<PAGE>
PROSPECTUS SUPPLEMENT
- ---------------------------
(TO PROSPECTUS DATED JANUARY 16, 1998)
[LOGO]
$135,546,875
WASHINGTON REAL ESTATE INVESTMENT TRUST
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
------------------------
Washington Real Estate Investment Trust ("WRIT" or the "Trust") may offer
from time to time up to $135,546,875 aggregate initial offering price, or the
equivalent thereof in one or more foreign or composite currencies, of its
Medium-Term Notes Due Nine Months or More From Date of Issue (the "Notes"). Such
aggregate initial offering price is subject to reduction as a result of the sale
by the Trust of other Offered Securities described in the accompanying
Prospectus. Each Note will mature on any day nine months or more from the date
of issue, as specified in the applicable pricing supplement hereto (each, a
"Pricing Supplement"), and may be subject to redemption at the option of the
Trust or repayment at the option of the Holder thereof, in each case, in whole
or in part, prior to its Stated Maturity Date, as specified in the applicable
Pricing Supplement. In addition, each Note may be denominated and/or payable in
United States dollars or a foreign or composite currency, as specified in the
applicable Pricing Supplement. The Notes, other than Foreign Currency Notes,
will be issued in minimum denominations of $1,000 and integral multiples
thereof, unless otherwise specified in the applicable Pricing Supplement, while
Foreign Currency Notes will be issued in the minimum denominations specified in
the applicable Pricing Supplement.
The Trust may issue Notes that bear interest at fixed rates ("Fixed Rate
Notes") or at floating rates ("Floating Rate Notes"). The applicable Pricing
Supplement will specify whether a Floating Rate Note is a Regular Floating Rate
Note, a Floating Rate/Fixed Rate Note or an Inverse Floating Rate Note and
whether the rate of interest thereon is determined by reference to one or more
of the CD Rate, the CMT Rate, the Commercial Paper Rate, the Eleventh District
Cost of Funds Rate, the Federal Funds Rate, LIBOR, the Prime Rate or the
Treasury Rate or any other interest rate basis or formula (each, an "Interest
Rate Basis"), as adjusted by any Spread and/or Spread Multiplier. Interest on
each Floating Rate Note will accrue from its date of issue and, unless otherwise
specified in the applicable Pricing Supplement, will be payable monthly,
quarterly, semiannually or annually in arrears, as specified in the applicable
Pricing Supplement, and on the Maturity Date. Unless otherwise specified in the
applicable Pricing Supplement, the rate of interest on each Floating Rate Note
will be reset daily, weekly, monthly, quarterly, semiannually or annually, as
specified in the applicable Pricing Supplement. Interest on each Fixed Rate Note
will accrue from its date of issue and, unless otherwise specified in the
applicable Pricing Supplement, will be payable semiannually in arrears on
January 1 and July 1 of each year and on the Maturity Date. The Trust may also
issue Discount Notes, Indexed Notes and Amortizing Notes.
The interest rate, or formula for the determination of the interest rate, if
any, applicable to each Note and the other variable terms thereof will be
established by the Trust on the date of issue of such Note and will be specified
in the applicable Pricing Supplement. Interest rates or formulas and other terms
of Notes are subject to change by the Trust, but no change will affect any Note
previously issued or as to which an offer to purchase has been accepted by the
Trust.
Each Note will be issued in book-entry form (a "Book-Entry Note") or in
fully registered certificated form (a "Certificated Note"), as specified in the
applicable Pricing Supplement. Each Book-Entry Note will be represented by one
or more fully registered global securities (the "Global Securities") deposited
with or on behalf of The Depository Trust Company (or such other depositary
identified in the applicable Pricing Supplement) (the "Depositary") and
registered in the name of the Depositary or the Depositary's nominee. Interests
in the Global Securities will be shown on, and transfers thereof will be
effected only through, records maintained by the Depositary (with respect to its
participants) and the Depositary's participants (with respect to beneficial
owners). Except in limited circumstances, Book-Entry Notes will not be
exchangeable for Certificated Notes.
SEE "RISK FACTORS" COMMENCING ON PAGE S-2 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT, THE PROSPECTUS OR ANY SUPPLEMENT HERETO. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO AGENTS' DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(1)(2) TRUST (1)(3)
<S> <C> <C> <C>
Per Note...................... 100% .125%-.750% 99.875%-99.250%
Total(4)...................... $135,546,875 $169,433-$1,016,601 $135,377,442-$134,530,274
</TABLE>
(1) Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, BT
Alex. Brown Incorporated, First Chicago Capital Markets, Inc. and Salomon
Brothers Inc (the "Agents"), may purchase Notes, as principal, from the
Trust, for resale to investors and other purchasers at varying prices
relating to prevailing market prices at the time of resale as determined by
the applicable Agent, or, if so specified in the applicable Pricing
Supplement, for resale at a fixed offering price. Unless otherwise specified
in the applicable Pricing Supplement, any Note sold to an Agent as principal
will be purchased by such Agent at a price equal to 100% of the principal
amount thereof less a percentage of the principal amount equal to the
commission applicable to an agency sale (as described below) of a Note of
identical maturity. If agreed to by the Trust and an Agent, such Agent may
utilize its reasonable efforts on an agency basis to solicit offers to
purchase the Notes at 100% of the principal amount thereof, unless otherwise
specified in the applicable Pricing Supplement. The Trust will pay a
commission to the Agent, ranging from .125% to .750% of the principal amount
of a Note, depending upon its stated maturity, sold through an Agent.
Commissions with respect to Notes with stated maturities in excess of 30
years that are sold through an Agent will be negotiated between the Trust
and such Agent at the time of such sale. See "Plan of Distribution."
(2) The Trust has agreed to indemnify the Agents against, and to provide
contribution with respect to, certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Plan of Distribution."
(3) Before deducting expenses payable by the Trust estimated at $340,000.
(4) Or the equivalent thereof in one or more foreign or composite currencies.
------------------------------
The Notes are being offered on a continuing basis by the Trust to or through
the Agents. Unless otherwise specified in the applicable Pricing Supplement, the
Notes will not be listed on any securities exchange. There is no assurance that
the Notes offered hereby will be sold or, if sold, that there will be a
secondary market for the Notes or that there will be liquidity in the secondary
market if one develops. The Trust reserves the right to cancel or modify the
offer made hereby without notice. The Trust or an Agent, if it solicits the
offer on an agency basis, may reject any offer to purchase Notes in whole or in
part. See "Plan of Distribution."
------------------------------
MERRILL LYNCH & CO.
BT ALEX. BROWN
FIRST CHICAGO CAPITAL MARKETS, INC.
SALOMON SMITH BARNEY
------------------
The date of this Prospectus Supplement is January 16, 1998.
<PAGE>
IN CONNECTION WITH AN OFFERING OF NOTES PURCHASED BY THE AGENTS AS PRINCIPAL
ON A FIXED OFFERING PRICE BASIS, THE AGENTS MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF SUCH NOTES. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
------------------------
RISK FACTORS
THIS PROSPECTUS SUPPLEMENT DOES NOT DESCRIBE ALL OF THE RISKS OF AN
INVESTMENT IN NOTES, WHETHER RESULTING FROM SUCH NOTES BEING DENOMINATED OR
PAYABLE IN OR DETERMINED BY REFERENCE TO A CURRENCY OR COMPOSITE CURRENCY OTHER
THAN UNITED STATES DOLLARS OR TO ONE OR MORE INTEREST RATE, CURRENCY OR OTHER
INDICES OR FORMULAS, OR OTHERWISE. THE TRUST AND THE AGENTS DISCLAIM ANY
RESPONSIBILITY TO ADVISE PROSPECTIVE INVESTORS OF SUCH RISKS AS THEY EXIST AT
THE DATE OF THIS PROSPECTUS SUPPLEMENT OR AS THEY CHANGE FROM TIME TO TIME.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN FINANCIAL AND LEGAL ADVISORS AS
TO THE RISKS ENTAILED BY AN INVESTMENT IN SUCH NOTES AND THE SUITABILITY OF
INVESTING IN SUCH NOTES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. SUCH NOTES
ARE NOT AN APPROPRIATE INVESTMENT FOR INVESTORS WHO ARE UNSOPHISTICATED WITH
RESPECT TO FOREIGN CURRENCY TRANSACTIONS OR TRANSACTIONS INVOLVING THE
APPLICABLE INTEREST RATE OR CURRENCY INDEX OR OTHER INDICES OR FORMULAS.
STRUCTURE RISKS
An investment in Notes indexed, as to principal, premium, if any, and/or
interest, if any, to one or more interest rate, currency (including exchange
rates and swap indices between currencies or composite currencies) or other
indices or formulas, either directly or inversely, entails significant risks
that are not associated with similar investments in a conventional fixed rate or
floating rate debt security. Such risks include, without limitation, the
possibility that such indices or formulas may be subject to significant changes,
that no interest will be payable in respect of such Notes or will be payable at
a rate lower than one applicable to a conventional fixed rate or floating rate
debt security issued by the Trust at the same time, that repayment of the
principal and/or premium, if any, in respect of such Notes may occur at times
other than that expected by the Holders (as defined in the accompanying
Prospectus) and that the Holders could lose all or a substantial portion of
principal and/or premium, if any, payable on the Maturity Date (as defined under
"Description of Notes--General"). Such risks depend on a number of interrelated
factors, including economic, financial and political events, over which the
Trust has no control. Additionally, if the formula used to determine the amount
of principal, premium, if any, and/or interest, if any, payable with respect to
such Notes contains a multiplier or leverage factor, the effect of any change in
the applicable index or indices or formula or formulas will be magnified. In
recent years, values of certain indices and formulas have been highly volatile
and such volatility may be expected to continue in the future. Fluctuations in
the value of any particular index or formula that have occurred in the past are
not necessarily indicative, however, of fluctuations that may occur in the
future.
Any optional redemption feature of Notes might affect the market value of
such Notes. Because the Trust may be expected to redeem such Notes when
prevailing interest rates are relatively low, Holders generally will not be able
to reinvest the redemption proceeds in a comparable security at an effective
interest rate as high as the current interest rate on such Notes.
The Notes will not have an established trading market when issued, and there
can be no assurance of a secondary market for the Notes or the liquidity of the
secondary market if one develops. See "Plan of Distribution."
The secondary market, if any, for Notes will be affected by a number of
factors independent of the creditworthiness of the Trust and the value of the
applicable index or indices or formula or formulas, including the complexity and
volatility of each such index or formula, the method of calculating the
principal, premium, if any, and/or interest, if any, in respect of such Notes,
the time remaining to the maturity of such Notes, the outstanding amount of such
Notes, any redemption features of such Notes, the amount of other debt
securities linked to such index or formula and the level, direction and
volatility of
S-2
<PAGE>
market interest rates generally. Such factors also will affect the market value
of such Notes. In addition, certain Notes may be designed for specific
investment objectives or strategies and, therefore, may have a more limited
secondary market and experience more price volatility than conventional debt
securities. Holders may not be able to sell such Notes readily or at prices that
will enable investors to realize their anticipated yield. No investor should
purchase Notes unless such investor understands and is able to bear the risk
that such Notes may not be readily saleable, that the value of such Notes will
fluctuate over time and that such fluctuations may be significant.
EXCHANGE RATES AND EXCHANGE CONTROLS
An investment in Foreign Currency Notes (as defined under "Description of
Notes--General") entails significant risks that are not associated with a
similar investment in a debt security denominated and payable in United States
dollars. Such risks include, without limitation, the possibility of significant
changes in the rate of exchange between the United States dollar and the
Specified Currency (as defined under "Description of Notes--General") and the
possibility of the imposition or modification of exchange controls by the
applicable governments or monetary authorities. Such risks generally depend on
factors over which the Trust has no control, such as economic, financial and
political events and the supply and demand for the applicable currencies or
composite currencies. In addition, if the formula used to determine the amount
of principal, premium, if any, and/or interest, if any, payable with respect to
Foreign Currency Notes contains a multiplier or leverage factor, the effect of
any change in the applicable currencies or composite currencies will be
magnified. In recent years, rates of exchange between the United States dollar
and foreign currencies or composite currencies have been highly volatile and
such volatility may be expected to continue in the future. Fluctuations in any
particular exchange rate that have occurred in the past are not necessarily
indicative, however, of fluctuations that may occur in the future. Depreciation
of the Specified Currency applicable to a Foreign Currency Note against the
United States dollar would result in a decrease in the United States
dollar-equivalent yield of such Foreign Currency Note, in the United States
dollar-equivalent value of the principal and premium, if any, payable on the
Maturity Date of such Foreign Currency Note, and, generally, in the United
States dollar-equivalent market value of such Foreign Currency Note.
Governments or monetary authorities have imposed from time to time, and may
in the future impose or revise, exchange controls at or prior to the date on
which any payment of principal of, or premium, if any, or interest, if any, on,
a Foreign Currency Note is due, which could affect exchange rates as well as the
availability of the Specified Currency on such date. Even if there are no
exchange controls, it is possible that the Specified Currency would not be
available on the applicable payment date due to other circumstances beyond the
control of the Trust. In such cases, the Trust will be entitled to satisfy its
obligations in respect of such Foreign Currency Note in United States dollars.
See "Special Provisions Relating to Foreign Currency Notes--Availability of
Specified Currency."
CREDIT RATINGS
Any credit ratings assigned to the Trust's medium-term note program may not
reflect the potential impact of all risks related to structure and other factors
on the value of the Notes. Accordingly, prospective investors should consult
their own financial and legal advisors as to the risks entailed by an investment
in the Notes and the suitability of investing in such Notes in light of their
particular circumstances.
DESCRIPTION OF NOTES
The Notes will be issued as a series of Debt Securities under an Indenture,
dated as of August 1, 1996, as amended or supplemented from time to time (the
"Indenture"), between the Trust and The First National Bank of Chicago, as
trustee (the "Indenture Trustee"). The Indenture is subject to, and governed by,
the Trust Indenture Act of 1939, as amended. The following summary of certain
provisions of the Notes and the Indenture does not purport to be complete and is
qualified in its entirety by reference to the actual provisions of the Notes and
the Indenture. Capitalized terms used but not defined herein shall have the
S-3
<PAGE>
meanings given to them in the accompanying Prospectus, the Notes or the
Indenture, as the case may be. The term "Debt Securities," as used in this
Prospectus Supplement, refers to all debt securities, including the Notes,
issued and issuable from time to time under the Indenture. The following
description of Notes will apply to each Note offered hereby unless otherwise
specified in the applicable Pricing Supplement.
GENERAL
All Debt Securities, including the Notes, issued and to be issued under the
Indenture will be unsecured general obligations of the Trust and will rank PARI
PASSU with all other unsecured and unsubordinated indebtedness of the Trust from
time to time outstanding. The Indenture does not limit the aggregate initial
offering price of Debt Securities that may be issued thereunder and Debt
Securities may be issued thereunder from time to time in one or more series up
to the aggregate initial offering price from time to time authorized by the
Trust for each series. However, the Notes are effectively subordinated to
mortgages and other secured indebtedness of the Trust, which totalled
approximately $7.5 million at December 31, 1997. The Trust may, from time to
time, without the consent of the Holders of the Notes, provide for the issuance
of Notes or other Debt Securities under the Indenture in addition to the
$135,546,875 aggregate initial offering price of Notes offered hereby.
The Notes are currently limited to up to $135,546,875 aggregate initial
offering price, or the equivalent thereof in one or more foreign or composite
currencies. Each Note will mature on any day nine months or more from its date
of issue (the "Stated Maturity Date"), as specified in the applicable Pricing
Supplement, unless the principal thereof (or any installment of principal
thereof) becomes due and payable prior to the Stated Maturity Date, whether by
the declaration of acceleration of maturity, notice of redemption at the option
of the Trust, notice of the Holder's option to elect repayment or otherwise (the
Stated Maturity Date or such prior date, as the case may be, is herein referred
to as the "Maturity Date" with respect to the principal of such Note repayable
on such date). Unless otherwise specified in the applicable Pricing Supplement,
interest-bearing Notes will either be Fixed Rate Notes or Floating Rate Notes,
as specified in the applicable Pricing Supplement. The Trust may also issue
Discount Notes, Indexed Notes and Amortizing Notes (as such terms are
hereinafter defined).
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will be denominated in, and payments of principal, premium, if any, and/or
interest, if any, will be made in, United States dollars. The Notes also may be
denominated in, and payments of principal, premium, if any, and/or interest, if
any, in respect thereof may be made in, one or more foreign currencies or
composite currencies ("Foreign Currency Notes"). See "Special Provisions
Relating to Foreign Currency Notes--Payment of Principal, Premium, if any, and
Interest, if any." The currency or composite currency in which a particular Note
is denominated (or, if such currency or composite currency is no longer legal
tender for the payment of public and private debts, such other currency or
composite currency of the relevant country that is then legal tender for the
payment of such debts), is herein referred to as the "Specified Currency" with
respect to such Note. References herein to "United States dollars", "U.S.
dollars" or "$" are to the lawful currency of the United States of America (the
"United States").
Unless otherwise specified in the applicable Pricing Supplement, purchasers
are required to pay for the Notes in the applicable Specified Currencies. At the
present time, there are limited facilities in the United States for the
conversion of United States dollars into foreign or composite currencies and
vice versa, and commercial banks do not generally offer non-United States dollar
checking or savings account facilities in the United States. The Agent from or
through which a Foreign Currency Note is purchased will be prepared to arrange
for the conversion of United States dollars into the Specified Currency in order
to enable the purchaser to pay for such Foreign Currency Note, provided that a
request is made to the Agent on or prior to the fifth Business Day (as
hereinafter defined) preceding the date of delivery of such Foreign Currency
Note, or by such other day as determined by such Agent. Each such conversion
will be made by such Agent on such terms and subject to such conditions,
limitations and charges as such Agent may from time to time establish in
accordance with its regular foreign exchange practices. All costs of exchange
will
S-4
<PAGE>
be borne by the purchaser of each such Foreign Currency Note. See "Special
Provisions Relating to Foreign Currency Notes--Payment of Principal, Premium, if
any, and Interest, if any."
Interest rates offered by the Trust with respect to the Notes may differ
depending upon, among other factors, the aggregate principal amount of Notes
purchased in any single transaction. Notes with different variable terms other
than interest rates may also be offered concurrently to different investors.
Interest rates or formulas and other terms of Notes are subject to change by the
Trust from time to time, but no such change will affect any Note previously
issued or as to which an offer to purchase has been accepted by the Trust.
Each Note will be issued as a Book-Entry Note represented by one or more
fully registered Global Securities or as a fully registered Certificated Note.
The minimum denominations of each Note other than a Foreign Currency Note will
be $1,000 and integral multiples thereof, unless otherwise specified in the
applicable Pricing Supplement, while the minimum denominations of each Foreign
Currency Note will be specified in the applicable Pricing Supplement.
Payments of principal of, and premium, if any, and interest, if any, on,
Book-Entry Notes will be made by the Trust through the Indenture Trustee to the
Depositary. See "--Book-Entry Notes." In the case of Certificated Notes, payment
of principal and premium, if any, due on the Maturity Date will be made in
immediately available funds upon presentation and surrender thereof (and, in the
case of any repayment on an Optional Repayment Date, upon submission of a duly
completed election form in accordance with the provisions described below) at
the office or agency maintained by the Trust for such purpose in the Borough of
Manhattan, The City of New York, currently the corporate trust office of the
Indenture Trustee c/o First Chicago Trust Company of New York, 14 Wall Street,
Eighth Floor, New York, New York 10005. Payment of interest, if any, due on the
Maturity Date of a Certificated Note will be made to the person to whom payment
of the principal thereof and premium, if any, thereon shall be made. Payment of
interest, if any, due on a Certificated Note on any Interest Payment Date (as
hereinafter defined) other than the Maturity Date will be made by check mailed
to the address of the Holder entitled thereto as such address shall appear in
the Security Register of the Trust. Notwithstanding the foregoing, a Holder of
$10,000,000 (or, if the applicable Specified Currency is other than United
States dollars, the equivalent thereof in such Specified Currency) or more in
aggregate principal amount of Certificated Notes (whether having identical or
different terms and provisions) will be entitled to receive interest payments,
if any, on any Interest Payment Date other than the Maturity Date by wire
transfer of immediately available funds if appropriate wire transfer
instructions have been received in writing by the Trustee not less than 15 days
prior to such Interest Payment Date. Any such wire transfer instructions
received by the Trustee shall remain in effect until revoked by such Holder. For
special payment terms applicable to Foreign Currency Notes, see "Special
Provisions Relating to Foreign Currency Notes--Payment of Principal, Premium, if
any, and Interest, if any."
As used herein, "Business Day" means any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which banking institutions
are authorized or required by law, regulation or executive order to close in The
City of New York; provided, however, that, with respect to Foreign Currency
Notes, such day is also not a day on which banking institutions are authorized
or required by law, regulation or executive order to close in the Principal
Financial Center (as hereinafter defined) of the country issuing the Specified
Currency (unless the Specified Currency is European Currency Units ("ECU"), in
which case such day is also not a day that appears as an ECU non-settlement day
on the display designated as "ISDE" on the Reuter Monitor Money Rates Service
(or is not a day designated as an ECU non-settlement day by the ECU Banking
Association) or, if ECU non-settlement days do not appear on that page (and are
not so designated), a day that is not a day on which payments in ECU cannot be
settled in the international interbank market); provided, further, that, with
respect to Notes as to which LIBOR is an applicable Interest Rate Basis, such
day is also a London Business Day (as hereinafter defined). "London Business
Day" means a day on which dealings in the Designated LIBOR Currency (as
hereinafter defined) are transacted in the London interbank market.
S-5
<PAGE>
"Principal Financial Center" means (i) the capital city of the country
issuing the Specified Currency (except as described in the immediately preceding
paragraph with respect to ECU) or (ii) the capital city of the country to which
the Designated LIBOR Currency, if applicable, relates (or, in the case of ECU,
Luxembourg), except, in each case, that with respect to United States dollars,
Australian dollars, Canadian dollars, Deutsche marks, Dutch guilders, Italian
lire and Swiss francs, the "Principal Financial Center" shall be The City of New
York, Sydney, Toronto, Frankfurt, Amsterdam, Milan (solely in the case of clause
(i) above) and Zurich, respectively.
Book-Entry Notes may be transferred or exchanged only through the
Depositary. See "--Book-Entry Notes." Registration of transfer or exchange of
Certificated Notes will be made at the office or agency maintained by the Trust
for such purpose in the Borough of Manhattan, The City of New York, currently
the corporate trust office of the Indenture Trustee c/o First Chicago Trust
Company of New York, 14 Wall Street, Eighth Floor, New York, New York 10005. No
service charge will be made by the Trust or the Indenture Trustee for any such
registration of transfer or exchange of Notes, but the Trust may require payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith (other than exchanges pursuant to the Indenture
not involving any transfer).
The defeasance and covenant defeasance provisions contained in the Indenture
shall apply to the Notes.
REDEMPTION AT THE OPTION OF THE TRUST
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will not be subject to any sinking fund. The Notes will be redeemable at the
option of the Trust prior to the Stated Maturity Date only if an Initial
Redemption Date is specified in the applicable Pricing Supplement. If so
specified, the Notes will be subject to redemption at the option of the Trust on
any date on and after the applicable Initial Redemption Date in whole or from
time to time in part in increments of $1,000 or such other minimum denomination
specified in such Pricing Supplement (provided that any remaining principal
amount thereof shall be at least $1,000 or such minimum denomination), at the
applicable Redemption Price (as hereinafter defined), together with unpaid
interest accrued to the date of redemption, on written notice given to the
Holders thereof not more than 60 nor less than 30 calendar days prior to the
date of redemption and in accordance with the provisions of the Indenture.
"Redemption Price," with respect to a Note, means an amount equal to the Initial
Redemption Percentage specified in the applicable Pricing Supplement (as
adjusted by the Annual Redemption Percentage Reduction, if applicable)
multiplied by the unpaid principal amount to be redeemed. The Initial Redemption
Percentage, if any, applicable to a Note shall decline at each anniversary of
the Initial Redemption Date by an amount equal to the applicable Annual
Redemption Percentage Reduction, if any, until the Redemption Price is equal to
100% of the unpaid principal amount to be redeemed. For a discussion of the
redemption of Discount Notes, see "-- Discount Notes."
