As filed with the Securities and Exchange Commission on April 5, 2002
Registration No. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
________________
PRENTISS PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 75-2661588
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3890 W. Northwest Highway, Suite 400 Gregory S. Imhoff
Dallas, Texas 75220 Prentiss Properties Trust
(214) 654-0886 3890 W. Northwest Highway, Suite 400
(Address, including zip code, and telephone number, Dallas, Texas 75220
including area code, of (214) 654-0886
registrant's principal executive offices) (Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copy to:
Michael E. Dillard, P.C.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1700 Pacific Avenue, Suite 4100
Dallas, Texas 75201
(214) 969-2800
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box: [_]
CALCULATION OF REGISTRATION FEE
==========================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class Of Securities to Aggregate Amount To Aggregate Offering Aggregate Offering Amount of
be Registered be Registered (1) Price Per Share Price Registration Fee
--------------------------------------------------------------------------------------------------------------------------
Common Shares of Beneficial
Interest, $0.01 par value per share 613,750 $29.40 (2) $18,044,250 (2) $1,661
Preferred Share Purchase Rights (3) N/A (4) N/A (4) N/A (4)
==========================================================================================================================
(1) Pursuant to Rule 416 of the Securities Act of 1933, as amended, this
Registration Statement also relates to such additional shares as may be
issuable as a result of certain adjustments, including, without limitation,
stock dividends, stock splits and distributions of options, warrants and
convertible securities.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended,
based on the average of the high and low reported sales prices on the New
York Stock Exchange on April 3, 2002.
(3) The rights to purchase Junior Participating Cumulative Preferred Shares of
Beneficial Interest, Series B, par value $0.01 per share, are attached to
and trade with the common shares. As no additional consideration will be
received for the rights, no registration fee is required with respect to
them under Rule 457(i).
(4) Rule 457(g) of the Securities Act of 1933, as amended, does not require the
payment of a registration fee because the Company is registering the rights
in the same registration statement as the securities being offered pursuant
to the rights.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this registration statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
********************************************************************************
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
********************************************************************************
Subject to Completion, dated April 5, 2002
Prospectus
[LOGO]
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
(214) 654-0886
613,750 Common Shares of Beneficial Interest
This prospectus relates to the public offer and sale of up to 613,750 of our
common shares of beneficial interest from time to time by the selling
shareholder named herein, or its transferees, pledgees, donees or successors.
Our common shares trade on the New York Stock Exchange under the symbol "PP."
On April 3, 2002, the last sale price of the shares as reported on the New York
Stock Exchange was $29.20 per share.
____________________
Investing in our common shares of beneficial interest involves risks. See the
sections entitled "Risk Factors" in the documents we file with the Securities
and Exchange Commission that are incorporated by reference in this Prospectus
for certain risks and uncertainties that you should consider as well as the risk
factors beginning on page 2 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ___________________, 2002
Table of Contents
Page
----
Forward Looking Statements.................................................... 1
About This Prospectus......................................................... 1
Risk Factors.................................................................. 2
Prentiss Properties Trust and The Operating Partnership....................... 3
Registration Rights........................................................... 4
Use of Proceeds............................................................... 4
Description of Shares of Beneficial Interest.................................. 4
Restrictions on Ownership and Transfer........................................ 7
Federal Income Tax Considerations............................................. 10
Important Provisions of Maryland Law and Our Declaration Of Trust And Bylaws.. 24
Selling Shareholder........................................................... 27
Plan of Distribution.......................................................... 27
Legal Matters................................................................. 28
Experts....................................................................... 28
Where You Can Find More Information........................................... 28
i
Forward Looking Statements
This prospectus, any prospectus supplement and the documents incorporated by
reference herein may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in this prospectus,
words such as "anticipate," "believe," "estimate," "expect," "intend,"
"predict," "project," and similar expressions, as they relate to us or our
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of our management as well as assumptions made by us and
information currently available to us. These forward-looking statements are
subject to certain risks, uncertainties and assumptions, including risks,
uncertainties and assumptions related to the following:
. The geographic concentration of our . Limited ability of shareholders to effect a
properties; change of control;
. Our real estate acquisition, redevelopment, . Our failure to qualify as a REIT;
development and construction activities;
. Factors that could result in the poor operating . Conflicts of interest;
performance of our properties including tenant
defaults and increased costs such as insurance;
. Competition in markets where we have properties; . Changes in our investment, financing and
borrowing policies without shareholder approval;
. Environmental and Americans with Disabilities Act . Our dependence on key personnel;
compliance issues related to our properties;
. Some of our properties may be subject to uninsured . Our third-party property management,
losses; leasing, development and construction business
and related services;
. Our properties are illiquid assets; . The effect of shares available for future
sale on the price of common shares; and
. Our incurrence of debt and use of variable rate debt . Changes in market conditions including
and derivative financial instruments; market interest rates.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect our current views with respect to future events and are subject to these
and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. You should
refer to the section entitled "Risk Factors" in this prospectus, any prospectus
supplement and in our Annual Report on Form 10-K for the year ended December 31,
2001, which is incorporated by reference, for a discussion of risk factors that
could cause actual results to differ materially from those indicated by the
forward-looking statements. You are cautioned not to place undue reliance on our
forward-looking statements, which speak only as of the date of this prospectus
or the date of any document incorporated by reference into this prospectus. We
do not undertake any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
About This Prospectus
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission utilizing a "shelf registration" process.
Under this shelf process, the selling shareholder named herein or its
transferees, pledgees, donees or successors may, from time to time, offer and
sell up to 613,750 of our common
shares of beneficial interest described in this prospectus. You should read both
this prospectus and any prospectus supplement together with additional
information described under the heading "Where You Can Find More Information."
Risk Factors
You should carefully consider the risks before acquiring our common shares
from time to time offered by the selling shareholder named herein or its
transferees, pledgees, donees or successors. If any of the risks actually
occur, our business, financial condition or results of operations could be
materially adversely affected, the trading price of our common shares could
decline and you may lose all or part of your investment. Additional risks and
uncertainties, including those that are not yet identified or that we think are
immaterial, may adversely effect our business, profitability and growth
prospects. You should carefully consider the following information in
conjunction with the other information contained in this prospectus, any
prospectus supplement and the documents and risk factors incorporated by
reference herein, before deciding to invest in our common shares.
We have shares available for future sale that could adversely affect the price
of our common shares.
Under our declaration of trust, our board of trustees has the authority to do
the following:
. amend our declaration of trust, without shareholder approval, to increase
or decrease the aggregate number of shares of beneficial interest or the
number of shares of beneficial interest of any class, including common
shares, that we have the authority to issue; and
. issue additional authorized but unissued common shares or preferred shares.
As of March 15, 2002, we have authorized 100,000,000 common shares, of which
62,188,981 common shares are unissued. In addition, we have granted options to
purchase 4,387,312 common shares to executive officers, employees and trustees,
of which options to purchase 1,874,805 common shares remain outstanding. We
have reserved a total of 3,773,585 common shares for issuance upon conversion of
the Series D Preferred Shares. Sales or issuances of a substantial number of
common shares, or the perception that such sales could occur could adversely
affect prevailing market prices of the common shares and dilute the percentage
ownership held by our shareholders.
Limited partners of our operating partnership have the right to receive, in
our or the general partner's discretion, either cash or one common share, in
exchange for each limited partnership unit they now hold, if and to the extent
they tender such units for redemption. As of March 15, 2002, there were
1,522,036 common units of our operating partnership outstanding and held by
partners other than Prentiss Properties Trust, and, if we or the general partner
elect to redeem such units for common shares, these common units are
exchangeable for 1,522,036 common shares. We are party to registration rights
agreements under which we are required to register the issuance of common shares
which we may issue upon the redemption by the holders of units of limited
partnership interest in our operating partnership. We can make no prediction
concerning the effect that such issuance or future sales of any such common
shares will have on market prices.
Changes in market conditions could hurt the market price of our shares.
The value of our common shares depends on various market conditions, which may
change from time to time. Among the market conditions that may affect the value
of our common shares are the extent of institutional investor interest in us;
the reputation of REITs generally and the attractiveness of their equity
securities in comparison to other equity securities, including securities issued
by other real estate companies, and fixed income securities; our financial
condition and performance; and general financial market conditions. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies.
Increased market rates may hurt the value of our shares.
We believe that investors consider the distribution rate on REIT shares,
expressed as a percentage of the price of the shares, relative to market
interest rates as an important factor in deciding whether to buy or sell the
shares. If
2
market interest rates go up, prospective purchasers of REIT shares may expect a
higher distribution rate. Higher interest rates would not, however, result in
more funds for us to distribute and in fact, would likely increase our borrowing
costs and might decrease our funds available for distribution. Thus, higher
market interest rates could cause the market price of our common shares to
decline.
Prentiss Properties Trust and The Operating Partnership
We are a self-administered and self-managed Maryland REIT that acquires, owns,
manages, leases, develops and builds primarily office properties throughout the
United States. We are self-administered in that we provide our own
administrative services, such as accounting, tax and legal services, internally
through our own employees. We are self-managed in that we internally provide
all the management and maintenance services that our properties require through
our own employees, such as property managers, leasing professionals and
engineers.
As of December 31, 2001, we owned interests in a diversified portfolio of 146
primarily suburban Class A office and suburban industrial properties, including
development projects, as follows:
Number of Net Rentable
Buildings Square Feet
--------- ------------
(in millions)
Office Properties 108 14.4
Industrial Properties 38 3.2
--- ----
TOTAL 146 17.6
=== ====
The above properties consist of 108 office properties containing approximately
14.4 million net rentable square feet and 38 industrial properties containing
approximately 3.2 million net rentable square feet. Our properties include 3
office properties containing 445,000 net rentable square feet that are in
various stages of development. As of December 31, 2001, our properties,
exclusive of the development properties, were 94% leased to approximately 1,100
tenants. In addition to managing properties that we own, we manage
approximately 19.7 million net rentable square feet in office, industrial and
other properties for third parties.
Our primary business is the ownership and operation of office and industrial
properties throughout the United States. We have determined that our reportable
segments are those that are based on our method of internal reporting, which
disaggregates our business by geographic region. In April 2001, we completed an
asset exchange with Brandywine Realty Trust, which included the sale of all of
the properties comprising our Northeast region, and as a result, at December 31,
2001, we had no operations in the Northeast region. In addition, during
December 2001, we changed our internal reporting dividing our West region into
separate Northern and Southern California regions. As of December 31, 2001, our
reportable segments include our five regions (1) Mid-Atlantic; (2) Midwest; (3)
Southwest; (4) Northern California; and (5) Southern California.
Our properties are located in 12 markets, which are included in our reportable
segments as follows:
Reportable Segment Market
------------------ ------
Mid-Atlantic Metropolitan Washington, DC, Atlanta
Midwest Chicago, Suburban Detroit
Southwest Austin, Dallas/Fort Worth, Denver, Houston
Northern California Sacramento, San Francisco Bay Area
Southern California Los Angeles, San Diego
We operate principally through Prentiss Properties Acquisition Partners, L.P.,
our operating partnership, and its subsidiaries and Prentiss Properties
Resources, Inc., a subsidiary that acts as manager. Our regional management
offices are located in San Diego, Oakland, Dallas, Chicago and Washington, D.C.
We have approximately 570 employees with expertise in areas such as
acquisitions, development, facilities management, property management and
leasing.
3
In February 2002, we completed the private offering of the 613,750 common
shares of beneficial interest to Salomon Smith Barney Inc., resulting in net
proceeds to us of approximately $16.3 million after underwriting discounts and
commissions and before offering expenses. We granted Salomon Smith Barney Inc.
registration rights in connection with the private placement. We contributed
the net proceeds of the sale of the common shares to our operating partnership
in exchange for additional units of limited partnership interest in the
operating partnership. We used the net proceeds from the sale of the common
shares to fund in part our purchase from Burnett Plaza--VEF III, L.P. of its 80%
joint venture interest in Burnett Plaza Associates.
