FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-78627
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 2, 1999)
[LOGO OF PS BUSINESS PARKS, INC./SM/]
2,000,000 Shares
PS Business Parks, Inc.
Depositary Shares Each Representing 1/1,000 of a Share of
8.750% Cumulative Preferred Stock, Series F
Liquidation Preference Equivalent to $25.00 Per Depositary Share
-----------
We are selling 2,000,000 depositary shares each representing 1/1,000 of a
share of our 8.750% Cumulative Preferred Stock, Series F. The shares of
Preferred Stock represented by the depositary shares will be deposited with
American Stock Transfer & Trust Company as depositary. As a holder of
depositary shares, you will be entitled to all proportional rights,
preferences and privileges of the Preferred Stock. The following is a summary
of the Preferred Stock:
. We will pay cumulative distributions on the Preferred Stock, from the
date of original issuance, at the rate of 8.750% of the liquidation
preference per year ($2.1875 per year per depositary share).
. We will pay distributions on the Preferred Stock quarterly, beginning on
March 31, 2002 (with the payment on that date being based pro rata on
the number of days from the original issuance of the Preferred Stock).
. We are not allowed to redeem the Preferred Stock before January 28,
2007, except in order to preserve our status as a real estate investment
trust.
. On and after January 28, 2007, we may, at our option, redeem the
Preferred Stock by paying you $25.00 per depositary share, plus any
accrued and unpaid distributions.
. The Preferred Stock has no stated maturity and is not subject to any
sinking fund or mandatory redemption and is not convertible into any
other securities.
. Investors in the depositary shares representing interests in the
Preferred Stock generally have no voting rights, except if we fail to
pay distributions for six or more quarters or as required by law.
We intend to apply to have the depositary shares listed on the American
Stock Exchange, or AMEX, under the symbol "PSBPrF." If this application is
approved, trading of the depositary shares on the AMEX is expected to begin
within 30 days following initial delivery of the depositary shares.
-----------
Investing in the depositary shares involves certain risks. See "Risk
Factors" beginning on page 1 of the accompanying prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
-----------
Per Depositary
Share Total
-------------- -----------
Public Offering Price........................... $ 25.00 $50,000,000
Underwriting Discount........................... $ 0.7875 $ 1,575,000
Proceeds to PS Business Parks (before
expenses)...................................... $24.2125 $48,425,000
The underwriters are offering the depositary shares subject to various
conditions. The underwriters expect to deliver the depositary shares to
purchasers on or about January 28, 2002.
-----------
Salomon Smith Barney
Credit Suisse First Boston
A.G. Edwards & Sons, Inc.
Morgan Stanley
CIBC World Markets
Deutsche Banc Alex. Brown
Tucker Anthony Incorporated
Wachovia Securities
January 18, 2002
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You should rely only on the information contained in or incorporated by
reference in this prospectus supplement or the accompanying prospectus. We have
not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in or
incorporated by reference in this prospectus supplement or the accompanying
prospectus is accurate as of any date other than the date on the front of this
prospectus supplement.
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TABLE OF CONTENTS
Prospectus Supplement
Page
----
Summary of the Offering.................................................... S-3
The Company................................................................ S-4
Use of Proceeds ........................................................... S-5
Capitalization............................................................. S-5
Description of Preferred Stock and Depositary Shares....................... S-6
Federal Income Tax Consequences............................................ S-13
Underwriting............................................................... S-16
Legal Matters.............................................................. S-18
Prospectus
Risk Factors............................................................... 1
About This Prospectus...................................................... 5
Where You Can Find More Information........................................ 6
Forward-Looking Statements................................................. 7
The Company................................................................ 7
Use of Proceeds............................................................ 8
Ratio of Earnings to Fixed Charges......................................... 8
Description of Common Stock ............................................... 8
Description of Preferred Stock............................................. 10
Description of Equity Stock................................................ 14
Description of the Depositary Shares....................................... 17
Description of Warrants.................................................... 20
Certain Federal Income Tax Considerations.................................. 20
Plan of Distribution....................................................... 33
Legal Opinions............................................................. 36
Experts.................................................................... 36
This prospectus supplement and the accompanying prospectus, including
documents incorporated by reference, contain forward-looking statements.
Forward-looking statements are inherently subject to risk and uncertainties,
many of which cannot be predicted with accuracy and some of which might not
even be anticipated. Future events and actual results, financial and
otherwise, may differ materially from the results discussed in the forward-
looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors" and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001, which are incorporated herein by reference.
S-2
SUMMARY OF THE OFFERING
Securities Offered............... 2,000,000 depositary shares each
representing 1/1,000 of a share of our
8.750% Cumulative Preferred Stock, Series
F.
Price per Share.................. $25.
Use of Proceeds.................. To repay a loan from Public Storage, Inc.,
and to fund acquisitions of commercial
properties, development activity, purchases
of interests in real estate entities and
general corporate purposes.
Ranking.......................... With respect to the payment of dividends
and amounts upon liquidation, the Series F
Preferred Stock will rank:
. on a parity with our 9 1/4% Cumulative
Preferred Stock, Series A, our 9 1/2%
Cumulative Preferred Stock, Series D and
any other preferred shares that are not
by their terms subordinated to the
Series F Preferred Stock, and
. senior to our common stock and any other
of our equity securities that by their
terms rank junior to the Series F
Preferred Stock.
Dividends........................ Holders of Series F Preferred Stock will be
entitled to receive, when, as and if
declared by the Board of Directors out of
assets of the Company legally available for
payment, cash dividends payable quarterly
in arrears on or before the last day of
March, June, September and December of each
year, commencing on March 31, 2002, at the
rate of 8.750% of the liquidation
preference per year ($2.1875 per year per
depositary share). Dividends on the Series
F Preferred Stock will accumulate whether
or not we have earnings, whether or not we
have funds legally available for the
payment of such dividends and whether or
not we declare dividends.
Liquidation Rights............... The Series F Preferred Stock will have a
liquidation preference equal to $25 per
depositary share, plus accrued and unpaid
dividends, if any.
Redemption....................... We are not allowed to redeem the Series F
Preferred Stock before January 28, 2007,
except in order to preserve our status as a
REIT. On and after January 28, 2007, we
may, at our option, redeem the Series F
Preferred Stock by paying you $25 per
depositary share, plus any accrued and
unpaid dividends.
Voting Rights.................... If dividends on the Series F Preferred
Stock are in arrears for six or more
quarterly periods, whether or not such
quarterly periods are consecutive, holders
of Series F Preferred Stock (voting
together with all other series of preferred
shares) will be entitled to vote for the
election of two additional directors to
serve on our Board of Directors until all
such arrearages have been paid.
No Conversion.................... The Series F Preferred Stock is not
convertible into or exchangeable for any
other of our property or securities.
Trading.......................... We intend to apply to have the depositary
shares listed on the AMEX under the symbol
PSBPrF. If approved, trading is expected to
begin within 30 days after the initial
delivery of the depositary shares.
S-3
THE COMPANY
We are a self-advised and self-managed real estate investment trust, or REIT,
that acquires, develops, owns and operates commercial properties. We are the
sole general partner of our operating partnership, PS Business Parks, L.P.,
through which we conduct most of our activities. At December 31, 2001, we had
interests in properties in nine states containing approximately 15.1 million
net rentable square feet of space.
The following table sets forth information relating to the net rentable
square footage of our properties as of December 31, 2001:
Industrial Office Flex Total % of Total
---------- --------- ---------- ---------- ----------
California:
Los Angeles County...... 1,006,000 88,000 770,000 1,864,000 12.3%
Northern California..... 405,000 64,000 1,026,000 1,495,000 9.9%
Orange County........... -- 161,000 911,000 1,072,000 7.1%
San Diego County........ -- 157,000 378,000 535,000 3.5%
--------- --------- ---------- ---------- -----
1,411,000 470,000 3,085,000 4,966,000 32.9%
--------- --------- ---------- ---------- -----
Virginia:
Northern Virginia....... -- 589,000 2,032,000 2,621,000 17.3%
Texas:
Dallas.................. -- -- 1,576,000 1,576,000 10.4%
Austin.................. -- -- 833,000 833,000 5.5%
Houston................. -- 132,000 243,000 375,000 2.5%
San Antonio............. -- 199,000 -- 199,000 1.3%
--------- --------- ---------- ---------- -----
-- 331,000 2,652,000 2,983,000 19.7%
--------- --------- ---------- ---------- -----
Oregon:
Portland................ -- 347,000 1,626,000 1,973,000 13.1%
Maryland:
Maryland................ -- 721,000 1,048,000 1,769,000 11.7%
Arizona:
Phoenix................. -- -- 569,000 569,000 3.8%
Other..................... -- -- 228,000 228,000 1.5%
--------- --------- ---------- ---------- -----
1,411,000 2,458,000 11,240,000 15,109,000 100.0%
========= ========= ========== ========== =====
Recent Developments
On November 20, 2001, we acquired a business park known as the Cornell Oaks
Corporate Center in Beaverton, Oregon and 24 acres of developable land adjacent
to the park at an aggregate cost, including closing costs, of $87.5 million.
The park consists of 12 buildings, including one office building with 63,000
net rentable square feet and 11 flex-space buildings with a total of 622,000
net rentable square feet. This acquisition increases our presence in the
Beaverton submarket of Portland, Oregon to approximately 2,000,000 net rentable
square feet of space.
On December 27, 2001, we acquired a business park known as Metro Park North
in Rockville, Maryland at a cost, including closing costs, of $127 million. The
park consists of 17 buildings, including nine office buildings with a total of
692,000 net rentable square feet and eight flex-space buildings with a total of
211,000 net rentable square feet. This acquisition provides us with a presence
in the Rockville, Maryland submarket and increases our presence in the
Maryland/Northern Virginia market to approximately 4,400,000 net rentable
square feet of space.
S-4
USE OF PROCEEDS
We estimate net proceeds from this offering of approximately $48.2 million
after all anticipated issuance costs. We intend to use the net proceeds to
repay a loan from Public Storage, Inc. in the amount of $30.0 million, which
was incurred in connection with our acquisition of the Metro Park North
business park described under "Recent Developments." The loan is due in June
2002 and bears interest at 3.25% per year. We intend to use the remaining
proceeds to fund acquisitions of commercial properties, development activity,
purchases of interests in real estate entities and general corporate purposes.
Pending such uses, the net proceeds of this offering will be deposited in
interest bearing accounts or invested in certificates of deposit, United States
government obligations or other short-term, high quality debt instruments
selected at our discretion.
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2001:
. on an actual basis;
. on a pro forma basis to give effect to indebtedness we incurred under
our line of credit and pursuant to a loan from an affiliate in the
fourth quarter of 2001 as if the indebtedness was incurred prior to
September 30, 2001; and
. on a pro forma as adjusted basis to give further effect to the issuance
of 2,000,000 depositary shares representing interests in the Preferred
Stock pursuant to this offering.
September 30, 2001
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ---------- -----------
(Dollars in Thousands)
Mortgage notes payable....................... $ 30,354 $ 30,354 $ 30,354
Line of credit............................... -- 100,000 100,000
Short-term indebtedness owed to affiliate.... -- 30,000 --
Minority interest:
Preferred units............................ 197,750 197,750 197,750
Common units............................... 162,338 162,338 162,338
Shareholders' equity:
Preferred stock, $0.01 par value,
50,000,000 shares authorized, 4,840 shares
(4,840,000 depositary shares) issued and
outstanding, actual, and 6,840 shares
(6,840,000 depositary shares) issued and
outstanding, as adjusted.................. 121,000 121,000 171,000
Common stock, $0.01 par value, 100,000,000
shares authorized, 21,704,067 shares
issued and outstanding.................... 217 217 217
Paid-in capital............................ 426,546 426,546 424,771
Cumulative net income...................... 162,134 162,134 162,134
Other comprehensive loss................... (740) (740) (740)
Cumulative distributions................... (106,296) (106,296) (106,296)
-------- ---------- ----------
Total shareholders' equity............... 602,861 602,861 651,086
-------- ---------- ----------
Total capitalization................... $993,303 $1,123,303 $1,141,528
======== ========== ==========
S-5
DESCRIPTION OF PREFERRED STOCK AND DEPOSITARY SHARES
General
Under our Articles of Incorporation, as amended, the Board of Directors is
authorized without further shareholder action to provide for the issuance of up
to 50,000,000 shares of preferred stock, in one or more series, with such
voting powers, full or limited, and with such designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be set forth in resolutions
providing for the issue of preferred stock adopted by the Board of Directors.
At September 30, 2001, we had outstanding 4,840 shares of preferred stock
(represented by 4,840,000 depositary shares) and had reserved for issuance an
additional 7,910,000 shares of preferred stock.
Prior to issuance, the Board of Directors will have adopted resolutions
creating the 8.750% Cumulative Preferred Stock, Series F (the "Preferred
Stock"). When issued, the Preferred Stock will have a liquidation value of
$25,000 per share, will be fully paid and nonassessable, will not be subject to
any sinking fund or other obligation of PS Business Parks, Inc. (the "Company")
to repurchase or retire the Preferred Stock, and will have no preemptive
rights.
American Stock Transfer & Trust Company will be the transfer agent and
dividend disbursing agent for the Preferred Stock.
Each Depositary Share represents 1/1,000 of a share of Preferred Stock. The
shares of the Preferred Stock will be deposited with American Stock Transfer &
Trust Company, as Depositary (the "Preferred Stock Depositary"), under a
Deposit Agreement among the Company, the Preferred Stock Depositary and the
holders from time to time of the depositary receipts (the "Depositary
Receipts") issued by the Preferred Stock Depositary under the Deposit
Agreement. The Depositary Receipts will evidence the Depositary Shares. Subject
to the terms of the Deposit Agreement, each holder of a Depositary Receipt
evidencing a Depositary Share will be entitled, proportionately, to all the
rights and preferences of, and subject to all of the limitations of, the
interest in the Preferred Stock represented by the Depositary Share (including
dividend, voting, redemption and liquidation rights and preferences). See
"Description of the Depositary Shares" in the accompanying Prospectus and "--
Depositary Shares" below.
Immediately following our issuance of the Preferred Stock, we will deposit
the Preferred Stock with the Preferred Stock Depositary, which will then issue
and deliver the Depositary Receipts to us. We will, in turn, deliver the
Depositary Receipts to the underwriters. Depositary Receipts will be issued
evidencing only whole Depositary Shares.
We intend to apply to have the Depositary Shares listed on the AMEX. The
Preferred Stock will not be listed and we do not expect that there will be any
trading market for the Preferred Stock except as represented by the Depositary
Shares.
Ownership Restrictions
For a discussion of ownership limitations that apply to the Preferred Stock
and related Depositary Shares, see "Description of Common Stock--Ownership
Limitations" in the accompanying Prospectus.
Preferred Stock
The following is a brief description of the terms of the Preferred Stock
which does not purport to be complete and is subject to and qualified in its
entirety by reference to the Certificate of Determination of the Preferred
Stock, the form of which is filed as an exhibit to, or incorporated by
reference in, the Registration Statement of which this Prospectus Supplement
constitutes a part.
S-6
Ranking
With respect to the payment of dividends and amounts upon liquidation, the
Preferred Stock will rank pari passu with our 9 1/4% Cumulative Preferred
Stock, Series A and our 9 1/2% Cumulative Preferred Stock, Series D
(collectively, with the Preferred Stock, the "Senior Preferred Stock") and any
other shares of preferred stock issued by us, whether now or hereafter issued,
ranking pari passu with the Senior Preferred Stock (including shares of
preferred stock issued upon conversion of the Series B, Series C, Series E,
Series X and Series Y Cumulative Redeemable Preferred Units of our operating
partnership), and will rank senior to the Common Stock and any other capital
stock of the Company ranking junior to the Preferred Stock.
Dividends
Holders of shares of Preferred Stock, in preference to the holders of shares
of the Common Stock, and of any other capital stock issued by us ranking junior
to the Preferred Stock as to payment of dividends, will be entitled to receive,
when, as and if declared by the Board of Directors out of assets of the Company
legally available for payment, cash dividends payable quarterly at the rate of
8.750% of the liquidation preference per year ($2,187.50 per year per share,
equivalent to $2.1875 per year per Depositary Share). Dividends on the shares
of Preferred Stock will be cumulative from the date of issuance and will be
payable, when, as and if declared by the Board of Directors, quarterly on or
before March 31, June 30, September 30 and December 31, commencing on or before
March 31, 2002, to holders of record as they appear on the stock register of
the Company on such record dates, not less than 15 or more than 45 days
preceding the payment dates thereof, as shall be fixed by the Board of
Directors. After full dividends on the Preferred Stock have been paid or
declared and funds set aside for payment for all past dividend periods and for
the then current quarter, the holders of shares of Preferred Stock will not be
entitled to any further dividends with respect to that quarter.
When dividends are not paid in full upon the Preferred Stock and any other
shares of preferred stock of the Company ranking on a parity as to dividends
with the Preferred Stock (including the other series of Senior Preferred
Stock), all dividends declared upon the Preferred Stock and any other preferred
shares of the Company ranking on a parity as to dividends with the Preferred
Stock shall be declared pro rata so that the amount of dividends declared per
share on such Preferred Stock and such other shares shall in all cases bear to
each other the same ratio that the accrued dividends per share on the Preferred
Stock and such other preferred shares bear to each other. Except as set forth
in the preceding sentence, unless full dividends on the Preferred Stock have
been paid for all past dividend periods, no dividends (other than in Common
Stock or other shares of capital stock issued by us ranking junior to the
Preferred Stock as to dividends and upon liquidation) shall be declared or paid
or set aside for payment, nor shall any other distribution be made on the
Common Stock or on any other shares of capital stock issued by us ranking
junior to or on a parity with the Preferred Stock as to dividends or upon
liquidation.
Unless full dividends on the Preferred Stock have been paid for all past
dividend periods, we and our subsidiaries may not redeem, repurchase or
otherwise acquire for any consideration (nor may we or they pay or make
available any moneys for a sinking fund for the redemption of) any shares of
Common Stock or any other shares of capital stock issued by us ranking junior
to or on a parity with the Preferred Stock as to dividends or upon liquidation
except by conversion into or exchange for shares of capital stock issued by us
ranking junior to the Preferred Stock as to dividends and upon liquidation.
Our revolving credit facility with a commercial bank restricts our ability to
pay distributions in excess of 95% of "Funds from Operations" for the prior
four fiscal quarters, less scheduled principal payments and capital
expenditures. Funds from operations is defined in the loan agreement generally
as net income before gain on sale of real estate, extraordinary loss on early
retirement of debt and deductions for depreciation, amortization and non-cash
charges. Our management believes that this restriction will not impede our
ability to pay the dividends on the Preferred Stock in full.
S-7
No Conversion Rights
The Preferred Stock will not be convertible into shares of any other class or
series of capital stock of the Company.
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Preferred Stock will be entitled
to receive out of our assets available for distribution to stockholders, before
any distribution of assets is made to holders of Common Stock or of any other
shares of capital stock issued by us ranking as to such distribution junior to
the Preferred Stock, liquidating distributions in the amount of $25,000 per
share (equivalent to $25 per Depositary Share), plus all accrued and unpaid
dividends (whether or not earned or declared) for the then current, and all
prior, dividend periods. If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the amounts payable with respect to
the Preferred Stock and any other shares of stock issued by us ranking as to
any such distribution on a parity with the Preferred Stock are not paid in
full, the holders of the Preferred Stock and of such other shares will share
ratably in any such distribution of assets of the Company in proportion to the
full respective preferential amounts to which they are entitled. After payment
of the full amount of the liquidating distribution to which they are entitled,
the holders of the Preferred Stock will not be entitled to any further
participation in any distribution of assets by us.
For purposes of liquidation rights, a consolidation or merger of the Company
with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Company is not a liquidation,
dissolution or winding up of the Company.
