Filed pursuant to Rule 424(b)(3)
Registration No. 333-84876
PROSPECTUS
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TRIZEC PROPERTIES, INC.
10,000,000 SHARES OF COMMON STOCK
$0.01 Par Value
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Under this prospectus, Trizec Canada Inc., as a selling stockholder,
is offering and may from time to time sell up to 10,000,000 shares of our common
stock for the purpose of satisfying redemptions by Trizec Canada Inc.
shareholders of Trizec Canada Inc. shares from time to time. At its election,
Trizec Canada Inc. may satisfy these redemptions with shares of our common stock
or cash. We will pay all expenses in connection with any offering and sale. We
have not engaged an underwriter for this purpose. Our registration of our shares
of common stock does not mean that Trizec Canada Inc. will offer or sell any of
our shares.
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Our common stock is currently listed on the New York Stock Exchange
under the symbol "TRZ." The last reported sale price of our common stock, as
reported on the New York Stock Exchange on October 21, 2003, was $13.33 per
share.
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We impose certain restrictions on the ownership of our common stock so
that we can maintain our qualification as a domestically-controlled real estate
investment trust, or REIT. You should read the information under the heading
"Description of Capital Stock--Restrictions on Ownership of our Capital Stock"
in this prospectus for a description of those restrictions.
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Investing in shares of our common stock involves risks. See "Risk Factors"
beginning on page 3.
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You should read this prospectus, the documents that are incorporated
by reference in this prospectus and any prospectus supplement carefully before
you decide to invest. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of this
document.
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Neither the Securities and Exchange Commission nor any state
securities regulator has approved or disapproved of these securities or passed
upon the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
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The date of this prospectus is October 22, 2003.
TABLE OF CONTENTS
Page
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The Company....................................................................1
Risk Factors...................................................................3
About This Prospectus.........................................................16
Forward-Looking Statements....................................................16
Use of Proceeds...............................................................17
Policy with Respect to Certain Activities.....................................18
Selling Stockholder...........................................................21
Description of Capital Stock..................................................22
Certain Provisions of Delaware Law and the Company's
Certificate and Bylaws.....................................................32
Certain United States Federal Income Tax Considerations.......................34
Plan of Distribution..........................................................42
Legal Matters.................................................................42
Experts.......................................................................42
Reconciliation of Non-GAAP Financial Measures.................................42
Where You Can Find More Information...........................................44
Incorporation By Reference....................................................44
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any offer or sale of
our common stock.
In this prospectus, the terms "we," "us," "our" and "our company"
refer to Trizec Properties, Inc. and its consolidated subsidiaries. For purposes
of this prospectus, the subsidiaries of a person include all entities that such
person controls.
i
THE COMPANY
Overview
We are one of the largest fully integrated, self-managed, publicly
traded real estate investment trusts, or REITs, in the United States. At June
30, 2003, we had total assets of $5.4 billion and owned interests in or managed
69 U.S. office properties containing approximately 47.9 million square feet,
with our pro rata ownership interest totaling approximately 41.2 million square
feet. Our office properties are concentrated in seven core markets in the United
States located in the following major metropolitan areas: Atlanta, Chicago,
Dallas, Houston, Los Angeles, New York and Washington, D.C.
We were originally incorporated as Trizec (USA) Holdings, Inc. in
Delaware on October 25, 1989. We changed our name to TrizecHahn (USA)
Corporation in 1996 and to Trizec Properties, Inc. in 2002.
The Corporate Reorganization
On May 8, 2002, a plan of arrangement implementing a corporate
reorganization of TrizecHahn Corporation, our former parent company, became
effective. As a result of this reorganization, we became a publicly traded REIT
and own all of the U.S. assets that TrizecHahn Corporation owned, directly or
indirectly, prior to the corporate organization. Also pursuant to this corporate
reorganization, TrizecHahn Corporation became an indirect, wholly owned
subsidiary of Trizec Canada Inc., a company incorporated under the Canada
Business Corporations Act.
The corporate reorganization was designed to create a publicly traded
REIT while reducing withholding tax liabilities and minimizing the recognition
of potential tax liabilities on unrealized appreciation in value that were
present in TrizecHahn Corporation's ownership structure prior to the
reorganization. The corporate reorganization was also intended to create
economic equivalence between shares of our common stock and Trizec Canada Inc.
subordinate voting shares or multiple voting shares.
The reorganization was implemented pursuant to a plan of arrangement
that was approved by the Ontario Superior Court of Justice and TrizecHahn
Corporation's shareholders. Upon implementation of the plan of arrangement,
holders of TrizecHahn Corporation's subordinate voting shares exchanged their
shares on a one-for-one basis for shares of our common stock; exchange
certificates representing underlying shares of our common stock; and/or Trizec
Canada subordinate voting shares.
The exchange certificates were exchangeable for our common stock on a
one-for-one basis during a three-month exchange period. At the end of that
exchange period, all exchange certificates that remained outstanding expired,
and the shares of common stock underlying those exchange certificates were sold
on the open market to qualifying U.S. persons. As a result, approximately 60% of
our common stock is owned primarily by qualifying U.S. persons. The remaining
approximately 40% of our common stock is owned indirectly by Trizec Canada
through its subsidiaries, with the result that Trizec Canada indirectly holds
one share of our common stock for each outstanding Trizec Canada subordinate
voting share.
In addition to owning shares of our common stock, Trizec Canada,
indirectly through its subsidiaries, owns all shares of our Class F convertible
stock and special voting stock. Trizec Canada's indirect ownership of our Class
F convertible stock and special voting stock is intended to maintain the
economic equivalence described above. The Class F convertible stock is
convertible into our common stock in certain tax-related circumstances so that
Trizec Canada and its subsidiaries, on the one hand, and our other stockholders,
on the other hand, may share ratably certain future taxes that TrizecHahn
Corporation, Trizec Canada or their subsidiaries may incur in those specified
circumstances. In addition, Trizec Canada will receive, directly or indirectly,
dividends on our special voting stock to address certain non-Canadian tax
liabilities of Trizec Canada's indirect, wholly-owned Hungarian subsidiary and
its direct and indirect shareholders. These dividends, when aggregated with
dividends received by the Hungarian subsidiary on our common stock and after
deducting related non-Canadian taxes, will equal the dividends received by our
U.S. stockholders on our common stock on a per share basis. Dividends on our
special voting stock will be payable only in connection with common stock
dividends paid within 66 months after the corporate reorganization.
1
Our special voting stock also entitles its holder to votes that, when
aggregated with votes of shares of common stock held by Trizec Canada or its
subsidiaries, represent a majority of the votes in elections of our board of
directors. As a result of the special voting right, provided that Trizec Canada
holds at least 5% of our common stock, Trizec Canada and its majority
shareholder will have voting control over the election of our directors, even
though Trizec Canada will not own a majority of our common stock. This special
voting right will expire on January 1, 2008.
Also under the plan of arrangement, all outstanding stock options of
TrizecHahn Corporation were cancelled and exchanged for either (1) options to
purchase our common stock, (2) warrants to purchase our common stock or (3)
options to purchase Trizec Canada subordinate voting shares. Consistent with the
one-for-one exchange ratio, the intrinsic value of each of our options or
warrants or each Trizec Canada option immediately after the corporate
reorganization was substantially the same as the intrinsic value of the replaced
TrizecHahn Corporation option immediately prior to the corporate reorganization.
By intrinsic value, we mean the then current market value of the shares subject
to the option or warrant less the exercise price.
Additionally, to preserve the economic equivalence between one share
of our common stock and one Trizec Canada subordinate voting share, Trizec
Canada holds warrants to purchase one share of our common stock for each Trizec
Canada option issued in the corporate reorganization. All warrants to purchase
our shares have a fixed term that is not contingent on continued service with us
or Trizec Canada as an employee, officer or director. The warrants are freely
transferable and fully vested and exercisable.
For more information about the reorganization, please see "Item
1--Business--The Corporate Reorganization" in our Annual Report on Form 10-K,
filed on March 27, 2003.
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Our principal executive offices are located at 233 South Wacker Drive,
46th Floor, Chicago, Illinois 60606 and our telephone number at that address is
(312) 798-6000.
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RISK FACTORS
You should carefully consider the risks described below. These risks
are not the only ones that our company may face. Additional risks not presently
known to us or that we currently consider immaterial may also impair our
business operations and hinder our ability to make expected distributions to our
stockholders.
This prospectus also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below or elsewhere in this prospectus.
Risks Relating To Our Business
Our economic performance and the value of our real estate assets are subject to
the risks incidental to the ownership and operation of real estate properties.
Our economic performance, the value of our real estate assets and,
therefore, the value of your investment are subject to the risks normally
associated with the ownership and operation of real estate properties, including
but not limited to:
o changes in the general and local economic climate;
o the cyclical nature of the real estate industry and possible
oversupply of, or reduced demand for, space in our core markets;
o trends in the retail industry, in employment levels and in
consumer spending patterns;
o changes in interest rates and the availability of financing;
o competition from other properties;
o further declines in the overall economic activity in our core
markets;
o changes in market rental rates and our ability to rent space on
favorable terms;
o the bankruptcy, insolvency or credit deterioration of our
tenants;
o the need to periodically renovate, repair and re-lease space and
the costs thereof;
o increases in maintenance, insurance and operating costs;
o civil unrest, acts of terrorism, earthquakes and other natural
disasters or acts of God that may result in uninsured losses;
o the attractiveness of our properties to tenants; and
o changes in the availability and affordability of insurance on
commercially reasonable terms, in levels of coverage for our real
estate assets and in exclusions from insurance policies for our
real estate assets.
In addition, applicable federal, state and local regulations, zoning
and tax laws and potential liability under environmental and other laws may
affect real estate values. Real estate investments are relatively illiquid and,
therefore, our ability to vary our portfolio quickly in response to changes in
economic or other conditions is limited. Further, we must make significant
expenditures, including property taxes, maintenance costs, mortgage payments,
insurance costs and related charges, throughout the period that we own real
property regardless of whether the property is producing any income. The risks
associated with real estate investments may adversely affect our operating
results and financial position, and, therefore, may adversely affect the amount
of our dividends or our ability to pay those dividends.
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Our inability to enter into renewal or new leases on favorable terms for all or
a substantial portion of space that is subject to expiring leases would
adversely affect our cash flows and operating results.
Scheduled lease expirations in our U.S. office portfolio over the next
five years average approximately 9.9% annually, based on owned space at June 30,
2003. When leases for our properties expire, we may be unable to promptly renew
leases with existing tenants or lease the properties to new tenants. In
addition, even if we were able to enter into renewal or new leases in a timely
manner, the terms of those leases may be less favorable to us than the terms of
expiring leases because:
o the rental rates of the renewal or new leases may be
significantly lower than those of the expiring leases; or
o tenant installation costs, including the cost of required
renovations or concessions to tenants, may be significant.
We expect significant lease expirations in the remainder of 2003 among
our office properties in Dallas, Houston and the Washington, D.C. area. In order
to enter into renewal or new leases for large blocks of space in these markets,
we may incur substantial tenant installation costs. If we are unable to enter
into renewal or new leases on favorable terms for all or a substantial portion
of space that is subject to expiring leases, our cash flows and operating
results would suffer, which could reduce the amount of our dividends.
If a significant number of our tenants defaulted or sought bankruptcy
protection, our cash flows and operating results would suffer.
A tenant may experience a downturn in its business, which could cause
the loss of that tenant or weaken its financial condition and result in the
tenant's inability to make rental payments when due. In addition, a tenant of
any of our properties may seek the protection of bankruptcy, insolvency or
similar laws, which could result in the rejection and termination of such
tenant's lease and cause a reduction in our cash flows. Although we have not
experienced material losses from tenant bankruptcies, we cannot assure you that
tenants will not file for bankruptcy or similar protection in the future
resulting in material losses.
We cannot evict a tenant solely because of its bankruptcy. A court,
however, may authorize a tenant to reject and terminate its lease with us. In
such a case, our claim against the tenant for unpaid, future rent would be
subject to a statutory cap that might be substantially less than the remaining
rent owed under the lease. In any event, it is unlikely that a bankrupt tenant
will pay in full amounts it owes us under a lease. The loss of rental payments
from tenants and costs of re-leasing would adversely affect our cash flows and
operating results, thereby reducing the amount of our dividends.
Our business is substantially dependent on the economic climates of seven core
markets.
Our real estate portfolio consists mainly of office properties in
seven core markets, located in the following major metropolitan areas: Atlanta,
Chicago, Dallas, Houston, Los Angeles, New York and Washington, D.C. As a
result, our business is substantially dependent on the economies of these
markets. As a result of the current slowdown in economic activity, there has
been an increase in vacancy rates for office properties in all of these markets.
A continuing, prolonged downturn in the economies of these core markets, or the
impact that a downturn in the overall national economy may have upon these
economies, could result in further reduced demand for office space. Although we
believe that our real estate portfolio is significantly diversified, a material
downturn in demand for office space in any one of our core markets could have a
material impact on our ability to lease the office space in our portfolio and
may adversely impact our cash flows, operating results and the amount of our
dividends.
We may be unable to complete the disposition of our non-core
retail/entertainment properties on a timely basis or on acceptable terms.
We are currently completing the stabilization of two
retail/entertainment centers: Hollywood & Highland in Los Angeles, California,
and Desert Passage in Las Vegas, Nevada. We plan to hold both of these projects
until we
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determine that we can realize an acceptable level of value upon disposition. A
number of factors may impair our ability to dispose of these properties on a
timely basis or on acceptable terms, including:
o physical characteristics, mixes of tenants and uses, required
operating resources and expertise and "anchor" tenants or other
attributes that might not be considered typical for a
retail/entertainment complex;
o the relatively large size and value of the assets;
o their relatively short operating histories;
o the requirements of, and dependence of the relevant project on,
contractual and working relationships with key tenants,
operators, government authorities and other third parties;
o the co-tenancy requirements in certain leases, which could
negatively impact occupancy levels;
o the limited number of parties with the strategic interest and
financial capability to be potential buyers of these properties;
o competition for tenants or customers from other projects or
destinations; and
o fluctuating and seasonal demands of business travelers and
tourism, and economic conditions that may affect the demand for
travel in general.
In addition, the unaffiliated owners of the Aladdin Hotel and Casino,
which adjoins Desert Passage, filed for Chapter 11 reorganization under the U.S.
Bankruptcy Code in September 2001. On August 28, 2003, the Bankruptcy Court
approved Aladdin's Plan for Reorganization. The plan is contingent upon the
purchaser of Aladdin's assets obtaining various permits, including (without
limitation) a gaming license. However, the existence of the pending bankruptcy
could adversely affect our ability to sell Desert Passage by:
o impairing the public perception and interest of potential
patrons, tenants and purchasers in Desert Passage as a result of
the perceived association with the Aladdin;
o limiting or delaying our collection or enforcement of amounts or
obligations owed to us by the Aladdin; and
o complicating or delaying the removal of liens potentially
affecting Desert Passage.
The bankruptcy of the Aladdin may have a negative impact on the
property operating income of Desert Passage while we hold it for disposition,
which could adversely affect our operating results.
We may have difficulty selling our properties, which may limit our flexibility.
Large and high quality office properties like the ones that we own can
be difficult to sell, especially if local market conditions are poor. This may
limit our ability to change our portfolio promptly in response to changes in
economic or other conditions. In addition, federal tax laws impact our decisions
to sell properties that we have owned for fewer than four years, and this may
affect our ability to sell properties without adversely affecting returns to our
stockholders. Even if we do sell our properties, we may choose to acquire
additional properties within a certain time-frame to avoid adverse tax
consequences and take advantage of tax-free exchange provisions. These
restrictions reduce our ability to respond to changes in the performance of our
investments and could adversely affect our financial condition and results of
operations.
