<PAGE> 1
File Pursuant To Rule 424(b)(5)
Registration No. 333-37067
DDRC LOGO
PROSPECTUS SUPPLEMENT
(To Prospectus Dated October 24, 1997)
2,000,000 Shares
Developers Diversified Realty Corporation
DEPOSITARY SHARES
EACH REPRESENTING 1/10 OF A SHARE OF 8.68% CLASS D CUMULATIVE
REDEEMABLE PREFERRED SHARES
($25 Liquidation Preference per Depositary Share)
------------------------
Developers Diversified Realty Corporation (the "Company") is a fully integrated
real estate company which develops, acquires, owns and manages shopping centers.
As of July 31, 1998, the Company owned, directly or through joint ventures, 160
shopping centers located throughout the United States containing an aggregate of
approximately 40.1 million square feet (of which approximately 32.0 million
square feet was Company-owned). The Company operates as a real estate investment
trust (a "REIT") for federal income tax purposes and is self-administered and
self-managed.
Each of the 2,000,000 Depositary Shares (the "Depositary Shares") offered hereby
(the "Offering") represents a 1/10 fractional interest in a share of 8.68% Class
D Cumulative Redeemable Preferred Shares, without par value, of the Company (the
"Class D Preferred Shares"), deposited with National City Bank, Cleveland, Ohio,
as Depositary, and entitles the holder to all proportional rights and
preferences of the Class D Preferred Shares (including dividend, voting,
redemption and liquidation rights and preferences). The liquidation preference
of each Class D Preferred Share is $250(equivalent to $25 per Depositary Share),
plus an amount equal to accumulated and unpaid dividends. See "Description of
Class D Preferred Shares and Depositary Shares."
Dividends on the Class D Preferred Shares represented by the Depositary Shares
offered hereby will be cumulative from the date of original issue and will be
payable quarterly on or about the fifteenth day of March, June, September and
December of each year, commencing December 15, 1998, at the rate of 8.68% of the
liquidation preference per annum (equivalent to $2.17 per annum per Depositary
Share). See "Description of Class D Preferred Shares and Depositary
Shares--Dividends."
The Class D Preferred Shares and the Depositary Shares representing such Class D
Preferred Shares are not redeemable prior to August 20, 2003. On or after August
20, 2003, the Class D Preferred Shares may be redeemed for cash at the option of
the Company, in whole or in part, at a redemption price of $250 per share
(equivalent to $25 per Depositary Share), plus accumulated and unpaid dividends,
if any, thereon. The redemption price of the Class D Preferred Shares (other
than any portion thereof consisting of accumulated and unpaid dividends) may be
paid only from the sale proceeds of other capital shares of the Company, which
may include shares of other classes or series of preferred shares, and from no
other source. The Class D Preferred Shares have no stated maturity and will not
be subject to any sinking fund or mandatory redemption provisions and will not
be convertible into any other securities of the Company. See "Description of
Class D Preferred Shares and Depositary Shares--Redemption." However, the
Company may redeem the Class D Preferred Shares at any time in order to preserve
its status as a REIT for federal income tax purposes. See "Description of
Preferred Shares--Redemption" and "--Restrictions on Ownership" in the
accompanying Prospectus.
------------------------
Application will be made to list the Depositary Shares on the New York Stock
Exchange. Trading of the Depositary Shares on the New York Stock Exchange is
expected to commence within the 30-day period after the initial delivery of the
Depositary Shares. See "Underwriting."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-6 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $25 A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
--------- -------------- -------------
<S> <C> <C> <C>
Per Depositary Share........... $25.00 $.7875 $24.2125
Total(4)....................... $50,000,000 $1,575,000 $48,425,000
</TABLE>
- ------------
(1) Plus accumulated dividends, if any, from the date of original issue.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $175,000.
(4) The Company has granted the several Underwriters a 30-day option to purchase
up to an additional 300,000 Depositary Shares to cover over-allotments, if
any. If all such shares are purchased, the total price to public,
underwriting discounts and commissions and proceeds to the Company will be
$57,500,000, $1,811,250 and $55,688,750, respectively. See "Underwriting."
------------------------
The Depositary Shares are offered, subject to prior sale, when, as and if
accepted by the Underwriters and subject to approval of certain legal matters by
Brown & Wood LLP, counsel for the Underwriters. It is expected that delivery of
the Depositary Receipts evidencing the Depositary Shares will be made on or
about August 20, 1998, at the office of Morgan Stanley & Co. Incorporated, New
York, New York, against payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
A.G. EDWARDS & SONS, INC.
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
August 13, 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEPOSITARY SHARES
OFFERED HEREBY. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE OFFERING AND MAY BID FOR, AND PURCHASE, THE DEPOSITARY SHARES IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................... S-3
Forward-Looking Information................................. S-6
Risk Factors................................................ S-6
The Company................................................. S-8
Recent Developments......................................... S-8
Use of Proceeds............................................. S-9
Selected Consolidated Financial Data........................ S-10
Description of Class D Preferred Shares and Depositary
Shares.................................................... S-12
Certain Federal Income Tax Considerations................... S-15
Underwriting................................................ S-18
Experts..................................................... S-19
Legal Matters............................................... S-19
PROSPECTUS
Available Information....................................... 2
Incorporation of Certain Documents by Reference............. 2
The Company................................................. 3
Use of Proceeds............................................. 3
Description of Debt Securities.............................. 3
Description of Preferred Shares............................. 20
Description of Depositary Shares............................ 26
Description of Common Shares................................ 30
Description of Common Share Warrants........................ 32
Certain Anti-Takeover Provisions of Ohio Law................ 32
Federal Income Tax Considerations........................... 33
Ratios of Earnings to Fixed Charges......................... 41
Plan of Distribution........................................ 42
Experts..................................................... 43
Legal Matters............................................... 43
</TABLE>
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus Supplement or the
accompanying Prospectus or incorporated herein or therein by reference.
Capitalized terms not defined in the summary and used in the summary shall have
the meanings set forth elsewhere in this Prospectus Supplement or the
Prospectus. Unless the context otherwise requires, references in this Prospectus
Supplement to the "Company" include the Company's subsidiaries and entities in
which the Company has an interest through joint ventures.
THE COMPANY
The Company is a fully integrated real estate company formed in November
1992 by the principals of the affiliates comprising the Developers Diversified
Group ("DDG") to continue the business of DDG by acquiring, developing,
redeveloping, owning, leasing and managing shopping centers and business
centers.
The Company believes that its portfolio of shopping center properties is
one of the largest (measured by total gross leasable area ("GLA")) currently
held by any publicly traded REIT. As of July 31, 1998, the Company's portfolio
consisted of 160 shopping centers containing an aggregate of approximately 40.1
million square feet of total GLA (of which approximately 32.0 million square
feet was Company-owned). In addition, the Company has numerous undeveloped
parcels, substantially all of which are located adjacent to shopping centers
owned by the Company. Overall, as of July 31, 1998, the Company owned and/or
managed approximately 34.3 million square feet of GLA, which included all of the
properties owned by the Company and 22 properties owned by third parties. The
Company's shopping centers are located in 35 states, principally in the East and
Midwest, with significant concentrations in Ohio, Florida, Missouri, South
Carolina, Michigan and North Carolina.
The principal executive offices of the Company are located at 34555 Chagrin
Boulevard, Moreland Hills, Ohio 44022, and its telephone number is (440)
247-4700.
RECENT DEVELOPMENTS
Recent Acquisitions. In March 1998, the Company acquired 10 shopping
centers, two of which were acquired through joint ventures, from Continental
Real Estate Companies ("Continental") of Columbus, Ohio. The 10 shopping centers
total 1.2 million square feet of Company-owned GLA. The aggregate cost of these
centers or interests therein was approximately $91 million. The Company's net
investment was initially funded through its revolving credit facilities, cash
and liabilities assumed aggregating approximately $31 million, mortgages assumed
of approximately $57.5 million (including $29.3 million of the Company's
proportionate share of joint venture mortgage debt) and the issuance of
operating partnership units in a partnership formed to hold certain of the
Continental properties, valued at approximately $2.8 million. These units are,
in certain circumstances and at the option of the Company, exchangeable into
139,872 shares of the Company's common shares, without par value (the "Common
Shares").
In April 1998, the Company acquired from Continental interests in three
additional shopping centers, two of which were acquired through joint ventures,
located in the Columbus, Ohio area. Combined, these shopping centers will have
approximately 1.0 million square feet of total GLA. The Company estimates that
its share of the investment cost will approximate $93.4 million upon completion
of approximately 345,000 square feet which is currently under construction. The
portion under construction has an estimated cost of approximately $42.4 million
and the Company is scheduled to close on this investment periodically throughout
1998.
In April 1998, the Company also acquired the remaining ownership interest
in a 584,000 square foot shopping center and adjacent pad site in Princeton, New
Jersey at a total cost of approximately $36.4 million for consideration in the
form of $27.8 million of debt assumed, $0.8 million of operating partnership
units in a partnership formed to hold the property and cash. The Company had
previously invested approximately $7.8 million in the shopping center at the end
of December 1997.
On July 1, 1998, the Company acquired from Hermes Associates ("Hermes") of
Salt Lake City, Utah, nine community shopping centers and one office building
aggregating 2.8 million square feet of GLA, located
S-3
<PAGE> 4
in Utah, Nevada and South Dakota. The transaction is valued at approximately
$310 million. The purchase includes three new shopping center development
projects and expansion projects at six of the existing centers.
On July 2, 1998, the Company acquired from Opus Northwest LLC a shopping
center aggregating 156,000 square feet of GLA located in Tanasbourne, Oregon
valued at approximately $22.1 million. This shopping center is adjacent to an
existing shopping center owned by the Company.
On July 16, 1998, the Company acquired from St. Louis, Missouri-based
Sansone Group ("Sansone Group"), 15 shopping centers and adjoining outparcels,
aggregating approximately 1.6 million square feet of GLA. In addition, the
Company formed a 50/50 strategic joint venture with Sansone Group to advance
Sansone Group's real estate development and property management business
throughout the central Midwestern United States.
On August 4, 1998, the Company, in a joint release with American Industrial
Properties Trust, a New York Stock Exchange-listed REIT ("AIP"), announced the
execution of a definitive share purchase agreement providing for a strategic
investment in AIP by the Company. Under the terms of the share purchase
agreement, the Company purchased 949,147 newly issued common shares of
beneficial interest of AIP at a price of $15.50 per share for approximately
$14.7 million. Under the terms of a separate agreement, the Company, in exchange
for five industrial properties previously owned by the Company and valued at
approximately $19.5 million, acquired approximately 1.3 million additional newly
issued common shares of beneficial interest of AIP. Combined, the Company's
acquired shares represent 19.9% of AIP's outstanding common shares prior to the
Company's purchase. The Company has also agreed to purchase approximately 5.2
million additional newly issued common shares of AIP for $81.0 million, subject
to shareholder approval at a special meeting of AIP shareholders expected to be
held before the end of 1998. Concurrent with entering into the agreements, AIP
appointed Scott A. Wolstein as Chairman of its Board of Trust Managers and three
additional designees of the Company to newly created positions on its Board of
Trust Managers. Pursuant to the agreement, AIP may, under certain circumstances
and subject to certain limitations, following the closing of the second purchase
of AIP's common shares, put additional common or preferred shares of AIP to the
Company, at a price not to exceed $15.50 and $14.00 per share, respectively. The
put of these additional shares would be for the sole purpose of financing
property acquisitions approved by AIP's Board of Trust Managers.
Stock Split. In July 1998, the Company announced that the board of
directors approved a two-for-one stock split to shareholders of record on July
27, 1998. On August 3, 1998, each such shareholder received one common share for
each common share held. This stock split was effected in the form of a stock
dividend.
THE OFFERING
Securities Offered............ 2,000,000 Depositary Shares each representing a
1/10 fractional interest of a Class D Preferred
Share.
Ranking....................... With respect to the payment of dividends and
amounts upon liquidation, the Class D Preferred
Shares will rank equally with all other
preferred shares and will rank senior to the
Company's Common Shares.
Use of Proceeds............... The net proceeds to the Company from the sale of
the Depositary Shares offered hereby, after
payment of expenses related to this Offering,
are estimated to be approximately $48,250,000
(approximately $55,513,750 if the Underwriters'
over-allotment option is exercised in full). The
Company will use the net proceeds of this
Offering to repay indebtedness on its unsecured
revolving credit facilities and the balance, if
any, of such proceeds for general corporate
purposes. See "Use of Proceeds."
Dividends..................... Dividends on the Class D Preferred Shares are
cumulative from the date of issue and are
payable quarterly on or about the fifteenth day
of March, June, September and December of each
year, commencing on December 15, 1998, at the
rate of 8.68% of the liquidation preference per
annum (equivalent to $2.17 per annum per Deposi-
S-4
<PAGE> 5
tary Share). Dividends on the Class D Preferred
Shares will accrue whether or not the Company
has earnings, whether or not there are funds
legally available for the payment of such
dividends and whether or not such dividends are
declared. See "Description of Class D Preferred
Shares and Depositary Shares -- Dividends."
Liquidation Preference........ The liquidation preference for each Class D
Preferred Share is $250 (equivalent to $25 per
Depositary Share), plus an amount equal to
accumulated and unpaid dividends. See
"Description of Class D Preferred Shares and
Depositary Shares -- Liquidation Preference."
Redemption.................... Except in certain circumstances relating to the
preservation of the Company's status as a REIT,
the Class D Preferred Shares are not redeemable
prior to August 20, 2003. See "Description of
Preferred Shares -- Restrictions on Ownership"
in the accompanying Prospectus. On and after
August 20, 2003, the Class D Preferred Shares
will be redeemable for cash at the option of the
Company (and the Preferred Shares Depositary
will redeem the number of Depositary Shares
representing the Class D Preferred Shares
redeemed), in whole or in part, at $250 per
share (equivalent to $25 per Depositary Share),
plus dividends accumulated and unpaid to the
redemption date.
Voting Rights................. Except as described herein and in the
accompanying Prospectus, holders of Class D
Preferred Shares and Depositary Shares will not
have any voting rights. In any matter in which
the Class D Preferred Shares may vote (as
expressly provided herein or as may be required
by law), each Depositary Share will be entitled
to 1/10 of a vote. For further information
regarding the voting rights of the holders of
Class D Preferred Shares and related Depositary
Shares, see "Description of Preferred
Shares -- Voting Rights" and "Description of
Depositary Shares -- Voting of the Underlying
Preferred Shares" in the accompanying
Prospectus.
No Conversion Rights.......... The Class D Preferred Shares and the Depositary
Shares are not convertible into or exchangeable
for any other property or securities of the
Company.
Ownership Limits.............. Ownership of more than 9.8% of the Depositary
Shares or the Class D Preferred Shares is
restricted in order to preserve the Company's
status as a REIT for Federal income tax
purposes. See "Description of Preferred
Shares -- Restrictions on Ownership" in the
accompanying Prospectus.
Listing....................... Application will be made to list the Depositary
Shares on the New York Stock Exchange. Trading
of the Depositary Shares on the New York Stock
Exchange is expected to commence within a 30-day
period after the initial delivery of the
Depositary Shares. The Class D Preferred Shares
will not be so listed and the Company does not
expect that there will be any trading market for
the Class D Preferred Shares except as
represented by the Depositary Shares. See
"Underwriting."
Risk Factors.................. An investment in the Depositary Shares involves
various risks, and prospective investors should
carefully consider the matters discussed under
"Risk Factors" commencing on page S-6 before
making any investment in the Company.
S-5
<PAGE> 6
FORWARD-LOOKING INFORMATION
This Prospectus Supplement and the accompanying Prospectus, including
documents incorporated by reference herein and therein, contain certain
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 Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is included in this statement for purposes of complying with
these safe harbor provisions. Forward-looking statements are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors that could cause actual results to differ materially from
those in forward-looking statements include, but are not limited to, those
stated under the caption "Risk Factors" herein, which should be considered in
evaluating forward-looking statements. Undue reliance should not be placed on
such statements.
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below before purchasing Depositary Shares in this Offering.
GENERAL REAL ESTATE INVESTMENT RISKS
Economic Performance and Value of Centers Depending on Many Factors. Real
property investments are subject to varying degrees of risk. The economic
performance and values of real estate, including the centers owned by the
Company, can be affected by many factors, including changes in the national,
regional and local economic climate, local conditions such as an oversupply of
space or a reduction in demand for real estate in the area, the attractiveness
of the properties to tenants, competition from other available space, the
ability of the owner to provide adequate maintenance and insurance and increased
operating costs.
Risks of Development Activities. The Company intends to continue to
actively pursue shopping center development projects, including the expansion of
certain of the existing centers. Such projects generally require the expenditure
of capital as well as various forms of government and other approvals, the
receipt of which cannot be assured. Consequently, there can be no assurance that
any such projects will be completed or that such projects will prove to be
profitable.
Dependence on Rental Income from Real Property. Since substantially all of
the Company's income is derived from rental income from real property, the
Company's income and funds available for distribution would be adversely
affected if a significant number of the Company's tenants were unable to meet
their obligations to the Company or if the Company were unable to lease a
significant amount of space in its properties on economically favorable lease
terms. There can be no assurance that any tenant whose lease expires in the
future will renew such lease or that the Company will be able to release space
on economically advantageous terms.
Environmental Risks. Under various federal, state and local laws,
ordinances and regulations, the Company may be considered an owner or operator
of real property or may have arranged for the disposal or treatment of hazardous
or toxic substances and, therefore, may become liable for the costs of removal
or remediation of certain hazardous substances released on or in its property or
disposed of by it, as well as certain other potential costs which could relate
to hazardous or toxic substances (including governmental fines and injuries to
persons and property). Such liability may be imposed whether or not the Company
knew of, or was responsible for, the presence of such hazardous or toxic
substances.
RELIANCE ON MAJOR TENANTS
As of July 31, 1998, the annualized base rental revenues from Wal-Mart and
Kmart represented 5.8% and 4.3%, respectively, of the Company's and its joint
ventures' aggregate annualized shopping center base rental
S-6
<PAGE> 7
revenues as of such date (after adjusting for the inclusion of anchor tenant
leases signed as of such date relating to approximately 572,000 square feet,
under which some of the tenants have not yet occupied the subject space or
commenced rental payments).
The Company could be adversely affected in the event of the bankruptcy or
insolvency of Wal-Mart or Kmart, or a significant downturn in the business of
Wal-Mart or Kmart. In addition, the Company could be adversely affected in the
event that either Wal-Mart or Kmart does not renew its leases as they expire.
The Company could also be adversely affected in the event of a downturn in
the business of other major tenants. However, as of July 31, 1998, the Company
received no more than 3.3% of its shopping center base rental revenues from any
other single tenant.
LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL
The Company's Amended and Restated Articles of Incorporation prohibit
ownership of more than 5% of the outstanding Common Shares by any person. Such
restriction is likely to have the effect of precluding acquisition of control of
the Company by a third party without consent of the Board of Directors even if a
change in control were in the interest of shareholders.
NO LIMITATION IN ORGANIZATIONAL DOCUMENTS ON INCURRENCE OF DEBT
The Company intends to continue to maintain a conservative debt
capitalization with a ratio of debt to total market capitalization (the sum of
the aggregate market value of the Company's Common Shares, the liquidation
preference on any preferred shares outstanding and the Company's total
indebtedness) of less than 50%, but the organizational documents of the Company
do not contain any limitation on the amount or percentage of indebtedness the
Company may incur. However, the indenture under which the Company has
indebtedness outstanding contains limits on the Company's ability to incur
indebtedness.
ADVERSE IMPACT ON DISTRIBUTIONS OF FAILURE TO QUALIFY AS A REIT
Since the Company's initial public offering in February 1993, the Company
has operated in a manner to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), and the Company intends to continue to operate in
such a manner so as to permit the Company to qualify as a REIT under the Code.
Although the Company believes that it will continue to operate in such a manner,
no assurance can be given that the Company will remain qualified as a REIT. If
in any taxable year the Company were to fail to qualify as a REIT, the Company
would not be allowed a deduction for distributions to shareholders in computing
taxable income and would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates.
S-7
<PAGE> 8
THE COMPANY
The Company is a fully integrated real estate company formed in November
1992 by the principals of the affiliates comprising the Developers Diversified
Group ("DDG") to continue the business of DDG by acquiring, developing,
redeveloping, owning, leasing and managing shopping centers and business
centers.
The Company believes that its portfolio of shopping center properties is
one of the largest (measured by total gross leasable area ("GLA")) currently
held by any publicly traded REIT. As of July 31, 1998, the Company's portfolio
consisted of 160 shopping centers containing an aggregate of approximately 40.1
million square feet of total GLA (of which approximately 32.0 million square
feet was Company-owned). In addition, the Company has numerous undeveloped
parcels, substantially all of which are located adjacent to shopping centers
owned by the Company. Overall, as of July 31, 1998, the Company owned and/or
managed approximately 34.3 million square feet of GLA, which included all of the
properties owned by the Company and 22 properties owned by third parties. The
Company's shopping centers are located in 35 states, principally in the East and
Midwest, with significant concentrations in Ohio, Florida, Missouri, South
Carolina, Michigan and North Carolina.
The principal executive offices of the Company are located at 34555 Chagrin
Boulevard, Moreland Hills, Ohio 44022, and its telephone number is (440)
247-4700.
RECENT DEVELOPMENTS
RECENT ACQUISITIONS
In March 1998, the Company acquired 10 shopping centers, two of which were
acquired through joint ventures, from Continental Real Estate Companies
("Continental") of Columbus, Ohio. The 10 shopping centers total 1.2 million
square feet of Company-owned GLA. The aggregate cost of these centers or
interests therein was approximately $91 million. The Company's net investment
was initially funded through its revolving credit facilities, cash and
liabilities assumed aggregating approximately $31 million, mortgages assumed of
approximately $57.5 million (including $29.3 million of the Company's
proportionate share of joint venture mortgage debt) and the issuance of
operating partnership units, in a partnership formed to hold certain of the
Continental properties, valued at approximately $2.8 million. These units are,
in certain circumstances and at the option of the Company, exchangeable into
139,872 shares of the Company's Common Shares.
In April 1998, the Company acquired from Continental interests in three
additional shopping centers, two of which were acquired through joint ventures,
located in the Columbus, Ohio area. Combined, these shopping centers will have
approximately 1.0 million square feet of total GLA. The Company estimates that
its share of the investment cost will approximate $93.4 million upon completion
of approximately 345,000 square feet which is currently under construction. The
portion under construction has an estimated cost of approximately $42.4 million
and the Company is scheduled to close on this investment periodically throughout
1998.
