<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998
REGISTRATION NO. 333-52829
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PACIFIC GULF PROPERTIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
MARYLAND 33-0577520
<S> <C>
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
4220 VON KARMAN AVENUE
NEWPORT BEACH, CALIFORNIA 92660
(949) 223-5000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GLENN L. CARPENTER
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
PACIFIC GULF PROPERTIES INC.
4220 VON KARMAN AVENUE
NEWPORT BEACH, CALIFORNIA 92660
(949) 223-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
DHIYA EL-SADEN, ESQ.
GIBSON, DUNN & CRUTCHER, LLP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90067
(213) 229-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 2, 1998
PROSPECTUS
LOGO
211,921 SHARES
PACIFIC GULF PROPERTIES INC.
COMMON STOCK
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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'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 March 31, 1998, the Company owned a portfolio of 56 operating
industrial properties containing an aggregate of 11.8 million leasable square
feet, two industrial properties being rehabilitated containing approximately
639,000 leasable square feet and five industrial properties being developed that
will contain approximately 622,000 leasable square feet (the "Industrial
Properties"). As of March 31, 1998, the Company also owned a portfolio of 25
operating multifamily properties, which included 17 apartment communities
containing 3,383 units and eight active senior apartment communities containing
1,438 units (the "Multifamily Properties," and collectively with the Industrial
Properties, the "Properties"). As of March 31, 1998, the operating Industrial
Properties and Multifamily Properties then owned by the Company experienced
occupancy rates of 96% 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.
This Prospectus relates to 211,921 shares (the "Exchange Shares" or the
"Securities") of Common Stock, par value $.01 per share (the "Common Stock"), of
the Company that may be offered and sold from time to time by the stockholders
of the Company listed herein under "Selling Stockholders" (the "Selling
Stockholders"). The Exchange Shares have been, or may be, issued by the Company
to the Selling Stockholders in exchange for 211,921 units ("Units") of limited
partnership interest in PGP Inland Properties, L.P., a Delaware limited
partnership (the "Inland Partnership"), pursuant to the Company's obligations
under that certain Exchange Rights Agreement, dated as of August 15, 1995, among
the Company, the Inland Partnership, and the limited partners of the Inland
Partnership (the "Limited Partners") (the "Exchange Rights Agreement"). The
Company is registering the offer and sale of the Exchange Shares by the Selling
Stockholders pursuant to its obligations under that certain Registration Rights
Agreement, dated as of August 15, 1995, among the Company and the Limited
Partners (the "Registration Rights Agreement"), but the registration of such
shares does not necessarily mean that any of such shares will be offered or sold
by the holders thereof.
The Company's Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "PAG." On June 29, 1998, the closing sale price of the
Common Stock as reported on the NYSE was $21 3/16 per share.
SEE "RISK FACTORS" BEGINNING AT PAGE 6 OF THIS PROSPECTUS FOR MATERIAL
RISK FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
The Selling Stockholders may from time to time offer and sell the Exchange
Shares held by them directly or through agents or broker-dealers on terms to be
determined at the time of sale. To the extent required, the names of any agent
or broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." Each of the
Selling Stockholders reserves the sole right to accept or reject, in whole or in
part, any proposed purchase of the Exchange Shares to be made directly or
through agents.
The Company will not receive any proceeds from the sale of such Exchange
Shares by the Selling Stockholders, but has agreed to bear certain expenses of
registration of the Exchange Shares under Federal and state securities laws,
other than commissions and discounts of agents or broker-dealers and transfer
taxes, if any.
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. 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."
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 DATE OF THIS PROSPECTUS IS JULY , 1998
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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 Exchange Shares.
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 Exchange Shares, 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 Room of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. 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.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference the following documents
heretofore filed by the Company under the Exchange Act with the Commission.
(a) The Company's Annual Report on Form 10-K, for its fiscal year
ended December 31, 1997;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
(c) The description of the Company's Common Stock and 8.375%
Convertible Subordinated Debentures due 2001 contained in its Registration
Statement on Form 8-A/A filed with the Commission on January 25, 1994 (File
No. 1-12546), as supplemented by Form 8-A filed with the Commission on
October 29, 1996; and
(d) The description of the Registrant's Preferred Stock Purchase
Rights contained in its Registration Statement on Form 8-A filed with the
Commission on December 17, 1997 (File No. 1-12768).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference into this Prospectus, and to be a part hereof from the date of
filing such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of the Registration Statement, this Prospectus, and any
applicable Prospectus Supplement to the extent that a statement contained in the
Registration Statement, this Prospectus, any applicable Prospectus Statement or
any other subsequently filed document that is also incorporated by reference
herein modifies or supersedes that statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a Prospectus is delivered, upon written
or oral request of that person, a copy of any document incorporated herein by
reference (other than exhibits to those documents unless the exhibits are
specifically incorporated by reference into the documents that this Prospectus
incorporates by reference). Written or oral requests should be directed to
Stockholder Relations, Pacific Gulf Properties Inc., 4220 Von Karman Avenue,
Newport Beach, California 92660; telephone (949) 223-5000.
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PROSPECTUS 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 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 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 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), 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 set forth herein, 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 March 31, 1998, the Company owned a
portfolio of 56 operating Industrial Properties, containing an aggregate of 11.8
million leasable square feet, two industrial properties being rehabilitated
containing approximately 639,000 leasable square feet and five industrial
properties being developed that will contain approximately 622,000 leasable
square feet. As of March 31, 1998, the Company also owned a portfolio of 25
operating Multifamily Properties, which included 17 apartment communities
containing 3,383 units and eight active senior apartment communities containing
1,438 units. As of March 31, 1998, the operating Industrial Properties and
Multifamily Properties then owned by the Company experienced occupancy rates of
96% 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 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
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Avenue, Newport Beach, California, 92660; and its telephone number is (949)
223-5000. Unless the context otherwise requires, as used herein the term
"Company" includes Pacific Gulf Properties Inc. and its consolidated
subsidiaries and partnerships.
THE INLAND PARTNERSHIP UNITS
The Inland Partnership was formed in 1995 by the Company, as general
partner, and the Limited Partners. The Limited Partners contributed certain
Properties to the Partnership in exchange for Units. In general, the Board of
Directors of the Company, in its capacity as sole general partner of the Inland
Partnership, manages the affairs of the Inland Partnership by directing the
affairs of the Company.
Pursuant to the Exchange Rights Agreement, the Limited Partners became
entitled in August 1997 to require the Company to purchase their Units for cash
or, at the option of the Company, shares of Common Stock. Pursuant to the
Registration Rights Agreement, the Company, upon the satisfaction of certain
conditions, is obligated to file and keep effective a registration statement
with respect to the offer and sale, from time to time, of such shares by such
Limited Partners.
The Selling Stockholders constitute Limited Partners who have exercised, or
may exercise, the above described rights and who have acquired, or may acquire,
shares of Common Stock as consideration for the Company's purchase of the Units.
This Prospectus constitutes a part of the Registration Statement pursuant to
which the Company has registered the offer and sale, from time to time, of such
shares by the Selling Stockholders.
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RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
investing in the shares of Common Stock offered hereby.
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 March 31, 1998, the Company had outstanding approximately $295.0
million of indebtedness secured by certain of its Properties, and a debt to
total market capitalization ratio of 40%. There is no limitation on the amount
of indebtedness the Company may incur. The Company, therefore, could become more
highly leveraged than it currently is, resulting in an increase in debt service.
An increase in the Company's debt service will adversely affect the Company's
cash from operations, its ability to make expected distributions to stockholders
and its ability to comply with its other financial obligations. Risks normally
associated with debt financing include (i) the risk that cash from operations
will be insufficient to meet required payments of principal and interest, (ii)
the risk that existing indebtedness cannot be refinanced, (iii) the risk that
the terms of such refinancing will not be as favorable as the terms of existing
indebtedness and (iv) the risk that interest rates may increase, adversely
affecting the Company's ability to make distributions. If real property is
mortgaged to secure payment of indebtedness and the Company is unable to meet
mortgage payments, such property could be transferred to the mortgagee with a
consequent loss of income and asset value to the Company.
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.
The Company will, on occasion, incur indebtedness secured by more than one
property. The Company may also incur separate pieces of indebtedness that
contain cross-default provisions pursuant to which a default under one piece of
indebtedness will result in a default under all other cross-defaulted pieces of
indebtedness. In any of such circumstances, the Company's inability to meet debt
service payments on one piece of indebtedness may result in a loss through
foreclosure of multiple properties due to the effects of such
cross-collateralization or cross-default provisions.
As of March 31, 1998, the three largest pools of loans that contained
cross-collateralization features amounted to $59.6 million (secured by 9
properties), $34.0 million (secured by 5 properties) and $24.5 million (secured
by 6 properties), respectively. Approximately $28.6 million of other term loan
indebtedness contained either a cross-collateralization or cross-default
feature.
As of March 31, 1998, certain of the Properties were subject to variable
rate mortgage indebtedness. At that date, the weighted average interest rate on
such outstanding indebtedness was 7.4%. An increase in interest rates will have
an adverse effect on the Company's net income and results of operations.
RISKS OF ACQUISITION AND DEVELOPMENT ACTIVITIES
The Company intends to actively continue to acquire Industrial and
Multifamily Properties. Acquisitions of such properties entail risks that
investments will fail to perform in accordance with expectations. Estimates
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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
development projects. Such projects generally require various governmental and
other approvals, the receipt of 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 from those
anticipated.
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., Americans with Disabilities Act 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.
RISKS ASSOCIATED WITH POSSIBLE HEDGING
The Company may from time to time engage in hedging transactions to limit
the effects of changes in interest rates on its operations, including engaging
in interest rate swaps, caps, floors and other interest rate exchange contracts.
The use of these types of instruments to hedge a portfolio carries a certain
risks, including the risk that losses on a hedge position will reduce the funds
available for distribution to shareholders and that
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such losses may exceed the amount invested in such instruments. There is no
perfect hedge for any investment, and a hedge may not perform its intended
purpose of offsetting losses on an investment.
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. For a discussion of the Multifamily Properties that
are subject to such laws and regulations, see Item 1 "Business -- Indebtedness"
in the Company's Annual Report on Form 10-K for its fiscal year ended December
31, 1997.
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 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. While the Company has not
experienced material competitive pressures confined to specific geographic
regions, it is possible that material adverse changes in regional economies or
in the operations of major regional employers (such as Boeing in the Pacific
Northwest) could have a material adverse effect on the ability of the Company to
lease its Properties and on the rents charged. Conversely, if any of the
regional geographic areas in which the Company owns Properties experiences
economic growth, the Company is likely to experience increased competition for
acquisition and development projects, thereby increasing the Company's costs of
acquisition and development and potentially reducing the Company's returns
therefrom.
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
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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 from electric
transmission lines, and other states have required transmission facilities to
measure for levels of EMFs. The Company understands that, on occasion, lawsuits
have been filed (primarily against electric utilities) that allege personal
injuries from exposure to transmission lines and EMFs, as well as from fear of
adverse health effects due to such exposure. This fear of adverse health effects
from transmission lines has been considered both when property values have been
determined to obtain financing, and in condemnation proceedings. The Company has
not searched for electric transmission lines near the Properties, but the
Company is aware of the potential exposure to damage claims by persons exposed
to EMFs.
Each of the Properties has been subjected to a Phase I or similar
environmental assessment. These assessments, completed by licensed and qualified
independent environmental consulting companies, usually are completed without
radon testing, and involve general inspections without soil sampling or
groundwater analysis. Some of the Company's properties have been subject to a
limited subsurface investigation. While these environmental assessments have not
revealed any environmental liability, no assurances can be given that such
assessments would reveal all such liabilities. Similarly, while the Company's
management is not aware of any environmental liability that it believes would
have a material adverse effect on the Company's business, assets or results of
operations, no assurances can be given that either a material environmental
condition does not otherwise exist as to any one or more of the Properties, or
that a prior owner of any of the Properties did not create any such condition
not known to the Company.
GENERAL UNINSURED LOSSES
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance for each of its Properties, with policy
specifications, limits and deductibles customarily carried for similar
properties. However, certain types of extraordinary losses exist which are
either uninsurable or not economically insurable. Further, all of the Properties
are located in areas subject to earthquake activity. Although the Company has
obtained certain limited earthquake insurance policies, should one or more of
the Properties sustain damage as a result of an earthquake, the Company may
sustain losses due to insurance deductibles and co-payments on insured or
uninsured losses.
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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
Exchange Shares 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.
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.
RISKS ASSOCIATED WITH PREFERRED STOCK
The Company has issued and outstanding 2,743,116 shares of Class A Senior
Cumulative Convertible Preferred Stock (the "Class A Preferred Stock"). All
shares of the Class A Preferred Stock are owned by Five Arrows Realty Securities
L.L.C. ("Five Arrows"). All cumulative dividends on the Class A Preferred Stock
must be paid in full before any dividend or distribution can be made in respect
of the Company's Common Stock. Holders of the Class A Preferred Stock and
holders of the Company's Common Stock vote together as a single class, and thus
holders of Class A Preferred Stock dilute the voting control of holders of
Common Stock. Additionally, Five Arrows has the right to appoint one or more
directors to the Company's Board of Directors under certain circumstances.
Generally, the Class A Preferred Stock is convertible into shares of Common
Stock on a one-for-one basis. Under certain circumstances involving a Change of
Control or Put Event (as such terms are herein defined), holders of Class A
Preferred Stock have the right to require the Company to convert each share of
Class A Preferred Stock into more than one share of Common Stock. Thus, the
Class A Preferred Stock may dilute the value of the financial ownership of the
Company by holders of Common Stock, and may also discourage third parties from
attempting to acquire control of the Company. See "Description of Capital
Stock -- Class A Senior Cumulative Convertible Preferred Stock."
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ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and the
Maryland General Corporation Law (the "MGCL"), federal tax laws governing the
qualifications of REITs and the Company's outstanding Preferred Stock Purchase
Rights under its Rights Plan could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock. See "Description of Capital Stock," "Certain Provisions of Maryland Law
and of the Company's Articles of Incorporation and Bylaws" and "Federal Income
Tax Considerations."
Such provisions in the Articles of Incorporation and MGCL include a
classified board of directors, limitations on the ability of stockholders to
remove a director and limitations on the ownership of shares of capital stock of
the Company. See "Description of Capital Stock -- Ownership and Transfer
Restrictions and Redemption Provisions" and "Certain Provisions of Maryland Law
and of the Company's Articles of Incorporation and Bylaws."
ISSUANCE OF SHARES MAY ADVERSELY AFFECT MARKET PRICE OF COMMON STOCK AND DILUTE
PER SHARE AMOUNTS AVAILABLE FOR DISTRIBUTION
Future issuances 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 $12.4 million in principal
amount of Debentures was outstanding as of March 31, 1998. Such 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
approximately 669,000 issuable shares.
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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 110,000,000 shares of capital stock, consisting of 100,000,000
shares of common stock, par value $.01 per share (the "Common Stock"), and
10,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"), of which 2,763,116 shares have been classified as Class A Preferred
Stock. As of July 1, 1998, 19,997,569 shares of Common Stock, 2,763,116 shares
of Class A Preferred Stock were issued and outstanding. 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.
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 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.
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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.
PREFERRED STOCK PURCHASE RIGHTS
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 was December 29, 1997. For additional information
regarding the Rights Plan, see the Company's Current Report on Form 8-K filed
with the Commission on December 18, 1997 and incorporated herein by reference.
CLASS A SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company has issued an aggregate of 2,763,116 shares of Class A
Preferred Stock to Five Arrows Realty Securities L.L.C. ("Five Arrows") at an
average price of $19.905 per share.
Prior to June 1998 the Company had two classes of preferred stock
outstanding, Class A Preferred Stock and Class B Senior Cumulative Preferred
Stock ("Class B Preferred Stock"). At the Company's 1998 Annual Meeting of
Stockholders held on May 13, 1998, the Company's stockholders approved an
amendment to the Company's Articles of Amendment and Restatement (the "Charter")
to, among other things, (a) increase the authorized number of shares of
Preferred Stock from 5,000,000 to 10,000,000 and (b) reclassify the issued and
outstanding shares of Class B Senior Cumulative Convertible Preferred Stock as
additional shares of Class A Preferred Stock and change the liquidation
preference of the Class A Preferred Stock to reflect the economic terms of such
reclassification of the Class B Preferred Stock. Prior to the filing of the
amended Charter, there were 1,351,351 shares of Class A Preferred Stock
outstanding with a liquidation preference of $18.50 per share and 1,411,765
shares of Class B Preferred Stock outstanding with a liquidation preference of
$21.25 per share. The reclassification resulted in an increase in the number of
shares of outstanding Class A Preferred Stock from 1,351,351 to 2,763,116. No
additional shares of preferred stock were issued in the reclassification. The
liquidation preference of the Class A Preferred Stock, as reclassified, is
$19.905 per share, which reflects the blended rates of the formerly outstanding
Class A Preferred Stock and Class B Preferred Stock. Five Arrows was the sole
holder of the Class A Preferred Stock and Class B Preferred Stock and approved
the amendment to the Charter to effect such reclassification.
The holders of the Class A Preferred Stock and the holders of the Common
Stock vote together as a single class. Each share of Class A Preferred Stock is
convertible into one share of Common Stock, subject to adjustment upon certain
events. The annual dividend per share on the Class A Preferred Stock 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 Stock is $19.905 per share, plus
an amount equal to any accumulated, accrued and unpaid dividends. The Company
may redeem the Class A Preferred Stock beginning on April 1, 2002 for cash in an
amount equal to $19.905 per share of Class A Preferred Stock plus accrued and
unpaid dividends and plus a premium initially equal to 6.0% of $19.905. 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 Stock or an
amount of voting securities that, if converted into Common Stock, would exceed
10% of the outstanding Common Stock, a seat on the Company's Board of Directors.
In addition, upon the occurrence of the failure of the Company to pay a
quarterly dividend on the Common Stock in an amount of at least $.40 per share,
the failure of the Company to meet certain earnings before interest,
depreciation and amortization budgets for three consecutive quarters or the
failure of the Company to pay accrued dividends on the Class A Preferred Stock,
Five Arrows would be granted one additional seat on the Board (all such
directors being "Preferred Directors").
If a Change in Control or Put Event (each, as defined below) occurs as a
result of the voluntary (and not legally compelled) act, omission or
participation of the Company, which act, omission, or participation the Company
had the discretion under existing laws and regulations to refrain from, then
each holder of shares of
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Class A Preferred Stock will have the right to require the Company to redeem
such holder's shares of Class A Preferred Stock at a redemption price payable in
cash in an amount equal to 102% of the Liquidation Value thereof, plus accrued
and unpaid dividends whether or not declared, if any, to the date of purchase or
the date that payment is made available. If a Change of Control or Put Event
occurs that is not the result of such voluntary act, omission or participation
of the Company, the Company may elect not to make the foregoing put payment in
which event the Conversion Ratio shall be revised to the greater of (i) 75% of
the then current Conversion Ratio so that each share of Class A Preferred Stock
will be convertible into 133% of the number of shares of Common Stock into which
it would otherwise have been convertible and (ii) a fraction, the numerator of
which is 75% of the then current market price and the denominator of which is
$19.905.