The impact of September 2001 terrorist attacks and the continuing threat of
terrorism may adversely affect operating results from our properties, as well as
our ability to sell properties that we are holding for disposition on a timely
basis or on acceptable terms.
The September 2001 terrorist attacks and the ongoing threat of
terrorism have had an adverse affect on the U.S. economy and, in particular, the
economies of the U.S. cities that comprise our core markets. The fear of
terrorist attacks has particularly impacted the tourism industry, upon which
many of our core markets, as well as our two retail/entertainment properties,
rely for a significant portion of their income. This economic impact could
5
adversely affect our operating results by reducing the number of tenants or the
financial capacity of tenants in our office properties, as well as by reducing
the number of guests and patrons at our retail/entertainment properties.
Our portfolio is concentrated in large metropolitan areas, some of
which have been or may be perceived to be subject to terrorist attacks.
Furthermore, many of our properties consist of high-rise buildings, which may
also be subject to this actual or perceived threat, which could be heightened in
the event that the U.S. engages in armed conflict. This could have a material
adverse affect on our ability to lease the office space in our portfolio.
Furthermore, the implementation of increased security measures at our properties
increases property costs, which we may not be able to fully pass on to tenants.
Each of these factors would have a material adverse impact on our operating
results and cash flow, as well as the amount of our dividends.
Our financial covenants could adversely affect our financial condition and
results of operations.
The financings secured by our properties contain customary covenants
such as those that limit our ability, without the prior consent of the lender,
to further mortgage the applicable property or to discontinue insurance
coverage. In addition, our secured revolving credit facility contains certain
customary restrictions, requirements and other limitations on our ability to
incur indebtedness, including debt ratios that we are required to maintain.
We expect to rely on borrowings under this credit facility for working
capital, liquidity, funds for dividends and to finance potential future
acquisition and development activities. Our ability to borrow under our credit
facility is subject to compliance with our financial and other covenants. If we
are unable to borrow under our credit facility, or to refinance existing
indebtedness, our financial condition and results of operations would likely be
adversely impacted. If we breach covenants in a debt agreement, the lender can
declare a default and require us to repay the debt immediately and, if the debt
is secured, can take possession of the property securing the loan. In addition,
some of our financings may be cross-defaulted or cross-accelerated to our other
indebtedness. A cross-default or cross-acceleration may give the lenders under
those financings the right also to declare a default or accelerate payment of
the loan.
Our degree of leverage may adversely affect our business and the market price of
our common stock.
At June 30, 2003, our leverage, which we define as the ratio of our
mortgage debt and other loans to the sum of mortgage debt and other loans and
the book value of stockholders' equity, was approximately 63%.
Our degree of leverage could adversely affect our ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
developments or other general corporate purposes. Our degree of leverage could
also make us more vulnerable to a downturn in our business or the economy
generally. We do not currently have a policy limiting our degree of leverage,
nor do our organizational documents contain such limits. We have entered into
certain financial agreements that contain financial and operating covenants
limiting our ability under certain circumstances to incur additional
indebtedness. There is also a risk that a significant increase in the ratio of
our indebtedness to the measures of asset value used by financial analysts may
have an adverse effect on the market price of our common stock.
Compliance with our tax cooperation agreement with Trizec Canada may limit our
flexibility in making real estate investments and conducting our business.
In connection with the corporate reorganization, we entered into a tax
cooperation agreement with TrizecHahn Office Properties Ltd., a wholly-owned,
Canadian subsidiary of TrizecHahn Corporation. Under the agreement, we have
agreed to continue to conduct our business activities with regard to the
consequences under Canadian tax legislation to TrizecHahn Office Properties
Ltd., related Canadian corporations and Trizec Canada Compliance with this
agreement may require us to conduct our business in a manner that may not always
be the most efficient or effective because of potential adverse Canadian tax
consequences. Furthermore, we may incur incremental costs due to the need to
reimburse these entities for any negative tax consequences.
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Our historical financial information may not be representative of our financial
position, operating results and cash flows as a separate company.
Our combined consolidated financial statements for periods prior to
the effective date of the corporate reorganization have been carved out from the
consolidated financial statements of TrizecHahn Corporation using the historical
operating results and historical bases of the assets and liabilities of the
businesses that we comprise. Accordingly, the historical financial information
that we have included in this prospectus does not necessarily reflect what our
financial position, operating results and cash flows would have been had we been
a separate, stand-alone public entity during all of the periods presented.
Prior to the effective date of the corporate reorganization,
TrizecHahn Corporation accounted for us as, and we operated as, a separate,
stand-alone entity. Our costs and expenses include payments made to TrizecHahn
Corporation for direct reimbursement of third-party purchased services and a
portion of salaries, for certain employees, for direct services rendered. We
consider these charges to be reasonable reflections of the use of services
provided to us for the benefit that we received.
Our historical financial information is not necessarily indicative of
what our operating results, financial position and cash flows will be in the
future. We have not made adjustments to our historical financial information to
reflect changes that have occurred in our cost structure as a result of the
corporate reorganization, including increased costs associated with being a
publicly traded, stand-alone company. These incremental costs included, but are
not limited to, additional senior management compensation expense to supplement
the existing management team, and internal and external public company corporate
compliance costs.
If we are unable to manage our interest rate risk effectively, our cash flows
and operating results may suffer.
At June 30, 2003 we had approximately $923 million of debt outstanding
that is subject to variable interest rates, and we may incur additional debt
that bears interest at variable rates. Accordingly, if interest rates increase,
our debt costs will also increase. To manage our overall interest rate risk, we
enter into fixed rate loans and floating rate loans. We also enter into interest
rate protection agreements consisting of swap contracts and cap contracts in
order to mitigate the effect of increasing rates on a portion of our floating
rate debt. Developing an effective interest rate strategy, however, is complex,
and no strategy can completely insulate us from the risks associated with
interest rate fluctuations. Despite our hedging activities, we cannot assure you
that we will be able to manage our interest rate risk effectively or that our
variable rate exposure will not have a material adverse effect on our cash
flows, operating results and cash available for distribution. Furthermore, our
interest rate hedging arrangements may expose us to additional risks, including
additional costs, such as transaction fees or breakage costs, or requirements to
post collateral for hedges that may have decreased in value since execution.
Although our interest rate risk management policy establishes minimum credit
ratings for counterparties, this does not eliminate the risk that a counterparty
may fail to honor its obligations. We cannot assure you that our hedging
activities will have the desired beneficial impact on our results of operations
or financial condition.
Our insurance may not cover some potential losses or may not be obtainable at
commercially reasonable rates, which could adversely affect our financial
condition and results of operations.
We carry insurance on our properties of types and in amounts that we
believe are in line with coverage customarily obtained by owners of similar
properties. We believe all of our properties are adequately insured. The
property insurance that we maintain has historically been on an "all risk"
basis, which until 2003 included losses caused by acts of terrorism. Following
the terrorist activity of September 11, 2001 and the resulting uncertainty in
the insurance market, insurance companies generally excluded insurance against
acts of terrorism from their "all risk" policies. As a result, our "all risk"
insurance coverage currently contains specific exclusions for losses
attributable to acts of terrorism. In light of this development, for 2003 we
purchased stand-alone terrorism insurance on a portfolio-wide basis with annual
aggregate limits that we consider commercially reasonable, considering the
availability and cost of such coverage. Our current terrorism coverage carries
an aggregate limit of $250 million on a portfolio-wide basis. Since the limit
with respect to our portfolio may be less than the value of the affected
properties, terrorist acts could result in property damage in excess of our
current coverage, which could result in significant losses to our company due to
the loss of revenues from the impacted property and the capital we would
7
have to invest in that property. Any such circumstance could have a material
adverse effect on our financial condition and results of operations.
The federal Terrorism Risk Insurance Act, enacted in November 2002,
requires regulated insurers to make available coverage for certified acts of
terrorism (as defined by the statute) under property insurance policies, but we
cannot currently anticipate whether the scope and cost of such coverage will
compare favorably to stand-alone terrorism insurance, and thus whether it will
be commercially reasonable for us to change our coverage for acts of terrorism
going forward.
Some of our lenders have taken or may take the position that our
insurance coverage against acts of terrorism no longer complies with covenants
in our debt agreements. Our lenders may also object to other technical
provisions of our insurance coverage. If a lender takes the position that our
insurance coverage is not in compliance with covenants in a debt agreement, we
could be deemed to be in default under the agreement. Alternately, we may be
required to obtain additional insurance to comply with the covenants. While we
have received notices to the effect that our insurance coverage may not comply
with loan covenants, we have reviewed our coverage and the loan documents and
believe that we comply with those documents and adequately protect the lenders'
interests. We have initiated discussions with these lenders and will do so with
any others who take a similar position to satisfy their concerns and assure that
their interests and ours are adequately protected. To the extent that we are
unable to pass the costs of any additional insurance on to tenants, these costs
may have an adverse affect on our cash flows and, therefore, on the amount of
our dividends. If we do pass the additional costs on to tenants, the resulting
increased rents may adversely affect the marketability of leased space in our
properties. Additionally, in the future our ability to obtain debt financing, or
the terms of such financing, may be adversely affected if lenders insist upon
additional requirements or greater insurance coverage against acts of terrorism
than may be available to us in the marketplace at rates or on terms that are
commercially reasonable.
We will continue to monitor the state of the insurance market, but we
do not currently expect that coverage for acts of terrorism on terms comparable
to pre-2002 policies will become available on commercially reasonable terms.
We carry earthquake insurance on our properties located in areas known
to be subject to earthquakes in an amount and subject to deductibles that we
believe are commercially reasonable. However, the amount of our earthquake
insurance coverage may not be sufficient to cover losses from earthquakes. As a
result of increased costs of coverage and decreased availability, the amounts of
the third party earthquake insurance we may be able to purchase on commercially
reasonable terms may be reduced. In addition, we may discontinue earthquake
insurance on some or all of our properties in the future if the premiums exceed
our estimation of the value of the coverage.
There are other types of losses, such as from wars, acts of
bio-terrorism or the presence of mold at our properties, for which we cannot
obtain insurance at all or at a reasonable cost. With respect to such losses and
losses from acts of terrorism, earthquakes or other catastrophic events, if we
experience a loss that is uninsured or that exceeds policy limits, we could lose
the capital invested in the damaged properties, as well as the anticipated
future revenues from those properties. Depending on the specific circumstances
of each affected property, it is possible that we could be liable for mortgage
indebtedness or other obligations related to the property. Any such loss could
materially and adversely affect our business and financial condition and results
of operations.
Additionally, although we generally obtain owner's title insurance
policies with respect to our properties, the amount of coverage under such
policies may be less than the full value of such properties. If a loss occurs
resulting from a title defect with respect to a property where there is no title
insurance or the loss is in excess of insured limits, we could lose all or part
of our investment in, and anticipated income and cash flows from, that property.
Fixed real estate costs may intensify revenue losses when income from our
properties decreases.
Our financial results depend primarily on leasing space in our office
properties to tenants on terms favorable to us. Costs associated with real
estate investment, such as real estate taxes and maintenance and other operating
costs, generally do not decrease even when a property is not fully occupied, or
the rate of retail sales at a project decreases, or other circumstances cause a
reduction in income from the property. Cash flow and income
8
from the operations of our properties may be reduced if a tenant does not pay
its rent. Under those circumstances, we might not be able to enforce our rights
as landlord without delays, we may be unable to re-lease properties on favorable
terms and we might incur substantial legal costs. Additionally, new properties
that we may acquire or develop may not produce significant revenue immediately,
and the cash flow from existing operations may be insufficient to pay the
operating expenses and debt service associated with that property until the
property is fully leased. Each of these circumstances can further reduce cash
flows and operating results by requiring us to expend capital to cover our fixed
real estate costs, thereby reducing the amount of our dividends.
Our competitors may adversely affect our ability to lease our properties, which
may cause our cash flows and operating results to suffer.
We face significant competition from developers, managers and owners of
office, retail and mixed-use properties in seeking tenants for our properties.
Substantially all of our properties face competition from similar properties in
the same markets. These competing properties may have vacancy rates higher than
our properties, which may result in their owners being willing to make space
available at lower prices than the space in our properties, particularly if
there is an oversupply of space available in the market. Competition for tenants
could have a material adverse effect on our ability to lease our properties and
on the rents that we may charge or concessions that we must grant. If our
competitors adversely impact our ability to lease our properties, our cash flows
and operating results may suffer, and consequently we may reduce the amount of
our dividends.
We face risks associated with property acquisitions.
Assuming we are able to obtain capital on commercially reasonable
terms, and that market conditions warrant it, we may acquire new office
properties. Competition from other well-capitalized real estate investors,
including both publicly traded real estate investment trusts and institutional
investment funds, may significantly increase the purchase price or prevent us
from acquiring a desired property. We may be unable to finance acquisitions on
favorable terms, or newly acquired properties may fail to perform as expected.
We may underestimate the costs necessary to bring an acquired property up to
standards established for its intended market position or may be unable to
quickly and efficiently integrate new acquisitions into our existing operations.
We may also acquire properties subject to liabilities and without any recourse,
or with only limited recourse, with respect to unknown liabilities. Each of
these factors could have an adverse affect on our results of operations and
financial condition.
Because we must distribute a substantial portion of our net income to qualify as
a REIT, we may be dependent on third-party sources of capital to fund our future
capital needs.
To qualify as a REIT, we generally must distribute to our stockholders
at least 90% of our net taxable income each year, excluding capital gains.
Because of this distribution requirement, it is not likely that we will be able
to fund all of our future capital needs, including capital for property
acquisitions and developments, from our net income. Therefore, we may have to
rely on third-party sources of capital, which may not be available on favorable
terms or at all. Our access to third-party sources of capital depends on a
number of things, including the market's perception of our growth potential and
our current and potential future earnings. Moreover, additional debt financings
may further increase our leverage.
We face risks associated with the use of debt to finance our business, including
refinancing risk.
We incur debt in the ordinary course of our business. We expect that
we will repay prior to maturity only a small portion of the principal of our
debt. We therefore plan to meet our maturing debt obligations partly with
existing cash and available credit, cash flows from operations and sales of
non-core assets, but primarily through the refinancing of maturing debt
obligations with other debt. We are subject to risks normally associated with
debt financing, and our ability to refinance our debt will depend on:
o our financial position;
o the estimated cash flow of our properties;
9
o the value of our properties;
o liquidity in the debt markets;
o the availability on commercially acceptable terms of insurance
coverage required by lenders;
o general economic and real estate market conditions; and
o financial, competitive, business and other factors, including
factors beyond our control.
We cannot assure you that any refinancing of debt with other debt will
be possible on terms that are favorable or acceptable to us. If we cannot
refinance, extend or pay principal payments due at maturity with the proceeds of
other capital transactions, such as new equity capital, our cash flows will not
be sufficient in all years to repay debt as it matures.
Restrictions in loan agreements may limit the distributions we receive from our
operating subsidiaries and the amounts available for distributions to you as
dividends on our common stock.
We conduct our operations through operating subsidiaries. We and some
of our subsidiaries, including subsidiaries that carry on a substantial part of
our overall business, are parties to loan agreements containing provisions that
require the maintenance of financial ratios and impose limitations on additional
indebtedness and distributions in respect of capital stock. These provisions may
limit the amount and flexibility of our current and future financings, the
receipt of cash distributions from some of our subsidiaries and, therefore, the
amounts that will be available for distributions to you as dividends on our
common stock. In addition, to qualify as a REIT, we generally must distribute to
our stockholders at least 90% of our net taxable income each year, excluding
capital gains. The provisions in loan agreements discussed above may impair our
ability to make the requisite distributions to our stockholders and may force us
to borrow funds on a short-term basis to meet the distribution requirements. We
cannot assure you that we will be able to borrow funds on terms that are
favorable to us.
Our success depends on key personnel whose continued service is not guaranteed.