In April 1998, the Company also acquired the remaining ownership interest
in a 584,000 square foot shopping center and adjacent pad site in Princeton, New
Jersey at a total cost of approximately $36.4 million for consideration in the
form of $27.8 million of debt assumed, $0.8 million of operating partnership
units in a partnership formed to hold the property and cash. The Company had
previously invested approximately $7.8 million in the shopping center at the end
of December 1997.
On July 1, 1998, the Company acquired from Hermes Associates ("Hermes") of
Salt Lake City, Utah, nine community shopping centers and one office building
aggregating 2.8 million square feet of GLA, located in Utah, Nevada and South
Dakota. The transaction is valued at approximately $310 million. The purchase
includes three new shopping center development projects and expansion projects
at six of the existing centers.
On July 2, 1998, the Company acquired from Opus Northwest LLC a shopping
center aggregating 156,000 square feet of GLA located in Tanasbourne, Oregon
valued at approximately $22.1 million. This shopping center is adjacent to an
existing shopping center owned by the Company.
S-8
<PAGE> 9
On July 16, 1998, the Company acquired from St. Louis, Missouri-based
Sansone Group ("Sansone Group"), 15 shopping centers and adjoining outparcels,
aggregating approximately 1.6 million square feet of GLA. In addition, the
Company formed a 50/50 strategic joint venture with Sansone Group to advance
Sansone Group's real estate development and property management business
throughout the central Midwestern United States.
On August 4, 1998, the Company, in a joint release with American Industrial
Properties Trust, a New York Stock Exchange-listed REIT ("AIP"), announced the
execution of a definitive share purchase agreement providing for a strategic
investment in AIP by the Company. Under the terms of the share purchase
agreement, the Company purchased 949,147 newly issued common shares of
beneficial interest at $15.50 per share for approximately $14.7 million. Under
the terms of a separate agreement, the Company, in exchange for five industrial
properties previously owned by the Company and valued at approximately $19.5
million, acquired approximately 1.3 million additional newly issued common
shares of beneficial interest of AIP. Combined, the Company's acquired shares
represent 19.9% of AIP's outstanding common shares prior to the Company's
purchase. The Company has also agreed to purchase approximately 5.2 million
additional newly issued common shares of AIP for $81.0 million, subject to
shareholder approval at a special meeting of AIP shareholders expected to be
held before the end of 1998. Concurrent with entering into the agreements, AIP
appointed Scott A. Wolstein as Chairman of its Board of Trust Managers and three
additional designees of the Company to newly created positions on its Board of
Trust Managers. Pursuant to the agreement, AIP may, under certain circumstances
and subject to certain limitations, following the closing of the second purchase
of AIP's common shares, put additional common or preferred shares of AIP to the
Company, at a price not to exceed $15.50 and $14.00 per share, respectively. The
put of these additional shares, would be for the sole purpose of financing
property acquisitions approved by AIP's Board of Trust Managers.
STOCK SPLIT
In July 1998, the Company announced that the board of directors approved a
two-for-one stock split to shareholders of record on July 27, 1998. On August 3,
1998, each such shareholder received one common share for each common share
held. This stock split was effected in the form of a stock dividend.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Depositary Shares
offered hereby, after payment of expenses related to this Offering, are
estimated to be approximately $48,250,000 (approximately $55,513,750 if the
Underwriters' over-allotment option is exercised in full). The Company will use
the net proceeds of this Offering to repay indebtedness on its unsecured
revolving credit facilities which have been used to fund acquisitions,
developments and expansions and the balance of such proceeds, if any, for
general corporate purposes.
On July 31, 1998, the weighted average interest rate on and the weighted
average maturity of the Company's outstanding indebtedness of approximately
$304.7 million under its unsecured revolving credit facilities were
approximately 6.7% and 2.7 years, respectively.
S-9
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the Company. The following information should be read in conjunction
with the Consolidated Financial Statements and notes thereto and Management's
Discussion and Analysis, included in the Company's 1997 Annual Report on Form
10-K, incorporated by reference in this Prospectus Supplement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues from rental operations........................... $169,040 $130,905 $107,805 $81,974 $54,531
Expenses:
Rental operation expenses............................... 47,017 35,123 28,069 22,802 16,863
Depreciation and amortization........................... 32,313 25,062 21,865 16,211 10,393
Interest Expense........................................ 35,558 29,888 29,595 21,423 15,060
-------- -------- -------- ------- -------
Total............................................... 114,888 90,073 79,529 60,436 42,316
-------- -------- -------- ------- -------
Income from operations.................................. 54,152 40,832 28,276 21,538 12,215
Equity in net income (loss) of joint ventures........... 10,893 8,710 486 (186) (347)
Minority equity interest................................ (1,049) -- -- -- --
Gain on sales of real estate............................ 3,526 -- 300 -- 122
Non-recurring charges(1)................................ -- -- -- -- (2,641)
-------- -------- -------- ------- -------
Income before extraordinary item........................ 67,522 49,542 29,062 21,352 9,349
Extraordinary items(2).................................. -- -- (3,557) (216) (731)
-------- -------- -------- ------- -------
Net Income.............................................. $ 67,522 $ 49,542 $ 25,505 $21,136 $ 8,618
======== ======== ======== ======= =======
Net income applicable to common shareholders.............. $ 53,322 $ 35,342 $ 24,250 $21,136 $ 8,618
======== ======== ======== ======= =======
Per share data:(3)
Earnings per share data -- Basic
Income before extraordinary item........................ 1.03 .84 .74 .68 .41
Net income.............................................. 1.03 .84 .65 .67 .38
Weighted average number of common shares................ 51,760 42,294 37,560 31,612 22,766
Earnings per share data -- Diluted
Income before extraordinary item........................ 1.03 .84 .74 .67 .41
Net income.............................................. 1.03 .84 .64 .67 .38
Weighted average number of common shares................ 52,124 42,372 37,818 31,832 22,788
Cash distributions per common share....................... $ 1.26 $ 1.20 $ 1.08 $ 0.96 $ 0.80(4)
Supplemental information:
Funds From Operations(5)
Net income applicable to common shareholders............ $ 53,322 $ 35,342 $ 24,250 $21,136 $ 8,618
Depreciation and amortization........................... 31,955 24,832 21,865 16,211 10,393
Equity in net (income) loss of joint ventures........... (10,893) (8,710) (486) 186 347
Joint ventures Funds From Operations.................... 16,077 13,172 1,364 217 105
Minority interest expense (OP units).................... 10 -- -- -- --
Gain on sales of real estate............................ (3,526) -- (300) -- (122)
Non-recurring and extraordinary items................... -- -- 3,557 216 3,372
-------- -------- -------- ------- -------
$ 86,945 $ 64,636 $ 50,250 $37,966 $22,713
======== ======== ======== ======= =======
Income before interest, depreciation and amortization, gain
on sales of land, equity in net income of joint ventures,
non-recurring charges and extraordinary items............. $122,023 $ 95,782 $ 79,736 $59,172 $37,668
Company GLA (square feet at end of period).................. 25,190 21,104 19,932 13,773 10,358
Percent of Company GLA leased............................... 96.1% 94.8% 95.8% 97.2% 96.5%
Number of shopping center and business center properties (at
end of period)............................................ 123 112 113 91 76
</TABLE>
- ---------------
(1) The non-recurring charges relate to costs incurred in connection with the
transfer to the Company of its initial portfolio with the IPO (primarily
transfer taxes and title insurance costs).
(2) The extraordinary items relate to debt prepayment fees and write-off of
deferred finance costs.
(3) Effective August 3, 1998, the Company executed a two-for-one stock split for
shareholders of record on July 27, 1998. All per share information and
number of common shares outstanding reflects the stock split. Earnings per
share data is reflected for all years utilizing SFAS 128.
(4) Represents annualized dividend rate.
S-10
<PAGE> 11
(5) Industry analysts generally consider FFO to be an appropriate measure of an
equity REIT. FFO does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs and should not
be considered as an alternative to net income as an indicator of the
Company's operating performance or as an alternative to cash flow as a
measure of liquidity. FFO is defined generally as net income applicable to
common shareholders excluding gains (losses) on sale of property,
nonrecurring and extraordinary items, adjusted for certain non-cash items,
principally real property depreciation and equity income (loss) from its
joint ventures and adding the Company's proportionate share of FFO of its
unconsolidated joint ventures, determined on a consistent basis. The Company
calculates FFO in accordance with the foregoing definition, which is
currently used by NAREIT. Certain other real estate companies may calculate
funds from operations in a different manner.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate, before accumulated depreciation........... $1,325,742 $991,647 $848,373 $686,890 $459,049
Real estate, net....................................... 1,154,005 849,608 728,333 586,839 375,183
Advances to and investments in joint ventures.......... 136,267 106,796 83,190 8,710 9,078
Total assets........................................... 1,391,918 975,126 830,060 611,116 395,942
Total debt............................................. 668,521 478,432 405,726 394,435 184,534
Shareholders equity (deficit).......................... 669,050 469,336 404,161 203,058 197,118
Total Market Equity (1)................................ 1,208,800 954,728 714,443 502,440 455,366
</TABLE>
- ---------------
(1) Represents number of Common Shares outstanding multiplied by the last
reported sale price on the NYSE Composite Tape on the respective dates plus
preferred shares at liquidation value.
S-11
<PAGE> 12
DESCRIPTION OF CLASS D PREFERRED SHARES AND DEPOSITARY SHARES
This description of the terms of the Class D Preferred Shares and the
Depositary Shares supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the Preferred
Shares and the Depositary Shares set forth in the accompanying Prospectus, to
which description reference is hereby made.
GENERAL
The Company is authorized to issue up to (i) 1,500,000 Class A Cumulative
Preferred Shares, without par value, (ii) 1,500,000 Class B Cumulative Preferred
Shares, without par value, (iii) 1,500,000 Class C Cumulative Preferred Shares,
without par value, (iv) 1,500,000 Class D Cumulative Preferred Shares, without
par value, (v) 1,500,000 Class E Cumulative Preferred Shares, without par value
and (vi) 1,500,000 Noncumulative Preferred Shares, without par value
(collectively, the "Preferred Shares"). Preferred Shares may be issued in one or
more series, with such designations, powers, preferences and rights of the
shares of each series of each class and the qualifications, limitations or
restrictions thereon, including, but not limited to, the fixing of the dividend
rate or rates, conversion rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, and the liquidation preferences, in
each case, if any, as the Board of Directors of the Company may determine by
adoption of an amendment to the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation"), without any further vote or
action by the shareholders. See "Description of Preferred Shares" in the
accompanying Prospectus.
On August 11, 1998, the Board of Directors of the Company approved an
amendment to the Articles of Incorporation determining the terms of a series of
Class D Cumulative Preferred Shares consisting of up to 300,000 shares,
designated 8.68% Class D Cumulative Redeemable Preferred Shares (the "Class D
Preferred Shares"). The following summary of the terms and provisions of the
Class D Preferred Shares does not purport to be complete and is qualified in its
entirety by reference to the pertinent sections of the Articles of
Incorporation, as amended, which is incorporated by reference in the Prospectus.
The transfer agent, registrar and dividend disbursing agent for the Class D
Preferred Shares will be National City Bank, Cleveland, Ohio.
Each Depositary Share represents a fractional interest in a Class D
Preferred Share. The Class D Preferred Shares will be deposited with National
City Bank, Cleveland, Ohio, as Depositary (the "Preferred Shares Depositary"),
under a Deposit Agreement among the Company, the Preferred Shares Depositary and
the holders from time to time of the depositary receipts (the "Depositary
Receipts") issued by the Preferred Shares Depositary thereunder. The Depositary
Receipts will evidence the Depositary Shares. Subject to the terms of the
Deposit Agreement, each holder of a Depositary Receipt evidencing a Depositary
Share will be entitled to all the rights and preferences of a fractional
interest in a Class D Preferred Share (including dividend, voting, redemption
and liquidation rights and preferences). See "Description of Depositary Shares"
in the accompanying Prospectus.
Application will be made to list the Depositary Shares on the New York
Stock Exchange. The Class D Preferred Shares will not be so listed and the
Company does not expect that there will be any trading market for the Class D
Preferred Shares except as represented by the Depositary Shares. See
"Underwriting."
DIVIDENDS
Holders of the Class D Preferred Shares will be entitled to receive, when
and as declared by the Board of Directors, out of funds legally available for
the payment of dividends, cumulative preferential cash dividends at the rate of
8.68% of the liquidation preference per annum (equivalent to $2.17 per annum per
Depositary Share). Such dividends shall be cumulative from the date of original
issue and will be payable quarterly in arrears on the fifteenth day of each
March, June, September and December or, if not a business day, the next
succeeding business day (each, a "Dividend Payment Date"). The first dividend,
which will be paid on December 15, 1998, will be for more than a full quarter.
Such dividend and any other dividend payable on the Class D Preferred Shares for
any partial dividend period will be computed on the basis of the 360-day year
S-12
<PAGE> 13
consisting of twelve 30-day months. The Preferred Shares Depositary will
distribute dividends received in respect of the Class D Preferred Shares to the
record holders of the Depositary Receipts as of the close of business on the
applicable record date, which shall be the first day of the calendar month in
which the applicable Dividend Payment Date falls or on such other date
designated by the Board of Directors of the Company for the payment of dividends
that is not more than 30 nor less than 10 days prior to such Dividend Payment
Date (each, a "Dividend Record Date").
No dividends on the Class D Preferred Shares may be declared by the Board
of Directors or paid or set apart for payment by the Company at any time if the
terms and provisions of any agreement of the Company, including any agreement
relating to its indebtedness, prohibit such declaration, payment or setting
apart for payments or provide that such declaration, payment or setting apart
for payment would constitute a breach thereof or a default thereunder, or if
such declaration or payment is restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Class D Preferred Shares
will accumulate whether or not the Company has earnings, whether or not there
are funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accumulated but unpaid dividends on the Class D
Preferred Shares will not bear interest. Holders of the Class D Preferred Shares
and the Depositary Shares will not be entitled to any dividends in excess of
full cumulative dividends as described above. See "Description of Preferred
Shares -- Dividends" in the accompanying Prospectus.
Any dividend payment made on the Class D Preferred Shares will first be
credited against the earliest accumulated but unpaid dividend due with respect
to such shares which remains payable.
RANKING
With respect to the payment of dividends and amounts upon liquidation, the
Class D Preferred Shares will rank equally with all other preferred shares, when
issued, of the Company (subject to dividends on Noncumulative Shares being
noncumulative), including the Class A Preferred Shares, Class B Preferred Shares
and Class C Preferred Shares and will rank senior to the Company's Common
Shares.
LIQUIDATION PREFERENCE
In the event of any voluntary liquidation, dissolution or winding up of the
Company, the holders of the Class D Preferred Shares are entitled to be paid out
of the assets of the Company legally available for distribution to its
shareholders a liquidation preference of $250 per share (equivalent to $25 per
Depositary Share), plus an amount equal to any accumulated and unpaid dividends
to the date of payment, before any distribution of assets is made to holders of
Common Shares or any other capital shares that rank junior to the Class D
Preferred Shares as to liquidation rights. After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of Class D
Preferred Shares will have no right or claim to any of the remaining assets of
the Company. For further information regarding the rights of the holders of the
Class D Preferred Shares upon the liquidation, dissolution or winding up of the
Company, see "Description of Preferred Shares -- Liquidation Preference" in the
accompanying Prospectus.
REDEMPTION
The Class D Preferred Shares are not redeemable prior to August 20, 2003.
On and after August 20, 2003, the Company at its option upon not less than 30
nor more than 60 days' written notice, may redeem the Class D Preferred Shares
(and the Preferred Shares Depositary will redeem the number of Depositary Shares
representing the Class D Preferred Shares so redeemed upon not less than 30
days' written notice to the holders thereof), in whole or in part, at any time
or from time to time, for cash at a redemption price of $250 per share
(equivalent to $25 per Depositary Share), plus all accumulated and unpaid
dividends thereon to the date fixed for redemption (except as provided below),
without interest. The redemption price of the Class D Preferred Shares (other
than the portion thereof consisting of accumulated and unpaid dividends) is
payable solely out of the sale proceeds of other Capital Shares of the Company,
which may include other series of preferred shares, and from no other source.
For purposes of the preceding sentence, "Capital Shares" means any equity
securities (including common shares and preferred shares), shares, interests,
participation or other
S-13
<PAGE> 14
ownership interests (however designated) and any rights (other than debt
securities convertible into or exchangeable for equity securities) or options to
purchase any of the foregoing. Holders of Depositary Receipts evidencing
Depositary Shares to be redeemed shall surrender such Depositary Receipts at the
place designated in such notice and shall be entitled to the redemption price
and any accumulated and unpaid dividends payable upon such redemption following
such surrender. If fewer than all the outstanding Depositary Shares are to be
redeemed, the Depositary Shares to be redeemed shall be selected pro rata (as
nearly as may be practicable without creating fractional Depositary Shares) or
by any other equitable method determined by the Company that will not result in
the issuance of any Excess Preferred Shares (defined in the accompanying
Prospectus).
Unless full cumulative dividends on all Class D Preferred Shares shall have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for all past dividend periods and
the then-current dividend period, no Class D Preferred Shares shall be redeemed
unless all outstanding Preferred Shares are simultaneously redeemed; provided,
however, that the foregoing shall not prevent the purchase or acquisition of
Class D Preferred Shares from persons owning in the aggregate 9.8% or more of
any class of the outstanding Class D Preferred Shares of the Company pursuant to
provisions of the Articles of Incorporation or pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding Class D
Preferred Shares. Unless full cumulative dividends on all outstanding Class D
Preferred Shares have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period, the Company
shall not purchase or otherwise acquire directly or indirectly any Class D
Preferred Shares (except by exchange for Capital Shares of the Company ranking
junior to the Class D Preferred Shares as to dividends and upon liquidation).
The Company shall give the Depositary not less than 60 days' prior written
notice of redemption of the deposited Class D Preferred Shares. In addition,
notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two successive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice will be mailed by the Preferred Shares
Depositary, postage prepaid, not less than 30 nor more than 60 days prior to the
redemption date, addressed to the respective holders of record of the Depositary
Shares to be redeemed at their respective addresses as they appear on the
records of the Preferred Shares Depositary. No failure to give such notice or
any defect thereto or in the mailing thereof shall affect the validity of the
proceedings for the redemption of any Class D Preferred Shares except as to the
holder to whom notice was defective or not given. Each notice shall state: (i)
the redemption date; (ii) the redemption price; (iii) the number of Class D
Preferred Shares and the number of Depositary Shares to be redeemed; (iv) the
place or places where the Depositary Receipts are to be surrendered for payment
of the redemption price; and (v) that dividends on the shares to be redeemed
will cease to accrue on such redemption date. If less than all the Class D
Preferred Shares held by any holder are to be redeemed, the notice mailed to
such holder shall also specify the number of Class D Preferred Shares to be
redeemed.
The holders of Depositary Shares at the close of business on a Dividend
Record Date will be entitled to receive the dividend payable with respect to the
underlying Class D Preferred Shares on the corresponding Dividend Payment Date
notwithstanding the redemption thereof between such Dividend Record Date and the
corresponding Dividend Payment Date or the Company's default in the payment of
the dividend due. Except as provided above, the Company will make no payment or
allowance for unpaid dividends, whether or not in arrears, on Class D Preferred
Shares called for redemption.
The Class D Preferred Shares have no stated maturity and will not be
subject to any sinking fund or mandatory redemption (except as provided under
"Description of Preferred Shares -- Redemption" and " -- Restrictions on
Ownership" in the accompanying Prospectus).
VOTING RIGHTS
In any matter in which the Class D Preferred Shares may vote (as expressly
provided herein, or as may be required by law), each Class D Preferred Share
shall be entitled to one vote. As a result, each Depositary
S-14
<PAGE> 15
Share will be entitled to 1/10 of a vote. For further information regarding the
voting rights of the holders of Preferred Shares and related Depositary
Receipts, see "Description of Preferred Shares -- Voting Rights" and
"Description of Depositary Shares -- Voting of the Underlying Preferred Shares"
in the accompanying Prospectus).
CONVERSION
The Class D Preferred Shares and the Depositary Shares are not convertible
into or exchangeable for any other property or securities of the Company.
RESTRICTIONS ON TRANSFER
For information regarding restrictions on transfer of the Class D Preferred
Shares and the Depositary Shares, see "Description of Preferred
Shares -- Restrictions on Ownership" in the accompanying Prospectus.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations is based
on current law, is for general information only, and is not tax advice. This
discussion supplements the discussion of the federal tax treatment of
shareholders contained in the accompanying Prospectus under the heading entitled
"Federal Income Tax Considerations" and does not purport to deal with all
aspects of taxation that may be relevant to particular shareholders in light of
their personal investment or tax circumstances, or to certain types of
shareholders (including insurance companies, tax-exempt organizations, financial
institutions or broker dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws.
This Prospectus Supplement also 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 "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 distributions to shareholders 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 shareholders would be reduced. See the discussion in the
Prospectus under the heading "Federal Income Tax Considerations -- Failure to
Qualify."
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT THE PROSPECTUS FOR
INFORMATION REGARDING THE TAX CONSEQUENCES TO THE COMPANY OF ITS ELECTION TO BE
TAXED AS A REIT AND THE TAX TREATMENT OF SHAREHOLDERS. EACH PROSPECTIVE
PURCHASER IS ALSO ADVISED TO CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC
TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE
DEPOSITARY SHARES OR THE CLASS C PREFERRED SHARES OF THE COMPANY, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP AND SALE, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Owners of the Depositary Shares will be treated for federal income tax
purposes as if they were direct owners of the Class D Preferred Shares
represented by such Depositary Shares and, accordingly, the following discussion
of tax consequences pertaining to the Class D Preferred Shares pertains equally
to the Depositary Shares.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
Dividends and Other Distributions. As long as the Company qualifies as a
REIT, distributions made to the Company's taxable domestic shareholders
(including holders of Class D Preferred Shares) out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account
S-15
<PAGE> 16
by them as ordinary income and will not be eligible for the dividends received
deduction for corporations. For purposes of determining whether distributions on
the Class D Preferred Shares are out of current or accumulated earnings and
profits, the earnings and profits of the Company will be allocated first to the
Preferred Shares, and then allocated to the Company's Common Shares.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent they do not exceed the Company's actual
net capital gain for the taxable year) without regard to the period for which
the holder has held its Class D Preferred Shares. However, corporate holders may
be required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to a holder to the extent that they do not exceed the
adjusted tax basis of the holder's shares, but rather will reduce the adjusted
basis of such shares. To the extent that such distributions exceed the adjusted
basis of a holder's shares they will be included in income as long-term capital
gain (or short-term capital gain if the shares have been held for one year or
less) assuming the shares are a capital asset in the hands of the holder. In
addition, any dividend declared by the Company in October, November or December
of any year payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following calendar year. Shareholders
may not include in their individual income tax returns any net operating losses
or capital losses of the Company.
