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FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-00018
PROSPECTUS
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MERIDIAN INDUSTRIAL TRUST, INC.
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This Prospectus relates to 553,000 shares of common stock, $.001 par value
per share (the "Common Stock") of Meridian Industrial Trust, Inc. (the
"Company") issuable upon exercise of the Company's outstanding merger warrants
(the "Merger Warrants"). On April 8, 1996, the Company in connection with the
merger of Meridian Point Realty Trust IV Co., Meridian Point Realty Trust VI Co.
and Meridian Point Realty Trust VII Co. with and into the Company (the "Merger")
issued 553,000 Merger Warrants pursuant to a Warrant Agreement dated
February 16, 1996. Each Merger Warrant entitles the holder to purchase one
share of Common Stock at a price of $16.23 per share. The exercise price and
the number of shares of Common Stock issuable upon the exercise of the Merger
Warrants are subject to adjustment in the event of stock dividends, stock
splits, reclassifications and certain other events.
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol ("MDN") and the Merger Warrants are currently listed
on the American Stock Exchange under the symbol "MDN.WS." On May 27, 1997, the
last reported sales price of the Common Stock on the NYSE was $21.50.
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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.
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Proceeds to
Price to Public Company(2)(3)
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Per share $16.23 $ 16.23
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Total $8,975,190
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(1) Before deducting estimated expenses of approximately $74,000 payable by the
Company.
(2) It is not known how many shares of Common Stock, if any, will be purchased
pursuant to exercises of the Merger Warrants; therefore, such amounts
have been estimated assuming exercise of all of the Merger Warrants.
The date of this Prospectus is May 27, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material can also be obtained from the
Commission's worldwide web site at http://www.sec.gov. The Company's
outstanding shares of Common Stock are listed on the New York Stock Exchange
(the "NYSE") under the symbol "MDN" and all such reports, proxy statements
and other information filed by the Company with the NYSE may be inspected at
the NYSE's offices at 20 Broad Street, New York, New York 10005. In
addition, warrants to purchase shares of the Company's Common Stock are
listed on the American Stock Exchange ("ASE"), and such reports, proxy
statements and other information filed by the Company with the ASE may be
inspected at the ASE's offices at 86 Trinity Place, New York, New York
10006-1881.
This Prospectus constitutes part of a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement") filed
by the Company with the Commission under the Securities Act of 1933 (the
"Securities Act"). This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
INCORPORATION BY REFERENCE
There are incorporated herein by reference the following documents
heretofore filed by the Company with the Commission (File No. 1-14166):
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(b) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997; and
(c) The description of the Common Stock contained in the Company's
registration statement on Form 8-A filed on January 4, 1996 for registration of
the Common Stock pursuant to Section 12(b) of the Exchange Act, including any
amendment or report filed for the purpose of updating such description.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
of the Offered Securities shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any subsequently filed document which is incorporated or
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus, except as so modified or superseded.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
incorporated herein by reference, other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into such documents.
Requests should be addressed to General Counsel, Meridian Industrial Trust,
Inc., 455 Market Street, 17th Floor, San Francisco, California 94105.
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AS USED HEREIN THE TERM "COMPANY" INCLUDES MERIDIAN INDUSTRIAL TRUST, INC.,
A MARYLAND CORPORATION, AND ONE OR MORE OF ITS SUBSIDIARIES, AS APPROPRIATE.
THE COMPANY
Meridian Industrial Trust, Inc. is a self-administered and self-managed
real estate operating company engaged primarily in the business of owning,
acquiring, developing, managing and leasing income-producing
warehouse/distribution and light industrial properties. Based on the total
square feet of leasable space and management's knowledge of the industrial real
estate market, the Company believes it is one of the largest owners and managers
of industrial space for lease in the United States. The Company's strategy is
to be a demand-driven, competitively priced, nationwide provider of
warehouse/distribution space.
The Company's fundamental business objective is to maximize total return to
its stockholders by increasing cash flow per share and increasing the long-term
value of the Company's properties (the "Properties"). In order to achieve this
objective, the Company will seek to add value to the Company's Properties, build
market share, achieve name recognition and continue to improve its operating
efficiency. The Company will seek to grow through (a) acquiring
warehouse/distribution properties, (b) developing warehouse/distribution
properties to meet customer demand, (c) selectively acquiring land parcels in
anticipation of development projects, (d) repositioning the Company's existing
portfolio by selling Properties which no longer meet its investment objectives
and reinvesting the proceeds and (e) by increasing occupancy levels and
releasing space at higher levels.
The Company's executive offices are located at 455 Market Street, 17th
Floor, San Francisco, California 94105, and its telephone number at those
offices is (415) 281-3900.
RISK FACTORS
An investment in Common Stock involves various risks. Prospective investors
should carefully consider the following risk factors, in addition to the other
information set forth in this Prospectus, in connection with an investment in
the shares of Common Stock offered hereby.
This Prospectus, including the information incorporated herein by
reference, contains statements which constitute forward looking statements
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Exchange Act. Those statements appear in a number of places in this Prospectus
and include statements regarding the intent, belief or current expectations of
the Company, its directors or its officers with respect to, among other things
(i) potential acquisitions or property developments by the Company; (ii) the
Company's financing plans; (iii) trends affecting the Company's financial
condition or results of operations; (iv) the Company's growth strategy,
operating strategy and financing strategy; (v) the declaration and payment of
dividends; and (vi) regulatory matters affecting the Company. Prospective
investors are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward looking
statements as a result of various factors. The accompanying information
contained in this Prospectus, including without limitation the information set
forth under the heading "Risk Factors" identifies important factors that could
cause such differences.
RISK OF INABILITY TO SUSTAIN DISTRIBUTION LEVEL
The Company's current intended distribution level is based on a number of
assumptions, including assumptions relating to the future operations of the
Company. These assumptions concern, among other matters, continued property
occupancy and profitability of tenants, capital expenditures and other costs
relating to the Company's Properties, the level of leasing activity, the
strength of real estate markets, competition, the cost of environmental
compliance and compliance with other laws, the amount of uninsured losses, and
decisions by the Company to reinvest rather than distribute cash available for
distribution. The Company currently expects to maintain its current distribution
level. However, some of the assumptions described above are beyond the control
of the Company, and a significant change in any such assumptions could cause a
reduction in cash available for distributions, which could affect the Company's
ability to sustain its distribution level.
INFLUENCE OF SIGNIFICANT STOCKHOLDERS
Seven institutional stockholders of the Company that own Common Stock (or
Series B Preferred Stock, par value $.001 per share, of the Company ("Series B
Preferred Stock") that is convertible into Common Stock) owned as of March 31,
1997 a total of 47.3% of the outstanding Common Stock on a pro forma basis
(assuming conversion of the Series B Preferred
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Stock and after giving effect to the issuance of Common Stock issuable upon
exercise of the Merger Warrants). The holders of Series B Preferred Stock
also are entitled to require that the Board of Directors of the Company (the
"Board") be expanded by one additional director and to fill the vacancy
created by that expansion until such time as the holders of the Series B
Preferred Stock cease to hold shares of Series B Preferred Stock representing
a total of at least the Minimum Ownership Level (as defined in the Company's
Charter and described together with additional rights under "Description of
Stock -- Preferred Stock"). Accordingly, for so long as these stockholders
own a significant percentage of the Company's stock, they will retain
substantial influence over the affairs of the Company which may result in
decisions that do not fully represent the interests of all stockholders of
the Company. See "Principal and Management Stockholders."
REAL ESTATE INVESTMENT RISKS
EXPIRING LEASES. The Company's inability to renew or release space upon
expiration of its expiring leases could adversely affect the Company's cash
available for distributions. In addition, the Company usually will incur
additional costs in the form of leasing commissions and tenant improvements if
it is unable to renew an expiring lease with an existing tenant.
GENERAL RISKS. The Company's investments are subject to the risks incident
to ownership and operation of commercial real estate generally. The yields
available from equity investments in real estate depend upon the amount of
income generated and expenses incurred. If the Company's Properties do not
generate revenue sufficient to cover operating expenses, including debt service
and capital expenditures, the Company's cash available for distribution and
ability to make distributions to its stockholders will be adversely affected.
A commercial property's revenues and value may be adversely affected by a
number of factors, including: the national, state and local economic climate and
real estate conditions (such as oversupply of or reduced demand for space and
changes in market rental rates); the perceptions of prospective tenants of the
safety, convenience and attractiveness of the properties; the ability of the
owner to provide adequate management, maintenance and insurance; the ability to
collect on a timely basis all rents from tenants; the expense of periodically
renovating, repairing and reletting space; and increasing operating costs
(including real estate taxes and utilities) which may not be passed through the
tenants. Certain significant expenditures associated with investments in real
estate (such as mortgage payments, real estate taxes, insurance and maintenance
costs) are generally not reduced when circumstances cause a reduction in rental
revenues from a property. If a property is mortgaged to secure the payment of
indebtedness and if the Company is unable to meet its mortgage payments, a loss
could be sustained as a result of foreclosure on the property or the exercise of
other remedies by the mortgagee. In addition, real estate values and income from
properties are affected by such factors as compliance with laws, including tax
laws, interest rate levels and the availability of financing.
RELIANCE ON MAJOR TENANTS. At March 31, 1997, the Company's largest
tenant, Sears Logistics Services, Inc. (an affiliate of Sears Roebuck and Co.)
accounted for approximately 12% of the Company's annual Base Rent. In addition,
five other tenants accounted for more than 15% of the Company's total annual
Base Rent during such period. The Company would be adversely affected in the
event of bankruptcy or insolvency of, or a downturn in the business of, any such
tenants.
TENANT DEFAULTS. Substantially all the Company's income is derived from
rental income from real property and, consequently, the Company's cash flow and
ability to make expected distributions to stockholders would be adversely
affected if a significant number of tenants of the Properties failed to meet
their lease obligations. In the event of a default by a lessee, the Company may
experience delays in enforcing its rights as lessor and may incur substantial
costs in protecting its investment. At any time, a tenant of the Properties may
also seek protection under the bankruptcy laws, which could result in rejection
and termination of such tenant's lease and thereby cause a reduction in the cash
available for distribution by the Company. If a tenant rejects its lease, the
Company's claim for breach of the lease would be treated (absent collateral
securing the claim) as a general unsecured claim. No assurance can be given that
the Company will not experience significant tenant defaults in the future.
MARKET ILLIQUIDITY. 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, provisions of the Code limit a REIT's ability to sell properties
held for fewer than four years, which may affect the Company's ability to sell
properties at a time when it is otherwise economically advantageous to do so,
thereby adversely affecting returns to holders of Common Stock.
OPERATING RISKS. The Properties are subject to operating risks common to
commercial real estate in general, any and all of which may adversely affect
occupancy or rental rates. The Properties are subject to increases in operating
expenses such as: cleaning, electricity, heating, ventilation and air
conditioning; insurance and administrative costs; and other general costs
associated with security, landscaping, repairs and maintenance. While the
Company's tenants are currently obligated to pay
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all or a portion of these escalating costs, there can be no assurance that
tenants will agree to pay such costs upon renewal or that new tenants will
agree to pay such costs. If operating expenses increase, the local rental
market may limit the extent to which rents may be increased to meet increased
expenses without decreasing occupancy rates. While the Company generally
implements cost saving incentive measures at its Properties, if any of the
above occurs, the Company's ability to make distributions to stockholders
could be adversely affected.
COMPETITION. There are numerous commercial properties that compete with
the Company in attracting tenants and numerous companies that compete in the
selection of land for development and properties for acquisition.
UNINSURED LOSSES. The Company carries or requires its tenants to carry
comprehensive liability, fire, extended coverage and rental loss insurance with
respect to all of the Properties, with policy specifications, insured limits and
deductibles customarily carried for similar properties. There are, however,
certain types of losses (such as losses arising from acts of war or relating to
pollution) that are not generally insured because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in a Property,
as well as the anticipated future revenue from such Property and would continue
to be obligated on any mortgage indebtedness or other obligations related to the
property. Any such loss could adversely affect the business of the Company and
its financial condition and results of operations.
