FILED PURSUANT TO RULE 424(b)(5)
Registration No. 33-96538
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 6, 1995)
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3,000,000 Shares
CALI REALTY CORPORATION
Common Stock
[LOGO]
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Cali Realty Corporation (the "Company") is a fully integrated, self-administered
and self-managed real estate investment trust ("REIT") that owns and operates a
portfolio comprised predominantly of Class A office and office/flex buildings
located primarily in New Jersey, as well as commercial real estate leasing,
management, acquisition, development and construction businesses. As of June 30,
1996, the Company owned 100 percent of 42 office and office/flex properties
encompassing approximately 4.2 million net rentable square feet and a
multifamily residential property (collectively, the "Properties"). Subsequent to
June 30, 1996, the Company acquired two additional properties. See "Recent
Developments-- Acquisitions."
The 3,000,000 shares of common stock of the Company, par value $.01 per share
(the "Common Stock"), offered hereby (the "Offering") are being sold by the
Company. The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "CLI." The last reported sales price of the Common Stock on the
NYSE on August 7, 1996 was $23.25 per share. See "Price Range of Common Stock
and Distributions."
The shares of Common Stock are subject to certain restrictions on ownership
designed to preserve the Company's status as a REIT for federal income tax
purposes. See "Description of Common Stock" and "Restrictions on Ownership of
Offered Securities" in the accompanying Prospectus.
SEE "RISK FACTORS" ON PAGES S-4 TO S-8 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[CAPTION]
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
Per Share......................................... $23.125 $0.685 $22.440
Total(3).......................................... $69,375,000 $2,055,000 $67,320,000
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $475,000.
(3) The Company has granted the Underwriter a 30-day over-allotment option to
purchase up to 450,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriter, the total Price to Public will be $79,781,250, the total
Underwriting Discounts and Commissions will be $2,363,250 and the total
Proceeds to Company will be $77,418,000. See "Underwriting."
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The shares of Common Stock are offered by the Underwriter, subject to delivery
by the Company and acceptance by the Underwriter, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriter is expected to be made at the office of
Prudential Securities Incorporated, One New York Plaza, New York, New York, on
or about August 13, 1996.
PRUDENTIAL SECURITIES INCORPORATED
August 7, 1996
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
S-2
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the Common Stock offered hereby. As permitted by the
rules and regulations of the Commission, this Prospectus Supplement and the
accompanying Prospectus omits certain information, exhibits and undertakings
contained in the Registration Statement. For further information pertaining to
the securities offered hereby, reference is made to the Registration Statement,
including the exhibits filed as a part thereof.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Commission.
Reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at its
Regional Offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and Seven World Trade Center, 13th Floor, New York, New York
10048. 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. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site is:
http://www.sec.gov. The Common Stock is listed on the NYSE and such reports,
proxy statements and other information concerning the Company can be inspected
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
All documents that are incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus but which are not delivered herewith
are available without charge (other than exhibits to such documents which are
not specifically incorporated by reference therein) upon request from Cali
Realty Corporation, 11 Commerce Drive, Cranford, New Jersey 07016 (telephone
number: (908) 272-8000).
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission by the Company pursuant to
the Exchange Act are hereby incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus:
(a) The Company's Annual Report on Form 10-K (File No. 1-13274) for the
fiscal year ended December 31, 1995.
(b) The Company's Quarterly Report on Form 10-Q (File No. 1-13274) for
the fiscal quarter ended June 30, 1996.
(c) The Company's Current Report on Form 8-K, dated July 16, 1996 (File
No. 1-13274); and
(d) The description of the Common Stock and the description of certain
provisions of Maryland Law and the Company's Articles of Incorporation and
Bylaws, both contained in the Company's Registration Statement on Form 8-A,
dated August 9, 1994.
S-3
The following is qualified in its entirety by the 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 Underwriter's over-allotment option will not be exercised. All
references to the Company in this Prospectus Supplement include the Company, its
subsidiaries and the other entities owned or controlled by the Company,
including Cali Services, Inc., unless the context indicates otherwise. As used
herein, "Units" refers to limited partnership interests in Cali Realty, L.P., a
Delaware limited partnership (the "Operating Partnership") through which the
Company conducts its real estate activities.
This Prospectus Supplement and the accompanying Prospectus, including
documents incorporated by reference, contain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. Future events and actual results, financial and
otherwise, may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors" included in this
Prospectus Supplement and in "Management's Discussion and Analysis of Results of
Operations and Financial Condition" included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, and the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996, which
are incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus.
RISK FACTORS
An investment in shares of Common Stock involves various risks. Prospective
investors should consider carefully the following risk factors, in addition to
the other information set forth in this Prospectus Supplement, in connection
with an investment in the shares of Common Stock offered hereby.
DEPENDENCE ON NEW JERSEY, NEW YORK AND PENNSYLVANIA OFFICE MARKETS. All of
the Properties are located in New Jersey, New York and Pennsylvania. The
Company's performance will be linked to economic conditions and the demand for
office space in these states. A decline in the economy in these states generally
may result in a decline in the demand for office space, which may adversely
affect the ability of the Company to make distributions to stockholders. Such
declines could have a greater adverse effect on the Company because its
portfolio consists primarily of office buildings (compared to a more diversified
real estate portfolio).
REAL ESTATE INVESTMENT CONSIDERATIONS.
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the amount
of income earned and capital appreciation generated by the related properties as
well as the expenses incurred in connection therewith. If the properties do not
generate income sufficient to meet operating expenses, including debt service
and capital expenditures, the ability to make distributions to the Company's
stockholders could be adversely affected. Income from the Properties may be
adversely affected by the general economic climate, local conditions such as
oversupply of office space or a reduction in demand for office space in the
area, the attractiveness of the Properties to potential tenants, competition
from other office buildings, the ability of the Company to provide adequate
maintenance and increased operating costs (including insurance premiums and real
estate taxes). In addition, revenues from properties and real estate values are
also affected by such factors as the cost of compliance with regulations and the
potential for liability under applicable laws, including changes in tax laws and
housing laws, interest rate levels and the availability
S-4
of financing. The Company's income would be adversely affected if a significant
number of tenants were unable to pay rent or if office space could not be rented
on favorable terms. Certain significant expenditures associated with an
investment in real estate (such as mortgage payments, real estate taxes and
maintenance costs) generally are not reduced when circumstances cause a
reduction in income from the investment.
Financially Distressed Tenants. In the event of any default by a tenant, the
Company may experience delays in enforcing its rights as landlord and may incur
substantial costs in protecting its investment. A tenant of the Properties may
seek the protection of the bankruptcy laws at any time, which could result in
the rejection and termination of such tenant's lease and thereby cause a
reduction in the cash flow available for distribution by the Company.
Illiquidity of Real Estate. Real estate investments are relatively illiquid
and, therefore, the Company has limited ability to vary its portfolio quickly in
response to changes in economic or other conditions. In addition, the
prohibition in the Internal Revenue Code of 1986, as amended (the "Code"), and
related regulations on a REIT holding property for sale may affect the Company's
ability to sell properties without adversely affecting distributions to the
Company's stockholders.
Compliance with Laws and Regulations. Many laws and governmental regulations
are applicable to the Properties and changes in these laws and regulations, or
their interpretation by agencies and the courts, occur frequently. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation, effective beginning in 1992, are required to meet certain federal
requirements related to access and use by disabled persons. Compliance with the
ADA requires removal of structural barriers to handicapped access in certain
public areas where such removal is "readily achievable." A number of additional
federal, state and local laws exist which also may require modifications to the
Properties, or restrict certain further renovations thereof, with respect to
access thereto by disabled persons. Noncompliance with the ADA or any of such
other laws could result in the imposition of fines or an award of damages to
private litigants. Although management of the Company believes that the
Properties are substantially in compliance with present requirements, final
regulations under the ADA have not yet been promulgated and the Company is
likely to incur additional costs of complying with the ADA. If required changes
involve a greater amount of expenditures than the Company currently anticipates
or if the changes must be made on a more accelerated schedule than the Company
currently anticipates, the Company's ability to make expected distributions to
stockholders could be adversely affected.
Under various laws and regulations relating to the protection of the
environment, an owner of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the owner
was responsible for, or even knew of, the presence of such substances. The
presence of such substances may adversely affect the owner's ability to rent or
sell the property or to borrow using such property as collateral and may expose
it to liability resulting from any release or exposure of such substances.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances at another location may also be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether or
not such facility is owned or operated by such person. Certain environmental
laws impose liability for release of asbestos-containing materials into the air,
and third parties may also seek recovery from owners or operators of real
properties for personal injury associated with asbestos-containing materials and
other hazardous or toxic substances. In connection with the ownership (direct or
indirect), operation, management and development of real properties, the Company
may be considered an owner or operator of such properties or as having arranged
for the disposal or treatment of hazardous or toxic substances and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental penalties and injuries to persons and
property.
S-5
Competition in the Company's Market. The Company plans to acquire additional
office buildings in New Jersey, New York, Pennsylvania and in the Northeast
generally. There are a number of office building developers and real estate
companies that compete with the Company in seeking properties for acquisition,
prospective tenants and land for development. All of the Properties are in
developed areas where there are other properties of the same type. Competition
from other office properties may affect the Company's ability to attract and
retain tenants, rental rates and expenses of operation (particularly in light of
the higher vacancy rates of many competing properties which may result in
lower-priced space being available in such properties). The Company may be
competing with other entities that have greater resources than the Company and
whose managers have more experience than the Company's directors and officers.
Risks of Real Estate Development. While the Company's primary focus is on
acquisitions of property, it is a part of the Company's operating strategy,
under certain conditions, to seek selective, attractive opportunities for
development. The real estate development business involves significant risks in
addition to those involved in the ownership and operation of established office,
industrial or multifamily residential apartment buildings, including the risks
that financing may not be available on favorable terms for development projects,
construction may not be completed on schedule or on budget, resulting in
increased debt service expense and construction costs, and long-term financing
may not be available upon completion of construction.
REAL ESTATE FINANCING RISKS.
Debt Financing and Debt Maturities. The Company is subject to the risks
normally associated with debt financing, including the risk that the Company's
cash flow will be insufficient to meet required payments of principal and
interest, the risk that indebtedness on the Properties will not be able to be
refinanced at maturity or that the terms of such refinancing will not be as
favorable as the terms of such indebtedness.
