<PAGE> 1
This filing is made pursuant
to Rule 424(b)(2) under the
Securities Act of 1933 in
connection with Registration
No. 333-23611
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 17, 1997)
- --------------------------------------------------------------------------------
874,317 Shares
PACIFIC GULF PROPERTIES INC.
LOGO Common Stock
- --------------------------------------------------------------------------------
Pacific Gulf Properties Inc. (the "Company"), a self-administered and
self-managed equity real estate investment trust (a "REIT"), owns, operates,
leases, acquires, rehabilitates and develops industrial and multifamily
properties. The Company focuses on properties located in California and the
Pacific Northwest, with the largest concentration in Southern California. As of
December 17, 1997, the Company owned a portfolio of 42 operating industrial
properties containing 9.6 million leasable square feet, two industrial
properties being rehabilitated containing approximately 639,000 leasable square
feet and four industrial properties being developed that will contain
approximately 578,000 leasable square feet. The Company also owns a portfolio of
24 operating multifamily properties containing 4,661 apartment units and one
multifamily property being developed that contains 166 apartment units.
All of the shares of common stock of the Company, par value $.01 per share
("Common Stock"), offered hereby are being sold by the Company (the "Offering").
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under the
symbol "PAG." On December 18, 1997, the last reported sales price of the Common
Stock on the NYSE was $22.875 per share. See "Price Range of Common Stock and
Distributions."
The Company operates as a REIT for federal income tax purposes and expects to
pay regular quarterly dividends to its stockholders, subject to the discretion
of the Company's Board of Directors. See "Price Range of Common Stock and
Distributions." The shares of Common Stock are subject to certain restrictions
on ownership designed to preserve the Company's status as a REIT for federal
income tax purposes. See "Description of Capital Stock" in the accompanying
Prospectus.
SEE "RISK FACTORS" ON PAGES 5 TO 9 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
- --------------------------------------------------------------------------------
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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Underwriter has agreed to purchase the shares of Common Stock from the
Company at a price of $21.73 per share, resulting in aggregate proceeds to the
Company of $18,998,908.41 before payment of expenses by the Company estimated at
$100,000, subject to the terms and conditions in the Underwriting Agreement. The
Underwriter intends to deposit the shares of Common Stock with the trustee of
National Equity Trust Equity Portfolio Series 1 (REIT Portfolio) (the "Trust")
in exchange for units in the Trust. If all of the shares of Common Stock so
deposited with the trustee of the Trust are valued at their reported last sale
price on December 18, 1997, the aggregate underwriting discount would be
$1,001,092.97. See "Underwriting."
The shares of Common Stock are offered by the Underwriter, subject to delivery
by the Company and acceptance by the Underwriter, to prior sale and withdrawal,
cancellation or modification of the offer without notice. Delivery of the shares
to the Underwriter is expected to be made at the office of Prudential Securities
Incorporated, One New York Plaza, New York, New York, on or about December 23,
1997.
PRUDENTIAL SECURITIES INCORPORATED
December 18, 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-6
Capitalization......................................................................... S-7
Price Range of Common Stock and Distributions.......................................... S-9
Current Markets........................................................................ S-10
Business and Properties................................................................ S-12
Underwriting........................................................................... S-17
Legal Matters.......................................................................... S-17
Experts................................................................................ S-17
PROSPECTUS
Available Information.................................................................. 2
Incorporation of Certain Documents by Reference........................................ 2
The Company............................................................................ 3
Use of Proceeds........................................................................ 4
Ratio of Earnings to Fixed Charges..................................................... 4
Risk Factors........................................................................... 5
Description of Capital Stock........................................................... 9
Description of Preferred Stock......................................................... 14
Description of Warrants................................................................ 17
Certain Provisions of Maryland Law and of the Company's Articles of Incorporation and
Bylaws............................................................................... 28
Plan of Distribution................................................................... 32
Federal Income Tax Considerations...................................................... 33
Legal Matters.......................................................................... 43
Experts................................................................................ 43
</TABLE>
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<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus Supplement, in the accompanying
Prospectus and in the documents incorporated herein by reference. Unless the
context otherwise requires, as used herein the term "Company" includes Pacific
Gulf Properties Inc. and its consolidated subsidiaries and partnerships. This
Prospectus Supplement includes 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 Supplement 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, 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 in
the accompanying Prospectus, 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.
THE COMPANY
The Company, a self-administered and self-managed equity REIT, owns,
operates, leases, acquires, rehabilitates and develops industrial and
multifamily properties. The Company's properties are located in California and
the Pacific Northwest, with the largest concentration in Southern California.
The Company focuses on the industrial and multifamily properties in this
geographic region due to management's extensive experience in these property
types and markets and management's belief that these markets present potential
for long-term economic growth. As of December 17, 1997, the Company owned a
portfolio of 42 operating industrial properties, containing an aggregate of 9.6
million leasable square feet, two industrial properties being rehabilitated
containing approximately 639,000 leasable square feet and four industrial
properties being developed that will contain approximately 578,000 leasable
square feet (the "Industrial Properties"). The Company also owns a portfolio of
24 operating multifamily properties, which includes 18 apartment communities
containing 3,662 units, six active senior apartment communities containing 999
units and one active senior apartment community being developed that contains
166 apartment units (the "Multifamily Properties," and collectively with the
Industrial Properties, the "Properties"). As of September 30, 1997, the
operating Industrial Properties and Multifamily Properties then owned by the
Company experienced occupancy rates of 97% and 95%, respectively.
RECENT DEVELOPMENTS
STOCKHOLDER RIGHTS PLAN
On December 11, 1997, the Company announced the adoption of a stockholder
rights plan (the "Rights Plan"). The record date for the distribution of rights
under the Rights Plan will be December 29, 1997. For additional information
regarding the Rights Plan see the Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission (the "SEC") on December 18, 1997,
and incorporated into the accompanying Prospectus by reference.
DIVIDEND INCREASE
On December 11, 1997, the Company's Board of Directors announced an
increase in the quarterly dividend to $.42 per share of Common Stock, effective
with the Company's fourth quarter ending
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<PAGE> 4
December 31, 1997. The dividend will be payable on January 9, 1998 to
stockholders of record on January 1, 1998.
PREFERRED STOCK
As of the date hereof, the Company has issued 270,270 shares of its Class A
Senior Cumulative Convertible Preferred Stock (the "Class A Preferred Stock")
and 705,882 shares of its Class B Senior Cumulative Convertible Preferred Stock
(the "Class B Preferred Stock"). The Company expects to issue an additional
1,081,081 shares of Class A Preferred Stock and 705,883 shares of Class B
Preferred Stock on or about December 23, 1997. See "Description of Capital
Stock" in the accompanying Prospectus.
ACQUISITIONS
The Company has entered into agreements to purchase additional properties,
each of which is described under the heading "Probable Acquisitions" in the
Company's Current Report on Form 8-K dated December 18, 1997 and incorporated
into the accompanying Prospectus by reference. The Company believes that the
acquisition of such properties (the "Probable Acquisitions") is probable. In
addition, the Company is in various stages of negotiation with respect to other
properties that are described under the heading "Possible Acquisitions" in the
Company's Current Report on Form 8-K, filed with the SEC on December 18, 1997
and incorporated into the accompanying Prospectus by reference (the "Possible
Acquisitions").
GROWTH STRATEGY
Management believes that focusing on two property types allows the Company
greater investment opportunities and flexibility than would be available by
investing in only one property type. Apartments have shorter term 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 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
more flexibility in implementing its investment, disposition and property
management strategies.
The Company seeks to maximize cash flow by increasing net operating income
(rental property income less rental property expenses) from existing properties,
making accretive acquisitions of additional operating properties in its
geographic markets, rehabilitating acquired and existing properties and
developing other properties.
