceed 10% of the outstanding
Common Stock on a fully diluted basis the holders
of the Class B Preferred Stock will have the right,
voting as a separate class, to elect one director
to the Company's Board of Directors. Furthermore,
and also except as set forth below, the holders of
the Class B Preferred Stock shall have, under
certain circumstances, the right to elect
additional directors upon the occurrence of certain
events. Under no circumstances will the holder(s)
of the Class B Preferred Stock have the right to
appoint more than two directors. Except as set
forth below, if dividends on the Class B Preferred
Stock are in arrears for three quarterly dividend
periods, holders of the Class B Preferred Stock
will have the right to elect two additional
directors to serve on the Company's Board of
Directors until such dividend arrearage is
eliminated.
RESTRICTIONS ON VOTING
RIGHTS................... Notwithstanding the foregoing, the above-described
rights to elect directors will not apply (i) for as
long as all of the outstanding Class B Preferred
Stock and all of the outstanding shares of the
Company's Class A Cumulative Convertible Preferred
Stock (the "Class A Preferred Stock") are held by
the same beneficial owner and (ii) if all
outstanding shares of the Class A Preferred Stock
and the Class B Preferred Stock are not voted in
favor of a proposal to, in effect, combine the
Class A Preferred Stock and the Class B Preferred
Stock into one class of Preferred Stock of the
Company having a blended liquidation rate and other
items provided for in the Articles Supplementary
with respect to the Class A Preferred Stock (the
"Class A Articles Supplementary"). In addition,
prior to June 30, 1998, the holders of the Class B
Preferred Stock will not be entitled to elect
directors pursuant to the above provisions if the
holders of the Class A Preferred Stock shall have
elected directors pursuant to corresponding
provisions in the Class A Articles Supplementary.
RANKING.................... The Class B Preferred Stock will rank senior to the
Common Stock and to all Preferred Stock that is
expressly stated to be junior to the Class B
Preferred Stock with respect to the payment of
dividends or amounts upon the liquidation,
dissolution or winding up of the Company and, as to
dividends and upon liquidation, dissolution and
winding up, ranks equal to and on a parity with the
Class A Preferred Stock. While any shares of Class
B Preferred Stock are outstanding, the Company may
not authorize, create or increase the authorized
amount of any class or series of stock that ranks
senior to or pari passu with the Class B Preferred
Stock with respect to the payment of dividends or
amounts upon liquidation, dissolution or winding up
without the consent of the holders of a majority of
the outstanding shares of Class B Preferred Stock,
voting as a single class.
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REGISTRATION............... The shares of Class B Preferred Stock are
registered under the Securities Act of 1933, as
amended. The Class B Preferred Stock and the shares
of Common Stock issuable upon conversion thereof
are subject to certain registration rights.
NYSE LISTING............... The shares of Class B Preferred Stock will not be
listed on the NYSE; however, the shares of Common
Stock issuable upon conversion of the Class B
Preferred Stock will be listed on the NYSE under
the symbol "PAG."
For a more complete description of the terms of the Class B Preferred
Stock, see "Description of Class B Preferred Stock" below.
S-5
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USE OF PROCEEDS
The Company will use the net proceeds of this Offering, estimated to be
approximately $30,000,000 million, to repay certain outstanding indebtedness
under the Company's line of credit and for working capital purposes, including
possible future acquisitions. Pending such uses, which the Company anticipates
will occur concurrently with or shortly following the consummation of each
closing related to the Offering, the Company may invest such net proceeds in
short-term income producing investments such as investment grade commercial
paper, government securities or money market funds that invest in government
securities.
As of March 31, 1997, the weighted average interest rate on the Company's
revolving line of credit, which is expected to be repaid with the net proceeds
of this Offering, was a variable rate equal to LIBOR plus 1.75% and the maturity
date of such indebtedness was July 1, 1998.
DESCRIPTION OF CLASS B PREFERRED STOCK
The summary of certain terms and provisions of the Class B Preferred Stock
contained in this Prospectus Supplement does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the terms and
provisions of the Company's Charter, Bylaws and Articles Supplementary to the
Charter setting forth the particular terms of the Class B Preferred Stock
("Class B Amendment").
The Charter authorizes the issuance of 5,000,000 shares of Preferred Stock,
par value $0.01 per share ("Preferred Stock"). On December 31, 1996, the Company
entered into an agreement with the Purchaser pursuant to which the Company
agreed to sell and the Purchaser agreed to buy, 1,351,351 shares of the
Company's Class A Senior Cumulative Convertible Preferred Stock (the "Class A
Preferred Stock"). Pursuant to such agreement, the Company issued 270,270 shares
of Class A Preferred Stock to the Purchaser on April 3, 1997. No series of
Preferred Stock other than the Class A Preferred Stock or the Class B Preferred
Stock have been authorized or issued. The Class B Preferred Stock may be issued
from time to time in one or more series, without shareholder approval, with such
voting powers (full or limited), designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof as shall be established by the Board of Directors. Thus,
without shareholder approval, the Company could authorize the issuance of
Preferred Stock with voting, conversion and other rights that could dilute the
voting power and other rights of the holders of Common Stock and Class B
Preferred Stock.
GENERAL
On May 7, 1997, the Board of Directors authorized the Company to classify
and issue the Class B Preferred Stock as part of the 5,000,000 shares of the
Company's authorized Preferred Stock.
When issued, the Class B Preferred Stock will be validly issued, fully paid
and nonassessable. The Class B Preferred Stock will not be subject to any
sinking fund or other obligation of the Company to redeem or retire the Class B
Preferred Stock. Unless converted or redeemed by the Company, the Class B
Preferred Stock will have a perpetual term, with no maturity.
RANKING
The Class B Preferred Stock will rank senior to the Common Stock with
respect to the payment of dividends and amounts upon liquidation, dissolution or
winding up of the Company and, as to dividends and upon liquidation, dissolution
and winding up, ranks equal to and on a parity with the Class A Preferred Stock.
While any shares of Class B Preferred Stock are outstanding, the Company
may not authorize, create or increase the authorized amount of any class or
series of stock that ranks senior or pari passu to the Class B Preferred Stock
with respect to the payment of dividends or amounts upon liquidation,
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<PAGE> 7
dissolution or winding up without the consent of the holders of a majority of
the outstanding shares of Class B Preferred Stock, voting as a single class.
However, the Company may create additional classes of stock, increase the
authorized number of shares of Preferred Stock or issue a different series of
Preferred Stock ranking junior to the Class B Preferred Stock with respect, in
each case, to the payment of dividends and amounts upon liquidation, dissolution
and winding up without the consent of any holder of Class B Preferred Stock. See
"-- Voting Rights" below. No dividends shall be set apart for or paid upon the
Common Stock or any other shares of stock ranking junior to the Class B
Preferred Stock unless all such cumulative dividends on the Class B Preferred
Stock have been paid. If any dividends are paid on either Class A Preferred
Stock or Class B Preferred Stock, no less than the full dividend on both Class A
Preferred Stock and Class B Preferred Stock may be paid.
DIVIDENDS
Dividend Rate. Holders of shares of Class B Preferred Stock will be
entitled to receive, when, as and if declared by the Board of Directors of the
Company, out of funds of the Company legally available for payment, cash
dividends payable in an amount per share equal to (i) $0.425 per share of Class
B Preferred Stock per quarter for any quarter that ends on or prior to December
31, 1997 and (ii) for any subsequent fiscal quarter the greater of (x) $0.425
per share of Class B Preferred Stock and (y) the product of 1.04 multiplied by
the per share quarterly dividend paid with respect to such quarter in respect of
the Company's Common Stock.
Cumulative Dividends. Dividends on the Class B Preferred Stock will be
cumulative and payable (if declared) quarterly in arrears on the 15th of
February, May, August and November of each year in respect of the prior quarter.
Each such dividend will be payable to holders of record as they appear on the
stock records of the Company at the close of business on such record dates, not
exceeding 30 days preceding the payment dates thereof, as shall be fixed by the
Board of Directors of the Company. Dividends will accrue and be cumulative from
the date of original issuance of the Class B Preferred Stock.
Interest on Unpaid Dividends. Accumulations of unpaid dividends on shares
of Class B Preferred Stock will bear interest at a rate of (i) 2% per fiscal
quarter for any quarter which ends on or prior to December 31, 1997 and (ii) for
any subsequent fiscal quarter the greater of (x) 2% per quarter and (y) 104% of
the per share quarterly dividend paid with respect to such quarter in respect of
the Common Stock, divided by $21.25, per quarter until such amount has been
paid. No dividends shall be set apart for or paid upon the Common Stock or any
other shares of stock ranking junior to the Class B Preferred Stock unless all
such cumulative dividends on the Class B Preferred Stock have been paid.
Prohibitions on Dividends, Distributions and Repurchases. Unless the
dividends (including accrued and unpaid dividends in arrears whether or not
declared) which pursuant to their terms should have been paid, have been paid in
full or declared and set apart for payment in full on the Class B Preferred
Stock, the Company will not pay dividends on, make any other distributions on,
or redeem or repurchase or otherwise acquire for consideration any capital stock
of the Company (without regard to rank, either as to dividends or upon
liquidation, dissolution or winding up).
REDEMPTION
General. The Class B Preferred Stock will not be redeemable by the Company
prior to April 1, 2002. On and after such date, the Class B Preferred Stock will
be redeemable by the Company, in whole or in part, at the option of the Company.
The Company has contractually agreed with the Purchaser that if it redeems any
shares of Class B Preferred Stock held by the Purchaser, it will redeem all
shares of Class B Preferred Stock then held by the Purchaser.
Notice of Redemption. The Company may exercise its option to redeem the
Class B Preferred Stock only by mailing a written notice of election to the
holders of shares of Class B Preferred Stock at least 30 days prior to the date
specified therein for the redemption of the Class B Preferred Stock.
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<PAGE> 8
Such notice shall state, at a minimum, the amount of shares of Class B Preferred
Stock to be redeemed, the date on which such redemption shall occur and the last
date on which such holder can exercise the conversion rights (described under
"-- Conversion Rights" below). If fewer than all of the shares of Class B
Preferred Stock are to be redeemed, the shares to be redeemed shall be selected
pro rata.
Redemption Price. Upon the thirtieth day following the mailing of the
redemption notice described above, the Company shall purchase from each holder
such shares of Class B Preferred Stock specified in the redemption notice, at a
price per share equal to $21.25 per share plus accrued and unpaid dividends
(whether or not declared and accrued through the date of payment for redemption
or the date payment is made available for payment to the holder thereof) plus a
premium equal to a percentage of $21.25 initially equal to 6.0% (if redemption
occurs between April 1, 2002 and December 31, 2002) and decreasing one percent
per annum thereafter to 0% (if redemption occurs after December 31, 2009).
LIQUIDATION PREFERENCE
Liquidation Payment. The holders of shares of Class B Preferred Stock will
be entitled to receive in the event of any liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary, before any distribution or
payment to the holders of shares of capital stock of the Company ranking junior
to the Class B Preferred Stock, $21.25 per share of Class B Preferred Stock plus
an amount per share of Class B Preferred Stock equal to all dividends (whether
or not earned or declared) accrued and unpaid thereon to the date of final
distribution to such holders ("Liquidation Preference"), and no more, provided
that if such liquidation, dissolution or winding up of the Company occurs in
connection with or subsequent to a Change in Control (as defined below), then
the holders of the Class B Preferred Stock shall be entitled to be paid the Put
Payment (as defined below under "-- Change in Control and Put Option"). The
Class B Preferred Stock, as to liquidation, dissolution and winding up, ranks
equal to and on a parity with the Class A Preferred Stock.
Pro Rata Payments. If, upon any liquidation, dissolution or winding up of
the Company, the assets of the Company available for distribution to the holders
of the shares of Class B Preferred Stock are insufficient to pay in full the
sums which such holders are entitled to receive in such case, then such assets
will be distributed among the holders of shares of Class B Preferred Stock,
ratably, in accordance with the respective amounts which would be payable on
such shares of Class B Preferred Stock and Class B Preferred Stock if all
amounts payable thereon were to be paid in full.
VOTING RIGHTS
General. Except as limited by law, the holder of the Class B Preferred
Stock shall be entitled to vote or consent on all matters submitted to the
holders of Common Stock together with the holders of Common Stock voting as a
single class. Each share of Class B Preferred Stock will entitle the holder
thereof to one vote for each share of Common Stock into which such share of
Class B Preferred Stock is convertible as of the record date for such vote or
consent, or if no record date is specified, as of the date of such vote or
consent.
Class B Director. Except as set forth below, in addition to the other
voting rights described herein, until the Purchaser, Rothschild Realty Inc. or
the 99% member of the Purchaser ceases to own either (i) all of the outstanding
shares of Class B Preferred Stock or (ii) an amount of voting securities of the
Company which, if converted into Common Stock, would exceed 10% of the
outstanding Common Stock on a fully diluted basis (the minimum criteria set
forth in clauses (i) and (ii) above are referred to herein as the "Minimum
Threshold"), the number of directors constituting the Board of Directors of the
Company will be increased by one and the holders of the Class B Preferred Stock
will have the right, voting as a separate class, to elect one director to the
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<PAGE> 9
Company's Board of Directors. Such director's position shall remain available
until the Minimum Threshold is no longer satisfied.
Additional Class B Directors. In addition to the foregoing and also except
as set forth below, upon the first to occur of (A) the Company's failure to pay
the Regular Quarterly Dividend (as defined below) on the Common Stock for any
quarter in an amount of at least $.40 per share (as may be adjusted under
certain circumstances), (B) the Company's financial results reflecting that the
ratio of its earnings before interest, taxes, depreciation and amortization (as
further described in the Class B Amendment, "EBITDA"), EBITDA to its reported
interest expense for each of three consecutive fiscal quarters was less than
1.25 to 1.00, or (C) the Company's failure to pay in full the quarterly dividend
payable on the Class B Preferred Stock (whether or not declared) (a "Dividend
Payment Default"), the Board of Directors of the Company shall automatically be
increased by an additional one member, which member shall be elected by the
holders of the shares of Class B Preferred Stock voting as a single class. Such
additional position on the Board shall remain available until the first to occur
of the following: (i) the Minimum Threshold fails to be satisfied and (ii) the
date upon which each of the following three conditions are satisfied (X) the
Regular Quarterly Dividend paid in the immediately preceding quarter on the
Common Stock shall be greater than $.40 per share (as may be adjusted under
certain circumstances), (Y) the Company reports for the prior three consecutive
fiscal quarters that the ratio of its EBITDA to its reported interest expense
for each such quarter was greater than 1.25 to 1.00, and (Z) all accrued and
unpaid dividends on the Class B Preferred Stock, whether or not declared, shall
have been paid or made available for payment. The term "Regular Quarterly
Dividend" means any cash dividend(s) paid in any calendar year that do not in
the aggregate exceed the Company's reported Funds From Operations (as defined by
NAREIT prior to 1996) for the quarter relating to such dividend.
Except as set forth below, at any time after the Minimum Threshold ceases
to be satisfied and a Dividend Payment Default occurs for three consecutive
fiscal quarters, the number of directors constituting the Board shall be
automatically increased by a maximum of two members, which members shall be
elected by the holders of the shares of Class B Preferred Stock voting as a
single class. The position on the Board created thereby shall continue to be
available until the earlier to occur of such time as (i) there are no shares of
Class B Preferred Stock outstanding and (ii) all dividends on the Class B
Preferred Stock, including accrued and unpaid dividends, whether or not
declared, shall have been paid or made available for payment.
Maximum of Two Preferred Directors. The members of the Board of Directors
elected by the holders of the Class B Preferred Stock voting as a separate class
as described above are referred to herein as "Preferred Directors." At no time
shall there be more than two Preferred Directors on the Board of Directors.
Restrictions on Voting Rights. Notwithstanding the foregoing, the
above-described rights to elect directors will not apply (i) for as long as all
of the outstanding Class B Preferred Stock and all of the outstanding shares of
the Class A Preferred Stock are held by the same beneficial owner and (ii) if
all outstanding shares of the Class A Preferred Stock and the Class B Preferred
Stock are not voted in favor of a proposal to in effect, combine the Class A
Preferred Stock and the Class B Preferred Stock into one class of Preferred
Stock of the Company having a blended liquidation rate and other items provided
for in the Class A Articles Supplementary. In addition, prior to June 30, 1998,
the holders of the Class B Preferred Stock will not be entitled to elect
directors pursuant to the above provisions if the holders of the Class A
Preferred Stock shall have elected directors pursuant to corresponding
provisions in the Class A Articles Supplementary.