REPAYMENT AT THE OPTION OF THE HOLDER
The Notes will be repayable by the Trust at the option of the Holders
thereof prior to the Stated Maturity Date only if one or more Optional Repayment
Dates are specified in the applicable Pricing Supplement. If so specified, the
Notes will be subject to repayment at the option of the Holders thereof on any
Optional Repayment Date in whole or from time to time in part in increments of
$1,000 or such other minimum denomination specified in the applicable Pricing
Supplement (provided that any remaining principal amount thereof shall be at
least $1,000 or such other minimum denomination), at a repayment price equal to
100% of the unpaid principal amount to be repaid, together with unpaid interest
accrued to the date of repayment. For any Note to be repaid, such Note must be
received, together with the form thereon entitled "Option to Elect Repayment"
duly completed, by the Trust at its office maintained for such purpose in the
Borough of Manhattan, The City of New York, currently the corporate trust office
of the Indenture Trustee c/o First Chicago Trust Company of New York, 14 Wall
Street, Eighth Floor, New York, New York 10005, not more than 60 nor less than
30 calendar days prior to the date of repayment. Exercise of such repayment
option by the Holder will be irrevocable. For a discussion of the repayment of
Discount Notes, see "--Discount Notes."
S-6
<PAGE>
Only the Depositary may exercise the repayment option in respect of Global
Securities representing Book-Entry Notes. Accordingly, Beneficial Owners (as
hereinafter defined) of Global Securities that desire to have all or any portion
of the Book-Entry Notes represented by such Global Securities repaid must
instruct the Participant (as hereinafter defined) through which they own their
interest to direct the Depositary to exercise the repayment option on their
behalf by delivering the related Global Security and duly completed election
form to the Indenture Trustee as aforesaid. In order to ensure that such Global
Security and election form are received by the Indenture Trustee on a particular
day, the applicable Beneficial Owner must so instruct the Participant through
which it owns its interest before such Participant's deadline for accepting
instructions for that day. Different firms may have different deadlines for
accepting instructions from their customers. Accordingly, Beneficial Owners
should consult the Participants through which they own their interest for the
respective deadlines for such Participants. All instructions given to
Participants from Beneficial Owners of Global Securities relating to the option
to elect repayment shall be irrevocable. In addition, at the time such
instructions are given, each such Beneficial Owner shall cause the Participant
through which it owns its interest to transfer such Beneficial Owner's interest
in the Global Security or Securities representing the related Book-Entry Notes,
on the Depositary's records, to the Indenture Trustee. See "--Book-Entry Notes."
If applicable, the Trust will comply with the requirements of Rule 14(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules promulgated thereunder, and any other securities laws or regulations
in connection with any such repayment.
The Trust may at any time purchase Notes at any price or prices in the open
market or otherwise. Notes so purchased by the Trust may, at the discretion of
the Trust, be held, resold or surrendered to the Trustee for cancellation.
INTEREST
GENERAL
Unless otherwise specified in the applicable Pricing Supplement, each
interest-bearing Note will bear interest from its date of issue at the rate per
annum, in the case of a Fixed Rate Note, or pursuant to the interest rate
formula, in the case of a Floating Rate Note, in each case as specified in the
applicable Pricing Supplement, until the principal thereof is paid or duly made
available for payment. Unless otherwise specified in the applicable Pricing
Supplement, interest payments in respect of Fixed Rate Notes and Floating Rate
Notes will be made in an amount equal to the interest accrued from and including
the immediately preceding Interest Payment Date in respect of which interest has
been paid or duly made available for payment (or from and including the date of
issue, if no interest has been paid or duly made available for payment) to but
excluding the applicable Interest Payment Date or the Maturity Date, as the case
may be (each, an "Interest Period").
Interest on Fixed Rate Notes and Floating Rate Notes will be payable in
arrears on each Interest Payment Date and on the Maturity Date. Unless otherwise
specified in the applicable Pricing Supplement, the first payment of interest on
any such Note originally issued between a Record Date (as hereinafter defined)
and the related Interest Payment Date will be made on the Interest Payment Date
immediately following the next succeeding Record Date to the Holder on such next
succeeding Record Date. Unless otherwise specified in the applicable Pricing
Supplement, a "Record Date" shall be the fifteenth calendar day (whether or not
a Business Day) immediately preceding the related Interest Payment Date.
FIXED RATE NOTES
Interest on Fixed Rate Notes will be payable on January 1 and July 1 of each
year or on such other date(s) specified in the applicable Pricing Supplement
(each, an "Interest Payment Date" with respect to the Fixed Rate Notes) and on
the Maturity Date. Unless otherwise specified in the applicable Pricing
S-7
<PAGE>
Supplement, interest on Fixed Rate Notes will be computed on the basis of a
360-day year of twelve 30-day months.
If any Interest Payment Date or the Maturity Date of a Fixed Rate Note falls
on a day that is not a Business Day, the required payment of principal, premium,
if any, and/or interest will be made on the next succeeding Business Day as if
made on the date such payment was due, and no interest will accrue on such
payment for the period from and after such Interest Payment Date or the Maturity
Date, as the case may be, to the date of such payment on the next succeeding
Business Day.
FLOATING RATE NOTES
Interest on Floating Rate Notes will be determined by reference to the
applicable Interest Rate Basis or Interest Rate Bases, which may, as described
below, include (i) the CD Rate, (ii) the CMT Rate, (iii) the Commercial Paper
Rate, (iv) the Eleventh District Cost of Funds Rate, (v) the Federal Funds Rate,
(vi) LIBOR, (vii) the Prime Rate, (viii) the Treasury Rate, or (ix) such other
Interest Rate Basis or interest rate formula as may be specified in the
applicable Pricing Supplement. The applicable Pricing Supplement will specify
certain terms with respect to which each Floating Rate Note is being delivered,
including: whether such Floating Rate Note is a "Regular Floating Rate Note," a
"Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," the Fixed
Rate Commencement Date, if applicable, Fixed Interest Rate, if applicable,
Interest Rate Basis or Bases, Initial Interest Rate, if any, Initial Interest
Reset Date, Interest Reset Dates, Interest Payment Dates, Index Maturity,
Maximum Interest Rate and/or Minimum Interest Rate, if any, and Spread and/or
Spread Multiplier, if any, as such terms are defined below. If one or more of
the applicable Interest Rate Bases is LIBOR or the CMT Rate, the applicable
Pricing Supplement will also specify the Designated LIBOR Currency and
Designated LIBOR Page or the Designated CMT Maturity Index and Designated CMT
Telerate Page, respectively, as such terms are defined below.
The interest rate borne by the Floating Rate Notes will be determined as
follows:
(i) Unless such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," or as having an
Addendum attached or having "Other/Additional Provisions" apply, in each
case relating to a different interest rate formula, such Floating Rate Note
will be designated as a "Regular Floating Rate Note" and, except as
described below or in the applicable Pricing Supplement, will bear interest
at the rate determined by reference to the applicable Interest Rate Basis or
Bases (a) plus or minus the applicable Spread, if any, and/or (b) multiplied
by the applicable Spread Multiplier, if any. Commencing on the Initial
Interest Reset Date, the rate at which interest on such Regular Floating
Rate Note shall be payable shall be reset as of each Interest Reset Date;
provided, however, that the interest rate in effect for the period, if any,
from the date of issue to the Initial Interest Reset Date will be the
Initial Interest Rate.
(ii) If such Floating Rate Note is designated as a "Floating Rate/Fixed
Rate Note," then, except as described below or in the applicable Pricing
Supplement, such Floating Rate Note will bear interest at the rate
determined by reference to the applicable Interest Rate Basis or Bases (a)
plus or minus the applicable Spread, if any, and/or (b) multiplied by the
applicable Spread Multiplier, if any. Commencing on the Initial Interest
Reset Date, the rate at which interest on such Floating Rate/Fixed Rate Note
shall be payable shall be reset as of each Interest Reset Date; provided,
however, that (y) the interest rate in effect for the period, if any, from
the date of issue to the Initial Interest Reset Date will be the Initial
Interest Rate and (z) the interest rate in effect for the period commencing
on the Fixed Rate Commencement Date to the Maturity Date shall be the Fixed
Interest Rate, if such rate is specified in the applicable Pricing
Supplement or, if no such Fixed Interest Rate is specified, the interest
rate in effect thereon on the day immediately preceding the Fixed Rate
Commencement Date.
S-8
<PAGE>
(iii) If such Floating Rate Note is designated as an "Inverse Floating
Rate Note," then, except as described below or in the applicable Pricing
Supplement, such Floating Rate Note will bear interest at the Fixed Interest
Rate minus the rate determined by reference to the applicable Interest Rate
Basis or Bases (a) plus or minus the applicable Spread, if any, and/or (b)
multiplied by the applicable Spread Multiplier, if any; provided, however,
that, unless otherwise specified in the applicable Pricing Supplement, the
interest rate thereon will not be less than zero. Commencing on the Initial
Interest Reset Date, the rate at which interest on such Inverse Floating
Rate Note shall be payable shall be reset as of each Interest Reset Date;
provided, however, that the interest rate in effect for the period, if any,
from the date of issue to the Initial Interest Reset Date will be the
Initial Interest Rate.
The "Spread" is the number of basis points to be added to or subtracted from
the related Interest Rate Basis or Bases applicable to such Floating Rate Note.
The "Spread Multiplier" is the percentage of the related Interest Rate Basis or
Bases applicable to such Floating Rate Note by which such Interest Rate Basis or
Bases will be multiplied to determine the applicable interest rate on such
Floating Rate Note. The "Index Maturity" is the period to maturity of the
instrument or obligation with respect to which the related Interest Rate Basis
or Bases will be calculated.
Unless otherwise specified in the applicable Pricing Supplement, the
interest rate with respect to each Interest Rate Basis will be determined in
accordance with the applicable provisions below. Except as set forth above or in
the applicable Pricing Supplement, the interest rate in effect on each day shall
be (i) if such day is an Interest Reset Date, the interest rate determined as of
the Interest Determination Date (as hereinafter defined) immediately preceding
such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the
interest rate determined as of the Interest Determination Date immediately
preceding the most recent Interest Reset Date.
The applicable Pricing Supplement will specify whether the rate of interest
on the related Floating Rate Note will be reset daily, weekly, monthly,
quarterly, semiannually or annually or on such other specified basis (each, an
"Interest Reset Period") and the dates on which such rate of interest will be
reset (each, an "Interest Reset Date"). Unless otherwise specified in the
applicable Pricing Supplement, the Interest Reset Dates will be, in the case of
Floating Rate Notes that reset: (i) daily, each Business Day; (ii) weekly, the
Wednesday of each week (with the exception of weekly reset Floating Rate Notes
as to which the Treasury Rate is an applicable Interest Rate Basis, which will
reset the Tuesday of each week, except as described below); (iii) monthly, the
third Wednesday of each month (with the exception of monthly reset Floating Rate
Notes as to which the Eleventh District Cost of Funds Rate is an applicable
Interest Rate Basis, which will reset on the first calendar day of the month);
(iv) quarterly, the third Wednesday of March, June, September and December of
each year; (v) semiannually, the third Wednesday of the two months specified in
the applicable Pricing Supplement; and (vi) annually, the third Wednesday of the
month specified in the applicable Pricing Supplement; provided however, that,
with respect to Floating Rate/Fixed Rate Notes, the rate of interest thereon
will not reset after the applicable Fixed Rate Commencement Date. If any
Interest Reset Date for any Floating Rate Note would otherwise be a day that is
not a Business Day, such Interest Reset Date will be postponed to the next
succeeding Business Day, except that in the case of a Floating Rate Note as to
which LIBOR is an applicable Interest Rate Basis and such Business Day falls in
the next succeeding calendar month, such Interest Reset Date will be the
immediately preceding Business Day.
The interest rate applicable to each Interest Reset Period commencing on the
related Interest Reset Date will be the rate determined by the Calculation Agent
as of the applicable Interest Determination Date and calculated on or prior to
the Calculation Date (as hereinafter defined), except with respect to LIBOR and
the Eleventh District Cost of Funds Rate, which will be calculated on such
Interest Determination Date. The "Interest Determination Date" with respect to
the CD Rate, the CMT Rate, the Commercial Paper Rate, the Federal Funds Rate and
the Prime Rate will be the second Business Day immediately preceding the
applicable Interest Reset Date; the "Interest Determination Date" with respect
to the Eleventh District Cost of Funds Rate will be the last working day of the
month immediately
S-9
<PAGE>
preceding the applicable Interest Reset Date on which the Federal Home Loan Bank
of San Francisco (the "FHLB of San Francisco") publishes the Index (as
hereinafter defined); and the "Interest Determination Date" with respect to
LIBOR will be the second London Business Day immediately preceding the
applicable Interest Reset Date, unless the Designated LIBOR Currency is British
pounds sterling, in which case the "Interest Determination Date" will be the
applicable Interest Reset Date. With respect to the Treasury Rate, the "Interest
Determination Date" will be the day in the week in which the applicable Interest
Reset Date falls on which day Treasury Bills (as hereinafter defined) are
normally auctioned (Treasury Bills are normally sold at an auction held on
Monday of each week, unless that day is a legal holiday, in which case the
auction is normally held on the following Tuesday, except that such auction may
be held on the preceding Friday); provided, however, that if an auction is held
on the Friday of the week preceding the applicable Interest Reset Date, the
"Interest Determination Date" will be such preceding Friday; provided, further,
that if the "Interest Determination Date" would otherwise fall on an Interest
Reset Date, then such Interest Reset Date will be postponed to the next
succeeding Business Day. The "Interest Determination Date" pertaining to a
Floating Rate Note the interest rate of which is determined by reference to two
or more Interest Rate Bases will be the most recent Business Day which is at
least two Business Days prior to the applicable Interest Reset Date for such
Floating Rate Note on which each Interest Rate Basis is determinable. Each
Interest Rate Basis will be determined as of such date, and the applicable
interest rate will take effect on the applicable Interest Reset Date.
Notwithstanding the foregoing, a Floating Rate Note may also have either or
both of the following: (i) a Maximum Interest Rate, or ceiling, that may accrue
during any Interest Period and (ii) a Minimum Interest Rate, or floor, that may
accrue during any Interest Period. In addition to any Maximum Interest Rate that
may apply to any Floating Rate Note, the interest rate on Floating Rate Notes
will in no event be higher than the maximum rate permitted by New York law, as
the same may be modified by United States law of general application.
Except as provided below or in the applicable Pricing Supplement, interest
will be payable, in the case of Floating Rate Notes that reset: (i) daily,
weekly or monthly, on the third Wednesday of each month or on the third
Wednesday of March, June, September and December of each year, as specified in
the applicable Pricing Supplement; (ii) quarterly, on the third Wednesday of
March, June, September and December of each year; (iii) semiannually, on the
third Wednesday of the two months of each year specified in the applicable
Pricing Supplement; and (iv) annually, on the third Wednesday of the month of
each year specified in the applicable Pricing Supplement (each, an "Interest
Payment Date" with respect to Floating Rate Notes) and, in each case, on the
Maturity Date. If any Interest Payment Date other than the Maturity Date for any
Floating Rate Note would otherwise be a day that is not a Business Day, such
Interest Payment Date will be postponed to the next succeeding Business Day,
except that in the case of a Floating Rate Note as to which LIBOR is an
applicable Interest Rate Basis and such Business Day falls in the next
succeeding calendar month, such Interest Payment Date will be the immediately
preceding Business Day. If the Maturity Date of a Floating Rate Note falls on a
day that is not a Business Day, the required payment of principal, premium, if
any, and interest will be made on the next succeeding Business Day as if made on
the date such payment was due, and no interest will accrue on such payment for
the period from and after the Maturity Date to the date of such payment on the
next succeeding Business Day.
All percentages resulting from any calculation on Floating Rate Notes will
be rounded to the nearest one hundred-thousandth of a percentage point, with
five-one millionths of a percentage point rounded upwards (e.g., 9.876545% (or
.09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used in
or resulting from such calculation on Floating Rate Notes will be rounded, in
the case of United States dollars, to the nearest cent or, in the case of a
foreign currency or composite currency, to the nearest unit (with one-half cent
or unit being rounded upwards).
With respect to each Floating Rate Note, accrued interest is calculated by
multiplying its principal amount by an accrued interest factor. Such accrued
interest factor is computed by adding the interest factor calculated for each
day in the applicable Interest Period. Unless otherwise specified in the
applicable
S-10
<PAGE>
Pricing Supplement, the interest factor for each such day will be computed by
dividing the interest rate applicable to such day by 360, in the case of
Floating Rate Notes for which an applicable Interest Rate Basis is the CD Rate,
the Commercial Paper Rate, the Eleventh District Cost of Funds Rate, the Federal
Funds Rate, LIBOR or the Prime Rate, or by the actual number of days in the year
in the case of Floating Rate Notes for which an applicable Interest Rate Basis
is the CMT Rate or the Treasury Rate. Unless otherwise specified in the
applicable Pricing Supplement, the interest factor for Floating Rate Notes for
which the interest rate is calculated with reference to two or more Interest
Rate Bases will be calculated in each period in the same manner as if only one
of the applicable Interest Rate Bases applied as specified in the applicable
Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, The First
National Bank of Chicago will be the "Calculation Agent." Upon request of the
Holder of any Floating Rate Note, the Calculation Agent will disclose the
interest rate then in effect and, if determined, the interest rate that will
become effective as a result of a determination made for the next succeeding
Interest Reset Date with respect to such Floating Rate Note. Unless otherwise
specified in the applicable Pricing Supplement, the "Calculation Date," if
applicable, pertaining to any Interest Determination Date will be the earlier of
(i) the tenth calendar day after such Interest Determination Date, or, if such
day is not a Business Day, the next succeeding Business Day or (ii) the Business
Day immediately preceding the applicable Interest Payment Date or the Maturity
Date, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, the
Calculation Agent shall determine each Interest Rate Basis in accordance with
the following provisions.
CD RATE. Unless otherwise specified in the applicable Pricing Supplement,
"CD Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CD Rate (a "CD Rate Interest Determination Date"), the rate on such date for
negotiable United States dollar certificates of deposit having the Index
Maturity specified in the applicable Pricing Supplement as published by the
Board of Governors of the Federal Reserve System in "Statistical Release
H.15(519), Selected Interest Rates" or any successor publication ("H.15(519)")
under the heading "CDs (Secondary Market)," or, if not published by 3:00 P.M.,
New York City time, on the related Calculation Date, the rate on such CD Rate
Interest Determination Date for negotiable United States dollar certificates of
deposit of the Index Maturity specified in the applicable Pricing Supplement as
published by the Federal Reserve Bank of New York in its daily statistical
release "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any
successor publication ("Composite Quotations") under the heading "Certificates
of Deposit." If such rate is not yet published in either H.15(519) or Composite
Quotations by 3:00 P.M., New York City time, on the related Calculation Date,
then the CD Rate on such CD Rate Interest Determination Date will be calculated
by the Calculation Agent and will be the arithmetic mean of the secondary market
offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest
Determination Date, of three leading nonbank dealers in negotiable United States
dollar certificates of deposit in The City of New York (which may include the
Agents or their affiliates) selected by the Calculation Agent for negotiable
United States dollar certificates of deposit of major United States money center
banks for negotiable certificates of deposit with a remaining maturity closest
to the Index Maturity specified in the applicable Pricing Supplement in an
amount that is representative for a single transaction in that market at that
time; provided, however, that if the dealers so selected by the Calculation
Agent are not quoting as mentioned in this sentence, the CD Rate determined as
of such CD Rate Interest Determination Date will be the CD Rate in effect on
such CD Rate Interest Determination Date.
CMT RATE. Unless otherwise specified in the applicable Pricing Supplement,
"CMT Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CMT Rate (a "CMT Rate Interest Determination Date"), the rate displayed on
the Designated CMT Telerate Page under the caption "...Treasury Constant
Maturities...Federal Reserve Board Release H.15...Mondays Approximately 3:45
P.M.," under the column for the Designated CMT Maturity Index for (i) if the
Designated CMT Telerate Page is 7055, the rate on such
S-11
<PAGE>
CMT Rate Interest Determination Date and (ii) if the Designated CMT Telerate
Page is 7052, the weekly or monthly average, as specified in the applicable
Pricing Supplement, for the week or the month, as applicable, ended immediately
preceding the week or the month, as applicable, in which the related CMT Rate
Interest Determination Date falls. If such rate is no longer displayed on the
relevant page or is not displayed by 3:00 P.M., New York City time, on the
related Calculation Date, then the CMT Rate for such CMT Rate Interest
Determination Date will be such treasury constant maturity rate for the
Designated CMT Maturity Index as published in H.15(519). If such rate is no
longer published or is not published by 3:00 P.M., New York City time, on the
related Calculation Date, then the CMT Rate on such CMT Rate Interest
Determination Date will be such treasury constant maturity rate for the
Designated CMT Maturity Index (or other United States Treasury rate for the
Designated CMT Maturity Index) for the CMT Rate Interest Determination Date with
respect to such Interest Reset Date as may then be published by either the Board
of Governors of the Federal Reserve System or the United States Department of
the Treasury that the Calculation Agent determines to be comparable to the rate
formerly displayed on the Designated CMT Telerate Page and published in
H.15(519). If such information is not provided by 3:00 P.M., New York City time,
on the related Calculation Date, then the CMT Rate on the CMT Rate Interest
Determination Date will be calculated by the Calculation Agent and will be a
yield to maturity, based on the arithmetic mean of the secondary market offered
rates as of approximately 3:30 P.M., New York City time, on such CMT Rate
Interest Determination Date reported, according to their written records, by
three leading primary United States government securities dealers in The City of
New York (which may include the Agents or their affiliates) (each, a "Reference
Dealer") selected by the Calculation Agent (from five such Reference Dealers
selected by the Calculation Agent and eliminating the highest quotation (or, in
the event of equality, one of the highest) and the lowest quotation (or, in the
event of equality, one of the lowest)), for the most recently issued direct
noncallable fixed rate obligations of the United States ("Treasury Notes") with
an original maturity of approximately the Designated CMT Maturity Index and a
remaining term to maturity of not less than such Designated CMT Maturity Index
minus one year. If the Calculation Agent is unable to obtain three such Treasury
Note quotations, the CMT Rate on such CMT Rate Interest Determination Date will
be calculated by the Calculation Agent and will be a yield to maturity based on
the arithmetic mean of the secondary market offered rates as of approximately
3:30 P.M., New York City time, on such CMT Rate Interest Determination Date of
three Reference Dealers in The City of New York (from five such Reference
Dealers selected by the Calculation Agent and eliminating the highest quotation
(or, in the event of equality, one of the highest) and the lowest quotation (or,
in the event of equality, one of the lowest)), for Treasury Notes with an
original maturity of the number of years that is the next highest to the
Designated CMT Maturity Index and a remaining term to maturity closest to the
Designated CMT Maturity Index and in an amount of at least $100 million. If
three or four (and not five) of such Reference Dealers are quoting as described
above, then the CMT Rate will be based on the arithmetic mean of the offered
rates obtained and neither the highest nor the lowest of such quotes will be
eliminated; provided, however, that if fewer than three Reference Dealers so
selected by the Calculation Agent are quoting as mentioned herein, the CMT Rate
determined as of such CMT Rate Interest Determination Date will be the CMT Rate
in effect on such CMT Rate Interest Determination Date. If two Treasury Notes
with an original maturity as described in the second preceding sentence have
remaining terms to maturity equally close to the Designated CMT Maturity Index,
the Calculation Agent will obtain quotations for the Treasury Note with the
shorter remaining term to maturity.
"Designated CMT Telerate Page" means the display on the Dow Jones Telerate
Service (or any successor service) on the page specified in the applicable
Pricing Supplement (or any other page as may replace such page on such service)
for the purpose of displaying Treasury Constant Maturities as reported in
H.15(519). If no such page is specified in the applicable Pricing Supplement,
the Designated CMT Telerate Page shall be 7052 for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of the
U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years) specified in
the applicable Pricing Supplement with respect
S-12
<PAGE>
to which the CMT Rate will be calculated or if no such maturity is specified in
the applicable Pricing Supplement, 2 years.