Registration Rights
In connection with the private placement, we and Salomon Smith Barney Inc.
entered into a registration rights agreement in February 2002. Under the
registration rights agreement, we agreed to file as soon as practicable, but in
any event by April 12, 2002, a shelf registration statement registering the
resale by the selling shareholder from time to time of the common shares we
issued in the private placement. We also agree to use our reasonable best
efforts to cause the registration statement to become effective as promptly as
practicable and within 90 days after the date of the registration rights
agreement subject to exceptions. In addition, we agreed to keep such
registration statement effective until the earliest time that all of the shares
have been sold under the registration statement, the holding period under Rule
144(k) under the Securities Act of 1933 that would apply to non-affiliates has
expired or all of the shares have been sold pursuant to Rule 144 under the
Securities Act of 1933. We have the right to suspend the availability of the
registration statement in a number of circumstances, including the issuance of a
stop order by the SEC, the occurrence of a material event that would cause the
registration statement to contain a material misstatement or omission, or the
occurrence or existence of a corporate development that would make it
appropriate, in our judgment, to suspend the registration statement. If we
receive a notice that the selling shareholder intends to sell shares at a time
when the registration statement is suspended or is otherwise not effective, we
will have a right to purchase the shares on the terms set forth in the
registration rights agreement.
On February 28, 2002, Salomon Smith Barney Inc. deposited the common shares
described in this prospectus with the trustee of The Equity Focus Trusts--REIT
Portfolio Series, 2002-A, an affiliate of Salomon Smith Barney Inc. The trust
is the beneficiary of our agreements under the registration rights agreement.
In the registration rights agreement, we have agreed to indemnify the
beneficiaries of the agreement against certain liabilities, including
liabilities under the Securities Act of 1933, or to contribute to payments which
they may be required to make in respect of any such liabilities.
Use of Proceeds
We will not receive any proceeds from the sale of the common shares by the
selling shareholder. We will bear all expenses incident to the registration of
the common shares under federal and state securities laws other than expenses
incident to the delivery of the shares to be sold by the selling shareholder.
Any transfer taxes payable on any such shares and any commission and discounts
payable to underwriters, agents or dealers will be paid by the selling
shareholder.
Description of Shares of Beneficial Interest
General
The following summary of the material terms of the common shares is subject to
the detailed provisions of the following:
. our current declaration of trust;
. our current bylaws;
. our articles supplementary relating to our Junior Participating Cumulative
Preferred Shares of beneficial interest, Series B, par value $0.01 per
share, or Series B Junior Preferred Shares;
. our articles supplementary relating to our 8.30% Series B Cumulative
Redeemable Perpetual Preferred Shares of beneficial interest, par value
$0.01 per share, or Series B Preferred Shares;
4
. our articles supplementary relating to our Series D Cumulative Convertible
Preferred Shares of beneficial interest, par value $0.01 per share, or
Series D Preferred Shares; and
. the terms of our 8.30% Series B Cumulative Redeemable Perpetual Preferred
Units of beneficial interest, par value $0.01 per share, and Series E
Cumulative Preferred Units of beneficial interest, par value $0.01 per
share, detailed in the limited partnership agreement of our operating
partnership.
The following summary does not purport to be complete or to give full effect to
the provisions of statutory or common law and should be read in conjunction with
the terms of our declaration of trust, bylaws and articles supplementary.
Our declaration of trust allows us to issue up to 100,000,000 common shares
and 20,000,000 preferred shares of beneficial interest, par value $0.01 per
share, of which 1,000,000 are Series B Junior Preferred Shares, 1,900,000 are
Series B Preferred Shares and 3,773,585 are Series D Preferred Shares. As of
March 15, 2002, 37,811,019 common shares, no Series B Junior Preferred Shares,
no Series B Preferred Shares and 3,773,585 Series D Preferred Shares were issued
and outstanding. As permitted by Maryland REIT law, our declaration of trust
allows our board of trustees, without any action by our shareholders, to amend
our declaration of trust to increase or decrease the aggregate number of shares
of beneficial interest or the number of shares of any class of shares of
beneficial interest that we may issue.
As a Maryland REIT, we are subject to Maryland REIT law, as amended. Both
Maryland REIT law and our declaration of trust provide that you will not be
personally liable for any of our obligations solely as a result of your status
as our shareholder. Our bylaws further provide that we must indemnify you
against any claim or liability to which you may become subject by reason of your
being or having been a shareholder or former shareholder. In addition, we must
pay or reimburse you for all legal and other expenses reasonably incurred by you
in connection with any such claim or liability successfully defended. It is our
policy to include a clause in our contracts which provides that shareholders
will not be personally liable for obligations entered into on our behalf.
However, with respect to tort claims, contractual claims where shareholder
liability is not removed or claims for taxes and statutory liability you may, in
some jurisdictions, be personally liable to the extent that we do not satisfy
such claims. Inasmuch as we carry public liability insurance that we consider
adequate, any risk of liability to you is limited to situations in which our
assets plus our insurance coverage would be insufficient to satisfy the claims
against us and our shareholders.
Common Shares
The common shares offered in this prospectus are duly authorized, validly
issued, fully paid and nonassessable, and the holders thereof will not have
preemptive or appraisal rights. As a holder of our common shares, you will be
entitled to the following:
. To receive dividends if, as and when authorized by our board of trustees and
declared by us out of legally available assets. We intend to pay quarterly
dividends to the holders of our common shares.
. To share ratably in our assets legally available for distribution to our
shareholders in the event of our liquidation, dissolution or winding-up
after payment of, or adequate provision for, all of our known debts and
liabilities.
. To one vote per share on all matters voted on by shareholders, including
elections of trustees. Our declaration of trust does not allow cumulative
voting in the election of trustees, which means the holders of a majority of
the outstanding common shares can elect all of the trustees then standing
for election.
Your rights to dividends and liquidation preferences are subject to the
preferential rights of any of our other shares or series of shares of beneficial
interest and to the provisions of our declaration of trust regarding shares-in-
trust. In addition, your rights to dividends and liquidation preferences are
subject to the preferential rights of any holders of preferred units of our
operating partnership. Your voting rights are subject to the provisions of our
declaration of trust regarding shares-in-trust.
5
Pursuant to Maryland REIT law, a REIT generally cannot amend its declaration
of trust or merge with or into another entity unless the matter is approved by
the affirmative vote of shareholders holding at least two-thirds of the shares
entitled to vote on the matter. A REIT may establish a lesser percentage, but
not less than a majority of all the votes entitled to be cast on the matter, in
the REIT's declaration of trust. Our declaration of trust provides for approval
by a majority of all the votes entitled to be cast on the matter in all
situations permitting or requiring action by the shareholders, except with
respect to the following, each of which requires the affirmative vote of the
holders of two-thirds of the outstanding voting shares:
. The removal of trustees;
. Any amendment to a specific section of our declaration of trust that relates
to our board of trustees, restrictions on the transfer of shares-in-trust,
amendments and our termination; and
. Our termination.
Our board of trustees may, by a two-thirds vote, amend our declaration of trust
from time to time to qualify as a REIT under the Internal Revenue Code of 1986
or Maryland REIT Law without the affirmative vote of our shareholders.
The transfer agent and registrar for the common shares is EquiServe Trust
Company. Our common shares trade on the New York Stock Exchange under the
symbol "PP." The common shares offered in this prospectus were approved for
listing on the New York Stock Exchange.
Preferred Share Purchase Rights
On February 6, 1998, we entered into a rights plan with First Chicago Trust
Company, a division of EquiServe, as rights agent, to enable our shareholders to
receive fair and equal treatment in the event of a third party's attempt to
acquire us. The rights plan could make it more difficult for a third party to
acquire, or could discourage a third party from acquiring, us or a large block
of our common shares.
On February 17, 1998, we distributed as a dividend one purchase right for each
outstanding common share. Each purchase right entitles the holder to purchase
one one-thousandth of a share of the Series B Junior Preferred Shares at an
exercise price of $85, subject to adjustment. The purchase rights are not
currently exercisable and are attached to and trade with the outstanding common
shares.
The purchase rights become exercisable if a person or group acquires, obtains
the right to acquire or announces a tender offer to acquire 10% or more of our
outstanding common shares. If the acquiror is Security Capital Preferred Growth
Incorporated, the threshold percentage is 11% instead of 10%. Each purchase
right would then entitle its holder to acquire Series B Junior Preferred Shares
at the exercise price or, at our option, common shares, cash, property or other
securities having a value equal to twice the exercise price of the purchase
right.
The purchase rights also become exercisable if we are acquired in a merger or
other business combination or if 50% or more of our assets or earning power is
transferred. Each purchase right would then entitle its holder, other than the
acquiring person, to purchase securities of the surviving company having a
market value equal to twice the exercise price of the purchase right.
Until exercisable, the purchase rights will be evidenced by the common share
certificates and will trade with the common share certificates. The purchase
rights will expire on February 17, 2008. We may redeem each purchase right at a
price of $0.001 at any time until ten days after an announcement that a person
or group has acquired a 10% position in us. As a result, the purchase rights
should not interfere with any merger or other business combination approved by
our board of trustees.
In January 2002, the rights plan was amended and restated to (1) allow our
full board of trustees, without a continuing trustee limitation, the ability to
redeem or exchange the rights and amend the rights plan, (2) allow our board of
trustees to delay the date upon which separate certificates evidencing the
rights would be issued in the context of a tender or exchange offer, (3) provide
that the ability of our board of trustees to redeem the rights will
6
end upon a person or entity becoming an acquiring person and (4) prevent the
amendment of the rights plan at any time during which we may not redeem the
rights.
Preferred Shares
Our board of trustees may issue preferred shares in one or more series without
shareholder approval. Our board of trustees may establish designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms and
conditions of redemption of our preferred shares. Thus, without shareholder
approval our board of trustees could authorize the issuance of preferred shares
that could have the following effects:
. the dilution of the voting power and other rights of the holders of common
shares, and
. the delay, deference or prevention of a takeover or other transaction that
holders of some, or a majority, of the common shares might believe to be in
their best interests or in which holders of some, or a majority, of the
common shares might receive a premium for their common shares over the then
market price of such common shares.
As of the date of this prospectus, our board of trustees had designated
1,900,000 Series B Preferred Shares, none of which were outstanding, 1,000,000
Series B Junior Preferred Shares, none of which were outstanding, and 3,773,585
Series D Preferred Shares, all of which were outstanding.
In June 1998, we privately placed 1,900,000 8.30% Series B Cumulative
Redeemable Perpetual Preferred Units of our operating partnership with Belair
Capital Fund. In connection with the private placement, on June 25, 1998, we
designated 1,900,000 Series B Preferred Shares. We may redeem the Series B
Preferred Units at any time after June 25, 2003 for cash in an amount equal to
the capital account balance subject to certain limitations. The holders of the
Series B Preferred Units may exchange the Series B Preferred Units at any time
on or after June 25, 2008 for Series B Preferred Shares at an exchange rate of
one Series B Preferred Share for one Series B Preferred Unit, subject to
adjustments. As of the date of this prospectus, no Series B Preferred Shares
were issued or outstanding.
In April 2001, we completed an asset exchange with Brandywine Realty Trust.
As part of that exchange, we acquired Brandywine's Northern Virginia assets
which includes a 25% non-controlling interest in the Tysons International
Partners joint venture that owns two office properties. In exchange for the
joint venture interest, we issued to Brandywine a combination of 200,000 7.50%
Series E Cumulative Preferred Units of our operating partnership and 26,768
common units of our operating partnership. The holders of the Series E
Preferred Units may choose to have the Series E Preferred Units redeemed at any
time on or after April 10, 2004. The Series E Preferred Units are redeemable
for either $10.0 million plus accrued but unpaid distributions or, at our
option, common shares having a market value equal to the redemption price. In
addition, the common units held by Brandywine are exchangeable after April 10,
2003, for either cash equal to the trading price of one common share at the time
of the exchange or, at our option, one common share.
In March 2001, we issued 3,773,585 Series D Preferred Shares in an exchange
for all of the outstanding Series A Preferred Shares held by Security Capital
Preferred Growth. The holders of the Series D Preferred Shares have the right to
convert all or any portion of such shares into common shares based on a
conversion price of $26.50 per common share. Conversion may also occur in the
event of a change of control of Prentiss Properties Trust or the termination of
our status as a REIT.
Restrictions on Ownership and Transfer
In order to qualify as a REIT under the Internal Revenue Code, we must satisfy
requirements concerning the ownership of our outstanding shares of beneficial
interest. Specifically, no more than 50% of the value of our outstanding shares
of beneficial interest may be owned, directly or indirectly, by five or fewer
individuals or entities during the last half of a taxable year, other than the
1996 taxable year, and we 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, other than our 1996 taxable year.