Restrictions on the Company. So long as shares of Class B Preferred Stock
are outstanding, without the consent of the holders of at least a majority of
the outstanding Class B Preferred Stock voting separately as a class, the
Company may not (i) amend or alter the Class B Amendment, (ii) amend or alter
the Company's Charter which would adversely affect the rights of the holders of
Class B Preferred Stock as such, (iii) amend, alter or repeal any provision of
the Charter which
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would increase in any respect the restrictions or limitations on ownership
applicable to the Class B Preferred Stock, (iv) amend, alter or repeal the
Charter or Bylaws of the Company to limit the right of indemnification provided
to any Preferred Director, (v) issue additional shares of Class B Preferred
Stock or of Preferred Stock (or a series of Preferred Stock that would vote as a
class with the shares of Class B Preferred Stock with respect to the election of
any Preferred Director) or shares of stock ranking senior or equal to the Class
B Preferred Stock, (vi) amend, alter or repeal any provision of the Charter or
Bylaws to increase the number of directors on the Board above 10 (not including
any Preferred Directors).
CONVERSION RIGHTS
Shares of Class B Preferred Stock will be convertible, in whole or in part,
at any time, at the option of the holders thereof, into the number of shares of
Common Stock obtained by dividing the number of shares of Class B Preferred
Stock being converted by the Conversion Ratio (as defined below and as in effect
at such time) by surrendering such shares of Class B Preferred Stock to be
converted. The "Conversion Ratio" with respect to any shares of Class B
Preferred Stock will initially be equal to one, subject to adjustment as
described below ("-- Conversion Ratio Adjustments"). The right to convert shares
of Class B Preferred Stock called for redemption will terminate at the close of
business on such redemption date. For information as to notices of redemption
see "-- Redemption" above.
Conversion of shares of Class B Preferred Stock, or a specified portion
thereof, may be effected by delivering a certificate or certificates evidencing
such shares, together with written notice of conversion and a proper assignment
of such certificate or certificates to the Company or in blank, together with an
amount sufficient to pay any transfer or similar tax (or satisfactory evidence
that such taxes have been paid) to the Company for that purpose. Initially, the
Company will serve as transfer agent and registrar of the Class B Preferred
Stock.
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for shares of Class
B Preferred Stock shall have been surrendered and notice shall have been
received by the Company as aforesaid, and the conversion shall be at the
Conversion Ratio in effect at such time and on such date.
Fractional shares of Common Stock are not to be issued upon conversion but,
in lieu thereof, the Company will pay a cash adjustment based on the current
market price of the Common Stock on the day prior to the conversion date.
CONVERSION RATIO ADJUSTMENTS
The Conversion Ratio is subject to adjustment upon certain events,
including the following:
Dividends, Subdivisions, Combinations, Reclassifications. If the Company
shall, while any shares of Class B Preferred Stock are outstanding, (A) pay a
dividend or make a distribution with respect to its capital stock in shares of
its Common Stock, (B) subdivide its outstanding Common Stock into a greater
number of shares, (C) combine its outstanding Common Stock into a smaller number
of shares or (D) issue any shares of capital stock by reclassification of its
Common Stock, the Conversion Ratio in effect at the opening of business on the
day next following the date fixed for the determination of shareholders entitled
to receive such dividend or distribution or at the opening of business on the
day following the day on which such subdivision, combination or reclassification
becomes effective, as the case may be, shall be adjusted so that the holder of
any shares of Class B Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of Common Stock that such
holder would have owned or have been entitled to receive after the happening of
any of the events described above had such shares of Class B Preferred Stock
been converted immediately prior to the record date in the case of a dividend or
distribution or the effective date in the case of a subdivision, combination or
reclassification.
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Issuance of Rights, Options or Warrants to Purchase Common Stock. If the
Company shall, while any shares of Class B Preferred Stock are outstanding,
issue rights, options or warrants to all holders of Common Stock entitling them
(for a period expiring within 45 days after the record date mentioned below) to
subscribe for or purchase Common Stock at a price per share less than the
current market price per share of Common Stock on the record date for the
determination of shareholders entitled to receive such rights or warrants, then
the Conversion Ratio in effect at the opening of business on the day next
following such record date shall be adjusted to equal the ratio determined by
multiplying (I) the Conversion Ratio in effect immediately prior to the opening
of business on the day next following the date fixed for such determination by
(II) a fraction, the numerator of which shall be the sum of (A) the number of
shares of Common Stock outstanding on the close of business on the date fixed
for such determination and (B) the number of shares that the aggregate proceeds
to the Company from the exercise of such rights or warrants for Common Stock
would purchase at such current market price, and the denominator of which shall
be the sum of (A) the number of shares of Common Stock outstanding on the close
of business on the date fixed for such determination and (B) the number of
additional shares of Common Stock offered for subscription or purchase pursuant
to such rights or warrants.
Issuance of Rights, Options or Warrants to Purchase Securities Other Than
Common Stock. If the Company shall distribute to all holders of its Common Stock
any shares of capital stock of the Company (other than Common Stock) or evidence
of its indebtedness or assets (excluding Regular Quarterly Dividends) or rights
or warrants to subscribe for or purchase any of its securities (any of the
foregoing being hereinafter called the "Securities"), then in each such case
each holder of shares of Class B Preferred Stock shall receive concurrently with
the receipt by holders of the Common Stock the kind and amount of such
Securities that it would have owned or been entitled to receive had such shares
of Class B Preferred Stock been converted immediately prior to such distribution
or related record date, as the case may be.
Distribution of Cash. In case the Company shall pay or make a dividend or
other distribution on its Common Stock exclusively in cash (excluding Regular
Quarterly Dividends), each holder of shares of Class B Preferred Stock shall
receive concurrently with the receipt by holders of the Common Stock the kind
and amount of any such distribution that it would have owned or been entitled to
receive had such shares of Class B Preferred Stock been converted immediately
prior to such distribution or related record date, as the case may be.
Certain Significant Transactions. If the Company shall be a party to any
transaction (including, without limitation, a merger, consolidation, statutory
share exchange, self tender offer for all or substantially all shares of Common
Stock, sale of all or substantially all of the Company's assets or
recapitalization of the Common Stock and excluding any transaction as to which
the other provisions of the Class B Amendment apply) (each of the foregoing
being referred to herein as a "Transaction"), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
share of Class B Preferred Stock that is not converted into the right to receive
stock, securities or other property in connection with such Transaction shall
thereafter be convertible into the kind and amount of shares of stock,
securities and other property (including cash or any combination thereof)
receivable upon the consummation of such Transaction by a holder of that number
of shares of Common Stock into which one share of Class B Preferred Stock was
convertible immediately prior to such Transaction, assuming such holder of
Common Stock (i) is not a person with which the Company consolidated or into
which the Company merged or which merged into the Company or to which such sale
or transfer was made, as the case may be (a "Constituent Person"), or an
affiliate of a Constituent Person or (ii) failed to exercise his or her rights
of election, if any, as to the kind or amount of stock, securities and other
property (including cash) receivable upon such Transaction (provided that if the
kind or amount of stock, securities and other property (including cash)
receivable upon such Transaction is not the same for each share of Common Stock
of the Company held immediately prior to such Transaction by other than a
Constituent Person or an
S-11
<PAGE> 12
affiliate thereof and in respect of which such rights of election shall not have
been exercised ("Nonelecting Share"), then for the purpose of this provision the
kind and amount of stock, securities and other property (including cash)
receivable upon such Transaction by each Non-electing Share shall be deemed to
be the kind and amount so receivable per share by a plurality of the
Non-electing Shares). The Company shall not be a party to any Transaction unless
the terms of such Transaction are consistent with this provision, and it shall
not consent or agree to the occurrence of any Transaction until the Company has
entered into an agreement with the successor or purchasing entity, as the case
may be, for the benefit of the holders of the shares of Class B Preferred Stock
that will contain provisions enabling the holders of the shares of Class B
Preferred Stock that remain outstanding after such Transaction to convert into
the consideration received by holders of Common Stock at the Conversion Ratio in
effect immediately prior to such Transaction.
Other Actions. If the Company shall take any action affecting the Common
Stock, other than the actions described above, that would materially adversely
affect the conversion rights of the holders of the shares of Class B Preferred
Stock or the value of such conversion rights, the Conversion Ratio for the
shares of Class B Preferred Stock may be adjusted, to the extent permitted by
law, in such manner, if any, and at such time, as the Board of Directors, in its
sole discretion, may determine to be equitable in the circumstances.
OTHER CONVERSION PROVISIONS
Cumulative Adjustments. No adjustment in the Conversion Ratio shall be
required unless such adjustment would require a cumulative increase or decrease
of at least 1%; provided, however, that any adjustments that by reason of this
provision are not required to be made shall be carried forward and taken into
account in any subsequent adjustment until made. If any action or transaction
would require adjustment of the Conversion Ratio pursuant to more than one
provision of the Class B Amendment, only one adjustment shall be made and such
adjustment shall be the amount of adjustment that has the highest absolute
value.
Exempted Transactions. The Company shall not be required to make any
adjustment of the Conversion Ratio for (x) the issuance of any shares of Common
Stock pursuant to any plan providing for the reinvestment of dividends or
interest payable on securities of the Company and the investment of additional
optional amounts in shares of Common Stock pursuant to any plan providing for
the reinvestment of dividends or interest payable on securities of the Company
and the investment of additional optional amounts in shares of Common Stock
under such plan, (y) the issuance of contingent rights issued pursuant to a
stockholders' rights plan adopted by the Company pursuant to which the
acquisition by any third party of a specified percentage of Common Stock
triggers the exercisability of such rights to purchase Common Stock, for so long
as no event has occurred triggering such rights to exercise, and (z) the
issuance of Common Stock or options to purchase Common Stock pursuant to an
employee benefit plan.
Reduction In Conversion Ratio. The Company shall be entitled, to the extent
permitted by law, to make such reductions in the Conversion Ratio, as it in its
discretion shall determine to be advisable in order that any stock dividends,
subdivision of shares, reclassification or combination of shares, distribution
of rights or warrants to purchase stock or securities, or a distribution of
other assets (other than cash dividends) hereafter made by the Company to its
shareholders shall not be taxable, or if that is not possible, to diminish any
income taxes that are otherwise payable because of such event.
Notice of Adjustment in Conversion Ratio. Whenever the Conversion Ratio is
adjusted as herein provided, the Company shall prepare a notice of such
adjustment of the Conversion Ratio setting forth the adjusted Conversion Ratio
and the effective date of such adjustment and shall mail such notice of such
adjustment of the Conversion Ratio to the holders of the shares of Class B
Preferred Stock at such holders' last address as shown on the stock records of
the Company.
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<PAGE> 13
Notice of Certain Events. If:
(i) the Company shall declare a dividend (or any other distribution)
on the Common Stock (other than the Regular Quarterly Dividend); or
(ii) the Company shall authorize the granting to all holders of the
Common Stock of rights or warrants to subscribe for or purchase any shares
of any class or any other rights or warrants; or
(iii) there shall be any reclassification of the Common Stock (other
than any event to which other provision of the Class B Amendment applies)
or any consolidation or merger to which the Company is a party and for
which approval of any shareholders of the Company is required, or a
statutory share exchange, or self tender offer by the Company for all or
substantially all of its outstanding shares of Common Stock or the sale or
transfer of all or substantially all of the assets of the Company as an
entity; or
(iv) there shall occur the involuntary or voluntary liquidation,
dissolution or winding up of the Company,
then the Company shall cause to be mailed to the holders of shares of Class B
Preferred Stock, at the address as shown on the stock records of the Company, as
promptly as possible, but at least 15 business days prior to the applicable date
hereinafter specified, a notice stating (A) the date on which a record is to be
taken for the purpose of such dividend, distribution or rights or warrants, or,
if a record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distribution or rights or warrants
are to be determined or (B) the date on which such reclassification,
consolidation, merger, statutory share exchange, sale, transfer, liquidation,
dissolution or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock shall be entitled to exchange
their shares of Common Stock for securities or other property, if any,
deliverable upon such reclassification, consolidation, merger, statutory share
exchange, sale, transfer, liquidation, dissolution or winding up.
Reservation, Validity, Listing and Securities Law Compliance With Respect
to Shares of Common Stock; Transfer Taxes. The Company will reserve and keep
available form its authorized capital stock a sufficient number of shares of
Common Stock as may be required to effect conversion of the Class Preferred
Stock. Any shares of Common Stock issued upon the conversion of the Shares of
Class B Preferred Stock shall be validly issued, fully paid and non-assessable.
The Company will endeavor (i) to list the shares of Common Stock required to be
delivered upon conversion of the Class B Preferred Stock, prior to such
delivery, upon each national securities exchange, if any, upon which the
outstanding Common Stock is listed at the time of such delivery and (ii) to
comply with all federal and state laws and regulations thereunder requiring the
registration of such securities with, or any approval of or consent to the
delivery thereof, by any governmental authority. The Company will pay any and
all documentary stamp or similar issue or transfer taxes payable in respect of
the issue or delivery of shares of Common Stock or other securities or property
on conversion of the Class B Preferred Stock pursuant hereto; provided, however,
that the Company shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issue or delivery of shares of Common
Stock or other securities or property in a name other than that of the holder of
the shares of Class B Preferred Stock to be converted, and no such issue or
delivery shall be made unless and until the person requesting such issue or
delivery has paid to the Company the amount of any such tax or established, to
the reasonable satisfaction of the Company, that such tax has been paid.
CHANGE OF CONTROL AND PUT OPTION
If a Change in Control or Put Event (each, as defined below) occurs as a
result of the voluntary (and not legally compelled) act, omission or
participation of the Company, which act, omission, or participation the Company
had the discretion under existing laws and regulations to refrain from, then
each holder of shares of Class B Preferred Stock will have the right to require
the Company to
S-13
<PAGE> 14
redeem such holder's shares of Class B Preferred Stock at a redemption price
payable in cash in an amount equal to 102% of the Liquidation Value thereof,
plus accrued and unpaid dividends whether or not declared, if any, to the date
of purchase or the date that payment is made available. If a Change of Control
or Put Event occurs that is not the result of such voluntary act, omission or
participation of the Company, the Company may elect not to make the foregoing
put payment in which event the Conversion Ratio shall be revised to the greater
of (i) 75% of the then current Conversion Ratio so that each share of Class B
Preferred Stock will be convertible into 133% of the number of shares of Common
Stock into which it would otherwise have been convertible and (ii) a fraction,
the numerator of which is 75% of the then current market price and the
denominator of which is $21.25.
The following terms, as used herein, have the following meanings:
"Change of Control" means each occurrence of any of the following: (i)
the acquisition, directly or indirectly, by any individual or entity or
group (as such term is used in Section 13(d)(3) of the Exchange Act of
1934, as amended (the "Exchange Act")) of beneficial ownership (as defined
in Rule 13d-3 under the Exchange Act, except that such individual or entity
shall be deemed to have beneficial ownership of all shares that any such
individual or entity has the right to acquire, whether such right is
exercisable immediately or only after passage of time) of more than 25% of
the aggregate outstanding voting power of capital stock of the Company;
(ii) other than with respect to the election, resignation or replacement of
the Preferred Directors, during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by
such Board of Directors or whose nomination for election by the
shareholders of the Company was approved by a vote of 66 2/3% of the
directors of the Company (excluding Preferred Directors) then still in
office who were either directors at the beginning of such period, or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of the
Company then in office; and (iii) (A) the Company consolidates with or
merges into another entity (the "Merger Entity") or conveys, transfers or
leases all or substantially all of its respective assets (including, but
not limited to, real property investments) to any individual or entity (the
"Acquiring Entity", and, together with the Merger Entity, the "Successor
Entity"), or (B) any corporation consolidates with or merges into the
Company, which in either event (A) or (B) is pursuant to a transaction in
which the outstanding voting capital stock of the Company is reclassified
or changed into or exchanged for cash, securities or other property (unless
the holders of the voting capital stock of the Company immediately prior to
such transaction hold immediately after such transaction more than 50% of
the outstanding voting capital stock of the Successor Entity.
"Put Event" means each occurrence of any of (i) the Company fails to
qualify as a real estate investment trust as described in Section 856 of
the Internal Revenue Code of 1986, as amended, other than as a result of
any action, or unreasonable failure to act, by any holder of shares of
Class B Preferred Stock; (ii) the Company becomes a "Pension-held REIT" as
defined in Section 856(h)(3)(D) of the Internal Revenue Code of 1986, as
amended, other than as a result of any action, or unreasonable failure to
act, by the holders of shares of Class B Preferred Stock; or (iii) the
Company ceases to be engaged primarily in the business of owning and
managing multi-family properties and/or industrial properties directly, or
through subsidiaries, as carried on as of the date hereof and described in
the Company's Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission for the year ended December 31, 1996.
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<PAGE> 15
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios of earnings to fixed
charges for the Company and for the predecessor to the Company prior to February
18, 1994.