Redemption
Except in certain circumstances relating to our qualification as a REIT, we
may not redeem the shares of Preferred Stock prior to January 28, 2007. On and
after January 28, 2007, at any time or from time to time, we may redeem the
shares of Preferred Stock in whole or in part at our option at a cash
redemption price of $25,000 per share of Preferred Stock (equivalent to $25 per
Depositary Share), plus all accrued and unpaid dividends to the date of
redemption. If fewer than all the outstanding shares of Preferred Stock are to
be redeemed, the shares to be redeemed will be determined by the Board of
Directors of the Company, and such shares shall be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares
held by such holders (with adjustments to avoid redemption of fractional
shares) or by lot in a manner determined by the Board of Directors of the
Company.
Notwithstanding the foregoing, if any dividends, including any accumulation,
on the Preferred Stock are in arrears, we may not redeem any Preferred Stock
unless we redeem simultaneously all outstanding Preferred Stock, and we may not
purchase or otherwise acquire, directly or indirectly, any Preferred Stock;
provided, however, that this shall not prevent the purchase or acquisition of
the Preferred Stock pursuant to a purchase or exchange offer if such offer is
made on the same terms to all holders of the Preferred Stock.
Notice of redemption of the Preferred Stock will be given by publication in a
newspaper of general circulation in the County of Los Angeles and the City of
New York, such publication to be made once a week for two successive weeks
commencing not less than 30 nor more than 60 days prior to the redemption date.
A similar notice will be mailed by us, postage prepaid, not less than 30 or
more than 60 days prior to the redemption date, addressed to the respective
holders of record of shares of Preferred Stock to be redeemed at their
respective addresses as they appear on the stock transfer records of the
Company. Each notice shall state: (i) the redemption date; (ii) the number of
shares of Preferred Stock to be redeemed; (iii) the redemption price per share
of Preferred Stock; (iv) the place or places where certificates for the
Preferred Stock are to be surrendered for payment of the redemption price; and
(v) that dividends on the shares of Preferred Stock to be redeemed will cease
to accrue on such redemption date. If fewer than all the shares of Preferred
Stock held by
S-8
any holder are to be redeemed, the notice mailed to such holder shall also
specify the number of shares of Preferred Stock to be redeemed from such
holder. In order to facilitate the redemption of shares of Preferred Stock, the
Board of Directors may fix a record date for the determination of shares of
Preferred Stock to be redeemed, such record date to be not less than 30 nor
more than 60 days prior to the date fixed for such redemption.
Notice having been given as provided above, from and after the date specified
therein as the date of redemption, unless we default in providing funds for the
payment of the redemption price on such date, all dividends on the Preferred
Stock called for redemption will cease. From and after the redemption date,
unless we so default, all rights of the holders of the Preferred Stock as
shareholders of the Company, except the right to receive the redemption price
(but without interest), will cease. Upon surrender in accordance with such
notice of the certificates representing any such shares (properly endorsed or
assigned for transfer, if the Board of Directors of the Company shall so
require and the notice shall so state), the redemption price set forth above
shall be paid out of the funds provided by the Company. If fewer than all the
shares represented by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares without cost to the holder
thereof.
Subject to applicable law and the limitation on purchases when dividends on
the Preferred Stock are in arrears, we may, at any time and from time to time,
purchase any shares of Preferred Stock in the open market, by tender or by
private agreement.
Voting Rights
Except as indicated below, or except as expressly required by applicable law,
holders of the Preferred Stock will not be entitled to vote.
If the equivalent of six quarterly dividends payable on the Preferred Stock
or any other series of preferred stock are in default (whether or not declared
or consecutive), holders of the Preferred Stock (voting as a class with all
other shares of preferred stock, without regard to series) will be entitled to
elect two additional directors until all dividends in default have been paid or
declared and set apart for payment.
Such right to vote separately to elect directors shall, when vested, be
subject, always, to the same provisions for vesting of such right to elect
directors separately in the case of future dividend defaults. At any time when
such right to elect directors separately shall have so vested, we may, and upon
the written request of the holders of record of not less than 20% of the total
number of shares of preferred stock of the Company then outstanding shall, call
a special meeting of shareholders for the election of directors. In the case of
such a written request, such special meeting shall be held within 90 days after
the delivery of such request and, in either case, at the place and upon the
notice provided by law and in our Bylaws, provided that we shall not be
required to call such a special meeting if such request is received less than
120 days before the date fixed for the next ensuing annual meeting of
shareholders, and the holders of all classes of outstanding preferred stock (in
the case of dividend defaults) are offered the opportunity to elect such
directors (or fill any vacancy) at such annual meeting of shareholders.
Directors so elected shall serve until the next annual meeting of our
shareholders or until their respective successors are elected and qualify. If,
prior to the end of the term of any director so elected, a vacancy in the
office of such director shall occur, during the continuance of a default in
dividends on shares of preferred stock of the Company by reason of death,
resignation, or disability, such vacancy shall be filled for the unexpired term
of such former director by the appointment of a new director by the remaining
director so elected.
The affirmative vote or consent of the holders of at least 66 2/3% of the
outstanding shares of the Preferred Stock will be required to amend or repeal
any provision of or add any provision to, the Articles of Incorporation,
including the Certificate of Determination, if such action would materially and
adversely alter or change the rights, preferences or privileges of the
Preferred Stock, except as set forth below. The affirmative vote or consent of
the holders of at least 66 2/3% of the outstanding shares of the Preferred
Stock and any other
S-9
series of preferred stock ranking on a parity with the Preferred Stock as to
dividends or upon liquidation, voting as a single class, will be required to
authorize another class or series of shares senior to the Preferred Stock with
respect to the payment of dividends or the distribution of assets on
liquidation.
No consent or approval of the holders of shares of the Preferred Stock will
be required for the issuance from the Company's authorized but unissued
preferred stock of other shares of any series of preferred stock ranking on a
parity with or junior to the Preferred Stock as to payment of dividends and
distribution of assets, including other shares of Preferred Stock.
Depositary Shares
The following is a brief description of the terms of the Depositary Shares
which does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Deposit Agreement (including
the form of Depositary Receipt contained therein), which is filed as an exhibit
to, or incorporated by reference in, the Registration Statement of which this
Prospectus Supplement constitutes a part.
Dividends
The Depositary will distribute all cash dividends or other cash distributions
received in respect of the Preferred Stock to the record holders of Depositary
Receipts in proportion to the number of Depositary Shares owned by such holders
on the relevant record date, which will be the same date as the record date
fixed by us for the Preferred Stock. In the event that the calculation of such
amount to be paid results in an amount which is a fraction of one cent, the
amount the Depositary shall distribute to such record holder shall be rounded
to the next highest whole cent if such fraction of one cent is equal to or
greater than $.005. Otherwise, the fractional interest shall be disregarded.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Receipts
entitled thereto, in proportion, as nearly as may be practicable, to the number
of Depositary Shares owned by such holders on the relevant record date, unless
the Depositary determines (after consultation with us) that it is not feasible
to make such distribution, in which case the Depositary may (with our approval)
adopt any other method for such distribution as it deems equitable and
appropriate, including the sale of such property (at such place or places and
upon such terms as it may deem equitable and appropriate) and distribution of
the net proceeds from such sale to such holders.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the affairs of
the Company, whether voluntary or involuntary, the holders of each Depositary
Share will be entitled to 1/1000th of the liquidation preference accorded each
share of the Preferred Stock.
Redemption
Whenever we redeem any Preferred Stock held by the Depositary, the Depositary
will redeem as of the same redemption date the number of Depositary Shares
representing the Preferred Stock so redeemed. The Depositary will publish a
notice of redemption of the Depositary Shares containing the same type of
information and in the same manner as our notice of redemption and will mail
the notice of redemption promptly upon receipt of such notice from us and not
less than 30 nor more than 60 days prior to the date fixed for redemption of
the Preferred Stock and the Depositary Shares to the record holders of the
Depositary Receipts. In case less than all the outstanding Depositary Shares
are to be redeemed, the Depositary Shares to be so redeemed shall be determined
pro rata or by lot in a manner determined by the Board of Directors.
Voting
Promptly upon receipt of notice of any meeting at which the holders of the
Preferred Stock are entitled to vote, the Depositary will mail the information
contained in such notice of meeting to the record holders of the
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Depositary Receipts as of the record date for such meeting. Each such record
holder of Depositary Receipts will be entitled to instruct the Depositary as
to the exercise of the voting rights pertaining to the number of shares of
Preferred Stock represented by such record holder's Depositary Shares. The
Depositary will endeavor, insofar as practicable, to vote such Preferred Stock
represented by such Depositary Shares in accordance with such instructions,
and we will agree to take all action which may be deemed necessary by the
Depositary in order to enable the Depositary to do so. The Depositary will
abstain from voting any of the Preferred Stock to the extent that it does not
receive specific instructions from the holders of Depositary Receipts.
Withdrawal of Preferred Stock
Upon surrender of Depositary Receipts at the principal office of the
Depositary, upon payment of any unpaid amount due the Depositary, and subject
to the terms of the Deposit Agreement, the owner of the Depositary Shares
evidenced thereby is entitled to delivery of the number of whole shares of
Preferred Stock and all money and other property, if any, represented by such
Depositary Shares. Partial shares of Preferred Stock will not be issued. If
the Depositary Receipts delivered by the holder evidence a number of
Depositary Shares in excess of the number of Depositary Shares representing
the number of whole shares of Preferred Stock to be withdrawn, the Depositary
will deliver to such holder at the same time a new Depositary Receipt
evidencing such excess number of Depositary Shares. Holders of Preferred Stock
thus withdrawn will not thereafter be entitled to deposit such shares under
the Deposit Agreement or to receive Depositary Receipts evidencing Depositary
Shares therefor.
Amendment and Termination of Deposit Agreement
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time and from time to time be
amended by agreement between us and the Depositary. However, any amendment
which materially and adversely alters the rights of the holders (other than
any change in fees) of Depositary Shares will not be effective unless such
amendment has been approved by the holders of at least a majority of the
Depositary Shares then outstanding. No such amendment may impair the right,
subject to the terms of the Deposit Agreement, of any owner of any Depositary
Shares to surrender the Depositary Receipt evidencing such Depositary Shares
with instructions to the Depositary to deliver to the holder the Preferred
Stock and all money and other property, if any, represented thereby, except in
order to comply with mandatory provisions of applicable law. The Deposit
Agreement may be terminated by us or the Depositary only if (i) all
outstanding Depositary Shares have been redeemed or (ii) there has been a
final distribution in respect of the Preferred Stock in connection with any
dissolution of the Company and such distribution has been made to all the
holders of Depositary Shares.
Charges of Depositary
We will pay all transfer and other taxes and governmental charges arising
solely from the existence of the depositary arrangements. We will pay charges
of the Depositary in connection with the initial deposit of the Preferred
Stock and the initial issuance of the Depositary Shares, and redemption of the
Preferred Stock and all withdrawals of Preferred Stock by owners of Depositary
Shares. Holders of Depositary Receipts will pay transfer, income and other
taxes and governmental charges and certain other charges as are provided in
the Deposit Agreement to be for their accounts. In certain circumstances, the
Depositary may refuse to transfer Depositary Shares, may withhold dividends
and distributions and sell the Depositary Shares evidenced by such Depositary
Receipt if such charges are not paid.
Miscellaneous
The Depositary will forward to the holders of Depositary Receipts all
reports and communications from us which are delivered to the Depositary and
which we are required to furnish to the holders of the Preferred Stock. In
addition, the Depositary will make available for inspection by holders of
Depositary Receipts at the principal
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office of the Depositary, and at such other places as it may from time to time
deem advisable, any reports and communications received from the Company which
are received by the Depositary as the holder of Preferred Stock.
Neither the Depositary nor any Depositary's Agent (as defined in the Deposit
Agreement), nor the Registrar (as defined in the Deposit Agreement) nor the
Company assumes any obligation or will be subject to any liability under the
Deposit Agreement to holders of Depositary Receipts other than for its gross
negligence, willful misconduct or bad faith. Neither the Depositary, any
Depositary's Agent, the Registrar nor the Company will liable if it is
prevented or delayed by law or any circumstance beyond its control in
performing its obligations under the Deposit Agreement. The Company and the
Depositary are not obligated to prosecute or defend any legal proceeding in
respect of any Depositary Shares, Depositary Receipts or Preferred Stock
unless reasonably satisfactory indemnity is furnished. The Company and the
Depositary may rely on written advice of counsel or accountants, on
information provided by holders of Depositary Receipts or other persons
believed in good faith to be competent to give such information and on
documents believed to be genuine and to have been signed or presented by the
proper party or parties.
Resignation and Removal of Depositary
The Depositary may resign at any time by delivering to us notice of its
election to do so, and we may at any time remove the Depositary, any such
resignation or removal to take effect upon the appointment of a successor
Depositary and its acceptance of such appointment. Such successor Depositary
must be appointed within 60 days after delivery of the notice for resignation
or removal and must be a bank or trust company having its principal office in
the United States of America and having a combined capital and surplus of at
least $150,000,000.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax considerations
pertaining to the acquisition, ownership and disposition of the Depositary
Shares. The following summary relates solely to the tax considerations relevant
specifically to the acquisition, ownership and disposition of Depositary
Shares. For a discussion of the taxation of the Company and the tax
considerations relevant to shareholders generally, see "Certain Federal Income
Tax Considerations--Taxation of the Company" and "--Taxation of U.S.
Shareholders Holding Common Stock" in the accompanying Prospectus. This
discussion is general in nature and not exhaustive of all possible tax
considerations, nor does the discussion address any state, local or foreign tax
considerations. The discussion is based on current law and does not purport to
deal with all aspects of federal income taxation that may be relevant to a
prospective shareholder in light of its particular circumstances or to certain
types of shareholders (including insurance companies, financial institutions,
broker-dealers, tax exempt investors, foreign corporations and persons who are
not citizens or residents of the United States) subject to special treatment
under the federal income tax laws. We have not requested and will not request a
ruling from the Internal Revenue Service (the "Service") with respect to any of
the federal income tax issues discussed below. Prospective investors should
consult, and must depend on, their own tax advisors regarding the federal,
state, local, foreign and other tax consequences of holding and disposing of
the Depositary Shares.
Taxation of Holders of Depositary Shares
General. Owners of the Depositary Shares will be treated for federal income
tax purposes as if they were owners of the Preferred Stock represented by such
Depositary Shares. Accordingly, such owners will be entitled to take into
account, for federal income tax purposes, income and deductions to which they
would be entitled if they were holders of such Preferred Stock. See
"Description of the Depositary Shares--Federal Income Tax Considerations" in
the accompanying Prospectus. Withdrawals of Preferred Stock for Depositary
Shares are not taxable events for federal income tax purposes.
Dividends and Other Distributions; Backup Withholding. For a discussion of
the taxation of the Company, the treatment of dividends and other distributions
with respect to shares of the Company, and the backup withholding rules, see
"Certain Federal Income Tax Considerations--Taxation of the Company" and "--
Taxation of U.S. Shareholders Holding Common Stock" in the accompanying
Prospectus. Effective for dividend payments made after December 31, 2001, the
backup withholding rate decreased from 30.5% to 30% and is scheduled to be
further reduced through 2006 as federal ordinary income tax rates decrease.
Sale or Exchange of Depositary Shares. Upon the sale, exchange or other
disposition of Depositary Shares to a party other than the Company, a holder of
Depositary Shares will realize capital gain or loss measured by the difference
between the amount realized on the sale, exchange or other disposition of the
Depositary Shares and such shareholder's adjusted tax basis in the Depositary
Shares (provided the Depositary Shares are held as a capital asset). Gain
recognized by a shareholder who is an individual, estate or trust upon a sale,
exchange or other disposition of Depositary Shares that have been held for more
than 12 months will generally be subject to tax at a rate not to exceed 20%.
Gain recognized from the sale, exchange or other disposition of Depositary
Shares that have been held for 12 months or less will be subject to tax at
ordinary income tax rates. In addition, capital gain recognized by a corporate
shareholder will continue to be subject to tax at the ordinary income tax rates
applicable to corporations. Any loss on a sale, exchange or other disposition,
of Depositary Shares that were held for six months or less and with respect to
which a "capital gain dividend" was received will be treated as a long term
capital loss, up to the amount of the capital gain dividend received with
respect to such Depositary Shares. For a discussion of capital gain taxation
see "Certain Federal Income Tax Considerations--Taxation of U.S. Shareholders
Holding Common Stock--Taxpayer Relief Act and IRS Restructuring Act Changes to
Capital Gain Taxation" in the accompanying Prospectus.
Redemption of Depositary Shares. Whenever the Company redeems any Preferred
Stock held by the Depositary, the Depositary will redeem as of the same
redemption date the number of Depositary Shares representing the Preferred
Stock so redeemed. The treatment to a holder of Depositary Shares accorded to
any
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redemption by the Company (as distinguished from a sale, exchange or other
disposition) of Preferred Stock held by the Depositary and corresponding
redemption of Depositary Shares can only be determined on the basis of
particular facts as to the holder of Depositary Shares at the time of
redemption. In general, a holder of Depositary Shares will recognize capital
gain or loss measured by the difference between the amount received upon the
redemption and the holder of the Depositary Shares' adjusted tax basis in the
Depositary Shares redeemed (provided the Depositary Shares are held as a
capital asset) if such redemption (i) results in a "complete termination" of a
holder's interest in all classes of stock of the Company under Section
302(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") or (ii)
is "not essentially equivalent to a dividend" with respect to the holder under
Section 302(b)(1) of the Code. In applying these tests, there must be taken
into account not only any Depositary Shares owned by the holder, but also such
holder's ownership of Common Stock, equity stock, other series of preferred
stock and any options (including stock purchase rights) to acquire any of the
foregoing. The holder also must take into account any such securities
(including options) which are considered to be owned by such holder by reason
of the constructive ownership rules set forth in Sections 318 and 302(c) of the
Code.
If a particular holder of Depositary Shares owns (actually or constructively)
no shares of Common Stock or equity stock of the Company or an insubstantial
percentage of the outstanding shares of Common Stock, Equity Stock or Preferred
Stock of the Company, based upon current law, it is probable that the
redemption of Depositary Shares from such a holder would be considered "not
essentially equivalent to a dividend." However, whether a distribution is "not
essentially equivalent to a dividend" depends on all of the facts and
circumstances, and a holder of Depositary Shares intending to rely on any of
these tests at the time of redemption should consult its tax adviser to
determine their application to its particular situation.
If the redemption does not meet any of the tests under Section 302 of the
Code, then the redemption proceeds received from the Depositary Shares will be
treated as a distribution on the Depositary Shares as described under "Certain
Federal Income Tax Considerations--Taxation of U.S. Shareholders Holding Common
Stock" in the accompanying Prospectus. If the redemption is taxed as a
dividend, the holder of Depositary Shares' adjusted tax basis in the redeemed
Depositary Shares will be transferred to any other stockholdings of the holder
of Depositary Shares in the Company. If the holder of Depositary Shares owns no
other stockholdings in the Company, under certain circumstances, such basis may
be transferred to a related person, or it may be lost entirely.
Legislation Affecting REITs
On December 17, 1999, the Work Incentives Improvement Act of 1999 (the
"Act"), which included certain provisions affecting REITs, was enacted. The
REIT provisions of the Act generally are effective for taxable years beginning
after December 31, 2000. The Act is intended to ease the restrictions on a
REIT's ability to own the stock of taxable companies. The Act allows REITs to
own up to 100% of the stock of companies that have made a joint election with
the REIT to be treated as "taxable REIT subsidiaries" ("TRSs"). A TRS will be
subject to federal income tax on income as a regular corporation. Under prior
law, a REIT generally could not own more than 10% of the voting securities of
other corporate issuers (see "Certain Federal Income Tax Considerations--
Taxation of the Company--Asset Tests" in the accompanying prospectus). Under
the Act, the prior law 10% voting securities test was expanded so that REITs
also are prohibited from owning more than (1) 10% of the value of outstanding
equity securities of any one corporate issuer, or (2) 10% of the value of
certain debt securities of any one issuer of any type, except for qualified
REIT subsidiaries, companies that elect to be treated as TRSs or companies that
qualify for certain grandfather provisions in the Act.