7
Because our board of trustees believes it is essential for us to continue to
qualify as a REIT, our declaration of trust contains an ownership limitation
that provides that no person may own more than 8.5% of the number of outstanding
common shares, other than Michael V. Prentiss, who currently may own up to 15%
of the number of outstanding common shares, or more than 9.8% of the number of
outstanding preferred shares of any series, other than Security Capital, which
may own all of the Series D Preferred Shares. Our board of trustees may, but is
not required to, decrease the ownership limit applicable to Mr. Prentiss'
ownership of common shares to as low as 9.8% of the outstanding common shares
upon an increase in the number of outstanding common shares or a reduction of
the number of common shares owned, directly or indirectly, by Mr. Prentiss.
Upon any such adjustment, the ownership limitation applicable to other
shareholders with respect to the common shares will be increased proportionately
to a maximum of 9.8% of the number of outstanding common shares.
As long as we receive evidence that our REIT status will not be lost, our
board of trustees may exempt a recipient of common shares from the ownership
limitation upon receipt of the following:
. a ruling from the Internal Revenue Service, or
. an opinion of counsel.
Our board of trustees has exempted Security Capital from the ownership
limitation on the condition that Security Capital not own more than 11% of the
number of outstanding common shares. Our board of trustees may monitor, modify,
suspend or revoke Security Capital's 11% ownership limitation as may be required
to maintain our REIT status. Our board of trustees may not grant an exemption
from the ownership limitation to any proposed transferee if such exemption would
result in the termination of our status as a REIT.
Any transfer of common shares or preferred shares that causes any one of the
following conditions to exist will be null and void, and the intended transferee
will acquire no rights in such common shares or preferred shares:
. any person owning, directly or indirectly, common shares or preferred shares
in excess of the ownership limitation;
. our outstanding shares being owned by fewer than 100 persons, as determined
without reference to any rules of attribution;
. our being "closely held" within the meaning of Section 856(h) of the
Internal Revenue Code; or
. our owning, directly or constructively, 10% or more of the ownership
interests in one of our tenants or the operating partnership's real property
within the meaning of Section 856(d)(2)(B) of the Internal Revenue Code.
If any purported transfer of common shares or preferred shares results in any of
the four above conditions, the common shares or preferred shares in excess of
the applicable limitation will be designated as "shares-in-trust" and
transferred automatically to a share trust effective on the day before the
purported transfer of such common shares or preferred shares. The record holder
of the common shares or preferred shares that are designated as shares-in-trust
will be required to submit such number of common shares or preferred shares to
us for registration in the name of the share trust. We will designate the
trustee of the share trust, but the trustee of the share trust will not be
affiliated with us. We will name one or more charitable organizations as the
share trust's beneficiary.
Shares-in-trust will remain issued and outstanding common shares or preferred
shares and will be entitled to the same rights and privileges as all other
shares of the same class or series. The share trust will receive all dividends
and distributions on the shares-in-trust and will hold such dividends and
distributions in trust for the benefit of the share trust's beneficiary. The
share trustee will vote all shares-in-trust. The trustee of the share trust may
transfer the shares-in-trust, provided the transferee:
. purchases such shares-in-trust for valuable consideration, and
. acquires such shares-in-trust without such acquisition resulting in a
transfer to another share trust and resulting in the redesignation of such
common shares or preferred shares as shares-in-trust.
8
The prohibited owner with respect to shares-in-trust:
. will be required to repay to the share trust the amount of any dividends or
distributions received by the prohibited owner that are attributable to any
shares-in-trust, and
. will generally receive from the share trustee the lower of (1) the amount
paid by the prohibited owner for the common shares designated as shares-in-
trust, or, in the case of a gift or devise, the "market price," as defined
in our declaration of trust, per share on the date of such transfer, or (2)
the amount received by the share trustee from the sale of such shares-in-
trust. Any amounts received by the trustee of the share trust in excess of
the amounts to be paid to the prohibited owner will be distributed to the
share trust's beneficiary.
The shares-in-trust will be deemed to have been offered for sale to us, or our
designee, at a price per share equal to the lesser of the following:
. the price per share in the transaction that created such shares-in-trust,
or, in the case of a gift or devise,
. the market price per share on the date of such transfer, or
. the market price per share on the date that we, or our designee, accepts
such offer.
We will have the right to accept such offer for a period of 90 days after the
date of the purported transfer that resulted in such shares-in-trust.
Any person who acquires or attempts to acquire common shares or preferred
shares in violation of the above restrictions, or any person who owned common
shares or preferred shares that were transferred to a share trust, is required
to immediately give written notice to us and to provide such other information
to us as we may request in order to determine the effect, if any, of such
transfer on our status as a REIT.
Our declaration of trust requires all persons who own, directly or indirectly,
more than 5%, or such lower percentages as required pursuant to regulations
under the Internal Revenue Code, of the outstanding common shares and preferred
shares, within 30 days after January 1 of each year, to provide a written
statement or affidavit to us stating their name and address, the number of
common shares and preferred shares owned, and a description of how such shares
are held. In addition, each direct or indirect shareholder must provide such
additional information to us as we may request in order to determine the effect,
if any, of such ownership on our status as a REIT and to ensure compliance with
the ownership limitation.
The ownership limitation generally will not apply to the acquisition of common
shares or preferred shares by an underwriter that participates in a public
offering of such shares. In addition, our board of trustees, upon receipt of a
ruling from the IRS or an opinion of counsel and upon such other conditions as
our board of trustees may direct, may exempt a person from the ownership
limitation. However, our board of trustees may not grant an exemption from the
ownership limitation to any proposed transferee whose ownership, direct or
indirect, of our shares of beneficial interest in excess of the ownership
limitation would result in the termination of our status as a REIT. These
restrictions will continue to apply until our board of trustees determines that
it is no longer in our best interests to attempt to qualify, or to continue to
qualify, as a REIT and there is an affirmative vote of a majority of the votes
entitled to be cast on such matter at a regular or special meeting of our
shareholders.
The ownership limitation could have the effect of delaying, deferring or
preventing a transaction or a change in control that might involve a premium
price for our common shares or might otherwise be in the best interest of our
shareholders. All certificates representing common shares or preferred shares
will bear a legend referring to the restrictions described above.
9
Federal Income Tax Considerations
The following is a summary of the material federal income tax considerations
that may be relevant to a prospective holder of the Shares. This discussion
does not address all aspects of taxation that may be relevant to particular
shareholders in light of their personal investment or tax circumstances, or to
shareholders, such as insurance companies, tax-exempt organizations, except to
the extent described below, financial institutions, broker-dealers, foreign
corporations, and persons who are not citizens or residents of the United
States, except to the extent described below, that are subject to special
treatment under the federal income tax laws.
This discussion is based on current provisions of the Internal Revenue Code,
existing, temporary, and currently proposed Treasury Regulations promulgated
under the Internal Revenue Code, the legislative history of the Internal Revenue
Code, existing administrative rulings and practices of the IRS, and judicial
decisions. No assurance can be given that future legislative, judicial, or
administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this prospectus with respect to the
transactions entered into or contemplated prior to the effective date of such
changes. Akin, Gump, Strauss, Hauer & Feld, L.L.P., or Akin Gump, has opined
that this summary of the material federal income tax consequences fairly
summarizes, subject to the limitations described herein, the federal income tax
considerations that are likely to be material to a holder of the common shares.
Because your income tax considerations may vary depending on your personal
investment or tax circumstances, we recommend that you consult your own tax
advisor regarding the specific tax consequences to you of the purchase,
ownership and sale of the common shares and of our election to be taxed as a
REIT, including the federal, state, local, foreign and other tax consequences of
such purchase, ownership, sale and election, and of potential changes in
applicable tax laws.
Taxation of Prentiss Properties Trust
We have elected to be taxed as a REIT beginning with our tax year ending on
December 31, 1996. We believe that, commencing with such taxable year, we have
been organized and have operated in such a manner so as to qualify for taxation
as a REIT under the Internal Revenue Code, and we intend to continue to operate
in such a manner. In addition, Akin Gump has opined, based upon representations
of fact given by us to them, that we were organized and have operated in
conformity with the requirements for qualification as a REIT under the Internal
Revenue Code beginning with our taxable year ending December 31, 1996, and
through the date hereof and our current and proposed method of operation will
enable us to continue to qualify as a REIT. In rendering its opinion, Akin Gump
has not independently verified these facts. We can give no assurance, however,
that the IRS will agree that we have or will remain so qualified.
Qualification and taxation as a REIT depends upon our ability to continuously
meet the various REIT qualification tests, which include actual annual operating
results, distribution levels and share ownership. No assurance can be given
that the actual results of our operations for any particular taxable year will
satisfy such requirements.
As a REIT, we generally are not subject to federal corporate income tax on our
net income that is distributed currently to our shareholders. That treatment
substantially eliminates the "double taxation", i.e., taxation at both the
corporate and shareholder levels, that generally results from an investment in a
corporation. However, we will be subject to federal income tax in the following
circumstances:
. we will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains.
. we may be subject to the "alternative minimum tax" on our undistributed
items of tax preference, if any.
. if we have (1) net income from the sale or other disposition of "foreclosure
property" that is held primarily for sale to customers in the ordinary
course of business or (2) other nonqualifying income from foreclosure
property, we will be subject to tax at the highest corporate rate on such
income.
10
. if we have net income from prohibited transactions, which are, in general,
sales or other dispositions of property, other than foreclosure property,
held primarily for sale to customers in the ordinary course of business,
such income will be subject to a 100% tax.
. if we fail to satisfy the 75% gross income test or the 95% gross income
test, as discussed below, and nonetheless have maintained our qualification
as a REIT because other requirements have been met, we will be subject to a
100% tax on (1) the gross income attributable to the greater of the amount
by which we fail the 75% or 95% gross income test multiplied by (2) a
fraction intended to reflect our profitability.
. if we should fail to distribute during each calendar year at least the sum
of (1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT
capital gain net income for such year, and (3) any undistributed taxable
income from prior periods, we will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
To the extent that we elect to retain and pay income tax on the net long-
term capital gain that we receive in a taxable year, such retained amounts
will be treated as having been distributed for purposes of the 4% excise
tax.
. if we acquire any asset from a C corporation, i.e., a corporation generally
subject to full corporate-level tax, in a transaction in which the basis of
the asset in our hands is determined by reference to the basis of the asset,
or any other asset, in the hands of the C corporation and we recognize gain
on the disposition of such asset during the 10-year period beginning on the
date on which such asset was acquired by us, then to the extent of such
asset's "built-in-gain", i.e., the excess of the fair market value of such
asset at the time of our acquisition over the adjusted basis in such asset
at such time, such gain will be subject to tax at the highest regular
corporate rate applicable, as provided in temporary and proposed Treasury
Regulations. The results described above with respect to the recognition of
"built-in-gain" assume that we will not make an election pursuant to these
Treasury Regulations to have such gain taxed currently if we were to make
any such acquisition.
Requirements for Qualification
The Internal Revenue Code defines a REIT as a corporation, trust, or
association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares or
by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation but for the REIT sections
of the Internal Revenue Code;
(4) that is neither a financial institution under the Internal Revenue Code
nor an insurance company to which subchapter L of the Internal Revenue
Code applies;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) not more than 50% in value of the outstanding shares of which is owned,
directly or indirectly, by five or fewer individuals or certain tax-
exempt entities during the last half of each taxable year (the "5/50
Rule");
(7) that makes an election to be a REIT, or has made such election for a
previous taxable year, and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met in
order to elect and maintain REIT status;
(8) that uses a calendar year for federal income tax purposes and complies
with the recordkeeping requirements of the Internal Revenue Code and
Treasury Regulations promulgated thereunder; and
(9) that meets the Internal Revenue Code's income and asset tests described
below.
11
If we comply with the requirements for ascertaining the ownership of our
outstanding shares of beneficial interest and do not know or have reason to know
that we have violated the 5/50 Rule, we will be deemed to satisfy the 5/50 Rule
for the taxable year. We have issued sufficient common shares with sufficient
diversity of ownership to allow us to satisfy requirements (5) and (6). In
addition, our declaration of trust provides for restrictions regarding transfer
of our shares that are intended to assist us in continuing to satisfy the share
ownership requirements described in clauses (5) and (6) above.
