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UNIT INVESTMENT TRUST
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 1, 1997)
751,174 SHARES
[Logo]
COMMON STOCK
Realty Income Corporation, a Maryland corporation (the "Company" or
"Realty Income"), is a fully integrated, self-administered and self-managed
real estate investment trust ("REIT") that acquires, owns and manages net
leased, retail properties. The Company's portfolio consists of freestanding,
single-tenant, retail properties diversified geographically and by industry
and operated under net lease agreements and, through its predecessors, has
been in the real estate investment business since 1969. As of December 31,
1997, the Company owned a diversified portfolio of 826 properties located in
43 states with over 6.3 million square feet of leasable space. Over 99
percent of the Company's single-tenant properties were leased as of December
31, 1997 pursuant to leases with an average remaining term (excluding
extension options) of approximately 8.4 years.
The Company currently pays regular monthly distributions to holders of its
outstanding shares of common stock, par value $1.00 per share ("Common Stock").
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under the
symbol "O." On February 18, 1998 the last reported sale price of the Common
Stock on the NYSE was $26.625 per share.
All of the 751,174 shares of Common Stock being offered hereby are being
sold by Realty Income.
The shares of Common Stock are subject to certain restrictions on ownership
and transfer designed to preserve the Company's status as a REIT for federal
income tax purposes. See "Restrictions on Ownership and Transfers of Capital
Stock" in the accompanying Prospectus.
See "Risk Factors" beginning on page S-2 for certain factors relevant to an
investment in the Common Stock 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 OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
A.G. Edwards & Sons, Inc. (the "UNDERWRITER") has agreed to purchase the
Common Stock from the Company at a price of $25.2950 per share, resulting in
aggregate proceeds to the Company of $19,000,946 before payment of expenses
by the Company estimated at $50,000, subject to the terms and conditions of
an Underwriting Agreement. The Underwriter intends to sell the shares of
Common Stock to the sponsor of a newly-formed unit investment trust at an
aggregate purchase price of $19,200,759. See "Underwriting."
The shares of Common Stock are offered by the Underwriter, subject to prior
sale, when, as and if issued by the Company and delivered to and accepted by the
Underwriter, subject to approval of certain legal matters by
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counsel for the Underwriter and subject to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Common
Stock will be made in New York, New York on or about February 23, 1998.
A.G. EDWARDS & SONS, INC.
The date of this Prospectus Supplement is February 18, 1998.
FORWARD - LOOKING STATEMENTS
THIS PROSPECTUS SUPPLEMENT, INCLUDING THE DOCUMENTS INCORPORATED AND DEEMED
TO BE INCORPORATED HEREIN AND THEREIN BY REFERENCE, CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"). FORWARD-LOOKING STATEMENTS ARE
INHERENTLY SUBJECT TO RISK AND UNCERTAINTIES, MANY OF WHICH CANNOT BE PREDICTED
WITH ACCURACY AND SOME OF WHICH MIGHT NOT EVEN BE ANTICIPATED. FUTURE EVENTS
AND ACTUAL RESULTS, FINANCIAL AND OTHERWISE, MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE
SECTIONS ENTITLED "RISK FACTORS" IN THIS PROSPECTUS SUPPLEMENT" AND "BUSINESS"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996 AND IN THE SECTIONS ENTITLED "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS" IN THE COMPANY'S
QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTERS ENDED MARCH 31, 1997, JUNE 30,
1997, AND SEPTEMBER 30, 1997 INCORPORATED BY REFERENCE IN THE ACCOMPANYING
PROSPECTUS.
RISK FACTORS
COMPETITION FOR ACQUISITION OF REAL ESTATE. The Company faces
competition in the acquisition, operation and sale of its properties. Such
competition can be expected from other businesses, individuals, fiduciary
accounts and plans and other entities engaged in real estate investment.
Some of the Company's competitors are larger and have greater financial
resources than the Company. This competition may result in a higher cost for
properties the Company wishes to purchase. The tenants leasing the Company's
properties generally face significant competition from other operators
ENVIRONMENTAL MATTERS. Investments in real property create a potential for
environmental liability on the part of the owner of such property for
contamination resulting from the presence or discharge of hazardous substances
on the property. Such liability may be imposed without regard to knowledge of,
or the timing, cause or person responsible for the release of such substances
onto the property. The Company believes that its properties are in compliance
in all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products. The
Company has not been notified by any governmental authority, and is not
otherwise aware, of any material noncompliance, liability or claim relating to
hazardous or toxic substances or petroleum products in connection with any of
its present properties. Moreover, the tenants are required to operate in
compliance with all applicable federal, state and local laws and regulations.
Nevertheless, if environmental contamination should exist, the Company could be
subject to strict liability by virtue of its ownership interest.
In December 1996, the Company obtained a five-year environmental insurance
policy on the property portfolio. Based upon the 826 properties in the
portfolio at December 31, 1997, the cost of the insurance will be approximately
$90,000 per year. The limit of the policy is $10.0 million for each loss and
$20.0 million in the aggregate, with a $100,000 deductible. There is a sublimit
on properties with underground storage tanks of $1.0 million per occurrence and
$5.0 million in the aggregate, with a deductible of $25,000.
RISKS RELATING TO QUALIFICATION AND OPERATIONS AS A REIT. The Company
believes that it has operated and intends to continue to operate so as to
qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the "Code"), commencing with its taxable year ended December
31, 1994. Although
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management believes that the Company is organized and operates in such a manner,
no assurance can be given that the Company will continue to be organized or be
able to operate in a manner so as to qualify or remain so qualified.
Qualification as a REIT involves the satisfaction of numerous requirements
established under highly technical and complex Code provisions for which there
are only limited judicial and administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
the Company's control. For example, in order to qualify as a REIT, at least 95%
of the Company's gross income in any year must be derived from qualifying
sources and the Company must pay distributions to stockholders aggregating
annually at least 95% of its REIT taxable income (determined without regard to
the dividends paid deduction and by excluding net capital gains). No assurance
can be given that legislation, new regulations, administrative interpretations
or court decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. See "Certain Federal Income Tax Considerations--Taxation of the
Company as a REIT" in the accompanying Prospectus.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would substantially reduce the net
earnings of the Company available for investment or distribution to stockholders
because of the additional tax liability to the Company for the years involved.
In addition, distributions to stockholders would no longer be required to be
made. See "Certain Federal Income Tax Considerations--Taxation of the Company
as a REIT--Requirements for Qualification" in the accompanying Prospectus.
Even if the Company qualifies for and maintains its REIT status, it is
subject to certain federal, state and local taxes on its income and property.
For example, if the Company has net income from a prohibited transaction, such
income will be subject to a 100% tax.
EFFECT OF DISTRIBUTION REQUIREMENTS. To maintain its status as a REIT for
federal income tax purposes, the Company generally is required each year to
distribute to its stockholders at least 95% of its taxable income (determined
without regard to the dividends paid deduction and by excluding net capital
gains) each year. The Company is also subject to tax at regular corporate rates
to the extent that it distributes less than 100% of its taxable income
(including net capital gains) each year. In addition, the Company is subject to
a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of 85% of its ordinary income for such calendar year, 95% of its capital gain
net income for the calendar year and any amount of such income that was not
distributed in prior years. The Company intends to continue to make
distributions to its stockholders to comply with the distribution requirements
of the Code and to reduce exposure to federal income taxes and the nondeductible
excise tax. Differences in timing between the receipt of income and the payment
of expenses in arriving at taxable income and the effect of required debt
amortization payments could require the Company to borrow funds on a short-term
basis to meet the distribution requirements that are necessary to achieve the
tax benefits associated with qualifying as a REIT.
DILUTION OF COMMON STOCK. The Company's future growth will depend in large
part upon its ability to raise additional capital. If the Company were to raise
additional capital through the issuance of equity securities, the interests of
holders of common stock could be diluted. Likewise, the Company's Board of
Directors is authorized to cause the Company to issue preferred stock of any
class or series (with such dividends and voting and other rights as the Board
of Directors may determine). Accordingly, the Board of Directors may authorize
the issuance of preferred stock with voting, dividend and other similar rights
which could be dilutive to or otherwise adversely affect the interests of
holders of Common Stock.
REAL ESTATE OWNERSHIP RISKS. The Company is subject to all of the general
risks associated with the ownership of real estate, in particular the risk that
rental revenue from the properties will not be sufficient to cover all corporate
operating expenses and debt service payments on indebtedness incurred by the
Company. These risks include adverse changes in general or local economic
conditions, changes in supply of or demand for similar or competing properties,
changes in interest rates and operating expenses, competition for tenants,
changes in market
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rental rates, inability to lease properties upon termination of existing leases,
renewal of leases at lower rental rates and inability to collect rents from
tenants due to financial hardship, including bankruptcy. Other risks include
changes in tax, real estate, zoning and environmental laws which may have an
adverse impact upon the value of real estate, uninsured property liability,
property damage or casualty losses and unexpected expenditures for capital
improvements or to bring properties into compliance with applicable federal,
state and local laws. Acts of God and other factors beyond the control of the
Company's management might also adversely affect the Company.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its
executive officers and key employees. The loss of the services of its executive
officers and key employees could have a material adverse effect on the Company's
operations.
RECENT DEVELOPMENTS
RECENT ACQUISITIONS. During 1997, the Company continued to increase the
size of its portfolio through a strategic program of acquisitions. The
Company acquired 96 additional properties (the "New Properties"), and
selectively sold 10 properties, increasing the number of properties in its
portfolio by 11.6% to 826 properties at December 31, 1997, from 740
properties at December 31, 1996. Of the New Properties, 87 were occupied as
of December 31, 1997 and the remaining properties were pre-leased and under
construction pursuant to contracts under which the tenants have agreed to
develop the properties (with development costs funded by the Company) and to
begin paying rent when the premises open for business. The New Properties
were acquired for an aggregate cost of approximately $139.2 million
(excluding the estimated unfunded development costs totaling $2.9 million on
properties under construction) at December 31, 1997. The New Properties are
located in 27 states, will contain approximately 1.13 million leasable square
feet and are 100% leased under net leases, with an average initial lease term
of 14.4 years. The weighted average annual unleveraged return on the cost of
the New Properties (including the estimated unfunded development cost of
properties under construction) is estimated to be 10.4%, computed as
estimated contractual net operating income (which in the case of a net leased
property is equal to the base rent or, in the case of properties under
construction, the estimated base rent under the lease) for the first year of
each lease, divided by total acquisition and estimated development costs.
Since it is possible that a tenant could default on the payment of
contractual rent, no assurance can be given that the actual return on the
cost of the New Properties will not differ from the foregoing percentage.
During 1997, the Company also invested $3.1 million in 12 development
properties acquired during 1996.
INTERIM AND ANNUAL FINANCIAL RESULTS. For the quarter ended December 31,
1997, funds from operations increased 13.6% to $14.92 million compared to $13.13
million for the same period in 1996. Net income for the quarter ended December
31, 1997, increased 13.3% to $10.05 million compared to $8.87 million for the
same period in 1996. On a diluted basis, for the quarter ended December 31,
1997, net income per share increased 2.6% to $0.40 per share compared to $0.39
per share during the same period in 1996. Funds from operations increased 9.7%
to $52.35 million for the year ended December 31, 1997, compared to $47.72
million for the same period in 1996. Net income for the year ended December 31,
1997, increased 7.9% to $34.77 million compared to $32.22 million for the year
ended December 31, 1996. On a diluted basis, for the year ended
December 31, 1997, net income per share increased 5.7% to $1.48 per share
compared to $1.40 in 1996 for the same period. Same store rents on 667
properties owned during the quarter ended December 31, 1997, increased 0.9% to
$14.78 million compared to $14.65 million in 1996. For the full year, same
store rents increased 1.4% to $55.74 million compared to $54.97 million in 1996.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be approximately $19,000,946 million. The Company
intends to use the net proceeds to pay down outstanding indebtedness under the
Credit Facility and for other general corporate purposes. Pending application
for such purposes, such net proceeds may be invested in short-term investments.
