SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
FORM 8-K
CURRENT REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): October 30, 1998
First Washington Realty Trust, Inc.
(Exact Name of Registrant as
Specified in Charter)
Maryland 0-25230 52-1879972
(State or Other (Commission File Number) (IRS Employer
Jurisdiction of Identification No.)
Incorporation)
4350 East-West Highway
Suite 400
Bethesda, Maryland 20814
(Address of Principal
Executive Offices)
(301) 907-7800
(Registrant's telephone
number, including area code)
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ITEM 5. Other Events
Prospective investors in securities of First Washington Realty Trust, Inc.
should carefully consider the following risk factors.
Although First Washington Realty Trust, Inc., First Washington Realty
Limited Partnership and First Washington Management, Inc. are separate entities,
for ease of reference, the terms "we," "us," and "ours" refer to the business
and properties of all of these entities, unless the context indicates otherwise.
For ease of reference and clarity, we refer to First Washington Realty Trust,
Inc. as the "REIT," First Washington Realty Limited Partnership as the
"Operating Partnership," and First Washington Management, Inc. as the
"Management Company."
Risk Factors
Indebtedness
Leverage. As of September 30, 1998, we had outstanding approximately $218
million of long-term mortgage indebtedness and $25 million of exchangeable
debentures. Our debt (including the exchangeable debentures as debt as discussed
below) to total market capitalization ratio (i.e., debt divided by the sum of
debt and the market value of our outstanding partnership units and shares of
common stock) is approximately 40.5%. The ratio of our debt (excluding the
exchangeable debentures as debt) to total market capitalization is approximately
36.3%.
Near Term Maturity of Indebtedness. At the current time, we have a
significant level of debt. We may have insufficient cash resources to make
required payments of principal and interest. We cannot guarantee that we can
refinance or repay our existing indebtedness at maturity. Also, the terms of any
such refinancing may not be as favorable as the terms of the existing financing.
Additionally, a large portion of our mortgage indebtedness will become due
by 2000. These mortgages provide for the repayment of principal in a lump sum or
"balloon" payment at maturity. This type of mortgage involves greater risks than
mortgages with principal amounts amortized over the term of the loan, since our
ability to repay the outstanding principal amount at maturity may depend on
obtaining adequate refinancing or selling the property which is subject to the
mortgage. These mortgages require balloon payments of $88.9 million (including
$25.0 million of exchangeable debentures) in 1999 and $24.3 million in 2000.
From 1998 through 2021, we will have to refinance an aggregate of approximately
$204 million of debt.
Only a small portion of the principal of our mortgage indebtedness will be
repaid prior to maturity and we do not plan to retain in advance enough cash to
repay this indebtedness at maturity. Therefore, we will have to refinance this
debt through additional debt financing or equity offerings. If we cannot
refinance this indebtedness on acceptable terms, we may have to dispose of
properties upon disadvantageous terms, which may result in losses to us and
lower distributions to stockholders. If the refinancing has a higher interest
rate, our interest expense
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would increase, which would limit the amount of cash to pay expected
distributions to stockholders. Further, if we cannot meet mortgage payments, we
could lose the mortgaged property or properties through foreclosure. Even if the
indebtedness is otherwise nonrecourse, the lender may have the right to recover
deficiencies from us in certain circumstances, including environmental
liabilities.
Risk of Rising Interest Rates. At September 30, 1998, $15.5 million of our
debt carried a variable interest rate, and we may incur additional debt in the
future that also bears interest at variable rates. If market interest rates
increase our debt service requirements would also increase.
No Limitation on Debt. While not required by our organizational documents,
we have a policy of maintaining a ratio of debt to total market capitalization
of 50% or less. However, our charter and bylaws do not contain any debt
incurrence restrictions and the Board of Directors could alter or eliminate this
policy.
Cross-Collateralization. A total of 17 properties are cross-collateralized
with one or more other properties. A default in a single loan which is
cross-collateralized by other properties may result in the foreclosure on all of
the properties by the mortgagee with a consequent loss of income and asset value
to us.
Historical Operating Losses And Net Deficit
We historically have experienced losses allocated to common stockholders
(as measured by generally accepted accounting principles) before extraordinary
items. These net losses reflect substantial non-cash charges such as
depreciation and amortization and the effect of distributions to holders of the
convertible preferred stock.