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------- MARCH 31,
1996 1995 1994 1993 1992 1997
------ ------ ----- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Historical Ratios of Earnings to
Fixed Charges...................... -- 1.12x 1.26x .74x .58x 1.73x
</TABLE>
Earnings for the year ended December 31, 1996 were inadequate to cover
fixed charges by approximately $.2 million as a result primarily of the non-cash
charge of $3.6 million relating to the Company's exchange of debentures for
Common Stock. The ratio of earnings to fixed charges excluding $3.6 million
non-cash items is 1.18 to 1.
For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of net earnings before income taxes, extraordinary items,
minority/predecessor interest income and fixed charges. Fixed charges consist of
interest expense, capitalized interest and amortization of deferred financing
costs and preferred stock dividends, where applicable.
Prior to completion of the Company's initial public offering in February
1994, the predecessor of the Company operated in a highly leveraged manner. As a
result, although the Company and the predecessor have historically generated
positive net cash flow, the financial statements of the predecessor show net
losses for the periods prior to February 1994. Consequently, the computation of
the ratio of earnings to fixed charges for such periods indicate that earnings
were inadequate to cover fixed charges by approximately $1.6 million, $2.3
million and $1.9 million for the years ended December 31, 1993, 1992 and 1991,
respectively.
RESTRICTIONS ON TRANSFER
Except as described below under "Related Agreements -- Limited Waiver of
Ownership Limit," the Class B Preferred Stock is subject to the restrictions on
ownership and transfer set forth in the Company's Charter and described in the
section captioned "Restrictions on Transfer of Capital Stock" in the
accompanying Prospectus.
RELATED AGREEMENTS
Operating Agreement/Registration Rights. Pursuant to an Operating Agreement
to be entered into by and between the Company and the Purchaser in connection
with the initial closing of the purchase of securities hereunder (the "Operating
Agreement"), the Company will grant the Purchaser certain registration rights,
including a single demand registration exercisable not earlier than the first
anniversary of the date thereof, a single shelf registration exercisable not
earlier than April 1, 1998, and certain piggyback registration rights. The
single demand registration right may be exercised by any holder or holders of
30% or more of the Registrable Securities (as defined below). The Company shall
file the single shelf registration statement upon the election of the Majority
Holders (as defined below). Generally, the right of the holders of Class B
Preferred Stock to demand registration, either pursuant to the single demand
registration or the single shelf registration, shall expire, unless earlier
expired, when such holders may sell the Registrable Securities under Rule 144
promulgated under the Securities Act without regard to the volume limitations
therein.
The following terms, as used herein, have the following meanings:
"Majority Holders" means (a) the Purchaser, so long as (i) the
Purchaser holds at least 25% of the outstanding Registrable Securities and
(ii) no underwritten demand registration or
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<PAGE> 16
piggyback registration has been consummated by the Company pursuant to the
Operating Agreement, or (b) otherwise, the holder or holders at the
relevant time (excluding the Company or any of its subsidiaries) of more
than 50% of the Class B Preferred Stock or Registrable Securities then
outstanding. For purposes of calculating such percentage, shares of Common
Stock constituting Registrable Securities shall be deemed to equal the
number of shares of converted shares of Class B Preferred Stock in respect
of which such shares of Common Stock were issued.
"Registrable Securities" means (i) all shares of Class B Preferred
Stock and all shares of Common Stock that have been issued, or are issuable
on conversion, in respect of the Class B Preferred Stock pursuant to the
provisions of Section 7 of the Class B Amendment, (ii) any other securities
that are received by the Holders pursuant to the provisions of Section 7 of
the Class B Amendment, (iii) any other capital stock of the Company, the
holders of which shall have the right, without limitation as to amount,
either to all or to a share of the balance of current dividends and
liquidating dividends after the payment of dividends and distributions on
any shares entitled to preference, and (iv) any other securities into which
or for which any of the securities described in clauses (i) through (iii)
above may be or have been converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise,
until such time as (a) they have been effectively registered under the
Securities Act of 1933, as amended (the "Securities Act") for resale and
sold thereunder, (b) they are distributed to the public pursuant to Rule
144 (or any similar provisions then in force) under the Securities Act, (c)
they shall have been otherwise transferred, new certificates therefor not
bearing a legend restricting further transfer shall have been issued by the
Company and subsequent disposition thereof shall not require registration
under the Securities Act, or (d) they shall have ceased to be outstanding.
Limited Waiver of Ownership Limit. The Charter of the Company provides
certain restrictions on the ownership of the Company's capital stock (the
"Ownership Restrictions") intended to preserve the Company's status as a REIT.
In order to enable the Purchaser to own the Class B Preferred Stock (and Common
Stock into which the Class B Preferred Stock is converted), the Company granted
a limited waiver of the Ownership Restrictions to the Purchaser and its majority
member. The waiver generally covers the Class B Preferred Stock, any Common
Stock into which the Class B Preferred Stock is converted, and an additional de
minimis amount of Common Stock. The waiver contains additional terms designed to
preserve the Company's status as a REIT, including provisions that cause the
waiver to become void ab initio or to expire upon the occurrence of certain
events. The waiver enables the Purchaser to transfer shares covered thereby to
another person in a transaction that otherwise would violate the Ownership
Restrictions, subject to conditions that include the Company's right of first
refusal to acquire the shares in excess of the shares that the transferee could
acquire without violating the Ownership Restrictions. The Company and the
Purchaser also agreed to certain indemnification provisions relating to the
effect of the Purchaser's ownership of the Company's capital stock on the REIT
status of the Company.
PLAN OF DISTRIBUTION
General. The Class B Preferred Stock will be issued and sold to Five Arrows
Realty Securities L.L.C. (the "Purchaser"), pursuant to that certain Investment
Agreement, dated as of May 27, 1997 (the "Investment Agreement"), at a purchase
price of $21.25 per share.
Closings. Pursuant to the terms of the Investment Agreement, the Company
and the Purchaser have agreed to sell and purchase, respectively, the Class B
Preferred Stock as follows. The Company is entitled to designate up to three
closings, the first two of which shall provide for the sale of at least 243,903
shares of Class B Preferred Stock each and the last of which shall provide for
the remaining shares of Class B Preferred Stock. Each closing shall occur on
such date as the Company notifies the Purchaser on not less than 10 business
days' notice, provided that if the sale of all the Class B
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<PAGE> 17
Preferred Stock provided for in the Investment Agreement shall not have occurred
before December 31, 1997, the closing for such shares of Class B Preferred Stock
as shall not previously been sold shall occur on such date.
Transaction Fee. The Company agrees to pay to Rothschild Realty, Inc.
("Rothschild") at each Closing a transaction fee of $0.75 per share of Class B
Preferred Stock issued at such closing (the "Transaction Fee"). The Transaction
Fee payable at each Closing pursuant to the Investment Agreement shall be paid
by wire transfer of funds immediately available to such account(s) as Rothschild
shall designate in a written notice delivered to the Company not less than two
Business Days prior to such Closing Date, provided, however, that the Purchaser,
on behalf of the Company, may directly pay the Transaction Fee out of the
purchase price payable hereunder at each Closing.
Lock-Up. Pursuant to the Investment Agreement, the Purchaser agreed that
until June 30, 1998, it shall not sell, transfer, convey, assign, pledge or
hypothecate any of the shares of Class B Preferred Stock or Class A Preferred
Stock or any shares of Common Stock obtained upon conversion of any shares of
Class B Preferred Stock or Class A Preferred Stock.
Standstill. Pursuant to the Investment Agreement, the Purchaser agreed that
until January 1, 1999, it and its affiliates will not (a) acquire, offer to
acquire, or agree to acquire, directly or indirectly, by purchase or otherwise,
any voting securities, direct or indirect rights or options to acquire any
voting securities, direct or indirect rights or options to acquire any voting
securities, or securities or instruments convertible into voting securities, of
the Company, (b) make, or in any way participate, directly or indirectly, in any
"solicitation" of "proxies" to vote (as such terms are used in the proxy rules
of the Securities and Exchange Commission) securities of the Company, or seek to
advise or influence any person or entity with respect to any voting of any
securities of the Company, (c) form, join or in any way participate in a "group"
within the meaning of Section 13(d)(3) of the Exchange Act, with respect to any
voting securities of the Company, (d) make any public announcement with respect
to or make or submit a proposal or offer (with or without conditions) for the
securities or assets of the Company or any extraordinary transaction involving
the Company or any of its Subsidiaries, (e) submit or effect any filing or
application, or seek to obtain any permit, consent or agreement, approval or
other action, required by or from any regulatory agency with respect to an
acquisition of the Company or any of its securities or assets, (f) otherwise act
alone or in concert with others to seek to control the management, board of
directors or policies of the Company; or (g) propose any of the foregoing unless
and until such proposal is specifically invited by the Company.
LEGAL MATTERS
Certain legal matters related to the shares of Class B Preferred Stock
offered by the Company will be passed upon for the Company by Gibson, Dunn &
Crutcher LLP, Los Angeles, California. Gibson, Dunn & Crutcher LLP will rely
upon the opinion of Piper & Marbury LLP, Baltimore, Maryland, as to certain
matters of Maryland law.
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<PAGE> 18
PROSPECTUS
[PAC GULF LOGO] $250,000,000
PACIFIC GULF PROPERTIES INC.
COMMON STOCK, PREFERRED STOCK, DEBT SECURITIES
AND
WARRANTS TO PURCHASE THE ABOVE SECURITIES
------------------------
Pacific Gulf Properties Inc. (the "Company") may offer and issue from time
to time (i) its debt securities (the "Debt Securities"), (ii) shares of its
common stock, par value $.01 per share (the "Common Stock"), (iii) shares of its
preferred stock, par value $.01 per share (the "Preferred Stock"), and (iv)
warrants to purchase Debt Securities, Common Stock or Preferred Stock (the
"Warrants"). The Debt Securities, Common Stock, Preferred Stock and Warrants are
herein collectively referred to as the "Securities," with an aggregate public
offering price not to exceed $250,000,000. The Securities may be offered in one
or more separate classes or series, in amounts and at prices and terms to be set
forth in one or more supplements to this Prospectus (each, a "Prospectus
Supplement"). Any Securities may be offered with other Securities or separately.
Debt Securities or Preferred Stock may be convertible into shares of Common
Stock.
Certain terms of any Debt Securities in respect of which this Prospectus is
being delivered will be set forth in the accompanying Prospectus Supplement
including, without limitation, the specific designation (including whether such
Debt Securities are senior or subordinated and whether such Debt Securities are
convertible), aggregate principal amount, purchase price, maturity, interest
rate (which may be fixed or variable) and time of payment of interest (if any),
terms (if any) for the subordination, redemption or conversion thereof, listing
(if any) on a securities exchange and any other specific terms of the Debt
Securities. Certain terms of any Preferred Stock in respect of which this
Prospectus is being delivered will be set forth in the accompanying Prospectus
Supplement including, without limitation, the designation, number of shares,
liquidation preference, purchase price, dividend, voting, redemption and
conversion provisions and any listing on a securities exchange. Certain terms of
any Warrants in respect of which this Prospectus is being delivered will be set
forth in the accompanying Prospectus Supplement, including the specific
designation, number, duration, purchase price and terms thereof, any listing of
the Warrants or the underlying securities on a securities exchange and any other
terms in connection with the offering, sale and exercise of the Warrants, as
well as the terms on which and the securities for which such Warrants may be
exercised. In addition, terms of the Securities may include limitations on
direct and beneficial ownership and restrictions on transfer of the Securities,
in each case as may be appropriate to preserve the status of the Company as a
real estate investment trust ("REIT") for federal income tax purposes. The
specific number of shares of Common Stock and issuance price per share will be
set forth in the applicable Prospectus Supplement.
The Company may sell all or a portion of any offering of its securities
directly, through agents designated from time to time, or to or through
underwriters or dealers. If any agents or underwriters are involved in the sale
of any of the Securities, their names, and any applicable purchase price, fee,
commission or discount arrangement between or among them, will be set forth, or
will be calculable from the information set forth, in the applicable Prospectus
Supplement. No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
Securities.
SEE "RISK FACTORS" BEGINNING AT PAGE 5 OF THIS PROSPECTUS FOR CERTAIN RISK
FACTORS RELEVANT TO AN INVESTMENT IN THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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 April 11, 1997
<PAGE> 19
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (the "Registration
Statement"), of which this Prospectus is a part, under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Securities. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. Statements contained in this Prospectus as to
the content of any contract or other document are not necessarily complete, and
in each instance reference is made to the copy of the contract or other document
filed as an exhibit to the Registration Statement, each statement being
qualified in all respects by that reference and the exhibits to the Registration
Statement. For further information regarding the Company and the Securities,
reference is hereby made to the Registration Statement, the exhibits to the
Registration Statement, and the documents incorporated by reference into the
Registration Statement, which may be obtained from the Commission at its
principal office in Washington, D.C., upon payment of fees prescribed by the
Commission.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. These reports, proxy and information statements, and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at 13th Floor, 7 World
Trade Center, New York, New York 10048, and at 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 at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Electronic filings
made through the Electronic Data Gathering, Analysis and Retrieval System are
publicly available though the Commission's web site (http://www.sec.gov). The
Common Stock is traded on the New York Stock Exchange, Inc. ("NYSE"). The
reports, proxy and information statements and other information can also be
inspected at the offices of NYSE, 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference the following documents
heretofore filed by the Company under the Exchange Act with the Commission.
(a) The Company's Annual Report on Form 10-K, for its fiscal year
ended December 31, 1996;
(b) The Company's Current Report on Form 8-K, dated February 18, 1997;
and
(c) The description of the Company's Common Stock and 8.375%
Convertible Subordinated Debentures due 2001 contained in its Registration
Statement on Form 8-A/A filed with the Commission, on January 25, 1994
(file no. 1-12546) and on Form 8-A filed with the Commission on October 29,
1996 (file no. 1-12708).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference into this Prospectus, and to be a part hereof from the date of
filing such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of the Registration Statement, this Prospectus, and any
applicable Prospectus Supplement to the extent that a statement contained in the
Registration Statement, this Prospectus, any applicable Prospectus Statement or
any other subsequently filed document that is also incorporated by reference
herein modifies or supersedes that statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a Prospectus is delivered, upon written
or oral request of that person, a copy of any document incorporated herein by
reference (other than exhibits to those documents unless the exhibits are
specifically incorporated by reference into the documents that this Prospectus
incorporates by reference). Written or oral requests should be directed to
Stockholder Relations, Pacific Gulf Properties Inc., 363 San Miguel Drive,
Newport Beach, California 92660; telephone (714) 721-2700.
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<PAGE> 20
THE COMPANY
Pacific Gulf Properties Inc., a self-administered and self-managed equity
REIT, owns, operates, leases, acquires and rehabilitates industrial and
multifamily properties. In addition, the Company has recently begun to develop
properties, including redevelopment of an industrial property consisting of
approximately 327,000 square feet and development of an active senior
residential property consisting of approximately 166 units. The Company's
properties are located in California and the Pacific Northwest, with the largest
concentration in Southern California. The Company focuses on this geographic
region due to management's extensive experience in these markets, and
management's belief that these markets present potential for long-term economic
growth. At February 28, 1997, the Company owned a portfolio of 24 industrial
properties, containing approximately 5.7 million leasable square feet (the
"Industrial Properties"), and 22 multifamily properties, containing 4,110
apartment units (the "Multifamily Properties," and together with the Industrial
Properties, the "Properties.") As of February 28, 1997, the Company's Industrial
Properties and Multifamily Properties experienced occupancy rates of 97% and
93%, respectively.
Management believes that focusing on two property types allows the Company
greater investment opportunities and flexibility than would be available by
investing only in one property type. Apartments have shorter leases than
industrial properties and, hence, apartment rental income reacts more quickly to
changes in economic conditions. Lease income on industrial properties reacts
more slowly to changes in the real estate economy due to longer term leases on
such properties. The values of these two property types and the opportunities
they present for growth are affected by the timing of such rental adjustments.
This distinction, along with other market factors that impact the demand for
multifamily and industrial properties differently, provides the Company with
greater options in implementing its investment, disposition and property
management strategies.
The Company seeks to maximize cash flow per share by improving net
operating income (rental property income less rental property expenses) of
existing properties, by acquiring or developing additional properties and by
reducing its cost of capital. Management closely monitors rental operations and
administrative expenses, utilizes new technologies, periodically conducts
contract reviews, and seeks opportunities to maximize economies of scale in
order to control costs, reduce tenant turnover and assure that the Company is
competitive in all aspects of its operations. The Company also seeks to increase
stockholder value through the acquisition of properties that provide attractive
initial returns and opportunities to increase net operating income.
