<PAGE>
424B4
333-331183
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED SEPTEMBER 18, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 18, 1997)
7,000,000 SHARES
HIGHWOODS PROPERTIES, INC. (Highwoods Logo)
COMMON STOCK
Highwoods Properties, Inc. (the "Company") is a self-administered and
self-managed equity real estate investment trust ("REIT") that began operations
through a predecessor in 1978. The Company is one of the largest owners and
operators of office and industrial properties in the Southeast. The Company owns
365 properties encompassing approximately 21.8 million rentable square feet
located in 16 markets in North Carolina, Florida, Tennessee, Georgia, Virginia,
South Carolina and Alabama. The Company has entered into agreements with
Associated Capital Properties, Inc. and certain of its affiliates ("ACP") and
other property owners pursuant to which the Company will combine its property
operations with ACP and acquire 84 office properties located in Florida (the
"ACP Transaction"). Assuming consummation of the ACP Transaction, which is
expected to occur by October 15, 1997, the Company will own 449 office and
industrial properties encompassing approximately 28.3 million rentable square
feet and will be the largest full-service real estate operating company in
Florida, specializing in the ownership, management, acquisition and development
of office and industrial properties.
All of the shares of common stock, par value $.01 per share, of the Company
(the "Common Stock") offered hereby are being sold by the Company. Of the
7,000,000 shares of Common Stock offered hereby, 5,600,000 shares of Common
Stock are being offered initially in the United States and Canada and the
remaining 1,400,000 shares are being offered initially outside of the United
States and Canada (collectively, the "Offerings").The Common Stock is listed on
the New York Stock Exchange (the "NYSE") under the symbol "HIW." On September
16, 1997, the last reported sale price of the Common Stock on the NYSE was $35.
See "Price Range of Common Stock and Distribution History."
SEE "RISK FACTORS" BEGINNING ON PAGE 3 IN THE ACCOMPANYING PROSPECTUS FOR
CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share........................................... $ $ $
Total (3)........................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Estimated expenses of the Company of $400,000 will be paid by the
Underwriters.
(3) The Company has granted to the several U.S. Underwriters an option to
purchase up to an additional 840,000 shares of Common Stock to cover
over-allotments, if any, and has granted the several International Managers
an option to purchase up to an additional 210,000 shares of Common Stock to
cover over-allotments, if any. If all of such shares are purchased, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the shares of
Common Stock will be made in New York, New York on or about September , 1997.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES INCORPORATED
SCOTT STRINGFELLOW, INC.
SMITH BARNEY INC.
The date of this Prospectus Supplement is September , 1997.
<PAGE>
* Assumes completion of the ACP Transaction. No assurance can be given that the
ACP Transaction will be consummated. See "Recent Developments."
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
EXERCISING THE OVERALLOTMENT OPTION, ENTERING STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
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<PAGE>
PROSPECTUS SUPPLEMENT 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 SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR INCORPORATED
HEREIN AND THEREIN BY REFERENCE. UNLESS INDICATED OTHERWISE, THE INFORMATION
CONTAINED IN THIS PROSPECTUS SUPPLEMENT ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTIONS ARE NOT EXERCISED. UNLESS THE CONTEXT OTHERWISE REQUIRES,
THE TERMS (I) "COMPANY" 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) "ACP" SHALL MEAN ASSOCIATED CAPITAL PROPERTIES,
INC., ITS PREDECESSORS AND THOSE ENTITIES OWNED OR CONTROLLED BY ASSOCIATED
CAPITAL PROPERTIES, INC., (III) "HIGHWOODS PROPERTIES" SHALL MEAN THE 225
SUBURBAN OFFICE AND 140 INDUSTRIAL (INCLUDING 74 SERVICE CENTER) PROPERTIES
OWNED BY THE COMPANY, (IV) "ACP PROPERTIES" SHALL MEAN THE 77 OFFICE PROPERTIES
OWNED BY ACP AND THE SEVEN OFFICE PROPERTIES THAT ACP HAS UNDER CONTRACT TO
PURCHASE AND (V) "PROPERTIES" SHALL MEAN THE HIGHWOODS PROPERTIES AND THE ACP
PROPERTIES COMBINED. ALL INFORMATION REGARDING THE HIGHWOODS PROPERTIES AND/OR
THE PROPERTIES AS OF JUNE 30, 1997 EXCLUDES INFORMATION ABOUT THE FOUR HIGHWOODS
PROPERTIES ACQUIRED AFTER SUCH DATE.
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT CONTAINS
"FORWARD-LOOKING STATEMENTS" RELATING TO, WITHOUT LIMITATION, FUTURE ECONOMIC
PERFORMANCE, PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS AND
PROJECTIONS OF REVENUE AND OTHER FINANCIAL ITEMS, WHICH CAN BE IDENTIFIED BY THE
USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT,"
"ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR COMPARABLE TERMINOLOGY. THE CAUTIONARY
STATEMENTS SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE ACCOMPANYING
PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
THE COMPANY
GENERAL
The Company is a self-administered and self-managed equity real estate
investment trust ("REIT") that began operations through a predecessor in 1978.
The Company is one of the largest owners and operators of office and industrial
properties in the Southeast. The Company owns a diversified portfolio of 365
in-service office and industrial properties encompassing approximately 21.8
million rentable square feet located in 16 markets in North Carolina, Florida,
Tennessee, Georgia, Virginia, South Carolina and Alabama. The Highwoods
Properties consist of 225 suburban office properties and 140 industrial
(including 74 service center) properties and are leased to approximately 2,050
tenants. As of June 30, 1997, the Highwoods Properties were 93% leased.
In addition, the Company has 26 properties (21 suburban office properties
and five industrial properties) (collectively, the "Development Projects") under
development in North Carolina, Virginia, Tennessee, Georgia and South Carolina,
which will encompass approximately 2.3 million rentable square feet. The Company
also owns approximately 547 acres (and has agreed to purchase an additional 423
acres inclusive of the ACP Transaction) of land for future development
(collectively, the "Development Land"). The Development Land is zoned and
available for office and/or industrial development, substantially all of which
has utility infrastructure already in place. The Company provides leasing,
property management, real estate development, construction and miscellaneous
tenant services for its properties as well as for third parties.
The Company conducts substantially all of its activities through, and
substantially all of its properties are held directly or indirectly by, the
Operating Partnership. The Operating Partnership is controlled by the Company as
its sole general partner. The Company owns approximately 84% of the common
partnership interests ("Common Units") in the Operating Partnership.
RECENT DEVELOPMENTS
The Company has entered into agreements (the "ACP Transaction Agreements")
with ACP and other owners of the ACP Properties pursuant to which the Company
will combine its property operations with ACP and acquire a portfolio of 84
office properties encompassing 6.5 million rentable square feet and
approximately 50 acres of land for development in six markets in Florida (the
"ACP Transaction"). The ACP Properties were 90% leased as of June 30, 1997. The
ACP Properties include 82 office properties (77 of which are suburban) in
Florida's four major markets, Orlando, Tampa, Jacksonville and South Florida,
one 245,000-square foot suburban office property in Tallahassee and one
51,831-square foot suburban office property in Ft. Myers. Upon completion of the
ACP Transaction, the Company will own 449 Properties encompassing approximately
28.3 million rentable square feet and will be the largest full-
S-3
<PAGE>
service real estate operating company in Florida. For a description of the
properties to be acquired in the ACP Transaction, see "The Properties." The ACP
Transaction is expected to close by October 15, 1997, but no assurance can be
made that all or part of the transaction will be consummated.
Under the terms of the ACP Transaction Agreements, the Company will acquire
all of the outstanding capital stock of ACP and all of the ownership interests
in the entities that own the ACP Properties for an aggregate purchase price of
$617 million, subject to certain adjustments. The purchase price is expected to
consist of the issuance of 3,036,702 Common Units (valued at $32.50 per Common
Unit), the assumption of approximately $481 million of mortgage debt ($391
million of which is expected to be paid off by the Company on the date of
closing), the issuance of 90,342 shares of Common Stock (valued at $32.50 per
share), a capital expense reserve of $11 million and a cash payment of
approximately $24 million. Such Common Units and Common Stock are subject to
certain restrictions on transfer or redemption. Also in connection with the ACP
Transaction, the Company will issue to certain affiliates of ACP warrants to
purchase 1,479,290 million shares of Common Stock at $32.50 per share. See
"Recent Developments -- Business Combination with Associated Capital Properties,
Inc. -- GENERAL."
Upon completion of the ACP Transaction, James R. Heistand, president of
ACP, will become a regional vice president of the Company responsible for the
Company's Florida operations. Mr. Heistand has over 19 years of commercial real
estate experience in Florida. Over 100 employees of ACP are expected to join the
Company, including the two other members of ACP's senior management team. See
"Recent Developments -- Business Combination with Associated Capital Properties,
Inc. -- MANAGEMENT OF ACP."
OPERATING STRATEGY
The Company believes that it will continue to benefit from the following
factors:
DIVERSIFICATION. Since its initial public offering (the "IPO") in 1994, the
Company has significantly reduced its dependence on any particular market or
tenant. At the time of the IPO, the Company's portfolio consisted almost
exclusively of office properties in the Raleigh-Durham, North Carolina area (the
"Research Triangle"). Based on June 1997 results, approximately 45% of the
rental revenue from the Highwoods Properties was derived from properties in
North Carolina (26% in the Research Triangle). Upon completion of the ACP
Transaction, approximately 33% of the rental revenue from the Properties will be
derived from properties in North Carolina (19% in the Research Triangle), as
compared to approximately 35% in Florida. The Company's tenants represent a
diverse cross-section of the economy. As of June 30, 1997, the 20 largest
tenants represented approximately 22.4% of the combined rental revenue from the
Highwoods Properties, and the largest single tenant accounted for approximately
4.3% of such revenue. Upon completion of the ACP Transaction, the 20 largest
tenants will account for approximately 21.5% of the combined rental revenue from
the Properties, and the largest single tenant will account for approximately
3.8% of such revenue.
ACQUISITION AND DEVELOPMENT OPPORTUNITIES. The Company believes that it has
several advantages over many of its competitors in pursuing development and
acquisition opportunities. The Company has the flexibility to fund acquisitions
and development projects from numerous sources, including the private and public
debt markets, proceeds from its private and public equity offerings, its $280
million unsecured revolving loan, other bank and institutional borrowings and
the issuance of Common Units, which may provide tax advantages to certain
sellers. In addition, its Development Land offers significant development
opportunities. Upon completion of the ACP Transaction, the Company will own
approximately 597 acres (and will have agreed to purchase an additional 373
acres) of Development Land. The Company's development and acquisition activities
should also continue to benefit from its relationships with tenants and property
owners and management's extensive local knowledge of the Company's markets.
MANAGED GROWTH STRATEGY. The Company's strategy has been to focus its real
estate activities in markets where it believes its extensive local knowledge
gives it a competitive advantage over other real estate developers and
operators. As the Company has expanded into new markets, it has continued to
maintain this localized approach by combining with local real estate operators
with many years of development and management experience in their respective
markets. Also, in making its acquisitions, the Company has sought to employ
those property-level managers who are experienced with the real estate
operations and the local market relating to the acquired properties, so that
approximately 85% of the rentable square footage of the Highwoods Properties was
either developed by the Company or is managed on a day-to-day basis by personnel
that previously managed, leased and/or developed those properties prior to their
acquisition by the Company. As a result of the addition of over 100 ACP
employees upon the anticipated completion of the ACP Transaction, approximately
80% of the rentable square footage of the Properties will have been developed by
the Company or will be managed on a day-to-day basis by personnel that
previously managed, leased and/or developed the Properties prior to their
acquisition by the Company.
S-4
<PAGE>
EFFICIENT, CUSTOMER SERVICE-ORIENTED ORGANIZATION. The Company provides a
complete line of real estate services to its tenants and third parties. The
Company believes that its in-house development, acquisition, construction
management, leasing and management services allow it to respond to the many
demands of its existing and potential tenant base, and enable it to provide its
tenants cost-effective services such as build-to-suit construction and space
modification, including tenant improvements and expansions. The Company believes
that the operating efficiencies achieved through its fully integrated
organization also provide a competitive advantage in setting its lease rates and
pricing other services.
FLEXIBLE AND CONSERVATIVE CAPITAL STRUCTURE. The Company is committed to
maintaining a flexible and conservative capital structure that: (i) allows
growth through development and acquisition opportunities; (ii) provides access
to the private and public equity and debt markets on favorable terms; and (iii)
promotes future earnings growth. Since the IPO, the Company has completed four
public offerings and two private placements of Common Stock and one public
offering of 8 5/8% Series A Cumulative Redeemable Preferred Shares, raising
total net proceeds of approximately $798 million. The net proceeds were
contributed to the Operating Partnership in exchange for additional partnership
interests as required under the Operating Partnership's limited partnership
agreement (the "Operating Partnership Agreement"). In addition, the Company has
a $280 million unsecured revolving line of credit (the "Revolving Loan") from a
syndicate of lenders. On December 2, 1996, the Operating Partnership issued $100
million of 6 3/4% notes due December 1, 2003 (the "2003 Notes") and $110 million
of 7% notes due December 1, 2006 (the "2006 Notes"). On June 24, 1997, a trust
formed by the Operating Partnership issued $100 million of Exercisable Put
Option Securities ("X-POSSM") due June 15, 2004. The X-POSSM bear an interest
rate of 7.19%, representing an effective borrowing cost of 7.09%, net of a
related put option and certain interest rate protection agreement costs. See
"Recent Developments -- Financing Activities and Liquidity."
Assuming completion of the ACP Transaction, the August 1997 Offering and
the Offerings, the Company's pro forma debt as of June 30, 1997 would have
totaled $896 million and would have represented approximately 30.5% of total
market capitalization (based on a price of $35 per share for the Common Stock).
THE PROPERTIES
The following table sets forth certain information about the Highwoods
Properties and the ACP Properties as of June 30, 1997:
<TABLE>
<CAPTION>
ANNUALIZED RENTAL REVENUE (1)
INDUSTRIAL
OFFICE PROPERTIES
PROPERTIES (2) TOTAL
<S> <C> <C> <C>
Highwoods Properties........................................................ $199,216,406 $34,468,743 $233,685,149
ACP Properties.............................................................. 83,949,754 -- 83,949,754
Total..................................................................... $283,166,160 $34,468,743 $317,634,903
</TABLE>
<TABLE>
<CAPTION>
RENTABLE SQUARE FEET
INDUSTRIAL
OFFICE PROPERTIES
PROPERTIES (2) TOTAL
<S> <C> <C> <C>
Highwoods Properties........................................................ 14,439,058 7,143,699 21,582,757
ACP Properties.............................................................. 6,450,652 -- 6,450,652
Total..................................................................... 20,889,710 7,143,699 28,033,409
</TABLE>
<TABLE>
<CAPTION>
PERCENT LEASED
INDUSTRIAL
OFFICE PROPERTIES WEIGHTED
PROPERTIES (2) AVERAGE
<S> <C> <C> <C>
Highwoods Properties........................................................ 94%(3) 90%(4) 93%
ACP Properties.............................................................. 90(5) -- 90
Weighted Average.......................................................... 92% 90% 92%
</TABLE>
<TABLE>
<CAPTION>
AGE (YEARS)
INDUSTRIAL
OFFICE PROPERTIES WEIGHTED
PROPERTIES (2) AVERAGE
<S> <C> <C> <C>
Highwoods Properties........................................................ 11.0 11.9(6) 11.3
ACP Properties.............................................................. 16.3(7) -- 16.3
Weighted Average.......................................................... 12.6 11.9 12.4
</TABLE>
(1) Annualized Rental Revenue is June 1997 rental revenue (base rent plus
operating expense pass throughs) multiplied by 12.
S-5
<PAGE>
(2) Includes 74 service center properties.
(3) Includes 40 single-tenant properties comprising 2.9 million rentable square
feet and 10,152 rentable square feet leased but not occupied.
(4) Includes 25 single-tenant properties comprising 1.6 million rentable square
feet and 66,330 rentable square feet leased but not occupied.
(5) Includes seven single-tenant properties comprising 800,000 rentable square
feet and 170,784 rentable square feet leased but not occupied.
(6) Excludes Ivy Distribution Center. The Company has entered into an agreement
to sell Ivy Distribution Center. Such sale is expected to close by September
30, 1997.
(7) Excludes the Comeau Building, which is a historical building constructed in
1926 and renovated in 1996. Of the 80 ACP Properties built before 1990, 67
have been substantially renovated within the past five years. See "The
Properties -- The ACP Properties."
The following table sets forth certain information about the Properties in
each of the 18 markets as of June 30, 1997:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
OFFICE INDUSTRIAL TOTAL RENTABLE RENTABLE ANNUALIZED
PROPERTIES PROPERTIES (1) PROPERTIES SQUARE FEET SQUARE FEET RENTAL REVENUE(2)
<S> <C> <C> <C> <C> <C> <C>
Research Triangle, NC......... 69 4 73 4,684,867 16.6% $ 60,708,337
Tampa, FL..................... 38 -- 38 2,618,072 9.3 35,269,515
Atlanta, GA................... 35 30 65 4,312,917 15.4 35,716,888
South Florida, FL............. 24 -- 24 1,953,370 7.0 31,793,212
Piedmont Triad, NC............ 25 80 105 4,592,854 16.4 30,178,568
Nashville, TN................. 13 3 16 1,645,839 5.9 23,985,895
Orlando, FL................... 30 -- 30 1,987,742 7.1 22,887,022
Jacksonville, FL.............. 16 -- 16 1,509,609 5.4 18,832,066
Charlotte, NC................. 14 16 30 1,375,122 4.9 13,572,690
Richmond, VA.................. 17 1 18 943,689 3.4 12,767,935
Greenville, SC................ 7 2 9 805,915 2.9 9,464,021
Memphis, TN................... 7 -- 7 466,362 1.7 8,649,836
Columbia, SC.................. 7 -- 7 423,001 1.5 5,550,045
Tallahassee, FL............... 1 -- 1 244,676 0.9 3,158,800
Birmingham, AL................ 1 -- 1 114,539 0.4 1,777,307
Norfolk, VA................... 1 1 2 178,827 0.6 1,553,477
Asheville, NC................. 1 1 2 124,177 0.4 1,136,476
Ft. Myers, FL................. 1 -- 1 51,831 0.2 632,813
Total................... 307 138 445 28,033,409 100.0% $ 317,634,903
<CAPTION>
PERCENT OF
TOTAL ANNUALIZED
RENTAL REVENUE
<S> <C>
Research Triangle, NC......... 19.1%
Tampa, FL..................... 11.1
Atlanta, GA................... 11.2
South Florida, FL............. 10.0
Piedmont Triad, NC............ 9.5
Nashville, TN................. 7.6
Orlando, FL................... 7.2
Jacksonville, FL.............. 5.9
Charlotte, NC................. 4.3
Richmond, VA.................. 4.0
Greenville, SC................ 3.0
Memphis, TN................... 2.7
Columbia, SC.................. 1.7
Tallahassee, FL............... 1.0
Birmingham, AL................ 0.6
Norfolk, VA................... 0.5
Asheville, NC................. 0.4
Ft. Myers, FL................. 0.2
Total................... 100.0%
</TABLE>
(1) Includes 74 service center properties.
(2) Annualized Rental Revenue is June 1997 rental revenue (base rent plus
operating expense pass throughs) multiplied by 12.
THE OFFERINGS
<TABLE>
<S> <C>
Shares Offered........................................ 7,000,000 (1)
Shares to be Outstanding After the Offerings.......... 45,037,400(1)(2)
Use of Proceeds....................................... The Company intends to use the net proceeds to fund the cash portion
of the purchase price of the ACP Transaction and to repay mortgage
debt assumed in connection with the ACP transaction. See "Use of
Proceeds."
NYSE Symbol........................................... "HIW"
</TABLE>
(1) Assumes the Underwriters' over-allotment options to purchase up to an
aggregate of 1,050,000 shares of Common Stock are not exercised. See
"Underwriting."
(2) Includes (a) 44,947,058 shares of Common Stock to be outstanding after the
Offering and (b) 90,342 shares of Common Stock to be issued in connection
with the ACP Transaction. Excludes (i) 2,500,000 shares of Common Stock
reserved for issuance upon exercise of options granted pursuant to the
Amended and Restated 1994 Stock Option Plan, (ii) 1,729,290 shares of Common
Stock that may be issued upon the exercise of warrants granted to certain
officers in connection with certain property acquisitions, including
warrants to purchase 1,479,290 shares of Common Stock to be issued in
connection with the ACP Transaction, (iii) 40,542 shares of Common Stock
that
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<PAGE>
may be issued pursuant to earn-out provisions in an acquisition agreement,
(iv) 354,000 shares of Common Stock that may be issued upon redemption of
Common Units that may be issued in connection with certain property
acquisitions and (v) 10,105,532 shares of Common Stock that may be issued
upon redemption of Common Units (including 3,036,702 Common Units to be
issued in connection with the ACP Transaction), which are redeemable by the
holder for cash or, at the option of the Company, shares of Common Stock on
a one-for-one basis.
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial and
operating information for the Company. The information was derived from, and
should be read in conjunction with, the Company's consolidated financial
statements, which are incorporated by reference in the accompanying Prospectus.
<TABLE>
<CAPTION>
JUNE 14
SIX MONTHS ENDED YEAR ENDED YEAR ENDED 1994 TO
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Total revenue........................................... $ 119,559 $ 51,437 $ 137,926 $ 73,522 $ 19,442
Rental property operating expenses (1).................. 31,588 13,195 35,313 17,049 5,110
General and administrative.............................. 4,284 2,134 5,666 2,737 810
Interest expense........................................ 23,638 9,074 26,610 13,720 3,220
Depreciation and amortization........................... 19,900 7,898 22,095 11,082 2,607
Income before minority interest......................... 40,149 19,136 48,242 28,934 7,695
Minority interest....................................... (6,424) (3,324) (6,782) (4,937) (808)
Income before extraordinary item........................ 33,725 15,812 41,460 23,997 6,887
Extraordinary item-loss on early extinguishment of
debt................................................. (3,337) -- (2,140) (875) (1,273)
Net income.............................................. $ 30,388 $ 15,812 $ 39,320 $ 23,122 $ 5,614
Dividends on 8 5/8% Series A Cumulative Redeemable
Preferred Shares..................................... (4,102) -- -- -- --
Net income available for common stockholders............ $ 26,286 $ 15,812 $ 39,320 $ 23,122 $ 5,614
Net income per common share............................. $ 0.74 $ 0.80 $ 1.51 $ 1.49 $ 0.63
BALANCE SHEET DATA (AT END OF PERIOD):
Real estate, net of accumulated depreciation............ $1,664,751 $ 721,155 $1,377,874 $ 593,006 $ 207,976
Total assets............................................ 1,737,538 972,536 1,443,440 621,134 224,777
Total mortgages and notes payable....................... 647,473 214,058 555,876 182,736 66,864
OTHER DATA:
FFO (2)................................................. 55,947 27,289 70,620 40,016 10,302
Number of in-service properties......................... 361 201 292 191 44
Total rentable square feet.............................. 21,583,000 10,385,000 17,455,000 9,215,000 2,746,000
</TABLE>
(1) Rental property operating expenses include salaries, real estate taxes,
insurance, repairs and maintenance, property management, security,
utilities, leasing, development, and construction expenses.
(2) Funds From Operations ("FFO") is defined as net income, computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains (losses) from debt restructuring and sales of property, plus
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Management generally considers FFO to be a
useful financial performance measurement of an equity REIT because, together
with net income and cash flows, FFO provides investors with an additional
basis to evaluate the ability of a REIT to incur and service debt and to
fund acquisitions and other capital expenditures. FFO does not represent net
income or cash flows from operating, investing or financing activities as
defined by GAAP. It should not be considered as an alternative to net income
as an indicator of the Company's operating performance or to cash flows as a
measure of liquidity. FFO does not measure whether cash flow is sufficient
to fund all cash needs including principal amortization, capital
improvements and distributions to stockholders. Further, funds from
operations statistics as disclosed by other REITs may not be comparable to
the Company's calculation of FFO.
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<PAGE>
THE COMPANY
GENERAL
The Company is a self-administered and self-managed equity REIT that began
operations through a predecessor in 1978. Following its initial public offering
(the "IPO") in 1994, the Company established itself as one of the largest owners
and operators of suburban office and industrial properties in the Southeast. The
Company owns 365 properties located in 16 markets in North Carolina, Florida,
Tennessee, Georgia, Virginia, South Carolina and Alabama. The Company has
entered into agreements (the "ACP Transaction Agreements") with ACP and other
owners of the ACP Properties pursuant to which the Company will combine its
property operations with ACP and acquire a portfolio of 84 office properties
encompassing approximately 6.5 million rentable square feet and approximately 50
acres of land for development in six markets in Florida (the "ACP Transaction").
