Pursuant to Rule 424B3
Registration No. 333-32597
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 26, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 26, 1997) [LOGO]
3,000,000 Shares
Kranzco Realty Trust
% Series D Cumulative Redeemable Preferred Shares
(Liquidation Preference $25 Per Share)
------------------------
Distributions on the % Series D Cumulative Redeemable Preferred Shares
of Beneficial Interest, par value $0.01 per share (the 'Series D Preferred
Shares'), of Kranzco Realty Trust (collectively, with its subsidiaries and
affiliated entities, the 'Company') are cumulative from the date of original
issue and are payable quarterly, commencing on , 1998, at the rate of
% per annum of the $25 liquidation preference (equivalent to a fixed annual
rate of $ per share). See 'Description of Series D Preferred
Shares--Distributions.'
Except in certain circumstances relating to the preservation of the
Company's qualification as a real estate investment trust (a 'REIT'), the Series
D Preferred Shares are not redeemable prior to , 2002. On and after
, 2002, the Series D Preferred Shares may be redeemed for cash at the
option of the Company, in whole or in part, at a redemption price of $25 per
share, plus accrued and unpaid distributions, if any, thereon to the redemption
date. The Series D Preferred Shares have no stated maturity and will not be
subject to any sinking fund or mandatory redemption and will not be convertible
or exchangeable for any other property or securities of the Company, except in
certain limited circumstances relating to the Company's qualification as an
REIT. See 'Description of Series D Preferred Shares--Redemption.'
The Series D Preferred Shares are subject to certain restrictions on
ownership and transfer designed to preserve the Company's status as a REIT for
federal income tax purposes. See 'Description of Series D Preferred
Shares--Restrictions on Ownership and Transfer.'
The Company has applied to list the Series D Preferred Shares on the New
York Stock Exchange, Inc. (the 'NYSE'), subject to official notice of issuance,
under the symbol 'KRTpfD.' If approved for listing, trading of the Series D
Preferred Shares on the NYSE is expected to commence within the 30-day period
after the initial delivery of the Series D Preferred Shares. While the
Underwriters (as defined herein) have advised the Company that they intend to
make a market in the Series D Preferred Shares prior to the commencement of
trading on the NYSE, they are under no obligation to do so and may discontinue
market making any time without notice. No assurance can be given that a market
for the Series D Preferred Shares will exist prior to commencement of trading or
at any other time. See 'Underwriting.'
------------------------
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
'RISK FACTORS' BEGINNING ON PAGE S-11 IN THIS PROSPECTUS SUPPLEMENT.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
Per Share $ $ $
Total(4) $ $ $
(1) Plus accrued distributions, if any, from the date of original issue.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See 'Underwriting.'
(3) Before deducting expenses payable by the Company estimated to be $ .
(4) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 450,000 additional Series D Preferred Shares on the same
terms set forth above, to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See 'Underwriting'
------------------------
The Series D Preferred Shares are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that delivery of the Series D Preferred
Shares will be made at the offices of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001 on or about , 1997.
------------------------
Smith Barney Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
Friedman, Billings, Ramsey & Co., Inc.
Salomon Brothers Inc
, 1997
[ARTWORK]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SERIES D
PREFERRED SHARES, INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS,
EFFECTING SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'
S-2
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial information appearing elsewhere in this Prospectus
Supplement and the accompanying Prospectus, or incorporated herein or therein by
reference. Unless otherwise indicated, the information contained in this
Prospectus Supplement assumes that the Underwriters' over-allotment option will
not be exercised. In addition, unless the context otherwise requires, references
to the Company in this Prospectus Supplement and the accompanying Prospectus
shall be deemed to include Kranzco Realty Trust, a Maryland real estate
investment trust, and its subsidiaries and affiliated entities.
THE COMPANY
Kranzco Realty Trust is a self-administered and self-managed equity real
estate investment trust (a 'REIT') engaged in the business of owning, managing,
operating, leasing, acquiring and expanding neighborhood and community shopping
centers and free-standing retail properties. The Company owns and operates 43
neighborhood and community shopping centers and 11 free-standing properties
(collectively, the 'Properties') aggregating approximately 7.0 million square
feet of gross leasable area ('GLA') located primarily in the Northeast,
Mid-Atlantic and Southern regions of the United States with a diverse base of
approximately 550 tenants.
The Company's primary business objective is to achieve growth in its funds
from operations by enhancing the operating performance of the Properties and,
through selective acquisitions, the value of its portfolio. The Company's
operating strategies are to: (i) focus on the neighborhood and community
shopping center business; (ii) actively manage its properties for long-term
growth in funds from operations and capital appreciation; (iii) increase
portfolio occupancy by capitalizing on management's reputation and long-standing
relationships with national and regional tenants and extensive experience in
marketing to local tenants, as well as the negotiating leverage inherent in a
large portfolio of properties; (iv) maintain, renovate, expand and reconfigure
its properties; (v) optimize the tenant mix in each shopping center; (vi)
develop or ground lease outparcels or expansion areas existing from time to time
at its properties for use as restaurants, banks, auto centers, cinemas or other
facilities; and (vii) benefit from economies of scale by spreading overhead
expenses over a larger asset base.
As of September 30, 1997, the Properties were 91% leased. Additionally, the
Company has no single tenant which accounted for greater than 5.2% of the
Company's annualized 1997 rental income.
BUSINESS STRATEGY AND RECENT DEVELOPMENTS
The Company's acquisition strategy is to opportunistically acquire
properties which need replacement anchor tenants or where the Company's
management expertise and reputation can enhance value. That strategy includes
acquiring and rehabilitating properties in new markets with strong demographic
characteristics in order to reduce the Company's sensitivity to regional
economic cycles. For example, in February 1997, the Company acquired from Union
Property Investors, Inc. ('UPI') 16 properties located in 11 states for
approximately $65 million aggregating approximately 1.3 million square feet of
GLA (the 'UPI Acquisition'). The UPI Acquisition provided the Company with
initial market penetration in the nine additional states of Arizona, Georgia,
Kentucky, Massachusetts, Michigan, Minnesota, Mississippi, North Carolina and
South Carolina.
In order to further geographically diversify its holdings and increase its
market presence in the Southeastern United States, the Company has entered into
agreements pursuant to which it expects to acquire five shopping centers in the
Atlanta metropolitan area (the 'Georgia Properties'), aggregating approximately
650,000 square feet of GLA, for approximately $44 million (the 'Georgia
Acquisition'). See 'Recent Developments' and 'Use of Proceeds.' The consummation
of the Georgia Acquisition is expected to occur in December 1997. The Georgia
Properties had an overall occupancy rate of 98% as of November 1, 1997 and an
average age of 10 years. Anchor tenants at the Georgia Properties include Kmart,
Kroger, Cub Foods, CVS/pharmacy and Bruno's.
S-3
The following chart sets forth certain information as of November 1, 1997
with respect to the Georgia Properties:
GROSS ANCHOR TENANTS
YEAR LEASABLE AREA PERCENT (LEASE EXPIRATION/
LOCATION PROPERTY DEVELOPED (SQ. FT.) LEASED OPTION EXPIRATION)
- ------------------------ ---------------------- --------- ------------- ------- ------------------------------
Atlanta, GA............. The Village at 1989 231,594 99% Kmart(1) (2014/2064)
Mableton CVS/pharmacy (2004/2019)
Bruno's (2009/2029)
Roswell, GA............. Holcomb Bridge 1988 105,420 100% CubFoods (2008/2033)
Crossing Georgetown Interiors (2003)
Carrollton, GA.......... Tower Plaza 1987 87,990 98% Bruno's (2007)
CVS/pharmacy (2000/2005)
Macon, GA............... North Park Center 1988 180,555 100% Kmart (2003/2063)
Kroger (2008/2028)
Douglasville, GA........ Park Plaza 1986 46,494 97% None(2)
-------------
Total................. 652,053 98%
-------------
-------------
- ------------------
(1) The Kmart facility, which is currently unoccupied, is being rebuilt due to
fire damage and is expected to reopen by the fourth quarter of 1998. The
cost of the repairs will be paid for by the tenant.
(2) The Park Plaza property is located directly adjacent to, and shares a
parking lot with, a Kroger supermarket, which is not owned by the Company.
THE PROPERTIES
The Company's 54 Properties are located in the following 16 states:
Arizona, Connecticut, Georgia, Kentucky, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, New Jersey, New York, North Carolina, Pennsylvania,
Rhode Island, South Carolina and Virginia. Consistent with its strategy, the
Company renovates, expands and reconfigures the Properties in order to maintain
their competitive position within their respective markets. The following table
sets forth certain information as of November 1, 1997 relating to the Properties
owned by the Company:
GROSS ANCHOR TENANTS
YEAR LEASABLE AREA PERCENT (LEASE EXPIRATION/
LOCATION PROPERTY DEVELOPED (SQ. FT.) LEASED OPTION EXPIRATION)
- ------------------------ ---------------------- --------- ------------- ------- ------------------------------
Tucson, AZ.............. Sinclair Paints 1985 14,840 100% Sinclair Paints (2000/2020)
Orange, CT.............. Golfland 1984 60,580 100% Pathmark (2008/2038)(1)
Groton, CT.............. Groton Square 1987 191,955 95% Bradlees (2007/2027),
Stop & Shop (2007/2027)
Manchester, CT.......... Manchester Kmart Plaza 1971 183,376 90% Kmart (1997/2022),
Stop & Shop (2018/2058),
Pep Boys (2016/2036)
Milford, CT............. Milford 1966 25,200 100% Xpect Discount Drug
(1999/2009)
Orange, CT.............. Orange 1967 27,000 100% Pergament Express (2004/2004)
Hamden, CT.............. Parkway Plaza I 1982 72,530 82% Pathmark (2007/2037)(1)
Hamden, CT.............. Parkway Plaza II 1982 131,100 56% Kids R Us (2006/2026),
Pathmark (2005/2035)(1)
Stratford, CT........... Stratford Square 1984 160,176 95% Pathmark (2009/2039)(1),
Marshalls (2000/2010)
Bainbridge, GA.......... Bainbridge Town Center 1990 143,729 99% Kmart (2015/2065),
Food Lion (2010/2030)
Harrodsburg, KY......... Harrodsburg 1987 60,048 100% Kroger (2007/2027)
Marketplace
Baltimore, MD........... Anneslie 1954 134,543 100% Caldor (2011/2041),
Party City (2006/2016)
College Park, MD........ Campus Village 1972 25,529 81% None
Coral Hills, MD......... Coral Hills 1988 86,050 92% Shoppers Food Warehouse
(2004/2029)
Prince Frederick, MD.... Fox Run 1991 288,278 100% Kmart (2016/2066),
Giant Foods (2021/2051),
Peebles (2012/2032),
Raley's Home Furnishings
(2004/2014)
Frederick, MD........... Hillcrest Plaza 1988 109,071 88% Shoppers Food Warehouse
(1999/2024)
S-4
GROSS ANCHOR TENANTS
YEAR LEASABLE AREA PERCENT (LEASE EXPIRATION/
LOCATION PROPERTY DEVELOPED (SQ. FT.) LEASED OPTION EXPIRATION)
- ------------------------ ---------------------- --------- ------------- ------- ------------------------------
Raynham, MA............. Ames Center 1985 55,000 100% Ames (2011/2031)
Flint, MI............... Builder's Square 1986 80,000 100% Builder's Square (2006/2026)
Livonia, MI............. Musicland 1985 80,000 100% Media Play (2005/2025)
Minnetonka, MN.......... Baker's Square 1986 3,881 100% Baker's Square (2001/2021)
Roseville, MN........... Baker's Square 1986 5,067 100% Baker's Square (2001/2021)
Brookhaven, MS.......... Brookway Village 1988 47,587 100% Delchamps (2008/2028)
Columbus, MS............ Towne Square 1983 116,153 99% Goody's (1998/2008),
Gold's Gym (2000/2010),
Jitney Jungle (2003/2003)
Glassboro, NJ........... Collegetown 1989 250,234 91% Kmart (2001/2021),
Acme (1999/2044),
Pep Boys (2015/2035)
Phillipsburg, NJ........ Hillcrest Mall 1985 220,985 53% Superfresh (1998/2008),
Staples (2010/2025),
R&S Strauss (2010/2025)
Hamilton, NJ............ Suburban Plaza 1971 239,723 100% Caldor (2013/2033),
Shop Rite (2002/2020),
Drug Emporium (2002/2012)
Mamaroneck, NY.......... A&P Mamaroneck 1976 24,978 100% A&P (2006/2016)
Yonkers, NY............. The Mall at Cross 1986 216,058 92% Rickel Home Centers
County (2012/2032),
Kids R Us (2008/2018),
The Sports Authority
(2010/2025),
T.J. Maxx (2004/2014)
Yonkers, NY............. High Ridge 1977 88,501 96% Pathmark (2003/2027)
New Rochelle, NY........ North Ridge 1971 43,105 96% Harmon Cosmetics (2007/2017),
NRHMC (2011/2016)
Port Washington, NY..... Port Washington 1968 19,600 100% North Shore Farms (1998/2033)
Larchmont, NY........... Village Square 1981 17,126 46% None
Cary, NC................ Cary Plaza 1990 60,702 95% Food Lion (2010/2030),
Revco Drugs (2001/2026)
Morganton, NC........... Magnolia Plaza 1987 104,026 100% Ingles Supermarket
(2007/2062),
Goody's (1999/2004)
Upper Darby, PA......... 69th Street Plaza 1959 42,500 100% Drug Emporium (2000/2000)
Doylestown, PA.......... Barn Plaza 1987 180,987 100% Acme (2007/2037),
Marshalls (2004/2019),
Toy Warehouse (2004/2014)
Bensalem, PA............ Bensalem Square 1983 72,558 97% Pathmark (2009/2039)
Tredyffrin, PA.......... Best Plaza 1985 113,000 41% Staples (1998/2008)
Bethlehem, PA........... Bethlehem Square 1987 386,820 99% Bradlees (2007/2025),
TJ Maxx (2006/2021),
Shop Rite (2010/2030),
Home Depot (2010/2040)
Bradford, PA............ Bradford Mall 1969 287,389 96% Kmart (2004/2049),
Consolidated Stores
(2002/2012),
Ames (2008/2027),
Jubilee Supermarket
(1999/2009)
Bristol, PA............. Bristol Commerce Park 1989 272,990 100% Superfresh (2008/2038),
Caldor (2013/2033)
Chambersburg, PA........ Franklin Center 1990 174,892 94% Food Lion (2010/2030),
Big Lots (2001/2011),
Lowe's (2010/2018)
Whitehall, PA........... MacArthur Road 1965 50,856 100% Oak Works (2007/2017),
Frank's Nursery (2002/2032)
Altoona, PA............. Park Hills Plaza 1976 279,856 100% Weis Market (2022/2037),
Dunham's Sporting Goods
(2004/2014),
Carmlike Cinemas (2006/2016),
Toys R Us (2015/2035),
Staples (2010/2020),
Superpetz (2005/2015)
S-5
GROSS ANCHOR TENANTS
YEAR LEASABLE AREA PERCENT (LEASE EXPIRATION/
LOCATION PROPERTY DEVELOPED (SQ. FT.) LEASED OPTION EXPIRATION)
- ------------------------ ---------------------- --------- ------------- ------- ------------------------------
Drexel Hill, PA......... Pilgrim Gardens 1950 83,358 100% Loehmann's (2003/2013),
QVC Network, Inc. (1999/1999)
Bensalem, PA............ Street Road 1986 68,031 93% Drug Emporium (2002/2008),
Frank's Nursery (2007/2022)
Phoenixville, PA........ Valley Forge Mall 1985 177,380 70% Eckerd Drug (2000/2010),
Ames (2017/2025)
Whitehall, PA........... Whitehall Square 1986 298,023 100% Bradlees (2006/2024),
PharMor (2001/2016),
The Sports Authority
(2006/2036),
Kids R Us (2007/2027)
East Providence, RI..... Wampanoag Plaza 1969 252,782 83% Rx Drug (2001/2016),
Cherry & Webb (2000/2005),
Marshalls (2001/2001),
Savers/TVI, Inc. (2010/2025)
Spartanburg, SC......... East Main Centre 1989 171,595 100% Wal Mart (2009/2039),
Goody's (1999/2009)
Columbia, SC............ Park Centre 1985 190,705 100% Wal Mart (2009/2039),
Harris Teeter (2012/2015)
Culpeper, VA............ Culpeper Town Mall 1965 131,086 70% Central Tractor (2000/2010),
Schewel Furniture (2001/2006)
Woodbridge, VA.......... Marumsco-Jefferson 1961 331,000 75% Giant Food Store (2004/2024),
Plaza Peebles (1999/2004),
CVS/pharmacy (2002/2002),
Consolidated Stores
(2002/2012)
Richmond, VA............ Newbridge Square 1985 55,000 100% USA Auctions, Inc. (1998/1998)
-------------
Total................. 7,007,539 91%
-------------
-------------
- ------------------
(1) Property includes unoccupied rental space for which rent is currently being
paid.
LEASE EXPIRATIONS-PORTFOLIO TOTAL
The following chart sets forth the status of the Company's scheduled lease
expirations for the Properties, as of November 1, 1997, assuming that none of
the tenants exercise renewal options or termination rights, if any, at or prior
to the scheduled expirations. For a schedule of the lease expirations of the
Georgia Properties, see 'Recent Developments--Proposed Georgia Acquisition.'
APPROXIMATE
AVERAGE PERCENTAGE OF
GROSS MINIMUM TOTAL GROSS
LEASES LEASABLE AREA ANNUALIZED RENT LEASABLE AREA
YEAR OF LEASE EXPIRATION EXPIRING (SQ. FT.) MINIMUM RENT PER SQ. FT. (SQ. FT.)
- ---------------------------------------------- -------- ----------------- ------------ ----------- -------------
1997.......................................... 54(1) 181,102 $ 1,157,858 $6.39 3%
1998.......................................... 103 435,052 3,620,112 8.32 6%
1999.......................................... 91 454,439 3,738,529 8.23 6%
2000.......................................... 89 370,359 3,257,534 8.80 5%
2001.......................................... 73 441,391 3,754,596 8.51 6%
2002.......................................... 80 521,993 4,141,702 7.93 7%
2003 and thereafter........................... 208 4,107,314 28,873,527 7.03 58%
--
--- ----------------- ------------
Total.................................... 698 6,511,650 $48,543,858 $7.45 91%(2)
--- ----------------- ------------ --
--- ----------------- ------------ --
- ------------------
(1) Of these leases, 45 have currently expired by their terms and are operating
as month-to-month tenancies. The Company is currently negotiating with
certain of these tenants to renew the leases. There can be no assurance that
such leases will be renewed or extended.
(2) This reflects the Company's 91% occupancy rate.
S-6
THE OFFERING
Securities Offered........................ 3,000,000 % Series D Cumulative Redeemable Preferred Shares of
Beneficial Interest, par value $0.01 per share (the 'Series D
Preferred Shares'). Application has been made to list the Series D
Preferred Shares on the NYSE, subject to official notice of issuance.
If approved for listing, trading of the Series D Preferred Shares on
the NYSE is expected to commence within the 30-day period after the
initial delivery of the Series D Preferred Shares. See
'Underwriting.'
Use of Proceeds........................... The net proceeds from the sale of the Series D Preferred Shares will
be used to (a) finance the Georgia Acquisition, (b) repay
indebtedness and (c) fund future property acquisitions and for other
general working capital purposes. See 'Use of Proceeds.'
Ranking................................... With respect to the payment of distributions and amounts upon
liquidation, dissolution or winding up, the Series D Preferred Shares
will rank senior to the Company's common shares of beneficial
interest, par value $0.01 per share (the 'Common Shares'), and pari
passu with the Company's Series A-1 Increasing Rate Cumulative
Convertible Preferred Shares of Beneficial Interest (the 'Series A-1
Preferred Shares'), the Company's 9.75% Series B-1 Cumulative
Convertible Preferred Shares of Beneficial Interest (the 'Series B-1
Preferred Shares'), the Company's 9.75% Series B-2 Cumulative
Convertible Preferred Shares of Beneficial Interest (the 'Series B-2
Preferred Shares,' and, together with the Series B-1 Preferred
Shares, the 'Series B Preferred Shares'), and the Company's Series C
Cumulative Redeemable Preferred Shares of Beneficial Interest (the
'Series C Preferred Shares'). See 'Description of Series D Preferred
Shares--Distributions' and '--Liquidation Preference.' For a
description of the Series A-1 Preferred Shares, the Series B
Preferred Shares and the Series C Preferred Shares, see
'Description of Preferred Shares' in the accompanying Prospectus.
Distributions............................. Distributions on the Series D Preferred Shares are cumulative from
the date of original issue and are payable quarterly, commencing on
, 1998, at the rate of % per annum of the $25
liquidation preference (equivalent to a fixed annual rate of $
per share). See 'Description of Series D Preferred Shares--
Distributions.'
Liquidation Rights........................ Equivalent to $25 per Series D Preferred Share, plus an amount equal
to accrued and unpaid distributions (whether or not declared). See
'Description of Series D Preferred Shares--Liquidation Preference.'
S-7
Redemption................................ Except in certain circumstances relating to the preservation of the
Company's qualification as a REIT (see 'Federal Income Tax
Considerations--Federal Income Taxation of the Company-- Annual
Distribution Requirements' in the accompanying Prospectus), the
Series D Preferred Shares are not redeemable prior to
, 2002. On and after , 2002, the
Series D Preferred Shares will be redeemable for cash at the option
of the Company, in whole or in part, at a redemption price of $25 per
share, plus distributions accrued and unpaid (whether or not
declared) to the redemption date. The redemption price (other than
the portion thereof consisting of accrued and unpaid dividends) shall
be payable solely out of the sale proceeds of other equity securities
of the Company, which may include other series of Preferred Shares,
and from no other source. See 'Description of Series D Preferred
Shares--Redemption.'
Voting Rights............................. Holders of Series D Preferred Shares will generally have no voting
rights. However, whenever distributions on any Series D Preferred
Shares are in arrears for six or more quarterly periods (whether or
not consecutive), the holders of such shares (voting separately as a
class with all other series of preferred shares upon which like
voting rights have been conferred and are exercisable) will be
entitled to vote for the election of two additional trustees of the
Company until all distributions accumulated on such Series D
Preferred Shares have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment. In
addition, certain changes to the terms of the Series D Preferred
Shares that would be materially adverse to the rights of holders of
the Series D Preferred Shares cannot be made without the affirmative
vote of holders of at least two-thirds of the outstanding Series D
Preferred Shares. See 'Description of Series D Preferred
Shares--Voting Rights.'
S-8
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT RATIO, PROPERTY DATA AND PER SHARE DATA)
The following sets forth summary financial, operating and other data on an
historical basis for the Company. Also set forth below are summary pro forma
financial, operating data and other data for the Company at and for the nine
months ended September 30, 1997 and the year ended December 31, 1996. The pro
forma balance sheet data as of September 30, 1997 has been prepared as if this
offering (this 'Offering'), the application of the proceeds therefrom and the
consummation of the Georgia Acquisition had occurred on September 30, 1997. The
pro forma operating data and other data for the nine months ended September 30,
1997 have been prepared as if this Offering, the application of the proceeds
therefrom and the consummation of the UPI Acquisition and the Georgia
Acquisition had occurred on January 1, 1997. The pro forma operating data and
other data for the year ended December 31, 1996 have been prepared as if the
foregoing transactions had occurred on January 1, 1996. The pro forma financial
and operating data are not necessarily indicative of what the actual financial
position or results of operations of the Company would have been as of the date
or for the periods indicated, nor do they purport to represent the results of
operations or financial position for future periods. This data should be read in
conjunction with the 'Management's Discussion and Analysis of Financial
Condition and Results of Operations,' included elsewhere in this Prospectus
Supplement. The five-year selected historical data is incorporated by reference
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------- -------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA ------------------- PRO FORMA ------------------------------
1997 1997 1996 1996 1996 1995 1994
--------- ------- -------- --------- -------- ------- -------
OPERATING DATA:
Revenue:
Minimum rent....................... $39,957 $35,185 $ 31,270 $53,516 $ 41,665 $40,259 $33,166
Percentage rent.................... 835 831 726 1,208 1,042 1,044 1,000
Expense reimbursements............. 8,881 8,253 8,852 13,184 11,732 10,988 9,455
Interest income.................... 180 180 523 624 624 902 985
Other income....................... 94 94 83 192 117 277 434
--------- ------- -------- --------- -------- ------- -------
Total Revenue...................... 49,947 44,543 41,454 68,724 55,180 53,470 45,040
Expenses:
General and administrative,
interest and property operating
costs............................ 26,876 27,213 26,786 38,587 35,514 32,690 26,107
Depreciation and amortization...... 10,243 9,247 8,434 14,327 11,194 10,903 9,066
--------- ------- -------- --------- -------- ------- -------
Income before extraordinary charges
and preferred distributions...... 12,828 8,083 6,234 15,810 8,472 9,877 9,867
Extraordinary charge from early
extinguishment of debt........... -- -- 11,052 11,052 11,052 -- --
--------- ------- -------- --------- -------- ------- -------
Net income (loss).................. $12,828 $ 8,083 $ (4,818) $ 4,758 $ (2,580) $ 9,877 $ 9,867
--------- ------- -------- --------- -------- ------- -------
--------- ------- -------- --------- -------- ------- -------
Income before extraordinary items
per share........................ $ 0.47 $ 0.55 $ 0.55 $ 0.50 $ 0.75 $ 0.91 $ 0.96
Distributions per share............ $ 1.44 $ 1.44 $ 1.44 $ 1.92 $ 1.92 $ 1.92 $ 1.90
S-9
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------------- ---------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA -------------------- PRO FORMA --------------------------------
1997 1997 1996 1996 1996 1995 1994
--------- -------- -------- --------- -------- -------- --------
OTHER DATA:
Funds from
operations (1)............... $ 14,465 $ 14,460 $ 13,586 $18,311 $ 18,313 $ 19,278 $ 17,918
Preferred share
distributions................ $ 7,970 $ 2,379 $ 521 $10,616 $ 695 $ 485 $ --
Ratio of funds from operations
to fixed charges (2)......... 1.66 1.82 1.95 1.62 1.97 2.05 2.37
Total properties (at end of
period)...................... 59 54 38 59 38 38 33
Total gross leasable area in
sq. ft. (at end of period, in
thousands)................... 7,600 7,000 5,700 7,600 5,700 5,700 5,000
BALANCE SHEET DATA (AT END OF
PERIOD):
Real estate, before accumulated
depreciation................. $487,008 $443,008 $370,491 $368,073 $318,870
Total assets................... 467,804 420,808 359,157 372,983 331,779
Total secured debt............. 224,992 250,424 212,590 204,247 160,771
Series C Preferred Shares...... 2,673 2,673 -- -- --
Beneficiaries' equity (3)...... 229,820 157,392 137,013 159,882 162,204
- ------------------
(1) Funds From Operations has been calculated in accordance with the definition
of 'funds from operations' clarified by the National Association of Real
Estate Investment Trusts, Inc. ('NAREIT') generally as net income, computed
in accordance with generally accepted accounting principles, excluding gains
or losses from debt restructuring and sales of property, plus depreciation
and amortization (in each case only on real estate related assets) and after
adjustments for unconsolidated partnerships and joint ventures, less
preferred share distributions. Funds from operations should not be
considered as a substitute for net income as an indication of the Company's
performance or as a substitute for cash flows as a measure of its liquidity.
(2) For purposes of these computations, funds from operations include interest
and preferred share distributions and excludes amortization of debt expense.
Fixed charges include interest, whether expensed or capitalized,
amortization of debt expense and preferred share distributions. See 'Ratios
of Earnings to Fixed Charges' in the accompanying Prospectus for the
Company's historical ratios of earnings to fixed charges.
(3) See 'Capitalization' for a description of beneficiaries' equity.
S-10
RISK FACTORS
An investment in the Series D Preferred Shares involves various risks.
Prospective investors should consider carefully the following factors, in
addition to other information contained in this Prospectus Supplement and the
accompanying Prospectus and incorporated herein and therein by reference, in
connection with an investment in the Series D Preferred Shares offered hereby.
This Prospectus Supplement and the accompanying Prospectus include certain
statements that may be deemed to be 'forward-looking statements' within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
'Securities Act'), and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements, other than statements of historical facts, included in
this Prospectus Supplement and the accompanying Prospectus that address
activities, events or developments that the Company expects, believes or
anticipates will or may occur in the future, including such matters as future
capital expenditures, distributions and acquisitions (including the amount and
nature thereof), the use of proceeds of this offering, expansion and other
development trends of the real estate industry, business strategies, expansion
and growth of the Company's operations and other such matters are
forward-looking statements. Such statements are based on assumptions and
expectations which may not be realized and are inherently subject to risks and
uncertainties, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. Prospective investors are cautioned that any such
statements are not guarantees of future performance and that actual results or
developments may differ materially from those anticipated in the forward-looking
statements. Risks and other factors that might cause differences, some of which
could be material, include, but are not limited to: the burden of the Company's
substantial debt obligations; the necessity of future financings to repay the
'balloon' payments required at the maturity of certain of the Company's debt
obligations; the highly competitive nature of the real estate leasing market;
adverse changes in the real estate markets including, among other things,
competition with other companies; general economic and business conditions,
which will, among other things, affect demand for retail space or retail goods,
availability and creditworthiness of prospective tenants and lease rents;
financial condition and bankruptcy of tenants, including disaffirmance of leases
by bankrupt tenants; the availability and terms of debt and equity financing;
risks of real estate acquisition, expansion and renovation, including the
failure to consummate the Georgia Acquisition; governmental actions and
initiatives; environmental/safety requirements; and other changes and factors
referenced in this Prospectus Supplement and the accompanying Prospectus.
SUBSTANTIAL DEBT OBLIGATIONS; BALLOON PAYMENTS; FLOATING RATE DEBT
The pro forma debt of the Company at September 30, 1997, after giving
effect to this Offering, the application of the proceeds therefrom and the
consummation of the Georgia Acquisition, would be $224,992,000, of which
approximately $224,477,000 would be long-term debt. The pro forma ratio of the
Company's debt to estimated value of the Company's real estate assets (as
estimated by the Company's Board of Trustees (the 'Board')) (the 'Debt Ratio')
at September 30, 1997, after giving effect to this Offering, the application of
the proceeds therefrom and the consummation of the Georgia Acquisition, would be
approximately 43%. This Debt Ratio may be increased by the Company without a
vote of the shareholders of the Company. The incurrence of new debt subsequent
to this Offering, the application of the proceeds therefrom and the consummation
of the Georgia Acquisition, could increase the debt service charges and the risk
of default under instruments or agreements creating the Company's debt, which
would have an adverse effect on the Company's net income and cash available for
distributions to shareholders. There is no limitation on the amount of debt that
the Company may incur.