Additionally, the Company seeks well-located properties in strong markets where
values have suffered due to poor management or maintenance and that can be
acquired at less than replacement cost.
The Company's Common Stock is listed on the NYSE under the symbol "PAG."
The Company was incorporated in Maryland in August 1993. The Company's executive
offices are located at 363 San Miguel Drive, Newport Beach, California, 92660;
and its telephone number is (714) 721-2700. Unless the context otherwise
requires, as used herein the term "Company" includes Pacific Gulf Properties
Inc. and its consolidated subsidiaries, including without limitation its
operating partnership, PGP Inland Communities, L.P.
USE OF PROCEEDS
Unless otherwise described in any Prospectus Supplement that accompanies
this Prospectus, the Company intends to use the net proceeds from the sale of
the Securities for general corporate purposes, which may include acquiring
additional properties or interests in entities owning properties as suitable
opportunities arise, making improvements to properties, repaying certain
then-outstanding secured or unsecured indebtedness and for working capital.
Pending such uses, the Company may invest such net proceeds in short-term,
income-producing investments such as investment grade commercial paper,
government securities or money market funds that invest in government
securities.
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<PAGE> 21
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges for
the Company and for the predecessor to the Company prior to February 18, 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges...................... -- 1.12x 1.26x -- --
</TABLE>
Earnings for the year ended December 31, 1996 were inadequate to cover
fixed charges by approximately $.2 million as a result primarily of the non-cash
charge of $3.6 million relating to the Company's exchange of debentures for
common stock. The ratio of earnings to fixed charges excluding this $3.6 million
non-cash items is 1.18 to 1.
For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of pre-tax income excluding non-recurring and extraordinary
items, the effects of discontinued operations, the cumulative effect of
accounting changes and fixed charges. Fixed charges consist of interest expense,
capitalized interest and amortization of deferred financing costs.
Prior to completion of the Company's initial public offering in February
1994, the predecessor of the Company operated in a highly leveraged manner. As a
result, although the Company and the predecessor have historically generated
positive net cash flow, the financial statements of the predecessor show net
losses for the periods prior to February 1994. Consequently, the computation of
the ratio of earnings to fixed charges for such periods indicate that earnings
were inadequate to cover fixed charges by approximately $1.6 million and $2.3
million for the years ended December 31, 1993 and 1992, respectively.
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<PAGE> 22
RISK FACTORS
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 Securities. This Prospectus
and the accompanying Prospectus Supplement include certain statements that may
be deemed to be "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. All statements, other
than statements of historical facts, included in this Prospectus that address
activities, events or developments that the Company expects, believes or
anticipates will or may occur in the future, including such matters as future
capital expenditures, dividends and acquisitions (including the amount and
nature thereof), the use of proceeds of the offering of the Securities,
expansion and other development trends of the real estate industry, business
strategies, expansion and growth of the Company's operations and other such
matters are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate. Such statements are
subject to a number of assumptions, risks and uncertainties, including the risk
factors discussed below, general economic and business conditions, the business
opportunities that may be presented to and pursued by the Company, and changes
in laws or regulations and other factors, many of which are beyond the control
of the Company. Prospective investors are cautioned that any such statements are
not guarantees of future performance and that actual results or developments may
differ materially from those anticipated in the forward-looking statements.
DEBT FINANCING; RISK OF RISING INTEREST RATES
The Company is 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, that the Company will not
be able to refinance existing indebtedness, or that the terms of such
refinancing will not be as favorable as the terms of existing indebtedness. As
of December 31, 1996, the Company had outstanding approximately $13.7 million of
unsecured indebtedness and $183.7 million of indebtedness secured by certain of
its Properties.
If prevailing interest rates or other factors at the time of a refinancing
result in higher interest rates on refinancing, the Company's interest expense
would increase, which would adversely affect the Company's cash provided by
operating activities and its ability to maintain or improve its Properties or to
make distributions or payments to holders of its securities. In addition, in the
event the Company were unable to secure refinancing of such indebtedness on
acceptable terms, the Company might be forced to dispose of properties upon
disadvantageous terms, which might result in losses to the Company and might
adversely affect the Company's cash flow or operating results. In addition, if a
property or properties are mortgaged to secure payment of indebtedness and the
Company is unable to meet mortgage payments, the property could be foreclosed
upon by or otherwise transferred to the mortgagee with a consequent loss of
income and asset value to the Company.
As of December 31, 1996, certain of the Properties were subject to variable
rate mortgage indebtedness. At that date, the weighted average interest rate on
such outstanding indebtedness was 7.4%. An increase in interest rates will have
an adverse effect on the Company's net income and results of operations.
RISKS OF ACQUISITION AND DEVELOPMENT ACTIVITIES
The Company intends to actively continue to acquire Industrial and
Multifamily Properties. Acquisitions of such properties entail risks that
investments will fail to perform in accordance with expectations. Estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate. In addition, there are general real estate investment risks
associated with any new real estate investment.
The Company has also recently begun to pursue Industrial and Multifamily
residential property development projects. Such projects generally require
various governmental and other approvals, the receipt of
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<PAGE> 23
which cannot be assured. Such development activities 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, possibly making the project not
economical; 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 development project
causing a reduction in cash flow or operating results or the funds available for
distribution.
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments are subject to a variety of risks. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If the Properties do not generate sufficient
income to meet operating expenses, including debt service and capital
expenditures, the Company's cash flow and ability to make distributions to its
stockholders will be adversely affected. The performance of the economy in each
of the areas 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 may have an impact on the cash flow and value of certain of the
Properties.
Increases in income, service or other taxes generally are not passed
through to tenants under leases and may adversely affect the Company's cash flow
or operating results and its ability to make distributions to stockholders.
Similarly, compliance with current federal, state or local laws, or changes in
such laws, including (i) laws increasing the potential liability for
environmental conditions existing on properties or the restrictions on
discharges or other conditions, (ii) rent control or rent stabilization laws or
other laws regulating housing or (iii) laws (such as the Americans with
Disabilities Act) requiring modifications to existing buildings to improve
access to such buildings by disabled persons, may result in significant
unanticipated expenditures, which would adversely affect the Company's cash flow
or operating results and its ability to make distributions to stockholders.
LACK OF GEOGRAPHIC DIVERSIFICATION
The Properties are located in California and the Pacific Northwest, with
the largest concentration in Southern California. Income from the Properties may
be adversely affected by the general economic climate, local economic conditions
in which the Properties are located, such as an 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 the 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.
AFFORDABLE HOUSING LAWS
Certain of the Company's Multifamily Properties are, and will be in the
future, subject to federal, state and local statutes or other restrictions
requiring that a percentage of apartment homes be made available to residents
whose incomes do not exceed a certain percentage of the local median. These laws
and regulations, as well as any changes thereto making it more difficult to meet
such requirements, or a reduction in or elimination of certain financing
advantages available to those persons satisfying such requirements, could
adversely affect the Company's profitability and its ability to develop certain
communities in the future.
A certain amount of the Properties are financed by tax-exempt financing.
The tax-exempt financing subjects these Properties to certain deed restrictions
and restrictive covenants. In addition, the Internal Revenue Code of 1986, as
amended, (the "Code") and the regulations promulgated thereunder impose various
restrictions, conditions and requirements relating to the exclusion from gross
income for Federal income tax purposes of interest on qualified bond
obligations, including requirements that at least 20% of
6
<PAGE> 24
apartment units be occupied by residents with gross incomes that do not exceed
50% of the median income for the applicable family size as determined by the
Housing and Urban Development Department of the Federal government. In addition
to Federal requirements, certain state and local authorities may impose
additional rental restrictions. The bond compliance requirements and the
requirements of any future tax-exempt bond financing utilized by the Company may
have the effect of limiting the Company's income from the tax-exempt median
income test. If the required number of apartment homes are not reserved form
residents satisfying these income requirements, the tax-exempt status of the
bonds may be terminated, the obligations of the Company under the bond documents
may be accelerated and other contractual remedies against the Company may be
available.
COMPETITION
Numerous industrial and residential 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 Properties. The number of
competitive properties in a particular area could have a material effect on the
Company's ability to lease space in its Properties or at newly developed or
acquired properties and on the rents charged.
POSSIBLE ENVIRONMENTAL LIABILITIES
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 or removal or remediation of
such substances at a disposal or treatment facility, whether or not such
facility is owned or operated by such person. 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.
Certain environmental laws impose liability for any release of
asbestos-containing materials ("ACMs") into the air. In addition, third parties
may seek recovery from owners or operators of real properties for personal
injury associated with exposure to ACMs released from such properties. Limited
quantities of ACMs are present in various building materials such as floor
coverings, ceiling texture material, acoustical tiles and decorative treatments
located at certain Properties. The ACMs present at such Properties are generally
in good condition, and possess low probabilities for unintentional disturbance.
The Company has implemented operations and maintenance plans for Properties
where ACMs are present or reasonably suspected. It is the Company's general
policy that ACMs will be removed by the Company in the ordinary course of
renovation and construction.
Moreover, there may be potential liability associated with lead-based paint
arising from lawsuits alleging personal injury and related claims. Typically,
the existence of lead paint is more of a concern in residential units than in
commercial properties. Although a structure built prior to 1978 may contain
lead-based paint and may present a potential for exposure to lead, structures
built after 1978 are not likely to contain lead-based paint. Although the
Company's existing Multifamily Properties have not been tested for lead-based
paint, the majority were constructed after 1978, and therefore are not likely to
contain lead-based paint.
The Company also recognizes that the Properties' values may be affected by
the proximity of the Properties to electric transmission lines. Electric
transmission lines are one of many sources of electro-magnetic fields ("EMFs")
to which people may be exposed. Research completed regarding potential health
concerns associated with exposure to EMFs has produced inconclusive results.
Notwithstanding the lack of conclusive scientific evidence, some states now
regulate the strength of electric and magnetic fields emanating
7
<PAGE> 25
from electric transmission lines, and other states have required transmission
facilities to measure for levels of EMFs. The Company understands that, on
occasion, lawsuits have been filed (primarily against electric utilities) that
allege personal injuries from exposure to transmission lines and EMFs, as well
as from fear of adverse health effects due to such exposure. This fear of
adverse health effects from transmission lines has been considered both when
property values have been determined to obtain financing, and in condemnation
proceedings. The Company has not searched for electric transmission lines near
the Properties, but the Company is aware of the potential exposure to damage
claims by persons exposed to EMFs.
Each of the Properties has been subjected to a Phase I or similar
environmental assessment. These assessments, completed by licensed and qualified
independent environmental consulting companies, usually are completed without
radon testing, and involve general inspections without soil sampling or
groundwater analysis. Some of the Properties have been subject to a limited
subsurface investigation. While these environmental assessments have not
revealed any environmental liability, no assurances can be given that such
assessments would reveal all such liabilities. Similarly, while the Company's
management is not aware of any environmental liability that it believes would
have a material adverse effect on the Company's business, assets or results of
operations, no assurances can be given that either a material environmental
condition does not otherwise exist as to any one or more of the Properties, or
that a prior owner of any of the Properties did not create any such condition
not known to the Company.
GENERAL UNINSURED LOSSES
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance for each of its Properties, with policy
specifications, limits and deductibles customarily carried for similar
properties. However, certain types of extraordinary losses exist which are
either uninsurable or not economically insurable. Further, all of the Properties
are located in areas subject to earthquake activity. Although the Company has
obtained certain limited earthquake insurance policies, should one or more of
the Properties sustain damage as a result of an earthquake, the Company may
sustain losses due to insurance deductibles and co-payments on insured or
uninsured losses.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Tax Liabilities Upon Failure to Qualify as a REIT. The Company made the
election to be treated for Federal income tax purposes as a REIT under the Code.
No assurance can be given that the Company will operate in a manner enabling it
to remain so qualified. Qualification as a REIT involves the application of
numerous highly technical and complex Code provisions which have only a limited
number of judicial or administrative interpretations, and the determination of
various factual matters and circumstances not entirely within the Company's
control may impact its ability to qualify as a REIT. See "Federal Income Tax
Considerations." In addition, no assurance can be given that new legislation,
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to REIT qualification or the
Federal income tax consequences of such qualification.
If in any taxable year the Company does not qualify as a REIT, it would be
taxed as a regular corporation and distributions to its stockholders would not
be deductible by the Company in computing its taxable income. In addition,
unless entitled to relief under certain statutory provisions, the Company would
also be disqualified from REIT treatment for the four taxable years following
the year during which qualification was lost. This treatment would significantly
reduce the funds available for investment, distribution or payment to holders of
Securities because of the additional tax liability of the Company for the year
or years involved. In addition, the Company would no longer be required by the
Code to make any distributions.
To qualify as a REIT, the Company is required to distribute at least 95% of
its taxable income to its stockholders each year. Possible timing differences
between receipt of income and payment of expenses, and the inclusion and
deduction of such amounts in determining taxable income, could require the
Company to borrow funds or dispose of assets in order to pay dividends, or to
reduce its dividends below the level necessary to maintain its qualification as
a REIT, which would have material adverse tax consequences.
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<PAGE> 26
Qualification of Certain Entities as Partnerships for Federal Income Tax
Purposes; Impact on REIT Status. PGP Inland Communities, L.P., the Company's
subsidiary operating partnership, and Pacific Inland Communities, LLC, the
entity used to effect certain tax-exempt financing of the Company (collectively,
the "Partnerships"), are intended to be treated as partnerships for Federal
income tax purposes. If the Internal Revenue Service, (the "IRS") were to
successfully challenge the status of either or both of the Partnerships as
partnerships for Federal income tax purposes, then either or both of the
Partnerships would be treated as an association taxable as a corporation. In
such event, for Federal income tax purposes the character of the Company's
assets and income pertaining to its interest in the Partnerships would change,
and could cause the Company to fail to meet the requirements for taxation as a
REIT for Federal income tax purposes and therefore to be taxed as a regular
corporation. The imposition of a corporate tax on the Company and on one or both
of the Partnerships would significantly reduce the funds available for
investment, distribution or payment to holders of the Securities.
Other REIT Taxes. Certain transactions or other events could lead to the
Company being taxed at rates ranging from 4% to 100% on certain income or gains.
See "Federal Income Tax Considerations."
DEPENDENCE ON KEY PERSONNEL
The Company's management has substantial experience in acquiring, managing
and financing industrial and multifamily properties. The Company believes that
its success will depend in significant part upon the efforts of such persons and
that it may be difficult to replace such persons with individuals having
comparable experience.
ISSUANCE OF SHARES MAY ADVERSELY AFFECT MARKET PRICE OF COMMON STOCK AND DILUTE
PER SHARE AMOUNTS AVAILABLE FOR DISTRIBUTION.
Future issuances of substantial amounts of Common Stock upon conversion of
the Company's 8.375% Convertible Subordinated Debentures (the "Debentures")
could adversely affect the market price for the Common Stock and dilute per
share amounts available for distribution to stockholders. An aggregate of
$56,551,000 in principal amount of Debentures, convertible into an aggregate of
3,036,710 additional shares of Common Stock, was issued by the Company in
February 1994. In December 1996, the Company consummated an exchange offer
pursuant to which it issued an aggregate of 2,440,002 shares of Common Stock in
exchange for $42,069,000 in principal amount of Debentures (at a rate of 58
shares of Common Stock for each $1,000 principal amount of Debentures).
Accordingly, an aggregate of $14,437,000 in principal amount of Debentures is
currently outstanding. The Debentures are convertible at any time at the
election of the holders at a rate of 53.6986 shares of Common Stock per $1,000
principal amount of Debentures, resulting in 268,852 issuable shares.
DESCRIPTION OF CAPITAL STOCK
The summary of the terms of the Company's Capital stock set forth below
does not purport to be complete and is subject to and qualified in its entirety
by reference to the Articles of Incorporation and Bylaws of the Company.
GENERAL
The Articles of Incorporation of the Company provide that the Company may
issue up to 60,000,000 shares of capital stock, consisting of 25,000,000 shares
of common stock, par value $.01 per share (the "Common Stock"), 30,000,000
shares of excess stock, par value $.01 per share (the "Excess Stock"), and
5,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"). As of March 3, 1997, 12,058,273 shares of Common Stock were issued and
outstanding. On December 31, 1996, the Company entered into an agreement to
issue 1,351,351 shares of Class A Senior Cumulative Convertible Preferred Stock
to an institutional investor on or before December 31, 1997. Under Maryland law,
stockholders generally are not liable for a corporation's debts or obligations.
9
<PAGE> 27
COMMON STOCK
Any shares of Common Stock offered hereby by the Company will be issued and
delivered upon receipt of payment. Subject to the preferential rights of any
other shares or series of capital stock holders of Common Stock will be entitled
to receive distributions on such shares if, as and when authorized and declared
by the Board of Directors of the Company out of assets legally available
therefor, and to share ratably in the assets of the Company legally available
for distribution to its stockholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all known
debts and liabilities of the Company.