POTENTIAL ENVIRONMENTAL LIABILITY RELATED TO THE PROPERTIES
Under various federal, state and local laws, ordinances and regulations, an
owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. These laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances. The cost of
any required remediation and the owner's liability therefore as to any property
is generally not limited under such enactments and could exceed the value of the
property and/or the aggregate assets of the owner. The presence of such
substances, or the failure to properly remediate such substances, may adversely
affect the owner'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 govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACMs") when such materials are in poor condition, or in the event of
renovation or demolition. Such laws impose liability for release of ACMs into
the air and third parties may seek recovery from owners or operators of real
properties for personal injury associated with ACMs. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Company may be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, potentially liable for removal or remediation
of costs, as well as certain other related costs, including governmental fines
and injuries to persons and property.
All the Properties have been subject to a Phase I or similar environmental
audit undertaken by independent environmental consultants after December 1992
(which involved general inspections without soil sampling, ground water analysis
or radon testing and, for the Properties constructed in 1978 or earlier, survey
inspections to ascertain the existence of ACMs). In addition, Phase II studies
were conducted on ten of the Properties in 1995. These environmental audits have
not revealed, and the Company is not aware of, any environmental liability that
would have a material adverse effect on the Company's business.
RISKS OF ACQUISITION, DEVELOPMENT AND CONSTRUCTION ACTIVITIES
The Company intends to acquire existing warehouse/distribution and light
industrial properties to the extent they can be acquired on advantageous terms
and meet the Company's investment criteria. Acquisitions of such properties
entail general investment risk associated with any real estate investment,
including the risk that investments will fail to perform as expected or that
estimates of cost of improvements to bring an acquired property up to standards
established for the intended market condition may prove inaccurate.
The Company also intends to grow through the selective development and
construction of build-to-suit warehouse/distribution and light industrial
properties, in accordance with the Company's policies as opportunities arise in
the future. Risks associated with the Company's development and construction
activities include the risk that: the Company may abandon development activities
after expending resources to determine feasibility; the construction cost of a
project may exceed original estimates; 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 the construction and lease-up may not be completed on schedule, resulting in
increased debt service, expense and construction costs. Development activities
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are also subject to risk relating to inability to obtain, or delays in
obtaining, all necessary zoning, land-use, building, occupancy and other
required governmental permits and authorizations. If any of the above occur, the
Company's ability to make expected distributions to stockholders could be
adversely affected. In addition, new development activities, regardless of
whether they are ultimately successful, typically require a substantial portion
of management's time and attention.
RISKS OF ADVERSE EFFECT ON THE COMPANY FROM DEBT SERVICING, INCREASES IN
INTEREST RATES, FINANCIAL COVENANTS AND ABSENCE OF LIMITATIONS ON DEBT
DEBT FINANCING. The Company is subject to risks normally associated with
debt financing, including the risk that the Company's cash flow will be
insufficient to meet required payments of principal and interest, the risk that
existing indebtedness on the Properties will not be able to be refinanced or
that the terms of such refinancings will be as favorable as the terms of the
existing indebtedness. There can be no assurance that the Company will be able
to refinance any indebtedness or otherwise obtain funds by selling assets or
raising equity to make required payments on maturing indebtedness.
REQUIREMENTS OF CREDIT FACILITIES; FORECLOSURES. The Company's unsecured
credit facility (the "Unsecured Credit Facility") provides for a maximum
borrowing amount of $150 million. The Unsecured Credit Facility requires the
Company to comply with a number of customary financial and other covenants (such
as maintaining certain debt coverage and loan-to-value ratios). The Unsecured
Credit Facility matures on April 3, 2000 and may be extended for an additional
year upon satisfaction of certain conditions. The Company may not have funds on
hand sufficient to repay such indebtedness at maturity. It may therefore be
necessary for the Company to refinance debt through additional debt financing or
equity offerings. If the Company is unable to refinance its indebtedness on
acceptable terms, the Company may be forced to dispose of properties upon
disadvantageous terms, which could result in losses to the Company and adversely
affect the amount of cash available for distribution to stockholders.
The Company has $66.1 million outstanding under its Mortgage Loan which
matures June 1, 2005. Currently 39 Properties secure payment of indebtedness
under the Mortgage Loan. If the Company is unable to meet payments, certain
Properties could be foreclosed upon by or otherwise transferred to the lender
with a consequent loss of income and asset value to the Company.
RISK OF RISING INTEREST RATES. Outstanding advances under the Unsecured
Credit Facility bear interest at a variable rate. In addition, the Company may
incur indebtedness in the future that also bears interest at a variable rate or
may be required to refinance its debt at higher rates. Increases in interest
rates could increase the Company's interest expense, which could adversely
affect the Company's ability to pay expected distributions to stockholders.
NO LIMITATION ON DEBT. The Company currently has a policy of incurring
debt only if, upon such incurrence, the Company's debt-to-total market
capitalization would be 50% or less. However, the Company's Third Amended and
Restated Articles of Incorporation (the "Charter") and the Company's Second
Amended and Restated Bylaws (the "Bylaws" and together with the Charter, the
"Organizational Documents") do not contain any limitation on the amount of
indebtedness the Company may incur. Accordingly, the Board could alter or
eliminate this policy and would do so if, for example, it were necessary in
order for the Company to continue to qualify as an REIT. If this policy were
changed, the Company could become more highly leveraged, resulting in an
increase in debt service that could adversely affect the cash available for
distribution to stockholders and could increase the risk of default on the
Company's indebtedness.
POSSIBLE STOCK PRICE VOLATILITY
The market price of Common Stock could be subject to significant
fluctuations in response to various factors and events, including quarterly
variations, operating results, liquidity of the market for Common Stock,
regulatory changes affecting the real estate industry generally, announcements
of business developments by the Company or its competitors, interest rate
fluctuations and other changes in real estate market conditions.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that influences the market price of the shares of Common
Stock in public markets is the annual yield on the price paid for shares of
Common Stock from distributions by the Company. An increase in market interest
rates may lead prospective purchasers of the Common Stock to demand a higher
annual yield from future distributions. Such an increase in the required
distribution yield may adversely affect the market price of Common Stock.
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CONFLICTS OF INTEREST
The Company has adopted certain policies designed to eliminate or minimize
conflicts of interest. These policies include a requirement that all
transactions in which officers, directors and substantial shareholders and their
affiliates have a conflicting interest must be approved by a majority of the
disinterested directors of the Company who are not officers or full time
employees of the Company or members of the immediate family of any such officer
or employee (the "Independent Directors"). However, there can be no assurance
that these policies will be successful in minimizing or eliminating such
conflicts and, if they are not successful, decisions could be made that might
fail fully to reflect the interests of all stockholders.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The investment, financing, conflicts of interest, borrowing and
distribution policies of the Company and its policies with respect to all other
activities, including qualifications as a REIT, growth, debt, capitalization and
operations, will be determined by the Board. Although it has no present
intention to do so, the Board may amend or revise these policies at any time and
from time to time at its discretion without a vote of the stockholders of the
Company. A change in these polices could adversely affect the Company's
financial condition, results of operations or the market price of the Common
Stock.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
AMERICANS WITH DISABILITIES ACT. Under the Americans with Disabilities Act
of 1990 (the "ADA"), places of public accommodation and commercial facilities
are required to meet certain federal requirements related to access and use by
disabled persons. These requirements became effective in 1992. Although
management of the Company believes that the Properties are substantially in
compliance with present requirements of the ADA, the Company may incur
additional costs of compliance in the future. A number of additional federal,
state and local laws exist which impose further burdens or restrictions on
owners with respect to access by disabled persons and may require modifications
to the Properties, or restrict certain further renovations thereof, with respect
to access by disabled persons. The ultimate amount of the cost of compliance
with the ADA or other such laws is not currently ascertainable. While such costs
are not expected to have a material effect on the Company, they could be
substantial. If required changes involve greater expense than the Company
currently anticipates, the Company's ability to make expected distributions
could be adversely affected.
OTHER LAWS. The Properties are also subject to various federal, state and
local regulatory requirements, such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to private
litigants. The Company believes that the Properties are currently in compliance
with all such regulatory requirements. However, there can be no assurance that
these requirements will not be changed or that new requirements will not be
imposed which would require significant unanticipated expenditures by the
Company and could have an adverse effect on the Company's expected
distributions.
RISKS OF FAILURE TO QUALIFY AS A REIT AND OTHER TAX LIABILITIES
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT. The Company has elected to
be taxed as a REIT under the Code, commencing with its initial taxable year
ended December 31, 1995. To maintain REIT status, the Company must meet a
number of highly technical requirements on a continuing basis. Those
requirements seek to ensure, among other things, that the gross income and
investments of a REIT are largely real estate related, that a REIT distributes
substantially all its ordinary taxable income to stockholders on a current basis
and that the REIT's ownership is not overly concentrated. Due to the complex
nature of these rules, the limited available guidance concerning interpretation
of the rules, the importance of ongoing factual determinations and the
possibility of adverse changes in the law, administrative interpretations of the
law and developments at the Company, no assurance can be given that the Company
will qualify as a REIT for any particular year.
If the Company fails to qualify as a REIT, it will be taxed as a regular
corporation, and distributions to stockholders will not be deductible in
computing the Company's taxable income. The resulting corporate tax liabilities
could materially reduce the funds available for distribution to the Company's
stockholders or for reinvestment. In the absence of REIT status, distributions
to stockholders would no longer be required. Moreover, the Company might not be
able to elect to be treated as a REIT for the four taxable years after the year
during which the Company ceased to qualify as a RElT. In addition, if the
Company later requalified as a REIT, it might be required to pay a full
corporate-level tax on any unrealized gain in its assets as of the date of
requalification and to make distributions equal to any earnings accumulated
during the period of non-REIT status.
EFFECT OF REIT DISTRIBUTION REQUIREMENTS. To maintain its qualification as
a REIT, the Company must annually distribute to the Company's stockholders at
least 95% of its net ordinary taxable income (not capital gains). This
requirement
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limits the Company's ability to accumulate capital. Under certain
circumstances, the Company may not have sufficient cash or other liquid
assets to meet the distribution requirement. Difficulties in meeting the
distribution requirements might arise due to competing demands for the
Company's funds or to timing differences between tax reporting and cash
receipts and disbursements (because income may have to be reported before
cash is received, or expenses may have to be paid before a deduction is
allowed or deductions may be disallowed or limited). In those situations, the
Company might be required to borrow funds or sell properties on adverse terms
in order to meet the distribution requirements. Although the Company does not
anticipate difficulties in meeting the distribution requirements, no
assurance can be given that the necessary funds will be available. If the
Company fails to make a required distribution, it would cease to be a REIT.
See "Federal Income Tax Considerations -- REIT Qualification."
LIMITS ON OWNERSHIP AND CHANGES IN CONTROL MAY DETER CHANGES IN MANAGEMENT AND
THIRD PARTY ACQUISITION PROPOSALS
In order to maintain its qualification as a REIT, not more than 50% in
value of the outstanding shares of the Company 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 (other than 1995) (the
"Five or Fewer Requirement"). To help the Company meet these requirements and
otherwise maintain its REIT status, the Charter prohibits (i) actual or
constructive ownership by any person (other than persons designated by the Board
as "Excepted Holders") of more than 8.5% of the lesser of the number or value of
the outstanding shares of any class of the Company's stock, (ii) ownership of
stock that would cause the Company to be "closely held" or otherwise fail to
qualify as a REIT and (iii) transfers that would result in outstanding shares
being owned by less than 100 persons. See "Federal Income Tax Consequences --
REIT Qualification." The Charter provides that, upon any attempted transfer of
shares (including warrants or options to acquire shares) that would cause any
person to be treated as owning stock in violation of the ownership restrictions
(other than the prohibition against transfers that would result in less than 100
owners), the number of shares that would cause the violation are automatically
transferred to a Trustee for the benefit of a charitable beneficiary as "Shares-
In-Trust." The person who otherwise would have been considered the owner (the
"Prohibited Owner") will have no rights or economic interest in those shares.
For these purposes, potentially violative "ownership" is evaluated by taking
into account the broad constructive ownership rules of Sections 544 and 318 of
the Code, with certain modifications. In addition, a "transfer" that is subject
to these restrictions includes any issuance, sale, transfer, gift, assignment,
devise or other disposition, as well as any other event that causes any person
to have or acquire ownership (applying the constructive ownership rules) of the
Company's Common Stock and Preferred Stock ("Equity Stock"). See "Description
of Stock -- Restrictions on Ownership and Transfer."