Assuming consummation of the ACP Transaction, which is expected to occur by
October 15, 1997, the Company will own 449 office and industrial properties
encompassing approximately 28.3 million rentable square feet and will be the
largest full-service real estate operating company in Florida, specializing in
the ownership, management, acquisition and development of office and industrial
properties. There can be no assurance that all or part of the ACP Transaction
will be consummated. See "Recent Developments."
The Highwoods Properties consist of 225 suburban office properties and 140
industrial (including 74 service center) properties, contain an aggregate of
approximately 21.8 million rentable square feet and are leased to approximately
2,050 tenants. At June 30, 1997, the Highwoods Properties were 93% leased. An
additional 26 properties (the "Development Projects"), which will encompass
approximately 2.3 million rentable square feet are under development in North
Carolina, Virginia, Tennessee, Georgia and South Carolina. The Company also owns
547 acres (and has agreed to purchase an additional 423 acres inclusive of the
ACP Transaction) of Development Land. The Development Land is zoned and
available for office and/or industrial development, substantially all of which
has utility infrastructure already in place.
The Company conducts substantially all of its activities through, and
substantially all of its properties are held directly or indirectly by, the
Operating Partnership. The Operating Partnership is controlled by the Company,
as its sole general partner, which owns approximately 84% of the Common Units in
the Operating Partnership. The remaining Common Units are owned by limited
partners (including certain officers and directors of the Company). Other than
Common Units held by the Company, each Common Unit may be redeemed by the holder
thereof for the cash value of one share of Common Stock or, at the Company's
option, one share (subject to certain adjustments) of Common Stock. With each
such exchange, the number of Common Units owned by the Company and, therefore,
the Company's percentage interest in the Operating Partnership, will increase.
In addition to owning the Highwoods Properties, the Development Projects
and the Development Land, the Company provides leasing, property management,
real estate development, construction and miscellaneous tenant services for its
properties as well as for third parties. The Company conducts its third-party
fee-based services through Highwoods Tennessee Properties, Inc., a wholly owned
subsidiary of the Company, and Highwoods Services, Inc., a subsidiary of the
Operating Partnership.
The Company was formed in North Carolina in 1994. The Company's executive
offices are located at 3100 Smoketree Court, Suite 600, Raleigh, North Carolina
27604, and its telephone number is (919) 872-4924. The Company also maintains
regional offices in Winston-Salem, Greensboro and Charlotte, North Carolina;
Richmond, Virginia; Nashville and Memphis, Tennessee; Atlanta, Georgia; and
Tampa and Boca Raton, Florida.
OPERATING STRATEGY
The Company believes that it will continue to benefit from the following
factors:
DIVERSIFICATION. Since its IPO in 1994, the Company has significantly
reduced its dependence on any particular market, property type or tenant. The
Company's in-service portfolio has expanded from 41 North Carolina properties
(40 of which were in the Research Triangle area) to 365 properties in 16
southeastern markets. Upon completion of the ACP Transaction, the Company will
own 449 properties in 18 southeastern markets. Based on June 1997 results,
approximately 45% of the rental revenue from the Highwoods Properties was
derived from properties in North Carolina (26% in the Research Triangle). Upon
completion
S-8
<PAGE>
of the ACP Transaction, approximately 33% of the rental revenue from the
Properties will be derived from properties in North Carolina (19% in the
Research Triangle), as compared to approximately 35% in Florida.
In February 1997, the Company made a significant investment in the suburban
Atlanta market with the acquisition of the Century Center Office Park and a
business combination with Anderson Properties, Inc. The Company first entered
the Atlanta market as well as four markets in Florida and six other markets
through its September 1996 merger with Crocker Realty Trust, Inc. Prior to its
merger with Crocker, the Company expanded into Winston-Salem/Greensboro, North
Carolina (the "Piedmont Triad") and Charlotte, North Carolina through a merger
with Forsyth Properties, Inc. ("Forsyth") and also completed significant
business combinations in Richmond, Virginia and Nashville, Tennessee. The
Company has focused on markets that, like the Research Triangle, have strong
demographic and economic characteristics. The Company believes that its markets
have the potential over the long term to provide investment returns that exceed
national averages.
The Company's strategy has been to assemble a portfolio of properties that
enables the Company to offer buildings with a variety of cost, tenant finish and
amenity choices that satisfy the facility needs of a wide range of tenants
seeking commercial space. This strategy led, in part, to the Company's
combination with Forsyth in February 1995, which added industrial and service
center properties (as well as additional office properties) to its suburban
office portfolio. Today, based on the June 1997 results for the Highwoods
Properties, approximately 85% of the Company's rental revenue is derived from
suburban office properties and 15% is derived from industrial properties. Upon
completion of the ACP Transaction, approximately 89% of the Company's rental
revenue will be derived from office properties and 11% will be derived from
industrial properties.
The Company has also reduced its dependence on any particular tenant or
tenants in any particular industry. Its tenants represent a diverse
cross-section of the economy. As of June 30, 1997, the 20 largest tenants of the
Highwoods Properties represented approximately 22.4% of the combined rental
revenue from the Highwoods Properties, and the largest single tenant accounted
for approximately 4.3% of such revenue. Upon completion of the ACP Transaction,
the 20 largest tenants of the Properties will represent approximately 21.5% of
the combined rental revenues from the Properties, and the largest single tenant
will account for approximately 3.8% of such revenue. See "The Properties."
ACQUISITION AND DEVELOPMENT OPPORTUNITIES. The Company seeks to acquire
suburban office and industrial properties at prices below replacement cost that
offer attractive returns, including acquisitions of underperforming, high
quality properties in situations offering opportunities for the Company to
improve such properties' operating performance. The Company will also continue
to engage in the selective development of office and industrial projects,
primarily in suburban business parks, and intends to focus on build-to-suit
projects and projects where the Company has identified sufficient demand. In
build-to-suit development, the building is significantly pre-leased to one or
more tenants prior to construction. Build-to-suit projects often foster strong
long-term relationships between the Company and the tenant, creating future
development opportunities as the facility needs of the tenant increase.
The Company believes that it has several advantages over many of its
competitors in pursuing development and acquisition opportunities. The Company
has the flexibility to fund acquisitions and development projects from numerous
sources, including the private and public debt markets, proceeds from its
private and public equity offerings, its $280 million Revolving Loan, other bank
and institutional borrowings and the issuance of Common Units. Frequently, the
Company acquires properties through the exchange of Common Units in the
Operating Partnership for the property owner's equity in the acquired
properties. As discussed above, each Common Unit received by these property
owners is redeemable for cash from the Operating Partnership or, at the
Company's option, shares of Common Stock. In connection with these transactions,
the Company may also assume outstanding indebtedness associated with the
acquired properties. The Company believes that this acquisition method may
enable it to acquire properties at attractive prices from property owners
wishing to enter into tax-deferred transactions. Since the Company's inception
and including the ACP Transaction, Common Units have constituted all or part of
the consideration for 231 properties comprising 16.0 million rentable square
feet. As of June 30, 1997, only 1,200 Common Units had been redeemed for cash,
totaling $35,000.
Another advantage is the Company's commercially zoned and unencumbered
Development Land in existing business parks. Upon completion of the ACP
Transaction the Company will own 597 acres (and will have agreed to purchase an
additional 373 acres) of Development Land, substantially all of which has
utility infrastructure already in place.
S-9
<PAGE>
The Company's development and acquisition activities also benefit from its
local market presence and knowledge. Upon completion of the ACP Transaction, the
Company's property-level officers will have on average over 18 years of real
estate experience in their respective markets. Because of this experience, the
Company is in a better position to evaluate acquisition and development
opportunities. In addition, the Company's relationships with its tenants and
those tenants at properties for which it conducts third-party fee based services
may lead to development projects when these tenants or their affiliates seek new
space. Also, its relationships with other property owners for whom it provides
third-party management services generate acquisition opportunities.
MANAGED GROWTH STRATEGY. The Company's strategy has been to focus its real
estate activities in markets where it believes its extensive local knowledge
gives it a competitive advantage over other real estate developers and
operators. As the Company has expanded into new markets, it has continued to
maintain this localized approach by combining with local real estate operators
with many years of development and management experience in their respective
markets. Also, in making its acquisitions, the Company has sought to employ
those property-level managers who are experienced with the real estate
operations and the local market relating to the acquired properties, so that
approximately 85% of the rentable square footage of the Highwoods Properties was
either developed by the Company or is managed on a day-to-day basis by personnel
that previously managed, leased and/or developed those Highwoods Properties
prior to their acquisition by the Company. Upon completion of the ACP
Transaction, approximately 80% of the rentable square footage of the Properties
will have been developed by the Company or will be managed on a day-to-day basis
by personnel that previously managed, leased and/or developed these Properties
prior to their acquisition by the Company.
EFFICIENT, CUSTOMER SERVICE-ORIENTED ORGANIZATION. The Company provides a
complete line of real estate services to its tenants and third parties. The
Company believes that its in-house development, acquisition, construction
management, leasing and management services allow it to respond to the many
demands of its existing and potential tenant base, and enable it to provide its
tenants cost-effective services such as build-to-suit construction and space
modification, including tenant improvements and expansions. In addition, the
breadth of the Company's capabilities and resources provides it with market
information not generally available. The Company believes that the operating
efficiencies achieved through its fully integrated organization also provide a
competitive advantage in setting its lease rates and pricing other services.
FLEXIBLE AND CONSERVATIVE CAPITAL STRUCTURE. The Company is committed to
maintaining a flexible and conservative capital structure that: (i) allows
growth through development and acquisition opportunities; (ii) provides access
to the private and public equity and debt markets on favorable terms; and (iii)
promotes future earnings growth.
The Company and the Operating Partnership have demonstrated a strong and
consistent ability to access the private and public equity and debt markets.
Since the IPO, the Company has completed four public offerings and two private
placements of its Common Stock and one public offering of 8 5/8% Series A
Cumulative Redeemable Preferred Shares, raising total net proceeds of $798
million, which were contributed to the Operating Partnership in exchange for
additional partnership interests as required by the Operating Partnership
Agreement. On December 2, 1996, the Operating Partnership issued the 2003 Notes
and the 2006 Notes in aggregate principal amounts of $100 million and $110
million, respectively.
On June 24, 1997, a trust formed by the Operating Partnership sold $100
million of Exercisable Put Option Securities ("X-POSSM"), which represent
fractional undivided beneficial interests in the trust. The assets of the trust
consist of, among other things, $100 million of Exercisable Put Option Notes due
June 15, 2011 issued by the Operating Partnership (the "Put Option Notes"). The
X-POSSM bear an interest rate of 7.19% and mature on June 15, 2004, representing
an effective borrowing cost of 7.09%, net of a related put option and certain
interest rate protection agreement costs. Under certain circumstances, the Put
Option Notes could also become subject to early maturity on June 15, 2004.
In addition, the Company has a $280 million Revolving Loan with a syndicate
of lenders. The Revolving Loan expires on October 31, 1999. As of September 16,
1997, interest on the outstanding balance was payable monthly at a rate of
6.66%.
Assuming completion of the ACP Transaction, the August 1997 Offering and
the Offerings, the Company's pro forma debt as of June 30, 1997 would have
totaled $896 million and would have represented approximately 30.5% of total
market capitalization (based on a price of $35 per share for the Common Stock).
S-10
<PAGE>
RECENT DEVELOPMENTS
BUSINESS COMBINATION WITH ASSOCIATED CAPITAL PROPERTIES, INC.
GENERAL. The Company has entered into the ACP Transaction Agreements with
ACP and the other owners of the ACP Properties pursuant to which the Company
will combine its property operations with ACP and acquire a portfolio of office
properties and development land in Florida (the "ACP Transaction"). The ACP
Transaction involves 84 office properties encompassing 6.5 million rentable
square feet (the "ACP Properties") and approximately 50 acres of land for
development with a build-out capacity of 1.9 million square feet. At June 30,
1997, the ACP Properties were 90% leased to approximately 1,100 tenants
including IBM, the state of Florida, Prudential, Price Waterhouse, AT&T, GTE,
Prosource, Lockheed Martin, NationsBank and Accustaff. Seventy-nine of the ACP
Properties are located in suburban submarkets, with the remaining properties
located in the central business districts of Orlando, Jacksonville and West Palm
Beach. For a description of the ACP Properties, see "The Properties." Although
the Company expects the ACP Transaction to close by October 15, 1997, no
assurance can be made that all or part of the transaction will be consummated.
Upon consummation of the ACP Transaction, the Company will become the
largest full-service real estate operating company in Florida, specializing in
the ownership, management, acquisition and development of office and industrial
properties. Upon completion of the ACP Transaction, the Company will have
offices in North Carolina's three major markets: the Research Triangle, the
Piedmont Triad and Charlotte, North Carolina; Richmond, Virginia; Nashville and
Memphis, Tennessee; Atlanta, Georgia; and Tampa, Boca Raton, Orlando, South
Florida, Tallahassee and Jacksonville, Florida. Following the ACP Transaction,
the Company will own 449 in-service properties (the "Properties") totaling
approximately 28.3 million rentable square feet.
The Company believes that the ACP Transaction is a unique investment
opportunity. The merger with ACP will combine the Company with Florida's largest
owner and operator of office properties. ACP has a demonstrated capacity for
value-added acquisitions and is regarded as one of the region's premier office
operators. Upon consummation of the ACP Transaction, Florida will become the
Company's largest market and the Company will enjoy a combined nine percent
share of the office market in the state's four largest metropolitan markets
Orlando, Tampa, Jacksonville and South Florida. From May 1996 to May 1997,
Florida's employment growth averaged 4%, compared to nationwide growth of
approximately 2% during the same period. The Company believes that the Florida
markets are early in the office recovery cycle, as evidenced by declining
vacancy rates, significant increases in rental rates and modest development
activity. The Company also believes that Florida's complex permitting and
regulatory environment discourages competitors by creating various barriers to
entry that serve to limit new development.
Under the terms of the ACP Transaction Agreements, the Company will acquire
all of the outstanding capital stock of ACP and all of the ownership interests
in the entities that own the ACP Properties for an aggregate purchase price of
$617 million, subject to certain adjustments. The cost of the ACP Transaction is
expected to consist of the issuance of 3,036,702 Common Units (valued at $32.50
per Common Unit), the assumption of approximately $481 million of mortgage debt
($391 million of which is expected to be paid off by the Company on the date of
closing), the issuance of 90,342 shares of Common Stock (valued at $32.50 per
share), a capital expense reserve of $11 million and a cash payment of
approximately $24 million. All Common Units and Common Stock to be issued in the
transaction are subject to restrictions on transfer or redemption. Lock-up
restrictions with respect to the Common Units issued to ACP and its affiliates
will expire over a three-year period in equal annual installments commencing one
year from the date of issuance. The restrictions on the transfer of the Common
Stock to be issued to ACP and its affiliates are to expire in 25% increments
(six months, one year, two years and three years from the date of closing). All
lockup restrictions on the transfer of such Common Units or Common Stock issued
to ACP and its affiliates will expire in the event of a change of control of the
Company or a material adverse change in the financial condition of the Company.
Such restrictions will also expire if James R. Heistand, president of ACP, is
not appointed or elected as a director of the Company within one year from the
date of closing. Also in connection with the ACP Transaction, the Company will
issue to certain affiliates of ACP warrants to purchase 1,479,290 shares of the
Common Stock at $32.50 per share.
Under the terms of the the ACP Transaction Agreements, the right of the
Company or ACP to terminate the ACP Transaction is generally limited to the
following: (i) the failure of the other party to close on
S-11
<PAGE>
or before October 15, 1997; provided that the terminating party has acted in
good faith; (ii) the existence of any material adverse change in the business or
financial condition or the financial or business prospects of the Company since
March 31, 1997; and (iii) the existence of any material structural or
environmental defects or title or other deficiencies existing at any or all of
the ACP Properties. In certain circumstances, if the ACP Transaction is
terminated, the terminating party may be required to pay a break-up fee of $15
million.
MANAGEMENT OF ACP. Upon completion of the ACP Transaction, Mr. Heistand
will become a regional vice president of the Company responsible for its Florida
operations and will become an advisory member of the Company's investment
committee. Mr. Heistand is expected to join the Company's Board of Directors and
become a voting member of the Company's investment committee within the next
year. Mr. Heistand has over 19 years of commercial real estate experience in
Florida. Over 100 employees of ACP are expected to join the Company, including
the two other members of ACP's senior management team, Allen C. de Olazarra and
Dale Johannes.
FINANCING ACTIVITIES AND LIQUIDITY
Set forth below is a summary description of the Company's recent financing
activities:
X-POSSM OFFERING. On June 24, 1997, a trust formed by the Operating
Partnership sold $100 million of Exercisable Put Option Securities ("X-POSSM")
due June 15, 2004, which represent fractional undivided beneficial interests in
the trust. The assets of the trust consist of, among other things, $100 million
of Exercisable Put Option Notes due June 15, 2011 issued by the Operating
Partnership. The X-POSSM bear an interest rate of 7.19%, representing an
effective borrowing cost of 7.09%, net of a related put option and certain
interest rate protection agreement costs. Under certain circumstances, the Put
Option Notes could also become subject to early maturity on June 15, 2004.
AUGUST 1997 OFFERING. On August 28, 1997, the Company entered into two
transactions with affiliates of Union Bank of Switzerland (the "August 1997
Offering"). In one transaction, the Company sold 1,800,000 shares of Common
Stock to UBS Limited for net proceeds of approximately $57 million. In the other
transaction, the Company entered into a forward share purchase agreement (the
"Forward Contract") with Union Bank of Switzerland, London Branch ("UBS/LB").
The Forward Contract generally provides that if the price of a share of Common
Stock is above $32.14 (the "Forward Price") on August 28, 1998, UBS/LB will
return the difference (in shares of Common Stock) to the Company. Similarly, if
the price of a share of Common Stock on August 28, 1998 is less than the Forward
Price, the Company will pay the difference to UBS/LB in cash or shares of Common
Stock, at the Company's option.
FINANCING OF THE ACP TRANSACTION. The Company intends to use the proceeds
of the Offerings to fund the $24 million cash portion of the purchase price of
the ACP Transaction and to repay a portion of the $481 million of indebtedness
to be assumed in connection with the ACP Transaction. See "Use of Proceeds." The
Company currently plans to repay all but $90 million of the remaining ACP debt
with the proceeds from a combination of additional preferred share and debt
offerings. Any public offering of additional equity or debt securities will be
made only by means of a separate prospectus supplement. The remaining $90
million of indebtedness consists of fixed rate mortgage loans with an average
maturity of nine years and a weighted average interest rate of 8.27%.
In connection with the ACP Transaction, the Company has obtained a
commitment from UBS for a $300 million bridge loan (the "Bridge Loan"). The
Bridge Loan would be unsecured and would bear interest at a rate of LIBOR plus
75 basis points. The Bridge Loan would have a maturity date three months from
its closing date and would contain financial covenants substantially similar to
those contained in the Company's current Revolving Loan.
PRO FORMA CAPITALIZATION. Assuming completion of the Offerings, the August
1997 Offering and the ACP Transaction, the Company's pro forma debt as of June
30, 1997 would have totaled $896 million and would have represented 30.5% of
total market capitalization (based on a stock price of $35). The Company's pro
forma fixed charge coverage ratio (defined as income before minority interest
plus depreciation and amortization and interest expense divided by contractual
interest expense plus preferred stock dividends) for the quarter ended June 30,
1997 would have equaled 3.1x.
ORGANIZATIONAL CHANGES
Upon completion of the ACP Transaction, the Company will create three
regional divisions. Mr. Heistand, president of ACP, will be responsible for the
Company's Florida operations. John W. Eakin, who joined the Company in
connection with its acquisition of Eakin & Smith in April 1996, will be
responsible for the Company's operations in Tennessee and Alabama. Edward J.
Fritsch, who joined the Company
S-12
<PAGE>
in 1982, will be responsible for the Company's operations in North Carolina,
Georgia, Virginia and South Carolina.
In addition, William T. Wilson III, who served the Company as executive
vice president since its merger with Forsyth Properties, Inc., has resigned as
an officer of the Company. Mr. Wilson will remain on the Company's Board of
Directors.
DEVELOPMENT ACTIVITY
The Company has 26 properties under development in nine markets totaling
approximately 2.3 million square feet of space. The following table summarizes
these Development Projects as of June 30, 1997:
<TABLE>
<CAPTION>
RENTABLE COSTS
SQUARE ESTIMATED AT PRE-LEASING ESTIMATED
NAME LOCATION FEET COSTS 6/30/97 PERCENTAGE COMPLETION
<S> <C> <C> <C> <C> <C> <C>
OFFICE PROPERTIES: (DOLLARS IN THOUSANDS)
Ridgefield III Asheville 57,000 $ 5,200 $ 14 0.0% 1Q98
2400 Century Center Atlanta 135,000 16,200 207 0.0 2Q98
Patewood VI Greenville 107,000 11,400 2,451 0.0 4Q98
Southwind III Memphis 69,000 7,000 2,598 100.0 4Q97
Colonnade Memphis 89,000 9,400 2,047 44.0 1Q98
SouthPointe Nashville 104,000 10,900 2,004 0.0 2Q98
Harpeth V Nashville 65,000 6,900 1,093 0.0 1Q98
Lakeview Ridge II Nashville 61,000 6,100 768 0.0 1Q98
Highwoods Plaza II Nashville 103,000 10,400 5,733 100.0 3Q97
RMIC Piedmont Triad 90,000 7,700 32 100.0 2Q98
Highwoods Center Research Traingle 76,000 8,300 3 0.0 3Q98
Overlook Research Triangle 97,000 9,900 410 0.0 3Q98
Red Oak Research Triangle 65,000 6,000 399 0.0 3Q98
Situs Two Research Triangle 59,000 5,900 758 0.0 3Q98
Rexwood V Research Triangle 60,000 7,400 1,933 28.0 4Q97
ClinTrials Research Triangle 178,000 21,500 4,242 100.0 2Q98
Highwoods V Richmond 67,000 6,600 921 0.0 2Q98
Markel-American Richmond 106,000 10,600 120 48.0 2Q98
Grove Park I Richmond 61,000 5,900 2,143 15.0 3Q97
Highwoods Two Richmond 76,000 7,300 4,958 77.0 3Q97
West Shore III Richmond 55,000 5,300 3,429 87.0 3Q97
OFFICE TOTAL OR WEIGHTED
AVERAGE 1,780,000 $185,900 $36,263 38.0%
INDUSTRIAL PROPERTIES:
TradePort-1 Atlanta 87,000 $ 3,100 $ 1,262 0.0% 4Q97
TradePort-2 Atlanta 87,000 3,100 -- 0.0 4Q97
Newpoint Atlanta 119,000 4,700 2,160 0.0 3Q97
R.F. Micro Devices Piedmont Triad 49,000 8,400 4,089 100.0 4Q97
Highwoods Airport Center Richmond 142,000 6,100 4,997 100.0 3Q97
INDUSTRIAL TOTAL OR WEIGHTED
AVERAGE 484,000 $ 25,400 $12,508 40.0%
TOTAL OR WEIGHTED AVERAGE OF
ALL DEVELOPMENT PROJECTS 2,264,000 $211,300 $48,771 38.0%
</TABLE>
SUMMARY BY ESTIMATED COMPLETION DATE:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Third Quarter 1997 556,000 $ 39,700 $23,420 65.0%
Fourth Quarter 1997 352,000 29,000 9,882 38.0
First Quarter 1998 272,000 27,600 3,922 14.0
Second Quarter 1998 680,000 73,500 7,526 47.0
Third Quarter 1998 297,000 30,100 1,570 0.0
Fourth Quarter 1998 107,000 11,400 2,451 0.0
2,264,000 $211,300 $48,771 38.0%
</TABLE>
OTHER ACQUISITION ACTIVITY
The Company's investment committee continually evaluates potential
acquisition opportunities in both its existing markets and in new markets that
have demographic and economic characteristics similar to its current markets.
Accordingly, at any particular time, the Company is likely to be involved in
negotiations (at various stages) to acquire one or more properties or
portfolios.
S-13
<PAGE>
THE PROPERTIES
GENERAL
The Company owns 225 suburban office properties and 140 industrial
properties, which are located in 16 markets in the Southeast. The office
properties are mid-rise and single-story suburban office buildings. The
industrial properties include 66 warehouse and bulk distribution facilities and
74 service center properties. The service center properties have varying amounts
of office finish (usually at least 33%) and their rents vary accordingly. The
service center properties are suitable for office, retail, light industrial and
warehouse uses. In the aggregate, management developed 160 of the 365 Highwoods
Properties. The Company provides management and leasing services for 347 of the
365 Highwoods Properties.
Upon completion of the ACP Transaction, the Company will own an additional
84 office properties. The ACP Properties are located in six markets in Florida,
including four markets in which the Company currently owns properties
(Jacksonville, Orlando, South Florida and Tampa).