The Credit Facility had an outstanding balance at February 10, 1998 of $21.3
million and is expected to be approximately $27.0 million on the closing date
of the Offering. Borrowings under the Credit Facility currently
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bear interest at a spread of 0.85% over the London Interbank Offered Rate
("LIBOR"). The Credit Facility also offers the Company other interest rate
options. The maturity date on the Credit Facility is December 30, 2000 and the
effective interest rate on outstanding borrowings at February 10, 1998, was
6.65%.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
On October 18, 1994, the Company's Common Stock began trading on the NYSE
under the symbol "O." Prior to October 18, 1994, the Common Stock was not
publicly traded. On February 18, 1998 the last reported sales price per share
of Common Stock on the NYSE was $26.625. The table below sets forth for the
periods indicated the high and low sales prices per share of the Company's
Common Stock, as reported on the NYSE composite tape, and distributions declared
per share of Common Stock.
<TABLE>
<CAPTION>
PRICE PER SHARE
OF
COMMON STOCK
DISTRIBUTIONS
HIGH LOW DECLARED (1)
<S> <C> <C> <C>
1996
First Quarter $23.250 $20.250 $0.3100 (2)
Second Quarter $21.375 $19.500 $0.4650
Third Quarter $23.750 $20.375 $0.4650
Fourth Quarter $24.500 $22.250 $0.4700
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$1.7100
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1997
First Quarter $26.625 $23.000 $0.4725
Second Quarter $26.500 $22.625 $0.4725
Third Quarter $27.813 $25.438 $0.4725
Fourth Quarter $27.438 $23.750 $0.4775
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$1.8950
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1998
First Quarter $27.000 $25.313 $0.3200
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---------
(Through February 18, 1998)
</TABLE>
(1) Distributions are currently declared monthly by the Company based on
financial results for the prior months. The Company's Board of Directors has
authorized a monthly distribution of $0.1600 per share of Common Stock payable
February 17, 1998 to stockholders of record on February 2, 1998. PURCHASERS OF
THE SHARES OF COMMON STOCK BEING OFFERED HEREBY WILL NOT RECEIVE THE FEBRUARY
17, 1998 DISTRIBUTION IN RESPECT OF THE SHARES OF COMMON STOCK BEING OFFERED
HEREBY. Although the Company expects to continue its policy of paying monthly
distributions, there can be no assurance that the current level of distributions
will be maintained by the Company.
(2) In the first quarter of 1996, two monthly distributions of $0.155 per share
were declared.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS TO HOLDERS OF COMMON STOCK
The following summary of certain U.S. federal income tax considerations to
holders of Common Stock is based on current law, is for general information
only, and is not tax advice. This discussion does not purport to deal with all
aspects of taxation that may be relevant to particular stockholders in light of
their personal investment or tax circumstances, or to certain types of
stockholders subject to special treatment under the federal income tax laws,
including, without limitation, insurance companies, tax exempt organizations
(except to the extent discussed under
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the heading "--Taxation of Certain Tax-Exempt Stockholders"), stockholders
holding Common Stock as part of a conversion transaction, as part of a hedge or
hedging transaction, or as a position in a straddle for tax purposes, certain
financial institutions, broker- dealers, foreign corporations, foreign
partnerships and persons who are not citizens or residents of the United States
(except to the extent discussed under the heading "--Taxation of Non-U.S.
Stockholders"). This discussion should be read in conjunction with the
discussion under "Certain Federal Income Tax Considerations" in the Prospectus.
In addition, the summary below does not consider the effect of any foreign,
state, local or other tax laws that may be applicable to prospective purchasers
of Common Stock or the effect of any potential changes in applicable tax laws.
This Prospectus Supplement does not address the taxation of the Company or
the impact on the Company of its election to be taxed as a REIT. The federal
income tax treatment of the Company is set forth in the Prospectus under the
heading entitled "Certain Federal Income Tax Considerations. "The discussion
set forth below assumes that the Company qualifies as a REIT under the Code. If
in any taxable year the Company were to fail to qualify as a REIT, the Company
would not be allowed a deduction for dividends paid to stockholders in computing
taxable income and would be subject to federal income tax on its taxable income
at regular corporate rates. As a result, the funds available for distribution
to the Company's stockholders would be reduced. See "Risk Factors--Risks
Relating to Qualification and Operations as a REIT" herein and "Certain Federal
Income Tax Considerations--Failure to Qualify" in the Prospectus.
EACH INVESTOR IS ADVISED TO CONSULT THE PROSPECTUS FOR INFORMATION
REGARDING THE FEDERAL INCOME TAX CONSIDERATIONS TO THE COMPANY OF ITS ELECTION
TO BE TAXED AS A REIT. EACH INVESTOR IS ALSO ADVISED TO CONSULT HIS OR HER OWN
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
ACQUISITION, OWNERSHIP AND SALE OF THE COMMON STOCK OF THE COMPANY INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF TAXABLE U.S. STOCKHOLDERS. As used herein, the term "U.S.
Stockholder" means a holder of shares of Common Stock who (for United States
Federal income tax purposes) (i) is a citizen or resident of the United States,
(ii) is a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof,
(iii) is an estate the income of which is subject to United States Federal
income taxation regardless of its source, or (iv) is a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States persons who have the authority to
control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, certain trusts in existence on
August 20, 1996, and treated as United States persons prior to such date that
elect to continue to be treated as United States persons, shall also be
considered U.S. Stockholders.
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. Stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taxable to
them as ordinary income and will not be eligible for the dividends received
deduction in the case of taxable U.S. Stockholders that are corporations.
Distributions that are properly designated as capital gain dividends will be
taxable to taxable U.S. Stockholders as gain (to the extent they do not
exceed the Company's actual net capital gain for the taxable year) from the
sale or disposition of a capital asset. Depending upon the period of time
that the Company held the assets to which such gains were attributable, and
upon certain designations, if any, which may be made by the Company, such
gains will be taxable to non-corporate U.S. Stockholders at a rate of either
20%, 25%, or 28%. However, U.S. Stockholders that are corporations may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. To the extent that the Company makes distributions (not designated
as capital gain dividends) in excess of its current and accumulated earnings
and profits, such distributions will be treated first as a tax free return of
capital to each U.S. Stockholder, reducing the adjusted basis which such U.S.
Stockholder has in his or her shares of Common Stock for tax purposes by the
amount of such distribution (but not below zero), with distributions in
excess of a U.S. Stockholder's adjusted basis in his or her shares taxable as
capital gains (provided that the shares have been held as a capital asset).
With respect to non-corporate U.S. Stockholders, amounts described as being
treated as capital gains in the preceding sentence will be taxable as
long-term capital gains if the shares to which such gains are attributable
have been held for more than eighteen months, mid-term
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capital gains if such shares have been held for more than one year but not more
than eighteen months, or short-term capital gains if such shares have been held
for one year or less. In addition, any dividend declared by the Company in
October, November or December of any year payable to a stockholder of record on
a specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company during January of the following
calendar year. Stockholders may not include in their individual income tax
returns any net operating losses or capital losses of the Company.
The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would
pay tax on such retained net long-term capital gains. In addition, to the
extent designated by the Company, a taxable U.S. Stockholder generally would (i)
include its proportionate share of such undistributed long-term capital gains in
computing its long-term capital gains in its return for its taxable year in
which the last day of the Company's taxable year falls (subject to certain
limitations as to the amount so includable), (ii) be deemed to have paid the
capital gains tax imposed on the Company on the designated amounts included in
such taxable U.S. Stockholder's long-term capital gains, (iii) receive a credit
or refund for such amount of tax deemed paid by it, (iv) increase the adjusted
basis of its shares of Common Stock by the difference between the amount of such
includable gains and the tax deemed to have been paid by it, and (v) in the case
of a taxable U.S. Stockholder that is a corporation, appropriately adjust its
earnings and profits for the retained capital gains in accordance with Treasury
Regulations to be prescribed by the IRS.
Distributions made by the Company and gain arising from the sale or
exchange by a taxable U.S. Stockholder of shares of Common Stock will not be
treated as passive activity income, and, as a result, such stockholders
generally will not be able to apply any "passive losses" against such income or
gain. Distributions made by the Company (to the extent they do not constitute a
return of capital) generally will be treated as investment income for purposes
of computing the investment interest limitation. Gain arising from the sale or
other disposition of Common Stock (or distributions treated as such), however,
will not be treated as investment income under certain circumstances.
Upon the sale or other disposition of shares of Common Stock, gain or loss
will be recognized by a taxable U.S. Stockholder in an amount equal to the
difference between (i) the amount of cash and fair market value of any property
received on such sale or other disposition, and (ii) the taxable U.S.
Stockholder's adjusted basis in such shares of Common Stock. Such gain or loss
will be capital gain or loss if the shares of Common Stock have been held by the
U.S. Stockholder as a capital asset, and, with respect to non-corporate U.S.
Stockholders, will be mid-term or long-term gain or loss if such shares have
been held for more than one year or eighteen months, respectively. In general,
any loss recognized by a U.S. Stockholder upon a sale or other disposition of
shares of Common Stock that have been held for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss to the extent of distributions received by such U.S. Stockholder from the
Company which were required to be treated as long-term capital gain
BACK-UP WITHHOLDING. The Company will report to its taxable U.S.
Stockholders and the IRS the amount of dividends paid during each calendar year,
and the amount of tax withheld, if any. Under the backup withholding rules, a
taxable U.S. Stockholder may be subject to backup withholding at the rate of 31%
with respect to dividends paid unless such stockholder (a) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (b) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A taxable U.S.
Stockholder that does not provide his correct taxpayer identification number may
also be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the taxable U.S. Stockholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain distributions to any taxable U.S. Stockholders who fail to certify
their non-foreign status to the Company. See "Taxation of Non-U.S.
Stockholders."
TAXATION OF CERTAIN TAX-EXEMPT STOCKHOLDERS. Generally, a tax-exempt
investor that is exempt from tax on its investment income, such as an individual
retirement account ("IRA") or a 401(k) plan, that holds the Common Stock as an
investment will not be subject to tax on distributions paid by the Company.
However, if such tax-
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exempt investor is treated as having purchased its Common Stock with borrowed
funds, some or all of its distributions from the Common Stock will be subject to
tax. In addition, under some circumstances certain pension plans (including
401(k) plans but not including IRAs and government pension plans) that own more
than 10% (by value) of the Company's outstanding Common Stock, could be subject
to tax on a portion of their Common Stock dividends even if their Common Stock
is held for investment and is not treated as acquired with borrowed funds. The
Ownership Limit, however, should generally prevent this result (see
"Restrictions on Ownership and Transfers of Capital Stock" in the Prospectus).
TAXATION OF NON-U.S. STOCKHOLDERS. The preceding discussion does not
address the rules governing United States federal income taxation of the
ownership and disposition of Common Stock by persons that are not U.S.
Stockholders ("Non-U.S. Stockholders"). In general, Non-U.S. Stockholders may
be subject to special tax withholding requirements on distributions from the
Company and with respect to their sale or other disposition of Common Stock,
except to the extent reduced or eliminated by an income tax treaty between the
United States and the Non-U.S. Stockholder's country. A Non-U.S. Stockholder
who is a stockholder of record and is eligible for reduction or elimination of
withholding must file an appropriate form with the Company in order to claim
such treatment. Non-U.S. Stockholders should consult their own tax advisors
concerning the federal income tax consequences to them of a purchase of shares
of the Company's Common Stock, including the federal income tax treatment of
dispositions of interests in, and the receipt of distributions from, the
Company.
OTHER TAX CONSIDERATIONS. The Company's stockholders may be subject to
state or local taxation in various state or local jurisdictions, including those
in which they transact business or reside. The state and local tax treatment of
the Company's stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.
UNDERWRITING
Pursuant to the terms and subject to the conditions of the Underwriting
Agreement (the "Underwriting Agreement") between the Company and A.G. Edwards &
Sons, Inc. (the "Underwriter"), the Underwriter has agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriter, 751,174 shares
of Common Stock.