An important effect of the Act is that TRSs are permitted to offer
noncustomary services to the tenants of the REIT (such services generally could
be provided under prior law only by "independent contractors" from which the
REIT could not earn any income). TRSs also are able to engage in other income
producing activities that typically had been undertaken by REITs only through
entities in which a REIT could have a substantial economic interest, but was
limited to a 10% or less voting interest. The Act includes certain limitations
that
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prevent income shifting between a REIT and its TRSs (including, for example,
interest payments in excess of certain specified levels), in an effort to
ensure that TRSs in fact are taxable on the income that they earn. The Act is
designed to force REITs to subject their taxable subsidiaries to the income
shifting limitations by prohibiting a REIT from owning more than 10% in either
vote or value of the equity securities of a corporate issuer that is not a TRS
or 10% of the value of certain debt securities of any one issuer of any type
that is not a TRS. In addition, under prior law, a REIT could not own
securities of any single issuer with a value in excess of 5% of the value of
all assets of the REIT. The Act also relaxed this limitation, so that a REIT
may own all or any portion of the securities of a TRS (or TRSs), so long as (1)
the aggregate value of the REIT's ownership interests in all TRSs does not
exceed 20% of the value of all assets of the REIT and (2) the aggregate value
of the REIT's ownership interests in all TRSs, when combined with all other
securities held by the REIT that do not qualify for the 75% asset test, does
not exceed 25% of the value of all assets of the REIT. The Company and Tenant
Advantage, Inc. jointly made the TRS election effective as of January 1, 2001.
Other provisions of the Act that are targeted at REITs include: (1) a
reduction in the size of a REIT's required annual distributions to 90% of REIT
taxable income (from the prior 95%) (a change that seems likely to have limited
effect, given that REITs typically seek to have distributions equal to 100% of
their REIT taxable income, so as to avoid paying taxes on any undistributed
portion); (2) provisions directed at other segments of the REIT industry,
principally the lodging and health-care sectors; and (3) various other
technical changes.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus supplement, each underwriter named below has
severally agreed to purchase, and we have agreed to sell to that underwriter,
the number of depositary shares set forth opposite the underwriter's name.
Number of
depositary
Underwriter shares
----------- ----------
Salomon Smith Barney Inc. ........................................ 390,000
Credit Suisse First Boston Corporation............................ 380,000
A.G. Edwards & Sons, Inc. ........................................ 380,000
Morgan Stanley & Co. Incorporated................................. 380,000
CIBC World Markets Corp. ......................................... 65,000
Deutsche Banc Alex. Brown Inc. ................................... 65,000
First Union Securities, Inc. ..................................... 65,000
Tucker Anthony Incorporated....................................... 65,000
RBC Dain Rauscher Inc. ........................................... 35,000
Janney Montgomery Scott LLC....................................... 35,000
McDonald Investments Inc. ........................................ 35,000
Prudential Securities Incorporated................................ 35,000
U.S. Bancorp Piper Jaffray Inc. .................................. 35,000
Wells Fargo Securities, Inc. ..................................... 35,000
---------
Total.......................................................... 2,000,000
=========
The underwriting agreement provides that the obligations of the several
underwriters to purchase the depositary shares included in this offering are
subject to approval of legal matters by counsel and to other conditions. The
underwriters are obligated to purchase all of the depositary shares if they
purchase any of the depositary shares.
The underwriters, for whom Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation, A.G. Edwards & Sons, Inc., Morgan Stanley & Co.
Incorporated, CIBC World Markets Corp., Deutsche Banc Alex. Brown Inc., First
Union Securities, Inc. and Tucker Anthony Incorporated are acting as
representatives, propose to offer some of the depositary shares directly to the
public at the public offering price set forth on the cover page of this
prospectus supplement and some of the depositary shares to dealers at the
public offering price less a concession not to exceed $0.50 per depositary
share. The underwriters may allow, and dealers may reallow, a concession not to
exceed $0.40 per depositary share on sales to other dealers. If all of the
depositary shares are not sold at the initial offering price, the
representatives may change the public offering price and the other selling
terms.
We intend to apply to have the depositary shares listed on the AMEX.
The following table shows the underwriting discounts and commissions that we
are to pay to the underwriters in connection with this offering.
Per depositary share.............................................. $ 0.7875
Total............................................................. $1,575,000
In connection with the offering, Salomon Smith Barney on behalf of the
underwriters may purchase and sell depositary shares in the open market. These
transactions may include short sales, syndicate covering transactions and
stabilizing transactions. Short sales involve syndicate sales of depositary
shares in excess of the number of depositary shares to be purchased by the
underwriters in the offering, which creates a syndicate
S-16
short position. "Covered" short sales are sales of depositary shares made in an
amount up to the number of shares represented by the underwriters' over-
allotment option. In determining the source of depositary shares to close out
the covered syndicate short position, the underwriters will consider, among
other things, the price of depositary shares available for purchase in the open
market as compared to the price at which they may purchase depositary shares
through the over-allotment option. Transactions to close out the covered
syndicate short position involve either purchases of the depositary shares in
the open market after the distribution has been completed or the exercise of
the over-allotment option. The underwriters may also make "naked" short sales
of depositary shares in excess of the over-allotment option. The underwriters
must close out any naked short position by purchasing depositary shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the depositary shares in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of bids for or purchases of depositary shares in the open market while the
offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney repurchases depositary shares originally sold by that
syndicate member in order to cover syndicate short positions or make
stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a
decline of the market price of the depositary shares. They may also cause the
price of the depositary shares to be higher than the price that would otherwise
exist in the open market in the absence of these transactions. The underwriters
may conduct these transactions on the AMEX or in the over-the-counter market,
or otherwise. If the underwriters commence any of these transactions, they may
discontinue any of them at any time.
We estimate that our portion of the total expenses of this offering will be
$200,000.
The underwriters have performed investment banking and advisory services for
us from time to time for which they have received customary fees and expenses.
The underwriters may, from time to time, engage in transactions with and
perform services for us in the ordinary course of their business.
One of the underwriters is First Union Securities, Inc., an indirect, wholly
owned subsidiary of Wachovia Corporation. Wachovia Corporation conducts its
investment banking, institutional, and capital markets businesses through its
various bank, broker-dealer and nonbank subsidiaries (including First Union
Securities, Inc.) under the trade name of Wachovia Securities. Any references
to Wachovia Securities in this prospectus, however, do not include Wachovia
Securities, Inc., member NASD/SIPC and a separate broker-dealer subsidiary of
Wachovia Corporation and sister affiliate of First Union Securities, Inc.,
which may or may not be participating as a selling dealer in the distribution
of the depositary shares.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make because of any of those
liabilities.
We expect that delivery of the depositary shares will be made against payment
therefor on or about January 28, 2002, which is the fifth business day
following the date of this prospectus supplement. Under Rule 15c6-1 of the
Securities Exchange Act, trades in the secondary market generally are required
to settle in three business days, unless the parties to any such trade
expressly agree otherwise. Accordingly, purchasers who wish to trade the
depositary shares on the date of this prospectus supplement or the next four
succeeding business days will be required, by virtue of the fact that the
depositary shares initially will settle in T+5, to specify an alternative
settlement cycle at the time of any such trade to prevent a failed settlement
and should consult their own advisor.
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LEGAL MATTERS
The validity of the Preferred Stock and the Depositary Shares offered hereby
will be passed upon for us by David Goldberg, vice-president and counsel of PS
Business Parks, and for the underwriters by Hale and Dorr LLP. Hogan & Hartson
L.L.P., Washington, D.C., has delivered an opinion as to the status of PS
Business Parks as a REIT. See "Certain Federal Income Tax Considerations" in
the accompanying prospectus. Mr. Goldberg owns 4,256 shares of our common
stock, has options to acquire an additional 3,995 shares of our common stock,
owns 10,000 depositary shares representing interests in our preferred stock and
intends to purchase 7,500 Depositary Shares in this offering. Hale and Dorr LLP
has from time to time represented PS Business Parks on other matters. Hale and
Dorr LLP will rely upon Mr. Goldberg with respect to matters governed by
California law.
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PS Business Parks, Inc.
By this prospectus, we may offer-
Common Stock
Preferred Stock
Equity Stock
Depositary Shares
Warrants
We will provide the specific terms
of these securities in supplements
to this prospectus. You should
read this prospectus and the
supplements carefully before you
invest.
This prospectus may also
be used in registered
resales of common stock
as described under "Plan
of Distribution."
Please read "Risk Factors" beginning on page 1 for a discussion of material
risks you should consider before you invest.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved the securities to be issued under this
prospectus or determined if this prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
June 2, 1999
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement or the accompanying prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in or
incorporated by reference in this prospectus supplement or the accompanying
prospectus is accurate as of any date other than the date on the front of this
prospectus supplement.
------------
TABLE OF CONTENTS
Page
----
Risk Factors
We are controlled by Public Storage..................................... 1
Provisions in our organizational documents may prevent changes in
control................................................................ 1
Our operating partnership poses additional risks to us.................. 1
We cannot sell certain properties without Public Storage's approval..... 2
Certain institutional investors have special rights..................... 2
We would incur adverse tax consequences if we fail to qualify as a
REIT................................................................... 2
Since we buy and operate real estate, we are subject to the general real
estate investment and operating risks.................................. 2
Our ability to control our properties may be adversely affected by
ownership through partnerships and joint ventures...................... 4
We can change our business policies and increase our level of debt
without shareholder approval........................................... 4
We can issue additional securities without shareholder approval......... 4
Increases in interest rates may adversely affect the market price of our
common stock........................................................... 4
Shares that become available for future sale may adversely affect the
market price of our common stock....................................... 5
We depend on key personnel.............................................. 5
About This Prospectus..................................................... 5
Where You Can Find More Information....................................... 6
Forward Looking Statements................................................ 7
The Company............................................................... 7
Use of Proceeds........................................................... 8
Ratio of Earnings to Fixed Charges........................................ 8
Description of Common Stock............................................... 8
Common Stock............................................................ 8
Ownership Limitations................................................... 9
Description of Preferred Stock............................................ 10
Outstanding Preferred Stock............................................. 10
Ownership Limitations................................................... 11
Future Series of Preferred Stock........................................ 11
Description of Equity Stock............................................... 14
Ownership Limitations................................................... 15
Terms of Equity Stock................................................... 15
Description of the Depositary Shares...................................... 17
Dividends............................................................... 17
Liquidation Rights...................................................... 17
Redemption.............................................................. 18
Conversion.............................................................. 18
Voting.................................................................. 18
Withdrawal of Preferred Stock........................................... 18
Amendment and Termination of Deposit Agreement.......................... 18
TABLE OF CONTENTS--(Continued)
Page
----
Charges of Depositary................................................... 19
Miscellaneous........................................................... 19
Resignation and Removal of Depositary................................... 19
Federal Income Tax Considerations....................................... 19
Description of Warrants................................................... 20
Certain Federal Income Tax Considerations................................. 20
Taxation of the Company................................................. 21
Taxation of U.S. Shareholders Holding Common Stock...................... 26
Taxation of Non-U.S. Shareholders....................................... 28
Administration's Proposed Changes to REIT Qualification Requirements.... 30
Tax Aspects of the Company's Ownership of Interests in the Operating
Partnership............................................................ 31
Taxation of Holders of Preferred Stock, Equity Stock, Depositary Shares
and Warrants........................................................... 33
State and Local Taxes................................................... 33
Plan of Distribution...................................................... 33
Legal Opinions............................................................ 36
Experts................................................................... 36
RISK FACTORS
Before investing in our securities, you should consider the following risks
and detriments:
We are controlled by Public Storage.
Public Storage owns a substantial number of our shares. At April 30, 1999,
Public Storage owned 22% of the outstanding shares of our common stock (41%
upon conversion of its interest in our operating partnership). Consequently,
Public Storage has the ability to effectively control all matters submitted to
a vote of our shareholders, including electing directors, changing our
articles of incorporation, dissolving and approving other extraordinary
transactions. In addition, Public Storage's ownership may make it more
difficult for another party to take over our company without Public Storage's
approval.
Public Storage has a voting agreement with another large shareholder. Public
Storage and an institutional shareholder owning 26% of our common stock as of
April 30, 1999 have both agreed to vote their shares to support specified
nominees to our board of directors until the voting agreement expires, which
is not before December 2001. This voting agreement further strengthens Public
Storage's control of our company.
Provisions in our organizational documents may prevent changes in control.
Our articles generally prohibit owning more than 7% of our shares. Our
articles of incorporation restrict the number of shares that may be owned by
any other person, and the partnership agreement of our operating partnership
contains an anti-takeover provision. No shareholder (other than Public Storage
and certain other specified shareholders) may own more than 7% of the
outstanding shares of our common stock, unless our board of directors waives
this limitation. We imposed this limitation to avoid, to the extent possible,
a concentration of ownership that might jeopardize our ability to qualify as a
real estate investment trust, or REIT. This limitation, however, also makes a
change of control much more difficult (if not impossible) even if it may be
favorable to our public shareholders. These provisions will prevent future
takeover attempts not approved by Public Storage even if a majority of our
public shareholders consider it to be in their best interests because they
would receive a premium for their shares over the shares' then market value or
for other reasons.
Our board can set the terms of certain securities without shareholder
approval. Our board of directors is authorized, without shareholder approval,
to issue up to 50,000,000 shares of preferred stock and up to 100,000,000
shares of equity stock, in each case in one or more series. Our board has the
right to set the terms of each of these series of stock. Consequently, the
board could set the terms of a series of stock that could make it difficult
(if not impossible) for another party to take over our company even if it
might be favorable to our public shareholders. Our articles of incorporation
also contain other provisions that could have the same effect. We can also
cause our operating partnership to issue additional interests for cash or in
exchange for property.
The partnership agreement of our operating partnership restricts
mergers. The partnership agreement of our operating partnership provides that
generally we may not merge or engage in a similar transaction unless limited
partners of our operating partnership are entitled to receive the same
proportionate payments as our shareholders. Also we have agreed not to merge
unless the merger would have been approved had the limited partners been able
to vote together with our shareholders. These provisions may also make it more
difficult for us to merge.
Our operating partnership poses additional risks to us.
Limited partners of our operating partnership, including Public Storage,
have the right to vote on certain changes to the partnership agreement. They
may vote in a way that is against the interests of our shareholders. Also, as
general partner of our operating partnership, we are required to protect the
interests of the limited partners of our operating partnership. The interests
of the limited partners and of our shareholders may differ.
We cannot sell certain properties without Public Storage's approval.
Before 2007, we may not sell 13 specified properties without Public
Storage's approval. Since Public Storage would be taxed on a sale of these
properties, the interests of Public Storage and our shareholders may differ as
to the best time to sell.
Certain institutional investors have special rights.
Certain institutional investors have rights, such as the right to approve
nominees to our board of directors, the right to purchase our securities in
certain circumstances and the right to require registration of their shares,
not available to our public shareholders.
We would incur adverse tax consequences if we fail to qualify as a REIT.
Our cash flow is reduced if we fail to qualify as a REIT. While we believe
that we have qualified since 1990 to be taxed as a REIT, and will continue to
be qualified, we cannot be certain. To continue to qualify as a REIT, we need
to satisfy certain requirements under the federal income tax laws relating to
our income, assets, distributions to shareholders and shareholder base. In
this regard, the share ownership limits in our articles of incorporation do
not necessarily ensure that our shareholder base is sufficiently diverse for
us to qualify as a REIT. For any year we fail to qualify as a REIT, we would
be taxed at regular corporate tax rates on our taxable income unless certain
relief provisions apply. Taxes would reduce our cash available for
distributions to shareholders or for reinvestment, which could adversely
affect us and our shareholders. Also we would not be allowed to elect REIT
status for five years after we fail to qualify unless certain relief
provisions apply.
Our cash flow is reduced if our predecessor failed to qualify as a REIT. For
us to qualify to be taxed as a REIT, our predecessor, American Office Park
Properties, also needed to qualify to be taxed as a REIT. We believe American
Office Park Properties qualified as a REIT beginning in 1997 until its March
1998 merger with us. If it is determined that it did not qualify as a REIT, we
could also lose our REIT qualification. Before 1997, our predecessor was a
taxable corporation and, to qualify as a REIT, was required to distribute all
of its profits before the end of 1996. While we believe American Office Park
Properties qualified as a REIT since 1997, we did not obtain an opinion of an
outside expert at the time of its merger with us.
We may need to borrow funds to meet our REIT distribution requirements. To
qualify as a REIT, we must generally distribute to our shareholders 95% of our
taxable income. Our income consists primarily of our share of our operating
partnership's income. We intend to make sufficient distributions to qualify as
a REIT and otherwise avoid corporate tax. However, differences in timing
between income and expenses and the need to make nondeductible expenditures
such as capital improvements and principal payments on debt could force us to
borrow funds to make necessary shareholder distributions.
Since we buy and operate real estate, we are subject to the general real
estate investment and operating risks.
Summary of real estate risks. We own and operate commercial properties and
are subject to the risks of owning real estate generally and commercial
properties in particular. These risks include:
. the national, state and local economic climate and real estate
conditions, such as oversupply of or reduced demand for space and
changes in market rental rates;
. how prospective tenants perceive the attractiveness, convenience and
safety of our properties;
. our ability to provide adequate management, maintenance and insurance;
. our ability to collect rent from tenants on a timely basis;
. the expense of periodically renovating, repairing and reletting spaces;
2
. increasing operating costs, including real estate taxes and utilities,
if these increased costs cannot be passed through to tenants; and
. changes in tax, real estate and zoning laws.
Certain significant costs, such as mortgage payments, real estate taxes,
insurance and maintenance costs, generally are not reduced even when a
property's rental income is reduced. In addition, environmental and tax laws,
interest rate levels, the availability of financing and other factors may
affect real estate values and property income. Furthermore, the supply of
commercial space fluctuates with market conditions.
If our properties do not generate sufficient income to meet operating
expenses, including any debt service, tenant improvements, leasing commissions
and other capital expenditures, we may have to borrow additional amounts to
cover fixed costs, and we may have to reduce our distributions to
shareholders.
We only recently acquired many of our properties. We have recently acquired
many of our properties and intend to continue to acquire additional
properties. As of March 31, 1999, approximately 36% of our properties' square
footage was not managed by us before January 1, 1998. We may not be aware of
problems with newly acquired properties that could affect their value, and
their operating performance may be less than we anticipate. Also, we may have
difficulty integrating new acquisitions into our existing portfolio.
We may encounter significant delays in reletting vacant space, resulting in
losses of income. When leases expire, we will incur expenses and we may not be
able to release the space on the same terms. Certain leases provide tenants
with the right to terminate early if they pay a fee. While we have estimated
our cost of renewing leases that expire in 1999, our estimates could be wrong.
If we are unable to release space promptly, if the terms are significantly
less favorable than anticipated or if the costs are higher, we may have to
reduce our distributions to shareholders.
Tenant defaults and bankruptcies may reduce our cash flow and
distributions. We may have difficulty in collecting from tenants in default,
particularly if they declare bankruptcies. This could affect our cash flow and
distributions to shareholders.
We may be adversely affected by significant competition among commercial
properties. Many other commercial properties compete with our properties for
tenants and we expect that new properties will be built in our markets. Also,
we compete with other buyers, many of whom are larger than us, for attractive
commercial properties. Therefore, we may not be able to grow as rapidly as we
would like.
We may be adversely affected if losses on our properties are not covered by
insurance. We carry insurance on our properties that we believe is comparable
to the insurance carried by other operators for similar properties. However,
we could suffer uninsured losses that adversely affect us or even result in
loss of the property. We might still remain liable on any mortgage debt
related to that property.
