As filed with the Securities and Exchange Commission on October 17, 2003
Registration No. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EASTGROUP PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-2711135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 One Jackson Place
188 East Capitol Street
Jackson, Mississippi 39201-2195
(601) 354-3555
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
DAVID H. HOSTER II, President and Chief Executive Officer
EastGroup Properties, Inc.
300 One Jackson Place
188 East Capitol Street
Jackson, Mississippi 39201-2195
(601) 354-3555
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
JOSEPH P. KUBAREK, Esq.
Jaeckle Fleischmann & Mugel, LLP
800 Fleet Bank Building
Twelve Fountain Plaza
Buffalo, New York 14202-2292
(716) 856-0600
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this registration statement as determined by
market conditions.
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 of
1933, 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,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
Title of Each Class Proposed Maximum
of Securities Aggregate Offering Amount of
to be Registered Price (1)(2) Registration Fee
--------------------------------------------------------------------------------
Preferred Stock $250,000,000 $20,225 (4)
Common Stock (3)
Warrants
================================================================================
(1) The aggregate maximum offering price of all securities issued pursuant to
this Registration Statement will not exceed $250,000,000. Any securities
registered hereunder may be sold separately or as units with other
securities registered hereunder.
(2) The amount to be registered by class and the proposed maximum offering
price per unit has been omitted pursuant to Instruction II.D of Form S-3
and will be determined, from time to time, by the registrant in connection
with the issuance by the registrant of the securities registered hereunder.
(3) Subject to footnote (1), includes such indeterminate number of shares of
common stock as may be issued upon conversion of or in exchange for any
shares of preferred stock that provide for conversion or exchange into
shares of common stock. No separate consideration will be received for the
shares of common stock issued upon conversion of or in exchange for shares
of preferred stock.
(4) The registration fee has been calculated pursuant to Rule 457(o) on the
basis of the maximum aggregate offering price of all the securities.
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 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 it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Dated October 17, 2003
Prospectus
$250,000,000
EASTGROUP PROPERTIES, INC.
COMMON STOCK, PREFERRED STOCK, WARRANTS
We may use this prospectus to offer and sell securities from time to time.
The types of securities we may sell include:
o shares of common stock;
o shares of preferred stock; or
o warrants to purchase preferred stock or common stock.
We will provide the specific terms of these securities in supplements to
this prospectus in connection with each offering. These terms may include:
In the case of any securities: In the case of preferred stock: In the case of warrants:
o offering price; o dividends rights; o the types of securities that
o size of offering; o liquidation preferences; may be acquired upon
o underwriting discounts; o redemption provisions; exercise;
o limitations on direct or o conversion privileges; and o expiration date;
beneficial ownership; and o voting and other rights. o exercise price; and
o restrictions on transfer. o terms of exercisability.
The securities offered will contain other significant terms and conditions.
Please read this prospectus and the applicable prospectus supplement carefully
before you invest.
Shares of our common stock are listed on the New York Stock Exchange under
the symbol "EGP."
1
An investment in securities involves a high degree of risk. See "Risk
Factors" beginning on page 7 of this prospectus for a discussion of risk factors
that you should consider in connection with an investment in the securities.
--------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
--------------------
The date of this prospectus is ______________, 2003.
2
You should rely only on the information contained in or incorporated by
reference into this prospectus and any related prospectus supplement. We have
not authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus, the related prospectus supplement
and the documents incorporated by reference herein is accurate only as of its
respective date or dates or on the date or dates which are specified in these
documents. Our business, financial condition, results of operations and
prospects may have changed since those dates.
TABLE OF CONTENTS
Page
ABOUT THIS PROSPECTUS.........................................................4
FORWARD-LOOKING INFORMATION...................................................4
WHERE YOU CAN FIND MORE INFORMATION...........................................4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................5
ABOUT EASTGROUP PROPERTIES, INC...............................................6
RISK FACTORS..................................................................7
USE OF PROCEEDS..............................................................16
RATIO OF EARNINGS TO FIXED CHARGES...........................................16
DESCRIPTION OF CAPITAL STOCK.................................................17
DESCRIPTION OF COMMON STOCK..................................................18
DESCRIPTION OF PREFERRED STOCK...............................................19
DESCRIPTION OF STOCKHOLDER RIGHTS PLAN.......................................21
DESCRIPTION OF WARRANTS......................................................21
MATERIAL PROVISIONS OF MARYLAND LAW..........................................23
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.......................26
PLAN OF DISTRIBUTION.........................................................43
LEGAL MATTERS................................................................44
EXPERTS......................................................................44
3
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission, or SEC, using a "shelf" registration
process, which enables us, from time to time, to offer and sell in one or more
offerings common shares, preferred shares and warrants to purchase common shares
and/or preferred shares or any combination of these securities. The aggregate
public offering price of the securities we sell in these offerings will not
exceed $250,000,000. This prospectus contains a general description of the
securities that we may offer. Each time we sell any securities pursuant to this
prospectus, we will provide a prospectus supplement that will contain specific
information about the terms of that offering. The prospectus supplement also may
add, update or change information contained in this prospectus. You should read
this prospectus and the applicable prospectus supplement, together with the
additional information described below under the heading "Where You Can Find
More Information," before you decide whether to invest in the securities.
FORWARD-LOOKING INFORMATION
We have made forward-looking statements with respect to our financial
condition, results of operations and business and on the possible impact of this
offering on our financial performance. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions as
they relate to us or our management, are intended to identify forward-looking
statements. These forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties, including those
described in our filing with the SEC and under "Risk Factors" in this
prospectus, that could cause actual results to differ materially from the
results contemplated by the forward-looking statements.
In evaluating the securities offered by this prospectus, you should
carefully consider the discussion of risks and uncertainties in the section
entitled "Risk Factors" on pages 7 to 16 of this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or the SEC, a
registration statement under the Securities Act with respect to the securities
offered hereunder. As permitted by the SEC's rules and regulations, this
prospectus does not contain all of the information set forth in the registration
statement. For further information regarding our company and our equity stock,
please refer to the registration statement and the contracts, agreements and
other documents filed as exhibits to the registration statement. Additionally,
we file annual, quarterly and special reports, proxy statements and other
information with the SEC.
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You may read and copy all or any portion of the registration statement or
any other materials that we file with the SEC at the SEC public reference room
at 450 Fifth Street, Washington, D.C., 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also available
to you on the SEC's web site (www.sec.gov). We also have a web site
(www.eastgroup.net) through which you may access our SEC filings. In addition,
you may view our SEC filings at the offices of the New York Stock Exchange,
Inc., which is located at 20 Broad Street, New York, New York 10005. Our SEC
filings are available at the NYSE because our common stock is listed and traded
on the NYSE under the symbol "EGP."
Information contained on our web site is not and should not be considered a
part of this prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information contained in
documents that we file with them. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information.
We incorporate by reference the documents listed below and any future
filings we make with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act prior to the completion of this offering:
o Our Annual Report on Form 10-K for the year ended December 31, 2002;
o Amendment No. 1 to our Annual Report on Form 10-K for the year ended
December 31, 2002;
o Our Quarterly Report on Form 10-Q for the three months ended March 31, 2003;
o Our Quarterly Report on Form 10-Q for the three months ended June 30, 2003;
o Our Current Reports on Form 8-K filed on May 22, 2003, June 2, 2003, June 4,
2003 and July 17, 2003; and
o The description of our common stock contained in our registration statement on
Form 8-B, filed on June 5, 1997, and all amendments and reports updating that
description.
You may request a free copy of these filings (other than exhibits, unless
they are specifically incorporated by reference in the documents) by writing or
telephoning us at the following address and telephone number:
5
EastGroup Properties, Inc.
Attention: Chief Financial Officer
300 One Jackson Place
188 East Capitol Street
Jackson, MS 39201-2195
(601) 354-3555
ABOUT EASTGROUP PROPERTIES, INC.
We are an equity real estate investment trust, or REIT, focused on the
acquisition, ownership and development of industrial properties in major Sunbelt
markets throughout the United States with a special emphasis in the states of
California, Florida, Texas and Arizona. We are a self-administered REIT in that
we provide our own investment and administrative services internally through our
own employees. Our strategy for growth is based on property portfolio
orientation toward premier distribution facilities located near major
transportation centers. As of June 30, 2003, our portfolio included 18.9 million
square feet with an additional 510,000 square feet of properties under
development. As of June 30, 2003, our industrial properties were, on average,
approximately 92.4% leased. Our mission is to maximize stockholder value by
being the leading provider of highly functional, flexible and quality business
distribution space for location sensitive tenants in the 5,000 to 50,000 square
foot range.
We are a corporation organized under the laws of the State of Maryland. Our
principal executive offices are located at 300 One Jackson Place, 188 East
Capitol Street, Jackson, MS 39201-2195, and our telephone number is (601)
354-3555. We also have a web site at www.eastgroup.net. Information contained on
our web site is not and should not be considered a part of this prospectus.
Additional information regarding EastGroup, including our audited financial
statements, is contained in the documents incorporated by reference in this
prospectus. See "Where You Can Find More Information" on page 4.
6
RISK FACTORS
You should carefully consider the risks and uncertainties described below
before purchasing our securities. Although our most significant risks and
uncertainties are described below, these are not the only risks that we may
face. If any of the following actually occurs, our business, financial condition
or operating results could be materially harmed and the trading price of our
securities, to the extent such securities are listed on any exchange,
inter-dealer quotation system or over-the-counter market, could decline and you
may lose all or part of your investment. In addition to the risks and
uncertainties described below, you should carefully consider all of the
information in this prospectus and the documents we refer you to in the section
in this prospectus called "Where You Can Find More Information."
Real Estate Industry Risks
We face risks associated with local real estate conditions in areas where
we own properties. We may be affected adversely by general economic conditions
and local real estate conditions. For example, an oversupply of industrial
properties in a local area or a decline in the attractiveness of our properties
to tenants would have a negative effect on us.
Other factors that may affect general economic conditions or local real
estate conditions include:
o population and demographic trends;
o employment and personal income trends;
o income tax laws;
o changes in interest rates and availability and costs of financing;
o construction costs; and
o weather conditions that may increase or decrease energy costs.
We may be unable to compete with our larger competitors and other
alternatives available to tenants or potential tenants of our properties. The
real estate business is highly competitive. We compete for interests in
properties with other real estate investors and purchasers, many of whom have
greater financial resources, revenues, and geographical diversity than we have.
Furthermore, we compete for tenants with other property owners. All of our
industrial properties are subject to significant local competition. We also
compete with a wide variety of institutions and other investors for capital
funds necessary to support our investment activities and asset growth. In
addition, our portfolio of retail properties faces competition from other
properties within each submarket where they are located.
7
We are subject to significant regulation that inhibits our activities.
Local zoning and use laws, environmental statutes and other governmental
requirements restrict our expansion, rehabilitation and reconstruction
activities. These regulations may prevent us from taking advantage of economic
opportunities. Legislation such as the Americans with Disabilities Act may
require us to modify our properties and noncompliance could result in the
imposition of fines or an award of damages to private litigants. Future
legislation may impose additional requirements. We cannot predict what
requirements may be enacted or what changes may be implemented to existing
legislation.
Risks Associated with Our Properties
We may be unable to renew leases or relet space as leases expire. When a
lease expires, a tenant may elect not to renew it. We may not be able to relet
the property on similar terms, if we are able to relet the property at all. The
terms of renewal or re-lease (including the cost of required renovations or
concessions to tenants) may be less favorable to us than the prior lease. If we
are unable to relet all or a substantial portion of our properties, or if the
rental rates upon such reletting are significantly lower than expected rates,
our cash generated before debt repayments and capital expenditures, and our
ability to make expected distributions to stockholders, may be adversely
affected.
We have been and may continue to be affected negatively by tenant
bankruptcies and leasing delays. At any time, a tenant may experience a downturn
in its business that may weaken its financial condition. Similarly, a general
decline in the economy may result in a decline in the demand for space at our
industrial properties. As a result, our tenants may delay lease commencement,
fail to make rental payments when due, or declare bankruptcy. Any such event
could result in the termination of that tenant's lease and losses to us, and
distributions to investors may decrease.
We receive a substantial portion of our income as rents under long-term
leases. If tenants are unable to comply with the terms of their leases because
of rising costs or falling sales, we may deem it advisable to modify lease terms
to allow tenants to pay a lower rent or a smaller share of operating costs,
taxes and insurance.
If a tenant becomes insolvent or bankrupt, we cannot be sure that we could
recover the premises from the tenant promptly or from a trustee or
debtor-in-possession in any bankruptcy proceeding relating to the tenant. We
also cannot be sure that we would receive rent in the proceeding sufficient to
cover our expenses with respect to the premises. If a tenant becomes bankrupt,
the federal bankruptcy code will apply and, in some instances, may restrict the
amount and recoverability of our claims against the tenant. A tenant's default
on its obligations to us could adversely affect our financial condition and the
cash we have available for distribution.
