SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-3
Registration Statement
Under the
Securities Act of 1933
HIGHWOODS PROPERTIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 56-1871668
(State of Incorporation) (I.R.S. Employer
Identification No.)
3100 Smoketree Court, Suite 600
Raleigh, North Carolina 27604
(919) 872-4924
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Copies to:
Ronald P. Gibson, President Brad S. Markoff
Highwoods Properties, Inc. Smith Helms Mulliss & Moore, L.L.P.
3100 Smoketree Court, Suite 600 316 W. Edenton Street
Raleigh, North Carolina 27604 Raleigh, North Carolina 27603
(919) 872-4924 (919) 755-8700
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
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 being registered 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, 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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Offering Price Per Unit Aggregate Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock 265,376 $27.25 $7,231,496 $2,494
</TABLE>
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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SUBJECT TO COMPLETION
Preliminary Prospectus Dated , 1996
PROSPECTUS
265,376 Shares
HIGHWOODS PROPERTIES, INC.
COMMON STOCK
(par value $.01 per share)
This Prospectus relates to the possible issuance by Highwoods
Properties, Inc. (the "Company") of up to 265,376 shares (the "Redemption
Shares") of common stock, par value $.01 per share (the "Common Stock"), if, and
to the extent that, holders of up to 265,376 units of partnership interest
("Units") in the Highwoods/Forsyth Limited Partnership (the "Operating
Partnership"), of which the Company is the sole general partner, exercise their
right to redeem such Units and the Company elects to satisfy such redemption
right through the issuance of Common Stock. The Units redeemable for Redemption
Shares registered hereby were issued in connection with private placements on
July 12, 1995 and July 20, 1995. The registration of the shares of Common Stock
to which this Prospectus relates does not necessarily mean that any of such
shares will be issued by the Company as Redemption Shares.
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "HIW." The Company will use its best efforts to cause the
Redemption Shares to be listed on the NYSE prior to their issuance. To insure
that the Company retains its status as a real estate investment trust ("REIT"),
ownership by any person is limited to 9.8% of the outstanding shares of Common
Stock, with certain exceptions.
See "Risk Factors" for certain factors relevant to an investment in the
Common Stock.
The Company will receive no proceeds upon the exchange of Units for
Common Stock; however, the Company has agreed to bear certain expenses of
registration of the Common Stock under the Federal and state securities laws.
The Company will acquire additional Units in the Operating Partnership in
exchange for any shares of Common Stock the Company issues to holders of Units
pursuant to this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or solicitation
of an offer to buy any securities other than the securities to which it relates
or any offer or solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
The date of this Prospectus is , 1996.
<PAGE>
AVAILABLE INFORMATION
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 statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied, at prescribed
rates, at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington, DC 25049, Room 1024, and at the Commission's New York regional
office at Seven World Trade Center, New York, New York 10048 and at the
Commission's Chicago regional office at Citicorp Center, 500 W. Madison Street,
Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates by writing to the public reference section of the Commission at
450 Fifth Street, N.W., Washington, DC 20549. The Common Stock of the Company is
listed on the NYSE, and such material can also be inspected and copied at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on
Form S-3 (the "Registration Statement") under the Securities Act, with respect
to the Common Stock registered hereby. This prospectus ("Prospectus"), which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and in the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is hereby made to such Registration Statement, exhibits
and schedules. The Registration Statement may be inspected without charge at, or
copies obtained upon payment of prescribed fees from, the Commission and its
regional offices at the locations listed above. Any statements contained herein
concerning a provision of any document are not necessarily complete, and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference and made a
part hereof:
a. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (as amended on Form 10-K/A on June 3, 1996
and June 18, 1996);
b. The description of the Common Stock of the Company included in
the Company's Registration Statement on Form 8-A, dated May
16, 1994;
c. The Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996 (as amended on Form 10-Q/A on June 3,
1996 and June 18, 1996); and
d. The Company's Current Reports on Form 8-K, dated July 12, 1995
(as amended on Form 8-K/A on September 6, 1995 and June 3,
1996), December 18, 1995, April 1, 1996 (as amended on Form
8-K/A on June 3, 1996 and June 18, 1996), and April 29, 1996
(as amended on Form 8-K/A on June 3, 1996 and June 18, 1996).
All documents filed by the Company with the Commission pursuant to
Sections 13(a) and 13(c) of the Exchange Act and any definitive proxy statements
so filed pursuant to Section 14 of the Exchange Act and any reports filed
pursuant to Section 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Common Stock shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from the date of filing of such documents. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which is incorporated by
reference herein modifies or supersedes such earlier statement. Any such
statements modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
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The Company will furnish without charge upon written or oral request to
each person to whom a copy of this Prospectus is delivered, including any
beneficial owner, a copy of any or all of the documents specifically
incorporated herein by reference (not including the exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents). Requests should be made to: Investor Relations, 3100 Smoketree
Court, Suite 600, Raleigh, North Carolina 27604.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
descriptions and the financial information and statements appearing elsewhere in
this Prospectus or incorporated herein by reference. Unless the context
otherwise requires, the term (i) "Company" or "Highwoods" shall mean Highwoods
Properties, Inc., predecessors of Highwoods Properties, Inc. and those entities
owned or controlled by Highwoods Properties, Inc., including Highwoods/Forsyth
Limited Partnership (the "Operating Partnership"), (ii) "Crocker" shall mean
Crocker Realty Trust, Inc., its predecessors and those entities owned or
controlled by Crocker, (iii) "Highwoods Properties" shall mean the 102 suburban
office and 98 industrial (including 62 service center) properties owned by the
Company, (iv) "Crocker Properties" shall mean the 58 suburban office and 12
service center properties owned by Crocker and (v) "Properties" shall mean the
Highwoods Properties and the Crocker Properties combined. All information about
the Properties as of March 31, 1996 excludes information about two Properties
placed in service by the Company after March 31, 1996.
The Company
The Company is a self-administered and self-managed real estate
investment trust ("REIT") that began operations through a predecessor in 1978.
At June 30, 1996, the Company owned a portfolio of 200 in-service office and
industrial properties (the "Properties"), together with approximately 215 acres
of land (the "Development Land") for future development. The Highwoods
Properties consist of 102 suburban office properties and 98 industrial
properties (including 62 service centers), located in Raleigh-Durham,
Winston-Salem, Greensboro and Charlotte, North Carolina, Nashville, Tennessee
and Richmond, Virginia. As of June 30, 1996, the Highwoods Properties consisted
of approximately 10.1 million square feet, which were approximately 93% leased
to approximately 1,100 tenants.
The Company conducts substantially all of its activities through, and
all of the Properties are held directly or indirectly by, Highwoods/Forsyth
Limited Partnership (the "Operating Partnership"). The Company is the sole
general partner of the Operating Partnership and as of June 30, 1996, owned 88%
of the partnership interests (the "Units") in the Operating Partnership. The
remaining Units are owned by limited partners (including certain officers and
directors of the Company). Each Unit may be redeemed by the holder thereof for
cash or, at the Company's option, one share (subject to certain adjustments) of
the Common Stock. With each such exchange, the number of Units owned by the
Company and, therefore, the Company's percentage interest in the Operating
Partnership, will increase.
The only businesses or assets of the Company which are not conducted
through the Operating Partnership are the brokerage and property management
business and related assets recently acquired on April 1, 1996 through the
Company's merger with Nashville, Tennessee-based Eakin & Smith, Inc.(the "Eakin
& Smith Transaction"). In addition to owning the Properties and the Development
Land, the Operating Partnership also provides services associated with leasing,
property management, real estate development, construction and miscellaneous
tenant services for the Properties as well as for third parties. The Company
conducts its third-party fee-based services through two subsidiaries of the
Operating Partnership, Highwoods Services, Inc. and Forsyth Properties Services,
Inc. (the "Service Companies"), and Forsyth-Carter Brokerage L.L.C.
("Forsyth-Carter Brokerage"), a joint venture with Carter Oncor International.
On April 29, 1996, the Company entered into a merger agreement (the
"Merger Agreement") with Crocker Realty Trust, Inc. ("Crocker") pursuant to
which the Company will acquire 58 suburban office properties and 12 service
center properties (the "Crocker Properties") located in 15 Southeastern markets
in Florida, North Carolina, South Carolina, Tennessee, Georgia, Virginia and
Alabama. The Crocker Properties encompass 5.7 million rentable square feet and,
at March 31, 1996, were 95% leased. Through the merger with Crocker (the
"Merger"), which is expected to occur in the third quarter of 1996, the Company
will establish itself as one of the largest real estate operating companies in
the Southeastern United States specializing in the ownership, management,
acquisition and development of suburban office and industrial properties. Under
the terms of the Merger Agreement, the Company will acquire all of the
outstanding capital stock of Crocker in exchange for a cash payment of $11.02
per share, subject to certain adjustments. Based on Crocker's 26,981,087 million
shares of outstanding capital stock at May 31, 1996, the purchase price will
total approximately $297 million. In addition, the Company will cash out certain
existing options and warrants to purchase Crocker common stock for an estimated
$4.2 million and assume approximately $240 million of Crocker's currently
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outstanding indebtedness, having a weighted average interest rate of 8.6%. In
connection with the Merger, the Company has also entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with certain stockholders of Crocker,
who together own approximately 83% of Crocker's outstanding common stock
(collectively, the "Crocker Selling Stockholders"), which obligates such
stockholders to sell their shares to the Company at a cash price of $11.02,
subject to the same adjustments as required under the Merger Agreement. The
approximately $247 million purchase price for such shares is part of the total
approximately $297 million purchase price for all of Crocker's outstanding
shares. The Merger Agreement and the Stock Purchase Agreement may be terminated
by the respective parties only in certain limited circumstances. In addition,
under the terms of the Merger Agreement, certain specified assets and
liabilities of Crocker will not be acquired by the Company. The Merger will be
accounted for by the Company under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations," as amended. Under this method of accounting, the purchase price
will be allocated to assets acquired and liabilities assumed based on their
estimated fair value at the closing date of the Merger.
The Company is a Maryland corporation that was incorporated in 1994.
The Operating Partnership is a North Carolina limited partnership formed in
1994. The Company's and the Operating Partnership's executive offices are
located at 3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604, and
their telephone number is (919) 872- 4924. The Company maintains offices in each
of its primary markets.
Risk Factors
Unit holders should carefully consider the matters discussed under
"Risk Factors" prior to making an investment decision regarding the redemption
of their Units.
Tax Status of the Company
The Company has elected to be taxed as a REIT under sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a
REIT, the Company generally will not be subject to federal income tax on net
income that it distributes to its stockholders. REITs are subject to a number of
organizational and operational requirements, including a requirement that they
currently distribute at least 95% of their taxable income. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to certain Federal,
state and local taxes on its income and property and to Federal income and
excise tax on its undistributed income. See "Certain Federal Tax
Considerations."
Securities to be Offered
This Prospectus relates to the possible issuance by the Company of up
to 265,376 Redemption Shares if, and to the extent that, holders of up to
265,376 Units exercise their right to redeem such Units and the Company elects
to satisfy such redemption right through the issuance of Common Stock. The
Company will receive no proceeds from the issuance of Redemption Shares.
The Units redeemable for Redemption Shares were issued in connection
with private placements on July 12, 1995 and July 20, 1995. All such Units were
issued in reliance on an exemption from registration under Section 4(2) of the
Securities Act.
All of the Units (other than those held by the Company) are subject to
certain agreements (the "Registration Rights Agreements") pursuant to which the
Company is required to register the shares issuable upon redemption of the
Units. The Registration Rights Agreements also prohibit the holders of Units
from disposing of (except in limited situations) such securities for a period of
one year from their issuance. The lock-up period for the Units redeemable for
the Redemption Shares offered by this registration statement ended July 12, 1996
and July 20, 1996.
Pursuant to the amended and restated agreement of limited partnership
of the Operating Partnership (the "Partnership Agreement"), each Unit (other
than Units held by the Company or those still subject to lock-up restrictions)
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may be tendered by its holder to the Operating Partnership for cash equal to the
fair market value of a share of Common Stock at the time of redemption.
Alternatively, at the option of the Company, as general partner of the Operating
Partnership, the Units may be redeemed for an equivalent number of shares of
Common Stock, and the Company will become the owner of the redeemed Units.
The Company anticipates that it generally will elect to acquire
directly Units tendered for redemption and to issue shares of Common Stock
pursuant to this Prospectus in exchange therefor rather than allowing the
Operating Partnership to pay cash. As a result, the Company may from time to
time issue up to 265,376 Redemption Shares upon the acquisition of Units
tendered for redemption. With each such redemption, the Company's interest in
the Operating Partnership will increase.
The Company will not receive any cash proceeds from the issuance of any
Redemption Shares. The registration of such shares does not necessarily mean
that any of such shares will be issued by the Company.
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RISK FACTORS
This Prospectus contains forward-looking statements. Actual results may
differ significantly from those projected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below under "Risk Factors." An investment in the Common Stock
involves various risks. Unit holders should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before seeking to redeem their Units.
Tax Consequences of Redemption of Units
The exercise by a Unit holder of the right to require the redemption of
his or her Units will be treated for tax purposes as a taxable sale or exchange
of the Units by the limited partner. The redeeming limited partner will be
treated as realizing proceeds in an amount equal to the sum of the cash (or
the value of the Common Stock) received in the exchange plus the amount of
the reduction in any Operating Partnership liabilities allocable to the
redeeming limited partner. It is possible that the amount of gain recognized
or even the tax liability resulting from such gain could exceed the amount
of cash or the value of Common Stock received upon such disposition. See
"Redemption of Units--Tax Consequences of Redemption." In addition, the
ability of the limited partner to raise cash through the sale of his or her
Common Stock to pay tax liabilities associated with the redemption of Units
may be limited because, as a result of fluctuations in the stock price, the
price the limited partner receives for such shares may not equal the value of
his or her Units at the time of redemption. See "--Effect on Common Stock Price
of Shares Available for Future Sale Upon Conversion of Units" below.
Potential Change in Investment Upon Redemption of Units
If a limited partner exercises the right to require the redemption of
his or her Units, such limited partner may receive, at the option of the Company
as general partner of the Operating Partnership, cash or shares of Common Stock
of the Company in exchange for the Units. If the limited partner receives cash,
the limited partner will no longer have any interest in the Company and will not
benefit from any subsequent increases in share price and will not receive any
future distributions from the Company (unless the limited partner currently owns
or acquires in the future additional shares of Common Stock or Units). If the
limited partner receives shares of Common Stock, the limited partner will become
a stockholder of the Company rather than a holder of Units in the Operating
Partnership. See "Redemption of Units--Comparison of Ownership of Units and
Shares of Common Stock."
Risks Associated with Rapid Growth
The Company is currently experiencing a period of rapid growth. After
giving effect to the Eakin & Smith Transaction and the Merger, the Company's
property portfolio will have increased from 193 properties, consisting of
approximately 9.4 million rentable square feet, to 270 properties, consisting of
approximately 15.9 million rentable square feet. The Company's ability to manage
its growth effectively will require it to integrate successfully the Eakin &
Smith management team and those members of the Crocker management team who will
continue with the Company after the Merger into its existing management
structure. In connection with the Eakin & Smith Transaction, the Company
retained all of Eakin & Smith's 46 employees. Furthermore, in connection with
the Merger, the Company expects to add approximately 50 administrative, property
management, leasing, marketing and maintenance personnel employed by Crocker.
There can be no assurance that the Company will be able to integrate these
additional employees into its organization or to manage the combined operations
effectively. Furthermore, the inability of the Company to integrate the
Properties in a timely and efficient manner could have an adverse effect on the
Company's business.
Upon completion of the Merger, four former officers of Crocker will
join the Company as vice presidents. Thomas F. Cochran will manage the Charlotte
division, which includes Greenville, South Carolina and Atlanta, Georgia;
Michael E. Harris will manage the Memphis division; Scott I. Peek, Jr. will
manage the Tampa division, which includes Jacksonville and Orlando; and Timothy
F. Vallace will manage the Boca Raton division. Thomas J. Crocker, the chairman
of the board and chief executive officer of Crocker, Richard S. Ackerman, the
president and chief operating officer of Crocker, and Robert E. Onisko, the vice
president and chief financial officer of Crocker, will not join the Company.
There can be no assurances that the Company will be able to integrate
successfully the Crocker Properties
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into its portfolio without them. Furthermore, it is expected that Messrs.
Crocker, Ackerman and Onisko will continue to be engaged in the commercial real
estate business following the Merger. As part of their severance agreements,
Messrs. Crocker, Ackerman and Onisko have agreed not to compete with the Company
within the city limits of Boca Raton, Florida for periods ranging from 12 months
(Mr. Onisko) to 18 months (Messrs. Crocker and Ackerman), except with respect to
certain contracts that Mr. Crocker has to manage certain office projects owned
by third parties and with respect to mixed-use retail and office complex known
as Mizner Park, which is owned by Mr. Crocker. Otherwise, Messrs. Crocker,
Ackerman and Onisko will be able to compete with the Company in all of its
markets. See "Recent Developments -- Pending Acquisition of Crocker Realty
Trust, Inc. -- Management of Crocker Properties." Finally, there can be no
assurance that the Merger will be consummated. See "Recent Developments --
Pending Acquisition of Crocker Realty Trust, Inc."
Risk of Failure of Crocker to Qualify as a REIT
Upon consummation of the Merger, Crocker will become a subsidiary of
the Operating Partnership. Except for the Federal and state income taxes that
might be payable upon the distribution of certain assets that will be
distributed directly or indirectly to the stockholders of Crocker prior to the
Merger (the "Excluded Assets"), the Merger has been structured to defer any tax
recognition to Crocker. To accomplish this, the Company intends to maintain
Crocker's separate status as an operating REIT. To maintain Crocker's REIT
status, the Company intends to cause Crocker to sell a sufficient amount of
common stock to at least 110 individuals to enable Crocker to meet the test for
qualification of a REIT under Section 856(a)(5) of the Internal Revenue Code of
1986, as amended (the "Code"). The aggregate amount of common stock to be issued
to such miniority stockholders is not expected to exceed 1.0% of the equity of
Crocker.
The Company expects Crocker at all times to maintain its status as a
REIT and to continue to be organized and operated so as to maintain its
qualification as a REIT. Since the ownership of Crocker stock by the Operating
Partnership is considered to be the ownership of a real estate asset for
purposes of the REIT qualification tests and since distributions received from a
REIT are income included in both the 95% and 75% income tests of Code Sections
856(c)(2) and (3), the Company's qualification as a REIT should not be affected
by the acquisition and ownership of Crocker. If, however, Crocker fails to
qualify as a REIT for any reason while its shares are owned by the Company or
the Operating Partnership, the Company will no longer qualify as a REIT and the
Company would be taxed as if it were a domestic corporation and its stockholders
would be taxed in the same manner as stockholders of ordinary corporations. In
that event, the Company could be subject to potentially significant tax
liabilities and, therefore, the amount of cash available for distribution to its
stockholders would be substantially reduced or eliminated.