The Underwriter intends to sell the shares of Common Stock to Nike
Securities L.P., which intends to deposit such shares, together with shares of
common stock of other entities also acquired from the Underwriter, into a
newly-formed unit investment trust (the "Trust") registered under the Investment
Company Act of 1940, as amended, in exchange for units in the Trust. If all the
shares offered hereby are sold at their reported last sale price as shown on the
cover page of this Prospectus Supplement, the aggregate underwriting
compensation would be $999,061. The Underwriter is not an affiliate of Nike
Securities L.P. or the Trust. The Underwriter intends to sell the shares of
Common Stock to Nike Securities L.P. at an aggregate purchase price of
$19,200,759. It is anticipated that the Underwriter will also participate in
the distribution of units of the Trust and will receive compensation therefor.
Pursuant to the Underwriting Agreement, the Company has agreed to indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act or to contribute to payments the Underwriter may be required to
make in respect thereof.
Until the distribution of the shares of Common Stock is completed, rules
of the Securities and Exchange Commission may limit the ability of the
Underwriter to bid for and purchase shares of Common Stock. As an exception
to these rules, the Underwriter is permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock. It is not currently anticipated
that the Underwriter will engage in any such transactions in connection with
this offering.
If the Underwriter creates a short position in the Common Stock in
connection with this offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement, the
S-8
<PAGE>
Underwriter may reduce the short position by purchasing shares in the open
market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the shares. In addition, neither the
Company nor the Underwriter makes any representation that the Underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
In the ordinary course of business, the Underwriter and its affiliates have
engaged, and may in the future engage, in investment banking transactions with
the Company.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Common Stock to be issued in connection with the
Offering will be passed upon for the Company by Ballard Spahr Andrews &
Ingersoll, LLP, Baltimore, Maryland. Certain legal matters relating to the
Offering will be passed upon for the Company by Latham & Watkins, Costa Mesa,
California. Certain legal matters related to the Offering will be passed upon
for the Underwriter by Chapman and Cutler, Chicago, Illinois. Chapman and
Cutler will rely on the opinion of Ballard Saphr Andrews & Ingersoll, LLP, as
to certain matters of Maryland law.
S-9
<PAGE>
PROSPECTUS
$300,000,000
REALTY INCOME CORPORATION
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
------------------------
Realty Income Corporation, a Maryland corporation (the "Company"), may from
time to time offer in one or more series (i) its debt securities (the "Debt
Securities"), (ii) shares of its Preferred Stock, $1.00 par value per share (the
"Preferred Stock"), or (iii) shares of its Common Stock, $1.00 par value per
share (the "Common Stock"), with an aggregate public offering price of up to
$300,000,000 on terms to be determined at the time of offering. The Debt
Securities, the Preferred Stock and the Common Stock (collectively, the
"Securities") may be offered, separately or together, in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each, a "Prospectus Supplement").
The specific terms of the 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, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, terms for
redemption at the Company's option or repayment at the holder's option, terms
for sinking fund payments, terms for conversion into shares of Preferred Stock
or Common Stock, covenants and any initial public offering price; (ii) in the
case of Preferred Stock, the specific designation, preferences, conversion and
other rights, voting powers, restrictions, limitations as to transferability,
dividends and other distributions and terms and conditions of redemption and any
initial public offering price; and (iii) in the case of Common Stock, any
initial public offering price. In addition, such specific terms may include
limitations on actual, beneficial or constructive ownership and restrictions on
transfer of the Securities, in each case as may be appropriate to preserve the
status of the Company as a real estate investment trust ("REIT") for federal
income tax purposes. See "Restrictions on Ownership and Transfers of Capital
Stock." The applicable Prospectus Supplement will also contain information,
where applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
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 October 1, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The registration
statement on Form S-3 (of which this Prospectus is a part) (the "Registration
Statement"), the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Common Stock is currently listed on the New York Stock Exchange ("NYSE") and
similar information concerning the Company can be inspected and copied at the
offices of the NYSE, 20 Broad Street, New York, New York 10005. Electronic
filings made through the Commission's EDGAR filing system are publicly available
through the Commission's web site (http://www.sec.gov).
The Company has filed with the Commission the Registration Statement under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities. This Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the Commission's rules and regulations. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed or incorporated by reference as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference and the exhibits and schedules thereto. For further
information regarding the Company and the Securities, reference is hereby made
to the Registration Statement and such exhibits and schedules, which may be
obtained from the Commission at its principal office in Washington, D.C. upon
payment of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(ii) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(iii) the Company's Current Report on Form 8-K dated May 5, 1997; and
(iv) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein (or in the applicable Prospectus Supplement) or in
any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. Copies of all documents
that are incorporated herein by reference (not including the exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates) will be provided without
charge to each person, including any beneficial owner, to whom this Prospectus
is delivered, upon written or oral request. Requests should be directed to the
Corporate Secretary of the Company, 220 West Crest Street, Escondido, California
92025 (telephone number: (760) 741-2111).
2
<PAGE>
THE COMPANY
Realty Income Corporation, a Maryland corporation (the "Company"), is a
fully integrated, self-administered and self-managed real estate investment
trust ("REIT") that focuses on the acquisition of long-term net lease
properties. The Company's philosophy is to employ a strategy of acquiring,
owning and managing properties that are preleased on a long-term net lease basis
to national and regional chain operators in a variety of consumer service and
retail industries throughout the United States. As of August 19, 1997, the
Company directly owned controlling interests in 771 properties located
throughout the United States.
The Company commenced operations as a REIT on August 15, 1994 through the
merger and consolidation of 25 public and private real estate limited
partnerships (the "Consolidation"). From September 1993 until May 28, 1997, the
Company existed as a corporation formed under the laws of the State of Delaware
(the "Delaware Company"). In March 1997, the Company formed Realty Income of
Maryland, Inc., a Maryland corporation and wholly-owned subsidiary of the
Delaware Company (the "Maryland Company"), specifically for the purpose of
reincorporating the Company under the laws of the State of Maryland (the
"Reincorporation"). The Maryland Company conducted no business and had no
material assets or liabilities prior to May 28, 1997. On May 28, 1997, the
Delaware Company was merged into the Maryland Company pursuant to an Agreement
and Plan of Merger approved by the Company's stockholders. Upon completion of
the merger, the Maryland Company changed its name to Realty Income Corporation.
The Reincorporation did not result in any change in the Company's business,
assets or liabilities and did not result in any relocation of management or
other employees. For a more complete description of the potential effects of the
Reincorporation, reference is hereby made to the section entitled,
"Reincorporation of the Company in Maryland and Related Changes to the Rights of
Stockholders" of the Company's Proxy Statement filed with the Commission on
March 28, 1997 in connection with its 1997 Annual Meeting of Stockholders, which
section is incorporated by reference herein.
The Company's executive offices are located at 220 West Crest Street,
Escondido, California 92025, and the telephone number is (760) 741-2111.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include the construction and acquisition
of additional properties and other acquisition transactions, the expansion and
improvement of certain properties in the Company's portfolio, and the repayment
of indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth ratios of earnings to fixed charges for the
periods shown. The years ended December 31, 1996 and 1995 and the six months
ended June 30, 1997 are for the Company. The results of operations used to
compute the ratio for the year ended December 31, 1994 are comprised of those of
the combined 10 private and 15 publicly held real estate limited partnerships
that were included in the Consolidation (collectively, the "Predecessor") from
January 1, 1994 through August 15, 1994 and those of the Company from August 16,
1994 through December 31, 1994. The ratio shown for the year ended December 31,
1993 is derived from the combined historical financial information of the
Predecessor. Ratios are not shown for the year ended December 31, 1992 because
the Predecessor did not have any fixed charges for such period.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, ------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
6x 14x 10x 39x 5,865x
</TABLE>
3
<PAGE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of net income before
extraordinary items plus fixed charges (excluding interest costs capitalized).
Fixed charges consist of interest expense (including interest costs capitalized)
and the amortization of debt issuance costs. To date, the Company has not issued
any Preferred Stock; therefore, the ratios of earnings to fixed charges and
preferred share dividends are the same as the ratios presented above.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct obligations of the Company, which may be
secured or unsecured, and which may be senior or subordinated indebtedness of
the Company. The Debt Securities may be issued under one or more indentures,
each dated as of a date on or before the issuance of the Debt Securities to
which it relates and in the form that has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part or incorporated by
reference herein by means of a post-effective amendment to the Registration
Statement or a Form 8-K, subject to such amendments or supplements as may be
adopted from time to time. Each such indenture (collectively, the "Indenture")
will be entered into between the Company and a trustee (the "Trustee"), which
may be the same Trustee. The Indenture will be subject to, and governed by, the
Trust Indenture Act of 1939, as amended. The statements made hereunder relating
to the Indenture and the Debt Securities are summaries of certain anticipated
provisions thereof, do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all provisions of the Indenture and
such Debt Securities. Capitalized terms used but not defined herein shall have
the respective meanings set forth in the Indenture.
TERMS
The particular terms of the Debt Securities offered by a Prospectus
Supplement will be described in the particular Prospectus Supplement, along with
any applicable modifications of or additions to the general terms of the Debt
Securities as described herein and in the applicable Indenture. Accordingly, for
a description of the terms of any series of Debt Securities, reference must be
made to both the Prospectus Supplement relating thereto and the description of
the Debt Securities set forth in this Prospectus. To the extent that any
particular terms of the Debt Securities described in a Prospectus Supplement
differ from any of the terms described herein, then such terms described herein
shall be deemed to have been superseded by such Prospectus Supplement.
Except as set forth in any Prospectus Supplement, 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 by the Company's Board of Directors
or as set forth in the applicable Indenture or one or more indentures
supplemental to the Indenture. All Debt Securities of one series need not be
issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series.
Each Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor Trustee may be
appointed to act with respect to such series. If two or more persons are acting
as Trustee with respect to different series of Debt Securities, each such
Trustee shall be a Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other Trustee and, except as
otherwise indicated herein, any action described herein to be taken by a Trustee
may be taken by each such Trustee with respect to, and only with respect to, the
one or more series of Debt Securities for which it is Trustee under the
applicable Indenture.
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<PAGE>
The following summaries set forth certain general terms and provisions of
the Indenture and the Debt Securities. The Prospectus Supplement relating to the
series of Debt Securities being offered will contain further terms of such Debt
Securities, including the following specific terms:
(1) the title of such Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) the price (expressed as a percentage of the principal amount
thereof) 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 Stock or Preferred Stock, or the method by which
any such portion shall be determined;
(4) if convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and conversion
period and, in connection with the preservation of the Company's status as a
REIT, any applicable limitations on the ownership or transferability of the
Common Stock or the Preferred Stock 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;
(6) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities
will bear interest, if any;
(7) the date or dates, or the method for determining such date or dates,
from which any interest will accrue, the dates upon which any such interest
will be payable, the record dates for payment of such interest, or the
method by which any 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;
(8) 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 conversion or registration of transfer or
exchange and where notices or demands to or upon the Company in respect of
such Debt Securities and the Indenture may be served;
(9) the period or periods, if any, within which, the price or prices at
which and the terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the Company's option;
(10) the obligation, if any, of the Company to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous provision or
at the option of a holder thereof, and the period or periods within which,
the price or prices at which and the terms and conditions upon which such
Debt Securities will be redeemed, repaid or purchased, as a whole or in
part, pursuant to such obligation;
(11) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(12) 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;
5
<PAGE>
(13) whether such Debt Securities will be issued in certificated and/or
book-entry form, and, if so, the identity of the depositary for such Debt
Securities;
(14) 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;
(15) the applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the applicable
Indenture, or any modification thereof;
(16) any deletions from, modifications of or additions to the events of
default or covenants of the Company with respect to such Debt Securities;
(17) whether and under what circumstances the Company will pay any
Additional Amounts on such Debt Securities in respect of any tax, assessment
or governmental charge and, if so, whether the Company will have the option
to redeem such Debt Securities in lieu of making such payment;
(18) the subordination provisions, if any, relating to such Debt
Securities;
(19) the provisions, if any, relating to any security provided for such
Debt Securities; and
(20) any other terms of such Debt Securities.