In addition, certain provisions of the Company's organizational documents
and the Maryland General Corporation Law (the "MGCL") may have the effect of
delaying, deferring or preventing a third party from making an acquisition
proposal for the Company and may thereby inhibit a change in control of the
Company. For example, such provisions may (i) deter tender offers for Common
Stock that may be attractive to stockholders or (ii) deter purchases of large
blocks of Common Stock, thereby limiting the opportunity for stockholders to
receive a premium for their Common Stock over then-prevailing market prices. See
"Certain Provisions of Maryland Law and of the Charter and Bylaws."
FUTURE ISSUANCES OF COMMON STOCK. The Charter authorizes the Board to
issue additional shares of Common Stock without stockholder approval. Any such
issuance could have the effect of diluting existing stockholders' interest in
the Company.
PREFERRED STOCK. The Charter authorizes the Board to (i) issue up to 25
million shares of preferred stock (the "Preferred Stock"), (ii) reclassify
unissued shares of stock, (iii) establish the preferences, conversion and other
rights, voting powers, restrictions, limitations and restrictions on ownership,
limitations as to dividends or other distributions and (iv) establish terms and
conditions of redemption for each class or series of any Preferred Stock issued.
See "Description of Stock -- Preferred Stock."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers. The loss
of their services could have an adverse effect on the operations of the Company.
USE OF PROCEEDS
The net proceeds received by the Company from the exercise of the Merger
Warrants will be used by the Company for general corporate purposes or for
acquisitions or development.
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DESCRIPTION OF STOCK
The following is a summary of certain features of the Company's stock. This
summary does not purport to be complete and is subject to and is qualified in
its entirety by reference to the Charter and Bylaws, copies of which are
exhibits to the Registration Statement of which this Prospectus is a part. See
"Available Information."
GENERAL
Under the Charter, the Company is authorized to issue a total of 200
million shares of stock, consisting of 175 million shares of Common Stock, par
value $.001 per share, and 25 million shares of Preferred Stock, par value $.001
per share. The Company is a Maryland corporation. Under Maryland law,
stockholders generally are not responsible for the corporation's debts or
obligations.
COMMON STOCK
All the shares of Common Stock offered by this Prospectus will be duly
authorized, fully paid and nonassessable. They will also be subject to the
ownership and transfer restrictions contained in the Charter. See
"-- Restrictions on Ownership and Transfer."
Subject to the preferential rights of any other shares or series of stock,
holders of shares of Common Stock are entitled to receive dividends on shares
if, as and when authorized and declared by the Board out of assets legally
available for distribution. Under the MGCL, a dividend or other distribution
may not be made if after giving effect to it (a) the corporation would not be
able to pay its debts as they become due in the usual course of business or
(b) the corporation's total assets would be less than the corporation's total
liabilities plus (unless the corporation's charter provides otherwise, which the
Charter does not) the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights upon dissolution are
superior to those receiving the distribution. Holders of shares of Common Stock
also are entitled to share ratably in the assets of the Company legally
available for distribution to its stockholders in the event of the Company's
liquidation, dissolution or winding-up after payment of, or adequate provision
for, all known debts and liabilities of the Company.
Subject to the REIT ownership provisions set forth in the Charter, each
outstanding share of Common Stock entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of directors. Except
as otherwise required by law or except as provided with respect to the Series B
Preferred Stock or any other class or series of stock, the holders of shares of
Common Stock possess the exclusive voting power of the Company. There is no
cumulative voting for the election of directors of the Company, which means that
the holders of a majority of the outstanding shares of Common Stock will be able
to elect all the directors for whom such holders vote, and the holders of the
remaining shares of Common Stock will not be able to elect any directors. As
explained under "-- Preferred Stock," the holders of shares of Series B
Preferred Stock will have certain rights to elect directors.
Holders of shares of Common Stock have no conversion, sinking fund or
redemption rights or any preemptive rights to subscribe for any additional
securities of the Company. All shares of Common Stock have equal distribution,
liquidation and other rights and have no preference or exchange rights.
Under the MGCL, a corporation generally cannot dissolve, amend its charter,
merge, sell all or substantially all of its assets, engage in a share exchange
or engage in similar transactions outside the ordinary course of business unless
approved by the affirmative vote of holders of at least two-thirds of the shares
entitled to vote on the matter or such lesser percentage (but not less than a
majority of all of the votes to be cast on the matter) as is set forth in the
corporation's charter. The Charter provides that, subject to the rights of any
series of Preferred Stock then outstanding, such extraordinary transactions may
be approved by the affirmative vote of a majority of all of the votes entitled
to be cast on such matters.
The transfer agent and registrar for the shares of Common Stock is First
Chicago Trust Company of New York.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time, in one or more
series, as authorized by the Board, subject to the rights of holders of any
series of Preferred Stock then outstanding. Prior to the issuance of shares of
each series, the Board is required by the MGCL and the Charter to fix (subject
to the express terms of any class or series of the Company stock outstanding at
the time and the ownership and transfer restrictions contained in the Charter,
described under "--Restrictions on Transfer and Ownership,") the terms,
preferences, conversion and other rights, voting powers, restrictions,
limitations as
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to dividends or other distributions, qualifications and terms and conditions
of redemption for each series. Such rights, powers, restrictions and
limitations could include the right to receive specified dividend payments
and payments on liquidation prior to any such payments being made to the
holders of shares of Common Stock. The Board could also authorize the
issuance of shares of Preferred Stock with terms and conditions that could
have the effect of discouraging a takeover or other transaction in which
holders of shares of Common Stock might receive a premium for their shares
over the then market price of such shares.
In connection with the formation and initial capitalization of the Company,
the Company issued a total of one million shares of Series A Preferred Stock,
par value $.001 per share ("Series A Preferred Stock") in connection with the
merger of Meridian Point Realty Trust IV Co., Meridian Point Realty Trust VI Co.
("Trust VI") and Meridian Point Realty Trust VII Co. ("Trust VII") with and into
the Company in February 1996 (the "Merger") and the acquisition of certain
assets of Meridian Point Realty Trust 83 (the "Asset Purchase"). These shares
were canceled or redeemed in connection with the Merger, and no shares of the
Series A Preferred Stock are outstanding.
On February 23, 1996, the Company issued a total of 2,272,727 shares of
Series B Preferred Stock for a total purchase price of $35 million or $15.40 per
share to State Street Bank and Trust Company, as trustee for Ameritech Pension
Trust ("Ameritech"), and OTR, an Ohio general partnership acting on behalf of
and as nominee for The State Teachers Retirement Board of Ohio ("OTR"). The
Board has established the rights, powers, restrictions and limitations of the
Series B Preferred Stock. The holders of shares of Series B Preferred Stock are
entitled to receive cumulative dividends: (a) for the first eight quarterly
dividend periods after issuance, in an amount per share equal to the greater of
(i) $0.31 per quarter or (ii) 103% (as adjusted from time to time by the Board
as the conversion price of the Series B Preferred Stock is adjusted from time to
time) of the quarterly dividend payable per share of Common Stock during that
period (determined as of the date on which the applicable Common Stock dividend
is authorized) and (b) beginning with the ninth quarterly dividend period after
issuance, in an amount per share equal to the greater of (i) the quarterly
dividend payable on the Series B Preferred Stock for the eighth quarterly
dividend period after issuance or (ii) the dividend paid per share of Common
Stock (determined as of the date on which the Common Stock dividend for the
corresponding Common Stock dividend period is authorized and as adjusted from
time to time by the Board as the conversion price of the Series B Preferred
Stock is adjusted from time to time). If the annual dividend rate is $1.24 per
share on the Series B Preferred Stock, the total dividend would equal
approximately $2.8 million per year.
The holders of shares of Series B Preferred Stock also are entitled to a
liquidation preference of $15.40 per share (equivalent to the initial purchase
price) plus accumulated unpaid dividends if the Company is liquidated or sold
prior to the redemption or conversion of those shares. The rights of holders of
Series B Preferred Stock to cumulative dividends and the liquidation preference
are senior to the rights of holders of Common Stock to dividends or any
distributions upon liquidation or sale of the Company.
Each share of Series B Preferred Stock is convertible at the option of its
holder at any time into shares of Common Stock at a conversion price of $15.40
per share of Common Stock (the "Conversion Price") (equivalent to an initial
conversion rate of one share of Common Stock per share of Series B Preferred),
subject to adjustment to reflect stock dividends, splits, combinations and
issuances of stock by reclassification of Common Stock. In addition, if the
Company issues for cash or other consideration shares of Common Stock or any
security convertible into or exchangeable or exercisable for Common Stock (other
than securities issued to directors, officers or employees of the Company and
securities issued in connection with property acquisitions that are approved by
the Investment Committee of the Board and the designee, if any, of the Series B
Preferred Stock then sitting on the Board) at a price, including any additional
consideration payable upon any such conversion, exchange or exercise (before
deduction of any reasonable and customary discounts, commissions, fees and other
expenses of issuance and marketing) that is less than $16.00 as adjusted from
time to time by the Board upon certain other adjustments to the conversion
price, there will be a reduction in the conversion price of the Series B
Preferred Stock equal to the amount by which $16.00 (as adjusted) exceeds the
purchase, exchange or conversion price. If the Company engages in more than one
such issuance, the amount of the adjustment to the Conversion Price will be
equal to the greatest individual reduction. However, such adjustments will not
be cumulative. The number of shares of Common Stock actually issuable upon the
conversion of the Series B Preferred Stock will be determined by dividing the
total liquidation preference of such shares (plus all unpaid accumulated
dividends, except any dividends accumulated on shares of Series B Preferred
Stock presented for conversion after the end of the last-completed quarterly
dividend period) by the conversion price in effect at that time.
At any time on or after January 1, 1999 and on or before December 31, 2004,
the Company, at its option, may convert the outstanding shares of Series B
Preferred Stock, in whole but not in part, into shares of Common Stock at the
then effective conversion price per share (currently equivalent to an initial
conversion rate of one share of Common Stock per share of Series B Preferred
Stock), subject to certain adjustments, so long as: (a) the average closing
price of Common Stock on the NYSE during any 20 trading days in a period of 30
consecutive trading days ending on the trading day immediately preceding the
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date the Company provides notice of exercise of its right to convert the Series
B Preferred Stock meets or exceeds the following percentages of the then-
applicable Conversion Price (the "Conversion Price Premium"):
YEAR PERCENTAGE
---- ----------
1999 115.0%
2000 119.0
2001 123.0
2002 127.5
2003 and 2004 132.0
and (b) the closing price of the Common Stock on the trading day immediately
preceding the date the Company provides notice of exercise of this option equals
or exceeds the applicable Conversion Price Premium.
At any time on or after January 1, 1999 and on or before December 31, 2004,
the Company, at its option, may redeem the Series B Preferred Stock, in whole or
in part (but in no event for a total consideration that is less than $1
million), for a per share cash price as follows:
REDEMPTION
YEAR PRICE
---- ----------
1999 $16.95
2000 17.35
2001 17.80
2002 18.25
2003 and 2004 18.70
plus, in each case, accumulated unpaid dividends to and including the date fixed
for redemption. If the Company exercises its right to redeem the Series B
Preferred Stock, the holder's conversion right will terminate five days before
the redemption date.
The holders of Series B Preferred Stock vote together with the holders of
the Common Stock on an as-converted basis on all matters submitted to a vote of
the Company's common stockholders. In addition, for so long as Ameritech and OTR
collectively hold shares of Series B Preferred Stock representing on an as-
converted basis more than 15% of the publicly-traded shares of Common Stock
(excluding shares owned by Hunt Acquisitions Partners, Ltd. ("Hunt"), USAA Real
Estate Company ("USAA"), officers and directors of the Company or Ameritech and
OTR and as otherwise defined in the agreement with Ameritech and OTR), the
holders of Series B Preferred Stock will be entitled to require the Company to
increase the size of the Board by one person (there currently are seven Company
directors) and to elect that additional director. That percentage will be
reduced to one-half of the then-effective percentage in the event of a partial
redemption or conversion of the Series B Preferred Stock. The applicable
percentage is referred to in this Prospectus as the "Minimum Ownership Level."
At each succeeding annual meeting for so long as Ameritech and OTR collectively
hold shares of Series B Preferred Stock representing on an as-converted basis
more than the Minimum Ownership Level and the holders of the Series B Preferred
Stock elect to exercise such right, the holders of the Series B Preferred Stock,
voting as a separate class, will be entitled to elect one director to serve on
the Board by majority vote. According to Ameritech's Form 13D dated February 29,
1996, Ameritech stated that it intended to exercise its right to appoint one
director as a member of the Board as soon as practicable. To date no action has
been taken with respect to such appointment. After the holders of the Series B
Preferred Stock first appoint a director and for as long thereafter as the
holders of the Series B Preferred Stock are entitled to these rights with
respect to the designation, appointment and election of a member of the Board
the size of the Board is limited to nine.