Although the Company believes, and Crocker has represented, that
commencing with Crocker's taxable year ended December 31, 1995, Crocker has
operated in such a manner so as to meet the Code requirements for qualification
as a REIT no assurances can be given that Crocker will qualify as a REIT now or
in the future. Crocker's qualification as a REIT is a condition to the Company's
obligation to consummate the Merger. See "Recent Developments -- Pending
Acquisition of Crocker Realty Trust, Inc." herein and "Federal Income Tax
Considerations" in the Prospectus.
Geographic Concentration
The Company's revenues and the value of its Properties may be affected
by a number of factors, including the local economic climate (which may be
adversely affected by business layoffs, downsizing, industry slowdowns, changing
demographics and other factors) and local real estate conditions (such as
oversupply of or reduced demand for office, industrial and other competing
commercial properties). As of June 30, 1996, the Properties were located in the
following areas (with the number of Properties noted parenthetically):
Raleigh-Durham, North Carolina (60); Greensboro, Winston-Salem and High Point,
North Carolina (100); Charlotte, North Carolina (22); Richmond, Virginia (11);
and Nashville, Tennessee (7). Using March 1996 base rent totals, the North
Carolina properties represented 87.5% of the annualized base rent of the
Properties, with Raleigh-Durham Properties alone constituting 53.1%. Although
the Merger would broaden the Company's geographic focus by adding 11 new markets
throughout the Southeastern United States, based on March 1996 rent rolls, the
North Carolina Properties would still represent 56.4% of the Company's
annualized rental revenue, with properties located in Raleigh-Durham accounting
for 31.8% following the Merger. The Company's performance and its ability to
make distributions to stockholders is therefore dependent on the economic
conditions in these market areas. There can be no assurance as to the continued
growth of the economy in these markets.
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Limitations on Acquisition and Change in Control
Ownership Limit. The Company's Articles of Incorporation prohibit
ownership of more than 9.8% of the outstanding Common Stock by any person. Such
restriction is likely to have the effect of precluding acquisition of control of
the Company by a third party without consent of the Board of Directors even if a
change in control were in the interest of stockholders.
Required Consent of the Operating Partnership for Merger or Other
Significant Corporate Action. The Company may not merge, consolidate or engage
in any combination with another person or sell all or substantially all of its
assets unless such transaction includes the merger of the Operating Partnership,
which requires the approval of the holders of a majority of the outstanding
Units. Should the Company ever own less than a majority of the outstanding
Units, this voting requirement might limit the possibility for acquisition or
change in the control of the Company. As of June 30, 1996, the Company owned
approximately 88% of the Units.
Staggered Board. The Board of Directors of the Company has three
classes of directors, the terms of which will expire in 1996, 1997 and 1998.
Directors for each class will be chosen for a three-year term. The staggered
terms for directors may affect the stockholders' ability to change control of
the Company even if a change in control were in the stockholders' interest.
Adverse Impact on Distributions of Failure to Qualify as a REIT
The Company and the Operating Partnership intend to operate in a manner
so as to permit the Company to remain qualified as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"). Although the Company believes
that it will operate in such a manner, no assurance can be given that the
Company will remain qualified as a REIT. If in any taxable year the Company were
to fail to qualify as a REIT, the Company would not be allowed a deduction for
distributions to stockholders in computing taxable income and would be subject
to Federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates.
Real Estate Investment Risks
General Risks. Real property investments are subject to varying degrees
of risk. The yields available from equity investments in real estate depend in
large part on the amount of income generated and expenses incurred. If the
Company's properties do not generate revenues sufficient to meet operating
expenses, including debt service, tenant improvements, leasing commissions and
other capital expenditures, the Company may have to borrow additional amounts to
cover fixed costs and the Company's cash flow and ability to make distributions
to its stockholders will be adversely affected.
The Company's revenues and the value of its properties may be adversely
affected by a number of factors, including the national economic climate; the
local economic climate; local real estate conditions; the perceptions of
prospective tenants of the attractiveness of the property; the ability of the
Company to provide adequate management, maintenance and insurance; and increased
operating costs (including real estate taxes and utilities). In addition, real
estate values and income from properties are also affected by such factors as
applicable laws, including tax laws, interest rate levels and the availability
of financing.
Competition. Numerous office and industrial properties compete with the
Company's properties in attracting tenants to lease space. Some of these
competing properties are newer or better located than some of the Company's
properties. Significant development of office or industrial properties in a
particular area could have a material effect on the Company's ability to lease
space in its properties and on the rents charged.
Bankruptcy and Financial Condition of Tenants. At any time, a tenant of
the Company's properties may seek the protection of the bankruptcy laws, which
could result in the rejection and termination of such tenant's lease and thereby
cause a reduction in the cash flow available for distribution by the Company.
Although the Company has not experienced material losses from tenant
bankruptcies, no assurance can be given that tenants will not file for
bankruptcy protection in the future or, if any tenants file, that they will
affirm their leases and continue to make rental payments in a timely manner. In
addition, a tenant from time to time may experience a downturn in its business,
which may weaken
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its financial condition and result in the failure to make rental payments when
due. If tenant leases are not affirmed following bankruptcy or if a tenant's
financial condition weakens, the Company's income may be adversely affected.
Renewal of Leases and Reletting of Space. The Company will be subject
to the risks that upon expiration of leases for space located in its properties,
the leases may not be renewed, the space may not be relet or the terms of
renewal or reletting (including the cost of required renovations) may be less
favorable than current lease terms. If the Company were unable to promptly relet
or renew the leases for all or a substantial portion of this space or if the
rental rates upon such renewal or reletting were significantly lower than
expected rates, then the Company's cash flow and ability to make expected
distributions to stockholders may be adversely affected.
Illiquidity of Real Estate. Equity real estate investments are
relatively illiquid. Such illiquidity will tend to limit the ability of the
Company to vary its portfolio promptly in response to changes in economic or
other conditions. In addition, the Code limits the Company's ability to sell
properties held for fewer than four years, which may affect the Company's
ability to sell properties without adversely affecting returns to holders of
Common Stock.
Changes in Laws. Because increases in income, service or transfer taxes
are generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make distributions
to stockholders. The Properties are also subject to various Federal, state and
local regulatory requirements, such as requirements of the Americans with
Disabilities Act and state and local fire and life safety requirements. Failure
to comply with these requirements could result in the imposition of fines by
governmental authorities or awards of damages to private litigants. The Company
believes that the Properties are currently in compliance with all such
regulatory requirements. However, there can be no assurance that these
requirements will not be changed or that new requirements will not be imposed
which would require significant unanticipated expenditures by the Company and
could have an adverse effect on the Company's cash flow and expected
distributions.
Consequences of Inability to Service Mortgage Debt. Pursuant to loan
agreements with the Company's bank lenders, a portion of the Properties are
mortgaged to secure payment of such indebtedness, and if the Company were to be
unable to meet such payments, a loss could be sustained as a result of
foreclosure on the Properties by the bank lenders.
Risk of Development, Construction and Acquisition Activities
The Company intends to actively continue development and construction
of office and industrial properties, including development on the Development
Land. Risks associated with the Company's development and construction
activities, including activities relating to the Development Land, may include:
abandonment of development opportunities; construction costs of a property
exceeding original estimates, possibly making the property uneconomical;
occupancy rates and rents at a newly completed property may not be sufficient to
make the property profitable; financing may not be available on favorable terms
for development of a property; and construction and lease-up may not be
completed on schedule, resulting in increased debt service expense and
construction costs. In addition, new development activities, regardless of
whether or not they are ultimately successful, typically require a substantial
portion of management's time and attention. Development activities are also
subject to risks relating to the inability to obtain, or delays in obtaining,
all necessary zoning, land-use, building, occupancy, and other required
governmental permits and authorizations.
The Company intends to actively continue to acquire office and
industrial properties. Acquisitions of office and industrial properties entail
risks that investments will fail to perform in accordance with expectations.
Estimates of the costs of improvements to bring an acquired property up to
standards established for the market position intended for that property may
prove inaccurate. In addition, there are general investment risks associated
with any new real estate investment.
Although the Company has limited its development, acquisition,
management and leasing business primarily to markets with which management is
familiar, the Company may expand its business to new geographic markets.
Management believes that much of its past success has been a result of its local
expertise. The Company may not initially possess the same level of familiarity
with new markets, which could adversely affect its ability to develop, acquire,
manage or lease properties in any new localities.
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Conflicts of Interests in the Business of the Company
Tax Consequences Upon Sale or Refinancing of Properties. Holders of
Units may suffer different and more adverse tax consequences than the Company
upon the sale or refinancing of any of the Properties and, therefore, such
holders, including certain of the Company's officers and directors, and the
Company may have different objectives regarding the appropriate pricing and
timing of any sale or refinancing of such Properties. Although the Company, as
the sole general partner of the Operating Partnership, has the exclusive
authority as to whether and on what terms to sell or refinance an individual
Property, those members of the Company's management and Board of Directors of
the Company who hold Units may influence the Company not to sell or refinance
the Properties even though such sale might otherwise be financially advantageous
to the Company, or may influence the Company to refinance Properties with a high
level of debt.
Policies with Respect to Conflicts of Interests. The Company has
adopted certain policies relating to conflicts of interest. These policies
include a bylaw provision requiring all transactions in which executive officers
or directors have a conflicting interest to be approved by a majority of the
independent directors of the Company or a majority of the shares of capital
stock held by disinterested stockholders. There can be no assurance that the
Company's policies will be successful in eliminating the influence of such
conflicts, and if they are not successful, decisions could be made that might
fail to reflect fully the interests of all stockholders.
Competitive Real Estate Activities of Management. John W. Eakin and
Thomas S. Smith, both of whom became officers and directors of the Company in
connection with the Eakin & Smith Transaction, maintain an ownership interest in
an office building in the central business district of Nashville, Tennessee,
which building may compete for potential tenants with the Company's Nashville
office properties.
Dependence on Distributions from Operating Partnership in order to Qualify as a
REIT
To obtain the favorable tax treatment associated with REITs, the
Company generally will be required each year to distribute to its stockholders
at least 95% of its net taxable income. Because the Company conducts
substantially all of its business activities through the Operating Partnership,
the ability of the Company to make such distributions is dependent upon the
receipt of distributions or other payments from the Operating Partnership.
Effect on Common Stock Price of Shares Available for Future Sale Upon Conversion
of Units
Sales of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices of the Common Stock. In connection with the Company's initial formation
and public offering and certain subsequent acquisitions, as of the date hereof,
approximately 4.2 million Units have been issued to various holders, including
certain officers and directors of the Company. In connection with the issuance
of Units, each holder thereof agreed not to sell or otherwise dispose of such
Units or shares of Common Stock received upon exchange of such Units for a
period of one year. At the conclusion of such period, any shares of Common Stock
issued upon exchange of Units may be sold in the public markets upon
registration or available exemptions from registration. No prediction can be
made about the effect that future sales of Common Stock will have on the market
price of shares. At July 20, 1996, the one-year lock-up period with respect to
3.7 million Units had expired.
Possible Environmental Liabilities
Under various Federal, state and local laws, ordinances and
regulations, such as the Comprehensive Environmental Response Compensation and
Liability Act or "CERCLA," and common laws, 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 as well as certain other costs, including
governmental fines and injuries to persons and 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 remediate such substances
properly, may adversely affect the owner's or operator's ability to sell or rent
such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may also
be liable for the costs of removal or remediation of such substances at a
disposal or treatment facility, whether or not such facility is
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owned or operated by such person. Certain environmental laws impose liability
for release of asbestos-containing materials ("ACM") into the air, and third
parties may seek recovery from owners or operators of real property for personal
injuries associated with ACM. In connection with its ownership and operation of
its properties, the Company may be potentially liable for these costs. In
addition, the presence of hazardous or toxic substances at a site adjacent to or
in the vicinity of a property could require the property owner to participate in
remediation activities in certain cases or could have an adverse effect on the
value of such property.
As of the date hereof, all but one of the Highwoods Properties had been
subjected to a Phase I environmental assessment. These assessments have not
revealed, nor is management of the Company aware of, any environmental liability
that it believes would have a material adverse effect on the Company's results
of operations, liquidity or financial position taken as a whole, nor is the
Company aware of any such material environmental liability. Nevertheless, it is
possible that the Company's assessments do not reveal all environmental
liabilities or that there are material environmental liabilities of which the
Company is unaware. In addition, assumptions regarding the existence and
nonexistence of contamination and groundwater flow are based on available
sampling data, and there are no assurances that the data is reliable in all
cases. Moreover, there can be no assurance that (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of the Properties will not be affected by
tenants, by the condition of land or operations in the vicinity of the
Properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
All of the Crocker Properties have been subjected to assessments by
independent environmental consultants in the last three years. The environmental
assessments of the Crocker Properties have not revealed any environmental
liability that the Company believes would have a material adverse effect on the
Company's results of operations, liquidity or financial position taken as a
whole, nor is the Company aware of any such material environmental liability.
Nevertheless, it is possible that the assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. In addition, assumptions regarding the
existence and nonexistence of contamination and groundwater flow are based on
available sampling data, and there are no assurances that the data is reliable
in all cases. Moreover, there can be no assurance that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the Crocker Properties will not
be affected by tenants, by the condition of land or operations in the vicinity
of the Crocker Properties (such as the presence of underground storage tanks),
or by third parties unrelated to the Company. The environmental assessments have
revealed the following:
o A property located southwest of the Sabal VI property is
listed on EPA's National Priority List (NPL). Groundwater at
the site contains elevated levels of inorganic metals and the
site appears to be hydraulically upgradient from the Sabal VI
property. Sampling at the southwestern boundary of the Sabal
VI property indicated levels of inorganic metals in the
groundwater above the cleanup standards, while levels of such
constituents in the soil were normal. Clean-up is ongoing at
the NPL site, funded by responsible parties. Based on
information known to date, there is no indication that the
Sabal VI property is a source of this contamination, and it is
unlikely that EPA or any other party would seek to impose
liability on the Company for the presence of such
contaminants.
o Contamination exists in groundwater at two NPL sites adjacent
to and upgradient from the Grassmere properties. Due to the
geology of the area, the consultant advised that sampling on
the property would not definitively determine whether
contamination from off-site had reached the Grassmere
properties; therefore, no on-site sampling was performed.
Funded clean-ups are ongoing at both NPL sites. Based on
information known to date, there is no indication that the
Grassmere properties are a source of the contamination, and it
is unlikely that EPA or any other party would seek to impose
liability on the Company for the presence of such
contamination.
o Lead was detected above the Federal action level in drinking
water from limited outlets at seven of the Crocker Properties.
Federal law only requires that public water suppliers take
action when this level is exceeded and requires no direct
action by the Company. Sampling was limited and more thorough
sampling would be required to accurately determine the sources
and levels of lead in those buildings. However, if elevated
lead levels do exist, it could present the potential for
allegations of liability from third parties.
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Some tenants use or generate hazardous substances in the ordinary
course of their respective businesses. These tenants are required under their
leases to comply with all applicable laws and have agreed to indemnify the
Company or Crocker for any claims resulting from noncompliance, and the Company
is not aware of any environmental problems resulting from tenants' use or
generation of hazardous substances. There are no assurances that all tenants
will comply with the terms of their leases or remain solvent and that the
Company may not at some point be responsible for contamination caused by such
tenants.
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RECENT DEVELOPMENTS
Pending Acquisition of Crocker Realty Trust, Inc.
General. On April 29, 1996, the Company entered into an Agreement and
Plan of Merger (the "Merger Agree ment") with Crocker Realty Trust, Inc., a
Maryland corporation ("Crocker"). As a result of the Merger, Highwoods will
acquire 58 suburban office properties and 12 service center properties (the
"Crocker Properties") located in 15 South eastern markets in Florida, North
Carolina, South Carolina, Tennessee, Georgia, Virginia and Alabama. The Crocker
Properties encompass 5.7 million rentable square feet and, at March 31, 1996,
were 95% leased.
Through the Merger, the Company will establish itself as one of the
largest real estate operating companies in the Southeastern United States,
specializing in the ownership, management, acquisition and development of
suburban office and industrial properties. Upon consummation of the Merger, the
Company will have offices in North Carolina's three major markets, the Research
Triangle, the Piedmont Triad and Charlotte; as well as in Richmond, Virginia;
Nash ville and Memphis, Tennessee; and Boca Raton, Florida. Following the
Merger, the Company will own 160 suburban office properties and 110 industrial
(including 74 service center) properties (the "Properties"), totaling 15.9
million rentable square feet. At March 31, 1996, the Properties were 94% leased.
The Company believes that the Merger provides Highwoods a unique investment
opportunity for future growth by allowing the Company to expand and diver sify
its operations to growth-oriented markets throughout the Southeast. Seventeen of
the Crocker Properties are located in existing Company markets, and the
Company's substantial real estate experience in these markets should allow for
management and operational cost savings due to economies of scale. In addition,
the Crocker transaction enhances the Company's opportunities to engage in single
accretive acquisitions and developments in each of the Company's markets due to
the inherent cost savings of previously established local real estate management
and infrastructure.
Under the terms of the Merger Agreement, the Company will acquire all
of the outstanding capital stock of Crocker in exchange for a cash payment of
$11.02 per share, subject to certain adjustments. Based on Crocker's 26,981,087
million shares of outstanding capital stock at May 31, 1996, the purchase price
will total approximately $297 million. In addition, the Company will cash out
certain existing options and warrants to purchase Crocker common stock for an
estimated $4.2 million and assume approximately $240 million of Crocker's
currently outstanding indebtedness, having a weighted average interest rate of
8.6%. In connection with the Merger, the Company has also entered into a Stock
Purchase Agreement (the "Stock Purchase Agreement") with AP CRTI Holdings, L. P.
(an affiliate of Apollo Real Estate Advisors), AEW Partners, L.P. (an investment
partnership advised by Aldrich Eastman Waltch), and Crocker's three senior
executives (Thomas J. Crocker, Richard S. Ackerman and Robert E. Onisko), who
together own approximately 83% of Crocker's outstanding common stock
(collectively, the "Crocker Selling Stockholders"), which obligates such
stockholders to sell their shares to the Company at a cash price of $11.02,
subject to the same adjustments as required under the Merger Agreement. The
approximately $247 million purchase price of such shares is part of the total
approximately $297 million purchase price for all of Crocker's outstanding
shares.
As part of the Merger, for a period of one year following the closing,
the Company has agreed to provide all employees of Crocker who continue with the
Company with cash compensation and employee benefits at least equal to what was
in existence at the closing date. In addition, for a period of six years
following the closing, the Company has agreed to provide officers and directors
of Crocker with indemnification coverage and liability insurance at the same
level as existed prior to the Merger.
Under the terms of the Merger Agreement and the Stock Purchase
Agreement, the right of the Company, Crocker or the Crocker Selling Stockholders
to terminate the respective agreements is generally limited to the following:
(i) the failure of Crocker to qualify as a REIT under Sections 856-860 of the
Code; (ii) the failure of Crocker's stockholders to approve the Merger; (iii)
the failure to obtain the consent to the transaction by certain of Crocker's
lenders; (iv) Crocker's failure to comply with its covenants to continue to
operate the business prior to the Merger within certain specified parameters;
and (v) the existence of any order, judgement, decree, injunction or ruling of a
court of competent jurisdiction restraining, enjoining or prohibiting
consummation of the Merger. Under the terms of the Stock Purchase Agreement, the
Crocker Selling Stockholders have agreed and granted irrevocable proxies to the
Company, to vote in favor of the Merger. As a result, either through the
acquisition of the Crocker Selling Stockholders' stock in Crocker or through
exercise of the proxy, the Company can assure that Crocker's stockholders will
approve the Merger.