The following terms, as used herein, have the following meanings:
"Change of Control" means each occurrence of any of the following: (i)
the acquisition, directly or indirectly, by any individual or entity or
group (as such term is used in Section 13(d)(3) of the Exchange Act of
1934, as amended (the "Exchange Act")) of beneficial ownership (as defined
in Rule 13d-3 under the Exchange Act, except that such individual or entity
shall be deemed to have beneficial ownership of all shares that any such
individual or entity has the right to acquire, whether such right is
exercisable immediately or only after passage of time) of more than 25% of
the aggregate outstanding voting power of capital stock of the Company;
(ii) other than with respect to the election, resignation or replacement of
the Preferred Directors, during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by
such Board of Directors or whose nomination for election by the
stockholders 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 Stock; (ii) the Company becomes a "Pension-held REIT" as defined
in Section 856(h)(3)(d) of the Internal Revenue Code of 1986, as amended,
other than as a result of any action, or unreasonable failure to act, by
the holders of Class A Preferred Stock; or (iii) the Company ceases to be
engaged primarily in the business of owning and managing multi-family
properties and/or industrial properties directly, or through subsidiaries,
as carried on as of the date hereof and described in the Company's Annual
Report on Form 10-K, as amended, as filed with the Securities and Exchange
Commission for the year ended December 31, 1996.
Five Arrows is prohibited from transferring any shares of Class A Preferred
Stock, or any shares of Common Stock into which such shares of Class A Preferred
Stock 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 shares of
Class A Preferred Stock or the shares of Common Stock into which such shares of
Class A Preferred Stock have been converted.
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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). The Code also
excludes from the definition of "rents from real property" amounts received from
a tenant if the Company is treated as owning 10% or more of the tenant. See
"Federal Income Tax Considerations -- Taxation of the Company." 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 Provisions were changed by the Board of Directors of
the Company in March of 1998, which changes were approved by the stockholders of
the Company at the Company's annual meeting of stockholders in May of 1998. The
Ownership Limit Provision as so amended provides that, subject to certain
exceptions, no stockholder may own, or be deemed to own by virtue of certain
constructive and beneficial ownership provisions of the Code, more than the
"Ownership Limit," which is equal to the more restrictive of (a) 9.8% in value
or in number, whichever is more restrictive, of the issued and outstanding
Common Stock of the Company and (b) 9.8% of the value of all outstanding stock
of the Company, provided that the Board of Directors of the Company would have
the right to increase or decrease the Ownership Limit subject to certain
limitations, including limitations on the effect of such a change on existing
holders of the Company's stock. The constructive and beneficial ownership rules
are complex and may cause capital stock owned directly or constructively or
beneficially by a group of related individuals or entities to be constructively
or beneficially 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 capital stock) by an
individual or entity could cause that individual or entity (or another
individual or entity) to constructively or beneficially own in excess of 9.8% in
value or in number of the issued and outstanding Common Stock or capital stock
of the Company, and thus subject such stock (or other stock) to the Ownership
Limit Provision. In addition, for these purposes, stock that may be acquired
upon conversion of Securities owned or deemed owned by an investor, but not
other 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 person if the Board of Directors obtains such representations
and undertakings as are reasonably necessary to ascertain that no individual's
beneficial or constructive ownership of capital stock will violate the Ownership
Limit Provision, or that any such violation will not cause the Company to fail
to qualify as a REIT under the Code, and such person agrees that any violation
or attempted violation of such representations and undertakings will result in
such capital stock being transferred to the trust as described above. 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 than 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 Stock, Five Arrows has been given a limited waiver of
the Ownership Limit Provision.
The Articles of Incorporation provide that in the event of a transfer or
other event that would, if effective result in a person beneficially or
constructively owning capital stock in excess of the Ownership Limit, then the
Common Stock or Preferred Stock purportedly being transferred or that would be
beneficially or constructively owned in violation of the Ownership Limit will be
automatically transferred to a trust for the exclusive benefit of one or more
charitable beneficiaries designated by the Company. The purported transferee of
the Common Stock or Preferred Stock shall have no rights in the shares of
capital stock held by the trustee and shall not benefit economically from any
shares held in the trust. The trustee of the trust will be permitted to sell the
shares to a third party designated by the trustee (including through the
facilities of a stock exchange). The trustee will have the right to vote and
receive dividends on shares transferred to the trust, and any
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dividends paid to a person who would have owned the shares in violation of the
Ownership Limit Provision shall be paid to the trustee, and the trustee will
have the right to rescind any votes cast by such person with respect to those
shares and recast those votes as desired by the trustee acting for the benefit
of the beneficiary (except that the trustee shall not have the right to rescind
a vote upon which the Company has acted).
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 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.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Company's Articles of Incorporation and Bylaws. The summary does not purport
to be complete and is subject to and qualified in its entirety by reference to
the Company's Articles of Incorporation and Bylaws, copies of which are exhibits
to the Registration Statement of which this Prospectus is a part, as described
in "Additional Information," and to Maryland law.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Articles of Incorporation provide that the number of
directors of the Company may be established by the Board of Directors, but may
not be fewer than three nor more than eleven. Any vacancy will be filled, at any
regular meeting or at any special meeting called for that purpose, by a majority
vote by the stockholders or directors then in office. A director chosen by the
stockholders shall hold office for the balance of the term remaining. A director
so chosen by the remaining directors shall hold office until the next annual
meeting of stockholders, at which time the stockholders shall elect a director
to hold office for the balance of the term then remaining. Pursuant to the terms
of the Articles of Incorporation, the directors are divided into three
classes -- i.e., Class I, Class II, and Class III. Presently, one class will
hold office for a term expiring at the annual meeting of stockholders to be held
in 1999 (i.e., Class II), another class will hold office for a term expiring at
the annual meeting of stockholders to be held in 2000 (i.e., Class III), and
another class will hold office for a term expiring at the annual meeting of
stockholders to be held in 2001 (i.e., Class I). 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.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Holders of Common Stock will have no right to cumulative voting in the election
of directors. Consequently, at each annual meeting of stockholders, the holders
of a plurality of Common Stock will be able to elect all of the successors of
the class of directors whose term expires at that meeting.
REMOVAL OF DIRECTORS AND VACANCIES
The Articles of Incorporation provide that a director may be removed only
for cause and only by the affirmative vote of stockholders holding at least
two-thirds of all the votes entitled to be cast in the election of directors.
The Company's Bylaws provide that stockholders may elect a successor to fill a
vacancy on the Board of Directors that results from the removal of a director.
In addition, a vacant position occurring in the Board of Directors for any cause
other than an increase in the number of directors may be filled by a majority
vote of the remaining directors, even if such majority is less than a quorum or
by a majority vote of the stockholders. Any vacancy occurring in the Board of
Directors by reason of an increase in the number of directors may be filled by a
majority vote of the entire Board of Directors or by a majority vote of the
stockholders.
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
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improper benefit or profit, or (ii) if a judgment or other final adjudication is
entered in a proceeding based on a finding that the director's or officer's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceedings. This
provision does not limit the ability of the Company or its stockholders to
obtain other relief, such as an injunction or rescission.
The Company's Bylaws require the Company to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time to
time by Maryland law. The MGCL permits a corporation to indemnify its directors,
officers and certain other parties against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service to
or at the request of the corporation, unless it is established that the act or
omission of the indemnified party was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or was the result of active and
deliberate dishonesty or (ii) the indemnified party actually received an
improper personal benefit, or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or officer
in connection with the proceeding; provided, however, that if the proceeding is
one by or in the right of the corporation, indemnification may not be made with
respect to any proceeding in which the director or officer has been adjudged to
be liable to the corporation. In addition, a director or officer may not be
indemnified with respect to any proceeding charging improper personal benefit to
the director or officer in which the director or officer was adjudged to be
liable on the basis that personal benefit was improperly received. The
termination of any proceeding by judgment, order or settlement does not create a
presumption that the director did not meet the requisite standard of conduct
required for indemnification to be permitted. However, the termination of any
proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard of
conduct required for indemnification to be permitted. It is the position of the
Commission that indemnification of directors and officers for liabilities
arising under the Securities Act is against public policy and is unenforceable
pursuant to Section 14 of the Securities Act.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting stock of the corporation (an "Interested Stockholder") or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Stockholder became an Interested Stockholder. Thereafter,
any such business combination must be recommended by the Board of Directors of
such corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation voting together as a single voting group, and (b) two-thirds of the
votes entitled to be cast by holders of outstanding voting shares other than
shares held by the Interested Stockholder with whom the business combination is
to be effected, unless, among other things, the corporation's stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder for its shares. These provisions of Maryland law do not
apply, however, to business combinations that are approved or exempted by the
Board of Directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. As permitted by Maryland law, the
Articles of Incorporation of the Company include a provision exempting all
future business combinations involving the Company from the operation of the
business combination statute.
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CONTROL SHARE ACQUISITIONS
The Company's Bylaws currently contain a provision exempting from the
control share acquisition statute described below any and all acquisitions by
any person of shares of capital stock of the Company. The current or future
directors of the Company may decide to eliminate or amend this provision,
although no such change is currently contemplated.
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third; (ii) one-third or more but less
than a majority; or (iii) a majority of all voting power. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for control shares, as of the date of the last control share
acquisition or, if a meeting of stockholders is held where the voting rights of
such shares are considered and not approved, as of the date of the meeting. If
voting rights for control shares are approved at a stockholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the Company is a party to the
transaction and such transaction is otherwise effected under the provision of
the MGCL; or to acquisitions approved or exempted by the Articles of
Incorporation or Bylaws of the Company.
AMENDMENT TO THE ARTICLES OF INCORPORATION
The Company's Articles of Incorporation, including its provisions on
classification of the Board of Directors and removal of directors, may be
amended only with the recommendation of the Board of Directors and by the
affirmative vote of stockholders holding at least a majority of all the votes
entitled to be cast on the matters.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
stockholders holding at least a majority of all the votes entitled to be cast on
this matter.
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
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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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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. However, 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. 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. 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."
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.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) of income that generally
results from an investment in a regular corporation. However, the Company will
be subject to federal income tax as follows: First, the Company will be taxed at
regular corporate rates on any undistributed "REIT taxable income" (as defined
below), including undistributed net capital gains. However, provided that the
Company properly elects to retain and pay tax on any undistributed net capital
gains, the stockholders will receive a credit for their proportionate share of
such tax. 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
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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 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 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
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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 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 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
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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 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 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.
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
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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 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
25
<PAGE> 27
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 includable in
income over the tax deemed paid on such 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 long-term capital gain or loss if the shares have
been held for more than one year (and as mid-term capital gain if held for more
than one year and less than 18 months) and otherwise as short-term capital gain
or loss. However, any loss upon a sale or exchange of shares by a
26
<PAGE> 28
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."
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.
27
<PAGE> 29
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 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
28
<PAGE> 30
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
REIT. However, because the stock will be publicly traded, no assurance can be
given that the Company is or will continue to be a domestically-controlled REIT.
In the circumstances described above in clauses (i) and (ii), the Non-U.S.
Stockholders will generally be subject to the same treatment as domestic
stockholders with respect to such gain (subject to a special alternative minimum
tax in the case of nonresident alien individuals in the circumstances described
above in clause (i) and, in the case of foreign corporations, subject to the
possible application of the 30% branch profits tax, discussed above). In the
circumstances described above in clause (iii), the nonresident alien individual
will be subject to a 30% tax on the individual's capital gain.
Estate Tax. Certain types of Securities owned or treated as owned by an
individual who is not a citizen or resident (as specially defined for United
States federal estate tax purposes) of the United States at the time of death
may be includable in the individual's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Such individual's estate may be subject to United States federal estate tax on
the property includable in the estate for United States federal estate tax
purposes.
Information Reporting and Backup Withholding. The Company must report
annually to the IRS and to each Non-U.S. Stockholder the amount of distributions
subject to withholding as described above and the tax 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.
29
<PAGE> 31
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.
30
<PAGE> 32
SELLING STOCKHOLDERS
Those persons who hold Exchange Shares or who currently hold Units and may
in the future hold Exchange Shares and may, from time to time, offer and sell
such Exchange Shares are referred to herein as "Selling Stockholders."
The following table provides, as of May 1, 1998, the names of and maximum
number of Exchange Shares, or number of Units that are convertible into Exchange
Shares, owned by each Selling Stockholder. Because the Selling Stockholders may
sell all, or some or none of their Exchange Shares, no estimate can be made of
the aggregate number of such Exchange Shares that are to be offered hereby or
that will be owned by each Selling Stockholder upon completion of the offering
to which this Prospectus relates.
The Exchange Shares may be offered from time to time by the Selling
Stockholders named below:
<TABLE>
<CAPTION>
UNITS/EXCHANGE COMMON STOCK
SHARES BENEFICIALLY MAXIMUM NUMBER OF BENEFICIALLY OWNED
OWNED PRIOR EXCHANGE SHARES FOLLOWING THE
NAME TO THE OFFERING(1) OFFERED OFFERING(2)
---- ------------------- ----------------- ------------------
<S> <C> <C> <C>
Susanne Jaffe............................ 2,493 2,493 --
Marshall Hammond......................... 482 482 --
John Konwiser............................ 107,490 107,490 --
Leo I. Bromiley.......................... 375 375 --
Stanley & Suzyn Goldenberg............... 375 375 --
Charles Diamond.......................... 45,472 45,472 --
John Hazeltine and Barbara Hazeltine..... 2,003 2,003 --
Larry Lizole............................. 1,418 1,418 --
Dr. Richard Merkin....................... 125 125 --
Howard P. Rosenberg, M.D................. 125 125 --
John B. Sauer and Beverly Sauer.......... 250 250 --
The Stuard Family Trust.................. 499 499 --
Herbert D. Tobin and Libby Tobin......... 4,161 4,161 --
The Village at Canyon Crest.............. 5,380 5,380 --
Shirley Levy............................. 452 452 --
Mark Levy................................ 452 452 --
Cora Baldikoski.......................... 452 452 --
Edward Seinfeld.......................... 452 452 --
Ernest Morrison, Trustee................. 4,554 4,554 --
Mrs. Mary Lou Bell....................... 452 452 --
Mr. And Mrs. Jack Neelon................. 293 293 --
Mr. Richard B. Smith, Trustee............ 877 877 --
Lewis Development Co..................... 4,007 4,007 --
Leonard Pariser, Trustee................. 166 166 --
Mary Tully Bowers........................ 1,930 1,930 --
James Austin Bowers...................... 2,252 2,252 --
Mary Ann Bowers McDannel................. 1,287 1,287 --
Reynold Neufeld.......................... 1,437 1,437 --
Myrna Jane Bowers Pope................... 1,287 1,287 --
James Austin Bower, Trustee.............. 1,287 1,287 --
Merle Bernstein Bauser................... 253 253 --
Lyn Belasco.............................. 253 253 --
Fred Jamner.............................. 202 202 --
Ronald Levy and Bernice Levy............. 152 152 --
John McDannel and Mary McDannel.......... 328 328 --
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
UNITS/EXCHANGE COMMON STOCK
SHARES BENEFICIALLY MAXIMUM NUMBER OF BENEFICIALLY OWNED
OWNED PRIOR EXCHANGE SHARES FOLLOWING THE
NAME TO THE OFFERING(1) OFFERED OFFERING(2)
---- ------------------- ----------------- ------------------
<S> <C> <C> <C>
Leonard and Sandra Pariser............... 385 385 --
Dale Stuard and Bernice Stuard,
Co-Trustees............................ 1,008 1,008 --
Lenore Yeamans Trust..................... 1,086 1,086 --
Jordan & Geraldine Kurnick Family
Trust.................................. 964 964 --
Alvin Kurnick............................ 49 49 --
The Allen Family Trust................... 2,195 2,195 --
Merle Bauser, Trustee.................... 1,279 1,279 --
Arnold Cunanan........................... 590 590 --
George Geyer III......................... 2,014 2,014 --
Helena & Johannes Gras................... 916 916 --
Leo Groenveld............................ 1,007 1,007 --
Harry & Marie Jansen..................... 2,014 2,014 --
Gerald & Marilyn McCloskey............... 916 916 --
Merton Schwartz & Jacqueline Schwartz,
Trust.................................. 2,746 2,746 --
Rae Williams, E.A........................ 458 458 --
Carolyn Noorlag Edwards.................. 141 141 --
Susan Morgan Tibbetts.................... 141 141 --
Ron Berger............................... 141 141 --
Gary Gowers.............................. 15 15 --
Eric and Connie Holtz.................... 88 88 --
Jordan Kurnick........................... 74 74 --
Leo Molek................................ 74 74 --
Bert and Elaine Roberts.................. 147 147 --
------- ------- --------
TOTAL.......................... 211,921 211,921
======= ======= ========
</TABLE>
- ---------------
(1) Figures include either Exchange Shares currently held by Selling
Stockholders or Units that may be converted into Exchange Shares.
(2) Assumes that all Exchange Shares are sold pursuant to this Prospectus. Also
assumes that no transactions with respect to the Common Stock occur other
than the transactions registered pursuant to the Registration Statement of
which this Prospectus is a part. Under the preceding assumptions, no Selling
Stockholder will own more than 1% of the outstanding Common Stock following
the Offering.
32
<PAGE> 34
PLAN OF DISTRIBUTION
This Prospectus relates to 211,921 Exchange Shares of Common Stock that may
be offered and sold from time to time by the Selling Stockholders. The Exchange
Shares were, or may be, issued by the Company to the Selling Stockholders in
exchange for ("Units") in the Inland Partnership, pursuant to the Company's
obligations under the Exchange Rights Agreement. The Company is registering the
offer and sale of the Exchange Shares by the Selling Stockholders pursuant to
its obligations under the Registration Rights Agreement, but the registration of
such shares does not necessarily mean that any of such shares will be offered or
sold by the holders thereof.
The Company will not receive any proceeds from the offering by the Selling
Stockholders. The Exchange Shares may be sold from time to time to purchasers
directly by any of the Selling Stockholders. Alternatively, the Selling
Stockholders may from time to time offer the Exchange Shares through dealers or
agents, who may receive compensation in the form of commissions from the Selling
Stockholders and/or the purchasers of Exchange Shares for whom they may act as
agent.