If dividends on the Series B Preferred Stock are in arrears for six
consecutive quarterly dividend periods, and Ameritech and OTR collectively hold
all the outstanding shares of Series B Preferred Stock, then the Board will be
increased by two (in addition to the director referred to previously), and
Ameritech will have the right to designate one such director and OTR will have
the right to designate the other such director. If Ameritech and OTR do not
then hold all of the outstanding shares of Series B Preferred Stock, then the
holders of a majority of the Series B Preferred Stock voting separately as a
class will have the right to elect one director to serve on the Board until all
such dividend arrearages are eliminated. At the next annual meeting of
stockholders of the Company after the election of such director or directors,
the size of the Board will be reduced to: (a) nine persons if one director is so
elected; and (b) ten directors if two directors are so elected (assuming the
Board was comprised of nine directors prior to such appointments). In either
case, that shall be the maximum membership of the Board until such time as all
arrearages in dividends shall have been paid.
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The Company may not amend the provisions of the Series B Preferred Stock
without the affirmative vote of holders of at least 75% of the outstanding
shares of Series B Preferred Stock. The holders of the Series B Preferred Stock
also have the right to approve certain extraordinary corporate transactions by a
majority vote, including a merger in which the Company is not the surviving
entity and any sale of all or substantially all of the Company's assets.
The Company has agreed in connection with the Stock Purchase Agreement with
Ameritech and OTR that until such time as Ameritech and OTR cease to hold shares
of Series B Preferred Stock (or Common Stock in the event of a conversion of
Series B Preferred) representing on an as-converted basis in the aggregate at
least the Minimum Ownership Level, the Company is subject to a number of
operating covenants, including: (a) the Company may not repurchase more than $5
million of Common Stock in the aggregate; (b) the Company may not incur debt
that, at the time the debt is incurred, would result in the Company having a
debt-to-total-debt-and-equity-capitalization ratio above 60%; (c) the Company
may engage in transactions with affiliates only with the approval of a majority
of its disinterested directors and upon terms no less favorable than those that
could be obtained in an arms'-length transaction and, if the value of any such
transaction exceeds 10% of the fair market value of the Company's assets as
determined by the Board, the Company must obtain a third-party appraisal or
other confirmation that such transaction is on terms no less favorable to the
Company than those that could be obtained in an arm's-length transaction; (d)
the Company must continue to qualify as a real estate operating company and (e)
until such time as the market value of the Company's publicly traded shares
exceeds $250 million for at least 60 consecutive days, the Company may not
engage in any issuances of equity securities in private placements unless, after
the private placement, the market value of the Company's publicly-traded shares
(as defined) would equal or exceed 50% of the Company's total equity
capitalization and unless the purchasers in any such private placement agree to
certain restrictions on the transfer of the stock purchased in the private
placement for a period of one year.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, beginning with
calendar year 1996, generally not more than 50% of the value of its outstanding
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities), and its outstanding stock must
be beneficially owned by at least 100 persons. See "Federal Income Tax
Considerations -- REIT Qualification." To help the Company meet these
requirements and otherwise maintain its REIT status, the Charter includes three
basic protective provisions affecting the ownership and transfer of the
Company's issued and outstanding shares of any class or series of Equity Stock:
(a) a general prohibition against actual or constructive ownership by any person
(other than persons designated by the Board as "Excepted Holders," described
further below) of more than 8.5% of the lesser of the number or value of the
outstanding shares of any class or series of Equity Stock; (b) a prohibition
against ownership of Equity Stock that would cause the Company to be "closely
held" or to otherwise fail to qualify as a REIT (such as ownership that would
result in the Company being treated as owning an interest in a tenant if income
derived by the Company from that tenant would cause the Company to fail to
satisfy any of the REIT gross income requirements) and (c) a prohibition against
transfers that would result in the Equity Stock being owned by less than 100
persons. In addition, in January, 1996, the Company issued shares of Common
Stock that, prior to the end of that month, were held by 100 individuals in
order to meet the 100-person requirement.
These ownership restrictions took effect on February 23, 1996 and may be
terminated if the Board determines that it is no longer in the best interests of
the Company to attempt to, or continue to, qualify as a REIT or that compliance
with the ownership limits and restrictions on transfer is no longer required in
order for the Company to qualify as a REIT.
These restrictions on ownership and transfer may have the effect of
precluding acquisition of control of the Company or otherwise limit the
opportunity for stockholders to receive a premium for their shares of Common
Stock that might otherwise exist if an investor attempted to assemble a block of
shares of Common Stock in excess of the 8.5% ownership limit or the higher
ownership limits set for certain stockholders. See "Risk Factors -- Limits on
Ownership and Changes in Control May Deter Changes in Management and Third Party
Acquisition Proposals."
TRANSFERS IN TRUST. The Charter provides that, upon any attempted transfer
of Equity Stock (including warrants or options to acquire Equity Stock) that
would cause any person to be treated as owning Equity Stock in violation of the
ownership restrictions (other than the prohibition against transfers that would
result in less than 100 owners), the number of shares that would cause the
violation are automatically transferred to a trustee for the benefit of a
charitable beneficiary as "Shares-in-Trust." The person who otherwise would have
been considered the owner (the "Prohibited Owner") will have no rights or
economic interest in those shares. For these purposes, potentially violative
"ownership" is evaluated by taking into account the broad constructive ownership
rules of Sections 544 and 318 of the Code, with certain modifications. In
addition, a "transfer" that is subject to these restrictions includes any
issuance, sale, transfer, gift, assignment, devise or other disposition as well
as any other event that causes any person to have or acquire ownership (applying
the constructive ownership rules) of Equity Stock.
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The trustee is entitled to vote all Shares-in-Trust and to receive all
distributions on Shares-in-Trust and will hold such distributions for the
benefit of the charitable beneficiary. If any distributions with respect to
Shares-in-Trust are paid to the Prohibited Owner before the Company discovers
the violation of the ownership limit, the Prohibited Owner must pay that amount
to the trustee. Distributions on Shares-in-Trust will be used by the trustee
first to pay any expenses of the trust, second to pay any expenses of the
Company incurred in connection with the trust and third to pay any excess to the
charitable beneficiary. The Prohibited Owner is not to receive any benefit from
distributions.
The trustee is obligated to sell the Shares-in-Trust promptly to a person
who would not cause a violation of the ownership restrictions (at which time the
shares will cease to be Shares-in-Trust) and to distribute the net sale proceeds
first to pay any expenses of the trust, second to pay any expenses of the
Company incurred in connection with the trust, third to pay the Prohibited Owner
an amount intended to ensure that the Prohibited Owner will not realize any
appreciation in value of the shares and fourth to pay any excess to the
charitable beneficiary. If a Prohibited Owner sells Shares-in-Trust before the
Company discovers the transfer, such shares are deemed to have been sold on
behalf of the trust. To the extent that the Prohibited Owner received more in
that sale than the Prohibited Owner would otherwise be entitled to receive under
these provisions, the excess must immediately be delivered to the trustee.
THE COMPANY PURCHASE RIGHT. The Company also will have the right to
purchase all or any portion of the Shares-in-Trust, and the Shares-in-Trust are
deemed to have been offered to the Company, at the lesser of: (a) the price per
share paid for such shares in the transaction that created the Shares-in-Trust
(or if no price was paid, the market price at the time of that event); and (b)
the market price on the date the Company or its designee accepts the offer. This
purchase right exists for a period of 90 days after the later of: (a) the date
of the purported transfer that created the Shares-in-Trust, if the Company
receives notice of the event; and (b) the date the Company determines in good
faith that a purported transfer creating Shares-in-Trust has occurred, if the
Company does not receive notice of the event. The Company may not, however,
exercise this right after the trustee has sold the Shares-in-Trust to a person
whose ownership will not cause a violation of the ownership restrictions.
REPORTING OF TRANSFERS AND OWNERSHIP. To assist in the enforcement of the
ownership restrictions, the Charter requires any person who acquires or attempts
to acquire Equity Stock in violation of the ownership restrictions (or who would
own shares of Equity Stock but for the automatic transfer to the trust) to give
the Company immediate written notice of that event. In the case of a proposed or
attempted violative transfer, the purported transferee must give at least 15
days' prior written notice of the event and provide any other information the
Company requests in order to determine whether such transfer affects the
Company's REIT status.
In addition, the Charter generally requires every person who owns more than
5% (or such lower percentage as is required under the applicable Treasury
Regulations) of the number or value of the outstanding shares of any class or
series of the Equity Stock to give the Company written notice, within 30 days
after the close of each taxable year, stating the owner's name and address, the
number of shares of each class or series of Equity Stock owned and a description
of how the shares are held. These owners must generally provide any additional
information the Company requests in order to determine whether such ownership
affects the Company's REIT status and to ensure compliance with the ownership
restrictions. All remaining owners must generally provide ownership information
upon request. The Charter allows the Board to determine the information that
must be delivered by each owner of Equity Stock.
TRANSFERS VOID. The Charter also provides that if, for any reason, a
transfer to the trust described above would not effectively prevent the
Prohibited Owner from violating the ownership restrictions, then the purported
transfer is void ab initio and the Prohibited Owner does not acquire any rights
in the excess Equity Stock.
EXCEPTED HOLDERS. In order to permit ownership in excess of the specified
8.5% ownership limit for persons who will not jeopardize the Company's REIT
status, the Charter permits the Board to designate certain "Excepted Holders."
Excepted Holders must supply appropriate representations and undertakings
designed to protect the Company's REIT status (such as information establishing
that the Excepted Holder is treated as a "look-through" entity in applying the
REIT stock ownership tests and that the deemed ownership of the Company shares
through the entity will be appropriately dispersed so as not to jeopardize the
Company's REIT status). Each Excepted Holder will be subject to a separate
ownership limit as specified by the Board.
The only current Excepted Holders (and their respective Excepted Holder
Limits for Common Stock) are Hunt (23.7%), USAA (20%), Ameritech (19.5%), OTR
(8.5%), and Morgan Stanley Asset Management, Inc. ("Morgan Stanley") (1,600,000
shares), five of the principal shareholders of the Company. Hunt, USAA,
Ameritech, OTR and Morgan Stanley have entered into separate "Excepted Holder
Agreements" with the Company under which they have given representations and
undertakings designed to protect the Company's REIT status. USAA has represented
and covenanted to the Company that
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shares that it owns will be treated as held proportionately by the
shareholders of its ultimate parent corporation and that no individual will
be treated as owning more than the "basic" 8.5% ownership limit. Hunt's
shares are held by a partnership that also has represented and covenanted to
the Company that the shares it owns will be held so that no individual will
be treated as owning more than the basic 8.5% ownership limit, except that up
to 15.3% of the lesser of the number or value of any outstanding class of
Equity Stock may be treated as owned by one individual and such individual's
family as defined in Code Section 544(a)(2). Accordingly, under the basic
8.5% ownership limit and the existing Excepted Holder Limits, no five or
fewer individuals would be permitted to own more than 49.3% of the
outstanding Equity Stock. One individual, owning through Hunt, may own up to
15.3%, and four others may together own up to 34% -- that is 8.5% each.
The Excepted Holder Agreements with Ameritech and OTR permit Ameritech and
OTR to own up to 100% of the outstanding shares of Series B Preferred Stock and
permit Ameritech to own up to 19.5% of the outstanding shares of Common Stock
and OTR to own up to 8.5% of the outstanding shares of Common Stock. The
Excepted Holder Agreement with Morgan Stanley permits Morgan Stanley acting on
its own behalf and on behalf of its clients accounts over which it has
investment discretion to own shares of Common Stock equal to the greater of
1,600,000 shares or 8.5% of the outstanding shares of Common Stock. These
agreements and the Hunt and USAA Excepted Holder Agreement also provide for
certain adjustments to the ownership limits if the Company engages in certain
types of redemptions or repurchases of Common Stock. Ameritech and OTR have
represented and covenanted that they are "qualified trusts" entitled to
"look-through" treatment in applying the REIT ownership restrictions and that
none of their beneficiaries has been treated as owning a significant portion
of the shares it owns.