If so provided in the applicable Prospectus Supplement, the Debt Securities
may be issued at a discount below their principal amount and provide for less
than the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof ("Original Issue Discount Securities"). In
such cases, any material U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise described in the applicable Prospectus Supplement, the
principal of (and premium, if any) and interest on any series of Debt Securities
will be payable at the applicable Trustee's corporate trust office, the address
of which will be set forth in the applicable Prospectus Supplement; PROVIDED,
HOWEVER, that, unless otherwise provided in the applicable Prospectus
Supplement, at the Company's option, payment of interest 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.
Subject to certain limitations imposed on Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt Securities
at the office of any transfer agent designated by the Company for such purpose.
In addition, subject to certain limitations imposed on Debt Securities issued in
book-entry form, the Debt Securities of any series may be surrendered for
conversion or registration of transfer thereof at the office of any transfer
agent designated by the Company for such purpose. Every Debt Security
surrendered for conversion, registration of transfer or exchange shall be duly
endorsed or accompanied by a written instrument of transfer and the person
requesting such transfer must provide evidence of title and identity
satisfactory to the Company and the applicable transfer agent. No service charge
will be made for any registration of transfer or exchange of any Debt
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. The Company
may at any time rescind the designation of any transfer agent appointed with
respect to the Debt Securities of any series or approve a change in the location
through which any such transfer agent acts, except that the Company will be
6
<PAGE>
required to maintain a transfer agent in each place of payment for such series.
The Company may at any time designate additional transfer agents with respect to
any series of Debt Securities.
Neither the Company nor any Trustee shall be required to (a) issue, register
the transfer of or exchange Debt Securities of any series if such Debt Security
may be among those selected for redemption during a period beginning at the
opening of business 15 days before the mailing or first publication, as the case
may be, of notice of redemption of such Debt Securities and ending at the close
of business on (i) if the Debt Securities of such series are issuable only in
registered form, the day of mailing of the relevant notice of redemption or (ii)
if the Debt Securities of such series are issuable in bearer form, the day of
the first publication of the relevant notice of redemption or, if such Debt
Securities are also issuable in registered form and there is no such
publication, the day of mailing of the relevant notice of redemption; (b)
register the transfer of or exchange any Debt Security in registered form, or
portion thereof, so selected for redemption, in whole or in part, except the
unredeemed portion of any Debt Security being redeemed in part; or (c) exchange
any Debt Security in bearer form so selected for redemption, except in exchange
for a Debt Security of such series in registered form that is simultaneously
surrendered for redemption; or (d) issue, register the transfer of or exchange
any Debt Security that has been surrendered for repayment at the holder's
option, except the portion, if any, of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Each Indenture will provide that the Company will not consolidate with, or
sell, lease or convey all or substantially all of its assets to, or merge with
or into, any person unless (a) either the Company shall be the continuing
entity, or the successor person (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received the
transfer of such assets shall be a corporation organized and existing under the
laws of the United States or any State thereof and shall expressly assume the
Company's obligation to pay the principal of (and premium, if any) and interest
on all the Debt Securities issued under such Indenture and the due and punctual
performance and observance of all the covenants and conditions contained in such
Indenture and in such Debt Securities; (b) immediately after giving effect to
such transaction and treating any indebtedness that becomes an obligation of the
Company or any Subsidiary as a result thereof as having been incurred, and any
liens on any property or assets of the Company or any Subsidiary that are
incurred, created or assumed as a result thereof as having been created,
incurred or assumed, by the Company or such Subsidiary at the time of such
transaction, no event of default under the Indenture, and no event that, 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 officers' certificate and
legal opinion covering such conditions shall be delivered to the Trustee.
CERTAIN COVENANTS
EXISTENCE. Except as permitted under "--Merger, Consolidation or Sale of
Assets," each Indenture will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, all material rights (by certificate of incorporation, by-laws and
statute) and all material franchises; PROVIDED, HOWEVER, that the Company shall
not be required to preserve any right or franchise if its Board of Directors
determines that the preservation thereof is no longer desirable in the conduct
of its business.
MAINTENANCE OF PROPERTIES. Each Indenture will require the Company 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 to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the Company's judgment may be necessary so that
the business carried on in connection therewith may be properly and
advantageously conducted at all times; PROVIDED, HOWEVER, that the Company and
its Subsidiaries shall not be prevented from selling or otherwise disposing of
their properties for value in the ordinary course of business.
7
<PAGE>
INSURANCE. Each Indenture will require the Company to, and to cause each of
its Subsidiaries to, keep in force upon all of its properties and operations
policies of insurance carried with responsible companies in such amounts and
covering all such risks as shall be customary in the industry in accordance with
prevailing market conditions and availability.
PAYMENT OF TAXES AND OTHER CLAIMS. Each Indenture will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (a) all taxes, assessments and governmental charges levied or
imposed on it or any Subsidiary or on the income, profits or property of the
Company or any Subsidiary and (b) all lawful claims for labor, materials and
supplies that, if unpaid, might by law become a lien upon the property of the
Company or any Subsidiary; PROVIDED, HOWEVER, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim the amount, applicability or validity of which is
being contested in good faith by appropriate proceedings.
PROVISION OF FINANCIAL INFORMATION. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, each Indenture will require the
Company, within 15 days after each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, (a) to transmit by
mail to all holders of Debt Securities issued under such Indenture, 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 Company would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company
were subject to such Sections, (b) to file with the applicable Trustee copies of
the annual reports, quarterly reports and other documents that the Company would
have been required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act if the Company were subject to such Sections, and (c) to
supply, promptly upon written request and payment of the reasonable cost of
duplication and delivery, copies of such documents to any prospective holder of
such Debt Securities.
Except as may otherwise be provided in the Prospectus Supplement relating to
any series of Debt Securities, the term "Subsidiary", as used in the Indenture,
means with respect to the Company, any other Person of which more than 50% of
(i) the equity or other ownership interests or (ii) the total voting power of
shares of capital stock or other ownership interests entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers, trustees or general or managing partners thereof is at the time owned
by the Company or one or more of the other Subsidiaries of the Company or a
combination thereof.
ADDITIONAL COVENANTS. Any additional covenants of the Company with respect
to any of the series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Indenture, each Indenture will
provide that the following events are "events of default" with respect to any
series of Debt Securities issued thereunder: (a) default for 30 days in the
payment of any installment of interest on any Debt Security of such series; (b)
default in the payment of the principal of (or premium, if any, on) any Debt
Security of such series when due, whether at stated maturity or by declaration
of acceleration, notice of redemption, notice of option to elect repayment or
otherwise; (c) default in making any sinking fund payment as required for any
Debt Security of such series; (d) default in the performance of any other
covenant of the Company contained in the 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
to the Company by the Trustee or the holders of at least 25% in principal amount
of the outstanding Debt Securities of such series; (e) a default under any bond,
debenture, note or other evidence of indebtedness for money borrowed by the
Company or any of its Subsidiaries (including obligations under leases required
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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 $25,000,000 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 Company or any of its Subsidiaries
(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 $25,000,000, whether such indebtedness exists at the date of
the relevant Indenture or shall thereafter 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 Company or any
Significant Subsidiary of the Company; and (g) any other Event of Default
provided with respect to a particular series of Debt Securities. The term
"Significant Subsidiary" has the meaning ascribed to such term in Regulation S-X
promulgated under the Securities Act, as such Regulation was in effect on
January 1, 1996.
If an event of default under any Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or Indexed Securities, such portion of the principal
amount as may be specified in the terms thereof) of all the Debt Securities of
that series to be due and payable immediately by written notice thereof to the
Company (and to the applicable Trustee if given by the holders). However, at any
time after such a declaration of acceleration with respect to Debt Securities of
such series has been made, but before a judgment or decree for payment of the
money due has been obtained by the applicable Trustee, the holders of not less
than a majority of the principal amount of the outstanding Debt Securities of
such series may rescind and annul such declaration and its consequences if (a)
the Company shall have deposited with the applicable Trustee all required
payments of the principal of (and premium, if any) and interest on the Debt
Securities of such series (other than principal and premium, if any, and
interest which have become due solely as a result of such acceleration), plus
certain fees, expenses, disbursements and advances of the applicable Trustee and
(b) all events of default, other than the nonpayment of accelerated principal
(or specified portion thereof), premium, if any, and interest with respect to
Debt Securities of such series have been cured or waived as provided in the
Indenture. Each Indenture will also provide that the holders of not less than a
majority in principal amount of the outstanding Debt Securities of any series
may waive any past default with respect to such series and its consequences,
except a default (y) in the payment of the principal of (or premium, if any) or
interest on any Debt Security of such series or (z) in respect of a covenant or
provision contained in such Indenture that cannot be modified or amended without
the consent of the holder of each outstanding Debt Security of such series
affected thereby.
Each Indenture will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the Indenture unless such
default shall have been cured or waived, subject to certain exceptions;
PROVIDED, HOWEVER, that such 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 on
any Debt Security of such series or in the payment of any sinking fund
installment in respect of any Debt Security of such series) if specified
Responsible Officers of the Trustee consider such withholding to be in such
holders' interest.
Each Indenture will provide that no holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to the
Indenture or for any remedy thereunder, except in the case of failure of the
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,
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and no direction inconsistent with such written request has been given to the
Trustee during such 60-day period by holders of a majority in principal amount
of the outstanding Debt Securities of such series. 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) and interest on
such Debt Securities at the respective due dates thereof.
Each Indenture will provide that, subject to provisions in the Trust
Indenture Act of 1939 relating to its duties in case of default, the Trustee is
under no obligation to exercise any of its rights or powers under the Indenture
at the request or direction of any holders of any series of Debt Securities then
outstanding under the Indenture, unless such holders shall have offered to the
Trustee reasonable security or indemnity. The holders of not less than a
majority in principal amount of the outstanding Debt Securities of any series
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or of exercising any trust
or power conferred upon the Trustee; provided that such direction shall not
conflict with any rule of law or the Indenture and the Trustee may refuse to
follow any direction that may involve the Trustee in personal liability or that
may be unduly prejudicial to the holders of Debt Securities of such series not
joining therein.
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to the Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the Indenture and, if so, specifying each such default and the
nature and status thereof.
MODIFICATION OF THE INDENTURE
Modifications and amendments of any Indenture will be permitted with the
consent of the holders of not less than a majority in principal amount of all
outstanding Debt Securities of each series issued under such Indenture affected
by such modification or amendment; PROVIDED, HOWEVER, that no such modification
or amendment may, without the consent of the holder of each Debt Security
affected thereby, (a) change the stated maturity of the principal of, or any
installment of principal, interest (or premium, if any) 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, 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 at the option
of the holder of any Debt Security (or reduce the amount of premium payable upon
any such repayment); (c) change the place of payment, or the coin or currency,
for payment of principal of (or premium, if any) or interest on 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 when due; (e) reduce the
above-stated percentage of outstanding Debt Securities of any series necessary
to modify or amend the 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 each outstanding Debt
Security affected thereby.
The holders of a majority in aggregate principal amount of outstanding Debt
Securities of any series may, on behalf of all holders of Debt Securities of
that series waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants in the applicable Indenture.