The $224,992,000 of pro forma debt of the Company referred to above will be
due as follows: $99,000 in 1997; $416,000 in 1998; $7,455,000 in 1999;
$6,651,000 in 2000; $3,762,000 in 2001; $456,000 in 2002; and $206,153,000
thereafter. In addition, the Company may finance future acquisitions with debt
which may require a 'balloon' payment for the outstanding principal balance at
maturity. After giving effect to this Offering, the application of the proceeds
therefrom and the consummation of the Georgia Acquisition, 46 of the Properties
will be security for mortgage indebtedness of the Company. The Salomon Facility
(as defined below) is secured by 14 Properties; the Company's seven-year real
estate loan (the 'Mortgage Loan') due in June 2003, in the principal amount of
$181,700,000, is secured by 27 Properties. After giving effect to this Offering,
the application of the proceeds therefrom and the consummation of the Georgia
Acquisition, three of the Georgia Properties will be security for mortgage
indebtedness. The Company's ability to pay the outstanding principal balance of
its debt at maturity may depend upon its ability to refinance such debt, or to
sell Properties. The Company has no commitments with respect to
S-11
refinancing its debt. There can be no assurance that refinancing will be
available on reasonable terms and conditions, that such sales are possible or
that the amounts received from such refinancing or sales will be sufficient to
make the required balloon payment on its debt. In fact, there are substantial
restrictions on the ability to remove 27 Properties from the lien under the
Mortgage Loan and similar restrictions may exist with respect to future
indebtedness. If the Company cannot make a balloon payment when due, the lenders
under its other debt may foreclose on the Properties securing the debt, which
foreclosure would have a material adverse effect on the Company's business,
assets and results of operations.
In addition, after giving effect to this Offering, the application of the
proceeds therefrom and the consummation of the Georgia Acquisition,
approximately $9 million of indebtedness will be outstanding under the Salomon
Facility which bears interest at a floating interest rate which is currently
7.41%. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and 'Use of Proceeds' for a description of this
indebtedness. As a result of variable interest rates on the Salomon Facility or
any other debt the Company may incur in the future, an increase in interest
rates could have an adverse effect on the Company's net income and cash
available for distributions.
RISK THAT GEORGIA ACQUISITION WILL NOT BE CONSUMMATED
The Georgia Acquisition is subject to the satisfaction of a number of
conditions, certain of which are material and beyond the control of the Company
and, unless satisfied, could result in one or more of the Georgia Properties not
being acquired. Should any of these purchases not occur, for whatever reason,
the net proceeds of this Offering will be used to repay additional indebtedness
under the Salomon Facility, to fund future property acquisitions and for other
general working capital purposes. There can be no assurance that the Company
will be able to locate and acquire sufficient additional properties meeting the
Company's acquisition criteria to utilize any such undesignated net proceeds.
See 'Use of Proceeds.'
COMPETITION
The leasing of real estate is highly competitive. All of the Properties are
located in developed retail and commercial areas and there are generally
numerous other neighborhood or community shopping centers within a five-mile
radius of any given Property. In addition, there are generally one or more
regional malls within a ten-mile radius of certain Properties.
There are numerous developers and real estate companies which compete with
the Company in seeking acquisition opportunities and locating tenants to lease
vacant space, some of which may have greater financial resources than the
Company. In addition, such developers or real estate companies may develop or
acquire new shopping centers or regional malls, or renovate, refurbish or expand
existing shopping centers or regional malls, in the vicinity of one or more of
the Properties. Competition from such developers and real estate companies could
have a material adverse effect on the Company's acquisition opportunities and
ability to locate tenants to lease vacant space.
REAL ESTATE INVESTMENT RISKS
General
Various factors, many of which are beyond the control of and cannot be
predicted by the Company, may affect the economic viability of the Properties.
The Properties may be affected by risks generally associated with real estate
investments, including, without limitation, adverse changes in general or local
economic conditions, adverse changes in consumer spending patterns, local
competitive conditions such as the supply of retail or commercial space or the
existence or construction of new shopping centers, regional malls or other
retail or commercial space, increased operating costs (including maintenance,
insurance, debt service, lease payments and tenant improvement costs and real
estate and other taxes), the attractiveness of the Properties to tenants and
their customers, the need to comply with various federal, state and local laws,
ordinances and regulations (including zoning and other regulatory restrictions
on the use of the Properties), and the loss, bankruptcy or financial distress of
tenants. In addition, certain significant operating expenses associated with the
Properties (including maintenance, insurance, debt service, lease payment and
tenant improvement costs and real estate and other taxes) generally are not
reduced when circumstances cause a reduction in gross income from the
Properties. If the Properties do not generate gross income sufficient to meet
operating expenses, the Company's net income and ability to make cash
distributions would be adversely affected.
S-12
Dependence on Retail Industry
The Company's performance is significantly affected by the market for
retail space and, indirectly, the retail sector of the general or local economy.
The market for retail space has been adversely affected in recent years by
consolidation in the retail sector, the financial distress of certain large
retailers and the excess amount of retail space in certain markets. To the
extent that these conditions persist, they would have an adverse effect on the
Company's net income and cash available for distributions to shareholders and
the Company may not be able to obtain debt or equity financing on reasonable
terms and conditions.
Leasing Risks
The ability of the Company to rent or relet unleased space is affected by
many factors, including certain covenants typically found in leases with tenants
in shopping centers that restrict the use of other space at such shopping
centers. Changes in the abilities of tenants of the Properties to pay and
perform their rental and other obligations under their respective leases and in
the Company's ability to lease or relet Properties may cause fluctuations in the
Company's cash flow, which, in turn, may affect the cash available for
distributions to shareholders.
Changes in Laws
The Properties are subject to various federal, state and local regulatory
requirements, including, without limitation, the Americans with Disabilities
Act, which requires that buildings be made accessible to people with
disabilities. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or the award of damages to
private litigants. The Company believes the Properties to be in substantial
compliance with all material federal, state and local regulatory requirements.
There can be no assurance, however, that these regulatory requirements will not
be changed or that new regulatory requirements will not be imposed that would
require significant unanticipated expenditures by the Company or the tenants,
which would adversely affect the Company's net income and cash available for
distributions to shareholders.
Illiquidity of Real Estate
The illiquidity of real estate investments, the possibility of taxes
imposed on a REIT such as the Company by the Internal Revenue Code of 1986, as
amended (the 'Code'), upon the sale of properties held for fewer than four years
and restrictions placed on the Company on the removal of 27 of the Properties
from the lien of the Mortgage Loan, will each serve to limit the Company's
ability to vary its real estate holdings promptly in response to changes in
economic or other conditions.
Casualty; Sufficiency of Insurance
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance for the Properties with policy specifications, limits
and deductibles customarily carried for similar properties. There are, however,
certain types of extraordinary losses which may be either uninsurable or not
economically insurable. There can be no assurance that every loss affecting the
Properties will be covered by insurance or that any such loss incurred by the
Company will not exceed the limits of policies obtained. Should an uninsured
loss occur, the Company's net income and cash available for distributions would
be adversely affected.
Default by Tenants; Financial Distress and Bankruptcy of Tenants
Substantially all of the Company's income will be derived from rental
payments from tenants of the Properties under their respective leases. In the
event of a default by a tenant in its payment or performance of its rental or
other obligations under its lease, the Company may experience delays in
enforcing its rights and may incur substantial costs and experience significant
delays associated with protecting its investment, including costs incurred in
making substantial improvements or repairs to a property and re-leasing the
property. In the event that a substantial number of tenants become financially
distressed and so default, the Company's net income and cash available for
distributions to shareholders would be adversely affected.
The Company has several tenants which are operating under Chapter 11 of the
United States Bankruptcy Code. The tenants operating under Chapter 11 account
for approximately $6.1 million, or 10% of the Company's annualized 1997
revenues, and 9.7% of the Company's GLA. Among these tenants are Bradlees (three
stores representing approximately $2.2 million, or 3.7%, of the Company's 1997
annualized revenues), Caldor (three stores representing approximately $2.5
million, or 4.2%, of the Company's 1997 annualized revenues), and
S-13
Rickels Home Center ('Rickels') (one store representing approximately $1.1
million, or 1.8%, of the Company's 1997 annualized revenues). The Bradlees
stores have approximately 85,900, 85,100 and 85,100 square feet of GLA,
respectively. All three of these leases were originally entered into with the
Stop & Shop Companies, Inc. which remains liable thereunder. The Caldor stores
have approximately 94,600, 113,200 and 119,900 square feet of GLA, respectively.
One of those leases is guaranteed by The May Company. To date, Bradlees and
Caldor continue to pay current rent and operate their stores located in the
Company's centers and have not taken any action to reject these leases. The
Rickels store has approximately 50,000 square feet of GLA. Rickels has affirmed
the lease which provides for an annual rent of approximately $1.1 million
including reimbursements for operating expenses. Any disaffirmed leases might
subject the Company to the risks set forth in the immediately preceding
paragraph.
Other tenants in the Company's portfolio that continue to pay current rent
and operate their stores under Chapter 11 constitute individually and in the
aggregate less than 1% of the Company's annualized 1997 revenues. The Company
believes that it has adequately reserved for these tenants. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quarter Ended September 30, 1997--Liquidity and Capital Resources.'
There can be no assurance that any tenant of the Properties that has filed
for bankruptcy protection will continue to pay or perform its rental or other
obligations under its lease or that other tenants of the Properties will not
file for bankruptcy protection in the future. If certain other tenants were to
file for bankruptcy protection, a delay or substantial reduction in rental
payments may occur which would adversely affect the Company's net income and
cash available for distributions to shareholders.
Possible Environmental Liabilities
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances on, under or in such property. Such laws often impose such liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances, and the liability under certain
such laws may be strict, joint and several unless the harm is divisible and
there is a reasonable basis for allocating responsibility. The costs of any
required remediation or removal of such substances may be substantial and the
owner's or operator's liability therefor as to any property is generally not
limited under such laws, ordinances and regulations and could exceed the value
of the property and/or the aggregate assets of the owner or operator. The
presence of hazardous or toxic substances, or the failure to properly remediate
property affected by such substances, may adversely affect the market value of
the affected property, as well as the owner's ability to sell or lease such
property or to obtain financing using such property as collateral.
None of the Properties is currently subject to an environmental claim, nor
is the Company aware of any threatened environmental claim with respect to any
of the Properties. However, there can be no assurance that the Properties will
not be subject to environmental claims in the future.
CONSEQUENCES OF FAILURE TO MAINTAIN STATUS AS A REIT
The Company has qualified to be taxed as a REIT commencing with its taxable
year ended December 31, 1992 and intends to continue to qualify to be taxed as a
REIT under the Code. There can be no assurance that the Company will be able to
continue to operate in a manner so as to maintain its qualification as a REIT.
Qualification as a REIT involves the application of highly technical and complex
Code provisions for which there are only limited judicial or administrative
interpretations and the determination of various factual matters and
circumstances not entirely within the Company's control may impact its ability
to qualify as a REIT under the Code. In addition, no assurance can be given that
new legislation, new regulations, administrative interpretations or court
decisions will not change the tax laws with respect to qualification as a REIT
or the federal income tax consequences of such qualification. The Company,
however, is not aware of any currently pending tax legislation or regulations
that would adversely affect its ability to maintain its qualification as a REIT.
If the Company fails to maintain its qualification as a REIT, the Company
will be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at corporate rates, and distributions, if
any, to shareholders will no longer be deductible by the Company. In addition,
unless entitled to relief under certain statutory provisions, the Company will
also be disqualified from treatment as a REIT for the four taxable years
following the year in which qualification was so lost. This treatment would
reduce the net earnings of the
S-14
Company available for investment or distribution to shareholders because of the
additional tax liability to the Company for the year or years involved. In
addition, during the period of disqualification, the Company would no longer be
required by the Code to make any distributions as a condition to REIT
qualification. To the extent that distributions to shareholders would have been
made in anticipation of the Company's continuing to qualify as a REIT, the
Company might be required to borrow funds or to liquidate certain of its
investments on adverse terms to pay the applicable tax.
RELIANCE ON MAJOR TENANTS
As of September 30, 1997, the Company's four largest tenants were Pathmark
Supermarkets, Caldor, Bradlees and Kmart, which represented approximately 5.2%,
4.2%, 3.5% and 3.1%, respectively, of the Company's annualized minimum rents. No
other tenant represented more than 2% of the aggregate annualized minimum rents
of the Properties as of such date. The financial position of the Company and its
ability to make distributions may be adversely affected by financial
difficulties experienced by any such tenants, or any other major tenant of the
Company, including a bankruptcy, insolvency or general downturn in the business
of any such tenant, or in the event any such tenant does not renew its leases as
they expire.
GEOGRAPHIC CONSIDERATIONS
All of the Properties are located in 16 states (Arizona, Connecticut,
Georgia, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi,
New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina
and Virginia). To the extent that general economic or other relevant conditions
in these states decline and result in a decrease in consumer demand in these
areas, the income from, and value of, these Properties may be adversely
affected.
EFFECT OF DISTRIBUTION REQUIREMENTS
In order to maintain its qualification as a REIT, the Company must make
distributions to shareholders aggregating annually at least 95% of its REIT
taxable income (which does not include net capital gains). The Company currently
distributes to shareholders approximately 103% of its funds from operations
(exclusive of nonrecurring items), which is in excess of 95% of the Company's
REIT taxable income. The actual amount of the Company's future distributions to
its shareholders will be based on the cash flows from operations from the
Properties, the Company's other business activities and from any future
investments and on the Company's net income.
Under certain circumstances, the Company may be required to accrue as
income for tax purposes interest and rent earned but not yet received. In such
event, the Company could have taxable income without sufficient cash to enable
the Company to meet the distribution requirements of a REIT. Accordingly, the
Company could be required to borrow funds or to sell certain of its investments
on adverse terms to meet such distribution requirements.
The Company expects to continue to make acquisitions and sign leases that
may require tenant improvements. As the Company must distribute 95% of its REIT
taxable income to continue to qualify as a REIT, there may not be sufficient
available cash in excess of distributions to fund future acquisitions or
required tenant improvements. In such an event, the necessary funds for future
acquisitions or required tenant improvements would have to be obtained, to the
extent available, from net proceeds from the issuance of equity securities, the
sale of existing investments and, to the extent consistent with the Company's
strategy to maintain a conservative capital structure, bank and other
institutional borrowings and the issuance of debt securities.
ANTI-TAKEOVER EFFECTS OF OWNERSHIP LIMIT, MARYLAND LAW AND A STAGGERED BOARD
In order to maintain its qualification as a REIT, not more than 50% in
value of the outstanding shares of beneficial interest may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). The Declaration of Trust of the Company authorizes the Board
to take such action as may be required to preserve its qualification as a REIT
and to limit any person, other than (i) Messrs. Norman M. Kranzdorf and Marvin
Williams and (ii) any person approved by the Board, to direct or indirect
ownership of 9.8% of the lesser of the number or value of the outstanding shares
of beneficial interest of the Company; provided, however, in no event may the
Board grant an exemption from the foregoing ownership limitation to any person
whose ownership, direct or indirect, of in excess of 9.8% of the lesser of the
number or value of the outstanding the shares of beneficial interest of the
Company would result in the termination of the Company's status as a REIT. In
connection with the UPI Acquisition, pursuant to the terms of the Series B
Preferred Shares, the Board granted an exemption from such
S-15
ownership limitations to Leonard Mandor, the Chairman of the UPI Board and the
Chief Executive Officer of UPI; Robert Mandor, the President and a director of
UPI; and certain of their affiliates. In addition to the foregoing, the Articles
Supplementary (as defined herein) authorize the Board to take such action as may
be required to preserve its qualification as a REIT for federal income tax
purposes and to limit any person, other than persons who may be excepted by the
Board, to direct or indirect ownership of 10% of the lesser of the number or the
value of the total Series D Preferred Shares outstanding. Based on the
foregoing, there can be no assurance that there will not be five or fewer
individuals who will own more than 50% in value of the outstanding shares of
beneficial interest of the Company, thereby causing the Company to fail to
qualify as a REIT.
Under the Maryland General Corporation Law, as amended (the 'MGCL'), as
applicable to a Maryland REIT, certain 'business combinations' (including a
merger, consolidation, share exchange or, in certain circumstances, an asset
transfer or issuance or reclassification of equity securities) between a
Maryland REIT and any person who beneficially owns 10% or more of the voting
power of the trust's shares or an affiliate of the trust who, at any time within
the two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then-outstanding voting shares (an
'Interested Shareholder') or an affiliate thereof are prohibited for five years
after the most recent date on which the Interested Shareholder becomes an
Interested Shareholder. Thereafter, any such business combination must be
recommended by the board and approved by the affirmative vote of at least (a)
80% of the votes entitled to be cast by holders of outstanding voting shares of
the trust and (b) two-thirds of the votes entitled to be cast by holders of
voting shares of the trust other than shares held by the Interested Shareholder
with whom (or with whose affiliate) the business combination is to be effected,
unless, among other conditions, the trust's common shareholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Shareholder for its shares. These provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the board of trustees
prior to the time that the Interested Shareholder becomes an Interested
Shareholder.
The ownership limits, as well as the ability of the Company to issue other
classes of common and preferred shares of beneficial interest and certain other
provisions of Maryland law, may delay, defer or prevent a change in control of
the Company or other transaction that may be in the best interests of the
shareholders and also may (i) deter tender offers for the Series D Preferred
Shares, which offers may be attractive to the shareholders, or (ii) limit the
opportunity for shareholders to receive a premium for their the Series D
Preferred Shares that might otherwise exist if an investor attempted to assemble
a block of shares of beneficial interest of the Company in excess of 9.8% in
number or value of the outstanding shares of beneficial interest of the Company
or 10% of the lesser of the number or the value of the total Series D Preferred
Shares outstanding or otherwise to effect a change of control of the Company.
See 'Description of Common Shares--Restrictions on Ownership' in the
accompanying Prospectus.
The Board is divided into three classes of trustees. The terms of the
first, second and third classes expire in 1998, 1999 and 2000, respectively.
Each year one class of the Board will be elected by the shareholders. The
staggered terms prevent the shareholders from voting on the election of more
than one class of trustees at each annual meeting and thus, may delay a change
of control of the Company or deter a bid for control of the Company even in a
case where the holders of a majority of the outstanding Common Shares believe a
change of control would be in their interest.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers and
trustees, particularly Norman M. Kranzdorf, the President and Chief Executive
Officer and a member of the Board. The loss of his services could have an
adverse effect on the Company's business, assets or results of operations.
CONTROL BY TRUSTEES AND EXECUTIVE OFFICERS
Trustees and executive officers of the Company currently own beneficially
approximately 2.04% of the outstanding Common Shares (approximately 7.45% if
they exercise all options granted to them under the Company share option plans
and assuming all restricted shares are fully vested). Based on such share
ownership and their positions with the Company, trustees and executive officers
of the Company may have substantial influence on the Company and on the outcome
of any matters submitted to the Company's shareholders for approval.
S-16
CHANGES IN INVESTMENT AND FINANCING POLICIES
The investment and financing policies of the Company and its policies with
respect to certain other activities, including growth, capitalization, debt
levels, distributions, REIT status and operating policies, are determined by the
Board. The Board may amend or revise these policies from time to time at its
discretion without a vote of the shareholders of the Company.
ABSENCE OF PRIOR MARKET; TRADING PRICES
There has been no public market for the Series D Preferred Shares prior to
this Offering. Due to the absence of any prior public market for the Series D
Preferred Shares, there can be no assurance that the initial public offering
price will correspond to the price at which the Series D Preferred Shares will
trade in the public market subsequent to this Offering. An application has been
made to list the Series D Preferred Shares on the NYSE upon official notice of
issuance. There can be no assurance that, upon listing, the Company will
continue to meet the criteria for continued listing of the Series D Preferred
Stock on the NYSE. See 'Underwriting.' Prices for the Series D Preferred Shares
will be determined in the marketplace and may be influenced by many factors,
including interest rates, the liquidity of the market for the Series D Preferred
Shares, investor perceptions of the Company, the market price of the Common
Shares, the market for similar securities, the volume of Series D Preferred
Shares available for sale and general industry and economic conditions.
S-17
RECENT DEVELOPMENTS
PROPOSED GEORGIA ACQUISITION
In furtherance of its strategy to expand and diversify its holdings, and
increase its presence in the Southeastern United States, the Company has entered
into agreements pursuant to which it expects to acquire five shopping centers in
the Atlanta metropolitan area, containing approximately 650,000 square feet of
GLA. The properties are known as The Village at Mableton, Park Plaza, North Park
Center, Holcomb Bridge Crossing and Tower Plaza. The aggregate purchase price
for the Georgia Properties of approximately $44 million is payable as follows:
approximately $21.9 million in cash to be paid out of the proceeds of this
Offering, approximately $20.5 million by the assumption of existing mortgage
indebtedness, and approximately $1.6 million by the issuance of Common Shares
(approximately 85,000 Common Shares assuming such shares are issued at $18 13/16
per share, the closing price for such shares on the NYSE on November 24, 1997).
Two of the shopping centers will be acquired by purchasing the partnership
interests of the entities which own them. The Georgia Properties had an overall
occupancy rate of approximately 98% as of November 1, 1997 and an average age of
10 years. Anchor tenants at the Georgia Properties include Kmart, Kroger, Cub
Foods, CVS/pharmacy and Bruno's. The consummation of the Georgia Acquisition is
subject to the satisfaction of various closing conditions. Accordingly, there is
no assurance that the Georgia Acquisition will be consummated, or consummated on
the terms set forth above. See 'Risk Factors--Risk that Georgia Acquisition will
not be Consummated.' The following chart summarizes the scheduled lease
expirations for the Georgia Properties commencing on January 1, 1998, assuming
that none of the tenants exercise renewal options or termination rights, if any,
at or prior to the scheduled expirations:
APPROXIMATE
PERCENTAGE
AVERAGE OF TOTAL
GROSS MINIMUM GROSS
LEASABLE ANNUALIZED RENT LEASABLE
AREA MINIMUM PER AREA
YEAR OF LEASE EXPIRATION (SQ. FT.) RENT SQ. FT. (SQ. FT.)
- ------------------------------------------------------------ ----------- ---------- ------- -----------
1998........................................................ 61,074 $ 527,330 $ 8.63 9%
1999........................................................ 40,450 457,687 11.31 6%
2000........................................................ 56,102 553,385 9.86 9%
2001........................................................ 21,200 247,357 11.67 3%
2002........................................................ 35,289 425,675 12.06 5%
Thereafter.................................................. 421,387 2,555,105 6.06 66%
----------- ---------- -----
Total..................................................... 635,502 $4,766,539 $ 7.50 98%
----------- ---------- -----
----------- ---------- -----
UPI ACQUISITION
In furtherance of the Company's business strategy, in February 1997, the
Company, through the UPI Acquisition, acquired 16 properties located in 11
states, having a total of approximately 1.3 million square feet of GLA. As of
September 30, 1997, the properties were approximately 99% leased. The total
purchase price of approximately $65 million was paid approximately $1.6 million
in cash, approximately $30.2 million by the assumption of existing indebtedness,
approximately $29.6 million by the issuance of Series B Preferred Shares and
approximately $3.6 million by the issuance of Series C Preferred Shares. The UPI
Acquisition provided the Company with initial market penetration in nine
additional states in which the Company did not previously own any properties.
SALOMON CREDIT FACILITY
In February 1997, the Company obtained a secured first mortgage loan
facility of up to $50 million from Salomon Brothers Realty Corp. (the 'Salomon
Facility'). Amounts borrowed under the Salomon Facility bear interest at a rate
equal to the one month London Interbank Offering Rate ('LIBOR') plus 175 basis
points, which rate was 7.41% at September 30, 1997. As of November 1, 1997,
there was $19 million outstanding under the Salomon Facility and an additional
$5 million available for future borrowing. The Salomon Facility is secured by 14
properties and matures in March 1999. The Company has an option to extend the
Salomon Facility for an
S-18
additional year. In connection with entering into the Salomon Facility, the
Company was required to establish a repair reserve account for immediate and
ongoing capital expenditures and replacements. The balance in this reserve
account was $389,000 as of September 30, 1997.
EXPANSION OF GROSS LEASABLE AREA
The Company maintains a strategy of selective expansion and renovation of
its properties in order to improve their operating performance and competitive
position. The Company also engages in an active redevelopment program with the
objective of attracting innovative retailers which management believes will
enhance the operating performance of the properties. The Company frequently
looks to tenants to pay for the construction costs of expanding gross leasable
areas. The following are examples of the Company's redevelopment program:
o Circuit City entered into a 20-year lease with the Company at The Mall at
Cross County in Yonkers, New York, pursuant to which Circuit City has
constructed a store of approximately 46,000 square feet of GLA. Circuit City
commenced payment of an annual minimum rent of $716,000 for the store in
November 1997.
o Applebee's entered into a 10-year ground lease with the Company of an
existing outparcel at the Fox Run Shopping Center in Prince Frederick, Maryland
pursuant to which Applebee's has constructed a restaurant of approximately 4,600
square feet of GLA. Applebee's commenced payment of an annual minimum rent of
$45,000 for the Prince Frederick location in November 1997.
o Applebee's also has entered into a 15-year ground lease with the Company
of an existing outparcel at Barn Plaza in Doylestown, Pennsylvania, pursuant to
which Applebee's is modernizing and expanding a restaurant from approximately
3,700 square feet to approximately 5,000 square feet of GLA. Applebee's is
expected to commence payment of an annual minimum rent of $60,000 for the
Doylestown location in April 1998.
o Regal Theatres entered into a 20-year lease for an existing outparcel
with the Company at Barn Plaza in Doylestown, Pennsylvania, pursuant to which
Regal Theatres is constructing a 14 screen movie theatre of approximately 49,000
square feet of GLA. Regal Theatres is expected to commence payment of an annual
minimum rent of $684,000 in July 1998.
In each of these cases the cost of construction is being paid for by the
tenant, except that in the case of Circuit City, the Company paid for the
footings, foundation, and building platform upon which the tenant constructed
and furnished its store, and in the case of the Regal Theatre, the Company has
agreed to reimburse the tenant approximately $70 per square foot for
construction of the theatre.
S-19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series D Preferred
Shares offered hereby, after deducting the Underwriters' discounts and
commissions and estimated expenses of this Offering, are estimated to be
approximately $72.0 million (approximately $82.9 million if the Underwriters'
over-allotment option is exercised in full). The Company intends to use the net
proceeds from this Offering as follows: (a) approximately $21.9 million to
finance the Georgia Acquisition, (b) approximately $37.0 million to repay
amounts under the indebtedness listed below, (c) approximately $10 million to
repay amounts outstanding under the Salomon Facility, and (d) the balance of
approximately $3.1 million to fund future property acquisitions and for general
working capital purposes. If the Georgia Acquisition is not consummated, or if
less than all of the Georgia Properties are acquired, the Company will use any
proceeds otherwise intended for the Georgia Acquisition to repay up to an
additional $9.0 million of indebtedness outstanding under the Salomon Facility
and the balance to fund future property acquisitions and for general working
capital purposes. The Company does not currently have agreements to acquire
additional properties, and there can be no assurance that the Company will be
able to locate and acquire sufficient additional properties meeting the
Company's acquisition criteria to utilize any such undesignated net proceeds.
The Salomon Facility bears interest at a rate equal to one month LIBOR plus 175
basis points, which rate was 7.41% at September 30, 1997, and is due in March
1999. The Company has an option to extend the Salomon Facility for an additional
year. Of the $19.0 million outstanding under the Salomon Facility as of November
1, 1997, approximately $13.0 million was used to finance the UPI Acquisition,
and the balance of approximately $6.0 million was used for general corporate and
working capital purposes.
The following table sets forth a description of the significant terms of
the indebtedness to be repaid by the Company from the proceeds of this Offering
(dollars in thousands):
PRINCIPAL
BALANCE AS OF ESTIMATED OFFERING
PROPERTY AND SEPTEMBER 30, INTEREST PREPAYMENT PROCEEDS
LOCATION INDEBTEDNESS 1997 RATE PENALTY USED MATURITY DATE
- --------------------------------- --------------- ------------- -------- ---------- -------- --------------
Towne Square in Columbus, MS..... Mortgage $ 1,834 8.50% $ 71 $ 1,905 May 2004
Builder's Square in Flint, MI.... Mortgage 2,882 8.50% 200 3,082 October 2006
East Main in Spartanburg, SC..... Mortgage 2,857 7.88% -- 2,857 January 2003
Bainbridge Shopping Center in
Bainbridge, GA................. Mortgage 5,074 10.00% 150 5,224 October 2000
Cary Plaza in Cary, NC........... Mortgage 1,480 7.88% 73 1,553 February 2009
Park Centre in Columbia, SC...... Mortgage 4,526 7.63% -- 4,526 February 2003
Musicland in Livonia, MI......... Mortgage 1,569 9.63% 55 1,624 October 1999
Campus Village in College
Park, MD....................... Mortgage 2,693 8.00% 215 2,908 December 2002
Coral Hills in Coral Hills, MD... Mortgage 6,535 10.50% 408 6,943 August 1999
Culpeper Shopping Center in
Culpeper, VA................... Mortgage 5,417 9.50% -- 5,417 November 2004
Golfland Shopping Center in
Orange, CT..................... Mortgage 1,000 9.00% -- 1,000 June 1998
14 Properties in various
locations...................... Salomon 10,000(1) 7.41% -- 10,000 March 1999
Facility
------------- ---------- --------
Total........................ $45,867 $1,172 $47,039
------------- ---------- --------
------------- ---------- --------
- ------------------
(1) Of the $17 million outstanding under the Salomon Facility on such date, $10
million will be repaid from the net proceeds of this Offering.
Pending such uses, the net proceeds may be invested in short-term
income-producing investments such as investment grade commercial paper,
government and government agency securities, money market funds that invest in
government securities, certificates of deposit and interest-bearing bank
accounts.
S-20
CAPITALIZATION
CAPITAL STRUCTURE
The following table sets forth the consolidated capitalization of the
Company (i) as of September 30, 1997 and (ii) as adjusted to give effect to the
issuance of the Series D Preferred Shares, the application of the net proceeds
therefrom and the consummation of the Georgia Acquisition. See 'Use of
Proceeds.'