We depend on the efforts of executive officers and other key
personnel, particularly Timothy H. Callahan, our President and Chief Executive
Officer. Among the reasons that they are important to our success is that each
has a national reputation which attracts business and investment opportunities
and assists us in negotiations with lenders. Our regional executive officers
also have strong regional reputations. Their reputations aid us in identifying
opportunities, having opportunities brought to us, and negotiating with tenants
and build-to-suit prospects. While we believe we could find replacements for
these key personnel, the loss of their services could adversely impact our
relationships with potential tenants, lenders and industry personnel.
Environmental problems at our properties are possible and may be costly.
We are subject to various federal, state and local laws and
regulations relating to environmental matters. Under these laws, we are exposed
to liability primarily as an owner or operator of real property and, as such, we
may be responsible for the cleanup or other remediation of contaminated
property, which could result in substantial costs that could adversely affect
our operating results and cash flow.
We believe that our exposure to environmental liabilities under
currently applicable laws is not material. We cannot assure you, however, that
we currently know of all circumstances that may give rise to such exposure.
Furthermore, environmental laws and regulations can change rapidly, and we may
become subject to more stringent environmental laws and regulations in the
future. Compliance with more stringent environmental laws and regulations could
have a material adverse effect on our operating results or financial condition.
If we were required to accelerate our efforts to comply with the Americans with
Disabilities Act, our cash flows and operating results could suffer.
All of our properties must comply with the Americans with Disabilities
Act, or the ADA. The ADA has separate compliance requirements for "public
accommodations" and "commercial facilities", but generally requires
10
that buildings be made accessible to people with disabilities. Compliance with
ADA requirements could require us to remove access barriers, and non-compliance
could result in the imposition of fines by the U.S. government or an award of
damages to private litigants. We believe that the costs of compliance with the
ADA will not have a material adverse effect on our cash flows or operating
results. However, if we must make changes to our properties on a more
accelerated basis than we anticipate, or if we are required to make substantial
alterations or capital expenditures in any of our properties, our cash flows and
operating results could suffer.
Additional regulations applicable to our properties could require us to make
substantial expenditures to ensure compliance, which could adversely affect our
cash flows and operating results.
Our properties are, and properties that we may acquire in the future
will be, subject to various federal, state and local regulatory requirements
such as local building codes and other similar regulations. If we fail to comply
with these requirements, governmental authorities may impose fines on us or
private litigants may be awarded damages against us.
We believe that our properties are currently in substantial compliance
with all applicable regulatory requirements. New regulations or changes in
existing regulations applicable to our properties, however, may require us to
make substantial expenditures to ensure regulatory compliance, which would
adversely affect our cash flows and operating results.
We do not have sole control over the properties that we hold with co-venturers
or partners or over the revenues and certain decisions associated with those
properties, which may limit our flexibility with respect to these investments.
We participate in seven office and two retail joint ventures or
partnerships. The office properties that we own through joint ventures or
partnerships total approximately 5.8 million square feet, with our ownership
interest totaling approximately 2.9 million square feet. A joint venture or
partnership involves risks, including the risk that a co-venturer or partner:
o may have economic or business interests or goals that are
inconsistent with our economic or business interests or goals;
o may take actions contrary to our instructions or requests, or
contrary to our policies or objectives with respect to our real
estate investments;
o may have to give its consent with respect to certain major
decisions, including the decision to distribute cash, refinance a
property or sell a property; and
o may become bankrupt, limiting its ability to meet calls for
capital contributions and potentially making it more difficult to
refinance or sell the property.
We do not have sole control of certain major decisions relating to the
properties that we own through joint ventures, including decisions relating to:
o the sale of the properties;
o refinancing;
o timing and amount of distributions of cash from such properties
to us;
o capital improvements; and
o calling for capital contributions.
In some instances, although we are the property manager for a joint
venture, the other joint venturer retains approval rights over specific leases
or our leasing plan. In addition, the sale or transfer of interests in some of
our joint ventures and partnerships is subject to rights of first refusal or
first offer and some joint venture and partnership agreements provide for
buy-sell or similar arrangements. Such rights may be triggered at a time when we
may not
11
want to sell but may be forced to do so because we may not have the financial
resources at that time to purchase the other party's interest. Such rights may
also inhibit our ability to sell our interest in a property or a joint venture
or partnership within our desired time frame or on any other desired basis.
Our failure to qualify as a REIT would decrease the funds available for
distribution to our stockholders and adversely affect the market price of our
common stock.
If we fail to qualify for taxation as a REIT in any taxable year, we
will face serious tax consequences that will substantially reduce the funds
available for dividend distributions due to the following reasons:
o we will be subject to tax on our taxable income at regular
corporate rates;
o we will not be able to deduct, and will not be required to make,
distributions to stockholders in any year in which we fail to
qualify as a REIT;
o we could be subject to federal alternative minimum tax or
increased state and local taxes; and
o unless we are entitled to relief under specific statutory
provisions, we will be disqualified from taxation as a REIT for
the four taxable years following the year during which we lost
our qualification.
In addition, failing to qualify as a REIT could impair our ability to
raise capital and expand our business, and could adversely affect the market
price of our common stock.
Determination of REIT status is highly technical and complex. Even a
technical or inadvertent mistake could endanger our REIT status. The
determination that we qualify as a REIT requires an analysis of various factual
matters and circumstances that may not be within our control. For example, the
Internal Revenue Service, or IRS, could change tax laws and regulations or the
courts may issue new rulings that make it impossible for us to maintain REIT
status. We do not believe that any pending or proposed law changes could change
our REIT status. We cannot guarantee, however, that we will continue to be
qualified and taxed as a REIT because our qualification and taxation as a REIT
will depend upon our ability to meet the requirements imposed under the Internal
Revenue Code of 1986, as amended, on an ongoing basis.
In order to maintain our status as a REIT, we may be forced to borrow funds
during unfavorable market conditions.
To qualify as a REIT, we generally must distribute to our stockholders
at least 90% of our net taxable income each year, excluding capital gains. This
requirement limits our ability to accumulate capital. We may not have sufficient
cash or other liquid assets to meet REIT distribution requirements. As a result,
we may need to incur debt to fund required distributions when prevailing market
conditions are not favorable. Difficulties in meeting distribution requirements
may arise as a result of:
o differences in timing between when we must recognize income for
U.S. federal income tax purposes and when we actually receive
income;
o the effect of non-deductible capital expenditures;
o the creation of reserves; or
o required debt or amortization payments.
If we are unable to borrow funds on favorable terms, our ability to
make distributions to our stockholders and our ability to qualify as a REIT may
suffer.
12
Risks Relating To Our Capital Stock
An ownership limitation in our certificate of incorporation may adversely affect
the market price of our common stock.
Our certificate of incorporation contains an ownership limitation that
is designed to enable us to qualify as a "domestically-controlled REIT" within
the meaning of Section 897(h)(4)(B) of the Internal Revenue Code of 1986, as
amended. This limitation restricts any person that is not a qualifying U.S.
person from beneficially owning our capital stock if that person's holdings,
when aggregated with shares of our capital stock beneficially owned by all other
persons that are not qualifying U.S. persons, would exceed 45% by value of our
issued and outstanding capital stock.
As a result of our enforcement of this ownership limitation, persons
other than qualifying U.S. persons are effectively excluded from the market for
our common stock. The inability of holders of our common stock to sell their
shares to persons other than qualifying U.S. persons, or the perception of this
inability, may adversely affect the market price of our common stock.
Higher market interest rates may adversely affect the market price of our common
stock.
One of the factors that investors may consider important in deciding
whether to buy or sell shares of a REIT is the dividend with respect to such
REIT's shares as a percentage of the price of those shares, relative to market
interest rates. If market interest rates go up, prospective purchasers of shares
of our common stock may require a higher yield on our common stock. Higher
market interest rates would not, however, result in more funds for us to
distribute and, to the contrary, would likely increase our borrowing costs and
potentially decrease funds available for distribution. Thus, higher market
interest rates could adversely affect the market price of our common stock.
P.M. Capital Inc., a corporation controlled by Peter Munk, maintains an
ownership interest in Trizec Canada by which Mr. Munk will control the election
of members of our board of directors until January 1, 2008.
Mr. Munk, our Chairman and the Chairman of Trizec Canada, controls
P.M. Capital Inc. P.M. Capital, through its ownership of Trizec Canada's
multiple voting shares, has a majority of the votes in elections of Trizec
Canada's board of directors and on other matters to be voted on by Trizec Canada
shareholders. Trizec Canada, through its indirect ownership of our common stock
and special voting stock, has a majority of the votes in elections of our board
of directors until January 1, 2008, provided that Trizec Canada or its
subsidiaries hold our special voting stock until such time. Mr. Munk's effective
control of Trizec Canada will therefore enable him to elect our entire board of
directors. Although a nominating committee composed of independent members of
our board of directors nominates candidates for election to our board, until
January 1, 2008, Mr. Munk may exercise his control over us to elect alternative
candidates. Additionally, as long as Mr. Munk has this right to elect directors,
he also has the power at any time, under Delaware law, to remove one or more
directors.
The sale or availability for sale of approximately 60 million shares of our
common stock owned indirectly by Trizec Canada or shares of our common stock
that may be issued hereafter could adversely affect the market price of our
common stock.
As a result of the corporate reorganization, approximately 60 million
shares, or approximately 40% of the outstanding shares of our common stock, are
held by Trizec Canada through an indirect, wholly-owned Hungarian subsidiary.
Dispositions of this common stock may occur in the following circumstances:
o Trizec Canada shareholders will have the right to redeem their
shares from time to time, and Trizec Canada will have the option
of satisfying these redemptions with shares of our common stock
held by the Hungarian subsidiary.
o The Hungarian subsidiary has pledged as collateral for secured
credit facilities of TrizecHahn Corporation all shares of our
common stock that it holds, and in the event of a default the
pledgee under those facilities may realize on the pledge and sell
the shares.
13
o Trizec Canada may cause the Hungarian subsidiary to dispose of
some or all of the shares of our common stock held by the
Hungarian subsidiary at any time for any reason.
We may issue additional shares of our common stock:
o upon exercises of our stock options and warrants; and
o upon conversions of our Class F convertible stock (for additional
information on the conversion of our Class F convertible stock,
see "--The issuance of additional shares of our common stock
pursuant to the terms of our Class F convertible stock may dilute
your interest in our company and adversely affect the market
price of our common stock" below).
To permit market sales of our common stock in the circumstances
described above, including by subsequent holders, we have registered or agreed
to register under the Securities Act of 1933, as amended, all of the common
stock described above.
We cannot predict what effect, if any, market sales of shares of our
common stock held indirectly by Trizec Canada or issued upon exercises of our
stock options or warrants or upon conversions of our Class F convertible stock
would have on the market price of our common stock. We are also unable to
predict what effect, if any, the availability of any of these shares for future
sale may have on the market price of our common stock. Future sales of
substantial amounts of our common stock, or the perception that these sales
could occur, may adversely affect the market price of our common stock.
Limits on changes of control may discourage takeover attempts that may be
beneficial to holders of our common stock.
Provisions of our certificate of incorporation and bylaws, as well as
provisions of the Internal Revenue Code of 1986, as amended, and Delaware
corporate law, may:
o delay or prevent a change of control over us or a tender offer
for our common stock, even if those actions might be beneficial
to holders of our common stock; and
o limit our stockholders' opportunity to receive a potential
premium for their shares of common stock over then-prevailing
market prices.
For example, primarily to facilitate the maintenance of our
qualification as a REIT, our certificate of incorporation generally prohibits
ownership, directly or indirectly, by any single stockholder of more than 9.9%
of the value of outstanding shares of our capital stock. Our board of directors
may modify or waive the application of this ownership limit with respect to one
or more persons if it receives a ruling from the Internal Revenue Service or an
opinion of counsel concluding that ownership in excess of this limit with
respect to one or more persons will not jeopardize our status as a REIT. The
ownership limit, however, may nevertheless have the effect of inhibiting or
impeding a change of control over us or a tender offer for our common stock.
An anticipated increase in taxes applicable to dividends that we pay to a
Hungarian subsidiary of Trizec Canada may decrease the amount of our dividends
on our common stock.
As a result of the corporate reorganization, Trizec Canada owns
approximately 40% of our common stock indirectly through an indirect,
wholly-owned Hungarian subsidiary. The Hungarian subsidiary and its shareholders
will be subject to taxes, expected to be only U.S. and Hungarian cross-border
withholding taxes, in respect of dividends paid by us to the Hungarian
subsidiary and by the Hungarian subsidiary to Trizec Canada.
The Hungarian subsidiary currently holds all of our special voting
stock. As the holder of this stock, the Hungarian subsidiary is entitled to
dividends from us that, when aggregated with dividends received by the Hungarian
subsidiary on our common stock and after deducting related non-Canadian taxes,
including the withholding taxes described above, will equal the dividends
received by our U.S. stockholders on our common stock
14
on a per share basis. Dividends on our special voting stock will be payable only
in connection with common stock dividends paid within 66 months after the
effective date of the corporate reorganization.
The U.S.-Hungary income tax treaty generally provides for a reduced
rate of U.S. cross-border withholding taxes applicable to dividends paid by us
to the Hungarian subsidiary. The income tax treaty is currently being
renegotiated. We expect that as a result of the renegotiation, the effective
rate of U.S. and Hungarian cross-border withholding taxes required to be paid on
the aforementioned common stock and special voting stock dividends will increase
from approximately 10% to approximately 30%. We do not presently know how long
the renegotiation process will take. If, however, an increased tax rate took
effect at any time prior to the expiration of the dividend right on our special
voting stock, any dividends paid on our special voting stock would increase,
thereby decreasing the amount of our dividends on our common stock.
The issuance of additional shares of our common stock pursuant to the terms of
our Class F convertible stock may dilute your interest in our company and
adversely affect the market price of our common stock.
In order that Trizec Canada and its subsidiaries, on the one hand, and
our other stockholders, on the other hand, will share ratably any FIRPTA tax, as
described below, that TrizecHahn Corporation, Trizec Canada or their
subsidiaries may incur, we have issued all outstanding shares of our Class F
convertible stock to the indirect, wholly-owned Hungarian subsidiary of Trizec
Canada. Under the terms of the Class F convertible stock, this stock is
convertible into shares of our common stock if TrizecHahn Corporation, Trizec
Canada or their subsidiaries incur FIRPTA tax and any related costs, interest
and penalties in connection with:
o the corporate reorganization; or
o specified future transactions or events that allow for the
conversion of our Class F convertible stock into common stock,
including:
o dispositions of our common stock in connection with major
corporate transactions or events, such as mergers, requiring
the approval of a specified portion of our common
stockholders or the tendering of a specified portion of our
common stock to effect those transactions or events, and
o transactions or events after the end of the five-year period
required for our qualification as a "domestically-controlled
REIT".
In general, a foreign corporation disposing of a U.S. real property
interest, including shares of U.S. corporations whose principal assets are U.S.
real estate, is subject to a tax, known as FIRPTA tax, equal to 35% of the gain
recognized on the disposition of that property interest. If, however, the
interest being disposed of is an interest in a REIT that qualifies as a
"domestically-controlled REIT" within the meaning of Section 897(h)(4)(B) of the
Internal Revenue Code of 1986, as amended, no FIRPTA tax is payable. Whether we
will qualify as a "domestically-controlled REIT" on any date will depend on our
ability to demonstrate that less than 50% of our capital stock, by value, has
been owned directly or indirectly by persons who are not qualifying U.S. persons
during a continuous five-year period ending on that date.