As of June 30, 1996, the Company had outstanding an aggregate of
approximately $83.1 million of long-term mortgage indebtedness (in addition to
borrowings under the Company's revolving credit facilities). This indebtedness
requires, among other things, a balloon payment of $64.5 million in 1999 and,
with respect to the remaining approximately $18.6 million thereof, payment of
principal and interest thereafter on a 20-year amortization schedule, with the
remaining principal balance due October 1, 2003. The Company also has a $70.0
million revolving credit facility with Prudential Securities Realty Funding
Corporation, an affiliate of the Underwriter (the "Revolving Credit Facility")
and a $75.0 million revolving credit facility with two participating banks (the
"Additional Credit Facility"). As of June 30, 1996, $15.0 million was
outstanding under the Revolving Credit Facility and $71.0 million was
outstanding under the Additional Credit Facility. From July 1, 1996 through
August 7, 1996, net additional borrowings under such revolving credit facilities
totaled $14.4 million. The Company currently believes it will have to refinance
the principal due on its long-term mortgage indebtedness at maturity. There can
be no assurance, however, that the Company will be able to refinance any
indebtedness the Company may incur.
If the Company were unable to refinance its indebtedness on acceptable
terms, or at all, the Company might be forced to dispose of one or more of the
Properties upon disadvantageous terms, which might result in losses to the
Company and might adversely affect its ability to make distributions. If
prevailing interest rates or other factors at the time of refinancing result in
higher interest rates on refinancings, the Company's interest expense would
increase, which would adversely affect the Company's cash flow and its ability
to pay expected distributions to stockholders. Further, if a Property is
mortgaged to secure payment of indebtedness and the Company is unable to meet
mortgage payments, the mortgagee could foreclose upon the Property, appoint a
receiver and receive an assignment of rents and leases or pursue other remedies,
all with a consequent loss of income and asset value to the
S-6
Company. Foreclosures could also create taxable income without accompanying cash
proceeds, thereby hindering the Company's ability to meet the REIT distribution
requirements of the Code.
Risk of Rising Interest Rates. Advances under the Company's revolving credit
facilities, as well as $20.2 million of borrowings under the Company's long-term
mortgage indebtedness, bear interest at variable rates. On May 24, 1995, the
Company entered into an interest rate swap agreement with a commercial bank. The
agreement fixes the Company's 30-day LIBOR base to 6.285 percent on a notional
amount of $24.0 million through August 1999 on its floating rate indebtedness.
On January 23, 1996, the Company entered into an interest rate swap agreement
with one of the participating banks in its Additional Credit Facility. The
agreement has a three-year term and a notional amount of $26.0 million which
fixes the Company's 30-day LIBOR base to 5.265 percent (with a 150 basis point
spread, an interest rate of 6.765 percent) on its floating rate credit
facilities. The Company is exposed to credit loss in the event of
non-performance by the other parties to the interest rate swap agreements.
However, the Company does not anticipate non-performance by either counterparty.
The Company may incur other indebtedness in the future that also bears interest
at a variable rate. Accordingly, increases in interest rates could increase the
Company's interest expense, which could adversely affect the Company's cash flow
and its ability to pay expected distributions to stockholders or cause the
Company to be in default under certain debt covenants.
NO LIMITATION ON DEBT. The Company funds acquisition opportunities and
development partially through short-term borrowings (including the revolving
credit facilities), as well as out of undistributed cash available for
distribution and other available cash. It expects to refinance projects
purchased with short-term debt either with long-term indebtedness or equity
financing depending upon the economic conditions at the time of refinancing. The
Board of Directors has adopted a policy of limiting its indebtedness to
approximately 50 percent of its total market capitalization (i.e., the market
value of the issued and outstanding shares of Common Stock, including interests
redeemable therefor, plus any Preferred Stock that may be outstanding and total
debt), but the organizational documents of the Company do not contain any
limitation on the amount or percentage of indebtedness, funded or otherwise,
that the Company may incur. The Board of Directors could alter or eliminate its
current policy on borrowing at any time at its discretion. If this policy were
changed, the Company could become more highly leveraged, resulting in an
increase in debt service that could adversely affect the Company's cash flow and
its ability to make expected distributions to its stockholders and an increased
risk of default on the Company's obligations.
LIMITS ON OWNERSHIP. In order to maintain its qualification as a REIT, not
more than 50 percent in value of the outstanding stock of the Company may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities). In light of the ownership positions of
certain stockholders of the Company immediately following the closing of its
initial public offering of shares of Common Stock (the "IPO"), the Company has
limited ownership of the outstanding shares of Common Stock by any single
stockholder to 9.8 percent of the outstanding shares of Common Stock (with
exceptions for the former principals of the Cali Group who collectively own
Units redeemable for approximately 15 percent of the outstanding shares of
Common Stock, after giving effect to the conversion of such Units). The former
principals of the Cali Group are permitted to acquire additional shares of
Common Stock, except to the extent that such acquisition results in 50 percent
or more in value of the outstanding shares of Common Stock of the Company being
owned, directly or indirectly, by five or fewer individuals. The Board of
Directors could waive this restriction if it were satisfied, based upon the
advice of tax counsel or otherwise, that such action would be in the best
interests of the Company. Common Stock acquired or transferred in breach of the
limitation may be redeemed by the Company for the lesser of the price paid and
the average closing price for the 10 trading days immediately preceding
redemption or sold at the direction of the Company. The Company may elect to
redeem such shares of Common Stock for Units, which are nontransferable except
in very limited circumstances. Any transfer of shares of Common Stock to a
person who, as a result of the transfer, violates the ownership limit will be
deemed void. Although the Company currently intends to continue
S-7
to operate in a manner designed to qualify as a REIT, it is possible that future
economic, market, legal, tax or other considerations may cause the Company's
Board of Directors to revoke the election for the Company to qualify as a REIT.
Under the Company's Articles of Incorporation, the Board of Directors can make
such revocation without the consent of the Company's stockholders.
In addition, the consent of the holders of at least 85 percent of the Units
is required: (i) to merge (or permit the merger of) the Operating Partnership
with another unrelated person, pursuant to a transaction in which the Operating
Partnership is not the surviving entity; (ii) to dissolve, liquidate or wind-up
the Operating Partnership; or (iii) to convey or otherwise transfer all or
substantially all of the Operating Partnership's assets. Following completion of
this Offering, the Company as general partner of the Operating Partnership will
own approximately 87 percent of the outstanding Units.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its
executive officers and chairman, particularly John J. Cali, John R. Cali, Brant
Cali and Thomas A. Rizk for strategic business direction and experience in the
New Jersey real estate market. While the Company believes that it could find
replacements for these key personnel, the loss of their services could have an
adverse effect on the operations of the Company. The Company has entered into
three year employment agreements (including non-competition provisions)
terminating in August 1997, if not otherwise extended, with each of John J.
Cali, John R. Cali, Brant Cali and Thomas A. Rizk. The Company does not have,
and is not currently contemplating obtaining, key man life insurance for its
executive officers.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT.
Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The
Company has operated so as to qualify as a REIT under the Code, commencing with
its taxable year ended December 31, 1994. Although the Company believes that it
will continue to operate in such a manner, no assurance can be given that the
Company will be able to operate in a manner so as to remain so qualified.
Qualification as a REIT involves the satisfaction of numerous requirements (some
on an annual and quarterly basis) established under highly technical and complex
Code provisions for which there are only limited judicial or administrative
interpretations, and involve the determination of various factual matters and
circumstances not entirely within the Company's control.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates. Moreover,
unless entitled to relief under certain statutory provisions, the Company also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce the net earnings of the Company available for investment or distribution
to stockholders because of the additional tax liability of the Company for the
years involved. In addition, distributions to stockholders would no longer be
required to be made.
Other Tax Liabilities. The Company, notwithstanding its REIT status, is
subject to certain federal, state and local taxes on its income and property. In
addition, the Company's net income, if any, from third party management and
tenant improvements will be subject to United States federal income tax.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. Since the market
price of shares of a publicly traded REIT, such as the Company, is determined in
part by the attractiveness of the yield on those shares compared to the
prevailing interest rates on fixed-income securities, an increase in interest
rates could lead purchasers of Common Stock to demand a higher yield, which
could adversely affect the market price of the Common Stock.
S-8
THE COMPANY
The Company is a fully-integrated REIT that owns and operates a portfolio
comprised predominantly of Class A office and office/flex buildings located
primarily in New Jersey, as well as commercial real estate leasing, management,
acquisition, development and construction businesses. As of June 30, 1996, the
Company owned 100 percent of 42 office and office/flex properties encompassing
approximately 4.2 million square feet and a 327 unit multifamily residential
property. The 42 office and office/flex properties are comprised of 29 office
buildings containing an aggregate of 3.7 million square feet (the "Office
Properties") and 13 office/flex buildings containing an aggregate of
approximately 500,000 square feet (the "Office/Flex Properties"). The Company
believes that its Properties have excellent locations and access and are
well-maintained and professionally managed. As a result, the Company believes
that its Properties attract high quality tenants and achieve among the highest
rent, occupancy and tenant retention rates within their markets. As of June 30,
1996, the Office Properties and Office/Flex Properties were approximately 97.0
percent leased to over 430 tenants.
The Company's strategy has been to focus its development and ownership of
properties in sub-markets where it is, or can become, a significant and
preferred owner and operator. The Company will continue this strategy by
expanding, primarily through acquisitions, initially into sub-markets where it
has, or can achieve, similar status. Management believes that the recent trend
towards increasing rental and occupancy rates in office buildings in the
Company's sub-markets presents significant opportunities for growth. The Company
may also develop properties in such sub-markets. Management believes that its
extensive market knowledge provides the Company with a significant competitive
advantage which is further enhanced by its strong reputation for and emphasis on
delivering highly responsible management services, including direct and
continued access to the Company's senior management.
Subsequent to June 30, 1996, the Company acquired two additional office
properties. See "Recent Developments-Acquisitions." The Company performs
substantially all construction, leasing, management and tenant improvements on
an "in-house" basis and is self-administered and self-managed.