The Exchange Shares may be sold from time to time at varying prices
determined at the time of sale or at negotiated prices. In order to comply with
the securities laws of certain states, if applicable, the Exchange Shares may be
sold by the Selling Stockholders only through registered or licensed brokers or
dealers. In addition, in certain states, the Exchange Shares may not be sold
unless they have been registered or qualified for sale in such state or an
exemption from such registration or qualification requirement is available and
is complied with.
The securities may be sold in (a) a block trade in which the broker or
dealer so engaged will attempt to sell the securities as agent but may position
and resell a portion of the block as principal to facilitate the transaction,
(b) transactions in which a broker or dealer acts as principal and resells the
securities for its account pursuant to this Prospectus, (c) an exchange
distribution in accordance with the rules of such exchange, and (d) ordinary
brokerage transactions and transactions in which the broker solicits purchases.
In effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Certain Selling
Stockholders also may, from time to time, authorize underwriters acting as their
agents to offer and sell securities upon such terms and conditions as shall be
set forth in any prospectus supplement. Underwriters, brokers or dealers will
receive commissions or discounts from Selling Stockholders in amounts to be
negotiated immediately prior to sale.
There is no assurance that any of the Selling Stockholders will offer for
sale or sell any or all of the securities covered by this Prospectus.
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 Exchange Shares
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, 1997, 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.
33
<PAGE> 35
======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER, AGENT, OR DEALER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE OF SECURITIES BEING OFFERED PURSUANT TO THIS PROSPECTUS
OR ANY ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE........................... 3
PROSPECTUS SUMMARY.................... 4
RISK FACTORS.......................... 6
DESCRIPTION OF CAPITAL STOCK.......... 12
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS............ 17
FEDERAL INCOME TAX CONSIDERATIONS..... 21
SELLING STOCKHOLDERS.................. 31
PLAN OF DISTRIBUTION.................. 33
LEGAL MATTERS......................... 33
EXPERTS............................... 33
</TABLE>
======================================================
======================================================
211,921 SHARES
PACIFIC GULF
PROPERTIES INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
JULY , 1998
======================================================
<PAGE> 36
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated fees and expenses payable by
the Company in connection with the issuance and distribution of the securities
registered hereby:
<TABLE>
<S> <C>
Registration fee............................................ $ 1,447
Printing, duplicating and engraving expenses................ 20,000
Legal fees and expenses (other than Blue Sky)............... 40,000
Accounting fees and expenses................................ 5,000
Blue sky fees and expenses.................................. 7,500
Miscellaneous............................................... 6,053
--------
Total............................................. $ 80,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation limit the liability of the
Company's directors and officers 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 proceeding. 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 Articles of Incorporation also permit the Company to
indemnify employees, agents and other persons acting on behalf of or at the
request of the Company. 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, (ii) the indemnified party actually
received an improper personal benefit or (iii) in the case of any criminal
proceeding, the indemnified party had reasonable cause to believe that the act
or omission was unlawful. Indemnification may be made against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by the
director or officer in connection with the proceeding; provided, however, that
if the proceeding is one by or in the right of the corporation, indemnification
may not be made with respect to any proceeding in which the director or officer
has been adjudged to be liable to the corporation. In addition, a director or
officer may not be indemnified with respect to any proceeding charging improper
personal benefit to the director or officer in which the director or officer was
adjudged to be liable on the basis that personal benefit was improperly
received. The termination of any proceeding by 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.
The Agreement of Limited Partnership of the Inland Partnership also
provides for indemnification of the Company, or any director or officer of the
Company, in its capacity as general partner of the Partnership, from
II-1
<PAGE> 37
and against all losses, claims, damages, liabilities, joint or several, expenses
(including legal fees), fines, settlements and other amounts incurred in
connection with any actions relating to the operations of the Inland Partnership
as set forth in the Inland Partnership Agreement.
The Company entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require, among
other things, that the Company indemnify its officers and directors to the
fullest extent permitted by the MGCL, and advance to the officers and directors
all related expenses, subject to reimbursement if it is subsequently determined
that indemnification is not permitted. The Company must also indemnify and
advance all expenses incurred by officers and directors seeking to enforce their
rights under the indemnification agreements, and cover officers and directors
under the Company's directors and officers' liability insurance. Although the
form of indemnification agreement offers substantially the same scope of
coverage afforded by provisions in the Charter and the Bylaws, it provides
greater assurance to directors and officers that indemnification will be
available, because, as a contract, it cannot be modified unilaterally in the
future by the Board of Directors or by the stockholders to eliminate the rights
it provides.
ITEM 16. EXHIBITS
See Exhibit Index attached hereto and incorporated by reference.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change in such information in the Registration
Statement;
provided, however, that paragraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 38
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions set forth or described in Item 15 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person, in
connection with the securities registered hereby, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newport Beach, State of California, on this 30th day
of June, 1998.
PACIFIC GULF PROPERTIES INC.
By:
/s/ GLENN L. CARPENTER
------------------------------------
Glenn L. Carpenter
President and Chief Executive
Officer
POWERS OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints Glenn L. Carpenter and Donald G.
Herrman, and each of them severally, as his true and lawful attorneys-in-fact
and agents with full power of substitution and resubstitution for him and him
and in his name, place, and stead in any and all capacities to sign any and all
amendments (including post-effective amendments and amendments filed pursuant to
462(b) under the Securities Act of 1933) to this Registration Statement, and to
file the name, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-facts and
agents or any of them, or of his or her substitute or substitutes, may lawfully
do to cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GLENN L. CARPENTER Chairman of the Board of June 30, 1998
- ----------------------------------------------------- Directors, President and Chief
Glenn L. Carpenter Executive Officer (Principal
Executive Officer)
/s/ DONALD G. HERRMAN Executive Vice President, June 30, 1998
- ----------------------------------------------------- Secretary, and Chief Financial
Donald G. Herrman Officer (Principal Financial and
Accounting Officer)
* Director June 30, 1998
- -----------------------------------------------------
Carl C. Gregory, III
* Director June 30, 1998
- -----------------------------------------------------
Peter L. Eppinga
Director
- -----------------------------------------------------
John F. Kooken
</TABLE>
II-4
<PAGE> 40
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director June 30, 1998
- -----------------------------------------------------
Robert E. Morgan
* Director June 30, 1998
- -----------------------------------------------------
Keith W. Renken
* Director June 30, 1998
- -----------------------------------------------------
James Quigley 3rd
*By /s/ GLENN L. CARPENTER
--------------------------------------------------
Glenn L. Carpenter
As Attorney-In-Fact
</TABLE>
II-5
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
4.1 Articles of Amendment and Restatement of the Registrant. ...
*4.2 Amended and Restated Bylaws of the Registrant (previously
filed as an Exhibit to Registrant's Registration Statement
on Form S-11 (Registration No. 33-69382) declared effective
on February 10, 1994 and incorporated herein by
reference). ................................................
5.1 Opinion of Piper & Marbury .................................
8.1 Opinion of Gibson, Dunn & Crutcher LLP regarding certain tax
matters ....................................................
23.1 Consent of Ernst & Young LLP ...............................
23.2 Consent of Piper & Marbury (included in Exhibit 5.1) .......
23.3 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
8.1) .......................................................
*24 Powers of Attorney (included on signature page) ............
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 4.1
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
PACIFIC GULF PROPERTIES INC.
Pacific Gulf Properties Inc., a Maryland corporation having its principal
office in Baltimore City, Maryland (which is hereinafter called the
"Corporation") hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: PACIFIC GULF PROPERTIES INC., a Maryland corporation (the
"Corporation"), desires to amend and restate its Charter currently in effect.
SECOND: The Charter is hereby amended and restated, in full, to read as
follows:
ARTICLE I
THE UNDERSIGNED, Henry D. Kahn, whose address is 36 S. Charles Street,
Baltimore, Maryland 21201, being at least 18 years of age, acting as
incorporator, does hereby form a corporation under the General Laws of the State
of Maryland.
ARTICLE II
NAME
The name of the corporation (the "Corporation") shall be:
PACIFIC GULF PROPERTIES INC.
ARTICLE III
PURPOSE
The purposes for which the Corporation is formed and the business and
objects to be carried on and promoted by it are to engage in any lawful act or
activity (including, without limitation or obligation, engaging in business as a
real estate investment trust under the Internal Revenue Code of 1986, as
amended, or any successor statute (the "Code")) for which corporations may be
organized under the general laws of the State of Maryland as now or hereafter in
force. For purposes of these Articles, "REIT" means a real estate investment
trust under Sections 856 through 860 of the Code. The Board of Directors may
determine that it is no longer in the best interests of the Corporation to
qualify as a REIT and upon any such determination the Board of Directors may
revoke or otherwise terminate the Corporation's election to be a REIT pursuant
to Section 856(g) of the Code.
ARTICLE IV
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The address of the Corporation's principal office in the State of Maryland
is c/o CT Corporation System, 300 E. Lombard Street, Baltimore, Maryland 21202.
The resident agent of the Corporation is CT Corporation System, 300 E. Lombard
Street, Baltimore, Maryland 21202. The resident agent is a Maryland corporation
located in the State of Maryland.
ARTICLE V
STOCK
A. Classes and Number of Shares. The total number of shares of stock of
all classes which the Corporation shall have authority to issue is 110,000,000
shares, of which (i) 100,000,000 shares are shares of Common Stock, par value
$.01 per share ("Common Stock") and (ii) 10,000,000 shares are shares of
Preferred Stock, par value $.01 per share ("Preferred Stock"). The aggregate par
value of all authorized shares of stock having par value is $1,100,000.
B. Ability to Reclassify. The Board of Directors may classify and
reclassify any unissued shares of any class of capital stock by setting or
changing in any one or more respects the preferences, conversion or other
1
<PAGE> 2
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of stock. Subject to the
terms and conditions of any outstanding capital stock, the power of the Board of
Directors to classify and reclassify any of the shares of capital stock shall
include, without limitation, subject to the provisions of the charter, authority
to classify or reclassify any shares of such stock into a class or classes of
stock that have a priority as to distributions and upon liquidation and to
divide and classify shares of any class into one or more series of such class by
determining, fixing or altering one or more of the following:
(1) The distinctive designation of such class or series and the number
of shares to constitute such class or series; provided, however, that,
unless otherwise prohibited by the terms of such or any other class or
series, the number of shares of any class or series may be decreased by
the Board of Directors in connection with any classification or
reclassification of unissued shares and the number of shares of such class
or series may be increased by the Board of Directors in connection with
any such classification or reclassification and any shares of a class or
series which have been redeemed, purchased, otherwise acquired or
converted into shares of Common Stock or any other class or series shall
become part of the authorized capital stock and be subject to
classification and reclassification as provided in this subparagraph.
(2) Whether or not and, if so, the rates, amounts and times at which,
and the conditions under which, dividends shall be payable on shares of
such class or series, whether any such dividends shall rank senior or
junior to or on a parity with the dividends payable on any other class or
series of stock and the status of any such dividends as cumulative,
cumulative to a limited extent or non-cumulative and as participating or
non-participating.
(3) Whether or not shares of such class or series shall have voting
rights, in addition to any voting rights provided by law and, if so, the
terms of such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions
thereof, including provision for adjustment of the conversion or exchange
rate in such events or at such times as the Board of Directors shall
determine.
(5) Whether or not shares of such class or series shall be subject to
redemption and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable
and the amount per share payable in case of redemption, which amount may
vary under different conditions and different redemption dates and whether
or not there shall be any sinking fund or purchase account in respect
thereof and, if so, the terms thereof.
(6) The rights of the holders of shares of such class or series upon
the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary
depending upon whether such liquidation, dissolution or winding up is
voluntary or involuntary and, if voluntary, may vary at different dates,
and whether such rights shall rank senior or junior to or on a parity with
such rights of any other class or series of stock.
(7) Whether or not there shall be any limitations applicable, while
shares of such class or series are outstanding, upon the payment of such
dividends or making of distributions on, or the acquisitions of, or the
use of moneys for purchase or redemption of, any stock of the Corporation,
or upon any other action of the Corporation, including action under this
subparagraph and, if so, the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with law and the Charter of the
corporation.
C. Voting Rights.
(1) Common. Except as required by law, each share of Common Stock
shall have one vote and, except as otherwise provided in respect of any
class of Preferred Stock, the exclusive voting power for all purposes
shall be vested in the holders of the Common Stock.
2
<PAGE> 3
(2) Preferred. The Preferred Stock shall have no voting rights and
shall have no rights to receive notice of any meetings, except as required
by law or as expressly provided in Article XIV of this Charter or by the
Board of Directors establishing the preferences, rights, restrictions and
qualifications of such other class or series of Preferred Stock.
D. Terms of Common Stock. The Common Stock shall be subject to the express
terms of the Preferred Stock and any series thereof. Each share of Common Stock
shall be equal to every other share of Common Stock.
(1) Dividend Rights. Subject to the provisions of law and any
preferences of any class of Preferred Stock, dividends, including
dividends payable in shares of another class of the Corporation's stock,
may be paid on the Common Stock of the Corporation at such time and in
such amounts as the Board of Directors may deem advisable.
(2) Liquidation Rights. The holders of the Common Stock shall be
entitled, after payment or provision for payment of the debts and other
liabilities of the Corporation and the amount to which the holders of any
class of Preferred Stock having a preference on distribution in
liquidation, dissolution or winding up of the Corporation shall be
entitled, together with the holders of any other class of Preferred Stock
not having a preference on distributions in the liquidation, dissolution
or winding up of the Corporation, to share ratably in the remaining net
assets of the Corporation.
(3) Restrictions on Transfer. The Common Stock shall be governed by
the restrictions on ownership and transfer set forth in subsection F of
this Article V.
E. Issuance and Terms of Certain Preferred Stock.
(1) Class A Preferred Stock. The terms of the "Class A Senior
Cumulative Convertible Preferred Stock" (the "Class A Preferred Stock"),
including the preferences, conversion or other rights, voting powers,
limitations as to dividends, qualifications and terms and conditions of
redemption, are as set forth in the description of the Class A Preferred
Stock contained in Article XIV of this Charter. All of the shares
previously classified as "Class B Senior Cumulative Convertible Preferred
Stock" are reclassified as additional shares of Class A Preferred Stock
and shall have such terms, including the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption as set forth in the
description of the Class A Preferred Stock contained in Article XIV of
this Charter. The right of holders of Class B Preferred Stock to the
dividends through the date of such reclassification shall not be impaired
by such reclassification.
(2) Class C Preferred Stock. The terms of the "Class C Junior
Participating Cumulative Preferred Stock" (the "Class C Preferred Stock"),
including the preferences, conversion or other rights, voting powers,
limitations as to dividends, qualifications and terms and conditions of
redemption, are as set forth in the description of the Class C Preferred
Stock contained in Article XIV of this Charter.
F. Restrictions on Ownership and Transfer to Preserve Tax Benefit.
(1) Definitions.
For the purposes of this Article V and of Article VI, the following
terms shall have the following meanings:
"AGGREGATE OWNERSHIP LIMIT" shall mean, except as otherwise provided
pursuant to subsection F(11) of this Article V, 9.8% in value of the
aggregate of the outstanding shares of Capital Stock. The value of the
outstanding shares of Capital Stock shall be determined by the Board of
Directors of the Corporation in good faith, which determination shall be
conclusive for all purposes hereof.
"BENEFICIAL OWNERSHIP" shall mean ownership of Capital Stock by a
Person directly, beneficially or as a result of being treated as an actual
or constructive owner of such Capital Stock through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code.
The terms "Beneficial Owner," "Beneficially Owns," "Beneficially Owned"
and "Beneficially Owning" shall have the correlative meanings.
3
<PAGE> 4
"BENEFICIARY" shall mean one or more beneficiaries of the Trust as
determined pursuant to paragraph F(3)(f) of this Article V.
"CAPITAL STOCK" shall mean shares of stock that are Common Stock or
Preferred Stock.
"COMMON STOCK OWNERSHIP LIMIT" shall mean, except as otherwise
provided pursuant to subsection F(11) of this Article V, 9.8% (in value,
or in number of shares, whichever is more restrictive) of the outstanding
Common Stock. The value of the outstanding Common Stock shall be
determined by the Board of Directors of the Corporation in good faith,
which determination shall be conclusive for all purposes hereof.
"CONSTRUCTIVE OWNERSHIP" shall mean ownership of Capital Stock by a
Person who is or would be treated as an owner of such Capital Stock either
actually or constructively through the application of Section 318 of the
Code, as modified by Section 856(d)(5) of the Code. The terms
"Constructively Own," "Constructively Owning" and "Constructively Owned"
shall have the correlative meanings.
"INITIAL PUBLIC OFFERING" shall mean the sale of Common Stock pursuant
to the Corporation's first effective registration statement for such
Common Stock filed under the Securities Act of 1933, as amended.
"IRS" means the United States Internal Revenue Service.
"MARKET PRICE" shall mean the last reported sales price of the Common
Stock or Preferred Stock reported on the NYSE on the trading day
immediately preceding the relevant date, or if the Common Stock or
Preferred Stock is not then traded on the NYSE, the last reported sales
price of the Common Stock or Preferred Stock on the trading day
immediately preceding the relevant date as reported on any exchange or
quotation system over which the Common Stock or Preferred Stock may be
traded, or if the Common Stock or Preferred Stock is not then traded over
any exchange or quotation system, then the market price of the Common
Stock or Preferred Stock on the relevant date as determined in good faith
by the Board of Directors of the Corporation.
"NYSE" shall mean the New York Stock Exchange.
"OWNERSHIP LIMIT" shall mean the Common Stock Ownership Limit or the
Aggregate Ownership Limit, whichever is more restrictive.
"PERSON" shall mean an individual, corporation, partnership, estate,
limited liability company, unincorporated organization, joint venture,
state or a political subdivision thereof, governmental agency, trust
(including a trust qualified under Section 401(a) or 501(c)(17) of the
Code), a portion of a trust permanently set aside for or to be issued
exclusively for the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of Section 509(a) of
the Code, joint stock company or other entity, and also includes a group
as that term is used for purposes of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, but does not include an Underwriter that
participates in an offering of the Common Stock, Preferred Stock, or any
convertible securities of the Corporation for purposes of determining
whether the Underwriter, but not any other Person, during the 90-day
period following such offering, has violated the Ownership Limit and
provided that the ownership of Common Stock, Preferred Stock and/or
convertible securities by such Underwriter would not result in the
Corporation being "closely held" within the meaning of Section 856(h) of
the Code, or would otherwise result in the Corporation failing to qualify
as a REIT.