Development and acquisition risks could impact our profitability. We intend
to continue to develop and acquire industrial properties. Such activities may be
conducted through wholly-owned affiliated companies or through joint ventures
with unaffiliated parties. We cannot be sure that properties will be available
for acquisition or development or, if available, that we will be able to acquire
or develop those properties upon favorable terms or that favorable financing
will be available for acquisitions
8
or development. The unavailability of properties could limit our growth. In
addition, acquisitions and the development of new properties may fail to perform
in accordance with our expectations, and our cost estimates for marketing,
acquisition, development and operation may be inaccurate. Our acquisition and
development activities may also be exposed to the following risks:
o we may not be able to acquire a desired property because of competition from
other real estate investors with greater capital and resources;
o we may overpay for new acquisitions;
o we may be unable to obtain, or face delays in obtaining, necessary zoning, land-
use, building, occupancy and other required governmental permits and
authorizations, which could result in increased development costs;
o we may incur construction costs for a property that exceed original estimates due
to increased materials, labor or other costs, which could make completion of the
property uneconomical, and we may not be able to increase rents to compensate
for the increase in construction costs;
o we may abandon development opportunities that we have already begun to
explore, and we may fail to recover expenses already incurred in connection with
exploring those opportunities;
o we have been and may continue to be unable to complete construction and lease-
up of a property on schedule and meet financial goals for development projects;
o new development activities, regardless of their ultimate success, typically require
a substantial portion of our management's time and attention, diverting their
attention from our day-to-day operations; and
o because occupancy rates and rents at a newly developed property may fluctuate
depending on a number of factors, including market and economic conditions, we
may be unable to meet our profitability goals for that property.
Coverage under our existing insurance policies may be inadequate to cover
losses. We generally maintain insurance policies related to our business,
including casualty, general liability and other policies, covering our business
operations, employees and assets. However, we would be required to bear all
losses that are not adequately covered by insurance. In addition, there are
certain losses that are not generally insured because it is not economically
feasible to insure against them, including losses due to riots or acts of war.
If an uninsured loss or a loss in excess of insured limits occurs with respect
to one or more of our properties, then we could lose the capital we invested in
the properties, as well as the anticipated future revenue from the properties
and, in the case of debt, which is with recourse to us, we would remain
obligated for any mortgage debt or other financial obligations related to the
properties.
9
Moreover, as a number of our properties are located in California, an area known
for seismic activity, we may incur material losses in the future in excess of
insurance proceeds from our earthquake insurance. Although we believe that our
insurance programs are adequate, we cannot assure you that we will not incur
losses in excess of our insurance coverage, or that we will be able to obtain
insurance in the future at acceptable levels and reasonable costs.
Increased operating costs may reduce our profitability and have an adverse
effect on our cash flow and our ability to make distributions to our
stockholders. In general, under our leases with tenants, we pass on a portion of
our operating costs to them. However, we cannot assure you that tenants will
actually bear the full burden of any higher operating costs, or that such
increased costs will not lead them, or other prospective tenants, to seek space
elsewhere. Also, lower occupancy rates of our properties affect our ability to
pass on our operating costs to our tenants. Moreover, the availability of other
comparable industrial space in our specific geographic markets may limit our
ability to increase rents.
We face risks due to lack of geographic diversity. Substantially all of our
properties are located in the Sunbelt region of the United States with a special
emphasis in the states of California, Florida, Texas and Arizona, which in the
aggregate represent 82.7% of the total square footage of our operating
properties and 82.7% of our annualized base rent as of June 30, 2003. A downturn
in general economic conditions and local real estate conditions in these
geographic regions, as a result of oversupply of or reduced demand for
industrial properties, local business climate, business layoffs and changing
demographics, would have a particularly strong adverse effect on us.
We face risks due to the illiquidity of real estate which may limit our
ability to vary our portfolio. Real estate investments are relatively illiquid.
Our ability to vary our portfolio in response to changes in economic and other
conditions will therefore be limited. In addition, the Internal Revenue Code
limits our ability to sell our properties. If we must sell an investment, we
cannot ensure that we will be able to dispose of the investment in the time
period we desire or that the sales price of the investment will recoup or exceed
our cost for the investment.
We face possible environmental liabilities. Current and former real estate
owners and operators may be required by law to investigate and clean up
hazardous substances released at the properties they own or operate. They may
also be liable to the government or to third parties for substantial property or
natural resource damage, investigation costs and cleanup costs. In addition,
some environmental laws create a lien on the contaminated site in favor of the
government for damages and costs the government incurs in connection with the
contamination. Contamination may affect adversely the owner's ability to use,
sell or lease real estate or to borrow using the real estate as collateral.
We have no way of determining at this time the magnitude of any potential
liability to which we may be subject arising out of environmental conditions or
violations with respect to the properties we currently or formerly owned.
Environmental laws today can impose liability on a previous owner or operator of
a property that owned or operated the property at a time when hazardous or toxic
substances were disposed of, released from, or present at, the property. A
conveyance of the property, therefore, does not relieve the owner or operator
from liability. Although we have conducted Phase I environmental
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site assessments ("ESAs") at most of our properties to identify potential
sources of contamination at those properties, such ESAs do not reveal all
environmental liabilities or compliance concerns that could arise from those
properties. Moreover, material environmental liabilities or compliance concerns
may exist, of which we are currently unaware, that in the future may have a
material adverse effect on our business, assets or results of operations.
Financing Risks
We face risks associated with the use of debt to fund acquisitions and
developments, including refinancing risk. We are subject to the risks normally
associated with debt financing, including the risk that our cash flow will be
insufficient to meet required payments of principal and interest. We anticipate
that a portion of the principal of our debt will not be repaid prior to
maturity. Therefore, we will likely need to refinance at least a portion of our
outstanding debt as it matures. There is a risk that we may not be able to
refinance existing debt or that the terms of any refinancing will not be as
favorable as the terms of the existing debt.
We face risks related to "balloon payments." Certain of our mortgages will
have significant outstanding principal balances on their maturity dates,
commonly known as "balloon payments." There can be no assurance whether we will
be able to refinance such balloon payments on the maturity of the loans, which
may force disposition of properties on disadvantageous terms or require
replacement with debt with higher interest rates, either of which would have an
adverse impact on our financial performance and ability to pay dividends to
investors.
We face risks associated with our dependence on external sources of
capital. In order to qualify as a REIT, we are required each year to distribute
to our stockholders at least 90% of our REIT taxable income, and we are subject
to tax on our income to the extent it is not distributed. Because of this
distribution requirement, we may not be able to fund all future capital needs
from cash retained from operations. As a result, to fund capital needs, we rely
on third-party sources of capital, which we may not be able to obtain on
favorable terms, if at all. Our access to third-party sources of capital depends
upon a number of factors, including (i) general market conditions; (ii) the
market's perception of our growth potential; (iii) our current and potential
future earnings and cash distributions; and (iv) the market price of our capital
stock. Additional debt financing may substantially increase our debt-to-total
capitalization ratio. Additional equity financing will dilute the holdings of
our current stockholders.
Fluctuations in interest rates may adversely affect our operations and
value of our stock. As of June 30, 2003, we had approximately $77 million of
variable interest rate debt. As of June 30, 2003, the weighted average interest
rate on our variable rate debt was 2.4%. We may also incur indebtedness in the
future that bears interest at a variable rate or we may be required to refinance
our existing debt at higher rates. Accordingly, increases in interest rates
could adversely affect our financial condition, our ability to pay expected
distributions to stockholders and the value of our stock.
11
We could default on cross-collateralized and cross-defaulted debt. As of
June 30, 2003, we had six secured loans that are cross-collateralized by 56
properties, totaling $165,973,000. If we default on any of these loans, then we
could be required to repay the aggregate of all indebtedness, together with
applicable prepayment charges, to avoid foreclosure on all the
cross-collateralized properties within the applicable pool. In addition, our
credit facilities contain cross-default provisions, which may be triggered in
the event that our other material indebtedness is in default. These
cross-default provisions may require us to repay or restructure the credit
facilities.
We may amend our investment strategy and business policies without your
approval. Our Board of Directors determines our growth, investment, financing,
capitalization, borrowing, REIT status, operating and distribution policies.
Although the Board of Directors has no present intention to amend or revise any
of these policies, these policies may be amended or revised without notice to
stockholders. Accordingly, stockholders may not have control over changes in our
policies. We cannot assure you that changes in our policies will fully serve the
interests of all stockholders.
Other Risks
The market value of our common stock could decrease based on our
performance and market perception and conditions. The market value of our common
stock may be based primarily upon the market's perception of our growth
potential and current and future cash dividends, and may be secondarily based
upon the real estate market value of our underlying assets. The market price of
our common stock is influenced by the dividend on our common stock relative to
market interest rates. Rising interest rates may lead potential buyers of our
common stock to expect a higher dividend rate, which would adversely affect the
market price of our common stock. In addition, rising interest rates would
result in increased expense, thereby adversely affecting cash flow and our
ability to service our indebtedness and pay dividends.
U.S. Federal income tax law developments could affect the desirability of
investing in our common stock because of our REIT status. In May 2003,
legislation was enacted that reduces the maximum tax rate of noncorporate
taxpayers for capital gains generally from 20% to 15% (from May 6, 2003 through
2008) and for dividends payable to noncorporate taxpayers generally from 38.6%
to 15% (from January 1, 2003 through 2008). In general, dividends payable by
REITs are not eligible for such treatment except in limited circumstances which
we do not contemplate. However, the recent legislation reduces the maximum tax
rate of noncorporate taxpayers on ordinary income from 38.6% to 35%.
Although this legislation does not adversely affect the taxation of REITs
or dividends paid by REITs, the more favorable treatment of regular corporate
dividends could cause investors who are individuals to consider stocks of other
corporations that pay dividends as more attractive relative to stocks of REITs.
It is not possible to predict whether this change in perceived relative value
will occur, or what the effect will be on the market price of our stock.
12
There are limits on the ownership of our capital stock as a result of which
a stockholder may lose beneficial ownership of its shares. The Internal Revenue
Code provides that, in order for us to maintain our REIT status, not more than
50% of the value of our outstanding capital stock may be owned, directly or
constructively, by five or fewer individuals or entities. In addition, our
charter prohibits, with limited exceptions, direct or constructive ownership of
more than 9.8% in value or in number of our outstanding equity stock (defined as
all of our classes of capital stock, except our excess stock), whichever is more
restrictive, by any individual or entity. The constructive ownership rules are
complex and may cause shares of our capital stock owned directly or
constructively by a group of related individuals or entities to be
constructively owned by one individual or entity. An acquisition of shares by a
person, or a transfer of shares to a person, as a result of which the ownership
limits set forth above are violated, may be void or may be deemed to be made to
a trust designated by us, or the shares of capital stock to be purchased or
transferred may be converted into another form of our securities.
We are subject to restrictions that may impede our ability to effect a
change in control. Certain provisions contained in our charter and bylaws, our
stockholder rights plan and severance agreements with our executive officers may
have the effect of discouraging a third party from making an acquisition
proposal for us and thereby inhibit a change in control.
Our Charter contains provisions that may adversely affect the value of
shareholders' stock. Our charter generally limits any holder from acquiring more
than 9.8% (in value or in number, whichever is more restrictive) of our
outstanding equity stock (defined as all of our classes of capital stock, except
our excess stock). The ownership limit may limit the opportunity for
stockholders to receive a premium for their shares of common stock that might
otherwise exist if an investor were attempting to assemble a block of shares in
excess of 9.8% of the outstanding shares of equity stock or otherwise effect a
change in control. Also, the request of the holders of a majority or more of our
common stock is necessary for stockholders to call a special meeting. We also
require advance notice by stockholders for the nomination of directors or
proposal of business to be considered at a meeting of stockholders.
We have adopted a stockholder rights plan that may make a change in control
difficult. We have a stockholder rights plan. Under the terms of the plan, we
declared a dividend of rights on our common stock and Series B preferred stock.
The rights issued under the plan will be triggered, with certain exceptions, if
and when any person or group acquires, or commences a tender offer to acquire,
15% or more of our shares, our Board of Directors determines that a substantial
stockholder's ownership may be adverse to the interests of our other
stockholders or our qualification as a REIT, or other similar events. The plan
could have the effect of deterring or preventing our acquisition, even if a
majority of our stockholders were in favor of such acquisition, and could have
the effect of making it more difficult for a person or group to gain control of
us or to change existing management.
We have change of control agreements with our executives that may deter
changes of control of the Company. We have entered into change of control
agreements with each of our executives providing for the payment of money to
these executives upon the occurrence of our change of control as defined in
these agreements. If, within a certain time period (as set in the executive's
agreement) following a change of control, we terminate the executive's
employment other than for cause, or if the
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executive elects to terminate his or her employment with us for reasons
specified in the agreement, we will make a severance payment equal to the
executive's average annual compensation times an amount specified in the
executive's agreement, together with the executive's base salary and vacation
pay that have accrued but are unpaid through the date of termination. These
agreements may deter our change of control because of the increased cost for a
third party to acquire control of us.