Limitation On The Level Of Distributions Payable With Respect To Common Stock;
Subordination Of Distributions With Respect To Common Stock
When the Board of Directors declares distributions, each share of
convertible preferred stock is entitled to receive distributions equal to
$0.6094 per quarter. Each share of convertible preferred stock is also entitled
to a participating distribution, which is equal to the amount of distributions
in excess of $0.4875 per quarter payable to the common stock multiplied by the
number of shares of common stock into which the convertible preferred stock is
then convertible. The payment of distributions to the convertible preferred
stock reduces the income allocable to the holders of common stock, which causes
a decrease in common stockholders' equity. The entitlement of the convertible
preferred stock to participating distributions limits the level of distributions
we can pay on the outstanding shares of common stock.
Limited Geographic Diversification; Dependence On The Mid-Atlantic Region
Local economic and real estate conditions could affect our results. Our
properties are located primarily in the Mid-Atlantic region. Approximately 45%
of the retail properties
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(based on gross leaseable area) are located in the Washington-Baltimore
corridor. Adverse economic developments in this area could adversely impact the
operations of our properties and therefore our profitability. The concentration
of properties in a limited number of markets may expose us to risks of adverse
economic developments which are greater than the risks of owning properties in
several markets.
Effect Of Exchange Of Exchangeable Indebtedness
As part of our formation, First Washington Realty Limited Partnership (the
"Operating Partnership") issued $25.0 million of exchangeable debentures, which
are exchangeable for 1,000,000 shares of convertible preferred stock. The
exchangeable debentures bear interest at the rate of 8.25% per year. If the
exchangeable debentures are exchanged for convertible preferred stock, our
annual amount of distribution payments on the convertible preferred stock (net
of reductions in interest payments) would be increased by approximately $0.375
million. Such an increase in distributions on the convertible preferred stock
would reduce the annual cash available for distribution payable on outstanding
shares of common stock by $0.04 per share.
Environmental Matters
General. Various federal, state and local laws, ordinances and regulations
subject property owners or operators to liability for the costs of removal or
remediation of certain hazardous substances released on a property. These laws
often impose liability without regard to whether the owner or operator knew of,
or was responsible for, the release of the hazardous substances. The presence or
the failure to properly remediate hazardous substances may adversely affect our
ability to sell, rent or borrow against contaminated property. In addition to
the costs associated with investigation and remediation actions brought by
governmental agencies, the presence of hazardous wastes on a property could
result in personal injury or similar claims by private plaintiffs.
Various laws also impose, on persons who arrange for the disposal or
treatment of hazardous or toxic substances, liability for the cost of removal or
remediation of hazardous substances at the treatment facility. These laws often
impose liability whether or not the person arranging for the disposal ever owned
or operated the disposal facility.
Independent environmental consultants have completed Phase I or similar
environmental audits on all of our properties. Phase I environmental site
assessments are intended to identify potential sources of contamination for
which a company may be responsible and to assess the status of environmental
regulatory compliance. An environmental audit involves general inspections
without soil sampling or groundwater analysis. These environmental assessments
and audits indicate that dry cleaning solvents, petroleum and/or hydraulic fluid
have been detected in the soil and/or groundwater at seven of our properties.
The contamination at these properties is either limited and no remediation is
warranted or is the responsibility of unrelated third parties and is being
addressed by these unrelated third parties.
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We believe that environmental studies have not revealed significant
environmental liabilities that would have a material adverse effect on our
business, results of operations and liquidity. However, existing environmental
studies of our properties may not have revealed all environmental conditions,
liabilities or compliance concerns. Also, environmental conditions, liabilities
or compliance concerns may have arisen at a property after the related review
was completed.
Risks Of Third-Party Management, Leasing And Related Service Business
Possible Termination of Management Contracts. We intend to pursue actively
the management, including contracts to lease space, of properties owned by third
parties. Managing properties owned by third parties presents certain risks,
including:
.. Management and leasing contracts may generally be canceled upon 30 days'
notice or upon certain events, including sale of the property. The property
owner may terminate these contracts, or we may lose the contracts in
connection with a sale of the property.