"PURPORTED BENEFICIAL TRANSFEREE," shall mean, with respect to any
purported Transfer or other event that results in a transfer of Common
Stock or Preferred Stock to the Trust pursuant to subsection F(3) of this
Article V, the purported beneficial transferee or owner for whom the
Purported Record Transferee would have acquired or owned shares of Common
Stock or Preferred Stock, if such Transfer or other event had been
permitted under subsection F(2) of this Article V.
"PURPORTED RECORD TRANSFEREE" shall mean, with respect to any
purported Transfer or other event that results in a transfer of Common
Stock or Preferred Stock to the Trust pursuant to subsection F(3) of
4
<PAGE> 5
this Article V, the record holder of the Common Stock or Preferred Stock
if such Transfer or other event had been permitted under subsection F(2)
of this Article V.
"TRANSFER" shall mean any sale, transfer, gift, assignment, devise or
other disposition of Common Stock or Preferred Stock, including (i) the
granting of any option or entering into any agreement for the sale,
transfer or other disposition of Common Stock or Preferred Stock or (ii)
the sale, transfer, assignment or other disposition of any securities (or
rights convertible into or exchangeable for Common Stock or Preferred
Stock), whether voluntary or involuntary, whether of record or
beneficially (including but not limited to transfers of interests in other
entities that result in changes in Beneficial Ownership of Common Stock or
Preferred Stock), whether by operation of law or otherwise and whether the
result of a transaction entered into through the facilities of the NYSE or
such other stock exchange on which the Common Stock or Preferred Stock is
then listed.
"TRUST" shall mean the trust created pursuant to subsection F(3) of
this Article V.
"TRUSTEE" shall mean any trustee for the Trust appointed by the
Corporation as provided in paragraph F(3)(a) of this Article V.
"UNDERWRITER" shall mean a securities firm or other similar entity in
its capacity as a party to an underwriting agreement with the Corporation
entered into with the intent of such firm or other entity of acquiring
securities of the Corporation for resale.
(2) Restriction on Ownership and Transfer.
(a) Except as provided in subsection F(9) of this Article V,
from and after the date of the Initial Public Offering, no Person
shall Beneficially Own or Constructively Own Capital Stock in excess
of the Ownership Limit.
(b) From and after the date of the Initial Public Offering, any
Transfer or other event that, if effective, would result in Common
Stock and Preferred Stock being beneficially owned by fewer than 100
Persons shall, to the maximum extent possible under law, be null and
void ab initio, and the intended transferee or other purported owner
of such Common Stock or Preferred Stock, which, if recognized, would
cause the 100 shareholder requirement of Code Section 856(a)(5) to be
violated, shall acquire, possess and retain no rights to or economic
interest whatsoever in such Common Stock or Preferred Stock to the
extent such recognition would cause this requirement to be violated.
(c) Notwithstanding any other provisions contained in this
Article V, from and after the date of the Initial Public Offering, no
Person shall Beneficially Own or Constructively Own Capital Stock to
the extent such Beneficial or Constructive Ownership would result in
the Corporation being "closely held" within the meaning of Section
856(h) of the Code, or would otherwise result in the Corporation
failing to qualify as a REIT (including but not limited to ownership
that would result in the Corporation owning (actually or
Constructively) an interest in a tenant that is described in Section
856(d)(2)(B) of the Code if the income derived by the Corporation
(either directly or indirectly through one or more entities) from such
tenant would cause the Corporation to fail to satisfy any of the gross
income requirements of Section 856(c) of the Code).
(3) Consequences of Violative Ownership.
(a) If at any time after the date of the Initial Public Offering
there is a purported Transfer or other event (whether or not such
Transfer or other event is the result of a transaction entered into
through the facilities of the NYSE or any other national securities
exchange or automated inter-dealer quotation system) that, if
effective, would result in any Person Beneficially or Constructively
Owning Capital Stock in violation of paragraphs F(2)(i) or (iii)
above, then the Common Stock or Preferred Stock purportedly being
Transferred (or in the case of an event other than a Transfer, the
Common Stock or Preferred Stock that would be Beneficially Owned or
Constructively Owned) and which would cause one or more of such
restrictions on ownership or transfer to be violated (rounded up to
the nearest whole share) shall be automatically transferred to the
Trustee in his capacity as a Trustee of a Trust for the exclusive
benefit of the Beneficiary. Such transfer to the Trust shall occur
without
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any action by the Corporation, the Trustee, the Purported Beneficial
Owner or the Purported Record Owner and shall be effective as of the
close of business on the business day prior to the date of such
Transfer or other event. The Trustee shall be appointed by the
Corporation and shall be a Person unaffiliated with the Corporation,
any Purported Beneficial Transferee and any Purported Record
Transferee. Each Beneficiary shall be designated by the Corporation as
provided in paragraph F(3)(f) of this Article V.
(b) Common Stock or Preferred Stock held by the Trustee shall be
issued and outstanding Common Stock or Preferred Stock, as the case
may be, of the Corporation. The Purported Beneficial Transferee or
Purported Record Transferee shall have no rights in the shares of
Capital Stock held by the Trustee. The Purported Beneficial Transferee
or Purported Record Transferee shall not benefit economically from
ownership of any shares held in trust by the Trustee, shall have no
rights to dividends and shall not possess any rights to vote or other
rights attributable to the shares of Capital Stock held in the Trust.
(c) The Trustee shall have all voting rights and rights to
dividends with respect to Capital Stock held in the Trust, which
rights shall be exercised for the exclusive benefit of the
Beneficiary. Any dividend or distribution paid prior to the discovery
by the Corporation that shares of Capital Stock have been transferred
to the Trustee shall be paid to the Trustee upon demand, and any
dividend or distribution declared but unpaid shall be paid when due to
the Trustee with respect to such Capital Stock. Any dividends or
distributions so paid over to the Trustee shall be held in trust for
the Beneficiary. The Purported Record Transferee and Purported
Beneficial Transferee shall have no voting rights with respect to the
Capital Stock held in the Trust and, subject to Maryland law,
effective as of the date the Capital Stock has been transferred to the
Trustee, the Trustee shall have the authority (at the Trustee's sole
discretion) (i) to rescind as void any vote cast by a Purported Record
Transferee with respect to such Capital Stock prior to the discovery
by the Corporation that the Capital Stock has been transferred to the
Trustee and (ii) to recast such vote in accordance with the desires of
the Trustee acting for the benefit of the Beneficiary; provided,
however, that if the Corporation has already taken irreversible
corporate action based upon such vote, then the Trustee shall not have
the authority to rescind and recast such vote. Notwithstanding the
provisions of this Article V, until the Corporation has received
notification that the Capital Stock has been transferred into a Trust,
the Corporation shall be entitled to rely on its share transfer and
other stockholder records for purposes of preparing lists of
stockholders entitled to vote at meetings, determining the validity
and authority of proxies and otherwise conducting votes of
stockholders.
(d) Within 20 days of receiving notice from the Corporation that
shares of Capital Stock have been transferred to the Trust, the
Trustee of the Trust shall sell (through the facilities of a stock
exchange if appropriate) the shares of Capital Stock held in the Trust
to a person, designated by the Trustee, whose ownership of the shares
of Capital Stock will not violate the ownership limitations set forth
in subsection F(2). Upon such sale, the interest of the Beneficiary in
the shares of Capital Stock sold shall terminate and the Trustee shall
distribute the net proceeds of the sale to the Purported Record
Transferee and to the Beneficiary as provided in this subsection
F(3)(d). The Purported Record Transferee shall receive the lesser of
(i) the price paid by the Purported Record Transferee for the shares
of Capital Stock in the transaction that resulted in such transfer to
the Trust (or, if the event which resulted in the transfer to the
Trust did not involve a purchase of such shares of Capital Stock at
Market Price, the Market Price of such shares of Capital Stock on the
day of the event which resulted in the transfer of such shares of
Capital Stock to the Trust) and (ii) the price per share received by
the Trustee (net of any commissions and other expenses of sale) from
the sale or other disposition of the shares of Capital Stock held in
the Trust. Any net sales proceeds in excess of the amount payable to
the Purported Record Transferee shall be immediately paid to the
Beneficiary together with any dividends or other distribution thereon
received by the Trustee. If, prior to the discovery by the Corporation
that shares of such Capital Stock have been transferred to the
Trustee, such shares of Capital Stock are sold by a Purported Record
Transferee then (x) such shares of Capital Stock shall be deemed to
have been sold on behalf of the Trust and (y) to the extent that the
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Purported Record Transferee received an amount for such shares of
Capital Stock that exceeds the amount that such Purported Record
Transferee was entitled to receive pursuant to this subsection
F(3)(d), such excess shall be paid to the Trustee upon demand. Each
Purported Record Transferee, Purported Beneficial Transferee and
Beneficiary waives any and all claims that it may have against the
Trustee and the Trust arising out of the disposition of any shares of
Capital Stock transferred to the Trust, except for claims arising out
of the gross negligence or willful misconduct arising out of the
enforcement of this Section F.
(e) Capital Stock transferred to the Trustee shall be deemed to
have been offered for sale to the Corporation, or its designee, at a
price per share equal to the lesser of (i) the price paid by the
Purported Record Transferee for the shares of Capital Stock in the
transaction that resulted in such transfer to the Trust (or, if the
event which resulted in the transfer to the Trust did not involve a
purchase of such shares of Capital Stock at Market Price, the Market
Price of such shares of Capital Stock on the day of the event which
resulted in the transfer of such shares of Capital Stock to the Trust)
and (ii) the Market Price on the date the Corporation, or its
designee, accepts such offer. The Corporation shall have the right to
accept such offer until the Trustee has sold the shares of Capital
Stock held in the Trust pursuant to subsection F(3)(d). Upon such a
sale to the Corporation, the interest of the Beneficiary in the shares
of Capital Stock sold shall terminate and the Trustee shall distribute
the net proceeds of the sale to the Purported Record Transferee and
any dividends or other distributions held by the Trustee with respect
to such Capital Stock shall thereupon be paid to the Beneficiary.
(f) By written notice to the Trustee, the Corporation shall
designate one or more nonprofit organizations to be the Beneficiary of
the interest in the Trust (and the relative percentage interests in
the Trust of each such organization) such that (i) the shares of
Capital Stock held in the Trust would not violate the restrictions set
forth in subsection F(2) in the hands of such Beneficiary and (ii)
each Beneficiary is an organization described in Sections
170(b)(1)(A), 170(c)(2) or 501(c)(3) of the Code and contributions to
each such organization must be eligible for deduction under Section
170(b)(1)(A) of the Code.
(g) No delay or failure on the part of the Corporation, the
Board of Directors or the Trustee, in exercising any right under the
Charter shall operate as a waiver of any right of the Corporation, the
Board of Directors or the Trustee, as the case may be, except to the
extent specifically waived in writing.
(h) If the transfer to the Trust describe in paragraph F(3)(a)
of this Article V would not be effective for any reason to prevent the
violation of paragraphs F(2)(a) and (c) of this Article V, then the
Transfer of that number of shares of Capital Stock that otherwise
would cause any Person to violate paragraphs F(2)(a) and (c) of this
Article V shall be void ab initio, and the intended transferee shall
acquire no rights in such shares of Capital Stock.
(4) Remedies for Breach. If the Board of Directors or its designees
shall at any time determine in good faith that a Transfer or other event
has taken place in violation of subsection F(2) of this Article V or that
a Person intends to acquire, has attempted to acquire or may acquire
Beneficial or Constructive Ownership of any shares of the Corporation in
violation of subsection F(2) of this Article V, the Board of Directors or
its designees shall take such action as it deems advisable to refuse to
give effect to or to prevent such Transfer or other event, including, but
not limited to, causing the Corporation to redeem such shares upon the
terms and conditions specified by the Board of Directors in its sole
discretion, refusing to give effect to such Transfer or other event on the
books of the Corporation or instituting proceedings to enjoin such
Transfer or other event; provided, however, that any Transfer (or, in the
case of events other than a Transfer, Beneficial Ownership or Constructive
Ownership) in violation of paragraphs F(2)(a) and (c) of this Article V
shall automatically result in the transfer to the Trust described in
subsection F(3) irrespective of any action (or inaction) by the Board of
Directors.
(5) Notice of Restricted Transfer. Any Person who acquires or attempts
or intends to acquire Common Stock or Preferred Stock or other securities
in violation of subsection F(2) of this Article V, or
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any Person who is a Purported Record Owner or Purported Beneficial Owner
of Capital Stock transferred to the Trust pursuant to subsection F(3) of
this Article V, shall immediately give written notice to the Corporation
of such event or, in the case of a proposed or intended transaction, give
at least 15 days prior written notice, and shall provide to the
Corporation such other information as the Corporation may request in order
to determine the effect, if any, of such Transfer or attempted Transfer or
other event on the Corporation's status as a REIT.
(6) Owners Required To Provide Information. From and after the date of
the Initial Public Offering, each Person who is a Beneficial Owner of
Common Stock or Preferred Stock and each Person (including the stockholder
of record) who is holding Common Stock or Preferred Stock for a Beneficial
Owner of Common Stock or Preferred Stock shall provide to the Corporation
such information that the Corporation may request, in good faith, in order
to determine the Corporation's status as a REIT.
(7) Remedies Not Limited. Nothing contained in this Article V (but
subject to section G of this Article V) shall limit the authority of the
Board of Directors to take such other action as it deems necessary or
advisable to protect the Corporation and the interests of its stockholders
by preservation of the Corporation's status as a REIT.
(8) Ambiguity. In the case of an ambiguity in the application of any
of the provisions of section F of this Article V, including any definition
contained in subsection F(1), the Board of Directors shall have the power
to determine the application of the provisions of this section F with
respect to any situation based on the facts known to it (subject, however,
to the provisions of section G of this Article V). In the event section F
requires an action by the Board of Directors and this Charter fails to
provide specific guidance with respect to such action, the Board of
Directors shall have the power to determine the action to be taken so long
as such action is not contrary to the provisions of section F. Absent a
decision to the contrary by the Board of Directors (which the Board may
make in its sole and absolute discretion), if a Person would have (but for
the remedies set forth in subsections F(2) and F(3)) acquired Beneficial
or Constructive Ownership of Capital Stock in violation of subsection
F(2), such remedies (as applicable) shall apply first to the shares that,
but for such remedies, would have caused such violation and would have
been actually owned by the Purported Beneficial Owner, second to shares
that, but for such remedies, would have caused such violation but which
would not have been actually owned by the Purported Beneficial Owner, pro
rata among the Persons who actually attempted to acquire such shares based
upon the relative value of what would have been the Purported Beneficial
Owner's Beneficial Ownership or Constructive Ownership interest in the
shares such Person attempted to acquire, third to other shares that are
actually owned by the Purported Beneficial Owner, and fourth to shares
that are actually owned by such other Persons whose ownership of shares is
attributed to the Purported Beneficial Owner, pro rata among such Persons
based upon the relative value of the Purported Beneficial Owner's
Beneficial Ownership or Constructive Ownership interest in the shares so
owned.
(9) Exceptions.
(a) Subject to paragraph F(2)(c) of this Article V, the Board of
Directors, in its sole and absolute discretion, may exempt a Person
from the Ownership Limit if the Board of Directors obtains such
representations and undertakings from such Person as it determines in
its sole and absolute discretion are reasonably necessary to ascertain
that no individual's Beneficial or Constructive Ownership of Common
Stock or Preferred Stock will violate the Ownership Limit or that any
such violation will not cause the Corporation to fail to qualify as a
REIT under the Code, and such Person agrees that any violation of such
representations or undertakings (or other action which is contrary to
the restrictions contained in subsection F(2) of this Article V and
not exempted by the Board of Directors) or attempted violation will
result in such Common Stock or Preferred Stock being transferred to
the Trust in accordance with subsection F(3) of this Article V.
(b) [Reserved]
(c) Prior to granting any exemption pursuant to paragraph
F(9)(a) of this Article V, the Board of Directors may require a ruling
from the IRS or an opinion of counsel, in either case in the form
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and substance satisfactory to the Board of Directors in its sole
discretion as it may deem necessary or advisable in order to determine
or ensure the Corporation's status as a REIT; provided, however, that
obtaining a favorable ruling or opinion shall not be required for the
Board of Directors to grant an exception hereunder.
(10) Legend. Each certificate for Common Stock shall bear the
following legend:
"The Corporation is authorized to issue two classes of capital
stock which are designated as Common Stock and Preferred Stock. The
Board of Directors is authorized to determine the preferences,
limitations and relative rights of the Preferred Stock before the
issuance of any Preferred Stock. The Corporation will furnish, without
charge, to any stockholder making a written request therefor, a copy
of the Corporation's Charter and a written statement of the
designations, and any preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption applicable to each class of stock.
Requests for such written statement may be directed to Pacific Gulf
Properties Inc. at its principal executive offices, Attention:
Secretary.
"The shares of Common Stock represented by this certificate are
subject to restrictions on ownership and transfer for the purpose of
the Corporation's maintenance of its status as a Real Estate
Investment Trust under the Internal Revenue Code of 1986, as amended.
No Person may Beneficially Own or Constructively Own Common Stock in
excess of 9.8% (in value or in number of shares, whichever is more
restrictive) of the outstanding Common Stock of the Corporation, and
no Person may Beneficially Own or Constructively Own Capital Stock
(including Common Stock and Preferred Stock) having a value in excess
of 9.8% of the value of the aggregate of the outstanding shares of
Capital Stock of the Corporation, with certain further restrictions
and exceptions set forth in the Corporation's Charter. Capital Stock
that may be acquired upon conversion of convertible securities of the
Corporation held, directly or constructively, by an investor, but not
Capital Stock issuable with respect to convertible securities held by
others, is deemed to be owned by the investor and outstanding prior to
conversion for purposes of determining the percentage of Capital Stock
held by that investor. Any Person who attempts to Beneficially Own or
Constructively Own Capital Stock in excess of the above limitations
must immediately notify the Corporation. All capitalized terms in this
legend have the meanings defined in the Corporation's Charter.
Transfers or other events in violation of the restrictions described
above shall be null and void ab initio, the purported transferee or
purported owner shall acquire or retain no rights to, or economic
interests in, any Common Stock held in violation of these
restrictions, and the shares that are subject to the purported
transfer or other event are transferred automatically to a trust for
the benefit of one or more charitable organizations. The Corporation
may redeem such shares upon the terms and conditions specified by the
Board of Directors in its sole discretion if the Board of Directors
determines that a Transfer or other event would violate the
restrictions described above."
Shares of Preferred Stock shall bear a corresponding legend.