AS OF SEPTEMBER 30,
1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
DEBT:
Mortgage Loan.......................................................................... $181,700 $ 181,700
Credit Facilities...................................................................... 18,000 7,000
Mortgage Loans......................................................................... 50,724 36,292
-------- -----------
Total debt........................................................................ 250,424 224,992
-------- -----------
REDEEMABLE PREFERRED SHARES:
Series C cumulative redeemable preferred shares of beneficial interest, 395,834 shares
authorized, 267,300 shares issued and outstanding................................... 2,673 2,673
-------- -----------
BENEFICIARIES' EQUITY:
Series A-1 increasing rate cumulative convertible preferred shares of beneficial
interest, 11,155 shares authorized, 11,155 shares issued and outstanding............ 1 1
Series B cumulative convertible preferred shares of beneficial interest, 2,470,000
shares authorized, 1,183,331 shares issued and outstanding.......................... 12 12
Series D cumulative redeemable preferred shares of beneficial interest, 3,450,000
shares authorized, none issued and outstanding (3,000,000 shares issued and
outstanding, as adjusted)........................................................... -- 30
Common shares of beneficial interest, $0.01 par value per share; 10,343,388 shares
issued and outstanding (10,428,388 shares issued and outstanding, as adjusted)...... 103 104
Capital in excess of par value......................................................... 216,777 290,346
Cumulative net income available for common shareholders................................ 32,458 31,286
Cumulative distributions on common shares of beneficial interest....................... (91,772) (91,772)
-------- -----------
157,579 230,007
Unearned compensation on restricted shares of beneficial interest...................... (187) (187)
-------- -----------
Total beneficiaries' equity....................................................... 157,392 229,820
-------- -----------
Total capitalization.............................................................. $410,489 $ 457,485
-------- -----------
-------- -----------
S-21
SUMMARY OF INDEBTEDNESS
The following is a summary, as of September 30, 1997, of the significant
terms of the indebtedness of the Company which will remain outstanding after
this Offering, the application of the proceeds therefrom and the consummation of
the Georgia Acquisition. The amounts reflected below are in thousands, other
than the interest rates.
PROPERTY AND PRINCIPAL BALANCE INTEREST
INDEBTEDNESS LOCATION SEPTEMBER 30, 1997 RATE MATURITY DATE
- ------------------------------------------ -------------------- ------------------ -------- --------------
Mortgage Loan............................. 27 Properties in $181,700 7.96% June 2003
various locations
Salomon Facility.......................... 14 Properties in 7,000 7.41%(1) March 1999
various locations
Mortgage.................................. Marumsco-Jefferson 15,857 9.38% July 2004
Plaza in Woodbridge,
VA
Mortgage.................................. The Village at 10,582 9.22% August 2006
Mableton in Atlanta,
GA
Mortgage.................................. Park Plaza in 3,346 8.25% September 2001
Douglasville, GA
Mortgage.................................. Holcomb Bridge 6,507 8.20% November 2000
Crossing in Roswell,
GA
------------------
Total..................................... $224,992
------------------
------------------
- ------------------
(1) The Salomon Facility bears interest at a rate equal to one month LIBOR plus
175 basis points, which rate was 7.41% at September 30, 1997.
S-22
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIO, PROPERTY DATA AND PER SHARE DATA)
The following sets forth selected financial, operating and other data on an
historical basis for the Company. Also set forth below are selected pro forma
financial, operating and other data for the Company at and for the nine months
ended September 30, 1997 and the year ended December 31, 1996. The pro forma
balance sheet data as of September 30, 1997 has been prepared as if this
Offering, the application of the proceeds therefrom and the consummation of the
Georgia Acquisition had occurred on September 30, 1997. The pro forma operating
and other data for the nine months ended September 30, 1997 have been prepared
as if this Offering, the application of the proceeds therefrom and the
consummation of the UPI Acquisition and the Georgia Acquisition had occurred on
January 1, 1997. The pro forma operating and other data for the year ended
December 31, 1996 have been prepared as if the foregoing transactions had
occurred on January 1, 1996. The pro forma financial and operating data are not
necessarily indicative of what the actual financial position or results of
operations of the Company would have been as of the date or for the periods
indicated, nor do they purport to represent the results of operations or
financial position for future periods. This data should be read in conjunction
with the 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' included elsewhere in this Prospectus Supplement. The
five-year selected historical data is incorporated by reference in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------------- ---------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA --------------------- PRO FORMA --------------------------------
1997 1997 1996 1996 1996 1995 1994
--------- -------- -------- --------- -------- -------- --------
OPERATING DATA:
Revenue:
Minimum rent................... $ 39,957 $ 35,185 $ 31,270 $53,516 $ 41,665 $ 40,259 $ 33,166
Percentage rent................ 835 831 726 1,208 1,042 1,044 1,000
Expense reimbursements......... 8,881 8,253 8,852 13,184 11,732 10,988 9,455
Interest income................ 180 180 523 624 624 902 985
Other income................... 94 94 83 192 117 277 434
--------- -------- -------- --------- -------- -------- --------
Total Revenue.................. 49,947 44,543 41,454 68,724 55,180 53,470 45,040
Expenses:
General and administrative,
interest and property
operating costs.............. 26,876 27,213 26,786 38,587 35,514 32,690 26,107
Depreciation and
amortization................. 10,243 9,247 8,434 14,327 11,194 10,903 9,066
--------- -------- -------- --------- -------- -------- --------
Income before extraordinary charges
and preferred distributions...... 12,828 8,083 6,234 15,810 8,472 9,877 9,867
Extraordinary charge from early
extinguishment of debt........... -- -- 11,052 11,052 11,052 -- --
--------- -------- -------- --------- -------- -------- --------
Net income (loss).................. $ 12,828 $ 8,083 $ (4,818) $ 4,758 $ (2,580) $ 9,877 $ 9,867
--------- -------- -------- --------- -------- -------- --------
--------- -------- -------- --------- -------- -------- --------
Income before extraordinary items
per share........................ $ 0.47 $ 0.55 $ 0.55 $ 0.50 $ 0.75 $ 0.91 $ 0.96
Distributions per share............ $ 1.44 $ 1.44 $ 1.44 $ 1.92 $ 1.92 $ 1.92 $ 1.90
OTHER DATA:
Funds from operations (1).......... $ 14,465 $ 14,460 $ 13,586 $18,311 $ 18,313 $ 19,278 $ 17,918
Preferred share distributions...... $ 7,970 $ 2,379 $ 521 $10,616 $ 695 $ 485 $ 0
Ratio of earnings to fixed charges
(2).............................. 1.21 1.31 1.40 1.17 1.41 1.50 1.72
Ratio of funds from operations to
fixed charges (3)................ 1.66 1.82 1.95 1.62 1.97 2.05 2.37
Total properties (at end of
period).......................... 59 54 38 59 38 38 33
Total gross leasable area in sq.
ft. (at end of period, in
thousands)....................... 7,600 7,000 5,700 7,600 5,700 5,700 5,000
BALANCE SHEET DATA (AT END OF
PERIOD):
Real estate, before accumulated
depreciation..................... $487,008 $443,008 $370,491 $368,073 $318,870
Total assets....................... 467,804 420,808 359,157 372,983 331,779
Total secured debt................. 224,992 250,424 212,590 204,247 160,771
Series C Preferred Shares.......... 2,673 2,673 -- -- --
Beneficiaries' equity (4).......... 229,820 157,392 137,013 159,882 162,204
(Footnotes on next page)
S-23
- ------------------
(Footnotes from previous page)
(1) Funds From Operations has been calculated in accordance with the definition
of 'funds from operations' clarified by NAREIT generally as net income,
computed in accordance with generally accepted accounting principles,
excluding gains or losses from debt restructuring and sales of property,
plus depreciation and amortization (in each case only on real estate related
assets) and after adjustments for unconsolidated partnerships and joint
ventures, less preferred share distributions. Funds from operations should
not be considered as a substitute for net income as an indication of the
Company's performance or as a substitute for cash flows as a measure of its
liquidity.
(2) For purposes of these computations, earnings consist of income before
extraordinary charges, if any, plus preferred share distributions, interest
expense and amortization of debt expense. Fixed charges include interest,
whether expensed or capitalized, amortization of debt expense and preferred
share distributions. See 'Ratios of Earnings to Fixed Charges' in the
accompanying Prospectus for the Company's historical ratios of earnings to
fixed charges.
(3) For purposes of these computations, funds from operations include interest
and preferred share distributions and excludes amortization of debt expense.
(4) See 'Capitalization' for a description of beneficiaries' equity.
S-24
KRANZCO REALTY TRUST PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
The accompanying financial statements present the unaudited pro forma
combined condensed Balance Sheet of the Company as of September 30, 1997 and the
unaudited pro forma combined condensed Statements of Operations of the Company
for the nine months ended September 30, 1997 and for the year ended December 31,
1996, in each case after giving effect to this Offering, the application of the
proceeds therefrom and the consummation of the UPI Acquisition and the Georgia
Acquisition.
The unaudited pro forma combined condensed Balance Sheet as of September
30, 1997 is presented as if this Offering, the application of the proceeds
therefrom and the consummation of the Georgia Acquisition had occurred on
September 30, 1997. The unaudited pro forma combined condensed Statements of
Operations for the nine months ended September 30, 1997 and for the year ended
December 31, 1996 are presented as if this Offering, the application of the
proceeds therefrom and the consummation of the UPI Acquisition and the Georgia
Acquisition had occurred on January 1, 1996 and carried forward through
September 30, 1997.
Preparation of the pro forma financial information was based on assumptions
deemed appropriate by the management of the Company. The assumptions give effect
to this Offering, the application of the proceeds therefrom and the consummation
of the UPI Acquisition and the Georgia Acquisition in accordance with generally
accepted accounting principles, the entity qualifying as a REIT, distributing
all of its taxable income and, therefore, incurring no federal income tax
expense during the periods presented. The pro forma financial information is
unaudited and is not necessarily indicative of the results which actually would
have occurred if the transactions had been consummated at the beginning of the
periods presented, nor does it purport to represent the future financial
position and results of operations for future periods. The pro forma information
should be read in conjunction with the historical financial statements of the
Company incorporated by reference into this Prospectus Supplement.
S-25
KRANZCO REALTY TRUST
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
ISSUANCE OF
SERIES D
COMPANY PREFERRED GEORGIA PAYOFF OF PRO FORMA
(HISTORICAL) SHARES ACQUISITION EXISTING DEBT TOTAL
------------ ----------- -------------- ------------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS:
Shopping centers properties, at cost, net......... $399,185 $-- $ 43,860 (B) $ -- $443,045
Cash and marketable securities.................... 3,466 72,000(A) (21,825)(B) (47,039)(C) 6,602
Restricted cash................................... 743 -- -- -- 743
Rents and other receivables, net.................. 9,025 -- -- -- 9,025
Prepaid expenses.................................. 2,843 -- -- -- 2,843
Deferred financing costs, net..................... 2,156 -- -- -- 2,156
Other deferred costs, net......................... 2,158 -- -- -- 2,158
Other assets...................................... 1,232 -- -- -- 1,232
------------ ----------- ------- ------------- ---------
Total assets...................................... $420,808 $72,000 $ 22,035 $ (47,039) $467,804
------------ ----------- ------- ------------- ---------
------------ ----------- ------- ------------- ---------
LIABILITIES:
Mortgages and notes payable....................... $250,424 $-- $ 20,435(B) ($45,867)(C) $224,992
Tenant security deposits.......................... 1,263 -- -- -- 1,263
Accounts payable and accrued expenses............. 2,057 -- -- -- 2,057
Other liabilities................................. 1,256 -- -- -- 1,256
Distributions payable............................. 5,743 -- -- -- 5,743
------------ ----------- ------- ------------- ---------
Total liabilities................................. 260,743 -- 20,435 (45,867) 235,311
SERIES C PREFERRED SHARES......................... 2,673 -- -- -- 2,673
BENEFICIARIES' EQUITY:
Common shares and preferred shares................ 116 30(A) 1(B) -- 147
Capital in excess of par value.................... 216,777 71,970(A) 1,599(B) -- 290,346
Cumulative net income available for common
shares.......................................... 32,458 -- -- (1,172)(C) 31,286
Cumulative distributions on common shares......... (91,772) -- -- -- (91,772)
------------ ----------- ------- ------------- ---------
157,579 72,000 1,600 (1,172) 230,007
Unearned compensation on restricted common
shares.......................................... (187) -- -- -- (187)
------------ ----------- ------- ------------- ---------
Total beneficiaries' equity....................... 157,392 72,000 1,600 (1,172) 229,820
------------ ----------- ------- ------------- ---------
Total liabilities, Series C Preferred Shares and
beneficiaries' equity........................... $420,808 $72,000 $ 22,035 $ (47,039) $467,804
------------ ----------- ------- ------------- ---------
------------ ----------- ------- ------------- ---------
- ------------------
NOTES AND MANAGEMENT'S ASSUMPTIONS TO PRO FORMA
COMBINED CONDENSED BALANCE SHEET FOR KRANZCO REALTY TRUST
AS OF SEPTEMBER 30, 1997
(A) To reflect the issuance of 3,000,000 shares of Series D Preferred Shares:
(DOLLAR AMOUNTS IN THOUSANDS)
Gross Proceeds................................................................. $75,000
Less: Cost of issuance......................................................... 3,000
-------
Net Proceeds................................................................... $72,000
-------
-------
(B) Adjustment to reflect acquisition of the Georgia Properties:
Purchase Price................................................................. $43,000
Plus: Acquisition costs........................................................ 860
-------
$43,860
-------
-------
Acquisition paid for by:
Assumption of debt............................................................. $20,435
Issuance of Common Shares...................................................... 1,600
Cash........................................................................... 21,825
-------
$43,860
-------
-------
(C) Payoff of existing debt:
Net proceeds from the Offering after consummation of the Georgia
Acquisition:
Net proceeds................................................................... $72,000
Cash used for the Georgia Acquisition.......................................... (21,825)
-------
Proceeds available to extinguish existing debt................................. 50,175
Prepayment penalties........................................................... (1,172)
Debt paid off.................................................................. (45,867)
-------
Cash available for future property acquisitions and for general working capital
purposes....................................................................... $ 3,136
-------
-------
S-26
KRANZCO REALTY TRUST
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
ISSUANCE OF GEORGIA
UPI SERIES D ACQUISITION PAYOFF OF
COMPANY ACQUISITION PREFERRED (PRO EXISTING COMPANY
(HISTORICAL) (1/1-2/27/97) TOTAL SHARES FORMA)(A) DEBT (PRO FORMA)
------------ ------------- ----------- ----------- ----------- --------- -----------
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
REVENUE:
Minimum Rent................ $ 35,185 $ 1,194 $ 36,379 $-- $ 3,578 $ -- $ 39,957
Percentage rent............. 831 4 835 -- -- -- 835
Expense reimbursements...... 8,253 152 8,405 -- 476 -- 8,881
Other income................ 94 -- 94 -- -- -- 94
Interest Income............. 180 -- 180 -- -- -- 180
------------ ------------- ----------- ----------- ----------- --------- -----------
Total revenue............... 44,543 1,350 45,893 -- 4,054 -- 49,947
------------ ------------- ----------- ----------- ----------- --------- -----------
EXPENSES:
Interest.................... 14,070 498 14,568 -- 1,324(B) (3,022)(C) 12,870
Depreciation and
amortization.............. 9,247 228 9,475 -- 768(D) -- 10,243
Real estate taxes........... 4,891 83 4,974 -- 315 -- 5,289
Operations and
maintenance............... 6,062 96 6,158 -- 369 -- 6,527
General and
administrative............ 2,190 -- 2,190 -- -- -- 2,190
------------ ------------- ----------- ----------- ----------- --------- -----------
Total expenses.............. 36,460 905 37,365 -- 2,776 (3,022) 37,119
------------ ------------- ----------- ----------- ----------- --------- -----------
NET INCOME.................... 8,083 445 8,528 -- 1,278 3,022 12,828
Distributions On Preferred
Shares...................... 2,379 528 2,907 5,063(E) -- -- 7,970
------------ ------------- ----------- ----------- ----------- --------- -----------
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON SHAREHOLDERS...... $ 5,704 $ (83) $ 5,621 $(5,063) $ 1,278 $ 3,022 $ 4,858
------------ ------------- ----------- ----------- ----------- --------- -----------
------------ ------------- ----------- ----------- ----------- --------- -----------
INCOME PER COMMON SHARE....... $ 0.55 $ 0.54 $ 0.47
------------ ----------- -----------
------------ ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OF BENEFICIAL
INTEREST.................... 10,337,000 10,337,000 10,422,000
The accompanying notes and management's assumptions are an integral part of this
statement.
S-27
KRANZCO REALTY TRUST
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
ISSUANCE OF GEORGIA
UPI SERIES D ACQUISITION PAYOFF OF
COMPANY ACQUISITION PREFERRED (PRO EXISTING COMPANY
(HISTORICAL) PRO FORMA TOTAL SHARES FORMA)(A) DEBT (PRO FORMA)
------------ ------------- ----------- ----------- ----------- --------- -----------
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
REVENUE:
Minimum Rent................ $ 41,665 $ 7,183 $ 48,848 $-- $ 4,668 $ -- $ 53,516
Percentage rent............. 1,042 166 1,208 -- -- -- 1,208
Expense reimbursements...... 11,732 760 12,492 -- 692 -- 13,184
Other income................ 117 75 192 -- -- -- 192
Interest Income............. 624 -- 624 -- -- -- 624
------------ ------------- ----------- ----------- ----------- --------- -----------
Total revenue............... 55,180 8,184 63,364 -- 5,360 -- 68,724
------------ ------------- ----------- ----------- ----------- --------- -----------
EXPENSES:
Interest.................... 17,069 2,579 19,648 -- 1,765(B) (4,029)(C) 17,384
Depreciation and
amortization.............. 11,194 2,110(F) 13,304 -- 1,023(D) -- 14,327
Provision to reduce property
to net realizable value... -- 400 400 -- -- -- 400
Real estate taxes........... 6,073 494 6,567 -- 394 -- 6,961
Operations and
maintenance............... 9,473 575 10,048 -- 482 -- 10,530
General and
administrative............ 2,836 476(F) 3,312 -- -- -- 3,312
------------ ------------- ----------- ----------- ----------- --------- -----------
Total expenses.............. 46,645 6,634 53,279 -- 3,664 (4,029) 52,914
------------ ------------- ----------- ----------- ----------- --------- -----------
NET INCOME.................... 8,535 1,550 10,085 -- 1,696 4,029 15,810
Distributions on Preferred
Shares...................... 695 3,171 3,866 6,750(E) -- -- 10,616
------------ ------------- ----------- ----------- ----------- --------- -----------
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON SHAREHOLDERS...... $ 7,840 $ (1,621) $ 6,219 $(6,750) $ 1,696 $ 4,029 $ 5,194
------------ ------------- ----------- ----------- ----------- --------- -----------
------------ ------------- ----------- ----------- ----------- --------- -----------
INCOME PER COMMON SHARE....... $ 0.76 $ 0.60 $ 0.50
------------ ----------- -----------
------------ ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OF BENEFICIAL
INTEREST.................... 10,333,000 10,333,000 10,418,000
- ------------------------
FOOTNOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
The extraordinary loss of $11,052 on refinancing recorded in the second quarter
of 1996 and the loss of $63 on the sale of real estate recorded in the first
quarter of 1996 by the Company have been excluded from the pro forma
presentation of the Statement of Operations.
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLAR AMOUNTS IN THE
THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
(A) To record the operations of the Georgia Properties.
(B) To reflect the interest expense on the three mortgages assumed in the Georgia
Acquisition as follows:
Debt assumed...................................................................... $ 20,435 $ 20,435
Interest expense.................................................................. $ 1,324 $ 1,765
(C) To record the repayment of debt outstanding and the related reduction of
interest expense as follows:
Principal amount of debt repayment................................................ $ 45,867 $ 45,867
Interest expense reduction on debt repayment...................................... $ 3,022 $ 4,029
(D) To reflect depreciation expense over a 30 year life as a result of the Georgia
Acquisition as follows:
Depreciable basis of property..................................................... $ 30,702 $ 30,702
Depreciation expense.............................................................. $ 768 $ 1,023
(E) To record the distributions on the issuance of Series D Preferred Shares:
Shares issued..................................................................... 3,000,000 3,000,000
Face amount per share............................................................. $ 25.00 $ 25.00
Gross proceeds.................................................................... $ 75,000 $ 75,000
Distribution rate(1).............................................................. 9.0% 9.0%
Distributions..................................................................... $ 5,063 $ 6,750
------------- ------------
------------- ------------
(1) The Company has assumed a 9.0% distribution rate for illustrative purposes and there can be no assurance that
such distribution rate shall be the actual distribution rate of this Offering.
(F) The depreciation and amortization and general and administrative amounts include pro forma adjustments as a result
of the UPI Acquisition.
S-28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Quarter ended September 30, 1997
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company had $3,466,000 of cash on hand. In
addition to its cash reserve, unused capacity under credit facilities totaled
$10,000,000 at September 30, 1997.
In February 1997, the Company acquired, in a merger, UPI for approximately
$65 million. UPI owned 16 properties located in 11 states that have a total of
approximately 1.3 million square feet of GLA. The Company funded this purchase
through the assumption of approximately $30.2 million of debt, the issuance of
approximately $29.6 million of Series B Preferred Shares and approximately $3.6
million of Series C Preferred Shares and the payment of approximately $1.6
million of cash. The Series B Preferred Shares and the Series C Preferred Shares
have distribution rates of 9.75% and 8.0%, respectively. The Series C Redeemable
Preferred Shares are required to be redeemed in eight equal quarterly
installments commencing in April 1997. The UPI Acquisition resulted in a 22%
increase in the Company's GLA and enabled the Company to expand into nine
additional states and diversify its geographic presence and tenant base.
As of September 30, 1997 the Company had total mortgages and notes payable
of $250,424,000 of which $219,624,000 bears interest at fixed rates ranging from
7.50% to 10.5%. As of September 30, 1997, the Company is required to make
principal payments of $1,283,000 in 1997, $1,290,000 in 1998, $26,352,000 in
1999, $6,488,000 in 2000, $1,510,000 in 2001 and $3,903,000 in 2002.
In June 1996, the Company successfully completed the refinancing of
substantially all of its variable rate debt and a portion of its fixed rate
debt. The Company entered into a seven year, secured, fixed rate real estate
mortgage loan in the principal amount of $181,700,000 at a weighted average
interest rate of 7.96%, which is inclusive of trustee and servicer fees. The
entire principal balance of the Mortgage Loan is due in June 2003.
As a condition of the Mortgage Loan, the Company was required to establish
a Sinking Fund Account and a Capital and TI Reserve Account. On a monthly basis,
$11,000 is deposited into a Sinking Fund Account maintained with the Collateral
Agent until the aggregate amount in the account equals or exceeds $786,000. All
funds in the Sinking Fund Account are to be returned to the Company on the
earlier of the repayment in full of the Mortgage Loan and the date of release or
substitution of a property for the mortgaged property located in Orange, CT. The
balance in the Sinking Fund Account was $169,000 as of September 30, 1997. On a
monthly basis, an amount equal to 1/12th of $0.25 per square foot of the GLA of
the mortgaged properties is deposited into the Capital and TI Reserve Account.
All funds in the Capital and TI Reserve Account may be used on a current basis
to fund capital improvements, repairs, alterations, tenant improvements and
leasing commissions at the mortgaged properties. The balance in the Capital and
TI Reserve Account was $185,000 as of September 30, 1997.
As of September 30, 1997, the Company had eight fixed rate mortgages
outstanding totalling $37,924,000. These mortgages have maturity dates ranging
from 1999 through 2009 and interest rates ranging from 7.5% to 10.5%. The
Company is required to make principal payments of $212,000 in 1997, $896,000 in
1998, $8,942,000 in 1999, $6,061,000 in 2000, $1,065,000 in 2001, and $3,437,000
in 2002.
In addition, the Company had three floating rate mortgages outstanding as
of September 30, 1997 totalling $12,800,000. These mortgages have maturity dates
ranging from 2003 through 2004 and have interest rates ranging from 7.5% to 9.0%
at September 30, 1997. The Company is required to make principal payments of
$71,000 in 1997, $394,000 in 1998, $410,000 in 1999, $427,000 in 2000, $445,000
in 2001, and $466,000 in 2002.
In February 1997, the Company obtained a secured first mortgage loan
facility of up to $50 million from Salomon Brothers Realty Corp. Amounts
borrowed under the line bear interest at the one-month LIBOR plus 175 basis
points, which was 7.41% at September 30, 1997. As of September 30, 1997, there
was $17,000,000 outstanding under this facility with $7,000,000 available for
future borrowings. The facility is secured by 14 properties and is due in March
1999. The Company has an option to extend the facility for an additional year.
S-29
The proceeds of the Salomon Facility will be used by the Company for funding
property acquisitions, general corporate purposes and capital needs. As a
condition of the Salomon Facility, the Company was required to establish a
Repair Reserve Account for immediate and ongoing capital expenditure reserves
and replacement reserves. The balance in the Repair Reserve Account was $389,000
as of September 30, 1997.
In November 1996, the Company obtained a $3.0 million secured line of
credit from Bank Leumi Trust Company of New York. Amounts borrowed under the
line bear interest at 50 basis points above that bank's reference rate, which
was 8.5% as of September 30, 1997. The outstanding borrowings under this
facility totalled $1,000,000 as of September 30, 1997. The term of the line has
been renewed through June 30, 1998.
In 1995 the Company obtained a $1.0 million unsecured line of credit from
CoreStates Bank, N.A. Amounts borrowed under the line will bear interest at the
bank's prime rate, which was 8.50% at September 30, 1997. There were no
borrowings outstanding under this facility as of September 30, 1997. The
facility expires on December 31, 1997 and the Company is involved in discussions
with the lender to extend the terms of the line.
Effective January 1, 1996, NAREIT revised the definition of funds from
operations to income before depreciation and amortization of real estate assets
and significant non-recurring events, less gains on sale of real estate. Funds
from operations does not represent cash flows from operations as defined by
generally accepted accounting principles and is not necessarily indicative as a
measure of liquidity of the Company. Also, funds from operations should not be
construed as an alternative to net income as defined by generally accepted
accounting principles as an indicator of the Company's operating performance.
Funds from operations for common shareholders increased $376,000 or 8% from
$4,516,000 for the third quarter of 1996 to $4,892,000 for the third quarter of
1997, and increased $874,000 or 6% from $13,586,000 for the first nine months of
1996 to $14,460,000 for the first nine months of 1997.
The Company has several tenants which are operating under Chapter 11 of the
United States Bankruptcy Code. Among these tenants are Bradlees (three stores
representing approximately $2.2 million or 3.7% of the Company's annualized
revenues) and Caldor (three stores representing approximately $2.5 million or
4.2% of the Company's annualized revenues). To date, Bradlees and Caldor
continue to pay current rent and operate their stores located in the Company's
centers and have not taken any action to reject these leases. Effective November
1, 1996, the Company entered into an agreement to reduce common area maintenance
and real estate tax reimbursements at one of the Caldor locations for a five
year period. Rickels disaffirmed the lease for the store located at the
Hillcrest Mall in Phillipsburg, NJ on November 30, 1996. The rental for this
store amounted to approximately $300,000 per year including reimbursements for
operating expenses. Rickels has affirmed the lease for The Mall at Cross County.
The rental for this store amounts to approximately $1.1 million per year
including reimbursements for operating expenses. Effective February 29, 1996,
Jamesway disaffirmed its leases at the two locations in which they had operated.
The Jamesway stores were approximately 60,000 and 76,000 square feet,
respectively, and the average rent paid by Jamesway for these locations was
approximately $2.60 per square foot, which represented less than 1% of revenues
in 1996. The Company has leased both of the locations to Ames department store.
One of the leases commenced in April of 1997 and the projected commencement date
of the other lease is April, 1998. Other tenants in the Company's portfolio that
continue to pay current rent and operate their stores under Chapter 11 are
individually and in the aggregate less than 1% of annual revenues. The Company
believes that it is adequately reserved for these tenants.
Best Products, a tenant in bankruptcy at one of the Company's centers,
discontinued operations of all of its stores and closed the store in the
Company's portfolio in February 1997. In May 1997, the Company purchased the
lease from Best Products for approximately $650,000. The Company has several
prospective tenants for this space and expects the space to be leased before the
end of the fourth quarter of 1997.
On July 31, 1997, the Company filed a Registration Statement on Form S-3
with the Securities and Exchange Commission to offer $100,000,000 of debt
securities, preferred shares, common shares, warrants and rights, separately or
together, in separate series, in amounts, at prices and on terms to be set forth
at a later date. The Company intends to use the net proceeds from the sale of
the offered securities for general corporate purposes, which may include the
acquisition of shopping centers, the expansion and improvement of existing
properties, the repayment of certain indebtedness and working capital.
S-30
During the nine months ended September 30, 1997, the Company invested
approximately $4,848,000 in the expansion and improvement of existing shopping
center properties, exclusive of the acquisition of the sixteen properties
acquired from UPI. The Company expects to meet its short-term liquidity
requirements through net cash flow provided from operations, existing cash,
long-term or short-term borrowings and the Capital and TI Reserve account. The
Capital and TI Reserve account may be utilized by the Company for the funding of
costs related to capital improvements, repairs, alterations, tenant improvements
and leasing commissions in the centers secured by the Mortgage Loan. To meet its
long-term liquidity requirements, such as refinancing its balloon mortgages,
financing acquisitions and major capital improvements, the Company intends to
either utilize long-term borrowings, issue debt securities and/or offer
additional equity securities.
Management believes it has adequate access to capital to continue to meet
its short-term and long-term requirements and objectives.
RESULTS OF OPERATIONS
Net income (loss) for common shareholders decreased $59,000, or 3%, from
$1,877,000 or $0.18 per common share in the third quarter of 1996 to $1,818,000
or $0.18 per common share in the third quarter of 1997. Net income (loss) for
common shareholders increased $11,043,000 from ($5,339,000), or ($0.52) per
common share, for the first nine months of 1996 to $5,704,000, or $0.55 per
common share, for the corresponding period in 1997. Excluding the extraordinary
loss on refinancing, the net income for common shareholders decreased $9,000 or
less than 1% from $5,713,000, or $0.55 per common share, for the first nine
months of 1996 to $5,704,000, or $0.55 per common share, for the corresponding
period in 1997. This was due to a combination of factors as described in further
detail below. The Company also recognized a loss of $63,000 on the sale of real
estate in the first quarter of 1996 in connection with the sale of a 3.4 acre
parcel of land located in Philadelphia, Pennsylvania.
Minimum rent increased $1,840,000, or 18%, from $10,302,000 in the third
quarter of 1996 to $12,142,000 in the third quarter of 1997 and increased
$3,915,000 or 13% from $31,270,000 for the first nine months of 1996 to
$35,185,000 for the corresponding period in 1997. The increase was primarily due
to the additional rents from the sixteen centers acquired in February 1997 of
approximately $4,227,000, which was offset by a net decrease in the minimum
rents of approximately $312,000 from the other thirty-eight shopping centers.