The Company commenced quarterly distributions on its Common Stock on April
15, 1994, and intends to continue making quarterly distributions on the
outstanding shares of Common Stock.
Subject to the matters discussed under "Certain Provisions of Maryland Law
and of the Company's Articles of Incorporation and Bylaws -- Control Share
Acquisitions," each outstanding share of Common Stock entitles the holder to one
vote on all matters submitted to a vote of stockholders, including the election
of directors, and, except as otherwise required by law or except as provided
with respect to any other class or series of stock, the holders of such Common
Stock will possess the exclusive voting power. There is no cumulative voting in
the election of directors, which means that the holders of a plurality of the
outstanding Common Stock can elect all of the directors then standing for
election and the holders of the remaining Common Stock will not be able to elect
any directors.
Holders of Common Stock have no conversion, sinking fund, redemption rights
or preemptive rights to subscribe for any securities of the Company.
All shares of Common Stock will have equal dividend, distribution,
liquidation and other rights, and will have no preference, appraisal or exchange
rights.
Pursuant to the Maryland General Corporation Law (the "MGCL"), a
corporation generally cannot dissolve, amend its Articles of Incorporation,
merge, transfer all or substantially all of its assets, engage in a share
exchange or engage in certain similar fundamental transactions unless
recommended by the Board of Directors and approved by the affirmative vote of
stockholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all of the
votes entitled to be cast on the matter) is set forth in the corporation's
Articles of Incorporation. The Company's Articles of Incorporation require the
affirmative vote of stockholders holding at least a majority of all the votes
entitled to be cast on such matters. In addition, a number of other provisions
of the MGCL could have a significant effect on the Common Stock and the rights
and obligations of holders thereof. See "Certain Provisions of Maryland Law and
of the Company's Articles of Incorporation and Bylaws."
The transfer agent and registrar for the Common Stock is Harris Trust
Company of California.
Purchasers of Common Stock will be subject to the restrictions on ownership
and transfer of the capital stock of the Company described below under the
heading "Ownership and Transfer Restrictions and Redemption Provisions." Such
provisions could affect a purchaser's ability to vote, to receive dividend and
other distributions, to convert or to otherwise obtain the benefit of
Securities.
CLASS A SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK
On December 31, 1996, the Company entered into an agreement to issue
1,351,351 shares of Class A Senior Cumulative Convertible Preferred Stock (the
"Class A Preferred Shares") to Five Arrows Realty Securities L.L.C. ("Five
Arrows") at a price of $18.50 per share. The Company is obligated to issue the
Class A Preferred Shares over the course of 1997 in a maximum of three separate
issuances, the timing of which may be specified by the Company, provided that
the Company will be charged with certain availability fees if all of the Class A
Preferred Shares are not issued before July 1, 1997. On April 3, 1997, the
Company consummated the first of these closings and sold to Five Arrows 270,270
Class A Preferred Shares pursuant to such agreement for an aggregate purchase
price of $5 million. Management believes the issuance of Class A Preferred
Shares will provide the Company with ready access to additional capital in order
to complete additional acquisitions or to provide additional working capital.
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The holders of the Class A Preferred Shares and the holders of the Common
Stock vote together as a single class. Each Class A Preferred Share is
convertible into one share of Common Stock, subject to adjustment upon certain
events. The annual dividend per share on the Class A Preferred Shares is (i)
$1.70 from the date of issuance until December 31, 1997, and (ii) the greater of
$1.70 or 104% of the then-current dividend on the Common Stock thereafter. The
liquidation preference of the Class A Preferred Shares is $18.50 per share, plus
an amount equal to any accumulated, accrued and unpaid dividends. The Company
may redeem the Class A Preferred Shares beginning on December 31, 2001 for cash
in an amount equal to $18.50 per Class A Preferred Share plus accrued and unpaid
dividends and plus a premium initially equal to 6.0% of $18.50. This premium
decreases to zero after December 31, 2009.
The Company has granted to Five Arrows, for as long as Five Arrows
maintains its ownership of either all of the Class A Preferred Shares or an
amount of voting securities that, if converted into Common Stock, would exceed
10% of the outstanding Common Stock, a seat on the Company's Board of Directors.
In addition, upon the occurrence of the failure of the Company to pay a
quarterly dividend on the Common Stock in an amount of at least $.40 per share,
the failure of the Company to meet certain earnings before interest,
depreciation and amortization budgets for three consecutive quarters or the
failure of the Company to pay accrued dividends on the Class A Preferred Shares,
Five Arrows would be granted one additional seat on the Board.
Five Arrows is prohibited from transferring any Class A Preferred Shares,
or any shares of Common Stock into which such Class A Preferred Shares have been
converted, until December 31, 1997. At that time, Five Arrows will have the
right, subject to certain conditions, to demand the Company effect the
registration under the Securities Act of 1933, as amended, of the Class A
Preferred Shares or the shares of Common Stock into which such Class A Preferred
Shares have been converted.
OWNERSHIP AND TRANSFER RESTRICTIONS AND REDEMPTION PROVISIONS
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its issued and outstanding capital stock may be owned, directly or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year, and the shares of
issued and outstanding capital stock of the Company must be beneficially owned
by 100 or more persons during at least 335 days of a taxable year of twelve
months (or during a proportionate part of a shorter taxable year). Because it is
essential for the Company to qualify as a REIT, the Articles of Incorporation
include certain provisions restricting the acquisition of the Company's capital
stock, including Common Stock and Preferred Stock (the "Ownership Limit
Provision").
The Ownership Limit Provision provides that, subject to certain exceptions,
no stockholder may own, or be deemed to own by virtue of the constructive
ownership provisions of the Code, more than the "Ownership Limit," which is
equal to 9.8% in value or in number, whichever is more restrictive, of the
issued and outstanding capital stock of the Company. The constructive ownership
rules are complex and may cause capital stock owned directly or constructively
by a group of related individuals or entities to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.8% in value or
in number of shares of the capital stock (or the acquisition of an interest in
an entity which owns Common Stock) by an individual or entity could cause that
individual or entity (or another individual or entity) to constructively own in
excess of 9.8% in value or in number of the issued and outstanding capital stock
of the Company, and thus subject such capital stock to the Ownership Limit. In
addition, for these purposes, Common Stock that may be acquired upon conversion
of Securities owned or deemed owned by an investor, but not other Common Stock,
is deemed to be owned by the investor and outstanding prior to conversion, for
purposes of determining the percentage of ownership of capital stock owned by
that investor.
The Board of Directors may waive the Ownership Limit with respect to a
particular stockholder if such person is not an individual for purposes of
applying the "five or fewer" rule described above, the Board of Directors
obtains such representations and undertakings as are reasonably necessary to
ascertain that no individual's actual or deemed ownership of capital stock will
violate the Ownership Provision, and such person agrees that, if the IRS Ruling
Satisfactory to the Corporation has been obtained, a violation of such
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representations and undertakings will result in such capital stock being
exchanged for Excess Stock. As a condition of such waiver, the Board of
Directors may require a ruling from the IRS or an opinion of counsel
satisfactory to it in its sole discretion as it may deem necessary or advisable
in order to determine or ensure the Company's status as a REIT. The ability of
the Board of Directors to waive the Ownership Limit Provision does not apply to
a waiver that would result in capital stock being beneficially owned by fewer
that 100 persons or that would result in a violation of the "five or fewer" rule
discussed above. In connection with its acquisition of the Class A Preferred
Shares, Five Arrows has been given a limited waiver of the Ownership Provision.
The Articles of Incorporation provide that a transfer or other event that
results in a person owning capital stock in excess of the Ownership Limit is
null and void ab initio as to the intended transferee or purported owner, and
the intended transferee or purported owner acquires or retains no rights or
economic interest in those shares of capital stock. However, if the Company
obtains a ruling by the United States Internal Revenue Service ( the "IRS"),
that provides in form and substance satisfactory to the Board of Directors of
the Company that the issuance by the Company of Excess Stock and the immediate
conversion of the Common Stock or Preferred Stock into such Excess Stock will
not cause the Company to fail to satisfy the requirements that must be met to
qualify for treatment as a REIT (an "IRS Ruling Satisfactory to the
Corporation"), capital stock purportedly owned, or deemed to be owned, or
transferred to a person in excess of the Ownership Limit, will automatically be
exchanged for Excess Stock that will be transferred, by operation of law, to a
trust for the exclusive benefit of the transferee or transferees to whom the
capital stock may ultimately be transferred (without violating the Ownership
Limit). The Excess Stock will possess such terms, limitations and rights as set
forth in Articles Supplementary adopted by the Board of Directors and filed of
record with the Maryland State Department of Assessments and Taxation and as are
necessary or prudent to enable the Company to obtain the IRS Ruling Satisfactory
to the Corporation. It is anticipated that the proposed transferee or owner will
not be entitled to vote, and will not be entitled to participate in any
appreciation of, or any distributions made by the Company in respect of, such
Excess Stock. It is also anticipated that any dividend or distribution paid on
Excess Stock to a purported transferee or owner prior to discovery by the
Company that such shares have become purportedly owned in violation of the
Ownership Limit Provision shall be held for the benefit of the beneficiary of
the trust in which such shares are held. In addition, the Company would have the
right, for a period of 90 days, to purchase all or any portion of the Excess
Stock at a price equal to the lesser of the price paid for the shares of capital
stock by the intended transferee or owner and the closing market price for the
shares of capital stock on the date the Company exercises its option to purchase
the capital stock. This 90-day period commences on the date of the violative
transfer of ownership if the intended transferee or owner gives notice of the
transfer to the Company as required by the Articles of Incorporation, or the
date the Board of Directors determines that a violative transfer has occurred
with no such notice is provided.
The Ownership Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the Board of Directors and the stockholders of
the Company determine that it is no longer in the best interest of the Company
to attempt to qualify, or to continue to qualify, as a REIT. Except as otherwise
described above, any change of the Ownership Limit would require an amendment to
the Articles of Incorporation. Amendments to the Articles of Incorporation
require recommendation by the Board of Directors and the affirmative vote of
stockholders holding at least a majority of all the votes entitled to be cast on
the matter. In addition to preserving the Company's status as a REIT, the
Ownership Limit may have the effect of precluding an acquisition of control of
the Company without the approval of the Board of Directors.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
All persons who own a specified percentage (or more) of outstanding capital
stock must file an affidavit with the Company containing information regarding
their ownership of capital stock, as set forth in the Treasury Regulations.
Under current Treasury Regulations, the percentage will be set between one-half
of one percent and five percent, depending on the number of record holders of
capital stock. In addition, each stockholder shall upon demand by the Company 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
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deems necessary to comply with the provisions of the Code applicable to a REIT
or to comply with the requirements of any taxing authority or government agency.
The ownership limitations could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of capital stock
might receive a premium for their shares over the then prevailing market price
or which such holders might believe to be otherwise in their best interest.
DESCRIPTION OF PREFERRED STOCK
GENERAL
The following description of terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in such
Prospectus Supplement. The description of certain provisions of the Preferred
Stock set forth below and in any Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Company's Articles of Incorporation and the Board of Directors' resolution or
resolutions relating to each series of the Preferred Stock which will be filed
with the Commission and incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part at or prior to the
time of the issuance of such series of Preferred Stock.
Subject to limitations prescribed by the MGCL and the Articles of
Incorporation, the Board of Directors is authorized to issue shares of Preferred
Stock in one or more series, to establish from time to time the number of shares
of Preferred Stock to be included in any such series and to fix for any such
series the designation and any preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. The Company is authorized to issue five million shares
of Preferred Stock. On December 31, 1996, the Company entered into an agreement
to issue 1,351,351 shares of Class A Senior Cumulative Convertible Preferred
Stock to an institutional investor on or before December 31, 1997. On April 3,
1997, the Company issued and sold 270,270 shares of such stock to such
institutional investor. See "Description of Capital Stock -- Class A Senior
Cumulative Convertible Preferred Stock."
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below, unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number of
shares offered; (ii) the amount of liquidation preference per share; (iii) the
initial public offering price at which such Preferred Stock will be issued; (iv)
the dividend rate (or method of calculation), the dates on which dividends shall
be payable and the dates from which dividends shall commence to cumulate, if
any; (v) any redemption or sinking fund provisions; (vi) any conversion right;
(vii) any listing of the Preferred Stock on any securities exchange; (viii) any
additional voting, dividend, liquidation, redemption, sinking fund and other
rights, preferences, privileges, limitations and restrictions not in conflict
with the Articles of Incorporation or the MGCL; (ix) a discussion of Federal
income tax considerations applicable to the Preferred Stock; (x) the relative
ranking and preferences of the Preferred Stock as to dividends and rights upon
liquidation; and (xi) any limitations on direct or beneficial ownership and
restrictions on transfer. The Preferred Stock will, when issued for lawful
consideration therefor, be fully paid and nonassessable and will have no
preemptive rights.
Unless otherwise indicated in a Prospectus Supplement relating thereto,
Harris Trust Company of California will be the transfer agent and registrar for
shares of each series of Preferred Stock.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights upon liquidation, dissolution or
winding up of the Company, rank: (i) senior to all classes or
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series of Common Stock and to all equity securities ranking junior to such
Preferred Stock; (ii) on a parity with all equity securities issued by the
Company the terms of which specifically provide that such equity securities rank
on a parity with the Preferred Stock; and (iii) junior to all equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank senior to the Preferred Stock. The rights of the holders of each
series of Preferred Stock will be subordinate to those of the Company's general
creditors.
DIVIDENDS
Holders of each series of Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of the Company
legally available for payment, cash dividends at such rates and on such dates as
will be set forth in the applicable Prospectus Supplement. Such rate may be
fixed or variable or both. Each such dividend shall be payable to holders of
record as they appear on the share transfer books of the Company on such record
dates as shall be fixed by the Board of Directors, as specified in the
Prospectus Supplement relating to such series of Preferred Stock.
Dividends on any series of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors fails to declare a
dividend payable on a dividend payment date on any series of Preferred Stock for
which dividends are noncumulative, then the holders of such series of Preferred
Stock will have no right to receive a dividend in respect of the dividend period
ending on such dividend payment date, and the Company will have no obligation to
pay the dividend accrued for such period, whether or not dividends on such
series are declared payable on any future dividend payment date. Dividends on
shares of each series of Preferred Stock for which dividends are cumulative will
accrue from the date on which the Company initially issues shares of such
series.
So long as any series of Preferred Stock shall be outstanding, unless: (i)
full dividends (including, if such dividends are cumulative, dividends for prior
dividend periods) shall have been paid or declared and set apart for payment on
all outstanding shares of Preferred Stock of such series and all other classes
and series of Preferred Stock (other than "Junior Stock," as defined below); and
(ii) the Company is not in default or in arrears with respect to the mandatory
or optional redemption or mandatory repurchase or other mandatory retirement of,
or with respect to any sinking or other analogous fund for, any shares of
Preferred Stock of such series or any other Preferred Stock of any class or
series (other than Junior Stock), the Company may not declare any dividends on
any Common Stock or any other equity securities of the Company ranking as to
dividends or distributions of assets junior to such series of Preferred Stock
(the Common Stock and any such other equity securities being herein referred to
as "Junior Stock"), or make any payment on account of, or set apart money for
the purchase, redemption of other retirement of or for a sinking or other
analogous fund, for any Junior Stock or make any distribution in respect
thereof, whether in cash or property or in obligations or equity securities of
the Company, other than shares of Junior Stock which are neither convertible
into, nor exchangeable or exercisable for, any securities of the Company other
than shares of Junior Stock.
Any dividend payment made on a series of Preferred Stock shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series which remains payable.
REDEMPTION
A series of Preferred Stock may be redeemable in whole or in part, from
time to time, at the option of the Company, or may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon the terms,
at the times and at the redemption prices set forth in the Prospectus Supplement
related to such series. Shares of Preferred Stock redeemed by the Company will
be restored to the status of authorized but unissued Preferred Stock of the
Company.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such Preferred Stock
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does not have a cumulative dividend, include any accumulation in respect of
unpaid dividends for prior dividend periods) to the date of redemption. The
redemption price may be payable in cash or other property, as specified in the
applicable Prospectus Supplement. If the redemption price for Preferred Stock of
any series is payable only from the net proceeds of the issuance of equity
securities of the Company, the terms of such series of Preferred Stock may
provide that, if no such equity securities shall have been issued or, to the
extent the net proceeds from any issuance are insufficient to pay in full the
aggregate redemption price then due, such Preferred Stock shall automatically
and mandatorily be converted into the applicable equity securities of the
Company pursuant to conversion provisions specified in the applicable Prospectus
Supplement.