The following table sets forth certain information about the Highwoods
Properties and ACP Properties as of June 30, 1997:
<TABLE>
<CAPTION>
ANNUALIZED RENTAL REVENUE (1)
INDUSTRIAL
OFFICE PROPERTIES
PROPERTIES (2) TOTAL
<S> <C> <C> <C>
Highwoods Properties............................................ $199,216,406 $34,468,743 $233,685,149
ACP Properties.................................................. 83,949,754 -- 83,949,754
Total......................................................... $283,166,160 $34,468,743 $317,634,903
</TABLE>
<TABLE>
<CAPTION>
RENTABLE SQUARE FEET
INDUSTRIAL
OFFICE PROPERTIES
PROPERTIES (2) TOTAL
<S> <C> <C> <C>
Highwoods Properties............................................ 14,439,058 7,143,699 21,582,757
ACP Properties.................................................. 6,450,652 -- 6,450,652
Total......................................................... 20,889,710 7,143,699 28,033,409
</TABLE>
<TABLE>
<CAPTION>
PERCENT LEASED
INDUSTRIAL
OFFICE PROPERTIES WEIGHTED
PROPERTIES (2) AVERAGE
<S> <C> <C> <C>
Highwoods Properties............................................ 94%(3) 90%(4) 93%
ACP Properties.................................................. 90(5) -- 90
Weighted Average.............................................. 92% 90% 92%
</TABLE>
<TABLE>
<CAPTION>
AGE (YEARS)
INDUSTRIAL
OFFICE PROPERTIES WEIGHTED
PROPERTIES (2) AVERAGE
<S> <C> <C> <C>
Highwoods Properties............................................ 11.0 11.9(6) 11.3
ACP Properties.................................................. 16.3(7) -- 16.3
Weighted Average.............................................. 12.6 11.9 12.4
</TABLE>
(1) Annualized Rental Revenue is June 1997 rental revenue (base rent plus
operating expense pass throughs) multiplied by 12.
(2) Includes 74 service center properties.
(3) Includes 40 single-tenant properties comprising 2.9 million rentable square
feet and 10,152 rentable square feet leased but not occupied.
(4) Includes 25 single-tenant properties comprising 1.6 million rentable square
feet and 66,330 rentable square feet leased but not occupied.
(5) Includes seven single tenant properties comprising 800,000 rentable square
feet and 170,784 rentable square feet leased but not occupied.
S-14
<PAGE>
(6) Excludes Ivy Distribution Center. The Company has entered into an agreement
to sell Ivy Distribution Center. Such sale is expected to close by September
30, 1997.
(7) Excludes the Comeau Building, which is a historical building constructed in
1926 and renovated in 1996. Of the 80 ACP Properties built before 1990, 67
have been substantially renovated within the past five years. See " -- The
ACP Properties."
PROPERTY LOCATIONS
Upon completion of the ACP Transaction, the Company will own properties in
18 markets. The following table sets forth certain information about the
Properties in each of the markets at June 30, 1997:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
RENTABLE RENTABLE ANNUALIZED PERCENT OF
OFFICE INDUSTRIAL TOTAL SQUARE SQUARE RENTAL TOTAL ANNUALIZED
PROPERTIES PROPERTIES (1) PROPERTIES FEET FEET REVENUE (2) RENTAL REVENUE
<S> <C> <C> <C> <C> <C> <C> <C>
Research Triangle,
NC................ 69 4 73 4,684,867 16.6% $ 60,708,337 19.1%
Tampa, FL........... 38 -- 38 2,618,072 9.3 35,269,515 11.1
Atlanta, GA......... 35 30 65 4,312,917 15.4 35,716,888 11.2
South Florida, FL... 24 -- 24 1,953,370 7.0 31,793,212 10.0
Piedmont Triad,
NC................ 25 80 105 4,592,854 16.4 30,178,568 9.5
Nashville, TN....... 13 3 16 1,645,839 5.9 23,985,895 7.6
Orlando, FL......... 30 -- 30 1,987,742 7.1 22,887,022 7.2
Jacksonville, FL.... 16 -- 16 1,509,609 5.4 18,832,066 5.9
Charlotte, NC....... 14 16 30 1,375,122 4.9 13,572,690 4.3
Richmond, VA........ 17 1 18 943,689 3.4 12,767,935 4.0
Greenville, SC...... 7 2 9 805,915 2.9 9,464,021 3.0
Memphis, TN......... 7 -- 7 466,362 1.7 8,649,836 2.7
Columbia, SC........ 7 -- 7 423,001 1.5 5,550,045 1.7
Tallahassee, FL..... 1 -- 1 244,676 0.9 3,158,800 1.0
Birmingham, AL...... 1 -- 1 114,539 0.4 1,777,307 0.6
Norfolk, VA......... 1 1 2 178,827 0.6 1,553,477 0.5
Asheville, NC....... 1 1 2 124,177 0.4 1,136,476 0.4
Ft. Myers, FL....... 1 -- 1 51,831 0.2 632,813 0.2
Total........ 307 138 445 28,033,409 100.0% $317,634,903 100.0%
</TABLE>
(1) Includes 74 service center properties.
(2) Annualized Rental Revenue is June 1997 rental revenue (base rent plus
operating expense pass throughs) multiplied by 12.
S-15
<PAGE>
TENANTS
Upon completion of the ACP Transaction, the Properties will be leased to
approximately 3,000 tenants, which engage in a wide variety of businesses. The
following table sets forth information concerning the 20 largest tenants of the
Properties as of June 30, 1997:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER ANNUALIZED ANNUALIZED
TENANT PORTFOLIO (1) OF LEASES RENTAL REVENUE (2) RENTAL REVENUE (2)
<S> <C> <C> <C> <C>
1. IBM........................................ H,A 14 $ 12,023,367 3.79%
2. Federal Government......................... H,A 42 11,364,429 3.58
3. AT&T....................................... H,A 16 6,862,466 2.16
4. Bell South................................. H,A 44 6,060,292 1.91
5. State of Florida........................... A 4 3,224,334 1.02
6. First Citizens Bank & Trust................ H 8 2,869,360 0.90
7. MCI........................................ H,A 11 2,428,690 0.76
8. Independent Life & Accident................ A 1 2,160,000 0.68
9. Price Waterhouse........................... H,A 3 2,138,427 0.67
10. BB&T....................................... H 3 1,912,170 0.60
11. The Martin Agency, Inc..................... H 1 1,879,875 0.59
12. International Paper........................ H 6 1,811,632 0.57
13. Jacobs-Sirrene Engineers, Inc.............. H 1 1,801,694 0.57
14. H.I.P. Health Plan of Florida.............. A 10 1,777,906 0.56
15. Duke University............................ H 5 1,743,889 0.55
16. Blue Cross & Blue Shield of NC............. H 7 1,708,580 0.54
17. Barclays American Mortgage................. H 3 1,665,378 0.52
18. Clintrials................................. H 4 1,642,695 0.52
19. Cigna Health Plans, Inc.................... H 1 1,629,111 0.51
20. GTE........................................ A 2 1,604,800 0.51
Total................................... 186 $ 68,309,096 21.51%
</TABLE>
(1) H=Highwoods and A=ACP.
(2) Annualized Rental Revenue is June 1997 rental revenue (base rent plus
operating expense pass throughs) multiplied by 12.
LEASE EXPIRATIONS OF THE PROPERTIES
The following table sets forth scheduled lease expirations for leases in
place at the Properties as of June 30, 1997, for each of the next 10 years
beginning with June 30, 1997, assuming no tenant exercises renewal options or is
terminated due to default:
<TABLE>
<CAPTION>
PERCENTAGE OF
RENTABLE TOTAL LEASED PERCENTAGE OF
SQUARE FEET SQUARE FEET ANNUALIZED TOTAL ANNUALIZED
NUMBER SUBJECT TO REPRESENTED BY RENTAL REVENUE RENTAL REVENUE
OF LEASES EXPIRING EXPIRING UNDER EXPIRING REPRESENTED BY
LEASE EXPIRING EXPIRING LEASES LEASES LEASES (1) EXPIRING LEASES
<S> <C> <C> <C> <C> <C>
Remainder of 1997.................. 566 2,428,591 9.4% $ 24,405,298 7.7%
1998............................... 788 4,424,274 17.2 51,055,354 16.1
1999............................... 714 4,409,874 17.1 51,829,526 16.2
2000............................... 622 3,931,321 15.3 50,075,932 15.8
2001............................... 413 3,337,214 13.0 45,583,820 14.4
2002............................... 282 2,790,629 10.8 33,817,693 10.6
2003............................... 67 972,615 3.8 14,166,264 4.5
2004............................... 41 849,698 3.3 11,846,802 3.7
2005............................... 34 702,234 2.7 8,944,568 2.8
2006............................... 25 889,358 3.5 11,128,041 3.5
Thereafter......................... 38 1,002,585 3.9 14,781,605 4.7
Total.............................. 3,590 25,738,393 100.0% $317,634,903 100.0%
</TABLE>
(1) Annualized Rental Revenue is June 1997 rental revenue (base rent plus
operating expense pass throughs) multiplied by 12.
S-16
<PAGE>
THE ACP PROPERTIES
The ACP Properties consist of 84 office buildings located in six
metropolitan areas in Florida encompassing a total of approximately 6.5 million
rentable square feet. Seventy-nine of the properties are suburban office
buildings and comprise approximately 5.1 million square feet of rentable space.
The remaining five properties are located in the central business districts of
Orlando, Jacksonville and West Palm Beach.
The ACP Properties generally were developed in the late 1970s and early
1980s and have an average age of approximately 16 years (excluding an
85,000-square foot historical property built in 1926). Of the 80 ACP Properties
built before 1990, 67 have been renovated during the past five years. The
majority of the ACP Properties were acquired by ACP or its predecessors during
the past three years, near the end of a downturn in commercial real estate
markets that resulted from the over-building of the 1980s. Most of the ACP
Properties are used for more than one business activity. The ACP 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 ACP Properties are well
maintained and strategically located near transportation corridors. Other than
regular maintenance operations, routine tenant improvements and a planned
renovation of Independent Square, the Company does not anticipate the necessity
of undertaking any significant renovation or construction projects at any of the
ACP Properties in the near term.
Management of the ACP Properties is supervised by ACP's asset managers in
regional offices. On-site management is conducted by ACP at all of its
properties. The Company intends to retain all of ACP's on-site managers
following completion of the ACP Transaction.
The following table sets forth information regarding the ACP Properties:
<TABLE>
<CAPTION>
TENANTS LEASING
25% OR MORE OF
PERCENT PERCENT RENTABLE SQUARE
RENTABLE LEASED AT OCCUPIED AT FEET AT
NUMBER OF YEAR YEAR SQUARE JUNE 30, JUNE 30, JUNE 30,
PROPERTY BUILDINGS BUILT RENOVATED FEET 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C>
JACKSONVILLE PORTFOLIO
Three Oaks Plaza 3 1972 1977 260,282 95.0% 94.5% N/A
Southpoint Building 1 1980 1994 58,154 63.2 63.2 N/A
Reflections 2 1985 1996 114,188 96.0 96.0 N/A
Independent Square 1 1975 1998 676,021 63.3 44.9 Independent Life & Accident
Life of the South 2 1964 1995 75,960 57.3 57.3 Life Of The South
Building
Harry James Building 1 1982 N/A 30,961 91.9 91.9 Aon Risk Services Inc. of Fl.
CIGNA Building 1 1972 1996 42,274 62.3 62.3 Insurance Co. Of North America
Belfort Park I 1 1988 1996 60,897 97.4 97.4 ACR Systems, Inc.
Belfort Park II 1 1988 1996 55,954 100.0 100.0 Mediaone
Belfort Park III 2 1988 N/A 84,294 100.0 100.0 Xomed, Inc.
JACKSONVILLE TOTAL OR
WEIGHTED AVERAGE 15 1,458,985 76.7% 68.1%
ORLANDO PORTFOLIO
Executive Point Towers 2 1978 1997 124,833 83.9% 73.2% AT&T
One Winter Park 1 1982 1992 62,212 80.7 80.7 N/A
Lakeview Office Park 6 1975 1996 211,266 84.5 77.0 N/A
2699 Lee Road Building 1 1974 1982 87,843 91.4 91.4 N/A
Premier Point North 1 1983 1997 47,871 91.6 91.6 Muscato Corporation
Premier Point South 1 1983 1997 47,581 92.8 92.8 N/A
Skyline Center 1 1985 1997 45,246 87.9 87.9 Hubbard Construction Co.
The Palladium 1 1988 1995 72,278 100.0 100.0 Westinghouse Electric
Corporate Square 4 1971 1997 46,915 64.1 64.1 Valencia Community College
ACP-W 6 1966-1992 1994 315,515 100.0 100.0 AT&T
201 Pine Street Building 1 1980 1994 236,866 97.4 97.4 N/A
CCC Building 1 1990 N/A 165,000 95.0 95.0 Campus Crusade
Interlachen Village 1 1987 N/A 49,705 88.0 88.0 N/A
Signature Plaza 1 1982 1994 273,815 100.0 100.0 N/A
ORLANDO TOTAL OR
WEIGHTED AVERAGE 28 1,786,946 93.1% 91.5%
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
TENANTS LEASING
25% OR MORE OF
PERCENT PERCENT RENTABLE SQUARE
RENTABLE LEASED AT OCCUPIED AT FEET AT
NUMBER OF YEAR YEAR SQUARE JUNE 30, JUNE 30, JUNE 30,
PROPERTY BUILDINGS BUILT RENOVATED FEET 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C>
SOUTH FLORIDA PORTFOLIO
The 1800 Eller Drive 1 1983 1996 100,509 99.0% 99.0% Renaissance Cruises
Building
The Comeau Building 1 1926 1996 85,060 73.0 71.3 N/A
Emerald Hills Executive 1 1979 1992 62,806 97.3 97.3 N/A
Plaza I
Emerald Hills Executive 1 1979 1992 74,141 91.3 86.6 Sheridan Health Corp
Plaza II
Venture Corporate Center 1 1982 1992 82,996 95.5 95.5 Conroy, Simberg & Lewis, P.A.
I
Venture Corporate Center 1 1982 1992 84,328 98.7 89.8 H.I.P. Health Plan of FL/
II Michael Swerdlow Cos.
Venture Corporate Center 1 1982 1992 83,443 100.0 100.0 H.I.P. Health Plan Of FL
III
The Atrium at Coral 1 1984 1996 163,968 95.8 95.8 Prosource
Gables
Dadeland Towers North 3 1972 1997 243,013 89.7 88.4 N/A
2828 Coral Way 1 1985 N/A 60,779 94.0 94.0 Spanish Radio Network
Centrum Plaza 1 1988 1995 41,414 100.0 100.0 N/A
Pine Island Commons 1 1985 1994 60,087 93.0 93.0 N/A
Atrium West 1 1983 1993 91,375 93.0 93.0 Federal Government
Palm Beach Gardens 2 1984 1992 67,657 92.0 92.0 N/A
Corporate Square 3 1981 N/A 88,979 94.0 94.0 Valencia Community College
Design Center 1 1986 N/A 57,500 100.0 100.0 N/A
SOUTH FLORIDA TOTAL OR
WEIGHTED AVERAGE 21 1,448,055 93.5% 92.4%
TALLAHASSEE PORTFOLIO
Blairstone Building 1 1994 N/A 244,676 100.0% 100.0% State of Florida
FT. MYERS PORFOLIO
Sunrise Office Center 1 1974 1997 51,831 72.4% 72.4% N/A
TAMPA PORTFOLIO
Crossroads 1 1981 1997 74,729 62.0% 62.0% N/A
5310 Cypress Center 1 1982 1995 49,578 94.0 94.0 Fireman's Fund Insurance Co./
Drive Pitney Bowes Mgmt Services
5400 Gray Street 1 1973 1997 5,408 100.0 100.0 The Wackenhut Corp
Lakeside 1 1978 1996 91,555 100.0 100.0 American Portable Telecom
Parkside 1 1979 1997 102,046 100.0 100.0 IBM
Horizon 1 1980 1994 92,338 92.8 92.8 IBM
Pavillion 1 1982 N/A 144,166 100.0 100.0 IBM
Spectrum 1 1984 1995 146,994 100.0 100.0 IBM
Lakepoint I 1 1986 N/A 229,358 99.7 99.7 IBM/Price Waterhouse
Grand Plaza 3 1985 1993 238,305 94.0 94.0 N/A
Lakeside Technology 4 1984 1996 147,944 92.0 92.0 NationsBank
Tampa Telecom 2 1991 N/A 137,738 100.0 100.0 GTE
TAMPA TOTAL OR
WEIGHTED AVERAGE 18 1,460,159 95.6% 95.6%
TOTAL OR WEIGHTED
AVERAGE OF ALL ACP
PROPERTIES 84 6,450,652 90.2% 87.5%
</TABLE>
S-18
<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATIONS AND OTHER DIRECTORSHIPS
<S> <C> <C>
O. Temple Sloan, Jr. 58 Director and Chairman of the Board of Directors. Mr. Sloan is a founder
of the predecessor of the Company. Mr. Sloan is a director of
NationsBank, N.A. Mr. Sloan also serves as chairman of General Parts,
Inc., a nationwide distributor of automobile replacement parts, which he
founded.
Ronald P. Gibson 53 Director, President and Chief Executive Officer. Mr. Gibson is a founder
of the Company and has served as president or managing partner of its
predecessor since its formation in 1978.
John L. Turner 51 Director, Vice Chairman of the Board of Directors and Chief Investment
Officer. Mr. Turner co-founded Forsyth's predecessor in 1975.
John W. Eakin 42 Director and Senior Vice President. Mr. Eakin is responsible for
operations in Tennessee and Alabama. Mr. Eakin was the founder and
president of Eakin & Smith, Inc. prior to its merger with the Company.
Gene H. Anderson 52 Director and Senior Vice President. Mr. Anderson manages the operations
of the Company's Georgia properties. Mr. Anderson was the founder and
president of Anderson Properties, Inc. prior to its merger with the
Company.
William T. Wilson III 43 Director. Mr. Wilson served as executive vice president of the Company
from February 1995 until June 1997. Mr Wilson joined Forsyth in 1982 and
served as its president from 1993 until its merger with the Company.
Thomas W. Adler 56 Director. Mr. Adler is a principal of Cleveland Real Estate Partners, a
fee-based real estate service company. Mr. Adler has served as a member
of the executive committee and board of governors of the National
Association of Real Estate Investment Trusts ("NAREIT") and he was
national president in 1990 of the Society of Industrial and Office
Realtors.
William E. Graham, Jr. 67 Director. Mr. Graham is a lawyer in private practice with the firm of
Hunton & Williams. Mr. Graham was a board member, vice chairman and
general counsel of Carolina Power & Light Company. Mr. Graham serves on
the Raleigh board of directors of NationsBank and the board of directors
of BB&T Mutual Funds Group.
L. Glenn Orr, Jr. 57 Director. Mr. Orr is a director of Southern National Corporation and was
its chairman of the board of directors, president and chief executive
officer prior to its merger with Branch Banking and Trust.
Willard H. Smith Jr. 60 Director. Mr. Smith was a managing director of Merrill Lynch. Mr. Smith
is a member of the board of directors of Cohen & Steers Realty Shares,
Cohen & Steers Realty Income Fund, Cohen & Steers Special Equity Fund,
Inc., Cohen & Steers Total Return Realty Fund, Cohen & Steers Equity
Income Fund, Essex Property Trust, Inc., Realty Income Corporation and
Willis Lease Financial Corporation.
</TABLE>
S-19
<PAGE>
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATIONS AND OTHER DIRECTORSHIPS
<S> <C> <C>
Stephen Timko 69 Director. Mr. Timko joined the Board of Directors in February 1995 in
connection with the Company's acquisition of Research Commons. He has
served as associate vice president of financial affairs for Temple
University.
Edward J. Fritsch 38 Senior Vice President and Secretary. Mr. Fritsch is responsible for
operations in North Carolina, Georgia, Virginia and South Carolina. Mr.
Fritsch joined the Company in 1982.
Carman J. Liuzzo 36 Vice President, Chief Financial Officer and Treasurer. Prior to joining
the Company, Mr. Liuzzo was vice president and chief accounting officer
for Boddie-Noell Enterprises, Inc. and Boddie-Noell Restaurant
Properties, Inc. Mr. Liuzzo is a certified public accountant.
Mack D. Pridgen, III 47 Vice President and General Counsel. Prior to joining the Company, Mr.
Pridgen was a partner with Smith Helms Mulliss & Moore, L.L.P.
</TABLE>
In addition, upon completion of the ACP Transaction, James R. Heistand,
president of ACP, will become a senior vice president of the Company responsible
for the Company's Florida operations and will become an advisory member of the
Company's investment committee. Within one year of the ACP Transaction, Mr.
Heistand is expected to join the Company's Board of Directors and become a
voting member of the Company's investment committee.
USE OF PROCEEDS
The net cash proceeds to the Company of the shares of Common Stock offered
in the Offerings are expected to be approximately $232.4 million (approximately
$267.3 million if the Underwriters' over-allotment option is exercised in full),
assuming an offering price of $35 (the closing price of the Common Stock on the
NYSE on September 16, 1997). The Company intends to use the net proceeds to (i)
fund the $24 million cash portion of the purchase price of the ACP Transaction
and (ii) repay approximately $208.4 million of mortgages to be assumed in
connection with the ACP Transaction. The mortgages bear a weighted average
interest rate of 9.4%. Pending such uses, the net proceeds may be invested in
short-term, investment grade, income producing investments such as commercial
paper, government securities or money market funds that invest in government
securities.
S-20
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Common Stock has been traded on the NYSE under the symbol "HIW" since
its initial public offering in June 1994. The following table sets forth the
high and low closing sales prices per share reported on the NYSE for the periods
indicated and the distributions paid per share for each such period.
<TABLE>
<CAPTION>
CLOSING PRICE DISTRIBUTIONS
PER SHARE PER
PERIOD OR QUARTER HIGH LOW SHARE
<S> <C> <C> <C>
June 7, 1994 through June 30, 1994.............................................. $ 21 1/2 $ 19 7/8 $.075(1)
Third Quarter 1994.............................................................. 21 20 .425
Fourth Quarter 1994............................................................. 21 5/8 18 3/4 .425
First Quarter 1995.............................................................. 22 20 .425
Second Quarter 1995............................................................. 25 1/2 21 1/4 .450
Third Quarter 1995.............................................................. 26 7/8 23 7/8 .450
Fourth Quarter 1995............................................................. 28 3/8 25 1/2 .450
First Quarter 1996.............................................................. 30 1/2 27 3/4 .450
Second Quarter 1996............................................................. 30 1/4 26 7/8 .480
Third Quarter 1996.............................................................. 30 3/8 27 .480
Fourth Quarter 1996............................................................. 33 3/4 28 1/2 .480
First Quarter 1997.............................................................. 35 1/2 33 .480
Second Quarter 1997............................................................. 33 1/2 30 .510
July 1, 1997 through September 16, 1997......................................... 35 31 1/16 --
</TABLE>
(1) No distribution was paid during this period. The accrued distribution of
$.075 per share was paid on November 16, 1994 at the time the Company paid
its initial distribution for the period from inception to September 30,
1994.
On September 16, 1997, the last reported sale price of the Common Stock on
the NYSE was $35 per share. On September 16, 1997, the Company had 764
stockholders of record.
The Company intends to continue to declare quarterly distributions on its
Common Stock. However, no assurances can be given as to the amounts of future
distributions as such distributions are subject to the Company's cash flow from
operations, earnings, financial condition, capital requirements and such other
factors as the Board of Directors deems relevant. The Company has determined
that 100% of the per share distribution for 1994, 93% of the per share
distribution for 1995 and 81% of the per share distribution for 1996 represented
ordinary income to the stockholders for income tax purposes. No assurance can be
given that such percentage will not change in future years.
The Company has adopted a program for the reinvestment of distributions
under which holders of Common Stock may elect automatically to reinvest
distributions in additional Common Stock. The Company may, from time to time,
repurchase Common Stock in the open market for purposes of fulfilling its
obligations under this distribution reinvestment program or may elect to issue
additional Common Stock.
S-21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 and on a pro forma basis assuming (i) the issuance and sale of the
7,000,000 shares of Common Stock offered in the Offerings at an assumed offering
price of $35.00 per share and the anticipated application of the net proceeds
therefrom as described in "Use of Proceeds," (ii) the ACP Transaction and (iii)
the August 1997 Offering each had occurred as of June 30, 1997. The
capitalization table should be read in conjunction with the financial statements
and the notes thereto incorporated herein by reference and the pro forma
financial information and the notes thereto incorporated herein by reference.