If any of TrizecHahn Corporation, Trizec Canada or their subsidiaries
incur FIRPTA tax in connection with the circumstances discussed above, our Class
F convertible stock will be convertible into additional shares of our common
stock in an amount sufficient to fund the payment of the FIRPTA tax, plus
reasonable costs and expenses in connection with the payment of the tax. If we
are required to issue additional shares of our common stock pursuant to the
terms of our Class F convertible stock, all shares of our common stock,
including those held indirectly by Trizec Canada, would suffer immediate
dilution, which could be substantial. In addition, the sale of our common stock
by Trizec Canada or its subsidiaries to fund the payment of FIRPTA tax in the
circumstances discussed above may adversely affect the market price of our
common stock. We believe that none of TrizecHahn Corporation, Trizec Canada or
their subsidiaries should incur a material amount of FIRPTA tax in connection
with any of the transfers made as part of the corporate reorganization. We
cannot assure you, however, that no material amount of FIRPTA tax would be
payable.
We are not currently planning to undertake any transactions or events
that would allow for the conversion of our Class F convertible stock, including
any transactions or events requiring the approval of a specified portion of
15
our common stockholders or the tendering of a specified portion of our common
stock to effect those transactions or events. We cannot assure you, however,
that any of those transactions or events will not take place during the
five-year period required for our qualification as a "domestically-controlled
REIT". If any such transactions or events were to take place at such time,
Trizec Canada or its subsidiaries might incur at least some amount of FIRPTA
tax. Furthermore, the existence of our Class F Convertible Stock may have the
effect of inhibiting or impeding a change of control over us or a tender offer
for our common stock.
We believe that after the end of the five-year period required for our
qualification as a "domestically-controlled REIT", neither Trizec Canada nor its
subsidiaries should incur a material amount of FIRPTA tax under circumstances
that would allow the holder of our Class F convertible stock to exercise its
conversion right. Based on all of the facts and circumstances, we believe that
63 months after the effective date of the corporate reorganization we will be
able to demonstrate that during the relevant time period less than 50% of our
capital stock, by value, was owned directly or indirectly by persons who were
not qualifying U.S. persons and that, as a result, we will then qualify as a
"domestically-controlled REIT".
Our certificate of incorporation and corporate policies are designed
to enable us to qualify as a "domestically-controlled REIT" as planned. The
ownership restrictions relating to non-U.S. persons in our certificate of
incorporation will prohibit ownership by persons if such ownership would cause
us to violate the requirements for being a "domestically-controlled REIT". We
believe these provisions will be effective, although certainty in this regard is
not possible. Legislative developments during the relevant five-year
qualification period could also affect our ability to qualify as a
"domestically-controlled REIT". Therefore, we cannot assure you that we will
become a "domestically-controlled REIT" 63 months after the effective date of
the corporate reorganization.
Recent changes to federal tax law reducing the tax on dividends paid by
companies to their shareholders could adversely affect the market valuation of
our stock.
On May 28, 2003, legislation was signed into law that provides
favorable income tax rates for certain corporate dividends received by
individuals through December 31, 2008. REIT dividends are not eligible for the
lower income tax rates unless the dividends are attributable to income that has
been subject to corporate-level tax. This legislation could cause stock in
non-REIT corporations to be more attractive to investors than stock in REITs,
which may negatively affect the value of our common stock.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form S-3 that
we filed with the SEC under the Securities Act of 1933. This prospectus and any
accompanying prospectus supplement do not contain all of the information
included in the registration statement. For further information, we refer you to
the registration statement, including its exhibits. Statements contained in this
prospectus and any accompanying prospectus supplement about the provisions or
contents of any agreement or other document are not necessarily complete. If the
SEC's rules and regulations require that an agreement or document be filed as an
exhibit to the registration statement, please see the agreement or document for
a complete description of these matters. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front of each document.
This prospectus provides you with a general description of the offered
shares. Each time a selling shareholder sells any of the offered shares, the
selling shareholder will provide you with this prospectus and a prospectus
supplement, if applicable, that will contain specific information about the
terms of the offering. The prospectus supplement also may add, update or change
any information contained in this prospectus. You should read both this
prospectus and any prospectus supplement together with additional information
described under the heading "Where You Can Find More Information" below.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements relating to our
business and financial outlook, which are based on our current expectations,
estimates, forecasts and projections. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes,"
16
"estimates," "predicts," "potential" or "continue" or the negative of these
terms or other comparable terminology. These forward-looking statements are not
guarantees of future performance and involve risks, uncertainties, estimates and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from those expressed in these forward-looking
statements. You should not place undue reliance on any of these forward-looking
statements. Further, any forward-looking statement speaks only as of the date on
which it is made, and we undertake no obligation to update any such statement to
reflect new information, the occurrence of future events or circumstances or
otherwise.
A number of important factors could cause actual results to differ
materially from those indicated by the forward-looking statements, including,
but not limited to, the risks described under "Risk Factors" in this prospectus.
USE OF PROCEEDS
Trizec Canada Inc., or one or more of its affiliates, successors or
assigns, as the selling stockholder, will receive all of the proceeds from the
disposition of our common stock under this prospectus. We will not receive any
proceeds from the disposition of our common stock.
17
POLICY WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and
other policies. These policies have been determined by our board of directors
and, in general, may be amended or revised from time to time by our board of
directors without a vote of our stockholders.
Investment Policies
Investment in Real Estate or Interests in Real Estate
Our primary investment objective is to generate growing cash flow from
operations with which to increase our quarterly cash distributions. A secondary
objective is to achieve long-term capital appreciation through increases in the
value of our assets.
We expect to continue to pursue our investment objectives primarily
through the ownership and leasing up of our properties and other properties that
we may manage, acquire or develop. We currently intend to continue to invest in
office properties in major metropolitan areas demonstrating high job growth.
Future investment or development activities will be focused on our core markets
and Class A buildings, although we do not have any limit on the amount or
percentage of our assets that may be invested in any one property or any one
geographic area. We intend to engage in such future investment or development
activities in a manner that is consistent with the maintenance of our status as
a REIT for federal income tax purposes.
We expect to continue to participate with third parties in property
ownership, through joint ventures or other types of co-ownership. Such
investments may permit us to own interests in larger assets without unduly
restricting diversification and, therefore, add flexibility in structuring our
portfolio.
Equity investments may be subject to existing mortgage financing and
other indebtedness or such financing or indebtedness as may be incurred in
connection with acquiring or refinancing these investments. Debt service on such
financing or indebtedness will have a priority over any distributions with
respect to the common stock. Investments are also subject to our policy not to
be treated as an investment company under the Investment Company Act of 1940, as
amended.
Investments in Real Estate Mortgages
While our primary focus will be on equity real estate investments, we
may, at our discretion, invest in mortgages on office properties and other
similar interests. We do not intend to invest to a significant extent in
mortgages or deeds of trust but may acquire mortgages as a strategy for
acquiring ownership of a property or the economic equivalent thereof, subject to
the investment restrictions applicable to REITs. In addition, we may invest in
mortgage-related securities and/or may seek to issue securities representing
interests in such mortgage-related securities as a method of raising additional
funds.
Securities or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers
Subject to the percentage of ownership limitations and gross income
tests necessary for REIT qualification, we also may invest in securities of
other REITs, other entities engaged in real estate activities or securities of
other issuers, including for the purpose of exercising control over such
entities.
Dispositions
Over the next several years, we plan to concentrate our capital on our
core markets and to exit selectively from investments in our secondary markets
in an orderly fashion. Where appropriate, and subject to REIT qualification
rules, we may sell certain of our properties.
18
Financing Policies
We do not have a policy limiting the amount of indebtedness that we
may incur. We expect to manage our balance sheet prudently. However, our
certificate of incorporation and bylaws do not limit the amount or percentage of
indebtedness that we may incur. We have not established any limit on the number
or amount of mortgages that may be placed on any single property or on our
portfolio as a whole.
We will consider a number of factors when evaluating our level of
indebtedness and when making decisions regarding the incurrence of indebtedness,
including overall prudence, the purchase price of properties to be acquired with
debt financing, the estimated market value of our properties upon refinancing
and the ability of particular properties and us as a whole to generate cash flow
to cover expected debt service.
Conflict of Interest Policies
We have adopted a policy that, without the approval of all of the
disinterested directors, we will not:
o acquire from or sell to any of our directors, officers or employees,
or any entity in which any of our directors, officers or employees is
a member of the board of directors or has an economic interest of more
than one percent or a controlling interest, or acquire from or sell to
any affiliate of any of the foregoing, any of our assets or other
property or contract for services from any of the foregoing persons;
o borrow from or make any loan to any of the foregoing persons other
than loans to cover relocation expenses of such persons, the terms of
which must be approved by the compensation committee of our board of
directors; or
o engage in any other transaction with any of the foregoing persons.
Our board of directors is subject to certain provisions of Delaware
law, which are also designed to eliminate or minimize conflicts. However, there
can be no assurance that these provisions of law will always be successful in
eliminating the influence of such conflicts, and if they are not successful,
decisions could be made that might fail to reflect fully the interests of all
stockholders.
Pursuant to Delaware law, a contract or other transaction between us
and a director or between us and any other corporation or other entity in which
one of our directors is a director or has a material financial interest is not
void or voidable solely on the grounds of such common directorship or interest,
the presence of such director at the meeting at which the contract or
transaction is authorized, approved or ratified or the counting of such
director's vote in favor thereof if:
o the material facts relating to the common directorship or interest and
as to the transaction are disclosed to our board of directors or a
committee of our board, and our board or committee in good faith
authorizes the transaction or contract by the affirmative vote of a
majority of disinterested directors, even if the disinterested
directors constitute less than a quorum; or
o the material facts relating to the common directorship or interest and
as to the transaction are disclosed to the shareholders entitled to
vote thereon, and the transaction is approved in good faith by vote of
the shareholders; or
o the transaction or contract is fair and reasonable to us at the time
it is authorized, ratified or approved.
Policies with Respect to Other Activities
We have authority to offer stock or options to purchase stock in
exchange for property and to repurchase or otherwise acquire our common stock or
other securities in the open market or otherwise, and we may engage in such
activities in the future. Our board of directors has no present intention of
causing the repurchase of any of our common stock. We have not engaged in
trading, underwriting or agency distribution or sale of securities of other
19
issuers and do not intend to do so. At all times, we intend to make investments
in such a manner as to qualify as a REIT, unless because of circumstances or
changes in the Internal Revenue Code of 1986, as amended (or the Treasury
regulations), our board of directors determines that it is no longer in our best
interest to qualify as a REIT. We intend to make investments in such a way that
we will not be treated as an investment company under the Investment Company Act
of 1940, as amended. Our policies with respect to such activities may be
reviewed and modified or amended from time to time by our board of directors
without a vote of the stockholders.
20
SELLING STOCKHOLDER
Trizec Canada Inc. owns, through its indirect, wholly owned Hungarian
subsidiary, approximately 40% of our common stock. Trizec Canada Inc.
shareholders have the right to redeem their shares from time to time. At its
election, Trizec Canada Inc. may satisfy these redemptions with shares of our
common stock or cash. We have agreed to cause the registration statement of
which this prospectus is a part to be filed with and declared effective by the
Securities and Exchange Commission, and to be maintained effective, so that
Trizec Canada Inc., or one or more of its affiliates, successors or assigns, may
dispose of shares of our common stock in satisfaction of such redemptions by
Trizec Canada Inc. shareholders.
This prospectus relates to the offer and sale by Trizec Canada Inc.,
or one or more of its affiliates, successors or assigns, the number of shares of
our common stock owned by Trizec Canada Inc. set forth below. The following
table sets forth (1) the name of the selling stockholder, (2) the number of
shares of common stock and the percentage of common stock beneficially owned by
the selling stockholder as of September 23, 2003, (3) the number of shares of
common stock that may be offered or sold by or on behalf of the selling
stockholder and (4) the amount and the percentage of shares of common stock to
be owned by the selling stockholder upon the completion of the offering assuming
all shares offered by such selling stockholder are sold. Any or all of the
shares listed below under the heading "Shares to be Sold" may be offered for
sale by or on behalf of the selling stockholder.
Shares Beneficially Owned Shares Beneficially Owned
Selling Stockholder Prior to the Offering Shares to be Sold After the Offering
------------------- --------------------- ----------------- ------------------
Number Percent Number Percent
------ ------- ------ -------
Trizec Canada Inc. 59,922,379 39.81% 10,000,000 49,922,379 33.16%
21
DESCRIPTION OF CAPITAL STOCK
The following is a description of the general terms and provisions of
our capital stock. This description is subject to and qualified in its entirety
by reference to the applicable provisions of our certificate of incorporation
and bylaws. Mellon Investor Services is our transfer agent.
Our authorized capital stock consists of 500,000,000 shares of common
stock, par value $0.01 per share; 100 shares of special voting stock, par value
$0.01 per share; 100,000 shares of Class F convertible stock, par value $0.01
per share; 1,100,000 shares of Series B convertible preferred stock, par value
$1.00 per share; and 750,000 shares of Class C convertible preferred stock, par
value $1.00 per share. As of September 9, 2003, we had 150,533,305 shares of
common stock, 100 shares of special voting stock and 100,000 shares of Class F
convertible stock outstanding. We had no shares of Series B convertible
preferred stock or Class C convertible preferred stock outstanding.
Common Stock
The holders of our common stock are entitled to one vote per share in
the election of directors and on all other matters voted on by stockholders. Our
certificate of incorporation does not provide for cumulative voting in the
election of directors.
Subject to the preferential rights of any other outstanding series of
our capital stock, the holders of common stock are entitled to distributions
declared from time to time by the board of directors or an authorized committee
thereof from funds available for distribution to such holders.
All issued and outstanding shares of common stock described in this
prospectus will be fully paid and non-assessable and will not be subject to
preemptive or similar rights.
In the event of our liquidation, dissolution or winding-up, the
holders of common stock are entitled to receive ratably the assets remaining
after satisfaction of all liabilities and payment of liquidation preferences and
accrued dividends, if any, on any class or series of capital stock that has a
liquidation preference.
The New York Stock Exchange has authorized the listing of our common
stock under the symbol "TRZ."
Special Voting Stock
We have issued all authorized shares of our special voting stock to an
indirect, wholly owned Hungarian subsidiary of Trizec Canada Inc.
The special voting stock entitles its holders to a number of votes in
the election of our directors, so that when that number of votes is added to the
aggregate number of votes that Trizec Canada Inc. and its subsidiaries otherwise
may cast in the election of our directors, the total number constitutes a
majority of the votes that may be cast. Holders of the special voting stock are
entitled to such votes in the election of our directors only if Trizec Canada
Inc. and its subsidiaries collectively own at least five percent of our issued
and outstanding common stock at the time of the vote. The voting rights provided
by the special voting stock will expire on January 1, 2008. The special voting
stock does not entitle its holders to any voting rights with respect to any
other matters, except as required by Delaware corporate law.
The special voting stock also entitles its holders to certain cash
dividends whenever we declare a dividend on our common stock during the 66
months after the effective date of the corporate reorganization. These dividend
rights, however, are junior to the dividend rights of the Class F convertible
stock.
The cash dividend on the special voting stock will be an amount that
on an after-tax basis is equal to all non-Canadian taxes, principally
cross-border withholding taxes, payable by Trizec Canada Inc. or its
subsidiaries in respect of:
22
o dividends paid to them by us after the corporate reorganization;
o related dividends paid by such entities; and
o certain prior dividends paid by us.
We will pay such cash dividends once the aggregate of such taxes exceeds a
threshold amount of $71 million.
The effective tax rate used to calculate this cash dividend will not
exceed 30% or such higher rate of United States withholding tax as may be
applicable under the Internal Revenue Code of 1986, as amended, to dividends
paid by a REIT to a foreign corporation at the time the particular cash dividend
is paid by us. The current effective rate of non-Canadian tax is approximately
10%. We expect, however, that this rate will increase in the future. See "Risk
Factors - An anticipated increase in non-Canadian taxes applicable to dividends
we pay to a Hungarian subsidiary of Trizec Canada Inc. may decrease the amount
of funds we have available for distribution as dividends on our common stock" in
this prospectus.