Our Board of Directors may authorize and issue securities without
stockholder approval. Under our Charter, the board has the power to classify and
reclassify any of our unissued shares of capital stock into shares of capital
stock with such preferences, rights, powers and restrictions as the board of
directors may determine. The authorization and issuance of a new class of
capital stock could have the effect of delaying or preventing someone from
taking control of us, even if a change in control were in our stockholders' best
interests.
Maryland business statutes may limit the ability of a third party to
acquire control of us. As a Maryland corporation, we are subject to various
Maryland laws which may have the effect of discouraging offers to acquire our
company and of increasing the difficulty of consummating any such offers, even
if our acquisition would be in our stockholders' best interests. The Maryland
General Corporation Law restricts mergers and other business combination
transactions between us and any person who acquires beneficial ownership of
shares of our stock representing 10% or more of the voting power without our
Board of Directors' prior approval. Any such business combination transaction
could not be completed until five years after the person acquired such voting
power, and generally only with the approval of stockholders representing 80% of
all votes entitled to be cast and 66 2/3% of the votes entitled to be cast,
excluding the interested stockholder, or upon payment of a fair price. Maryland
law also provides generally that a person who acquires shares of our equity
stock that represent 10% or more of the voting power in electing directors will
have no voting rights unless approved by a vote of two-thirds of the shares
eligible to vote.
Additionally, Maryland law provides, among other things, that our Board of
Directors has broad discretion in adopting stockholders' rights plans and has
the sole power to fix the record date, time and place for special meetings of
the stockholders. Furthermore, Maryland corporations that:
o have three independent directors who are not officers or employees of the entity
or related to an acquiring person; and
o are subject to the reporting requirements of the Securities Exchange Act of 1934,
may elect in their charter or bylaws or by resolution of the board of directors
to be subject to all or part of a special subtitle that provides that:
o the corporation will have a staggered board of directors;
o any director generally may be removed only for cause and by the vote of two-
thirds of the votes entitled to be cast in the election of directors, even if a lesser
proportion is provided in the charter or bylaws;
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o the number of directors may only be set by the board of directors, even if the
procedure is contrary to the charter or bylaws;
o vacancies may only be filled by the remaining directors, even if the procedure is
contrary to the charter or bylaws; and
o the Secretary of the corporation may call a special meeting of stockholders at the
request of stockholders only upon the written request of the stockholders entitled
to cast at least a majority of all the votes entitled to be cast at the meeting, even if
the procedure is contrary to the charter or bylaws.
To date, we have not made any of the elections described above although our
charter and bylaws contain some of these provisions independent of these
elections.
We may fail to qualify as a REIT. If we fail to qualify as a REIT, we will
not be allowed to deduct distributions to stockholders in computing our taxable
income and will be subject to federal income tax, including any applicable
alternative minimum tax, at regular corporate rates. In addition, we may be
barred from qualification as a REIT for the four years following
disqualification. The additional tax incurred at regular corporate rates would
significantly reduce the cash flow available for distribution to stockholders
and for debt service.
Furthermore, we would no longer be required by the Internal Revenue Code to
make any distributions to our stockholders as a condition of REIT qualification.
Any distributions to stockholders would be taxable as ordinary income to the
extent of our current and accumulated earnings and profits, although such
dividend distributions would be subject to a top federal tax rate of 15% through
2008. Corporate distributees, however, may be eligible for the dividends
received deduction on the distributions, subject to limitations under the
Internal Revenue Code.
To qualify as a REIT, we must comply with certain highly technical and
complex requirements. We cannot be certain we have complied with these
requirements because there are few judicial and administrative interpretations
of these provisions. In addition, facts and circumstances that may be beyond our
control may affect our ability to qualify as a REIT. We cannot assure you that
new legislation, regulations, administrative interpretations or court decisions
will not change the tax laws significantly with respect to our qualification as
a REIT or with respect to the federal income tax consequences of qualification.
We cannot assure you that we are qualified or will remain qualified as a REIT.
We may be unable to comply with the strict income distribution requirements
applicable to REITs. To obtain the favorable tax treatment associated with
qualifying as a REIT, among other requirements, we are required each year to
distribute to our stockholders at least 90% of our REIT taxable income (other
than our net capital gain). We will be subject to corporate income tax on any
undistributed REIT taxable income. In addition, we will incur a 4% nondeductible
excise tax on the amount
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by which our distributions (including any capital gains we elect to retain) in
any calendar year are less than the sum of: (i) 85% of our ordinary income for
the year; (ii) 95% of our capital gain net income for the year; and (iii) any
undistributed taxable income from prior years. We could be required to borrow
funds on a short-term basis to meet the distribution requirements that are
necessary to achieve the tax benefits associated with qualifying as a REIT (and
to avoid corporate income tax and the 4% excise tax), even if conditions were
not favorable for borrowing.
Notwithstanding our status as a REIT, we are subject to various federal,
state, local and foreign taxes on our income and property. For example, as
described above, we will be taxed at regular corporate rates on any
undistributed taxable income, including undistributed net capital gains,
provided, however, that properly designated undistributed capital gains will
effectively avoid taxation at the stockholder level. We may be subject to other
federal income taxes as more fully described in "Material United States Federal
Income Tax Consequences--Taxation of Us as a REIT." We may also have to pay some
state income or franchise taxes because not all states treat REITs in the same
manner as they are treated for federal income tax purposes.
USE OF PROCEEDS
As will be more fully described in any applicable prospectus supplement, we
intend to use the net proceeds of any sale of securities for general corporate
purposes, including, without limitation, the repayment of debt and the
development and acquisition of additional properties.
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to combined fixed charges and preferred stock
dividends for the six months ended June 30, 2003 and the years ended December
31, 2002, 2001, 2000, 1999 and 1998 was 1.32, 1.33, 1.48, 1.44, 1.57 and 1.83,
respectively.
For purposes of calculating these ratios, earnings represent net income
from continuing operations plus interest expense and an interest component of
rental expense. Fixed charges represent interest expense and preferred stock
dividends from our consolidated statements of operations plus capitalized
interest and an estimated interest component of rental expense. The ratios are
based solely on historical financial information and no pro forma adjustments
have been made thereto.
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DESCRIPTION OF CAPITAL STOCK
The following description is only a summary of certain terms and provisions
of our capital stock. You should refer to our charter and bylaws for the
complete provisions thereof.
The total number of shares of capital stock of all classes that we are
authorized to issue is 100,000,000. Our charter authorizes the issuance of
65,280,000 shares of common stock, par value $.0001 per share; 2,800,000 shares
of Series B Cumulative Convertible Preferred Stock, par value $.0001 per share;
600,000 shares of Series C Preferred Stock, par value $.0001 per share;
1,320,000 shares of 7.95% Series D Cumulative Redeemable Preferred Stock, par
value $.0001 per share; and 30,000,000 shares of Excess Stock, par value $.0001
per share. As of September 30, 2003, 19,369,471 shares of common stock, 550,000
shares of Series B preferred stock, 1,320,000 shares of Series D preferred
stock, no shares of Series C preferred stock and no shares of Excess Stock were
issued and outstanding. The common stock and the Series D preferred stock are
currently listed on the New York Stock Exchange under the symbols "EGP" and "EGP
PrD," respectively. There is no public market for our Series B preferred stock.
Our Board of Directors is authorized by the charter, to classify and
reclassify any of our unissued shares of capital stock, by, among other
alternatives, setting, altering or eliminating the designation, preferences,
conversion or other rights, voting powers, qualifications and terms and
conditions of redemption of, limitations as to dividends and any other
restrictions on, our capital stock. The power of the Board of Directors to
classify and reclassify any of the shares of capital stock includes the
authority to classify or reclassify such shares into a class or classes of
preferred stock or other stock.
Pursuant to the provisions of our charter, if a transfer of stock occurs
such that any person would own, beneficially or constructively (applying the
applicable attribution rules of the Code), more than 9.8% (in value or in
number, whichever is more restrictive) of our outstanding equity stock
(excluding shares of Excess Stock), then the amount in excess of the 9.8% limit
will automatically be converted into shares of Excess Stock, any such transfer
will be void from the beginning, and we will have the right to redeem such
stock. These restrictions also apply to any transfer of stock that would result
in our being "closely held" within the meaning of Section 856(h) of the Code, or
otherwise failing to qualify as a REIT for federal income tax purposes. Upon any
transfer that results in Excess Stock, such Excess Stock shall be held in trust
for the exclusive benefit of one or more charitable beneficiaries designated by
us. Upon the satisfaction of certain conditions, the person who would have been
the recordholder of the equity stock if the transfer had not resulted in Excess
Stock may designate a beneficiary of an interest in the trust. Upon such
transfer of an interest in the trust, the corresponding shares of Excess Stock
in the trust shall be automatically exchanged for an equal number of shares of
equity stock of the same class as such stock had been prior to it becoming
Excess Stock and shall be transferred of record to the designated beneficiary.
Excess Stock has no voting rights, except as required by law, and any vote cast
by a purported transferee in respect of shares of Excess Stock prior to the
discovery that shares of equity stock had been converted into Excess Stock shall
be void from the beginning. Excess Stock shall not be entitled to dividends. Any
dividend paid prior to our discovery that equity stock has been converted into
Excess Stock shall be repaid to us upon
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demand. In the event of our liquidation, each holder of Excess Stock shall be
entitled to receive that portion of our assets that would have been distributed
to the holder of equity stock in respect of which such Excess Stock was issued.
The trustee of the trust holding Excess Stock shall distribute such assets to
the beneficiaries of such trust. These restrictions will not prevent the
settlement of a transaction entered into through the facilities of any
interdealer quotation system or national securities exchange upon which shares
of our capital stock are traded. Notwithstanding the prior sentence, certain
transactions may be settled by providing shares of Excess Stock.
Our Board of Directors, upon receipt of a ruling from the Internal Revenue
Service or an opinion of counsel or other evidence satisfactory to the Board of
Directors and upon at least 15 days written notice from a transferee prior to a
proposed transfer that, if consummated, would result in the intended transferee
"beneficially owning" (as defined in our charter, and determined after the
application of the applicable attribution rules of the Code) equity stock in
excess of the 9.8% ownership limit and the satisfaction of such other conditions
as the Board may direct, may in its sole and absolute discretion exempt a person
from the 9.8% ownership limit. Additionally, our Board of Directors, upon
receipt of a ruling from the Internal Revenue Service or an opinion of counsel
or other evidence satisfactory to our Board, may in its sole and absolute
discretion exempt a person from the limitation on a person "constructively
owning" (as defined in our charter, and determined after the application of the
applicable attribution rules of the Code) equity stock in excess of the 9.8%
ownership limit if (x) such person does not and represents that it will not
directly or "constructively own" (after the application of the applicable
attribution rules of the Code) more than a 9.8% interest in a tenant of ours;
(y) we obtain such representations and undertakings as are reasonably necessary
to ascertain this fact; and (z) such person agrees that any violation or
attempted violation of such representations, undertakings and agreements will
result in such equity stock in excess of the ownership limit being converted
into and exchanged for Excess Stock. Our Board of Directors may from time to
time increase or decrease the 9.8% limit, provided that the 9.8% limit may be
increased only if five individuals could not "beneficially own" or
"constructively own" (applying the applicable attribution rules of the Internal
Revenue Code) more than 50.0% in value of the shares of equity stock then
outstanding.
DESCRIPTION OF COMMON STOCK
Distributions. Subject to the preferential rights of any shares of
preferred stock currently outstanding or subsequently classified and to the
provisions of our charter regarding restrictions on transfer and ownership of
shares of common stock, a holder of our common stock is entitled to receive
distributions, if, as and when declared by our Board of Directors, out of our
assets that we may legally use for distributions to stockholders and to share
ratably in our assets that we may legally distribute to our stockholders in the
event of our liquidation, dissolution or winding up after payment of, or
adequate provision for, all of our known debts and liabilities. We currently pay
regular quarterly distributions on our common stock.
Relationship to Preferred Stock and Other Shares of Common Stock. The
rights of a holder of shares of common stock will be subject to, and may be
adversely affected by, the rights of holders
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of preferred stock that have been issued and that may be issued in the
future. Our Board of Directors may cause preferred stock to be issued to obtain
additional capital, in connection with acquisitions, to our officers, directors
and employees pursuant to benefit plans or otherwise and for other corporate
purposes.
A holder of our common stock has no preferences, conversion rights, sinking
fund, redemption rights or preemptive rights to subscribe for any of our
securities. Subject to the provisions of our charter regarding restrictions on
ownership and transfer, all shares of common stock have equal distribution,
liquidation, voting and other rights.