.. Contracts may not be renewed upon expiration or may not be renewed on terms
consistent with current terms.
.. Management fees are based on rental revenues which may decline as a result
of general or specific market conditions.
Possible Adverse Consequences of Lack of Control Over the Business of the
Management Company. Certain members of our management, own 100% of the voting
common stock of the Management Company and have the ability to elect the board
of directors of the Management Company. Consequently, we have no ability to
influence the decisions of the Management Company. As a result, the board of
directors and management of the Management Company may implement business
policies or decisions that are adverse to our interests or that lead to adverse
financial results. The voting common stock of the Management Company is subject
to an assignable right of first refusal held by Stuart D. Halpert and William J.
Wolfe.
Possible Adverse Consequences of REIT Status on the Business of the
Management Company. Certain requirements for REIT qualification may limit our
ability to increase third-party management, leasing and related services offered
by the Management Company.
Conflicts Of Interest
Policies with Respect to Conflicts of Interests. We have adopted certain
policies designed to eliminate or minimize conflicts of interest. However, these
policies may not successfully eliminate the influence of these conflicts.
Consequently, our decisions may not reflect fully the interests of all
stockholders.
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Tax Consequences Upon Sale of Properties. Holders of Common Units may
suffer adverse tax consequences upon certain of our properties' sales or
refinancings. Therefore, holders of Common Units, including members of our
management may have their own objectives regarding the appropriate pricing and
timing of a property's sale or refinancing. Although we, as the sole general
partner of the Operating Partnership have the exclusive authority to sell or
refinance an individual property, officers and directors who hold Common Units
may influence us not to sell or refinance certain properties (or repay debt
collateralized by these properties) even though a sale or refinancing might be
financially advantageous to stockholders. Policies adopted by the Board to
minimize the impact of this conflict may not succeed in eliminating the
influence of officers and directors who hold Common Units.
Conflict of Interest with Respect to Mid-Atlantic Centers Limited
Partnership. Certain members of management are the sole owners of a corporation
that is the general partner of Mid-Atlantic Centers Limited Partnership. This
partnership owns one shopping center currently managed by the Management
Company. These members of management may have objectives different than ours
regarding the determination of the management fee charged by us for this
property.
Changes In Investment And Financing Policies Without Stockholder Approval
The Board of Directors determines our investment and financing policies,
and our policies with respect to certain other activities, including our growth,
debt, capitalization, distributions, REIT status and operating policies.
Although they have no present intention to do so, the Board of Directors may
amend or revise these policies from time to time without notice to or a vote of
our stockholders. Accordingly, stockholders may not have control over changes in
our policies.
Influence Of Executive Officers
As of September 30, 1998, our officers as a group beneficially owned
approximately 10.5% of the total issued and outstanding shares of common stock
(assuming exchange of common units and exercise of options) and 5.6% of the
outstanding shares of common stock (assuming the exchange and/or conversion of
all other securities convertible into common stock). They have substantial
influence on us which might not be consistent with the interests of our other
stockholders. Also, they may in the future have a substantial influence on the
outcome of any matters submitted to our stockholders for approval.
Dependence On Key Personnel
We depend on the efforts of our executive officers, particularly Messrs.
Halpert and Wolfe. While we believe that we could replace these individuals, the
loss of their services could have an adverse effect on our operations. Messrs.
Halpert and Wolfe have entered into employment and non-compete agreements with
us.
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General Real Estate Investment Risks; Adverse Impact On Ability To Make
Distributions
General. Our ability to make expected distributions to stockholders depends
on our ability to generate funds from operations in excess of scheduled
principal payments on debt and capital expenditure requirements. Events and
conditions beyond our control may adversely affect funds from operations and the
value of our properties. Examples include:
.. an adverse economic climate, particularly in the Mid-Atlantic Region;
.. attractiveness of properties to tenants;
.. an oversupply of space or reduction of demand for space in the areas where
we operate;
.. competition from other retail properties;
.. our ability to provide adequate maintenance and insurance;
.. increased operating costs, including insurance premiums, real estate taxes,
repair costs and renovation costs;
.. changes in market rental rates;
.. the availability of financing and interest rate levels;
.. zoning or other regulatory restrictions;
.. changes in traffic patterns; and
.. environmental liability.