<TABLE>
<CAPTION>
JUNE 30, 1997
HISTORICAL PRO FORMA
<S> <C> <C>
(IN THOUSANDS)
Debt:
Revolving Loan........................................................ $ -- $ 158,334
Mortgage notes........................................................ 337,473 427,866
6 3/4% Notes due 2003................................................. 100,000 100,000
7% Notes due 2006..................................................... 110,000 110,000
Exercisable Put Option Notes due 2011 (1)............................. 100,000 100,000
Total debt......................................................... 647,473 896,200
Minority interest in the Operating Partnership.......................... 171,759 270,452
Stockholders' equity:
Preferred Stock, $.01 par value; 10,000,000 authorized,
8 5/8% Series A Cumulative Redeemable Preferred Shares
(liquidation preference $1,000 per share), 125,000 shares issued
and outstanding.................................................... 125,000 125,000
Common Stock, $.01 par value; 100,000,000 authorized, 35,931,307
shares and 44,821,649 shares, respectively, issued and outstanding
(2)................................................................ 359 448
Additional paid-in capital............................................ 783,437 1,075,720
Accumulated deficit................................................... (18,706) (18,706)
Total stockholders' equity......................................... 890,095 1,182,475
Total capitalization............................................... $1,709,327 $2,349,127
</TABLE>
(1) On June 24, 1997, a trust formed by the Operating Partnership sold $100
million of Exercisable Put Option Securities ("X-POSSM"), which represent
fractional undivided beneficial interests in the trust. The assets of the
trust consist of, among other things, $100 million of Exercisable Put Option
Notes due June 15, 2011 issued by the Operating Partnership (the "Put Option
Notes"). The X-POSSM bear an interest rate of 7.19% and mature on June 15,
2004, representing an effective borrowing cost of 7.09%, net of a related
put option and certain interest rate protection agreement costs. Under
certain circumstances, the Put Option Notes could also become subject to
early maturity on June 15, 2004.
(2) Excludes (a) 7,068,830 (historical) and 10,105,532 (pro forma) shares of
Common Stock that may be issued upon redemption of Common Units (which are
redeemable by the holder for cash or, at the Company's option, shares of
Common Stock on a one-for-one basis) issued in connection with the formation
of the Company and subsequent property acquisitions, including the ACP
Transaction, (b) 2,500,000 shares of Common Stock reserved for issuance upon
exercise of options granted pursuant to the Amended and Restated 1994 Stock
Option Plan, (c) 1,729,290 shares of Common Stock that may be issued upon
the exercise of outstanding warrants granted to certain officers in
connection with certain property acquisitions, including the ACP
Transaction, (d) 354,000 shares of Common Stock that may be issued upon
redemption of Common Units that may be issued in connection with certain
property acquisitions and (e) 40,542 shares of Common Stock that may be
issued pursuant to earn-out provisions in an acquisition agreement.
S-22
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information
for the Company on an historical basis for the Company for the period from June
14, 1994 (commencement of operations) to December 31, 1994, for the years ended
December 31, 1995 and 1996 and for the six months ended June 30, 1997 and 1996.
The financial data for the six-month periods ended June 30, 1997 and 1996 is
derived from unaudited financial statements. The other data was derived from
unaudited information maintained by the Company. The following information
should be read in conjunction with the financial statements and notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" incorporated by reference in the accompanying Prospectus
and with the financial statements and pro forma financial statements and notes
thereto regarding the ACP Transaction included in the Company's Current Report
on Form 8-K filed on September 18, 1997 which is incorporated herein by
reference.
<TABLE>
<CAPTION>
JUNE 14,
SIX MONTHS ENDED YEAR ENDED YEAR ENDED 1994 TO
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Total revenue............................... $ 119,559 $ 51,437 $ 137,926 $ 73,522 $ 19,442
Rental property operating expenses (1)...... 31,588 13,195 35,313 17,049 5,110
General and administrative.................. 4,284 2,134 5,666 2,737 810
Interest expense............................ 23,638 9,074 26,610 13,720 3,220
Depreciation and amortization............... 19,900 7,898 22,095 11,082 2,607
Income before minority interest............. 40,149 19,136 48,242 28,934 7,695
Minority interest........................... (6,424) (3,324) (6,782) (4,937) (808)
Income before extraordinary item............ 33,725 15,812 41,460 23,997 6,887
Extraordinary item-loss on early
extinguishment of debt................... (3,337) -- (2,140) (875) (1,273)
Net income.................................. 30,388 15,812 39,320 23,122 5,614
Dividends on 8 5/8% Series A Cumulative
Redeemable Preferred Shares.............. (4,102) -- -- -- --
Net income available for common
stockholders............................. $ 26,286 $ 15,812 $ 39,320 $ 23,122 $ 5,614
Net income per common share................. $ 0.74 $ 0.80 $ 1.51 $ 1.49 $ 0.63
BALANCE SHEET DATA
(AT END OF PERIOD):
Real estate, net of accumulated
depreciation.............................. $1,664,751 $ 721,155 $1,377,874 $593,066 $207,976
Total assets................................ 1,737,538 972,536 1,443,440 621,134 224,777
Total mortgages and notes payable........... 647,473 214,058 555,876 182,736 66,864
OTHER DATA:
FFO(2)...................................... 55,947 27,289 70,620 40,016 10,302
Number of in-service properties............. 361 201 292 191 44
Total rentable square feet.................. 21,583,000 10,385,000 17,455,000 9,215,000 2,746,000
</TABLE>
(1) Rental property operating expenses include salaries, real estate taxes,
insurance, repairs and maintenance, property management, security,
utilities, leasing, development, and construction expenses.
(2) Funds From Operations ("FFO") is defined as net income, computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains (losses) from debt restructuring and sales of property, plus
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Management generally considers FFO to be a
useful financial performance measurement of an equity REIT because, together
with net income and cash flows, FFO provides investors with an additional
basis to evaluate the ability of a REIT to incur and service debt and to
fund acquisitions and other capital expenditures. FFO does not represent net
income or cash flows from operating, investing or financing activities as
defined by GAAP. It should not be considered as an alternative to net income
as an indicator of the Company's operating performance or to cash flows as a
measure of liquidity. FFO does not measure whether cash flow is sufficient
to fund all cash needs including principal amortization, capital
improvements and distributions to partners. Further, funds from operations
statistics as disclosed by other REITs may not be comparable to the
Company's calculation of FFO.
S-23
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the terms agreement and
the related underwriting agreement (collectively, the "U.S. Underwriting
Agreement"), the Company has agreed to sell to each of the underwriters named
below (the "U.S. Underwriters"), and each of the U.S. Underwriters, for whom
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Montgomery
Securities, Morgan Stanley Dean Witter, Prudential Securities Incorporated,
Scott & Stringfellow, Inc. and Smith Barney Inc. are acting as representatives
(the "U.S. Representatives"), has severally agreed to purchase from the Company,
the respective number of shares of Common Stock set forth below opposite their
respective names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................................................
Montgomery Securities...............................................................................
Morgan Stanley Dean Witter..........................................................................
Prudential Securities Incorporated..................................................................
Scott & Stringfellow, Inc...........................................................................
Smith Barney Inc....................................................................................
Total.................................................................................. 5,600,000
</TABLE>
The Company also has entered into a terms agreement and related
underwriting agreement (the "International Underwriting Agreement" and, together
with the U.S. Underwriting Agreement, the "Underwriting Agreements") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for whom
Merrill Lynch International, Montgomery Securities, Morgan Stanley & Co.
International Limited, Prudential-Bache Securities (U.K.) Inc., Scott &
Stringfellow, Inc. and Smith Barney Inc. are acting as lead managers. Subject to
the terms and conditions set forth in the International Underwriting Agreement,
and concurrently with the sale of 5,600,000 shares of Common Stock to the U.S.
Underwriters pursuant to the U.S. Underwriting Agreement, the Company has agreed
to sell to the International Managers, and the International Managers have
severally agreed to purchase from the Company, an aggregate of 1,400,000 shares
of Common Stock. The public offering price per share and the underwriting
discount per share are identical under the International Underwriting Agreement
and the U.S. Underwriting Agreement.
In each Underwriting Agreement, the U.S. Underwriters and the International
Managers have agreed, subject to the terms and conditions set forth therein, to
purchase all of the shares being sold pursuant to each such Underwriting
Agreement if any of such shares of Common Stock are purchased. Under certain
circumstances, the commitments of nondefaulting U.S. Underwriters or
International Managers may be increased. The closings with respect to the sale
of the shares to be purchased by the International Managers and the U.S.
Underwriters are conditioned one upon the other.
S-24
<PAGE>
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus
Supplement and to certain dealers at such price less a concession not in excess
of $ per share. The U.S. Underwriters may allow, and such dealers may
re-allow, a discount not in excess of $
per share on sales to certain other dealers. After the Offerings, the public
offering price, concession and discount may be changed.
The Company has been informed that the U.S. Underwriters and the
International Managers have entered into an intersyndicate agreement (the
"Intersyndicate Agreement") that provides for the coordination of their
activities. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and the International Managers are permitted to sell Common Stock
to each other for purposes of resale at the price per share to the public on the
cover page of this Prospectus Supplement, less an amount not greater than the
selling concession. Under the terms of the Intersyndicate Agreement, the
International Managers and any dealer to whom they sell Common Stock will not
offer to sell or sell Common Stock to persons who are United States persons or
Canadian persons or to persons they believe intend to resell to persons who are
United States persons or Canadian persons, and the U.S. Underwriters and any
dealer to whom they sell Common Stock will not offer to sell or sell Common
Stock to persons who are non-United States and non-Canadian persons or to
persons they believe intend to resell to persons who are non-United States and
non-Canadian persons, except in each case for transactions pursuant to the
Intersyndicate Agreement.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days after the date of this Prospectus Supplement, to purchase up to 840,000
additional shares of Common Stock to cover over-allotments, if any, at the price
to the public less the underwriting discount set forth on the cover page of this
Prospectus Supplement. If the U.S. Underwriters exercise this option, each U.S.
Underwriter will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by it shown in the foregoing table bears to the
5,600,000 shares of Common Stock offered hereby. The Company has granted to the
International Managers an option, exercisable for 30 days after the date of this
Prospectus Supplement, to purchase up to 210,000 additional shares of Common
Stock to cover over-allotments, if any, on terms similar to those granted to the
U.S. Underwriters.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
in respect thereof.
The Company and the executive officers and directors of the Company have
agreed that for a period of 90 days from the date of this Prospectus Supplement
they will not, without the prior written consent of Merrill Lynch, sell, offer
to sell, grant any option for the sale of, or otherwise dispose of any shares of
Common Stock or any security convertible into or exercisable for shares, except
for the issuance of Common Stock in connection with property acquisitions, the
Amended and Restated 1994 Stock Option Plan or the conversion of Common Units.
In connection with the Offerings, the rules of the Securities and Exchange
Commission permit the U.S. Representatives and the International Managers to
engage in certain transactions that stabilize the price of the Common Stock.
Such transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
If the U.S. Underwriters or the International Managers create a short
position in the Common Stock in connection with the Offerings (I.E., if they
sell more shares of Common Stock than are set forth on the cover page of this
Prospectus Supplement), the U.S. Representatives and the International Managers,
respectively, may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives and the International Managers also may
elect to reduce any short position by exercising all or part of the
over-allotment options described herein.
The U.S. Representatives and the International Managers also may impose a
penalty bid on certain Underwriters and selling group members. This means that
if the U.S. Representatives and the International Managers purchase shares of
Common Stock in the open market to reduce the U.S. Underwriters' or the
International Managers' short position, respectively, or to stabilize the price
of the Common Stock, they
S-25
<PAGE>
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offerings.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives or the International Managers will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
Merrill Lynch from time to time provides investment banking and financial
advisory services to the Company and the Operating Partnership. Merrill Lynch
also acted as representative of various underwriters in connection with
offerings of the Company's equity securities and the Operating Partnership's
debt securities from 1994 through 1997. In connection with the ACP Transaction,
Merrill Lynch rendered advisory services and provided an opinion to the Board of
Directors of the Company for which it was paid a fee of approximately $1.0
million.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Alston & Bird
LLP, Raleigh, North Carolina. Certain legal matters related to the Offerings
will be passed upon for the Underwriters by Andrews & Kurth L.L.P., Washington,
D.C.
S-26
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES IN
ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
</TABLE>
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Prospectus Supplement Summary.................... S-3
The Company...................................... S-8
Recent Developments.............................. S-11
The Properties................................... S-14
Management....................................... S-19
Use Of Proceeds.................................. S-20
Price Range of Common Stock and Distribution
History........................................ S-21
Capitalization................................... S-22
Selected Financial Data.......................... S-23
Underwriting..................................... S-24
Legal Matters.................................... S-26
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information............................ 2
Incorporation Of Certain Documents By
Reference...................................... 2
The Company And The Operating Partnership........ 3
Risk Factors..................................... 3
Use Of Proceeds.................................. 7
Ratios Of Earnings To Combined Fixed Charges And
Preferred Stock Dividends...................... 7
Description Of Debt Securities................... 8
Description Of Preferred Stock................... 20
Description Of Series A Preferred Shares......... 25
Description Of Depositary Shares................. 26
Description Of Common Stock...................... 29
Federal Income Tax Considerations................ 32
Plan Of Distribution............................. 43
Experts.......................................... 43
Legal Matters.................................... 44
</TABLE>
7,000,000 SHARES
COMMON STOCK
PROSPECTUS SUPPLEMENT
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES INCORPORATED
SCOTT & STRINGFELLOW, INC.
SMITH BARNEY INC.
SEPTEMBER , 1997
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED SEPTEMBER 18, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 18, 1997)
7,000,000 SHARES
COMMON STOCK
Highwoods Properties, Inc. (the "Company") is a self-administered and
self-managed equity real estate investment trust ("REIT") that began operations
through a predecessor in 1978. The Company is one of the largest owners and
operators of office and industrial properties in the Southeast. The Company owns
365 properties encompassing approximately 21.8 million rentable square feet
located in 16 markets in North Carolina, Florida, Tennessee, Georgia, Virginia,
South Carolina and Alabama. The Company has entered into agreements with
Associated Capital Properties, Inc. and certain of its affiliates ("ACP") and
other property owners pursuant to which the Company will combine its property
operations with ACP and acquire 84 office properties located in Florida (the
"ACP Transaction"). Assuming consummation of the ACP Transaction, which is
expected to occur by October 15, 1997, the Company will own 449 office and
industrial properties encompassing approximately 28.3 million rentable square
feet and will be the largest full-service real estate operating company in
Florida, specializing in the ownership, management, acquisition and development
of office and industrial properties.
All of the shares of common stock, par value $.01 per share, of the Company
(the "Common Stock") offered hereby are being sold by the Company. Of the
7,000,000 shares of Common Stock offered hereby, 1,400,000 shares of Common
Stock are being offered initially outside the United States and Canada and the
remaining 5,600,000 shares are being offered initially inside the United States
and Canada (collectively, the "Offerings"). The Common Stock is listed on the
New York Stock Exchange (the "NYSE") under the symbol "HIW." On September 16,
1997, the last reported sale price of the Common Stock on the NYSE was $35. See
"Price Range of Common Stock and Distribution History."
SEE "RISK FACTORS" BEGINNING ON PAGE 3 IN THE ACCOMPANYING PROSPECTUS FOR
CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
[CAPTION]
<TABLE>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share........................................... $ $ $
Total (3)........................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Estimated expenses of the Company of $400,000 will be paid by the
Underwriters.
(3) The Company has granted to the several International Managers an option to
purchase up to an additional 210,000 shares of Common Stock to cover
over-allotments, if any, and has granted the several U.S. Underwriters an
option to purchase up to an additional 840,000 shares of Common Stock to
cover over-allotments, if any. If all of such shares are purchased, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the shares of
Common Stock will be made in New York, New York on or about September , 1997.
MERRILL LYNCH INTERNATIONAL
MONTGOMERY SECURITIES
MORGAN STANLEY DEAN WITTER
PRUDENTIAL-BACHE SECURITIES
SCOTT & STRINGFELLOW, INC.
SMITH BARNEY INC.
The date of this Prospectus Supplement is September , 1997.
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the international terms
agreement and the related underwriting agreement (collectively, the
"International Underwriting Agreement"), the Company has agreed to sell to each
of the underwriters named below (the "International Managers"), and each of the
International Managers, for whom Merrill Lynch International, Montgomery
Securities, Morgan Stanley & Co. International Limited, Prudential-Bache
Securities (U.K.) Inc., Scott & Stringfellow, Inc. and Smith Barney Inc. are
acting as lead managers, has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth below opposite their
respective names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
<S> <C>
Merrill Lynch International.........................................................................
Montgomery Securities...............................................................................
Morgan Stanley & Co. International Limited..........................................................
Prudential-Bache Securities (U.K.) Inc..............................................................
Scott & Stringfellow, Inc...........................................................................
Smith Barney Inc....................................................................................
Total.................................................................................. 1,400,000
</TABLE>
The Company also has entered into a U.S. terms agreement and related U.S.
underwriting agreement (the "U.S. Underwriting Agreement" and, together with the
International Underwriting Agreement, the "Underwriting Agreements") with
certain underwriters in the United States and Canada (the "U.S. Underwriters"
and, together with the International Managers, the "Underwriters") for whom
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Montgomery
Securities, Morgan Stanley Dean Witter, Prudential Securities Incorporated,
Scott & Stringfellow, Inc. and Smith Barney Inc. are acting as representatives
(the "U.S. Representatives"). Subject to the terms and conditions set forth in
the U.S. Underwriting Agreement, and concurrently with the sale of 1,400,000
shares of Common Stock to the International Managers pursuant to the
International Underwriting Agreement, the Company has agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters have severally agreed to purchase from
the Company, an aggregate of 5,600,000 shares of Common Stock. The public
offering price per share and the underwriting discount per share are identical
under the U.S. Underwriting Agreement and the International Underwriting
Agreement.
In each Underwriting Agreement, the U.S. Underwriters and the International
Managers have agreed, subject to the terms and conditions set forth therein, to
purchase all of the shares being sold pursuant to each such Underwriting
Agreement if any of such shares of Common Stock are purchased. Under certain
circumstances, the commitments of nondefaulting U.S. Underwriters or
International Managers may be increased. The closings with respect to the sale
of the shares to be purchased by the International Managers and the U.S.
Underwriters are conditioned one upon the other.
The International Managers have advised the Company that they propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus
S-24
<PAGE>
Supplement and to certain dealers at such price less a concession not in excess
of $ per share. The International Managers may allow, and such dealers may
reallow, a discount not in excess of $ per share on sales to certain other
dealers. After the Offerings, the public offering price, concession and discount
may be changed.
The Company has been informed that the U.S. Underwriters and the
International Managers have entered into an intersyndicate agreement (the
"Intersyndicate Agreement") that provides for the coordination of their
activities. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the price per share to the
public on the cover page of this Prospectus Supplement, less an amount not
greater than the selling concession. Under the terms of the Intersyndicate
Agreement, the International Managers and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to persons
who are United States persons or Canadian persons or to persons they believe
intend to resell to persons who are United States persons or Canadian persons,
and the U.S. Underwriters and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to persons who are
non-United States and non-Canadian persons or to persons they believe intend to
resell to persons who are non-United States and non-Canadian persons, except in
each case for transactions pursuant to the Intersyndicate Agreement.
Each International Manager has agreed that (i) it has not offered or sold,
and it will not offer or sell, directly or indirectly, any shares of Common
Stock offered hereby in the United Kingdom by means of any document except in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Act 1985, (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the shares of Common Stock in, from or
otherwise involving the United Kingdom, and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received by
it in connection with the issuance of shares of Common Stock to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom the
the document may otherwise lawfully be issued or passed on.
Purchasers of shares of Common Stock offered hereby may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase, in addition to the price per share to the public set forth
on the cover page of this Prospectus Supplement.
The Company has granted to the International Managers an option,
exercisable for 30 days after the date of this Prospectus Supplement, to
purchase up to 210,000 additional shares of Common Stock to cover
over-allotments, if any, at the price to the public less the underwriting
discount set forth on the cover page of this Prospectus Supplement. If the
International Managers exercise this option, each of the International Managers
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the foregoing table bears to the 1,400,000
shares of Common Stock offered hereby. The Company has granted to the U.S.
Underwriters an option, exercisable for 30 days after the date of this
Prospectus Supplement, to purchase up to 840,000 additional shares of Common
Stock to cover over-allotments, if any, on terms similar to those granted to the
International Managers.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
in respect thereof.
The Company and the executive officers and directors of the Company have
agreed that for a period of 90 days from the date of this Prospectus Supplement
they will not, without the prior written consent of Merrill Lynch, sell, offer
to sell, grant any option for the sale of, or otherwise dispose of any shares of
Common Stock or any security convertible into or exercisable for shares of
Common Stock, except for the issuance of Common Stock in connection with
property acquisitions, the Amended and Restated 1994 Stock Option Plan or the
conversion of Common Units.
In connection with the Offerings, the rules of the Securities and Exchange
Commission permit the U.S. Representatives and the International Managers to
engage in certain transactions that stabilize the price of the Common Stock.
Such transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
S-25
<PAGE>
If the U.S. Underwriters or the International Managers create a short
position in the Common Stock in connection with the Offerings (I.E., if they
sell more shares of Common Stock than are set forth on the cover page of this
Prospectus Supplement), the U.S. Representatives and the International Managers,
respectively, may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives and the International Managers,
respectively, also may elect to reduce any short position by exercising all or
part of the over-allotment options described herein.
The U.S. Representatives and the International Managers also may impose a
penalty bid on certain Underwriters and selling group members. This means that
if the U.S. Representatives and the International Managers purchase shares of
Common Stock in the open market to reduce the U.S. Underwriters' or the
International Managers' short position, respectively, or to stabilize the price
of the Common Stock, they may reclaim the amount of the selling concession from
the Underwriters and selling group members who sold those shares as part of the
Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offerings.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives or the International Managers will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
Merrill Lynch from time to time provides investment banking and financial
advisory services to the Company and the Operating Partnership. Merrill Lynch
also acted as representative of various underwriters in connection with
offerings of the Company's equity securities and the Operating Partnership's
debt securities from 1994 through 1997. In connection with the ACP Transaction,
Merrill Lynch rendered advisory services and provided an opinion to the Board of
Directors of the Company for which it was paid a fee of approximately $1.0
million.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Alston & Bird
LLP, Raleigh, North Carolina. Certain legal matters related to the Offerings
will be passed upon for the Underwriters by Andrews & Kurth L.L.P., Washington,
D.C.
S-26
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES IN
ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
</TABLE>
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Prospectus Supplement Summary.................... S-3
The Company...................................... S-8
Recent Developments.............................. S-11
The Properties................................... S-14
Management....................................... S-19
Use Of Proceeds.................................. S-20
Price Range of Common Stock and Distribution
History........................................ S-21
Capitalization................................... S-22
Selected Financial Data.......................... S-23
Underwriting..................................... S-24
Legal Matters.................................... S-26
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information............................ 2
Incorporation Of Certain Documents By
Reference...................................... 2
The Company And The Operating Partnership........ 3
Risk Factors..................................... 3
Use Of Proceeds.................................. 7
Ratios Of Earnings To Combined Fixed Charges And
Preferred Stock Dividends...................... 7
Description Of Debt Securities................... 8
Description Of Preferred Stock................... 20
Description Of Series A Preferred Shares......... 25
Description Of Depositary Shares................. 26
Description Of Common Stock...................... 29
Federal Income Tax Considerations................ 32
Plan Of Distribution............................. 43
Experts.......................................... 43
Legal Matters.................................... 44
</TABLE>
7,000,000 SHARES
COMMON STOCK
PROSPECTUS SUPPLEMENT
MERRILL LYNCH INTERNATIONAL
MONTGOMERY SECURITIES
MORGAN STANLEY DEAN WITTER
PRUDENTIAL-BACHE SECURITIES
SCOTT & STRINGFELLOW, INC.
SMITH BARNEY INC.
SEPTEMBER , 1997
<PAGE>
PROSPECTUS
$1,250,000,000
HIGHWOODS PROPERTIES, INC.
COMMON STOCK, PREFERRED STOCK AND DEPOSITARY SHARES
HIGHWOODS/FORSYTH LIMITED PARTNERSHIP
DEBT SECURITIES
Highwoods Properties, Inc. (the "Company") may from time to time offer in
one or more series (i) shares of common stock, $.01 par value per share ("Common
Stock"), (ii) shares of preferred stock, $.01 par value per share ("Preferred
Stock"), and (iii) shares of Preferred Stock represented by depositary shares
(the "Depositary Shares"), with an aggregate public offering price of up to
$830,000,000 (or its equivalent in another currency based on the exchange rate
at the time of sale) in amounts, at prices and on terms to be determined at the
time of offering. Highwoods/Forsyth Limited Partnership (the "Operating
Partnership") may from time to time offer in one or more series unsecured non-
convertible debt securities ("Debt Securities"), with an aggregate public
offering price of up to $420,000,000 (or its equivalent in another currency
based on the exchange rate at the time of sale) in amounts, at prices and on
terms to be determined at the time of offering. The Common Stock, Preferred
Stock, Depositary Shares and Debt Securities (collectively, the "Securities")
may be offered, separately or together, in separate series in amounts, at prices
and on terms to be set forth in one or more supplements to this Prospectus (each
a "Prospectus Supplement"). If any Debt Securities issued by the Operating
Partnership are rated below investment grade at the time of issuance, such Debt
Securities will be fully and unconditionally guaranteed by the Company as to
payment of principal, premium, if any, and interest (the "Guarantees"). Debt
Securities rated investment grade may also be accompanied by a Guarantee to the
extent and on the terms described herein and in the accompanying Prospectus
Supplement. The Company conducts substantially all of its activities through,
and substantially all of its assets are held by, directly or indirectly, the
Operating Partnership. Consequently, the Company's operating cash flow and its
ability to service its financial obligations, including the Guarantees, is
dependent upon the cash flow of, and distributions or other payments from, the
Operating Partnership to the Company.