Voting Rights. Subject to the provisions of our charter regarding
restrictions on transfer and ownership of shares of common stock, a holder of
common stock has one vote per share on all matters submitted to a vote of
stockholders, including the election of directors.
There is no cumulative voting in the election of directors, which means
that the holders of a plurality of the outstanding shares of common stock voting
can elect all of the directors then standing for election and the holders of the
remaining shares of common stock, if any, will not be able to elect any
directors, except as otherwise provided for any series of our preferred stock.
Stockholder Liability. Under Maryland law applicable to Maryland
corporations, holders of common stock will not be liable as stockholders for our
obligations solely as a result of their status as stockholders.
Transfer Agent. The registrar and transfer agent for shares of our common
stock is Equiserve Trust Company, N.A.
DESCRIPTION OF PREFERRED STOCK
General. Shares of preferred stock may be issued from time to time, in one
or more series, as authorized by our Board of Directors. Before issuance of
shares of each series, the Board of Directors is required to fix for each such
series, subject to the provisions of Maryland law and our charter, the powers,
designations, preferences and relative, participating, optional or other special
rights of such series and qualifications, limitations or restrictions thereof,
including such provisions as may be desired concerning voting, redemption,
dividends, dissolution or the distribution of assets, conversion or exchange,
and such other matters as may be fixed by resolution of the Board of Directors
or a duly authorized committee thereof. The Board of Directors could authorize
the issuance of shares of preferred stock with terms and conditions which could
have the effect of discouraging a takeover or other transaction which holders of
some, or a majority of, shares of common stock might believe to be in their best
interests, or in which holders of some, or a majority of, shares of common stock
might receive a premium for their shares of common stock over the then market
price of such shares. The shares of preferred stock will, when issued, be fully
paid and nonassessable and will have no preemptive rights.
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The prospectus supplement relating to any shares of preferred stock offered
thereby will contain the specific terms, including:
(i) The title and stated value of such shares of preferred stock;
(ii) The number of such shares of preferred stock offered, the liquidation
preference per share and the offering price of such shares of preferred stock;
(iii) The voting rights of such shares of preferred stock;
(iv) The dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such shares of preferred stock;
(v) The date from which dividends on such shares of preferred stock will
accumulate, if applicable;
(vi) The procedures for any auction or remarketing, if any, for such shares of
preferred stock;
(vii) The provision for a sinking fund, if any, for such shares of preferred stock;
(viii) The provisions for redemption, if applicable, of such shares of preferred
stock;
(ix) Any listing of the shares of preferred stock on any securities exchange;
(x) The terms and conditions, if applicable, upon which the shares of preferred
stock will be convertible into shares of our common stock, including the
conversion price (or manner of calculation thereof);
(xi) A discussion of federal income tax considerations applicable to such shares
of preferred stock;
(xii) The relative ranking and preferences of such shares of preferred stock as to
dividend rights and rights upon liquidation, dissolution or winding up of our
affairs;
(xiii) Any limitations on issuance of any series of shares of preferred stock ranking
senior to or on a parity with such series of shares of preferred stock as to
dividend rights and rights upon liquidation, dissolution or winding up of our
affairs;
(xiv) Any limitations on direct or beneficial ownership and restrictions on transfer
of such shares of preferred stock, in each case as may be appropriate to
preserve our status as a REIT; and
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(xv) Any other specific terms, preferences, rights, limitations or restrictions of
such shares of preferred stock.
The registrar and transfer agent for the shares of preferred stock will be
set forth in the applicable prospectus supplement.
The description of the provisions of the shares of preferred stock set
forth in this prospectus and in the related prospectus supplement is only a
summary, does not purport to be complete and is subject to, and is qualified in
its entirety by, reference to the definitive Articles Supplementary to our
Charter relating to such series of shares of preferred stock. You should read
these documents carefully to fully understand the terms of the shares of
preferred stock. In connection with any offering of shares of preferred stock,
Articles Supplementary will be filed with the Securities and Exchange Commission
as an exhibit or incorporated by reference in the Registration Statement.
DESCRIPTION OF STOCKHOLDER RIGHTS PLAN
Our Board of Directors has adopted a stockholder rights plan. As a result,
we issued one right for each outstanding share of common stock and 1.1364 rights
(subject to adjustments) for each share of Series B preferred stock outstanding.
One right and 1.1364 rights (subject to adjustments) will be issued for each
additional share of common stock or Series B preferred stock, respectively, that
we issue. Each right entitles the holder to purchase one one-thousandth of a
share of our Series C preferred stock at an exercise price of $70.00 (subject to
adjustments). The rights become exercisable 10 business days after any party
acquires or announces an offer to acquire 15% or more of our common stock, our
Board of Directors determines that a substantial stockholder's ownership may be
adverse to the interests of our other stockholders or our qualification as a
REIT, or certain similar event. The rights expire on December 3, 2008, unless
earlier redeemed. The rights are redeemable at $0.0001 per right at any time
before 10 business days following the time that any party acquires, or obtains
the right to acquire, beneficial ownership of 15% or more of our outstanding
common stock, or our Board of Directors determines that a substantial
stockholder's ownership may be adverse to the interests of our other
stockholders or our qualification as a REIT.
DESCRIPTION OF WARRANTS
We may issue warrants for the purchase of shares of preferred stock or
shares of common stock. Warrants may be issued independently or together with
any other securities offered by any prospectus supplement and may be attached to
or separate from such securities. Each series of warrants will be issued under a
separate warrant agreement to be entered into between us and a warrant agent
specified in the applicable prospectus supplement. The warrant agent will act
solely as our agent in connection with the warrants of such series and will not
assume any obligation or relationship of agency or
21
trust for or with any holders or beneficial owners of warrants. The following
summary of certain provisions of the securities warrant agreement and the
warrants does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the securities warrant
agreement and the securities warrant certificates relating to each series of
warrants, which will be filed with the Securities and Exchange Commission and
incorporated by reference as an exhibit to the registration statement, of which
this prospectus is a part, at or before the time of the issuance of that series
of warrants.
In the case of warrants for the purchase of shares of preferred stock or
shares of common stock, the applicable prospectus supplement will describe the
terms of those warrants, including the following where applicable:
o the offering price;
o the type and aggregate number of shares purchasable upon exercise of the
warrants, the exercise price, and in the case of warrants for shares of
preferred stock, the designation, aggregate number and terms of the series of
shares of preferred stock with which the warrants are being offered, if any,
and the number of such warrants being offered with the shares of preferred
stock;
o the date, if any, on and after which the warrants and the related series of
shares of preferred stock, if any, or shares of common stock will be
transferable separately;
o the date on which the right to exercise such warrants will commence and the
date on which such right will expire;
o any special United States federal income tax consequences; and
o any other material terms of the warrants.
Warrant certificates may be exchanged for new warrant certificates of
different denominations, may (if in registered form) be presented for
registration of transfer, and may be exercised at the corporate trust office of
the warrant agent or any other office indicated in the applicable prospectus
supplement. Before the exercise of any warrants to purchase shares of preferred
stock or shares of common stock, holders of such warrants will not have any
rights of holders of such shares of preferred stock or shares of common stock,
including the right to receive payments of dividends, if any, on such shares of
preferred stock or shares of common stock, or to exercise any applicable right
to vote.
Each warrant will entitle the holder thereof to purchase such number of
shares of preferred stock or shares of common stock, as the case may be, at such
exercise price as shall in each case be set forth in, or calculable from, the
prospectus supplement relating to the offered warrants. After the close of
business on the expiration date (or such later date to which such expiration
date may be extended by us), unexercised warrants will become void.
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Warrants may be exercised by delivering to the warrant agent payment, as
provided in the applicable prospectus supplement, of the amount required to
purchase the shares of preferred stock or shares of common stock purchasable
upon such exercise, together with certain information set forth on the reverse
side of the securities warrant certificate. Warrants will be deemed to have been
exercised upon receipt of payment of the exercise price, subject to the receipt
within five business days, of the securities warrant certificate evidencing such
warrants. Upon receipt of such payment and the securities warrant certificate
properly completed and duly executed at the corporate trust office of the
securities warrant agent or any other office indicated in the applicable
prospectus supplement, we will, as soon as practicable, issue and deliver the
shares of common stock purchasable upon such exercise. If fewer than all of the
warrants represented by such securities warrant certificate are exercised, a new
securities warrant certificate will be issued for the remaining amount of
warrants.
The warrant agreements may be amended or supplemented without the consent
of the holders of the warrants issued under the warrant agreements to effect
changes that are not inconsistent with the provisions of the warrants and that
do not adversely affect the interests of the holders of the warrants.
MATERIAL PROVISIONS OF MARYLAND LAW
The following paragraphs summarize the material provisions of Maryland law
applicable to Maryland corporations. The summary does not purport to be complete
and is subject to and qualified in its entirety by reference to Maryland law,
our charter, including any articles supplementary, and bylaws. You should read
these documents carefully to fully understand the terms of Maryland law, our
charter and our bylaws.
Maryland, the state of our incorporation, has certain anti-takeover
statutes, including the "business combination" provisions and "control share
acquisition" provisions, which may also have the effect of making it difficult
to gain control of us or to change existing management. To date, we have not
opted out of the business combination provisions or the control share
acquisition provisions of the Maryland General Corporation Law (the "MGCL").
Business Combinations
Maryland corporations are subject to certain restrictions under the MGCL
concerning certain "business combinations" (including a merger, consolidation,
share exchange or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland corporation and an
"interested stockholder." An interested stockholder is: (i) a person who
beneficially own 10% or more of the voting power of the outstanding voting stock
of the corporation, or (ii) an affiliate or associate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner, directly or indirectly, of 10% or more of the voting power of
the then-outstanding voting stock of the corporation. Such business combinations
are prohibited for five years after the most
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recent date on which the interested stockholder became an interested
stockholder. Thereafter, in addition to any other required vote, any such
business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (i) 80% of the
votes entitled to be cast by holders of outstanding shares of voting stock of
the corporation, voting together as a single voting group, and (ii) two-thirds
of the votes entitled to be cast by holders of voting stock of the corporation
(other than voting stock held by the Interested Stockholder who will, or whose
affiliate will, be a party to the business combination or by an affiliate or
associate of the Interested Stockholder) voting together as a single voting
group. The extraordinary voting provisions do not apply if, among other things,
the corporation's stockholders receive a minimum price for their shares
determined in accordance with the MGCL and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the interested stockholder becomes an
interested stockholder.
Control Share Acquisitions
The MGCL also provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by the affirmative vote of two-thirds of the votes entitled to
be cast on the matter excluding "interested shares" (shares of stock in respect
of which any of the following persons is entitled to exercise or direct the
exercise of the voting power of shares of stock of the corporation in the
election of directors: an "acquiring person," an officer of the corporation or
an employee of the corporation who is also a director). "Control shares" are
shares of stock which, if aggregated with all other such shares of stock owned
by the acquiring person, or in respect of which such person is entitled to
exercise or direct the exercise of voting power of shares of stock of the
corporation in electing directors within one of the following ranges of voting
power: (i) one-tenth or more but less than one-third, (ii) one-third or more but
less than a majority, or (iii) a majority or more of all voting power. Control
shares do not include shares the acquiring person is entitled to vote as a
result of having previously obtained stockholder approval. The control share
acquisition statute does not apply to shares acquired in a merger, consolidation
or share exchange if the corporation is a party to the transaction, or to
acquisitions approved or exempted by the charter or bylaws of the corporation.
A person who has made or proposes to make a control share acquisition,
under certain conditions (including an undertaking to pay expenses), may compel
the board of directors to call a special meeting of stockholders to be held
within 50 days of demand to consider the voting rights of the control shares
upon delivery of an acquiring person statement containing certain information
required by the MGCL, including a representation that the acquiring person has
the financial capacity to make the proposed control share acquisition, and a
written undertaking to pay the corporation's expenses of the special meeting
(other than the expenses of those opposing approval of the voting rights). If no
request for a meeting is made, the corporation may itself present the question
at a stockholders' 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 MGCL, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have
24
previously been approved) for fair value, determined without regard to the
absence of voting rights for control shares, as of the date of the last control
share acquisition or, if a meeting of stockholders is held, as of the date of
such meeting at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders'
meeting before the control share acquisition and the acquiring person becomes
entitled to exercise or direct the exercise of a majority or more of all voting
power, all other stockholders may exercise rights of objecting stockholders
under Maryland law to receive the fair value of their shares. The fair value of
the shares for such purposes may not be less than the highest price per share
paid by the acquiring person in the control share acquisition. Certain
limitations and restrictions otherwise applicable to the exercise of the
objecting stockholders' rights do not apply in the context of a control share
acquisition.
Certain Elective Provisions of Maryland Law
Maryland law provides, among other things, that the board of directors has
broad discretion in adopting stockholders' rights plans and has the sole power
to fix the record date, time and place for special meetings of the stockholders.