COMMERCIAL PAPER RATE. Unless otherwise specified in the applicable Pricing
Supplement, "Commercial Paper Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Commercial Paper Rate (a "Commercial Paper
Rate Interest Determination Date"), the Money Market Yield (as hereinafter
defined) on such date of the rate for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement as published in H.15(519) under
the caption "Commercial Paper--Nonfinancial." In the event that such rate is not
published by 3:00 P.M., New York City time, on the related Calculation Date,
then the Commercial Paper Rate on such Commercial Paper Rate Interest
Determination Date will be the Money Market Yield of the rate for commercial
paper having the Index Maturity specified in the applicable Pricing Supplement
as published in Composite Quotations under the heading "Commercial Paper" (with
an Index Maturity of one month or three months being deemed to be equivalent to
an Index Maturity of 30 days or 90 days, respectively). If such rate is not yet
published in either H.15(519) or Composite Quotations by 3:00 P.M., New York
City time, on the related Calculation Date, then the Commercial Paper Rate on
such Commercial Paper Rate Interest Determination Date will be calculated by the
Calculation Agent and will be the Money Market Yield of the arithmetic mean of
the offered rates at approximately 11:00 A.M., New York City time, on such
Commercial Paper Rate Interest Determination Date of three leading dealers of
commercial paper in The City of New York (which may include the Agents or their
affiliates) selected by the Calculation Agent for commercial paper having the
Index Maturity specified in the applicable Pricing Supplement placed for an
industrial issuer whose bond rating is "Aa", or the equivalent, from a
nationally recognized statistical rating organization; provided, however, that
if the dealers so selected by the Calculation Agent are not quoting as mentioned
in this sentence, the Commercial Paper Rate determined as of such Commercial
Paper Rate Interest Determination Date will be the Commercial Paper Rate in
effect on such Commercial Paper Rate Interest Determination Date.
"Money Market Yield" means a yield (expressed as a percentage) calculated in
accordance with the following formula:
<TABLE>
<S> <C>
Money Market Yield = D x 360
------------ X 100
360 - (D x M)
</TABLE>
where "D" refers to the applicable per annum rate for commercial paper quoted on
a bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the applicable Interest Reset Period.
ELEVENTH DISTRICT COST OF FUNDS RATE. Unless otherwise specified in the
applicable Pricing Supplement, "Eleventh District Cost of Funds Rate" means,
with respect to any Interest Determination Date relating to a Floating Rate Note
for which the interest rate is determined with reference to the Eleventh
District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Interest
Determination Date"), the rate equal to the monthly weighted average cost of
funds for the calendar month immediately preceding the month in which such
Eleventh District Cost of Funds Rate Interest Determination Date falls, as set
forth under the caption "11th District" on Telerate Page 7058 as of 11:00 A.M.,
San Francisco time, on such Eleventh District Cost of Funds Rate Interest
Determination Date. If such rate does not appear on Telerate Page 7058 on such
Eleventh District Cost of Funds Rate Interest Determination Date, then the
Eleventh District Cost of Funds Rate on such Eleventh District Cost of Funds
Rate Interest Determination Date shall be the monthly weighted average cost of
funds paid by member institutions of the Eleventh Federal Home Loan Bank
District that was most recently announced (the "Index") by the FHLB of San
Francisco as such cost of funds for the calendar month immediately preceding
such Eleventh District Cost of Funds Rate Interest Determination Date. If the
FHLB of San Francisco fails to announce the Index on or prior to such Eleventh
District Cost of Funds Rate Interest Determination Date for the calendar month
S-13
<PAGE>
immediately preceding such Eleventh District Cost of Funds Rate Interest
Determination Date, the Eleventh District Cost of Funds Rate determined as of
such Eleventh District Cost of Funds Rate Interest Determination Date will be
the Eleventh District Cost of Funds Rate in effect on such Eleventh District
Cost of Funds Rate Interest Determination Date.
FEDERAL FUNDS RATE. Unless otherwise specified in the applicable Pricing
Supplement, "Federal Funds Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Federal Funds Rate (a "Federal Funds Rate
Interest Determination Date"), the rate on such date for United States dollar
federal funds as published in H.15(519) under the heading "Federal Funds
(Effective)" or, if not published by 3:00 P.M., New York City time, on the
related Calculation Date, the rate on such Federal Funds Rate Interest
Determination Date as published in Composite Quotations under the heading
"Federal Funds/Effective Rate." If such rate is not published in either
H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the
related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate
Interest Determination Date will be calculated by the Calculation Agent and will
be the arithmetic mean of the rates for the last transaction in overnight United
States dollar federal funds arranged by three leading brokers of federal funds
transactions in The City of New York (which may include the Agents or their
affiliates) selected by the Calculation Agent prior to 9:00 A.M., New York City
time, on such Federal Funds Rate Interest Determination Date; provided, however,
that if the brokers so selected by the Calculation Agent are not quoting as
mentioned in this sentence, the Federal Funds Rate determined as of such Federal
Funds Rate Interest Determination Date will be the Federal Funds Rate in effect
on such Federal Funds Rate Interest Determination Date.
LIBOR. Unless otherwise specified in the applicable Pricing Supplement,
"LIBOR" means the rate determined in accordance with the following provisions:
(i) With respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference
to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will be either: (a)
if "LIBOR Reuters" is specified in the applicable Pricing Supplement, the
arithmetic mean of the offered rates (unless the Designated LIBOR Page by
its terms provides only for a single rate, in which case such single rate
shall be used) for deposits in the Designated LIBOR Currency having the
Index Maturity specified in such Pricing Supplement, commencing on the
applicable Interest Reset Date, that appear (or, if only a single rate is
required as aforesaid, appears) on the Designated LIBOR Page as of 11:00
A.M., London time, on such LIBOR Interest Determination Date, or (b) if
"LIBOR Telerate" is specified in the applicable Pricing Supplement or if
neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the applicable
Pricing Supplement as the method for calculating LIBOR, the rate for
deposits in the Designated LIBOR Currency having the Index Maturity
specified in such Pricing Supplement, commencing on such Interest Reset
Date, that appears on the Designated LIBOR Page as of 11:00 A.M., London
time, on such LIBOR Interest Determination Date. If fewer than two such
offered rates so appear, or if no such rate so appears, as applicable, LIBOR
on such LIBOR Interest Determination Date will be determined in accordance
with the provisions described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which fewer
than two offered rates appear, or no rate appears, as the case may be, on
the Designated LIBOR Page as specified in clause (i) above, the Calculation
Agent will request the principal London offices of each of four major
reference banks (which may include affiliates of the Agents) in the London
interbank market, as selected by the Calculation Agent, to provide the
Calculation Agent with its offered quotation for deposits in the Designated
LIBOR Currency for the period of the Index Maturity specified in the
applicable Pricing Supplement, commencing on the applicable Interest Reset
Date, to prime banks in the London interbank market at approximately 11:00
A.M., London time, on such LIBOR Interest Determination Date and in a
principal amount that is representative for a single transaction in such
Designated LIBOR Currency in such market at such time. If at least two such
quotations are so
S-14
<PAGE>
provided, then LIBOR on such LIBOR Interest Determination Date will be the
arithmetic mean of such quotations. If fewer than two such quotations are so
provided, then LIBOR on such LIBOR Interest Determination Date will be the
arithmetic mean of the rates quoted at approximately 11:00 A.M., in the
applicable Principal Financial Center, on such LIBOR Interest Determination
Date by three major banks (which may include affiliates of the Agents) in
such Principal Financial Center selected by the Calculation Agent for loans
in the Designated LIBOR Currency to leading European banks, having the Index
Maturity specified in the applicable Pricing Supplement and in a principal
amount that is representative for a single transaction in the Designated
LIBOR Currency in such market at such time; provided, however, that if the
banks so selected by the Calculation Agent are not quoting as mentioned in
this sentence, LIBOR determined as of such LIBOR Interest Determination Date
will be LIBOR in effect on such LIBOR Interest Determination Date.
"Designated LIBOR Currency" means the currency or composite currency
specified in the applicable Pricing Supplement as to which LIBOR shall be
calculated or, if no such currency or composite currency is specified in the
applicable Pricing Supplement, United States dollars.
"Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in the
applicable Pricing Supplement, the display on the Reuter Monitor Money Rates
Service (or any successor service) on the page specified in such Pricing
Supplement (or any other page as may replace such page on such service) for the
purpose of displaying the London interbank rates of major banks for the
applicable Designated LIBOR Currency, or (b) if "LIBOR Telerate" is specified in
the applicable Pricing Supplement or neither "LIBOR Reuters" nor "LIBOR
Telerate" is specified in the applicable Pricing Supplement as the method for
calculating LIBOR, the display on the Dow Jones Telerate Service (or any
successor service) on the page specified in such Pricing Supplement (or any
other page as may replace such page on such service) for the purpose of
displaying the London interbank rates of major banks for the Designated LIBOR
currency.
PRIME RATE. Unless otherwise specified in the applicable Pricing
Supplement, "Prime Rate" means, with respect to any Interest Determination Date
relating to a Floating Rate Note for which the interest rate is determined with
reference to the Prime Rate (a "Prime Rate Interest Determination Date"), the
rate on such date as such rate is published in H.15(519) under the heading "Bank
Prime Loan." If such rate is not published prior to 3:00 P.M., New York City
time, on the related Calculation Date, then the Prime Rate shall be the
arithmetic mean of the rates of interest publicly announced by each bank that
appears on the Reuters Screen USPRIME1 Page (as hereinafter defined) as such
bank's prime rate or base lending rate as in effect for such Prime Rate Interest
Determination Date. If fewer than four such rates appear on the Reuters Screen
USPRIME1 Page for such Prime Rate Interest Determination Date, then the Prime
Rate shall be the arithmetic mean of the prime rates or base lending rates
quoted on the basis of the actual number of days in the year divided by a
360-day year as of the close of business on such Prime Rate Interest
Determination Date by four major money center banks (which may include
affiliates of the Agents) in The City of New York selected by the Calculation
Agent. If fewer than four such quotations are so provided, then the Prime Rate
shall be the arithmetic mean of four prime rates quoted on the basis of the
actual number of days in the year divided by a 360-day year as of the close of
business on such Prime Rate Interest Determination Date as furnished in The City
of New York by the major money center banks, if any, that have provided such
quotations and by a reasonable number of substitute banks or trust companies
(which may include affiliates of the Agents) to obtain four such prime rate
quotations, provided such substitute banks or trust companies are organized and
doing business under the laws of the United States, or any State thereof, each
having total equity capital of at least $500 million and being subject to
supervision or examination by Federal or State authority, selected by the
Calculation Agent to provide such rate or rates; provided, however, that if the
banks or trust companies so selected by the Calculation Agent are not quoting as
mentioned in this sentence, the Prime Rate determined as of such Prime Rate
Interest Determination Date will be the Prime Rate in effect on such Prime Rate
Interest Determination Date.
S-15
<PAGE>
"Reuters Screen USPRIME1 Page" means the display on the Reuter Monitor Money
Rates Service (or any successor service) on the "USPRIME1" page (or such other
page as may replace the USPRIME1 page on such service) for the purpose of
displaying prime rates or base lending rates of major United States banks.
TREASURY RATE. Unless otherwise specified in the applicable Pricing
Supplement, "Treasury Rate" means, with respect to any Interest Determination
Date relating to a Floating Rate Note for which the interest rate is determined
by reference to the Treasury Rate (a "Treasury Rate Interest Determination
Date"), the rate from the auction held on such Treasury Rate Interest
Determination Date (the "Auction") of direct obligations of the United States
("Treasury Bills") having the Index Maturity specified in the applicable Pricing
Supplement, as such rate is published in H.15(519) under the heading "Treasury
Bills-auction average (investment)" or, if not published by 3:00 P.M., New York
City time, on the related Calculation Date, the auction average rate of such
Treasury Bills (expressed as a bond equivalent on the basis of a year of 365 or
366 days, as applicable, and applied on a daily basis) as otherwise announced by
the United States Department of the Treasury. In the event that the results of
the Auction of Treasury Bills having the Index Maturity specified in the
applicable Pricing Supplement are not reported as provided by 3:00 P.M., New
York City time, on the related Calculation Date, or if no such Auction is held,
then the Treasury Rate will be calculated by the Calculation Agent and will be a
yield to maturity (expressed as a bond equivalent on the basis of a year of 365
or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean
of the secondary market bid rates, as of approximately 3:30 P.M., New York City
time, on such Treasury Rate Interest Determination Date, of three leading
primary United States government securities dealers (which may include the
Agents or their affiliates) selected by the Calculation Agent, for the issue of
Treasury Bills with a remaining maturity closest to the Index Maturity specified
in the applicable Pricing Supplement; provided, however, that if the dealers so
selected by the Calculation Agent are not quoting as mentioned in this sentence,
the Treasury Rate determined as of such Treasury Rate Interest Determination
Date will be the Treasury Rate in effect on such Treasury Rate Interest
Determination Date.
OTHER/ADDITIONAL PROVISIONS; ADDENDUM
Any provisions with respect to the Notes, including the specification and
determination of one or more Interest Rate Bases, the calculation of the
interest rate applicable to a Floating Rate Note, the Interest Payment Dates,
the Stated Maturity Date, any redemption or repayment provisions or any other
term relating thereto, may be modified and/or supplemented as specified under
"Other/Additional Provisions" on the face thereof or in an Addendum relating
thereto, if so specified on the face thereof and described in the applicable
Pricing Supplement.
REMARKETED NOTES
From time to time, the Trust may offer Notes ("Remarketed Notes") bearing
interest initially at the rate and through the date set forth in the applicable
Pricing Supplement (the "Initial Interest Rate Period"). Thereafter, each
Remarketed Note will bear interest at rates established by a remarketing agent
(the "Remarketing Agent") selected by the Trust as specified in the applicable
Pricing Supplement. In the event the Trust issues Remarketed Notes, it will
enter into a Remarketing Agreement with each Remarketing Agent. Further
information concerning additional terms and provisions of Remarketed Notes will
be specified in the applicable Pricing Supplement.
DISCOUNT NOTES
The Trust may offer Notes ("Discount Notes") from time to time that have an
Issue Price (as specified in the applicable Pricing Supplement) that is less
than 100% of the principal amount thereof (I.E., par) by more than a percentage
equal to the product of 0.25% and the number of full years to the Stated
Maturity Date. Discount Notes may not bear any interest currently or may bear
interest at a rate that is below
S-16
<PAGE>
market rates at the time of issuance. The difference between the Issue Price of
a Discount Note and par is referred to herein as the "Discount." In the event of
redemption, repayment or acceleration of maturity of a Discount Note, the amount
payable to the Holder of such Discount Note will be equal to the sum of (i) the
Issue Price (increased by any accruals of Discount) and, in the event of any
redemption of such Discount Note (if applicable), multiplied by the Initial
Redemption Percentage (as adjusted by the Annual Redemption Percentage
Reduction, if applicable) and (ii) any unpaid interest accrued thereon to the
date of such redemption, repayment or acceleration of maturity, as the case may
be.
Unless otherwise specified in the applicable Pricing Supplement, for
purposes of determining the amount of Discount that has accrued as of any date
on which a redemption, repayment or acceleration of maturity occurs for a
Discount Note, such Discount will be accrued using a constant yield method. The
constant yield will be calculated using a 30-day month, 360-day year convention,
a compounding period that, except for the Initial Period (as hereinafter
defined), corresponds to the shortest period between Interest Payment Dates for
the applicable Discount Note (with ratable accruals within a compounding
period), a coupon rate equal to the initial coupon rate applicable to such
Discount Note and an assumption that the maturity of such Discount Note will not
be accelerated. If the period from the date of issue to the initial Interest
Payment Date for a Discount Note (the "Initial Period") is shorter than the
compounding period for such Discount Note, a proportionate amount of the yield
for an entire compounding period will be accrued. If the Initial Period is
longer than the compounding period, then such period will be divided into a
regular compounding period and a short period with the short period being
treated as provided in the preceding sentence. The accrual of the applicable
Discount may differ from the accrual of original issue discount for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"), certain Discount
Notes may not be treated as having original issue discount within the meaning of
the Code, and Notes other than Discount Notes may be treated as issued with
original issue discount for federal income tax purposes. See "Certain United
States Federal Income Tax Considerations."
INDEXED NOTES
The Trust may from time to time offer Notes ("Indexed Notes") with the
amount of principal, premium and/or interest payable in respect thereof to be
determined with reference to the price or prices of specified commodities or
stocks, to the exchange rate of one or more designated currencies (including a
composite currency such as the ECU) relative to an indexed currency or to other
items, in each case as specified in the applicable Pricing Supplement. In
certain cases, Holders of Indexed Notes may receive a principal payment on the
Maturity Date that is greater than or less than the principal amount of such
Indexed Notes depending upon the relative value on the Maturity Date of the
specified indexed item. Information as to the method for determining the amount
of principal, premium, if any, and/or interest, if any, payable in respect of
Indexed Notes, certain historical information with respect to the specified
indexed item and any material tax considerations associated with an investment
in Indexed Notes will be specified in the applicable Pricing Supplement. See
also "Risk Factors."
AMORTIZING NOTES
The Trust may from time to time offer Notes ("Amortizing Notes") with the
amount of principal thereof and interest thereon payable in installments over
the term of such Notes. Unless otherwise specified in the applicable Pricing
Supplement, interest on each Amortizing Note will be computed on the basis of a
360-day year of twelve 30-day months. Payments with respect to Amortizing Notes
will be applied first to interest due and payable thereon and then to the
reduction of the unpaid principal amount thereof. Further information concerning
additional terms and provisions of Amortizing Notes will be specified in the
applicable Pricing Supplement, including a table setting forth repayment
information for such Amortizing Notes.
S-17
<PAGE>
BOOK-ENTRY NOTES
The Trust has established a depositary arrangement with the Depositary with
respect to the Book-Entry Notes, the terms of which are summarized below. Any
additional or differing terms of the depositary arrangement with respect to the
Book-Entry Notes will be described in the applicable Pricing Supplement.
Upon issuance, all Book-Entry Notes of like tenor and terms up to
$200,000,000 aggregate principal amount will be represented by a single Global
Security. Each Global Security representing Book-Entry Notes will be deposited
with, or on behalf of, the Depositary and will be registered in the name of the
Depositary or a nominee of the Depositary. No Global Security may be transferred
except as a whole by a nominee of the Depositary to the Depositary or to another
nominee of the Depositary, or by the Depositary or such nominee to a successor
of the Depositary or a nominee of such successor.
So long as the Depositary or its nominee is the registered owner of a Global
Security, the Depositary or its nominee, as the case may be, will be the sole
Holder of the Book-Entry Notes represented thereby for all purposes under the
Indenture. Except as otherwise provided below, the Beneficial Owners of the
Global Security or Securities representing Book-Entry Notes will not be entitled
to receive physical delivery of Certificated Notes and will not be considered
the Holders thereof for any purpose under the Indenture, and no Global Security
representing Book-Entry Notes shall be exchangeable or transferable.
Accordingly, each Beneficial Owner must rely on the procedures of the Depositary
and, if such Beneficial Owner is not a Participant, on the procedures of the
Participant through which such Beneficial Owner owns its interest in order to
exercise any rights of a Holder under such Global Security or the Indenture. The
laws of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. Such limits and such
laws may impair the ability to transfer beneficial interests in a Global
Security representing Book-Entry Notes.
Unless otherwise specified in the applicable Pricing Supplement, each Global
Security representing Book-Entry Notes will be exchangeable for Certificated
Notes of like tenor and terms and of differing authorized denominations
aggregating a like principal amount, only if (i) the Depositary notifies the
Trust that it is unwilling or unable to continue as Depositary for the Global
Securities or the Trust becomes aware that the Depositary has ceased to be a
clearing agency registered under the Exchange Act and, in any such case, the
Trust shall not have appointed a successor to the Depositary within 60 days
thereafter, (ii) the Trust, in its sole discretion, determines that the Global
Securities shall be exchangeable for Certificated Notes or (iii) an Event of
Default shall have occurred and be continuing with respect to the Notes under
the Indenture. Upon any such exchange, the Certificated Notes shall be
registered in the names of the Beneficial Owners of the Global Security or
Securities representing Book-Entry Notes, which names shall be provided by the
Depositary's relevant Participants (as identified by the Depositary) to the
Indenture Trustee.
The following is based on information furnished by the Depositary:
The Depositary will act as securities depository for the Book-Entry
Notes. The Book-Entry Notes will be issued as fully registered securities
registered in the name of Cede & Co. (the Depositary's partnership nominee).
One fully registered Global Security will be issued for each issue of
Book-Entry Notes, each in the aggregate principal amount of such issue, and
will be deposited with the Depositary. If, however, the aggregate principal
amount of any issue exceeds $200,000,000, one Global Security will be issued
with respect to each $200,000,000 of principal amount and an additional
Global Security will be issued with respect to any remaining principal
amount of such issue.
The Depositary is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and
a "clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. The Depositary holds securities that its participants
("Participants") deposit with the Depositary.
S-18
<PAGE>
The Depositary also facilitates the settlement among Participants of
securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement
of securities certificates. Direct Participants of the Depositary ("Direct
Participants") include securities brokers and dealers (including the Agent),
banks, trust companies, clearing corporations and certain other
organizations. The Depositary is owned by a number of its Direct
Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the Depositary's system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the Securities and
Exchange Commission.
Purchases of Book-Entry Notes under the Depositary's system must be made
by or through Direct Participants, which will receive a credit for such
Book-Entry Notes on the Depositary's records. The ownership interest of each
actual purchaser of each Book-Entry Note represented by a Global Security
("Beneficial Owner") is in turn to be recorded on the records of Direct
Participants and Indirect Participants. Beneficial Owners will not receive
written confirmation from the Depositary of their purchase, but Beneficial
Owners are expected to receive written confirmations providing details of
the transaction, as well as periodic statements of their holdings, from the
Direct Participants or Indirect Participants through which such Beneficial
Owner entered into the transaction. Transfers of ownership interests in a
Global Security representing Book-Entry Notes are to be accomplished by
entries made on the books of Participants acting on behalf of Beneficial
Owners. Beneficial Owners of a Global Security representing Book-Entry Notes
will not receive Certificated Notes representing their ownership interests
therein, except in the event that use of the book-entry system for such
Book-Entry Notes is discontinued.
To facilitate subsequent transfers, all Global Securities representing
Book-Entry Notes that are deposited with, or on behalf of, the Depositary
are registered in the name of the Depositary's nominee, Cede & Co. The
deposit of Global Securities with, or on behalf of, the Depositary and their
registration in the name of Cede & Co. effect no change in beneficial
ownership. The Depositary has no knowledge of the actual Beneficial Owners
of the Global Securities representing the Book-Entry Notes; the Depositary's
records reflect only the identity of the Direct Participants to whose
accounts such Book-Entry Notes are credited, which may or may not be the
Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to
Direct Participants, by Direct Participants to Indirect Participants, and by
Direct Participants and Indirect Participants to Beneficial Owners will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consent or vote with respect
to the Global Securities representing the Book-Entry Notes. Under its usual
procedures, the Depositary mails an Omnibus Proxy to the Trust as soon as
possible after the applicable record date. The Omnibus Proxy assigns Cede &
Co.'s consenting or voting rights to those Direct Participants to whose
accounts the Book-Entry Notes are credited on the applicable record date
(identified in a listing attached to the Omnibus Proxy).
Principal, premium, if any, and/or interest, if any, payments on the
Global Securities representing the Book-Entry Notes will be made in
immediately available funds to the Depositary. The Depositary's practice is
to credit Direct Participants' accounts on the applicable payment date in
accordance with their respective holdings shown on the Depositary's records
unless the Depositary has reason to believe that it will not receive payment
on such date. Payments by Participants to Beneficial Owners will be governed
by standing instructions and customary practices, as is the case with
securities held
S-19
<PAGE>
for the accounts of customers in bearer form or registered in "street name,"
and will be the responsibility of such Participant and not of the
Depositary, the Indenture Trustee or the Trust, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal, premium, if any, and/or interest, if any, to the Depositary is
the responsibility of the Trust and the Indenture Trustee, disbursement of
such payments to Direct Participants shall be the responsibility of the
Depositary, and disbursement of such payments to the Beneficial Owners shall
be the responsibility of Direct Participants and Indirect Participants.