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Modifications and amendments of an Indenture will be permitted to be made by
the Company and the Trustee without the consent of any holder of Debt Securities
for any of the following purposes: (a) to evidence the succession of another
person to the Company as obligor under the Indenture; (b) to add to the
covenants of the Company for the benefit of the holders of all or any series of
Debt Securities or to surrender any right or power conferred upon the Company in
the Indenture; (c) to add events of default for the benefit of the holders of
all or any series of Debt Securities; (d) to add or change any provisions of the
Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt
Securities in bearer form, or to permit or facilitate the issuance of Debt
Securities in uncertificated form, PROVIDED that such action shall not adversely
affect the interests of the holders of the Debt Securities of any series in any
material respect; (e) to change or eliminate any provisions of the Indenture,
PROVIDED that any such change or elimination does not apply to any outstanding
Debt Securities of a series created prior to the date of such amendment or
supplement that are entitled to the benefit of such provision; (f) to secure the
Debt Securities; (g) to establish the form or terms of Debt Securities of any
series, including the provisions and procedures, if applicable, for the
conversion of such Debt Securities into Common Stock or Preferred Stock; (h) to
provide for the acceptance of appointment by a successor Trustee or facilitate
the administration of the trusts under the Indenture by more than one Trustee;
(i) to cure any ambiguity, defect or inconsistency in the Indenture or to make
any other provisions with respect to matters or questions arising under the
Indenture PROVIDED, HOWEVER, that such action shall not adversely affect the
interests of holders of Debt Securities of any series in any material respect;
or (j) to supplement any of the provisions of the Indenture to the extent
necessary to permit or facilitate defeasance, covenant defeasance and discharge
of any series of such Debt Securities, PROVIDED, HOWEVER, that such action shall
not adversely affect the interests of the holders of the Debt Securities of any
series in any material respect.
Each Indenture will provide 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, (a) 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, (b) 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 an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (a) above), (c) 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 in the
applicable Indenture, and (d) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any affiliate of the Company or of such
other obligor shall be disregarded.
Each Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series. A meeting may be permitted to be called at any
time by the Trustee, and also, upon request, by the Company 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 Indenture. Except for any
consent or waiver that must be given by the holder of each Debt Security
affected thereby, 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 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
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Indenture will be binding on all holders of Debt Securities of that series. The
persons holding or representing a majority in principal amount of the
outstanding Debt Securities of a series shall constitute a quorum for a meeting
of holders of such series; PROVIDED, HOWEVER, that if any action is to be taken
at such meeting with respect to a consent or waiver that may be given by the
holders of not less than a specified percentage in principal amount of the
outstanding Debt Securities of a series, the persons holding or representing
such specified percentage in principal amount of the outstanding Debt Securities
of such series will constitute a quorum.
Notwithstanding the foregoing provisions, each Indenture will provide 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, direction, notice,
consent, waiver or other action that the Indenture expressly provides may be
made, given or taken by the holders of such series and one or more additional
series: (a) there shall be no minimum quorum requirement for such meeting and
(b) the principal amount of the outstanding Debt Securities of all such series
that are entitled to 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.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, upon
request of the Company any Indenture shall cease to be of further effect with
respect to any series of Debt Securities issued thereunder specified in such
Company request (except as to certain limited provisions of such Indenture which
shall survive) when either (i) all Debt Securities of such series have been
delivered to the Trustee for cancellation or (ii) all Debt Securities of such
series have become due and payable or will become due and payable within one
year (or are scheduled for redemption within one year) and the Company has
irrevocably deposited with the applicable Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal (and
premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or redemption
date, as the case may be.
Each Indenture will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either to (a) defease
and be discharged from any and all obligations with respect to any series of
Debt Securities (except for the obligation to pay Additional Amounts, if any,
upon the occurrence of certain events of tax 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 money for payment in trust) ("defeasance") or (b) be
released from its obligations with respect to certain covenants (which will be
described in the relevant Prospectus Supplement) applicable to such Debt
Securities under the applicable Indenture (which may include, subject to a
limited exception, the covenants described under "--Certain Covenants"), and any
omission to comply with such obligations shall not constitute a default or an
event of default with respect to such Debt Securities ("covenant defeasance"),
in either case upon the irrevocable deposit by the Company with the applicable
Trustee, in trust, of an amount, in such currency or currencies, currency unit
or units or composite currency or currencies in which such Debt Securities are
payable at stated maturity, or Government Obligations (as defined below), or
both, applicable to such Debt Securities that 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.
Such a trust may only be established if, among other things, the Company has
delivered to the applicable Trustee an opinion of counsel (as specified in the
applicable Indenture) to the effect that the
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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, must refer to and be based on a ruling of the
Internal Revenue Service (the "IRS") or a change in applicable U.S. federal
income tax law occurring after the date of the applicable Indenture. In the
event of such defeasance, the holders of such Debt Securities would thereafter
be able to look only to such trust fund for payment of principal (and premium,
if any) and interest.
"Government Obligations" means securities that are (a) 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 (b) obligations of a person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America or such government which issued the foreign currency in
which the Debt Securities of such series are payable, the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America or such other government, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and 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 depository receipt; PROVIDED, HOWEVER, that (except
as required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the Government Obligation or the
specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security or (b)
a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security will 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
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or Conversion
Event based on the applicable market exchange rate. "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 institution 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 made in U.S. dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any event of default, other than the event of default
described in clause (d) under "--Events of Default, Notice and Waiver" with
respect to the specified sections of the applicable Indenture (which sections
would no longer be applicable to such Debt Securities) or clause (g) thereunder
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
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Debt Securities are payable, and Government Obligations on deposit with the
applicable Trustee, may not be sufficient to pay amounts due on such Debt
Securities at the time of the acceleration resulting from such event of default.
The Company would, however, 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 Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities and any restrictions on conversion, including restrictions directed
at maintaining the Company's REIT status.
UNCLAIMED PAYMENTS
All amounts paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Security that
remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Security thereafter may look only to the Company for payment
thereof.
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 COMMON STOCK
The Company has authority to issue 100,000,000 shares of Common Stock, $1.00
par value per share. As of August 19, 1997, the Company had outstanding
22,994,964 shares of Common Stock.
GENERAL
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that the Common Stock will
be issuable upon conversion of Debt Securities or Preferred Stock. The
statements below describing the Common Stock are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of the
Company's charter (the "Charter") and Bylaws (the "Bylaws").
TERMS
Subject to the preferential rights of any other shares or series of stock
and to the provisions of the Charter regarding the restrictions on transfer of
stock, holders of Common Stock are entitled to receive dividends when, as and if
authorized and declared by the Company's Board of Directors out of assets
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legally available therefor. Payment and authorization of dividends on the Common
Stock and purchases of shares thereof by the Company may be subject to certain
restrictions if the Company fails to pay dividends on the Preferred Stock. See
"Description of Preferred Stock." Upon any liquidation, dissolution or winding
up of the Company, holders of Common Stock are entitled to share equally and
ratably in any assets available for distribution to them, after payment or
adequate provision for payment of the debts and other liabilities of the Company
and the preferential amounts owing with respect to any outstanding Preferred
Stock. Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, each outstanding share of Common Stock entitles the holder to
one vote on all matters submitted to a vote of stockholders, including the
election of directors and, except as provided with respect to any other class or
series of stock, the holders of such shares will possess the exclusive voting
power. The Company's Board of Directors is divided into three classes of
directors. The initial terms of the Class I, Class II and Class III directors
will expire in 1998, 1999 and 2000, respectively. Beginning in 1998, directors
of each class will be chosen for three-year terms upon the expiration of their
current terms and each year one class of directors will be elected by the
stockholders. The staggered terms of directors may reduce the possibility of a
tender offer or an attempt to change control of the Company even though a tender
offer or change in control might involve a premium price for the Common Stock or
otherwise be in the best interest of the stockholders. Holders of Common Stock
do not have cumulative voting rights in the election of directors, which means
that holders of more than 50% of all the shares of the Company's Common Stock
voting for the election of directors can elect all the directors of the class
standing for election at the time if they choose to do so and the holders of the
remaining shares cannot elect any directors of such class. Holders of shares of
Common Stock do not have preemptive rights, which means they have no right under
the Charter, Bylaws or Maryland law to acquire any additional shares of Common
Stock that may be issued by the Company at a subsequent date. Holders of shares
of Common Stock have no preference, conversion, exchange, sinking fund,
redemption or appraisal rights. All shares of Common Stock now outstanding are,
and additional shares of Common Stock offered will be when issued, fully paid
and nonassessable.
Under the Maryland General Corporation Law (the "MGCL"), a Maryland
corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business unless approved by the
affirmative vote of stockholders holding at least two thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes entitled to be cast on the matter) is set forth in
the corporation's charter. The Charter provides that any such action shall be
effective if approved by the affirmative vote of holders of shares entitled to
cast a majority of all the votes entitled to be cast on the matter.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of stock and to establish
the number of shares in each class or series and to set the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
transferability, dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
MARYLAND BUSINESS COMBINATION LAW
Under the MGCL, certain "business combinations" (including certain issuances
of equity securities) between a Maryland corporation and any person who
beneficially owns ten percent or more of the voting power of the corporation's
shares (an "Interested Stockholder") or an affiliate thereof are prohibited for
five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business combination
must be approved by two super-majority stockholder votes unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. The business combinations provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the Board of Directors
prior to the time that the Interested Stockholder becomes an Interested
Stockholder.
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These provisions of the MGCL may delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interests of the stockholders.
MARYLAND CONTROL SHARE ACQUISITIONS LAW
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
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 of the corporation to call a special meeting
of stockholders 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 corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders 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 by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
As permitted by the MGCL, the Bylaws contain a provision exempting the
Company from the control share acquisition statute any and all acquisitions by
any person of the Company's shares of stock. There can be no assurance that such
provision will not be amended or eliminated by the Board of Directors at any
time in the future.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, actually or constructively, by five or fewer
individuals (defined in the Code to include certain entities) during the last
half of a taxable year. To assist the Company in meeting this requirement and
certain other requirements relating to its tax status as a REIT, the Company may
take certain actions to limit the actual, beneficial or constructive ownership
by a single person or entity of the Company's outstanding equity securities. See
"Restrictions on Ownership and Transfers of Capital Stock."
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TRANSFER AGENT
The registrar and transfer agent for the Common Stock is The Bank of New
York.
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred Stock,
$1.00 par value per share, of which no shares were outstanding as of August 19,
1997.
GENERAL
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Charter (including any applicable Articles
Supplementary) and the Bylaws.
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any class or series, as authorized by the Board of Directors.
Prior to issuance of shares of each series, the Board is required by the MGCL
and the Charter to set, subject to the provisions of the Charter regarding the
restrictions on transfer of stock, the preferences, conversion or other rights,
voting powers, restrictions, limitations as to transferability, dividends or
other distributions, qualifications and terms or conditions of redemption for
each such series. Thus, the Board could authorize the issuance of shares of
Preferred Stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest. As of the date hereof, no shares of
Preferred Stock are outstanding and the Company has no present plans to issue
any Preferred Stock. The Preferred Stock will, when issued, be fully paid and
nonassessable and will have no preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms of and other information concerning the
Preferred Stock, including:
(1) the title of such Preferred Stock;
(2) the number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) whether such Preferred Stock is cumulative or not and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(5) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) the provision for a sinking fund, if any, for such Preferred Stock;
(7) any voting rights of such Preferred Stock;
(8) the provision for redemption, if applicable, of such Preferred
Stock;
(9) any listing of such Preferred Stock on any securities exchange;
(10) the terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock, including the conversion price
(or manner of calculation thereof);
(11) a discussion of federal income tax considerations applicable to
such Preferred Stock;
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(12) any limitations on actual, beneficial or constructive ownership and
restrictions on transfer, in each case as may be appropriate to preserve the
Company's REIT status;
(13) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(14) whether liquidation preferences on Preferred Stock shall be counted
as liabilities of the Company in determining whether distributions to junior
stockholders can be made under the MGCL;
(15) any limitations on issuance of any series or class of Preferred
Stock ranking senior to or on a parity with such series or class of
Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company; and
(16) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company, rank (a)
senior to all classes or series of Common Stock and to all equity securities
ranking junior to such Preferred Stock with respect to dividend rights or rights
upon liquidation, dissolution or winding up of the Company; (b) on a parity with
all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank on a parity with the Preferred Stock
with respect to dividend rights or rights upon liquidation, dissolution or
winding up of the affairs of the Company; and (c) junior to all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
affairs of the Company. For these purposes, the term "equity securities" does
not include convertible debt securities.