The Company was incorporated on May 24, 1994. The Company's executive
offices are located at 11 Commerce Drive, Cranford, New Jersey 07016, and its
telephone number is (908) 272-8000.
RECENT DEVELOPMENTS
ACQUISITIONS
On March 20, 1996, the Company sold its office building located at 15 Essex
Road in Paramus, New Jersey ("Essex Road") and concurrently acquired a 95,000
square foot office building at 103 Carnegie Center in Princeton, New Jersey (the
"Princeton Property") with the net proceeds from the sale of Essex Road of
approximately $10.3 million. The concurrent transactions qualified as a tax-free
exchange, as the Company used substantially all of the proceeds from the sale of
Essex Road to acquire the Princeton Property. In advance of the sale of Essex
Road, on March 12, 1996, the Company prepaid $5.5 million of its mortgage
indebtedness and obtained a release of the mortgage liens on the property.
On May 2, 1996, the Company acquired Rose Tree Corporate Center, a
two-building suburban office complex totaling approximately 260,000 square feet,
located in Media, Pennsylvania. The complex was acquired for approximately $28.0
million, which was drawn on one of the Company's credit facilities.
On July 23, 1996, the Company acquired 222 and 233 Mount Airy Road, two
suburban office buildings totaling approximately 115,000 square feet, located in
Basking Ridge, New Jersey. The buildings were acquired for approximately $10.5
million, which was drawn on one of the Company's credit facilities.
S-9
FINANCING ACTIVITIES
On February 1, 1996, the Company obtained the Additional Credit Facility
secured by certain of its Properties in the amount of $75.0 million from two
participating banks. The Additional Credit Facility has a three-year term and
bears interest at 150 basis points over 30-day LIBOR. The terms of the
Additional Credit Facility include certain restrictions and covenants which
limit, among other things, dividend payments and additional indebtedness and
which require compliance with specified financial ratios and other financial
measurements. The Additional Credit Facility also requires a fee equal to one
quarter of one percent of the unused balance payable quarterly in arrears.
On May 24, 1995, the Company entered into an interest rate swap agreement
with a commercial bank. The swap agreement fixes the Company's 30-day LIBOR base
to 6.285 percent on a notional amount of $24.0 million through August 1999 on
its floating rate indebtedness.
On January 23, 1996, the Company entered into an interest rate swap
agreement with one of the participating banks in its Additional Credit Facility.
The swap agreement has a three-year term and a notional amount of $26.0 million
which fixes the Company's 30-day LIBOR base to 5.265 percent (with a 150 basis
point spread, an interest rate of 6.765 percent) on its floating rate credit
facilities.
The Company is exposed to credit loss in the event of non-performance by the
other parties to the interest rate swap agreements. However, the Company does
not anticipate non-performance by either counterparty.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby, after deduction of the underwriting discounts and commissions and
estimated offering expenses, is estimated to be approximately $66.8 million
($76.9 million if the Underwriter's over-allotment option is exercised in full).
The Company presently intends to use the net proceeds from the Offering to
reduce its outstanding borrowings under its revolving credit facilities and for
general corporate purposes. The principal balances outstanding as of June 30,
1996 were, respectively, approximately $15.0 million under the Revolving Credit
Facility and $71.0 million under the Additional Credit Facility. Both revolving
credit facilities bear interest at a floating rate equal to 150 basis points
over 30-day LIBOR. The Revolving Credit Facility matures on May 31, 1997 and the
Additional Credit Facility matures on February 1, 1999.
S-10
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
Since the IPO, the Company's Common Stock has been listed on the NYSE under
the symbol "CLI." The following sets forth the high and low closing sales prices
for the Common Stock for the fiscal periods indicated as reported by the NYSE
and the distributions per share paid by the Company with respect to each such
period.
HIGH LOW DISTRIBUTION
------- ------- ------------
1994
August 25 through September 30................................ $17.250 $16.125 $.1346(1)
Fourth Quarter................................................ $16.375 $14.875 $.4038
1995
First Quarter................................................. $17.375 $15.500 $.4038
Second Quarter................................................ $19.375 $16.500 $.4038
Third Quarter................................................. $20.250 $18.875 $.4250
Fourth Quarter................................................ $22.500 $19.125 $.4250
1996
First Quarter................................................. $23.625 $20.750 $.4250
Second Quarter................................................ $24.625 $21.500 $.4250
Third Quarter (through August 7).............................. $24.250 $22.625 N/A
- ------------
(1) Represents distributions for the partial quarter subsequent to the IPO.
As of July 3, 1996, there were 178 registered holders of shares of Common
Stock.
As a result of the Company's improved operating performance, in September
1995, the Company announced a 5.25 percent increase in its regular quarterly
distribution, commencing with the Company's distribution with respect to the
third quarter of 1995, from $.4038 per share to $.4250 per share of Common Stock
($1.70 per share of Common Stock on an annualized basis).
Future distributions by the Company will be at the discretion of the Board
of Directors and will depend on the actual cash flow of the Company, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board of
Directors deems relevant.
Distributions by the Company to the extent of its current earnings and
profits for federal income tax purposes are taxable to stockholders as ordinary
dividend income (unless such distributions are designated as capital gain
distributions). Distributions in excess of earnings and profits generally are
treated as a non-taxable return of capital to the extent of a stockholder's
basis for the Common Stock. A return of capital distribution has the effect of
deferring taxation until a stockholder's sale of the Common Stock. The Company
has determined that all of the distributions paid during 1994 and 1995
represented ordinary dividend income to its stockholders.
S-11
UNDERWRITING
Prudential Securities Incorporated ("Prudential Securities" or the
"Underwriter") has agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the shares of Common Stock
offered hereby. The Company is obligated to sell, and the Underwriter is
obligated to purchase, all of the shares of Common Stock offered hereby if any
are purchased.
The Underwriter has advised the Company that it proposes to offer the shares
of Common Stock initially at the public offering price set forth on the cover
page of this Prospectus Supplement, that the Underwriter may allow to selected
dealers a concession of $0.47 per share, and that such dealers may reallow a
concession of $0.10 per share to certain other dealers. After the initial public
offering, the offering price and the concessions may be changed by the
Underwriter.
The Company has granted the Underwriter an option, exercisable for 30 days
from the date of this Prospectus Supplement, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus Supplement. The Underwriter may exercise such option solely for the
purpose of covering over-allotments incurred in the sale of shares of Common
Stock offered hereby.
The Company has agreed to indemnify the Underwriter or to contribute to
losses arising out of certain liabilities, including liabilities under the
Securities Act.
The Company and the directors and executive officers of the Company have
agreed that they will not, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge
grant of any option to purchase or other sale or disposition) of any shares of
Common Stock or other capital stock of the Company, or any securities
convertible into, or exchangeable or exercisable for, any shares of Common Stock
or other capital stock of the Company (including Units), for a period of 90 days
from the date of this Prospectus Supplement, without the prior written consent
of the Underwriter.
In the ordinary course of their businesses, Prudential Securities and its
affiliates have engaged, and may in the future engage, in investment banking or
commercial banking transactions with the Company. The Prudential Insurance
Company of America ("Prudential") is the mortgage lender with respect to the
Company's office building located at 17-17 Route 208, Fairlawn, New Jersey.
As of June 30, 1996, Prudential occupied approximately 37,300 square feet of
the Company's Property at 400 Rella Boulevard, Suffern, New York (approximately
21 percent of the net rentable square feet) pursuant to leases which expire on
September 13, 2002. Total annual base rent under Prudential's leases was
approximately $620,000 as of June 30, 1996. The Prudential leases provide for,
among other things, annual base rent increases of approximately $89,000 in
September 1997, approximately $13,000 in September 1998, 1999 and 2000, and
approximately $26,000 in September 2001.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby will be passed upon for the Company by Pryor, Cashman, Sherman & Flynn,
New York, New York. Certain legal matters relating to Maryland law, including
the validity of the issuance of the securities registered hereby, will be passed
upon for the Company by Swidler & Berlin, Chartered. Certain legal matters will
be passed upon for the Underwriter by Skadden, Arps, Slate, Meagher & Flom, New
York, New York.
S-12
EXPERTS
The financial statements incorporated in this Prospectus Supplement and the
accompanying Prospectus by reference to the Annual Report on Form 10-K of the
Company for the year ended December 31, 1995 have been so incorporated in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting. The
financial statements incorporated in this Prospectus by reference to the Current
Report on Form 8-K of the Company, dated July 16, 1996, have been so
incorporated in reliance on the report of Schonbraun, Safris, Sternlieb & Co.,
L.L.C., independent accountants, given on the authority of said firm as experts
in auditing and accounting.
S-13
PROSPECTUS
- ----------
CALI REALTY CORPORATION
$250,000,000
PREFERRED STOCK, COMMON STOCK AND WARRANTS
Cali Realty Corporation (together with its subsidiaries, the "Company") may
from time to time offer in one or more series (i) shares or fractional shares of
its preferred stock, par value $.01 per share (the "Preferred Stock"), (ii)
shares of its common stock, par value $.01 per share (the "Common Stock"), or
(iii) warrants to purchase Common Stock or Preferred Stock (the "Warrants"),
with an aggregate initial public offering price of up to $250,000,000 on terms
to be determined at the time of offering. The Preferred Stock, Common Stock and
Warrants (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 Preferred
Stock, the specific title and stated value, any dividend, liquidation,
redemption, conversion, voting and other rights and the initial public offering
price; (ii) in the case of Common Stock, the initial public offering price; and
(iii) in the case of Warrants, the securities as to which such Warrants may be
exercised, the duration, offering price, exercise price and detachability. In
addition, such specific terms may include limitations on direct or beneficial
ownership and restrictions on transfer of the Offered Securities, in each case
as may be appropriate to preserve the status of the Company as a real estate
investment trust ("REIT") for United States federal income tax purposes. See
"Restrictions on Ownership of Capital Stock".
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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-------------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 6, 1995.
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 Registration
Statement, the exhibits and schedules forming a part thereof and 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., Room 1024,
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 Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can also be obtained at prescribed rates by
writing to 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 Stock is listed on the New York Stock Exchange (the "NYSE") and similar
information concerning the Company can be inspected and copied at the offices of
the NYSE, 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, 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 and such exhibits and schedules which may be obtained
from the Commission at its principal office in Washington, D.C. upon payment of
the fees prescribed by the Commission.