For purposes of determining stock ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes is generally considered an individual. A trust that is a qualified
trust under the Internal Revenue Code, however, is generally not considered an
individual, and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.
We currently have three wholly-owned subsidiaries, the general partner of the
operating partnership, the general partner of Prentiss Properties Real Estate
Fund I, L.P. and the general partner of Prentiss Austin Properties, L.P., and
may have additional wholly-owned subsidiaries in the future. The Internal
Revenue Code provides that a corporation that is a "qualified REIT subsidiary"
shall not be treated as a separate corporation, and all assets, liabilities, and
items of income, deduction, and credit of a "qualified REIT subsidiary" shall be
treated as assets, liabilities, and items of income, deduction, and credit of
the REIT. A "qualified REIT subsidiary" is a corporation all of the capital
stock of which is owned by the REIT. In applying the requirements described
herein, any of our "qualified REIT subsidiaries" will be ignored, and all
assets, liabilities, and items of income, deduction, and credit of such
subsidiaries will be treated as our assets, liabilities, and items of income,
deduction, and credit. All of our corporate subsidiaries are "qualified REIT
subsidiaries." Those subsidiaries, therefore, will not be subject to federal
corporate income taxation, although they may be subject to state and local
taxation.
In the case of a REIT that is a partner in a partnership, the Treasury
Regulations provide that the REIT will be deemed to own its proportionate share,
determined on the basis of the REIT's capital interest in the partnership, of
the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of the REIT tests of the Internal Revenue Code,
including satisfying the gross income and asset tests described below. Thus,
our proportionate share of the assets, liabilities, and items of income of the
operating partnership and the noncorporate subsidiaries of the operating
partnership will be treated as our assets, liabilities, and items of income for
purposes of applying the requirements described herein.
Income Tests
In order for us to qualify and to maintain our qualification as a REIT, two
requirements relating to our gross income must be satisfied annually. First, at
least 75% of our gross income, excluding gross income from prohibited
transactions, for each taxable year must consist of defined types of income
derived directly or indirectly from investments relating to real property or
mortgages on real property, including "rents from real property" and, interest
on obligations secured by mortgages on real property, or qualified temporary
investment income. Second, at least 95% of our gross income, excluding gross
income from prohibited transactions, for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, some payments under hedging instruments and gain from the sale or
disposition of stock or securities and some hedging instruments, or from any
combination of the foregoing.
The rent we receive from our tenants will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if the following conditions are met:
. the amount of rent must not be based, in whole or in part, on the income or
profits of any person. However, an amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales.
. the rent received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if we, or a direct or
indirect owner of 10% or more of our shares of beneficial interest,
directly, indirectly or constructively owns 10% or more of such tenant.
12
. if rent attributable to personal property, leased in connection with a lease
of a property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will
not qualify as "rents from real property."
. for the rent to qualify as "rents from real property," we generally must not
furnish or render services to the tenants of our properties, other than
through an "independent contractor" who is adequately compensated and from
whom we derive no revenue.
The "independent contractor" requirement, however, does not apply to the extent
the services provided by us are "usually or customarily rendered" in connection
with the rental of space for occupancy only, e.g., furnishing water, heat,
light, and air conditioning and cleaning windows, public entrances, and lobbies,
and are not otherwise considered "rendered to the occupant", for example renting
parking spaces on a reserved basis to tenants. In addition, we may furnish or
render a very small amount of "noncustomary services" to the tenants of a
property other than through an independent contractor as long as the amount that
we receive for such services does not exceed 1% of our total receipts from the
property. For this purpose, the amount attributable to our noncustomary
services will be at least equal to 150% of our cost of providing the services.
In addition, services provided through "taxable REIT subsidiaries," as defined
below, may qualify as "rents from real property" even though we do not use an
independent contractor to provide such services.
We do not charge rent for any portion of 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 or percentages of receipts or sales, as described
above. Furthermore, we expect that, with respect to other properties that we
may acquire in the future, we will not charge rent for any portion of any
property that is based, in whole or in part, on the income or profits of any
person to the extent that the receipt of such rent would jeopardize our status
as a REIT. In addition, although we currently receive rent from tenants that
could be considered related parties under the Internal Revenue Code (a "Related
Party Tenant"), we expect that, to the extent that we receive rent from a
Related Party Tenant, such rent will not cause us to fail to satisfy either the
75% or 95% gross income test. We currently do not receive rent attributable to
personal property that is greater than 15% of the rent received under the
applicable Lease. We expect that in the future we will not allow the rent
attributable to personal property leased in connection with any lease of real
property to exceed 15% of the total rent received under the lease, if the
receipt of such rent would cause us to fail to satisfy either the 75% or 95%
gross income test.
Through the operating partnership and the noncorporate subsidiaries, none of
which constitutes a qualifying independent contractor, we provide and will
provide in the future real estate services to our tenants. We believe that all
such services are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise "rendered to the
occupant," so that the provision of such services does not jeopardize the
qualification of the rent as "rents from real property." In the case of any
services that are not "usual and customary" under the foregoing rules, we employ
and will continue to employ qualifying independent contractors to provide such
services. Furthermore, we expect that we will not provide noncustomary services
with respect to other properties that we acquire in the future, other than
through a qualifying independent contractor or through a taxable REIT
subsidiary, to the extent that the provision of such services would cause us to
fail to satisfy either the 75% or 95% gross income test.
If any portion of the rent does not qualify as "rents from real property"
because such rent is attributable to personal property and exceeds 15% of the
total rent received under the applicable lease, the portion of the rent that is
attributable to the personal property will not be qualifying income for purposes
of either the 75% or 95% gross income test. Thus, if the rent attributable to
such personal property, plus any other income received by us during a taxable
year that is not qualifying income for purposes of the 95% gross income test,
exceeds 5% of our gross income during such year, we would likely lose our REIT
status. If any portion of the rent received under a lease does not qualify as
"rents from real property" because either the rent is considered based on the
income or profits of any person or the tenant is a Related Party Tenant, none of
the rent we receive under such lease would qualify as "rents from real
property." In that case, if the rent we receive under such a lease, plus any
other income we receive during the taxable year that is not qualifying income
for purposes of the 95% gross income test, exceeds 5% of our gross income for
such year, we would also likely lose our REIT status. Finally, if any portion
of the rent does not qualify as "rents from real property" because we furnish
noncustomary services to the tenants of a property other than through a
qualifying independent contractor, none of the rent we receive with respect to
the related property
13
would qualify as "rents from real property." In that case, if the rent we
receive with respect to the related property, plus any other income we receive
during the taxable year that is not qualifying income for purposes of the 95%
gross income test, exceeds 5% of our gross income for such year, we would
likewise lose our REIT status.
Through our operating partnership, we may receive other types of income that
will not qualify for purposes of the 75% or 95% gross income test. In
particular, dividends paid with respect to the stock of Prentiss Properties
Resources, Inc., a taxable REIT subsidiary owned by the operating partnership
will be qualifying income for purposes of the 95% gross income test, but not the
75% gross income test. In addition, the operating partnership has received, and
in the future will receive indirectly, fees for the performance of services by a
noncorporate subsidiary with respect to properties that are owned, directly or
indirectly, by the operating partnership. Although the tax law is not entirely
clear, to the extent that the operating partnership owns, directly or
indirectly, both an interest in such properties and an interest in the
Noncorporate Subsidiary providing the services, such fees should be disregarded
for purposes of the 75% and 95% gross income tests. However, the remainder of
such fees received by the operating partnership, that is, any portion of the
fees that is attributable to a third party's ownership interest in our
properties, will be nonqualifying income for purposes of the 75% and 95% gross
income tests. In addition, any fees received, directly or indirectly, by the
operating partnership in exchange for providing services with respect to
properties owned by unrelated third parties will not be qualifying income for
purposes of the 75% and 95% gross income tests. Furthermore, to the extent that
we receive interest that is accrued on the late payment of the rent, such
amounts will not qualify as "rents from real property" and, thus, will not be
qualifying income for purposes of the 75% gross income test, however, that
interest will be treated as interest that qualifies for the 95% gross income
test. We believe that the aggregate amount of any such nonqualifying income in
any taxable year has not caused and will not cause us to fail to satisfy either
the 75% or 95% gross income test.
The net income derived from a prohibited transaction is subject to a 100% tax.
The term "prohibited transaction" generally includes a sale or other disposition
of property, other than foreclosure property, that is held primarily for sale to
customers in the ordinary course of a trade or business. We believe that no
asset owned by us or the operating partnership will be held for sale to
customers and that a sale of any such asset will not be in the ordinary course
of our or the operating partnership's business. Whether an asset is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular asset. Nevertheless, we will attempt to
comply with the terms of safe-harbor provisions in the Internal Revenue Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that we can comply
with the safe-harbor provisions of the Internal Revenue Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
It is possible that, from time to time, we or the operating partnership will
enter into hedging transactions with respect to one or more of our assets or
liabilities. Any such hedging transaction could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that we or the
operating partnership enters into an interest rate swap, cap agreement, option,
futures contract, forward rate agreement, or similar financial instrument to
reduce the interest rate risks with respect to indebtedness incurred or to be
incurred to acquire or carry real estate assets, any periodic income or gain
from the disposition of such contract should be qualifying income for purposes
of the 95% gross income test, but not the 75% gross income test. To the extent
that we or the operating partnership hedges with other types of financial
instruments or in other situations, it may not be entirely clear how the income
from those transactions will be treated for purposes of the various income tests
that apply to REITs under the Internal Revenue Code. We intend to structure any
hedging transactions in a manner that does not jeopardize our status as a REIT.
If we fail to satisfy one or both of the 75% or 95% gross income tests for any
taxable year, we nevertheless may qualify as a REIT for such year if we are
entitled to relief under the Internal Revenue Code. Those relief provisions
generally will be available if our failure to meet such tests is due to
reasonable cause and not due to willful neglect, we attach a schedule of the
sources of our income to our return, and any incorrect information on the
schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances we would be entitled to the
benefit of those relief provisions. Even if those relief provisions apply, a
100% tax would be imposed on:
14
. the gross income attributable to the greater of the amount by which we fail
the 75% or 95% gross income test multiplied by
. a fraction intended to reflect our profitability.
Asset Tests
We, at the close of each quarter of each taxable year, also must satisfy the
following two tests relating to the nature of our assets:
. at least 75% of the value of our total assets must be represented by cash or
cash items, which generally include receivables, government securities,
"real estate assets," (which generally includes interests in real property,
interests in mortgages on real property and shares of other REITs) or, in
cases where we raise new capital through stock or publicly offered long-
term, at least five-year, debt, temporary investments in stock or debt
instruments during the one-year period following our receipt of such
capital.
. of the investments not included in the 75% asset class, the value of any one
issuer's securities we own may not exceed 5% of the value of our total
assets; and we may not own more than 10% of the vote or value of any one
issuer's outstanding securities, except for our interests in the operating
partnership, the noncorporate subsidiaries, taxable REIT subsidiaries and
any qualified REIT subsidiary, and certain "straight debt" securities.
Additionally, not more than 20% of the value of our assets may be
represented by securities of one or more taxable REIT subsidiaries.
For purposes of the 75% asset test, the term "interest in real property"
includes an interest in land and improvements thereon, such as buildings or
other inherently permanent structures, including items that are structural
components of such buildings or structures, a leasehold of real property, and an
option to acquire real property, or a leasehold of real property.
For purposes of the asset tests, we are deemed to own our proportionate share
of the assets of the operating partnership, any qualified REIT subsidiary, and
each noncorporate subsidiary, rather than our interests in those entities. At
least 75% of the value of our total assets have been and will be represented by
real estate assets, cash and cash items, including receivables, and government
securities. Through the operating partnership, we own 100% of the nonvoting
stock of Prentiss Properties Resources, Inc. and hold unsecured notes issued by
Prentiss Properties Limited, Inc., a subsidiary of Prentiss Properties
Resources, Inc. We do not own, directly or indirectly, any of the voting stock
of Prentiss Properties Resources, Inc. and believe that the value of our
ownership interest in Prentiss Properties Resources, Inc. does not exceed 5% of
the value of our total assets. In addition, we have not owned, and will not own
(i) securities of any one issuer the value of which exceeds 5% of the value of
our total assets, (ii) more than 10% of the vote or value of any one issuer's
outstanding securities, except for our interests in the operating partnership,
the noncorporate subsidiaries, any taxable REIT subsidiary and any qualified
REIT subsidiary, or (iii) securities of taxable REIT subsidiaries with an
aggregate value in excess of 20% of the value of our assets. In addition, we
have represented that we will not acquire or dispose, or cause the operating
partnership to acquire or dispose, of assets in the future in a way that would
cause it to violate any of the asset tests.