If applicable, redemption notices shall be sent to Cede & Co. If less
than all of the Book-Entry Notes within an issue are being redeemed, the
Depositary's practice is to determine by lot the amount of the interest of
each Direct Participant in such issue to be redeemed.
A Beneficial Owner shall give notice of any option to elect to have its
Book-Entry Notes repaid by the Trust, through its Participant, to the
Indenture Trustee, and shall effect delivery of such Book-Entry Notes by
causing the Direct Participant to transfer the Participant's interest in the
Global Security or Securities representing such Book-Entry Notes, on the
Depositary's records, to the Indenture Trustee. The requirement for physical
delivery of Book-Entry Notes in connection with a demand for repayment will
be deemed satisfied when the ownership rights in the Global Security or
Securities representing such Book-Entry Notes are transferred by Direct
Participants on the Depositary's records.
The Depositary may discontinue providing its services as securities
depository with respect to the Book-Entry Notes at any time by giving
reasonable notice to the Trust or the Indenture Trustee. Under such
circumstances, in the event that a successor securities depository is not
obtained, Certificated Notes are required to be printed and delivered.
The Trust may decide to discontinue use of the system of book-entry
transfers through the Depositary (or a successor securities depository). In
that event, Certificated Notes will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's system has been obtained from sources that the Trust believes to be
reliable, but the Trust takes no responsibility for the accuracy thereof.
SPECIAL PROVISIONS RELATING TO FOREIGN CURRENCY NOTES
GENERAL
Unless otherwise specified in the applicable Pricing Supplement, Foreign
Currency Notes will not be sold in, or to residents of, the country issuing the
applicable currency. The information set forth in this Prospectus Supplement is
directed to prospective purchasers who are United States residents and, with
respect to Foreign Currency Notes, is by necessity incomplete. The Trust and the
Agents disclaim any responsibility to advise prospective purchasers who are
residents of countries other than the United States with respect to any matters
that may affect the purchase, holding or receipt of payments of principal of,
and premium, if any, and interest, if any, on, the Foreign Currency Notes. Such
persons should consult their own financial and legal advisors with regard to
such matters. See "Risk Factors--Exchange Rates and Exchange Controls."
PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST, IF ANY
Unless otherwise specified in the applicable Pricing Supplement, the Trust
is obligated to make payments of principal of, and premium, if any, and
interest, if any, on, Foreign Currency Notes in the applicable Specified
Currency. Any such amounts payable by the Trust in the Specified Currency will
be converted by the exchange rate agent named in the applicable Pricing
Supplement (the "Exchange Rate Agent") into United States dollars for payment to
Holders unless otherwise specified in the applicable
S-20
<PAGE>
Pricing Supplement or the Holder of a Foreign Currency Note elects, in the
manner hereinafter described, to receive such amounts payable in the Specified
Currency.
Any United States dollar amount to be received by a Holder of a Foreign
Currency Note will be based on the highest bid quotation in The City of New York
received by the Exchange Rate Agent at approximately 11:00 A.M., New York City
time, on the second Business Day preceding the applicable payment date from
three recognized foreign exchange dealers (one of whom may be the Exchange Rate
Agent) selected by the Exchange Rate Agent and approved by the Trust for the
purchase by the quoting dealer of the Specified Currency for United States
dollars for settlement on such payment date in the aggregate amount of such
Specified Currency payable to all Holders of Foreign Currency Notes scheduled to
receive United States dollar payments and at which the applicable dealer commits
to execute a contract. All currency exchange costs will be borne by the Holders
of such Foreign Currency Notes by deductions from such payments. If three such
bid quotations are not available, payments will be made in the Specified
Currency.
Holders of Foreign Currency Notes may elect to receive all or a specified
portion of any payment of principal, premium, if any, and/or interest, if any,
in the Specified Currency by submitting a written request for such payment to
the Indenture Trustee at its corporate trust office in The City of New York on
or prior to the applicable Record Date or at least fifteen calendar days prior
to the Maturity Date, as the case may be. Such written request may be mailed or
hand delivered or sent by cable, telex or other form of facsimile transmission.
Holders of Foreign Currency Notes may elect to receive all or a specified
portion of all future payments in the Specified Currency and need not file a
separate election for each payment. Such election will remain in effect until
revoked by written notice to the Indenture Trustee, but written notice of any
such revocation must be received by the Indenture Trustee on or prior to the
applicable Record Date or at least fifteen calendar days prior to the Maturity
Date, as the case may be. Holders of Foreign Currency Notes to be held in the
name of a broker or nominee should contact such broker or nominee to determine
whether and how an election to receive payments in the Specified Currency may be
made.
Unless otherwise specified in the applicable Pricing Supplement, if the
Specified Currency is other than United States dollars, a Beneficial Owner of
the related Global Security or Securities that elects to receive payments of
principal, premium, if any, and/or interest, if any, in the Specified Currency
must notify the Participant through which it owns its interest on or prior to
the applicable Record Date or at least fifteen calendar days prior to the
Maturity Date, as the case may be, of such Beneficial Owner's election. Such
Participant must notify the Depositary of such election on or prior to the third
Business Day after such Record Date or at least twelve calendar days prior to
the Maturity Date, as the case may be, and the Depositary will notify the
Indenture Trustee of such election on or prior to the fifth Business Day after
such Record Date or at least ten calendar days prior to the Maturity Date, as
the case may be. If complete instructions are received by the Participant from
the Beneficial Owner and forwarded by the Participant to the Depositary, and by
the Depositary to the Indenture Trustee, on or prior to such dates, then such
Beneficial Owner will receive payments in the applicable foreign currency or
composite currency.
Payments of the principal of, and premium, if any, and/or interest, if any,
on, Foreign Currency Notes that are to be made in United States dollars will be
made in the manner specified herein with respect to Notes denominated in United
States dollars. See "Description of Notes--General." Payments of interest, if
any, on Foreign Currency Notes that are to be made in the Specified Currency on
an Interest Payment Date other than the Maturity Date will be made by check
mailed to the address of the Holders of such Foreign Currency Notes as they
appear in the Security Register, subject to the right to receive such interest
payments by wire transfer of immediately available funds under the circumstances
described under "Description of Notes--General." Payments of principal of, and
premium, if any, and/or interest, if any, on, Foreign Currency Notes that are to
be made in the Specified Currency on the Maturity Date will be made by wire
transfer of immediately available funds to an account with a bank designated at
least fifteen calendar days prior to the Maturity Date by each Holder thereof,
provided that such bank has appropriate facilities therefor and that the
applicable Foreign Currency Note is presented and surrendered at the office
S-21
<PAGE>
or agency maintained by the Trust for such purpose in the Borough of Manhattan,
The City of New York, currently the corporate trust office of the Indenture
Trustee c/o First Chicago Trust Company of New York, 14 Wall Street, Eighth
Floor, New York, New York 10005, in time for the Indenture Trustee to make such
payments in such funds in accordance with its normal procedures.
AVAILABILITY OF SPECIFIED CURRENCY
Except as set forth below, if the Specified Currency for a Foreign Currency
Note is not available for the required payment of principal, premium, if any,
and/or interest, if any, in respect thereof, due to the imposition of exchange
controls or other circumstances beyond the control of the Trust, the Trust will
be entitled to satisfy its obligations to the Holder of such Foreign Currency
Note by making such payment in United States dollars on the basis of the Market
Exchange Rate, computed by the Exchange Rate Agent, on the second Business Day
prior to such payment or, if such Market Exchange Rate is not then available, on
the basis of the most recently available Market Exchange Rate, or as otherwise
specified in the applicable Pricing Supplement.
If the Specified Currency for a Foreign Currency Note is a composite
currency that is not available for the required payment of principal, premium,
if any, and/or interest, if any, in respect thereof due to the imposition of
exchange controls or other circumstances beyond the control of the Trust, the
Trust will be entitled to satisfy its obligations to the Holder of such Foreign
Currency Note by making such payment in United States dollars on the basis of
the equivalent of the composite currency in United States dollars. The component
currencies of the composite currency for this purpose (the "Component
Currencies") shall be the currency amounts that were components of the composite
currency as of the last day on which the composite currency was used. The
equivalent of the composite currency in United States dollars shall be
calculated by aggregating the United States dollar equivalents of the Component
Currencies. The United States dollar equivalent of each of the Component
Currencies shall be determined by the Exchange Rate Agent on the basis of the
Market Exchange Rate on the second Business Day prior to the required payment,
or, if such Market Exchange Rate is not then available, on the basis of the most
recently available Market Exchange Rate for each such Component Currency, or as
otherwise specified in the applicable Pricing Supplement.
If the official unit of any Component Currency is altered by way of
combination or subdivision, the number of units of the currency as a Component
Currency shall be divided or multiplied in the same proportion. If two or more
Component Currencies are consolidated into a single currency, the amounts of
those currencies as Component Currencies shall be replaced by an amount in such
single currency equal to the sum of the amounts of the consolidated Component
Currencies expressed in such single currency. If any Component Currency is
divided into two or more currencies, the amount of the original Component
Currency shall be replaced by the amounts of such two or more currencies, the
sum of which shall be equal to the amount of the original Component Currency.
The "Market Exchange Rate" for a Specified Currency other than United States
dollars means the noon dollar buying rate in The City of New York for cable
transfers for such Specified Currency as certified for customs purposes by (or
if not so certified, as otherwise determined by) the Federal Reserve Bank of New
York. Any payment made in United States dollars under such circumstances where
the required payment is in a Specified Currency other than United States dollars
will not constitute an Event of Default under the Indenture with respect to the
Notes.
All determinations referred to above made by the Exchange Rate Agent shall
be at its sole discretion and shall, in the absence of manifest error, be
conclusive for all purposes and binding on the Holders of the Foreign Currency
Notes.
S-22
<PAGE>
JUDGMENTS
Under current New York law, a state court in the State of New York rendering
a judgment in respect of a Foreign Currency Note would be required to render
such judgment in the Specified Currency, and such foreign currency judgment
would be converted into United States dollars at the exchange rate prevailing on
the date of entry of such judgment. Accordingly, the Holder of such Foreign
Currency Note would be subject to exchange rate fluctuations between the date of
entry of such foreign currency judgment and the time the amount of such foreign
currency judgment is paid to such Holder in United States dollars and converted
by such Holder into the Specified Currency. It is not certain, however, that a
non-New York state court would follow the same rules and procedures with respect
to conversions of foreign currency judgments.
The Trust will indemnify the Holder of any Note against any loss incurred by
such Holder as a result of any judgment or order being given or made for any
amount due under such Note and such judgment or order requiring payment in a
currency or composite currency (the "Judgment Currency") other than the
Specified Currency, and as a result of any variation between (i) the rate of
exchange at which the Specified Currency amount is converted into the Judgment
Currency for the purpose of such judgment or order, and (ii) the rate of
exchange at which the Holder of such Note, on the date of payment of such
judgment or order, is able to purchase the Specified Currency with the amount of
the Judgment Currency actually received by such Holder, as the case may be.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain United States Federal income tax
consequences of the purchase, ownership and disposition of the Notes is based
upon laws, regulations ("Treasury Regulations"), rulings and decisions now in
effect, all of which are subject to change (including changes in effective
dates) or possible differing interpretations. It deals only with Notes held as
capital assets and does not purport to deal with persons in special tax
situations, such as financial institutions, insurance companies, regulated
investment companies, dealers in securities or currencies, persons holding Notes
as a hedge against currency risks or as a position in a "straddle" for tax
purposes, or persons whose functional currency is not the United States dollar.
It also does not deal with holders other than original purchasers (except where
otherwise specifically noted). Persons considering the purchase of the Notes
should consult their own tax advisors concerning the application of United
States Federal income tax laws to their particular situations as well as any
consequences of the purchase, ownership and disposition of the Notes arising
under the laws of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation or a partnership (including an entity
treated as a corporation or a partnership for United States Federal income tax
purposes) created or organized in or under the laws of the United States or of
any State or the District of Columbia (unless, in the case of a partnership,
Treasury Regulations are adopted that provide otherwise), (iii) an estate the
income of which is subject to United States Federal income taxation regardless
of its source, (iv) any other person whose income or gain in respect of a Note
is effectively connected with the conduct of a United States trade or business,
or (v) any trust if a court within the United States is able to exercise primary
supervision over the administration of the trust, and one or more United States
persons have the authority to control all substantial decisions of the trust. As
used herein, the term "non-U.S. Holder" means a beneficial owner of a Note that
is not a U.S. Holder.
S-23
<PAGE>
U.S. HOLDERS
PAYMENTS OF INTEREST
Subject to the original issue discount rules described below, payments of
interest on a Note generally will be taxable to a U.S. Holder as ordinary
interest income at the time such payments are accrued or are received (in
accordance with the U.S. Holder's regular method of tax accounting).
ORIGINAL ISSUE DISCOUNT
The following summary is a general discussion of the United States Federal
income tax consequences to U.S. Holders of the purchase, ownership and
disposition of Notes issued with original issue discount ("Original Issue
Discount Notes").
For United States Federal income tax purposes, original issue discount is
the excess of the stated redemption price at maturity of a Note over its issue
price, if such excess equals or exceeds a DE MINIMIS amount (generally 1/4 of 1%
of the Note's stated redemption price at maturity multiplied by the number of
complete years to its maturity from its issue date or, in the case of a Note
providing for the payment of any amount other than qualified stated interest (as
hereinafter defined) prior to maturity, multiplied by the weighted average
maturity of such Note). The issue price of each Note in an issue of Notes equals
the first price at which a substantial amount of such Notes has been sold
(ignoring sales to bond houses, brokers, or similar persons or organizations
acting in the capacity of underwriters, placement agents, or wholesalers). The
stated redemption price at maturity of a Note is the sum of all payments
provided by the Note other than "qualified stated interest" payments. In the
case of a Fixed Rate Note, the term "qualified stated interest" generally means
stated interest that is unconditionally payable in cash or property (other than
debt instruments of the issuer) at least annually at a single fixed rate.
Further, if a Note bears interest for one or more accrual periods at a rate
below the rate applicable for the remaining term of such Note (E.G., Notes with
teaser rates or interest holidays), and if the greater of either the resulting
foregone interest on such Note or any "true" discount on such Note (I.E., the
excess of the Note's stated principal amount over its issue price) equals or
exceeds a specified DE MINIMIS amount, then the stated interest on the Note
would be treated as original issue discount rather than qualified stated
interest.
Payments of qualified stated interest on a Note are taxable to an U.S.
Holder as ordinary interest income at the time such payments are accrued or are
received (in accordance with the U.S. Holder's regular method of tax
accounting). An U.S. Holder of an Original Issue Discount Note with a maturity
date more than one year from the date of issue must include original issue
discount in income as ordinary interest for United States Federal income tax
purposes as it accrues under a constant yield method in advance of receipt of
the cash payments attributable to such income, regardless of such U.S. Holder's
regular method of tax accounting. In general, the amount of original issue
discount included in income by the initial U.S. Holder of an Original Issue
Discount Note is the sum of the daily portions of original issue discount with
respect to such Original Issue Discount Note for each day during the taxable
year (or portion of the taxable year) on which such U.S. Holder held such
Original Issue Discount Note. The "daily portion" of original issue discount on
any Original Issue Discount Note is determined by allocating to each day in any
accrual period a ratable portion of the original issue discount allocable to
that accrual period. An "accrual period" may be of any length and the accrual
periods may vary in length over the term of the Original Issue Discount Note,
provided that each accrual period is no longer than one year and each scheduled
payment of principal or interest occurs either on the final day of an accrual
period or on the first day of an accrual period. The amount of original issue
discount allocable to each accrual period is generally equal to the difference
between (i) the product of the Original Issue Discount Note's adjusted issue
price at the beginning of such accrual period and its yield to maturity
(determined on the basis of compounding at the close of each accrual period and
appropriately adjusted to take into account the length of the particular accrual
period) and (ii) the amount of any qualified stated interest payments allocable
to
S-24
<PAGE>
such accrual period. The "adjusted issue price" of an Original Issue Discount
Note at the beginning of any accrual period is the sum of the issue price of the
Original Issue Discount Note plus the amount of original issue discount
allocable to all prior accrual periods minus the amount of any prior payments on
the Original Issue Discount Note that were not qualified stated interest
payments. Under these rules, U.S. Holders generally will have to include in
income increasingly greater amounts of original issue discount in successive
accrual periods.
An U.S. Holder who purchases an Original Issue Discount Note for an amount
that is greater than its adjusted issue price as of the purchase date and less
than or equal to the sum of all amounts payable on the Original Issue Discount
Note after the purchase date other than payments of qualified stated interest,
will be considered to have purchased the Original Issue Discount Note at an
"acquisition premium." Under the acquisition premium rules, the amount of
original issue discount that such U.S. Holder must include in its gross income
with respect to such Original Issue Discount Note for any taxable year (or
portion thereof in which the U.S. Holder holds the Original Issue Discount Note)
will be reduced (but not below zero) by the portion of the acquisition premium
properly allocable to the period.
Floating Rate Notes and Indexed Notes ("Variable Notes") are subject to
special rules whereby a Variable Note will qualify as a "variable rate debt
instrument" if (a) its issue price does not exceed the total noncontingent
principal payments due under the Variable Note by more than a specified DE
MINIMIS amount and (b) it provides for stated interest, paid or compounded at
least annually, at current values of (i) one or more qualified floating rates,
(ii) a single fixed rate and one or more qualified floating rates, (iii) a
single objective rate, or (iv) a single fixed rate and a single objective rate
that is a qualified inverse floating rate.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Note is denominated. Although a multiple of a qualified floating rate
will generally not itself constitute a qualified floating rate, a variable rate
equal to the product of a qualified floating rate and a fixed multiple that is
greater than .65 but not more than 1.35 will constitute a qualified floating
rate. A variable rate equal to the product of a qualified floating rate and a
fixed multiple that is greater than .65 but not more than 1.35, increased or
decreased by a fixed rate, will also constitute a qualified floating rate. In
addition, under the applicable Treasury Regulations, two or more qualified
floating rates that can reasonably be expected to have approximately the same
values throughout the term of the Variable Note (E.G., two or more qualified
floating rates with values within 25 basis points of each other as determined on
the Variable Note's issue date) will be treated as a single qualified floating
rate. Notwithstanding the foregoing, a variable rate that would otherwise
constitute a qualified floating rate but that is subject to one or more
restrictions such as a maximum numerical limitation (I.E., a cap) or a minimum
numerical limitation (I.E., a floor) may, under certain circumstances, fail to
be treated as a qualified floating rate under the applicable Treasury
Regulations unless such cap or floor is fixed throughout the term of the Note.
An "objective rate" is a rate that is not itself a qualified floating rate but
that is determined using a single fixed formula and that is based upon objective
financial or economic information. A rate will not qualify as an objective rate
if it is based on information that is within the control of the issuer (or a
related party) or that is unique to the circumstances of the issuer (or a
related party), such as dividends, profits or the value of the issuer's stock
(although a rate does not fail to be an objective rate merely because it is
based on the credit quality of the issuer). A "qualified inverse floating rate"
is any objective rate where such rate is equal to a fixed rate minus a qualified
floating rate, as long as variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the qualified floating rate. The
Treasury Regulations also provide that if a Variable Note provides for stated
interest at a fixed rate for an initial period of less than one year followed by
a variable rate that is either a qualified floating rate or an objective rate
and if the variable rate on the Variable Note's issue date is intended to
approximate the fixed rate (E.G., the value of the variable rate on the issue
date does not differ
S-25
<PAGE>
from the value of the fixed rate by more than 25 basis points), then the fixed
rate and the variable rate together will constitute either a single qualified
floating rate or objective rate, as the case may be.
If a Variable Note that provides for stated interest at either a single
qualified floating rate or a single objective rate throughout the term thereof
qualifies as a "variable rate debt instrument" under the Treasury Regulations
and if interest on such Note is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually, then all stated
interest on such Note will constitute qualified stated interest and will be
taxed accordingly. Thus, a Variable Note that provides for stated interest at
either a single qualified floating rate or a single objective rate throughout
the term thereof and that qualifies as a "variable rate debt instrument" under
the Treasury Regulations will generally not be treated as having been issued
with original issue discount unless the Variable Note is issued at a "true"
discount (I.E., at a price below the Note's stated principal amount) in excess
of a specified DE MINIMIS amount. The amount of qualified stated interest and
the amount of original issue discount, if any, that accrues during an accrual
period on such Variable Note is determined under the rules applicable to fixed
rate debt instruments by assuming that the variable rate is a fixed rate equal
to (i) in the case of a qualified floating rate or qualified inverse floating
rate, the value as of the issue date, of the qualified floating rate or
qualified inverse floating rate, or (ii) in the case of an objective rate (other
than a qualified inverse floating rate), a fixed rate that reflects the yield
that is reasonably expected for the Variable Note. The qualified stated interest
allocable to an accrual period is increased (or decreased) if the interest
actually paid during an accrual period exceeds (or is less than) the interest
assumed to be paid during the accrual period pursuant to the foregoing rules.
In general, any other Variable Note that qualifies as a "variable rate debt
instrument" will be converted into an "equivalent" fixed rate debt instrument
for purposes of determining the amount and accrual of original issue discount
and qualified stated interest on the Variable Note. The Treasury Regulations
generally require that such a Variable Note be converted into an "equivalent"
fixed rate debt instrument by substituting for any qualified floating rate or
qualified inverse floating rate provided for under the terms of the Variable
Note a fixed rate equal to the value of the qualified floating rate or qualified
inverse floating rate, as the case may be, as of the Variable Note's issue date.
Any objective rate (other than a qualified inverse floating rate) provided for
under the terms of the Variable Note is converted into a fixed rate that
reflects the yield that is reasonably expected for the Variable Note. In the
case of a Variable Note that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Variable Note provides for a qualified inverse floating
rate). Under such circumstances, the qualified floating rate or qualified
inverse floating rate that replaces the fixed rate must be such that the fair
market value of the Variable Note as of the Variable Note's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that provides for either the qualified floating rate or qualified
inverse floating rate rather than the fixed rate. Subsequent to converting the
fixed rate into either a qualified floating rate or a qualified inverse floating
rate, the Variable Note is then converted into an "equivalent" fixed rate debt
instrument in the manner described above.
Once the Variable Note is converted into an "equivalent" fixed rate debt
instrument pursuant to the foregoing rules, the amount of original issue
discount and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the general original issue
discount rules to the "equivalent" fixed rate debt instrument and a U.S. Holder
of the Variable Note will account for such original issue discount and qualified
stated interest as if the U.S. Holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Variable Note during the accrual period.
S-26
<PAGE>
If a Variable Note does not qualify as a "variable rate debt instrument"
under the applicable Treasury Regulations, then the Variable Note would be
treated as a contingent payment debt obligation. In general, the Treasury
Regulations governing contingent payment debt obligations (the "CPDI
Regulations") would cause the timing and character of income, gain or loss
reported on a contingent payment debt instrument to substantially differ from
the timing and character of income, gain or loss reported on a contingent
payment debt instrument under general principals of current United States
Federal income tax law. Specifically, the CPDI Regulations require a U.S. Holder
of such an instrument to include future contingent and noncontingent interest
payment income as such interest accrues based upon a projected payment schedule.
Moreover, in general, under the CPDI Regulations, any gain recognized by a U.S.
Holder on the sale, exchange, or retirement of a contingent payment debt
instrument will be treated as ordinary income and all or a portion of any loss
realized could be treated as ordinary loss as opposed to capital loss (depending
upon the circumstances). The proper United States Federal income tax treatment
of Variable Notes that are treated as contingent payment debt obligations will
be more fully described in the applicable Pricing Supplement. Furthermore, any
other special United States Federal income tax considerations, not otherwise
discussed herein, which are applicable to any particular issue of Notes will be
discussed in the applicable Pricing Supplement.
Certain of the Notes (i) may be redeemable at the option of the Trust prior
to their stated maturity (a "call option") and/or (ii) may be repayable at the
option of the holder prior to their stated maturity (a "put option"). Notes
containing such features may be subject to rules that differ from the general
rules discussed above. Investors intending to purchase Notes with such features
should consult their own tax advisors, since the original issue discount
consequences will depend, in part, on the particular terms and features of the
purchased Notes.