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:
a. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994;
b. Amendemnt on Form 10-K/A to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 as filed with the Commission on
October 6, 1995;
c. The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1995 and June 30, 1995;
d. The Company's Proxy Statement relating to the Annual Meeting of
Shareholders held on May 18, 1995;
e. The Company's Current Report on Form 8-K, dated September 25, 1995
(File No. 1-13274); and
f. The description of the Common Stock and the description of certain
provisions of Maryland Law and the Company's Articles of Incorporation and
Bylaws, both contained in the Company's Registration Statement on Form 8-A,
dated August 9, 1994; and the information thereby incorporated by reference
contained in the Company's Registration Statement on Form S-11, dated August
24, 1994.
2
All 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 part hereof from the date
of filing such documents (provided, however, that the information referred to in
Item 402(a)(8) of Regulation S-K of the Commission shall not be deemed
specifically incorporated by reference herein).
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, including any beneficial owner of the Offered
Securities, to whom this Prospectus is delivered, upon written or oral request.
Requests should be made to Barry Lefkowitz, Vice President-Finance and Chief
Accounting Officer of the Company, 11 Commerce Drive, Cranford, New Jersey
07016-3510 (telephone number: (908) 272-8000).
THE COMPANY
Cali Realty Corporation and its subsidiaries (the "Company") is a
fully-integrated REIT formed in 1994 to succeed to substantially all of the
business of Cali Associates (founded in 1949), consisting primarily of a
portfolio of Class A office buildings in prime locations in Northern and Central
New Jersey, and its real estate leasing, manage-ment, acquisition, development
and construction business. As of June 30, 1995, the Company owned 100 percent of
15 Class A office properties (the "Office Properties") encompassing
approximately 2.63 million square feet of usable and common areas and one 327
unit multifamily residential property (collectively, the "Properties"). As of
June 30, 1995, the Office Properties were approximately 92 percent leased to
over 290 tenants. The C o m pany provides substantially all construction,
leasing, management and tenant improvements on an "in-house" basis and is
self-administered and self-managed. As of June 30, 1995, the Company had 80
employees.
The Company has elected to be taxed as a REIT for federal income tax
purposes and expects to continue to elect such status. Although the Company
believes that it was organized and has been operating in conformity with the
requirements for qualification under the Internal Revenue Code of 1986, as
amended (the "Code"), no assurance can be given that the Company will continue
to qualify as a REIT. Qualification as a REIT involves the application of highly
technical and complex Code provisions of which there are only limited judicial
or administrative interpretations. If in any taxable year the Company were to
fail to qualify as a REIT, the Company would not be allowed a deduction for
distributions to stockholders in computing taxable income and would be subject
to federal taxation at regular corporate rates. As a result, such a failure
would adversely affect the Company's ability to make distributions to its
stockholders and could have an adverse affect on the market value and
marketability of the Offered Securities.
To ensure that the Company qualifies as a REIT, transfer of the shares of
Common Stock and Preferred Stock (as defined below) is subject to certain
restrictions, and ownership of capital stock by any single person is limited to
9.8 percent of the value of such capital stock, subject to certain exceptions.
The Company's Articles of Incorporation provide that any purported transfer in
violation of the above-described ownership limitations shall be void ab initio.
3
The shares of Common Stock of the Company are listed on the NYSE under the
symbol "CLI." The Company has paid regular quarterly distributions on its Common
Stock since it commenced operations as a REIT in 1994. The Company intends to
continue making regular quarterly distributions to its common stockholders.
Distributions depend upon a variety of factors, and there can be no assurance
that distributions will be made.
All of the Company's interests in the Properties are held by, and its
operations are conducted through, Cali Realty, L.P., a Delaware limited
partnership (the "Operating Partnership"), or by entities controlled by the
Operating Partnership. Cali Realty Corporation owned, as of June 30, 1995,
approximately 78 percent of the Operating Partnership's outstanding units of
partnership interest ("Units"), and is the sole general partner of the Operating
Partnership.
The Company was incorporated under the laws of Maryland on May 24, 1994, its
execu-tive offices are located at 11 Commerce Drive, Cranford, New Jersey 07016,
and its telephone number is (908)
272-8000.
RATIOS OF EARNINGS TO FIXED CHARGES
The following tables set forth the Company's consolidated ratios of earnings
to fixed charges for the periods shown:
FOR THE SIX FOR THE PERIOD
MONTHS ENDED AUGUST 31, 1994 TO
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
2.69x.................................................... 3.13x
The following tables set forth the amounts by which the Company's
predecessor's earnings were inadequate to cover fixed charges:
FOR THE PERIOD FOR THE YEARS ENDED DECEMBER 31,
JANUARY 1, 1994 TO ----------------------------------------
AUGUST 30, 1994 1993 1992 1991 1990
- -------------------------------------- ------- ------- ------- -------
$(110)................................ $(1,064) $(2,172) $(1,125) $(2,766)
The ratios of earnings to fixed charges were computed by dividing earnings
before fixed charges by fixed charges. For this purpose, earnings consist of
pre-tax income (loss) from continuing operations before minority interest plus
fixed charges excluding capitalized interest. Fixed charges consist of interest
costs both expensed and capitalized, the amortization of debt issuance costs and
the interest portion of ground rents on land leases. To date, the Company has
not issued any Preferred Stock, therefore, the ratios of earnings to combined
fixed charges and preferred stock dividend requirements are the same as the
ratios of earnings to fixed charges presented above.
USE OF PROCEEDS
The Company is required by the terms of the Amended and Restated Agreement
of Limited Partnership of the Operating Partnership to invest the net proceeds
of any sale of Common Stock or Preferred Stock in the Operating Partnership in
exchange for additional Units. 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 corporate purposes, including the leasing,
management, acquisition, development and construction of office, office/flex,
industrial, multi-family residential or other properties as suitable
opportunities arise, the expansion and improvement of certain properties in the
Company's portfolio, and the repayment of indebtedness.
4
DESCRIPTION OF COMMON STOCK
The Company has the authority to issue up to 25,000,000 shares of common
stock, par value $.01 per share (the "Common Stock"). At June 30, 1995, the
Company had outstanding 10,400,000 shares of Common Stock.
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that Common Stock will be
issuable upon conversion of Preferred Stock of the Company or upon the exercise
of Warrants to purchase Common Stock issued by the Company. The statements below
describing the Common Stock are in all respects subject to and qualified in
their entirety by reference to the applicable provisions of the Company's
Articles of Incorporation and bylaws.
Each outstanding share of Common Stock will entitle the holder to one vote
on all matters presented to stockholders for a vote, subject to the provisions
of the Company's Articles of Incorporation regarding the ownership of shares of
Common Stock in excess of the Ownership Limit described below under
"Restrictions on Ownership of Capital Stock". Holders of shares of Common Stock
will have no preemptive rights or cumulative voting rights. All shares of Common
Stock will, when issued, be duly authorized, fully paid, and nonassessable.
Distributions may be paid to the holders of shares of Common Stock if and when
declared by the Board of Directors of the Company out of funds legally available
therefor.
Under Maryland law, stockholders are generally not liable for the Company's
debts or obligations. If the Company is liquidated, subject to the right of any
holders of Preferred Stock to receive preferential distribution, each
outstanding share of Common Stock will be entitled to participate pro rata in
the assets remaining after payment of, or adequate provision for, all known
debts and liabilities of the Company, including debts and liabilities arising
out of its status of general partner of the Operating Partnership.
RESTRICTIONS ON OWNERSHIP
With certain exceptions, the Company's Articles of Incorporation provide
that no person may own, or be deemed to own by virtue of the attribution rules
the Code, more than 9.8 percent of the value of the Company's issued and
outstanding shares of capital stock. See "Restrictions on Ownership of Capital
Stock".
TRANSFER AGENT
The registrar and transfer agent for the Company's Common Stock is Chemical
Bank.
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock, par
value $.01 per share (the "Preferred Stock"). No shares of Preferred Stock are
outstanding as of the date hereof.
Under the Company's Articles of Incorporation, shares of Preferred Stock may
be issued from time to time, in one or more series, as authorized by the Board
of Directors. Prior to the issuance of shares of each series, the Board of
Directors is required by the Maryland General Corporation Law (the "MGCL") and
the Company's Articles of Incorporation to adopt resolutions and file Articles
Supplementary (the "Articles Supplementary") with the State Department of
Assessments and Taxation of Maryland, fixing for each such series the
designations, powers, preferences and rights of the shares of such series and
the qualifications, limitations or restrictions thereon, including, but not
limited to, dividend rights, dividend rate or rates, conversion rights, voting
rights, rights and terms of redemption
5
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences as are permitted by Maryland law. Because the Board of
Directors has the power to establish the terms and conditions of each series of
Preferred Stock, it may afford the holders of any series of Preferred Stock
power, preferences and rights, voting or otherwise, senior to the rights of
holders of shares of Common Stock. The issuance of Preferred Stock could have
the effect of delaying or preventing a change in control of the Company.
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Articles of Incorporation (including the
applicable Articles Supplementary) and bylaws.
GENERAL
Subject to limitations prescribed by Maryland law and the Company's Articles
of Incorporation and bylaws, the Board of Directors is authorized to fix the
number of shares constituting each series of Preferred Stock and the
designations, powers, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereon,
including such provisions as may be desired concerning voting, redemption,
dividends, 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
Directors or a duly authorized committee thereof. The Preferred Stock will, when
issued, be fully paid and nonassessable.
Reference is made to the Prospectus Supplement relating to the series of
Preferred Stock offered thereby for specific terms, including:
(1) the title and stated value of such Preferred Stock;
(2) the number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) whether dividends shall be cumulative or non-cumulative and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(5) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) the provisions for a sinking fund, if any, for such Preferred Stock;
(7) any voting rights of such Preferred Stock;
(8) the provisions for redemption, if applicable, of such Preferred
Stock;
(9) any listing of such Preferred Stock on any securities exchange;
(10) the terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock of the Company, including the
conversion price (or manner of calculation thereof) and conversion period;
(11) if appropriate, a discussion of United States federal income tax
considerations applicable to such Preferred Stock;
(12) any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT;
6
(13) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(14) any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; and
(15) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred Stock
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company, rank (i) senior to all classes or series of Common
Stock of the Company, and to all equity securities ranking junior to such
Preferred Stock with respect to dividend rights or rights upon liquidation,
dissolution or winding up of the Company; (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 Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company; 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 Stock with respect to dividend rights or rights upon liquidation,
dissolution or winding up of the Company. As used in the Company's Articles of
Incorporation for these purposes, the term "equity securities" does not include
convertible debt securities.