Risks of Acquisition, Renovation and Development Business. We intend to
continue actively with the acquisition of principally supermarket-anchored
neighborhood shopping centers. Acquisition of neighborhood shopping centers
entails risks that investments will fail to perform in accordance with our
expectations. We intend to expand and/or renovate our properties or develop new
properties from time to time. Expansion, renovation and development projects
generally require expenditure of capital as well as various government and other
approvals, which cannot be assured. We have implemented policies with respect to
expansion, renovation and development activities to limit some of the risks
otherwise associated with these activities. For example, we initiate
construction after securing commitments from anchor tenants. However, we will
incur certain risks, including expenditures of funds on, and devotion of
management's time to, projects which we may not complete. Although from time to
time we enter into agreements for the acquisition of retail properties, such
agreements are subject to customary conditions to closing, including completion
of due diligence investigations to our satisfaction. It is possible that such
agreements may not be consummated. Any of the foregoing could have a material
adverse effect on our ability to make anticipated distributions to you.
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Dependence on Rental Income from Real Property; Tenants Involved in
Bankruptcy Proceedings. We derive most of our income from rental income. A
tenant may experience a downturn in its business, which may weaken its financial
condition and result in its failure to make timely rental payments. Also, when
our tenants decide not to renew their leases, we may not be able to relet the
space. Even if tenants do renew, the terms of renewal or reletting may not be as
favorable as current lease terms. Leases on 9.4% and 9.5% of the gross leasable
area in the properties will be expiring in 1999 and 2000, respectively. In the
event of default by a lessee, we may experience delays in enforcing our rights
as lessor and may incur substantial costs in protecting our investment.
The bankruptcy or insolvency of a major tenant may adversely affect the
income produced by our properties. As of October 23, 1998, three tenants were
involved in bankruptcy proceedings. All of these tenants are currently paying
rent. These tenants represent approximately 0.15% of the total annual minimum
rents of our properties. These bankrupt tenants may not continue to pay rent and
additional tenants may become bankrupt or insolvent.
Small Size of Certain Properties. Nine of our properties are relatively
small in size, with less than 50,000 square feet of gross leasable area, and are
not anchored by a supermarket or drug store tenant. These properties may
experience greater variability in consumer traffic.
Market Illiquidity. Equity real estate investments are relatively illiquid
and therefore tend to limit our ability to vary our portfolio promptly in
response to changes in economic or other conditions. Our properties primarily
are neighborhood shopping centers, and we do not presently intend to
substantially vary the types of real estate in our portfolio. In addition,
certain significant expenditures associated with each equity investment (such as
mortgage payments, real estate taxes and maintenance costs) are generally not
reduced when circumstances cause a reduction in income from the investment.
Uninsured Loss. We carry comprehensive liability, fire, flood, extended
coverage and rental loss insurance on all of our properties. We believe that the
policy specifications and insured limits are customary for similar properties.
There are, however, certain types of losses (generally of a catastrophic nature,
such as wars or earthquakes) which may be either uninsurable or not economically
insurable. Should an uninsured loss occur, we could lose both our invested
capital in and anticipated profits from a property. In such event, we might
nevertheless remain obligated to repay any mortgage indebtedness on the
property.
Competition. Numerous companies compete with us in seeking properties for
acquisition and tenants who will lease space in these properties. We may not be
able to acquire suitable leased properties and tenants for our properties in the
future.
Investments in Mortgages. Although we currently have no plans to invest in
mortgages, we may invest in mortgages in the future. If we were to invest in
mortgages, we would incur the risks of this type of investment, which include:
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.. borrowers may not be able to make debt service payments or pay principal
when due;
.. the value of mortgage property may be less than the amount owed; and
.. interest rates payable on the mortgages may be lower than our costs of
funds.
Costs of Compliance with Americans with Disabilities Act and Similar Laws.
Under the Americans with Disabilities Act of 1990 all public accommodations must
meet certain federal requirements related to access and use by disabled persons.