The decrease was due to the lower occupancy rate at those centers.
Expense reimbursements increased $169,000, or 6%, from $2,629,000 in the
third quarter of 1996 to $2,798,000 in the third quarter of 1997 and decreased
$599,000 or 7% from $8,852,000 for the first nine months of 1996 to $8,253,000
for the corresponding period in 1997. The decrease was primarily due to the
common area maintenance expenses which were significantly lower in 1997 due to
the severe winter weather in the Northeast portion of the United States in 1996.
Interest income decreased $18,000, or 22%, from $82,000 in the third
quarter of 1996 to $64,000 in the third quarter of 1997 and decreased $343,000
from $523,000 for the first nine months of 1996 to $180,000 for the
corresponding period in 1997. The decrease was primarily due to the sale of the
Series A-2 Commercial Mortgage Modified Pass-Through Interest Only Certificates
(the 'Series A-2 Certificates'). The Series A-2 Certificates provided for
payment of interest only at 65 basis points calculated on a notional amount of
$100,000,000. The Series A-2 Certificates were sold in connection with the debt
refinancing in June 1996.
Interest expense increased $574,000, or 14%, from $4,242,000 in the third
quarter of 1996 to $4,816,000 in the third quarter of 1997 and $1,317,000 or 10%
from $12,753,000 for the first nine months of 1996 to $14,070,000 for the
corresponding period in 1997. The increase is primarily due to the interest
expense incurred in connection with the additional sixteen centers acquired in
February 1997 of approximately $1,628,000. In addition, interest expense was
reduced by capitalized interest on projects under construction and land under
development in the amount of $63,000 and $300,000 for the third quarter of 1996
and 1997, respectively, and $185,000 and $632,000 for the first nine months of
1996 and 1997, respectively.
Depreciation and amortization increased $537,000, or 20%, from $2,720,000
in the third quarter of 1996 to $3,257,000 in the third quarter of 1997 and
increased $813,000 or 10% from $8,434,000 for the first nine months of 1996 to
$9,247,000 for the corresponding period in 1997.
S-31
Depreciation expense on buildings and improvements increased approximately
$832,000 in the first nine months of 1997 versus the first nine months of 1996
due to the sixteen additional centers acquired in February 1997 as well as two
full quarters of depreciation taken on improvements made prior to 1997. This
increase is offset by a decrease in amortization of deferred financing costs of
approximately $133,000 in the first nine months of 1997 versus 1996. This
decrease was due to the change in deferred financing fees associated with the
Company's debt refinancing in June 1996.
Real estate taxes increased $113,000, or 7%, from $1,555,000 in the third
quarter of 1996 to $1,668,000 in the third quarter of 1997, and increased
$377,000 or 8% from $4,514,000 for the first nine months of 1996 to $4,891,000
for the corresponding period in 1997. The increase was primarily due to the
increase in expense from the additional sixteen centers acquired in 1997, as
well as the effect of a real estate tax refund of approximately $40,000 recorded
in the first quarter of 1996. The increase was offset by the capitalization of
real estate taxes on projects under construction and land under development in
the amount of $29,000 and $55,000 for the third quarter of 1996 and 1997,
respectively, and $93,000 and $132,000 for the first nine months of 1996 and
1997, respectively.
Operations and maintenance expenses increased $108,000, or 6%, from
$1,915,000 in the third quarter of 1996 to $2,023,000 in the third quarter of
1997 and decreased $1,037,000 or 17% from $7,099,000 for the first nine months
of 1996 to $6,062,000 for the corresponding period in 1997. The decrease was
primarily due to the unusually high snow removal costs incurred as a result of
the severe winter experienced in the first quarter of 1996 in the Northeast
portion of the United States (approximately $1 million).
General and administrative expenses decreased $66,000, or 8%, from $834,000
in the third quarter of 1996 to $768,000 in the third quarter of 1997 and
decreased $167,000 or 8% from $2,357,000 for the first nine months of 1996 to
$2,190,000 for the corresponding period in 1997. The decrease is primarily due
to capitalization of certain direct labor costs in 1997 related to identifiable
projects such as the merger of the Company with UPI and certain leasing
projects.
INFLATION
Most of the retail tenant leases at the shopping center properties contain
provisions which will entitle the Company to receive percentage rents based on
the tenants' gross sales. Such percentage rents minimize the risk to the Company
of the adverse effects of inflation. Most of the leases at the shopping center
properties require the tenants to pay a substantial share of operating expenses,
such as real estate taxes, insurance and common area maintenance costs, and
thereby reduce the Company's exposure to increased costs. In addition, many of
the leases at the shopping center properties are for terms of less than ten
years, which may enable the Company to seek increased rents upon renewal of
existing leases.
S-32
MANAGEMENT
The trustees and executive officers of the Company are as follows:
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
Norman M. Kranzdorf............................. 67 President, Chief Executive Officer and Trustee
Edmund Barrett.................................. 64 Executive Vice President, Chief Operating
Officer and Trustee
Robert H. Dennis................................ 50 Vice President, Chief Financial Officer,
Treasurer and Trustee
Bernard J. Korman............................... 66 Trustee
Dr. Peter D. Linneman........................... 46 Trustee
James B. Selonick............................... 72 Trustee
E. Donald Shapiro............................... 66 Trustee
Hermina G. Kranzdorf............................ 62 Secretary and Director of Communications
Norman M. Kranzdorf, 67, a co-founder of the Company, has been a trustee
and the President and Chief Executive Officer of the Company since its
organization in June 1992. Mr. Kranzdorf was the President of Kranzco Realty,
Inc., a general commercial real estate management and brokerage company
('Kranzco Realty'), from 1979, when he founded the company, to 1992. He served
as President of Amterre Development, Inc. ('Amterre') from 1972 to 1981.
Amterre, the successor to Food Fair Properties, Inc., owned and operated over 50
shopping centers, as well as other single-tenant retail properties, on the
Eastern seaboard. Mr. Kranzdorf was also an officer and director of Kranzco
Management, Inc., a general commercial real estate manager and brokerage company
and a wholly-owned subsidiary of Kranzco Realty, from 1980, when it was founded,
to 1992. Mr. Kranzdorf is the husband of Hermina Kranzdorf. He is a member of
the Board of Governors of NAREIT and a former trustee of the International
Council of Shopping Centers. Mr. Kranzdorf is a member of the Board's Executive
Committee and Executive Compensation Committee.
Edmund Barrett, 64, has been a trustee of the Company since June 1995, the
Chief Operating Officer of the Company since December 1994, and the Director of
Leasing and Executive Vice President of the Company since 1992. Previously, he
was the Assistant Director of Development of Kranzco Realty from 1987 to 1988
and a Vice President of Kranzco Realty from 1988 to 1992.
Robert H. Dennis, 50, has been a trustee of the Company since June 1994 and
the Chief Financial Officer and Treasurer of the Company since its organization
in June 1992. Prior thereto he was the Chief Financial Officer and Assistant
Secretary of Kranzco Realty from 1981 to 1992.
Bernard J. Korman, 66, has been a trustee of the Company since May 1997.
Mr. Korman is the Chairman of Graduate Health System, Inc., a non-profit
organization, and NutraMax Products, Inc., a public company. Mr. Korman, a
founder of American Medicorp in 1968, served as President and Chief Executive
Officer of MEDIQ Incorporated from 1981 to 1995 and as a chairman of PCI
Services, Inc. from 1995 to 1996. Mr. Korman currently is a director of The Pep
Boys, Inc., Today's Man, Inc., New America High Income Fund, Inc., InnoServ
Technologies, Inc., Kapson Senior Quarters Corp. and Omega Healthcare Investors,
Inc. Mr. Korman is a member of the Board's Executive Compensation Committee and
Audit Committee.
Dr. Peter D. Linneman, 46, has been a trustee of the Company since November
1992. Dr. Linneman has been a Professor of Finance and Public Policy at the
Wharton School of the University of Pennsylvania since 1979, the Albert Sussman
Professor of Real Estate at the Wharton School since 1989 and a director of the
Wharton Real Estate Center since 1986. In addition, he is an Urban Land
Institute Research Fellow and a member of NAREIT. Dr. Linneman is also currently
engaged as Managing Director of Amerimar Realty, a real estate investment firm,
and serves as an advisor to other real estate investors. He is a trustee of
Universal Health Realty Trust, Equity Office Properties Trust, and Gables
Residential Properties Trust. Dr. Linneman is a member of the Board's Audit
Committee.
S-33
James B. Selonick, 72, has been a trustee of the Company since November
1992. Mr. Selonick has been a real estate consultant since 1987. Prior thereto
and since 1970, Mr. Selonick served first as Vice President for Property
Development and later as Senior Vice President of Federated Department Stores,
Inc. From 1973 to 1987, Mr. Selonick was Chairman of Federated Stores Realty, a
shopping center developer. Mr. Selonick also served as a trustee of the
International Council of Shopping Centers (1972-1978 and 1980-1986; member of
Executive Committee 1981-1985) and the Urban Land Institute (1983-1989). Mr.
Selonick is a member of the Board's Audit Committee and Executive Compensation
Committee.
E. Donald Shapiro, 66, has been a trustee of the Company since June 1994.
Mr. Shapiro has been The Joseph Solomon Distinguished Professor of Law at New
York Law School since 1983, a Supernumerary Fellow of St. Cross College at
Oxford University since 1985, a Voting Member of the Congregation of Oxford
University since 1990 and a Visiting Distinguished Professor at Bar-Ilan
University, Tel-Aviv, Israel, since 1986. Mr. Shapiro also serves as a director
of each of the following entities: Loral Space and Communications; Bank Leumi
Trust Co.; Vasomedical, Inc.; Vion, Inc.; Eyecare Products, PLC; Premier Laser
Systems; United Industrial Corporation; and Telepad Corporation. Mr. Shapiro is
a member of the Board's Audit Committee, Executive Committee and Executive
Compensation Committee.
Hermina G. Kranzdorf, 62, has been the Director of Communications and
Secretary of the Company since 1992. From 1986 to 1992, she was the Director of
Communications and Secretary of Kranzco Realty. Ms. Kranzdorf is the wife of
Norman Kranzdorf. Ms. Kranzdorf is a member of the International Council of
Shopping Centers and presently serves as a member of the Council's Community
Services Committee.
S-34
DESCRIPTION OF SERIES D PREFERRED SHARES
This description of the particular terms of the Series D Preferred Shares
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the Preferred Shares set forth in the
accompanying Prospectus, to which description reference is hereby made.
GENERAL
The Company is authorized to issue Preferred Shares in one or more series,
with such designations, preferences, conversion and other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms and
conditions of redemption in each case, if any, as are permitted by Maryland law
and as the Board may determine by resolution. See 'Description of Preferred
Shares' in the accompanying Prospectus. The Series D Preferred Shares is a
series of the Company's Preferred Shares. As of November 1, 1997, there are
outstanding 11,155 Series A-1 Preferred Shares; 274,606 Series B-1 Preferred
Shares; 908,725 Series B-2 Preferred Shares; and 222,750 Series C Preferred
Shares.
On November 19, 1997, the Board adopted resolutions establishing the terms
of a series of Preferred Shares consisting of up to 3,450,000 shares, designated
% Series D Cumulative Redeemable Preferred Shares. The following summary of
the terms and provisions of the Series D Preferred Shares does not purport to be
complete and is qualified in its entirety by reference to the pertinent sections
of the Declaration of Trust and the articles supplementary amending the
Declaration of Trust (the 'Articles Supplementary') establishing the Series D
Preferred Shares, each of which is available from the Company.
RANK
The Series D Preferred Shares will, with respect to distribution rights and
rights upon liquidation, dissolution or winding up of the Company, rank (a)
senior to all classes or series of Common Shares and all equity securities
ranking junior to such Series D Preferred Shares; (b) on a parity (i) with the
Series A-1 Preferred Shares, the Series B Preferred Shares and the Series C
Preferred Shares and (ii) all equity securities issued by the Company the terms
of which specifically provide that such equity securities rank on a parity with
the Series D Preferred Shares (the 'Parity Preferred Shares'); and (c) junior to
all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank senior to the Series D Preferred
Shares. The term 'equity securities' does not include convertible debt
securities for this purpose.
DISTRIBUTIONS
Holders of Series D Preferred Shares shall be entitled to receive, when, as
and if authorized and declared by the Board, out of assets of the Company
legally available for payment, cash distributions payable quarterly at the rate
of % per annum of the $25 liquidation preference (equivalent to $ per
annum per share). Such distributions shall be cumulative from the date of
original issue and shall be payable quarterly on the of each ,
, and of each year or, if not a business day, the next
succeeding business day (each a 'Distribution Payment Date'). The first
distribution, which will be paid on , 1998, will be for less than a full
quarter. Such distribution and any distribution payable on the Series D
Preferred Shares for any partial distribution period will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Distributions will
be payable to holders of record as they appear on the stock transfer books of
the Company at the close of business on the applicable record date, which shall
be fixed by the Board and which shall be not more than 60 nor less than 10 days
prior to such Distribution Payment Date (each a 'Distribution Record Date').
After full distributions on the Series D Preferred Shares have been paid or
declared and funds set aside for payment for all past distribution periods and
for the then current quarter, the holders of Series D Preferred Shares will not
be entitled to any further distributions with respect to that quarter.
When distributions are not paid in full upon the Series D Preferred Shares
and any other series of Parity Preferred Shares, all distributions declared upon
the Series D Preferred Shares and any other Parity Preferred Shares shall be
declared pro rata so that the amount of distributions declared per share on such
Series D Preferred Shares and such other Parity Preferred Shares shall in all
cases bear to each other the same ratio that the accrued distributions per share
on the Series D Preferred Shares and such other Parity Preferred Shares bear to
each other. Except as set forth in the preceding sentence, unless full
distributions on the Series D Preferred Shares have been
S-35
or contemporaneously are authorized and paid or authorized and a sum sufficient
for the payment thereof set apart for payment for all past distribution periods
and the then current distribution period, no distributions (other than in Common
Shares or other shares of equity securities of the Company ranking junior to the
Series D Preferred Shares as to distributions and upon liquidation) shall be
authorized or paid or set aside for payment on the Common Shares or on any other
shares of equity securities of the Company ranking junior to or on a parity with
the Series D Preferred Shares as to distributions or upon liquidation. Unless
full distributions on the Series D Preferred Shares have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof set apart for payment for all past distribution periods and
the then current distribution period, no Common Shares or any other shares of
equity securities of the Company ranking junior to or on a parity with the
Series D Preferred Shares as to distributions or upon liquidation (including
less than all of Series D Preferred Shares) shall be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid or made
available for a sinking fund for the redemption of any such shares) by the
Company or any subsidiary of the Company except by conversion into or exchange
for shares of equity securities of the Company ranking junior to the Series D
Preferred Shares as to distributions and upon liquidation. See 'Description of
Series D Preferred Shares--Redemption' for similar restrictions on the
redemption, purchase or other acquisition of the Series D Preferred Shares.
No distributions on the Series D Preferred Shares shall be authorized by
the Board or paid or set apart for payment by the Company at such time as the
terms and provisions of any agreement of the Company, including any agreement
relating to its indebtedness, prohibits such authorization, payment or setting
apart for payment or provides that such authorization, payment or setting apart
for payment would constitute a breach thereof or a default thereunder, or if
such authorization or payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, distributions on the Series D Preferred
Shares will accrue whether or not the Company has earnings, whether or not there
are funds legally available for the payment of such distributions, whether or
not any agreement of the Company prohibits payment of such distributions, and
whether or not such distributions are authorized. Accrued but unpaid
distributions on the Series D Preferred Shares will not bear interest and
holders of Series D Preferred Shares shall not be entitled to any distribution,
whether payable in cash, property or shares of beneficial interest, in excess of
full cumulative distributions on the Series D Preferred Shares as provided
above. See 'Description of Preferred Shares--Distributions' in the accompanying
Prospectus.
Any distribution payment made on the Series D Preferred Shares shall first
be credited against the earliest accrued but unpaid distribution due with
respect to such shares which remains payable.
If, for any taxable year, the Company elects to designate as 'capital gain
dividends' (as defined in Section 857 of the Code) any portion (the 'Capital
Gains Amount') of the dividends (within the meaning of the Code) paid for the
year to holders of all classes of shares of beneficial interest in the Company
(the 'Total Distributions'), then the portion of the Capital Gains Amount that
will be allocable to the holders of the Series D Preferred Shares will be the
Capital Gains Amount multiplied by a fraction, the numerator of which will be
the total dividends (within the meaning of the Code) paid to the holders of the
Series D Preferred Shares for the year and the denominator of which shall be the
Total Distributions.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Shares or any other class or series of shares
of beneficial interest of the Company ranking junior to the Series D Preferred
Shares in the distribution of assets upon any liquidation, dissolution or
winding up of the Company, the holders of Series D Preferred Shares shall be
entitled to receive, after payment or provision for payment of the Company's
debts and other liabilities, out of assets of the Company legally available for
distribution to shareholders, a liquidation preference of $25 per share, plus an
amount equal to any accrued and unpaid distributions to the date of such
liquidation, dissolution or winding up (whether or not declared). After payment
of the full amount of the liquidating distributions to which they are entitled,
the holders of Series D Preferred Shares will have no right or claim to any of
the remaining assets of the Company.
S-36
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the legally available assets of the Company are
insufficient to pay the amount of the liquidating distributions on all
outstanding Series D Preferred Shares and the corresponding amounts payable on
all shares of other classes or series of equity security of the Company ranking
on a parity with the Series D Preferred Shares in the distribution of assets
upon liquidation, dissolution or winding up, then the holders of the Series D
Preferred Shares and all other such classes or series of equity security 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 Series D Preferred Shares, the remaining assets of the Company shall
be distributed among the holders of any other classes or series of equity
security ranking junior to the Series D Preferred Shares 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 purposes of this section, a distribution of assets in any dissolution,
winding up or liquidation will not include (i) any consolidation or merger of
the Company with or into any other entity, (ii) any dissolution, liquidation,
winding up, or reorganization of the Company immediately followed by
incorporation of another entity to which such assets are distributed or (iii) a
sale or other disposition of all or substantially all of the Company's assets to
another entity; provided that, in each case, effective provision is made in the
charter of the resulting and surviving entity or otherwise for the recognition,
preservation and protection of the rights of the holders of Series D Preferred
Shares.
REDEMPTION
Except in certain circumstances relating to the Company's maintenance of
its ability to qualify as a REIT under the Code as described under 'Description
of Common Shares--Restrictions on Ownership' in the accompanying Prospectus, the
Series D Preferred Shares are not redeemable prior to , 2002. On any date
as fixed by the Board on or after , 2002, the Company, upon not less than
30 nor more than 60 days' written notice, may redeem the Series D Preferred
Shares, in whole or in part, at any time or from time to time, for cash at a
redemption price of $25 per share, plus all accrued and unpaid distributions
thereon, if any (whether or not declared), to the date fixed for redemption
(except as provided below), without interest, to the extent the Company will
have funds legally available therefore. The redemption price of the Series D
Preferred Shares (other than any portion thereof consisting of accrued and
unpaid dividends) is payable solely out of the sale proceeds of other capital
shares of the Company and not from any other source. For purposes of the
preceding sentence, 'capital shares' means any common shares of beneficial
interest, preferred shares, depositary shares, interests, participation or other
ownership interests (however designated) and any rights (other than debt
securities convertible into or exchangeable for equity securities) or options to
purchase any of the foregoing of or in the Company. Holders of Series D
Preferred Shares to be redeemed shall surrender such Series D Preferred Shares
at the place designated in such notice and shall be entitled to the redemption
price and any accrued and unpaid distributions payable upon such redemption
following such surrender. If notice of redemption of any Series D Preferred
Shares has been given and if the funds necessary for such redemption have been
set aside by the Company in trust for the benefit of the holders of any Series D
Preferred Shares so called for redemption, then from and after the redemption
date distributions will cease to accrue on such Series D Preferred Shares, such
shares of Series D Preferred Shares shall no longer be deemed outstanding and
all rights of the holders of such shares will terminate, except the right to
receive the redemption price plus any accrued and unpaid distributions payable
upon such redemption. If fewer than all of the outstanding Series D Preferred
Shares are to be redeemed, the number of shares to be redeemed will be
determined by the Board and such shares shall be redeemed pro rata from the
holders of record thereof in proportion to the number of such shares held by
such holders (with adjustments to avoid redemption of fractional shares) or by
any other equitable method determined by the Company.
Notwithstanding the foregoing, unless full cumulative distributions on all
Series D Preferred Shares shall have been or contemporaneously are authorized
and paid or authorized and a sum sufficient for the payment thereof set apart
for payment for all past distribution periods, no Series D Preferred Shares
shall be redeemed unless all outstanding Series D Preferred Shares are
simultaneously redeemed and the Company shall not purchase or otherwise acquire
directly or indirectly any Series D Preferred Shares (except by exchange for
shares of beneficial interest of the Company ranking junior to the Series D
Preferred Shares as to distributions and upon
S-37
liquidation); provided, however, that the foregoing shall not prevent the
purchase by the Company of Excess Shares (as defined in 'Description of Common
Shares--Restrictions on Ownership' in the accompanying Prospectus) in order to
ensure that the Company remains qualified as a REIT for federal income tax
purposes, or the purchase or acquisition of Series D Preferred Shares pursuant
to a purchase or exchange offer made on the same terms to holders of all
outstanding Series D Preferred Shares.
Notice of redemption will be given by publication in a newspaper of general
circulation in 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 the Company, postage
prepaid, not less than 30 nor more than 60 days prior to the redemption date,
addressed to the respective holders of record of Series D Preferred Shares to be
redeemed at their respective addresses as shown on the stock transfer books of
the Company. No failure to give such notice or any defect thereto or in the
mailing thereof shall affect the validity of the proceedings for the redemption
of any Series D Preferred Shares except as to the holder to whom notice was
defective or not given. Each notice shall state: (i) the redemption date; (ii)
the redemption price; (iii) the number of Series D Preferred Shares to be
redeemed; (iv) the place or places where the Series D Preferred Shares are to be
surrendered for payment of the redemption price; and (v) that distributions on
the Series D Preferred Shares to be redeemed will cease to accrue on such
redemption date. If fewer than all the Series D Preferred Shares held by any
holder are to be redeemed, the notice mailed to such holder shall also specify
the number of Series D Preferred Shares to be redeemed from such holder.
In order to facilitate the redemption of the Series D Preferred Shares, the
Board may fix a record date for the determination of Series D Preferred Shares
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. Except as provided above, the
Company will make no payment or allowance for unpaid distributions, whether or
not in arrears, on Series D Preferred Shares for which a notice of redemption
has been given.
The Series D Preferred Shares have no stated maturity and will not be
subject to any sinking fund or mandatory redemption provisions (except as
provided under '--Restrictions on Ownership and Transfer').
Subject to applicable law and the limitation on purchases when
distributions on the Series D Preferred Shares are in arrears, the Company may,
at any time and from time to time, purchase any Series D Preferred Shares in the
open market, by tender or by private agreement.
VOTING RIGHTS
Holders of the Series D Preferred Shares will not have any voting rights,
except as set forth below.
Whenever distributions on any Series D Preferred Shares shall be in arrears
for six or more quarterly periods (whether or not consecutive), the holders of
such Series D Preferred Shares (voting separately as a class with all other
series of Preferred Shares upon which like voting rights have been conferred and
are exercisable) will be entitled to vote for the election of two additional
trustees of the Company at a special meeting called by the holders of record of
at least 20% of the outstanding Series D Preferred Shares or the holders of
shares of any series of Preferred Shares so in arrears (unless such request is
received less than 90 days before the date fixed for the next annual or special
meeting of the shareholders) or at the next annual meeting of shareholders and
at each subsequent meeting until all distributions accumulated on such Series D
Preferred Shares for the past distribution periods and the then current
distribution period shall have been fully paid or authorized and declared and a
sum sufficient for the payment thereof set aside for payment in full. In such
case, the entire Board will be increased by two trustees.
The affirmative vote or consent of the holders of at least two-thirds of
the outstanding Series D Preferred Shares and of any series of Parity Preferred
Shares, voting as a single class, will be required to authorize another class of
equity securities senior to the Series D Preferred Shares with respect to the
payment of distributions or the distribution of assets on liquidation. The
affirmative vote or consent of the holders of at least two-thirds of the
outstanding Series D Preferred Shares will be required to amend, alter or repeal
any provision of, or add any provision to, the Declaration of Trust, including
the Articles Supplementary, if such action would materially and adversely alter
or change the rights, preferences or privileges of the Series D Preferred
Shares. No such vote or consent is required in connection with (i) any increase
in the total number of authorized Common Shares; (ii) the
S-38
authorization or increase of any class or series of shares of beneficial
interest ranking, as to distribution rights and liquidation preference, on a
parity with or junior to the Series D Preferred Shares; (iii) any merger or
consolidation in which the Company is the surviving entity if, immediately after
the merger or consolidation, there are outstanding no shares of beneficial
interest and no securities convertible into shares of beneficial interest
ranking as to distribution rights or liquidation preference senior to the Series
D Preferred Shares other than the securities of the Company outstanding prior to
such merger or consolidation; (iv) any merger or consolidation in which the
Company is not the surviving entity if, as result of the merger or
consolidation, the holders of Series D Preferred Shares receive shares of stock
or beneficial interest or other equity securities with preferences, rights and
privileges substantially identical with the preferences, rights and privileges
of the Series D Preferred Shares and there are outstanding no shares of stock or
beneficial interest or other equity securities of the surviving entity ranking
as to distribution rights or liquidation preference senior to the Series D
Preferred Shares other than the securities of the Company outstanding prior to
such merger or consolidation; or (v) if, at or prior to the time when the
issuance of any such shares ranking senior to the Series D Preferred Shares is
to be made or any such change is to take effect, as the case may be, proper
notice has been given and sufficient funds have been irrevocably deposited in
trust for the redemption of all the then outstanding Series D Preferred Shares.
CONVERSION
The Series D Preferred Shares are not convertible into or exchangeable for
any other property or securities of the Company.
TRANSFER AGENT
The registrar, transfer agent and distribution disbursing agent for the
Series D Preferred Shares will be First Union National Bank.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Ownership of Series D Preferred Shares by any person is limited, with
certain exceptions, to 9.8% of the lesser of the number or value of the
Company's total outstanding shares of beneficial interest. For information
regarding additional restrictions on ownership and transfer of the Series D
Preferred Shares, see 'Description of Common Shares--Restrictions on Ownership'
in the accompanying Prospectus.
In addition to the restrictions on ownership and transfer set forth in the
Declaration of Trust, the Articles Supplementary provide, subject to certain
exceptions, that no person may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 10% (the 'Series D Preferred Share
Ownership Limit') of the number or value of the outstanding Series D Preferred
Shares.
The Board, in its sole discretion, may exempt a proposed transferee from
the Series D Preferred Share Ownership Limit (an 'Excepted Holder'). However,
the Board may not grant such an exemption to any person if such exemption would
result in the Company being 'closely held' within the meaning of Section 856(h)
of the Code or otherwise would result in the Company failing to qualify as a
REIT. In order to be considered by the Board of Trustees as an Excepted Holder,
a person also must not own, directly or indirectly, an interest in a tenant of
the Company (or a tenant of any entity owned or controlled by the Company) that
would cause the Company to own, directly or indirectly, more than a 10% interest
in such a tenant. The person seeking an exemption must represent to the
satisfaction of the Board of Trustees that it will not violate the two
aforementioned restrictions. The person also must agree that any violation or
attempted violation of any of the foregoing restrictions will result in the
automatic transfer of the shares of stock causing such violation to the Trust
(as defined below).
Any person who acquires or attempts or intends to acquire beneficial or
constructive ownership of Series D Preferred Shares that will or may violate any
of the foregoing restrictions on transferability and ownership, or any person
who would have owned Series D Preferred Shares that resulted in a transfer of
shares to the Trust, is required to give notice immediately to the Company and
provide the Company with such other information as the Company may request in
order to determine the effect of such transfer on the Company's status as a
REIT.
S-39
If any transfer of Series D Preferred Shares occurs which, if effective,
would result in any person beneficially or constructively owning Series D
Preferred Shares in excess or in violation of the Series D Ownership Limit (a
'Prohibited Owner'), then that number of Series D Preferred Shares the
beneficial or constructive ownership of which otherwise would cause such person
to violate such limitations (rounded to the nearest whole share) shall be
automatically transferred to a trust (the 'Trust') for the exclusive benefit of
one or more charitable beneficiaries (the 'Charitable Beneficiary'), and the
Prohibited Owner shall not acquire any rights in such shares. Such automatic
transfer shall be deemed to be effective as of the close of business on the
Business Day (as defined in the Articles Supplementary) prior to the date of
such violative transfer. Series D Preferred Shares held in the Trust shall be
issued and outstanding shares. The Prohibited Owner shall not benefit
economically from ownership of any Series D Preferred Shares held in the Trust,
shall have no rights to dividends and shall not possess any rights to vote or
other rights attributable to the Series D Preferred Shares held in the Trust.
The trustee of the Trust (the 'Trustee') shall have all voting rights and rights
to dividends or other distributions with respect to Series D Preferred Shares
held in the Trust, which rights shall be exercised for the exclusive benefit of
the Charitable Beneficiary. Any dividend or other distribution paid prior to the
discovery by the Company that Series D Preferred Shares have been transferred to
the Trustee shall be paid by the recipient of such dividend or distribution to
the Trustee upon demand, and any dividend or other distribution authorized but
unpaid shall be paid when due to the Trustee. Any dividend or distribution so
paid to the Trustee shall be held in trust for the Charitable Beneficiary. The
Prohibited Owner shall have no voting rights with respect to shares of
beneficial interest held in the Trust and, subject to Maryland law, effective as
of the date that such Series D Preferred Shares have been transferred to the
Trust, the Trustee shall have the authority (at the Trustee's sole discretion)
(i) to rescind as void any vote cast by a Prohibited Owner prior to the
discovery by the Company that such Series D Preferred Shares have been
transferred to the Trust and (ii) to recast such vote in accordance with the
desires of the Trustee acting for the benefit of the Charitable Beneficiary.
However, if the Company has already taken irreversible trust action, then the
Trustee shall not have the authority to rescind and recast such vote.