Once during the 66-month period after the effective date of the
corporate reorganization, our board of directors may pay a dividend on the
special voting stock based on estimated future dividends on our common stock and
estimated non-Canadian tax rates. If we have paid an estimated dividend on the
special voting stock, the amount of the subsequent special voting stock
dividends payable in connection with dividends on our common stock will be
reduced by the amount of the estimated dividend.
After the first date on which no taxing authority can make a further
determination that Trizec Canada Inc. or its subsidiaries are liable for
non-Canadian taxes in respect of a dividend paid by us on shares of our special
voting stock or common stock held, directly or indirectly, by Trizec Canada
Inc., we or the holders of the special voting stock will be entitled to redeem
any or all outstanding shares of special voting stock for an aggregate
redemption price of $100,000, plus any declared but unpaid dividends.
Upon liquidation, dissolution or winding-up, the holders of special
voting stock will be entitled to an aggregate preferential distribution of
$100,000 plus any declared but unpaid dividends, but no more, all subject to the
prior rights of holders of Class F convertible stock and all other shares
entitled to priority in the distribution of assets.
Class F Convertible Stock
If and to the extent that TrizecHahn Corporation, Trizec Canada Inc.
or their subsidiaries dispose of shares of our stock at a time when that sale is
not exempt from U.S. tax because we are not then a "domestically-controlled
REIT," TrizecHahn Corporation, Trizec Canada Inc. and their subsidiaries will
incur FIRPTA tax with respect to gains realized on such disposition. In
determining the value of the shares of TrizecHahn Corporation for the purpose of
their exchange with a subsidiary of Trizec Canada Inc. for our common stock, it
was decided that this potential FIRPTA tax liability should be taken into
account to the extent it might be realized in the future as the result of
certain specified triggering events. The amount, if any, of this potential
liability, however, was not ascertainable at the time of the corporate
reorganization, although it may become more clearly ascertainable based on
events occurring within a period of five and half years after the corporate
reorganization. Therefore, it was decided that in determining the number of our
shares to be exchanged for TrizecHahn Corporation's shares it would be
appropriate to assume that such FIRPTA tax would not become payable but to
provide a mechanism that would have the effect of adjusting such number of
shares in the event that a relevant FIRPTA tax liability arises in the future.
Because it would not be feasible to require that a portion of the shares of our
stock held by the public be transferred to a subsidiary of Trizec Canada Inc.
should such a relevant FIRPTA tax liability arise, the Class F convertible stock
mechanism, described below, was adopted to adjust for this potential tax
liability.
We have issued all authorized shares of our Class F convertible stock
to an indirect, wholly owned Hungarian subsidiary of Trizec Canada Inc. The
shares of Class F convertible stock do not entitle their holders to vote or to
receive notice of or to attend any meeting of our stockholders, except as
required by Delaware corporate law.
23
The Class F convertible stock entitles its holders to an aggregate
cumulative dividend of $5,000 per annum prior to any dividend payments on or
redemption of the special voting stock, Series B convertible preferred stock,
Class C convertible preferred stock or the common stock in any year. The Class F
convertible stock does not participate in any dividends declared on any other
class of capital stock.
Holders of the Class F convertible stock will be entitled to convert
shares of Class F convertible stock into shares of our common stock, in most
cases on the business day following delivery of a conversion notice to us, in
connection with any of the following conversion triggering events:
o FIRPTA tax is payable in connection with a disposition of our
capital stock pursuant to the corporate reorganization;
o FIRPTA tax is payable in connection with major corporate
transactions or events, such as mergers, requiring the approval
of a specified portion of our common stockholders or the
tendering of a specified portion of our common stock to effect
those transactions or events, where they occur within 66 months
following the effective date of the corporate reorganization;
o FIRPTA tax is payable in connection with a disposition of shares
of our capital stock by Trizec Canada Inc. or its subsidiaries
within a three-month period following the 63rd month after the
corporate reorganization, and prior to such disposition we were
unable to deliver certification stating that we are a
"domestically-controlled REIT" at such time or we provided such
certification but FIRPTA tax is nevertheless payable on such
disposition;
o FIRPTA tax is payable in connection with a disposition of shares
of our capital stock by Trizec Canada Inc. or its subsidiaries
within a 60-month period following the 66th month after the
corporate reorganization, which shares were held by Trizec Canada
Inc. or its subsidiaries on the 66th-month anniversary of the
corporate reorganization; provided that in connection with a
disposition of our capital stock by Trizec Canada Inc. or its
subsidiaries in the three-month period following the 63rd month
after the corporate reorganization, we were unable to deliver
certification stating that we were a "domestically-controlled
REIT" at such time or we provided such certification but FIRPTA
tax was nevertheless payable on such disposition; and
o a FIRPTA tax liability is asserted by the Internal Revenue
Service but is disputed by the relevant taxpayer and such
taxpayer wishes to prepay the disputed amount pending resolution
of the dispute but is unable to finance on commercial terms such
prepayment and any associated taxes or costs; provided, however,
that following the settlement of the dispute the relevant
taxpayer will refund to us any amount that is in excess of such
taxpayer's FIRPTA tax liability plus any costs associated with
the dispute.
In order to convert a share of Class F convertible stock, the holder
must give a notice to us within 21 days after the occurrence of the relevant
conversion triggering event. In most circumstances, however, a sale of shares of
our capital stock by Trizec Canada Inc. or its subsidiaries in the 63-month
period following the corporate reorganization will not entitle a holder to
convert any shares of Class F convertible stock into shares of our common stock.
Upon conversion, a holder of Class F convertible stock will generally
be entitled to a number of shares of our common stock such that the after-tax
proceeds from the sale thereof would equal the amount of the FIRPTA tax
incurred, plus any costs or penalties associated therewith. In the event that
our Class F convertible stock is convertible because FIRPTA tax is payable in
connection with a disposition of our stock in the 60-month period following the
66th month after the corporate reorganization as described above, the aggregate
number of shares of our common stock that may be received by the holder of our
Class F convertible stock pursuant to such conversions would be subject to a
limit based on a fixed amount of FIRPTA tax. Specifically, the aggregate number
of shares received will be limited so that the aggregate after-tax proceeds from
any sale thereof will not exceed the amount of FIRPTA tax that would have been
payable had all such shares been sold at the end of the 66th month after the
24
corporate reorganization. For the purposes of determining a holder's conversion
entitlement, the fair market value of our common stock will be calculated as
follows:
o Where common stock is sold before the conversion date to fund
applicable taxes or costs, the fair market value of our common
stock will be determined by the weighted average prices realized
on sales of our common stock, less costs associated with such
sales.
o Otherwise, the fair market value of our common stock will be
determined by the weighted average trading price of our common
stock on the day the conversion notice was delivered.
If we disagree with the calculation of the number of shares of common
stock resulting from conversion, we will be entitled to dispute the calculation
in arbitration proceedings.
After the conversion rights expire, we or the holders will be entitled
to redeem any or all outstanding shares of Class F convertible stock for an
aggregate redemption price of $100,000 plus any declared but unpaid dividends.
Upon liquidation, dissolution or winding-up, the holders of Class F
convertible stock will be entitled to an aggregate preferential distribution in
the amount of $100,000, plus any declared but unpaid dividends, prior to any
distributions to holders of special voting stock or common stock. Once the Class
F convertible stockholders receive the preferential distribution upon our
liquidation, dissolution or winding-up, they will not be entitled to share in
any further distributions.
Series B Convertible Preferred Stock
The holders of our Series B convertible preferred stock are not
entitled to vote as such, except as required by the Delaware General Corporate
Law.
The Series B convertible preferred stock entitles its holders to an
aggregate cumulative dividend at a fixed per annum rate of 7.5% of the price per
share at which such stock was purchased. The Series B convertible preferred
stock does not participate in any dividends declared on any other class of
capital stock.
Holders of shares of Series B convertible preferred stock may at their
option convert all or part of their shares of Series B convertible preferred
stock into common stock. Each share of Series B convertible preferred stock
shall be convertible into such number of shares of our common stock equal to
$1,000 divided by the fair market value of one share of our common stock at the
time of conversion, which is to be determined by our board of directors.
We may redeem any or all issued and outstanding shares of Series B
convertible preferred stock at a redemption price equal to $1,000 per share,
plus any declared but unpaid dividends. We may also choose to purchase for
cancellation any or all outstanding shares of Series B convertible preferred
stock by an invitation to tender addressed to all registered holders of Series B
convertible preferred stock, but only if the price per share being offered is
less than the price that would be paid on redemption.
Upon liquidation, dissolution or winding-up, the holders of Series B
convertible preferred stock will be entitled to a preferential distribution in
the amount of $1,000 per share, plus any declared but unpaid dividends, prior to
any distributions to holders of common stock. Once the Series B convertible
preferred stockholders receive the preferential distribution upon our
liquidation, dissolution or winding-up, they will not be entitled to share in
any further distributions.
Class C Convertible Preferred Stock
The holders of our Class C convertible preferred stock are not
entitled to vote as such, except as required by the Delaware General Corporate
Law.
25
The Class C convertible preferred stock entitles its holders to an
aggregate cumulative dividend at a fixed per annum rate of 7% of the price per
share at which such stock was purchased payable quarterly prior to any dividend
payments on or redemption of the Series B convertible preferred stock or the
common stock in any year. The Class C convertible preferred stock does not
participate in any dividends declared on any other class of capital stock.
Holders of shares of Class C convertible preferred stock may at their
option convert all or part of their shares of Class C convertible preferred
stock into common stock at any time after April 1, 2002. Each share of Class C
convertible preferred stock shall be convertible into such number of shares of
our common stock equal to $1,100 divided by the fair market value of one share
of our common stock at the time of conversion, which is to be determined by our
board of directors.
We may redeem any or all issued and outstanding shares of Class C
convertible preferred stock at a redemption price equal to $1,100 per share,
plus any declared but unpaid dividends at any time after the fifth anniversary
of the issue date of the Class C convertible preferred stock. We may also choose
to purchase for cancellation at any time after the fifth anniversary of the
issue date any or all outstanding shares of Class C convertible preferred stock
by an invitation to tender addressed to all registered holders of Class C
convertible preferred stock, but only if the price per share being offered is
less than the price that would be paid on redemption.
Upon liquidation, dissolution or winding-up, the holders of Class C
convertible preferred stock will be entitled to a preferential distribution in
the amount of $1,100 per share, plus any declared but unpaid dividends, prior to
any distributions to holders of Series B convertible preferred stock or common
stock. Once the Class C convertible preferred stockholders receive the
preferential distribution upon our liquidation, dissolution or winding-up, they
will not be entitled to share in any further distributions.
Restrictions on Ownership of our Capital Stock
For us to qualify as a REIT under the Internal Revenue Code of 1986,
as amended, among other things:
o not more than 50% in value of our outstanding capital stock may
be owned, directly or indirectly, by five or fewer individuals,
as defined in the Internal Revenue Code of 1986, as amended,
during the last half of a taxable year; and
o our capital stock must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months
or during a proportionate part of a shorter taxable year.
To enable us to continue to qualify as a REIT, our certificate of
incorporation restricts the ownership of shares of our capital stock as
described below to address these requirements.
Our certificate of incorporation provides that no stockholder other
than TrizecHahn Corporation, Trizec Canada Inc. or their subsidiaries may
beneficially own, or be deemed to own by virtue of the attribution provisions of
the Internal Revenue Code of 1986, as amended, more than 9.9% of the value of
the outstanding shares of our capital stock. The board of directors may waive
the application of this ownership limitation to a person subject thereto if the
board of directors receives a ruling from the Internal Revenue Service or an
opinion of counsel concluding that all the requirements for our qualification as
a REIT and as a "domestically-controlled REIT" will be satisfied. However, prior
to waiving the application of this ownership limitation, the board of directors
must require such representations and undertakings from the applicant as are
reasonably necessary to ascertain that such applicant's beneficial or
constructive ownership of our capital stock will not then or in the foreseeable
future violate the requirements for our qualification as a REIT and as a
"domestically-controlled REIT."
In addition to the ownership limitations established to preserve our
REIT status, as described above, our certificate of incorporation contains an
ownership limitation that is designed to enable us to qualify as a
"domestically-controlled REIT," within the meaning of Section 897(h)(4)(B) of
the Internal Revenue Code of 1986, as amended. This limitation restricts any
person that is not a qualifying U.S. person from beneficially owning our capital
stock if such person's holdings, when aggregated with shares of our capital
stock beneficially owned by all
26
other persons that are not qualifying U.S. persons, would exceed 45% by value of
our issued and outstanding capital stock. Such limitation, however, will not
affect the right of TrizecHahn Corporation, Trizec Canada Inc. and their
subsidiaries to hold shares of our capital stock that were acquired prior to, or
in connection with, the corporate reorganization or that may be acquired
pursuant to the conversion of Class F convertible stock.
For purposes of these limitations on ownership relating to
"domestically-controlled REIT" status, a qualifying U.S. person is a person who
falls within at least one of the following categories:
(1) a U.S. citizen;
(2) a U.S. resident individual;
(3) an S corporation;
(4) a partnership or limited liability company (or other entity
classified as a partnership for United States federal income tax
purposes) (a) that is created or organized in or under the laws
of the United States or any State or the District of Columbia and
(b) at least 95% (by value) of the interests in which are owned
by qualifying U.S. persons;
(5) a corporation or business trust (or other entity classified as a
corporation for United States federal income tax purposes) (a)
that is created or organized in or under the laws of the United
States or any State or the District of Columbia and (b) at least
95% (by value) of the shares, units or other ownership interests
in which are owned by qualifying U.S. persons;
(6) an estate if (a) its income is subject to U.S. tax regardless of
source and (b) at least 95% of amounts distributable by it are
distributable to qualifying U.S. persons;
(7) a registered investment company (as defined in Section 851 of the
Internal Revenue Code of 1986, as amended) that is offered for
sale only in the United States;
(8) a trust if (a) a court within the United States is able to
exercise primary jurisdiction over its administration, (b) one or
more United States persons (as defined in Section 7701(a)(30) of
the Internal Revenue Code of 1986, as amended) have the authority
to control all substantial decisions of the trust, and (c) at
least 95% of amounts distributable by it are distributable to
qualifying U.S. persons;
(9) a corporation, fund, foundation or other organization organized
under the laws of the United States or any State or the District
of Columbia and that is generally exempt from tax therein and is
described in Section 501(c)(3) of the Internal Revenue Code of
1986, as amended;
(10) a legal person organized under the laws of the United States or
any State or the District of Columbia and that is generally
exempt from tax therein and is established and maintained to
provide pensions or other similar benefits in connection with
employment pursuant to a plan (including, without limitation, (a)
a trust described in Section 401(a) of the Internal Revenue Code
of 1986, as amended, and (b) an "eligible deferred compensation
plan" as defined in Section 457 of the Internal Revenue Code of
1986, as amended, in respect of which the employer is a
qualifying U.S. person);
(11) a simplified employee pension plan described in Section 408(k) of
the Internal Revenue Code of 1986, as amended, an individual
retirement account, an account described in Section 408(p) of the
Internal Revenue Code of 1986, as amended, an annuity plan
described in Section 403 of the Internal Revenue Code of 1986, as
amended, and any similar plan permitted under the Internal
Revenue Code of 1986, as amended, in respect of individual
retirement benefits or similar benefits, provided that in each
case at least 95% of all amounts payable under such plan are
payable to qualifying U.S. persons;
27
(12) a group trust in which assets of persons described in paragraph
(10) or (11) above are pooled;
(13) a Keough plan, provided that at least 95% of all amounts payable
under such plan are payable to qualifying U.S. persons;
(14) a governmental entity consisting of any of: (a) any governing
body of the United States, or of a political subdivision or local
authority of the United States; (b) a person that is wholly
owned, directly or indirectly, by the United States or a
political subdivision or local authority of the United States
provided (i) it is created or organized in or under the laws of
the United States, or any State or the District of Columbia, (ii)
its earnings are credited to its own account with no portion of
its income inuring to the benefit of any private person, and
(iii) its assets vest in the United States or a political
subdivision or local authority of the United States upon
dissolution; and (c) a pension trust or fund of a person
described in subparagraph (a) or (b) that is created or organized
in or under the laws of the United States or any State or the
District of Columbia and that is constituted and operated
exclusively to administer or provide pension benefits to
individuals in respect of services rendered to such person in the
discharge of functions of a governmental nature;
(15) a "common trust fund" as defined in Section 584 of the Internal
Revenue Code of 1986, as amended, or separate account,
respectively, (a) established by a bank or insurance company,
respectively, organized in the United States or under the laws of
the United States or any State or the District of Columbia and
(b) at least 95% (by value) of the interests in which are owned
by qualifying U.S. persons; and
(16) an investment club or similar entity (a) that is created or
organized in or under the laws of the United States or any State
or the District of Columbia and (b) at least 95% (by value) of
the interests in which are owned by qualifying U.S. persons.