Although we believe that our properties substantially comply with present
requirements of the act, we have not conducted an audit or investigation of all
of our properties to determine our compliance. We may incur additional costs of
complying with the act. A number of additional federal, state and local laws
also may require modifications to our properties, or restrict our ability to
renovate our properties. We cannot currently ascertain the ultimate amount of
the cost of compliance with the act or other legislation. Although we do not
expect such costs to have a material effect on us, such costs could be
substantial.
Ownership Limit And Limits On Changes In Control
Ownership Limit Necessary to Maintain REIT Qualification. To maintain our
qualification as a REIT, not more than 50% in value of our outstanding capital
stock may be owned, actually or constructively, by five or fewer individuals (as
defined in the Internal Revenue Code of 1986, as amended (the "Code") to include
certain entities) at any time during the last half of our taxable year other
than during the first taxable year for which we elected to be taxed as a REIT
(the "five or fewer" requirement). Attribution rules in the Code determine if
any individual or entity actually or constructively owns our stock under the
"five or fewer" requirement. Our charter contains certain restrictions on the
ownership and transfer of our capital stock. These restrictions aim to prevent
concentration of stock ownership. Primarily because of fluctuations in values
among the different classes of our capital stock, these restrictions may not
ensure that we will satisfy the "five or fewer" requirement, or avoid receiving
rent from a related party tenant. If we do not satisfy the "five or fewer"
requirement, our status as a REIT will terminate. We will not be able to prevent
such termination.
If we fail to qualify as a REIT in any year, we would be subject to federal
income tax (including any applicable alternative minimum tax) on our taxable
income at regular corporate rates. Distributions to shareholders in any year in
which we fail to qualify will not be deductible by us, nor will they be required
to be made. If this happens, to the extent of our current or accumulated
earnings and profits, all distributions to shareholders will be dividends, and
subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends-received deduction. Unless we are entitled to relief
under certain statutory provisions, we will also be disqualified from taxation
as a REIT for the four taxable years following the year during which we lost our
qualification.
The Board of Directors may waive certain of these limitations with respect
to a
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particular stockholder if it is satisfied, based upon the advice of tax counsel,
that ownership in excess of these limitations will not jeopardize our status as
a REIT. Any attempted acquisition (actual or constructive) of shares by a person
who, as a result, would violate one of these limitations will cause the shares
purportedly transferred to be automatically transferred to a trust for the
benefit of a charitable beneficiary or, under certain circumstances, the
transfer will be deemed void. In addition, violations of the ownership
limitations which are caused by certain other events (such as changes in the
relative values of different classes of our capital stock) generally will result
in our automatic repurchase of the violative shares.
Our charter contains certain limitations on ownership of our capital stock.
These limitations may:
.. discourage a change of control;
.. deter tender offers for the capital stock, which may be attractive to our
stockholders; or
.. limit the opportunity for stockholders to receive a premium for their
capital stock.
In addition, in certain circumstances, a holder of convertible preferred
stock who is not otherwise in violation of the ownership limits could be
prevented from converting its convertible preferred stock into shares of common
stock.
Staggered Board. Our Board of Directors has been divided into three classes
of directors. The staggered terms for directors may reduce the possibility of a
tender offer or an attempt to change control even if a tender offer or a change
in control were in the stockholders' interest.
Preferred Stock. Our charter authorizes the Board of Directors to issue up
to 10,000,000 shares of preferred stock, including the convertible preferred
stock. The Board of Directors may establish the preferences, rights and other
terms (including the right to vote and the right to convert into common stock)
of any shares issued. The issuance of preferred stock could delay or prevent a
tender offer or a change in control even if a tender offer or a change in
control were in our stockholders' interest. No shares of preferred stock other
than the convertible preferred stock are currently issued or outstanding.
Exemptions for Certain Members of Management from the Maryland Business
Combination Law. The Maryland General Corporation Law, as amended, prohibits
certain "business combinations" between a Maryland corporation and an
"interested stockholder" or an affiliate of an interested stockholder for five
years after the most recent date on which the interested stockholder becomes an
interested stockholder. An interested stockholder is any person who beneficially
owns ten percent or more of the voting power of the corporation's shares. After
the five-year prohibition, any such business combination must be approved by two
supermajority stockholder votes unless, among other conditions, the
corporation's common
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stockholders receive a minimum price for their shares and receive consideration
in cash or in the same form as previously paid by the interested stockholder for
its shares. This means that, unless an exemption applies, the transaction must
be approved by at least:
.. 80% of the votes entitled to be cast by holders of outstanding voting
shares, and
.. two-thirds of the votes entitled to be cast by holders of outstanding
voting shares other than shares held by the interested stockholder with
whom the business combination is to be effected.