(11) The Board of Directors may from time to time increase or decrease
the Common Stock Ownership Limit and the Aggregate Stock Ownership Limit;
provided, however, that:
(a) Any decrease may be made only prospectively as to subsequent
holders or, with respect to existing holders, subsequent Transfers
(other than a decrease in such limits as a result of a retroactive
change in existing law, in which case such decrease shall be effective
immediately);
(b) Subject to subsection F(9), neither ownership limitation may
be increased if, after giving effect to such increase, five Persons
could Beneficially Own or Constructively Own, in the aggregate, more
than 50.0% in value of the shares of Capital Stock then outstanding;
and
(c) Prior to the modification of either of the ownership
limitations, the Board of Directors of the Corporation may require
such opinions of counsel, affidavits, undertakings or agreements as it
may deem necessary or advisable in order to determine or ensure the
Corporation's status as REIT.
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(12) Severability. If any provision or item of this Article V or any
application of any such provision or item is determined to be invalid by
any federal or state court having jurisdiction, the validity of the
remaining provisions and items shall not be affected and other
applications of such provision or item shall be affected only to the
extent necessary to comply with the determination of such court.
G. Settlement. Nothing in this Article V shall preclude the settlement of
any transaction entered into through facilities of the NYSE or such other stock
exchange on which the Corporation's Common Stock or Preferred Stock may be
listed. The shares that are the subject of such transaction shall continue to be
subject to the terms of this Article V after such settlement.
H. Issuance of Rights to Purchase Securities and Other Property. Subject
to the rights of the holders of any series of Preferred Stock, the Board of
Directors is hereby authorized to create and to authorize and direct the
issuance (on either a pro rata or a non-pro rata basis) by the Corporation of
rights, options and warrants for the purchase of shares of Capital Stock, other
securities of the Corporation, or shares or other securities of any successor in
interest of the Corporation (a "Successor"), at such times, in such amounts, to
such persons, for such consideration (if any), with such form and content
(including without limitation the consideration for which any shares of Capital
Stock, other securities of the Corporation, or shares or other securities of any
Successor are to be issued) and upon such terms and conditions as it may, from
time to time, determine, subject only to the restrictions, limitations,
conditions and requirements imposed by the Maryland General Corporation Law,
other applicable laws and the Corporation's Charter.
I. Preemptive Rights. Except as may be provided by the Board of Directors
in authorizing the issuance of shares of Preferred Stock and as set forth in
Articles Supplementary creating such Preferred Stock, no holder of shares of
stock of the Corporation shall, as such holder, have any preemptive right to
purchase or subscribe for any additional shares of stock of the Corporation or
any other security of the Corporation which it may issue or sell.
J. Authorized Shares of Common and Preferred Stock. The authorized number
of shares of Common Stock and Preferred Stock may, without a class or series
vote, be increased or decreased from time to time by the affirmative vote of the
holders of a majority of the combined voting power of the then-outstanding
shares of Capital Stock of the Corporation that pursuant to the Charter are
entitled to vote generally in the election of directors of the Corporation,
voting together as a single class.
ARTICLE VI
DIRECTORS
A. Number. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, the number of
directors of the Corporation shall be three, which number may be increased or
decreased pursuant to the Bylaws of the Corporation; provided, however, that the
number of directors shall never be less than three or greater than eleven.
B. Classification. The directors of the Corporation, other than those who
may be elected by the holders of any series of Preferred Stock, shall be
divided, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as possible, with the initial term of
office of the Class I directors to expire at the 1995 annual meeting of
stockholders, the initial term of office of the Class II directors to expire at
the 1996 annual meeting of stockholders and the initial term of office of the
Class III directors to expire at the 1997 annual meeting of stockholders,
provided that the directors in office on September 30, 1993 shall consist of one
Class I director, one Class II director and one Class III director. Members of
each class shall hold office until their successors are elected and qualified.
At each succeeding annual meeting of stockholders of the Corporation, the
successors of the class of directors whose term expires at that meeting shall be
elected by a plurality vote of all votes cast at such meeting to hold office for
a term expiring at the annual meeting of stockholders held in the third year
following the year of their election.
C. Written Ballot. Unless and except to the extent that the Bylaws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
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D. Removal. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances, any
director may be removed from office at any time, but only for cause and only by
the affirmative vote of the holders of 66-2/3% of the then outstanding shares of
stock entitled to vote generally in the election of directors ("Voting Stock"),
voting together as a single class.
E. Vacancies. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies on the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office, or other causes shall be filled by a majority vote of the
stockholders or directors then in office. A director so chosen by the
stockholders shall hold office for the balance of the term then remaining. A
director so chosen by the remaining directors shall hold office until the next
annual meeting of stockholders, at which time the stockholders shall elect a
director to hold office for the balance of the term then remaining. No decrease
in the number of directors constituting the Board of Directors shall affect the
tenure of the office of any director.
F. Stock Issuances. The Board of Directors is hereby empowered to
authorize the issuance from time to time of shares of its stock of any class,
whether now or hereafter authorized, or securities convertible into shares of
its stock of any class or classes, whether now or hereafter authorized, for such
consideration as may be deemed advisable by the Board of Directors and without
any action by the stockholders.
ARTICLE VII
AMENDMENTS
The Corporation reserves the right at any time and from time to time to
make any amendment to its Charter, now or hereafter authorized by law, including
any amendment altering the terms or contract rights, as expressly set forth in
its Charter, or any shares of outstanding stock. Any amendment to the
Corporation's Charter shall be valid only if such amendment shall have been
approved by the affirmative vote of the holders of a majority of the outstanding
Voting Stock, voting together as a single class. All rights and powers conferred
by the Corporation's Charter on stockholders, directors and officers are granted
subject to this reservation.
ARTICLE VIII
INDEMNIFICATION
The Corporation shall indemnify (A) its directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's
Bylaws and be permitted by law. The foregoing rights of indemnification shall
not be exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such action as is necessary to
carry out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such bylaws, resolutions or contracts
implementing such provisions or such further indemnification arrangements as may
be permitted by law. No amendment of the Charter of the Corporation or repeal of
any of its provisions shall limit or eliminate the right to indemnification
provided hereunder with respect to acts or omissions occurring prior to such
amendment on repeal.
ARTICLE IX
LIMITATION OF LIABILITY
To the fullest extent permitted by Maryland statutory or decisional law,
as amended or interpreted, no director or officer of the Corporation shall be
personally, liable to the Corporation or its stockholders for money damages. No
amendment of the Charter of the Corporation or repeal of any of its provisions
shall limit or eliminate the limitation on liability provided to directors and
officers hereunder with respect to any act or omission occurring prior to such
amendment or repeal.
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ARTICLE X
CERTAIN TRANSACTIONS
With respect to any proposed merger, acquisition, business combination or
other transaction or proposal, a director of the Corporation, in determining
what is in the best interests of the Corporation, shall consider the interests
of the Stockholders of the Corporation and, in his or her discretion, may
consider (i) the interests of the Corporation's employees, suppliers, creditors
and customers, (ii) the economy of the nation, (iii) community and societal
interests and (iv) the long-term as well as short-term interests of the
Corporation and its Stockholders, including the possibility that these interests
may be best served by the continued independence of the Corporation. Pursuant to
this provision, the Board of Directors may consider numerous judgmental or
subjective factors affecting a proposal, including certain nonfinancial matters,
and on the basis of these considerations may oppose a business combination or
other transaction which, as an exclusively financial matter, might be attractive
to some, or a majority, of the Corporation's stockholders.
ARTICLE XI
BUSINESS COMBINATIONS
The Corporation hereby expressly elects not to be governed by the
provision of Title 3, Subtitle 6 of the Maryland General Corporation Law.
ARTICLE XII
RIGHTS AND POWERS OF CORPORATION,
BOARD OF DIRECTORS AND OFFICERS
In carrying on its business, or for the purpose of attaining or furthering
any of its objects, the Corporation shall have all of the rights, powers and
privileges granted to corporations by the laws of the State of Maryland, as well
as the power to do any and all acts and things that a natural person or
partnership could do as now or hereafter authorized by law, either alone or in
partnership or conjunction with others.
Any director or officer individually, or any firm of which any director or
officer may be a member, or any corporation or association of which any director
or officer may be a director or officer or in which any director or officer may
be interested as the holder of any amount of its capital stock or otherwise, may
be a party to, or may be pecuniarily or otherwise interested in, any contract or
transaction of the Corporation, and, in the absence of fraud, no contract or
other transaction shall be thereby affected or invalidated; provided, however,
that (a) such fact shall have been disclosed or shall have been known to the
Board of Directors or the committee thereof that approved such contract or
transaction and such contract or transaction shall have been, approved or
ratified by the affirmative vote of a majority of the disinterested directors,
or (b) such fact shall been disclosed or shall have been known to the
stockholders entitled to vote, and such contract or transaction shall have been
approved or ratified by a majority of the votes cast by the stockholders
entitled to vote, other than the votes of shares owned of record or beneficially
by the interested director or corporation, firm or other entity, or (c) the
contract or transaction is fair and reasonable to the Corporation. Any director
of the Corporation who is also a director or officer of, or interested in, such
other corporation or association, or who, or the firm of which he or she is a
member, is so interested, may be counted in determining the existence of a
quorum at any meeting of the Board of Directors of the Corporation which shall
authorize any such contract or transaction, with like force and effect as if he
or she were not such director or officer of such other corporation or
association or were not so interested or were not a member of a firm so
interested.
Except as otherwise provided in the Corporation's Charter or the Bylaws of
the Corporation, as amended from time to time, the business of the Corporation
shall be managed by its Board of Directors. The Board of Directors shall have
and may exercise all the rights, powers and privileges of the Corporation except
only for those that are by law, these Articles of Incorporation or the Bylaws of
the Corporation, conferred upon or reserved to the stockholders. Additionally,
the Board of Directors is hereby specifically authorized and empowered from time
to time in its discretion:
To borrow and raise money, without limit and upon any terms, for any
corporate purposes; and, subject to applicable law, to authorize the
creation, issuance, assumption, or guaranty of bonds,
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<PAGE> 13
debentures, notes or other evidences of indebtedness for money so
borrowed, to include therein such provisions as to redeemability,
convertibility or otherwise, as the Board of Directors, in its sole
discretion, determines, and to secure the payment of principal, interest
or sinking fund in respect thereof by mortgage upon, or the pledge of, or
the conveyance or assignment in trust of, all or any part of the
properties, assets, and goodwill of the Corporation then owned or
thereafter acquired;
To make, alter, amend, change, add to or repeal the Bylaws of the
Corporation in accordance with the terms of the Bylaws adopted by the
Board of Directors pursuant to Section 2-109 of the Maryland General
Corporation Law; and
To the extent permitted by law, to declare and pay dividends or other
distributions to the stockholders from time to time out of the earnings,
earned surplus, paid-in surplus or capital of the Corporation,
notwithstanding that such declaration may result in the reduction of the
capital of the Corporation. In connection with any dividends or other
distributions upon the Common Stock, the Corporation need not reserve any
amount from such dividend or other distributions to satisfy any
preferential rights of any stockholder.
Notwithstanding any provision of law requiring the authorization of any
action by a greater proportion than a majority of the total number of shares of
all classes of capital stock or of the total number of shares of any class of
capital stock, such action shall be valid and effective if authorized by the
affirmative vote of the holders of a majority of the total of shares of all
classes outstanding and entitled to vote thereon, except as otherwise provided
in the Charter.
ARTICLE XIII
DURATION
The duration of the Corporation shall be perpetual.
ARTICLE XIV
PREFERRED STOCK
A. Class A Preferred Stock.
(1) Preferred Shares -- Designation and Amount. The shares of such
class of Preferred Stock shall be designated as "Class A Senior Cumulative
Convertible Preferred Stock" and the number of shares constituting the
class so designated shall be 2,763,113 (the "Preferred Shares").
(2) Preferred Shares -- Dividend Rights.
(a) General. Subject to Section 9, and in addition to any other
dividends provided for herein, the Corporation shall pay in cash,
when, as and if declared by the Board, out of funds legally available
therefor as provided by the M.G.C.L. (the "Legally Available Funds"),
dividends at the quarterly rate equal to the Applicable Dividend Rate
(as defined below) per issued and outstanding Preferred Share, per
quarter. Such dividends shall be cumulative and payable (if declared)
quarterly on each February 15, May 15, August 15 and November 15, with
respect to the prior quarter, commencing February 15, 1997 (except
that if such date is not a Business Day (as defined below), then such
dividend will be payable on the next succeeding Business Day) to the
holders of record at the close of business on the date specified by
the Board at the time such dividend is declared no more than thirty
(30) days prior to the date fixed for payment thereof; provided,
however, that the Corporation shall have the right to declare and pay
dividends at any time. Dividends shall begin to accrue and be
cumulative from the date of issuance of such Preferred Share to and
including the first to occur of (i) the date on which the Liquidation
Value (as defined herein) of such Preferred Share or Put Payment (plus
all accrued and unpaid dividends thereon whether or not declared) is
paid to the holder thereof in connection with the liquidation of the
Corporation or the redemption of such Preferred Share by the
Corporation, (ii) the last day of the quarter preceding the quarter in
which such Preferred Shares are converted into shares of Common Stock
hereunder if such date is after the record date for the Regular
Quarterly Dividend (as defined herein) on the Common Stock for the
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<PAGE> 14
quarter in which such conversion takes place, (iii) the last day of
the quarter second preceding the quarter in which such Preferred
Shares are converted into shares of Common Stock hereunder if such
date is prior to the record date for the Regular Quarterly Dividend on
the Common Stock for the quarter in which such conversion takes place,
or (iv) the date on which such share is otherwise acquired and paid
for by the Corporation.
(b) Cumulative Dividends. Each of such dividends shall be fully
cumulative, to the extent not previously paid. Any accrued dividend
that is not paid, or made available for payment, on the date set forth
in Section 2(a) above shall accrue dividends at a rate of (i) 2.297%
per fiscal quarter for any quarter which ends on or prior to December
31, 1997 and (ii) for any subsequent fiscal quarter the greater of (x)
2.297% per quarter and (y) the product of 1.04 and the per share
quarterly dividend paid in that quarter in respect of the common
stock, par value $.01 per share, of the Corporation (the "Common
Stock"), divided by $19.905, per quarter until such amount has been
paid. Any dividend payment with respect to the Preferred Shares shall
first be credited against any prior accrued and unpaid dividend. No
dividends shall be set apart for or paid upon the Common Stock or any
other shares of stock ranking junior to the Preferred Shares unless
all such cumulative dividends on the Preferred Shares have been paid.
(c) Applicable Dividend Rate. With respect to any Preferred
Share then issued and outstanding the "Applicable Dividend Rate" shall
be (i) $0.425 per Preferred Share, per fiscal quarter for any quarter
which ends on or prior to December 31, 1997 and (ii) for any
subsequent fiscal quarter the greater of (x) $0.425 per Preferred
Share, per quarter, and (y) the product of 1.04 and the per share
quarterly dividend paid in that quarter in respect of the Common
Stock, per fiscal quarter. If any of the events described under
Section 7 requiring the adjustment of the Conversion Price (as defined
herein) occurs, such dividends payable thereafter on the Common Stock
shall be calculated for purposes of the foregoing clause (y) so as to
reverse the effect of such events. The Applicable Dividend Rate shall
be pro rated for the actual number of days in any partial quarter.
(d) Pro Rata Distribution. All dividends paid with respect to
Preferred Shares pursuant to this Section 2 shall be paid pro rata in
respect of each Preferred Share entitled thereto. In the event that
the Legally Available Funds available for the payment of dividends
shall be insufficient for the payment of the entire amount of
dividends payable with respect to Preferred Shares on any date on
which the Board has declared the payment of a dividend or otherwise,
the amount of any available surplus shall be allocated for the payment
of dividends with respect to the Preferred Shares and any other shares
of capital stock that are pari passu as to dividends pro rata based
upon the amount of accrued and unpaid dividends of such shares of
capital stock.
(e) Business Day. For purposes hereof, the term "Business Day"
shall mean any Monday, Tuesday, Wednesday, Thursday or Friday which is
not a day on which banking institutions in New York City are
authorized or obligated by law or executive order to close.
(3) Preferred Shares -- Certain Restrictions. Unless the dividends
(including accrued and unpaid dividends in arrears whether or not
declared) described above in Section 2, which pursuant to their terms
should have been paid, have been paid in full or declared and set apart
for payment, the Corporation shall be prohibited from paying dividends on,
making any other distributions on, or redeeming or purchasing or otherwise
acquiring for consideration any capital stock of the Corporation (without
regard to its rank, either as to dividends or upon liquidation,
dissolution or winding up). The Corporation shall not permit any
subsidiary or subpartnership of the Corporation to purchase or otherwise
acquire for consideration or make any payment with respect to any shares
of capital stock of the Corporation if the Corporation is prohibited from
purchasing or otherwise acquiring for consideration or making any payment
with respect to such shares at such time and in such manner pursuant to
the prior sentence, provided, however, that the Corporation shall not be
prohibited from making a capital contribution of capital stock of the
Corporation to any of its subsidiaries or subpartnerships.
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<PAGE> 15
(4) Preferred Shares -- Voting Rights.
(a) General. Except as limited by law the holders of the
Preferred Shares shall be entitled to vote or consent on all matters
submitted to the holders of Common Stock together with the holders of
the Common Stock as a single class.
(b) Calculation of Votes. For the purposes of calculating the
votes cast for a particular matter when voting or consenting pursuant
to Section 4(a), each Preferred Share will entitle the holder thereof
to one vote for each share of Common Stock into which such Preferred
Share is convertible as provided in Section 7(c) herein as of the
record date for such vote or consent or, if no record date is
specified, as of the date of such vote or consent.
(c) Section 4(c) Directors. In addition to the other voting
rights described herein, upon the issuance to Five Arrows Realty
Securities L.L.C. of Preferred Shares such that, and until Five Arrows
Realty Securities L.L.C., Rothschild Realty Inc. or the ninety-nine
percent (99%) member of Five Arrows Realty Securities L.L.C., ceases
to own either (A) all of the outstanding Preferred Shares or (B) an
amount of voting securities of the Corporation which, if converted
into shares of Common Stock, would exceed 10% of the outstanding
Common Stock on a fully diluted basis (determined on the basis of then
convertible, exercisable or exchangeable securities, warrants or
options issued by the Corporation (such amount as set forth in clauses
(A) and (B) above, the "Minimum Threshold"), (i) the number of
directors constituting the Board shall be automatically increased by
one (1) member and (ii) upon the first to occur, or from time to time
following the Dividend/Earnings Cure (as defined herein) upon the
first to occur, of (x) the Corporation's failure to pay the Regular
Quarterly Dividend on the Common Stock for any quarter in an amount of
at least $.40 per share (adjusted to reverse the effect of any event
set forth in Section 7 that would require an adjustment to the
Conversion Price (the "Dividend Reduction Default"), (y) the
Corporation's financial results reflecting that the ratio of its
Combined EBITDA to its reported interest expense (as described in
clause (2) under the definition of Combined EBITDA below) for each of
three consecutive fiscal quarters was less than 1.25 to 1.00 (the
"Earnings Default"), or (z) the Corporation's failure to pay in full
the quarterly dividend payable hereunder (whether or not declared) at
any time in respect of the Preferred Shares (the "Dividend Payment
Default"), the Board shall be automatically increased by an additional
one (1) member for an aggregate maximum increase pursuant hereto of
two directors. The position on the Board established pursuant to
clause (i) of this Section 4(c) shall remain available until the
Minimum Threshold is no longer satisfied. The position on the Board
established pursuant to clause (ii) of this Section 4(c) shall remain
available until the first to occur of such time as (i) the Minimum
Threshold fails to be satisfied and (ii) the Dividend/Earnings Cure
(as defined herein). Any director elected pursuant to this section
shall be deemed to have resigned upon the position created hereby not
being available.