The illiquidity of our real estate investments may prevent us from adjusting
our portfolio to respond to market changes. There may be delays and
difficulties in selling real estate. Therefore, we cannot easily change our
portfolio when economic conditions change. Also, tax laws limit a REIT's
ability to sell properties held for less than four years.
We may be adversely affected by changes in laws. Increases in income and
service taxes may reduce our cash flow and ability to make expected
distributions to our shareholders. Our properties are also subject to various
federal, state and local regulatory requirements, such as state and local fire
and safety codes. If we fail to comply with these requirements, governmental
authorities could fine us or courts could award damages against us. We believe
our properties comply with all significant legal requirements. However, these
requirements could change in a way that would reduce our cash flow and ability
to make distributions to shareholders.
3
We may incur significant environmental remediation costs. Under various
federal, state and local environmental laws an owner or operator of real
estate interests may have to clean spills or other releases of hazardous or
toxic substances on or from a property. Certain environmental laws impose
liability whether or not the owner knew of, or was responsible for, the
presence of the hazardous or toxic substances. In some cases, liability may
exceed the value of the property. The presence of toxic substances, or the
failure to properly remedy any resulting contamination, may make it more
difficult for the owner or operator to sell, lease or operate its property or
to borrow money using its property as collateral. Future environmental laws
may impose additional material liabilities on us.
In May 1998, we bought a property in Beaverton, Oregon known as Creekside
Corporate Park. Under a consent order issued by the Oregon environmental
agency, the current and past owners of the property are conducting an
environmental remedial investigation of a property next to Creekside Corporate
Park, which is owned by Mattel Corporation. We are not a party to the consent
order. As part of the consent order, the Oregon environmental agency ordered
the property owners to sample soil and groundwater on our property to
determine the nature and extent of contamination resulting from past
industrial operations at the Mattel property. We executed access agreements
with the current and former property owners to allow access to our property to
conduct the required sampling and testing. The sampling and testing is
ongoing, and preliminary results from one area indicate that the contamination
from the Mattel property may have migrated onto a portion of the Creekside
Corporate Park that we own.
We believe that we bear no responsibility or liability for the
contamination. If we are held responsible for any costs related to this
matter, we believe that the party from whom the property was purchased will be
responsible for any expenses or liabilities that we may incur as a result of
this contamination.
We may be affected by the Americans with Disabilities Act. The Americans
with Disabilities Act of 1990 requires that access and use by disabled persons
of all public accommodations and commercial properties be facilitated.
Existing commercial properties must be made accessible to disabled persons.
While we have not estimated the cost of complying with this act, we do not
believe the cost will be significant.
Our ability to control our properties may be adversely affected by ownership
through partnerships and joint ventures.
We own most of our properties through our operating partnership. Our
organizational documents do not limit our investment of funds with others in
partnerships or joint ventures. This type of investment may present additional
risks. For example, our partners may have interests that differ from ours or
that conflict with ours, or our partners may become bankrupt.
We can change our business policies and increase our level of debt without
shareholder approval.
Our board of directors establishes our investment, financing, distribution
and our other business policies and may change these policies without
shareholder approval. Our organizational documents do not limit our level of
debt. A change in our policies or an increase in our level of debt could
adversely affect our operations or the price of our common stock.
We can issue additional securities without shareholder approval.
We can issue preferred and common stock without shareholder approval.
Holders of preferred stock have priority over holders of common stock, and the
issuance of additional shares of common stock reduces the interest of existing
holders in our company.
Increases in interest rates may adversely affect the market price of our
common stock.
One of the factors that influences the market price of our common stock is
the annual rate of distributions that we pay on our common stock, as compared
with interest rates. An increase in interest rates may lead
4
purchasers of REIT shares to demand higher annual distribution rates, which
could adversely affect the market price of our common stock.
Shares that become available for future sale may adversely affect the market
price of our common stock.
Substantial sales of our common stock, or the perception that substantial
sales may occur, could adversely affect the market price of our common stock.
Certain of our shareholders hold significant numbers of shares of our common
stock and, subject to compliance with applicable securities laws, could sell
their shares.
We depend on key personnel.
We depend on our executive officers, including Ronald L. Havner, Jr., our
chief executive officer and president, and Mary Jayne Howard, our chief
operating officer and executive vice president. The loss of either of these
executive officers could adversely affect our operations. We maintain no key
person insurance on either of them.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process. Under
this shelf process, we may sell from time to time up to $600,000,000 of our
common stock, preferred stock, equity stock, depositary shares and warrants,
in any combination. This prospectus provides a general description of the
securities that we may offer. Each time we offer any of the types of
securities described in this prospectus, we will prepare and distribute a
prospectus supplement that will contain a description of the specific terms of
the securities being offered and of the offering. The prospectus supplement
may also supplement the information contained in this prospectus. You should
read both this prospectus and the applicable prospectus supplement, together
with the additional information described under the heading "Where You Can
Find More Information," before purchasing any securities.
This prospectus may also be used in registered resales of common stock as
described under "Plan of Distribution."
Unless otherwise indicated or unless the context requires otherwise, all
references in this prospectus to "the Company," "we," "us," "our" and similar
references mean PS Business Parks, Inc. and its subsidiaries, including PS
Business Parks, L.P. All references in this prospectus to "our operating
partnership" mean PS Business Parks, L.P.
5
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934, and are required to file annual, quarterly and special reports with
the Securities and Exchange Commission. You may read and copy any of these
documents at the Commission's public reference rooms at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at Seven World Trade Center, 13th Floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. You may telephone the Commission at 1-800-SEC-0330 for
further information on the Commission's public reference facilities. The
Commission also maintains a computer site on the World Wide Web
(http://www.sec.gov) that contains the reports, proxy and information
statements and other information that we and other registrants file
electronically with the Commission. You can also inspect reports and other
information we file at the offices of the American Stock Exchange, Inc., 86
Trinity Place, New York, New York 10006.
We have filed a registration statement on Form S-3, of which this prospectus
is a part, with the Commission to register offers and sales of the securities
described in this prospectus under the Securities Act of 1933. The
registration statement contains additional information about us and the
securities. You may read the registration statement and its exhibits without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, or on the Commission's World Wide Web site, and you may obtain
copies of it from the Commission at prescribed rates.
The Commission allows us to provide information about our business and other
important information to you by "incorporating by reference" the information
we file with the Commission, which means that we can disclose that information
to you by referring in this prospectus to the documents we file with the
Commission. Under the Commission's regulations, any statement contained in a
document incorporated by reference in this prospectus is automatically updated
and superseded by any information contained in this prospectus, or in any
subsequently filed document of the types described below.
We incorporate into this prospectus by reference the following documents
filed by us with the Commission, each of which should be considered an
important part of this prospectus:
SEC Filing (File No. 1-10709) Period Covered or Date of Filing
----------------------------- --------------------------------
Annual Report on Form 10-K...................... Year ended December 31, 1998
Quarterly Report on Form 10-Q................... Quarter ended March 31, 1999
Current Report on Form 8-K...................... Dated April 28, 1999
Description of our common stock contained in
Registration Statement on Form 8-A, as
supplemented by the description of our common
stock contained in this prospectus............. Effective March 15, 1991
All subsequent documents filed by us under
Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act of 1934........................... After the date of this prospectus
and before the termination of the
offering
You may request a copy of each of our filings at no cost, by writing or
telephoning us at the following address, telephone or facsimile number:
Investor Services Department
PS Business Parks, Inc.
701 Western Avenue
Glendale, California 91201-2397
Telephone: (800) 807-3055
(800) 421-2856
(818) 244-8080
Facsimile: (818) 241-0627
Exhibits to a document will not be provided unless they are specifically
incorporated by reference in that document.
6
FORWARD-LOOKING STATEMENTS
Some of the information included or incorporated by reference in this
prospectus contains forward-looking statements, such as those pertaining to
our portfolio performance and future results of operations, market conditions
and prospects. The pro forma financial statements and other pro forma
information incorporated by reference in this prospectus also contain forward-
looking statements. You can identify forward-looking statements by their use
of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "intends," "plans," "pro forma," "estimates" or
"anticipates" or the negative of these words and phrases or similar words or
phrases. Discussion of strategy, plans or intentions also include forward-
looking statements.
Forward-looking statements inherently involve risks and uncertainties and
you should not rely on them as predictions of future events. The factors
described above under the heading "Risk Factors," as well as changes in the
commercial real estate market and the general economy, could cause future
events and actual results to differ materially from those set forth or
contemplated in the forward-looking statements.
THE COMPANY
We are a self-advised and self-managed real estate investment trust or REIT
that acquires, develops, owns and operates commercial properties. We are the
sole general partner of our operating partnership, PS Business Parks, L.P.,
through which we conduct most of our activities. At March 31, 1999, we owned
approximately 73% of our operating partnership with substantially all of the
balance owned by Public Storage, Inc.
In a March 1998 merger with American Office Park Properties, Inc., we
acquired the commercial property business previously operated by Public
Storage and were renamed "PS Business Parks, Inc." At March 31, 1999, we owned
114 commercial properties in 11 states containing approximately 11.3 million
square feet of space.
We elected to be taxed as a REIT beginning with our 1990 taxable year. To
the extent that we continue to qualify as a REIT, we will not be taxed, with
certain limited exceptions, on the net income that we distribute currently to
our shareholders. We were incorporated in California in 1990. Our principal
executive offices are located at 701 Western Avenue, Glendale, California
91201-2397. Our telephone number is (818) 244-8080.
7
USE OF PROCEEDS
We intend to use the net proceeds from the sale of the securities described
in this prospectus for the acquisition of commercial properties, repayment of
our outstanding debt and for general business purposes. Pending their use, we
may invest the net proceeds in short-term, interest bearing securities.
RATIO OF EARNINGS TO FIXED CHARGES
We compute our ratio of earnings to combined fixed charges and preferred
stock dividends by dividing our earnings by our fixed charges. Earnings
consists of net income before minority interest in income, loss on early
extinguishment of debt and gain on disposition of real estate plus fixed
charges less the portion of minority interest in income which does not
contribute to fixed charges. In computing our ratio for periods prior to
March 17, 1998, we used the operations and fixed charges of American Office
Park Properties, Inc., our predecessor for accounting and financial reporting
purposes.
For the Three
Months Ended
March 31, For the Year Ended December 31,
------------- ------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ----- --------- ---- ---- ----
Ratio of earnings to combined
fixed charges and preferred
stock dividends.............. 12.17 29.92 16.34 12,403.00 N/A N/A N/A
N/A--not applicable as we did not have any fixed charges in this period.
DESCRIPTION OF COMMON STOCK
We are authorized to issue 100,000,000 shares of common stock. At April 30,
1999, we had outstanding 23,637,410 shares of common stock (exclusive of a
total of 7,903,666 shares issuable upon exchange of interests in our operating
partnership and shares subject to options).
Common Stock
The following description of our common stock sets forth certain general
terms and provisions of the common stock to which any prospectus supplement
may relate, including a prospectus supplement providing that common stock will
be issuable upon conversion of preferred stock or upon the exercise of
warrants. The statements below describing our common stock are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of our articles of incorporation and bylaws.
Holders of our common stock will be entitled to receive dividends when, as
and if declared by our board of directors, out of funds legally available
therefor. Payment and declaration of dividends on our common stock and
purchases of shares of common stock by us will be subject to certain
restrictions if we fail to pay dividends on outstanding preferred stock. See
"Description of Preferred Stock." Upon any liquidation, dissolution or winding
up of the Company, holders of common stock will be entitled to share equally
and ratably in any assets available for distribution to them, after payment or
provision for payment of the debts and our other liabilities and the
preferential amounts owing with respect to any of our outstanding preferred
stock. Holders of our common stock have no preemptive rights, except such as
have been provided to certain of our shareholders by contract, which means
public shareholders have no right to acquire any additional shares of common
stock that we may issue at a later date.
Each outstanding share of our common stock entitles the holder to one vote
on all matters presented to our holders for a vote, with the exception that
they have cumulative voting rights with respect to the election of our board
of directors, in accordance with California law. Cumulative voting means that
each holder of our common stock is entitled to cast as many votes as there are
directors to be elected multiplied by the number of shares
8
registered in his or her name. A holder of our common stock may cumulate the
votes for directors by casting all of the votes for one candidate or by
distributing the votes among as many candidates as he or she chooses. The
outstanding shares of our common stock are, and additional shares of common
stock will be, when issued, fully paid and nonassessable.
The rights, preferences and privileges of holders of our common stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of our preferred stock or our equity stock which we may
designate and issue in the future. See "Description of Preferred Stock" and
"Description of Equity Stock."
Ownership Limitations
For us to qualify as a REIT under the Internal Revenue Code of 1986, as
amended (the "Code"), no more than 50% in value of our outstanding shares of
capital stock may be owned, directly or constructively under the applicable
attribution rules of the Code, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of a taxable year. In
order to maintain our qualification as a REIT, our articles of incorporation
provide certain restrictions on the shares of capital stock that any
shareholder may own.
Our articles of incorporation provide that, subject to certain exceptions,
no holder may own, or be deemed to own by virtue of the attribution provisions
of the Code, more than (A) 7.0% of the outstanding shares of our common stock
and (B) 9.9% of the outstanding shares of each class or series of shares of
our preferred stock or equity stock and that all shares of stock be imprinted
with a legend setting forth that restriction. Our articles of incorporation
provide, however, that no person shall be deemed to exceed the ownership limit
solely by reason of the beneficial ownership of shares of any class of stock
to the extent that such shares of stock were beneficially owned by such person
(including Public Storage) upon completion of, and after giving effect to, the
merger with American Office Park Properties. Thus, this limitation does not
affect the ownership of common stock held by Public Storage and certain other
shareholders at the time of the merger. Furthermore, the limitation does not
apply with respect to shares of stock deemed to be owned by a person as a
result of such person's ownership of shares of Public Storage (however, such
ownership will be taken into account in determining whether a subsequent
acquisition or transfer of our shares (but not Public Storage) violates the
ownership limit). The ownership limitation is intended to assist in preserving
our REIT status in view of Public Storage's substantial ownership interest in
us and the Hughes family's substantial ownership interest in Public Storage.
There can be no assurance, however, that such ownership limit will enable us
to satisfy the requirement that a REIT not be "closely held" within the
meaning of Section 856(h) of the Code for any given taxable year, in part as a
result of the provision described above providing that the ownership
limitation generally does not apply to our shares deemed to be owned as a
result of a person's ownership of shares of Public Storage.
Our articles of incorporation provide that our board of directors, in its
sole and absolute discretion, may grant exceptions to the ownership limits, so
long as (A) our board has determined that we would not be "closely held"
within the meaning of Section 856(h) of the Code (without regard to whether
the event in question takes place during the second half of a taxable year)
and would not otherwise fail to qualify as a REIT, after giving effect to an
acquisition by an excepted person of beneficial ownership of the maximum
amount of capital stock permitted as a result of the exception to be granted,
and taking into account the existing and permitted ownership by other persons
of stock (taking into account any other exceptions granted) and (B) the
excepted persons provide to our board such representations and undertakings as
our board may require. In any case, no holder may own or acquire, either
directly, indirectly or constructively under the applicable attribution rules
of the Code, any shares of any class of capital stock if such ownership or
acquisition (i) would cause more than 50% in value of outstanding capital
stock to be owned, either directly or constructively, under the applicable
attribution rules of the Code, by five or fewer individuals (as defined in the
Code to include certain tax-exempt entities, other than, in general, qualified
domestic pension funds), (ii) would result in the Company's stock being
beneficially owned by less than 100 persons (determined without reference to
any rules of attribution), or (iii) would otherwise result in our failing to
qualify as a REIT.
9
Our articles of incorporation generally provide that if any holder of
capital stock purports to transfer shares to a person or there is a change in
our capital structure, and either the transfer or the change in capital
structure would result in our failing to qualify as a REIT, or such transfer
or the change in capital structure would cause the transferee to hold shares
in excess of the applicable ownership limit, then the shares causing the
violation will be automatically transferred to a trust for the benefit of a
designated charitable beneficiary. The purported transferee of those shares
will have no right to receive dividends or other distributions with respect to
them and will have no right to vote the shares. Any dividends or other
distributions paid to such purported transferee prior to the discovery by us
that the shares have been transferred to a trust will be paid to the trustee
of the trust for the benefit of the charitable beneficiary upon demand. The
trustee will designate a transferee of those shares so long as the shares
would not violate the restrictions on ownership or transfer in the articles of
incorporation in the hands of the designated transferee. Upon the sale of such
shares, the purported transferee will receive out of any proceeds remaining
after payment of expenses of the charitable trust and us the lesser of (A)(i)
the price per share such purported transferee paid for the stock in the
purported transfer that resulted in the transfer of the shares to the trust,
or (ii) if the transfer or other event that resulted in the transfer of the
shares to the trust was not a transaction in which the purported transferee
gave full value for such shares, a price per share equal to the market price
on the date of the purported transfer or other event that resulted in the
transfer of the shares to the trust and (B) the price per share received by
the trustee from the sale or other disposition of the shares held in the
trust. Each purported transferee shall be deemed to have waived any claims
such purported transferee may have against the trustee and us arising from the
disposition of the shares, except for claims arising from the trustee's or our
gross negligence, willful misconduct, or failure to make payments when
required by the articles of incorporation.
DESCRIPTION OF PREFERRED STOCK
We are authorized to issue 50,000,000 shares of preferred stock. At April
30, 1999, we had 2,200 outstanding shares of preferred stock (represented by
2,200,000 depositary shares) and 510,000 shares reserved for issuance. Our
articles of incorporation provide that the preferred stock may be issued from
time to time in one or more series and give our board of directors broad
authority to fix the dividend and distribution rights, conversion and voting
rights, if any, redemption provisions and liquidation preferences of each
series of preferred stock. Holders of preferred stock have no preemptive
rights. The preferred stock will be, when issued, fully paid and
nonassessable.
Although the issuance of preferred stock with special voting rights (or
common stock) could be used to deter attempts to obtain control of us in
transactions not approved by our board of directors, we have no present
intention to issue stock for that purpose.
Outstanding Preferred Stock
At April 30, 1999, we had outstanding a series of preferred stock. It
(1) has a stated value of $25 per depositary share, (2) in preference to the
holders of shares of our common stock and any other capital stock ranking
junior to the preferred stock as to payment of dividends, provides for
cumulative quarterly dividends of 9 1/4% of the stated value and (3) is
subject to redemption, in whole or in part, at our option at a cash redemption
price of $25 per depositary share, plus accrued and unpaid dividends, on and
after April 30, 2004.
In the event of our voluntary or involuntary liquidation, dissolution or
winding up, the holders of the preferred stock will be entitled to receive out
of our assets available for distribution to shareholders, before any
distribution of assets is made to holders of our common stock or any other
shares of capital stock ranking as to such distributions junior to the
preferred stock, liquidating distributions in the amount of $25 per depositary
share, plus all accrued and unpaid dividends.
Except as expressly required by law and in certain other limited
circumstances, holders of the preferred stock are not entitled to vote. The
consent of holders of at least 66 2/3% of the outstanding shares of the
preferred stock (and any other series of preferred stock ranking on a parity
therewith), voting as a single class, is required to authorize another class
of shares senior to the preferred stock.
10
Ownership Limitations
For a discussion of the ownership limitations that apply to preferred stock,
see "Description of Common Stock--Ownership Limitations."
Future Series of Preferred Stock
The following description of preferred stock sets forth certain general
terms and provisions of the preferred stock to which any prospectus supplement
may relate. The statements below describing the preferred stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of our articles of incorporation (including the
applicable form of certificate of determination) and bylaws.