As permitted by the statute, our Board of Directors has exempted any
business combination involving Messrs. Halpert and Wolfe and any of their
affiliates or associates or any person acting in concert with any of such
persons. Consequently, the five-year prohibition and the super-majority vote
requirements described above will not apply to business combinations between us
and any of these people. As a result, Messrs. Halpert and Wolfe and other
persons referred to in the preceding sentence may be able to enter into business
combinations with us which may not be in the best interest of the stockholders.
In such case, we would not have to comply with the super-majority vote
requirements and other provisions of the statute.
Maryland Control Share Acquisition Statute. Maryland law 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
stockholder vote. Two-thirds of the shares eligible to vote must vote in favor
of granting the "control shares" voting rights. "Control Shares" are shares of
stock that, taken together with all other shares of stock the acquiror
previously acquired, would entitle the acquiror to exercise voting power in
electing directors within three ranges of voting power, beginning with one-fifth
of all voting power. Control shares do not include shares of stock the acquiring
person is entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control shares
subject to certain exceptions.
If a person who has made (or proposes to make) a control share acquisition
satisfies certain conditions (including agreeing to pay expenses), he may compel
the Board of Directors to call a special meeting of stockholders to be held
within 50 days to consider the voting rights of the shares. If such a person
makes no request for a meeting, the corporation has the option to present the
question at any stockholders' meeting.
If voting rights are not approved at a meeting of stockholders then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value. Fair value is determined without regard to the
absence of voting rights for control shares, as of the date of either:
.. the last control share acquisition; or
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.. any meeting where stockholders considered and did not approve voting rights
of the control shares.
If voting rights for control shares are approved at a stockholders' meeting
and the acquiror becomes entitled to vote a majority of the shares of stock
entitled to vote, all other stockholders may exercise appraisal rights. Under
Maryland law, the fair value as determined for purposes of these appraisal
rights may not be less than the highest price per share paid in the control
share acquisition.
Pursuant to the statute, our bylaws contain a provision exempting from the
control share acquisition any and all acquisitions by any person of our shares
of stock. Our Board of Directors may amend or eliminate this provision at any
time in the future.
Stockholder Rights Plan. On October 10, 1998, our Board of Directors
adopted a stockholders' rights plan and declared a distribution of one preferred
share purchase right for each outstanding share of common stock. The rights were
issued on October 26, 1998 to each stockholder of record on that date. The
rights have certain anti-takeover effects. The rights would cause substantial
dilution to a person or group that attempts to acquire us on terms that our
Board of Directors does not approve. We may redeem the shares for $.01 per
right, prior to the time that a person or group has acquired beneficial
ownership of 15% or more of our common stock. Therefore, the rights should not
interfere with any merger or business combination our Board of Directors
approves.
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Adverse Consequences Of Failure To Qualify As A REIT
Taxation as a Corporation. We believe we have operated so as to qualify as
a REIT under the Code, commencing with our taxable year ended December 31, 1994.
However, we may not have qualified, or may not remain qualified. Qualification
as a REIT involves the application of highly technical and complex Code
provisions for which there are only limited judicial and administrative
interpretations. The determination of various factual matters and circumstances
not entirely within our control may affect our ability to qualify as a REIT. For
example, in order to qualify as a REIT, at least 95% of our gross income in any
year must be derived from qualifying sources. Also, we must make distributions
to stockholders aggregating annually at least 95% of our REIT taxable income
(excluding capital gains). In addition, legislation, new regulations,
administrative interpretations or court decisions may significantly change the
tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification.