DIVIDENDS
Holders of shares of the Preferred Stock of each series or class shall be
entitled to receive, when, as and if authorized and declared by the Company's
Board of Directors, out of the Company's assets legally available for payment,
cash dividends at such rates and on such dates as will be set forth in the
applicable Prospectus Supplement. Each such dividend shall be payable to holders
of record as they appear on the Company's stock transfer books on such record
dates as shall be fixed by the Company's Board of Directors.
Dividends on any series or class of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Company's Board of Directors fails to
authorize a dividend payable on a dividend payment date on any series or class
of Preferred Stock for which dividends are noncumulative, then the holders of
such series or class of Preferred Stock will have no right to receive a dividend
in respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such series or class are declared or paid for any
future period.
If any shares of Preferred Stock of any series or class are outstanding, no
full dividends shall be authorized or paid or set apart for payment on the
Preferred Stock of any other series or class ranking, as to dividends, on a
parity with or junior to the Preferred Stock of such series or class for any
period unless (a) if such series or class of Preferred Stock has a cumulative
dividend, then full cumulative dividends have been or contemporaneously are
authorized and paid or authorized and a sum sufficient for the payment thereof
is set apart for such payment on the Preferred Stock of such series or class for
all past dividend periods and the then current dividend period or (b) if such
series or class of Preferred Stock does not have
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a cumulative dividend, then full dividends for the then current dividend period
have been or contemporaneously are authorized and paid or authorized and a sum
sufficient for the payment thereof is set apart for such payment on the
Preferred Stock of such series or class. When dividends are not paid in full (or
a sum sufficient for such full payment is not so set apart) upon the shares of
Preferred Stock of any series or class and the shares of any other series or
class of Preferred Stock ranking on a parity as to dividends with the Preferred
Stock of such series or class, then all dividends authorized on shares of
Preferred Stock of such series or class and any other series or class of
Preferred Stock ranking on a parity as to dividends with such Preferred Stock
shall be authorized pro rata so that the amount of dividends authorized per
share on the Preferred Stock of such series or class and such other series or
class of Preferred Stock shall in all cases bear to each other the same ratio
that accrued dividends per share on the shares of Preferred Stock of such series
or class (which shall not include any accumulation in respect of unpaid
dividends for prior dividend periods if such Preferred Stock does not have a
cumulative dividend) and such other series or class of Preferred Stock bear to
each other. No interest, or sum of money in lieu of interest, shall be payable
in respect of any dividend payment or payments on Preferred Stock of such series
or class that may be in arrears.
Except as provided in the immediately preceding paragraph, unless (a) if
such series or class of Preferred Stock has a cumulative dividend, full
cumulative dividends on the Preferred Stock of such series or class have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period and (b) if such series or class of Preferred
Stock does not have a cumulative dividend, full dividends on the Preferred Stock
of such series or class have been or contemporaneously are authorized and paid
or authorized and a sum sufficient for the payment thereof is set apart for
payment for the then current dividend period, then no dividends (other than in
the Common Stock or other stock of the Company ranking junior to the Preferred
Stock of such series or class as to dividends and upon liquidation) shall be
authorized or paid or set aside for payment nor shall any other distribution be
authorized or made on the Common Stock or any other stock of the Company ranking
junior to or on a parity with the Preferred Stock of such series or class as to
dividends or upon liquidation, nor shall the Common Stock or any other stock of
the Company ranking junior to or on a parity with the Preferred Stock of such
series or class as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any amounts be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
by the Company (except by conversion into or exchange for other stock of the
Company ranking junior to the Preferred Stock of such series or class as to
dividends and upon liquidation).
Any dividend payment made on shares of a series or class of Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of such series or class that remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at the
Company's option, as a whole or in part, in each case on the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series or class of Preferred Stock
that is subject to mandatory redemption will specify the number of shares of
such Preferred Stock that shall be redeemed by the Company in each year
commencing after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accumulated and unpaid dividends
thereon (which shall not, if such Preferred Stock does not have a cumulative
dividend, include any accumulation in respect of unpaid dividends for prior
dividend periods) to the date of redemption. The redemption price may be payable
in cash or other property, as specified in the applicable Prospectus Supplement.
If the redemption price for Preferred Stock of any series or class is payable
only from the net proceeds of the issuance of stock of the Company, the terms of
such Preferred Stock may provide that, if no such stock shall have been
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issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into shares of the applicable stock
of the Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (a) if such series or class of
Preferred Stock has a cumulative dividend, full cumulative dividends on all
shares of such series or class of Preferred Stock have been or contemporaneously
are authorized and paid or authorized and a sum sufficient for the payment
thereof is set apart for payment for all past dividend periods and the then
current dividend period and (b) if such series or class of Preferred Stock does
not have a cumulative dividend, full dividends on the Preferred Stock of such
series or class have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof is set apart for payment
for the then current dividend period, then no shares of such series or class of
Preferred Stock shall be redeemed unless all outstanding shares of Preferred
Stock of such series or class are simultaneously redeemed; PROVIDED, HOWEVER,
that the foregoing shall not prevent the purchase or acquisition of shares of
Preferred Stock of such series or class to preserve the Company's REIT status or
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding shares of Preferred Stock of such series or class. In addition,
unless (i) if such series or class of Preferred Stock has a cumulative dividend,
full cumulative dividends on all outstanding shares of such series or class of
Preferred Stock have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof is set apart for payment
for all past dividend periods and the then current dividend period and (ii) if
such series or class of Preferred Stock does not have a cumulative dividend,
full dividends on the Preferred Stock of such series or class have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof is set apart for payment for the then current dividend
period, the Company shall not purchase or otherwise acquire directly or
indirectly any shares of Preferred Stock of such series or class (except by
conversion into or exchange for stock of the Company ranking junior to the
Preferred Stock of such series or class as to dividends and upon liquidation);
PROVIDED, HOWEVER, that the foregoing shall not prevent the purchase or
acquisition of shares of Preferred Stock of such series or class to preserve the
Company's REIT status or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding shares of Preferred Stock of such
series or class.
If fewer than all the outstanding shares of Preferred Stock of any series or
class are to be redeemed, the number of shares to be redeemed will be determined
by the Company and such shares may be redeemed pro rata from the holders of
record of such shares in proportion to the number of such shares held by such
holders (with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Company.
Notice of redemption will be mailed at least 30, but not more than 60, days
before the redemption date to each holder of record of a share of Preferred
Stock of any series or class to be redeemed at the address shown on the
Company's stock transfer books. Each notice shall state: (a) the redemption
date; (b) the number of shares and series or class of the Preferred Stock to be
redeemed; (c) the redemption price; (d) the place or places where certificates
for such Preferred Stock are to be surrendered for payment of the redemption
price; (e) that dividends on the shares to be redeemed will cease to accumulate
on such redemption date; and (f) the date on which the holder's conversion
rights, if any, as to such shares shall terminate. If fewer than all the shares
of Preferred Stock of any series or class are to be redeemed, the notice mailed
to each such holder thereof shall also specify the number of shares of Preferred
Stock to be redeemed from each such holder and, upon redemption, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof. If notice of redemption of any shares of Preferred Stock has
been given and if the funds necessary for such redemption have been set aside by
the Company in trust for the benefit of the holders of any shares of Preferred
Stock so called for redemption, then from and after the redemption date
dividends will cease to accrue on such shares of Preferred Stock, such shares of
Preferred Stock shall no longer be deemed outstanding and all rights of the
holders of such shares will
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terminate, except the right to receive the redemption price. In order to
facilitate the redemption of shares of Preferred Stock of any series or class,
the Board of Directors may fix a record date for the determination of shares of
such series or class of Preferred Stock to be redeemed.
Subject to applicable law and the limitation on purchases when dividends on
a series or class of Preferred Stock are in arrears, the Company may, at any
time and from time to time, purchase any shares of such series or class of
Preferred Stock in the open market, by tender or by private agreement.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of the Common Stock or any other series or class of stock of
the Company ranking junior to any series or class of the Preferred Stock in the
distribution of assets upon any liquidation, dissolution or winding up of the
affairs of the Company, the holders of such series or class of Preferred Stock
shall be entitled to receive out of assets of the Company legally available for
distribution to shareholders liquidating distributions in the amount of the
liquidation preference per share (set forth in the applicable Prospectus
Supplement), plus an amount equal to all dividends accrued and unpaid thereon
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods if such Preferred Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. If, upon any such voluntary
or involuntary liquidation, dissolution or winding up, the legally available
assets of the Company are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of any series or class of Preferred
Stock and the corresponding amounts payable on all shares of other classes or
series of stock of the Company ranking on a parity with such series or class of
Preferred Stock in the distribution of assets upon liquidation, dissolution or
winding up, then the holders of such series or class of Preferred Stock and all
other such classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
any series or class of Preferred Stock, the remaining assets of the Company
shall be distributed among the holders of any other classes or series of stock
ranking junior to such series or class of Preferred Stock upon liquidation,
dissolution or winding up, according to their respective rights and preferences
and in each case according to their respective number of shares. For such
purposes, the consolidation or merger of the Company with or into any other
entity, or the sale, lease, transfer or conveyance of all or substantially all
of the Company's property or business, shall not be deemed to constitute a
liquidation, dissolution or winding up of the affairs of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series or class of Preferred Stock, so
long as any shares of Preferred Stock of a series or class remain outstanding,
the Company shall not, without the affirmative vote or consent of the holders of
at least a majority of the shares of such series or class of Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting (such series or class voting separately as a class), (a) authorize or
create, or increase the authorized or issued amount of, any class or series of
stock ranking prior to such series or class of Preferred Stock with respect to
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up or reclassify any authorized stock of the Company into any such
shares, or create, authorize or issue any obligation or security convertible
into or evidencing the right to purchase any such shares; or (b) amend, alter or
repeal
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the provisions of the Charter or the Articles Supplementary for such series or
class of Preferred Stock, whether by merger, consolidation or otherwise, so as
to materially and adversely affect any right, preference, privilege or voting
power of such series or class of Preferred Stock or the holders thereof;
PROVIDED, HOWEVER, that any increase in the amount of the authorized Preferred
Stock or the creation or issuance of any other series or class of Preferred
Stock, or any increase in the amount of authorized shares of such series or
class or any other series or class of Preferred Stock, in each case ranking on a
parity with or junior to the Preferred Stock of such series or class with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series or class of Preferred Stock
shall have been redeemed or called for redemption upon proper notice and
sufficient funds shall have been deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series or class
of Preferred Stock are convertible into shares of Common Stock will be set forth
in the applicable Prospectus Supplement relating thereto. Such terms will
include the number of shares of Common Stock into which the Preferred Stock is
convertible, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option of
the holders of the Preferred Stock or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such Preferred Stock.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, actually or constructively,
by five or fewer individuals (defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement and certain other requirements relating to its tax status as a REIT,
the Company may take certain actions to limit the actual, beneficial or
constructive ownership by a single person or entity of the Company's outstanding
equity securities. See "Restrictions on Ownership and Transfers of Capital
Stock."
TRANSFER AGENT
The transfer agent and registrar for any series or class of Preferred Stock
will be set forth in the applicable Prospectus Supplement.
RESTRICTIONS ON OWNERSHIP AND TRANSFERS OF CAPITAL STOCK
The following summary of certain restrictions on the ownership and transfer
of shares of stock of the Company does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the applicable provisions of
the Charter and Bylaws.
In order for the Company to qualify as a REIT under the Code, no more than
50% in value of its outstanding shares of stock may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be treated as a REIT has been made). In addition,
if the Company, or an owner of 10% or more of the Company, actually or
constructively owns 10% or more of a tenant of the Company (or a tenant of any
partnership in which the Company is a partner), the rent received by the Company
(either directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. A
REIT's stock must also be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months or during a
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proportionate part of a shorter taxable year (other than the first year for
which an election to be treated as a REIT has been made).
Because the Company expects to continue to qualify as a REIT, the Charter
contains restrictions on the ownership and transfer of Common Stock which are
intended to assist the Company in complying with these requirements. The Charter
provides that, subject to certain specified exceptions, no person or entity may
own, or be deemed to own by virtue of the applicable constructive ownership
provisions of the Code, more than 9.8% (by number or value, whichever is more
restrictive) of the outstanding shares of Common Stock (the "Ownership Limit").