As used herein, the term "United States" means the United States of
America, and includes the States thereof and the District of Columbia; such
term, however, does not include Puerto Rico, the Virgin Islands, Guam or any
other United States possession or territory.
Solely for the purposes of applying the 45% foreign ownership
limitation, unless and until otherwise determined by our board of directors, any
purported acquisition of beneficial ownership of shares of our capital stock by
a person that is not a qualifying U.S. person, of which we become aware, will be
presumed to cause a violation of such limitation. However, this presumption will
not be applied to:
o any acquisition by TrizecHahn Corporation, Trizec Canada Inc. or
their subsidiaries of shares of our common stock acquired in
connection with the corporate reorganization or upon exercise of
our warrants;
o any acquisition of our Class F convertible stock or special
voting stock;
o any issuance by us of our common stock to a holder of Class F
convertible stock upon conversion by such holder of shares of
Class F convertible stock; and
o any acquisition by a person that is not a qualifying U.S. person
resulting from such person's exercise of stock options issued by
us, but only if such shares are disposed of by the close of the
first business day following the exercise of such stock options.
Our board of directors may, in its sole discretion, terminate the
presumption referred to above at any time following the occurrence of any event
or events that, in the judgment of our board of directors, result in a
substantial reduction in the percentage ownership of our capital stock by
TrizecHahn Corporation, Trizec Canada Inc. or their subsidiaries, provided that
the board of directors has received a ruling from the Internal Revenue Service
or an
28
opinion of counsel concluding in effect that a termination of the presumption
would not significantly and adversely affect our ability to qualify as a
"domestically-controlled REIT."
In the event that a purported transfer, including but not limited to a
sale or issuance, of shares of our capital stock to any person would:
o cause the person to own shares of our capital stock in violation
of any of the ownership limitations and restrictions;
o cause us to be beneficially owned by fewer than 100 persons;
o cause us to become "closely held" under Section 856(h) of the
Internal Revenue Code of 1986, as amended;
o cause us to constructively own 10% or more of the ownership
interests in a tenant of real property owned by us or by our
direct or indirect subsidiary within the meaning of Section
856(d)(2)(B) of the Internal Revenue Code of 1986, as amended, if
that would cause us to violate the 95% or 75% gross income tests
of Section 856(c) of the Internal Revenue Code; or
o result in us not qualifying as a "domestically-controlled REIT"
(determined for this purpose without regard to the five-year
period referred to in Section 897(c)(1) of the Internal Revenue
Code of 1986, as amended),
such purported transfer will be void ab initio, the intended transferee will be
deemed to be a prohibited owner and will acquire no rights in such shares, and
such shares will be designated as excess shares. All excess shares will be
automatically transferred (without action by the stockholder) to a charitable
trust for the exclusive benefit of charitable beneficiaries designated by us,
subject to the prohibited owner's entitlement to certain proceeds as described
below. The transfer of the excess shares to the charitable trust will be
effective as of the close of trading on the trading day immediately preceding
the purported transfer date.
If we determine that: (a) a purported transfer of shares of our
capital stock would be in violation of any of the ownership limitations and
restrictions, (b) a person acquired or intends to acquire beneficial ownership
of our capital stock in violation of any of the ownership limitations and
restrictions, or (c) a person is otherwise in violation of any of the ownership
limitations and restrictions, we will take any necessary actions to prevent or
void such transfer or acquisition. Our failure to act, however, will not affect
the designation of shares of our capital stock as excess shares and their
automatic transfer to the charitable trust in accordance with procedures
described above. In addition, any person who acquires or attempts to acquire
shares of our capital stock in violation of the ownership restrictions or who is
otherwise in violation of any of the ownership limitations and restrictions will
be required immediately to provide us with written notice of the purported
transfer or of any other event that caused the person to beneficially own our
capital stock in violation of the ownership restrictions, and, upon our request,
will also be required to provide us with any information concerning the impact
of the purported transfer or such other event on our status as a REIT and as a
"domestically-controlled REIT."
A person who is deemed to be a prohibited owner will not benefit
economically from any excess shares held in the charitable trust, will have no
rights to dividends paid with respect to the excess shares and will not have any
rights to vote or other rights attributable to the excess shares held in the
charitable trust. Upon liquidation, the prohibited owner who gave value for
shares of the capital stock that are designated as excess shares and are
automatically transferred to the charitable trust will be entitled to receive an
amount not greater than the price per share that such prohibited owner paid for
such shares, or, if the prohibited owner did not give value for the shares, an
amount that is equal to the price per share based on fair market value of the
shares on the date of the purported transfer or such other event that caused the
transfer of such shares to the charitable trust. Within 20 days of receiving
notice from us that the shares have been transferred to the charitable trust,
the charitable trustee will sell the shares to a permitted transferee (or
permitted transferees) whose beneficial ownership of our capital stock would not
violate our ownership limitations and restrictions. Upon this transfer by the
trustee to a permitted transferee, the prohibited owner will receive from the
trustee the lesser of the proceeds received on the disposition of the shares to
a permitted transferee or the price per share such prohibited owner paid for
such shares or, if no value was given by
29
the prohibited owner, a price based on the fair market value of the shares on
the date of the purported transfer or such other event as caused the transfer of
the shares of capital stock to the charitable trust. The trustee will distribute
any excess amounts to the charitable beneficiaries.
While the excess shares are held in trust, the trustee, as a record
holder of the excess shares, will be entitled to all dividends and
distributions, including any distributions upon liquidation, paid by us with
respect to the relevant class of capital stock. The trustee will have all the
voting rights of excess shares held by the trust and rights to receive any
notice of any meetings that a particular class of excess shares held by the
trustee is entitled to. The trustee will agree to vote the excess shares
pursuant to a voting agreement with us.
The ownership limitation provisions of the certificate of
incorporation will not be automatically removed if the REIT provisions of the
Internal Revenue Code of 1986, as amended, are changed to remove or increase the
ownership concentration limitation. Except as otherwise described above, any
change in the ownership limit would require an amendment to the certificate of
incorporation. In addition to preserving our status as a REIT, the ownership
limit may have the effect of precluding a third party from acquiring control of
us.
We are specifically authorized to seek equitable relief to enforce our
ownership limitations.
Our ownership limitations do not preclude the settlement of
transactions entered into through the facilities of the New York Stock Exchange,
the Nasdaq Stock Market Inc. or any other national securities exchange (but the
fact of settlement will not prevent or deter the transfer of our capital stock
to the charitable trust as described above).
All certificates representing shares of our capital stock will bear a
legend referring to the restrictions described above.
Obligations of the Stockholders to Provide Information
Each person who beneficially owns 2% or more of the outstanding shares
of our capital stock, is obligated, within 30 days after the end of each fiscal
year, to give to us a written statement or an affidavit, as we may determine,
stating, among other things, (1) the amount of capital stock beneficially owned
by such person as of each of the dividend record dates of our capital stock on
which such person beneficially owned shares of our capital stock during the
immediately preceding year and (2) whether or not such person is a qualifying
U.S. person. Under the policies and procedures to be established by our board of
directors, a statement similar to the one required from beneficial owners of 2%
or more of our outstanding shares of capital stock is also required of persons
who beneficially own between 1% and 2% of our outstanding shares of capital
stock.
Each person who is a beneficial, constructive or record owner of
capital stock is required to promptly provide to us such information as we may
request in order to determine our status as a REIT and as a
"domestically-controlled REIT" and to determine and ensure compliance with our
ownership limitations and restrictions.
Any person who fails to provide us promptly with any of the requested
information will be automatically deemed to not be a qualifying U.S. person and,
therefore, a prohibited owner. Such prohibited owner's shares of capital stock
will be designated as excess shares and transferred to the charitable trust for
sale to a qualifying U.S. person, in the manner described above in the section
entitled "Restrictions on Ownership of our Capital Stock," except that, for the
purposes of determining such prohibited owner's entitlement upon liquidation and
upon sale of excess shares to a permitted transferee, such prohibited owner will
be considered to have given no value for such shares.
Warrants
As part of the corporate reorganization, we have issued warrants (1)
to certain former holders of outstanding TrizecHahn Corporation stock options in
replacement of such options and (2) to Trizec Canada Inc. or a wholly owned
subsidiary of Trizec Canada Inc. in an amount sufficient to allow Trizec Canada
Inc. or such wholly owned subsidiary to purchase one share of our common stock
for each Trizec Canada Inc. stock option granted in the corporate
reorganization.
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Each warrant entitles the registered holder to purchase shares of our
common stock at any time prior to the expiration date of such warrant. The
expiration date of each warrant issued in replacement of an outstanding
TrizecHahn Corporation stock option is identical to the expiration date of the
stock option that such warrant replaces, and the exercise price of each such
warrant is the U.S. dollar equivalent of the exercise price of the stock option
that such warrant replaces. Upon the exercise of an outstanding Trizec Canada
Inc. stock option to acquire a newly issued Trizec Canada Inc. subordinate
voting share, we expect that Trizec Canada Inc. or a wholly owned subsidiary of
Trizec Canada Inc. will exercise a warrant providing Trizec Canada Inc. or the
subsidiary with a corresponding newly issued share of our common stock. Any
warrant not exercised before its expiration date will become void, and rights of
the holder will cease. The warrants do not entitle the holders thereof to any of
the rights of holders of our common stock or to vote at any meetings of our
stockholders or at any other time at which a vote or consent of any of our
stockholders is sought.
These warrants are structured to qualify as readily ascertainable fair
market value options for U.S tax purposes. Accordingly, they are freely
transferable by the holder and fully vested and exercisable and have a fixed
term that is not linked to continued service with us as an employee or director.
The warrants will not, however, be listed on any stock exchange.
Each warrant is subject to the terms of a warrant agreement that was
entered into prior to the issuance of the warrants. This warrant agreement
provides for adjustment of the exercise price to protect holders against
dilution in the event of a stock dividend, stock split, combination or
reclassification of the common stock.
Anti-takeover Effect of Provisions in our Charter and Bylaws and Under Delaware
Law
Charter and Bylaws
The ownership restrictions contained in our certificate of
incorporation and bylaws might discourage transactions that involve an actual or
threatened takeover of us. These ownership restrictions would delay or impede a
transaction or a change in control that might involve a premium price for our
capital stock or would otherwise be in the best interest of the stockholders.
See "Description of Capital Stock - Restrictions on Ownership" and "Description
of Capital Stock - Qualification as a 'Domestically-Controlled REIT'" in this
prospectus. These provisions may reduce the possibility of a tender offer or an
attempt to change our control.
Delaware Law
The holders of our Class F convertible stock, special voting stock,
Series B convertible preferred stock and Class C convertible preferred stock may
be able to delay, defer or prevent a change in control of our business in
circumstances where the holders of any of these classes of our capital stock
would have class voting rights. Specifically, regardless of whether our
certificate of incorporation grants voting rights to holders of a particular
class of our capital stock, Section 242(b)(2) of the Delaware General
Corporation Law grants to the holders of each class of our capital stock a
statutory voting right to approve as a class any amendment to our certificate of
incorporation if the amendment would change the aggregate number of authorized
shares of the particular class of capital stock or its par value or would
adversely change the powers, preferences or special rights of the particular
class of capital stock. This statutory voting right exists with respect to a
particular class of capital stock for so long as any shares of that class remain
outstanding and only terminates when all shares of the class are redeemed or
converted, if applicable, or otherwise retired.
Our certificate of incorporation provides that Section 203 of the
Delaware General Corporation Law, an anti-takeover law, will not apply to us.
Section 203 generally prohibits an interested stockholder from engaging in
certain types of business combinations with a Delaware corporation for three
years after becoming an interested stockholder. An "interested stockholder" is a
person who, together with affiliates and associates, owns 15% or more of our
outstanding voting stock or is our affiliate or associate who, together with
affiliates and associates, at any time within three years prior, did own 15% or
more of the corporation.
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CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE AND
BYLAWS
The following summary of certain provisions of Delaware law and our
certificate of incorporation and bylaws does not purport to be complete and is
subject to and qualified in its entirety by reference to Delaware law and our
certificate of incorporation, as amended, and bylaws, copies of which have been
filed with the SEC and are incorporated as exhibits hereto by reference to our
registration statement on Form 10, registration statement on Form S-8 and
quarterly report on Form 10-Q for the quarter ended March 31, 2002,
respectively.
Our certificate of incorporation and bylaws contain certain provisions
that could make it more difficult to acquire us by means of a tender offer, a
proxy contest or otherwise. See also "Description of Capital Stock -
Anti-takeover Effect of Provisions in our Charter and Bylaws and Under Delaware
Law."
Amendment of Our Certificate of Incorporation and Bylaws
Our certificate of incorporation may be amended only by being first
approved by our board of directors pursuant to a resolution adopted in
accordance with Section 242 of the Delaware General Corporation Law, and, except
as otherwise provided by law, thereafter approved by the stockholders. Whenever
any vote of the holders of voting stock is required to amend or repeal any
provision of our certificate of incorporation, then in addition to any other
vote of the holders of voting stock that is required by our certificate of
incorporation or bylaws, the affirmative vote of a majority of the outstanding
shares of our capital stock entitled to vote on such amendment or repeal, voting
together as a single class, and the affirmative vote of a majority of the
outstanding shares of each class entitled to vote thereon as a class, shall be
required to amend or repeal any provision of our certificate of incorporation.
Unless otherwise required by law, our board of directors may amend our bylaws by
the affirmative vote of a majority of the directors. Our bylaws may also be
amended by the stockholders, at an annual meeting or at a special meeting called
for such purpose, by the affirmative vote of the majority of the shares present
in person or represented by proxy at such meeting and entitled to vote on such
amendment or repeal, voting together as a single class.
Dissolution of the Company
The Delaware General Corporation Law permits our dissolution by (1)
the affirmative vote of a majority of the entire board of directors declaring
such dissolution to be advisable and directing that the proposed dissolution be
submitted for consideration at an annual or special meeting of stockholders, and
(2) upon proper notice, stockholder approval by the affirmative vote of a
majority of the votes entitled to be cast on the matter.
Meetings of Stockholders
Under our bylaws, annual meetings of stockholders shall be held at
such date and time as determined by our board of directors, chairman of the
board or president. Our bylaws establish an advance notice procedure for
stockholders to make nominations of candidates for directors or bring other
business before an annual meeting of stockholders. Special meetings of
stockholders may be called only by a majority of the directors, and only matters
set forth in the notice of the meeting may be considered and acted upon at such
a meeting.
The Board of Directors
Our certificate of incorporation provides that our board of directors
shall initially consist of four directors and thereafter the number of our
directors may be established by our board of directors but may not be fewer than
the minimum number required by the Delaware General Corporation Law nor more
than eleven. Any vacancy will be filled, including any vacancy created by an
increase in the number of directors, at any regular meeting or at any special
meeting called for the purpose by the affirmative vote of a majority of the
remaining directors then in office, even if less than a quorum of our board of
directors or any authorized committee thereof.