Furthermore, Maryland corporations that:
o have three independent directors who are not officers or employees of the entity
or related to an acquiring person; and
o are subject to the reporting requirements of the Securities Exchange Act,
may elect in their charter or bylaws or by resolution of the board of directors
to be subject to all or part of a special subtitle which provides that:
o the corporation will have a staggered board of directors;
o any director may be removed only for cause and by the vote of two-thirds of the
votes entitled to be cast in the election of directors generally, even if a lesser
proportion is provided in the charter or bylaws;
o the number of directors may only be set by the board of directors, even if the
procedure is contrary to the charter or bylaws;
o vacancies may only be filled by the remaining directors, even if the procedure is
contrary to the charter or bylaws; and
o the secretary of the corporation may call a special meeting of stockholders only
on the written request of the stockholders entitled to cast at least a majority of all
the votes entitled to be cast at the meeting, even if the procedure is contrary to the
charter or bylaws.
25
To date, we have not made any of the elections described above, although our
charter and bylaws contain some of these provisions independent of these
elections.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Introductory Notes
The following discussion describes the material federal income tax
considerations relating to the taxation of the Company as a REIT, and the
ownership and disposition of the securities offered under this Prospectus. A
prospectus supplement will contain information about additional federal income
tax considerations, if any, relating to a particular offering.
The following discussion is not exhaustive of all possible tax
considerations and does not provide a detailed discussion of any state, local or
foreign tax considerations, nor does it discuss all of the aspects of federal
income taxation that may be relevant to a prospective stockholder in light of
his or her particular circumstances or to stockholders (including insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) who are subject to special treatment under the federal income tax
laws.
Jaeckle Fleischmann & Mugel, LLP has provided an opinion to the effect that
this discussion, to the extent that it contains descriptions of applicable
federal income tax law, is correct in all material respects and fairly
summarizes in all material respects the federal income tax laws referred to
herein. This opinion, however, does not purport to address the actual tax
consequences of the purchase, ownership and disposition of our capital stock to
any particular holder. The opinion and the information in this section are based
on the Code, current, temporary and proposed Treasury regulations, the
legislative history of the Code, current administrative interpretations and
practices of the Internal Revenue Service, and court decisions. The reference to
Internal Revenue Service interpretations and practices includes Internal Revenue
Service practices and policies as endorsed in private letter rulings, which are
not binding on the Internal Revenue Service except with respect to the taxpayer
that receives the ruling. In each case, these sources are relied upon as they
exist on the date of this prospectus. No assurance can be given that future
legislation, regulations, administrative interpretations and court decisions
will not significantly change current law, or adversely affect existing
interpretations of existing law, on which the opinion and information in this
section are based. Any change of this kind could apply retroactively to
transactions preceding the date of the change. Moreover, opinions of counsel
merely represent counsel's best judgment with respect to the probable outcome on
the merits and are not binding on the Internal Revenue Service or the courts.
Accordingly, even if there is no change in applicable law, no assurance can be
provided that such opinion, or the statements made in the following discussion,
will not be challenged by the Internal Revenue Service or will be sustained by a
court if so challenged.
EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR TO DETERMINE THE IMPACT OF HIS OR HER PERSONAL TAX
26
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
SALE OF THE SECURITIES OFFERED UNDER THIS PROSPECTUS. THIS INCLUDES THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
SALE OF THE SECURITIES OFFERED UNDER THIS PROSPECTUS AND THE POTENTIAL CHANGES
IN APPLICABLE TAX LAWS.
Taxation of Us as a REIT
We have elected to be taxed as a REIT under Sections 856 through 859 of the
Code, commencing with our initial taxable year. Our qualification and taxation
as a REIT depends upon our ability to meet on a continuing basis, through actual
annual (or in some cases quarterly) operating results, distribution levels and
diversity of stock ownership, the various qualification tests and organizational
requirements imposed under the Code, as discussed below. We believe that we are
organized and have operated in such a manner as to qualify under the Code for
taxation as a REIT since the effective date of our election, and we intend to
continue to operate in such a manner. No assurances, however, can be given that
we will operate in a manner so as to qualify or remain qualified as a REIT. See
"-- Failure to Qualify" below.
The following is a general summary of the material Code provisions that
govern the federal income tax treatment of a REIT and its stockholders. These
provisions of the Code are highly technical and complex. This summary is
qualified in its entirety by the applicable Code provisions, the regulations
promulgated thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof.
Jaeckle Fleischmann & Mugel, LLP has provided to us an opinion to the
effect that we have been organized and have operated in conformity with the
requirements for qualification and taxation as a REIT, effective for each of our
taxable years ended December 31, 1997 through December 31, 2002, and our current
and proposed organization and method of operation will enable us to continue to
meet the requirements for qualification and taxation as a REIT for taxable year
2003 and thereafter. It must be emphasized that this opinion is conditioned upon
certain assumptions and representations made by us to Jaeckle Fleischmann &
Mugel, LLP as to factual matters relating to our organization and operation and
that of our subsidiaries. In addition, this opinion is based upon our factual
representations concerning our business and properties as described in the
reports filed by us under the federal securities laws.
Qualification and taxation as a REIT depends upon our ability to meet on a
continuing basis, through actual annual (or in some cases quarterly) operating
results, the various requirements under the Code described in this prospectus
with regard to, among other things, the sources of our gross income, the
composition of our assets, our distribution levels, and our diversity of stock
ownership. While we intend to operate so that we continue to qualify as a REIT,
given the highly complex nature of the rules governing REITs, the ongoing
importance of factual determinations, and the possibility of future changes in
our circumstances, no assurance can be given that we satisfy all of the tests
for REIT qualification or will continue to do so.
27
If we qualify for taxation as a REIT, we generally will not be subject to
federal corporate income taxes on net income that we currently distribute to
stockholders. This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that generally results from investment in
a corporation.
Notwithstanding our REIT election, however, we will be subject to federal
income tax in the following circumstances. First, we will be taxed at regular
corporate rates on any undistributed taxable income, including undistributed net
capital gains. Second, under certain circumstances, we may be subject to the
"alternative minimum tax" on any items of tax preference and alternative minimum
tax adjustments. Third, if we have (i) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property acquired
by foreclosure or otherwise on default of a loan secured by the property) that
is held primarily for sale to customers in the ordinary course of business or
(ii) other nonqualifying income from foreclosure property, we will be subject to
tax at the highest corporate rate on such income. Fourth, if we have net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax on prohibited transactions. Fifth, if we should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), and have nonetheless maintained our qualification as a REIT because
certain other requirements have been met, we will be subject to a 100% tax equal
to the gross income which caused us to fail the income tests. Sixth, if we
should fail to distribute during each calendar year at least the sum of (i) 85%
of our REIT ordinary income for such year; (ii) 95% of our REIT capital gain net
income for such year (for this purpose such term includes capital gains which we
elect to retain but which we report as distributed to our stockholders. See "--
Annual Distribution Requirements" below); and (iii) any undistributed taxable
income from prior years, we would be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed. Seventh, 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
property) 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 property's
built-in gain (the excess of the fair market value of such property at the time
of acquisition by us over the adjusted basis of such property at such time),
such gain will be subject to tax at the highest regular corporate rate then
applicable. Eighth, we will be subject to a 100% penalty tax on amounts received
(or on certain expenses deducted by a taxable REIT subsidiary) if arrangements
among us, our tenants and a taxable REIT subsidiary are not comparable to
similar arrangements among unrelated parties.
Requirements for Qualification
The Code defines a REIT as a corporation, trust or association (i) which is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) which would be taxable as a domestic corporation but
for Sections 856 through 859 of the Code; (iv) which is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) of
which not more than 50% in value of the outstanding capital stock is owned,
directly or
28
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year after applying
certain attribution rules; (vii) that makes an election to be treated as a REIT
for the current taxable year or has made an election for a previous taxable year
which has not been revoked; and (viii) which meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (i) through (iv), inclusive, must be met during the
entire taxable year and that condition (v) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year
of less than 12 months. Condition (vi) must be met during the last half of each
taxable year other than the first taxable year for which an election to become a
REIT is made. For purposes of determining stock ownership under condition (vi),
a supplemental unemployment compensation benefits plan, a private foundation or
a portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. However, a trust that is a
qualified trust under Section 401(a) of the Code generally is not considered an
individual, and beneficiaries of a qualified trust are treated as holding shares
of a REIT in proportion to their actuarial interests in the trust for purposes
of condition (vi). Conditions (v) and (vi) do not apply until after the first
taxable year for which an election is made to be taxed as a REIT. We have issued
sufficient common stock with sufficient diversity of ownership to allow us to
satisfy requirements (v) and (vi). In addition, our charter contains
restrictions regarding the transfer of our shares intended to assist us in
continuing to satisfy the share ownership requirements described in (v) and (vi)
above. See "Description of Capital Stock" above. These restrictions, however,
may not ensure that we will be able to satisfy these share ownership
requirements. If we fail to satisfy these share ownership requirements, we will
fail to qualify as a REIT.
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. Our taxable year is the calendar year.
To qualify as a REIT, we cannot have at the end of any taxable year any
undistributed earnings and profits that are attributable to a non-REIT taxable
year. We believe that we have complied with this requirement.
For our tax years beginning prior to January 1, 1998, pursuant to
applicable Treasury Regulations, to be taxed as a REIT, we were required to
maintain certain records and request on an annual basis certain information from
our stockholders designed to disclose the actual ownership of our outstanding
shares. We have complied with such requirements. For our tax years beginning on
or after January 1, 1998, these records and informational requirements are no
longer a condition to REIT qualification. Instead, a monetary penalty will be
imposed for failure to comply with these requirements. If we comply with these
regulatory rules, and we do not know, or exercising reasonable diligence would
not have known, whether we failed to meet requirement (vi) above, we will be
treated as having met the requirement.
Qualified REIT Subsidiaries
If a REIT owns a corporate subsidiary that is a "qualified REIT
subsidiary," the separate existence of that subsidiary will be disregarded for
federal income tax purposes. Generally, a qualified REIT subsidiary is a
corporation, other than a taxable REIT subsidiary, all of the capital stock of
which is owned by the REIT. All assets, liabilities and items of income,
deduction and credit of the qualified REIT
29
subsidiary will be treated as assets, liabilities and items of income, deduction
and credit of the REIT itself. A qualified REIT subsidiary of ours will not be
subject to federal corporate income taxation, although it may be subject to
state and local taxation in some states.
Taxable REIT Subsidiaries
A "taxable REIT subsidiary" is a corporation in which we directly or
indirectly own stock and that elects with us to be treated as a taxable REIT
subsidiary under Section 856(l) of the Code. In addition, if one of our taxable
REIT subsidiaries owns, directly or indirectly, securities representing more
than 35% of the vote or value of a subsidiary corporation, that subsidiary will
automatically be treated as a taxable REIT subsidiary of ours. A taxable REIT
subsidiary is a corporation subject to federal income tax, and state and local
income tax where applicable, as a regular C corporation. As a result, our
earnings derived through a taxable REIT subsidiary are effectively subject to a
corporate level tax notwithstanding our status as a REIT. No more than 20% of
our assets may consist of the securities of one or more taxable REIT
subsidiaries.
Generally, a taxable REIT subsidiary can perform impermissible tenant
services without causing us to receive impermissible tenant services income
under the REIT income tests. However, several provisions regarding the
arrangements between a REIT and its taxable REIT subsidiaries ensure that a
taxable REIT subsidiary will be subject to an appropriate level of federal
income taxation. For example, a taxable REIT subsidiary may be limited in its
ability to deduct interest payments made to us. In addition, we will be
obligated to pay a 100% penalty tax on some payments that we receive or on
certain expenses deducted by the taxable REIT subsidiary if the economic
arrangements among us, our tenants and the taxable REIT subsidiary are not
comparable to similar arrangements among unrelated parties.
We have established a wholly owned taxable REIT subsidiary, EastGroup TRS,
Inc., for the purpose of developing and selling certain real property located in
Houston, Texas and we may establish other taxable REIT subsidiaries in the
future.
Income Tests
In order for us to maintain qualification as a REIT, two percentage tests
relating to the source of 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 be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of our gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments described above, dividends,
interest and gain from the sale or disposition of stock or securities, some
payments under hedging instruments, or from any combination of the foregoing.
Rents received by us will qualify as "rents from real property" in
satisfying the above gross income tests only if several conditions are met.
First, the amount of rent must not be based in whole or in
30
part on the income or profits of any person. However, amounts received or
accrued generally will not be excluded from "rents from real property" solely by
reason of being based on a fixed percentage or percentages of receipts or sales.
Second, rents received from a tenant will not qualify as "rents from real
property" if we, or a direct or indirect owner of 10% or more of our stock,
actually or constructively owns 10% or more of such tenant. We may, however,
lease our properties to a taxable REIT subsidiary and rents received from that
subsidiary will not be disqualified from being "rents from real property" by
reason of our ownership interest in the subsidiary if at least 90% of the
property in question is leased to unrelated tenants and the rent paid by the
taxable REIT subsidiary is substantially comparable to the rent paid by the
unrelated tenants for comparable space.