Sale or Redemption of Class D Preferred Shares. On the sale of Class D
Preferred Shares, gain or loss will be recognized by the holder in an amount
equal to the difference between (i) the amount of cash and fair market value of
any property received on such sale (less any portion thereof attributable to
accumulated and declared but unpaid dividends, which will be taxable as a
dividend to the extent of the Company's current or accumulated earnings and
profits), and (ii) the holder's adjusted basis in the Class D Preferred Shares.
Such gain or loss will be capital gain or loss if the Class D Preferred Shares
are held as capital assets, and will be long-term gain or loss if such shares
are held for more than one year. In general, any loss upon a sale or exchange of
shares by a holder who has held such shares 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 from the Company required to be treated by
such holder as long-term capital gain.
A redemption of Class D Preferred Shares will be treated under Section 302
of the Code as a distribution that is taxable at ordinary income tax rates as a
dividend (to the extent of the Company's current or accumulated earnings and
profits), unless the redemption satisfies certain tests set forth in Section
302(b) of the Code enabling the redemption to be treated as a sale or exchange
of the Class D Preferred Shares. The redemption will have satisfied such tests
if it (i) is "substantially disproportionate" with respect to the holder, (ii)
results in a "complete termination" of the holder's equity interest in the
Company, or (iii) is "not essentially equivalent to a dividend" with respect to
the holder, all within the meaning of Section 302(b) of the Code. In determining
whether any of these tests have been met, shares considered to be owned by the
holder by reason of certain constructive ownership rules set forth in the Code,
as well as shares actually owned, must generally be taken into account. Because
the determination as to whether any of the alternative tests of Section 302(b)
of the Code will be satisfied with respect to any particular holder of Class D
Preferred Shares depends upon the facts and circumstances at the time that the
determination must be made, prospective investors are advised to consult their
own tax advisors to determine such tax treatment.
If redemption of the Class D Preferred Shares is not treated as a
distribution taxable as a dividend to a particular shareholder, it will be
treated, as to that shareholder, as a taxable exchange under Section 302(a) of
the Code, the tax consequences of which are the same as a sale, as described
above.
If redemption of the Class D Preferred Shares is treated as a distribution
that is taxable as a dividend, the amount of the distribution will be measured
by the amount of cash and the fair market value of any property received by the
shareholder. The shareholder's adjusted tax basis in the redeemed Class D
Preferred Shares will be transferred to any of the holder's remaining holdings
in the Company. If, however, the shareholder has no remaining holdings in the
Company, such basis could be transferred to a related person or it may be lost.
The Internal Revenue Service Restructuring and Reform Act of 1998, which
was signed into law on July 22, 1998, reduced the required holding period for
the application of the 20% and 25% capital gain tax
S-16
<PAGE> 17
rates from more than 18 months to more than 12 months for sales of capital gain
assets on or after January 1, 1998.
NEW WITHHOLDING REGULATIONS
Subsequent to the date of the accompanying Prospectus, final regulations
dealing with withholding tax on income paid to foreign persons and related
matters (the "New Withholding Regulations") were promulgated. In general, the
New Withholding Regulations do not significantly alter the substantive
withholding and information reporting requirements, but unify current
certification procedures and forms and clarify reliance standards. For example,
the New Withholding Regulations adopt a certification rule which was in the
proposed regulations under which a foreign shareholder who wishes to claim the
benefit of an applicable treaty rate with respect to dividends received from a
U.S. corporation will be required to satisfy certain certification and other
requirements. In addition, the New Withholding Regulations require a corporation
that is a REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion and to apply the FIRPTA withholding rules (discussed in the accompanying
Prospectus) with respect to the portion of the distribution designated by the
REIT as capital gain dividend. The New Withholding Regulations will generally be
effective for payments made after December 31, 1999. EXCEPT FOR THIS PARAGRAPH,
THE DISCUSSION SET FORTH IN THE ACCOMPANYING PROSPECTUS UNDER "FEDERAL INCOME
TAX CONSIDERATIONS--TAXATION OF FOREIGN STOCKHOLDERS" DOES NOT TAKE THE NEW
WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S. SHAREHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE IMPACT OF THE NEW
WITHHOLDING REGULATIONS.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective purchasers of the Depositary Shares
should consult their own tax advisors regarding the effect of state and local
tax laws on an investment in the Company.
S-17
<PAGE> 18
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Morgan Stanley & Co. Incorporated, A.G. Edwards & Sons, Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Prudential Securities Incorporated
and Smith Barney Inc. are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company, the respective number of
Depositary Shares set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
DEPOSITARY
UNDERWRITER SHARES
----------- ----------
<S> <C>
Morgan Stanley & Co. Incorporated........................... 315,000
A.G. Edwards & Sons, Inc.................................... 315,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 315,000
Prudential Securities Incorporated.......................... 315,000
Smith Barney Inc............................................ 315,000
BT Alex Brown Incorporated.................................. 25,000
Robert W. Baird & Co. Incorporated.......................... 25,000
CIBC Oppenheimer Corp....................................... 25,000
Goldman, Sachs & Co......................................... 25,000
Legg Mason Wood Walker, Incorporated........................ 25,000
McDonald & Company Securities, Inc.......................... 25,000
Roney Capital Markets -- A Division of First Chicago Capital
Markets, Inc.............................................. 25,000
SG Cowen Securities Corporation............................. 25,000
J.C. Bradford & Co. ........................................ 12,500
Crowell, Weedon & Co. ...................................... 12,500
Dain Rauscher Wessels....................................... 12,500
Fahnestock & Co. Inc........................................ 12,500
Fidelity Capital Markets -- A Division of National Financial
Services Corporation...................................... 12,500
First Albany Corporation.................................... 12,500
J.J.B. Hilliard, W.L. Lyons, Inc............................ 12,500
Interstate/Johnson Lane Corporation......................... 12,500
Janney Montgomery Scott Inc................................. 12,500
Morgan Keegan & Company, Inc................................ 12,500
Fifth Third/The Ohio Company................................ 12,500
Olde Discount Corporation................................... 12,500
Piper Jaffray Inc........................................... 12,500
Raymond James & Associates, Inc............................. 12,500
Scott & Stringfellow, Inc................................... 12,500
The Robinson-Humphrey Company, LLC.......................... 12,500
Tucker Anthony Incorporated................................. 12,500
Wheat First Securities, Inc................................. 12,500
---------
Total............................................. 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Depositary Shares offered
hereby are subject to the approval of certain legal matters by their counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all Depositary Shares offered hereby if any such Depositary Shares are taken.
The Representatives have advised the Company that the Underwriters propose
initially to offer the Depositary Shares to the public at the public offering
price set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of $.50 per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $.40 per share on sales to
S-18
<PAGE> 19
certain other dealers. After the initial offering of the Depositary Shares, the
public offering price and other selling terms may be changed, from time to time,
by the Representatives.
The Company has granted to the Underwriters an option, exercisable within
30 days of the date of this Prospectus Supplement, to purchase up to 300,000
additional Depositary Shares at the price to public less underwriting discounts
and commissions set forth on the cover page of this Prospectus Supplement for
the purpose of covering over-allotments, if any. If the Underwriters exercise
this option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of Depositary Shares to be purchased by it shown in the foregoing table
bears to the 2,000,000 Depositary Shares offered hereby.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company has agreed that for a period of 30 days from the date hereof,
the Company will not, without the prior written consent of the Representatives,
directly or indirectly, sell, offer to sell, grant any option for the sale of,
or otherwise dispose of any Depositary Shares or any other preferred stock
ranking on a parity with the Series D Preferred Shares and the related
Depositary Shares.
Application will be made to list the Depositary Shares on the New York
Stock Exchange. Trading of the Depositary Shares on the New York Stock Exchange
is expected to commence within the 30-day period after the initial delivery of
the Depositary Shares. The Representatives have advised the Company that they
intend to make a market in the Depositary Shares prior to the commencement of
trading on the New York Stock Exchange. The Representatives will have no
obligation to make a market in the Depositary Shares, however, and may cease
market making activities, if commenced, at any time.
In order to facilitate the offering of the Depositary Shares, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Depositary Shares. Specifically, the Underwriters may
overallot in connection with the offering, creating a short position in the
Depositary Shares for their own account. In addition, to cover overallotments or
to stabilize the price of the Depositary Shares, the Underwriters may bid for,
and purchase, the Depositary Shares in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an underwriter
or a dealer for distributing the Depositary Shares in the Offering, if the
syndicate repurchases previously distributed Depositary Shares in transactions
to cover syndicate short positions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
Depositary Shares above independent market levels. The Underwriters are not
required to engage in these activities and may end any of these activities at
any time.
The Representatives from time to time provide investment banking and
financial advisory services to the Company. Certain of the Representatives have
also acted as representatives of various underwriters in connection with
offerings of the Company's equity securities.
EXPERTS
The financial statements incorporated in this Prospectus Supplement by
reference to the Annual Report on Form 10-K of the Company for the year ended
December 31, 1997, the audited historical statements included on pages F-3 to
F-23 of the Company's Current Report on Form 8-K/A dated February 25, 1998, and
the audited historical statements included on pages F-2 to F-10 of the Company's
Current Report on Form 8-K dated April 28, 1998 have been so incorporated in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The legality of the Class D Preferred Shares offered hereby will be passed
upon for the Company by Baker & Hostetler LLP, Cleveland, Ohio, and certain
legal matters will be passed upon for the Underwriters by Brown & Wood LLP, New
York, New York. Albert T. Adams, a director of the Company, is a partner in
Baker & Hostetler LLP.
S-19
<PAGE> 20
PROSPECTUS
DEVELOPERS DIVERSIFIED REALTY CORPORATION
$500,000,000
DEBT SECURITIES, PREFERRED SHARES, DEPOSITARY SHARES, COMMON SHARES AND COMMON
SHARE WARRANTS
Developers Diversified Realty Corporation (the "Company") may from time to
time offer in one or more series (i) its unsecured debt securities (the "Debt
Securities"), which may be senior debt securities ("Senior Securities") or
subordinated debt securities ("Subordinated Securities"), (ii) whole or
fractional Preferred Shares (collectively, "Preferred Shares"), (iii) Preferred
Shares represented by depositary shares ("Depositary Shares"), (iv) common
shares, without par value ("Common Shares"), or (v) warrants to purchase Common
Shares ("Common Share Warrants"), with an aggregate public offering price of up
to $500,000,000, on terms to be determined at the time or times of offering. The
Debt Securities, Preferred Shares, Depositary Shares, Common Shares and Common
Share Warrants (collectively, the "Offered Securities") may be offered,
separately or together, in separate classes or series, in amounts, at prices and
on terms to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, when 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 option of the Company or
repayment at the option of the holder thereof, terms for sinking fund payments,
terms for conversion into Preferred Shares or Common Shares, and any public
offering price; (ii) in the case of Preferred Shares, the specific class,
series, title and stated value, any dividend, liquidation, redemption,
conversion, voting and other rights, and any initial public offering price;
(iii) in the case of Depositary Shares, the whole or fractional Preferred Shares
represented by each such Depositary Share; (iv) in the case of Common Shares,
any initial public offering price; and (v) in the case of Common Share Warrants,
the duration, offering price, exercise price and detachability features. In
addition, such specific terms may include limitations on direct or beneficial
ownership and restrictions on transfer of the Offered Securities, in each case
as may be appropriate to preserve the status of the Company as a real estate
investment trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, when
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by that Prospectus Supplement.
The Offered 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 Offered
Securities, their names and any applicable purchase price, fee, commission or
discount arrangement between or among them will be set forth in or will be
calculable from the information set forth in the applicable Prospectus
Supplement. No Offered Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of those
Offered Securities. See "Plan of Distribution" for possible indemnification
arrangements with underwriters, dealers and agents.
------------------------
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.
October 24, 1997
<PAGE> 21
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR AN APPLICABLE PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
DEALER OR AGENT. THIS PROSPECTUS AND ANY APPLICABLE PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF.
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, 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 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. The Commission also maintains a Web
site at http://www.sec.gov containing reports, proxy and information statements
and other information regarding registrants, including the Company, that file
electronically with the Commission. In addition, the Company's Common Shares are
listed on the New York Stock Exchange and similar information concerning the
Company can be inspected and copied at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement (the
"Registration Statement") (of which this Prospectus is a part) under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Offered Securities. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. 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 as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Offered 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 with the
Commission and are incorporated herein by reference:
a. Annual Report on Form 10-K for the fiscal year ended December 31,
1996;
b. The description of the Company's Common Shares contained in the
Company's Registration Statement on Form 8-A dated January 26, 1993;
c. Quarterly Report on Form 10-Q for the fiscal quarters ended March
31, 1997 and June, 30, 1997;
d. Current Report on Form 8-K dated July 2, 1996;
e. Current Report on Form 8-K dated January 13, 1997;
f. Current Report on Form 8-K dated June 16, 1997; and
g. Current Report on Form 8-K dated June 18, 1997.
2
<PAGE> 22
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Offered Securities shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing of 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 which 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.
The Company hereby undertakes to provide without charge to each person to
whom this Prospectus has been delivered, upon the written or oral request of
such person, a copy of any and all documents incorporated by reference in this
Prospectus (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to Developers Diversified Realty Corporation, 34555
Chagrin Boulevard, Moreland Hills, Ohio 44022, Attn: Joan U. Allgood, Vice
President and General Counsel, telephone number (216) 247-4700.
THE COMPANY
The Company, a self-administered and self-managed real estate investment
trust, was formed in November 1992 by the principals of the affiliates
comprising the Developers Diversified Group ("DDG") to continue the business of
DDG by acquiring, developing, redeveloping, owning, leasing and managing
shopping centers and business centers. The Company believes that its portfolio
of shopping center properties is one of the largest (measured by total GLA)
currently held by any publicly traded REIT. The Company completed its initial
public offering of its Common Shares in February 1993 (the "IPO"). The Company's
executive offices are located at 34555 Chagrin Boulevard, Moreland Hills, Ohio
44022, and its telephone number is (216) 247-4700.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Offered Securities
for general corporate purposes, which may include the acquisition of properties
(including using the net proceeds for possible portfolio or asset acquisitions
or in business combinations) as suitable opportunities arise, the expansion and
improvement of certain properties in the Company's portfolio and the repayment
of certain indebtedness.
DESCRIPTION OF DEBT SECURITIES
The Senior Securities will be issued under an Indenture dated as of May 1,
1994, as amended or supplemented from time to time (the "Senior Indenture"),
between the Company and National City Bank, as Trustee. The Subordinated
Securities are to be issued under an Indenture dated as of May 1, 1994, as
amended or supplemented from time to time (the "Subordinated Indenture"),
between the Company and The Chase Manhattan Bank (formerly known as Chemical
Bank), as Trustee. The Senior Indenture and the Subordinated Indenture are
sometimes referred to herein collectively as the "Indentures" and each
individually as an "Indenture."
The Indentures have been incorporated by reference as exhibits to the
Registration Statement of which this Prospectus is a part and are available for
inspection at the respective corporate trust offices of the Trustee as follows:
(i) with respect to National City Bank, 1900 East Ninth Street, Corporate Trust
Division, Cleveland, Ohio 44114, and (ii) with respect to The Chase Manhattan
Bank (formerly known as Chemical Bank), 450 West 33rd Street, Fifteenth Floor,
New York, New York 10001-2697. The Indentures are subject to, and are governed
by, the Trust Indenture Act of 1939, as amended. The statements made hereunder
relating to the Indentures and the Debt Securities to be issued thereunder are
summaries of certain provisions
3
<PAGE> 23
thereof and do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all provisions of the Indentures and such
Debt Securities. All section references appearing in this section "Description
of Debt Securities" are to sections of the applicable Indenture, and capitalized
terms used but not defined herein shall have the respective meanings set forth
in the applicable Indenture.
GENERAL
The Debt Securities will be direct, unsecured obligations of the Company.
Each Indenture provides that the Debt Securities issued thereunder may be issued
without limit as to aggregate principal amount, in one or more series, in each
case as established from time to time in or pursuant to authority granted by a
resolution of the Board of Directors of the Company or as established in one or
more indentures supplemental to the applicable 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 (Section 301 of the Indentures). Any Trustee under either Indenture may
resign or be removed with respect to one or more series of Debt Securities
issued under such Indenture, and a successor Trustee may be appointed to act
with respect to such series.
Reference is made to each Prospectus Supplement for the specific terms of
the series of Debt Securities being offered thereby, including:
(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 percentage of the principal amount at which such Debt
Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the portion of the
principal amount of such Debt Securities which is convertible into Common
Shares or other equity securities of the Company, or the method by which
any such portion shall be determined;
(4) if such Debt Securities are convertible, any limitation on the
ownership or transferability of the Common Shares or other equity
securities of the Company into which such Debt Securities are convertible
in connection with the preservation of the Company's status as a REIT;
(5) the date or dates, or the method for determining the 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 the date or
dates, from which any such interest will accrue, the Interest Payment Dates
on which any such interest will be payable, the Regular Record Dates for
such Interest Payment Dates, or the method by which such Regular Record
Dates shall be determined, the Person 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)
or interest, if any, on such Debt Securities will be payable, such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange, and notices or demands to or upon the Company in respect of such
Debt Securities and the applicable Indenture may be served;
(9) the period or periods 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 option of the Company, if the
Company is to have such an option;
(10) the obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a Holder thereof, and the period or
4
<PAGE> 24
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) any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the Events of Default or covenants set
forth in the applicable Indenture;
(14) whether such Debt Securities will be issued in certificated or
book-entry form;
(15) whether such Debt Securities will be in registered or bearer form
or both and, if and to the extent in registered form, the denominations
thereof if other than $1,000 and any integral multiple thereof and, if and
to the extent in bearer form, the denominations thereof and terms and
conditions relating thereto;
(16) the applicability, if any, of the defeasance and covenant
defeasance provisions of Article XIV of the applicable Indenture;
(17) the terms, if any, upon which such Debt Securities may be
convertible into Common Shares or other equity securities of the Company
(and the class thereof) and the terms and conditions upon which such
conversion will be effected, including, without limitation, the initial
conversion price or rate and the conversion period;
(18) whether and under what circumstances the Company will pay
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;
and
(19) any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). 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.
Except as hereinafter set forth under the caption "Certain
Covenants -- Limitation on Incurrence of Debt," and "-- Maintenance of
Unencumbered Real Estate Assets," which relates solely to the Senior Indenture
and the Senior Securities issued thereunder, neither Indenture contains any
provision that would limit the ability of the Company to incur indebtedness or
that would afford Holders of Debt Securities protection in a highly leveraged or
similar action involving the Company or in the event of a change of control of
the Company. However, certain restrictions on ownership and transfers of the
Company's Common Shares and the Company's other equity securities designed to
preserve its status as a REIT may act to prevent or hinder a change of control.
See "Description of Common Shares," "Description of Preferred Shares" and
"Description of Depositary Shares." Reference is made to the applicable
Prospectus Supplement for information with respect to any deletion from,
modification of or addition to the Events of Default or covenants of the Company
that are described below, including any addition of a covenant or other
provision providing event risk or similar protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof (Section 302 of the Indentures).
5
<PAGE> 25
Unless otherwise specified 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 corporate trust office of the applicable Trustee as
follows: (i) with respect to National City Bank, 120 Broadway, 33rd Floor, New
York, New York 10271, and (ii) with respect to The Chase Manhattan Bank
(formerly known as Chemical Bank), 450 West 33rd Street, Fifteenth Floor, New
York, New York 10001-2697, provided that, at the option of the Company, payment
of interest may be made by check mailed to the address of the Person entitled
thereto as it appears in the Security Register or by wire transfer of funds to
such Person at an account maintained within the United States (Sections 301,
305, 306, 307 and 1002 of the Indentures).
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the Holder on the applicable Regular Record
Date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
applicable Trustee, notice of which shall be given to the Holder of such Debt
Security not less than 10 days prior to such Special Record Date, or may be paid
at any time in any other lawful manner, all as more completely described in the
applicable Indenture (Section 307 of the Indentures).
Subject to certain limitations applicable to Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the applicable Trustee. In
addition, subject to certain limitations applicable to 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 corporate trust office of
the applicable Trustee. Every Debt Security surrendered for conversion,
registration of transfer or exchange must be duly endorsed or accompanied by a
written instrument of transfer. No service charge will be made for any
registration of transfer or exchange of any Debt Securities, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith (Section 305 of the Indentures). If the
applicable Prospectus Supplement refers to any transfer agent (in addition to
the Trustee) initially designated by the Company with respect to any series of
Debt Securities, the Company may at any time rescind the designation of any such
transfer agent or approve a change in the location at 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 (Section 1002 of the Indentures).
Neither the Company nor any Trustee will be required (i) to issue, register
the transfer of or exchange Debt Securities of any series during a period
beginning at the opening of business 15 days before any selection of Debt
Securities of that series to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption; (ii) to register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed in
part; or (iii) to issue, register the transfer of or exchange any Debt Security
which has been surrendered for repayment at the option of the Holder, except the
portion, if any, of such Debt Security not to be so repaid (Section 305 of the
Indentures).
MERGER, CONSOLIDATION OR SALE
Each Indenture provides that the Company may consolidate with, or sell,
lease or convey all or substantially all of its assets to, or merge with or
into, any other corporation, provided that (i) either the Company must be the
continuing corporation, or the successor corporation (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 must expressly assume payment of the
principal of (and premium, if any), and interest on, all of the outstanding Debt
Securities and the due and punctual performance and observance of all of the
covenants and conditions contained in the applicable Indenture; (ii) immediately
after giving effect to such transaction and treating any indebtedness which
becomes an obligation of the Company or any Subsidiary as a result thereof as
having been incurred by the Company or such Subsidiary at the time of such
transaction, no Event of Default under the applicable Indenture, and no event
which, after notice or the lapse of time, or both, would
6
<PAGE> 26
become such an Event of Default, shall have occurred and be continuing; and
(iii) an officer's certificate and legal opinion concerning such conditions
shall be delivered to the applicable Trustee (Sections 801 and 803 of the
Indentures).