DIVIDENDS
Unless otherwise specified in the Prospectus Supplement, the Preferred Stock
will have the rights with respect to payment of dividends set forth below.
Holders of shares of the Preferred Stock of each series shall be entitled to
receive, when, as and if declared and authorized by the Board of Directors of
the Company, out of assets of the Company legally available for payment, cash
dividends at such rates and on such dates as will be set forth in the applicable
Prospectus Supplement. Each such dividend shall be payable to holders of record
as they appear on the stock transfer books of the Company on such record dates
as shall be fixed by the Board of Directors of the Company.
Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will accumulate from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors of the Company fails
to declare a dividend payable on a dividend payment date on any series of the
Preferred Stock for which dividends are noncumulative, then the holders of such
series of the Preferred Stock will have no right to receive a dividend in
respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such series are declared payable on any future
dividend payment date.
If any shares of the Preferred Stock of any series are outstanding, no full
dividends shall be declared or paid or set apart for payment on the Preferred
Stock of the Company of any other series ranking, as to dividends, on a parity
with or junior to the Preferred Stock of such series for any period unless (i)
if such series of Preferred Stock has a cumulative dividend, full cumulative
dividends have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof irrevocably set apart for such payment on
the Preferred Stock of such series for all past dividend periods and the then
current dividend period or (ii) if such series of Preferred Stock does not have
a cumulative dividend, full dividends for the then current dividend period have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof irrevocably set
7
apart for such payment on the Preferred Stock of such series. When dividends are
not paid in full (or a sum sufficient for such full payment is not so
irrevocably set apart) upon the shares of Preferred Stock of any series and the
shares of any other series of preferred stock ranking on a parity as to
dividends with the Preferred Stock of such series, all dividends declared upon
shares of Preferred Stock of such series and any other series of preferred stock
ranking on a parity as to dividends with such Preferred Stock shall be declared
pro rata so that the amount of dividends declared per share on the Preferred
Stock of such series and such other series of preferred stock shall in all cases
bear to each other the same ratio that accrued and unpaid dividends per share on
the shares of Preferred Stock of such series (which shall not include any
accumulation in respect of unpaid dividends for prior dividend periods if such
Preferred Stock does not have a cumulative dividend) and such other series of
preferred stock bear to each other. Except as may otherwise be set forth in the
applicable Prospectus Supplement, no interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
irrevocably set apart for payment for all past dividend periods and the then
current dividend period or (ii) if such series of Preferred Stock does not have
a cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof irrevocably set apart for payment for the then current
dividend period, no dividends (other than in Common Stock or other capital stock
ranking junior to the Preferred Stock of such series as to dividends and upon
liquidation, dissolution or winding up of the Company) shall be declared or paid
or set aside for payment or other distribution shall be declared or made upon
the Common Stock or any other capital stock of the Company ranking junior to or
on a parity with the Preferred Stock of such series as to dividends or upon
liquidation, dissolution or winding up of the Company, nor shall any Common
Stock or any other capital stock of the Company ranking junior to or on a parity
with the Preferred Stock of such series as to dividends or upon liquidation,
dissolution or winding up 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 any such stock) by the Company
(except by conversion into or exchange for other capital stock of the Company
ranking junior to the Preferred Stock of such series as to dividends and upon
liquidation, dissolution or, winding up of the Company).
Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at 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 Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in such year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement.
8
Notwithstanding the foregoing, unless (i) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all shares of any series
of Preferred Stock shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof irrevocably set apart for
payment for all past dividend periods and the then current dividend period or
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends on the Preferred Stock of any series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
irrevocably set apart for payment for the then current dividend period, no
shares of any series of Preferred Stock shall be redeemed unless all outstanding
shares of Preferred Stock of such series are simultaneously redeemed; provided,
however, that the foregoing shall not prevent the purchase or acquisition of
shares of Preferred Stock of such series pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of Preferred
Stock of such series. In addition, unless (i) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all outstanding shares
of any series of Preferred Stock have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof irrevocably set
apart for payment for all past dividend periods and the then current dividend
period and (ii) if such series of Preferred Stock does not have a cumulative
dividend, full dividends on the Preferred Stock of any series have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof irrevocably set apart for payment for the then current dividend
period, the Company shall not purchase or otherwise acquire directly or
indirectly any shares of Preferred Stock of such series (except by conversion
into or exchange for capital stock of the Company ranking junior to the
Preferred Stock of such series as to dividends and upon liquidation, dissolution
or winding up of the Company); provided, however, that the foregoing shall not
prevent the purchase or acquisition of shares of Preferred Stock of such series
to preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of Preferred
Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any series
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 that will not result in violation of
the ownership limitations set forth in the Articles of Incorporation.
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 a share of Preferred
Stock 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 Stock to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such Preferred
Stock are to be surrendered for payment of the redemption price; (v) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date; and (vi) the date upon which the holder's conversion rights, if any, as to
such shares shall terminate. If fewer than all the shares of Preferred Stock of
any series are to be redeemed, the notice mailed to each such holder thereof
shall also specify the number of shares of Preferred Stock to be redeemed from
each such holder. If notice of redemption of any shares of Preferred Stock has
been given and if the funds necessary for such redemption have been irrevocably
set apart by the Company in trust for the benefit of the holders of any shares
of Preferred Stock so called for redemption, then from and after the redemption
date dividends will cease to accrue on such shares of Preferred Stock, such
shares of Preferred Stock 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.
9
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 Stock or any other class or series of capital
stock of the Company ranking junior to the Preferred Stock in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Stock shall be entitled to receive out of
assets of the Company legally available for distribution to stockholders
liquidating distributions in the amount of the liquidation preference per share
(set forth in the applicable Prospectus Supplement and Articles Supplementary),
plus an amount equal to all dividends accrued and unpaid thereon (which shall
not include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Stock does not have a cumulative dividend). Except as
may otherwise be set forth in the applicable Prospectus Supplement, after
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of Preferred Stock will have no right or claim to any of
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 outstanding shares of Preferred Stock and the corresponding
amounts payable on all shares of other classes or series of capital stock of the
Company ranking on a parity with the Preferred Stock in the distribution of
assets upon liquidation, dissolution or winding up of the Company, then the
holders of the Preferred Stock and all other such classes or series of capital
stock shall share ratably in any such distribution of assets in proportion to
the full liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders of
shares of Preferred Stock, the remaining assets of the Company shall be
distributed among the holders of any other classes or series of capital stock
ranking junior to the Preferred Stock upon liquidation, dissolution or winding
up of the Company, according to their respective rights and preferences and in
each case according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other corporation, or
the sale, lease, transfer or conveyance of all or substantially all of the
property or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock 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.
Whenever dividends on any shares of Preferred Stock shall be in arrears for
six or more consecutive quarterly periods, the holders of such shares of
Preferred Stock (voting separately as a class with all other series of preferred
stock upon which like voting rights have been conferred and are exercisable)
will be entitled to vote for the election of two additional directors of the
Company at the next annual meeting of stockholders, and at each subsequent
annual meeting, until (i) if such series of Preferred Stock has a cumulative
dividend, all dividends accumulated on such shares of Preferred Stock for the
past dividend periods and the then current dividend period shall have been fully
paid or declared and a sum sufficient for the payment thereof irrevocably set
apart for payment or (ii) if such series of Preferred Stock does not have a
cumulative dividend, four consecutive quarterly dividends shall have been fully
paid or declared and a sum sufficient for the payment thereof irrevocably set
apart for payment. In such case, the entire Board of Directors of the Company
will be increased by two directors.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock remain outstanding, the Company shall not, without the
affirmative vote or consent of the holders of at least 66 percent of the shares
of each series of Preferred Stock outstanding at the time, given in person or by
proxy, either in writing or at a meeting (each such series voting separately as
a class), (i) authorize or create, or increase the authorized or issued amount
of, any class or series of capital stock ranking senior to such series of
Preferred Stock with respect to payment of dividends or the distribution
10
of assets upon liquidation, dissolution or winding up of the Company or
reclassify any authorized capital stock 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 Company's Articles of Incorporation (including the
Articles Supplementary for such series of Preferred Stock), 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 Stock or the
holders thereof; provided, however, that any increase in the amount of the
authorized preferred stock or the creation or issuance of any other series of
preferred stock, or any increase in the amount of authorized shares of such
series or any other series of Preferred Stock, in each case ranking on a parity
with or junior or to the Preferred Stock of such series with respect to payment
of dividends and the distribution of assets upon liquidation, dissolution or
winding up of the Company, 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 effected, all outstanding shares of such series of Preferred Stock 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.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock 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 Stock.
RESTRICTIONS ON OWNERSHIP
With certain exceptions, the Company's Articles of Incorporation provide
that no person may own, or be deemed to own by virtue of the attribution rules
the Code, more than 9.8 percent of the value of the Company's issued and
outstanding shares of capital stock. See "Restrictions on Ownership of Capital
Stock".
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Preferred Stock or Common
Stock. 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 specified
therein ("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 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 or prices of such Warrants may be payable; (5) the
designation, amount and terms of the Offered Securities purchasable upon
exercise of such Warrants; (6) the designation and terms of the other Offered
Securities, if any, with which such Warrants are issued and the number of such
Warrants issued with each such security; (7) if applicable, the date on and
after which such Warrants and the Offered Securities purchasable upon exercise
of such Warrants will be separately transferable; (8) the price or prices at
which and currency or currencies in which the Offered
11
Securities purchasable upon exercise of such Warrants may be purchased; (9) the
date on which the right to exercise such Warrants shall commence and the date on
which such right shall expire; (10) the minimum or maximum amount of such
Warrants which may be exercised at any one time; (11) information with respect
to book-entry procedures, if any; (12) a discussion of certain federal income
tax considerations; and (13) any other material terms of such Warrants,
including terms, procedures and limitations relating to the exchange and
exercise of such Warrants.