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Common Stock, any initial
public offering price; (ii) in the case of Preferred Stock, the specific title
and stated value, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price; (iii) in the case of
Depositary Shares, the fractional share of Preferred Stock represented by each
such Depositary Share; and (iv) in the case of Debt Securities, the specific
title, aggregate principal amount, currency, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, terms for
redemption at the option of the Operating Partnership or repayment at the option
of the holder, terms for sinking fund payments, covenants, applicability of any
Guarantees and any initial public offering price. In addition, such specific
terms may include limitations on direct or beneficial ownership and restrictions
on transfer of the Securities, in each case as may be appropriate to preserve
the status of the Company as a real estate investment trust ("REIT") for Federal
income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States Federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS FOR A DESCRIPTION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PURCHASERS OF THE SECURITIES.
The Securities may be offered directly, through agents designated from time
to time by the Company or the Operating Partnership, or to or through
underwriters or dealers. If any agents or underwriters are involved in the sale
of any of the Securities, their names, and any applicable purchase price, fee,
commission or discount arrangement between or among them, will be set forth, or
will be calculable from the information set forth, in an accompanying Prospectus
Supplement. See "Plan of Distribution." No Securities may be sold without
delivery of a Prospectus Supplement describing the method and terms of the
offering of such series of Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is September 18, 1997.
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AVAILABLE INFORMATION
The Company and the Operating Partnership are subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith the Company files reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission") and the Operating Partnership files reports with 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, D.C. 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. Such information, when
available, also may be accessed through the Commission's electronic data
gathering, analysis and retrieval system ("EDGAR") via electronic means,
including the Commission's home page on the Internet (http://www.sec.gov). In
addition, the Common Stock of the Company and certain debt securities of the
Operating Partnership are listed on the New York Stock Exchange ("NYSE"), and
similar information concerning the Company or the Operating Partnership can be
inspected and copied at the offices of the NYSE, 20 Broad Street, New York, New
York 10005.
The Company and the Operating Partnership have filed with the Commission a
registration statement on Form S-3 under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Securities. 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, the Operating Partnership and the Securities, 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 statements
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 or the Operating Partnership
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,
1996;
b. The Operating Partnership's annual report on Form 10-K for the year
ended December 31, 1996;
c. The Company's quarterly reports on Form 10-Q for the periods ended March
31, 1997 and June 30, 1997;
d. The Operating Partnership's quarterly reports on Form 10-Q for the
periods ended March 31, 1997 and June 30, 1997;
e. The Company's current reports on Form 8-K, dated April 1, 1996 (as
amended on June 3, 1996 and June 18, 1996), April 29, 1996 (as amended
on June 3, 1996 and June 18, 1996), January 9, 1997 (as amended on
February 7, 1997 and March 10, 1997), February 12, 1997 and September
18, 1997;
f. The Operating Partnership's current reports on Form 8-K, dated January
9, 1997 (as amended on February 7, 1997 and March 10, 1997) and February
12, 1997; and
g. The description of the Common Stock of the Company included in the
Company's registration statement on Form 8-A, dated May 16, 1994.
All documents filed by the Company or the Operating Partnership 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
Securities to which this Prospectus relates shall be deemed to be incorporated
by reference into this Prospectus and to be a part hereof
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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 that 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.
Copies 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) will be furnished
without charge to each person to whom a copy of this Prospectus is delivered
upon written or oral request. Requests should be made to: Highwoods Properties,
Inc., Investor Relations, 3100 Smoketree Court, Suite 600, Raleigh, North
Carolina 27604.
THE COMPANY AND THE OPERATING PARTNERSHIP
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,
1997, the Company owned a portfolio of 361 in-service office and industrial
properties (the "Properties"), and 543 acres (and had agreed to purchase an
additional 369 acres) of undeveloped land suitable for future development (the
"Development Land"). In addition, as of June 30, 1997, an additional 32
properties (the "Development Projects"), which will encompass approximately 2.6
million square feet, were under development. The Properties consist of 223
suburban office properties and 138 industrial (including 74 service center)
properties located in 16 markets in North Carolina, Florida, Tennessee, Georgia,
Virginia, South Carolina and Alabama. As of June 30, 1997, the Properties
consisted of approximately 21.6 million rentable square feet, which were leased
to approximately 2,050 tenants.
The Company conducts substantially all of its activities through, and
substantially all of its interests in 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, 1997, owned approximately 84% of the common
partnership interests (the "Common Units") in the Operating Partnership. The
remaining Common Units are owned by limited partners (including certain officers
and directors of the Company). Each Common Unit may be redeemed by the holder
thereof for the cash value of one share of Common Stock or, at the Company's
option, one share (subject to certain adjustments) of the Common Stock. With
each such exchange, the number of Common Units owned by the Company and,
therefore, the Company's percentage interest in the Operating Partnership, will
increase.
In addition to owning the Properties, the Development Projects and the
Development Land, the Company provides leasing, property management, real estate
development, construction and miscellaneous services for the Properties as well
as for third parties. The Company conducts its third-party fee-based services
through Highwoods Services, Inc., a subsidiary of the Operating Partnership
("Highwoods Services"), and through Highwoods/Tennessee Properties, Inc., a
wholly owned subsidiary of the Company.
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
Prospective investors should carefully consider, among other factors, the
matters described below before purchasing offered Securities.
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
impacted by business layoffs or downsizing, industry slowdowns, changing
demographics and other factors) and local real estate conditions (such as
oversupply of or reduced demand for office and other competing commercial
properties). As of June 30, 1997, the North Carolina Properties represented 45%
of the annualized rental revenue of the Properties,
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with Research Triangle Properties alone constituting 26%. The Company's
performance and its ability to make distributions to stockholders is dependent
on the economic conditions in its southeastern markets and in its North Carolina
markets in particular. In addition, there can be no assurance as to the
continued growth of the economy in these markets.
CONFLICTS OF INTEREST IN THE BUSINESS OF THE COMPANY
TAX CONSEQUENCES UPON SALE OR REFINANCING OF PROPERTIES. Holders of Common
Units may suffer adverse tax consequences upon the sale or refinancing of any of
the Company's properties; 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 Common Units may influence the
Company not to sell or refinance certain properties even though such sale or
refinancing might otherwise be financially advantageous to the Company.
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.
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 capital stock of the Company 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 SIGNIFICANT CORPORATE
ACTION. The Company may not engage in certain change of control transactions
without the approval of the holders of a majority of the outstanding Common
Units. Should the Company ever own less than a majority of the outstanding
Common Units, this voting requirement might limit the possibility for an
acquisition or change in the control of the Company. As of June 30, 1997, the
Company owned approximately 84% of the Common Units.
STAGGERED BOARD. The board of directors of the Company has three classes of
directors, the terms of which will expire in 1998, 1999 and 2000. 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.
OPERATING PARTNERSHIP AGREEMENT. The Operating Partnership Agreement was
recently amended to clarify the provisions relating to limited partners'
redemption rights in the event of certain changes of control of the Company.
Because these provisions require an acquiror to make provision under certain
circumstances to maintain the Operating Partnership structure and maintain a
limited partner's right to continue to hold Common Units with future redemption
rights, the Amendment could have the effect of discouraging a third party from
making an acquisition proposal for the Company.
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.
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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's ability to make distributions to its
stockholders and the Operating Partnership's ability to make payments of
interest and principal on any Debt Securities may 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 each 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 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 its financial performance.
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 Company's 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 comply in all material respects with 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.
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RISK OF DEVELOPMENT, CONSTRUCTION AND ACQUISITION ACTIVITIES
The Company intends to continue development and construction of office and
industrial properties, including development on the Development Land and the
completion of the Development Projects. Risks associated with the Company's
development and construction activities, including activities relating to the
Development Land and the Development Projects, 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 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.
FINANCING RISKS
DEBT FINANCING. The Company and the Operating Partnership are subject to
the risks associated with debt financing, including the risk that the cash
provided by operating activities will be insufficient to meet required payments
of principal and interest, the risk of rising interest rates on floating rate
debt, the risk that the Company and the Operating Partnership will not be able
to prepay or refinance existing indebtedness (which generally will not have been
fully amortized at maturity) or that the terms of such refinancing will not be
as favorable as the terms of existing indebtedness. If refinancing of such
indebtedness could not be secured on acceptable terms, the Company and/or the
Operating Partnership might be forced to dispose of properties upon
disadvantageous terms, which might result in losses and might adversely affect
the cash flow available for distribution to equity holders or debt service. An
inability to secure refinancing could also cause the Company to issue equity
securities when its valuation is low, which could adversely affect the market
price of such securities. In addition, if a property or properties are mortgaged
to secure payment of indebtedness and the Company is unable to meet mortgage
payments, the mortgage securing the property could be foreclosed upon by, or the
property could be otherwise transferred to, the mortgagee with a consequent loss
of income and asset value to the Company.
RISK OF RISING INTEREST RATES. The Company and the Operating Partnership
have incurred and expect in the future to incur floating rate indebtedness in
connection with the acquisition and development of properties, as well as for
other purposes. Also, additional indebtedness that the Company and the Operating
Partnership incur under the existing revolving credit facility bears interest at
a floating rate. Accordingly, increases in interest rates would increase
interest costs (to the extent that the related indebtedness was not protected by
interest rate protection arrangements).
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 owned or operated by such person.
Certain environmental laws impose liability for release of asbestos-containing
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materials ("ACM"), and third parties may seek recovery from owners or operators
of real property for personal injuries associated with ACM. A number of the
Properties contain ACM or material that is presumed to be ACM. In connection
with the ownership and operation of its properties, the Company may be liable
for such costs. In addition, it is not unusual for property owners to encounter
on-site contamination caused by off-site sources, and the presence of hazardous
or toxic substances at a site in the vicinity of a property could require the
property owner to participate in remediation activities in certain cases or
could have an adverse affect on the value of such property. In a few situations,
contamination from adjacent properties has migrated onto property owned by the
Company; however, based on current information, management of the Company does
not believe that any significant remedial action is necessary at these affected
sites.
As of the date hereof, substantially all of the Properties have been
subjected to a Phase I environmental assessment or assessment update. 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 financial position, operations or liquidity taken as a whole. This
projection, however, could prove to be incorrect depending on certain factors.
For example, the Company's assessments may not reveal all environmental
liabilities, or may underestimate the scope and severity of environmental
conditions observed, with the result that there may be material environmental
liabilities of which the Company is unaware, or material environmental
liabilities may have arisen after the assessments were performed of which the
Company is unaware. In addition, assumptions regarding groundwater flow and the
existence and source of contamination 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, or by third parties
unrelated to the Company.
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 are responsible to the Company for any
damages resulting from the tenants' use of the property. The Company is not
aware of any material 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.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the
Company and the Operating Partnership intend to use the net proceeds from the
sale of Securities for general corporate purposes, including the development and
acquisition of additional properties and other acquisition transactions, the
payment of certain outstanding debt, and improvements to certain properties in
the Company's portfolio. The Company is required, by the terms of the
partnership agreement of the Operating Partnership (the "Operating Partnership
Agreement"), to invest the net proceeds of any sale of Common Stock, Preferred
Stock or Depositary Shares in the Operating Partnership in exchange for
additional partnership interests.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The ratios of earnings to fixed charges for the Company for the six months
ended June 30, 1997 and for the year ended December 31, 1996 were 2.50x and
2.53x, respectively. The ratios of earnings to fixed charges for the Operating
Partnership for the six months ended June 30, 1997 and for the year ended
December 31, 1996 were 2.46x and 2.55x, respectively. The ratios of earnings to
fixed charges for both the Company and the Operating Partnership for the years
ended December 31, 1995, 1994, 1993 and 1992 were 3.00x, 2.42x, 0.97x and 0.95x,
respectively. Earnings were inadequate to cover fixed charges by $171,000 and
$239,000 for the years ended December 31, 1993, and 1992, respectively. These
deficiencies occurred prior to the Company's initial public offering (the "IPO")
of Common Stock in June 1994. Prior to the completion of the IPO, the Company's
predecessor (the "Highwoods Group") operated in a manner as to minimize taxable
income to the owners. As a result, although its properties have generated
positive net cash
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flow, the Highwoods Group had net losses for the years ended December 31, 1992
and 1993. The IPO allowed the Company to significantly deleverage its properties
and improve its ratio of earnings to fixed charges.
On February 12, 1997, the Company issued 125,000 8 5/8% Series A Cumulative
Redeemable Preferred Shares (the "Series A Preferred Shares"), which was its
first and, to date, only issuance of preferred stock. See "Description of Series
A Preferred Shares." For the six months ended June 30, 1997, the ratio of
earnings to combined fixed charges and preferred stock dividends was 2.37x for
the Company and 2.33x for the Operating Partnership.
The ratio of earnings to combined fixed charges and preferred stock
dividends is computed as income from operations before extraordinary items plus
fixed charges (excluding capitalized interest) divided by fixed charges and
preferred stock dividends. Fixed charges and preferred stock dividends consist
of interest costs, including amortization and debt discount and deferred
financing fees, whether capitalized or expensed, the interest component of
rental expense, plus any dividends on outstanding preferred stock.
DESCRIPTION OF DEBT SECURITIES
Unless otherwise specified in the applicable Prospectus Supplement, the
Debt Securities will be issued under an indenture dated as of December 1, 1996
(the "Indenture"), between the Operating Partnership, the Company and First
Union National Bank, as trustee (together with any other trustees appointed in a
supplemental indenture with respect to a particular series, the "Trustee"). The
Indenture has been filed as an exhibit to the registration statement of which
this Prospectus is a part and is available for inspection at the corporate trust
office of the Trustee or as described above under "Available Information." The
Indenture is subject to, and governed by, the Trust Indenture Act of 1939, as
amended (the "TIA"). The statements made hereunder relating to the Indenture and
the Debt Securities to be issued thereunder are summaries of certain provisions
thereof and do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all provisions of the Indenture and such Debt
Securities. All section references appearing herein are to sections of the
Indenture, and capitalized terms used but not defined herein shall have the
respective meanings set forth in the Indenture.
GENERAL
The Debt Securities will be direct, unsecured obligations of the Operating
Partnership and will rank equally with all other unsecured and unsubordinated
indebtedness of the Operating Partnership. At June 30, 1997, the total
outstanding debt of the Operating Partnership was $645.4 million, $363.0 million
of which was secured debt. The Debt Securities may be issued without limit as to
aggregate principal amount, in one or more series, in each case as established
from time to time in or pursuant to authority granted by a resolution of the
board of directors of the Company as sole general partner of the Operating
Partnership or as established in one or more indentures supplemental to the
Indenture. All Debt Securities of one series need not be issued at the same time
and, unless otherwise provided, a series may be reopened, without the consent of
the holders of the Debt Securities of such series, for issuances of additional
Debt Securities of such series (Section 301).
If any Debt Securities are rated below investment grade at the time of
issuance, such Debt Securities will be fully and unconditionally guaranteed by
the Company as to payment of principal, premium, if any, and interest.
The Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
the Indenture may resign or be removed with respect to one or more series of
Debt Securities, and a successor Trustee may be appointed to act with respect to
such series (Section 608). In the event that two or more persons are acting as
Trustee with respect to different series of Debt Securities, each such Trustee
shall be a trustee of a trust under the Indenture separate and apart from the
trust administered by any other Trustee (Section 609), and, except as otherwise
indicated herein, any action described herein to be taken by a Trustee may be
taken by each such Trustee with respect to, and only with respect to, the one or
more series of Debt Securities for which it is Trustee under the Indenture.
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Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including:
(1) the title of such Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) the percentage of the principal amount at which such Debt Securities
will be issued and, if other than the principal amount thereof, the
portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof;
(4) the date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(5) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(6) the date or dates, or the method for determining such date or dates,
from which any interest will accrue, the dates on which any such
interest will be payable, the record dates for such interest payment
dates, or the method by which any such date shall be determined, the
person to whom such interest shall be payable, and the basis upon
which interest shall be calculated if other than that of a 360-day
year of twelve 30-day months;
(7) the place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, such Debt
Securities may be surrendered for registration of transfer or exchange
and notices or demands to or upon the Operating Partnership in respect
of such Debt Securities and the Indenture may be served;
(8) the period or periods within which, the price or prices at which and
the terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the option of the Operating
Partnership, if the Operating Partnership is to have such an option;
(9) the obligation, if any, of the Operating Partnership to redeem, repay
or purchase such Debt Securities pursuant to any sinking fund or
analogous provision or at the option of a holder thereof, and the
period or periods within which, the price or prices at which and the
terms and conditions upon which such Debt Securities will be redeemed,
repaid or purchased, as a whole or in part, pursuant to such
obligation;
(10) if other than U.S. dollars, the currency or currencies in which such
Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite
currency or currencies, and the terms and conditions relating thereto;
(11) whether the amount of payments of principal of (and premium, if any)
or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula
or method may, but need not be, based on a currency, currencies,
currency unit or units or composite currency or currencies) and the
manner in which such amounts shall be determined;
(12) the events of default or covenants of such Debt Securities, to the
extent different from or in addition to those described herein;
(13) whether such Debt Securities will be issued in certificated and/or
book-entry form;
(14) whether such Debt Securities will be in registered or bearer form and,
if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the
denominations thereof if other than $5,000 and terms and conditions
relating thereto;
(15) with respect to any series of Debt Securities rated below investment
grade at the time of issuance, the Guarantees (the "Guaranteed
Securities");
(16) if the defeasance and covenant defeasance provisions described herein
are to be inapplicable or any modification of such provisions;
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(17) whether and under what circumstances the Operating Partnership will
pay additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Operating
Partnership will have the option to redeem such Debt Securities in
lieu of making such payment;
(18) with respect to any Debt Securities that provide for optional
redemption or prepayment upon the occurrence of certain events (such
as a change of control of the Operating Partnership), (i) the possible
effects of such provisions on the market price of the Operating
Partnership's or the Company's securities or in deterring certain
mergers, tender offers or other takeover attempts, and the intention
of the Operating Partnership to comply with the requirements of
Regulation 14E under the Exchange Act and any other applicable
securities laws in connection with such provisions; (ii) whether the
occurrence of the specified events may give rise to cross-defaults on
other indebtedness such that payment on such Debt Securities may be
effectively subordinated; and (iii) the existence of any limitation on
the Operating Partnership's financial or legal ability to repurchase
such Debt Securities upon the occurrence of such an event (including,
if true, the lack of assurance that such a repurchase can be effected)
and the impact, if any, under the Indenture of such a failure,
including whether and under what circumstances such a failure may
constitute an Event of Default;
(19) if other than the Trustee, the identify of each security registrar
and/or paying agent; and
(20) any other terms of such Debt Securities.
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). If material or applicable, special U.S.
Federal income tax, accounting and other considerations applicable to Original
Issue Discount Securities will be described in the applicable Prospectus
Supplement.
Except as described under " -- Merger, Consolidation or Sale" and
" -- Certain Covenants" or as may be set forth in any Prospectus Supplement, the
Indenture does not contain any other provisions that would limit the ability of
the Operating Partnership to incur indebtedness or that would afford holders of
the Debt Securities protection in the event of (i) a highly leveraged or similar
transaction involving the Operating Partnership, the management of the Operating
Partnership or the Company, or any affiliate of any such party, (ii) a change of
control, or (iii) a reorganization, restructuring, merger or similar transaction
involving the Operating Partnership or the Company. In addition, subject to the
limitations set forth under " -- Merger, Consolidation or Sale," the Operating
Partnership or the Company may, in the future, enter into certain transactions,
such as the sale of all or substantially all of its assets or the merger or
consolidation of the Operating Partnership or the Company, that would increase
the amount of the Operating Partnership's indebtedness or substantially reduce
or eliminate the Operating Partnership's assets, which may have an adverse
effect on the Operating Partnership's ability to service its indebtedness,
including the Debt Securities. In addition, restrictions on ownership and
transfers of the Company's Common Stock and Preferred Stock which are designed
to preserve its status as a REIT may act to prevent or hinder a change of
control. See "Description of Common Stock -- Certain Provisions Affecting Change
of Control" and "Description of Preferred Stock -- Restrictions on Ownership."
Reference is made to the applicable Prospectus Supplement for information with
respect to any deletions from, modifications of or additions to the events of
default or covenants that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
Reference is made to " -- Certain Covenants" below and to the description
of any additional covenants with respect to a series of Debt Securities in the
applicable Prospectus Supplement. Except as otherwise described in the
applicable Prospectus Supplement, compliance with such covenants generally may
not be waived with respect to a series of Debt Securities by the board of
directors of the Company as sole general partner of the Operating Partnership or
by the Trustee unless the Holders of at least majority in principal amount of
all outstanding Debt Securities of such series consent to such waiver, except to
the extent that the defeasance and covenant defeasance provisions of the
Indenture described under " -- Discharge, Defeasance and Covenant Defeasance"
below apply to such series of Debt Securities. See " -- Modification of the
Indenture."
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GUARANTEES
The Company will fully, unconditionally and irrevocably guarantee the due
and punctual payment of principal, premium, if any, and interest on any Debt
Securities rated below investment grade at the time of issuance by the Operating
Partnership, and the due and punctual payment of any sinking fund payments
thereon, when and as the same shall become due and payable, whether at a
maturity date, by declaration of acceleration, call for redemption or otherwise.
In addition, Debt Securities rated investment grade may also be accompanied by a
Guarantee to the extent and on the terms described in the applicable Prospectus
Supplement.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series which are registered securities, other than
registered securities issued in global form (which may be of any denomination),
shall be issuable in denominations of $1,000 and any integral multiple thereof
and the Debt Securities which are bearer securities, other than bearer
securities issued in global form (which may be of any denomination), shall be
issuable in denominations of $5,000 (Section 302).
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and premium, if any) and interest on any series of Debt Securities
will be payable at the corporate trust office of the Trustee, provided that, at
the option of the Operating Partnership, payment of interest may be made by
check mailed to the address of the Person entitled thereto as it appears in the
applicable Security Register or by wire transfer of funds to such Person at an
account maintained within the United States (Sections 301, 307 and 1002).
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the Holder on the applicable Regular Record
Date and may either be paid to the Person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to the Holder of such Debt Security not
less than 10 days prior to such Special Record Date, or may be paid at any time
in any other lawful manner, all as more completely described in the Indenture.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the Trustee referred to above.
In addition, subject to certain limitations imposed upon Debt Securities issued
in book-entry form, the Debt Securities of any series may be surrendered for
registration of transfer thereof at the corporate trust office of the Trustee
referred to above. Every Debt Security surrendered for registration of transfer
or exchange shall be duly endorsed or accompanied by a written instrument of
transfer. No service charge will be made for any registration of transfer or
exchange of any Debt Securities, but the Trustee or the Operating Partnership
may require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith (Section 305). If the applicable
Prospectus Supplement refers to any transfer agent (in addition to the Trustee)
initially designated by the Operating Partnership with respect to any series of
Debt Securities, the Operating Partnership may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, except that Operating Partnership
will be required to maintain a transfer agent in each place of payment for such
series. The Operating Partnership may at any time designate additional transfer
agents with respect to any series of Debt Securities (Section 1002).
Neither the Operating Partnership nor the Trustee shall be required (i) to
issue, register the transfer of or exchange any Debt Security if such Debt
Security may be among those selected for redemption during a period beginning at
the opening of business 15 days before selection of the Debt Securities to be
redeemed and ending at the close of business on the day of such selection, or
(ii) to register the transfer of or exchange any Registered Security so selected
for redemption in whole or in part, except, in the case of any Registered
Security to be redeemed in part, the portion thereof not to be redeemed, or
(iii) to exchange any Bearer Security so selected for redemption except that
such a Bearer Security may be exchanged for a Registered
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Security of that series and like tenor, provided that such Registered Security
shall be simultaneously surrendered for redemption, or (iv) to issue, register
the transfer of or exchange any Security which has been surrendered for
repayment at the option of the Holder, except the portion, if any, of such Debt
Security not to be so repaid (Section 305).
MERGER, CONSOLIDATION OR SALE
The Operating Partnership or the Company may consolidate with, or sell,
lease or convey all or substantially all of its assets to, or merge with or
into, any other entity, provided that (a) the Operating Partnership or the
Company, as the case may be, shall be the continuing entity, or the successor
entity (if other than the Operating Partnership or the Company, as the case may
be) formed by or resulting from any such consolidation or merger or which shall
have received the transfer of such assets shall expressly assume payment of the
principal of (and premium, if any) and interest on all the Debt Securities and
the due and punctual performance and observance of all of the covenants and
conditions contained in the Indenture; (b) immediately after giving effect to
such transaction, no Event of Default under the Indenture, and no event which,
after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's certificate
and legal opinion covering such conditions shall be delivered to the Trustee
(Sections 801 and 803).