CERTAIN COVENANTS
The Senior Indenture contains the following covenants:
Limitation on Incurrence of Debt. The Company will not, and will not
permit any Subsidiary to, incur any Debt (as defined below) if, immediately
after giving effect to the incurrence of such additional Debt, the aggregate
principal amount of all outstanding Debt of the Company and its Subsidiaries on
a consolidated basis determined in accordance with generally accepted accounting
principles is greater than 65% of the sum of (i) the Company's Undepreciated
Real Estate Assets (as defined below) as of the end of the calendar quarter
covered in the Company's Annual Report on Form 10-K or Quarterly Report on Form
10-Q, as the case may be, most recently filed with the Commission (or, if such
filing is not permitted under the Exchange Act, with the applicable Trustee)
prior to the incurrence of such additional Debt and (ii) the purchase price of
all real estate assets acquired by the Company or any Subsidiary since the end
of such calendar quarter, including those obtained in connection with the
incurrence of such additional Debt (Section 1004 of the Senior Indenture).
In addition to the foregoing limitation on the incurrence of Debt, the
Company will not, and will not permit any Subsidiary to, incur any Debt if
Consolidated Income Available for Debt Service (as defined below) for any 12
consecutive calendar months within the 15 calendar months immediately preceding
the date on which such additional Debt is to be incurred shall have been less
than 1.5 times the Maximum Annual Service Charge (as defined below) on the Debt
of the Company and all Subsidiaries to be outstanding immediately after the
incurring of such additional Debt (Section 1004 of the Senior Indenture).
Restrictions on Dividends and Other Distributions. The Company will not,
in respect of any shares of any class of its capital stock, (i) declare or pay
any dividends (other than dividends payable in capital stock of the Company)
thereon, (ii) apply any of its property or assets to the purchase, redemption or
other acquisition or retirement thereof, (iii) set apart any sum for the
purchase, redemption or other acquisition or retirement thereof or (iv) make any
other distribution thereon, by reduction of capital or otherwise if, immediately
after such declaration or other such action, the aggregate of all such
declarations and other actions since the date on which the Indenture was
originally executed shall exceed the sum of (a) Funds from Operations (as
defined below) from December 31, 1993 until the end of the latest calendar
quarter covered in the Company's Annual Report on Form 10-K or Quarterly Report
on Form 10-Q, as the case may be, most recently filed with the Commission (or,
if such filing is not permitted under the Exchange Act, with the applicable
Trustee) prior to such declaration or other action and (b) $20,000,000;
provided, however, that the foregoing limitation does not apply to any
declaration or other action referred to above which is necessary to maintain the
Company's status as a REIT under the Internal Revenue Code of 1986, as amended
(the "Code"), if the aggregate principal amount of all outstanding Debt of the
Company and its Subsidiaries at such time is less than 65% of the Company's
Undepreciated Real Estate Assets as of the end of the latest calendar quarter
covered in the Company's Annual Report on Form 10-K or Quarterly Report on Form
10-Q, as the case may be, most recently filed with the Commission (or, if such
filing is not permitted under the Exchange Act, with the applicable Trustee)
prior to such declaration or other action (Section 1005 of the Senior
Indenture).
Notwithstanding the provisions described in the immediately preceding
paragraph, the Company will not be prohibited from making the payment of any
dividend within 30 days after the declaration thereof if at the date of
declaration such payment would have complied with those provisions (Section 1005
of the Senior Indenture).
Existence. Except as permitted under the provisions of the Senior
Indenture described in "Merger, Consolidation or Sale," the Company must do or
cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence, rights (charter and statutory) and franchises;
provided, however, that the Company will not be required to preserve any right
or franchise if it determines that the preservation
7
<PAGE> 27
thereof is no longer desirable in the conduct of its business and that the loss
thereof is not disadvantageous in any material respect to the Holders of the
Senior Securities (Section 1006 of the Senior Indenture).
Maintenance of Properties. The Company must cause all of its 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 must cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Company 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 will not be prevented
from selling or otherwise disposing for value its properties in the ordinary
course of business (Section 1007 of the Senior Indenture).
Insurance. The Company will, and will cause each of its Subsidiaries to,
keep all of its respective insurable properties insured against loss or damage
at least equal to their then full insurable value with insurers of recognized
responsibility and having a rating of at least A:VIII in Best's Key Rating Guide
(Section 1008 of the Senior Indenture).
Payment of Taxes and Other Claims. The Company must pay or discharge or
cause to be paid or discharged, before the same shall become delinquent, (i) all
taxes, assessments and governmental charges levied or imposed upon it or any
Subsidiary or upon the income, profits or property of the Company or any
Subsidiary, and (ii) all lawful claims for labor, materials and supplies which,
if unpaid, might by law become a lien upon the property of the Company or any
Subsidiary, provided, however, that the Company will not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings (Section 1009 of the Senior Indenture).
Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Company must, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the Commission pursuant to such Section 13 or 15(d) (the "Financial
Statements") if the Company were so subject, on or prior to the respective dates
(the "Required Filing Dates") by which the Company would have been so required
so to file such documents. The Company must also in any event (x) within 15 days
after each Required Filing Date (i) transmit by mail to all Holders of Senior
Securities, as their names and addresses appear in the Security Register,
without cost to such Holders, copies of the annual reports and quarterly reports
which 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 (ii) file with the applicable Trustee copies of the annual reports,
quarterly reports and other documents which 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 (y) if filing such documents by
the Company with the Commission is not permitted under the Exchange Act,
promptly upon written request and payment of the reasonable cost of duplication
and delivery, supply copies of such documents to any prospective Holder of
Senior Securities (Section 1010 of the Senior Indenture).
Maintenance of Unencumbered Real Estate Assets. The Company must maintain
an Unencumbered Real Estate Asset Value of not less than 135% of the aggregate
principal amount of all outstanding unsecured Debt of the Company and its
Subsidiaries (Section 1011 of the Senior Indenture).
Definitions. As used herein,
"Consolidated Income Available for Debt Service" for any period means
Consolidated Net Income (as defined below) of the Company and its Subsidiaries
(a) plus amounts which have been deducted for (i) interest on Debt of the
Company and its Subsidiaries, (ii) provision for taxes of the Company and its
Subsidiaries based on income, (iii) amortization of debt discount and (iv)
depreciation and amortization and (b) adjusted, as appropriate, for (i) the
effect of any noncash charge resulting from a change in accounting principles in
determining Consolidated Net Income for such period and (ii) the effect of
equity in net income
8
<PAGE> 28
or loss of joint ventures in which the Company owns an interest to the extent
not providing a source of, or requiring a use of, cash, respectively.
"Consolidated Net Income" for any period means the amount of net income (or
loss) of the Company and its Subsidiaries for such period determined on a
consolidated basis in accordance with generally accepted accounting principles.
"Debt" of the Company or any Subsidiary means any indebtedness of the
Company or any Subsidiary, whether or not contingent, in respect of (i) borrowed
money or evidenced by bonds, notes, debentures or similar instruments, (ii)
indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or any
security interest existing on property owned by the Company or any Subsidiary,
(iii) letters of credit or amounts representing the balance deferred and unpaid
of the purchase price of any property except any such balance that constitutes
an accrued expense or trade payable or (iv) any lease of property by the Company
or any Subsidiary as lessee which is reflected on the Company's Consolidated
Balance Sheet as a capitalized lease in accordance with generally accepted
accounting principles, in the case of items of indebtedness under (i) through
(iii) above to the extent that any such items (other than letters of credit)
would appear as a liability on the Company's Consolidated Balance Sheet in
accordance with generally accepted accounting principles, and also includes, to
the extent not otherwise included, any obligation of the Company or any
Subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise
(other than for purposes of collection in the ordinary course of business),
indebtedness of another person (other than the Company or any Subsidiary) (it
being understood that Debt shall be deemed to be incurred by the Company or any
Subsidiary whenever the Company or such Subsidiary shall create, assume,
guarantee or otherwise become liable in respect thereof).
"Funds from Operations" for any period means the Consolidated Net Income of
the Company and its Subsidiaries for such period without giving effect to
depreciation and amortization, non-recurring gains and losses from extraordinary
items, gains or losses on sales of real estate, plus funds from operations of
unconsolidated joint ventures, all determined on a consistent basis for such
period.
"Maximum Annual Service Charge" as of any date means the maximum amount
which may become payable in a period of 12 consecutive calendar months from such
date for interest on, and required amortization of, Debt. The amount payable for
amortization will include the amount of any sinking fund or other analogous fund
for the retirement of Debt and the amount payable on account of principal of any
such Debt which matures serially other than at the final maturity date of such
Debt.
"Subsidiary" means a corporation a majority of the outstanding voting stock
of which is owned, directly or indirectly, by the Company or by one or more
other Subsidiaries of the Company. For purposes of this definition, "voting
stock" means stock having voting power for the election of directors, whether at
all times or only so long as no senior class of stock has such voting power by
reason of any contingency.
"Undepreciated Real Estate Assets" as of any date means the amount of real
estate assets of the Company and its Subsidiaries on such date, before
depreciation and amortization and determined on a consolidated basis in
accordance with generally accepted accounting principles.
"Unencumbered Real Estate Asset Value" as of any date means the sum of (i)
the Company's Undepreciated Real Estate Assets as of the end of the latest
calendar quarter covered in the Company's Annual Report on Form 10-K or
Quarterly Report on Form 10-Q, as the case may be, most recently filed with the
Commission (or, if that filing is not required under the Exchange Act, with the
Trustee) prior to such date, which Undepreciated Real Estate Assets are not
encumbered by any mortgage, lien, charge, pledge, or security interest, and (ii)
the purchase price of any real estate assets that are not encumbered by any
mortgage, lien, charge, pledge, or security interest and were acquired by the
Company or any Subsidiary after the end of such calendar quarter.
The Subordinated Indenture does not contain the covenants described in this
section captioned "Certain Covenants," and does not contain any limitation on
the amount of Debt of any kind which the Company may incur or on the amount of
dividends or other distributions which the Company may pay to its shareholders.
9
<PAGE> 29
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each Indenture provides that the following events are "Events of Default"
with respect to any series of Debt Securities issued thereunder: (i) default for
30 days in the payment of any installment of interest on any Debt Security of
such series; (ii) default in the payment of the principal of (or premium, if
any, on) any Debt Security of such series at its Maturity; (iii) default in
making any sinking fund payment as required for any Debt Security of such
series; (iv) default in the performance of any other covenant of the Company
contained in the applicable Indenture (other than a covenant added to such
Indenture solely for the benefit of a series of Debt Securities issued
thereunder other than such series), continued for 60 days after written notice
as provided in such Indenture; (v) default under any evidence of indebtedness of
the Company or any mortgage, indenture or other instrument under which such
indebtedness is issued or by which such indebtedness is secured which results in
the acceleration of indebtedness in an aggregate principal amount exceeding
$10,000,000, but only if such indebtedness is not discharged or such
acceleration is not rescinded or annulled as provided in the applicable
Indenture; (vi) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee, of the Company or of any
Significant Subsidiary or of the respective property of either and (vii) any
other Event of Default provided with respect to that series of Debt Securities
(Section 501 of the Indentures). The term "Significant Subsidiary" means each
significant subsidiary (as defined in Regulation S-X promulgated under the
Securities Act) of the Company.
If an Event of Default under either Indenture with respect to Debt
Securities of any series issued thereunder 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
of the Debt Securities of that series to be due and payable immediately by
written notice thereof to the Company (and to such Trustee if given by the
Holders). However, at any time after such a declaration of acceleration with
respect to Debt Securities of such series (or of all Debt Securities then
Outstanding under such Indenture, as the case may be) has been made, the Holders
of not less than a majority in principal amount of Debt Securities of such
series (or of each series of Debt Securities then Outstanding under such
Indenture, as the case may be) may rescind and annul such declaration and its
consequences if (i) the Company shall have deposited with such Trustee all
required payments of the principal of (and premium, if any) and interest on the
Debt Securities of such series (or of all Debt Securities then Outstanding under
such Indenture, as the case may be), plus certain fees, expenses, disbursements
and advances of such Trustee and (ii) all Events of Default, other than the
nonpayment of accelerated principal (or specified portion thereof) with respect
to Debt Securities of such series (or of all Debt Securities then Outstanding
under such Indenture, as the case may be) have been cured or waived as provided
in such Indenture (Section 502 of the Indentures). The Indentures also provide
that the Holders of not less than a majority in principal amount of the Debt
Securities of any series (or of each series of Debt Securities then Outstanding
under the applicable Indenture, as the case may be) may waive any past default
with respect to such series and its consequences, except a default (x) in the
payment of the principal of (or premium, if any) or interest on any Debt
Security of such series or (y) in respect of a covenant or provision contained
in such Indenture that cannot be modified or amended without the consent of the
Holder of each Outstanding Debt Security affected thereby (Section 513 of the
Indentures).
Each Indenture provides that the Trustee thereunder is required to give
notice to the Holders of Debt Securities issued thereunder within 90 days of a
default under such Indenture; provided however, that such Trustee may withhold
notice to the Holders of any such 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 the Responsible Officers of such Trustee consider such withholding to
be in the interest of such Holders (Section 601 of the Indentures).
Each Indenture provides that no Holder of Debt Securities of any series
issued thereunder may institute any proceeding, judicial or otherwise, with
respect to such Indenture or for any remedy thereunder, except in the case of
the failure of the applicable Trustee, for 60 days, to act after it has received
a written request to
10
<PAGE> 30
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 reasonable indemnity (Section 507 of the
Indentures). 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 the Debt Securities held by that Holder
at the respective due dates thereof (Section 508 of the Indentures).
Subject to provisions in the applicable Indenture relating to its duties in
case of default, the Trustee thereunder is under no obligation to exercise any
of its rights or powers under such Indenture at the request or direction of any
Holders of any series of Debt Securities then Outstanding under such Indenture,
unless such Holders shall have offered to such Trustee reasonable security or
indemnity (Section 602 of the Indentures). The Holders of not less than a
majority in principal amount of the Outstanding Debt Securities of any series
(or of each series of Debt Securities then Outstanding under such Indenture, as
the case may be) shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to such Trustee, or of
exercising any trust or power conferred upon such Trustee. However, such Trustee
may refuse to follow any direction which is in conflict with any law or such
Indenture, which may involve such Trustee in personal liability or which may be
unduly prejudicial to the Holders of Debt Securities of such series not joining
therein (Section 512 of the Indentures).
Within 120 days after the close of each fiscal year, the Company must
deliver to each Trustee under the Indentures a certificate, signed by one of
several specified officers, stating whether such officer has knowledge of any
default under the applicable Indenture and, if so, specifying each such default
and the nature and status thereof (Section 1012 of the Senior Indenture and
Section 1004 of the Subordinated Indenture).
MODIFICATION OF THE INDENTURES
Modifications and amendments of either Indenture may be made only with the
consent of the Holders of not less than a majority in principal amount of all
Outstanding Debt Securities issued thereunder which are affected by such
modification or amendment; provided however, that no such modification or
amendment may, without the consent of the Holder of each such Debt Security
affected thereby, (i) change the Stated Maturity of the principal of, or any
installment of interest (or premium, if any) on, any such Debt Security, (ii)
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 of the Holder
of any such Debt Security, (iii) change the Place of Payment, or the currency or
currencies, for payment of principal of, or premium, if any, or interest on any
such Debt Security, (iv) impair the right to institute suit for the enforcement
of any payment on or with respect to any such Debt Security, (v) reduce the
percentage of Outstanding Debt Securities of any series necessary to modify or
amend the applicable Indenture, to waive compliance with certain provisions
thereof or certain defaults and consequences thereunder or to reduce the quorum
or voting requirements set forth in such Indenture; or (vi) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the Holder of such Debt Security
(Section 902 of the Indentures).
The Senior Indenture provides that the Holders of not less than a majority
in principal amount of Outstanding Debt Securities issued thereunder have the
right to waive compliance by the Company with certain covenants in the Senior
Indenture, including those described in the section of this Prospectus captioned
"Certain Covenants" (Section 1014 of the Senior Indenture).
Modifications and amendments of either Indenture may be made by the Company
and the applicable Trustee without the consent of any Holder of Debt Securities
issued thereunder for any of the following purposes: (i) to evidence the
succession of another Person to the Company as obligor under such Indenture;
(ii) to add to the covenants of the Company for the benefit of the Holders of
all or any series of Debt Securities issued thereunder or to surrender any right
or power conferred upon the Company in such Indenture; (iii) to add Events of
Default for the benefit of the Holders of all or any series of Debt Securities
11
<PAGE> 31
issued thereunder; (iv) to add or change any provisions of such Indenture to
facilitate the issuance of, or to liberalize certain terms of, Debt Securities
issued thereunder in bearer form, or to permit or facilitate the issuance of
such Debt Securities in uncertificated form, provided that such action shall not
adversely affect the interests of the Holders of such Debt Securities of any
series in any material respect; (v) to change or eliminate any provision of such
Indenture, provided that any such change or elimination shall become effective
only when there are no Debt Securities Outstanding of any series issued
thereunder created prior thereto which are entitled to the benefit of such
provision; (vi) to secure the Debt Securities issued thereunder; (vii) to
establish the form or terms of Debt Securities of any series issued thereunder,
including the provisions and procedures, if applicable, for the conversion of
such Debt Securities into Common Shares or Preferred Shares of the Company;
(viii) to provide for the acceptance of appointment by a successor Trustee or
facilitate the administration of the trusts under such Indenture by more than
one Trustee; (ix) to cure any ambiguity, defect or inconsistency in such
Indenture, provided that such action shall not adversely affect the interests of
Holders of Debt Securities of any series issued thereunder in any material
respect; or (x) to supplement any of the provisions of such Indenture to the
extent necessary to permit or facilitate defeasance and discharge of any series
of such Debt Securities issued thereunder, provided that such action shall not
adversely affect the interests of the Holders of the Debt Securities of any
series issued thereunder in any material respect (Section 901 of the
Indentures).
Each Indenture provides that in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series issued
thereunder have given any request, demand, authorization, direction, notice,
consent or waiver thereunder or whether a quorum is present at a meeting of
Holders of such Debt Securities, (i) the principal amount of an Original Issue
Discount Security that shall be deemed to be Outstanding shall be the amount of
the principal thereof that would be due and payable as of the date of such
determination upon declaration of acceleration of the maturity thereof, (ii) the
principal amount of a 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 (i) above),
(iii) the principal amount of an Indexed Security that shall be deemed
Outstanding shall be the principal face amount of such Indexed Security at
original issuance, unless otherwise provided with respect to such Indexed
Security pursuant to Section 301 of such Indenture, and (iv) 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 (Section
101).
Each Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series issued thereunder (Section 1501 of the Indentures).
A meeting may be called at any time by the applicable Trustee and also, upon
request, by the Company or the Holders of at least 10% in principal amount of
the Outstanding Debt Securities of such series, in any such case upon notice
given as provided in the applicable Indenture (Section 1502 of the Indentures).
Except for any consent that must be given by the Holder of each Debt Security
affected by certain modifications and amendments of such Indenture, any
resolution presented at a meeting or adjourned meeting duly reconvened at which
a quorum is present may be adopted by the affirmative vote of the Holders of a
majority in principal amount of the Outstanding Debt Securities of that series;
provided however, that, except as referred to above, any resolution with respect
to any request, demand, authorization, direction, notice, consent, waiver or
other action that may be made, given or taken by the Holders of a specified
percentage which is less than a majority in principal amount of the Outstanding
Debt Securities of a series may be adopted at a meeting or adjourned meeting
duly reconvened at which a quorum is present by the affirmative vote of the
Holders of such specified percentage in principal amount of the Outstanding Debt
Securities of that series. Any resolution passed or decision taken at any
meeting of Holders of Debt Securities of any series duly held in accordance with
the applicable Indenture will be binding on all Holders of Debt Securities of
that series. The quorum at any meeting called to adopt a resolution, and at any
reconvened meeting, will be Persons holding or representing a majority in
principal amount of the Outstanding Debt Securities of a series; provided
however, that if any action is to be taken at such meeting with respect to a
consent or waiver which may be given by the Holders of not less than a specified
percentage in principal amount of the Outstanding Debt Securities of a series,
the Persons holding or representing such specified
12
<PAGE> 32
percentage in principal amount of the Outstanding Debt Securities of such series
will constitute a quorum (Section 1504 of the Indentures).
Notwithstanding the provisions described above, 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 applicable Indenture expressly provides may be made, given or
taken by the Holders of a specified percentage in principal amount of all
Outstanding Debt Securities affected thereby, or of the Holders of such series
and one or more additional series: (i) there shall be no minimum quorum
requirement for such meeting and (ii) the principal amount of the Outstanding
Debt Securities of such series that vote in favor of such request, demand,
authorization, direction, notice, consent, waiver or other action shall be taken
into account in determining whether such request, demand, authorization,
direction, notice, consent, waiver or other action has been made, given or taken
under such Indenture (Section 1504 of the Indentures).
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Company may discharge certain obligations to Holders of any series of
Debt Securities that have not already been delivered to the applicable Trustee
for cancellation and that either have become due and payable or will become due
and payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with such 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 (Section 401 of the Indentures).
Each Indenture provides that, if the provisions of Article Fourteen thereof
(relating to defeasance and covenant defeasance) are made applicable to the Debt
Securities of or within any series issued thereunder pursuant to Section 301 of
such Indenture, the Company may elect either (i) to defease and be discharged
from any and all obligations (except for the obligation to pay Additional
Amounts, if any, upon the occurrence of certain events of tax, assessment or
governmental charge with respect to payments on such Debt Securities and the
obligations to register the transfer or exchange of such Debt Securities, to
replace temporary or mutilated, destroyed, lost or stolen Debt Securities, to
maintain an office or agency in respect of such Debt Securities and to hold
moneys for payment in trust) with respect to such Debt Securities ("defeasance")
(Section 1402 of the Indentures) or (ii) to be released from its obligations
relating to (a) with respect to Senior Securities, the obligations under
Sections 1004 to 1011, inclusive, of the Senior Indenture (being the
restrictions described under the caption "Certain Covenants") and, if provided
pursuant to Section 301 of the Senior Indenture, its obligations with respect to
any other covenant contained in the Senior Indenture, and (b) with respect to
Subordinated Securities, if provided pursuant to Section 301 of the Subordinated
Indenture, its obligations with respect to any covenant contained in the
Subordinated Indenture, 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") (Section 1403 of the Indentures), 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 which through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient to pay the principal of (and premium, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor.