Reference is made to the prospectus supplement relating to the preferred
stock offered thereby for specific terms, including, where applicable, the
following: (1) the title and stated value of such preferred stock; (2) the
number of shares of such preferred stock offered, the liquidation preference
per share and the offering price of such preferred stock; (3) the dividend
rate(s), period(s) and/or payment date(s) or method(s) of calculation
applicable to such preferred stock; (4) the date from which dividends on such
preferred stock shall accumulate, if applicable; (5) the provision for a
sinking fund, if any, for such preferred stock; (6) the provision for
redemption, if applicable, of such preferred stock; (7) any listing of such
preferred stock on any securities exchange; (8) the terms and conditions, if
applicable, upon which such preferred stock will be convertible into common
stock, including the conversion price (or manner of calculation); (9) the
voting rights, if any, of such preferred stock; (10) any other specific terms,
preferences, rights, limitations or restrictions of such preferred stock; (11)
the relative ranking and preferences of such preferred stock as to dividend
rights and rights upon liquidation, dissolution or winding up of our affairs;
and (12) any limitations on issuance of any series of preferred stock ranking
senior to or on a parity with such series of preferred stock as to dividend
rights and rights upon liquidation, dissolution or winding up of our affairs.
Ranking. The ranking of the preferred stock is set forth in the applicable
prospectus supplement. Unless otherwise specified in the applicable prospectus
supplement, such preferred stock will, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of our affairs, rank (i)
senior to the common stock, any additional class of common stock and any
series of preferred stock expressly made junior to such preferred stock; (ii)
on a parity with all preferred stock previously issued by us the terms of
which specifically provide that such preferred stock rank on a parity with the
preferred stock offered hereby; and (iii) junior to all preferred stock
previously issued by us the terms of which specifically provide that such
preferred stock rank senior to the preferred stock offered hereby.
Dividends. Holders of shares of the preferred stock of each series offered
hereby will be entitled to receive, when, as and if declared by our board of
directors, out of our assets legally available for payment, cash dividends at
such rates and on such dates as will be set forth in the applicable prospectus
supplement. Each such dividend shall be payable to holders of record as they
appear on the stock transfer books of the Company on such record dates as
shall be fixed by our board of directors.
Dividends on any series of the preferred stock offered hereby may be
cumulative or non-cumulative, as provided in the applicable prospectus
supplement. Dividends, if cumulative, will be cumulative from and after the
date set forth in the applicable prospectus supplement. If our board of
directors fails to declare a dividend payable on a dividend payment date on
any series of the preferred stock for which dividends are noncumulative, then
the holders of such series of the preferred stock will have no right to
receive a dividend in respect of the dividend period ending on such dividend
payment date, and we will have no obligation to pay the dividend accrued for
such period, whether or not dividends on such series are declared payable on
any future dividend payment date.
No dividends (other than in common stock or other capital stock ranking
junior to the preferred stock of any series as to dividends and upon
liquidation) will be declared or paid or set aside for payment (nor will any
other distribution be declared or made upon the common stock, or any other
capital stock of us ranking junior to
11
or on a parity with the preferred stock of such series as to dividends or upon
liquidation), nor will any common stock or any other of our capital stock
ranking junior to or on a parity with the preferred stock of such series as to
dividends or upon liquidation be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any shares of any such stock) by us (except by
conversion into or exchange for other capital stock of us ranking junior to
the preferred stock of such series as to dividends and upon liquidation)
unless (i) if such series of preferred stock has a cumulative dividend, full
cumulative dividends on the preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for all past dividend periods and
the then current dividend period, and (ii) if such series of preferred stock
does not have a cumulative dividend, full dividends on the preferred stock of
such series have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for payment for the
then current dividend period.
Any dividend payment made on shares of a series of cumulative preferred
stock offered hereby will first be credited against the earliest accrued but
unpaid dividend due with respect to shares of such series which remains
payable.
Redemption. If so provided in the applicable prospectus supplement, the
shares of preferred stock will be subject to mandatory redemption or
redemption at our option, in whole or in part, in each case upon the terms, at
the times and at the redemption prices set forth in such prospectus
supplement.
The prospectus supplement relating to a series of preferred stock offered
hereby that is subject to mandatory redemption will specify the number of
shares of such preferred stock that will be redeemed by us in each year
commencing after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accrued and unpaid dividends
thereon (which will not, if such preferred stock does not have a cumulative
dividend, include any accumulation in respect of unpaid dividends for prior
dividend periods) to the date of redemption. The redemption price may be
payable in cash, securities or other property, as specified in the applicable
prospectus supplement.
Notwithstanding the foregoing, no shares of any series of preferred stock
offered hereby will be redeemed and we will not purchase or otherwise acquire
directly or indirectly any shares of preferred stock of such series (except by
conversion into or exchange for capital stock of us ranking junior to the
preferred stock of such series as to dividends and upon liquidation) unless
all outstanding shares of preferred stock of such series are simultaneously
redeemed unless, in each case, (i) if such series of preferred stock has a
cumulative dividend, full cumulative dividends on the preferred stock of such
series will have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for payment for all
past dividend periods and the then current dividend period and (ii) if such
series of preferred stock does not have a cumulative dividend, full dividends
on the preferred stock of such series have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for payment for the then current dividend period; provided, however,
that the foregoing shall not prevent the purchase or acquisition of shares of
preferred stock of such series pursuant to a purchase or exchange offer made
on the same terms to holders of all outstanding shares of preferred stock of
such series.
If fewer than all of the outstanding shares of preferred stock of any series
offered hereby are to be redeemed, the number of shares to be redeemed will be
determined by us and such shares may be redeemed pro rata from the holders of
record of such shares in proportion to the number of such shares held by such
holders (with adjustments to avoid redemption of fractional shares) or any
other equitable method determined by us.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of preferred stock of
any series to be redeemed at the address shown on our stock transfer books.
Each notice will state: (i) the redemption date; (ii) the number of shares and
series of the preferred stock to be redeemed; (iii) the redemption price; (iv)
the place or places where certificates for such preferred stock are to be
surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed
12
will cease to accrue on such redemption date; and (vi) the date upon which the
holder's conversion rights, if any, as to such shares shall terminate. If
fewer than all the shares of preferred stock of any series are to be redeemed,
the notice mailed to each such holder thereof shall also specify the number of
shares of preferred stock to be redeemed from each such holder and, upon
redemption, a new certificate shall be issued representing the unredeemed
shares without cost to the holder thereof. In order to facilitate the
redemption of shares of preferred stock, our board of directors may fix a
record date for the determination of shares of preferred stock to be redeemed,
such record date to be not less than 30 or more than 60 days prior to the date
fixed for such redemption.
Notice having been given as provided above, from and after the date
specified therein as the date of redemption, unless we default in providing
funds for the payment of the redemption price on such date, all dividends on
the preferred stock called for redemption will cease. From and after the
redemption date, unless we so default, all rights of the holders of the
preferred stock as our shareholders, except the right to receive the
redemption price (but without interest), will cease.
Subject to applicable law and the limitation on purchases when dividends on
preferred stock are in arrears, we may, at any time and from time to time,
purchase any shares of preferred stock in the open market, by tender or by
private agreement.
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, then, before any distribution or
payment shall be made to the holders of any common stock or any other class or
series of our capital stock ranking junior to any series of the preferred
stock in the distribution of assets upon our liquidation, dissolution or
winding up, the holders of such series of preferred stock will be entitled to
receive out of our assets legally available for distribution to shareholders
liquidating distributions in the amount of the liquidation preference per
share (set forth in the applicable prospectus supplement), plus an amount
equal to all dividends accrued and unpaid thereon (which shall not include any
accumulation in respect of unpaid dividends for prior dividend periods if such
preferred stock does not have a cumulative dividend). After payment of the
full amount of the liquidating distributions to which they are entitled, the
holders of preferred stock will have no right or claim to any of our remaining
assets. In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, our legally available assets are insufficient to
pay the amount of the liquidating distributions on all outstanding shares of
any series of preferred stock and the corresponding amounts payable on all
shares of other classes or series of our capital stock ranking on a parity
with the preferred stock in the distribution of assets upon liquidation,
dissolution or winding up, then the holders of such series of preferred stock
and all other such classes or series of capital stock shall share ratably in
any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
preferred stock, our remaining assets will be distributed among the holders of
any other classes or series of capital stock ranking junior to such series of
preferred stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, our consolidation or merger
with or into any other corporation, or the sale, lease, transfer or conveyance
of all or substantially all of our property or business will not be deemed to
constitute a liquidation, dissolution or winding up.
Voting Rights. Holders of the preferred stock offered hereby will not have
any voting rights, except as set forth below or as otherwise expressly
required by law or as indicated in the applicable prospectus supplement.
If the equivalent of six quarterly dividends payable on any series of
preferred stock are in default (whether or not declared or consecutive), the
holders of all such series of preferred stock, voting as a single class with
all other series of preferred stock upon which similar voting rights have been
conferred and are exercisable, will be entitled to elect two additional
directors until all dividends in default have been paid or declared and set
apart for payment.
Such right to vote separately to elect directors shall, when vested, be
subject, always, to the same provisions for vesting of such right to elect
directors separately in the case of future dividend defaults. At any time when
13
such right to elect directors separately shall have so vested, we may, and
upon the written request of the holders of record of not less than 20% of our
total number of preferred shares then outstanding shall, call a special
meeting of shareholders for the election of directors. In the case of such a
written request, such special meeting shall be held within 90 days after the
delivery of such request and, in either case, at the place and upon the notice
provided by law and in the bylaws, provided that we will not be required to
call such a special meeting if such request is received less than 120 days
before the date fixed for the next ensuing annual meeting of shareholders, and
the holders of all classes of outstanding preferred stock are offered the
opportunity to elect such directors (or fill any vacancy) at such annual
meeting of shareholders. Directors so elected will serve until the next annual
meeting of shareholders or until their respective successors are elected and
qualify. If, prior to the end of the term of any director so elected, a
vacancy in the office of such director shall occur, during the continuance of
a default by reason of death, resignation, or disability, such vacancy shall
be filled for the unexpired term of such former director by the appointment of
a new director by the remaining director or directors so elected.
The affirmative vote or consent of the holders of at least a majority of the
outstanding shares of each series of preferred stock will be required to amend
or repeal any provision of or add any provision to, our articles of
incorporation, including the certificate of determination, if such action
would materially and adversely alter or change the rights, preferences or
privileges of such series of preferred stock.
No consent or approval of the holders of any series of preferred stock
offered hereby will be required for the issuance from our authorized but
unissued preferred stock of other shares of any series of preferred stock
ranking on a parity with or junior to such series of preferred stock, or
senior to a series of preferred stock expressly made junior to other series of
preferred stock as to payment of dividends and distribution of assets,
including other shares of such series of preferred stock.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of preferred stock had been
redeemed or called for redemption upon proper notice and sufficient funds had
been deposited in trust to effect such redemption.
Conversion Rights. The terms and conditions, if any, upon which shares of
any series of preferred stock offered hereby are convertible into common stock
will be set forth in the applicable prospectus supplement relating thereto.
Such terms will include the number of shares of common stock into which the
preferred stock is convertible, the conversion price (or manner of calculation
thereof), the conversion period, provisions as to whether conversion will be
at our option or at the option of the holders of the preferred stock or
automatically upon the occurrence of certain events, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such preferred stock.
DESCRIPTION OF EQUITY STOCK
We are authorized to issue 100,000,000 shares of equity stock. At April 30,
1999, we had no outstanding shares of equity stock. Our articles of
incorporation provide that the equity stock may be issued from time to time in
one or more series and give our board of directors broad authority to fix the
dividend and distribution rights, conversion and voting rights, redemption
provisions and liquidation rights of each series of equity stocks. Holders of
equity stock have no preemptive rights. The shares of equity stock will be,
when issued, fully paid and nonassessable.
The issuance of equity stock with special voting rights (or common stock)
could be used to deter attempts by a single shareholder or group of
shareholders to obtain control of us in transactions not approved by our board
of directors. We have no intention to issue the equity stock (or common stock)
for such purposes.
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Ownership Limitations
For a discussion of the ownership limitations that apply to equity stock,
see "Description of Common Stock--Ownership Limitations."
Terms of Equity Stock
The following description of equity stock sets forth certain general terms
and provisions of the equity stock to which any prospectus supplement may
relate. The statements below describing the equity stock are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of our articles of incorporation (including the applicable form of
certificate of determination) and bylaws.
Reference is made to the prospectus supplement relating to the equity stock
offered thereby for specific terms, including, where applicable, the
following: (1) the designation of such equity stock; (2) the number of shares
of such equity stock offered, the liquidation rights and the offering price of
such equity stock; (3) the dividend rate(s), period(s) and/or payment date(s)
or method(s) of calculation applicable to such equity stock; (4) the provision
for redemption, if applicable, of such equity stock; (5) any listing of such
equity stock on any securities exchange; (6) the terms and conditions, if
applicable, upon which such equity stock will be convertible into common
stock, including the conversion price (or manner of calculation thereof); (7)
the voting rights, if any, of such equity stock; (8) any other specific terms,
rights, limitations or restrictions of such equity stock; and (9) the relative
ranking of such equity stock as to dividend rights and rights upon
liquidation, dissolution or winding up of our affairs.
Ranking. The ranking of the equity stock is set forth in the applicable
prospectus supplement. Unless otherwise specified in the applicable prospectus
supplement, such equity stock will, with respect to dividend rights and rights
upon liquidation, dissolution or winding up of our affairs, rank on a parity
with the common stock.
Dividends. Holders of shares of the equity stock of each series offered
hereby shall be entitled to receive, when, as and if declared by our board of
directors, out of our assets legally available for payment, cash dividends at
such rates and on such dates as will be set forth in the applicable prospectus
supplement. Each such dividend shall be payable to holders of record as they
appear on our stock transfer books on such record dates as shall be fixed by
our board of directors. Unless otherwise specified in the applicable
prospectus supplement, dividends on such equity stock will be non-cumulative.
Redemption. If so provided in the applicable prospectus supplement, the
shares of equity stock will be subject to mandatory redemption or redemption
at our option, in whole or in part, in each case upon the terms, at the times
and at the redemption prices set forth in such prospectus supplement.
The prospectus supplement relating to a series of equity stock offered
hereby that is subject to mandatory redemption will specify the number of
shares of such equity stock that we redeem in each year commencing after a
date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon
(which shall not, if such equity stock does not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in
cash, securities or other property, as specified in the applicable prospectus
supplement.
If fewer than all of the outstanding shares of equity stock of any series
offered hereby are to be redeemed, the number of shares to be redeemed will be
determined by us and such shares may be redeemed pro rata from the holders of
record of such shares in proportion to the number of such shares held by such
holders (with adjustments to avoid redemption of fractional shares) or any
other equitable method determined by us.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of equity stock of
any series to be redeemed at the address shown on our stock transfer
15
books. Each notice shall state: (i) the redemption date; (ii) the number of
shares and series of the equity stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such equity stock are
to be surrendered for payment of the redemption price; (v) that dividends on
the shares to be redeemed will cease to accrue on such redemption date; and
(vi) the date upon which the holder's conversion rights, if any, as to such
shares shall terminate. If fewer than all the shares of equity stock of any
series are to be redeemed, the notice mailed to each such holder thereof shall
also specify the number of shares of equity stock to be redeemed from each
such holder and, upon redemption, a new certificate shall be issued
representing the unredeemed shares without cost to the holder thereof. In
order to facilitate the redemption of shares of equity stock, our board of
directors may fix a record date for the determination of shares of equity
stock to be redeemed, such record date to be not less than 30 or more than 60
days prior to the date fixed for such redemption.
Notice having been given as provided above, from and after the date
specified therein as the date of redemption, unless we default in providing
funds for the payment of the redemption price on such date, all dividends on
the Equity Stock called for redemption will cease. From and after the
redemption date, unless we so default, all rights of the holders of the equity
stock as our shareholders, except the right to receive the redemption price
(but without interest), will cease.
Liquidation Rights. If we voluntarily or involuntarily liquidate, dissolve
or wind-up our affairs, then, before any distribution or payment may be made
to the holders of the equity stock or any other class or series of our capital
stock ranking junior to any series of the preferred stock in the distribution
of assets upon our liquidation, dissolution or winding up, the holders of such
series of preferred stock will be entitled to receive out of our assets
legally available for distribution to shareholders liquidating distributions
in the amount of the liquidation preference per share, plus an amount equal to
all dividends accrued and unpaid thereon (which shall not include any
accumulation in respect of unpaid dividends for prior dividend periods if such
preferred stock does not have a cumulative dividend). After payment of the
full amount of the liquidating distributions to which they are entitled, the
holders of Preferred Stock will have no right or claim to any of our remaining
assets. If we voluntarily or involuntarily liquidate, dissolve or wind-up our
affairs and our legally available assets are insufficient to pay the amount of
the liquidating distributions on all outstanding shares of any series of
preferred stock and the corresponding amounts payable on all shares of other
classes or series of our capital stock ranking on a parity with the preferred
stock in the distribution of assets upon liquidation, dissolution or winding
up, then the holders of such series of preferred stock and all other such
classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions have been made in full to all holders of
preferred stock, our remaining assets will be distributed among the holders of
any other classes or series of capital stock ranking junior to such series of
preferred stock upon liquidation, dissolution or winding up, including the
equity stock, according to their respective rights and in each case according
to their respective number of shares. For such purposes, our consolidation or
merger with or into any other corporation, or the sale, lease, transfer or
conveyance of all or substantially all of our property or business, will not
be deemed to constitute a liquidation, dissolution or winding up.
Unless otherwise specified in the applicable prospectus supplement, upon any
voluntary or involuntary liquidation, dissolution or winding up of our
affairs, holders of the equity stock will rank on a parity with the holders of
the common stock, subject to any maximum or minimum distribution to holders of
equity stock specified in such prospectus supplement.
Voting Rights. Unless otherwise specified in the applicable prospectus
supplement, holders of the equity stock will have the same voting rights as
holders of the common stock.
No consent or approval of the holders of any series of equity stock will be
required for the issuance from our authorized but unissued equity stock of
other shares of any series of equity stock including shares of such series of
equity stock.
16
Conversion Rights. The terms and conditions, if any, upon which shares of
any series of equity stock offered hereby are convertible into common stock
will be set forth in the applicable prospectus supplement relating thereto.
Such terms will include the number of shares of common stock into which the
equity stock is convertible, the conversion price (or manner of calculation),
the conversion period, provisions as to whether conversion will be at our
option or at the option of the holders of the equity stock or automatically
upon the occurrence of certain events, the events requiring an adjustment of
the conversion price and provisions affecting conversion in the event of the
redemption of such equity stock.
DESCRIPTION OF THE DEPOSITARY SHARES
We may, at our option, elect to offer depositary shares rather than full
shares of preferred stock or equity stock. In the event such option is
exercised, each of the depositary shares will represent ownership of and
entitlement to all rights and preferences of a fraction of a share of
preferred stock or equity stock of a specified series (including dividend,
voting, redemption and liquidation rights). The applicable fraction will be
specified in the prospectus supplement. The shares of preferred stock or
equity stock represented by the depositary shares will be deposited with a
depositary named in the applicable prospectus supplement, under a deposit
agreement, among the depositary, the holders of the depositary receipts and
us. Depositary receipts, which are certificates evidencing depositary shares,
will be delivered to those persons purchasing depositary shares in the
offering. The depositary will be the transfer agent, registrar and dividend
disbursing agent for the depositary shares. Holders of depositary receipts
agree to be bound by the deposit agreement, which requires holders to take
certain actions such as filing proof of residence and paying certain charges.
The summary of terms of the depositary shares contained in this prospectus
does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the deposit agreement, our articles of
incorporation and the form of certificate of determination for the applicable
series of preferred stock or equity stock.