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Under Maryland law, Crocker's stockholders do not have dissenters' rights in
connection with the Merger Agreement and the consummation of the transactions
contemplated thereby. Furthermore, the consummation of the Merger Agreement and
the Stock Purchase Agreement by the Company is not subject to the approval of
the Company's stockholders.
Under the terms of the Merger Agreement, Crocker will distribute
certain of its assets and liabilities, which are not being acquired by the
Company, to an entity to be owned by all or a portion of Crocker's stockholders
(the "Crocker Distribution Entity"). The distributed assets comprise (i)
approximately 258 acres of undeveloped land near or adjacent to certain of the
Crocker Properties; (ii) partnership interests in two office properties in which
Crocker only holds a partial joint venture interest; and (iii) rights under
certain existing contracts or letters of intent to purchase from third parties
certain office properties and undeveloped land (collectively, the "Excluded
Assets"). The Excluded Assets have a current book value of approximately $17.7
million. All costs (including any tax liabilities) associated with the distri
bution of the Excluded Assets will be borne by the Crocker Distribution Entity.
The Crocker Distribution Entity will also (i) assume the liability, if any,
relating to certain existing litigation involving one of Crocker's senior
officers or will agree to reimburse the Company for the costs of insuring in
full any such liability and (ii) enter into a lease agreement with Crocker that
obligates it to pay Crocker, as a subsidiary of the Operating Partnership, a sum
of $1.8 million over a two-year period following the consummation of the Merger.
The Crocker Distribution Entity will also bear certain of Crocker's
costs associated with the Merger. Under the terms of the Merger Agreement, (i)
the Crocker Distribution Entity shall reimburse Crocker for the excess, if any,
o the Designated Transaction Expenses (as hereinafter defined) over $9,150,000
and (ii) Crocker shall pay to the Crocker Distribution Entity 50% of the excess,
if any, of $8,600,000 over the Designated Transaction Expenses. "Designated
Transaction Expenses" shall mean expenses incurred by Crocker in connection with
its proposed public offering, which was terminated as a result of the Merger, or
in connection with the Merger Agreement and the Merger only in the following
categories: (i) fees and expenses of legal counsel; (ii) fees and expenses of
accountants; (iii) fees and expenses of investment bankers and appraisers; (iv)
printing expenses; (v) severance payments to employees (including officers);
(vi) payments to Crocker's three senior executives in connection with the
release of certain stock options held by them; and (vii) amounts due, if any, to
any solicitation agent in connection with the exercise of Crocker's outstanding
public warrants, which will be cashed out by Highwoods upon their exercise at a
price equal to $1.02 per share (the difference between their exercise price of
$10.00 per share and the $11.02 per share merger consideration), subject to
adjustment for changes in the purchase price per share of Crocker's common stock
under the Merger Agreement.
Management of Crocker Properties. Upon completion of the Merger,
Crocker's three senior officers, Thomas J. Crocker, Richard S. Ackerman and
Robert E. Onisko, will resign as officers and directors of Crocker. In
connection with their resignation, they will receive certain severance benefits,
totaling in the aggregate, approximately $5.1 million, which includes payments
related to the cashing out of their respective stock options and warrants. As
part of the severance agreements, the three senior officers have agreed not to
compete with the Company within the city limits of Boca Raton, Florida, for
periods ranging from 12 months (Mr. Onisko) to 18 months (Messrs. Crocker and
Ackerman), except with respect to contracts that Mr. Crocker has to manage
certain office projects owned by third parties and with respect to a mixed-use
retail and office complex known as Mizner Park, which is owned by Mr. Crocker.
See "Risks Factors - Risks Associated with Rapid Growth."
Following the consummation of the Merger, Highwoods will retain the
services of several key Crocker employees who will be responsible for managing a
significant portion of the Crocker Properties. Thomas F. Cochran will manage the
Company's business in Charlotte, North Carolina, Greenville, South Carolina, and
Atlanta, Georgia and will serve as vice president. Mr. Cochran served as senior
vice president for NationsBank from 1987 to 1993 where he was responsible for
development and asset management of 47 of the properties in the Crocker
portfolio. In 1993 he joined Patriot American Asset Management Corporation where
he was a senior vice president and managed the portfolio. He became senior vice
president with Crocker after the merger in 1995 between Crocker Realty
Investors, Inc., and Southeastern Realty Corp., which owned the 47 properties.
Michael E. Harris will manage the Company's business in the Memphis, Tennessee
area, and will serve as vice president. Mr. Harris joined Crocker in January
1996 in connection with Crocker's acquisition of a portfolio of properties owned
by Towermarc Corporation. While at Crocker, he managed the Memphis region. From
1981 to 1996, he served as senior vice president, general counsel and chief
financial officer of Towermarc Corporation where he developed and managed
approximately 2.0 million square feet of properties. Scott I. Peek, Jr. will
manage the Company's business in the Tampa, Orlando and Jacksonville, Florida
areas and will serve
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as vice president. Mr. Peek served as vice president with Towermarc Corporation
from 1992 to 1996 prior to Crocker's acquisition of Towermarc's real estate
holdings in January 1996. While with Towermarc, he was responsible for the
leasing, property management and development activities of its Tampa and
Jacksonville regions. After joining Crocker, he held a similar role in the Tampa
region. Timothy F. Vallace will manage the Boca Raton division. Mr. Vallace has
served as an assistant vice president at Crocker since 1993. His duties include
asset management, leasing, construction management and marketing for Crocker's
Boca Raton operations.
Subsidiaries of Crocker. Crocker holds the 70 Crocker Properties
through two partnerships and three corporations. Forty-six of the Crocker
Properties are held by AP Southeast Portfolio Partners, L.P. (the "Financing
Partnership"), a Delaware limited partnership that was formed on November 17,
1993 for the sole purpose of acquiring such properties from NationsBank of North
Carolina, N.A., as trustee for the NCNB Real Estate Fund. (See " - Financing
Activities and Liquidity" for a description of the mortgage note that is secured
by the 46 properties owned by the Financing Partnership.) AP Fontaine III
Partners, L.P. is a Delaware limited partnership formed on October 28, 1993 for
the sole purpose of acquiring one of the Crocker Properties. Neither partnership
has employees, and their activities are carried out by Crocker and its
subsidiaries. Directly or indirectly, Crocker owns 100% of such partnerships.
Three corporate subsidiaries hold the remaining 23 Crocker Properties as
follows: three are owned by Crocker Realty Investors, Inc., a Florida
corporation, 15 are owned by CRT Florida Holdings, Inc., a Florida corporation,
and five are owned by CRT Tennessee Holdings Corp., a Tennessee corporation.
Crocker conducts its property management business through Crocker
Realty Management, Inc. (the "Management Subsidiary"), a real estate operating
company specializing in development, construction management, property
management and leasing of office buildings and mixed-use properties. In addition
to the Crocker Properties, the Management Subsidiary currently manages
approximately 2.2 million square feet of commercial property, 70% of which space
(representing 83% of Crocker's third-party revenue) is owned or managed by
Thomas J. Crocker or Richard S. Ackerman and which is not expected to be managed
by the Company after the Merger.
Transaction Structure. Under the terms of the Merger Agreement, Cedar
Acquisition Corporation ("Cedar"), a newly formed subsidiary of Highwoods, will
merge into Crocker with Highwoods becoming the sole shareholder of Crocker.
Highwoods intends to contribute the shares of common stock of Crocker to the
Operating Partnership in exchange for Units. As a result, Crocker would become a
subsidiary of the Operating Partnership. Except for the Federal and state income
taxes that might be payable upon the distribution of the Excluded Assets, which
taxes are to be paid by the Crocker Distribution Entity, the Merger has been
structured to defer any tax recognition to Crocker at the corporate or
subsidiary level. To accomplish this, the Company intends to maintain Crocker's
separate status as an operating REIT. To maintain Crocker's REIT status, the
Company intends to cause Crocker to sell a sufficient amount of common stock to
approximately 100 to 110 individuals to enable Crocker to meet the test for
qualification of a REIT under Section 856(a)(5) of the Code. The aggregate
amount of common stock to be issued to such minority stockholders is not
expected to exceed 1.0% of the equity of Crocker. The Merger will be accounted
for by the Company under the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations," as amended.
Under this method of accounting, the purchase price will be allocated to assets
acquired and liabilities assumed based on their estimated fair value at the
closing date of the Merger.
Federal Income Tax Consequences of the Merger. The Merger is a taxable
purchase of 100% of the outstanding stock of Crocker which will be taxable to
the selling stockholders of Crocker but, except as described below relative to
the Excluded Assets, will not be taxable at the Crocker corporate or subsidiary
level. The Company's tax basis in its Crocker stock will be equal to the total
cash it pays in the Merger for the Crocker stock, stock options and warrants. No
gain or loss will result to the Company from the Merger. Crocker, however, may
have corporate level taxable income and income tax liability due to the transfer
of the Excluded Assets to the Crocker Distribution Entity or the transfer of the
ownership interests in the Crocker Distribution Entity to some or all of the
Crocker stockholders. Any tax liabilities arising from the transactions related
to the Excluded Assets or the Crocker Distribution Entity will be borne by the
Crocker Distribution Entity. Following the Merger, the Company will transfer all
of the stock of Crocker to the Operating Partnership in exchange for Units and
the assumption of debt. This transaction will be a nontaxable transfer of
property to a partnership in exchange for ownership interests in the
partnership. The Company's tax basis in the Units so acquired will be equal to
its tax basis in the Crocker stock transferred to the Operating Partnership, and
no gain or loss will be realized by Crocker, the Company or the Operating
Partnership as a result of this transaction.
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The Company expects Crocker at all times to maintain its status as a
REIT. As discussed in "Transaction Struc ture" above, Crocker or the Company
will sell shares of Crocker common stock to individuals sufficient for Crocker
to meet the REIT qualification requirement of 100 stockholders. Crocker and the
Company also intend that Crocker will continue to be organized and operated so
as to maintain its qualification as a REIT. Since the ownership of Crocker stock
by the Operating Partnership is considered to be the ownership of a real estate
asset for purposes of the REIT qualification tests and since distributions
received from a REIT are income included in both the 95% and 75% income tests of
Code Sections 856(c)(2) and (3), the Company's qualification as a REIT should
not be affected by the acquisition and ownership of Crocker. If, however,
Crocker fails to qualify as a REIT for any reason while its shares are owned by
the Company or the Operating Partnership, the Company will no longer quality as
a REIT and the Company would be taxed as if it were a domestic corporation and
its stockholders would be taxed in the same manner as stockholders of ordinary
corporations. In that event, the Company could be subject to potentially
significant tax liabilities and, therefore, the amount of cash available for
distribution to its stockholders would be substantially reduced or eliminated.
See "Risk Factors - Risk of Failure of Crocker to Qualify as a REIT."
The Company believes, and Crocker has represented, that commencing with
Crocker's taxable year ended December 31, 1995, Crocker has operated in such a
manner so as to meet the Code requirements for qualification as a REIT.
Crocker's qualification as a REIT is a condition to the Company's obligation to
consummate the Merger.
The Crocker Properties. The Crocker Properties consist of 58 suburban
office buildings and 12 service center properties located in 15 metropolitan
areas in seven states in the Southeastern United States encompassing a total of
approximately 5.7 million rentable square feet. Sixty-three of the properties
are located in suburban office parks and comprise approximately 4.7 million
square feet of rentable space. The remaining seven properties are also located
in suburban areas in the Southeast.
The Crocker Properties were developed between 1980 and 1991 and have a
weighted average age of nine years. The majority of the Crocker Properties were
acquired by Crocker or its predecessors in 1993, near the end of a downturn in
commercial real estate markets that resulted from the over-building of the
1980s. Most of the Crocker Properties are used for more than one business
activity. The Crocker Properties are similar in quality to that of the Highwoods
Properties. They are primarily of brick or concrete construction, having one to
ten stories, with lush landscaped areas and sufficient parking for their
intended use. The Crocker Properties are well maintained and strategically
located near transportation corridors. All of the Crocker Properties have been
inspected by independent engineers since September 1993 and are in good to
excellent physical condition. Other than regular maintenance operations and
routine tenant improvements, the Company does not anticipate the necessity of
undertaking any significant renovation or construction projects at any of the
Crocker Properties in the near term. Certain of the Crocker Properties are
encumbered by mortgage indebtedness. See "Recent Developments--Financing
Activities and Liquidity."
Management of the Crocker Properties is supervised by Crocker's asset
managers in regional offices. On-site management is conducted by Crocker at 55
of its Properties. Highwoods intends to retain substantially all of Crocker's
on-site managers following the Merger and to reduce the reliance on third-party
property managers and leasing agents with respect to the Crocker Properties.
The following table sets forth scheduled lease expirations for leases
for Crocker's properties in place as of March 31, 1996, for each of the 10 years
beginning with March 31, 1996, assuming no tenant exercises renewal options or
its terminated due to default:
Lease Expirations of Crocker Properties
(Office Only)
<TABLE>
<CAPTION>
Percentage of Average Percentage of
Rentable Total Leased Annualized Annualized Rental Total Annualized
Number Square Feet Square Feet Rental Revenue Revenue Per Rental Revenue
of Leases Subject to Represented by Under Expiring Square Foot Under Represented
Lease Expiring Expiring Expiring Leases Expiring Leases Leases(1) Expiring Leases by Expiring Leases
- -------------- -------- --------------- --------------- ----------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1996......... 71 389,110 9.3% $5,605,984 $14.14 9.6%
1997...................... 111 668,690 16.0 8,790,584 13.15 15.0
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Percentage of Average Percentage of
Rentable Total Leased Annualized Annualized Rental Total Annualized
Number Square Feet Square Feet Rental Revenue Revenue Per Rental Revenue
of Leases Subject to Represented by Under Expiring Square Foot Under Represented
Lease Expiring Expiring Expiring Leases Expiring Leases Leases(1) Expiring Leases by Expiring Leases
- -------------- -------- --------------- --------------- ----------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
1998...................... 106 726,341 17.4 9,880,076 13.60 16.9
1999...................... 89 562,977 13.5 8,062,666 14.32 13.8
2000...................... 75 502,275 12.0 7,903,807 15.74 13.5
2001...................... 39 382,806 9.1 5,952,787 15.55 10.2
2002...................... 25 337,705 8.1 5,187,273 15.36 8.9
2003...................... 12 186,643 4.4 2,433,831 13.04 4.2
2004...................... 4 55,926 1.3 828,758 14.82 1.4
2005...................... 4 288,180 6.9 2,474,227 8.59 4.2
Thereafter................ 2 82,473 2.0 1,347,284 16.34 2.3
---- ----------- --- --------- ----- ---
Total or average.......... 538 4,183,126 100.0% $58,467,277 $13.98 100.0%
=== ========= ===== ========== ===== =====
</TABLE>
Lease Expirations of Crocker Properties
(Service Center Only)
<TABLE>
<CAPTION>
Percentage of Average Percentage of
Rentable Total Leased Annualized Annualized Rental Total Annualized
Number Square Feet Square Feet Rental Revenue Revenue Per Rental Revenue
of Leases Subject to Represented by Under Expiring Square Foot Under Represented
Lease Expiring Expiring Expiring Leases Expiring Leases Leases(1) Expiring Leases by Expiring Leases
- -------------- -------- --------------- --------------- ----------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1996......... 20 151,589 12.9% $1,153,083 $7.61 13.3%
1997...................... 25 230,128 20.9 1,861,150 8.09 20.2
1998...................... 22 169,576 16.4 1,460,495 8.61 14.8
1999...................... 24 261,206 20.8 1,851,032 7.09 22.9
2000...................... 16 253,654 22.5 2,010,487 7.93 22.2
2001...................... 8 75,875 6.5 583,119 7.69 6.6
2002...................... -- -- -- -- -- --
2003...................... -- -- -- -- -- --
2004...................... -- -- -- -- -- --
2005...................... -- -- -- -- -- --
Thereafter................ -- -- -- -- -- --
---- ---------------- -------- -- ---- -----
Total or average.......... 115 1,142,028 100.0% $8,919,366 $7.81 100.0%
=== ========= ===== ========= ==== =====
</TABLE>
- --------------------------------
(1) Annualized Rental Revenue is March 1996 rental revenue (base rent plus
operating expense pass throughs) multiplied by 12.
15
<PAGE>
Eakin & Smith Transaction
On April 1, 1996, the Company completed a merger with Eakin & Smith and
its affiliates ("Eakin & Smith") combining their property portfolios, management
teams and business operations. Through the combination, the Com pany succeeded
to the ownership of seven suburban office buildings totaling 848,000 square
feet, a 103,000-square-foot suburban office development project, 18 acres of
development land and Eakin & Smith's brokerage and property management
operations. All the properties and development land are located in Nashville,
Tennessee. At March 31 1996, the properties acquired in the transaction were 97%
leased.
The aggregate cost to the Company of the Eakin & Smith Transaction,
assuming the completion of the in-process development project, was approximately
$98.5 million payable through the issuance of 537,138 limited partnership units
of the Operating Partnership and 489,421 shares of Common Stock, the assumption
of $37 million of indebtedness (with a weighted average fixed rate of 8.0%), and
cash payments of approximately $33 million. The cost excludes deferred payments
of up to 54,056 shares of Common Stock, which are attributable to Eakin &
Smith's brokerage and property management operation. A total payment of 13,514
shares of Common Stock will be made to the three principals of Eakin & Smith,
Inc. for each of the first four 12-month periods following the combination in
which third-party service revenue attributable to the Eakin & Smith brokerage
and property management operations exceeds $2,000,000.
As part of the Eakin & Smith Transaction, the three principals of Eakin
& Smith, Inc. received options to purchase 105,000 shares of common stock at
$27.50 per share. Such options vest in four equal annual installments beginning
with the second anniversary of the date of grant. Such principals also received
warrants to purchase 150,000 shares of Common Stock for $28.00 per share. In
addition, John W. Eakin and Thomas S. Smith were added to the Company's Board of
Directors. The third principal, W. Brian Reames, has also remained with the
Company.