Management of Properties. The Company manages all of its properties using
its network of six regional offices. The Company believes its property
management organization provides many competitive advantages, including
efficient property management and local market expertise. The Company targets
properties where it can enhance cash flow and value by increasing rents to
current market levels and by reducing costs. The Company closely monitors rental
operations and administrative expenses, utilizes new technologies, periodically
conducts contract reviews, and seeks economies of scale in order to control
costs, reduce vacancy rates and assure that the Company is competitive in all
aspects of its operations. As a result, net operating income from the pool of
properties owned by the Company as of January 1, 1996 has increased 7.2% from
$21.0 million for the nine months ended September 30, 1996 to $22.5 million for
the nine months ended September 30, 1997.
Acquisitions. The Company's acquisition program is focused primarily on
industrial and multifamily properties and portfolios located in its markets that
may provide attractive returns. The Company generally seeks to acquire
properties at a discount to replacement cost and where it can improve cash flow
and value without relying on increases in market rental rates. The Company's
industrial property acquisition activities are focused on business parks or
warehouse/distribution facilities serving multiple tenants. The Company's
multifamily property acquisitions are focused on medium-sized class-B properties
targeted towards middle or
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<PAGE> 5
lower income families or active senior citizens. Pursuant to the Company's
acquisition strategy and based on current market conditions, the Company
generally seeks stabilized yields of 10% or greater. Since January 1, 1996, the
Company has increased the leasable square footage in its Industrial Property
portfolio 231% from 2.9 million to 9.6 million square feet and has increased the
number of units in its Multifamily Property portfolio 13% from 4,110 to 4,661
units.
Renovation and Rehabilitation. As a part of its acquisition program, the
Company seeks properties whose financial performance can be enhanced through
physical renovation and rehabilitation. The Company also periodically renovates
and rehabilitates the properties it already owns. Rehabilitation activity
generally involves updating older properties to conform to current market
standards and may include the installation of additional loading facilities,
sprinkler upgrades, mezzanine level upgrades, parking lot upgrades and cosmetic
rehabilitation of the property. The Company capitalizes on senior management's
experience with renovation and rehabilitation projects, as well as third party
expertise, to expedite the renovation and rehabilitation process. The Company
believes that all-in yields on such projects on a stabilized basis typically
exceed those of projects that are not renovated or that do not require
renovation. Since June 30, 1996, the Company has completed three such
acquisitions for an aggregate purchase price of $34.8 million with estimated
subsequent renovation or rehabilitation expenses of $5.0 million.
Development. The Company develops new properties on land currently owned
for development, and continues to acquire land for future development. The
Company also develops additional rentable square footage and units on the excess
land of existing properties. Since January 1, 1996, the Company has completed
the acquisition of 34.7 acres of land for future development at an aggregate
purchase price of approximately $11.7 million. The Company is currently
developing approximately 578,000 square feet of Industrial Property and 166
units of Multifamily Properties at an estimated development cost of $28.0
million and $6.8 million, respectively.
The Company was incorporated in Maryland in August 1993. The Company's
executive offices are located at 4220 Von Karman Avenue, Newport Beach,
California 92660, and its telephone number is (714) 223-5000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby......................... 874,317 shares(1)
Common Stock to be Outstanding after the Offering... 19,949,023 shares(1)
Use of Proceeds..................................... To repay indebtedness under the Company's
Line of Credit (as defined herein) and
other general corporate purposes. See "Use
of Proceeds."
NYSE Symbol......................................... PAG
</TABLE>
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(1) Excludes (a) 951,404 shares of Common Stock reserved for issuance under the
Company's 1993 Share Option Plan and 246,372 shares of Common Stock reserved
for issuance under the Company's Dividend Reinvestment Plan, (b) an
aggregate of 505,340 shares of Common Stock which the Company will have the
right, but not the obligation, to issue to the holders of the limited
partnership interests in certain of the Company's subsidiary operating
partnerships, (c) 270,270 shares of Common Stock issuable upon conversion of
the outstanding Class A Preferred Stock and (d) 705,882 shares of Common
Stock issuable upon conversion of the outstanding Class B Preferred Stock.
Also excludes an additional 1,081,081 shares of Common Stock and 705,883
shares of Common Stock issuable upon conversion of a like amount of
currently unissued shares of Class A Preferred Stock and Class B Preferred
Stock, respectively, which the Company expects to issue on or about December
23, 1997.
S-5
<PAGE> 6
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are expected to be approximately $18.9 million. The Company currently
intends to use the net proceeds from the Offering (i) to repay indebtedness
outstanding under the Company's $65.0 million secured revolving line of credit
(the "Line of Credit"), which indebtedness was incurred to fund the purchase
price of acquisitions, and (ii) for general corporate purposes. The principal
balances outstanding under the Line of Credit at September 30, 1997 were $32.1
million. The Line of Credit matures in July 1998 and had an interest rate of
7.625% as of September 30, 1997 (floating interest rate of LIBOR plus 1.75%).
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> 7
CAPITALIZATION
The following table sets forth the capitalization of the Company on: (1) a
historical basis as of September 30, 1997; (2) an as adjusted basis giving
effect to certain transactions completed by the Company or which the Company
anticipates completing subsequent to September 30, 1997, including: (i) the
October 1997 repayment of the outstanding balance on the Company's $35.0 million
unsecured acquisition credit facility with Bank of America (the "Acquisition
Facility") using proceeds from a new loan; (ii) the October 1997 acquisition of
and the assumption of indebtedness related to Eden Plaza/Eden Industrial, two
industrial properties containing approximately 501,000 leasable square feet;
(iii) the October 1997 borrowings under the Line of Credit to fund the
acquisition of Eden Plaza/Eden Industrial and to repay a maturing loan payable;
(iv) the purchase of a portfolio of four industrial properties (the "Industrial
Portfolio Acquisition Properties") as more fully described in the Company's
Current Report on Form 8-K dated November 21, 1997 (as amended) and incorporated
into the accompanying Prospectus by reference; (v) the purchase of the Probable
Acquisitions as more fully described in the Company's Current Report on Form 8-K
dated December 18, 1997 and incorporated into the accompanying Prospectus by
reference; (vi) the issuance of 4,776,300 shares of Common Stock as part of the
Company's November 1997 public offering of common stock; and (vii) the October
1997 issuance of 235,294 shares of Class B Preferred Stock and the expected
December 1997 issuances of 1,081,081 shares of Class A Preferred Stock and
705,883 shares of Class B Preferred Stock, the proceeds of which will be used to
fund a portion of the Probable Acquisitions; (3) a pro forma basis giving effect
to the completion of this Offering and the application of the net proceeds as
more fully described under "Use of Proceeds."