So long as any dividends on shares of any series of Preferred Stock or any
other series of Preferred Stock of the Company ranking on a parity as to
dividends and distribution of assets with such series of Preferred Stock are in
arrears, no shares of any such series of Preferred Stock or such other series of
Preferred Stock of the Company will be redeemed (whether by mandatory or
optional redemption) unless all such shares are simultaneously redeemed, and the
Company will not purchase or otherwise acquire any such shares; provided,
however, that the foregoing will not prevent the purchase or acquisition of such
shares pursuant to a purchase or exchange offer made on the same terms to
holders of all such shares outstanding.
In the event that fewer than all of the outstanding shares of a series of
Preferred Stock are to be redeemed, whether by mandatory or optional redemption,
the number of shares to be redeemed will be determined by lot or pro rata
(subject to rounding to avoid fractional shares) as may be determined by the
Company or by any other method as may be determined by the Company in its sole
discretion to be equitable. From and after the redemption date (unless default
shall be made by the Company in providing for the payment of the redemption
price plus accumulated and unpaid dividends, if any), dividends shall cease to
accumulate on the shares of Preferred Stock called for redemption and all rights
of the holders thereof (except the right to receive the redemption price plus
accumulated and unpaid dividends, if any) shall cease.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Junior Stock, the holders of each series of Preferred
Stock shall be entitled to receive out of assets of the Company legally
available for distribution to stockholders, liquidating distributions in the
amount of the liquidation preference per share (set forth in the applicable
Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid
thereon (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such Preferred Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidating distributions on all outstanding Preferred Stock and the
corresponding amounts payable on all shares of other classes or series of equity
securities of the Company ranking on a parity with the Preferred Stock in the
distribution of assets, then the holders of the Preferred Stock and all other
such classes or series of equity securities shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of shares of Junior Stock, according to their respective rights and
preferences and in each case according to their respective number of shares. For
such purposes, the consolidation or merger of the Company with or into any other
corporation, or the sale, lease or conveyance of all or substantially all of the
assets or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
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VOTING RIGHTS
Except as indicated below or in a Prospectus Supplement relating to a
particular series of Preferred Stock, or except as required by applicable law,
holders of the Preferred Stock will not be entitled to vote for any purpose.
So long as any series of Preferred Stock remains outstanding, the consent
or the affirmative vote of the holders of at least a majority of the votes
entitled to be cast with respect to the then outstanding shares of such series
of Preferred Stock together with any "Other Preferred Stock" (as defined below),
voting as one class, either expressed in writing or at a meeting called for that
purpose, will be necessary: (i) to permit, effect or validate the authorization,
or any increase in the authorized amount, of any class or series of equity
securities of the Company ranking prior to Preferred Stock of such series as to
dividends, voting or upon distribution of assets; and (ii) to repeal, amend or
otherwise change any of the provisions applicable to the Preferred Stock of such
series in any manner which adversely affects the powers, preferences, voting
power or other rights or privileges of such series of Preferred Stock. In case
any series of Preferred Stock would be so affected by any such action referred
to in clause (ii) above in a different manner than one or more series of Other
Preferred Stock which will also be affected, the holders of the Preferred Stock
of such series, together with any series of Other Preferred Stock which will be
similarly affected, will be entitled to be cast with respect to each such series
of Preferred Stock and Other Preferred Stock then outstanding, in lieu of the
consent or affirmative vote hereinafter otherwise required.
With respect to any matter as to which the Preferred Stock of any series is
entitled to vote, holders of the Preferred Stock of such series and any other
series of Preferred Stock ranking on a parity with such series of Preferred
Stock as to dividends and distributions of assets and which by its terms
provides for similar voting rights (the "Other Preferred Stock") will be
entitled to cast the number of votes set forth in the Prospectus Supplement with
respect to that series of Preferred Stock. As a result of the provisions
described in the preceding paragraph requiring the holders of shares of a series
of Preferred Stock to vote together as a class with the holders of shares of one
or more series of Other Preferred Stock, it is possible that the holders of such
shares of Other Preferred Stock could approve actions that would adversely
affect such series of Preferred Stock, including the creation of a class of
shares of stock ranking prior to such shares of Preferred Stock as to dividends,
voting or distributions of assets.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any 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 Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
the provisions as to whether conversion will be at the option of the holders of
the Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and the provisions affecting conversion.
DESCRIPTION OF WARRANTS
The Company may issue warrants to purchase Debt Securities (the "Debt
Warrants"), Preferred Stock (the "Preferred Stock Warrants") or Common Stock
(the "Common Stock Warrants," collectively with the Debt Warrants and the
Preferred Stock Warrants, the "Warrants"). Warrants may be issued independently
or together with any Securities and may be attached to or separate from such
Securities. The Warrants are to be issued under warrant agreements (each, a
"Warrant Agreement") to be entered into between the Company and a bank or trust
company, as warrant agent (the "Warrant Agent"), all as shall be set forth in
the Prospectus Supplement relating to the Warrants being offered pursuant
thereto.
DEBT WARRANTS
The applicable Prospectus Supplement will describe the terms of Debt
Warrants offered thereby, the Warrant Agreement relating to such Debt Warrants
and the debt warrant certificates representing such Debt
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Warrants, including the following: (1) the title of such Debt Warrants; (2) the
aggregate number of such Debt Warrants; (3) the price or prices at which such
Debt Warrants will be issued; (4) the designation, aggregate principal amount
and terms of the Debt Securities purchasable upon exercise of such Debt
Warrants, and the procedures and conditions relating to the exercise of such
Debt Warrants; (5) the designation and terms of any related Debt Securities with
which such Debt Warrants are issued, and the number of such Debt Warrants issued
with each such security; (6) the date, if any, on and after such Debt Warrants
and the related Debt Securities will be separately transferable; (7) the
principal amount of Debt Securities purchasable upon exercise of each Debt
Warrant, and the price at which such principal amount of Debt Securities may be
purchased upon such exercise; (8) the date on which the right to exercise such
Debt Warrants shall commence, and the date on which such right shall expire; (9)
the maximum or minimum number of such Debt Warrants that may be exercised at any
time; (10) a discussion of material federal income tax considerations, if any;
and (11) any other terms of such Debt Warrants and terms, procedures and
limitations relating to the exercise of such Debt Warrants.
Debt Warrant certificates will be exchangeable for new Debt Warrant
certificates of different denominations, and Debt Warrants may be exercised at
the corporate trust office of the Warrant Agent or any other office indicated in
the Prospectus Supplement. Prior to the exercise of their Debt Warrants, holders
of Debt Warrants will not have any of the rights of holders of the securities
purchasable upon such exercise and will not be entitled to payments of principal
of (or premium, if any) or interest, if any, on the securities purchasable upon
such exercise.
OTHER WARRANTS
The applicable Prospectus Supplement will describe the following terms of
Preferred Stock Warrants and Common Stock Warrants in respect of which this
Prospectus is being delivered: (1) the title of such Warrants; (2) the
Securities for which such Warrants are exercisable; (3) the price or prices at
which such Warrants will be issued; (4) the number of such Warrants issued with
each share of Preferred Stock or Common Stock: (5) the number of Securities
purchasable upon exercise of such Warrants and the price at which such
Securities may be purchased upon such exercise; (6) any provisions for
adjustment of the number or amount of shares of Preferred Stock or Common Stock
receivable upon exercise of such Warrants or the exercise price of such
Warrants; (7) if applicable, the date on and after which such Warrants and the
related Preferred Stock or Common Stock will be separately transferable; (8) if
applicable, a discussion of material federal income tax considerations; (9) any
other terms of such Warrants, including terms, procedures and limitations
relating to the exchange and exercise of such Warrants; (10) the date on which
the right to exercise such Warrants shall commence, and the date on which such
right shall expire; and (11) the maximum or minimum number of such Warrants that
may be exercised at any time.
EXERCISE OF WARRANTS
Each Warrant will entitle the holder of Warrants to purchase for cash such
principal amount of Debt Securities or shares of Preferred Stock or Common Stock
at such exercise price as shall in each case be set forth in, or be determinable
as set forth in, the Prospectus Supplement relating to the Warrants offered
thereby. Warrants may be exercised at any time up to the close of business on
the expiration date set forth in the Prospectus Supplement relating to the
Warrants offered thereby. After the close of business on the expiration date,
unexercised Warrants will become void.
Warrants may be exercised as set forth in the Prospectus Supplement
relating to the Warrants offered thereby. Upon receipt of payment and the
warrant certificate properly completed and duly executed at the corporate trust
office of the Warrant Agent or any other office indicated in the Prospectus
Supplement, the Company will, as soon as practicable, forward the Debt
Securities or shares of Preferred Stock or Common Stock purchasable upon such
exercise. If less than all of the Warrants represented by such warrant
certificate are exercised, a new warrant certificate will be issued for the
remaining Warrants.
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OWNERSHIP AND TRANSFER RESTRICTIONS
Purchasers of Warrants will be subject to the restrictions on ownership and
transfer of the capital stock of the Company described above under the heading
"Description of Capital Stock -- Ownership and Transfer Restrictions and
Redemption Provisions." Such provisions could affect a purchaser's ability to
vote, to receive dividend and other distributions, to convert or to otherwise
obtain the benefit of Securities.
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.
The Debt Securities are to be issued under an Indenture, as amended or
supplemented from time to time (the "Indenture"), between the Company and a
Trustee chosen by the Company and qualified to act as such under the Trust
Indenture Act of 1939 as amended (the "TIA") (together with any other trustee(s)
appointed in a supplemental indenture with respect to a particular series, the
"Trustee"). The Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part and will be 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
TIA. The Company will execute the Indenture if and when the Company issues the
Debt Securities. 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 Company.
Except for any series of Debt Securities which is specifically subordinated to
other indebtedness of the Company, the Debt Securities will rank equally with
all other unsecured and unsubordinated indebtedness of the Company. 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 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 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 may 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 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.
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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;
(2) the aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) the percentage of the principal amount at which such Debt Securities
will be issued and, if other than the principal amount thereof, the
portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the portion
of the principal amount of such Debt Securities which is convertible
into Common Stock or Preferred Stock, or the method by which any such
portion shall be determined;
(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 conversion or registration
of transfer, exchange or conversion and (iii) notices or demands to or
upon the Company in respect of such Debt Securities 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 Company, if the Company is to have such an option;
(9) the obligation, if any, of the Company 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 or
book-entry from;
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(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;
(16) if such Debt Securities are to be issued upon the exercise of debt
warrants, the time, manner and place for such Debt Securities to be
authenticated and delivered;
(17) the terms, if any, upon which such Debt Securities may be convertible
into Common Stock or Preferred Stock of the Company and the terms and
conditions upon which such conversion will be effected, including,
without limitation, the initial conversion price or rate, the
conversion period and, in connection with the preservation of the
Company's status as a REIT, limitations on the ownership of the Common
Stock or Preferred Stock into which such Debt Securities are
convertible;
(18) the terms and conditions, if any, upon which such Debt Securities may
be subordinated to other indebtedness of the Company;
(19) whether and under what circumstances the Company will pay Additional
Amounts as contemplated in the Indenture on such Debt Securities in
respect of any tax, assessment or governmental charge and, if so,
whether the Company will have the option to redeem such Debt
Securities in lieu of making such payment; and
(20) 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 Company to incur indebtedness or that would afford Holders of Debt
Securities protection in the event of a highly leveraged or similar transaction
involving the Company. However, restrictions on ownership and transfers of the
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
Company that are described below, including any addition of a covenant or other
provision providing event risk or similar protection.
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 Company, 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 Company 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 Company, and the
holder of the Debt Security thereafter may look only to the Company for payment
thereof.
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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).
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, 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 Company 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 Company
with respect to any series of Debt Securities, the Company may at any time
rescind the designation of any such transfer agent or approve a change in the
location through which any such transfer agent acts, except that the Company
will be required to maintain a transfer agent in each Place of Payment for such
series. The Company may at any time designate additional transfer agents with
respect to any series of Debt Securities (Section 1002).
Neither the Company 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 Company may consolidate with, or sell, lease or convey all or
substantially of its assets to, or merge with or into, any other trust or
corporation, provided (a) either the Company shall be the continuing entity, or
the successor (if other than the Company) formed by or resulting from any such
consolidation or merger or which shall have received the transfer of such assets
and is a corporation organized under the laws of any domestic jurisdiction and
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 Company or any Subsidiary as a
result thereof as having been incurred by the Company 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 officer's certificate
and legal opinion 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 will require the Company to do or cause to be done all things
necessary to preserve and keep in full force and effect its existence, rights
(declaration and statutory) and franchises; provided, however, that the Company
shall not be required to preserve any right or franchise if it determines that
the preservation thereof is no longer desirable
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in the conduct of its business and that the loss thereof is not disadvantageous
in any material respect to the Holders of the Debt Securities (Section 1004).
Maintenance of Properties. The Indenture will require the Company to cause
all of its material properties used or useful in the conduct of its business or
the business of any subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and will
cause to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Company may be necessary so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided, however, that the Company and
its subsidiaries shall not be prevented from selling or otherwise disposing of
their properties for value in the ordinary course of business. (Section 1007).
Insurance. The Indenture will require the Company to cause each of its and
its subsidiaries' insurable properties to be insured against loss of damage with
insurers of recognized responsibility and, if described in the applicable
Prospectus Supplement, in specified amounts and with insurers having a specified
rating from a recognized insurance rating service. (Section 1008).
Payment of Taxes and Other Claims. The Indenture will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any subsidiary or upon the income, profits or property of the
Company or any subsidiary and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Company or any subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any tax,
assessment, charge or claim whose amount, applicability is being contested in
good faith. (Section 1009).
Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Company will, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the Commission pursuant to such Section 13 or 15(d) (the "Financial
Statements") if the Company were so subject, such documents to be filed with the
Commission on or prior to the respective dates (the "Required Filing Dates") by
which the Company would have been required so to file such documents if the
Company were so subject. The Company will also in any event (x) file with the
Trustee copies of the annual reports, quarterly reports and other documents
which the Company would have been required to file with the Commission pursuant
to Section 13 or 15(d) of the Exchange Act if the Company were subject to such
Sections and (y) if filing such documents by the Company with the Commission is
not permitted under the Exchange Act, promptly upon written request and payment
of the reasonable cost of duplication and delivery, supply copies of such
documents to any prospective Holder (Section 1005).
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 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 indebtedness of the
Company outstanding in an aggregate principal amount in excess of $10,000,000 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; (f)
certain events of bankruptcy, insolvency or reorganization, or court appointment
of a receiver, liquidator or trustee of the Company or any Significant
Subsidiary or the property of either; (g) the acquisition by any Person
(including
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<PAGE> 40
any affiliates of such Person) of 35% or more of the Company's Common Stock,
unless the Company's Board of Directors shall have first approved of such
acquisition; and (h) any other Event of Default provided with respect to a
particular 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 Company. (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 25% 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 (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 than a majority in principal amount of
Outstanding Debt Securities of such series may rescind and annul such
declaration and its consequences if (a) the Company 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 25% 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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<PAGE> 41
Within 120 days after the close of each fiscal year, the Company must
deliver to the Trustee a certificate, signed by one of several specified
officers, 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 1006).
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 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 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
Company with certain covenants in the Indenture relating to such series (Section
1011).
Modifications and amendments of the Indenture may be made by the Company
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
Company as obligor under the Indenture; (ii) to add to the covenants of the
Company for the benefit of the Holders of all or any series of Debt Securities
or to surrender any right or power conferred upon the Company in the Indenture;
(iii) to add Events of Default for the benefit of the Holders of all or any
series of Debt Securities; (iv) to add or change any provisions of 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; (vii) to establish the form or
terms of Debt Securities of any series, including the provision and procedures,
if applicable, or the conversion of such Debt Securities into Common Stock or
Preferred Stock; (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; (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 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
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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 Company or
any other obligor upon the Debt Securities or any Affiliate of the Company 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 Company or the Holders of at
least 10% in principal amount of the Outstanding Debt Securities of such series,
in any such case upon notice given as provided in the Indenture (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 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).
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise provided in the Prospectus Supplement, the Company 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
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Indenture, the Company may elect either (a) to defease and be discharged from
any and all obligations with respect to such Debt Securities (except for the
obligation to pay Additional Amounts, if any, upon the occurrence of certain
events of tax, assessment or governmental charge with respect to payments on
such Debt Securities and the obligations to register the transfer or exchange of
such Debt Securities, to replace temporary or mutilated, destroyed, lost or
stolen Debt Securities, to maintain an office or agency in respect of such Debt
Securities and to hold moneys for payment in trust) ("defeasance") (Section
1402) or (b) to be released from its obligations with respect to such Debt
Securities under Sections 1004 and 1005, 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
Company 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 Company
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 is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt (Section 101).