U.S. Holders may generally, upon election, include in income all interest
(including stated interest, acquisition discount, original issue discount, DE
MINIMIS original issue discount, market discount, DE MINIMIS market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium) that accrues on a debt instrument by using the constant
yield method applicable to original issue discount, subject to certain
limitations and exceptions.
SHORT-TERM NOTES
Although Notes that have a fixed maturity of one year or less ("Short-Term
Notes") may be treated as having been issued with original issue discount, a
cash method U.S. Holder generally is not required to accrue such original issue
discount unless the U.S. Holder elects to do so. Unless such an election is
made, any gain recognized by the cash method U.S. Holder on the sale, exchange
or maturity of the Short-Term Note will be ordinary income to the extent of the
original issue discount accrued on a straight-line basis, or upon election under
the constant yield method (based on daily compounding), through the date of sale
or maturity, and a portion of any deductions otherwise allowable to the U.S.
Holder for interest on indebtedness incurred or continued to purchase or carry
the Short-Term Note will be deferred until a corresponding amount of income is
realized or the Short-Term Note is disposed of. U.S. Holders who report income
for United States Federal income tax purposes under the accrual method, and
certain other holders including banks and dealers in securities, are required to
accrue original issue discount on a Short-Term Note on a straight-line basis
unless an election is made to accrue the original issue discount under a
constant yield method (based on daily compounding).
MARKET DISCOUNT
If a U.S. Holder purchases a Note, other than an Original Issue Discount
Note, for an amount that is less than its issue price (or, in the case of a
subsequent purchaser, its stated redemption price at maturity) or, in the case
of an Original Issue Discount Note, for an amount that is less than its adjusted
issue price as of the purchase date, such U.S. Holder will be treated as having
purchased such Note at a "market discount," unless such market discount is less
than a specified DE MINIMIS amount.
S-27
<PAGE>
Under the market discount rules, a U.S. Holder will be required to treat any
partial principal payment (or, in the case of an Original Discount Note, any
payment that does not constitute qualified stated interest) on, or any gain
realized on the sale, exchange, retirement or other disposition of, a Note as
ordinary income to the extent of the lesser of (i) the amount of such payment or
realized gain or (ii) the market discount which has not previously been included
in income and is treated as having accrued on such Note at the time of such
payment or disposition. Market discount will be considered to accrue ratably
during the period from the date of acquisition to the maturity date of the Note,
unless the U.S. Holder elects to accrue market discount on the basis of
semiannual compounding.
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a Note with market discount until the maturity of the Note or
certain earlier dispositions, because a current deduction is only allowed to the
extent the interest expense exceeds an allocable portion of market discount. A
U.S. Holder may elect to include market discount in income currently as it
accrues (on either a ratable or semiannual compounding basis), in which case the
rules described above regarding the treatment as ordinary income of gain upon
the disposition of the Note and upon the receipt of certain cash payments and
regarding the deferral of interest deductions will not apply. Generally, such
currently included market discount is treated as ordinary interest for United
States Federal income tax purposes. Such an election will apply to all debt
instruments acquired by the U.S. Holder on or after the first day of the taxable
year to which such election applies and may be revoked only with the consent of
the Internal Revenue Service (the "IRS").
PREMIUM
If a U.S. Holder purchases a Note for an amount that is greater than the sum
of all amounts payable on the Note after the purchase date other than payments
of qualified stated interest, such U.S. Holder will be considered to have
purchased the Note with "amortizable bond premium" equal in amount to such
excess. A U.S. Holder may elect to amortize such premium using a constant yield
method over the remaining term of the Note and may offset interest otherwise
required to be included in respect of the Note during any taxable year by the
amortized amount of such excess for the taxable year. However, if the Note may
be optionally redeemed after the U.S. Holder acquires it at a price in excess of
its stated redemption price at maturity, special rules would apply which could
result in a deferral of the amortization of some bond premium until later in the
term of the Note. Any election to amortize bond premium applies to all taxable
debt obligations then owned and thereafter acquired by the U.S. Holder and may
be revoked only with the consent of the IRS.
DISPOSITION OF A NOTE
Except as discussed above, upon the sale, exchange or retirement of a Note,
a U.S. Holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement
(other than amounts representing accrued and unpaid interest) and such U.S.
Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in a
Note generally will equal such U.S. Holder's initial investment in the Note
increased by any original issue discount included in income (and accrued market
discount, if any, if the U.S. Holder has included such market discount in
income) and decreased by the amount of any payments, other than qualified stated
interest payments, received and amortizable bond premium taken with respect to
such Note. Such gain or loss generally will be capital gain or loss if the Note
were held for more than one year. (See "--SHORT-TERM NOTES" above for an
exception related to certain discounts not previously included in income.)
NOTES DENOMINATED, OR IN RESPECT OF WHICH INTEREST IS PAYABLE, IN A FOREIGN
CURRENCY
As used herein, "Foreign Currency" means a currency or currency unit other
than U.S. dollars.
S-28
<PAGE>
PAYMENTS OF INTEREST IN A FOREIGN CURRENCY
CASH METHOD. A U.S. Holder who uses the cash method of accounting for
United States Federal income tax purposes and who receives a payment of interest
on a Note (other than original issue discount or market discount) will be
required to include in income the U.S. dollar value of the Foreign Currency
payment (determined on the date such payment is received) regardless of whether
the payment is in fact converted to U.S. dollars at that time, and such U.S.
dollar value will be the U.S. Holder's tax basis in such Foreign Currency.
Original issue discount is determined in units of the Foreign Currency and
accrued original issue discount is translated into U.S. dollars as described in
"--ACCRUAL METHOD" below. The amount of Foreign Currency gain or loss recognized
on the accrued original issue discount is determined by comparing the amount of
income received attributable to the discount (either upon payment, maturity or
an earlier disposition), as translated into U.S. dollars at the rate of exchange
on the date of such receipt, with the amount of original issue discount accrued
in U.S. dollars.
ACCRUAL METHOD. A U.S. Holder who uses the accrual method of accounting for
United States Federal income tax purposes, or who otherwise is required to
accrue interest prior to receipt, will be required to include in income the U.S.
dollar value of the amount of interest income (including original issue discount
or market discount and reduced by amortizable bond premium to the extent
applicable) that has accrued and is otherwise required to be taken into account
with respect to a Note during an accrual period. The U.S. dollar value of such
accrued income will be determined by translating such income at the average rate
of exchange for the accrual period or, with respect to an accrual period that
spans two taxable years, at the average rate for the partial period within the
taxable year. A U.S. Holder may elect, however, to translate such accrued
interest income using the rate of exchange on the last day of the accrual period
or, with respect to an accrual period that spans two taxable years, using the
rate of exchange on the last day of the taxable year. If the last day of an
accrual period is within five business days of the date of receipt of the
accrued interest, a U.S. Holder may translate such interest using the rate of
exchange on the date of receipt. The above election will apply to other debt
obligations held by the U.S. Holder and may not be changed without the consent
of the IRS. A U.S. Holder should consult a tax advisor before making the above
election. A U.S. Holder will recognize exchange gain or loss (which will be
treated as ordinary income or loss) with respect to accrued interest income on
the date such income is received. The amount of ordinary income or loss
recognized will equal the difference, if any, between the U.S. dollar value of
the Foreign Currency payment received (determined on the date such payment is
received) in respect of such accrual period and the U.S. dollar value of
interest income that has accrued during such accrual period (as determined
above).
PURCHASE, SALE AND RETIREMENT OF NOTES
A U.S. Holder who purchases a Note with previously owned Foreign Currency
will recognize ordinary income or loss in an amount equal to the difference, if
any, between such U.S. Holder's tax basis in the Foreign Currency and the U.S.
dollar fair market value of the Foreign Currency used to purchase the Note,
determined on the date of purchase.
Except as discussed above with respect to Short-Term Notes, upon the sale,
exchange or retirement of a Note, a U.S. Holder will recognize taxable gain or
loss equal to the difference between the amount realized on the sale, exchange
or retirement and such U.S. Holder's adjusted tax basis in the Note. Such gain
or loss generally will be capital gain or loss (except to the extent of any
accrued market discount not previously included in the U.S. Holder's income). To
the extent the amount realized represents accrued but unpaid interest, however,
such amounts must be taken into account as interest income, with exchange gain
or loss computed as described in "Payments of Interest in a Foreign Currency"
above. If a U.S. Holder receives Foreign Currency on such a sale, exchange or
retirement the amount realized will be based on the U.S. dollar value of the
Foreign Currency on the date the payment is received or the Note is disposed of
S-29
<PAGE>
(or deemed disposed of as a result of a material change in the terms of such
Note). In the case of a Note that is denominated in Foreign Currency and is
traded on an established securities market, a cash basis U.S. Holder (or, upon
election, an accrual basis U.S. Holder) will determine the U.S. dollar value of
the amount realized by translating the Foreign Currency payment at the spot rate
of exchange on the settlement date of the sale. A U.S. Holder's adjusted tax
basis in a Note will equal the cost of the Note to such holder, increased by the
amounts of any market discount or original issue discount previously included in
income by the holder with respect to such Note and reduced by any amortized
acquisition or other premium and any principal payments received by the holder.
A U.S. Holder's tax basis in a Note, and the amount of any subsequent
adjustments to such holder's tax basis, will be the U.S. dollar value of the
Foreign Currency amount paid for such Note, or of the Foreign Currency amount of
the adjustment, determined on the date of such purchase or adjustment.
Gain or loss realized upon the sale, exchange or retirement of a Note that
is attributable to fluctuations in currency exchange rates will be ordinary
income or loss which will not be treated as interest income or expense. Gain or
loss attributable to fluctuations in exchange rates will equal the difference
between the U.S. dollar value of the Foreign Currency principal amount of the
Note, determined on the date such payment is received or the Note is disposed
of, and the U.S. dollar value of the Foreign Currency principal amount of the
Note, determined on the date the U.S. Holder acquired the Note. Such Foreign
Currency gain or loss will be recognized only to the extent of the total gain or
loss realized by the U.S. Holder on the sale, exchange or retirement of the
Note.
PREMIUM AND MARKET DISCOUNT
In the case of a Note with market discount, (i) market discount is
determined in units of the Foreign Currency, (ii) accrued market discount taken
into account upon the receipt of any partial principal payment or upon the sale,
exchange, retirement or other disposition of the Note (other than accrued market
discount required to be taken into account currently) is translated into U.S.
dollars at the exchange rate on such disposition date (and no part of such
accrued market discount is treated as exchange gain or loss) and (iii) accrued
market discount currently includible in income by a U.S. Holder for any accrual
period is translated into U.S. dollars on the basis of the average exchange rate
in effect during such accrual period, and the exchange gain or loss is
determined upon the receipt of any partial principal payment or upon the sale,
exchange, retirement or other disposition of the Note in the manner described in
"-- PAYMENTS OF INTEREST IN A FOREIGN CURRENCY--ACCRUAL METHOD" above with
respect to computation of exchange gain or loss on accrued interest.
With respect to a Note issued with amortizable bond premium, such premium is
determined in the relevant Foreign Currency and reduces interest income in units
of the Foreign Currency. Although not entirely clear, a U.S. Holder should
recognize exchange gain or loss equal to the difference between the U.S. dollar
value of the bond premium amortized with respect to a period, determined on the
date the interest attributable to such period is received, and the U.S. dollar
value of the bond premium determined on the date of the acquisition of the Note.
EXCHANGE OF FOREIGN CURRENCIES
A U.S. Holder will have a tax basis in any Foreign Currency received as
interest or on the sale, exchange or retirement of a Note equal to the U.S.
dollar value of such Foreign Currency, determined at the time the interest is
received or at the time of the sale, exchange or retirement. Any gain or loss
realized by a U.S. Holder on a sale or other disposition of Foreign Currency
(including its exchange for U.S. dollars or its use to purchase Notes) will be
ordinary income or loss.
S-30
<PAGE>
NON-U.S. HOLDERS
A non-U.S. Holder will not be subject to United States Federal income taxes
on payments of principal, premium (if any) or interest (including original issue
discount, if any) on a Note, unless such non-U.S. Holder is a direct or indirect
10% or greater shareholder of the Trust, a controlled foreign corporation
related to the Trust or a bank receiving interest described in section
881(c)(3)(A) of the Code. To qualify for the exemption from taxation, the last
United States payor in the chain of payment prior to payment to a non-U.S.
Holder (the "Withholding Agent") must have received in the year in which a
payment of interest or principal occurs, or in either of the two preceding
calendar years, a statement that (i) is signed by the beneficial owner of the
Note under penalties of perjury, (ii) certifies that such owner is not a U.S.
Holder and (iii) provides the name and address of the beneficial owner. The
statement may be made on an IRS Form W-8 or a substantially similar form, and
the beneficial owner must inform the Withholding Agent of any change in the
information on the statement within 30 days of such change. If a Note is held
through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the Withholding Agent. However, in such case, the signed statement must be
accompanied by a copy of the IRS Form W-8 or the substitute form provided by the
beneficial owner to the organization or institution.
Generally, a non-U.S. Holder will not be subject to United States Federal
income taxes on any amount that constitutes capital gain upon retirement or
disposition of a Note, provided the gain is not effectively connected with the
conduct of a trade or business in the United States by the non-U.S. Holder.
Certain other exceptions may be applicable, and a non-U.S. Holder should consult
its tax advisor in this regard.
The Notes will not be includible in the estate of a non-U.S. Holder unless
the individual is a direct or indirect 10% or greater shareholder of the Trust
or, at the time of such individual's death, payments in respect of the Notes
would have been effectively connected with the conduct by such individual of a
trade or business in the United States.
Final regulations dealing with withholding tax on income paid to foreign
persons and related matters (the "New Withholding Regulations") were issued by
the Treasury Department on October 6, 1997. The New Withholding Regulations will
generally be effective for payments made after December 31, 1998, subject to
certain transition rules. Non-U.S. Holders are strongly urged to consult their
own tax advisors with respect to the New Withholding Regulations
BACKUP WITHHOLDING
Backup withholding of United States Federal income tax at a rate of 31% may
apply to payments made in respect of the Notes to registered owners who are not
"exempt recipients" and who fail to provide certain identifying information
(such as the registered owner's taxpayer identification number) in the required
manner. Generally, individuals are not exempt recipients, whereas corporations
and certain other entities generally are exempt recipients. Payments made in
respect of the Notes to a U.S. Holder must be reported to the IRS, unless the
U.S. Holder is an exempt recipient or establishes an exemption. Compliance with
the identification procedures described in the preceding section would establish
an exemption from backup withholding for those non-U.S. Holders who are not
exempt recipients.
In addition, upon the sale of a Note to (or through) a broker, the broker
must withhold 31% of the entire purchase price, unless either (i) the broker
determines that the seller is a corporation or other exempt recipient or (ii)
the seller provides, in the required manner, certain identifying information
and, in the case of a non-U.S. Holder, certifies that such seller is a non-U.S.
Holder (and certain other conditions are met). Such a sale must also be reported
by the broker to the IRS, unless either (i) the broker determines that the
seller is an exempt recipient or (ii) the seller certifies its status as a
non-U.S. Holder (and certain other conditions are met). Certification of the
registered owner's status as a non-U.S. Holder
S-31
<PAGE>
would be made normally on an IRS Form W-8 under penalties of perjury, although
in certain cases it may be possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
PLAN OF DISTRIBUTION
The Notes are being offered on a continuous basis for sale by the Trust to
or through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, BT Alex. Brown Incorporated, First Chicago Capital Markets, Inc.
and Salomon Brothers Inc (the "Agents"). The Agents, individually or in a
syndicate, may purchase Notes, as principal, from the Trust from time to time
for resale to investors and other purchasers at varying prices relating to
prevailing market prices at the time of resale as determined by the applicable
Agent, or, if so specified in the applicable Pricing Supplement, for resale at a
fixed offering price. If agreed to by the Trust and an Agent, such Agent may
also utilize its reasonable efforts on an agency basis to solicit offers to
purchase the Notes at 100% of the principal amount thereof, unless otherwise
specified in the applicable Pricing Supplement. The Trust will pay a commission
to an Agent, ranging from .125% to .750% of the principal amount of each Note,
depending upon its stated maturity, sold through such Agent as an agent of the
Trust. Commissions with respect to Notes with stated maturities in excess of 30
years that are sold through an Agent as an agent of the Trust will be negotiated
between the Trust and the Agent at the time of such sale.
Unless otherwise specified in the applicable Pricing Supplement, any Note
sold to the Agent as principal will be purchased by the Agent at a price equal
to 100% of the principal amount thereof less a percentage of the principal
amount equal to the commission applicable to an agency sale of a Note of
identical maturity. An Agent may sell Notes it has purchased from the Trust as
principal to certain dealers less a concession equal to all or any portion of
the discount received in connection with such purchase. Such Agent may allow,
and such dealers may reallow, a discount to certain other dealers. After the
initial offering of Notes, the offering price (in the case of Notes to be resold
on a fixed offering price basis), the concession and the reallowance may be
changed.
The Trust reserves the right to withdraw, cancel or modify the offer made
hereby without notice and may reject offers in whole or in part (whether placed
directly with the Trust or through an Agent). Each Agent will have the right, in
its discretion reasonably exercised, to reject in whole or in part any offer to
purchase Notes received by it on an agency basis.
Unless otherwise specified in the applicable Pricing Supplement, payment of
the purchase price of the Notes will be required to be made in immediately
available funds in the Specified Currency in The City of New York on the date of
settlement. See "Description of Notes--General."
Upon issuance, the Notes will not have an established trading market. The
Notes will not be listed on any securities exchange. The Agents may from time to
time purchase and sell Notes in the secondary market, but the Agents are not
obligated to do so, and there can be no assurance that there will be a secondary
market for the Notes or that there will be liquidity in the secondary market if
one develops. From time to time, the Agents may make a market in the Notes, but
the Agents are not obligated to do so and may discontinue any market-making
activity at any time.
The Agents may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). The Trust has agreed
to indemnify the Agents against, and to provide contribution with respect to,
certain liabilities (including liabilities under the Securities Act). The Trust
has agreed to reimburse the Agents for certain other expenses.
In the ordinary course of their respective businesses, certain of the Agents
and their affiliates have engaged and may in the future engage in investment and
commercial banking transactions with the Trust.
S-32
<PAGE>
In particular, The First National Bank of Chicago, the Indenture Trustee and an
affiliate of First Chicago Capital Markets, Inc., is one of the lenders under
the Trust's lines of credit. Accordingly, if any proceeds from the sale of Notes
are applied by the Trust to amounts borrowed under such lines of credit, The
First National Bank of Chicago will receive a proportionate share of repaid
amounts.
From time to time, the Trust may issue and sell other Offered Securities
described in the accompanying Prospectus, and the amount of Notes offered hereby
is subject to reduction as a result of such sales.
In connection with the offering of Notes purchased by the Agents as
principal on a fixed price basis, the Agents are permitted to engage in certain
transactions that stabilize the price of the Notes. Such transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Notes. If the Agents create a short position in the Notes in
connection with the offering (I.E., if they sell Notes in an aggregate principal
amount exceeding that set forth in the applicable Pricing Supplement), then the
Agents may reduce that short position by purchasing Notes in the open market.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Trust by Arent Fox
Kintner Plotkin & Kahn, PLLC, Washington, D.C. David M. Osnos, a trustee of the
Trust, is a member of Arent Fox Kintner Plotkin & Kahn, PLLC. Andrews & Kurth
L.L.P., Washington, D.C., will act as counsel to the Agents.
S-33
<PAGE>
PROSPECTUS
[LOGO]
$200,000,000
WASHINGTON REAL ESTATE INVESTMENT TRUST
DEBT SECURITIES
PREFERRED SHARES
COMMON SHARES
COMMON SHARE WARRANTS
---------------------
Washington Real Estate Investment Trust ("WRIT" or the "Trust") intends to
issue from time to time its (i) unsecured senior or subordinated debt securities
(the "Debt Securities"), (ii) preferred shares of beneficial interest, $.01 par
value per share ("Preferred Shares"), (iii) common shares of beneficial
interest, $.01 par value per share ("Common Shares"), and/or (iv) warrants to
purchase Common Shares ("Common Share Warrants"), having an aggregate initial
public offering price not to exceed $200,000,000 or the equivalent thereof in
one or more foreign currencies or composite currencies, including European
Currency Units, on terms to be determined at the time of sale. The Debt
Securities, the Preferred Shares, the Common Shares and the Common Share
Warrants offered hereby (collectively, the "Offered Securities") may be offered,
separately or as units with other Offered Securities, in separate series or
amounts, at prices and on terms to be determined at the time of sale and to be
set forth in a supplement to this Prospectus (a "Prospectus Supplement.")
The Debt Securities will be direct unsecured obligations of the Trust and
may be either senior Debt Securities ("Senior Securities") or subordinated Debt
Securities ("Subordinated Securities"). The Senior Securities will rank equally
with all other unsecured and unsubordinated indebtedness of the Trust. The
Subordinated Securities will be subordinated to all existing and future Senior
Debt of the Trust, as defined. See "Description of Debt Securities."
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, (i) in the case of Debt
Securities, the specific title, aggregate principal amount, currency,
denominations, maturity, priority, interest rate, time of payment of interest,
terms of redemption at the option of the Trust or repayment at the option of the
holder or for sinking fund payments, terms for conversion into or exchange for
other Offered Securities and the initial public offering price; (ii) in the case
of Preferred Shares, the series designation and the number of shares and the
dividend, liquidation, redemption, conversion, voting and other rights and the
initial public offering price; (iii) in the case of Common Shares, the initial
public offering price; (iv) in the case of Common Share Warrants, the duration,
offering price, exercise price and detachability; and (v) in the case of all
Offered Securities, whether such Offered Securities will be offered separately
or as a unit with other Offered Securities. In addition, such specific terms may
include limitations on direct or beneficial ownership and restrictions on
transfer of the Offered Securities, in each case as may be appropriate to
preserve the status of the Trust as a qualified real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by such Prospectus Supplement.
The Offered Securities may be offered directly, through agents designated
from time to time by the Trust or to or through underwriters or dealers. If any
agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in an accompanying Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of a Prospectus Supplement describing the method and terms of
the offering of such series of Offered Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is January 16, 1998.
<PAGE>
AVAILABLE INFORMATION
The Trust is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Trust can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's Regional Offices at 7 World Trade Center,
Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such filings are also available from commercial
document retrieval services and from the Commission's site on the World Wide Web
located at www.sec.gov. The Common Shares are listed on the American Stock
Exchange, 86 Trinity Place, New York, New York 10005 and reports, proxy
statements and other information filed by the Trust can be inspected at such
Exchange.
The Trust has filed a registration statement on Form S-3 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Offered Securities. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Trust hereby incorporates by reference the following documents filed
with the Commission pursuant to the Exchange Act:
1. The Trust's Annual Report on Form 10-K for the year ended December
31, 1996.
2. The Trust's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 (as amended), June 30, 1997 and September 30, 1997.
3. The Trust's Current Report on Form 8-K dated October 31, 1997.
4. The Trust's Current Report on Form 8-K dated November 21, 1997.
5. The Trust's Current Report on Form 8-K dated May 31, 1996, as amended
by Amendment No. 1 dated July 25, 1996.
6. The Trust's Proxy Statement dated April 22, 1996.
7. The Trust's Form 8-B dated July 10, 1996.
Each document filed subsequent to the date of this Prospectus pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to termination
of the offering of all Offered Securities to which this Prospectus relates shall
be deemed to be incorporated by reference in this Prospectus and shall be a part
hereof from the date of filing of such document. Any statement contained herein
or in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained in this Prospectus (in the case of a
statement in a previously-filed document incorporated or deemed to be
incorporated by reference herein), in any accompanying Prospectus Supplement
relating to a specific offering of Offered Securities or in any other
subsequently filed document that is also incorporated or deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus or any
accompanying Prospectus Supplement. Subject to the foregoing, all information
appearing in this Prospectus and each accompanying Prospectus Supplement is
qualified in its entirety by the information appearing in the documents
incorporated by reference.
2
<PAGE>
The Trust will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon their written or oral request, a copy of any or
all of the documents incorporated herein by reference (other than exhibits to
such documents). Written requests for such copies should be addressed to Larry
E. Finger, Washington Real Estate Investment Trust, 10400 Connecticut Avenue,
Kensington, Maryland 20895, telephone (301) 929-5900 or (800) 565-9748.