CERTAIN COVENANTS
LIMITATIONS ON INCURRENCE OF DEBT. The Operating Partnership will not, and
will not permit any Subsidiary to, incur any Debt (as defined below), other than
intercompany debt (representing Debt to which the only parties are the Company,
the Operating Partnership and any of their Subsidiaries (but only so long as
such Debt is held solely by any of the Company, the Operating Partnership and
any Subsidiary) that is subordinate in right of payment to the Debt Securities)
if, immediately after giving effect to the incurrence of such additional Debt,
the aggregate principal amount of all outstanding Debt of the Operating
Partnership and its Subsidiaries on a consolidated basis determined in
accordance with generally accepted accounting principles is greater than 60% of
the sum of (i) the Operating Partnership's Total Assets (as defined below) as of
the end of the calendar quarter covered in the Operating Partnership's annual
report on Form 10-K or quarterly report on Form 10-Q, as the case may be, most
recently filed with the Commission (or, if such filing is not permitted under
the Exchange Act, with the Trustee) prior to the incurrence of such additional
Debt and (ii) the increase in Total Assets from the end of such quarter
including, without limitation, any increase in Total Assets resulting from the
incurrence of such additional Debt (such increase together with the Operating
Partnership's Total Assets shall be referred to as the "Adjusted Total Assets")
(Section 1011).
In addition to the foregoing limitations on the incurrence of Debt, the
Operating Partnership will not, and will not permit any Subsidiary to, incur any
Debt secured by any mortgage, lien, charge, pledge, encumbrance or security
interest of any kind upon any of the property of the Operating Partnership, or
any Subsidiary ("Secured Debt"), whether owned at the date of the Indenture or
thereafter acquired, if, immediately after giving effect to the incurrence of
such additional Secured Debt, the aggregate principal amount of all outstanding
Secured Debt of the Operating Partnership and its Subsidiaries on a consolidated
basis is greater than 40% of the Operating Partnership's Adjusted Total Assets
(Section 1011).
In addition to the foregoing limitations on the incurrence of Debt, the
Operating Partnership will not, and will not permit any Subsidiary to, incur any
Debt if the ratio of Consolidated Income Available for Debt Service to the
Annual Service Charge (in each case as defined below) for the four consecutive
fiscal quarters most recently ended prior to the date on which such additional
Debt is to be incurred shall have been less than 1.5 to 1.0 on a pro forma basis
after giving effect to the incurrence of such Debt and to the application of the
proceeds therefrom, and calculated on the assumption that (i) such Debt and any
other Debt incurred by the Operating Partnership or its Subsidiaries since the
first day of such four-quarter period and the application of the proceeds
therefrom, including to refinance other Debt, had occurred at the beginning of
such period, (ii) the repayment or retirement of any other Debt by the Operating
Partnership or its Subsidiaries since the first day of such four-quarter period
had been incurred, repaid or retired at the beginning of such period (except
that, in making such computation, the amount of Debt under any revolving credit
facility shall be computed based upon the average daily balance of such Debt
during such period), (iii) the income earned on any increase in Adjusted Total
Assets since the end of such four-quarter period
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had been earned, on an annualized basis, during such period, and (iv) in the
case of any acquisition or disposition by the Operating Partnership or any
Subsidiary of any asset or group of assets since the first day of such
four-quarter period, including, without limitation, by merger, stock purchase or
sale, or asset purchase or sale, such acquisition or disposition or any related
repayment of Debt had occurred as of the first day of such period with the
appropriate adjustments with respect to such acquisition or disposition being
included in such pro forma calculation (Section 1011).
For purposes of the foregoing provisions regarding the limitation on the
incurrence of Debt, Debt shall be deemed to be "incurred" by the Operating
Partnership and its Subsidiaries on a consolidated basis whenever the Operating
Partnership and its Subsidiaries on a consolidated basis shall create, assume,
guarantee or otherwise become liable in respect thereof.
MAINTENANCE OF TOTAL UNENCUMBERED ASSETS. The Operating Partnership is
required to maintain Total Unencumbered Assets of not less than 200% of the
aggregate outstanding principal amount of all outstanding Unsecured Debt
(Section 1012).
EXISTENCE. Except as permitted under " -- Merger, Consolidation or Sale,"
the Operating Partnership and the Company are required to do or cause to be done
all things necessary to preserve and keep in full force and effect their
existence, rights and franchises; PROVIDED, HOWEVER, that the Operating
Partnership or the Company shall not be required to preserve any right or
franchise if it determines that the preservation thereof is no longer desirable
in the conduct of its business and that the loss thereof is not disadvantageous
in any material respect to the Holders of the Debt Securities (Section 1007).
MAINTENANCE OF PROPERTIES. The Operating Partnership is required to cause
all of its material properties used or useful in the conduct of its business or
the business of any Subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Operating Partnership may be
necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; PROVIDED, HOWEVER, that the
Operating Partnership and its Subsidiaries shall not be prevented from selling
or otherwise disposing for value their respective properties in the ordinary
course of business (Section 1005).
INSURANCE. The Operating Partnership is required to, and is required to
cause each of its Subsidiaries to, keep all of its insurable properties insured
against loss or damage at least equal to their then full insurable value with
financially sound and reputable insurance companies (Section 1006).
PAYMENT OF TAXES AND OTHER CLAIMS. Each of the Operating Partnership and
the Company is required to pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (i) all taxes, assessments and
governmental charges levied or imposed upon it or any Subsidiary or upon its
income, profits or property or that of any Subsidiary, and (ii) all lawful
claims for labor, materials and supplies which, if unpaid, might by law become a
lien upon the property of the Operating Partnership, the Company, or any
Subsidiary; PROVIDED, HOWEVER, that the Operating Partnership and the Company
shall not be required to pay or discharge or cause to be paid or discharged any
such tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings (Section 1013).
PROVISION OF FINANCIAL INFORMATION. The Holders of Debt Securities will be
provided with copies of the annual reports and quarterly reports of the
Operating Partnership. Whether or not the Operating Partnership is subject to
Section 13 or 15(d) of the Exchange Act and for so long as any Debt Securities
are outstanding, the Operating Partnership will, to the extent permitted under
the Exchange Act, be required to file with the Commission the annual reports,
quarterly reports and other documents that the Operating Partnership would have
been required to file with the Commission pursuant to such Section 13 or 15(d)
(the "Financial Statements") if the Operating Partnership were so subject, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Operating Partnership would have been
required so to file such documents if the Operating Partnership were so subject.
The Operating Partnership will also in any event (x) within 15 days of each
Required Filing Date (i) transmit by mail to all Holders of Debt Securities, as
their names and addresses appear in the Security Register, without cost to such
Holders, copies of the annual reports and quarterly reports which the Operating
Partnership would have been required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act if the
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Operating Partnership were subject to such Sections and (ii) file with the
Trustee copies of the annual reports, quarterly reports and other documents that
the Operating Partnership would have been required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act if the Operating Partnership
were subject to such Sections and (y) if filing such documents by the Operating
Partnership with the Commission is not permitted under the Exchange Act,
promptly upon written request and payment of the reasonable cost of duplication
and delivery, supply copies of such documents to any prospective Holder (Section
1014).
As used herein and in the Prospectus Supplement:
"ANNUAL SERVICE CHARGE" as of any date means the amount which is expensed
in any 12-month period for interest on Debt (as defined below).
"CONSOLIDATED INCOME AVAILABLE FOR DEBT SERVICE" for any period means
Consolidated Net Income (as defined below) of the Operating Partnership and its
Subsidiaries (i) plus amounts which have been deducted for (a) interest on Debt
of the Operating Partnership and its Subsidiaries, (b) provision for taxes of
the Operating Partnership and its Subsidiaries based on income, (c) amortization
of debt discount, (d) depreciation and amortization, (e) the effect of any
noncash charge resulting from a change in accounting principles in determining
Consolidated Net Income for such period, (f) amortization of deferred charges,
(g) provisions for or realized losses on properties and (h) charges for early
extinguishment of debt and (ii) less amounts that have been included for gains
on properties.
"CONSOLIDATED NET INCOME" for any period means the amount of consolidated
net income (or loss) of the Operating Partnership and its Subsidiaries for such
period determined on a consolidated basis in accordance with generally accepted
accounting principles ("GAAP").
"DEBT" means any indebtedness, whether or not contingent, in respect of (i)
borrowed money evidenced by bonds, notes, debentures or similar instruments,
(ii) indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or
any security interest existing on property, (iii) the reimbursement obligations,
contingent or otherwise, in connection with any letters of credit actually
issued or amounts representing the balance deferred and unpaid of the purchase
price of any property except any such balance that constitutes an accrued
expense or trade payable or (iv) any lease of property which would be reflected
on a consolidated balance sheet as a capitalized lease in accordance with GAAP,
in the case of items of indebtedness under (i) through (iii) above to the extent
that any such items (other than letters of credit) would appear as a liability
on a consolidated balance sheet in accordance with GAAP, and also includes, to
the extent not otherwise included, any obligation to be liable for, or to pay,
as obligor, guarantor or otherwise (other than for purposes of collection in the
ordinary course of business), indebtedness of another person.
"SUBSIDIARY" means a corporation, partnership or limited liability company,
a majority of the outstanding voting stock, partnership interests or membership
interests, as the case may be, of which is owned or controlled, directly or
indirectly, by the Operating Partnership or by one or more other Subsidiaries of
the Operating Partnership. For the purposes of this definition, "voting stock"
means stock having the voting power for the election of directors, general
partners, managers or trustees, as the case may be, whether at all times or only
so long as no senior class of stock has such voting power by reason of any
contingency.
"TOTAL ASSETS" as of any date means the sum of (i) the Undepreciated Real
Estate Assets and (ii) all other assets of the Operating Partnership and its
Subsidiaries on a consolidated basis determined in accordance with GAAP (but
excluding intangibles and accounts receivable).
"TOTAL UNENCUMBERED ASSETS" means the sum of (i) those Undepreciated Real
Estate Assets not subject to an encumbrance and (ii) all other assets of the
Operating Partnership and its Subsidiaries not subject to an encumbrance
determined in accordance with GAAP (but excluding intangibles and accounts
receivable).
"UNDEPRECIATED REAL ESTATE ASSETS" as of any date means the cost (original
cost plus capital improvements) of real estate assets of the Operating
Partnership and its Subsidiaries on such date, before depreciation and
amortization, determined on a consolidated basis in accordance with GAAP.
"UNSECURED DEBT" means Debt of the Operating Partnership or any Subsidiary
which is not secured by any mortgage, lien, charge, pledge or security interest
of any kind upon any of the properties owned by the Operating Partnership or any
of its Subsidiaries.
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ADDITIONAL COVENANTS. Any additional or different covenants of the
Operating Partnership or the Company with respect to any series of Debt
Securities will be set forth in the Prospectus Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture provides that the following events are "Events of Default"
with respect to any series of Debt Securities issued thereunder: (a) default for
30 days in the payment of any installment of interest on any Debt Security of
such series; (b) default in the payment of the principal of (or premium, if any
on) any Debt Security of such series at its maturity; (c) default in making any
sinking fund payment as required for any Debt Security of such series; (d)
default in the performance of any other covenant of the Operating Partnership or
the Company contained in the Indenture (other than a covenant added to the
Indenture solely for the benefit of a series of Debt Securities issued
thereunder other than such series), such default having continued for 60 days
after written notice as provided in the Indenture; (e) default in the payment of
an aggregate principal amount exceeding $5,000,000 of any evidence of recourse
indebtedness of the Operating Partnership or the Company or any mortgage,
indenture or other instrument under which such indebtedness is issued or by
which such indebtedness is secured, such default having occurred after the
expiration of any applicable grace period and having resulted in the
acceleration of the maturity of such indebtedness, but only if such indebtedness
is not discharged or such acceleration is not rescinded or annulled, such
default having continued for 10 days after notice as provided in the Indenture;
(f) certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator or trustee of the Operating Partnership,
the Company or any Significant Subsidiary or any of their respective property;
and (g) any other Event of Default provided with respect to a particular series
of Debt Securities. The term "Significant Subsidiary" means each significant
subsidiary (as defined in Regulation S-X promulgated under the Securities Act)
of the Operating Partnership or the Company (Section 501).
If an Event of Default under the Indenture with respect to Debt Securities
of any series at the time Outstanding occurs and is continuing, then in every
such case the Trustee or the Holders of not less than 25% in principal amount of
the Outstanding Debt Securities of that series may declare the principal amount
(or, if the Debt Securities of that series are Original Issue Discount
Securities or Indexed Securities, such portion of the principal amount as may be
specified in the terms thereof) of all of the Debt Securities of that series to
be due and payable immediately by written notice thereof to the Operating
Partnership and the Company (and to the Trustee if given by the Holders);
provided, that in the case of an Event of Default described under provision (f)
of the preceding paragraph, acceleration is automatic. However, at any time
after such a declaration of acceleration with respect to Debt Securities of such
series (or of all Debt Securities then Outstanding under the Indenture, as the
case may be) has been made, but before a judgment or decree for payment of the
money due has been obtained by the Trustee, the Holders of not less than a
majority in principal amount of Outstanding Debt Securities of such series (or
of all Debt Securities then Outstanding under the Indenture, as the case may be)
may rescind and annul such declaration and its consequences if (a) the Operating
Partnership or the Company shall have deposited with the Trustee all payments of
the principal of (and premium, if any) and interest on the Debt Securities of
such series (or of all Debt Securities then Outstanding under the Indenture, as
the case may be), plus certain fees, expenses, disbursements and advances of the
Trustee and (b) all Events of Default, other than the non-payment of accelerated
principal of (or specified portion thereof), or premium (if any) or interest on
the Debt Securities of such series (or of all Debt Securities then Outstanding
under the Indenture, as the case may be) have been cured or waived as provided
in the Indenture (Section 502). The Indenture also provides that the Holders of
not less than a majority in principal amount of the Outstanding Debt Securities
of any series (or of all Debt Securities then Outstanding under the Indenture,
as the case may be) may waive any past default with respect to such series and
its consequences, except a default (x) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (y) in
respect of a covenant or provision contained in the Indenture that cannot be
modified or amended without the consent of the Holder of each Outstanding Debt
Security affected thereby (Section 513).
The Trustee will be required to transmit notice to the Holders of a series
of Debt Securities within 90 days of a default under the Indenture unless such
default has been cured or waived; PROVIDED, HOWEVER, that the Trustee may
withhold notice to the Holders of any series of Debt Securities of any default
with respect
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to such series (except a default in the payment of the principal of (or premium,
if any) or interest on any Debt Security of such series or in the payment of any
sinking fund installment in respect of any Debt Security of such series) if
specified Responsible Officers of the Trustee consider such withholding to be in
the interest of such Holders (Section 602).
The Indenture provides that no Holders of Debt Securities of any series may
institute any proceedings, judicial or otherwise, with respect to the Indenture
or for any remedy thereunder, except in the case of failure of the Trustee, for
60 days, to act after it has received a written request to institute proceedings
in respect of an Event of Default from the Holders of not less than 25% in
principal amount of the Outstanding Debt Securities of such series, as well as
an offer of indemnity reasonably satisfactory to it (Section 507). This
provision will not prevent, however, any holder of Debt Securities from
instituting suit for the enforcement of payment of the principal of (and
premium, if any) and interest on such Debt Securities at the respective due
dates thereof (Section 508).
The Trustee is under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any Holders of any series of
Debt Securities then Outstanding under the Indenture, unless such Holders shall
have offered to the Trustee thereunder reasonable security or indemnity (Section
601). The Holders of not less than a majority in principal amount of the
Outstanding Debt Securities of any series shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or of exercising any trust or power conferred upon the Trustee with
respect to the Debt Securities of such series. However, the Trustee may refuse
to follow any direction which is in conflict with any law or the Indenture or
would subject the Trustee to personal liability, or which may be unduly
prejudicial to the holders of Debt Securities of such series not joining therein
(Section 512).
Within 120 days after the close of each fiscal year, the Operating
Partnership and the Company (if the Debt Securities are Guaranteed Securities)
must deliver to the Trustee a certificate, signed by one of several specified
officers of the Company, stating whether or not such officer has knowledge of
any default under the Indenture and, if so, specifying each such default and the
nature and status thereof (Sections 1009 and 1010).
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture will be permitted to be made
only with the consent of the Holders of not less than a majority in principal
amount of all Outstanding Debt Securities or series of Outstanding Debt
Securities which are affected by such modification or amendment; PROVIDED,
HOWEVER, that no such modification or amendment may, without the consent of the
Holder of each such Debt Security affected thereby, (a) change the Stated
Maturity of the principal of, or premium (if any) or any installment of interest
on, any such Debt Security, reduce the principal amount of, or the rate or
amount of interest on, or any premium payable on redemption of, any such Debt
Security, or reduce the amount of principal of an Original Issue Discount
Security that would be due and payable upon declaration of acceleration of the
maturity thereof or would be provable in bankruptcy, or adversely affect any
right or repayment of the holder of any such Debt Security, change the place of
payment, or the coin or currency, for payment of principal of, premium, if any,
or interest on any such Debt Security or impair the right to institute suit for
the enforcement of any payment on or with respect to any such Debt Security; (b)
reduce the above-stated percentage of outstanding Debt Securities of any series
necessary to modify or amend the Indenture, to waive compliance with certain
provisions thereof or certain defaults and consequences thereunder or to reduce
the quorum or voting requirements set forth in the Indenture; (c) modify or
affect in any manner adverse to the Holders the terms and conditions of the
obligations of the Company in respect of the payment of principal (and premium,
if any) and interest on any Guaranteed Securities; or (d) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the Holder of such Debt Security
(Section 902).
The Indenture provides that the Holders of not less than a majority in
principal amount of a series of Outstanding Debt Securities have the right to
waive compliance by the Operating Partnership and/or the Company with certain
covenants relating to such series of Debt Securities in the Indenture (Section
1008).
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Modifications and amendments of the Indenture will be permitted to be made
by the Operating Partnership, the Company and the Trustee without the consent of
any Holder of Debt Securities for any of the following purposes: (i) to evidence
the succession of another Person to the Operating Partnership as obligor or the
Company as guarantor under the Indenture; (ii) to add to the covenants of the
Operating Partnership or the Company for the benefit of the Holders of all or
any series of Debt Securities or to surrender any right or power conferred upon
the Operating Partnership or the Company in the Indenture; (iii) to add Events
of Default for the benefit of the Holders of all or any series of Debt
Securities; (iv) to add or change any provisions of the Indenture to facilitate
the issuance of, or to liberalize certain terms of, Debt Securities in bearer
form, or to permit or facilitate the issuance of Debt Securities in
uncertificated form, provided that such action shall not adversely affect the
interests of the Holders of the Debt Securities of any series in any material
respect; (v) to amend or supplement any provisions of the Indenture, provided
that no such amendment or supplement shall materially adversely affect the
interests of the Holders of any Debt Securities then Outstanding; (vi) to secure
the Debt Securities; (vii) to establish the form or terms of Debt Securities of
any series; (viii) to provide for the acceptance of appointment by a successor
Trustee to facilitate the administration of the trusts under the Indenture by
more than one Trustee; (ix) to cure any ambiguity, defect or inconsistency in
the Indenture, provided that such action shall not adversely affect the
interests of Holders of Debt Securities of any series in any material respect;
or (x) to supplement any of the provisions of the Indenture to the extent
necessary to permit or facilitate defeasance and discharge of any series of such
Debt Securities, provided that such action shall not adversely affect the
interests of the Holders of the Debt Securities of any series in any material
respect (Section 901). In addition, with respect to Guaranteed Securities,
without the consent of any Holder of Debt Securities, the Company, or a
subsidiary thereof, may directly assume the due and punctual payment of the
principal of, any premium and interest on all the Guaranteed Securities and the
performance of every covenant of the Indenture on the part of the Operating
Partnership to be performed or observed. Upon any such assumption, the Company
or such subsidiary shall succeed to, and be substituted for and may exercise
every right and power of, the Operating Partnership under the Indenture with the
same effect as if the Company or such subsidiary had been the issuer of the
Guaranteed Securities and the Operating Partnership shall be released from all
obligations and covenants with respect to the Guaranteed Securities. No such
assumption shall be permitted unless the Company has delivered to the Trustee
(i) an officer's certificate and an opinion of counsel, stating, among other
things, that the Guarantee and all other covenants of the Company in the
Indenture remain in full force and effect and (ii) an opinion of independent
counsel that the Holders of Guaranteed Securities shall have no United States
Federal tax consequences as a result of such assumption, and that, if any Debt
Securities are then listed on the New York Stock Exchange, that such Debt
Securities shall not be delisted as a result of such assumption (Section 805).
The Indenture provides that in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of Holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be Outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of a Debt Security denominated in a foreign currency that shall be deemed
Outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above), (iii) the
principal amount of an Indexed Security that shall be deemed Outstanding shall
be the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such Indexed Security pursuant to the
Indenture, and (iv) Debt Securities owned by the Operating Partnership, the
Company or any other obligor upon the Debt Securities or any affiliate of the
Operating Partnership, the Company or of such other obligor shall be
disregarded.
The Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series (Section 1501). A meeting will be permitted to be
called at any time by the Trustee, and also, upon request, by the Operating
Partnership, the Company (in respect of a series of Guaranteed Securities) or
the holders of at least 10% in principal amount of the Outstanding Debt
Securities of such series, in any such case upon notice given as provided in the
Indenture (Section 1502). Except for any consent that must be given by the
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Holder of each Debt Security affected by certain modifications and amendments of
the Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present will be permitted to be adopted by the
affirmative vote of the Holders of a majority in principal amount of the
Outstanding Debt Securities of that series; PROVIDED, HOWEVER, that, except as
referred to above, any resolution with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action that may be
made, given or taken by the Holders of a specified percentage, which is less
than a majority, in principal amount of the Outstanding Debt Securities of a
series may be adopted at a meeting or adjourned meeting duly reconvened at which
a quorum is present by the affirmative vote of the Holders of such specified
percentage in principal amount of the Outstanding Debt Securities of that
series. Any resolution passed or decision taken at any meeting of Holders of
Debt Securities of any series duly held in accordance with the Indenture will be
binding on all Holders of Debt Securities of that series. The quorum at any
meeting called to adopt a resolution, and at any reconvened meeting, will be
Persons holding or representing a majority in principal amount of the
Outstanding Debt Securities of a series; PROVIDED, HOWEVER, that if any action
is to be taken at such meeting with respect to a consent or waiver which may be
given by the Holders of not less than a specified percentage in principal amount
of the Outstanding Debt Securities of a series, the Persons holding or
representing such specified percentage in principal amount of the Outstanding
Debt Securities of such series will constitute a quorum (Section 1504).
Notwithstanding the foregoing provisions, any action to be taken at a
meeting of Holders of Debt Securities of any series with respect to any action
that the Indenture expressly provides may be taken by the Holders of a specified
percentage which is less than a majority in principal amount of the Outstanding
Debt Securities of a series may be taken at a meeting at which a quorum is
present by the affirmative vote of Holders of such specified percentage in
principal amount of the Outstanding Debt Securities of such series (Section
1504).
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Operating Partnership may discharge certain obligations to Holders of
any series of Debt Securities that have not already been delivered to the
Trustee for cancellation and that either have become due and payable or will
become due and payable within one year (or scheduled for redemption within one
year) by irrevocably depositing with the Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal (and
premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the Stated Maturity or Redemption
Date, as the case may be (Section 401).
Unless otherwise provided in the applicable Prospectus Supplement, the
Operating Partnership may elect either (a) to defease and discharge itself and
the Company (if such Debt Securities are Guaranteed Securities) from any and all
obligations with respect to such Debt Securities (except for the obligation to
pay additional amounts, if any, upon the occurrence of certain events of tax,
assessment or governmental charge with respect to payments on such Debt
Securities and the obligations to register the transfer or exchange of such Debt
Securities, to replace temporary or mutilated, destroyed, lost or stolen Debt
Securities, to maintain an office or agency in respect of such Debt Securities
and to hold moneys for payment in trust) ("defeasance") or (b) to release itself
and the Company (if such Debt Securities are Guaranteed Securities) from their
obligations with respect to such Debt Securities under certain sections of the
Indenture (including the restrictions described under " -- Certain Covenants")
and if provided pursuant to Section 301 of the Indenture, their obligations with
respect to any other covenant, and any omission to comply with such obligations
shall not constitute a default or an Event of Default with respect to such Debt
Securities ("covenant defeasance"), in either case upon the irrevocable deposit
by the Operating Partnership or the Company (if the Debt Securities are
Guaranteed Securities) with the Trustee, in trust, of an amount, in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable at Stated Maturity, or
Government Obligations (as defined below), or both, applicable to such Debt
Securities which through the scheduled payment of principal and interest in
accordance with their terms will provide money in an amount sufficient to pay
the principal of (and premium, if any) and interest on such Debt Securities, and
any mandatory sinking fund or analogous payments thereon, on the scheduled due
dates therefor (Section 402).