RESTRICTIONS ON OWNERSHIP
With certain exceptions, the Company's Articles of Incorporation provide
that no person may own, or be deemed to own by virtue of the attribution rules
of the Code, more than 9.8 percent of the value of the Company's issued and
outstanding shares of capital stock. See "Restrictions on Ownership of Capital
Stock".
RESTRICTIONS ON OWNERSHIP OF OFFERED SECURITIES
For the Company to qualify as a REIT under the Code, not more than 50
percent in value of its outstanding capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year, and its capital stock
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year.
The Company's Articles of Incorporation provide, subject to certain
exceptions specified therein, that no holder may own, or be deemed to own by
virtue of the constructive ownership provisions of the Code, more than 9.8
percent by value (the "Ownership Limit") of the outstanding capital stock of the
Company. Any transfer of Offered Securities that would create a direct or
indirect ownership of shares of Common Stock and/or Preferred Stock
(collectively the "Stock") in excess of the Ownership Limit or result in the
Company being "closely held" within the meaning of Code Section 856(h) shall be
null and void, and the intended transferee will acquire no rights to the Offered
Securities, but will acquire shares of Excess Stock as described below to the
extent of shares of Stock purported to be acquired in excess of the Ownership
Limit. Any transfer of Stock that would result in the capital stock of the
Company being beneficially owned by fewer than 100 persons shall be null and
void, and the interested transferee will acquire no rights to such shares of
Stock.
Capital stock owned, or deemed to be owned, or transferred to a stockholder
in excess of the Ownership Limit will automatically be exchanged for shares of
Excess Stock that will be transferred, by operation of law, to the Company as
trustee of a trust for the exclusive benefit of the transferees to whom such
capital stock may be ultimately transferred without violating the Ownership
Limit. While the Excess Stock is held in trust, it will not be entitled to vote,
it will not be considered for purposes of any stockholder vote or the
determination of a quorum for such vote, except as required by the MGCL, and,
except upon liquidation, it will not be entitled to participate in dividends or
other distributions. Any dividend or distribution paid to a proposed transferee
of Excess Stock prior to the discovery by the Company that capital stock has
been transferred in violation of the provisions of the Company's Articles of
Incorporation shall be repaid to the Company upon demand. The Excess Stock is
not treasury stock, but rather constitutes a separate class of issued and
outstanding stock of the Company. The original transferee-stockholder may, at
any time the Excess Stock is held by the Company in trust, transfer the interest
in the trust representing the Excess Stock to any individual whose ownership of
the capital stock exchanged into such Excess Stock would be permitted under the
Ownership Limit, at a price not in excess of the price paid by the original
transferee-stockholder for the capital stock that was exchanged into Excess
Stock. Immediately upon the transfer to the permitted transferee, the Excess
Stock will automatically be exchanged for Offered Securities from which it was
converted. 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 Stock may be deemed, at the option of the
12
Company, to have acted as an agent on behalf of the Company in acquiring the
Excess Stock and to hold the Excess Stock on behalf of the Company.
In addition to the foregoing transfer restrictions, the Company will have
the right, for a period of 90 days during the time any Excess Stock is held by
the Company in trust, to purchase all or any portion of the Excess Stock from
the original transferee-stockholder for the lesser of the price paid for the
Stock by the original transferee-stockholder or the market price (as determined
in the manner set forth in the Articles of Incorporation by reference to the
average closing sale price of the Stock as reported on the NYSE) of the Stock on
the date on which the Company exercises its option to purchase. The 90-day
period begins on the date on which the Company receives written notice of the
transfer or other event resulting in the exchange of Stock for Excess Stock.
The constructive ownership rules are complex and may cause Common Stock or
Preferred Stock owned directly or constructively by a group of related
individuals and/or entities to be deemed constructively owned by one individual
or entity. As a result, the acquisition of less than 9.8 percent of the value of
the capital stock of the Company (or the acquisition of an interest in an entity
which owns such capital stock) by an individual or entity could cause that
individual or entity (or another individual or entity) to own constructively in
excess of 9.8 percent of the value of the capital stock, and thus subject such
capital stock to the Ownership Limit. Moreover, an individual or an entity which
owns Warrants to acquire Stock will be deemed to own such Stock for purposes of
applying the Ownership Limit.
The Board of Directors may waive the Ownership Limit with respect to a
particular stockholder if evidence satisfactory to the Board of Directors or 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 Board of Directors no later
than the 15th day prior to any transfer which, if consummated, would result in
the intended transferee having the direct or beneficial ownership of shares in
excess of the Ownership Limit. The foregoing restrictions on transferability and
ownership will not apply if the Board of Directors determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT.
All certificates representing shares of Common Stock and Preferred Stock
will bear a legend referring to the restrictions described above.
All stockholders of record who own more than a specified percentage of the
out-standing shares of Stock must file a written statement with the Company
containing certain information specified in Treasury Regulations, pertaining to
the actual ownership of the Stock, no later than January 31 of each year. In
addition, each holder of Stock and/or Warrants shall, upon demand, be required
to disclose to the Company in writing such in-formation with respect to the
direct, indirect and constructive ownership of Stock as the Board of Directors
deems necessary to comply with the provisions of the Code applicable to a REIT
or to comply with the requirements of any taxing authority or governmental
agency.
In addition to preserving the Company's status as a REIT, the Ownership
Limit may have the effect of precluding an acquisition of control of the REIT
without the approval of the Board of Directors. These ownership limitations
could have the effect of discouraging a takeover or other transaction in which
holders of some, or a majority, of shares of capital stock of the Company might
receive a premium for their shares over the then prevailing market price or
which such holders might believe to be otherwise in their best interest.
13
CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS TO THE COMPANY OF ITS REIT ELECTION
Pryor, Cashman, Sherman & Flynn, which has acted as tax counsel to the
Company in connection with the formation of the Company and the Company's
election to be taxed as a REIT, has reviewed the following discussion and is of
the opinion that it fairly summarizes the federal income tax considerations
relevant to the Company's status as a REIT. The following summary of certain
federal income tax considerations is based on current law, is for general
information only, 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.
The REIT provisions of the Code are highly technical and complex. The
following sets forth the material aspects of the sections that govern the
federal income tax treatment of a REIT. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change (which change may apply retroactively).
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.
TAXATION OF THE COMPANY AS A REIT
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,
1994. The Company believes that it has been organized and operated in such a
manner as to qualify for taxa-tion as a REIT under the Code for such taxable
year and for the current taxable year and the Company intends to continue to
operate in such a manner in the future, but no assurance can be given that it
will operate in a manner so as to qualify or remain qualified.
In the opinion of Pryor, Cashman, Sherman & Flynn, the Company has been
organized in conformity with the requirements for qualification and taxation as
a REIT, commencing with its taxable year ended December 31, 1994, and for all
subsequent taxable years to date, and its method of operation will enable it to
continue to meet the requirements for qualification and taxation as a REIT under
the Code. It must be emphasized that this opinion is based on various
assumptions and is conditioned upon such assumptions and certain representations
made by the Company as to factual matters. Pryor, Cashman, Sherman & Flynn is
not aware of any facts or circumstances that are inconsistent with these
representations and assumptions. Moreover, such qualification and taxation as a
REIT depends upon the Company's ability to meet, through actual annual operating
results, distribution levels and diversity of stock ownership, the various
qualification tests imposed under the Code and discussed below, the results of
which will not be reviewed by Pryor, Cashman, Sherman & Flynn. Accordingly, no
assurance can be given that the actual results of the Company's operation of any
particular taxable year will satisfy such requirements. See "--Failure to
Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "corporate alternative minimum tax" on its items
of tax preference.
14
Third, if the Company has (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (ii) other non-qualifying net income from
foreclosure property, it will be subject to tax at the highest corporate rate on
such income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business, other than
foreclosure property), such income will be subject to a 100 percent tax. Fifth,
if the Company should fail to satisfy the 75 percent gross income test or the 95
percent gross income test (as discussed below), but has nonetheless maintained
its qualification as a REIT because certain other requirements have been met, it
will be subject to a 100 percent tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75
percent or 95 percent test, multiplied by (b) a fraction intended to reflect the
Company's profitability. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85 percent of its REIT ordinary
income for such year, (ii) 95 percent of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from prior years, the
Company would be subject to a 4 percent excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, with
respect to an asset (a "Built-In Gain Asset") acquired by the Company from a
corporation which is or has been a C corporation (i.e., generally, a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
Built-In Gain Asset in the hands of the Company is determined by reference to
the basis of the asset in the hands of the C corporation, if the Company
recognizes gain on the disposition of such asset during the ten-year period (the
"Recognition Period") beginning on the date on which such asset was acquired by
the Company, then, to the extent of the Built-In Gain (i.e., the excess of (a)
the fair market value of such asset over (b) the Company's adjusted basis in
such asset, determined as of the beginning of the Recognition Period), such gain
will be subject to tax at the highest corporate tax rate pursuant to Internal
Revenue Service ("IRS") regulations that have not yet been promulgated. The
results described above with respect to the recognition of Built-In Gain assume
that the Company will make an election pursuant to IRS Notice 88-19. In
addition, Cali Services, Inc. is taxed on its income at regular corporate rates.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors,
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (3) which would be taxable as
a domestic corporation, but for Code Sections 856 through 859, (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 (determined without reference to any rules of attribution), (6)
during the last half of each taxable year, not more than 50 percent in value of
the outstanding stock of which is owned, directly or constructively, by five or
fewer individuals (as defined in the Code to include certain entities) and (7)
which meets certain other tests, described below, regarding the matter of its
income and assets. The Code provides that conditions (1) to (4), inclusive, must
be met during the entire taxable year and that condition (5) must be met during
at least 335 days of a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months.
The Company has previously issued sufficient shares to allow it to satisfy
conditions (5) and (6). In addition, the Company's Articles of Incorporation
provide for restrictions regarding ownership and transfer of the Company's
capital stock, which restrictions are intended to assist the Company in
continuing to satisfy the share owner-ship requirements described in (5) and (6)
above. The ownership and transfer restrictions are described in "Restrictions on
Ownership of Capital Stock."