Dividends
The depositary will distribute all cash dividends or other cash
distributions received in respect of the series of preferred stock represented
by the depositary shares to the record holders of depositary receipts in
proportion to the number of depositary shares owned by such holders on the
relevant record date, which will be the same date as the record date fixed by
us for the applicable series of preferred stock or equity stock. The
depositary, however, will distribute only such amount as can be distributed
without attributing to any depositary share a fraction of one cent, and any
balance not so distributed will be added to and treated as part of the next
sum received by the depositary for distribution to record holders of
depositary receipts then outstanding.
In the event of a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary
receipts entitled thereto, in proportion, as nearly as may be practicable, to
the number of depositary shares owned by such holders on the relevant record
date, unless the depositary determines (after consultation with us) that it is
not feasible to make such distribution, in which case the depositary may (with
our approval) adopt any other method for such distribution as it deems
equitable and appropriate, including the sale of such property (at such place
or places and upon such terms as it may deem equitable and appropriate) and
distribution of the net proceeds from such sale to such holders.
Liquidation Rights
In the event of the liquidation, dissolution or winding up of our affairs,
whether voluntary or involuntary, the holders of each depositary share will be
entitled to the fraction of the liquidation amount accorded each share of the
applicable series of preferred stock or equity stock, as set forth in the
prospectus supplement.
17
Redemption
If the series of preferred stock represented by the applicable series of
depositary shares is redeemable, such depositary shares will be redeemed from
the proceeds received by the depositary resulting from the redemption, in
whole or in part, of preferred stock or equity stock held by the depositary.
Whenever we redeem any preferred stock or equity stock held by the depositary,
the depositary will redeem as of the same redemption date the number of
depositary shares representing the preferred stock or equity stock so
redeemed. The depositary will mail the notice of redemption promptly upon
receipt of such notice from us and not less than 30 nor more than 60 days
prior to the date fixed for redemption of the preferred stock or equity stock
and the depositary shares to the record holders of the depositary receipts.
Conversion
If the series of preferred stock or equity stock represented by the
applicable series of depositary shares is convertible into a different class
of our securities, the depositary shares will be also be convertible on the
terms described in the applicable prospectus supplement.
Voting
Promptly upon receipt of notice of any meeting at which the holders of the
series of preferred stock or equity stock represented by the applicable series
of depositary shares are entitled to vote, the depositary will mail the
information contained in such notice of meeting to the record holders of the
depositary receipts as of the record date for such meeting. Each such record
holder of depositary receipts will be entitled to instruct the depositary as
to the exercise of the voting rights pertaining to the number of shares of
preferred stock or equity stock represented by such record holder's depositary
shares. The depositary will endeavor, insofar as practicable, to vote such
preferred stock or equity stock represented by such depositary shares in
accordance with such instructions, and we will agree to take all action which
may be deemed necessary by the depositary in order to enable the depositary to
do so. The depositary will abstain from voting any of the preferred stock or
equity stock to the extent that it does not receive specific instructions from
the holders of depositary receipts.
Withdrawal of Preferred Stock
Upon surrender of depositary receipts at the principal office of the
depositary, upon payment of any unpaid amount due the depositary, and subject
to the terms of the deposit agreement, the owner of the depositary shares
evidenced thereby is entitled to delivery of the number of whole shares of
preferred stock or equity stock and all money and other property, if any,
represented by such depositary shares. Partial shares of preferred stock or
equity stock will not be issued. If the depositary receipts delivered by the
holder evidence a number of depositary shares in excess of the number of
depositary shares representing the number of whole shares of preferred stock
or equity stock to be withdrawn, the depositary will deliver to such holder at
the same time a new depositary receipt evidencing such excess number of
depositary shares. Holders of preferred stock or equity stock thus withdrawn
will not thereafter be entitled to deposit such shares under the deposit
agreement or to receive depositary receipts evidencing depositary shares
therefor.
Amendment and Termination of Deposit Agreement
The form of depositary receipt evidencing the depositary shares and any
provision of the deposit agreement may at any time and from time to time be
amended by agreement between the Depositary and us. However, any amendment
which materially and adversely alters the rights of the holders (other than
any change in fees) of depositary shares will not be effective unless such
amendment has been approved by at least a majority of the depositary shares
then outstanding. No such amendment may impair the right, subject to the terms
of the deposit agreement, of any owner of any depositary shares to surrender
the depositary receipt evidencing such depositary shares with instructions to
the depositary to deliver to the holder the preferred stock and all money and
other property, if any, represented thereby, except in order to comply with
mandatory provisions of applicable law. The deposit agreement may be
terminated by the depositary or us only if (i) all outstanding depositary
shares
18
have been redeemed or (ii) there has been a final distribution in respect of
the preferred stock or equity stock in connection with our liquidation,
dissolution or winding up and such distribution has been made to all the
holders of depositary shares.
Charges of Depositary
We will pay all transfer and other taxes and governmental charges arising
solely from the existence of the depositary arrangements. We will pay charges
of the depositary in connection with the initial deposit of the preferred
stock or equity stock and the initial issuance of the depositary shares, and
redemption of the preferred stock or equity stock and all withdrawals of
preferred stock or equity stock by owners of depositary shares. Holders of
depositary receipts will pay transfer, income and other taxes and governmental
charges and certain other charges as are provided in the deposit agreement to
be for their accounts. In certain circumstances, the depositary may refuse to
transfer depositary shares, may withhold dividends and distributions and sell
the depositary shares evidenced by such depositary receipt if such charges are
not paid.
Miscellaneous
The depositary will forward to the holders of depositary receipts all
reports and communications from us which are delivered to the depositary and
which we are required to furnish to the holders of the preferred stock. In
addition, the depositary will make available for inspection by holders of
depositary receipts at the principal office of the depositary, and at such
other places as it may from time to time deem advisable, any reports and
communications received from us which are received by the depositary as the
holder of preferred stock or equity stock.
Neither the depositary nor we assume any obligation or will be subject to
any liability under the deposit agreement to holders of depositary receipts
other than for its negligence or willful misconduct. Neither the depositary
nor we will be liable if the depositary is prevented or delayed by law or any
circumstance beyond its control in performing its obligations under the
deposit agreement. Our obligations and those of the depositary under the
deposit agreement will be limited to performance in good faith of their duties
thereunder, and they will not be obligated to prosecute or defend any legal
proceeding in respect of any depositary shares or preferred stock unless
satisfactory indemnity is furnished. We and the depositary may rely on written
advice of counsel or accountants, on information provided by holders of
depositary receipts or other persons believed in good faith to be competent to
give such information and on documents believed to be genuine and to have been
signed or presented by the proper party or parties.
Resignation and Removal of Depositary
The depositary may resign at any time by delivering to us notice of its
election to do so, and we may at any time remove the depositary, any such
resignation or removal to take effect upon the appointment of a successor
depositary and its acceptance of such appointment. Such successor depositary
must be appointed within 60 days after delivery of the notice for resignation
or removal and must be a bank or trust company having its principal office in
the United States of America and having a combined capital and surplus of at
least $150,000,000.
Federal Income Tax Considerations
Owners of the depositary shares will be treated for federal income tax
purposes as if they were owners of the preferred stock or equity stock
represented by such depositary shares. Accordingly, such owners will be
entitled to take into account, for federal income tax purposes, income and
deductions to which they would be entitled if they were holders of such
preferred stock. In addition, (i) no gain or loss will be recognized for
federal income tax purposes upon the withdrawal of preferred stock in exchange
for depositary shares, (ii) the tax basis of each share of preferred stock or
equity stock to an exchanging owner of depositary shares will, upon such
exchange, be the same as the aggregate tax basis of the depositary shares
exchanged therefor, and (iii) the holding period for preferred stock or equity
stock in the hands of an exchanging owner of depositary shares will include
the period during which such person owned such depositary shares.
19
DESCRIPTION OF WARRANTS
We have no warrants outstanding (other than options issued under our stock
option plan). We may issue warrants for the purchase of common stock,
preferred stock or equity stock. Warrants may be issued independently or
together with any other securities offered by any prospectus supplement and
may be attached to or separate from such securities. Each series of warrants
will be issued under a separate warrant agreement to be entered into between
the Company, a warrant agent specified in the applicable prospectus supplement
and us. The warrant agent will act solely as our agent in connection with the
warrants of such series and will not assume any obligation or relationship of
agency or trust for or with any holders or beneficial owners of warrants. The
following sets forth certain general terms and provisions of the warrants
offered hereby. Further terms of the warrants and the applicable warrant
agreement will be set forth in the applicable prospectus supplement.
The applicable prospectus supplement will describe the terms of the warrants
in respect of which this prospectus is being delivered, including, where
applicable, the following: (1) the title of such warrants; (2) the aggregate
number of such warrants; (3) the price or prices at which such warrants will
be issued; (4) the designation, number and terms of the shares of common
stock, preferred stock or equity stock purchasable upon exercise of such
warrants; (5) the designation and terms of the other securities, if any, with
which such warrants are issued and the number of such warrants issued with
each such security; (6) the date, if any, on and after which such warrants and
the related common stock, preferred stock or equity stock, if any, will be
separately transferable; (7) the price at which each share of common stock,
preferred stock or equity stock purchasable upon exercise of such warrants may
be purchased; (8) the date on which the right to exercise such warrants shall
commence and the date on which such right shall expire; (9) the minimum or
maximum amount of such warrants which may be exercised at any one time; and
(10) any other terms of such warrants, including terms, procedures and
limitations relating to the exchange and exercise of such warrants.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax
considerations relating to the Company and to the acquisition, ownership and
disposition of Common Stock. The applicable Prospectus Supplement will contain
information about additional federal income tax considerations, if any,
relating to Securities other than Common Stock. The following discussion,
which is not exhaustive of all possible tax considerations, does not give a
detailed description of any state, local, or foreign tax considerations. Nor
does it discuss all of the aspects of federal income taxation that may be
relevant to a prospective Shareholder in light of his or her particular
circumstances or to certain types of Shareholders (including insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the
United States) who are subject to special treatment under federal income tax
laws. The information in this section is based on the Code, current, temporary
and proposed Treasury Regulations thereunder, the legislative history of the
Code, current administrative interpretations and practices of the IRS
(including its practices and policies as endorsed in private letter rulings,
which are not binding on the IRS except with respect to the taxpayer that
receives such a ruling), and court decisions, all as of the date hereof. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and court decisions will not significantly
change current law or adversely affect existing interpretations of current
law. Any such change could apply retroactively to transactions preceding the
date of the change. The Company has not requested and does not plan to request
any rulings from the IRS concerning the tax treatment of the Company or the
Operating Partnership. Thus, no assurance can be provided that the statements
set forth herein (which do not bind the IRS or the courts) will not be
challenged by the IRS or will be sustained by a court if so challenged.
EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS
SUPPLEMENT, AS WELL AS HIS OR HER TAX ADVISOR, REGARDING THE TAX CONSEQUENCES
TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF
SUCH ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
20
As used under this heading, the term "Company" refers solely to PS Business
Parks, Inc., "AOPP" refers to American Office Park Properties, Inc. and
"Merger" refers to the merger with AOPP.
Taxation of the Company
General. The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Code commencing with its taxable year ended December 31,
1990. The Company believes that its has been organized and operated in a
manner so as to qualify as a REIT, and the Company intends to continue to
operate in such a manner. So long as the Company qualifies for taxation as a
REIT, it generally will not be subject to federal corporate income taxes on
net income that it distributes currently to Shareholders. However, the Company
will be subject to federal income tax in the following circumstances. First,
the Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under
certain circumstances, the Company may be subject to the "alternative minimum
tax" on its items of tax preference. Third, if the Company has (i) net income
from the sale or other disposition of "foreclosure property" (which is, in
general, property acquired by foreclosure or otherwise on default of a lease
or a loan secured by the property) which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if the Company has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75%
or 95% gross income test. Sixth, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such
year, and (iii) any undistributed taxable income from prior periods, it would
be subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. Seventh, if the Company acquires or has
acquired any asset from a taxable C corporation in a transaction in which the
basis of the asset in the acquiror's hands is determined by reference to the
basis of the asset (or any other asset) in the hands of the C corporation and
the acquiror recognizes gain on the disposition of such asset during the 10
year period beginning on the date on which such asset was acquired by it, then
to the extent of such asset's "Built-In Gain" (i.e., the excess of (a) the
fair market value of such asset at the time of the acquisition by the Company
over (b) the adjusted basis in such asset, determined at the time of such
acquisition), such gain will be subject to tax at the highest regular
corporate rate applicable, pursuant to anticipated Treasury Regulations that
have yet to be promulgated. The results described above with respect to the
recognition of Built-In Gain assume that the Company will make an election
pursuant to Notice 88-19 with respect to any such acquisition. Prior to 1997,
AOPP was taxable as a regular C corporation. In making its election to be
taxed as a REIT for 1997, AOPP elected to be subject to the Built-In Gain
rules of Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors,
(2) the beneficial ownership of which is evidenced by transferable shares of
stock, or by transferable certificates of beneficial interest, (3) that would
be taxable as a domestic corporation, but for Sections 856 through 860 of the
Code, (4) that 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) that during the last half of each
taxable year not more than 50% in value of the outstanding stock of which is
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities), (7) that makes an election to be taxable as
a REIT, or has made such election for a previous taxable year which has not
been revoked or terminated, and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met in order
to elect and maintain REIT status; (8) that uses a calendar year for federal
income tax purposes and complies with recordkeeping requirements of the Code
and regulations promulgated thereunder; and (9) that meets certain other
tests, described below, regarding the nature of its income and assets and the
amount of its distributions. The Code provides that conditions (1) through
(4), inclusive, must be met during the entire taxable year and that condition
(5) must be
21
met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. For purposes of
determining stock ownership under condition (6), a supplemental unemployment
compensation benefits plan, a private foundation or a portion of a trust
permanently set aside or used exclusively for charitable purposes generally is
considered an individual. However, a trust that is a qualified trust under
Code section 401(a) generally is not considered an individual and
beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of
condition (6).
The Company's Articles of Incorporation contain restrictions regarding the
transfer of its capital stock that are intended to assist the Company in
continuing to satisfy the stock ownership requirements described in conditions
(5) and (6). See "Description of Common Stock--Ownership Limitations." In
connection with condition (6), a REIT is required to send annual letters to
its shareholders requesting information regarding the actual ownership of
shares. For the Company's taxable years commencing on or after January 1,
1998, if the Company complies with the annual letters requirement and the
Company does not know, or exercising reasonable diligence would not have
known, whether it failed to meet requirement (6) above, the Company will be
treated as having met the requirement.
The ownership restrictions in the Company's articles of incorporation
generally prohibit the actual or constructive ownership of more than 7% of the
outstanding shares of Common Stock (excluding the interest held by Public
Storage) or more than 9.9% of the outstanding shares of each class or series
of shares of Preferred Stock, unless an exception is established by the Board
of Directors. The restrictions provide that if, at any time, for any reason,
those ownership limitations are violated or more than 50% in value of the
Company's outstanding stock otherwise would be considered owned by five or
fewer individuals, then a number of shares of stock necessary to cure the
violation will automatically and irrevocably be transferred from the person
causing the violation to a designated charitable beneficiary.
The REIT protective provisions are modeled after certain arrangements that
the IRS has ruled in private letter rulings will preclude a REIT from being
considered to violate the ownership restrictions so long as the arrangements
are enforceable as a matter of state law and the REIT seeks to enforce them as
and when necessary. There can be no assurance, however, that the IRS might not
seek to take a different position with respect to the Company (a private
letter ruling is legally binding only with respect to the taxpayer to whom it
was issued and the Company will not seek a private ruling on this or any other
issue) or contend that the Company failed to enforce these various
arrangements. Moreover, the Company's limitations will not apply to the
ownership of shares at the time of the Merger, or to shares of stock of the
Company deemed to be owned by a person as a result of such person's ownership
of shares of Public Storage (however, such deemed ownership will be taken into
account in determining whether a subsequent acquisition or transfer of shares
of the Company (but not Public Storage) violates the limitations), exceptions
not contained in the private letter rulings previously issued by the IRS.
Accordingly, there can be no assurance that these arrangements necessarily
will preserve the Company's REIT status. The Company believes, however, that
it has issued and outstanding sufficient shares with sufficient diversity of
ownership to allow it to satisfy the REIT ownership requirements.
A REIT is not permitted to have at the end of any taxable year any
undistributed earnings and profits that are attributable to a "C corporation"
taxable year. As a result of the Merger, the Company succeeded to various tax
attributes of AOPP, including any undistributed earnings and profits. AOPP was
taxable as a "C corporation" prior to 1997, and does not believe that it has
transferred any undistributed "C corporation earnings and profits" to the
Company. However, neither AOPP nor the Company has sought an opinion of
counsel or outside accountants to the effect that the Company has not acquired
any "C corporation earnings and profits" from AOPP. There can be no assurance
that the IRS would not contend otherwise on a subsequent audit of AOPP. It
appears that the Company could keep from being disqualified as a REIT by using
"deficiency dividend" procedures to distribute the "C corporation" earnings
and profits. In order to use this procedure, an affected REIT would have to
make an additional distribution to its shareholders (in addition to
distributions made for purposes of satisfying the normal REIT distribution
requirements), within 90 days of the IRS determination.
22
In addition, the REIT would have to pay to the IRS an interest charge on 50%
of the acquired C corporation earnings and profits that were not distributed
prior to the end of the REIT's taxable year in which they were acquired. If
C corporation earnings and profits were deemed to have been acquired by the
Company, there can be no assurance, however, that the IRS would not take the
position either that the procedure is not available at all (in which case the
Company would fail to qualify as a REIT) or, alternatively, that even if the
procedure is available, the Company cannot qualify as a REIT for its taxable
year in which the earnings and profits were acquired, but it could qualify as
a REIT for subsequent taxable years. Finally, if AOPP were determined not to
have qualified as a REIT for the taxable year ended December 31, 1997 or its
short taxable year ending at the time of the Merger, the Company would not be
eligible to elect REIT status for up to four years after the year in which
AOPP failed to qualify as a REIT. AOPP made an election to be taxed as a REIT
commencing with its taxable year ended December 31, 1997. The Company and AOPP
believe that AOPP's election is valid and that AOPP was organized, and
operated in 1997 and until the time of the Merger, in conformity with the
requirements for taxation as a REIT.
Income Tests. In order to maintain qualification as a REIT, the Company must
satisfy certain gross income requirements, which are applied on an annual
basis. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived
directly or indirectly from investments relating to real property or mortgages
on real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments.
Second, at least 95% of the Company's gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived from the
same items which qualify under the 75% income test, and from dividends,
interest and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements 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. The Company anticipates that none of its annual gross
income will be attributable to rents that are based in whole or in part on the
income of any person (excluding rents based on a percentage of receipts or
sales, which, as described above, are permitted). Second, the Code provides
that rents received from a tenant will not qualify as "rents from real
property" if the Company, or an owner of 10% or more of the Company, directly
or constructively owns 10% or more of such tenant (a "Related Party Tenant").
The Company does not anticipate that it will receive income from Related Party
Tenants. 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." The Company
does not anticipate deriving rent attributable to personal property leased in
connection with real property that exceeds 15% of the total rents. Finally,
for rents to qualify as "rents from real property," the Company generally must
not operate or manage the property or furnish or render services to tenants,
other than through an "independent contractor" that is adequately compensated
and from whom the Company derives no revenue. The "independent contractor"
requirement, however, does not apply to the extent the services provided by
the Company are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise considered "rendered
to the occupant." Any services with respect to certain properties that the
Company believes may not be provided by the Company directly without
jeopardizing the qualification of rent as "rents from real property" will be
performed by "independent contractors."