The constructive ownership rules of the Code are complex, and may cause shares
of Common Stock owned actually or constructively by a group of related
individuals and/or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.8% of the shares of Common
Stock (or the acquisition of an interest in an entity that owns, actually or
constructively, Common Stock) by an individual or entity, could, nevertheless
cause that individual or entity, or another individual or entity, to own
constructively in excess of 9.8% of the outstanding Common Stock and thus
violate the Ownership Limit, or such other limit as permitted by the Board of
Directors. The Board of Directors may, but in no event is required to, waive the
Ownership Limit with respect to a particular stockholder if it determines that
such ownership will not jeopardize the Company's status as a REIT. As a
condition of such waiver, the Board of Directors may require a ruling from the
Internal Revenue Service or an opinion of counsel satisfactory to it and/or
undertakings or representations from the applicant with respect to preserving
the REIT status of the Company.
The Charter further prohibits (i) any person from actually or constructively
owning shares of Common Stock of the Company that would result in the Company
being "closely held" under Section 856(h) of the Code or otherwise cause the
Company to fail to qualify as a REIT, and (ii) any person from transferring
shares of Common Stock of the Company if such transfer would result in shares of
stock of the Company being beneficially owned by fewer than 100 persons
(determined without reference to any rules of attribution).
Any person who acquires or attempts to acquire actual or constructive
ownership of shares of stock of the Company that will violate any of the
foregoing restrictions on transferability and ownership is required to give
notice immediately to the Company and provide the Company with such other
information as the Company may request in order to determine the effect of such
transfer on the Company's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interest of the Company to attempt
to qualify, or to continue to qualify, as a REIT and such determination is
approved by a two thirds vote of the Company's stockholders as required by the
Charter. Except as otherwise described above, any change in the Ownership Limit
would require an amendment to the Charter.
Pursuant to the Charter, if any purported transfer of Common Stock or any
other event would otherwise result in any person violating the Ownership Limit
or such other limit as permitted by the Board of Directors, or result in the
Company being "closely held" under Section 856(h) of the Code or otherwise cause
the Company to fail to qualify as a REIT, then that number of shares in excess
of the Ownership Limit or such other limit shall be transferred to a trust for
the benefit of a charitable beneficiary as described below and the purported
transferee (the "Prohibited Transferee"), shall acquire no rights (or, in the
case of any event other than a purported transfer, the person or entity holding
record title to any such excess shares (the "Prohibited Owner") shall cease to
have any rights) in such excess shares. Any such excess shares described above
will be transferred automatically, by operation of law, to a trust, the
beneficiary of which will be a qualified charitable organization selected by the
Company (the "Beneficiary"). Such automatic transfer shall be deemed to be
effective as of the close of business on the business day prior to the date of
such violative transfer. Within 20 days of receiving notice from the Company of
the transfer of shares to the trust, the trustee of the trust (who shall be
designated by the Company and be unaffiliated with the Company and any
Prohibited Transferee or Prohibited Owner) will be required to sell such excess
shares to a person or entity who could own such shares without violating the
Ownership Limit,
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or such other limit as permitted by the Board of Directors, and distribute to
the Prohibited Transferee or Prohibited Owner, as applicable, an amount equal to
the lesser of the price paid by the Prohibited Transferee or Prohibited Owner
for such excess shares or the net sales proceeds received by the trust for such
excess shares. In the case of any excess shares resulting from any event other
than a transfer, or from a transfer for no consideration (such as a gift), the
trustee will be required to sell such excess shares to a qualified person or
entity and distribute to the Prohibited Owner an amount equal to the lesser of
the Market Price (as defined in the Charter) of such excess shares as of the
date of such event or the net sales proceeds received by the trust for such
excess shares. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner, as applicable,
will be distributed to the Beneficiary. Prior to a sale of any such excess
shares by the trust, the trustee will be entitled to receive, in trust for the
Beneficiary, all dividends and other distributions paid by the Company with
respect to such excess shares, and also will be entitled to exercise all voting
rights with respect to such excess shares. Subject to Maryland law, effective as
of the date that such shares have been transferred to the trust, the trustee
shall have the authority (at the trustee's sole discretion) (i) to rescind as
void any vote cast by a Prohibited Transferee or Prohibited Owner, as
applicable, prior to the discovery by the Company that such shares have been
transferred to the trust and (ii) to recast such vote in accordance with the
desires of the trustee acting for the benefit of the Beneficiary. However, if
the Company has already taken irreversible corporate action, then the trustee
shall not have the authority to rescind and recast such vote. Any dividend or
other distribution paid to the Prohibited Transferee or Prohibited Owner (prior
to the discovery by the Company that such shares had been automatically
transferred to a trust as described above) will be required to be repaid to the
trustee upon demand for distribution to the Beneficiary. In the event that the
transfer to the trust as described above is not automatically effective (for any
reason) to prevent violation of the Ownership Limit or such other limit as
permitted by the Board of Directors, then the Charter provides that the transfer
of the excess shares will be void.
In addition, shares of stock of the Company held in the trust shall be
deemed to have been offered for sale to the Company, or its designee, at a price
per share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the trust (or, in the case of a devise or gift or
other transaction which does not involve a purchase of stock, the Market Price
as of the day of the event which resulted in the transfer of such excess shares
to the trust) and (ii) the Market Price on the date the Company, or its
designee, accepts such offer. The Company shall have the right to accept such
offer until the trustee has sold the shares of stock held in the trust. Upon
such a sale to the Company, the interest of the Beneficiary in the shares sold
shall terminate and the trustee shall distribute the net proceeds of the sale to
the Prohibited Transferee or Prohibited Owner.
If any purported transfer of shares of Common Stock would cause the Company
to be beneficially owned by fewer than 100 persons, such transfer will be null
and void in its entirety and the intended transferee will acquire no rights to
the stock.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of stockholders.
Under the Charter, each stockholder shall upon demand be required to
disclose to the Company in writing such information as the Company may request
in order to determine the Company's status as a REIT.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations to the
Company is based on current law, is for general information only, and is not tax
advice. The tax treatment of a holder of any of the Securities will vary
depending upon the terms of the specific Securities acquired by such holder, as
well as his particular situation, and this discussion does not attempt to
address any aspects of federal income taxation relating to holders of
Securities. Certain federal income tax considerations relevant to holders of the
Securities will be provided in the applicable Prospectus Supplement relating
thereto.
EACH INVESTOR IS URGED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS
WELL AS HIS OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OF THE
ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND
SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY AS A REIT
GENERAL. The Company has elected to be taxed as a real estate investment
trust under Sections 856 through 860 of the Code, commencing with its taxable
year ended December 31, 1994. The Company believes that, commencing with its
taxable year ended December 31, 1994, it has been organized and has operated in
such a manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that it has operated or will operate in a manner so as to qualify or
remain qualified.
These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the sections that govern the federal income
tax treatment of a REIT. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof. Latham & Watkins has acted
as tax counsel to the Company in connection with this Prospectus and the
Company's election to be taxed as a REIT.
Latham & Watkins has rendered an opinion to the Company as of September 12,
1997 to the effect that commencing with the Company's taxable year ended
December 31, 1994, the Company has been organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
has enabled and will continue to enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters, and that Latham &
Watkins undertakes no obligation to update this opinion subsequent to such date.
Moreover, such qualification and taxation as a REIT depends upon the Company's
ability to meet (through actual annual operating results, distribution levels
and diversity of stock ownership) the various qualification tests imposed under
the Code discussed below, the results of which have not been and will not be
reviewed by Latham & Watkins. Accordingly, no assurance can be given that the
actual results of the Company's operation in any particular taxable year will
satisfy such requirements. See "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed real estate investment trust taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference. Third, if Company has (i) net income from the sale
or other disposition of "foreclosure property" which is held primarily for sale
to customers in the ordinary course of business or (ii) other non-qualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if
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the Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure property),
such income will be subject to a 100% tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), but has nonetheless maintained its qualification as a real estate
investment trust because certain other requirements have been met, it will be
subject to a 100% tax on an amount equal to (a) the gross income attributable to
the greater of the amount by which the Company fails the 75% or 95% test,
multiplied by (b) a fraction intended to reflect the Company's profitability.
Sixth, if the Company should fail to distribute during each calendar year at
least the sum of (i) 85% of its real estate investment trust ordinary income for
such year, (ii) 95% of its real estate investment trust capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, with respect to any
asset (a "Built-in Gain Asset") acquired by the Company from a corporation which
is or has been a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in a transaction in which the basis of the Built-in Gain
Asset in the hands of the Company is determined by reference to the basis of the
asset in the hands of the C corporation, if the Company recognizes gain on the
disposition of such asset during the 10-year period (the "Recognition Period")
beginning on the date on which such asset was acquired by the Company, then, to
the extent of the Built-in Gain (i.e., the excess of (a) the fair market value
of such asset over (b) the Company's adjusted basis in such asset, determined as
of the beginning of the Recognition Period), such gain will be subject to tax at
the highest regular corporate rate pursuant to Treasury Regulations that have
not yet been promulgated. The results described above with respect to the
recognition of Built-in Gain assume that the Company has made an election
pursuant to IRS Notice 88-19.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors,
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (3) which would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code, (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code, (5) the beneficial ownership of which is held by 100 or
more persons, (6) during the last half of each taxable year, not more than 50%
in value of the outstanding stock of which is owned, actually or constructively,
by five or fewer individuals (as defined in the Code to include certain
entities) and (7) which meets certain other tests, described below, regarding
the nature of its income and assets and the amount of its distributions. The
Code provides that conditions (1) to (4) must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. Conditions (5) and (6) will not apply until after the first taxable
year for which an election is made to be taxed as a real estate investment
trust.
The Company believes that it has satisfied condition (5) and that it has
issued sufficient shares to allow it to satisfy condition (6). In addition, the
Company's Charter provides for restrictions regarding ownership and transfer of
the Company's capital stock, which restrictions are intended to assist the
Company in continuing to satisfy the share ownership requirements described in
(5) and (6) above. Such ownership and transfer restrictions are described in
"Restrictions on Ownership and Transfers of Capital Stock." There can be no
assurance, however, that such transfer and ownership restrictions will, in all
cases, prevent a violation of the stock ownership provisions described in (5)
and (6) above. The ownership and transfer restrictions pertaining to a
particular class or series of capital stock will be described in the applicable
Prospectus Supplement pertaining to such class or series.
The Company owns, and has owned, interests in various partnerships. In the
case of a REIT that is a partner in a partnership, Treasury Regulations provide
that the REIT will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership will retain the same character in the hands of the
real estate investment trust for purposes of
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Section 856 of the Code, including satisfying the gross income tests and the
asset tests. Thus, the Company's proportionate share of the assets, liabilities
and items of income of the partnerships in which the Company is a partner will
be treated as assets, liabilities and items of income of the Company for
purposes of applying the requirements described herein. See "--Tax Risks
Associated with the Partnerships."
The Company owns 100% of the stock of a subsidiary that is a qualified REIT
subsidiary (a "QRS") and may acquire stock of one or more new subsidiaries. A
corporation will qualify as a QRS if 100% of its stock is held by the Company at
all times during the period such QRS was in existence. A QRS will not be treated
as a separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a QRS will be treated as assets, liabilities and such
items (as the case may be) of the Company for all purposes of the Code including
the REIT qualification tests. For this reason, references under "Certain Federal
Income Tax Considerations" to the income and assets of the Company shall include
the income and assets of any QRS. A QRS will not be subject to federal income
tax and the Company's ownership of the voting stock of a QRS will not violate
the restrictions against ownership of securities of any one issuer which
constitute more than 10% of such issuer's voting securities or more than 5% of
the value of the Company's total assets, described below under "--Asset Tests."