If we should fail to satisfy the asset tests at the end of a calendar quarter,
such a failure would not cause us to lose our REIT status if:
. we satisfied the asset tests at the close of the preceding calendar quarter
and
. the discrepancy between the value of our assets and the asset test
requirements arose from changes in the market values of our assets and was
not wholly or partly caused by an acquisition of nonqualifying assets.
If the condition described in the second clause is not satisfied, we still could
avoid disqualification by eliminating any discrepancy within 30 days after the
close of the calendar quarter in which it arose.
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Distribution Requirements
In order to qualify as a REIT, we are required to distribute each taxable year
dividends, other than capital gain dividends and retained capital gains, to our
shareholders in an aggregate amount at least equal to the sum of:
. 90% of our "REIT taxable income", computed without regard to the dividends
paid deduction and excluding our net capital gain, and
. 90% of the net income, after tax, if any, from foreclosure property, minus
. the sum of items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before we timely file our federal income
tax return for such year and if paid on or before the IRS regular dividend
payment date after such declaration. To the extent that we do not distribute
all of our net capital gain or distribute at least 90%, but less than 100%, of
our "REIT taxable income," as adjusted, we will be subject to tax thereon at
regular corporate tax rates. Furthermore, if we should fail to distribute during
each calendar year at least the sum of:
. 85% of our REIT ordinary income for such year,
. 95% of our REIT capital gain income for such year, and
. any undistributed taxable income from prior periods,
we will be subject to a 4% nondeductible excise tax on the excess of such
required distribution over the amounts actually distributed. We have made, and
intend to continue to make, timely distributions sufficient to satisfy the
annual distribution requirement. We may elect to retain and pay income tax on
our long-term capital gains. Any such retained amount will be treated as having
been distributed by us for purposes of the 4% excise tax described above.
It is possible that, from time to time, we may experience timing differences
between the actual receipt of income and actual payment of deductible expenses
and the inclusion of that income and deduction of such expenses in arriving at
our REIT taxable income. Further, it is possible that, from time to time, we
may be allocated a share of net capital gain attributable to the sale of
depreciated property that exceeds our allocable share of cash attributable to
that sale. Therefore, we may have less cash than is necessary to meet our
annual 90% distribution requirement or to avoid corporate income tax or the
excise tax imposed on undistributed income. In such a situation, we may find it
necessary to arrange for short-term, or possibly long-term, borrowings or to
raise funds through the issuance of preferred shares or common shares.
We may be able to rectify a failure to meet the distribution requirement for a
year by paying "deficiency dividends" to our shareholders in a later year, which
may be included in our deduction for dividends paid for the earlier year.
Although we may be able to avoid being taxed on amounts distributed as
deficiency dividends, we will be required to pay to the IRS interest based upon
the amount of any deduction taken for deficiency dividends.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, we must maintain records and
request on an annual basis information from our shareholders designed to
disclose the actual ownership of our outstanding shares. We have complied and
intend to continue to comply with such requirements in the future.
Failure to Qualify
If we fail to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, we will be subject to tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Distributions to our shareholders in any year in which we fail to
qualify will not be deductible nor will they be required to be made. In such
event, to the extent of our current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income, and corporate
distributees may be eligible for the
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dividends received deduction. Unless entitled to relief under specific statutory
provisions, we will also be disqualified from taxation as a REIT for the four
taxable years following the year during which we ceased to qualify as a REIT. It
is not possible to state whether in all circumstances we would be entitled to
such statutory relief.
Taxation of Taxable U.S. Shareholders
As long as we qualify as a REIT, distributions not designated as capital gain
dividends or retained capital gains made to our taxable U.S. shareholders out of
current or accumulated earnings and profits will be taken into account by such
U.S. shareholders as ordinary income and will not be eligible for the dividends
received deduction generally available to corporations. As used herein, the
term "U.S. shareholder" means a holder of common shares that for U.S. federal
income tax purposes is:
. a citizen or resident of the United States,
. a corporation, partnership, or other entity created or organized in or under
the laws of the United States or of any political subdivision thereof,
. an estate whose income from sources without the United States is includible
in gross income for U.S. federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States,
or
. any trust with respect to which (A) a U.S. court is able to exercise primary
supervision over the administration of such trust and (B) one or more U.S.
persons have the authority to control all substantial decisions of the
trust.
Distributions that are designated as capital gain dividends generally will be
taxed as long-term capital gains to the extent they do not exceed our actual net
capital gain for the taxable year without regard to the period for which the
shareholder has held his common shares. However, corporate shareholders may be
required to treat up to 20% of capital gain dividends as ordinary income. We
may elect to retain and pay income tax on our net long-term capital gains. In
that case, our shareholders would include in income their proportionate share of
our undistributed long-term capital gains. In addition, the shareholders would
be deemed to have paid their proportionate share of the tax paid by us, which
would be credited or refunded to the shareholders. Each shareholder's basis in
his shares would be increased by the amount of the undistributed long-term
capital gain included in the shareholder's income, less the shareholder's share
of the tax paid by us.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's common shares, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
shareholder's common shares, such distributions will be included in income as
gains from the sale or exchange of a capital asset, assuming the common shares
are capital assets in the hands of the shareholder. In addition, any
distribution we declare in October, November, or December of any year and
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by us and received by the shareholder on December 31 of
such year, provided that the distribution is actually paid by us during January
of the following calendar year.
Shareholders may not include in their individual income tax returns any of our
net operating losses or capital losses. Instead, we will carry over such losses
for potential offset against our future income. Taxable distributions from us
and gain from the disposition of the common shares will not be treated as
passive activity income and, therefore, shareholders generally will not be able
to apply any "passive activity losses", such as losses from limited partnerships
that engage in passive activities in which a shareholder is a limited partner,
against such income. In addition, taxable distributions from us generally will
be treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of common shares, or
distributions treated as such, however, will be treated as investment income
only if the shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. We have notified and will continue to notify
shareholders after the close of our taxable year as to the portions of the
distributions attributable to that year that constitute ordinary income, return
of capital, and capital gain.
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Taxation of Shareholders on the Disposition of the Common Shares
In general, any gain or loss realized upon a taxable disposition of the common
shares by a shareholder who is not a dealer in securities will be treated as
capital gain or loss if the common shares have been held as a capital asset.
Such gain or loss will generally constitute long-term capital gain or loss and
will be taxable at a maximum rate of 20% if the common shares have been held for
more than twelve months. Otherwise, such a gain will generally be taxed at the
holder's regular marginal tax rate. However, any loss upon a sale or exchange
of common shares by a shareholder who has held such shares for six months or
less, after applying holding period rules, will be treated as a long-term
capital loss to the extent of distributions from us required to be treated by
such shareholder as long-term capital gain. All or a portion of any loss
realized upon a taxable disposition of the common shares may be disallowed if
other common shares are purchased within 30 days before or after the
disposition.
Capital Gains and Losses
The highest marginal individual income tax rate is 38.6%. The maximum tax
rate on net capital gains applicable to noncorporate taxpayers is generally 20%
for sales and exchanges of assets held for more than one year. The maximum tax
rate on long-term capital gain from the sale or exchange of depreciable real
property is 25% to the extent that such gain would have been treated as ordinary
income if the property were "section 1245 property." With respect to
distributions designated by us as capital gain dividends and any retained
capital gains that we are deemed to distribute, we may designate, subject to
limits, whether such a distribution is taxable to its noncorporate stockholders
at a 20% or 25% tax rate. Thus, the tax rate differential between capital gain
and ordinary income for noncorporate taxpayers may be significant. In addition,
the characterization of income as capital or ordinary may affect the
deductibility of capital losses. Capital losses not offset by capital gains may
be deducted against a noncorporate taxpayer's ordinary income only up to a
maximum annual amount of $3,000. Unused capital losses may be carried forward.
All net capital gain of a corporate taxpayer is subject to tax at ordinary
corporate rates. A corporate taxpayer can deduct capital losses only to the
extent of capital gains, with unused losses being carried back three years and
forward five years.
Taxable REIT Subsidiaries
The Real Estate Investment Trust Modernization Act allows a corporation, other
than a REIT, in which a REIT directly or indirectly owns stock and that has made
a joint election with the REIT, to perform services for tenants without
disqualifying the rents received, as would have been the case under prior law.
These subsidiaries, called Taxable Real Estate Investment Trust Subsidiaries (a
"taxable REIT subsidiary" or "TRS"), are subject to taxation and are limited in
the amount of debt and rental payments between the REIT and the TRS. Existing
subsidiaries, such as Prentiss Properties Limited, Inc., were grandfathered in a
one-time tax-free conversion and are not subject to these limitations unless
they engage in a new line of business or increase their assets. If either of
these events occurs, new restrictions on debt and rental payments will apply to
these converted entities as well.
The operating partnership formed Prentiss Properties Resources, Inc. to
function as a TRS and provide services to the operating partnership. In
exchange for its ownership interests in Prentiss Properties Resources, Inc., the
operating partnership contributed its ownership interests in Prentiss Properties
Limited, Inc., notes issued by Prentiss Properties Limited, Inc., cash, and
other assets not directly related to our core business.
The fair market value of all TRS securities cannot exceed 20% of the REIT's
fair market value. At this time, the Company does not anticipate that its
investments in all future TRS will exceed 20% of the value of the Company.
Information Reporting Requirements and Backup Withholding
We report and will continue to report to our U.S. shareholders and to the IRS
the amount of distributions paid during each calendar year, and the amount of
tax withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 30% (subject to reduction in future
years) with respect to distributions paid unless such holder is a corporation or
is otherwise exempt and, when required, demonstrates this fact or provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. If you are a shareholder, and do not provide us with
your correct taxpayer identification number, you may be subject to penalties
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imposed by the IRS. Any amount paid as backup withholding will be creditable
against your income tax liability. In addition, we may be required to withhold
a portion of capital gain distributions to you if you fail to certify your
nonforeign status to us.
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts generally are exempt from federal
income taxation. However, they are subject to taxation on their unrelated
business taxable income. While many investments in real estate generate
unrelated business taxable income, the IRS has issued a published ruling that
dividend distributions from a REIT to an exempt employee pension trust do not
constitute unrelated business taxable income, provided that the shares of the
REIT are not otherwise used in an unrelated trade or business of the exempt
employee pension trust. Based on that ruling, amounts distributed by us to tax-
exempt entities generally should not constitute unrelated business taxable
income. However, if a tax-exempt entity finances its acquisition of the common
shares with debt, a portion of its income from us will constitute unrelated
business taxable income pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that are
exempt from taxation under paragraphs section 501(c) (7), (9), (17), and (20),
respectively, of the Internal Revenue Code are subject to different unrelated
business taxable income rules, which generally could require them to
characterize a portion of distributions from us as unrelated business taxable
income. In addition, a pension trust that owns more than 10% of our shares may
be required to treat a percentage of the dividends from us as unrelated business
taxable income. That percentage is the gross income derived by us from an
unrelated trade or business, determined as if we were a pension trust, divided
by our gross income for the year in which the dividends are paid. The unrelated
business taxable income rule applies to a pension trust holding more than 10% of
our stock only if (1) the unrelated business taxable income percentage is at
least 5%, (2) we qualify as a REIT by reason of the modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be treated as holding
our shares in proportion to their actuarial interests in the pension trust, and
(3) we are a "pension-held" REIT, that is, either (A) one pension trust owns
more than 25% of the value of our shares or (B) a group of pension trusts each
individually owning more than 10% of the value of our shares and collectively
owning more than 50% of the value of our shares. Because the Ownership
Limitation prohibits any pension trust from owning more than 8.5% of the common
shares or more than 9.8% of any class or series of the Preferred Shares, we
should not be a "pension-held" REIT.
Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively referred to as foreign shareholders) are complex and
no attempt will be made herein to provide more than a summary of such rules.
Prospective foreign shareholders should consult with their own tax advisors to
determine the impact of federal, state, and local income tax laws with regard to
an investment in the common shares, including any reporting requirements.
If you are a foreign shareholder, distributions that are not attributable to
gain from our sales or exchanges of U.S. real property interests and that we do
not designate as capital gains dividends or retained capital gains will be
treated as dividends of ordinary income to the extent that they are made out of
our current or accumulated earnings and profits. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the common shares is treated as
effectively connected with the foreign shareholder's conduct of a U.S. trade or
business, the foreign shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such distributions, and also may be subject to the 30% branch profits
tax in the case of a foreign shareholder that is a non-U.S. corporation. We
expect to withhold U.S. income tax at the rate of 30% on the gross amount of any
such distributions made to a foreign shareholder unless a lower treaty rate
applies and any required form evidencing eligibility for that reduced rate is
filed with us or the foreign shareholder files the required form with us
claiming that the distribution is effectively connected income. Distributions
in excess of our current and accumulated earnings and profits will not be
taxable to a shareholder to the extent that such distributions do not exceed the
adjusted basis of the shareholder's common shares, but rather will reduce the
adjusted basis of such shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
foreign shareholder's common shares, such distributions will give rise to tax
liability if the foreign shareholder would otherwise be subject to tax on any
gain from the sale or
19
disposition of his common shares, as described below. Because it generally
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 entire amount of any distribution normally will be subject to withholding at
the same rate as a dividend. Amounts so withheld, however, are refundable to the
extent it is determined subsequently that such distribution was, in fact, in
excess of our current and accumulated earnings and profits.
We are required to withhold 10% of any distribution in excess of our current
and accumulated earnings and profits. Consequently, although we intend to
withhold at a rate of 30% on the entire amount of any distribution, to the
extent that we do not do so, any portion of a distribution not subject to
withholding at a rate of 30% will be subject to withholding at a rate of 10%.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges by us of U.S. real property
interests will be taxed to a foreign shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980, or FIRPTA. Under FIRPTA,
distributions attributable to gain from sales of U.S. real property interests
are taxed to a foreign shareholder as if such gain were effectively connected
with a U.S. business. Foreign shareholders thus would be taxed at the normal
capital gain rates applicable to U.S. shareholders, subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals. Distributions subject to FIRPTA also may be
subject to the 30% branch profits tax in the hands of a non-U.S. corporate
shareholder not entitled to treaty relief or exemption. We are required to
withhold 35% of any distribution that may be designated by us as a capital gains
dividend. The amount withheld is creditable against the Non-U.S. Shareholder's
FIRPTA tax liability.
Gain recognized by a foreign shareholder upon a sale of his common shares
generally will not be taxed under FIRPTA if we are a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by non-U.S. persons. However, because the common shares will be
publicly traded, no assurance can be given that we are or will continue to be a
"domestically controlled REIT." In addition, a foreign shareholder that owned,
actually or constructively, 5% or less of the common shares or preferred shares
at all times during a specified testing period will not be subject to tax under
FIRPTA if the common shares or preferred shares, as applicable, are "regularly
traded" on an established securities market. Furthermore, gain not subject to
FIRPTA will be taxable to a foreign shareholder if (1) investment in the common
shares is effectively connected with the foreign shareholder's U.S. trade or
business, in which case the foreign shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain, or (2) the foreign
shareholder is a nonresident alien individual who was present in the U.S. for
183 days or more during the taxable year and other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of the common shares were
to be subject to taxation under FIRPTA, the foreign shareholder would be subject
to the same treatment as U.S. shareholders with respect to such gain, subject to
applicable alternative minimum tax, a special alternative minimum tax in the
case of nonresident alien individuals, and the possible application of the 30%
branch profits tax in the case of non-U.S. corporations.
Possible Legislation or Other Action Affecting Tax Consequences
The rules dealing with federal income taxation are constantly under review by
persons involved in the legislative process and by the IRS and the U.S. Treasury
Department. We cannot predict whether, when, in what forms, or with what
effective dates, the tax laws applicable to us or an investment in us might be
changed.
Other Tax Consequences
We, the general partner, the operating partnership, Prentiss Properties
Resources, Inc., a noncorporate subsidiary, or our shareholders may be subject
to state or local taxation in various state or local jurisdictions, including
those in which we, it or they own property, transact business, or reside. Such
state and local tax treatment may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in us.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas, including REITs that
are organized as corporations. While we are organized as a Maryland
20
real estate investment trust and are therefore not subject to the Texas
franchise tax, we own, directly or indirectly, qualified REIT subsidiaries and
limited liability companies that are subject to the tax. The Texas franchise tax
imposed on a corporation doing business in Texas generally is equal to the
greater of (1) .25% of "taxable capital", generally, financial accounting net
worth with adjustments, apportioned to Texas; or (2) 4.5% of "taxable earned
surplus", generally, federal taxable income with adjustments, apportioned to
Texas. A corporation's taxable capital and taxable earned surplus are
apportioned to Texas based upon a fraction, the numerator of which is the
corporation's gross receipts from business transacted in Texas and the
denominator of which is the corporation's gross receipts from all sources.
Tax Aspects of the Operating Partnership and the Noncorporate Subsidiaries
The following discussion summarizes material federal income tax considerations
applicable to our direct or indirect investment in the operating partnership and
the noncorporate subsidiaries, each of the operating partnership and the
noncorporate subsidiaries is referred to herein as a "partnership". The
discussion does not cover state or local tax laws or any federal tax laws other
than income tax laws.
Classification as a Partnership
We will be entitled to include in our income our distributive share of each
partnership's income and to deduct our distributive share of each partnership's
losses only if each partnership is classified for federal income tax purposes as
a partnership rather than as a corporation or an association taxable as a
corporation. An entity will be classified as a partnership rather than as a
corporation for federal income tax purposes if the entity is treated as a
partnership under Treasury regulations relating to entity classification and is
not a "publicly traded" partnership.
In general, under the entity classification regulations, we will be treated as
a partnership for federal income tax purposes. The federal income tax
classification of an entity that was in existence prior to January 1, 1997, the
effective date of the entity classification regulations, such as the
partnerships, will be respected for all periods prior to January 1, 1997 if:
. the entity had a reasonable basis for its claimed classification,
. the entity and all members of the entity recognized the federal tax
consequences of any changes in the entity's classification within the 60
months prior to January 1, 1997, and
. neither the entity nor any of its members was notified in writing by a
taxing authority on or before May 8, 1996 that the classification of the
entity was under examination.
Each partnership in existence on January 1, 1997 reasonably claimed partnership
classification under the entity classification regulations in effect prior to
January 1, 1997, and such classification should be respected for federal income
tax purposes. In addition, no partnership was notified by a taxing authority on
or before May 8, 1996 that its classification was under examination. The
partnerships intend to continue to be classified as partnerships and no
partnership will elect to be treated as an association taxable as a corporation
for federal income tax purposes under the entity classification regulations. We
have represented to Akin Gump that, to the best of our knowledge, each
partnership will be treated as a "partnership" for federal income tax purposes.
A publicly traded partnership is a partnership whose interests trade on an
established securities market or are readily tradable on a secondary market, or
the substantial equivalent thereof. A publicly traded partnership will be
treated as a corporation for federal income tax purposes unless at least 90% of
such partnership's gross income for a taxable year consists of "qualifying
income" under the publicly traded partnership provisions of the Internal Revenue
Code, which generally includes any income that is qualifying income for purposes
of the 95% gross income test applicable to REITs. The U.S. Treasury Department
has issued regulations that provide limited safe harbors from the definition of
a publicly traded partnership. Pursuant to one of those safe harbors, interests
in a partnership will not be treated as readily tradable on a secondary market
or the substantial equivalent thereof if all interests in the partnership were
issued in a transaction, or transactions, that was not required to be registered
under the Securities Act of 1933, and the partnership does not have more than
100 partners at any time during the partnership's taxable year. In determining
the number of partners in a partnership, a person owning an interest in a flow-
through entity, that is, a partnership, grantor trust, or S corporation, that
owns an interest in the partnership is
21
treated as a partner in such partnership only if substantially all of the value
of the owner's interest in the flow-through entity is attributable to the flow-
through entity's interest, direct or indirect, in the partnership and a
principal purpose of the use of the flow-through entity is to permit the
partnership to satisfy the 100-partner limitation. Each partnership qualifies
for this private placement exclusion. If a partnership is considered a publicly
traded partnership under the publicly traded partnership regulations because it
is deemed to have more than 100 partners, such partnership should not be treated
as a corporation because it should have a sufficient amount of passive-type
income to meet the qualifying income exception to publicly traded partnership
status.
If for any reason one or more of the partnerships are taxable as corporations,
rather than as partnerships, for federal income tax purposes, we would likely
not be able to qualify as a REIT. In addition, any change in a partnership's
status for tax purposes might be treated as a taxable event, in which case we
might incur a tax liability without any related cash distribution. Further,
items of income and deduction of such partnership would not pass through to its
partners, and its partners would be treated as shareholders for tax purposes.
Consequently, such partnership would be required to pay income tax at corporate
tax rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing such partnership's taxable
income.
Income Taxation of the Partnerships and their Partners
Partners, not Partnerships, Subject to Tax. A partnership is not a taxable
entity for federal income tax purposes. Rather, we will be required to take into
account our allocable share of each partnership's income, gains, losses,
deductions, and credits for any taxable year of such partnership ending within
or with our taxable year, without regard to whether we have received or will
receive any distribution from such partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under the partnership provisions of the
Internal Revenue Code and Treasury Regulations if they do not comply with those
provisions. If an allocation is not recognized for federal income tax purposes,
the item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. Each partnership's allocations of
taxable income and loss are intended to comply with the requirements of the
partnership provisions of the Internal Revenue Code and the Treasury
Regulations.
Tax Allocations with Respect to Contributed Properties. Pursuant to the
partnership provisions of the Internal Revenue Code, income, gain, loss, and
deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
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.
Under the operating limited partnership agreement, depreciation or
amortization deductions of the operating partnership generally are allocated
among the partners in accordance with their respective interests in the
operating partnership, except to the extent that the operating partnership is
required under the partnership provisions of the Internal Revenue Code and
Treasury Regulations to use a method for allocating tax depreciation deductions
attributable to our properties that results in our receiving a
disproportionately large share of such deductions. In addition, gain on the
sale of a property contributed to the operating partnership in exchange for an
interest in the partnership will be specially allocated to the contributor to
the extent of any "built-in" gain with respect to such property for federal
income tax purposes. Depending on the allocation method elected under the
Internal Revenue Code, it is possible that we may be allocated lower amounts of
depreciation deductions for tax purposes with respect to contributed properties
than would be allocated to us if such properties were to have a tax basis equal
to their fair market value at the time of contribution and may be allocated
taxable gain in the event of a sale of such contributed properties in excess of
the economic profit allocated to us as a result of such sale. These allocations
may cause us to recognize taxable income in excess of cash proceeds, which might
adversely affect our ability to comply with the REIT distribution requirement,
although we do not anticipate that this event will occur. The foregoing
principles also will affect the calculation of our earnings and profits for
purposes of determining which portion of our distributions is taxable as a
dividend. The allocations described in this paragraph may result in a higher
portion of our distributions being taxed as dividends than would have occurred
had we purchased our properties for cash.
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Basis in Operating Partnership Interest. Our adjusted tax basis in our
partnership interest in the operating partnership generally is equal to (1) the
amount of cash and the basis of any other property contributed to the operating
partnership by us, (2) increased by (A) our allocable share of the operating
partnership's income and (B) our allocable share of indebtedness of the
operating partnership, and (3) reduced, but not below zero, by (A) our allocable
share of the operating partnership's loss and (B) the amount of cash distributed
to us, including constructive cash distributions resulting from a reduction in
our share of indebtedness of the operating partnership.