The Company owns and operates all of the properties through partnerships in
which the Operating Partnership and six direct, wholly-owned subsidiaries (the
"Cali Subs") are partners. Code Section 856 (i) provides that a corporation,
100% of whose stock is held by a REIT at all times during the corporation's
existence, is a "qualified REIT subsidiary." 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)
15
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. The Company has not, however,
sought or received a ruling from the IRS that any of the Cali Subs is a
"qualified REIT subsidiary."
In the case of a REIT that is a partner in a partnership, either directly,
or indirectly through a "qualified REIT subsidiary," IRS regulations provide
that the REIT will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership will retain the same character in the hands of the
REIT for purposes of Code Section 856, including satisfying the gross income
tests and the asset tests. Thus, the Company's proportionate share of the
assets, liabilities and items of income of the partnerships in which the Company
is a partner, directly or indirectly, will be treated as the assets, liabilities
and items of income of the Company for purposes of applying the requirements
described herein.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75
percent of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments.
Second, at least 95 percent of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property investments, dividends, interest and gain from the sale or
disposition of stock or securities (or from any combination of the foregoing).
Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions and gain on the sale or other
disposition of real property held for fewer than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30 percent of the Company's gross income (including gross income from
prohibited transactions) for each taxable year. See "--Sales or Dispositions of
Assets."
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits derived by any person from such property.
However, an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code provides that
rents received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the REIT, or a direct or constructive owner
of 10 percent or more of the REIT, directly or constructively owns 10 percent or
more of such tenant (a "Related Party Tenant"). Third, if rent attributable to
personal property leased in connection with a lease of real property is greater
than 15 percent 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 received to qualify as "rents from real property,"
the REIT generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an independent
contractor from whom the REIT derives no revenue; provided, however, the Company
may directly perform certain services that are "usually or customarily rendered"
in connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. The Company does not and
will not (i) charge rent for any property that is based in whole or in part on
the income or profits of any person (except by reason of being based on a fixed
percentage of receipts or sales, as described above), (ii) rent any property to
a Related Party Tenant, (iii) derive rental income attributable to personal
property (other than personal property leased in connection with the lease of
real property, the amount of which is less than 15 percent of the total rent
received under the
16
lease), or (iv) perform services which are not usually or customarily rendered
and which are considered to be rendered to the occupant of the property, other
than through an independent contractor from whom the Company derives no revenue.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
The Operating Partnership may receive fees in consideration of the
performance of management and administrative services with respect to Properties
that are not owned entirely by the Operating Partnership. Although a portion of
such management and administrative fees generally will not qualify under the 75
percent or 95 percent gross income tests, the Company believes that the
aggregate amount of such fees (and any other non-qualifying income) in any
taxable year will not cause the Company to exceed the limits on non-qualifying
income under the 75 percent and 95 percent gross income tests.
In the opinion of Pryor, Cashman, Sherman & Flynn, the Company has satisfied
the 75 percent and 95 percent gross income tests for taxable years ending prior
to the date of this Prospectus. The Company intends to operate in such a manner
as will enable it to satisfy such tests in the future. If the Company fails to
satisfy one or both of the 75 percent or 95 percent gross income tests for any
taxable year, it may nevertheless qualify as a REIT for such year if it is
entitled to relief under certain provisions of the Code. These relief provisions
will generally be available if the Company's failure to meet such tests is due
to reasonable cause and not due to willful neglect, the Company attaches a
schedule of the sources of its income to its federal income tax return, and any
incorrect information on the schedule is not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. As
discussed above under "--General," even if these relief provisions were to
apply, a tax would be imposed with respect to the excess net income.
Sales or Dispositions of Assets. The Company, as a REIT, is generally
subject to two restrictions that limit its ability to sell real property. First,
as previously discussed, to qualify as a REIT, the Company must satisfy a 30
percent gross income limitation. Second, the Company is subject to a tax of 100
percent on its gain (i.e., the excess, if any, of the amount realized over the
Company's adjusted basis in the property) from each sale of property (excluding
certain property obtained through foreclosure) in which it is a dealer. In
calculating its gains subject to the 100 percent tax, the Company is not allowed
to offset gains on sales of property against losses on other sales of property
in which it is a dealer.
Under the Code, the Company would be deemed to be a dealer in any property
that the Company holds primarily for sale to customers in the ordinary course of
its business. Such determination is a factual inquiry, and absolute legal
certainty of the Company's status generally cannot be provided. However, the
Company will not be treated as a dealer in real property for the 30 percent
gross income limitation if (i) it has held the property for at least four years
for the production of rental income, (ii) capitalized expenditures on the
property in the four years preceding sale are less than 30 percent of the net
selling price of the property, and (iii) the Company either (a) has seven or
fewer sales of property (excluding certain property obtained through
foreclosure) for the year, (b) the aggregate tax basis of property sold during
the taxable year is 10 percent or less of the aggregate tax basis of all assets
of the Company as of the beginning of the taxable year, or (c) substantially all
of the marketing and development expenditures with respect to the property sold
are made through an independent contractor from whom the Company derives no
income. The sale of more than one property to one buyer as part of one
transaction constitutes one sale. However, the failure of the Company to meet
these "safe harbor" requirements does not necessarily mean that it is a dealer
in real property for purposes of the 100 percent tax.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75 percent of the value of the Company's total
17
assets must be represented by real estate assets (including (i) assets held by
the Company's qualified REIT subsidiaries and the Company's allocable share of
real estate assets held by partnerships in which the Company owns an interest
and (ii) stock or debt instruments held for not more than one year purchased
with the proceeds of a stock offering or long-term (at least five years) debt
offering of the Company), cash, cash items and government securities. Second,
not more than 25 percent of the Company's total assets may be represented by
securities other than those in the 75 percent asset class. Third, of the
investments included in the 25 percent asset class, the value of any one
issuer's securities owned by the Company may not exceed (at the end of the
quarter in which such securities are acquired) 5 percent of the value of the
Company's total assets and the Company may not own more than 10 percent of any
one issuer's outstanding voting securities.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (A) the sum of (i) 95 percent 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 percent of the
net income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of non-cash income. In addition, if the Company disposes of any
Built-In Gain Asset during its Recognition Period, the Company will be required,
pursuant to IRS regulations which have not yet been promulgated, to distribute
at least 95 percent of the Built-in Gain (after tax), if any, recognized on the
disposition of such asset. 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 prior year and if paid on or before
the first regular dividend payment after such declaration. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95 percent, but less than 100 percent, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital gain
corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85 percent of its REIT
ordinary income for such year, (ii) 95 percent of its REIT capital gain income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4 percent excise tax on the excess of such
required distribution over the amounts actually distributed.
In the opinion of Pryor, Cashman, Sherman & Flynn, the Company has satisfied
the annual distribution requirements for taxable years ended prior to the date
of this Prospectus. The Company intends to continue to make timely distributions
sufficient to satisfy this annual distribution requirement in the future. It is
possible that the Company, from time to time, may not have sufficient cash or
other liquid assets to meet the 95 percent distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at the taxable income of the Company, or if the amount
of nondeductible expenses, such as principal amortization or capital
expenditures exceeds the amount of noncash deductions. In the event that such
timing differences occur, in order to meet the 95 percent distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowing or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay interest to the IRS based upon the amount of any
deduction taken for deficiency dividends.
18
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable corporate alternative minimum tax) on its taxable
income at regular corporate rates. Such a failure could have an adverse effect
on the market value and marketability of the Offered Securities. Distributions
to stockholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. In such event,
to the extent of current and accumulated earnings and profits, all distributions
to stockholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF STOCKHOLDERS
Taxation of Taxable Domestic Stockholders. As long as the Company qualifies
as a REIT, distributions made to the Company's taxable domestic stockholders out
of current or accumulated earnings and profits (and not designated as capital
gain dividends) will be taken into account by them as ordinary income and will
not be eligible for the dividends received deduction for corporations.
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 stockholder has held its stock. However, corporate stockholders may be
required to treat up to 20 percent of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's shares, but rather will reduce the adjusted
basis of such shares. To the extent that such distributions exceed the adjusted
basis of a stockholder's shares, they will be included in income as long-term
capital gain (or short-term capital gain if the shares have been held for one
year or less), assuming the shares are a capital asset in the hands of the
stockholder. In addition, any dividend declared by the Company in October,
November or December of any year payable to a stockholder of record on a
specific date in any such month shall be treated as both paid by the Company and
received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company during January of the following
calendar year. Stockholders may not include in their individual income tax
returns any net operating losses or capital losses of the Company.
In general, any loss upon a sale or exchange of shares by a stockholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such stockholder as
long-term capital gain.
Backup Withholding. The Company will report to its domestic stockholders and
the IRS the amount of dividends paid during each calendar year, and the amount
of tax withheld, if any, with respect thereto. Under the backup withholding
rules, a stockholder may be subject to backup withholding at the rate of 31
percent with respect to dividends paid unless such holder (a) is a corporation
or comes within certain other exempt categories and, when required, demonstrates
this fact or (b) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A stockholder who does not provide
the Company with its correct taxpayer identification number may also be subject
to penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the stockholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions made
to any stockholders who fail to certify their non-foreign status to the Company.
See "--Taxation of Foreign Stockholders" below.
19
Taxation of Tax-Exempt Stockholders. Under the Revenue Reconciliation Act of
1993 (the "1993 Act"), in applying the REIT stock ownership test under the Code,
a pension trust generally is not treated as a single individual as it would have
been under prior law. Rather, the 1993 Act treats beneficiaries of certain
pension trusts as holding the shares of a REIT in proportion to their actuarial
interests in such trust, and thus permits certain pension trusts to acquire more
concentrated ownership of a REIT.
In addition, under the 1993 Act, a pension fund owning more than 10 percent
of a REIT must treat a percentage of dividends from the REIT as "unrelated
business taxable income" ("UBTI"). The percentage is determined by dividing the
REIT's gross income derived from an unrelated trade or business for the year by
the gross income of the REIT for the year in which the dividends are paid. If
this percentage is less than five percent, however, dividends are not treated as
UBTI. In general, the UBTI rule applies to a REIT where the REIT qualifies as a
REIT by reason of the above modification of the stock ownership test and (i) one
pension trust owns more than 25 percent of the value of the REIT; or (ii) a
group of pension trusts individually holding more than 10 percent of the value
of the REIT collectively own more than 50 percent of the value of the REIT.