The information set forth in the following table should be read in
conjunction with the Company's Pro Forma Consolidated Financial Statements
incorporated in the accompanying Prospectus by reference from the Company's
Current Reports on Form 8-K dated November 21, 1997 and December 18, 1997 and
the Company's consolidated financial statements and notes thereto incorporated
by reference in the accompanying Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------
HISTORICAL AS ADJUSTED(A) PRO FORMA(B)(C)
---------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Loans payable..................................... $ 211,638 $260,368 $ 260,368
Line of credit.................................... 32,120 24,002 5,104
Acquisition facility.............................. 33,625 -- --
8.375% Convertible Subordinated Debentures, net of
debenture discount............................. 12,652 12,652 12,652
--------- -------- ---------
Total debt........................................ 290,035 297,022 278,124
--------- -------- ---------
Minority interest in consolidated partnerships...... 8,465 11,334 11,334
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, of which 1,351,351 shares have been
designated as Class A Preferred Stock and of
which 1,411,765 shares have been designated as
Class B Preferred Stock; 270,270 Class A shares
and 705,882 Class B shares issued and
outstanding; 1,351,351 Class A shares and
1,411,765 Class B shares outstanding on an
adjusted basis and on a pro forma basis........ 7 27 27
Common stock, $.01 par value; 25,000,000 shares
authorized; 14,294,379 shares issued and
outstanding; 19,070,679 and 19,959,568 shares
outstanding on an adjusted basis and on a pro
forma basis, respectively...................... 143 191 200
Excess stock, $.01 par value; 30,000,000 shares
authorized; no shares outstanding.............. -- -- --
Outstanding restricted stock...................... (865) (865) (865)
Additional paid-in capital........................ 259,558 392,862 411,751
Distributions in excess of earnings............... (23,617) (23,617) (23,617)
--------- -------- ---------
Total shareholders' equity........................ 235,226 368,598 387,496
--------- -------- ---------
Total capitalization........................... $ 533,726 $676,954 $ 676,954
========= ======== =========
</TABLE>
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(A) See notes to pro forma consolidated financial statements incorporated by
reference herein from the Company's Current Report on Form 8-K dated
December 18, 1997.
(B) Approximate net proceeds of $18,898 (par value of $9, additional paid-in
capital of $18,889) from the issuance of 874,317 shares of Common Stock
pursuant to this Offering at an offering price of $21.73 per share, before
payment of expenses by the Company estimated at $100. The net proceeds from
this Offering will be used to repay outstanding balances on the Company's
Line of Credit.
(C) Excludes (i) 951,404 shares of Common Stock reserved for issuance under the
Company's 1993 Share Option Plan and 246,372 shares of Common Stock reserved
for issuance under the Company's Dividend Reinvestment Plan, (ii) an
aggregate of 505,340 shares of Common Stock which the Company will have the
right, but not the obligation, to issue to the holders of the limited
partnership interests in certain of the Company's subsidiary operating
partnerships, (iii) 1,351,351 shares of Common Stock issuable upon
conversion of the Class A Preferred Stock and (iv) 1,411,765 shares of
Common Stock issuable upon conversion of the Class B Preferred Stock. As of
the date hereof, the Company has issued 270,270 shares of Class A Preferred
Stock and 705,882 shares of Class B Preferred Stock. The Company expects to
issue 1,081,081 shares of Class A Common Stock and 705,883 shares of Class B
Common Stock on or about December 23, 1997. See "Description of Capital
Stock" in the accompanying Prospectus.
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<PAGE> 9
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock of the Company began trading on the NYSE on October 29,
1996 under the symbol "PAG." From the date of the Company's IPO until October
28, 1996, the Company's Common Stock traded on the ASE under the same symbol.
The following table sets forth the high and low closing prices for the Common
Stock on the ASE or the NYSE, as applicable, and the distributions declared for
the periods indicated:
<TABLE>
<CAPTION>
DISTRIBUTIONS
HIGH LOW DECLARED
---- ---- -------------
<S> <C> <C> <C>
1995
1st Quarter..................................... $16 $14 5/8 $ .39
2nd Quarter..................................... 16 1/8 14 7/8 .39
3rd Quarter..................................... 16 1/2 14 5/8 .39
4th Quarter..................................... 16 3/4 13 1/2 .40
1996
1st Quarter..................................... $18 3/4 $16 1/8 $ .40
2nd Quarter..................................... 18 1/4 16 1/4 .40
3rd Quarter..................................... 18 3/4 16 3/4 .40
4th Quarter..................................... 20 18 1/8 .41
1997
1st Quarter..................................... $23 3/8 $19 1/4 $ .41
2nd Quarter..................................... 22 1/8 20 1/2 .41
3rd Quarter..................................... 24 5/16 20 7/8 .41
4th Quarter (through December 17, 1997)......... 24 5/16 20 7/8 .42(1)
</TABLE>
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(1) Declared on December 11, 1997. Payable on January 9, 1998 to stockholders of
record on January 1, 1998.
The closing price of the Common Stock on the NYSE on December 17, 1997 was
$22 13/16 per share. As of such date there were approximately 260 record holders
of Common Stock.
Since the Company's IPO, the Company has declared regular quarterly
distributions to its stockholders. Federal income tax law requires that a REIT
distribute annually at least 95% of its REIT taxable income, which, for the
Company, was approximately $2.5 million, $2.3 million and $4.8 million in 1994,
1995 and 1996 ($.58, $.48 and $.76, respectively, per share of Common Stock).
See "Federal Income Tax Considerations -- Annual Distribution Requirements" in
the accompanying Prospectus. Future distributions by the Company will be at the
discretion of the Board of Directors and will depend upon the actual Funds From
Operations of the Company, its financial condition, capital requirements, the
annual distribution requirements under the REIT provisions of the Internal
Revenue Code of 1986, as amended, applicable legal restrictions and such other
factors as the Board of Directors deems relevant. Although the Company intends
to continue to make quarterly distributions to its stockholders, no assurances
can be given as to the amount of distributions, if any, made in the future.
The Company anticipates that cash available for distribution will be
greater than earnings and profits due to non-cash expenses, primarily
depreciation and amortization, incurred by the Company. Distributions by the
Company to the extent of its current and accumulated earnings and profits for
federal income tax purposes generally will be taxable to stockholders as
ordinary dividend income. Distributions to a stockholder in excess of earnings
and profits generally will be treated as non-taxable return of capital to the
extent of the stockholder's tax basis in its shares, and thereafter as capital
gain (assuming such shares are held as a capital asset). See "Federal Income Tax
Considerations" in the accompanying Prospectus. Distributions treated as a
return of capital have the effect of deferring taxation until the sale of a
stockholder's Common Stock. In order to maintain its qualification as a REIT,
the Company could be required to make distributions in excess of cash
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<PAGE> 10
available for distribution. The Company estimates that 35%, 68% and 45% of the
distributions paid in 1994, 1995 and 1996, respectively, were in excess of its
current and accumulated earnings and profits.
During 1995, the Company implemented a Dividend Reinvestment and Stock
Purchase Plan, which permits stockholders to acquire additional shares of Common
Stock by automatically reinvesting cash distributions and making optional cash
purchases without payment of any broker commissions or service charges.
Stockholders who do not participate in such Plan continue to receive cash
distributions as paid.
CURRENT MARKETS
Set forth below is a brief description of the current markets in which the
Company currently owns industrial properties. The information was derived from
data provided by, among other sources, CB Commercial Torto Wheaton Research.
Riverside-San Bernardino. The Riverside-San Bernardino metropolitan
statistical area is comprised of the two counties of Riverside and San
Bernardino. As of the second quarter of 1997, the population of the
Riverside-San Bernardino metropolitan statistical area was 3.05 million, making
it the 12th most populous metropolitan statistical area in the country. The
median per capita income in 1995 was $18,467, which is 20% below the national
average. Industries concentrated in the Riverside-San Bernardino metropolitan
statistical area include state and local governments, food industries,
department stores and military.
As of the second quarter of 1997, the Riverside-San Bernardino industrial
market had grown 14.4 million square feet since 1992. Warehouses comprised the
largest part (76.2%) of the industrial property rental market, with
manufacturing facilities next at 22.8%. Vacancy rates ranged from 8.8% in
warehouse properties to 15.5% in R&D properties.
Orange County. As of the second quarter of 1997, the population of the
Orange County metropolitan statistical area was 2.67 million, making it the 16th
most populous metropolitan statistical area in the country. The median per
capita income in 1995 was $26,925, which is 16% above the national average.
Industries concentrated in the Orange County metropolitan statistical area
include food industries, personnel supply services, amusement/recreation and
professional and commercial equipment.