Development Activity
The following table summarizes the three development projects placed in
service by the Company during 1996:
Rentable
Property Property Type Location Square Feet Initial Cost
- -------- ------------- -------- ------------ ------------
Hewlett Packard Office Piedmont Triad 15,000 $ 1,000,000
Global Software Office Research Triangle 92,700 7,500,000
Regency One Industrial Piedmont Triad 127,600 3,500,000
------- ----------
Total 235,300 $12,000,000
======= ===========
The Company has eight suburban office properties and one industrial
property under development totaling 791,000 square feet of space. The following
table summarizes these projects:
Estimated
Rentable Estimated Percent Completion
Office Properties Location Square Feet Cost Preleased Date
MSA Research Triangle 57,000 $6,200,000 100% 4Q96
Healthsource Research Triangle 180,000 14,400,000 100% 4Q96
One Shockoe Plaza Richmond 118,000 15,000,000 0% 4Q96
16
<PAGE>
<TABLE>
<CAPTION>
Estimated
Rentable Estimated Percent Completion
Office Properties Location Square Feet Cost Preleased Date
<S> <C> <C> <C> <C> <C>
Highwoods One Richmond 126,000 12,500,000 0% 4Q96
Situs One Research Triangle 58,000 5,100,000 58% 4Q96
Maryland Way Nashville 103,000 11,500,000 50% 4Q96
Inacom Piedmont Triad 13,000 900,000 100% 4Q96
North Park Research Triangle 40,000 4,000,000 40% 1Q97
------ --------- ---
Total or Weighted Average 695,000 $689,600,000 67%
Industrial Property
- -------------------
Regency Two Piedmont Triad 96,000 $ 2,800,000 39% 4Q96
------- ----------- ----
Total or Weighted Average 791,000 $72,400,000 66%
======= =========== ===
</TABLE>
Following the Merger, the Company will continue Crocker's development
of an approximately 81,000-square foot office building in Center Point Office
Park in Columbia, South Carolina. Crocker owns the other office building in the
park, which building was 100% leased at March 31, 1996. The total cost of the
project is expected to be approximately $7.6 million, including the purchase of
the land. Pursuant to a contract entered into with the contractor, the
construction costs are fixed. The building is expected to be completed in the
fourth quarter of 1996 and is approximately 50% pre-leased.
Other Pending Acquisitions
The Company has entered into agreements to acquire two suburban office
properties: one in Richmond, Virginia and the other in Nashville, Tennessee. The
properties encompass 155,000 square feet in the aggregate and will be acquired
at a total cost of $15.3 million. The purchase price will be funded through a
$10.4 million cash payment and the assumption of a $4.9 million, 8.75%
non-recourse mortgage loan. Additionally, the Company has entered into a letter
of intent to acquire two suburban office properties totaling 224,000 square feet
and three acres of land in Nashville and Charlotte in exchange for 305,438 Units
and $5.7 million in cash.
Financing Activities and Liquidity
Set forth below is a summary description of the Company's recent
financing activities:
Credit Facility. In March 1996, the Company closed on a $140 million
unsecured credit facility (the "Credit Facility"), which replaced an $80 million
secured facility. The Credit Facility is with NationsBank, First Union National
Bank of North Carolina and Wachovia Bank of North Carolina and requires monthly
payment of interest and matures on September 30, 1999. The initial interest rate
on the Credit Facility is LIBOR plus 150 basis points. The interest rate will
adjust based on the Company's senior unsecured credit rating within a range of
LIBOR plus 100 basis points to LIBOR plus 175 basis points. The replacement of
the secured facility with the Credit Facility enhanced the Company's financial
flexibility by releasing the liens on 24 properties with a book value of
approximately $226 million.
Financing of the Eakin & Smith Transaction. The Company financed the
Eakin & Smith Transaction through the issuance of 537,138 Units of the Operating
Partnership and 489,421 shares of Common Stock, the assumption of $37.0 million
of mortgage indebtedness and a $26.6 million draw on the Credit Facility. The
mortgage indebtedness
17
<PAGE>
assumed has an average fixed rate of approximately 8% and an average remaining
life of approximately six years. Approximately $5.5 million of the mortgage
indebtedness is fixed at a rate of 7.7% to the maturity date of the underlying
debt through the use of an interest rate swap. Further, the Company entered into
a five-year, $7.0 million interest rate swap agreement that commences in January
1997 and effectively fixes $7.0 million of the Company's variable rate debt at
8.0%.
July 1996 Offerings. The Company recently completed two offerings in
July 1996 (the "July 1996 Offerings") selling 11,500,000 and 250,000 shares of
Common Stock, respectively. Before deducting estimated expenses of $760,000, the
Company raised $299,691,250 in the July 1996 Offerings. As described below, the
proceeds of the offerings are expected to be used to fund the pending
acquisition of Crocker.
Financing of the Pending Merger. In connection with the Merger, the
Company obtained a commitment from NationsBank and First Union National Bank of
North Carolina for a $250 million revolving line of credit (the "Revolving
Loan"). The Revolving Loan will replace the Credit Facility and will be used
together with the proceeds from the July 1996 Offerings to fund the Merger.
The Revolving Loan will be unsecured for the first nine months and will
bear interest at a rate of LIBOR plus 150 basis points. After the initial
nine-month period, the Revolving Loan will either convert to a secured loan with
a maturity date two years from its closing date or to an unsecured loan maturing
on July 31, 1999. The Revolving Loan will remain unsecured if the Company meets
the following financial covenants: (i) adjusted net operating income divided by
total liabilities of not less than 16.5%; (ii) total liabilities not greater
than 45% of market capitalization; (iii) tangible net worth of not less than
$700 million, which amount shall be increased by not less than 85% of the net
proceeds of any future offerings of the Company's capital stock (including the
July 1996 offerings); (iv) a ratio of total liabilities to total assets at cost
of no more than .50 to 1.0; (v) a ratio of earnings before interest, income tax,
depreciation and amortization to interest expense plus capital expenditures of
not less than 2.5 to 1.0; (vi) A ratio of unencumbered assets to unsecured debt
of not less than 2.25 to 1.0; (vii) a ratio of secured debt to total assets of
not more than .30 to 1.0; (viii) a ratio of adjusted net operating income as
derived from unencumbered assets to interest expense paid on unsecured debt of
not less than 2.25 to 1.0; and (ix) a ratio of adjusted net operating income
derived from unencumbered assets to unsecured debt of not less than .18 to 1.0.
If the Revolving Loan remains unsecured after the initial nine-month
period, it would have an interest rate ranging from LIBOR plus 100 basis points
to LIBOR plus 175 basis points based on the Company's senior unsecured credit
rating. If the loan converts to a secured facility, the Company will be required
to pledge assets at least equal in value to 60% of the outstanding amount of the
Revolving Loan and the interest rate will equal LIBOR plus 175 basis points.
Also in connection with the Merger, the Company will assume
approximately $239.5 million of indebtedness at an average rate of 8.57%. This
indebtedness includes: (i) a $140 million mortgage note (the "Mortgage Note")
with a fixed rate of 7.9%, (ii) variable rate mortgage loans in the aggregate
amount of $69.4 million with a weighted average interest rate of 9.4% at March
31, 1996 and (iii) fixed rate mortgage loans in the amount of $30.1 million with
a weighted average interest rate of 9.8%.
The Mortgage Note is a conventional, monthly pay, first mortgage note
in the principal amount of $140 million issued by the Financing Partnership. The
Mortgage Note is a limited recourse obligation of the Financing Partnership as
to which, in the event of a default under the Indenture or the Mortgage,
recourse may be had only against the specific 46 Properties (the "Mortgage Note
Properties") and other assets that have been pledged as security therefor. The
Mort gage Note was issued to Kidder Peabody Acceptance Corporation I pursuant to
an Indenture, dated March 1, 1994 (the "Indenture"), among the Financing
Partnership, Bankers Trust Company of California, N.A., and Bankers Trust
Company.
The Mortgage Note bears interest on its outstanding principal balance
at the rate of 7.88% per annum, subject to increase in the event of a default in
the payment of any amount due, and matures on January 3, 2001. The Mortgage Note
provides for scheduled monthly payments of interest only, which are due on the
first business day of each calendar month.
18
<PAGE>
The Mortgage Note is secured by a blanket, first mortgage lien on the
Mortgage Note Properties (the "Mortgage"). The Mortgage Note is further secured
by (i) a first priority assignment of all present and future leases encumbering
portions of those Properties, (ii) a security interest in any personal property
owned by Financing Partnership and (iii) a collateral assignment of the right,
title and interest of the Financing Partnership in and rights to all management
agreements relating to those Properties. As an additional security for the
Mortgage Note, the Financing Partnership maintains with the Banker's Trust
Company various "sweep accounts," a central cash collateral account (the "Cash
Collateral Account") and a contingency reserve account (the "Contingency Reserve
Account"). All rents with respect to the Mortgage Note Properties are made
payable to, and deposited directly in, the sweep accounts, which are then
transferred to the Cash Collateral Account, and all other property income and
capital event proceeds are deposited into the Cash Collateral Account promptly
upon receipt thereof. Cash of at least $7 million (the "Contingency Reserve") is
maintained in the Contingency Reserve Account.
The Indenture provides for a lockout period which prohibits optional
redemption payments in respect of principal of the Mortgage Note (other than the
premium-free redemption payment described below) prior to November 22, 1998.
Thereafter, the Financing Partnership may make optional redemption payments in
respect of principal of the Mortgage Note on any distribution date, subject to
the payment of a yield maintenance charge in connection with such payments made
prior to August 1, 2000. Notwithstanding the foregoing, the Financing
Partnership may be required to make payments in respect of the principal of the
Mortgage Note in certain limited circumstances and the Financing Partnership has
a one-time right, exercisable at any time during the term of the Mortgage Note,
to make the premium-free redemption payment in a principal amount not to exceed
$7 million, without any applicable yield maintenance charges.
Covenants in the Indenture restrict the Financing Partnership from,
among other things, engaging in any business or activity other than that in
connection with or relating to the ownership and operation of the Mortgage Note
Properties, incurring, creating or assuming any indebtedness or encumbrance
other than the Mortgage Note and as otherwise expressly permitted under the
Indenture, or liquidating or dissolving or entering into any consolidation or
merger. The Indenture also restricts the Financing Partnership's right to
terminate any of its leases, and requires the Financing Partnership to maintain
or cause the tenants to maintain specified insurance coverage, including rental
loss insurance covering annual gross rentals net of noncontinuing expenses for a
period of not less than two years.
Under the terms of the purchase agreement relating to the Mortgage Note
Properties, the Financing Partnership may be obligated to pay NationsBank a
deferred contingent purchase price. This contingent payment, which will in no
event exceed $4.4 million, is due on April 1, 1998 if the actual four-year
cumulative cash flow of such Properties exceeds the projected four-year
cumulative cash flow. Based on Crocker's estimates of future operations, the
Company does not believe that any deferred contingent purchase price will be
payable.
The Company is currently considering various alternatives related to
the $99.5 million of indebtedness to be assumed in the Merger other than the
Mortgage Note. The Company may repay this indebtedness with the proceeds from
the issuance of either senior unsecured debt or conventional mortgage debt. To
limit its exposure to increasing interest rates, the Company has entered into a
forward-starting $75 million interest rate swap agreement that commences on
September 15, 1996. The interest rate swap matures on September 15, 2003 and
will limit the Company's exposure to increases in interest rates on either $75
million of LIBOR based floating rate borrowings or $75 million of fixed rate
debt issued in the future. Upon commencement of the interest rate swap, the
Company will pay the counterparty a fixed rate of 7.02% while the counterparty
will pay the Company an amount equal to 30-day LIBOR.
Organizational Changes
On May 20, 1996 the Company announced certain changes to its
organizational structure, which will allow the Company to utilize its existing
senior management for overall leadership while taking advantage of certain
members of Crocker's management to integrate Crocker into the Highwoods
organization. These changes will provide property and market specific experience
to the combined portfolio. The Company believes that upon the completion of the
Merger, approximately 85% of its portfolio will be managed and leased on a
day-to-day basis by personnel that have previously managed, leased or developed
the properties for which they are responsible.
In connection with the organizational changes, William T. Wilson, III
was appointed to the newly created position of executive vice president and
chief operating officer. Mr. Wilson will assume responsibility for all aspects
19
<PAGE>
of the Company's divisional operations and the Company's acquisition group.
Prior to this appointment, he served as executive vice president and was
responsible for the operations of the Forsyth division, which included the
operations of the Piedmont Triad and Charlotte area properties. John E. Reece,
II will assume Mr. Wilson's responsibilities with respect to the Piedmont Triad
area properties and will serve the Company as a vice president. Mr. Reece was
previously responsible for the leasing, marketing and development activities of
the Forsyth division. In addition, John W. Eakin has been appointed as senior
vice president and will be responsible for operations in Tennessee (Nashville
and Mem phis), Alabama and Florida (Tampa, Boca Raton, Orlando and
Jacksonville). Since joining the Company in April 1996 in connection with the
Eakin & Smith Transaction, Mr. Eakin has been responsible for the Company's
Nashville operations.
Upon completion of the Merger, Messrs. Cochran, Harris, Peek and
Vallace will join the Company from Crocker as vice presidents with specific
regional responsibility. See " - Pending Acquisition of Crocker Realty Trust,
Inc."
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The authorized capital stock of the Company includes 100,000,000 shares
of Common Stock, $.01 par value per share. Each outstanding share of Common
Stock entitles the holder to one vote on all matters presented to shareholders
for a vote. Holders of Common Stock have no preemptive rights. As of the date
hereof, there were 31,783,970 shares of Common Stock outstanding and 4,134,550
shares reserved for issuance upon exchange of outstanding Units.
Shares of Common Stock currently outstanding are listed for trading on
the New York Stock Exchange (the "NYSE"). The Company will apply to the NYSE to
list the additional shares of Common Stock to be sold pursuant to this
Prospectus, and the Company anticipates that such shares will be so listed.
All shares of Common Stock issued will be duly authorized, fully paid,
and non-assessable. Distributions may be paid to the holders of Common Stock if
and when declared by the board of directors of the Company out of funds legally
available therefor. The Company intends to continue to pay quarterly dividends.
Under Maryland law, shareholders are generally not liable for the
Company's debts or obligations. If the Company is liquidated, subject to the
right of any holders of preferred stock, if any, to receive preferential
distributions, each outstanding share of Common Stock will be entitled to
participate pro rata in the assets remaining after payment of, or adequate
provision for, all known debts and liabilities of the Company.
The Articles of Incorporation of the Company provide for the board of
directors to be divided into three classes of directors, each class to consist
as nearly as possible of one-third of the directors. At each annual meeting of
shareholders, the class of directors to be elected at such meeting will be
elected for a three-year term and the directors in the other two classes will
continue in office. The overall effect of the provisions in the Articles of
Incorporation with respect to the classified board may be to render more
difficult a change of control of the Company or removal of incumbent management.
Holders of Common Stock have no right to cumulative voting for the election of
directors. Consequently, at each annual meeting of shareholders, the holders of
a plurality of the shares of Common Stock are able to elect all of the
successors of the class of directors whose term expires at that meeting.
Directors may be removed only for cause and only with the affirmative vote of
the holders of two-thirds of the shares of capital stock entitled to vote in the
election of directors.
Certain Provisions Affecting Change of Control
General. Pursuant to the Company's Articles of Incorporation and the
Maryland general corporation law (the "MGCL"), the Company cannot merge into or
consolidate with another corporation or enter into a statutory share exchange
transaction in which it is not the surviving entity or sell all or substantially
all of the assets of the Company unless the Board of Directors adopts a
resolution declaring the proposed transaction advisable and a majority of
20
<PAGE>
stockholders entitled to vote thereon (voting together as a single class)
approve the transaction. In addition, the agreement of limited partnership of
the Operating Partnership (the "Operating Partnership Agreement") requires that
any such merger or sale of all or substantially all of the assets of the
Operating Partnership be approved by a majority of the holders of Units
(including Units owned by the Company).
Maryland Business Combination and Control Share Statutes. The MGCL
establishes special requirements with respect to business combinations between
Maryland corporations and interested stockholders unless exemptions are
applicable. Among other things, the law prohibits for a period of five years a
merger and other specified or similar transactions between a company and an
interested stockholder and requires a supermajority vote for such transactions
after the end of the five-year period. The Company's Articles of Incorporation
contain a provision exempting the Company from the requirements and provisions
of the Maryland business combination statute. There can be no assurance that
such provision will not be amended or repealed at any point in the future.
The MGCL also 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 owned by the acquiror or by officers or directors who
are employees of the Company. 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, or to acquisitions approved or exempted
by the Articles of Incorporation or bylaws of the Company. The Company's bylaws
contain a provision exempting from the control share acquisition statute any and
all acquisitions by any person of the Company's stock. There can be no assurance
that such provision will not be amended or repealed, in whole or in part, at any
point in the future.
The Company's Articles of Incorporation (including the provision
exempting the Company from the Maryland business combination statute) may not be
amended without the affirmative vote of at least a majority of the shares of
capital stock outstanding and entitled to vote thereon voting together as a
single class, provided that certain provisions of the Articles of Incorporation
may not be amended without the approval of the holders of two-thirds of the
shares of capital stock of the Company outstanding and entitled to vote thereon
voting together as a single class. The Company's bylaws may be amended by the
Board of Directors or a majority of the shares cast of capital stock entitled to
vote thereupon at a duly constituted meeting of stockholders.
If either of the foregoing exemptions in the Articles of Incorporation
or bylaws is amended, the Maryland business combination statute or the control
share acquisition statute could have the effect of discouraging offers to
acquire the Company and of increasing the difficulty of consummating any such
offer.
Ownership Limitations and Restrictions on Transfers. For the Company to
remain qualified as a REIT under the Code, not more than 50% in value of its
outstanding shares of Common Stock may be owned, directly or indirectly, by five
or fewer individuals (defined in the Code to include certain entities) during
the last half of a taxable year, and such shares must be beneficially owned by
100 or more persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year. To ensure that the
Company remains a qualified REIT, the Articles of Incorporation provide that no
holder (other than persons approved by the directors at their option and in
their discretion) may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than 9.8% (the "Ownership Limit") of the issued and
outstanding capital stock of the Company. The Board of Directors may waive the
Ownership Limit if evidence satisfactory to the Board of Directors and the
Company's tax counsel is presented that the changes in ownership will not
jeopardize the Company's status as a REIT.
If any stockholder purports to transfer shares to a person and either
the transfer would result in the Company failing to qualify as a REIT, or the
stockholder knows that such transfer would cause the transferee to hold more
than the Ownership Limit, the purported transfer shall be null and void, and the
stockholder will be deemed not to have transferred the shares. In addition, if
any person holds shares of capital stock in excess of the Ownership Limit, such
person will be deemed to hold the excess shares in trust for the Company, will
not receive distributions with respect to such shares and will not be entitled
to vote such shares. The person will be required to sell such shares to the
Company for the lesser of the amount paid for the shares and the average closing
price for the 10 trading days immediately preceding the redemption or to sell
such shares at the direction of the Company, in which case the Company will be
reimbursed for its expenses in connection with the sale and will receive any
amount of such proceeds that exceeds the amount such person paid for the shares.
If the Company repurchases such shares, it may pay for the shares with Units.
21
<PAGE>
The foregoing restrictions on transferability and ownership will not apply if
the Board of Directors and the stockholders (by the affirmative vote of the
holders of two-thirds of the outstanding shares of capital stock entitled to
vote on the matter) determine that it is no longer in the best interests of the
Company to continue to qualify as a REIT.
All certificates representing shares of Common Stock bear a legend
referring to the restrictions described above.