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 upon a
13
<PAGE> 33
ruling of the Internal Revenue Service or a change in applicable United States
federal income tax law occurring after the date of such Indenture (Section 1404
of the Indentures).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the Foreign
Currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged, or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or 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 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 (Section 101 of the Indentures).
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,
(i) the Holder of a Debt Security of such series is entitled to, and does, elect
pursuant to Section 301 of 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 (ii) a Conversion Event (as defined below) occurs in respect of the
currency, currency unit or composite currency in which such deposit has been
made, the indebtedness represented by such Debt Security shall be deemed to have
been, and will be, fully discharged and satisfied through the payment of the
principal of (and premium, if any) and interest on such Debt Security as they
become due out of the proceeds yielded by converting the amount so deposited in
respect of such Debt Security into the currency, currency unit or composite
currency in which such Debt Security becomes payable as a result of such
election or such cessation of usage based on the applicable market exchange rate
(Section 1405 of the Indentures). "Conversion Event" means the cessation of use
of (a) a currency, currency unit or composite currency both by the government of
the country which issued such currency and for the settlement of actions by a
central bank or other public institution of or within the international banking
community, (b) the ECU both within the European Monetary System and for the
settlement of transactions by public institutions of or within the European
Communities or (c) any currency unit or composite currency other than the ECU
for the purposes for which it was established. Unless otherwise described in the
applicable Prospectus Supplement, all payments of principal of (and premium, if
any) and interest on any Debt Security that is payable in a Foreign Currency
that ceases to be used by its government of issuance shall be made in U.S.
dollars (Section 101 of the Indentures).
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 (i) with respect to Senior
Securities, the Event of Default described in clause (iv) under "Events of
Default, Notice and Waiver" with respect to Sections 1004 to 1011, inclusive, of
the Senior Indenture (which Sections would no longer be applicable to such Debt
Securities) or (ii) with respect to all Debt Securities, the Event of Default
described in clause (vii) under "Events of Default, Notice and Waiver" with
respect to any other covenant as to which there has been covenant defeasance,
the amount in such currency, currency unit or composite currency in which such
Debt Securities are payable, and Government Obligations on deposit with the
applicable Trustee, will be sufficient to pay amounts due on such Debt
Securities at the time of their Stated Maturity but may not be sufficient to pay
amounts due on such Debt Securities at the time of the acceleration resulting
from such Event of Default. In any such event, the Company would remain liable
to make payment of such amounts due at the time of acceleration.
14
<PAGE> 34
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.
SENIOR SECURITIES AND SENIOR INDEBTEDNESS
Each series of Senior Securities will constitute Senior Indebtedness (as
described below) and will rank equally with each other series of Senior
Securities and other Senior Indebtedness. All subordinated indebtedness
(including, but not limited to, all Subordinated Securities issued under the
Subordinated Indenture) will be subordinated to the Senior Securities and other
Senior Indebtedness.
Senior Indebtedness is defined in the Subordinated Indenture to mean (i)
the principal of and premium, if any, and unpaid interest on indebtedness for
money borrowed, (ii) purchase money and similar obligations, (iii) obligations
under capital leases, (iv) guarantees, assumptions or purchase commitments
relating to, or other transactions as a result of which the Company is
responsible for the payment of, such indebtedness of others, (v) renewals,
extensions and refunding of any such indebtedness, (vi) interest or obligations
in respect of any such indebtedness accruing after the commencement of any
insolvency or bankruptcy proceedings and (vii) obligations associated with
derivative products such as interest rate and currency exchange contracts,
foreign exchange contracts, commodity contracts, and similar arrangements,
unless, in each case, the instrument by which the Company incurred, assumed or
guaranteed the indebtedness or obligations described in clauses (i) through
(vii) expressly provides that such indebtedness or obligation is subordinate or
junior in right of payment to any other indebtedness or obligations of the
Company.
SUBORDINATION OF SUBORDINATED SECURITIES
Subordinated Indenture. The payment of the principal of (and premium, if
any) and interest on the Subordinated Securities will be subordinated as set
forth in the Subordinated Indenture to the Senior Indebtedness of the Company
whether outstanding on the date of the Subordinated Indenture or thereafter
incurred (Section 1701 of the Subordinated Indenture).
Ranking. No class of Subordinated Securities is subordinated to any other
class of subordinated debt securities. See "Subordination Provisions" below.
Subordination Provisions. In the event (i) of any distribution of assets of
the Company upon any dissolution, winding up, liquidation or reorganization of
the Company, whether in bankruptcy, insolvency, reorganization or receivership
proceeding or upon an assignment for the benefit of creditors or any other
marshaling of the assets and liabilities of the Company or otherwise, except a
distribution in connection with a merger or consolidation or a conveyance or
transfer of all or substantially all of the properties of the Company which
complies with the requirements of Article Eight of the Subordinated Indenture,
or (ii) that a default shall have occurred and be continuing with respect to the
payment of principal of (or premium, if any) or interest on any Senior
Indebtedness, or (iii) that the principal of the Subordinated Securities of any
series issued under the Subordinated Indenture (or in the case of Original Issue
Discount Securities, the portion of the principal amount thereof referred to in
Section 502 of the Subordinated Indenture) shall have been declared due and
payable pursuant to Section 502 of the Subordinated Indenture, and such
declaration shall not have been rescinded and annulled as provided in said
Section 502, then:
(1) in a circumstance described in the foregoing clause (i) or (ii), the
holders of all Senior Indebtedness, and in the circumstance described in the
foregoing clause (iii), the holders of all Senior Indebtedness outstanding at
the time the principal of such Subordinated Securities issued under the
Subordinated Indenture (or in the case of Original Issue Discount Securities,
such portion of the principal amount) shall have been so declared due and
payable, shall first be entitled to receive payment of the full amount due
thereon in respect of principal, premium (if any) and interest, or provision
shall be made for such payment in money or money's worth, before the Holders of
any of the Subordinated Securities are entitled to receive any payment on
account of the principal of (or premium, if any) or interest on the indebtedness
evidenced by the Subordinated Securities;
15
<PAGE> 35
(2) any payment by, or distribution of assets of, the Company of any kind
or character, whether in cash, property or securities (other than certain
subordinated securities of the Company issued in a reorganization or
readjustment), to which the Holder of any of the Subordinated Securities would
be entitled except for the provisions of Article Seventeen of the Subordinated
Indenture shall be paid or delivered by the person making such payment or
distribution directly to the holders of Senior Indebtedness (as provided in
clause (1) above), or on their behalf, ratably according to the aggregate amount
remaining unpaid on account of such Senior Indebtedness, to the extent necessary
to make payment in full of all Senior Indebtedness (as provided in clause (1)
above) remaining unpaid after giving effect to any concurrent payment or
distribution (or provisions therefor) to the holders of such Senior
Indebtedness, before any payment or distribution is made to or in respect of the
Holders of the Subordinated Securities; and
(3) in the event that, notwithstanding the foregoing, any payment by, or
distribution of assets of, the Company of any kind or character is received by
the Holders of any of the Subordinated Securities issued under the Subordinated
Indenture before all Senior Indebtedness is paid in full such payment or
distribution shall be paid over to the holders of such Senior Indebtedness or on
their behalf, ratably as aforesaid, for application to the payment of all such
Senior Indebtedness remaining unpaid until all such Senior Indebtedness shall
have been paid in full, after giving effect to any concurrent payment or
distribution (or provisions therefor) to the holders of such Senior
Indebtedness.
By reason of such subordination in favor of the holders of Senior
Indebtedness in the event of insolvency, certain general creditors of the
Company, including holders of Senior Indebtedness, may recover more, ratably,
than the Holders of the Subordinated Securities.
CONVERTIBLE DEBT SECURITIES
The following provisions will apply to Debt Securities that will be
convertible into Common Shares or other equity securities of the Company
("Convertible Debt Securities") unless otherwise described in the Prospectus
Supplement for such Convertible Debt Securities.
The Holder of any Convertible Debt Securities will have the right,
exercisable at any time during the time period specified in the applicable
Prospectus Supplement, unless previously redeemed by the Company, to convert
such Convertible Debt Securities into Common Shares or other equity securities
of the Company at the conversion price or rate for each $1,000 principal amount
of Convertible Debt Securities set forth in such Prospectus Supplement. The
Holder of any Convertible Debt Security may convert a portion thereof which is
$1,000 or any integral multiple of $1,000 (Section 301 of the Senior Indenture
and Section 1602 of the Subordinated Indenture). In the case of Convertible Debt
Securities called for redemption, conversion rights will expire at the close of
business on the date fixed for the redemption specified in the Prospectus
Supplement, except that, in the case of repayment at the option of the
applicable Holder, such right will terminate upon the Company's receipt of
written notice of the exercise of such option (Section 301 of the Senior
Indenture and Section 1602 of the Subordinated Indenture).
In certain events, the conversion price or rate will be subject to
adjustment as contemplated in the applicable Indenture. For Debt Securities
convertible into Common Shares, such events include the issuance of Common
Shares of the Company as a dividend; subdivisions and combinations of Common
Shares; the issuance to all holders of Common Shares of rights or warrants
entitling such holders to subscribe for a purchase of Common Shares at a price
per share less than the current market price per Common Share; and the
distribution to all holders of Common Shares of shares of capital stock of the
Company (other than Common Shares), evidences of indebtedness or assets of the
Company (excluding cash dividends or distributions paid from retained earnings
of the Company or subscription rights or warrants other than those referred to
above). In any of such cases, no adjustment of the conversion price or rate will
be required unless an adjustment would require a cumulative increase or decrease
of at least 1% in such price or rate (Section 301 of the Senior Indenture and
Section 1605 of the Subordinated Indenture). Fractional Common Shares will not
be issued upon conversion, but, in lieu thereof, the Company will pay cash
adjustments (Section 301 of the Senior Indenture and Section 1606 of the
Subordinated Indenture). Unless otherwise specified in the applicable Prospectus
Supplement, Convertible Debt Securities convertible into Common
16
<PAGE> 36
Shares surrendered for conversion between any record date for an interest
payment and the related interest payment date (except such Convertible Debt
Securities called for redemption on a redemption date during such period) must
be accompanied by payment of an amount equal to the interest thereon which the
Holder thereof is entitled to receive (Section 301 of the Senior Indenture and
Section 1604 of the Subordinated Indenture).
To protect the Company's status as a REIT, a person may not own or convert
any Convertible Debt Security if as a result of such ownership or upon such
conversion such person would then be deemed to Beneficially Own (as defined in
the Indenture) more than 5.0% of the outstanding capital stock of the Company
(Section 1602 of the Subordinated Indenture). Common Shares or other equity
securities of the Company that may be acquired upon the conversion of
Convertible Debt Securities directly or constructively held by an investor, but
not Common Shares or other equity securities of the Company issuable with
respect to the conversion of Convertible Debt Securities held by others, are
deemed to be outstanding (a) at the time of purchase of the Convertible Debt
Securities, and (b) prior to the conversion of the Convertible Debt Securities,
for purposes of determining the percentage ownership of Common Shares or other
equity securities of the Company held by such investor. See "Federal Income Tax
Considerations."
The adjustment provisions for Debt Securities convertible into equity
securities of the Company other than Common Shares will be determined at the
time of issuance of such Debt Securities and will be set forth in the applicable
Prospectus Supplement.
Except as set forth in the applicable Prospectus Supplement, any
Convertible Debt Securities called for redemption, unless surrendered for
conversion on or before the close of business on the redemption date, are
subject to being purchased from the Holder of such Convertible Debt Securities
by one or more investment bankers or other purchasers who may agree with the
Company to purchase such Convertible Debt Securities and convert them into
Common Shares or other equity securities of the Company, as the case may be
(Section 1108 of the Indentures).
Reference is made to the sections captioned "Description of Common Shares,"
"Description of Preferred Shares" and "Description of Depositary Shares" for a
general description of securities to be acquired upon the conversion of
Convertible Debt Securities, including a description of certain restrictions on
the ownership of the Common Shares and the Preferred Shares.
THE TRUSTEES
National City Bank serves as Trustee for the Company's Senior Securities
pursuant to the Senior Indenture and serves as Transfer Agent for the Company's
Common Shares. The Chase Manhattan Bank (formerly known as Chemical Bank) serves
as Trustee for the Company's Subordinated Securities pursuant to the
Subordinated Indenture.
BOOK-ENTRY DEBT SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (each, a "Global Security") that will be
deposited with, or on behalf of, a depository identified in the applicable
Prospectus Supplement. Global Securities may be issued in either registered or
bearer form and in either temporary or permanent form. Unless otherwise provided
in such Prospectus Supplement, Debt Securities that are represented by a Global
Security will be issued in denominations of $1,000 or any integral multiple
thereof and will be issued in registered form only, without coupons. Payments of
principal of, premium, if any, and interest on Debt Securities represented by a
Global Security will be made by the Company to the applicable Trustee under the
applicable Indenture, and then forwarded to the depository.
The Company anticipates that any Global Securities will be deposited with,
or on behalf of, The Depository Trust Company, New York, New York ("DTC"), and
that such Global Securities will be registered in the name of Cede & Co., DTC's
nominee. The Company further anticipates that the following provisions will
apply to the depository arrangements with respect to any such Global Securities.
Any additional or differing terms of the depository arrangements will be
described in the Prospectus Supplement relating to a particular series of Debt
Securities issued in the form of Global Securities.
17
<PAGE> 37
So long as DTC or its nominee is the registered owner of a Global Security,
DTC or its nominee, as the case may be, will be considered the sole Holder of
the Debt Securities represented by such Global Security for all purposes under
the applicable Indenture. Except as described below, owners of beneficial
interests in a Global Security will not be entitled to have Debt Securities
represented by such Global Security registered in their names, will not receive
or be entitled to receive physical delivery of Debt Securities in certificated
form and will not be considered the owners or Holders thereof under the
applicable Indenture. The laws of some states require that certain purchasers of
securities take physical delivery of such securities in certificated form;
accordingly, such laws may limit the transferability of beneficial interests in
a Global Security.
Unless otherwise specified in the applicable Prospectus Supplement, each
Global Security representing Book-Entry Notes will be exchangeable for
certificated notes only if (i) DTC notifies the Company that it is unwilling or
unable to continue as depository or DTC ceases to be a clearing agency
registered under the Securities Exchange Act of 1934 (if so required by
applicable law or regulation) and, in either case, a successor depository is not
appointed by the Company within 90 days after the Company receives such notice
or becomes aware of such unwillingness, inability or ineligibility, (ii) the
Company in its sole discretion determines that the Global Securities shall be
exchangeable for certificated notes or (iii) there shall have occurred and be
continuing an Event of Default under an Indenture with respect to the Notes and
beneficial owners representing a majority in aggregate principal amount of the
Book-Entry Notes represented by Global Securities advise DTC to cease acting as
depository. Upon any such exchange, owners of a beneficial interest in the
Global Security or Securities representing Book-Entry Notes will be entitled to
physical delivery of individual Debt Securities in certificated form of like
tenor and rank, equal in principal amount to such beneficial interest, and to
have such Debt Securities in certificated form registered in the names of the
beneficial owners, which names shall be provided by DTC's relevant Participants
(as identified by DTC) to the applicable Trustee. Unless otherwise described in
the applicable Prospectus Supplement, Debt Securities so issued in certificated
form will be issued in denominations of $1,000 or any integral multiple thereof,
and will be issued in registered form only, without coupons.
The following is based on information furnished to the Company:
DTC will act as securities depository for the Debt Securities. The Debt
Securities will be issued as fully registered securities registered in the name
of Cede & Co. (DTC's partnership nominee). One fully registered Debt Security
certificate will be issued with respect to each $200 million of principal amount
of the Debt Securities of a series, and an additional certificate will be issued
with respect to any remaining principal amount of such series.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others,
such as securities brokers and dealers, and banks and trust companies that clear
through or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its Participants are on file with the Securities and Exchange Commission.
Purchases of Debt Securities under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Debt Securities
on DTC's records. The ownership interest of each actual purchaser of each Debt
Security ("Beneficial Owner") is in turn recorded on the Direct and Indirect
Participants' records. A Beneficial Owner does not receive written confirmation
from DTC of its purchase, but is expected to receive a written confirmation
providing details of the transaction, as well as periodic statements
18
<PAGE> 38
of its holdings, from the Direct or Indirect Participant through which such
Beneficial Owner entered into the transaction. Transfers of ownership interests
in Debt Securities are accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners do not receive
certificates representing their ownership interests in Debt Securities, except
in the event that use of the book-entry system for the Debt Securities is
discontinued.
To facilitate subsequent transfers, the Debt Securities are registered in
the name of DTC's partnership nominee, Cede & Co. The deposit of the Debt
Securities with DTC and their registration in the name of Cede & Co. will effect
no change in beneficial ownership. DTC has no knowledge of the actual Beneficial
Owners of the Debt Securities; DTC records reflect only the identity of the
Direct Participants to whose accounts Debt Securities are credited, which may or
may not be the Beneficial Owners. The Participants remain responsible for
keeping account of their holdings on behalf of their customers.
Delivery of notices and other communications by DTC to Direct Participants,
by Direct Participants to Indirect Participants, and by Direct Participants and
Indirect Participants to Beneficial Owners are governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
Neither DTC nor Cede & Co. consents or votes with respect to the Debt
Securities. Under its usual procedures, DTC mails a proxy (an "Omnibus Proxy")
to the issuer as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts the Debt Securities are credited on the record date (identified
on a list attached to the Omnibus Proxy).
Principal, premium, if any, and interest payments on the Debt Securities
will be made in immediately available funds to DTC. DTC's practice is to credit
Direct Participants' accounts on the payment date in accordance with their
respective holdings as shown on DTC's records unless DTC has reason to believe
that it will not receive payment on the payment date. Payments by Participants
to Beneficial Owners are governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name" and are the responsibility of such
Participant and not of DTC, the applicable Trustee or the Company, subject to
any statutory or regulatory requirements as may be in effect from time to time.
Payment of principal, premium, if any, and interest to DTC is the responsibility
of the Company or the applicable Trustee, disbursement of such payments to
Direct Participants is the responsibility of DTC, and disbursement of such
payments to the Beneficial Owners is the responsibility of Direct and Indirect
Participants.
If applicable, redemption notices shall be sent to Cede & Co. If less than
all of the Book-Entry Notes within an issue are being redeemed, DTC's practice
is to determine by lot the amount of the interest of each Direct Participant in
such issue to be redeemed.
A Beneficial Owner shall give notice of any option to elect to have its
Book-Entry Notes repaid by the Company, through its Participant, to the
applicable Trustee, and shall effect delivery of such Book-Entry Notes by
causing the Direct Participant to transfer the Participant's interest in the
Global Security or Securities representing such Book-Entry Notes, on DTC's
records, to such Trustee. The requirement for physical delivery of Book-Entry
Notes in connection with a demand for repayment will be deemed satisfied when
the ownership rights in the Global Security or Securities representing such
Book-Entry Notes are transferred by Direct Participants on DTC's records.
DTC may discontinue providing its services as securities depository with
respect to the Debt Securities at any time by giving reasonable notice to the
Company or the applicable Trustee. Under such circumstances, in the event that a
successor securities depository is not appointed, Debt Security certificates are
required to be printed and delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
Debt Security certificates will be printed and delivered.
19
<PAGE> 39
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Unless stated otherwise in the Prospectus Supplement, the underwriters or
agents with respect to a series of Debt Securities issued as Global Securities
will be Direct Participants in DTC.
None of the Company, the applicable Trustee or any applicable paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial interests in a Global Security, or
for maintaining, supervising or reviewing any records relating to such
beneficial interest.
DESCRIPTION OF PREFERRED SHARES
The Amended and Restated Articles of Incorporation of the Company (the
"Articles") authorize the issuance of up to (i) 1,500,000 Class A Cumulative
Preferred Shares, without par value (the "Class A Shares"), (ii) 1,500,000 Class
B Cumulative Preferred Shares, without par value (the "Class B Shares"), (iii)
1,500,000 Class C Cumulative Preferred Shares, without par value (the "Class C
Shares"), (iv) 1,500,000 Class D Cumulative Preferred Shares, without par value
(the "Class D Shares"), (v) 1,500,000 Class E Cumulative Preferred Shares,
without par value (the "Class E Shares"), and (vi) 1,500,000 Noncumulative
Preferred Shares, without par value (the "Noncumulative Shares") (the Class A
Shares, the Class B Shares, the Class C Shares, the Class D Shares, the Class E
Shares and the Noncumulative Shares, collectively the "Preferred Shares"). As of
the date of this Prospectus, there are 460,000 9.5% Class A Cumulative
Redeemable Preferred Shares ($250.00 liquidation preference per share), 177,500
9.44% Class B Cumulative Redeemable Preferred Shares ($250.00 liquidation
preference per share) and no Class C Shares, Class D Shares, Class E Shares or
Noncumulative Shares outstanding. The outstanding Preferred Shares are
represented by Depositary Shares. See "Description of Depositary Shares."
The following descriptions of the classes of Preferred Shares set forth
certain general terms and provisions of each class of Preferred Shares to which
any Prospectus Supplement may relate. The statements below describing each class
of Preferred Shares are in all respects subject to and qualified in their
entirety by reference to the applicable provisions of the Articles, which will
be further amended by the Board of Directors in connection with the fixing by
the Board of Directors of certain terms of the Preferred Shares as provided
below.