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the Holder of a Debt Security of such series is entitled to, 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 they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or such
cessation of usage based on the applicable market exchange rate (Section 1405).
"Conversion Event" means
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the cessation of use of (i) a currency, currency unit or composite currency both
by the government of the country which issued such currency and for the
settlement of transactions by a central bank or other public institutions or
within the international banking community, (ii) the ECU both within the
European Monetary System and for the settlement of transactions by public
institutions of or within the European Communities or (iii) any currency unit or
composite currency other than the ECU for the purposes for which it was
established. (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 Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than the Event of Default described
in clause (d) under "Events of Default, Notice and Waiver" with respect to
Sections 1004 and 1005, inclusive, of the Indenture (which Sections would no
longer be applicable to such Debt Securities) or described in clause (h) 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 Company would
remain liable to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the Holders
of the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities and any restriction on conversion, including restrictions directed at
maintaining the Company's REIT status.
SUBORDINATION
The terms and conditions, if any, upon which the Debt Securities are
subordinated to other indebtedness of the Company will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include a
description of the indebtedness ranking senior to the Debt Securities, the
restrictions on payments to the Holders of such Debt Securities while a default
with respect to such senior indebtedness in continuing, the restrictions, if
any, on payments to the Holders of such Debt Securities following an Event of
Default, and provisions requiring Holders of such Debt Securities to remit
certain payments to holders of senior indebtedness.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the applicable Prospectus Supplement relating to such series, Global Securities
may be issued in either registered or bearer form and in either temporary or
permanent form. The specific terms of the depositary arrangement with respect to
a series of Debt Securities will be described in the applicable Prospectus
Supplement relating to such series.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Company's Articles of Incorporation and Bylaws. The summary does not purport
to be complete and is subject to and qualified in its entirety by reference to
the Company's Articles of Incorporation and Bylaws, copies of which are exhibits
to the Registration Statement of which this Prospectus is a part, as described
in "Additional Information," and to Maryland law.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Articles of Incorporation provide that the number of
directors of the Company may be established by the Board of Directors, but may
not be fewer than three nor more than eleven. Any vacancy will be filled, at any
regular meeting or at any special meeting called for that purpose, by a majority
vote by the stockholders or directors then in office. A director chosen by the
stockholders shall hold office for the balance of the term remaining. A director
so chosen by the remaining directors shall hold office until the next annual
meeting of stockholders, at which time the stockholders shall elect a director
to hold office for the balance of the term then remaining. Pursuant to the terms
of the Articles of Incorporation, the directors are divided into three
classes -- i.e., Class I, Class II, and Class III. Presently, one class will
hold office for a term expiring at the annual meeting of stockholders to be held
in 1997 (i.e., Class III), another class will hold office for a term expiring at
the annual meeting of stockholders to be held in 1998 (i.e., Class I), and
another class will hold office for a term expiring at the annual meeting of
stockholders to be held in 1999 (i.e., Class II). As the term of each class
expires, directors in that class will be elected for a term of three years or
until their successors are duly elected and qualify. The Company believes that
classification of the Board of Directors will help to assure the continuity and
stability of the Company's business strategies and policies as determined by the
Board of Directors. Additionally, Five Arrows, the initial holder of Class A
Preferred Shares, has the right to elect one director as long as certain levels
of ownership are maintained, and has the right to elect another director if
certain covenants are not met or if certain dividends are not paid. See
"Description of Capital Stock -- Class A Senior Cumulative Convertible Preferred
Stock."
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Holders of Common Stock will have no right to cumulative voting in the election
of directors. Consequently, at each annual meeting of stockholders, the holders
of a plurality of Common Stock will be able to elect all of the successors of
the class of directors whose term expires at that meeting.
REMOVAL OF DIRECTORS AND VACANCIES
The Articles of Incorporation provide that a director may be removed only
for cause and only by the affirmative vote of stockholders holding at least
two-thirds of all the votes entitled to be cast in the election of directors.
The Company's Bylaws provide that stockholders may elect a successor to fill a
vacancy on the Board of Directors that results from the removal of a director.
In addition, a vacant position occurring in the Board of Directors for any cause
other than an increase in the number of directors may be filled by a majority
vote of the remaining directors, even if such majority is less than a quorum or
by a majority vote of the stockholders. Any vacancy occurring in the Board of
Directors by reason of an increase in the number of directors may be filled by a
majority vote of the entire Board of Directors or by a majority vote of the
stockholders.
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LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of the
Company's directors and officers to the Company and its stockholders to the
fullest extent permitted from time to time by Maryland law. Maryland law
presently permits the liability of directors and officers to a corporation or
its stockholders for money damages to be limited, except (i) to the extent that
it is proved that the director or officer actually received an improper benefit
or profit, or (ii) if a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceedings. This provision
does not limit the ability of the Company or its stockholders to obtain other
relief, such as an injunction or rescission.
The Company's Bylaws require the Company to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time to
time by Maryland law. The MGCL permits a corporation to indemnify its directors,
officers and certain other parties against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service to
or at the request of the corporation, unless it is established that the act or
omission of the indemnified party was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or was the result of active and
deliberate dishonesty or (ii) the indemnified party actually received an
improper personal benefit, or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or officer
in connection with the proceeding; provided, however, that if the proceeding is
one by or in the right of the corporation, indemnification may not be made with
respect to any proceeding in which the director or officer has been adjudged to
be liable to the corporation. In addition, a director or officer may not be
indemnified with respect to any proceeding charging improper personal benefit to
the director or officer in which the director or officer was adjudged to be
liable on the basis that personal benefit was improperly received. The
termination of any proceeding by judgment, order or settlement does not create a
presumption that the director did not meet the requisite standard of conduct
required for indemnification to be permitted. However, the termination of any
proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard of
conduct required for indemnification to be permitted. It is the position of the
Commission that indemnification of directors and officers for liabilities
arising under the Securities Act is against public policy and is unenforceable
pursuant to Section 14 of the Securities Act.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting stock of the corporation (an "Interested Stockholder") or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Stockholder became an Interested Stockholder. Thereafter,
any such business combination must be recommended by the Board of Directors of
such corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation voting together as a single voting group, and (b) two-thirds of the
votes entitled to be cast by holders of outstanding voting shares other than
shares held by the Interested Stockholder with whom the business combination is
to be effected, unless, among other things, the corporation's stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder for its shares. These provisions of Maryland law do not
apply, however, to business combinations that are approved or exempted by the
Board of Directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. As permitted by Maryland law, the
Articles of Incorporation of the
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Company include a provision exempting all future business combinations involving
the Company from the operation of the business combination statute.
CONTROL SHARE ACQUISITIONS
The Company's Bylaws currently contain a provision exempting from the
control share acquisition statute described below any and all acquisitions by
any person of shares of capital stock of the Company. The current or future
directors of the Company may decide to eliminate or amend this provision,
although no such change is currently contemplated.
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third; (ii) one-third or more but less
than a majority; or (iii) a majority of all voting power. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for control shares, as of the date of the last control share
acquisition or, if a meeting of stockholders is held where the voting rights of
such shares are considered and not approved, as of the date of the meeting. If
voting rights for control shares are approved at a stockholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the Company is a party to the
transaction and such transaction is otherwise effected under the provision of
the MGCL; or to acquisitions approved or exempted by the Articles of
Incorporation or Bylaws of the Company.
AMENDMENT TO THE ARTICLES OF INCORPORATION
The Company's Articles of Incorporation, including its provisions on
classification of the Board of Directors and removal of directors, may be
amended only with the recommendation of the Board of Directors and by the
affirmative vote of stockholders holding at least a majority of all the votes
entitled to be cast on the matters.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
stockholders holding at least a majority of all the votes entitled to be cast on
this matter.
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ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual
meeting of stockholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by stockholders may be
made only (i) pursuant to the Company's notice of the meeting, (ii) by the Board
of Directors, or (iii) by a stockholder who is entitled to vote at the meeting
and who has complied with the advance notice procedures set forth in the Bylaws,
and (b) with respect to special meetings of stockholders, only the business
specified in the Company's notice of the meeting may be brought before the
meeting of stockholders, and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to the Company's notice of meeting, (ii)
by the Board of Directors, or (iii) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a stockholder who
is entitled to vote at the meeting and who has complied with the advance notice
provisions set forth in the Bylaws.
The provisions in the Articles of Incorporation on classification of the
Board of Directors and removal of directors, the business combination and, if
the applicable provision in the Company's Bylaws is rescinded, control share
acquisition provisions of the MGCL, and the advance notice provisions of the
Bylaws could have the effect of discouraging a takeover or other transaction in
which holders of some, or a majority, of the Common Stock might receive a
premium for their Common Stock over the then prevailing market price or which
such holders might believe to be otherwise in their best interests.
PLAN OF DISTRIBUTION
The Company may sell the Securities through one or more underwriters or
dealers, directly to one or more purchasers, through agents, or through a
combination of any such methods of sale. Any such underwriter or agent involved
in the offer and sale of the Securities will be named in the applicable
Prospectus Supplement. Sales of Securities 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 also may,
from time to time, authorize underwriters acting as the Company's agents to
offer and sell the Securities upon the terms and conditions as are set forth in
the applicable Prospectus Supplement. In connection with the sale of the
Securities, underwriters may be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of the Securities for whom they may act as
agent. Underwriters may sell the Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of the Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Securities may be deemed to
be underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the Securities may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers, and agents may be entitled, under agreements entered into with the
Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act. Underwriters,
dealers and agents may engage in transactions with, or perform services for, or
be customers of, the Company in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase the Securities 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 amount of the 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
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will in all cases be subject to the approval of the Company. Contracts will not
be subject to any conditions except: (i) the purchase by an institution of the
Securities covered by its Contracts shall not at the time of delivery be
prohibited under the laws of any jurisdiction in the United States to which such
institution is subject; and (ii) if the Securities are being sold to
underwriters, the Company shall have sold to such underwriters the total amount
of the Securities less the amount thereof covered by the Contracts.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock which is listed on the New York Stock Exchange. Any
shares of Common Stock sold by the Company pursuant to a Prospectus Supplement
will be listed on such exchange, subject to official notice of issuance. The
Company may elect to list any series of Preferred Stock on any exchange, but is
not obligated to do so. It is possible that one or more underwriters may make a
market in a series of 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 of the
Securities.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain of the material federal income tax
considerations regarding the Company and is based on current law, is for general
information only and is not tax advice. This discussion does not purport to deal
with all aspects of taxation that may be relevant to particular investors in
light of their personal investment or tax circumstances, or to certain types of
investors including insurance companies, tax-exempt organizations or retirement
accounts (except to the extent discussed under the heading "-- Taxation of
Tax-Exempt Stockholders"), financial institutions or broker-dealers, foreign
corporations, persons who are not citizens or residents of the United States
(except to the extent discussed under the heading "-- Taxation of Non-U.S.
Stockholders"), and persons who own Securities as part of a conversion
transaction, as part of a hedging transaction, or as a position in a straddle
for tax purposes, which are subject to special treatment under the federal
income, estate and other tax laws.
EACH PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE SPECIFIC
FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
SECURITIES AND THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS AND OF ANY POTENTIAL CHANGES IN THE APPLICABLE TAX LAWS AFTER THE
DATE HEREOF.
TAXATION OF THE COMPANY
General. The Company has made an election to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with its taxable year ended
December 31, 1994. The Company believes that it has been organized and has
operated in such a manner as to qualify for taxation as a REIT under the Code,
and the Company intends to continue to operate in such a manner, but no
assurance can be given that it has operated or will operate in a manner so as to
qualify or remain qualified.
The sections of the Code and Treasury Regulations governing REITs are
highly technical and complex. The following sets forth the material aspects of
the sections 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, Treasury Regulations and rules promulgated thereunder, and
administrative and judicial interpretations thereof.
In the opinion of Gibson, Dunn & Crutcher LLP, special tax counsel to the
Company, commencing with the Company's taxable year ended December 31, 1994, the
Company was organized in conformity with the requirements for qualification as a
REIT, and its method of operation has enabled, and its proposed method of
operation will enable, it to meet the requirements under the Code for
qualification and taxation as a REIT. It must be emphasized that this opinion is
based on various assumptions and is conditioned upon the accuracy of certain
representations made by the Company as to factual matters relating to the
Company's organization, operations, income, assets, distributions and stock
ownership. The Company's qualification as a REIT depends
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on the Company having met and continuing to meet -- through actual operating
results, distribution levels and diversity of stock ownership -- the various
qualification tests imposed under the Code and discussed below, the results of
which will not be reviewed by Gibson, Dunn & Crutcher LLP. Accordingly, no
assurance can be given that the actual results of the Company's operations for
any particular taxable year have satisfied or will satisfy such requirements. An
opinion of counsel is not binding on the IRS or the courts, and no assurance can
be given that the IRS will not challenge the Company's eligibility for taxation
as a REIT. Further, the anticipated federal income tax treatment described in
this Prospectus may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time. See "-- Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) of income that generally
results from an investment in a regular corporation. 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 "REIT taxable income" (as defined
below), including undistributed net capital gains. Second, under certain
circumstances the Company may be subject to the "alternative minimum tax" as a
consequence of its items of tax preference to the extent that tax exceeds its
regular tax. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (generally, property acquired by reason of
default on indebtedness held by the Company) that is held primarily for saleto
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of
business, other than foreclosure property), such income will be subject to a
100% tax. Fifth, if the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax on an amount equal to (a) the greater
of the amount by which the Company fails the 75% or 95% test, multiplied by (b)
a fraction intended to reflect the Company's profitability. Sixth, if the
Company should fail to distribute during each calendar year at least the sum (i)
85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain
net income for such year, and (iii) any undistributed 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, with
respect to any asset (a "Built-in Gain Asset") acquired by the Company from a
corporation which is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in certain transactions in which the basis
of the Built-in Gain Asset in the hands of the Company is determined by
reference to the basis of the asset in the hands of the C corporation, if the
Company recognizes gain on the disposition of such asset during the 10-year
period (the "Recognition Period") beginning on the date on which such asset was
acquired by the Company, then, to the extent of the Built-in Gain (i.e., the
excess of (a) the fair market value of such asset over (b) the Company's
adjusted basis in such asset, determined as of the beginning of the Recognition
Period), such gain will be subject to tax at the highest regular corporate rate
pursuant to IRS regulations that have not yet been promulgated.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) that would be taxable
as a domestic corporation but for Sections 856 through 859 of the Code; (iv)
that is neither a financial institution nor an insurance company subject to
certain provisions of the Code; (v) the beneficial ownership of which is held by
100 or more persons; (vi) in which during the last half of each taxable year not
more than 50% in value of its outstanding stock is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) to (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
The Company believes that it has issued sufficient shares with sufficient
diversity of ownership to allow it to satisfy conditions (v) and (vi). In
addition, the Company's Charter provides for restrictions regarding the
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transfer and ownership of shares, which restrictions are intended to assist the
Company in continuing to satisfy the share ownership requirements described in
(v) and (vi) above. Such transfer and ownership restrictions are described in
the accompanying Prospectus. These restrictions may not ensure that the Company
will, in all cases, be able to satisfy the share ownership requirements
described above. If the Company fails to satisfy such share ownership
requirements, the Company's status as a REIT will terminate. See "Failure to
Qualify."
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year from
the record holders of certain percentages of its shares of stock in which the
record holders are to disclose the actual owners of the shares (i.e., the
persons required to include in gross income the REIT dividends). A REIT with
2,000 or more record stockholders must demand statements from record holders of
5% or more of its shares, one with less than 2,000, but more than 200 record
stockholders must demand statements from record holders of 1% or more of the
shares, while a REIT with 200 or fewer record stockholders must demand
statements from record holders of 0.5% or more of the shares. A list of those
persons failing or refusing to comply with this demand must be maintained as
part of the Company's records. A stockholder who fails or refuses to comply with
the demand must submit a statement with its tax return disclosing the actual
ownership of the shares and certain other information.
In the case of a REIT which 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 the partnership shall retain the same character in
the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income tests and the assets tests, discussed below. Thus,
the Company's proportionate share of the assets, liabilities and items of income
of PGP Inland Communities, L.P., the Company's subsidiary operating partnership
and Pacific Inland Communities, LLC, the entity used to effect certain
tax-exempt financing of the Company (collectively, the "Partnerships"), are
treated as assets, liabilities and items of income of the Company for purposes
of applying the requirements described herein. The Company controls the
Partnerships and believes it has operated the Partnerships in a manner
consistent with the requirements for qualification as a REIT, and intends to
continue to operate the Partnerships in such a manner. However, there can be no
assurance that the Company has operated or will actually operate the
Partnerships in a manner that has enabled or will enable the Company to continue
to satisfy the REIT provisions of the Code.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from certain sales of real
property held primarily for sale) for each taxable year must be derived directly
or indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of the Company's gross income (excluding gross income from certain sales of real
property held primarily for sale) for each taxable year must be derived from
items of income that qualify under the 75% test, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, gain from the sale or other disposition of stock or
securities held for less than one year, gain from certain sales of real property
held primarily for sale and gain from the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the Company's
gross income for each taxable year.