As of the second quarter of 1997, the Orange County industrial market had
grown 4.2 million square feet since 1992. Manufacturing facilities comprised the
largest part (72.2%) of the commercial real estate market with research and
development ("R&D") facilities next at 21.1%. Vacancy rates ranged from 5.9% in
manufacturing to 11.7% for R&D properties.
San Diego. As of the second quarter of 1997, the population of the San
Diego metropolitan statistical area was 2.68 million, making it the 15th most
populous metropolitan statistical area in the country. The median per capita
income in 1995 was $22,559, which is 3% below the national average. Industries
concentrated in the San Diego metropolitan statistical area include military,
federal government, hotels and motels and research and testing services.
As of the second quarter of 1997, the San Diego industrial market had grown
4.3 million square feet since 1992. Manufacturing facilities comprised the
largest part (47.8%) of the industrial property rental market, with R&D
properties next at 23.1%. Vacancy rates ranged from 6.8% in R&D properties to
8.0% in manufacturing.
Seattle. As of the second quarter of 1997, the population of the Seattle
metropolitan statistical area was 2.27 million, making it the 21st most populous
metropolitan statistical area in the country. The median per capita income in
1995 was $28,329, which is 22% above the national average. Industries
concentrated in the Seattle metropolitan statistical area include aircraft and
aircraft parts, computer and data processing, medical offices and general
building contractors.
As of the second quarter of 1997, the Seattle industrial market had grown
12.9 million square feet since 1992. Warehouses comprised the largest part
(68.9%) of the industrial property rental market, with
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<PAGE> 11
manufacturing facilities next at 22.9%. Vacancy rates ranged from 3.2% in
manufacturing space to 10.1% in R&D properties.
Los Angeles. As of the second quarter of 1997, the population of the Los
Angeles metropolitan statistical area was 9.17 million, making it the most
populous metropolitan statistical area in the country. The median per capita
income in 1995 was $23,028, which is 1% below the national average. Industries
concentrated in the Los Angeles metropolitan statistical area include motion
picture production, personnel supply services and business services.
As of the second quarter of 1997, the Los Angeles industrial market had
grown 5.4 million square feet since 1992. Manufacturing facilities comprised the
largest part (48.5%) of the industrial property rental market, with warehouses
next at 43.1%. Vacancy rates ranged from 4.9% in manufacturing space to 11.3% in
R&D properties.
San Francisco. As of the second quarter of 1997, the population of the San
Francisco metropolitan statistical area was 1.67 million, making it the 30th
most populous metropolitan statistical area in the country. The median per
capita income in 1995 was $35,015, which is 51% above the national average.
Industries concentrated in the San Francisco metropolitan statistical area
include federal government, transportation by air, hotels and motels and
commercial banks.
As of the second quarter of 1997, the San Francisco industrial market had
grown 441,000 square feet since 1992. Warehouses comprised the largest part
(62.2%) of the industrial property rental market, with manufacturing facilities
next at 17.6%. Vacancy rates ranged from 0.8% in manufacturing facilities to
5.4% in warehouse properties.
Sacramento. As of the second quarter of 1997, the population of the
Sacramento metropolitan statistical area was 1.5 million, making it the 39th
most populous metropolitan statistical area in the country. The median per
capita income in 1995 was $22,922, which is 1% below the national average.
Industries concentrated in the Sacramento metropolitan statistical area include
state and local government, food and food related industries and federal
government.
As of the second quarter of 1997, the Sacramento industrial market had
grown 8.5 million square feet since 1992. Warehouses comprised the largest part
(81.5%) of the industrial property rental market, with R&D properties next at
10.5%. Vacancy rates ranged from 7.4% in manufacturing facilities to 12.5% in
warehouse properties.
S-11
<PAGE> 12
BUSINESS AND PROPERTIES
GENERAL ACQUISITION GUIDELINES
The Company has established a set of general guidelines and physical
characteristics it uses to evaluate acquisition opportunities available within
its markets. Specifically, the Company seeks to acquire properties that it
believes can benefit from the Company's management expertise, and in many cases
from physical renovations and rehabilitations, to improve financial performance.
The Company's acquisition program is focused primarily on industrial properties
and selected multifamily properties and portfolios located in its markets. The
Company seeks to acquire properties at a discount to replacement costs and where
it can improve cash flow and value without relying on increases in market rental
rates. Such growth in cash flow and value may come through physical
rehabilitation and/or turnover of leases with below market rents and through the
Company's effective and efficient local management. The Company's industrial
property acquisition activities will generally be focused on business parks or
warehouse/distribution facilities serving multiple tenants. The Company's
multifamily property acquisitions will generally be focused on medium-sized
class-B properties targeted towards middle or lower income families or active
senior citizens. Pursuant to the Company's acquisition strategy and based on
current market conditions, the Company generally seeks stabilized yields of 10%
or greater.
The Company believes that its status as a publicly traded REIT enhances its
ability to acquire properties or development sites by providing property sellers
with a means to defer federal income taxes on gains through the use of
partnership units in lieu of cash for all or a portion of the consideration of
the acquisition. The Company believes that there is a large number of long-term
owners with low or negative basis who could realize tax benefits by receiving
partnership units as consideration. Thus the ability of the Company to exchange
partnership units for a property provides an incentive to the seller and a
competitive advantage to the Company over other buyers who do not have the
ability to issue partnership units.
GENERAL
The tables below set forth certain information relating to the Company's
operating Industrial and Multifamily Properties by location and type as of
September 30, 1997.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF LEASABLE INDUSTRIAL GROSS
PROPERTIES SQUARE FEET RENTAL REVENUE OCCUPANCY
--------- ----------- ------------------ ---------
<S> <C> <C> <C> <C>
INDUSTRIAL
California
Inland Empire(1)............................... 6 1,989,194 19% 99%
San Diego...................................... 6 1,203,606 21 99
Orange County.................................. 8 1,178,470 24 93
Los Angeles.................................... 3 1,183,495 11 95
Northern California............................ 4 1,249,566 9 99
Pacific Northwest
Seattle, WA.................................... 5 861,067 16 98
--- --------- --- ---
Total or Weighted Average........................ 32(2) 7,665,398 100% 97%
=== ========= === ===
</TABLE>
S-12
<PAGE> 13
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MULTIFAMILY GROSS
PROPERTIES UNITS RENTAL REVENUE OCCUPANCY
--------- ----- ------------------- ---------
<S> <C> <C> <C> <C>
MULTIFAMILY
California
Inland Empire(1)................................. 12 1,533 36% 92%
Orange County.................................... 3 742 18 96
San Diego........................................ 2 551 5 97
Pacific Northwest
Seattle, WA...................................... 6 1,556 35 97
Portland, OR..................................... 1 279 6 92
--- ----- --- ---
Total or Weighted Average................ 24 4,661 100% 95%
=== ===== === ===
</TABLE>
- ---------------
(1) Includes the eastern portion of Los Angeles County adjacent to the
Riverside-San Bernardino metropolitan statistical area.
(2) Subsequent to September 30, 1997, the Company acquired ten Industrial
Properties which in the aggregate contain 1.9 million leasable square feet.
INDUSTRIAL PROPERTIES
The Company focuses on multi-tenant business parks and mid-size
warehouse/distribution facilities. Whenever possible, the Company seeks a
significant market share in its principal sub-markets so that it can accommodate
its tenants as their needs change and have an influence on trends in market
rents. The Company also seeks properties that are well-located and offer
convenient access to major distribution points, such as shipping ports, major
airports and major freeways.