For the Company's taxable years commencing on or after January 1, 1998,
rents received generally will qualify as rents from real property even if the
Company were to provide services that are not permissible services so long as
the amount received for such services meets a de minimis standard. The amount
received for "impermissible services" with respect to a property (or, if
services are available only to certain tenants, possibly with respect to such
tenants) cannot exceed 1% of all amounts received, directly or indirectly, by
the Company with respect to such property (or, if services are available only
to certain tenants, possibly with respect to such tenants). In computing any
such amounts, the amount that the Company would be deemed to have received for
23
performing "impermissible services" will be the greater of the actual amount
so received or 150% of the direct cost to the Company of providing those
services. If the impermissible service income exceeds 1% of the Company's
total income from a property, then all of the income from that property will
fail to qualify as rents from real property.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. It is
not possible, however, to state whether in all circumstances the Company would
be entitled to the benefit of these relief provisions. Even if these relief
provisions were to apply, however, a 100% tax would be imposed with respect to
the "excess net income" attributable to the failure to satisfy the 75% and 95%
gross income tests.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by real
estate assets. The Company's real estate assets include, for this purpose, its
allocable share of real estate assets held by the Operating Partnership and
the non-corporate subsidiaries of the Operating Partnership, as well as stock
or debt instruments held for less than one year purchased with the proceeds of
a stock offering, or long-term (at least five years) debt offering of the
Company, cash, cash items and government securities. Second, not more than 25%
of the Company's total assets may be represented by securities other than
those in the 75% asset class. Third, of the investments included in the 25%
asset class, the value of any one issuer's securities owned by the Company may
not exceed 5% of the value of the Company's total assets, and, except for
REITs or "qualified REIT subsidiaries," the Company may not own more than 10%
of any one issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the 25% or
5% asset tests at the end of a later quarter solely by reason of changes in
the relative values of its assets. If the failure to satisfy the 25% or 5%
asset tests results from an acquisition of securities or other property during
a quarter, including, for example, as a result of the Company increasing its
interest in the Operating Partnership as a result of a merger, the exercise of
unit redemption rights or an additional capital contribution of proceeds of an
offering of shares by the Company, the failure can be cured by disposition of
sufficient nonqualifying assets within 30 days after the close of that
quarter. The Company intends to maintain adequate records of the value of its
assets to ensure compliance with the asset tests and to take any available
actions within 30 days after the close of any quarter as may be required to
cure any noncompliance with the 25% or 5% asset tests. If the Company fails to
cure noncompliance with the asset tests within such time period, the Company
would cease to qualify as a REIT.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (i) the sum of (a) 95% of
the Company's "REIT taxable income" (computed without regard to the dividends
paid deduction and the Company's net capital gain) and (b) 95% of the net
income (after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of non-cash income. In addition, if the Company disposes of any
Built-In Gain Asset during the 10 year period beginning on the date the
Company acquired that asset, the Company will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at
least 95% of the Built-In Gain (after tax), if any, recognized on the
disposition of such asset. See "--General" above for a discussion of "Built-In
Gain Assets." Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before the Company
timely files its tax return for such year and if paid on or before the first
regular dividend payment date after such declaration.
To the extent that the Company does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its "REIT taxable
income," as adjusted, it will be subject to tax thereon at regular ordinary
and capital gain corporate tax rates. The Company may elect to require the
shareholders to include the Company's undistributed net capital gains in their
income by designating, in a written notice to shareholders, those amounts as
undistributed capital gains in respect of its shareholders' shares. If the
Company makes such
24
an election, the shareholders will (i) include in their income as capital
gains their proportionate share of such undistributed capital gains and (ii)
be deemed to have paid their proportionate share of the tax paid by the
Company on such undistributed capital gains and thereby receive a credit or
refund for such amount. A shareholder will increase the basis in its Common
Shares by the difference between the amount of capital gain included in its
income and the amount of the tax that the Company is deemed to have paid on
the shareholder's behalf. The earnings and profits of the Company will be
adjusted appropriately. For a more detailed description of the tax
consequences to a shareholder of such a designation, see "--Taxation of U.S.
Shareholders Holding Common Stock."
In addition, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% excise tax on the excess of such required distribution over the sum of
amounts actually distributed during the calendar year by the REIT and the
amount, if any, on which the REIT paid income tax for such year.
The Company intends to make timely distributions sufficient to satisfy its
annual distribution requirements. It is expected that the Company's REIT
taxable income will be less than its cash flow due to the allowance of
depreciation and other non-cash charges in computing REIT taxable income.
Accordingly, the Company anticipates that it will generally have sufficient
cash or liquid assets to enable it to satisfy the distribution requirements
described above. It is possible, however, that the Company, from time to time,
may not have sufficient cash or other liquid assets to meet these distribution
requirements due to timing differences between (i) the actual receipt of
income and actual payment of deductible expenses and (ii) the inclusion of
such income and deduction of such expenses in arriving at taxable income of
the Company, or due to the need to make nondeductible payments, such as
principal payments on any indebtedness it may have. If such circumstances
occur, in order to meet the distribution requirements, the Company may find it
necessary to arrange for short-term, or possibly long-term, borrowings or to
pay dividends in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
Recordkeeping Requirements. Pursuant to applicable Treasury Regulations, the
Company must comply with certain recordkeeping requirements to qualify for
taxation as a REIT.
Failure of the Company to Qualify as a REIT. For any taxable year that the
Company fails to qualify as a REIT, the Company would be taxed at the usual
corporate rates on all of its taxable income. Those taxes would reduce the
amount of cash available to the Company for distribution to its Shareholders.
Distributions to shareholders in any year in which the Company fails to
qualify as a REIT will not be deductible and will not be required to be made.
In addition, if the Company fails to qualify as a REIT, all distributions to
shareholders will be taxed as ordinary income, to the extent of the Company's
current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction.
Unless certain relief provisions apply, the Company's election to be treated
as a REIT will terminate automatically if the Company fails to meet the
qualification requirements described above and the Company will not be
eligible to elect REIT status again until the fifth taxable year that begins
after the first year for which the Company's election was terminated (or
revoked). If the Company loses its REIT status, but later qualifies and elects
to be taxed as a REIT again, the Company may face significant adverse tax
consequences.
25
Taxation of U.S. Shareholders Holding Common Stock
As used herein, the term "U.S. Shareholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or any political subdivision thereof, (iii) is an estate the income of which
is subject to United States federal income taxation regardless of its source
or (iv) is a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more Untied States
persons who have the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to such date that elect to continue to be treated
as United States persons, shall also be considered U.S. Shareholders.
Distributions by the Company. As long as the Company qualifies as a REIT,
distributions made to the Company's taxable U.S. Shareholders (and not
designated as capital gain dividends) will generally be taxable to such
Shareholders as ordinary income to the extent of the Company's current or
accumulated earnings and profits. For purposes of determining whether
distributions on shares of Common Stock are out of current or accumulated
earnings and profits, the earnings and profits of the Company will be
allocated first to shares of Preferred Stock and second to shares of Common
Stock. There can be no assurance that the Company will have sufficient
earnings and profits to cover distributions on any shares of Preferred Stock.
Such distributions will not be eligible for the dividends received deductions
in the case of Shareholders that are corporations. Dividends declared during
the last quarter of a calendar year and actually paid during January of the
immediately following calendar year generally are treated as if received by
the Shareholders on December 31 of the calendar year during which they were
declared.
Distributions designated by the Company as capital gain dividends generally
will be taxed as gain from the sale or exchange of a capital asset held for
more than one year (to the extent that the distributions do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the Shareholder has held its stock. Corporate Shareholders
however, may be required to treat up to 20% of certain capital gain dividends
as ordinary income.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against future income
(subject to certain limitations). Distributions made by the Company and gain
arising from the sale or exchange by a holder of Common Stock will not be
treated as passive activity income, and, as a result, holders of Common Stock
generally will not be able to apply any "passive losses" against such income
or gain. Future regulations may require that Shareholders take into account,
for purposes of computing their individual alternative minimum tax liability,
certain tax preference items of the Company. In addition, taxable
distributions from the Company generally will be treated as investment income
for purposes of the investment interest limitations. Capital gain dividends
and capital gain from the disposition of shares, including distributions
treated as such, however, will be treated as investment income for purposes of
the investment interest limitation only if the U.S. Shareholder so elects, in
which case such capital gains will be taxed at ordinary income rates. The
Company will notify shareholders after the close of the Company's taxable year
as to the portions of distributions attributable to that year that constitute
ordinary income, return of capital and capital gain.
Distributions in excess of current or accumulated earnings and profits will
not be taxable to a U.S. shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares of Common Stock, but rather will
reduce the adjusted basis of such shares of Common Stock. To the extent that
such distributions exceed the adjusted basis of a U.S. shareholder's shares of
Common Stock, they will be included in income as capital gains, assuming the
shares of Common Stock are a capital asset in the hands of the U.S.
Shareholder.
For the Company's taxable years commencing on or after January 1, 1998, the
Company may elect to require the holders of Common Stock to include the
Company's undistributed net long-term capital gains in their income. If the
Company makes such an election, the holders of Common Stock will (i) include
in their income as long-term capital gains their proportionate share of such
undistributed capital gains and (ii) be deemed to have
26
paid their proportionate share of the tax paid by the Company on such
undistributed capital gains and thereby receive a credit or refund for such
amount. A holder of Common Stock will increase the basis in its Common Stock
by the difference between the amount of capital gain included in its income
and the amount of the tax it is deemed to have paid. The earnings and profits
of the Company will be adjusted appropriately. With respect to such long-term
capital gain of a taxable domestic shareholder that is an individual or an
estate or trust, the IRS has authority to issue regulations that could apply
the special tax rate applicable to sales of depreciable real property by an
individual or an estate or trust to the portion of the long-term capital gains
of an individual or an estate or trust attributable to deductions for
depreciation taken with respect to depreciable real property.
Sales of Shares. In general, a U.S. Shareholder will realize gain or loss on
the disposition of shares of Common Stock equal to the difference between (i)
the amount of cash and the fair market value of any property received on such
disposition and (ii) the shareholder's adjusted basis of such shares of Common
Stock. Such gain or loss will be capital gain or loss if the shares have been
held as a capital asset. In the case of a taxable U.S. Shareholder who is an
individual or an estate or trust, such gain or loss will be long-term capital
gain or loss, and such long-term capital gain shall be subject to the maximum
capital gain rate of 20%. In the case of a taxable U.S. Shareholder that is a
corporation, such gain or loss will be long-term capital gain or loss if such
shares have been held for more than one year and any such capital gain shall
be subject to the maximum capital gain rate of 35%. Loss upon a sale or
exchange of shares of Common Stock by a shareholder who has held such shares
of Common 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 from the Company required to be treated by such shareholder as
long-term capital gain.
Taxpayer Relief Act and IRS Restructuring Act Changes to Capital Gain
Taxation. The Taxpayer Relief Act of 1997 (the "Taxpayer Relief Act") altered
the taxation of capital gain income. Under the Taxpayer Relief Act,
individuals, trusts and estates that hold certain investments for more than
18 months may be taxed at a maximum long-term capital gain rate of 20% on the
sale or exchange of those investments. Individuals, trusts and estates that
hold certain assets for more than one year but not more than 18 months may be
taxed at a maximum long-term capital gain rate of 28% on the sale or exchange
of those investments. The Taxpayer Relief Act also provides a maximum rate of
25% for "unrecaptured Section 1250 gain" for individuals, trusts and estates,
special rules for "qualified 5-year gain" and other changes to prior law. The
recently enacted IRS Restructuring Act of 1998, however, reduced the holding
period requirement established by the Taxpayer Relief Act for the application
of the 20% and 25% capital gain tax rates to 12 months from 18 months for
sales of capital gain assets after December 31, 1997 and thus eliminated the
28% rate. The Taxpayer Relief Act allows the IRS to prescribe regulations on
how the Taxpayer Relief Act's capital gain rates will apply to sales of
capital assets by "pass-through entities," including REITs, such as the
Company and to sales of interests in "pass-through entities." Shareholders are
urged to consult with their own tax advisors with respect to the rules
contained in the Taxpayer Relief Act and the IRS Restructuring Act.
On November 10, 1997, the IRS issued IRS Notice 97-64, which provides
generally that the Company may classify portions of its designated capital-
gain dividend as (i) a 20% rate gain distribution (which would be taxed as
long-term capital gain in the 20% group), (ii) an unrecaptured Section 1250
gain distribution (which would be taxed as long-term capital gain in the 25%
group), or (iii) a 28% rate gain distribution (which would be taxed as long-
term capital gain in the 28% group). (If no designation is made, the entire
designated capital gain dividend will be treated as a 28% rate gain
distribution.) IRS Notice 97-64 provides that a REIT must determine the
maximum amounts that it may designate as 20% and 25% rate capital gain
dividends by performing the computation required by the Code as if the REIT
were an individual whose ordinary income were subject to a marginal tax rate
of at least 28%. The Notice further provides that designations made by the
REIT will only be effective to the extent that they comply with Revenue Ruling
89-81, which requires that distributions made to different classes of shares
be composed proportionately of dividends of a particular type. Although Notice
97-64 will apply to sales of capital gain assets after July 28, 1997 and
before January 1, 1998, it is expected that the IRS will issue clarifying
guidance, most likely applying the same principles set forth in Notice 97-64,
regarding a REIT's designation of capital gain dividends in light of the new
holding period requirements.
27
Backup Withholding. The Company will report to its domestic shareholders and
the IRS the amount of dividends paid during each calendar year, and the amount
of tax withheld, if any, with respect thereto. Under the backup withholding
rules, a shareholder may be subject to backup withholding at the rate of 31%
with respect to dividends paid unless such holder (a) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (b) provides a taxpayer identification number and certifies as
to no loss of exemption from backup withholding. Amounts withheld as backup
withholding will be creditable against the stockholder's income tax liability.
In addition, the Company may be required to withhold a portion of capital gain
distributions made to any shareholders who fail to certify their non-foreign
status to the Company. See "--Taxation of Non-U.S. Shareholders" below.
Taxation of Tax-Exempt Shareholders. As a general rule, amounts distributed
to a tax-exempt entity by a corporation do not constitute "unrelated business
taxable income" ("UBTI"), and thus distributions by the Company to a
stockholder that is a tax-exempt entity generally should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
shares of Common Stock with "acquisition indebtedness" within the meaning of
the Code and the shares of Common Stock are not otherwise used in an unrelated
trade or business of the tax-exempt entity. However, distributions by a REIT
to a tax-exempt employee's pension trust that owns more than 10% of the REIT
will be treated as UBTI in an amount equal to the percentage of gross income
of the REIT that is derived from an "unrelated trade or business" (determined
as if the REIT were a pension trust) divided by the gross income of the REIT
for the year in which the dividends are paid. This rule only applies, however,
if (i) the percentage of gross income of the REIT that is derived from an
unrelated trade or business for the year in which the dividends are paid is at
least 5%, (ii) the REIT qualifies as a REIT only because the pension trust is
not treated as a single individual for purposes of the "five-or-fewer rule"
(see "--Taxation of the Company--Requirements for Qualification" above), and
(iii) (A) one pension trust owns more than 25 percent of the value of the REIT
or, (B) a group of pension trusts individually holding more than 10 percent of
the value of the REIT collectively own more than 50 percent of the value of
the REIT. The Company currently does not expect that this rule will apply.
Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of non-U.S. Shareholders
are complex, and the following discussion is intended only as a summary of
such rules. Prospective non-U.S. Shareholders should consult with their tax
advisors to determine the impact of federal, state, local and foreign income
tax laws on an investment in the Company, including any reporting
requirements.
Distributions by the Company. Distributions to a non-U.S. Shareholder that
are not attributable to gain from sales or exchanges by the Company of U.S.
real property interests and not designated by the Company as capital gain
dividends will generally be subject to tax as ordinary income to the extent of
the Company's current or accumulated earnings and profits as determined for
U.S. federal income tax purposes. Such distributions will generally be subject
to a withholding tax equal to 30% of the gross amount of the distribution,
unless reduced by an applicable tax treaty or unless such dividends are
treated as effectively connected with a United States trade or business. If
the amount distributed exceeds a non-U.S. Shareholder's allocable share of
such earnings and profits, the excess will be treated as a tax-free return of
capital to the extent of such non-U.S. Shareholder's adjusted basis in the
Common Stock. To the extent that such distributions exceed the adjusted basis
of a non-U.S. Shareholder's Common Stock, such distributions will generally be
subject to tax if such non-U.S. Shareholder would otherwise be subject to tax
on any gain from the sale or disposition of its Common Stock, as described
below.
For withholding tax purposes, the Company currently is required to treat all
distributions as if made out of its current or accumulated earnings and
profits and thus intends to withhold at the rate of 30% (or a reduced treaty
rate if applicable) on the amount of any distribution (other than
distributions designated as capital gain dividends) made to a Non-U.S.
Shareholder. Under regulations generally effective for distributions on or
after January 1, 1999, the Company would not be required to withhold at the
30% rate on distributions it reasonably
28
estimates to be in excess of the Company's current and accumulated earnings
and profits. If it cannot be determined at the time a distribution is made
whether such distribution will be in excess of current and accumulated
earnings and profits, the distribution will be subject to withholding at the
rate applicable to ordinary dividends. As a result of a legislative change
made by the Small Business Job Protection Act of 1996, under current law, it
appears that the Company will be required to withhold 10% of any distribution
to a non-U.S. Shareholder in excess of the Company's current and accumulated
earnings and profits. Consequently, although the Company intends to withhold
at a rate of 30% on the entire amount of any distribution to a non-U.S.
Shareholder (or lower applicable treaty rate), to the extent the Company does
not do so, any portion of such a distribution not subject to withholding at a
rate of 30% (or lower applicable treaty rate) will be subject to withholding
at a rate of 10%. However, the non-U.S. Shareholder may seek a refund of such
amounts from the IRS if it subsequently determined that such distribution was,
in fact, in excess of current or accumulated earnings and profits of the
Company, and the amount withheld exceeded the non-U.S. Shareholder's United
States tax liability, if any, with respect to the distribution.
Distributions to a non-U.S. Shareholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those
arising from the disposition of a United States real property interest)
generally will not be subject to United States federal income taxation, unless
(i) the investment in the Common Stock is effectively connected with the non-
U.S. Shareholder's United States trade or business, in which case the non-U.S.
Shareholder will be subject to the same treatment as U.S. Shareholders with
respect to such gain (except that a shareholder that is a foreign corporation
may also be subject to the 30% branch profits tax) or (ii) the non-U.S.
Shareholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and certain other
requirements are met, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains.
Under the Foreign Investment in Real Property Tax Act ("FIRPTA"),
distributions to a non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests
(whether or not designated as a capital gain dividend) will be taxed to a non-
U.S. Shareholder at the normal capital gains rates applicable to domestic
Shareholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals). Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a non-U.S. Shareholder
that is a corporation and that is not entitled to treaty relief or exemption.
The Company is required by applicable FIRPTA Treasury Regulations to withhold
35% of any such distribution that is or could be designated by the Company as
a capital gain dividend. That amount is creditable against the non-U.S.
Shareholder's United States FIRPTA tax liability.
Even if the Company does not qualify or ceases to be a domestically
controlled REIT, gain arising from the sale or exchange by a non-U.S.
Shareholder of Common Stock would still not be subject to U.S. taxation under
FIRPTA as a sale of a United States real property interest if (i) the class or
series of shares being sold is "regularly traded," as defined by applicable
Treasury Regulations, on an established securities market such as the New York
Stock Exchange, and (ii) the selling non-U.S. Shareholder owned 5% or less of
the value of the outstanding class or series of shares being sold throughout
the five-year period ending on the date of the sale or exchange.
If gain on the sale or exchange of Common Stock were subject to taxation
under FIRPTA, the non-U.S. Shareholder would be subject to regular United
States income tax with respect to such gain in the same manner as a taxable
U.S. Shareholder, subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations. The purchaser of the Common Stock would be required to withhold
and remit to the IRS 10% of the purchase price.