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Ownership Limitations
Our certificate of incorporation contains provisions that limit the
ownership by any person of shares of any class or series of our capital stock.
See "Description of Capital Stock - Restrictions on Ownership of our Capital
Stock."
Limitation of Liability and Indemnification
Section 145 of the General Corporation Law of the State of Delaware
permits a corporation, under specified circumstances, to indemnify its
directors, officers, employees or agents against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are our directors,
officers, employees or agents, if such directors, officers, employees or agents
acted in good faith and in a manner they reasonably believed to be in or not
opposed to our best interests and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful. In a derivative
action, i.e., one by or in the right of our company, indemnification may be made
only for expenses actually or reasonably incurred by directors, officers,
employees or agents in connection with the defense or settlement of an action or
suit, subject to certain limitations.
Our certificate of incorporation, as well as our bylaws, provides that
we will fully indemnify our officers, directors and employees to the fullest
extent possible under the General Corporation Law of the State of Delaware as
described above. Additionally, our certificate of incorporation provides that a
director will have personal liability for money damages to us or our
stockholders for breach of fiduciary duty only for:
o a breach of the director's duty of loyalty;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful dividends or unlawful stock purchases or redemptions; or
o any transaction from which the director received an improper
personal benefit.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Directors' and Officers' Insurance and Indemnification
In 2003, we purchased insurance for the benefit of directors and
officers of our company and our subsidiaries against liability incurred by them
in their capacity as directors and officers. The premium, including taxes,
amounted to approximately $1.3 million. The policy provides coverage to the
directors and officers of $50 million for each claim in the policy year. If we
become liable pursuant to the indemnification of directors and officers with
respect to any action against them in respect of execution of their duties of
office, the insurance coverage will extend to us; however, each claim will be
subject to a deductible of $500,000.
Business Combinations
We have elected not to be governed by Section 203 of the Delaware
General Corporation Law relating to business combinations with interested
shareholders.
33
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary discusses the federal income tax considerations
anticipated to be material to you. The discussion addresses only holders that
hold shares of our common stock as capital assets and does not address the tax
consequences that may be relevant to individual stockholders in light of their
particular circumstances or any special treatment to which they may be subject
under certain federal income tax laws, such as dealers in securities, traders in
securities that elect to mark to market, banks, insurance companies, persons
liable for the alternative minimum tax, persons that hold securities that are a
hedge, that are hedged against currency risks or that are part of a straddle or
conversion transaction, persons whose functional currency is not the U.S.
dollar, tax-exempt organizations (except to the extent discussed under the
heading "- Taxation of Tax-Exempt Stockholders") or non-United States persons.
This discussion does not address any consequences arising under the laws of any
state, local or foreign jurisdiction.
The information in this discussion is based on current provisions of
the Internal Revenue Code of 1986, as amended ("Code"), existing, temporary and
currently proposed Treasury Regulations thereunder, the legislative history of
the Code, existing administrative interpretations and practices of the Internal
Revenue Service (the "IRS"), and judicial decisions, all of which are subject to
change either prospectively or retroactively. No assurance can be given that
future legislation, Treasury Regulations, administrative interpretations or
judicial decisions will not significantly change the current law or adversely
affect existing interpretations of the current law.
You are advised to consult your own tax advisor regarding the specific
tax consequences to you of the purchase, ownership and disposition of our common
stock.
Taxation of Our Company
General
We have made an election to be taxed as a REIT, under Sections 856
through 860 of the Code, commencing with our taxable year ending on December 31,
2001. We believe that we have operated in a manner that permits us to satisfy
the requirements for taxation as a REIT under the applicable provisions of the
Code. We intend to continue to operate in such manner, but no assurance can be
given that we will continue to operate in a manner so as to qualify or remain
qualified as a REIT for United States federal income tax purposes.
Shearman & Sterling LLP, acting as our special counsel, has delivered
an opinion substantially to the effect that, commencing with our taxable year
ended December 31, 2001, we have been organized in conformity with the
requirements for qualification as a REIT, and our method of operation has
enabled and will enable us to continue to meet the requirements for
qualification and taxation as a REIT under the Code. This opinion is based on
current law and various assumptions, and relies upon the accuracy of certain
representations made by us as to factual matters, and an opinion of counsel is
not binding upon the IRS. Moreover, qualification and taxation as a REIT depends
upon our ability to meet on an ongoing basis (through actual annual operating
results, distribution levels and diversity of stock ownership) the various
qualification tests imposed under the Code, as discussed below, the results of
which will not be reviewed by Shearman & Sterling LLP. Accordingly, no assurance
can be given that the actual results of our operations for any particular
taxable year will satisfy such requirements. Further, the anticipated income tax
treatment described in this prospectus may be changed, perhaps retroactively, by
legislative, administrative or judicial action at any time.
The provisions of the Code, Treasury Regulations promulgated
thereunder and other federal income tax laws relating to the qualification as
and taxation of REITs are highly technical and complex. The following discussion
sets forth the material aspects of the laws that govern the federal income tax
treatment of a REIT and its stockholders. This summary is qualified in its
entirety by the applicable Code provisions, rules and Treasury Regulations
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change, which changes may apply retroactively.
If we qualify for taxation as a REIT, generally, we will not be
subject to United States federal corporate income taxes on that portion of our
ordinary income or capital gain that we currently distribute to stockholders.
The
34
REIT provisions of the Code generally allow a REIT to deduct dividends paid to
our stockholders. This deduction for dividends substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. We will, however, be subject
to federal income tax under certain circumstances, among which are the
following:
We will be subject to tax at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
See, however, "Annual Distribution Requirements" below with respect to our
ability to elect to treat as having been distributed to our stockholders certain
capital gains upon which we have paid taxes, in which case, so much of the taxes
as we have paid with respect to such income would also be treated as having been
distributed to stockholders.
We may be subject to the "alternative minimum tax" on our items of tax
preference.
If we have (a) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (b) other nonqualifying income from foreclosure
property, we will be subject to tax at the highest corporate rate on such
income. In general, foreclosure property is property acquired through
foreclosure after a default on a loan secured by the property or on a lease of
the property.
We will be required to pay a 100% tax on any net income from
prohibited transactions. In general, prohibited transactions are sales or other
taxable dispositions of property, other than foreclosure property, held
primarily for sale to customers in the ordinary course of business.
If we fail to satisfy the 75% gross income test or the 95% gross
income test (as discussed below), but we have maintained our qualification as a
REIT because certain other requirements have been met, we will be subject to a
100% tax on an amount equal to (1) the gross income attributable to the greater
of the amount by which we fail the 75% or 95% gross income test multiplied by
(2) a fraction intended to reflect our profitability.
We will be required to pay a 4% excise tax on the amount by which our
annual distributions to our stockholders are less than the sum of (1) 85% of our
ordinary income for the taxable year, (2) 95% of our REIT capital gain net
income for the year (other than capital gain income we elect to retain and pay
tax on) and (3) any undistributed taxable income from prior periods (other than
capital gains from such years which we elected to retain and pay tax on).
If we acquire an asset from a corporation that is not a REIT in a
transaction in which the basis of the asset in our hands is determined by
reference to the basis of the asset in the hands of the transferor corporation,
and we subsequently sell the asset within 10 years, then pursuant to the
Temporary Treasury Regulations, we would be required to pay tax at the highest
regular corporate tax rate on this gain to the extent (a) the fair market value
of the asset exceeds (b) our adjusted tax basis in the asset, in each case,
determined as of the date on which we acquired the asset. The results described
in this paragraph assume that we will elect this treatment in lieu of an
immediate tax when the asset is acquired.
Organizational Requirements
The Code defines a REIT as a corporation, trust or association (1)
which is managed by one or more trustees or directors; (2) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (3) which would be taxable as a domestic
corporation but for Sections 856 through 859 of the Code; (4) which is neither a
financial institution nor an insurance company subject to certain provisions of
the Code; (5) the beneficial ownership of which is held by 100 or more persons;
(6) not more than 50% in value of the outstanding capital 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) at any time during
the last half of each taxable year; and (7) which meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (1) to (4), inclusive, must be met during the entire
taxable year and that condition (5) 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.
35
We believe that we will have issued sufficient shares of our common
stock with sufficient diversity of ownership to allow us to satisfy conditions
(5) and (6). In addition, our certificate of incorporation will provide for
certain restrictions regarding the transfer of our capital stock in order to aid
in meeting the stock ownership requirements. If we were to fail to satisfy such
ownership requirements, our status as a REIT will terminate.
To monitor our compliance with the stock ownership requirements, we
are required to maintain records regarding the actual ownership of our capital
stock. To do so, we must demand written statements each year from the record
holders of certain percentages of our capital stock in which the record holders
are to disclose the actual owners of the capital stock (i.e., the persons
required to include in gross income the REIT dividends). A list of those persons
failing or refusing to comply with this demand must be maintained as part of our
records. A stockholder who fails or refuses to comply with the demand must
submit a statement with its United States federal income tax return disclosing
the actual ownership of the capital stock and certain other information.
Although we intend to satisfy the stockholder demand statement requirements
described in this paragraph, any failure to satisfy those requirements will not
result in our disqualification as a REIT under the Code but may result in the
imposition of IRS penalties against us.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of a partnership will retain the same character in the
hands of a partner qualifying as a REIT for purposes of Section 856 of the Code,
including satisfying the gross income tests and the asset tests, described
below.
Income Tests
There are two separate percentage tests relating to the sources of our
gross income that must be satisfied for each taxable year.
First, at least 75% of our gross income (excluding gross income from
"prohibited transactions") for each taxable year must be derived, directly or
indirectly, from investments relating to real property or mortgages on real
property (including "rents from real property," "gain from the sale or other
disposition of real property," and, in certain circumstances, interest) or from
certain other types of gross income specified in Section 856(c)(3) of the Code.
Second, at least 95% of our gross income (excluding gross income from
"prohibited transactions") for each taxable year must be derived, directly or
indirectly, from such real property investments, dividends, interest and gain
from the sale or disposition of capital stock or securities (or from any
combination of the foregoing).
In addition, if we should realize any net income from the sale or
other disposition of property held primarily for sale to customers in the
ordinary course of business (including our share of any such gain realized by
any partnership in which we are a partner), then such income would be treated as
income from a "prohibited transaction" and would not count towards satisfying
the 95% and 75% gross income tests. Such income would also be subject to a 100%
penalty tax. Under existing law, whether property is held primarily for sale to
customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction.
Rents received from a tenant will qualify as rents from real property
in satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the REIT, or
an actual or constructive owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property" in this prospectus. Finally, for rents
received to qualify as "rents from real property," the REIT generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an independent contractor from whom the REIT
derives no revenue. The "independent contractor" requirement, however, does not
apply to the extent that the services provided by us are "usually or customarily
36
rendered" in connection with the rental of space for occupancy only, and are not
otherwise considered "rendered to the occupant." To the extent that services
(other than those customarily furnished or rendered in connection with the
rental of real property) are rendered to the tenants of the property by the
independent contractor, the cost of the services must be borne by the
independent contractor. Both for the Related Party Tenant rules and for
determining whether an entity qualifies as an independent contractor of a REIT,
certain attribution rules of the Code apply, pursuant to which shares of a REIT
held by one entity are deemed held by another. In addition to the independent
contractor exception, a "taxable REIT subsidiary" in which we own an interest
may provide both customary and noncustomary services to our tenants without
causing the rent we receive from those tenants to fail to qualify as "rents from
real property."
We believe that we have held and managed our properties in a manner
that has given rise to rental income qualifying under the gross income
requirements for the REIT.
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for such year if we
are entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if our failure to meet such tests was due
to reasonable cause and not due to willful neglect, if we attach a schedule of
the sources of our income to our United States federal income tax return, and if
any incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances we
would be entitled to the benefit of these relief provisions. As discussed above
in "- General," even if these relief provisions apply, a tax would be imposed
with respect to the excess gross income.
Asset Tests
At the close of each quarter of our taxable year, we must satisfy two
tests relating to the nature of our assets. First, at least 75% of the value of
our total assets must be represented by interests in real property, interests in
mortgages on real property, shares in other REITs, cash, cash items and
government securities (as well as certain temporary investments in stock or debt
instruments purchased with the proceeds of new capital raised by us). Second, no
more than 25% of our total assets may be represented by securities other than
those in the 75% asset class. Of the investments included in the 25% asset
class, subject to an exception for securities in the 75% asset class, (1) the
value of one or more "taxable REIT subsidiaries" owned by us may not exceed 20%,
of our total assets, (2) the value of any one issuer's securities (other than
securities of taxable REIT subsidiaries) owned by us may not exceed 5% of our
total assets, (3) we may not own more than 10% of any one issuer's outstanding
voting securities, and (4) we may not own more than 10% of any one issuer's
securities by value, excluding certain "safe harbor" debt. We may own 100% of
"qualified REIT subsidiaries," which are, in general, 100% owned, corporate
subsidiaries of a REIT. All assets, liabilities and items of income, deduction
and credit of such a qualified REIT subsidiary will be treated as owned and
realized directly by us.
Because substantially all of our assets consist of interests in real
property, we believe that we will satisfy the asset tests described above.
If we fail to satisfy the asset tests at the end of a calendar
quarter, such failure would not cause us to lose our REIT status if (1) we
satisfied all of the asset tests at the close of the preceding calendar quarter
and (2) the discrepancy between the value of our assets and the asset
requirements either did not exist immediately after the acquisition of any
particular asset or was not wholly or partly caused by such an acquisition
(i.e., the discrepancy arose from changes in the market values of our assets).
If the condition described in clause (2) of the preceding sentence were not
satisfied, we could still avoid disqualification by eliminating any discrepancy
within 30 days after the close of the quarter in which it arose.
Annual Distribution Requirements
In order to qualify as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our stockholders each year in an amount
equal to at least (A) the sum of (i) 90% of our REIT taxable income (computed
without regard to the dividends paid deduction and our net capital gain) and
(ii) 90% of the net income (after tax), if any, from foreclosure property, minus
(B) the sum of certain items of non-cash income. Such distributions must be paid
in the taxable year to which they relate, or in the following taxable year if
declared before
37
we timely file our tax return for such year and if paid on or before the first
regular dividend payment after such declaration. To the extent that we do not
distribute all of our net capital gain or distribute at least 90%, but less than
100%, of our REIT taxable income, as adjusted, we will be subject to tax on the
undistributed amount at regular capital gains or ordinary corporate tax rates,
as the case may be. Furthermore, if we should fail to distribute during each
calendar year at least the sum of (1) 85% of our ordinary income for such year,
(2) 95% of our net capital gain income for such year, and (3) any undistributed
taxable income from prior periods, we would be subject to a 4% excise tax on the
excess of such required distribution over the sum of the amounts actually
distributed and the amount of any net capital gains we elected to retain and pay
tax on.
We may elect to retain rather than distribute our net long-term
capital gains. The effect of this election is that (1) we would be required to
pay the tax on such gains at regular corporate tax rates, (2) our stockholders,
while required to include their proportionate share of the undistributed
long-term capital gain in income, would receive a credit or refund for their
share of the tax paid by us; and (3) the basis of a stockholder's stock would be
increased by the amount of the undistributed long-term capital gains (minus the
amount of capital gains tax paid by us and deemed paid by the stockholder).
It is possible that in the future we may not have sufficient cash or
other liquid assets to meet the distribution requirement, due to timing
differences between the actual receipt of income and actual payment of expenses,
on the one hand, and the inclusion of such income and deduction of such expenses
in computing our REIT taxable income, on the other hand. To avoid any problem
with the distribution requirement, we will closely monitor the relationship
between our REIT taxable income and cash flows and, if necessary, will borrow
funds in order to satisfy the distribution requirement. We may be required to
borrow funds at times when market conditions are not favorable.