The term "Regular Quarterly Dividend" means any cash dividend or
dividends paid in any calendar quarter that do not in the aggregate
exceed the Corporation's reported Funds From Operations (as defined by
the National Association of Real Estate Investment Trusts prior to
1996) for the quarter relating to such dividend.
The term "Combined EBITDA" means the combined net income of the
Corporation (before extraordinary income or gains) as reported in its
Quarterly Report on Form 10-Q under the Securities Exchange Act of
1934, as amended (the "Exchange Act") or otherwise furnished to
holders of Preferred Shares pursuant to Section 4(j) increased (to the
extent deducted in determining consolidated net income) by the sum of
the following (without duplication):
(1) all income and state franchise taxes paid or accrued
according to generally accepted accounting principals in the
United States ("GAAP") for such period (other than income taxes
attributable to extraordinary, unusual or non-recurring gains or
losses except to the extent that such gains were not included in
Combined EBITDA),
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<PAGE> 16
(2) all interest expense paid or accrued in accordance with
GAAP for such period (including financing fees and amortization
of deferred financing fees and amortization of original issue
discount),
(3) depreciation and depletion reflected in such reported
net income,
(4) amortization reflected in such reported net income
including, without limitation, amortization of capitalized debt
issuance costs (only to the extent that such amounts have not
been previously included in the amount of Combined EBITDA
pursuant to clause (2) above), and
(5) any other non-cash charges to the extent deducted from
combined net income (including, but not limited to, income
allocated to minority interests, non-recurring or one-time GAAP
non-cash income, gains, expenses or losses).
(d) Section 4(d) Directors. In addition to the other voting
rights described herein, at any time after the Minimum Threshold
ceases to be satisfied and a Dividend Payment Default occurs for three
consecutive fiscal quarters, the number of directors constituting the
Board shall be automatically increased by a maximum of two (2)
members. The position on the Board created pursuant to this Section
4(d) shall continue to be available until the earlier to occur of such
time as (i) there are no Preferred Shares of the Corporation
outstanding and (ii) the Dividend Payment Cure (as defined herein).
Any director elected pursuant to this section shall be deemed to have
resigned upon the position created hereby not being available.
(e) Election of Preferred Directors. The holders of the
Preferred Shares shall have the special right, voting separately as a
single class, to elect as soon as practical, a director to fill each
vacancy created pursuant to Section 4(c) or 4(d) and to elect their
respective successors at each succeeding annual meeting of the
Corporation thereafter at which such successor is to be elected. The
director so elected from time to time in respect of clause (i) of
Section 4(c) shall be referred to herein as the "Section 4(c)(i)
Director." The director so elected from time to time in respect of
clause (ii) of Section 4(c) shall be referred to herein as the
"Section 4(c)(ii) Director." The directors so elected from time to
time in respect of Section 4(d) shall be referred to herein as the
"Section 4(d) Directors." As used herein, the term "Preferred
Director" shall refer to each of the Section 4(c)(i) Director, the
Section 4(c)(ii) Director or a Section 4(d) Director, as appropriate,
and the term "Preferred Directors" shall refer to all such directors.
At no time shall there be more than two Preferred Directors on the
Board.
(f) Classification of Board. Each vacancy created upon the Board
from time to time pursuant to clause (i) or (ii) of Section 4(c) or
Section 4(d), as the case may be, shall be apportioned among the
classes of directors, if any, so that the number of directors in each
of the classes of directors is as nearly equal in number as possible.
The Preferred Directors shall be classified accordingly.
(g) Cure. Upon the occurrence of a Dividend Reduction Default or
an Earnings Default, the same shall be deemed to continue to exist
until such time as (the "Dividend/Earnings Cure") (i) the Regular
Quarterly Dividend paid in the immediately preceding quarter on the
Common Stock shall be greater than $.40 per share (adjusted to reverse
the effect of any event set forth in Section 7 that would require an
adjustment to the Conversion Price), (ii) the Corporation reports for
the prior three consecutive fiscal quarters that the ratio of its
Combined EBITDA to its reported interest expense (as described in
clause (2) under the definition of Combined EBITDA above) for each
such quarter was greater than 1.25 to 1.00, and (iii) all dividends,
and all other accrued and unpaid dividends whether or not declared, on
the Preferred Shares have been paid or made available for payment.
Upon the occurrence of the Dividend Payment Default, the same shall be
deemed to continue and exist until (the "Dividend Payment Cure") such
time as the earlier to occur of (i) none of the Preferred Shares shall
remain outstanding or (ii) all dividends, including accrued and unpaid
dividends on the Preferred Shares whether or not declared, have been
paid or made available for payment.
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<PAGE> 17
(h) Board Committees. The 4(c)(i) Director shall be designated
as a member of every committee of the Board, other than two
committees, such two committees to be specified by such 4(c)(i)
Director. During such period of time as a 4(c)(ii) Director shall be a
member of the Board, such 4(c)(ii) Director shall be designated as a
member of each committee of the Board on which the 4(c)(i) Director is
not a member.
(I) Voting Procedures. At each meeting of the stockholders of
the Corporation at which the holders of the Preferred Shares shall
have the right to vote as a single class, as provided in this Section
4, the presence in person or by proxy of the holders of record of a
majority of the total number of Preferred Shares then outstanding
shall be necessary and sufficient to constitute a quorum of such class
for such election by such stockholders as a class. At any such meeting
or adjournment thereof the absence of a quorum of holders of Preferred
Shares shall not prevent the election of directors other than the
Preferred Directors, and the absence of a quorum of the holders of any
other class or series of stock for the election of such other
directors shall not prevent the election of any Preferred Directors by
the holders of the Preferred Shares.
(j) Vacancy. In case any vacancy shall occur among the directors
elected by the holders of the Preferred Shares such vacancy shall be
filled by the vote of holders of the Preferred Shares, voting as a
single class, at a special meeting of such stockholders called for
that purpose.
(k) Written Consent. Notwithstanding the foregoing, any action
required or permitted to be taken by holders of Preferred Shares at
any meeting of stockholders may be taken without a meeting, without
prior notice and without a vote, if a unanimous consent, in writing,
setting forth the action so taken, shall be signed by each of the
holders of Preferred Shares and shall be executed and delivered to the
Secretary of the Corporation for placement among the minutes of
proceedings of the stockholders of the Corporation.
(l) Approval by the Corporation. The Corporation acting through
a majority of its Directors shall have the right to approve the
nomination of any Section 4(c)(i) Director or Section 4(c)(ii)
Director, such approval not to be unreasonably withheld; provided,
however, that such right shall not apply to any of John D. McGurk,
James E. Quigley 3rd, Matthew W. Kaplan, and D. Pike Aloian.
(m) Restrictions. So long as Preferred Shares of the Corporation
are outstanding, without the consent of the holders of at least the
majority of the Preferred Shares at the time outstanding, given in
person or by proxy, at a meeting called for that purpose at which the
holders of the Preferred Shares shall vote separately as a class, or
by the unanimous consent in writing of all of the holders of the
Preferred Shares (in addition to any other vote or consent of
stockholders required by law or by the Charter), the Corporation may
not (i) effect or validate the amendment, alteration or repeal of any
provision of the Charter of the Corporation which would adversely
effect the rights of the holders of the Preferred Shares as such, (ii)
effect or validate the amendment, alteration or repeal of any
provision of the Charter of the Corporation which would increase in
any respect the restrictions or limitations on ownership applicable to
the Preferred Shares pursuant thereto, (iii) effect or validate the
amendment, alteration or repeal of any provision of the Charter of the
Corporation or By-Laws of the Corporation so as to limit the right to
indemnification provided to any present or future member or members of
the Board elected by the holders of the Preferred Shares, (iv) other
than the 2,763,113 Preferred Shares authorized herein, issue Preferred
Shares (or a series of preferred stock that would vote as a class with
the Preferred Shares with respect to the election of any Preferred
Director) or shares of stock ranking senior or equal to the Preferred
Shares (as to dividends or upon liquidation, dissolution or winding
up), or (v) effect or validate the amendment, alteration or repeal of
any provision of the Charter of the Corporation or ByLaws of the
Corporation so as to increase the number of members of the Board
beyond ten (10) members (not including any Preferred Directors).
Nothing in this Section 4(m) shall prevent the Corporation from
issuing any shares of stock of the Corporation which rank junior (as
to dividends and upon liquidation, dissolution or winding up) to the
Preferred Shares upon such terms as the Board shall authorize from
time to time.
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(n) Reports. The Corporation shall mail to each holder of record
of Preferred Shares, at such holder's address in the records of the
Corporation, within 45 days after the end of the first three fiscal
quarters of each fiscal year and within 90 days after the end of each
fiscal year, its financial reports for such fiscal period in such form
and containing such independent accountants report as set forth under
the rules of the Securities and Exchange Commission (together with the
report of the Corporation's independent accountants with respect to
such fiscal period) irrespective of whether the Corporation is then
required to file reports under such rules.
(5) Preferred Shares -- Redemption Rights.
(a) General. The Corporation may, at its option, to the extent
it shall have Legally Available Funds therefor, redeem all or any
portion (on a pro rata basis) of the outstanding Preferred Shares, at
any time on or after the date which is the fifth anniversary of the
original date of issuance of Preferred Shares.
(b) Notice. The option of the Corporation to redeem the
Preferred Shares pursuant to this Section 5 shall be exercised by
mailing of a written notice of election (a "Redemption Notice") by the
Corporation to the holders of the Preferred Shares at such holder's
address appearing on the records of the Corporation, which notice
shall be mailed at least 30 days prior to the date specified therein
for the redemption of the Preferred Shares. Such notice shall state,
at a minimum, the amount of Preferred Shares to be redeemed, the date
on which such redemption shall occur and the last date on which such
holder can exercise the conversion rights provided for in Section 7
herein (the "Final Conversion Date"). Any notice which was mailed in
the manner herein provided shall be conclusively presumed to have been
given on the date mailed whether or not the holder receives such
notice.
(c) Conversion. During the period beginning on the date on which
the Corporation mailed to each holder of the Preferred Shares a
written notice of election pursuant to subsection (b) above and ending
on the thirtieth day following the date of such mailing, each holder
of the Preferred Shares may exercise its rights pursuant to Section 7
herein.
(d) Redemption Price. Upon the thirtieth day following the
mailing to the holder of the Preferred Shares of a written notice of
election pursuant to subsection (b) above, the Corporation shall be
required, unless such holder of Preferred Shares has exercised its
rights pursuant to subsection (c) above, to purchase from such holder
of Preferred Shares (upon surrender by such holder at the
Corporation's principal office of the certificate representing such
Share), such Preferred Shares specified in the Redemption Notice, at a
price equal to the product of (i) $19.905 per share plus accrued and
unpaid dividends (whether or not declared and accrued through the date
of payment for redemption or the date payment is made available for
payment to the holder thereof) plus a premium equal to the following
percentage of $19.905:
<TABLE>
<CAPTION>
REDEMPTION OCCURS
ON OR AFTER BUT PRIOR TO % PREMIUM
----------------- ----------------- ---------
<S> <C> <C>
April 1, 2002 December 31, 2002 6.0
December 31, 2002 December 31, 2003 5.0
December 31, 2003 December 31, 2004 4.0
December 31, 2004 December 31, 2005 3.0
December 31, 2005 December 31, 2006 2.5
December 31, 2006 December 31, 2007 2.0
December 31, 2007 December 31, 2008 1.5
December 31, 2008 December 31, 2009 1.0
December 31, 2009 0.0
</TABLE>
and (ii) the number of Preferred Shares to be redeemed as provided in
the Redemption Notice (the "Redemption Price").
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(e) Dividends. No Preferred Share is entitled to any dividends
accruing thereon after the date on which the payments provided by and
in accordance with Section 5(d) are paid or made available for payment
to the holder thereof. On such date all rights of the holder of such
Preferred Share shall cease, and such Preferred Share shall not be
deemed to be outstanding.
(6) Preferred Shares -- Liquidation Rights.
(a) Liquidation Payment. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, then out of the assets of the Corporation before any
distribution or payment to the holders of shares of capital stock of
the Corporation ranking junior to the Preferred Shares (as to
dividends or upon liquidation, dissolution or winding up), the holders
of the Preferred Shares shall be entitled to be paid $19.905 per share
(the "Liquidation Value") plus accrued and unpaid dividends whether or
not declared, if any, (or a pro rata portion thereof with respect to
fractional shares), to the date of final distribution or the
distribution is made available; provided, however, that if such
liquidation, dissolution or winding up of the Corporation occurs in
connection with or subsequent to a Change of Control (as defined in
Section 8(e)), then the holders of the Preferred Shares shall be
entitled to be paid the Put Payment (as defined herein). Except as
provided in this Section 6, the holders of the Preferred Shares shall
be entitled to no other or further distribution in connection with
such liquidation, dissolution or winding up.
(b) ProRata Distribution. If, upon any liquidation, dissolution
or winding up of the Corporation, the assets of the Corporation
available for distribution to the holders of Preferred Shares shall be
insufficient to permit payment in full to such holders the sums which
such holders are entitled to receive in such case, then all of the
assets available for distribution to the holders of the Preferred
Shares shall be distributed among and paid to the holders of Preferred
Shares, ratably in proportion to the respective amounts that would be
payable to such holders if such assets were sufficient to permit
payment in full.
(7) Preferred Shares -- Conversion.
(a) Conversion Rights. Subject to and upon compliance with the
provisions of this Section 7, a holder of Preferred Shares shall have
the right, at such holder's option, at any time to convert all or a
portion of such shares into the number of fully paid and
non-assessable shares of Common Stock obtained by dividing the number
of Preferred Shares being converted by the Conversion Ratio (as
defined below and as in effect at the time and on the date provided
for in this Section 7(b)(iv)) by surrendering such Preferred Shares to
be converted. Such surrender shall be made in the manner provided in
Section 7, paragraph (b); provided, however, that the right to convert
any Preferred Shares called for redemption pursuant to Section 5 shall
terminate at the close of business on the Final Conversion Date,
unless the Corporation shall default in making payment of any cash
payable upon such redemption under Section 5 hereof. The "Conversion
Ratio" with respect to any Preferred Shares will initially be equal to
1, subject to adjustment as described below.
(b) Manner of Conversion.
(i) In order to exercise the conversion right, the holder
of each Preferred Share to be converted shall surrender to the
Corporation the certificate representing such share, duly
endorsed or assigned to the Corporation or in blank, accompanied
by written notice to the Corporation that the holder thereof
elects to convert such Preferred Shares. Unless the shares of
Common Stock issuable on conversion are to be issued in the same
name as the name in which such Preferred Shares are registered,
each Preferred Share surrendered for conversion shall be
accompanied by instruments of transfer, in form satisfactory to
the Corporation, duly executed by the holder or such holder's
duly authorized attorney and an amount sufficient to pay any
transfer or similar tax (or evidence reasonably satisfactory to
the Corporation demonstrating that such taxes have been paid).
(ii) As promptly as practicable after the surrender of
certificates of Preferred Shares as aforesaid, the Corporation
shall issue and shall deliver at such office to such holder, or
on such
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<PAGE> 20
holder's written order, a certificate or certificates for the
number of full shares of Common Stock issuable upon the
conversion of such Preferred Shares in accordance with the
provisions of this Section 7, and any fractional interest in
respect of a share of Common Stock arising upon such conversion
shall be settled as provided in paragraph (c) of this Section 7.
(iii) Each conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which
certificates for Preferred Shares have been surrendered and such
notice received by the Corporation as aforesaid, and the person
or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby at such time
on such date and such conversion shall be at the Conversion
Ratio in effect at such time on such date unless the stock
transfer books of the Corporation shall be closed on that date,
in which event such conversion shall have been deemed to have
been effected and such person or persons shall be deemed to have
become the holder or holders of record at the close of business
on the next succeeding day on which such stock transfer books
are open, but such conversion shall be at the Conversion Ratio
in effect on the date on which such shares shall have been
surrendered and such notice received by the Corporation.
(c) Fractional Shares. No fractional shares or scrip representing
fractions of shares of Common Stock shall be issued upon conversion of the
Preferred Shares. Instead of any fractional interest in a share of Common
Stock that would otherwise be deliverable upon the conversion of Preferred
Shares, the Corporation shall pay to the holder of such share an amount in
cash based upon the Current Market Price of Common Stock on the Trading
Day immediately preceding the date of conversion. If more than one
Preferred Share shall be surrendered for conversion at one time by the
share holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number
of Preferred Shares so surrendered.
(d) Adjustment of Conversion Ratio. The Conversion Ratio shall be
adjusted from time to time as follows:
(i) If the Corporation shall, while any Preferred Shares are
outstanding, (A) pay a dividend or make a distribution with respect to
its capital stock in shares of its Common Stock, (B) subdivide its
outstanding Common Stock into a greater number of shares, (C) combine
its outstanding Common Stock into a smaller number of shares or (D)
issue any shares of capital stock by reclassification of its Common
Stock, the Conversion Ratio in effect at the opening of business on
the day next following the date fixed for the determination of
shareholders entitled to receive such dividend or distribution or at
the opening of business on the day following the day on which such
subdivision, combination or reclassification becomes effective, as the
case may be, shall be adjusted so that the holder of any Preferred
Shares thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock that such holder would
have owned or have been entitled to receive after the happening of any
of the events described above had such Preferred Shares been converted
immediately prior to the record date in the case of a dividend or
distribution or the effective date in the case of a subdivision,
combination or reclassification. An adjustment made pursuant to this
subparagraph (i) shall become effective immediately after the opening
of business on the day next following the record date (except as
provided in paragraph (h) below) in the case of a dividend or
distribution and shall become effective immediately after the opening
of business on the day next following the effective date in the case
of a subdivision, combination or reclassification.