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a real estate investment trust
described above only if several conditions are met. First, the amount of rent
must not be based in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code provides that
rents received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the real estate investment trust, or an
owner of 10% or more of the real estate investment trust, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the real estate investment trust generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an independent contractor from whom the real
estate investment trust derives no revenue; PROVIDED, HOWEVER, the Company may
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. The Company does not and
will not (i) charge rent for any property that is based in whole or in part on
the income or profits of any person (except by reason of being based on a
percentage of receipts or sales, as described above), (ii) rent any property to
a Related Party Tenant, (iii) derive rental income attributable to personal
property (other than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total rent received
under the lease), or (iv) perform
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services considered to be rendered to the occupant of the property, other than
through an independent contractor from whom the Company derives no revenue.
Notwithstanding the foregoing, the Company may take certain of the actions set
forth in (i) through (iv) above to the extent such actions will not, based on
the advice of tax counsel to the Company, jeopardize the Company's tax status as
a REIT.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a real estate
investment trust for such year if it is entitled to relief under certain
provisions of the Code. These relief provisions will generally be available if
the Company's failure to meet such tests was due to reasonable cause and not due
to willful neglect, the Company attaches a schedule of the sources of its income
to its federal income tax return, and any incorrect information on the schedule
was not due to fraud with intent to evade tax. It is not possible, however, to
state whether in all circumstances the Company would be entitled to the benefit
of these relief provisions. As discussed above under "--General," even if these
relief provisions apply, a tax would be imposed with respect to the excess net
income.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year purchased with the proceeds of a stock offering or long-term (at least five
years) public debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the net income
(after tax), if any, from foreclosure property, minus (B) the sum of certain
items of non-cash income. In addition, if the Company disposes of any asset
during its Recognition Period, the Company will be required, pursuant to IRS
regulations which have not yet been promulgated, to distribute at least 95% of
the Built-in Gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax
thereon at regular ordinary and capital gain corporate tax rates.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company. In the event that
such timing differences occur, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the above distribution requirements for a year by paying "deficiency
dividends" to stockholders in a later year, which
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may be included in the Company's deduction for dividends paid for the earlier
year. Thus, the Company may be able to avoid being taxed on amounts distributed
as deficiency dividends; however, the Company will be required to pay interest
based upon the amount of any deduction taken for deficiency dividends.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its real estate investment trust ordinary
income for such year, (ii) 95% of its real estate investment trust capital gain
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company intends
to make timely distributions sufficient to satisfy the annual distribution
requirements set forth above.
DISTRIBUTION OF ACQUIRED EARNINGS. In addition to the above annual
distribution requirements, a REIT is not allowed to have accumulated earnings
and profits attributable to non-REIT years. A REIT has until the close of its
first taxable year in which it has non-REIT earnings and profits to distribute
any such earnings and profits. In a corporate reorganization qualifying as a
tax-free statutory merger, the acquired corporation's earnings and profits are
carried over to the surviving corporation. Any earnings and profits treated as
having been acquired by a REIT through such a merger will be treated as
accumulated earnings and profits of the REIT attributable to non-REIT years. On
August 17, 1995, R.I.C. Advisor, Inc., a California corporation ("R.I.C.
Advisor"), merged with and into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger dated as of April 28, 1995, by and among the
Company, R.I.C. Advisor and the shareholders of R.I.C. Advisor. Accordingly, as
a result of the Merger, the Company was treated as having acquired the earnings
and profits (the "Acquired Earnings") of R.I.C. Advisor. The Company was
required to distribute (or be deemed to distribute) the Acquired Earnings prior
to the close of 1995. Failure to do so would result in the loss of the Company's
REIT status, which would have a material adverse effect on the financial
position and results of operations of the Company and its ability to make
distributions to stockholders and debt service payments. See "--Failure to
Qualify."
The amount of the Acquired Earnings was based on the earnings and profits of
R.I.C. Advisor immediately prior to the Merger. The Acquired Earnings were
determined through an earnings and profits study based on the corporate tax
returns of R.I.C. Advisor for the tax years beginning with R.I.C. Advisor's date
of incorporation through the date of the Merger. The Company requested that KPMG
Peat Marwick LLP perform certain procedures relating to the amount of the
earnings and profits of R.I.C. Advisor for purposes of the earnings and profits
distribution requirement. Based on KPMG Peat Marwick LLP's conclusions (which
were based on R.I.C. Advisor's tax returns as filed with the Internal Revenue
Service (the "IRS"), certain other information provided by R.I.C. Advisor and
other assumptions and qualifications set forth in KPMG Peat Marwick LLP's
report) and other relevant factors, the Company believes that it made (or was
deemed to make) distributions to its shareholders which were sufficient to
distribute the Acquired Earnings prior to the close of 1995.
The calculation of the amount of Acquired Earnings is subject to challenge
by the IRS. The IRS may examine R.I.C. Advisor's prior tax returns and propose
adjustments to increase its taxable income. Because the earnings and profits
study used to calculate the amount of Acquired Earnings was based on these
returns, such adjustments may increase the amount of the Acquired Earnings. If
the IRS determines that the Company did not distribute all of the Acquired
Earnings prior to the end of 1995, the Company would fail to qualify as a REIT
for 1995 and perhaps for subsequent years, which would have a material adverse
effect on the financial position and results of operations of the Company and
its ability to make distributions to stockholders and debt service payments. See
"--Failure to Qualify." However, the Company may make an additional distribution
within 90 days of such a determination by the IRS to distribute the Acquired
Earnings and would be required to pay to the IRS an interest charge based on 50%
of the amount not previously distributed. If such additional distribution is
made, the Company's failure to distribute the Acquired Earnings would not
prevent it from qualifying as a REIT for years subsequent to 1995.
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TAX RISKS ASSOCIATED WITH THE PARTNERSHIPS
The Company presently owns an interest in one partnership and previously
owned an interest in other partnerships. The ownership of an interest in a
partnership may involve special tax risks, including the possible challenge by
the IRS of (i) allocations of income and expense items, which could affect the
computation of taxable income of the Company, and (ii) the status of a
partnership as a partnership (as opposed to an association taxable as a
corporation) for federal income tax purposes. If the partnership was treated as
an association taxable as a corporation for federal income tax purposes, the
partnership would be treated as a taxable entity. In addition, in such a
situation, (i) if the Company owned more than 10% of the outstanding voting
securities of such partnership, or the value of such securities exceeded 5% of
the value of the Company's assets, the Company would fail to satisfy the asset
tests described above and would therefore fail to qualify as a REIT, (ii)
distributions from the partnership to the Company would be treated as dividends,
which are not taken into account in satisfying the 75% gross income test
described above and could, therefore, make it more difficult for the Company to
satisfy such test, (iii) the interest in the partnership held by the Company
would not qualify as a "real estate asset," which could make it more difficult
for the Company to meet the 75% asset test described above, and (iv) the Company
would not be able to deduct its share of any losses generated by the
partnerships in computing its taxable income. See "--Failure to Qualify" for a
discussion of the effect of the Company's failure to meet such tests for a
taxable year. The Company believes that each of the partnerships in which the
Company owns or has owned an interest have been and will be treated for tax
purposes as a partnership (rather than an association taxable as a corporation).
The Company's position will not be binding on the IRS and no assurance can be
given that the IRS will not successfully challenge the status of any partnership
as a partnership for federal income tax purposes.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Such a failure to qualify for taxation as a REIT would
reduce the cash available for distribution by the Company to stockholders and to
pay debt service and could have an adverse effect on the market value and
marketability of the Securities. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXPAYER RELIEF ACT OF 1997
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (H.R. 2014), which will have the effect of modifying certain
REIT-related Code provisions for tax years beginning on or after January 1,
1998. Some of the potentially significant REIT-related changes contained in this
legislation include: (i) the rule disqualifying a REIT for any year in which it
fails to comply with certain regulations requiring the REIT to monitor its stock
ownership is replaced with an intermediate financial penalty; (ii) the rule
disqualifying a REIT in any year that it is "closely held" does not apply if
during such year the REIT complied with certain regulations which require the
REIT to monitor its stock ownership, and the REIT did not know or have reason to
know that it was closely held; (iii) a REIT is permitted to render a DE MINIMIS
amount of impermissible services to tenants in connection with the management of
property and still treat amounts received with respect to such property (other
than certain amounts relating to such services) as qualified rent; (iv) the
rules regarding attribution to partnerships for purposes of defining
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qualified rent and independent contractors are modified so that attribution
occurs only when a partner owns a 25% or greater interest in the partnership;
(v) the 30% gross income test is repealed; (vi) any corporation wholly-owned by
a REIT is permitted to be treated as a qualified REIT subsidiary regardless of
whether such subsidiary has always been owned by the REIT; (vii) the ordering
rule for purposes of the requirement that newly-electing REITs distribute
earnings and profits accumulated in non-REIT years is modified; (viii) the class
of excess noncash items for purposes of the REIT distribution requirements is
expanded; (ix) the rules regarding the treatment of hedges are modified; and (x)
certain other Code provisions relating to REITs are amended. Some or all of the
provisions could affect both the Company's operations and its ability to
maintain its REIT status for its taxable years beginning in 1998.
STATE AND LOCAL TAXES
The Company may be subject to state or local taxes in other jurisdictions
such as those in which the Company may be deemed to be engaged in activities or
own property or other interests. Such tax treatment of the Company in states
having taxing jurisdiction over it may differ from the federal income tax
treatment described in this summary.
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices relating to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of Securities, underwriters
may be deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent. Any underwriting
compensation paid by the Company to underwriters or agents in connection with
the offering of Securities, and any discounts, concessions or commissions
allowed by underwriters to participating dealers, will be set forth in the
applicable Prospectus Supplement. Underwriters, dealers and agents participating
in the distribution of the Securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the Securities may be deemed to be underwriting discounts and
commissions, under the Securities Act. Any such underwriter or agent will be
identified, and such compensation received from the Company will be described,
in the applicable Prospectus Supplement.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
Certain of the underwriters, dealers and agents and their affiliates may be
customers of, engage in transactions with and perform services for the Company
and its subsidiaries in the ordinary course of business.
Unless otherwise specified in the related Prospectus Supplement, each series
of Securities will be a new issue with no established trading market, other than
the Common Stock. The Common Stock is currently listed on the NYSE. Unless
otherwise specified in the related Prospectus Supplement, any shares of Common
Stock sold pursuant to a Prospectus Supplement will be listed on the NYSE,
subject to official notice of issuance. The Company may elect to list any series
of Debt Securities or Preferred Stock on an
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exchange or Nasdaq, but is not obligated to do so. It is possible that one or
more underwriters may make a market in a series of Securities, but will not be
obligated to do so and may discontinue any market making at any time without
notice. Therefore, there can be no assurance as to the liquidity of, or the
trading market for, the Securities.
EXPERTS
The consolidated financial statements and financial statement schedule of
Realty Income Corporation as of December 31, 1996 and 1995 and for each of the
years in the three-year period ended December 31, 1996 included in Realty Income
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 and incorporated by reference herein have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, and have been incorporated herein
by reference in reliance upon the reports of KPMG Peat Marwick LLP, incorporated
herein by reference, and upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Ballard Spahr Andrews & Ingersoll. Certain legal matters will be passed upon for
the Company by Latham & Watkins.
32
<PAGE>
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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 OR THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES
AN OFFER TO SELL, OR A SOLICITATION OR AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Risk Factors................................... S-2
Use of Proceeds................................ S-4
Price Range of Common Stock and Distribution
History...................................... S-5
Certain U.S. Federal Income Tax Considerations
to Holders of Common Stock................... S-5
Underwriting................................... S-8
Legal Matters.................................. S-9
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
The Company.................................... 3
Use of Proceeds................................ 3
Ratios of Earnings to Fixed Charges............ 3
Description of Debt Securities................. 4
Description of Common Stock.................... 14
Description of Preferred Stock................. 17
Restrictions on Ownership and Transfers of
Capital Stock................................ 22
Certain Federal Income Tax Considerations...... 25
Plan of Distribution........................... 31
Experts........................................ 32
Legal Matters.................................. 32
</TABLE>
751,174 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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A.G. EDWARDS & SONS, INC.
FEBRUARY 18, 1998
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