THE TRUST
The Trust is an equity real estate investment trust investing in income
producing properties in the Mid-Atlantic area with a principal focus in the
greater Washington-Baltimore region. The Trust owns a diversified portfolio of
53 properties consisting of 18 office buildings, 12 shopping centers, 8
apartment buildings and 15 industrial distribution properties.
WRIT's principal objective is to increase operating income by investing in
high quality real estate with strong growth potential in prime locations and
aggressively managing these properties with active leasing and capital
improvement programs. The percentage leased at December 31, 1997 for the Trust's
properties was 96% for office buildings, 95% for shopping centers, 97% for
apartment buildings and 93% for industrial distribution properties.
WRIT's total debt on December 31, 1997 was approximately $203 million.
In 1995, the Trust organized WRIT Limited Partnership (the "Partnership") to
assist the Trust in competing for acquisition of properties that meet the
Trust's objectives from sellers who may wish to defer taxation of gain realized
on sale through an exchange of partnership interests.
WRIT's income from operations per share has increased for 31 consecutive
years. WRIT concentrates on increasing its income from operations and funds from
operations to achieve its objective of paying increasing dividends to its
shareholders. Consecutive quarterly dividends have been paid for 35 years, and
the annual dividend paid has increased every year for the last 27 years.
The Trust is a Maryland real estate investment trust, successor to a trust
founded in 1960. The principal offices of the Trust are located at 10400
Connecticut Avenue, Kensington, Maryland 20895, telephone (301) 929-5900 or
(800) 565-9748.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the
Trust intends to use the net proceeds from the sale of Offered Securities for
general business purposes, including the acquisition and/ or renovation,
expansion or improvement of income-producing properties or the repayment of
indebtedness. It is expected that properties purchased in the future will be of
the same general character as those presently held by the Trust. Pending such
uses, the net proceeds may be invested in short- term income producing
investments such as commercial paper, government securities or money market
funds that invest in government securities.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the Trust's ratios of earnings to fixed
charges for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994 1993 1992
- ------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
4.17x 6.11x 13.03x 38.66x 369.95x 46.00x
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of income from continuing
operations plus fixed charges. Fixed charges consist of interest expense
(including interest costs capitalized) and the amortization of debt issuance
costs.
3
<PAGE>
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Senior Securities will be issued under an indenture dated as of August
1, 1996, as supplemented from time to time (the "Senior Indenture") between the
Trust and The First National Bank of Chicago, as trustee (the "Senior Indenture
Trustee"), and the Subordinated Securities will be issued under an indenture
(the "Subordinated Indenture"), between the Trust and a commercial bank to be
selected (the "Subordinated Indenture Trustee"). The term "Indenture Trustee,"
as used herein, shall refer to the Senior Indenture Trustee or the Subordinated
Indenture Trustee, as appropriate. The Senior Indenture and the form of the
Subordinated Indenture (being sometimes referred to herein collectively as the
"Indentures" and individually as an "Indenture") are filed as exhibits to the
Registration Statement to which this Prospectus is a part and will be available
for inspection at the corporate trust offices of the Senior Indenture Trustee
and the Subordinated Indenture Trustee, or as described under "Available
Information." The Indentures are subject to and governed by the Trust Indenture
Act of 1939, as amended (the "TIA"). The statements made under this heading
relating to the Debt Securities and the Indentures are summaries of the
provisions thereof and do not purport to be complete and are qualified in their
entirety by reference to the Indentures and the Debt Securities. All Section
references herein are to sections of the Indentures, and capitalized terms used
but not defined herein shall have the respective meanings set forth in the
Indentures and the Debt Securities.
TERMS
The Debt Securities will be direct, unsecured obligations of the Trust. The
indebtedness represented by the Senior Securities will rank equally with all
other unsecured and unsubordinated indebtedness of the Trust. The indebtedness
represented by the Subordinated Securities will be subordinated in right of
payment to the prior payment in full of the Senior Debt of the Trust, as
described under "Subordination." Each Indenture provides that the Debt
Securities may be issued without limit as to aggregate principal amount, in one
or more series, in each case as established from time to time in or pursuant to
authority granted by a resolution of the Board of Trustees of the Trust or as
established in one or more indentures supplemental to such Indenture. Debt
Securities may be issued with terms different from those of Debt Securities
previously issued. All Debt Securities of one series need not be issued at the
same time and, unless otherwise provided, a series may be reopened, without the
consent of the holders of the Debt Securities of such series, for issuances of
additional Debt Securities of such series (Section 301 of each Indenture).
Each Indenture provides that there may be more than one Indenture Trustee
thereunder, each with respect to one or more series of Debt Securities. Any
Indenture Trustee under either Indenture may resign or be removed with respect
to one or more series of Debt Securities, and a successor Indenture Trustee may
be appointed to act with respect to such series (Section 608 of each Indenture).
In the event that two or more persons are acting as Indenture Trustee with
respect to different series of Debt Securities, each such Indenture Trustee
shall be an Indenture Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other Indenture Trustee (Section
609 of each Indenture), and, except as otherwise indicated herein, any action
described herein to be taken by an Indenture Trustee may be taken by each such
Indenture Trustee with respect to, and only with respect to, the one or more
series of Debt Securities for which it is Indenture Trustee under the applicable
Indenture.
The Prospectus Supplement relating to the series of Debt Securities being
offered will contain the specific terms thereof, including:
(1) The title of such Debt Securities and whether such Debt Securities
are Senior Securities or Subordinated Securities;
4
<PAGE>
(2) The aggregate principal amount of such Debt Securities and any limit
on such principal amount;
(3) The percentage of the principal amount at which such Debt Securities
will be issued and, if other than the principal amount thereof, the
portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the portion
of the principal amount of such Debt Securities that is convertible
into Common Shares or Preferred Shares, or the method by which any
such portion shall be determined;
(4) If convertible, in connection with the preservation of the Trust's
status as a REIT, any applicable limitations on the ownership or
transferability of the Common Shares or Preferred Shares into which
such Debt Securities are convertible:
(5) The date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable and
the amount of principal payable thereon;
(6) The rate or rates (which may be fixed or variable) at which such Debt
Securities will bear interest, if any, or the method by which such
rate or rates shall be determined, the date or dates, or the method
for determining such date or dates, from which any such interest will
accrue, the dates on which any such interest will be payable, the
record dates for such interest payment dates, or the method by which
such dates shall be determined, the persons to whom such interest
shall be payable, and the basis upon which interest shall be
calculated if other than that of a 360-day year of twelve 30-day
months;
(7) The place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where such
Debt Securities may be surrendered for registration of transfer or
exchange and where notices or demands to or upon the Trust in respect
of such Debt Securities and the applicable Indenture may be served;
(8) The period or periods within which, the price or prices at which, the
currency or currencies, currency units or units or composite currency
or currencies in which, and other terms and conditions upon which
such Debt Securities may be redeemed, as a whole or in part, at the
option of the Trust, if the Trust is to have such an option;
(9) The obligation, if any, of the Trust to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or
periods within which or the date or dates on which, the price or
prices at which, the currency or currencies, currency unit or units
or composite currency or currencies in which, and other terms and
conditions upon which such Debt Securities will be redeemed, repaid
or purchased, as a whole or in part, pursuant to such obligation;
(10) If other than U.S. dollars, the currency or currencies in which such
Debt Securities will be denominated and payable, which may be a
foreign currency or units of two or more foreign currencies or a
composite currency or currencies, and the terms and conditions
relating thereto;
(11) Whether the amount of payments of principal of (and premium, if any)
or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula
or method may, but need not be, based on a currency, currencies,
currency unit or units or composite currency or currencies) and the
manner in which such amounts shall be determined;
(12) Whether the principal of (and premium, if any) or interest on such
Debt Securities are to be payable, at the election of the Trust or a
holder thereof, in a currency, or currencies, currency unit or units
or composite currency or currencies other than that in which such
Debt Securities are denominated or stated to be payable, the period
or periods within which, and
5
<PAGE>
the terms and conditions upon which, such election may be made, and
the time and manner of, and identity of the exchange rate agent with
responsibility for, determining the exchange rate between the
currency or currencies, currency unit or units or composite currency
or currencies in which such Debt Securities are denominated or stated
to be payable and the currency or currencies, currency unit or units
or composite currency or currencies in which such Debt Securities are
to be payable;
(13) Provisions, if any, granting special rights to the holders of such
Debt Securities upon the occurrence of such events as may be
specified;
(14) Any deletions from, modifications of or additions to the Events of
Default or covenants of the Trust with respect to such Debt
Securities, whether or not such Events of Default or covenants are
consistent with the Events of Default or covenants set forth in the
applicable Indenture;
(15) Whether such Debt Securities will be issued in certificated or
book-entry form;
(16) Whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than
$1,000 and any integral multiple thereof and, if in bearer form, the
denominations thereof and terms and conditions relating thereto;
(17) The applicability, if any, of the defeasance and covenant defeasance
provisions described herein, or any modification thereof;
(18) Whether and under what circumstances the Trust will pay any
Additional Amounts as contemplated in the applicable Indenture on
such Debt Securities in respect of any tax, assessment or
governmental charge and, if so, whether the Trust will have the
option to redeem such Debt Securities in lieu of making such payment;
and
(19) Any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture (Section 301 of each
Indenture).
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). Special U.S. federal income tax,
accounting and other considerations applicable to Original Issue Discount
Securities will be described in the applicable Prospectus Supplement.
Except as set forth below under "--Certain Covenants" and as may be set
forth in any Prospectus Supplement, the Indentures will not contain any
provisions that would limit the ability of the Trust to incur indebtedness or
that would afford holders of Debt Securities protection in the event of a highly
leveraged or similar transaction involving the Trust or in the event of a change
of control. Reference is made to the applicable Prospectus Supplement for
information with respect to any deletions from, modifications of, or additions
to the events of default or covenants of the Trust that are described below,
including any addition of a covenant or other provision providing event risk or
similar protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series issued in registered form will be issuable in
denominations of $1,000 and integral multiples thereof. Unless otherwise
specified in the applicable Prospectus Supplement, the Debt Securities of any
series issued in bearer form will be issuable in denominations of $5,000.
(Section 302 of each Indenture).
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and premium, if any) and interest on any series of Senior
Securities will be payable at the corporate trust office of the Senior Indenture
Trustee, which initially shall be c/o First Chicago Trust Company of New York,
14 Wall Street, Eighth Floor, New York, New York 10005 and the principal of (and
premium, if any) and interest
6
<PAGE>
on any series of Subordinated Securities will be payable at the corporate trust
office of the Subordinated Indenture Trustee; provided that, at the option of
the Trust, payment of interest on any series of Debt Securities may be made by
check mailed to the address of the Person entitled thereto as it appears in the
applicable register for such Debt Securities or by wire transfer of funds to
such person at an account maintained within the United States (Sections 301, 307
and 1002 of each Indenture).
Any interest not punctually paid or duly provided for on any interest
payment date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder on the applicable Regular Record
Date and may either be paid to the Person in whose name such Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Indenture Trustee, notice whereof shall be given to the holder of such Debt
Security not less than 10 days prior to such Special Record Date, or may be paid
at any time in any other lawful manner, all as more completely described in the
applicable Indenture (Section 307 of each Indenture).
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the applicable Indenture
Trustee referred to above. In addition, subject to certain limitations imposed
upon Debt Securities issued in book-entry form, the Debt Securities of any
series may be surrendered for conversion, registration of transfer or exchange
thereof at the corporate trust office of the applicable Indenture Trustee. Every
Debt Security surrendered for conversion, registration of transfer or exchange
must be duly endorsed or accompanied by a written instrument of transfer. No
service charge will be made for any registration of transfer or exchange of any
Debt Securities, but the Trust may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith (Section
305 of each Indenture). If the applicable Prospectus Supplement refers to any
transfer agent (in addition to the applicable Indenture Trustee) initially
designated by the Trust with respect to any series of Debt Securities, the Trust
may at any time rescind the designation of any such transfer agent or approve a
change in the location through which any such transfer agent acts, except that
the Trust will be required to maintain a transfer agent in each place of payment
for such series. The Trust may at any time designate additional transfer agents
with respect to any series of Debt Securities (Section 1002 of each Indenture).
Neither the Trust nor either Indenture Trustee shall be required to (i)
issue, register the transfer of or exchange Debt Securities of any series during
a period beginning at the opening of business 15 days before any selection of
Debt Securities of that series to be redeemed and ending at the close of
business on the day of mailing of the relevant notice of redemption; (ii)
register the transfer of or exchange any Debt Security, or portion thereof,
called for redemption, except the unredeemed portion of any Debt Security being
redeemed in part; or (iii) issue, register the transfer of or exchange any Debt
Security that has been surrendered for repayment at the option of the holder,
except the portion, if any, of such Debt Security not to be so repaid (Section
305 of each Indenture).
MERGER, CONSOLIDATION OR SALE
The Trust will be permitted to consolidate with, or sell, lease or convey
all or substantially all of its assets to, or merge with or into, any other
entity provided that (a) either the Trust shall be the continuing entity, or the
successor entity (if other than the Trust) formed by or resulting from any such
consolidation or merger or which shall have received the transfer of such assets
shall expressly assume payment of the principal of (and premium, if any) and
interest on all of the Debt Securities and the due and punctual performance and
observance of all of the covenants and conditions contained in each Indenture;
(b) immediately after giving effect to such transaction and treating any
indebtedness that becomes an obligation of the Trust or any Subsidiary as a
result thereof as having been incurred by the Trust or such Subsidiary at the
time of such transaction, no Event of Default under an Indenture, and no event
which,
7
<PAGE>
after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's certificate
and legal opinion covering such conditions shall be delivered to the Indenture
Trustee (Sections 801 and 803 of each Indenture).
CERTAIN COVENANTS
SENIOR INDENTURE LIMITATIONS ON INCURRENCE OF DEBT. The Senior Indenture
provides that the Trust will not, and will not permit any Subsidiary to, incur
any Debt (as defined below) if, immediately after giving effect to the
incurrence of such Debt and the application of the proceeds thereof, the
aggregate principal amount of all outstanding Debt of the Trust and its
Subsidiaries on a consolidated basis determined in accordance with generally
accepted accounting principles is greater than 60% of the sum of (without
duplication) (i) the Trust's Total Assets as of the end of the calendar quarter
covered in the Trust's Annual Report on Form 10-K or Quarterly Report on Form
10-Q, as the case may be, most recently filed with the Commission (or, if such
filing is not permitted under the Exchange Act, with the Indenture Trustee)
prior to the incurrence of such additional Debt and (ii) any increase in the
Trust's Total Assets since the end of such quarter including, without
limitation, any increase in Total Assets resulting from the incurrence of such
additional Debt (such increase together with the Trust's Total Assets being
referred to as "Adjusted Total Assets") (Section 1011 of the Senior Indenture).
In addition to the foregoing limitation on the incurrence of Debt, the
Senior Indenture provides that the Trust will not, and will not permit any
Subsidiary to, incur any Debt secured by any mortgage, lien, charge, pledge,
encumbrance or security interest of any kind upon any of the property of the
Trust or any Subsidiary ("Secured Debt"), whether owned at the date of the
Senior Indenture or thereafter acquired, if, immediately after giving effect to
the incurrence of such additional Secured Debt and the application of the
proceeds thereof, the aggregate principal amount of all outstanding Secured Debt
of the Trust and its Subsidiaries on a consolidated basis is greater than 40% of
the Trust's Adjusted Total Assets (Section 1011 of the Senior Indenture).
In addition to the foregoing limitations on the incurrence of Debt, the
Senior Indenture provides that the Trust will not, and will not permit any
Subsidiary to, incur any Debt if the ratio of Consolidated Income Available for
Debt Service (as defined below) to the Annual Service Charge (as defined below)
for the four consecutive fiscal quarters most recently ended prior to the date
on which such additional Debt is to be incurred shall have been less than 1.5 to
1.0, on a pro forma basis after giving effect thereto and to the application of
the proceeds therefrom, and calculated on the assumption that (i) such Debt and
any other Debt incurred by the Trust and its Subsidiaries since the first day of
such four-quarter period and the application of the proceeds therefrom,
including to refinance other Debt, had occurred at the beginning of such period;
(ii) the repayment or retirement of any other Debt by the Trust and its
Subsidiaries since the first day of such four-quarter period had been incurred,
repaid or retired at the beginning of such period (except that, in making such
computation, the amount of Debt under any revolving credit facility shall be
computed based upon the average daily balance of such Debt during such period);
(iii) in the case of Acquired Debt (as defined below) or Debt incurred in
connection with any acquisition since the first day of such four-quarter period,
the related acquisition had occurred as of the first day of such period with the
appropriate adjustments with respect to such acquisition being included in such
pro forma calculation; and (iv) in the case of any acquisition or disposition by
the Trust or its Subsidiaries of any asset or group of assets since the first
day of such four-quarter period, whether by merger, stock purchase or sale, or
asset purchase or sale, such acquisition or disposition or any related repayment
of Debt had occurred as of the first day of such period with the appropriate
adjustments with respect to such acquisition or disposition being included in
such pro forma calculation (Section 1011 of the Senior Indenture).
For purposes of the foregoing provisions regarding the limitation on the
incurrence of Debt, Debt shall be deemed to be "incurred" by the Trust or a
Subsidiary whenever the Trust or such Subsidiary shall create, assume, guarantee
or otherwise become liable in respect thereof.
8
<PAGE>
MAINTENANCE OF TOTAL UNENCUMBERED ASSETS. The Senior Indenture also
provides that the Trust is required to maintain Total Unencumbered Assets (as
defined below) of not less than 150% of the aggregate outstanding principal
amount of the Unsecured Debt (as defined below) of the Trust (Section 1012 of
the Senior Indenture).
As used herein:
"ACQUIRED DEBT" means Debt of a Person (i) existing at the time such Person
becomes a Subsidiary or (ii) assumed in connection with the acquisition of
assets from such Person, in each case, other than Debt incurred in connection
with, or in contemplation of, such Person becoming a Subsidiary or such
acquisition. Acquired Debt shall be deemed to be incurred on the date of the
related acquisition of assets from any Person or the date the acquired Person
becomes a Subsidiary.
"ANNUAL SERVICE CHARGE" as of any date means the maximum amount which is
payable in any period for interest on, and original issue discount of, Debt of
the Trust and its Subsidiaries.
"CAPITAL STOCK" means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participations or other
ownership interests (however designated) of such Person and any rights (other
than debt securities convertible into or exchangeable for corporate stock),
warrants or options to purchase any thereof.
"CONSOLIDATED INCOME AVAILABLE FOR DEBT SERVICE" for any period means
Consolidated Net Income (as defined below) of the Trust and its Subsidiaries (i)
plus amounts which have been deducted for (a) interest on Debt of the Trust and
its Subsidiaries, (b) provision for taxes of the Trust and its Subsidiaries
based on income, (c) amortization of debt discount, (d) depreciation and
amortization, (e) the effect of any noncash charge resulting from a change in
accounting principles in determining Consolidated Net Income for such period,
(f) amortization of deferred charges and (g) provision for or realized losses on
properties and (ii) less amounts which have been included for gains on
disposition of properties.
"CONSOLIDATED NET INCOME" for any period means the amount of consolidated
net income (or loss) of the Trust and its Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles.
"DEBT" of the Trust or any Subsidiary means any indebtedness of the Trust or
any Subsidiary, whether or not contingent, in respect of (i) borrowed money
evidenced by bonds, notes, debentures or similar instruments, (ii) indebtedness
secured by any mortgage, pledge, lien, charge, encumbrance or any security
interest existing on property owned by the Trust or any Subsidiary, (iii) the
reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued or amounts representing the balance deferred
and unpaid of the purchase price of any property except any such balance that
constitutes an accrued expense or trade payable, or all conditional sale
obligations or obligations under any title retention agreement, (iv) the
principal amount of all obligations of the Trust or any Subsidiary with respect
to redemption, repayment or other repurchase of any Disqualified Stock, or (v)
any lease of property by the Trust or any Subsidiary as lessee which is
reflected in the Trust's consolidated balance sheet as a capitalized lease in
accordance with generally accepted accounting principles to the extent, in the
case of items of indebtedness under (i) through (iii) above, that any such items
(other than letters of credit) would appear as a liability on the Trust's
consolidated balance sheet in accordance with generally accepted accounting
principles, and also includes, to the extent not otherwise included, any
obligation by the Trust or any Subsidiary to be liable for, or to pay, as
obligor, guarantor or otherwise (other than for purposes of collection in the
ordinary course of business), indebtedness of another person (other than the
Trust or any Subsidiary).
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock of
such Person which by the terms of such Capital Stock (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable), upon the happening of any event or otherwise (i) matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, (ii)
is convertible into or exchangeable or
9
<PAGE>
exercisable for Debt or Disqualified Stock or (iii) is redeemable at the option
of the holder thereof, in whole or in part, in each case on or prior to the
Stated Maturity of the series of Debt Securities.
"ENCUMBRANCE" means any mortgage, security interest, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or other) or
preference, priority or other security agreement, except: (i) liens for taxes
(a) which are not yet delinquent, (b) which are not in an aggregate amount, as
to the Trust and all Subsidiaries, of greater than 10% of Total Assets or (c)
which are being contested in good faith by all appropriate proceedings, provided
that adequate reserves with respect thereto are maintained on the books of the
Trust or its Subsidiaries, as the case may be, in conformity with GAAP; (ii)
carrier's, warehousemen's, mechanic's, materialmen's, repairmen's or other like
liens (a) which are not in an aggregate amount, as to the Trust and all
Subsidiaries, of greater than 10% of Total Assets, (b) which do not remain
unsatisfied or undischarged for a period of more than 90 days or (c) which are
being contested in good faith by all appropriate proceedings; (iii) pledges or
deposits in connection with workers compensation, unemployment insurance and
other social security legislation and deposits securing liability to insurance
carriers under insurance or self-insurance arrangements; (iv) deposits to secure
the performance of bids, trade contracts (other than for borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business;
and (v) easements, rights of way, restrictions, development orders, plats and
other similar encumbrances.
"SUBSIDIARY" means a corporation, partnership or limited liability company,
a majority of the outstanding voting stock, partnership interests or membership
interests, as the case may be, of which is owned or controlled, directly or
indirectly, by the Trust or by one or more other Subsidiaries of the Trust. For
the purposes of this definition, "voting stock" means stock having voting power
for the election of directors, or trustees, as the case may be, whether at all
times or only so long as no senior class of stock has such voting power by
reason of any contingency.
"TOTAL ASSETS" as of any date means the sum of (i) the Undepreciated Real
Estate Assets and (ii) all other assets of the Trust and its Subsidiaries
determined in accordance with generally accepted accounting principles (but
excluding accounts receivable and intangibles).
"TOTAL UNENCUMBERED ASSETS" means the sum of (i) those Undepreciated Real
Estate Assets not subject to an Encumbrance and (ii) all other assets of the
Trust and its Subsidiaries not subject to an Encumbrance determined in
accordance with generally accepted accounting principles (but excluding accounts
receivable and intangibles).
"UNDEPRECIATED REAL ESTATE ASSETS" as of any date means the cost (original
cost plus capital improvements) of real estate assets of the Trust and its
Subsidiaries on such date, before depreciation and amortization, determined on a
consolidated basis in accordance with generally accepted accounting principles.
"UNSECURED DEBT" means Debt of the Trust or any Subsidiary which is not
secured by any mortgage, lien, charge, pledge or security interest of any kind
upon any of the properties owned by the Trust or any of its Subsidiaries.
EXISTENCE. Except as permitted under "--Merger, Consolidation or Sale," the
Trust will be required to do or cause to be done all things necessary to
preserve and keep in full force and effect its existence, rights and franchises;
provided, however, that the Trust shall not be required to preserve any right or
franchise if it determines that the preservation thereof is no longer desirable
in the conduct of its business (Section 1004 of each Indenture).
MAINTENANCE OF PROPERTIES. The Trust will be required to cause all of its
material properties used or useful in the conduct of its business or the
business of any Subsidiary to be maintained and kept in good condition, repair
and working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Trust may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times (Section 1005 of each Indenture).