Third, if rent attributable to personal property that is leased in
connection with a lease of real property is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to such personal
property will not qualify as "rents from real property." Under prior law, this
15% test was based on the relative adjusted tax basis of both the real and
personal property. For taxable years beginning after December 31, 2000, the test
is based on the relative fair market value of the real and personal property.
Generally, for rents to qualify as "rents from real property" for the
purposes of the gross income tests, we are only allowed to provide services that
are both "usually or customarily rendered" in connection with the rental of real
property for occupancy only and not otherwise considered "rendered to the
occupant." Income received from any other service will be treated as
"impermissible tenant service income" unless the service is provided through an
independent contractor that bears the expenses of providing the services and
from whom we derive no revenue or through a taxable REIT subsidiary, subject to
specified limitations. The amount of impermissible tenant service income we
receive is deemed to be the greater of the amount actually received by us or
150% of our direct cost of providing the service. If the impermissible tenant
service income exceeds 1% of our total income from a property, then all of the
income from that property will fail to qualify as rents from real property. If
the total amount of impermissible tenant service income from a property does not
exceed 1% of our total income from that property, the income will not cause the
rent paid by tenants of that property to fail to qualify as rents from real
property, but the impermissible tenant service income itself will not qualify as
rents from real property.
Our investment in commercial and industrial properties generally gives rise
to rental income that is qualifying income for purposes of the 75% and 95% gross
income tests. We do not receive any rent that is based on the income or profits
of any person. In addition, we do not own, directly or indirectly, 10% or more
of any tenant (other than, perhaps, a tenant that is a taxable REIT subsidiary
where other requirements are satisfied). Furthermore, we believe that any
personal property rented in connection with our facilities is well within the
15% restriction. Moreover, we do not provide services, other than within the 1%
de minimis exception described above, to our tenants that are not customarily
furnished or rendered in connection with the rental of property, other than
through an independent contractor or a taxable REIT subsidiary. Finally, we
anticipate that income on our other investments will not result in our failing
the 75% or 95% gross income test for any year.
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If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for such year if we are
entitled to relief under certain provisions of the Code. These relief provisions
generally will be available if our failure to meet such tests was due to
reasonable cause and not due to willful neglect, if we attach a schedule of the
sources of our income to our federal income tax return for such years, and if
any incorrect information on the schedules was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances we
would be entitled to the benefit of these relief provisions. As discussed above
in "-- Taxation of Us as a REIT," even if these relief provisions were to apply,
a tax would be imposed with respect to the excess net income.
Asset Tests
At the close of each quarter of our taxable year, we must satisfy six tests
relating to the nature of our assets.
1. At least 75% of the value of our total assets must be represented by
"real estate assets," cash, cash items and government securities. Our real
estate assets include, for this purpose, our allocable share of real estate
assets held by the partnerships in which we own an interest, and the
noncorporate subsidiaries of these partnerships, as well as stock or debt
instruments held for less than one year purchased with the proceeds of an
offering of our shares or long-term debt.
2. Not more than 25% of our total assets may be represented by securities,
other than those in the 75% asset class.
3. Except for equity investments in REITs and equity and debt investments
in qualified REIT subsidiaries and taxable REIT subsidiaries, the value of any
one issuer's securities owned by us may not exceed 5% of the value of our total
assets.
4. Except for equity investments in REITs and equity and debt investments
in qualified REIT subsidiaries and taxable REIT subsidiaries, we may not own
more than 10% of any one issuer's outstanding voting securities.
5. Except for equity investments in REITs and equity and debt investments
in qualified REIT subsidiaries and taxable REIT subsidiaries, we may not own
more than 10% of the total value of the outstanding securities of any one
issuer, other than securities that qualify as "straight debt" under the Code.
6. Not more than 20% of our total assets may be represented by the
securities of one or more taxable REIT subsidiaries.
For purposes of these asset tests, any shares of qualified REIT
subsidiaries are not taken into account, and any assets owned by our qualified
REIT subsidiaries are treated as owned directly by us.
32
Securities, for purposes of the assets tests, may include debt we hold.
However, debt we hold in an issuer will not be taken into account for purposes
of the 10% value test if the debt securities meet the "straight debt" safe
harbor and either (1) the issuer is an individual, (2) the only securities of
the issuer that we hold are straight debt, or (3) if the issuer is a
partnership, we hold at least a 20% profits interest in the partnership. Debt
will meet the "straight debt" safe harbor if the debt is a written unconditional
promise to pay on demand or on a specified date a sum certain in money (1) which
is not convertible, directly or indirectly, into stock and (2) the interest rate
(or the interest payment dates) of which is not contingent on profits, the
borrower's discretion or similar factors.
With respect to each issuer in which we currently own an interest that does
not qualify as a REIT, a qualified REIT subsidiary or a taxable REIT subsidiary,
we believe that our pro rata share of the value of the securities, including
unsecured debt, of any such issuer does not exceed 5% of the total value of our
assets and that we comply with the 10% voting securities limitation and 10%
value limitation (taking into account the "straight debt" exceptions with
respect to certain issuers). In addition, we believe that our securities of
taxable REIT subsidiaries do not exceed 20% of the value of our total assets.
With respect to our compliance with each of these asset tests, however, we
cannot provide any assurance that the Internal Revenue Service might not
disagree with our determination.
After initially meeting the asset tests after the close of any quarter, we
will not lose our status as a REIT if we fail to satisfy the 25%, 20% or 5%
asset test or the 10% value limitation at the end of a later quarter solely by
reason of changes in the relative values of our assets. If the failure to
satisfy the 25%, 20% or 5% asset test or the 10% value limitation results from
an increase in the value of our assets after the acquisition of securities or
other property during a quarter, the failure can be cured by a disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
We have maintained and intend to continue to maintain adequate records of the
value of our assets to ensure compliance with the asset tests and to take any
available actions within 30 days after the close of any quarter as may be
required to cure any noncompliance with the 25%, 20% or 5% asset test or the 10%
value limitation. We cannot ensure that these steps always will be successful.
If we were to fail to cure the noncompliance with the asset tests within this 30
day period, we could fail to qualify as a REIT.
Annual Distribution Requirements
We, in order to qualify as a REIT, are required to distribute dividends
(other than capital gain dividends) to our stockholders in an amount at least
equal to (i) the sum of (a) 90% of our "REIT taxable income" (computed without
regard to the dividends paid deduction and our net capital gain) and (b) 90% of
the net income (after tax), if any, from foreclosure property, minus (ii) the
sum of certain items of noncash income. Such distributions generally must be
paid in the taxable year to which they relate. Dividends may be paid in the
following year in two circumstances. First, dividends may be declared in the
following year if the dividends are declared before we timely file our tax
return for the year and if made before the first regular dividend payment made
after such declaration. Second, if we declare a dividend in October, November or
December of any year with a record date in one of these months and pay the
dividend on or before January 31 of the following year, we will be treated as
having paid the dividend on December 31 of the year in which the dividend was
declared. To the extent that we do not distribute all of
33
our net capital gain or distribute at least 90%, but less than 100%, of our
"REIT taxable income," as adjusted, we will be subject to tax on the
nondistributed amount at regular capital gains and ordinary corporate tax rates.
Furthermore, if we should fail to distribute during each calendar year at least
the sum of (i) 85% of our REIT ordinary income for such year; (ii) 95% of our
REIT capital gain net income for such year; and (iii) 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.
We may elect to retain and pay tax on our net long-term capital gains and
require our stockholders to include their proportionate share of such
undistributed net capital gains in their income. If we make such election, our
stockholders would receive a tax credit attributable to their share of the
capital gains tax paid by us, and would receive an increase in the basis of
their shares in us in an amount equal to the stockholder's share of the
undistributed net long-term capital gain reduced by the amount of the credit.
Further, any undistributed net long-term capital gains that are included in the
income of our stockholders pursuant to this rule will be treated as distributed
for purposes of the 4% excise tax.
We have made and intend to continue to make timely distributions sufficient
to satisfy the annual distribution requirements. It is possible, however, that
we, from time to time, may not have sufficient cash or liquid assets to meet the
distribution requirements due to timing differences between the actual receipt
of income and actual payment of deductible expenses and the inclusion of such
income and deduction of such expenses in arriving at our taxable income, or if
the amount of nondeductible expenses such as principal amortization or capital
expenditures exceeds the amount of noncash deductions. In the event that such
timing differences occur, in order to meet the distribution requirements, we may
arrange for short-term, or possibly long-term, borrowing to permit the payment
of required dividends. If the amount of nondeductible expenses exceeds noncash
deductions, we may refinance our indebtedness to reduce principal payments and
may borrow funds for capital expenditures.
Under certain circumstances, we may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year that may be included in our deduction for dividends
paid for the earlier year. Thus, we may avoid being taxed on amounts distributed
as deficiency dividends; however, we will be required to pay interest to the
Internal Revenue Service based upon the amount of any deduction taken for
deficiency dividends.
Failure to Qualify
If we fail to qualify for taxation as a REIT in any taxable year and no
relief provisions apply, we will be subject to tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates.
Distributions to stockholders in any year in which we fail to qualify will not
be deductible by us, nor will such distributions be required to be made. In such
event, to the extent of our current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations in the Code, corporate distributees may be eligible for
the dividends received deduction. Unless entitled to relief under specific
statutory provisions, we will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances we would be entitled to
such statutory relief.
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Tax Aspects of Our Investments in Partnerships
General. Many of our investments are held through subsidiary partnerships
and limited liability companies. This structure may involve special tax
considerations. These tax considerations include the following:
1. the status of each subsidiary partnership and limited liability company
as a partnership (as opposed to an association taxable as a corporation) for
income tax purposes; and
2. the taking of actions by any of the subsidiary partnerships or limited
liability companies that could adversely affect our qualification as a REIT.
We believe that each of the subsidiary partnerships and each of the limited
liability companies that are not disregarded entities for federal income tax
purposes will be treated for tax purposes as partnerships (and not as
associations taxable as corporations). If any of the partnerships were to be
treated as a corporation, it would be subject to an entity level tax on its
income. In such a situation, the character of our assets and items of gross
income would change, which could preclude us from satisfying the asset tests and
possibly the income tests, and in turn prevent us from qualifying as a REIT. In
addition, if any of the partnerships were treated as a corporation, it is likely
that we would hold more than 10% of the voting power or value of the entity and
would fail to qualify as a REIT. See "-- Asset Tests."
A REIT that is a partner in a partnership will be deemed to own its
proportionate share of the assets of the partnership and will be deemed to earn
its proportionate share of the partnership's income. In addition, the assets and
gross income of the partnership retain the same character in the hands of the
REIT for purposes of the gross income and asset tests applicable to REITs. Thus,
our proportionate share of the assets and items of income of each subsidiary
partnership and limited liability company that is treated as a partnership for
federal income tax purposes is treated as our assets and items of income for
purposes of applying the asset and income tests. We have sufficient control over
all of the subsidiaries that are treated as partnerships for federal income tax
purposes to protect our REIT status and intend to operate them in a manner that
is consistent with the requirements for our qualification as a REIT.
Taxation of Stockholders
Taxation of Taxable U.S. Stockholders. As used in the remainder of this
discussion, the term "U.S. Stockholder" means a beneficial owner of equity stock
that is for United States federal income tax purposes:
1. a citizen or resident, as defined in Section 7701(b) of the Code, of the
United States;
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2. a corporation or partnership, or other entity treated as a corporation
or partnership for federal income tax purposes, created or organized in or under
the laws of the United States or any state or the District of Columbia;
3. an estate the income of which is subject to United States federal income
taxation regardless of its source; or
4. in general, a trust subject to the primary supervision of a United
States court and the control of one or more United States persons.
Generally, in the case of a partnership that holds our stock, any partner
that would be a U.S. Stockholder if it held the stock directly is also a U.S.
Stockholder. As long as we qualify as a REIT, distributions made to our taxable
U.S. Stockholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends or retained capital gains) will be taken
into account by them as ordinary income, and corporate stockholders will not be
eligible for the dividends received deduction as to such amounts. Distributions
in excess of current and accumulated earnings and profits will not be taxable to
a stockholder to the extent that they do not exceed the adjusted basis of such
stockholder's stock, but rather will reduce the adjusted basis of such shares as
a return of capital. To the extent that such distributions exceed the adjusted
basis of a stockholder's stock, they will be included in income as long-term
capital gain (or short-term capital gain if the shares have been held for one
year or less), assuming the shares are a capital asset in the hands of the
stockholder. In addition, any dividend declared by us in October, November or
December of any year payable to a stockholder of record on a specific date in
any such month shall be treated as both paid by us and received by the
stockholder on December 31 of such year, provided that the dividend is actually
paid by us during January of the following calendar year. For purposes of
determining what portion of a distribution is attributable to current or
accumulated earnings and profits, earnings and profits will first be allocated
to distributions made to holders of the shares of preferred stock. Stockholders
may not include in their individual income tax returns any net operating losses
or capital losses of ours.