Within 20 days of receiving notice from the Company that Series D Preferred
Shares have been transferred to the Trust, the Trustee shall sell the Series D
Preferred Shares held in the Trust to a person, designated by the Trustee, whose
ownership of the Series D Preferred Shares will not violate the ownership
limitations set forth in the Articles Supplementary. Upon such sale, the
interest of the Charitable Beneficiary in the shares sold shall terminate and
the Trustee shall distribute the net proceeds of the sale to the Prohibited
Owner and to the Charitable Beneficiary as follows. The Prohibited Owner shall
receive the lesser of (i) the price paid by the Prohibited Owner for the shares
or, if the Prohibited Owner did not give value for the shares in connection with
the event causing the shares to be held in the Trust (e.g., a gift, devise or
other such transaction), the Market Price (as defined in the Articles
Supplementary) of such shares on the day of the event causing the shares to be
held in the Trust and (ii) the price per share received by the Trustee from the
sale or other disposition of the shares held in the Trust. Any net sale proceeds
in excess of the amount payable to the Prohibited Owner shall be paid
immediately to the Charitable Beneficiary. If, prior to the discovery by the
Company that Series D Preferred Shares have been transferred to the Trust, such
shares are sold by a Prohibited Owner, then (i) such shares shall be deemed to
have been sold on behalf of the Trust and (ii) to the extent that the Prohibited
Owner received an amount for such shares that exceeds the amount that such
Prohibited Owner was entitled to receive pursuant to the aforementioned
requirement, such excess shall be paid to the Trustee upon demand.
In addition, Series D Preferred Shares held in the Trust shall be deemed to
have been offered for sale to the Company, or its designee, at a price per share
equal to the lesser of (i) the price per share in the transaction that resulted
in such transfer to the Trust (or, in the case of a devise or gift, the Market
Price at the time of such devise or gift) and (ii) the Market Price on the date
the Company, or its designee, accepts such offer. The Company shall have the
right to accept such offer until the Trustee has sold the Series D Preferred
Shares held in the Trust. Upon such a sale to the Company, the interest of the
Charitable Beneficiary in the shares sold shall terminate and the Trustee shall
distribute the net proceeds of the sale to the Prohibited Owner.
All certificates representing Series D Preferred Shares will bear a legend
referring to the restrictions described above.
Every owner of more than 5% of Series D Preferred Shares, within 30 days
after the end of each taxable year, is required to give written notice to the
Company stating the name and address of such owner, the number
S-40
of shares of each class and series of shares of beneficial interest of the
Company which the owner beneficially owns and a description of the manner in
which such shares are held. Each such owner shall provide to the Company such
additional information as the Company may request in order to determine the
effect, if any, of such beneficial ownership on the Company's status as a REIT
and to ensure compliance with the Series D Preferred Share Ownership Limit. In
addition, each shareholder shall upon demand be required to provide to the
Company such information as the Company may request, in good faith, in order to
determine the Company's status as a REIT and to comply with the requirements of
any taxing authority or governmental authority or to determine such compliance.
These ownership limitations could delay, defer or prevent a transaction or
a change in control of the Company that might involve a premium price for the
Series D Preferred Shares or otherwise be in the best interest of the
shareholders. See 'Risk Factors--Anti-Takeover Effects of Ownership Limit,
Maryland Law and a Staggered Board.'
S-41
UNDERWRITING
Under the terms and subject to the Underwriting Agreement dated the date
hereof, each of the Underwriters named below (each, an 'Underwriter' and
together, the 'Underwriters'), has severally agreed to purchase, and the Company
has agreed to sell to each Underwriter, the number of Series D Preferred Shares
set forth opposite the name of such Underwriter below:
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ---------
Smith Barney Inc.................................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
Friedman, Billings, Ramsey & Co., Inc............................................
Salomon Brothers Inc.............................................................
---------
Total.......................................................................... 3,000,000
---------
---------
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Series D Preferred Shares are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all of the Series
D Preferred Shares offered hereby (other than those covered by the
over-allotment option described below) if any such shares are taken.
The Underwriters initially propose to offer part of the Series D Preferred
Shares directly to the public at the public offering price set forth on the
cover page of this Prospectus Supplement and part to certain dealers at a price
which represents a concession not in excess of $ per share under the
public offering price. Each Underwriter may allow, and such dealers may
re-allow, a concession not in excess of $ per share to the other
Underwriters or to certain other dealers. After the initial public offering, the
public offering price and such concessions may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to an aggregate
of 450,000 additional Series D Preferred Shares at the public offering price set
forth on the cover page of this Prospectus Supplement, minus the underwriting
discounts and commissions. The Underwriters may exercise such option to purchase
additional Series D Preferred Shares solely for the purpose of covering
over-allotments, if any, incurred in connection with the sale of the Series D
Preferred Shares offered hereby. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional Series D Preferred Shares
as the number of Series D Preferred Shares set forth opposite such Underwriter's
name in the preceding table bears to the total number of Series D Preferred
Shares in such table.
In connection with this offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Series D Preferred Shares than the
total amount shown on the list of Underwriters and participations which appears
above) and may effect transactions which stabilize, maintain or otherwise affect
the market price of the Series D Preferred Shares at levels above those which
might otherwise prevail in the open market. Such transactions may include
placing bids for the Series D Preferred Shares or effecting purchases of the
Series D Preferred Shares for the purpose of pegging, fixing or maintaining the
price of the Series D Preferred Shares or
S-42
for the purpose of reducing a syndicate short position created in connection
with this Offering. A syndicate short position may be covered by exercise of the
option described above in lieu of or in addition to open market purchases. In
addition, the contractual arrangements among the Underwriters include a
provision whereby, if the Underwriters purchase Series D Preferred Shares in the
open market for the account of the underwriting syndicate and the securities
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling group
member in question to purchase the Series D Preferred Shares in question at the
cost price to the syndicate or may recover from (or decline to pay to) the
Underwriter or the selling group member in question the selling concession
applicable to the securities in question. The Underwriters are not required to
engage in any of these activities and any such activities, if commenced, may be
discontinued at any time.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
The Company has applied to the NYSE for listing of the Series D Preferred
Shares, subject to official notice of issuance, under the symbol 'KRTpfD.' Prior
to this Offering, there has been no public market for the Series D Preferred
Shares. Trading of the Series D Preferred Shares on the NYSE is expected to
commence within 30 days after the initial delivery of the Series D Preferred
Shares. The Underwriters have advised the Company that they intend to make a
market in the Series D Preferred Shares prior to the commencement of trading on
the NYSE, but are not obligated to do so and may discontinue market making at
any time without notice. No assurance can be given that a market for the Series
D Preferred Shares will exist prior to commencement of trading or at any other
time.
Salomon Brothers Realty Corp., an affiliate of Salomon Brothers Inc, is the
lender under the Salomon Facility and will receive the proceeds of any repayment
of any indebtedness under the Salomon Facility. See 'Use of Proceeds.'
In the ordinary course of their respective businesses, certain of the
Underwriters and/or affiliates of such Underwriters have engaged, and may in the
future engage, in investment banking, investment advisory and/or commercial
banking transactions with the Company and its affiliates for which customary
compensation has been, and will be, received.
LEGAL MATTERS
The validity of the Series D Preferred Shares offered hereby will be passed
upon for the Company by Robinson Silverman Pearce Aronsohn & Berman LLP, New
York, New York and for the Underwriters by Battle Fowler LLP, New York, New
York. Certain matters of Maryland law will be passed upon for the Company by
Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland.
S-43
(This page intentionally left blank)
PROSPECTUS
KRANZCO REALTY TRUST
$100,000,000
DEBT SECURITIES, PREFERRED SHARES,
COMMON SHARES, WARRANTS AND RIGHTS
------------------------
Kranzco Realty Trust (the 'Company') may from time to time offer in one or
more series its (i) unsecured debt securities, which may be either senior debt
securities ('Senior Securities') or subordinated debt securities ('Subordinated
Securities,' and together with Senior Securities, the 'Debt Securities'), (ii)
preferred shares of beneficial interest, par value $.01 per share ('Preferred
Shares'), (iii) common shares of beneficial interest, par value $.01 per share
('Common Shares'), (iv) warrants to purchase Debt Securities, Preferred Shares
or Common Shares (collectively, 'Warrants'), or (v) rights to purchase Common
Shares ('Rights'), with an aggregate initial public offering price of up to
$100,000,000 on terms to be determined at the time of offering. Debt Securities,
Preferred Shares, Common Shares, Warrants and Rights (collectively, the 'Offered
Securities') may be offered, separately or together, in separate series in
amounts, at prices and on terms to be set forth in a supplement to this
Prospectus (a 'Prospectus Supplement').
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable: (i) in the case of Debt
Securities, the specific title, aggregate principal amount, ranking, currency,
form (which may be registered or bearer, or certificated or global), authorized
denominations, maturity, rate (or manner of calculation thereof) and time of
payment of interest, terms for redemption at the option of the Company or
repayment at the option of the holder, terms for sinking fund payments, terms
for conversion into Preferred Shares or Common Shares, certain covenants, other
terms and conditions, and the initial public offering price; (ii) in the case of
Preferred Shares, the number, specific title and par value, any distribution or
liquidation preference, any redemption, conversion or voting rights and other
terms and conditions, and the initial public offering price; (iii) in the case
of Common Shares, any initial public offering price; (iv) in the case of
Warrants, the number and terms thereof, the designation and the number of
securities issuable upon their exercise, the exercise price, the terms of the
offering and sale thereof and, where applicable, the duration and detachability
thereof; and (v) in the case of Rights, the duration, exercise price and
transferability thereof. In addition, such specific terms may include
limitations on direct or beneficial ownership and restrictions on transfer of
certain types of Offered Securities, in each case as may be appropriate to
preserve the status of the Company as a real estate investment trust ('REIT')
for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by such Prospectus Supplement.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company, or to or through underwriters or dealers. If
any agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in the applicable Prospectus
Supplement. See 'Plan of Distribution.' No Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such series of Offered Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 26, 1997.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the 'Commission'). The reports, proxy
statements and other information filed by the Company with the Commission in
accordance with the Exchange Act can be inspected and copied at the Commission's
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Company's Common Shares and 9.75%
Series B-1 Cumulative Convertible Preferred Shares of Beneficial Interest are
listed on the New York Stock Exchange and similar information concerning the
Company can be inspected and copied at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement (the
'Registration Statement') (of which this Prospectus is a part) under the
Securities Act of 1933, as amended (the 'Securities Act'), with respect to the
Offered Securities. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement or to previous filings made by the Company with the
Commission, each such statement being qualified in all respects by such
reference and the exhibits and schedules thereto. For further information
regarding the Company and the Offered Securities, reference is hereby made to
the Registration Statement, the previous filings made by the Company with the
Commission and the exhibits and schedules thereto, which may be obtained from
the Commission (i) at its principal office in Washington, D.C., upon payment of
the fees prescribed by the Commission or (ii) by consulting the Commission's Web
site at the address of http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Exchange Act with the Commission and are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
2. The Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997.
3. The Company's Current Report on Form 8-K dated February 27, 1997,
filed March 14, 1997, as amended by Form 8-K/A dated May 6, 1997, filed May
8, 1997.
4. The Company's Current Report on Form 8-K dated November 7, 1997
filed November 25, 1997.
5. The description of the Company's Common Shares contained in the
Registration Statement on Form S-11 (No. 33-49434), and the documents
incorporated therein by reference, as amended by Amendment No. 1, filed
with the Commission on October 16, 1992, Amendment No. 2, filed with the
Commission on November 4, 1992 and Amendment No. 3, filed with the
Commission on November 10, 1992, dated November 10, 1992.
6. The description of the Company's Series A-1 Preferred Shares (as
defined below), contained in the Registration Statement on Form S-4 (No.
333-18249), and the documents incorporated therein by reference, as amended
by Amendment No. 1, filed with the Commission on January 29, 1997.
7. The description of the Company's Series B-1 Preferred Shares (as
defined below) contained in the Registration Statement on Form 8-A (No.
1-11478), and the documents incorporated therein by reference, as amended
by Amendment No. 1, filed with the Commission on June 2, 1997.
2
8. The description of the Company's Series B-2 Preferred Shares and
Series C Preferred Shares (each, as defined below), contained in the
Company's Current Report on Form 8-K dated February 27, 1997.
9. All other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since December 31, 1996.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Offered
Securities shall be deemed to be incorporated by reference in this Prospectus
and to be a part hereof from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person to whom this Prospectus is delivered, upon written
or oral request. Requests should be directed to Kranzco Realty Trust, Attention:
Robert H. Dennis, 128 Fayette Street, Conshohocken, Pennsylvania 19428
(Telephone Number: (610) 941-9292).
THE COMPANY
Kranzco Realty Trust is a self-administered and self-managed equity real
estate investment trust (a 'REIT') engaged in the business of owning, managing,
operating, leasing, acquiring and expanding neighborhood and community shopping
centers and free-standing retail properties. The Company owns and operates 43
neighborhood and community shopping centers and 11 free-standing properties
(collectively, the 'Properties') aggregating approximately 7.0 million square
feet of gross leasable area ('GLA') located in the Northeast, Mid-Atlantic and
Southern regions of the United States with a diverse base of approximately 550
tenants.
The Company's primary business objective is to achieve growth in its funds
from operations by enhancing the operating performance of the Properties and,
through selective acquisitions, the value of its portfolio. The Company's
operating strategies are to: (i) focus on the neighborhood and community
shopping center business; (ii) actively manage its properties for long term
growth in funds from operations and capital appreciation; (iii) increase
portfolio occupancy by capitalizing on management's reputation and long-standing
relationships with national and regional tenants and extensive experience in
marketing to local tenants, as well as the negotiating leverage inherent in a
large portfolio of properties; (iv) maintain, renovate, expand and reconfigure
its properties; (v) optimize the tenant mix in each shopping center; (vi)
develop or ground lease outparcels or expansion areas existing from time to time
at properties for use as restaurants, banks, auto centers, cinemas or other
facilities; and (vii) benefit from economies of scale by spreading overhead
expenses over a larger asset base.
The Company's acquisition strategy is to opportunistically acquire
properties which need replacement anchor tenants, or where the Company's
management expertise and reputation can enhance value. That strategy includes
acquiring and rehabilitating properties in new markets with strong demographic
characteristics in order to reduce the Company's sensitivity to regional
economic cycles.
The Company was formed on June 17, 1992 as a Maryland real estate
investment trust. The Company's executive offices are located at 128 Fayette
Street, Conshohocken, Pennsylvania 19428, and its telephone number is (610)
941-9292.
3
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios of earnings to fixed
charges for the Company for the periods indicated and for the predecessors to
the Company, Kranzco Controlled Properties, for the period January 1, 1992 to
November 18, 1992:
KRANZCO
CONTROLLED
PROPERTIES
KRANZCO REALTY TRUST ----------
------------------------------------------------------------------------- JAN. 1,
NINE MONTHS FOR THE 12 MONTHS ENDED DEC. 31, 1992-
ENDED -------------------------------- NOV. 19, 1992- NOV. 18,
SEPTEMBER 30, 1997 1996 1995 1994 1993 DEC. 31, 1992 1992
------------------ ---- ---- ---- ---- -------------- ----------
Ratio of Earnings
to Fixed Charges....... 1.31 1.41(1) 1.50 1.72 1.99 1.73 1.01
----- ---- ---- ---- ---- ----- -----
----- ---- ---- ---- ---- ----- -----
- ------------------
(1) Excludes $11,052,000 extraordinary loss on refinancing.
For purposes of computing the ratio of earnings to fixed charges: (a)
earnings have been based on income (loss) from continuing operations before
fixed charges (exclusive of interest capitalized) and (b) fixed charges consist
of interest and amortization of deferred financing costs (including amounts
capitalized) and distributions on the Series A-1 Preferred Shares, the Series
B-1 Preferred Shares, the Series B-2 Preferred Shares and the Series C Preferred
Shares (each, as defined below).
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Offered Securities
for general working capital purposes, which may include the acquisition of
shopping centers as suitable opportunities arise, the expansion and improvement
of certain properties owned or to be owned by the Company, the repayment of
certain indebtedness outstanding at such time, and working capital.
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions
of the Debt Securities to which any Prospectus Supplement may relate. The
particular terms of the Debt Securities being offered and the extent to which
such general provisions may apply will be described in a Prospectus Supplement
relating to such Debt Securities.
The Senior Securities are to be issued under an Indenture, as amended or
supplemented from time to time (the 'Senior Securities Indenture'), between the
Company and a trustee to be selected by the Company (the 'Senior Securities
Trustee') and the Subordinated Securities are to be issued under an Indenture,
as amended or supplemented from time to time (the 'Subordinated Securities
Indenture'), between the Company and a trustee to be selected by the Company
(the 'Subordinated Securities Trustee'). The Senior Securities Indenture and the
Subordinated Securities Indenture are referred to herein individually as the
'Indenture' and collectively as the 'Indentures,' and the Senior Securities
Trustee and the Subordinated Securities Trustee are referred to herein
individually as the 'Trustee' and collectively as the 'Trustees.' A form of the
Senior Securities Indenture and a form of the Subordinated Securities Indenture
will be filed as exhibits to the Registration Statement of which this Prospectus
is a part and will be available for inspection at the corporate trust offices of
the respective Trustees or as described above under 'Available Information.' The
Indentures will be subject to and governed by the Trust Indenture Act of 1939,
as amended (the 'TIA'). The description of the Indentures set forth below
assumes that the Company has entered into the Indentures. The Company will
execute the applicable Indenture when and if the Company issues Debt Securities.
The statements made hereunder relating to the Indentures and the Debt Securities
to be issued thereunder are summaries of certain provisions thereof and do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all provisions of the Indentures and such Debt Securities.
4
Unless otherwise specified, all capitalized terms used but not defined
herein shall have the meanings set forth in the Indentures.
GENERAL
The Debt Securities will be direct, unsecured obligations of the Company.
Senior Securities will rank pari passu with certain other senior debt of the
Company that may be outstanding from time to time, and will rank senior to all
Subordinated Securities that may be outstanding from time to time. Subordinated
Securities will be subordinated in right of payment to the prior payment in full
of the Senior Debt of the Company, as described under 'Subordination.'
Each Indenture provides that the Debt Securities may be issued without
limit as to aggregate principal amount, in one or more series, in each case as
established from time to time in or pursuant to authority granted by a
resolution of the Board of Trustees of the Company or as established in one or
more indentures supplemental to the Indenture. All Debt Securities of one series
need not be issued at the same time and, unless otherwise provided, a series may
be reopened, without the consent of the Holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series.
Each Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
either Indenture may resign or be removed with respect to one or more series of
Debt Securities, and a successor Trustee shall be appointed by the Company, by
or pursuant to a resolution adopted by the Board of Trustees, to act with
respect to such series. In the event that two or more persons are acting as
Trustee with respect to different series of Debt Securities, each such Trustee
shall be a Trustee of a trust under the applicable Indenture separate and apart
from the trust administered by any other Trustee thereunder, and, except as
otherwise indicated herein or therein, any action described herein or therein to
be taken by the Trustee may be taken by each such Trustee with respect to, and
only with respect to, the one or more series of Debt Securities for which it is
Trustee under the applicable Indenture.
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including:
(1) the title of such Debt Securities;
(2) the classification of such Debt Securities as Senior Securities or
Subordinated Securities;
(3) the aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
(4) the percentage of the principal amount at which such Debt
Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the portion of the
principal amount of such Debt Securities which is convertible into Common
Shares or Preferred Shares, or the method by which any such portion shall
be determined;
(5) if convertible, in connection with the preservation of the
Company's status as a REIT, any applicable limitations on the ownership or
transferability of the Common Shares or Preferred Shares into which such
Debt Securities are convertible;
(6) the date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable;
(7) the rate or rates (which may be fixed or variable), or the method
by which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(8) the date or dates, or the method for determining such date or
dates, from which any such interest will accrue, the Interest Payment Dates
on which any such interest will be payable, the Regular Record Dates for
such Interest Payment Dates, or the method by which such dates shall be
determined, the Person to whom such interest shall be payable, and the
basis upon which interest shall be calculated if other than that of a
360-day year of twelve 30-day months;
(9) the place or places where the principal of (and premium or
Make-Whole Amount, if any) and interest and Additional Amounts, if any, on
such Debt Securities will be payable, such Debt Securities may be
surrendered for conversion or registration of transfer or exchange and
notices or demands to or upon the Company in respect of such Debt
Securities and the applicable Indenture may be served;
5
(10) the period or periods within which, the price or prices
(including premium or Make-Whole Amount, if any) at which and the terms and
conditions upon which such Debt Securities may be redeemed, in whole or in
part, at the option of the Company, if the Company is to have such an
option;
(11) the obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a Holder thereof, and the period or periods
within which, the price or prices at which and the terms and conditions
upon which such Debt Securities will be redeemed, repaid or purchased, in
whole or in part, pursuant to such obligation;
(12) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(13) whether the amount of payments of principal of (and premium or
Make-Whole Amount, if any) or interest, if any, on such Debt Securities may
be determined with reference to an index, formula or other method (which
index, formula or other method may, but need not, be based on a currency,
currencies, currency unit or units or composite currency or currencies) and
the manner in which such amounts shall be determined;
(14) whether such Debt Securities will be issued in the form of one or
more global securities and whether such global securities are to be
issuable in a temporary global form or permanent global form;
(15) any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the Events of Default or covenants set
forth in the applicable Indenture;
(16) whether the principal of (and premium or Make-Whole Amount, if
any) or interest or Additional Amounts, if any, on such Debt Securities are
to be payable, at the election of the Company or a Holder, in one or more
currencies other than that in which such Debt Securities are denominated or
stated to be payable, the period or periods within which, and the terms and
conditions upon which, such election may be made, and the time and manner
of, and identity of the exchange rate agent with responsibility for,
determining the exchange rate between the currency or currencies in which
such Debt Securities are denominated or stated to be payable and the
currency or currencies in which such Debt Securities are to be so payable;
(17) whether such Debt Securities will be issued in certificated or
book-entry form;
(18) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and the terms and conditions relating thereto;
(19) the applicability, if any, of the defeasance and covenant
defeasance provisions of the applicable Indenture;
(20) if such Debt Securities are to be issued upon the exercise of
Warrants, the time, manner and place for such Debt Securities to be
authenticated and delivered;
(21) the terms, if any, upon which such Debt Securities may be
convertible into Common Shares or Preferred Shares and the terms and
conditions upon which such conversion will be effected, including, without
limitation, the initial conversion price or rate and the conversion period;
(22) whether and under what circumstances the Company will pay
Additional Amounts as contemplated in the applicable Indenture on such Debt
Securities in respect of any tax, assessment or governmental charge and, if
so, whether the Company will have the option to redeem such Debt Securities
in lieu of making such payment;
(23) the name of the applicable Trustee and the address of its
corporate trust office; and
(24) any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
6
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
('Original Issue Discount Securities') or that the principal amount thereof
payable at their stated maturity may be more or less than the principal face
amount thereof at original issuance ('Indexed Securities'). Special U.S. federal
income tax, accounting and other considerations applicable to Original Issue
Discount Securities will be described in the applicable Prospectus Supplement.
Except as set forth below under 'Certain Covenants--Senior Securities
Indenture Limitations on Incurrence of Debt,' neither Indenture contains any
other provisions that would limit the ability of the Company to incur
indebtedness or that would afford Holders of Debt Securities protection in the
event of a highly leveraged or similar transaction involving the Company or in
the event of a change of control. However, restrictions on ownership and
transfers of the Company's Common Shares and Preferred Shares are designed to
preserve its status as a REIT and, therefore, may delay, deter, or prevent a
change of control of the Company or other transaction that may be in the best
interests of the shareholders. See 'Description of Preferred Shares' and
'Description of Common Shares.'
Reference is made to the applicable Prospectus Supplement for information
with respect to any deletions from, modifications of or additions to the Events
of Default or covenants of the Company that are described below, including any
addition of a covenant or other provision providing event risk or similar
protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof. Unless otherwise described in the applicable
Prospectus Supplement, the Debt Securities of any series issued in bearer form
will be issuable in denominations of $5,000.
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and premium or Make-Whole Amount, if any) and interest on any
series of Debt Securities will be payable at an office or agency established by
the Company in accordance with the Indenture, provided that, at the option of
the Company, payment of interest may be made by check mailed to the address of
the Person entitled thereto as it appears in the Security Register or by wire
transfer of funds to such Person at an account maintained within the United
States.
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ('Defaulted Interest') will
forthwith cease to be payable to the Holder on the applicable Regular Record
Date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the 'Special
Record Date') for the payment of such Defaulted Interest to be fixed by the
applicable Trustee, notice whereof shall be given to the Holder of such Debt
Security not less than 10 days prior to such Special Record Date, or may be paid
at any time in any other lawful manner, all as more completely described in the
applicable Indenture.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the applicable Trustee or at an
office or agency established by the Company in accordance with the Indenture. In
addition, subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series may be surrendered for
exchange or registration of transfer thereof at the corporate trust office of
the applicable Trustee or at an office or agency established by the Company in
accordance with the Indenture. Every Debt Security surrendered for registration
of transfer or exchange shall be duly endorsed or accompanied by a written
instrument of transfer. No service charge will be made for any registration of
transfer or exchange of any Debt Securities, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith. If the applicable Prospectus Supplement refers to any
transfer agent (in addition to the Trustee) initially designated by the Company
with respect to any series of Debt Securities, the Company may at any time
rescind the designation of any such transfer agent or approve a change in the
location through which any such transfer agent acts, except that the Company
will be required to maintain a transfer agent in each Place of Payment for such
series. The Company may at any time designate additional transfer agents with
respect to any series of Debt Securities.
7
Neither the Company nor any Trustee shall be required to (i) issue,
register the transfer of or exchange Debt Securities of any series during a
period beginning at the opening of business 15 days before any selection of Debt
Securities of that series to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption; (ii) register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed in
part; or (iii) issue, register the transfer of or exchange any Debt Security
which has been surrendered for repayment at the option of the Holder, except the
portion, if any, of such Debt Security not to be so repaid.
CERTAIN COVENANTS
Senior Securities Indenture Limitations on Incurrence of Debt. The Company
will not, and will not permit any Subsidiary to, incur any Debt (as defined
below) if, immediately after giving effect to the incurrence of such additional
Debt and the application of the proceeds thereof, the aggregate principal amount
of all outstanding Debt of the Company and its Subsidiaries on a consolidated
basis determined in accordance with generally accepted accounting principles is
greater than 75% of the sum of (without duplication) (i) the Company's
Undepreciated Real Estate Assets (as defined below) as of the end of the
calendar quarter covered in the Company's Annual Report on Form 10-K or
Quarterly Report on Form 10-Q, as the case may be, most recently filed with the
Commission (or, if such filing is not permitted under the Exchange Act, with the
Trustee) prior to the incurrence of such additional Debt and (ii) the purchase
price of any real estate assets or mortgages receivable acquired, and the amount
of any securities offering proceeds received (to the extent that such proceeds
were not used to acquire real estate assets or mortgages receivable or used to
reduce Debt), by the Company or any Subsidiary since the end of such calendar
quarter, including those proceeds obtained in connection with the incurrence of
such additional Debt.
In addition to the foregoing limitation on the incurrence of Debt, the
Company will not, and will not permit any Subsidiary to, incur any Debt secured
by any mortgage, lien, charge, pledge, encumbrance or security interest of any
kind upon any of the property of the Company or any Subsidiary if, immediately
after giving effect to the incurrence of such additional Debt and the
application of the proceeds thereof, the aggregate principal amount of all
outstanding Debt of the Company and its Subsidiaries on a consolidated basis
which is secured by any mortgage, lien, charge, pledge, encumbrance or security
interest on property of the Company or any Subsidiary is greater than 60% of the
sum of (without duplication) (i) the Company's Undepreciated Real Estate Assets
as of the end of the calendar quarter covered in the Company's Annual Report on
Form 10-K or Quarterly Report on Form 10-Q, as the case may be, most recently
filed with the Commission (or, if such filing is not permitted under the
Exchange Act, with the Trustee) prior to the incurrence of such additional Debt
and (ii) the purchase price of any real estate assets or mortgages receivable
acquired, and the amount of any securities offering proceeds received (to the
extent that such proceeds were not used to acquire real estate assets or
mortgages receivable or used to reduce Debt), by the Company or any Subsidiary
since the end of such calendar quarter, including those proceeds obtained in
connection with the incurrence of such additional Debt.
In addition to the foregoing limitations on the incurrence of Debt, the
Company will not, and will not permit any Subsidiary to, incur any Debt if the
ratio of Consolidated Income Available for Debt Service (as defined below) to
the Annual Service Charge (as defined below) for the four consecutive fiscal
quarters most recently ended prior to the date on which such additional Debt is
to be incurred shall have been less than 1.5:1, on a pro forma basis after
giving effect thereto and to the application of the proceeds therefrom, and
calculated on the assumption that (i) such Debt and any other Debt incurred by
the Company and its Subsidiaries since the first day of such four-quarter period
and the application of the proceeds therefrom, including to refinance other
Debt, had occurred at the beginning of such period; (ii) the repayment or
retirement of any other Debt by the Company and its Subsidiaries since the first
day of such four-quarter period had been repaid or retired at the beginning of
such period (except that, in making such computation, the amount of Debt under
any revolving credit facility shall be computed based upon the average daily
balance of such Debt during such period); (iii) in the case of Acquired Debt (as
defined below) or Debt incurred in connection with any acquisition since the
first day of such four-quarter period, the related acquisition had occurred as
of the first day of such period with the appropriate adjustments with respect to
such acquisition being included in such pro forma calculation; and (iv) in the
case of any acquisition or disposition by the Company or its Subsidiaries of any
asset or group of assets since the first day of such four-quarter period,
whether by merger, stock purchase or sale, or asset purchase or sale, such
8
acquisition or disposition or any related repayment of Debt had occurred as of
the first day of such period with the appropriate adjustments with respect to
such acquisition or disposition being included in such pro forma calculation.
As used herein,
'Acquired Debt' means Debt of a Person (i) existing at the time such
Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Debt
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Debt shall be deemed to be
incurred on the date of the related acquisition of assets from any Person
or the date the acquired Person becomes a Subsidiary.
'Annual Service Charge' as of any date means the maximum amount which
is payable in any period for interest on, and original issue discount of,
Debt of the Company and its Subsidiaries.
'Capital Stock' means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participants or other
ownership interests (however designated) of such Person and any rights
(other than debt securities convertible into or exchangeable for corporate
stock), warrants or options to purchase any thereof.
'Consolidated Income Available for Debt Service' for any period means
Earnings from Operations (as defined below) of the Company and its
Subsidiaries plus amounts which have been deducted, and minus amounts which
have been added, for the following (without duplication): (i) interest on
Debt of the Company and its Subsidiaries, (ii) provision for taxes of the
Company and its Subsidiaries based on income, (iii) amortization of debt
discount, (iv) provisions for gains and losses on properties and property
depreciation and amortization, (v) the effect of any noncash charge
resulting from a change in accounting principles in determining Earnings
from Operations for such period and (vi) amortization of deferred charges.