Every beneficial owner of more than 5% (or such lower percentage as
required by the Code or regulations thereunder) of the issued and outstanding
shares of capital stock must file a written notice with the Company no later
than January 30 of each year, containing the name and address of such beneficial
owner, the number of shares of Common Stock and/or Preferred Stock owned and a
description of how the shares are held. In addition, each stockholder shall be
required upon demand to disclose to the Company in writing such information as
the Company may request in order to determine the effect of such stockholder's
direct, indirect and constructive ownership of such shares on the Company's
status as a REIT.
These ownership limitations could have the effect of precluding
acquisition of control of the Company by a third party unless the Board of
Directors and the stockholders determine that maintenance of REIT status is no
longer in the best interest of the Company.
Registrar and Transfer Agent
The Registrar and Transfer Agent for the Common Stock is First Union
National Bank, Charlotte, North Carolina.
Preferred Stock
Preferred Stock may be issued from time to time, in one or more series,
as authorized by the Board of Directors. Prior to issuance of shares of each
series, the Board of Directors is required by the MGCL and the Company's
Articles of Incorporation to fix for each series the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms or conditions of redemption, as are
permitted by Maryland law. Such rights, powers, restrictions and limitations
could include the right to receive specified distribution payments and payments
on liquidation prior to any such payments being made to the holders of the
shares of Common Stock. The Board of Directors could authorize the issuance of
Preferred Stock with terms and conditions that could have the effect of
discouraging a takeover or other transaction that holders of shares of Common
Stock might believe to be in their best interests. As of the date hereof, no
shares of Preferred Stock are outstanding, and the Company has no present plans
to issue any shares of Preferred Stock.
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REDEMPTION OF UNITS
General
Each limited partner may, subject to certain limitations, require that
the Operating Partnership redeem all or a portion of such partner's Units
beginning one year from the date of issuance by delivering a notice to the
Operating Partnership. Upon redemption, a limited partner will receive, at the
option of the Company, as general partner of the Operating Partnership, either
(i) a number of shares of Common Stock equal to the number of Units redeemed or
(ii) cash in an amount equal to market value of the number of shares of Common
Stock the partner would have received pursuant to (i) above. The market value of
the Common Stock for this purpose will be equal to the average of the closing
trading price of the Company's Common Stock for the 10 trading days before the
day on which the redemption notice was received by the Operating Partnership.
In lieu of the Operating Partnership redeeming Units, the Company, as
general partner, in its sole discretion, has the right to assume directly and
satisfy the redemption right of the limited partner. The Company anticipates
that it generally will elect to assume directly and satisfy any redemption right
exercised by a limited partner through the issuance of the shares of Common
Stock pursuant to this Prospectus, whereupon the Company will acquire the Units
being redeemed and will become the owner of the Units. Such an acquisition by
the Company will be treated as a sale of the Units to the Company for Federal
income tax purposes. See "--Tax Consequences of Redemption" below. Upon
redemption, such limited partner's right to receive distributions with respect
to the Units redeemed will cease. However, the limited partner will then have
rights as a stockholder of the Company from the time of his or her acquisition
of Common Stock, including the payment of dividends.
A limited partner must notify the Company, as general partner of the
Operating Partnership, of such partner's desire to require the Operating
Partnership to redeem Units by sending a notice in the form attached as an
exhibit to the Partnership Agreement, a copy of which is available from the
Company. A limited partner must request the redemption of at least 1000 Units
(or all of the Units held by such holder, if less). A redemption generally will
occur on the 10th business day after the notice is delivered by the limited
partner, except that no redemption can occur if the delivery of Redemption
Shares would be prohibited under the provisions of the Articles of Incorporation
to protect the Company's qualification as a REIT.
Tax Consequences of Redemption
The following discussion summarizes certain Federal income tax
considerations that may be relevant to a limited partner who exercises his right
to require the redemption of his Units.
Tax Treatment of Redemption of Units. If a limited partner exercises
his or her right to require the redemption of Units, the Partnership Agreement
provides that the redemption will be treated by the Company, the Operating
Partnership and the redeeming limited partner, for tax purposes, as a sale of
Units. Such sale will be fully taxable to the redeeming limited partner. Such
limited partner generally will be treated as realizing for tax purposes an
amount equal to the sum of either the cash or the value of the Common Stock
received plus the amount of any Operating Partnership liabilities allocable to
the redeemed Units at the time of the redemption. The determination of the
amount of gain or loss is discussed more fully below.
If the Company elects not to issue shares of Common Stock in exchange
for a limited partner's Units, and the Operating Partnership redeems such Units
for cash to effect the redemption, the tax consequences would be as described in
the previous paragraph. However, if the Operating Partnership redeems less than
all of a limited partner's Units, the limited partner would not be permitted to
recognize any loss occurring on the transaction and would recognize taxable gain
only to the extent that the cash, plus the amount of any Operating Partnership
liabilities allocable to the redeemed Units, exceeded the limited partner's
adjusted basis in all of such limited partner's Units immediately before the
redemption. The methodology used by the Operating Partnership to allocate its
liabilities to its partners will likely result in a varying amount of such
liabilities being allocated to different partners. Under that methodology, which
is based on principals set forth in Treasury Regulations, it is possible that
partners who hold an identical number of Units are allocated different amounts
of liabilities of the Operating Partnership for Federal income tax purposes.
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Tax Treatment of Disposition of Units by Limited Partner Generally. If
a Unit is redeemed in a manner that is treated as a sale of the Unit, or a
limited partner otherwise disposes of a Unit, the determination of gain or loss
from the sale or other disposition will be based on the difference between the
amount considered realized for tax purposes and the tax basis in such Unit. See
"--Basis of Units" below. Upon the sale of a Unit, the "amount realized" will be
measured by the sum of the cash or fair market value of Common Stock received
plus the reduction in the amount of any Operating Partnership liabilities
allocable to the Unit holder. To the extent that the amount of cash or property
received plus the reduction in the allocable share of any Operating Partnership
liabilities exceeds the limited partner's basis in his or her interest in the
Operating Partnership, such limited partner will recognize gain. It is possible
that the amount of gain recognized or even the tax liability resulting from such
gain could exceed the amount of cash or the value of Common Stock received upon
such disposition.
Except as described below, any gain recognized upon a sale or other
disposition of Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount realized
upon the sale of a Unit attributable to a limited partner's share of "unrealized
receivables" of the Operating Partnership (as defined in Section 751 of the
Code) exceeds the basis attributable to those assets, such excess will be
treated as ordinary income. Unrealized receivables include, to the extent not
previously included in Operating Partnership income, any rights to payment for
services rendered or to be rendered. Unrealized receivables also include amounts
that would be subject to recapture as ordinary income if the Operating
Partnership had sold its assets at their fair market value at the time of the
transfer of a Unit.
Basis of Units. In general, a limited partner who was deemed at the
time of the Formation Transactions to have received his or her Units upon
liquidation of a partnership, had an initial tax basis in the Units ("Initial
Basis") equal to his or her basis in the partnership interest at the time of
such liquidation. Similarly, in general, a limited partner who at the time of
the Formation Transactions contributed a partnership interest in exchange for
his or her Units had an Initial Basis in the Units equal to his or her basis in
the contributed partnership interest. A limited partner's Initial Basis in his
or her Units generally is increased by (i) such limited partner's share of
Operating Partnership taxable and tax-exempt income and (ii) increases in such
partner's share of the liabilities of the Operating Partnership (including any
increase in his or her share of liabilities occurring in connection with the
Formation Transactions). Generally, such partner's basis in his or her Units is
decreased (but not below zero) by (A) his or her share of Operating Partnership
distributions, (B) decreases in his or her share of liabilities of the Operating
Partnership (including any decrease in his or her share of liabilities of the
Operating Partnership occurring in connection with the Formation Transactions),
(C) his or her share of losses of the Operating Partnership and (D) his or her
share of nondeductible expenditures of the Operating Partnership that are not
chargeable to capital account.
Potential Application of the Disguised Sale Regulations to a Redemption
of Units. There is a risk that a redemption of Units issued in the Formation
Transactions may cause the original transfer of property to the Operating
Partnership in exchange for Units in connection with the Formation Transactions
to be treated as a "disguised sale" of property. Section 707 of the Code and the
Treasury Regulations thereunder (the "Disguised Sale Regulations") generally
provide that, unless one of the prescribed exceptions is applicable, a partner's
contribution of property to a partnership and a simultaneous or subsequent
transfer of money or other consideration (including the assumption of or taking
subject to a liability) from the partnership to the partner will be presumed to
be a sale, in whole or in part, of such property by the partner to the
partnership. Further, the Disguised Sale Regulations provide generally that, in
the absence of an applicable exception, if money or other consideration is
transferred by a partnership to a partner within two years of the partner's
contribution of property, the transactions are presumed to be a sale of the
contributed property unless the facts and circumstances clearly establish that
the transfers do not constitute a sale. The Disguised Sale Regulations also
provide that if two years have passed between the transfer of money or other
consideration and the contribution of property, the transactions will be
presumed not to be a sale unless the facts and circumstances clearly establish
that the transfers constitute a sale.
Accordingly, if a Unit is redeemed, the Internal Revenue Service could
contend that the Disguised Sale Regulations apply because the limited partner
will thus receive cash or shares of Common Stock subsequent to his previous
contribution of property to the Operating Partnership. In that event, the IRS
could contend that the Formation Transactions themselves were taxable as a
disguised sale under the Disguised Sale Regulations. Any gain recognized thereby
may be eligible for installment reporting under Section 453 of the Code, subject
to certain limitations.
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Comparison of Ownership of Units and Shares of Common Stock
Generally, the nature of any investment in shares of Common Stock of
the Company is substantially equivalent economically to an investment in Units
in the Operating Partnership. A holder of a share of Common Stock receives the
same distribution that a holder of a Unit receives, and stockholders and Unit
holders generally share in the risks and rewards of ownership in the enterprise
being conducted by the Company (through the Operating Partnership). However,
there are some differences between ownership of Units and ownership of Common
Stock, some of which may be material to investors.
The information below highlights a number of the significant
differences between the Operating Partnership and the Company relating to, among
other things, form of organization, permitted investments, policies and
restrictions, management structure, compensation and fees, investor rights and
Federal income taxation and compares certain legal rights associated with the
ownership of Units and Common Stock. These comparisons are intended to assist
limited partners of the Operating Partnership in understanding how their
investment will be changed if their Units are redeemed for Common Stock. This
discussion is summary in nature and does not constitute a complete discussion of
these matters, and holders of Units should carefully review the balance of this
Prospectus and the Registration Statement of which this Prospectus is a part for
additional important information about the Company.
Form of Organization and Assets Owned. The Operating Partnership is
organized as a North Carolina partnership. All of the Company's operations are
conducted through the Operating Partnership, except that the Eakin & Smith
brokerage and third-party property management operations are conducted at the
Company level.
The Company is a Maryland corporation. The Company has elected to be
taxed as a REIT under the Code and intends to maintain its qualification as a
REIT. The Company's only asset (other than the Eakin & Smith third-party
brokerage and property management business) is its interest in the Operating
Partnership, which gives the Company an indirect investment in the properties
and other assets owned by the Operating Partnership.
Length of Investment. The Operating Partnership has a stated
termination dated of December 31, 2092, although it may be terminated earlier
under certain circumstances. The Company has a perpetual term and intends to
continue its operations for an indefinite time period.
Purpose and Permitted Investments. The purpose of the Operating
Partnership includes the conduct of any business that may be lawfully conducted
by a limited partnership formed under North Carolina law, except that the
Partnership Agreement requires the business of the Operating Partnership to be
conducted in such a manner that will permit the Company to be classified as a
REIT for Federal income tax purposes. The Operating Partnership may, subject to
the foregoing limitation, invest or enter into partnerships, joint ventures or
similar arrangements and may own interests in any other entity.
Under its Articles of Incorporation, the Company may engage in any
lawful activity permitted under Maryland law. Under the Partnership Agreement,
however, the Company may not conduct any business other than the business of the
Operating Partnership and cannot own any assets other than its interest in the
Operating Partnership and such bank accounts or similar instruments as are
necessary to carry out its responsibilities under the Partnership Agreement or
its organizational documents, except that the Partnership Agreement allows for
the ownership of the Eakin & Smith third-party business directly.
Additional Equity. The Operating Partnership is authorized to issue
Units and other partnership interests to the partners or to other persons for
such consideration and on such terms and conditions as the Company, in its sole
discretion, may deem appropriate. In addition, the Company may cause the
Operating Partnership to issue to the Company additional Units or other
partnership interests in different series or classes which may be senior to the
Units in conjunction with the offering of securities of the Company having
substantially similar rights, in which the proceeds thereof are contributed to
the Operating Partnership. No limited partner has any preemptive, preferential
or similar rights with respect to additional capital contributions to the
Operating Partnership or the issuance or sale of any interests therein.
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The Board of Directors of the Company may issue, in its discretion,
additional equity securities consisting of Common Stock or Preferred Stock;
provided, however, that the total number of shares issued does not exceed the
authorized number of shares of capital stock set forth in the Company's Articles
of Incorporation. As long as the Operating Partnership is in existence, the
proceeds (or a portion thereof) of all equity capital raised by the Company will
be contributed to the Operating Partnership in exchange for Units or other
interests in the Operating Partnership, provided that the General Partner's
contribution will be deemed to be an amount equal to the net proceeds of any
such offering plus any underwriter's discount or other expenses incurred in
connection with such issuance.
Borrowing Policies. The Operating Partnership has no restrictions on
borrowings, and the Company as general partner has full power and authority to
borrow money on behalf of the Operating Partnership. The Company (as general
partner), through its Board of Directors, has adopted a policy that currently
limits total borrowing to 50% of the total market capitalization of the Company
and the Operating Partnership, but this policy may be altered at any time by the
Board of Directors. The foregoing reflects the Company's general policy over
time and is not intended to operate in a manner that inappropriately restricts
the Company's ability to raise additional capital, including additional debt, to
implement its planned growth, to pursue attractive acquisition opportunities
that may arise or to otherwise act in a manner that the Board of Directors
believes to be in the best interests of the Company and its stockholders. The
Board of Directors, with the assistance of management of the Company, may
reevaluate from time to time its debt and other capitalization policies in light
of then current economic conditions, including the relative costs of debt and
equity capital, the market value of its properties, growth and acquisition
opportunities, the market value of its equity securities in relation to the
Company's view of the market value of its properties, and other factors, and may
modify its debt policy. Such modification may include increasing or decreasing
its general ratio of debt to total market capitalization or substituting another
measuring standard.
The Company is not restricted under its governing instruments from
incurring borrowings.
Other Investment Restrictions. Other than restrictions precluding
investments by the Operating Partnership that would adversely affect the
qualification of the Company as a REIT, there are no restrictions on the
Operating Partnership's authority to enter into certain transactions, including,
among others, making investments, lending Operating Partnership funds, or
reinvesting the Operating Partnership's cash flow and net sale or refinancing
proceeds.
Neither the Company's Articles of Incorporation nor its bylaws impose
any restrictions upon the types of investments made by the Company except that
under the Articles of Incorporation, the Board of Directors is prohibited from
taking any action that would terminate the Company's REIT status, unless a
majority of the stockholders vote to terminate such REIT status.
Management Control. All management powers over the business and affairs
of the Operating Partnership are vested in the general partner of the Operating
Partnership, and no limited partner of the Operating Partnership has any right
to participate in or exercise control or management power over the business and
affairs of the Operating Partnership. The general partner may not be removed by
the limited partners for any reason.
The Board of Directors has exclusive control over the Company's
business and affairs subject only to the restrictions in the Articles of
Incorporation, the bylaws and the Partnership Agreement. The Board of Directors
is classified into three classes of directors. At each annual meeting of the
stockholders, the successors of the class of directors whose terms expire at
that meeting will be elected. The policies adopted by the Board of Directors may
be altered or eliminated without advice of the stockholders. Accordingly, except
for their vote in the elections of directors, stockholders have no control over
the ordinary business policy of the Company.
Fiduciary Duties. Under North Carolina law, the general partner of the
Operating Partnership is accountable to the Operating Partnership as a fiduciary
and, consequently, is required to exercise good faith in all of its dealings
with respect to partnership affairs. However, under the Partnership Agreement,
the general partner is under no obligation to take into account the tax
consequences to any partner of any action taken by it. The general partner will
have no liability to a limited partner as a result of any liabilities or damages
incurred or suffered by, or benefits not derived by, a limited partner as a
result of any action or inaction of the general partner so long as the general
partner acted in good faith.
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Under Maryland law, the directors must perform their duties in good
faith, in a manner that they believe to be in the best interests of the Company
and with the care an ordinarily prudent person would exercise under similar
circumstances. Directors of the Company who act in such a manner generally will
not be liable to the Company for monetary damages arising from their activities.
Management Liability and Indemnification. The Partnership Agreement
generally provides that the general partner will incur no liability to the
Operating Partnership or any limited partner for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or omission if the
general partner acted in good faith. In addition, the general partner is not
responsible for any misconduct or negligence on the part of its agents provided
the general partner appointed such agents in good faith. The general partner may
consult with legal counsel, accountants, appraisers, management consultants,
investment bankers and other consultants and advisors. Any action the general
partner takes or omits to take in reliance upon the opinion of such persons, as
to matters which the general partner reasonably believes to be within their
professional or expert competence, shall be conclusively presumed to have been
done or omitted in good faith and in accordance with such opinion. The
Partnership Agreement also provides for indemnification of the general partner,
the directors and officers of the general partner, and such other persons as the
general partner may from time to time designate, against any and all losses,
claims, damages, liabilities, expenses, judgments, fines, settlements and other
amounts arising from any and all claims, demands, actions, suits or proceedings
that relate to the operations of the Operating Partnership in which such person
may be involved, or is threatened to be involved, to the fullest extent
permitted under North Carolina law.
As permitted by Maryland law, the Articles of Incorporation include a
provision limiting the liability of the Company's directors and officers to the
corporation and its stockholders for money damages, subject to specified
restrictions. The law does not, however, permit the liability of directors and
officers to the corporation or its stockholders to be limited to the extent that
(i) it is proved that the person actually received an improper benefit or profit
in money, property or services or (ii) a judgment or other final adjudication is
entered in a proceeding based on a finding that the person'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 charter provision does
not limit or eliminate the rights of the Company or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Anti-takeover Provisions. Except in limited circumstances, the general
partner of the Operating Partnership has exclusive management power over the
business and affairs of the Operating Partnership. The general partner may not
be removed by the limited partners with or without cause. Under the Partnership
Agreement the general partner may, in its sole discretion, prevent a limited
partner from transferring his interest or any rights as a limited partner except
in certain limited circumstances. The general partner may exercise this right of
approval to deter, delay or hamper attempts by persons to acquire an interest in
the Operating Partnership.
The Articles of Incorporation and bylaws of the Company contain a
number of provisions that may have the effect of delaying or discouraging an
unsolicited proposal for the acquisition of the Company or the removal of
incumbent management. See "Risk Factors -- Limits on Changes in Control."
Voting Rights. Under the Partnership Agreement, the limited partners
generally do not have voting rights relating to the operation and management of
the Operating Partnership. Limited partners do have the right to vote on certain
amendments to the Partnership Agreement. The ownership of Units does not entitle
the holder thereof to vote on any matter to be voted upon by the stockholders of
the Company.