If we fail to meet the distribution requirement as a result of an
adjustment to our tax return by the IRS, we may retroactively cure the failure
by paying a "deficiency dividend" (plus applicable penalties and interest)
within a specified period.
Failure to Qualify
If we fail to qualify for taxation as a REIT in any taxable year and
the relief provisions do not apply, we will be subject to tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Distributions to stockholders in any year in which we fail to qualify
will not be deductible by us, nor will they be required to be made. In such
event, to the extent of our current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations in the Code, corporate distributees may be eligible for
the dividends received deduction. Unless entitled to relief under specific
statutory provisions, we will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether we would be entitled to such statutory
relief.
Taxation of Stockholders
Taxation of U.S. Stockholders
Taxation of Taxable U.S. Stockholders
As used herein, "U.S. Stockholder" means a holder of our capital stock
who or that is (1) a citizen or resident of the United States, (2) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or a political subdivision thereof, (3) an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source, (4) a trust if (A) a United States court is able to
exercise primary supervision over the administration of the trust and (B) one or
more U.S. persons, within the meaning of Section 7701(a)(30) of the Code, have
authority to control all substantial decisions of the trust. As long as we
qualify as a REIT, distributions made to our taxable U.S. Stockholders out of
current or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by them as ordinary income. U.S.
Stockholders that are corporations will not be entitled to a dividends received
deduction. To the extent that we make distributions in excess of current and
accumulated earnings and profits, these distributions are treated first as a
tax-
38
free return of capital to the U.S. Stockholder, reducing the tax basis of a
U.S. Stockholder's capital stock by the amount of such distribution (but not
below zero), with distributions in excess of the U.S. Stockholder's tax basis
taxable as capital gains (if the stock is held as a capital asset).
Any dividend declared by us in October, November or December of any
year and payable to a U.S. Stockholder of record on a specific date in any such
month shall be treated as both paid by us and received by the U.S. Stockholder
on December 31 of such year, provided that the dividend is actually paid by us
during January of the following calendar year. U.S. stockholders may not include
in their own income tax returns any of our net operating losses or capital
losses.
In general, distributions which are designated by us as capital gain
dividends will be taxed to U.S. Stockholders as capital gains from the sale of
assets held for greater than one year (i.e., "long-term term capital gain") to
the extent they do not exceed our actual net capital gain for the year, without
regard to the period for which a U.S. Stockholder has held his stock upon which
the capital gain dividend is paid. However, corporate U.S. Stockholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. A portion of such capital gain dividends received by noncorporate
taxpayers might be subject to tax at a 25% rate to the extent attributable to
certain gains realized on the sale of real property.
We may elect to retain, rather than distribute as a capital gain
dividend, our net long-term capital gains. In such event, we would pay tax on
such retained net long-term capital gains. In addition, to the extent that we
designate, a U.S. Stockholder generally would (1) include his proportionate
share of such retained capital gains in computing his long-term capital gains in
his return for his taxable year in which the last day of our taxable year falls
(subject to certain limitations as to the amount so includable), (2) be deemed
to have paid the capital gains tax imposed on us on the designated amounts
included in such U.S. Stockholder's long-term capital gains, (3) receive a
credit or refund for such amount of tax deemed paid, (4) increase the adjusted
basis of his shares by the difference between the amount of such includable
gains and amount of the tax deemed paid by him, and (5) in the case of a U.S.
Stockholder that is a corporation, appropriately adjust its earnings and profits
for the retained capital gains in accordance with Treasury Regulations (which
have not yet been issued).
Distributions made by us and gain arising from a U.S. Stockholder's
sale or exchange of our shares will not be treated as passive activity income.
As a result, U.S. Stockholders generally will not be able to apply any passive
losses against that income or gain.
When a U.S. Stockholder sells or otherwise disposes of shares of our
stock, the stockholder will recognize gain or loss for United States federal
income tax purposes in an amount equal to the difference between (a) the amount
of cash and the fair market value of any property received on the sale or other
disposition, and (b) the holder's adjusted basis in the shares for tax purposes.
This gain or loss will be capital gain or loss if the U.S. shareholder has held
the shares as a capital asset. The gain or loss will be long-term gain or loss
if the U.S. shareholder has held the shares for more than one year.
In general, any loss upon a sale or exchange of our capital stock by a
U.S. Stockholder who has held such stock for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss, to
the extent of distributions (actually made or deemed made in accordance with the
procedure described above) from us that are required to be treated by such
stockholder as long-term capital gain.
Taxation of Tax-Exempt Stockholders
Based upon a published ruling by the IRS, a distribution by us to a
U.S. Stockholder that is a tax-exempt entity will not constitute "unrelated
business taxable income" ("UBTI"), provided that the tax-exempt entity has not
financed the acquisition of its shares with "acquisition indebtedness" within
the meaning of the Code and the shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity.
Notwithstanding the preceding paragraph, however, a portion of the
dividends paid by us may be treated as UBTI to certain domestic private pension
trusts if we are treated as a "pension held REIT." We believe that we are
39
not, and do not expect to become, a "pension-held REIT." If we were to become a
"pension-held REIT," these rules generally would only apply to certain pension
trusts that held more than 10% of our capital stock.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends
in respect of, and the proceeds received on the disposition of our common stock
paid within the United States (and in certain cases, outside of the United
States) to U.S. Stockholders other than certain exempt recipients (such as
corporations), and a 28 percent backup withholding tax may apply to such amounts
if the U.S. Stockholder fails to provide an accurate taxpayer identification
number or to report interest and dividends required to be shown on its federal
income tax returns or otherwise fails to comply with or establish an exemption
from such backup withholding tax. The amount of any backup withholding from a
payment to a U.S. Stockholder will be allowed as a credit against the U.S.
Stockholder's United States federal income tax liability.
Legislative or Other Actions Affecting Tax Considerations
Prospective investors should recognize that the present federal income
tax treatment of an investment in us may be modified by legislative, judicial or
administrative action at any time, and that any such action may affect
investments and commitments previously made. The rules dealing with federal
income taxation are regularly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department, resulting
in revisions of regulations and revised interpretations of established concepts
as well as statutory changes. Revisions in federal tax laws and interpretations
thereof could adversely affect the tax consequences of an investment in us.
Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the
"2003 Act"), signed into law on May 28, 2003, the marginal tax rates applicable
to ordinary income generally have been lowered effective January 1, 2003.
Furthermore, for capital assets held for over one year and sold or exchanged on
or after May 6, 2003 but in taxable years beginning before January 1, 2009, the
maximum rate of tax generally will be 15% (rather than the higher rates of tax
generally applicable to items of ordinary income). Finally, "qualified dividend
income" received in taxable years beginning after December 31, 2002 and
beginning before January 1, 2009, generally will be taxed at the rates
applicable to these capital gains (i.e., a maximum rate of 15%) rather than the
rates applicable to other items of ordinary income. However, because REITs
generally are not subject to corporate income tax, this reduced tax rate
generally does not apply to ordinary REIT dividends, which continue to be taxed
at the higher tax rates applicable to ordinary income.
The new maximum rate of 15% applies to:
o long-term capital gains recognized on the disposition of REIT
shares;
o REIT capital gain distributions (except to the extent
attributable to real estate depreciation, in which case such
distributions continue to be subject to a 25% tax rate);
o REIT dividends attributable to dividends received by a REIT from
non-REIT corporations, such as taxable REIT subsidiaries; and
o REIT dividends attributable to income that was subject to
corporate income tax at the REIT level (e.g., to the extent that
a REIT distributes less than 100% of its taxable income).
The 2003 Act could make shares in non-REIT corporations relatively
more attractive to certain prospective investors than shares in REITs and could
have an adverse effect on the market price of our common stock. Prospective
investors are urged to consult their own tax advisers regarding the impact on
their particular situations of the provisions of the 2003 Act.
40
State and Local Taxes
We and our stockholders may be subject to state or local taxation in
various jurisdictions, including those in which we or they transact business or
reside. The state and local tax treatment of us and our stockholders may not
conform to the federal income tax consequences discussed above. Consequently,
prospective stockholders should consult their own tax advisers regarding the
effect of state and local tax laws on an investment in our common stock.
41
PLAN OF DISTRIBUTION
We are registering shares of our common stock on behalf of Trizec
Canada Inc., or one or more of its affiliates, successors or assigns, as the
selling stockholder. We will pay for the costs, expenses and fees in connection
with the registration of the shares, except for brokerage commissions incurred
by the selling stockholder in connection with the sale or other disposition of
the common stock. The selling stockholder may dispose of its shares of our
common stock in one or more of the following types of transactions (including
block transactions):
o through delivery of shares of our common stock to Trizec Canada
Inc. shareholders in satisfaction of redemptions,
o on the New York Stock Exchange,
o in the over-the-counter market,
o in privately negotiated transactions,
o through put or call options transactions relating to the shares,
o through short sales of shares, or
o a combination of such methods of sale.
The selling stockholder may sell its shares at prevailing market
prices or at privately negotiated prices. Such transactions may or may not
involve its brokers or dealers.
The selling stockholder may offer and sell its shares directly to
purchasers or to or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commission from the selling stockholder and/or the
purchasers of shares.
We have agreed to indemnify the selling stockholder against certain
liabilities, including liabilities arising under the Securities Act.
Certain of the brokers, dealers or agents and their associates who may
become involved in the sale of the shares may engage in transactions with and
perform other services for us in the ordinary course of their business for which
they receive customary compensation.
LEGAL MATTERS
Certain legal matters, including the validity of our common stock,
will be passed upon for us by Shearman & Sterling LLP, New York, New York.
EXPERTS
The financial statements incorporated in this registration statement
by reference to the Annual Report on Form 10-K for the year ended December 31,
2002 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The Securities and Exchange Commission recently issued Regulation G
concerning the use of non-GAAP financial measures. Prior to the adoption of
Regulation G by the Securities and Exchange Commission effective March 28, 2003,
we included in our Form 10-K funds from operations, which is a non-GAAP
financial measure that
42
we believe to be helpful to a reader's understanding of our financial
statements. Our Form 10-K did not include the reconciliations of these non-GAAP
measures to their most comparable GAAP measures that are now required under
Regulation G. Because we incorporate by reference in this prospectus our Form
10-K, we present below, in compliance with Regulation G, reconciliations for
funds from operations included in our Form 10-K to its most comparable measure
presented in accordance with GAAP.
Funds from Operations
We believe that funds from operations, as defined by the National
Association of Real Estate Investment Trusts, or NAREIT, is an appropriate
measure of performance for an equity REIT. The White Paper on Funds from
Operations, approved by NAREIT in April 2002, defines funds from operations as
net income (loss), computed in accordance with GAAP, excluding gains (or losses)
from debt restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. We compute funds from operations as net income
available to common shareholders adjusted for sales of properties, real estate
related depreciation and amortization, (gain) loss on early debt retirement,
minority interest, recovery on insurance claims and cumulative effect of change
in accounting principle. In addition, we eliminate the effects of provision for
loss on real estate and provision for and loss on investments because they are
not representative of our real estate operations. We believe that funds from
operations is helpful to investors as a measure of the performance of an equity
REIT because, along with cash flow from operating activities, investing
activities and financing activities, it provides investors with an indication of
the ability of a company to incur and service debt, to make capital expenditures
and to fund other cash needs. Our computation of funds from operations may not
be comparable to funds from operations reported by other REITs. Funds from
operations does not represent cash generated from operating activities in
accordance with GAAP, nor does it represent cash available to pay distributions
and should not be considered as an alternative to net income, determined in
accordance with GAAP, as an indication of our financial performance or to cash
flows from operating activities, determined in accordance with GAAP, as a
measure of our liquidity, nor is it indicative of funds available to fund our
cash needs, including our ability to make cash distributions.
The following table reflects the calculation of funds from operations
for the years ended December 31, 2002, 2001, 2000, 1999 and 1998:
FFO Reconciliation
(in millions)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net (Loss) Income Available to Common Shareholders $(188.8) $(152.5) $383.0 $38.3 $402.3
Add/(Deduct):
(Gain) Loss on Disposition of Real Estate (3.0) 2.1 (36.9) - (535.0)
Gain on Disposition of Discontinued Real Estate (4.9) - - - -
Depreciation and Amortization (Real Estate Related)
Including Share of Unconsolidated Real Estate
Joint Ventures and Discontinued Operations 190.5 174.9 161.8 142.3 85.8
Loss on Early Debt Retirement - 18.0 1.5 - -
Minority Interest (1.8) (0.4) (0.6) (1.5) (1.1)
Recovery on Insurance Claim (3.5) - - - -
Cumulative Effect of Change in Accounting Principle - 4.6 - - -
Provision for Loss on Real Estate and Investments 260.2 258.0 3.7 41.4 -
Provision for Loss on Unconsolidated Real Estate
Joint Ventures 58.9 46.9 - - -
Provision for (Benefit from) Income Taxes - 8.9 (262.2) 21.6 246.4
------ ------ ------- ------ ------
Funds From Operations Available to Common Shareholders $307.6 $360.5 $250.3 $242.1 $198.4
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WHERE YOU CAN FIND MORE INFORMATION
You may obtain from the SEC, through the SEC's web site or at the SEC
offices mentioned in the following paragraph, a copy of the registration
statement, including exhibits, that we have filed with the SEC to register the
securities offered under this prospectus. The registration statement may contain
additional information about our company and the securities being offered that
may be important to you.
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You also may read and
copy any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549. You also can obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. Our SEC filings are also available at the office of the New York
Stock Exchange located at 20 Broad Street, New York, New York 10005. For further
information on obtaining copies of our public filings at the New York Stock
Exchange, you should call (212) 656-5060. These SEC filings are also available
to the public from commercial document retrieval services.
We make available free of charge at www.trz.com copies of materials we
file with, or furnish to, the SEC, including our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements,
and amendments to those filings, as soon as reasonably practicable after we
electronically file such materials with, or furnish them to, the SEC. The
information on our web site is not a part of this prospectus.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" into this prospectus
the information that we file with the SEC. This permits us to disclose important
information to you by referring to those documents rather than repeating them in
full in this prospectus. The information incorporated by reference in this
prospectus contains important business and financial information. In addition,
information that we file with the SEC after the date of this prospectus and
prior to the completion of the offering under this prospectus will update and
supersede the information contained in this prospectus and incorporated filings.
We incorporate by reference the following documents filed by us with the SEC and
any documents we file with the SEC in the future under Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act until this offering is completed (other than any
portions of the respective filings that were furnished, under applicable SEC
rules, rather than filed):
o Annual Report on Form 10-K for the year ended December 31, 2002;
o Quarterly Reports on Form 10-Q for the periods ended March 31,
2003 and June 30, 2003; and
o Current Reports on Form 8-K dated April 11, 2003, April 14, 2003,
May 20, 2003 and August 29, 2003.
Any statement contained in a document incorporated by reference, or
deemed to be incorporated by reference, in this prospectus shall be deemed to be
modified or superseded for purposes of this prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated by reference in this prospectus modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
Statements contained in this prospectus as to the contents of any contract or
other document referred to in this prospectus do not purport to be complete, and
where reference is made to the particular provisions of such contract or other
document, such provisions are qualified in all respects by reference to all of
the provisions of such contract or other document.
You may request a copy of each document incorporated by reference in
this prospectus at no cost, by writing or calling us at 233 S. Wacker Drive,
Suite 4600, Chicago, IL 60606, telephone (312) 798-6000, attention: Investor
Relations.
44
Exhibits to a document will not be provided unless they are
specifically incorporated by reference in this document.
The information in this prospectus may not contain all of the
information that may be important to you. You should read the entire prospectus,
as well as the documents incorporated by reference in this prospectus, before
making an investment decision.
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10,000,000 SHARES
TRIZEC PROPERTIES, INC.
COMMON STOCK
----------
PROSPECTUS
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October 22, 2003
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