GENERAL
The Class A Shares, the Class B Shares, the Class C Shares, the Class D
Shares, the Class E Shares and the Noncumulative Shares rank on a parity with
each other and are identical to each other, except (1) that dividends on the
Class A Shares, the Class B Shares, the Class C Shares, the Class D Shares and
the Class E Shares will be cumulative, while dividends on the Noncumulative
Shares will not be cumulative, and (2) in respect of the following matters and
the matters enumerated below that, pursuant to the terms of the Articles and
subject to Ohio law, such matters may be fixed by the Board of Directors with
respect to each series of each class of Preferred Shares prior to the issuance
thereof: (i) the designation of the series which may be by distinguishing
number, letter or title, (ii) the authorized number of shares of the series,
which number the Board of Directors may (except when otherwise provided in the
creation of the series) increase or decrease from time to time before or after
the issuance thereof (but not below the number of shares thereof then
outstanding), (iii) the dividend rate or rates of the series, including the
means by which such rates may be established, (iv) with respect to the Class A
Shares, the Class B Shares, the Class C Shares, the Class D Shares and the Class
E Shares, the date or dates from which dividends shall accrue and be cumulative
and, with respect to all Preferred Shares, the date on which and the period or
periods for which dividends, if declared, shall be payable, including the means
by which such dates and periods may be established, (v) redemption rights and
prices, if any, (vi) the terms and amounts of the sinking fund, if any, (vii)
the amounts payable on shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, (viii) whether the shares of the series shall be convertible into
Common Shares or shares of any other class and, if so, the conversion rate or
rates or price or prices, any
20
<PAGE> 40
adjustments thereof and all other terms and conditions upon which such
conversion may be made, and (ix) restrictions on the issuance of shares of the
same or any other class or series.
Reference is made to the Prospectus Supplement relating to the Preferred
Shares offered thereby for specific terms, including:
(1) The class, series and title of such Preferred Shares;
(2) The number of shares of such Preferred Shares offered, the
liquidation preference per share and the offering price of such Preferred
Shares;
(3) The dividend rate or rates, period or periods and payment date or
dates or method of calculation thereof applicable to such Preferred Shares;
(4) The date from which dividends on such Preferred Shares shall
accumulate, if applicable;
(5) The procedures for any auction or remarketing of such Preferred
Shares;
(6) The provision for any sinking fund for such Preferred Shares;
(7) The provision for redemption, if applicable, of such Preferred
Shares;
(8) Any listing of such Preferred Shares on any securities exchange;
(9) Any terms and conditions upon which such Preferred Shares will be
convertible into Common Shares of the Company, including the conversion
price (or manner of calculation thereof);
(10) Whether interests in such Preferred Shares will be represented by
Depositary Shares;
(11) Any other specific terms, preferences, rights, limitations or
restrictions of or on such Preferred Shares;
(12) A discussion of federal income tax considerations applicable to
such Preferred Shares;
(13) The relative ranking and preferences of such Preferred Shares as
to dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(14) Any limitations on issuance of securities ranking senior to or on
a parity with such Preferred Shares as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; and
(15) Any limitations on direct or beneficial ownership and
restrictions on transfer, in each case as may be appropriate to preserve
the status of the Company as a REIT.
The Preferred Shares will, when issued, be fully paid and nonassessable and
will have no preemptive rights.
RANK
All Preferred Shares will, when issued, rank (i) on a parity with all other
Preferred Shares with respect to dividend rights (subject to dividends on
Noncumulative Shares being noncumulative) and rights upon liquidation,
dissolution or winding up of the Company, (ii) senior to all classes of Common
Shares of the Company and to all other equity securities ranking junior to such
Preferred Shares with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company; (iii) 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 Shares with respect
to dividend rights and rights upon liquidation, dissolution or winding up of the
Company; and (iv) junior to all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank senior to
the Preferred Shares, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company.
21
<PAGE> 41
DIVIDENDS
The holders of each series of each class of Preferred Shares are entitled
to receive, if, when and as declared, out of funds legally available therefor,
dividends in cash at the rate determined for such series and no more, payable on
the dates fixed for such series, in preference to the holders of Common Shares
and of any other class of shares ranking junior to the Preferred Shares. With
respect to each series of Class A Shares, Class B Shares, Class C Shares, Class
D Shares and Class E Shares, such dividends will be cumulative from the dates
fixed for the series. With respect to each series of Noncumulative Preferred
Shares, dividends will not be cumulative (i.e., if the Board of Directors fails
to declare a dividend payable on a dividend payment date on any Noncumulative
Shares, the holders of such series of Noncumulative Shares 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 any dividend for
such period, whether or not dividends on such series of Noncumulative Shares
would be declared to be payable on any future dividend payment date). Each such
dividend will be payable to holders of record as they appear on the stock
transfer books of the Company on such record dates as shall be fixed by the
Board of Directors of the Company.
If Preferred Shares of any series of any class are outstanding, no
dividends may be paid upon or declared or set apart for any series of Preferred
Shares for any dividend period unless at the same time (i) a like proportionate
dividend for the dividend periods terminating on the same or any earlier date
for all shares of all series of such class then issued and outstanding and
entitled to receive such dividend (but, if such series are series of
Noncumulative Shares, then only with respect to the current dividend period),
ratably in proportion to the respective annual dividend rates fixed therefor,
shall have been paid upon or declared or set apart and (ii) the dividends
payable for the dividend periods terminating on the same or any earlier date for
all other classes of Preferred Shares then issued and outstanding and entitled
to receive such dividends (but, with respect to Noncumulative Shares, only with
respect to the then current dividend period), ratably in proportion to the
respective dividend rates fixed therefor, shall have been paid upon or declared
or set apart.
So long as any series of Preferred Shares is outstanding, no dividend,
except a dividend payable in Common Shares or other shares ranking junior to
such series of Preferred Shares, shall be paid or declared or any distribution
made, except as aforesaid, in respect of the Common Shares or any other shares
ranking junior to such series of Preferred Shares, nor shall any Common Shares
or any other shares ranking junior to such series of Preferred Shares be
purchased, retired or otherwise acquired by the Company, except out of the
proceeds of the sale of Common Shares or other shares of the Company ranking
junior to such series of Preferred Shares received by the Company subsequent to
the date of first issuance of such series of Preferred Shares, unless (i) all
accrued and unpaid dividends on all classes of Preferred Shares then
outstanding, including the full dividends for all current dividend periods
(except, with respect to Noncumulative Shares, for the then current dividend
period only), shall have been declared and paid or a sum sufficient for payment
thereof set apart, and (ii) there shall be no arrearages with respect to the
redemption of any series of any class of Preferred Shares from any sinking fund
provided for such class in accordance with the Articles.
The foregoing restrictions on the payment of dividends or other
distributions on, or on the purchase, redemption, retirement or other
acquisition of, Common Shares or any other shares ranking on a parity with or
junior to any class of Preferred Shares will be inapplicable to (i) any payments
in lieu of issuance of fractional shares, whether upon any merger, conversion,
stock dividend or otherwise, (ii) the conversion of Preferred Shares into Common
Shares, or (iii) the exercise by the Company of its rights to repurchase shares
of its capital stock in order to preserve its status as a REIT under the Code.
When dividends are not paid in full (or a sum sufficient for such full payment
is not so set apart) upon the Preferred Shares of any series and the shares of
any other series of Preferred Shares ranking on a parity as to dividends with
such series, all dividends declared upon Preferred Shares of such series and any
other series of Preferred Shares ranking on a parity as to dividends with such
Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share on the shares of such series of Preferred Shares shall in all
cases bear to each other the same ratio that accrued dividends per share on the
Preferred Shares of such series (which shall not include any accumulation in
respect of unpaid dividends for prior dividend periods for Noncumulative Shares)
and such other series 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 Shares of such series which may be in arrears.
22
<PAGE> 42
Any dividend payment made on Preferred Shares will first be credited
against the earliest accrued but unpaid dividend due with respect to such shares
which remains payable.
REDEMPTION
If so described in the applicable Prospectus Supplement, a series of a
class of Preferred Shares will be subject to mandatory redemption or redemption
at the option of the Company, as a whole or in part, in each case upon the
terms, at the times and at the redemption prices set forth in such Prospectus
Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of such Preferred Shares
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 accrued and unpaid dividends thereon (which, in the case of
Noncumulative Shares, includes only unpaid dividends for the current dividend
period) to the date of redemption. The redemption price may be payable in cash
or other property, as specified in the applicable Prospectus Supplement.
Except in connection with the repurchase by the Company of shares of its
capital stock in order to maintain its qualification as a REIT for federal
income tax purposes, the Company may not purchase or redeem (for sinking fund
purposes or otherwise) less than all of a class of Preferred Shares then
outstanding except in accordance with a stock purchase offer made to all holders
of record of such class, unless all dividends on all Preferred Shares of that
class then outstanding for previous and current dividend periods (except, in the
case of Noncumulative Shares, dividends for the current dividend period only)
shall have been declared and paid or funds therefor set apart and all accrued
sinking fund obligations applicable thereto shall have been complied with.
If fewer than all of the outstanding shares of any class of Preferred
Shares are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares to be redeemed shall be selected by
lot in a manner determined by the Board of Directors.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of a Preferred Share to
be redeemed at the address shown on the stock transfer books of the Company. If
fewer than all the Preferred Shares of any series are to be redeemed, the notice
mailed to each such holder thereof shall also specify the number of Preferred
Shares to be redeemed from each holder. If notice of redemption of any Preferred
Shares 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 the
Preferred Shares so called for redemption, then from and after the redemption
date dividends will cease to accrue on such Preferred Shares, and such holders
will cease to be shareholders with respect to such shares and such holders shall
have no right or claim against the Company with respect to such shares, except
only the right to receive the redemption price without interest or to exercise
before the redemption date any unexercised privileges of conversion.
LIQUIDATION PREFERENCE
In the event of any voluntary liquidation, dissolution or winding up of the
affairs of the Company, the holders of any series of any class of Preferred
Shares shall be entitled to receive in full out of the assets of the Company,
including its capital, before any amount shall be paid or distributed among the
holders of the Common Shares or any other shares ranking junior to such series,
the amounts fixed by the Board of Directors with respect to such series and set
forth in the applicable Prospectus Supplement plus an amount equal to all
dividends accrued and unpaid thereon (except, with respect to Noncumulative
Shares, dividends for the current dividend period only) to the date of payment
of the amount due pursuant to such liquidation, dissolution or winding up the
affairs of the Company. After payment to the holders of the Preferred Shares of
the full preferential amounts to which they are entitled, the holders of
Preferred Shares, as such, shall have no right or claim to any of the remaining
assets of the Company.
If liquidating distributions shall have been made in full to all holders of
Preferred Shares, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital stock
23
<PAGE> 43
ranking junior to the Preferred Shares upon liquidation, dissolution or winding
up, according to their respective rights and preferences and in each case
according to their respective numbers of shares. The merger or consolidation of
the Company into or with any other corporation, or the sale, lease or conveyance
of all or substantially all of the assets of the Company, shall not constitute a
dissolution, liquidation or winding up of the Company.
VOTING RIGHTS
Holders of Preferred Shares will not have any voting rights, except as set
forth below and as from time to time required by law.
If and when the Company is in default in the payment of (or, with respect
to Noncumulative Shares, has not paid or declared and set aside a sum sufficient
for the payment of) dividends on any series of any class of Preferred Shares at
the time outstanding, for a number of consecutive dividend payment periods which
in the aggregate contain at least 540 days, all holders of shares of such class,
voting separately as a class, together and combined with all other Preferred
Shares upon which like voting rights have been conferred and are exercisable,
will be entitled to elect a total of two members of the Board of Directors,
which voting right shall be vested (and any additional directors shall serve)
until all accrued and unpaid dividends (except, with respect to Noncumulative
Shares, only dividends for the then current dividend period) on such Preferred
Shares then outstanding shall have been paid or declared and a sum sufficient
for the payment thereof set aside for payment.
The affirmative vote of the holders of at least two-thirds of a class of
Preferred Shares at the time outstanding, voting separately as a class, given in
person or by proxy either in writing or at a meeting called for the purpose,
shall be necessary to effect either of the following:
(1) The authorization, creation or increase in the authorized number
of any shares, or any security convertible into shares, in either case
ranking prior to such class of Preferred Shares; or
(2) Any amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Articles or the
Code of Regulations which affects adversely and materially the preferences
or voting or other right of the holders of such class of Preferred Shares
which are set forth in the Articles; provided, however, neither the
amendment of the Articles so as to authorize, create or change the
authorized or outstanding number of a class of Preferred Shares or of any
shares ranking on a parity with or junior to such class of Preferred Shares
nor the amendment of the provisions of the Code of Regulations so as to
change the number or classification of directors of the Company shall be
deemed to affect adversely and materially preferences or voting or other
rights of the holders of such class of Preferred Shares.
Without limiting the provisions described above, under Ohio law, holders of
each class of Preferred Shares will be entitled to vote as a class on any
amendment to the Articles, whether or not they are entitled to vote thereon by
the Articles, if the amendment would (i) increase or decrease the par value of
the shares of such class, (ii) change the issued shares of such class into a
lesser number of shares of such class or into the same or different number of
shares of another class, (iii) change the express terms or add express terms of
the shares of the class in any manner substantially prejudicial to the holders
of such class, (iv) change the express terms of issued shares of any class
senior to the particular class in any manner substantially prejudicial to the
holders of shares of the particular class, (v) authorize shares of another class
that are convertible into, or authorize the conversion of shares of another
class into, shares of the particular class, or authorize the directors to fix or
alter conversion rights of shares of another class that are convertible into
shares of the particular class, (vi) reduce or eliminate the stated capital of
the Company, (vii) substantially change the purposes of the Company, or (viii)
change the Company into a nonprofit corporation.
If, and only to the extent, that (i) a class of Preferred Shares is issued
in more than one series and (ii) Ohio law permits the holders of a series of a
class of capital stock to vote separately as a class, the affirmative vote of
the holders of at least two-thirds of each series of such class of Preferred
Shares at the time outstanding, voting separately as a class, given in person or
by proxy either in writing or at a meeting called for
24
<PAGE> 44
the purpose of voting on such matters, shall be required for any amendment,
alteration or repeal, whether by merger, consolidation or otherwise, of any of
the provisions of the Articles or the Code of Regulations which affects
adversely and materially the preferences or voting or other rights of the
holders of such series which are set forth in the Articles; provided, however,
neither the amendment of the Articles so as to authorize, create or change the
authorized or outstanding number of a class of Preferred Shares or of any shares
ranking on a parity with or junior to such class of Preferred Shares nor the
amendment of the provisions of the Code of Regulations so as to change the
number or classification of directors of the Company shall be deemed to affect
adversely and materially the preference or voting or other rights of the holders
of such series.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would be required shall be
effected, all outstanding shares of such series of Preferred Shares shall have
been redeemed or called for redemption 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 of any
class of Preferred Shares are convertible into Common Shares will be set forth
in the applicable Prospectus Supplement relating thereto. Such terms will
include the number of Common Shares into which the Preferred Shares are
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 such Preferred Shares or the Company, the events requiring an
adjustment of the conversion price, and provisions affecting conversion upon the
occurrence of certain events.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Shares -- 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, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year, and the capital stock
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year, and certain other requirements must be satisfied.
To assure that five or fewer individuals do not own more than 50% in value
of the Company's outstanding Preferred Shares, the Articles provide that,
subject to certain exceptions, no holder may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.8% (the "Preferred Shares
Ownership Limit") of any series of any class of the Company's outstanding
Preferred Shares. In addition, as discussed above under "Description of Common
Shares -- Restriction on Ownership," because rent from a Related Party Tenant
(any tenant 10% of which is owned, directly or constructively, by a REIT,
including an owner of 10% or more of a REIT) is not qualifying rent for purposes
of the gross income tests under the Code, the Articles provide that no
individual or entity may own, or be deemed to own by virtue of the attribution
provisions of the Code (which differ from the attribution provisions applied to
the Preferred Shares Ownership Limit), in excess of 9.8% of the outstanding
shares of any series of any class of Preferred Shares (the "Preferred Shares
Related Party Limit"). The Board of Directors may waive the Preferred Shares
Ownership Limit and the Preferred Shares Related Party Limit if the Board of
Directors obtains such representations and undertakings from the applicant with
respect to preserving the REIT status of the Company as are reasonably necessary
to ascertain that such ownership will not jeopardize the Company's status as a
REIT.
The foregoing restrictions on transferability and ownership of Preferred
Shares may not apply if the Board of Directors determines that it is no longer
in the best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT. The Preferred Shares Ownership Limit and the Preferred
Shares Related Party Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Any change in the Preferred Shares Ownership Limit would require an
amendment to the Articles, even if the Board of Directors determines that
maintenance of REIT status is no longer in the best interests of the Company.
Amendments to the Company's Articles require the affirmative vote of holders
owning not less
25
<PAGE> 45
than a majority of the outstanding Common Shares. If it is determined that an
amendment would materially and adversely affect the holders of any class of
Preferred Shares, such amendment would also require the affirmative vote of
holders of not less than two-thirds of such class of Preferred Shares.
If Preferred Shares in excess of the Preferred Shares Ownership Limit or
the Preferred Shares Related Party Limit, or shares which would cause the REIT
to be beneficially or constructively owned by fewer than 100 persons or would
result in the Company being "closely held" within the meaning of Section 856(h)
of the Code, are issued or transferred to any person, such issuance or transfer
will be null and void to the intended transferee, and the intended transferee
will acquire no rights to the shares. Preferred Shares transferred or proposed
to be transferred in excess of the Preferred Shares Ownership Limit or the
Preferred Shares Related Party Limit or which would otherwise jeopardize the
Company's REIT status ("Excess Preferred Shares") will be subject to repurchase
by the Company. The purchase price of any Excess Preferred Shares will be equal
to the lesser of (i) the price in such proposed transaction and (ii) the fair
market value of such shares reflected in the last reported sales price for the
shares on the trading day immediately preceding the date on which the Company or
its designee determines to exercise its repurchase right, if the shares are then
listed on a national securities exchange, or such price for the shares on the
principal exchange if the shares are then listed on more than one national
securities exchange, or, if the shares are not then listed on a national
securities exchange, the latest bid quotation for the shares if the shares are
then traded over-the-counter, or, if such quotation is not available, the fair
market value as determined by the Board of Directors in good faith, on the last
trading day immediately preceding the day on which notice of such proposed
purchase is sent by the Company. From and after the date fixed for purchase of
such Excess Preferred Shares by the Company, the holder thereof will cease to be
entitled to distribution, voting rights and other benefits with respect to such
shares except the right to payment of the purchase price for the shares. Any
dividend or distribution paid to a proposed transferee on Excess Preferred
Shares must be repaid to the Company upon demand. If the foregoing transfer
restrictions are determined to be void or invalid by virtue of any legal
decision, statute, rule or regulation, then the intended transferee of any
Excess Preferred Shares may be deemed, at the option of the Company, to have
acted as an agent on behalf of the Company in acquiring such Excess Preferred
Shares and to hold such Excess Preferred Shares on behalf of the Company.
Reference is made to the section captioned "Description of Common Shares"
for a general description of the Common Shares to be acquired upon the
conversion of Preferred Shares convertible into Common Shares ("Convertible
Preferred Shares"), including a description of certain restrictions on the
ownership of the Common Shares. Common Shares that may be acquired upon the
conversion of convertible Preferred Shares directly or constructively held by an
investor will be deemed by the Company to be outstanding (i) at the time of
purchase of the convertible Preferred Shares, and (ii) prior to the conversion
of the convertible Preferred Shares, for purposes of determining the percentage
ownership of Common Shares held by such investor.
All certificates representing Preferred Shares will bear a legend referring
to the restrictions described above.
The Articles provide that all persons who own, directly or by virtue of the
attribution provisions of the Code, more than 5% of the Preferred Shares shall
upon demand be required to disclose to the Company in writing such information
with respect to the direct, indirect and constructive ownership of shares as the
Board of Directors deems necessary to comply with the provisions of the Code as
applicable to a REIT or to comply with the requirements of any taxing authority
or governmental agency.
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest or a share of a
particular series of a class of Preferred Shares, as specified in the applicable
Prospectus Supplement. Preferred Shares of each series of each class represented
by Depositary Shares will be deposited under a separate Deposit Agreement (each,
a "Deposit Agreement") among the Company, the depositary named therein (such
depositary or its successor, the "Preferred Shares Depositary")
26
<PAGE> 46
and the holders from time to time of the Depositary Receipts. Subject to the
terms of the Deposit Agreement, each owner of a Depositary Receipt will be
entitled, in proportion to the fractional interest of a share of the particular
series of a class of Preferred Shares represented by the Depositary Shares
evidenced by such Depositary Receipt, to all the rights and preferences of the
Preferred Shares represented by such Depositary Shares (including dividend,
voting, conversion, redemption and liquidation rights). As of the date of this
Prospectus, there are outstanding (i) 4,215,000 Depositary Shares each
representing 1/10 of a share of the 9.5% Class A Cumulative Redeemable Preferred
Shares and (ii) 1,775,000 Depositary Shares each representing 1/10 of a share of
the 9.44% Class B Cumulative Redeemable Preferred Shares. See "Description of
Preferred Shares." These Depositary Shares are listed on the New York Stock
Exchange under the symbols DDRPrA and DDRPrB, respectively.
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the Preferred Shares by the Company to the Preferred Shares
Depositary, the Company will cause the Preferred Shares Depositary to issue, on
behalf of the Company, the Depositary Receipts. Copies of the applicable form of
Deposit Agreement and Depositary Receipt may be obtained from the Company upon
request.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Preferred Shares Depositary will distribute all cash dividends or other
cash distributions received in respect of the Preferred Shares to the record
holders of the Depositary Receipts evidencing the related Depositary Shares in
proportion to the number of such Depositary Receipts owned by such holder,
subject to certain obligations of holders to file proofs, certificates and other
information and to pay certain charges and expenses to the Preferred Shares
Depositary.
In the event of a distribution other than in cash, the Preferred Shares
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject to certain obligations of holders
to file proofs, certificates and other information and to pay certain charges
and expenses to the Preferred Shares Depositary, unless the Preferred Shares
Depositary determines that it is not feasible to make such distribution, in
which case the Preferred Shares Depositary may, with the approval of the
Company, sell such property and distribute the net proceeds from such sale to
such holders.