'Debt' of the Company or any Subsidiary means any indebtedness of the
Company or any Subsidiary, whether or not contingent, in respect of (i)
borrowed money or evidenced by bonds, notes, debentures or similar
instruments, (ii) indebtedness for borrowed money secured by any mortgage,
pledge, lien, charge, encumbrance or any security interest existing on
property owned by the Company or any Subsidiary (each securing such debt,
an 'Encumbrance'), (iii) the reimbursement obligations, contingent or
otherwise, in connection with any letters of credit actually issued or
amounts representing the balance deferred and unpaid of the purchase price
of any property or services, except any such balance that constitutes an
accrued expense or trade payable or (iv) any lease of property by the
Company or any Subsidiary as lessee which is reflected on the Company's
Consolidated Balance Sheet as a capitalized lease in accordance with
generally accepted accounting principles to the extent, in the case of
items of indebtedness under (i) through (iii) above, that any such items
(other than letters of credit) would appear as a liability on the Company's
Consolidated Balance Sheet in accordance with generally accepted accounting
principles, and also includes, to the extent not otherwise included, any
obligation by the Company or any Subsidiary to be liable for, or to pay, as
obligor, guarantor or otherwise (other than for purposes of collection in
the ordinary course of business), Debt of another Person (other than the
Company or any Subsidiary) (it being understood that Debt shall be deemed
to be incurred by the Company or any Subsidiary whenever the Company or
such Subsidiary shall create, assume, guarantee or otherwise become liable
in respect thereof).
'Earnings from Operations' for any period means net earnings excluding
gains and losses on sales of investments, net as reflected in the financial
statements of the Company and its Subsidiaries for such period determined
on a consolidated basis in accordance with generally accepted accounting
principles.
'Subsidiary' means, with respect to any Person, any corporation or
other entity of which a majority of (i) the voting power of the voting
equity securities or (ii) the outstanding equity interests are owned,
directly or indirectly, by such Person. For the purposes of this
definition, 'voting equity securities' means equity securities having
voting power for the election of directors, whether at all times or only so
long as no senior class of security has such voting power by reason of any
contingency.
9
'Total Unencumbered Assets' means the sum of (i) those Undepreciated
Real Estate Assets not subject to an Encumbrance and (ii) all other assets
of the Company and its Subsidiaries not subject to an Encumbrance
determined in accordance with generally accepted accounting principles (but
excluding accounts receivable and intangibles).
'Undepreciated Real Estate Assets' as of any date means the cost
(original cost plus capital improvements) of real estate assets of the
Company and its Subsidiaries on such date, before depreciation and
amortization determined on a consolidated basis in accordance with
generally accepted accounting principles.
'Unsecured Debt' means Debt which is not secured by any mortgage,
lien, charge, pledge or security interest of any kind upon any of the
properties of the Company or any Subsidiary.
Existence. Except as permitted under 'Merger, Consolidation or Sale,' the
Company will do or cause to be done all things necessary to preserve and keep in
full force and effect its existence, rights (charter and statutory) and
franchises; provided, however, that the Company will not be required to preserve
any right or franchise if it determines that the preservation thereof is no
longer desirable in the conduct of its business and that the loss thereof is not
disadvantageous in any material respect to the Holders of the Debt Securities.
Maintenance of Properties. The Company will cause all of its properties
used or useful in the conduct of its business or the business of any Subsidiary
to be maintained and kept in good condition, repair and working order and
supplied with all necessary equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
provided, however, that the Company and its Subsidiaries shall not be prevented
from selling or otherwise disposing for value its properties in the ordinary
course of business.
Insurance. The Company will, and will cause each of its Subsidiaries to,
keep all of its insurable properties adequately insured against loss or damage
with financially sound and reputable insurance companies.
Payment of Taxes and Other Claims. The Company will pay or discharge or
cause to be paid or discharged, before the same shall become delinquent, (i) all
taxes, assessments and governmental charges levied or imposed upon it or any
Subsidiary or upon the income, profits or property of the Company or any
Subsidiary, and (ii) all lawful claims for labor, materials and supplies which,
if unpaid, might by law become a lien upon the property of the Company or any
Subsidiary, unless such lien would not have a material adverse effect upon such
property; provided, however, that the Company will not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings or for which the Company has set apart and maintains
an adequate reserve.
Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Company will, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the Commission pursuant to such Section 13 or 15(d) (the 'Financial
Statements'), or which the Company would have been so required if the Company
were so subject, such documents to be filed with the Commission on or prior to
the respective dates (the 'Required Filing Dates') by which the Company is or
would have been so required to file such documents if the Company is or were so
subject. The Company will also in any event (x) within 15 days of each Required
Filing Date (i) transmit by mail to all Holders of Debt Securities, as their
names and addresses appear in the Security Register, without cost to such
Holders, copies of the annual reports and quarterly reports which the Company is
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act, or which the Company would have been so required if the Company
were subject to such Sections and (ii) file with the Trustees copies of annual
reports, quarterly reports and other documents which the Company is required to
file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act, or
which the Company would have been so required if the Company were subject to
such Sections, and (y) if filing such documents by the Company with the
Commission is not permitted under the Exchange Act, promptly upon written
request and payment of the reasonable cost of duplication and delivery, supply
copies of such documents to any prospective Holder.
10
MERGER, CONSOLIDATION OR SALE
The Company may consolidate with, or sell, lease or convey all or
substantially all of its assets to, or merge with or into, any other entity,
provided that (a) either the Company shall be the continuing entity, or the
successor entity (if other than the Company) formed by or resulting from any
such consolidation or merger or which shall have received the transfer of such
assets shall expressly assume payment of the principal of (and premium or
Make-Whole Amount, if any) and interest (including Additional Amounts, if any)
on all of the Debt Securities and the due and punctual performance and
observance of all of the covenants and conditions contained in the Indentures;
(b) immediately after giving effect to such transaction and treating any
indebtedness which becomes an obligation of the Company or any Subsidiary as a
result thereof as having been incurred by the Company or such Subsidiary at the
time of such transaction, no Event of Default under the Indentures, and no event
which, after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's certificate
and legal opinion covering such conditions shall be delivered to the Trustees.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each Indenture will provide that the following events are 'Events of
Default' with respect to any series of Debt Securities issued thereunder: (a)
default for 30 days in the payment of any installment of interest or Additional
Amounts on any Debt Security of such series; (b) default in the payment of the
principal of (or premium or Make-Whole Amount, if any, on) any Debt Security of
such series when due; (c) default in making any sinking fund payment as required
for any Debt Security of such series; (d) default in the performance of any
other covenant of the Company contained in the applicable Indenture (other than
a covenant added to such Indenture solely for the benefit of a series of Debt
Securities issued thereunder other than such series) continued for 60 days after
written notice as provided in such Indenture; (e) default in the payment of an
aggregate principal amount exceeding $10,000,000 of any evidence of indebtedness
for borrowed money of the Company or any mortgage, indenture or other instrument
under which such indebtedness is issued or by which such indebtedness is
secured, such default having occurred after the expiration of any applicable
grace period and having resulted in the acceleration of the maturity of such
indebtedness, but only if such indebtedness is not discharged or such
acceleration is not rescinded or annulled; (f) certain events of bankruptcy,
insolvency or reorganization, or court appointment of a receiver, liquidator or
trustee of the Company, any Significant Subsidiary or the property of the
Company or any Significant Subsidiary or all or substantially all of either of
its property; and (g) any other Event of Default provided with respect to a
particular series of Debt Securities. The term 'Significant Subsidiary' means
each significant subsidiary (as defined in Regulation S-X promulgated under the
Securities Act) of the Company.
If an Event of Default under either Indenture with respect to Debt
Securities of any series at the time Outstanding occurs and is continuing, then
in every such case the Trustee or the Holders of not less than 25% in principal
amount of the Outstanding Debt Securities of that series may declare the
principal amount (or, if the Debt Securities of that series are Original Issue
Discount Securities or Indexed Securities, such portion of the principal amount
as may be specified in the terms thereof) and the Make-Whole Amount, if any, of
the Outstanding Debt Securities of that series to be due and payable immediately
by written notice thereof to the Company (and to the applicable Trustee if given
by the Holders). However, at any time after such a declaration of acceleration
with respect to Debt Securities of such series (or of all Debt Securities then
Outstanding under the applicable Indenture, as the case may be) has been made,
but before a judgment or decree for payment of the money due has been obtained
by the applicable Trustee, the Holders of not less than a majority in principal
amount of Debt Securities then outstanding of such series (or of all Debt
Securities then Outstanding under the applicable Indenture, as the case may be)
may rescind and annul such declaration and its consequences if (a) the Company
shall have deposited with the applicable Trustee all required payments of the
principal of (and premium or Make-Whole Amount, if any) and interest, and any
Additional Amounts, on the Debt Securities of such series (or of all Debt
Securities then outstanding under the applicable Indenture, as the case may be),
plus certain fees, expenses, disbursements and advances of the Trustee and (b)
all Events of Default, other than the non-payment of accelerated principal (or
specified portion thereof and the premium or Make-Whole Amount, if any, or
interest), with respect to Debt Securities of such series (or of all Debt
Securities then Outstanding under the applicable Indenture, as the case may be)
have been cured or waived as provided in the applicable Indenture.
11
Each Indenture also provides that the Holders of not less than a majority in
principal amount of the Outstanding Debt Securities of any series (or of all
Debt Securities then Outstanding under the applicable Indenture, as the case may
be) may waive any past default with respect to such series and its consequences,
except a default (x) in the payment of the principal of (premium or Make-Whole
Amount, if any) or interest or Additional Amounts on any Debt Security of such
series or (y) in respect of a covenant or provision contained in the applicable
Indenture that cannot be modified or amended without the consent of the Holder
of each Outstanding Debt Security affected thereby.
Each Trustee is required to give notice to the Holders of Debt Securities
within 90 days of a default under the applicable Indenture; provided, however,
that the Trustee may withhold notice to the Holders of any series of Debt
Securities of any default with respect to such series (except a default in the
payment of the principal of (or premium or Make-Whole Amount, if any) or
interest payable on or any Additional Amounts with respect to any Debt Security
of such series or in the payment of any sinking fund installment in respect of
any Debt Security of such series) if the Responsible Officers of the Trustee
consider such withholding to be in the interest of such Holders.
Each Indenture provides that no Holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to the
applicable Indenture or for any remedy thereunder, except in the case of failure
of the Trustee thereunder for 60 days, to act after it has received a written
request to institute proceedings in respect of an Event of Default from the
Holders of not less than 25% in principal amount of the Outstanding Debt
Securities of such series, as well as an offer of reasonable indemnity. This
provision will not prevent, however, any Holder of Debt Securities from
instituting suit for the enforcement of payment of the principal of (and premium
or Make-Whole Amount, if any) and interest on, and Additional Amounts payable
with respect to, such Debt Securities at the respective due dates thereof.
Subject to provisions in each Indenture relating to its duties in case of
default, each Trustee is under no obligation to exercise any of its rights or
powers under the applicable Indenture at the request or direction of any Holders
of any series of Debt Securities then Outstanding under such Indenture, unless
such Holders shall have offered to the Trustee reasonable security or indemnity.
The Holders of not less than a majority in principal amount of the applicable
Outstanding Debt Securities of any series (or of all Debt Securities then
Outstanding under the applicable Indenture, as the case may be) shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or of exercising any trust or power conferred
upon the Trustee. However, the Trustee may refuse to follow any direction which
is in conflict with any law or the applicable Indenture, which may involve the
Trustee in personal liability or which may be unduly prejudicial to the Holders
of Debt Securities of such series not joining therein.
Within 120 days after the close of each fiscal year, the Company must
deliver to each Trustee a certificate, signed by one of several specified
officers, stating whether or not such officer has knowledge of any default under
the applicable Indenture and, if so, specifying each such default and the nature
and status thereof.
MODIFICATION OF THE INDENTURES
Except as described below, modifications and amendments of each Indenture
may be made with the consent of the Holders of not less than a majority in
principal amount of all Outstanding Debt Securities issued under such Indenture
which are affected by such modification or amendment; provided, however, that no
such modification or amendment may, without the consent of the Holder of each
such Debt Security affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest or Additional Amounts payable on
(or premium or Make-Whole Amount, if any) any such Debt Security; (b) reduce the
principal amount of, or the rate or amount of interest on, or any premium or
Make-Whole Amount payable on redemption of, or change any obligation of the
Company to pay any Additional Amounts set forth in the Indenture relating to, or
reduce any Additional Amounts payable with respect to, any such Debt Security,
or reduce the amount of principal of an Original Issue Discount Security or
premium or Make-Whole Amount, if any, that would be due and payable upon
declaration of acceleration of the maturity thereof or would be payable in
bankruptcy, or adversely affect any right of repayment of the Holder of any such
Debt Security; (c) change the Place of Payment, or the coin or currency, for
payment of principal of (and premium or Make-Whole Amount, if any), or interest
on, or any Additional Amounts payable with respect to, any such Debt Security;
(d) impair the right to institute suit for the
12
enforcement of any payment on or with respect to any such Debt Security; (e)
reduce the percentage of Outstanding Debt Securities of any series necessary to
modify or amend the applicable Indenture, to waive compliance with certain
provisions thereof or certain defaults and consequences thereunder or to reduce
the quorum or voting requirements set forth in such Indenture; or (f) modify any
of the foregoing provisions or any of the provisions relating to the waiver of
certain past defaults or certain covenants, except to increase the required
percentage to effect such action or to provide that certain other provisions may
not be modified or waived without the consent of the Holder of such Debt
Security.
The Holders of not less than a majority in principal amount of Outstanding
Debt Securities issued under either Indenture have the right to waive compliance
by the Company with certain covenants in the applicable Indenture.
Modifications and amendments of each Indenture may be made by the Company
and the applicable Trustee without the consent of any Holder of Debt Securities
issued thereunder for any of the following purposes: (i) to evidence the
succession of another Person to the Company as obligor under the applicable
Indenture; (ii) to add to the covenants of the Company for the benefit of the
Holders of all or any series of Debt Securities or to surrender any right or
power conferred upon the Company in the applicable Indenture; (iii) to add
Events of Default for the benefit of the Holders of all or any series of Debt
Securities; (iv) to add or change any provisions of the applicable Indenture to
facilitate the issuance of, or to liberalize certain terms of, Debt Securities
in bearer form, or to permit or facilitate the issuance of Debt Securities in
uncertificated form, provided that such action shall not adversely affect the
interests of the Holders of the Debt Securities of any series in any material
respect; (v) to change or eliminate any provision of the applicable Indenture,
provided that any such change or elimination shall become effective only when
there are no Debt Securities Outstanding of any series issued thereunder created
prior thereto which are entitled to the benefit of such provision; (vi) to
secure the Debt Securities; (vii) to establish the form or terms of Debt
Securities of any series, including the provisions and procedures, if
applicable, for the conversion of such Debt Securities into Preferred Shares or
Common Shares; (viii) to provide for the acceptance of appointment by a
successor Trustee or facilitate the administration of the trusts under the
applicable Indenture by more than one Trustee; (ix) to cure any ambiguity,
defect or inconsistency in the applicable Indenture, provided that such action
will not adversely affect the interests of Holders of Debt Securities of any
series in any material respect; (x) to close the applicable Indenture with
respect to the authentication and delivery of additional series of Debt
Securities or to qualify or maintain qualification of, the applicable Indenture
under the TIA; or (xi) to supplement any of the provisions of the applicable
Indenture to the extent necessary to permit or facilitate defeasance and
discharge of any series of such Debt Securities, provided that such action will
not adversely affect the interests of the Holders of the Debt Securities of any
series in any material respect.
Each Indenture provides that, in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of Holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding will be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of a Debt Security denominated in a Foreign Currency that shall be deemed
outstanding will be the U.S. dollar equivalent, determined on the issue date for
such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above), (iii) the
principal amount of an Indexed Security that will be deemed outstanding will be
the principal face amount of such Indexed Security at original issuance, unless
otherwise provided with respect to such Indexed Security pursuant to the
applicable Indenture, and (iv) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any Affiliate of the Company or of such
other obligor will be disregarded.
Each Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series. A meeting may be called at any time by the
applicable Trustee, and also, upon request, by the Company, pursuant to a
resolution adopted by the Board of Trustees, or the Holders of at least 10% in
principal amount of the Outstanding Debt Securities of such series, in any such
case upon notice given as provided in the applicable Indenture. Except for any
consent that must be given by the Holder of each Debt Security affected by
certain modifications and amendments of the applicable Indenture, any resolution
presented at a meeting or adjourned
13
meeting duly reconvened at which a quorum is present may be adopted by the
affirmative vote of the Holders of a majority in principal amount of the
Outstanding Debt Securities of that series; provided, however, that, except as
referred to above, any resolution with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action that may be
made, given or taken by the Holders of a specified percentage, which is less
than a majority, in principal amount of the Outstanding Debt Securities of a
series may be adopted at a meeting or adjourned meeting duly reconvened at which
a quorum is present by the affirmative vote of the Holders of such specified
percentage in principal amount of the Outstanding Debt Securities of that
series. Any resolution passed or decision taken at any meeting of Holders of
Debt Securities of any series duly held in accordance with the applicable
Indenture will be binding on all Holders of Debt Securities of that series. The
quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be Persons holding or representing a majority in principal amount
of the Outstanding Debt Securities of a series; provided, however, that, if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the Holders of not less than a specified percentage in principal
amount of the Outstanding Debt Securities of a series, the Persons holding or
representing such specified percentage in principal amount of the Outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Debt Securities of any series with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action that
the applicable Indenture expressly provides may be made, given or taken by the
Holders of a specified percentage in principal amount of all Outstanding Debt
Securities affected thereby, or of the Holders of such series and one or more
additional series: (i) there shall be no minimum quorum requirement for such
meeting and (ii) the principal amount of the Outstanding Debt Securities of such
series that vote in favor of such request, demand, authorization, direction,
notice, consent, waiver or other action shall be taken into account in
determining whether such request, demand, authorization, direction, notice,
consent, waiver or other action has been made, given or taken under the
applicable Indenture.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Company may discharge certain obligations to Holders of any series of
Debt Securities that have not already been delivered to the Trustee for
cancellation and that either have become due and payable or will become due and
payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the applicable Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal (and
premium or Make-Whole Amount, if any) and interest and Additional Amounts
payable to the date of such deposit (if such Debt Securities have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be.
Each Indenture provides that, under certain circumstances, the Company may
elect to (a) defease and be discharged from any and all obligations with respect
to such Debt Securities (except for the obligation to pay Additional Amounts, if
any, upon the occurrence of certain events of tax, assessment or governmental
charge with respect to payments on such Debt Securities and the obligations to
register the transfer or exchange of such Debt Securities, to replace temporary
or mutilated, destroyed, lost or stolen Debt Securities, to maintain an office
or agency in respect of such Debt Securities and to hold moneys for payment in
trust) ('defeasance') and/or (b) be released from its obligations with respect
to such Debt Securities under the applicable Indenture (being the restrictions
described under 'Certain Covenants') or, under certain circumstances, its
obligations with respect to any other covenant, and any omission to comply with
such obligations will not constitute a default or an Event of Default with
respect to such Debt Securities ('covenant defeasance'), in either case upon the
irrevocable deposit by the Company with the applicable Trustee, in trust, of an
amount, in such currency or currencies, currency unit or units or composite
currency or currencies in which such Debt Securities are payable at Stated
Maturity, or Government Obligations (as defined below), or both, applicable to
such Debt Securities which through the scheduled payment of principal and
interest in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium or Make-Whole Amount, if any)
and interest on such Debt Securities, and any mandatory sinking fund or
analogous payments thereon, on the scheduled due dates therefor.
Such a trust may only be established if, among other things, the Company
has delivered to the applicable Trustee an Opinion of Counsel (as specified in
the applicable Indenture) to the effect that the Holders of such
14
Debt Securities will not recognize income, gain or loss for U.S. federal income
tax purposes as a result of such defeasance or covenant defeasance and will be
subject to U.S. federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance or covenant
defeasance had not occurred, and such Opinion of Counsel, in the case of
defeasance, must refer to and be based upon a ruling of the Internal Revenue
Service (the 'IRS') or a change in applicable United States federal income tax
law occurring after the date of the Indenture.
'Government Obligations' means securities which are (i) direct obligations
of the United States of America or the government which issued the Foreign
Currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations of
a Person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government which issued the Foreign
Currency in which the Debt Securities of such series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other government, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and will also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, provided that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if,
after the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the Holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security shall be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium or Make-Whole Amount, if any) and interest on such Debt Security as
they become due out of the proceeds yielded by converting the amount so
deposited in respect of such Debt Security into the currency, currency unit or
composite currency in which such Debt Security becomes payable as a result of
such election or such cessation of usage based on the applicable market exchange
rate. 'Conversion Event' means the cessation of use of (i) a Foreign Currency
(other than the ECU or other currency unit), both by the government of the
country which issued such currency and for the settlement of transactions by a
central bank or other public institutions of or within the international banking
community, (ii) the ECU both within the European Monetary System and for the
settlement of transactions by public institutions of or within the European
Communities or (iii) any currency unit or composite currency other than the ECU
for the purposes for which it was established. Unless otherwise provided in the
applicable Prospectus Supplement, all payments of principal of (and premium or
Make-Whole Amount, if any) and interest on any Debt Security that is payable in
a Foreign Currency that ceases to be used by its government of issuance will be
made in U.S. dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than the Event of Default described
in clause (d) under 'Events of Default, Notice and Waiver' under certain
circumstances or described in clause (g) under 'Events of Default, Notice and
Waiver' under certain circumstances, the amount in such currency, currency unit
or composite currency in which such Debt Securities are payable, and Government
Obligations on deposit with the applicable Trustee, will be sufficient to pay
amounts due on such Debt Securities at the time of their Stated Maturity but may
not be sufficient to pay amounts due on such Debt Securities at the time of the
acceleration resulting from such Event of Default. However, the Company would
remain liable to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
15
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Preferred Shares or Common Shares will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Preferred Shares or Common
Shares, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the Holders
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more fully registered global securities (the 'Global Securities')
that will be deposited with, or on behalf of, a depositary (the 'Depositary')
identified in the applicable Prospectus Supplement relating to such series.
Global Securities are expected to be deposited with The Depository Trust
Company, as Depositary. Global Securities may be issued in either registered or
bearer form and in either temporary or permanent form.
Unless and until it is exchanged in whole or in part for the individual
Debt Securities represented thereby, a Global Security may not be transferred
except as a whole by the Depositary for such Global Security to a nominee of
such Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by the Depositary or any nominee of such
Depositary to a successor Depositary or any nominee of such successor.
The specific terms of the depositary arrangement with respect to a series
of Debt Securities will be described in the applicable Prospectus Supplement
relating to such series. Unless otherwise indicated in the applicable Prospectus
Supplement, the Company anticipates that the following provisions will apply to
depositary arrangements.
Upon the issuance of a Global Security, the Depositary for such Global
Security or its nominee will credit on its book-entry registration and transfer
system the respective principal amounts of the individual Debt Securities
represented by such Global Security to the accounts of persons that have
accounts with such Depositary ('Participants'). Such accounts shall be
designated by the underwriters, dealers or agents with respect to such Debt
Securities or by the Company if such Debt Securities are offered and sold
directly by the Company. Ownership of beneficial interests in a Global Security
will be limited to Participants or persons that may hold interests through
Participants. Ownership of beneficial interests in such Global Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the applicable Depositary or its nominee (with respect to
beneficial interests of Participants) and records of Participants (with respect
to beneficial interests of persons who hold through Participants). The laws of
some states require that certain purchasers of securities take physical delivery
of such securities in definitive form. Such limits and laws may impair the
ability to own, pledge or transfer beneficial interest in a Global Security.
So long as the Depositary for a Global Security or its nominee is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
applicable Indenture. Except as provided below or in the applicable Prospectus
Supplement, owners of a beneficial interest in a Global Security will not be
entitled to have any of the individual Debt Securities of the series represented
by such Global Security registered in their names, will not receive or be
entitled to receive physical delivery of any such Debt Securities of such series
in definitive form and will not be considered the owners or holders thereof
under the applicable Indenture.
Payments of principal of, any premium or Make-Whole Amount on, and any
interest on, or any Additional Amounts payable with respect to, individual Debt
Securities represented by a Global Security registered in the name of a
Depositary or its nominee will be made to the Depositary or its nominee, as the
case may be, as the registered owner of the Global Security representing such
Debt Securities. None of the Company, the Trustees, any Paying Agent or the
Security Registrar for such Debt Securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global
16
Security for such Debt Securities or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
The Company expects that the Depositary for a series of Debt Securities or
its nominee, upon receipt of any payment of principal, premium or interest in
respect of a permanent Global Security representing any of such Debt Securities,
will immediately credit Participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Security for such Debt Securities as shown on the records of such
Depositary or its nominee. The Company also expects that payments by
Participants to owners of beneficial interests in such Global Security held
through such Participants will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in 'street name.' Such payments will be
the responsibility of such Participants.
If a Depositary for a series of Debt Securities is at any time unwilling,
unable or ineligible to continue as depositary and a successor depositary is not
appointed by the Company within 90 days, the Company will issue individual Debt
Securities of such series in exchange for the Global Security representing such
series of Debt Securities. In addition, the Company may, at any time and in its
sole discretion, subject to any limitations described in the applicable
Prospectus Supplement relating to such Debt Securities, determine not to have
any Debt Securities of such series represented by one or more Global Securities
and, in such event, will issue individual Debt Securities of such series in
exchange for the Global Security or Securities representing such series of Debt
Securities. Individual Debt Securities of such series so issued will be issued
in denominations, unless otherwise specified by the Company, of $1,000 and
integral multiples thereof.
NO PERSONAL LIABILITY
No past, present or future trustee, officer, employee or shareholder, as
such, of the Company or any successor thereof shall have any liability for any
obligations of the Company under the Debt Securities or the applicable Indenture
or for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of Debt Securities by accepting such Debt Securities
waives and releases all such liability. The waiver and release are part of the
consideration for the issue of Debt Securities. Each Holder of Debt Securities
shall look solely to the assets of the Company for satisfaction of any liability
of the Company in respect of the applicable Indenture or the Debt Securities and
will not seek recourse or commence any action against any of the trustees,
officers or shareholders of the Company or any of their personal assets for the
performance or payment of any obligation thereunder.
SUBORDINATION
Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
the Subordinated Securities will be subordinated to the extent provided in the
Subordinated Securities Indenture in right of payment to the prior payment in
full of all Senior Debt, but the obligation of the Company to make payment of
the principal and interest on the Subordinated Securities will not otherwise be
affected. No payment of principal or interest may be made on the Subordinated
Securities at any time if a default on Senior Debt exists that permits the
holders of such Senior Debt to accelerate its maturity and the default is the
subject of judicial proceedings or the Company receives notice of the default.
After all Senior Debt is paid in full and until the Subordinated Securities are
paid in full, holders will be subrogated to the rights of holders of Senior Debt
to receive distributions applicable to Senior Debt to the extent that
distributions otherwise payable to holders have been applied to the payment of
Senior Debt. By reason of such subordination, in the event of a distribution of
assets upon insolvency, certain general creditors of the Company may recover
more, ratably, than holders of the Subordinated Securities.
Senior Debt is defined in the Subordinated Securities Indenture as the
principal of and interest on, or substantially similar payments to be made by
the Company in respect of, the following, whether outstanding at the date of
execution of the Subordinated Securities Indenture or thereafter incurred,
created or assumed: (a) indebtedness of the Company for money borrowed or
represented by purchase- money obligations, (b) indebtedness of the Company
evidenced by notes, debentures, or bonds, or other securities issued under the
provisions of an indenture, fiscal agency agreement or other instrument, (c)
obligations of the Company as lessee under leases of property either made as
part of any sale and leaseback transaction to which the Company is a
17
party or otherwise, (d) indebtedness of partnerships and joint ventures that is
included in the consolidated financial statements of the Company, (e)
indebtedness, obligations and liabilities of others in respect of which the
Company is liable contingently or otherwise to pay or advance money or property
or as guarantor, endorser or otherwise or which the Company has agreed to
purchase or otherwise acquire, and (f) any binding commitment of the Company to
fund any real estate investment or to fund any investment in any entity making
such real estate investment, in each case other than (1) any such indebtedness,
obligation or liability referred to in clauses (a) through (f) above as to
which, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such indebtedness, obligation or
liability is not superior in right of payment to the Subordinated Securities or
ranks pari passu with the Subordinated Securities, (2) any such indebtedness,
obligation or liability which is subordinated to indebtedness of the Company to
substantially the same extent as or to a greater extent than the Subordinated
Securities are subordinated, (3) any trade accounts payable and (4) the
Subordinated Securities. There are no restrictions in the Subordinated
Securities Indenture upon the creation of additional Senior Debt. However, the
Senior Securities Indenture contains limitations on incurrence of indebtedness
by the Company. See 'Certain Covenants--Senior Securities Indenture Limitations
on Incurrence of Debt.'
If this Prospectus is being delivered in connection with a series of
Subordinated Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Debt outstanding as of the end of the Company's most recent
fiscal quarter.
DESCRIPTION OF PREFERRED SHARES
The Company's Amended and Restated Declaration of Trust, as amended (the
'Declaration of Trust'), authorizes the Company to issue up to 100,000,000
shares of beneficial interest of the Company, consisting of Common Shares and
such other types or classes of shares of beneficial interest as the Board of
Trustees may create and authorize from time to time and designate as
representing a beneficial interest in the Company. The Board of Trustees is
granted the power to authorize the issuance of one or more series of preferred
shares of beneficial interest. As of November 1, 1997, the Company had issued
and outstanding 11,155 Series A-1 Increasing Rate Cumulative Convertible
Preferred Shares of Beneficial Interest (the 'Series A-1 Preferred Shares'),
274,606 9.75% Series B-1 Cumulative Convertible Preferred Shares of Beneficial
Interest (the 'Series B-1 Preferred Shares'), 908,725 9.75% Series B-2
Cumulative Convertible Preferred Shares of Beneficial Interest (the 'Series B-2
Preferred Shares,' and, together with the Series B-1 Preferred Shares, the
'Series B Preferred Shares') and 222,750 Series C Cumulative Redeemable
Preferred Shares of Beneficial Interest (the 'Series C Preferred Shares').