10
<PAGE>
INSURANCE. The Trust will be required to, and will be required to cause
each of its Subsidiaries to, keep all of its insurable properties insured
against loss or damage at least equal to their then full insurable value with
insurers of recognized responsibility and, if described in the applicable
Prospectus Supplement, having a specified rating from a recognized insurance
rating service (Section 1006 of each Indenture).
PAYMENT OF TAXES AND OTHER CLAIMS. The Trust will be required to pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any Subsidiary or upon the income, profits or property of the
Trust or any Subsidiary, and (ii) all lawful claims for labor, materials and
supplies, which, if unpaid, might by law become a material lien upon the
property of the Trust or any Subsidiary; PROVIDED, HOWEVER, that the Trust shall
not be required to pay or discharge or cause to be paid or discharged any such
tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith (Section 1007 of each Indenture).
PROVISION OF FINANCIAL INFORMATION. Whether or not the Trust is subject to
Section 13 or 15(d) of the Exchange Act, the Trust will be required, within 15
days of each of the respective dates by which the Trust would have been required
to file annual reports, quarterly reports and other documents with the
Commission if the Trust were so subject, to (i) transmit by mail to all holders
of Debt Securities, as their names and addresses appear in the applicable
register for such Debt Securities, without cost to such holders, copies of the
annual reports, quarterly reports and other documents that the Trust would have
been required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act if the Trust were subject to such sections, (ii) file with the
applicable Indenture Trustee copies of the annual reports, quarterly reports and
other documents that the Trust would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Trust were
subject to such Sections, and (iii) promptly upon written request and payment of
the reasonable cost of duplication and delivery, supply copies of such documents
to any prospective holder (Section 1008 of each Indenture).
ADDITIONAL COVENANTS. Any additional covenants of the Trust with respect to
any series of Debt Securities will be set forth in the Prospectus Supplement
relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each Indenture provides that the following events are "Events of Default"
with respect to any series of Debt Securities issued thereunder: (a) default for
30 days in the payment of any installment of interest or Additional Amounts
payable on any Debt Security of such series; (b) default in the payment of
principal of (or premium, if any, on) any Debt Security of such series at its
maturity; (c) default in making any sinking fund payment as required for any
Debt Security of such series; (d) default in the performance or breach of any
other covenant or warranty of the Trust contained in the Indenture (other than a
covenant added to the Indenture solely for the benefit of a series of Debt
Securities issued thereunder other than such series), continued for 60 days
after written notice as provided in the Indenture; (e) a default under any bond,
debenture, note or other evidence of indebtedness for money borrowed by the
Trust (including obligations under leases required to be capitalized on the
balance sheet of the lessee under generally accepted accounting principles but
not including any indebtedness or obligations for which recourse is limited to
property purchased) in an aggregate principal amount in excess of $5,000,000 or
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any indebtedness for money borrowed
by the Trust (including such leases, but not including such indebtedness or
obligations for which recourse is limited to property purchased) in an aggregate
principal amount in excess of $5,000,000, whether such indebtedness now exists
or shall hereafter be created which default shall have resulted in such
indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable or such obligations being
accelerated, without such acceleration having been rescinded or annulled; (f)
certain events of bankruptcy, insolvency or reorganization, or court appointment
of a receiver, liquidator or trustee of the Trust or any Significant
11
<PAGE>
Subsidiary of the Trust; and (g) any other event of default provided with
respect to a particular series of Debt Securities (Section 501 of each
Indenture). The term "Significant Subsidiary" means each significant subsidiary
(as defined in Regulation S-X promulgated under the Securities Act) of the
Trust.
If an Event of Default under either Indenture with respect to Debt
Securities of any series at the time outstanding occurs and is continuing, then
in every such case the Indenture Trustee or the holders of not less than 25% in
principal amount of the outstanding Securities of that series will have the
right to declare the principal amount (or, if the Debt Securities of that series
are Original Issue Discount Securities or Indexed Securities, such portion of
the principal amount as may be specified in the terms thereof) of, and premium,
if any, on all of the Debt Securities of that series to be due and payable
immediately by written notice thereof to the Trust (and to the Indenture Trustee
if given by the holders). However, at any time after such a declaration of
acceleration with respect to Debt Securities of such series (or of all Debt
Securities then outstanding under the applicable Indenture, as the case may be)
has been made, but before a judgment or decree for payment of the money due has
been obtained by the Indenture Trustee, the holders of not less than a majority
in principal amount of outstanding Debt Securities of such series (or of all
Debt Securities then outstanding under the applicable Indenture, as the case may
be) may rescind and annul such declaration and its consequences if (a) the Trust
shall have deposited with the applicable Indenture Trustee all required payments
of the principal of (and premium, if any) and interest, and any Additional
Amounts, on the Debt Securities of such series (or of all Debt Securities then
outstanding under the applicable Indenture, as the case may be), plus certain
fees, expenses, disbursements and advances of such Indenture Trustee and (b) all
Events of Default, other than the non-payment of accelerated principal (or
specified portion thereof and the premium, if any) or interest, with respect to
Debt Securities of such series (or of all Debt Securities then outstanding under
the applicable Indenture, as the case may be) have been cured or waived as
provided in the applicable Indenture (Section 502 of each Indenture). Each
Indenture also provides that the holders of not less than a majority in
principal amount of the outstanding Debt Securities of any series (or of all
Debt Securities then outstanding under the applicable Indenture, as the case may
be) may waive any past default with respect to such series and its consequences,
except a default (x) in the payment of the principal of (or premium, if any) or
interest or Additional Amounts payable on any Debt Security of such series or
(y) in respect of a covenant or provision contained in the applicable Indenture
that cannot be modified or amended without the consent of the holder of each
outstanding Debt Security affected thereby (Section 513 of each Indenture).
Each Indenture Trustee will be required to give notice to the holders of
Debt Securities within 90 days of a default under the applicable Indenture
unless such default shall have been cured or waived; PROVIDED, HOWEVER, that
such Indenture Trustee may withhold notice to the holders of any series of Debt
Securities of any default with respect to such series (except a default in the
payment of the principal of (or premium, if any) or interest or Additional
Amounts payable on any Debt Security of such series or in the payment of any
sinking fund installment in respect of any Security of such series) if specified
responsible officers of such Indenture Trustee consider such withholding to be
in the interest of such holders (Section 601 of each Indenture).
Each Indenture provides that no holders of Debt Securities of any series may
institute any proceedings, judicial or otherwise, with respect to such Indenture
or for any remedy thereunder, except in the cases of failure of the Indenture
Trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an event of default from the holders of not
less than 25% in principal amount of the outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it (Section
507 of each Indenture). This provision will not prevent, however, any holder of
Debt Securities from instituting suit for the enforcement of payment of the
principal of (and premium, if any), interest on and Additional Amounts payable
with respect to, such Debt Securities at the respective due dates thereof.
Subject to provisions in each Indenture relating to its duties in case of
default, each Indenture Trustee will not be under any obligation to exercise any
of its rights or powers under the applicable Indenture at the request or
direction of any holders of any series of Debt Securities then outstanding under
such
12
<PAGE>
Indenture, unless such holders shall have offered to the Indenture Trustee
thereunder reasonable security or indemnity (Section 602 of each Indenture). The
holders of not less than a majority in principal amount of the outstanding Debt
Securities of any series (or of all Debt Securities then outstanding under the
applicable Indenture, as the case may be) shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Indenture Trustee, or of exercising any trust or power conferred upon such
Indenture Trustee. However, an Indenture Trustee may refuse to follow any
direction which is in conflict with any law or the Indenture, which may involve
the Indenture Trustee in personal liability or which may be unduly prejudicial
to the holders of Debt Securities of such series not joining therein (Section
512 of each Indenture).
Within 120 days after the close of each fiscal year, the Trust will be
required to deliver to each Indenture Trustee a certificate, signed by one of
several specified officers of the Trust, stating whether or not such officer has
knowledge of any default under the applicable Indenture and, if so, specifying
each such default and the nature and status thereof (Section 1009 of each
Indenture).
MODIFICATION OF THE INDENTURES
Modifications and amendments of either Indenture will be permitted to be
made only with the consent of the holders of not less than a majority in
principal amount of all outstanding Debt Securities issued under each Indenture
which are affected by such modification or amendment; PROVIDED, HOWEVER, that no
such modification or amendment may, without the consent of the holder of each
such Debt Security affected thereby, (a) change the stated maturity of the
principal of (or premium, if any) , or any installment of principal of or
interest payable on, any such Debt Security; (b) reduce the principal amount of,
or the rate or amount of interest on, or any premium payable on redemption of,
or Additional Amounts payable with respect to, any such Debt Security, or reduce
the amount of principal of an Original Issue Discount Security that would be due
and payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment of the holder
of any such Debt Security; (c) change the place of payment, or the coin or
currency, for payment of principal of (and premium, if any), or interest on, or
any Additional Amounts payable with respect to, any such Debt Security; (d)
impair the right to institute suit for the enforcement of any payment on or with
respect to any such Debt Security; (e) reduce the above-stated percentage of
outstanding Debt Securities of any series necessary to modify or amend the
applicable Indenture, to waive compliance with certain provisions thereof or
certain defaults and consequences thereunder or to reduce the quorum or voting
requirements set forth in the Indenture; or (f) modify any of the foregoing
provisions or any of the provisions relating to the waiver of certain past
defaults or certain covenants, except to increase the required percentage to
effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the holder of such Debt Security
(Section 902 of each Indenture).
The holders of not less than a majority in principal amount of outstanding
Debt Securities issued under either Indenture will have the right to waive
compliance by the Trust with certain covenants in such Indenture (Section 1013
of each Indenture).
Modifications and amendments of each Indenture will be permitted to be made
by the Trust and the applicable Indenture Trustee thereunder without the consent
of any holder of Debt Securities for any of the following purposes: (i) to
evidence the succession of another person to the Trust as obligor under the
applicable Indenture; (ii) to add to the covenants of the Trust for the benefit
of the holders of all or any series of Debt Securities or to surrender any right
or power conferred upon the Trust in the applicable Indenture; (iii) to add
events of default for the benefit of the holders of all or any series of Debt
Securities; (iv) to add or change any provisions of the applicable Indenture to
facilitate the issuance of, or to liberalize certain terms of, Debt Securities
in bearer form, or to permit or facilitate the issuance of Debt Securities in
uncertificated form, PROVIDED that such action shall not adversely affect the
interests of the holders of the Debt Securities of any series in any material
aspect; (v) to change or eliminate any provisions of the applicable Indenture,
PROVIDED that any such change or elimination shall become effective only when
there
13
<PAGE>
are no Debt Securities outstanding of any series created prior thereto which are
entitled to the benefit of such provision; (vi) to secure the Debt Securities;
(vii) to establish the form or terms of Debt Securities of any series; (viii) to
provide for the acceptance of appointment by a successor Indenture Trustee or
facilitate the administration of the trusts under the applicable Indenture by
more than one Indenture Trustee; (ix) to cure any ambiguity, defect or
inconsistency in the applicable Indenture, PROVIDED that such action shall not
adversely affect the interests of holders of Debt Securities of any series
issued under such Indenture in any material respect; or (x) to supplement any of
the provisions of such Indenture to the extent necessary to permit or facilitate
defeasance and discharge of any series of such Debt Securities, PROVIDED that
such action shall not adversely affect the interests of the holders of the Debt
Securities of any series in any material respect (Section 901 of each
Indenture).
Each Indenture provides that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of any Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above), (iii) the
principal amount of an Indexed Security that shall be deemed outstanding shall
be the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such indexed security pursuant to
Section 301 of the Indenture, and (iv) Debt Securities owned by the Trust or any
other obligor upon the Debt Securities or any affiliate of the Trust or of such
other obligor shall be disregarded (Section 101 of each Indenture).
Each Indenture contains provisions for convening meetings of the holders of
Debt Securities of a series (Section 1501 of each Indenture). A meeting will be
permitted to be called at any time by the applicable Indenture Trustee, and
also, upon request, by the Trust or the holders of at least 10% in principal
amount of the outstanding Debt Securities of such series, in any such case upon
notice given as provided in the applicable Indenture (Section 1502 of each
Indenture). Except for any consent that must be given by the holder of each Debt
Security affected by certain modifications and amendments of the applicable
Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present may be adopted by the affirmative vote
of the holders of a majority in principal amount of the outstanding Debt
Securities of that series; PROVIDED, HOWEVER, that, except as referred to above,
any resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
holders of a specified percentage, which is less than a majority, in principal
amount of the outstanding Debt Securities of a series may be adopted at a
meeting or adjourned meeting or adjourned meeting duly reconvened at which a
quorum is present by the affirmative vote of the holders of such specified
percentage in principal amount of the outstanding Debt Securities of that
series. Any resolution passed or decision taken at any meeting of holders of
Debt Securities of any series duly held in accordance with the applicable
Indenture will be binding on all holders of Debt Securities of that series. The
quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be persons holding or representing a majority in principal amount
of the outstanding Debt Securities of a series; PROVIDED, HOWEVER, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the holders of not less than a specified percentage in principal
amount of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum (Section 1504 of each
Indenture).
Notwithstanding the foregoing provisions, each Indenture provides that if
any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization,
14
<PAGE>
direction, notice, consent, waiver and other action that the Indenture expressly
provides may be made, given or taken by the holders of a specified percentage in
principal amount of all outstanding Debt Securities affected thereby, or of the
holders of such series and one or more additional series: (i) there shall be no
minimum quorum requirement for such meeting, and (ii) the principal amount of
the outstanding Debt Securities of such series that vote in favor of such
request, demand, authorization, direction, notice, consent, waiver or other
action shall be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under the Indenture (Section 1504 of each Indenture).
SUBORDINATION
Upon any distribution to creditors of the Trust in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
the Subordinated Securities will be subordinated to the extent provided in the
Subordinated Indenture in right of payment to the prior payment in full of all
Senior Debt (Sections 1601 and 1602 of the Subordinated Indenture), but the
obligation of the Trust to make payment of the principal and interest on the
Subordinated Securities will not otherwise be affected (Section 1608 of the
Subordinated Indenture). No payment of principal or interest may be made on the
Subordinated Securities at any time if a default on Senior Debt exists that
permits the holders of such Senior Debt to accelerate its maturity and the
default is the subject of judicial proceedings or the Trust receives notice of
the default (Section 1603 of the Subordinated Indenture). After all Senior Debt
is paid in full and until the Subordinated Securities are paid in full, holders
will be subrogated to the rights of holders of Senior Debt to the extent that
distributions otherwise payable to holders have been applied to the payment of
Senior Debt (Section 1607 of the Subordinated Indenture). By reason of such
subordination, in the event of a distribution of assets upon insolvency, certain
general creditors of the Trust may recover more, ratably, than holders of the
Subordinated Securities.
Senior Debt is defined in the Subordinated Indenture as the principal of and
interest on, or substantially similar payments to be made by the Trust in
respect of, the following, whether outstanding at the date of execution of the
Subordinated Indenture or thereafter incurred, created or assumed: (a)
indebtedness of the Trust for money borrowed or represented by purchase-money
obligations, (b) indebtedness of the Trust evidenced by notes, debentures, or
bonds, or other securities issued under the provisions of an indenture, fiscal
agency agreement or other instrument, (c) obligations of the Trust as lessee
under leases of property either made as part of any sale and leaseback
transaction to which the Trust is a party or otherwise, (d) indebtedness of
partnerships and joint ventures that is included in the consolidated financial
statements of the Trust, (e) indebtedness, obligations and liabilities of others
in respect of which the Trust is liable contingently or otherwise to pay or
advance money or property or as guarantor, endorser or otherwise or which the
Trust has agreed to purchase or otherwise acquire and (f) any binding commitment
of the Trust to fund any real estate investment or to fund any investment in any
entity making such real estate investment, in each case other than (1) any such
indebtedness, obligation or liability referred to in clauses (a) through (f)
above as to which, in the instrument creating or evidencing the same pursuant to
which the same is outstanding, it is provided that such indebtedness, obligation
or liability is not superior in right of payment to the Subordinated Securities
or ranks pari passu with the Subordinated Securities, (2) any such indebtedness,
obligation or liability which is subordinated to indebtedness of the Trust, to
substantially the same extent as or to a greater extent than the Subordinated
Securities are subordinated and (3) the Subordinated Securities (Section 101 of
the Subordinated Indenture). At December 31, 1997, Senior Debt aggregated
approximately $203 million. There are no restrictions in the Subordinated
Indenture upon the creation of additional Senior Debt. However, the Senior
Indenture contains limitations on incurrence of indebtedness by the Trust.
"See--Certain Covenants--Senior Indenture Limitations on Incurrence of Debt."
15
<PAGE>
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Under each Indenture, the Trust may discharge certain obligations to holders
of any series of Debt Securities issued thereunder that have not already been
delivered to the applicable Indenture Trustee for cancellation and that either
have become due and payable or will become due and payable within one year (or
scheduled for redemption within one year) by irrevocably depositing with the
applicable Indenture Trustee, in trust, funds in such currency or currencies,
currency unit or units or composite currency or currency in which such Debt
Securities are payable in an amount sufficient to pay the entire indebtedness on
such Debt Securities in respect of principal (and premium, if any) and interest
and any Additional Amounts payable to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or redemption
date, as the case may be (Section 401 of each Indenture).
Each Indenture provides that, if the provisions of Article Fourteen thereof
are made applicable to the Debt Securities of or within any series pursuant to
Section 301 of such Indenture, the Trust may elect either (a) to defease and be
discharged from any and all obligations with respect to such Debt Securities
(except for the obligation to pay Additional Amounts, if any, upon the
occurrence of certain events of tax, assessment or governmental charge with
respect to payments on such Debt Securities and the obligations to register the
transfer or exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities, to maintain an office or agency in
respect of such Debt Securities and to hold moneys for payment in trust)
("defeasance") (Section 1402 of each Indenture) or (b) to be released from its
obligations with respect to such Debt Securities under Sections 1004 to 1008,
inclusive, and Sections 1011 and 1012 under such Indenture (being the
restrictions described under "--Certain Covenants") or, if provided pursuant to
such Indenture, its obligations with respect to any other covenant, and any
omission to comply with such obligations shall not constitute an event of
default with respect to such Debt Securities ("covenant defeasance") (Section
1403 of each Indenture), in either case upon the irrevocable deposit by the
Trust with the applicable Indenture Trustee, in trust, of an amount, in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable at stated maturity, or
Government Obligations (as defined below), or both, applicable to such Debt
Securities which through the scheduled payment of principal and interest in
accordance with their terms will provide money in an amount sufficient to pay
the principal of (and premium, if any) and interest on such Debt Securities, and
any mandatory sinking fund or analogous payments thereon, on the scheduled due
dates therefor (Section 1404 of each Indenture).
Such a trust will only be permitted to be established if, among other
things, the Trust has delivered to the applicable Indenture Trustee an opinion
of counsel (as specified in each Indenture) to the effect that the holders of
such Debt Securities will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such defeasance or covenant defeasance and
will be subject to U.S. federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such defeasance or
covenant defeasance had not occurred, and such opinion of counsel, in the case
of defeasance, will be required to refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable United States federal income
tax law occurring after the date of such Indenture (Section 1404 of each
Indenture).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable for the
payment of which its full faith and credit is pledged or (ii) obligations of a
person controlled or supervised by and acting as an agency or instrumentality of
the United States of America or the government which issued the foreign currency
in which the Debt Securities of a particular series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other government, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a
16
<PAGE>
depository receipt, PROVIDED that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount receiving by the custodian in respect of
the Government Obligation or the specific payment of interest on or principal of
the Government Obligation evidenced by such depository receipt (Section 101 of
each Indenture).
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Trust has deposited funds and/or Government Obligations to effect defeasance
or covenant defeasance with respect to Debt Securities of any series, (a) the
holder of a Debt Security of such series is entitled to, and does, elect
pursuant to Section 301 of either Indenture or the terms of such Debt Security
to receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security shall be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium, if any) and interest on such Debt Security as they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Security into the currency, currency unit or composite currency in which such
Debt Security becomes payable as a result of such election or such cessation of
usage based on the applicable market exchange rate (Section 1405 of each
Indenture). "Conversion Event" means the cessation of use of (i) a currency,
currency unit or composite currency both by the government of the country which
issued such currency and for the settlement of transactions by a central bank or
other public institutions of or within the international banking community, (ii)
the ECU both within the European Monetary System and for the settlement of
transactions by public institutions of or within the European Communities or
(iii) any currency unit or composite currency other than the ECU for the
purposes for which it was established. Unless otherwise provided in the
applicable Prospectus Supplement, all payments of principal of (and premium, if
any) and interest on any Debt Security that is payable in a foreign currency
that ceases to be used by its government of issuance shall be in U.S. dollars
(Section 101 of each Indenture).
In the event the Trust effects covenant defeasance with respect to any Debt
Securities and such Debt Securities are declared due and payable because of the
occurrence of any Event of Default other than the Event of Default described in
clause (d) under "Events of Default, Notice and Waiver" with respect to Sections
1004 to 1008, inclusive, and Sections 1011 and 1012 of either Indenture (which
sections would no longer be applicable to such Debt Securities) or described in
clause (g) under "Events of Default, Notice and Waiver" with respect to any
other covenant as to which there has been covenant defeasance, the amount in
such currency, currency unit or composite currency in which such Debt Securities
are payable, and Government Obligations on deposit with the applicable Indenture
Trustee, will be sufficient to pay amounts due on such Debt Securities at the
time of their stated maturity but may not be sufficient to pay amounts due on
such Debt Securities at the time of the acceleration resulting from such Event
of Default. However, the Trust would remain liable to make payment of such
amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Shares or Preferred Shares will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Shares or Preferred
Shares, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
or the Trust, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities.
17
<PAGE>
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
DESCRIPTION OF SHARES
GENERAL
The Trust is authorized to issue 100,000,000 Common Shares with a par value
of $.01 per share. Under Maryland law and the Trust's Declaration of Trust (the
"Declaration of Trust"), the Trust may increase the aggregate number of
authorized Common Shares without shareholder approval. As of January 13, 1998,
35,678,110 Common Shares were outstanding.
The Trust's Board of Trustees has proposed to amend the Declaration of Trust
to authorize the Trust to issue Preferred Shares, $.01 par value per share (the
"Preferred Amendment"). The adoption of the Preferred Amendment requires the
approval of the Board of Trustees and of the holders of a majority of the
Trust's outstanding Common Shares of the form of an amendment to the Declaration
of Trust authorizing the Preferred Shares. No Preferred Shares may be issued
prior to the adoption of the Preferred Amendment.
The following statements with respect to the Common Shares and Preferred
Shares (being sometimes referred to herein collectively as the "Shares") are
subject to the detailed provisions of the Declaration of Trust, the Trust's
bylaws and the proposed Preferred Amendment. These statements do not purport to
be complete or to give full effect to the terms of the provisions of the
statutory or common law and are subject to, and are qualified in their entirety
by reference to, the terms of the Declaration of Trust, the Trust's bylaws and
the proposed Preferred Amendment.
COMMON SHARES
Holders of Common Shares are entitled to receive dividends and distributions
when and as declared by the Board of Trustees after payment of, or provision
for, any cumulated dividends and distributions on and any required redemptions
of Preferred Shares then outstanding. Holders of Common Shares have one vote per
share and non-cumulative voting rights. The Declaration of Trust establishes the
number of Trustees at not less than three nor more than seven and divides the
Trustees into three classes to be elected on a staggered basis. Upon liquidation
of the Trust, holders of Common Shares would receive their PRO RATA share of the
distributable assets of the Trust remaining after the satisfaction of prior
preferential rights of Preferred Shares and the satisfaction of all debts and
liabilities of the Trust. Holders of Common Shares do not have any preference,
conversion, exchange, preemptive or redemption rights.
Outstanding Common Shares are listed on the American Stock Exchange.
American Stock Transfer & Trust Company, New York, New York is the transfer
agent for the Common Shares.
PREFERRED SHARES
The following description of the terms of the Preferred Shares sets forth
certain general terms and provisions of the Preferred Shares to which a
Prospectus Supplement may relate. Specific terms of any series of Preferred
Shares offered by a Prospectus Supplement will be described in that Prospectus
Supplement. The description set forth below is subject to and qualified in its
entirety by reference to the Articles of Amendment to the Declaration of Trust
fixing the preferences, limitations and relative rights of a particular series
of Preferred Shares.