In general, any gain or loss realized upon a taxable disposition of shares
by a stockholder who is not a dealer in securities will be treated as a
long-term capital gain or loss if the shares have been held for more than one
year, otherwise as a short-term capital gain or loss. However, any loss upon a
sale or exchange of stock by a stockholder who has held such shares for six
months or less (after applying certain holding period rules) will be treated as
long-term capital loss to the extent of distributions from us required to be
treated by such stockholder as long-term capital gain.
Distributions that we properly designate as capital gain dividends will be
taxable to stockholders as gains (to the extent that they do not exceed our
actual net capital gain for the taxable year) from the sale or disposition of a
capital asset held for greater than one year. If we designate any portion of a
dividend as a capital gain dividend, a U.S. Stockholder will receive an Internal
Revenue Service Form 1099-DIV indicating the amount that will be taxable to the
stockholder as capital gain. However, stockholders that are corporations may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. A portion of capital gain dividends received by noncorporate taxpayers
may be subject to
36
tax at a 25% rate to the extent attributable to certain gains realized on the
sale of real property. In addition, noncorporate taxpayers are generally taxed
at a maximum rate of 15% on net long-term capital gain (generally, the excess of
net long-term capital gain over net short-term capital loss) attributable to
gains realized on the sale of property held for greater than one year.
Distributions we make and gain arising from the sale or exchange by a
stockholder of shares of our stock will not be treated as passive activity
income, and, as a result, stockholders generally will not be able to apply any
"passive losses" against such income or gain. Distributions we make (to the
extent they do not constitute a return of capital) generally will be treated as
investment income for purposes of computing the investment interest limitation.
Gain arising from the sale or other disposition of our stock (or distributions
treated as such) will not be treated as investment income under certain
circumstances.
Upon any taxable sale or other disposition of our stock, a U.S. Stockholder
will recognize gain or loss for federal income tax purposes on the disposition
of our stock in an amount equal to the difference between
o the amount of cash and the fair market value of any property received on such
disposition; and
o the U.S. Stockholder's adjusted basis in such stock for tax purposes.
Gain or loss will be capital gain or loss if the stock has been held by the
U.S. Stockholder as a capital asset. The applicable tax rate will depend on the
stockholder's holding period in the asset (generally, if an asset has been held
for more than one year it will produce long-term capital gain) and the
stockholder's tax bracket. A U.S. Stockholder who is an individual or an estate
or trust and who has long-term capital gain or loss will be subject to a maximum
capital gain rate of 15%. U.S. Stockholders that acquire, or are deemed to
acquire, stock after December 31, 2000 and who hold the stock for more than five
years and certain low income taxpayers may be eligible for a lower long-term
capital gains rate. However, to the extent that the capital gain realized by a
noncorporate stockholder on the sale of REIT stock corresponds to the REIT's
"unrecaptured Section 1250 gain," such gain would be subject to tax at a rate of
25%. Stockholders are advised to consult with their own tax advisors with
respect to their capital gain tax liability.
On May 28, 2003, the President signed into law the Jobs and Growth Tax
Relief Reconciliation Act of 2003. This new tax law will reduce the maximum
individual tax rate for long-term capital gains generally from 20% to 15% (for
sales occurring after May 6, 2003 through December 31, 2008) and for dividends
generally from 38.6% to 15% (for tax years from 2003 through 2008). Without
future congressional action, the maximum tax rate on long-term capital gains
will return to 20% in 2009, and the maximum rate on dividends will move to 35%
in 2009 and 39.6% in 2011. Because we are not generally subject to federal
income tax on the portion of our REIT taxable income or capital gains
distributed to our stockholders, our dividends will generally not be eligible
for the new 15% tax rate on dividends. As a result, our ordinary REIT dividends
will continue to be taxed at the higher tax rates
37
applicable to ordinary income. However, the 15% tax rate for long-term capital
gains and dividends will generally apply to:
1. your long-term capital gains, if any, recognized on the disposition of
our shares;
2. our distributions designated as long-term capital gain dividends (except
to the extent attributable to "unrecaptured Section 1250 gain," in which case
such distributions would continue to be subject to a 25% tax rate);
3. our dividends attributable to dividends received by us from non-REIT
corporations, such as taxable REIT subsidiaries; and
4. our dividends to the extent attributable to income upon which we have
paid corporate income tax (e.g., to the extent that we distribute less than 100%
of our taxable income).
Economic Accrual of Redemption Premium on Preferred Stock. For federal
income tax purposes, if a corporation issues preferred stock that may be
redeemed at a price that is more than a de minimis amount higher than its issue
price, the difference is treated as a "redemption premium" that is taxable to
the holder on an annual economic accrual basis. If a U.S. Stockholder recognizes
income as a result of redemption premium on the preferred stock, the holder's
tax basis in the preferred stock will increase by the amount included in the
holder's gross income.
Taxation of Tax-Exempt Stockholders. Provided that a tax-exempt stockholder
has not held its stock as "debt financed property" within the meaning of the
Code, the dividend income from us will not be unrelated business taxable income,
referred to as UBTI, to a tax-exempt stockholder. Similarly, income from the
sale of stock will not constitute UBTI unless the tax-exempt stockholder has
held its stock as debt financed property within the meaning of the Code or has
used the stock in a trade or business. However, for a tax-exempt stockholder
that is a social club, voluntary employee benefit association, supplemental
unemployment benefit trust, or qualified group legal services plan exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code, respectively, or a single parent title-holding corporation exempt
under Section 501(c)(2) of the Code the income of which is payable to any of the
aforementioned tax-exempt organizations, income from an investment in us will
constitute UBTI unless the organization properly sets aside or reserves such
amounts for purposes specified in the Code. These tax-exempt stockholders should
consult their own tax advisors concerning these "set aside" and reserve
requirements.
A "qualified trust" (defined to be any trust described in Section 401(a) of
the Code and exempt from tax under Section 501(a) of the Code) that holds more
than 10% of the value of the shares of a REIT may be required, under certain
circumstances, to treat a portion of distributions from the REIT as UBTI. This
requirement will apply for a taxable year only if (i) the REIT satisfies the
requirement that not more than 50% of the value of its shares be held by five or
fewer individuals (the "five or fewer requirement") only by relying on a special
"look-through" rule under which shares held by qualified trust stockholders are
treated as held by the beneficiaries of such trusts in proportion to their
actuarial interests
38
therein; and (ii) the REIT is "predominantly held" by qualified trusts. A REIT
is "predominantly held" by qualified trusts if either (i) a single qualified
trust holds more than 25% of the value of the REIT shares, or (ii) one or more
qualified trusts, each owning more than 10% of the value of the REIT shares,
hold in the aggregate more than 50% of the value of the REIT shares. If the
foregoing requirements are met, the percentage of any REIT dividend treated as
UBTI to a qualified trust that owns more than 10% of the value of the REIT
shares is equal to the ratio of (i) the UBTI earned by the REIT (computed as if
the REIT were a qualified trust and therefore subject to tax on its UBTI) to
(ii) the total gross income (less certain associated expenses) of the REIT for
the year in which the dividends are paid. A de minimis exception applies where
the ratio set forth in the preceding sentence is less than 5% for any year.
The provisions requiring qualified trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the five or
fewer requirement without relying on the "look-through" rule. The restrictions
on ownership of stock in our charter should prevent application of the foregoing
provisions to qualified trusts purchasing our stock, absent a waiver of the
restrictions by the board of directors.
Taxation of Non-U.S. Stockholders. The rules governing U.S. federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a limited summary of such rules. The discussion does not consider any
specific facts or circumstances that may apply to a particular Non-U.S.
Stockholder. Prospective Non-U.S. Stockholders should consult with their own tax
advisors to determine the impact of U.S. federal, state and local income tax
laws with regard to an investment in our common stock, including any reporting
requirements.
Distributions that are not attributable to gain from sales or exchanges by
us of U.S. real property interests and not designated by us as capital gain
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 such rate. However, if income from the investment
in our stock is treated as effectively connected with the Non-U.S. Stockholder's
conduct of a U.S. trade or business (or, if a treaty applies, attributable to a
U.S. permanent establishment of the Non-U.S. Stockholder), the Non-U.S.
Stockholder generally will be subject to a tax at graduated rates in the same
manner as U.S. Stockholders are taxed with respect to such dividends (and may
also be subject to a branch profits tax of up to 30% if the stockholder is a
foreign corporation). We expect to withhold U.S. income tax at the rate of 30%
on the gross amount of any dividends paid to a Non-U.S. Stockholder that are not
designated as capital gain dividends, unless (i) a lower treaty rate applies and
the Non-U.S. Stockholder files an IRS Form W-8BEN evidencing eligibility for
that reduced rate with us or (ii) the Non-U.S. Stockholder files an IRS Form
W-8ECI with us claiming that the distribution is income treated as effectively
connected to a U.S. trade or business.
Distributions in excess of our current and accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's stock, but rather will reduce the adjusted
basis of such shares. To the extent that such distributions exceed the
39
adjusted basis of a Non-U.S. Stockholder's shares, they will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on any
gain from the sale or disposition of his or her stock as described below. We may
be required to withhold U.S. federal income tax at the rate of at least 10% on
distributions to Non-U.S. Stockholders that are not paid out of current or
accumulated earnings and profits unless the Non-U.S. Stockholders provide us
with withholding certificates evidencing their exemption from withholding tax.
If it cannot be determined at the time that such a distribution is made, whether
or not such distribution will be in excess of current and accumulated earnings
and profits, the distribution will be subject to withholding at the rate
applicable to dividends. However, the Non-U.S. Stockholder may seek a refund of
such amounts from the Internal Revenue Service if it is subsequently determined
that such distribution was, in fact, in excess of our current and accumulated
earnings and profits.
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 Non-U.S. Stockholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
these distributions are taxed to a Non-U.S. Stockholder as if such gain were
effectively connected with a U.S. business. Thus, Non-U.S. Stockholders will be
taxed on such distributions at the normal capital gain rates applicable to U.S.
Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a corporate Non-U.S. Stockholder not entitled to treaty relief or
exemption. We are required by applicable Treasury Regulations to withhold 35% of
any distribution that could be designated by us as a capital gain dividend. This
amount is creditable against the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon the sale or exchange of our
stock generally would not be subject to United States taxation unless:
o the investment in our stock is effectively connected with the Non-U.S.
Stockholder's U.S. trade or business (or, if a treaty applies, attributable to a U.S.
permanent establishment of the Non-U.S. Stockholder), in which case the Non-
U.S. Stockholder will be subject to the same treatment as domestic stockholders
with respect to any gain (and in the case of a corporate Non-U.S. Stockholder,
may also be subject to the branch profits tax discussed above);
o the Non-U.S. Stockholder is a non-resident alien individual who is present in the
United States for 183 days or more during the taxable year and certain other
conditions are present, in which case the non-resident alien individual will be
subject to a 30% tax on the individual's net capital gains for the taxable year; or
o our stock constitutes a United States real property interest within the meaning of
FIRPTA and certain other conditions are present, as described below.
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Our stock will not constitute a United States real property interest if we
are a domestically-controlled REIT. We will be a domestically-controlled REIT
if, at all times during a specified testing period, less than 50% in value of
our stock is held directly or indirectly by Non-U.S. Stockholders.
We believe that, currently, we are a domestically controlled REIT and,
therefore, that the sale of our stock would not be subject to taxation under
FIRPTA. Because our stock is publicly traded, however, we cannot guarantee that
we are or will continue to be a domestically-controlled REIT.
Even if we do not qualify as a domestically-controlled REIT at the time a
Non-U.S. Stockholder sells our stock, gain arising from the sale still would not
be subject to FIRPTA tax if:
o the class or series of shares sold is considered regularly traded under applicable
Treasury Regulations on an established securities market, such as the NYSE; and
o the selling Non-U.S. Stockholder owned, actually or constructively, 5% or less in
value of the outstanding class or series of stock being sold throughout the five-
year period ending on the date of the sale or exchange.
If gain on the sale or exchange of our stock were subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to regular U.S. federal income
tax with respect to any gain in the same manner as a taxable U.S. Stockholder,
subject to any applicable alternative minimum tax and special alternative
minimum tax in the case of nonresident alien individuals.
State and Local Taxes. We and our stockholders may be subject to state or
local taxation in various state or local jurisdictions, including those in which
we or they transact business or reside (although U.S. Stockholders who are
individuals generally should not be required to file state income tax returns
outside of their state of residence with respect to our operations and
distributions). The state and local tax treatment of us and our stockholders may
not conform to the federal income tax consequences discussed above.
Consequently, prospective stockholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in the common
stock.