(ii) If the Corporation shall, while any Preferred Shares are
outstanding, issue rights, options or warrants to all holders of
Common Stock entitling them (for a period expiring within 45 days
after the record date mentioned below) to subscribe for or purchase
Common Stock at a price per share less than the Current Market Price
per share of Common Stock on the record date for the determination of
shareholders entitled to receive such rights or warrants, then the
Conversion Ratio in effect at the opening of business on the day next
following such record date shall be adjusted to equal the ratio
determined by multiplying (I) the Conversion Ratio in effect
immediately prior to the
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opening of business on the day next following the date fixed for such
determination by (II) a fraction, the numerator of which shall be the
sum of (A) the number of shares of Common Stock outstanding on the
close of business on the date fixed for such determination and (B) the
number of shares that the aggregate proceeds to the Corporation from
the exercise of such rights or warrants for Common Stock would
purchase at such Current Market Price, and the denominator of which
shall be the sum of (A) the number of Shares of Common Stock
outstanding on the close of business on the date fixed for such
determination and (B) the number of additional shares of Common Stock
offered for subscription or purchase pursuant to such rights or
warrants. Such adjustment shall become effective immediately after the
opening of business on the day next following such record date (except
as provided in paragraph (h) below). In determining whether any rights
or warrants entitle the holders of Common Stock to subscribe for or
purchase shares of Common Stock at less than such Current Market
Price, there shall be taken into account any consideration received by
the Corporation upon issuance and upon exercise of such rights or
warrants, the value of such consideration, if other than cash, to be
determined by the Board of Directors.
(iii) If the Corporation shall distribute to all holders of its
Common Stock any shares of capital stock of the Corporation (other
than Common Stock) or evidence of its indebtedness or assets
(excluding Regular Quarterly Dividends) or rights or warrants to
subscribe for or purchase any of its securities (excluding those
rights and warrants issued to all holders of Common Stock entitling
them for a period expiring within 45 days after the record date
referred to in subparagraph (ii) above to subscribe for or purchase
Common Stock, which rights and warrants are referred to in and treated
under subparagraph (ii) above) (any of the foregoing being hereinafter
in this subparagraph (iii) called the "Securities"), then in each such
case each holder of Preferred Shares shall receive concurrently with
the receipt by holders of the Common Stock the kind and amount of such
Securities that it would have owned or been entitled to receive had
such Preferred Shares been converted immediately prior to such
distribution or related record date, as the case may be.
(iv) Distribution of Cash. In case the Corporation shall pay or
make a dividend or other distribution on its Common Stock exclusively
in cash (excluding Regular Quarterly Dividends), each holder of
Preferred Shares shall receive concurrently with the receipt by
holders of the Common Stock the kind and amount of any such
distribution that it would have owned or been entitled to receive had
such Preferred Shares been converted immediately prior to such
distribution or related record date, as the case may be.
(v) No adjustment in the Conversion Ratio shall be required
unless such adjustment would require a cumulative increase or decrease
of at least 1%; provided, however, that any adjustments that by reason
of this subparagraph (v) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment until
made. Notwithstanding any other provisions of this Section 7, the
Corporation shall not be required to make any adjustment of the
Conversion Ratio for (x) the issuance of any shares of Common Stock
pursuant to any plan providing for the reinvestment of dividends or
interest payable on securities of the Corporation and the investment
of additional optional amounts in shares of Common Stock pursuant to
any plan providing for the reinvestment of dividends or interest
payable on securities of the Corporation and the investment of
additional optional amounts in shares of Common Stock under such plan,
(y) the issuance of contingent rights issued pursuant to a
stockholders' rights plan adopted by the Corporation pursuant to which
the acquisition by any third party of a specified percentage of Common
Stock triggers the exercisability of such rights to purchase Common
Stock, for so long as no event has occurred triggering such rights to
exercise, and (z) the issuance of Common Stock or options to purchase
Common Stock pursuant to an employee benefit plan. All calculations
under this Section 7 shall be made to the nearest cent (with $.005
being rounded upward) or to the nearest one-tenth of a share (with .05
of a share being rounded upward), as the case may be. Anything in this
paragraph (d) to the contrary notwithstanding, the Corporation shall
be entitled, to the extent permitted by law, to make such reductions
in the Conversion Ratio, in addition to those required by this
paragraph (d), as it in its discretion shall determine to be advisable
in order that any stock dividends, subdivision of shares,
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<PAGE> 22
reclassification or combination of shares, distribution of rights or
warrants to purchase stock or securities, or a distribution of other
assets (other than cash dividends) hereafter made by the Corporation
to its shareholders shall not be taxable, or if that is not possible,
to diminish any income taxes that are otherwise payable because of
such event.
(e) Adjustment of Conversion Ratio Upon Certain Transactions. If the
Corporation shall be a party to any transaction (including, without
limitation, a merger, consolidation, statutory share exchange, self tender
offer for all or substantially all shares of Common Stock, sale of all or
substantially all of the Corporation's assets or recapitalization of the
Common Stock and excluding any transaction as to which subparagraph (d)(i)
of this Section 7 applies) (each of the foregoing being referred to herein
as a "Transaction"), in each case as a result of which shares of Common
Stock shall be converted into the right to receive stock, securities or
other property (including cash or any combination thereof), each Preferred
Share that is not converted into the right to receive stock, securities or
other property in connection with such Transaction shall thereafter be
convertible into the kind and amount of shares of stock, securities and
other property (including cash or any combination thereof) receivable upon
the consummation of such Transaction by a holder of that number of shares
of Common Stock into which one Preferred Share was convertible immediately
prior to such Transaction, assuming such holder of Common Stock (i) is not
a person with which the Corporation consolidated or into which the
Corporation merged or which merged into the Corporation or to which such
sale or transfer was made, as the case may be (a "Constituent Person"), or
an affiliate of a Constituent Person or (ii) failed to exercise his or her
rights of election, if any, as to the kind or amount of stock, securities
and other property (including cash) receivable upon such Transaction
(provided that if the kind or amount of stock, securities and other
property (including cash) receivable upon such Transaction is not the same
for each share of Common Stock of the Corporation held immediately prior
to such Transaction by other than a Constituent Person or an affiliate
thereof and in respect of which such rights of election shall not have
been exercised ("Non-electing Share"), then for the purpose of this
paragraph (e) the kind and amount of stock, securities and other property
(including cash) receivable upon such Transaction by each Non-electing
Share shall be deemed to be the kind and amount so receivable per share by
a plurality of the Non-electing Shares). The Corporation shall not be a
party to any Transaction unless the terms of such Transaction are
consistent with the provisions of this paragraph (e), and it shall not
consent or agree to the occurrence of any Transaction until the
Corporation has entered into an agreement with the successor or purchasing
entity, as the case may be, for the benefit of the holders of the
Preferred Shares that will contain provisions enabling the holders of the
Preferred Shares that remain outstanding after such Transaction to convert
into the consideration received by holders of Common Stock at the
Conversion Ratio in effect immediately prior to such Transaction. The
provisions of this paragraph (e) shall similarly apply to successive
Transactions.
(f) Notice of Certain Events. If:
(i) the Corporation shall declare a dividend (or any other
distribution) on the Common Stock (other than the Regular Quarterly
Dividend); or
(ii) the Corporation shall authorize the granting to all
holders of the Common Stock of rights or warrants to subscribe for or
purchase any shares of any class or any other rights or warrants; or
(iii) there shall be any reclassification of the Common Stock
(other than any event to which subparagraph (d)(i) of this Section 7
applies) or any consolidation or merger to which the Corporation is a
party and for which approval of any shareholders of the Corporation is
required, or a statutory share exchange, or self tender offer by the
Corporation for all or substantially all of its outstanding shares of
Common Stock or the sale or transfer of all or substantially all of
the assets of the Corporation as an entity (other than the
Corporation's current exchange offer with respect to its outstanding
8.375% Convertible Subordinated Debentures due 2001); or
(iv) there shall occur the involuntary or voluntary
liquidation, dissolution or winding up of the Corporation, then the
Corporation shall cause to be mailed to the holders of Preferred
Shares, at
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<PAGE> 23
the address as shown on the stock records of the Corporation, as
promptly as possible, but at least 15 Business Days prior to the
applicable date hereinafter specified, a notice stating (A) the date
on which a record is to be taken for the purpose of such dividend,
distribution or rights or warrants, or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to
be entitled to such dividend, distribution or rights or warrants are
to be determined or (B) the date on which such reclassification,
consolidation, merger, statutory share exchange, sale, transfer,
liquidation, dissolution or winding up is expected to become
effective, and the date as of which it is expected that holders of
Common Stock shall be entitled to exchange their shares of Common
Stock for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, statutory share exchange,
sale, transfer, liquidation, dissolution or winding up. Failure to
give or receive such notice or any defect therein shall not affect the
legality or validity of the proceedings described in this Section 7.
(g) Notice of Adjustment of Conversion Ratio. Whenever the Conversion
Ratio is adjusted as herein provided, the Corporation shall prepare a
notice of such adjustment of the Conversion Ratio setting forth the
adjusted Conversion Ratio and the effective date of such adjustment and
shall mail such notice of such adjustment of the Conversion Ratio to the
holders of the Preferred Shares at such holders' last address as shown on
the stock records of the Corporation.
(h) Timing of Adjustment. In any case in which paragraph (d) of this
Section 7 provides that an adjustment shall become effective on the day
next following the record date for an event, the Corporation may defer
until the occurrence of such event (A) issuing to the holder of Preferred
Shares converted after such record date and before the occurrence of such
event the additional shares of Common Stock issuable upon such conversion
by reason of the adjustment required by such event over and above the
Common Stock issuable upon such conversion before (giving effect to such
adjustment and (B) paying to Such holder any amount of cash in lieu of any
fraction pursuant to paragraph (c) of this Section 7.
(i) No Duplication of Adjustments. There shall be no adjustment of the
Conversion Ratio in case of the issuance of any stock of the Corporation
in a reorganization, acquisition or other similar transaction except as
specifically set forth in this Section 7. If any action or transaction
would require adjustment of the Conversion Ratio pursuant to more than one
paragraph of this Section 7, only one adjustment shall be made and such
adjustment shall be the amount of adjustment that has the highest absolute
value.
(j) Other Adjustments to Conversion Ratio. If the Corporation shall
take any action affecting the Common Stock, other than action described in
this Section 7, that would materially adversely affect the conversion
rights of the holders of the Preferred Shares or the value of such
conversion rights, the Conversion Ratio for the Preferred Shares may be
adjusted, to the extent permitted by law, in such manner, if any, and at
such time, as the Board of Directors, in its sole discretion, may
determine to be equitable in the circumstances.
(k) Reservation, Validity, Listing and Securities Law Compliance With
Respect to Shares of Common Stock.
(i) The Corporation covenants that it will at all times
reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued shares of Common Stock for
the purpose of effecting conversion of the Preferred Shares, the full
number of shares of Common Stock deliverable upon the conversion of
all outstanding Preferred Shares not therefore converted. Before
taking any action which would cause an adjustment in the Conversion
Ratio such that Common Stock issuable upon the conversion of Preferred
Shares would be issued below par value of the Common Stock, the
Corporation will take any corporate action which may, in the opinion
of its counsel, be reasonably necessary in order that the Corporation
may validly and legally issue fully-paid and nonassessable shares of
Common Stock at such adjusted Conversion Ratio.
(ii) The Corporation covenants that any shares of Common Stock
issued upon the conversion of the Preferred Shares shall be validly
issued, fully paid and non-assessable.
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(iii) The Corporation shall endeavor to list the shares of
Common Stock required to be delivered upon conversion of the Preferred
Shares, prior to such delivery, upon each national securities
exchange, if any, upon which the outstanding Common Stock is listed at
the time of such delivery.
(iv) Prior to the delivery of any securities that the
Corporation shall be obligated to deliver upon conversion of the
Preferred Shares, the Corporation shall endeavor to comply with all
federal and state laws and regulations thereunder requiring the
registration of such securities with, or any approval of or consent to
the delivery thereof, by any governmental authority.
(l) Transfer Taxes. The Corporation will pay any and all documentary
stamp or similar issue or transfer taxes payable in respect of the issue
or delivery of shares of Common Stock or other securities or property on
conversion of the Preferred Shares pursuant hereto; provided, however,
that the Corporation shall not be required to pay any tax that may be
payable in respect of any transfer involved in the issue or delivery of
shares of Common Stock or other securities or property in a name other
than that of the holder of the Preferred Shares to be converted, and no
such issue or delivery shall be made unless and until the person
requesting such issue or delivery has paid to the Corporation the amount
of any such tax or established, to the reasonable satisfaction of the
Corporation, that such tax has been paid.
(m) Certain Defined Terms. The following definitions shall apply to
terms used in this Section 7:
(1) "CURRENT MARKET PRICE". For the purpose of any computation
under this Section 7, the Current Market Price per share of Common
Stock on any date in question shall be deemed to be the average of the
daily closing prices for the five consecutive Trading Days preceding
such date in question; provided, however, that if another event occurs
that would require an adjustment pursuant to subsection (f) through
(j), inclusive, the Board may make such adjustments to the closing
prices during such five Trading Day period as it deems appropriate to
effectuate the intent of the adjustments in this Section 7, in which
case any such determination by the Board shall be set forth in a
resolution of the Board and shall be conclusive.
(2) "TRADING DAY" shall mean a day on which Preferred Shares
are traded on the national Preferred Shares exchange or quotation
system used to determine the Closing Price.
(8) Preferred Shares -- Change of Control and Put Option.
(a) Subject to the last sentence of this Section 8(a), if a
Change of Control or Put Event occurs, in either case as a result of
the voluntary (and not legally compelled) act, omission or
participation of the Corporation, which act, omission or participation
the Corporation had the discretion under existing laws and regulations
to refrain from, then each holder of Preferred Shares will have the
right to require that the Corporation, to the extent it shall have
Legally Available Funds therefor, to redeem such holder's 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 (the "Put Payment"), to the
date of purchase or the date payment is made available (the "Put
Date") pursuant to the offer described in subsection (b) below (the
"Put Offer"). If a Change of Control or Put Event occurs that is not
the result of such voluntary act, omission or participation of the
Corporation, the Corporation may elect not to make the foregoing Put
Payment by not commencing the Put Offer on the Put Date, in which
event the Conversion Ratio shall be revised to the greater of (i) 75%
of the then current Conversion Ratio so that each 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 Current Market Price (as defined in
Section 7 hereof) and the denominator of which is $19.905.
Notwithstanding the foregoing, if the Securities and Exchange
Commission or its staff (collectively, the "SEC"), by written
communication to the Corporation, indicates that the provisions of the
first sentence of this Section 8(a) would preclude the Corporation
from treating the Preferred Shares as equity on its financial
statements, then those events constituting either a Change of Control
Event or Put Event for which the SEC objects to the holder of
Preferred Shares having a cash redemption right
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shall, instead, be covered by the Conversion Ratio revision
alternative set forth in the second sentence of this Section 8(a).
(b) Within 15 days following the Company becoming aware that
an event has occurred that has resulted in any Change of Control or
Put Event, the Corporation shall mail a notice to each holder of
Preferred Shares, at such holder's address appearing in the records of
the Corporation, stating (i) that a Change of Control or Put Event, as
applicable, has occurred and that such holder has the right to require
the Corporation to redeem such holder's Preferred Shares in cash, (ii)
the date of redemption (which shall be a Business Day, no earlier than
30 days and no later than 60 days from the date such notice is mailed,
or such later date as may be necessary to comply with the requirements
of applicable law including the Exchange Act), (iii) the redemption
price for the redemption, and (iv) the instructions determined by the
Corporation, consistent with this subsection, that a holder must
follow in order to have its Preferred Shares redeemed.
(c) On the Put Date, the Corporation will, to the extent
lawful, accept for payment Preferred Shares or portions thereof
tendered pursuant to the Put Offer and pay an amount equal to the Put
Payment in respect of all Preferred Shares or portions thereof so
tendered. The Corporation shall promptly mail to each holder of
Preferred Shares to be redeemed the Put Payment for such Preferred
Shares.
(d) Notwithstanding anything else herein, to the extent they
are applicable to any Change of Control Offer, the Corporation will
comply with Section 14 of the Exchange Act and the provisions of
Regulation 14D and 14E and any other tender offer rules under the
Exchange Act and any other federal and state securities laws, rules
and regulations and all-time periods and requirements shall be
adjusted accordingly.
(e) "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 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 Corporation; (ii) other than with respect to the
election, resignation or replacement of the Preferred Directors,
during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the
Corporation (together with any new directors whose election by such
Board of Directors or whose nomination for election by the
shareholders of the Corporation was approved by a vote of 66 2/3% of
the directors of the Corporation (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 Corporation then in office; and (iii) (A) the
Corporation 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
Corporation, which in either event (A) or (B) is pursuant to a
transaction in which the outstanding voting capital stock of the
Corporation is reclassified or changed into or exchanged for cash,
securities or other property (unless the holders of the voting capital
stock of the Corporation immediately prior to such transaction hold
immediately after such transaction more than 50% of the outstanding
voting capital stock of the Successor Entity.
(f) "Put Event" means each occurrence of any of (i) the
Corporation 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 Preferred Shares; (ii) the Corporation
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,
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or unreasonable failure to act, by the holders of Preferred Shares; or
(iii) the Corporation 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 Corporation's Annual Report on Form
10-K, as amended, as filed with the Securities and Exchange Commission
for the year ended December 31, 1995.
(9) Preferred Shares -- Restrictions on Ownership Transfer to
Preserve Tax Benefit.
(a) The Preferred Shares shall be governed by the restrictions
on ownership and transfer set forth in subsection F of Article V of
the Charter.
(b) So long as Preferred Shares are outstanding, without the
consent of the holders of at least a majority of the Preferred Shares
at the time outstanding, given in person or by proxy, at a meeting
called for that purpose at which the holders of the Preferred Shares
shall vote separately as a class, or by unanimous written consent in
writing of all holders of the Preferred Shares, the Corporation will
not effect or validate any amendment, alteration or repeal of any
Section of the Charter, so as to increase in any respect the
restrictions or limitations on ownership applicable to the Preferred
Shares pursuant thereto.
(10) Miscellaneous.
(a) Exchange or Market Transactions. Nothing in Section 9 or
this Section 10 shall preclude the settlement of any transaction
entered into through the facilities of the NYSE or any other national
securities exchange or automated inter-dealer quotation system. The
shares that are the subject of such transaction shall continue to be
subject to the terms of Article V after such settlement.
(b) Severability. If any provision of Section 9 or this
Section 10 or any application of any such provision is determined to
be invalid by any federal or state court having jurisdiction over the
issues, the validity of the remaining provisions shall not be affected
and other applications of such provisions shall be affected only to
the extent necessary to comply with the determination of such court.
(c) Mailings. All mailings shall be made by overnight United
States mail or by another overnight courier service.