18
<PAGE>
GENERAL. Upon the adoption of the Preferred Amendment, the Board of
Trustees would be authorized, without further shareholder action, to provide for
issuance of Preferred Shares, in one or more series, with such voting powers and
with such designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions, as the
Board of Trustees shall approve.
The Preferred Shares will have the dividend, liquidation, redemption,
conversion and voting rights set forth below unless otherwise provided in the
Prospectus Supplement relating to a particular series of Preferred Shares.
Reference is made to the Prospectus Supplement relating to the particular series
of Preferred Shares offered thereby for specific terms, including: (i) the title
and liquidation preference per share of such Preferred Shares and the number of
shares offered; (ii) the price at which such series will be issued; (iii) the
dividend rate (or method of calculation), the dates on which dividends shall be
payable and the dates from which dividends shall commence to accumulate; (iv)
any redemption or sinking fund provisions of such series; (v) any conversion
provisions of such series; and (vi) any additional dividend, liquidation,
redemption, sinking fund and other rights, preferences, privileges, limitations
and restrictions of such series.
The Preferred Shares will, when issued, be fully paid and nonassessable.
Unless otherwise specified in the Prospectus Supplement relating to a particular
series of Preferred Shares, each series will rank on a parity as to dividends
and distributions in the event of a liquidation with each other series of
Preferred Shares and, in all cases, will be senior to the Common Shares.
DIVIDEND RIGHTS. Holders of Preferred Shares of each series will be
entitled to receive, when, as and if declared by the Board of Trustees, out of
assets of the Trust legally available therefor, cash dividends at such rates and
on such dates as are set forth in the Prospectus Supplement relating to such
series of Preferred Shares. Such rate may be fixed or variable or both and may
be cumulative, noncumulative or partially cumulative.
If the applicable Prospectus Supplement so provides, as long as any
Preferred Shares are outstanding, no dividends will be declared or paid or any
distributions be made on the Common Shares, other than a dividend payable in
Common Shares, unless the accrued dividends on each series of Preferred Shares
have been fully paid or declared and set apart for payment and the Trust shall
have set apart all amounts, if any, required to be set apart for all sinking
funds, if any, for each series of Preferred Shares.
If the applicable Prospectus Supplement so provides, when dividends are not
paid in full upon any series of Preferred Shares and any other series of
Preferred Shares ranking on a parity as to dividends with such series of
Preferred Shares, all dividends declared upon such series of Preferred Shares
and any other series of Preferred Shares ranking on a parity as to dividends
will be declared PRO RATA so that the amount of dividends declared per share on
such series of Preferred Shares and such other series will in all cases bear to
each other the same ratio that accrued dividends per share on such series of
Preferred Shares and such other series bear to each other.
Each series of Preferred Shares will be entitled to dividends as described
in the Prospectus Supplement relating to such series, which may be based upon
one or more methods of determination. Different series of Preferred Shares may
be entitled to dividends at different dividend rates or based upon different
methods of determination. Except as provided in the applicable Prospectus
Supplement, no series of Preferred Shares will be entitled to participate in the
earnings or assets of the Trust.
RIGHTS UPON LIQUIDATION. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Trust, the holders of each series
of Preferred Shares will be entitled to receive out of the assets of the Trust
available for distribution to shareholders the amount stated or determined on
the basis set forth in the Prospectus Supplement relating to such series, which
may include accrued dividends, if such liquidation, dissolution or winding up is
involuntary, or may equal the current redemption price per share (otherwise than
for the sinking fund, if any, provided for such series) provided for such series
set forth in such Prospectus Supplement, if such liquidation, dissolution or
winding up is voluntary, and on such
19
<PAGE>
preferential basis as is set forth in such Prospectus Supplement. If, upon any
voluntary or involuntary liquidation, dissolution or winding up of the Trust,
the amounts payable with respect to Preferred Shares of any series and any other
shares of stock of the Trust ranking as to any such distribution on a parity
with such series of Preferred Shares are not paid in full, the holders of
Preferred Shares of such series and of such other shares will share ratably in
any such distribution of assets of the Trust in proportion to the full
respective preferential amounts to which they are entitled or on such other
basis as is set forth in the applicable Prospectus Supplement. The rights, if
any, of the holders of any series of Preferred Shares to participate in the
assets of the Trust remaining after the holders of other series of Preferred
Shares have been paid their respective liquidation preferences upon any
liquidation dissolution or winding up of the Trust will be described in the
Prospectus Supplement relating to such series.
REDEMPTION. A series of Preferred Shares may be redeemable, in whole or in
part, at the option of the Trust, and may be subject to mandatory redemption
pursuant to a sinking fund, in each case upon terms, at the times, at the
redemption prices and for the types of consideration set forth in the Prospectus
Supplement relating to such series. The Prospectus Supplement relating to a
series of Preferred Shares which is subject to mandatory redemption shall
specify the number of shares of such series that shall be redeemed by the Trust
in each year commencing after a date to be specified, together with an amount
equal to any accrued and unpaid dividends thereon to the date of redemption.
If, after giving notice or redemption to the holders of a series of
Preferred Shares, the Trust deposits with a designated bank funds sufficient to
redeem such Preferred Shares, then from and after such deposit, all shares
called for redemption will no longer be outstanding for any purpose, other than
the right to receive the redemption price and the right to convert such shares
into other classes of capital stock of the Trust. The redemption price will be
stated in the Prospectus Supplement relating to a particular series of Preferred
Shares.
Except as indicated in the applicable Prospectus Supplement, the Preferred
Shares will not be subject to any mandatory redemption at the option of the
holder.
SINKING FUND. The Prospectus Supplement for any series of Preferred Shares
will state the terms, if any, of a sinking fund for the purchase or redemption
of that series.
CONVERSION RIGHTS. The Prospectus Supplement for any series of Preferred
Shares will state the terms, if any, on which shares of that series are
convertible into Common Shares or another series of Preferred Shares. The
Preferred Shares will have no preemptive rights.
VOTING RIGHTS. Except as indicated in the Prospectus Supplement relating to
a particular series of Preferred Shares, or except as expressly required by
Maryland law, a holder of Preferred Shares will not be entitled to vote. Except
as indicated in the Prospectus Supplement relating to a particular series of
Preferred Shares, in the event the Trust issues full shares of any series of
Preferred Shares, each such share will be entitled to one vote on matters on
which holders of such series of Preferred Shares are entitled to vote.
Under Maryland law, the affirmative vote of the holders of a majority of the
outstanding shares of all series of Preferred Shares, voting as a separate
voting group, will be required for (i) the authorization of any class of shares
ranking prior to or on parity with Preferred Shares or the increase in the
authorized number of any such shares, (ii) any increase in the authorized number
of Preferred Shares and (iii) certain amendments to the Declaration of Trust
that may be adverse to the rights of Preferred Shares outstanding.
TRANSFER AGENT AND REGISTRAR. The transfer agent, registrar and dividend
disbursement agent for a series of Preferred Shares will be selected by the
Trust and be described in the applicable Prospectus Supplement. The registrar
for Preferred Shares will send notices to shareholders of any meetings at which
holders of Preferred Shares have the right to vote on any matter.
20
<PAGE>
BUSINESS COMBINATION PROVISIONS
The Declaration of Trust provides that any merger, consolidation or
liquidation of the Trust, or any sale of all or substantially all of its assets,
must be approved by a majority of the Trustees, and that if any such transaction
is with, into or to a Related Shareholder (defined as a person or entity
beneficially owning, directly or indirectly, 5% or more of the outstanding
Shares), the transaction must be approved by a majority of the Trustees not
appointed or nominated by or acting on behalf of the Related Shareholder or an
affiliate or associate of the Related Shareholder.
The Trust, as permitted by Maryland Law, has expressly elected to be
governed by the special voting requirement of the Maryland Corporations and
Associates Article (the "Special Voting Article"). The Special Voting Article
establishes special requirements with respect to "business combinations" between
an "interested stockholder" and a Maryland corporation unless exemptions are
applicable. Among other things, the Special Voting Article prohibits, for a
period of five years, a merger and other specific or similar transactions
between a Maryland corporation and an interested stockholder and requires a
super majority vote for such transactions after the end of such five-year
period. (For the purposes of the Special Voting Article and the Control Share
Article (described below), a "Maryland corporation" includes a Maryland real
estate investment trust. They are referred to collectively in this section as a
"Maryland company.")
"Interested stockholders" are all persons owning beneficially, directly or
indirectly, more than 10% of the outstanding voting stock of a Maryland company.
"Business combinations" include any merger or similar transaction subject to a
statutory vote and additional transactions involving transfers of assets or
securities in specified amounts to interested stockholders or their affiliates.
Unless an exemption is available, transactions of these types may not be
consummated between a Maryland company and an interested stockholder and,
thereafter, may not be consummated unless recommended by the board of the
Maryland company and approved by the affirmative vote of at least 80% of the
votes entitled to be cast by all holders of outstanding shares of voting stock
and 66 2/3% of the votes entitled to be cast by all holders of outstanding
shares of voting stock other than the interested stockholder unless, among other
things, the company's stockholders receive a minimum price (as defined in the
Special Voting Article) for their shares and the consideration is received in
cash or in the same form as previously paid by the interested stockholder for
its shares.
A business combination with an interested stockholder which is approved by
the board of a Maryland company at any time before an interested stockholder
first becomes an interested stockholder is not subject to the special voting
requirements or fair price provisions of the Special Voting Article. An
amendment to a Maryland company's charter electing not to be subject to the
foregoing requirements must be approved by the affirmative vote of at least 80%
of the votes entitled to be cast by all holders of outstanding shares of voting
stock and 66 2/3% of the votes entitled to be cast by holders of outstanding
shares of voting stock who are not interested stockholders. Any such amendment
is not effective until eighteen months after the vote of stockholders and does
not apply to any business combination of a company with a stockholder who was an
interested stockholder on the date of the stockholder vote.
The Trust, as permitted by Maryland law, has also expressly elected to be
governed by the control share provisions of the Maryland Corporations and
Associates Article (the "Control Share Article"). Under the Control Share
Article, "control shares" of a Maryland company acquired in a "control share
acquisition" have no voting rights except to the extent approved a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares of
stock owned by the acquirer or by officers or directors who are employees of the
company. "Control shares" are voting shares of stock which, if aggregated with
all other shares of stock previously acquired by such a person, would entitle
the acquirer to exercise voting power in electing directors within one of the
following ranges of voting power: (i) 20% or more but less than 33 1/3%, or
33 1/3% or more but less than a majority, or (iii) a majority of all voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained
21
<PAGE>
shareholder approval. A "control share acquisition" means, subject to certain
exceptions, the acquisition of, ownership of, or the power to direct the
exercise of voting power with respect to, control shares.
A person who has made or proposes to make a control share acquisition upon
satisfaction of certain conditions (including an undertaking to pay expenses)
may compel the board of directors to call a special meeting of shareholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the Maryland company may itself present the
question at any shareholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as permitted by the statute,
then, subject to certain conditions and limitations, the Maryland company may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value, without regard to voting rights.
Fair value shall be determined as of the date of the meeting of the shareholders
at which the voting rights of the control shares are considered but not
approved. If no such meeting is held, fair value shall be determined as of the
date of the last acquisition of control shares by the acquiring person. If
voting rights for control shares are approved at a shareholders' meeting and the
acquirer becomes entitled to a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a control share acquisition.
The Control Share Article does not apply to shares acquired in a merger,
consolidation or share exchange if the Maryland company is a party to the
transaction, to acquisitions approved or exempted by the charter or bylaws of
the Maryland company or to shares acquired before November 4, 1988 or pursuant
to a contract entered into before November 4, 1988.
The foregoing provisions may have the effect of discouraging unilateral
tender offers or other takeover proposals which certain shareholders might deem
in their interests or pursuant to which they might receive a substantial premium
for their Shares. The Control Share Article in particular has the effect of
making a unilateral tender offer or other takeover of the Trust more difficult.
The provisions could also have the effect of insulating current management
against the possibility of removal and could, by possibly reducing temporary
fluctuations in market price caused by accumulations of Shares, deprive
shareholders of opportunities to sell at a temporarily higher market price.
EXCESS SHARE PROVISIONS
For the Trust to qualify as a REIT under the Code, in any taxable year, not
more than 50% in value of its outstanding Shares may be owned, directly or
indirectly, by five or fewer individuals during the last six months of such
year, and the Shares must be owned by 100 or more persons during at least 335
days of a taxable year or a proportionate part of a taxable year less than 12
months. In order to meet these and other requirements, the Trustees have the
power to redeem or prohibit the transfer of a sufficient number of Shares to
maintain or bring the ownership of the Shares into conformity with such
requirements. In connection with the foregoing, if the Trustees shall, at any
time and in good faith, be of the opinion that direct or indirect ownership of
Shares representing more than 10% in value of the total Shares outstanding (the
"Excess Shares") has or may become concentrated in the hands of one beneficial
owner, the Trustees shall have the power (i) to repurchase from any shareholder
of the Trust such Excess Shares and (ii) to refuse to sell, transfer or deliver
Shares to any person whose acquisition of such Shares would, in the opinion of
the Trustees, result in the direct or indirect beneficial ownership by any
person of Shares representing more than 10% in value of the outstanding Shares.
The purchase price for any Shares so repurchased shall be at cost or at the last
sale price of the Share as of the date immediately preceding the day on which
the demand for repurchase is mailed, whichever price is higher. From and after
the date fixed for repurchase by the Trustees, and so long as payment of the
purchase price for the Shares to be so
22
<PAGE>
repurchased shall have been made or duly provided for, the holder of any Excess
Shares so called for repurchase shall cease to be entitled to distributions,
voting rights and other benefits with respect to such Shares, except the right
to payment of the purchase price for the Shares.
The Declaration of Trust includes an excess share provision to ensure that
any rent paid to the trust by a "sister corporation" not become disqualified as
rent from real property by virtue of Section 856(d)(2)(B) of the Code. Under
these provisions, the Trustees have the power (i) by lot or other means deemed
equitable to call for purchase from any shareholder such numbers of Shares as
shall be sufficient in the opinion of the Trustees to maintain or bring the
direct or indirect ownership of Shares in conformity with the requirements of
Section 856(d)(2)(B), and (ii) to refuse to register the transfer of Shares to
any person whose ownership would jeopardize the Trust's compliance with Section
856(d)(2)(B). For purposes of this provision, the term "sister corporation"
means a corporation the shares of which are owned by exactly or substantially
the same persons and in exactly or substantially the same numbers as are the
Shares. This provision shall apply even if a "sister corporation" does not exist
(i) at the time the Trustees determine that the ownership of Shares has or may
become so concentrated, or (ii) at the time the Trustees call Shares for
purchase or refuse to register the transfer of Shares. The purchase price for
the Shares purchased pursuant thereto shall be equal to the fair market value of
such Shares as reflected in the closing price for such Shares on the principal
stock exchange on which such Shares are listed or, if such Shares are not
listed, then the last bid for the Shares, as of the close of business on the
date fixed by the Trustees for such purchase or, if no such quotation is
available, as shall be determined in good faith by the Trustees. From and after
the date fixed for purchase by the Trustees, the holder of any Shares so called
for purchase shall cease to be entitled to dividends, voting rights and other
benefits with respect to such Shares, except the right to payment of the
purchase price fixed as aforesaid.
In order to further assure that ownership of the Shares does not become so
concentrated, the Declaration of Trust provides that if any transfer of Shares
would prevent amounts received by the Trust from a "sister corporation," if one
existed, from qualifying as "rents from real property" as defined in Section
856(d) of the Code, by virtue of the application of Section 856(d)(2)(B) of the
Code, the transfer shall be void AB INITIO and the intended transferee of such
Shares shall be deemed never to have had an interest therein. If this provision
is deemed void or invalid by virtue of any legal decision, statute, rule or
regulation, then the transferee of such Shares is deemed to have acted as an
agent on behalf of the Trust. Furthermore, the Declaration of Trust provides
that shareholders shall upon demand disclose to the Trustees in writing such
information with respect to their direct and indirect ownership of the Shares as
the Trustees deem necessary to determine whether the Trust satisfies the
provisions of Sections 856(a)(5) and (6) and Section 856(d) of the Code or the
regulations thereunder, as the same shall from time to time be amended, or to
comply with the requirements of any other taxing authority.
Similarly to the business combination provisions, the excess share
provisions may deter or render more difficult attempts by third parties to
obtain control of the Trust if such attempts are not supported by the Board of
Trustees.
TAXATION
The Trust has elected to be taxed as a REIT under the Code. A REIT which
meets certain qualifications is relieved of federal income taxes on ordinary
income and capital gains distributed to shareholders. In the opinion of Arent
Fox Kintner Plotkin & Kahn, PLLC, legal counsel for WRIT, the Trust has
qualified as a real estate investment trust for the years 1992--1996 and its
present and contemplated method of operation will put it in a position to
continue to so qualify. David M. Osnos, a trustee, is a member of such firm.
23
<PAGE>
DESCRIPTION OF COMMON SHARE WARRANTS
The Trust may issue Common Share Warrants for the purchase of Common Shares.
Common Share Warrants may be issued independently or together with any other
Offered Securities offered by any Prospectus Supplement and may be attached to
or separate from such Offered Securities. Each series of Common Share Warrants
will be issued under a separate warrant agreement (each, a "Warrant Agreement")
to be entered into between the Trust and a warrant agent specified in the
applicable Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will
act solely as an agent of the Trust in connection with the Common Share Warrants
of such series and will not assume any obligation or relationship of agency or
trust for or with any holders or beneficial owners of Common Share Warrants.
The applicable Prospectus Supplement will describe the terms of the Common
Share Warrants in respect of which this Prospectus is being delivered,
including, where applicable, the following: (i) the title of such Common Share
Warrants; (ii) the aggregate number of such Common Share Warrants; (iii) the
price or prices at which such Common Share Warrants will be issued; (iv) the
designation, number and terms of the Common Shares purchasable upon exercise of
such Common Share Warrants; (v) the designation and terms of the other Offered
Securities with which such Common Share Warrants are issued and the number of
such Common Share Warrants issued with each such Offered Security; (vi) the
date, if any, on and after which such Common Share Warrants and the related
Common Shares will be separately transferable; (vii) the price at which each
Common Share purchasable upon exercise of such Common Share Warrants may be
purchased; (viii) the date on which the right to exercise such Common Share
Warrants shall commence and the date on which such right shall expire; (ix) the
minimum and maximum amount of such Common Share Warrants which may be exercised
at any one time; (x) information with respect to book-entry procedures, if any;
(xi) a discussion of certain federal income tax considerations; and (xii) any
other material terms of such Common Share Warrants, including terms, procedures
and limitations relating to the exchange and exercise of such Common Share
Warrants.
PLAN OF DISTRIBUTION
The Trust may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, at prices related to the prevailing market prices
at the time of sale or at negotiated prices. The Trust also may, from time to
time, authorize underwriters acting as the Trust's agents to offer and sell the
Offered Securities upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of Offered
Securities, underwriters may be deemed to have received compensation from the
Trust in the form of underwriting discounts or commissions and may also receive
commissions from purchasers of Offered Securities for whom they may act as
agent. Underwriters may sell Offered Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Trust to underwriters or agents in
connection with the offering of Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Offered Securities may be
deemed to be underwriters, and any discounts and commission received by them and
any profit realized by them on resale of the Offered Securities may be deemed to
be underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Trust, to
24
<PAGE>
indemnification against the contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Trust will
authorize dealers acting as the Trust's agents to solicit offers by certain
institutions to purchase Offered Securities from the Trust at the public
offering price set forth in such Prospectus Supplement pursuant to delayed
delivery contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate principal amount of Offered Securities
sold pursuant to Contracts shall be not less nor more than, the respective
amounts stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and other institutions but will in all cases be subject
to the approval of the Trust. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Offered Securities covered by
its Contracts shall not at the time of delivery be prohibited under the laws of
any jurisdiction in the United States to which such institution is subject, and
(ii) if the Offered Securities are being sold to underwriters, the Trust shall
have sold to such underwriters the total principal amount of the Offered
Securities less the principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may engage in transactions
with and perform services for the Trust and its subsidiaries in the ordinary
course of business.
LEGAL OPINIONS
The legality of the Offered Securities is being passed upon for the Trust by
Arent Fox Kintner Plotkin & Kahn, PLLC, Washington, D.C. David M. Osnos, a
trustee of the Trust, is a member of Arent Fox Kintner Plotkin & Kahn, PLLC,
Andrews & Kurth L.L.P., Washington, D.C., will act as counsel to any
underwriters, dealers or agents.
EXPERTS
The financial statements for the year ended December 31, 1996 incorporated
by reference in this Prospectus to the Trust's Annual Report on Form 10-K for
the year ended December 31, 1996 have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein upon the authority of said firm as experts in
auditing and accounting in giving said report, and the financial statements for
the years ended December 31, 1995 and 1994 incorporated in this Prospectus by
reference to the Trust's Annual Report on Form 10-K for the year ended December
31, 1996 have been so incorporated in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The historical summary of gross income and direct operating expenses for the
year ended December 31, 1995 of Maryland Trade Center I and II included in the
Trust's Current Report on Form 8-K dated May 31, 1996, as amended by Amendment
No. 1 dated July 25, 1996, incorporated by reference herein, has been so
incorporated in reliance on the report dated June 18, 1996 of Stoy, Malone &
Company, P.C., also incorporated by reference herein, and on the authority of
said firm as experts in auditing and accounting.
The historical summary of gross income and direct operating expenses for the
year ended December 31, 1996 of 1600 Wilson Boulevard included in the Trust's
Current Report on Form 8-K dated October 31, 1997, incorporated by reference
herein, has been so incorporated in reliance on the report dated October 17,
1997 of Stoy, Malone & Company, P.C., also so incorporated by reference herein,
and on the authority of said firm as experts in auditing and accounting.
The historical summary of gross income and direct operating expenses for the
year ended December 31, 1996 of Bethesda Hill Apartments included in the Trust's
Current Report on Form 8-K dated November 21, 1997, incorporated by reference
herein, has been so incorporated in reliance on the report
25
<PAGE>
dated November 12, 1997 of Stoy, Malone & Company, P.C., also so incorporated by
reference herein, and on the authority of said firm as experts in auditing and
accounting.
The historical summary of gross income and direct operating expenses for the
year ended December 31, 1996 of Space Center Tysons, Inc. included in the
Trust's Current Report on Form 8-K dated November 21, 1997, incorporated by
reference herein, has been so incorporated in reliance on the report dated
November 14, 1997 of McGladrey & Pullen, LLP, also so incorporated by reference
herein, and on the authority of said firm as experts in auditing and accounting.
26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus Supplement, the applicable Pricing
Supplement or the Prospectus in connection with the offer made by this
Prospectus Supplement, the applicable Pricing Supplement and the Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Trust or the Agents. Neither the delivery of this
Prospectus Supplement, the applicable Pricing Supplement or the Prospectus nor
any sale made hereunder and thereunder shall under any circumstance create an
implication that there has not been any change in the affairs of the Trust since
the date hereof. This Prospectus Supplement, the applicable Pricing Supplement
and the Prospectus do not constitute an offer or solicitation by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer is not qualified to do so or to anyone to whom it
is unlawful to make such offer or solicitation.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
Risk Factors................................... S-2
Description of Notes........................... S-3
Special Provisions Relating to
Foreign Currency Notes....................... S-20
Certain United States Federal
Income Tax Considerations.................... S-23
Plan of Distribution........................... S-32
Legal Matters.................................. S-33
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain
Documents By Reference....................... 2
The Trust...................................... 3
Use of Proceeds................................ 3
Ratios of Earnings to Fixed Charges............ 3
Description of Debt Securities................. 4
Description of Shares.......................... 18
Description of Common Share Warrants........... 24
Plan of Distribution........................... 24
Legal Opinions................................. 25
Experts........................................ 25
</TABLE>
$135,546,875
[LOGO]
WASHINGTON REAL ESTATE
INVESTMENT TRUST
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE
FROM DATE OF ISSUE
------------
PROSPECTUS SUPPLEMENT
----------------
MERRILL LYNCH & CO.
BT ALEX. BROWN
FIRST CHICAGO CAPITAL MARKETS, INC.
SALOMON SMITH BARNEY
JANUARY 16, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