Although the law is not entirely clear on the matter, it appears that
amounts designated by the Company pursuant to the Taxpayer Relief Act as
undistributed capital gains in respect of shares of Common Stock (see
"Taxation of U.S. Shareholders Holding Common Stock" above) would be treated
with respect to non-U.S. Shareholders in the manner outlined in the preceding
paragraph for actual distributions by the Company of
29
capital gain dividends. Under that approach, the non-U.S. Shareholders would
be able to offset as a credit against their United States federal income tax
liability resulting therefrom their proportionate share of the tax paid by the
Company on such undistributed capital gains (and to receive from the IRS a
refund to the extent their proportionate share of such tax paid by the Company
were to exceed their actual United States federal income tax liability).
Sale of Common Stock. Gain recognized by a non-U.S. Shareholder upon a sale
of its Common Stock will generally not be subject to tax under FIRPTA if the
Company is a "domestically controlled REIT," which is defined generally as a
REIT in which at all times during a specified testing period less than 50% in
value of its shares were held directly or indirectly by non-U.S. persons.
Because only a minority of the Shareholders are non-U.S. Shareholders, the
Company expects to qualify as a "domestically controlled REIT." Accordingly, a
non-U.S. Shareholder should not be subject to U.S. tax on gains recognized
upon disposition of the Common Stock, provided that such gain is not
effectively connected with the conduct of a United States trade or business
and, in the case of an individual Shareholder, such holder is not present in
the United States for 183 days or more during the year of sale and certain
other requirements are met.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at a rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends, or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply,
however, to a payment of the proceeds of a sale of Common Stock by a foreign
office of a broker that (a) is a United States person, (b) derives 50% or more
of its gross income for certain periods from the conduct of a trade or
business in the United States or (c) is a "controlled foreign corporation"
(generally a foreign corporation controlled by United States Shareholders) for
United States tax purposes, unless the broker has documentary evidence in its
records that the holder is a non-U.S. Shareholder and certain other conditions
are met, or the Shareholder otherwise establishes an exemption. Payment to or
through a United States office of a broker of the proceeds of a sale of Common
Stock is subject to both backup withholding and information reporting unless
the Shareholder certifies under penalty of perjury that the Shareholder is a
non-U.S. Shareholder, or otherwise establishes an exemption. A non-U.S.
Shareholder may obtain a refund of any amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS.
The United States Treasury Department has recently finalized regulations
regarding the withholding and information reporting rules discussed above. In
general, these regulations do not alter the substantive withholding and
information reporting requirements but unify certification procedures and
forms and clarify and modify reliance standards. These regulations generally
are effective for payments made after December 31, 1999, subject to certain
transition rules. Valid withholding certificates that are held on December 31,
1999, will remain valid until the earlier of December 31, 2000, or the date of
the expiration of the certificate under rules currently in effect, unless
otherwise invalidated due to changes in the circumstances of the person whose
name is on such certificate. A non-U.S. Shareholder should consult its advisor
regarding the effect of the new Treasury Regulations.
Administration's Proposed Changes to REIT Qualification Requirements
The administration's fiscal year 2000 budget proposal, announced February 1,
1999, includes a proposal that would change the 10% voting securities test to
a 10% vote or value test. Under the proposal, a REIT would not be able to own
more than 10% of the vote or value of the outstanding securities of any
corporation, except for a qualified REIT subsidiary or another REIT (see
"Taxation of the Company--Asset Tests" above). The proposal also contains an
exception to the 5% and 10% asset tests that would allow a REIT to have
"taxable
30
REIT subsidiaries," including both "qualified independent contractor
subsidiaries," which could perform noncustomary and other currently prohibited
services for tenants and other customers, and "qualified business
subsidiaries," which could undertake third-party management and development
activities as well as other non-real estate related activities. Under the
proposal, no more than 15% of a REIT's total assets could consist of taxable
REIT subsidiaries and no more than 5% of a REIT's total assets could consist
of qualified independent contractor subsidiaries. Under the budget proposal, a
taxable REIT subsidiary would not be entitled to deduct any interest on debt
funded directly or indirectly by the REIT. This proposal would be effective
after the date of enactment and a REIT would be allowed to combine and convert
existing corporate subsidiaries into taxable REIT subsidiaries tax-free prior
to a certain date. A transition period would allow for conversion of existing
corporate subsidiaries before the 10% vote or value test would become
effective. For the Company's taxable years after the effective date of the
proposal and after any applicable transition period, the 10% vote or value
test would apply to the Company's ownership in any of the non-qualified REIT
subsidiaries not converted into taxable REIT subsidiaries. It is presently
uncertain whether any proposal regarding REIT subsidiaries, including the
budget proposal, will be enacted or, if enacted, what the terms, including the
effective date, of such proposal will be.
On April 28, 1999, the Real Estate Investment Trust Modernization Act of
1999 (the "bill") was introduced in Congress. The bill is similar to the
administration's proposal in several respects. Like the administration's
proposal, the bill would create "taxable REIT subsidiaries" that would not be
subject to the 5% asset test, but that would remain subject to the 25% asset
test (see "Taxation of the Company--Asset Tests" above). The "taxable REIT
subsidiaries" would also be subject to "earnings stripping" limitations on the
deductibility of interest. Under the bill, a REIT would be able to rent up to
10% of a property to a taxable REIT subsidiary and generally have the rent
qualify as good income. The bill would also change the 10% voting securities
test to a 10% vote or value test unless the corporation elects to be a taxable
REIT subsidiary or the securities qualify for the "grandfather rule." In
general, the "grandfather rule" would apply to securities of a corporation in
which the REIT owned an interest on April 28, 1999. The grandfather rule would
also apply to securities acquired in a tax-free exchange for "grandfathered
securities" and to securities acquired in a qualifying tax-free reorganization
with another REIT, if those securities were grandfathered in the hands of the
other REIT. Securities of a corporation will lose their "grandfathered" status
if the corporation acquires any substantial asset or engages in a substantial
new line of business after April 28, 1999 (other than pursuant to a binding
contract in effect on that date).
Tax Aspects of the Company's Ownership of Interests in the Operating
Partnership
General. A significant portion of the Company's investments will be held
indirectly through the Operating Partnership. In general, partnerships are
"pass-through" entities that are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income,
gain, loss, deduction and credit of a partnership, and are potentially subject
to tax on those items, without regard to whether the partners receive a
distribution from the partnership. In the case of a REIT which is a partner in
a partnership, Treasury Regulations provide that for purposes of applying the
REIT gross income and gross asset tests, 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 that share, in each
case based on its "capital interest" in the partnership. In addition, the
character of the gross income and assets of the partnership shall retain the
same character in the hands of the REIT for purposes of Section 856 of the
Code which includes the gross income and asset tests described above. The
Company will have direct control of the Operating Partnership and intends to
operate it consistent with the requirements for qualification as a REIT. The
Company will include in its income its proportionate share of the foregoing
partnership items for purposes of the various REIT income tests and will take
into account its distributive share of partnership items in the computation of
its REIT taxable income. Moreover, for purposes of the REIT asset tests, the
Company will include its proportionate share of assets held through the
Operating Partnership.
Entity Classification. If the Operating Partnership were treated as an
association, the entity would be taxable as a corporation and therefore would
be subject to an entity level tax on its income. In such a situation,
31
the character of the Company's assets and items of gross income would change
and would preclude the Company from qualifying as a REIT. The same result
could occur if any subsidiary partnership failed to qualify for treatment as a
partnership.
Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company was treated as a partnership for federal income tax
purposes rather than as a corporation only if it had no more than two of the
four corporate characteristics that the Treasury Regulations in effect at that
time used to distinguish a partnership from a corporation for tax purposes.
These four characteristics were (i) continuity of life, (ii) centralization of
management, (iii) limited liability and (iv) free transferability of
interests.
Under final Treasury Regulations that became effective January 1, 1997, the
four factor test has been eliminated and an entity formed as a partnership or
as a limited liability company will be taxed as a partnership for federal
income tax purposes unless it specifically elects otherwise. The Treasury
Regulations provide that the IRS will not challenge the classification of an
existing partnership or limited liability company for tax periods prior to
January 1, 1997 so long as (1) the entity had a reasonable basis for its
claimed classification, (2) the entity and all its members recognized the
federal income tax consequences of any changes in the entity's classification
within the 60 months prior to January 1, 1997, and (3) neither the entity nor
any member of the entity had been notified in writing on or before May 8,
1996, that the classification of the entity was under examination by the IRS.
The Company believes that the Operating Partnership will be treated as a
partnership for federal income tax purposes (and not as an association taxable
as a corporation).
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, those allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the related Treasury Regulations. Generally,
those provisions require that partnership allocations reflect the economic
arrangement of the partners. The allocations of taxable income and loss
provided for in the Operating Partnership Agreement are intended to comply
with the requirements of Section 704(b) of the Code and the related Treasury
Regulations. If an allocation is not recognized for federal income tax
purposes, the item subject to the allocation will be reallocated in accordance
with the partners' interests in the partnership, which will be determined by
taking into account all of the facts and circumstances relating to the
economic arrangement of the partners with respect to that item.
Tax Allocations with Respect to the Properties. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property that is contributed to a partnership in exchange for an
interest in the partnership, must be allocated in a manner so that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of the unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of the
property at that time (a "Book-Tax Difference"). These allocations are solely
for federal income tax purposes and do not affect the book capital accounts or
other economic or legal arrangements among the partners. Similar rules can
apply in the case of appreciated or depreciated properties held by a
partnership at the time of new contributions to the partnership. The Operating
Partnership was formed by way of contributions of appreciated and depreciated
properties. Consequently, the Operating Partnership Agreement requires that
those allocations be made in a manner consistent with Section 704(c) of the
Code.
In general, the partners of the Operating Partnership who contributed assets
will be allocated differing depreciation deductions than if they had retained
the contributed property. In addition, on the disposition of any contributed
asset that has a Book-Tax Difference, the income or loss attributable to the
Book-Tax Difference generally will be allocated to the contributing partner.
These allocations will tend to eliminate the Book-Tax Difference over the life
of the Operating Partnership. However, the special allocation rules of Section
704(c) do not always entirely eliminate the Book-Tax Difference on an annual
basis or with respect to a specific taxable transaction such as a sale. Thus,
the carryover basis of the contributed assets in the hands of the Operating
32
Partnership may cause the Company to be allocated lower depreciation and other
deductions, and possibly an amount of taxable income in the event of a sale of
the contributed assets in excess of the economic or book income allocated to
it as a result of that sale. Such an allocation might cause the Company to
recognize taxable income in excess of cash proceeds, which might adversely
affect the Company's ability to comply with the REIT distribution
requirements.
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including the "traditional method" or the election of certain methods that
would permit any distortions caused by a Book-Tax Difference to be entirely
rectified on an annual basis or with respect to a specific taxable transaction
such as a sale. The Operating Partnership and the Company will determine with
respect to each contribution to the Operating Partnership which method to use.
Taxation of Holders of Preferred Stock, Equity Stock, Depositary Shares and
Warrants
If the Company offers one or more series of Preferred Stock, Equity Stock,
Depositary Shares or Warrants, there may be tax consequences for the holders
of such Securities not discussed herein. For a discussion of any such
additional consequences, see the applicable Prospectus Supplement.
State and Local Taxes
The tax treatment of the Company and the Shareholders in states having
taxing jurisdiction over them may differ from the federal income tax
treatment. Accordingly, no discussion of state taxation of the Company and the
Shareholders is provided nor is any representation made as to the tax status
of the Company in such states. All investors should consult their tax advisors
as to the treatment of the Company under the respective state tax laws
applicable to them.
PLAN OF DISTRIBUTION
We may sell the securities to one or more underwriters for public offering
and sale by them or may sell the securities to investors directly or through
agents. Any such underwriter or agent involved in the offer and sale of the
securities will be named in the applicable prospectus supplement.
Direct sales to investors may be accomplished through subscription offerings
or through shareholder purchase rights distributed to shareholders. In
connection with subscription offerings or the distribution of shareholder
purchase rights to shareholders, if all of the underlying securities are not
subscribed for, we may sell such unsubscribed securities to third parties
directly or through underwriters or agents and, in addition, whether or not
all of the underlying securities are subscribed for, we may concurrently offer
additional securities to third parties directly or through underwriters or
agents. Any such underwriter or agent involved in the offer and sale of the
securities will be named in the applicable prospectus supplement. If
securities are to be sold through shareholder purchase rights, such
shareholder purchase rights will be distributed as a dividend to the
shareholders for which they will pay no separate consideration. The prospectus
supplement with respect to the offer of securities pursuant to shareholder
purchase rights will set forth the relevant terms of the shareholder purchase
rights, including (i) whether common shares or common share warrants, or both,
will be offered pursuant to the shareholder purchase rights and the number of
common shares and common share warrants, as applicable, which will be offered
pursuant to the shareholder purchase rights, (ii) the period during which and
the price at which the shareholder purchase rights will be exercisable, (iii)
the number of shareholder purchase rights then outstanding, (iv) any
provisions for changes to or adjustments in the exercise price of the
shareholder purchase rights and (v) any other material terms of the
shareholder purchase rights.
Underwriters may offer and sell the securities at a fixed price or prices,
which may be changed, at prices related to the prevailing market prices at the
time of sale or at negotiated prices. We also may, from time to time,
authorize underwriters acting as our agents to offer and sell the securities
upon the terms and conditions as are set forth in the applicable prospectus
supplement. In connection with the sale of securities, underwriters may
33
be deemed to have received compensation from us in the form of underwriting
discounts or commissions and may also receive commissions from purchasers of
securities for whom they may act as agent. Underwriters may sell securities to
or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agent.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of securities, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set
forth in the applicable prospectus supplement. Underwriters, dealers and
agents participating in the distribution of the securities may be deemed to be
underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the securities may be deemed to be
underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered
into with us, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
Securities may also be offered and sold, if so indicated in the applicable
prospectus supplement, in connection with a remarketing upon their purchase,
in accordance with a redemption or repayment pursuant to their terms, or
otherwise, by one or more firms ("remarketing firms"), acting as principals
for their own accounts or as our agents. Any remarketing firm will be
identified and the terms of its agreement, if any, with us and its
compensation will be described in the applicable prospectus supplement.
Remarketing firms may be deemed to be underwriters in connection with the
securities remarketed thereby. Remarketing firms may be entitled under
agreements which may be entered into with us to indemnification by us against
certain liabilities, including liabilities under the Securities Act, and may
be customers of, engage in transactions with or perform services for us in the
ordinary course of business.
If so indicated in the applicable prospectus supplement, we will authorize
dealers acting as our agents to solicit offers by certain institutions to
purchase securities at the offering price set forth in such prospectus
supplement pursuant to delayed delivery contracts providing for payment and
delivery on the date or dates stated in such prospectus supplement. Each
contract will be for an amount not less than, and the aggregate principal
amount of securities sold pursuant to contracts shall be not less nor more
than, the respective amounts stated in the applicable prospectus supplement.
Institutions with whom contracts, when authorized, may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions, and other institutions but
will in all cases be subject to our approval. Contracts will not be subject to
any conditions except (i) the purchase by an institution of the securities
covered by its contracts will not at the time of delivery be prohibited under
the laws of any jurisdiction in the United States to which such institution is
subject, and (ii) if the securities are being sold to underwriters, we will
have sold to such underwriters the total principal amount of the securities
less the principal amount thereof covered by contracts. Agents and
underwriters will have no responsibility in respect of the delivery or
performance of contracts.
Certain of the underwriters, if any, and their affiliates may be customers
of, engage in transactions with and perform services for us in the ordinary
course of business.
34
This prospectus may also be used in registered resales by the following
holders of common stock:
Shares of Percentage of
Shares of Common Shares of Common Stock Outstanding Shares
Stock Percentage of Common Stock Beneficially of Common Stock
Beneficially Outstanding Shares Being Registered Owned After Beneficially Owned
Name Owned of Common Stock for Resale Resale After Resale
---- ---------------- ------------------ ---------------- ------------ ------------------
Acquiport Two
Corporation............ 6,110,265 25.8% 6,110,265 0 0%
State Treasurer, State
of Michigan............ 2,131,611 9.0% 888,172(1) 1,243,439 5.3%
Cohen & Steers Capital
Management, Inc.(2).... 1,176,234 4.9% 888,171(1) 288,063 1.2%
Morgan Stanley Asset
Management(2).......... 693,493 2.9% 693,493(1) 0 0%
Harvard Private Capital
Realty, Inc............ 874,074 3.7% 592,114(1) 281,960 1.2%
ABKB/LaSalle Securities
Limited
Partnership(2)......... 2,331,148 9.9% 592,113(1) 1,739,035 7.4%
Fidelity Real Estate
Investment Portfolio... 348,219 1.5% 348,219(1) 0 0%
Stanford University..... 437,037 1.8% 296,058(1) 140,979 (3)
The Fidelity REIT
Collective Pool........ 66,048 (3) 44,742(1) 21,306 (3)
State Employees'
Retirement Fund of the
State of Delaware...... 30,911 (3) 20,940(1) 9,971 (3)
J.W. McConnell Family
Foundation............. 7,821 (3) 5,298(1) 2,523 (3)
--------
(1) Reflects an aggregate of 4,588,885 shares issued to these holders in May
1998 pursuant to a Common Stock Purchase Agreement dated as of January 23,
1998.
(2) All shares of common stock held as agent for and for the benefit of
certain of such holder's clients.
(3) Less than 1%.
This prospectus may also be used in registered resales of common stock by
the following persons upon exchange of interests in our operating partnership
for common stock:
Shares of Common Shares of Common Shares of Common
Stock Beneficially Stock Being Registered Stock Beneficially
Name Owned(1)(2) for Resale(1) Owned After Resale
---- ------------------ ---------------------- ------------------
Galaxy Partnership...... 14,384 14,384 0
Galaxy Associates,
L.L.C.................. 79,464 79,464 0
Galaxy Associates II,
L.L.C. ................ 13,669 13,669 0
Faraton Corp............ 1,748 1,748 0
--------
(1) Reflects shares to be issued upon exchange of interests in our operating
partnership.
(2) Less than 1% of the outstanding shares of common stock.
We have registered the shares of common stock by the holders in the tables
above to provide them with freely tradeable common stock, but the registration
of such shares does not necessarily mean that all of such shares will be
issued by us or any will be offered or sold by such holders. We will not
receive any proceeds from the offering by such holders.
The holders in the tables above may sell the shares of common stock to
investors directly or through agents or to one or more underwriters for public
offering and sale by them in any of the types of transactions described above.
Any such underwriter or agent involved in the offer and sale of such shares
will be named in the applicable prospectus supplement.
35
Any profits realized on sales pursuant to this prospectus by the holders in
the tables above of such shares may be regarded as underwriting compensation.
We will pay all expenses incident to the offering and sale of such shares,
other than commissions, discounts and fees of underwriters, broker-dealers or
agents. We have agreed to indemnify the holders of such shares against certain
losses, claims, damages and liabilities, including liabilities under the
Securities Act.
LEGAL OPINIONS
David Goldberg, our vice president and counsel, has delivered an opinion to
the effect that the securities offered by this prospectus will be validly
issued, fully paid and nonassessable. Hogan & Hartson L.L.P., Washington,
D.C., has delivered an opinion as to our status as a REIT. See "Certain
Federal Income Tax Considerations." Mr. Goldberg owns 4,256 shares of common
stock, and has options to acquire an additional 7,991 shares of common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K
for the year ended December 31, 1998, as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our financial statements and schedule are incorporated by reference
in reliance on Ernst & Young LLP's report, given on their authority as experts
in accounting and auditing.
36
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2,000,000 Shares
PS Business Parks, Inc.
Depositary Shares
Each Representing 1/1,000 of a Share of
8.750% Cumulative Preferred Stock, Series F
[LOGO OF PS BUSINESS PARKS, INC. (SM)]
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PROSPECTUS SUPPLEMENT
January 18, 2002
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Salomon Smith Barney
Credit Suisse First Boston
A.G. Edwards & Sons, Inc.
Morgan Stanley
CIBC World Markets
Deutsche Banc Alex. Brown
Tucker Anthony Incorporated
Wachovia Securities
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