To qualify as a REIT, not more than 5% of our total assets may consist of
securities of one issuer. We believe that the value of the securities of the
Management Company held by us did not exceed at any time 5% of the value of our
total assets and will not exceed such amount in the future. We based this belief
on the initial allocation of shares among participants in the formation
transactions and our opinion regarding the maximum value that could be assigned
to the existing and expected future assets and net operating income of the
Management Company. If we fail to satisfy the 5% requirement or otherwise fail
to qualify as a REIT, we will be subject to federal income tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Furthermore, we would not be allowed a deduction in computing our taxable
income for amounts distributed to our stockholders. In addition, unless entitled
to relief under certain statutory provisions, we will be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. The additional tax would significantly reduce the cash
flow available for distribution to stockholders.
REIT Distribution Requirements and Potential Impact of Borrowings. To
qualify as a REIT, we generally must distribute to our stockholders at least 95%
of our net taxable income each year. In addition, we will be subject to a 4%
nondeductible excise tax on the amount by which certain distributions paid by us
in any calendar year are less than the sum of 85% of ordinary income, 95% of
capital gain net income and 100% of undistributed income from prior years.
We might need to borrow funds on a short-term basis to meet the
distribution requirements necessary to qualify as a REIT. These short-term
borrowing needs could result from differences in timing between the actual
receipt of income and inclusion of income for tax purposes, or the effect of
non-deductible capital expenditures, the creation of reserves or required debt
or amortization payments. In this instance, we might need to borrow funds to
avoid adverse tax consequences even if then prevailing market conditions were
not generally favorable for these borrowings.
Other Tax Liabilities. Even if we qualify as a REIT, we will be subject to
certain
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federal, state and local taxes on our income and property. In addition, the
Management Company generally is subject to federal and state income tax at
regular corporate rates on its net taxable income, which includes its
management, leasing and related service business.
Year 2000
Many of the world's computer systems currently record years in a two digit
format. These computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to disruptions in our operations. This problem
is commonly referred to as the Year 2000 issue.
The following systems are vulnerable to the Year 2000 issue:
Accounting/General Ledger/Property Management Software. We currently
believe that our software package is Year 2000 compliant in all material
aspects. Additional testing and compliance is ongoing. Nonetheless, we are
currently reviewing other vendor products which claim to be fully Year 2000
compliant. We have budgeted $500,000 for replacement software and hardware,
including installation costs. Currently, we expect implementation commencement
in early 1999 with completion by June 1999.
Hardware Components, Servers and Workstations. These components are
currently being upgraded to be fully Year 2000. We expect such upgrades to be
completed by early 1999.
Key Vendors. We have identified key vendors we believe could have a
material impact on operations if those vendors aren't Year 2000 compliant. We
are developing a short questionnaire to send to our major vendors regarding
their Year 2000 compliance.
Although we are taking the foregoing steps to establish Year 2000
compliance, we cannot guarantee that all of our systems will be Year 2000
compliant or that other companies on which we rely will be timely converted. As
a result, our operations could be adversely affected.
Effect On Price Of Shares Available For Future Sale
Sales of a substantial number of shares of common stock, or the perception
that this could occur, could adversely affect prevailing prices for the common
stock. We have reserved:
.. 2,876,828 shares of common stock for issuance upon exchange of common units
issued in connection with our formation and in connection with property
acquisitions,
.. 2,966,908 shares of common stock for issuance upon conversion of
outstanding convertible preferred stock issued in connection with our
formation and in connection with property acquisitions (which becomes
convertible on or after May 31, 1999),
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.. 1,832,239 shares of common stock for issuance upon conversion of reserved
convertible preferred stock (reserved for exchange of exchangeable
preferred units and the exchangeable debentures issued in connection with
the formation and subsequent property acquisitions),
.. 1,862,523 shares of common stock for issuance under our employee benefit
plans.
We have filed or have agreed to file registration statements covering the
issuance of shares of common stock and convertible preferred stock upon
exchange of common units and exchangeable preferred units and the resale of
convertible preferred stock issued in connection with our formation and
subsequent property acquisitions. We also have filed registration
statements covering the sale of common stock issued or to be issued under
our employee benefit plans. The exchange of partnership units for common
stock and convertible preferred stock will increase the number of
outstanding shares of common stock and convertible preferred stock, and
will increase our percentage ownership interest in the Operating
Partnership.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
First Washington Realty Trust, Inc.
By: /s/ Jeffrey S. Distenfeld
Jeffrey S. Distenfeld
Senior Vice President and General Counsel
Date: October 30, 1998
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