Backup Withholding Tax and Information Reporting
U.S. Stockholders. In general, information reporting requirements will
apply to certain U.S. Stockholders with regard to payments of dividends on our
stock and payments of the proceeds of the sale of our stock, unless an exception
applies.
The payor will be required to withhold tax on such payments at the rate of
28% if (i) the payee fails to furnish a taxpayer identification number, or TIN,
to the payor or to establish an exemption from backup withholding, or (ii) the
Internal Revenue Service notifies the payor that the TIN furnished by the payor
is incorrect.
41
In addition, a payor of dividends on our stock will be required to withhold
tax at a rate of 28% if (i) there has been a notified payee under-reporting with
respect to interest, dividends or original issue discount described in Section
3406(c) of the Code, or (ii) there has been a failure of the payee to certify
under the penalty of perjury that the payee is not subject to backup withholding
under the Code.
Some holders, including corporations, may be exempt from backup
withholding. Any amounts withheld under the backup withholding rules from a
payment to a holder will be allowed as a credit against the holder's U.S.
federal income tax and may entitle the holder to a refund, provided that the
required information is furnished to the Internal Revenue Service.
Non-U.S. Stockholders. Generally, information reporting will apply to
payments of dividends on our stock, interest, and backup withholding will also
apply as described above for a U.S. Stockholder, unless the payee certifies that
it is not a U.S. person or otherwise establishes an exemption.
The payment of the proceeds from the disposition of our stock to or through
the U.S. office of a U.S. or foreign broker will be subject to information
reporting and backup withholding as described above for U.S. Stockholders unless
the Non-U.S. Stockholder satisfies the requirements necessary to be an exempt
Non-U.S. Stockholder or otherwise qualifies for an exemption. The proceeds of a
disposition by a Non-U.S. Stockholder of our stock to or through a foreign
office of a broker generally will not be subject to information reporting or
backup withholding. However, if the broker is a U.S. person, a controlled
foreign corporation for U.S. tax purposes, a foreign person 50% or more of whose
gross income from all sources for specified periods is from activities that are
effectively connected with a U.S. trade or business, a foreign partnership if
partners who hold more than 50% of the interests in the partnership are U.S.
persons, or a foreign partnership that is engaged in the conduct of a trade or
business in the U.S., then information reporting generally will apply as though
the payment was made through a U.S. office of a U.S. or foreign broker.
Applicable Treasury Regulations provide presumptions regarding the status
of holders when payments to the holders cannot be reliably associated with
appropriate documentation provided to the payor. Under these Treasury
Regulations, some holders are required to provide new certifications with
respect to payments made after December 31, 2000. Because the application of
these Treasury Regulations varies depending on the stockholder's particular
circumstances, you are advised to consult your tax advisor regarding the
information reporting requirements applicable to you.
Sunset of Tax Provisions
Several of the tax considerations described herein are subject to a sunset
provision. The sunset provision generally provides that, for taxable years
beginning after December 31, 2008, certain provisions that are currently in the
Code will revert back to a prior version of those provisions. These provisions
include provisions related to qualified dividend income, the application of the
15% capital gains rate to qualified dividend income and other tax rates
described herein. The impact of this reversion is not discussed herein.
Consequently, prospective security holders should consult their own tax advisors
regarding the effect of sunset provisions on an investment in our stock.
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PLAN OF DISTRIBUTION
We may sell securities to one or more underwriters for public offer and
sale by them or may sell securities offered hereby to the public directly or
through agents. Any underwriter or agent involved in the offer and sale of the
securities will be named in the applicable prospectus supplement. In addition,
the terms of any agreement, arrangement or understanding entered into with any
brokers or dealers after the effective date of the registration statement, of
which this prospectus is a part, will be described in the applicable prospectus
supplement. All participating underwriters, dealers and agents will be
registered broker-dealers or associated persons of registered broker-dealers.
The distribution of the securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, related
to the prevailing market prices at the time of sale or at negotiated prices (any
of which may represent a discount from the prevailing market prices). We also
may, from time to time, authorize underwriters acting as our agents to offer and
sell the securities upon the terms and conditions as are set forth in the
applicable prospectus supplement. In connection with the sale of securities,
underwriters may be deemed to have received compensation from us in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of securities for whom they may act as agent. Underwriters may sell
securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of securities and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable prospectus supplement. Underwriters, dealers and agents
participating in the distribution of the securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the securities may be deemed to be underwriting
discounts and commissions, under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with us, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act.
Some of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for us and our subsidiaries in the
ordinary course of business.
The maximum commission or discount to be received by any NASD member or
independent broker-dealer in connection with any offering of securities under
this prospectus will not exceed 8.0% of the gross proceeds of the offering.
In connection with the offering, the underwriters may purchase and sell our
securities in the open market. These transactions may include short sales,
syndicate covering transactions and stabilizing transactions. Short sales
involve syndicate sales of our securities in excess of the number of shares to
be purchased by the underwriters in the offering, which creates a syndicate
short position. The underwriters
43
must close out any short position by purchasing our securities in the open
market. A short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who purchase in
the offering. Stabilizing transactions consist of bids for, or purchases of,
shares in the open market while the offering is in progress. The underwriters
also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a
selling concession from a syndicate member when the underwriters repurchase
shares originally sold by that syndicate member in order to cover syndicate
short positions or to make stabilizing purchases. Any of these activities may
have the effect of preventing or retarding a decline in the market price of our
securities. They may also cause the price of our securities to be higher than
the price that would otherwise exist in the open market in the absence of these
transactions. The underwriters may conduct these transactions on the New York
Stock Exchange or in the over-the-counter market, or otherwise. If the
underwriters commence any of these transactions, they may discontinue them at
any time.
LEGAL MATTERS
Certain legal matters, including the validity of the securities offered by
this prospectus, will be passed upon for us by Jaeckle Fleischmann & Mugel, LLP,
Buffalo, New York.
EXPERTS
The consolidated financial statements and schedules of EastGroup
Properties, Inc. as of December 31, 2002 and 2001, and for each of the years in
the three-year period ended December 31, 2002, have been incorporated by
reference herein in reliance upon the reports of KPMG LLP, independent
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing. The audit report covering the
December 31, 2002 consolidated financial statements refers to a change in the
methods of accounting for the impairment or disposal of long-lived assets and
stock-based compensation.
44
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered are set forth below (all amounts
except the registration fee are estimated):
Registration fee.........................................................$20,225
Accountants' fees and expenses............................................$5,000
Legal fees and expenses..................................................$20,000
Printing fees............................................................$15,000
Miscellaneous.............................................................$4,775
Total............................................................$65,000
All expenses in connection with the issuance and distribution of the
securities being offered shall be borne by EastGroup Properties, Inc.
("EastGroup").
Item 15.Indemnification of Directors and Officers.
EastGroup's Articles of Incorporation, as amended ("Charter"), contain a
provision authorizing EastGroup to indemnify, to the fullest extent permitted by
Maryland law, its directors and officers, whether serving EastGroup or, at its
request, any other entity. Additionally, the Charter provides that to the
fullest extent permitted by Maryland law, no director or officer shall be liable
to EastGroup or its stockholders for money damages.
Section 2-418 of the Maryland General Corporation Law (the "Indemnification
Statute"), the law of the state in which EastGroup is organized, empowers a
corporation, subject to certain limitations, to indemnify its officers and
directors against expenses, including attorneys' fees, judgments, penalties,
fines, settlements and expenses, actually and reasonably incurred by them in any
suit or proceeding to which they are parties. Indemnification, however, is not
permitted if the act or omission of the officer or director was material to the
matter giving rise to the proceeding and was committed in bad faith, or was the
result of active and deliberate dishonesty. Additionally, indemnification is not
permitted if the officer or director received an improper personal benefit or,
with respect to a criminal action or proceeding, the officer or director had no
reasonable cause to believe his or her conduct was unlawful. Finally,
indemnification is not permitted if a director or officer is found liable in a
proceeding brought by or in the right of the corporation.
EastGroup has entered into an indemnification agreement (the
"Indemnification Agreement") with each of its directors and officers, and the
Board of Directors has authorized EastGroup to enter into an Indemnification
Agreement with each of the future directors and officers of EastGroup. The
Indemnification
II-1
Statute permits a corporation to indemnify its directors and officers; however,
it also authorizes other arrangements for indemnification of directors and
officers, including insurance. The Indemnification Agreement is intended to
provide indemnification to the maximum extent allowed by the laws of the State
of Maryland.
The Indemnification Agreement provides that EastGroup shall indemnify a
director or officer who is a party to the Agreement (the "Indemnitee") if he or
she was or is a party to or otherwise involved in any proceeding by reason of
the fact that he or she was or is a director or officer of EastGroup, or was or
is serving at its request in a certain capacity of another entity, against
losses incurred in connection with the defense or settlement of such proceeding.
The provisions in the Indemnification Agreement are similar to those provided in
the Indemnification Statute. According to the Indemnification Agreement,
however, an Indemnitee who pays any amount in settlement of a proceeding without
EastGroup's written consent is not entitled to indemnification.
Item 16. Exhibits.
1* Form of underwriting agreement.
3.1 Articles of Incorporation (incorporated by reference to Appendix B to the Company's
Proxy Statement dated April 24, 1997).
3.2 Bylaws of the Company (incorporated by reference to Appendix C to the Company's
Proxy Statement dated April 24, 1997).
3.3 Articles Supplementary of the Company relating to the 9.00% Series A Cumulative
Redeemable Preferred Stock of the Company (incorporated by reference to the
Company's Form 8-A filed June 15, 1998).
3.4 Articles Supplementary of the Company relating to the Series B Cumulative
Convertible Preferred Stock (incorporated by reference to the Company's Form 8-K
filed on October 1, 1998).
3.5 Articles Supplementary of the Company relating to the Series C Preferred Stock
(incorporated by reference to the Company's Form 8-A filed December 9, 1998).
3.6 Certificate of Correction to Articles Supplementary with respect to Series B
Cumulative Convertible Preferred Stock (incorporated by reference to the Company's
Form 10-K for the year ended December 31, 1998).
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3.7 Articles Supplementary of the Company relating to the 7.95% Series D Cumulative
Redeemable Preferred Stock (incorporated by reference to the Company's Form 8-A
filed June 6, 2003).
4* Form of Warrant Agreement.
5 Opinion of Jaeckle Fleischmann & Mugel, LLP regarding legality of securities being
registered (filed herewith).
8 Opinion of Jaeckle Fleischmann & Mugel, LLP regarding certain tax matters (filed
herewith).
12 Statement of ratio of earnings to fixed charges (filed herewith).
23.1 Consent of independent public accountants (filed herewith).
23.2 Consent of Jaeckle Fleischmann & Mugel, LLP (included in Exhibits 5 and 8).
24 Powers of Attorney (included on signature page).
----------------
* To be filed, if applicable, subsequent to the effectiveness of this
registration statement by an amendment to the registration statement or
incorporated by reference pursuant to a Current Report on Form 8-K in
connection with the offering of securities.
Item 17.Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, 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, as amended (the "Securities Act");
(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 volume of securities
offered (if the total dollar
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value of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 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 paragraphs (a)(1)(i) and (a)(1)(ii) 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
Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, 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.
(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.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act 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 in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities 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 the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its 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 Securities Act and will be governed by the final
adjudication of such issue.
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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 Jackson, State of Mississippi on October 17, 2003.
EASTGROUP PROPERTIES, INC.
By: /s/ David H. Hoster II
David H. Hoster II
President and Chief Executive Officer
POWERS OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints each of David H. Hoster II or N. Keith McKey his
true and lawful attorney-in-fact and agent, each with full power of substitution
and revocation, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each attorney-in-fact and agent, full power and
authority to do and perform each such and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
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Pursuant to the requirements of the Securities Act of 1933, this
registration statement and the foregoing Powers of Attorney have been signed by
the following persons in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Leland R. Speed Chairman of the Board October 16, 2003
Leland R. Speed
/s/ David H. Hoster II Chief Executive Officer, President and October 16, 2003
David H. Hoster II Director (Principal Executive
Officer)
/s/ N. Keith McKey Executive Vice President, Chief Financial October 16, 2003
N. Keith McKey, CPA Officer, Secretary and Treasurer (Principal
Financial Officer)
/s/ Bruce Corkern Senior Vice President and Controller October 16, 2003
Bruce Corkern, CPA (Principal Accounting Officer)
/s/ D. Pike Aloian Director October 16, 2003
D. Pike Aloian
/s/ Alexander G. Anagnos Director October 16, 2003
Alexander G. Anagnos
/s/ H.C. Bailey, Jr. Director October 16, 2003
H.C. Bailey, Jr.
/s/ Hayden C. Eaves III Director October 16, 2003
Hayden C. Eaves III
/s/ Fredric H. Gould Director October 16, 2003
Fredric H. Gould
/s/ David M. Osnos Director October 16, 2003
David M. Osnos
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