The holders of the Series A-1 Preferred Shares (the 'Series A-1 Preferred
Holders') are entitled to cumulative cash distributions at the current rate of
5.5% increasing annually to 6.5% in 2001 as set forth in the Company's Articles
Supplementary Classifying 11,155 Shares of Beneficial Interest as Series A-1
Preferred Shares, payable quarterly. In the event of any liquidation,
dissolution or winding-up of the affairs of the Company, the Series A-1
Preferred Holders are entitled to receive, out of the assets of the Company
legally available therefor, the amount of $1,000 in cash for each Series A-1
Preferred Share, plus an amount in cash equal to all accrued and unpaid
distributions on each such share. The Series A-1 Preferred Shares rank pari
passu with the Series B Preferred Shares and Series C Preferred Shares as to
priority for receiving distributions, including liquidating distributions. The
Series A-1 Preferred Holders have the right, exercisable at any time and from
time to time after April 18, 1999 and prior to April 18, 2009, to convert all or
any of their respective Series A-1 Preferred Shares into such number of Common
Shares as would then receive aggregate annual cash distributions equal to the
then aggregate annual cash distributions such holders of the Series A-1
Preferred Shares are entitled to receive on the number of Series A-1 Preferred
Shares which such holders elect to convert into Common Shares, subject to
certain limitations on the number of Series A-1 Preferred Shares which may be
converted in any one year. The Series A-1 Preferred Shares may be redeemed at
the option of the Company, in whole or from time to time in part, at the
redemption price per share of $1,000, plus in each case all accrued and unpaid
distributions, if any, to the redemption date. The Series A-1 Preferred Holders
are not entitled to vote, except as required by law and in certain other limited
situations.
18
The Series B-1 Preferred Shares and Series B-2 Preferred Shares are
identical in all respects, and have the same rights, privileges and preferences
in all circumstances, except with respect to the conversion rights. The holders
of the Series B Preferred Shares (the 'Series B Preferred Holders') are entitled
to cumulative cash distributions at the rate of 9.75% per annum of the $25.00
per share liquidation preference of the Series B Preferred Shares, payable
quarterly. In the event of any liquidation, dissolution or winding-up of the
affairs of the Company, the Series B Preferred Holders are entitled to receive,
out of the assets of the Company legally available therefor, a liquidation
preference in the amount of $25.00 per share, plus an amount equal to all
accrued and unpaid distributions on each such share. The Series B Preferred
Shares rank pari passu with the Series A-1 Preferred Shares and Series C
Preferred Shares as to priority for receiving distributions, including
liquidating distributions. The Series B Preferred Shares are not redeemable
prior to February 27, 2002. On and after February 27, 2002, if the aggregate
liquidation preferences of all of the outstanding Series B Preferred Shares is
less than $3,000,000, the Series B Preferred Shares may be redeemed at the
option of the Company, in whole, at a redemption price equal to $25.00 per
share, plus accrued and unpaid distributions, if any, to the redemption date.
The holders of the Series B-1 Preferred Shares shall have the right,
exercisable after February 27, 1998 (unless exercisable earlier in the event of
a Special Conversion Event as described below), to convert each of their
respective Series B-1 Preferred Shares into such number of Common Shares as is
obtained by dividing the $25.00 per share liquidation preference by (i) $19.1750
if the date of conversion is February 28, 1998 to February 27, 1999, (ii)
$18.6875 if the date of conversion is February 28, 1999 to February 27, 2000,
(iii) $18.2000 if the date of conversion is February 28, 2000 to February 27,
2001, (iv) $17.7125 if the date of conversion is February 28, 2001 and
thereafter and at any time after a Special Conversion Event shall have occurred.
A 'Special Conversion Event' shall mean, among other events, (i) Norman M.
Kranzdorf ceasing to be a senior executive officer of the Company, (ii) certain
mergers or sales of assets where there is a change of control or (iii) the
Company failing to pay a distribution on the Series B Preferred Shares for any
quarterly distribution period within five days of the distribution payment date
therefor. The Series B-2 Preferred Shares will, after February 27, 2000 (unless
converted earlier upon the occurrence of a Special Conversion Event),
automatically convert into an equal number of Series B-1 Preferred Shares which
will then be convertible into Common Shares at the same conversion rate as set
forth above. The conversion rate for the Series B Preferred Shares in effect at
any time shall be subject to adjustment from time to time to protect against
certain dilutive events.
The Series B Preferred Holders are generally not entitled to vote, except
as required by law and except in certain other limited situations summarized
below. If the Company fails to pay the distributions on the outstanding Series B
Preferred Shares for any two distribution periods or a Special Conversion Event
shall have occurred, the Series B Preferred Holders shall at all times
thereafter vote together with the holders of the Common Shares as a single class
on all actions. If the Company fails to authorize and pay or declare and set
apart for payment the distributions accumulated on the outstanding Series B
Preferred Shares (i) for any four distribution periods the Series B Preferred
Holders shall have the right to elect one additional trustee to the Company's
Board of Trustees and (ii) for any six distribution periods the Series B
Preferred Holders shall have the right to elect a second additional trustee, in
each case, until the full distributions accumulated on all outstanding Series B
Preferred Shares shall have been authorized and paid or declared and set apart
for payment.
The holders of the Series C Preferred Shares (the 'Series C Preferred
Holders') are entitled to cumulative cash distributions at the rate of 8% per
annum of the $10.00 per share liquidation preference of the Series C Preferred
Shares, payable quarterly. In the event of any liquidation, dissolution or
winding-up of the affairs of the Company, the Series B Preferred Holders are
entitled to receive, out of the assets of the Company legally available
therefor, a liquidation preference in the amount of $10.00 per share, plus an
amount equal to all accrued and unpaid distributions on each such share. The
Series C Preferred Shares rank pari passu with the Series A-1 Preferred Shares
and Series B Preferred Shares as to priority for receiving distributions,
including liquidating distributions. The Company is required to redeem all of
the Series C Preferred Shares in eight equal quarterly on the last day of
January, April, July and October of each calendar year, beginning April 30,
1997, at a redemption price equal to $10.00 per share, plus accrued and unpaid
distributions (the 'Series C Redemption Price'), if any, to the redemption date.
The Company shall also be required to redeem all outstanding Series C Preferred
Shares at the Series C Redemption Price if the Company fails to discharge any
mandatory redemption obligation or fails to pay a distribution on the
outstanding Series C Preferred Shares for any quarter within five days of any
19
distribution payment date therefor. The Series C Preferred Shares may be
redeemed at the option of the Company at any time, and from time to time, at the
Series C Redemption Price. The Series C Preferred Holders are not entitled to
vote, except as required by law and in certain other limited situations.
The following description of the Preferred Shares which may be offered
pursuant to a Prospectus Supplement sets forth certain general terms and
provisions of the Preferred Shares to which any Prospectus Supplement may
relate. The particular terms of the Preferred Shares being offered and the
extent to which such general provisions may or may not apply will be described
in a Prospectus Supplement relating to such Preferred Shares. The statements
below describing the Preferred Shares are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of the
Declaration of Trust (including the applicable Articles Supplementary) and the
Company's Bylaws, as in effect.
GENERAL
Subject to limitations prescribed by Maryland law and the Declaration of
Trust, the Board of Trustees is authorized to fix the number of shares
constituting each series of Preferred Shares and the designations, preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends and other distributions and qualifications, and terms and conditions
of redemption, redemption, distributions, dissolution or the distribution of
assets, conversion or exchange, and such other subjects or matters as may be
fixed by resolution of the Board of Trustees or a duly authorized committee
thereof. The Preferred Shares will, when issued, be fully paid and nonassessable
and will have no preemptive rights.
Both Maryland statutory law governing real estate investment trusts formed
under the laws of that state and the Declaration of Trust provide that no
shareholder of the Company will be personally liable for any obligation of the
Company solely as a result of his status as a shareholder. The Company's Bylaws
further provide that the Company shall indemnify each shareholder or former
shareholder against any claim or liability to which the shareholder may become
subject by reason of his being or having been a shareholder or a former
shareholder and that the Company shall reimburse each shareholder for all legal
and other expenses reasonably incurred by him in connection with any such claim
or liability. In addition, it is the Company's policy to include a clause in its
contracts which provides that shareholders assume no personal liability for
obligations entered into on behalf of the Company. However, with respect to tort
claims, contractual claims where shareholder liability is not so negated, claims
for taxes and certain statutory and other liabilities, a shareholder may, in
some jurisdictions, be personally liable to the extent that such claims are not
satisfied by the Company. Inasmuch as the Company carries public liability
insurance which it considers adequate, any risk of personal liability to
shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.
The Register and Transfer Agent for any Preferred Shares will be set forth
in the applicable Prospectus Supplement.
Reference is made to the Prospectus Supplement relating to the Preferred
Shares offered thereby for specific terms, including:
(1) the title and stated value of such Preferred Shares;
(2) the number of shares of such Preferred Shares being offered, the
liquidation preference per share and the offering price of such
Preferred Shares;
(3) the distribution rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred
Shares;
(4) the date from which distributions on such Preferred Shares shall
accumulate, if applicable;
(5) the procedures for any auction and remarketing, if any, for such
Preferred Shares;
(6) the provision for a sinking fund, if any, for such Preferred
Shares;
(7) the provisions for redemption, if applicable, of such Preferred
Shares;
(8) any listing of such Preferred Shares on any securities exchange;
20
(9) the terms and conditions, if applicable, upon which such
Preferred Shares will be convertible into Common Shares,
including the conversion price (or manner of calculation
thereof);
(10) a discussion of federal income tax considerations applicable to
such Preferred Shares;
(11) the relative ranking and preferences of such Preferred Shares as
to distribution rights (including whether any liquidation
preference as to the Preferred Shares will be treated as a
liability for purposes of determining the availability of assets
of the Company for distributions to holders of Shares remaining
junior to the Preferred Shares as to distribution rights) and
rights upon liquidation, dissolution or winding up of the affairs
of the Company;
(12) any limitations on issuance of any series of preferred shares
ranking senior to or on a parity with such series of Preferred
Shares as to distribution rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company;
(13) any limitations on direct or beneficial ownership and
restrictions on transfer of such Preferred Shares, in each case
as may be appropriate to preserve the status of the Company as a
REIT; and
(14) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Shares.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Shares will, with respect to distribution rights and/or rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to all
classes or series of Common Shares, and to all equity securities ranking junior
to such Preferred Shares with respect to distribution rights and/or rights upon
liquidation, dissolution or winding up of the Company as the case may be; (ii)
on a parity with all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank on a parity with the
Preferred Shares with respect to distribution rights and/or rights upon
liquidation, dissolution or winding up of the Company, as the case may be; and
(iii) junior to all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank senior to the Preferred
Shares with respect to distribution rights and/or rights upon liquidation,
dissolution or winding up of the Company, as the case may be. As used in the
Declaration of Trust, for these purposes, the term 'equity securities' does not
include convertible debt securities. The Preferred Shares will rank on a parity
with or junior to the Series A-1 Preferred Shares, Series B Preferred Shares and
Series C Preferred Shares unless the Series A-1 Preferred Holders, Series B
Preferred Holders or Series C Preferred Holders agree otherwise with respect to
the Series A-1 Preferred Shares, Series B Preferred Shares or Series C Preferred
Shares, respectively.
DISTRIBUTIONS
Holders of Preferred Shares shall be entitled to receive, when, as and if
authorized by the Board of Trustees of the Company, out of assets of the Company
legally available for payment, cash distributions at such rates (or method of
calculation thereof) and on such dates as will be set forth in the applicable
Prospectus Supplement. Each such distribution shall be payable to holders of
record as they appear on the share transfer books of the Company on such record
dates as shall be fixed by the Board of Trustees of the Company.
Distributions on any series of the Preferred Shares may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement.
Distributions, if cumulative, will be cumulative from and after the date set
forth in the applicable Prospectus Supplement. If the Board of Trustees of the
Company fails to authorize a distribution payable on a distribution payment date
on any series of the Preferred Shares for which distributions are noncumulative,
then the holders of such series of the Preferred Shares will have no right to
receive a distribution in respect of the distribution period ending on such
distribution payment date, and the Company will have no obligation to pay the
distribution accrued for such period, whether or not distributions on such
series are authorized for payment on any future distribution payment date.
If any Preferred Shares of any series are outstanding, no full
distributions shall be authorized or paid or set apart for payment on the
preferred shares of the Company of any other series ranking, as to
distributions, on a parity with or junior to the Preferred Shares of such series
for any period unless (i) if such series of Preferred Shares has a cumulative
distribution, full cumulative distributions have been or contemporaneously are
21
authorized and paid or authorized and a sum sufficient for the payment thereof
set apart for such payment on the Preferred Shares of such series for all past
distribution periods and the then current distribution period or (ii) if such
series of Preferred Shares does not have a cumulative distribution, full
distributions for the then current distribution period have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof set apart for such payment on the Preferred Shares of such
series. When distributions are not paid in full (or a sum sufficient for such
full payment is not so set apart) upon the Preferred Shares of any series and
the shares of any other series of preferred shares ranking on a parity as to
distributions with the Preferred Shares of such series, all distributions
authorized upon the Preferred Shares of such series and any other series of
preferred shares ranking on a parity as to distributions with such Preferred
Shares shall be authorized pro rata so that the amount of distributions
authorized per share on the Preferred Shares of such series and such other
series of preferred shares shall in all cases bear to each other the same ratio
that accrued and unpaid distributions per share on the Preferred Shares of such
series (which shall not include any accumulation in respect of unpaid
distributions for prior distribution periods if such Preferred Shares do not
have a cumulative distribution) and such other series of preferred shares bear
to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any distribution payment or payments on Preferred Shares
of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Shares has a cumulative distribution, full cumulative
distributions on the Preferred Shares of such series have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof set apart for payment for all past distribution periods and
the then current distribution period and (ii) if such series of Preferred Shares
does not have a cumulative distribution, full distributions on the Preferred
Shares of such series have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof set apart for payment
for the then current distribution period, no distributions (other than in common
shares or other shares of beneficial interest ranking junior to the Preferred
Shares of such series as to distributions and upon liquidation, dissolution or
winding up of the affairs of the Company) shall be authorized or paid or set
aside for payment or other distribution upon the Common Shares or any other
shares of beneficial interest of the Company ranking junior to or on a parity
with the Preferred Shares of such series as to distributions or upon
liquidation, dissolution or winding up of the affairs of the Company, nor shall
any Common Shares or any other shares of beneficial interest of the Company
ranking junior to or on a parity with the Preferred Shares of such series as to
distributions or upon liquidation, dissolution or winding up of the affairs of
the Company 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 beneficial interest) by the Company (except by
conversion into or exchange for other shares of beneficial interest of the
Company ranking junior to the Preferred Shares of such series as to
distributions and upon liquidation, dissolution or winding up of the affairs of
the Company).
Any distribution payment made on a series of Preferred Shares shall first
be credited against the earliest accrued but unpaid distribution due with
respect to shares of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred
Shares of any series will be subject to mandatory redemption or redemption at
the option of the Company, as a whole or in part, in each case upon the terms,
at the times and at the redemption prices set forth in such Prospectus
Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of such Preferred Shares
that shall be redeemed by the Company in each year commencing after a date to be
specified, at a redemption price per share to be specified, together with an
amount equal to all accrued and unpaid distributions thereon (which shall not,
if such Preferred Shares does not have a cumulative distribution, include any
accumulation in respect of unpaid distributions for prior distribution periods)
to the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Shares of any series is payable only from the net
proceeds of the issuance of shares of beneficial interest of the Company, the
terms of such Preferred Shares may provide that, if no such shares of beneficial
interest shall have been issued or to the extent the net proceeds from any
issuance are insufficient to pay in full the aggregate redemption price then
due, such Preferred
22
Shares shall automatically and mandatorily be converted into shares of the
applicable shares of beneficial interest of the Company pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred
Shares has a cumulative distribution, full cumulative distributions on all
shares of such series have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof set apart for payment
for all past distribution periods and the then current distribution period and
(ii) if such series of Preferred Shares does not have a cumulative distribution,
full distributions on all shares of such series have been or contemporaneously
are authorized and paid or authorized and a sum sufficient for the payment
thereof set apart for payment for the then current distribution period, no
shares of such series of Preferred Shares shall be redeemed unless all
outstanding Preferred Shares of such series are simultaneously redeemed;
provided, however, that the foregoing shall not prevent the purchase or
acquisition of Preferred Shares of such series pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding Preferred
Shares of such series, and, unless (i) if such series of Preferred Shares has a
cumulative distribution, full cumulative distributions on all outstanding shares
of such series have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof set apart for payment
for all past distribution periods and the then current distribution period and
(ii) if such series of Preferred Shares does not have a cumulative distribution,
full distributions on all shares of such series have been or contemporaneously
are authorized and paid or authorized and a sum sufficient for the payment
thereof set apart for payment for the then current distribution period, the
Company shall not purchase or otherwise acquire directly or indirectly any
Preferred Shares of such series (except by conversion into or exchange for
shares of beneficial interest of the Company ranking junior to the Preferred
Shares of such series as to distributions and upon liquidation).
If fewer than all of the outstanding Preferred Shares of any series are to
be redeemed, the number of shares to be redeemed will be determined by the
Company and such shares may be redeemed pro rata from the holders of record of
such shares in proportion to the number of such shares held by such holders
(with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Shares of
any series to be redeemed at the address shown on the stock transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Shares to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such Preferred
Shares are to be surrendered for payment of the redemption price; (v) that
distributions 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 Preferred Shares
of any series are to be redeemed, the notice mailed to each such holder thereof
shall also specify the number of Preferred Shares to be redeemed from each such
holder. If notice of redemption of any Preferred Shares has been properly given
and if the funds necessary for such redemption have been irrevocably set aside
by the Company in trust for the benefit of the holders of any Preferred Shares
so called for redemption, then from and after the redemption date distributions
will cease to accrue on such Preferred Shares, such Preferred Shares shall no
longer be deemed outstanding and all rights of the holders of such shares will
terminate, except the right to receive the redemption price. Any moneys so
deposited which remain unclaimed by the holders of such Preferred Shares at the
end of two years after the redemption date will be returned by the applicable
bank or trust company to the Company.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Shares or any other class or series of shares
of beneficial interest of the Company ranking junior to any series of Preferred
Shares in the distribution of assets upon any liquidation, dissolution or
winding up of the Company, the holders of such series of Preferred Shares shall
be entitled to receive, after payment or provision for payment of the Company's
debts and other liabilities, out of assets of the Company 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 distributions accrued and unpaid
thereon (which shall not include any accumulation in respect of unpaid
distributions for prior distribution periods if such Preferred Shares do not
have a cumulative distribution). After payment of the full amount of the
liquidating distributions to which they are
23
entitled, the holders of such series of Preferred Shares will have no right or
claim to any of the remaining assets of the Company. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding up, the
legally available assets of the Company are insufficient to pay the amount of
the liquidating distributions on all such outstanding Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of shares
of beneficial interest of the Company ranking on a parity with such series of
Preferred Shares in the distribution of assets upon liquidation, dissolution or
winding up, then the holders of such series of Preferred Shares and all other
such classes or series of shares of beneficial interest 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 the liquidating distributions shall have been made in full to all
holders of a series of Preferred Shares, the remaining assets of the Company
shall be distributed among the holders of any other classes or series of shares
of beneficial interest ranking junior to such series of Preferred Shares 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
purposes of this section, a distribution of assets in any dissolution, winding
up or liquidation will not include (i) any consolidation or merger of the
Company with or into any other corporation, (ii) any dissolution, liquidation,
winding up, or reorganization of the Company immediately followed by
organization of another entity to which such assets are distributed or (iii) a
sale or other disposition of all or substantially all of the Company's assets to
another entity; provided that, in each case, effective provision is made in the
charter of the resulting and surviving entity or otherwise for the recognition,
preservation and protection of the rights of the holders of Preferred Shares.
VOTING RIGHTS
Holders of any series of Preferred Shares will not have any voting rights,
except as set forth below or as otherwise from time to time required by law or
as indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Shares, so long as
any Preferred Shares remain outstanding, the Company will not, without the
affirmative vote or consent of the holders of a majority of the shares of each
series of Preferred Shares outstanding at the time, given in person or by proxy,
either in writing or at a meeting (such series voting separately as a class),
(i) authorize, create or issue, or increase the authorized or issued amount of,
any class or series of shares of beneficial interest ranking prior to such
series of Preferred Shares with respect to payment of distributions or the
distribution of assets upon liquidation, dissolution or winding up, or
reclassify any authorized shares of beneficial interest of the Company into any
such shares, or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such shares; or (ii)
amend, alter or repeal the provisions of the Declaration of Trust, including the
applicable Articles Supplementary for such series of Preferred Shares, whether
by merger, consolidation or otherwise, so as to materially and adversely affect
any right, preference, privilege or voting power of such series of Preferred
Shares or the holders thereof; provided, however, that any increase in the
amount of the authorized preferred shares or the creation or issuance of any
other series of preferred shares, or any increase in the amount of authorized
shares of such series or any other series of Preferred Shares, in each case
ranking on a parity with or junior to the Preferred Shares of such series with
respect to payment of distributions or the distribution of assets upon
liquidation, dissolution or winding up, shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be affected, all outstanding shares of such series of Preferred Shares shall
have been redeemed or called for redemption upon proper notice and sufficient
funds shall have been irrevocably deposited in trust to effect such redemption.
Whenever distributions on any Preferred Shares shall be in arrears for six
or more consecutive quarterly periods, the holders of such Preferred Shares
(voting together as a class with all other series of Preferred Shares upon which
like voting rights have been conferred and are exercisable) will be entitled to
vote for the election of two additional trustees of the Company until, (i) if
such series of Preferred Shares has a cumulative distribution, all distributions
accumulated on such Preferred Shares for the past distribution periods and the
then current distribution period shall have been fully paid or authorized and a
sum sufficient for the payment thereof set aside
24
for payment or (ii) if such series of Preferred Shares does not have a
cumulative distribution, four consecutive quarterly distributions shall have
been fully paid or authorized and a sum sufficient for the payment thereof set
aside for payment. In such case, the entire Board of Trustees of the Company
will be increased by two trustees.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Shares
are convertible into Common Shares will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will include the number of
Common Shares into which the Preferred Shares are convertible, the conversion
price (or manner of calculation thereof), the conversion period, provisions as
to whether conversion will be at the option of the holders of the Preferred
Shares or the Company, the events requiring an adjustment of the conversion
price and provisions affecting conversion in the event of the redemption of such
Preferred Shares.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the 'Code'), not more than 50% in value of its outstanding
shares of beneficial interest may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code) during the last half of a taxable
year, and the shares of beneficial interest must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year of 12 months (or during
a proportionate part of a shorter taxable year). The Declaration of Trust
imposes certain restrictions on the ownership and transferability of Preferred
Shares. For a general description of such restrictions, see 'Description of
Common Shares--Restrictions on Ownership.' All certificates representing
Preferred Shares will bear a legend referring to these restrictions.
DESCRIPTION OF COMMON SHARES
As of November 1, 1997, the Company had outstanding 10,347,064 Common
Shares. The following description of the Common Shares sets forth certain
general terms and provisions of the Common Shares to which any Prospectus
Supplement may relate, including a Prospectus Supplement providing that Common
Shares will be issuable upon conversion of Debt Securities or Preferred Shares
or upon the exercise of Warrants. The statements below describing the Common
Shares are in all respects subject to and qualified in their entirety by
reference to the applicable provisions of the Declaration of Trust and the
Company's Bylaws.
Holders of Common Shares will be entitled to receive distributions when, as
and if authorized and declared by the Board of Trustees of the Company, out of
funds legally available therefor. Payment and authorization of distributions on
the Common Shares and purchases of Common Shares by the Company will be subject
to certain restrictions if the Company fails to pay distributions on the Series
A-1 Preferred Shares, Series B Preferred Shares, Series C Preferred Shares or
Preferred Shares. See 'Description of Preferred Shares.' Upon any liquidation,
dissolution or winding up of the Company, holders of Common Shares 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 other
liabilities of the Company and the preferential amounts owing with respect to
any outstanding Series A-1 Preferred Shares, Series B Preferred Shares, Series C
Preferred Shares or Preferred Shares. The Common Shares will possess ordinary
voting rights for the election of trustees and in respect of other trust
matters, each share entitling the holder thereof to one vote. Holders of Common
Shares will not have cumulative voting rights in the election of trustees, which
means that holders of more than 50% of all of the outstanding Common Shares
voting for the election of trustees can elect all of the trustees (subject to
the rights of holders of Preferred Shares to elect trustees) if they choose to
do so and the holders of the remaining shares cannot elect any trustees.
Approval of the following matters requires the affirmative vote of the holders
of at least 66 2/3% of all outstanding Common Shares: certain amendments to the
Declaration of Trust, termination of the Company, removal of a trustee, certain
mergers, reorganizations or consolidations of the Company or the sale,
conveyance, exchange or other disposition of all or substantially all of the
Company's property. Holders of Common Shares do not have preemptive rights,
which means they have no right to acquire any additional Common Shares that may
be issued by the Company at a subsequent date. The Common Shares will, when
issued, be fully paid and nonassessable.
The description of the limitations on the liability of shareholders of the
Company set forth under 'Description of Preferred Shares--General' is applicable
to holders of Common Shares.
The Registrar and Transfer Agent for the Company's Common Shares is First
Union National Bank of NC.
25
RESTRICTIONS ON OWNERSHIP
For the Company to continue to qualify as a REIT under the Code, among
other requirements, not more than 50% in value of its outstanding shares of
beneficial interest may be owned, directly or indirectly, by five or fewer
individuals (after applying certain attribution rules of the Code) during the
last half of a taxable year, and the shares must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year (see 'Federal Income Tax
Considerations'). The Declaration of Trust, subject to certain exceptions,
provides that no holder (other than (i) Norman M. Kranzdorf, President and Chief
Executive Officer of the Company, and Marvin Williams, former Chairman of the
Board of the Company, and (ii) any other person approved by the trustees, at
their option and in their discretion, provided that such approval will not
result in the termination of the status of the Company as a REIT) may own, or be
deemed to own by virtue of the attribution provisions of the Code, more than
9.8% (the 'Ownership Limit') of the lesser of the number or value (in either
case as determined in good faith by the trustees) of the total outstanding
Common Shares. All certificates representing Common Shares will bear a legend
referring to these restrictions. The Articles Supplementary for any series of
Preferred Shares will provide, subject to certain exceptions, that no holder
(other than any person approved by the trustees, at their option and in their
discretion, provided that such approval will not result in the termination of
the status of the Company as a REIT) may own, or be deemed to own by virtue of
the attribution provisions of the Code, more than 9.8% (the 'Preferred Shares
Ownership Limit') of the lesser of the number or the value (in either case as
determined in good faith by the trustees) of the total outstanding Preferred
Shares. Notwithstanding the foregoing, if certain events occur, including a
substantial reduction in the value of the Common Shares and high concentrations
of beneficial ownership of Common Shares and/or Preferred Shares, such that five
or fewer individuals own more than 50% of the value of the outstanding shares of
beneficial interest of the Company during the last half of a taxation year, then
the Company would fail to qualify as a REIT.
The trustees may waive the Ownership Limit or the Preferred Shares
Ownership Limit if evidence satisfactory to the trustees and the Company's tax
counsel is presented that such ownership will not then or in the future
jeopardize the Company's status as a REIT. As a condition of such waiver, the
intended transferee must give written notice to the Company of the proposed
transfer and must furnish such opinions of counsel, affidavits, undertakings,
agreements and information as may be required by the trustees no later than the
15th day prior to any transfer which, if consummated, would result in the
intended transferee owning shares in excess of the Ownership Limit or the
Preferred Shares Ownership Limit. The foregoing restrictions on transferability
and ownership will not apply if the trustees determine that it is no longer in
the best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT. Any transfer of shares that would (i) create a direct or
indirect ownership of shares in excess of the Ownership Limit or the Preferred
Shares Ownership Limit, (ii) result in the shares being owned by fewer than 100
persons or (iii) result in the Company being 'closely held' within the meaning
of Section 856(h) of the Code, shall be null and void, and the intended
transferee will acquire no rights to the shares. The Declaration of Trust
provides that the Company, by notice to the holder thereof, may purchase any or
all shares of beneficial interest of the Company (the 'Excess Shares') that are
proposed to be transferred pursuant to a transfer which, if consummated, would
result in the intended transferee owning shares in excess of the Ownership Limit
or would otherwise jeopardize the REIT status of the Company. The Articles
Supplementary for any series of Preferred Shares will provide that the Company,
by notice to the holder thereof, may purchase any or all Preferred Shares (the
'Excess Preferred Shares') that are proposed to be transferred pursuant to a
transfer which, if consummated, would result in the intended transferee owning
Preferred Shares in excess of the Preferred Shares Ownership Limit or would
otherwise jeopardize the REIT status of the Company. The purchase price of any
Excess Shares or Excess Preferred Shares, as the case may be, shall be equal to
the fair market value of such shares reflected in the closing sales price for
the shares, if then listed on a national securities exchange, or such price for
the shares on the principal exchange if then listed on more than one national
securities exchange, or, if the shares are not then listed on a national
securities exchange, the latest bid quotation for the shares if then traded
over-the-counter, or, if such quotation is not available, the fair market value
as determined by the trustees in good faith, on the last trading day immediately
preceding the day on which notice of such proposed purchase is sent by the
Company. From and after the date fixed for purchase by the trustees, the holder
of such shares to be purchased by the Company shall cease to be entitled to
distribution, voting rights and other benefits with respect to such shares
except the right to payment of the purchase price for the shares. Any
distribution paid to a proposed transferee on Excess Shares or Excess Preferred
Shares prior to
26
the discovery by the Company that such shares have been transferred in violation
of the provisions of the Declaration of Trust or Articles Supplementary shall be
repaid to the Company upon demand. If the foregoing transfer restrictions are
determined to be void or invalid by virtue of any legal decision, statute, rule
or regulation, then the intended transferee of any Excess Shares or Excess
Preferred Shares may be deemed, at the option of the Company, to have acted as
an agent on behalf of the Company in acquiring such Excess Shares or Excess
Preferred Shares and to hold such Excess Shares or Excess Preferred Shares on
behalf of the Company.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% in number or value of the outstanding (i) Common Shares
or (ii) Preferred Shares of the Company must give a written notice to the
Company containing the information specified in the Declaration of Trust or
Articles Supplementary by January 30 of each year. In addition, each shareholder
shall upon demand be required to disclose to the Company in writing such
information with respect to the direct, indirect and constructive ownership of
beneficial interests as the trustees deem necessary to comply with the
provisions of the Code applicable to a REIT, to comply with the requirements of
any taxing authority or governmental agency or to determine any such compliance.
These ownership limitations may delay, deter, or prevent a change of
control of the Company or other transaction that may be in the best interests of
the shareholders unless the trustees determine that maintenance of REIT status
is no longer in the best interests of the Company.