Under the Excepted Holder Agreements, the Excepted Holders have made
representations with respect to their actual or constructive ownership of
interests in tenants of the Company. These representations are designed to
assist the Company to qualify as a REIT. A breach of any of these
representations, except as determined by the Board with respect a particular
Excepted Holder, may result in certain shares of Equity Stock held by such
Excepted Holder becoming Shares-in-Trust. The Excepted Holder Agreement entered
into with Ameritech provides that a tenant ownership issue of this type will be
resolved other than through the creation of Shares-in-Trust.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has adopted a dividend reinvestment and stock purchase plan
designed to provide holders of Common Stock with a convenient and economical
means to reinvest all or a portion of their the Company cash dividends in shares
of Common Stock and to acquire additional shares of Common Stock through
voluntary purchases. First Chicago Trust Company of New York, which serves as
the Company's transfer agent, administers the dividend reinvestment and stock
purchase plan.
DESCRIPTION OF WARRANTS
As a result of the Merger, holders of Trust VI common stock and Trust VII
common stock were entitled to receive a total of 553,000 Merger Warrants. The
Merger Warrants were issued in certificated form under a Warrant Agreement
between the Company and First Chicago Trust Company of New York, as warrant
agent.
The Merger Warrants were issued on April 8, 1996. Each Merger Warrant
entitles the holder to receive one share of Common Stock upon its exercise. The
Merger Warrants are listed for trading on the American Stock Exchange. The
Merger Warrants are exercisable during the period from May 23, 1997 through
February 23, 1999. The exercise price of the Merger Warrants is $16.23 (the
average of the closing prices of the Common Stock for the first 20 trading days
after the Merger).
The exercise price of the Merger Warrants and the number of shares of
Common Stock issuable upon exercise of the Merger Warrants are subject to
adjustment in the event of stock dividends, stock splits, subdivisions,
reclassifications, reorganizations, consolidations and mergers. During the
period that the Merger Warrants are exercisable, the Merger Warrants may be
exercised by delivering the certificates representing the Merger Warrants, and
paying the exercise price by cash or certified or bank check, to the warrant
agent. The Merger Warrants may not be exercised unless a registration statement
under the Securities Act, covering the underlying shares of Common Stock, is
current and effective and those shares of Common Stock have been qualified, or
there is an exemption from applicable qualification requirements, under the
securities laws of the state of residence of the holder of the Merger Warrants.
The shares of Common Stock underlying the Merger Warrants have been registered
under the Company's registration statement declared effective January 6, 1996.
However, the Company may suspend the exercisability of the Merger Warrants
during the exercise period if, for any reason, no registration statement is
effective with respect to the shares of Common Stock underlying the Merger
Warrants (for example, because a stop order relating to the Registration
Statement issued by the SEC is then in effect) or the Company determines that
the Prospectus does
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not provide current information as required by the Securities Act or
otherwise needs to be amended in order to comply with the Securities Act.
The Company would extend the exercise period of the Merger Warrants in the
case of certain such suspensions.
IF A HOLDER OF MERGER WARRANTS FAILS TO EXERCISE HIS OR HER MERGER WARRANTS
BEFORE THEIR EXPIRATION, THOSE WARRANTS WILL EXPIRE AND THE HOLDER WILL HAVE NO
FURTHER RIGHTS WITH RESPECT TO MERGER WARRANTS. A holder of Merger Warrants
will not have any rights, privileges or liabilities of a stockholder of the
Company prior to exercise of the Merger Warrants, including the rights to vote
and to receive distributions.
On or about May 29, 1997, each record holder of a Merger Warrant on May 28,
1997 was mailed an information packet regarding the exercise of the Merger
Warrants. This packet included a copy of this Prospectus, a Letter of
Transmittal to be used to exercise the Merger Warrants and a letter from the
Company explaining the exercise procedure. The Company will send an information
packet to any Merger Warrant holder upon request to General Counsel, Meridian
Industrial Trust, Inc., 455 Market Street, 17th Floor, San Francisco, California
94105.
On February 23, 1996, the Company issued a warrant to purchase shares of
Common Stock to USAA (the "USAA Warrant"). The USAA Warrant was issued as
consideration for the grant by USAA to the Company of the USAA Option. The USAA
Warrant has an exercise price of $14.60 per share and covers 184,900 shares of
Common Stock. On April 3, 1966, USAA sold the USAA Warrant to an affiliate of
Morgan Stanley for $300,000.
PLAN OF DISTRIBUTION
All of the Common Stock offered hereby will be sold, if at all, by the
Company directly to the holders of the Merger Warrants.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws does not purport to be complete and is subject to and
qualified in its entirety by reference to Maryland law and the Charter and
Bylaws, copies of which are exhibits to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
BOARD OF DIRECTORS
The Company's Organizational Documents specify that the initial number of
directors is nine and allow a majority of the entire Board to increase or
decrease the number of directors within a range of three to 15. The tenure of
office of a sitting director will not be affected by any decrease in the number
of directors. These provisions are in accord with Section 2-402 of the MGCL,
which fixes the minimum number of directors at three and allows a range to be
specified in a corporation's bylaws. As described below (see "-- Amendment to
Organizational Documents"), the Bylaws may be amended only by the Board, not by
its stockholders. The Board could, therefore, amend the Bylaws to increase or
decrease the number of directors within the specified range, without stockholder
approval, but could not reduce the number of directors below three. The holders
of shares of Series B Preferred Stock are entitled to require, at least
temporarily, that the Board be expanded and be entitled to fill the additional
position or positions on the Board. See "Description of Stock -- Preferred
Stock."
As permitted by the MGCL, the Charter provides that, subject to the rights
of the holders of any series of Preferred Stock then outstanding, the Company's
stockholders may remove any director, with or without cause, by the affirmative
vote of a majority of all votes entitled to be cast for the election of
directors. If the stockholders of any class or series are entitled separately
to elect one or more directors, a majority vote of all votes of that class or
series is required in order to remove without cause a director elected by that
class or series.
MERGERS, CONSOLIDATIONS AND SALES OF ASSETS
In general, under the MGCL, any proposed merger or consolidation of the
Company with another company or companies, or any sale of all or substantially
all the assets of the Company, must be approved by the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter or such lesser
percentage (subject to a specified minimum) as is set forth in the corporation's
charter. The Charter provides that such transactions may be approved by the
affirmative vote of a majority of all votes entitled to be cast on such matters.
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BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an affiliate of the corporation who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of ten percent or more of the voting power of the then-outstanding voting
stock of the corporation (an "Interested Stockholder") or an affiliate of such
an Interested Stockholder are prohibited for five years after the most recent
date on which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(i) 80% of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation and (ii) two-thirds of the votes entitled to be
cast by holders of voting stock of the corporation other than shares held by the
Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the corporation's
common stockholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder. Hunt, RLH Corporation
(and its affiliates), Ray L. Hunt (and his affiliates), USAA, United States
Automobile Association (and its direct and indirect subsidiaries) and Ameritech,
beneficially own or are not prohibited by the Company's Organizational Documents
and their respective Excepted Holder Agreements from owning more than 10% of the
Company's voting shares and would or may in the future, therefore, be subject to
the business combination provision of the MGCL. However, pursuant to the
statute, the Company has exempted any business combinations involving these
stockholders and affiliates and, consequently, the five-year prohibition and the
super-majority vote requirements will not apply to business combinations between
any of them and the Company. As a result, these stockholders and affiliates may
be able to enter into business combinations with the Company that may not be in
the best interest of its stockholders without compliance by the Company with the
super-majority vote requirements and the other provisions of the statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror, by officers or by directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (a) one-fifth or more but less than
one-third, (b) one-third or more but less than a majority, or (c) a majority or
more of all voting power. Control Shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
Control Shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of the demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the Control Shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the Control Shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
As permitted by the MGCL, the Bylaws exempt any acquisitions of shares of
the Company's stock by Hunt, RLH Corporation (and its affiliates), Ray L. Hunt
(and his affiliates), USAA and United States Automobile Association (and its
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direct and indirect subsidiaries). There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
RELATED PARTY TRANSACTIONS
Although it is the Company's policy not to engage in transactions with its
directors or officers, the Charter does not place specific restrictions on
related party transactions. The Company is subject to the provisions of the
MGCL concerning "interested director transactions," that is, transactions
between the Company and a member of the Board or between the Company and another
corporation, firm or other entity in which any of its directors is a director or
has a material financial interest. Under the MGCL, a contract or transaction
between a corporation and any of its directors, or between a corporation and any
other corporation, firm or other entity in which any of its directors is a
director or has a material financial interest, is not void or voidable solely
for this reason, or solely because the director is present at or participates in
the meeting of the board or committee that authorizes the contract or
transaction, or solely because his or her votes are counted for such purpose,
if:
1. The fact of the common directorship or interest is disclosed or known
to the board of directors or the committee, and the board or committee
authorizes, approves or ratifies the contract or transaction by the affirmative
vote of a majority of the disinterested directors, even if the disinterested
directors constitute less than a quorum;
2. The fact of the common directorship or interest is disclosed or known
to the stockholders entitled to vote thereon, and the contract or transaction is
authorized, approved or ratified by a majority of the votes cast by the
stockholders entitled to vote, excluding the votes of shares owned by the
interested director or other interested party; or
3. The contract or transaction is fair and reasonable to the corporation.
SPECIAL MEETINGS OF STOCKHOLDERS
The Bylaws provide that special meetings of the Company's stockholders may
be called: (a) by the Chairman of the Board, the President or the Board; or (b)
upon the written request of stockholders holding not less than 10% of all the
votes entitled to be cast at the meeting. The request must state the purpose of
the meeting and the matters proposed to be acted on at the meeting. Upon
payment by the requesting stockholders of the cost of preparing and mailing
notice of the meeting, the Secretary of the Company must give notice to each
stockholder entitled to notice. Unless requested by stockholders entitled to
cast a majority of the votes entitled to be cast at the meeting, a special
meeting need not be called to consider any matter that is substantially the same
as one voted on at any special meeting during the preceding 12 months. Under
the Bylaws, if the Company calls a special meeting for the purpose of electing
one or more directors, any stockholder of record at the time the notice is given
who is entitled to vote at the meeting may nominate a person or persons for
election by giving notice containing specified information to the Secretary not
earlier than the 90th day before the meeting and not later than the later of the
60th day before the meeting or the 10th day after the day on which a public
announcement is first made of the date of the meeting and the nominees proposed
by the Board. Only persons nominated in accordance with procedures specified in
the Bylaws are eligible to serve as directors and only the business specified in
the notice of the meeting may be conducted at the meeting.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws establish procedures for nominations or other business brought
by stockholders at annual meetings. Under these procedures, a stockholder
entitled to vote in the election of directors generally may nominate one or more
persons for election to the Board or propose other business at an annual meeting
only if the stockholder gives notice to the Secretary of the Company not less
than 60 nor more than 90 days before the first anniversary of the preceding
year's annual meeting. If, however, the date of the annual meeting is advanced
by more than 30 days or delayed by more than 60 days from the anniversary date,
to be timely, notice by the stockholder must be delivered not earlier than the
90th day before such annual meeting and not later than the close of business on
the later of the 60th day before such annual meeting or the tenth day following
the day on which public announcement of the date of such meeting was first made.
Such notice must contain specified information. For example, in the case of a
nomination by a stockholder, the notice must include the information about each
nominee that is required to be disclosed pursuant to the proxy rules under the
Exchange Act. The Company's next stockholders' meeting is expected to take
place in mid-1998.
AMENDMENTS TO ORGANIZATIONAL DOCUMENTS
Section 2-604 of the MGCL and Article 7 of the Charter govern amendments to
the Charter. After the Board proposes a charter amendment, the affirmative vote
of the holders of a majority of the outstanding voting stock, voting together
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as a single class, is required to amend the Charter. The Bylaws provide that
the Board has the exclusive power to adopt, alter or repeal any provision of
the Bylaws, except for the provision relating to the application of the
control share acquisition provisions of the MGCL, which may not be amended or
repealed, in whole or in part, without the prior written consent of Ray L.
Hunt (or any affiliate of Ray L. Hunt) and USAA. See "Certain Provisions of
Maryland Law and of the Charter and Bylaws -- Control Share Acquisitions."