Stockholders of the Company have the right to vote on, among other
things, a merger or sale of all or substantially all of the assets of the
Company, amendments to the Articles of Incorporation, certain amendments to the
bylaws and dissolution of the Company. The Company is managed and controlled by
a Board of Directors consisting of three classes having staggered terms of
office. Each class is to be elected by the stockholders at annual meetings of
the Company. All shares of Common Stock have one vote, and the Articles of
Incorporation permit the Board of
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Directors to classify and issue Preferred Stock in one or more series having
voting power which may differ from that of the Common Stock.
Amendment of the Partnership Agreement or the Articles of
Incorporation. Amendments to the Partnership Agreement may be proposed by the
general partner or by any limited partners holding 10 percent or more of the
Partnership interests. Approval of such an amendment requires the vote of the
general partner and the holders of a majority of the Units, including those
Units held by the general partner. Certain amendments may be approved solely by
the general partner, such as, among other things, amendments that would add to
the obligations of the general partner, reflect the admission, substitution,
termination or withdrawal of partners, or satisfy any legal requirements.
Certain amendments that affect the fundamental rights of a limited partner must
be approved by each affected limited partner.
The Company's Articles of Incorporation may not be amended without the
affirmative vote of at least a majority of the shares of capital stock
outstanding and entitled to vote thereon voting together as a single class,
provided that certain provisions of the Articles of Incorporation may not be
amended without the approval of the holders of two-thirds of the shares of
capital stock of the Company outstanding and entitled to vote thereon voting
together as a single class. The Company's bylaws may be amended by the Board of
Directors or a majority of the shares cast of capital stock entitled to vote
thereupon at a duly constituted meeting of stockholders.
Vote Required to Dissolve the Operating Partnership or the Company.
Under North Carolina law, the Operating Partnership may be dissolved, other than
in accordance with the terms of the Partnership Agreement, only upon the
unanimous vote of the limited partners.
Under Maryland law, the Company may be dissolved by (i) the affirmative
vote of a majority of the entire Board of Directors declaring such dissolution
to be advisable and directing that the proposed dissolution be submitted for
consideration at an annual or special meeting of stockholders, and (ii) upon
proper notice, stockholder approval by the affirmative vote of the holders of a
majority of the total number of shares of Stock outstanding and entitled to vote
thereon voting as a single class.
Vote Required to Sell Assets or Merge. Under the Partnership Agreement,
the sale, exchange, transfer or other disposition of all or substantially all of
the Operating Partnership's assets or the merger or consolidation of the
Operating Partnership requires the consent of the general partner and holders of
a majority of the outstanding Units (including Units held by the general
partner).
Under the MGCL, a corporation generally cannot sell substantially all
of its assets or merge without the approval of the holders of two-thirds of the
shares entitled to vote on the matter unless a lesser percentage is set forth in
the corporation's charter. The Company's charter contains such a provision and
provides that such actions may be taken if approved by a majority of the shares
outstanding and entitled to vote thereon. The MGCL establishes special
requirements with respect to "business combinations" between Maryland
corporations and "interested stockholders" unless exemptions are applicable.
Among other things, the law prohibits for a period of five years a merger and
other specified or similar transactions between a company and an interested
stockholder and requires a supermajority vote for such transactions after the
end of the five-year period. The Company's Articles of Incorporation contain a
provision exempting the Company from the requirements and provisions of the
Maryland business combination statute. There can be no assurance that such
charter provisions will not be amended at any point in the future.
Compensation, Fees and Distributions. The general partner does not
receive any compensation for its services as general partner of the Operating
Partnership. As a partner in the Operating Partnership, however, the general
partner has the same right to allocations and distributions as other partners of
the Operating Partnership. In addition, the Operating Partnership reimburses the
general partner for all expenses incurred relating to the ongoing operation of
the Company and any offering of partnership interests in the Operating
Partnership or capital stock of the Company.
The directors and officers of the Company receive compensation for
their services.
Liability of Investors. Under the Partnership Agreement and applicable
North Carolina law, the liability of the limited partners for the Operating
Partnership's debts and obligations is generally limited to the amount of their
investment in the Operating Partnership.
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Under Maryland law, stockholders are not personally liable for the
debts or obligations of the Company.
Nature of Investment. The Units constitute equity interests entitling
each limited partner to a pro rata share of cash distributions made to the
limited partners of the Operating Partnership. The Operating Partnership
generally intends to retain and reinvest proceeds of the sale of property or
excess refinancing proceeds in its business.
The shares of Common Stock constitute equity interests in the Company.
The Company is entitled to receive its pro rata share of distributions made by
the Operating Partnership with respect to the Units, and each stockholder will
be entitled to his pro rata share of any dividends or distributions paid with
respect to the Common Stock. The dividends payable to the stockholders are not
fixed in amount and are only paid if, when and as declared by the Board of
Directors. In order to qualify as a REIT, the Company must distribute 95% of its
taxable income (excluding capital gains), and any taxable income (including
capital gains) not distributed will be subject to corporate income tax.
Potential Dilution of Rights. The general partner of the Operating
Partnership is authorized, in its sole discretion and without limited partner
approval, to cause the Operating Partnership to issue additional limited
partnership interests and other equity securities for any partnership purpose at
any time to the limited partners or to other persons on terms established by the
general partner.
The Board of Directors of the Company may issue, in its discretion,
additional shares of Common Stock and have the authority to issue from the
authorized capital stock a variety of other equity securities of the Company
with such powers, preferences and rights as the Board of Directors may designate
at the time. The issuance of additional shares of either Common Stock or other
similar equity securities may result in the dilution of the interests of the
stockholders.
Liquidity. The limited partners generally may transfer all or a portion
of their interests in the Operating Partnership to a transferee, subject to the
one-year lock-up provisions in the Registration Rights Agreements. No
transferee, however, will be admitted to the Operating Partnership as a
substitute limited partner having the rights of a limited partner without the
consent of the Company as the general partner and provided that certain other
conditions are met, including an agreement to be bound by the terms and
conditions of the Operating Partnership Agreement.
Upon the effectiveness of the Registration Statement of which this
Prospectus is a part, the Redemption Shares will be freely transferable as
registered securities under the Securities Act. The Common Stock is listed on
the NYSE and the Company intends to cause the Redemption Shares to be so listed.
The breadth and strength of this market will depend, among other things, upon
the number of shares outstanding, the Company's financial results and prospects,
the general interest in the Company's and other real estate investments and the
Company's dividend yield compared to that of other debt and equity securities.
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REGISTRATION RIGHTS
The registration of the shares of Common Stock pursuant to the
Registration Statement of which this Prospectus is a part will discharge the
Company's obligations under the terms of the Registration Rights Agreements for
the benefit of holders (the "Holders") of Units issued in transactions dated
July 12, 1995 and July 20, 1995. The following summary does not purport to be
complete and is qualified in its entirety by reference to the Registration
Rights Agreements.
Under the Registration Rights Agreements, the Company is obligated to
use its reasonable efforts to file and cause to be declared effective under the
Securities Act a "shelf registration" statement covering the Redemption Shares.
The Company is also required to use its reasonable efforts to keep the shelf
registration statement continuously effective for a period expiring on the
earlier of (i) the sale of all shares of Common Stock covered by the
Registration Rights Agreements and (ii) the date on which (A) none of the Units
specified in the Registration Rights Agreements are outstanding and (B) all such
Redemption Shares would be eligible for sale pursuant to Rule 144. Any
Redemption Shares that have been issued pursuant to the Registration Statement
of which this Prospectus is a part, or which have been otherwise transferred and
subject to the issuance of new certificates without legal restriction on further
transfer of such shares, will no longer be entitled to the benefits of the
Registration Rights Agreements.
Pursuant to the Registration Rights Agreements, the Company has agreed
to pay all expenses in connection with the registration of the Redemption Shares
(other than underwriting discounts and commissions, fees and disbursements of
counsel representing the Holders, and transfer taxes, if any). The Company has
also agreed to indemnify each Holder and its officers and directors and any
person, if any, who controls any Holder against certain losses, claims, damages
and expenses arising from any untrue statement or alleged untrue statement or
omission or alleged omission, provided that such statement or omission cannot be
traced back to the Holder. In addition, each Holder has agreed to indemnify the
Company and other Holders, and each of their respective directors and officers,
to the same extent as discussed above. However such indemnification shall be
provided only for any loss, claim, damage or expense arising out of written
information furnished to the Company by such Holder expressly for use in the
Registration Statement or Prospectus, or any amendment or supplement thereto.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material Federal income tax
considerations to the Company and its stockholders relating to this Registration
Statement and the treatment of the Company as a REIT. It is not intended to
represent a detailed description of the Federal income tax consequences
applicable to a particular stockholder of the Company in view of a stockholder's
particular circumstances, or to certain types of stockholders subject to special
treatment under the Federal income tax laws (including insurance companies,
tax-exempt organizations, financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States). The discussion in this section is based on current provisions of the
Code, current and proposed Treasury Regulations, court decisions and other
administrative rulings and interpretations, all of which are subject to change,
that may be retroactively applied. There can be no assurance that any such
change, future Code provisions or other legal authorities will not alter
significantly the tax considerations described herein.
EACH PROSPECTIVE PURCHASER OF COMMON SHARES IS URGED TO CONSULT HIS OR
HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES, IN VIEW OF SUCH
PROSPECTIVE PURCHASER'S INDIVIDUAL CIRCUMSTANCES, OF THE PURCHASE, OWNERSHIP AND
SALE OF THE COMMON SHARES
General
The Company has elected to be taxed as a REIT commencing with its
taxable year ended December 31, 1994. The Company believes that, commencing with
its taxable year ended December 31, 1994, it has been organized and is operating
in such a manner as to qualify for taxation as a REIT under the Code for such
taxable year, and the Company intends to continue to operate in such a manner in
the future. No assurance can be given, however, that the Company has operated or
will operate in a manner so as to qualify or remain qualified as a REIT.
In the opinion of Smith Helms Mulliss and Moore, L.L.P., commencing
with the Company's taxable year ended December 31, 1994, the Company has been
organized and has operated in conformity with the requirements for qualification
and taxation as a REIT under the Code for its taxable year ended December 31,
1994, and the Company's current organization and proposed method of operation
should enable it to continue to meet the requirements for qualification and
taxation as a REIT under the Code. This opinion is based on the factual
representations of the Company concerning its business and properties including,
but not limited to, those set forth in the Prospectus. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet
the various qualification tests imposed under the Code discussed below on a
continuing basis, through actual annual operating results, distribution levels
and diversity of stock ownership. Accordingly, no assurance can be given that
the actual results of the Company's operations for any particular taxable year
will satisfy such requirements. See "Risk Factors --Adverse Impact on
Distributions to Qualify as a REIT.
The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code 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, rules and regulations promulgated
thereunder and administrative and judicial interpretations thereof. The Company
has not requested rulings from the IRS in regard to any issues relating to its
qualification as a REIT. Thus, no assurance can be given that the IRS will not
challenge the status of the Company as a REIT.
Federal Income Taxation of the Company
If the Company qualifies for taxation as a REIT, it generally will not
be subject to Federal corporate income tax on that portion of its ordinary
income or capital gain that is currently distributed to stockholders. The REIT
provisions of the Code generally allow a REIT to deduct distributions paid to
its stockholders substantially eliminating the Federal "double taxation" on
earnings (once at the corporate level when earned and once again at the
stockholder level when distributed) that usually results from investments in a
corporation. Nevertheless, the Company will be subject to Federal income tax as
follows: First, the Company will be taxed at regular corporate rates on its
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be
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subject to the "alternative minimum tax" as a consequence of its items of tax
preference. Third, if the Company has net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or other non-qualifying 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 other
than foreclosure property held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy either the 75% or 95% gross income test
(discussed below) but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which the
Company fails either the 75% or 95% test, multiplied by a fraction intended to
reflect the Company's profitability. Sixth, if the Company fails to distribute
during each year at least the sum of (i) 85% of its ordinary income for such
year, (ii) 95% of its capital gain net 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. Seventh, if the Company should acquire any asset from a C
corporation (i.e., a corporation generally subject to full corporate-level tax)
in a carryover-basis transaction and the Company subsequently recognizes gain on
the disposition of such asset during the 10-year period (the "Recognition
Period") beginning on the date on which the asset was acquired by the Company,
then, to the extent of the excess of (a) the fair market value of the asset as
of the beginning of the applicable Recognition Period over (b) the Company's
adjusted basis in such asset as of the beginning of such Recognition Period (the
"Built-In Gain"), such gain will be subject to tax at the highest regular
corporate rate, pursuant to guidelines issued by the IRS (the "Built-In Gain
Rules").
Requirements for Qualification
To qualify as a REIT, the Company must elect to be so treated and must
meet the requirements, discussed below, relating to the Company's organization,
sources of income, nature of assets and distributions of income to stockholders.
Organizational Requirements. 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 the REIT requirements, (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,
and (vi) during the last half of each taxable year not more than 50% in value of
the outstanding stock of which is owned, directly or indirectly, through the
application of certain attribution rules, by five or fewer individuals (as
defined in the Code to include certain entities). In addition, certain other
tests regarding the nature of its income and assets, described below, also must
be satisfied. The Code provides that conditions (i) through (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. Conditions (v) and
(vi) (the "100 stockholder" and "five or fewer" requirements) will not apply
until after the first taxable year for which an election is made to be taxed as
a REIT. For purposes of conditions (v) and (vi), pension funds and certain other
tax-exempt entities are treated as individuals or persons, subject to a
"look-through" exception in the case of condition (vi). In addition, the
Company's Articles of Incorporation currently include certain restrictions
regarding transfer of its Common Stock, which restrictions are intended (among
other things) to assist the Company in continuing to satisfy conditions (v) and
(vi) above.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership 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 asset tests. Thus, the Company's proportionate share
of the assets, liabilities and items of income of the Operating Partnership
(including the Operating Partnership's share of the assets and liabilities and
items of income with respect to any partnership in which it holds an interest)
will be treated as assets, liabilities and items of income of the Company for
purposes of applying the requirements described herein.
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Income Tests. To maintain qualification as a REIT, three gross income
requirements must be satisfied annually.
o First, at least 75% of the Company's gross income, for each
taxable year, excluding gross income from certain dispositions
of property held primarily for sale to customers in the
ordinary course of a trade or business ("prohibited
transactions"), 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.
o Second, at least 95% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable
year must be derived from such real property investments and
from distributions, interest and gain from the sale or
disposition of stock or securities or from any combination of
the foregoing.
o Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions 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 (including gross income from
prohibited transactions) for each taxable year.
Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met.
o First, the amount of rent generally 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 of receipts or sales.
o Second, the Code provides that rents received from a tenant
will not qualify as "rents from real property" in satisfying
the gross income tests, if the REIT or an owner of 10% or more
of the REIT, directly or constructively, owns 10% or more of
such tenant (a "Related Party Tenant").
o 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 the personal property will not qualify
as "rents from real property."
o Finally, for rents to qualify as "rents from real property"
the REIT generally must not operate or manage the property or
furnish or render services to tenants, other than through an
"independent contractor" who is adequately compensated and
from whom the REIT does not derive any income; provided,
however, that a REIT may provide services with respect to its
properties and the income will qualify as "rents from real
property" if the services are "usually or customarily
rendered" in connection with the rental space for occupancy
only and are not otherwise considered "rendered to the
occupant."
The Company does not currently and does not anticipate charging rent
that is based in whole or in part on the income or profits of any person. The
Company also does not anticipate either deriving rent attributable to personal
property leased in connection with real property that exceeds 15% of the total
rents or receiving rent from Related Party Tenants.
The Company does provide certain services with respect to the
Properties. The Company believes that the services with respect to the
Properties that are and will be provided by it directly are usually or
customarily rendered in connection with the rental of space for occupancy only
and are not otherwise rendered to particular tenants and therefore that the
provision of such services will not cause rents received with respect to the
Properties to fail to qualify as rents
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from real property. Services with respect to the Properties that the Company
believes may not be provided by the Company directly without jeopardizing the
qualification of rent as "rents from real property" will be performed by
independent contractors.
The Operating Partnership may receive fees in consideration of the
performance of property management services with respect to certain Properties
not owned entirely by the Operating Partnership. A portion of such fees
(corresponding to that portion of a property owned by a third-party) will not
qualify under the 75% or 95% gross income test. The Operating Partnership also
may receive certain other types of income with respect to the properties it owns
that will not qualify for the 75% or 95% gross income test. In addition,
distributions on the Operating Partnership's stock in the Service Companies and
income earned by Forsyth-Carter Brokerage will not qualify under the 75% gross
income test. The Company believes, however, that the aggregate amount of such
fees and other non-qualifying income in any taxable year will not cause the
Company to exceed the limits on non-qualifying income under the 75% and 95%
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
that year if it is eligible for relief under certain provisions of the Code.
These relief provisions will be generally available if (i) the Company's failure
to meet these tests was due to reasonable cause and not due to willful neglect,
(ii) the Company attaches a schedule of the sources of its income to its Federal
income tax return and (iii) any incorrect information on the schedule is not due
to fraud with intent to evade tax. It is not possible, however, to state
whether, in all circumstances, the Company would be entitled to the benefit of
these relief provisions. For example, if the Company fails to satisfy the gross
income tests because non-qualifying income that the Company intentionally incurs
exceeds the limits on such income, the IRS could conclude that the Company's
failure to satisfy the tests was not due to reasonable cause. As discussed above
in "Federal Income Tax Considerations -- Federal Income Taxation of the
Company," even if these relief provisions apply, a tax would be imposed with
respect to the excess net income. No similar mitigation provision provides
relief if the Company fails the 30% income test, and in such case, the Company
will cease to qualify as a REIT. See "Risk Factors -- Adverse Impact on
Distributions of Failure to Qualify as a REIT.
Asset Tests. At the close of each quarter of its taxable year, the
Company also must satisfy three tests relating to the nature and diversification
of its assets.
o First, at least 75% of the value of the Company's total assets
must be represented by real estate assets, cash, cash items
and government securities.
o Second, no more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset
class.
o 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.
The 5% test must generally be met for any quarter in which the Company
acquires securities of an issuer. Thus, this requirement must be satisfied not
only on the date the Company acquires securities of either of the Service
Companies, but also each time the Company increases its ownership of their
respective securities (including as a result of increasing its interest in the
Operating Partnership as limited partners exercise their redemption rights).
Although the Company plans to take steps to ensure that it satisfies the 5%
value test for any quarter with respect to which retesting is to occur, there
can be no assurance that such steps will always be successful or will not
require a reduction in the Company's overall interest in either of the Service
Companies.