If the allocation of our distributive share of the operating partnership's
loss would reduce the adjusted tax basis of our partnership interest in the
operating partnership below zero, the recognition of such loss will be deferred
until such time as the recognition of such loss would not reduce our adjusted
tax basis below zero. To the extent that the operating partnership's
distributions, or any decrease in our share of the indebtedness of the operating
partnership, would reduce our adjusted tax basis below zero, such distributions,
including such constructive distributions, will constitute taxable income to us.
Such distributions and constructive distributions normally will be characterized
as capital gain, and if our partnership interest in the operating partnership
has been held for longer than the one-year long-term capital gain holding
period, the distributions and constructive distributions will constitute long-
term capital gain.
Sale of the Operating Partnership's or a Noncorporate Subsidiary's Property
Generally, any gain realized by a partnership on the sale of property held for
more than one year will be long-term capital gain, except for any portion of
such gain that is treated as depreciation or cost recovery recapture. Any gain
recognized by a partnership on the disposition of the contributed properties,
and any gain recognized upon the disposition of the properties acquired by a
partnership for cash, over and above the gain allocated to the contributor, as
discussed above, will be allocated among the partners in accordance with their
respective percentage interests in the partnership. Our bylaws provide that any
decision to sell any real estate asset in which a trustee, or officer, or any
affiliate of the foregoing, has a direct or indirect interest, will be made by a
majority of the trustees including a majority of the Independent Trustees.
Our share of any gain realized by a partnership on the sale of any property
held by the partnership as inventory or other property held primarily for sale
to customers in the ordinary course of the partnership's trade or business will
be treated as income from a prohibited transaction that is subject to a 100%
penalty tax. Such prohibited transaction income also may have an adverse effect
upon our ability to satisfy the income tests for REIT status. We, however, do
not presently intend to acquire or hold or to allow a partnership to acquire or
hold any property that represents inventory or other property held primarily for
sale to customers in the ordinary course of our or a partnership's trade or
business.
23
Important Provisions of Maryland Law
and Our Declaration Of Trust And Bylaws
The following summary of important provisions of Maryland law and of our
declaration of trust and bylaws is not complete and is qualified in its entirety
by reference to Maryland law and to our declaration of trust and bylaws.
Our declaration of trust and the bylaws contain provisions that could make
more difficult the acquisition of Prentiss Properties Trust by means of a tender
offer, a proxy contest or otherwise. These provisions and provisions of
Maryland law regarding business combination and control share acquisitions could
delay, defer or prevent a transaction or a change in control of Prentiss
Properties Trust. These provisions are expected to discourage some types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Prentiss Properties Trust to negotiate
first with our board of trustees. We believe that the benefits of these
provisions outweigh the potential disadvantages of discouraging these proposals
because, among other things, negotiation of these proposals might result in an
improvement of their terms.
Board of Trustees - Number, Classification, Vacancies and Removal
The bylaws provide that the number of trustees of Prentiss Properties Trust
may be established by our board of trustees but may not be less than 3 nor more
than 9. Our declaration of trust provides that a majority of our board of
trustees be independent. Our board of trustees has set the number of trustees
at seven and all seven seats of the board are currently filled. Maryland law
provides that shareholders may fill a vacancy on our board of trustees which
results from the removal of a trustee. Any other vacancy will be filled, at any
regular meeting or at any special meeting called for that purpose, by a majority
of the remaining trustees. Any trustee elected by the shareholders to fill a
vacancy resulting from the removal of a trustee will hold office for the
remainder of the full term of the class of trustees in which the vacancy
occurred. Any trustee elected to fill a vacancy by the trustees will hold
office until the next annual meeting shareholders and until his or her successor
is duly elected and qualified.
Pursuant to our declaration of trust, the trustees are divided into three
classes. Trustees of each class are chosen for three-year terms upon the
expiration of their current terms and each year one class of trustees will be
elected by the shareholders. At least two annual meetings of shareholders,
instead of one, will generally be required to effect a change in a majority of
our board of trustees. The classified board provision could have the effect of
making the replacement of incumbent trustees more time consuming and difficult.
Our declaration of trust provides that, subject to the rights of one or more
classes or series of preferred shares to elect one or more trustees, any trustee
may be removed at any time, with or without cause, by the affirmative vote of at
least two-thirds of the votes entitled to be cast in the election of trustees.
Business Combinations
Under Maryland law, "business combinations" between a Maryland REIT and an
interested shareholder or an affiliate of an interested shareholder are
prohibited for five years after the most recent date on which the interested
shareholder becomes an interested shareholder. These business combinations
include a merger, consolidation, share exchange, or, in circumstances specified
in the statute, an asset transfer or issuance or reclassification of equity
securities. An interested shareholder is defined as:
. any person who beneficially owns ten percent or more of the voting
power of the Maryland REIT shares; or
. an affiliate or associate of the Maryland REIT who, at any time within
the two-year period prior to the date in question, was the beneficial
owner of ten percent or more of the voting power of the then
outstanding voting shares of the Maryland REIT.
A person is not an interested shareholder under the statute if our board of
trustees approved in advance the transaction by which it otherwise would have
become an interested shareholder. However, in approving a transaction, our
board of trustees may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions determined by the
board.
24
After the five-year prohibition, any business combination between the
Maryland REIT and an interested shareholder generally must be recommended by our
board of trustees of the Maryland REIT and approved by the affirmative vote of
at least:
. 80% of the votes entitled to be cast by holders of outstanding shares
of voting stock of the Maryland REIT; and
. two-thirds of the votes entitled to be cast by holders of voting
shares of the Maryland REIT other than shares held by the interested
shareholder with whom or with whose affiliate the business combination
is to be effected or held by an affiliate or associate of the
interested shareholder.
These super-majority vote requirements do not apply if the Maryland REIT
common shareholders receive a minimum price, as defined under Maryland law, for
their shares in the form of cash or other consideration in the same form as
previously paid by the interested shareholder for its shares.
The statute permits various exemptions from its provisions, including
business combinations that are exempted by our board of trustees before the time
that the interested shareholder becomes an interested shareholder.
In October 1996, our board of trustees, resolved to opt out of the business
combination statute. Our board of trustees further resolved that it shall not
resolve to opt back in to the statute unless the opt in resolution is
conditioned upon the approval of the holders of a majority of the votes entitled
to be cast.
Control Share Acquisitions
Maryland law provides that control shares of a Maryland REIT acquired in a
control share acquisition have no voting rights except to the extent approved by
a vote of two-thirds of the votes entitled to be cast on the matter. Shares
owned by the acquiror, by officers or by trustees who are employees of the
Maryland REIT are excluded from shares entitled to vote on the matter. Control
shares are voting shares of shares of beneficial interest of the Maryland REIT
which, if aggregated with all other shares owned by the acquiror or in respect
of which the acquiror is able to exercise or direct the exercise of voting
power, except solely by virtue of a revocable proxy, would entitle the acquiror
to exercise voting power in electing trustees within one of the following ranges
of voting power:
. one-tenth or more but less than one-third,
. one-third or more but less than a majority, or
. a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained shareholder approval. A control
share acquisition means the acquisition of control shares, subject to specific
exceptions.
A person who has made or proposes to make a control share acquisition may
compel our board of trustees of the Maryland REIT to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. The right to compel the calling of a special meeting is subject
to the satisfaction of specific conditions, including an undertaking to pay the
expenses of the meeting. If no request for a meeting is made, the Maryland REIT
may itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then
the Maryland REIT may redeem for fair value any or all of the control shares,
except those for which voting rights have previously been approved. The right
of the Maryland REIT to redeem control shares is subject to specific conditions
and limitations. Fair value is determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of shareholders at which the
voting rights of the shares are considered and not approved. If voting rights
for control shares are approved at a shareholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
shareholders may exercise appraisal rights. The fair value of the shares as
25
determined for purposes of appraisal rights may not be less than the highest
price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the Maryland REIT is a party to the
transaction, or to acquisitions approved or exempted by our declaration of trust
or bylaws of the corporation.
Our bylaws contain a provision exempting the application of the control
share acquisition statute to shares of Prentiss Properties Trust.
Amendment to the Declaration of Trust
Our declaration of trust may be amended by the affirmative vote of a
majority of the votes entitled to be cast on the matter. However, the provisions
of our declaration of trust relating to our board of trustees, including
classification and removal, restrictions on transferability of shares, amendment
of our declaration of trust, and our termination may only be amended by the
affirmative vote of the holders of no less than two-thirds of all votes entitled
to be cast on the matter.
Dissolution of Prentiss Properties Trust
The dissolution of Prentiss Properties Trust must be approved by the
affirmative vote of the holders of not less than two-thirds of all of the votes
entitled to be cast on the matter.
Advance Notice of Trustee Nominations and New Business
The bylaws provide that with respect to an annual meeting of shareholders,
nominations of persons for election to our board of trustees and the proposal of
business to be considered by shareholders may be made only:
. pursuant to our notice of the meeting;
. by or at the discretion of our board of trustees; or
. by any shareholder who is a shareholder of record at the time of
giving notice, which is entitled to vote at the meeting and who has
complied with the notice procedures set forth in the bylaws.
The bylaws also provide that with respect to special meetings of the
shareholders, only the business specified in our notice of meeting may be
brought before the meeting of shareholders and nominations of persons for
election to our board of trustees may be made only:
. pursuant to our notice of the meeting;
. by or at the discretion of our board of trustees; or
. provided that our board of trustees has determined that trustees will
be elected at the meeting, by a shareholder who is a shareholder of
record at the time of giving notice and at the time of the special
meeting, who is entitled to vote at the meeting and who has complied
with the notice procedures set forth in the bylaws.
Unsolicited Takeover Statutes
Subtitle 8 of Title 3 of the Maryland General Corporation Law permits a
Maryland corporation, defined to include a real estate investment trust, with a
class of equity securities registered under the Securities Exchange Act of 1934
and at least three independent directors to elect to be subject, by provision in
its charter or bylaws or a resolution of its board of directors and
notwithstanding any contrary provision in the charter or bylaws, to any or all
of five provisions:
(1) a classified board,
26
(2) two-thirds vote requirement for removing a director,
(3) a requirement that the number of directors be fixed only by vote of
the directors,
(4) a requirement that a vacancy on the board be filled only by the
remaining directors and for the remainder of the full term of the
class of directors in which the vacancy occurred, and
(5) a majority requirement for the calling of a special meeting of
shareholders.
We, through existing provisions in our declaration of trust and bylaws unrelated
to Subtitle 8, have already taken advantage of the principal takeover defenses
provided for in Subtitle 8 by providing for a classified board in our
declaration of trust, vesting in our board the exclusive power to fix the number
of trusteeships and fill any vacancies arising on our board, and requiring a
two-thirds vote for the removal of any trustee from our board.
Selling Shareholder
The Equity Focus Trusts--REIT Portfolio Series, 2002-A, including its
affiliates, permitted pledgees, transferees or other successors in interest, may
from time to time offer and sell any or all of the shares offered by this
prospectus. If necessary, a supplement to this prospectus will identify any
other selling shareholder. The registration of the shares offered hereby does
not necessarily mean that the selling shareholder will sell any or all of the
shares.
As of the date of this prospectus, the selling shareholder beneficially
owned 613,750 shares of our common shares, approximately 1.6% of our outstanding
common shares. All of such shares are available for resale under this
prospectus. Since the selling shareholder may sell all, some or none of the
shares offered hereby, no estimate can be made of the number of offered shares
that will be sold by the selling shareholder or that will be owned by the
selling shareholder upon completion of the offering.
Plan of Distribution
The selling shareholder, including its donees, pledgees, transferees or
other successors in interest, may effect from time to time sales of the common
shares, described in this prospectus, directly or indirectly, by or through
underwriters, agents or broker-dealers, and the common shares may be sold by one
or a combination of several of the following methods:
. ordinary brokerage transactions;
. put or call options transactions or hedging transactions relating to
the common shares;
. short sales;
. purchases by a broker-dealer as principal and resale by that broker-
dealer for its own account;
. "block" sale transactions; and
. privately negotiated transactions.
The common shares will be sold at prices and on terms then prevailing in
the market, at prices related to the then-current market price of the common
shares or at negotiated prices. At the time that a particular offer is made, a
prospectus supplement, if required, will be distributed that describes the name
or names of underwriters, agents or broker-dealers, any discounts, commissions
and other terms constituting selling compensation and any other required
information. Moreover, in effecting sales, broker-dealers engaged by the selling
shareholder and purchasers of the common shares may arrange for other broker-
dealers to participate in the sale process. Broker-dealers will receive
discounts or commissions from the selling shareholder and the purchasers of the
common shares in amounts that will be negotiated prior to the time of the sale.