LIABILITY AND INDEMNIFICATION OF CERTAIN PERSONS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liabilities to the maximum extent
permitted by Maryland law.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not), to indemnify a director or officer who has been
successful on the merits or otherwise, in defense of any proceeding to which he
is made a party by reason of his service in that capacity. The MGCL permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was a result of an active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of a criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. However, a Maryland corporation may not indemnify for any adverse
judgment in a suit by or in the right of a corporation. In addition, the MGCL
requires the Company, as a condition to advancing expenses, to obtain (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
The Charter obligates the Company to the maximum extent permitted by
Maryland law to indemnify and to pay or reimburse reasonable expenses in advance
of final disposition of a proceeding to (a) any present or former director or
officer of the Company or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served as a director,
officer, partner or trustee of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise. The Charter also permits the
Company to indemnify and advance expenses to any person who served a predecessor
of the Company in any other capacity as described above and to any employee or
agent of the Company or a predecessor of the Company.
The Company has entered into indemnification agreements with each of its
officers and directors. The indemnification agreements require, among other
matters, the Company indemnify its executive officers and directors to the
fullest extent permitted by law and advance to the officers all related
expenses, subject to reimbursement, if it is subsequently determined that
indemnification is not permitted. Under these agreements, the Company must also
indemnify and advance all expenses incurred by executive officers and directors
seeking to enforce their rights under the indemnification agreements and may
cover executive officers and directors under the Company's directors' and
officers' liability insurance. Although the indemnification agreement offers
substantially the same scope of coverage afforded by law, it provides greater
assurance to directors and executive officers that indemnification will be
available, because, as a contract, it cannot be modified unilaterally in the
future by the Board of Directors or stockholders to eliminate the rights it
provides. It is the position of the SEC that indemnification of directors and
officers for liability under the Securities Act is against public policy and
unenforceable pursuant to Section 14 of the Securities Act.
COMMON STOCK
Article 4 of the Charter authorizes the Company to issue up to 175 million
shares of Common Stock, of which 13,597,214 shares were outstanding at May 1,
1997. The holders of shares of Common Stock have the right to vote on all
matters for which a common stockholder is entitled to vote at all meetings of
the stockholders of the Company, and will be entitled to one vote for each share
of Common Stock entitled to vote at such a meeting. Common Stock is subject to
ownership limits and restrictions on transfer. See "Description of Stock."
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PREFERRED STOCK
Article 4 of the Charter authorizes the Company to issue up to 25 million
shares of Preferred Stock, of which 2,272,727 shares of Series B Preferred Stock
are presently outstanding. Preferred Stock, like Common Stock, is subject to
ownership limits and restrictions on transfer. See "Description of Stock --
Restrictions on Ownership and Transfer."
Subject to any limitations imposed by the NYSE and the rights of the
holders of shares of Series B Preferred Stock, the Company may, without
stockholder approval, issue shares of Preferred Stock in classes and series, and
may establish from time to time the number of shares to be included in each such
class or series, and fix the designation, powers, preferences and the rights of
the shares of each such class or series and the qualifications, limitations and
restrictions of each. Except as otherwise provided by law, the holders of the
Preferred Stock have and will have only such voting rights as are provided for
or expressed in the resolutions of the Board relating to such Preferred Stock.
The Board believes it is desirable for the Company to have Preferred Stock
available for possible future financing and acquisition transactions, stock
dividends or distributions and other general corporate purposes. The
availability of such shares for issuance in the future will give the Company
greater flexibility in obtaining financing or in acquiring Properties by
permitting such shares to be issued without the expense and delay of a special
stockholders' meeting.
The availability of Preferred Stock, however, entails risks. Under certain
circumstances, shares of Preferred Stock could be used to create voting
impediments or to frustrate persons seeking to effect a takeover, engage in
proxy contests, or otherwise gain control of the Company. The Board could
authorize holders of Preferred Stock to vote as a class, either separately or
with the holders of Common Stock, and with voting rights that are the same as or
different from the voting rights of Common Stock, on the election of directors,
or approval of a merger, sale or exchange of assets by the Company or any other
extraordinary corporate transaction. See "Description of Stock -- Preferred
Stock" for a description of the voting rights of the Series B Preferred Stock.
In addition, the shares of Preferred Stock could be privately placed with
purchasers who might side with the Board in opposing a hostile takeover bid.
Such uses could enhance the Board's ability to deal with attempts to gain
control of, or impose transactions upon, the Company that the Board believes are
coercive, unfair or otherwise not in the best interests of the Company and all
of its stockholders, but which certain stockholders may find attractive. It is
also possible that the dividend requirements and sinking fund, conversion or
redemption provisions, if any, which may be fixed by the Board for any class or
series of Preferred Stock at the time of issuance may have an adverse effect on
the availability of earnings for distribution to holders of Common Stock or for
other corporate purposes.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the material federal income tax
considerations affecting the Company and holders of Common Stock. Vinson &
Elkins L.L.P. counsel to the Company, has reviewed the following discussion and
is of the opinion that it fairly summarizes the material federal income tax
considerations to a holder of the Common Stock based on current law. This
discussion is directed principally at stockholders who are individual United
States citizens or residents. No attempt has been made to comment on all federal
income tax consequences of the ownership of Common Stock. The summary does not
address considerations that may be relevant to particular stockholders,
including stockholders who are subject to special treatment under the federal
income tax laws (such as insurance companies, financial institutions or
broker-dealers), nor does it address any tax consequences under the laws of
any state, local or foreign jurisdiction. No rulings will be sought from the
IRS or any other tax authorities concerning the federal, state, local or
other tax considerations relevant to the Company's operations or REIT status,
or to the purchase, ownership or disposition of Common Stock. Because the
following is only a summary, it is qualified in its entirety by the
applicable provisions of the Code and the regulations adopted under the Code,
court decisions, and the rulings and other pronouncements of the IRS, all of
which are subject to change, possibly with retroactive effect.
EACH PROSPECTIVE STOCKHOLDER OF THE COMPANY IS ADVISED TO CONSULT HIS OR
HER OWN TAX ADVISOR ABOUT THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF THE OWNERSHIP OR DISPOSITION OF SHARES OF COMMON STOCK,
PARTICULARLY IN LIGHT OF THAT STOCKHOLDER'S SPECIFIC CIRCUMSTANCES.
FEDERAL INCOME TAXATION OF THE COMPANY
The Company believes that since its formation, it has been organized and
operated in a manner that permits it to satisfy the various requirements for
taxation as a REIT under the applicable provisions of the Code. The rules
governing REIT's are highly technical and require ongoing compliance with a
variety of tests that depend, among other things, on operating results. While
the Company believes it has satisfied these tests since its formation and plans
to use its best efforts
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to do so on a continuing basis, no assurance can be given that such
requirements will be met or that the Company will qualify as a REIT for any
particular year.
In the opinion of Vinson & Elkins L.L.P., commencing with the Company's
initial taxable year ended December 31, 1995, if the Company is organized and
operated as described in this Prospectus, the Company will be able to qualify as
a REIT. It must be emphasized that this opinion is based and conditioned on
various assumptions and representations of the Company and its officers that are
described below. The Company's qualification as a REIT depends upon its ability
to meet, through actual annual operating results, the various qualification
tests imposed under the Code that are discussed below, the results of which will
NOT be monitored or reviewed by Vinson & Elkins L.L.P. While the Company
expects to satisfy these tests and plans to use its best efforts to do so, no
assurance can be given that actual operations will meet these requirements and
that the Company will qualify as a REIT for any particular year. The opinion of
Vinson & Elkins L.L.P. is not binding on the IRS or any court. The opinion of
Vinson & Elkins L.L.P. is based upon existing law, IRS regulations and currently
published administrative positions of the IRS and judicial decisions, all of
which are subject to change either prospectively or retroactively.
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 net capital gain that is currently distributed to stockholders. The REIT
provisions of the Code generally allow a REIT to deduct dividends paid to its
stockholders. This deduction for dividends paid to stockholders substantially
eliminates the Federal "double taxation" on earnings (once at the corporate
level and once again at the stockholder level) that usually results from
investments in a corporation.
Even if the Company qualifies for taxation as a REIT, however, the Company
may be subject to Federal income or excise tax, including the following: First,
the Company will be taxed at regular corporate rates on its undistributed REIT
taxable income, including undistributed net capital gain. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax."
Third, if the Company has net income from the sale or other disposition of
"foreclosure property" (which is, in general, property acquired by the Company
by foreclosure or otherwise on default on a loan secured by such 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 held primarily for sale to customers in the
ordinary course of business, other than foreclosure property), such income will
be subject to a 100% tax. Fifth, if the Company should fail to satisfy either
the 75% or 95% gross income test (discussed below) but has nonetheless
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax on the net income attributable to the
greater of the amount by which the Company fails either of the 75% or 95% test,
multiplied by a fraction intended to reflect the Company's profitability.
Sixth, if the Company fails to distribute during a year at least the sum of (a)
85% of its REIT ordinary income for such year, (b) 95% of its REIT capital gain
net income for such year and (c) any undistributed taxable income from prior
years, 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 ten-year period beginning on the date on which the asset was acquired
by the Company, then, to the extent of the excess of the fair market value of
the asset over its adjusted basis upon its acquisition by the Company, such gain
will be subject to tax at the highest regular corporate rate, pursuant to
guidelines issued by the IRS.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association: (a) that
is managed by one or more directors or trustees, (b) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest, (c) that would be taxable as a domestic corporation but for
the REIT provisions of the Code, (d) that is neither a financial institution nor
an insurance company subject to certain provisions of the Code, (e) the
beneficial ownership of which is held by 100 or more persons, and (f) 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). The Company expects to meet each of these
requirements as well as certain other tests, described below, regarding the
nature of its income and assets. The Code provides that conditions (a) through
(d), inclusive, must be met during the entire taxable year and that condition
(e) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months.
Conditions (e) and (f) (the "100-Stockholder Requirement" and "Five-or-Fewer
Requirement") do not apply for the first taxable year for which an election is
made to be taxed as a REIT. For purposes of conditions (e) and (f), pension
funds and certain other tax-exempt entities are treated as individuals, subject
to a "look-through" exception in the case of condition (f).
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To protect against violations of the stock ownership requirements, the
Charter provides that no person (other than an "Excepted Holder") is permitted
to own, applying certain constructive ownership tests, more than 8.5% of the
lesser of the number or value of the outstanding shares of any class of the
Company's stock (the "Ownership Limit"). An Excepted Holder is a person whom the
Board has determined will be permitted to hold shares in excess of the Ownership
Limit, based upon appropriate representations and undertakings designed to
protect the Company's REIT status (such as information establishing that the
Excepted Holder is treated as a "look-through" entity in applying the REIT stock
ownership tests and that the deemed ownership of the Company shares through it
will be appropriately dispersed so as not to jeopardize the Company's REIT
status). Each Excepted Holder will be subject to a separate ownership limit as
specified by the Board. Attempted transfers of shares of the Company's stock
that would violate the ownership limits (or related restrictions contained in
the Charter or Excepted Holder Agreements) generally will cause the number of
shares in excess of the limit to be transferred automatically to a trust for the
benefit of a charitable beneficiary rather than to the purported transferee.
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records disclosing the actual ownership of
its stock. To do so, the Company must demand written statements each year from
the record holders of 5% or more of its shares. In those statements, the record
holders are to disclose who actually owns the shares (that is, the persons
required to include the Company's dividends in their gross incomes). The
Company must maintain a list of those persons who fail or refuse to comply with
this demand. Such stockholders must submit a statement with their tax returns
disclosing the actual ownership of the shares of stock and certain other
information.
GROSS INCOME TESTS. In order to qualify as a REIT for a particular year,
the Company also must meet three tests governing the sources of its gross income
that are designed to ensure that the Company earns its income principally from
passive real estate investments. In evaluating a REIT's income under the income
tests, the REIT will be treated as receiving its proportionate share of the
income produced by any partnership in which the REIT invests, and any such
income will retain the character that it has in the hands of the partnership.
The Company may, from time to time, own and operate a number of its properties
through "qualified REIT subsidiaries." The Code provides that a qualified REIT
subsidiary is not treated as a separate corporation, and all of its assets,
liabilities and items of income, deduction and credit are treated as assets,
liabilities and such items of the REIT.