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Such a trust will only be permitted to be established if, among other
things, the Operating Partnership or the Company (if the Debt Securities are
Guaranteed Securities) has delivered to the Trustee an Opinion of Counsel (as
specified in the Indenture) to the effect that the Holders of such Debt
Securities will not recognize income, gain or loss for U.S. Federal income tax
purposes as a result of such defeasance or covenant defeasance and will be
subject to U.S. Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance or covenant
defeasance had not occurred, and such Opinion of Counsel, in the case of
defeasance, must refer to and be based upon a ruling of the Internal Revenue
Service or a change in applicable United States Federal income tax law occurring
after the date of the Indenture (Section 402).
"GOVERNMENT OBLIGATIONS" means securities that are (i) direct obligations
of the United States of America or the government that issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations of
a person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government that issued the foreign
currency in which the Debt Securities of such series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other government, and that, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, provided that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Operating Partnership or the Company (if the Debt Securities are Guaranteed
Securities) has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the Holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the Indenture or the terms of such Debt Security to receive payment
in a currency, currency unit or composite currency other than that in which such
deposit has been made in respect of such Debt Security, or (b) a Conversion
Event (as defined below) occurs in respect of the currency, currency unit or
composite currency in which such deposit has been made, the indebtedness
represented by such Debt Security shall be deemed to have been, and will be,
fully discharged and satisfied through the payment of the principal of (and
premium, if any) and interest on such Debt Security as they become due out of
the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or such
Conversion Event based on the applicable market exchange rate (Section 402).
"Conversion Event" means the cessation of use of (i) a currency, currency unit
or composite currency both by the government of the country that issued such
currency and for the settlement of transactions by a central bank or other
public institutions of or within the international banking community, (ii) the
ECU both within the European Monetary System and for the settlement of
transactions by public institutions of or within the European Union or (iii) any
currency unit or composite currency other than the ECU for the purposes for
which it was established. Unless otherwise provided in the applicable Prospectus
Supplement, all payments of principal of (and premium, if any) and interest on
any Debt Security that is payable in a foreign currency that ceases to be used
by its government of issuance shall be made in U.S. dollars.
If the Operating Partnership effects covenant defeasance with respect to
any Debt Securities and such Debt Securities are declared due and payable
because of the occurrence of any Event of Default other than the Event of
Default described in clause (d) under " -- Events of Default, Notice and Waiver"
with respect to Sections no longer applicable to such Debt Securities or
described in clause (g) under " -- Events of Default, Notice and Waiver" with
respect to any other covenant as to which there has been covenant defeasance,
the amount in such currency, currency unit or composite currency in which such
Debt Securities are payable, and Government Obligations on deposit with the
Trustee, will be sufficient to pay amounts due on such Debt Securities at the
time of their Stated Maturity but may not be sufficient to pay amounts due on
such Debt Securities at the time of the acceleration resulting from such Event
of Default. However, the
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Operating Partnership and the Company (if such Debt Securities are Guaranteed
Securities) would remain liable to make payment of such amounts due at the time
of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
NO CONVERSION RIGHTS
The Debt Securities will not be convertible into or exchangeable for any
capital stock of the Company or equity interest in the Operating Partnership.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the applicable Prospectus Supplement relating to such series. Global Securities
may be issued in either registered or bearer form and in either temporary or
permanent form. The specific terms of the depositary arrangement with respect to
a series of Debt Securities will be described in the applicable Prospectus
Supplement relating to such series.
DESCRIPTION OF PREFERRED STOCK
GENERAL
The Company is authorized to issue 10,000,000 shares of preferred stock,
$.01 par value per share, of which 125,000 8 5/8% Series A Cumulative Redeemable
Preferred Shares have been issued and are outstanding as of the date hereof. See
"Description of Series A Preferred Shares."
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and Bylaws and any applicable
amendment to the Articles of Incorporation designating terms of a series of
Preferred Stock (a "Designating Amendment").
TERMS
Subject to the limitations prescribed by the Articles of Incorporation, the
board of directors is authorized to fix the number of shares constituting each
series of Preferred Stock and the designations and powers, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions thereof, including such provisions as may be desired
concerning voting, redemption, dividends, dissolution or the distribution of
assets, conversion or exchange, and such other subjects or matters as may be
fixed by resolution of the board of directors. The Preferred Stock will, when
issued, be fully paid and nonassessable by the Company and will have no
preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(1) the title and stated value of such Preferred Stock;
(2) the number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Preferred Stock;
(4) the date from which dividends on such Preferred Stock shall
accumulate, if applicable;
(5) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) the provision for a sinking fund, if any, for such Preferred Stock;
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(7) the provision for redemption, if applicable, of such Preferred Stock;
(8) any listing of such Preferred Stock on any securities exchange;
(9) the terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock of the Company, including
the conversion price or manner of calculation thereof;
(10) whether interests in such Preferred Stock will be represented by
Depositary Shares;
(11) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(12) a discussion of Federal income tax considerations applicable to such
Preferred Stock;
(13) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(14) any limitations on issuance of any series of Preferred Stock ranking
senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company; and
(15) any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, rank (i) senior to all classes or
series of Common Stock of the Company, and to all equity securities ranking
junior to such Preferred Stock; (ii) on a parity with all equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank on a parity with the Preferred Stock; and (iii) junior to all
equity securities issued by the Company the terms of which specifically provide
that such equity securities rank senior to the Preferred Stock. The term "equity
securities" does not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the board of directors of the Company, out of assets
of the Company legally available for payment, cash dividends at such rates and
on such dates as will be set forth in the applicable Prospectus Supplement. Each
such dividend shall be payable to holders of record as they appear on the share
transfer books of the Company on such record dates as shall be fixed by the
board of directors of the Company.
Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the board of directors of the Company fails
to declare a dividend payable on a dividend payment date on any series of the
Preferred Stock for which dividends are non-cumulative, then the holders of such
series of the Preferred Stock will have no right to receive a dividend in
respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such series are declared payable on any future
dividend payment date.
If Preferred Stock of any series is outstanding, no dividends will be
declared or paid or set apart for payment on any capital stock of the Company of
any other series ranking, as to dividends, on a parity with or junior to the
Preferred Stock of such series for any period unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the Preferred Stock of such
series for all past dividend periods and the then current dividend period or
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends for the then current dividend period have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for such payment on the Preferred Stock of such series. When dividends
are not paid in full (or a sum sufficient for such full payment is not so set
apart) upon Preferred Stock of any series and the shares of any other series of
Preferred Stock ranking on a parity as to dividends with the Preferred Stock of
such
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series, all dividends declared upon Preferred Stock of such series and any other
series of Preferred Stock ranking on a parity as to dividends with such
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share of Preferred Stock of such series and such other series of
Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the Preferred Stock of such series (which shall
not include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Stock does not have a cumulative dividend) and such
other series of Preferred Stock bear to each other. No interest, or sum of money
in lieu of interest, shall be payable in respect of any dividend payment or
payments on Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past dividend periods and the then current
dividend period, and (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then current dividend
period, no dividends (other than in shares of Common Stock or other capital
shares ranking junior to the Preferred Stock of such series as to dividends and
upon liquidation) shall be declared or paid or set aside for payment or other
distribution shall be declared or made upon the Common Stock, or any other
capital shares of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation, nor shall
any shares of Common Stock, or any other capital shares of the Company ranking
junior to or on a parity with the Preferred Stock of such series as to dividends
or upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any such shares) by the Company (except by conversion into or
exchange for other capital shares of the Company ranking junior to the Preferred
Stock of such series as to dividends and upon liquidation).
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred Stock
will be subject to mandatory redemption or redemption at the option of the
Company, as a whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if Preferred Stock does not have a cumulative dividend, include any
accumulation in respect of unpaid dividends for prior dividend periods) to the
date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of capital shares of the Company, the terms of such
Preferred Stock may provide that, if no such capital shares shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into the applicable capital shares of
the Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all shares of any series
of Preferred Stock have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period, and (ii) if such
series of Preferred Stock does not have a cumulative dividend, full dividends of
the Preferred Stock of any series have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period, no shares of any series of
Preferred Stock shall be redeemed unless all outstanding Preferred Stock of such
series is simultaneously redeemed; PROVIDED, HOWEVER, that the foregoing shall
not prevent the purchase or acquisition of Preferred Stock of such series to
preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding Preferred Stock of
such series. In addition, unless (i) if such series of Preferred Stock has a
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cumulative dividend, full cumulative dividends on all outstanding shares of any
series of Preferred Stock have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for payment
for all past dividends periods and the then current dividend period, and (ii) if
such series of Preferred Stock does not have a cumulative dividend, full
dividends on the Preferred Stock of any series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for the then current dividend period, the Company shall
not purchase or otherwise acquire directly or indirectly any shares of Preferred
Stock of such series (except by conversion into or exchange for capital shares
of the Company ranking junior to the Preferred Stock of such series as to
dividends and upon liquidation); PROVIDED, HOWEVER, that the foregoing shall not
prevent the purchase or acquisition of Preferred Stock of such series to
preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding Preferred Stock of
such series.
If fewer than all of the outstanding shares of Preferred Stock of any
series are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares held
or for which redemption is requested by such holder (with adjustments to avoid
redemption of fractional shares) or by lot in a manner determined by the
Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the share transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such Preferred Stock are
to be surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and (vi) the
date upon which the holder's conversion rights, if any, as to such shares shall
terminate. If fewer than all the shares of Preferred Stock of any series are to
be redeemed, the notice mailed to each such holder thereof shall also specify
the number of shares of Preferred Stock to be redeemed from each such holder. If
notice of redemption of any Preferred Stock has been given and if the funds
necessary for such redemption have been set aside by the Company in trust for
the benefit of the holders of any Preferred Stock so called for redemption, then
from and after the redemption date dividends will cease to accrue on such
Preferred Stock, and all rights of the holders of such shares will terminate,
except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock or any other class or series of capital
shares of the Company ranking junior to the Preferred Stock in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Stock shall be entitled to receive out of
assets of the Company legally available for distribution to stockholders
liquidating distributions in the amount of the liquidation preference per share
(set forth in the applicable Prospectus Supplement), plus an amount equal to all
dividends accrued and unpaid thereon (which shall not include any accumulation
in respect of unpaid dividends for prior dividend periods if such Preferred
Stock does not have a cumulative dividend). After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of
Preferred Stock will have no right or claim to any of the remaining assets of
the Company. If, upon any such voluntary or involuntary liquidation, dissolution
or winding up, the available assets of the Company are insufficient to pay the
amount of the liquidating distributions on all outstanding Preferred Stock and
the corresponding amounts payable on all shares of other classes or series of
capital shares of the Company ranking on a parity with the Preferred Stock in
the distribution of assets, then the holders of the Preferred Stock and all
other such classes or series of capital shares shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital shares
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ranking junior to the Preferred Stock upon liquidation, dissolution or winding
up, according to their respective rights and preferences and in each case
according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other corporation, trust
or entity, or the sale, lease or conveyance of all or substantially all of the
property or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Whenever dividends on any shares of Preferred Stock shall be in arrears for
six or more consecutive quarterly periods, the holders of such shares of
Preferred Stock (voting separately as a class with all other series of preferred
stock upon which like voting rights have been conferred and are exercisable)
will be entitled to vote for the election of two additional directors of the
Company at a special meeting called by the holders of record of at least 10% of
any series of Preferred Stock so in arrears (unless such request is received
less than 90 days before the date fixed for the next annual or special meeting
of the stockholders) or at the next annual meeting of stockholders, and at each
subsequent annual meeting until (i) if such series of Preferred Stock has a
cumulative dividend, all dividends accumulated on such shares of Preferred Stock
for the past dividend periods and the then current dividend period shall have
been fully paid or declared and a sum sufficient for the payment thereof set
aside for payment or (ii) if such series of Preferred Stock does not have a
cumulative dividend, four consecutive quarterly dividends shall have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment. In such case, the entire board of directors of the Company will be
increased by two directors.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock remain outstanding, the Company will not, without the
affirmative vote or consent of the holders of at least two-thirds of the shares
of each series of Preferred Stock outstanding at the time, given in person or by
proxy, either in writing or at a meeting (such series voting separately as a
class), (i) authorize or create, or increase the authorized or issued amount of,
any class or series of capital stock ranking prior to such series of Preferred
Stock with respect to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up or reclassify any authorized capital
stock of the Company into such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the Company's
Articles of Incorporation or the Designating Amendment for such series of
Preferred Stock, whether by merger, consolidation or otherwise (an "Event"), so
as to materially and adversely affect any right, preference, privilege or voting
power of such series of Preferred Stock or the holders thereof; PROVIDED,
HOWEVER, with respect to the occurrence of any of the Events set forth in (ii)
above, so long as the Preferred Stock remains outstanding with the terms thereof
materially unchanged, taking into account that upon the occurrence of an Event,
the Company may not be the surviving entity, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of Preferred Stock and provided further
that (x) any increase in the amount of the authorized Preferred Stock or the
creation or issuance of any other series of Preferred Stock, or (y) any increase
in the amount of authorized shares of such series or any other series of
Preferred Stock, in each case ranking on a parity with or junior to the
Preferred Stock of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into shares of Common Stock will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will
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include the number of shares of Common Stock into which the shares of Preferred
Stock are convertible, the conversion price (or manner of calculation thereof),
the conversion period, provisions as to whether conversion will be at the option
of the holders of the Preferred Stock or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such series of Preferred Stock.
STOCKHOLDER LIABILITY
As discussed below under "Description of Common Stock -- General,"
applicable Maryland law provides that no stockholder, including holders of
Preferred Stock, shall be personally liable for the acts and obligations of the
Company and that the funds and property of the Company shall be the only
recourse for such acts or obligations.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Stock -- Certain Provisions
Affecting Change of Control -- OWNERSHIP LIMITATIONS AND RESTRICTIONS ON
TRANSFERS," for the Company to qualify as a REIT under the Internal Revenue Code
of 1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital shares may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a 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% of the
issued and outstanding capital stock of the Company. To assist the Company in
meeting this requirement, the Company may take certain actions to limit the
beneficial ownership, directly or indirectly, by a single person of the
Company's outstanding equity securities, including any Preferred Stock of the
Company. Therefore, the Designating Amendment for each series of Preferred Stock
may contain provisions restricting the ownership and transfer of the Preferred
Stock. The applicable Prospectus Supplement will specify any additional
ownership limitation relating to a series of Preferred Stock.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
DESCRIPTION OF SERIES A PREFERRED SHARES
The following description of the Company's 8 5/8% Series A Cumulative
Redeemable Preferred Shares, par value $.01 per share (the "Series A Preferred
Shares"), is in all respects subject to and qualified in its entirety by
reference to the applicable provisions of the Company's Articles of
Incorporation, including the Articles Supplementary applicable to the Series A
Preferred Shares. The Company is authorized to issue 143,750 Series A Preferred
Shares, 125,000 of which were issued and outstanding as of the date hereof.
With respect to the payment of dividends and amounts upon liquidation, the
Series A Preferred Shares rank pari passu with any other equity securities of
the Company the terms of which provide that such equity securities rank on a
parity with the Series A Preferred Shares and rank senior to the Common Stock
and any other equity securities of the Company which by their terms rank junior
to the Series A Preferred Shares. Dividends on the Series A Preferred Shares are
cumulative from the date of original issue and are payable quarterly on or about
the last day of February, May, August and November of each year commencing May
31, 1997, at the rate of 8 5/8% of the liquidation preference per annum
(equivalent to $86.25 per annum per share). Dividends on the Series A Preferred
Shares will accrue whether or not the Company has earnings, whether or nor there
are funds legally available for the payment of such dividends and whether or not
such dividends are declared. The Series A Preferred Shares have a liquidation
preference of $1,000 per share, plus an amount equal to any accrued and unpaid
dividends.
The Series A Preferred Shares are not redeemable prior to February 12,
2027. On and after February 12, 2027, the Series A Preferred Shares will be
redeemable for cash at the option of the Company, in whole or in part, at $1,000
per share, plus any accrued and unpaid dividends thereon to the date fixed for
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redemption. The redemption price (other than the portion thereof consisting of
accrued and unpaid dividends) is payable solely out of the sale proceeds of
other capital stock of the Company, which may include other series of Preferred
Stock, and from no other source.
If dividends on the Series A Preferred Shares are in arrears for six or
more quarterly periods, whether or not such quarterly periods are consecutive,
holders of the Series A Preferred Shares (voting separately as a class with all
other series of Preferred Stock upon which like voting rights have been
conferred and are exercisable) will be entitled to vote for the election of two
additional directors to serve on the board of directors of the Company until all
dividend arrearages have been paid.
The Series A Preferred Shares are not convertible or exchangeable for any
other property or securities of the Company. The Series A Preferred Shares are
subject to certain restrictions on ownership intended to preserve the Company's
status as a REIT for Federal income tax purposes. See "Description of Preferred
Stock -- Restrictions on Ownership" and "Description of Common Stock -- Certain
Provisions Affecting Change of Control -- Ownership Limitations and Restrictions
on Transfer."
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest of a share of a
particular series of Preferred Stock, as specified in the applicable Prospectus
Supplement. Shares of Preferred Stock of each series represented by Depositary
Shares will be deposited under a separate deposit agreement (each, a "Deposit
Agreement") among the Company, the depositary named therein (a "Preferred Stock
Depositary") and the holders from time to time of the Depositary Receipts.
Subject to the terms of the applicable Deposit Agreement, each owner of a
Depositary Receipt will be entitled, in proportion to the fractional interest of
a share of a particular series of Preferred Stock represented by the Depositary
Shares evidenced by such Depositary Receipt, to all the rights and preferences
of the Preferred Stock represented by such Depositary Shares (including
dividend, voting, conversion, redemption and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the Preferred Stock by the Company to a Preferred Stock
Depositary, the Company will cause such Preferred Stock Depositary to issue, on
behalf of the Company, the Depositary Receipts. Copies of the applicable form of
Deposit Agreement and Depositary Receipt may be obtained from the Company upon
request, and the statements made hereunder relating to Deposit Agreements and
the Depositary Receipts to be issued thereunder are summaries of certain
anticipated provisions thereof and do not purport to be complete and are subject
to, and qualified in their entirety by reference to, all of the provisions of
the applicable Deposit Agreement and related Depositary Receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
A Preferred Stock Depositary will be required to distribute all cash
dividends or other cash distributions received in respect of the applicable
Preferred Stock to the record holders of Depositary Receipts evidencing the
related Depositary Shares in proportion to the number of such Depositary
Receipts owned by such holders, subject to certain obligations of holders to
file proofs, certificates and other information and to pay certain charges and
expenses to such Preferred Stock Depositary.
In the event of a distribution other than in cash, a Preferred Stock
Depositary will be required to distribute property received by it to the record
holders of Depositary Receipts entitled thereto, subject to certain obligations
of holders to file proofs, certificates and other information and to pay certain
charges and expenses to such Preferred Stock Depositary, unless such Preferred
Stock Depositary determines that it is not feasible to make such distribution,
in which case such Preferred Stock Depositary may, with the approval of the
Company, sell such property and distribute the net proceeds from such sale to
such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any Preferred Stock that has been converted or
exchanged.
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WITHDRAWAL OF STOCK
Upon surrender of the Depositary Receipts at the corporate trust office of
the applicable Preferred Stock Depositary (unless the related Depositary Shares
have previously been called for redemption or converted), the holders thereof
will be entitled to delivery at such office, to or upon each such holder's
order, of the number of whole or fractional shares of the applicable Preferred
Stock and any money or other property represented by the Depositary Shares
evidenced by such Depositary Receipts. Holders of Depositary Receipts will be
entitled to receive whole or fractional shares of the related Preferred Stock on
the basis of the proportion of Preferred Stock represented by each Depositary
Share as specified in the applicable Prospectus Supplement, but holders of such
shares of Preferred Stock will not thereafter be entitled to receive Depositary
Shares therefor. If the Depositary Receipts delivered by the holder evidence a
number of Depositary Shares in excess of the number of Depositary Shares
representing the number of shares of Preferred Stock to be withdrawn, the
applicable Preferred Stock Depositary will be required to deliver to such holder
at the same time a new Depositary Receipt evidencing such excess number of
Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems shares of Preferred Stock held by a Preferred
Stock Depositary, such Preferred Stock Depositary will be required to redeem as
of the same redemption date the number of Depositary Shares representing shares
of the Preferred Stock so redeemed, provided the Company shall have paid in full
to such Preferred Stock Depositary the redemption price of the Preferred Stock
to be redeemed plus an amount equal to any accrued and unpaid dividends thereon
to the date fixed for redemption. The redemption price per Depositary Share will
be equal to the redemption price and any other amounts per share payable with
respect to the Preferred Stock. If fewer than all the Depositary Shares are to
be redeemed, the Depositary Shares to be redeemed will be selected pro rata (as
nearly as may be practicable without creating fractional Depositary Shares) or
by any other equitable method determined by the Company.
From and after the date fixed for redemption, all dividends in respect of
the shares of Preferred Stock so called for redemption will cease to accrue, the
Depositary Shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the Depositary Receipts evidencing
the Depositary Shares so called for redemption will cease, except the right to
receive any moneys payable upon such redemption and any money or other property
to which the holders of such Depositary Receipts were entitled upon such
redemption upon surrender thereof to the applicable Preferred Stock Depositary.
VOTING OF THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the
applicable Preferred Stock are entitled to vote, a Preferred Stock Depositary
will be required to mail the information contained in such notice of meeting to
the record holders of the Depositary Receipts evidencing the Depositary Shares
that represent such Preferred Stock. Each record holder of Depositary Receipts
evidencing Depositary Shares on the record date (which will be the same date as
the record date for the Preferred Stock) will be entitled to instruct such
Preferred Stock Depositary as to the exercise of the voting rights pertaining to
the amount of Preferred Stock represented by such holder's Depositary Shares.
Such Preferred Stock Depositary will be required to vote the amount of Preferred
Stock represented by such Depositary Shares in accordance with such
instructions, and the Company will agree to take all reasonable action that may
be deemed necessary by such Preferred Stock Depositary in order to enable such
Preferred Stock Depositary to do so. Such Preferred Stock Depositary will be
required to abstain from voting the amount of Preferred Stock represented by
such Depositary Shares to the extent it does not receive specific instructions
from the holders of Depositary Receipts evidencing such Depositary Shares. A
Preferred Stock Depositary will not be responsible for any failure to carry out
any instruction to vote, or for the manner or effect of any such vote made, as
long as any such action or non-action is in good faith and does not result from
negligence or willful misconduct of such Preferred Stock Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of each Depositary Receipt will be
entitled to the fraction of the liquidation preference
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accorded each share of Preferred Stock represented by the Depositary Share
evidenced by such Depositary Receipt, as set forth in the applicable Prospectus
Supplement.
CONVERSION OF PREFERRED STOCK
The Depositary Shares, as such, will not be convertible into Common Stock
or any other securities or property of the Company. Nevertheless, if so
specified in the applicable Prospectus Supplement relating to an offering of
Depositary Shares, the Depositary Receipts may be surrendered by holders thereof
to the applicable Preferred Stock Depositary with written instructions to such
Preferred Stock Depositary to instruct the Company to cause conversion of the
Preferred Stock represented by the Depositary Shares evidenced by such
Depositary Receipts into whole shares of Common Stock, other shares of Preferred
Stock of the Company or other shares of stock, and the Company will agree that
upon receipt of such instructions and any amounts payable in respect thereof, it
will cause the conversion thereof utilizing the same procedures as those
provided for delivery of Preferred Stock to effect such conversion. If the
Depositary Shares evidenced by a Depositary Receipt are to be converted in part
only, a new Depositary Receipt or Receipts will be issued for any Depositary
Shares not to be converted. No fractional shares of Common Stock will be issued
upon conversion, and if such conversion will result in a fractional share being
issued, an amount will be paid in cash by the Company equal to the value of the
fractional interest based upon the closing price of the Common Stock on the last
business day prior to the conversion.
AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT
Any form of Depositary Receipt evidencing Depositary Shares that will
represent Preferred Stock and any provision of a Deposit Agreement will be
permitted at any time to be amended by agreement between the Company and the
applicable Preferred Stock Depositary. However, any amendment that materially
and adversely alters the rights of the holders of Depositary Receipts or that
would be materially and adversely inconsistent with the rights granted to the
holders of the related Preferred Stock will not be effective unless such
amendment has been approved by the existing holders of at least two-thirds of
the applicable Depositary Shares evidenced by the applicable Depositary Receipts
then outstanding. No amendment shall impair the right, subject to certain
anticipated exceptions in the Deposit Agreements, of any holder of Depositary
Receipts to surrender any Depositary Receipt with instructions to deliver to the
holder the related Preferred Stock and all money and other property, if any,
represented thereby, except in order to comply with law. Every holder of an
outstanding Depositary Receipt at the time any such amendment becomes effective
shall be deemed, by continuing to hold such Depositary Receipt, to consent and
agree to such amendment and to be bound by the applicable Deposit Agreement as
amended thereby.