Management believes that the Southern California industrial property market
is recovering based upon an increasing level of leasing interest and a limited
supply of new product. As evidence of this, the Company already has observed
recent increases in the prices for industrial properties and tenant requests for
longer term leases. With over 56% of its industrial leases expiring during the
next 27 months, the Company believes it is in a good position to capitalize on
anticipated rental rate increases. As of September 30, 1997, effective rental
rates on the 282 leases (representing approximately 975,000 rentable square
feet) signed or renewed by the Company in the first three quarters of 1997 were
on average, based on the number of square feet subject to such leases, 7.5%
higher than the ending rate on the previous leases for the same space. The
Industrial Properties are currently occupied by over 1,200 tenants, and no one
tenant accounts for more than 1.8% of the Company's total rental revenues.
The Company generally offers industrial leases in the one- to five-year
range. Lease terms include, in most cases, annual adjustments based on changes
in the consumer price index. The standard lease also includes some refurbishing
and tenant improvement allowance with the amount varying depending upon the
length of the lease, the size of the space leased and the use. The Company seeks
tenants primarily involved in warehouse, distribution, assembly and light
manufacturing activities.
S-13
<PAGE> 14
The following table presents information concerning the Industrial
Properties, including the actual average rent per square foot and percentage of
the leasable square footage leased and occupied by tenants as of September 30,
1997:
<TABLE>
<CAPTION>
NET AVERAGE
DATE RENTABLE MONTHLY
CONSTRUCTED/ SQUARE BASE RENT
INDUSTRIAL PROPERTY LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY
- ---------------------------------- --------------------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Pacific Park Business Park........ Aliso Viejo, CA 1988 99,622 $ .91 94%
Baldwin Commerce Center........... Baldwin Park, CA 1986 567,605 .37 94
PGP Distribution Center........... Chino, CA 1988 302,166 .27 100
Pacific Gulf Distribution
Center.......................... City of Industry, CA 1973-77 326,596 .29 100
Concord Business Park............. Concord, CA 1989 141,792 .62 96
PGP Distribution Center........... Downey, CA 1977-1988 289,294 .32 90
Pacific Gulf Business Park........ Escondido, CA 1988-92 251,464 .51 97
PGP Distribution Center........... Fontana, CA 1989 380,634 .29 100
PGP Distribution Center........... Fremont, CA 1980-1987 344,416 .38 100
Garden Grove Industrial........... Garden Grove, CA 1979 252,184 .40 89
Pacific Gulf Business Park
Center.......................... Garden Grove, CA 1986 189,526 .64 93
Pacific Gulf Commerce Park........ Hayward, CA 1972-74 193,358 .64 93
La Mirada Business Center......... La Mirada, CA 1975 82,010 .57 89
Miramar Business Center(1)........ Miramar, CA 1981 186,022 .69 100
Etiwanda Distribution Center...... Ontario, CA 1991 576,327 .31 100
PGP Distribution Center........... Rancho Bernardo, CA 1990 215,502 .52 100
Crescent Business Center.......... Rancho Cucamonga, CA 1981 136,066 .39 100
Golden West Industrial Park....... Rancho Cucamonga, CA 1990 296,821 .39 92
Riverview Industrial Park......... San Bernardino, CA 1980 297,180 .26 100
Bay San Marcos.................... San Marcos, CA 1988 121,768 .43 100
San Marcos Commerce Center........ San Marcos, CA 1985 72,050 .44 100
Harbor Business Park.............. Santa Ana, CA 1974-76 193,136 .60 96
Harbor Warner Business Park....... Santa Ana, CA 1974-76 127,836 .61 92
Bell Ranch Industrial Park........ Santa Fe Springs, CA 1981 128,640 .29 100
Vista Distribution Center......... Vista, CA 1990 356,800 .39 100
PGP Distribution Center........... Woodland, CA 1986 570,000 .18 100
North County Business Center...... Yorba Linda, CA 1987-89 105,516 .57 89
PGP Distribution Center........... Algona, WA 1988 200,401 .34 100
Seattle I......................... Seattle, WA 1968 42,240 .42 100
Seattle II........................ Seattle, WA 1981 64,077 .57 100
Seattle III....................... Seattle, WA 1981 78,720 .56 100
Pacific Gulf Business Park........ Tukwila, WA 1975-79 475,629 .54 97
--------- ---
Sub-Total or Weighted Average... 7,665,398 97%
========= ===
Industrial Property Rehabilitation
Warehouse/Distribution............ San Diego, CA April 1998(2) 375,919 NA NA
Warehouse/Distribution............ Algona, WA December 1997(2) 263,155 NA NA
---------
Sub-Total or Weighted Average... 639,074
=========
Industrial Property Development
Warehouse/Distribution............ Lake Forest, CA April 1998(2) 203,500 NA NA
Business Park..................... Lake Forest, CA July 1998(2) 230,000 NA NA
Warehouse/Distribution............ City of Industry, CA December 1997(2) 56,000 NA NA
Warehouse/Distribution............ San Diego, CA April 1998(2) 88,000 NA NA
---------
Sub-Total or Weighted Average... 577,500
=========
</TABLE>
- ---------------
(1) Subject to a ground lease expiring in July 2035.
(2) Estimated.
S-14
<PAGE> 15
The following table shows scheduled lease expirations for all leases for
the Industrial Properties (excluding properties under development) as of
September 30, 1997. The Company has leases covering leasable square feet that
are on a month-to-month basis and are therefore not included in the table below.
<TABLE>
<CAPTION>
GROSS LEASABLE ANNUAL BASE PERCENTAGE OF PERCENTAGE
NUMBER OF AREA OF RENT OF GROSS LEASABLE ANNUAL BASE
PROPERTY LEASES EXPIRING EXPIRING LEASES EXPIRING LEASES AREA EXPIRING RENT EXPIRING
- ----------------------------- --------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1997 (4th Quarter)........... 131 445,595 $ 2,606,462 6.4% 7.7%
1998......................... 412 1,959,465 10,514,778 28.0 31.0
1999......................... 230 1,086,933 6,018,930 15.5 17.7
2000......................... 115 1,049,546 5,012,377 15.0 14.8
2001......................... 56 679,314 3,385,085 9.7 9.9
2002......................... 26 1,272,177 3,973,502 18.2 11.7
2003......................... 9 199,030 1,088,240 2.8 3.2
2004......................... 1 90,400 469,284 1.3 1.4
2005......................... 1 11,520 57,600 0.1 0.2
2006 and thereafter.......... 2 208,090 797,556 3.0 2.4
--- --------- ----------- ----- -----
Totals............. 983 7,002,070 $33,923,814 100.0 100.0%
=== ========= =========== ===== =====
</TABLE>
MULTIFAMILY PROPERTIES
The Company invests primarily in two types of multifamily apartment
communities: communities oriented to family-style living and communities for
active seniors ages 55 and older.
The Company focuses on family-style apartment communities with greater
concentrations of two- and three-bedroom units with rents affordable by
middle-income families. The Company believes that there is a strong demand among
middle-income families for affordable rental housing such as that offered by the
Company.
The Company also focuses on active senior housing for individuals ages 55
and older, where seniors can be involved in activities, social gatherings and
other types of entertainment with residents of their own age group. The Company
offers no assisted living or related services; the Company's properties are
oriented to those seniors interested in renting versus owning and who are able
to care for themselves. The Company believes that the senior population will
continue to grow and that the market for rental housing for active seniors will
be strong. In addition, management believes that active senior housing typically
has lower operating and management costs due to lower tenant turnover.
Each of the Multifamily Properties provides tenants with attractive
amenities, including a swimming pool (except Inn at Laguna Hills) and clubhouse,
and many include jacuzzis, tennis courts, sports courts and saunas. Many offer
additional features such as vaulted ceilings, fireplaces, washers and dryers,
cable television and limited access gates. None of the Multifamily Properties
currently are subject to rent control or rent stabilization regulations.
