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UNIT INVESTMENT TRUST
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 1, 1997)
372,093 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 March 25, 1998
the last reported sale price of the Common Stock on the NYSE was
$26.875 per share.
All of the 372,093 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-3 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
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SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
EVEREN Securities, Inc. (the "Underwriter") has agreed to purchase the
Common Stock from the Company at a price of $25.53125 per share,
resulting in aggregate proceeds to the Company of $9,499,999
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 (the "Trust") at an aggregate
purchase price of $9,670,000, resulting in aggregate net proceeds to
the Underwriters of $170,000. See "Underwriting." Such sponsor
intends to deposit the shares of Common Stock into the Trust in
exchange for units in the Trust. The units of the Trust will be sold
to investors at a price based upon the net asset value of the
securities in the Trust. For purposes of this calculation, the value
of the Common Stock as of the evaluation time for units of the Trust
on March 25, 1998 was $26.875 per share of Common Stock.
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 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 Chicago, Illinois on or about March 30, 1998.
EVEREN Securities, Inc.
The date of this Prospectus Supplement is March 25, 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, 1997 INCORPORATED BY REFERENCE IN
THE ACCOMPANYING PROSPECTUS.
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RISK FACTORS
COMPETITION. 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
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
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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
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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 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
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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, 88 were occupied as of February 28, 1998 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. During
1997, the Company also invested $3.1 million in 12 development
properties acquired during 1996. 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.
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.
Realty Income defines funds from operations as net income before gain
on sales of properties, plus provision for impairment losses, plus
depreciation and amortization. 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 $9.5 million. The
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Company intends to use the net proceeds to acquire additional
properties, pay down outstanding indebtedness under the Credit
Facility and/or 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 March 18, 1998
of $12.0 million and is expected to be approximately $45.9 million on
the closing date of the Offering. Borrowings under the Credit
Facility currently 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 March 18, 1998, was 6.6%.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Company's Common Stockis traded on the NYSE under the symbol
"O." On March 25, 1998 the last reported sales price per share of
Common Stock on the NYSE was $26.875. 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.
PRICE PER SHARE OF
COMMON STOCK
DISTRIBUTIONS
HIGH LOW DECLARED (1)
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
=======
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 $27.188 $25.250 $0.4825
(Through March 25, 1998) =======
(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 $0.16 per share of
Common Stock payable March 16, 1998 to stockholders of record on
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March 1, 1998. PURCHASERS OF THE SHARES OF COMMON STOCK BEING OFFERED
HEREBY WILL NOT RECEIVE THE MARCH 16, 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 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.
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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
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the shares to which such gains are attributable have been held for
more than eighteen months, mid-term 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.
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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-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
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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 EVEREN Securities, Inc. (the "Underwriter"), the
Underwriter has agreed to purchase from the Company, and the Company
has agreed to sell to the Underwriter, 372,093 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. 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 aggreage
purchase price of $9,670,000. It is anticipated the the Underwriter
will also participate as sole underwriter 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 of 1933, as amended, 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
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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 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.
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 Spahr Andrews & Ingersoll, LLP, as to certain
matters of Maryland law.
S-13
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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
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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.
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
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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).
THE COMPANY
Realty Income Corporation, a Maryland corporation (the
"Company"), is a fully integrated, self-administered and self-managed
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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.
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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.
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, ---------------------------------------------------
1997 1996 1995 1994 1993
- ------------ ------------ ------------ ------------ ------------
6x 14x 10x 39x 5,865x
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
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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.
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:
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(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
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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;
(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
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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 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.
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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.
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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.
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
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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 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
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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
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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, 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
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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.
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
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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
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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 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
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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
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.
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"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
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(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 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")
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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 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
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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
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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. 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
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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."
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
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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);
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(11) a discussion of federal income tax considerations applicable
to such Preferred Stock;
(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
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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 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
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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 issued or to the
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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.
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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 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
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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 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
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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.
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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 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.
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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, 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
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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.
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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.
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.
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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 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
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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.
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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 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.
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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 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
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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,
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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
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
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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.
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
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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
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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 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
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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 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.
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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
---------------------------------------
PAGE
---------
Risk Factors........................................... S-3
Use of Proceeds........................................ S-6
Price Range of Common Stock and Distribution
History.............................................. S-7
Certain U.S. Federal Income Tax Considerations
to Holders of Common Stock........................... S-8
Underwriting........................................... S-12
Legal Matters.......................................... S-13
PROSPECTUS
Available Information.................................. 2
Incorporation of Certain Documents by
Reference............................................ 3
The Company............................................ 3
Use of Proceeds........................................ 4
Ratios of Earnings to Fixed Charges.................... 5
Description of Debt Securities......................... 5
Description of Common Stock............................ 21
Description of Preferred Stock......................... 24
Restrictions on Ownership and Transfers of
Capital Stock........................................ 33
Certain Federal Income Tax Considerations.............. 36
Plan of Distribution................................... 45
Experts................................................ 46
Legal Matters.......................................... 46
47
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372,093 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS SUPPLEMENT
---------------------
EVEREN Securities, Inc.
March 25, 1997
48
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