WITHDRAWAL OF SHARES
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Shares Depositary (unless the related Depositary Shares have
previously been called for redemption), the holders thereof will be entitled to
delivery at such office, to or upon such holder's order, of the number of whole
or fractional Preferred Shares and any money or other property represented by
the Depositary Shares evidenced by such Depositary Receipts. Holders of
Depositary Receipts will be entitled to receive whole or fractional shares of
the related Preferred Shares on the basis of the proportion of Preferred Shares
represented by each Depositary Share as specified in the applicable Prospectus
Supplement, but holders of such Preferred Shares will not thereafter be entitled
to receive Depositary Shares therefor. If the Depositary Receipts delivered by
the holder evidence a number of Depositary Shares in excess of the number of
Depositary Shares representing the number of Preferred Shares to be withdrawn,
the Preferred Shares Depositary will deliver to such holder at the same time a
new Depositary Receipt evidencing such excess number of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems Preferred Shares held by the Preferred Shares
Depositary, the Preferred Shares Depositary will redeem as of the same
redemption date the number of Depositary Shares representing the Preferred
Shares so redeemed, provided the Company shall have paid in full to the
Preferred Shares Depositary the redemption price of the Preferred Shares to be
redeemed plus an amount equal to any accrued and unpaid dividends (except, with
respect to Noncumulative Shares, dividends for the current dividend period only)
thereon to the date fixed for redemption. The redemption price per Depositary
Share will be equal to the redemption price and any other amounts per share
payable with respect to the Preferred
27
<PAGE> 47
Shares. If less than all the Depositary Shares are to be redeemed, the
Depositary Shares to be redeemed will be selected by the Preferred Shares
Depositary by lot.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Receipts evidencing the Depositary Shares so called
for redemption will cease, except the right to receive any moneys payable upon
such redemption and any money or other property to which the holders of such
Depositary Receipts were entitled upon such redemption upon surrender thereof to
the Preferred Shares Depositary.
VOTING OF THE UNDERLYING PREFERRED SHARES
Upon receipt of notice of any meeting at which the holders of the Preferred
Shares are entitled to vote, the Preferred Shares Depositary will mail the
information contained in such notice of meeting to the record holders of the
Depositary Receipts evidencing the Depositary Shares which represent such
Preferred Shares. Each record holder of Depositary Receipts evidencing
Depositary Shares on the record date (which will be the same date as the record
date for the Preferred Shares) will be entitled to instruct the Preferred Shares
Depositary as to the exercise of the voting rights pertaining to the amount of
Preferred Shares represented by such holder's Depositary Shares. The Preferred
Shares Depositary will vote the amount of Preferred Shares represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all reasonable action which may be deemed necessary by the
Preferred Shares Depositary in order to enable the Preferred Shares Depositary
to do so. The Preferred Shares Depositary will abstain from voting the amount of
Preferred Shares represented by such Depositary Shares to the extent it does not
receive specific instructions from the holders of Depositary Receipts evidencing
such Depositary Shares.
LIQUIDATION PREFERENCE
In the event of liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, each holder of a Depositary Receipt will be
entitled to the fraction of the liquidation preference accorded each Preferred
Share represented by the Depositary Share evidenced by such Depositary Receipt,
as set forth in the applicable Prospectus Supplement.
CONVERSION OF PREFERRED SHARES
The Depositary Shares, as such, are not convertible into Common Shares or
any other securities or property of the Company. Nevertheless, if so specified
in the applicable Prospectus Supplement relating to an offering of Depositary
Shares, the Depositary Receipts may be surrendered by holders thereof to the
Preferred Shares Depositary with written instructions to the Preferred Shares
Depositary to instruct the Company to cause conversion of the Preferred Shares
represented by the Depositary Shares evidenced by such Depositary Receipts into
whole Common Shares, other Preferred Shares of the Company or other shares of
capital stock, and the Company has agreed that upon receipt of such instructions
and any amounts payable in respect thereof, it will cause the conversion thereof
utilizing the same procedures as those provided for delivery of Preferred Shares
to effect such conversion. If the Depositary Shares evidenced by a Depositary
Receipt are to be converted in part only, one or more new Depositary Receipts
will be issued for any Depositary Shares not to be converted. No fractional
Common Shares will be issued upon conversion, and if such conversion will result
in a fractional share being issued, an amount will be paid in cash by the
Company equal to the value of the fractional interest based upon the closing
price of the Common Shares on the last business day prior to the conversion.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares which
represent the Preferred Shares and any provision of the Deposit Agreement may at
any time be amended by agreement between the Company and the Preferred Shares
Depositary. However, any amendment that materially and adversely alters the
rights of the holders of Depositary Receipts will not be effective unless such
amendment has been
28
<PAGE> 48
approved by the existing holders of at least a majority of the Depositary Shares
evidenced by the Depositary Receipts then outstanding.
The Deposit Agreement may be terminated by the Company upon not less than
30 days' prior written notice to the Preferred Shares Depositary if (i) such
termination is to preserve the Company's status as a REIT or (ii) a majority of
each class of Preferred Shares affected by such termination consents to such
termination, whereupon the Preferred Shares Depositary shall deliver or make
available to each holder of Depositary Receipts, upon surrender of the
Depositary Receipts held by such holder, such number of whole or fractional
Preferred Shares as are represented by the Depositary Shares evidenced by such
Depositary Receipts. In addition, the Deposit Agreement will automatically
terminate if (i) all outstanding Depositary Shares shall have been redeemed,
(ii) there shall have been a final distribution in respect of the related
Preferred Shares in connection with any liquidation, dissolution or winding up
of the Company and such distribution shall have been distributed to the holders
of Depositary Receipts evidencing the Depositary Shares representing such
Preferred Shares or (iii) each related Preferred Share shall have been converted
into capital stock of the Company not so represented by Depositary Shares.
CHARGES OF PREFERRED SHARES DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, the
Company will pay the fees and expenses of the Preferred Shares Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, holders of Depositary Receipts will pay the fees and expenses of the
Preferred Shares Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the Deposit
Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Preferred Shares Depositary may resign at any time by delivering to the
Company notice of its election to do so, and the Company may at any time remove
the Preferred Shares Depositary, any such resignation or removal to take effect
upon the appointment of a successor Preferred Shares Depositary. A successor
Preferred Shares Depositary must be appointed within 60 days after delivery of
the notice of resignation or removal and must be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
The Preferred Shares Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Shares Depositary with respect to the related Preferred Shares.
Neither the Preferred Shares Depositary nor the Company will be liable if
it is prevented from or delayed in, by law or any circumstances beyond its
control, performing its obligations under the Deposit Agreement. The obligations
of the Company and the Preferred Shares Depositary under the Deposit Agreement
will be limited to performing their duties thereunder in good faith and without
negligence, gross negligence or willful misconduct, and the Company and the
Preferred Shares Depositary will not be obligated to prosecute or defend any
legal proceeding in respect of any Depositary Receipts, Depositary Shares or
Preferred Shares represented thereby unless satisfactory indemnity is furnished.
The Company and the Preferred Shares Depositary may rely on written advice of
counsel or accountants, or information provided by persons presenting Preferred
Shares represented thereby for deposit, holders of Depositary Receipts or other
persons believed to be competent to give such information, and on documents
believed to be genuine and signed by a proper party.
If the Preferred Shares Depositary shall receive conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Company, on the other hand, the Preferred Shares Depositary shall
be entitled to act on such claims, requests or instructions received from the
Company.
29
<PAGE> 49
DESCRIPTION OF COMMON SHARES
GENERAL
The Articles authorize the issuance of up to 50,000,000 Common Shares,
without par value. As of September 15, 1997, there were 26,566,625 Common Shares
issued and outstanding. In addition, up to 2,056,903 Common Shares have been
reserved for issuance upon the exercise of options under the Company's employee
share option plan (the "Stock Option Plan"), 600,000 Common Shares have been
reserved for issuance under the Company's Equity-Based Award Plan and 293,333
Common Shares have been reserved for issuance upon the exercise of options
granted to the Company's directors and others. The Common Shares are listed on
the NYSE under the symbol "DDR." National City Bank, Cleveland, Ohio, is the
transfer agent and registrar of the Common Shares.
The following description of the Common Shares sets forth certain general
terms and provisions of the Common Shares to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that Common Shares will be
issuable upon conversion of Debt Securities or Preferred Shares of the Company
or upon the exercise of Common Share Warrants issued by the Company. The
statements below describing the Common Shares are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of the
Articles and the Company's Code of Regulations (the "Code of Regulations").
Holders of Common Shares are entitled to receive dividends, when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor. The payment and declaration of dividends on the Common
Shares and purchases thereof by the Company will be subject to certain
restrictions if the Company fails to pay dividends on any outstanding Preferred
Shares. See "Description of Preferred Shares." The holders of Common Shares,
upon any liquidation, dissolution or winding-up of the Company, are entitled to
receive ratably any assets remaining after payment in full of all liabilities of
the Company, including the preferential amounts owing with respect to any
Preferred Shares. The Common Shares possess ordinary voting rights, with each
share entitling the holder thereof to one vote. Holders of Common Shares have
cumulative voting rights in the election of directors. Holders of Common Shares
do not have preemptive rights, which means that they have no right to acquire
any additional Common Shares that may be subsequently issued by the Company.
All of the Common Shares now outstanding are, and any Common Shares offered
hereby when issued will be, fully paid and nonassessable.
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, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year, and its capital stock must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year.
Additionally, certain other requirements must be satisfied.
To assure that five or fewer individuals do not own more than 50% in value
of the Company's outstanding Common Shares, the Articles provide that, subject
to certain exceptions, no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 5% (the "Ownership Limit") of the
Company's outstanding Common Shares. Shareholders whose ownership exceeded the
Ownership Limit immediately after the IPO may continue to own Common Shares in
excess of the Ownership Limit and may acquire additional shares through the
Stock Option Plan, any dividend reinvestment plan adopted by the Company (a
"Dividend Reinvestment Plan") or from other existing shareholders who exceed the
Ownership Limit, but may not acquire additional shares from such sources such
that the five largest beneficial owners of Common Shares hold more than 49.6% of
the outstanding Common Shares, and in any event may not acquire additional
shares from any other source. In addition, because rent from a Related Party
Tenant (any tenant 10% of which is owned, directly or constructively, by a REIT,
including an owner of 10% or more of a REIT) is not qualifying rent for purposes
of the gross income tests under the Code, the Articles provide that no
individual or entity may own, or be deemed to own by virtue of the attribution
provisions of the Code (which
30
<PAGE> 50
differ from the attribution provisions applied to the Ownership Limit), in
excess of 9.8% of the outstanding Common Shares (the "Related Party Limit"). The
Board of Directors may waive the Ownership Limit and the Related Party Limit
(such Related Party Limit has been waived with respect to the shareholders who
exceeded the Related Party Limit immediately after the IPO) if an opinion of
counsel or a ruling from the Internal Revenue Service is provided to the Board
of Directors to the effect that such ownership will not then or in the future
jeopardize the Company's status as a REIT. As a condition of such waiver, the
Board of Directors will require appropriate representations and undertakings
from the applicant with respect to preserving the REIT status of the Company.
The foregoing restrictions on transferability and ownership of Common
Shares may not apply if the Board of Directors determines that it is no longer
in the best interests of the Company to continue to qualify as a REIT. The
Ownership Limit and the Related Party Limit will not be automatically removed
even if the REIT provisions of the Code are changed so as to no longer contain
any ownership concentration limitation or if the ownership concentration
limitation is increased. In addition to preserving the Company's status as a
REIT, the effects of the Ownership Limit and the Related Party Limit are to
prevent any person or small group of persons from acquiring unilateral control
of the Company. Any change in the Ownership Limit would require an amendment to
the Articles, even if the Board of Directors determines that maintenance of REIT
status is no longer in the best interests of the Company. Amendments to the
Articles require the affirmative vote of holders owning not less than a majority
of the outstanding Common Shares. If it is determined that an amendment would
materially and adversely affect the holders of any class of Preferred Shares,
such amendment also would require the affirmative vote of holders of not less
than two-thirds of such class of Preferred Shares.
If Common Shares in excess of the Ownership Limit or the Related Party
Limit, or Common Shares which would cause the REIT to be beneficially or
constructively owned by less than 100 persons or would result in the Company
being "closely held" within the meaning of Section 856(h) of the Code, are
issued or transferred to any person, such issuance or transfer will be null and
void to the intended transferee, and the intended transferee will acquire no
rights to the shares. Common Shares transferred or proposed to be transferred in
excess of the Ownership Limit or the Related Party Limit or which would
otherwise jeopardize the Company's REIT status ("Excess Shares") will be subject
to repurchase by the Company. The purchase price of any Excess Shares will be
equal to the lesser of (i) the price in such proposed transaction and (ii) the
fair market value of such shares reflected in the last reported sale price for
the Common Shares on the trading day immediately preceding the date on which the
Company or its designee determines to exercise its repurchase right, if then
listed on a national securities exchange, or such price for the shares on the
principal exchange, if they are then listed on more than one national securities
exchange, or, if the Common Shares are not then listed on a national securities
exchange, the latest bid quotation for the Common Shares if they are then traded
over-the-counter, or, if such quotation is not available, the fair market value
as determined by the Board of Directors in good faith, on the last trading day
immediately preceding the day on which notice of such proposed purchase is sent
by the Company. From and after the date fixed for purchase of Excess Shares by
the Company, the holder of such Excess Shares will cease to be entitled to
distribution, voting rights and other benefits with respect to such Excess
Shares except the right to payment of the purchase price for the Excess Shares.
Any dividend or distribution paid to a proposed transferee on Excess Shares will
be repaid to the Company upon demand. If the foregoing transfer restrictions are
determined to be void or invalid by virtue of any legal decision, statute, rule
or regulation, then the intended transferee of any Excess Shares may be deemed,
at the option of the Company, to have acted as an agent on behalf of the Company
in acquiring such Excess Shares and to hold such Excess Shares on behalf of the
Company.
All certificates representing Common Shares bear a legend referring to the
restrictions described above.
The Articles provide that all persons who own, directly or by virtue of the
attribution provisions of the Code, more than 5% of the outstanding Common
Shares must file an affidavit with the Company containing information specified
in the Articles within 30 days after January 1 of each year. In addition, each
such shareholder will upon demand be required to disclose to the Company in
writing such information with respect to the direct, indirect and constructive
ownership of shares as the Board of Directors deems necessary to
31
<PAGE> 51
comply with the provisions of the Code as applicable to a REIT or to comply with
the requirements of any taxing authority or governmental agency.
DESCRIPTION OF COMMON SHARE WARRANTS
The Company may issue Common Share Warrants for the purchase of Common
Shares. Common Share Warrants may be issued independently or together with any
other Offered Securities offered by any Prospectus Supplement and may be
attached to or separate from such Offered Securities. Each series of Common
Share Warrants will be issued under a separate warrant agreement (each, a
"Warrant Agreement") to be entered into between the Company and a warrant agent
specified in the applicable Prospectus Supplement (the "Warrant Agent"). The
Warrant Agent will act solely as an agent of the Company in connection with the
Common Share Warrants of such series and will not assume any obligation or
relationship of agency or trust for or with any holders or beneficial owners of
Common Share Warrants. The following sets forth certain general terms and
provisions of the Common Share Warrants offered hereby. Further terms of the
Common Share Warrants and the applicable Warrant Agreements will be set forth in
the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Common
Share Warrants in respect of which this Prospectus is being delivered,
including, where applicable, the following: (i) the title of such Common Share
Warrants; (ii) the aggregate number of such Common Share Warrants; (iii) the
price or prices at which such Common Share Warrants will be issued; (iv) the
number of Common Shares purchasable upon exercise of such Common Share Warrants;
(v) the designation and terms of the other Offered Securities with which such
Common Share Warrants are issued and the number of such Common Share Warrants
issued with each such Offered Security; (vi) the date, if any, on and after
which such Common Share Warrants and the related Common Shares will be
separately transferable; (vii) the price at which each Common Share purchasable
upon exercise of such Common Shares Warrants may be purchased; (viii) the date
on which the right to exercise such Common Share Warrants shall commence and the
date on which such right shall expire; (ix) the minimum or maximum amount of
such Common Share Warrants which may be exercised at any one time; (x)
information with respect to book-entry procedures, if any; (xi) a discussion of
certain federal income tax considerations; and (xii) any other terms of such
Common Share Warrants, including terms, procedures and limitations relating to
the exchange and exercise of such Common Share Warrants.
Reference is made to the section captioned "Description of Common Shares"
for a general description of the Common Shares to be acquired upon the exercise
of the Common Share Warrants, including a description of certain restrictions on
the ownership of Common Shares. Common Shares that may be acquired upon the
exercise of Common Share Warrants directly or constructively held by an investor
will be deemed by the Company to be outstanding (i) at the time of acquisition
of the Common Share Warrants, and (ii) prior to the exercise of the Common Share
Warrants, for purposes of determining the percentage ownership of Common Shares
held by such investor.
CERTAIN ANTI-TAKEOVER PROVISIONS OF OHIO LAW
Certain provisions of Ohio law may have the effect of discouraging or
rendering more difficult an unsolicited acquisition of a corporation or its
capital stock to the extent the corporation is subject to such provisions. The
Company has opted out of one such provision. The provisions remaining applicable
to the Company are described below.
Chapter 1704 of the Ohio Revised Code prohibits certain transactions,
including mergers, sales of assets, issuances or purchases of securities,
liquidation or dissolution, or reclassifications of the then outstanding shares
of an Ohio corporation with fifty or more shareholders involving, or for the
benefit of, certain holders of shares representing 10% or more of the voting
power of the corporation (any such shareholder, a "10% Shareholder"), unless (i)
such transactions are approved by the directors prior to the 10% Shareholder
becoming a 10% Shareholder, (ii) the acquisition of 10% of the voting power is
approved by the directors prior
32
<PAGE> 52
to the 10% Shareholder becoming a 10% Shareholder, or (iii) the transaction
involves a 10% Shareholder which has been a 10% Shareholder for at least three
years and is approved by holders of two-thirds of the voting power of the
Company and the holders of a majority of the voting power not owned by the 10%
Shareholder, or certain minimum price and form of consideration requirements are
met. Chapter 1704 of the Ohio Revised Code may have the effect of deterring
certain potential acquisitions of the Company which might be beneficial to
shareholders.
Section 1701.041 of the Ohio Revised Code regulates certain "control bids"
for corporations in Ohio with fifty or more shareholders which have significant
Ohio contacts and permits the Ohio Division of Securities to suspend a control
bid if certain information is not provided to offerees.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material Federal income tax
considerations to the Company and its security holders relating to the Offered
Securities and the treatment of the Company as a REIT. The discussion is general
in nature and is not intended to represent a detailed description of the Federal
income tax consequences applicable to a particular shareholder of the Company in
view of a shareholder's particular circumstances, or to certain types of
shareholders (including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the Federal income tax laws. The discussion in this section is based on current
provisions of the Code, current and proposed Treasury Regulations, court
decisions and other administrative rulings and interpretations, all of which are
subject to change either prospectively or retroactively. There can be no
assurance that any such change, future Code provision or other legal authority
will not alter significantly the tax considerations described herein.
THIS DISCUSSION IS NOT INTENDED TO BE A SUBSTITUTE FOR CAREFUL TAX PLANNING
AND EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT THE APPLICABLE PROSPECTUS
SUPPLEMENT, AS WELL AS HIS OWN TAX ADVISOR, REGARDING THE SPECIFIC TAX
CONSEQUENCES, IN VIEW OF SUCH PROSPECTIVE PURCHASER'S INDIVIDUAL CIRCUMSTANCES,
OF THE PURCHASE, OWNERSHIP AND SALE OF THE OFFERED SECURITIES, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Company has elected to be taxed as a real estate investment trust under
Section 856 through 860 of the Code, commencing with its initial taxable year
ended December 31, 1993 which began January 1, 1993. The Company believes that
it is organized and is operating in such a manner as to qualify for taxation as
a REIT under the Code. The Company intends to continue to operate in such a
manner, but no assurance can be given that it will operate in a manner so as to
qualify or remain qualified as a REIT.
In the opinion of Baker & Hostetler LLP, based on certain assumptions and
representations, the Company has qualified as a REIT for its taxable years ended
December 31, 1993 through December 31, 1996, and the Company is organized in
conformity with the requirements for qualification as a REIT and its method of
operation has and will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code provided the Company
continues to meet the asset composition, source of income, shareholder
diversification, distributions, recordkeeping, and other requirements of the
Code necessary for the Company to qualify as a REIT. 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 including, but not
limited to, those set forth below in this discussion of "Federal Income Tax
Considerations" and those concerning the Company's business and properties as
set forth in this Prospectus. 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
will not be reviewed by Baker & Hostetler LLP. Accordingly, no assurance can be
given
33
<PAGE> 53
that the actual results of the Company's operations for any particular taxable
year will satisfy such requirements. See "-- Failure to Qualify."
TAXATION OF THE COMPANY
A REIT, such as the Company, generally will not be subject to Federal
corporate income tax on its taxable income that is currently distributed to its
shareholders. This treatment substantially eliminates the "double taxation" (at
the corporate and shareholder levels) that generally results from an investment
in a corporation. However, the Company will be subject to Federal income tax in
several ways, including the following: First, the Company will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax." Third, if the 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 on such income at the highest corporate rate. 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% corporate level tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(each discussed below) but has nonetheless maintained its qualification as a
REIT by satisfying certain other requirements, it will be subject to a 100% tax
on an amount equal to the gross income attributable to the greater of the amount
by which the Company fails the 75% or 95% test, multiplied by 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
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year and (iii) any undistributed taxable income from prior periods, it
will be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, if the Company acquires any
asset from a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in a transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other property) in the hands of the C corporation, and the Company recognizes
gain on the disposition of such asset during the ten-year period beginning on
the date the asset was acquired by the Company, then the excess of (i) the fair
market value of such asset as of the beginning of such period over (ii) the
Company's adjusted basis in such asset as of the beginning of such period will
be subject to tax at the highest regular corporate tax rate. For taxable years
beginning after August 5, 1997, the Taxpayer Relief Act of 1997 (the "1997 Act")
permits a REIT, with respect to undistributed net long-term capital gains it
received during the taxable year, to designate in a notice mailed to
shareholders within 60 days of the end of the taxable year (or in a notice
mailed with its annual report for the taxable year) such amount of such gains
which its shareholders are to include in their taxable income as long-term
capital gains. Thus, if the Company made this designation, the shareholders of
the Company would include in their income as long-term capital gains their
proportionate share of the undistributed long-term capital gains as designated
by the Company. Each shareholder of the Company would be deemed to have paid
such shareholder's share of the tax paid by the Company on such gains, which tax
would be credited or refunded to the shareholder. A shareholder would increase
his tax basis in his Company stock by the difference between the amount of
income to the shareholder resulting from the designation less the shareholder's
credit or refund for the tax paid by the Company.