However, certain of these properties are subject to restrictions based upon
tax-exempt loan requirements, such as providing a percentage of units to low
income tenants. There can be no assurances that rent control or rent
stabilization regulations will not be imposed in the future.
S-15
<PAGE> 16
The following table presents information concerning the Multifamily
Properties, including average gross scheduled rents per unit and percentage of
units occupied as of September 30, 1997:
<TABLE>
<CAPTION>
AVERAGE AVERAGE
DATE UNIT SIZE RENT PER
MULTIFAMILY PROPERTY LOCATION CONSTRUCTED UNITS (SQ. FT.) UNIT OCCUPANCY
- -------------------------------------------------- ---------------- ----------- ----- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Daisy 5(1)(2)..................................... Covina, CA 1977 38 897 $724 87%
Daisy 7(1)(2)..................................... Diamond Bar, CA 1978 204 950 798 95
Morningview Terrace(3)(4)......................... Escondido, CA 1986 326 649 579 97
Terrace Gardens(3)(4)............................. Escondido, CA 1985 225 781 573 97
Inn at Laguna Hills(3)............................ Laguna, CA 1994 140 500 610 98
Daisy 19(2)....................................... Ontario, CA 1983 125 1,019 738 96
Daisy 20(2)....................................... Ontario, CA 1982 155 1,000 671 92
Sunnyside II(2)(3)................................ Ontario, CA 1983 60 493 490 95
Sunnyside III(2)(3)............................... Ontario, CA 1985 84 508 508 88
Raintree(1)....................................... Ontario, CA 1984 165 846 578 90
Sunnyside I(2)(3)................................. San Dimas, CA 1984 164 495 522 88
Daisy 12(1)(2).................................... San Dimas, CA 1979 102 952 707 89
Daisy 17(1)(2).................................... San Dimas, CA 1981 156 962 712 89
Lariat(1)(2)...................................... San Dimas, CA 1981 30 970 774 93
Park Place........................................ Santa Ana, CA 1990 196 799 658 94
Applewood......................................... Santa Ana, CA 1972 406 801 716 96
Daisy 16(1)(2).................................... West Covina, CA 1981 250 986 729 97
Waterhouse........................................ Beaverton, OR 1990 279 937 673 92
Holly Ridge....................................... Burien, WA 1987 146 946 665 97
Lora Lakes........................................ Burien, WA 1987 234 907 644 95
Fulton's Crossing................................. Everett, WA 1986 256 803 568 98
Fulton's Landing.................................. Everett, WA 1988 248 745 548 98
Heatherwood(1).................................... Federal Way, WA 1985 368 741 556 96
Hampton Bay....................................... Kent, WA 1987 304 884 663 98
----- ---
Sub-Total or Weighted Average............. 4,661 95%
===== ===
</TABLE>
<TABLE>
<CAPTION>
MULTIFAMILY PROPERTY DEVELOPMENT
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rancho Santa Margarita Senior Community........... Rancho Santa NA 166 600 NA NA
Margarita, CA
</TABLE>
- ---------------
(1) Under rehabilitation.
(2) Owned by PGP Inland Communities, L.P., a limited partnership in which the
Company has a minimum 78% equity interest, full management and control, and
the right to 100% of cash flow until certain net operating income levels are
achieved.
(3) Properties serving active senior tenants (individuals ages 55 and older).
(4) Owned by Terrace Gardens-PGP, L.P. and Morning View Terrace-PGP, L.P.,
limited partnerships in which the Company has minimum equity interests of
60% and 58%, respectively, and full management and control.
S-16
<PAGE> 17
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
dated the date hereof (the "Underwriting Agreement"), between Prudential
Securities Incorporated (the "Underwriter") and the Company, the Underwriter has
agreed to purchase from the Company, and the Company has agreed to sell to the
Underwriter, 874,317 shares of Common Stock at a price of $21.73 per share,
resulting in aggregate proceeds to the Company of $18,998,908.41 before payment
of expenses by the Company estimated at $100,000.
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the shares of Common Stock are subject to
approval of certain legal matters by its counsel and to certain other
conditions. The Underwriter is obligated to take and pay for all shares of
Common Stock offered hereby if any such shares of Common Stock are taken.
The Underwriter intends to deposit the shares of Common Stock with the
trustee of the Trust, a registered unit investment trust under the Investment
Company Act of 1940, as amended, in exchange for units in the Trust. If all of
the shares of Common Stock so deposited with the trustee of the Trust are valued
at their reported last sale price on December 18, 1997, the aggregate
underwriting discount would be $1,001,092.97. The Underwriter is acting as
sponsor and depositor of the Trust and is therefore considered an affiliate of
the Trust.
The Underwriting Agreement contains covenants of indemnity between the
Underwriter and the Company against certain liabilities, including liabilities
under the Securities Act.
The Underwriter and its affiliates have from time to time performed, and
may continue to perform in the future, various investment banking services for
the Company, for which customary compensation has been received.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Gibson, Dunn &
Crutcher LLP, Los Angeles, California and Piper & Marbury L.L.P., Baltimore,
Maryland. Certain legal matters will be passed upon for the Underwriter by
Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California.
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 the accompanying 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.
S-17
<PAGE> 18
This filing is made pursuant
to Rule 424(b)(2) under the
Securities Act of 1933 in
connection with Registration
No. 333-23611
PROSPECTUS
- --------------------------------------------------------------------------------
$250,000,000
PACIFIC GULF PROPERTIES INC.
LOGO 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 November 17, 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 Reports on Form 10-K, for its fiscal year
ended December 31, 1996;
(b) The Company's Quarterly Report on Form 10-Q for its fiscal quarter
ended March 31, 1997;
(c) The Company's Quarterly Report on Form 10-Q for its fiscal quarter
ended June 30, 1997;
(d) The Company's Quarterly Report on Form 10-Q for its fiscal quarter
ended September 30, 1997;
(e) The Company's Current Reports on Form 8-K, dated January 17, 1997
(Form 8-K/A), January 21, 1997, February 18, 1997, April 18, 1997, May 29,
1997 June 10, 1997, June 26, 1997, August 1, 1997 and October 31, 1997; and
(f) 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
2
<PAGE> 20
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., 4220 Von Karman Avenue,
Newport Beach, California 92660; telephone (714) 223-5000.
THE COMPANY
The Company, a self-administered and self-managed equity REIT, owns,
operates, leases, acquires, rehabilitates and develops industrial and
multifamily properties. The Company's properties are located in California and
the Pacific Northwest, with the largest concentration in Southern California.
The Company focuses on the industrial and multifamily properties in this
geographic region due to management's extensive experience in these property
types and markets and management's belief that these markets present potential
for long-term economic growth. The Company currently owns a portfolio of 34
operating industrial properties, containing an aggregate of 8.2 million leasable
square feet, two industrial properties being rehabilitated containing
approximately 639,000 leasable square feet and four industrial properties being
developed that will contain approximately 578,000 leasable square feet (the
"Industrial Properties"). The Company also owns a portfolio of 24 operating
multifamily properties, which includes 18 apartment communities containing 3,662
units, six active senior apartment communities containing 999 units and one
active senior apartment community being developed that contains 166 apartment
units (the "Multifamily Properties," and collectively with the Industrial
Properties, the "Properties"). As of September 30, 1997, the operating
Industrial Properties and Multifamily Properties then owned by the Company
experienced occupancy rates of 97% and 95%, respectively.
Management believes that focusing on two property types allows the Company
greater investment opportunities and flexibility than would be available by
investing in only one property type. Apartments have shorter term 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 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
more flexibility in implementing its investment, disposition and property
management strategies.
The Company seeks to maximize cash flow by increasing net operating income
(rental property income less rental property expenses) from existing properties,
making accretive acquisitions of additional operating properties in its
geographic markets, rehabilitating acquired and existing properties and
developing other properties.