SEVENTY-FIVE PERCENT GROSS INCOME TEST. At least 75% of a REIT's gross
income for each taxable year must be derived from specified classes of income
that principally are real estate related. The key permitted categories are:
(a) rents from real property; (b) interest on loans secured by real property;
(c) gain from the sale of real property or real property loans (excluding gain
from the sale of property that is held primarily for sale to customers in the
ordinary course of a trade or business, which is referred to below as "dealer
property"); (d) income from the operation and gain from the sale of certain
property acquired in connection with the foreclosure of a mortgage securing that
property or upon a default on a lease of the property ("foreclosure property");
(e) distributions on, or gain from the sale of, shares of other REITs and (vi)
"qualified temporary investment income" (described below).
In evaluating the Company's compliance with the 75% income test (as well as
the 95% income test described below), gross income does not include gross income
from "prohibited transactions." A prohibited transaction is a sale of dealer
property, not including foreclosure property and certain dealer property held by
the Company for at least four years.
The Company expects that substantially all of its operating gross income
from its properties will be considered rent from real property. Rent from real
property is qualifying income for purposes of the 75% income test only if
certain conditions are satisfied. Rent from real property includes charges for
services customarily rendered to tenants and rent attributable to personal
property leased together with the real property so long as the personal property
rent is less than 15% of the total rent. The Company does not expect to earn
material amounts of income from services rendered to tenants or from personal
property.
Rent from real property generally does not include rent based on the income
or profits derived from the property, unless the computation is based only on a
fixed percentage of receipts or sales. Also excluded is rent received from a
person or corporation in which the Company (or any of its 10% or greater owners)
owns a 10% or greater interest. The Company does not expect to earn income in
these two excluded categories.
A third exclusion covers amounts received with respect to real property if
the Company furnishes services to the tenants or manages or operates the
property, other than through an "independent contractor" from whom the Company
does not derive any income. The obligation to operate through an independent
contractor generally does not apply, however, if any services provided by the
Company are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not considered rendered primarily for the
convenience of the tenant (applying standards that govern in evaluating whether
rent from real property would be unrelated business taxable income when received
by a tax-exempt owner of the property). The Company generally will directly
operate and manage its properties without using an "independent contractor,"
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although independent contractors may be employed to perform certain day-to-day
property management duties, such as collection of rents and routine maintenance.
The Company believes that the only material services to be provided to tenants
will be those usually or customarily rendered in connection with the rental of
space for occupancy only. The Company does not provide services that might be
considered rendered primarily for the convenience of the tenants. The Company
believes that substantially all its income from the properties will be
qualifying income under the 75% income test.
A portion of the proceeds of the sale of the Common Stock issuable upon the
exercise of the Merger Warrants may be invested in interest-bearing accounts and
an investment fund or funds that invest substantially all their assets in
diversified portfolios of U.S. dollar-denominated "money market" instruments
(such as bank certificates of deposit and bankers acceptances, commercial paper
and repurchase agreements) and obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities. The interest and dividend
income earned on those funds should be includable under the 75% income test as
"qualified temporary investment income" (which includes income earned on stock
or debt instruments acquired with the proceeds of a stock offering, not
including amounts received under a dividend reinvestment plan). Qualified
temporary investment income treatment only applies during the one-year period
beginning when a REIT receives the new capital.
Upon the Company's ultimate sale of its properties, any gains realized are
expected to constitute qualifying income, as gain from the sale of real property
(not involving a prohibited transaction).
NINETY-FIVE PERCENT GROSS INCOME TEST. In addition to earning 75% of its
gross income from the sources listed above, at least an additional 20% of the
Company's gross income for each taxable year must come either from those
sources, or from dividends, other interest or gains from the sale or other
disposition of stock or other securities that do not constitute dealer property.
This test permits a REIT to earn a significant portion of its income from
traditional "passive" investment sources that are not necessarily real estate
related. The term "interest" (under both the 75% and 95% tests) does not include
amounts that are based on the income or profits of any person, unless the
computation is based only on a fixed percentage of receipts or sales.
THIRTY PERCENT GROSS INCOME TEST. The Company also must earn less than 30%
of its gross income in each taxable year from the sale or other disposition of:
(a) real property and loans secured by real property held for less than four
years (other than foreclosure property and involuntary conversions); (b) stock
or securities held for less than one year; and (c) property in a prohibited
transaction. The 30% income test does not have a reasonable cause exception as
do the 75% and 95% income tests. Consequently, a failure to meet the 30% income
test would terminate the Company's status as a REIT automatically. Because the
Company expects to hold its properties for long-term investment and does not
anticipate selling them within four years after they were acquired, the Company
expects to comply with this requirement.
FAILING THE BASIC GROSS INCOME TESTS. As a result of the 75% and 95%
tests, REITs generally are not permitted to earn more than 5% of their gross
income from active sources (such as brokerage commissions or other fees for
services rendered). While the Company does not anticipate that it will earn
substantial amounts of nonqualifying income, if nonqualifying income exceeds 5%
of the Company's gross income, the Company could lose its status as a REIT. If a
REIT fails to meet either the 75% or 95% income tests during any taxable year,
it may still qualify as a REIT for that year if the failure was due to
reasonable cause and certain relief provisions apply, although a special penalty
tax may be owed. See "-- Federal Income Taxation of the Company."
ASSET TESTS. In order to qualify as a REIT for a particular year, on the
last day of each calendar quarter the Company also must meet two tests
concerning the nature of its investments. First, at least 75% of the value of
the Company's total assets generally must consist of real estate assets, cash,
cash items (including receivables) and government securities. For this purpose,
"real estate assets" include interests in real property, interests in loans
secured by mortgages on real property or by interests in real property, shares
in other REITs, certain options, and for the one year-period following receipt
of new capital, stock and debt instruments acquired with that new capital. Real
estate assets do not include mineral, oil or gas royalty interests. Second,
although the balance of the Company's assets generally may be invested without
restriction, except for securities that are considered real estate assets, the
Company will not be permitted to own: (a) securities of any one nongovernmental
issuer that represent more than 5% of the value of the Company's total assets;
or (b) more than 10% of the outstanding voting securities of any single issuer.
A REIT may, however, own 100% of the stock of a qualified REIT subsidiary, in
which case the assets, liabilities and items of income, deduction and credit of
the subsidiary are treated as those of the REIT. The Company may, from time to
time, hold certain properties through qualified REIT subsidiaries. In evaluating
a REIT's assets, if the REIT invests in a partnership, it is deemed to own its
proportionate share of the assets of the partnership.
The Company anticipates that it will comply with these asset tests. As was
described above, for a temporary period, some of the proceeds of the sale of the
Common Stock issuable upon the exercise of the Merger Warrants may be invested
principally in interest-bearing accounts and an investment fund or funds that
invest substantially all their assets in diversified
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portfolios of U.S. dollar-denominated "money market" instruments (such as
bank certificates of deposit and bankers acceptances, commercial paper and
repurchase agreements) and obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities, which should constitute
qualifying assets, at least during the initial one-year period following the
sale of the Common Stock issuable upon the exercise of the Merger Warrants.
Substantially all of the Company's other investments will be in properties
that should represent qualifying real estate assets.
ANNUAL DISTRIBUTION REQUIREMENT. To maintain REIT status, the Company
generally must distribute to its stockholders in each taxable year at least 95%
of its net ordinary income (capital gain is not required to be distributed).
More precisely, the Company must distribute an amount equal to: (a) 95% of the
sum of (i) its "REIT Taxable Income" before the deduction for dividends paid and
excluding any net capital gain and (ii) any net income from foreclosure property
less the tax on such income, minus (b) certain limited categories of "excess
non-cash income." REIT Taxable Income is defined to be the taxable income of the
REIT, computed as if it were an ordinary corporation, with certain
modifications. For example, net income from foreclosure property and net income
from prohibited transactions are excluded. In addition, the REIT may carry over,
but not carry back, a net operating loss for 15 years after the year in which it
was incurred.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with certain dividends paid after the end of the taxable year.
Dividends paid in January that were declared during the last calendar quarter of
the prior year and were payable to stockholders of record during the last
calendar quarter of that prior year are treated as paid on December 31 of the
prior year (both for the Company and its stockholders). Because dividends that
are paid in a subsequent year and fail to meet this test will be subject to a
nondeductible 4% excise tax, the Company anticipates distributing its fourth
quarter dividends within the taxable year, or by January 31 of the following
year. Dividends declared before the due date of the Company's tax return for the
taxable year (including extensions) also will be treated as paid in the prior
year (although subject to the excise tax) if they are paid: (a) within 12
months of the end of such taxable year; and (b) no later than the Company's next
regular distribution payment. Dividends that are paid after the close of a
taxable year and do not qualify under the rule governing payments made in
January will be taxable to the stockholders in the year paid, even though they
may be taken into account by the Company for a prior year.
The Company will be taxed at regular corporate rates to the extent that it
retains any portion of its taxable income. For example, if the Company only
distributes the required 95% of its taxable income, it would be taxed on the
retained 5%. The Company currently intends to distribute sufficient income to
satisfy the annual 95% distribution requirement. Under certain circumstances,
however, the Company may not have sufficient cash or other liquid assets to meet
the distribution requirement. This could arise because of competing demands for
the Company's funds, or due to timing differences between tax reporting and cash
receipts and disbursements (income may have to be reported before cash is
received, or expenses may have to be paid before a deduction is allowed).
Although the Company does not anticipate difficulties in meeting this
requirement, no assurance can be given that the necessary funds will be
available. If the Company fails to make a required distribution, it would lose
its REIT status.
If the Company fails to meet the 95% distribution requirement because of an
adjustment to the Company's taxable income by the IRS, the Company may be able
to cure the failure retroactively by paying to its stockholders a "deficiency
dividend" (as well as paying applicable interest and penalties to the IRS)
within a specified period.
SPECIAL DISTRIBUTION REQUIREMENT; BUILT-IN GAIN RULES. The Code and
regulations provide that a corporation may be taxed as a REIT only if it has no
earnings and profits accumulated in any non-REIT year (including amounts
attributable to entities merged into the REIT). The Company expects to be
treated as a REIT from inception and does not believe that it inherited any
earnings and profits from any of the Merged Trusts that were accumulated during
any non-REIT years. Pursuant to IRS Notice 88-19, if a REIT acquires the assets
of a C corporation in a tax-free transaction, unless the REIT makes a special
election to recognize any built-in gain over a ten-year period, the C
corporation is treated as having disposed of the assets in a taxable transaction
immediately before the transfer to the REIT. Due to the REIT status of the
Merged Trusts, the Company does not believe that these requirements apply to the
Company or the Merged Trusts. If the IRS were to challenge successfully the REIT
status of one or more of the Merged Trusts during any period prior to the
Merger, depending upon the specific circumstances, the rules applicable to
transfers from C corporations to REITs might adversely affect the Company's
ability to qualify as a REIT.
FAILURE TO QUALIFY AS A REIT
For any taxable year in which the Company fails to qualify as a REIT, it
would be taxed at the usual corporate rates on all of its taxable income.
Distributions to its stockholders would not be deductible in computing that
taxable income, and distributions would no longer be required under the Code.
Any corporate level taxes generally would reduce the amount of cash available to
the Company for distribution to its stockholders or for reinvestment. Because
the stockholders would continue
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to be taxable on the distributions they receive, the net after-tax yield to
the stockholders from their investment in the Company likely would be reduced
substantially. As a result, the Company's failure to qualify as a REIT during
any taxable year could have a material adverse effect on the Company and its
stockholders. If the Company loses its REIT status, unless certain relief
provisions apply, the Company would not be eligible to elect REIT status
again until the fifth taxable year that begins after the first year for which
the Company's election was terminated.
If, after forfeiting its REIT status, the Company later qualifies and
elects to be taxed as a REIT again, the Company may face additional adverse tax
consequences. Prior to the end of the year in which the Company sought to
qualify again as a REIT, the Company would be required to make distributions
sufficient to eliminate any earnings and profits accumulated during its period
of non-REIT status. Moreover, under IRS Notice 88-19, immediately prior to the
effectiveness of the election to return to REIT status, the Company would be
treated as having disposed of all of its assets in a taxable transaction,
triggering taxable gain with respect to the Company's appreciated assets. In
that event, however, under current law the Company would be permitted to elect
an alternative treatment under which those gains would be taken into account
only as and when they actually were recognized upon sales of the appreciated
property occurring within a ten-year period (certain proposed legislation might
eliminate this alternative treatment, in which case the Company might choose to
remain a C corporation). The Company would be required to distribute at least
95% of any such recognized gains, but it would not receive the benefit of a
dividends-paid deduction to reduce those taxable gains. Thus, any such gains on
appreciated assets would be subject to double taxation (that is, at the
corporate level as well as the stockholder level).