REQUIREMENTS FOR QUALIFICATION
A REIT is defined in the Code as a corporation, trust or association: (i)
which is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares or by transferable
certificates of beneficial interest; (iii) which would be taxable as a domestic
corporation, but for Sections 856 through 859 of the Code; (iv) which is neither
a financial institution nor an insurance company subject to certain provisions
of the Code; (v) the beneficial ownership of which is held by 100 or more
persons; (vi) not more than 50% in value of the outstanding stock of which is
owned during the last half of each taxable year, directly or indirectly, by or
for five or fewer individuals (as defined in the Code to include certain
entities); and (vii) which meets certain income and asset tests described below.
Conditions (i) through
34
<PAGE> 54
(iv) above must be met during the entire taxable year and condition (v) must be
met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. However, conditions
(v) and (vi) do not apply until after the first taxable year for which an
election is made to be taxed as a REIT. Under the 1997 Act, for taxable years
beginning after August 5, 1997, if the Company complies with the Treasury
Regulations for ascertaining its actual ownership and did not know, or
exercising due diligence would not have reason to know, that more than 50% in
value of its outstanding shares of stock were held, actually or constructively,
by five or fewer individuals, then the Company will be treated as meeting such
requirement. These share ownership requirements need not be met until the second
taxable year of the Company for which a REIT election is made.
The Company has satisfied conditions (v) and (vi) set forth above. In
addition, the Company's Amended and Restated Articles of Incorporation provide
for restrictions regarding the ownership and transfer of the Company's capital
stock, which restrictions are intended to assist the Company in continuing to
satisfy those requirements.
The Company owns and/or operates a number of properties through its wholly
owned subsidiaries, Developers Diversified Finance Corporation, Developers
Diversified of Alabama, Inc., DD Community Centers One, Inc., DD Community
Centers Two, Inc., DD Community Centers Three, Inc., Eastchase Market Inc.,
Developers Diversified of Pennsylvania, Inc., Pedro Community Centers, Inc.,
Foothills Towne Center II, Inc., and Foothills Towne Center III, Inc. (the "DDRC
Subsidiaries"). The DDRC Subsidiaries are "qualified REIT subsidiaries" of the
Company and 100% of the outstanding capital stock of each of the DDRC
Subsidiaries has been held by the Company at all times during the period that
such DDRC Subsidiary has been in existence. Code Section 856(i) provides that a
corporation which is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities and items of income, deduction
and credit of a "qualified REIT subsidiary" shall be treated as assets,
liabilities and such items (as the case may be) of the REIT. Thus, in applying
the requirements described herein, the DDRC Subsidiaries will be ignored, and
all assets, liabilities and items of income, deduction and credit of the DDRC
Subsidiaries will be treated as assets, liabilities and items of the Company.
In the case of a REIT that is a partner in a partnership, the Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
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 REIT 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
(including limited liability companies treated as partnerships for federal
income tax purposes) in which the Company or its Subsidiaries is a partner will
be treated as assets, liabilities and items of income of the Company for
purposes of applying the requirements described herein.
INCOME TESTS
In order to maintain qualification as a REIT, currently 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 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. The 30% gross income test has been repealed
by the 1997 Act for taxable years beginning after August 5, 1997.
35
<PAGE> 55
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT 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 REIT, or an owner of 10% or more of the REIT, directly 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 REIT 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 REIT derives no income;
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.
For taxable years beginning after August 5, 1997, a REIT is permitted to
render a de minimis amount of impermissible services to tenants, or in
connection with the management of property, and still treat amounts received
with respect to that property as rent. The value of the impermissible services
may not exceed 1% of all amounts received or accrued during the year, directly
or indirectly, from the property. The amount received for any service (or
management operation) for this purpose shall be deemed to be not less than 150%
of the direct cost of the REIT in furnishing or rendering the service (or
providing the management or operation).
The Company does not and will not 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),
and the Company does not and will not rent any 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).
The Company directly performs services under certain of its leases, but such
services are not rendered to the occupant of the property. Furthermore, these
services are usual and customary management services provided by landlords
renting space for occupancy in the geographic areas in which the Company owns
property. To the extent that the performance of any services provided by the
Company would cause amounts received from its tenants to be excluded from rents
from real property, the Company will hire independent contractors from whom the
Company derives no revenue to perform such services.
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 REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if the Company's failure to meet such
tests was attributable to reasonable cause and not to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not attributable to fraud with intent
to evade tax. It is not possible, however, to determine whether, in all
circumstances, the Company would be entitled to the benefit of those relief
provisions. As discussed above in "-- General," even if those relief provisions
apply, a tax would be imposed with respect to excess net income.
ASSET TESTS
At the close of each quarter of its taxable year, the Company 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 interests in real
property, interests in mortgages on real property to the extent the mortgage
balance does not exceed the value of the associated real property, shares in
other REITs, cash, cash items, government securities and certain securities
attributable to temporary investment of new capital. Second, not more than
36
<PAGE> 56
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.
As set forth above, the ownership of more than 10% of the voting securities
of any one issuer by a REIT is prohibited by the asset tests. However, if the
Company owns stock in any subsidiaries that are "qualified REIT subsidiaries" as
defined in the Code, such as the DDRC Subsidiaries, such subsidiaries will not
be treated as separate corporations for Federal income tax purposes. Thus, the
Company's ownership of stock of a "qualified REIT subsidiary" will not cause the
Company to fail the asset tests.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its shareholders each year in
an amount at least equal to: (i) the sum of (a) 95% of the Company's "REIT
taxable income" (computed without regard to the dividends paid deduction and the
Company's net capital gain) and (b) 95% of the net income (after tax), if any,
from foreclosure property, minus (ii) the sum of certain items of non-cash
income. 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 gains corporate tax rates. Furthermore, if the Company
fails to distribute during each calendar year at least the sum of: (i) 85% of
its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income
for such year and (iii) any undistributed taxable income from prior periods, the
Company will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. For taxable years beginning
after August 5, 1997, the 1997 Act (i) expands the class of non-cash income that
is excluded from the distribution requirement to include income from the
cancellation of indebtedness and (ii) extends the treatment of original issue
discount ("OID") (over cash and the fair market value of property received on
the instrument) as such non-cash income to OID instruments generally and for
REITs, like the Company, that use an accrual method of accounting. 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 on the undistributed
amount at regular capital gains or ordinary corporate tax rates, as the case may
be. For taxable years beginning after August 5, 1997, the 1997 Act permits a
REIT, with respect to undistributed net long-term capital gains it received
during the taxable year, to designate in a notice mailed to shareholders within
60 days of the end of the taxable year (or in a notice mailed with its annual
report for the taxable year) such amount of such gains which its shareholders
are to include in their taxable income as long-term capital gains. Thus, if the
Company made this designation, the shareholders of the Company would include in
their income as long-term capital gains their proportionate share of the
undistributed long-term capital gains as designated by the Company. Each
shareholder of the Company would be deemed to have paid such shareholder's share
of the tax paid by the Company on such gains, which tax would be credited or
refunded to the shareholder. A shareholder would increase his tax basis in his
Company stock by the difference between the amount of income to the shareholder
resulting from the designation less the shareholder's credit or refund for the
tax paid by the Company.
The Company intends to make timely distributions sufficient to satisfy
these annual distribution requirements. 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 because of timing differences between (i) the
actual receipt of income and the actual payment of deductible expenses and (ii)
the inclusion of such income and deduction of such expenses in arriving at the
taxable income of the Company. In the event that such timing differences occur,
in order to meet the 95% distribution requirement the Company may find it
necessary to arrange for short-term, or possibly long-term, borrowings or to pay
dividends in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a certain year by paying "deficiency
dividends" to shareholders in a later year, which may be
37
<PAGE> 57
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.
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 corporate alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders 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 by the Company. In such event, to the extent of
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income, and, subject to certain limitations, a
corporate distributee 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. Whether the Company
would be entitled to such statutory relief cannot be foreseen.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to its
taxable domestic shareholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will result in ordinary income to
such shareholders. Corporate shareholders will not be entitled to the dividends
received deduction. Distributions (and for taxable years beginning after August
5, 1997, undistributed amounts) that are designated as capital gain dividends
will be treated as gain from the sale or disposition of a capital asset held for
more than one year (to the extent they do not exceed the Company's actual net
capital gain for the taxable year) without regard to the period for which the
shareholder has held its shares. However, corporate shareholders may be required
to treat up to 20% of certain capital gain dividends as ordinary income.
Distributions by the Company in excess of its current and accumulated earnings
and profits will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's shares, but
rather, will be a non-taxable reduction in a shareholder's adjusted basis in
such shares to the extent thereof and thereafter will be taxed as capital gain.
Any dividend declared by the Company in October, November or December of
any year payable to a shareholder of record on a specified date in any such
month will be treated as both paid by the Company and received by the
shareholder on or before December 31 of such year, provided that the dividend is
actually paid by the Company by January 31 of the following calendar year.
Shareholders may not include any net operating losses or capital losses of
the Company in their individual income tax returns. In general, any loss upon
the sale or exchange of shares by a shareholder who has held such shares for six
months or less (after applying certain holding period rules) will be treated as
a long-term capital loss to the extent distributions from the Company are
required to be treated by such shareholder as long-term capital gain.
The recently enacted Taxpayer Relief Act of 1997 made certain changes to
the Code with respect to taxation of long-term capital gains earned by taxpayers
other than a corporation. In general, for sales made after May 6, 1997, the
maximum tax rate for individual taxpayers on net long-term capital gains (i.e.,
the excess of net long-term capital gain over net short-term capital loss) is
lowered to 20% for most assets. This 20% rate applies to sales on or after July
29, 1997 only if the asset was held for more than 18 months at the time of
disposition. Capital gains on the disposition of assets on or after July 29,
1997 held for more than one year and up to 18 months at the time of disposition
will be taxed as "mid-term gain" at a maximum rate of 28%. Also, so called
"unrecaptured section 1250 gain" is subject to a maximum Federal income tax rate
of 25%. "Unrecaptured section 1250 gain" generally includes the long-term
capital gain realized on (i) the sale after May 6, 1997 of a real property asset
described in Section 1250 of the Code or (ii) the sale after July 28, 1997 of a
real property asset described in Section 1250 of the Code which the taxpayer has
held for more than 18 months, but in each case not in excess of the amount of
depreciation (less the gain, if any, treated as ordinary income under Code
Section 1250) taken on such asset. A rate of 18% instead of 20% will apply after
38
<PAGE> 58
December 31, 2000 for assets held for more than 5 years. However, the 18% rate
applies only to assets acquired after December 31, 2000 unless the taxpayer
elects to treat an asset held prior to such date as sold for fair market value
on January 1, 2001. In the case of individuals whose ordinary income is taxed at
a 15% rate, the 20% rate is reduced to 10% and the 10% rate for assets held for
more than 5 years is reduced to 8%.
Certain aspects of the new legislation are currently unclear, including how
the reduced rates will apply to gains earned by REITs such as the Company. Until
the IRS issues some guidance, it is unclear whether or how the 20% or 10% rate
will apply to distributions of long-term capital gains by the Company. The 1997
Act gives the IRS authority to apply the 1997 Act's new rules on taxation of
capital gains to sales by pass-through entities, including REITs. It is possible
that the IRS could provide in such regulations that REIT capital gain dividends
must be determined by looking through to the assets sold by the REIT and treated
by REIT shareholders as "long-term capital gain", "mid-term gain" and
"unrecaptured section 1250 gain" to the extent of such respective gain realized
by the REIT. No regulations have yet been issued. Such regulations, if and when
issued, may have a retroactive effect.
Shareholders of the Company should consult their tax advisor with regard to
(i) the application of the changes made by the 1997 Act with respect to taxation
of capital gains and capital gain dividends and (ii) state, local and foreign
taxes on capital gains.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S.
Shareholder the amount of dividends (including any capital gain dividends) paid
to, and the tax withheld with respect to, each Non-U.S. Shareholder. These
reporting requirements apply regardless of whether withholding was reduced or
eliminated by an applicable tax treaty. Copies of these returns may also be made
available under the provisions of a specific treaty or agreement with the tax
authorities in the country in which the Non-U.S. Shareholder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required under
the U.S. information reporting requirements) and information reporting will
generally not apply to dividends (including any capital gain dividends) paid on
stock to a Non-U.S. Shareholder at an address outside the United States.
The payment of the proceeds from the disposition of stock to or through a
U.S. office of a broker will be subject to information reporting and backup
withholding unless the owner, under penalties of perjury, certifies, among other
things, its status as a Non-U.S. Shareholder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting, except as noted below. In the case
of a payment of proceeds from the disposition of stock to or through a non-U.S.
office of a broker which is (i) a U.S. person, (ii) a "controlled foreign
corporation" for U.S. Federal income tax purposes or (iii) a foreign person 50%
or more of whose gross income for certain periods is derived from a U.S. trade
or business, information reporting (but not backup withholding) will apply
unless the broker has documentary evidence in its files that the holder is a
Non-U.S. Shareholder (and the broker has no actual knowledge to the contrary)
and certain other conditions are met, or the holder otherwise establishes an
exemption. Under proposed Treasury Regulations, a payment of the proceeds from
the disposition of stock to or through such broker will be subject to backup
withholding if such broker has actual knowledge that the holder is a U.S.
person.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-U.S.
Shareholder's U.S. Federal income tax liability, provided that required
information is furnished to the IRS.
These backup withholding and information reporting rules are currently
under review by the Treasury Department, and their application to stock is
subject to change. In particular, Treasury Regulations proposed in 1996, which
have not yet been adopted, and are therefore not currently effective, would, if
and when they become effective, revise in certain respects the rules applicable
to foreign shareholders with respect to payments made after December 31, 1997.
39
<PAGE> 59
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
unrelated business taxable income ("UBTI"). Subject to the discussion below
regarding a "pension-held REIT," based on such ruling and the statutory
framework of the Code, distributions by the Company to a shareholder that is a
tax-exempt entity should not constitute UBTI, provided that the tax-exempt
entity has not financed the acquisition of its stock with "acquisition
indebtedness" within the meaning of the Code, that the stock is not otherwise
used in an unrelated trade or business of the tax-exempt entity, and that the
Company, consistent with its present intent, does not hold a residual interest
in a REMIC.
However, if any pension or other retirement trust that qualifies under
Section 401(a) of the Code ("qualified pension trust") holds more than 10% by
value of the interests in a "pension-held REIT" at any time during a taxable
year, a portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is defined
as a REIT if (i) such REIT would not have qualified as a REIT but for the
provisions of the Code which look through such a qualified pension trust in
determining ownership of stock of the REIT and (ii) at least one qualified
pension trust holds more than 25% by value of the interests of such REIT or one
or more qualified pension trusts (each owning more than a 10% interest by value
in the REIT) hold in the aggregate more than 50% by value of the interests in
such REIT.
TAXATION OF FOREIGN SHAREHOLDERS
A "Non-U.S. Shareholder" is (i) any individual who is neither a citizen nor
resident of the United States, (ii) any corporation or partnership other than a
corporation or partnership created or organized in the United States or under
the laws of the United States or any state thereof or under the laws of the
District of Columbia (unless in the case of a partnership, Treasury Regulations
provide otherwise), (iii) an estate or (iv) a trust that is not a "U.S. Trust."
For taxable years beginning after December 31, 1996 (or if the trustee of a
trust elects to apply the following definition to an earlier taxable year ending
after August 20, 1996) a trust is a U.S. Trust if, and only if, (a) a court
within the United States is able to exercise primary supervision over the
administration of the trust and (b) one or more U.S. persons has the authority
to control all substantial decisions of the trust. For taxable years other than
those described in the preceding sentence a U.S. Trust is, any trust the income
of which is subject to U.S. Federal income taxation regardless of its source.
The rules governing United States Federal income taxation of Non-U.S.
Shareholders are complex and no attempt is made herein to provide more than a
summary of such rules. Prospective Non-U.S. Shareholders should consult with
their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in the Common Shares, including any
reporting requirements.
It is currently anticipated that the Company will qualify as a
"domestically controlled REIT" (i.e., a REIT in which at all times during a
specified testing period less than 50% of the value of the capital stock of
which is owned directly or indirectly by Non-U.S. Shareholders) and therefore
gain from the sale of Common Shares by a Non-U.S. Shareholder will not be
subject to United States taxation unless such gain is treated as "effectively
connected" with the Non-U.S. Shareholder's United States trade or business.
Distributions that are not attributable to gain from the sale or exchange
by the Company of United States real property interests (and are not designated
as capital gain dividends) will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions generally will be subject to a United States
withholding tax equal to 30% of the gross amount of the distribution, subject to
reduction or elimination under an applicable tax treaty. However, if dividends
from the investment in the shares are treated as "effectively connected" with
the Non-U.S. Shareholder's conduct of a United States trade or business, such
dividends will be subject to regular U.S. income taxation (foreign corporations
may also be subject to the 30% branch profits tax). The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
such dividends paid to a Non-U.S. Shareholder unless: (i) a lower treaty rate
applies and the Non-U.S. Shareholder files certain information evidencing its
entitlement to such lower treaty rate, or (ii) the Non-U.S. Shareholder files
40
<PAGE> 60
an IRS Form 4224 with the Company claiming that the distribution is "effectively
connected" income. Distributions which exceed current and accumulated earnings
and profits of the Company will not be taxable to the extent that they do not
exceed the adjusted basis of a shareholder's shares, but rather will reduce (but
not below zero) the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Shareholder's shares, they
generally will give rise to United States tax liability if the Non-U.S.
Shareholder would otherwise be subject to tax on gain from the sale or
disposition of his shares in the Company, as described above. If it cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the
distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.
Distributions by the Company to a Non-U.S. Shareholder that are
attributable to gain from sales or exchanges by the Company of a United States
real property interest are subject to income and withholding tax under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, those distributions, if any, which are treated as gain
recognized from the sale of a United States real property interest, are taxed as
income "effectively connected" with a United States business. Non-U.S.
Shareholders would thus be taxed at the normal capital gain rates applicable to
U.S. shareholders (subject to the applicable alternative minimum tax and a
special alternative minimum tax for nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty exemption.
The Company will withhold 35% of any distribution to a Non-U.S. Shareholder that
could be designated by the Company as a capital gain dividend. This amount is
creditable against the Non-U.S. Shareholder's FIRPTA tax liability. A refund may
be available if the amount withheld exceeds the Non-U.S. Shareholder's federal
tax liability.
STATE AND LOCAL CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation
in various jurisdictions, including those in which it or they transact business
or reside. The state and local tax treatment of the Company and its shareholders
may not conform to the federal income tax consequences discussed above.
Prospective shareholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in the Company.
FEDERAL ESTATE TAX
Shares owned or treated as owned by an individual who is not a citizen or
"resident" (as specifically defined for U.S. Federal estate tax purposes) of the
United States at the time of death will be includable in the individual's gross
estate for U.S. Federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise. Such individual's estate may be subject to U.S.
Federal estate tax on the property includable in the estate for U.S. Federal
estate tax purposes.
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
The Company's ratio of earnings to fixed charges for the six-month period
ended June 30, 1997, the fiscal years ended December 31, 1996, December 31,
1995, December 31, 1994 and December 31, 1993 (which includes results of
operations for the pre-IPO period January 1, 1993 through February 9, 1993), was
2.24, 2.01, 1.66, 1.86 and 1.58, respectively. The Company's ratio of earnings
to combined fixed charges and Preferred Share dividends for the six-month period
ended June 30, 1997 and the fiscal years ended December 31, 1996 and December
31, 1995 was 1.76, 1.53 and 1.61, respectively.
For purposes of computing these ratios, earnings have been calculated by
adding fixed charges (excluding capitalized interest) to income (loss) before
income taxes and extraordinary items. Fixed charges consist of interest costs,
whether expensed or capitalized, the interest component of rental expense, and
amortization of
41
<PAGE> 61
debt discounts and issue costs, whether expensed or capitalized. For the ratio
of earnings to combined fixed charges and Preferred Share dividends the fixed
charges are also adjusted by the Preferred Share dividends.
Prior to completion of the IPO, DDG operated in a manner so as to minimize
net taxable income. As a result, although the Company's properties have
historically generated positive net cash flow, DDG had net losses for its fiscal
year ended December 31, 1992. Consequently, the computation of the ratio of
earnings to fixed charges for such period indicates that earnings were
inadequate to cover fixed charges by approximately $6.1 million.
The consolidation of DDG into the Company prior to and concurrently with
the IPO permitted the Company to significantly deleverage many shopping center
properties, resulting in a significantly improved ratio of earnings to fixed
charges for periods subsequent to February 1993.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, related 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
Offered Securities upon the terms and conditions set forth in an applicable
Prospectus Supplement. In connection with the sale of Offered 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 Offered Securities for whom they may act as agent.
Underwriters may sell Offered Securities to or through dealers, and such dealers
may receive compensation in the form of discounts, concessions from the
underwriters 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 Offered Securities and any discounts,
concessions or commissions allowed by underwriters to participating dealers will
be set forth in the applicable Prospectus Supplement. Underwriters, dealers and
agents participating in the distribution of the Offered Securities may be deemed
to be underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the Offered Securities may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with the
Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate principal amount of Securities sold
pursuant to Contracts shall be not less or more than, the respective amounts
stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions, but will in all cases be
subject to the approval of the Company. Contracts will not be subject to any
conditions except (i) the purchase by an institution of the Offered Securities
covered by its Contracts shall not at the time of delivery be prohibited under
the laws of any jurisdiction in the United States to which such institution is
subject and (ii) if the Offered Securities are being sold to underwriters, the
Company shall have sold to such underwriters the total principal amount of the
Offered Securities less the principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
42
<PAGE> 62
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K of the Company for the year ended December 31,
1996 and the audited historical financial statements included on pages F-2 to
F-4 of the Company's Current Report on Form 8-K dated June 16, 1997, have been
so incorporated in reliance on the reports of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The validity of the Offered Securities as well as certain legal matters
described under "Federal Income Tax Considerations" will be passed upon for the
Company by Baker & Hostetler LLP, Cleveland, Ohio, and for any underwriters,
dealers or agents by Brown & Wood LLP, New York, New York. A partner of Baker &
Hostetler LLP who is participating as counsel in this offering serves as a
director of the Company.
43
<PAGE> 63
Developers Diversified
Realty Corporation
DEVELOPERS DIVERSIFIED LOGO