Rents received by the Company qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income test if the Company,
or an owner of 10% or more of the Company, actually or constructively owns 10%
or more of such tenant (a "Related Party Tenant"). Third, if rent attributable
to personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will
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not qualify as "rents from real property." 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 the tenants of such
property, other than through an independent contractor from whom the Company
derives no revenue, provided, however, the Company may directly perform certain
services that are "usually or customarily rendered" in connection with the
rental of space for occupancy only and not otherwise considered "rendered to the
occupant" of the property. The Company monitors its activities to ensure that
the foregoing tests are satisfied. There can be no assurances, however, that the
Company will not realize rental income that does not qualify as "rents from real
property," including as a result of the constructive ownership of an interest in
a tenant by Five Arrows. See "Class A Senior Cumulative Convertible Preferred
Stock."
The Company includes its proportionate share (based on its capital
interest) of income, gain, loss, deduction and credit from the Partnerships in
applying these income tests. In addition, the Company receives fees in exchange
for management services rendered to the Partnerships. Although the percentage of
those fees exceeding the Company's capital interest in the Partnership paying
such fee will not qualify under the 75% or 95% gross income tests, the Company
believes that the aggregate amount of such income (together with any other
nonqualifying income) in any taxable year has not exceeded and is not expected
to exceed the limits on nonqualifying income under the gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if (i) the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, (ii) the
Company attaches to its return for that year a schedule of the nature and amount
of each item of its income and (iii) any incorrect information on the schedule
was not due to fraud with intent to evade tax. However, in the event the Company
does not meet these tests, the Company would not be entitled to the benefit of
these relief provisions. If these relief provisions are inapplicable to a
particular set of circumstances involving the Company, the Company will not
qualify as a REIT. As discussed above in "-- General," even if these relief
provisions apply, a tax would be imposed with respect to the excess
nonqualifying income. No comparable relief provisions are available to mitigate
the consequences of a failure to satisfy the 30% gross income test.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets, stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, cash, cash items and government securities.
Second, not more than 25% of Company's total assets may be represented by
securities other than those included in the 75% asset test. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities. In applying these tests, the Company will be
deemed to own a proportionate share of any assets owned, directly or indirectly,
by the Partnerships based on its capital interest in the Partnerships.
The Company believes that it has complied and will continue to comply with
the asset tests. Substantially all of the Company's investments represent
qualifying real estate assets, including the Company's share of the assets of
the Partnerships.
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 in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. "REIT taxable income" for any year means the taxable
income of the Company for such year (excluding any net income derived either
from property held primarily for sale to customers or from foreclosure
property), subject to certain adjustments provided in the REIT provisions of the
Code. In addition, if the Company disposes of any Built-in Gain Asset during
such asset's Recognition Period, the Company will be required, pursuant to IRS
regulations which have not yet been promulgated, to distribute at least 95% of
the Built-in Gain (after tax), if any, recognized on the
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disposition of such asset. 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. The Company intends to
make, and to cause the Partnerships to make, timely distributions sufficient to
enable the Company to satisfy these annual distribution requirements. To the
extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its REIT taxable income, as
adjusted, it will be subject to tax thereon at regular capital gain and ordinary
corporate tax rates.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the distribution requirements described
above due to timing differences between the actual receipt of income and actual
payment of deductible expenses and the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company, or if nondeductible
capital expenditures such as principal amortization or capital expenditures
exceed the amount of noncash deductions. In the event that such timing
differences occur, in order to meet the distribution requirements, the Company
may find it necessary to arrange, or to cause the Partnerships to arrange, for
short-term or long-term borrowing, to sell assets, or to pay dividends in the
form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the above distribution requirements for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. The Company will,
however, be required to pay interest based upon the amount of any deduction
taken for deficiency dividends.
Furthermore, if the Company should fail to distribute each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year and (iii) any undistributed taxable
income from prior periods, the Company will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed. Any
REIT taxable income and capital gains on which tax is imposed for any year is
treated as an amount distributed during that year for purposes of this excise
tax.
FAILURE TO QUALIFY
If the Company should fail 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
rates applicable to regular C corporations. Distributions to stockholders in any
year in which the Company fails to qualify as a REIT will not be deductible by
the Company nor will they be required to be made. As a result, the Company's
failure to qualify as a REIT will reduce the cash available for distribution by
the Company to investors. In addition, if the Company fails to qualify as a
REIT, all distributions to stockholders will be taxable as ordinary income to
the extent of the Company's current and accumulated earnings and profits, and,
subject to certain limitations in the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
the Company would be entitled to such statutory relief.
TAXATION OF 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 and will not be eligible for the dividends
received deduction for corporations. Distributions that are properly designated
by the Company as capital gain dividends will be taxed as long-term capital gain
(to the extent they do not exceed the Company's actual net capital gain for the
taxable year) without regard to the period for which the stockholder has held
its shares. However, corporate stockholders may be required to treat up to 20%
of certain capital gain dividends as ordinary income. Distributions (not
designated as capital gain dividends) in excess of current and accumulated
earnings and profits will be treated as tax-free returns of capital to the
extent of the stockholder's basis in
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the shares, and will reduce the adjusted basis of such shares (but not below
zero). To the extent distributions in excess of current and accumulated earnings
and profits exceed the basis of a stockholder's shares they will be included in
income as long-term capital gain (or short-term capital gain if the shares have
been held for one year or less), assuming the shares are a capital asset in the
hands of the stockholder. In addition, any dividend declared by the Company in
October, November or December of any year payable to a stockholder of record on
a specified 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.
Upon any sale or other disposition of shares, a domestic stockholder will
recognize gain or loss for Federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares for tax purposes. In general, provided the shares
were held as a capital asset, any gain or loss realized on a taxable disposition
of shares will be treated as long-term capital gain or loss if the shares have
been held for more than one year and otherwise as short-term capital gain or
loss. However, any loss upon a sale or exchange of shares by a stockholder who
has held such shares 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.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company reports to its domestic stockholders and the IRS the amount of
dividends paid with respect to each calendar year, and the amount of tax
withheld therefrom, if any. Under the backup withholding rules, a stockholder
may be subject to backup withholding at a rate of 31% with respect to dividends
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) 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. 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 withheld under the backup withholding rules will be
creditable against the stockholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions made
to any stockholders who fail to certify to their nonforeign status to the
Company. See "-- Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a REIT do not
constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, dividend income from the Company should
not, subject to certain exceptions described below, be UBTI to a qualified plan,
IRA or other tax-exempt entity (a "Tax-Exempt Stockholder") provided the
Tax-Exempt Stockholder has not held its shares as "debt financed property"
within the meaning of Section 514 of the Code and the shares are not otherwise
used in an unrelated trade or business of the Tax-Exempt Stockholder. Similarly,
income from the sale of stock of the Company should not, subject to certain
exceptions described below, constitute UBTI unless the Tax-Exempt Stockholder
has held such stock as a dealer (under Section 512(b)(5)(B) of the Code) or as
"debt-financed property."
For Tax-Exempt Stockholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their tax advisors concerning these
"set-aside" and reserve requirements.
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Notwithstanding the above, however, a portion of the dividends paid by the
Company may be treated as UBTI to certain trusts if the Company is treated as a
"pension held REIT." A trust will be subject to this rule if it (i) is described
in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a) of the
Code and (iii) holds more than 10% (by value) of the interests in the REIT.
Tax-exempt pension funds that are described in Section 401(a) of the Code are
referred to below as "qualified trusts."
The Company will be treated as a "pension held REIT" if (i) it would not
have qualified as a REIT but for the fact that Section 856(h)(3) of the Code
provides that stock owned by qualified trusts shall be treated, for purposes of
the "five or fewer" stockholder requirement (discussed above), as owned by the
beneficiaries of the trust (rather than by the trust itself) and (ii) either (a)
at least one such qualified trust holds more than 25% (by value) of the
interests in the Company or (b) one or more such qualified trusts, each of whom
owns more than 10% (by value) of the interests in the Company, hold in the
aggregate more than 50% (by value) of the interests in the Company. The Company
believes that it has not been, and is not, a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax law and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Stockholder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that the Company qualifies for taxation
as a REIT. Prospective Non-U.S. Stockholders should consult with their own tax
advisors to determine the impact of federal, state, local and foreign income and
other tax laws with regard to an investment in Securities, including any
reporting requirements.
Distributions. Distributions by the Company to a Non-U.S. Stockholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions generally will be subject to withholding of United
States federal income tax at a 30% rate on the total amount distributed unless
an applicable income tax treaty reduces or eliminates that tax. However,
dividends that are "effectively connected" with the conduct of a trade or
business by the Non-U.S. Stockholder (or, if an income tax treaty applies, are
attributable to a permanent establishment of the Non-U.S. Stockholder) will be
subject to tax on a net basis at graduated rates, in the same manner as domestic
stockholders are taxed with respect to such dividends, and are generally not
subject to withholding. Any such "effectively connected" dividends received by a
Non-U.S. Stockholder that is a corporation may also be subject to an additional
branch profits tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of ascertaining the requirement of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations not currently in effect, however, a Non-U.S.
Stockholder who seeks to claim the benefit of an applicable treaty rate would be
required to satisfy certain certification and other requirements. Under certain
treaties, lower withholding rates generally applicable to dividends do not apply
to dividends from a REIT, such as the Company. A Non-U.S. Stockholder must file
a properly completed and executed IRS Form 4224 (or, under proposed regulations
not currently in effect, IRS Form W-8) with the Company's withholding agent
certifying that the investment to which the distribution relates is effectively
connected with the conduct of a United States trade or business or is
attributable to a permanent establishment of such Non-U.S. Stockholder in order
to qualify for the exemption from withholding under the effectively connected
income or permanent establishment exemptions discussed above.
If stock of the Company is not a USRPI (as defined below), distributions
that are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the
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Company as capital gains dividends and that are in excess of current or
accumulated earnings and profits of the Company will not be taxable to a
Non-U.S. Stockholder to the extent that they do not exceed the adjusted basis of
the stockholder's stock, but rather will reduce the adjusted basis of such
stock. If, however, the stock is treated as a USRPI, then unless otherwise
treated as a dividend for withholding purposes as described below, any such
distribution in excess of current or accumulated earnings and profits will be
subject to 10% withholding. To the extent such distributions in excess of the
Company's current and accumulated earnings and profits exceed the adjusted basis
of a Non-U.S. Stockholder's stock, they will give rise to gain from the sale or
exchange of the stock, the tax treatment of which is described below. Under
current Treasury Regulations, for purposes of withholding U.S. income tax, if it
cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current or accumulated earnings and profits,
the entire distribution will generally be treated as a dividend subject to
withholding. Amounts withheld are generally refundable if it is subsequently
determined that such amounts are, in fact, in excess of the Non-U.S.
Stockholder's U.S. income tax liability. Under proposed regulations not
currently in effect, for purposes of withholding U.S. income tax, the Company
may, at its option, make a reasonable estimate of the portion of a distribution
that is out of current or accumulated earnings and profits, although any such
determination would not affect the Non-U.S. Stockholder's liability for U.S.
income tax.
Distributions to a Non-U.S. Stockholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
be treated as income that is effectively connected with a United States trade or
business of the Non-U.S. Stockholder. Non-U.S. Stockholders would thus generally
be taxed on such distributions at the same rates applicable to domestic
stockholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals). Also, such gain may be subject to a 30% branch
profits tax in the hands of a corporate Non-U.S. Stockholder that is not
entitled to a treaty exemption or rate reduction. The Company is required to
withhold 35% of any such distribution, and the withheld amount is creditable
against the Non-U.S. Stockholder's United States federal income tax liability.
Sale of Stock. Gain recognized by a Non-U.S. Stockholder upon a sale or
other disposition of stock of the Company generally will not be subject to
United States federal income tax unless (i) the stock constitutes a "United
States real property interest" (a "USRPI"), or (ii) the investment in the stock
is effectively connected with the Non-U.S. Stockholder's United States trade or
business (or, if an income tax treaty applies, is attributable to a permanent
establishment of the Non-U.S. Stockholder) or (iii) in the case of a Non-U.S.
Stockholder who is a nonresident alien individual, the individual is present in
the United States for 183 days or more during the taxable year and either has a
"tax home" in the United States or sold his shares under circumstances where the
sale is attributable to a U.S. office. Stock of the Company generally will not
constitute a USPRI if the Company is a "domestically controlled REIT" or if the
holder owned (during specified testing periods) 5% or less of the class of stock
sold and the stock sold was part of a class of stock regularly traded on an
established securities market. A domestically controlled REIT is defined
generally as a REIT in which at all times during a specified testing period less
than 50% in value of the stock was held directly or indirectly by foreign
persons. The Company currently believes that it is a domestically controlled
REIT. However, because the stock will be publicly traded, no assurance can be
given that the Company is or will continue to be a domestically-controlled REIT.
In the circumstances described above in clauses (i) and (ii), the Non-U.S.
Stockholders will generally be subject to the same treatment as domestic
stockholders with respect to such gain (subject to a special alternative minimum
tax in the case of nonresident alien individuals in the circumstances described
above in clause (i) and, in the case of foreign corporations, subject to the
possible application of the 30% branch profits tax, discussed above). In the
circumstances described above in clause (iii), the nonresident alien individual
will be subject to a 30% tax on the individual's capital gain.
Estate Tax. Certain types of Securities owned or treated as owned by an
individual who is not a citizen or resident (as specially defined for United
States federal estate tax purposes) of the United States at the time of death
may be includable in the individual's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Such individual's estate may be subject to United States federal estate tax on
the property includable in the estate for United States federal estate tax
purposes.
Information Reporting and Backup Withholding. The Company must report
annually to the IRS and to each Non-U.S. Stockholder the amount of distributions
subject to withholding as described above and the tax
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withheld with respect to such distributions, regardless of whether withholding
is actually required. Copies of the information returns reporting such
distributions and withholding may also be made available to the tax authorities
in the country in which the Non-U.S. Stockholder resides under the provisions of
an applicable income tax treaty. Additional issues may arise pertaining to
information reporting and backup withholding for Non-U.S. Stockholders. Non-U.S.
Stockholders should consult their tax advisors with regard to U.S. information
reporting and backup withholding.
OTHER TAX CONSEQUENCES
The Company and its investors may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its investors may not conform to the federal income tax consequences
discussed above. Consequently, prospective investors should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Gibson, Dunn &
Crutcher LLP, Los Angeles, California, and the legality of the Securities will
be passed upon for the Company by Piper & Marbury LLP, Baltimore, Maryland.
EXPERTS
The financial statements for Pacific Gulf Properties Inc. and the
Predecessor Multifamily and Industrial Operations included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated
by reference in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as stated in their report appearing therein and has been
so included in reliance upon the report given upon their authority as experts in
accounting and auditing.
40
<PAGE> 58
======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
AGENT, OR DEALER. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT DO
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT NOR ANY SALE OF SECURITIES
BEING OFFERED PURSUANT TO THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE
ACCOMPANYING PROSPECTUS SUPPLEMENT OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary.......... S-3
Use of Proceeds........................ S-6
Description of Class B Preferred
Stock................................ S-6
Ratio of Earnings of Fixed Charges..... S-15
Related Agreements..................... S-15
Plan of Distribution................... S-16
Legal Matters.......................... S-17
PROSPECTUS
Available Information.................. 2
Incorporation of Certain Documents by
Reference............................ 2
The Company............................ 3
Use of Proceeds........................ 3
Ratio of Earnings to Fixed Charges..... 4
Risk Factors........................... 5
Description of Capital Stock........... 9
Description of Preferred Stock......... 13
Description of Warrants................ 16
Description of Debt Securities......... 18
Certain Provisions of Maryland Law and
of the Company's Articles of
Incorporation and Bylaws............. 28
Plan of Distribution................... 31
Federal Income Tax Considerations...... 32
Legal Matters.......................... 40
Experts................................ 40
</TABLE>
======================================================
======================================================
1,411,765 SHARES
LOGO
PACIFIC GULF
PROPERTIES INC.
CLASS B
SENIOR CUMULATIVE
CONVERTIBLE PREFERRED STOCK
------------------------
PROSPECTUS SUPPLEMENT
------------------------
May 27, 1997
======================================================