A Deposit Agreement will be permitted to be terminated by the Company upon
not less that 30 days' prior written notice to the applicable Preferred Stock
Depositary if (i) such termination is necessary to preserve the Company's status
as a REIT or (ii) a majority of each series of Preferred Stock affected by such
termination consents to such termination, whereupon such Preferred Stock
Depositary will be required to deliver or make available to each holder of
Depositary Receipts, upon surrender of the Depositary Receipts held by such
holder, such number of whole or fractional shares of Preferred Stock as are
represented by the Depositary Shares evidenced by such Depositary Receipts
together with any other property held by such Preferred Stock Depositary with
respect to such Depositary Receipts. The Company will agree that if a Deposit
Agreement is terminated to preserve the Company's status as a REIT, then the
Company will use its best efforts to list the Preferred Stock issued upon
surrender of the related Depositary Shares on a national securities exchange. In
addition, a Deposit Agreement will automatically terminate if (i) all
outstanding Depositary Shares thereunder shall have been redeemed, (ii) there
shall have been a final distribution in respect of the related Preferred Stock
in connection with any liquidation, dissolution or winding up of the Company and
such distribution shall have been distributed to the holders of Depositary
Receipts evidencing the Depositary Shares representing such Preferred Stock or
(iii) each share of the related Preferred Stock shall have been converted into
stock of the Company not so represented by Depositary Shares.
CHARGES OF A PREFERRED STOCK DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of a Deposit Agreement. In addition, the
Company will pay the fees and expenses of a Preferred
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Stock Depositary in connection with the performance of its duties under a
Deposit Agreement. However, holders of Depositary Receipts will pay certain
other transfer and other taxes and governmental charges as well as the fees and
expenses of a Preferred Stock Depositary for any duties required by such holders
to be performed which are outside of those expressly provided for in the
applicable Deposit Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
A Preferred Stock Depositary will be permitted to resign at any time by
delivering to the Company notice of its election to do so, and the Company will
be permitted at any time to remove a Preferred Stock Depositary, any such
resignation or removal to take effect upon the appointment of a successor
Preferred Stock Depositary. A successor Preferred Stock Depositary will be
required to be appointed within 60 days after delivery of the notice of
resignation or removal and will be required to be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
A Preferred Stock Depositary will be required to forward to holders of
Depositary Receipts any reports and communications from the Company which are
received by such Preferred Stock Depositary with respect to the related
Preferred Stock.
Neither a Preferred Stock Depositary nor the Company will be liable if it
is prevented from or delayed in, by law or any circumstances beyond its control,
performing its obligations under a Depositary Agreement. The obligations of the
Company and a Preferred Stock Depositary under a Deposit Agreement will be
limited to performing their duties thereunder in good faith and without
negligence (in the case of any action or inaction in the voting of Preferred
Stock represented by the applicable Depositary Shares), gross negligence or
willful misconduct, and neither the Company nor any applicable Preferred Stock
Depositary will be obligated to prosecute or defend any legal proceeding in
respect of any Depositary Receipts, Depositary Shares or shares of Preferred
Stock represented thereby unless satisfactory indemnity is furnished. The
Company and any Preferred Stock Depositary will be permitted to rely on written
advice of counsel or accountants, or information provided by persons presenting
shares of Preferred Stock represented thereby for deposit, holders of Depositary
Receipts or other persons believed in good faith to be competent to give such
information, and on documents believed in good faith to be genuine and signed by
a proper party.
In the event a Preferred Stock Depositary shall receive conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Company, on the other hand, such Preferred Stock Depositary shall
be entitled to act on such claims, requests or instructions received from the
Company.
DESCRIPTION OF COMMON STOCK
GENERAL
The authorized capital stock of the Company includes 100 million 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 stockholders for a
vote. Holders of Common Stock have no preemptive rights. As of June 30, 1997,
there were approximately 35.9 million shares of Common Stock outstanding, and
approximately 6.8 million shares reserved for issuance upon exchange of
outstanding Common 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 any Prospectus
Supplement.
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.
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Under Maryland law, stockholders 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
stockholders, 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 stockholders, 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
stockholders entitled to vote thereon (voting together as a single class)
approve the transaction.
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.
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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 Common
Units. 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.
OPERATING PARTNERSHIP AGREEMENT. The Operating Partnership Agreement
requires that any merger (unless the surviving entity contributes substantially
all of its assets to the Operating Partnership for Common Units) or sale of all
or substantially all of the assets of the Operating Partnership be approved by a
majority of the holders of Common Units (including Common Units owned by the
Company). The Operating Partnership Agreement also contains provisions relating
to a limited partner's redemption right in the event of certain changes of
control of the Company and under certain circumstances allows for limited
partners to continue to hold Common Units in the Operating Partnership following
such a change of control, thereby maintaining the tax basis in their Common
Units. The covered changes of control (each, a "Trigger Event") are: (i) a
merger involving the Company in which the Company is not the surviving entity;
(ii) a merger involving the Company in which the Company is the survivor but all
or part of the Company's shares are converted into securities of another entity
or the right to receive cash; and (iii) the transfer by the Company to another
entity of substantially all of the assets or earning power of the Company or the
Operating Partnership.
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Upon occurrence of a Trigger Event, the rights of a limited partner to
receive a share of the Company's common stock (a "REIT Share") or cash equal to
the fair market value of a REIT Share upon redemption of a Common Unit is
converted into the right to receive a share (a "Replacement Share") or cash
equal to the fair market value thereof of the acquiror or a parent of the
acquiror. If the acquiror does not have publicly traded securities and a parent
of the acquiror does, the publicly traded equity securities of the parent entity
with the highest market capitalization will be the Replacement Shares. If
neither the acquiror nor any parent has publicly traded equity securities, the
Replacement Shares will be the equity securities of the entity with the highest
market capitalization. The number of Replacement Shares to be received by a
limited partner (or to be used to calculate the cash payment due) upon a
redemption of Common Units shall be equal to the number of REIT Shares issuable
prior to the Trigger Event multiplied by (i) the number of Replacement Shares
the holder of a single REIT Share would have received as a result of the Trigger
Event or, if the Replacement Shares have not been publicly traded for one year,
(ii) a fraction, the numerator of which is the Average Trading Price (as defined
in the Operating Partnership Agreement) of a REIT Share as of the Trigger Event
and the denominator of which is the Average Trading Price of a Replacement Share
as of the Trigger Event.
If the acquiror in a Trigger Event is a REIT, it must make provision to
preserve an operating partnership structure with terms no less favorable to the
limited partners than currently in place. In addition, the Operating Partnership
Agreement provides that, if a distribution of cash or property is made in
respect of a Replacement Share, the Operating Partnership will distribute the
same amount in respect of a Common Unit as would have been received by a limited
partner had such partner's Common Units been redeemed for Replacement Shares
prior to such distribution.
Because the Operating Partnership Agreement requires an acquiror to make
provision under certain circumstances to maintain the Operating Partnership
structure and maintain a limited partner's right to continue to hold Common
Units with future redemption rights, the terms of the Operating Partnership
Agreement could also have the effect of discouraging a third party from making
an acquisition proposal for the Company.
These provisions of the Operating Partnership Agreement may only be waived
or amended upon the consent of limited partners holding at least 75% of the
Common Units (excluding those held by the Company).
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Common Stock is First Union
National Bank, Charlotte, North Carolina.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain Federal income tax considerations to the
Company is based on current law, is for general purposes only, and is not tax
advice. The summary addresses the material Federal income tax considerations
relating to the Company's REIT status, as well as material Federal income tax
considerations relating to the Operating Partnership. The tax treatment of a
holder of any of the Securities will vary depending upon the terms of the
specific securities acquired by such holder, as well as his particular
situation, and this discussion does not attempt to address any aspects of
Federal income taxation relating to holders of Securities. Certain Federal
income tax considerations relevant to holders of the Securities will be provided
in the applicable Prospectus Supplement relating thereto.
EACH INVESTOR IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING
THE TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE
OFFERED SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
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TAXATION OF THE COMPANY AS A REIT
GENERAL. Commencing with its taxable year ended December 31, 1994, the
Company has elected to be taxed as a real estate investment trust under sections
856 through 860 of the Code. The Company believes that, commencing with its
taxable year ended December 31, 1994, it has been organized and has operated in
such a manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that it has operated or will operate in a manner so as to qualify or
remain qualified.
These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the sections that govern the Federal income
tax treatment of a REIT and its stockholders. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretation thereof.
Alston & Bird LLP has acted as tax counsel to the Company in connection
with the offering of the Securities and the Company's election to be taxed as a
REIT. Alston & Bird LLP is of the opinion that 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 years ended December 31, 1994
through 1996 and that the Company is in a position to continue its qualification
as a REIT within the definition of section 856(a) of the Code for the taxable
year that will end December 31, 1997. This opinion is based solely on the
factual representations of the Company concerning its business operations and
its properties. In addition, the Company's qualification as a REIT at any time
during the 1997 year is dependent, among other things, upon its meeting the
requirements of section 856(a) of the Code throughout the year and for the year
as a whole. Accordingly, no assurance can be given that the actual results of
the Company's operations for any particular year will satisfy the REIT
requirements.
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 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 of the 75% or 95% gross income tests
(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
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corporate rate, pursuant to guidelines issued by the Internal Revenue Service
("IRS") (the "Built-In Gain Rules").
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company has elected 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. For purposes of
condition (vi), pension funds and certain other tax-exempt entities are treated
as individuals or persons on a "look-through" basis. 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.
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property; including investments in other REITs, or mortgages on
real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments, dividends, interest and gain from the sale or disposition
of stock or securities (or from any combination of the foregoing). Third,
short-term gain from the sale or other disposition of stock or securities, gain
from prohibited transactions and gain on 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 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. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, 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% of more of the REIT, directly or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection
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with a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, for rents received to
qualify as "rents from real property," the REIT generally must not operate or
manage the property or furnish or render services to the tenants of such
property, other than through an independent contractor from whom the REIT
derives no revenue, provided, however, the Company may directly perform certain
services that are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise considered "rendered to
the occupant" of the property.
The Company does not currently charge 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 Operating Partnership 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 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 from real property. Services with respect to the
Properties that the Company believes may not be provided by the Company or the
Operating Partnership directly without jeopardizing the qualification of rent as
"rents from real property" are and will be performed by independent contractors.
The Operating Partnership and the Company receive fees in consideration of
the performance of property management and brokerage and leasing services with
respect to certain Properties not owned entirely by the Operating Partnership.
Such fees will not qualify under the 75% or the 95% gross income tests. The
Operating Partnership also may receive certain other types of income with
respect to the properties it owns that will not qualify for either of these
tests. In addition, dividends on the Operating Partnership's stock in Highwoods
Services 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 either the 75% or the 95% gross income test.
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 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 would cease 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. First, at least 75% of the value of the Company's total assets must be
represented by real estate assets, including shares in other REITs, cash, cash
items and government securities. Second, no more than 25% of the Company's total
assets may be represented by securities other than those in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
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 on which the Company through the Operating Partnership acquired
the securities of Highwoods Services, but also each time the Company
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increases its ownership of its 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
Highwoods Services.
The Operating Partnership owns 100% of the nonvoting stock and 1% of the
voting stock of Highwoods Services, and by virtue of its ownership of Common
Units, the Company will be considered to own its pro rata share of such stock.
See "The Company and the Operating Partnership." Neither the Company nor the
Operating Partnership, however, will own more than 1% of the voting securities
of Highwoods Services. 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
Highwoods Services exceeds 5% 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 Highwoods Services owned by the Operating Partnership relative
to the estimated value of the other assets owned by the Operating Partnership.
No independent appraisals will be obtained to support this conclusion, and
Alston & Bird LLP, 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 Highwoods Services. 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
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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 stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends. The Company
will, however, be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of 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.
TAXATION OF U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of Common Stock
that (for 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, subject to certain limitations, a
trust, the income of which is subject to 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
discussed below.
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 are not allowed to 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 in
" -- 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.
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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 stockholder
generally will not constitute "unrelated business taxable income" ("UBTI")
unless the stockholder has borrowed to acquire or carry its Common Stock.
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 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 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
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accumulated earnings and profits. Generally, any ordinary income dividend will
be subject to a 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).
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 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 is "regularly traded" on an established securities market or if the
Company is a domestically controlled REIT. Otherwise, under FIRPTA the purchaser
of Common Stock from a Non-U.S. Stockholder may be required to withhold 10% of
the purchase price and remit this amount to the IRS.
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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.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
GENERAL. Substantially all of the Company's investments are held through
the Operating Partnership. In general, partnerships are "pass-through" entities
which are not subject to Federal income tax. Rather, partners are allocated
their proportionate shares of the items of income, gain, loss, deduction and
credit of a partnership, and are potentially subject to tax thereon, without
regard to whether the partners receive a distribution from the partnership. The
Company includes in its income its proportionate share of the foregoing
Operating Partnership items for purposes of the various REIT income tests and in
the computation of its REIT taxable income. Moreover, for purposes of the REIT
asset tests, the Company includes its proportionate share of assets held by the
Operating Partnership.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property (such as the Properties) that is contributed to a
partnership in exchange for an interest in the partnership, 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 in generally equal to the difference between the fair market
value of contributed property at the time of contribution, and the adjusted tax
basis of such property at the time of contribution (a "Book-Tax Difference").
Such allocations are solely for Federal income tax purposes and do not affect
the book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property (including the Properties). Consequently, the Operating
Partnership Agreement requires such allocations to be made in a manner
consistent with Section 704(c) of the Code.
In general, the partners who have contributed partnership interests in the
Properties to the Operating Partnership (the "Contributing Partners") will be
allocated lower amounts of depreciation deductions for tax purposes than such
deductions would be if determined on a pro rata basis. In addition, in the event
of the disposition of any of the contributed assets (including the Properties)
which have a Book-Tax Difference, all taxable income attributable to such
Book-Tax Difference generally will be allocated to the Contributing Partners,
and the Company generally will be allocated only its share of capital gains
attributable to appreciation, if any, occurring after the closing of the
acquisition of such properties. This will tend to eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect
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to a specific taxable transaction such a sale. Thus, the carryover basis of the
contributed assets in the hands of the Operating Partnership will cause the
Company to be allocated lower depreciation and other deductions, and possibly
amounts of taxable income in the event of a sale of such contributed assets in
excess of the economic or book income allocated to it as a result of such sale.
This may cause the Company to recognize taxable income in excess of cash
proceeds, which might adversely affect the Company's ability to comply with the
REIT distribution requirements. See " -- Requirements for
Qualification -- ANNUAL DISTRIBUTION REQUIREMENTS."
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including the "traditional method" that may leave some of the Book-Tax
Differences unaccounted for, or the election of certain methods which would
permit any distortions caused by a Book-Tax Difference at this time to be
entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Operating Partnership and the Company have
determined to use the "traditional method" for accounting for Book-Tax
Differences with respect to the Properties contributed to the Partnership. As a
result of such determination, distributions to stockholders will be comprised of
a greater portion of taxable income rather than a return of capital. The
Operating Partnership and the Company have not determined which of the
alternative methods of accounting for Book-Tax Differences will be elected with
respect to Properties contributed to the Partnership in the future.
With respect to any property purchased by the Operating Partnership, such
property initially will have a tax basis equal to its fair market value and
Section 704(c) of the Code will not apply.
BASIS IN OPERATING PARTNERSHIP INTEREST. The Company's adjusted tax basis
in its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the Operating
Partnership by the Company, (ii) will be increased by (a) its allocable share of
the Operating Partnership's income and (b) its allocable share of indebtedness
of the Operating Partnership and (iii) will be reduced, but not below zero, by
the Company's allocable share of (a) losses suffered by the Operating
Partnership, (b) the amount of cash distributed to the Company and (c)
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss will
be deferred until such time and to the extent that the Company has an adjusted
tax basis in its partnership interest. To the extent that the Operating
Partnership's distributions, or any decrease in the Company's share of the
indebtedness of the Operating Partnership (such decreases being considered a
cash distribution to the partners), exceed the Company's adjusted tax basis,
such excess distributions (including such constructive distributions) constitute
taxable income to the Company. Such taxable income normally will be
characterized as a capital gain, and if the Company's interest in the Operating
Partnership has been held for longer than the long-term capital gains. Under
current law, capital gains and ordinary income of corporations are generally
taxed at the same marginal rates.
SALE OF THE PROPERTIES. The Company's share of gain realized by the
Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to customers
in the ordinary course of the Operating Partnership's trade or business will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See " -- Requirements for Qualification -- Income Tests." Such
prohibited transaction income may also have an adverse effect upon the Company's
ability to satisfy the income tests for qualification as a REIT. Under existing
law, whether property is held as inventory or primarily for sale to customers in
the ordinary course of the Operating Partnership's trade or business is a
question of fact that depends on all the facts and circumstances with respect to
the particular transaction. The Operating Partnership intends to hold the
Properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, developing, owning, and operating the Properties (and
other properties) and to make such occasional sales of the Properties, including
peripheral land, as are consistent with the Operating Partnership's investment
objectives.
RECENT LEGISLATION
Prospective purchasers of Securities should be aware that the recently
enacted Taxpayer Relief Act of 1997 (the "1997 Act") made numerous changes to
the Code, including reducing the maximum tax imposed
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on net capital gains from the sale of assets held for more than 18 months by
individuals, trusts and estates. The 1997 Act also makes certain changes to the
requirements to qualify as a REIT and to the taxation of REITs and their
shareholders.
The 1997 Act contains significant changes to the taxation of capital gains
of individuals, trusts and estates and certain changes to the REIT requirements
and the taxation of REITs. For gains realized after July 28, 1997, and subject
to certain exceptions, the maximum rate of tax on net capital gains on
individuals, trusts and estates from the sale or exchange of assets held for
more than 18 months has been reduced to 20%, and such maximum rate is further
reduced to 18% for assets acquired after December 31, 2000 and held for more
than five years. For fifteen percent bracket taxpayers, the maximum rate on net
capital gains is reduced to 10%, and such maximum rate is further reduced to 8%
for assets acquired after December 31, 2000 and held for more than five years.
The maximum rate for net capital gains attributable to the sale of depreciable
real property held for more than 18 months is 25% to the extent of the
deductions for depreciation with respect to such property. Long-term capital
gain allocated to a shareholder by the Company will be subject to the 25% rate
to the extent that the gain does not exceed depreciation on real property sold
by the Company. The maximum rate of capital gains tax for capital assets held
more than one year but not more than 18 months remains at 28%. The taxation of
capital gains of corporations was not changed by the 1997 Act.
The 1997 Act also includes several provisions that are intended to simplify
the taxation of REITs. These provisions are effective for taxable years
beginning after the date of enactment of the 1997 Act which, as to the Company,
is its taxable year commencing January 1, 1998. First, in determining whether a
REIT satisfies the income tests, a REIT's rental income from a property will not
cease to qualify as "rents from real property" merely because the REIT performs
a de minimis amount of impermissible services to the tenant. For purposes of the
preceding sentence, (i) the amount of income received from such impermissible
services cannot exceed one percent of all amounts received or accrued during
such taxable year directly or indirectly by the REIT with respect to such
property and (ii) the amount treated as received by the REIT for such
impermissible services cannot be less than 150 percent of the direct cost of the
trust in furnishing or rendering such services. Second, certain non-cash income,
including income from cancellation of indebtedness and original issue discount
will be excluded from income in determining the amount of dividends that a REIT
is required to distribute. Third, a REIT may elect to retain and pay income tax
on net long-term capital gain that it received during the tax year. If such
election is made, (i) the shareholders will include in their income their
proportionate share of the undistributed long-term capital gains as designated
by the REIT; (ii) the shareholders will be deemed to have paid their
proportionate share of the tax, which would be credited or refunded to the
shareholder, and (iii) the basis of the shareholders' shares will be increased
by the amount of the undistributed long-term capital gains (less the amount of
capital gains tax paid by the REIT) included in such shareholders' long-term
capital gains. Fourth, the 1997 Act repeals the requirement that a REIT receive
less than 30% of its gross income from the sale or disposition of stock or
securities held for less than one year, gain from prohibited transactions, and
gain from certain sales of real property held less than four years. Finally, the
1997 Act contains a number of technical provisions that reduce the risk that a
REIT will inadvertently cease to qualify as a REIT.
OTHER TAX CONSIDERATIONS
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 Highwoods Services held by the Operating Partnership. Highwoods Services will
not qualify as a REIT and will pay Federal, state and local income taxes on its
taxable income at normal corporate rates. Any Federal, state or local income
taxes that Highwoods Services is 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 Highwoods Services held
by the Company cannot exceed 5% of the value of the Company's assets at a time
when a Common Unit holder in the Operating Partnership exercises his or her
redemption right (or the Company otherwise is considered to acquire additional
securities of Highwoods Services). See " -- Federal Income Taxation of the
Company." This limitation may restrict the ability of Highwoods Services to
increase the size of its business unless the value of the assets of the Company
is increasing at a commensurate rate.
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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.
PLAN OF DISTRIBUTION
The Company and the Operating Partnership may sell the Securities to one or
more underwriters for public offering and sale by them or may sell the
Securities to investors directly or through agents or through a combination of
any such method of sale. Any such underwriter or agent involved in the offer and
sale of the Securities will be named in the applicable Prospectus Supplement.
The distribution of Securities may be effected from time to time in
transactions at a fixed price or prices, which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Company and the Operating Partnership also
may, from time to time, authorize underwriters acting as their agents to offer
and sell the Securities upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of Securities,
underwriters may be deemed to have received compensation from the Company or the
Operating Partnership in the form of underwriting discounts or commissions and
may also receive commissions from purchasers of Securities for whom they may act
as agent. Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Company or the Operating
Partnership to underwriters or agents in connection with the offering of
Securities, and any discounts, concessions or commissions allowed by
underwriters to participating dealers, are set forth in the applicable
Prospectus Supplement. Underwriters, dealers and agents participating in the
distribution of the Securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the Securities may be deemed to be underwriting discounts and
commissions, under the Securities Act. Underwriters, dealers and agents may be
entitled, under agreements entered into with the Company and the Operating
Partnership, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company and
the Operating Partnership will authorize dealers acting as their agents to
solicit offers by certain institutions to purchase Securities from them at the
public offering price set forth in such Prospectus Supplement pursuant to
Delayed Delivery Contracts ("Contracts") providing for payment and delivery on
the date or dates stated in such Prospectus Supplement. Each Contract will be
for an amount not less than, and the aggregate principal amount of Securities
sold pursuant to Contracts shall be not less nor more than, the respective
amounts stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be subject
to the approval of the Company and the Operating Partnership. Contracts will not
be subject to any conditions except (i) the purchase by an institution of the
Securities covered by its Contracts shall not at the time of delivery be
prohibited under the laws of any jurisdiction in the United States to which such
institution is subject, and (ii) if the Securities are being sold to
underwriters, the Company and the Operating Partnership shall have sold to such
underwriters the total principal amount of the Securities less the principal
amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and the
Operating Partnership in the ordinary course of business.
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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, 1996, and of Highwoods/Forsyth Limited
Partnership, incorporated herein by reference from the Operating Partnership's
annual report (Form 10-K) for the year ended December 31, 1996, the financial
statements with respect to Anderson Properties, Inc. and the financial
statements with respect to Century Center Group incorporated herein by reference
from the Company's current report on Form 8-K dated January 9, 1997 (as amended
on Forms 8-K/A dated February 7, 1997 and March 10, 1997), 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 dated April 1, 1996 (as amended on Forms 8-K/A filed 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 dated April 29, 1996 (as amended on Forms 8-K/A filed
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 combined statement of revenue and certain operating expenses of the
Associated Capital Properties Portfolio for the year ended December 31, 1996,
and the combined statement of revenue and certain operating expenses of the 1997
Pending Acquisitions for the year ended December 31, 1996, incorporated by
reference herein from the Company's current report on Form 8-K dated September
18, 1997, have been so incorporated in reliance upon the reports of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of said firm as
experts in accounting and auditing.
The 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 each of the years in the two year period ended December 31, 1994, have
been incorporated by reference herein from the Company's current report on Form
8-K dated April 29, 1996 (as amended on Forms 8-K/A filed 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 dated April 29, 1996 (as amended on Forms
8-K/A filed 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
dated April 29, 1996 (as amended on Forms 8-K/A filed 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
The validity of the Securities offered hereby is being passed upon for the
Company and the Operating Partnership by Alston & Bird LLP, Raleigh, North
Carolina. Certain legal matters will be passed upon for any underwriters,
dealers or agents by Andrews & Kurth L.L.P., Washington, D.C.
In addition, the description of Federal income tax consequences contained
in this Prospectus entitled "Federal Income Tax Considerations" is based upon
the opinion of Alston & Bird LLP.
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