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 4220 Von Karman Avenue, Newport Beach, California 92660,
and its telephone number is (714) 223-5000. Unless the context otherwise
requires, as used herein the term "Company" includes Pacific Gulf Properties
Inc. and its consolidated subsidiaries and partnerships.
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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.
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>
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------- ----------------------------------
1997 1996 1995 1994 1993 1992
------------- ---- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges................. 1.75x -- 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 September 30, 1997, the Company had outstanding approximately $33.6 million
of unsecured indebtedness and $32.1 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 September 30, 1997, certain of the Properties were subject to
variable rate mortgage indebtedness. At that date, the weighted average interest
rate on such outstanding indebtedness was 7.7%. 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
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<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
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<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, as well as the Probable Acquisitions and the
Possible Acquisitions, 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 such properties have been subject to a limited subsurface investigation,
and, with respect to the Properties, in some cases limited remediation. While
these environmental assessments have not revealed any significant environmental
liability, no assurances can be given that such assessments would reveal all
such liabilities or that any required remediation would not be material.
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 has 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, possibly with retroactive
effect.
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
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 $56.6
million 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 $42.1 million in principal amount of Debentures (at a rate of 58
shares of Common Stock for each $1,000 principal amount of Debentures). An
aggregate of $12.8 million in principal amount of Debentures is outstanding as
of September 30, 1997. 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 685,409 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 September 30, 1997, 14,295,454 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. In May 1997 the
Company entered into an agreement to issue and sell 1,411,765 shares of Class B
Senior Cumulative Convertible Preferred Stock to the same institutional buyer on
or before December 31, 1997. Under Maryland law, stockholders generally are not
liable for a corporation's debts or obligations.
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.
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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. 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.
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,
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<PAGE> 28
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.
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 Class A Preferred Shares will have the right to require the
Company to redeem such holder's of Class A Preferred Shares 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 Class A
Preferred Share 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 $18.50.
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 directors elected by Preferred Shareholders, 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 Class A
Preferred Shares; (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 Class A Preferred Shares; 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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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 June 30, 1998. 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.
CLASS B SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK
In May 1997, the Company entered into a second agreement with Five Arrows
to issue 1,411,765 shares of Class B Senior Cumulative Convertible Preferred
Shares (the "Class B Preferred Shares") at a price of $21.25 per share over the
course of 1997 in a maximum of three separate issuances, the timing of which may
be specified by the Company. Since entering into this agreement, the Company has
issued and sold to Five Arrows an aggregate of 705,882 Class B Preferred Shares
for an aggregate purchase price of $15 million. Upon each issuance of Class B
Preferred Shares, the Company is required to pay a transaction fee of $0.75 per
share being issued. As part of this transaction, Five Arrows agreed to waive
certain availability fees that were to be charged to the Company if all of the
Class A Preferred Shares were not issued before July 1, 1997. Additionally, Five
Arrows agreed that it would not transfer any Class A Preferred Shares or Class B
Preferred Shares, or any shares of Common Stock into which such shares of
Preferred Stock have been converted, until June 30, 1998. The terms of the Class
B Preferred Shares are substantially similar to those of the Class A Preferred
Shares, except that (i) the liquidation preference of the Class B Preferred
Shares is $21.25 per share (plus accumulated, accrued and unpaid dividends) and
(ii) Five Arrows will not be entitled to designate any additional
representatives to the Company's Board of Directors while it owns both the Class
A Preferred Shares and the Class B Preferred Shares. See "Description of Capital
Stock -- Class A Senior Cumulative Convertible Preferred Stock" above.
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
Provision. 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 Provision with respect
to a particular stockholder if (i) such person is not an individual for purposes
of applying the "five or fewer" rule described above, (ii) 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 Limit Provision, and (iii) such person
agrees that, if an IRS Ruling Satisfactory to the Corporation (as defined below)
has been
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obtained, a violation of such 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 and Class B Preferred Shares, Five Arrows has been given a
limited waiver of the Ownership Limit 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 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 exceeding 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 if
no such notice is provided.
The Ownership Limit Provision 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 Provision 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 Provision 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. In May 1997,
the Company entered into an agreement to issue and sell 1,411,765 shares of
Class B Senior Cumulative Convertible Preferred Stock to the same institutional
investor on or before December 31, 1997. On April 3, 1997, the Company issued
and sold 270,270 shares of Class A Senior Cumulative Convertible Preferred Stock
to such institutional investor. Over the course of 1997, the Company has issued
and sold an aggregate of 705,882 shares of Class B Senior Cumulative Convertible
Preferred Stock to the same institutional investor. See "Description of Capital
Stock -- Class A Senior Cumulative Convertible Preferred Stock" and "-- Class B
Senior Cumulative Convertible Preferred Stock" above.
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.
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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 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.
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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 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.
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;
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(3) the percentage of the principal amount at which such Debt
Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, 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;
(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
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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.
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
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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 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
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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 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
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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).
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;
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(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 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
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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 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
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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 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
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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.
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
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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 timeconsuming 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.
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
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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 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.
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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.
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.
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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 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.
Underwriters have represented and agreed that (i) they have not offered or
sold, and will not for a period of six months following consummation of the
Offerings offer or sell any shares of Common Stock offered hereby, to persons in
the United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances that do not
constitute an offer to the public in the United Kingdom for the purposes of the
Public Offers of Securities Regulations 1995, (ii) they have complied with and
will comply with all applicable provisions of the Public Offers of Securities
Regulations 1995 and the Financial Services Act 1986 with respect to anything
done by them in relation to the shares of Common Stock offered hereby in, from,
or otherwise involving the United Kingdom and (iii) they have only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by them in connection with the issue or sale of the shares of Common
Stock offered hereby to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1996, as amended, or is a person to whom the document may otherwise lawfully be
issued or passed on.
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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 whose opinion has been filed as an exhibit to the Registration
Statement, 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 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
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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 its 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 sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property 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 of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any undistributed
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. The result described above with respect to the recognition of
"Built-in Gain" assumes that the Company will make an election pursuant to IRS
Notice 88-19, if the Company acquires such an asset.
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, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) (the "5/50 Rule"); 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 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
"Description of Capital Stock -- Ownership and Transfer Restrictions and
Redemption
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Provisions." 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. For taxable years of the
Company beginning prior to January 1, 1998, failure to comply with the foregoing
requirements could have resulted in the Company's disqualification as a REIT.
The Company believes that it has complied with these requirements for such
taxable years. For taxable years of the Company beginning on or after January 1,
1998, the Company will be treated as satisfying the 5/50 Rule if it complies
with the demand letter and recordkeeping requirements described above, and if it
does not know, and exercising reasonable diligence would not have known, whether
it failed to satisfy the 5/50 Rule.
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 the partnerships and limited liability companies in which the Company has a
direct or indirect interest (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 (the "75% test").
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 (the "30% test").
The 30% test does not apply to taxable years of the Company beginning on or
after January 1, 1998.
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
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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 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 ("Disqualified Services"), other than through an independent contractor
from whom the Company derives no revenue. The Company may, however, directly
perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and that are not
otherwise considered "rendered to the occupant" of the property. For taxable
years of the Company beginning on or after January 1, 1998, however, the
performance of Disqualified Services with respect to any property will not cause
rents from property to fail to be treated as "rents from real property" if the
amount received or accrued for such Disqualified Services is less than, or equal
to, one percent of all amounts received or accrued, directly or indirectly, by
the Company with respect to such property. For purposes of the preceding
sentence, the amount treated as received for any Disqualified Services shall not
be less than 150% of the direct cost of the Company in furnishing or rendering
the Disqualified Services. 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," and "Class B 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% test, which applies to taxable
years of the Company that commence prior to January 1, 1998.