Sales will be made only through broker-dealers properly registered in a subject
jurisdiction or in transactions exempt from registration. Any of these
underwriters,
27
broker-dealers or agents may perform services for us or our affiliates in the
ordinary course of business. We have not been advised that the selling
shareholder has any definitive selling arrangement with any underwriters,
broker-dealer or agent.
The selling shareholder also may resell all or a portion of the common
shares in open market transactions in reliance upon Rule 144 of the Securities
Act of 1933, provided that they meet the criteria and conform to the
requirements of such rule.
Any broker or dealer participating in any distribution of the common shares
in connection with the offering made by this prospectus may be considered to be
an "underwriter" within the meaning of the Securities Act of 1933 and may be
required to deliver a copy of this prospectus, including a prospectus
supplement, if required, to any person who purchases any of the common shares
from or through that broker or dealer.
We will not receive any of the proceeds from the sale of the common shares
offered pursuant to this prospectus. We will bear all expenses incident to the
registration of the common shares under federal and state securities laws and
the sale of the common shares hereunder other than expenses incident to the
delivery of the common shares to be sold by the selling shareholder. Salomon
Smith Barney Inc. has agreed to reimburse us for certain expenses incident to
the preparation of the registration statement. Any transfer taxes payable on any
shares and any commissions and discounts payable to underwriters, agents or
dealers shall be paid by the selling shareholder.
In order to comply with various states' securities laws, if applicable, the
common shares will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the common shares
may not be sold unless it has been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
complied with.
We have agreed to indemnify the selling shareholder and its directors,
officers and controlling persons against liabilities relating to the
registration statement, including liabilities under the Securities Act of 1933,
or to contribute to payments which the beneficiaries of the registration rights
agreement may be required to make in respect of any such liabilities. Each of
Salomon Smith Barney Inc. and the selling shareholder has agreed to indemnify us
and our directors, officers and controlling persons against liabilities relating
to any information given to us by such parties in writing for inclusion in the
registration statement, including liabilities under the Securities Act of 1933.
Legal Matters
Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland, is passing on
the legality of the securities to be offered in this offering. Akin, Gump,
Strauss, Hauer & Feld, L.L.P. is providing a legal opinion regarding certain tax
matters.
Experts
The financial statements and financial statement schedule incorporated in
this Prospectus by reference to the Annual Report on Form 10-K for the year
ended December 31, 2001 have been so incorporated in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. The SEC's Washington, D.C. public reference room is located
at 450 Fifth Avenue, N.W., Washington, D.C. 20549. Please call the SEC at 1-
800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from our web site at
http://www.pplinc.com or at the SEC's web site at http://www.sec.gov.
We filed a registration statement on Form S-3 to register with the SEC the
common shares described in this prospectus. This prospectus is a part of that
registration statement. As allowed by SEC rules, this prospectus does
28
not contain all of the information you can find in the registration statement or
the exhibits to the registration statement.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information filed with the
SEC will automatically update and supersede previously filed information,
including information contained in this document.
We incorporate by reference the documents listed below and any future
filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act from the date hereof until our offering is completed.
(1) Our Annual Report on Form 10-K, File No. 001-14516, for the year ended
December 31, 2001, filed on March 27, 2002.
(2) The description of the common shares contained in our registration
statement on Form 8-A, File No. 001-14516, filed on October 17, 1996,
under the Exchange Act, including any reports filed under the Exchange
Act for the purpose of updating such description.
(3) The description of the Series B Junior Preferred Shares contained in
our registration statement on Form 8-A, File No. 000-23813, filed on
February 17, 1998, as amended by our registration statement of Form 8-
A, File No. 001-14516, filed on March 10, 1998, and Form 8-A, File No.
001-14516, filed on February 6, 2002, including any reports filed
under the Exchange Act for the purpose of updating such description.
You may request a copy of these filings, at no cost, by writing or
telephoning:
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
Attention: Gregory S. Imhoff
(214) 654-0886
You should rely on the information incorporated by reference or provided in
this prospectus or any prospectus supplement. We have authorized no one to
provide different information to you. We are not making an offer of these
securities in any state where such offer is not permitted. You should not assume
that the information in this prospectus or any prospectus supplement is accurate
as of any date other than the date on the front of the document.
29
613,750 Common Shares
of Beneficial Interest
[LOGO]
PRENTISS PROPERTIES TRUST
______________________________
PROSPECTUS
______________________________
___________, 2002
PART II
Information Not Required In Prospectus
Item 14. Other Expenses of Issuance and Distribution
The following sets forth the estimated expenses, other than underwriting
discounts and commissions, in connection with the issuance and distribution of
the securities being registered hereby, all of which be paid for by Prentiss
Properties Trust (the "Company"):
SEC registration fee.................................. $ 1,653
Accounting fees and expenses.......................... $ 4,000
Blue Sky fees and expenses............................ $ 1,000
Legal fees and expenses............................... $15,000
Printing.............................................. $ 5,000
Miscellaneous......................................... $ 1,347
-------
TOTAL................................................. $28,000
Item 15. Indemnification of Officers and Directors
Maryland REIT law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages,
except for liability resulting from (a) actual receipt of an improper benefit or
profit in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Company's declaration of trust contains such a provision, which eliminates such
liability to the maximum extent permitted by Maryland REIT law.
The Company's declaration of trust authorizes it, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former shareholder, Trustee or officer or (b) any individual
who, while a Trustee of the Company and at the request of the Company, serves or
has served another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a trustee,
director, officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a trustee, director, officer or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as a
present or former shareholder, Trustee or officer of the Company. The bylaws of
the Company obligate it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of the final
disposition of a proceeding to (a) any present or former shareholder, Trustee or
officer who is made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a shareholder, Trustee or officer of
the Company and at the request of the Company, serves or has served another real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a trustee, director, officer or
partner of such real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his service in that capacity. The Company's
declaration of trust and bylaws also permit the Company to indemnify and advance
expenses to any person who served a predecessor of the Company in any of the
capacities described above and to any employee or agent of the Company or a
predecessor of the Company. The Company's bylaws require the Company to
indemnify any person in any of the capacities described above who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity.
Maryland REIT law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as is permitted by Maryland General Corporation Law for
directors and officers of Maryland corporations. Maryland General Corporation
Law permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines,
II-1
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that a personal benefit
was improperly received unless a court orders indemnification and then only for
expenses. In accordance with Maryland General Corporation Law, the bylaws of the
Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the Trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the Company's bylaws and (b) a written undertaking by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
Item 16. Exhibits
The following Exhibits are filed as part of this Registration Statement:
Exhibit
Number Exhibits
------- --------
2.1 Purchase Agreement, dated February 25, 2002, between us and Salomon
Smith Barney Inc. (filed as Exhibit 10.38 to our Annual Report on
Form 10-K, filed on March 27, 2002, File No. 001-14516, and
incorporated herein by reference).
4.1 Form of Common Share Certificate (filed as Exhibit 4.1 to our
Registration Statement on Amendment No. 1 of Form S-11, File No.
333-09863, and incorporated herein by reference).
4.2 Amended and Restated Rights Agreement, dated January 22, 2002,
between us and EquiServe Trust Company, N.A., as Rights Agent
(filed as Exhibit 1 to our Registration Statement on Form 8A/A,
filed on February 6, 2002, File No. 001-14516, and incorporated
herein by reference).
4.3 Form of Rights Certificate (included as Exhibit A to the Rights
Agreement (Exhibit 4.2)).
4.4 Form of Series D Preferred Share Certificate (filed as Exhibit 4.4
to our Annual Report on Form 10-K, filed March 27, 2001, File No.
001-14516, and incorporated herein by reference).
*5 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.
*8 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10 Registration Rights Agreement, dated as of February 28, 2002,
between us and Salomon Smith Barney Inc. (filed as Exhibit 10.39 to
our Annual Report on Form 10-K, filed on March 27, 2002, File No.
001-14516, and incorporated herein by reference).
*23.1 Consent of PricewaterhouseCoopers LLP.
*23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in
Exhibit 5).
*23.3 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 8).
*24 Power of Attorney (included on the signature page of this
Registration Statement).
* Filed herewith.
II-2
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement
(notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective registration statement); and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that the undertakings set forth in subparagraphs (i) and (ii)
above do not apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic reports filed
with or furnished to the SEC by the registrant pursuant to Section 13 or 15(d)
of the Exchange Act that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in this registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that the in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in
II-3
the successful defense of any action, suit or proceeding) is asserted against
the registrant by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the opinion
of their counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant further hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
Signatures
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Dallas, state of Texas, on April 5, 2002.
PRENTISS PROPERTIES TRUST
By:/s/ Thomas F. August
--------------------------------------
Thomas F. August
President, Chief Executive Officer and
Trustee
Power of Attorney
The undersigned directors and officers of Prentiss Properties Trust hereby
constitute and appoint Michael V. Prentiss, Thomas F. August and Gregory S.
Imhoff, and any of them, with full power to act and full power of substitution
and resubstitution, our true and lawful attorneys-in-fact with full power to
execute in our name and behalf in the capacities indicated below any and all
amendments (including post-effective amendments and amendments thereto) to this
registration statement and to file the same, with all exhibits thereto and other
documents relating thereto and any registration statement relating to any
offering made pursuant to this registration statement that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933 with the
SEC and hereby ratify and confirm all that such attorneys-in-fact, or any of
them, or their substitutes shall lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated below on April 5, 2002.
Name Title
---- -----
/s/ Michael V. Prentiss Chairman of the Board and Trustee
---------------------------------------
Michael V. Prentiss
/s/ Thomas F. August President, Chief Executive Officer
--------------------------------------- and Trustee
Thomas F. August (Principal Executive Officer)
Trustee
---------------------------------------
Thomas J. Hynes, Jr.
/s/ Barry J.C. Parker Trustee
---------------------------------------
Barry J.C. Parker
/s/ Leonard M. Riggs, Jr. Trustee
---------------------------------------
Leonard M. Riggs, Jr.
Trustee
---------------------------------------
Ronald G. Steinhart
/s/ Lawrence A. Wilson Trustee
---------------------------------------
Lawrence A. Wilson
II-5
/s/ Michael A. Ernst Executive Vice President and Chief
--------------------------------------- Financial Officer
Michael A. Ernst (Principal Financial Officer)
/s/ Thomas P. Simon Senior Vice President and Chief
--------------------------------------- Accounting Officer
Thomas P. Simon (Chief Accounting Officer)
II-6
Exhibit Index
Exhibit
Number Exhibits
------- --------
2.1 Purchase Agreement, dated February 25, 2002, between us and Salomon
Smith Barney Inc. (filed as Exhibit 10.38 to our Annual Report on
Form 10-K, filed on March 27, 2002, File No. 001-14516, and
incorporated herein by reference).
4.1 Form of Common Share Certificate (filed as Exhibit 4.1 to our
Registration Statement on Amendment No. 1 of Form S-11, File No.
333-09863, and incorporated herein by reference).
4.2 Amended and Restated Rights Agreement, dated January 22, 2002,
between us and EquiServe Trust Company, N.A., as Rights Agent
(filed as Exhibit 1 to our Registration Statement on Form 8A/A,
filed on February 6, 2002, File No. 001-14516, and incorporated
herein by reference).
4.3 Form of Rights Certificate (included as Exhibit A to the Rights
Agreement (Exhibit 4.2)).
4.4 Form of Series D Preferred Share Certificate (filed as Exhibit 4.4
to our Annual Report on Form 10-K, filed March 27, 2001, File No.
001-14516, and incorporated herein by reference).
*5 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.
*8 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10 Registration Rights Agreement, dated as of February 28, 2002,
between us and Salomon Smith Barney Inc. (filed as Exhibit 10.39 to
our Annual Report on Form 10-K, filed on March 27, 2002, File No.
001-14516, and incorporated herein by reference).
*23.1 Consent of PricewaterhouseCoopers LLP.
*23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in
Exhibit 5).
*23.3 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 8).
*24 Power of Attorney (included on the signature page of this
Registration Statement).
----------
* Filed herewith.