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
Distributions generally will be taxable to stockholders as ordinary income
to the extent of the Company's earnings and profits. Dividends declared during
the last quarter of a calendar year and actually paid during January of the
immediately following calendar year will generally be treated as if received by
the stockholders on December 31 of the calendar year during which they were
declared. Distributions paid to stockholders will not constitute passive
activity income and, as a result, generally cannot be offset by losses from
passive activities of a stockholder who is subject to the passive activity
rules.
Distributions designated by the Company as capital gains dividends
generally will be taxed as long-term capital gains to stockholders to the extent
that the distributions do not exceed the Company's actual net capital gain for
the taxable year. Corporate stockholders may be required to treat up to 20% of
any such capital gains dividends as ordinary income. Distributions by the
Company, whether characterized as ordinary income or as capital gains, are not
eligible for the 70% dividends received deduction for corporations. Stockholders
are not permitted to deduct losses or loss carryforwards of the Company. Future
regulations may require that stockholders take into account, for purposes of
computing their individual alternative minimum tax liability, certain tax
preference items of the Company.
The Company may generate cash in excess of its net earnings. If the Company
distributes cash to stockholders in excess of the Company's current and
accumulated earnings and profits, the excess cash will be deemed to be a
nontaxable return of capital to each stockholder to the extent of the adjusted
tax basis of the stockholder's shares, and the distribution will reduce the
stockholder's basis (but not below zero). Distributions in excess of the
adjusted tax basis will be treated as gain from the sale or exchange of the
shares. A stockholder who has received a distribution in excess of the current
and accumulated earnings and profits of the Company may, upon the sale of the
shares, realize a higher taxable gain or a smaller loss because the basis of the
shares as reduced by that distribution will be used for purposes of computing
the amount of the gain or loss.
Generally, gain or loss realized by a stockholder upon the sale of shares
will be reportable as capital gain or loss. If a stockholder receives a capital
gain dividend from the Company and sells the shares before holding them for more
than six months, any loss incurred on the sale or exchange of the shares is
treated as a long-term capital loss to the extent of the corresponding capital
gain dividend received.
In any year in which the Company fails to qualify as a REIT, its
stockholders generally will continue to be treated in the same fashion described
above, except that the Company dividends will not be eligible for treatment as
capital gains dividends, corporate stockholders will qualify for the dividends
received deduction and the stockholders will not be required to report any share
of the Company's tax preference items.
BACKUP WITHHOLDING
The Company will report to its stockholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if any.
If a stockholder is subject to backup withholding, the Company will be required
to deduct and withhold from any dividends payable to that stockholder a tax of
31%. These rules may apply: (i) when a stockholder fails to supply a correct
taxpayer identification number; (ii) when the IRS notifies the Company that the
stockholder is subject to
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the rules or has furnished an incorrect taxpayer identification number; or
(iii) in the case of corporations or others within certain exempt categories,
when they fail to demonstrate their qualification for exemption when
required. A stockholder who does not provide a correct taxpayer
identification number may also be subject to penalties imposed by the IRS.
Any amount withheld as backup withholding may be creditable against the
stockholder's federal income tax liability. The Company also may be required
to withhold a portion of capital gain distributions made to stockholders who
fail to certify their non-foreign status to the Company.
TAXATION OF DOMESTIC TAX-EXEMPT STOCKHOLDERS
In 1993, the federal income tax laws were changed to facilitate investments
by pension funds in REITs. As described above, a corporation cannot be a REIT if
more than 50% of the value of its stock is owned by five or fewer individuals at
any time during the last half of a taxable year. In applying this test, pension
trusts (and certain other tax-exempt stockholders) formerly were treated as
single individuals. Beginning in 1994, however, a qualified pension trust
generally has not been considered a single individual in evaluating a REIT's
ownership. Instead, beneficiaries of the pension trust are treated as holding
the pension trust's stock investment in the REIT in proportion to their
actuarial interests in the pension trust.
In general, a tax-exempt entity that is a stockholder of the Company will
not be subject to tax on distributions from the Company or gain realized on the
sale of shares. In Revenue Ruling 66-106, the IRS ruled that a REIT's
distributions to a tax-exempt employees' pension trust did not constitute
unrelated business taxable income. However, when the law was changed to relax
the stock ownership restrictions applicable to pension plan investors, a related
change was made for unrelated business income tax purposes. This provision
applies only if a REIT is a "Pension-Held REIT." In that case, those pension
trusts owning more than 10% of the value of the REIT's stock may be required to
report a portion of any dividends they receive from the REIT as unrelated
business taxable income. One aspect of the definition of a Pension-Held REIT
requires that either one pension trust must own more than 25% of the value of
the REIT's stock, or one or more pension trusts (each of which owns more than
10%) must own in the aggregate more than 50% of the value of the REIT's stock.
The Company does not believe that these provisions will cause its stockholders
that are pension trusts to receive dividends that will be considered unrelated
business taxable income. A tax-exempt entity, however, may be subject to the
unrelated business income tax on dividends from or gain on the Company's shares
to the extent that the tax-exempt entity financed the acquisition of its shares
with "acquisition indebtedness" within the meaning of the Code.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under Sections 501(c)(7), (9), (17) and (20) of the
Code, respectively, income from an investment in the Company will constitute
unrelated business taxable income unless the organization is able to deduct
amounts properly set aside or placed in reserve for certain purposes so as to
offset the unrelated business taxable income generated by the investment in the
Company. These investors must consult their own tax advisors concerning the "set
aside" and reserve requirements.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States income, gift and estate taxation of
foreign entities and individuals who are neither citizens nor residents of the
U.S. are complex. They depend not only upon U.S. tax principles, but also upon
the treaties, if any, between the U.S. and the countries of the foreign
investors. The following discussion is only a summary of certain U.S. federal
income tax considerations potentially affecting foreign stockholders of the
Company, who must consult with their own advisors to evaluate all relevant tax
considerations.
The character of distributions on the Company's shares generally will be
determined in the same fashion for foreign stockholders as for domestic
stockholders (that is, a distribution may be categorized as a taxable ordinary
income dividend paid out of the Company's current or accumulated earnings and
profits, a nontaxable return of capital, a distribution in excess of the
stockholder's basis that is taxable as gain from sale of the shares or a capital
gain dividend). See "-- Taxation of Taxable Domestic Stockholders."
If income or gain from the shares is effectively connected with a U.S.
trade or business conducted by a foreign stockholder ("effectively connected
income"), it generally will be subject to regular U.S. income taxes at graduated
rates rather than to the withholding tax described below. Foreign stockholders
whose income from the shares is effectively connected income may file an IRS
Form 4224 with the Company certifying to that effect. Such income may be subject
to the alternative minimum tax, and a special alternative minimum tax may apply
to nonresident alien individuals. Foreign corporate stockholders receiving
effectively connected income from the shares also may be subject to an
additional 30% branch profits tax, unless certain exemptions apply.
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Foreign stockholders whose income from the shares is not effectively
connected income generally will be subject to withholding at a 30% rate on
ordinary income dividends paid by the Company, unless an applicable tax treaty
reduces that rate. For this purpose, however, ordinary income distributions will
be presumed to represent dividends paid out of earnings and profits, rather than
nontaxable returns of capital or capital gains. If such a distribution is later
determined to have exceeded earnings and profits, an affected foreign
stockholder may claim a refund for excess withholdings.
Any distributions that are attributable to gain from the sale of United
States real property interests (whether or not specifically designated as
capital gain dividends) will be subject to the Foreign Investment in Real
Property Tax Act ("FIRPTA"). Under FIRPTA, those distributions will be treated
as gains that are effectively connected income and generally will be taxed at
regular U.S. capital gains tax rates. As a means of collecting this tax, the
Treasury Regulations require the Company to withhold 35% of any distributions to
foreign stockholders that the Company could designate as capital gains
dividends. If the amount of the FIRPTA withholding exceeds the applicable tax,
the foreign stockholder may obtain a refund.
Gain from the sale of shares generally will not be subject to U.S.
taxation. The sale of shares generally will not be subject to FIRPTA because the
Company should qualify as a "domestically-controlled REIT" (only a minority, if
any, of the Company's stockholders are expected to be foreign stockholders). If
any capital gain dividends or gains from the sale of shares constitute
effectively connected income, however, regular U.S. taxes may apply as described
above. If a nonresident alien stockholder is present in the U.S. for 183 days or
more during the year for which the gains are reportable and has a "tax home" in
the U.S., a 30% tax may apply to the capital gains.
Upon the death of a foreign individual stockholder, the stockholder's
shares will be treated as part of the stockholder's U.S. estate for purposes of
the U.S. estate tax, except as may be otherwise provided in an applicable estate
tax treaty.
POSSIBLE TAX LAW CHANGES
The anticipated income tax treatment described in this Prospectus may be
changed, perhaps retroactively, by legislative, administrative or judicial
action at any time. Congress at any time may consider changes to the tax laws,
and any such legislation may affect the treatment of real estate investments, in
general, or REITs in particular. For example, similar bills involving the tax
treatment of REITs were introduced in both the House of Representatives (H.R.
2121, introduced July 26, 1995) and the Senate (S. 1297, introduced September
29, 1995). The specific proposals generally are designed to make it easier for
taxpayers to comply with the highly-technical REIT rules. Similar provisions
were also included in the House version, but not the Senate or conference
agreement versions, of the Revenue Reconciliation Act of 1995 (H.R. 2491
approved by the House on October 26, 1995, and by the Senate on October 27,
1995, and vetoed by the President on December 6, 1995) and were recently
introduced in the House (H.R. 1150, introduced March 20, 1997) in the Real
Estate Investment Trust Simplification Act of 1997. The Clinton administration
has also proposed certain legislation that would require immediate recognition
of built-in gains of certain large C corporations (with a stock value in excess
of $5 million) that elect to be taxed as REITs (potentially applicable if a REIT
loses its REIT status and then seeks to requalify) or of large C corporations
the assets of which are acquired by REITs in tax-free transactions (effectively
repealing the ability to elect under IRS Notice 88-19 to report any such built-
in gains only to the extent that they are recognized when and if the appreciated
assets are sold during a ten-year period). No assurance can be given as to
whether these or any other changes to the REIT tax rules will be implemented, or
whether any changes that might take effect would adversely affect the Company's
ability to qualify as a REIT or the treatment of the Company's stockholders.
STATE AND LOCAL TAXES
The Company will be subject to the taxing jurisdiction of each state in
which it owns properties or otherwise engages in business. Stockholders also may
be subject to state or local taxes in various jurisdictions, including those in
which they reside or transact business. The state or local tax treatment may
differ from the federal income tax treatment described above. As a general
matter, however, stockholders receiving dividends from the Company are likely to
be taxable on those amounts only in their states of residence. Because of the
potential diversity of the state and local rules, this Prospectus does not
include a discussion of state or local taxation of the Company or the
stockholders, nor is any representation made as to the tax status of the Company
or the stockholders in any state or local jurisdiction. All stockholders must
consult their own tax advisors concerning the possible application of any state
or local tax laws.
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EXPERTS
The consolidated financial statements and related schedules of the Company
included in the Company's annual report on Form 10-K for the year ended December
31, 1996 incorporated by reference herein and in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, to the
extent and for the periods indicated in their reports, and have been
incorporated by reference herein and in the Registration Statement in reliance
upon the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the Common Stock to be issued upon the exercise of the
Merger Warrants will be passed upon for the Company by Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland. Certain legal matters described under "Federal
Income Tax Considerations" will be passed upon for the Company by Vinson &
Elkins L.L.P., Dallas, Texas.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN A PROSPECTUS
SUPPLEMENT IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. NEITHER THIS PROSPECTUS NOR ANY
PROSPECTUS SUPPLEMENT CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY SUCH
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY PROSPECTUS
SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY INFORMATION CONTAINED HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
PAGE
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Available Information ......................................... 2
Incorporation by Reference .................................... 2
The Company ................................................... 3
Risk Factors .................................................. 3
Use of Proceeds ............................................... 8
Description of Stock .......................................... 9
Description of Warrants ....................................... 14
Plan of Distribution .......................................... 15
Certain Provisions of Maryland Law and of
the Charter and Bylaws ...................................... 15
Federal Income Tax Considerations ............................. 19
Experts ....................................................... 27
Legal Matters ................................................. 27
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LOGO
Common Stock
PROSPECTUS
May 27, 1997
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