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, property attributable to the temporary investment of capital
raised within the preceding one-year period, cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those included in the 75% asset class.
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.
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Under Section 856(i) of the Code, a "qualified REIT subsidiary" means any
corporation if 100% of the stock of such corporation is held by the REIT. For
taxable years that begin prior to January 1, 1998, the stock of such corporation
must have been held by the REIT at all times during the period such corporation
was in existence. Under the Code, a corporation which is a qualified REIT
subsidiary is not treated as a separate corporation for federal income tax
purposes, and all assets, liabilities, and items of income, deduction, and
credit of the corporation shall be treated as assets, liabilities, and such
items (as the case may be) of the REIT.
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 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 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. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends.
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
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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 would substantially reduce
the cash available for distribution by the Company to investors, and could
result in the Company's incurring substantial indebtedness (to the extent that
borrowings are feasible) or liquidating substantial investments in order to pay
the resulting taxes. 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 used herein, the term "domestic stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) is an estate, the income of which is
subject to United States federal income taxation regardless of its source or
(iv) is a trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust. 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 and that are out of current and accumulated
earnings and profits 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) from
the sale or disposition of a capital asset held for more than one year without
regard to the period for which the stockholder has held its shares. However,
domestic stockholders that are corporations 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 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 (mid-term capital gain if the shares have been held for more than
one year but not more than eighteen months, 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.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"), for taxable
years of the Company that begin on or after January 1, 1998, the Company may
elect to retain, rather than distribute as capital gain dividends, its net
long-term capital gain. In such event, the Company would pay tax on its net
long-term capital gain attributable to such taxable year. If the Company makes
this election, its domestic stockholders will be required to include in their
income as long-term capital gain their proportionate share of such amount so
designated by the Company. A domestic stockholder will be treated as having paid
his or her share of the tax paid by the Company in respect of the amount so
designated by the Company, for which such stockholder will be entitled to a
credit or refund. Additionally, each domestic stockholder's adjusted basis in
the Common Stock will be increased by the excess of the amount so includible in
income over the tax deemed paid on such
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amount. The Company must pay tax on its designated long-term capital gain within
30 days of the close of any taxable year in which it designates long-term
capital gain pursuant to this rule, and it must mail a written notice of its
designation to its stockholders within 60 days of the close of the taxable year.
Distributions received by domestic stockholders with respect to Common
Stock and gain arising from the sale or exchange by a domestic stockholder of
shares of Common Stock will not be treated as passive activity income, and, as a
result, domestic stockholders will not be able to apply any "passive activity
losses" against such income or gain. Distributions received by domestic
stockholder with respect to Common Stock (to the extent that they do not
constitute a return of capital) generally will be treated as investment income
for purposes of computing the investment interest limitation. Gain arising from
the sale or other disposition of Common Stock (and distributions treated as
such), however, will not be treated as investment income unless a domestic
stockholder so elects, in which case such capital gains will be taxed at
ordinary income rates.
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 mid-term or long-term capital gain or loss if the
shares have been held for more than one year or eighteen months, respectively
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.
The 1997 Act also created several new categories of capital gains
applicable to noncorporate taxpayers. Under prior law, noncorporate taxpayers
were generally taxed at a maximum rate of 28% on net capital gain (generally,
the excess of net long-term capital gain over net short-term capital loss).
Noncorporate taxpayers are now generally taxed at a maximum rate of 20% on net
capital gain attributable to gains realized on the sale of property held for
more than eighteen months, and a maximum rate of 28% on net capital gain
attributable to gain realized on the sale of property held for more than one
year and eighteen months or less. In addition, a maximum rate of 25% now applies
to noncorporate taxpayers on certain gains realized on the sale of real
property. The 1997 Act did not affect the treatment of short-term capital gain
or loss (generally, gain or loss attributable to capital assets held for one
year or less) and did not affect the taxation of capital gains in the hands of
corporate taxpayers. The 1997 Act authorizes the IRS to issue regulations
coordinating the capital gains provisions with other rules involving the
treatment of sales and exchanges by "pass-through" entities, such as REITs and
partnerships, and of sales and exchanges of interests therein. The IRS recently
issued Notice 97-64, which states generally that such regulations, when issued,
will permit (but not require) the Company to designate the portion of its
capital gain dividends, if any, to which the 28%, 25% and 20% rates apply, based
on the net amount of each class of capital gain recognized by the Company,
determined as if the Company were an individual subject to a marginal tax rate
on ordinary income of at least 28%.
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."
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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.
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 not domestic stockholders (as
defined above) (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 a withholding tax equal
to 30% of the gross amount of the distribution 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
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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 Treasury Regulations currently in effect, 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
Treasury Regulations scheduled to take effect January 1, 1999, 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 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 such 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.
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
and refundable if it exceeds the United States tax liability of the Non-U.S.
Stockholder.
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 USRPI 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
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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), 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 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. U.S. backup withholding, which generally is imposed at the rate of 31%
on certain payments to persons that fail to furnish the information required
under the U.S. information reporting requirements, will generally not apply to
dividends (including any capital gain dividend) paid on stock of the Company to
a Non-U.S. Stockholder at an address outside the United States. However, the
payment of the proceeds from the disposition of stock of the Company to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalty of perjury, certifies, among
other things, its status as a Non-U.S. Stockholder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting. 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 the application and effect of U.S. information reporting and backup
withholding to an investment in the Company.
Final regulations dealing with withholding tax on amounts paid to foreign
persons and related matters (the "New Withholding Regulations") were recently
promulgated. In general, the New Withholding Regulations do not significantly
alter the substantive withholding and information reporting requirements, but
unify current certification procedures and forms and clarify reliance standards.
For example, the new Withholding Regulations adopt a certification rule which
was in the proposed regulations, under which a foreign stockholder who wishes to
claim the benefit of an applicable treaty rate with respect to dividends
received from a United States corporation will be required to satisfy certain
certification and other requirements. The New Withholding Regulations will
generally be effective for payments made after December 31, 1998, subject to
certain transition rules. THE DISCUSSION SET FORTH ABOVE IN "TAXATION OF
NON-U.S. STOCKHOLDERS" GENERALLY DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS
INTO ACCOUNT. PROSPECTIVE NON-U.S. STOCKHOLDERS ARE STRONGLY URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION AND EFFECT OF THE NEW
WITHHOLDING REGULATIONS TO AN INVESTMENT IN THE COMPANY.
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.
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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.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE
ACCOMPANYING PROSPECTUS CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DO THEY
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Table of Contents.......................... S-2
Prospectus Supplement Summary.............. S-3
Use of Proceeds............................ S-6
Capitalization............................. S-7
Price Range of Common Stock and
Distributions............................ S-9
Current Markets............................ S-10
Business and Properties.................... S-12
Underwriting............................... S-17
Legal Matters.............................. S-17
Experts.................................... S-17
PROSPECTUS
Available Information...................... 2
Incorporation of Certain Documents by
Reference................................ 2
The Company................................ 3
Use of Proceeds............................ 4
Ratio of Earnings to Fixed Charges......... 4
Risk Factors............................... 5
Description of Capital Stock............... 9
Description of Preferred Stock............. 14
Description of Warrants.................... 17
Certain Provisions of Maryland Law and of
the Company's Articles of Incorporation
and Bylaws............................... 28
Plan of Distribution....................... 32
Federal Income Tax Considerations.......... 33
Legal Matters.............................. 43
Experts.................................... 43
</TABLE>
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874,317 Shares
LOGO
PACIFIC GULF
PROPERTIES INC.
Common Stock
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PROSPECTUS SUPPLEMENT
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PRUDENTIAL SECURITIES INCORPORATED
December 18, 1997
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