The Operating Partnership owns 100% of the nonvoting stock and 1% of
the voting stock of each of the Service Companies, and by virtue of its
ownership of Units, the Company will be considered to own its pro rata share of
such stock. See "The Company." Neither the Company nor the Operating
Partnership, however, will own more than 1% of the voting securities of either
of the Service Companies. In addition, the Company and its senior management do
not believe that the Company's pro rata share of the value of the securities of
either of the Service Companies exceeds 5%
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of the total value of the Company's assets. The Company's belief is based in
part upon its analysis of the estimated value of the securities of each of the
Service Companies owned by the Operating Partnership relative to the estimated
value of the other assets to be owned by the Operating Partnership. No
independent appraisals will be obtained to support this conclusion, and Smith
Helms Mulliss & Moore, L.L.P., in rendering its opinion as to the qualification
of the Company as a REIT, is relying on the conclusions of the Company and its
senior management as to the value of the securities of each of the Service
Companies. There can be no assurance, however, that the IRS might not contend
that the value of such securities held by the Company (through the Operating
Partnership) exceeds the 5% value limitation.
After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests and to take such other
actions within 30 days after the close of any quarter as may be required to cure
any noncompliance.
Annual Distribution Requirements. In order to be taxed as a REIT, the
Company is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (a) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends-paid
deduction and the Company's capital gain) and (ii) 95% of the net income, if
any, from foreclosure property in excess of the special tax on income from
foreclosure property, minus (b) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its
Federal income tax return for such year and if paid on or before the first
regular dividend payment after such declaration. Even if the Company satisfies
the foregoing distribution requirements, to the extent that the Company does not
distribute all of its net capital gain or "REIT taxable income" as adjusted, it
will be subject to tax thereon at regular capital gains or ordinary corporate
tax rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (a) 85% of its ordinary income for that year,
(b) 95% of its capital gain net income for that year and (c) 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. In addition, during its Recognition Period, if the Company disposes
of any asset subject to the Built-In Gain Rules, the Company will be required,
pursuant to guidance issued by the IRS, to distribute at least 95% of the
Built-In Gain (after tax), if any, recognized on the disposition of the asset.
The Company intends to make timely distributions sufficient to satisfy
the annual distribution requirements. In this regard, the Operating Partnership
Agreement authorizes the Company, as general partner, to take such steps as may
be necessary to cause the Operating Partnership to distribute to its partners an
amount sufficient to permit the Company to meet these distribution requirements.
It is expected that the Company's REIT taxable income will be less than
its cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it will
generally have sufficient cash or liquid assets to enable it to satisfy the 95%
distribution requirement. It is possible, however, that the Company, from time
to time, may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement or to distribute such greater amount as may be
necessary to avoid income and excise taxation, due to timing differences between
(i) the actual receipt of income and the actual payment of deductible expenses
and (ii) the inclusion of such income and the deduction of such expenses in
arriving at taxable income of the Company, or as a result of nondeductible cash
expenditures such as principal amortization or capital expenditures in excess of
noncash deductions. In the event that such timing differences occur, the Company
may find it necessary to arrange for borrowings or, if possible, pay taxable
stock dividends in order to meet the distribution requirement.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders 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.
Earnings and Profits. Under recent final Treasury Regulations, the
existence of undistributed earnings and profits of a non-REIT predecessor
corporation at the close of the taxable year generally will preclude a successor
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corporation from qualifying to be taxed as a REIT. Highwoods Properties Company
("HPC"), the Company's predecessor, made an election to be taxed for Federal
income tax purposes under subchapter S of the Code (an "S corporation")
effective as of January 1, 1993. The Company has represented that (i) HPC was an
S corporation for Federal income tax purposes at all times since its
incorporation and was an S corporation until such election was terminated in
connection with the Formation Transactions (the "S Period") and (ii) as of the
time of the acquisition of the assets of HPC by the Company, HPC had no earnings
and profits for Federal income tax purposes. In rendering its opinion regarding
the eligibility of the Company to qualify as a REIT, Smith Helms Mulliss &
Moore, L.L.P. has confirmed (based upon certain factual representations by the
Company) the qualification of HPC as an S corporation at all times since its
incorporation. Moreover, in the event that HPC is found not to have been an S
corporation for some period during its existence and prior to its REIT election,
although not free from doubt, pursuant to Treasury Regulations, the Company may
be able to use certain "deficiency dividend" procedures to distribute any HPC
earnings and profits determined to exist that were not distributed by the close
of the 1994 taxable year. There can be no assurance, however, that 1994
distributions would be sufficient to distribute any HPC earnings and profits
determined to exist or that such deficiency dividends procedures would be
available. In the event that 1994 distributions were insufficient to distribute
any such earnings and profits, and the Company were unable to utilize the
deficiency dividend procedures in the Treasury Regulations, the Company would
fail to qualify as a REIT.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable
year and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current or accumulated
earnings and profits, all distributions to stockholders will be dividends,
taxable as ordinary income, except that, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends-received
deduction. Unless the Company is entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief. For example, if the Company fails to satisfy
the gross income tests because non-qualifying income that the Company
intentionally incurs exceeds the limit on such income, the IRS could conclude
that the Company's failure to satisfy the tests was not due to reasonable cause.
See "Risk Factors -- Adverse Impact on Distributions of Failure to Qualify as a
REIT; Other Tax Liabilities."
Taxation of U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of Common
Stock that (for United States Federal income tax purposes) (a) is a citizen or
resident of the United States, (b) 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 or (c) is an estate or trust, the income of which
is subject to United States Federal income taxation regardless of its source.
For any taxable year for which the Company qualifies for taxation as a REIT,
amounts distributed to taxable U.S. Stockholders will be taxed as follows.
Distributions Generally. Distributions to U.S. Stockholders, other than
capital gain dividends discussed below, will constitute dividends up to the
amount of the Company's current or accumulated earnings and profits and, to that
extent, will be taxable to the stockholders as ordinary income. These
distributions are not eligible for the dividends-received deduction for
corporations. To the extent that the Company makes a distribution in excess of
its current or accumulated earnings and profits, the distribution will be
treated first as a tax-free return of capital, reducing the tax basis in the
U.S. Stockholder's Common Stock, and the distribution in excess of such basis
will be taxable as gain realized from the sale of its Common Stock. Dividends
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 stockholders on December 31 of
the year, provided that the dividends are actually paid by the Company during
January of the following calendar year. Stockholders may not include on their
own Federal income tax returns any tax losses of the Company.
The Company will be treated as having sufficient earnings and profits
to treat as a dividend any distribution by the Company up to the amount required
to be distributed in order to avoid imposition of the 4% excise tax discussed
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in "Federal Income Tax Considerations -- Federal Income Taxation of the Company"
above. Moreover, any "deficiency dividend" will be treated as an ordinary or
capital gain dividend, as the case may be, regardless of the Company's earnings
and profits. As a result, stockholders may be required to treat certain
distributions that would otherwise result in a tax-free return of capital as
taxable dividends.
Capital Gain Distributions. Distributions to U.S. Stockholders that are
properly designated by the Company as capital gain distributions will be treated
as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain) for the taxable year without regard to the period for
which the stockholder has held his stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Capital gain dividends are not eligible for the dividends-received
deduction for corporations.
Passive Activity Loss and Investment Interest Limitations.
Distributions from the Company and gain from the disposition of Common Stock
will not be treated as passive activity income, and therefore stockholders will
not be able to apply any "passive losses" against such income. Dividends from
the Company (to the extent they do not constitute a return of capital) will
generally be treated as investment income for purposes of the investment
interest limitation; net capital gain from the disposition of Common Stock or
capital gain dividends generally will be excluded from investment income.
Certain Dispositions of Shares. Losses incurred on the sale or exchange
of Common Stock held for less than six months (after applying certain holding
period rules) will be deemed long-term capital loss to the extent of any capital
gain dividends received by the selling stockholder from those shares.
Treatment of Tax-Exempt Stockholders. Distributions from the Company to
a tax-exempt employee pension trust or other domestic tax-exempt shareholder
generally will not constitute "unrelated business taxable income" ("UBTI")
unless the stockholder has borrowed to acquire or carry its Common Stock. For
taxable years beginning after December 31, 1993, however, qualified trusts that
hold more than 10% (by value) of the shares of certain REITs may be required to
treat a certain percentage of such a REIT's distributions as UBTI. This
requirement will apply only if (i) the REIT would not qualify as such for
Federal income tax purposes but for the application of a "look-through"
exception to the five or fewer requirement applicable to shares held by
qualified trusts and (ii) the REIT is "predominantly held" by qualified trusts.
A REIT is predominantly held if either (i) a single qualified trust holds more
than 25% by value of the REIT interests or (ii) one or more qualified trusts,
each owning more than 10% by value of the REIT interests, hold in the aggregate
more than 50% of the REIT interests. The percentage of any REIT dividend treated
as UBTI is equal to the ratio of (a) the UBTI earned by the REIT (treating the
REIT as if it were a qualified trust and therefore subject to tax on UBTI) to
(b) the total gross income (less certain associated expenses) of the REIT. A de
minimis exception applies where the ratio set forth in the preceding sentence is
less than 5% for any year. For these purposes, a qualified trust is any trust
described in Section 401 (a) of the Code and exempt from tax under Section
501(a) of the Code. The provisions requiring qualified trusts to treat a portion
of REIT distributions as UBTI will not apply if the REIT is able to satisfy the
five or fewer requirement without relying upon the "look-through" exception. The
restrictions on ownership of Common Stock in the Articles of Incorporation
generally will prevent application of the provisions treating a portion of REIT
distributions as UBTI to tax-exempt entities purchasing Common Stock, absent a
waiver of the restrictions by the Board of Directors.
Special Tax Considerations for Non-U.S. Stockholders
The rules governing United States income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships and foreign trusts and
estates (collectively, "Non-U.S. Stockholders") are complex, and the following
discussion is intended only as a summary of these rules. Prospective Non-U.S.
Stockholders should consult with their own tax advisors to determine the impact
of Federal, state and local income tax laws on an investment in the Company,
including any reporting requirements.
In general, Non-U.S. Stockholders will be subject to regular United
States Federal income tax with respect to their investment in the Company if the
investment is "effectively connected" with the Non-U.S. Stockholder's conduct of
a trade or business in the United States. A corporate Non-U.S. Stockholder that
receives income that is (or is treated as) effectively connected with a U.S.
trade or business may also be subject to the branch profits tax under Section
884
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of the Code, which is payable in addition to regular United States Federal
corporate income tax. The following discussion will apply to Non-U.S.
Stockholders whose investment in the Company is not so effectively connected.
A distribution by the Company that is not attributable to gain from the
sale or exchange by the Company of a United States real property interest and
that is not designated by the Company as a capital gain distribution will be
treated as an ordinary income dividend to the extent that it is made out of
current or accumulated earnings and profits. Generally, any ordinary income
dividend will be subject to a United States Federal income tax equal to 30% of
the gross amount of the dividend unless this tax is reduced by an applicable tax
treaty. Such a distribution in excess of the Company's earnings and profits will
be treated first as a return of capital that will reduce a Non-U.S.
Stockholder's basis in its Common Stock (but not below zero) and then as gain
from the disposition of such shares, the tax treatment of which is described
under the rules discussed below with respect to dispositions of Common Stock.
Distributions by the Company that are attributable to gain from the
sale or exchange of a United States real property interest will be taxed to a
Non-U.S. Stockholder under the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Stockholder as if the distributions were gains "effectively connected" with a
United States trade or business. Accordingly, a Non-U.S. Stockholder will be
taxed at the normal capital gain rates applicable to a U.S. Stockholder (subject
to any applicable alternative minimum tax and a special alternative minimum tax
in the case of non-resident alien individuals). Distributions subject to FIRPTA
also may be subject to a 30% branch profits tax when made to a foreign corporate
stockholder that is not entitled to either a reduced rate or an exemption under
a treaty.
Although tax treaties may reduce the Company's withholding obligations,
the Company generally will be required to withhold from distributions to
Non-U.S. Stockholders, and remit to the IRS, (i) 35% of designated capital gain
dividends (or, if greater, 35% of the amount of any distributions that could be
designated as capital gain dividends) and (ii) 30% of ordinary dividends paid
out of earnings and profits. In addition, if the Company designates prior
distributions as capital gain dividends, subsequent distributions, up to the
amount of such prior distributions, will be treated as capital gain dividends
for purposes of withholding. A distribution in excess of the Company's earnings
and profits will be subject to 30% dividend withholding. If the amount of tax
withheld by the Company with respect to a distribution to a Non-U.S. Stockholder
exceeds the stockholder's United States tax liability with respect to such
distribution, the Non-U.S. Stockholder may file for a refund of such excess from
the IRS.
Unless the Common Stock constitutes a "United States real property
interest" within the meaning of FIRPTA, a sale of Common Stock by a Non-U.S.
Stockholder generally will not be subject to United States Federal income
taxation. The Common Stock will not constitute a United States real property
interest if the Company is a "domestically controlled REIT." A domestically
controlled REIT is a REIT in which at all times during a specified testing
period less than 50% in value of its shares is held directly or indirectly by
Non-U.S. Stockholders. It is currently anticipated that the Company will be a
domestically controlled REIT and therefore that the sale of Common Stock will
not be subject to taxation under FIRPTA. However, because the Common Stock will
be publicly traded, no assurance can be given that the Company will continue to
be a domestically controlled REIT. Notwithstanding the foregoing, capital gains
not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S.
Stockholder is a non-resident alien individual who is present in the United
States for 183 days or more during the taxable year and certain other conditions
apply, in which case the non-resident alien individual will be subject to a 30%
tax on his or her U.S. source capital gains. If the Company were not a
domestically controlled REIT, whether a Non-U.S. Stockholder's sale of Common
Stock would be subject to tax under FIRPTA as a sale of a United States real
property interest would depend on whether the Common Stock were "regularly
traded" on an established securities market (such as the New York Stock
Exchange) on which the Common Stock will be listed and on the size of the
selling stockholder's interest in the Company. If the gain on the sale of Common
Stock were subject to taxation under FIRPTA, the Non-U.S. Stockholder would be
subject to the same treatment as a U.S. Stockholder with respect to the gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of non-resident alien individuals). In addition, distributions
that are treated as gain from the disposition of Common Stock and that are
subject to tax under FIRPTA also may be subject to a 30% branch profit tax when
made to a foreign corporate stockholder that is not entitled to either a reduced
rate or an exemption under a treaty. In any event, a purchaser of Common Stock
from a Non-U.S. Stockholder will not be required to withhold under FIRPTA on the
purchase price if the purchased Common Stock are "regularly traded" on an
established securities market or if the Company is a domestically controlled
REIT. Otherwise, under FIRPTA the purchaser of Common Stock may be required to
withhold 10% of the purchase price and remit this amount to the IRS.
38
<PAGE>
Information Reporting Requirements and Backup Withholding Tax
Under certain circumstances, U.S. Stockholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, Common Stock. Backup withholding will apply only if
the holder (i) fails to furnish his or her taxpayer identification number
("TIN") (which, for an individual, would be his or her Social Security Number),
(ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he or she has
failed to report properly payments of interest and dividends or is otherwise
subject to backup withholding or (iv) under certain circumstances, fails to
certify, under penalties of perjury, that he or she has furnished a correct TIN
and (a) that he or she has not been notified by the IRS that he or she is
subject to backup withholding for failure to report interest and dividend
payments or (b) that he or she has been notified by the IRS that he or she is no
longer subject to backup withholding. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations and
tax-exempt organizations.
U.S. Stockholders should consult their own tax advisors regarding their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a U.S.
Stockholder will be allowed as a credit against the U.S. Stockholder's United
States Federal income tax liability and may entitle the U.S. Stockholder to a
refund, provided that the required information is furnished to the IRS.
Additional issues may arise pertaining to information reporting and
backup withholding for Non-U.S. Stockholders. Non-U.S. Stockholders should
consult their tax advisors with regard to U.S. information reporting and backup
withholding.
Other Tax Considerations
Effect of Tax Status of Operating Partnership on REIT Qualification.
Substantially all of the Company's investments are through the Operating
Partnership. The Operating Partnership may involve special tax considerations.
Such considerations include (i) the allocations of income and expense items of
the Operating Partnership, which could affect the computation of taxable income
of the Company, (ii) the status of the Operating Partnership as a partnership
(as opposed to an association taxable as a corporation) for income tax purposes,
and (iii) the taking of actions by the Operating Partnership that could
adversely affect the Company's qualifications as a REIT. In the opinion of Smith
Helms Mulliss & Moore, L.L.P. and based on certain representations of the
Operating Partnership and the Company, the Operating Partnership will be treated
for Federal income tax purposes as a partnership (and not as an association
taxable as a corporation). If, however, the Operating Partnership were treated
as an association taxable as a corporation, the Company would fail to qualify as
a REIT for a number of reasons.
Tax Allocations with Respect to the Properties. When property is
contributed to a partnership in exchange for an interest in the partnership, the
partnership generally takes a carryover basis in that property for tax purposes
equal to the adjusted basis of the contributing partner in the property, rather
than a basis equal to the fair market value of the property at the time of
contribution. Pursuant to Section 704(c) of the Code, income, gain, loss and
deduction attributable to such contributed property must be allocated in a
manner such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of the contributed property at the time of contribution and the adjusted
tax basis of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are solely for Federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. The Operating Partnership was formed by way of contributions
of appreciated property, i.e., partnership interests in the partnerships
affiliated with HPC. Consequently, the Operating Partnership Agreement requires
tax allocations to be made in a manner consistent with Section 704(c) of the
Code.
IRS Regulations provide partnerships with a choice of several methods
of accounting for Book-Tax Differences for property contributed on or after
December 21, 1993, including the retention of the "traditional method." The
Company utilizes the "traditional method" of determining Section 704(c)
allocations. As a consequence of the Operating Partnership's Book-Tax
Difference, which is substantial, and the use of the traditional method, each
year the Company will recognize additional ordinary income equal to the
reduction in annual depreciation deductions caused by the
39
<PAGE>
Book-Tax Difference. In addition, if any property that has a Book-Tax Difference
is sold for an amount less than its adjusted Book Value, the tax loss, if any,
allocated to the Company will be less than its economic loss, thereby increasing
its taxable income. Although certain tax elections are available that would
eliminate any such distortions by increasing the taxable income (but not the
economic income) allocated to partners other than the Company, the Operating
Partnership does not intend to make such elections. This will cause a greater
portion of the Company's distributions to be taxable to stockholders rather than
treated as a return of capital and may cause the Company to recognize taxable
income in excess of cash proceeds, which might adversely affect the Company's
ability to comply with REIT distribution requirements. See " -- Requirements for
Qualification."
Interests in the partnerships affiliated with HPC purchased by the
Operating Partnership simultaneously with or subsequent to the admission of the
Company to the Operating Partnership initially had a tax basis equal to their
fair market value. Thus, Section 704(c) does not apply to such interests.
Service Companies. A portion of the amounts to be used to fund
distributions to stockholders is expected to come from the Operating Partnership
from distributions on stock of the Service Companies held by the Operating
Partnership. Neither of the Service Companies will qualify as a REIT, and the
Service Companies will pay Federal, state and local income taxes on their
taxable incomes at normal corporate rates. Any Federal, state or local income
taxes that the Service Companies are required to pay will reduce the cash
available for distribution by the Company to its stockholders.