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Debt Securities,
Preferred Shares or Common Shares. Warrants may be issued independently or
together with any Offered Securities and may be attached to or separate from
such securities. Each series of Warrants will be issued under a separate warrant
agreement (each, a 'Warrant Agreement') to be entered into between the Company
and a warrant agent ('Warrant Agent'). The Warrant Agent will act solely as an
agent of the Company 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 following terms,
where applicable, of the Warrants in respect of which this Prospectus is being
delivered: (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
currencies in which the price of such Warrants may be payable; (5) the
designation, aggregate principal amount and terms of the securities purchasable
upon exercise of such Warrants; (6) the designation and terms of the Offered
Securities with which such Warrants are issued and the number of such Warrants
issued with each such security; (7) the currency or currencies, including
composite currencies, in which the principal of or any premium or interest on
the securities purchasable upon exercise of such Warrants will be payable; (8)
if applicable, the date on and after which such Warrants and the related
securities will be separately transferable; (9) the price at which and currency
or currencies, including composite currencies, in which the securities
purchasable upon exercise of such Warrants may be purchased; (10) the date on
which the right to exercise such Warrants shall commence and the date on which
such right shall expire; (11) the minimum or maximum amount of such Warrants
which may be exercised at any one time; (12) information with respect to
book-entry procedures, if any; (13) a discussion of certain Federal income tax
considerations; and (14) any other terms of such Warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
Warrants.
DESCRIPTION OF RIGHTS
The Company may issue Rights to its shareholders for the purchase of Common
Shares. Each series of Rights will be issued under a separate rights agreement
(a 'Rights Agreement') to be entered into between the Company and a bank or
trust company, as Rights agent, all as set forth in the Prospectus Supplement
relating to the particular issue of Rights. The Rights agent will act solely as
an agent of the Company in connection with the certificates relating to the
Rights and will not assume any obligation or relationship of agency or trust for
or with
27
any holders of Rights certificates or beneficial owners of Rights. The Rights
Agreement and the Rights certificates relating to each series of Rights will be
filed with the Commission and incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part at or prior to the
time of the issuance of such series of Rights.
The applicable Prospectus Supplement will describe the terms of the Rights
to be issued, including the following where applicable: (i) the date for
determining the shareholders entitled to the Rights distribution; (ii) the
aggregate number of Common Shares purchasable upon exercise of such Rights and
the exercise price; (iii) the aggregate number of Rights being issued; (iv) the
date, if any, on and after which such Rights may be transferable separately; (v)
the date on which the right to exercise such Rights shall commence and the date
on which such right shall expire; (vi) any special United States federal income
tax consequences; and (vii) any other terms of such Rights, including terms,
procedures and limitations relating to the distribution, exchange and exercise
of such Rights.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the Code provisions
governing the United States federal income tax treatment of a REIT and is not
tax advice. The tax treatment of a holder of any of the Offered Securities will
vary depending upon the terms of the specific securities acquired by such
holder, as well as his particular situation, and this discussion does not
attempt to address any aspects of Federal income taxation relating to holders of
Offered Securities. Certain Federal income tax considerations relevant to
holders of the Offered Securities will be provided in the applicable Prospectus
Supplement relating thereto.
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 a taxpayer that receives such a
ruling), and court decisions, all as of the date hereof. The Taxpayer Relief Act
of 1997 (the '1997 Act') was enacted on August 5, 1997. The 1997 Act contains
many provisions which generally make it easier to operate and to continue to
qualify as a REIT for taxable years beginning after the date of enactment
(which, for the Company, would be applicable commencing with its taxable year
beginning January 1, 1998). No assurance can be given that future legislation,
Treasury Regulations, administrative interpretations and court decisions will
not significantly change the current law or adversely affect existing
interpretations of current law. Any such change could apply retroactively to
transactions preceding the date of the change.
EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT,
AS WELL AS HIS OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES OF THE
ACQUISITION, OWNERSHIP AND SALE OF THE OFFERED 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.
FEDERAL INCOME 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, 1992. In
the opinion of Robinson Silverman Pearce Aronsohn & Berman LLP, commencing with
the Company's taxable year ended December 31, 1992, the Company was organized in
conformity with the requirements for qualification as a REIT, and its method of
operation enabled it to meet the requirements for qualification and taxation as
a REIT under the Code. The Company intends to continue to operate in such a
manner, but no assurance can be given that it will operate in a manner so as to
qualify or remain qualified.
It must be emphasized that this opinion is based on various assumptions and
is conditioned upon certain representations made by the Company as to factual
matters. Such factual assumptions and representations are set forth below in
this discussion of 'Federal Income Tax Considerations.' In addition, this
opinion is based upon
28
the factual representations of the Company concerning its business and
properties as set forth in this Prospectus. Moreover, such qualification and
taxation as a REIT depends upon the Company's ability to meet, through actual
annual operating results, distribution levels, diversity of share ownership, and
the various other qualification tests imposed under the Code discussed below,
the results of which have not been and will not be reviewed by Robinson
Silverman Pearce Aronsohn & Berman LLP. Accordingly, no assurance can be given
that the actual results of the Company's operation for any one taxable year will
satisfy such requirements. See '--Failure to Qualify as a Real Estate Investment
Trust.'
If the Company qualifies for tax treatment as a REIT, it will generally not
be subject to Federal corporate taxation on its net income to the extent
currently distributed to its shareholders. This substantially eliminates the
'double taxation' (at both the corporate and stockholder levels) that typically
results from the use of corporate investment vehicles.
The Company will be subject to Federal income tax, however, as follows:
First, the Company will be taxed at regular corporate rates on its undistributed
REIT taxable income, including undistributed net capital gains. Second, under
certain circumstances, the Company may be subject to the 'alternative minimum
tax' to the extent that tax exceeds its regular tax. Third, if the Company has
net income from the sale or other disposition of 'foreclosure property' that is
held primarily for sale to customers in the ordinary course of business or other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, any net income that the Company
has 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 and, effective for the Company's
taxable years beginning January 1, 1998 and thereafter, other than dispositions
of property that occur due to an involuntary conversion) will be subject to a
100% tax. Fifth, if the Company should fail to satisfy either the 75% or 95%
gross income tests (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 an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75% or
95% test, multiplied by (b) a fraction intended to reflect the Company's
profitability. Sixth, if the Company fails to distribute during each year at
least the sum of (i) 85% of its 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 preceding periods, the Company will be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed. Seventh, if the Company acquires any asset from a C corporation
(i.e., generally a corporation subject to full corporate-level tax) in certain
transactions in which the basis of the asset in the hands of the Company is
determined by reference to the basis of the asset (or any other property) in the
hands of the C corporation, and the Company recognizes gain on the disposition
of such asset during the 10-year period (the 'Recognition Period') beginning on
the date on which such asset was acquired by the Company, then, to the extent of
the excess, if any, of the fair market value over the adjusted basis of any such
asset as of the beginning of the Recognition Period, such gain will be subject
to tax at the highest regular corporate rate.
Requirements for Qualification
A REIT is defined in the Code as a corporation, trust or association: (1)
which is managed by one or more trustees or directors; (2) the beneficial
ownership of which is evidenced by transferable shares or by transferable
certificates of beneficial interest; (3) which would be taxable as a domestic
corporation, but for Sections 856 through 860 of the Code; (4) which is neither
a financial institution nor an insurance company subject to certain provisions
of the Code; (5) the beneficial ownership of which is held by 100 or more
persons; (6) not more than 50% in value of the outstanding stock of which is
owned during the last half of each taxable year, directly or indirectly, by or
for five or fewer individuals (as defined in the Code to include certain
entities) (the 'Five or Fewer Requirement'); and (7) which meets certain income
and asset tests described below. Conditions (1) to (4), inclusive, must be met
during the entire taxable year and condition (5) must be met during at least 335
days of a taxable year of 12 months or during a proportionate part of a taxable
year of less than 12 months. For purposes of conditions (5) and (6), pension
funds and certain other tax-exempt entities are treated as individuals, subject
to a 'look-through' exception in the case of condition (6).
The Company has represented that it has satisfied the share ownership
requirements set forth in (5) and (6) above. In addition, the Company's
Declaration of Trust provides restrictions regarding the transfer of its
29
Shares which are intended to assist the Company in continuing to satisfy the
shares ownership requirements described in (5) and (6) above. Such transfer
restrictions are described in 'Description of Common Shares--Restrictions on
Ownership.'
Pursuant to the 1997 Act, for the Company's taxable years commencing on and
after January 1, 1998, if the Company complies with regulatory rules pursuant to
which it is required to send annual letters to certain of its shareholders
requesting information regarding the actual ownership of its stock, but does not
know, or exercising reasonable diligence would not have known, whether it failed
to meet the Five or Fewer Requirement, the Company will be treated as having met
the requirement described in (6) above. If the Company were to fail to comply
with these regulatory rules for any year, it would be subject to a $25,000
penalty. If the Company's failure to comply was due to intentional disregard of
the requirements, the penalty is increased to $50,000. However, if the Company's
failure to comply was due to reasonable cause and not willful neglect, no
penalty would be imposed.
The Company owns and operates a number of properties through wholly owned
subsidiaries. Code Section 856(i) provides that a corporation which is a
'qualified REIT subsidiary' shall not be treated as a separate corporation, and
all assets, liabilities, and items of income, deduction, and credit of a
'qualified REIT subsidiary' shall be treated as assets, liabilities and such
items (as the case may be) of the REIT. Thus, in applying the requirements
described herein, the Company's 'qualified REIT subsidiaries' will be ignored,
and all assets, liabilities and items of income, deduction, and credit of such
subsidiaries will be treated as assets, liabilities and items of the Company.
Income Tests
There are three percentage tests relating to the sources of the Company's
gross income. First, at least 75% of the Company's gross income (excluding gross
income from certain sales of property held primarily for sale and from discharge
of indebtedness) must be directly or indirectly derived each taxable year from
investments relating to real property or mortgages on real property or certain
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from certain sales of property held primarily for sale
and from discharge of indebtedness) must be directly or indirectly derived each
taxable year from any of the sources qualifying for the 75% test and from
dividends, interest, and gain from the sale or disposition of stock or
securities. Third, in each taxable year short-term gains from sales of stock or
securities, gains from sales of property (other than foreclosure property) held
primarily for sale and gains from the sale or other taxable disposition of real
property held for less than four years (other than from involuntary conversions
and foreclosure property) must represent less than 30% of the Company's gross
income. However, the 1997 Act repeals the 30% gross income test effective for
the Company's taxable years beginning on and after January 1, 1998. In applying
these tests, if the Company invests in a partnership, the Company will be
treated as realizing its share of the income and bearing its share of the loss
of the partnership, and the character of such income or loss, as well as other
partnership items, will be determined at the partnership level.
Rents received by the Company will qualify as 'rents from real property'
for purposes of satisfying the gross income tests for a REIT 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, although rents generally will not
be excluded merely because they are based on a fixed percentage of receipts or
sales. Second, rents received from a tenant will not qualify as 'rents from real
property' if the REIT, or an owner of 10% or more of the REIT, also directly or
constructively owns 10% or more of such tenant. Third, if rent attributable to
personal property leased in connection with a lease of real property is greater
than 15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as 'rents from real
property.' Finally, for rents to qualify as 'rents from real property,' the REIT
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an independent contractor
from whom the REIT derives no income; provided, however, the Company may
directly perform certain services customarily furnished or rendered in
connection with the rental of real property in the geographic area in which the
property is located other than services which are considered rendered to the
occupant of the property. The Company will, in a timely manner, hire independent
contractors from whom it derives no revenue to perform such services, except
that the Company will directly perform services under certain of its leases with
respect to which it will receive an opinion of counsel or otherwise satisfy
itself that its performance of such services will
30
not cause the rents received with respect to such leases to fail to qualify as
'rents from real property.' The Company has represented that each of the above
requirements has been satisfied. In addition, for its 1998 taxable year and
thereafter, the Company is permitted to receive up to 1% of the gross income
from each property from the provision of non-customary services and still treat
all other amounts received from such property as 'rents from real property.'
The term 'interest' generally does not include any amount if the
determination of such amount depends in whole or in part on the income or
profits of any person, although an amount generally will not be excluded from
the term 'interest' solely by reason of being based on a fixed percentage of
receipts or sales.
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 eligible for relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not now possible to determine the circumstances under which the
Company may be entitled to the benefit of these relief provisions. If these
relief provisions apply, a 100% tax is imposed on the net income attributable to
the greater of the amount by which the Company failed the 75% test or the 95%
test.
Asset Tests
At the close of each quarter of its taxable year, the Company must also
satisfy several tests relating to the nature and diversification of its assets.
First, at least 75% of the value of the Company's total assets must be
represented by real estate assets, cash, cash items (including receivables
arising in the ordinary course of the Company's operation) and government
securities. In addition, not more than 25% of the value of the Company's total
assets may be represented by securities other than those includible in the 75%
asset class. Moreover, 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. Finally, of the investments included in
the 25% asset class, the Company may not own more than 10% of any one issuer's
outstanding voting securities.
Annual Distribution Requirements
The Company, in order to avoid being taxed as a regular corporation, is
required to make distributions (other than capital gain distributions) to its
shareholders which qualify for the dividends paid deduction in an amount at
least equal to (A) the sum of (i) 95% of the Company's 'REIT taxable income'
(computed without regard to the dividends paid deduction and the Company's net
capital gain) and (ii) 95% of the after-tax net income, if any, from foreclosure
property, minus (B) a portion of certain items of non-cash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular distribution
payment 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 corporate tax rates. Finally, as discussed above, the Company
may be subject to an excise tax if it fails to meet certain other distribution
requirements. The Company intends to make timely distributions sufficient to
satisfy these annual distribution requirements.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement, or to
distribute such greater amount as may be necessary to avoid income and excise
taxation, due to, among other things, (a) 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 (b) the payment of severance benefits that may not be
deductible to the Company. In the event that such timing differences occur, the
Company may find it necessary to arrange for borrowings or, if possible, pay
taxable share distributions in order to meet the distribution requirement.
Under certain circumstances, in the event of a deficiency determined by the
IRS, the Company may be able to rectify a resulting 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 distributions paid for the
31
earlier year. Thus, although the Company may be able to avoid being taxed on
amounts distributed as deficiency distributions, it will be required to pay
interest based upon the amount of any deduction taken for deficiency
distributions.
FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST
The Company's election to be treated as a REIT will be automatically
terminated if the Company fails to meet the requirements described above. In
that event, the Company will be subject to tax (including any applicable minimum
tax) on its taxable income at regular corporate rates, and distributions to
shareholders will not be deductible by the Company. All distributions to
shareholders will be taxable as ordinary income to the extent of current and
accumulated earnings and profits allocable to such distributions and will be
eligible for the 70% dividends received deduction for corporate shareholders
(although special rules apply in the case of any 'extraordinary dividend' as
defined in Code Section 1059). The Company will not be eligible again to elect
REIT status until the fifth taxable year which begins after the year for which
the Company's election was terminated unless the Company did not willfully fail
to file a timely return with respect to the termination taxable year, inclusion
of incorrect information in such return was not due to fraud with intent to
evade tax, and the Company establishes that failure to meet the requirement was
due to reasonable cause and not willful neglect. Failure to qualify for even one
year could result in the Company incurring substantial indebtedness (to the
extent borrowings are feasible) or liquidating substantial investments in order
to pay the resulting taxes.
FEDERAL INCOME TAXATION OF SHAREHOLDERS
General
So long as the Company qualifies for taxation as a REIT, distributions with
respect to its Shares made out of current or accumulated earnings and profits
allocable thereto (and not designated as capital gain dividends) will be
includable by the shareholders as ordinary income for Federal income tax
purposes. For this purpose, the current and accumulated earnings and profits of
the Company will be allocated first to distributions with respect to Series A-1
Preferred Shares, Series B Preferred Shares and Series C Preferred Shares and
then to distributions with respect to Common Shares. None of these distributions
will be eligible for the dividends received deduction for corporate
shareholders. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the shareholder has held his shares. For a U.S. shareholder who
is an individual or an estate or trust, such capital gain dividends generally
will be taxable at the 28% rate applicable to mid-term capital gain (i.e., gains
from the sale of capital assets held for more than one year but not more than 18
months) except to the extent the Company designates the capital gain dividend as
a 20% rate distribution or a 25% rate distribution, as the case may be, based on
certain IRS guidelines. Corporate shareholders may be required to treat up to
20% of certain capital gain dividends as ordinary income.
The 1997 Act provides that, for the Company's taxable years beginning on
and after January 1, 1998, if the Company elects to retain and pay income tax on
any net long term capital gain, domestic shareholders of the Company would
include in their income as long term capital gain their proportionate share of
such net long term capital gain. A domestic shareholder would also receive a
refundable tax credit for such shareholder's proportionate share of the tax paid
by the Company on such retained capital gains and an increase in its basis in
the shares of the Company in an amount equal to the shareholder's includible
capital gains less its share of the tax deemed paid.
Distributions in excess of current or accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Shares. Shareholders will be required to
reduce the tax basis of their Shares by the amount of such distributions until
such basis has been reduced to zero, after which such distributions will be
taxable as capital gain (ordinary income in the case of a shareholder who holds
his Shares as a dealer). The tax basis as so reduced will be used in computing
the capital gain or loss, if any, realized upon sale of the Shares. Any loss
upon a sale or exchange of Shares by a shareholder who held such Shares for six
months or less (after applying certain holding period rules) will generally be
treated as a long-term capital loss to the extent such shareholder previously
received capital gain distributions with respect to such Shares.
32
Shareholders may not include in their individual Federal income tax returns
any net operating losses or capital losses of the Company. In addition, any
distribution declared by the Company in October, November or December of any
year payable to a shareholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the distribution is actually paid by the
Company no later than January 31 of the following year. The Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their non-foreign status to the Company.
Upon the sale or exchange of Shares to or with a person other than the
Company or a sale or exchange of Shares with the Company to the extent not
taxable as a dividend, a holder will recognize capital gain or loss equal to the
difference between the amount realized on such sale or exchange and the holder's
adjusted tax basis in such shares. Any capital gain or loss recognized will
generally be treated as mid-term capital gain or loss (taxable at a maximum rate
of 28%) if the holder held such shares for more than one year but not more than
18 months, or as net adjusted capital gain or loss (taxable at a maximum rate of
20%) if the holder held such shares for more than 18 months.
Redemption of Preferred Shares
If the redemption price of Preferred Shares that is subject to optional
redemption by the Company exceeds its issue price, and if such excess is not
considered 'reasonable,' the entire amount of the redemption premium will be
treated as being distributed to the holder of such shares, on an economic
accrual basis, over the period from issuance of such shares until the date the
shares are first redeemable. In this respect, the Treasury Regulations provide
as a safe harbor that a redemption premium not in excess of 10% of the issue
price of shares which are not redeemable for five years from the date of issue
is considered reasonable. Even if the precise tests of the safe harbor cannot be
met, however, a call premium will be regarded as reasonable if such premium is
in the nature of a penalty for a premature redemption of the Preferred Shares
and such premium does not exceed the amount the issuer would be required to pay
for the right to make such premature redemption under the market conditions
existing at the time of issuance.
Gain or loss recognized by a holder on a redemption of Preferred Shares
will be treated as a gain or loss from the sale or exchange of the Preferred
Shares (see discussion above concerning a sale or exchange of Shares), if,
taking into account shares that are actually or constructively owned under the
rules of Code Section 318 by such holder, either (i) the holder's interest in
Common Shares and Preferred Shares is completely terminated as a result of the
redemption, (ii) the redemption is 'substantially disproportionate' with respect
to the holder or (iii) the redemption is 'not essentially equivalent to a
dividend.' Whether a redemption is not essentially equivalent to a dividend
depends on each holder's facts and circumstances, but in any event, requires a
'meaningful reduction' in such holder's interest in the Company.
If none of the above conditions is satisfied, the entire amount of the cash
received on a redemption of the Preferred Shares will be treated as a
distribution taxable as a dividend (to the extent of the Company's current and
accumulated earnings and profits allocable thereto). The holder's basis in the
redeemed Preferred Shares would, in such case, be transferred to the holder's
remaining shares of the Company (if any).
Backup Withholding and Information Reporting
A noncorporate holder of Shares who is not otherwise exempt from backup
withholding may be subject to backup withholding at the rate of 31% with respect
to distributions paid on, or the proceeds of a sale, exchange or redemption of,
the Shares. Generally, backup withholding applies only when the taxpayer (i)
fails to furnish or certify his correct taxpayer identification number to the
payor in the manner requested, (ii) is notified by the IRS that he has failed to
report payments of interest or dividends properly, or (iii) under certain
circumstances, fails to certify that he has not been notified by the IRS that he
is subject to backup withholding for failure to report interest or dividend
payments. Any amounts withheld under the backup withholding rules from a payment
to a holder will be allowed as a credit against the holder's federal income tax
liability or as a refund, provided that the required information is furnished to
the IRS. Holders should consult their own tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining any applicable exemption.
33
Foreign Shareholders
The rules governing United States Federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, 'Non-U.S. Shareholders') are complex and no attempt
will be made herein to provide more than a general summary of such rules.
Prospective Non-U.S. Shareholders should consult with their own tax advisors to
determine the impact of Federal, state and local income tax laws with regard to
an investment in Shares, including any reporting requirements, as well as the
tax treatment of such an investment under their home country laws.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the Shares is treated as effectively connected with the
Non-U.S. Shareholder's conduct of a United States trade or business, the
Non-U.S. Shareholder generally will be subject to a tax at graduated rates, in
the same manner as U.S. Shareholders are taxed with respect to such dividends
(and may also be subject to the 30% branch profits tax in the case of a
shareholder that is a foreign corporation). The Company expects to withhold
United States income tax at the rate of 30% on the gross amount of any such
dividends paid to a Non-U.S. Shareholder unless (i) a lower treaty rate applies
and the Non-U.S. Shareholder files an IRS Form 1001 with the Company claiming a
lower treaty rate or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with
the Company claiming that the distribution is effectively connected income.
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's Shares, but rather will reduce
the adjusted basis of such Shares. To the extent that such distributions exceed
the adjusted basis of a Non-U.S. Shareholder's Shares, they will give rise to
tax liability if the Non-U.S. Shareholder would otherwise be subject to tax on
any gain from the sale or disposition of his Shares in the Company, as described
below. If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current and accumulated earnings and
profits, the distributions will be subject to withholding at the same rate as
dividends. However, amounts thus withheld are refundable if it is subsequently
determined that such distribution was, in fact, in excess of current and
accumulated earnings and profits of the Company.
Recently adopted Treasury Regulations not yet in effect (the 'Final
Regulations'), would alter the foregoing rules in certain respects. In general,
the Final Regulations are effective January 1, 1999. Under the Final
Regulations, a Non-U.S. Holder seeking an exemption from withholding or reduced
rate of withholding on account of a treaty or the effectively connected income
exemption would generally be required to provide a beneficial owner certificate
on Form W-8, which form may include, among other things, the Non-U.S. Holder's
taxpayer identification number and certain other information and
representations. The Final Regulations also provide special rules to determine
whether, for purposes of determining the applicability of a tax treaty,
distributions paid to a Non-U.S. Holder that is an entity should be treated as
paid to the entity or those holding an interest in the entity. With respect to
withholding the 30% tax on distributions to Non-U.S. Shareholders, the Final
Regulations would allow the Company to make an election to estimate its earnings
and profits and withhold the tax only on that portion of the gross distribution
that would constitute a dividend. The Company may or may not make any such
elections in the future.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
('FIRPTA'). Under FIRPTA, these distributions are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Non-U.S. Shareholders would thus be taxed at the normal capital gain
rates applicable to U.S. shareholders (subject to applicable alternative minimum
tax and 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 foreign corporate shareholder not entitled
to treaty exemption. The Company is required to withhold 35% of any distribution
that could be designated by the Company as a capital gain dividend. This amount
is creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
34
Gain recognized by a Non-U.S. Shareholder upon a sale of Shares generally
will not be taxed under FIRPTA if the Company is a 'domestically controlled
REIT,' defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. It is currently anticipated that the Company will
be a 'domestically controlled REIT,' and that therefore the sale of Shares will
not be subject to taxation under FIRPTA. However, gain not subject to FIRPTA
will be taxable to a Non-U.S. Shareholder if (i) investment in the Shares 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, or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a 'tax home' in the
United States, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains. If the gain on the sale of Shares
were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder will be
subject to the same treatment as U.S. shareholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals).
Tax-Exempt Shareholders
Distributions from the Company to a tax-exempt employee pension trust or
other domestic tax- exempt shareholder generally will not constitute 'unrelated
business taxable income' ('UBTI') unless the shareholder has borrowed to acquire
or carry its Shares. Qualified trusts that hold more than 10% (by value) of the
shares of certain REITs, however, may be required to treat a certain percentage
of such a REIT's distributions as UBTI. This requirement will apply only if (i)
the REIT would not qualify as such for Federal income tax purposes but for the
application of a 'look-through' exception to the Five or Fewer Requirement
applicable to shares held by qualified trusts and (ii) the REIT is
'predominantly held' by qualified trusts. A REIT is predominantly held by
qualified trusts if either (i) a single qualified trust holds more than 25% by
value of the interests in the REIT or (ii) one or more qualified trusts, each
owning more than 10% by value of the interests in the REIT, hold in the
aggregate more than 50% of the interests in the REIT. The percentage of any REIT
distribution treated as UBTI is equal to the ratio of (a) the UBTI earned by the
REIT (treating the REIT as it were a qualified trust and therefore subject to
tax on UBTI) to (b) the total gross income of the REIT. A de minimis exception
applies where the percentage is less than 5% for any year. For these purposes, a
qualified trust is any trust described in section 401(a) of the Code and exempt
from tax under section 501(a) of the Code. The provisions requiring qualified
trusts to treat a portion of REIT distributions as UBTI will not apply if the
REIT is able to satisfy the Five or Fewer Requirement without relying upon the
'look-through' exception.
STATE, LOCAL AND FOREIGN TAXATION
The Company and its shareholders may be subject to state, local or foreign
taxation in various state, local or foreign jurisdictions, including those in
which it or they transact business or reside. Such state, local or foreign
taxation may differ from the Federal income tax treatment described above.
Consequently, prospective holders of Offered Securities should consult their own
tax advisors regarding the effect of state, local and foreign tax laws on an
investment in the Company.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to investors
directly or through agents or through a combination of any such methods of sale.
Any such underwriter or agent involved in the offer and sale of the Offered
Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Offered 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. The Company also may offer and sell
the Offered Securities in exchange for one or more of its then outstanding
issues of debt or convertible debt securities. The Company also may, from time
to time, authorize underwriters acting as the Company's agents to offer and sell
the Offered Securities upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of Offered
Securities, underwriters may be
35
deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Offered Securities for whom they may act as agent. Underwriters
may sell Offered Securities to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Offered 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 Offered 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 Offered Securities may be
deemed to be underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act. In the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Offered Securities will be a new issue with no established trading
market, other than the Common Shares which are listed on the New York Stock
Exchange. Any shares of Common Shares sold pursuant to a Prospectus Supplement
will be listed on the New York Stock Exchange, subject to official notice of
issuance. The Company may elect to list any series of Offered Securities on an
exchange, but is not obligated to do so. It is possible that one or more
underwriters may make a market in a series of Offered Securities, but will not
be obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of, or the
trading market for, the Offered Securities.
If so indicated in a Prospectus Supplement, the Company will authorize
agents, underwriters or dealers to solicit offers by certain institutional
investors to purchase Offered Securities of the series to which such Prospectus
Supplement relates providing for payment and delivery on a future date specified
in such Prospectus Supplement. There may be limitations on the minimum amount
which may be purchased by any such institutional investor or on the portion of
the aggregate principal amount of the particular Offered Securities which may be
sold pursuant to such arrangements. Institutional investors to which such offers
may be made, when authorized, include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and such other institutions as may be approved by the Company. The
obligations of any such purchasers pursuant to such delayed delivery and payment
arrangements will not be subject to any conditions except that (i) the purchase
by an institution of the particular Offered Securities shall not at the time of
delivery be prohibited under the laws of any jurisdiction in the United States
to which such institution is subject, and (ii) if the particular Offered
Securities are being sold to underwriters, the Company shall have sold to such
underwriters the total principal amount of such Offered Securities or number of
Warrants less the principal amount or number thereof, as the case may be,
covered by such arrangements. Underwriters will not have any responsibility in
respect of the validity of such arrangements or the performance of the Company
or such institutional investors thereunder.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
In order to comply with the securities laws of certain states, if
applicable, the Offered Securities offered hereby will be sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states Offered Securities may not be sold unless they have
been registered or qualified for sale in the applicable state or an exemption
from the registration or qualification requirement is available and is complied
with.
36
ERISA MATTERS
The Company may be considered a 'party in interest' within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ('ERISA'), and a
'disqualified person' under corresponding provisions of the Code with respect to
certain employee benefit plans. Certain transactions between an employee benefit
plan and a party in interest or disqualified person may result in 'prohibited
transactions' within the meaning of ERISA and the Code, unless such transactions
are effected pursuant to an applicable exemption. Any employee benefit plan or
other entity subject to such provisions of ERISA or the Code proposing to invest
in the Offered Securities should consult with its legal counsel.
LEGAL OPINIONS
Certain legal matters will be passed upon for the Company by Robinson
Silverman Pearce Aronsohn & Berman LLP, New York, New York. The legal
authorization and issuance of the Offered Securities, as well as certain other
legal matters concerning Maryland law, will be passed upon for the Company by
Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. In addition, the
description of Federal income tax consequences contained in this Prospectus
entitled 'Federal Income Tax Considerations' is based upon the opinion of
Robinson Silverman Pearce Aronsohn & Berman LLP.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report (Form 10-K) for the year ended December 31, 1996, have
been audited by Arthur Andersen LLP, independent public accountants as indicated
in their report with respect thereto, and are incorporated by reference herein,
in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
37
(This page intentionally left blank)
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.................. S-3
Risk Factors................................... S-11
Recent Developments............................ S-18
Use of Proceeds................................ S-20
Capitalization................................. S-21
Selected Consolidated Financial Data........... S-23
Kranzco Realty Trust Pro Forma Combined
Condensed Financial Information.............. S-25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... S-29
Management..................................... S-33
Description of Series D Preferred Shares....... S-35
Underwriting................................... S-42
Legal Matters.................................. S-43
PAGE
----
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
The Company.................................... 3
Ratios of Earnings to Fixed Charges............ 4
Use of Proceeds................................ 4
Description of Debt Securities................. 4
Description of Preferred Shares................ 18
Description of Common Shares................... 25
Description of Warrants........................ 27
Description of Rights.......................... 27
Federal Income Tax Considerations.............. 28
Plan of Distribution........................... 35
ERISA Matters.................................. 37
Legal Opinions................................. 37
Experts........................................ 37
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,000,000 SHARES
KRANZCO REALTY TRUST
% SERIES D CUMULATIVE REDEEMABLE
PREFERRED SHARES
OF BENEFICIAL INTEREST
KRANZCO [LOGO]
------------------------
PROSPECTUS SUPPLEMENT
, 1997
------------------------
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
SALOMON BROTHERS INC
------------------------------------------------------
------------------------------------------------------