The provisions of the 1993 Act apply to taxable years of a REIT beginning on
or after January 1, 1994.
Taxation of Foreign Stockholders. The rules governing U.S. federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a limited summary of such rules. Prospective Non-U.S. Stockholders should
consult with their own tax advisors to determine the impact of U.S. federal,
state and local income tax laws with regard to an investment in the Offered
Securities, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of U.S. real property interests and not designated by the Company as
capital gain dividends will 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 will ordinarily be subject to a withholding tax
equal to 30 percent of the gross amount of the distribution unless an applicable
tax treaty reduces that tax. However, if income from the investment in the
Offered Securities is treated as effectively connected with the Non-U.S.
Stockholder's conduct of a U.S. trade or business, the Non-U.S. Stockholder
generally will be subject to a tax at graduated rates, in the same manner as
U.S. stockholders are taxed with respect to such dividends (and may also be
subject to the 30 percent branch profits tax if the stockholder is a foreign
corporation). The Company expects to withhold U.S. income tax at the rate of 30
percent on the gross amount of any dividends paid to a Non-U.S. Stockholder
unless (i) a lower treaty rate applies and the required form evidencing
eligibility for that reduced rate is filed with the Company or (ii) the Non-U.S.
Stockholder 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 stockholder to the extent that they do not exceed the adjusted basis of the
stockholder'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.
Stockholder's shares, they will give rise to tax liability if the Non-U.S.
Stockholder would otherwise be subject to tax on any gain from the sale or
disposition of his shares, 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 distribution will be
subject to withholding at the rate applicable to dividends. However, the
Non-U.S. Stockholder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
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 U.S. real
property interests will be taxed to a Non-U.S.
20
Stockholder 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. Stockholder as if such gain were effectively connected with a U.S.
business. Thus, Non-U.S. Stockholders would be taxed at the normal capital gain
rates applicable to U.S. stockholders (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
percent branch profits tax in the hands of a corporate Non-U.S. Stockholder not
entitled to treaty relief or exemption. The Company is required by applicable
Treasury Regulations to withhold 34 percent of any distribution to a Non-U.S.
Stockholder that could be designated by the Company as a capital gain dividend.
This amount is creditable against the Non-U.S. Stockholder's FIRPTA tax
liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of stock generally
will not be taxed under FIRPTA if a REIT is a "domestically controlled REIT,"
defined generally as a REIT in which at all times during a specified testing
period less than 50 percent 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 therefore the sale of stock will not be
subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Stockholder if (i) investment in the Stock is "effectively
connected" with the Non-U.S. Stockholder's U.S. trade or business, in which case
the Non-U.S. Stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder 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 percent tax
on the individual's capital gains. If the gain on the sale of stock were to be
subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to
the same treatment as U.S. stockholders with respect to such gain (subject to
applicable alternative minimum tax, possible withholding tax and a special
alternative minimum tax in the case of nonresident alien individuals).
OTHER TAX MATTERS
Certain of the Company's investments are through partnerships which may
involve special tax risks. Such risks include possible challenge by the IRS of
(a) allocations of income and expense items, which could affect the computation
of income of the Company and (b) the status of the partnerships as partnerships
(as opposed to associations taxable as corporations) for income tax purposes. If
any of the partnerships is treated as an association, it would be taxable as a
corporation. In such a situation, if the Company's ownership in any of the
partnerships exceeded 10 percent of the partnership's voting interests or the
value of such interest exceeded 5 percent of the value of the Company's assets,
the Company would cease to qualify as a REIT. Furthermore, in such a situation,
distributions from any of the partnerships to the Company would be treated as
dividends, which are not taken into account in satisfying the 75 percent gross
income test described above and which could therefore make it more difficult for
the Company to qualify as a REIT for the taxable year in which such distribution
was received. In addition, in such a situation, the interest in any of the
partnerships held by the Company would not qualify as a "real estate asset,"
which could make it more difficult for the Company to meet the 75 percent asset
test described above. Finally, in such a situation, the Company would not be
able to deduct its share of loses generated by the partnerships in computing its
taxable income. See "Failure to Qualify" above for a discussion of the effect of
the Company's failure to meet such tests for a taxable year. The Company
believes that each of the partnerships will be treated for tax purposes as a
partnership (and not as an association taxable as a corporation). However, no
assurance can be given that the IRS may not successfully challenge the tax
status of any of the partnerships.
Tax Allocations With Respect to Contributed Properties. Pursuant to Section
704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated for Federal income tax purposes in
a manner such that the contributor is charged with the unrealized gain
associated with the property at
21
the time of the contribution. The amount of such unrealized gain is generally
equal to the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis of such property
at the time of contribution (the "Book-Tax Difference"). In general, the fair
market value of the interests in the various Partnerships contributed to the
Operating Partnership are substantially in excess of their adjusted tax bases.
The Partnership Agreements of each of the Operating Partnership, the Existing
Partnerships and the Holding Partnerships require that allocations attributable
to each item of contributed property be made so as to allocate the tax
depreciation available with respect to such property first to the partners other
than the partner that contributed the property, to the extent of, and in
proportion to, their book depreciation, and then, if any tax depreciation
remains, to the partner that contributed the property. Upon the disposition of
any item of contributed property, any gain attributable to an excess, at such
time, of basis for book purposes over basis for tax purposes would be allocated
for tax purposes to the contributing partner. These allocations are intended to
be consistent with the Treasury Regulations under Section 704(c) of the Code.
In general, certain persons who acquired interests in the Operating
Partnership in connection with the formation of the Company are allocated
disproportionately lower amounts of depreciation deductions for tax purposes
relative to their percentage interests in the Operating Partnership, and
disproportionately greater shares relative to their per-centage interests in the
Operating Partnership of the taxable income and gain on the sale by the
Partnerships of one or more of the contributed properties. These tax allocations
will tend to reduce or eliminate the Book-Tax Difference over the life of the
Partnerships. The Partnership Agreements of the Partnerships adopt the
"traditional method" of making allocations under Section 704(c) of the Code,
unless otherwise agreed to between the Company and the contributing partner.
Under the traditional method the amounts of the special allocations of
depreciation and gain under the special rules of Section 704(c) of the Code will
be limited by the so-called "ceiling rule" and will not always eliminate the
Book-Tax Difference on an annual basis or with respect to a specific transaction
such as a sale. Thus, the carryover basis of the contributed assets in the hands
of the partnerships will cause the Company to be allocated less depreciation
than would be available for newly purchased properties.
State and Local Taxes. The Company and its stockholders may be subject to
state or local taxation in various state or local jurisdictions, including those
in which it or they transact business or reside. The state and local tax
treatment of the Company and its stockholders may not conform to the federal
income tax consequences discussed above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and local
tax laws on an investment in the Offered Securities.
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. 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, 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 deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from any entity 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.
22
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, concessions 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, u n der
agreements entered into with the Company, to indemnification against and
contribution toward certain civil liabilities, including liabilities under the
Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate principal amount of Offered Securities
sold pursuant to Contracts shall be not less nor more than, the respective
amounts stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Offered Securities covered by
its Contracts 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 Offered Securities are being sold to underwriters, the Company shall
have sold to such underwriters the total principal amount of the Offered
Securities less the principal amount thereof covered by Contracts.
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.
EXPERTS
The financial statements incorporated in this Prospectus by reference to the
Annual Report on Form 10-K of the Company for the year ended December 31, 1994
have been so incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. The financial statements incorporated in this
Prospectus by reference to the Current Report on Form 8-K of the Company, dated
September 25, 1995, have been so incorporated in reliance on the report of
Schonbraun, Safris, Sternlieb & Co., L.L.C., independent accountants, given on
the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
Certain legal matters in connection with the Offered Securities as well as
certain legal matters described under "Certain United States Federal Income Tax
Considerations to the Company of its REIT Election" will be passed upon for the
Company by Pryor, Cashman, Sherman & Flynn, New York, New York. Certain legal
matters relating to Maryland law, including the validity of the issuance of the
securities registered hereby, will be passed upon for the Company by Swidler &
Berlin, Chartered.
23
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NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS OTHER THAN THOSE CONTAINED IN
OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOM- 3,000,000
PANYING PROSPECTUS IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS SUP-
PLEMENT AND THE ACCOMPANYING PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION [LOGO]
OR REPRESENTATIONS MUST NOT BE RELIED CALI REALTY CORPORATION
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITER. NEITHER
THIS PROSPECTUS SUPPLEMENT NOR THE
ACCOMPANYING PROSPECTUS CONSTITUTES Common Stock
AN OFFER TO SELL OR A SOLICITATION
OF ANY OFFER TO BUY ANY SECURITY OTHER
THAN THE SECURITIES OFFERED HEREBY NOR
DO THEY CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF ANY OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY BY
ANYONE 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 SOLICI-
TATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOM-
PANYING PROSPECTUS, NOR ANY SALE MADE
HEREUNDER OR THEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLI- ---------------------
CATION THAT ANY INFORMATION CONTAINED PROSPECTUS SUPPLEMENT
HEREIN IS CORRECT AS OF ANY TIME ---------------------
SUBSEQUENT TO THE DATE HEREOF.
-----------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Available Information........ S-3
Information Incorporated
by Reference............... S-3
Risk Factors................. S-4
The Company.................. S-9
Recent Developments.......... S-9
Use of Proceeds.............. S-10
Price Range of Common
Stock and Distributions.... S-11 PRUDENTIAL SECURITIES INCORPORATED
Underwriting................. S-12
Legal Matters................ S-12
Experts...................... S-13
PROSPECTUS
PAGE
----
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
Common Stock............... 5
Description of
Preferred Stock............ 5
Description of Warrants...... 11
Restrictions on Ownership
of Offered Securities...... 12
Certain United States
Federal Income Tax
Considerations to the
Company of its REIT
Election................... 14
Plan of Distribution......... 22
Experts...................... 23
Legal Matters................ 23
August 7, 1996
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