As described above, the value of the securities of each of the Service
Companies held by the Company cannot exceed 5% of the value of the Company's
assets at a time when a Unit holder in the Operating Partnership exercises his
or her redemption right (or the Company otherwise is considered to acquire
additional securities of either of the Service Companies). See " -- Federal
Income Taxation of the Company." This limitation may restrict the ability of
each of the Service Companies to increase the size of its respective business
unless the value of the assets of the Company is increasing at a commensurate
rate.
State and Local Tax
The Company and its stockholders may be subject to state and local tax
in various states and localities, including those in which it or they transact
business, own property, or reside. The tax treatment of the Company and the
stockholders in such jurisdictions may differ from the Federal income tax
treatment described above. Consequently, prospective stockholders should consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in the Common Stock of the Company.
40
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus relates to the possible issuance by the Company of
265,376 Redemption Shares if, and to the extent that, holders of up to 265,376
Units exercise their right to redeem such Units and the Company elects to
satisfy such redemption rights through issuance of Common Stock. The Company has
registered these Redemption Shares to provide the holders thereof with freely
tradeable securities, but registration of such shares does not necessarily mean
that any of such shares will be issued by the Company. The Company will not
receive any proceeds from the issuance of the Redemption Shares to holders of
Units upon receiving a notice of redemption (but it may acquire from such
holders the Units tendered for redemption).
The Company may from time to time issue up to 265,376 shares of
Redemption Shares upon the acquisition of the Units tendered for redemption. The
Company will acquire the exchanging limited partner's Units in exchange for the
Redemption Shares issued in connection with these acquisitions. Consequently,
with each redemption, the Company's interest in the Operating Partnership will
increase.
41
<PAGE>
EXPERTS
The consolidated financial statements and schedule of Highwoods
Properties, Inc., incorporated herein by reference from the Company's Annual
Report (Form 10-K) for the year ended December 31, 1995, the Combined Statement
of Revenue and Certain Expenses of TBC Parkway Plaza, Inc. for the year ended
December 31, 1994, incorporated herein by reference from the Company's Current
Report on Form 8-K, dated December 18, 1995, the Combined Statement of Revenue
and Certain Expenses of the Acquired Properties for the year ended December 31,
1994, incorporated herein by reference from the Company's Current Report on Form
8-K, dated July 12, 1995 (as amended on Form 8-K/A on September 6, 1995 and June
3, 1996), the combined financial statements and schedule of Eakin & Smith for
the year ended December 31, 1995, incorporated by reference from the Company's
Current Report on Form 8-K/A dated April 1, 1996 as amended on June 3, 1996 and
June 18, 1996 and the Historical Summary of Gross Income and Direct Operating
Expenses for certain properties owned by Towermarc Corporation for the year
ended December 31, 1995, incorporated herein by reference from the Company's
Current Report on Form 8-K/A, dated April 29, 1996 as amended on June 3, 1996
and June 18, 1996 have been audited by Ernst & Young LLP, independent auditors,
as set forth in their reports thereon included therein and incorporated herein
by reference. Such financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Crocker Realty Trust, Inc.
as of December 31, 1995 and for the year then ended, the financial statements
of Crocker & Sons, Inc. as of December 31, 1994 and for the year then ended,
and the financial statements of Crocker Realty Investors, Inc. as of December
31, 1994 and 1993, and for the two years ended December 31, 1994, have been
incorporated by reference herein from the Company's Current Report on Form 8-K/A
dated April 29, 1996 as amended on June 3, 1996 and June 18, 1996, in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The combined financial statements of Southeast Realty Corp., AP
Southeast Portfolio Partners, L.P. and AP Fontaine III Partners, L.P. as of
December 31, 1994 and for the year ended December 31, 1994, and the financial
statements of AP Fontaine III Partners, L.P. for the period from October 28,
1993 (date of inception) through December 31, 1993 incorporated herein by
reference from the Company's Current Report on Form 8-K/A dated April 29, 1996
as amended on June 3, 1996 and June 18, 1996, have been audited by Deloitte &
Touche LLP, independent auditors, as set forth in their reports thereon included
therein and incorporated herein by reference and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of AP Southeast Portfolio Partners, L.P. for
the period from its date of inception (November 17, 1993) through December 31,
1993 incorporated herein by reference from the Company's Current Report on Form
8-K/A dated April 29, 1996 as amended on June 3, 1996 and June 18, 1996, have
been so included in reliance on the reports of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
Certain legal matters have been passed upon for the Company by Smith
Helms Mulliss & Moore, L.L.P., Raleigh, North Carolina. In addition, Smith Helms
Mulliss & Moore, L.L.P. has rendered its opinion with respect to certain Federal
income tax matters relating to the Company.
42
<PAGE>
PART II
SUPPLEMENTAL INFORMATION
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth estimates of the various expenses to be
paid by Highwoods Properties, Inc. in connection with the registration of the
Registerable Securities.
Securities and Exchange Commission Registration Fee....... $ 2,494
Fees and Expenses of Counsel.............................. 10,000
NYSE listing fee.......................................... 2,000
Miscellaneous............................................. 5,506
-------
TOTAL............................................ 20,000
Item 15. Indemnification of Directors and Officers
The Company's officers and directors are and will be indemnified
against certain liabilities in accordance with the MGCL, the Articles of
Incorporation and bylaws of the Company and the Operating Partnership Agreement.
The Articles of Incorporation require the Company to indemnify its directors and
officers to the fullest extent permitted from time to time by the MGCL. The MGCL
permits a corporation to indemnify its directors and officers, among others,
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 reasons of their service in those or other capacities unless it
is established that the act or omission of the director or officer was material
to the matter giving rise to the proceeding and was committed in bad faith or
was the result of active and deliberate dishonesty, or the director or officer
actually received an improper personal benefit in money, property or services,
or in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful.
The Operating Partnership Agreement also provides for indemnification
of the Company and its officers and directors to the same extent indemnification
is provided to officers and directors of the Company in its Articles of
Incorporation and limits the liability of the Company and its officers and
directors to the Operating Partnership and its partners to the same extent
liability of officers and directors of the Company to the Company and its
stockholders is limited under the Company's Articles of Incorporation.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1* Articles of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 to
Registrant's registration statement on Form S-11 (File No. 33-76952)
3.2* Bylaws of Registrant (incorporated by reference to Exhibit 3.2 to Registrant's registration
statement on Form S-11 (File No. 33-76952))
5.1 Opinion of Smith Helms Mulliss & Moore, L.L.P. regarding the legality of the shares of
Common Stock being registered
43
<PAGE>
8.1 Opinion of Smith Helms Mulliss & Moore, L.L.P. regarding certain federal tax matters
10.1* Form of Registration Rights and Lock-up Agreement between the Company and the Unit
holders (incorporated by reference to Exhibit 10.2 to Registrant's 10-K for the fiscal year
ended December 31, 1995)
23.1 Consent of Smith Helms Mulliss & Moore, L.L.P. (included as part of Exhibits 5.1 and 8.1)
23.2 Consent of Ernst & Young LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Price Waterhouse LLP
24.1 Power of Attorney (included as part of the signature page to the Registration Statement)
</TABLE>
* Previously filed.
Item 17. Undertakings
(a) 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;
(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 the registration statement;
provided, however, that any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement; provided,
however, that the undertakings set forth in paragraphs (i) and (ii) also shall
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities
44
<PAGE>
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 the 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.
(c) Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions described under 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 Securities 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 being registered, 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.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 Raleigh, State of North Carolina, on July 26, 1996.
HIGHWOODS PROPERTIES, INC.
By: /s/ RONALD P. GIBSON
Ronald P. Gibson
President
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Highwoods Properties, Inc. hereby severally constitute Ronald P.
Gibson and Carman J. Liuzzo and each of them singly, our true and lawful
attorney with full power to them, and each of them singly, to sign for us and in
our names in the capacities indicated below, the Registration Statement filed
herewith and any and all amendments to said Registration Statement, and
generally to do all such things in our names and our capacities as officers and
directors to enable Highwoods Properties, Inc. to comply with the provisions of
the Securities Act of 1933, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signature as they may be signed
by our said attorneys, or any of them, to said Registration Statement and any
and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ O. TEMPLE SLOAN, JR. Chairman of the Board of Directors July 26, 1996
- ---------------------------------
O. Temple Sloan, Jr.
/s/ RONALD P. GIBSON President, Chief Executive Officer and July 26, 1996
- --------------------------------- Director
Ronald P. Gibson
/s/ WILLIAM T. WILSON, III Executive Vice President and Director July 26, 1996
- --------------------------------- and Chief Operating Officer
William T. Wilson, III
/s/ JOHN L. TURNER Chief Investment Officer and Vice July 26, 1996
- --------------------------------- Chairman of the Board of Directors
John L. Turner
/s/ JOHN W. EAKIN Vice President and Director July 26, 1996
- ---------------------------------
John W. Eakin
/s/ THOMAS S. SMITH Vice President and Director July 26, 1996
- ---------------------------------
Thomas S. Smith
<PAGE>
/s/ THOMAS W. ADLER Director July 26, 1996
- ---------------------------------
Thomas W. Adler
/s/ WILLIAM E. GRAHAM, JR. Director July 26, 1996
- ---------------------------------
William E. Graham, Jr.
/s/ ROBERT L. KIRBY Director July 26, 1996
- ---------------------------------
Robert L. Kirby
/s/ L. GLENN ORR, JR. Director July 26, 1996
- ---------------------------------
L. Glenn Orr, Jr.
/s/ WILLARD H. SMITH, JR. Director July 26, 1996
- ---------------------------------
Willard H. Smith, Jr.
/s/ STEPHEN TIMKO Director July 26, 1996
- ---------------------------------
Stephen Timko
/s/ CARMAN J. LIUZZO Vice President, Chief Financial Officer July 26, 1996
- --------------------------------- and Treasurer (Principal Accounting
Carman J. Liuzzo Officer)
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
3.1* Articles of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 to Registrant's registration
statement on Form S-11 (File No. 33-76952))
3.2* Bylaws of Registrant (incorporated by reference to
Exhibit 3.2 to Registrant's registration statement on
Form S-11 (File No. 33-76952))
5.1 Opinion of Smith Helms Mulliss & Moore, L.L.P.
regarding the legality of the shares of Common Stock
being registered
8.1 Opinion of Smith Helms Mulliss & Moore, L.L.P.
regarding certain federal tax matters
10.1* Form of Registration Rights and Lock-up Agreement between the
Company and the Unit holders (incorporated by reference to Exhibit
10.2 to Registrant's 10-K for the fiscal year ended December 31,
1995)
23.1 Consent of Smith Helms Mulliss & Moore, L.L.P.
(included as part of Exhibits 5.1 and 8.1)
23.2 Consent of Ernst & Young LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Price Waterhouse LLP
24.1 Power of Attorney (included as part of the Signature Page of the
Registration Statement)
* Previously filed.
(919) 755-8731
July 26, 1996
Highwoods Properties, Inc.
3100 Smoketree Court
Suite 600
Raleigh, North Carolina 27604
Ladies and Gentlemen:
This opinion is furnished in connection with the registration pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), of 265,376 shares
(the "Shares") of common stock, par value $.01 per share, of Highwoods
Properties, Inc., a Maryland corporation (the "Company").
In connection with rendering this opinion, we have examined the Articles of
Incorporation and Bylaws of the Company, each as amended to date; such records
of the corporate proceedings of the Company as we deemed material; a
registration statement on Form S-3 under the Securities Act relating to the
Shares (the "Registration Statement"), and the prospectus contained therein (the
"Prospectus"), and such other certificates, receipts, records and documents as
we considered necessary for the purposes of this opinion.
We are attorneys admitted to practice in the State of North Carolina. We express
no opinion concerning the laws of any jurisdiction other than the laws of the
United States of America and the State of North Carolina.
Based upon the foregoing, we are of the opinion that when the Shares have been
issued in accordance with the terms of the Prospectus, the Shares will be
legally issued, fully paid and nonassessable shares.
The foregoing assumes that all requisite steps will be taken to comply with the
requirements of the Securities Act and applicable requirements of state laws
regulating the offer and sale of securities.
We consent to your filing this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Matters" in
the Prospectus included therein.
Very truly yours,
SMITH HELMS MULLISS & MOORE, L.L.P.
SMITH HELMS MULLISS & MOORE
ATTORNEYS AT LAW
RALEIGH, NORTH CAROLINA
July 26, 1996
Highwoods Properties, Inc.
3100 Smoketree Court, Suite 600
Raleigh, North Carolina 27604
Ladies and Gentlemen:
In connection with the registration statement on Form S-3 (the
"Registration Statement") being filed by you on or about July 26, 1996 with the
Securities and Exchange Commission regarding the registration of 265,376 shares
of Common Stock under the Securities Act of 1933, as amended, you have requested
our opinion concerning certain of the federal income tax consequences to the
Company of its election to be taxed as a real estate investment trust. This
opinion is based on various assumptions, and is conditioned upon certain
representations made by the Company as to factual matters through a certificate
of an officer of the Company (the "Officer's Certificate"). In addition, this
opinion is based upon the factual representations of the Company concerning its
business and properties as set forth in the Registration Statement.
In our capacity as counsel to the Company, 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 examinations, we have assumed the authenticity of all documents
submitted to us as originals, the genuineness of all signatures thereon, the
legal capacity of natural persons executing such documents and the conformity to
authentic original documents of all documents submitted to us as copies.
<PAGE>
Highwoods Properties, Inc.
July 26, 1996
Page 2
We are opining herein as to the effect on the subject transaction only
of the federal income tax laws of the United States and we express no opinion
with respect to the applicability thereto, or the effect thereon, of other
federal laws, the laws of any other jurisdiction, the laws of any state or as to
any matters of municipal law or the laws of any other local agencies within any
state.
Based on the facts in the Registration Statement and the Officer's
Certificate, it is our opinion that:
1. Commencing with the Company's taxable year ending December
31, 1994, the Company has been organized in conformity with the
requirements for qualification as a "real estate investment trust," and
its proposed method of operation, as described in the representations
of the Company referred to above, will enable it to meet the
requirements for qualification and taxation as a "real estate
investment trust" under the Internal Revenue Code of 1986, as amended
(the "Code").
2. The statements in the Registration Statement set forth
under the caption "Certain Federal Income Tax Considerations" to the
extent such information constitutes matters of law, summaries of legal
matters, or legal conclusions, have been reviewed by us and are
accurate in all material respects.
No opinion is expressed as to any matter not discussed herein.
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 of which are
subject to change either prospectively or retroactively. Also, any variation or
difference in the facts from those set forth in the Registration Statement or
the Officer's Certificate may affect the conclusions stated herein. Moreover,
the Company's qualification and taxation as a real estate investment trust
depends upon the Company's ability to meet (through actual annual operating
results, distribution levels and diversity of stock ownership) the various
qualification tests imposed under the Code, the results of which have not and
will not be reviewed by Smith Helms Mulliss & Moore, L.L.P. Accordingly, no
assurance can be given that the actual results of the Company's operation for
any one taxable year will satisfy such requirements.
This opinion is furnished only to you, and is solely for your use in
connection with the Registration Statement. We hereby consent to the filing of
this opinion as an exhibit to the Registration Statement and to the use of our
name under the caption "Legal Matters" in the Registration Statement.
Very truly yours,
SMITH HELMS MULLISS & MOORE, L.L.P.
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement on Form S-3 No. 333-________ and related Prospectus
of Highwoods Properties, Inc. We also consent to the incorporation by reference
therein of our reports (a) dated February 2, 1996 with respect to the
consolidated financial statements and schedule of Highwoods Properties, Inc.,
included in its Annual Report (Form 10-K) for the year ended December 31, 1995
(as amended on Form 10-K/A dated June 3, 1996 and June 18, 1996) and (b) dated
January 16, 1996 with respect to the audited Statement of Revenue and Certain
Expenses of TBC Parkway Plaza, Inc. for the year ended December 31, 1994,
included in its Current Report on Form 8-K dated December 18, 1995, (c) dated
July 18, 1995 with respect to the Audited Combined Statement of Revenue and
Certain Expenses of the Acquired Properties for the year ended December 31,
1994, included in its Current Report on Form 8-K dated July 12, 1995 (as amended
on Form 8-K/A on September 6, 1995 and June 3, 1996), (d) dated April 17, 1996
with respect to the combined audited financial statements and schedule of Eakin
& Smith for the year ended December 31, 1995 included in its Current Report on
Form 8-K/A dated April 1, 1996 as amended on June 3, 1996 and June 18, 1996 and
(e) dated February 26, 1996 with respect to the audited Historical Summary of
Gross Income and Direct Operating Expenses for certain properties owned by
Towermarc Corporation for the year ended December 31, 1995 included in its
Current Report on Form 8-K/A dated April 29, 1996 as amended on June 3, 1996 and
June 18, 1996, all filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Raleigh, North Carolina
July 25, 1996
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration
statement (No. 333-_______) on Form S-3 of Highwoods Properties, Inc. of our
report dated February 21, 1995, with respect to the combined financial
statements of Southeast Realty Corp., AP Southeast Portfolio Partners, L.P. and
AP Fontaine III Partners, L.P. for the year ended December 31, 1994, and of our
report dated February 10, 1995, on the financial statements of AP Fontaine III
Partners, L.P. for the period from October 28, 1993 (date of inception) to
December 31, 1993, which report appears in the Form 8-K/A of Highwoods
Properties, Inc. dated April 29, 1996, as amended on June 3, 1996 and June 18,
1996. We also consent to the reference to our firm under the heading "Experts"
in the prospectus that is part of the registration statement.
DELOITTE & TOUCHE, LLP
Dallas, Texas
July 26, 1996
ACCOUNTANTS' CONSENT
THE BOARD OF DIRECTORS
HIGHWOODS PROPERTIES, INC.
We consent to the incorporation by reference in the registration
statements (No. 333- _______) on Form S-3 of Highwoods Properties, Inc. of our
report dated March 4, 1996, with respect to the consolidated balance sheet of
Crocker Realty Trust, Inc. as of December 31, 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1995, and our report dated February 3, 1995 with respect to the
balance sheets of Crocker Realty Investors, Inc. as of December 31, 1994 and
1993, and the related statements of operations, stockholders' equity and cash
flows for the years then ended, and our report dated February 23, 1995 with
respect to the balance sheet of Crocker & Sons, Inc. as of December 31, 1994,
and the related statements of operations, stockholders' equity and cash flows
for the year then ended which reports appear in the Form 8-K/A of Highwoods
Properties, Inc. dated April 29, 1996, as amended on June 3, 1996 and June 18,
1996. We also consent to the reference to our firm under the heading "Experts"
in the prospectus that is a part of the registration statement.
KMPG PEAT MARWICK, LLP
Fort Lauderdale, Florida
July 26, 1996
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of Highwoods
Properties, Inc. of our report dated March 7, 1994 relating to the financial
statements of AP Southeast Portfolio Partners, L.P. which appears on page F-13
in the Form 8-K/A of Highwoods Properties, Inc. dated April 29, 1996, as
amended June 3, 1996 and June 18, 1996. We also consent to the references
to us under the heading "Experts" in the prospectus that is part of such
Registration Statement.
PRICE WATERHOUSE LLP
Dallas, Texas
July 25, 1996