(d) Reacquired Shares. Any Preferred Shares purchased or
otherwise acquired by the Corporation in any matter whatsoever shall
be retired and canceled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be classified again and
reissued as part of a new series or class of Preferred Stock to be
created by the Board pursuant to its power contained in the Charter,
subject to conditions and restrictions on issuance set forth herein.
B. Class C Preferred Stock.
(1) Designation and Amount. The shares of such class of Preferred
Stock shall be designated as "Class C Junior Participating Cumulative
Preferred Stock" and the number of shares constituting such class so
designated shall be 300,000 (the "Class C Preferred Stock"). Such number
of shares may be increased or decreased by resolution of the Board of
Directors and as otherwise provided hereunder; provided, however, that no
decrease shall reduce the number of shares of Class C Preferred Stock to a
number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options,
rights or warrants or upon the conversion of any outstanding securities
issued by the Corporation convertible into Class C Preferred Stock.
(2) Dividends and Distributions.
(a) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Class C Preferred Stock with respect to dividends, the
holders of shares of Class C Preferred Stock, in preference to the
holders of shares of Common
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Stock, par value $.01 per share (the "Common Stock"), of the
Corporation, and of any other junior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable
in cash on the first day of March, June, September and December in
each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a
share of Class C Preferred Stock, in an amount per share (rounded to
the nearest cent) equal to the greater of (i) $.25 per share ($1.00
per annum) or (ii) subject to the provision for adjustment hereinafter
set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a
dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock since the immediately preceding Quarterly
Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a
share of Class C Preferred Stock. In the event the Corporation shall
at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such event the amount to which the holder of each
share of Class C Preferred Stock was entitled immediately prior to
such event under clause (ii) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares
of Common Stock that were outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution
on the Class C Preferred Stock as provided in paragraph (a) of this
Section 2 immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided, however, that, in the event no dividend or
distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $.25 per
share ($1.00 per annum) on the Class C Preferred Stock shall
nevertheless be payable on such subsequent Quarterly Dividend Payment
Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Class C Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares,
unless the date of issue of such shares is prior to the record date
for the first Quarterly Dividend Payment Date, in which event
dividends on such shares shall begin to accrue from the date of issue
of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination
of holders of shares of Class C Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall cumulate but shall not bear interest. Dividends
paid on the shares of Class C Preferred Stock in an amount less than
the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors
may fix a record date for the determination of holders of shares of
Class C Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more
than 60 days prior to the date fixed for the payment thereof.
(3) Voting Rights. The holders of shares of Class C Preferred
Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set
forth, each share of Class C Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
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consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to which
holders of shares of Series C Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided herein, in the Charter, in
any other Articles Supplementary creating a series of Preferred Stock
or any similar stock or by law, the holders of shares of Class C
Preferred Stock and the holders of shares of Common Stock and any
other capital stock of the Corporation having general voting rights
shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(c) Except as set forth herein, or as otherwise provided by
law, holders of Class C Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
(4) Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Class C Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not authorized or declared, on
shares of Class C Preferred Stock outstanding shall have been paid in
full, the Corporation shall not, directly or indirectly:
(i) authorize, declare or pay dividends on, or make any
other distributions with respect to any shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Class C Preferred Stock;
(ii) authorize, declare or pay dividends on, or make any
other distributions with respect to any shares of stock ranking
on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Class C Preferred Stock,
except dividends paid ratably on the Class C Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders
of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Class C Preferred Stock, provided that the Corporation may at
any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Class C Preferred
Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Class C Preferred Stock, or any
shares of stock ranking on a parity with the Class C Preferred
Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith
will result in fair and equitable treatment among the respective
series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration,
directly or indirectly, any shares of stock of the Corporation
unless the Corporation could, under paragraph (a) of this Section
4, purchase or otherwise acquire such shares at such time and in
such manner.
(5) Reacquired Shares. Any shares of Class C Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition
28
<PAGE> 29
thereof. All such shares shall upon their cancellation become authorized
but unissued shares of Preferred Stock and may be reissued as part of a
new series of Preferred Stock subject to the conditions and restrictions
on issuance set forth herein, in the Charter, in any other Articles
Supplementary creating a series of Preferred Stock or any similar stock or
as otherwise required by law.
(6) Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be
made to: (i) the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Class C
Preferred Stock unless, prior thereto, the holders of shares of Class C
Preferred Stock shall have received the greater of (A) $100.00 per share
($1.00 per one one-hundredth of a share), plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, or (B) an aggregate amount per share, subject
to the provision for adjustment hereinafter set forth, equal to 100 times
the aggregate amount to be distributed per share to holders of shares of
Common Stock; or (ii) the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up)
with the Class C Preferred Stock, except distributions made ratably on the
Class C Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon
such liquidation, dissolution or winding up. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable
in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such event the aggregate amount to which each holder of a
share of Class C Preferred Stock was entitled immediately prior to such
event under the proviso in clause (i) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of which
is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(7) Consolidation, Merger or Other. In the event the Corporation shall
enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property or otherwise changed,
then in any such event each share of Class C Preferred Stock shall at the
same time be similarly exchanged or changed into an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such event the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Class C Preferred
Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event, and the denominator of which is the number
of shares of Common Stock that were outstanding immediately prior to such
event.
(8) No Redemption. The shares of Class C Preferred Stock shall not be
redeemable.
(9) Rank. The Class C Preferred Stock shall rank, with respect to the
payment of dividends and the distribution of assets, junior to all series
or classes of the Corporation's Preferred Stock whether issued before or
after the issuance of the Class C Preferred Stock.
(10) Amendment. The Charter shall not be amended in any manner that
would materially alter or change the powers, preferences or special rights
of the Class C Preferred Stock, as set forth herein, so as to affect them
adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Class C Preferred Stock, voting
together as a single class.
29
<PAGE> 30
THIRD: The foregoing Amendment and Restatement of the Charter of the
Corporation (the "Restated Articles") as hereinabove set forth have been duly
authorized and approved by a majority of the Board of Directors and approved by
the stockholders of the Corporation as required by the Maryland General
Corporation Law.
FOURTH: The current address of the principal office of the Corporation in
the State of Maryland is as set forth in Article IV of the foregoing Restated
Articles.
FIFTH: The name and address of the Corporation's current resident agent is
as set forth in Article IV of the foregoing Restated Articles.
SIXTH: The number of directors of the Corporation is eight, and the names
of those currently serving as directors are: Glenn L. Carpenter, Keith W.
Renken, Royce B. McKinley, James E. Quigley, 3rd, Carl C. Gregory, III, Peter L.
Eppinga, John F. Kooken and Robert E. Morgan.
SEVENTH: (a) Pursuant to the authority expressly vested in the Board of
Directors of the Corporation by the Charter of the Corporation, the Board of
Directors divided and classified 1,351,351 shares of the Preferred Stock of the
Corporation into a class designated Class A Senior Cumulative Convertible
Preferred Stock (the "Class A Preferred Stock") and provided for the issuance of
such Class A Preferred Stock. The terms of the Class A Preferred Stock,
including the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, were set forth in Articles Supplementary filed with
the Maryland State Department of Assessments and Taxation ("SDAT") on April 3,
1997. Pursuant to the foregoing Restated Articles, the Corporation has amended
certain terms and conditions of the Class A Preferred Stock. Therefore, after
the foregoing Restated Articles become effective, the preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the Class A Preferred
Stock shall be as set forth in the description of the Class A Preferred Stock
contained in Article XIV of the foregoing Restated Articles and the Articles
Supplementary specifically referenced above shall be of no further force and
effect.
(b) Pursuant to the authority expressly vested in the Board of Directors
of the Corporation by the Charter of the Corporation, the Board of Directors
divided and classified 1,411,765 shares of the Preferred Stock of the
Corporation into a class designated Class B Senior Cumulative Convertible
Preferred Stock (the "Class B Preferred Stock") and provided for the issuance of
such Class B Preferred Stock. The terms of the Class B Preferred Stock,
including the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, were set forth in Articles Supplementary filed with
SDAT on October 21, 1997. Pursuant to the foregoing Restated Articles and
effective upon the filing of these Restated Articles with SDAT, the Corporation
hereby reclassifies each share of Class B Preferred Stock as one (1) additional
share of Class A Preferred Stock; the preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of such Class A Preferred Stock as set forth
in the description of the Class A Preferred Stock contained in Article XIV of
the foregoing Restated Articles. Therefore, after the foregoing Restated
Articles become effective, the Articles Supplementary specifically referenced
above shall be of no further force and effect.
(c) Pursuant to the authority expressly vested in the Board of Directors
of the Corporation by the Charter of the Corporation, the Board of Directors
divided and classified 300,000 shares of the Preferred Stock of the Corporation
into a class designated Class C Junior Participating Cumulative Preferred Stock
(the "Class C Preferred Stock") and provided for the issuance of such class C
Preferred Stock. The terms of the Class C Preferred Stock, including the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption, were set forth in Articles Supplementary filed with SDAT on December
24, 1997. The foregoing Restated Articles include (and restate without
amendment) the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the Class C Preferred Stock in the description of
the Class C Preferred Stock contained in Article XIV. Therefore, after the
foregoing Restated Articles become effective, the above-referenced Articles
Supplementary shall be of no further force and effect.
30
<PAGE> 31
EIGHTH: (a) Immediately before these Articles of Amendment and Restatement
become effective, the total number of shares of stock of all classes which the
Corporation has authority to issue is Sixty Million (60,000,000) shares of
capital stock, having an aggregate par value of Six Hundred Thousand Dollars
($600,000), of which (i) Twenty-Five Million (25,000,000) shares are Common
Stock, par value $.01 per share, (ii) Thirty Million (30,000,000) shares are
Excess Stock, par value $.01 per share and (iii) Five Million (5,000,000) shares
are Preferred Stock, par value $.01 per share.
(b) As amended by these Articles of Amendment and Restatement, the total
number of shares of stock of all classes which the Corporation has authority to
issue is One Hundred and Ten Million (110,000,000) shares of capital stock,
having an aggregate par value of One Million One Hundred Thousand Dollars
($1,100,000), of which (i) One Hundred Million (100,000,000) shares are Common
Stock, par value $.01 per share and (ii) Ten Million (10,000,000) shares are
Preferred Stock, par value $.01 per share.
(c) Before the Articles of Amendment and Restatement become effective, the
aggregate par value of all shares of stock of all classes of the Corporation is
Six Hundred Thousand Dollars ($600,000.00). After the Articles of Amendment and
Restatement become effective, the aggregate par value of all shares of stock of
all classes of the Corporation shall be One Million One Hundred Thousand Dollars
($1,100,000).
31
<PAGE> 32
IN WITNESS WHEREOF. Pacific Gulf Properties Inc. has caused these presents
to be signed in its name and on its behalf by its President and Chief Executive
Officer and witnessed by is Assistant Secretary on June , 1998.
WITNESS:
/s/ Cindy Smith /s/ Glenn L. Carpenter
- ----------------------------- --------------------------------------
Cindy Smith Glenn L. Carpenter
Assistant Secretary President and Chief Executive Officer
The undersigned, President of Pacific Gulf Properties Inc., who executed
on behalf of the Corporation the foregoing Articles of Amendment and Restatement
of which this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles of Amendment and Restatement
to be the corporate act of said corporation and hereby certifies that to the
best of his knowledge, information and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in all
material respects under penalties of perjury.
/s/ Glenn L. Carpenter
--------------------------------------
Glenn L. Carpenter
President and Chief Executive Officer
32
<PAGE> 1
EXHIBIT 5.1
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH
36 SOUTH CHARLES STREET
BALTIMORE, MARYLAND 21201-3018
410-539-2530
FAX: 410-539-0489
WASHINGTON
NEW YORK
PHILADELPHIA
EASTON
June 29, 1998
Pacific Gulf Properties, Inc.
4220 Von Karman, Second Floor
Newport Beach, California 92660
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as Maryland counsel to Pacific Gulf Properties Inc., a
Maryland corporation and a self-administered and self-managed equity real estate
investment trust (the "Company"), in connection with the issuance and sale by
the Company of 211,921 shares of common stock of the Company (the "Common
Stock"), $.01 par value per share (the "Shares") pursuant to a Registration
Statement on Form S-3, filed by the Company with the Securities and Exchange
Commission on May 14, 1998 (together with and any post-effective amendments, the
"Registration Statement") and the Prospectus relating thereto dated April 23,
1998 (the "Prospectus").
In this capacity, we have reviewed the Charter documents and By-laws of the
Company, the Registration Statement and the Prospectus. In addition, we have
examined originals or copies, certified or otherwise identified to our
satisfaction, of such other documents, corporate records, certificates or public
officials and other instruments as we have deemed necessary for the purpose of
rendering this opinion. In such examination, we have assumed, without
independent investigation, the genuineness of all signatures, the legal capacity
of all individuals who have executed any of the aforesaid documents, the
authenticity of all documents submitted to us as originals and the conformity
with originals of all documents submitted to us as copies (and the authenticity
of the originals of such copies), that there has been no substantial change in
the final documents from documents submitted to us as drafts and that all public
records reviewed are accurate and complete. As to factual matters, we have
relied upon the above-referenced certificates of officers of the Company and
have not independently verified the matters stated therein. This opinion is also
based upon the assumption that the Registration Statement has become effective
under the Act, and that the Prospectus was filed with the Commission pursuant to
Rule 424(b) under the Securities Act.
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that the Shares have been
duly authorized for issuance by all necessary corporate action on the part of
the company and, upon payment of the consideration specified in the Registration
Statement and the Prospectus relating thereto, the issuance and delivery of the
Shares in accordance with the terms therefor and the countersigning of the
certificate or certificates representing the Shares by
<PAGE> 2
Piper & Marbury L.L.P.
Pacific Gulf Properties, Inc.
June 29, 1998
Page 2
a duly authorized officer of the registrar for the Company's Common Stock, the
Shares will be validly issued, fully paid and nonassessable.
The opinions expressed herein: (i) are limited to the matters set forth
herein, and no other opinion should be inferred beyond the matters expressly
stated; (ii) are subject to the qualification that we express no opinion as to
the laws of any jurisdiction other than the laws of the State of Maryland; and
(iii) concern only the effect of the laws (excluding the principles of conflict
of laws of the State of Maryland as currently in effect. We assume no obligation
to supplement this opinion if any applicable laws change after the date hereof
or if we become aware of any facts that might change the opinion expressed
herein after the date hereof.
In addition, the opinions expressed herein are for the benefit of the
persons to whom this opinion is addressed and, without our prior written
consent, may not be quoted in whole or in part or otherwise referred to in any
legal opinion, document, or other report, and may not be furnished to any person
or entity, except that Gibson, Dunn & Crutcher LLP is authorized to rely on this
opinion in rendering any opinion to the Company which is to be filed as an
exhibit to the Registration Statement. In addition, we hereby consent to the
filing of this opinion as Exhibit 5 to the Registration Statement and to the
reference to our firm in the Registration Statement and the Prospectus relating
thereto.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE> 1
EXHIBIT 8.1
[Letterhead of Gibson, Dunn & Crutcher LLP]
July 2, 1998
(213) 229-7000 C 72764-00023
Pacific Gulf Properties Inc.
4220 Von Karman Avenue, Second Floor
Newport Beach, California 92660-2002
Re: Pacific Gulf Properties Inc.
Gentlemen:
We have acted as special tax counsel to Pacific Gulf Properties Inc., a
Maryland corporation (the "Company"), in connection with that certain
Registration Statement filed on Form S-3 with the Securities and Exchange
Commission (File No. 333-52829)(the "Registration Statement"), covering the
offering and sale of 211,887 shares of common stock of the Company from time to
time by certain stockholders of the Company, pursuant to the Prospectus forming
a part thereof, as amended as of the date hereof (the "Prospectus"). You have
requested our opinion concerning certain of the federal income tax
considerations described in the Prospectus.
In connection with rendering this opinion, we have made such legal and
factual examinations and inquiries, including an examination of originals or
copies certified or otherwise identified to our satisfaction of such documents,
corporate records and other instruments as we have deemed necessary or
appropriate for purposes of this opinion. In our examination of such documents,
corporate records and other instruments, we have assumed the authenticity of
original documents, the conformity to the originals of any copies, the
genuineness of signatures, and the legal capacity of signatories. We have also
assumed that all parties to such documents have acted, and will act, in
accordance with the terms of such documents. With your permission we also have
relied upon and assumed the accuracy of representations made by the Company as
to factual matters relating to the Company's organization, operations, income,
assets, distributions and stock ownership, including those set forth in an
Officer's Certificate of even date herewith delivered to us for the purpose of
rendering this opinion, and the accuracy of the representations and statements
in the Registration Statement regarding the Company and its operations (and that
any representations referred to above that are based on any person's knowledge
or belief are accurate without regard to such person's knowledge or belief).
<PAGE> 2
Pacific Gulf Properties Inc.
July 2, 1998
Page 2
We are opining herein only as to the effect of the federal income tax
laws of the United States and we express no opinion with respect to the
applicability or effect of other federal laws, the laws of any other
jurisdiction or as to any matters of municipal law or the laws of any other
local agencies within any state.
In light of the foregoing, it is our opinion that, based on the facts,
assumptions and representations of the Company referred to above, as of the date
hereof the information in the Prospectus under the caption "Federal Income Tax
Considerations," to the extent that it constitutes matters of law, summaries of
legal matters or legal conclusions, has been reviewed by us and is accurate in
all material respects.
This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all as of the date
hereof. We caution that such authorities are subject to change and that any such
change may be applied retroactively. Also, any variation or difference in the
facts from the representations and other facts assumed or relied upon as
described above may affect the conclusion stated herein. The Company's
qualification and taxation as a real estate investment trust depends upon the
Company's having met and continuing to meet -- through annual operating results,
distribution levels and diversity of stock ownership -- the various
qualification tests imposed under the Code. Accordingly, no assurance can be
given that the actual results of the Company's operations, distribution levels
or diversity of stock ownership for any one taxable year have satisfied or will
satisfy such requirements.
This opinion is being rendered to you solely in connection with the
transactions set forth in the Registration Statement. We hereby consent to the
reference to this firm under the heading "Legal Matters" in the Prospectus.
Very truly yours,
GIBSON, DUNN & CRUTCHER LLP
PSI/DLF
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (No. 333-52829 on Form S-3), Amendment No. 1 to the
Registration Statement (No. 333-52829 on Form S-3), dated July 2, 1998 and
related Prospectus of Pacific Gulf Properties Inc. for the registration of
211,921 shares of Company's common stock. We also consent to the incorporation
by reference therein of our report dated February 13, 1998, with respect to the
consolidated financial statements and schedule of Pacific Gulf Properties Inc.
included in its Annual Report (Form 10-K) for the year December 31, 1997 filed
with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Newport Beach, California
July 2, 1998
